Phillip Swagel used an Economix post to discuss the ramifications of debtors not paying their debts. While his basic point is valid, that reducing payments to creditors will affect their willingness to lend in the future, some of the specifics are questionable.

His first example is the case of the auto bailouts, where the terms of the bailout put some commitments to the workers (most notably retiree health care benefits) ahead of bondholders, reversing the normal ordering of creditors in a bankruptcy. While Swagel refers to research that suggests that unionized firms paid a penalty in their borrowing in the period immediately following the bailout, the logic of the situation would not support this outcome.

As a result of the government's intervention, all creditors, including bondholders, almost certainly got more money than would have been the case if the government had let GM and Chrysler go into bankruptcy without assistance. What would matter to a creditor is their expected payback in the event of a bankruptcy, not whether another creditor may be placed ahead of them in line. If the bailout allowed a higher payback for creditors than would have otherwise been the case, then it should reduce interest rates for unionized firms that might be more likely to be bailed out, not increase them. This is the outcome that Swagel indicates was supported by other research.

Swagel also looks at the case of municipal bonds in the wake of the Detroit bankruptcy. He notes that creditors will likely have to take losses on general obligation bonds which are backed by tax revenues. He mentions that this appears to be leading to higher interest rates for other municipalities in Michigan. While this may be due to the fact that Detroit bondholders will be forced to take losses, it can also be attributed to the fact that creditors had not previously assessed risks accurately.

Mark WeisbrotThe Guardian Unlimited, August 20, 2013

Dean Baker
The Huffington Post, August 19, 2013
Al Jazeera English, August 20, 2013

A newly declassified intelligence estimate [large PDF] from the U.S. Southern Command (SOUTHCOM) reveals that the U.S. military considers International Monetary Fund (IMF) policy constraints on Honduras to be a factor that could lead to greater unrest. The memo is dated July 22, 2011 and was originally designated as “SECRET/ORCON/NOFORN” (meaning “Dissemination & Extraction of Information Controlled by Originator” and “Not Releasable to Foreign Nationals/Governments/Non-US Citizens”).

In assessing Honduras’ “social environment,” the memo states:

Economic conditions in Honduras will have a tremendous impact on the social environment over the mid to long term. Efforts to combat rampant poverty, inequality, and unemployment will continue to be hindered by budgetary pressures. Over the medium term, IMF-established targets aimed at boosting Honduran macroeconomic stability will continue to reign in public expenditures. Should key social programs remain under- or unfunded, preexisting socio-economic cleavages between the poor and elite business sectors may be further aggravated and lead to an escalation in protests.

The document comes back to this theme in its conclusion, with the last two sentences reading:

Honduras' progress towards compliance with IMF guidelines and recent full reintegration into the international community increase the likelihood of the country receiving expanded international aid. However, as Honduras continues to reign in its domestic fiscal policy to remain in compliance with IMF mandates, the nation will continually struggle to effectively respond to growing security and socio-economic concerns. [Emphasis added.]

Dean Baker
The Hankyoreh (South Korea), August 19, 2013

Dean Baker
Truthout, August 19, 2013

In a post for PBS NewsHour's The Business Desk, Dean Baker takes on Paul Solman on what the government can do to address unemployment. Solman responded to Dean here, and Dean responded this morning on Beat the Press.

Paul Solman takes me and my grumpy friend Paul Krugman to task for insisting that there is a growing consensus within the economics profession that we are not suffering from structural unemployment. Krugman and I used our blogs to complain about Aug. 2's segment in which Brooks suggested structural unemployment was the economy's main problem and that there was little that could be done about it.

The United States currently has about 9 million fewer people working than if it had continued on its trend of growth from 2002 to 2007.

The question is whether the unemployment problem is a lack of demand due to a loss of $8 trillion in housing bubble wealth, or whether there are structural problems that would prevent most of these 9 million people from being re-employed even if the demand were there. Krugman and I support the former idea; those who see unemployment as structural are in the latter camp. Here's another way to think about the problem. Imagine someone found a $1 trillion bill in the street and decided that, as a public service, she would spend the money over the next 12 months to boost the economy. For simplicity, let's assume that she decides to divide her $1 trillion so that it is spent in exactly the same way that the economy's current $16 trillion in annual spending is spent.

In my view, this $1 trillion of new spending would cause output to increase by roughly 6 percent. (I'm ignoring multiplier effects to keep things simple.) Employment would also rise by roughly the same amount, filling the bulk of the 9-million-jobs hole. In other words, this would be great news for the country.

It's always fun to have conversations with people who will proclaim themselves great experts on a country about which they may know very little because they have been there. I have encountered people who tell me poor countries are rich because they saw opulent homes and expensive restaurants on a visit, or that there is no unemployment in the middle of a downturn because every business owner they talked to couldn't find enough workers.

Steven Pearlstein gives us a wonderful example of such arguments in his piece on Ireland's economy in the Post. Pearlstein tells readers:

"In the world beyond its emerald shores, meanwhile, another simple narrative about Ireland’s economy has found a receptive audience, this one about the Draconian spending cuts and tax increases that have been forced on Ireland by its creditors in order to reduce an annual government budget deficit that had reached 32 percent of the country’s annual economic output. The Irish themselves have long since accepted the urgent necessity of belt-tightening. But to Keynesian critics who believe in the healing power of fiscal stimulus, the country’s recent slide back into recession is offered as proof of the futility of austerity.

"Neither of these fables — the one about the bank bailout, the other about austerity — is adequate to explain the rise and fall of the Celtic Tiger. You don’t have to spend much time here before discovering that the real story turns out to be both more complicated and more interesting.

"In fact, you might say that what’s holding back Ireland’s economy is the same thing that is now holding back the once-fast growing economies of Brazil, Russia, India and China. It is the same thing that afflicts Greece, Italy, France and the other struggling economies of Europe. And, to a somewhat lesser degree, it is the same problem bedeviling the U.S. economy.

"In each, it is the inability to make fundamental reforms to political and economic institutions that now prevents them from rebalancing their economy, from taking next leap in terms of their productivity and efficiency, from creating a new, more sustainable model for economic growth."

Wow, Ireland and all these other countries need to make adjustments to adapt to a changing world! Who could have guessed?

There are two types of people in the world: those who make complicated things simple and those who make simple things complicated. Paul Solman seems determined to convince us he is in the latter camp with his insistence that there is little or nothing we can do to address unemployment.

He raises many points in his response to my post, but I will start with a small one. Economics actually does not teach us that “every decision has both benefits and costs.” For example, if we can find a shortcut on our drive to work, that is a decision that will only have benefits. Just like finding a faster way to get to work, there are in fact many cases in economics where we can identify policies that have benefits with little or no obvious costs.

Creating jobs in an economy that is suffering from inadequate demand, as is the case in the United States today, is in fact one of these cases. While Solman seems to believe  that something bad happens if we put people to work, he never even hints at what it might be. Will aliens descend from the sky and steal our children? Will rivers flow upstream? What exactly is the bad thing that happens if the government spends money to put people back to work?

Economists who oppose such spending usually argue that it will cause inflation, but most have recently  become more quiet arguing this case because the argument suffers from a serious lack of evidence at this point. Inflation has been falling just about everywhere in spite of substantial deficits and vast amounts of money put into the economy by the Fed and other central banks. Of course Solman doesn’t make the inflation argument, so readers can only guess as to what bad event he thinks occurs if we run deficits to put people back to work.

His main concern seems to be that demand will not come back to employ people even in the long-term, but this raises two issues. First, why is this an argument not to employ people now? Lives are being ruined today because workers can’t find jobs and properly support their families. Solman certainly gives no reason as to why he thinks demand will not return in the longer term, so what benefit are we getting by ruining people’s lives with unemployment?

The second point is that there are intelligent things that can be said about the loss of demand and the long-term prospects for its coming back. Unlike the overwhelming majority of people who talk about economics on the Newshour, some of us were not all surprised by the economic collapse in 2007-2008. I in fact warned about the housing bubble for years and that its collapse would likely lead to a recession. This was not a random bad event from the sky; the downturn was a 100 percent predictable for anyone paying attention to the economy and doing their homework.

Last week, reports came out that a woman was “brutally attacked” by four men who “stripped [her] of all of her clothing” in the capital of Honduras, Tegucigalpa, while she was walking home from an event hosted by the Ministry of Justice and Human Rights.  It appears that Arely Victoria Gomez Cruz was attacked “on a public street in full view of many people” primarily because she is a transgender woman.  Just two blocks away from where she was attacked, Walter Tróchez, a gay man and member of the resistance movement to the coup, was killed in 2009.  These two events, one shortly after the June 2009 military coup and the other within the past week, illustrate something about the type of violence going on in Honduras: Honduras has the highest murder rate in the world and, since the coup that forced out democratically-elected president Manuel Zelaya, over 90 LGBT people have been killed.

As of late, the mainstream media has focused a great deal on LGBT rights in Russia as a result of the Russian government’s new law criminalizing expressions of “nontraditional sexual relationships.”  But the rash of killings and other violent attacks on members of Honduras’ LGBT community have received relatively little attention in the U.S. media.  It’s worth noting that the media uproar around the state of LGBT rights in Russia has come on the heels of U.S. government criticism of the draconian law earlier this month.  Yet the law was actually passed several months ago, on June 11^th, and signed by Putin at the end of that month.  Could Russia’s August 1^st decision to grant temporary asylum to NSA whistle-blower Edward Snowden have something to do with the sudden explosion of interest in this issue?   

The new U.S. government and media attention to LGBT rights in Russia seems to bear all the hallmarks of “pinkwashing,” a phenomenon involving a government or company deliberately highlighting support for gay rights while ignoring or downplaying other relevant human rights issues.  In this case, while the U.S. government seeks to raise the profile of violations of LGBT rights in Russia, it stays mum, or at least speaks up less, when it comes to LGBT rights in countries that are official friends, such as Saudi Arabia and the United Arab Emirates.  Similarly, we hear little praise for countries that have made great strides in LGBT rights if they are official enemies, such as Cuba, where the daughter of the current president leads that country’s National Center for Sex Education.  Mariela Castro, who helped pass a law expanding access to sex affirmation surgery as part of the island’s national health system, had to fight a travel ban recently in order to attend an international awards dinner in New York.

After two months of protests that started over price gouging in public transportation and spread to a variety of issues spanning the political spectrum, positive results are beginning to be seen in Rio de Janeiro, where governor Sérgio Cabral, once touted in the New York Times as a possible 2014 presidential candidate is now so unpopular that socialist former mayoral candidate Marcelo Freixo said that he doesn’t think he could even get elected as a condominium residents association secretary.

Sérgio Cabral (right) with businessman Eike Batista. (Photo by Brazil 247)

During the last week a series of measures was announced that seem to show a turning of the tide against the hegemony wielded by the Fédération Internationale de Football Association (FIFA) and the Rio de Janeiro state and municipal governments over local residents.

First, after spending over $500 million rehabbing the structurally sound Maracana stadium – its third multi-million rehab in a dozen years - the plan to privatize and sell it off to a group of cronies for a fraction of that value has been stalled. The landmark status for the neighboring high school and Indigenous museum buildings has been upheld by the court system, so they can no longer be destroyed to create a parking garage. Furthermore, the federal government has blocked destruction of the public swimming pool and athletic track that made up part of the stadium compound. According to the privatization agreement, these are deal killers. The original plan was to surround the stadium with parking garages and luxury shops for the white, middle-class patrons who would now be the only ones able to easily afford ticket prices.  The consortium that was poised to take over management of the stadium announced that it was going to back out, then changed its mind but still hasn’t closed a deal. It appears that the new, expensive ticket prices are keeping fans away and this might prove to be a deciding factor in blocking privatization.