Economics in crisis

The Economist contains an article on the crisis of economics in the wake of the global financial crisis. Its particular reference points are macroeconomics and financial economics, and in particular the "rational expectations" school and the "efficient markets hypothesis". The critiques of Paul Krugman and Brad de Long, amoing others, have been developed in the Australian context by economist and blogger John Quiggan.

OF ALL the economic bubbles that have been pricked, few have burst more spectacularly than the reputation of economics itself. A few years ago, the dismal science was being acclaimed as a way of explaining ever more forms of human behaviour, from drug-dealing to sumo-wrestling. Wall Street ransacked the best universities for game theorists and options modellers ...

In the wake of the biggest economic calamity in 80 years that reputation has taken a beating. In the public mind an arrogant profession has been humbled. Though economists are still at the centre of the policy debate—think of Ben Bernanke or Larry Summers in America or Mervyn King in Britain—their pronouncements are viewed with more scepticism than before. The profession itself is suffering from guilt and rancour. In a recent lecture, Paul Krugman, winner of the Nobel prize in economics in 2008, argued that much of the past 30 years of macroeconomics was “spectacularly useless at best, and positively harmful at worst.” Barry Eichengreen, a prominent American economic historian, says the crisis has “cast into doubt much of what we thought we knew about economics.” ...

two central parts of the discipline—macroeconomics and financial economics—are now, rightly, being severely re-examined (see article, article). There are three main critiques: that macro and financial economists helped cause the crisis, that they failed to spot it, and that they have no idea how to fix it.

The End of Fortress Journalism

Peter Horrocks, Director of the BBC World Service, has contributed to a collection of papers published by the BBC on The Future of Journalism. The full report can be accessed from the link provided, but a sample of what he refers to as the "end of fortress journalism" can be found below.

Most journalists have grown up with a fortress mindset. They have lived and worked in proud institutions with thick walls. Their daily knightly task has been simple: to battle journalists from other fortresses. But the fortresses are crumbling and courtly jousts with fellow journalists are no longer impressing the crowds. The end of fortress journalism is deeply unsettling for us and requires a profound change in the mindset and culture of journalism.

Fortress journalism has been wonderful. Powerful, long-established institutions provided the perfect base for strong journalism. The major news organisations could nurture skills, underwrite risk and afford expensive journalism. The competition with other news organisations inspired great journalism and if the journalist got into trouble - legally, physically or with the authorities - the news organisation would protect and support. It has been familiar and comfortable for the journalist.

But that world is rapidly being eroded. The themes are familiar. Economic pressures - whether in the public or private sectors - are making the costs of the fortresses unsustainable. Each week brings news of redundancies and closures. The legacy costs of buildings, printing presses, studios and all the other structural supports of the fortress are proving too costly for the revenues that can now be generated.

Aged News?

Jon Stewart's The Daily Show is already writing the obituary for newspapers. Check the question here about whether the New York Times only has "aged news", and the Woodward and Bernstein questions.

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Todd Gitlin on Journalism in Crisis

Todd Gitlin's Keynote presentation at the Journalism in Crisis conference being held by the University of Westminster can be found here.

It is called "A Surfeit of Crises: Circulation, Revenue, Attention, Authority, and Deference" and it is a rollicking read.

A section can be found below:

The word “crisis” is overused, as is its anodyne opposite, “problem,” or its cousin, “issue.” (As in the highly flexible, “I have issues.”) Ordinary troubles become inflated into “crises” because crises sound somehow more dignified or electrifying. A problem sounds possibly serious, if hypothetically soluble, but a crisis sounds, well, critical. Yet the overuse might lead us to bend over backwards and fall into euphemism—calling a grave matter “a little difficult,” for example, as is common, for some reason, in American discourse today. There are crises. History proceeds by convulsions, not only increments—or rather, increments build up into crises, and before one knows it, the landscape has changed, one is living in a different world, and the world before it changed is barely conceivable and certainly unrecoverable. It was a foreign country; they did things differently there.

In the case of the murky future of journalism, it is fair to speak of crisis—crises, actually. The landscape has changed, is changing, will change—radically. You must know the parable of the boy who cried “wolf.” Just because the overanxious boy kept thinking the wolf was at the door, and sounding a warning to which others became accustomed, and therefore ignored, did not mean that the wolf was not nearby. When the real wolf showed up, no one was ready.

I shall speak primarily of American journalism because it is what I know best, and leave it to you to judge how much this case is typical. Four wolves have arrived at the door simultaneously while a fifth has already been lurking for some time. One is the precipitous decline in the circulation of newspapers. The second is the decline in advertising revenue, which, combined with the first, has badly damaged the profitability of newspapers. The third, contributing to the first, is the diffusion of attention. The fourth is the more elusive crisis of authority. The fifth, a perennial—so much so as to be perhaps a condition more than a crisis—is journalism’s inability or unwillingness to penetrate the veil of obfuscation behind which power conducts its risky business.

For more read here.

The continuing crisis in California

From The Economist:

ARNOLD SCHWARZENEGGER was skiing in Idaho when his office released a detailed outline of California’s 2009-10 budget. It would be unfair to suggest that the governor is unconcerned about the state’s dire fiscal situation. On the contrary, he has tried to focus minds on it for months. But the episode does, perhaps, hint at how seriously he expects his proposed solution to be taken.

California, first in many things, is facing America’s worst budget crisis. The gap between projected revenues and spending during this fiscal year and next amounts to $41.6 billion, which is almost half the total sum that the state expects to raise next year. Unlike the federal government, California is not allowed to get out of the jam by running a deficit. It is finding it hard to borrow to meet even short-term needs. Infrastructure work has virtually stopped. If nothing is done to close the gap soon—and perhaps even if it is—the state will begin issuing IOUs as early as next month.

Recession triggered the crisis but did not cause it. California relies heavily on income taxes, especially those paid by the top 1% of earners. These veer up and down with the markets. But instead of saving money in boom years, the state locks in higher spending on public services and embarks on projects that need long-term investment. Dave Cogdill, head of the Republicans in the state Senate, likens it to a family that adopts children in good times, only to find that it cannot afford to feed them when the economy sours.

Mr Schwarzenegger’s solution, which he will describe in detail later this week, combines swingeing spending cuts (even to normally inviolable schools) and equally swingeing tax increases. He wants to lift the sales tax by 1.5% until 2012. This would take it to between 8.75% and 10.25%, depending on where one is in the state. Although painful, the governor’s proposed budget is still rather optimistic. It assumes, for example, that federal spending on infrastructure will jump, that the cost of fighting fires will be less than half of what it was this year, and that the state will be able to sell $5 billion in bonds by July.

The plan anyway faces crippling opposition in the state Capitol. The Democrats who dominate both houses of the legislature find deep cuts to education and health care unpalatable. The Republicans, who can muster enough votes to block the governor’s budget, refuse to consider tax increases unless they are accompanied by a root-and-branch overhaul of state finances and a mass sell-off of state assets. The divide between the two camps is as wide as Yosemite Valley.

More on California fiscal crisis

From the Financial Times:

SAN FRANCISCO, Dec 19 - California Governor Arnold Schwarzenegger declared a fiscal emergency on Friday to call lawmakers into another special session to tackle the state’s weakening finances, and separately ordered state officials to prepare to furlough and lay off employees to cut costs.

His two actions mark a dramatic escalation in the budget battle waged in recent weeks in Sacramento, the capital of the most populous US state and world’s eighth-largest economy, as its revenues fall harder and faster than expected.

California’s state government now faces a $40 billion budget shortfall over its current and next fiscal years and is on track to run out of cash in February.

California’s Democrat-led legislature concluded its prior special session on Thursday by approving an $18 billion budget package, but Schwarzenegger, a Republican, said he would veto it because he wants lawmakers to both address the state’s budget gap and ease regulations to speed construction projects to help stimulate the state’s economy.

Assembly Speaker Karen Bass said the Democrats’ package would have provided for $3 billion in revenues for transportation projects, accelerated $3 billion in bonds for transportation projects and made it easier for hospital construction and expansion projects to move forward.

The dispute over which approach would better boost California’s ailing economy, underscored by its 8.4 per cent unemployment rate last month, comes on the heels of a decision on Wednesday by the state’s Pooled Money Investment Board to halt $3.8 billion in loans for public works.

The state government needs funds from the Pooled Money Investment Board to pay for vital services. The board’s action affects almost 2,000 projects, including highways, schools, levees, housing and parks.

The legislature now has 45 days to pass and send a bill or bills addressing the state budget to Schwarzenegger.

In the meantime, the state’s Department of Personnel Administration will under Schwarzenegger’s executive order adopt a plan that would go into effect in February to furlough state employees and supervisors for two days per month.

The order also calls for state agencies and departments to initiate layoffs and other ”program efficiency measures” to post savings of up to 10 per cent in the state’s general fund.

”Every California family and business has been forced to cut back during these difficult economic times and state government cannot be exempt from similar belt tightening,” a statement from Schwarzenegger office said.

Assembly Majority Leader Alberto Torrico and two other top Democratic lawmakers issued a statement that said Schwarzenegger’s order ”adds insult to injury for the state’s economy” and chided him for failing to win over either Democrats or Republican lawmakers to his budget plan.

”The governor has shown he can’t negotiate with Republicans, he doesn’t negotiate with Democrats, and now he’s refusing to negotiate with employees,” their statement said.

”It’s the same lack of leadership that has kept him from coming up with a single vote for any budget solution. And now that lack of leadership has resulted in his making a scapegoat of employees who are not the source of the problem.”

Still watching California

The issue of whether the US state of California will go the way of Iceland is still on the agenda.

THE state of California, one of the top 10 largest economies in the world, will run out of money by February, causing "financial Armageddon", according to dire new budget projections.

As of yesterday, the state's debts were mounting at a rate of $US1.7 million ($2.54 million) per hour.

The de facto insolvency of the US's most populous state - home to such economic engines as Silicon Valley, the Central Valley agricultural region, Hollywood, Napa Valley, the Long Beach ports, and the defence research and production facilities of Los Angeles, San Diego, and the Mojave Desert - would represent a new scale of catastrophe in a year that has seen financial markets and economies across the world implode.

Bill Lockyer, the Treasurer of California, has given warning that $US5 billion of public works projects, including road and school construction, will have to be cancelled because the state's lenders are worried about an impending Iceland-style bankruptcy. California - which has a GDP of $US1.7 trillion - already has the worst credit rating of any of the US's 50 states.

"Without a budget solution, state financing of infrastructure projects will stop. It's as simple, and dire, as that," Mr Lockyer said this week.

For California's Republican Governor Arnold Schwarzenegger, the crisis represents a humiliating final act to his second term. Mr Schwarzenegger, 61, came to power in 2003 because of an almost identical financial calamity, which resulted in his Democratic predecessor, Gray Davis, being "recalled" from office.

At the time Mr Schwarzenegger promised an end to California's tax-and-spend policies and runaway expenses, yet over the past four years of his administration the state's budget has grown by 40 per cent to $US144.5 billion. Thanks to the housing crash, recession and credit crunch, the state can no longer afford this with tax collection.

As the crisis continues and California's credit rating deteriorates, the cost to the state of borrowing keeps rising - a process that could ultimately cause the same kind of deadly spiral that this week tipped the Chicago-based publisher of the Los Angeles Times into bankruptcy.

Mr Schwarzenegger is proposing the same kind of emergency tax rises that in 2003 turned Mr Davis into a pariah. He has suggested a 1.5 per cent increase in sales tax - the equivalent of Britain's VAT - and a tripling of the car tax. When Mr Schwarzenegger first ran for office, he did so on a promise to a revoke a similar car tax increase proposed by his predecessor.

So far, however, Republicans in California's legislature have refused to go along with the proposals and Democrats have refused to cut government programmes, hence the stalemate.

Mr Schwarzenegger has declared a "fiscal emergency" to keep California's legislature in session until a solution can be found.

"When you have a crisis the most important thing is to make a decision," said a clearly frustrated Mr Schwarzenegger at a hastily called press conference on Wednesday. There, he presented an electronic display showing how much the deficit is growing in real time: $US470 per second, $US1.7 million per hour, and $US40 million per day.

He put it outside his office in Sacramento in an attempt to get the state's legislators to reach some kind of agreement. "The worst thing is not to make a decision," he said. "The most costly thing we can do is not to take any action."

California's biggest problem is the precipitous decline in tax revenues over the past year. The state's property taxes - the equivalent of Britain's council taxes - are based on the value of a house when it was first bought, and can then rise by no more than 2 per cent a year. This means that by far the most tax revenues come from new property sales, and these have all but dried up.

Adding to the problem is the fact that many homeowners who bought during the bubble years are now successfully appealing against their property taxes, using evidence that the value of their home is less than it was when they purchased it.

Tax revenues have also been hit by the global recession.

More media trouble: Tribune and Fairfax

This item from Tuesday's Wall Street Journal via The Australian:

TRIBUNE Company has filed for bankruptcy protection, in a sign of worsening trouble for the newspaper industry.

In recent days, as Chicago-based Tribune continued talks with lenders to restructure its debt, the newspaper-and-television concern hired investment bank Lazard as its financial adviser and law firm Sidley Austin to advise the company on a possible trip through Chapter 11 bankruptcy, people familiar with the matter say.

Tribune owns eight major daily newspapers, including the Los Angeles Times, Chicago Tribune and Baltimore Sun, plus a string of local TV stations.

A Tribune spokesman said the company doesn't comment on rumours or speculation. A spokeswoman for Lazard didn't respond to requests for comment. Representatives of Sidley Austin couldn't be reached for comment.

Tribune's latest actions underscore the deepening distress enveloping Tribune and other newspaper publishers. Their businesses are being battered by dwindling advertising sales, and many are carrying debt loads that are unmanageable in current market conditions. Industry insiders expect some papers will need to fold in coming months or seek protection from creditors to reorganise.

Tribune has been on wobbly footing since last December, when real-estate mogul Samuel Zell led a debt-backed deal to take the company private. Tribune has stayed ahead of its $US12 billion ($18 billion) in borrowings with the help of asset sales. Now, however, shrinking profits are tightening the noose.

The company's cash flow may not be enough to cover nearly $US1 billion in interest payments due this year, and Tribune owes a $US512 million debt payment in June.

One of Tribune's most pressing concerns: The company is likely to be in violation of debt terms that limit borrowings at the end of the year to nine times its adjusted profits. The ratio stood at 8.3 at the end of the second quarter, before Tribune reported an 83 per cent decline in operating profit for the three months ended September 28.

Violations of such debt covenants have become commonplace for newspaper companies as their profits have ebbed. Lenders so far have been willing to give the companies a pass in exchange for higher interest rates and other concessions, but Tribune has little wiggle room. Terms of the company's debt already are so loose and its financial standing so unsteady that a covenant waiver may not help.

Tribune's hiring of Lazard, meanwhile, brings it a firm experienced in debt restructuring, and one that has become a go-to adviser for newspaper companies in financial distress.

Even as its financial performance worsens, Tribune has some options. A sale of its Chicago Cubs baseball team is under way, and Tribune owns valuable stakes in businesses including the cable-TV channel Food Network.

Tribune already has auctioned off pieces of the company, including the Long Island, New York., daily Newsday to raise cash. Now, frozen credit markets have depressed sale prices.

Selling off more newspapers may not be a viable alternative because buyers are scarce and Tribune may be better off holding onto the profits from its papers.

And cost cutting is most likely afoot at Fairfax under new CEO Brian McCarthy:

SPECULATION is growing that likely new Fairfax Media chief executive Brian McCarthy could restructure senior management.

It is likely he will elevate more former key Rural Press executives to top positions in the Fairfax group.

It is understood Mr McCarthy will be formally anointed as CEO of Fairfax at a 9.30am board meeting in Sydney today.

The meeting comes after broking firm Goldman Sachs JBWere revealed last night that Fairfax's weekly page count across its main metropolitan newspapers, The Sydney Morning Herald, The Age and The Australian Financial Review, fell by about 5 per cent. This was led by a 20 per cent fall in classified ad pages across all mastheads.

Today's board meeting will also discuss how it plans to pay down $2.5 billion in debt. It will examine immediate options that include cutting dividends, selling off assets and more cost cuts. Mr McCarthy's former role as CEO of the leanly run Rural Press, taken over by Fairfax last year, is seen as the perfect training for Fairfax's necessary belt-tightening.

Fairfax is moving on from its expansionary phase of recent years -- which saw it clock up debt by making a number of takeovers -- to one of getting the best out of existing assets.

Speculation has centred on the possible elevation to more senior roles of a raft of former colleagues of Mr McCarthy at the regional newspaper group, all schooled in what has been dubbed the Rural Press "School of Cost Management".

As one media analyst at a broking firm put it yesterday: "Some of the Rural Press team have effectively been the shadow cabinet since the merger with Fairfax. But following the landslide election win of Brian McCarthy as Prime Minister of Fairfax, they are now likely to move to the front bench."

Those possibly in line for elevation under such a policy could include: Brian Cassell, currently Fairfax's group finance general manager; Allen Williams, head of community newspapers for the Hunter and Illawarra regions; and Allan Browne, CEO of regional publishing, southern and western.

Mr Cassell is particularly in touch with the McCarthy approach, having been his trusted finance lieutenant as general manager, accounting and finance, for Rural Press, a company famed for its lean approach.

Mr Cassell's current finance role at Fairfax sees him as No2 to the company's current CFO, Sankar Narayan. Mr Narayan was appointed in April 2004, under the former Fairfax regime of Fred Hilmer. Like Mr Hilmer, he had a management consulting background.

Mr Narayan is broadly viewed by analysts as a "strategic" CFO who was appropriate for the company's expansion of recent years. However, as one media boss put it yesterday, Mr Narayan is not regarded "as an operational CEO".

Alternatively, informed sources say, while Mr Cassell is viewed as a "numbers guy, not a strategic CFO", this could be an appropriate choice for the company in the finance area as it moves to a belt-tightening phase under Mr McCarthy.

Already, Mr McCarthy -- who for 20 months has been Fairfax's head of Australian operations -- has had another former Rural Press executive as a key right-hand man, with Lloyd Whish-Wilson CEO of Fairfax's NSW and ACT metropolitan publishing.

There have been suggestions of a restructure of roles at the top of Fairfax under a McCarthy regime. Mr McCarthy may look to restructure national and metropolitan newspapers to break down silos within the business.

One more radical scenario could see a return of Fairfax to a single national management structure, as opposed to the state-based silos now in place.

Late yesterday, it was revealed Fairfax's departed CEO, David Kirk, completed his term still owning a total of 1.97 million of the company's shares.

Clock still ticking in California

The world's sixth largest economy is still in danger of fiscal insolvency. The ramifications of California going the way of Iceland are pretty dire to contemplate.

With time and money running out for California, Gov. Arnold Schwarzenegger declared a fiscal emergency Monday and called legislators into a new special session that won't end until they agree on a way to trim the state's $11.2 billion budget deficit.

"Without immediate action, our state is headed for a fiscal disaster" in which California could run out of money to pay its bills by late February, the governor said in a news conference in Los Angeles.

He compared the growing deficit, which could reach $28 billion by 2010, to an avalanche gaining momentum, and he slammed the Legislature, Democrats and Republicans, for not coming up with solutions during a special session that ended Nov. 25.

"Unfortunately for California, the legislators did not seem to appreciate the severity of our crisis," Schwarzenegger said. "In an emergency like this, we have to take quick action to avoid even worse problems, even if they include decisions we don't like."

For more read here.