The Economics of Grazing Leah Duzy Agricultural Economist USDA-NRCS March 12, 2008.
Economist 12 05
Transcript of Economist 12 05
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Building competitiveness
Insider aiding
Europes labour markets have favoured older workers at the expense of younger ones. The
latest in an occasional series on structural reform
Feb 25th 2!2 " from the print edition
#F $%% the euro &ones many problems'
youth unemployment is perhaps the most
distressing. (oblessness among young
workers is around )* in +ortugal and
nearly 5* in ,pain. $bove-average
unemployment is the norm for young
people' even in more liberal markets like
$mericas. ut ,pains youth
unemployment rate /umped by nearly 2
percentage points between 20 and
21' compared with a rise of seven
points in $merica. %abour-market
regulations take much of the blame while
hard-to-fire older workers luxuriate on
permanent contracts' the young are
typically hired temporarily and are easier
to sack.
,uch 3dual4 labour markets arethemselves products of reform. $lthough
$merican unemployment uickly dropped
following the troubles of the !10s and
early !16s' European /oblessness
remained stuck at high levels. %eaders
recognised the need to in/ect more
flexibility into the labour market but
powerful trade unions headed off a full-
frontal assault on workers rights. The
answer was to create a less-protected
class of employees.
,pains experience is instructive. $s the
unemployment rate approached 2* in
the mid-!16s' the government
introduced fixed-term contracts of
between six months and three years'
which were sub/ect to lower dismissal
costs than those for workers on open-
ended contracts. $t the end of a three-
year contract firms could either convert a
worker to permanent employment or send
him packing. The reforms got results.
7nemployment fell from nearly !6* when
they began in !168 to around !8* six
years later.
ut the reforms had unintended
conseuences too. Temporary contracts
surged' soon accounting for close to a
third of ,panish employment. 9orkers
churned from /ob to /ob /ust :* of
temporary contracts were converted to
permanent employment during the mid-
2s. 9hen the economy turned down
employees were shed in larger numbers
and the unemployment rate rose fasterthan before. Those more likely to be
employed on temporary contracts' such as
the young' bore the brunt of the pain. The
euro &ones long expansion from the mid-
!11s until the crisis of 26 disguised
many of these problems. $ construction
boom helped ,panish unemployment back
below !*' even as immigration soared.
ut the crisis has exposed old weaknesses
again.
;olatility is but one cost of dual labour
markets. Freuent /ob turnover makes
households finances less certain' making
it harder' for example' to save regularly
for old age.
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employment discourages firms from
investing in their workers. The cost to an
employer of converting an expiring
temporary contract into a permanent one
is uite high because of a discontinuous
/ump in the cost of sacking the worker. ,othere is an incentive to get rid of him
when his contract ends and to invest little
in training him.
This systematic underinvestment drags
productivity inexorably downward. $ 2!!
study by (uan =olado of 7niversidad
>arlos ??? de
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$nd attractive as the Aerman model is
now' across decades $merican /obless
rates are tough to match. The $nglo-
,axon preference for little or no
employment protection may be the most
effective at herding workers from declining
industries to growing ones' driving /ob
creation and innovation. =yspeptic bond
markets are now pushing ,pain and
others towards reforms that make it
easier and cheaper to lay off workers
again. Cot before time.
The euro crisis
Europes Achilles heel
Amid growing risk of a Greek exit, the euro zone has et to face up to the task of
saving the single currenc itself
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second election looming in Areece' where
parties are struggling to form a
government. ?f a ma/ority of Areeks again
vote to re/ect the spending cuts and
reforms that go with their countrys bail-
out' then euro-&one governmentsJin
particular' AermanysJwill face a drastic
choice.
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wages stagnate. Dow wonderful it would
be if a cut in interest rates' :' extra
teachers and some new roads could spare
the French from all this. ut that growth
fairy does not exist.
"and the stories the #elieve
$cross Europe the pattern repeats itself.
?n ?taly the half-truth is that the country
can escape its dysfunctional politics by
entrusting hard choices to a technocrat.
?ts prime minister'
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$aluing %ace#ook
&ucker#ergs rocket, read for lift'off
=espite the hype as it prepares to launch its ?+#' the giant social network still has plenty toprove
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This fren&y is further proof' if any were
needed' that Facebook has become a global
internet idol. Facebulls reckon the flotation'
which could raise almost G!2 billion with
about half going to shareholders selling upH'
will help transform the social network into aweb powerhouse in the same way that
Aoogle used the riches from its 28 ?+# to
spread its tentacles across the web. $nd
they confidently predict that Facebooks
shares will start trading well above the
range of G26-)5 that the firm has set for
themJa range that would value Facebook
at G00 billion-1: billion. Editors 7pdate
:55 A
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,uch sums of money are impressive given that
Facebook was only launched in the same year
that Aoogle went public. ut the networks rise
also raises several important uestions that
investors would do well to ponder. The first of
these is whether Facebook can become a partof the fabric of a more social web' rather than
simply a destination on it. 9ithin five years'
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probably the single most powerful platform out there right now for targeting consumers'4
says =ick @eed of (ust
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maturing into an exceptional technology leader. ut if something were to go badly wrong at
Facebook in future' its shareholders will be able to do little more than give him a big thumbs
down.
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Income ine(ualit
)ho exactl are the *+
The ver rich in America increasingl work in finance, marr each other and care
passionatel a#out politics
(an 2!st 2!2 " from the print edition
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The average household income of the !* was G!.2m in 26' according to federal tax data.
The ultra-rich skew that average upwards admission to the !* began at G)6' in 26.
The >ongressional udget #ffice puts the cut-off lower' at G)80' in 20' or G252'
after subtracting federal taxes and adding back transfers. ollege and two
others' !:* of the top !* were in medical professions and 6* were lawyers shares thathave changed little between !101 and 25' the latest year the authors examined see
chartH. The most striking shift has been the growth of financial occupations' from /ust under
6* of the wealthy in !101 to !).1* in 25. Their representation within the top .!* is
even more pronounced !6*' up from !!* in !101.
,teve Baplan of the 7niversity of >hicago thinks finance explains much of the rise in
ineuality. 7pdating a series developed by Thomas +iketty and Emmanuel ,ae&'
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$lthough the !* have been gaining share in most countries' a recent #E>= report shows
that the trend began sooner' and has gone further' in $merica. ,ome scholars' noting that
ineuality has risen more in English-speaking countries' think social and political values may
play a role in mainland Europe and (apan' corporate governance' tax laws and unionisation
have tended to lessen income disparities. ut the relatively large role of the financial sector
in English-speaking countries could also be a factor even more of the top !* work in
finance in ritain than in $merica.
ommon Aood' a group of rich people who back #ccupy 9all ,treet. Der
father used to give his occupation as 3capitalist4. 3? grew up believing that QcapitalistsR were
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making the world a better place'4 she says. 3The capitalism we have has left us with
degraded infrastructure' threats to our health' and global warming.4
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fed up bank investors have become with
their returns.
Co wonder. etween 20 and the end of
last year shareholders in banks globally have
lost almost !* of their investment each
year' according to the oston >onsulting
Aroup see chart !H. ehind this
international average lie some truly horrible
losses. ?nvestors who stuck it out in =utch
banks saw the value of their holdings fall by
almost 26* a year. Dolders of French'
Aerman and ,wiss banks suffered average
annual losses of close to 2*. Those in$merican and ritish banks lost !8* and
!:* a year respectively. 3The little secret to
doing wellShas been /ust dont hold banks'4 says (acob de Tusch-%ec' a fund manager at
$rtemis.
$ fall in the price of an asset is usually a good signal to consider buying it. ut those
investors who thought that they had timed the bottom of the market have been proved
wrong again and again. 3?ve been dipping in and out of ?talian banks but am keeping very
uiet about it'4 says one fund manager. 3%ast year when ? told an investor Qin my fundR that
? was holding some he got up and left the room.4
,uch sharp falls in shareholder value are not /ust distressing for investors. They should also
worry the businesses and households that need a healthy banking system to keep credit
flowing. ?f the shares and debt issued by banks are uninvestible' then over time the banking
system will have to shrink or be nationalised.
There are three reasons why the banks have been such a bad bet. The first is weakness in
9estern economies' which has led to elevated losses' subdued demand for credit and
deleveraging by the banks themselves. 9ith returns on assets remaining largely unchanged
this is a tough time to charge customers moreH' the industrys total profits are likely to
keep falling.
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$ second reason is worries about sovereign
defaults. ?n the second half of last year
European banks sold virtually none of the long-
term bonds that they use' alongside deposits'
to finance loans. These markets have thawed
slightly since the European >entral ank E>Hprovided more than ! trillion G!.) trillionH in
three-year loans to European banks. ut they
are still fragile' partly because banks have
pledged collateral to the E>' leaving less to
repay bondholders if a bank were to go bust.
,imon ,amuels' an analyst at arclays' points
out that almost five years since the start of the
financial crisis' European banks are more
dependent on state support than ever. 39hat
we have' in effect' is nationalisation via the
debt markets'4 he says. 3?f you cant get a private-sector debt model to work then there isno real investible euity.4
The weak economy and worries over the euro area are' with some luck' transient problems.
Met weighing on investors minds is a third concern the impact that regulation will have on
banks long-term profitability and the safety of their debt. @eturns on euity have fallen
precipitously' from about !5* before the crisis to below !* now. ritish banks returns
have slipped from almost 2* to about 5* last year see chart 2H.
$ big reason is that banks have to hold much more euity as a buffer against losses. ,imple
arithmetics dictates that returns must fall. #ther regulations to make banks safer also have
a cost. anks will have to hold many more liuid assets' which can be uickly sold. They are
also being forced to stop profitable if riskyH activities such as proprietary trading.
@ules aimed at ring-fencing retail banks' 3bailing in4 bondholders and making banks easier
to wind up if they fail are also pushing up banks funding costs and depressing returns. They
are doing little to encourage investors to buy bank bonds. 3?f regulators told European
banks to raise bail-in debt there would be a resounding clatter of pennies at the bottom of
the tin but no folding money at all'4 says the chairman of a large bank.
For all the gloom' most big banks are still forecasting or at least aiming forH returns on
euity of !2-!5*' which would handily cover the cost of their capital. That would also be
respectable by historical standards $utonomous @esearch reckons that over the long term
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banks returns have averaged !* in ritain and 1* in $merica. ut it invites two
uestions.
The first is whether banks can attract investors with a combination of utility-like returns and
bank-like volatility. @egulators hope better-capitalised banks will be less volatile and moreattractive. onsulting Aroup
reckons that investment banks can uickly cut !-!5* of fat in areas such as market data
and exchange fees. =eeper savings can be made by reducing layers of management and
title creep it found that almost half of the staff in second-tier investment banks had the
title of director or managing director compared with 2-)* among the better firms.
ut banks do not have a great record as beancounters. European lenders have managed to
reduce their overall cost-to-income ratio only to about :2* from :1* since the mid-!11s'
an average improvement of .)* a year. Their current targets assume an average
improvement of 2.0* a year over the next three years' a figure