Arnold Kling  

Depression Mania

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Mark Thoma has a roundup of commentary on the Citigroup bailout. I'll add a few thoughts.

1. For all of the Depression Mania, there is a lot of the U.S. economy that does not have to shrink. Manufacturing is pretty lean to begin with. Housing construction is already much lower than it has been in years. Unlike the 1930's, we have some very big sectors (health care, education, other government employment) that are unlikely to develop massive layoffs.

The one sector that definitely needs to contract is the financial sector. Maintaining Citi as a zombie bank is not really constructive. I would feel better if it were carved up, with the viable pieces sold to other firms and the remainder wound down by government. In my view, getting the financial sector down to the right size ought to be done sooner, rather than later.

From my perspective, the whole TARP/bailout concept is misconceived. The priority should not be saving firms. The priority should be pruning the industry. Get rid of the weak firms, and make good on deposit insurance. Then let the remaining firms provide the lending that the economy needs.

2. When I see Obama's proposals for a big investment in infrastructure, I get this picture in my head of former mortgage brokers and bond salesmen on highway construction projects wearing hard hats and driving bulldozers. Actually, the employment benefit of infrastructure projects is more likely to go to the illegal immigrants who were laid off from housing construction and who otherwise would be headed back home.


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COMMENTS (21 to date)
fundamentalist writes:

"Actually, the employment benefit of infrastructure projects is more likely to go to the illegal immigrants who were laid off from housing construction and who otherwise would be headed back home."

That is exactly right! Thanks for saying it.

Dennis Mangan writes:

Re: illegal immigrants and infrastructure: Arnold must be channeling (or at least reading) Steve Sailer. http://isteve.blogspot.com/2008/11/learning-from-new-deal.html

Jeffrey writes:

I find this bit of information interesting:

"Construction firms shed 35,000 jobs for the month [Sept] and 464,000 (-6.1%) over the past 12 months. Residential building and specialty trade contractors lost 13,000 jobs in September and 341,000 (-11%) over 12 months; nonresidential building, specialty trade and heavy and civil engineering employers cut 22,000 workers for the month and 122,000 (-2.8%) over 12 months. However, BLS may be understating residential job losses because many employees of “residential” specialty trade contractors are now working on nonresidential sites. Based on the Census Bureau’s report on Wednesday that residential spending declined 28% from August 2007 to August 2008, it is likely that residential employment also fell roughly 28%, not 11%. The difference, 550,000 workers, implies that nonresidential employment actually rose by 425,000 (10%). Such a gain is more consistent with the 11% increase in nonresidential spending over that span. It also helps to explain why average hourly earnings for production and nonsupervisory workers rose more in construction from September 2007 to September 2008 (4.5%) than in the overall private sector (3.4%)." Ken Simonson, Chief Economist, Associated General Contractors of America

My guess is that building velocity increased, thus depleating the volume of backlog projects in commmercial and heavy civil projects. The backlog was not replenished due to credit issues stalling projects. Crappy timing for most large contractors brought on by lousy financial decisions in the financial sector.

The real necessity to retain construction workers in short supply is interesting and in direct contrast to the artificial desire to retain workers in a bloated financial industry.

Maniel writes:

"When I see Obama's proposals for a big investment in infrastructure, I get this picture in my head of former mortgage brokers and bond salesmen on highway construction projects wearing hard hats and driving bulldozers."

Government intervention is generally backward looking, although there are examples of forward-looking infrastructure investments - the railroads and interstate highways. I suggest that a new transportation system is in order - say a mass-transit / automobile hybrid. There would be openings for both financeers and hard-working illegals.

Check out http://www.publishedauthors.net/tricenpioneers/index.html

ThomasL writes:

"[W]e have some very big sectors (health care, education, other government employment) that are unlikely to develop massive layoffs."

Am I the only one that is not particularly impressed by the nature of these sectors? Can you real have an economy with those as the foundations?

trumpetbob15 writes:

"When I see Obama's proposals for a big investment in infrastructure, I get this picture in my head of former mortgage brokers and bond salesmen on highway construction projects wearing hard hats and driving bulldozers."

Don't forget, with a government road project, they always need at least 15 people standing around watching the construction. So, there are still jobs available for former financial workers in infastructure; plus, they can still wear hard hats!

The Snob writes:

"Am I the only one that is not particularly impressed by the nature of these sectors? Can you real have an economy with those as the foundations?"

One very important characteristic of those sectors is that they employ a much lower ratio of capital to labor in the production of goods or services.

Agriculture, manufacturing, and construction have over the years become dramatically more efficient at producing food, clothing, and shelter. By contrast, government structurally favors growth in headcount over productivity-per-employee and education quality is seen as a function of student-teacher ratios.

Meanwhile, healthcare goods are largely produced by independent artisans according to a guild system, i.e., a highly-trained doctor making a diagnosis and providing treatment, while other aspects like nurse care are difficult or undesirable to automate.

As a result, it is inevitable that the proportion of employees in these spaces has grown significantly. They are not the foundation of the economy, but the foundation of employment, which is a different matter.

The real question is, what would happen if we managed to make any or all of these sectors much more productive? At that point we might need import tariffs or a ban on the use of tractors and nailguns in order to guarantee employment for the cognitively-challenged masses.

P. Blank writes:

“…employment benefit of infrastructure projects is more likely to go to the illegal immigrants…”

What? So, all those planners, engineers and CM staffers who design the highway projects are really illegal immigrants from Mexico. Hardly! Design, construction management and materials (taken together) are FAR more expensive than labor.

You guys are so funny!

Thomas writes:

Finance has shrunk. Didn't Citibank itself lay off 50,000+

Export goods in another area that needs to expand to pay off foreign debt and probably investment goods, too as investments will need to increase as consumption becomes a smaller share of GDP.

jb writes:

P. Blank - I'm not sure that Arnold's saying that the bulk of the money will go to illegal immigrants - obviously the material cost of construction projects is significant - I think he's saying that of the small portion of the money that is used for the actual manual labor, a good chunk will go to illegal immigrants.

urban legend writes:

These will be union-driven Davis-Bacon jobs, more than a bit less likely to go to illegals. Pick your poison, fellows.

Even if they did, and someone decided we couldn't or wouldn't do anything about it, what should we do, just let the roads and bridges crumble?

Steve Sailer writes:

A major goal of the Obama Administration is to keep millions of illegal immigrants from going home, thus depriving the Democratic Party of large numbers of votes in coming decades from them and their American-born (and thus birthright citizen) children. Spending hundreds of billions of the taxpayers' dollars to keep illegal immigrant construction workers previously employed putting up unneeded McMansions in exurban Las Vegas from going back home is a small price to pay for future Democratic dominance.

Randy writes:

Urban Legend,

"...what should we do, just let the roads and bridges crumble?"

Yes. Allow a liberal use of rfid technology and then let the market decide which roads and bridges survive.

amaxen writes:

In the same way, the project to build a big wall between the US and Mexico would have served primarily as a means to attract illegals to the US by driving up demand for construction labor.

jason writes:

A major goal of the Obama Administration is to keep millions of illegal immigrants from going home, thus depriving the Democratic Party of large numbers of votes in coming decades from them and their American-born (and thus birthright citizen) children.

Yeah, you hit the nail on the head. Remember you are not a citizen and have no rights. You are a consumer.

So stop complaining and consume some stuff!

Niccolo writes:

"P. Blank - I'm not sure that Arnold's saying that the bulk of the money will go to illegal immigrants - obviously the material cost of construction projects is significant - I think he's saying that of the small portion of the money that is used for the actual manual labor, a good chunk will go to illegal immigrants."


Wait... And why are we freaking out about money going to immigrants over domestics?


What does it have to do with anything?

Patrick writes:

my initial thought upon hearing about Citibank's potential bankrupcy was, Sweet... this will cancel out the small fortune's worth of debt I have stored up on my trusty Citi-card... right?

El Presidente writes:

First point was excellent. Second was not.

What about debt? Can we keep spending like this?

http://www.bloomberg.com/apps/news?pid=20601109&sid=arEE1iClqDrk&refer=home

$7.4+ trillion is already "pledged"...

El Presidente writes:

The Freedom Thinker,

"What about debt? Can we keep spending like this?

For ever and ever, amen.

It sounds kinda like a dare. I would reword the question.

Tom Grey writes:

There is too little in the currnet money/ fiscal policy Depression blogosphere about the labor transition away from farming as agro-industry used capital to replace labor.

The Joad family were among the future ex-farmers.

Thanks, Jeffrey, for pointing out that 464,000 jobs were lost in the construction industry. It's probably much more, because many cash-paid illegals are not being counted.

The financial industry should be looking to lose 500 000 or so -- so the 'bailout' to the Big Banks is a stall to avoid this needed contraction.
Oh, yeah, and to keep the Fat Cats Fat and Sassy.

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