California Senate approves Amazon sales tax deal [Updated]

After days of intense negotiations between big-box national retailers and Amazon.com Inc., the California Legislature is poised to send the governor a bill that would require the Internet seller to start collecting sales taxes on purchases by Californians, beginning a year from now.

The compromise on Friday, the final day of the legislative session, was approved by the state Senate on a bipartisan 36-1 vote. As of 8 p.m., it had yet to clear the Assembly, but supporters said it had a good chance of passing.

[Updated at 10:17 p.m.: The bill passed the Assembly 59-8 and was sent to Gov. Jerry Brown for his approval.]

As part of the deal, Seattle-based Amazon agreed to start collecting California sales taxes Sept. 15, 2012, unless Congress first passes legislation setting a national standard. Such a law would end squabbling in dozens of U.S. states over whether and how to make Amazon and other online merchants follow the same rules as the big bricks-and-mortar chains.

The companies that operate on California Main Streets and shopping malls, such as Wal-Mart Stores Inc. and Target Corp., said they suffer from unfair competition because Amazon doesn’t collect sales taxes, enabling it to sell products at overall prices that are as much as 10% lower. Amazon countered that getting taxes from companies that don’t have stores or warehouses in the state is unconstitutional, according to a a 1992 U.S. Supreme Court decision.

Passage of the new bill, AB 155 by Assemblyman Charles Calderon (D-Whittier), and a signature from Gov. Jerry Brown, if it comes, would head off a costly and unpredictable legal and political fight between the rival business interests.

The governor, who signed an earlier version of the tax bill in June, has declined to telegraph his position on the current bill. Amazon, which until recently refused to collect sales taxes from its customers here, was getting ready to submit petitions with more than 500,000 signatures of registered voters. That’s sufficient to qualify a referendum for the June ballot seeking to repeal the law that took effect July 1.

The new bill, though, would supersede the current law and could not be subject to a referendum because it would take effect immediately upon being signed by the governor.

“Nobody wanted this referendum,” said Lenny Goldberg, a supporter who is executive director of the labor-oriented California Tax Reform Assn. “There’s a big down-side risk for everyone with the referendum. Amazon gets hammered [with bad publicity], and we could lose [the election].”

Amazon refused to comment on the legislative agreement it’s been negotiating for the last week. The deal between Amazon and the big-box stores is a “classic compromise” even though it deprives the state treasury of an estimated $200 million in sorely needed revenues during its first year, said Senate President Pro Tem Darrell Steinberg (D-Sacramento).

At the same time, the agreement guarantees that the state will get even greater revenues in future years without being bogged down in court battles. “Sometimes the [legislative] process works,” he said, “and this is a good example.”

-- Marc Lifsher

California Senate approves Amazon sales tax deal

After days of intense negotiations between big-box national retailers and Amazon.com Inc., the California Legislature is poised to send the governor a bill that would require the Internet seller to start collecting sales taxes on purchases by Californians, beginning a year from now.

The compromise on Friday, the final day of the legislative session, was approved by the state Senate on a bipartisan 36-1 vote. As of 8 p.m., it had yet to clear the Assembly, but supporters said it had a good chance of passing.

As part of the deal, Seattle-based Amazon agreed to start collecting California sales taxes Sept. 15, 2012, unless Congress first passes legislation setting a national standard. Such a law would end squabbling in dozens of U.S. states over whether and how to make Amazon and other online merchants follow the same rules as the big bricks-and-mortar chains.

The companies that operate on California Main Streets and shopping malls, such as Wal-Mart Stores Inc. and Target Corp., said they suffer from unfair competition because Amazon doesn’t collect sales taxes, enabling it to sell products at overall prices that are as much as 10% lower. Amazon countered that getting taxes from companies that don’t have stores or warehouses in the state is unconstitutional, according to a a 1992 U.S. Supreme Court decision.

Passage of the new bill, AB 155 by Assemblyman Charles Calderon (D-Whittier), and a signature from Gov. Jerry Brown, if it comes, would head off a costly and unpredictable legal and political fight between the rival business interests.

The governor, who signed an earlier version of the tax bill in June, has declined to telegraph his position on the current bill. Amazon, which until recently refused to collect sales taxes from its customers here, was getting ready to submit petitions with more than 500,000 signatures of registered voters. That’s sufficient to qualify a referendum for the June ballot seeking to repeal the law that took effect July 1.

The new bill, though, would supersede the current law and could not be subject to a referendum because it would take effect immediately upon being signed by the governor.

“Nobody wanted this referendum,” said Lenny Goldberg, a supporter who is executive director of the labor-oriented California Tax Reform Assn. “There’s a big down-side risk for everyone with the referendum. Amazon gets hammered [with bad publicity], and we could lose [the election].”

Amazon refused to comment on the legislative agreement it’s been negotiating for the last week. The deal between Amazon and the big-box stores is a “classic compromise” even though it deprives the state treasury of an estimated $200 million in sorely needed revenues during its first year, said Senate President Pro Tem Darrell Steinberg (D-Sacramento).

At the same time, the agreement guarantees that the state will get even greater revenues in future years without being bogged down in court battles. “Sometimes the [legislative] process works,” he said, “and this is a good example.”

-- Marc Lifsher

Dow falls more than 300 points as European fears grow

Fears that the European debt crisis may be coming to a head drove down stock markets around the world.

The market declines were driven largely by reports out of Germany that indicated leaders there are preparing for Greece to default on its bonds but are struggling to reach a consensus on how to handle the problem.

The news sent the German stock market down 4.1% by the end of the day Friday, similar to the declines elsewhere in Europe. Leading U.S. stock indexes followed, with the Dow Jones industrial average experiencing its worst day in more than three weeks, wiping out gains made earlier in the week.

“Now people aren’t talking about a recession here in the U.S.,” said Anthony Conroy, head equity trader at BNY ConvergEx. “Now we’re talking about a global recession.”

The Dow finished the day down 303.68 points, or 2.7%, to 10,992.13. The broader Standard & Poor’s 500 index fell 31.67 points, or 2.7%, to 1,154.23. Both indexes have fallen five of the last six weeks.

President Obama had hoped to lift some of the economic gloom with his speech to Congress on Thursday night promoting an $447-billion economic stimulus plan that would cut taxes and increase spending on infrastructure.

The speech, though, was immediately met with questions about whether it can pass a Republican-controlled House of Representatives, and whether it is even big enough to have an impact if it does pass.

Investors had also held out hope that Federal Reserve Chairman Ben S. Bernanke would provide some hope for stimulus in a speech he gave Thursday, but he stepped back from making any firm commitments.

“Presumably they have shot their big cannons and what they have left are a few handguns,” said Bernie McGinn, president of McGinn Investment Management. “People would like to have cannons now.”

By Friday morning, most eyes had shifted to Europe, where investors were buying up Greek bonds at prices that appear to assume a default is coming.

The European Central Bank has been purchasing Greek bonds in an effort to help support the Greek government as it implements an austerity program.

On Friday morning, though, the bank announced that its No. 2 official, Juergen Stark, was resigning, reportedly due to his disagreement with the bond-buying program.

Shortly after that announcement, reports indicated that Germany is drawing up a plan to shield its banks in case Greece does default on its bonds.

In July the European Union came out with a $220-billion plan to help Greece avoid default, but political disagreements have thrown into doubt whether the second dose of this aid will be delivered to Greece.

The failure to deliver the aid probably would force the Greek government into default.

The specter of a Greek default is so feared because many European banks hold vast stores of sovereign bonds, and could face difficulties like those encountered by U.S. banks in 2008 when mortgage-backed securities lost their value.

“This is Europe’s 2008,” said Kim Caughey Forrest, a portfolio manager at Fort Pitt Capital Group.

RELATED:

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Obama jobs plan spurs cautious hope among small businesses

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-- Nathaniel Popper

Twitter.com/nathanielpopper

Photo: The New York Stock Exchange. Credit: Spencer Platt / Getty Images

Podcast: The Economy, Manufacturing and Commercialized College Life

The economy has been slowing and unemployment in the United States is stuck at 9.1 percent. President Obama has come up with a program that he says will help.

In a speech on Thursday, he offered a $447 billion package of tax cuts and spending programs that received a lukewarm reception from Republicans in Congress. The total of fiscal stimulus items was bigger than expected, but it’s not clear how much of it will be enacted, Floyd Norris says in the new Weekend Business podcast.

The Federal Reserve is contemplating action of its own, deriving inspiration from an old song by Chubby Checker. Among the options being considered to stimulate the economy is a variation on a 1961 Fed program known as Operation Twist. As I write in the Strategies column in Sunday Business, and as we discuss in the podcast, the Fed might twist the composition of its own bond portfolio to lower longer-term interest rates. New research suggests that such an effort might be effective, though its impact could be dwarfed by other influences on financial markets.

In a separate conversation in the podcast, Greg Mankiw, the Harvard economics professor, analyzes the economy’s problems and suggests a long-term solution: stoking the “animal spirits” of business to increase investment spending. This is the focus of his Economic View column in Sunday Business.

And Louis Uchitelle discusses the role of government in manufacturing, the subject of his cover article in Sunday Business. The manufacturing sector is in relative decline in the United States, he says, and isn’t likely to recover without more government help.

The increasing commercialization of college life is the focus of a Sunday Business cover article by Natasha Singer. In a conversation with David Gillen, she says brand marketing on campus has grown in scope and intensity. Along with traditional college colors, student T-shirts have sometimes been emblazoned with corporate logos.

You can find specific segments of the podcast at these junctures: Floyd Norris and Operation Twist (33:31); news summary (25:03); Natasha Singer (22:58); Louis Uchitelle (14:59); Greg Mankiw (7:07); the week ahead (1:43).

As articles discussed in the podcast are published during the weekend, links will be added to this post.

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

Retail gasoline prices at an all-time post-Labor Day high

Gasoline prices are at an all-time high for the week following Labor Day and the end of the traditional summer driving season.

The average price of regular gasoline in California was $3.946 a gallon, according to the AAA Fuel Gauge Report. That was an increase from $3.888 a gallon last week, and it was a whopping 91 cents a gallon higher than the price a year ago.

The latest gasoline prices in the state also topped the previous post-Labor Day high of $3.859 a gallon in September 2008.

Nationally, the average price of a gallon of regular gasoline reached $3.659 a gallon, up 1.2 cents since last week. That was also a record for the week following Labor Day.

Experts warned not to expect much relief in the coming weeks.

"You'll see some price drops, particularly after we start to switch over to the winter blend gasolines that are cheaper to make than summer blends, but there is too much demand for refined fuels in the rest of the world for prices to drop very far in the U.S.," said Tom Kloza, chief oil analyst for the Oil Price Information Service in New Jersey.

ALSO:

Rising fuel exports keep U.S. gas prices high

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-- Ronald D. White

Chart: The AAA rolling 12-month averages for a gallon of regular gasoline. Credit: AAA

Honda plans big recall of Pilot sport utility vehicle

Honda Motor Co. will recall more than 300,000 Pilot sport utility vehicles from the 2009 through 2011 model years to inspect the front seat belts, which could become disconnected in a crash, increasing the risk of injury.

The automaker said that because of a manufacturing error in the assembly of some of the vehicles, the stitching connecting the lap section of the belt to the outboard anchor webbing could be either incomplete or missing. 

No injuries or deaths have been reported related to this condition.

Earlier this week, and prior to this latest Pilot issue, Honda said it was recalling about 1 million cars worldwide, including almost 100,000 in the United States.

The recall included about 80,000 CR-V sport utility vehicles from the 2006 model year in the U.S. to replace the power window master switch.

Honda also called back 5,626 CR-Z small hybrids from the 2011 model year in the U.S. The cars subject to the recall are equipped with manual transmissions and require an update to the software that controls the hybrid electric motor. Honda said it wants to fix a problem that can cause the car to roll backward unexpectedly.

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-- Jerry Hirsch
twitter.com/LATimesJerry

Photo: The Honda Pilot. Credit: Bloomberg News.

Alaska Airlines faces $590,000 fine for wiring problem

The Federal Aviation Administration proposed Friday a $590,000 fine against Alaska Airlines for allegedly operating a passenger jet on more than 2,000 flights under unsafe conditions.

The federal agency charges that the airline flew a 737-400 jet for about 18 months with an improperly installed hose clamp above the flight deck. Chafing between the clamp and adjacent wires sparked a fire while the plane was parked in Anchorage International Airport in January 2010, the FAA said.

The FAA said the wiring on the plane was last inspected in 2008 but maintenance crews did not fix the hose clamp, despite warnings in the plane's maintenance manual. An investigation by the airline found the same clamp problem on nine other jets.

Under FAA rules, the airline could be fined $25,000 for each violation, with every flight constituting a violation. Under that rule, the FAA could fine Alaska about $53 million for the flights performed by the plane that caught fire.

Instead, the FAA has proposed a $590,000 fine to settle the alleged violation. The airline has 30 days to either pay the penalty or dispute the fine in federal district court.

In a statement, Alaska Airline said it plans to cooperate with the FAA to resolve the matter.

-- Hugo Martin

Photo credit: Alaska Airlines

California workers may be undereducated for available jobs, study says

Unemployment may be high in some areas because workers just aren't educated enough, according to a new study by the Brookings Institution, which lends some credence to an economic theory that there is a structural problem in the nation creating unemployment.

That problem may be getting worse: The years of schooling required by the average job grew between 2005 and 2009, the study says, outpacing the growth in the supply of educated workers.  

"This report provides evidence that there is an education gap in most metropolitan areas, and that this gap is responsible for higher unemployment," said Jonathan Rothwell, one of the authors of the study, Education, Demand and Unemployment in Metropolitan America.

An education gap is when the demand for educated workers is greater than the supply in any given market. Brookings calculated the gap by taking the years of schooling required to do jobs in an area and dividing it by the years of education attained by the average working person there. 

The Riverside-San Bernardino-Ontario area had one of the highest education gaps in the nation, on average, between 2005 and 2009. Its ratio was 1.026, the fourth-highest after Chattanooga, Tenn.; Lakeland, Fla.; and Youngstown, Ohio. 

The average job in the Riverside area required 13.35 years of education in 2009, the most recent data available, while the average working resident had 12.92 years of education, Rothwell said. In the Los Angeles area, the average job required 13.58 years of education, while residents had, on average, 13.38 years.

Across the nation, this gap has been exacerbated by the recession, Rothwell said, as construction and manufacturing jobs, which required less schooling, disappeared, while the health and education sectors continued to grow. But areas where the education gap was the highest, such as Riverside, had consistently higher unemployment rates than those that didn't.

They also fared worse during the recession. California areas including Stockton, Fresno and Modesto all saw their unemployment rates rise more than 8 percentage points from their pre-recession lows to May 2011. All were among those with the highest average education gaps. Areas such as Madison, Wis., and the Washington, D.C., metro area had the lowest education gaps, on average, and their unemployment rates changed just 1.9 and 2.7 percentage points, respectively, over that time.

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-- Alana Semuels

Photo: An education center in Virginia that specializes in retraining. Credit: Steve Helber / Associated Press

Truck models still make up the best-selling vehicles

Truck models continue to be the best selling vehicles in America, despite high gas prices.

More people purchased the Ford F-series line of pickups in August than any other vehicle, according to Autodata Corp. It also is the best-selling auto this year.

The Chevrolet Silverado, also a truck, was next, for both the month and the year.

The trucks were followed by the Toyota Camry, Nissan Altima and Chevrolet Cruze sedans.

The Chevrolet division of General Motors Co. has two of the five top-selling vehicles this year, and with the Malibu sedan, three of the top 10.  With the F-series, the Escape SUV and the Fusion sedan, Ford also has three of the top 10.

Here's Autodata's list of the top 20 vehicles, by sales, in August.

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-- Jerry Hirsch
twitter.com/LATimesJerry

Photo: Ford F-150 undergoes engine tests. Credit: Ford Motor Co.

Consumer Confidential: BofA layoffs, wiener war cease-fire

Here's your frosted-flakes Friday roundup of consumer news from around the Web:

--And the Bad Timing Award goes to Bank of America, which, a day after President Obama called for more job creation, is reportedly on the verge of laying off about 40,000 workers. The Wall Street Journal says officials at the bank have discussed cutting as much as 14% of the company's workforce. BofA has already cut at least 6,000 jobs this year as part of its reorganization under CEO Brian Moynihan, who has been in the top spot since last year. Moynihan earlier this week unveiled a shakeup in the bank's management ranks. BofA, still struggling under the weight of toxic mortgage loans, says the moves are part of "delayering and simplifying" operations. It has more employees than most of its major competitors, and top executives have stressed the need to eliminate redundancies resulting from past acquisitions.

--The wiener war is over. A two-year battle pitted Sara Lee's Ball Park and Kraft Foods' Oscar Mayer hot dogs. The companies, America's largest hot dog makers, both alleged that the other exaggerated claims about being No. 1. The two Chicago-area food giants announced that they have settled out of court -- less than a month after their civil trial began. The terms of their frankfurter cease-fire are confidential, though a Sara Lee spokesman says neither side paid money to the other, and that neither is changing its marketing practices. So it'll be up to us to decide which wiener is top dog.

-- David Lazarus

Photo: Bank of America is reportedly showing workers the door. Credit: Andrew Gombert / EPA

 

Amazon may deliver packages to 7-Eleven lockers

Missed-delivery slips from Amazon.com could soon be just a bad memory.

The legion of 9-to-5 workers who can’t have packages left at their door have long had to trudge to a will call station or the post office to gather their items.  But there’s another option in the works, according to iPad magazine The Daily.

Amazon is developing a prototype pickup system involving lockers at 7-Eleven locations, including one test site in Seattle.

Customers receive a bar code via email when their package is delivered to the store. When they arrive to collect the package, they can scan the code for a PIN number that is used to open the storage cubby.

If successful, the 7-Eleven system could spread around the country by next summer, according to The Daily.

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-- Tiffany Hsu

Photo: A box from Amazon.com. Credit: Rick Wilking / Reuters

If the Bank of England is going to do more QE, it should get ultra adventurous

The Bank of England.

As regular readers will know, I'm not in favour of a new programme of "quantitative easing" for the UK in current circumstances. Not until there is an extreme deflationary threat does it strike me as warranted. That moment may come soon enough, but we are not yet there.

Yet perhaps I've been a little too dogmatic here, for I have assumed that any fresh programme of QE from the Bank of England would, as before, target mainly UK government bonds (gilt edged stock), where yields are already at record lows and where adding yet another source of demand to markets where investors seem unprepared to invest in anything else other than gilts would seem to be close to insane.

If the rate of interest on bonds is already close to zero, it's not clear that pushing it marginally lower still would persuade investors to put their money in higher risk assets. And if that's the primary purpose of QE, then what's the point of doing it?

But there are other ways in which the Bank could help. One quite attractive idea which the Bank has been exploring with the Treasury is that of so called "credit easing", which would be similar in some respects to QE but with significant differences. Instead of injecting new cash into the economy via the purchase of government bonds, the Bank of England would purchase ordinary banking credit.

By targetting credit directly, the Bank of England would be going to the heart of the problem, which is that in a period of vicious deleveraging, there's both a problem with demand for credit and the supply of credit. Bankers tell me that risk aversion has reached a point which threatens another funding crisis, similar to the one that took place in the run up to the Lehman crisis. Interbank funding markets have not yet closed, in the way they did back then, but there is again severe distress.

In circumstances where there are funding difficulties, the supply of new credit will become even more constrained. What the Bank of England must do is provide the funding that markets are refusing. What's proposed is something similar to the Special Liquidity Scheme of early 2008, when the Bank agreed to issue banks with Treasury bills – easily transformed into cash – in return for mortgage securities that at that stage could not be otherwise funded.

But under the SLS, these were legacy assets that the Bank was taking as collateral. What "credit easing" would do is attempt to create new credit by making cash available for new SME lending. The effect would also be to push down the effective interest rate businesses are required to pay for their loans, and thereby reduce what are at present exhorbitant spreads. It's already being done in Japan, and it may be worth a try here.

Sir Mervyn King, Governor of the Bank of England, has made clear that he's against the sort of QE that would involve the Bank in decisions about the allocation of credit, but assuming the Bank is properly indemnified by the Treasury, I can't necessarily see a problem with it.

In an era where bond yields are already as low as low can be, this type of QE promises to be a good deal more effective than simply buying another shed load full of gilts.

Global economic fears send stocks down

Stock markets around the world fell Friday as doubts grew about the ability of political leaders to confront the broadening economic slowdown.

European markets were particularly rattled by reports that the chief economist at the European Central Bank is resigning, allegedly due to tensions over the bank's handling of an emergency bond-buying program.

In the United States, investors appeared to be disappointed by heavily anticipated speeches Thursday from President Obama and Federal Reserve chief Ben Bernanke.

The Dow Jones industrial average was recently down 200.07 points, or 1.8%, to 11,095.74 in early trading.

Leading indexes were down even more sharply in Europe, falling 3.2% in Germany and 3.1% in France.

The declines mark the second day of falling prices and have wiped out the gains made earlier in the week.

On Thursday night, Obama presented a $447-billion program to cut taxes and spend on infrastructure, but it was immediately met with questions about whether it was substantial enough, or stood a chance of passing the Republican-led House of Representatives.

In Europe, the central bank has been buying up the debt of Greek and Italy in an effort to prop up those struggling economies and provide more time for reform. But the program reportedly led to the resignation Friday morning of bank executive board member Juergen Stark, who is considered the second most influential member of the board.

Later on Friday, the top finance officials from the G7 are set to meet to discuss measures that could help alleviate the global slowdown.

RELATED:

Obama pitches $447-billion jobs plan

Obama jobs plan spurs cautious hope among small businesses

Fed Chairman Ben S. Bernanke doesn't tip hand on more stimulus

-- Nathaniel Popper in New York

Twitter.com/nathanielpopper

Photo credit: Spencer Platt / Getty Images

Greece – the final furlong beckons

Will Greece repay a cent of its €109 billion bailout?

It has been some time since anyone in financial markets took seriously the concept that Greece might eventually repay its debts.  Outright default was priced in, and the debate moved on to how big the default would be.  The July 21st Greece II bailout agreement envisaged a default equivalent to about 21 per cent for participating bonds, but in fact a default of some 50-70 per cent (if not more) on the whole debt burden – some 170 per cent of GDP – is what will eventually happen.

I haven't ever believed that a single euro cent of the €109 billion agreed in the Greece II bailout would ever change hands.  Greece II was not about providing the Greeks with even more money.  The point of it was to try to secure the final €50 billion of payments from the Greece I bailout of 2010.  Greece was so totally excluded from financial markets, its economy so dire, its society so unwilling to bear the austerity that would be required, that in spring this year the IMF became concerned that Greece would not have sufficient 2012 funding in place to allow the IMF, under its rules, to continue to disburse funds – IMF rules are quite strict, and the IMF has never not been repaid.  It threatened to withhold payments, which would have triggered full-blown Greek default earlier than EU policymakers had hoped.  The Greece II bailout was devised so that EU policymakers could tell the IMF that it had not excuse not to continue to provide the Greece I funding.

Of course, the way it was set up no money was ever likely to change hands.  Before the Greece II bailout agreement, Finland had already passed a law saying it could give no more money to Greece without collateral, and Slovakia (which hadn't even given any money to the Greece I bailout) had declared its support for this collateral concept.  Once each of these countries claimed collateral (and there was never any option of them paying otherwise) it was always inevitable that other countries would call for the same – as happened, in due course, with Slovenia, Austria and the Netherlands.  Other Eurozone states would be doing exactly the same were they not confident that no money from Greece II will ever change hands.

The IMF knows it's been had, and is trying to work out how to get out of the mess.  The Greek economy is giving them plenty of potential excuses.  The dependence of Greek banks on the ECB and the flight of Greek depositors to banks in other parts of the Eurozone (or, for those with the means, to private vaults) are well-known.  Less clear from the data, but strongly supported by anecdotal evidence, is the silent flight of Greek professionals, leaving Greece for other parts of the Eurozone because they fear that once Greece leaves / is ejected from the EU (likely to follow hard on the heels of Greek withdrawal from the euro), then they will not be permitted to move to other Member States, but they do not expect to be ejected if they are already there.  (Incidentally, if there is a wider EU breakup, this factor is liable to create huge tensions – whilst Polish immigrants in, say, Portugal, would be unlikely to be ejected immediately if free movement were abandoned, how long would the Portuguese really accept large immigrant populations, from countries from which new immigration would not be permitted, if there is high unemployment for the Portuguese?)

Professionals are also departing because of the ongoing Greek recession – and losing one's highest-value workers is not good for long-term competitiveness.  I suspect that the official figures for the recession (an annual 7.3 per cent rate of contraction in the last quarter) overstate the depth.  My guess is that what was already widespread and notorious tax evasion in Greece has gone totally pathological in recent months, and as companies refuse to report their profits accurately and as workers understate their incomes for tax purposes, the official GDP numbers shrink as a result.  But even if the recession is not as bad as the official figures suggest, it is still surely bad.  And whether because they can't pay or they won't pay, the taxes aren't coming in.  Without tax receipts, far from Greece repaying its debts, they are rising.  Whatever its government says, and whatever pretence IMF and EU policymakers might like to maintain, between them the Greek economy and Greek taxpayers have decided that Greece is not paying.

We approach the final furlong.  Without the Greece II bailout money, and without a miraculous turnaround in both its economic growth and its ability to garner tax receipts, Greece now has no realistic chance of making its March 2012 debt repayment - which would surely trigger a full-blown default.  If the IMF loses patience first, and the Greek I bailout is not continued to the bitter end, default could come much sooner.

China inflation eases in August

China’s inflation eased in August from a three-year high, giving central leaders much-needed breathing room in the face of a worsening global economy.

The National Bureau of Statistics said Friday the country’s consumer price index rose 6.2% from a year ago -– down from 6.5% in July, which was a 37-month high.

Though inflation remains well above a 4% annual target, analysts say the problem may have peaked, diminishing the need for the government to employ tightening measures.

China’s leaders will need fiscal flexibility if a major financial downturn ripples across the globe.

“Although we have entered a period of structurally higher inflation, the moderation in the CPI reading is encouraging and could give the government more policy leeway at a time when market concerns have shifted towards the potential for slower growth in the global economy,” said Jing Ulrich, J.P. Morgan’s chairman of global markets for China.

Falling food prices were largely responsible for tempering inflation last month, rising 13.4% from a year ago compared to 14.8% in July.

But non-food inflation rose 3% from a year earlier, slightly up from July’s reading of 2.9%.

“China’s inflation is down but not out,” said Alistair Thornton, an economist for IHS Global Insight. “The moderation in inflation is not broad-based.”

-- David Pierson 

Twitter.com/dhpierson

Photo: Customers look at prices for vegetables at a supermarket in Hefei, China. Credit: Reuters

A Jobs Program in Need of Reform

Judith Scott-Clayton is an assistant professor at Teachers College, Columbia University.

Readers following recent proposals to stimulate employment may be surprised to learn that one of the largest and longest-running federal programs providing direct employer subsidies to hire disadvantaged workers is run by the Department of Education.

Today’s Economist

Perspectives from expert contributors.

The Federal Work-Study Program, created in 1964, provides more than $1 billion in wage subsidies to institutions and reaches more than 750,000 college students each year. For students who are financially eligible, the program covers up to 75 percent of wages for 10 to 15 weekly hours of on-campus employment or, in some cases, for community service work off campus. The college covers the rest.

Perspectives from expert contributors.

The federal government spends only about half as much on the Work Opportunity Tax Credit, which subsidizes 25 to 40 percent of wages when employers hire workers in one of nine target groups.

The longevity of the work-study program program reflects its popularity, and, to some extent, romanticized public conceptions of the student “working his way through college” (see, for example, this 1907 article from The New York Times Magazine). Surveys suggest that students like the program. And it’s obvious why work-study is beloved by institutions: it provides a highly discounted labor pool.

But popularity aside, the equity and efficiency of the program are questionable at best.

Unlike Pell Grants or student loans (and also unlike other wage-subsidy programs like the Work Opportunity Tax Credit), work-study dollars aren’t really distributed on the basis of need. The eligibility criteria are loose enough that far more students qualify for work-study than can receive it, and colleges can choose from among eligible students however they want.

Fewer than half of undergraduate work-study recipients are needy enough to qualify for a Pell Grant, and 20 percent come from families earning more than $100,000 a year (see chart).

Moreover, the way work-study funds are allocated to individual institutions has virtually no connection to the neediness of its student body. The precise formula is incredibly arcane, but the first five words capture the essence: “Allocation based on previous allocation.” The highest per-student allocations go to already advantaged institutions that had access to savvy grant-proposal writers when initial allocations were determined by review boards in the late 1960s (see this report for the program history).

The inequity is extreme: Columbia University receives more than five times as much in work-study allocations as Florida State University, although Florida State has more than five times as many undergraduates, a much higher proportion of whom qualify for Pell Grants.

The chart below shows the ratio of work-study allocations to aggregate Pell Grants awarded (a summary measure of the neediness of the student population) for selected institutions. The ratios for elite schools like Columbia and Harvard have been even higher in previous years.

More fundamentally, it’s not clear that the program works very well either as a jobs program or a financial aid program. While work-study jobs may help improve students’ work ethic, they are typically low-skill clerical or service positions unrelated to students’ studies or future career plans. In other words, they are the type of jobs most students would be able to find even without a work-study subsidy.

Finally, in comparison with the large body of rigorous research on other types of financial aid, the evidence regarding the academic benefits of work-study assistance is thin. While some correlational studies have found a positive relationship between on-campus employment and academic outcomes, one particularly rigorous quasi-experimental study found large negative effects of student employment on grade point averages.

My own research-in-progress indicates strong negative effects for women, but some positive effects for men – perhaps explained by gender differences in job types or in what students would be doing if they weren’t working.

Now is not the time to reduce federal investments in financial aid and jobs programs. The work-study program could be reformed to better target truly needy students, to provide more substantive job options or even to give students the option of taking the value of their wage subsidy as a grant instead.

But in its current form, federal work-study may better serve the interests of privileged institutions than those of needy students.