Loving austerity

You’ve got to hand it to the Brits, as Anne Applebaum explains:

“Vicious cuts.” “Savage cuts.” “Swingeing cuts.” The language that the British use to describe their new government’s spending reduction policy is apocalyptic in the extreme. The ministers in charge of the country’s finances are known as “axe-wielders” who will be “hacking” away at the national budget. Articles about the nation’s finances are filled with talk of blood, knives and amputation.

And the British love it. Not only is “austerity” being touted as the solution to Britain’s economic woes, it is also being described as the answer to the country’s moral failings. On Oct. 20, the government will announce $128 billion worth of spending cuts, and many seem positively excited about it. . . For these voters, the very idea of instant gratification is anathema, in theory if not in practice. And they elected this government because they’ve convinced themselves that they’ve had enough of it.

Austerity, by contrast, has a deep appeal. Austerity is what made Britain great. Austerity is what won the war. It cannot be an accident that several British television channels are running programs this year with titles such as “Spirit of 1940,” all dedicated to the 70th anniversary of that “remarkable year” of rationing, air raid sirens and hardship. One series, “Ration Book Britain” is even devoted to that era’s parsimonious cooking. “With bacon, eggs and sugar rationed, wartime cooks had to be jolly resourceful,” explains an advertisement for the show. Its host promises to “re-create the recipes that kept the country fighting fit.”

Sometimes the depth of the Anglo-American cultural divide reveals itself in unexpected ways, and this is one of those moments: No cooking show featuring corned beef hash and powdered eggs would stand a chance in the United States. Perhaps for similar reasons, nobody is talking about “austerity” in the United States either. On the contrary, Republicans are still gunning for tax cuts, and Democrats are still advocating higher spending. Almost nobody — not Paul Krugman, not Newt Gingrich — talks enthusiastically about budget cuts. Instead, our politicians use euphemisms about “eliminating waste” or “making government more efficient,” as if no one had ever thought of doing that before.

Despite the deep shock the United States supposedly experienced during the banking crisis of 2008 and the resulting recession, we are, in other words, still far from Clegg’s “long-termism.” Hardly anyone in America is talking about cuts in Medicare, Medicaid or Social Security, for example, the biggest budgetary items (even though “private” pensions now look a lot safer, even when taking stock market fluctuations into account, than those who will depend entirely on a bankrupt federal budget 20 years hence). In Britain, by contrast, everything is on the table: pensions, housing benefits, disability payments, tax breaks.

Politics explain some of this difference, but I reckon history explains more of it. The last period of real national hardship Americans might remember is the 1930s, too long ago for almost everyone alive today. But rationing in Britain lasted well into the 1950s, long enough to color the childhoods of many politicians now in power. Nostalgic Brits, longing to re-create their country’s finest hour, remember postwar scrimping and saving. Nostalgic Americans in search of their own country’s finest hour remember postwar abundance, the long consumer boom — and, yes, a time when even instant gratification wasn’t fast enough.

via Anne Applebaum – For the U.S., Britain’s austerity is a foreign concept.

The conventional wisdom is that politicians dare not ask Americans to make sacrifices of any kind.  Do you think Americans could come to love austerity?

The unemployment conundrum

Steven Pearlman offers a sobering analysis of why just tinkering with government spending–whether increasing it or decreasing it–will not bring the uneployment rate down significantly:

The reason there were 8 million additional jobs back in 2007 is that demand for goods and services was artificially – and unsustainably – inflated by cheap, plentiful credit. Between 2002 and 2007, household debt was increasing at the torrid pace of more than 10 percent annually, while business debt and the debt of state and local governments was growing at an average of 9 percent. Much of that money was used to finance present consumption.

Now all that has reversed. Household debt is shrinking at a rate of 2.4 percent per year as the savings rate has risen from nearly zero to more than 5 percent. Meanwhile, business debt declined 2.5 percent last year and is now flat, as is the case for state and local governments.

All that deleveraging and living within our means is obviously a good thing in the long run. But what it means for the economy in the short run is that neither the excess consumption nor the jobs it supported are coming back. During the past two years, the federal government has been actively trying to take up some of the slack by going on a borrowing-and-spending binge of its own. But continuing on that path is also unsustainable – certainly politically, and probably economically as well. And once federal deficits begin to decline next year, we’ll have yet another drag on economic growth and employment.

At this point, there is only one clear path out of the unemployment box we have created for ourselves.

Right now, the United States is running a trade deficit that is likely to reach $450 billion this year. That’s down considerably from the $750 billion at the height of the economic bubble, but still more than a wealthy advanced economy should have. Bringing it down – either by producing more of what we consume (fewer imports) or more of what other countries consume (more exports) – represents the path toward sustainable, long-term job creation.

The problem with that strategy is that for the past two decades we have allowed our industrial and technological base to deteriorate as talent and capital were grossly misallocated toward other sectors of the economy, even as other countries were able to attract the investment, the technology and the know-how to serve the U.S. and global markets.

For a time, none of this seemed to matter because we were consuming so much that we were able to support job creation at home as well as overseas. But now that the debt-fueled consumption binge is over, we find that we don’t have the companies, the workers or the competitive products to replace the stuff we now import or expand our share of export markets. Even when we do, our companies are disadvantaged by an overvalued currency or unfair trading practices.

via Steven Pearlstein – The bleak truth about unemployment.

So the previous decades of spending beyond our means cannot be made up for by the government spending beyond its means.  Prediction:  Someone will propose policies of protectionism.  It may be a Democrat or it may be a Republican, since both labor and big business tend to want government protection for their industries.  The thinking may be that America cannot compete in a global economy as it used to. Instead of the current bipartisan commitment to free trade, we will start putting tariffs on foreign imports to give an advantage to American-made products.  Prices will go up for consumers, but more of them will have jobs.  Do you think this is likely, a good idea, or a potential disaster?  Meanwhile, what policies might help create jobs?  Or do we just need to hunker down until our new thrifty lifestyles create an economic equilibrium?

Consumers are acting too responsibly

Why is the economy faltering?  Robert Samuelson blames consumers, who are saving more and paying down their debt instead of spending:

“Consumers are deleveraging (reducing debt) . . . and rebuilding saving faster than expected,” writes economist Richard Berner of Morgan Stanley. In 2007, the personal savings rate (the share of after-tax income devoted to saving) was 2 percent. Now it’s about 6 percent. Temporarily, this hurts buying. Declines in consumer spending in 2008 and 2009 were the first back-to-back annual drops since the 1930s. Since World War II, annual consumption spending had fallen only twice (1974 and 1980). . . .

Household debt has already dropped $800 billion from its peak of $11.7 trillion, estimates economist Mark Zandi of Moody’s Analytics. The Federal Reserve reports that debt service — the share of income going to interest and principal payment — has decreased from almost 14 percent in early 2008 to about 12.5 percent, the lowest since 2000.

via Robert J. Samuelson – The saving mentality is hurting the economy’s recovery.

And what has economists in a panic is the prospect of people continuing these good habits!

How Netflix pays its employees

Have you heard about the compensation system at Netflix?:

The online movie service, which today launched an iPhone app for subscribers to watch TV and movies on the go, has no vacation policy at all.

That doesn’t mean Netflix doesn’t allow vacation. Rather, operating under the idea that its engineers and professionals should be treated as adults, Netflix allows salaried employees to take as much vacation as they’d like.

In story in Britain’s Daily Telegraph last week, Dan Pink, author of the excellent leadership book Drive, shares the scoop on Netflix’s flexible vacation rules. If they don’t get their work done, or simply turn in mediocre performance, the company is candid about their fate: “adequate performance,” reads a slide presentation on the company’s web site, “gets a generous severance package.”

That slide deck made its way around the Internet last summer, as out-of-work techies salivated over Netflix’s generous and flexible benefits and pay. But while most of the attention at the time–it was August, after all–centered on the company’s hands-off approach to vacation, Netflix’s way of compensating its employees is just as radical, if not more so.

The Los Gatos, Calif.-based company takes a market-based approach to pay, believing that to get the best employees, it must pay above-market rates. Rather than setting a new staffer’s salary against what his internal peers make–an approach many companies take–Netflix carefully studies what that person could earn at other companies in combined salary and bonus, and then sets their pay a notch higher. Then, end of the year cash and stock incentives are not paid.

While that’s a highly unusual approach, what’s really radical is what comes next. Employees get to choose how much of their total pay comes in cash versus equity. Risk-averse employees can take the safe route, requesting the entire sum in cash. Those who want to tie their fortunes to Netflix’s can take half of it in equity, or other combinations of cash and stock. “If you have a high performance team, with fully formed adults,” asked Netflix’s Chief Talent Officer Patty McCord when I interviewed her recently, “why are we being paternalistic about compensation?”

What Netflix is doing with both its vacation and pay policies is to make its in-demand engineers feel like rational, thinking adults. The company trusts them to make decisions, and to act in the best interests of both their company and themselves.

But by not paying an annual bonus, it’s also fostering the sort of environment that doesn’t encourage outsized risk-taking by employees doing whatever they can to meet their annual goals. That hardly means the company doesn’t wave any sticks: Netflix’s zero tolerance for mediocrity means employees are incentivized to keep their jobs at a company that pays them above-market salaries and treats them like the professionals they are.

via PostLeadership: Netflix vacation policy is only the tip of a radical compensation iceberg – Jena McGregor.

Student Loan scandal update

Yesterday we blogged about the Washington Post’s dependence on income from its ownership of Kaplan, whose for-profit-universities are being accused of defrauding the government.  tODD points out that its universities are only part of the Kaplan empire, doing the math to show that the percentage of the Post’s income from the colleges and from the taxpayers is smaller than the 62% I cited.  Meanwhile, in another case of surprising readers of this blog, one of the original litigators who helped expose the corruption at Kaplan, Mike Aguirre, wrote in.  You need to read his post in the comments.  It tells about how Kaplan officials were caught destroying diplomas of “phantom students” who didn’t really exist, but who apparently were made up by the university just to get student loans.  Mr. Aguirre also noted the staggering sums that flowed into Kaplan from the Title IV student loan plan:

> Finally, I would like to note the following amounts of Title IV funds paid to Kaplan in addition to those identified in the operative complaint.
> In 2005 Kaplan derived more than $500 million of its revenues from Title IV funds. In 2006 Kaplan derived $580 million of its revenues from Title IV funds. In 2007 Kaplan Title IV revenue was $745 million, or approximately 73%, of total KHE revenues. In 2008 Title IV funds accounted for $904 million, or approximately 71%, of total KHE revenues. During 2009 Title IV funds accounted for $1.283 billion million, or approximately 83%, of KHE revenues.

The student loan scandal

Colleges and universities are howling at an administration proposal to cut off federal student loans to institutions unless more than 35% of their graduates pay back the loans.  That would still allow for 65% to default on what they owe!  But even this mild requirement would put a lot of for-profit colleges out of business.  Their average rate of students paying back loans is 36%.  That means that 64% of their students blow off their loans, getting a free ride from American taxpayers who are putting them through college.

But the story at not-for-profit colleges and universities is not much better. Only 54% of public college graduates are paying back their loans. At private schools the rate is 56%.

Previously, banks made these loans, which the government guaranteed. In the case of defaults, taxpayers paid them back. Under the new system, the federal government cuts out the banks and just takes the losses directly.

This costs the government–that is to say, taxpayers– billions of dollars. The total amount of student debt is now $830 billion, which is more than the accumulation of all credit card debt! And a huge percentage of that obligation is now going to be paid back, leading some to call it a new mortgage bubble about to burst.

I know it’s hard to pay back student loans. One reason is that the quality of education many of these institutions are dishing out is very, very low. The institutions–many of which are turning out to be committing out and out fraud in getting students to borrow money they can never pay back–deserve a big share of the blame, as well as the corrupt system itself.

(My own institution, Patrick Henry College, refuses to take government money, even in the form of federal student loans. We try to make up for that in other forms of financial aid, drawing on private sources. It can be a hardship, but it’s worth it.)

See this and this.


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