"The Perils of Prosperity: The Story Behind the Economic Crisis"

This essay is by noted U.S. economist Robert Samuelson. Those of you who studied economics in college read his books. It's a great piece. Having lived through bubbles, this is starting to make much more sense to me. Perhaps it will make sense to you, as well.

WASHINGTON -- We need to get the story straight. Already, a crude consensus has formed over what caused the financial crisis. We were victimized by dishonest mortgage brokers, greedy bankers and inept regulators. Easy credit from the Federal Reserve probably made matters worse. True, debate continues over details. Fed Chairman Ben Bernanke recently gave a speech denying that it had loosened credit too much, though he admitted to lax bank regulation. A congressionally created commission opened hearings on the causes of the crisis. Still, the basic consensus seems well-established and highly reassuring. It suggests that if we toughen regulation, suppress outrageous avarice and improve the Fed's policies, we can prevent anything like this from ever occurring again.

There's only one problem: The consensus is wrong -- or at least vastly simplified.

Viewed historically, what we experienced was a classic boom and bust. Prolonged prosperity dulled people's sense of risk. With hindsight, we know that investors, mortgage brokers and bankers engaged in reckless behavior that created economic havoc. We know that regulators turned a blind eye to practices that, in retrospect, were ruinous, unethical and sometimes criminal. We know that the Fed kept interest rates low for a long period (the overnight Fed funds rate fell to 1 percent in June 2003). But the crucial question is: Why? Greed and shortsightedness didn't suddenly burst forth seven or eight years ago; they are constants of human nature.

One answer is this: Speculation and complacency flourished, because the prevailing view was that the economy and financial system had become safer. For a quarter-century, from 1983 to 2007, the United States enjoyed what was arguably the greatest prosperity in its history. The boom was triggered by the conquest of high inflation, which had destabilized the economy since the late 1960s. From 1970 to 1984, inflation dropped from almost 13 percent to 4 percent. By 2001, it was 1.6 percent. As inflation fell, interest rates followed -- though the relationship was loose -- and as interest rates fell, the stock market and housing prices soared. From 1980 to 2000, the value of household stocks and mutual funds increased from about $1 trillion to nearly $11 trillion. The median price for existing homes rose from $62,200 in 1980 to $143,600 in 2000; by 2006, it was $221,900.

Feeling enriched by higher home values and stock portfolios, many Americans skimped on savings or borrowed more. The personal saving rate dropped from 10 percent of disposable income in 1980 to about 2 percent 20 years later. The parallel surge in consumer spending, housing construction and renovation propelled the economy and created jobs, 36 million of them from 1983 to 2001. There were only two recessions in these years, both historically mild: those of 1990-91 and 2001. Monthly unemployment peaked at 7.8 percent in mid-1992.

The hard-won triumph over double-digit inflation in the early 1980s, engineered by then-Fed Chairman Paul Volcker and backed by newly elected President Ronald Reagan, qualifies as one of the great achievements of economic policy since World War II. The temptation is to portray it as a pleasing morality tale. The economic theories that led to higher inflation were bad; the theories that subdued higher inflation were good. Superior ideas displaced inferior ones, and the reward was the increased prosperity and economic stability of the 1980s and later. But that, unfortunately, is only half the story.

Success also planted the seeds of disaster by creating self-defeating expectations and behaviors. The huge profits made in these decades by both professional and amateur investors conditioned many to believe in the underlying benevolence of financial markets. Although they might periodically go to excess, they would ultimately self-correct without too much collateral damage. The greater stability of the real economy -- by contrast, there had been four recessions of growing severity from the late 1960s to the early 1980s -- provided an anchor. The Fed was also a backstop: Under Alan Greenspan, it was lionized for averting deep downturns after the stock market crash of 1987 and the burst "tech bubble" in 2000. Money managers, regulators, economists and the general public all succumbed to these seductive beliefs.

The explosion of the subprime-mortgage market early in the new century may now appear insane, but it had a logic. Housing prices would continue rising, because they had consistently risen for two decades. Consumers could borrow and spend more because their wealth was constantly expanding and they were less threatened by recession. That justified relaxed lending standards. Similarly, investment banks could take on more "leverage." Homeowners with weak credit histories could refinance loans on more favorable terms in two or three years, because the value of their houses would have risen. If borrowers defaulted, lenders could recover their money because the underlying homes would be worth more.

The paradox is that, thinking the world less risky, people took actions that made it more risky. The pleasures of prosperity backfired. They bred carelessness and complacency. If regulation was lax, the main reason was that regulators -- like the lenders, investors and borrowers they regulated -- shared the conventional wisdom. Markets seemed to be working. Why interfere? That was the lesson of experience, not an abstract devotion to the theory of "efficient markets," as is now increasingly argued. Euphoria, or something close to it, was considered realism.

Unless we get the story of the crisis right, we may be disappointed by the sequel. The boom-bust explanation does not exonerate greed, shortsightedness or misguided government policies. But it does help explain them. It doesn't mean that we can't -- or shouldn't -- take steps to curb dangerous risk-taking. Some of the Obama administration's proposals for "financial reform" make sense. Greater capital requirements would protect banks from losses; the ability to control the shutdown of large, failing financial institutions might avoid the chaos of the Lehman Brothers collapse; moving the trading of many "derivatives" (such as "credit-default swaps") to exchanges would create more transparency in financial markets. Because the government ultimately stands behind financial markets, regulation is justified to limit taxpayer expense and to prevent catastrophic economic instability.

But it's neither possible -- nor desirable -- to regulate away all risk. Every "bubble" is not a potential Depression. Popped bubbles and losses must occur to deter speculation and compel investors and borrowers to evaluate risk. The overregulation of finance may discourage useful innovation and clog the channels for capital on which an expanding economy depends. Finally, a single-minded focus on the blunders of Wall Street may also distract us from other possible sources of future crises, including excessive government debt and borrowing.

The larger lesson of the recent crisis is sobering. Modern, advanced democracies strive to deliver as much prosperity as possible to as many people as possible for as long as possible. They are in the business of creating perpetual booms. The cruel contradiction is that this promise itself may become a source of instability, because the more it is attained, the more people begin acting in ways that ultimately invite its destruction. Booms often have unintended and nasty side effects. Even anticipated side effects that are ultimately unsustainable -- stock market "bubbles," excessively tight labor markets -- can be hard to police, because they're initially popular and pleasurable.

The quest for ever-more and ever-better prosperity subverts itself. It might be better to tolerate more frequent, milder recessions and financial setbacks than to strive for a sustained prosperity that, though superficially more appealing, is unattainable and ends in a devastating bust. That's a central implication of the crisis, but it poses hard political and economic questions that haven't yet been asked, let alone answered.

This essay is adapted from the paperback edition of "The Great Inflation and Its Aftermath: the Past and Future of American Affluence" by Robert J. Samuelson, published by Random House at the end of January.

ADP Reveals Shocking Decade-Long Employment Data

Medium-sized businesses are back in hiring mode, according to ADP. That's the good news, since medium-sized businesses employ more Americans than big corporations and almost as many as small businesses. Nationally, these firms employ more than 42 million Americans, far more than large companies (17.8 million) and nearly as many as small businesses (48 million).

The bad news is that small businesses shed another 12,000 jobs and large businesses shed 19,000 in January 2010.

The really bad news is that over the last 10 years, according to ADP data, the United States actually has added no net new jobs.

In December 2000 there were 111.65 million U.S. employees working.

In January 2010 there were  108.14 million Americans working. From March 2007 to May 2008 U.S. employment was above the 115 million mark.

Overall, the economy still lost 22,000 jobs between December and January, according to the ADP report.

In May 2008 there were 115.2 million U.S. workers. That means the country must add back 7.1 million jobs to get back to where it was before the recent recession began.

One might argue that means 7.1 million U.S. families that are spending far less than they used to, on communications and all sorts of other things. But that completely understates the matter. Several hundred other million consumers have ratcheted their spending down as well.

All of that likely means several more years of slow economic growth, as consumers restructure their finances, government at all levels finds it simply cannot spend so much because the tax revenue isn't there, and the other long-term impact of unusual and unprecedented government indebtedness starts to be felt.

Some have argued that consumer behavior has permanently altered. One doesn't even have to go that far to predict a long, sluggish climb back up. Behavior now is constrained in real ways. It isn't a matter of permanently altered behavior but rather of sheer inability to behave otherwise.

The recovery has begun. The bad news is that it will be hard to see, and that there is no way to test the thesis of new consumer behavior patterns for some years, because it will take years before consumers really are free to choose.

How Many New Broadband Access Lines Will be Added by Broadband Stimulus?

For most applicants, Feb. 16, 2010 to March 15, 2010 is the window for filing "broadband stimulus" requests to the Rural Utilities Service and National Telecommunications & Information Administration programs. 

Satellite providers largely will be waiting for a new "third round" aimed at funding satellite projects, funded by the RUS.  A funding window will open "later" to provide grants for satellite service for premises that remain unserved after all other Recovery Act broadband funding is awarded, NTIA says. 

It isn't clear how much funding that might entail. The RUS will be disbursing about $2.2 billion in this funding round, while the NTIA will be awarding about $2.6 billion, of which approximately $2.35 billion will be made available for infrastructure projects, $150 million for public computer center projects, and $100 million for sustainable adoption projects. 

Most of the NTIA money is expected to support middle-mile projects, rather than access. Perhaps oddly enough, that decision by NTIA means there will not be a significant increase in new broadband access facilities,. since the middle mile projects, by definition, are "backbone" projects deemed necessary to get broadband backhaul facilities into place, not serve end users. 

The RUS, on the other hand, has said its $2.2 billion will be spent directly to expand access facilities. 

Assume each new broadband line costs just $3000, the figure suggested as an average for new rural broadband deployments. If all $2.2 billion is spent on access facilities, an additional 733,333 new broadband access lines would be added to the national total. Since there are additional costs, the total will be less than that. 

As the bulk of the total RUS funding ($2.3 billion out of a total of $2.5 billion) will be awarded in the second round, and using the same $3,000 per line assumption, of the $200 million awarded in the first round, 66,667 new lines could have been added, for a grand total of 800,000 lines. 

That is not to say the additional middle-mile facilities will not be foundational, and will result in potential new lines later. But there is no particular reason to believe an additional $3,000 per new access line will be required, when the time comes to actually install access facilities.

$7.2 billion for 800,000 lines might be an unfair way to characterize the program, as some of the money will be spent for public access facilities and training, and the middle-mile infrastructure is required for eventual deployment of new access facilities. 

But it is not far from the truth to point out this near-term conclusion: the immediate change in new broadband access lines from the whole broadband stimulus program will be on the order of 800,000. There will be some additional growth when wireless broadband networks funded under the program are able to finish deployment of their new networks, of course.

But the calculation of 800,000 new lines does not subject overhead and other administrative costs that will lessen the total number of added lines. In all likelihood, adding all fixed broadband lines will only bring the total back up to the 800,000 range. 

14% of Information Workers Use Web Conferencing Daily or Weekly

By some surveys, such as this study by Forrester Research, Web conferencing tools still have quite some ways to grow.

Only about 14 percent of information workers use Web conferencing daily or weekly (click on image for larger view).

About a quarter say they use Web conferencing, compared to 26 percent who say they use instant messaging, for example.


The Forrester Research survey of  2,001 U.S. information workers were "a little surprising," the company says.

Despite the heavy investment by a majority of firms, Web conferencing is still used by only one in four information workers. "Given the benefits of real-time collaboration for bridging the distances that divide many teams, it’s troubling that so few information workers use Web meeting technology regularly, Forrester researchers say.

Only four percent of information workers use Web conferencing daily. Workers in this high-need
group are dominated by customer-facing employees in sales and marketing.

For 10 percent of information workers, Web conferencing is a weekly activity, largely driven by customer-facing workers.

About 76 percent of information workers don’t use Web conferencing at all.

Google Maps to Sync Android Mobile and PC Searches

Many users have grown accustomed to the idea that their appointments, contacts and email can be synchronized across their mobile and PC devices. Now Google wants to make that same sort of experience possible in Google Maps run on Android devices.

Google Maps for mobile now will "sync" searches made on PCs with searches on Android mobiles. "Personalized suggestions" make it easy to find places users previously have searched for.
There is one immediately practical value: instead of searching on a PC and printing out directions, users now will simply be able to recall searches and have the information displayed on their mobile screens when they need the information.

"For example, imagine you're on your computer and you come across the Place Page for Mario's Bohemian Cigar Store Cafe," the Google blog say Michael Siliski and Taj Campbell, Google Maps staffers, on the Google Mobile Blog. "When you're ready to go and want to get directions, just open Google Maps on your phone, start typing "mar," and you'll quickly see a suggestion, saving you from re-typing a long query and making it easier and faster to be on your way."

The new feature also adds a way to "mark" places on your own maps that will appear on either a PC or Android display whenever a map near that place is displayed.

"When viewing place details, just press the star icon next to the place name; these starred places are automatically synchronized between desktop and mobile, and can be accessed from both the 'More' menu on your phone and from the My Maps tab on your computer," they say.

"Starring" and "personalized suggestions" both require that users be signed in with their Google account, and "Web History" must be enabled in order to use personalized suggestions.

Both features are available in Google Maps 3.4. On Nexus One phones, users get this version of Maps after accepting the over-the-air update that already is in progress.

For other Android devices, starring and personalized suggestions will soon be available by downloading Google Maps 3.4 from Android Market.

Can These Economic Growth and Unemployment Forecasts be Right?

As part of the annual budget, the Obama White House assumes real gross domestic product growth of 2.7 percent in 2010, followed by 3.8 percent, 4.3 percent and 4.2 percent in 2013.

At the same time, the forecast assumes unemployment of 10 percent in 2010, with a decline to 9.2 percent in 2011, 8.2 percent in 2012 and 7.3 percent in 2013.


I'm no economist, but at least some trained economists have to be wondering how growth can occur at those accelerating rates if unemployment remains so stubbornly high. 


There are some obvious answers, including the possibility that the White House does not actually believe both sets of assumptions are congruent, but have some other compelling political motivations for claiming the figures. 


Other forecasts suggest that we will not recover the lost jobs of the recent recession until 2014 or even later. As consumer spending drives 70 percent of GDP, it is hard to see strong growth and high unemployment at the same time.  


Perhaps growth will be higher, and unemployment less bad, than these numbers suggest. As somebody who believes in the vitality of the U.S. workforce and economy, I would not bet against the United States, if impediments are not thrown in its way. 


But then, I'm not a professional economist. 

Comcast To Buy New Global Telecom

Comcast Corp. apparently has agreed to purchase New Global Telecom Inc., according to XChange. The deal should reemphasize the growing role cable operators expect to play in the business IP communications space, beginning with the small business segment.

Based in Golden, Colo., New Global Telecom provides wholesale services to carriers and competitive service providers in the U.S. The company has recently announced a series of private-label deals, under which NGT supplies branded VoIP services to operators like American Broadband Inc.