“Are we there yet?” The Economist, 2010
This article reviews in detail the impact of the policies of the Federal Government on the recession. According to the article, though the recession had ended, the growth has been rather slow, and it would continue to be so for another four years. Such recessions, according to the author, which occur due to the financial crisis, would exist at least for seven years. Therefore, the chance that America could walk out of the crisis early is rather low.
The author also argues that though many financial professionals have been presenting that the fiscal policies of the current government and its funding, a larger government is not a good idea. Though this has not resulted in direct gains in terms of a financial recovery, the author says, it was a no-choice when such steps were taken. There was no other way the government could have reacted to the situation. He also says that all the tax cuts that were ushered in during the Bush regime need to be continued and should not be allowed to expire. The rate at which the economy is recovering is not very encouraging. With such a situation, it is only right that the government continues with tax rebates, he argues.
The housing market is a reflection of the unemployment market. Though there was a nominal increase in the housing market rates when the government offered sops for the purchase of houses, the same did not continue once the sops were withdrawn. The same is reflected in the unemployment market as well. It seemed to gather momentum momentarily only to slow down further. There has been an increase in the unemployment rate of late rather than a fall.
The author’s arguments seem well-positioned. However, the author has failed to point out that some of the basic corrective steps have not been taken to strengthen the overall financial market. It is common knowledge that the hedging of accounts and derivatives were the major cause of financial crisis when it occurred. Till today, no steps have been taken to correct those imperfections in the financial system. This has not been addressed by the author. The same way most of the think tanks on the financial crisis conveniently ignore the cause of the entire event. Instead, the companies and the papers concentrate more on government support to pull them out of the trouble.
The author suggests that the mortgages on houses for the citizens should be written off to the current value of the house. Wherever the value of the house is lesser than the mortgaged amount or the money that the owner owes to the bank, then the loan should be written down on a prorated basis to the current value of the house. This would certainly help the citizens to tied over the situation and bring themselves back under control.
Will such a measure help the country to come out of the imbroglio? Will it help the country never to face such a situation again? There are no strong answers to these questions without setting right what really went wrong and what really caused the financial crisis in the first place. Though the entire occurrence has been well documented and how the whole crisis started with the derivative mishandling, no proper control and monitoring of the derivatives market has been set up.
‘In California, a Road to Recovery Stirs Unrest’ by Ianthe Jeanne Dugan in The Wall Street Journal. 2010
California’s gateway to San Francisco under construction from the Golden Gate Bridge to the city is currently under siege by the workers of the State. The objection raised by the workers is that the project is not funded out of state money; on the contrary, it is funded directly by foreign investors. It is true that this means the public work will have a private partnership. This was expected to herald a fresh construction drive in the country, and this could bring in new employment opportunities to the people.
On the contrary, the people in the workforce had raised objections. The author points out that the workers union is jeopardizing the 1 billion dollar project. The workers union has gone to the court and has positioned the case as an illegal award of contract without proper bidding. The State Superior Court has admitted the case and its pending hearing. While such projects, according to the author, could be a solution for many cash strapped cities and states to rebuild their damaged roads, the happening in California could also cause concern across the United States.
While the positive side of the project is that there are approximately 30,000 new jobs created for the project, second, it could be the starting point for a number of other projects across the country in a similar public-private partnership. If the judge should stop this project, that could have multiple implications for the economic situation.
On the side of the workers union, the author says that the workers are cash strapped; the government has cut their salaries by 15% last year. Instead, if the government had presented a bond for the road project, the government could have easily raised the money needed for the project. Secondly, the cost of the project would have also come down drastically if the government made use of its own staff to execute the project.
The workers union feels that this is like taking away American jobs and providing it to foreign companies. While it is true that the state government did not have the financial strength to execute the project, they could have raised the money if they had wanted to. At the same time, the workers should also realize that the jobs for the project are really being executed by other Americans and not by any foreigner. Therefore, their argument that the jobs are going out of the country is not tenable. However, it is also possible for the state government to have executed the job with local staff. This would have also pumped in more financial money into the public and thereby increasing the flow of money, nearly one billion dollars.
‘How the enterprises trashed the economy’ – Henry Mintzberg, The Economist. 2010
According to the author, the economy of the United States has reached its muddy phase because of bad enterprise management. The enterprises had lost their enterprising nature. Instead, they had gone on to maintain a good stock value. This they did in order to get a huge paycheck for the chief executive and his cohorts. It is common knowledge that the chief executives in many companies are paid large paychecks. It is also common knowledge that many of these companies are also getting financial rebuilding package from the government.
The author questions the sanity in the decision to provide financial bailouts to such companies and enterprises that have been maintaining a façade of glory. At the same time, these enterprises have been rotting from the core. The author quotes an Israeli proverb that says, ‘a fish rots from its head.’ The rot in the American enterprises has set in from the head, that is, the CEO. It is pretty common knowledge that many of these companies have queued up for bailout plans from the government.
The author is also of the opinion that such bailouts will never work. The reasoning can only be deduced since he does not elaborate on his thoughts on this. Only a badly managed company can really get into an issue with its financial situation. A well-managed company would not have any such financial problems to be faced. Secondly, he also points out the fact that where there is a hire-and-fire policy, the commitment of its staff to the welfare of the company is also limited. It is quite some time since we could see workers who have been with a company for decades.
Such a commitment to the workers and with the company to retain such glorious relationships seems to be dying. Changing jobs have become very comfortable with the workers. Similarly, when the situation is not conducive or as the author calls it when the Wall Street Wolves are at your door, the enterprise is of the habit of kicking out some of its human resources to reduce the cost. The human resource addition or removal does not seem to have any great strategy. The planning that normally goes into such working does not exist in the current scenario, according to the author.
The solution, according to the author, should have been ‘productivity,’ ‘robust enterprises,’ ‘destructive compensation packages to its CEO,’ and ‘engaged management.’ Only such solutions would have taken the economic recession out of its hold in America. Instead of concentrating on such issues that caused the recession in the first place, the government, the enterprises, and the people all seem to get carried away by the heroics of the top management executives. They look at the stock market values done by exploiting the situation rather than by ‘exploring’ and identifying the value of their inventions and hard work.
Enterprises should really be ‘enterprising’ according to the author. This is the right approach. It is only true that there is no substitute for true hard work in bringing out America from the recession that it is in.
‘Time to Bring US Profits Home’ – Frank Aquila, in Bloomberg Businessweek. 2010
The author provides an interesting viewpoint to combat the current recession in the US. The government is currently spending in the order of billions of dollars to bail out companies that are in bad shape. This includes companies and enterprises such as Citibank, Ford, and many others. Almost all of these companies and a large number of other companies too have funds stashed away in foreign locations. This is done since the companies have to end up paying more than 35% of their ‘foreign source income’ as tax to the government.
This is the reason why most of the companies, including such giants as Microsoft, Dell, IBM, and others, have not brought in their money earned abroad. When Microsoft wanted funds to support their expansion projects in the US, they choose to borrow rather than bring in their money from outside the United States. It makes more sense to borrow rather than to use their fund from outside the country. It is cheaper than the other one.
The same working is done by the other companies too when they are held up by a financial crunch. According to the author, there are more than a trillion dollars of cash available to American companies from their foreign investments. If only the government would allow free repatriation of foreign earned money into the country, the same would work well for the citizens of the country during the hour of need.
The point raised by the author appears strong and in the right direction. This would not really be a load on the budget expenses of the government. There is no additional spending, but still, the amount of 1 trillion dollars could just get into the system to pull it out of the issue it is in. This would be in the right direction for the economy to go.
The author’s request to drop the tax against funds earned abroad; the government has not taken any positive action to date. In most of the countries where such overseas funds exist for companies or even for individuals, it is common practice for the country to allow repatriation of funds without any cost to the individual or to the company. Only in the United States, such things exist, and it costs the individual to bring money into the country.
The idea of charging was ushered in by proponents of anti-outsourcing in the United States. These people insist that the companies should not gain by employing foreign workers and by getting jobs done for a lower cost at a foreign location. However, as the author quotes, it is important to realize that when a company expands either in America or abroad, the base in America is certain to expand. The management, research, human resources, administration, and a number of other divisions of the company, which is certain to be in the US, will expand remarkably when the company expands its operations abroad.
The points raised by the author appear valid, and it is right that the companies exporting and doing business abroad should not be punished. Punishing for growth can never be right.
Bibliography
- Aquila, Frank, ‘‘Time to Bring US Profits Home”, Bloomberg Businessweek, Viewpoint, 2010.
- Dugan, Ianthe Jeanne, “In California, a Road to Recovery Stirs Unrest,” The Wall Street Journal, 2010.
- “Are we there yet?” The Economist, 2010.
- Mintzberg, Henry, “How the enterprises trashed the economy,” The Economist, 2010.