reality is only those delusions that we have in common...

Saturday, September 11, 2010

week ending Sept 11

Fed Assets Little Changed as Treasury Securities Increase -- The Federal Reserve’s total assets were little changed at $2.31 trillion as its portfolio of Treasury securities grew under a plan announced last month.  Total assets rose by $3.75 billion in the week ended yesterday, according to the weekly release today on the central bank’s balance sheet. The Fed’s holdings of mortgage-backed securities were unchanged at $1.1 trillion. Holdings of federal agency securities were unchanged at $156.5 billion.  The Fed said last month that as housing debt matures it will purchase new Treasury securities to maintain its total securities holdings at $2.05 trillion. The plan is aimed at preventing money from being drained out of the financial system.  The central bank has purchased $14.2 billion of Treasuries since it began the program on Aug. 17. The Fed’s holdings of Treasury securities increased by $3.61 billion to $789.9 billion in the past week. M2 money supply rose by $30.7 billion in the week ended Aug. 23, the Fed said. That left M2 growing at an annual rate of 2.2 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

US Fed Total Discount Window Borrowings Wed $52.94 Billion -(Dow Jones)- The U.S. Federal Reserve's balance sheet edged up slightly in the latest week, along with the central bank's holdings of U.S. securities. The Fed's asset holdings in the week ended Sept. 8 expanded to $2.309 trillion, from $2.305 trillion a week earlier, the Fed said in a weekly report released Thursday. In the latest week, the Fed's holdings of U.S. Treasury securities rose to $ 789.89 billion on Wednesday from $786.28 billion a week earlier. Holdings of mortgage-backed securities were steady at $1.103 trillion Wednesday, for a second week in a row. The report also showed total discount window borrowings fell to $52.94 billion Wednesday from $54.03 billion a week earlier.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--September 9, 2010

Kocherlakota Backs Setting Floor on Fed Balance Sheet  (Bloomberg) -- Federal Reserve Bank of Minneapolis President Narayana Kocherlakota backed the Fed’s decision last month to reinvest maturing mortgage bonds into Treasuries as a way to sustain economic growth. A decline in long-term assets on the Fed’s balance sheet could have been “a drag on the recovery,” Kocherlakota said today in a speech in Missoula, Montana. He would have voted for the Aug. 10 decision had he been a voting member of the Federal Open Market Committee, he said.Policy makers are debating what level of monetary stimulus to provide the U.S. economy amid a weakening in growth during recent months. Chairman Ben S. Bernanke said last month that the Fed “will do all that it can” to safeguard the economic recovery and that more securities purchases may be warranted if growth slows.

Fed's Move to Buy Treasurys Posing Serious Risks: Mishkin - The Federal Reserve's decision last month to step up its buying of Treasury securities could be laying the groundwork for inflation and a host of other political and economic troubles, former Fed governor Frederic Mishkin told CNBC. In a rare public dissent with the central bank, Mishkin, a professor at Columbia Business School who left the central bank in 2008, called the Fed's move to use receipts from maturing mortgage-backed securities to buy more Treasurys "one of the most important decisions the Fed has made in a very long time." The purchases of long-term government debt—expected to total about half a trillion dollars—should be accompanied by an exit strategy, he said. "When you hold a lot of long-term debt on your balance sheet, you're now exposed to a lot of interest rate risks," Mishkin said in a live interview. "All of a sudden you could be booking losses. Think about the screams in Congress about all of this."

Kansas City, Dallas Feds Called for Rate Increase - Two regional Federal Reserve banks continued to call for an increase in the interest rate charged to banks on emergency loans last month, despite signs that the U.S. economy’s recovery was losing steam. Prior to the Fed’s latest policy-setting meeting Aug. 10, directors of the Federal Reserve Bank of Kansas City and from the Dallas Fed voted to increase the discount rate by a quarter percentage point to 1%. However, they found little support from the majority of U.S. central bank officials, who recommended keeping monetary policy loose amid a fragile recovery. The Fed has kept the discount rate unchanged at 0.75% since February, when it was raised by a quarter percentage point following an improvement in the economy at the end of 2009. Since the second quarter of this year, however, the recovery has slowed and the unemployment rate has stayed high. “Overall, directors anticipated only modest near-term economic expansion,” the minutes of the Aug. 9 discount rate meeting showed.

Donald Kohn Says Fed Should Consider More Action -The former vice chairman of the Federal Reserve, who retired last week after 40 years at the central bank, says that the economy is in “a slow slog out of a very deep hole,” and that the Fed should consider additional stimulus unless the recovery shows signs of “decent progress.”  The departure of the official, Donald L. Kohn, who as the Fed’s No. 2 official played a pivotal role in its handling of the financial crisis, is something of an end of an era. A staff economist who worked his way up through the ranks, Mr. Kohn was one of the last direct links to Paul A. Volcker and Alan Greenspan, the chairmen who defined the modern Fed. In a telephone interview from Seattle, where he was vacationing before starting work as a senior fellow at the Brookings Institution, Mr. Kohn, 67, said he believed the Fed should take additional measures — like resuming purchases of government securities to keep long-term interest rates low — if the recovery continued to slow..

Got a New Idea for Monetary Policy? - Do you have a new proposal for monetary policy? Perhaps a new policy rule? If so, it would be good to try out your idea first on a model of the economy. See how it works. Better yet, since economic models are different and economists frequently disagree, try it out in several models to be sure your rule is robust. But what models and how ? Volker Wieland and his colleagues are performing a valuable public service that makes it much easier to try out new policy ideas than it used to be when work on policy rules was first starting. They are creating an on-line model database containing monetary models used at the Fed, the ECB, and other central banks, The models range in size from over 100 equation models to small three equation models (a policy rule equation for the interest rate, a staggered price setting equation for inflation, and an equation relating output to the interest rate). They all have inflexibilities, forward-looking expectations, and a policy analysis based on policy rules. So far there are 35 models in the database. Here is a list. For more information log into Volker Wieland's model database and have some fun.

Breakfast at Richard's - A few weeks ago I blogged about the views of Richard Fisher, President of the Federal Reserve Bank of Dallas and self-described "inflation hawk." Although most of my earlier blog post just quoted from his speeches, you couldn't describe it as a friendly or neutral post. I concluded it by saying My bottom line is that I agree with Krugman. It is depressing, no, make that calamitous, to have someone with such a dangerous and cultivated degree of ignorance in a critical decision-making role. But let's not be surprised. And let's not pretend that Mr. Fisher is alone.  That kicked off a lively discussion, but the most surprising part of it (to me, anyhow) was the e-mail that I received a couple of days later. Dear Mr. van Norden: I am amused by your comments ... I would be delighted to host you in coming to Dallas to meet with me and my team so that we can better understand your views and so that you might better understand ours....I look forward to meeting with you and exchanging views. With all best wishes, Richard W. Fisher...There are some invitations that you just can't accept quickly enough! So I talked with Richard Fisher last Friday over breakfast for an hour and a half. I also had a chance to present some of my research and talk informally with members of his staff.

The Bank of Canada and the Fed: rules vs. discretion -I just can't get interested in the Bank of Canada right now. I can only think about the Fed. The Bank of Canada is just too boring. Which it should be.  I'm not alone. Simon van Norden has had breakfast (and lunch and dinner) at the Bank of Canada many times, but has only blogged about his breakfast at the Fed. It's not just that Canada seems to be recovering from the recession and the US isn't. Nor just that Canada is boring and America exciting. It's because of a very old debate in monetary policy: rules vs discretion.  The "rules vs discretion" debate has gone through many different interpretations of what we might mean by the distinction. But at its simplest, it's the debate between those who believe that monetary policy should follow some sort of fixed rule, and those who believe that monetary policy should be left to the discretion of those in authority to do what they think is best.

Fed Banks: `Widespread Signs of a Deceleration' in Economy  (Bloomberg) -- The Federal Reserve said the U.S. economy maintained its expansion while showing “widespread signs of a deceleration” in mid-July through the end of August, according to a survey by 12 regional Fed banks.  Five regional banks reported “economic growth at a moderate pace” and two pointed to “positive developments or net improvements.” The remaining five banks said conditions were mixed or decelerating. The report underscores the Fed’s view that while the recovery from the worst recession in seven decades has cooled, the economy isn’t relapsing into a contraction. In a speech last month in Jackson Hole, Wyoming, Fed chairman Ben S. Bernanke said “the preconditions for a pickup in growth in 2011 appear to remain in place.”

Fed's Beige Book: Continued growth, but "widespread signs of a deceleration" - From the Federal Reserve: Beige book Reports from the twelve Federal Reserve Districts suggested continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods. Manufacturing activity expanded further on balance, although the pace of growth appeared to be slower than earlier in the year. Most Districts reported further gains in production activity and sales across a broad spectrum of manufacturing industries. However, New York, Richmond, Atlanta, and Chicago noted that the overall pace of growth slowed. Residential construction activity declined in most areas in response to weak demand. Demand for commercial, industrial, and retail space generally remained depressed. Vacancy rates stayed at elevated levels in general and rose further in a few Districts, placing substantial downward pressure on rents.

Fed Report Finds Signs Growth Is Slowing - The United States economy showed “widespread signs” of slowing, the Federal Reserve said on Wednesday, though modest growth continued from mid-July through the end of August. The latest regional survey by the 12 district Federal banks, known as the beige book, described an economy in which many sectors, from consumer spending to manufacturing, continued to expand. But there were also “widespread signs of a deceleration,” the report said. In at least five of the 12 Fed districts — New York, Philadelphia, Atlanta, Chicago and Richmond, Va. — conditions were “mixed” or had slowed, the report said.  The publication, which is based on information supplied by business contacts in the different regions, confirms the thrust of much of the economic data in the last month that has shown a sluggish pace to the recovery. Gross domestic product has been revised downward to 1.6 percent from 2.4 percent for the second quarter and the housing market has slumped.

Highlights (and lowlights) from the Beige Book - FT Alphaville - Just as the US was turning its weary eyes to Barack Obama’s speech on the economy on Wednesday, the Federal Reserve Board released the sixth Beige Book report of the year. This most recent edition covers activity in the last half of July and all of August. The unsurprising top line: Reports from the twelve Federal Reserve Districts suggested continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods. As for individual categories, manufacturing activity seems to be caught somewhere between the optimistic ISM numbers from last week and the relative pessimism of August’s Fed surveys:

Fed sees 'widespread signs of deceleration' - - The economy grew at a sluggish pace through the summer months, and there are now "widespread signs" that activity is slowing, the Federal Reserve said Wednesday in its latest snapshot of regional economic conditions. Economic growth continued at a modest pace in 7 of the central bank's 12 districts, according to the September edition of the Fed's Beige Book, which is published eight times a year.  The western districts, Boston and Cleveland were among those reporting modest economic growth from mid-July through the end of August. But New York, Philadelphia, Richmond, Atlanta, and Chicago all reported mixed conditions or deceleration in overall activity.

The Tortoise Economy - Robert Reich - Word from the twelve Federal Reserve Banks, summarized in the Fed’s so-called ”Beige Book,” shows the economy slowing in July and August. Duh. But the Fed is quick to point out the economy overall is still growing — even though it’s growing more slowly than in the spring. Can we have a moment of realism here, please? In 2008 and 2009 the economy fell into the deepest hole it’s been in since the Great Depression. Since then we’ve been struggling to get out. We’re failing big time.  After a typical recession, growth surges until the economy reemerges from whatever hole it fell into and returns to its normal growth path. Usually that surge isn’t difficult to accomplish once the upswing begins because all the assets the economy needs to get back to its old path are readily available — lots of people who have been laid off or have come into the job market and been unable to find work, unused office and retail space, factories and equipment that had been idled. After the economy returns to normal and almost all these people and physical assets are back to work, growth slows to its normal pace.

Bullard: Fed Ready for Further Action if Necessary - A top Federal Reserve official said Friday the central bank has moved closer to providing additional support to the economy via new asset purchases, although he added he doesn’t expect that action to become necessary. While the economy is likely to see better growth in 2011 and there’s some evidence the soft patch seen through the summer may be over, policy makers “have to be prepared” for unexpected events, Federal Reserve Bank of St. Louis President James Bullard said during an interview Referring to the Federal Open Market Committee’s decision last month to keep its balance sheet size steady, Bullard said, “I think the FOMC did make a move to position itself to be able to act if necessary, to take more action, more easing type action.” He added, “The purchase of longer-dated Treasurys is the most promising action we can take.”

More on Massive Quantitative Easing - In tomorrow’s Wall Street Journal there is a symposium on monetary policy in which Richard Fisher, Rick Mishkin, Vince Reinhart, Allan Meltzer, Ron McKinnon and I participate. One of the points I make in my piece is that another massive dose of quantitative easing is not appropriate now. I briefly explained the rationale for this point of view in a post on this blog several days ago, where I referred to Milton Friedman’s advocacy of stable monetary policy rules. A number of people wrote to ask me about that post, and Scott Sumner has written a thoughtful blog entry about it, quoting Milton Friedman on Japan. I completely agree that the problems in Japan in the 1990s stemmed from a sharp decline in money growth compared with the 1980s, from 8.9 percent per year during 1980.1--1991.4 to 2.6 percent per year during 1992.1 – 2000.1 as shown in the Table and Chart in this speech I gave at the Bank of Japan.  Now consider the current situation in the United States. We did not see the same kind of decline in money growth as in Japan going into the recent recession. The US recession began in December 2007. Measured over 12 month periods, M2 growth rose from 4.8% in January 2006 to 5.9% in January 2007 to 6.0% in January 2008 to 10.4% in January 09.

The WSJ "Symposium" on Monetary Policy - The WSJ asked several people, mostly on the right, about whether the Fed has the power to do more. John Taylor's answer was predictable, the problem is that they aren't following the Taylor rule and the sooner they get back to it, the better.  Richard Fisher of the Dallas Fed is predictably hawkish, adopts the GOP line on business uncertainty causing problems, and concludes: The minutes of the last Federal Open Market Committee (FOMC) meeting noted that "a number of participants reported that business contacts again indicated that uncertainty about future taxes, regulations, and health-care costs made them reluctant to expand their workforces." . The claim that business uncertainty is holding up the recovery will appear again below, so I'll hold off with the evidence against it. Next is Frederic Mishkin. I wasn't sure how he'd answer. He's fearful that debt monetization will lead to lack of fiscal discipline, that losses on asset purchases might lead to a loss of Fed independence, and that all roads lead to inflation:

We Still Have Our Work Cut Out For Us - Sigh. The Wall Street Journal had a symposium on monetary policy where it asked six prominent monetary economists what the Fed should do next.  Via Mark Thoma we see that five out of six responded with answers that effectively amount to a tightening of monetary policy.  Now most of them did not call for an outright tightening of monetary policy, but they did in one form or the other call for passiveness on part of the Fed. Unfortunately, that is not a great idea right now since inflation expectations and aggregate demand forecasts are falling.  Doing nothing to arrest these declines amounts to a tightening of monetary policy. Ben Bernanke makes this very point in his recent speech at the Jackson Hole conference.  There he argued that by failing to stabilize the Fed's balance sheet the Fed was passively tightening monetary policy.  The same goes for failing to stabilize inflation and aggregate demand forecast since these developments affect current spending decisions as well as future ones.  Now I respect many of the economists in this symposium so it pains me to say this, but I see no other option.  Doing nothing amounts to failure for monetary policy.

"The Dramatic Jump in the Actual Unemployment Rate [is] Largely a Cyclical Phenomenon" - Minnesota Fed president Narayana Kocherlakota says once again that there's little that monetary policy can do for the unemployment problem because it's largely structural (here's Brad DeLong's reaction, see here too). However, researchers at the Cleveland Fed say their estimates tell a different story: The dramatic jump in the actual unemployment rate we have observed since the beginning of the recession is being interpreted in our flows-based analysis as largely a cyclical phenomenon, with little movement in the long-term rate. The long-run trend does appear to have increased from its prerecession level, but by only a small margin. The natural rate of unemployment is not 9.6 percent, the current unemployment rate. It's not even close to that (the Cleveland Fed says it's "roughly 5.6 percent to 5.7 percent"). But even if it was as high as 7.5 percent (to be clear, this is a hypothetical), are we just going to give up on the other 2.1 percent? As the Cleveland Fed notes in the link given above, even though the problem is largely cyclical in their view, it's looking like a long recovery is ahead:

Ben Bernanke's Trifecta of Errors - Many have noted the resemblance between the Federal Reserve Board and the Catholic Church. Both have long traditions of secret convocations: meetings of the Open Market Committee and the College of Cardinals. Both have a revered leader: the Chair of the Board of Governors and the Pope. And both have claims to infallibility. In the case of the Fed Chair, infallibility is bestowed by the business reporters and politicians who treat every word from the reigning Fed chair as a priceless pearl of wisdom. This aura of infallibility is especially painful in the current economic situation when error seems to be the new religion of the Fed. Just to remind everyone -- since so much denial has dominated the debate -- the only reason that we are facing near double-digit unemployment and the worst economic calamity in 70 years is that the Fed was out to lunch in combating the housing bubble.

Spectre of deflation kills the mood at Jackson Hole - The mood at the annual gathering of the world’s central bankers at Jackson Hole a few weeks ago was grim, particularly for central bankers from the developed world. That was in stark contrast to last year, when the mood was one of relief.  The elite group has good reason for their anxiety. They know better than most the limits of monetary policy.  It is hard for any central banker to walk the tightrope between instilling confidence in the future and maintaining credibility. And many of them believe that Ben Bernanke, Federal Reserve’s chairman, may have lost his balance by trying to suggest that monetary policy at this point can make a significant difference.  Officials at the Bank of Japan have come to believe that, while monetary policy can play a big role in influencing inflation, it cannot by itself stem deflation in a world of zero interest rates. Now some central bankers in the US are arriving at the same conclusion.  “We can’t create growth ourselves,” says one senior US central banker, “all we can do is create the conditions that make growth possible.”

A Question I Can Answer: Why Is the Speed Limit on Deflation so Low? - Nick Rowe asks: Worthwhile Canadian Initiative: Re-learning the New Keynesian IS curve: [A]n empirical puzzle for New Keynesian macroeconomists. If macroeconomic black holes of deflationary spirals exist, and if bad monetary policy can cause economies to fall into one, why haven't we ever observed this happening? Does somebody up there like us? (At least, until now). Or is something wrong with the model? The Akerlof-Yellen answer--which I think is correct--is that the expectational Phillips Curve model of pricing is wrong. Cutting nominal wages substantially has such devastating effects on worker morale that employers simply do not do it in large numbers--even with enormous amounts of slack in the labor market. Thus the dynamic system has two basins that converge to two attractors: a basin that converges to "normal" with employment near full, the nominal interest rate equal to inflation plus the warranted natural real rate of interest, and inflation near the central bank's target; and a basin that converges to "Japan" with nominal interest rates at their floor and deflation proceeding at its (slow) speed limit.

In Case You Were Wondering... It's still happening.  Eight months on and counting, expected inflation continues to fall at a steady pace as seen below: (Click on figure to enlarge.) Several things to note about this remarkable downward trend.  First, given that productivity is now declining this picture screams out that total current dollar spending is expected to decline.  That is, the market expects weaker aggregate demand (AD) in the future and, as a result, there will be lower inflation.  Second, the spread has on averaged declined about 0.55 basis points a day over the January 4, 2010 - September 2, 2010 period.  At this pace and with no policy change, zero inflation expectations will be hit sometime around March 2011. Thereafter, it's a deflation expectation world. Third, the Fed has done nothing meaningful to arrest this downward trend.  Finally, this is the longest-running decline for this spread since the daily TIPS data for this maturity became available in 2003.  Yes, the 2008 decline is larger, but it only lasts from July to November, 5 months.  This decline is going on 8 months now with no end in sight. 

Dangerous Defeatism is taking hold among America’s economic elites - The US economy has slowed to stall speed: successive quarters of 5pc growth, 2.7pc, and 1.6pc (to be revised down), the worst recovery of the post-war era. Such is the crush of debt.  While last week's data was less bad than feared, it was still awful. Manufacturing orders fell to the lowest in 15 months. Some 54,000 jobs were lost in August and the broad U6 gauge of unemployment rose from 16.5pc to 16.7pc. The US needs to create 150,000 a month just to stay even. The social depression is getting worse, not better. Hardline bears think growth will drop below to 1pc in the second half as the inventory boost wears off and the tail winds of stimulus turn to headwinds, leaving no margin for error. Goldilocks has played a trick on America. Growth is not warm enough to prevent hard-core unemployment climbing to post-war highs and sticking at levels that corrode the body politic, but not yet cold enough to overcome the fierce resistance of the Fed's regional hawks for a fresh blast of stimulus.

Data Improve, as Some in Fed Offer Context for Recovery Pace - When Federal Reserve chief Ben Bernanke spoke late last month at the posh gathering of central bankers in Jackson Hole, Wyo., he acknowledged the recovery wasn’t turning out exactly as he had hoped. The Fed boss told the audience that while the expansion was continuing, “the pace of that growth recently appears somewhat less vigorous than we expected.” That acknowledgment allowed Bernanke to lay out what else the Fed could do to support the economy, even as he affirmed the low odds those actions would come to pass. Some data over recent days–especially numbers released Thursday–are causing some economists to believe that the so-called soft patch may be evaporating. They’re offering those views amid commentary from some in the Fed that points out that even with the disappointing path of recent numbers, the pace of the recovery is not really all that surprising.

Q&A with economist Mark Zandi - Economic expert Mark Zandi is chief economist of Moody's Analytics and cofounder of The Wall Street Journal called him 'the de facto chief economist to Congress.' At a August 25 Monitor breakfast, he discussed the housing market, the odds of the economy slipping back into recession, and what the Obama administration could do to help the economy in the near term.

So much for “better than expected” - As if we hadn’t already rained on the expectations-beating parade of recent economic news, along comes this new chart from the Conference Board:The key points:The Conference Board Employment Trends Index (ETI) decreased in August for the second time in the past four months. The index now stands at 96.7, down from July’s revised figure of 97.4. The index is up 9.4 percent from a year ago. …This month’s decline in the Employment Trends Index was driven by negative contributions from seven out of the eight components. The weakening indicators included Percentage of Respondents Who Say They Find “Jobs Hard to Get”, Initial Claims for Unemployment Insurance, Percentage of Firms With Positions Not Able to Fill Right Now, Part-Time Workers for Economic Reasons, Job Openings, Industrial Production and Real Manufacturing and Trade Sales. It is the first time since March 2009 that seven components contributed negatively to the overall index.

No defence left against double-dip recession, says Nouriel Roubini…The United States, Japan and large parts of Europe have exhausted their policy arsenal, leaving them defenceless against a double-dip recession as recovery slows to ‘stall speed’  “The US has run out of bullets,” said Nouriel Roubini, professor at New York University, and one of a caste of luminaries with grim forecasts at the annual Ambrosetti conference on Lake Como.  “More quantitative easing (bond purchases) by the Federal Reserve is not going to make any difference. Treasury yields are already down to 2.5pc yet credit spreads are widening again. Monetary policy can boost liquidity but it can’t deal with solvency problems,” he told Europe’s policy elite. Dr Roubini said the US growth rate was likely to fall below 1pc in the second half of the year, despite the biggest stimulus in history: a cut in interest rates from 5pc to zero, a budget deficit of 10pc of GDP, and $3 trillion to shore up the financial system.

In The Headlights - The toils of summer are bygone now. The days grow shorter and America stands in the darkling road of its own prospects like a dumb animal frozen in the blinding light of approaching fury. The White House must be a strange place these days with the management of the USA turned over to astrologasters, alchemists, prayer-wheel spinners, fakirs, viziers, necromancers and other visitors from occult realms unaffiliated with the dominion of reality. It's all a mystery in Washington. Nobody can figure out what happened to their green-eyed champion called Growth, that savior who rights all wrongs and insures our eternal exception from the sad fates of other less-blessed empires. Isn't there a book of conjures somewhere in the Harvard Business School that guarantee perpetual growth -- even if there are different tomes around the campus that describe the essential tragic nature of life, viz., that there is a beginning, a middle, and an end to everything. And while this might not be the end of the human project in North America, it is certainly the end of the cheap oil abbondanza, and everything spun off of it in the way of mass consumer luxury, with air-conditioning and a cherry on top.

Global, U.S. growth view for 2011 cut by RBS -- Economists at the Royal Bank of Scotland have downgraded their world growth estimate for 2011 for a second time, moving to below 4%, a decline of roughly half a point from its first downward revision made in July. In a note, the economists cut their view on U.S. growth to below 3% from 3.6% previously, and that will also have an impact on the rest of the world, particularly Europe. The European outlook has also deteriorated "as the policy response to address the periphery is unlikely to bring about the sustained rebound in confidence policy makers hoped for." RBS estimates euro-zone growth in 2011 of 1%, down from 1.3%, and U.K. growth of 1.9%, down from 2.2%. "A slowing in trade activity is now well established: the pace of growth in world trade probably halved in the third quarter and early indications point to a further easing in the fourth quarter," they added. "Countries most reliant on exports like Germany will be hardest hit. This is a story for end of the fourth quarter/beginning of next year."

What is the economic outlook for OECD countries? An interim assessment - OECD, 9th September 2010 pdf

Oops At The OECD - Krugman - Regular readers may recall that back in May I fulminated about the OECD Economic Outlook. The Paris-based OECD is Conventional Wisdom Central; and in May, it dutifully relayed the conventional wisdom that advanced nations should start cutting spending and, even more remarkably, raising interest rates right away. As I pointed out, this made no sense even in terms of the OECD’s own forecasts, which said that unemployment would remain very high and inflation very low for years to come. Now the OECD has climbed down, sort of (pdf). Maybe hold off on those interest hikes, it says, and if things get really bad, maybe delay the fiscal austerity. So here’s how I see it: what we’re really seeing here is a sort of intellectual Wile E. Coyote moment. Back in May, the OECD was responding to social pressure, not economic logic. All the right people wanted austerity now now now, because, well, because, and the OECD went along. Now a bit of bad economic news has led the organization to look down, and realize that there’s nothing supporting its position. But there never was.

Economists cut U.S. growth forecast again (Reuters) - Projected U.S. economic growth for the rest of this year and next was revised down for a third month in a row by a panel of about 50 economists. The latest Blue Chip Economic Indicators report on Thursday said the weaker outlook for second-half 2010 growth stemmed from lower expectations for consumer spending, business investment and private construction. "Growth in the current quarter now is expected to be little better than the disappointingly soft advance registered last quarter," the survey said. Gross domestic product grew at a meager 1.6 percent annual rate in the second quarter, less than half the first quarter's 3.7 percent rate.But the economists' group said that, after the mid-year soft patch, it saw a gradual improving trend setting in with growth slightly surpassing trend rate in the second half of 2011.

The Long Shock - Economic policy-makers and analysts paid close attention in mid-August as Federal Reserve officials gathered in Jackson Hole for their annual symposium. Immediately after Chair Ben Bernanke delivered cautiously optimistic remarks about the state of the economy and the Fed's ability to improve it (at some undefined later date), a panel took the stage to present a research paper with some bad news: We're nowhere near finished with this recession. In fact, most countries that face a recession dominated by a financial crisis have never recovered to pre-crisis levels, even decades later.  The Reinharts found that economic growth lags for years after a financial crisis ends. Advanced economies in particular feel the effect on their labor markets, with each that has faced a post-World War II financial crisis seeing higher unemployment after the crisis than before. This, in turn, suggests that what the United States faces is not a "cyclical" crisis but rather a long-term shock to the economy, something different from what we've experienced since World War II in the United States.

A vision of gloom and chaos - Just in time for the new year, Ian Bremmer and Nouriel Roubini have delivered a 4,000-word thumbsucker on the global political economy. Essentially, they take Mohamed El-Erian’s idea of a “new normal” and start getting very specific about where and how it’s going to fall apart. And it’s hard to disagree with things like this:  The reopening of the fire hoses of credit and capital that occurred during the bubble years will happen again and intensify the boom-and-bust cycles. Driven by ever-more- desperate policymakers in the U.S., Europe and Japan, these cycles will both shorten and magnify. Political, policy and regulatory uncertainty will increase, and as a result, financial crises will become more frequent and costly, while risk aversion, volatility and uncertainty will rise. The illusions of the Great Moderation — a phrase coined by Harvard University economist James Stock to describe the two-decade period that started in the late ’80s, with its quasireligious embrace of market efficiency and infinite American power — will have created the era of the Great Financial Instability. And nothing could hasten the decline of American influence more than another self-inflicted catastrophe of global market capitalism.

I see a darkness - IT SEEMS like Dr Doom has been feeling as though his gloominess is no longer appreciated—is overshadowed, even, by the faddish pessimism that's become as unbearably ubiquitous as Justin Bieber. In a new essay co-written with Ian Bremmer, Nouriel Roubini tries to remind us that no one does gloom like he does. In short, the authors say, the world is going to hell in a handbasket. The story they tell is centred on the decline of the unipolar, American-led global economy. As the developed world deleverages and stagnates, America's strength will decline. A vacuum in global leadership will develop. But emerging powers who might rise to fill that vacuum will be too involved with domestic matters to take on leadership responsibilities. Meanwhile, the new international bodies designed to facilitate cooperation between the great powers will have grown too large to be wieldy. The G20, for example, has too many countries with competing interests and too loose a form to be able to make tough decisions.

And You Thought We Were Bearish? - How best to summarise this long, depressing outlook on the global economy by Nouriel Roubini and Ian Bremmer? We’ll give it a shot. First, no matter who you are, you are too optimistic: Still, many policymakers and economic thinkers in the U.S., Europe and Japan remain shrouded in denial. They assume that after a period of healing, high growth will return and the rules of global capitalism will restore the preeminence of the U.S. economy and the appeal of a chastened (yet only slightly less freewheeling) laissez-faire Anglo-Saxon model. Such thinking is either dangerously naive or the result of epistemological blindness. Good luck with that whole G-20 thing and your dreams for a harmonious post-American world — not happening.

No Economic Growth for Years to Come - There is no shortage of analysts and experts out there who see and recognize some part of what’s ailing our economies. There is, however, a huge shortage of those who can connect the parts. Often the American people themselves look to be better judges of reality than all those who make a good living telling them what that reality is.  Still, Ian Bremmer & Nouriel Roubini start out promising enough:Paradise Lost: Why Fallen Markets Will Never Be the Same...”A scenario in which the U.S. not only returns to precrisis “potential growth” but even exceeds it”? If you have enough fantasy, well, perhaps. But what about all the other scenarios, why not talk about those? Roubini's problem is he can't shake off the notion of growth, in this case posing as "lackluster growth". And everything he says, and presumably thinks, falls in that light.

Delusions Of Recovery - Krugman - I’ve had a couple of conversations lately with people who follow politics and public affairs, but aren’t that close to the economic discussion — and I’ve discovered that there are two comforting delusions still out there. Delusion #1 is that we’re on the road to recovery, just more slowly than we’d like; to be fair, the White House keeps saying this. But it’s not at all true. GDP is growing below potential; employment, even if you focus just on private employment, is growing more slowly than the working-age population. If you ask how long it will take us to return to, say, 5 percent unemployment on the current track, the answer is forever. Delusion #2 is the belief that the stimulus may yet do the trick, because there are still substantial funds unspent. I tried to deal with this last year. The level of GDP depends not on total funds spent, but on the rate at which funds are being spent, which has already peaked; GDP growth on the rate of change in the rate at which funds are being spent, which peaked last year. It’s all downhill from here.

The Slump Goes On: Why?, by Paul Krugman and Robin Wells - In the winter of 2008–2009, the world economy was on the brink. Stock markets plunged, credit markets froze, and banks failed in a mass contagion that spread from the US to Europe and threatened to engulf the rest of the world. By the summer of 2009, however, as the world economy stabilized, it became clear that there would not be a full replay of the Great Depression. Since around June 2009 many indicators have been pointing up: GDP has been rising in all major economies, world industrial production has been rising, and US corporate profits have recovered to pre-crisis levels.  Yet unemployment has hardly fallen in either the United States or Europe—which means that the plight of the unemployed, especially in America with its minimal safety net, has grown steadily worse as benefits run out and savings are exhausted. And little relief is in sight: Given this bleak prospect, shouldn’t we expect urgency on the part of policymakers and economists, a scramble to put forward plans for promoting growth and restoring jobs? Apparently not: a casual survey of recent books and articles shows nothing of the kind. .

One Model To Rule Them All - Krugman - I was, in a way, ready for this particular mess: a decade earlier, trying to make sense of Japan’s woes, I had thought through the economics of a liquidity trap. Moving back and forth between that basic model and its translation into more traditional IS-LM analysis (pdf), I had a framework ready-made for the mess we’re in. And that framework has held up very well. That basic framework led me to conclude that the Obama stimulus was much too small; that the huge increase in the monetary base wouldn’t be inflationary; that interest rates would stay low as long as the economy remained depressed, despite huge government borrowing. All this has turned out to be true. Now, there’s no virtue in sticking with a model if it fails the reality test; but in this case the model — unlike the economy — has performed well. By contrast, many policy makers and, sad to say, economists, have been frantically inventing new models and doctrines to justify whatever the currently fashionable policy recommendations are. And looking back at that 1999 paper, I see that I anticipated this, too. But the men in suits have decided that they know better — and the slump goes on, and on, and on.

The Pain Bias: What Doesn’t Kill Us - Will make our lives less worth living until our eventual death anyway. Paul Krugman complains that its not only the Austerity crowd but the Tight Money crowd that’s switching its tune on the bond markets The odd thing isn’t that people only hear what they want. Confirmation bias is ubiquitous. The odd thing is that so many in positions of authority only want to hear that which justifies greater indifference to human suffering. Others will see more cynical causes but, my current explanation is that this is a transfer of logic from the way certain body tissues operate. Its clearly the case that skin, muscle and connective tissue respond to stress by growing:  a process known as hypertrophy. When you stress most things they don’t grow back stronger, they break. When you apply job losses to an economy people don’t become hardier, they become poorer.  The idea that tough love will lead to a better economy in the long run is just wrong. Not mean. Not heartless. Not insensitive. Wrong. Monetary policy doesn’t work that way. Fiscal stimulus doesn’t work that way.

Financial Armageddon: Maybe Not - A recent commenter at Financial Armageddon wrote that I am "intellectually dishonest" and "cannot accept bad news." In his view, we have "avoided a double-dip recession" and, whether I like it or not, "the economy is improving." While I disagree with the criticisms directed at me personally -- for one thing, I consider myself intellectually honest, in contrast to many other financial commentators who seem to be constantly shilling for one thing or another -- I admit I could be wrong about the outlook. Maybe we have seen the lows. Maybe all the bailouts and borrowed money has saved the day. Maybe the stock market will prove to have been something of a leading indicator after all. However, everything I see and hear tells me that the so-called recovery is less than it seems, and that the big risk remains to the downside. Ordinary Americans believe it, as I pointed out yesterday. And so, it seems, do a number of those at the top of the economic food chain, according to a report from CNBC, "EXCLUSIVE: Outlook Gloomy at Secret Billionaire Meeting":

Mutant Rat Epidemic Spreading Economic Black Plague - We are in the midst of a rat infestation of epidemic proportions -- an ‘Economic Black Death’, a plague, spread by Xenopsylla cheopis (rat-fleas). These are no ordinary rats. No. Our infestation consists of 900-hundred pound, grotesque, disgustingly despicable, giant, disease-carrying, plague-creating, rat-flea ridden mutant rats. These rat-fleas carry, bite at, and fatally infect, the two things we need to survive:  A sound economy and freedom.  You’d think 900 pound rodents spreading an Economic Black Death would be noticeably obvious to everyone.  Unfortunately, this is not the case. For decades these mutants have remained hidden in the shadows of Wall Street, cowardly veiling themselves behind the walls of our government and lurking in the vile, foul-smelling financial sewers below where we sleep, work, and raise our families.

The Last Chapter - Mauldin: Let’s Look at the Rules - There are rules in sports. Three strikes and you’re out. You have to make ten yards in four downs to get another first down. You can’t touch the soccer ball with your hands. There are rules in economics as well, they’re just not as well-known. And breaking these rules has consequences for individuals, companies, and countries. Sadly, there is no independent referee who can blow a whistle and stop the game, assess a penalty, and make you obey the rules. There is, however, a market that can decide not to buy your currency or your bonds if you don’t play by the rules. We are going to look at some of the more important rules in this chapter. But, gentle reader, don’t panic. These rules are fairly easy to understand if we take out the academic jargon often associated with them. And if you “get it” then it is much easier to understand the consequences of what happens when a nation violates the rules, both from a policy perspective and a personal investing point of view.

I Don't Think This Is the Best Way to Put It...The problem was created by too much risky debt and not enough safe debt. The result is that right now there is an excess demand for safe assets--like U.S. government securities. Because businesses and households want to hold more safe assets at full employment than exist, they are trying to cut back on their spending on currently-produced goods and services in order to build up their stocks of safe assets. If our big problem were too much debt we would not be here, in depression. Too much debt generates inflation. The things that generate depression are shortages of financial assets, and excess demand for some class of financial assets then produces, by Walras's Law, excess supply of currently-produced goods and services. We had a "shortage of liquid cash money" recession in 1982; we had a "shortage of long-duration bonds" recession in 2002, and now we are having a "shortage of safe assets" recession.

The true cost of the Iraq war: $3 trillion and beyond, by Joseph E. Stiglitz and Linda J. Bilmes - Writing in these pages in early 2008, we put the total cost to the United States of the Iraq war at $3 trillion. This price tag dwarfed previous estimates, including the Bush administration's 2003 projections of a $50 billion to $60 billion war.  But today, as the United States ends combat in Iraq, it appears that our $3 trillion estimate (which accounted for both government expenses and the war's broader impact on the U.S. economy) was, if anything, too low. For example, the cost of diagnosing, treating and compensating disabled veterans has proved higher than we expected.  Moreover, two years on, it has become clear to us that our estimate did not capture what may have been the conflict's most sobering expenses: those in the category of "might have beens," or what economists call opportunity costs. For instance, many have wondered aloud whether, absent the Iraq invasion, we would still be stuck in Afghanistan. And this is not the only "what if" worth contemplating. We might also ask: If not for the war in Iraq, would oil prices have risen so rapidly? Would the federal debt be so high? Would the economic crisis have been so severe?

Analysts: Iraq war ‘partly to blame’ for financial crisis - Stiglitz and Bilmes: Recession will be longer because of war. The financial crisis that rocked the world in 2008 and still reverberates today was "due at least in part" to the Iraq war, which also made it more difficult for the government to react when economic problems happened, argue two prominent policy makers. In an article in Sunday's Washington Post, former Clinton-era economic adviser Joseph Stiglitz and Harvard University public policy lecturer Linda J. Bilmes say that the Iraq war forced the US to take on more debt than it had to, and caused in part the rising oil prices that resulted in large amounts of money flowing out of the US economy. To counter the effects of those trends, fiscal policy makers had to keep interest rates unnaturally low, causing the securities and real estate bubbles that burst at the start of the recession, the authors say. The authors also amended their assessment from several years ago that the Iraq war's true cost is around $3 trillion, saying new information suggests that the cost goes "beyond" that estimate

Inflation Won't Help Us With Our Debt Load -This post from Arnold Kling, on a podcast by Jeffrey Rogers Hummel, makes what I think is an good point about the possibilities for inflating away our liabilities: He argues that there is not enough tax revenue available from seignorage for governments to inflate their way out of their debts. Because of financial innovation and money substitutes, it would take hyperinflation to use money printing to finance large deficits. Hummel says that of all the bad choices the U.S. government would face in a financial crisis, a formal default will be preferable. As I've noted before, inflating away your debt only works if you don't have to finance current deficits; if you've still got a budget gap, any gains from inflation will quickly be eroded by the higher interest rates you need to pay to roll over your existing stock of debt.  The faster that markets start demanding higher interest rates to compensate for inflation, the less mileage you get out of inflation

1938 in 2010, by Paul Krugman-  Here’s the situation: The U.S. economy has been crippled by a financial crisis. The president’s policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections.  The president in question is Franklin Delano Roosevelt; the year is 1938. President Obama’s economists promised not to repeat the mistakes of 1937, when F.D.R. pulled back fiscal stimulus too soon. But by making his program too small and too short-lived, Mr. Obama did just that: the stimulus raised growth while it lasted, but it made only a small dent in unemployment — and now it’s fading out.  And the inadequacy of the administration’s initial economic plan has landed it — and the nation — in a political trap. More stimulus is desperately needed, but in the public’s eyes the failure of the initial program to deliver a convincing recovery has discredited government action to create jobs. In short, welcome to 1938.

How did American pay for World War II? - To a degree that will surprise many, the US funded its World War II effort largely by raising taxes and tapping into Americans' personal savings. Both of those avenues are nowhere near as promising today as they were in 1941 Current tax burdens are now much higher than they were before the War, so raising taxes today would be much more difficult. The "Victory Tax" of 1942 sharply raised income tax rates and allowed, for the first time in our nation's history, taxes to be withheld directly from paychecks. The hikes were originally intended to be temporary but have, of course, far outlasted their purpose. It would be unlikely that Americans would accept higher taxes today to fund a real war, let alone a pretend one.

Rome is Burning - There is a critical point that I fear the commentariat is just not getting. In my darker moments I fear that some of my fellow economists aren’t getting it either but we aren’t going to go there. Look at these two graphs because they tell you the fundamental problem in America today: We have very low capacity utilization (75%) and very high unemployment (10%). That is, we have factories sitting idle for lack of workers – low capacity utilization. At the same time we have workers sitting idle for lack of factories – high unemployment. There are machines waiting to be worked and people waiting to work them but they are not getting together. The labor market is failing to clear. This is a fucking disaster.Excuse my language, but you have to get that this is a big deal. This is a failure of our basic institutions of production. The job of the market is to bring together willing buyers with willing sellers in order to produce value. This is not happening and as a result literally trillions of dollars in value are not being produced.

Where There’s Smoke…In an update to his popular post, which is causing some interesting commentary on Twitter, my co-blogger Karl Smith has this to say: My argument is no, this isn’t just another bad experience. Its a failure of our most basic institutions and is leading to pure loss. Indeed, I think that the wrong way to think about the problem of recessions is that there is a fundamental problem with market economies, or that recessions (no matter how deep) represent a market failure. To me, this recession (both the depth and length) is fairly clearly a monetary failure…and if you catch me on a bad day (or a good day, depending on your disposition I suppose), I’d even go as far as to claim that the type of money system we use makes our economies prone to the types of failures we have recently experienced. In fact, financial crises are not rare. The World Bank has identified 96 banking crises (large enough to cause economy-wie problems) and 176 monetary failures since the dismantling of the Bretton Woods in 1971.[1] Even before the termination of gold convertibility, massive crashes were remarkably common the world over. From the Holland tulip mania to the Great Crash of 1929, these crashes have happened with frightening regularity. .

US Fiscal Weakness Is Not Grasped by Markets, Kotlikoff Says (Bloomberg) -- Financial markets don’t fully grasp the extent of deterioration in the U.S. fiscal position burdened with rising health-care and Social Security costs, Boston University economics professor Laurence Kotlikoff said. “The potential for the U.S. fiscal crisis to kick off a global financial meltdown is significant,” Kotlikoff wrote in the September issue of the International Monetary Fund’s Finance and Development magazine. “Once the world catches on to the true extent of the U.S. fiscal insolvency, the ability of the United States to continue to finance its government borrowing could come to a halt.”

Trying To Have It Both Ways On What The Bond Market Is Saying About The Deficit - My Aug. 3 column about the former “bond market vigilantes” now being obvious federal budget deficit cheerleaders generated a great deal of attention and lots of pro and con comments. The biggest complaint by far was that the bond market will someday change its mind, think that the economy warrants lower rather than higher federal deficits and start to push up interest rates in anticipation of that not happening. We should deal with that, the complainers said, by beginning to reduce the deficit immediately. The best way to demonstrate the absurdity of this position is to ask what the complainers would be recommending if the mirror image of this situation existed. Would the same people be just as adamant that, if the bond market were back in a vigilante mode, we should begin to adopt policies that increase federal spending, reduce taxes and raise Washington’s borrowing because, after all, at some point it will change its mind? Of course they wouldn’t.

Listening To The Bond Market - Or Not - Stan Collender has been getting sort of, well, shrill over the way in which austerity enthusiasts told us that we had to utterly obey what the bond market was saying when interest rates were rising, but are telling us to ignore the market now that rates are very low.  The same goes for monetary policy. A few months ago there was a flurry of demands for tighter monetary policy, right away. And not just from cranks: the OECD, that virtual definer of conventional wisdom, called for a rapid rise in US policy interest rates, even thought its own forecast showed unemployment remaining very high and inflation remaining very low for years to come. Why? Because market indicators of expected inflation had trended up modestly over the previous few months. But those indicators have since gone into reverse, big time. So will the OECD call for a drastic shift toward expansionary policies, since the clear and present danger, at least according to the bond market, is disinflation (and possibly deflation)? No, it won’t. The bond market only rules if it tells people what they want to hear.

Attention: Deficit - The growth of entitlements is on an unsustainable path. If allowed to continue, spending on Social Security, Medicare, and Medicaid will require untenable tax increases, crowd out almost all other spending, or lead to a dangerous accumulation of debt. If any of these scenarios unfolds, the nation’s ability to remain economically competitive will be substantially weakened, and enormous burdens will be imposed on the poor and middle classes.  As all sides in the debate know well, the politics of entitlement reform are toxic. Only 7 percent of the public is in favor of cutting spending on either Social Security or Medicare. Shielding these programs from change–almost any change–is a political strategy that may jeopardize the entire liberal agenda going forward.  First, preserving the status quo will erode trust in government. A government that has lost control of its fiscal future, with most of its budget on automatic pilot and a fifth of its expenses unpaid for, cannot garner much respect from its citizens.

“There Is No Economic Justification for Deficit Reduction” Galbraith to Deficit Commission "Your proceedings are clouded by illegitimacy. In this respect, there are four major issues. First, most of your meetings are secret, apart from two open sessions before this one, which were plainly for show. Second, there is a question of leadership. A bipartisan commission should approach its task in a judicious, open-minded and dispassionate way. Third, most members of the Commission are political leaders, not economists. With all respect for Alice Rivlin, with just one economist on board you are denied access to the professional arguments surrounding this highly controversial issue. Conflicts of interest constitute the fourth major problem. The fact that the Commission has accepted support from Peter G. Peterson, a man who has for decades conducted a relentless campaign to cut Social Security and Medicare, raises the most serious questions."

Congressional Budget Office - The Budget and Economic Outlook: Fiscal Years 2010 to 2020

Time-shifting planned demand vs. permanently increasing actual demand - Most policies aimed at increasing demand merely time-shift planned demand. Does that mean they don't really work? Does it mean we get recovery now at the expense of an even bigger recession later? Do we just have to cross our fingers and hope that something else eventually comes along to increase demand in future? A cut in interest rates causes each individual to time-shift his planned demand for consumption goods. He plans to consume more now, and less later. The present value of his planned total demand is still constrained to equal the present value of his income. Or, suppose we bring investment into the picture. If we cut interest rates today, and that increases planned investment today, that means firms will have a higher capital stock next year, creating an even bigger supply of goods next year, meaning we will have a bigger problem of excess supply next year. Or, suppose we bring fiscal policy into the picture. Governments have budget constraints too. If governments spend more today, it means they must spend less in future. Or tax more in future, which reduces households' future income and consumption spending. A policy that time-shifts planned demand can permanently increase actual demand. But it only works if the increase in planned current demand causes current income to rise, and this in turn causes people to revise upwards their beliefs about permanent income.

Things Could Be Worse, by Paul Krugman - In the 1990s, Japan conducted a dress rehearsal for the crisis that struck much of the world in 2008. Runaway banks fueled a bubble in land prices; when the bubble burst, these banks were severely weakened, as were the balance sheets of everyone who had borrowed in the belief that land prices would stay high. The result was protracted economic weakness.  And the policy response was too little, too late. The Bank of Japan was always behind the curve and persistent deflation took hold. The government propped up employment with public works programs, but its efforts were never focused enough to start a self-sustaining recovery. Banks were kept afloat, but were slow to face up to bad debts and resume lending. The result of inadequate policy was an economy that remains depressed to this day.  Like their Japanese counterparts, American policy makers initially responded to a burst bubble and a financial crisis with half-measures. ... The question is: What happens now?  Republican obstruction means that the best we can hope for in the near future are palliative measures — modest additional spending like the infrastructure program President Obama proposed this week, aid to state and local governments to help them avoid severe further cutbacks, aid to the unemployed to reduce hardship and maintain spending power.

To Have a Second Stimulus, Or Not to Have a Second Stimulus? What the Obama Administration Really Wants - On Thursday afternoon, press secretary Robert Gibbs announced at his daily briefing that "a big, new stimulus plan is not in the offing." A few hours later, the Washington Post reported that administration officials were talking about a second stimulus after all--that it would might include a payroll tax holiday and some sort of tax break for business, and that it might be in the “hundreds of billions” of dollars. The White House Press Office quickly issued a quasi-denial: “There have been a lot of reports and rumors on different options being considered--many of which are incorrect. Meanwhile, at around the same time, Politico posted its own story on internal deliberations: “The Obama administration is mulling a raft of emergency fixes to stimulate the economy before the midterms, Finally, following this morning’s jobs report, President Obama announced that “I will be addressing a broader package of ideas next week. We are confident that we are moving in the right direction, but we want to keep this recovery moving stronger and accelerate the job growth that’s needed so desperately all across the country.” What’s really going on here?

Text of Obama’s Remarks on the Economy - Here is the text of President Barack Obama’s remarks on the economy as prepared for delivery at 2:10 p.m. EDT in Cleveland. It was released by the White House.

Latest Obama Economic Plan : Long on PR, Short on Economic Reality” - I participated in the White House Blogger conference call today, as a stand-in for the traveling Yves. The call was run by Jason Furman, the deputy director of the National Economic Council, who provided a brief recap of President Obama’s speech earlier in the day. The stated purpose of the call was to emphasize the importance of the Administrations three economic initiatives: a R&D tax credit, a $50 billion infrastructure investment and change in the tax code to all businesses to frontload their deductions for capital investments. Mr. Furman emphasized that the Administration had been working hard from the outset to bolster the economy and that these initiatives were a stark contrast to the “failed policies” of the past administrations. His prepared remarks were less than five minutes long and then he opened the call to questions.While I appreciate the Administration’s efforts to broaden the reach of their communication, I must confess to feeling a bit let down by the presentation.

What Is President Obama’s Fiscal Message? - By Simon Johnson - President Obama is finally attempting to cut through some of the disinformation and confusion that surrounds US fiscal policy in general and taxes in particular.  His suggestion this week is: let’s (effectively) raise taxes on relatively high income people – by letting the Bush tax cuts expire for those people – while introducing temporary tax breaks that will more directly stimulate business investment and presumably hiring.  Any way you cut it, the numbers involved are not big enough to impact unemployment significantly by November, but these ideas – and the Republican rival suggestions currently on the table – are more about symbols, messages, and midterm votes than about accelerating the economic recovery.  Seen in those terms, the president is still missing a key argument in both economic and political terms.

Ezra Klein - People don't listen to the president To read pundits talking about presidential speeches, you'd think there was a statute requiring every American to watch every presidential address and then score a 75 percent or higher on a quiz testing their listening skills. In fact, pretty much no one watches presidential speeches. Obama's 2010 State of the Union got 48 million viewers. His Iraq speech last week grabbed about 29 million of the country. Most of the others speeches get much smaller shares. No one, as far as I can tell, pays attention to the weekly radio address, or the average midday remarks.

Fiscal policy: Build America | The Economist - Most of the current popular proposals focus on tax cuts—for small businesses or of payroll taxes. As the discussion proceeds, however, I'm reminded of one of the great and continuing mysteries of the policy response to the recession: why hasn't the administration pushed for a major infrastructure investment programme? The government hasn't been entirely absent on this score. The stimulus passed last year contained just over $100 billion in funding for infrastructure projects. But the scope for additional investments is tremendous. One particular portion of the stimulus—the Transportation Investment Generating Economic Recovery, or Tiger, grants—allocated $1.5 billion to be handed out on a competitive basis to individual transportation projects. The programme was massively oversubscribed; applicants requested 38 times the money allocated for the programme, and many deserving projects failed to get funding. The infrastructure investment in the stimulus only scratched the surface of what the country could use.

Obama Calls for $50 Billion Public Works Plan -President Obama, looking to stimulate a sluggish economy and create jobs, called Monday for Congress to approve major upgrades to the nation’s roads, rail lines and runways — part of a six-year plan that would cost tens of billions of dollars and create a government-run bank to finance innovative transportation projects.  With Democrats facing an increasingly bleak midterm election season, Mr. Obama used a speech at a union gathering on Labor Day, the traditional start of the campaign season, to outline his plan. It calls for a quick infusion of $50 billion in government spending that White House officials said could spur job growth as early as next year — if Congress approves.  That is a big if. Though transportation bills usually win bipartisan support, hasty passage of Mr. Obama’s plan seems unlikely, given that Congress has only a few weeks of work left before lawmakers return to their districts to campaign and that Republicans are showing little interest in giving Democrats any pre-election victories.

Obama’s Economic “Plan”: Ten Times Less Than Adequate and Far, Far Too Late - As already noted by David Dayen, things have been moving fairly quickly today on how the Obama Administration will address the economy as we embark on the final two months leading up to the November elections. First, Dayen noted that John McCain has been given an elevated platform once again, from which he is pushing for extending the Bush tax cuts for the rich. Shortly thereafter, Dayen found that Obama appears to have abandoned the idea of a large payroll tax holiday, but will instead roll out a plan for a very modest infrastructure building program. As a guide to evaluating the ideas and plans that will be tossed about in the next few weeks, it is informative to go back to the time of the original Obama stimulus plan. Paul Krugman provided a very brief but penetrating analysis of the plan as it was nearing its final form

Feasible Stimulus Politics ? - Obama proposes an additional $ 50 billion for infrastructure. He ignored my proposal to mail a $ 500 check to every US family this month. The proposal is better policy than my proposal. If implemented it wouldn't help Democrats in November, since it would start next year.  My guess is the plan is to have Republicans block the bill, scream about the deficit and insist on extending tax cuts for the rich. I think Rich vs non-rich is much better politics and that the vast majority who don't know they already got a tax cut in the ARRA (stimulus) would notice a check in the mail. At least the Obama administration is seeking a fight. Until recently, they were embracing the idea of a payroll tax holiday. This is also fine policy, but it is a Republican proposal.

One Small Step for Recovery, One Giant Leap Still Needed - Electoral disaster has a way of focusing the mind. Perhaps this is the best way to explain President Obama’s latest initiatives: an investment in the nation’s roads, railways and runways that would cost at least $50 billion, along with a permanent extension of the research and development tax allowance, which represents a further $200 billion in tax breaks for businesses. All well and good, although it remains to be seen whether Obama’s journey represents a genuine conversion on the road to Damascus, or another detour into a fiscal cul de sac of the kind that has long characterized his Presidency. Sure every little bit helps, but if the $787 billion package introduced in March 2009 wasn’t sufficient to bring unemployment down, is $50 billion more in infrastructure spending really going to make up the difference? As for the R&D and bonus depreciation tax credits: nice cosmetic gestures to a business community that is coming to view this President as “anti-business”, but it remains the case that firms will only borrow, produce, invest, and employ now if they feel they will be able to sell the output in the future.

Infrastructure - Krugman - Some bleary-eyed thoughts from Japan on the reported administration proposal for $50 billion in new spending: 1. It’s a good idea 2. It’s much too small 3. It won’t pass anyway — which makes you wonder why the administration didn’t propose a bigger plan, so as to at least make the point that the other party is standing in the way of much needed repair to our roads, ports, sewers, and more– not to mention creating jobs. Once again, they’re striking right at the capillaries. Beyond all that, the new initiative is a chance for me to air one of my pet peeves: the stupidity of the claim, which you hear all the time — and you’ll hear again now — that it’s always better to provide stimulus in the form of tax cuts, because individuals know better than the government what to do with their money. Why is this claim stupid? Because Econ 101 tells us that there are some things the government must provide, namely public goods whose benefits can’t be internalized by the market.— and anyone who tells you that basic economics settles the question, that is says that devoting more resources to production of private goods is better, doesn’t understand Econ 101.

Smart policy: Mr. Obama’s plan for an infrastructure bank - PRESIDENT OBAMA'S Labor Day proposal to create a national infrastructure bank and accelerate infrastructure spending may or may not be good politics. It certainly would be good policy, both short- and long-term. The proposal, which would require congressional approval, will not create jobs right away, but it has become painfully clear that slow job growth is a problem that will take years to resolve. Front-loading the spending so that $50 billion would be available quickly is a sensible idea in this environment. In the construction industry, the unemployment rate is 17 percent, almost double the national average, and at risk of growing even higher as stimulus spending peters out. To dismiss this proposal, as did House Minority Leader John A. Boehner (R-Ohio), as "more of the same failed stimulus spending," misunderstands both the effectiveness of the current spending and the particularly useful nature of infrastructure investment, which is not dependent on consumers' decisions to spend rather than pay down their debt.

The wisdom to delegate - My colleague at Democracy in America is not fond of the idea of a National Infrastructure Bank, which would consider transportation projects on a merit basis and which is designed specifically to get legislators out of the transportation planning business. He writes: Now, I certainly understand the desire to insulate one's own cherished pet projects from the vicissitudes of the democratic appropriations process. However, an argument for withdrawing matters of infrastructure, of all things, from the domain of democratic authority suggests equally persuasive arguments for similarly immunising defence spending, entitlement spending, spending on subsidies to "strategic" industries, etc. If we generalise Mr Pearlstein's reasoning, we end up with, at best, a ruthlessly rational and efficient Singapore-style technocracy, which wouldn't be so bad, but isn't anybody's idea of liberal democracy. More likely, we would end up with a system even more corrupt, corporatist, and inefficient than the one we've got, but with fewer of the protections afforded by democracy.

Top Democrats Throw Cold Water on Obama’s Jobs Plan - House Democratic leaders are already writing off President Barack Obama’s $50 billion infrastructure proposal, saying that GOP opposition will likely doom any major bills on tap before the November elections. House Majority Leader Steny Hoyer (D-Md.) said Tuesday that Democrats are looking at Obama’s proposal to pass “additional legislation to invest in infrastructure,” but he warned, “It will be very difficult to get a very broad agenda through ... because Republicans’ obstructionism has, in effect, not allowed us to do some of the job-creating actions that we want.”  The most likely scenario over the coming weeks is action on a continuing resolution to keep the government funded past the end of the fiscal year, along with a continued push for passage of the small-business jobs bill that has stalled amid Senate GOP opposition,

Infrastructure Spending Is Not A Boondoggle - One of the biggest problems in talking about the importance of and the need for infrastructure spending is that people who argue against it almost never look at maps. Let's paint a hypothetical picture. There are two cities, A and B. Both cities have complementary economies -- that is, the economy of A provides goods and services that would increase the productivity of economy B and/or vice versa. Or, suppose we have the far more likely case where both economies complement various parts of the other. How are goods and services going too move between these two cities? The standard Libertarian answer to this question is to let private industry do it. However, in a country as large as the US that would require trillions of dollars -- an amount of money far out of reach of even the largest companies. To draw this example into the real world, here is a map of Texas' (my home state) rail lines:

Business Groups Target Higher Energy Taxes - Business groups are cranking up a multi-state TV and radio campaign today to make the case against the Obama administration’s plan to raise energy taxes to pay for some of its new economic initiatives.  The business groups, including the National Association of Manufacturers and the National Federation of Independent Business, worry that higher energy taxes would force up prices and make their members less competitive. In the face of continued economic weakness, President Barack Obama has rolled out a series of proposals this week for more public infrastructure spending, permanent extension of a current tax break for business research, and creation of a new temporary tax break for business purchase of plant and equipment. White House officials have said they want to eliminate some tax breaks for oil and gas companies to pay for the infrastructure initiative, but they say those changes won’t affect the international price of oil.

Rearranging The Deck Chairs - Listening to the "news" and reading the usual sources on the internet has become surreal as the summer winds down. The key word lately is infrastructure. The President and the Democrats launched some initiatives that have no chance of being approved by Congress because they have to run for re-election on something, especially with underemployment the highest it's been since World War II.  The details of the plan will come as no surprise to DOTE readers—  Specifically, the president wants to rebuild 150,000 miles of road, lay and maintain 4,000 miles of rail track, restore 150 miles of runways and advance a next-generation air-traffic control system. Oh, my! If you require additional proof of the utter bankruptcy of political thinking in the United States, you need not look any further than this.  My recent post Ass Backwards America described the tragic state of public transportation in the United States. I wrote it up before Obama's proposal, and here's what I said

Rearranging The Deck Chairs — Part II - In yesterday's post Rearranging The Deck Chairs, I alluded to the surreal quality of the current debate about Obama's proposed stimulus program to rebuild America's roads & highways infrastructure. But the debate about letting the Bush tax cuts expire is even more bizarre. The entire discussion is taking place without its proper context—the grotesque wealth & income inequality in the United States. Instead, the arguments center around future deficits, stimulating spending to achieve economic growth, the economic effects of taxes, etc. Talk about rearranging the deck chairs on the Titanic! First, let's get the facts out of way. The Bush tax cuts were enacted in 2001 and 2003, and are due to expire at the end of this year. About 40% of the benefits went to "the tiny sliver of Americans earning over $500,000." If the tax cuts are reinstated, Greg David tells us what will happen

$600 Billion – Krugman - Oy, it seems that another out-of-context quote of mine is being used to claim that I thought the Obama stimulus plan was just dandy. So: back in 2008, I wrote this piece in which I called for stimulus of 4 percent of GDP, or $600 billion. Didn’t we get that, and more? No. If you read the actual argument — which explains in detail how I arrived at the number — you’ll see that I was thinking in terms of a one-year program; $600 billion is 4 percent of one year’s GDP. I wasn’t clear about the issue of stimulus spread out over 2 years; but if you apply the math in that post, you’ll see that it implies a two-year program twice that size, which was just about what Christina Romer concluded was appropriate. And by January it was already apparent that the slump was going to be deeper than I expected when I wrote that original post.

The "Ever-Expanding" Government Sector, Illustrated: Just some numbers to bring reality into the general discussion:

CHART OF THE DAY: A Huge Chunk Of The Old Stimulus Hasn't Even Hit The Economy Yet - Despite talk about how the U.S. economy will soon lose the support of economic stimulus, or that stimulus 'hasn't worked', U.S. fiscal stimulus for the economy is far from finished, and this doesn't even consider additional measures being debated. This is because a large chunk of the 'old stimulus' hasn't even hit the economy yet. As shown below using data from ProPublica, 35% of the government's $790 billion original fiscal stimulus program (started in early 2009) is still on the way. 'Tax cuts remaining' and 'stimulus money either unspent or in progress' total $278 billion dollars. This $278 billion will likely be delivered by the end of 2010, and it's a huge sum for just four months. Thus the remainder of 2010 will continue to be supported by stimulus, and investors should take note. 2011 is when the economy will lose its training wheels, though an additional round of economic initiatives currently being debated could push the timeline back even further.

On the demand and the supply side: The stimulus debate - The flaming debate on how to steer the economy forward and avoid America’s “Japanification” has been dominated by two seemingly irreconcilable camps: On one hand we’ve got the demand-side guys, who claim that Japan’s “lost decade” of the 1990s was the result of a spineless government policy reaction to the post-bubble reality... ergo the US can avoid becoming Japan by keep on stimulating itself with fiscal and monetary measures until private demand recovers. On the other hand, we’ve got a bunch of supply-siders, who attribute Japan’s quagmire to the drop in Japan’s total factor productivity (TFP) 1/—a shock in the face of which demand-side policies are impotent. The two schools of thought are irreconcilable only insofar as they are driven by the blind ideology of those expressing them; in economic terms, they are not. Here, I’ll start form Japan and notably with the observation that TFP growth did in fact decline during the 1990s. (See here and here).

Public Goods and Countercyclical Fiscal Policy - I just want to point out that the idea of "public goods" and the need for government to provide them has been lost in discussions over stimulus spending. A previous post quoting Richard Green makes the basic case that, recession or not, spending on public goods can have benefits that exceed costs:...what if the cost to borrow for the bridge is 3 percent and the bridge's IRR is 5%? Then doesn't the bridge stimulate spending for the simple reason that it is a good investment? When interest rates are low and resources such as labor are idle, costs are low, and the cost-benefit calculation is more favorable. Duncan Black has been banging this drum: Beware Of The Bond Vigilantes, by Duncan Black:10-year Treasury at 2.51. As I keep saying, at rates this low it's a crime not to borrow crazy amounts and spend it on supertrains and fixing bridges and whatnot.

Death By Globalism - The main feature of the current issue is “The Great Stimulus Debate.” Is the Obama fiscal stimulus helping the economy or hindering it?  If one overlooks the real world and the need of life for sustenance, one can become engrossed in this debate. However, the minute one looks out the window upon the world, one realizes that cutting Social Security, Medicare, Medicaid, food stamps, and housing subsidies when 15 million Americans have lost jobs, medical coverage, and homes is a certain path to death by starvation, curable diseases, and exposure, and the loss of the productive labor inputs from 15 million people. Although some proponents of this anti-Keynesian policy deny that it results in social upheaval, Gerald Celente’s observation is closer to the mark: “When people have nothing left to lose, they lose it.”

Stimulus and Payroll Holiday: Some Back of the Envelope Calculations - Megan McArdle doubts that we could have possibly had a stimulus big enough to restore full employment ...let’s take the CBO’s estimates as representing a rough consensus of those who favor stimulus:  for our $800 billion, we got a reduction of 0.7 to 1.8 percentage pointsFull employment is perhaps 4.5-5%.  If we assume that stimulus benefits increase linearly, that means we would have needed a stimulus of, on the low end, $2.5 trillion.  On the high end, it would have been in the $4-5 trillion range. Importantly, however, even to date not all stimulus funds have been spent. Propublica, estimates that only $289 Billion of the spending dollars have gone out and only $223 Billion in tax cuts have gone out since ARRA passed nearly a year and half ago. This is why I initially argued against spending as stimulus and instead for a full payroll tax holiday. I didn’t dispute the basic model predictions that spending multipliers tend to be bigger than tax cut multipliers. 

Economic Policy and Politics - My roots are in Canada where, as far as I can tell, we are all socialists. In Canada, liberal is not a pejorative. Indeed, we capitalize that word, apply it to a political party, and sometimes have those people run the country. Is there some case for a fiscal policy initiative that we could construct based on the particulars of the financial crisis? If we think that a key source of our recent problems is a temporary increase in credit market frictions, one approach might be a pure Ricardian one. When there are credit-constrained economic agents, a temporary tax cut for everyone, with a promise to pay off the resulting debt with higher future taxes, is effectively a large government credit program. It does not require any new government bureaucracy, and just works through the existing income tax mechanism. Those who are credit constrained spend the tax cut as if they were getting a loan, and work harder or consume less in the future so as to pay the higher future taxes, as if they were paying off the loan. Those who are not credit-constrained save the tax cut so as to pay their future taxes. There are no long-run implications for the government budget. Why didn't we just do that?

Obama to Push Tax Break for Business Investment - President Barack Obama, in one of his most dramatic gestures to business, will propose that companies be allowed to more quickly write off 100% of their new investment in plants and equipment through 2011. The president is proposing that companies be allowed to write off 100% of new investment in plants and equipment through 2011, a plan White House economists say would cut business taxes by nearly $200 billion. Companies can now deduct new investment expenses, but over a longer period of time—three to 20 years. The proposed change, which would let companies keep more cash now, is meant to give companies who may be hesitant to invest an incentive to expand, acting as a spur to the overall economy.

Reactions to Obama's Business Tax Write-Off Proposals - President Obama is proposing a tax write-off for businesses. It would allow companies to deduct the full value of new equipment purchases from their taxes through 2011, with the intention of increasing demand for new equipment and hopefully creating jobs to go along with those new capital investments. The proposal is generally supported by businesses, but has had a mixed reception from economists and political commentators. Here are some reactions from the econoblogosphere: Martin A. Sullivan, contributing editor, TaxAnalysts: “The first-year write off of plant and equipment — known as “expensing” — has long been a dream of the business community. But it will probably win Obama little support because of its temporary nature… The Goldman Sachs economics team: “Our previous analysis indicated that the 50% bonus depreciation provision effective for 2008 and 2009 had a relatively small effect on investment. To the extent it does have an effect, it is likely to pull forward demand into the quarter just before expirationGreg Mankiw, Harvard professor: “This is a good idea.  People are feeling poorer and more uncertain about the future.  The rational response is greater saving.  The trick to restoring aggregate demand and full employment is to channel that saving into investment.  Ryan Avent, The Economist: “This could potentially be quite big. The immediate budgetary cost would be about $200 billion, which would represent direct support to business finances, and the measure would create a strong incentive for firms to make investments now. Robert Reich, Berkeley professor and former Labor Secretary: “The economy needs two whopping corporate tax cuts right now as much as someone with a serious heart condition needs Botox.

Small Business to Obama: Tax Cuts Wont Work - The Obama administration has targeted small business with laser-like focus, pushing a $30 billion small-business lending fund in Congress and, later this week, rolling out a tax break allowing businesses to deduct 100% of qualified capital investments. But the chief economist at the National Federation of Independent Businesses said today that small business doesn’t need more tax relief. Instead, he said, Washington should aim its firepower at consumers so they begin spending money and creating demand for the products and services small companies provide. “If you give a small business guy $20,000 he’ll say, ‘I could buy a new delivery truck but I have nobody to deliver to,’” said William Dunkelberg, chief economist for NFIB. Rather than aim more tax relief at business, Dunkelberg said Washington should extend the Bush-era tax cuts for everyone – including those making above $250,000.

John Boehner's stale 'two-step job creation plan' Minority Leader John Boehner is proposing what his members are calling a "two-step job creation plan." The two steps? Pass a budget that costs only as much as the 2008 budget, and extend the Bush tax cuts for everyone, including the wealthiest Americans.  So on the one hand, a measure that will make a small dent in the deficit. On the other hand, a measure that will lead to a huge increase in the deficit. There's no theory of the economy in which this really makes sense: If the market is worried about the government's finances, this makes them worse, not better. It's also worth noting that these policies are both stale: The Bush tax cuts are ... tax policy from 10 years ago, designed to deal with a very different set of circumstances. ... Our economic situation has changed dramatically in the past few years. Don't Republicans have any fresh thinking on what to do about it?

Boehner’s Two-Step Job Destruction Plan - Ezra Klein rightfully criticizes what he calls John Boehner's stale 'two-step job creation plan' as something that could lead to larger long-term deficits. But let’s look at what the likely effects would be for the current weak economy. Step 1 would be to roll back Federal spending by almost $100 billion per year.  The difference in what Boehner as his step 2 is proposing versus the President is proposing amounts to a difference in tax collections from the very rich that is less than $100 billion per year. If we took the Peter Orszag proposed political compromise and extended these tax cuts for the very rich for only a couple of years, we would have a temporary tax cut for the well to do who are not likely liquidity constrained The life cycle model says most of this will be saved with very little aggregate demand impact. The Ricardian Equivalence extension of this model says all of it will be saved with zero aggregate demand impact. Combining the two steps – we would clearly have a reduction in fiscal stimulus and hence a reduction in aggregate demand. The Boehner proposal is therefore not a job creation plan but rather a recipe for another recession

CNNMoney Fails Introductory Macro - OK – I just ripped off the title of Peter Dorman’s ripping of Peter Orszag’s NYTimes oped but how else can you describe the CNN/Money piece entitled Boehner unveils his own plan to aid economy?. Boehner and other GOP leaders propose to cut government spending which would deepen the recession. How can any reporter say this is an aid to the economy? Could at least one reporter have the intelligence and integrity to entitle such a piece Boehner unveils his own plan to screw economy? If you any decent reporting on such GOP gibberish – let us know.

Tax Cut Smackdown: Obama v. Boehner (and Orszag)- The outlines of the Great Tax Debate of 2010 are coming clear. Yesterday, President Obama insisted on permanently extending the 2001-2003 tax cuts for those making less than $200,000 while allowing those aimed at the highest earners to expire at the end of the year. By contrast, House Republican leader John Boehner (R-OH) said he wants Congress to temporarily extend the Bush-era tax cuts for everyone. Boehner took his cues from an op-ed in Tuesday’s New York Times by Peter Orszag, Obama’s former budget director, which included a similar proposal for the next two years. First, while fun, this argument is not all that important. A ‘permanent” tax cut is a fiction. No tax cuts are forever. Congress amends the Internal Revenue Code annually, and sometimes more than once a year. Since World War II, it has done a major overhaul about once a decade, and is overdue for its next renovation. And given massive budget pressures, one is likely to come sooner rather than later.And when it does, the entire Code will be in the mix, notwithstanding what it permanent and what is not.

Boehner Proposal Cuts Non-Security Discretionary Programs 22%the Deepest Such Cut in Recent U.S. History - Tax-Cut Part of Plan Designed to Achieve Opposite of Orszag Fiscal Goal  - CBPP - House Minority Leader John Boehner Wednesday issued a proposal to cut funding for non-security discretionary programs and to extend all of the Bush tax cuts for two years. He portrayed the proposal as a bipartisan compromise. Closer examination shows, however, that this is a radical plan that reflects deeply conservative ideology.

In The Long Run, Some Of Us Are Very, Very Confused - Krugman - Brad DeLong has some fun with Megan McArdle acting as if using present values to compare costs at different dates were some weird leftist idea. But it actually gets funnier: she asserts that  the only reason the two numbers look even remotely similar is that they’re using a present value calculation and a very long time frame which is right, but not in the way she thinks: if you use a shorter time frame, say 25 years, there isn’t any Social Security shortfall at all! But there’s an issue here a lot broader than Ms. McArdle, involving time horizons and the convenient way they shift among those on the right. The basic position here is that people on the right favor high-end tax cuts that will worsen the deficit, while at the same time demanding both immediate fiscal austerity and cuts to Social Security, in the name of deficit reduction. They justify their tax cuts/austerity position by arguing that what’s important is holding down current deficit numbers, never mind the 10-year outlook.

In Which I Sort of Agree With Paul Krugman - Megan McArdle - Paul Krugman writes: Brad DeLong has some fun with Megan McArdle acting as if using present values to compare costs at different dates were some weird leftist idea. But it actually gets funnier: she asserts that the only reason the two numbers look even remotely similar is that they're using a present value calculation and a very long time frame which is right, but not in the way she thinks: if you use a shorter time frame, say 25 years, there isn't any Social Security shortfall at all! Had Paul Krugman read the blog, he would have noted that I made this very observation about Social Security!  Sort of.  Since there is, in fact,  a Social Security shortfall right now.  At least from the point of view of the US federal unified budget--which is, of course, the only context in which comparing the Bush tax cuts to Social Security makes sense.  Since the Bush tax cuts won't cost the Social Security administration anything!

Obama to Pitch Making Research Tax Credit Permanent - As part of his pre-election push to spur the slumping economy and his party, President Obama this week will ask Congress to increase and permanently extend a popular but costly tax credit for businesses’ research expenses, and to pay for it by closing other corporate tax breaks, according to administration officials.  Besides seeking a permanent research credit, Mr. Obama will call for expanding the simpler of two credit options available to businesses. He would increase that to 17 percent from 14 percent.  The research credit, which has existed in some form since 1981, has strong bipartisan and business support.

Goolsbee to Be Named Chairman of Economic Advisers - Mr. Obama’s decision to elevate Mr. Goolsbee, a left-of-center economist, to succeed Christina D. Romer, who returned this month to the University of California, Berkeley, is part of a broader flux within the White House economic team, as architects of the government’s response to the worst recession in 80 years begin moving up and out and their roles shift.  Mr. Goolsbee has been serving as a member of the three-person advisory panel since the beginning of the Obama administration.  No other major changes are expected, officials say, reflecting a theme the president sounded on Wednesday Republican leaders in Congress, and a few endangered Democrats seeking to distance themselves from the White House before the midterm elections, have called for Mr. Obama to fire his top advisers, including the Treasury secretary, Timothy F. Geithner. But Mr. Geithner, who did not know Mr. Obama previously, has become one of the president’s most trusted advisers, credited with successfully managing the financial bailout and recovering most of the taxpayers’ money. He is expected to remain for some time.

Austan Goolsbee to CEA - BARACK OBAMA will tap his long-time economic advisor Austan Goolsbee to replace Christina Romer as head of the White House's Council of Economic Advisers. Mr Goolsbee was already a member of the panel, and the promotion seems partially designed to emphasise continuity. Many will be looking at Mr Goolsbee's background for hints of how policy may change. The Wall Street Journal provides a helpful summary

What Can Goolsbee’s Early Academic Work Tell Us About the R&D Tax Credit? - JW Mason has a great find and post about the R&D tax credit that made me laugh: Goolsbeeism. Obama to propose $100 billion permanent extension of research and development tax credit. Meanwhile, speculation is growing that Austan Goolsbee is the favorite to replace departing CEA chair Christina Romer. Looks like Goolsbee is the perfect pick to succeed Romer — his advice is already being ignored even before he’s been hired. From his Investment Tax Incentives, Prices, and the Supply of Capital Goods:

Will Obama's Economic Medley Work? - Obama's new economic recovery brew—a mix of business tax breaks, tax credits for research and development, and infrastructure spending—is dominating the headlines this week. The plan is both a political and an economic gamble—a bet that spending on roads and airports combined with tax breaks will lift both the economy and the Democrats before the fall elections. But will Obama's economic medley work? A little bit, says Mark Zandi, a former John McCain adviser and chief economist at Moody's Analytics. Zandi told the Washington Post that Obama's proposals are "helpful on the margin to the recovery. But they're not a game-changer."  Marshall Auerback, a over the Daily Beast, is a little more optimistic about the economic package's chances. He predicts the package will create "some jobs," and praised Obama's decision to embrace yet more government spending to get the recovery moving along again. "At least he's now practicing stimulus!" Auerback writes. "Within 48 hours, he has re-focused the recovery around fiscal policy, rather than publicly fretting about deficits."

Why Obama Is Proposing Corporate Tax Cuts, Why He's Wrong - President Obama reportedly will propose two big corporate tax cuts this week.  One would expand and make permanent the research and experimentation tax credit, at a cost of about $100 billion over the next ten years. The other would allow companies to write off 100 percent of their new investments in plant and equipment between now and the end of 2011 at a cost next year of substantially more than $100 billion (but a ten-year cost of about $30 billion since those write-offs wouldn’t be taken over the longer-term).  The economy needs two whopping corporate tax cuts right now as much as someone with a serious heart condition needs Botox.   The reason businesses aren’t investing in new plant and equipment has nothing to do with the cost of capital. It’s because they don’t need the additional capacity. There isn’t enough demand for their goods and services to justify it.

Taxes, Deficits and Elections - Obama and the Democrats, of course, are not immune to suasion in the face of potential election losses.  So as the GOP party of "no" continues its push to provide tax cuts for the wealthy or bust, and the tea partiers continue their push to paint all of the effort that has been necessary to combat the terrible mess that the Bush regime left the country in as Obama's problem rather than a predictable result of the lousy economic policies followed by the GOP "believers" in market fundamentalism and greed-is-good philosophy, it is not such a surprise that the Democrats are adopting GOP-favored tax policies that benefit big corporations and the wealthy to the detriment of the fisc.  Case in point-- Obama has come out for an expensing deduction for big corporations.  This is essentially a huge multi-billion tax write-off, even if temporary.   It would cost about $200 billion upfront, though after taking otherwise allowable depreciation into account, there'd be a net cost of $30 billion (plus the fact of acceleration of losses to the fisc).  See Jackie Calmes, Obama to Propose Tax Write-Off for Business

Tax Cuts May Be Good Politics but Poor Stimulus - NYTimes - News Analysis - President Obama is advocating a mixed bag of tax proposals. He wants to extend the cuts for all but the wealthiest 2 percent of Americans and offer businesses hundreds of billions in breaks and write-offs intended to encourage investment and hiring. Republicans, and a few Democrats, assert that the Bush tax cuts should be extended for everyone, warning that a tax increase right now, even if limited to the highest income bracket, would hurt small businesses and choke off an economic recovery that is already gasping. Given the economy’s persistent weakness and an unemployment rate hovering above 9.5 percent, those arguments have gained traction. But economic research suggests that tax cuts, though difficult for politicians to resist in election season, have limited ability to bolster the flagging economy because they are essentially a supply-side remedy for a problem caused by lack of demand.

Obama should follow in FDR's footsteps - Roosevelt accepted the Democratic nomination in 1932 touting a plan to put a million men to work in national parks and forests. When he took office, with the unemployment rate at 24.9%, he created the Civilian Conservation Corps, his first jobs program.But it was too limited to make much of a dent in joblessness. Estimates of the number of people out of work ranged as high as 15 million. The "CCC boys," as the young men who worked out of military-style camps doing erosion control and reforestation work were known, never numbered more than 300,000 at any given time. Roosevelt continued his efforts with the Federal Emergency Relief Administration. The agency's first charge was to feed the hungry and see that they had clothes and shelter, and in tackling that mission, it put 2 million people to work by the fall of 1933 as well. These efforts still left far too many people out of jobs. As winter approached, relief administrator Harry Hopkins persuaded Roosevelt to create a temporary jobs program that would give the private economy a few more months to pick up steam. The Civil Works Administration put more than 4 million workers into jobs during the winter of 1933-34. They mostly repaired roads, parks and public buildings, but there were jobs for teachers and other white-collar workers too.

Letter to Obama: Yes We Could, But Are We? - Below the fold is a reposting of an open letter I wrote to newly elected President Obama 20 months ago (posted here as Yes We Can But Will We?). The essay touches on principles of natural capital, debt, and human demand drivers and suggested some ways forward for the then President-elect. In retrospect, I didn't understand the intricacies of our debt crisis at that time (as I now believe debt deflation and or currency reform are clearer and more present threats than resource depletion or environmental damage in upsetting the social applecart), and that large scaling of wind turbines (as I recommend below) may in many ways be counterproductive unless that plan is accompanied by an entirely different economic system and expectations. I don't think Obama, 20 months in, has done much, but I still think he will be able to, even after a mid-term election setback, accomplish more than any likely successors might as far as radical positive steps.

Should the Bush tax cuts be extended? As recently as July, Barack Obama was planning on allowing the cuts for top tax brackets to expire and was hoping to make Republican support for a full extension—and deficit hyposcrisy—a focus of the fall Congressional campaigns. But things look less clear now. The American economic recovery is in a fragile state. The default path for fiscal policy, based on scheduled expirations of various tax measures including the Bush tax cuts, is for a near-term tightening of fiscal policy of about 2.5% of GDP. Suddenly, any new fiscal burden seems like a dangerous thing to lay on the American economy. The Congressional Budget Office has estimated the cost of the cuts over the ten years to 2011 at $1.7 trillion...And yet: The CBO’s “baseline” budget forecast, which assumes that the cuts do indeed expire as planned, sees the deficit falling from 9.1% of GDP in 2010 to 2.5% in 2014. A full extension of the Bush tax cuts would increase the shortfall in 2014 to 4.1% of GDP (see chart) and would produce a total budgetary cost of $3.3 trillion over the next decade. That seems completely unaffordable.

The Bush Tax Cuts and Infrastructure Spending - The Economist asks: Should the Bush tax cuts be extended? Here are the answers, including one from me:

Tom Gallagher Yes, but only for a short period
Michael Bordo Yes, their benefits outweigh their costs
Alberto Alesina Maintain the cuts and reduce spending to trim deficits
Guillermo Calvo Yes, as the rich will drive recovery
Mark Thoma Only some, and the saved revenue should be recycled
[All Responses.]

Given the reports this morning that the administration's is about to propose a six year plan to rebuild infrastructure, I may want to rethink this part of my answer on what to do with tax revenue gained from allowing high end tax cuts to expire: I still think that Congress is unlikely to go along. As for the proposal itself, here are a few details: Obama to unveil infrastructure plan, Reuters via FT:

Considering Better Alternatives to Extension of the Bush Tax Cuts for More Stimulus - The key word in the title of this post, from my perspective, is “alternatives”–not “additions.”  The Obama Administration is reportedly considering some new proposals for a variety of business tax cuts that they believe would be particularly effective in creating jobs quickly.  As the AP’s Julie Pace reports:— Seeking ways to spur economic growth ahead of the November elections, President Barack Obama will ask Congress to increase and permanently extend research and development tax credits for businesses. The motivation for this longer-term cut in business taxes is probably largely political, because while there are other types of tax cuts or spending that would be more effective as true “stimulus” in increasing aggregate demand immediately, these types of permanent business-side tax cuts are less likely to be opposed by Republicans, even if they are deficit-financed (or maybe even especially if they are deficit-financed).

Again with the Small Business Myth - Kevin Hasset and Alan Viard took another run at arguing that small business will be crippled if the Bush tax cuts expire for individuals earning above $200,000 and families with incomes above $250,000. I've looked into this before, as have others, and the argument is thin.  But first, let's back off the romance about small business a bit.   Small companies are a big part of the economy.  They're also an important source of dynamism, if only because they start up and shut down so rapidly.   But small business is also just a form of organization, not inherently better than big corporations. Think about it: is someone who makes $500,000 a year as the owner of a McDonald's franchise more vital to the economy than a senior VP at McDonald's who makes the same amount?   And let's be honest: many small businesses are a lot  worse than big corporations in how they treat their employeees.   

Ezra Klein - Extending the Bush tax cuts for all Americans is unpopular - Here's a statement that isn't true: The American people want Congress to extend all the Bush tax cuts. The political system acts like it's true. The media often does the same. But here's Gallup: -- A majority of Americans favor letting the tax cuts enacted during the Bush administration expire for the wealthy. While 37% support keeping the tax cuts for all Americans, 44% want them extended only for those making less than $250,000 and 15% think they should expire for all taxpayers.Meanwhile, the majority of Republicans want the tax cuts extended for all taxpayers, regardless of their income level. Independents' views fall between those of the two groups, but a majority (56%) would seem to endorse the idea of not extending tax cuts for higher-income Americans. If anything, I think the White House's current position actually goes too far: Extending the middle-class cuts indefinitely locks in a budget with insufficient revenue. Extend the middle-class cuts for three years and, if the economy is back, reevaluate then. The key is keeping them time-limited:

$250k isn’t a lot of money if you want to shit gold dust I’m not very sympathetic to the argument that $250,000 doesn’t make you rich if you live somewhere where cost of living expenses are high. Spending your large income on expensive shit doesn’t make you not rich, it makes you someone with the privilege to buy expensive shit and choosing to do so. Living in the most expensive places in the country isn’t some natural expense you’re burdened with like a disability or disease: it’s a choice about how to spend your money. If someone making $250,000 doesn’t feel rich in Manhattan then they can just move to Queens and feel rich.  Whether you’re rich or not isn’t a state of mind, nor is it what you spend your money on: it’s a summary statistic. If you make more than 95% of the population you’re rich, even if you don’t feel rich because you’ve spent it all on goldust to sprinkle on every meal…. Oh, and saying you don’t feel rich when you make $250,000 a year doesn’t just not make you less rich, it also makes you kind of an asshole.

One Nation, Two Deficits - Peter Orszag - The nation faces a nasty dual deficit problem: a painful jobs deficit in the near term and an unsustainable budget deficit over the medium and long term. This month, the Senate will be debating an issue with significant implications for both — what to do about the Bush-era tax cuts scheduled to expire at the end of the year.  In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.  Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Trial Balloon for Obama on Bush tax cuts - Peter Orszag, who stepped down just as White House budget director just a month ago, appears to have just floated an important trial balloon on a potential Democratic strategy for the Bush tax cuts. It comes in the form of Orszag's debut column for the New York Times op-ed page, but it's probably a good indicator of where the White House would like to go.  I just posted on this for the Fiscal Times: Orszag proposes two departures from the current White House orthodoxy:

    • 1) Extend all  the Bush tax cuts for two years, even for the top 2 percent of earners – i.e., households with annual incomes above $250,000.
    • 2) Let all  the Bush tax cuts expire,  including those for middle-income households, starting in 2013.

Did Peter Orszag Really Break from the Administration's Position on Expiring Tax Cuts? - Headline writers, journalists, and bloggers are in a frenzy today over former OMB Director Peter Orszag's apparent disagreement with his former boss (Pres. Obama) over what to do about the expiring Bush tax cuts. But a closer look at what Orszag wrote in the New York Times today suggests he's merely ranking his policy preferences in a set with more than two options (and the concept of second-best). Here's what Orszag says: In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it. So let's summarize Orszag's ordering of policy preferences for short-term tax policy (next year):

Orszag Hints that Health Care Reform Bill May Not Have Significant Long-Term Deficit-Reducing Effects After All -In his now famous New York Times piece on Tuesday, former OMB Director Peter Orszag made the following statement regarding why over the medium-term, spending isn't the only way to solve the medium-term fiscal deficit problem and that revenues have to be part of the solution: How much savings is plausible on the spending side? Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries - and so would generate little savings over the next five years. The health reform act included substantial savings in Medicare and Medicaid, so there aren't further big reductions available there in our time frame. From a strict accounting perspective, the health care bill reduced the budget deficit. However, if what Orszag says is true, it's possible that the health care bill didn't really reduce the long-term budget deficit. That's because the health care bill may have "used up" a source of funding in "Medicare savings" that would have otherwise been used to finance the medium and long-term budget problems

Bush Tax Cuts: White House Rejects New Orszag Proposal - Former White House budget director Peter Orszag made the case for extending the Bush-era tax cuts for just a couple more years in a New York Times column today.  It’s “troubling,” Orszag acknowledged, that “middle-class and lower-class families would be saddled with higher taxes.” But he concluded that it is a “legitimate concern, but also a largely unavoidable one if we are to tackle the medium-term fiscal problem.”  Extending the middle-class tax breaks permanently would cost the government about $3 trillion in tax revenue over the next decade. So ending them early would preserve a huge amount of that money for Washington.  Don’t expect the White House to sign on to this plan anytime soon, however. For one thing, it would explicitly violate Obama’s often-repeated promise not to raise taxes on the middle class. And from a tactical standpoint, Obama could accept an eventual two-year extension by Congress later this year, without committing to a longer-term middle-class tax increase.

Temporary Extension of All Bush Tax Cuts Looks Like Path of Least Resistance - Ben Nelson has come out for extending all the Bush tax cuts “until Nebraska’s and the nation’s economy is in better shape, and perhaps longer, because raising taxes in a weak economy could impair recovery.” He wants to pay for the tax cuts “as much as possible” but he’s not super-concerned with it, because the tax cuts primarily affect rich people we have to bring certainty to families and businesses. By the way, the only uncertainty I see from families is whether or not they’ll have a job in the next few months.  As for whether keeping tax rates on the rich would help the economy, McClatchy takes a look at the issue, and finds that the benefit to be mild at best. If the money from those taxes were re-channeled in the short term into more stimulative measures to create jobs, that actually WOULD help the economy

The Case for a New Top Income Tax Bracket - Peter Orszag’s New York Times opinion piece has set off a flurry of discussion about whether to extend tax breaks for the wealthiest Americans and how the political fight over the Bush tax cuts might play out this fall. Policymakers’ ultimate goal is to keep the recovery going while ensuring tax revenue helps ease the deficit. A number of options are on the table, but one choice that might be popular and effective has been left out — creating a new tax bracket for very high-income earners. Democrats could, for instance, offer to create a new tax bracket for the top one percent of earners (those making more than about $410,000) or for any earners making more than $1 million. That tax bracket could pay the top marginal rate before the tax cuts, 39.6 percent, or some rate between the current 35 percent and 39.6 percent in 2011 and 2012. Then, two years from now, Democrats could end the Bush-era tax cuts for all families making more than $250,000 and individuals making more than $200,000, bringing that bracket up to 39.6 percent and pushing taxes on the highest earners up again.

Progressives Press Obama To Recess Appoint Elizabeth Warren Before Congress Returns - There are only a few days left until Congress returns to session, and that means President Obama faces a deadline, of sorts, if he wants to quickly fill vacancies in his administration. Obama has until the beginning of next week to offer recess appointments to nominees or expected nominees to positions that typically require Senate confirmation.Highlighting the progressive angst about Obama's general unwillingness to exercise his recess appointment power are new website ads, produced by the Progressive Change Campaign Committee, pressuring him to give Elizabeth Warren the top slot at the Consumer Financial Protection Bureau. PCCC has partnered with Credo mobile to petition the White House to let Warren head the CFPB.

Obama, Warren Meet; No Decision - President Barack Obama and Harvard Law School Professor Elizabeth Warren met Tuesday at the White House, but administration officials still aren’t tipping their hand as to whether the outspoken academic could be selected as the first director of the Bureau of Consumer Financial Protection. “Elizabeth Warren is a respected advocate and she was meeting at the White House Tuesday, but no decision has been made about the consumer agency,” a White House spokeswoman said. Consumer and liberal groups have pushed for months to have Warren nominated for the post, which would give her a five-year term as director. The agency was created by the new Dodd-Frank financial overhaul law when it was enacted in July, and it would write and enforce rules for things like credit cards and mortgages.

Obama Praises Elizabeth Warren and Hints Consumer Pick Near - At a White House news conference, Mr. Obama praised Elizabeth Warren, the Harvard law professor who was the chief proponent of the Consumer Financial Protection Bureau and is a front-runner to lead it. Calling her “a dear friend” and a “tremendous advocate” for the new agency, the president said he had talked with her but added, “I’m not going to make an official announcement until it’s ready.” Ms. Warren is considered a foe of Wall Street but a favorite of liberals. If she were nominated to the post it could set off a partisan brawl similar to the battles that nearly swamped the Dodd-Frank financial overhaul law Mr. Obama signed in July, which created the bureau. That position, however, is only one of a half-dozen unfilled presidentially appointed posts that have vast powers over the mortgage market, financial stability and the banking and insurance industries. The seats have been vacant even though the new law directed regulatory agencies to make scores of major decisions that will shape Wall Street and the financial sector for years to come.

Media Misses the Point on Elizabeth Warren Nomination - Politico tried to gin up some controversy about the Elizabeth Warren selection for the Consumer Financial Protection Bureau by wondering about “the delay,” and they won the morning enough to get a question about it into the President’s press conference. I would hesitate to go as far as Greg Sargent and suggest that Obama hinted at the appointment. First of all, meeting with her twice in the last month was a good enough hint. Second, the question was specifically about Warren. Third, Obama said nothing in the presser that he hasn’t already said about Warren – that she invented the concept of the CFPB, that he’s known her a long time and that she’s a dear friend. Parsing the word “official” in his line “I’m not going to make an official announcement until it’s ready” seems to me to not be worth the effort. What a legitimate reporter would have asked is why the Treasury Department hasn’t named an acting director, which they can do without Senate confirmation. Instead, we heard this weird statement about “are you concerned she wouldn’t be able to get confirmed” when she doesn’t need to be to get started.

Republican Nightmare: Putting Elizabeth Warren to Work Now - Simon Johnson - President Obama is finally looking for bold, creative, and clever ways to change the way the US economy operates – preferably with measures that will take effect by the November midterms and change the tone of the broader political debate.  His tax proposals this week have some symbolic value, but in the broader sense all of these fiscal suggestions are tinkering at the margins. What could he possibly do that would grab people’s attention, mobilize his political base, and put his opponents on the defensive?  There is an easy answer: Appoint Elizabeth Warren to start running the Consumer Financial Protection Bureau (CFPB) immediately. And the brilliant part of this idea – as explained by Shahien Nasiripour at the Huffington Post (see also David Dayen’s Thursday coverage)– is that the Dodd-Frank financial reform legislation allows the person charged with setting up this new agency to be an outright appointment, rather than a nomination subject to Senate confirmation.

New council of regulators will take aim at systemic risks… How's this for a daunting assignment: Monitor the entire financial landscape for risks that could spark another crippling crisis. Identify and supervise firms that could pose those systemic risks. And make sure they never grow so large, complex and leveraged that their failure can wreak havoc across the globe.  In a nutshell, that's the mission of the new Financial Stability Oversight Council, which in coming weeks will hold its first gathering to figure out how to accomplish those lofty goals.  Other provisions in the recently passed financial overhaul bill, including creation of a new watchdog to protect consumers, have garnered far bigger headlines. But for sheer power and reach, the council of regulators has few rivals.

Too big to liquidate is too big to live - No phrase in the debate about financial reform is more wrong-headed and pernicious than the description of certain institutions as “too big to fail”. It should be expunged from the lexicon.  No institution is too big to fail. But some institutions are too big to liquidate. Such institutions pose an existential threat to the stability of the financial system and cannot be allowed to live.Too big to liquidate, not too big to fail, is the appropriate test for regulators and policymakers to apply when deciding whether to restrict the trading activities of banks and hedge funds or to forcibly break up some of the giant universal banks.

Deep Read: ‘Traders, Guns & Money‘ - podcast & transcript - Das says when he first started working with deriatives, they were like insurance, a way for people to protect themselves from price fluctuations, but they didn't stay that way for long. Gradually what I noticed is that the other features of deriatives, because they have other features like they are purely commercial bets at one level which aren't related to whether you buy or sell the underlying commodity, so they can be used to speculate and create leverage positions which are very sensitive to price movements. That process of creating what I call risk cocktails became fundamentally more important so they became ways of taking on risk rather than actually effectively managing risk. Das thinks the global financial crisis gave legislators and regulators an opportunity to address all this speculative activity, but they missed it. In his opinion, the "Frankly A Dud Bill" doesn't address the real issue

EU Effectively Forces Securitization Reforms on the US - Yves Smith - Wow, the EU is increasingly taking steps to force foreign, meaning US and UK firms, to play by its rules or not have access to its investors. The first salvo occurred over private equity funds and hedge funds, where the EU will limit its investors to funds located in the EU, and is also limiting the ability of foreign funds to acquire firms in the EU. The latest development is that the EU is implementing a rule called 122(a) which will have a significant impact on the private securitization market. EU investors will be penalized (via much higher capital requirements) if they invest in asset backed securities that they cannot understand. And of course, to understand them, the issuer has to make pretty complete disclosure (you can’t assess in a vacuum). That disclosure in turn happens to be higher than the norm pre crisis.  A second element is that Rule 122(a) will also require issuers to retain 5% of their new issues. From Institutional Risk Analyst:

The War on Bank Profits? - The Wall Street Journal had a peculiar opinion piece today about bank regulation.  I won't pick the low-hanging fruit of its bizarre statements about potential CFPB Director nominees, but I think it's noteworthy for the revealing language it uses.  It says that Washington should "call off the war on bank profits" and allow[] banks to make profits."   The conceit of the piece is that a subset of businesses have an entitlement to be profitable.  That's deeply inconsistent with a belief in markets.  The fundamental rule of American capitalism is "Go Forth and Profit, but Fairly."  It's one thing to debate what sort of practice is fair or not.  But that's not what the WSJ piece argues.  It argues that legislation like the Credit CARD Act and the Consumer Financial Protection Act are wrong because the restrict banks' profitability.

Why regulators should be tough on bank capital - John Carney today writes about what he calls “the deeper problem” behind the Basel III negotiations: “how regulators can assess capital requirements without a functioning market process”. Ideally, he says, “we wouldn’t have regulatory capital requirements at all”, and banks would voluntarily raise their capital levels because doing so would decrease their funding costs. But in an age of moral hazard and government guarantees, that doesn’t work. But underlying all of this is the idea that there’s an art to setting an optimal capitalization ratio, so that it’s not too high and not too low. My feeling, by contrast, is that left to their own devices banks will always have too little equity and too much debt, for the reasons that Carney glosses and also just because they tend to trust each other too much, believing that in extremis they can always exit most of any given interbank position overnight.

Will Basel III really deliver? - I very much hope that Die Zeit is right about the Basel III capital requirements: the numbers being mooted there are definitely at the top end of what anybody expected. They start with a bare minimum Tier 1 capital requirement of 6%; that’s a substantial increase of 50% over the 4% minimum that holds right now. And then they get tougher. There’s also a 3% conservation buffer: essentially, if your Tier 1 capital is less than 9%, you’re constrained in what you can do; certainly you can’t pay out dividends to shareholders. On top of that, the countercyclical capital buffer is being set at another 3%, which means that in good times, healthy banks wanting to pay dividends will need Tier 1 capital of 12%. Ah, you say, but can’t they just be clever with definitions, including all manner of dodgy-looking assets as part of their Tier 1 capital? Well, yes. So there’s a parallel set of requirements for what they’re calling Core Tier 1: essentially, pure equity. That has a minimum of 5%, plus a conservation buffer of 2.5%, plus a countercyclical capital buffer of another 2.5%.

Basel III: The compromise - Maybe 9% was too good to be true after all. According to David Walker, of Australia’s Banking Day, a compromise with “nations including Germany, France, Italy and Japan” has knocked 0.5% off the proposed Tier 1 capital requirements, and another 0.5% off the proposed conservation buffer. As a result, banks wanting to pay dividends are now going to have to have a minimum of 8% Tier 1 capital, rather than 9%. If* the new ratios are strictly enforced once they become fully phased in, this is still a big improvement over what we had before, and a win for the community of global bank regulators. Still, we’re not there yet: final agreement won’t come until the G20 meets in Seoul in November. Fingers crossed nothing else will get diluted between now and then. *This of course is a big if, and Kindred Winecoff, for one, thinks that it’s hopeless to even dream that it might become reality:

More reassuring news on Basel III - Robert Peston provides the latest piece of the Basel III puzzle, adding to last night’s report from Australia: while the Tier 1 capital ratio looks set to be 8%, the core Tier 1 capital ratio — the bit which is hardest to game, and which is basically just pure equity — seems to be 7%. That number seems to be made up of a base minimum of 4%, plus a 3% conservation buffer. Peston also helps out on the way the battle lines are being drawn: while Germany, France, Italy and Japan are pushing for lower ratios, it’s the U.S., UK and Switzerland which want higher ratios: Peston says they were pushing for something between 8% and 9%. The U.S., UK, and Switzerland, of course, between them account for the overwhelming majority of the world’s global banks. So if their regulators get tough on capital rules, making it clear to the likes of JP Morgan, Barclays, and UBS that they would really like to see core equity closer to 9% than 7%, then we might even end up in a rule where the de facto global standards are tougher than the de jure Basel regulations. Which would be no bad thing at all.

Do financial statements tell the truth? - Financial statements are often referred to as “reports”. As you scan the pages, you will find neat columns of precise numbers. Financial statements look objective. Looks can be deceiving. The questions that financial statements are intended to address do not have objectively true answers. Suppose a firm builds a factory, with custom-built machinery designed to specifically to produce the firm’s product. That factory would become an asset on the left-hand side of the balance sheet. How much is that asset worth? Often in this course we will emphasize “market value”. But our specialized equipment may not be usable by other firms, so if we tried to sell it in the market, it’d be valued as scrap, and would be worth a fraction of what we paid for it. Uncertainty and bias are unavoidable in financial statements. Fortunately, the purpose of financial statements is not to whisper truth in God’s ear, but to inform human action. Since “truth” is not on the menu, long-term investors prefer that estimates be conservative.

Ultra-Rich in Finance Are Meaner Than Rest of Us - At a conference in Zurich last week, the head of Barclays Wealth Management’s private-banking unit, Gerard Aquilina, appeared to issue a red alert about the richest of clients. “Beware of the complexities of dealing with ultra high net worths,” Aquilina told his audience. “Demanding and often unreasonable” requests from them may create “impossible demands on the organization.” Such as? Help with getting children into the right school, securing credit to buy property, or obtaining last-minute concert tickets, for example. Even worse, the richest of the rich turn out to be pretty stingy as well. They don’t even want to pay the full fee for all the services they demand.  It was strong stuff. But it was also an insight into the way the rich have changed over the past decade. They are, it turns out, a nasty bunch of people who are only getting nastier. And the banking industry only has itself to blame.

Wall Street buys some new friends - In an unscripted moment during his Labor Day speech, President Obama declared that "powerful interests who had been dominating the agenda in Washington for a very long time" were not happy with him."They talk about me like a dog," he said. The nastiness is not confined to the much-remarked outbursts of overblown rhetoric from Wall Streeters. According to a new analysis of campaign finance contributions conducted by the Center for Responsive Politics, in 2010 the financial industry  sharply increased the flow of funds headed to Republicans, and decreased it to Democrats. During this year's second quarter, the finance, insurance and real estate sector pumped $28.54 million in federal-level contributions into the political system, with $16.29 million going to Republican candidates and interests, while about $12.1 million went to Democrats.At the OpenSecrets blog, Dave Levinthal writes that the "change in donation patterns coincided with congressional Democrats' aggressively pushing financial reform legislation -- legislation highly unpopular with many banks and financial houses."

Wall Street Firms to Cut 80,000 Jobs in 18 Months, Whitney Says (Bloomberg) -- Securities firms around the world will cut as many as 80,000 jobs in the next 18 months as revenue growth begins to slow, said Meredith Whitney, the former Oppenheimer & Co. analyst who now runs her own firm. The reductions, about 10 percent of current levels, will come after 2010 compensation payments, Whitney, 40, said in a report dated Aug. 31 and obtained by Bloomberg News today. The industry’s payouts will be “down dramatically,” said Whitney, who started New York-based Meredith Whitney Group after correctly predicting Citigroup Inc.’s dividend cut in 2007. “The key product drivers of Wall Street’s revenues and profits over the past decade have been in a structural decline over the past three years,” Whitney said in the report. “2010 marks the first year in many in which Wall Street-centric firms will go through structural changes.”

Will We Finally See Some Prosecutions for Lehman’s Dubious Accounting? - Yves Smith - The Wall Street Journal reports that the SEC is ratcheting up its investigation into questionable accounting practices at Lehman. Lehman has long looked to be the poster child of likely accounting fraud. I know some readers may think that Lehman is 2008’s news. That sort of learned attention deficit disorder works to the advantage of those who participated in or enabled the looting of the average person to the benefit of the banksters. And the degree of questionable behavior of Lehman was so pronounced that if regulators and prosecutors are unable to collect a scalp or two, it provides compelling evidence of deficiencies in our legal regime as far as white collar crime is concerned. And I use the word “crime” deliberately. What went on at Lehman and AIG, as well as the chicanery in the CDO business, by any sensible standard is criminal.

Something wrong with Bernanke - I caught a bit of Bernanke's testimony last week on CSpan and found it unsettling, but the general consensus may let it pass.  Okay.  Why dig up Lehman now?  Why make a fuss? Well, because we need all the confidence we can get in the Fed chair's ability to get things right.  Confidence is a key ingredient in a turnaround in the economy. But, as John Cassidy points out, confidence in Bernanke has gotten iffy.  Cassidy thinks Bernanke's little twist  and turn, his change of mind, his reliance on a legal argument to justify letting Lehman go, will do him some damage.What really happened remains an open question. But by shifting his ground at this late stage, even if only modestly, Bernanke has given more ammunition to his inquisitors, who now include many members of the Financial Crisis Inquiry Commission. When the Commission issues its report in December, I fully expect it to be highly critical of Bernanke and his fellow policymakers.

New Economic Perspectives: Is the Economy as Broke as Lehman Was? The Angelides Committee Sidesteps the Mortgage Fraud Issue - What is the difference between today's economy and Lehman Brothers just before it collapsed in September 2008? Should Lehman, the economy, Wall Street – or none of the above – be bailed out of bad mortgage debt? How did the Fed and Treasury decide which Wall Street firms to save – and how do they decide whether or not to save U.S. companies, personal mortgage debtors, states and cities from bankruptcy and insolvency today? Why did it start by saving the richest financial institutions, leaving the "real" economy locked in debt deflation? Stated another way, why was Lehman the only Wall Street firm permitted to go under? How does the logic that Washington used in its case compare to how it is treating the economy at large? Why bail out Wall Street – whose managers are rich enough not to need to spend their gains – and not the quarter of U.S. homeowners unfortunate enough also to suffer "negative equity" but not qualify for the help that the officials they elect gave to Wall Street's winners by enabling Bear Stearns, A.I.G., Countrywide Financial and other gamblers to pay their bad debts?

SEC Says Prince, Rubin Knew of Losses on Assets at Suit’s Focus (Bloomberg) -- Charles O. “Chuck” Prince and Robert Rubin were among Citigroup Inc. officials who knew 2007 losses were mounting on mortgage assets that U.S. regulators have faulted the bank for not disclosing, a court filing shows.  Prince, the bank’s chief executive officer at the time, and Rubin, who was then chairman, knew the highest-rated segments of subprime mortgage-backed securities were the source of about $200 million in new losses in October 2007, the Securities and Exchange Commission said yesterday in a filing at federal court in Washington. In July, the agency accused the bank and two other executives of failing to disclose $40 billion in subprime assets before losses surged. It didn’t target Prince and Rubin.

What can be done to slow high-frequency trading? - Would it be possible to impose a speed limit on high-frequency trading? That is the question currently hovering in the air, after Mary Schapiro, chairman of the Securities and Exchange Commission, warned this week in New York that the SEC is planning new controls following the May 6 “flash crash”. But as the debate intensifies about hyper-fast equity trades, investors and policymakers would do well to remember another point. As a fascinating paper from Andy Haldane, an official at the Bank of England* points, what makes the flash crash interesting is that it was not an isolated incident: on the contrary, it epitomises, in an extreme form, a bigger problem of speed in modern finance. And while this “speed” issue has not garnered much attention in recent years – partly because most observers assumed that speed was good – it seems that a debate is long overdue. Not only does the financial system seem to have sped up dramatically in recent years, but this trend has caused destabilisation in ways that go well beyond the “flash crash”.

Mutual Fund Cash Balances at Five Year Low - According to this Decision Point chart, mutual fund cash balances (as a percentage of assets under management) are at the lowest level in their five years of data.  The highest percentage of cash was in March 2009 (the stock market low!), and the previous lowest percentage of cash was in summer 2007 (the stock market high!). This seems to be a fantastic contrary indicator. And why wouldn't it be? If mutual funds are fully invested, who is the marginal investor?

Policy may have created the housing bubble, but which policy is to blame? - Atlanta Fed's macroblog -  There is little dispute that misguided policy choices led to the housing boom-bust cycle from which we are still recovering. The debate about which policies were most culpable, however, rages on. The latest chapter in this dispute is now available in the proceedings from this year's edition of the Kansas City Fed's Jackson Hole Economic Policy Symposium.

The True Cost of the Bank Bailout (PBS video) We all know about TARP, the Troubled Asset Relief Program, where $700 billion dollars went to bail out the banks in 2008. That money was scrutinized by congress and the media, but it turns out that that $700 billion was just part of a much larger pool of money that has gone to propping up our nation's financial system, and most of that taxpayer money hasn't had much public scrutiny at all. According to a team at Bloomberg News, at one point last year, the US had lent, spent or guaranteed as much as 12.8 trillion dollars to rescue the economy. That's trillion, with a T.

Unofficial Problem Bank List increases to 849 institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for September 10, 2010. Changes and comments from surferdude808: After six additions and one removal, the Unofficial Problem Bank List includes 849 institutions with aggregate assets of $415.3 billion, up from 844 institutions with assets of $412 billion last week. The FDIC has only closed one bank over the last three weeks - but the additions keep coming!

House Prices and Stress Tests - The following graph shows the two bank stress test scenarios compared to the Case-Shiller Composite 10 Index. The heavy government support for house prices has kept prices well above the baseline scenario. But is this good news?  With prices higher than projected, banks have taken fewer write downs than originally expected - and many homeowners have been able to refinance into Fannie and Freddie (or FHA insured) loans putting the future risk on the taxpayer. This is good news for the banks. However, since prices are still too high in many areas, the market has not cleared and there is still too much inventory. Until the excess inventory is absorbed, there will be little new construction and few construction related jobs - and the recovery will remain sluggish.

CMBS delinquencies accelerate toward 9% in August: Trepp - After two months of moderated growth in delinquent loans backing commercial mortgage-backed securities (CMBS), the delinquency rate in August increased 21 basis points to 8.92%, according to the analytics firm Trepp. It's an increase from the 8.71% measured in July and another new record. The August delinquency rate is more than double the 4.03% rate a year ago. Since the beginning of 2010, the delinquency rate has increased more than 200 bps. "The August numbers may give ammunition to those who argue that the commercial real estate crisis is far from over," according to the Trepp report.

Reports: Distressed Commercial Real Estate Equals $187B - The total value of distressed commercial real estate (CRE) in the United States right now is $186.9 billion, including properties in default, foreclosure, and lender REO, according to data from the research firm Real Capital Analytics.  The Transwestern company Delta Associates says this tally represents an increase of 12 percent, or $20.1 billion, since June and following recent declines, means CRE distress is back to the level it was in March of this year. “We think a plateau in the $165-$200 billion range may be with us for a while, as lenders continue to extend debt obligations and commercial property values are no longer falling in many markets,” Delta Associates said in commentary released to, noting that property values are beginning to rise in some metro markets, with deals no longer underwater.

Senior Lenders Moving to Foreclose on NYC’s Stuyvesant Town- The battle over Manhattan's giant Peter Cooper Village and Stuyvesant Town apartment complex intensified Saturday as the banks overseeing the $3 billion first-mortgage debt on the property moved to foreclose.The banks, including Bank of America Corp. and U.S. Bancorp, has set a public auction for the 56-building complex for Oct. 4, according to a foreclosure notice viewed by The Wall Street Journal. The move comes after the banks sued in New York State Supreme Court last month to block a group led by activist investor William Ackman from foreclosing on the property.

Bankers Urge Government to Pull Plug on Fannie, Freddie – NYTimes - The federal government should take mortgage finance giants Fannie Mae and Freddie Mac off life support sooner rather than later, the Mortgage Bankers Association urged on Wednesday.  The bankers said Fannie Mae and Freddie Mac should move beyond the "conservatorship" that started two years ago and be placed "receivership."  "Fannie Mae and Freddie Mac have already moved well beyond the points where any other financial institution would have been put into receivership," MBA Chief Executive John Courson and MBA Chairman-elect Michael Berman wrote in a seven-page letter to the Federal Housing Finance Agency.  As the financial crisis unfolded in 2008, then-Treasury Secretary Henry Paulson effectively took control of the firms, although he stopped short of full nationalization by placing them in a "conservatorship" to keep them off the federal balance sheet.  The government controls 79.9 percent of Fannie Mae and Freddie Mac, just shy of the 80 percent threshold for placing them on the federal books. Conservatorship is intended for firms that could be restored to health, while receivership is the end-of-the-line liquidation phase.

FDIC's Bair Warns of Government "Exposure" in Mortgages(Reuters) - A key U.S. banking regulator raised concern on Wednesday about the risk of "exposure" the government is taking on in the mortgage market and urged more stringent standards for underwriting mortgages. "We should all be concerned about the type of exposure that the government is taking on through guaranteeing so many mortgages right now and make sure that we do have some prudent underwriting standards," Federal Deposit Insurance Corp Chairman Sheila Bair suggested in an interview on CNBC. "The government is taking on a lot of exposure and guaranteeing most mortgages that are being originated these days," she said. "And I think the policymakers here are trying to balance the need for prudent underwriting with a need to support... what is still a very distressed housing market." Mortgage finance giants Fannie Mae and Freddie Mac, under government control since September 2008, and the Federal Housing Administration, currently back some 90 percent of new U.S. mortgages.

Moody’s continues to downgrade RMBS - Moody's Investors Service downgraded another handful of residential mortgage-backed securities this week because of the deterioration in the performance of the underlying mortgage pools backing the transactions. For the past few months, Moody's has been lowering MBS ratings as the pools suffer numerous setbacks in conjunction with macroeconomic conditions that remain under duress. Moody's also recently updated loss expectations on Alt-A pools issued between 2005 to 2007. The ratings agency also continues to see "an increasing potential for a double-dip recession, which could cause a further 20% decline in home prices." Analysts downgraded much of $10.4 billion of securities backed by Alt-A residential mortgages issued by Deutsche Bank in 2006 and 2007.

Florida’s High-Speed Answer to a Foreclosure Mess - The state routinely sets new records for foreclosures — in the second quarter, 20.13 percent of its mortgages were delinquent or in foreclosure, a national high, according to the Mortgage Bankers Association. And with housing prices still in a free fall, almost half of all borrowers in Florida owe more on their mortgages than their properties are worth, says CoreLogic, a data firm. While the Waters-Reese case may not be unusual in Florida, the coming auction of the home is still notable: it will be a result of the Florida Legislature’s new effort to cut the number of foreclosures inching their way through the state’s courts. Earlier this year, Florida earmarked $9.6 million to set up foreclosures-only courts across the state, staffed by retired judges. The goal of the program, which began in July, is to reduce the foreclosures backlog by 62 percent within a year.  No one disputes that foreclosures dominate Florida’s dockets and that something needs to be done to streamline a complex and emotionally wrenching process. But lawyers representing troubled borrowers contend that many of the retired judges called in from the sidelines to oversee these matters are so focused on cutting the caseload that they are unfairly favoring financial institutions at the expense of homeowners.

Grim Housing Choice: Help Today’s Owners or Future Ones - The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.  Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live. As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

Streitfeld: Grim Housing Choice - From David Streitfeld at the NY Times: Grim Housing Choice: Help Today’s Owners or Future Ones Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market ... The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.  As the economy again sputters and potential buyers flee... Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash. I wouldn't quite phrase it as "let the housing market crash" - instead I'd argue to stop trying to support house prices and think jobs, jobs, jobs. More jobs mean more households - and more households will absorb the excess supply of housing. More from Streitfeld:  A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners who are just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.

Ryan Avent of The Economist gets it right  - He writes:"'s simply not true that the administration has rolled out every programme it can think of. Economists with which administration officials are very familiar have proposed measures to deal with the real problem in housing markets: negative equity. Promising policies like mortgage cramdowns and own-to-rent programmes have yet to get a serious look from Washington leaders. But ultimately, a real fix for housing markets must address underwater mortgages. Absent some attempt to deal with negative equity, a rush of buyers into the market will accomplish little; the problem is that underwater homeowners can't afford to sell at prevailing prices. Driving those prices lower won't change that fact. The truth is that the trouble in housing is not, for the most part, a demand-side issue. The problem is the millions of homeowners stuck in houses they can't afford to sell. These households represent a significant shadow supply of foreclosures-in-waiting. I agree that it would be silly for the administration to try to support housing prices by offering more goodies to potential homebuyers. But it doesn't follow that letting prices go their own way will magically get housing markets moving again."

Homebuyer tax credit: 950,000 must repay - Nearly half of all Americans who claimed the first-time homebuyer tax credit on their 2009 tax returns will have to repay the government.  According to a report from the Inspector General for Tax Administration, released to the public Thursday, about 950,000 of the nearly 1.8 million Americans who claimed the tax credit on their 2009 tax returns will have to return the moneyThe confusion comes because homebuyers were eligible for two different credits, depending on when their homes were purchased. Those who bought properties during 2008 were to deduct, dollar for dollar, up to 10% of the home's purchase price or $7,500, whichever was less. The catch: The money was a no-interest loan that had to be repaid within 15 years.  Had they waited to buy until 2009, they could have gotten a much sweeter deal. Congress extended the credit and made it a refund rather than a loan.

From Loan Modification Purgatory to Foreclosure Hell - David Lazarus has an interesting foreclosure story in the LA Times: Suddenly, their house is taken over A few details: The couple fell behind on their mortgage payments (he works in construction). Wells Fargo put them in a HAMP three month trial modification program in December, and they made all their payments.  After the three months were up they were told by Wells that their case was still under review and that they should keep making the $1,400 payments. They did. The bank continued requesting paperwork as part of its review process. ... The Kaharas received a letter from Wells dated Aug. 11 saying that their application for a permanent loan modification had been rejected. The letter said the Kaharas would have 30 days to discuss other options available to them. "No foreclosure sale will be conducted and you will not lose your home during this 30-day period," the letter said. On August 18th there was a knock on the door - it was the new owner who had bought the home at foreclosure!

Lawler: Again on Existing Home Months’ Supply: What’s “Normal?” It has become “common practice” when talking about the “months’ supply” of existing homes for sale for folks to say that the “normal” months’ supply, or the months’ supply that means it is neither a “buyers” or a “sellers” market, is around 6 to 7 months. Yet here is the history of months’ supply for existing SF homes from the National Association of Realtors. As one can see, this “metric” actually has not been in the six-to-seven month range very often. From mid-1982 through 1992, the months’ supply measure was above seven months in all but a handful of months, while from 1998 to the spring of 2006 it was always below six months. The measure, of course, is quite volatile, and sorta weird in that the inventory number (the numerator) is not seasonally adjusted while the sales data (the denominator) is seasonally adjusted. The measure also can be extremely volatile as sales tend to be impacted more by “special factors” (weather, tax credits, etc.) than listings.

Mortgage Rates and Home Prices - But what about interest rates? Anyone who argues that home prices do not seem headed for another big decline will probably hear some version of this question. Interest rates are historically low right now. They will surely rise at some point. All else equal, higher rates should push down home prices. Yet compare the national median home price to 30-year fixed mortgage rates over the last three decades (with both indexed to 1 in 1971):  It’s not easy to see much of a relationship. The fall in rates appears to have helped the housing boom of the last decade. On the other hand, the spike in rates in the 1980s had little apparent effect on prices. My best guess for why the two don’t correlate more closely is the role that psychology plays in housing markets. Prices just don’t move as quickly as economic theory suggests they should.

Housing Divided - There’s been considerable buzz lately on the doomed attempt to sustain and reflate the housing bubble. Should policy capitulate to the real free market and let prices deflate? Which is another way of saying, should we let prices move closer to reality? Housing became absurdly expensive, way beyond any historical measure, as a result of the bubble. Reality now wants to deflate. This would contradict the government’s commitment to propping up the zombie banks, as their fraudulent balance sheets are dependent upon reflating the bubble. This has been the basic contradiction from the start of the Bailout: Corruption vs. increasingly insistent reality. It defines how the Bailout, even leaving aside its criminality, is a policy of fantasy and insanity. That’s why every phony mortgage mod plan was intended only to continue to extract payments while preventing prices from continuing to decline. That’s why cramdowns are anathema. That’s why the nightmare scenario would be large numbers of people making the rationally and morally correct decision to walk away* from underwater mortgages. That’s why the desperation position, including that floated a month ago as a rumor about upcoming GSE policy, would be to really renegotiate payment schedules but not write down the principal (the HAMP was a lie which promised to do this).

Housing Starts and Vacant Units - The following graph shows total housing starts and the percent vacant housing units (owner and rental) in the U.S. Note: this is a combined vacancy rate based on the Census Bureau vacancy rates for owner occupied and rental housing through Q2 2010.The vacancy rate continued to climb even after housing starts fell off a cliff. Initially this was because of a significant number of completions. Then some hidden inventory (like some 2nd homes) probably became available for sale or for rent, and also some households have doubled up because of tough economic times. It appears the total vacancy rate might have peaked and started to decline. This suggests more households are now being formed than net housing units added to the housing stock. But there is still a long way to go. I know I'm a broken record - but it is very unlikely that there will be a strong rebound in housing starts with a near record number of vacant housing units.

Housing Completions will set new record low in 2010 - One of the key questions for housing, jobs, and the economy is: When will the excess housing supply be absorbed? The answers depends on: 1) The current number of excess housing units, 2) how many net units are added to the housing stock, and 3) how many net households are being formed. There is no timely data for net household formation, and estimates of the excess housing supply vary widely. So the answer involves some guesses (I'll get back to these questions). The best data is for completions of housing units - although the number of demolitions is unclear. So the limited purpose of this post to to provide an estimate of the net units added to the housing stock in 2010. Housing units include single family homes (included as 1 to 4 units), apartments (5+ units), and mobile homes. Demolitions are subtracted from the stock. NOTE: Table is based on Completions. Housing units added to stock:

Is The Poor Housing Market A Genetic Disease? - The U.S. housing crisis was caused by mortgage products like Alt-A, sub-prime, negative amortization loans, and teaser-rate adjustable loans that caused millions of people to buy far more home than they could sustainably own, or even afford to rent at substantially discounted rates. Too many people bought homes hoping to flip them after a few years for fat profits that could be used in acquiring lesser, more affordable homes. The whole idea was as unsustainable as the nation’s deficit spending fiscal policies.  By analogy, the U.S. is a huge sub-prime borrower with a mortgage that cannot be paid. We’re hanging on only because the Fed extended teaser rates. The U.S. Congress should understand this. Ironically, while members of Congress castigate Fannie Mae and Freddie Mac, they're voting for fiscal policies that are just as irresponsible and illegitimate.

Is this your grandfather’s mortgage crisis? - Vox EU: The current mortgage crisis in the US is more severe than any since the 1930s. So it makes good sense to examine the origins, impacts, and consequences of that last great mortgage crisis great mortgage crisis – indeed many commentators have made a direct comparison between the two (see for example Eichengreen and O'Rourke 2010). The case for examining the last great crisis is especially pronounced given that the US Secretary of the Treasury has just asked Americans to “consider the challenge of how to build a more stable housing finance system” (Geithner 2010).  Yet we should be humble in taking up this challenge. We are after all reforming a mortgage system that was built on a framework that Depression-era policymakers forged in response to their own crisis.

How huge houses consume fortunes - Consider high end residential real estate. You would think after the experience of the past several years that all the wealth-multiplying, or even wealth-maintaining illusions would have been washed out of that asset class, but you would be wrong.  House prices in places such as the Hamptons have not only stopped declining, but are even rising again, at least for the moment. When you ask how this can be sustained, you get references to Russian oligarchs, or rich Chinese, or “Europeans”. While everyone now knows that Middle America’s real estate will be a value trap for years to come, there is the sense that trophy properties, whether in Mayfair or Southampton, will have stratospheric price tags for the indefinite future. Actually, I believe the reverse will be the case. Middle class or working class residential properties in developed countries are more likely to maintain their value over the next decade, or at least have less significant price declines, than the tippy-toppiest houses in the most expensive districts. The trophies, in other words, will gather a lot more dust. There is some history to consider here.

Sellers Cut Prices on 50% of Homes - Homeowners are slashing prices more drastically and more frequently, according to recently released data from ZipRealty. The average price reduction is now 7.1 percent of list price.List prices dipped about $19,000 in August compared with July, across the 26 markets studied. On average, sellers made two price cuts during that time.  Seven cities saw price reductions on more than half of their inventory, with Jacksonville, Phoenix and Minneapolis on top with 55 percent, 54.4 percent and 52.4 percent, respectively.  "Earlier in the year we saw sellers being aggressive with their pricing, but not reducing as much,"  "What we are seeing now is that the trends are reversing." predicts a 9% fall in property prices nationwide in 2010 - We make the call for a new decline in prices despite positive signals of higher prices including a gain of seven percent nationwide by Case-Shiller 10-City index from its post-crash bottom in April 2009. surveys and averages the data of four major property price indexes including Case-Shiller, the Federal Housing Finance Agency (FHFA), First American, and Freddie Mac (Please see the results immediately below.).Our projections are based upon the assumption that values broke into bubble gains starting in 2000. We project a pre-bubble trend using values predating 2000 and going as far back as possible in each data series. We then project a second trend: It follows prices from the fall of the height of the boom.

Housing Faces the Fall - As recently as two weeks ago, the standard sources of price data, Case-Shiller, NAR, FHFA, were making headlines with the news that housing prices were up over the first half of the year.  But as the summer ends and the home buying season winds down, a cloak of gloom is settling over the industry and Washington policy-makers, whose efforts to reverse the decline of national wealth in home equity have largely failed. Experts believe the indices that prompted optimism in the first half are about to reverse themselves as government props to stabilize prices either, like the $30 billion homebuyer tax credit, faded away, or bombed altogether. After 18 months of tax credits, July housing sales sank 26 percent from July 2009 and inventories soared to their highest level in recorded history.  Now that the average American home takes more than a year to sell, sellers are cutting prices in despair.

In struggling housing market, buyers and sellers are out of sync - Across the Washington region and around the country, the expectations of buyers and sellers are out of whack, thwarting deals that could potentially lift the U.S. housing sector from its long funk. The nascent rebirth of the market earlier this year proved to be a mirage. Despite record-low interest rates, many would-be buyers are retrenching, hamstrung by meager growth in their wages, gripped by fears over the possibility of losing their jobs or another recession. Sales of existing homes plunged in July to the lowest level in more than a decade, and sales of new homes were slower than at any time since the government started tracking the data in 1963. The results were far worse than some of the most pessimistic economists had expected and added to the doubts nagging at Wright and other prospective buyers, even in areas such as Washington that have been relatively insulated from the housing bust. There are now so many homes for sale, and so few of them are selling that, at the current sales pace, it would take over a year to clear the existing inventory on the U.S. market. That is more than double the time required in a healthy market and up significantly just since June.

The Bears and the State of Housing - At times, real estate seems to be in the early stages of a severe double dip. Home sales plunged in July, and some analysts are now predicting that the market will struggle for years, if not decades.  Others argue that the worst is over. As Karl Case, the eminent real estate economist recently wrote, “Buying a house now can make a lot of sense.”  I can’t claim to clear up all the uncertainty. But I do want to suggest a framework for figuring out whether you lean bearish or less bearish: do you believe that housing is a luxury good and that societies spend more on it as they get richer? Or do you think it’s more like food, clothing and other staples that account for an ever smaller share of consumer spending over time?  If you believe housing resembles a luxury good, then you’ll end up thinking house prices will rise nearly as fast as incomes in the long run and that houses today aren’t terribly overvalued. If housing is a staple, though, prices will rise more slowly — with general inflation, as food tends to.

Should we let housing prices fall? - Many smart people say we should.  It seems increasingly clear that we must.  For how long can the government prop them up?  Are we never to have a private market in mortgages again? Yet what happens if we let them fall?  Arguably many banks would once again be "under water."  Enthusiasm for another set of bailouts is weak, to say the least.  Our government would end up nationalizing these banks and it still would be on the hook for their debts.  The blow to confidence would be a major one, especially if along the way we saw a recreation of a Lehman or Bear Stearns or A.I.G. episode. I increasingly believe there is no easy way out of this dilemma and it is a major reason why the U.S. economy remains stuck.  Housing prices must fall, yet...housing prices must not fall.

The big housing question - EVERYONE is linking to Tyler Cowen: So, one question is: what is the government doing to prop prices up? The housing tax credit has expired. Interest rates are low, but interest rates don't explain all that much of the movements we see in home prices. It sounds like Mr Cowen views the continued purchase of mortgage debt as the key mechanism here. He seems to be saying that absent government involvement in mortgage markets, housing credit would dry up, and prices would fall. That's true, but it's hard to know how much of the plunge would simply be due to sudden illiquidity in mortgage markets. Mr Cowen suggests that that illiquidity—the failure of private buyers for mortgage debt to emege as the government exits—is de facto evidence that prices have farther to fall. But I'm not sure about that. Or rather, I'm not sure that the fear of falling prices tells us about anything other than market uncertainty over the issue of negative equity in housing markets.

The house price fairy - The house price fairy visited me last night. She offered me three choices: she would instantly double all house prices; she would instantly halve all house prices; or she would leave all house prices the same."You stupid fairy!" I replied. "Don't you know i already own this house, and I have no plans to sell it or to buy another? I need somewhere to live, and I've got it; I have already covered the short position in housing I was born with. I don't give a damn what you do with house prices; it won't make me richer or poorer or affect me in the slightest. That's why I own exactly one house, not two houses, and not zero houses, so I didn't have to care if house prices went up or down. Next time you wake me up, at least offer me something interesting to choose from!"She looked at me reproachfully. "Nick, I expected better from you. Non-economists can only think of wealth (income) effects, and usually get them wrong too. You got the wealth effect right, but you ignored the substitution effect". She was right. What should I have chosen? Or rather, which of the three choices should I not have chosen?

Relearning the lessons of the Great Depression: Housing markets edition - There was an article last week in the New York Times about economists calling for the government to simply allow house prices fall and reach their bottom, an idea which is gathering more and more support. I think this is a bad idea because the real costs falling home prices are obvious, likely, and severe, while the benefits are vague and speculative.For starters, as the following chart from Calculated Risk shows, in Q1 2010 there were millions of homeowners who are in a negative equity position. If prices fall another 5%, each of these bars will shift to the left on position. If the drop 10%, they will shift two. As you can see though, the numbers of homeowners in each category get larger as the approach zero, going from 1.1, to 1.3, to 1.5, to 1.8 million in the last 4 bins. So it’s likely we’ll actually get upwards of 6 million more homeowners underwater.In addition, a fall of 15% would push around 1.9 million more homeowners into 50% or more of negative equity, driving this number up to around 6 million. These large increases in total negative equity will drive a wave of foreclosures. The best evidence indicates that foreclosures, in turn, will decrease nearby home values by 1% to 2%, which could exacerbate the foreclosure blights many neighborhoods are already facing.

The Thoughtful Roar of the Housing Bears -I was a housing bear for a long time. And I’m not exactly bullish now. But I am a bit less bearish than some other real estate watchers. They’re making some thoughtful arguments today about why we should expect home prices to soon fall more. Tyler Cowen and Felix Salmon both point out that the market itself seems to be gloomy about house prices. Mr. Cowen writes, referring to lenders and bondholders, “the private sector interest in mortgage securities [remains] quite weak, which suggests the market knows which way prices have to move.” Mr. Salmon makes a related point about home buyers:… houses are not clearing right now. And insofar as they are, they’re only doing so because of trillions of dollars of implicit federal subsidies being pumped into the mortgage market via Fannie, Freddie, the F.H.A. and other state-owned agencies. Meanwhile, Daniel Indiviglio, at The Atlantic Wire, suggests that the weakness of the American economy will weigh on the housing market for years: I think — and sure hope — that real after-tax incomes will start rising sometime before 2023. But the broader points here seem reasonable. House prices are more likely to fall than rise in the immediate future. The price-to-income and price-to-rent numbers suggest to me that the market is still about 5 to 10 percent overvalued, nationwide. Barry Ritholtz, at The Big Picture blog, says 5 to 15 percent. Other real estate specialists — like Tom Lawler and Mark Zandi — think many markets are close to being fairly valued.

No reason to be optimistic about house prices - David Leonhardt has delivered yet another excellent housing column, full of sharp insights and careful thinking. The key concept in the piece is the distinction between the idea that houses rise with incomes, on the one hand, and the idea that they rise with inflation, on the other. If house prices generally rise with inflation, as Bob Schiller thinks, then they have quite a ways further to fall. On the other hand, if they rise with incomes, then they’ve already mean-reverted. I think that Leonhardt is right in thinking that houses are more likely to rise with incomes than with inflation. Houses sell for whatever buyers can afford; the key numbers here are the total monthly outlays, on the one hand, and income, on the other. If mortgage rates remain steady, then house prices, once they start clearing, are likely to rise in line with incomes. But on the strength of that premise, I’m not nearly as bullish as Leonhardt, for three big reasons...

What a Mess - Dhaval Joshi awhile back discussed the $4 trillion dollar mortgage problem: Can the US economy really return to “business as usual” when it has 4 million houses surplus to requirement, when 1 out of 4 mortgages are in negative equity, and when by our calculation, it is burdened with $4 trillion of excess mortgage debt, equivalent to 30% of GDP?  [...] The fact that mortgage debt has barely declined suggests that relatively few homeowners have defaulted on their mortgages or paid off debt yet. Instead, a quarter of all borrowers are sitting on negative equity. That’s just as well – because were mortgage debt to shrink by even half of $4 trillion, the US economy would slump. Here is the accompanying figure: What a mess we are in.  So what can be done? My recommendation is (1) have the Fed take more aggressive actions to stabilize the macroeconomy which would make it easier to (2) do the structural changes needed to address the problems outlined above.  One specific structural proposal would be to swap underwater mortgage debt for equity. What suggestions do you have?

Fixing America’s Broken Housing Market - Stiglitz – In short, government policies to support the housing market not only have failed to fix the problem, but are prolonging the deleveraging process and creating the conditions for Japanese-style malaise. Avoiding this dismal “new normal” will be difficult, but there are alternative policies with far better prospects of returning the US and the global economy to prosperity.Corporations have learned how to take bad news in stride, write down losses, and move on, but our governments have not. For one out of four US mortgages, the debt exceeds the home’s value. Evictions merely create more homeless people and more vacant homes. What is needed is a quick write-down of the value of the mortgages. Banks will have to recognize the losses and, if necessary, find the additional capital to meet reserve requirements. This, of course, will be painful for banks, but their pain will be nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy.

Nine of Ten Consumers Postponing Big Purchases Through 2010 - Fear that a double dip recession will threaten their personal finances is driving nine out of ten potential buyers out of the market for big ticket items like homes and cars for at least the next three to four months, according to a new national consumer survey released today. A survey taken in the last week of August by the polling firm StrategyOne suggests that fence sitting by home buyers will dramatically increase in the fourth quarter. Some 87 percent of consumers say they do not plan to make a big-ticket purchase (such as a house or car) in the next 3 to 4 months. Nearly half, 49 percent, say they have already delayed making a big-ticket purchase during the past few months. Only 13 percent said they plan to make a big purchase during the balance of the year. Consumers will be less likely to cut back on overall spending than on big ticket items. Over half, 52 percent, expect to spend the same amount in the fourth quarter as they did during the last three months

Study Shows Drop in Credit Card Use - NYTimes - According to the results of a November 2009 Javelin survey, 56 percent of consumers said they used a credit card in the last month, down from 87 percent in the same period in 2007. The 56 percent figure is the lowest since Javelin started conducting the annual surveys about six years ago, and Javelin said it expected the figure to drop to 45 percent in this year’s survey. Javelin said the decline is part of a longer-term shift among consumers away from credit cards and toward more alternative payment options like debit cards and reloadable prepaid cards. But, he said, the weak economy has sped up the shift. He said the drop in credit card usage is particularly pronounced among 18- to 24-year-old consumers, who, Javelin has found, seem to prefer more immediate, real-time payment options. Meanwhile, he said credit card usage generally tends to be more resilient among people with higher incomes — those more likely to use their cards to obtain rewards and pay their balances off every month. “The more you earn, the less likely you are to decrease your credit card usage,” Mr. Van Dyke said, “and the opposite is true.”

Low Interest Rates Help Companies at the Expense of Savers… Households and corporations alike are refinancing their loans in droves to take advantage of interest rates that seem impossibly cheap. But those same low rates come with a flip side, driving down the income of retirees and others who live off their savings.  It is a side effect of a government policy meant to push down interest rates to a point that businesses and consumers are compelled to borrow and spend again, and yet it is hurting anyone with a savings account. For example, anyone keeping $500,000 in a 12-month certificate of deposit earning a rate of 1.5 percent annually — one of the best savings rates available nationally these days — would earn $7,500 a year, hardly enough to live on. Just three years ago, that same investment would have generated $26,250.

Cardholders Prefer Debit as Credit-Card Use Falls - Americans are shunning their credit cards and using debit to avoid incurring more debt, said Javelin Strategy & Research. Total payment volume for debit cards surpassed credit-card volume for the first time in 2009 and will continue to eclipse it in 2010, according to a report released today by the Pleasanton, California-based market-research firm that specializes in financial services. At San Francisco-based Visa Inc., the world’s biggest payments network, the total payment volume for debit cards increased by 7.9 percent in 2009 to $883 billion as credit-card volume declined by 7.3 percent to $764 billion.  Fifty-six percent of consumers said they had used a credit card in the past month compared with 87 percent who said they had in 2007, according to the study, which surveyed 3,294 people in November 2009 for that question. Other findings were based on data collected online from 5,211 respondents in March 2010 and 5,000 consumers in November 2009. If the rate of decline continues, 45 percent of consumers will reach for a credit card in 2010, the study said.

AMEX, Visa, MasterCard All Give Thumbs Up To $10 Credit Minimums… For years, educated credit card holders have been safe in the knowledge that a merchant could not require them to purchase a minimum amount in order to charge something to their cards. But with the recent passing of the finance bill, the door has been opened to allow such minimums -- and the card companies are just fine with that. Visa is leading the way in this brave new world of minimum charges.  On the card company's site, it now reads, "U.S. retailers may require a minimum purchase amount on credit card transactions. The minimum purchase amount must not exceed $10 and does not apply to transactions made with a debit card." To see if the other card companies were following suit, we checked out the info available on their sites. In the American Express Merchant Manual [PDF], Section 3.2 says Merchant may not: "impose any restrictions, conditions, disadvantages or fees when the Card is accepted that are not imposed equally on all Other Payment Products, except for ACH funds transfer, cash, and checks." To us, this implies that -- so long as the merchant requires the same minimums on all the other cards it accepts, AMEX is okay with it too. We checked with a rep for AMEX who confirmed:

Consumer Credit Declines in July - The Federal Reserve reportsIn July, total consumer credit decreased at an annual rate of 1-3/4 percent. Revolving credit decreased at an annual rate of 6-1/4  percent, and nonrevolving credit increased at an annual rate of 1/2 percent. This graph shows the increase in consumer credit since 1978. The amounts are nominal (not inflation adjusted). Revolving credit (credit card debt) is off 15.2% from the peak. Non-revolving debt (auto, furniture, and other loans) is off 1.1% from the peak. Note: Consumer credit does not include real estate debt.

Americans Fear "Double Dip" Recession & European Financial Problems. - Beyond significant concerns about the current state of the US economy, Americans see a double-dip recession as a real possibility and fear Europe’s financial problems will harm the US economy.  65% of the roughly 1,000 Americans polled last week by StrategyOne say it’s likely that the US will experience a double dip recession, compared with just 35% who say it’s not likely to happen. 72% believe that Europe’s financial problems are likely to harm the US’ economic recovery, compared with just 28% who say the US is largely insulated.  Add to this the fact that just 36% have seen signs of economic recovery where they live and work, compared with 64% who say they have not seen too many signs or any signs at all of economic recovery. In addition, 79% – nearly 8 in 10 Americas – agree that they really can’t say for sure that the economy is improving.

Money Can Buy Happiness, Study Finds — But Only Up To $75,000 - They say money can't buy happiness. They're wrong. At least up to a point. People's emotional well-being - happiness - increases along with their income up to about $75,000, researchers report in Tuesday's edition of Proceedings of the National Academy of Sciences. For folks making less than that, said Angus Deaton, an economist at the Center for Health and Wellbeing at Princeton University, "Stuff is so in your face it's hard to be happy. It interferes with your enjoyment." Deaton and Daniel Kahneman reviewed surveys of 450,000 Americans conducted in 2008 and 2009 for the Gallup-Healthways Well-Being Index that included questions on people's day-to-day happiness and their overall life satisfaction. Happiness got better as income rose but the effect leveled out at $75,000, Deaton said. On the other hand, their overall sense of success or well-being continued to rise as their earnings grew beyond that point.

Retailers – Reality Check Time I understand the dynamics of a high growth rollout of stores as a key to increasing market share and profits. Some of the best retail names in the US have practiced the identical strategy of concentrating many stores in each market to drive the small competitors out of business. This strategy worked wonders for Lowes, Wal-Mart, Target and Kohl’s during the early part of this decade. The combination of solid same store sales and opening new stores is a fantastic combination during good times. The results actually make the CEOs of these companies think they are brilliant.  What these CEOs didn’t realize was that their expansion plans were based on lies and frauds. If they had advisors who could give them a reality check, they could have avoided the massive downsizing that awaits them. Retail America has run directly into a brick wall. Below are charts detailing the expansion history of four of the most admired retailers in America. Lowes grew their store count from 600 to 1,700 over the course of the decade, a 183% increase. Wal-Mart grew their store count from 4,000 to 8,500, a 113% increase. Target grew their store count from 1,000 to 1,750, a 75% increase. Kohl’s grew their store count from 300 to 1,050, a 250% increase. Same store sales are the true measure of a retailer’s health. When comp store sales are +5% or better, retailers make substantial profits and confidently build new stores. As the charts below clearly show, comp store sales have been in a substantial downtrend since 2006. The new stores that have been built in existing markets are over cannibalizing their existing stores.

In low-ball America, employers and shoppers pay less, and everyone suffers. - Mott's isn't the only company squeezing its employees during this recovery. With millions out of work, it's a buyer's market for employees. In the economy at large, wages have risen only 1.7 percent in the past year while corporate profits are up nearly 40 percent. A report by the Washington-based Economic Policy Institute found that between the second quarter of 2009 and the second quarter of 2010, men's wages fell 1.3 percent. Welcome to the low-ball culture. In a world of sluggish growth, excess capacity, and depressed expectations, buyers of goods and services—labor, houses, and restaurant meals, among other things—have come to believe that desperate sellers should take any offer they make. But that kind of systemic bargain-hunting can create a dangerous spiral: Employers short-change workers, workers buy fewer goods—and the overall economy suffers.

August Rail Traffic, An Upbeat Economic Indicator - August was a busy month for America’s railroads, according to the Association for American Railroads. Traffic spiked up, as often happens during the month. More importantly, August traffic was 11% higher than a year ago (the same gain as reported in July):Carloads (think bulk materials like coal, grains, minerals, and chemicals plus autos) are up about 6% over 2009:..Intermodal traffic (think trailers and containers) is up almost 20%, thus returning to 2008 levels:

Index Points to Slowdown in Hiring - An August measure of labor indicators suggests a slowing in hiring in coming months, according to a report released Tuesday by the Conference Board. The board said its August employment trends index fell to 96.7, down from July’s revised figure of 97.4, first reported as 97.0. The August index is up 9.4% from a year ago. “Employment growth has been slow lately, and the employment trends index suggests that it may slow even further this fall,” said Gad Levanon, associate director. “However, we still expect job growth rather than an outright decline in the next several months.” Seven out of the eight components had a negative impact last month. The negative indicators were: the percentage of consumers who say jobs are “hard to get”, jobless claims, the percentage of firms with positions they’re not able to fill right now, involuntary part-time employment, job openings, industrial production and real business sales.

Republican’s Backing Aids $30bn Stimulus Bill - A $30bn White House plan to boost lending to small business has secured the support of a key Republican senator, putting Democrats on course to pass the first in a series of mini-stimulus bills. George Voinovich, the Republican senator from Ohio, has agreed to back the long-delayed legislation at a vote due next week, according to Republicans and Democrats familiar with talks between Mr Voinovich and Harry Reid, the Democratic leader in the Senate. The bill would set up a $30bn Treasury-backed loan facility to encourage banks to lend more to small companies. It also contains more than $12bn in tax breaks for the struggling sector that, unlike large multinational companies, cannot circumvent troubled banks and tap the bond market.

Think Small Business Is Job Engine? Think Again - One economic adage is that small businesses generate the bulk of all U.S. jobs. It’s a rule of thumb often cited by politicians. The problem is: the truism may not be entirely true. The age of the firm–not its size–matters more.Three economists looked into the debate between firm size and employment growth. They used Census data on firms and establishments by their age and numbers of employees from 1992 to 2005. Not surprising, start-ups generate a lot of jobs in their first year. “Start-ups tend to be small so most of the truth to the popular perception is driven by the contribution of start-ups” to net job growth, says the paper. The problem is that many of those jobs don’t last. “Start-ups contribute to job creation, but they also contribute disproportionately to job destruction,” says Haltiwanger. Indeed, the research shows that within five years, 40% of start-up jobs have been lost because the firms went out of business.

So crowded, no one's working anymore - AN ECONOMY only has so much in the way of real resources. At a given moment, there are only so many people available to work and only so much capital that can be used in production. If an economy is operating at capacity and the government wants to expand what it's doing, say by going to war, it must begin utilising real resources that are already being deployed elsewhere. It can do this by borrowing. These processes are generally called "crowding out", and they represent worrisome economic shifts. When expanded government activity generates increased interest rates, that's a sign that the activity is coming at the direct expense of private sector expansion, and society should think very, very carefully about the return to that increased government activity. But what if an economy isn't running at capacity? What if there are millions of workers sitting around without jobs and hundreds of billions in capital sitting around earning almost nothing in the safest securities firms can find? Well obviously, in that case, expanded government activity would not crowd out private activity. On the contrary, increased government demand should actually increase private activity,

Unemployment after the Recession: A New Natural Rate? - Cleveland Fed - The past recession has hit the labor market especially hard, and economists are wondering whether some fundamentals of the market have changed because of that blow. Many are suggesting that the natural rate of long-term unemployment—the level of unemployment an economy can’t go below—has shifted permanently higher. We use a new measure that is based on the rates at which workers are finding and losing jobs and which provides a more accurate assessment of the natural rate. We find that the natural rate of unemployment has indeed shifted higher—but much less so than has been suggested. Surprising trends in both the job-finding and job-separation rates explain much about the current state of the unemployment rate.

A Tutorial For Journalists On Reporting Jobs Numbers - I am not going to get into all of the arcane details of BLS jobs numbers today. Suffice it to say that if you look just a little bit deeper into the BLS data, you will find that the jobs situation in the United States is much worse than officially reported. Mish gives us some of the details today in his Destitute Index. In so far as the mainstream media are too lazy or simpleminded to tell you the real story about unemployment in America, I thought I would provide a tutorial which teaches them how to dig deeper into the jobs numbers. You DOTE readers can follow along, but the rest of this post is for journalists, especially Morning Edition hosts Renee Montagne and Steve Inskeep at National Public Radio.

Snapshots of the Employment Situation, August 2010 - I thought I'd add a few observations on the latest employment report (other reports here: [NYT], [WSJ RTE/Izzo] [CR], [Economist's View]). First, by an alternate measure, employment is improving more rapidly than the standard nonfarm employment (NFP) measure. Second, the alternate measure increased faster than nonfarm payroll employment over the period of temporary Census hiring. Third, aggregate hours worked in the private sector continues to rise faster than private sector employment. Fourth, the NFP growth consistent with zero GDP growth is lower in the last decade, versus previous decades, even while the elasticity of NFP growth with respect to GDP growth has risen. (graph series & details)

Reconciling the Household and Payroll Surveys of Employment - Every month the BLS puts out a report that discusses the difference between the household and establishment surveys: Employment from the BLS household and payroll surveys: summary of recent trends The Unemployment Rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households. The jobs number comes from Current Employment Statistics (CES: payroll survey), a sample of approximately 390,000 business establishments nationwide. These are very different surveys: the CPS gives the total number of employed (and unemployed including the alternative measures), and the CES gives the total number of positions (excluding some categories like the self-employed, and a person working two jobs counts as two positions). The linked monthly report from the BLS discusses the differences, and adjusts the household survey to "an employment concept more similar to the payroll survey’s". This graph from the BLS shows the household survey, the payroll survey and the adjusted household survey.

Update: Total people receiving unemployment benefits - Here is a graph from the Atlanta Fed of the number of people receiving extended unemployment benefits ... Note: data as of Aug 7th - there were about 300,000 less people receiving benefits on Aug 14th (most recent data NSA). From the Atlanta Fed: • The number of persons receiving emergency unemployment compensation (EUC) has increased by nearly 1.6 million in the three weeks since the program was reinstated on July 22, 2010. For the week ending August 7, the number of claimants reached 4.9 million. • Extended benefits (EB) claimants increased by more than 300,000 (or 50%) during the same period. There were 937,000 people claiming extended benefits for the week ending August 7. • Currently, up to 73 weeks of benefits extensions are available including both the EUC and EB programs (53 weeks of EUC and 20 weeks of EB). That is an increase of almost 2 million people receiving aid since the program was reinstated.

Taking the Un- Out of Unemployment - The latest estimates for August of this year suggest that wage and salary employment is stuck in the mud. While estimates of unemployment provide a vital indicator of economic health (or in the current case, ill health), these estimates are more complicated – and more vulnerable to political bombast – than estimates of employment.The employment trends in the chart above, based on figures for August released on Friday by the Bureau of Labor Statistics, call attention to the need to create more jobs – fast. You might think that unemployment is simply the mirror image of employment, but it’s not that simple. Unemployment is a somewhat more subjective measure, because it relies on survey respondents’ reports that they are actively seeking paid employment.Some conservatives seize on this subjective element to argue that many of the unemployed aren’t really seeking work, but rather taking advantage of unemployment benefits to slack off.On the other hand, many workers do get discouraged and give up looking for work until labor-market conditions improve.

BLS: Job Openings increases in July, Low Labor Turnover - From the BLS: Job Openings and Labor Turnover Summary - There were 3.0 million job openings on the last business day of July 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate increased over the month to 2.3 percent. The hires rate (3.3 percent) and the separations rate (3.4 percent) were unchanged....The following graph shows job openings (purple), hires (blue), Total separations (include layoffs, discharges and quits) (red) and Layoff, Discharges and other (yellow) from the JOLTS. Notice that hires (blue) and separations (red) are pretty close each month. In July, about 4.4 million people lost (or left) their jobs, and 4.23 million were hired (this is the labor turnover in the economy) for a loss of 168,000 jobs in July (this includes Census jobs lost).  The employment report (revised) showed a loss of only 54,000 jobs in July, and usually these numbers are pretty close, so this is a little puzzling. I expect some revisions to one or both reports.

Nearly 5 Jobless Workers Per Opening in July - There were slightly fewer than five unemployed workers for each job opening in July, according to a new Labor Department report. Once again, that’s a better ratio than what the economy showed earlier this year, but it still indicates persistent softness in the American labor market. The chart below shows the jobless worker/job opening ratio going back to 2000, the earliest year that the Labor Department kept data on job openings:  As of July, there were 4.8 unemployed people for each opening, compared with a ratio of 5.1 in June. The ratio ticked downward both because the number of unemployed workers fell and because the number of job openings rose. There were three million job openings in July; that’s much better than the most recent series low of 2.3 million in July 2009, but sill far below the 4.4 million available jobs when the recession began in December 2007. The job openings rate — that is, the number of job openings, relative to the sum of openings and occupied jobs — was highest for professional and business services and lowest for construction and for state and local government work. The hiring rate, however, was nonetheless quite high for construction, even if the number of advertised openings were few.

Trend in Temp Hiring Doesn't Bode Well for Overall Jobs Picture - Starting last winter and into this spring, the hiring of temporary workers surged, giving hope that companies were poised to convert those hires to permanent ones. Of course we know by now that the economic recovery has hit a rough patch, with private sector hiring only just remaining positive. Temporary hiring has slowed as well, although it was actually one of the stronger performing categories in the monthly snapshot of labor statistics released by the government last Friday. Temporary help services added 16,800 jobs, out of a total of 67,000 private-sector jobs added on net in August.But that number pales in comparison to the 94,700 temporary jobs that were added last November, or even the 30,400 jobs that were added as recently as May of this year. That downward trend “does not bode well for the next few months,” “It means that employers aren’t under any pressure to get people in to fill things.”

Double Digit Unemployment Rate early next year? - From Ethan Harris, Bank of America North American Economist, and others, Growth recession, Sept 3rd:  "[F]or most of 2010 and 2011, employment growth is not expected to keep up with the rise in the labor force, which means the unemployment rate heads north. We expect a steady increase to 10.1% by the second quarter with a slow fall slightly below 10.0% by the end of 2011." From Ed McKelvey, Goldman Sachs senior economist today:  "[W]e expect payroll gains to slow to 25,000 per month (ex Census workers) and the jobless rate to drift up to 10% over the next half year." With growth slowing in the 2nd half (and into 2011), this means the unemployment rate will probably tick up too (unless the participation rate falls further). I've been expecting the unemployment rate to stay elevated, and probably increase further - and the main reason is the same as for the BofA and Goldman analysts: the general slowing economy.

Obama’s Jobs Crisis - With the unemployment rate stuck at 9.6 percent, President Obama used his Labor Day speech in Milwaukee to announce a new initiative to address America’s jobs crisis. The $50 billion in new government spending on transportation and public works that he is now proposing is badly needed, and would eventually create jobs. But even in the unlikely event that the plan wins Congressional support, it will not be sufficient to stimulate enough growth to create the millions of new jobs the nation needs. Why has there been so little urgency in the White House to confront the issue that will most directly affect the outcome of the November elections?  Rarely has the job situation been more dire. Only once since World War II has the unemployment rate stood this high on Labor Day—during the steep recession of 1982 under President Reagan. It has remained at 9 percent or higher for 16 straight months and is likely to surpass the 19-month record of such high rates set in 1982 and 1983. When the rate includes those who have given up looking for jobs or are working part-time because they can’t find a full-time job, it is nearly 17 percent. Thus, one out of six Americans who want a job can’t find one today.

Is it possible for the government to reduce unemployment? - There was a reasonably interesting call today between various bloggers and Jason Furman, an economic policy wonk at the White House. The main message was that the Obama administration’s new economic-stimulus proposals were essentially ways of front-loading attempts to create long-term economic growth, and that unemployment would come down as and when that growth arrived. I wasn’t particularly convinced. There’s a colorable case — made today by Brad DeLong — that all of these proposals, coming as they do halfway into Obama’s four-year term in office, are too little too late, compared to the messages that Larry Summers and others were sending at the beginning of 2009. On the call, Furman valiantly tried to paint policies like cash-for-clunkers and the extension of unemployment insurance as being all about creating jobs, but the fact is that it’s hard for any government to create jobs, beyond simply hiring more people, and the effect of those policies on the unemployment rate was surely minimal at best.

Government Employment since 1976 - Menzie Chinn at Econbrowser posted a graph of total government employment over the last decade: The "Ever-Expanding" Government Sector, Illustrated In response to the comments to his post, here are a couple of additional graphs: This graph shows federal, state, and local government employment as a percent of the civilian noninstitutional population since 1976 (all data from the BLS). Federal government employment has decreased over the last 35 years (mostly in the 1990s), state government employment has been flat, and local government employment has increased. Note the small spikes very 10 years. That is the impact of the decennial census.The second graph shows government employment excluding education as a percent of the civilian noninstitutional. The percent of federal and state government employment (ex-education) have all declined. Local government employment has been steady - so overall government employment (ex-education) as a percent of the civilian population is down over the last 35 years.

Trade Deficit declines in July - The Census Bureau reports: [T]otal July exports of $153.3 billion and imports of $196.1 billion resulted in a goods and services deficit of $42.8 billion, down from $49.8 billion in June, revised.The first graph shows the monthly U.S. exports and imports in dollars through June 2010. Although imports declined in July, imports have been increasing much faster than exports.  The second graph shows the U.S. trade deficit, with and without petroleum, through July. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. The decrease in the deficit in July was across the board, although the oil deficit only declined slightly. And the trade gap with China declined slightly to $25.92 billion from $26.15 billion in June - essentially unchanged. This is the 2nd largest monthly trade deficit since the 2008 collapse in trade.

U.S. Trade Deficit Narrowed in July as Exports Rose - NYTimes - The United States trade deficit narrowed by 14 percent in July as exports by American companies rose by about $2.8 billion, suggesting that trade would be less of a drag on growth in the months ahead.  Commerce Department figures showed that exports totaled $153.3 billion in July, up from $150.6 billion in June. A $2.3 billion increase in capital goods, most of it civilian aircraft, accounted for the bulk of the export increase. Industrial supplies and materials, and food and beverages also rose.  The trade deficit narrowed to $42.8 billion, down from a revised $49.8 billion in June, the department said. Imports totaled $196.1 billion in July, $4.2 billion less than June. Much of the decline, $1.9 billion, came from lower imports of consumer goods.  Economists said that the smaller trade deficit in July meant there would be less of an impact on the third-quarter gross domestic product than the deficit had in the second quarter

Exports and Net Exports - The classic way out from a deleveraging slump is export-led growth. You put your productive capacity to use making stuff for other people since your own people can’t afford to buy more stuff. This lets you earn income and delever. But something I find is often missing from these discussions is the distinction between exports and net exports. But you need to pay attention to the fact that the United States exports lots of stuff and our exports have been growing steadily for decades: If I wanted a really striking example, I could cheat and show you the version of the chart that doesn’t use log scale.

Once a Dynamo, the Tech Sector Is Slow to Hire - For years the technology sector has been considered the most dynamic, promising and globally envied industry in the United States. It escaped the recession relatively unscathed, and profits this year have been soaring.  But as the nation struggles to put people back to work, even high-tech companies have been slow to hire, a sign of just how difficult it will be to address persistently high joblessness. While the labor report released last week showing August figures provided mildly positive news on private-sector hiring, the unemployment rate was 9.6 percent.  The disappointing hiring trend raises questions about whether the tech industry can help power a recovery and sustain American job growth in the next decade and beyond. Its tentativeness has prompted economists to ask “If high tech isn’t hiring, who will?”  “We are talking about people with very particular, advanced skills out there who are at this point just not needed anymore,”

Americans in their 50s especially hard-hit by recession - In this bloody free-for-all of a recession, Americans in their 50s are really taking it hard on the chin.Their 401(k)s have been cut down to 201(k)s. Their pensions have been frozen, or worse. Their home equity has evaporated just as their kids' college bills come due. And while younger workers may have been hit harder by unemployment, 50-something Americans who get laid off are stuck in jobless limbo longer than any other age group. Peek inside this statistical slaughterhouse: As older Americans headed for retirement, the recession cut into their plans, sending retirement account balances down 32 percent from a peak of $8.7 trillion in September 2007 to $5.9 trillion in March 2009, according to AARP. As the recession kicked in, more than one of every four foreclosures and delinquencies involved Americans age 50 and older, this on top of the decade's already sharp increase in bankruptcy filings for the 55-and-above set.

Millions struggle with part-time or lower-paying jobs - Beyond the 15 million Americans who have no jobs at all, millions more are caught in part-time or limited jobs that don't pay them enough to maintain their standard of living — much less contribute to the strong consumer spending needed to power the nation out of the economic doldrums. Economists have a technical term for these people: underemployed. The latest Labor Department report shows there are nearly 9 million people like Linehan who want full-time jobs but can't find them. In some cases, their formerly full-time employers have reduced their hours because of a lack of business. The lack of full-time work is both a hardship for individuals and their families and a substantial drag on the still-feeble recovery. With consumer spending accounting for 70% of the nation's total economic activity, having millions of underemployed workers means a loss of economic vitality — along with lower tax revenues and more budget problems for governments at every level.

For many unemployed workers, jobs aren't coming back. The nation's job deficit is so deep that even a powerful recovery would leave large numbers of Americans out of work for years, experts say. And with growth now weakening, analysts are doubtful that companies will boost payrolls significantly any time soon. Unemployment, long considered a temporary, transitional condition in the United States, appears to be settling in for a lengthy run. "This is the new reality," said Mark Zandi, chief economist at Moody's Analytics. "In the past decade we've gone from the best labor market in our economic history to arguably one of the worst. It's going to take years, if not decades, to completely recover from the fallout." The U.S. safety net wasn't designed to withstand such a strain. The extent and duration of unemployment benefits vary by state, but 26 weeks is typical. Several federal extensions have increased that to 99 weeks in California and other hard-hit states. Even so, an estimated 3.5 million Americans will have run out of benefits by the end of the year. About 180,000 Californians have already fallen off the rolls.

How To Tell When There’s Structural Unemployment - I feel like the entire Minneapolis Fed take on structural unemployment and “skill mismatch” is a giant exercise in obfuscation. Of course the economy has many structural features and at any given time there are limits to growth. But there’s a very simple way to tell when additional monetary stimulus will no longer increase real output and that’s by looking at inflation. Return to my parable of the counterfeiters. If a bunch of counterfeiters show up in a country where there’s full employment—for whatever you think full employment means for that country—then by definition the only impact that the arrival of their funny money will have is to raise the price level. There’s no ability for the economy to actually produce more goods and services, so when the counterfeiters show up existing goods and services are simply reallocated to new buyers and they become scarcer and more expensive. By contrast, if there are genuinely idle resources the impact on the price level will be modest and what you’ll mostly see is unemployed people getting jobs and producing new goods and services.

Jobless Thursday - America's Infrastructure Crisis - Not only are our students failing to keep up with the rest of the World but America is close to getting a failing grade in Infrastructure.  That’s right, what was once the World’s mightiest and proudest economy, this once great nation of builders has been given an overall grade of D in the American Society of Civil Engineers report on our Infrastructure. The 2009 Grades include: Aviation (D), Bridges (C), Dams (D), Drinking Water (D-), Energy (D+), Hazardous Waste (D), Inland Waterways (D-), Levees (D-), Public Parks and Recreation (C-), Rail (C-), Roads (D-), Schools (D), Solid Waste (C+), Transit (D), and Wastewater (D-).  Awful?  Shameful?  How about DANGEROUS?  Deadly even… For one thing, The number of high hazard dams—dams that, should they fail, pose a significant risk to human life—has increased by more than 3,000 just since 2007, when there were "just" 1,000 dams at risk and 3,000 to pro actively maintain but the administration refused to fund the project, now the costs have tripled as the situation deteriorates but that’s nothing compared to what happens if just a few of them break completely.  1,819 dams are now in the "high hazard" category and, with the current budget, for every one damn that is repaired, two more become an emergency. 

Stimulus and Private-Sector Hiring - Stimulus advocates have offered the United States engagement in World War II as evidence that government spending can end a depression and expand an anemic private sector. They are incorrect about World War II and give dangerous advice for today. The Great Depression began in 1929 and lasted too long. Stimulus advocates tell us that the government spending surge that occurred as a result of our joining the war is the primary reason the Great Depression eventually ended. The chart below shows the civilian unemployment rate from 1929 through 1941. It’s true that World War II had an effect on top of the recovery the United States had experienced before Pearl Harbor, but that effect is easily exaggerated. The expanded wartime capacity did not primarily come from putting the Depression unemployed back to work but by drawing into the marketplace women, teenagers and others who were not part of the Depression labor force. Nor did wartime military spending expand the private sector. Many parts of the private sector shrank during the war precisely because the government was spending so much.

Manufactured concern - MATT YGLESIAS says he's unhappy with Louis Uchitelle's use of the chart at right to illustrate the evolution of American manufacturing. What we see there is a decline in share of manufacturing in output. Mr Yglesias notes that one might just as easily look at indexes of actual output, which have increased steadily over the past half century. In recent years, annual American manufacturing output has been between $1.5 and $2 trillion, which means that, for the moment, America is the world's biggest manufacturer. Why has the share of manufacturing in the economy declined? Well, one answer is that rising productivity has made manufactured goods very cheap relative to services, and so Americans now devote a much larger share of their incomes to things like health services, education, and so on. To the extent that the American economy has become overly dependent on domestic consumption, that has likely contributed to a more rapid decline in the share of manufacturing output in the economy. But we're not talking about a big difference here. Services account for about 77% of American economic activity and about 72% of industrial powerhouse Germany's economic activity.

Labor’s laboring effort - The United States’ rate of “union density,” the proportion of employed workers who belong to unions, now about 12%, is far below of that of most western European nations (with the interesting exception of France) which range from about 20% to about 60%. While union membership rates have been declining there as well, the drop-off is not nearly as steep as here. This year has not been particularly good for labor with unemployment so high. The last few decades have not been particularly good with most Americans’ wages having stagnated since about 1970. And the last half-century has not been particularly good for the labor movement, with membership declining since about 1960.

The Return of the Blue-Collar Blues - NYTimes - The ’70s began on a remarkably hopeful — and militant — note. Working-class discontent was epidemic: 2.4 million people engaged in major strikes in 1970 alone, all struggling with what Fortune magazine called an “angry, aggressive and acquisitive” mood in the shops.  Most workers weren’t angry over wages, though, but rather the quality of their jobs. Pundits often called it “Lordstown syndrome,” after the General Motors plant in Ohio where a young, hip and interracial group of workers held a three-week strike in 1972. The workers weren’t concerned about better pay; instead, they wanted more control over what was then the fastest assembly line in the world. Newsweek called the strike an “industrial Woodstock,” an upheaval in employment relations akin to the cultural upheavals of the 1960s. The “blue-collar blues” were so widespread that the Senate opened an investigation into worker “alienation.”  But what felt to some like radical change in the heartland was really the beginning of the end — not just of organized labor’s influence, but of the very presence of workers in national civic life

Happy Fuckin’ Labor Day! - Michael Moore - Dear Rahm Emanuel: Happy Fuckin' Labor Day! I read this week that — according to a new book by Steven Rattner, your administration's former "Car Czar" — during White House meetings about how to save the tens of thousands of jobs that would be lost if GM and Chrysler collapsed, your response was, "Fuck the UAW!" Now, I can't believe you actually said that. Maybe Rattner got confused because you drop a lot of F-bombs, or maybe your assistant was trying to order lunch and you said (to Rattner) "Fuck you" and then to your assistant "A&W, no fries." Or maybe you did mean Fuck the UAW. If so, let me give you a little fucking lesson (a lesson I happen to know because my fucking uncle was in the sit-down strike that founded the fucking UAW).

Holding Wal-Mart Accountable - Nobody, it seems, is responsible for the conditions of work in the warehouses of Fontana -- even though warehouse work is mainly what Fontana has to offer. The Los Angeles exurb is part of California's Inland Empire, which boasts the world's largest concentration of warehouses, to which thousands of trucks make a daily 70-mile trek from the ports of Long Beach and Los Angeles, carrying Asian-made goods for market. Thousands more trucks depart daily from Fontana, carrying those goods, re-sorted and repackaged, to Wal-Marts, Targets, Loews, and Home Depots up to a thousand miles away. Close to 90,000 people work in those warehouses. But no one is responsible for the conditions of their work... Fontana's warehouse workers never made a decent wage, even when the economy was robust. Cortes made $9.50 an hour with no benefits, until she was replaced last year by a new hire who was paid $7 an hour.

Introducing the Great Divergence -In 1915, a statistician at the University of Wisconsin named Willford I. King published The Wealth and Income of the People of the United States, the most comprehensive study of its kind to date. That was when the richest 1 percent accounted for 18 percent of the nation's income. Today, the richest 1 percent account for 24 percent of the nation's income. What caused this to happen? Over the next two weeks, I'll try to answer that question by looking at all potential explanations—race, gender, the computer revolution, immigration, trade, government policies, the decline of labor, compensation policies on Wall Street and in executive suites, and education. Then I'll explain why people who say we don't need to worry about income inequality (there aren't many of them) are wrong.

Beautiful fractals and ugly inequality - Income inequality behaves like a fractal: income is very uneven at large scales and at small scales. Here’s a mapping exercise that illustrates this, with a tastefully chosen color scheme that is consistent across all maps (rich is red or brown-red, poor is pale yellow, in between is orange). We are going to go from global to the US to the New York City metro area to the neighborhood of NYU in Manhattan. At each scale, there is a remarkably high level of inequality across space. The rich coastal cities in the US and the poor rural South. Rich lower and midtown Manhattan and poor South Bronx. Rich West Village and Soho and poor Lower East Side. Inequality is one of the hardest policy problems, so more later. A simpler insight of economics is that the most obvious answer to inequality is exactly wrong — complete redistribution (i.e. a 100 percent tax on everyone above average to go to everyone below average) would destroy incentives for wealth creation and make everyone worse off.

"Destitute Index" - Officially unemployed - 14.9 million unemployed. Marginally Attached Workers - 2.4 million. Part Time For Economic Reasons - 8.9 million. The total is 26.3 million but not all of the above are destitute or in poverty, even though the vast majority of them are suffering in some way. Unfortunately, the total does not stop there because it does not include children or elderly. Both children and the elderly have been affected by the economic downturn, but neither reflects in unemployment stats. Most of the destitute are on food stamps (now called SNAP - Supplemental Nutrition Assistance Program to destigmatize the name).According to SNAP, there are 41,275,411 on food stamps. However, that total is understated because it does not include the homeless. In addition, one must factor in AFDC (Aid to families with dependent children), Head Start, and numerous other state programs. One cannot add them all up because of obvious overlap.

Food Stamp Participation Climbs 10%: … [There are] 41 million Americans relying on the Department of Agriculture’s Supplemental Nutrition Assistance Program, known to many of us as “food stamps.” The story is simple: in this serious recession, more and more people have turned to the social safety net for help in meeting the needs of daily life — 26 million in September 2007, 31 million by September 2008, and in June 2010, the most recent report, 41 million people in 19 million households. Thirteen percent of the population, or more than one in eight people. That’s an increase of 10 percent from a year ago; participation increased every month this year. The costs of the benefits were $50 billion in the last fiscal year — about $130 per month per person. (How much did we spend on AIG?) …

Food Stamps Slated For Cuts - While the numbers of people receiving food assistance through the USDA SNAP program (formerly know as food stamps) are growing, funding is set to be cut, if a bill passed by the House makes its way into law. It comes down to budget priorities, and is a preview of the “austerity” we will be seeing from federal and state governments as they try to mitigate the costs of the financial crisis and the weak economy we are all grappling with. Yesterday I wrote about how the SNAP has grown in the past few years (see that post here). ... Mark Thoma followed up on the topic, wondering how food stamps would fare in the proposed rollbacks of federal spending declared by House Minority Leader John Boehner (Republican, Ohio). (See Mark’s post here.) Anyway, I wasn’t able to reach Rep. Boehner’s people, but here’s what has already happened in the House, two weeks ago, as the Democrats who still are in the majority try to spur the economy with the shrinking funds available, and deal with the political will of Republicans:  This afternoon, the House, reconvened for a special emergency vote, passed a $26.1 billion bill providing aid to cash-strapped state governments. The bill provides $16.1 billion in Medicaid funding and $10 billion to help states keep teachers on the payroll. … To pay for the bill - Republicans refused to cross the aisle unless the bill was entirely deficit-neutral - the Senate resorted to some controversial cuts… [M]ost controversially, it took $12 billion from future Supplemental Nutrition Assistance Program, or food stamps, funding. Senate aides stress that the cut does not cut the benefits authorized in the most recent Farm Bill. It takes from expanded benefits created in the $787 billion American Recovery and Reinvestment Act, the Feb. 2009 stimulus. ...

Food Pantries Are Feeling The Pinch - Thousands of people turn to the Lutheran Social Services Community Care Center in Van Nuys for help putting food on the table.  Last week, a sign went up on the door: "We're sorry but we ran out of food."  With demand for assistance continuing to rise, officials at many Los Angeles County food pantries say they have had to reduce what they offer or turn away people in need.  About 284,000 county residents are served each month at the 500 pantries supplied by the Los Angeles Regional Foodbank, according to figures from April, May and June. That is nearly 21% more people than in the same months last year and 48% more than in 2008.  "We're distributing more food to local pantries than ever before, yet it's still not enough to keep pace with the growing need in the community,"  The food bank has increased the volume of commodities it distributes by 62% in the last two years with help from the U.S. Department of Agriculture, grocery stores and community food drives.

How Many People Experience Homelessness? There is no easy answer to this question and, in fact, the question itself is misleading. In most cases, homelessness is a temporary circumstance -- not a permanent condition. A more appropriate measure of the magnitude of homelessness is the number of people who experience homelessness over time, not the number of "homeless people."  As a result of methodological and financial constraints, most studies are limited to counting people who are in shelters or on the streets. While this approach may yield useful information about the number of people who use services such as shelters and soup kitchens, or who are easy to locate on the street, it can result in underestimates of homelessness. Many people who lack a stable, permanent residence have few shelter options because shelters are filled to capacity or are unavailable. A recent study conducted by the U.S. Conference of Mayors found that 12 of the 23 cities surveyed had to turn people in need of shelter away due to a lack of capacity. Ten of the cities found an increase in households with children seeking access to shelters and transitional housing while six cities cited increases in the numbers of individuals seeking these resources (U.S. Conference of Mayors, 2007).On an average night in the 23 cities surveyed, 94 percent of people living on the streets were single adults, 4 percent were part of families and 2 percent were unaccompanied minors.  Seventy percent of those in emergency shelters were single adults, 29 percent were part of families and 1 percent were unaccompanied minors.  Of those in transitional housing, 43 percent were single adults, 56 percent were part of families, and 1 percent were unaccompanied minors.  Those who occupied permanent supportive housing were 60 percent single adults, 39.5 percent were part of families, and .5 percent were unaccompanied minors (U.S. Conference of Mayors, 2008).

A National Disaster: Examining a Welfare System Broken by Reform - When the opponents of welfare sold us on the idea of "welfare reform", what we were supposed to get was a responsible, compassionately-repaired welfare system. What we actually received was, for all practical purposes, an abolishment of welfare for the sake of partisan politics. Little to no thought was given toward the future hardships that might be imposed upon America's poor; at the time that the reform bill passed, the country was in the midst of an economic boom, jobs were plentiful, and wealth was increasing at a staggering rate. Fourteen years later, as the nation faces an economic turndown of epic proportions, staggering job losses, sharply rising costs for food and fuel, and disappearing retirement accounts, the only things that seem to be increasing are need and despair. Although welfare reform has resulted in a massive reduction of individuals "on the rolls", this drop is not necessarily a positive thing, as it has not been accompanied by a significant rise in self-sufficiency. Caseloads have decreased because of a combination of time limits and hassle-related drop-offs. Poverty remains a serious threat to the fabric of the nation, especially deep poverty, and the reformed welfare system is ill-prepared to address the imminent increase in poverty in a post-economic crash nation.

More Children Being Raised by Grandparents - The number of American children being raised by their grandparents rose after the recession began, according to a report from Pew Social Research. The report, based on an analysis of Census data, found that the number and share of children who lived with their grandparents had been slowly rising over the last decade but increased sharply from 2007 to 2008:  The sharpest increase in the number of children who had a grandparent as a primary caregiver was among white children, though in general this family set-up is more common in black and Hispanic families. Not all of these children live alone with their grandparents; in fact, only 43 percent of these children have no parent in the household. Nearly half (49 percent) of children being raised by grandparents also live with a single parent, and 8 percent live with both parents in the household in addition to the caregiver grandparent. Most grandparent caregivers — 62 percent — are women, the report found.

Religious Outlier - A Gallup report issued on Tuesday underscored just how out of line we are. Gallup surveyed people in more than 100 countries in 2009 and found that religiosity was highly correlated to poverty. Richer countries in general are less religious. But that doesn’t hold true for the United States. Sixty-five percent of Americans say that religion is an important part of their daily lives. That is compared with just 30 percent of the French, 27 percent of the British and 24 percent of the Japanese. I used Gallup’s data to chart religiosity against gross domestic product per capita, and to group countries by their size and dominant religions. The cliché goes, “a picture is worth a thousand words.”  Assuming that this holds true for charts, here is mine.

Whatever happened to the Guns or Butter premise - Naomi Freundlich at Maggie Mahar’s Health Beat Blog discusses the passage of the $26 billion state aid package and why it does not go far enough in securing healthcare for those who qualify for Medicaid. Passage of $26 billion State Aid Package Is Merely a Stop-Gap Measure For Medicaid Woes. To get this past the Senate, the bill was stripped of $12 billion Food Stamp Program and closed loopholes in incentives which encourage employers to move jobs overseas to make it revenue neutral. While it is good to see Congress start to close loop holes for companies and individuals who utilize them to their own benefit and not for what they were intended, you have to wonder what were they thinking when it came to the food stamp program. In the midst of a mediocre job creation economy with no end in the near term, the millionaire Senate balances the budget on the backs of the poor who depend upon Food Stamps . . . 41 million citizens in 2010 . . . to get Senator’s Snowe and Collin’s votes. The kicker here is the Senate playing Education off against healthcare and food stamps. Education, healthcare, or food ???

A Tale of Three States - The Bureau of Labor Statistics released national data on Friday for August that showed a relatively static employment situation. Private employment increased, government employment dropped, and the overall unemployment rate remained around 9.6 percent, which is where it has been since May. Regional unemployment patterns have also displayed remarkable persistence for more than a year. Two days earlier, the bureau reported metropolitan-area unemployment numbers for July, which remind us that we are in the Flo-Mi-Ca recession, where Florida, Michigan and California continue to contain the majority of metropolitan areas with truly terrible unemployment rates.Florida, Michigan and California are the three large states with unemployment rates of 12 percent or more. Why has economic pain come to three states that are, in so many ways, completely unlike each other? One view is that their current suffering is the hangover of past success and a reflection of an abundance of people relative to economic activity.

New York is running on empty, state Controller Thomas DiNapoli warns - New York State Controller Thomas DiNapoli warned Thursday that the recently adopted state budget relies on risky and temporary funding that could put New York in another crisis.The Democratic controller's annual analysis says the budget enacted four months late totals nearly $136 billion. "After months of budget dysfunction and delay, New York is still on the edge of a very steep financial cliff," DiNapoli said.

Budget Analysis Predicts $1.3B Budget Hole for Indiana - A nonpartisan budget analysis predicts the General Assembly will have trouble avoiding tax hikes in the next state budget. Indiana's tax collections are up nine-percent this fiscal year, but that's largely because last year was so awful. Even if the state maintained that pace next year, the Indiana Fiscal Policy Institute says it would be $647 million short of what it needs just for required increases in pensions and Medicaid. The institute says 2.9% growth is more realistic, leaving a $1.3 billion hole."The economy is not going to grow enough to increase revenue to offset the projected deficit,"

Cash-strapped Metro targets drivers' pay - Seattle Times - After two years of tapping reserves, boosting fares, surviving on federal grants and postponing new routes, King County Metro Transit managers now are looking behind the wheel for savings. Metro drivers rank third nationally in wages, with a top rate of $28.47 an hour, and the average yearly income, including overtime, is almost $61,000 a year, according to a Metro review that includes full- and part-time drivers. Because of cost-of-living raises in the union contract, drivers' pay rose nearly 4 percent each year over the past five years. Union leaders say the growth merely brings drivers back to a reasonable standard of living, after losing ground in the 1990s.

State government squeezing Springfield landlords, building owners say - State officials say they’ve saved $20 million by consolidating, renegotiating and rebidding leases on property the state rents throughout Illinois. One of the state’s landlords, though, said the state’s efforts to slash leasing costs will “devastate downtown Springfield,” possibly including foreclosure actions aimed at the Bressmer and Mendenhall buildings in the 600 block of West Adams Street. “It’s a shell game. What they are doing is generating short term gains to plug budget holes today that will result in long-term damage and cost to the state and Springfield,” said Mark Friedman, a California-based developer who owns state-leased property in Springfield.

Alabama's Jefferson County To Get Receiver: Judge - An Alabama judge said on Tuesday he would appoint a receiver to oversee the sewer system revenues of debt-ridden Jefferson County, in a setback for county authorities. The Bank of New York Mellon, trustee for the county's creditor banks, won its request for the appointment of a receiver empowered to raise sewer revenues to repay more of the county's $3.2 billion debt. Jefferson County, which is home to the state's largest city, Birmingham, is fighting to stave off what would be the largest municipal bankruptcy in U.S. history.  The county accrued the debt in the mid-2000s. It escalated in 2008 when variable and auction rate swaps were devalued and in the fallout from the crisis several prominent county officials were jailed for corruption. The bonds were originally intended to refinance a federally mandated upgrade to the county sewer system.

Pa. capital city's debt mounts amid political feud — Pennsylvania's financially troubled capital city is trying to avoid painful budget cuts while city leaders feud over how to deal with a staggering debt that is threatening to drag the city into bankruptcy. In 2003, the city decided to renovate its aging and inefficient trash incinerator — but the project quickly went awry and costs ballooned, leaving the city on the hook for $280 million-plus debt. Last year, the Thompson-led council rejected a proposal by her predecessor to lease the city's parking lots, spaces and garages for 75 years to a private company in exchange for a $215 million up-front payment. Gov. Ed Rendell has declined to bail out Harrisburg, and has endorsed the idea of the sale or lease of major city assets, such as the parking garages and an island in the Susquehanna that is home to a soccer field and a minor league baseball park.

Pennsylvania's Rendell Working to Avoid Harrisburg Bankruptcy (Bloomberg) -- Pennsylvania Governor Ed Rendell said he opposes a bankruptcy filing by the state’s capital city, Harrisburg, which has told bondholders it cannot make $3.3 million in general-obligation bond payments due Sept. 15. Rendell said his administration is working with the city to pay for a financial adviser. Pennsylvania, the sixth most-populous U.S. state, has no authority to make the debt-service payment, which is scheduled to be covered by its insurer, Ambac Financial Group, on Harrisburg’s behalf, Rendell said in an interview with Margaret Brennan on Bloomberg Television’s “InBusiness.” “They have a chance to dig themselves out of this without going into bankruptcy, and that’s something I’d like to see,” he said today. “Harrisburg has some assets they can sell.”

Louisiana Agencies Weighing 35% Budget Cut Possibility - Every department of state government is reviewing revenues and expenditures to draw up new budgets with an eye on possibly having to deal with 35 percent less money than they have now Commissioner of Administration Paul Rainwater says drafting what-if budgets is "just an exercise" as his office works to determine how much has to be cut. Rainwater issued that challenge, sending some agencies into hurry-up mode, but others are taking it in stride, accustomed to dealing with early fears of massive budget cuts. The difference this time, though, is that $1.56 billion in federal stimulus funds that are spread throughout state government disappear June 30, 2011. Added to an anticipated drop in state revenues, the Joint Legislative Committee on the Budget cautioned state agencies in August they are looking at a $1.6 billion shortfall -- about 20 percent of the current year's budget.

Jobs Surge for the Class of 2010 - There was a surprising development in the latest jobs report - the number of young adults counted as being employed surged during August 2010!  In fact, young adults between the ages of 20 and 24 enjoyed the greatest increase of all Americans counted as being employed by age group.  All told, young adults took nearly 3 out of every 5 of newly filled jobs during the month, or rather, they represented 168,000 of the total increase of 290,000 employed individuals counted as being part of America's workforce in August 2010.  By contrast, both teens (Age 16-19) and adults (Age 25+) saw modest increases in their respective ranks of the employed.

Collecting spare change for the schools - Spare change? Starting Monday, your pennies, nickels and dimes will be gratefully received in collection boxes at public schools in San Francisco and South San Francisco, and Walgreens stores in both cities. In another sign of the economic times, the San Francisco Chamber of Commerce is teaming up with local businesses, banks and the two cities' school districts in a three-week campaign cheerfully called "The Coin Rush!"  "If you do the math," said Chamber of Commerce CEO Steve Falk, citing a U.S. Mint estimate that $80 million worth of pennies alone are circulating or unaccounted for in the Bay Area, "we can see that collecting pennies, nickels and dimes can add up to a significant amount for our schools."  So far, 58 public schools in San Francisco and 15 in South San Francisco have signed up for the campaign, which is scheduled to last through the end of the month. First National Bank of Northern California has volunteered to oversee the collection account, and armored cars provided by San Leandro's Dunbar Armored Inc. will be securing the collection boxes' take.

Why the Education Gap? - Probably the most important and intractable economic problem we face is not restarting the economy after the financial crisis, but the decades-old problem of stagnant wages for the lower and middle classes and the consequent massive increase in income inequality. This is something that Raghuram Rajan brings up in the first chapter of Fault Lines, and, like many people, he points the finger at education.“Recent technological advances now require many workers to have a college degree to carry out their tasks. But the supply of college-educated workers has not kept pace with demand–indeed, the fraction of high school graduates in every age cohort has stopped rising, having fallen slightly since the 1970s.” There are certainly many problems with our educational system. The list includes huge disparities in early childhood preparation; expensive college tuition and insufficient financial aid; the property tax funding system for K-12 education, which means that rich towns (usually) spend more on their schools; unions that make it impossible to get rid of bad teachers; the fact that we don’t even know what exactly makes a good teacher; and, though not that big a factor, the fact that some parts of the country insist on teaching children that human beings aren’t subject to the laws of evolution.

Slow Learners and Good Teachers - One of the objections that’s often raised to using test scores in teacher evaluations is that students are not randomly assigned to teachers. A teacher may be assigned a large number of troubled students because she is especially good at helping such students. Comparing her students’ test scores to those of an honors class obviously wouldn’t be fair. In reality, I’m not aware of any teacher-measurement system that uses test scores in this way. Instead, the systems tend to be based on the amount of progress children make over the course of the year, comparing their end-of-year test scores one year with their end-of-year scores the prior year. That’s what The Los Angeles Times did in its big teacher-evaluation series, relying on a method called value-added analysis. In The New York Times Magazine this week, I tried to argue that this approach still wasn’t foolproof, because some teachers might be assigned more slow learners than other teachers. Kevin Carey, writing at the Quick and the Ed blog, disagrees:

Paying Third-Graders for Better Test Scores - Efforts to improve education in the U.S. has included financial incentives for high-performing teachers and programs have targeted middle- and high-school students, but a recent study found success in giving money to kids as young as third grade who scored well on standardized tests. In a paper published by the National Bureau of Economic Research titled “Paying to Learn: The Effect of Financial Incentives on Elementary School Test ScoresEric P. Bettinger of the Stanford School of Education looks at a program in the poor, Appalachian community of Coshocton, Ohio. The pay-for-performance plan targeted third through sixth graders who took standardized tests in math, reading, writing, science, and social studies. The students could earn up to $100 — $20 per score of Advanced in each test. Students who scored proficient were awarded $15 per test. In order to make sure the proceeds went directly to the students, payment was made in “Coshocton Children’s Bucks,” which could only be redeemed by kids for children’s items. Participation in the program was randomized based on a lottery as specified by Robert Simpson, a local factory owner, who financed the effort.

If There Is Interest, Children Will Learn - That’s the lesson of this TED talk from Sugata Mitra. Mr. Mitra conducts experiments in which he plants computers in poor villages in the developing world, without instruction or supervision, and watches what happens.

UCLA business school to end public funding - A leading business school in the University of California system is preparing to forgo public funding amid increasing uncertainty about the state’s economic health and California’s ability to pay for higher education. The UCLA Anderson School of Management plans to fill the funding gap with money from private donors, Its decision to opt out, which is awaiting the approval of Mark Yudof, president of the UC system, is a clear indication of the broad changes that lie ahead for the network, which was established in the 1960s with a public mandate to provide world-class education to deserving students regardless of their ability to pay. The system, which includes colleges in Berkeley and San Diego, is seen as one of California’s jewels yet has struggled in recent years as the state has grappled with the recession and plunging tax revenues.

Why UC is exploring online learning: Cost, access, innovation - The University of California is launching an online learning pilot program. If successful, I hope the university will embrace large-scale online instruction — not to replace the on-campus experience, but to enrich it. More urgently, online learning would enable us to serve the growing number of qualified students for whom there will be no room on campus or for whom a residential full-time program won’t work. Online education could become central to the University of California. Technological evolution, especially social networking, is making innovations in teaching possible; even in huge courses, instruction doesn’t have to be limited to the sage-on-the-stage.

Christie Begins Assault On N.J. Pensions And Benefits -- As Democratic legislators Tuesday attempted to continue to place Gov. Chris Christie in the center of the bad news about New Jersey failing to gain $400 million in federal education aid, the governor launched what aides are describing as a campaign to gain public support for his agenda to rebuild the state.  Christie's remarks touched on what he sees as early successes of his 7-months-old administration in bringing about bipartisan solutions to the critical challenges faced by the state, including closing an $11 billion budget deficit, passing a 2 percent cap on annual property tax hikes, and the first steps toward pension and benefit reform. New Jersey's unfunded benefit obligation rises to $173.9 billion (assuming 3.5% discount rate instead of the current 8.25%). This amount is equivalent to 44 percent of the state's current GDP and 328 percent of its current explicit government debt

Older workers without jobs are taking Social Security early - "Working is my whole life. That's what I do," said Patterson, of Riviera Beach, Fla., who spent decades as a union ironworker. "I'm going to be forced to retire just to have some income." Millions of workers are in the same situation, even though collecting Social Security at 62 instead of at the full retirement age of 66 means taking a 25 percent hit on benefits. The average Social Security retirement benefit is $1,171, and a 25 percent reduction amounts to $293 a month.  A record 2.74 million Americans filed for Social Security in 2009, and nearly 72 percent of men who filed for Social Security last year took their benefits before 66.

The Schizophrenia of Social Security Reporting - When I first started paying serious attention to Social Security reporting back in 1997 I was struck by its curious mix of precision and fluidity and how that mix moved from the latter to the former as you went from the data tables to the top line numbers and then on to whatever coverage the Report received by the media. That is by the time the numbers hit the New York Times everything was in declarative mode "The Trustees project the Trust Fund WILL go to Depletion in year X unless taxes are increased by 2.xy%". But when you examine the actual Report in detail you find that 'year X' and '2.xy%' are simply mid-points of a probability distribution. Worse when you examine the Reports on a year over year basis you find that that mid-point changes in ways that can whip the long-term probability tail significantly. Yet in the reporting there is always the unstated assumption that THIS year's data set is closer to projecting the next 75 years than last year's set.

Making Social Security less generous isn't the answer - Ezra Klein - Raising the Social Security retirement age has become as close to a consensus position as exists in American politics. And for a while, I agreed. It seemed obvious: People live longer today, and so they should work later into life. But as I've looked at the issue, I've decided that I was wrong. We should leave the retirement age alone. In fact, we should leave Social Security alone -- unless we're making it more, rather than less, generous.  Social Security provides disability insurance and survivor's benefits, but when people talk about it, they tend to be referring to its role as a program that provides income support to retirees. The average monthly benefit of $1,170 replaces about 39 percent of the person's pre-retirement earnings. Over the next two decades, the "replacement rate" is slated to drop to 31 percent. That is less than in most developed countries -- the Organization for Economic Cooperation and Development ranks it 25 out of 30 member nations.  The system, in other words, is not that generous, and it's becoming less so every year.

Ezra Klein - 30 options for reforming Social Security - As I've said, my preference is to make Social Security more, rather than less, generous. There are a lot of areas in which the federal government should be spending a lot less -- but I don't think Social Security is one of them. Still, Social Security reform is likely to be a big issue in the fall, and so it's worth getting a sense of the wide range of potential changes available. This chart comes from the Congressional Budget Office's report on 'Policy Options in Social Security,' and it shows both what people think they are, and how much they'll save. Click for a larger version. Straightforward options like raising the retirement age and applying payroll taxes to all income get the most attention, as people can actually understand them. But for that exact reason, I'd guess that more opaque changes, such as "progressive price indexing," which ties benefits to prices rather than earnings, are more likely.

Why 'Nothing' is STILL the 2nd Best Plan for Social Security: and Why YOUR Plan Probably Sucks - A curious feature of the battle over Social Security is that it is almost always a battle of adjectives and adverbs and not numbers, In particular almost everyone agrees that 'Nothing' is not a plan, People are not always clear on the consequences of 'Nothing' whether that be 'massive' benefit cuts or 'devastating' program cuts or just the Invisible Bond Vigilantes burning down our fiscal house but everyone just assumes its going to be bad. Real bad. Horribly really bad. Because only morons don't understand that Something has to be done: benefit cuts or retirement age changes or cap increases or means testing but Something!! Well call me Moron. Or maybe Guy That Has Read the Report and Wonders What the Shouting is About. Maybe that still adds up to Moron, but can we at least start with official numbers and methodology?

Reading List for the Serious Student of Social Security

Medicare: The $60 Billion Fraud (60 Minutes video) Medicare and Medicaid fraudsters are beating U.S. taxpayers out of an estimated $90 billion a year - $60 billion of it from Medicare - using a billing scam that is surprisingly easy to execute. Steve Kroft investigates Medicare

Tomorrow's Medicare: The Efficient Hybrid? - It begs the question: which is better — a government-run fee-for-service program or a system based on private plans? Reasonable people can disagree. But when it comes to taxpayer costs, the answer may be, "both." Counter-intuitively, the program's messy duality may include the potential for savings and efficiency.  Because health care markets are not all alike, what is best for one market may not be best for another. Within a model of competition across all Medicare plan types, the co-existence of private plans and a public fee-for-service option can be harnessed to reduce program costs.  According to analysis by American Enterprise Institute-funded health economists and researchers taxpayers could save 8% or about $50 billion per year (based on a 2010 Medicare cost estimate) through a competitive pricing system in which all plans, fee-for-service included, offer bids for a standardized set of benefits and the government pays all plans based on the lowest of these cost estimates. .

Health Affairs covers malpractice - The September issue of Health Affairs focuses on medical malpractice in the United States, and there are a number of pieces in there worth reading.  I’m going to discuss just a few.  Unfortunately, those looking for “answers” may be disappointed.  While many of the pieces are rigorous and thoughtful, they are often based on models and have limitations that will undoubtedly leave them open to attack by those who do not like their implications.  That does not mean they should be ignored. Low Costs Of Defensive Medicine, Small Savings From Tort Reform, by J. William Thomas, Erika C. Ziller, and Deborah A. Thayer.  While many seem to believe that capping damages and awards is the panacea to the high cost of health care in the US, no one ever really seems to explain why.  The best explanation I have heard is that reducing indemnity payments will mean both fewer cases and less expensive cases, which will bring down the cost of malpractice insurance.  This will make doctors behave in a less defensive manner, and then they will practice better and cheaper medicine, since they fear lawsuits less. 

Health Insurer PacifiCare Faces Up To $9.9 Billion In Fines For Nearly A Million Alleged Health Care Violations - California regulators are seeking fines of up to $9.9 billion from health insurer PacifiCare over allegations that it repeatedly mismanaged medical claims, lost thousands of patient documents, failed to pay doctors what they were owed and ignored calls to fix the problems.  In court filings and other documents, the California Department of Insurance says PacifiCare violated state law nearly 1 million times from 2006 to 2008 after it was purchased by UnitedHealth Group Inc., the nation's largest health insurance company by revenue. Regulators said the companies broke promises to maintain smooth operations for 130,000 of PacifiCare's customers, resulting in what insurance officials nationwide believe is the largest fine ever sought against a U.S. health insurer.

HEALTH CARE thoughts: Nursing Shortage Issues - A phenomena many of us have noticed over the years (hard to exactly quantify though) is that recessions pull nurses back into the labor market. Nurses (about 94% female) often have husbands or significant others who lose jobs or hours.Also, some of the staffing pressure is off at the hospital level because elective procedures are down and that takes pressure off the nursing staffing. Recessions are not the desired means of correcting the shortage though. My files on the shortage go back at 20+ years, and amazingly little progress has been made during that time.

How Does Obesity in Adults Affect Spending on Health Care? - CBO Director's Blog -  Over the past two decades, the adult population in the United States has, on average, become much heavier. From 1987 to 2007, the fraction of adults who were overweight or obese increased from 44 percent to 63 percent; almost two-thirds of the adult population now falls into one of those categories. The share of obese adults rose particularly rapidly, more than doubling from 13 percent to 28 percent. Those adults are more likely to develop serious illnesses, including coronary heart disease, diabetes, and hypertension. As a result, that trend also affects spending on health care. A CBO issue brief released this afternoon examines changes over time in the distribution of adults among four categories of body weight: underweight, normal, overweight, and obese. Those categories are defined in federal guidelines using a measure known as the body-mass index—a measure that standardizes weight for height. CBO analyzes how past changes in the weight distribution have affected health care spending per adult and projects how future changes might affect spending going forward.

Losing weight not always a positive - The research reveals how weight loss can lead to the release of persistant organic pollutants into the blood, which can have a significant negative impact on a person’s health. Persistant organic pollutants are organic compounds commonly created by humans in industrial processes, and have been linked to a wide variety of illnesses, including disruption of the endocrine, reproductive and immune systems, dementia, and cancers. They are stored in fat tissue in the body, however Duk-Hee Lee and colleagues noted that but during weight loss -when the volume of fat is reduced - these compounds are released into the blood where they are able to reach vital organs and take their effect. They observed that this effect occurred to a lesser extent when self reported weight change was sustained for only one year compared to when sustained for 10 years

Brain cells determine obesity — not lack of willpower: study - The study, led in Australia by the Monash Obesity and Diabetes Institute (MODI) at Monash University, found a high-fat diet causes brain cells to become insulated from the body preventing vital signals, which tell the body to stop eating and to burn energy, from reaching the brain efficiently. 'We discovered that a high-fat diet caused brain cells to become insulated from the body, rendering the cells unable to detect signals of fullness to stop eating," Professor Cowley said."Secondly, the insulation also created a further complication in that the body was unable to detect signals to increase energy use and burn off calories/kilojoules." The research showed that support cells in the brain developed overgrowth in a high-fat diet. This prevented the regular brain cells (the melanocortin system or POMC neurons) from connecting with other neural mechanisms, which determine appetite and energy expenditure.

‘Five-minute brain scan’ for kids - Children's mental development could be recorded in much the same way we chart height and weight, say scientists. They have devised a way of mapping development using an MRI machine and a mathematics programme. The tool can be used to place children on a "maturation curve" just like we do with height and weight. The scientists claim the technique might one day be used to spot early signs of disorders such as schizophrenia or autism.

Study examines association between urban living and psychotic disorders - The association between psychotic disorders and living in urban areas appears to be a reflection of increased social fragmentation present within cities, according to a report in the September issue of Archives of General Psychiatry.  "There is a substantial worldwide variation in incidence rates of schizophrenia," the authors write as background in the article. "The clearest geographic pattern within this distribution of rates is that urban areas have a higher incidence of schizophrenia than rural areas." Characteristics of neighborhoods that have been associated with an increased risk of developing psychosis include population and ethnic density, deprivation and social fragmentation or reduced social capital and cohesion.

Bee decline already having dramatic effect on pollination of plants - Researchers have found that pollination levels of some plants have dropped by up to 50 per cent in the last two decades.  The "pollination deficit" could see a dramatic reduction in the yield from crops. The research, carried out in the Rocky Mountains, Colorado, is the first to show that the effect is real and serves as a "warning" to Britain which if anything has seen an even greater decline in bees and pollinators.

Fears of a decline in bee pollination confirmed - - Widespread reports of a decline in the population of bees and other flower-visiting animals have aroused fear and speculation that pollination is also likely on the decline. A recent University of Toronto study provides the first long-term evidence of a downward trend in pollination, while also pointing to climate change as a possible contributor."Bee numbers may have declined at our research site, but we suspect that a climate-driven mismatch between the times when flowers open and when bees emerge from hibernation is a more important factor," says James Thomson, a scientist with U of T's Department of Ecology and Evolutionary Biology.  Thomson's 17-year examination of the wild lily in the Rocky Mountains of Colorado is one of the longest-term studies of pollination ever done. It reveals a progressive decline in pollination over the years, with particularly noteworthy pollination deficits early in the season. 

Food Crisis Worsens in Central Africa - Torrential rains and flash floods that swept through cities and villages in Central Africa in late August have intensified a food crisis in the region, leaving upwards of 10 million people suffering from severe food shortages, the United Nations and relief organizations warned last week. The floods, which destroyed crops and livestock, struck an area already on the brink of famine after successive years of drought and failed harvests. Rising world grain prices, resulting partly from the heat wave and drought that destroyed wheat crops across Russia this summer, are compounding the crisis, relief organizations said.“Imported food in the markets is already too expensive for those most in need, and the current uncertainty in the global food market is likely to push prices higher still,”

Freshwater turtles ‘in decline‘ - Freshwater turtles are in catastrophic decline, according to a new analysis by Conservation International (CI). The group says more than a third of the estimated 280 species around the world are now threatened with extinction. The unsustainable collection of turtles for food and to supply a lucrative pet trade are the key drivers behind the fall in numbers. Habitat loss as a result of river-damming for hydro-electricity is another major concern. "These are animals that take 15-20 years to reach maturity and then live for another 30-40 years, putting a clutch of eggs in the ground every year. They play the odds, hoping that in that 50-year lifetime, some of their hatchlings will somehow evade predators and go on to breed themselves.

His Corporate Strategy: The Scientific Method Dr. Venter, now 63, made his name as a gene hunter. He was co-founder of a company, Celera Genomics, that nearly left the federally funded Human Genome Project in the dust in the race to determine the complete sequence of DNA in human chromosomes. He garnered admiration for some path-breaking ideas but also the enmity of some scientific rivals who viewed him as a publicity seeker who was polluting a scientific endeavor with commercialism. Now Dr. Venter is turning from reading the genetic code to an even more audacious goal: writing it. At Synthetic Genomics, he wants to create living creatures — bacteria, algae or even plants — that are designed from the DNA up to carry out industrial tasks and displace the fuels and chemicals that are now made from fossil fuels.

Coffee prices soar, you may feel the pinch - You may soon find yourself paying more for your morning coffee - if you aren't already. A trifecta of bad news has sent coffee futures soaring 44% since June, and companies such as Dunkin' Donuts, Green Mountain and Maxwell House are passing on those costs. Bad weather in South America is threatening crops. Brazil and top exporter Vietnam are talking about hoarding their stocks. And U.S. stockpiles are reportedly at 10-year lows. That means higher prices for U.S. coffee companies, which, in turn, may mean higher prices for consumers.

Is It Time to Start Hoarding Coffee Beans? Perhaps you shouldn't read this until you've had your first cup, but wholesale coffee prices have skyrocketed on fears that global supply will fall short of demand. In plain English: There's a worldwide coffee shortage. No kidding. Prices for arabica beans—the kind used in a decent cup of roast coffee—have jumped by more than a third in the past few months to multiyear highs. Harvests have been weaker than expected. Inventories are down to ominously low levels. And the rest of the world is drinking more coffee, meaning there's less left over for the U.S.

Cotton crunch could push up apparel prices in 2011 - Cotton prices have nearly doubled this year, hitting a near 15-year high following a chain of events among major Asian cotton producers that has choked off global supply. The price of raw cotton reached 90 cents a pound this year, up from the 40 or 50 cent average, said Mark Messura, an economist and vice president with Cotton Incorporated.  Cotton domino effect: First, a drought in China, the world's largest cotton producer and consumer, damaged crops there and forced the nation to ramp up cotton imports to make up for the shortfall.  Meanwhile, the world's second-biggest cotton producer, India, restricted its exports to protect domestic supplies and prices. At the same time, Pakistan, another major cotton producer, was hit by devastating floods, further exacerbating the cotton shortage and boosting raw cotton prices even higher.

Fungus Genes Help Turn Grass into Ethanol:  Modified yeast could help make ethanol from hard-to-digest materials. Genes copied from a common fungus could simplify the production of ethanol from abundant materials such as grass and wood chips, a development that could one day help ethanol compete with gasoline. Scientists have taken genes from a fungus that grows on grass and dead plants, and transplanted them into yeast that is already used to turn sugar into ethanol. The genes let the yeast ferment parts of plants that it normally can’t digest, potentially streamlining the production of ethanol. Most ethanol is produced using simple sugars, like the glucose derived from corn kernels or sugar cane. Researchers would like to use glucose from more abundant sources, such as corn husks and stalks, switchgrass, wood waste, and other tough plant materials. But those plant parts are made of cellulose, a carbohydrate built from long chains of sugars. For yeast to produce ethanol, the complex carbohydrate has to first be broken down into very simple sugars, a process that takes time and normally requires the addition of expensive enzymes. Though dozens of demonstration plants have been built to produce cellulosic ethanol, none is at a commercial scale.

Oil From Forestry and Agricultural Waste  - Researchers from the University of Twente's IMPACT institute are developing a method for converting biomass into oil as efficiently and cheaply as possible. Such oil could then be used as a raw material for existing refineries, in the production of transport fuels. This process involves the use of second generation biomass - oil from forestry and agricultural waste. Sascha Kersten anticipates that many cars, and certainly trucks, will be running on such biofuels by 2020.Pyrolysis oil will only react with hydrogen at high pressure, high temperature, and in the presence of a catalyst. The resultant oil, however, can be fed directly into existing refineries. "This upgrading process produces a mixture of an aqueous fraction and an oil fraction. The oil fraction can go directly to the refinery" says Dr Hogendoorn. The drawback with using hydrogen is that it is very expensive. He goes on to explain that "We are therefore studying ways of improving efficiency, to cut the amount of hydrogen used to the bare minimum."

Water: Canada’s most valuable resource - The notion of exporting water is still a taboo subject in Canadian policy circles; the country took great pains to keep water out of the North American Free Trade Agreement. But, like most things, acceptance may be a matter of price. And the price of water is rising steadily, making Canada’s freshwater bounty more valuable every day.  As with tar sands oil, the natural market for Canadian water is the United States. While places like Buffalo and Cleveland have access to just as much water as any place in Canada, that’s not where folks have been moving to lately. Increasingly, states like California and Florida are turning to desalination to meet their freshwater needs. At around 65 cents per cubic meter, the going rate of desalinated water in the US provides a very attractive pricing point for potential Canadian water exports.

SEDAC is relatively optimistic about crop yields under climate change - That's Socioeconomic Data and Applications Center at Columbia University. They are optimistic--very optimistic--relative to our predictions, at least for corn and soybeans in the United States.  Our predictions are based on statistical analysis; theirs are based on yield simulation models. They have also analyzed the whole world and have a cool interactive web page where you can see maps of their predictions. Here's their map for corn.

jeff Masters: Hottest summer in history for 50 million Americans - The U.S. had its fourth warmest summer since record keeping began 116 years ago, according to statistics issued yesterday by the National Climatic Data Center. Only 1936, 2006 and 1934 were hotter. Ten states had their warmest summer on record -- Rhode Island, New Jersey, Delaware, Maryland, Virginia, North Carolina, Tennessee, South Carolina, Georgia and Alabama. Seventeen other states had a top-ten warmest summer, including five states that had their second warmest summer in history (Figure 4). No states had a top-ten coldest summer. Record daily highs outpaced record daily lows by about 4 to 1 during the summer, with 5,287 daily record highs set, and 1,426 record lows. The summer warmth was a pretty remarkable swing from this past winter, which was the 18th coldest in U.S. history.According to Chris Burt, author of Extreme Weather, approximately 50-60 million Americans experienced their hottest summer ever. No summer in U.S. history has affected so many Americans as the "hottest-summer-on-record." The following large cities all posted a record hottest summer:

Weird Weather in a Warming World - New York City just had its hottest June-to-August stretch on record. Moscow, suffering from a once-in-a-millennium heat wave, tallied thousands of deaths, a toll that included hundreds of inebriated, overheated citizens who stumbled into rivers and lakes and didn’t come out. Pakistan is reeling from flooding that inundated close to a fifth of the country.  For decades, scientists have predicted that disastrous weather, including heat, drought and deluges, would occur with increasing frequency in a world heated by the rising concentrations of greenhouse gases. While some may be tempted to label this summer’s extremes the manifestation of our climate meddling, there’s just not a clear-cut link — yet.  Martin Hoerling, a research meteorologist who investigates extreme weather for the National Oceanic and Atmospheric Administration, calls any such impression “subjective validation.” He and other climate scientists insist there’s still no way to point to any particular meteorological calamity and firmly finger human-caused global warming, despite high confidence that such warming is already well under way.

20 Years Left: Mammals Plunge Into Extinction - Along with many species of quolls, bandicoots, possums and marsupial rats, the bettongs had thrived for millions of years in northern Australia, surviving ice ages, surging sea levels and human hunters. But many of these natives are unlikely to survive another decade or two, according to a new report which reveals an abrupt, stunning plunge towards mass extinction in the past few years. At the 136 sites across northern Australia that have been repeatedly surveyed since 2001, the mammal populations have dropped by an average of 75 per cent. The number of sites classified as "empty" of mammal activity rose from 13 per cent in 1996 to 55 per cent in 2009.

How to save the Earth: Goldstein - You’d think world leaders would be boasting that in 2009, for the first time since 1992, global emissions of man-made carbon dioxide did not increase over the previous year. Indeed, in the industrialized world — us — they dropped a record 7%.Unfortunately, the major reason wasn’t the increasing use of renewable energy. It was the global recession set off in 2008 by the U.S. subprime mortgage crisis. The reality is recessions are the only things that dramatically and consistently reduce emissions, not publicly-subsidized wind turbines, solar panels, or the shell game of buying and selling carbon credits. The reason is simple. When people and nations become poorer, they have less money to buy things, which means it takes less fossil fuel energy to provide them.), a leading monitor of global emissions, funded by the Dutch government.

Study slashes estimated rates of ice loss from Greenland, West Antarctica - Estimates of the rate of ice loss from Greenland and West Antarctica, one of the most worrying questions in the global warming debate, should be halved, according to Dutch and US scientists.In the last two years, several teams have estimated Greenland is shedding roughly 230 gigatonnes of ice, or 230 billion tonnes, per year and West Antarctica around 132 gigatonnes annually. Together, that would account for more than half of the annual three-millimetre (0.2 inch) yearly rise in sea levels, a pace that compares dramatically with 1.8mm (0.07 inches) annually in the early 1960s. But, according to the new study, published in the September issue of the journal Nature Geoscience, the ice estimates fail to correct for a phenomenon known as glacial isostatic adjustment. This is the term for the rebounding of Earth's crust following the last Ice Age.

Arctic non-shocker: Ever-thinning sea ice melts out as area, extent, and volume approach record lows - In May, I wrote “Arctic poised to see record low sea ice volume this year.”  The latest analysis from the Polar Science Center suggests that in fact we are going to break the record of “5,800 km^3 or 67% below its 1979 maximum.” That plot is sea ice area from the Japan Aerospace Exploration Agency. The National Snow and Ice Data Center (NSIDC) tells me that “at this time of year area would be a better indicator of the health of the ice pack than the extent.”  NSIDC explains the difference between extent and area here: A simplified way to think of extent versus area is to imagine a slice of swiss cheese. Extent would be a measure of the edges of the slice of cheese and all of the space inside it. Area would be the measure of where there is cheese only, not including the holes. UPDATE:  NSIDC has its August update here, noting, “This August, ice extent was the second lowest in the satellite record, after 2007.”

Serreze: Arctic is “continuing down in a death spiral. Every bit of evidence we have says the ice is thinning.” National Snow and Ice Data Center (NSIDC) director Mark Serreze slammed the anti-science disinformers yesterday: There are claims coming from some communities that the Arctic sea ice is recovering, is getting thicker again. That’s simply not the case.  It’s continuing down in a death spiral. Every bit of evidence we have says the ice is thinning.  That means there’s less energy needed to melt it out than there used to be. Certainly the latest analysis from the  Polar Science Center bears that out: Arctic sea ice volume, extent, and area continue to shrink apace as we approach the dramatic end to this year’s melt season.  The NSIDC tells me extent dropped to 4.76 million square kilometers today — which is below the majority of even the most recent expert predictions logged with the Study of Environmental Arctic Change (SEARCH). Here’s one of the sea ice graphs on the web I haven’t posted before, from the University of Bremen (click to enlarge), one of the resources that SEARCH recommends:

Philippe Cousteau: “Time is running out for ourselves and future generations.” - John Doerr: If we don't embrace a low carbon economy this decade, it won't just harm the planet, but also the U.S. economy. -Philippe Cousteau is becoming a true champion of the ocean and the climate (see “Stunning video makes clear prevention is the only cure: What dispersants have really done to Gulf“).  He is following in the footsteps of his famous father and even more famous grandfather with his work at Earth Echo. He spoke earlier today at the third annual National Clean Energy Summit (webcast here), and was pretty blunt about the dire nature of our current situation:John Doerr, partner in VC Kleiner Perkins (which helped launch Google, among other mega-companies), spoke later and explained that if we don’t embrace a low carbon economy this decade, it won’t just have devastating consequences to the planet, but also to the economy.

How will climate change impact urbanites and their cities? - Most scientists agree that climate change is underway or at least on the horizon. This column introduces the author's book 'Climatopolis: How Our Cities will Thrive in Our Hotter Future.' It outlines an optimism and an irony: Urban economic growth may have caused climate change, but through the free market, it will also help us to adapt to it. Without being overly dramatic, climate change is coming. The concentration of carbon dioxide in the Earth's atmosphere is approximately 390 parts per million by volume as of 2010, and rising by about 1.9 parts per million per year (Wikipedia 2010). Recent efforts at the December 2009 Copenhagen Climate Conference and in the US Senate during the summer of 2010 have failed to overcome the fundamental free rider problem – no one individual or nation has an incentive to unilaterally reduce emissions.

Making a Market for Pollution - This is possibly the newest market in the world, a would-be global attempt to create a trade in the greenhouse gas emissions from any nation's fleet of cars, household refrigerators, electric power plants, factories, even farms. It's an attempt to peel back the smothering blanket of global warming by giving people a financial incentive to reduce emissions under an economic concept known as cap and trade. The carbon desk Hochschild occupies is in the middle of five long rows of tables, buried under computer monitors, laptops and thick books of market arcana, that make up the trading floor at Evolution Markets, an "environmental" brokerage in White Plains, N.Y.

In the Market for Pollution: Carbon Trade or Carbon Con? - A company recycles a product, doing its part for the environment through reuse, only to be told it's worth more to destroy it. Welcome to the wonderful world of the carbon market, especially for a company that deals in refrigerants. These gases, culprits in no less than two environmental crimes—the ozone hole and climate change—are required to efficiently cool your food and beverages. Yet, chlorofluorocarbons, to give them their proper name, are potent molecules that both exacerbate the blanket of greenhouse gases warming the world as well as chew up the stratospheric ozone layer protecting the planet's inhabitants from excess doses of ultraviolet sunlight. Such refrigerants can be turned to cash, either the old-fashioned way—making and selling them—or by destroying them to reap carbon credits. In 2005, destroying such refrigerants "was the big thing," said Lenny Hochschild, a broker at Evolution Markets. "It was the low-hanging fruit, but that's all gone now."

A carbon border tax can curb climate change - As global growth picks up after the economic crisis, carbon emissions are going back up too. With China and India back on track to double their gross domestic product every decade, and with coal providing nearly 30 per cent of global energy, the chances of stabilising and reducing emissions are low. Indeed, little progress has been made in the last two decades. Only recessions lower emissions – and then only for a short time.This is partly due to the failed strategy for carbon reduction laid out at Kyoto. But behind it lurks another troubling development: advanced nations fiddling their carbon reduction figures. As Robert Watson, the UK government’s chief environment scientist, has recently accepted, countries such as Britain that appear to have lowered their greenhouse gases have done no such thing. Instead they have exported them, to the developing world. A new approach is now needed to combat this evasion, beginning with plans for carbon border taxes.

U.S. Affirms Climate Goal; Envoys Cite Progress on ‘Green Fund"… (Bloomberg) -- The U.S. failure to pass cap-and- trade legislation won’t change its target for 2020 to reduce greenhouse-gas emissions by roughly 17 percent, climate negotiator Todd Stern said today. The House approved a bill last year to set limits on carbon dioxide linked to global warming and create a market in pollution allowances. The bill, supported by President Barack Obama, stalled in the Senate. Without new cap-and-trade legislation, Obama’s Environmental Protection Agency plans to use existing laws to regulate some sources of carbon pollution.  “I think EPA will be an important piece of the total equation, and there will be legislative progress also, though I cannot tell you when it’s going to be,” Stern told a news conference in Geneva today following two days of climate talks. “I’m in no sense whatsoever writing off legislation over time, and I’m quite sure the president isn’t either.”

Climate-change study: Today’s power plants aren’t the problem - When it comes to greenhouse-gas emissions contributing to global warming, the big problem isn’t the power plant on the outskirts of town. Rather, the big factor is the plants that will be built a decade or two from now. “The sources of the most threatening emissions have yet to be built,” according to a team of scientists trying to see what sort of warming will have been triggered by the end of the century by only today’s greenhouse-gas emitters. The scientists’ study appeared Thursday in the journal Science. The researchers say their findings reinforce the notion that to meet skyrocketing demand for energy during this century, it will take “truly extraordinary development and deployment of carbon-free sources of energy” to keep global warming in check.

Hearings begin on wind farm contract - It may be the most watched — and controversial — state Department of Public Utilities hearing in years, but opening day of the agency’s review of the Cape Wind energy project quickly devolved into a discussion of mind-numbing legal and technical minutiae as the main opposition group’s lawyer cross-examined representatives of the developer. The DPU must decide whether a contract allowing the utility National Grid to purchase half of the power generated from 130 turbines in Nantucket Sound is a good deal for ratepayers. The cost of that power is more than twice that of electricity from traditional sources, and the issue has emerged as among the most contentious in the wind farm proponents’ nine-year struggle for government permits.

Chinese Offshore Development Blows Past U.S. - As proposed American offshore wind-farm projects creep forward — slowed by state legislative debates, due diligence and environmental impact assessments — China has leapt past the United States, installing its first offshore wind farm. Several other farms also are already under construction, and even the Chinese government’s ambitious targets seem low compared to industry dreaming. “What the U.S. doesn’t realize,” said Peggy Liu, founder and chairwoman of the Joint U.S.-China Collaboration on Clean Energy, is that China “is going from manufacturing hub to the clean-tech laboratory of the world.” The first major offshore wind farm outside of Europe is located in the East China Sea, near Shanghai. The 102-megawatt Donghai Bridge Wind Farm began transmitting power to the national grid in July and signals a new direction for Chinese renewable energy projects and the initiation of a national policy focusing not just on wind power, but increasingly on the offshore variety.

On Clean Energy, China Skirts Rules - Changsha and two adjacent cities are emerging as a center of clean energy manufacturing. They are churning out solar panels for the American and European markets, developing new equipment to manufacture the panels and branching into turbines that generate electricity from wind. By contrast, clean energy companies in the United States and Europe are struggling. Some have started cutting jobs and moving operations to China in ventures with local partners. The booming Chinese clean energy sector, now more than a million jobs strong, is quickly coming to dominate the production of technologies essential to slowing global warming and other forms of air pollution. But much of China’s clean energy success lies in aggressive government policies that help this crucial export industry in ways most other governments do not. These measures risk breaking international rules to which China and almost all other nations subscribe, according to some trade experts interviewed by The New York Times.

I'm in favor of Chinese subsidies - From today's NYTimes comes a five page article:  The booming Chinese clean energy sector, now more than a million jobs strong, is quickly coming to dominate the production of technologies essential to slowing global warming and other forms of air pollution. But much of China’s clean energy success lies in aggressive government policies that help this crucial export industry in ways most other governments do not. via The static analysis of export subsidies clearly indicates that the nation doing the subsidizing loses. The cost of the subsidy and losses to domestic consumers outweigh the gain to the exporting industry.  The dynamic effects are not so clear. If the export subsidies triggers some sort of positive spillover (e.g., learning by doing that leads to a reduction in production cost) then the exporting country might benefit.  But either way, export subsidies unambiguously benefit importing countries by lowering the price of imported goods.

US asks firms to reveal gas extraction liquid - US companies have increasingly tapped shale gas, which lies deep underground and was once thought inaccessible. Firms force out the gas through hydraulic fracturing, or fracking, in which a large volume of liquid is injected below. The Environmental Protection Agency said it had sent letters to nine companies including energy giant Haliburton asking for data within 30 days on the chemicals involved in fracking. The agency's chief, Lisa Jackson, said the data would "help us make a thorough and efficient review of hydraulic fracturing and determine the best path forward." "Natural gas is an important part of our nation's energy future, and it's critical that the extraction of this valuable natural resource does not come at the expense of safe water and healthy communities," Jackson said.

E.P.A. to Study Chemicals Used to Tap Natural Gas - The Environmental Protection Agency sent letters to nine drilling companies on Thursday requesting detailed information about the chemicals contained in fluids used to crack open underground rock formations in the hunt for oil and natural gas. The move is part of the federal agency’s preparations for a long-term scientific study of the effects of the practice, known as hydraulic fracturing or “fracking,” on drinking water and public health. “Natural gas is an important part of our nation’s energy future, and it’s critical that the extraction of this valuable natural resource does not come at the expense of safe water and healthy communities,” the E.P.A. administrator, Lisa P. Jackson, said in a statement. The agency asked the companies to respond to its request within seven days and to voluntarily provide the information within 30 days, according to a copy of the letter provided by the agency.

Mining the Truth on Coal Supplies - No matter how bad coal might be for the planet, the conventional wisdom is that there is so much of it underground that the world’s leading fuel for electricity will continue to dominate the energy scene unless global action is taken on climate change. But what if conventional wisdom is wrong? A new study seeks to shake up the assumption that use of coal, the most carbon-intensive fossil fuel, is bound to continue its inexorable rise. In fact, the authors predict that world coal production may reach its peak as early as next year, and then begin a permanent decline.

Thorium Reactors — The New Free Lunch - A week ago, Ambrose Evans-Pritchard of the UK newspaper the Telegraph demonstrated that he is a staunch advocate of Free Lunches in his Obama could kill fossil fuels overnight with a nuclear dash for thorium—Human beings love the Free Lunch, so there were comments & chatter galore on the internets about Evan-Pritchard's article. He quoted nuclear physicist Carlo Rubbia to make his point, with one easily forgettable caveat—There is no certain bet in nuclear physics but work by Nobel laureate Carlo Rubbia at CERN (European Organization for Nuclear Research) on the use of thorium as a cheap, clean and safe alternative to uranium in reactors may be the magic bullet we have all been hoping for, though we have barely begun to crack the potential of solar power. If something sounds too good to be true, it's a good bet it is. Needless to say, no such reactor exists, and that's not entirely due to the fact that uranium was chosen over thorium decades ago because you can make atomic bombs with it. Without much effort, I found several credible sources of information about the state of thorium reactor development. I will quote from IEEE Spectrum's Is Thorium the Nuclear Fuel of the Future?

Mississippi Shrimpers Find Oil Throughout Waters, Refuse To Trawl "We come out and catch all our Mississippi oysters right here," James "Catfish" Miller, a commercial shrimper in Mississippi, said in an interview. Pointing to the area in the Mississippi Sound from his shrimp boat, he added, "It's the only place in Mississippi to catch oysters, and there is oil and dispersants all over the top of it."  On Aug. 6, Mississippi's Department of Marine Resources (DMR) and the Mississippi Department of Environmental Quality, in coordination with the National Oceanic and Atmospheric Administration and the U.S. Food and Drug Administration, ordered the reopening of all Mississippi territorial waters to all commercial and recreational finfish and shrimp fishing activities that were part of the precautionary closures following the BP oil rig disaster in April. At least five million barrels flowed into the Gulf before the well was shut earlier this month. But Miller, along with many other commercial shrimpers, refuses to trawl.

Blood Tests Show Elevated Level of Toxic Hydrocarbons in Gulf Residents - A number of different chemists are finding elevated levels of toxic hydrocarbons in the bloodstream of Gulf coast residents.What is most disturbing about these results is that people who simply live near the water are showing higher than normal levels of toxic chemicals. These are not fishermen, shrimpers, oil workers or others who work on the water. Jerry Cope recently wrote about his test results in a must-read essay at Huffington Post. Several Gulf coast residents described their test results in the following video:

No Safe Harbor on Gulf Coast; Human Blood Tests Show Dangerous Levels of Toxic Exposure - Even as BP and US government officials continue to declare the oil spill over at Mississippi Canyon 252 and the cleanup operation an unqualified success, for the first time blood tests on sickened humans have shown signs of exposure to high levels of toxic chemicals related to crude oil and dispersants. Some of the individuals tested have not been on the beaches, were not involved in any cleanup operations or in the Gulf water -- they simply live along the Gulf Coast. Several of them are now leaving the area due to a combination of illness and economic hardship. As the media's attention has moved on and the public interest wanes, the suffering and hardship for people along the entire Gulf Coast of the United States from Louisiana to Florida continues to worsen. While BP and the government are scaling back cleanup operations and distancing themselves from legal liability for the environmental destruction, economic hardship, sickness and death resulting from the largest environmental disaster in our nation's history, the situation continues to deteriorate. The use of the Corexit dispersant 9500 and the highly toxic 9527 by BP, with the approval and assistance of the US Coast Guard and EPA, has been the subject of intense scrutiny and criticism. Never before has such a huge quantity of the toxic compound been used anywhere on the planet. Most countries including NATO allies ban it's use and will only grant approval as a last resort after other methods have failed. Britain has banned its use altogether.

No Risk, Says Leader of Spill Response - Crews hoisted the blowout preventer that once sat atop BP’s stricken well to the surface of the Gulf of Mexico on Saturday night, and the federal leader of the spill response said that there was no longer any risk that the well might leak again. “This well does not constitute a threat to the Gulf of Mexico at this point,” the leader, Thad W. Allen, a former Coast Guard admiral, said during a conference call with reporters. “The well has been effectively secured regarding any potential source of pollution.”  On Friday night, BP technicians replaced the original damaged blowout preventer — the safety device that failed when the Deepwater Horizon drilling rig exploded on April 20 — with another one that will be better able to handle any pressure changes that might take place during the final steps in the process of plugging the well permanently. That procedure should occur this week, Admiral Allen said

BP ultimatum: Let us drill or funds will dry up - Oil giant BP is telling lawmakers that if it isn't allowed to get new offshore drilling permits in the Gulf, it will not be able to afford to pay for the damage caused by the Deepwater Horizon oil spill, the New York Times reported in its Friday edition.The Times reports the UK-based oil giant is on the warpath against a drilling reform bill passed by the House earlier this summer that would effectively bar BP from getting new drilling permits in the US. The CLEAR Act, passed by the House in July, includes an amendment (PDF) that states any oil company that has received more than $10 million in safety fines, or has seen more than 10 workers killed in the past seven years, is barred from being granted new drilling permits. The Times notes that, currently, only BP fits that criteria. But the Times reports that BP is using some of its voluntary payments as "bargaining chips" with lawmakers. "As state and federal officials, individuals and businesses continue to seek additional funds beyond the minimum fines and compensation that BP must pay under the law, the company has signaled its reluctance to cooperate unless it can continue to operate in the Gulf of Mexico," the Times reports.

Fool me once, shame on Big Oil…. Failing oil rigs are like roaches — if you see one, it probably means that you have 1,000 more somewhere in your house.  So it is not surprise that another offshore oil rig exploded last week in the Gulf of Mexico about 100 miles off the Louisiana coast. All of us can feel some relief that this incident was not as catastrophic as the BP disaster. But it shouldn’t take an oil apocalypse to get our attention. We are facing a continuing threat in the gulf from multiple points of potential peril. There are currently more than 4,000 active oil and gas rigs in the gulf, along with 27,000 abandoned oil and gas wells lurking in the hard rock. There are 1,000 decaying oil rigs and drilling structures.  We have been told time and time again by the oil industry, lobbyist, and pro-drilling lawmakers that offshore drilling is safe. They have told us that serious accidents cannot happen here in the United Sates because the technology is too advanced.

Trend Break in Oil Supply - The enthusiastic professionals in Paris report that: Global oil supply fell 250 kb/d to 86.8 mb/d in August, as non-OPEC output dipped to 52.4 mb/d on seasonal maintenance in Canada, the UK and Russia. I've added that to the graph above (along with the OPEC data point I discussed yesterday).  As often, the agencies don't completely agree on what's going on, with OPEC now seeing July as only a partial restoration of production cuts in June, but the IEA still seeing it as taking production to a higher level.  But both concur that August is now below the level of February. So there is certainly the appearance of a trend break here.  To give you some idea, from May 2009 to February 2010, the slope of the three-agency average was 0.25 ± 0.03 mbd/month, while from Feb to August of this year, the slope was -0.02 ± 0.04 mbd/month.  So the slope since February is not significantly different than zero.  However, the slope is significantly different than last year - the difference between the two is 0.27 ± 0.05, which is highly significant*.

Peak Oil, Carrying Capacity and Overshoot: Population, the Elephant in the Room - Revisited -  At the root of all the converging crises of the World Problematique is the issue of human overpopulation. Each of the global problems we face today is the result of too many people using too much of our planet's finite, non-renewable resources and filling its waste repositories of land, water and air to overflowing. The true danger posed by our exploding population is not our absolute numbers but the inability of our environment to cope with so many of us doing what we do. It is becoming clearer every day, as crises like global warming, water, soil and food depletion, biodiversity loss and the degradation of our oceans constantly worsen, that the human situation is not sustainable. Bringing about a sustainable balance between ourselves and the planet we depend on will require us, in very short order, to reduce our population, our level of activity, or both. One of the questions that comes up repeatedly in discussions of population is, "What level of human population is sustainable?" In this article I will give my analysis of that question, and offer a look at the human road map from our current situation to that level.

German military study warns of peak oil crisis - A study by a German military think tank has analyzed how “peak oil” might change the global economy. The internal draft document — leaked on the Internet — shows for the first time how carefully the German government has considered a potential energy crisis. The term “peak oil” is used by energy experts to refer to a point in time when global oil reserves pass their zenith and production gradually begins to decline. This would result in a permanent supply crisis — and fear of it can trigger turbulence in commodity markets and on stock exchanges.The issue is so politically explosive that it’s remarkable when an institution like the Bundeswehr, the German military, uses the term “peak oil” at all. But a military study currently circulating on the German blogosphere goes even further.

Peak Denial About Peak Oil - It is par for the course that with oil hovering between $70 and $80 per barrel Americans have continued to buy SUVs and Trucks at a rapid pace. Politicians don’t have constituents screaming at them because gas is $4.00 per gallon, so it is no longer an issue for them. They need to focus on the November elections. It is no time to discuss a difficult issue that requires foresight and honesty. It is no time to tell the American public that oil will be over $200 a barrel within the next 5 years. Anyone who would go on CNBC today and declare that oil will be over $200 a barrel would be eviscerated by bubble head Bartiromo or clueless Kudlow. Bartiromo filled up her Escalade this morning for $2.60 a gallon, so there is no looming crisis on the horizon. The myopic view of the world by politicians, the mainstream media and the American public in general is breathtaking to behold. Despite the facts slapping them across the face, Americans believe cheap oil is here to stay. It is their right to have an endless supply of cheap oil. The American way of life has been granted by God. We are the chosen people.

Easy to be complacent about energy until it's too late - David Suzuki warns us about complacency with the story of the pond where the lily pad population doubles every week. Starting with one plant, a corner of the pond starts filling up. But the week before the lily pads smother the whole pond, half the water is still open, so choking from overcrowding still seems a long way off. That's an apt metaphor to illustrate a report recently released by two highly respected United Kingdom institutions: Lloyd’s of London and Chatham House Royal Institute of International Affairs. The report dives headfirst into the doomsday pool by predicting "catastrophic consequences" for businesses that fail to prepare for a world of increasing oil scarcity, higher oil prices, and disrupted energy supplies. They're all on the way, says the report, because of soaring energy demand in China and India (40 percent growth projected in the next two decades in China), constraints on production resulting from the BP oil spill, and moves to cut carbon dioxide emissions to slow down global warming (and mitigate floods like the one now ravaging Pakistan).

North Sea Oil Declines Continuing - After looking at US data for a couple of days, I was curious whether the other poster-children for the idea that post-peak declines are inexorable were also showing production up-ticks.  The above is the EIA monthly data for the North Sea (through May of this year, in thousands of barrels/day).  In the mid 2000s, the North Sea was the principal evidence for the idea that "modern oilfield practices cause dramatic declines post-peak".  As you can see, declines are definitely continuing and have not been arrested by relatively high prices since 2000.  (For more background, see this Euan Mearns piece from last year at TOD). Looking a little deeper, and noting that the data above have clear seasonality, here's the average percentage decline from 12 months earlier.

The New Normal in Oil and Natural Gas Prices - In previous posts (most recent here), I noted that oil and natural gas prices have disconnected from their usual historical relationship. For many years, oil prices (as measured in $ per barrel) tended to be 6 to 12 times natural gas prices (as measured in $ per MMBtu). That ratio blew out to more than 20 in late 2009, briefly receded toward more traditional levels, and then expanded again. At Tuesday’s close, the ratio stood at 19.4, far above its historical range:  (Note: A barrel of oil has roughly 6 times the energy content of a MMBtu of natural gas.) The unusual pricing of the last two years reflects two factors. First, there has been a dramatic–and welcome–expansion in domestic natural gas supplies. That’s driven natural gas prices down to less than $4 per MMBtu at yesterday’s close. Second, there is limited opportunity for energy users–utilities, businesses, and homeowners–to switch from oil to natural gas. Years ago, such switching linked oil and natural gas prices relatively closely. But today those prices appear largely decoupled.

Pipeline to pump crude from Russia - People's Daily - After over a decade of negotiation and two years of construction, China will be able to tap directly into Russia's gas output with the completion of a pipeline next month. The China-Russia crude oil pipeline starts from Russia's Skovorodino Transmission Station and ends at Daqing City, Northeast China's Heilongjiang Province, home to one of the region's major oilfields. The pipeline stretches around 1,000 kilometers, with over 90 percent located within China. "The pipeline will provide 15 million tons of crude oil to China each year when it starts operation, and then its transport capacity will rise sharply," the official Xinhua News Agency quoted Lv Jicheng, project manager of Mohe-Daqing part of the program, as saying Friday.

The Crisis Papers on DU - Fruit Flies in a Bottle - Place a few fruit flies in a bottle with a layer of honey at the bottom, and they will quickly multiply to an enormous number, and then, just as quickly, die off to the very last, poisoned by their wastes. Similarly, add a few yeast cells to grape juice, seal the bottle, and the cells will consume the sugar and turn it into alcohol. When the alcohol rises to 12.5% it will kill off all the yeast, and the wine will be ready for the table. Fruit flies and yeast in a bottle are embarked upon suicidal endeavors. They can’t help it. They don’t know any better, lacking the cognitive equipment to “know” anything at all. Human beings, we are told, are different. Humans can utilize their accumulated knowledge, evaluate evidence and apply reason, and with these skills and accomplishments they can imagine alternative futures and choose among them to their advantage. But history teaches us that all too often, human beings simply refuse to apply them and, like the mindless fruit flies, march blindly into oblivion.

China in the Driver's Seat - Few would argue that the rise of China has world-altering significance. But across the American left there are sharp, sometimes acrimonious differences about what constitutes appropriate and principled responses to China's emergence as a great power, and whether the country's ascendance is promising or ominous. Many in the labor movement, of course, are riled by their belief that export factories in China, often managed by US and other multinational corporations, are stealing American manufacturing jobs. They view China as the biggest player in a worldwide rush by US and other corporations to take advantage of cheap labor and lax regulatory regimes in much of the developing world, whose producers stock the shelves of American shopping malls with imported goods. The implications of China's rapid ascent go far beyond those concerns. It is fast becoming an economic giant, moving from low-end assembly lines and garment sweatshops to high-end products and innovative approaches to green technology, including wind turbines, solar panels and electric cars. Despite the uncontrolled, almost Wild West nature of capitalism in China, for many developing countries its muscular combination of top-down political control and state-guided industrial growth represents a palpable challenge to the dominant post–World War II paradigm of American-style development, and it is an attractive one in many quarters.

New Zealand exporting water to China? - New Zealand’s rainfall averages 2m a year, more than double the world average of 0.8m - why does this have implications for China?  In the New Zealand Herald Mark Lister of Craigs Investment Partners wrote a very thought-provoking piece here about the potential of the Chinese market to New Zealand’s agricultural sector. China is expeceted to become a major importer of food and as incomes rise so does their demand for more dairy products and meat. He states that the main indicator to look out for is the growing Chinese middle class. GDP/Capita is approximately US$4,000 but there are 120 million who have income greater than US$70,000. This trend should increase the demand for higher-value food products such as dairy and meat. One of the reasons that China has had to start importing food is the fact that they only have one-third of the freshwater per capita of the global average and with a higher proportion of China’s water being required for residential consumption there will less available for agricultural purposes.

The Two Keys to Understanding China's Housing Bubble - My wife and I are fortunate to have a network of contacts and friends in China, and we learned that as long ago as 2004, the typical two-income middle class household in China—those in which wage earners make around $5,000 or more a year each—was buying one, two, or even three flats for investment purposes. The apartments were not rented out, as this lowered the resale value, and renting out flats was a burden busy people didn't care to shoulder.  Since there is no property tax in China that is analogous to U.S. parcel taxes, and since the vast majority of buyers paid cash, then the carrying costs for these investment properties was very modest.  Why are Chinese dumping the majority of their savings in housing?  One reason is that there are precious few investment options, and many investors felt burned by the volatile Chinese stock market (as they are not allowed to invest in overseas funds).  Real estate has two advantages over stocks:  Everyone understands it has value as shelter, and housing has been rising far faster than China's not-quite-benign rate of inflation.

Caixin Online: China’s census to include empty housing -- The Chinese government will collect information about vacant housing in connection with a population census now underway, according to the National Statistics Bureau (NBS).  Data will be crunched through a survey mechanism to determine housing vacancy rates, which are important indicators for the real-estate market. Specific information about empty flats will be compiled in several communities within major cities, Ma Jiantang, head of NBS, told the official People's Daily newspaper.

A question of time - Recent statistics show that there are about 64 million apartments and houses that have remained empty during the past six months, according to Chinese media reports. On the assumption that each flat serves as a home to a typical Chinese family of three (parents and one child), the vacant properties could accommodate 200 million people, which account for more than 15% of the country’s 1.3 billion population. But instead, they remain empty. This is in part because many Chinese believe that a home is not a real home unless you own the flat.  And so people prefer buying to renting, and as a result, the rental yield is relatively low. This has fuelled worries that China’s property market is bubbling. Yi Xianrong, a prominent economist, said the numbers are “shocking” and the country’s property market is dangerously overheated. “Many of them are bought by property speculators betting on a constantly rising property market,” he wrote in a commentary to the official newspaper, the People’s Daily. “This is a serious threat to the sustainability of China’s economy.”

China Industrial Output Tops Forecast as 'Robust' Demand Aids World Growth (Bloomberg) -- China’s industrial output rose at a faster pace than analysts estimated in August, signaling that the world’s third-biggest economy is maintaining momentum as growth moderates.  Production gained 13.9 percent from a year earlier, more than that 13 percent median estimate of 29 economists, a statistics bureau report showed in Beijing today. Consumer prices jumped 3.5 percent, the most in 22 months, as food costs climbed. Retail sales increased 18.4 percent.  Today’s data suggest domestic demand is withstanding curbs on bank lending and government crackdowns to cool the property market and meet energy and pollution targets. Bank of America- Merrill Lynch forecasts gross domestic product will expand at least 9.4 percent this quarter and 9 percent in the final three months of the year, aiding the global recovery as elevated unemployment caps U.S. growth.

China to Pass US as Largest Credit-Card Market by 2020, MasterCard Says - (Bloomberg) -- China will overtake the U.S. as the largest market for credit cards by 2020 with about 900 million cards in circulation, according to MasterCard Inc., the world’s second-biggest payment network.  Chinese credit cards will probably increase by an annual 11 percent in number and 14 percent in transaction value until 2025, MasterCard said in a statement in Shanghai today. Issuers’ revenue will jump 20 times by 2025 and profit may grow 30 times.  International financial firms including American Express Co., Citigroup Inc. and HSBC Holdings Plc. are banking on dual- currency credit cards in China to build brand awareness and customer bases. The world’s fastest-growing major economy has $4.2 trillion in household savings.

China Advisors Say Dollar Waning, Call For Oversight - Chinese officials continued to round on U.S. monetary policy on Tuesday, warning that emerging economies are cutting their reliance on U.S. dollars as they depeg from the American economy and call for global oversight of major reserve currency issuers. The comments were made at a conference here organized by the Chinese People's Political Consultative Conference, a leading advisory body to the government which is largely composed of former government officials. Although it has little direct influence on policy-making, the CPPCC is influential, and the comments delivered here Tuesday mark the latest indications that China is reorienting its approach to the global monetary system, with the dollar the notable victim.

Recession Geopolitics: - Throughout the crisis, the Chinese economy continued to grow at an amazing pace, in part as a consequence of massive fiscal stimulus. When anyone wants an example of how effective a Keynesian counter-cyclical strategy can be, internationally as well as domestically, they need look no further than China’s four-trillion-renminbi stimulus of 2008-2009. Apart from a six-month period after the September 2008 collapse of Lehman Brothers, in which trade finance stopped and the world did look as if it was close to Great Depression circumstances, China and other emerging markets helped those export-oriented industrial economies to recover. The surprising strength of the German economy, with more vigorous growth than at any time in the past 15 years, is due to the dynamism of emerging-market – particularly Chinese – demand, not only for investment goods, engineering products, and machine tools, but also for luxury consumer products. Germany’s high-end automobile producers are now operating at full capacity.

Intelligent trade policy - Those that have been responsible for intelligent trade policy have “other irons” in the fire, namely, representing companies that have made a fortune outsourcing to China. From the EPIs Robert E. Scott post at Huffington Post: “An op-ed published in New York Times last week (August 23) claimed that revaluation of the Chinese yuan would "make barely a dent in America's trade deficit."This ludicrous assertion flies in the face of basic economic theory and our own economic history. The U.S. trade deficit with China displaced 2.4 million U.S. jobs between 2001 and 2008 alone. Treasury Secretary Geithner should identify China as a currency manipulator, and Congress should pass legislation that would authorize the president to impose substantial tariffs on Chinese goods if they fail to substantially revalue the yuan by the end of 2010. “ The U.S. should insist that the yuan float freely. Additionally, the U.S. should insist that Chinese labor be allowed honestly to collectively bargain. Free trade is simply not possible if sweatshop labor is allowed. I am constantly surprised how little economists—from the right and the left—ignore labor’s rights.

Geithner Says China Needs to Let Markets Drive Yuan Higher (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner said China must let the yuan rise more quickly to show trading partners that it’s following through on its promises. “Frankly they haven’t let the currency move very much so far,” Geithner said yesterday in an interview on Bloomberg Television in Washington. “They know they’re just at the beginning of that process and I think we’d like to see them move more quickly.”  Premier Wen Jiabao’s government has limited the yuan’s gain to less than 1 percent versus the dollar since a June pledge for greater flexibility. With November elections approaching, U.S. legislators have planned hearings on the topic and may push a bill to let U.S. companies seek tariffs in compensation for an undervalued yuan that makes Chinese goods cheaper overseas.

China Posts $20 Billion Trade Surplus as U.S. Seeks Yuan Gains-- China posted a third straight trade surplus of more than $20 billion in August even as imports leaped, highlighting friction with the U.S. over claims that the nation’s currency is undervalued. Exports rose 34.4 percent and inbound shipments climbed a more-than-forecast 35.2 percent, leaving a $20.03 billion excess, a customs bureau report showed today. That compared with $15.7 billion a year earlier and the median $26.9 billion estimate in a Bloomberg News survey of 34 economists.  The yuan had its biggest weekly gain against the dollar since June as sustained surpluses may fuel American lawmakers’ calls to escalate pressure on China. At the same time, the surge in imports may fortify Chinese officials’ position that the nation is already making progress in boosting demand for overseas goods, independent of the exchange rate.

Auerback: China is Still a Renegade Nation - A few years ago, Chris Dialynas and I wrote a piece which introduced the concept of “renegade economics”. The nation which best reflects this description today is China. In response to Beijing’s mind boggling increase in real credit in the first half of 2009,\Chinese fixed investment in industrial tradables rose dramatically . In the first phase of such an investment boom China’s imports had to rise, as the country needed capital goods and inputs for planned new industrial capacity. It takes many quarters to go from credit disbursements to the completion of new capacity and the initiation of new production. By the second quarter of this year some – but only some – of this new capacity began to come on stream. Further production responses to this new round of Chinese overinvestment lie ahead. When such capacity comes on stream there is a lesser need for imported capital goods and for the import and stock piling of inputs for planned future production. Instead, there is an onslaught of new production which targets export markets and which substitutes for prior imports.

China rebuffs pressure on exchange rate reform-- China rebuffed pressure to reform its currency on Tuesday, amid visits by two senior U.S envoys in Beijing. "Exchange rate reform can't be pressed ahead under external pressure," Chinese foreign ministry spokeswoman Jiang Yu was cited as saying in reports. She added that China would "firmly oppose" politicizing any trade and economic issues, during comment at a briefing related to the visit of of U.S. National Economic Council Director Lawrence Summers and U.S. Deputy National Security Adviser Thomas Donilon. Jiang reportedly said Beijing would press ahead with reforms leading to "dynamic management" of the its exchange rate, but did not specify a timeline, according to reports.

Yuan up, yuan down - TRADE backlashes appear to operate on a bit of a lag. Last month, we learned that China's trade surplus and America's trade deficit had both swollen considerably. The imbalance occured against a backdrop of new yuan depreciation, and the worse-than-expected trade numbers contributed to a substantial downward revision in America's second quarter output. The stage seemed set for a showdown. But Congress was on recess, and other, more important, issues loomed. Move forward a month and the trade data is considerably better. New July data showed a decline in America's deficit, from $50 billion to $43 billion, as exports increased while imports decreased. Chinese imports jumped in August, leading to a smaller than expected Chinese surplus (of about $20 billion, down from $29 billion in July). So naturally, now is the time for this: Frustrated members of Congress may vote in the coming weeks on legislation penalizing Chinese imports for Beijing’s artificially-low currency.

Congress Yuan Action May Spark China Treasuries Sale, Roach Says  (Bloomberg) -- President Barack Obama may be pressured by election-year politics to sign legislation aimed at China’s currency, sparking retaliation that could include Chinese selling of U.S. Treasuries, Morgan Stanley Asia Chairman Stephen Roach said. The U.S. House Ways and Means Committee is set to hold hearings on one such bill next week that might levy trade sanctions against China and other nations found to undervalue their currencies. There is a similar measure in the Senate. Last year China had a $226.8 billion trade surplus with the U.S., according to U.S. Commerce Department data. Facing the possible loss of both houses in mid-term elections in November, Obama may see no choice but to sign legislation if Congress sends him a bill, Roach said in an interview. That would lead China to retaliate with its own measures and may even trigger sales of Treasuries by the biggest foreign holder of U.S. government debt, and a subsequent rise in U.S. interest rates, Roach said.

Chinese Bond Purchases - Krugman -Regular readers may remember that I’ve spent more than a year trying to knock down the idea that the United States dare not get tough with China, because we need them to keep buying our bonds; as I wrote way back in May 2009, given the fact that we’re in a liquidity trap, a decision by China to buy fewer of our bonds would actually be doing us a favor — it would weaken the dollar, and help our exports. I’ve failed, despite repeated attempts, to get through with this point here — but the Japanese get it. They’re complaining to China about its purchases of yen-denominated bonds, which they argue — correctly — hurts Japan by strengthening the yen. Quick update: I should also link to this post, and quote Dean Baker again: China has an unloaded water pistol pointed at our head

Is the WTO Bad for America? - In the first chapter of my Trade text book I describe the WTO; how and why it was set up and how it works today. The section is meant to clear up some of the misunderstandings and misrepresentations that are common about the WTO. This week I came across a prime example on an internet blog post titled “Globalism Destroys America: 10 Reasons why the World Trade Organization is Bad for America.” So let me respond to several of the points raised by the author. Point 1 – “The WTO is not accountable to the American people or to any other voters around the globe. It is a sprawling bureaucracy that wields an almost unbelievable amount of power that is completely unchecked by democratic processes.”

Selling global rebalancing - At its most recent meeting in Toronto this spring, the G-20 agreed to disagree. Even though the world economy is desperately in need of rebalancing, their declaration was deliberately vague enough to accommodate any set of domestic policies that countries might choose. Everyone came away thinking that they had won, but the world largely lost.  World trade is highly imbalanced. Households in the United States, having spent too much, are now weighed down by debt. Similarly, the export lobby in China has no interest in a strong renminbi, even though it is in China’s long-term interest to let its currency appreciate. We keep hoping that somehow meetings of heads of state will magically produce the policies that will rebalance world trade. Unfortunately, the macroeconomic changes that countries must make involve actions to which even heads of state are unable to commit.

Is Chinese Mercantilism Good or Bad for Poor Countries? - Discussion of China’s currency ... is viewed largely as a US-China issue, and the interests of poor countries get scarcely a hearing... Yet a noticeable rise in the renminbi’s value may have significant implications for developing countries. Whether they stand to gain or lose from a renminbi revaluation, however, is hotly contested. ...  Strip away the technicalities, and the debate boils down to one fundamental question: what is the best, most sustainable growth model for low-income countries? Historically, poor regions of the world have often relied on ... exporting to other parts of the world primary products and natural resources such as agricultural produce or minerals. ... But this model suffers from two fatal weaknesses. First, it depends heavily on rapid growth in foreign demand. When such demand falters, developing countries find themselves with a protracted domestic crisis. Second, it does not stimulate economic diversification. Economies hooked on this model find themselves excessively specialized in primary products that promise little productivity growth.

Bill Black: “Control Fraud” Crushes Kabul, And the New York Times Needs to Correct its Correction - The New York Times, in a story entitled “Afghanistan Tries to Help Nation’s Biggest Bank” issued the following correction: An earlier version of this article, citing American and Afghan officials, erroneously stated that the United States would contribute money to help the Kabul Bank. American officials say the United States is providing technical assistance but no funds for the bank.The problem is that the “earlier version” was correct – the correction is incorrect. Kabul Bank has been revealed to be a “control fraud.” Control frauds occur when those that control a seemingly legitimate entity use it as a “weapon” to defraud. Control frauds cause greater financial losses than all other forms of property crime – combined. Control frauds can also cause immense damage to a nation because they are run by financial elites that curry favor from political elites. The result is that they are often able to loot “their” banks for years with impunity. They also degrade the integrity of the entire system.

China's yen for yen - One of the most important questions facing currency markets these days is: What's China up to? How Chinese policymakers decide to invest their staggering $2.5 trillion in reserves can have a huge impact on currency values worldwide. But recently, China has given us a couple rare peeks into the state of its currency holdings. Those glimpses prove just how much power China has gained over the fate of national currencies – but also the tough job preserving its national wealth has become. Take a look at China's new interest in the yen. Japan's Ministry of Finance announced this week that China added nearly $7 billion in yen-denominated financial assets in July. Nearly all of those purchases are believed to be Japanese government bonds. In all, China has bought a record amount of yen assets this year. What does that mean? China is very likely attempting to further diversity ifs currency holdings, especially due to the rough ride the euro has had this year amid the region's debt crisis. But more importantly, China's new yen for yen is having a big impact on the Japanese economy.

Japan Plans to Seek Discussions With China on Bond Purchases (Bloomberg) -- Japan’s government said it will seek discussions with China over the nation’s record purchases of Japanese bonds as an appreciating yen threatens to undermine an economic recovery.  Japan is closely watching the transactions and will seek to maintain close contact with Chinese authorities on the issue, Vice Finance Minister Naoki Minezaki told lawmakers in Tokyo. Finance Minister Yoshihiko Noda suggested at the same hearing that it’s inappropriate for China to buy Japan’s bonds without a reciprocal ability for Japanese to invest in China’s market.  A surge in the yen to a 15-year high against the dollar has prompted Japanese companies to warn their overseas earnings are under threat, with almost half of manufacturers seeing a hit to sales, one survey showed last week. China, by contrast, has kept the yuan’s gain to less than 1 percent since June, in the process accumulating foreign exchange that it needs to invest.

Print Money and Be Damned! - Japan was the world's most admired economy in the '80s. Then it was the world's most despised economy in the '90s. By 1995, economists pointed their fingers and laughed - the world's most admired businessman had lost his left shoe. But now, much of the world is barefoot. The US inflation rate has been going down since the early '80s and was cut in half since last year. It now hovers barely above zero. Surely Japan - where prices have been falling for two decades - has something to tell us. As we pointed out last week, the Nipponese have been in decline for the last 20 years - with lower stock prices, falling real estate prices, and a falling GDP. Even the population has been sliding for the last five years This week the Japanese decided to throw some more grit on the slope. Japan's central bank governor, Masaaki Shirakawa, said he was boosting his "special loan facility" by 10 trillion yen, about $120 billion. And Mr. Naoto Kan, Japan's Premier, said he would support the central bank, adding a "second pillar of stimulus' of some 920 billion yen. The numbers always sound impressive in yen. But they are unlikely to give the economy much traction.

Japanese Demography - Paul Krugman - I’m not the first person by a long shot to make this point, but it’s fairly amazing how much of Japan’s relative slide since the early 90s can be explained not by economics per se but by demography.Using the Total Economy Database — another useful source — I find that from 1992 to 2007 (eve of the crisis), Japanese GDP per capita fell from 88 percent of US GDP per capita to 76 percent. That sounds bad, and it is. But about two-thirds of that decline can be explained by the aging of Japan’s population. According to the OECD factbook, in 1992 working-age adults were 69.7 percent of Japan’s population, compared with 65.5 in the US; by 2007, the Japanese number was down to 64, while the US number was up to 67. Demography is not the whole story; Japan has stayed depressed, deflation is a problem, labor markets are poor  Still, when you look at Japan’s declining share of world GDP, and even its relative decline in per capita GDP, the biggest single cause is the declining number of working-age Japanese.

Weaker US Outlook Prompts Warnings by Central Banks in Japan, Australia (Bloomberg) -- Japan’s and Australia’s central banks signaled that the outlook for U.S. growth is deteriorating, making it tougher for them to set monetary policy.  The Reserve Bank of Australia extended a pause in raising interest rates “for the time being” today, even after the nation’s gross domestic product rose the most since 2007. The Bank of Japan said it’s prepared to add more monetary stimulus after last week’s emergency decision to expand a credit program that followed a tumble in the dollar against the yen.  Both banks singled out the U.S., with the RBA saying growth there looked “weaker” in the second half, and the BOJ citing “uncertainty about the future, especially for the U.S.” The statements highlight the threat of any return to recession for the world’s biggest economy, even for nations benefiting from surging demand in Asian emerging markets, led by China.

IMF Chief Economist: Advanced Countries’ Output ‘Too Tepid’ - The International Monetary Fund’s chief economist on Thursday said output in advanced countries, such as the U.S., is “too tepid” to reduce unemployment rapidly. IMF Chief Economist Olivier Blanchard fears unemployment could become a “structural problem,” and is urging world policy makers to act swiftly. “We have to use fiscal and monetary policies to support as strong an output recovery as we can: Output growth is the single most important determinant of employment growth,” Blanchard said in an interview with an IMF publication. Many advanced economies need “credible medium-term fiscal consolidation,” as opposed to a “fiscal noose,” Blanchard said. He refuted the notion that fiscal stimulus has been exhausted

U.S. Pressures I.M.F. to Give Greater Role to Growing Economies - NYT- In a move that has met with resistance in Europe, the United States is pushing to reduce the Continent’s influence over the International Monetary Fund and grant more of a say to economies outside of Europe that are growing and leading the global recovery.  The move could shape the governance of the fund, which has taken a more prominent and stronger role after the financial crisis.  Since the onset of the crisis, the I.M.F.’s lending commitments have soared to $195 billion from less than $2 billion in 2007, and total capital on hand is set to rise to about $850 billion from $250 billion.  Though the timing of Washington’s push surprised some European officials, it is part of an effort to realign the World War II-era financial architecture to reflect changes like China’s emergence as the world’s second-largest economy.  European countries occupy nine of the 24 seats on the fund’s executive board, which represents the interests of all 187 members under a complex voting process that dates to the Bretton Woods system of economic cooperation, established in 1944.

The Death of Cash? All Over the World Governments Are Banning Large Cash Transactions - Are we witnessing the slow but certain death of cash in this generation? Is a truly cashless society on the horizon? Legislation currently pending in the Mexican legislature would ban a vast array of large cash transactions, but the truth is that Mexico is far from alone in trying to restrict cash. All over the world, governments are either placing stringent reporting requirements on large cash transactions or they are banning them altogether. We are being told that such measures are needed to battle illegal drug traffic, to catch tax evaders and to fight the war on terror. But are we rapidly getting to the point where we will have no financial privacy left whatsoever? Should we just accept that we have entered a time when the government will watch, track and trace all financial transactions? Is it inevitable that at some point in the near future ALL transactions will go through the banking system in one form or another (check, credit card, debit card, etc.)?

Despite Europe’s Debt Crisis, Lending Remained Strong - Even as Europe’s sovereign debt crisis intensified early this year, banks continued to load up on debt from Greece and other countries with the most acute fiscal problems, according to a report released on Sunday. The report suggests that the European Central Bank inadvertently encouraged institutions to increase their risk as it tried to stabilize the banking system.  Banks increased the amount of credit they extended to governments and the private sector in Greece, Ireland, Portugal and Spain by 4.3 percent, or $109 billion, in the first quarter of 2010 compared with the previous quarter, the quarterly report from the Bank for International Settlements said. The additional credit brought banks’ total exposure to those countries to $2.6 trillion.

Belgium’s deputy PM says prepare for the end of Belgium as new political crisis looms - King Albert accepts resignation of Elio di Rupo as mediator; hopes of a formation of a new government fail, as francophones are now contemplating the end of Belgium as they know it; in Germany, European finance ministers are under pressure to find common position on IMF representation; Thilo Sarrazin threatens legal action; polls show wide support for his far-right views; President Wulff is under attack, and now seeks to hide behind the government’s legal service; Edward Hugh says there are signs that the Spanish economy might fall back into recession; European governments are set to return to the bond markets in a big way this month, as solvency is becoming a big issue among investors; Irish government supports 10-year wind-down plan for Anglo-Irish bank; Spanish banks are also beginning to tap the capital markets; Wolfgang Munchau, meanwhile, says that concerns about peripheral European solvency are for real. [more]

Is Calm on the European Front Merely a Lull Before an Inevitable Storm -  Yves Smith - During the global financial crisis, after each acute phase, there would be a period of relief in which conditions returned to a semblance of normalcy, and policymakers and investors carried on as if acting as if all was well would make it so. Unfortunately, positive thinking provided only temporary relief from the undertow of rising defaults and continuing deterioration of bank balance sheets. A similar dynamic may be underway in Europe, but potentially on a more extended timetable. The upheaval of May had a familiar, vertiginous feel of 2008: are these sudden market shifts the beginning of something much worse? Even though key political actors shows a fair bit of disarray, and the responses were deemed to have meaningful shortcomings, it looked as if Mr. Market was very keen to find an excuse, any excuse, to pull back from the brink. So a rescue package that looked circular (stressed states helping bail out themselves) and unduly dependent on an increasingly skittish Germany, plus not very convincing stress tests, nevertheless gave the markets a real boost. Or have they? The euro has slipped from recent highs, and perhaps more important, the bond markets are signaling considerable concern.  Wolfgang Munchau points this out in the Financial Times:

Europe's debt crisis: Here we go again? - About six weeks ago, a perception took hold that Europe's leaders, employing promises of bail-outs, budget austerity programs and Eurozone reform, had managed to stem the debt crisis that ravaged through the continent in the first half of 2010. Bond markets stabilized and the euro strengthened against the dollar. Fears of impending insolvency abated. The respite in Europe's debt crisis appears to have been only temporary. Once again investors have come to realize that the real, underlying problems of Europe's weaker economies remain generally unresolved, while the European Unions still has no clear agenda for resolving them. The renewed jitters have showed up in sovereign bonds yields. The spread in yields between benchmark German bonds and those of Europe's weaker economies --especially Greece, Ireland, Portugal and Spain – have been rising again in recent weeks, back towards levels last seen during the depth of the crisis in May, an indication that investors consider their bonds riskier to hold. In fact, the spread on Ireland's bonds hit a record level after Standard & Poor's downgraded its sovereign rating in late August.

No escape from tighter EU financial supervision - FT video - “No one will escape” tighter financial supervision in the European Union in the future, warned the bloc’s Internal Market Commissioner, even as he attempted to reassure the industry to “remain calm” over the new regulatory regime. Michel Barnier’s comments were especially directed at the City of London which has expressed concerns about the impact of more centralised decision-making in areas such as over-the-counter derivatives, securities markets and hedge fund regulation.  Mr Barnier was speaking after the agreement in principle last Friday by European parliamentarians and diplomats to an overhaul of the way banks and markets in the region are supervised. The framework is likely to be endorsed by European Union finance ministers on Tuesday.

Europe’s Banks Stressed By Sovereign Debts Regulators Ducked -- Even after a 750 billion euro ($960 billion) bailout for the weaker economies in the euro zone, investors are skittish about sovereign debt -- and about the banks that hold the region’s government bonds.  A default by Greece could trigger the collapse of banks with large sovereign-bond holdings, says Konrad Becker, a financial analyst at Merck Finck & Co. in Munich. “A default by one EU country would lead to an evaporation of trust in banks,” he says. “If investors aren’t willing to invest in banks anymore, then many banks will go bust in months, not years.”  The new concern about the fragility of the region’s banks comes as politicians and regulators are eager to claim progress in fixing the global financial system, almost two years after credit markets cracked, Bloomberg Markets magazine reports in its October issue.

Eurobank Worries Back to the Fore - Yves - The end of the US summer holiday period is upon us, and with it, a return to reality. The markets are again concerned re Eurobanks, as the fears registered in EU periphery country bond spreads are now registering with investors in other markets. Per Bloomberg: The gaps between 10- year German bond yields and those of Irish and Portuguese debt climbed to all-time highs, while the German-Greek yield spread increased to the widest since May. “Widening spreads are like a canary in a coal mine,” said Quincy Krosby, chief market strategist for Newark, New Jersey- based Prudential Financial Inc., which oversees $690 billion. “It’s a signal that debt concerns are mounting. In order for the stock market to move higher, investors will have to see a solid package of data suggesting that we’re avoiding a double- dip recession.”

WSJ: The stress tests were essentially a fraud – revelation sends bond spreads to new records - Many European banks understated their bond holdings in the stress test examination; the revelation renders the stress tests essentially worthless; there is also a massive discrepancy between the stress test data and the BIS data on government bond holdings by banks; the revelations had a severely negative impact on the markets, as the bank shares fell; 10-year sovereign spreads rose to new records – 372bp for Ireland, 355bp for Portugal; Ecofin effectively killed the German idea of a financial transactions tax; but reached agreement on a European semester to coordinate fiscal policy; 1m people turn out in protests against French pension reforms; Barroso delivers a pompous state of the union address to 100 MEPs in Strasbourg; Martin Wolf says Germany is the biggest beneficiary of the euro; John Plender, meanwhile, argues that Merkel’s political future may depend on her not understanding the economics of the crisis. [more]

Trichet Says Weaning Banks Off ECB's Emergency Lending Will `Take Time' -- European Central Bank President Jean-Claude Trichet said it will take time to wean banks off its emergency lending measures, which policy makers extended last week into 2011. “We are accompanying the market as it progressively gets back to normal,” Trichet said in an interview with the Financial Times published late yesterday. The ECB confirmed Trichet’s comments. “It’s a process that takes time.” The ECB last week extended its offerings of unlimited liquidity to banks until at least Jan. 18 as investors refocus their attention on the health of governments’ finances and the banking system. Trichet’s comments were published as ECB colleague Miguel Angel Fernandez Ordonez said another bout of financial instability can’t be ruled out.

European Bond Spreads - The spread on Greek debt over the German 10-year bond was up to 937 basis points yesterday (Sept. 9), and just a hair below the all-time maximum of 954 bp. The spread on Irish debt was 365 bp, and above the all-time high, whereas its Portuguese counterpart was 343 bp, very close to the maximum. Why is not the press (or the blogosphere) full of headlines about that this week? The worries are substantial. Perhaps it's not news after all that those countries are going to hell in a handbasket...

Greece's Economy Contracted 1.8% in Second Quarter (Bloomberg) -- Greece’s economy contracted in the second quarter more than originally estimated as the government cut back on spending and raised taxes as part of efforts to trim the European Union’s second-biggest budget gap. Gross domestic product shrank 1.8 percent from the first quarter, when it fell 0.8 percent, the Athens-based Hellenic Statistical Authority said in an e-mailed statement today. From a year earlier, GDP declined 3.7 percent.The figures were revised from an initial Aug. 12 reading of a quarterly contraction of 1.5 percent and a 3.5 percent drop from a year earlier.Greece faces a second year of a recession as the government attempts to tame a budget shortfall of 13.6 percent of GDP, the highest in the 27-nation EU after Ireland. Wage and pension cuts and tax increases have damped spending.

Greek Debt Deals Hidden From EU Probed as 400% Yield Gap Shows Bond Doubts-- Four months after the 110 billion- euro ($140 billion) bailout for Greece, the nation still hasn’t disclosed the full details of secret financial transactions it used to conceal debt.  “We have not seen the real documents,” Walter Radermacher, head of the European Union’s statistics agency Eurostat, said in a Sept. 2 interview in his Luxembourg office. Eurostat first requested the contracts in February.  Radermacher vows new toughness when officials from his staff head to Greece this month to come up with a “solid estimate” of the total value of debt hidden by the opaque contracts. “This is a new era,” he said.

Beware of Greeks bearing bonds - As Wall Street hangs on the question “Will Greece default?,” the author heads for riot-stricken Athens, and for the mysterious Vatopaidi monastery, which brought down the last government, laying bare the country’s economic insanity. But beyond a $1.2 trillion debt (roughly a quarter-million dollars for each working adult), there is a more frightening deficit. After systematically looting their own treasury, in a breathtaking binge of tax evasion, bribery, and creative accounting spurred on by Goldman Sachs, Greeks are sure of one thing: they can’t trust their fellow Greeks.

Greece Default Risk Is `Substantial,’ Pimco’s Bosomworth Says (Bloomberg) -- Greece still faces a “substantial” default risk as insolvency prevents the nation from repaying its debt when its bailout program expires in three years, Pacific Investment Management Co. fund manager Andrew Bosomworth said.  “Greece is insolvent,” Bosomworth, Munich-based head of portfolio management at Pimco, which oversees the world’s largest bond fund, said in a telephone interview today. “I see it as being quite a substantial risk that Greece eventually defaults or restructures.”  In a best-case scenario, Greece’s government debt will swell to 150 percent of gross domestic product, Bosomworth said. The European Union-led rescue package assumes the Athens-based government will tap investors for 82 billion euros ($106 billion) during the life of the bailout program, “and that’s I think going to be very difficult,” he said.

Why Greece won’t turn itself around - If you haven’t yet read Michael Lewis’s fantastic piece on Greece, you should really carve out some time to do so. It’s almost impossible to summarize, but suffice to say that it serves as an utterly convincing and highly entertaining 11,500-word rejoinder to the IMF’s bullish case that Greece can somehow avoid default. Essentially, the only way that Greece can survive its current debt crisis without default and/or devaluation is by a concerted and nationwide pulling-together for the sake of the country as a whole, including an unprecedented willingness on the part of Greece’s citizens to pay their taxes. But that’s not going to happen. The only Greeks who paid their taxes were the ones who could not avoid doing so—the salaried employees of corporations, who had their taxes withheld from their paychecks. The vast economy of self-employed workers—everyone from doctors to the guys who ran the kiosks that sold the International Herald Tribune—cheated “It’s become a cultural trait,” he said. “The Greek people never learned to pay their taxes. And they never did because no one is punished. No one has ever been punished. It’s a cavalier offense—like a gentleman not opening a door for a lady.”

Hungary’s Budget Gap Widened in August on Revenue Lag (Bloomberg) -- Hungary, which is seeking to increase its budget deficit target for next year, had a gap equivalent to 124 percent of the full-year goal in the January- August period.The shortfall totaled 1.08 trillion forint ($4.8 billion) for the first eight months, the Budapest-based Economy Ministry said in a statement today. The budget recorded a deficit of 83.9 billion forint in August.The International Monetary Fund suspended talks after the government refused to commit to a narrower budget-deficit target for 2011, citing the need for jumpstarting the economy. Using fiscal stimulus to boost growth is “strictly off limits,” Economy Minister Gyorgy Matolcsy said on Sept. 3. “The government can’t even try” to put money into the economy which would “spoil the budget deficit,” he said

The Belgian mess (II) - In Euroland, Ireland (on which more later if I have time), Portugal (whose banks turned out to need still more funding help from the ECB in August) and Greece (where there is a continued run on bank deposits – they’ve now lost 11% of their deposit base since January, and one bank, National Bank of Greece, now has to raise new capital) are hogging the market’s attention, with CDS and 10-year spreads over German government bonds widening sharply. In the mean time, the situation in my favourite Eurosleeper, Belgium just got a little more critical. Negotiations to form a new government, which have been dragging on since May, broke down last Friday. Not terribly surprising, and in fact pretty routine for Belgian politics, but what seems to be new is that for the Francophone Socialist Party, talk of the end of Belgium as a national entity is starting to be taken seriously. So far, secession has been the agenda of a minority: the now largest Flemish party, Nieuw-Vlaamse Alliantie.

The Irish mess (II) - With an eye to illustrating this progression one more time, my last post on Ireland was just a snapshot of the dubious official story about the state of Irish banks. I had a little feeling that the snapshot would soon be out of date; in the most important respect, the likely Irish loan losses (initially touted as 30% of EUR 70Bn, though the first set of loans were transferred in at 50% haircuts), it was already bordering on stale. When one observes that those loans were ~50% “investment property” and ~28% land, 50% haircuts look pretty darned optimistic, too. Any guesses on appetite for investment property and development land in Ireland, for the foreseeable future? Those loans look like zeroes, on any reasonable timescale. Based on the latest news, for the Irish government, the stages of Grief seem more likely to be Denial, Bargaining and Oblivion. Two years into the Irish crisis (for the Irish banks, the music stopped, dead, in September 2008) we may be glimpsing the end of the Bargaining phase. First of all, the second set of transfers into NAMA, at haircuts around 60%, pretty much extinguishes any hope that the average losses will be anything like 30%, even bearing in mind that after the second transfer, only one third of the loans (23Bn of EUR 70Bn) have been transferred.

Ireland Moves to Shore Up State-Owned Bank - It's not a good sign when the government has to intervene to prevent a run on a bank that is already owned by the government, but apparently, that's what it's doing with Anglo-Irish bankIrish Finance Minister Brian Lenihan, days after meeting European Union officials, said state-owned Anglo Irish Bank Corp. would be divided into a government-backed bank that would hold customer deposits and an "asset recovery bank" holding the bank's increasingly bad loans. The asset-recovery bank could be sold in whole or part down the road. Mr. Lenihan said the cost of the restructuring would be announced in October. Ireland's renewed banking problems are sparking fears that the European Union's rescue of debt-laden Greece won't be its last. Earlier this year, the EU and the European Central Bank unveiled a raft of measures to stop the spiraling debt crisis in Greece from threatening the rest of the euro zone.One guesses that the answer is that the restructuring will cost a lot, and the "asset-recovery" bank will be worth very little.

Ireland breaks up Anglo Irish as EMU debt jitters return –Ireland is to break up the nationalised lender Anglo Irish Bank, hoping to end a disastrous saga that has shattered confidence in Irish finance and left taxpayers with daunting debt.  The move came after yields on Irish 10-year bonds rose above 6pc for the first time since the launch of the euro. Spreads over German Bunds rose to a record 379 basis points.  Greek debt was pummelled after National Bank of Greece, the country's top lender, announced plans to raise €2.8bn (£2.3bn) in fresh capital, raising concerns that Greek lenders are taking precautions against the risk of debt restructuring on their holdings of government debt. Credit default swaps (CDS) for Portugal, Spain, Italy, and Belgium have all surged this week. Markit's stress gauge for the group is now higher than during the debt crisis, when the EU launched its €440bn bail-out fund and the European Central Bank began buying eurozone bonds.

Sound as a punt - TYLER COWEN directs us to a disconcerting story: Ireland's troubled banking system became the latest flash point in Europe's continuing economic crisis, as the government said it would split up the weakest of its major banks to stave off a run by depositors. Irish Finance Minister Brian Lenihan, days after meeting European Union officials, said state-owned Anglo Irish Bank Corp. would be divided into a government-backed bank that would hold customer deposits and an "asset recovery bank" holding the bank's increasingly bad loans. The asset-recovery bank could be sold in whole or part down the road. Mr. Lenihan said the cost of the restructuring would be announced in October. Megan McArdle quips: It's not a good sign when the government has to intervene to prevent a run on a bank that is already owned by the government. There are a couple of things to take away from this. One is that this is pretty good evidence that austerity won't magically produce growth and market confidence. Ireland's been relatively aggressive at trimming its spending, and yet bond yields are rising. And the other is that with problems still looming in the banking sector, a nasty dynamic can take hold.

ECB intervenes to buy Irish bonds - The Irish press is full of stories this morning that the ECB intervened in the Irish bond market yesterday, and bought Irish bonds to stabilise the yield. The volumes involved are supposed to be small, according to the Irish Independent. The Irish 10 year spread continued to rise despite the intervention yesterday, to 3.81%. Ireland will today issue a new 10-year bond at a yield of 5.89%. The paper quoted one trader as saying that the ECB’s move was aimed as a reminder to market participants that they are still out there.

(Some) economists topsy turvy world - Spain, where unemployment has risen to 20% and domestic demand has yet to recover, has just approved a labor reform law that makes it easier for employers to dismiss workers. I hope someone from the IMF or OECD -- the two institutions responsible for convincing the Spaniards that such a reform is an urgent priority -- will explain to me how reducing the cost of firing workers can lower unemployment in the midst of a decline in labor demand.

Bargaining power in Germany - Germany’s reemerging economy is giving labour unions bargaining power and some are looking for annual wage increases up to 6%. If successful, Germany and the euro zone could see inflation rates move higher and eventually above the European Central Bank’s 2% target. This presents a dilemma for ECB policy makers who must balance a strict anti-inflation mandate with a still-fragile recovery in Europe’s periphery (look for the excellent graphic from the WSJ).  To give you an idea of the robustness of the German economy unemployment has fallen for 14 consecutive months, bringing the unemployment rate back to its prerecession level of 7.6%, the lowest since 1992. Unemployment in other big economies, particularly the U.S., is still stubbornly high, keeping a lid on wage growth. ECB President Jean-Claude Trichet wants others in the region to take note of Germany’s success at restraining labour costs – see graph below. Since 2000, German labour costs have increased just 19%, significantly below the average for Europe. In Spain they rose nearly three times as fast.

Dallas Fed: Sovereign debt default is politically strategic - The ability to pay off sovereign debt levels has more to do with political will than financial constraints, according to a study by the Federal Reserve Bank of Dallas. The Dallas Fed looked at debt levels in Ireland, Italy, Portugal, Spain and the much-publicized struggles of Greece. In these five countries, debt levels have risen for several years, to about 115% of the gross domestic product (GDP) for Greece and Italy at the end of 2009. Portugal saw an increase to 77%, Ireland to 64%, and Spain saw its debt increase to 54% of GDP. Budget deficits have created widened shortfalls as well. Greece's deficit was 13.6% of GDP at the end of 2009, 14.3% in Ireland, 11.2% in Spain, 9.4% in Portugal, and 5.3% in Italy."Looking at the excessive debt levels and budget deficits, it seems intuitive to link debt size to the likelihood that a government will be able to repay: At some point, increasing debt must exceed the resources available for repayment. However, the link isn’t entirely clear,"

ECB Chief economist disses German banks (and Eurostresstests) -A little shock for the Germans while we’re at it, with resonances for the whole Eurozone. From FT Deutschland: The chief economist of the European Central Bank (ECB), Juergen Stark, considers the German banks to be undercapitalized. Stark made this statement on Wednesday at a meeting with the head of Unions Parliamentary Group in Berlin, according to participants. He was referring largely to savings banks and regional banks (Sparkassen und Landesbanken). Accordingly, [Stark] called for privatization of the German savings banks, based on the successful Spanish model. The ECB declined to comment. Well, whether any of that is a big novelty is debatable: not if you read Hubert in the comments, or read Yves’s posts passim, for the last couple of years at least, or anything at all about the recent stress tests, apart from the official puffs. Very tasteless remarks, these. Good for Stark, though there is some serious politics going on, no doubt, when the ECB’s Chief Economist contradicts the ECB.

German Banks May Need to Raise $135 Billion on Rule Changes, Group Says -- Germany’s 10 biggest lenders, including Deutsche Bank AG and Commerzbank AG, may need about 105 billion euros ($135 billion) in fresh capital because of new regulation, the Association of German Banks said.  The lenders would need to raise that sum to reach an estimated 10 percent Tier 1 capital ratio, a key measure of financial strength, according to Dirk Jaeger, who is responsible for regulatory topics at the group. The association said higher capital requirements, set to be proposed tomorrow by the Basel Committee on Banking Supervision, may endanger the economic recovery by limiting the ability to lend.  The Basel Committee last month rebuffed complaints from banks that the proposed regulations may damage economic growth, saying the impact would be “modest.” The committee estimated in an Aug. 18 report the new rules would trim 0.38 percent from gross domestic product in the U.S., the euro area and Japan after 4 1/2 years. That’s below the 3.1 percent cut foreseen by the Institute of International Finance, an industry lobby group, over five years.

German banks warn of credit crunch, if Basle III is enacted - German banking association as new leverage ratio – which would limit the hybrid capital scam – would force banks to withdraw €1000bn in credits and trigger a depression; position determines German government’s continue scepticism towards to new capital adequacy rules, and support for longer time for implementation; the political situation in Italy is coming to a head, as Fini launched a blistering attack on Berlusconi; Berlusconi and other party leaders met last night, and vowed to ask President Napolitano to fire Fini’s as speaker of the House; EU finance minister continue to disagree about the new sanctions regime, as Elena Salgado rejects the inclusion of structural funds removal in the new sanctions regime; Schauble says recovery seems to lessen the determination to overhaul the rules; the EU restructuring fund, meanwhile, design to compensate workers affected by globalisation, has turned out to be a farce. [more]

Basel III compromise on the cards - likely to trigger a revamp of the German banking system - Agreement will water down the original Basel III proposals, but not by much; Germany loses fight to maintain its cranky capital adequacy system, as a result of which German banks will need mass recapitalisation; but new rules are likely to phased in over several years; Jurgen Stark tells German MPs that the country’s banking system is largely insolvent, and needs to raise capital; the Irish government decides to split up Anglo Irish Bank, but doubts persist about the cost implications; a day of strikes has forced President Sarkozy to water down the pension reform plans; Germany’s economy appears to be slowing down moderately; IMF downgrades Italy’s growth outlook for 2011, and says the country is still lacking competitiveness; Elena Salgado announces relaxed debt rules for Spain’s provinces; Greece, meanwhile, has a new and much enlarged cabinet. [more]

A Pensions Timebomb In Europe (Video) To avoid setting off what has been described as a pensions timebomb, Europeans face having to work longer and harder before they can retire. The EU warns that the ratio of pensioners to workers in Europe will double in the next 50 years, with two active workers for every retiree. So life expectancy continues to rise, and many state pension schemes are placing a strain on public finances and appear unsustainable.  France says its pension fund will be 10.7 billion euros in the red this year. Without reform, that figure will hit 50 billion euros in 2020.

French Strike To Fight Sarkozy Plan To Raise Retirement Age - Thousands of French workers will take to the streets and shut down railways, schools and public services across the nation today, in a last-ditch effort to stop a plan by the President, Nicolas Sarkozy, to raise the retirement age to 62. The national strike is the first in a series of demonstrations being planned across Europe as workers rebel against the wave of austerity measures imposed to rein in burgeoning government deficits. The retirement-age proposal, to be put to Parliament this month, has been greeted with outrage in a nation that has treasured stopping work at 60 for more than a quarter of a century. It was introduced by a Socialist government in 1983 and is seen as a right by French workers who have vehemently opposed the plan - even though it will not be implemented until 2018.

BBC News - Pension rallies hit French cities (video) More than one million French workers have taken to the streets to protest against austerity measures planned by President Nicolas Sarkozy's government. The rallies came as a 24-hour national strike disrupted flight and rail services, and closed schools.  Activists are angry at government plans to overhaul pensions and raise the retirement age from 60 to 62.  Union leaders say more strikes and protests are possible if the government fails to give an adequate response. "If they don't respond and they don't pay heed, there'll be a follow up, and nothing is ruled out at this stage," Bernard Thibault, leader of the large CGT union, told a rally in Paris. France's retirement age is lower than many countries in Europe, but analysts say the issue is polarising politics in the country.

Russia's retirement age should be raised - pension fund - The question of raising Russia's retirement age cannot be avoided, the chairman of Russia's Pension Fund said on Tuesday. "I do not think we will be able to avoid this problem. We will have to make a decision on the matter," Anton Drozdov told a conference on social security. Prime Minister Vladimir Putin recently said the issue was not under discussion, while the Pension Fund and the Finance Ministry earlier said that any changes to the country's retirement age would not be brought in before 2014-2015. Russia's retirement age is lower than in most other European countries. Currently, men are entitled to retire at 60 and women at 55.

Hungary, Romania, Serbia Struggle to Sell Debt After Receiving IMF Funds (Bloomberg) --Hungary, Romania and Serbia, which turned to bailouts in 2009, are struggling to find buyers for their debt as spending cuts weaken government power and concerns grow about a stalled recovery.  Serbia failed to attract enough bids to cover offers in six out of 25 debt auctions since the start of June, while Romania failed to sell any debt in four auctions since the launch of an austerity program in July and had only partial sales in 10 other auctions. Hungary’s auction last week also came up short.  The three former communist countries rely on a combined 43 billion euros ($55 million) in loans backed by the International Monetary Fund. Hungary, the European Union’s most indebted state, Romania, the bloc’s poorest, and Serbia, which is not an EU member, are trying to bolster their currencies, hold back inflation and raise foreign direct investment as revenue slumps, with little success, analysts said.

Germany Extends Nuclear Plants' Life - The German government has decided to extend the life spans of the country’s 17 nuclear plants while alternative energy sources are developed, a move that is also likely to create windfalls for both power companies and strained government coffers.  The decision comes at a time when several European countries, including Italy and Sweden, are reconsidering long-held policies against nuclear power, not only to develop new sources of energy but also to combat climate change.  New taxes levied on utility companies as part of the deal will be used in part to help develop renewable energy sources, Chancellor Angela Merkel said Monday. But she said Germany could not afford to get rid of nuclear power as planned because the amount of renewable energy available would not be sufficient to fill the gap.  “Nuclear energy is a bridge,” she said.

Millions stranded as Tube strike hits London -  More than 3.5 million people use London's subway system daily and the walk-out left all but one of the city's 11 Underground lines shut or partly suspended. Commuters were forced to take jam-packed buses, pay for taxis, ride bicycles, use boat services along the River Thames or simply walk to work. At London Bridge station, Kirbal Singh, 33, told how his usually straightforward 30-minute commute had turned into a two-and-a-half-hour ordeal involving a two separate trains and a bus. The industrial action was in protest over 800 planned job cuts, mostly among station staff. But Transport for London, which runs the network – famously known as the Tube – says there will be no compulsory layoffs.

Strikes in France, London Foreshadow More Protests - French strikers disrupted trains and planes, hospitals and mail delivery Tuesday amid massive street protests over plans to raise the retirement age. Across the English Channel, London subway workers unhappy with staff cuts walked off the job. The protests look like the prelude to a season of strikes in Europe, from Spain to the Czech Republic, as heavily indebted governments cut costs and chip away at some cherished but costly benefits that underpin the European good life — a scaling-back process that has gained urgency with Greece's euro110 billion ($140 billion) bailout. In France, where people poured into the streets in 220 cities, setting off flares and beating drums, a banner in the southern port city of Marseille called for Europe-wide solidarity: "Let's Refuse Austerity Plans!" The Interior Ministry said more than 1.1 million people demonstrated throughout France, while the CFDT union put the number at 2.5 million.

Bank capital ratios and standing on tippy-toes - In the UK banks were allowed to lever themselves to a silly extent (similar over-leverage occurs in their life insurance companies).  Overleverage as a policy was the defining character of Northern Rock.  Individually it makes sense for banks to lever up.  However competition was intense - and collectively it was insane.  Northern Rock was levered 60 times or so - but to mortgages that were really thin margin.  Their spreads were about 40bps.  (I wrote my impression of Northern Rock down here...) What I suspect is happening is all the banks are standing on tippy-toes.  It is individually rational - collectively insane because competition kills the benefit of all that extra leverage.  Margins in the UK - the most over-levered market on the planet - fell further than anywhere else. 

Beggar thy Neighbour - It has been an unpredictable summer. Investors have been wrong-footed by surprisingly strong growth emanating from Europe (read Germany), whereas the US economy – habitually the locomotive for the global economy – has gone from one disappointment to another[1]. Not many would have predicted that back in early summer. The endless series of bad news has led many commentators to speculate on whether the US is about to catch a bout of the Japanese disease. The most comprehensive analysis on the subject that I have come across has been conducted by the Global Economics and Strategy team at Bank of America Merrill Lynch

The authority to justify fiscal austerity is lapsing - Yesterday, two public statements were made which caught my roving eye. First, the British Government claimed they were going to cut harder than planned to weed out the unemployed who took income support payments to support their “lifestyles”. That was the approach the previous conservative government took in Australia between 1996 and 2007 and so we have experience with it. It failed dismally to achieve anything remotely positive. Second, the OECD released their Interim Assessments to update the May Economic Outlook publication. It showed that the GDP growth forecasts for 2010 and beyond were being revised sharply downwards. The OECD now claims there are many negative indicators and that governments should not push ahead with their austerity plans if the world economy is really slowing. The British government has used the earlier May EO forecasts (which were overly optimistic) as authority to justify their proposed cutbacks. Well now that authority is gone. However, their proposal to further cut back public spending would seem to be in denial of what is now obvious to even the right-wing hacks at the OECD.

Global economic recovery is slowing, OECD warns — Global economic recovery is slowing faster than expected and extra stimulus from governments may be needed, although another recession remains "unlikely," the OECD said on Thursday. Growth in the Group of Seven leading industrialised economies could slow to an annual rate of 1.5 percent in the second half of the year, the Organisation for Economic Cooperation and Development said in an interim assessment, lowering a projection in May of 1.75 percent. "Recent high-frequency indicators point to a slowdown in the pace of recovery of the world economy that is somewhat more pronounced than previously anticipated," the OECD said.

How State Capitalism and Illiberal Democracy Will Shape the Global Economy - Ian Bremmer and Nouriel Roubini have written an absolutely terrifying essay for Institutional Investor magazine, which resonates with Stephen S. Cohen and Brad DeLong’s arguments in their excellent book The End of Influence. Bremmer and Roubini carefully explain why the rise of beggar-thy-neighbor state capitalism will result in “an extended period of anemic, subpar growth.”  Part of the problem, if you can call it that, was anticipated by the much-maligned and badly misunderstood Samuel P. Huntington in The Clash of Civilizations and the Remaking of World Order. Modernization does not necessarily mean westernization. It often means “indigenization,” or the reinvention of indigenous cultural forms to suit increasingly prosperous urban societies. The rise of Hindutva and the assertion of linguistic minorities in India is one example of this phenomenon, and the advent of a uniquely Turkish political Islam that places heavy emphasis on small-scale entrepreneurship and a vision of a broader Turkic cultural space is another.

Global Agenda: Creative Destruction - First, the effort to put Humpty Dumpty back together is hopeless and pointless. That means that the finance-led economy in which the share of the financial sector in GDP grew constantly and voraciously, is not coming back. The financial sector will shrink and many more of the inefficient and corrupt behemoths that developed in the Old World will shrink, merge or simply disappear. So, too, will other sectors that came to rely on government handouts for survival in a world in which they and their business models were clearly incapable of surviving: the automobile industry and the airline sector are two obvious examples. Thus the first stage of the real debate about the American economy is between those who believe it is doomed in its entirety – because the many weak sectors will drag down the rest, thanks to their stranglehold on the politicians and thus on the public purse – versus those who maintain that the outcome will be exactly the opposite. In the end, and the sooner the better for the sake of the country and most of its citizens, the dead wood will be chopped off.


Madame Or said...

Sorry to blow your bubble but Quantitative Easing is over since August 25, secretly and unobserved, Quantitative Tightening is now on:

Operation TWIST Again: Quantitative Tightening

Giving Tempo to the TWIST.

Operation TWIST Again: Market Crash Cheap Date.

Update you Software

rjs said...

Madame Or: you have not blown my bubble, because i had no bubble to begin with...if you'd look closer, you'd see i link to both sides of any story, when there are different positions taken by the sources i frequent...i continue to vacillate & am unencombered by absolutes...if you notice my blog header indicates "reality is only those delusions that we have in common", thus i subscribe to none of them...