CA Court Rules Cities Can Unilaterally Lay Off Workers in Times of Financial Adversity; How to Protect the Workload and Safety of Remaining Workforce

Today, the California Supreme court upheld a lower court ruling that allows cities in distress to fire union workers regardless of contractual obligation.

This is a victory for justice and common sense. My only question is "what took so long". The case in question involves the city of Richmond's decision in 2003.

Please consider Calif. high court sides with Richmond on layoffs

Cities and counties don't have to consult with unions before deciding to lay off workers to save money, the state Supreme Court ruled Monday.

The court unanimously upheld Richmond's decision to eliminate 18 of its 90 firefighting jobs in 2003, when the city said it faced potential bankruptcy.

The International Association of Fire Fighters argued that the city could have avoided layoffs by cutting costs in other areas, and filed a complaint with the state Public Employment Relations Board.

The board said decisions to cut the workforce for financial reasons are not subject to collective bargaining, and the court agreed.

Under California law, "a local public entity that is faced with a decline in revenues or other financial adversity may unilaterally decide to lay off some of its employees," Justice Joyce Kennard said in the ruling, which upheld lower-court decisions.

Thoughts on Financial Adversity

The term "Financial Adversity" is very broad and can mean a wide variety of things. I suggest cities use the term liberally.

Please note that the court further ruled that a "government employer must negotiate over the implementation of the decision, including the number of employees to be laid off, the timing, and the effect on the workload and safety of the remaining employees."

Maintaining the Safety of Public Union Workers is Crucial

I agree with the court that we should not put the safety of the remaining employees at risk. Nor should the safety of the public be put at risk.

When it comes to ensuring the safety of the remaining employees, there are logical steps cities must take. Here is my carefully considered proposal:

For the purposeful benefit of the public union employees, I suggest cities replace fired union workers with non-union workers, as appropriate, to make sure the safety of the workers and the public is maintained.

Unfortunately, my proposal to protect the safety of union employees adds costs to the proposal. To the extent those costs cause further "financial adversity", the number of layoffs needed to protect the safety of the workers will go up as a result.

Thus, all things considered, the correct approach for cities is to figure out how many workers are needed to preserve safety, how much costs have to be reduced to handle the "financial adversity" then in accordance with terms specified by the court, do as much as needed to handle both the adversity and safety issues.

For example, in the case of police, I am quite certain that the local sheriffs' association can provide fill-in support, as necessary, to handle any safety issues that arise.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Exponential Credit Petri Dish; Steve Keen Responds to "World Economic Forum Endorses Fraud" Post

In response to World Economic Forum Endorses Fraud; Steve Keen Mocks the WEF Report, So Do I; The Purported "Need to Double Credit in 10 Years" I received a nice email from Steve Keen.

Hi Mish,

One key thing better in your critique than mine was that you focused on the naivety of neoclassical thinkers (it certainly wasn't any other type that put that together) when it comes to compound growth.

I was once sent a link to the work of a very good mathematician who claimed that humanity's greatest weakness was its inability to comprehend the exponential function.

Here is the link: Albert Bartlett on Sustainability

Bartlett has made two notable statements relating to sustainability:

"The greatest shortcoming of the human race is our inability to understand the exponential function."

and his Great Challenge:

"Can you think of any problem in any area of human endeavor on any scale, from microscopic to global, whose long-term solution is in any demonstrable way aided, assisted, or advanced by further increases in population, locally, nationally, or globally?"

It could be argued that neoclassical economics institutionalizes this failing, by using static analysis to consider what is really an exponentially growing system. It therefore doesn't see the problem with "small divergences" like credit growing 2% faster than GDP for a decade or so, when that means that every 36 years, two numbers that should stay within reach of each other diverge by a factor of two.

At some stage, those two factors will have to come crashing back towards each other, and that's what in our case has given us a financial crisis (it can also give you a population crisis, a resources crisis, etc., depending on the factors you're looking at of course!).

Moreover, you're spot on when you comment that it's not availability of credit that is the problem for the poor, but the lack of property rights, and I like your way of putting it too:

"It's easy to figure this out if you think in reverse. What do countries have in common where credit is generally available?"

Here's your answer.


• property rights
• rule of law
• civil rights

Fix problems in those areas and credit will likely be available.


I'd like to use that as a way of getting into the FRB thing. Seen from one perspective, FRB is the fraud: take in $10 in deposits, lend out 90% of them, and after a number of loans and re-deposits, you end up having $10 in cash backing $100 of money. Ipso facto, FRB is a fraud.

But what is going on is, I think, a very different process: double entry book-keeping. A bank makes a loan of $100 by double entry bookkeeping, having (I'm assuming for the sake of the argument) NO reserves to back its loan. The money circulates in the economy and a fraction is repaid. Over time, the bank ends up with 90% of its assets in loans and 10% in repayments. The appearance is exactly the same: $10 in "cash" backing $100 of money circulating in the economy.

I argue that this is the process that lay behind the Free Banking period in the 19th century, and to get past some confusions in non-neoclassical economics, that's the system I modeled in this technical paper on how money is created and monetary profits made in a sustainable capitalist system with credit finance: Steve Keen - Solving the Paradox of Monetary Profits

In some ways Fractional Reserve Lending might be viewed as an essential step in the development of capitalism. However, when applied to banking, it enables the creation of credit money and the crises we have seen emanate from it because the temptation to fund Ponzi Schemes that was is almost irresistible.

Bear in mind that this problem existed when the Fed wasn't backing private credit creation with its bailouts. What I see as dangerous in the current system is that the Fed's interventions have enabled a process that would have ended with a minor crisis in 1987 without its backing to continue for another 2 decades and lead to a far bigger crisis--the 2-4% rate of growth thing compounded over 25 years.

Attempts to tame this process using gold backing in effect try to make money a commodity when it's not one, but a creature of double entry book keeping. The problem is that the only way to guarantee this is to insist that gold is used in every transaction--literally. As soon as you allow certificates (or electronic database exchanges) to be used, even if they are ostensibly backed by gold, you allow double entry book keeping to work its magic once more and you're back in a credit system.

Interestingly, the section of my blog you took as a veiled critique of FRB is actually a critique of a system in which non-banks can't create money, but can create debt. When a non-bank lends, it debits its account at a bank and credits a borrower's account in its own institution. There is then no creation of money, but an additional debt to a non-bank is added to the debt created by the bank loan to create the non-bank in the first place.

There is a reform proposal out there to apply the same system to banks themselves, so that they can only lend out what they have in accounts with another institution: the Federal Government. Fundamentally, this proposal sees double-entry bookkeeping as the root problem, not FRB which it regards as a fiction, as I do--a case of seeing "SunRise" when in fact what is happening is "EarthRotate". So in effect it proposes banning double entry bookkeeping for banks to end their capacity to create money and hand that over to the government instead.

I know this is ideologically the opposing position to you, but in a fundamental way I think they're in agreement with you about the problems of the current system, and accurate about the mechanism by which money is created (as you are--I know you understand that the Money Multiplier is a myth of course!), but they reject the concept of money backed by a commodity like gold. Their alternative is to hand over money creation to the government--not your alternative! But their vision about the need to stop the banks exploiting and debasing double entry bookkeeping is the same.

The group is the American Monetary Institute.

The chief guy behind them, Stephen Zarlanga, is an intelligent guy who has written a very detailed treatise on money "The Lost Science of Money", which argues that money has always been effectively credit, backed by the State's capacity to enforce contracts in money and acceptance of money as payment of taxes.

The difference that I see between your proposals and theirs thus boils down to whether credit money should be backed by a commodity (gold) or government money creation. I see problems with both proposals--which is why I am more directed at removing the capacity of banks to fund Ponzi schemes than at effectively abolishing double entry bookkeeping as applied to banking.

We should have a serious get together on this front at some stage: email is good but no substitute to a detailed working over of a topic like this over a few days face to face. I am flat out writing two books right now--a second edition of Debunking Economics, which I hope to complete by mid-February, and then a huge project to write up my overall economic analysis in "Finance and Economic Breakdown" for Edward Elgar Publishers.

I also have a large survey paper to write for a neoclassical journal on non-neoclassical approaches to economics!--but when I'm next in the States (god knows when--sometime this year for sure) I'll try to set aside a few days to spend with you.

Cheers, Steve

Sustainability of Exponentially Growing Systems

Steve Keen has still more on the sustainability of exponentially growing systems in an new post Mish Mashes the WEF.

My comrade-in-outrage Mish Shedlock has also taken a swipe at the World Economic Forum report More Credit with Fewer Crises, and pointed out a key weakness that I omitted reference to: their inability to understand exponential growth.

Mish attacks the report on many fronts, but the one that I’ll highlight here is [the WEF's statement]:

“This means that the world’s stock of credit outpaced GDP growth by less than 2 percentage points a year – not a wide margin. In theory, there is nothing unsustainable about this picture: as long as credit grows broadly in line with economic growth, the credit is put to good use and borrowers can meet interest obligations and repay principal.”

The American mathematician Andrew Bartlett claims that “The greatest shortcoming of the human race is our inability to understand the exponential function”, to which I’d add that that shortcoming almost defines neoclassical economics.

2 percent per annum doesn’t sound like a lot, but over 36 years that means the ratio doubles, over 72 it quadruples, over 144 it becomes 8 times what it was, and so on.

Mish provides some nice graphs to illustrate this process:



For the record, the actual rate of growth of the private US debt to GDP ratio was roughly 2.9% p.a. from 1945 till 2008. That means that the ratio doubled every 25 years, from 45% in 1945 to 90% in 1970, 180% in 1995, and if it had kept going, it would have been 360% in 2020.

Instead it fell over in 2008, and is now going backward at a rate of knots. Here’s an extrapolation of the trend that the WEF says is “nothing unsustainable about”, from the time period they should have started their analysis—not 2000 but 1945—and focusing on the key problem—private debt:



“Nothing unsustainable about” it, eh?

This naivety by neoclassical economists about growth and exponential processes in general is positively dangerous for the human race.

Exponential Credit Petri Dish

I view Steve Keen as one of the world's top economists. It is a pleasure and an honor to be in a position to exchange emails with him and get detailed answers back. As you can see, we agree on many critical things, but have differing opinions about other things.

This "sustainable" exponential credit growth theory of the WEF is much like the exponential growth of bacteria in a Petri dish. Bacteria keep expanding rapidly until the culture takes over the whole Petri dish and the system collapses.

In the case of credit, the lower the rate of exponential credit expansion, the longer the growth can last. However, to keep growth expanding at the target rates requires borrowers of decreasing marginal ability to pay back loans.

Eventually the pool of credit-worthy borrowers dries up just as the food in a Petri dish is consumed.

Think about the credit-expansion factors it took to get to this point starting from 1938.

Credit-Expansion Factors 1938 to Present

• Destruction of the world's capacity in WWII
• Baby boomer effect of increasing population after the war
• Two wages earners replace one as women go to work in the late 60's, 70's, and 80's
• The internet revolution fueled an amazing productivity advance
  
• Greenspan stepped on the gas fueling the dot-com bubble
• Greenspan stepped on the gas once again fueling the housing bubble in the wake of the dot-com crash
  
• In a last gasp phase to keep the credit bubble alive, liar loans dominated
  

The WEF fails to see this is a gigantic Ponzi scheme. Indeed they purposely missed looking at those things via a piss poor starting date for their report, year 2000. Then they failed to consider the boomer bust, even though Japan provides a model.

"This naivety by neoclassical economists about growth and exponential processes in general is positively dangerous for the human race."

The above statement by Keen shows we both understand something about "sustainable credit" that a group of 50 economists, CEOs, and rating agency executives don't (or don't care to).

Interview Bias

Once again I point out that McKinsey interviewed all the people who benefited from the bubble.

CEOs, rating agency executives, central bankers, and regulators all were beneficiaries of the credit expansion. Of course they are going to agree on the need for more credit even if they cannot come up with a precise definition of "sustainable".

The result of this collective effort was a report extremely easy to systematically trash on numerous points (I listed 18). This is what happens when you purposely start with a bias then get someone like McKinsey to do a "study" with a predetermined outcome.

That report is a certifiable disgrace to McKinsey and every economist who remotely agrees with its conclusions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Sarkozy Calls for G-20 to Regulate Commodities, a New G-Club to Tackle Currencies; Is there a "Grain Shortage"? Price Control Madness

French President Nicolas Sarkozy is now convinced the recovery is real and the only thing left to do is tie up some loose ends. He thinks the most pressing G-need is for the G-20 to regulate commodities and that is the right size of the group.

In contrast, Sarkozy thinks the G-20 is too large and unwieldy to tackle currencies. He proposes a G-5 or G-14 or some other unknown G-number hoping to hit the magic G-spot.

Bloomberg reports Sarkozy Calls for G-20 to Regulate Commodities, Price Swings

French President Nicolas Sarkozy said regulation of commodity markets will be a priority as he leads the Group of 20 nations this year, and inaction may cause food rioting in the world’s poorest countries.

“If we do nothing, we risk having food riots in the poorest countries and also an unfavorable impact on global growth,” Sarkozy said. “We want regulation of the financial markets for commodities.”

Global food security may face a threat from “excessive price volatility and speculation,” farm ministers from 48 countries said in a joint statement in Berlin on Jan. 22. World food prices rose to a record in December, according to the United Nations, and a jump in food costs helped spark deadly riots in Algeria and Tunisia this month.

Information on physical-commodity stockpiles must be improved, said Sarkozy, who proposed creating a shared database similar to one that exists for oil. When Russia last year banned grain exports after a crop-damaging drought, “there wasn’t a single calculation on the exact state of stocks,” he said.

One of the rules France proposes is for commodity investors to set aside a deposit equal to part of the value of the raw material being traded, according to the president.

“Does it make sense that you can buy considerable stocks of commodities without running any risk, without blocking any sum, without committing to any cargo delivery?” Sarkozy said.

Excuse me for asking but since when can you "buy considerable stocks of commodities without running any risk"?

Bear in mind regulatory proposal is from the same country that thought it could regulate solar energy. If you want to read a hilarious escapade regarding those solar energy regulations, please see Sunday Funnies 2011-01-23 Student Loans; Solar Energy Madness in Europe.

Solar energy madness aside, if Sarkozy wants futures buyers to commit to take delivery, he will wreck the futures market in grains, while exacerbating shortages in commodities that can easily be stored and transported, such as gold, silver, and copper.

Sarkozy Wants New "G-Club" to Address Currency Issues

On the basis twenty is too "unwieldy" Sarkozy Said to Seek Club of Nations to Address Currency Issues

French President Nicolas Sarkozy wants to persuade the Group of 20 nations to establish a smaller forum to address global currency issues because the larger body is too unwieldy, three French government officials said.

“The French appear to want a smaller group of countries to address currency matters because the G-20 looks too large and the G-7 too small,” said Gerard Lyons, chief economist at Standard Chartered Bank in London.

Possible outcomes include opening the G-7 to China or shrinking it to a G-5, with one euro-region representative, the officials said. Other emerging economies could also join, they said. The G-7 comprises the U.S., Japan, Germany, the U.K., France, Canada and Italy. Russia makes it the G-8.

Sarkozy has regularly complained that the euro is too strong against the yuan and the yen, hurting European export competitiveness. The euro is 8.2 percent overvalued against the dollar even after weakening 4 percent in the past 12 months, according to an index compiled by the Organization for Economic Cooperation and Development.

The most “pragmatic” decision would be to add Brazil, Russia, India and China to a G-7 where euro countries would merge in order to “keep it smaller than the G-20 and by that way more powerful in terms of quick decisions,” said Sebastian Wanke, an economist at Dekabank in Frankfurt.

Finance Minister Christine Lagarde has hinted at the French plans. In October in Washington, she said she was “not sure that 20 is the absolute right number” to “discuss effectively currencies.” Earlier this month, Lagarde wished journalists luck in explaining G-20 talks, including how to “legitimize the existence of a G-5 rather than a G-14 or a G-20.”

I hope you find this search for the "absolute right" G-spot humorous, because there is certainly nothing of substance in the above debate.

It matters not whether the group is 5, 8, 14, or 20, it is not going to accomplish a damn thing until there is an earth-shaking crisis, and then the most likely result will be to make matters worse.

U.S. farmers called to plant more acres

The Watertown Daily Times reports on the "Grain Shortage"

Grain production shortages around the world and high grain prices are calling for American farmers to plant every acre they can this spring, the Wall Street Journal reported.

Farmers will need to sow an additional 10 million acres to boost supplies of several crops. Supplies are expected to drop to 15-year lows for corn and more than 40-year lows for soybeans, according to the U.S. Department of Agriculture.

Analysts are calling for 327 million acres to be planted, which will require converting animal grazing pastures to cropland, sowing marginal lands, in some cases planting an acre twice in the same year and planting under questionable weather conditions.

Gee, let's plant on flood plains, in questionable weather, and to make thing really efficient let's pay farmers to not grow corn on their driveways and tennis courts they don't have.

A quick search for "food shortage" uncovers articles all the way back to 1974, most of them full hype about global warming or the falling dollar. One article was on "food control genocide".

There are food shortages of course, but most of them are caused by political turbulence, unsustainable local population growth patterns, price controls, or various weather-related natural disasters.

Potato Price Controls in Russia

Russia has learned nothing from history regarding disastrous central planning efforts. Its Deputy Economic Minister says Food Price Control Possible

The government may impose a maximum price level for some foods, such as potatoes, as it faces elevating inflationary pressure, Deputy Economic Minister Andrei Klepach said Monday.

Klepach said, however, that the government has not discussed any proposals yet. “I just do not exclude this, and it is envisaged by legislation that we can use this kind of means,” Klepach said. Parliamentary elections are due in December, and voters cite high prices as a top concern in opinion polls.

Food, Cotton Price Controls in China

In November China Announced Price Controls to Tackle Food Inflation

China will unveil food price controls and crack down on speculation in agricultural commodities to contain inflationary pressure that its central bank governor highlighted as a risk on Tuesday.

With consumer prices rising at their fastest pace in more than two years, the National Development and Reform Commission, the country's top planning agency, is preparing a "one-two punch" of actions to rein in food costs, official media reported.

Such direct intervention would mark an escalation of the government's efforts to tame inflation and underline its worries over the rapid run-up in food prices.

Possible steps include price controls, subsidies for shoppers, a crackdown on hoarding and price gouging as well as a system whereby mayors are made responsible for a basket of food items, the China Securities Journal reported.

Those found speculating on corn or cotton will also be punished severely, it added.

Emerging Nations Tackle Food Costs

The Wall Street Journal reports Emerging Nations Tackle Food Costs

Fast-growing emerging nations are taking increasingly aggressive actions to beat back rising food prices as they grow more worried of threats to stability if prices don't start to retreat.

Developing-market governments have unveiled a laundry list of measures—including price caps, export bans and rules to counter commodity speculation—to keep food costs from disrupting their economies as price spikes that some had hoped were temporary have stretched into the new year.

In the latest indication of concern, Indonesia said Thursday it will remove import tariffs on more than 50 items including wheat, soybeans, fertilizer and animal feed in an effort to slow the rise in food prices. Indonesia is also planning to raise taxes on palm-oil exports to 25% from 20% next month, according to a government official familiar with the matter.

Bad weather, more-affluent populations and underinvestment in agriculture have pushed up prices of everything from wheat, rice and onions in India, chilies in Indonesia and water spinach in China. Some point to low interest rates in the U.S., Japan and Europe, as investors use cheap financing to invest in globally traded commodities such as rice, sugar, cotton and oil, driving their prices higher. Soy bean prices in the past six months have risen 46% to more than $14 a bushel at the Chicago Board of Trade. Sugar, while lower than in November, is still up 34% over six months ago to around 31 cents a pound in Intercontinental Exchange trading.

In response to the price pressures, India earlier this month extended bans on exporting lentils and cooking oil. It also struck a deal with archrival Pakistan to import 1,000 tons of onions, a key cooking ingredient whose price has skyrocketed after floods.

China, Korea Moves Underscore Rising Food Prices

The Huffington Post reports China, Korea Moves Underscore Rising Food Prices

China dumped plans to import several million tonnes of expensive corn in 2011 and South Korea unveiled cuts in import tariffs on some products, underscoring the dilemma over how to tackle rising food prices.

In India, where vegetable prices have risen more than 70 percent in the past year, the finance minister said the government would unveil measures later on Thursday to combat inflation.

World food prices hit a record high in December after adverse weather affected crops, the UN's food agency said in a report last week that raised concerns about inflation, protectionism and social unrest -- factors that contributed to the 2008 food crisis.

Wheat prices rose 47 percent last year, corn more than 50 percent and U.S. soybeans by 34 percent. The U.N. Food and Agricultural Organization (FAO) said in its report key grains prices could rise further, a view underlined by a U.S. report published on Wednesday.

The U.S. Department of Agriculture report reduced estimates for U.S. corn and soybean harvests, trimmed its corn and soy output forecast for drought-hit Argentina and cuts its outlook for wheat production in flood-hit Australia.

The report sent grains prices soaring and the rally continued in Asia on Thursday.

The rise in food prices so far has led to differing responses from governments, pointing to the difficulty of how to handle the issue.

For China, corn prices are just too high, so it has canned a proposal to import millions of tonnes of the grain in 2011, two industry sources with knowledge of the plan said on Thursday.

The initial Chinese proposal had been drawn up as a way to combat food inflation, a worry for Beijing because China's food inflation is running in double digits.

China was a major factor behind the 2010 rally in corn prices after it imported about 1.5 million tonnes from the United States to mark its first major purchase in 15 years.

India's main price measure, the wholesale price index, showed inflation at 7.48 percent in November, which analysts said would prompt the central bank this month to raise interest rates.

India's food inflation is the highest among major economies in Asia and is an issue particularly sensitive to the government because roughly two out of every five Indians live on less than $1.25 a day, the World Bank's measure of poverty.

Finance Minister Pranab Mukherjee called on Thursday for calm, saying: "We have analyzed the situation. We have indicated what further steps we are going to take. We have also indicated there should not be any unnecessary panic."

In regards to the last sentence above, I have to ask: what about necessary panic?

How To Create Shortages in One Simple Lesson

The easiest way to create excess capacity is for bureaucrats to offer price supports or subsidies. Conversely, the easiest way to create shortages is for bureaucrats to implement price controls.

Little can be done about flooding in Australia, or droughts in South America.

However, massive credit expansion and money supply growth in China and India have fueled rising food prices. In the US, fed-induced liquidity measures have fueled commodity speculation. However, rising futures prices have not made it far up the chain in US retail prices, except for energy.

For a discussion, please see ...

• No Such Thing as Cost-Push Inflation; Demographics and the "Demand for Money"


• Huge Margin Squeeze: Restaurants, Hotels, Cruise Lines Unable to Pass on Rising Food and Energy Prices; China's Role in Commodity Bubble

Every country wants to "stimulate exports" by printing money to weaken their currencies. Those actions exacerbate the weather-related problems.

Price controls will make matters still worse by causing hoarding and localized shortages. Unfortunately, this is the path many nations have taken.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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