Obama's 9/11

What arguably secured a second term for George W. Bush was the way in which he dealt with 9/11. The strong, hardline response was just what the American people expected from their President. Now, eight years later, Bush's successor faces his own 9/11 which provides an opportunity for another term in the White House and furthermore the chance to secure his legacy.

Many economists agree that unemployment rates in the U.S. could persist around the 9-11% mark for years to come with the global recession pushing whole communities onto the backfoot. One only has to look at Detroit with it's jobless rate of 17.7% to see the effect of the collapse of the automobile industry though this has affected towns and cities across America. And of course it isn't just transport manufacturing that has suffered with unemployment in furniture manufacturing at 22.5% and the construction industry is suffering with 16.5% unemployment.

At least it's a good time to be an economist with theories being thrown at the crisis left, right and centre. What is perhaps most interesting is that Okun's law seems to be faltering. The principle basically states that as the economy shrinks it sheds job at a similar rate and vice versa. On this basis, unemployment in America at the moment should be at around 8.5%; not the substantially greater 9.7% it is suffering.

What does all this mean? Well for some economists such as the renowned labour theorist Larry Summers, this could well signify a hysteresis in the economy and this seems to be backed up by the Peterson Institutes's Jacob Kirkegaard who recently stated that "a lot of the jobs that have been lost will never come back".

So if economic growth alone won't re-employ America, what can Obama do? The way to create a job stimulus seems to come in two parts and suits a Democrat President. Firstly, people have to be able retrain and learn new skills whilst out of work but the thing that stands in the way is a lack of economic freedom to do so. A sort of Medicare bill but for skills education would perhaps give mature students a right to healthcare or subsidised mentoring so that they could, for instance, learn a useful skill without worrying as much about their family. Secondly, more support must be given to new companies; the future economy. This can be done through tax breaks or even direct loans but unless new companies receive initial help they will not survive for long in this time of economic hardship.

These policy ideas aren't exactly in line with my normal Randian way of thinking, but as George W. Bush said a year ago; I am abandoning free-market principles in order to save the free-market.

Lehman Brothers: An Obituary

As we pass the one year anniversary of the collapse of Lehman Brothers a lot of media sources and politicians are looking back and asking how and why this happened. It is the latter query though which is both more interesting yet worrying for libertarians.

It doesn't need me to spell it out for you that a a lack of regulation and more generally, capitalism, has taken the brunt of the blame. In his speech from Wall Street, Barack Obama stated “We will not go back to the days of reckless behaviour and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses".

To me this seems like a rather over-zealous argument, how can you realistically blame capitalism for the expensive mistakes of various CEOs such as Richard Fuld? Running a high-risk business would pay-off with some massive bonuses in the short-term but when it all goes down the proverbial gutter, people can't be too surprised.

The real problem lies in government bailouts and in this sense the American government did the right thing by refusing to help out Lehman Brothers though this rule should apply right across the board. I understand that the likes of Goldman Sachs have now paid back what they borrowed with interest but the very knowledge that this safety net will be there only promotes greater and greater risk. Only when it is made clear that companies are responsible for their own actions will they be able to make a healthy profit without jeopardising the public purse.

Preparing for the Future

The Mansion House speeches are normally more of a back patting exercise rather than the substantial debate of economic policy seen on the 17th June. The reason for this is the collapse of the financial system and in particular the near-death of the banks last October. All of this has resulted in the biggest rift between the government and the Bank of England since Gordon Brown (as chancellor) freed them 12 years ago.

In many respects Alistair Darling is lucky to be making a speech at all after the recent cabinet reshuffle. Nevertheless the speech is representative of new Labour policy and make interesting reading. Firstly, Mervyn King stated that the central bank should not only take charge of macroprudential regulation but should also be given new powers in order to do so effectively. This echoes the position of the Conservative party but in stark contrast, Darling suggested that "to concentrate on institutions seems to me to miss the point". In effect Darling said that no one system of regulation has protected a country though this view in itself seems to be missing the point and also appears naive of the situation.

The most interesting exchange though took place on the European level. This comes after a meeting of European leaders on the 18th and 19th June where it was recommended that more regulatory power be shifted to Europe. The proposals would include a 'European Systemic Risk Board' (ESRB) that would look out for dangers to financial stability then suggest how to avoid them flaring up any further. On top of this a 'European System of Financial Supervisors' would aim for more convergence in financial regulation.

In general I am an anti-European man myself but if you had asked me in 1957 whether I supported the newly formed European Economic Community (EEC) I would have said yes. Any institution which facilitates free trade is good in my eyes. This is why I support these reforms even where pro-European new Labour have some concerns. Darling agrees that there should be more co-operation on both a European and global level but dislikes the proposed commanding role of the head of the European Central Bank as well as believing bank supervision should remain a national responsibility. To a large extent I agree with this position. If, as happened with the EEC, Europe begins sticking it's oar in where it is not wanted then we may not only lose our own sovereignty but, particularly here, land ourselves in serious economic trouble. However, it should be noted that when European Finance Ministers met on the 9th June it was recognised that European supervisory ruling should not impinge on national fiscal sovereignty.