ADP jobs report shows paltry growth again

Economists are looking to Friday's jobs report with trepidation -- if the nation again adds a paltry number of jobs, fears of another recession will grow. But August job growth isn't likely to be impressive, according to the ADP National Employment Report, released Wednesday, which shows that employment in the private sector rose by just 91,000.

The average job growth during the previous three months has been just 72,000, which leaves millions still out of work. The nation added just 117,000 jobs in July.

ADP's National Employment Report, which focuses only on the private sector, showed gains in construction, which had shrunk for three months in a row. The service-providing sector provided the most employment growth. Employers with payrolls of fewer than 50 workers added the most jobs in August, while employers with more than 500 workers added the fewest.

The jobs report from the Bureau of Labor Statistics will include both private and government jobs. Economists say the private sector needs to perform well to offset losses in state and local governments, which are shedding jobs.

The firm Challenger, Gray and Christmas said Wednesday that employers planned to cut 51,114 workers from payrolls in August, fewer cuts than they had made in July. The government sector has announced more than 100,000 job cuts this year, the firm said.

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-- Alana Semuels

Photo: A job fair in Anaheim. Credit: Luis Sinco / Los Angeles Times

California solar panel manufacturer ceases operations

The California solar panel manufacturer that received a high profile $535 million Energy Department loan guarantee announced today that it was ceasing operations, laying off 1,100 workers and will file for bankruptcy in the coming days.

Fremont-based Solyndra said that it had been rocked by stifling global economic conditions and a slow recovery from the great recession. It had also faced heavy competition from Chinese firms that were undercutting it on costs.

The company's website had not been updated to reflect the development. A terse voice mail announcement on one of Solyndra's contact information telephones said only the following: "Solyndra announced today in a press release that it has ceased operations and intends to file for chapter 11 bankruptcy protection," advising customers on how to contact the company for further information.

It was quite a fall from late May 2010, when the company hosted the president on a factory tour. Company officials announced then that they expected to be adding new employees. But in July of this year, the company was being grilled on Capitol Hill by House Republicans who said that there were indications that the company was in a weak financial condition and wasn't a good choice for the loan program.

Solyndra would become the third such company to file for bankruptcy in recent days. Spectrawatt Inc. of Hopewell Junction, N.Y., filed for Chapter 11 bankruptcy on Aug. 19. Evergreen Solar Inc. of Marlboro, Mass., filed for Chapter 11 bankruptcy on Aug. 15.

Experts said that solar energy was still among the most promising of all of the alternative energy sources, but they added that due diligence was necessary to pick the best companies. Other experts said that a brutal and wholesale consolidation of the industry was inevitable.

Bill Bathe, chief executive of U.S. Energy Services, a Minneapolis company that offers a portfolio of energy management services, said "there are a lot of companies competing for that space. There used to be 50 car companies in this country, but very few survived. For consumers, this is an exciting time, but for investors, this is still a very high-risk stage. You may hit a home run or be part of the experiment that delivers no pay out."

Another expert said that he was not familiar with the company, but added that it was an example of how the federal government will have to be far more careful in the future.

"There has to be a more efficient and effective way of making these kinds of decisions on loan subsidies," said Bruce Bullock, executive director of the Maguire Energy Institute at Southern Methodist University.

Tyson Slocum, director of the energy program at Public Citizen, said that there were lessons to be learned in the way that other nations, particularly Germany and Japan, have funded their renewable energy projects.

"You can't end loan subsidies for renewable energy. That would be a disaster. What we need to do is make better decisions about the subsidies we do deploy. In countries like Germany and Japan, which have a much larger footprint in this area, subsidies have been remarkably successful," Slocum said. "We can do the same here, if we are more careful."

Photo: Ben Bierman, left, and Chris Gronet take President Obama on a tour of the Solyndra solar panel company in Fremont, Calif. Credit: Paul Chinn/Pool photo

Also: Solar power in California is still a hot topic

Also: Investing: Green technology has big growth potential

-- Ronald D. White

 

Once again, investors yank money from stock funds

Investors are selling stock mutual funds -- again.

After a one-week respite, individual investors pulled a net $3.2 billion from U.S. stock funds and $610 million from foreign funds in the week ended Aug. 24, according to the Investment Company Institute.

The outflow was nowhere near the frenetic selling seen earlier this month when the stock market plunged amid worries about the economy. Fund owners dumped a net $34 billion in U.S. equity funds in the first two weeks of August.

Still, the renewed selling pressure underscores the skittishness among small investors about the market. They had added a net $1.3 billion into U.S. equity funds in the previous week.

More than that, departing investors missed out on an inchoate uptick in stock prices. Through Tuesday, the Standard & Poor's 500 index gained 8% in the past week and a half, and the market is up again Wednesday morning.

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Three-fourths of Americans surveyed say economy has not hit bottom

Don't panic in reaction to stock market swings

-- Walter Hamilton

Photo: A bank of phones at the New York Stock Exchange; Credit: Getty Images

BofA to sell or close another mortgage arm, putting jobs at risk

Bank of America Corp. has put another giant piece of the Countrywide mortgage empire on the auction block -- the correspondent lending arm, which buys closed home loans from mortgage bankers, commercial banks and other loan originators.

A spokesman said Wednesday that the Charlotte, N.C., bank is in serious talks with a buyer for the correspondent business. But if it can't strike a deal with that buyer or find another, Bank of America would shut down the business, jeopardizing 1,400 jobs.

Of those, about half are in Southern California, spokeswoman Jumana Bauwens said -- 450 in Westlake Village and 250 in Thousand Oaks.

From  a statement provided by Bauwens on Wednesday:

We intend to sell the correspondent mortgage lending division or, if a suitable deal is not identified, we will consider other options, including winding down the correspondent lending business in an orderly manner.  At this time, our correspondent lending operations continue business as usual. 

Bank of America is currently the second-largest player in the correspondent market, with 23% of the business, while No. 1 Wells Fargo & Co. has a 26.2% share, said Guy Cecala, publisher of Inside Mortgage Finance.

Of Bank of America's total $40.4 billion in mortgage loans in the second quarter, more than half -- $21.8 billion -- was generated through the correspondent channel.

Bank of America has been shedding businesses it considers nonessential as CEO Brian Moynihan tries to raise capital and focus the company, the nation's largest retail bank, on selling multiple products to its core customers. 

Barbara DeSoer, who heads up the home-lending business, decided that borrowers who obtain loans from other originators do not fit in that category, BofA mortgage spokesman Dan Frahm said. The bank generally provides customer service to borrowers as part of its deals with the correspondent lenders who make the loans and then sell them to BofA.

"We want to be in the direct-to-consumer business," Frahm said.  "These are customers who elected to finance their mortgages using a brand other than Bank of America."

When Bank of America in 2008 acquired Countrywide Financial Corp., then the nation's largest mortgage lender, the stated aim was to take advantage of the superior systems the Calabasas company was said to have developed for all aspects of the home lending business, including correspondent lending.

But after recording billions of dollars of losses related to Countrywide, Bank of America has wound up selling or shutting down many mortgage operations.

The bank previously exited wholesale mortgage lending, which is making loans through brokers, and the reverse mortgage business, which allows older people to remain in their homes while drawing down the home equity to live on.

It also sold Balboa Insurance, a legacy Countrywide unit. Balboa provides insurance policies that are forced upon homeowners who let their own fire insurance lapse, often because they are headed for foreclosure.

RELATED:

BofA gets 5 billion more reasons to regret acquiring Countrywide

BofA's legal woes from Countrywide worse than expected 

Lender buy proves costly for Bank of America 

Bank of America agrees to write down California mortgage principal

-- E. Scott Reckard

Photo: Home Defenders League activists rally in San Jose. Credit: Paul Sakuma/Associated Press

 

 

 

Robert Greene and his influence over American Apparel [Video]

Author Robert Greene rose to fame with his controversial bestseller "The 48 Laws of Power," in which he counsels readers to act ruthlessly to get ahead. Some oft-quoted laws include "Court attention at all costs," "Crush your enemy totally" and "Get others to do the work for you, but always take the credit."

His book became a must-read among rappers, prisoners and business executives, including Dov Charney, the provocative founder and chief executive of Los Angeles clothing chain American Apparel Inc.

Read the full story, and watch Times reporter Andrea Chang talk about profiling Robert Greene below:

 

Photo: Robert Greene, author of "The 48 Laws of Power," with his cat Brutus. Credit: Brian van der Brug / Los Angeles Times

For Graduates, a Shrinking Payoff

Attention recent college graduates — as well as parents who covered those big tuition bills. You may not want to hear this, but a study released on Wednesday found that entry-level wages for students who graduated from college in 2010 was lower than a decade earlier, after adjusting for inflation.

The study was done by Heidi Shierholz, a labor market economist at the Economic Policy Institute, a liberal research and policy center. She found that after gains in the 1980s and 1990s, entry-level hourly wages for college-educated men (without advanced degrees) were $21.77 in 2010, down 4.5 percent from $22.75 in 2000. For college-educated women, entry-level wages were $18.43 in 2010, the study found, down 5.2 percent from $19.38 10 years earlier. (The figures are in 2010 dollars.)

Ms. Shierholz said in an interview, “We’re seeing increased demand for college grads, but the fact that we see these declining wages suggests that demand is being more than met by the increased supply of college grads.”

She said that in the decade after 2000, the business cycle was tough on workers and wages across the board, except for those at the very top. “These young people coming out of college get swooped up in the bottom part of the wage distribution that really suffered during the whole decade after 2000,” she said.

Her study concluded on a pessimistic note: “With unemployment expected to remain above 8 percent well into 2014, it will likely be many years before young college graduates — or any workers — see substantial wage growth.”

First PacTrust to acquire Beach Business Bank of Manhattan Beach

First PacTrust Bancorp, the parent of Chula Vista's Pacific Trust Bank, has agreed to acquire Beach Business Bank, a Manhattan Beach community bank with a specialty sideline of lending to physicians across the country.

The deal, expected to close early next year, continues an expansion into Los Angeles and Orange counties for First PacTrust, which raised $28 million in fresh capital this summer by selling stock.

First PacTrust also is acquiring Gateway Business Bank, a three-branch bank based in Cerritos that operates home-lending offices across California, Oregon and Arizona through its Mission Hills Mortgage Bankers arm.

In a joint statement Wednesday morning, First PacTrust and Beach Business Bank said their boards had OK'd the deal, which also requires approval by Beach shareholders and regulators.

Assuming that goes as planned, Beach shareholders are to receive combinations of cash and stock or cash and stock warrants with a total value of $37.2 million, the statement said.

The deal adds up to $9.07 for each share of Beach Business Bank stock. The closely held shares had traded in the $16 range in late 2006 and early 2007, before the financial crisis struck.

They had been changing hands at about $6 in recent over-the-counter trading and shot up to $8.60 after the deal was announced, a 45% gain.

Besides its Manhattan Beach headquarters, Beach has full-service branches in Long Beach and Costa Mesa and a lending office in Torrance.

It is to continue operating under its own name, with its chief executive, Robert M. Franko, becoming president of First PacTrust Bancorp. Franko said the merger would "result in a stronger bank with the capital strength and scale to continue to expand into new markets."

Job Insecurity Remains High

For the last couple of years, the problem plaguing the job market was that companies have been in a holding pattern: Companies weren’t laying off workers in high numbers. But if you were already laid off, finding a company willing to expand was impossible.

CATHERINE RAMPELL

Dollars to doughnuts.

Even so, workers still employed remain anxious about their job security, according to new survey data from Gallup.

Dollars to doughnuts.

A USA Today/Gallup Poll conducted in mid-August, based on a survey of 489 adults employed full or part time, found that 30 percent said they were worried about being laid off, similar to the 31 percent who answered this way in August 2009.

The survey also found that workers were concerned that their hours, wages and benefits would be cut back. Benefit cuts were the most common worry, with 44 percent of workers surveyed saying they thought benefits might be on the chopping block.

Lower-income workers were especially likely to be concerned about their job security:

As you can see, workers in households earning less than $50,000 annually were about twice as likely as their counterparts in households making at least $75,000 to be concerned about layoffs, shorter workweeks and off-shoring.

Maybe the anxiety is unfounded, and companies are not planning layoffs at any increased pace. But such worries can become self-fulfilling if workers start cutting back in preparation for potential job losses. If they cut back their spending, companies don’t sell as much and then starting paring down their own staffs.

Three-fourths of Americans surveyed say economy has not hit bottom

The economy has consumers feeling so pessimistic that they’re clipping coupons, accepting undesirable jobs and wringing their hands over the high cost of food and gas.

Nearly three-fourths of Americans think the economy has yet to hit bottom, according to a Citibank survey conducted by Hart Research Associates. And compared with 2008, 44% of consumers said they feel less financially secure now.

The state of their local economy is fair or poor, according to 77% of respondents. The 41% of people expecting business conditions to improve in their area over the next year represents a 22-percentage-point slump since January. A whopping 85% showed little confidence in nearby employment opportunities.

In such a precarious environment, working for a small business or the state or local government is rarely viewed as a safe bet. Nearly one-third of Americans say working for yourself is the best bet to staying financially secure.

The majority of consumers reported cutting back on premium coffee and food brands and clipping coupons. Three in 10 said they’ve altered their living situation to save money. About one-fourth have postponed retirement or are working jobs they would have shunned in better times.

RELATED:

Consumer confidence in the economy plunges

Shaky economy? Tell that to the high rollers at Tiffany & Co.

-- Tiffany Hsu

Photo: Katie Busker, 30, clips coupons as her son, Austin Spiker, 6, plays with Legos at the dinner table in Independence, Iowa. Credit: Jessica Rinaldi / Reuters

U.S. Justice Department sues to stop AT&T merger with T-Mobile

 

 

 

 

 

 

 

 

 

 

 

The U.S. Justice Department is suing to block the $39-billion acquisition of cellular phone company T-Mobile by telecom giant AT&T.

Deputy Atty. Gen. James M. Cole said that the acquisition  "would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for mobile wireless services."

The Obama administration called T-Mobile "an important source of competition among the national carriers." Currently, AT&T and T-Mobile now compete head to head in 97 of the nation's largest cellphone markets. That competition would be eliminated by the acquisition, which would create the nation's largest wireless communications company, the government said.

DOCUMENT: Read the antitrust lawsuit

AT&T currently is the second-biggest cellular provider, and T-Mobile is the fourth-biggest as measured by the number of subscribers, the Justice Department said.

AT&T did not immediately respond to the government's announcement.

Earlier in the day, AT&T announced that if the takeover of T-Mobile goes through, it would repatriate 5,000 call-center jobs -- which had been outsourced overseas -- to the United States.

"At a time when many Americans are struggling and our economy faces significant challenges, we're pleased that the T-Mobile merger allows us to bring 5,000 jobs back to the United States and significantly increase our investment here," said Randall Stephenson, AT&T chairman and chief executive.

Stephenson's statement was applauded by labor union leaders.

"Cuts in wages, benefits and jobs have become the new normal in America, so that when a company like AT&T takes action to bring back quality jobs, it's big news," said Larry Cohen, president of the Communications Workers of America union.

The proposed merger currently is being studied by the Federal Communications Commission. The California Public Utilities Commission also is investigating the pros and cons of the proposed deal.

RELATED:

FCC restarts the clock on review of merger between AT&T and T-Mobile

Free alternatives may cut into text messaging profits

Credit: Associated Press

-- Marc Lifsher

Restaurants to draw one-third of Americans over Labor Day weekend

Labor Day seems to make Americans hungry -- more than one-third will either dine out over the holiday weekend or get takeout or delivery to bring to outdoor festivities, according to new research.

High demand is especially reassuring for East Coast eateries worried that tourists will shun the area in the aftermath of Hurricane Irene, the National Restaurant Assn. said.

The group found that a quarter of consumers, many of them middle-aged, will visit a restaurant over the long weekend while 15%, most of them younger, will opt for takeout. For 5%, both options will be a good bet.

Over the summer, 66% of survey respondents said they visited a restaurant while on vacation. Seeking shelter from the heat, 17% of dining patrons said they ate out to help cool down. Special summer deals such as Restaurant Week promotions and happy hours clinched the deal for 12% of consumers.

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9,450 restaurants closed in U.S. last year, report says

Food prices grow, as does public's appetite to eat out

-- Tiffany Hsu

Photo: Is this 32-ounce porterhouse steak from Cut in Beverly Hills the kind of food Americans will be ordering over Labor Day weekend? Credit: Los Angeles Times

Dow back in the black for 2011 after stocks rise

The Dow Jones industrial average was back in positive territory for the year after stocks rose Wednesday morning for the fourth straight day.

A report from the Commerce Department said that factory orders grew in July more than economists expected, dampening fears that the economy is heading back into recession. A seperate report showed that private businesses added employees in August, though fewer than in July.

The Dow was recently trading up 116.17 points, or 1.0%, at 11,676.12. That is nearly 100 points higher than where the blue-chip index began the year. Thanks to the market plunge earlier this month, the Dow is still well below the highs reached in late April and July.

The broader Standard & Poor's 500 index is still in negative territory for the year.

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Bernanke and Buffett try the feel-better approach

August consumer confidence lowest in more than 2 years

-- Nathaniel Popper

twitter.com/nathanielpopper

Photo: Spencer Platt / Getty Images

When debt levels turn cancerous

 Now we know where the tipping point lies. Debt becomes poisonous once it reaches 80pc to 100pc of GDP for governments, 90pc of GDP for companies, and 85pc of GDP for households. From then on, extra debt chokes growth.

Stephen Cecchetti and his team at the Bank for International Settlements have written the definitive paper rebutting the pied pipers of ever-escalating credit. “The debt problems facing advanced economies are even worse than we thought.”

　

The basic facts are that combined debt in the rich club has risen from 165pc of GDP thirty years ago to 310pc today, led by Japan at 456pc and Portugal at 363pc.

“Debt is rising to points that are above anything we have seen, except during major wars. Public debt ratios are currently on an explosive path in a number of countries. These countries will need to implement drastic policy changes. Stabilization might not be enough.”

Demographic atrophy and aging costs will make this even nastier. “Rising dependency ratios put further downward pressure on trend growth, over and above the negative effects of debt.”

　

　

Why has it happened?

1) Restrictions on credit have been “systematically removed” since the 1970s. (ie Gordon Brown’s 120pc mortgages and other such idiocies)

2) Greenspan’s “Great Moderation” fooled us all into thinking the world was free of risk.

3) The “Asian Savings Glut” pulled down real bond yields. (The BIS is being too kind to its masters — central banks — who also pulled down short rates for fifteen years, catastrophically so in my view).

4) Tax policies favour debt; ie corporate debt in Europe, or mortgages in the US, as well as a host implicit debt subsidies and guarantees (Fannie Mae and Freddie Mac?)

So get rid of all these bad policies (gradually of course).

The professoriat has been a little too cavalier in arguing that debt does not really matter for the world as a whole because we all owe it to ourselves. Debtors are offset by creditors (not always from friendly countries). Common sense suggest that this academic solipsism is preposterous, and so it now proves to be.

“As modern macroeconomics developed over the last half-century, most people either ignored or finessed the issue of debt. Yet, as the mainstream was building and embracing the New Keynesian orthodoxy, there was a nagging concern that something had been missing. On the fringe were theoretical papers in which debt plays a key role.”

“There are intrinsic differences between borrowers and lenders; non-linearities, discontinuities… It is the asymmetry between those who are highly indebted and those who are not that leads to a decline in aggregate demand.”

Creditors do not step up spending to cover the shortfall when debtors are forced to retrench suddenly. So the economy tanks.

My own suspicion is that debt has very powerful “intertemporal effects” that are not factored into the models. It steals growth from tommorow, until there is little left to steal. The BIS does not explore this angle. (Mr Cecchetti said politely that I was talking nonsense when I raised this point with him .. well yes, perhaps, wouldn’t be the first time).

Here is the league table. It is revealing.

 

As you can see, the US has one of the lower combined debts at 268pc of GDP. Australia is lowest (232), followed by Austria (238) and Germany (241). (I don’t believe the Norway figure in this chart. Norway has no public debt, except for purposes of monetary management).

This is one reason why I hold to my quirky view that the US is in better relative shape than much of OECD bloc — though still dreadful, obviously. It was on a flat line of around 150pc for half a century before exploding).

The US also has much healthier fertility rates and demographics than most. Adjusted for aging effects, America is more credit-worthy than Germany.

By all means strip the US of its AAA rating, but every country with total debt above 240pc of GDP and a fertility rate below 1.9 should also be stripped. All members of currency unions should be capped at AA automatically, since they no longer have sovereign policy instruments and since they switch FX risk into default risk.

It is far from clear what the rich world should do about this mess right now. The BIS does not offer a policy prescription, though the IMF has.

Christine Lagarde says there is an optimum “therapeutic dose” of fiscal tightening. If too violent, it threatens to tip the global economy back into recession and prove self-defeating. Deficits and debt will rise as fast, or even faster.

The IMF view is that calibrated fiscal tightening must be offset by easy monetary policy, perhaps even QE3 if deflation rears its ugly head again and threatens a full-blown Fisherite debt-deflation spiral. That is broadly my view. We are not there yet, though we might be soon.

Let us not demonize all debt. It is the lubricant of progress.

“Used wisely and in moderation, it clearly improves welfare. But, when it is used imprudently and in excess, the result can be disaster.”

And disaster we have. We must prepare for a long hard slog, for the rest of my life and yours.

Do read the report. The BIS has been a rare of voice of good judgement for the last decade.

What happens when banks are required to hold more capital?

Why shouldn't banks be allowed to go bust?

Financial regulation imposes requirements on banks to hold certain amounts of capital. When the financial crisis began in 2007, the capital banks held fell significantly. Regulators could have taken the view that capital is there as a buffer against a rainy day, and the rainy day had come, so the buffer should be allowed to be used up – indeed, if it were totally used up, the banks might go bust, as would be right and proper.  Instead, regulators tended to maintain their rules, so that if banks’ capital had fallen below the regulatory thresholds they were required to raise additional capital. From September 2008, as the crisis escalated after the quasi-nationalisations of US mortgage firms Fannie Mae and Freddie Mac, which triggered the collapse of a number of other institutions (most notoriously Lehman Brothers), regulators actually increased their capital requirements, so banks had to hold more capital on the rainy day than they had had to hold against the rainy day!

Subsequently, there have been many proposals that capital requirements should be increased even further.  A rather odd (and badly confused) idea has emerged, particularly amongst politicians but also certain regulatory authorities, that the point of capital requirements is to prevent banks going bust. It certainly is not. Capital requirements would have to be many many times their previous levels even to have a significant impact on when banks would go bust – at levels that would be considered implausible by almost anyone – and even then there would still be some occasions, every few decades, when collapses occurred. Because they were so rare, when banking collapses did finally occur they would be totally catastophic (no-one would be prepared for them). And in the meantime because banks were not going bust, competition in the sector would be seriously damaged. Competition can only function properly when new entrants can drive out existing player, so that there is turnover in ideas and methods.  Companies going bust is not capitalism failing – it is capitalism working. We do not want banks less able to go bust – we want them more able to do so without bank failures leading to disaster for the wider economy!

Capital requirements take the form of the banks having to hold a certain percentage of their risk-weighted assets as capital (e.g. shares). So banks can deliver higher capital requirements in three key ways. They can raise extra money (e.g. issuing extra shares). They can reduce the size of their balance sheets, by making fewer loans or by calling in past loans.  Or they can reduce the riskiness of their loans (e.g. by refusing to make loans to as risky business ventures, focusing on lending only to nearly “sure things”).

The FSA has studied how banks actually respond to increased capital requirements in practice. What it found was two key things. First, it found that banks deliver about half of increased capital requirements by reducing their risk-adjusted balance sheets (i.e. by lending less and less risky) and about half by raising extra money. Second, it found that the order in which this happens is that first banks cut the size of their balance sheets, and only once that is largely achieved do they start raising capital. (This latter result in unsurprising – investors aren’t going to pour extra money into a bank with inadequate capital until it has proven that it can de-risk.)

The implication is twofold. First, regulators cannot expect to achieve both higher capital requirements and more lending at the same time. If you want banks to hold more capital, you must accept that they will lend less. If you want them to lend more, you can’t require them to hold more capital. The second is that responding to a financial crisis by increasing capital requirements should be expected to result in banks initially cutting back on lending even more than they might other do so. That is likely to damage wider economic growth, making households and businesses less able to repay their debts, so banks become more bust, so the financial crisis gets worse.  Increasing capital requirements in response to a financial crisis is a perverse policy response.

Capital provides a buffer. It does not exist to prevent banks ever going bust and is not a substitute for having proper mechanisms to allow banks to go bust safely. What is needed – what is desperately and urgently needed – to help resolve the ongoing banking crisis is not higher capital requirements. It is proper resolution mechanisms for failed financial institutions – in particular mechanisms that impose losses on bank bondholders (e.g. via debt-equity swaps). Losses for lenders, not taxpayers – shouldn’t be rocket science, should it? So why hasn’t it happened yet?

Preparing for Disaster

Casey B. Mulligan is an economics professor at the University of Chicago.

Much of the economics of environmental disasters is about anticipating and planning.

Today’s Economist

Perspectives from expert contributors.

Hurricane Irene traveled the East Coast last weekend and was expected to be one of the rare hurricanes to hit New York (by the time it reached there, it had been downgraded to a tropical storm). Although many thousands of people in the region may be without electricity for days to come, New Yorkers are glad that Irene did little damage as hurricanes go.

Perspectives from expert contributors.

The storm began to receive media attention the weekend before it arrived, and people in the New York area used the time to prepare themselves. Forecasters have been criticized for overestimating the amount of wind that New York would experience, but the winds and tides were plenty strong. Preparation was an important reason that damage was limited.

For example, the eye of the storm passed right over Kennedy International and LaGuardia Airports, but planes did not crash because the airports were shut during the storm. Few lives and little cargo was lost from ships in the area because the ports were closed, and vessels moved out of the area.

Hundreds of thousands of people were left without power, and many homes were flooded. But, clearly, the damage would have been much worse if Hurricane Irene had hit with no warning.

I have no expertise in climate, weather, physics or aerodynamics, but one of the lessons of economics that environmental changes are less harmful when they can be anticipated. With only a few days of preparation, as with Hurricane Irene, people and mobile capital can be moved out of harm’s way. Protective barriers can be constructed for the immobile capital like homes.

New York was not given a definite warning of Irene a year ahead, let alone a decade ahead. But if it had been warned years ahead, the economy could have adjusted even more by making plans to locate activity in more protected places. Or perhaps even to invent goods and production processes that are more hurricane resistant.

The opportunities for preparation are one reason why economists expect the damage from global warming to be different, and perhaps less, than from natural disasters that hit by surprise.

Global warming is expected to raise temperatures and sea levels over a period of decades – perhaps centuries. Even if scientists are completely unable to retard or reverse the environmental consequences of global warming, thanks to decades of warning the economy can greatly adjust to minimize the economic costs of those environmental consequences.

That’s the thesis of a recent book, “Climatopolis: How Our Cities Will Thrive in the Hotter Future,” by Matthew Kahn of the University of California, Los Angeles (disclosure: Professor Kahn is a friend and was my classmate at the University of Chicago). Given advance warning, people will protect themselves and innovate in order to make sales in future market when the symptoms of global warming are more threatening.