December 10, 2019

Economix Blog: Inflationphobia, Part I

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Generals and admirals are always fighting the last war, it is said, designing weapons and devising strategies that are inherently out of date, rather than planning for the next war. Thus, before World War II, United States naval strategy was based on battleships, which proved largely useless when war came, rather than aircraft carriers and destroyers, which proved to be decisive.

Today’s Economist

Perspectives from expert contributors.

So, too, with economists. They tend to worry obsessively about the last big national economic problem, seeing its regeneration everywhere, rather than looking at the data and economic conditions objectively, thereby missing new problems that require a different strategy.

The Great Depression was for economists what World War II was for the military — a problem so big that it forced a complete reassessment of traditional thinking. When the depression and the war ended, the new ideas that they led to became the new orthodoxy.

The military learned the importance of air power and that formed the foundation of Cold War strategy, but left the United States vulnerable to guerrilla warfare in Vietnam, for which air power was ill suited.

Economists learned from the Great Depression that easy money and fiscal stimulus could stimulate growth. Pre-Depression classical economics had been based on a rigid balanced budget requirement for government and a gold standard that provided no discretion for the monetary authorities.

The new economic orthodoxy became associated with the theories of the British economist John Maynard Keynes and came to be called Keynesian economics. Supporters of classical economics were relegated to the sidelines of economic discussion, but they never went away. Throughout the 1950s and 1960s they continued to wage war against Keynesian economics, certain that the abiding truths of classical economics would triumph in the end.

The classical economists thought that inflation was the Achilles’ heel of Keynesian economics, and they hammered this point relentlessly. In truth, the Keynesians were vulnerable on that issue, believing that a little inflation was a small price to pay for bringing down the unemployment rate.

One problem for the Keynesians is that as time went by, their theories became increasingly divorced from the economics of John Maynard Keynes, becoming almost a caricature. Moreover, the economic circumstances were vastly different from those of the Great Depression and required different policies. But economists kept advocating more of what had worked in the 1930s and 1940s.

Keynesian economics was essentially reduced to something called the Phillips curve, which showed that there was always a trade-off between inflation and unemployment – more of one would reduce the other. The only question for policy makers was determining which problem, inflation or unemployment, was more important to voters.

Unfortunately, there was a political bias in the calculation; politicians tended to put reducing unemployment above reducing inflation and so inflation ratcheted upward. There was also confusion among economists about the cause of inflation. The Keynesians, whose view was shaped by the experience of the Great Depression, in which deflation or falling prices was the big problem, underestimated the role of the Federal Reserve and monetary policy in generating inflation.

This led to a counterattack by classical economists based mainly at the University of Chicago. By the 1980s, these economists had essentially overthrown the Keynesians by asserting that inflation had one and only one cause – excessive money growth by the Fed. Tight money had broken the back of inflation and the idea of tying the Fed’s hands, as the gold standard had done, gained popularity.

Fast forward to 2008. The nation fell into another recession. Initially, economists thought it was not dissimilar to those the economy had faced throughout the postwar era; they were slow to recognize its severity as a depression about one-third the size of the Great Depression.

Fortunately, the Fed was led by Ben Bernanke, whose expertise as an academic economist was the Great Depression. He knew that the Fed’s errors had contributed mightily to the depression’s origins, length and depth, and resolved not to make the same mistakes twice. Mr. Bernanke opened the monetary floodgates to keep the financial system and the economy from imploding. I believe that what the Fed did saved us from a rerun of the Great Depression or worse.

But the classical economists, whose ranks were much strengthened by the failure of Keynesian economics in the fight against inflation and the apparent triumph of classical policies in the 1980s and 1990s, immediately saw an inevitable replay of the 1970s. They were fighting the last war.

Virtually every classical economist declared that inflation would quickly return. Many urged people to buy gold to protect themselves, which led the gold price to rise, which was then taken as proof of impending inflation. They demanded that the Fed immediately rescind its emergency actions, withdraw the excess money that had been injected into the banking system and nip inflation in the bud.

Unfortunately, this was more than an academic debate, because many of the Federal Reserve’s regional bank presidents, five of whom sit on the policy-making Federal Open Market Committee, were inflation hawks who shared the view of the classical economists that high inflation was certain unless the Fed tightened monetary policy as soon as possible. They were supported by Republicans in Congress, who berated Mr. Bernanke in the harshest possible terms at every opportunity, as well as a large number of private economists and pundits with access to wide-circulation publications such as The Wall Street Journal and its editorial page.

While the Fed has generally maintained an easy money policy, inflation has remained dormant; some of the Fed’s inflation hawks have even become doves. But the constant drumbeat of attacks on the Fed for fostering inflation has constrained its actions, condemning the economy to slower growth and higher unemployment than necessary.

Next week I will have more to say about inflationphobia.

Article source: http://economix.blogs.nytimes.com/2013/07/09/inflationphobia-part-i/?partner=rss&emc=rss

News Analysis: Japan Courts Growth While Europe Keeps Up Austerity

Even as Europe fell deeper into what just became its longest recession since World War II, Japan posted an unexpectedly robust growth rate of 3.5 percent under the bold new stimulus measures championed by Prime Minister Shinzo Abe — precisely the medicine many have urged European leaders to take.

“The elites in Europe don’t learn,” said Stephan Schulmeister, an economist with the Austrian Institute of Economic Research. “Instead of saying, ‘Something goes wrong, we have to reconsider or find a different navigation map, change course,’ instead what happens is more of the same.”

He added, “Angela Merkel is not willing to learn from the Japanese experience,” referring to the German chancellor.

Since taking office in December, Mr. Abe has pushed a three-pronged program — called the three-arrowed approach in Japan — to end two decades of stagnation in the Japanese economy. It involves a strongly expansionary monetary policy, increased fiscal spending and structural changes to improve competitiveness; the first-quarter growth spurt suggests that his approach is already paying off.

Not only have exports improved, the logical outgrowth of a weaker currency, but consumer sentiment and household consumption also have risen. “The real economy is responding,” said Adam S. Posen, president of the Peterson Institute for International Economics in Washington. “The last five months, six months, there’s been a mini consumer boom. All the things that people said could never happen in Japan have turned around.”

He added: “Japan’s central bank is supporting recovery, and it’s working. The European Central Bank is supporting stagnation, and it’s working.”

The question is whether European leaders will learn from the Japanese, and the answer thus far appears to be no. Though it is early in Mr. Abe’s term, Japan may have found the recipe for successful economic stimulus, but Germany is barring the door to the European kitchen.

“In Germany the hostility toward those unconventional measures is greater than in any other European society,” said Heribert Dieter, a political economist at the German Institute for International and Security Affairs in Berlin. In his view, the question is whether a departure from austerity would provide anything more than a few months or even a few years of breathing space.

Other than more flexibility in the speed of budget cutting, there is little sign of a deep rethinking in Germany. If anything it feels as though Berlin is digging in its heels. “It would postpone the day of reckoning,” Mr. Dieter said. “It would not solve any problems.” The emphasis, in the German view, has to be on maintaining fiscal discipline while focusing on structural changes to restore competitiveness, the only one of Mr. Abe’s three arrows that the Germans seem prepared to pull from the quiver.

Many German economists argue that the period of retrenchment is nearing a conclusion, and that the gains promised for the pain of austerity are now right around the corner. “There’s no need for a special fiscal stimulus program,” said Michael Hüther, the director of the Cologne Institute for Economic Research.

Mr. Hüther pointed to signs of improved export performance in countries like Spain, Greece and Portugal as evidence that an upturn was nigh. “I’m optimistic that next year there will be a turnaround,” he said. “It’s not a good idea to join the Japanese program.”

The envy of the world in the 1980s, Japan suffered a real estate and stock market collapse that left it mired in a deflation trap, with falling prices and an economy alternating between anemic growth and contraction. Japan went through recessions in 2011 and 2012, shrinking at an annualized rate of 3.5 percent as late as the third quarter of last year.

After Mr. Abe’s Liberal Democrats won a landslide victory in December, Mr. Abe made good on his promise to increase public spending. The central bank increased liquidity and the yen has fallen by about 20 percent against the dollar this year, a boon to the country’s exporters. The Japanese stock market has soared, with the Nikkei 225 Index up more than 70 percent over the past year.

Article source: http://www.nytimes.com/2013/05/17/world/europe/japan-courts-growth-while-europe-keeps-up-austerity.html?partner=rss&emc=rss

Japan Re-emerges in the Aerospace Arena With a New Jet

Japan’s golden era of aviation that culminated with the feared and respected Mitsubishi Zero fighter planes had ended a decade earlier along with World War II. Banned from making planes by American occupiers after the war, then allowed to make only parts for American military jets, Japan’s aircraft industry was a shadow of its former self.

If all goes well this year, Mr. Kawai, now 65 and president of the Mitsubishi Aircraft Corporation, will preside over Japan’s biggest aviation comeback since the war. In late 2013, the company plans the first flight of its Mitsubishi Regional Jet, a sleek, 90-seat commercial plane that is Japan’s bid to break into the industry’s big leagues after almost 70 years.

“For decades, we were confined to supplying parts for other passenger jets. But we’re finally heading into new territory,” Mr. Kawai said in a recent interview at Mitsubishi Aircraft’s Tokyo office.

Mitsubishi’s comeback was abetted in large part by Boeing’s outsourcing more of its aircraft manufacture to overseas suppliers. As Boeing came to rely on foreign contractors, Japanese manufacturers moved in, designing and supplying some of the jet’s most vital sections.

A full third of Boeing’s new 787 Dreamliner is supplied by Japanese manufacturers, including Mitsubishi Aircraft’s parent company, Mitsubishi Heavy Industries, which makes the jet’s carbon-fiber composite main wings.

Even so, Boeing and Mitsubishi could not be further apart in their approach to jet-building. In contrast to the cutting-edge 787, Mitsubishi’s regional jet uses only a little of the advanced carbon fiber that its parent company supplies to Boeing.

Neither does its regional jet use the volatile lithium-ion batteries that have become a major headache for Boeing, overheating on two separate planes in January and prompting American and Japanese safety regulators to ground its entire 787 fleet.

Mitsubishi’s caution underscores the importance, to the company and to Japan, of getting the regional jet project off the ground in an industry where reputation for reliability is paramount. That is especially the case, experts say, for a country long absent from the business of making planes, save military jets under license from the United States, and a series of small private jets.

In the late 1950s and 1960s, Mitsubishi participated in a consortium to develop the YS-11 plane, a 60-seat turboprop airliner led and largely financed by the Japanese government, which was eager to restart the country’s aviation industry.

Leading the YS-11’s design was Teruo Tojo, one of the Mitsubishi Zero fighter’s original engineers and the second son of Hideki Tojo, the Japanese wartime leader who was executed as a war criminal by the Allies. But with no experience in making civilian jets, Mr. Tojo and his team of engineers struggled with the YS-11’s design.

Early versions of the aircraft rolled from side to side, regulators in the United States who tested the plane charged, and leaked rainwater. Its air-conditioning systems broke down. Passengers complained its roaring twin engines were too loud. And despite generous state backing, soaring manufacturing costs crippled the consortium’s finances. In 1973, barely 10 years after the YS-11’s maiden flight, the consortium canceled the project. It built just 182 aircraft and sold its planes at a loss.

“We wanted to sell to the world, but on the ground, we felt we were chasing an impossible dream,” Mr. Tojo, who eventually became vice president of Mitsubishi Heavy Industries and president of Mitsubishi Motors, reminisced in a 1990 interview with the Nikkei Sangyo Shimbun newspaper. “Who would buy a plane made in Japan?” Mr. Tojo passed away last year at the age of 98.

Burned by the YS-11 flop, Japan shifted its aviation strategy to supplying, and learning from, the largest aircraft makers of the time, of which the largest was Boeing. Japanese suppliers have played an increasingly bigger role in building Boeing aircraft, supplying 15 percent of the 767 jet, 21 percent of the 777, and 35 percent of the 787.

The Japanese government quickly became one of the largest financial backers of those projects, handing out billions of yen in subsidies to help Japanese suppliers develop technology and win lucrative contracts from Boeing. Though the government declines to reveal exact numbers, estimates by researchers at the State University of New York of how much Japan has handed out to 787 suppliers in subsidies and loans over the past decade are as high as $1.6 billion. .

Article source: http://www.nytimes.com/2013/04/10/business/global/japan-re-emerges-in-the-aerospace-arena-with-a-new-jet.html?partner=rss&emc=rss

Helsinki Journal: ‘Nuntii Latini,’ News Broadcast in Finland, Unites Fans of Latin

Nobody knows exactly how many listeners the Latin program reaches. “Tens of thousands is my wild guess,” said Sami Koivisto, a reporter in the station’s news department. But it seems clear that the Internet is injecting new life into a language often described as dead.

No, there are no traffic reports from the Appian Way, nor does the station assign a political reporter to the Forum. But, on Friday evenings before the main news broadcast, the Finnish Broadcasting Company presents five or six short news stories in Latin. In recent weeks, the subjects have included the financial crisis in Cyprus, an unusually brilliant aurora borealis and the election of Pope Francis.

“There are no scoops,” Mr. Blanchard, 37, said recently, over coffee. “But it is a great way to hear the news.” A request to the French national broadcaster to do something similar, he said, failed to produce a response.

Not even Vatican Radio, which broadcasts some prayers each day in Latin, reports the news in the ancient tongue.

Tuomo Pekkanen, a retired professor of Latin who helped start “Nuntii Latini,” or “Latin News,” as the program is known, said the language is very much alive for him and for many educated Finns of his generation deeply influenced by Edwin Linkomies, his Latin professor at Helsinki University and prime minister during the difficult years of World War II. For them, Latin was a part of Finnish identity as well as of a sound education.

“In order to be educated,” said Mr. Pekkanen, 78, who is proficient in not only Latin but also ancient Greek and Sanskrit, “it was once said that a real humanist must write poetry in Latin and Greek.”

Mr. Pekkanen helped start the news program almost on a lark, then saw it steadily gain popularity. “Picking the subjects, that is the most difficult part of it,” said Mr. Pekkanen, who in his spare time has translated all 22,795 verses of the Finnish national epic, the Kalevala, into rhymed Latin verse. “One principle is that we don’t want to count the bodies of how many were killed in this or that country,” he said. “That is dull.”

It may be no coincidence that the broadcast began in 1989, the year Communism collapsed in Eastern Europe and the Finns turned toward Western Europe. For educated Finns, Latin had long been the country’s link to Western culture, and they were required to study the language in school.

“It’s a brilliant idea,” said Jukka Ammondt, a university lecturer in English and German who dabbles in Latin and regularly tunes in to the broadcasts, even though he confesses that he cannot understand everything.

Mr. Ammondt, 68, has certainly done his part to promote Latin — and Finland. After a difficult divorce two decades ago, he turned increasingly to the songs of Elvis Presley, an idol of his youth, for consolation. For the fun of it, he began singing them in Latin.

Now, in addition to teaching, he gives occasional concerts like one last summer when he swayed a crowd at the Finnish Culture Center in St. Petersburg, Russia, east of here, with his renditions of “Tenere me ama,” (“Love Me Tender”) and “Ursus Taddeus” (“Teddy Bear”).

While the broadcasts once went out over the airwaves, with shortwave reception for listeners outside Finland, more and more listeners tune in to the program’s Web site, through podcasts and MP3 downloads.

It also reinforces a global trend among lovers of Latin to try to speak it, not just read it.

In Paris, Mr. Blanchard, an avid Latin speaker, helps run the “Circulus Latinus Lutetiensis,” or “Paris Latin Circle,” whose members meet monthly to converse, produce works of theater or just play cards, all in Latin. “We use the Internet to chat, in Latin,” he said.

Antti Ijas, 27, a graduate student writing a thesis on Old English poetry, helps Mr. Pekkanen translate news spots and field e-mails from listeners across the world. “We do get linguistic feedback,” he said, “especially from Germany,” where Latin studies have a deep tradition.

Most comments, he said, focus on pronunciation. There are endless debates about how Cicero would have sounded as he addressed the Senate — and about the choice of words for modern things like “golf course” (“campus pilamallei”) or iPad (they haven’t found one). “I don’t use an iPad myself,” Mr. Pekkanen said with a chuckle, adding: “We quarrel with the Germans.”

But many listeners think the criticism is largely unfounded. “I’m often struck when I’m listening how well structured it is, how idiomatic, how precise the vocabulary is,” said Ms. Whittington, the Harvard professor.

The most common complaint about the broadcast is that at five minutes, it is far too brief. Mr. Pekkanen demurs. The choice of subjects and translation, he said, “takes much time.”

“In my opinion, five minutes is quite suitable,” he said.

Joonas Ilmavirta, a graduate student in mathematics and a regular listener, understands the challenge. “It’s very labor intensive,” he said. Mr. Ilmavirta, 25, who studied Latin in high school and occasionally helps Mr. Ammondt translate Elvis, keeps up his Latin by reading comic books in the language.

He only occasionally dips into serious authors. “If I could pick one, it might be Catullus,” he said, referring to the earthy Roman poet.

Many Finns know the broadcast because it precedes the popular Friday evening news, even though most these days cannot understand it.

Mr. Ilmavirta acknowledged that few of his contemporaries share his passion for Latin. “I don’t really know of young people interested in Latin,” he said. “And by young, I mean under 40.”

Mr. Ammondt, the Latin Elvis, said numbers did not matter. “Latin is the basis of Western culture,” he said. “That is why it is very symbolic.”

Article source: http://www.nytimes.com/2013/04/09/world/europe/nuntii-latini-news-broadcast-in-finland-unites-fans-of-latin.html?partner=rss&emc=rss

U.S. Recovery Slowly Gained Speed in Late ’11, Data Show

The pace of growth was faster than in the third quarter, when gross domestic product expanded at an annual rate of 1.8 percent.

Even so, both  figures were below the average speed of economic expansion in the United States since World War II. Above-average growth in the quarter would have helped to make up for the destruction wrought by the Great Recession.

“At this rate, we’ll never reduce unemployment,” said Justin Wolfers, an economist at the University of Pennsylvania. “The recovery has been postponed, again.”

Still, the 2.8 percent rate is likely to be seen by many as something of a relief, given that just last summer many economists were predicting the country would soon dip back into recession. Whether this modestly brisker pace of growth will continue is unclear, however.

One of the biggest drags on growth in the last quarter was government spending at the federal, state and local levels, according to the Commerce Department report. National defense spending fell a whopping 12.5 percent, for example. Strapped state and local governments are likely to continue cutting back in 2012, as they have done nearly every quarter for the last several years.

At the federal level, Congress has not yet decided whether to renew a temporary payroll tax cut and extended unemployment benefits past February, when both are scheduled to expire.

Consumer spending rose at an annual pace of 2 percent, slightly better than the 1.7 percent in the previous quarter. But there were signs that the increase in spending might have been driven by borrowing based on expected improvements in the economy and that consumers were starting to retrench again.

“It will be very hard for consumption growth this quarter to match what we saw last quarter,” said Paul Ashworth, chief United States economist at Capital Economics. “Remember that with consumption at 70 percent of G.D.P., slower consumer spending growth can mean much slower G.D.P. growth.”

Among the more optimistic signs recently, many American companies have reported strong profits in recent months. In addition, new orders for manufactured durable goods, reported on Thursday, exceeded economists’ expectations in December by growing 3 percent.

And companies like General Electric and Lockheed Martin closed the year with record order backlogs, a sign that, at least for some businesses, demand is so strong that they cannot produce quickly enough. The backlogs portend solid manufacturing growth going forward, and suggest to some economists that the United States could weather the European sovereign debt crisis relatively unscathed after all.

On the other hand, so far in this recovery, corporate success has not necessarily benefited American workers and consumers. Today, the economy produces more than it did when the recession began in 2007, but it manages to do so with six million fewer jobs.

Companies seem reluctant to use their burgeoning profits to invest in new workers.

“Businesses have been holding much higher levels of cash than they have in past,” said Conrad DeQuadros, senior economist at RDQ Economics.

Article source: http://www.nytimes.com/2012/01/28/business/economy/us-economy-grows-at-modest-2-8-percent-rate.html?partner=rss&emc=rss

Off the Charts: As a Market Predictor, a Trusty Guide Falters

Through November, an investor in the stocks in the Standard Poor’s 500 had a small profit of 1.1 percent this year, including reinvested dividends. But that figure was a 6 percent loss a week earlier, before investors took pleasure from positive reports of post-Thanksgiving retail sales and became more optimistic that another round of European summit meetings next week would reduce the threat of a new financial collapse.

The last negative return during the third year of a presidential term was in 1939, when the loss was a barely noticeable 0.1 percent. That loss came as storm clouds gathered in Europe with the beginning of World War II. It is hard to think of any year since the war when Europe’s problems have loomed as large to investors as they have this year.

As can be seen from the accompanying charts, an investor who put money into American stocks at the beginning of each third year, and then got out of the market for the next three years, would have done far better than one who chose any other year of the presidential cycle to invest in.

With this year’s performance, the compound annual gain for all third years since World War II will dip below 20 percent, barring a major rally this month. During the postwar years, the second-best showing was from fourth years — the years when a new president is elected. It was just over 8 percent.

A $100 investment in 1947, allowed to grow only in third years, would be worth more than $2,000 now. Similar investments in the first, second or fourth years would have grown to less than $400.

It has long been suspected that the fact that third years were the best was far from a coincidence, as presidents sought to stimulate the economy and corporate profits heading into a year when they would seek re-election or, if they were completing a second term, try to keep the White House in the hands of the same party.

This year, the economic outlook has been anything but clear, with encouraging signs of growth early in the year replaced by fears of a double-dip recession in the summer as the European credit crisis intensified. Since August, the market has gyrated wildly as European prospects have seemed to change almost daily.

At the same time, it has become increasingly clear that Congressional Republicans are unlikely to allow any significant effort to stimulate the economy before next year’s election.

President Obama may be pleased to learn that third-year stock market returns have not been good predictors of election results. The four best third years — all with total gains of more than 30 percent — were in 1955, 1975, 1991 and 1995. In 1956 and 1996, incumbents easily won re-election. In 1976 and 1992, incumbents were defeated. Similarly, the results after the four lowest postwar gains were also split, with the incumbent party winning twice and losing twice.

The stock market has long been viewed as a leading indicator of the economy, and the presidential cycle seems to bear that out. The best economic growth, on average, has been in the fourth years of presidential cycles, with the third year second-best.

There is another historical indicator that provides hope that the third-year pattern will hold. Year-end rallies are common, and as a result December has been more likely to show increases than any other month over the last six decades.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://feeds.nytimes.com/click.phdo?i=034cb25a3e6f4fa25922c3e892eaa6f2

Off the Charts: For Companies, the Good Old Days Are Now

During the same period, there never was a quarter when wage and salary income amounted to less than 45 percent of the economy. Now the figure is below 44 percent.

For companies, these are boom times. For workers, the opposite is true.

The government’s first estimate of corporate profits in the third quarter was released two days before Thanksgiving, at the same time it revised the rate of G.D.P. growth in the quarter down to an annual rate of 2.0 percent.

The report showed that effective tax rates, both corporate and personal, are well below where they were during most of the post-World War II era.

Corporate profits after taxes were estimated to be $1.56 trillion, at an annual rate, during the quarter, or 10.3 percent of the size of the economy, up from 10.1 percent in the second quarter. Until 2010, the government had never reported even a single quarter in which the corporate share was as high as 9 percent, as can be seen in the accompanying charts.

The government began calculating the quarterly figures on corporate profits in 1947, but it has annual figures back to 1929. Until last year, the record annual share was 8.98 percent, set in 1929. For all of 2010, the figure was 9.56 percent.

Wage and salary income was only 43.7 percent of G.D.P., the lowest number for any period going back to 1929. That figure first fell below 45 percent in 2009.

Compared with the final three months of 2007 — as the 2007-9 recession was beginning — wage and salary income was just 1.8 percent higher in the third quarter of this year. By contrast, overall corporate profits before taxes were 35 percent higher. With estimated corporate taxes just 1.5 percent higher, after-tax profits were up 49 percent. Those figures are not adjusted for inflation.

The corporate tax figures, which are estimates by the Bureau of Economic Analysis of the Commerce Department and are subject to revision, include state and local income taxes as well as federal income taxes.

In the quarter, corporate taxes amounted to 21 percent of corporate profits, a figure that is lower than in all but two previous periods, the first two quarters of 2009, during the recent recession.

During the half-century from 1960 through 2010, corporate taxes averaged almost 34 percent of net income, so the current figure is about a third lower than average.

Personal taxes as a proportion of total personal income was estimated at 14.1 percent for the quarter. The tax figure included state and local income taxes, taxes on personal property and the employees’ share of payroll taxes like Social Security. That figure is higher than it was in recent quarters but well below the 50-year average of 15.5 percent.

That increase came despite the government’s temporary reduction of some payroll taxes this year as a way to stimulate the economy.

The figures for wage and salary income arguably understate the cost of hiring, since they exclude both the employer’s share of payroll taxes and the cost of other benefits, like health insurance. Including those costs, total compensation of employees came to 54.3 percent of G.D.P. That figure is not a record low, but it is the smallest share for any period since 1955.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://feeds.nytimes.com/click.phdo?i=514583a80140b777e9b48b59d80a18b2

Square Feet: Unconventional Financing Aids Deal for Brooklyn Space

Mostly vacant for the better part of a decade, the 650,000-square-foot building has been a tire factory, a trade school and even hosted antiaircraft guns on its roof to protect the Brooklyn waterfront in World War II. Most recently, it warehoused data servers during the dot-com boom.

But late last month, the New York City Human Resources Administration signed a 20-year, 400,000- square-foot lease for six floors of the 10-story building — the largest deal in Brooklyn this year and the culmination of more than two years of negotiations. Along with a second, smaller deal, 470 Vanderbilt is now 85 percent leased. In conjunction with a residential tower that the developers hope to build on an adjacent parking lot, it could speed the transformation of the area, which lies between Fort Greene and Clinton Hill.

“The building is huge, an entire city block, and it has basically sat vacant and derelict for years,” said Steven Hurwitz, the vice president of acquisitions and developments at GFI Development, which acquired the ground lease in 2007 for $45 million from the estate of Sol Goldman. “This is a major turnaround for the building and the surrounding neighborhood.”

With some 1,800 full-time employees and 1,500 daily visitors, the Human Resources Administration “will mean more patrons for our businesses and an increase in foot traffic for the neighborhoods,” said Phillip Kellogg, the manager of the Fulton Area Business Alliance.

The H.R.A., which provides support to New Yorkers with social service and economic needs, is consolidating from three locations, shrinking its overall occupancy by 95,000 square feet. It will be vacating 271,000 square feet at 330 West 34th Street, 37,000 square feet at 2 Washington Street in Manhattan and 187,000 square feet at 210 Livingston Street in Brooklyn. Peter B. Hennessy, president of the New York tri-state region for Cassidy Turley, represented the housing authority in the deal and Gary Kamenetsky, a first vice president at CB Richard Ellis, represented GFI.

Construction at 470 Vanderbilt Avenue is expected to start by the end of the year with a move-in date of next winter.

The new lease will save the agency $7 million a year in rent. The deal “is an excellent example of the city’s ongoing, proactive space-efficiency efforts,” said Edna Wells Handy, the commissioner of the Department of Citywide Administrative Services, which negotiated the lease on behalf of the Human Resources Administration.

Other tenants include the League Education and Treatment Center, which recently signed a lease for more than 77,000 square feet at the site and is relocating from a smaller space in Dumbo, and the New York City Housing Authority, which moved into 62,000 square feet in 2009.

Still vacant is 70,000 square feet on the building’s upper floors. Unlike the base of the building, which has 75,000-square-foot floor plates, these floors are 20,000 square feet each. “We are already starting to get a lot of interest from smaller users that can feed off of the foot traffic from the H.R.A. and N.Y.C.H.A.,” said Mr. Hurwitz, who said the asking rent was $32 a square foot.

There is also 15,000 square feet of retail space on the ground floor, adjacent to the H.R.A. offices. With some 3,300 people coming in and out of the agency’s offices daily, as well as the 700 or 800 that work and visit the housing authority, “there will be close to 5,000 people in the building who will need to eat, so something like a cafeteria would make sense,” Mr. Hurwitz said.

Now that the office space is almost fully leased, GFI is turning its focus to building housing on the site. A uniform land use review procedure last year allows GFI to construct a 350-unit rental building next to the office space. It is looking for financing to start construction on the building, which would set aside 24 percent of the apartments for affordable housing and also include a two-level underground garage for 320 cars.

In the deal with the housing authority, the developer struggled over how to finance some $60 million that was needed to transform the space, which is now raw, into a usable office, including furniture, carpeting and lighting.

“Very often, tenant improvements are the last piece of the puzzle,” said Richard L. Podos, the chief executive of Lance LLC, which advised GFI on the transaction, “and they can be a stumbling block to getting a large deal done.” Landlords, and the lenders who finance them, prefer not to bear the costs of building out office interiors because they do not increase the overall value of the property. Tenants, meanwhile, do not want to pay to improve office space they do not own. Typically, landlords will allocate some money for improvements and tenants pay the remainder.

In this case, the city wanted GFI to pay all of the upfront costs and to reimburse the developer when it occupied the space. GFI, however, did not have access to sufficient funds. “The city likes the landlord to pay the whole thing, and then when the work is done and they are ready to occupy the space, the city will write a check,” said Mr. Hurwitz. “The amount was significant, however, and we needed a financing tool to bridge the gap.”

To close the deal, GFI joined with Lance Capital and the CGA Capital Corporation to create a trust company that issued a bond. In a twist, the $44 million bond issuance was secured not by the building but by a part of the rent that the housing authority will pay. Since the bonds are not backed by any physical assets, should the city stop paying its rent, the only recourse bondholders would have is to sue the city for payment. Still, bondholders are betting that the city, with a double-A rating, is unlikely to go bankrupt or stop its payments.

The bonds, which were privately placed with investors and fully amortize over seven years, came with a rate of under 5 percent, well below the 8 to 12 percent that banks would normally charge borrowers for this type of expenditure, Mr. Podos said. “Because we figured out how to use the creditworthiness of the city,” he said, “we were able to finance it really cheaply for the landlord.”

The city was not involved in the bond financing, and is connected only insofar as it is a tenant whose rent is being used as collateral. “At the time, we understood that conventional financing was unavailable to the landlord,” said Theresa Ward, the chief asset management officer for the Department of Citywide Administrative Services, and “the landlord presented this as a cost-effective alternative.”

In addition to issuing a bond to pay for the tenant improvements, GFI also refinanced its existing bank loan and increased the lending facility on the property to $130 million. As part of this, it brought in an additional $24 million of equity from a new partner, the Starwood Capital Group.

Article source: http://feeds.nytimes.com/click.phdo?i=51e402d7af46d6005acfe74060bfd776

Strong Yen Is a Two-Edged Sword for Japan

TOKYO — In a bid to calm jittery markets, top Japanese finance officials discussed the country’s persistently strengthening currency at an emergency meeting Thursday, even as a beverage maker announced an overseas acquisition that took advantage of the soaring yen.

The contrast between the alarm among government officials over the strong yen on one hand and the opportunism of Asahi Group’s bold $1.3 billion deal for a New Zealand beverage company on the other underscores the mixed fortunes for Japan from its surging currency.

Considered a haven by investors, the yen has been driven to near post-World War II highs amid Europe’s debt problems and doubts about U.S. economic growth. The currency’s climb has wreaked havoc with Japan’s export-led economy and weighed on the stock market.

A strong yen hurts Japanese exporters because it makes their goods less competitive and erodes the value of their overseas earnings when repatriated into yen. Every time the dollar loses ¥1 in value, Toyota Motor loses about ¥30 billion in earnings per quarter, according to the automaker.

At the same time, the strong yen has bolstered the country’s purchasing power overseas, an advantage most visibly exploited by Japanese corporations that are seeking to expand. On Thursday, Asahi said it was buying Independent Liquor of New Zealand for ¥97.6 billion, or $1.3 billion, as the Tokyo-based beverage maker looked to increase its sales overseas to make up for a shrinking market at home.

Tsuyoshi Ueno, senior economist at the NLI Research Institute in Tokyo, said Japan needed to concentrate on the positives of a strong currency and deal with the negatives.

“Upward pressure on the yen is likely to continue for some time, and even if the yen were to weaken temporarily, there would be no change to the fact that every time the global economy worsens, the yen strengthens,” Mr. Ueno said in a note to clients. “To escape this cycle, Japan needs to build an economy and industry that not only survives a strong yen, but thrives with it.” Japan needs to foster new industries, like care for its elderly, and

seek opportunities overseas, he said.

Asahi, the maker of Japan’s top-selling beer, Super Dry, and soft drinks, said in a statement Thursday that it would buy all outstanding shares of Flavoured Beverages Group, the parent company of Independent Liquor, from the private equity firms Unitas and Pacific Equity Partners, adding the Woodstock Bourbon and Vodka Cruiser labels to its family of drinks.

Asahi’s purchase followed a bigger overseas acquisition by its rival Kirin, which said this month that it would buy a controlling stake in Schincariol, a Brazilian beverage maker, for $2.6 billion.

Despite the disruption caused by the devastating earthquake and tsunami in March, Japanese companies spent $26.6 billion on mergers and acquisitions overseas in the three months through June, the highest quarterly volume in almost three years, according to Dealogic.

“When the yen is on an upward trend, it creates a favorable environment for M.A.’s,” Kotaro Masuda of the Institute for International Trade and Investment said in a research note, referring to mergers and acquisitions. “It also becomes possible for companies to buffer against currency risks by producing more overseas.”

Still, the response in Japan has been characterized more by panic than anticipation of any potential upside. And the prospect of Japanese companies’ shifting more of their production abroad does little to soothe the anxiety.

Two weeks ago, the Japanese government spent an estimated ¥4.5 trillion to stage a record intervention in currency markets, selling the yen and buying dollars in a bid to weaken the Japanese currency.

Though the yen fell slightly against the dollar following that move, it has again edged upward in recent sessions. Late Thursday in Tokyo, the dollar traded at ¥76.60, down 11 percent from a year earlier and 3 percent in the past month.

Over the past five years, the dollar’s value has fallen 33 percent against the yen. Analysts have questioned whether Japan can hope to keep the yen from rising, as long as global investors treat it as a haven. It may seem counterintuitive that the currency of Japan, a country burdened with sluggish growth and a huge public debt, is seen as a refuge from the debt crisis in Europe. But most of Japan’s debt is held domestically, yields on government bonds remain far lower than other industrialized nations and inflation is nonexistent, all positive factors for the yen.

On Thursday, a top currency official at the Japanese Finance Ministry met with his counterpart at the central bank, a signal to markets of government readiness to temper the rise in the yen. The government has staged a series of currency interventions in the past year with limited effect. One, conducted in March in conjunction with other members of the Group of 7 industrialized nations, came after the yen reached its post-World War II high following the earthquake and tsunami.

Though the officials who met Thursday did not reveal specifics of their discussion, the meeting seemed aimed at showing markets Japan’s determination to try to stare down currency markets. After the meeting, Vice Finance Minister Takehiko Nakao said that talks had covered “the yen and global financial markets over all.” Mr. Nakao met with Hiroshi Nakaso, the executive director of the Bank of Japan, the central bank.

Mr. Nakao did not say whether Japan planned another currency intervention, though government officials have said that they are watching market movements closely. Government officials have also urged the Bank of Japan to take measures to increase liquidity in the Japanese financial system, which also has the effect of weakening the yen.

Last year, a similar meeting between senior officials of the Finance Ministry and Bank of Japan, also following a spike in the yen, produced a joint statement warning markets against excessive currency volatility. No such statement was issued Thursday.

Meanwhile, government numbers released Thursday showed that exports continued to suffer from the strong yen. Japanese exports were down 3.3 percent in July from a year earlier, according to Ministry of Finance data, worse than the 2.4 percent decline expected by economists.

The strong currency is threatening to undermine Japan’s economic recovery just as industrial production rebounds following the earthquake and tsunami. Fears of a global economic slowdown are also hurting trade, weighing on the Japanese economy.

Reconstruction demand and a recovery in industrial output are likely to buoy the economy, said Cameron Umetsu, senior economist for Japan at UBS. “But the murky global backdrop still holds the potential to serve up nasty surprises for export-sensitive Japan,” he said.

Article source: http://www.nytimes.com/2011/08/19/business/global/japanese-finance-officials-meet-to-address-yens-strength.html?partner=rss&emc=rss

Economix Blog: Podcast: Bonds, Markets, the Economy and History

The markets are being whipsawed. How severe has the volatility been? One statistic tells the story: for the first time in its history, the Standard Poor’s 500-stock index moved up or down by at least 4 percent on four consecutive days.

In the new Weekend Business podcast, I talked to Floyd Norris and Julie Creswell, two veteran financial reporters for The Times, about the turmoil in the markets. Ms. Creswell has been covering the impact on individual investors and says many have been rushing to sell their stock holdings.

Of course, selling in a downturn is not always the best approach, Mr. Norris pointed out, especially if markets rise again soon. A big issue at the moment is whether we are experiencing a repeat of the 2008-9 crisis, when markets fell far more steeply than they have in recent weeks, or whether the current situation is more benign. Unfortunately, there are no firm answers.

One reason for the plunge in asset values is a global economic slowdown. In a separate conversation on the podcast, Christina Romer, an economist at the University of California, Berkeley, says the Great Depression and World War II supply some important lessons for dealing with the current crisis. In the Economic View column in Sunday Business, she says that expansive monetary and fiscal policy worked well back then to promote economic growth. In addition, the United States took on a far heavier debt load in the war years than it has so far, and still managed to pay it down when the economy was stronger.

Reconciling economic stimulus with a prudent long-term fiscal policy can be done again, she says, but the logic for these intertwined approaches needs to be conveyed forcefully to the American public.
I also chatted with Steve Lohr, a Times technology reporter, about a new approach to corporate social responsibility. In the Unboxed column in Sunday Business, he says academic theorists are proposing a concept known as shared value, in which companies profit by taking on tasks that result in public good. One example is General Electric’s “ecomagination” program, in which the company has invested in technology to lower the energy consumption of its products and to reduce the use of water and other resources in manufacturing. The company says its sole motive has been profit; the social benefits are ancillary.

And in another podcast conversation, Phyllis Korkki interviewed me about the implications of the downgrading of United States Treasury debt, the subject of my Strategies column in Sunday Business. Treasury bonds have been the linchpin of the world financial system, and the center of myriad calculations in business, portfolio construction and capital markets. The 10-year Treasury yield has been plugged into countless algorithms as the putative “risk-free rate of return,” against which other cash flows are compared. Now, the rate for a risk-free investment may need to be approximated, and the center of the global financial structure seems much less solid than it was just a few years ago.

You can find specific segments of the podcast at these junctures: Floyd Norris and Julie Creswell (37:06); news headlines (27:41); Steve Lohr (23:14); Christina Romer (16:01); Strategies column (8:51); the week ahead (1:57).

As articles discussed in the podcast are published during the weekend, links will be added to this post.

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

Article source: http://feeds.nytimes.com/click.phdo?i=ef68e80ca754b549afaca15dd36d98e1