Dubai Bye

Once there was a happy little kingdom where people enjoyed the good life and basked in the warm glow of the king’s largess. They had it good, the cultural equivalent of June Cleaver in the kitchen and Jenna Jameson in the bedroom. Their homeland was a pleasant seigneury where they dashed from the indoor skiing facility to the pristine beaches and back again, giggling at the ice cream headaches it gave them. Their popular monarch put up breathtaking skyscrapers and billboards of himself all over the land and the people smiled with pride at the sight of both.

One day a cloud of hungry locusts approached the kingdom demanding to be fed money for they had given the king a little here and a little there to help him build the skyscrapers, indoor skiing facilities, and other massive capital investments with dubious return on investment. The king told the locusts and the media gadflies and the investment analyst ticks swept in on their wake that they would not be given the money they greedily sought.

“Hey look”, said the king, “We’ve got around $90 billion in debt and we haven’t got a nickel back from a lot of our investments. If I ever get my hands on those bastards who sold us that roach motel in Times Square I’m gonna give them a Columbian necktie. By the way are those imported Columbians still around or did we forget to pay them too? What, we have some Filipinos left? OK, that’ll do. Where was I? Right, you can’t have your money we’re a little short on cash.”

One of the locusts spoke up. “So you’re not going to pay the interest you owe us on those bonds we bought and those loans we gave you? Well OK then, you better sell some of your stuff or get a loan from that boring oil-rich fiscally responsible yet heavy handed kingdom next door. Because if you don’t pay out one way or the other, after we gut this joint we’ll start swarming over to other lands we have leant to and demand from them fat wads of money to shove into our hungry pusses.” With this proclamation a few of the gadflies sped off to spread the news and one of the ticks keeled over at the thought of not feeding again for a very long time.

“You can kiss my sovereign ass” said the king as he closed the solid gold Medici replica doors to the kingdom behind him. The people rejoiced as once again their beloved hereditary monarch had flipped his jewel laden middle finger at the insects from the west. And that night they all slept blissfully dreaming of sustained 10 – 12% GDP growth and low taxes.

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The fairytale existence of Dubai has come to an end. I can’t say the Dubai World financial Hindenburg registers very high on the schadenfreude meter (see below) as you have to hand it to the city state’s leadership for truly creating something from nothing. In thirty odd years they have gone from dredging a creek to creating a stunning cultural and economic center for the Arab world. But like other developing world high flyers they took on too much risk in areas that were highly susceptible in economic downturns: Real estate and tourism foremost among them.

With its failure to meet interest obligations on the debt of a government owned enterprise Dubai is not dead, it’s only mostly dead. That is to say gone are the days of endless growth and island making. It’s kind of sad as it was wicked fun watching Dubai build all that cool stuff, especially if you have Discovery HD. Dubai will live on, quite nicely I think, but it can be removed from the “ai” musketeers: Dubai, Shanghai, and Mumbai. The big question is could one of the other “ai’s” be next?

Later

Why Jobs Should Not Be Job One

There are two Economic pundits I read every week: Robert Samuelson and Paul Krugman. Samuelson is what I’ll refer to as a Realist Economist who generally understands that actions produce results, some of them unintended and therefore we must think carefully before we act. Krugman is a Nobel prize winner who proudly wears his far left liberalism on his sleeve and couldn’t care less about unintended consequences because Economic policy should be thought of like Christmas presents from your aunt Helen: It’s the thought that counts.

Samuelson, in my opinion, is right more often than Krugman but Krugman is way more fun to read. Consider his latest argument for a national jobs program. In a piece from Monday’s New York Times professor Krugman admonishes the Obama administration for not giving top priority to job creation. He carefully words his backing statistics claiming that “There are six times as many Americans seeking work as there are job openings" and “the average duration of unemployment — the time the average job-seeker has spent looking for work — is more than six months, the highest level since the 1930s” (1). Yikes, looks like we haven’t stimulated the economy enough and a government lap dance is required to stiffen up our flaccid GDP.

Krugman thinks “our best hope now is for a somewhat cheaper program that generates more jobs for the buck. Such a program should shy away from measures, like general tax cuts, that at best lead only indirectly to job creation.” He favors federal aid to states to hire teachers and other public service providers combined with federal programs comparable to the failed Works Progress Administration (WPA) of the Depression era. He admits that these jobs would be low paying and would be considered “make work” but that they would benefit society by creating the kinds of cultural and economic homeruns like pay toilets on the Mass Pike and monuments commemorating Indian massacres.

Samuelson weighed in on Thursday, his take being that more government stimulus with the aim of creating jobs would create “risks in overaggressive government job-creation programs that can be sustained only by borrowing or taxes.” He favors an approach of less government spending with more attention paid to rationalizing taxes to promote growth and more focus on long term deficit reduction in order to prevent a budgetary nose offing to spite the face of economic recovery.

It is the opinion of your humble shade tree economist that both Krugman and Samuelson miss the mark. Job loss is a symptom of a bad economy, not a cause. To someone unemployed or looking for a job this sounds like a bullshit opinion from an amateurish wannabe economist. But let me explain: Jobs are lost when there is a lack of demand for the products and services those jobs produce. The current lack of demand for housing, financial services, and consumer products is the result of a double whammy of contracting credit and a deflated asset bubble. Having government, at various levels, hire more teachers, police, and people to fix roads and infrastructure will provide us with lower teacher/student ratios, safer communities, and better roads (music to the ears of a poor bastard that commutes over 100 miles a day). It won’t, however, fix the demand for products and services lost over the past two years. It will increase the staggering public debt and will eventually push interest rates and taxes to levels that further strangle the economy.

If you don’t believe me (good for you, always a safe bet) here’s what an invitee to last week’s jobs summit had to say: “The lack of jobs is a symptom of a down economy due to asset bubbles bursting and a drought of credit and a lack of direction and clear communication of policy from Washington.” That comment came from Fred P. Lampropoulos, CEO of Merit Medical Systems Inc., a medical devices manufacturer from Utah. Comments like this are frightening not only because they expose the lack of clearly understandable policy coming out of Washington but also because they demonstrate the freeze the lack of clear direction has put on business decision making.

Net, net we don’t need a jobs program we need to understand what the roadmap is for getting the economy back on course to grow and create jobs. How about a program to communicate the direction the Obama administration and Congress will take to create an environment favorable to growth and not more taxes and debt? It’s often been said that American business can adapt to anything as long as the rules are understood. Let’s hope the rules are established soon so that we can at least make decisions and then read about the consequences instead of why decisions are not being made.

Later.



(1) The two statistics Krugman cites are somewhat apples to oranges comparisons as the latest Bureau of Labor Statistics available (maybe PK has a bat cave like facility deep beneath Princeton where he gets and analyzes data faster than the Feds) shows that in September there were 2.5 million job openings and the October data shows 15.7 million unemployed. Programming this mass of data into a sophisticated multidimensional model and running it through my super fast six year old Dell laptop I come out with a ratio of 6.28 unemployed people for every job opening. In a noteworthy comparison, the lowest ratio since the BLS has been measuring job openings was .83 back in January of 2001 (5.1 million openings to 4.2 million unemployed). The seasonally adjusted duration of unemployment was 26.9 weeks in October, with historical data hard to come by the best I could compare to was over the past year when in November of ’08 the duration was 18.9 weeks.