Fed Assets Little Changed as Treasury Securities Holdings Rise (Bloomberg) -- The Federal Reserve’s total assets were little changed at $2.31 trillion as the central bank expanded its holdings of Treasury securities under a plan announced last month. Total assets rose by $965 million 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 little changed at $1.1 trillion. Holdings of federal agency securities were unchanged at $156.5 billion. The central bank has purchased $10.19 billion of Treasuries since policy makers began the program on Aug. 17. The Fed’s holdings of Treasury securities totaled $786.3 billion, an increase of $1.79 billion from the previous week. M2 money supply rose by $11.9 billion in the week ended Aug. 23, the Fed said. That left M2 growing at an annual rate of 2.1 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.
New Ideas about Monetary Policy from Jackson Hole - Taylor - The main thing I took away from Ben Bernanke’s opener (the tradition going back to Paul Volcker and Alan Greenspan is for the Fed chair to lead off) was his call for a “cost-benefit” approach to determine whether another dose of unorthodox large scale asset purchases is needed. This is a big improvement over a “whatever it takes” approach, and it opens the door to a transparent discussion of the costs and benefits of such policies. My own view (based on research with Johannes Stroebel) is that the benefits in terms of lower rates are very small, while the short-term costs of greater uncertainty about the exit strategy and long-term costs from a loss of independence are large. Larry Christiano presented a new and interesting modification of the Taylor rule which replaces the output gap with a measure of credit growth. He presented some preliminary model simulation work to see how his idea would work in practice. Given the measurement problems with the output gap, more research along these lines would be valuable. Milton Friedman once proposed that I consider replacing the output gap with money growth (M2) in the Taylor rule, which is a similar proposal.
More Thoughts on Bernanke's Speech - Bernanke, in his speech was talking about the recent announced change in Fed policy, which was to replace MBS (mortgage backed securities) that are running off the Fed's balance sheet with long-term Treasuries. Now, as an example, suppose that $100 billion in MBS run off because people are refinancing their mortgages. Then, suppose that the new mortgages these people take out are sold to Fannie Mae, which holds them, and finances the purchases by issuing $100 billion in agency securities. What has changed? The private sector is now holding $100 billion less in reserves, and $100 billion more in agency securities. Both of these types of securities are effectively obligations of the (consolidated) federal government. Furthermore, the reserves (under current conditions) are the same as T-bills. Bernanke says that this involves an "implicit tightening." Why? This is of course the key to the whole "quantitative easing" program. The Fed thinks that shortening the average maturity of federal debt obligations in the hands of the private sector is somehow expansionary. Thus the policy action the Fed just announced: we undo the "implicit tightening" by having the Fed buy $100 billion in long-term Treasuries. Now, reserves are unchanged, and this is just a swap of $100 billion in agency securities for $100 billion in Treasuries, and those assets are essentially identical.
Don’t Trust the Fed - Bernanke’s speech Friday was more of the same: a misguided faith in the Federal Reserve. Reboot America manifesto signer Marshall Auerback on why more spending is the economy’s best hope to create jobs. Plus, join in with over 150 economists and historians who have pledged to get America back to work.While insisting that the Federal Reserve stands ready to take further steps to prop up the slowing economy, Fed Chairman Ben Bernanke’s speech at the Jackson Hole economic symposium last week also contained a telling concession: “Central bankers alone cannot solve the world’s economic problems.” Amid a renewed bout of job-shedding—to be expected given the impact of the now-waning fiscal stimulus—and weak consumer spending unresponsive to interest-rate cuts, Bernanke’s implicit message was that there are limits to the impact of monetary policy.
Bernanke's Speech: A Big Tease - Let's look at the three points he acknowledges in turn. First, he concedes that the low interest rates can reflect a weak economy rather than being a sign of loose monetary policy. Second, he grants that the Fed can be effectively tightening monetary policy simply by being passive. He makes these two big concessions in his discussion of why the FOMC decided to stabilize the Fed's balance sheet (my bold): Bernanke's third concession is an important one too. In his discussion of what the Fed can do if more action is required, he alludes to the idea of price level targeting. Now this option is not as good as NGDP level targeting, but it would be vast improvement over what is going on. Here is what he said:
"I was wrong again!" What Ben Bernanke meant to say - As a man, Ben Bernanke is prone to understatement, a tendency that was reinforced very early in his term as chairman of the Federal Reserve when a dinner-party comment he made to CNBC anchor Maria Bartiromo sent financial markets into a tizzy the next day. Therefore, any speech he gives -- in particular, major speeches on the state of the economy at a time of high national anxiety -- must be read through a special filter. I call this filter the Bernanke-Hype-ometer, and I have applied it to the address he gave at Jackson Hole, Wyo., Friday morning. (Bernanke comments in bold, followed by Hype-ometer translations.)
Warming Up the Helicopter - In his speech at the Jackson Hole conference, Ben Bernanke acknowledged that the economy isn't growing fast enough: Bernanke methodically weighed several ideas that have been circulating about how the Fed could give the recovery a push (see e.g., Joseph Gagnon and Alan Blinder). Overall, the Fed is ready to do more if necessary and they are not going to let a Japanese-style deflation (a.k.a. "it") happen here: Although many of us think there is no need to wait and see if "further action should prove necessary" (e.g. Mark Thoma) the speech should be somewhat reassuring to those, like Paul Krugman, who argue the Fed is in denial (but he is not reassured).
Fed admits: Money is a spreadsheet - In the face of the financial crisis, the Federal Reserve decided to buy $1.25 trillion of mortgage-backed bonds as part of its effort to prop up the economy. ....[Julie Remache] and her team worked in a plain room with four small cubicles, [and] spent six weeks coming up with a plan of attack, and 15 months actually buying mortgage-backed bonds, all of which came with a government guarantee that they’d be paid back even if the borrowers defaulted. The program’s intent was to keep interest rates low, and slow the decline in housing prices. The team ended up buying more than a fifth of all of the government-backed bonds on the market. ... In the end, they came very, very close to their target: They told us they were just 61 cents short. (In other words, they bought $1,249,999,999,999.39 worth of mortgage-backed bonds.) The Fed was able to spend so much money so quickly because it has a unique* power: It can create money out of thin air, whenever it decides to do so. So, [the New York Fed's Richard] Dzina explains, the mortgage team would decide to buy a bond, they’d push a button on the computer — "and voila, money is created."
A Question for the Kansas City Fed - This has annoyed me for several years now. Why won't the Kansas City Fed make the papers for the Jackson Hole conference available until after the conference is over? What's the purpose of this? None that I can think of, other than making themselves special, but that's no way for a public agency to behave. This is the opposite of transparency. I can understand waiting until the final versions are submitted, but at that point, why not post the papers so we can read them prior to the conference and give more informed commentary on the event? As it stands, I have to rely upon reporters to accurately tell me what's in the papers and, while I do trust some of them to mostly get things right (but not all), I'd like to be able to check the papers for myself. Sometimes participants will give a report after the event is over, but that's a bit late and even then I'd like to be able to come to my own conclusions, or at least verify the reports from reading the papers themselves. What's the point in locking them up? (As far as I can tell, the authors aren't even allowed to post the papers on their own sites.)
The Jackson Hole papers (finally) - As Mark Thoma notes, the Kansas City Fed has an inexplicable (and seemingly indefensible) policy of withholding from the public the research papers that are presented at Jackson Hole until after the conference is over.Well, it’s over. For your skimming pleasure, below we provide links to the papers and excerpts from their abstracts and conclusions. After the Fall, by Carmen and Vincent Reinhart: Monetary Policy and Stock Market Booms, by Lawrence Christiano, Cosmin Ilut, Roberto Motto and Massimo Rostagno: Modeling Inflation After the Crisis, by James Stock and Mark Watson:Monetary Policy after the Fall, by Charles Bean, Matthias Paustian, Adrian Penalver, and Tim Taylor: Monetary Science, Fiscal Alchemy, by Eric Leeper
Economists Consider Asset Purchases By Central Banks - Asset purchases by central banks work. That was the conclusion of Charles Bean, deputy governor of the Bank of England, in a paper he presented at the Federal Reserve’s annual economic symposium in Jackson Hole, Wyo., setting off a lively debate among academics and central bankers from around the world. This is one of the most pressing issues in central banking today. The central banker’s traditional lever is short-term interest rates. They’re lowered to spur borrowing and economic activity. After driving short-term interest rates to near zero during the financial crisis, the Federal Reserve and the Bank of England undertook large scale purchases of long-term securities to help reduce long-term interest rates, too. The idea is that lower long-term borrowing costs could also help spur economic activity. Fed officials are now debating whether to buy even more to drive alreayd low long-term rates down even further to enliven a disappointing recovery.
Bitter GOP Criticism Of The Fed May Be Ahead - Ben Bernanke may have painted a big bullseye on the Federal Reserve when he spoke last week in Jackson, Wyoming, about the Fed providing additional stimulus if the economy needs it. Although he wasn’t specific about what it might do and when it might do it, Bernanke clearly indicated that the Fed was ready to use the tools it had at it’s disposal to stimulate the economy given that (1) the recovery was not as robust as he thought it should be and (2) that additional fiscal policy stimulus measures were unlikely to be enacted in the current politics-of-obstruction political environment. It’s not at all clear, however, whether Bernanke realizes that the same political pressure that has brought fiscal policy to a standstill in Washington is very likely to be applied to the Fed if it decides to move forward. With Republican policymakers seeing economic hardship as the path to election glory this November, there is every reason to expect that the GOP will be equally as opposed to any actions taken by the Federal Reserve that would make the economy better, and that Republicans will openly and virulently criticize the Fed for even thinking about it.
When Is the Government Spending Multiplier Large? - FRB Atlanta - We argue that the government spending multiplier can be very large when the nominal interest rate is constant. We focus on a natural case in which the interest rate is constant, which is when the zero lower bound on nominal interest rates binds. For the economies that we consider it is optimal to increase government spending in response to shocks that make the zero bound binding. Download the full text of this paper (936 KB)
It falls to the Fed to fuel recovery - The US recovery is stalling. As a matter of economics the balance of risks strongly favors further fiscal and monetary stimulus. Politics appears to rule out the first, and a divided Federal Reserve is hesitating over the second. America’s leaders are letting the country down. Unlike most other advanced economies, the US could undertake further fiscal stimulus at acceptably low risk. Global appetite for its debt is undiminished. The risk, such as it is, could be all but eliminated if Congress could commit itself to stimulus now, restraint later – an easy thing, you might suppose, but evidently beyond its grasp. The administration could and should be pushing for just such a package, but it is not. The political problem is that US voters ... have wrongly decided that the first stimulus was an expensive failure. The administration is partly to blame. It oversold the first package. Most economists think the stimulus helped a lot. Yet, as in other areas, President Barack Obama’s defense of his policy has been strangely diffident
The Fed Is In A Box, And The Next Round Of Quantitative Easing Won't Do Anything - Apparently I am not the only one who believes quantitative easing is a “non-event”. In a recent note UniCredit analysts describe why they believe the Fed is out of bullets and will have little to no impact on markets with its “creative” new forms of monetary policy: UniCredit correctly argues that lower rates are unlikely to fix the system because the lending markets are effectively clogged: UniCredit believes this is a major “paradigm shift” in the way markets view monetary policy. In essence, the Fed is impotent and the markets are only just beginning to realize this:
Bernanke out of moves, critics say - With interest rates near zero and the Federal Reserve already owning a large share of the mortgage and Treasury securities markets, many investors fear the central bank may be out of ammunition should the economy take a serious turn for the worse. But Fed-watchers say the central bank, despite its dwindling options, has proved adept recently at manipulating markets to generate at least a psychological boost - perhaps all the economy needs if it is experiencing only a temporary "soft patch," as the Fed maintains.The Fed got markets churning at its last meeting in August, when it decided to reinvest mortgage securities that are coming due in its $2 trillion portfolio, putting the money in an array of Treasury securities. That seemingly small gesture will infuse between $14 billion and $25 billion a month into the world's largest securities market - a drop in the bucket, given the trillions of dollars of turnover there each day.
Bernanke Manages Expectations for Fed Role in Recovery - NYTimes- Federal Reserve officials and economists appear increasingly united in their view that the partisan gridlock on fiscal policy in Washington has clouded the prospects for a faster and stronger recovery. The Fed chairman, Ben S. Bernanke, who has assiduously avoided taking sides in fiscal debates, said on Friday that the central bank stood ready to use a variety of tools to forestall deflation, a broad decline in prices. But he made it clear that the Fed could not simply conjure up a recovery by manipulating interest rates and the money supply. “Central bankers alone cannot solve the world’s economic problems,” Mr. Bernanke said in what became a theme of the annual Fed policy symposium here, organized by the Federal Reserve Bank of Kansas City.
FOMC August Minutes: Both employment and inflation to fall short of dual mandate - From the Fed: Minutes of the Federal Open Market Committee Economic outlook: Members still saw the economic expansion continuing, and most believed that inflation was likely to stabilize near recent low readings in coming quarters and then gradually rise toward levels they consider more consistent with the Committee's dual mandate for maximum employment and price stability. Nonetheless, members generally judged that the economic outlook had softened somewhat more than they had anticipated, particularly for the near term, and some saw increased downside risks to the outlook for both growth and inflation. Some members expressed a concern that in this context any further adverse shocks could have disproportionate effects, resulting in a significant slowing in growth going forward. While no member saw an appreciable risk of deflation, some judged that the risk of further near-term disinflation had increased somewhat. More broadly, members generally saw both employment and inflation as likely to fall short of levels consistent with the dual mandate for longer than had been anticipated.
Fed Officials Discussed Further Stimulus Steps — Federal Reserve officials signaled at their August meeting that they would consider going beyond a modest program to purchase government debt if necessary to boost the economy. Minutes of the Fed's discussions from the Aug. 10 meeting show the central bank recognized that the economy could need further stimulus beyond the debt purchases. Those are intended to lower interest rates on a range of consumer and business loans. The minutes, which were released Tuesday, did not spell out what new steps might be taken. But they do indicate that the officials focused attention on the modest move the Fed did take at the meeting, which would invest the proceeds from its huge mortgage bond portfolio in Treasury securities. Some Fed officials argued that reinvesting proceeds from the Fed's holdings of mortgage securities "could send an inappropriate signal to investors about the committee's readiness to resume large-scale asset purchases," the minutes said.
Fed Discussed Reinvesting in Mortgages - The Federal Reserve’s decision to reinvest the proceeds of mortgage-backed securities into Treasurys earlier this month was a signal of steady monetary policy, though officials also raised the possibility of reinvesting in mortgages in the future.Most Fed board members agreed that the new strategy of reinvesting maturing or refinanced mortgage-related securities was necessary to avoid an unwanted tightening given the weakening economic recovery, minutes of the August 10 policy-setting meeting showed Tuesday. “Most members judged, in light of current conditions in the MBS market and the committee’s desire to normalize the composition of the Federal Reserve’s portfolio, that it would be better to reinvest in longer-term Treasury securities than in MBS,” according to the minutes.
Bickering at the FOMC? - You already knew this if you read the Wall Street Journal’s impressively detailed article last week, but the just-released minutes of the FOMC’s meeting on August 10 seem to reinforce the notion that there is significant disagreement within the Fed behind closed doors. Or maybe we’re just reading too much into it.Here is one passage reprising the whole structural vs cyclical unemployment debate (emphasis ours): Several participants suggested that structural factors such as mismatches between unemployed workers’ skills and the needs of employers with job openings, or unemployed workers’ inability to move to a new locale, were contributing to the elevated level and long average duration of unemployment. Other participants, while agreeing that such factors could restrain job growth and contribute to high rates of unemployment, noted that employment was lower than a year earlier and that job openings were only slightly above their lowest level in 10 years, indicating that few firms saw a need to add employees.
Moderate Lockhart Says Fed’s Next Move Isn’t Decided - Donald Kohn had advice for Fed watchers in a CNBC interview this week: Watch the moderates on the Federal Open Market Committee if you want to know what the Fed is going to do next. Their views point to the direction of central bank. Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, is a moderate, which makes his comments in a speech in Tennessee worth digesting at a time of great uncertainty about Fed policy. His bottom line: 1) The central bank is keeping its options open. Don’t prejudge its next steps. 2) Though the recovery has been disappointing, the economy isn’t falling off a cliff. “There was too much optimism in the early months and quarters of the recovery, and now there may be excessive pessimism,” he says. Here are some key passages:
The Taylor Rule Does Not Say Minus Six Percent - John B. Taylor - The Taylor rule says that the federal funds rate should equal 1.5 times the inflation rate plus .5 times the GDP gap plus 1. Currently the inflation rate is about 1.5 percent and the GDP gap is about -5 percent (using the average of the seven estimates of the gap provided in the recent update by Justin Weidner and John Williams). So a little algebra gives a funds rate of 1.5X1.5 + .5X(-5) + 1 = .75 percent. This number is nowhere near -6 percent, which is what you sometimes hear people say the Taylor rule implies. If you think that 1 percent is a better measure of inflation, then that would bring the interest rate down to 0 percent. If you use the largest of the seven gaps reported by Weidner and Williams ( – 8 percent) , then you get an interest rate of -.75 percent. Still nothing close to -6 percent.
The uncomfortable mathematics of monetary policy (Reuters) - Bigger, as the Federal Reserve may soon discover, is not always better. The prospect of a renewed effort by the U.S. central bank to drive down already super-low borrowing costs raises the issue of whether such measures can help stimulate a recovery that is faltering due to a lack of consumer demand. The sorry state of the U.S. economy, despite all the monetary and fiscal firepower the Fed and the Treasury have deployed, already befuddles the experts. Speaking at the Fed's annual Jackson Hole conference on Friday, Fed Chairman Ben Bernanke signaled he would be willing embark on yet another round of asset purchases should the economy weaken further, even if he currently believes that will not happen. But there is a growing fear within and outside the central bank about whether the risks of such purchases outweigh the benefits. One concern is that it may take an ever larger amount of bond buying to get the same effect.
Krugman vs. Holtz-Eakin: Has the Fed Done Enough? - The discussion starts around the 2:00 minute mark. Via C&L Holtz-Eakin is encouraging us to balance the budget even though the economy is still relatively weak, and in doing so, to make the same mistake we made during the Great Depression. A quick look at recent data, and all the talk about the chance of a double dip we've been hearing, shows that we are anything but certain we we will be back at full employment anytime soon. Recovery from a financial crisis is often a long, drawn out process, and that may be true this time as well, but that means the economy needs more help over a longer period, not a premature return to austerity that risks sending the economy back into recession. Why would we want to risk sending the economy back into a recession by beginning to balance the budget before the economy is growing robustly on its own? Republicans believe some sort of confidence effect from the decline in the deficit -- one that cannot actually be observed in the data but is, nevertheless, asserted to be there anyway -- will somehow more than offset the certain decline in demand from the reduction in the government deficit. But the problem is that the decline in demand will have it's own confidence effect on businesses, one that is negative, more certain, and likely much larger than any positive effects from deficit reduction.
Yes, the Fed can do more, and probably should have done more a long time ago - The infamous quote from Milton Friedman was: "We're all Keynesians now."
What Friedman meant at that point in time, and I believe he thought up until the day he died, was that the vast majority of economists were Keynesians in the positive sense. That is, the Keynesian model of macroeconomic business cycles was essentially correct. But Friedman disagreed with Keynes' normative solution to the problem of severe recessions and depressions: that fiscal stimulus should be used to rescue the economy from recessions and depressions when interest rates hit the zero lower bound. Instead, Friedman argued that appropriate management of the money supply (i.e, Fed policy) would correct the problem of severe recessions and thereby render fiscal stimulus unnecessary. And I think most economists agreed with Friedman on both points. Until now. (Err.., almost two years ago.)
Arrow, Schelling, and the Fed - Does the Fed want to loosen monetary policy? If so, why doesn't it do it? There are two answers (or at least, two simple answers) to this question: 1. The Fed doesn't want to loosen monetary policy. 2. The Fed wants to loosen monetary policy, but thinks it can't. I'm trying to come up with a third answer. (Scott Sumner goaded me into writing this post; I would caricature his position as being closer to answer 1.) Arrow said that you can't (or you can't always) aggregate preferences. The Fed's decisions are not made by a single individual. So it may not make sense to talk about what the Fed "wants". Schelling said that zero is a magic number. And he said that in coordination games, magic numbers matter. The equilibrium that players choose will be at a magic number, or "focal point".
So $400 Billion of QE Buys 17 Basis Points of Rate Reduction? - A key paragraph in a post on a new paper by Jim Hamilton: We can summarize the implications of that forecast in terms of the following scenario. Suppose that the Federal Reserve were to sell off all its Treasury securities of less than one-year maturity, and use the proceeds to buy up all the longer term Treasury debt it could. For example, in December of 2006, this would have required selling off about $400 B in bills and notes or bonds with less than one year remaining, with which the Fed could have effectively retired all Treasury debt beyond 10 years. The figure below summarizes the implied average change in forecast for the 1990-2007 period as a result of this change for interest rates of various maturities. Yields on maturities longer than 2-1/2 years would fall, with those at the long end decreasing by up to 17 basis points. Yields on the shortest maturities would increase by almost as much. While our estimates imply that the Fed could make a modest change in the slope of the yield curve, it would not make any difference for the average level of interest rates.
Queasing over Quantitative Easing, Part IV - In my last post on this topic, I went over the orthodox and unorthodox monetary policy responses to the crisis in the US. I’m not sure there is that much difference between Fed funds at 0.25% and 0.10%, except that money market funds will find themselves in further trouble, as yields are too low to credit anything. That the Fed will be on hold for a long time seems to be the default view of the market already, so an explicit declaration would likely prove superfluous. On buying long-dated Treasury bonds, that will benefit the US Government by pseudo-monetizing the debt, but won’t help the real economy much. Yes, some high-quality corporate and mortgage bond rates will be pulled down with it, but so will discount rates for liabilities. The same applies to spending rules for endowments, and how much retirees can get if they go to buy an annuity. The effects of QE are mixed at best, and on balance, might be depressing, not stimulating. But what practical proof, if any, do we have that QE has ever worked?
Japan’s Experience Suggests Quantitative Easing Helps Financial Institutions, Not Real Economy - Yves Smith - When an economy is very slack, cheaper money is not going to induce much in the way of real economy activity. Unless you are a financial firm, the level of interest rates is a secondary or tertiary consideration in your decision to borrow. You will be interested in borrowing only if you first, perceive a business need (usually an opportunity). The next question is whether it can be addressed profitably, and the cost of funds is almost always not a significant % of total project costs (although availability of funding can be a big constraint)….. So cheaper money will operate primarily via their impact on asset values. That of course helps financial firms, and perhaps the Fed hopes the wealth effect will induce more spending. But that’s been the movie of the last 20+ years, and Japan pre its crisis, of having the officialdom rely on asset price inflation to induce more consumer spending, and we know how both ended.
Policy tools that could lower interest rates further- Even though the overnight interest rate has been stuck near zero for 20 months, are there options available to the Federal Reserve or the U.S. Treasury to bring longer-term yields down further? I have been looking into this question with Cynthia Wu, an extremely talented UCSD graduate student. We present our findings in a new research paper, some of whose results I summarize here. Our starting point was a framework developed by Vayanos and Vila (2009), who interpret the term structure of interest rates as arising from the behavior of risk-averse arbitrageurs. This model is one way to capture formally the portfolio balance channel that Fed Chairman Bernanke indicated is central to the Fed's understanding of how nonstandard monetary operations might affect the economy.
Did I Hear that Right? You Want to Raise Interest Rates? -Let me explain, as simply as I can, the underlying reason for the strong reaction to Minnesota Fed president Narayana Kocherlakota's suggestion that raising interest rates would be helpful.When a Federal Reserve president calls for an increase in interest rates while the economy is still struggling to recover, something that repeats the errors of 1937-38, all of his buddies in academia should expect a reaction. It comes with the job. The fact that he can point to a model that failed to provide much help with the situation we're in to justify the statement isn't of much comfort, and there are serious questions about the validity of the claim in any case. This isn't just a theoretical exercise where finding novel, counter-intuitive results that may or may not have real world applicability draws the admiration of peers, people's livelihoods are at stake. Real people in the real world are depending on the Fed to get this right, and suggestions that the Fed raise interest rates to help with the recession go against every intuitive bone I have in my body. More importantly, for those who think those bones might be broken, it goes against the existing empirical evidence. This is not a game, actual policy is at stake that will affect people's lives, and we cannot be careless in how we approach it.
Interest And Inflation Wonkery – Krugman - So I thought I’d produce a simple graphical summary of how I see the whole interest rates etc. thing. Why? Well, I think little teachable models are always useful; and I always enjoy putting them together. So here’s how I think about it: combine a Wicksell-type notion of a natural rate of interest — but it has to be a natural real rate of interest — with a Taylor-type description of monetary policy. In the figure below, the flatter line (with a 45-degree slope) shows combinations of inflation and nominal interest rates at which the economy is at the natural rate of unemployment. Inflation will accelerate if the economy is below that line, decelerate if it’s above. Meanwhile, the steeper line is a Taylor rule describing the central bank’s behavior: it raise rates if inflation rises, lowers them if inflation falls. The line has to be steeper than 45 degrees, or the thing is unstable. In this picture, long-run equilibrium is where the two lines cross, at point 1. Now suppose there’s an expansionary change in policy: the central bank sets the interest rate lower for any given rate of inflation. This shifts the Taylor rule down and to the right:
The Trap We're In (Wonkish) - Paul Krugman - Ah: in this post on interest rates and inflation, I neglected to point out that right now we’re not on the Taylor rule line, because of the zero lower bound. The picture looks like this: with the blue arrow pointing to our current position. We got here, of course, thanks to a huge financial shock that shifted the natural real interest rate way down. Now, at this point any Taylor rule fitted to past Fed behavior says that the Fed funds rate should be something like minus 5 or 6 right now, but you can’t do that, so we’re stuck with an interest rate that’s too high given low inflation and very high unemployment. The crucial thing to understand about this position is that it’s not self-correcting. On the contrary, as inflation falls over time and possibly goes to actual deflation, we sink deeper into the trap. That’s why the Fed’s wait-and-see policy is so wrong-headed: to the extent that the Fed thinks it can use unconventional measures to get some traction, it should use them now now now, not wait until expectations of below-target inflation have gotten embedded.
Central Banks can target short term interest rates no matter what - Paul Krugman asks a rhetorical question which I dare to answer. He is still considering Kocherlakota's argument that low interest rates imposed by the monetary authority must cause deflation. "First of all, if inflation isn’t sticky, how is it that the Fed can set short-term interest rates at all?" Second of all, there is a short-term nominal interest rate which the Fed can set no matter what -- the discount rate. If the Fed loans at some interest rate, then the Fed loans at that interest rate. Second, I think the Federal funds rate has to be no higher than the discount rate. Why pay a bank more when you can get a loan for less straight from the Fed. So what happens if there is high inflation and the the central bankkeeps the discount rate low ? Banks borrow lots and lots of money from the central banks so the money supply increases. This can't be prevented by open market operations.
More-Than-Ever Worked Up About Nothing - I missed some of this stuff, as I try not to read DeLong's blog, for fear of depreciating my human capital. Here's a Krugman post, and a LeDong post relating to this. Having a rational discussion with these guys is something like having afternoon tea with a couple of psychotic ferrets. Here's what I said in response to a commenter: This is a long-run proposition. I know it's confusing. Tighter monetary policy, in the short run, raises nominal interest rates. Ultimately, the lower monetary growth as the result of tightening leads to lower inflation and lower nominal interest rates over a longer horizon. Look at what happened after the Volcker tightening. Nominal interest rates went up, then they came back down again as the inflation rate fell. In the short run, there is a "liquidity effect" whereby tight monetary policy tends to increase the nominal interest rate. In the long run, what dominates is the "Fisher effect" whereby an inflation premium gets built into the nominal interest rate. That's pretty much what Krugman and DeLong seem to be trying to say. What's all the heat about?
When paradigms collide - Nathan Kocherlakota certainly created a blogstastic firestorm with his statement that we need to raise interest rates to avoid deflation (Here is a good round up from Economist's View). In a strange way, I think this can be related to Scott Sumner's multi-year hammering of the argument that money is indeed too tight. Sumner favors the Fed targeting nominal GDP; it is not clear to me what Kocherlakota favors targeting. If the Fed directly targeted a 5% inflation rate and did so successfully, two things would happen. First, we would avoid deflation. Second, interest rates would rise. If the Fed directly targeted an 8% nominal GDP growth rate, the same two things would happen. So, I can read Kocherlakota as making sense by interpreting him as calling for the Fed to change its operating procedures, something that he does not directly do in his statement.
“Low for long”: A risky but necessary interest rate policy - In its annual report, the Bank for International Settlements (BIS) rightly insisted on the dangers arising from central banks’ rates being kept “low for long” (BIS Annual Report 2009/10). The study reminded us that such policies distorted the perception of risk while they encouraged a search for yield that laid the ground for the financial crisis. Are low interest rates storing up more trouble for the future? This column argues that low interest rates have been necessary to sustain large current-account imbalances. With global imbalances unlikely to be redressed any time soon, low interest rates may be the best option for a while longer – but this policy is not without its risks.
Global economic policy: Monetary illusions | The Economist…OVER the past few years the reputations of the rich world’s central bankers have fluctuated wildly. When the financial crisis struck, they were blamed for allowing the housing and credit bubbles to build, and for failing to foresee the bust. Later they were lionised for preventing a new Depression with bold actions to support the financial system. Now a third stage is at hand, one of dangerously outsized expectations. With most governments unable, or unwilling, to offer more fiscal stimulus, central banks are left solely responsible for propping up the flagging recovery. The phenomenon is most obvious in America. Its economy has weakened, yet the default path for fiscal policy is a hefty tightening as the Obama stimulus wanes, the states slash spending to balance their budgets and the Bush tax cuts expire. With any discussion of remedies by politicians drowned out by partisan positioning before the mid-term elections in November, disproportionate hope is pinned on Ben Bernanke’s Federal Reserve.
Fed's Fisher says ball is in "fiscal court," not Fed's (Reuters) - The U.S. Federal Reserve is committed to keeping the price of money low until the economic recovery strengthens, but should not do more to boost growth without fiscal and regulatory policies that support businesses, a top Fed official said on Wednesday.The Fed's recent decision to keep its $2 trillion balance sheet steady was an effort to put a halt to any "passive tightening" that could impede recovery, Dallas Federal Reserve President Richard Fisher told a group of business leaders. But he said he would be reluctant to expand the Fed's balance sheet further, because to do so would at best be ineffective and at worst fuel the fires of future inflation."I believe that monetary accommodation alone cannot buy happiness,"
Modern Monetary Theory — A Primer on the Operational Realities of the Monetary System - At its core, there are two parts to Modern Monetary Theory (MMT). The first is a description of how the monetary system actually works, mostly focusing upon interactions between the central bank, the treasury, and the financial system, though this part also requires a very thorough understanding of the Minskyan-related literature of many MMT’ers (I note this because so many critics of MMT ignore or not aware of the vast MMT literature on financial instability and reforming the financial system). The second is a set of policy proposals that arise from this description and is largely outside the scope of this particular post but which can be found in any number of MMT publications and blogposts (and, again, including the sizeable MMT literature on reforming the financial system).
The Fed should buy pro-cyclical assets, not bonds - Suppose you believe that the US economy needs increased Aggregate Demand, and needs looser monetary policy to accomplish that, and needs asset purchases by the Fed to accomplish that. (I believe those things, but am not going to argue them here). What sort of assets should the Fed buy? I want to divide all assets into two classes: "pro-cyclical" assets and "counter-cyclical" assets. I think the Fed should buy pro-cyclical assets. I'm going to define them in a minute. I believe there exists a long-run equilibrium path for the US economy, with higher actual and expected inflation, actual and expected GDP growth and employment, and an associated monetary policy that is consistent with that long-run equilibrium. But the US economy is currently not on that path. The problem is, how to get onto that path?
The Fed should raise rates and lower them too - There is much debate over whether the Federal Reserve should tighten or further ease monetary policy. This dichotomous framing overlooks another possibility, which is whether the Fed should change the mix of its stance, tightening in some areas and further easing in others. In particular, there are strong grounds for the Fed to abandon its support of the Treasury bond market and to gradually raise the federal funds rate (to say 1 per cent), while simultaneously increasing its purchases of mortgage-backed securities. If permissible, the Fed should also purchase state government bonds according to a per- capita formula. Such a recalibration of policy could have positive effects. Increased purchases of MBS will help the housing market, which remains at the heart of the US economy’s problems. Declining house prices continue to inflict financial losses on banks and consumers, and the prospect of further price declines deters buyers and undermines new construction. Increased MBS purchases could help stem this problem by further lowering mortgage rates. That would help households by facilitating more mortgage refinancing, help banks by reducing foreclosures and help the construction industry by making home ownership cheaper.
Interest Rates: The Zero Percent Solution – Raghuram Rajan, a former chief economist at the International Monetary Fund who is a professor at the University of Chicago's Booth School of Business, saw the credit crisis brewing in 2005; he now says Fed Chairman Ben Bernanke should gradually increase his benchmark interest rate by as much as two percentage points. William White, who used to head the monetary and economics department at the Bank for International Settlements, is warning that "low rates are not a free lunch, but people are acting as though they are." Keeping rates too low for too long damages the recovery by "raising asset prices and incentivizing investment in riskier assets," according to Rajan, which threatens to create yet more bubbles that central banks are unwilling to tackle. Moreover, savers aren't simply punished by near-zero returns; their nest eggs shrink further when the inflation rate outpaces deposit rates. And if improving consumer confidence is a prerequisite for a rebound in growth, then near-zero interest rates send the wrong message: They destroy nascent hope in the economic outlook and make the future that much more uncertain for consumers and companies. Such arguments are gaining traction with a vocal minority of policymakers.
Fed Watch: No Clothes : Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation. --- Federal Reserve Chairman Ben Bernanke, "The Economic Outlook and Monetary Policy" Speech (August 27, 2010) Rereading Federal Reserve Chairman Ben Bernanke's recent speech and measuring it against the incoming data leaves me with a pit in my stomach. I sense Bernanke reveals in this speech he is the proverbial emperor without clothes, short on policy options but long on hope. A last ditch attempt to persuade us that as long as we don't believe deflation will be a problem, it will not be a problem. But he faces the same challenge as did then President Gerald Ford. All hat and no cattle
Jim Bullard Responds to Tim Duy - Via email, Jim Bullard, President of the St. Louis Fed, responds to Tim Duy: Hi Tim, I read your "Fed watch" column this morning in our news clips. You do an excellent job of summarizing important issues facing the FOMC. I have three comments, all of which I have made publicly recently, and I think they are critical ones for the direction policy will take: --on the "raising interest rates" question: I am not sure if you have looked at my paper, "Seven Faces of the Peril," but if not please take a look at Figure 1 there (web page below) and contemplate the left hand side of the picture. This convinces me that staying with the near-zero interest rate policy alone--and promising to stay near-zero for a long time without doing anything else--risks a deflationary trap. To avoid this, I am recommending additional QE as a supplement to the near-zero rate policy as our best option. --on the effectiveness of QE: I do not agree that asset purchases are somehow ineffective. I talk about this in my CNBC interview at Jackson Hole (also posted on my web page). The direct empirical evidence on the effectiveness of QE both in the U.S. and the U.K. is fairly strong. For example, see the paper by Chris Neely of our staff cited in the "Perils" paper. --on the "disciplined" QE program: The quote from Vince Reinhart, who is a great guy, gives the "shock and awe" view of QE. I do not think this is remotely correct. We know how monetary policy works: through the expected future path of policy, not through the actual move on a particular day. When we make 25 basis point moves on the federal funds rate, those are small viewed in isolation, but they have important effects for macroeconomic stabilization because they imply an expected interest rate path over the coming years. The same is true for QE. A move on a particular day may seem small, but it implies a path for future policy, and a series of smaller moves may add up to a very large move if the incoming data are consistent with such an outcome.
Where the Monetary Debate Is Happening - Once upon a time, if you wanted to know what was happening in a particular field such as economics, you read academic journals like the American Economic Review. If you had a particular interest in, say, monetary policy you would read the Journal of Money, Credit and Banking and other specialized journals. And you needed to read things like the Federal Reserve Bulletin if you wanted to know what the Fed was up to and have access to the latest data. Today, that’s all changed. If you want to really know what’s going on in terms of monetary theory and policy you have to be reading the blogs, some obscure even to economists specializing in monetary policy. This really came through to me this week when I noted that Jim Bullard, president of the Federal Reserve Bank of St. Louis, responded almost immediately with a detailed commentary on a post by University of Oregon economist Tim Duy. I was impressed. It made me realize that a relatively small number of blogger economists are really where the action is in terms of understanding where we are in terms of how monetary theory is impacting on monetary policy. Issues that might have taken years to resolve in the academic journals in the past are now dissected in days. But you have to know where to look. For this reason, I am posting a list of must-read bloggers that anyone interested in the cutting edge debate on monetary policy must be aware of.
Deflation Traps Here's a Krugman post about deflation. Early on he says this: Now, at this point any Taylor rule fitted to past Fed behavior says that the Fed funds rate should be something like minus 5 or 6 right now, but you can’t do that, so we’re stuck with an interest rate that’s too high given low inflation and very high unemployment.I wish people would stop making the argument this way. If your model is a New Keynesian one, as seems to be the case here, and you are thinking about policy in terms of a Taylor rule, you better take account of the fact that there is a zero lower bound on the nominal interest rate. If the rule is telling you that the fed funds rate should be minus 5 or 6, you have the wrong rule. Roughly, the rest of Krugman's argument hangs on this: The crucial thing to understand about this position is that it’s not self-correcting. On the contrary, as inflation falls over time and possibly goes to actual deflation, we sink deeper into the trap. Now he's just making it up. "As inflation falls over time..." Why? How? Then he qualifies it ("...possibly goes to actual deflation"). Is that high probability or low probability? Can you put a point estimate on that, with a confidence interval? Why do you get trapped? If Krugman knows, he should lay this out for the rest of us so we can evaluate it.
What Bernanke doesn’t understand about deflation - Debt reduction is now the real story of the American economy, just as real story behind the apparent free lunch of the last two decades was rising debt. The secret that has completely eluded Bernanke is that aggregate demand is the sum of GDP plus the change in debt. So when debt is rising demand exceeds what it could be on the basis of earned incomes alone, and when debt is falling the opposite happens. I’ve been banging the drum on this for years now, but it’s a hard idea to communicate because it’s so alien to the way most economists (and many people) think. For a start, it involves a redefinition of aggregate demand. Most economists are conditioned to think of commodity markets and asset markets as two separate spheres, but my definition lumps them together: aggregate demand is the sum of expenditure on goods and services, PLUS the net amount of money spent buying assets (shares and property) on the secondary markets. This expenditure is financed by the sum of what we earn from productive activities (largely wages and profits) PLUS the change in our debt levels. So total demand in the economy is the sum of GDP plus the change in debt.
Paging Dr. Bernanke…Dr. Bernanke to Emergency, Stat! - Our central bank chairman is a versatile man. Last month we portrayed him as a sea captain, charting a course for the Federal Reserve’s imminent launch of it mighty deflation-fighting vessel, the QE II, a likely second round of quantitative easing to monetize another meaningful, trillion-dollar chunk of the nation’s public and private debt, and perhaps – but who knows – to begin purchase in size of other financial assets like corporate bonds and stocks or real assets like buildings and houses. Anything to try to create some inflation, because, as we mentioned last month, the fear of deflation sends chills down the spines of central bank economists who have nearly no effective tools to counter the deflationary effects of debt deleveraging.
Defeating Demon Deflation - Since early April, the yield on 10-year Treasury notes has dwindled from 4.0% to below 2.5% on August 24th. Meanwhile, the 12-month change in the Cleveland Fed's median CPI has hovered feebly between 0.5% and 0.6% since March. These abnormally low interest and inflation rates are fanning fears of renewed GDP contraction, a plunge into price deflation, or both. Boardrooms and blogs are humming with rumors of a 'QE II' (Quantitative Easing II) program to counter a chilly deflationary dip. One reason fears are so acute is that the Federal Reserve's main policy tool, the overnight interest rate on Fed Funds, is flatlined at zero. Moreover, via 'extraordinary measures' beginning in September 2008, the Federal Reserve added some $1.4 trillion of securities, including $1.1 trillion of MBS (mortgage-backed securities), to its balance sheet in a stimulus bid. Yet despite these heroic efforts, economic leading indicators have turned weak this summer, as sinking Treasury yields add to the disquiet.
Bond Market Instability in a Liquidity Trap - For simplicity, let’s assume that the Fed’s policy instrument (now that the federal funds rate is stuck near zero) is the 10-year Treasury note. As an example, suppose the yield is 4%. In that case, it’s all but certain that the Fed, if it chooses, can do something to stimulate the economy and raise the inflation rate. For example, suppose the Fed were to bid the 10-year note yield down from 4% to 1%. It would take out a whole slew of marginal noteholders in the process. Banks that had been satisfied with a 4% return would be unsatisfied with a 1% return and would lend more aggressively. Domestic investors that had been satisfied with a 4% return would be unsatisfied with 1% and would bite the bullet and buy stock. International investors would be unsatisfied and would shift their investments into foreign assets, thus weakening the dollar and making US products more competitive. Households would refinance their mortgages and spend some portion of the increased cash flow. Others who previously couldn’t afford houses could now afford them, so demand for houses and home furnishings would go up. And so on. With such a huge policy action, it’s virtually certain that business activity would accelerate enough to reverse any deflationary pressure. .
The Fed Is Still Clueless About Bubbles and So Is the WSJ - The economists and central bankers attending the annual meeting of central bankers in Jackson Hole, Wyoming apparently have not noticed the collapse of the housing bubble and the wreckage it has caused. This is the only plausible explanation for a WSJ article that told readers about a paper on a new approach to fiscal policy that argues: "fiscal policy could benefit from the more scientific approach taken by monetary policy over the past two decades." People who pay attention to the economy know that the monetary policy pursued over the last three decades has devastated the economy, leaving tens of millions of workers in the United States unemployed or underemployed. It would be hard to imagine a policy that could produce more disastrous results than the single-minded focus on inflation that central banks followed even as housing bubbles in the U.S. and elsewhere grew to ever more dangerous levels.
The Inflation Cure - Krugman - Ken Rogoff is proposing — not for the first time — that the United States use a burst of inflation to get out of its slump. My reaction is a mix of agreement and exasperation. I agree that higher inflation would help; my exasperation comes from Rogoff’s offhandedness about the whole thing. How, exactly, are we supposed to get this burst of inflation? Just saying “monetary policy” doesn’t cut it. I don’t think anyone can count on the Fed to deliver, on cue, Rogoff’s “two or three years of slightly elevated inflation”. In fact, the whole logic of the liquidity trap suggests that if central banks can gain any leverage at all, it’s only by credibly committing to inflation over a fairly sustained period. So how might inflation be achieved? Actually, we have a good example: the end of the Great Depression. The immediate cause of the depression’s end was, of course, a very large fiscal stimulus, also known as World War II. Why, then, didn’t depression return? The best answer I’ve come up with is that the depression was, at least in part, a Koo-type balance sheet slump — and the private sector emerged from World War II with much-improved balance sheets. And inflation was an important part of that improvement. Here’s the GDP deflator (a measure of the overall price of things America produces) from 1929 to 1948:
Things We Know About Inflation (Wonkish) - Paul Krugman - This just in: inflation falls during periods of high unemployment! OK, it’s something we should have known already. But that’s the message of the Stock-Watson paper (big pdf) from Jackson Hole. It’s also the message of the recent IMF paper on PLOGs and my own quick-and-dirty comparison of disinflation episodes, from which the chart above is taken. What all these analyses have in common is that they use an episode-based approach rather than trying to fit a Phillips curve. There’s good reason for that: we don’t have any good way to get the timing, the way in which inflation expectations fall over time, right So why, exactly, did members of the FOMC believe in their most recent meeting that inflation was likely to stabilize near recent low readings in coming quarters and then gradually rise toward levels they consider more consistent with the Committee’s dual mandate for maximum employment and price stability. I don’t know about you, but I find it disturbing that the Fed is clinging to beliefs that are at odds with basic macroeconomics, at odds with the lessons of history, but happen to justify sitting there and doing nothing.
Inflation, Deflation, Debt - Some readers ask what’s actually a very good question: even granted that inflation reduces the real liabilities of debtors, it also reduces the real assets of creditors. So why is there any benefit to the economy? The answer is, I think, easier to understand by considering the reverse case: the problem of debt-deflation. Here a falling price level increases the real value of all debts — and Irving Fisher famously argued that this has a contractionary effect on the economy, possibly turning into a vicious circle. Why? The answer is that on average, debtors are more likely to be constrained by their balance sheets than creditors. The 1929-33 plunge in prices made heavily mortgaged farmers poorer, while making wealthy people sitting on cash richer; but while the farmers were forced to slash spending to make their payments, the people sitting on cash merely had the option of spending more — an option many didn’t take. And all of this in turn explains why debt, even if it’s debt we collectively owe to ourselves, can be a major economic problem.
How Hyperinflation Will Happen - One day—when nothing much is going on in the markets, but general nervousness is running like a low-grade fever (as has been the case for a while now)—there will be a commodities burp: A slight but sudden rise in the price of a necessary commodity, such as oil.This will jiggle Treasury yields, as asset managers will reduce their Treasury allocations, and go into the pressured commodity, in order to catch a profit. (Actually it won’t even be the asset managers—it will be their programmed trades.) These asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell. It won’t be the volume of the sell-off that will pique Bernanke and the drones at the Fed—it will be the timing. It’ll happen right before a largish Treasury auction. So Bernanke and the Fed will buy Treasuries, in an effort to counteract the sell-off and maintain low yields—they want to maintain low yields in order to discourage deflation. But they’ll also want to keep the Treasury cheaply funded. QE-lite has already set the stage for direct Fed buys of Treasuries. The world didn’t end. So the Fed will feel confident as it moves forward and nips this Treasury yield jiggle in the bud.
Hyperinflation Ends The Game - So It Is Unlikely - This three-way conversation between “Blogger Extraordinaire” Mish Shedlock in the US and private investors Erik Townsend and Michael Hampton in Hong Kong cuts through the fog surrounding the deflation versus hyperinflation debate. Mish and Mike update their mostly accurate forecasts for 2010 ( [url=”http://tinyurl.com/mishmike-F2010″]http://tinyurl.com/mishmike-F2010[/url] ), and Erik T. chips in with some key demographic challenges facing the US. The three discuss market sentiment, the Hindenburg Omen, and the arguments for hyperinflation from Gonzalo Lira and Marc Faber. Ultimately, it may come down to who is elected to Congress in the November elections, and not the actions of the Federal Reserve.
The Right Kind of Helicopter Drop - Some observers say the Fed is out of ammo, that any further attempts by it to stimulate nominal spending is like pushing on a string--it's futile. This understanding ignores the fact that the Fed has yet to use all of its big guns and that these guns were found to be highly effective in ending the Great Contraction of 1929-1933. Moreover, Fed officials including Bernanke believe the Fed could do more if it wanted to do so. So the "Fed is pushing on a string" folks are simply wrong. Still, it is always useful to consider exactly how the Fed could stimulate total current dollar spending. Ricardo Caballero does just that in his recent proposal to have the Fed do a helicopter drop via the U.S. Treasury Department. His proposal is very explicit in how it would work and with a few minor tweaks I believe it could be effective in stabilizing aggregate demand. I would tweak this proposal in two ways. First, I would do fiscal expansion via a payroll tax holiday. Second, I would announce that this payroll tax holiday would be contingent on hitting an explicit nominal GDP or price level target.
A helicopter drop for the Treasury (VoxEU)The US may be near a liquidity trap. This column argues that the ineffectiveness of monetary policy can be turned on its head by using money creation to finance fiscal policy stimulus – such as a large but temporary cut in sales taxes. To avoid future problems, the Treasury could commit to transfer resources back to the Fed when the economy is back to full employment. This would be a helicopter drop with a drainage contingency.
What If We Ditched Quantitative Easing and Just Printed (and Distributed) Cash? -Many people think QE is a "helicopter drop" of cash; it is not. It is simply a way of expanding credit and encouraging more borrowing. What if the Federal Reserve and U.S. Treasury stopped trying to stimulate the economy by encouraging more borrowing with "quantitative easing" and instead "dropped money from helicopters" into households' accounts? The core of quantitative easing is this: by expanding bank credit and lowering interest rates, a central bank (in the U.S., the Federal Reserve) stimulates more borrowing and thus more spending by businesses and households.The problem with this policy is that none of the funds goes directly into consumers' accounts. If consumers are tapped out or wary of taking on more debt, then bank credit can be expanded to the moon and households will not borrow more money. So while the Fed, Treasury and the FDIC have shoveled about $4 trillion dollars into the nation's banking sector in various bailouts and guarantees, these actions have not actually distributed any cash to consumers or businesses. The problem with quantitative easing is fairly obvious to all: it hasn't really stimulated the economy, which despite the trillions of dollars spent on bank bailouts, is still tanking.
Can the Fed’s helicopter drop money on Treasury? - Ricardo Caballero has an interesting idea: The economy is barely muddling through. While some of this is unavoidable given the magnitude of the financial shock that is slowly working its way out of the system, macro-policy still has an important role to play in preventing a relapse. Unfortunately, the Federal Reserve has the resources but not the instruments, while the US Treasury has the policy instruments but not the resources. It stands to reason that what we need is a transfer from the Fed to the Treasury.Caballero doesn’t give an indication of how big this transfer should be. But presumably he thinks the transfer should be substantially larger than the sums that the Fed is already remitting to Treasury. And remittances are pretty large, and they’ve been growing sharply since the Fed started expanding its balance sheet. Remittances from the Fed to Treasury ranged from $19 billion to $34 billion between fiscal 2000 and fiscal 2008. In fiscal 2009, they were $34 billion — that’s the amount of money the Fed sent to Treasury between October 2008 and November 2009, about $2.8 billion a month. But if you look at calendar 2009, the Fed ended up remitting $46 billion to Treasury — that’s a rate of $3.8 billion a month. And in fiscal 2010, the CBO projects that total remittances will reach a whopping $77 billion — that’s $6.4 billion a month.
Nowhere to go - BEN BERNANKE, in his recent assessment of the American recovery, shocked some people by declaring that the conditions are still in place for a recovery in 2011. Economic data have certainly been disappointing lately, leading many to extrapolate various downward pointing lines back into negative territory. But Mr Bernanke has a point. The conditions are in place for a recovery. Primarily because they can't get much worse. Think about variables like housing sales or vehicle sales. Both are at or near historically low levels. To get a new period of sustained contraction, you'd have to have a scenario in which sales fell below current low levels. If they stay where they are, we wouldn't observe a strong contribution to growth, but neither would we see subtraction from it.
The Great Depression in Economic Memory - The dispute that has emerged in the United States and Europe between proponents of further government stimulus and advocates of fiscal retrenchment feels very much like a debate about economic history. Both sides have revisited the Great Depression of the 1930’s – as well as the centuries-long history of sovereign-debt crises – in a controversy that bears little resemblance to conventional economic-policy controversies. The pro-stimulus camp often refers to the damage wrought by fiscal retrenchment in the US in 1937, four years after Franklin Roosevelt’s election as US president and the launch of the New Deal. According to computations by the economist Paul van den Noord, the net result of the 1937 budget was a fiscal contraction amounting to three percentage points of GDP – certainly not a trivial amount. So, are we in 1936, and does the budgetary tightening contemplated in many countries risk provoking a similar double-dip recession?
What Can Sustain GDP Growth? Open Economy Version - With the consumer in the doldrums, residential investment unlikely to rebound in the near future, and government stimulus constrained by political gridlock, it's hard to see where the sources of aggregate demand will be. I'm going to extend Jim's search for silver linings in the latest GDP release. One possibility is that domestic investment will take up some slack. As several observers have noted, corporations have been making substantial profits and have the wherewithal to invest, and yet are not. Of course, depressed investment in plant and equipment was true before the recession, in 2006 and 2007, so it's unclear why it should take the lead now. One reason to think that nonresidential investment would take off is that gross investment is rising (17.6% q/q SAAR, roughly twice what MA forecasted back on 8/12), and contributed 2 ppts to GDP growth. Before anybody thinks this is some pollyana-ish prediction, I'll note that the rise only makes sense given the catastrophic and persistent decline in this category during the recession. Given depreciation, the real private nonresidential capital stock has probably been flat.
Conflicting data on the US economy -Most of the monthly economic indicators (and there are more of them than ever - see this FT Alphaville comment) are little more than noise, which are just as likely to confuse investors as to enlighten them. However, once in a while, a surprise in one of the leading indicators turns out to be an early warning of a major inflexion point in the economy. The difficult trick is to know when.The US manufacturing PMI survey is undoubtedly one of the small handful of critical global indicators published each month. Taken at face value, yesterday’s PMI is at a level equivalent to a real GDP growth rate running at about 3 per cent in the third quarter, which is about double the growth rate I thought we were likely to get. So why not revise the expected growth rate upwards? There are two reasons for being cautious.
Breaking down the ISM numbers - Having explained the limits of economic indicators, perhaps it’s unfair to hit you with a discussion of another one.But given the overwhelmingly bearish nature of this month’s US economic data (especially in the housing market) the surprisingly positive ISM numbers are worth further, detailed consideration. But first an apology. In our earlier economic roundups — where we mentioned that Fed surveys from various districts had indicated slower manufacturing activity — we failed to notice a few indicators that were painting a slightly prettier picture of the sector.From Econbrowser: As long as I’m passing along the not-as-awful-as-we-thought spin on the economic news, I should also mention that the Fed’s index of industrial production grew by 1% in July. That’s 12% at an annual rate, if we were lucky enough to see it repeated for a whole year– no danger of that, unfortunately. But the favorable industrial production numbers were likely a key factor that helped pull both the Chicago Fed National Activity Index and the Aruoba-Diebold-Scotti Business Conditions Index back up to zero, away from the alarmingly negative numbers with which both had flirted last month.
Beware those who think the worst is past - Reinhart and Reinhart - The landscape of Jackson Hole, Wyoming, where central bankers gathered at their annual conference last week, is spectacular and forbidding. Ben Bernanke, chairman of the Federal Reserve, painted a sober but reassuring picture of US prospects. The basis for sustained recovery is in place, and canny Fed officials are now alive to the dangers of both deflation and inflation. Similarly Jean Claude Trichet, head of the European Central Bank, spoke about how the dust had begun to settle on the crisis. Policymakers and financial markets seem to be looking at what comes next. Such optimism, however, may be premature. We have analysed data on numerous severe economic dislocations over the past three-quarters of a century; a record of misfortune including 15 severe post-second world war crises, the Great Depression and the 1973-74 oil shock. The result is a bracing warning that the future is likely to bring only hard choices
Why America isn't working - As the US economy limps toward the second anniversary of the Lehman Brothers bankruptcy, anemic growth has left unemployment mired near 10%, with little prospect of significant improvement anytime soon. Little wonder that, with mid-term congressional elections coming in November, Americans are angrily asking why the government’s hyper-aggressive stimulus policies have not turned things around. What more, if anything, can be done? The honest answer – but one that few voters want to hear – is that there is no magic bullet. It took more than a decade to dig today’s hole, and climbing out of it will take a while, too. As Carmen Reinhart and I warned slow, protracted recovery with sustained high unemployment is the norm in the aftermath of a deep financial crisis. One reason, of course, is that the financial system takes time to heal – and thus for credit to begin flowing properly again. Pumping vast taxpayer funds into financial behemoths does not solve the deeper problem of deflating an overleveraged society.
Will we ever recover from the financial crisis?… Well, define recovery. If recovery is getting back to the low unemployment levels that preceded the crisis, then no, we might not ever recover. If recovery is just getting back to some more normal-looking growth and job numbers, it's still going to take a very long time.That, at least, is the conclusion of a new paper from Carmen and Vincent Reinhart assessing the aftermath of severe financial crises and shocks. The two scholars looked at "real GDP (levels and growth rates), unemployment, inflation, bank credit, and real estate prices in a twenty one-year window" surrounding "the 1929 stock market crash, the 1973 oil shock, the 2007 U.S. subprime collapse and fifteen severe post-World War II financial crises." Their conclusion? Settle in. This may take a while. Real per capita GDP growth, they found, is significantly lower in the decade following a financial crisis than in the decade preceding one. If we're just looking the global crises, the median GDP growth for an advanced economy in the 10 years before the Great Depression was 3 percent a year, and before the 1973 oil shock, 4 percent a year. In the 10 years after both crises, growth averaged 1.8 percent.
V-Shaped Dreams Evaporate - Roubini -The curtain has opened on Act II of our "Year of Two Halves"--RGE's theme since the end of 2009--with the slowdown forecast for H2 2010 getting here a bit earlier than expected. Growth in Q2 2010 registered a very weak 1.6%, revised down from an original estimate of 2.4%—a sharp slowdown from the 3.7% of Q1. This implies much weaker growth in H1 than even bearish forecasters had expected. Moreover, most of the growth was driven by a temporary inventory adjustment; final sales grew a mediocre 1.1% in Q1 and 1% in Q2. All the tailwinds of H1 will become headwinds in H2. As state and local governments keep retrenching and even the federal stimulus diminishes, the fiscal stimulus will turn into a fiscal drag that will be much more pronounced in 2011 and after some of the 2001–03 tax cuts expire. The base effects from the lousy economic activity figures of 2009 are gone, temporary census hiring finished and tax incentives--cash for clunkers, the investment tax credit, the first-time home buyer tax credit and cash for green appliances--all expired after "stealing" demand and growth from the future.
Impediments to Rapid Recovery From Financial Crisis Are More Political Than Economic - I wrote yesterday that I think the Reinhardt & Reinhardt finding that economies in the wake of a financial crisis typically experience years of slow growth is evidence that such crises are normally met with an inadequate policy response. The other read, the one that both Reinhardt’s and Carmen Reinhardt’s co-author Ken Rogoff seem to prefer, is that years of suffering are just quasi-inevitable. But it’s a little bit hard for me to understand why they take this line. In his latest piece, for example, Rogoff is full of gloom and doom but actually sees plenty of policy steps that could improve things. In terms of fiscal policy, he agrees that stimulus could be helpful but thinks it might also be counterproductive unless we simultaneously tackle the long-term deficit situation. And he also thinks monetary expansion could help. So despite the rhetoric of despair and how “It took more than a decade to dig today’s hole, and climbing out of it will take a while, too,” Rogoff doesn’t really seem to believe that.
The Backward Slide Into Recession - The economy is sliding backwards into recession. Ongoing deleveraging has slowed personal consumption and trimmed 2nd quarter GDP to a revised 1.6 per cent. As Obama's fiscal stimulus dries up and the private sector slashes spending, demand will continue to collapse pushing more businesses and households into default. The economy is now caught in a reinforcing downward cycle in which dwindling fiscal and monetary support is shrinking the money supply triggering a slowdown in activity in the broader economy. Far right policymakers have shrugged off increasingly ominous economic data, choosing to pursue their political aims through obstructionism. By torpedoing the recovery, GOP leaders hope to take advantage of anti-incumbent sentiment and engineer a landslide victory in the midterm elections. But the timing could not be worse. The economy is in greater peril than most realize and badly in need of government intervention. As the current account deficit continues to widen, the global system inches closer to a major currency crisis. Ballooning trade imbalances signal that a disorderly unwinding of the dollar is becoming more probable. If the dollar drops precipitously, US demand for foreign exports will fall and the world will plunge into another deep slump.
Economy Avoids Recession Relapse as Data Can’t Get Much Worse (Bloomberg) -- The U.S. economy is so bad that the chance of avoiding a double dip back into recession may actually be pretty good. The sectors of the economy that traditionally drive it into recession are already so depressed it’s difficult to see them getting a lot worse, said Ethan Harris, head of developed markets economics research at BofA Merrill Lynch Global Research in New York. Inventories are near record lows in proportion to sales, residential construction is less than half the level of the housing boom and vehicle sales are more than 30 percent below five years ago. “It doesn’t rule out a recession,” Harris said. “It just makes it less likely than otherwise.”
What Can Be Done to Cure the Ailing Economy? - THE American economy is once again tilting toward danger. Despite an aggressive regimen of treatments from the conventional to the exotic — more than $800 billion in federal spending, and trillions of dollars worth of credit from the Federal Reserve — fears of a second recession are growing, along with worries that the country may face several more years of lean prospects. Yet even as vital signs weaken — plunging home sales, a bleak job market and, on Friday, confirmation that the quarterly rate of economic growth had slowed, to 1.6 percent — a sense has taken hold that government policy makers cannot deliver meaningful intervention. That is because nearly any proposed curative could risk adding to the national debt — a political nonstarter. The situation has left American fortunes pinned to an uncertain remedy: hoping that things somehow get better.
Fisher: Improved Fiscal, Regulatory Policies Should Activate U.S. Economy - Federal Reserve Bank of Dallas President Richard Fisher said Wednesday the recovery of the U.S. economy “will take quite some time,” and that improved regulatory and fiscal policies are needed in order to help the process. “We need to restore confidence,” he told reporters “We are not the only one in the pilot house driving this ship, it has to be complemented…with fiscal and regulatory” policies that encourage business owners. He added that any possible new stimulus program should focus on generating jobs. Fisher, who isn’t a voting member of the interest-rate-setting Federal Open Market Committee this year but will be a voting member in 2011, said that an improved regulatory and fiscal environment should help to activate the economy. Business owners will accept policies they are not “happy” with because at least they will be more certain about the rules, he said.
Optimism…pessimism…and a bit of perspective - Atlanta Fed's macroblog - Here's how I'm tempted to summarize today's release of the August employment report from the U.S. Bureau of Labor Statistics: more of the same. That theme fits nicely with comments this morning from Atlanta Fed President Dennis Lockhart, in a speech at East Tennessee State University. Here he calls for a little perspective: "At the last meeting of the Federal Open Market Committee (FOMC) in Washington, the committee made a decision that has been widely interpreted as signaling declining confidence in the strength and sustainability of the recovery…. "In my remarks today, I will provide a less alarmist interpretation of recent economic information and the Fed's recent policy decision. I will argue that, generally speaking, there was too much optimism in the early months and quarters of the recovery and now there may be excessive pessimism." One point is that recoveries are not generally linear affairs:"Growth at the end of last year and early part of this year was stronger than I anticipated while economic activity in the second and third quarters seems weaker than I expected. "But such ups and downs are not unusual during a recovery.
Thank goodness, an excuse not to act - THIS is nearly enough to make one root for bad economic numbers: Today’s better-than-forecast U.S. payrolls report reduces pressure on Federal Reserve policy makers to add monetary stimulus when they meet this month without forestalling the need to act later, economists said. “I don’t think this is going to provide a foundation for any major move,” on Sept. 21, former Fed Governor Randall Kroszner said in a Bloomberg Television interview. Here's what Ben Bernanke said at Jackson Hole last month:. Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability. If we're taking Mr Bernanke at his word, this report should not dissuade the Fed from additional action. What it is more likely to do is convince the Fed that it can afford to wait until its October meeting. I think that would be a bad idea, but the Fed are a cautious bunch.
A Termite-Riddled House: Treasury Bonds - When termites eat your house, you don’t notice a thing. You don’t hear a thing, you don’t see a thing—you’re house stands there, silent and staid, while you and your family happily go about your days, without a care in the world——until your house crashes on top of your head. Right now, we are at a stage where Treasury bonds are as weakened as a termite-riddled house. They look fine: Nice glossy coat of paint, pretty shingles, bright clear windows, sturdy-looking plankings on the open-aired porch. But Treasuries are well on their way to a complete collapse. Why? Because of the way they have been mishandled and mistreated by the Federal Reserve Board, and the U.S. Treasury. Whether by incompetence or by design, U.S. Treasury bonds have become the New & Improved Toxic Asset. The question is no longer if they will collapse—it’s when. Let me explain why.
Jordan’s Central Bank Chief Defends Role of U.S. Dollar - The leader of a central bank that pegs its currency to the dollar defended the U.S. currency’s role as the chief global reserve currency on Saturday, and fretted about the potential for a wave of competitive devaluations by some emerging-economy nations.Umayya Toukan, governor of the central bank of Jordan, told participants at the Federal Reserve Bank of Kansas City’s annual gathering in Jackson Hole, Wyo., that, despite the challenges the dollar has faced over the course of the financial crisis, it is likely to retain a paramount role for reserve purposes. He spoke in a climate where some nations, such as China and Russia, have at times pushed for alternatives to the dollar. That agitation has looked to some like a signal of waning American economic vigor. “Only currencies that can be freely convertible for trade or investment purposes have the potential to achieve the status of an international currency,” Toukan said. He countered those who believe the dollar, and the euro, too, will decline in importance for global trade by saying “most of the concerns are not totally justified” about those two economic zones.
White: ‘Burden of Debt’ Will Slow Global Growth - Bill White, formerly of the BIS and now with the OECD spoke to Bloomberg News during the KC Fed’s annual meeting in Jackson Hole, WY. He gave some rather pointed answers to questions about the Federal Reserve’s monetary policy. I reviewed some of White’s remarks in my April piece The origins of the next crisis regarding the global economy and the accumulation of debt in advanced economies. The remarks he made to Bloomberg were of the same nature. In particular, White characterized the medium-term to longer-term problem in language I used a couple of days ago in Why the U.S. economy is weak, regarding the centrality of household debt. The question for the Fed is: what should a central bank do to deal with a weak but indebted economy. White says that the Fed shouldn’t leave interest rates too low for too long
America's Hidden Debt - On New York City’s Avenue of the Americas, tourists can find a mathematical landmark that has grown in infamy as it has grown in digits. It is the National Debt Clock, and it has served as a publicly-displayed meter of the federal government’s spending habits for more than a decade. But as economists and politicians debate the merits of recognizing the future outflows of Social Security and Medicare as part of the debt, two different entities have already made the clock obsolete — Fannie Mae and Freddie Mac. The aftermath of the housing bubble is causing Washington’s twin lending giants to apply much more immediate pressure to the federal balance sheet. Combined, they have over $5 trillion in liabilities that government officials have repeatedly insisted are not obligations of the taxpayers. With Fannie and Freddie debt trading at prices nearly identical to Treasury debt, however, the markets assume that the taxpayers are on the hook, which means that somebody has to lose big.
Why Total Debt/GDP Hides West's Sick Finances - Constantly travelling around, I meet all sorts. I've met folks who worked for Enron, the US military in Iraq, and a private military company operating there--and I'm talking about the same guy (bada-boom)! Today, however, one of my other contacts has delivered on something that has piqued my interest which (thankfully) doesn't involve violence like that in Iraq. Still it involves quite a bit of fraud like Enron and accounting for US expenditures in Mesopotamia. In recent days, both FT Alphaville and the Becker-Posner blog commented on a recent Morgan Stanley report fetchingly titled "Ask Not Whether [Developed] Governments Will Default, But How." It is the first in a series of reports concerning "Sovereign Subjects." The main gist of the report is that it is not possible for major developed countries to meet their obligations given current demographic and economic trends. Now, this is plenty obvious to everyone but the most jaded mathlexics who are unfortunately all too common in the blogosphere--especially America#1-style cheerleaders who try to make up for their proud ignorance with ideological blinders. Being a more curious and open-minded sort, I asked a colleague to fetch me a copy of this Morgan Stanley report to see for myself
The End of Unsustainable Debt - As every economist knows, Stein's Law says that trends which can't continue don't. Unfortunately, it doesn't tell us anything about when or how they come to an end. Since our national debt is assumed by virtually all economists except my friend Jamie Galbraith to be unsustainable, and since it seems increasingly unlikely that Congress will act before it has a gun at its head, a few analysts are starting to think about when and how a debt crisis will ultimately emerge and how the government will respond.In my Fiscal Times column this week I examine some recent research on this question. As I pointed out in a previous column, it is almost a certainty that higher taxes will be the primary governmental response. The reason is that the key metric of debt sustainability, according to bond market analysts, is not the debt/GDP ratio, but interest on the debt as a share of revenues. Therefore, cutting spending--even a lot--won't do any good in a crisis situation; only higher revenues will help calm markets.
American Apocalypse - The United States now is in a shockingly deteriorated condition. It is debt-ridden, hobbled by grievous failings in honesty of government, integrity of the justice system, competitiveness of the education system, anomalies in immigration policy, insupportable health-care costs, a presidency that has almost no credibility, a foreign policy that has foundered on the appeasement of Iran (as well as absurd nostrums such as the pursuit of a non-nuclear world and the war on global warming) and an economic policy that has been an epochal failure. The second half of the double dip yawns before us like the Grand Canyon, and it will be deeper and longer than the first, until leadership provides the radical solutions that are required. America’s problems are not imperial overreach, or social decay, which have brought down the world’s previous leading nations and peoples; they are profound but corrigible public-policy errors. The nation was transformed into a white-collar fool’s paradise, where lawyers bill $1-trillion a year, manufacturing departs and too few people are actually doing anything useful. The result: no saving, little investment and instant gratification on borrowed money.
America Adds $210 Billion In Gross Debt In August, Rolls $620 Billion In Bills And Notes - As per the August 31 DTS statement, the US ended the month with a new all time record of $13.45 trillion in debt, and increase of $210 billion from the beginning of the month (or $225 billion in public debt, net of intragovernmental holdings). With just 30 days left in fiscal year 2010, the US has added $1.54 trillion in the eleven months ended August 31, a monthly average increase of $140 billion. As a point of reference, the US has received $1.53 trillion in withheld income tax over the same period, confirming that the US continues to issue more than one dollar in debt for every dollar it receives via income tax revenue. This balance will likely be tipped soon courtesy of changes to the tax law, which will adversely impact the withheld tax line, implying even more funding has to come in the form of debt.
New database on the maturity structure of publicly-held debt - I have been working on a project with UCSD graduate student Cynthia Wu to try to assess the potential for the Federal Reserve to continue to influence long-term interest rates even when the short-term interest rate is essentially at zero. I'll be relating the conclusions from that research in a few days. But first I'd like to call attention to a new data set that we developed on the maturity structure of publicly-held debt which may be of interest to other researchers. As Paul Krugman likes to warn, this one is just for the wonks.
Federal Spending Rises A Record 16% In 2009, Census Bureau Says - Federal domestic spending increased a record 16 percent to $3.2 trillion in 2009, the Census Bureau reported Tuesday, largely because of a boost in aid to the unemployed and the huge economic stimulus package enacted to rescue the sinking economy. The rise in spending was the largest since the Census Bureau began compiling the data in 1983. The Washington region was among the biggest beneficiaries of the government's spending. With congressional elections looming this fall, the spike in federal spending has emerged as one of the nation's most contentious political issues.
Meet The 18 People Who Could Determine The Fate Of Social Security - Last week former Republican Senator Alan Simpson, who co-chairs the White House's fiscal commission, drew a storm of criticism for comparing Social Security to a "cow with 310 million tits." But Titgate isn't really about language. It's about both Simpson himself -- who has long viewed Social Security as a bloated program for spoiled old people -- and about the commission as a whole. Comprised of nine tax-averse Republicans and nine Democrats, many of whom have expressed support for Social Security changes in the past, the commission will almost certainly be biased toward benefit cuts, and away from raising taxes, when it presents its report on December 1. Below, the cast of characters who will be making the calls.
Dean Baker Schools Simpson on Social Security - Dean asks:
1) How much higher are real wages projected to be in 2040 than today? In other words, how much richer do we expect the average worker to be 30 years from now?
2) How did the 2010 Trustees Report change the projections for 2040 wages compared with the 2009 report?
3) If we solve the projected shortfall in Social Security entirely by raising the payroll tax, what percent of the gain in real wages over the next 30 years would have to go to pay the tax?
4) What percent of real wage gains over the last 30 years was absorbed by the increase in Social Security payroll taxes?
5) What percent of the projected long-term budget shortfall is due to the inefficiencies of the US health care system?
6) How much wealth should we expect near retirees to have to support themselves in retirement?
7) What percent of older workers have jobs in which they can reasonably be expected to work at into their late 60s?
Cenk Uygur: White House Circling the Wagons Around Alan Simpson | Video Cafe (video & transcript) Cenk Uygur filling in for Ed Schultz asks the question I'm sure so many of us have as well on President Obama's deficit commission. Why did we elect a Democrat if we`re going to get a conservative deficit commission that`s going to cut our Social Security? As Bob Shrum rightly responds, if the Democrats join with Republicans to destroy Social Security, it's going to spell big trouble for the party, and rightfully so. Alan Simpson and the whole commission need to go.
Simpson to disabled vets: You cost too much - Fresh off of being forgiven by the White House, Simpson has a new target..—The system that automatically awards disability benefits to some veterans because of concerns about Agent Orange seems contrary to efforts to control federal spending, the Republican co-chairman of President Barack Obama's deficit commission said Tuesday. Former Wyoming Sen. Alan Simpson's comments came a day after The Associated Press reported that diabetes has become the most frequently compensated ailment among Vietnam veterans, even though decades of research has failed to find more than a possible link between the defoliant Agent Orange and diabetes."The irony (is) that the veterans who saved this country are now, in a way, not helping us to save the country in this fiscal mess," said Simpson, an Army veteran who was once chairman of the Senate Veterans' Affairs Committee.... "It's the kind of thing that's just driving us to this $1 trillion, $400 billion deficit this year,"
House Democrats To Obama: No Cuts To Social Security - Democrats led by Congressional Progressive Caucus co-chair Raul Grijalva are drawing a line in the sand before the White House's fiscal commission: If your report recommends cuts or other changes to Social Security, they will say, you'll lose our support. In a letter to be sent to President Obama, obtained by TPM, House Democrats will pledge to vote against any legislation based on the commission's report unless Social Security is taken off the table. "We oppose any cuts to Social Security benefits, including raising the retirement age," the letter reads. "We also oppose any effort to privatize Social Security, in whole or in part.... If any of the Commission's recommendations cut or diminish Social Security in any way, we will stand firmly against them."The effort is intended to tie the commission's hands, at least on this issue.
Coup d'Etat: Standard & Poor's Is Now Giving Orders to Congress ... and the American People - There's been a lot of talk recently about the enormous power that's been given to the Deficit Commission, which is co-chaired by Alan "Social Security recipients are milking it" Simpson and dominated by people who have advocated cuts to Social Security and Medicare. But here's an aspect of the story that's gone unremarked: Standard & Poor's, the credit rating agency whose reputation should rightfully have been shattered by the economic crisis, is now dictating policy to the United States government. S&P just put our elected officials on notice: Submit to the proclamations of the Deficit Commission or we'll downgrade our rating of government debt. That's blackmail, plain and simple. This threat comes from a privately-owned company whose rating process is riddled with conflicts, and which has gotten virtually every critical assessment of recent years spectacularly wrong. Enron? Lehman? Subprime mortgages? They were zero for three. Yet rather than reining back their penchant for reckless proclamations, the chairman of S&P's "sovereign rating committee"
Making hard choices on the budget - Megan McArdle does some back-of-the-envelope math that leads her to doubt that Social Security's 75-year shortfall and extending Bush's upper-income tax cuts would both cost about 0.7 percent of GDP. The Center on Budget and Policy Priorities has posted a response that's pretty persuasive, and suggests that McArdle misread one of the underlying CBO documents. So I'm calling this one for CBPP, at least for the moment. But that leaves us with McArdle's second point: "While it is perhaps true that you could 'pay for' the Social Security shortfall by rescinding the Bush tax cuts on the rich," she writes, "that would leave a gaping budget deficit that would then have to be paid for in some other way." Well, yes. The contention is that there are better ways to pay down the deficit than raising the Social Security retirement age or cutting benefits.
The Dark Side of Deficits - Two last charts from Ed. The first is the average GDP for the last 110 years, and the next is a graph of real GDP above and below that average of 3.3%. Note that GDP per capita in the 2000s was the second lowest for the last 110 years. Also that real GDP was the second lowest. Not pretty. One could take comfort from the long perspective that the US will get back to trend GDP growth of 3.3% and that earnings will go back to trend, as I illustrated in a previous chart. That would require a decade well above trend growth to balance things out. And that is what SHOULD happen. There is one caveat. The research of Reinhardt and Rogoff demonstrates that when the government debt-to-GDP level gets to about 90%, trend growth seems to drop by about 1%. They do not offer an explanation, just an observation. My speculation is that it might be government spending and debt crowding out private savings, not leaving enough for productive private investment.
Time to Make Hard Choices on the Budget - The Center on Budget and Policy Priorities has made some splashes with this graph. I find this strangely unconvincing as a policy argument for anything. For starters, the 0.7% of GDP that it covers only matches the shortfall for a brief period, at least according to the Social Security Trustees report. By the middle-to-late twenties, the shortfall is more than twice the amount of the Bush tax cuts on the rich. Even if we hadn't already (hopefully) earmarked this money for something else, this would be at best a stopgap measure; the program would rapidly begin putting more pressure on the budge. But I can't even make those numbers add up over the short term. By the admittedly ham fisted method of dividing the roughly $700 billion the CBO said that extending the Bush tax cuts for the rich would cost, by the $190 trillion worth of GDP that the CBO projects over the next ten years, I get 0.36% of GDP, not 0.7%. The CBO's numbers don't seem to be increasing much beyond the rate of inflation towards the end of the forecast period, so I find it hard to reconcile their numbers with the CBPPs even by extending out the forecast period.
Insulating Fiscal Policy from a Dysfunctional Congress: The economic crisis has made two things clear. First, monetary policy won’t always be capable of stabilizing the economy on its own. When the problems become large enough, fiscal policy must be part of the response. Second, even when our economic problems are severe and righting the ship ought to be the primary concern, Congress is incapable of implementing fiscal policy with the timeliness and effectiveness that is needed. As Alan Blinder said recently, “I’m looking at the political system turning itself into a paralyzed beast.” We need a better way of conducting fiscal policy, one that avoids the political fights in Congress that lead to delay and compromised, watered down policies, or to complete gridlock that prevents any response at all. Automatic stabilizers are a tried and true means of stabilizing the economy. Increased reliance upon this type of stabilization could help solve the political problems that prevent Congress from responding effectively when the economy is most in need of help.
Obama was too cautious in fearful times - Suppose that the US presidential election of 1932 had, in fact, taken place in 1930, at an early stage in the Great Depression. Suppose, too, that Franklin Delano Roosevelt had won then, though not by the landslide of 1932. How different subsequent events might have been. The president might have watched helplessly as output and employment collapsed. The decades of Democratic dominance might not have happened.On such chances the wheel of history turns. But this time was different: the crisis brought Barack Obama to power close to the beginning of the economic collapse. I (among others) then argued that policy needed to be hugely aggressive. Alas, it was not. In consequence, the administration has lost credibility with the public and the chances of a renewed fiscal expansion have disappeared. With the Federal Reserve cautious, too, the likelihood of a lengthy period of weak growth and heavy joblessness is high. So, too, are the chances of domestic and global political friction.
Nobody – Krugman - Via Atrios, this depressing item:Asked if the stimulus bill was too small, [White House press secretary Robert] Gibbs says: “I think it makes sense to step back just for a second. … Nobody had, in January of 2009, a sufficient grasp of … what we were facing.” He adds that any stimulus was “unlikely to fill” the hole the financial meltdown created. “What the Recovery Act did was prevent us from sliding even into a deeper recession with greater economic contraction, with greater job loss than we have experienced because of it,” he says. The truth is that some of us were practically screaming back in January 2009 that the administration was proposing too small a program. Start with this post and work forward. And no, the point isn’t that I’m so smart — it is that given the forecasts we had at the time, and given historical experience of recessions after financial crises, it wasn’t at all hard to see that the plan was too small. Things have been worse than expected — but not that much worse.
Why We Need a Second Stimulus, by Laura Tyson - NY Times: Our national debate about fiscal policy has become skewed, with far too much focus on the deficit and far too little on unemployment. There is too much worry about the size of government, and too little appreciation for how stimulus spending has helped stabilize the economy and how more of the right kind of government spending could boost job creation and economic growth. By focusing on the wrong things, we are in serious danger of failing to do the right things to help the economy recover from its worst labor market crisis since the Great Depression. The primary cause of the labor market crisis is a collapse in private demand — the same problem that bedeviled the economy in the 1930s. In the wake of the financial shocks at the end of 2008, spending by American households and businesses plummeted, and companies responded by curbing production and shedding workers. By late 2009, in response to unprecedented fiscal and monetary stimulus, household and business spending began to recover. But by the second quarter of this year, economic growth had slowed to 1.6 percent, according to a government estimate issued Friday. Clearly, the pace of recovery is far slower than what is needed to restore the millions of jobs that have been lost.
Counting the Stimuli - The main point of Laura Tyson's "Why We Need a Second Stimulus."op-ed in Saturday's New York Times is correct: we should be using the occasion of very low interest rates on government debt to add to our productive infrastructure. In fact, what she's arguing for is not the second but the third stimulus. As is common with the current administration and its supporters, she forgets that the $150 billion infusion in early 2008 was a bipartisan attempt to prevent economic growth from stalling. The Obama administration is now populated by those who, in late 2007 and early 2008, were calling for a "timely, targeted, and temporary" bout of deficit spending to prop up the economy. They shouldn't be running away from it now. Why does it matter what number stimulus this is? Because the larger the number, the more it becomes clear that this is not the right way to implement a counter-cyclical fiscal policy. Good counter-cyclical fiscal policy is established well in advance of the downturn, so that it addresses well established federal government responsibilities and is not held up based on the partisan issues of the moment, like the upcoming midterm elections.
It’s Witch-Hunt Season, by Paul Krugman, Commentary, NY Times: The last time a Democrat sat in the White House, he faced a nonstop witch hunt by his political opponents. Prominent figures on the right accused Bill and Hillary Clinton of everything from drug smuggling to murder. And once Republicans took control of Congress, they subjected the Clinton administration to unrelenting harassment — at one point taking 140 hours of sworn testimony over accusations that the White House had misused its Christmas card list. Now it’s happening again — except that this time it’s even worse. Let’s turn the floor over to Rush Limbaugh: “Imam Hussein Obama,” he recently declared, is “probably the best anti-American president we’ve ever had” ..., bear in mind that he’s an utterly mainstream figure within the Republican Party; bear in mind, too, that unless something changes the political dynamics, Republicans will soon control at least one house of Congress. This is going to be very, very ugly.
Blocking Stimulus for Political Gains ? - “Now I’m looking at the political system turning itself into a paralyzed beast. A lost decade now looms as a much bigger risk. The Fed’s running out of powder; Its really powerful ammunition has been expended.”-Alan Blinder, former vice chairman Federal Reserve. Peter Goodman has a longish article in the NYT Week in Review, What Can Be Done to Cure the Ailing Economy?. It is notable for a few reasons: Great chart porn (see right), a few good quotes (see above), and a bombshell from Bruce Barlett, the Treasury economist in the first Bush administration. Bartlett has become a pariah to the Republican party, saying out loud what few people dare to even think. He notes that we are already in gridlock, with the GOP deploying a blocking strategy. He thinks nothing substantive is going to change for a simple reason: “Clearly, a weak economy in 2012 will be very good for whoever the Republican presidential candidate is. It’s hard to see how the Republicans lose by blocking stimulus.”
How Big a Stimulus Did We Need? - Paul Krugman writes: But the stimulus wasn't nearly big enough to restore full employment -- as I warned from the beginning. And it was set up to fade out in the second half of 2010. I've heard this complaint from a number of commentators, and it always surprises me. Did anyone think we were going to get a stimulus big enough to restore full employment? How much unemployment reduction you get for a given amount of stimulus spending is, obviously, at best an imperfect estimation. But 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 points. Full 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. I'm going to go out on a limb and say that even if Republicans had simply magically disappeared, the government still would not have been able to borrow and spend $2.5 trillion in any reasonably short time frame, much less $4-5 trillion.
A moderate and pragmatic proposal for monetary stimulus - There is no point in proposing my dream monetary policy–NGDP futures targeting and all. The Fed would never contemplate anything so radical at this time. Instead I am going to suggest something that just might be acceptable, should the Fed decide the economy needs more demand. The term ‘moderate’ refers to the fact that I won’t ask the Fed to deviate from their 2% implicit inflation target, and the term ‘pragmatic’ refers to the fact that I won’t ask for risky and untested ideas such as negative interest rates on excess reserves and/or NGDP futures contracts.Any monetary stimulus proposal has at most three primary components: I will try to use all three approaches, and do so in a synergistic plan that consists of more than merely the sum of the parts.
- 1. A bigger supply of base money
- 2. Less demand for base money
- 3. A commitment for greater monetary stimulus in the future
Krugman: Let-the-lawyers-in-congress-spend-another-$800B -Paul Krugman was on CNBC today calling for more stimulus. He wants to give Congress the ability to spend another $800B in an effort to get the economy going again. He says this is feasible because the bond market is allowing us to “fund” future spending via historically low rates. There are a lot of things wrong here, but I’ll keep my comments brief. First of all, it’s clear that Krugman is still suffering from neo-classical bewilderment. Despite the operational evidence pointing to the contrary it’s clear that Krugman still believes we are living in a gold standard world where the USA’s deficits really are funded by taxes and bond markets. Unfortunately for Mr. Krugman, we now live in a non-convertible fiat monetatry system where the USA is the monopoly supplier of currency. Second, Mr. Krugman has no qualms about giving Congress the last call on where this money gets spent. This is astonishingly naive in my opinion. The efficiency of the original stimulus package was low to say the least and the latest CBO figures show that the impacts on the economy have been enough to keep us afloat, but far from enough to solve the actual problems. What we have here is a balance sheet recession due to a debt bubble and implosion. So, what we need is balance sheet repair. We don’t need more solutions that merely kick the can down the road.
Wrong! - Krugman— I check into Yahoo! finance, and see featured on the front page commentary titled Krugman is wrong! I’d be tempted to reject the whole thing because it’s your basic guy-who-doesn’t-understand-why-Say’s law-is-wrong thing. But then I remembered that this particular commentator is someone to be reckoned with. After all, not many of us have the sheer analytical prowess to declare, on the day Lehman collapsed, that The good news is that this financial earthquake is unlikely to turn into an economic earthquake. The bad loans made earlier this decade did not create a widespread economic boom; and the realization of how bad some of these loans are will not create an economic bust. So when he says I’m wrong, that’s a judgment you can trust. I should add, I suppose, that I’m not upset about being attacked like this. On the contrary: people wouldn’t go to such lengths, and Yahoo! wouldn’t be featuring it, if someone weren’t worried that I was actually having some influence.
A Teachable Moment: Westbury on Stimulus - Really quickly, this Brian Westbury quote is brilliant because it is so perfectly, delectably wrong. Its the kind of thing you dream a student will say so that you correct the entire class’s misunderstandings in one fell swoop. “They (the government) either had to tax it from somewhere or borrow it from somewhere," says Wesbury and “by moving resources out of one sector into another you have now messed up the natural order of things and you’ve influenced it in a negative way." Wesbury says THAT is the mistaken belief about government stimulus. You’re exactly right Brian. The money has to come from somewhere. However, remember money and production are not the same thing. In the case of money, we have a technology known as the printing press which allows us to print money as much money as we want. So creating money is no problem. Won’t that cause inflation? Yes, but we are below inflation targets right now, not above. We want more inflation. Right now the Fed is trying to get more inflation but is having trouble. Stimulus spending will help them out with that.
Brother, Can You Paradigm? – Krugman - A few months back one of my original mentors in economics — someone who got his graduate training in the pre-fresh-water era — asked me whether there was anything about the current crisis that required fundamentally new analysis. We agreed that there wasn’t. This is one of the untold tales of the mess we’re in. Contrary to what you may have heard, there’s very little that’s baffling about our problems — at least not if you knew basic, old-fashioned macroeconomics. In fact, someone who learned economics from the original 1948 edition of Samuelson’s textbook would feel pretty much at home in today’s world. If economists seem totally at sea, it’s because they have carefully unlearned the old wisdom. If policy has failed, it’s because policy makers chose not to believe their own models.
The Economic Narrative - Paul Krugman - It’s not about “I told you so”, or at least not mainly. It’s about the economic narrative, which will matter long after the current players are off the scene.The way the right wants to tell the story — and, I’m afraid, the way it will play in November — is that the Obama team went all out for Keynesian policies, and they failed. So back to supply-side economics!The point, of course, is that that is not at all what happened. A straight Keynesian analysis implied the need for a much bigger program, more oriented toward spending, than the administration proposed. And people like me said that at the time — we’re not talking about hindsight. You can argue that nothing bigger and better was politically feasible; we’ll never know about that. But what we do know is that (1) senior administration officials, even in internal arguments, claimed that half-measures were the right thing to do, based on … well, invented doctrines that certainly weren’t basic Keynesian. And (2), the administration has never said that it had to make do with an underpowered plan; on the contrary, to this day it maintains that what it did was just right. And this just feeds the false narrative
The Real Story, by Paul Krugman - When Mr. Obama first proposed $800 billion in fiscal stimulus, there were two groups of critics. Both argued that unemployment would stay high — but for very different reasons. One group — the group that got almost all the attention — declared that the stimulus was much too large, and would lead to disaster..., skyrocketing interest rates and soaring inflation. The other group, which included yours truly, warned that the plan was much too small given the economic forecasts then available...; an $800 billion program, partly consisting of tax cuts that would have happened anyway, just wasn’t up to the task... Critics in the second camp were particularly worried about what would happen this year, since the stimulus would ... gradually fade out. Last year, many of us were already warning that the economy might stall in the second half of 2010. So what actually happened? When rates rose in early 2009, The Wall Street Journal ... declared that it was all about fear of deficits, and concluded, “When in doubt, bet on the markets.” The 10-year bond rate was over 3.7 percent when The Journal published that editorial; it’s under 2.7 percent now.
Paradoxes Of Deleveraging And Releveraging – Krugman - Whenever the issue of fiscal stimulus comes up, you can count on someone chiming in to say, “Only a moron could believe that the answer to a problem created by too much debt is to create even more debt.” It sounds plausible — but it misses the key point: there’s a fallacy of composition here. When everyone tries to pay off debt at the same time, the result is contraction and deflation, which ends up making the debt problem worse even if nominal debt falls. On the other hand, a strong fiscal stimulus, by expanding the economy and creating moderate inflation, can actually help resolve debt problems. Let’s go to the tape here. Below are two time series. The first is total US debt from 1929 to 1948 — public plus private — in billions of dollars. The second is total debt as a percentage of GDP:From 1929 to 1933, everyone was trying to pay down debt — and the debt/GDP ratio skyrocketed thanks to contraction and deflation. During and immediately after WWII, there was massive borrowing — but GDP grew faster than debt, and the debt burden ended up falling.
Politically Feasible Stimulus - Is going to disagree with Barack Obama and Paul Krugman. Krugman writes and Obama implies that no large stimulus will pass congress. I think a proposal to send a $500 check to every US citizen containing family would pass congress. In particular some allegedly Democratic Senators (cough Conrad) are arguing for a temporary extension of Bush tax cuts for the rich. My proposal dominates Conrads both as effective stimulus and as popular politics. Update: However, it is not gonna happen the top White House spokesman on Thursday said a large spending measure is not being considered. "Some big, new stimulus plan is not in the offing," White House press secretary Robert Gibbs said. Sam Youngman at The Hill uses "spending" and "stimulus" as synonyms, supporting the mistaken belief that the ARRA did not include tax cuts for the vast majority of Americans. I almost wonder if no one in the White House considered doing it with just tax cuts. I consider it a no brainer.
Why the Stimulus Ran Out of Steam - Last week, the bottom seemed to fall out of the economy all at once. Second-quarter growth was revised downward. The Dow dropped below 10,000. Sales of single-family homes plunged to their lowest level in 15 years. The White House appeared helpless. Asked whether, in hindsight, the stimulus had been too small, White House spokesman Robert Gibbs demurred. ''Nobody had, in January of 2009, a sufficient grasp [of] the sheer depth of what we were facing,'' he said. ''I think that's true for virtually every economist that made predictions.'' But that just wasn't true -- one of the economists who foresaw the depth of the crisis, Christina Romer, even works in the White House. Her arguments for a larger stimulus went unheeded.
Fiscal policy: Stimulus lost - The Economist - CHRISTINA ROMER, prominent academic economist and outgoing head of Barack Obama's Council of Economic Advisors, gave her final speech as an administration member today. She pulled no punches:The Administration understood that the recovery would be difficult precisely because many of the usual drivers of growth were missing. That is why we included $266 billion of additional temporary recovery measures in our 2011 budget. Congress has taken some important steps, including extending unemployment insurance, allocating funds to prevent teacher layoffs, and passing the HIRE tax credit to encourage firms to hire unemployed workers. However, it has enacted substantially less than what the Administration proposed. As a result, the economy has not had all the additional support that it needed. While we would all love to find the inexpensive magic bullet to our economic troubles, the truth is, it almost surely doesn’t exist. The only surefire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less. In my view, we should be moving forward on both fronts.
Christina Romer’s Farewell Address - Below, Brad DeLong summarizes the key parts of Christina Romer’s farewell speech. A nice going away present would be another stimulus package, but that’s not going to happen.It’s frustrating. We are putting pressure on the Fed to engage in quantitative easing and other measures in the hope that this will lower long term real interest a bit. There’s not a lot of room for them to fall, but there’s some room and recent work suggests the Fed has the power to make this happen. Once interest rates fall by however much, we then hope firms will be induced to invest more in new plants and equipment (because it’s now slightly cheaper), and we hope that consumers will increase their consumption of durable goods. What’s frustrating is that an investment tax credit or some other tax inducement could provide the same incentive to invest as a fall in long-term rates. Fiscal policy can accomplish the same task monetary policy hopes to achieve, and do so much more directly. You don’t have to hope that interest rates fall so as to create an incentive to invest, the tax credit makes the incentive certain, and the incentive can be larger because it’s not limited by the small amount interest rates can fall.
Romer: ‘Spend More, Tax Less’ to Boost Economy - Christina Romer, a top economic adviser to President Barack Obama who is leaving her post this week, chided policymakers for being weak-willed and said they need to accept that fixing the economy will require expensive and unpopular measures. In her final speech before returning to academia, Romer offered a defense of the measures taken so far, in particular the Recovery Act. She said the economic stimulus program prevented a much worse recession but said more needs to be done to get the economy back on track. “Policymakers need to find the will to take the steps needed to finish the job and return the American economy to full health,” she said in the address at the National Press Club.
Tax Cuts, Infrastructure Spending Weighed to Spur Economy - The Obama administration is considering a range of new measures to boost economic growth, including tax cuts and a new nationwide infrastructure program, according to people familiar with the discussions. The president's economic team has met frequently in recent days to list ways to bolster the struggling recovery, according to government officials. On the list of possible actions: additional tax cuts for small businesses beyond those included in a $30 billion small-business lending bill before the Senate. It's not clear what those tax breaks would target or how much they might cost in lost revenue to the government. Also in the mix: a possible payroll tax cut for businesses and individuals, as well as other business tax breaks, according to people familiar with the discussions. Currently, income taxes are scheduled to rise with the expiration of Bush-era tax cuts at the end of this year.
Economist Touts 'Fiscal Science' - WSJ - Better tax and spending decisions may be possible if governments set clear fiscal goals, such as a debt target, and tell citizens how they plan to achieve them, a new economics paper suggested. Fiscal policy could benefit from the more scientific approach taken by monetary policy over the past two decades, especially as governments around the world contend with high debt levels, the paper said. Entitled "Monetary Science, Fiscal Alchemy," the paper was presented by Indiana University professor Eric M. Leeper to the Federal Reserve Bank of Kansas City's annual economic policy symposium of the world's top central bankers and academics in the Grand Teton mountains. The former U.S. Federal Reserve economist noted how monetary policy has improved after central banks started to adopt goals such as inflation targeting and as central bankers started to articulate the "science" in public speeches.
Payroll Tax Holiday a Poor Stimulus Idea —This week Senate Minority Leader Mitch McConnell suggested suspending the Social Security payroll tax for a period of time, as a stimulus measure. A payroll tax holiday, however, would both be costly — a two-month suspension could cost about $120 billion, for example — and likely relatively ineffective as a stimulus measure. Public resources would be better spent on stimulus measures with a higher “bang for the buck,” such as the Making Work Pay tax cut that President-elect Obama has proposed. Economic stimulus measures aim to encourage an immediate increase in aggregate demand by boosting consumer spending. The most efficient way to boost consumer spending is to put money into the hands of people who will spend it quickly rather than save it; tax cuts focused on moderate- and low-income households are more effective as stimulus than tax cuts that are larger for people with higher incomes, because people at low-income levels spend a larger share of tax cuts they receive than people at higher income levels do.
Is a Payroll Tax Holiday a Good Idea? - That's the question of the day, now that a new article in the Washington Post indicates that the government is considering a package of business tax breaks to stimulate jobs ahead of the mid-terms, including a payroll tax holiday. Thoughts:
- 1) Practically, this isn't going to do anything before the mid-terms. These sorts of changes take time to roll out, and there's no way they could get anything into effect soon enough to make an actual difference in peoples' lives.
- 2) Whether you think this works as a campaign tactic depends on whether you think people will think that it is going to work. On that question, I have no idea. People do love cash in their pockets, however.
- 3) Politically, this has one major drawback: it's going to put huge holes in the Social Security and Medicare trust funds. Since I think those trust funds are meaningless accounting devices, I don't think this has any practical relevance.
- 4) Practically, I think the actual impact will be minimal, at least on employment.
Payroll Tax Holiday with a Twist - There is a lot of chatter right now about whether a payroll tax holiday would provide an effective stimulus to the slumbering U.S. economy. The motivation for this chatter is the news that the White House is considering, among other things, some kind of payroll tax cut. The discussion so far has been mixed with some folks like Scott Sumner, Tyler Cowen, and Arnold Kling endorsing it while others like Megan Mcardle and Mark Thoma expressing uncertainty as to how much stimulus it would actually provide. See the rest of Thoma's post as to why a payroll tax could affect both aggregate supply (AS) and aggregate demand (AD). One way to make sure the AD effect dominates would be to do the payroll tax holiday in the manner I suggested a few days ago: have the Federal Reserve (Fed) fund the payroll tax holiday with a "monetary gift" to the Treasury department and at the same time commit the Fed to doing so until a certain nominal target (e.g. a price level target) is hit.
NABE Survey: Most Economists Favor Extending Bush Tax Cuts -- Most U.S. economists want the Bush tax cuts to be extended given growing concerns about the strength of the recovery, but a survey released Monday showed divisions on what path the Federal Reserve should take.At least 60% of economists surveyed by the National Association for Business Economics said lower tax rates on capital gains and dividends should not be allowed to expire as provided under current law. Another 22% said the lower rate on capital gains and dividends should be preserved for middle-income taxpayers, but not for the wealthy. The findings point to increasing nervousness about the impact the expiration of tax cuts could have on the struggling recovery, as Congress gears up for a fall debate on how to deal with the tax cuts.
Keep the Bush Tax Cuts for a Couple of Years, But Reshuffle the Dollars - It seems increasingly likely that Congress will extend most, if not all, of the Bush tax cuts for at least a year or two. As the economy shows growing signs of softening, lawmakers are less and less likely to take steps that will be seen as “raising taxes.” But there is a way Congress could maintain the magnitude of the Bush tax cuts while moving around some dollars to enhance their short-term economic benefit. The goal of this shift would be to focus tax cuts on those most likely to spend the money. Here’s the problem: The Treasury Department figures that temporarily extending the 2001 and 2003 tax cuts would reduce federal revenues by roughly $200 billion in Fiscal 2011 and $260 billion in 2012. For technical reasons, those numbers may be off a bit, but you get the drift. Of that, about $75 billion would go to top-bracket taxpayers So why not take that $75 billion and give it to those who are more likely to spend it—people with low- and moderate incomes. It would be simple to do. Congress could, for example, expand the Earned Income Credit. Or it could continue a scaled-back version of President Obama’s Making Work Pay (MWP) tax credit that is also due to expire at the end of the year.
Do the rich spend more from tax rebates? - PtitSeb did not ask this exactly, but this quotation he posted from Mark Zandi raises an interesting question: Mark Zandi's op-ed in the NYT last week ... mentioned that "successful small-business owners, who power the nation’s job-creation machinery, make up one-third of these high-income taxpayers."The evidence is mixed, but seems to suggest that I was wrong. In "Do the Rich Save More?", economists Karen Dynan, Jonathan Skinner and Stephen Zeldes found a strong relationship between personal savings and income. However, other research suggests the opposite conclusion. Julia Lynn Coronado, Joseph Lupton and Louise Sheiner of the Federal Reserve studied (PDF) the effects of the 2003 tax cuts' child credit and found that the rich were actually more likely to spend most of the credit. Most of this is due to the fact that high earners were less likely to have to pay off debt:
Would the Rich Really Spend Less of Their Tax Cuts? - Dylan Matthews asks if the conventional economic wisdom on the “marginal propensity to consume” of richer vs. poorer people (that it’s higher for the poor mainly because they are too constrained and can’t afford to save) is really true. He points to a couple empirical studies based on the lump-sum-type rebate/refundable credit portions of the 2001 and 2003 tax cuts that suggest that the higher-income households were more inclined to spend their tax cuts than the lower-income ones were. If these studies reflect today’s reality about how rich vs. poor would spend extra money, then this would weaken the argument that we should let the tax cuts for the rich go ahead and expire because they wouldn’t provide effective stimulus compared with tax cuts for lower- and middle-income households (and especially compared to other forms of deficit-financed stimulus). But I have a couple of problems with leaping to such conclusions based on these earlier studies.
Comparing the High-Income Tax Cuts and the Social Security Shortfall - The Atlantic’s Megan McArdle has written another post about our comparison over the next 75 years of the Social Security shortfall and the cost of the Bush-era tax cuts for high-income taxpayers. The gist of Ms. McArdle’s argument seems to be that we’re not computing the present value of these two policies in the same way. That’s simply incorrect. Our figure for the Social Security shortfall comes straight from the 2010 Social Security Trustees’ Report. The report estimates that the program’s shortfall over the long term (which the trustees define as the next 75 years) is equivalent to 1.92 percent of payroll subject to Social Security tax, or 0.7 percent of gross domestic product (GDP). (See Table IV.B5 on page 63 and Table VI.F4 on page 187.) Note that the trustees don’t define the shortfall as simply the difference between the present value of the taxes Social Security will collect and the benefits it will pay out over the next 75 years. The trustees also take into account the current amount of the Social Security trust funds — something that Ms. McArdle has omitted.
A Push on Tax Cuts? - This — “White House considering major tax breaks for businesses,” The Washington Post reports — certainly counts as good news. Among the options are a payroll tax holiday and an extension of a research tax credit. But if the White House is about to start pushing tax cuts, you do have to wonder why it waited until September. For much of the summer, the economy has appeared to be slowing. Meanwhile, the Federal Reserve wasn’t willing to take action, and both Republican leaders and some Senate Democrats were not willing to approve more spending. To policy makers who believed the economy needed more help, there were two options. One was to push harder for spending programs that might resonate with voters, like those to save the jobs of firefighters, teachers and public workers, and hope that the Senate would come around. Two was to push for tax cuts.
The White House WILL Cut Taxes, So Long As It Can Find A Way… We're convinced that the talk from earlier today about Obama possibly cutting taxes is true. It just makes too much sense politically AND economically for The White House not to be serious about it. Pretty much the only reason that it ever made sense to cancel the Bush tax cuts was to make a signal that we're serious about the deficit. But a) The deficit just isn't that pressing of an issue right now and b) the only deficit hawks would be happy to cut taxes on the rich. There's just no way that keeping the tax cuts could hurt anything, and to the extend that it foments some economic confidence, that'd be a good thing. So the only question is: how?
Democrats unlikely to repeal tax cuts for the rich - Democrats in Congress are poised to play a leading role this month in thwarting their party's effort to raise income tax rates on the wealthy. Tax cuts enacted in 2001 and 2003 expire at the end of this year. President Barack Obama and Democratic congressional leaders have been eager to extend the breaks for individuals who earn less than $200,000 annually and joint filers who make less than $250,000. Those who earn more would pay higher, pre-2001 rates starting next year. However, a small but growing number of moderate Democrats are balking at boosting taxes on the rich. Many face electorates that recoil at the mention of any tax increase. Some represent areas that are loaded with wealthier taxpayers. Further, some incumbent senators who don't face voters this fall are reluctant to increase taxes on anyone while the economy remains sluggish. Without their support, the push to raise rates on the rich probably will fail.
Bush Tax Cuts: More Dems Come Out Against Tax Increases For The Rich - Congress seems increasingly reluctant to let taxes go up, even on wealthier Americans. Worried about the fragile economy and their own upcoming elections, a growing number of Democrats are joining the rock-solid Republican opposition to President Barack Obama's plans to let some of the Bush administration's tax cuts expire. Democratic leaders in Congress still back Obama, but the willingness to raise taxes is waning among the rank and file as the stagnant economy threatens the party's majority in the House and Senate. The pushback on tax increases comes as lawmakers and the Obama administration consider ways to boost the economy and increase the speed of an anemic recovery. Along with tax cuts for middle- and low-income families, Obama said this week that he would soon be proposing new measures to grow the economy and encourage hiring, including additional business tax cuts.
One Dollar, One Vote? - Nobody wants to repeal George Bush's tax cuts for the middle class. Especially in a bad economy, this is a no-brainer, both politically and economically. But what about tax cuts for high earners? This should be an easy question to answer too. On the political side, a CBS poll earlier this week found that repeal is supported by 56% and opposed by only 36%. Economically, repeal would cut $700 billion off the federal deficit over the next decade and, because consumption by the wealthy doesn't depend very much on small changes in income, it wouldn't noticeably affect consumer spending either. Allowing tax rates on the rich to rise back to their pre-Bush levels, therefore, should also be a no-brainer, both politically and economically. So how do you explain this?
Dealing with the Sunset of the Bush Tax Cuts (Part V in a series)--dividends at capital gains rate - IN this series, i've been discussing the merits of enacting a new series of tax cuts that mimic, at least in part, the Bush temporary tax cut legislation that expires at the end of this year. The primary arguments for the original Bush temporary tax cuts were either bogus to start with or proven weak over the period of the tax cuts.So what should this list of bogus and failed reasoning tell us about what the Congress should do on taxes for 2011 and thereafter?
It's a good time to index taxes on capital - The Modeled Behavior blog has been taking nominations for the 4% Club, which it describes as "An elite group of economists, pundits, and politicians" who want the Federal Reserve to raise its inflation target from 2%. Its members tend to the left side of the political spectrum, but not exclusively; one of the loudest champions of a higher inflation target is Scott Sumner, a right-of-center economics professor at Bentley University. Some of the four-percenters have expressed annoyance and consternation about persistent inflation-hawkishness at the Federal Reserve, even in light of a TIPS spread showing 10-year inflation expectations below 2% -- far from raising the inflation target, the Fed is not even managing to hit the target it has. But one likely barrier to a higher inflation target is a quirk of tax policy: non-indexation of capital taxation means that higher inflation causes a stealth rise in the real tax rate on capital gains and interest income. Naturally, this makes investors more keen on rock-bottom inflation than they otherwise would be -- and the Federal Reserve Board is institutionally likely to focus on the interests of the investor class.
Bring Back the Estate Tax Now, by Robert Rubin and Julian Robertson -Congress is finally turning its attention to the expiring 2001 and 2003 tax cuts. But there is one tax issue that should have long since been addressed: the federal estate tax. That tax expired at the end of last year, and there have been no estate taxes levied this year. If a new estate tax is not enacted as soon as Congress returns from its August recess, this void will continue until the end of the year. We would recommend continuing 2009's regime, with a top rate of 45% and a $3.5 million individual exemption. Small businesses and family farms can be protected both through the exemption (which is $7 million for a couple) and through special deferred payment rules. We both believe that the estate tax should be a component of any federal tax system. ... A key criterion in choosing taxes is to have the least negative impact on economic activity. The estate tax, in our opinion, meets that test. An estate tax can provide revenue—with little, if any, adverse supply-side economic impact—to fund deficit reduction, additional public investment or added assistance to those affected by the economic crisis.
When plutocrats call for higher taxes - Bob Rubin and Julian Robertson have clearly come to the happy conclusion that, having lived through the first eight months of the year, both of them are likely to survive well into 2011 and beyond. But they want to tax their fellow plutocrats who aren’t so lucky, by bringing back the estate tax for the remainder of 2010, and even trying to make the tax retroactive to January. That’s a good idea, of course. It’s ludicrous that the estate tax is at zero this year. But it’s not going to be easy to pass a retroactive tax, especially when its biggest cheerleaders are these two guys: the person most to blame for the global financial crisis, and a hedge-fund billionaire who carefully skirts residency requirements to avoid paying millions of dollars in taxes. In the interests of full disclosure, it would have been nice to see the amount of money that Rubin and Robertson have spent between them on estate planning and strategies designed to minimize the taxes that their heirs will pay on their billions.
Robert Rubin Demands Government Give $250 Billion to Millionaires - One area of the debate over the Bush tax cuts that seems pretty cut and dried is the estate tax. Right now there is no estate tax for 2010. If we do nothing, it will revert back to the Clinton-era rates of 55% for estates over $1 million dollars (that’s a marginal tax, by the way, so the tax on an estate worth $1,000,001 would be 55 cents). What’s important to understand is that this reversion to 2009 rates permanently would cost the country $292 billion dollars, according to the Tax Policy Center. If we made it retroactive to capture the tax on estates in this holiday year of 2010, maybe it’s closer to $250 billion. But it’s still a large hole in the budget relative to current law, in a time when every deficit hawk is screaming about long-term debt. Therefore, it’s the height of faux-populist kabuki to assail the absence of the estate tax in 2010, and then promote a policy that would reduce estate tax receipts by hundreds of billions of dollars. And that’s where we find Robert Rubin today in the Wall Street Journal
White House considers pre-midterm package of business tax breaks to spur hiring - With just two months until the November elections, the White House is seriously weighing a package of business tax breaks - potentially worth hundreds of billions of dollars - to spur hiring and combat Republican charges that Democratic tax policies hurt small businesses, according to people with knowledge of the deliberations. Among the options under consideration are a temporary payroll-tax holiday and a permanent extension of the now-expired research-and-development tax credit, which rewards companies that conduct research into new technologies within the United States. Administration officials have struggled to develop new economic policies and an effective message to blunt expected Republican gains in Congress and defuse complaints from Democrats that President Obama is fumbling the issue most important to voters.
The Tax Cuts That Matter in a Struggling Economy - It’s time to start talking about a tax cut. The economy is struggling mightily. Some 15 million people remain unemployed. The Federal Reserve has been slow to act and still is not doing much. The Senate has been unable to find the 60 votes needed to pass anything but minor bills. The best hope for a short-term economic plan that can win bipartisan support is a tax cut — and not the permanent extension of George W. Bush’s tax cuts, which have been dominating the debate lately. Such an extension is unlikely to win many Democratic votes. Republicans, meanwhile, are unlikely to support more spending, like the national infrastructure project President Obama has been mentioning. A well-devised tax cut could be different. Cutting taxes has been the heart of the Republican economic program for 30 years, and last year’s stimulus bill showed that Mr. Obama was open to tax cuts. The question, then, is what kind of cut can put people back to work quickly.
Offshore Banking Secrecy--more on the UBS case - The IRS announced today that the Swiss government has completed its processing of the 4450 UBS accounts of U.S. taxpayers that were the subject of the August 2009 agreement for deferred prosecution of UBS and ending of the John Doe summons request. The IRS has already received about 2000 names and expects to receive the rest of the information very soon. It will be interesting to see the developments this fall as the IRS begins to use the information it has received to prosecute indviduals for tax fraud and to pursue attorneys, accountants or others that have helped Americans hide their assets overseas.
The Billionaires Bankrolling the Tea Party - ANOTHER weekend, another grass-roots demonstration starring Real Americans who are mad as hell and want to take back their country from you-know-who. Last Sunday the site was Lower Manhattan, where they jeered the “ground zero mosque.” This weekend, the scene shifted to Washington, where the avatars of oppressed white Tea Party America, Glenn Beck and Sarah Palin, were slated to “reclaim the civil rights movement” (Beck’s words) on the same spot where the Rev. Martin Luther King Jr. had his dream exactly 47 years earlier. There’s just one element missing from these snapshots of America’s ostensibly spontaneous and leaderless populist uprising: the sugar daddies who are bankrolling it, and have been doing so since well before the “death panel” warm-up acts of last summer. Three heavy hitters rule. You’ve heard of one of them, Rupert Murdoch. The other two, the brothers David and Charles Koch, are even richer, with a combined wealth exceeded only by that of Bill Gates and Warren Buffett among Americans. But even those carrying the Kochs’ banner may not know who these brothers are.
The Age of Mammon - As our economy hurtles towards its meeting with destiny, the political class seeks to assign blame on their enemies for this Greater Depression. The Republicans would like you to believe that Bill Clinton, Robert Rubin, Chris Dodd, and Barney Frank and their Community Reinvest Act caused the collapse of our financial system. Democrats want you to believe that George Bush and his band of unregulated free market capitalists created a financial disaster of epic proportions. The truth is that America has been captured by a financial class that makes no distinction between parties. These barbarians have sucked the life out of a once productive nation by raping and pillaging with impunity while enriching only them. They live in 20,000 square foot $10 million mansions in Greenwich, CT and in $3 million dollar penthouses on Central Park West.These are the robber barons that represent the Age of Mammon. The greed, avarice, gluttony and acute materialism of these American traitors has not been seen in this country since the 1920′s. The hedge fund managers and Wall Street bank executives that occupy the mansions and penthouses evidently don’t find much time to read the bible in their downtime from raping and pillaging the wealth of the middle class. There are cocktail parties and $5,000 a plate political “fundraisers” to attend. You can’t be cheap when buying off your protection in Washington DC.
One Lump Or Two? - Barack Obama personifies this failure these days, a politician proclaiming "change" who not only managed to change nothing, but promoted a continuation of the national self-swindling with legislation so dazzlingly prolix and complicated that no one can claim to have read either the Health Care Reform Act or the Financial Regulation bill, the two hallmarks of his tenure so far, neither of which will change anything about how we do these things. Why Mr. Obama has turned out to be such a weenie remains a mystery. Even the former communists at Russia Today laugh at the idea that he is a "communist" or a "socialist" and so do I. He certainly appears to be hostage of the more malign forces in society these days -- the medical insurance racket, the too-big-to-fail banks, the multi-national corporations. But I don't believe it's because he wants to suck up to them, or join their country clubs when his current job ends. My own guess is that he's been informed that the system is so fragile that if he dares to disturb even one teensy-weensy part of it -- for instance, by throwing some executives from Goldman Sachs, Merrill Lynch, et cetera, into federal prison -- that said system will fly to pieces in a fortnight. So Obama's main task for a year and a half has been to desperately apply baling wire and duct tape to the banking system while telling fibs to the public about a wished-for recovery to a prior state. Unfortunately that prior state is the ecstasy of a self-swindle in the moments before it unravels... the sublime feeling of having gotten something wonderful for nothing. We're beyond that now and nothing on the age-old shelf of nostrums, spells, prayers, and miracle-cures will avail to bring that moment back, though the public does not know this.
It’s Not Over Until It’s in the Rules - Having passed the Dodd-Frank Act earlier this summer, the bill that aspires to reorder our financial universe in the wake of the most serious economic crisis in generations, Congress has moved on to other matters. Regulators are left to write the rules that will make financial reform a reality — or not — and are beginning that laborious process. The Commodity Futures Trading Commission is one regulator with a lot on its plate. Last month, the commission published a list of 30 areas related to over-the-counter derivatives that require new rules. Derivatives, you might remember, are the exotic securities that Wall Street engineered to hedge risk, only to discover during the mortgage meltdown that the contracts — which linked together a dizzying number of financial players — actually amplified the severity of the crisis.
Obama’s Old Deal - Obama’s cautious, late embrace of Volcker was all too typical. He had arrived in office perceived by some as the second coming of Franklin Delano Roosevelt. Yet Obama hadn’t acted much like FDR in the ensuing months. Instead he had faithfully channeled Summers and Geithner and their conservative approach to stimulus and reform. Early on, Obama’s two key economic officials had argued down Christina Romer, the new chairwoman of the Council of Economic Advisers, when she suggested a massive $1.2 trillion stimulus to make up for the collapse of private demand. They opted for slightly less than $800 billion. “We believe that this is a properly sized approach to move the economy forward,” said Summers, who didn’t want to expand the federal deficit or worry the bond market. With the recession still darkening their outlook, Summers and Geithner also didn’t want to tamper too much with what they still saw as the economy’s engine room: Wall Street. Partly on their advice, the president “explicitly decided not to break up all big financial institutions,” said another top economic adviser, Austan Goolsbee.
JPMorgan Said to End Proprietary Trading to Meet Volcker Rule (Bloomberg) -- JPMorgan Chase & Co. told traders who bet on commodities for the firm’s account that their unit will be closed as the company, the second-biggest U.S. bank by assets, starts to shut down all proprietary trading, according to a person briefed on the matter. The bank eventually will close all in-house trading to comply with new U.S. curbs on investment banks, said the person, who asked not to be identified because New York-based JPMorgan’s decision hasn’t been made public. Closing the proprietary trading desk for commodities affects fewer than 20 traders, one in the U.S. and the rest in the U.K., the person said. The unit is based in London, and traders there were given notice on Aug. 27 that their jobs were at risk as required by U.K. law, according to the person. Proprietary traders in fixed-income and equities, who account for 50 to 75 employees, will need to find jobs when those desks are shut down, this person said.
GOP Warming to Elizabeth Warren? - Yes, you read that right. Apparently some GOPers are rethinking their vehement opposition to Harvard law professor and bailout watchdog Elizabeth Warren running the new Bureau of Consumer Financial Protection. A short item in the Wall Street Journal's gossipy "Heard on the Street" column today says there are whispers that "some Republicans are warming to Ms. Warren as the first consumer financial-affairs regulator over another candidate, Treasury Department Assistant Secretary Michael Barr. The thinking: Ms. Warren isn't shy about speaking her mind, so banks would know what was coming." Whereas Barr, the Journal says, might be more likely to spring big regulatory surprises on the banks, something no banker—or Republican, presumably—wants.
Let a Thousand Regulators Bloom - Anyone who thought the battle over Wall Street reform ended with passage of the Dodd-Frank Act and President Barack Obama's July 21 signature hasn't seen Kayla Gillan's whiteboard. Gillan, the deputy chief of staff to Securities & Exchange Commission Chairman Mary L. Schapiro, is in charge of coordinating the commission's implementation campaign, and she's covered her office whiteboard with dense, color-coded columns of tasks and deadlines that have already spilled over to some adjacent poster boards. There is little time to spare. A rule requiring the registration of financial advisers to municipal governments is due on Oct. 1, and myriad others must follow in quick succession. While hotly contested issues like limits on banks' proprietary trading and a new consumer protection agency got most of the attention during the financial overhaul debate, the SEC alone will be issuing some 100 rules covering derivatives, hedge funds, asset-backed securities, and executive pay. The agency needs to hire 25 examiners right away for a new office of credit-rating agency oversight.
Companies Already Lobbying Fed on Financial Rules - U.S. firms eager to shape newly-passed financial laws have wasted no time in lobbying the Federal Reserve and other agencies, according to new details released Thursday by the central bank. Summaries of 11 meetings involving Fed staff and outside corporations and advocacy groups highlight the high-stakes rulemaking that will occur as U.S. regulators seek to implement the wide-ranging financial overhaul legislation. The meeting log shows representatives from Visa Inc. met with Fed staff just two days after President Barack Obama signed the Dodd-Frank bill into law on July 21. The topics of conversation at that meeting: debit cards and interchange rates charged to merchants. ... The records show Bank of America Corp., J.P. Morgan Chase & Co. and American Express Co. have all met with Fed staff at least once since mid-July to discuss the interchange issue. Firms such as Goldman Sachs Group Inc. and Citigroup Inc. have also discussed tough new rules for derivatives with Fed officials, among others.
Economic consequences of speculative side bets: naked CDS - voxeu - The role of naked credit default swaps in the global crisis is an ongoing source of controversy. This column seeks to add some formal analysis to the debate. Its model finds that speculative side bets can have significant effects on economic fundamentals, including the terms of financing, the likelihood of default, and the scale and composition of investment expenditures.
Whalen Says Forget QE, Get Tough With Banks - Yves Smith - Chris Whalen has a particularly tough-minded post at Reuters in which he explains why QE does little for the real economy (similar to the conclusions reached by the Bank of Japan regarding its own QE) and why its benefits for banks fade over time. Key sections: When interest rates are low, savers move their preference for liquidity to infinity, especially after the past several years of market breakdown. Retirees spend less because the interest earned on bonds and savings has plummeted…. When the Fed buys securities through QE, it is removing duration from the markets, pushing down yields and volatility. For a while this boosts the net interest margin (NIM) of leveraged investors such as banks, who are able to borrow at lower rates to fund current assets. As assets re-price to the low rates maintained by the Fed, however, NIM begins to disappear. Over the medium to longer term, think of duration and NIM as being linked, so obviously a sustained period of QE is bad for NIM. This is why NIM in the U.S. banking sector is starting to fall.
Number of the Week: Safer Banks Without Sacrificing Growth - 1.9%: The added annual economic output that tougher banking regulations could generate, according to the Bank for International Settlements. Bankers and Wall Street economists typically present financial regulation as a trade-off: If we want a safer banking system, we’ll also have to give up the robust economic growth that bankers’ risk-taking facilitates. But as much as the argument seems to make intuitive sense, a new and rather extensive study from the Bank for International Settlements – a sort of central bank for central bankers — suggests it’s not quite right. The study concludes that if regulators around the world require banks to set aside more capital as a buffer against losses and hold more cash as insurance against panics, annual economic output could actually be 1.9% higher in the long run. That’s because the benefit of having fewer banking crises would far outweigh the costs of the added regulatory burden.
Why Basel III is No Magic Bullet - Yves Smith - There’s been an interesting dialogue between Streetwise Professor and Deus ex Macchiato on the matter of the practical impact of the pending Basel III rules, which will rejigger, in a pretty significant way, bank capital requirements (see here and here for details). The reason Basel III matters is that the Treasury has been touting it as the remedy for all the things that didn’t get done in the financial reform hoopla: if the banks are forced to have “enough” capital (query what “enough”) is, and better liquidity buffers, the likelihood of a financial crisis will be lower. As an motherhood and apple pie statement, it’s hard to argue with that sort of thing, but making it operational is quite another matter. And here’s where the chat between Streetwise and Deus comes in.
Lax Basel III Rules to Spur Further Bank Consolidation, Meaning More TBTF? - Yves Smith -The “lax” is clearly a tad inflammatory, but tweaks in Basel III rules to allow dubious quality items like mortgage servicing rights as Tier I capital speak volumes. In addition, the various noises from policy makers makes clear that they aren’t willing to make banks raise capital level by much due to fears of the impact of lower loan availability on economic growth (more equity behind lending means higher lending costs, since equity is more expensive than debt). And with that not-very-strong starting point, the banks have pushed for even weaker rules. Should this come to pass, Credit Suisse, per the Wall Street Journal, is already predicting the outcome: more bank mergers. This is would be yet another example of the costs of not taking a tough enough line with banks (the 2009 example being explicit and covert bailouts, without forcing changes in top management and boards at the struggling banks, was diverted to a significant degree to record bonuses, rather than its intended aim, building up capital levels).
Bank capital: Foundations of jelly | The Economist - The thinking behind the regulatory push for simplicity and solidity is that over the past few decades banks have been allowed to build complex capital structures made from inferior materials. The best sort of capital to ensure a stable banking system is equity, because it directly absorbs losses and can thus cushion against systemic shocks. It is, however, expensive, so banks have sought to dilute it with cheap fillers, such as the delightfully-named “hybrid capital” and other fancy instruments. One reason for their popularity with the banks that issued them was that they paid fixed interest, which was tax-deductible. Regulators, for their part, took comfort from the fact that hybrids were a bit like equity in that payments could be stopped to preserve capital should a bank run into trouble. Sadly, hybrids have not behaved quite as expected.
15 years of Cato Financial Deregulation - Looking at the Cato Handbook for Policymakers, which has 7 editions online starting from 1995, the chapters on financial regulation is a fascinating walk down memory lane. They aren’t in every edition, but they are in most. A few fun facts: - In their 2001 and 2003 edition the financial regulation chapter is called “Financial Deregulation”, as in how to do it and keep it going; they changed the title in their 2009 edition to “Monetary Policy and Financial Regulation” because I imagine calling for more financial deregulation looks odd in the public sphere with a massive financial crisis that has devastated so many balance sheets and lives. Heh. - The 1990s ones are the most interesting.
Government Regulation and the Financial Crisis - There’s a recent exchange between two writers at the Economist’s Democracy in America blog that comes after a previous exchange about the role of inequality and the role of the government in the recent financial crisis. The first by M.S. argues that “If the CRA was largely irrelevant, and Fannie and Freddie were also-rans, it seems hard to understand how one could put government at the heart of the crisis”, and W.W. argues that “The market failed. And the market was what it was because government made it that way.” You should read both since I’m going to refer to the W.W. essay in detail but I don’t want to blockquote chunks of it. Looking at W.W.’s argument, he relies on a scholar from Cato, a scholar from the American Enterprise Institute, and…..another scholar from the American Enterprise Institute. The author is capable of, Matrix-style, getting a full argument saturated in pre-conceived talking-points downloaded straight into the consciousness by only engaging a handful of right-wing think tanks. Is this what they mean by “epistemic closure” on the right?
Lehman Derivatives Records a `Mess,’ Barclays Executive Says (Bloomberg) -- Barclays Plc had no idea how big Lehman Brothers Holdings Inc.’s futures-and-options trading business was when it considered taking over the defunct bank’s derivatives trades at exchanges in 2008, a Barclays executive said. “Lehman’s books were in such a mess that I don’t think they knew where they were,” Elizabeth James, a director of Barclays’s futures business, testified today in U.S. Bankruptcy Court in Manhattan. James worked on Barclays’s purchase of Lehman’s brokerage during the 2008 financial crisis. She said she received an e-mail from former Barclays trading executive Stephen King saying Lehman had “absolutely no idea” if it had sold $2 billion more options than it had bought, or whether it owned $4 billion more than it had sold.
Will Ratings Agencies Escape Justice? -The Bloomberg/BusinessWeek headline was enough to ruin your evening: SEC Declines to Sue Moody’s Over Inflated Ratings. The facts were even worse: Moody’s, the bond rating company, chose not to downgrade inflated ratings on almost $1 billion of debt in 2007. The reason? Concern for their own reputation. The decision came out of Moody’s Investors Service committee in Europe, raising jurisdictional issues. Our CrowdQuery for this evening:
- 1. Will the Rating Agencies ever be forced to pay for the massive damage they have inflicted?
- 2. Is the current system of NRSRO going to change?
- 3. What is structured finance and bond ratings likely to look like in the future? What should it look like?
Staff Losses and Dissent May Hurt Crisis Panel - With less than four months left to complete its work, the group appointed by Congress to examine the causes of the financial crisis has been hampered by an exodus of senior employees and by internal disagreements that could hinder its ability to produce a report the entire commission could support. The group, the Financial Crisis Inquiry Commission, is expected to report to the nation by Dec. 15 on the causes of the 2008 financial debacle. It is investigating 22 factors, including Asian savings, regulatory failings in the United States, executive pay and credit ratings. Modeled in part on the 9/11 Commission and in part on the Pecora hearings, which the Senate convened to investigate the sources of the Great Depression, the commission hopes to produce a detailed report that will influence future policy making. It has held 12 days of hearings, interviewed more than 500 witnesses and pored over hundreds of thousands of pages of documents.
Too Big to Fail - Expectations and Impact of Extraordinary Government Intervention and the Role of Systemic Risk in the Financial Crisis - FRB New York - Thomas C. Baxter Jr., Executive Vice President and General Counsel - Testimony before the Financial Crisis Inquiry Commission, Washington, D.C.
Megabanks Will Shrink, Bernanke Tells Financial Crisis Commission, Yet Doubts Over Too Big To Fail Remain - In one of his most definitive statements on the subject to date, the nation's central banker said Thursday that he expects some of the nation's megabanks to start getting smaller."The most important lesson of this crisis is we have to end Too Big To Fail," Federal Reserve Chairman Ben Bernanke testified before the Financial Crisis Inquiry Commission. "My projection is that, even without direct intervention by the government, that over time we're going to see some breakups and some reduction in size and complexity of some of these firms as they respond to the incentives created by market pressures, and regulatory pressures as well."Throughout the legislative slog toward financial reform, Bernanke -- like the Obama administration -- resisted congressional efforts to break up the handful of too-big-to-fail firms that dominate the financial system. In May, however, a third of the Senate voted to effectively bust up the biggest of those giant financial institutions.
Political Economy: US regulators fell short before financial crisis, Bernanke says -U.S. regulators fell short in using their powers "forcefully or effectively" to stop risky practices by banks and were slow to identify and address abuses in subprime mortgage lending before the financial crisis, Federal Reserve Chairman Ben S. Bernanke told a panel investigating the financial crisis on Thursday. In testimony before the Congressionally appointed committee, Bernanke said that statutory gaps were an important contributor to the buildup of risk in the system but that even when regulators had the tools they needed to stem those risks, they did not use them well."Once a crisis occurs, timely and effective action by the government is critical to containing the severity of financial disruptions and their economic effects...However, the crisis revealed large gaps in the government's ability to respond quickly, effectively, and with minimum cost to taxpayers and the economy," Bernanke said.
Internal Documents to Be Made Public by FCIC - A number of internal documents pertaining to the events that led up to the crisis are to be released by the Financial Crisis Inquiry Commission, The Financial Times reported. The F.C.I.C.’s final report is to be published in December, which the commission’s chairman Phil Angelides has said will contain a large quantity of inside information relating not only to banks, but also to a number of government agencies that, Mr. Angelides told the newspaper, “want to keep all their documents secret.”The FT writes:The commission – set up by Congress to study the crisis and given sweeping legal authority – has used subpoena powers to compel Goldman Sachs to release documents and to force Warren Buffett, the chairman of Berkshire Hathaway, to testify.But it is in a race against time to obtain additional information from Wall Street and complete its work before its deadline. “Sometimes it’s fair to say we’re getting the ‘slow walk’. They’re probably looking at December 15 and saying ‘we’ve got 100 days to go until these guys are gone’,” said Mr Angelides.
The cost of Bernanke’s failure-aversion - John Cassidy has very little patience for Ben Bernanke’s latest attempt, in front of the FCIC, to explain how Lehman Brothers was allowed to fail so catastrophically. Bernanke is now saying that Lehman was in such bad shape that it would have failed whether or not the Fed had stepped in to guarantee its debts; like Cassidy, I’m very suspicious of that argument, since a Fed guarantee would have stopped any bank run cold in its tracks. My feeling is that Bernanke, along with Hank Paulson, had an unnecessarily binary idea of what exactly “failure” meant. They were faced with a choice between the chaotic collapse that we saw, on the one hand, and a much more orderly failure, on the other; and they utterly failed to grok how much worse the first option was than the second. Bernanke has long said that the Treasury “did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman’s acquisition by another firm” — but now it seems that he’s also saying something which demonstrates much weaker leadership.
Is the Economy as Broke as Lehman Was? - 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?
Too Much “Too Big to Fail”?, by Lord Adair Turner - Obviously, the global financial crisis of 2008-2009 was partly one of specific, systemically important banks and other financial institutions such as AIG. In response, there is an intense debate about the problems caused when such institutions are said to be “too big to fail.” Politically, that debate focuses on the costs of bailouts and on tax schemes designed to “get our money back.” For economists, the debate focuses on the moral hazard created by ex ante expectations of a bailout, which reduce market discipline on excessive risk-taking – as well as on the unfair advantage that such implicit guarantees give to large players over their small-enough-to-fail competitors. Numerous policy options to deal with this problem are now being debated. I am convinced that finding answers to the too-big-to-fail problem is necessary... But we must not confuse “necessary” with “sufficient”; there is a danger that an exclusive focus on institutions that are too big to fail could divert us from more fundamental issues.
William Black: Theoclassical Law and Economics Makes the Law an Ass - One of the great advantages of blogs is spurring informative debate. The debates also tend to morph as commentators develop their arguments. I want to address the initial and the morphed debate that Yves’ column kicked off: The Continued Stealth Takeover of the Courts. Yves warned that corporate CEOs are making concerted efforts to direct political contributions in a manner designed to elect judges that will champion CEOs’ interests. Note that I stress that the person that controls the corporation, typically the CEO, is the key actor and that the CEO commonly maximizes what he believes will be his interests at the expense of the corporation and its shareholders, creditors, and employees. This harms the nation. Yves’ blog prompted responses that eventually morphed into a debate about the role of law and economics in judicial decision making and discussion of what students are being taught in law and economics.
Wall Street May Pay Bonuses Early To Dodge Possible Repeal Of Bush Tax Cuts - Wall Street is reportedly one step ahead of the Obama administration's plan to scrap some of the Bush tax cuts on the nation's top earners.Banks are considering paying annual bonuses early this year to lessen the impact of the increased tax rates expected in January, when bonuses are traditionally paid out, reports the Wall Street Journal. Rumors of the hurry-up bonuses on Wall Street come on the heels of Credit Suisse's reported plan to pay 400 managing directors in its London office a cash reward next month in lieu of a chunk of their 2009 bonuses. The bank's aim, according to a Bloomberg report, was to spread the cost of a one-time 50 percent tax levied on bank bonuses in the U.K.
Why aren’t financial fortune tellers regulated too?- For example, Annapolis, Md., issues what it calls a "fortune-telling license" only if its police force concludes the applicant is "of good moral character." OK, so how about other people in the fortune-telling business? Like hedge fundies and arbitrageurs and Golden Sacks quants? Why don't banksters have to be "of good moral character"?
How to Tell When A CEO is Lying - Deceptive bosses, it transpires, tend to make more references to general knowledge (“as you know…”), and refer less to shareholder value (perhaps to minimise the risk of a lawsuit, the authors hypothesise). They also use fewer “non-extreme positive emotion words”. That is, instead of describing something as “good”, they call it “fantastic”. The aim is to “sound more persuasive” while talking horsefeathers. When they are lying, bosses avoid the word “I”, opting instead for the third person. They use fewer “hesitation words”, such as “um” and “er”, suggesting that they may have been coached in their deception. As with Mr Skilling’s “asshole”, more frequent use of swear words indicates deception. These results were significant, and arguably would have been even stronger had the authors been able to distinguish between executives who knowingly misled and those who did so unwittingly. They had to assume that every restatement was the result of deliberate deception; but the psychological traits they tested for would only appear in a person who knew he was lying
The 10 Highest-Paid CEOs Who Laid Off The Most Workers: Institute For Policy Studies (PHOTOS) - The CEOs who laid off the most employees during the recession are also the CEOs who took home the biggest pay checks, according to a study released last week. CEOs of the 50 U.S. firms that slashed the most jobs between November 2008 and April 2010 took in 42 percent more than the average CEO at an S&P 500 firm, according to the 17th annual Executive Excess study by the Institute for Policy Studies, a progressive Washington think tank. The study (PDF) also found that 36 of the 50 layoff leaders "announced their mass layoffs at a time of positive earnings reports," suggesting a trend of "squeezing workers to boost profits and maintain high CEO pay." The 10 "highest-paid CEO layoff leaders" ranked in the report include the CEO of Hewlett-Packard, Mark Hurd, who earned $24.2 million in 2009 as the company laid off 6,400 workers and Walmart CEO Michael Duke, who earned $19.2 million as the company laid off 13,350 workers.
Editorial - The Real Say on Executive Pay - NYTimes - The Financial Times reported this week that lawyers for corporate America are warning of a “logistical nightmare” from a provision in the new financial reform law that requires companies to disclose the ratio between a chief executive’s pay package and that of a typical employee. The lawyers say that the ratio would be unfairly complex to calculate and could encourage false comparisons. But the real problem is that C.E.O.’s and corporate boards would have to justify — to shareholders, employees and the public — what are sure to be some very large gaps between pay at the top and pay for everyone else. Federal filings already tell investors how much top executives make. The median salary of a Standard & Poor’s 500 chief executive last year was $1.025 million, and the median total pay package including bonuses and nonsalary income was $7.5 million, according to Equilar, an executive compensation research firm. The median pay of private-sector workers in the United States was about $30,000 in 2008, the most recent year of data. With benefits added in, that comes to roughly $36,000. Without company-specific data, however, it is impossible to measure and judge the effect of pay structures on companies and the broader economy.
The Economic Geography of Publicly-Traded Companies in the United States by Sector - For public companies in the US, this is the breakdown by state and then by sector, as measured by market capitalization: Quite a graph. Some states are like the US Average Sector mix, and some are very different. This set of two graphs will tell the story...These are broad generalizations, but why are do some states have a set of publicly traded companies like or unlike the national average? Now, remember the limitations here. Private companies are equally important in the US, and so is the non-profit sector. The reason that I work with the publicly traded companies, is that the data is readily available, and there is an easy summary statistic that is a proxy of the long-term value of the firm, equity market capitalization. Maybe I should have used enterprise value, but I think that would have given undue weight to financials.
China to Job-Seeking C.E.O.’s: Come Work for Us - The Chinese government ran an enormous help-wanted advertisement on Monday seeking professional managers for some of its biggest state-controlled companies, a novel but not unprecedented move that apparently reflected unhappiness with the companies’ current performance. The advertisement, two broadsheet-newspaper pages of small type, sought applicants for 20 senior management jobs in industries like nuclear power, auto manufacturing and textiles. While some of the positions were restricted to Chinese citizens, many of the posts were open to foreign applicants, and several required proficiency in languages like English and French. The advertisements were placed by the Chinese Communist Party’s central organization department and the State-Owned Assets Supervision and Administration Commission, the high-level government body that oversees the operations of China’s 129 biggest state-controlled corporations. They appeared in major Chinese and English-language newspapers, including the Communist Party newspaper, The People’s Daily, and on most major Internet portals.
Bank Profits Soar, Lending Falls As Banks Pay Next To Nothing For Funds - Bank profits jumped 21 percent last quarter to nearly $22 billion, the highest level in three years, as banks put away less money to cover future losses, fewer borrowers fell behind on payments and lenders paid the least for their funds in perhaps 50 years, a government report released Tuesday shows. Lending also dropped by about $96 billion, or 1.3 percent, as borrowers continue to remain skittish about the "slow recovery," Federal Deposit Insurance Corporation Chairman Sheila Bair told reporters Tuesday in Washington. "Consumers and businesses need to have confidence in the recovery before they will start making decisions on credit," Bair said, according to a transcript of her remarks. Meanwhile, despite the sector's high profits, challenges remain: home prices are forecast to decline into next year while lenders continue to repossess homes at record rates; the commercial real estate market has yet to hit its nadir; community banks continue to fail; and the number of lenders on the FDIC's confidential "Problem List" continues to grow. Nearly 830 banks are on the list, up from 775 at the end of March, the FDIC's quarterly report shows.
F.D.I.C. Gives a Mixed Report on Banks in 2nd Quarter – Sheila C. Bair, who heads the F.D.I.C., warned that the recovery of the banking industry could be hampered by protracted weakness in the economy. Even as the economy remains weak and the number of troubled banks creeps higher, the Federal Deposit Insurance Corporation’s quarterly report card on Tuesday showed that the banking sector is slowly starting to recover. Agency officials said the list of “problem banks” reached 829 in the second quarter, an increase of 54 lenders, many of which were small community banks. While that is a smaller increase than in previous quarters, the number of problem banks remains at its highest level in more than 16 years.
FDIC Q2 Banking Profile: 829 Problem Banks - The FDIC released the Q2 Quarterly Banking Profile today. The FDIC listed 829 banks with $403 billion in assets as “problem” banks in Q2, up from 775 banks in Q1 2010, but the total assets declined from $431 billion in assets in Q1 2010. There were 702 banks with $403 billion in assets on the list at the end of 2009. Note: Not all problem banks will fail - and not all failures will be from the problem bank list - but this shows the problem is significant and still growing. The Unofficial Problem Bank List shows 840 problem banks with $410 billion in assets - the difference is timing of releases of formal actions (or hints of pending actions). This graph shows the number of FDIC insured "problem" banks since 1990.All data is year end except Q1 2010. The 829 problem banks reported at the end of Q2 is the highest since 1992. The FDIC is just behind the pace for 1,000 problem banks by the end of the year, although it also depends on how many banks are removed from the list.
Unofficial Problem Bank List increases to 844 institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for September 3, 2010. Changes and comments from surferdude808: It was a comparatively quiet week for the Unofficial Problem Bank List as there were only four additions and no removals with the FDIC taking the long holiday weekend off from closures.
More than 400 US Banks Will Fail: Roubini - Even if the US and European economies manage to avoid a double dip, it will still feel like a recession, while more than half of the 800-plus US banks on the "critical list" are likely to go bust, according to renowned economist Nouriel Roubini of Roubini Global Economics. The second half of the year will remain weak as tailwinds become headwinds, Roubini told CNBC on the shores of Lake Como, Italy at the Ambrosetti Forum economics conference. "In the second half, fiscal policy becomes a headwind, no more cash for clunkers," Roubini said. "The positive scenario is that growth will be below par." Roubini recently said the chance of a double-dip recession in the US was now more than 40 percent.
Banks are lending but no one wants debt --- Finally, nearly two years after they were bailed out by Congress, big banks are beginning to ease lending standards for individuals and small businesses. But it's not exactly having the reception many believed it would. Just when credit becomes more available, there's little evidence of a surge in demand for it. Since the financial crisis, banks have been blamed for slowing the pace of economic recovery because of their reluctance to lend. Unlike larger companies that can borrow from bond markets, small businesses and consumers mostly depend on loans from banks. Federal officials have said tight credit has kept households from spending more and small businesses from hiring more.
MBA: 2Q CMBS delinquency rate 8.22% - Second-quarter delinquency rates for loans held in commercial mortgage-backed securities are at the highest level since the Mortgage Bankers Association began tracking the data in 1997. The MBA also said Thursday that delinquency rates for other mortgage groups "remain below levels seen in the early 1990's, some by large margins." The association's commercial/multifamily delinquency report showed the delinquency rate for CMBS during the second quarter was 8.22%, which is up from 3.91% in the year earlier and 0.53% in 2008. MBA said the CMBS rate comprises loans 30+ days delinquent, including foreclosures and real estate owned (REO). The first quarter, 30+ day delinquency rate on loans held in CMBS was 6.83%.
Home truths for complacent economists - The howls of surprised economists were everywhere last week as the government reported on Tuesday that July had sharpest single-month plunge in existing home sales on record. The next day the commerce department reported that new home sales hit a post-war low in July. All the economists who had told us that the housing market had stabilised and that prices would soon rebound looked really foolish, yet again. To understand how lost these professional error-makers really are, it is only necessary to know that the Mortgage Bankers Association (MBA) puts out data on mortgage applications every week. The MBA index plummeted beginning in May, immediately after the last day (30 April) for signing a house sale contract that qualified for the homebuyers' tax credit. It typically takes 6-8 weeks between when a contract is signed and a house sale closes. The plunge in applications in May meant that homebuyers were not signing contracts to buy homes. This meant that sales would plummet in July. Economists with a clue were not surprised by the July plunge in home sales.
Home Prices Respond to Government Cheese - No, really?The S&P/Case-Shiller index of property values increased 4.2 percent from June 2009, the group said today in New York. The median estimate of economists surveyed by Bloomberg News called for a 3.5 percent advance.So let's see, if we take $8,000 and divide by 4.2% we get $190,476... heh, that's suspiciously close to the median home price. How'd that happen? Of course when the government hands out "free checks" you'll find the market dislocates. But this destroys forward demand, as we have now seen with July's home sales numbers, as the "cheese" is the only thing that is creating sales, and organic buyers (and the setting of market prices that they cause to occur) all disappear - why would they overpay by $8,000? There's a lesson in here for the government, in that these sorts of "pull forward demand" games are only of "benefit" for as long as they continue, and as soon as that program ends (and all such programs must end, since the "freebie money" isn't infinite either) you create a worse dislocation than you originally had, as the entirety of the distortion you created now has come back out of the market along with whatever the natural progress originally was!
FHFA Sets New Affordable Housing Goals for GSEs - The GSE regulator Thursday issued new affordable goals that Fannie Mae and Freddie Mac are expected to meet this calendar year. A final rule issued by the Federal Housing Finance Agency creates home purchase and refinancing goals based on the two's total mortgage acquisitions. Under the new rules, 27% of loan purchases should benefit low-income homebuyers with incomes below 80% of area median income. For refinancings, 21% of GSE loan purchases should benefit low-income families. Loan modifications for low-income families also count toward the refinancing goal. FHFA sets numerical benchmarks for the multifamily goals. Fannie is expected to acquire mortgages that finance 177,750 low-income rental housing units, Freddie 161,250 units.
FHA won't insure low credit score borrowers under new guidelines - "Borrowers with credit scores less than 500 are not eligible for Federal Housing Administration-insured mortgage financing, according to the new credit score and loan-to-value (LTV) requirements released today by the U.S. Department of Housing and Urban Development."
Fed’s Pianalto: Multiple Solutions Needed for Housing Crisis - The housing crisis needs multiple, coordinated policy solutions, Federal Reserve Bank of Cleveland President Sandra Pianalto said Thursday. Speaking at a housing conference in Washington at which Boston Fed President Eric Rosengren was also due to speak, Pianalto said the size and complexity of the housing crisis meant that “no one-size-fits-all short-term remedies would work.” “Our research has led us to understand that the housing market collapse is the result of a destructive cycle that feeds on itself,” Pianalto said. “In our region, mortgage delinquencies led to a high number of foreclosures, which led to an oversupply of housing, which led to home prices depreciating and borrowers and financial institutions taking on big losses. “To break this cycle, a coordinated set of policies is needed to target multiple points of the breakdown in the housing market.”
Two New Federal Programs for Struggling Home Owners - NYTimes - We hear from surprisingly many quarters these days that North Atlantic governments and central banks should give up on expansionary policies to try to reduce unemployment, for the high unemployment that currently afflicts the North Atlantic is not cyclical but “structural,” and hence not open to alleviation by policies that boost aggregate demand.Let me be the first to say that structural unemployment is a true and severe danger. Situations in which people who in other circumstances could be happy, healthy, and productive members of the work force but lack the skills, the confidence, the social networks, and the experience needed for them to find a place to do something worth paying for–that is a tremendous danger. And if unemployment in the North Atlantic stays elevated for two or three more years it is highly likely that that danger will be upon us: nothing converts cyclical unemployment into structural unemployment more certainly than prolonged unemployment. But now? Does it look right now as if the North Atlantic is afflicted by structural unemployment? No, it does not.
Obama Administration Plans Mortgage Aid, HUD’s Donovan Says… (Bloomberg) -- The Obama administration plans to set up an emergency loan program for the unemployed and a government mortgage refinancing effort in the next few weeks to help homeowners after home sales dropped in July, Housing and Urban Development Secretary Shaun Donovan said. “The July numbers were worse than we expected, worse than the general market expected, and we are concerned,” Donovan said on CNN’s “State of the Union” program yesterday. “That’s why we are taking additional steps to move forward.” The administration will begin a Federal Housing Authority refinancing effort to help borrowers who are struggling to pay their mortgages, and will start an emergency homeowners’ loan program for unemployed borrowers so they can stay in their homes, Donovan said. “We’re going to continue to make sure folks have access to home ownership,” he said.
Lawler: HUD Secretary May Have Just Made Near-Term Home Sales Worse - Here are economist Tom Lawler's thoughts on HUD Secretary Shaun Donovan comments this weekend ... In an interview with CNN over the weekend, HUD Secretary Donovan noted that the July plunge in home sales following the end of the federal home buyer tax credit was much sharper than the administration expected; that the administration was “very concerned,” and would “do everything we can” to stabilize the shaky housing market. Many folks appear to have interpreted Donovan’s remarks as meaning that the administration has not “ruled out” reviving the home buyer tax credit if home sale continue to be weaker than expected, thus confirming some potential home buyers’ views that it’s better to wait to buy a home until the government “does it again.” The home buyer tax credit, of course, was an enormously costly and inefficient program where many home buyers who would have purchased a home anyway got a tax credit for doing so.
Another Housing Tax Credit? - From Reuters: No Decision on Reviving Homebuyer Credit: Donovan "It's too early to say whether the tax credit will be revived," Donovan said in an interview on CNN's "State of the Union" program. He said the administration would "do everything we can" to stabilize the shaky U.S. housing market. The problem in housing is there is too much supply (at the current price). Incentivizing people to buy existing homes just shuffles households around - it does NOT reduce the overall supply unless the buyer is moving out of their parent's basement. I doubt that happened very often. Note: It is important to remember that rental units are part of the overall supply, so moving people from a rental unit to homeownership doesn't help. And if the tax credit leads to more new home sales - that ADDS to the excess supply. And that makes the situation WORSE. It would be far better for housing and the economy to announce "There will be no further housing tax credits."
Talk of the Homebuyer Credit: It’s Baaaack - Please tell me it isn’t true: Washington is buzzing with talk of Homebuyer Tax Credit III. Like the killers in those really bad slasher movies, this tax subsidy wreaks havoc wherever it goes, appears to meet its demise in the last reel, yet returns to create more misery. The latest round started on Sunday, when HUD Secretary Shaun Donovan said it was "too early to say" whether the White House would support another round of credits. Donovan and the Obama Administration have been backtracking ever since. But the damage is done.Members of Congress and congressional hopefuls have leapt on the bandwagon. There is even a facebook page called “Extend the $8000 Federal Tax Credit until 2011 for 1st Time Homebuyers.” Congress has run the homebuyer credit experiment twice in the past two years. And the dismal results were exactly what economists predicted: In the months before the credit expired, buyers scrambled to get a deal from Uncle Sam. The frenzy boosted demand and drove up prices. Until the day the credit expired. Then demand collapsed and so did those prices.
Realtors, Builders oppose another Housing Tax Credit - A couple of quotes from the San Francisco Chronicle: Little support for new home-buyer tax credit "We are not advocating another one. We think it's important for the market to have time to recover on its own," says Walter Molony, spokesman for the National Association of Realtors.."From a political standpoint, with Congress not wanting to increase the debt, it would be too expensive," [Bernard Markstein, senior economist with the National Association of Home Builders] says. "In terms of advisable, we are bordering on where tax credits become ineffective."And HUD Secretary Shaun Donovan said yesterday, via Reuters: No talk of new homebuyer tax credit "It is not high on anyone's list that we have heard. We have not heard Congress talking about renewing it," Housing and Urban Development Secretary Shaun Donovan said in response to a reporter's question about a possible tax credit renewal.
A Dream House After All - If you read the coverage of the latest figures on the sales of existing homes..., you may well have come to the conclusion that the American dream is dead. It is indeed worrisome that sales in July were down 25 percent from a year ago. But a little perspective is in order. First, the bad news. What has happened in the housing markets since 2005 is a catastrophe that may take years for our economy to recover from. Depressing, yes — but the end of a dream? Not exactly. I have never quite understood what the American dream really means when it comes to housing. For some people, it means having a solid and fairly safe long-term investment that is coupled with the satisfaction of owning the house they live in. That dream is still alive. Others, however, think the American dream is owning property that appreciates by 30 percent a year, making a house into a vehicle for paying bills. But those kinds of dreams have become nightmares for the millions of foreclosed property owners who have found themselves sliding toward bankruptcy.
Don't think of it as an investment - KARL CASE, he of the Case-Shiller home price index, has written an op-ed that seems calculated to reassure those thinking of buying a home. It closes:This financial crisis has made us all too aware that we live in a Catch-22 world: the performance of the housing market drives the economy, and the performance of the economy drives the housing market. But housing has perhaps never been a better bargain, and sooner or later buyers will regain faith, inventories will shrink to reasonable levels, prices will rise and we’ll even start building again. The American dream is not dead — it’s just taking a well-deserved rest. Housing is much of if not quite all of the business cycle. And so as someone who would like to see the American economy return to growth, I am hopeful (though not particularly optimistic) that housing markets will soon take a decisive turn for the better. But I can't begin to encourage housing as an investment, as Mr Case does.
Case-Shiller: Home Price indices increase in June - These graphs are Seasonally Adjusted (SA). S&P has cautioned that the seasonal adjustment is probably being distorted by irregular factors. These distortions could include distressed sales and the various government programs. S&P/Case-Shiller released the monthly Home Price Indices for June (actually a 3 month average of April, May and June). This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities) and the quarterly national index. From S&P: For the Past Year Home Prices Have Generally Moved Sideways The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).The Composite 10 index is off 29.0% from the peak, and up 0.3% in June (SA).The Composite 20 index is off 28.4% from the peak, and up 0.3% in June (SA).The second graph shows the Year over year change in both indices. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.
A Look at Case-Shiller, by Metro Area (August Update) - The S&P/Case-Shiller Composite 20 home price index, a broad gauge of U.S. home prices, posted a 1% gain in June from a month earlier and rose 4.2% from 2009, but the gains decelerated as a government tax credit wound down. Seventeen cities posted month-to-month increases in June — just Las Vegas posted a decline — but the growth level was lower in 10 of those cities. The numbers also were boosted by seasonal factors in addition to the residual effects of the tax credit. On a year-to-year basis, which eliminates some of the seasonal variations, prices were down in five cities, though three cities — Minneapolis, San Diego and San Francisco — posted annual increases over 10%.The home-price gains in the Case-Shiller indexes may be difficult to sustain amid more recent indications that the housing market slowed substantially over the summer. “As we move further away from the tax credit boosted spring, home prices should level out somewhat — the year-over-year price improvement actually moved lower in June — if not move outright lower as we enter the fall,”
On Case-Shiller House Prices: October is the "Witching Hour" -As we've discussed for some time, the Case-Shiller index is seriously lagged to real time data. The release today was for "June", but it is really an average of April, May and June. Home sales were strong in April, May and June, and then collapsed in July. And prices have probably been falling for two months now - but that won't show up in Case-Shiller until the end of next month or even October (the Case-Shiller release at the end of October will be for June, July and August). Note: The title for this post is from Rolfe Winkler at the WSJ's Heard on the Street (last week): Housing's Witching Hour [T]he S&P/Case-Shiller home-price index ... could be set for another leg down. The index is computed using a three-month rolling average, meaning last month's weakness really should assert itself in late October. RadarLogic released a statement today: As Predicted, June S&P/Case-Shiller Home Price Indices Overstate Housing Market Strength
Home Prices Rise---Is It a Mirage? - The Case-Shiller index of home prices in 20 different markets rose briskly in June, according to Standard & Poor's. This may give a nice boost to the stock market but it's a pretty meaningless statistic because the data is two months old. That puts it right at the tail end of the buying flurry that came with the Homebuyer Tax Credit. Though the credit required that homebuyers have a signed contract by the end of April, they had another two months to close the deal. Thus June becomes the busy wind-up month for the credit. And guess what happened when the credit officially expired. That's right, we saw that stunning decline in existing home sales in July. When the prices are released for July expect to see the wind come out of the sails.
Are Existing Home Prices Overrepresented By Up To 40%? - A reader writes in with some troubling observations on what could potentially be a pretty substantial scheme to artificially "boost" existing home prices by up to 40%, putting all the NAR data, and all other relevant public housing data materially into question. Since trick is painfully simplistic, and all too easy to spot, we wish to open it up to our readers for verification, as this could be a huge hit to the credibility of all existing home price metrics, and put into question all transitory upticks in home prices, such as the backward looking Case-Shiller index indicated yesterday. From the email; Realtors are not reporting the true sold prices on homes. Here are 2 examples. If a home is listed on the MLS and then sells at a auction like Hudson & Marshal or RealtyBid, you can see the sold price online or if you attend the live auctions, see the house sell at open outcry auction. The next day the houses are reported sold on the MLS but always at full price. The example below sold for $115,000 at Realtybid but is listed as sold for $159,500 on the MLS
Do House Prices Still Have Farther to Fall? - Joe Nocera is concerned about the state of the US real estate market. Unemployment and a huge "shadow inventory" of as-yet-unforeclosed-upon homes with badly delinquent mortgages are making people afraid to buy. Meanwhile, those who are foolhardy enough to seek loans are having trouble getting them: Now look at it from the lender's perspective. Chastened by the excesses of the bubble, mortgage lenders have swung hard in the other direction, becoming excessively, almost insanely, conservative....Here's the strangest part, though: it is really not the lenders themselves who are imposing the most draconian of these tight new underwriting standards. Rather, it is the federal government. That's right, the government. At the same time that the administration was offering a hefty tax credit to spur home sales, the government's wholly owned subsidiaries, Fannie Mae and Freddie Mac, were imposing rules that made it increasingly difficult to buy a home
Canada’s Housing Bubble: An Accident Waiting to Happen - For the first time in 30 years, six of Canada's hottest real estate markets are in a housing bubble. This study examines trends in house prices in Toronto, Vancouver, Calgary, Edmonton, Montreal and Ottawa between 1980 and 2010 and finds price increases in those cities are outside of a historic comfort level. Download Now 1060 KB PDF | 24 pages
Vacant Homes in U.S. = Canada Housing Stock x2 (chart) From a new Moody's report, the number of vacant houses in the U.S. is now roughly 2x the entire Canadian housing stock.
Housing prices in hottest Canadian markets a concern - Steep housing price increases in six of Canada’s hottest real estate markets since 2002 have all the hallmarks of an “accident waiting to happen” if mortgage rates rise too sharply, warns a new report. The report by the Centre for Policy Alternatives says smart mortgage rate setting is needed to prevent the bubbles hanging over the housing markets in Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal from bursting. “The hottest six real-estate markets could be in for a correction at best or, at worst, a bubble burst,” writes David Macdonald, author of the report. “Rate setters at the big banks are in the driver’s seat now as mortgage rates inch up. They need to hit the breaks lightly.” The chief concern is the price increases in those markets are outside the “historic comfort level,” which makes them much more susceptible to mortgage rate changes, the report said.
Oceanfront lot recently sold at $20.5 million loss - DAYTONA BEACH -- Heads turned and eyebrows raised when WCI Communities purchased a vacant oceanfront tract for a then-record $23 million in early 2006. Those same eyebrows crinkled with concern recently when that same 1.9-acre tract of open sand at 1751 S. Atlantic Ave. sold for $2.5 million, an 89 percent drop...Bayshore Capital, a subsidiary of Bayshore Group of Companies, a Toronto-based financial and investment company, bought the property as a long-term investment
House Prices Are Still 10% Too High, Says Barry Ritholtz (Tech Ticker video) Money-manager Barry Ritholtz has a message for the National Association of Realtors, the trade group that always puts a sunny spin on the outlook for the housing market, no matter how horrific the facts may be:You're making the problemRitholtz, who runs Fusion IQ and writes The Big Picture blog, says that the NAR's happy spin is making homeowners too optimistic about the prices they'll be able to get--thus encouraging them to price their houses too high. In this market, says Ritholtz, houses priced realistically sell quickly. But since the majority of sellers are still dreaming of the good old days, most houses are priced too high and aren't selling. If the NAR would stop spinning and start helping sellers get more realistic, Ritholtz says, the housing market would fix itself more quickly.
Psychological Stages of a RE Bubble Market - In light of the latest Case Shiller data was out this morning, I wanted to draw your attention to a fascinating chart from the Irvine Housing Blog. Its a Real Estate focused variant of the market cycle/psychological chart we have run in the past. I have annotated it in red, to show where we are. Note what they call a bear rally is actually just the result of government programs, mortgage mods, HAMP, etc. Irvine Housing Blog interprets the chart as “a sign that people are clinging to the hope of a real estate recovery. We are not yet at the bottom.”
Pending Home Sales Reconfirm the Market is Crashing - Three months of data after the end of free down-payments, the inventory of purchase contracts rose just 5.25%. The inventory is still is at a record low with the exception of the two previous months – each of which were record lows in themselves (Please see the chart above showing how radically far demand has fallen. The three worst months are the last three months.). The index of unclosed contracts to buy a home increased from 75.5 to 79.4. In the previous two months demand had fallen a record 30% and then 2.8% more. The July 2010 reading released today is 19% lower than July 2009. The forecast was for a one percent fall according to 37 economists surveyed by Bloomberg News.Freddie Mac also announced today that the 30-year fixed rate mortgage has fallen to another record low — 4.32%. Outstanding rates and a price fall of 30 percent since the peak of the bubble has failed to ignite demand in our current market. Existing home sales represent 90% of residential housing transactions. The low reading of today will carry through to actual closed sales for July and August.
Time to let home prices fall? - You can't force someone to buy a house. But as a society we've long tried to make homeownership an offer you couldn't refuse. And since the real estate mega-bubble burst three years ago, the government has tried even more tricks to get people to sign home purchase contracts. Now, a grim reality has set in:
Reports this week on home purchases in July were beyond dismal. Sales of existing homes tumbled 27% from June and 25% from a year earlier. New-home sales slumped to an annualized rate of just 276,000 units, down 32% from July 2009 and the lowest since at least the early 1960s. Some of the fall-off undoubtedly reflected the spring expiration of the latest federal housing gimmick — tax credits of $8,000 for first-time buyers who met certain income requirements, and $6,500 for repeat buyers. Dean Baker, co-director of the Center for Economic Policy and Research in Washington, believes home prices still are overvalued by 15% to 20% in many areas. For government to stand in the way of a further price decline is unfair to the next generation of buyers, he said. "The people who get hurt the most are those who are overpaying for houses today," he said.
The-answer-to-a-housing-recovery: lower-prices - The simple economics behind the situation in housing is beginning to become more apparent as the weeks go by. As we’ve noted for several years now the primary problem in the US housing market remains one of supply and demand. As the jobs market continues to weaken, deflation takes hold of the US economy and the shadow inventory floods the market the math here remains simple enough for an Econ 101 student to understand. In order for the housing market to build a firm foundation that does not require government aid we will need to see a reduction in prices. In a recent research report Merrill Lynch described just how extreme the supply/demand imbalance has become in recent months and years:“The collapse in housing demand means that it likely will take even longer to clear the inventory of homes for sale. In the new market, builders have continued to slash construction, maintaining incredibly lean inventories, and yet there is still supply of 9.1 months. Even more worrisome, however, is the existing home market where inventory is still on a decisive uptrend. As such, it takes 12.5 months to clear the inventory at the July sales pace. This widening gap between housing demand and supply means that construction likely will remain depressed and prices will dip lower (Chart 5).”
Banks Playing 'Foreclosure Roulette' With Delinquent Homeowners - Banks don't want to recognize losses by having to put homes on the market at foreclosure-sale prices, but they don't want to encourage borrowers to quit making payments either, so, O'Toole believes, they randomly foreclose on some people to prevent widespread "moral hazard." The rest are left hanging with the help of the government's "extend and pretend" approach to the collapse of the housing bubble. "We just don't have the political appetite to bail homeowners out," said O'Toole, CEO of ForeclosureRadar.com. "On the other hand, we don't have the political appetite to kick them out."The Garwoods' trial period dragged on for nine months before they received a letter of rejection in March. They've been waiting anxiously since then for the day they will finally lose their house. It may be a while. The average foreclosure now takes 469 days, according to Lender Processing Services, whereas it took 319 days at the beginning of 2009. Many industry analysts say that is due to the Troubled Asset Relief Program, HAMP, and federal accounting-rule changes.
Fannie to Crack Down on Foreclosure Delays - Yves Smith - Is a stealth shift in policy afoot, to find the bottom in the housing market by getting banks to start clearing out their foreclosed and “ought to be foreclosed” exposures? On Tuesday, Fannie Mae announced that it was not longer giving servicers free rein, and was clamping down on multiple fronts, such as procedures and record-handling, mortgage mods. When a group of bloggers met with the Treasury in mid-August, one senior Treasury official commented on how apparent servicer intransigence (my turn of phrase, not his) with Federal programs like HAMP raised credibility issues and Treasury planned to look into it. This move suggests they knew they’d be taking a tougher stance back then. However, one element of the supposed “get tough” program has gotten comparatively little attention. Mortgage servicers are being directed to speed up foreclosures and sales of foreclosed properties.
Foreclosures: Movin' on up! - This is a something we've been watching for some time ... From the Los Angeles Times: Foreclosures of million-dollar-plus homes on the rise Although the pace of foreclosures has slowed in the general housing market in Southern California and much of the nation, it's still rising for upper-tier homes. The number of homes in the $1-million-and-up slice of the market that have become bank owned has tripled in the second quarter compared with the same period three years earlier in Los Angeles County, which has the majority of Southern California's high-priced REO houses. And the trend has shown little sign of slowing, according to data from ForeclosureRadar..."We believe the high end is ready to fall apart,"
Foreclosure Crisis Update - New numbers are out for the second quarter from the Mortgage Bankers Association’s National Delinquency Survey and HOPE NOW. After three years, the ramp-up phase of the foreclosure crisis seems to be ending, as the rate of mortgages in default or foreclosure has leveled off, albeit at historically unprecedented and appalling levels. The bad news is that new (30- and 60-day) delinquencies are still high, although down just a bit from their early 2009 peak, so that the foreclosure pipeline will remain primed for many months to come. Equally problematic are the huge numbers of very-overdue loans not yet in foreclosure, still at five times their normal level, and portending continued high foreclosure inventory and sale rates for the foreseeable future The NDS confirms the catastrophic failure of subprime adjustable-rate mortgages. There are still 4.5 million subprime ARMs out there in the NDS sample, which extrapolates to 5.3 million in the U.S., or about 10% of all outstanding mortgages. Fully half of the loans in this category have defaulted: 28% are behind in payments and another 23% are in foreclosure. There are an additional 5% of U.S. home mortgages that are fixed-rate subprime loans, one-third of which are in default or foreclosure.
US homeowners flock to Florida event in desperate bid to save properties - For five days, the Neighbourhood Assistance Corporation of America (Naca), a not-for-profit organisation, is working round the clock to help homeowners hang on to their houses. More than 12,000 people have signed up in advance and more than 20,000 are expected to turn up, travelling from as far afield as California, Georgia and Maryland. "It's either feed your kids or pay your mortgage," says Omayra Delgado, a 33-year-old special education teacher whose Miami house has slumped in value from $160,000 (£103,000) to $60,000. "My home is in foreclosure. I'm trying to keep it." Politicians' talk of an economic recovery is laughable to many of those here. This is a last, desperate bid to cling on to home ownership – the event is shrewdly named "save the dream". Inside, hundreds of loan advisers sit behind trestle tables. They are colour-coded: Bank of America workers wear red, Citigroup are in blue and Wells Fargo are in black. Even the moribund government-supported refinancing giants Fannie Mae and Freddie Mac are here, but their budgets don't run to natty coloured clothing.
Pending Home Sales increase in July - From the NAR: Pending Home Sales Rise The Pending Home Sales Index ... rose 5.2 percent to 79.4 based on contracts signed in July from a downwardly revised 75.5 in June, but remains 19.1 percent below July 2009 when it was 98.1. The data reflects contracts and not closings, which normally occur with a lag time of one or two months. Lawrence Yun, NAR chief economist, cautioned that there would be a long recovery process. “Home sales will remain soft in the months ahead ..." This suggests a small increase in existing home sales in September (reported when transactions close), but this also suggests double digit months of supply for some time.
MBA: Purchase Application activity suggests low level of existing home sales in August and September - The MBA reports: Mortgage Applications Increase as Rates Hit New Low in MBA Weekly Survey The Refinance Index increased 2.8 percent from the previous week and is at its highest level since May 1, 2009. The seasonally adjusted Purchase Index increased 1.8 percent from one week earlier."Refinancing activity picked up again last week, reaching new 15-month highs, as borrowers took advantage of even lower mortgage rates. The drop in mortgage rates was in line with Treasury rates as the latest data continue to show weak economic growth and an exceptionally weak housing market," Despite the slight increase in purchase activity in the past week, the continued low level of purchase applications indicates we are unlikely to see an increase in new home sales reported for August or existing home sales reported for September." The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.43 percent from 4.55 percentThe contract rate is a new low for this survey.
Personal Bankruptcy Filings: Down from July, Up from August 2009 - From the American Bankruptcy Institute: August Consumer Bankruptcy Filings fall 8 Percent this Month The 127,028 consumer bankruptcies filed in August represented a 8 percent decrease nationwide over the 137,698 filings recorded in July 2010, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). Though a decrease from the previous month, NBKRC’s data also showed that the August 2010 consumer filings represented a 6 percent increase from the 119,874 consumer filings recorded in August 2009. ...“While monthly filings are volatile, consumer bankruptcies are still the highest they have been since Congress overhauled the bankruptcy law in 2005,” “Consumer filings remain on track to top 1.6 million filings in 2010.” This graph shows the non-business bankruptcy filings by quarter using monthly data from the ABI and previous quarterly data from USCourts.gov.
How credit cards force the poor to subsidize the rich - Just after I went on holiday in July, the Boston Fed released a 57-page paper quantifying the subsidy from poor to rich that is the result of credit-card interchange fees. It was picked up by the likes of the NYT and the WSJ, and now Tim Chen, the CEO of NerdWallet, has decided to push back on the findings. The numbers in the Boston Fed paper, says Chen, don’t pass the smell test: The popular press had a field day with the idea that card-using households are earning $1,482 annually from cash users. But if we assume that the reward rate is 0.75% on rewards credit cards, as they mention on page 15, then the average card-carrying American has to spend $197,600 on credit card purchases each year. Even if we assume that card users receive the full 2% merchant fee, which is ridiculous, we’re talking about $74,100 in credit card spending.This does a really good job of misrepresenting the Boston Fed paper. For one thing, the rich don’t just spend more money on credit cards, they spend more cash, too. So a lot of the cross-subsidy on this axis takes place from Americans to themselves: they take the money they overspend when they pay in cash, and get it back in terms of credit card rewards when they pay with plastic. The real cross-subsidy takes place between rich and poor:
Personal Income, Spending increase in July - From the BEA: Personal Income and Outlays, April 2010 - Personal income increased $30.0 billion, or 0.2 percent ... Personal consumption expenditures (PCE) increased $44.1 billion, or 0.4 percent...Real PCE -- PCE adjusted to remove price changes -- increased 0.2 percent in July, compared with an increase of 0.1 percent in June... Personal saving as a percentage of disposable personal income was 5.9 percent in July, compared with 6.2 percent in June.This graph shows real personal income less transfer payments since 1969. This measure of economic activity is moving sideways - similar to what happened following the 2001 recession. This month the saving rate decreased slightly ... This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the July Personal Income report.
America’s Saving Surprise - The household saving rate in the United States has tripled in the past three years. Why? And what does it mean for the US economy and the rest of the world? The rapid rise in saving has reduced consumer spending, slowing the pace of GDP growth in 2009 and in early 2010. If the saving rate continues to rise rapidly, it could push America’s fragile economy into another downturn. That would mean lower imports, creating a potential problem for countries that depend for their employment on exporting to the US. Higher household saving depresses consumption because it is the difference between households’ after-tax income and what they spend. The saving may be deposited in bank accounts or used to buy mutual funds or corporate stock. Saving may also take the form of individual contributions to retirement accounts or employer contributions to corporate saving plans. Paying down debt on credit cards or mortgages also counts as saving – but increases in the value of existing assets like stocks or real estate do not, even though they increase the value of household wealth.
U.S. Consumers Pulling Back on Spending in August - -- Americans' self-reported spending in stores, restaurants, gas stations, and online averaged $61 per day during the week ending Aug. 29. So far, August and back-to-school 2010 spending trends appear no better than those of August 2009. Gallup's consumer spending measure averaged $68 per day in July and $67 in June -- up $6 on average from prior-year comparables, and at the upper end of the 2009 "new normal" monthly spending range of $59 to $67. The July results seem consistent with Monday's report of a 0.4% increase in personal spending in July 2010. At this point, consumer spending in August is running below that of June and July, falling back to roughly the $65-per-day average of August 2009. This is consistent with perceptions of a continued weakening of the U.S. economy and tepid back-to-school sales.
The saving mentality is hurting the economy's recovery - The logic of the economic recovery isn't working -- or, at any rate, not well. By that logic, over-borrowed Americans would repay loans and replenish depleted savings, creating a temporary drop in consumer spending and economic activity. But once savings increased and debt declined, consumer buying would strengthen. It would replace the Obama stimulus program. Hiring would improve; the recovery would become self-sustaining. We're still waiting. Just last week, economic growth for the second quarter was revised down to a meager 1.6 percent annual rate. Why is the recovery faltering? There are many explanations: a depressed housing market; weaker-than-expected exports; cautious corporations. But consumers, representing 70 percent of the economy's $14.5 trillion of spending, are the crux of the matter.
Robert Samuelson Gets the Saving Story Wrong - Robert Samuelson seems to think that the problem with the recovery is that people are still saving. The current saving rate is approximately 6 percent of disposable income. While Samuelson implies this is high, it is actually very low by historic standards. The saving rate averaged more than 8 percent through most of the post-war era until the wealth effect of the stock and housing bubbles drove it toward zero in the last 15 years. Samuelson seems to think that after a couple of years of a 6 percent saving rate, saving will again fall to its bubble levels of near zero. There is no reason to expect this. As the housing bubble deflates further, households will see a further decline in wealth. They will likely increase their saving rate to the 8 percent pre-bubble range. In fact, demographics suggest that the saving rate could rise even higher. The huge baby boom cohort is at the edge of retirement, with most having almost nothing other than their Social Security to depend upon. This provides a strong incentive to save, especially in an environment where much of the political leadership is pushing for cuts to Social Security..
Luxury retailing booms while discount houses suffer - Personal spending in the US is diverging into two distinct categories as strong growth at high-end stores contrasts with continuing difficulties for mass-market, low-price retailers.Nearly a year after the US economy returned to growth, corporate earnings reports in recent months have provided consistent evidence of the differing fortunes. At high-end stores such as Neiman Marcus and Tiffany, shoppers are demonstrating confidence and spending with vigour. At the other end of the retail spectrum, consumers are cautious amid economic uncertainties, denting the earnings of groups such as Walmart.In the second quarter of 2010, personal consumption expenditure – the commerce department’s main measure of consumer spending – advanced at an annualised rate of 2 per cent in the US, matching the fourth quarter 2009 figure and improving upon the 1.9 per cent gain recorded in the first quarter of this year. However, these modest increases are much weaker than the rebound in consumer consumption experienced after previous recessions.
Free Market Has Turned Us Into 'Matrix' Drones - A leading economist has likened the nation's acceptance of free-market capitalism to that of the brainwashed characters in the film The Matrix, unwitting pawns in a fake reality. In a controversial new book, the Cambridge economist Ha-Joon Chang debunks received wisdom on everything from the importance of the internet to the idea that people in the United States enjoy the highest standard of living in the world; an iconoclastic attitude that has won him fans such as Bob Geldof and Noam Chomsky. South-Korean born Dr Chang aims to disprove what he sees as economic myths, including the idea that people are paid what they are worth, that the "trickle down" effect of increasing wealth among the rich helps the poor, and that education makes countries more prosperous. One of the modern idols Dr Chang seeks to bring down is the internet. He claims that we overestimate the importance of new technologies compared to older inventions – such as the washing machine – and criticises the way in which internet access has been seen as key to countries' development.
Obama to Revamp U.S. Export Control, Ease Limits (Bloomberg) -- President Barack Obama plans to ease restrictions on selling products with military applications to foreign buyers as part of a restructuring of U.S. export rules that companies said were too broad and burdensome. Obama will announce the changes, which will create narrower and more consistent rules for defense, technology and aerospace products, in a video message to an export-control conference in Washington tomorrow, the administration announced. “While there is still more work to be done, taken together, these reforms will focus our resources on the threats that matter most, and help us work more effectively with our allies in the field,” Obama will say in his remarks, according to a text released by the White House. “By enhancing the competitiveness of our manufacturing and technology sectors, they’ll help us not just increase exports and create jobs, but strengthen our national security as well,” he will say.
Surprising Many, Manufacturing Is Bright Spot - The August factory report is like a shiny holiday gift found lying among depressing lumps of coals. Its unexpectedly optimistic tone was a nice contrast to the downbeat read on labor markets released Wednesday, and it supports the view that the U.S. economy — although weak — will avoid a double-dip recession. The Institute for Supply Management reported that its factory purchasing managers’ index rose to 56.3 in August. The reading was better than July’s 55.5 and beat expectations of a slowdown to 52.5. Equally important was the breadth of improvement in the subcategories. Except for customer inventories, all of the indexes are above the 50-mark, which indicates expansion. “Certainly there are no signs of a double dip in manufacturing,”
Loan Applicant Receives Rejection Letter Calling Her ‘One Crazy Ass Bitch’ – The Consumerist - When the owner of a Seattle beauty salon had her application for a loan from the Rainier Valley Community Development Fund denied last year, that was bad enough. When she later received what appeared to be a second rejection letter for the same loan application, she discovered that the reason for her inability to get the loan was that she is a "crazy ass bitch." The full letter is below, but here are some highlights: I want to tell you that you are one crazy ass bitch. It was a complete waste of time for you to come before the board though it did provide us some comic relief.... We are very interested in how our programs are working to help Rainier Valley businesses who actually operate a business and not a hobby. The CDF strives to deliver a professional service to our customers which by the looks of your establishment, you wouldn't know anything about. Your comments will help us to improve upon our program operations where we will better screen out broke ass crazies.
Who's Making Business Nervous Now? - Remember when Republicans were complaining about "uncertainty"? As the argument went, businesses weren't expanding and hiring new workers because they feared struggling with new regulations and taxes. Businesses, the Republicans said, needed certainty and financial relief. Apparently Republican thinking has evolved, as Steve Benen at Washington Monthly and Pat Garofalo at Wonk Room explain today. In late July, the Democrats were poised to pass a small-business assistance bill, full of tax breaks and other incentives designed to reward small businesses that hire new workers. But, as always, the Democrats were one vote short in the Senate. And not one Republican agreed to sign on. So where does that leave small business? Via USA Today: Small businesses have put hiring, supply buying and real estate expansion on hold as they wait out the vote on a small-business-aid bill that stalled in the Senate earlier this summer.
Rail Traffic increases 5.7% in August compared to August 2009 - From the Association of American Railroads: Rail Time Indicators. The AAR reports traffic in August 2010 was up 5.7% compared to August 2009 - and traffic was 11.6% lower than in August 2008. This graph shows U.S. average weekly rail carloads (NSA). Traffic increased in 16 of 19 major commodity categories year-over-year. From AAR:
• U.S. freight railroads originated 1,179,447 carloads in August 2010, an average of 294,862 carloads per week. That’s up 5.7% from August 2009 though down 11.6% from August 2008 on a non-seasonally adjusted basis. It’s also the highest weekly average for any month since November 2008 and reverses a string of three straight months in which average unadjusted carloads fell in absolute terms.
• However, on a seasonally adjusted basis, U.S. rail carloads fell 1.6% in August 2010 from July 2010.
Restaurant Index shows contraction in July - Same store sales and customer traffic both declined in July (on a year-over-year basis). This is the fourth consecutive month of declines. (see graph) Note: Any reading above 100 shows expansion for this index. From the National Restaurant Association (NRA): Restaurant Industry Outlook Remained Uncertain in July as Restaurant Performance Index Remains Essentially Flat The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 99.4 in July, down 0.1 percent from June and its fourth consecutive decline. In addition, the RPI stood below 100 for the third consecutive month, which signifies contraction in the index of key industry indicators. Restaurant operators reported negative same-store sales for the fourth consecutive month in July, with the overall results similar to the June performance.
US private sector unexpectedly cuts jobs in August - (Reuters) - U.S. private employers unexpectedly cut jobs in August, a report by a payrolls processor showed on Wednesday, delivering another blow to the already faltering economic recovery. A separate report showed the number of planned layoffs at U.S. firms fell to their lowest level in 10 years though, but there is little to suggest companies are on the verge of hiring on a scale that would lower the unemployment rate. The private sector cut 10,000 jobs in August compared to a revised gain of 37,000 in July, ADP Employer Services said. The July figure was originally reported as a gain of 42,000.
ADP: Private Employment decreases 10,000 in August - ADP reports: Private sector employment decreased by 10,000 from July to August on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from June to July was revised down slightly, from the previously reported increase of 42,000 to an increase of 37,000. The decline in private employment in August confirms a pause in the recovery already evident in other economic data...Unlike the estimate of total establishment employment to be released on Friday by the Bureau of Labor Statistics (BLS), today’s figure does not include the effects of federal hiring — and now firing — for the 2010 Census.Note: ADP is private nonfarm employment only (no government jobs). The consensus was for ADP to show an increase of about 20,000 private sector jobs in August, so this was below consensus.
August Employment Report: 60K Jobs ex-Census, 9.6% Unemployment Rate - From the BLS: Nonfarm payroll employment changed little (-54,000) in August, and the unemployment rate was about unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today. Government employment fell, as 114,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment continued to trend up modestly (+67,000). Census 2010 hiring decreased 114,000 in August. Non-farm payroll employment increased 60,000 in July ex-Census. Both June and July payroll employment were revised up. "June was revised from -221,000 to -175,000, and the change for July was revised from -131,000 to -54,000."This graph shows the unemployment rate vs. recessions. Nonfarm payrolls decreased by 54 thousand in August. The economy has gained 229 thousand jobs over the last year, and lost 7.6 million jobs since the recession started in December 2007. The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost). The dotted line is ex-Census hiring. The two lines have almost joined since the decennial Census hiring is almost over.
The August Employment Report - The latest from the BLS on the employment situation is more of the same. There was essentially no net job growth -- a decline of 54,000 consisting of a fall in government employment as Census workers finished up that was not quite offset by a rise in private sector employment. The official unemployment rate went from 9.5 to 9.6 percent and the broadest measure of labor underutilization (U-6) went from 16.5 to 16.7 percent. There is nothing in here that merits joy. Expect the spinmeisters to focus on the rise in private sector employment (up 763,000 since the low in December 2009) and the upward revisions (to smaller job losses) from the two prior months.
EMPLOYMENT REPORT (5 charts) The monthly employment report roughly showed the economy to be still stagnated as the trends that have been in place so far this year continued. Private payrolls increased modestly by some 67,000 jobs. But the drop in census temporary employment caused total nonfarm payroll employment to fall 54,000. The year over year gain in jobs as reported by both the payroll and the household survey is now near zero. The unemployment rate at 9.6% was essentially unchanged and has remained in a range of9.5% to 9.7% for several months. The average workweek was unchanged so hours worked increased 0.3% from 99.2 to 99.5. On a smoothed basis the three month growth rate of hours worked slipped to 1.4% versus the recent peak of a 3.7% growth rate in June. Average hourly earnings growth continued to moderate and average weekly earnings actually ticked down this month. With energy prices and overall inflation weakening this low level of wage growth is generating some modest gains in real earnings. As of last month the year over gain in real average hourly earnings of production and non supervisory employees was 0.7% and real weekly wage were up 1.6%. While encouraging, by historical norms this is very weak for the first year of a recovery.
Comparing This Recession to Previous Ones: Job Changes - The economy lost 54,000 jobs in August, driven primarily by the elimination of 114,000 temporary Census Bureau positions. Additionally, state and local governments eliminated 10,000 jobs last month.In the private sector, payrolls increased by 67,000 in August, a modest gain over total private payrolls in July. The chart above shows job changes in this recession compared with recent ones, with the black line representing the current downturn. The line has risen since last year, but still has a long way to go before the job market fully recovers to its pre-recession level. Since the downturn began in December 2007, the economy has shed, on net, about 5.5 percent of its nonfarm payroll jobs. And that doesn’t even account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy we should have more jobs today than we had before the recession.
Labour markets: Still rising | The Economist - GIVEN the consistently disappointing data we've seen out of the American economy in recent weeks, the outlook for this morning's August payroll employment report was uncomfortably uncertain. Initial jobless claims have risen ominously of late, and a number of indicators of economic activity have edged downward, leading some to believe that the Labour Department would provide evidence of a sharp retrenchment in labour markets for the month. In fact, the figures aren't that bad. The headline number is negative—off 54,000 for the month—but that's overwhelmingly due to the continued drawdown in temporary census employment, which subtracted 114,000 jobs from the August report. Ex-census, the economy added 60,000 jobs in August. Private employment rose by 67,000 for the month. Since December of 2009, private employment has grown by a total of 763,000. Meanwhile, revisions to previous months' data indicated a better labour market performance than was previously believed. The June employment change was revised from a drop of 221,000 to a decline of 175,000, and the change in July was revised from a decline of 131,000 jobs to a dip of just 54,000. July private employment growth was revised up to 107,000 jobs.
Recovery, Year One: No Recovery For The Jobs Market , by Paul Vigna: Here’s your takeaway from the jobs report: The jobs market isn’t getting any worse. It isn’t getting any better either. Nothing much changed in August for the nation’s work force, and nothing much has changed in the past year either. The Bureau of Labor Statistics reported 54,000 people lost their jobs in August, with 114,000 temporary Census Bureau workers coming to the end of that gig, while the private sector added 67,000 jobs. This is such a middling report, it can probably be spun any way you’d want to spin it, so it’s best to try and look at the biggest picture possible. I’ll frame it this way: we’re eight months into 2010, and the economy has added a net total of 723,000 jobs. Job growth rose the first five months of the year, and has fallen the past three months. That averages out to 90,000 jobs a month, which is not even enough to keep up with population growth, forget starting to whittle down that 15 million-strong sea of unemployed people out there.
The Employment Report: “We’ve Gone Essentially Nowhere in a Year”- Here's my somewhat cranky response this morning's employment report showing that the unemployment rate ticked up, and that the broader U-6 measure went up even more. There was some private sector job growth, but not nearly enough to keep up with population growth, and far from enough to make any inroads into reemploying the millions of people who have lost jobs: The Employment Report: “We’ve Gone Essentially Nowhere in a Year” My fear isn't a double dip as much as it is that job and GDP growth will remain stagnant.The administration is supposed to propose new policies to try to help us reach the other side faster, but the timing of that effort -- way too late except as a political ploy -- is one of the thing's I'm cranky about.
Nowhere To Run, Nowhere To Hide - On the eve of the Labor Day weekend, the Bureau of Labor Statistics told us today that the economy lost a net 55,000 jobs, with private sector gains (+67,000) being more than offset of government losses (-122,000). Of the government losses, 114,000 were laid-off census workers. The "official" unemployment rate (the U3), which comes from the Household Survey, was basically unchanged at 9.6%. This rate would be somewhere north of 10% if people dropped from the labor force were put back in.Looking at this data that compares current job losses with those in previous recessions, one would think that we might declare a national emergency, that we would engage in a serious discussion of where this country is headed, and that we would work hard to define a new way forward. But, no! Instead those in Washington dither & dally, wondering what went wrong but being careful to tell us it will all work out just fine in the end if we're willing to be patient. Basically, they are waiting for economic crisis to fix itself.
Whiff of Good News on Long-Term Unemployment- There was a slice of good news in today’s jobs report about the state of long-term unemployment in America. The Labor Department reported that the share of workers who were out of a job for six months or longer fell for the third straight month, to 42%. It was 46% in May. The number of Americans who were out of work for six months or longer also fell to 6.2 million, from 6.8 million in May. There are many reasons to worry about long-term unemployment. One is the human toll it takes on individuals and families. Another is a problem that economists call hysteresis, which has plagued Europe. This is the theory that the longer a person is out of work, the harder it becomes to get a new job because that person’s skills degrade. Long-term unemployment still has a long way to go before it gets back to normal. Moreover, it’s not clear why long-term unemployment ticked down. It might have been because government unemployment benefits — the subject of political battles in Congress all summer — expired or threatened to expire for many individuals.
Reflections on the "Recovery" - Mish - One year ago the official unemployment rate was 9.7%. Today it is 9.6%. One year ago U-6 unemployment was 16.8%. Today U-6 is 16.7%. click on chart for sharper image For more details on the jobs report, please see Jobs Decrease by 54,000, Rise by 60,000 Excluding Census; Unemployment Rises Slightly to 9.6%; A Look Beneath the Surface. For all the trillions of dollars in stimulus and additional trillions of dollars in bank bailouts and trillions of dollars of expansion of the Fed's balance sheet, this is all we have to show for it.Moreover, the economy is clearly slowing already by many economic reports including new home sales, existing home sales, the regional Fed manufacturing surveys, sentiment measures, and consumer spending trends. The only major discrepancy is ISM. This week, none of that matters. However, I would like to point out that bear market rallies end, not on bad news, but on good news. It will be interesting to see how much more good news there is, and the market's reaction to it.
The Great Jobs Depression Worsens, and the Choice Ahead Grows Starker The Great Jobs Depression continues to worsen.The Labor Department reports this morning that companies created ony 67,000 new jobs in August. That’s down from the 107,000 they created in July. And because the government laid off temporary Census workers, the economy as a whole lost 54,000 jobs.To put this into perspective, we need 125,000 net new jobs a month just to keep up with the growth of the population and the potential workforce. Think of it this way. The number of Americans willing and able to work but who cannot find a job hasn’t stopped growing since the start of 2008. All told, about 22 million Americans are now jobless. Add in those who are working part-time who’d rather be working full time, and we’re up to 25 million. And because most families depend on two paychecks, the practical impact is almost double.
Broader U-6 Jobless Rate up to 16.7%: Why the Jump? - The U.S. jobless rate rose to 9.6% in August, but the government’s broader measure of unemployment rose even more to 16.7%, the highest rate since April. The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. Both rates increased despite a rise of 290,000 in the number of people who are employed. The number of unemployed people in the U.S. also rose, but by a smaller amount — 261,000. The unemployment rates moved up as more unemployed people moved back into the labor force to look for jobs. More than half a million people re-entered the job market last month, as the overall labor force rose 550,000. The labor force data were likely affected by a temporary end to extended unemployment benefits. The Labor Department survey was conducted after the U.S. Senate expanded an extended-jobless-benefits program through the end of the year. Many of the people who fell off the labor force rolls during the gap in extended benefits likely re-entered the market last month.
Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks - This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at the bottom of the recession (Both the 1991 and 2001 recessions were flat at the bottom, so the choice was a little arbitrary). The dotted line shows the impact of Census hiring. In August, there were only 82,000 temporary 2010 Census workers still on the payroll. The number of Census workers will continue to decline - and the remaining gap between the solid and dashed red lines will be gone soon. The Employment-Population ratio increased to 58.5% in August from 58.4% in July. This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population. The Labor Force Participation Rate increased to 64.7% from 64.6% in July. This is the percentage of the working age population in the labor force. This increase was mostly because of the an increase in the teen participation rate. The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) was at 8.9 million in August. This increase was bad news. The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce.
Relief in the Temp Sector - A month ago, the Labor Department’s payroll data offered a worrying sign for the economy: temp employment had dropped in July for the first time in 10 months, signaling potential trouble ahead for the labor market given the temp sector’s traditional role as a leading indicator for overall jobs. With today’s payroll data, that brief decline in temps looks like little more than a blip.The temporary-help services sector added 16,800 jobs in August, the government said Friday. That’s close to the revised 18,600 seen in June. July’s figure was revised upward, from a previously reported loss of 5,600 to a decline of just 900 jobs.The July drop now appears to have been just a summer lull in the sector. But overall temp growth remains slow: Before the summer, temp employment was growing by about 45,000 jobs a month. The newer pace fits in with expectations for slow growth in the labor market in coming months.
Duration of Unemployment - This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. Note: The BLS reports 15+ weeks, so the 15 to 26 weeks number was calculated.
In August 2010, the number of unemployed for 27 weeks or more declined significantly to 6.249 million (seasonally adjusted) from 6.752 million in July. It appears the number of long term unemployed has peaked, but it is still very difficult for these people to find a job - and this is a very serious employment issue. The 5 to 14 week category increased sharply in August and is now at the highest level since October 2009 - and that is concerning.
The Slog - It’s easy to get confused by month-month fluctuations in the jobs report. But the bigger picture of the economy’s performance over the three years is starting to look very consistent. Today’s jobs report confirms that. We don’t seem to be in a double-dip recession. We do seem to be in a long slog. Phase One of the past three years started in late 2007 and went through the end of last year. This phase was the Great Recession itself. Employers were shedding jobs, and the percentage of people out of work was rising.Phase Two went from the end of last year through this spring, when the economy began to turn around and did so more rapidly than many forecasters had expected. From March to May, the economy added almost 1 million jobs, the kind of three-month gain that was typical in the late 1990s boom. But it didn’t continue. We entered Phase Three — the slog — instead. Some of the earlier job gains were temporary Census hires. The European debt markets quaked, and American investors and companies grew nervous. Consumer spending here remained subdued.
Why Are Wages Rising? - Average hourly pay for all workers had another nice increase in August. It rose 6 cents, to $22.56, after having risen 5 cents in July. Job growth may have tailed off in recent months, but wage growth for people with jobs has picked up: As I’ve written before, hourly pay has done far better than expected over the last few years. In the deep recessions of the mid-1970s and early 1980s, real hourly pay fell significantly — more than 4 percent in each case. One possible explanation for why the pattern is different this time is that companies are passing some of the impressive recent productivity gains onto their workers — at least enough of those gains to outpace the modest level of inflation. Another possible explanation, however, occurred to me while reading Reed Abelson’s article in today’s Times: As health care costs continue their relentless climb, companies are increasingly passing on higher premium costs to workers…
What's Good About Rising Unemployment - The Department of Labor reported August job numbers on Friday, and the numbers appeared to be another bad sign for the recovery. The economy lost 54,000 positions in the last full month of summer. Worse, the unemployment rate rose for the first time in four months to 9.6%, from a rate of 9.5% the month before.So is this jobs report the latest sign that we are headed for a double dip? Probably not. Actually it's the opposite. Despite what it looks like, today's jobs numbers are good news for the economy. Mark Zandi, a closely watched economist, had this to say on CNBC when the job report was announced, "It solidifies the idea the economic recovery is going to remain in tack." What's going on here? First of all, a good part of the job losses came from the government. If you just look at the private sector, the economy actually added 67,000 positions. People getting off government payrolls and being hired by corporations or small businesses is a good sign.
Employment Diffusion Indices - The seasonally adjusted (SA) teen participation rate increased from 34.6% to 35.2%. This was because so few teens looked for jobs this summer. This was a factor in pushing up the overall participation rate even with a weak job market. The before rounding participation rate (SA) rose from 64.55% in July to 64.73% in August, and the before rounding unemployment rate rose from 9.51% in July to 9.643% in August. It won't take much to push the headline unemployment rate to 9.7%. The BLS diffusion index for total private employment declined to 53.0 from 56.7 in July. For manufacturing, the diffusion index declined to 47.0 from 53.0 in July, and down sharply from 67.1 in April. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. From the BLS: Figures are the percent of industries with employment increasing plus one-half of the industries with unchanged employment, where 50 percent indicates an equal balance between industries with increasing and decreasing employment.
US Auto Sales May Hit 28-Year Low as Discounts Flop (Bloomberg) -- U.S. auto sales in August probably were the slowest for the month in 28 years as model-year closeout deals failed to entice consumers concerned the economy is worsening and they may lose their jobs. Industrywide deliveries, to be released tomorrow, may have reached an annualized rate of 11.6 million vehicles this month, the average of eight analysts’ estimates compiled by Bloomberg. That would be the slowest August since 1982, according to researcher Ward’s AutoInfoBank. The rate would be 18 percent below last year’s 14.2 million pace, when the U.S. government’s “cash for clunkers” incentive program boosted sales. “Home sales are way down, the stock market is way down, the unemployment report is very disappointing and consumer confidence is sputtering,”
U.S. Light Vehicle Sales 11.5 Million SAAR in August - Based on an estimate from Autodata Corp, light vehicle sales were at a 11.47 million SAAR in August. That is down 18.9% from August 2009 (cash-for-clunkers), and down 0.5% from the July sales rate. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for August (red, light vehicle sales of 11.47 million SAAR from Autodata Corp). The high for the year was in March, and sales have moved mostly sideways since then. The second graph shows light vehicle sales since the BEA started keeping data in 1967.
August auto sales - August auto sales worst in 27 years, declared some headlines. While the statement may be true, I don't think it's the best way to summarize what we're seeing. The graph below is my preferred way to view the auto sales data; as far as I'm aware Econbrowser remains the only place on the web you'll find auto sales data displayed this way. The graph allows you to compare each month with the same month in previous years (by looking at different colors within each group) or different months in the same year (by looking at the same color across groups). These numbers are not seasonally adjusted, and it's true there are strong seasonals in auto sales. But there are often big outliers as well (such as the cash-for-clunkers effect for August and part of July last year) that can throw standard seasonal-adjustment filters out of whack but are pretty easy to see visually in a plot like this.
ISM Non-Manufacturing Index declines in August - The August ISM Non-manufacturing index was at 51.5%, down from 54.3% in July - and below expectations of 53.0%. The employment index showed contraction in August at 48.2%. Note: Above 50 indicates expansion, below 50 contraction. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. The overall ISM index, and the employment index, are both at the lowest level since January. From the Institute for Supply Management: August 2010 Non-Manufacturing ISM Report On Business
The price of paid vacation - With Ezra Klein reviving his campaign for mandatory paid vacation in the United States let me revive my counterpoint to this idea: In particular, in my view a lot of people are being misled by the concept of a “paid vacation.” A paid vacation is a kind of accounting fiction — you continue to draw a paycheck (and health care benefits, etc.) even while you’re on vacation. But nobody’s going to pay you to go on vacation. You’re paid for the work that you actually do. The money you get on your vacation days is part of your payment for the work you do on the other days. Over the long run, if the government mandates a certain number of paid vacation days, then positions that currently offer fewer vacation days then that will become less lucrative. It’s always hard to know what will happen in the short-term because of nominal stickiness and the vagaries of labor market conditions on any given day, but one relevant point that should be familiar from the health care debate is that over the long run the total share of GDP going to labor force compensation is roughly constant at around 56 percent of GDP.
The Obscenity of the Right-Wing Professoriat, by Robert Reich: Harvard Professor Robert Barro opined in today’s Wall Street Journal that America’s high rate of long-term unemployment is the consequence rather than the cause of today’s extended unemployment insurance benefits. In point of fact, most states provide unemployment benefits that are only a fraction of the wages and benefits people lost when their jobs disappeared. Indeed, fewer than 40 percent of the unemployed in most states are even eligible for benefits... So it’s hard to make the case that many of the unemployed have chosen to remain jobless and collect unemployment benefits rather than work. Anyone who bothered to step into the real world would see the absurdity of Barro’s position. ... Right now, there are roughly five applicants for every job opening in America. ...
For Many, a New Job Means Lower Wages -After being out of work for more than a year, Donna Ings, 47, finally landed a job in February as a home health aide with a company in Lexington, Mass., earning about $10 an hour. Chelsea Nelson, 21, started two weeks ago as a waitress at a truck stop in Mountainburg, Ark., making around $7 or $8 an hour, depending on tips, ending a lengthy job search that took her young family to California and back. Both are ostensibly economic success stories, people who were able to find work in a difficult labor market. . Both women, however, took large pay cuts from their old jobs With the country focused on job growth and with unemployment continuing to hover above 9 percent, comparatively little attention has been paid to the quality of the jobs being created and what that might say about the opportunities available to workers when the recession finally settles. There are reasons for concern, however, even in the early stages of a tentative recovery that now appears to be barely wheezing along.
The Path to a High-Wage Society - American workers today face declining job security and dwindling earnings as companies downsize, move overseas, and shift more jobs to part-time workers. Last year, a survey by the Economic Policy Institute found that 44 percent of American families had experienced either the job loss of one or more members, a reduction in hours, or a cut in pay over the previous year. For the vast majority of workers, the costs of basic necessities are rising faster than incomes. As this special report of The American Prospect has demonstrated, government has ample powers to change these trends for the better. Republican critics liked to say that the best anti-poverty program is a job. The federal government has the capacity -- and responsibility -- to promote full employment, where everyone who wants to work has a job. But the kind of job -- the pay, benefits, security, and prospects for advancement -- are as important as the job itself.
The Skills Deficit - The slowdown has predictably led to calls for further fiscal and monetary stimulus. The argument seems simple: only a massive dose of government spending and massive central-bank support for the financial system prevented a slide into a second Great Depression, so more of the same medicine is now needed to prevent a slide back into recession.This argument seems particularly strong in the United States, which during the long boom years grew accustomed to unemployment rates of around 5% and steady growth in consumption. But, in assessing the outlook for the US economy, one should not compare low quarterly growth rates (the data for April-June are particularly disappointing) and the current unemployment rate of almost 10% to the “goldilocks” bubble period. A longer-term view is required, because the US is facing a structural-adjustment challenge that will be accompanied by high unemployment. The structural shift towards exports will be difficult and time-consuming mainly because producing the high-tech goods that the US should be exporting requires a skilled workforce, which has largely been lost and cannot be re-created overnight.
The cyclical, structural unemployment problem - Economists often describe unemployment as “cyclical” or “structural.” Cyclical unemployment results from broad economic slowdowns: As the economy turns, businesses lay off workers, meaning other businesses suffer, meaning more layoffs. Structural unemployment results from broad economic changes: An economy with a strong apple trade might be becoming an economy with a strong orange trade, and as that transformation happens, a lot of apple workers might be out of a job. Economic commentators such as Mohamed El-Erian, the head of PIMCO, have described the United States’ problem as mostly structural. The housing boom created millions of jobs in construction, development and realty, and those jobs are gone. Over at Project Syndicate, economist Brad DeLong makes the argument for cyclical unemployment:DeLong does not say that structural unemployment does not exist in the U.S. economy, just that the problem is primarily cyclical. In a few years, with unemployment still projected to be above 8 percent, the problem will primarily be a structural one, he notes.
Against Claims of “Structural Unemployment” - The Obama administration plans to take two new steps in the next few weeks to help struggling homeowners pay their mortgages, said Shaun Donovan, the secretary of Housing and Urban Development. The administration will begin a Federal Housing Administration refinancing effort to help borrowers who are struggling to pay their home mortgages, and will start an emergency homeowners’ loan program for unemployed borrowers so they can stay in their homes, Mr. Donovan said on “State of the Union” on CNN. “We are going to continue to make sure folks have access to home ownership,” he said. Home prices fell 1.6 percent in the second quarter from a year earlier as record foreclosures added to the inventory of properties for sale. The annual drop followed a 3.2 percent decline in the first quarter, the Federal Housing Finance Agency said last week in a report.
Cyclical vs Structural Unemployment part N - Kevin Drum stresses the very sound point that even if part of current unemployment is structural, we should stimulate to get rid of the part which is cyclical. I don't have a serious disagreement and choose to debate his guess as to the level of structural unemployment for the sake of debating. "The "normal" unemployment level is about five points less than it is today. I wouldn't be surprised if perhaps three of those points are cyclical and two are structural." He agrees with Annie Lowrey who presents the following analysis Most sectors have suffered from the turndown, but job losses are concentrated in some industries: In residential construction, they are down 38 percent since 2006. In health care and education, however, jobs are up. This analysis is accidental theory. Between the first sentence and the second, there is a theoretical argument that the cycle has the same effect on log employment in each sector. This argument makes no sense. More after the jump.
Why Cheaper Money Won't Mean More Jobs - Robert Reich - Can the Fed rescue the economy by making money even cheaper than it already is? A debate is being played out in the Fed about whether it should return to so-called “quantitative easing” The sad reality is cheaper money won’t work. Individuals aren’t borrowing because they’re still under a huge debt load. And as their homes drop in value and their jobs and wages continue to disappear, they’re not in a position to borrow. Small businesses aren’t borrowing because they have no reason to expand. Retail business is down, construction is down, even manufacturing suppliers are losing ground. That leaves large corporations. They’ll be happy to borrow more at even lower rates than now — even though they’re already sitting on mountains of money. But this big-business borrowing won’t create new jobs. To the contrary, large corporations have been investing their cash to pare back their payrolls. They’ve been buying new factories and facilities abroad (China, Brazil, India), and new labor-replacing software at home.
Why the Big Lie About the Job Crisis? And the $10 Trillion Answer - The August unemployment numbers are ugly, yet again. Nearly 30 million Americans are still jobless or forced into part-time jobs. The Bureau of Labor Statistics official unemployment rate is 9.6%. It's borader and more telling jobless rate (U6) of 16.7% confirms that we're stuck in our own version of the Great Depression. We'll need more than 22 million new jobs to bring us back to full-employment. . To get out of this quagmire we'll have to face up to two fundamental facts: 1. We really are in the midst of a horrific jobs crisis. All the happy talk about the economy being on the road to recovery is just plain old denial. We'll never find jobs for all the people who desperately need them until we recognize that this employment crisis poses a clear and present danger to our republic. Modern capitalist societies require full employment. When we don't have it for long periods of time, chaos ensues. What's missing in Washington is a sense of urgency. Denial is dangerous -- and an insult to the unemployed. 2. We must face up to the real causes of this mess. Unfortunately, a lot of Americans are succumbing to a wrong-headed narrative that has been pushed into our heads:
How to fix unemployment - Demand is weak, but not enough to account for so many jobless. There’s good reason to believe some of the unemployment is due to long-term structural problems. This means some of the unemployment comes from firms who fired workers from jobs that no longer exist. This is not caused by deficient demand; it happens when an economy goes through a structural change (more globalisation, new technology, permanently higher taxes) which leads to a permanent change in demand for labour and skills. To remedy this kind of unemployment requires more subtle long-term solutions. An enormous fiscal stimulus may restore the economy back to “full-employment”, but full employment might be the new structural level, much higher than the 5 or 6% pre-crisis level. Voters might be disappointed to find that trillions of future taxpayer dollars were spent to only reduce unemployment a little bit.
Heal Job Market By Cultural Renewal, Not Fed Intervention - Americans have been reminded of at least two things of late: In the end, deflation is significantly about jobs. Secondly, and also according to Ben Bernanke, while we wait for the jobs we must realize that “central bankers alone cannot solve the world’s economic problems.” These may be the most important words Bernanke has uttered during his tenure as Fed chief. Economic growth only matters when jobs appear, too. But where are the jobs going to come from? Should the Federal government hire many of the unemployed as temporary government project workers, stringently withholding the benefits of full federal employment? The answer is a guarded and qualified “yes:” Something must be done to help salvage the self-respect of the unemployed. If the U.S. Congress doesn’t do enough we face the proverbial risk that “idle hands are the devil’s workshop.”
How increased immigration would help fix the economy - The SF Fed’s Giovanni Peri has the latest research on the subject: Statistical analysis of state-level data shows that immigrants expand the economy’s productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers. The effects of immigration on US wages are large, positive, and significant: Over the long run, a net inflow of immigrants equal to 1% of employment increases income per worker by 0.6% to 0.9%. This implies that total immigration to the United States from 1990 to 2007 was associated with a 6.6% to 9.9% increase in real income per worker. That equals an increase of about $5,100 in the yearly income of the average U.S. worker in constant 2005 dollars. Such a gain equals 20% to 25% of the total real increase in average yearly income per worker registered in the United States between 1990 and 2007.
Immigrants Make U.S. Workers Richer - The San Francisco Fed is wading into the contentious debate over whether immigrants help or hurt employment for American citizens, in a paper that asserts new entrants to the nation help make almost everybody wealthier. The report counters those who believe immigrants to the U.S. take away the jobs of citizens and depress wages.“There is no evidence that immigrants crowd out U.S.-born workers in either the short or long run,” Peri writes. Instead, the evidence suggests “the economy absorbs immigrants by expanding job opportunities rather than by displacing workers born in the United States.”
Youth Unemployment Hit A Record High This Summer - In July, 51.1 percent of Americans between the ages of 16 and 24 years old were unemployed, according to new data from the U.S. Bureau of Labor Statistics (BLS). This marks the first time since 1948, when the government first started collecting this data, that less than half of all U.S. youth were employed in July. Each year from April to July, the youth labor force grows sharply as high school and college students -- and recent graduates -- search for summer jobs. This summer, the youth labor force grew by 2.4 million to a total of 22.9 million in July, which is typically the summertime peak for youth employment, while the number of youths employed grew 1.8 million to 18.6 million, according to the BLS. Though the increase in youth employment was slightly larger than last year's increase of 1.6 million, the percentage of the total youth population that was employed in July dropped 2.5 percentage points to 48.9 percent. This percentage has dropped by about 20 percentage points since its peak in July 1989. And, as the Wall Street Journal notes, rampant youth unemployment is not just an American problem.
Walking Away From a Win-Win-Win - CBPP - An emergency jobs program through which 37 states have provided subsidized jobs for nearly 250,000 otherwise unemployed parents and youth — helping families, businesses, and communities across America weather the recession — will end September 30 unless the Senate joins the House in voting to extend it. The TANF Emergency Fund, which President Obama and Congress created in last year’s Recovery Act, has given states over $1 billion to operate subsidized jobs programs that have proved successful on multiple fronts. The fund has been a “win-win-win,” helping unemployed families find work, businesses expand capacity in a difficult economic environment, and local economies cope with the recession. Without the fund, some 120,000 young people would not have had summer jobs and some 130,000 parents would not have had jobs to provide for their families’ basic needs; they would also have lost a valuable opportunity to build skills for the future.
Economic theory suggests symbiosis driven by self-interest, not rewards or punishment - Applying employment contract theory to symbiosis, a new paper suggests mutually beneficial relationships are maintained by simple self-interest, with partners benefiting from healthy hosts much as employees benefit from robust employers. The new work discounts the theory that host species have evolved to promote symbiosis by promising rewards or threatening punishment.Economists and biologists from Harvard University, the University of Toronto, and the University of East Anglia present the work in the Proceedings of the National Academy of Sciences."Cooperation between species, known as mutualism, is remarkably commonplace in nature, but the evolutionary origins of such partnerships remain murky," says Naomi E. Pierce, the Sidney A. and John H. Hessel Professor of Biology at Harvard. "Since symbiotic host species essentially 'employ' their symbionts, it occurred to us that economic theories explaining how and why employers reward or punish their workers might give us deeper insights into symbiosis. This approach reveals that punishment is far from ubiquitous in nature."
A deserted feeling in working-class America - Of all the groups in the Democratic orbit, it is labor that has assumed the most demanding role in this year's midterm elections: keeping the white working class from flooding into the Republican column. "When our canvassers call on our members on their doorsteps, they hear Glenn Beck or Bill O'Reilly in the background," says Dan Heck, who heads a massive union-sponsored program in Ohio devoted to persuading its members to vote this November for candidates who would mightily displease Beck and O'Reilly. Heck's organization, Working America, was created by the national AFL-CIO in 2004 to reach out to white, working-class voters in key swing states such as Ohio, Michigan and Pennsylvania. "Right now, we talk to 25,000 people every week," says Karen Nussbaum, the program's national director, "and we'll knock on a million doors in the next two months. The people we talk to are the volatile 40 percent in the middle of the electorate. They're angry, and they're not sure who to blame or what to do about it."
No holiday for labor unions - Unions are in trouble. They represent less than 13 percent of the workforce and less than 8 percent of private workers. Union workers still receive higher wages and are more likely to have employer-provided health insurance, pensions and paid sick leave than non-union workers. But when unions represented over 33 percent of all private workers in the 1940s, they drove wage increases for everyone -- non-union firms had to compete for good workers. Now, unions struggle just to defend their members' wages and benefits. Over the past decade before the Great Recession, productivity soared, profits rose and CEO pay skyrocketed, but most workers lost ground. Unions face constant attacks from corporations and conservatives. The most recent campaign -- designed as always to divide workers from one another -- assails the pay and particularly the pensions of public employees. Why should they have pensions, when many workers have lost theirs and get, at best, a retirement savings plan at work? In fact, in a civilized society, we would ask the reverse question. How do we create pensions -- beyond Social Security -- for workers across the economy, leveling up, rather than down?
Local Governments Shed Part-Time Workers in 2009, Census Says (Bloomberg) -- The number of part-time municipal- government workers shrank by 4.1 percent to 3.25 million in 2009 even as full-time state and local employment remained the same, the U.S. Census Bureau said today. The bureau’s annual snapshot of government employment, taken every March, showed 16.6 million full-time workers in 2009, statistically unchanged from 2008. Local governments -- including counties, cities and school districts -- accounted for 12.2 million full-time employees, and state governments had 4.4 million, according to the Census data. Overall, part-time employment fell 2 percent.
Food Stamps Went to Record 41.3 Million in June, USDA Says (Bloomberg) -- The number of Americans receiving food stamps rose to a record 41.3 million in June as the jobless rate hovered near a 27-year high, the government said. Recipients of Supplemental Nutrition Assistance Program subsidies for food purchases jumped 18 percent from a year earlier and increased 1.2 percent from May, the U.S. Department of Agriculture said today in a statement on its website. Participation has set records for 19 straight months. About 40.5 million people, more than an eighth of the population, will get food stamps each month in the year that began Oct. 1, according to White House estimates. The figure is projected to rise to 43.3 million in 2011.
Record number in government anti-poverty programs — Government anti-poverty programs that have grown to meet the needs of recession victims now serve a record one in six Americans and are continuing to expand. More than 50 million Americans are on Medicaid, the federal-state program aimed principally at the poor, a survey of state data by USA TODAY shows. That's up at least 17% since the recession began in December 2007. "Virtually every Medicaid director in the country would say that their current enrollment is the highest on record," The program has grown even before the new health care law adds about 16 million people, beginning in 2014. That has strained doctors. "Private physicians are already indicating that they're at their limit," says Dan Hawkins of the National Association of Community Health Centers.More than 40 million people get food stamps, an increase of nearly 50% during the economic downturn, according to government data through May. The program has grown steadily for three years.
Financial Depression Spreads Among Seniors -Among the hardest hit now are more than 2-million people age 55 and over, half of whom have been looking for work for six months or longer. For them, the Great Recession is a no-fooling, deepening Depression.Many of these seniors have no families to care for them. Others are too proud to ask their families, churches, or relief agencies to help them in their time of need. Even so, many a proud, independent, well-dressed senior is a soup kitchen regular because it's either that or go hungry.Many seniors have been loyal to a corporation for much or all of their working lives only to discover the corporation has no loyalty to them. Instead, their employer laid them off before the retirement age and hired a younger, cheaper worker to replace them or just shipped their job to an office or plant on foreign soil. Many seniors are right to feel betrayed.
How panhandlers use free credit cards - Over the past two weeks, I wandered Toronto’s downtown core with five prepaid Visa and MasterCard gift cards, in $50 and $75 denominations, waiting for people to ask for money. When they did, I asked them what they needed. A meal at a restaurant, groceries, a new pair of pants, they said. I handed out the cards and asked that they give them back when they’d finished shopping. I either waited at a coffee shop while they shopped or — in the case of those who could not buy what they needed nearby or were reticent about leaving their panhandling post — I said I’d return on another day to pick up the card. That’s when I would reveal that I was a journalist.
To Add Jobs, Revive Revenue Sharing - Robert Shiller - In my last column, I called for big, temporary government programs aimed directly at putting people back to work. But how might we best accomplish this? The clock is ticking, and we don’t have time to create new national organizations to employ people. Instead, the most efficient approach is to use existing organizations for specific ideas and projects. State and local governments as well as nonprofit and other organizations need to be mainstays in this effort. We need to enlist their help — without telling them exactly what to do. As for a framework, think of the general revenue sharing program adopted by Congress in 1972. President Richard M. Nixon advocated general revenue sharing to offset the tendency for power to be concentrated in Washington. Give local governments the money and “put the power to spend it where the people are,” he said. Support for the idea was not confined to Republicans. A leading Democrat, Senator Hubert H. Humphrey, supported it in 1972, saying that federal taxes were more progressive than state and local ones and that federal money could be spent more effectively by people with local knowledge than by “some agency head in Washington.”
Property Tax Revenue Increased As Property Values Fell - The recession that began in December 2007 was precipitated by a financial crisis which in turn was triggered by the popping of a real estate bubble, particularly in residential property. And indeed, property values did decline dramatically. The Case-Shiller index, a popular measure of residential home values, shows a drop of almost 16 percent in home values across the country between 2007 and 2008. As property values fell, one might expect property tax collections to have fallen commensurately, but in most cases they did not. Data on state and local taxes from the U.S. Census Bureau show that most states' property owners paid more in FY 2008 (July 1, 2007, through June 30, 2008) than they had the year before (see Table 1). Nationwide, property tax collections increased by more than 4 percent. In only four states were FY 2008's collections lower than in FY 2007: Michigan, South Carolina, Texas and Vermont. And in three states—Florida, Indiana and New Mexico—property tax collections rose more than 10 percent.
State Tax Revenues Tick Up - Speaking of the different business models of each of the 50 states, those business models finally seem to be functioning a little better: state taxes rose modestly in the second quarter. They are still below their prerecession levels, however.Preliminary tax collection numbers released today by the Rockefeller Institute show that overall state tax revenues grew 2.2 percent in the second quarter of 2010, compared with same period a year earlier. This was the second consecutive quarter of overall year-over-year growth.During the first half of this year, the growth in tax revenues was driven by an increase in both sales taxes and personal income taxes. For four consecutive quarters, though, corporate income tax revenues have fallen, must recently by 18.8 percent on a year-over-year basis. And even the positive growth in personal income taxes was nothing to write home about, as it was largely because of a legislated tax increase in California. Excluding California, state personal income tax collections for the whole country during the second quarter declined 1.1 percent when compared to the same quarter in 2009.
States That Received the Most Federal Funds - Obligations for federal domestic spending rose 16 percent in fiscal year 2009 to $3.2 trillion. That comes out to $10,548 per person living in the United States. Alaska received nearly twice the national average, taking in $20,351.13 per resident, the most of any American state. The state with the second-highest total in per-capita federal funds received was Virginia, at $19,734. The District of Columbia, however, received an even higher amount per capita than both those states. The nation’s capital received $83,196.12 per resident, mainly because of salaries and wages paid to the many federal employees who work there.The state receiving the least federal money per resident was Nevada, which obtained $7,148.49 per capita, followed by Utah with $7,434.65 per capita.Click on the interactive map below to see the amount of per-capita funds received for different categories of federal spending (retirement and disability, grants, procurement, salaries and wages, and other direct payments).
Being broke costs state $550 million - The state's miserable bond rating has driven up borrowing costs for state government by more than $500 million since last year, a government watchdog group says. The nonpartisan, Chicago-based Civic Federation analyzed the near-record borrowing that the state has undertaken since last September and looked at similar borrowing during the same period in other states that have higher bond ratings than Illinois. The result was a staggering $551.3 million extra that state taxpayers are having to devote to support the state's thirst for debt because of a series of rating downgrades, the group says in a report being released today.
California Lawmakers Fail To Pass Budget By End Of Session - In Sacramento tonight, California state lawmakers wrap up a two-year legislative session. But they'll have to return to the capital at some point to pass a state budget. California legislators passed hundreds of bills — but not the most important one. Two competing state spending plans — one by Democrats and one by Republicans — failed to get enough votes. The failure to pass a spending plan creates some real consequences for California. The state controller has already deferred September's payments to school districts, and he’s preparing to pay the bills with IOUs.
California `Budget Kabuki' Impasse Increases Schwarzenegger Borrowing Cost (Bloomberg) -- California’s borrowing costs are rising, even as Governor Arnold Schwarzenegger says he’s not ready to call lawmakers into special session to eliminate a $19.1 billion deficit before the state runs out of cash. The extra yield investors demand on 10-year California bonds rose to 124 basis points above AAA rated municipal securities yesterday, up 14 percent in a week, Bloomberg Fair Value Index data show. The increase comes as the state will need to borrow as much as $10 billion in short-term notes within four weeks of any budget agreement and more than $6 billion in longer-dated bonds by December for public-works projects
Los Angeles Uses Light to Fight Crime -Lights are going on across the country as cities try to cut crime by flipping a switch. Los Angeles this year added eight parks to its Summer Night Lights program, which now keeps the lights on until midnight at 24 parks in neighborhoods with high levels of gang-related crime, as part of a broader community-involvement effort. Earlier this year, Joplin, Mo., reported a 47% drop in crime since 2007, when it started adding or replacing more than 1,000 lights throughout the city to reduce crime. And in other cities, like Fresno, Calif., plans to turn off street lights to cut carbon emissions and reduce costs have been thwarted by resistance from those with concerns about crime levels. The idea is that increased illumination gives criminals fewer places to commit their illegal activities inconspicuously and instills in them a fear of being caught.
Rising Prison Population Dampens Hopes Of Budget Relief - Connecticut's prison population stood poised Tuesday to record its fourth consecutive monthly increase, a trend likely to put a damper hopes that a prison closure could help balance the state's budget. The latest surge in the inmate population, which approached 18,600 Tuesday, was attributed largely to an unanticipated jump in the number of unsentenced prisoners. Connecticut politicians have been proposing prison closures as a means to help balance the state's finances. The legislature's nonpartisan Office of Fiscal Analysis is projecting a $3.37 billion shortfall built into the 2011-12 budget, an amount equal to nearly 20 percent of current spending.
The inflationary impact of the recession - ANNIE LOWREY directs us to a fascinating, though troubling, portrait of life within an American prison:[B]lack market prices were suddenly going through the roof. The price of a deck of smokes tripled. There was an actual economic reason about this. I went away in Michigan, where a lot of people lost their houses, mostly poor people already. When they had to move away from the prison, it meant they couldn’t bring their loved ones as much contraband group, which meant the price of what there was sky rocketed. And the worse things got, the more the people who worked in the store would wonk and take home with them, which meant stocks ran low which [screwed] us even further. Of course, if you're interested in reading more about America's criminal justice system, that was recently the subject of an Economist cover package.
Budget Woes Threaten Police And Firefighters' Compensation In Grand Rapids - Grand Rapids is West Michigan's largest city, and it's currently sinking in debt. If the city runs out of money, city parks and streets, and the repairs they need, will be in jeopardy. When the current fiscal year ends, Grand Rapids will be almost $2.5 million in the hole. Cutting benefits to police and fire departments could save a lot of money, but the city won't be able to pass such measures without a fight. City leaders know that Grand Rapids will have to tighten its belt again soon. The mayor says the $20 million in painful budget cuts passed in 2009 are just a prelude to what's to come if things don't change.
Bankruptcy on horizon for Pennsylvania capital - The city of Harrisburg has said that it will not make a $3.3 million municipal bond payment due in two weeks, a decision that could move the Pennsylvania capital closer to bankruptcy. The city's decision, announced in a letter dated Monday, is highly unusual because it saves a relatively small sum of money while compromising Harrisburg's ability to restructure its overwhelming debt and raise money in the future. "This shows that the city is failing to function," said Matt Fabian, managing director of Municipal Market Advisors, a Massachusetts-based research firm. "Now it seems that a municipal bankruptcy filing is almost a foregone conclusion."
Homelessness Up 50% In New York City - If you think you've been seeing more people sleep on city streets, statistics back up the perception. The homeless population living on New York City streets has gone up 50 percent in the past year, according to city statistics reported by the HellsKitchenLife.com blog.The New York City Department of Homeless Services conducts a yearly survey of the streets of the city to count the number of homeless who are not in shelters. The HOPE survey was conducted in January 2010.The number of homeless in the borough of Manhattan was up 47 percent in the past year, according to the count. The 2010 count had 1,145 people living in the streets. That is up 368 from 2009.Brooklyn had the biggest increase of any borough. It saw a homeless increase of more than 100 percent in 2010. More than 1,000 people now live in New York City's subway system -- up 11 percent in the past year.
The fastest-growing group among local homeless: families - Parents with children are the fastest-growing yet least-visible segment of the homeless population, far more likely to be doubled up in the homes of friends or living in their cars than to be at a busy intersection asking for help.At its core, homelessness is driven by poverty and lack of affordable housing, and many believe the true breadth of the problem may not yet be evident as families who lost their homes in this recession still hang on with relatives.Yet even as their numbers grow, the system in place to help homeless families — a sprawling network of programs and agencies offering everything from child care to subsidized housing — is bottlenecked at every turn.
Abandoned boats litter waters in tough economy - States across the USA are taking steps to deal with an armada of derelict boats abandoned by their owners in a tough economy: In Massachusetts,Democratic Gov. Deval Patrick signed a bill this month that gave local governments the power to seize abandoned vessels. The problem was growing faster than the state's ability to deal with it, says Michael Nichols, legal counsel to Democratic state Rep. Antonio Cabral, who introduced the bill. In the San Francisco Bay Area, as many boats were reported abandoned by the Coast Guard in the first quarter of 2009 as in all of 2008, says Deb Self, executive director of San Francisco Baykeeper, an environmental group. The number of eyesores, many of them leaking fuel and chemicals, continued to grow this year, from 64 in February to 76 this month, even after 12 boats were hauled away, Self says. Twelve states, including Kansas, Missouri and Tennessee, have passed laws on abandoned boats in the past five years
Illinois can't even pay office utility bills for legislators - State Sen. Dave Luechtefeld was in session in Springfield earlier this year when he got a call from his secretary back in his district office. She was calling from her cell phone because the district office phones, which are paid for by the state of Illinois, had been disconnected for nonpayment."That was the first time," recalled Luechtefeld, R-Okawville.His office phones were later cut off again, with the state still months behind in paying for the service. He's now getting renewed threats from the phone company of a third cutoff. "It's laughable," he said, "but it's not." It's the same story at the district offices of Illinois' elected legislators across the state: Phone, utilities, garbage and rent payments months behind, prompting a monthly flurry of terse late notices and cutoff threats to offices with the state emblem on the doors.
Rising school fees result of state's late payments - SPRINGFIELD - This school year, many parents across the state are having to pay a little more to send their kids to school. District officials throughout the state say they have bumped up their fees to account for late state payments to their districts. School fees vary from district to district and can be charged for registration, textbook rentals, physical education attire, driver's education, and sports and activities.
When You Don't Spend Any, the Velocity of Money becomes Zero - Edmoney is tracking the allocation and spending of education-related stimulus grants. The interactive map is here. Some states have gotten the funds into circulation better than others. Selected states below:
Why are Alabama schools going broke? Alabama made national headlines this week when 25 more schools reported they will likely have to extend lines of credit to remain open, in addition to the five schools that borrowed from banks last year.According to a CNN report, Alabama schools suffer from a “combination of having the lowest per capita property tax collections in the nation … a constitution that prohibits local governments from independently increasing taxes, and a state-funded education system with funds that stem almost exclusively from income and sales tax revenues.”Namely, Alabama schools are ailing due to inadequate funding. The reporter buttressed the thesis by pointing to the 20 percent cut in the state’s education budget over the last three years.
Test Failure - For public school students, back-to-school means not just long hours in a classroom, but a tough regimen of tests designed to measure their proficiency in basic subjects like math and reading. Increasingly, these same tests are also being used to evaluate teachers. In 2001, Congress approved the No Child Left Behind Act, requiring all schools to measure student performance through standardized tests. The volumes of data that have been collected since then have also been used to “grade” teachers, determine pay raises, and sometimes terminate them. More recently, schools have applied a method of value-added modeling, or VAM, in order to apply a more sophisticated analysis to the test score results. But even when value-added modeling is used in the analysis, student test scores are not reliable indicators of teacher effectiveness, according to the EPI report, Problems with the Use of Student Test Scores to Evaluate Teachers. The authors find that the accuracy of these analyses of student test scores is highly problematic. They argue that the practice of holding teachers accountable for their student’s test score results should be reconsidered.
Problems with the use of student test scores to evaluate teachers - Every classroom should have a well-educated, professional teacher, and school systems should recruit, prepare, and retain teachers who are qualified to do the job. Yet in practice, American public schools generally do a poor job of systematically developing and evaluating teachers. Many policy makers have recently come to believe that this failure can be remedied by calculating the improvement in students’ scores on standardized tests in mathematics and reading, and then relying heavily on these calculations to evaluate, reward, and remove the teachers of these tested students. While there are good reasons for concern about the current system of teacher evaluation, there are also good reasons to be concerned about claims that measuring teachers’ effectiveness largely by student test scores will lead to improved student achievement.
When does holding teachers accountable go too far? - Schools generally do not allow parents to see any part of a teacher’s past evaluations, for instance. And there is nothing resembling a rigorous, Consumer Reports-like analysis of schools, let alone of individual teachers. That, however, may be starting to change. A few months ago, a team of reporters at The Los Angeles Times and an education economist set out to create precisely such a consumer guide to education in Los Angeles. The reporters requested and received seven years of students’ English and math elementary-school test scores from the school district. The economist then used a statistical technique called value-added analysis to see how much progress students had made, from one year to the next, under different third- through fifth-grade teachers. The variation was striking. Under some of the roughly 6,000 teachers, students made great strides year after year. Under others, often at the same school, students did not. The newspaper named a few teachers — both stars and laggards — and announced that it would release the approximate rankings for all teachers, along with their names.
A roof (and a mortarboard) over your head - ANNIE LOWREY directs us to still more interesting new research: "These estimates imply that the recent housing bust could have a significant negative effect on college enrollment through the reduction in housing wealth of families with college-age children." Er, yes. Though one suspects that high unemployment and slashed state budgets could be at least as important. My first impression was that this might not be the result it seems to be—that the newly liquid housing wealth (and low interest rates) may simply have led some households to shift borrowing for college from other sources to home equity. But that doesn't seem to be what's happening: I find four-year growth in housing equity raises college enrollment only post-2000, and the effect is localized to lower-resource households. Housing issues aside, this suggests that lack of access to credit is reducing human capital investment among lower income households. And that's terrible! As interesting as the housing equity story is, the big story here, to me, is the missed policy opportunity.
Housing Bust Makes Paying for College Harder - Another casualty of the housing bust: Higher education. The biggest financial asset for most American families — and in many cases, the only asset — is their home. When real estate values skyrocketed in the early 2000s, many people borrowed against the value of their houses and spent far more than their incomes alone allowed. Now, of course, we’re living through the aftermath, and it ain’t pretty. But while plenty of that money may have been spent superfluously, it also appears to have played an important role in funding college educations, particularly for lower income families, according to Cornell University economist Michael Lovenheim. ( Read the study)
Student Loan Debt Clock near $850 billion - This clock reports an estimate of current student loan debt outstanding, including both federal and private student loans. Total student loan debt outstanding exceeded total credit card debt outstanding for the first time in June 2010. The seasonally adjusted figure for revolving credit in the Federal Reserve's G.19 report (current report, historical data) was $826.5 billion in June 2010. (Credit card debt represents as much as 98% of revolving credit.) Revolving credit started declining in September 2008 when it reached a peak of $975.7 billion. The decrease is probably due a combination of higher minimum payments on credit cards, which were increased to 4% from 2%, lower credit card limits and tighter credit underwriting. Student loan debt, on the other hand, as been growing steadily because need-based grants have not been keeping pace with increases in college costs. Federal student loan debt outstanding reached approximately $665 billion and private student loan debt reached approximately $168 billion in June 2010, for a total student loan debt outstanding of $833 billion. Total student loan debt is increasing at a rate of about $2,853.88 per second.
Student Loan Debt - the gateway drug to debt slavery (infographic)
What percentage of college graduates get a job that has anything to do with their major? - This study uses data from the Follow-up of Graduates Survey – Class of 2000, to look at the determinants of education-job match among Canadian university graduates. From a public policy perspective, the question of education-job match is relevant given the substantial investment society puts into its postsecondary institutions, and the role devoted to human capital in economic development. Our results indicate that one graduate out of three (35.1%) is in a job that is not closely related to his or her education. The most important result is that demographic and socioeconomic characteristics (gender and family background) do not significantly affect the match. On the other hand, education characteristics strongly influence match, with field specific programs (such as “Health sciences” and “Education”) having the highest likelihood of obtaining an education-job match. In addition, the level of education (i.e. graduates with a postgraduate degree vs. a bachelor degree), as well as good grades, strongly affect the match. Employment characteristics also affect the match, but to a mixed extent, with certain characteristics, such as industry, as well as working full-time (vs. part time) affecting the match to a strong extent, while others, such as the permanence of employment, as well as the method used to obtain employment, not having a significant effect on match.
Did Californians break their contract? - Mark Thoma, whom I admire, approvingly posts Michael O'Hare's letter to his students. Professor O'Hare says something that really bothers me: ...for a variety of reasons, California voters realized that while they had done very well from the existing contract, they could do even better by walking away from their obligations and spending what they had inherited on themselves. “My kids are finished with school; why should I pay taxes for someone else’s? Posterity never did anything for me!” As Professor O'Hare correctly notes in the header to his blog, "everyone is entitled to his own opinion, but not his own facts." So before we accuse middle-aged Californians of being greedy, we should consider four things. First, California ranks 4th in state and local per capita spending in the country. Second, about 2/3 of California bond referenda that go to the public receive the 2/3 super-majority necessary to get passed. Third, we in Los Angeles County voted two years ago, in the middle of a recession, to tax ourselves to pay for transportation infrastructure. Finally, we absorb more people from the rest of the world relative to our population than any other state. These facts are more consistent with generosity than greed.
Just As Berkeley Rejoices About Its Finances, UC System Revealed To Have $20 billion Pension Shortfall - Over the last couple of years, Berkeley, the flagship university of the UC system, has come under a fair amount of financial strain prompting cutbacks and outrage among the student body. But good news! According to its Chancelor, the school is back on track, thanks to hiked tuition and an increase in private donations. He's apparently "cautiously optimistic." But before you get too excited about the state of the UC system, take a look at the big picture. The LA Times is citing a new report that says the UC pension system faces a $20 billion shortfall (weirdly the article doesn't acknowledge the panel that produced the report). Apparently a really silly short-term decision may bear part of the blame: Much of the problem with the retirement fund stems from a decision 20 years ago when UC and its employees stopped paying into the retirement system because it was believed to be overfunded, officials said. The university and employees resumed payments this year, but concerns about the possibility of unfunded pensions and post-retirement healthcare continue, according to the report.
Texas A&M System Will Rate Professors Based on Their Bottom-Line Value - The Texas A&M University System is moving ahead with a controversial method of evaluating how much professors are worth, based on their salaries, how much research money they bring in, and how much money they generate from teaching, The Bryan-College Station Eagle reports. Under the proposal, officials will add the money generated by each professor and subtract that amount from his or her salary to get a bottom-line value for each, according to the article. Frank Ashley, vice chancellor for academic affairs for the 11-campus system, said the public wanted accountability. "It's something that we're really not used to in higher education: for someone questioning whether we're working hard, whether our students are learning. That accountability is going to be with us from now on."
The higher education system of the future - Camille Paglia offers a criticism of todays college education and appeal to a more job centered approach focused on trades:Jobs, and the preparation of students for them, should be front and center in the thinking of educators. The idea that college is a contemplative realm of humanistic inquiry, removed from vulgar material needs, is nonsense. The humanities have been gutted by four decades of pretentious postmodernist theory and insular identity politics. They bear little relationship to the liberal arts of broad perspective and profound erudition that I was lucky enough to experience in college in the 1960s. I don’t know how much of a solution she has offered.She wants us to “revalorize the trades”, and make sure that “every four-year college or university should forge a reciprocal relationship with regional trade schools”. I agree these are good things, but ultimately the problem lies with the incentives and constraints these institutions face, not with mission statements or relationships.Until we know exactly why it is that universities aren’t already operating with an “obligation to think in practical terms about the destinies of their charges” we won’t know how to make them be better.
Retirement system's cost to rise dramatically soon - The amount of money the West Chester Area School District must contribute to PA's Public School Employees Retirement System will jump from $2.6 million in the 2011-12 school year to $14 million in the 2013-14 school year, according to the district's current projections. This is a dramatic increase, considering the district's 2010-11 budget was $203 million and 60 to 70 percent of the district's expenses are dedicated to salaries and benefits — a percentage that, because of contractual obligations, is difficult to reduce or change. Schools across the state are facing similar increases in their retirement system contributions, and their budgets are similarly constrained
Older people enjoy reading negative stories about young| Reuters - Older people like reading negative news stories about their younger counterparts because it boosts their own self-esteem, according to a new study. German researchers said older people tend to be portrayed negatively in society. Although they are often described as wise, they are also be shown as being slow and forgetful."Living in a youth centered culture, they may appreciate a boost in self-esteem. That's why they prefer the negative stories about younger people, who are seen as having a higher status in our society," said Dr. Silvia Knobloch-Westerwick, of Ohio State University
Key Kentucky state worker pension fund in distress — The largest pension fund for state workers is considered one of the most troubled public employee pension funds in the country, with administrators having to cash out investments each month to pay benefits. The Kentucky Employees Retirement System — which covers 84,000 retirees and workers in jobs that don't involve hazardous duty — faces a roughly $6billion shortfall. The situation is likely to get worse before it gets better. The system has approximately 40percent of the assets it needs to cover benefits now. By 2017 that figure will be at a dangerously low 16percent, according to a recent report from a consultant hired by the system
New York's DiNapoli Cuts Pension Investment Outlook, Raises Contributions (Bloomberg) -- New York’s $124.8 billion pension fund, the nation’s third-largest, reduced the assumed rate of return on its investments to 7.5 percent from 8 percent as it recovers from market losses, Comptroller Thomas DiNapoli said. DiNapoli, the sole trustee of the pension fund, said state and local government employers’ payments to the fund will increase to about 16.3 percent of payroll in February 2012, from 11.9 percent due in February 2011. The fund covers 1 million current and retired government workers.
Schwarzenegger’s pension math - Since I’m interested in the value of a guaranteed real income, this sentence jumped out at me from Arnold Schwarzenegger’s recent WSJ op-ed: Few Californians in the private sector have $1 million in savings, but that’s effectively the retirement account they guarantee to public employees who opt to retire at age 55 and are entitled to a monthly, inflation-protected check of $3,000 for the rest of their lives. The problem is, I can’t make the math work. You can argue until you’re blue in the face about proper discount rates, but at the very least any pension plan should be able to invest its money to keep up with inflation. But let’s see what happens with a 0% real discount rate, not least because it makes the math easier.
Inflationary Policy Is WMD on Babyboomers - Moderate inflation is good. This has been held as self-evident truth in modern monetary policy. But this will quickly become antisocial as the entire west goes through a structural change in demographics caused by babyboomer retirement. BoJ seems to have realized this early and well; they have managed their social transition with remarkably success, despite much sneering from western economists (I argued here that the Japanese lost decades is in fact a great achievement that US will only wish to match in 10 years). ECB seems to have realized this judging from their proclaimed resolve for austerity as opposed to unlimited simulus. The big question is: when will Fed and US government realize this?
How illegal immigrants are helping Social Security - The contributions by unauthorized immigrants to Social Security -- essentially, to the retirement income of everyday Americans -- are much larger than previously known, raising questions about the efforts in many states and among Republicans in Congress to force these workers out. In response to a research inquiry for a book I am writing on the economics of immigration, Stephen C. Goss, the chief actuary of the Social Security Administration and someone who enjoys bipartisan support for his straightforwardness, said that by 2007, the Social Security trust fund had received a net benefit of somewhere between $120 billion and $240 billion from unauthorized immigrants. That represented an astounding 5.4 percent to 10.7 percent of the trust fund's total assets of $2.24 trillion that year. The cumulative contribution is surely higher now. Unauthorized immigrants paid a net contribution of $12 billion in 2007 alone, Goss said.
The case against reforming Social Security - In my previous post, I wrote that "if you're worried about [Social Security]'s finances, you can really only do one of two things: Lower the amount of money the program sends out or increase the amount of money it brings in."That's pretty much true. But there's no real reason to be worried about "Social Security's finances." What we're worried about, rather, is the federal government's finances. If Social Security is proving a drag on the federal budget, then one option is make changes to Social Security, but another option is to make offsetting changes elsewhere in the federal budget.And increasingly, that's my preference. It's a testament to Social Security's efficiency that every option for balancing its books is a bad option. Raising the retirement age hurts real people. Raising taxes also hurts real people. Cutting benefits hurts -- well, you get the point. Social Security is adding value. Any change you make will either increase how much we're spending for that value or decrease the total value we're getting from the program.
Gov’t Now Pays 30 Cents Of Every $1 in Income - By at least one measure, government is playing an unprecedented role in the economy: In recent months, more than 30 cents of every dollar in personal income came directly from the government, new Commerce Department data show. That’s equal to about $3.8 trillion of $12.5 trillion in total personal income on an annualized basis. Transfer payments (income support and health insurance benefits) ticked up to a record 18.4% of personal income last month. Another roughly 12% of income came from wages and benefits to current government employees at the federal, state and local levels. Transfer payments as a share of personal income are up by nearly half from 12.7% in 2000 and more than a quarter from 14.4% in 2007. The growth is a combination of the inexorable rise of spending on Social Security and health care entitlement programs, as well as a spike in unemployment compensation, food stamps and Medicaid due to weak labor markets. USA Today reported this week that 1 in 6 Americans are being served by anti-poverty programs.
The Medicare Headline You Didn't See (and won't) - For years we have been regaled with scary, scary numbers about how Medicare's projected unfunded liability was in the TENS OF TRILLIONS. And sure enough if you consulted the Medicare Report and examined the actuarial projections for Medicare Part A you would find that number. But a funny thing happened with the 2010 Report and is shown in the data table above: the 75 year number is down to $6.9 trillion, a big number but only 0.5% of projected GDP over that period, and the infinite future number is actually a $600 billion SURPLUS. Oddly this multi-multi trillion dollar turnaround did not result in banner headlines in the NYT or the WaPo, nor did congratulatory telegrams pour into the offices of Nancy Pelosi, Harry Reid and dare I say it Barack Obama from the folk at Cato and Concord that have been weeping bitter, bitter tears about 'intergenerational inequity' and begging us to 'think about the grandchildren'. Because that is not how they roll nor was any of this what the kerfluffle has been about. The fundamental hostility to Medicare among the self-style deficit hawks is not because it is broken, but instead because it works.
Employers Push Costs for Health on Workers - As health care costs continue their relentless climb, companies are increasingly passing on higher premium costs to workers. The shift is occurring, policy analysts and others say, as employers feel more pressure from the weak economy and the threat of even more expensive coverage under the new health care law. In contrast to past practices of absorbing higher prices, some companies chose this year to keep their costs the same by passing the entire increase in premiums for family coverage onto their workers, according to a new survey released on Thursday by the Kaiser Family Foundation, a nonprofit research group. Workers’ share of the cost of a family policy jumped an average of 14 percent, an increase of about $500 a year. The cost of a policy rose just 3 percent, to an average of $13,770.
Healthcare costs: Employers push rise in costs onto workers… As employers struggle with rising healthcare costs and a sour economy, U.S. workers for the first time in at least a decade are being asked to shoulder the entire increase in the cost of health benefits on their own. The average worker with a family plan was hit with 14% premium increase this year, pushing the bill to nearly $4,000 a year, according to a survey by the nonprofit Henry J. Kaiser Family Foundation and the Health Research and Educational Trust.That is the largest annual increase since the survey began in 1999 and a marked change from previous years, when employers generally split the rise in the cost of premiums with their employees.
State Retiree Healthcare Costs Could Double Over Next Nine Years - The annual cost of providing healthcare benefits for retired teachers and state government employees will more than double over the next nine years from $1.27 billion to almost $2.75 billion, adding to New Jersey’s long-term budget woes, according to the state’s actuarial consultant. In a 65-page report delivered July 20 to the state Division of Pension and Benefits, Aon Consulting projected that healthcare costs for retirees under age 65 will grow 8.5 percent to 9.5 percent per year for medical coverage and 10.5 percent for prescription benefits. The Somerset firm projected a 5 percent annual increase in medical and prescription costs for retirees over age 65, for whom the federal government’s Medicare Plan B picks up much of the expense. Aon also concluded that New Jersey is on the hook for $68 billion in future health benefit payments to current and retired teachers and government workers, a figure in line with an analysis from the Pew Center for the States six months ago showing New Jersey with an unfunded liability for retiree health benefits of $68.9 billion by the end of 2007, the highest in the nation.
Cash-Poor Governments Ditching Public Hospitals - Faced with mounting debt and looming costs from the new federal health-care law, many local governments are leaving the hospital business, shedding public facilities that can be the caregiver of last resort. More than a fifth of the nation's 5,000 hospitals are owned by governments and many are drowning in debt caused by rising health-care costs, a spike in uninsured patients, cuts in Medicare and Medicaid and payments on construction bonds sold in fatter times. Because most public hospitals tend to be solo operations, they don't enjoy the economies of scale, or more generous insurance contracts, which bolster revenue at many larger nonprofit and for-profit systems
Survival rates are not the same as mortality rates - Yesterday’s post drew a stronger response than I expected. Surprisingly, the email I received was about evenly split between people who claimed no one serious ever says “we have the best health care system in the world” and people who claimed “we have the best health care system in the world”. Regardless, many of the emails attesting to the superiority of the US health care system proclaimed “Our survival rates for [fill in the cancer] are better!” And while we can argue whether our ability to extend the life of a relatively small number of people a short period of time is the true hallmark of quality, it’s our fixation on survival rates and not mortality rates that is telling. Mortality rates define the number of people who die of a certain cause in a year divided by the total number of people. For instance, the mortality rate for people with lung cancer in the United States is 53.4 per 100,000 people. Survival rates are something else entirely. They calculate the percentage of people with a disease who are still alive a set amount of time after diagnosis. The five year survival rate for people with lung cancer in the US is 15.6%.
Why the ACA is a transfer program - The following entertaining passage by Steve Landsburg is worth a read, as his the entire post from which it is excerpted. [E]fficiency analysis strikes down political smokescreens. Like this: …And now, you see, thanks to the economist’s insistence on thinking about efficiency, we end up having an honest debate about the politician’s real goal instead of a dishonest debate about the politician’s feigned goal. However the debate turns out, that’s a useful exercise.I agree that thinking about efficiency is completely worthwhile. I’ve said so in blog posts and done so in my work. Making the not-too-risky inference from the above quote that Landsburg would consider the ACA a transfer program (since it subsidizes health care insurance for lower-income individuals an families), I agree with him on that too. However, I disagree that the politician’s goal in his hypothetical is necessarily to redistribute wealth. In fact, I think the politician was duped by the economist. This reminds me of Greg Mankiw’s claim that the ACA is an merely an excuse to redistribute income.
16.6 million small business employees could benefit from ACA - —16.6 million small business employees work in firms that will be eligible for tax credits under the Affordable Care Act (ACA), according to a new Commonwealth Fund report. The credits, designed to offset health insurance premium costs and help small businesses afford and maintain health insurance, are available in taxable years beginning in 2010. Researchers estimate that by 2013, 3.4 million workers may work in firms that take advantage of the tax credit. The tax credits increase in value in 2014, from up to 35 percent of the employer's premium contribution to up to 50 percent. The report, Realizing the Potential of Health Reform: Small Businesses and the Affordable Care Act of 2010, finds that relief for small businesses is greatly needed, as most of the erosion in employer health coverage over the last decade has taken place in small firms. Nearly all firms (98 percent) with 200 or more employees offer health benefits compared to only 46 percent of firms with fewer than 10 employees. In addition, 52 percent of workers in firms with fewer than 50 employees are uninsured or underinsured.
Malkin Unhappy, Obamacare Rattling Insurers. It's All Good - When Assurant Health, a Milwaukee-based health insurance company, announced this month it was laying off 130 employees in Milwaukee and Minneapolis, it blamed the health care overhaul for its struggles -- and at least one prominent critic of reform quickly chimed in. "There are more and more Obamacare job-killing stories piling up like this one," conservative columnist Michelle Malkin wrote in an item with the headline, "The White House War on Jobs." I know a lot of smart, thoughtful health reform critics. Malkin is not one of them. But we will likely read more news stories like these in the coming months. And, given public ambivalence about health reform and anger over the economy, we'll likely hear more naysayers making these arguments.
Genetic Information, Health Insurance, and "Socialized Medicine" - Maxine Udall - Yet the spectre of "socialized medicine" prevents us moving to single payer, where the incentives for prudent life cycle management of risk across all age and income groups would be better aligned. Why, when we already have what is in effect single payer for the elderly and the poor, do some believe that single payer is "socialized medicine" and why do they fear it so? I gained some insight into this recently when an elderly relative started complaining about "Obamacare" and how it would lead to "socialized medicine." Knowing the person had heart surgery courtesy of Medicare and was receiving ongoing monitoring and care, I said, "I didn't realize you were so unhappy with Medicare." To which I received the reply: "I'm not talking about Medicare, I'm talking about socialized medicine." "How is Medicare different from socialized medicine?" I asked. "Medicare isn't socialized," came the reply.
Want to know why people aren’t happy? - Every year, the Kaiser Family Foundation publishes its annual survey of Employer Health Benefits. Here’s the summary. Here’s the chart pack. Let’s wade right in.The average premium for coverage by an employer provided health insurance plan for an individual in 2010 is $421 per month or $5,049 per year. The average premium for family coverage is $1,147 per month or $13,770 per year. (chart) Think about that for a second. That’s not the Cadillac plan. That’s the average. Twenty percent of plans for families cost $16,524 or more. How has that changed over time? Health care premiums have more than doubled in the last decade. Has your salary more than doubled in the last decade? I doubt it. We are putting more and more or our income every year into health insurance premiums. Do you feel healthier? Do you feel safer? Do you feel happier?
Poll Suggests Unpopular Individual Mandate Hurts Health Care Reform’s Popularity - Health care reform has steadily decreased in popularity since its passage. The Kaiser tracking poll (PDF) has generally had most positive numbers for health care reform, but even this poll now shows the law losing support. In August they found only 43% held a favorable opinion of the new law while 45% viewed it unfavorably. This is a significant drop since July (50% favorable – 35% unfavorable) and May (48% favorable – 35% unfavorable). Some provisions are popular while others are highly unpopular. At 75%, a large majority of voters hold a favorable opinion of federal subsidies to help people afford buying health insurance. And at 71%, an almost equally large majority favors expanding Medicaid, the government-run health care program for low-income Americans. Sentiment is nearly evenly divided on the employer mandate (52% favorable – 47% unfavorable) but the American people are firmly against the individual mandate. Not only do a full 80% of all voters have an unfavorable view of the individual mandate but a majority of voters (52%) has a very unfavorable opinion of the provision.
Prescription Drug Use Rose to Include Half of Americans in 2008 (Bloomberg) -- Almost half of Americans took at least one prescription drug per month in 2008, an increase of 10 percent over the past decade, a U.S. study found. One of every five children ages 11 or younger took at least one medication each month in 2008, led by asthma and allergy treatments, according to the survey released today by the U.S. Centers for Disease Control and Prevention. Among those ages 60 or older, 37 percent used five or more prescriptions per month. U.S. spending for prescription drugs more than doubled to $234.1 billion over the 10 years covered by the report, according to Centers for Medicare & Medicaid Services. The two biggest-sellers last year were Pfizer Inc.’s Lipitor for high cholesterol and Bristol-Myers Squibb Co.’s clot-buster, Plavix. The rise of such medicines may continue as insurers add as many as 32 million customers through the U.S. health-care overhaul, according to the Congressional Budget Office.
Ancient Brew Masters Tapped Antibiotic Secret— A chemical analysis of the bones of ancient Nubians shows that they were regularly consuming tetracycline, most likely in their beer. The finding is the strongest evidence yet that the art of making antibiotics, which officially dates to the discovery of penicillin in 1928, was common practice nearly 2,000 years ago. The research, led by Emory anthropologist George Armelagos and medicinal chemist Mark Nelson of Paratek Pharmaceuticals, Inc., is published in the American Journal of Physical Anthropology. "We tend to associate drugs that cure diseases with modern medicine," Armelagos says. "But it's becoming increasingly clear that this prehistoric population was using empirical evidence to develop therapeutic agents. I have no doubt that they knew what they were doing."
Child’s Ordeal Shows Risks of Psychosis Drugs for Young - He was sedated, drooling and overweight from the side effects of the antipsychotic medicine. All by the time he was 3. Although his mother, Brandy Warren, had been at her “wit’s end” when she resorted to the drug treatment, she began to worry about Kyle’s altered personality. “All I had was a medicated little boy,” Ms. Warren said. “I didn’t have my son. It’s like, you’d look into his eyes and you would just see just blankness.” More than 500,000 children and adolescents in America are now taking antipsychotic drugs, according to a September 2009 report by the Food and Drug Administration. Their use is growing not only among older teenagers, when schizophrenia is believed to emerge, but also among tens of thousands of preschoolers. A Columbia University study recently found a doubling of the rate of prescribing antipsychotic drugs for privately insured 2- to 5-year-olds from 2000 to 2007. Only 40 percent of them had received a proper mental health assessment, violating practice standards from the American Academy of Child and Adolescent Psychiatry.
Survivors and Foragers: speculation on group selection and obesity - What if one of the variables in human weight control was activity response to caloric restriction? Ok, so that's not too speculative. We know obese humans decrease activity when they diet. This is one reason that, in a nation of very cheap calories, so many Americans are obese. When these people diet, they are put into an involuntary lethargic state. It's a behavior that makes lots of evolutionary sense. Throughout most of human history these people would have been survivors of famine. We can call them The Survivors. But what if there's a distribution across the population? What if there are people who respond to caloric restriction with increased activity? That makes a sort of Darwinian sense too, particularly if you think of humans as group selected Big Brain Bees (BBBs). Think of these people as Foragers, they roam from the Hive looking for new options. In todays world, some of them are anorexics, but mostly they're just slender.
Will Human Cloning Cause the Next Financial Crisis? - To the best of my knowledge, no where among the nearly 2,300 pages that is the Dodd-Frank Wall Street Reform and Consumer Protection Act and the hundreds of proposed new regulations is there anything restricting human cloning. And that, it turns out, might be a bad thing. Recently, a nearly decade old paper on the economic effects of human cloning by a French economics professor has been getting some attention. The paper argues that rather than an army of low-level cloned workers or fighters as is predicted in Huxley's Brave New World or Star Wars, cloning will lead to more and more higher skilled workers. That's because the returns of cloning people who can make a lot of money will be higher than cloning average Joes. And when it comes to cloning, we're in it for the money, just like everything else. What's more, it will probably be only the rich who will be able to afford to clone themselves at the start.
World Bank says population growth, climate change demand better water management - A soaring world population, climate change and greater demands for food are placing greater demands on the planet’s water resources. The World Bank says the best way to address those issues is to have better information and a more integrated approach to water management. The bank says a review of its 2003 water resources strategy finds many successes in water projects. But it also sets priorities and makes recommendations as access to water becomes critical for many people around the world.
Searching for the right price for water - This OECD video available on You Tube argues the case for putting a price on water. Nearly one in every two people will live in water-stressed areas by 2030. Households, industry and agriculture will increasingly compete for water - can the price mechanism be used more intelligently as a way of encouraging a reduction in consumption and signalling resources to be alocated to lowering water wastage? This link provides some good background charts that might be used in teaching on this topic.
Water footprint calculator - We live in a watery world, with the average American lifestyle fueled by nearly 2,000 gallons of H2O a day. What may come as a surprise is that very little of that—only five percent—runs through toilets, taps, and garden hoses at home. Nearly 95 percent of your water footprint is hidden in the food you eat, energy you use, products you buy, and services you rely on. Find out your water footprint, then pledge to dry it out, joining other nationalgeographic.com users who have already committed to saving thousands of gallons. The more we save, the more water we leave for healthy ecosystems and a sustainable future.
U.S. test shows water problem near natgas drill site - U.S. government officials urged residents of a Wyoming farming community near natural gas drilling sites not to use private well water for drinking or cooking because of chemical contamination. “Sample results indicate that the presence of petroleum hydrocarbons and other chemical compounds in groundwater represents a drinking water concern,” the Environmental Protection Agency said in a statement about tests of 19 water wells around the town of Pavillion. The Wyoming investigation precedes a national study by the EPA into the safety of the drilling technique known as hydraulic fracturing or “fracking”, in response to concern in Congress and in some communities near gas rigs in many states that human health is threatened by the process.
From outer space, a new dilemma for old-growth forests - From 15 percent to 30 percent of the 7 billion tons of carbon that are released globally every year is unaccounted for, government scientists say. About 3 billions tons remain in the atmosphere, and the oceans absorb 2 billion tons. Vegetation, including the forests, probably absorbs the remaining 1 billion to 2 billion tons, but no one knows for sure how much and where. Scientists suspect that the forests with the biggest trees store the most carbon, and the Northwest forests are probably among the largest carbon sinks in the world. However, they also say that while slower-growing older trees store more carbon, younger trees also absorb more carbon as they grow rapidly. That sets up a debate about how forests should be managed, particularly whether older trees should be cut to make way for younger ones or whether they should be protected to store the carbon they contain.
Amazon at lowest level for 40 years - Officials in the Peruvian city of Iquitos said the river level had fallen to 14.4ft, a point not seen in more than four decades, and was predicted to drop further. Low levels have brought economic havoc in areas of Peru that depend on the Amazon for shipping, by denying boats a navigable river as well as usable ports and harbors. At least six boats are stranded because of the lack of river flow over the past three weeks and several shipping companies have been forced to suspend service, leading to economic hardship in areas of Peru that depend on the Amazon for shipping. The drop has been caused by a lack of rain and high temperatures. The Amazon is the second-longest river in the world, after the Nile, but discharges far more water at its mouth than any other.
Fears Growing Over Global Food Supply - Russia announced a 12-month extension of its grain export ban on Thursday, raising fears about a return to the food shortages and riots of 2007-08 which spread through developing countries dependent on imports. The announcement by Vladimir Putin came as the UN’s Food and Agriculture Organization called an emergency meeting to discuss the wheat shortage, and riots in Mozambique left seven dead. The unrest in Maputo, in which 280 people were also injured, followed the government’s decision to raise bread prices by 30 per cent. Police opened fire on demonstrators after thousands turned out to protest against the price hikes, burning tyres and looting food warehouses.
Wheat Rises on Russian Export Ban; Mozambique Riots Over Food (Bloomberg) -- Wheat rose in Chicago after Russia, the world’s third-largest grower, extended a ban on grain exports into next year, raising the prospect of higher food prices that already have sparked riots in Mozambique. Wheat for December delivery rose as much as 1.5 percent to $7.2475 a bushel, advancing for a third day and taking this week’s gain to 4.3 percent. Russia, suffering from its worst drought in at least a half century, started an export ban Aug. 15 that was scheduled to end Dec. 31. Prime Minister Vladimir Putin said yesterday it wouldn’t be reviewed until after the next harvest and Agriculture Minister Yelena Skrynnik said Russians are hoarding staples. “Russia was for the last couple of seasons a very large part of the world export market and now all of sudden they disappeared,” said Keith Flury, a grains analyst at Ratzeburg, Germany-based F.O. Licht. “This is kind of the new fundamental shift that not everybody was really ready for.”
U.N. Raises Concerns as Global Food Prices Jump - With memories still fresh of food riots set off by spiking prices just two years ago, agricultural experts on Friday cast a wary eye on the steep rise in the cost of wheat prompted by a Russian export ban and the questions looming over harvests in other parts of the world because of drought or flooding. Food prices rose 5 percent globally during August, according to the United Nations, spurred mostly by the higher cost of wheat, and the first signs of unrest erupted as 10 people died in Mozambique during clashes ignited partly by a 30 percent leap in the cost of bread. “You are dealing with an unstable situation,”
Scramble for food companies a warning of crisis to come - MUCH has been said about how BHP Billiton's bid for Potash Corporation and Canadian fertiliser company Agrium's play for AWB fit in with the growing issue of food security and food shortages. These are just new chapters in developments that resulted in China's Bright Food Group trying to acquire Australia's CSR sugar this year and Sinochem's move to buy Australian agrichemicals operator Nufarm. Then there's Qatar-based Hassad Food, backed by the Qatar Investment Authority, buying up rural land in Australia to feed Qatar and other Middle East countries worried about food security. Hassad has bought more than $40 million worth of sheep stations in northern New South Wales and South Australia in the past six months. The corporate activity is a storm warning of how food shortages and famine will reshape the world and corporate strategies.
Food production: Agriculture wars - “I’ve never heard of BHP – does this mean the price of potash is going to rise?” Mr Jiang asks repeatedly from his fertiliser store. Others in China’s agricultural areas say they have not heard of the bid for the Canadian fertiliser company by the world’s largest miner. But their interest in the price and availability of potash, a mineral used in fertilisers, is keen. The significance of the bid, the biggest in a wave of mergers and acquisitions in the sector, reaches beyond investment bankers and boardrooms. Mr Jiang’s anxiety encapsulates the increasing interaction between globalisation, demographics, agriculture and food security. The ascent of potash – and other fertilisers such as phosphate and nitrogen – into investors’ portfolios tracks the resurgence of agriculture in the new millennium. Behind this is the rise of emerging countries such as China and the elevation to the middle class of billions of people who now require a diet richer than the traditional staples of rice and wheat
The Coming Food Crisis - The brutal wildfires and crippling drought in Russia are decimating wheat crops and prompting shortsighted export bans. The ongoing floods and widespread crop destruction in Pakistan are creating a massive humanitarian crisis that has left more than 1,600 dead and some 16 million homeless and hungry in a region vital to U.S. national security. These and other climate crises trigger widespread food-price volatility, disproportionately and relentlessly devastating the world's poor. Less noticed has been the spiking price of wheat -- up 50 percent since early June. The U.N. Food and Agriculture Organization recently cut its 2010 global wheat forecast by 4 percent amid fears of a scramble among national governments to secure supplies. As wheat prices climb, demand for other essential food crops such as rice will increase as part of a knock-on effect on world food markets, driving up costs for consumers. In particular, Egypt and other countries that depend heavily on Russian wheat might see dramatic price increases and unrest in the streets.
The Coming Food Crisis: Global food security is stretched to the breaking point, and Russia’s fires and Pakistan’s floods are making a bad situation worse. -Podesta, Caldwell: "Lasting gains in agricultural productivity will require ... action to confront climate change." - Prices of basic foodstuffs like buckwheat and flour have soared in Russia over the past month as the effects of its worst ever drought hit supplies, statistics showed Wednesday…. Most alarmingly, the price of Russian staple buckwheat — enjoyed by generations for breakfast or as an accompaniment to meat — rose a very sharp 8.6 percent in the space of the week. So Seed Daily reported Wednesday. Last year, Lester Brown and Scientific American asked “Could Food Shortages Bring Down Civilization?” CAP’s John D. Podesta and Jake Caldwell have a new piece in Foreign Policy,”The Coming Food Crisis,” which I excerpt below:
The Dangers of Agricultural Speculation: 'Price Increases Are Costing Millions of People their Health - Financial speculators have discovered agricultural commodities, and the result has been skyrocketing prices for wheat, barley and other grains. SPIEGEL spoke with agricultural economist Joachim von Braun about how to curb such speculation and the dangers for the world's poor.
Rolling the dice with evolution - A new study by J. Alroy, just published in Science (subscription required for full text), has been getting some reporting by other sources. It's mildly entitled "The Shifting Balance of Diversity Among Major Marine Animal Groups."Evolution, and biodiversity, and the interrelationships of biosystems, are to me the imprint of the universe's organizing principles. It's what I grew up with instead of religion. My father was an evolutionary biologist and animal behaviorist, and so I grew up with dinnertime discussions about evolutionary pressures on butterfly wing designs, or the evolutionary explanations for beehive altruism, or why mating behavior affected peacock feather development. I've long known about what's become called the "sixth extinction" -- a.k.a. the "Holocene extinction" -- the one humans are currently creating. Elroy's analysis -- while not a surprise -- hit me surprisingly hard, because it drove home the full impact of the "sixth extinction."
UN Soon to Ditch Millenium Development Goals? - Well, not really. But, a report suggests the MDGs are, well, incomplete. A recent Associated Press article clued me to the release of a new UN Research for Social Development (UNRISD) report reviewing the UN's efforts in helping promote development, particularly regarding use of the Millennium Development Goals. As someone who's taught international organization, let me say that even my head spins trying to identify the countless UN agencies dealing with development and what they do specifically. To make a long story short, think of UNRISD as the UN's near-equivalent of the World Bank's Independent Evaluation Group that invites others not usually involved in day-to-day activities to critique ongoing activities. William Easterly aside, the UNRISD critique of the Millennium Development Goals fall under three main categories from what I can tell: First, inequality is given short shrift. Again, this makes sense since x amount of additional income would benefit poverty alleviation efforts more if spread evenly throughout the population instead of going mostly to those in the top income tiers, leaving those below in a struggle to meet income thresholds. Second, social policy needs to be more systematically addressed, perhaps as opposed to being boiled down to a number of indicators. Third, and this should come as no shocker, politics matter in development.
Russia seeks new sea routes to Asia - A Russian gas tanker completed a pioneering voyage this week through the Northern Sea route, with the new journey expected to transform global trade. Russia is keen to open up the Northern Sea Route from Europe to Asia, with the passage possible to cut 10,000 kilometers or more compared to journeys that go via the Suez Canal and the Indian Ocean. Russia's biggest private gas producer, Novatek, is acting as a pathfinder, as it wants to open up a direct route to export its liquefied natural gas to Asia. The arrival of the tanker Baltika, with 70,000 tonnes of gas condensate aboard, in the Eastern Russian port of Pevek signified a new milestone in that ambition.
Japan endures hottest summer on record - Japan is sweltering through its hottest summer on record, weather officials said Thursday. The Asian country joins a large swath of the Northern Hemisphere that has experienced an unusually hot summer. Meteorologists say 17 nations have recorded all-time-high temperatures this year, more than in any other year, and scientists have said that July was the hottest month on record for the world’s oceans. A heat wave in Russia unprecedented in 130 years of record-keeping triggered thousands of wildfires, while a surge in temperatures across much of Europe caused crops to wither and roads to melt. In the U.S., many cities in the northeast had record summer heat, while earlier this month 18 states issued heat advisories. In the Middle East, temperatures hit a record high in Kuwait during June, while those in Saudi Arabia were several degrees above average. In China, Shanghai had its hottest August on record, while other provinces broke decades-old records, according to domestic media reports.
Chris Mooney: Arctic Ice -- Less Than Meets The Eye - On the surface, the situation in the Arctic looks dramatic enough. In September 2007, the total extent of sea with surface ice shrank further than ever recorded before -- to nearly 40% below the long-term average. This low has yet to be surpassed. But the extent of sea ice is not all that matters, as Barber found. Look deeper and there are even more dramatic changes. This is something everyone should be concerned about because the transformation of the Arctic will affect us all.
Arctic sea ice volume heads toward record low as Northwest Passage melts free fourth year in a row - Masters rebukes disinformers: "Diminishing the importance of Arctic sea ice loss by calling attention to Antarctic sea ice gain is like telling someone to ignore the fire smoldering in their attic, and instead go appreciate the coolness of the basement, because there is no fire there. Planet Earth's attic is on fire." Chris Mooney has a good piece in New Scientist, “Arctic ice: Less than meets the eye,” the source of the above figures. Mooney focuses on the work of Canada’s David Barber — you can find his peer-reviewed work here: “Where on Earth is it unusually warm? Greenland and the Arctic Ocean, which is full of rotten ice” — New study supports finding that “the amount of [multi-year] sea ice in the northern hemisphere was the lowest on record in 2009.” Mooney also discusses the PIOMAS ice volume model developed by the University of Washington’s Polar Science Center in Seattle, which I have been featuring on CP this year. Their analysis finds “not only has the total volume of Arctic ice continued to decline since 2007, but that the rate of loss is accelerating” [see also Arctic death spiral: Naval Postgrad School’s Maslowski “projects ice-free* fall by 2016 (+/- 3 yrs)”]. Mooney talks to Michael MacCracken of the Climate Institute who explains how an increasingly ice free Arctic will lead to “more extreme storms and heavy precipitation events in regions not used to them” like the U.S. Great Plains.
Historical Sea Level Rise - High-quality measurements of (near)-global sea level have been made since late 1992 by satellite altimeters, in particular, TOPEX/Poseidon (launched August 1992), Jason-1 (launched December 2001) and Jason-2 (launched June 2008). This data has shown a more-or-less steady increase in Global Mean Sea Level (GMSL) of around 3.2 ± 0.4 mm/year over that period. This is more than 50% larger than the average value over the 20th century. Whether or not this represent a further increase in the rate of sea level rise is not yet certain.The two plots below show the GMSL measured from TOPEX/Poseidon, Jason-1 and Jason-2.
Pacific Hot Spells Shifting as Predicted in Human-Heated World - NYTimes - Federal researchers have published work concluding that a particular variant of the periodic El Niño warmups of the tropical Pacific Ocean is becoming more frequent and stronger. The pattern appears to fit what is expected from human-driven warming of the global climate, said the researchers, Tong Lee of NASA’s Jet Propulsion Laboratory and Michael McPhaden of the Pacific Marine Environmental Laboratory, part of the National Oceanic and Atmospheric Administration. The news release from NASA describes the work in detail. I asked Lee and McPhaden how a connection to greenhouse-driven warming could be made, given the possibility that the Pacific shift could be the result of long-term oscillations in conditions in the ocean unrelated to the buildup of heat-trapping greenhouse gases in the air. Here are the scientists’ replies:
Creating jobs and savings with energy efficiency - Upgrading just 40% of buildings would generate 625,000 jobs and cut U.S. energy bills up to $64 billion a year - Energy efficiency is THE core climate solution: The biggest low-carbon resource by far. “Efficiency Works,” a major new report by Bracken Hendricks, Bill Campbell, Pen Goodale, finds that a straightforward set of policies aimed at upgrading just 40% of the residential and commercial building stock in the United States would:
- Create 625,000 sustained full-time jobs over a decade
- Spark $500 billion in new investments to upgrade 50 million homes and office buildings
- Generate as much as $64 billion a year in cost savings for U.S. ratepayers, freeing consumers to spend their money in more productive ways
The IPCC lowballs likely impacts with its instantly out-of-date reports and is clearly clueless on messaging — should it be booted or just rebooted? I don’t know what value the IPCC now provides. But then, I had the exact same concern back in December 2007 (see “Time to shut down the IPCC?“).As I wrote back then, “I am a fan of what the Intergovernmental Panel on Climate Change (IPCC) has done — and they certainly deserve the Nobel Prize.” But even back then I didn’t see a lot of value in the IPCC going forward, as I wrote in long column at Salon.com, “Desperate times, desperate scientists”:I think that with the release of the recent synthesis report, the IPCC has reached the end of its usefulness. Anyone who isn’t persuaded by that document and the general desperation of international climate scientists is unlikely to be moved by yet another such assessment and more begging. In particular, skeptical Americans are unlikely to be convinced by another international report that focuses on international climate impacts.That’s even more true today.
Ohio Tea Party survey to candidates: “The regulation of Carbon Dioxide in our atmosphere should be left to God and not government and I oppose all measures of Cap and Trade as well as the teaching of global warming theory in our schools.” - At first, I wasn’t going to blog on this because I thought it must be a hoax. Who could possibly ask such a question of candidates? Then again, the Tea Party have outsourced their thinking on climate to The Viscount Monckton of Brenchley, which is as ridiculous as it gets. Yesterday, the UK Guardian’s Leo Hickman reported the story, “with a side order of jaw drop”. One merely need replace “carbon dioxide” with, say “toxic air pollutants” to see how absurd and self-contradictory the statement is. Or one could replace “Carbon Dioxide in our atmosphere” with, say, “crime” — that’s what the 10 Commandments are therefore, no? But that all does assume these folks are open to even a modicum of logic.
Green Column - Cap-and-Trade Is Beginning to Raise Some Concerns - The business works as follows: Factories producing refrigerants install equipment to transform the waste gas so it has less warming potential and then apply to the United Nations for permission to sell credits. The factories sell credits in proportion to the overall amount of gas destroyed to buyers that include governments, banks, trading companies and utilities. Buyers can sell the credits again on emissions trading markets or use them to meet their legal or voluntary obligations to cut emissions. Most of the demand for those credits is in the European Union, where polluters have operated under a mandatory cap-and-trade system since 2005. Europe dominates a market for greenhouse gases worth $144 billion worldwide in 2009.
Climate Change and the Wealth of Nations - The pressing needs of a great recession crowd out interest in global warming. The environmental economists Matthew Kahn and Matthew Kotchen have found that a higher state unemployment rate is associated with a decrease in Google searches for the term “global warming” and a lower “probability that residents think global warming is happening.” Professor Kahn isn’t skeptical about global warming, but he is (quite reasonably) skeptical about our ability individually and collectively to reduce carbon emissions: “attempts to reduce or reverse our carbon output — to mitigate the damage that we’ve already done — aren’t going so well” and “evidence shows that very few individuals have cut back on their carbon-producing activities at all.” Consequently, he predicts, “the world is going to get hotter.” But while this would lead many people to doomsday scenarios, Professor Kahn is an optimist who believes “that we will save ourselves by adapting to our ever-changing circumstances.” He says this salvation will come from “a multitude of self-interested people armed only with their wits and access to capital markets.”
The Economist's Review of Climatopolis - I'm thrilled that the book was reviewed but permit me to push back a pinch on the Moscow case study. To make my book of more "local interest" I added a couple of "Best Cities" lists. I must admit that I didn't take these lists very seriously and I did rank Moscow as a climate resilient city. This is a northern city unlikely to face sea level rise. I did not anticipate the Heat Wave of 2010 and this unexpected shock has had serious consequences for that city. But, my friends --- "fool me once , shame on you --- fool me twice, shame on me." Moscow will update its priors like a good Bayesian statistician and now that it is more aware of the possibility of future heat waves it will make pro-active investments that will protect it from the next heat wave. This is the major theme of climatopolis. Anticipation creates investment that helps to shield urbanites from the body blows posed by Mother Nature due to climate change.Yes, I do not have a crystal ball but I don't need to have one. Self interested cities, learn from their experience with changing climate conditions and make new investments to help them adapt.
Bill Gates on Carbon Taxes - I am not an expert on the politics –- I do think a carbon tax should be put in place. When the government raises a lot of money people get concerned about politically favored causes being what gets funded and we saw with the House energy bill that funding for specific CO2 sequestration was chosen even though that might not be the best way to spend the money. Since R&D is long lead time and the economy is weak if could be the ideal approach is to get a modest tax now with the expectation of a higher carbon tax in the 10-40-year timeframe which is key for people deciding what power plants to buy or cars to build.
Earth on the verge of mass extinctions? Mass extinctions have served as huge reset buttons that dramatically changed the diversity of species found in oceans all over the world, according to a comprehensive study of fossil records. The findings suggest humans will live in a very different future if they drive animals to extinction, because the loss of each species can alter entire ecosystems. Some scientists have speculated that effects of humans - from hunting to climate change - are fueling another great mass extinction. A few go so far as to say we are entering a new geologic epoch, leaving the 10,000-year-old Holocene Epoch behind and entering the Anthropocene Epoch, marked by major changes to global temperatures and ocean chemistry, increased sediment erosion, and changes in biology that range from altered flowering times to shifts in migration patterns of birds and mammals and potential die-offs of tiny organisms that support the entire marine food chain.
Real adaptation is as politically tough as real mitigation, but much more expensive and not as effective in reducing future misery - Rhetorical adaptation, however, is a political winner. Too bad it means preventable suffering for billions.We basically have three choices: mitigation, adaptation and suffering. We’re going to do some of each. The question is what the mix is going to be. The more mitigation we do, the less adaptation will be required and the less suffering there will be.That’s the pithiest expression I’ve seen on the subject of adaptation, via John Holdren, now science advisor. Sometimes he uses “misery,” rather than “suffering.” I’m going to start a multipart series on adaptation — in honor of the fifth anniversary of Katrina. That disaster provides many lessons we continue to ignore, such as Global warming “adaptation” is a cruel euphemism — and prevention is far, far cheaper.
It's a Communication Challenge, Not a Scientific Challenge - Why anyone was surprised that Congress failed to enact climate change legislation is shocking to me. Similarly (though the data is mixed), why so many Americans refuse to believe the scientific consensus about global warming is extremely frustrating but hardly surprising. I don't blame Americans for their misguided views about climate change. I also don't blame the environmental and scientific communities or the politicians that favor an environmental agenda for failing to convince Americans that global warming is real and solutions are needed now. The way to overcome this dismal situation is not with more science but with more effective communication. Even if you're Al Gore (and maybe especially if you're Al Gore), I caution you against arguing the science of climate change. You cannot change the mind of a global warming skeptic by citing scientific facts. The reason is simple; resistance isn't grounded in facts. Instead, it's grounded in emotion, political ideology and perceived financial self-interest. Let's examine each one:
Bjørn Lomborg: $100bn a year needed to fight climate change… The world's most high-profile climate change sceptic is to declare that global warming is "undoubtedly one of the chief concerns facing the world today" and "a challenge humanity must confront", in an apparent U-turn that will give a huge boost to the embattled environmental lobby. Bjørn Lomborg, the self-styled "sceptical environmentalist" once compared to Adolf Hitler by the UN's climate chief, is famous for attacking climate scientists, campaigners, the media and others for exaggerating the rate of global warming and its effects on humans, and the costly waste of policies to stop the problem.But in a new book to be published next month, Lomborg will call for tens of billions of dollars a year to be invested in tackling climate change. "Investing $100bn annually would mean that we could essentially resolve the climate change problem by the end of this century," the book concludes.
Delays Plague Solar Energy On Fed Lands (AP) -- Not a light bulb's worth of solar electricity has been produced on the millions of acres of public desert set aside for it. Not one project to build glimmering solar farms has even broken ground. Instead, five years after federal land managers opened up stretches of the Southwest to developers, vast tracts still sit idle. An Associated Press examination of U.S. Bureau of Land Management records and interviews with agency officials shows that the BLM operated a first-come, first-served leasing system that quickly overwhelmed its small staff and enabled companies, regardless of solar industry experience, to squat on land without any real plans to develop it. At a time when the nation drills ever deeper for oil off its shores even as it tries to diversify its energy supply, the federal government has, so far, failed to use the land it already has -- some of the world's best for solar -- to produce renewable electricity.
Geothermal Power: Hot Rocks And High Hopes - Geothermal power: Deriving energy from subterranean heat is no longer limited to volcanic regions. By drilling deep wells into the ground, it can be made to work almost anywhere. Just watch out for the earthquakes. Conventional geothermal power exploits naturally occurring pockets of steam or hot water, close to the Earth’s surface, to generate electricity. (Heat from the water is used to boil a fluid and drive a steam turbine connected to a generator.) Because such conditions are rare, the majority of today’s geothermal power plants are located in rift zones or volcanically active parts of the world. In Iceland, around one-quarter of the country’s electricity is produced by geothermal power stations; Geothermal power stations can also be found along the “Ring of Fire” around the Pacific, in Indonesia, the Philippines and on America’s west coast. Conventional geothermal power stations worldwide have a total capacity of 10.7 gigawatts (GW) and will generate 67.2 gigawatt hours (GWh) of energy this year—enough to supply power to more than 52.5m people in 24 countries, according to America’s Geothermal Energy Association.
Hygroelectricity: A New Type Of Alternative Energy, Extracted From Air’s Electrical Charge - In their search of alternative energy resources, scientists have stopped at a phenomenon that, although known for ages, brought them surprises. They want to harvest electricity by profiting from the fact that air is loaded with electric charges, and work on a prototype for such a harvester.Through experimentation and research, Galembeck and his team found out that the water in the atmosphere picks up charges. They proved that by measuring the charge of silica and aluminum phosphate. When the air is humid, silica turns negative and the aluminum phosphate gets a more positive charge.
Study: Drinking water polluted by coal-ash dump sites - A new study identifies 39 additional coal-ash dump sites in 21 states that pollute drinking water with arsenic, lead and other heavy metals. The analysis comes as the U.S. Environmental Protection Agency begins regional hearings on whether to regulate coal ash waste from coal-fired power plants. It will hold the first of seven hearings Monday in Arlington, Va. A public comment period ends Nov. 19. “This is a huge and very real public health issue for Americans. Coal ash is putting drinking water around these sites at risk,” says Jeff Stant of the Environmental Integrity Project, a nonpartisan group that co-wrote the report with the Sierra Club and Earthjustice. The heavy metals exceeded federal drinking water standards at every site equipped with monitoring wells.
Obama could kill fossil fuels overnight with a nuclear dash for thorium - If Barack Obama were to marshal America’s vast scientific and strategic resources behind a new Manhattan Project, he might reasonably hope to reinvent the global energy landscape and sketch an end to our dependence on fossil fuels within three to five years. Muddling on with the status quo is not a grown-up policy. The International Energy Agency says the world must invest $26 trillion (£16.7 trillion) over the next 20 years to avert an energy shock. The scramble for scarce fuel is already leading to friction between China, India, and the West. 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. We could then stop arguing about wind mills, deepwater drilling, IPCC hockey sticks, or strategic reliance on the Kremlin. History will move on fast.
Banks Grow Wary of Environmental Risks - Blasting off mountaintops to reach coal in Appalachia or churning out millions of tons of carbon dioxide to extract oil from sand in Alberta are among environmentalists’ biggest industrial irritants. But they are also legal and lucrative. For a growing number of banks, however, that does not seem to matter. After years of legal entanglements arising from environmental messes and increased scrutiny of banks that finance the dirtiest industries, several large commercial lenders are taking a stand on industry practices that they regard as risky to their reputations and bottom lines. In the most recent example, the banking giant Wells Fargo noted last month what it called “considerable attention and controversy” surrounding mountaintop removal mining, and said that its involvement with companies engaged in it was “limited and declining.”
New fault lines in mountaintop coal debate - The war over mountaintop removal mining is opening up on several new fronts — including, as I note in an article in The New York Times on Tuesday, among several big banks. Several lenders, including Bank of America, JPMorgan Chase and Wells Fargohave developed internal lending policies that limit or eliminate their relationships with mining outfits that engage in mountaintop removal mining, which is precisely as it sounds: mining companies simply blast off mountaintops to quickly (and cheaply) gain access to coal seams, dumping the debris in valleys below. The banks appear to be wagering that mountaintop removal has become sufficiently objectionable that it threatens their reputations if they’re seen as connected to it — something opponents have become all too happy to expose.
Coast Guard reports mile-long oil sheen from burning Gulf platform - A mile-long oil sheen has spread from an burning offshore petroleum platform in the Gulf of Mexico off Lousiana, the AP reports, quoting Coast Guard Petty Officer Bill Coklough. The officer says the sheen is about 100 feet wide. Three firefighting vessels have been sent to the scene to assist a fourth already in place, he says. USA TODAY's Alan Levin reports that the platform is owned by Mariner Energy, according to the Bureau of Ocean Energy Management. The agency said that the platform was authorized to produce oil and natural gas, but had been undergoing maintenance at the time of the accident and was not producing.
Nearly 94 Percent of Gulf Coast Claims Remain Unprocessed… The Gulf Coast Claims Facility, which is being overseen by independent administrator Kenneth Feinberg, has been up and running for more than a week now. Feinberg has said all individual claims will be processed within 48 hours and business claims will be processed within seven days. But, according to statistics released by the GCCF, nearly 94 percent of the claims filed so far have not yet been processed because they lack the proper documentation. Between Aug. 23 and Aug. 30, according to the latest report from the GCCF, 28,880 people filed claims for damages they’ve suffered from the oil spill. Some people have filed multiple claims, bringing the total number of claims to 31,225. Of those claims, only 1,935 — just over 6 percent — have been paid.
BP's Gulf Crude Oil Nearly 40% Methane - Will Huge Dead Zone Follow? - But making the BP Macondo eruption even worse is the fact that the spewing crude oil contains 40% natural gas of which most is methane that can end up depleting oxygen and causing one or more dead zones where marine life cannot live. The reason is that all those methane hydrocarbons now in the water are food for microorganisms. In the expected feeding frenzy, those methane-eating organisms will deplete the oxygen and produce a dead zone. How big an oxygen-depleted dead zone depends on how fast the oxygen is depleted and if there is any fresh oxygen supply going into the Gulf currents.
When Seafloor Meets Ocean, the Chemistry Is Amazing - Far more natural gas is sequestered on the seafloor—or leaking from it—than can be drilled from all the existing wells on Earth. The ocean floor is teeming with methane, the same gas that fuels our homes and our economy. Until recently, scientists have largely overlooked seafloor methane and its potentially dramatic impacts. The problem is that methane commonly vents out of isolated cracks in the seafloor—some so small that they are easily missed by oceanic surveillance systems. Once out into the ocean, the methane usually is diluted rapidly by seawater, or it dissolves in seawater and is consumed by microorganisms that convert it metabolically into carbon dioxide. Unless you happen to be looking in the right place at the right time, you’ll miss the show. But evidence has steadily accumulated that natural seepage of methane from the seafloor is a large, continuous, and ubiquitous phenomenon. When oceanographers happen upon these vents (often called “cold seeps”), the scene is often spectacular.
Tests Find Sickened Family Has 50.3ppm Of Corexit’s 2-Butoxyethanol In Swimming Pool - Warren collected a water sample from the pool filter on August 17th… packed the sample according to Mr. Naman’s instructions, and overnighted it to his Mobile, Ala. lab that same day,” she noted. The results were delivered by Naman over the phone on August 27 at 11:00 a.m. EDT. A copy of the findings were then e-mailed to the Scheblers. To view the document, click here. “Naman [said] our pool water sample we sent him contained 50.3 ppm [parts per million] 2-butoxyethanol marker for Corexit,” according to Mrs. Schebler. Tests for arsenic came back at less than .02 ppm. A July letter from four top scientists noted, “Corexit 9527A contains 2-BTE (2-butoxyethanol), a toxic solvent that ruptures red blood cells, causing hemolysis (bleeding) and liver and kidney damage (Johanson and Bowman, 1991, Nalco, 2010).” The safety data sheet provided by Nalco, the manufacturer of Corexit 9527A, warns, “Harmful if absorbed through skin. May be harmful if swallowed. May cause liver and kidney effects and/or damage. There may be irritation to the gastro-intestinal tract.”
Oil Tests Positive for Dispersants in the Mississippi Sound - The Press-Register notes today: Lumpy, degraded oil collected in the Mississippi Sound has tested positive for several of the main ingredients in the Corexit dispersant used in connection with the Deepwater Horizon oil spill, according to scientists working for a New Orleans-based lawyer. Officials with the federal government and BP PLC have maintained throughout the oil spill that no dispersant products have been used near shorelines in Alabama or Mississippi. Marco Kaltofen, part of the group of scientists who found the oil in Mississippi Sound, said it was impossible to determine when the dispersant had been applied to the oil. Results from the tests, which were conducted in a Colorado laboratory, indicated the oil was from the Deepwater Horizon well, he said.
Scientists Say Dispersants May Delay Recovery of the Gulf By Years … Or Decades - The government and BP claim that the combination of Corexit and crude oil is less toxic than crude oil by itself. Is that true? Well, scientists have found that when Corexit is applied to the actual crude oil from BP’s well, it releases 35 times more toxic chemicals into the water column than would be released with crude alone. And the tests conducted by the EPA which purport to show that dispersant plus crude is less toxic than oil alone used a combination of Corexit with Louisiana light crude oil. However, the oil coming out of BP’s leaking well contains an unusually high concentration of methane. As CBS notes: The oil emanating from the seafloor contains about 40 percent methane, compared with about 5 percent found in typical oil deposits, It is doubtful that the EPA used such unusually methane-rich oil in their testing. More importantly, EPA toxicity tests on the dispersant-oil mixture were conducted at sea level pressures (in other words, the pressure at the surface of the ocean). But enormous quantities of Corexit have been applied 5,000 feet under the ocean at the leaking wellhead
Risk-Taking Rises as Oil Rigs in Gulf Drill Deeper - The $3 billion rig, called Perdido, can pump oil from dozens of wells nearly two miles under the sea while simultaneously drilling new ones. It is part of a wave of ultra-deep platforms — all far more sophisticated than the rig that was used to drill the ill-fated BP well that blew up in April. These platforms have sprung up far from shore and have pushed the frontiers of technology in the gulf, a region that now accounts for a quarter of the nation’s oil output. Major offshore accidents are not common. But whether through equipment failure or human error, the risks increase as the rigs get larger and more complicated. Yet even as regulators investigate the causes of the Deepwater Horizon disaster, the broader dangers posed by the industry’s push into deeper waters have gone largely unscrutinized.
Mexico sees big potential near Tsimin oil find (Reuters) - Mexico's state oil company Pemex is increasingly optimistic about the potential of what appears to be a new cluster of light crude oil fields around its Tsimin discovery, according to company executives.The side-by-side Tsimin and Xux discoveries are believed to hold the equivalent of 1.5 billion barrels of proved, probable and possible oil reserves said Manuel Teran, a Pemex engineer working on the discoveries, at a petroleum engineering conference this weekend. "We are also optimistic that nearby locations could be similarly productive," . Pemex plans to drill additional exploratory wells at the two finds to allow it to reclassify the oil discoveries as proven, Teran said. If Pemex succeeds in its efforts to reclassify Tsimin and Xux, the two fields would account for more than 10 percent of Mexico's total proven oil reserves.
Ukraine May Give Russia Joint Control of Pipe to Cut Gas Prices -(Bloomberg) -- Ukraine is willing to give Russia joint control of a pipeline to southeastern Europe in exchange for access to natural gas supplies, Prime Minister Mykola Azarov said as the country’s negotiate a gas venture.The governments are seeking to create the venture between NAK Naftogaz Ukrainy and OAO Gazprom, both of which were once part of the Soviet gas monopoly, by year-end, Azarov said in an interview in his Kiev office yesterday. The agreement would reduce the price Ukraine pays for Russian gas, he said. “I have a hope that we will meet the year 2011 with a new gas agreement,” Azarov said. The current price calculation “means we are doomed to have an unfair price.”
Russia to double gas imports from Azerbaijan in a fresh blow to EU-touted pipeline project - Russia's Gazprom on Friday clinched a deal to double supplies from Azerbaijan in a bid to expand its control over gas produced by former Soviet republics. Gazprom and the State Oil and Gas Company of Azerbaijan signed an agreement to boost Azerbaijan's gas supplies to Russia to 2 million cubic meters next year, Gazprom said in a statement. The Azeri company also committed to sell over 2 million cubic meters of gas in 2012, Gazprom said. This will be four times as much as the amount Russia contracted in the first big gas deal with Azerbaijan in June last year.
Technology Review: Sign of the Times - It was with something like an apology that Earl Cook, a geologist and executive secretary of the division of earth sciences at the National Research Council, began his December 1972 article for Technology Review on the energy issues that he felt people would face in the next millennium. Geologists tend to take the long view of our existence on this planet, but Cook worried that his readers would fail to see the relevance of his points. He needn't have worried: the following year brought the OPEC embargo, which revealed how utterly dependent we were on access to cheap energy. But of course, the oil shortage caused by the embargo was due to political conflicts, not geology. What motivated Cook was an idea that was then somewhat novel: that we were fast approaching the limit of the fossil fuels we could extract from the earth.
German military report: Peak oil could lead to collapse of democracy - Peak oil has happened or will happen some time around this year, and its consequences could threaten the continued survival of democratic governments, says a secret Germany military report that was leaked online. According to Der Spiegel, the report from a think-tank inside the German military warns that shrinking global oil supplies will threaten the world's economic foundations and possibly lead to mass-scale upheaval within the next 15 to 30 years. International trade would suffer as the cost of transporting goods across oceans would soar, resulting in "shortages in the supply of vital goods," the report states, as translated by Der Spiegel. The result would be the collapse of the industrial supply chain. "In the medium term the global economic system and every market-oriented national economy would collapse," the report states
Military Study Warns of a Potentially Drastic Oil Crisis - Der Spiegel - 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 study is a product of the Future Analysis department of the Bundeswehr Transformation Center, a think tank tasked with fixing a direction for the German military. The team of authors, led by Lieutenant Colonel Thomas Will, uses sometimes-dramatic language to depict the consequences of an irreversible depletion of raw materials. It warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the "total collapse of the markets" and of serious political and economic crises.
Exponentially on purpose: a century-and-a-half of ignored warnings - The concept of peak oil, based on the pioneering work of geologist M. King Hubbert (right), states that world oil production will one day reach a natural limit due to geological factors. As he observed, “although production rates tend initially to increase exponentially, physical limits prevent their continuing to do so.” In other words, oil is a finite resource, and regardless of technology and investment, output cannot go on increasing year after year. Geology trumps economics, although the latter explains what will happen to oil prices once output begins to decline. But no-one wants to hear the argument. Even International Energy Agency forecasts of record world oil demand, and warnings that the “era of cheap oil is over” made barely a ripple in the media. It would seem to be wholly sensible, conservative even, to suggest that exponential growth cannot go on forever. But whenever anyone does say this out loud, they find themselves routinely disparaged and outright misrepresented in the media. But then, the naysayers are well practiced. The arguments go back to the Victorian era.
Where can I find up-to-date rigorous peak oil projections? - (answering a letter I received from a reader) Curve fitting techniques including Hubbert Linearization, and forecasts based on amounts of reserves and dates of discovery, can be useful tools but, unfortunately, they provide only rough estimates. Now that we are so close to the peak oil date, the deficiencies of these techniques become more of a problem, because a difference of 5 or 10 years in peak date becomes more of an issue.One thing that these techniques do not tell us is how much oil is really economic. In a way, this is equivalent to saying that these techniques do not tell us how much oil has a high enough Energy Return on Energy Invested (EROEI) that it really can be recovered and sold at a price that customers can afford. We are only now learning what this price might be. A rough estimate is that if the prices are above about $85 a barrel, they will send the economy into recession. It may be that in some places, enhanced oil recovery can be economically used, while in other places it is too expensive, and reserves should be adjusted accordingly.
Peak Oil Is History - My disqualifications aside, now does seem to be an auspicious moment to hold forth with a new piece of Peak Oil theory, because this is the year when, for the first time, just about everyone is ready to admit that Peak Oil is real, in essence, though some are not quite ready to call it by that name. Just five years ago everyone from government officials to oil company executives treated Peak Oil theory as the work of a lunatic fringe, but now that conventional world oil production peaked in 2005, and all liquid fuels world production peaked in 2008, everyone is ready to concede that there are serious problems with growing the global oil supply. And although some people still feel skittish about using the term Peak Oil (and a few experts still insist that the peak must be referred to as "an undulating plateau," which, if anything, is a graceful turn of phrase) the differences of opinion now largely stem from a refusal to accept the terminology of Peak Oil rather than the substance of peaking global oil production. This is, of course, quite understandable: it is awkward to suddenly jump from shouting "Peak Oil is bunk!" to shouting "Peak Oil is history!" in a single bound. Such acrobatics are only safe if you happen to be a politician or an economist.
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. 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. 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. A funny thing happened on our way to permanent prosperity and unlimited cheap oil. The right to prosperity was yanked out from underneath us by the current Greater Depression. The worldwide economic downturn has masked the onset of peak cheap oil. Therefore, when it hits America with its full fury, it will be a complete surprise to the ignorant masses and the ignorant politicians who run this country.
Environmental Sustainability, Peak Oil and World Hunger - Environmental sustainability isn't just an idea that marketing departments for large companies can shine up with snazzy graphics and a captive consumer market. Environmental sustainability a genuine necessity to continue at even a fraction of our current consumption levels for survival. I hate to be alarmist. I'm not selling the "2012 Revelations Package." I'm simply looking to make a point of equations. The United States uses 25% of the world's oil reserves on the daily while boasting a mere 4% of its population. 25%. 1/4. It's a lot of freaking oil. Now, we can blame the cars. We can blame the factories. We can blame a number of institutions, but really, we only have to blame ourselves. Last year, The United Nations reported that over one billion people in the world are starving. That's more than 16% of the world population that are in extreme want for food; meanwhile industrialized nations waste almost equal to their consumption. And considering the general girth of industrial waistlines, that's a lot of food. People are starving in the world because we allow them to starve. This inequality is a direct result of surplus to lack.
A deregulation conundrum - Marc Rich exploited price fixing/import/export controls to make simply unbelievable profits trading oil. Marc Rich & Co (the Swiss vehicle) was started with just over $1 million in capital and a couple of years later was making in excess of $200 million in profit. This level of profitability exceeds - by far - any other trading operation I have ever seen - and was probably the most profitable trading operation in history. Marc Rich & Co (since renamed Glencore) is possibly the most valuable business in Switzerland within the lifetime of its founder. A typical Marc Rich & Co trade involved Iran (under the Shah), Israel, Communist Albania and Fascist Spain. The Shah needed a path to export oil probably produced in excess of OPEC quotas and one which was unaudited and hence could be skimmed to support the Shah’s personal fortune. Israel - a pariah state in the Middle East - wanted oil. Spain had rising oil demand and limited foreign currency but was happy to buy oil (slightly) on the cheap. Spain however did not recognise Israel and hence would not buy oil from Israel - so it needed to be washed through a third country. Albania openly traded with both Israel and Spain. So what is the deal? The Shah sells his non-quota oil down the pipeline through Israel and skims his take of the proceeds. Israel skim their take of the oil. Someone doing lading and unlading in Albania gets their take and hence make it - from the Spanish perspective - Albanian, not Israeli oil. The Spanish ask few questions. The margins are mouth-watering - and they all come from giving people what they really want rather than what they say they want. We know what the Shah wanted (folding stuff). We know what Israel wanted (oil). We know what Spain wanted (cheap oil). Who cares that Spain was publicly spouting anti-Israel rhetoric.
Biofuels Firms Buy Up African Land, Chase EU Goals, Study Says… (Bloomberg) -- Biofuels companies from the U.K. to Brazil and China are buying up large swaths of Africa, causing deforestation and diverting land from food to fuel production, the environmental group Friends of the Earth said. Across the continent almost 5 million hectares of land, an area bigger than the Netherlands, have been sold to cultivate crops for biofuels since 2006, Friends of the Earth’s Brussels- based European division said today in a 36-page study. European companies including Portugal’s Galp Energia SGPS SA, the U.K.’s D1 Oils Plc and Sun Biofuels Ltd. and Agroils Srl of Italy joined firms from Canada and Israel in buying acreage to plant jatropha to make biofuels, the study said. The 27- nation European Union has set a goal of getting 10 percent of transport fuels from renewable sources by 2020. “The EU’s mandatory target for increasing agrofuels is a clear driver to the land grabbing in Africa,” Friends of the Earth said. “There is a risk that agrofuels, and with them, Africa’s agricultural land and natural resources, will be exported abroad with minimal benefit for local communities and national economies.”
China: Rare Earth Export Cuts Protect Environment (Reuters) - China's decision to slash export quotas of rare earth elements was a necessary step to protect the country's environment, commerce minister Chen Deming said following criticism from Japanese officials. "Mass extraction of rare earth will cause great damage to the environment and that's why China has tightened controls over rare earth production, exploration and trade," Chen was quoted by state news agency Xinhua as saying on Saturday. China issued export quotas for 30,258 tonnes by the end of July, down 40 percent compared to last year, following a nationwide campaign to consolidate the sector and clamp down on illegal production.
The rare earth element big squeeze - If a conservative is a liberal who just got mugged, then an advocate of government intervention in the economy is nothing more than a free market believer who just realized that China dominates an industry with major implications for national defense and renewable energy technology. That's the primary conclusion to be gleaned from a review of three recent studies of Chinese dominance of rare earth element mining and processing, "Rare Earth Elements: The Global Supply Chain," a report published by the Congressional Research Service in July, the Government Accountability Office's "Rare Earth Materials in the Defense Supply Chain," published in April, and China's Rare Earth Elements Industry: What Can the West Learn?" published by the Institute for the Analysis of Global Security in March. Rare earth elements are critical to advanced military technologies, computer and cellphone hardware, hybrid car batteries and wind turbine magnets. In other words, if you were going to target an industry crucial to dominating key technologies of the 21st century, rare earth element processing would be near the top of the list.
Backlash over China curb on metal exports - China's draconian export curbs on rare earth minerals needed by the rest of the world for frontier technologies is escalating into a serious diplomatic and trade clash with the United States and other leading powers. Japan's foreign minister Katsuya Okada issued what amounted to a formal protest at top-level meeting with Chinese officials in Beijing over the weekend, saying the sudden cut-off was "affecting the global production chain". It is the latest sign of rising pressure after angry complaints by companies outside China that rely on this family of 17 metals for hybrid cars, mobile phones, superconductors, navigation, and a host of high-tech industries. Beijing set off shockwaves in early July when it announced a 72pc reduction in rare earth exports over the second half of this year. The country has acquired a near monopoly, with 97pc of global output after under-cutting the rest of the world with Mongolian ores in the 1990s. The sudden cut-off since July has drastically restricted supplies to the rest of world. The last US mine shut 14 years ago, discouraged by tough US environmental rules.
China Defends Control of Rare Earth Exports as Move to Protect Environment (Bloomberg) -- China defended its controls on exports of rare earth after Japanese officials raised concerns about supplies of the raw materials used in the manufacture of products from cell phones to radar. Restrictions on the rare earth industry will help protect the environment, the state-run Xinhua News Agency cited Chen Deming, China’s commerce minister, as saying yesterday at a media briefing during China-Japan economic talks in Beijing. China cut its export quotas for rare earth by 72 percent for the second half of this year, according to data from the Ministry of Commerce on July 8. Shipments will be capped at 7,976 metric tons, down from 28,417 tons for the same period a year ago. Japanese officials told their counterparts that the lower quotas could have a major effect on global industry, and demanded early action on easing them, The U.S. Trade Representative is also targeting the restrictions for a potential trade case. The U.S. has asked business groups and labor unions to provide evidence that China is hoarding these elements for a case that might be filed at the World Trade Organization.
Rare Earths: Digging In - BEHIND the rise of resource-poor countries like Japan, South Korea and China into industrial giants has been the readiness of other countries to sell them critical commodities, albeit sometimes at excruciating cost. An unfolding collision around a group of elements known as “rare earths” is seen by some as a test of China’s willingness to reciprocate. Rare earths have become increasingly important in manufacturing sophisticated products including flat-screen monitors, electric-car batteries, wind turbines and aerospace alloys. Over the summer prices for cerium (used in glass), lanthanum (petrol refining), yttrium (displays) and a bunch of other –iums have zoomed upward (see chart) as China, which accounts for almost all of the world’s production, squeezes supply. In July it announced the latest in a series of annual export reductions, this time by 40% to precisely 30,258 tonnes. That is 15,000-20,000 tonnes less than consumption by non-Chinese producers, says Judith Chegwidden of Roskill Information Services, a consultancy.
China economy faces complicated domestic, international conditions: official (Xinhua) -- China's top economic planner said Thursday that China's economy still faced complicated domestic and international conditions. The foundation for world economic recovery remained fragile, and uncertain and unstable factors still abounded, said Zhang Ping, director of the National Development and Reform Commission. Zhang made the statement in his report on the implementation of national economic and social development plan for the first seven months to the 16th Session of the Standing Committee of the 11th National People's Congress (NPC), a bimonthly session running from Aug. 23 to 28. He identified greater fluctuations in the exchange rates of major currencies and international commodity prices, as well as rising trade and investment protectionism worldwide as the major uncertain factors in the international market.
Is Low-Wage China Disappearing? - It is my hope that China’s comparative advantage as a low-wage producer does disappear – the sooner the better. But why should I, a Chinese economist, wish to see China’s competitiveness reduced through rising labor costs? After all, when a country still lacks real advantages, such as higher education, efficient markets and enterprises, and a capacity for innovation, it needs something like low wages to maintain growth. While cheap labor has been a key factor in generating high growth over the past three decades, it has also contributed to profound income disparities, especially in recent years. And persistent, widening inequality might cause social crises that could interrupt growth and damage competitiveness. China must avoid such a scenario, and if wages could increase in some meaningful way, it would indicate that the economy might finally reach the next stage of development, during which income disparities would be narrowed. Unfortunately, China has not yet reached that point – and will not any time soon. Agriculture remains the main source of income for more than 30% of China’s labor force. Another 30% of the labor force comprises migrant workers, who have doubled their incomes by moving from agriculture to the industrial and service sectors.
Have We Underestimated Chinese Consumption? On August 8 Credit Suisse published a study they had commissioned by Professor Wang Xiaolu of the China Reform Foundation. A lot of readers have asked on- and offline me to discuss this study in light of the entry I posted two weeks ago about Chinese consumption – and especially to explain whether this study would cause me to retract any of the things I said.Before I get into that, I suppose by now everyone has noticed that China is trying to diversify its reserve holdings and is reported to be buying more Japanese yen and Korean won, and perhaps other currencies. In my entry six weeks ago, I argued that the fear that China could disrupt the US Treasury market by dumping dollars was totally unreasonable. The latest news supports my argument, I think. First, it is pretty clear from the recent performance of the market that the vigorous attempt to diversify PBoC holdings has had no disruptive affect on the US Treasury market.
Have we underestimated Chinese consumption? - To get back to the Credit Suisse study, it is a very interesting attempt to estimate the real size of the Chinese economy, Chinese household income, and Chinese savings and consumption rates by eliminating some of the biases in the NBS surveys. As they explain it: The purpose is to try to correct the understatement of income in the official household survey by the National Bureau of Statistics (NBS). Basically, the study assumes that while respondents understate their income during the survey of NBS Based on this assumption, the survey employs interviewers’ questions about income, spending and food consumption from the 4,000 plus respondents whom they know personally. The assumption is that as the interviewer knows the respondent personally, the respondent will feel more comfortable and willing to disclose their “true” income.
China's rising bank debt could leave nation exposed - Moody's rating agency is concerned that China is powering its economic growth by raising the gearing of the banking system, leaving the country exposed if the outlook darkens. The banks are expanding their balance sheets rapidly through higher leverage – a policy that relies entirely on the continuance of torrid growth. "Pain lies ahead if China's economic growth slows and the banking business model cannot adjust accordingly in time," said Yvonne Zhang, the agency's senior China analyst.
Reversing reform - OVER the past several decades, China has slowly reduced its interventions in the economy and it has encouraged state-owned firms to compete aggressively in the market. The effort to remove the heavy shackles on the Chinese economy has generated a period of record growth. Is the process of reform now threatened? Michael Wines writes: New data from the World Bank show that the proportion of industrial production by companies controlled by the Chinese state edged up last year, checking a slow but seemingly inevitable eclipse. Moreover, investment by state-controlled companies skyrocketed, driven by hundreds of billions of dollars of government spending and state bank lending to combat the global financial crisis.They join a string of other signals that are fueling discussion among analysts about whether China, which calls itself socialist but is often thought of in the West as brutally capitalist, is in fact seeking to enhance government control over some parts of the economy.
China Begs, Borrows, Steals American Know-How (Bloomberg) -- China’s fourth-largest steel producer, government-owned Anshan Iron & Steel Group, wants to buy a stake in the U.S. Steel Development Co. The plan is to build five new mills, with the first adding 120 jobs to one of America’s most economically depressed states, Mississippi. What could be wrong with that? Plenty, says a bipartisan group of 50 members of Congress. They are demanding an investigation by the Obama administration on economic and national-security grounds. The Anshan deal, far from an isolated event, is part of a larger go-abroad strategy of Chinese industrial policy. The goals: protect and subsidize China’s state-owned “national champions,” acquire foreign companies and/or their technologies, then further penetrate foreign markets while often bypassing trade barriers such as anti-dumping duties.
Heavy in dollars, China warns of depreciation (Reuters) - China on Friday offered a rare glimpse into its foreign exchange reserves, confirming that they are overwhelmingly allocated in dollars, while a central banker said the mountain of cash could face depreciation risks. The Chinese government's currency reserves, the world's largest such stockpile at $2.45 trillion, are held roughly in line with what was described as the global average: 65 percent in dollars, 26 percent in euros, 5 percent in pounds and 3 percent in yen. The report in the China Securities Journal, an official newspaper, cited unnamed reserve managers. The allocation of Chinese foreign exchange reserves is considered to be a state secret, but analysts have long estimated that about two-thirds are invested in dollar assets.
Dragon could get burnt - Chinese investors are finding that the centralised, top-down approach does not work in the rest of the world. THE map of China's overseas resource investments is not a pretty picture. In the developed world, Chinese investors are tangling with unfamiliar regulations, labour markets and technologies.In unstable nations, particularly in Africa, they are aligning themselves with transient regimes. In South America and the Pacific Islands, which have pugnacious traditions of local community rights, they are finding that doing cozy deals at the state level does not solve grassroots problems.So they are encountering huge cost overruns and delays in Australia; a rolling tangle of violent landowner disputes and now court injunctions in Papua New Guinea; ugly labour and environmental disputes in Peru; a violent backlash against Chinese workers in Angola and a fraught alliance with a brutal dictator in Sudan.
Help the World’s Poor: Buy Some New Clothes Back to school shopping leads many people to buy apparel that was made in sweatshops. Rather than feel guilty for “exploiting” poor workers, shoppers should rejoice. Their spending is some of the best aid we can give to people in poorer countries. When workers voluntarily take a job they demonstrate that they believe the job is the best alternative available to them – even when that job is unsafe and the pay is very low compared to wages in the United States. That’s why economists with political views as divergent as Paul Krugman and Walter Williams have both written in defense of sweatshops. Sweatshop jobs are often far better than the vast majority of jobs in the countries where they are located. David Skarbek and I researched sweatshops that were documented in U.S. news sources (or see here for my shorter, more general defense of sweatshops). We found that sweatshop worker earnings equaled or exceeded the average national income in 9 out of 11 countries we studied. Working in a sweatshop paid more than double the national average in four of the countries.
The Reality of US Trade Decline in Southeast Asia - This post is a follow-up to one I made a few weeks ago concerning changing regional predominance in the Asia-Pacific. The bigger they are, the harder they fall: In 2008, the United States was left behind by China as the third-largest trading partner of ASEAN member states--Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam--after Japan and the European Union. Fast-forward to the present and the ASEAN secretariat has revealed an even more remarkable finding: In 2009, China emerged as ASEAN's outright largest trading partner even as worldwide trade fell. The EU maintained second place status, while Japan fell to third and the US stayed in fourth place. Indeed, those championing a continued and strong American presence in the region have many reasons to be wary. At midyear 2010, trade between ASEAN and China is already up 55%. While some gains are attributable to global recovery in trade volumes, some are also due to the trade agreement assigned between ASEAN and China which came into effect at the start of the year. Speaking of which, fearmongering of China wiping out ASEAN in terms of export competitiveness appear overblown as ASEAN's trade surplus with China looks set to increase, not decrease or even become a trade deficit:
Afghans Continue Pulling Money From Troubled Bank -Nervous Afghans pulled more deposits out of the nation's largest bank on Saturday, despite assurances from government leaders that their money was safe. Crowds gathered at Kabul Bank branches around the capital to withdraw dollar and Afghan currency savings, with customers saying they had lost faith in the bank's solvency following a change in leadership and reports that tens of millions of dollars had been lent to political elites for risky real estate investments."Kabul Bank has lost the trust of the people. Even the chairman resigned so all the people are concerned," said Mohammad Nawaz, head of an Afghan aid group who had been trying for three hours to withdraw the $15,000 in his account.
Indian economy grows 8.8 percent in quarter - -- India's economy grew 8.8 per cent from April to June compared with the same period last year, driven by a strong pick-up in manufacturing, trade, transport and services. The growth in the first quarter of India's financial year -- which runs from April to March -- was largely in line with expectations, and was an acceleration of the 8.6 per cent growth recorded in the previous quarter. The robust growth will encourage the Reserve Bank of India, the central bank, to persist with its course of monetary tightening and interest rate normalisation, as it tries to control inflation, which remains high after falling from its peak double-digit levels. India's economy expanded 7.4 per cent last year, despite a severe drought that hit farm production and caused food prices to rocket. New Delhi is forecasting that growth will exceed 8.5 per cent in the current financial year, and that inflation will drop sharply to more manageable levels.
Economists Question 8.8% Q1 GDP Growth Number - The government’s claim that the Indian economy grew at its fastest pace in over two years in the April-June quarter has been questioned by economists, who said the huge gap between the different growth estimates was confusing. The value of all goods and services produced by India, or the gross domestic product (GDP), grew 8.8% in the first quarter of the current fiscal, according to the `supply-side’ growth estimate arrived from various sectors such as agriculture, industry and services. The numbers were 6% a year ago and 8.6% in the previous quarter. But, the robust 8.8% growth figure was not corroborated by the `demand side’ of the equation based on transactions in the market place. The demand number—calculated from private and government consumption, investment and net exports—showed that the economy grew as low as 3.7% during the first quarter of the current year. On an average, the divergence is well below 0.5%, though on a few occasions it has touched 2-3%.
Is red-hot India too hot? - While most of the world is worried about the prospects of a double-dip recession, India is facing just the opposite problem – managing supercharged growth. The Indian economy, oblivious to the meager recovery in the West, is roaring. GDP surged 8.8% in the April-June quarter, the fastest clip in two-and-a-half years. There's some debate among economists over what might happen next – some think growth has peaked for now, others think India may put up even bigger numbers in coming quarters. But either way, India's performance will remain stellar. Goldman Sachs forecasts India's GDP will surge 8.2% in 2010 and 8.7% in 2011. That's behind the 10% or so Goldman expects for China in both those years, but not by much.
Brazilian Economy Expands Robustly -Brazil's economy maintained its torrid pace of growth in the second quarter, continuing a boom in Latin America's largest economy despite a series of interest rate hikes. Growth surpassed most expectations, and will likely lead economists to raise their forecasts for 2010 as a whole. But a debate rages over the prospects in 2011, with some economists arguing the government should be applying the breaks now, both through lower spending and higher interest rates, to avoid overheating next year. Gross domestic product expanded 8.8% in the second quarter from a year ago, the Brazilian statistics agency, or IBGE, said Friday. That was above the median forecast of 7.9% from a survey of 15 economists by Dow Jones Newswires.
Japan announces 920 billion yen stimulus package - — Japan on Monday unveiled an 11 billion dollar stimulus and announced monetary steps to safeguard a fragile economy and curb the impact of a strong yen, but markets were left unimpressed. Prime Minister Naoto Kan announced the 920 billion yen stimulus package and the central bank extended a multi-billion-dollar loan scheme in a bid to boost an economy beset by deflation and curb the strength of the yen. Kan said the plan will include steps to boost employment for graduates, investment in green industries and support for smaller businesses and measures to boost consumption, adding it would get final approval on September 10. The stimulus package would be financed by reserve funds, but Kan added that the government would consider compiling an additional budget if necessary.
Bank of Japan Seems `Powerless' to Halt Yen's Climb, Sumitomo Mitsui Says (Bloomberg) -- The Bank of Japan’s decision to expand a lending program will have a limited effect on the yen because the currency’s gain versus the dollar is mainly driven by a U.S. economic slowdown, Sumitomo Mitsui Banking Corp. said. The BOJ will boost the funds in the facility by 10 trillion yen ($117 billion) to a total of 30 trillion yen, the bank said today in a statement after an emergency meeting in Tokyo. “Since the U.S. economy isn’t expected to turn around soon, any move by the BOJ is unlikely to change the yen’s rising trend,” said Daisuke Uno, chief strategist in Tokyo at the unit of Japan’s third largest banking group. “The market was too impatient to wait. There’s even a sense of powerlessness about the BOJ’s decision.”
Japan, Greece Among Nations Close to Having Unsustainable Debt, IMF Says-- Greece, Italy, Japan and Portugal are the advanced economies hovering closest to unsustainable levels of government debt, International Monetary Fund staff said in a research note today. The four nations are most at risk of needing drastic budget cuts to avoiding facing uncontrollable increases in public debt because traditional budget cuts won’t suffice, IMF staff said in the paper. The U.S. and Spain are also constrained, the report said. Still, a separate IMF report said indicators of default risk by a wealthy economy reflect “some market overreaction.” “Since behavior can change, a finding that a country has little or no fiscal space is not a prediction that public debt will explode or that the government will default -- history is not destiny -- but rather that something must change and fiscal policy cannot proceed on a ‘business as usual’ basis,” the economists wrote. “Specifically, fiscal policy will need to react more strongly to debt than past behavior would suggest.”
Trichet May Keep ECB in Crisis Mode as Global Economy Slows (Bloomberg) -- European Central Bank President Jean-Claude Trichet may signal that the bank will stay in crisis mode into next year as the risk of a renewed U.S. recession threatens the euro region’s economic rebound.While the ECB will probably raise its growth forecasts today after Europe’s economy expanded at the fastest pace in four years in the second quarter, U.S. indicators are pointing to a slackening in activity. ECB council member Axel Weber said in an Aug. 19 interview that the ECB should help banks through end-of-year liquidity tensions before determining early next year when to withdraw emergency measures.
Eurozone bond spreads back to their previous high - Irish spreads have reached 357bp, an all time record, other peripheral spreads are close to the level at early May; the majority of Germans have some sympathies with Thilo Sarrazin, the renegade Bundesbanker, and oppose his sacking; the Bundesbank, however, is set to fire him, but is still locking for legal support to make a watertight case; the IMF says that a Greek debt default is unlikely; the ECB is expected to decide on an extension of its collateral regime; Schauble says lack of EU support for a financial transactions tax poses some risks for the German budget; EU officials and MEPs are due to meet today to hammer out a compromise over European banking supervision; the European Commission plans to introduce new rules to make it more difficult for member states to proclaim unilateral short sale bans; China’s manufacturing economy, meanwhile, remains surprisingly robust; a group of 12 countries, including the UK, France and Germany, supports the idea of a Tobin tax to fund development aid.
IMF Eliminates Borrowing Cap On Rescue Facility In Anticipation Of Europe Crisis 2.0; US Prepares To Print Fresh Trillions In "Rescue" Linen Back in April, when we discussed the inception of the IMF's then brand new New Arrangement to Borrow (NAB) $500 billion credit facility, we asked rhetorically, "If the IMF believes that over half a trillion in short-term funding is needed imminently, is all hell about to break loose." A month later the question was answered, as Greece lay smoldering in the ashes of insolvency, and the developed world was on the hook for almost a trillion bucks to make sure the tattered eurozone remained in one piece (leading to such grotesque abortions as Ireland, whose cost of debt is approaching 6%, funding Greek debt at 5%). Well, if that was the proverbial canary in the coalmine, today the entire flock just keeled over and died: today the IMF announced it "expanded and enhanced its lending tools to help contain the occurrence of financial crises." As a result, the IMF has as of today extended the duration of its existing Flexible Credit Line (FCL) to two years, concurrently removing the borrowing cap on this facility, which previously stood at 1000 percent of a member’s IMF quota, in essence making the FCL a limitless credit facility, to be used to rescue whomever, at the sole discretion of the IMF's overlords.
European 2011 Debt Sales to Rise to 990 Billion Euros, ING Says (Bloomberg) -- Government bond sales in the euro region will increase by 1 billion euros ($1.27 billion) to a gross 990 billion euros in 2011 as increased redemptions outweigh improved government finances, ING Groep NV said. While net issuance will slip to 408 billion euros from 468 billion euros this year, redemption payments will rise to 582 billion euros from 521 billion euros, Padhraic Garvey, head of developed markets debt strategy at ING in Amsterdam, wrote in an e-mailed note today. That will cancel the benefit of an 85- billion euro decline in deficits, he said.The 2011 issuance “will feel just as heavy as in 2010,” Garvey said. “The good news from a supply perspective is that lower fiscal deficits take pressure off 2011 issuance requirements. The bad news is redemption payments are higher in 2011.”
EU's Barroso warns Italy on high debt (Xinhua) -- President of the European Commission Manuel Jos Barroso on Friday confirmed Italy's positive economic recovery but warned against its high public debt.Talking at an important socio-economic forum in the Italian town of Rimini, the EU executive's head said Italy had more chances to successfully defeat the global recession but must boost efforts in keeping its public finances under control, suggesting more thorough cuts in debt and public deficit.Despite praising Italy's winning assets, including "a solid banking system, no private debt problems, a strong level of competition and a stable level of unemployment," Barroso said there will be "a lot of work to do" on balancing finances and recovering confidence in the economy.
Europe Bond Yields - Usually I just post the bond spreads in Europe, but I think this excellent tool from Bloomberg shows visually what is happening with bond yields in Europe.You can click here for the graph for the Greece 10 year bond yields. Then you can add other bonds for comparison. This is a 3 year graph from Bloomberg.Where it says "Add a comparison" you can enter the symbols for Germany (GDBR10:IND) and then Ireland (GIGB10YR:IND) to create this graph. Nemo has links for more countries on the sidebar of his site. Starting in 2008 the bond yields started to separate - with Greece and Ireland paying more. Then in May of this year, the situation reached crisis levels. And now the spreads are steadily widening again - as the German bond yields have fallen recently (like the U.S. yields) and the Irish and Greek bond yields have been increasing.
European Central Bank refuses to disclose ‘top secret’ amount of Irish debt – THE European Central Bank (ECB) has refused to clarify how much Irish debt it is currently holding because the issue is "top secret".Despite the downgrade by Standard and Poor's of Ireland's credit rating, the NTMA has said that the ECB was not involved in last Wednesday's auction of government debt, but questions have been raised over the propping up of Ireland by Frankfurt. The amount of debt held by the ECB is said to be less than €10bn, but the Sunday Independent was told that the official amount can't be revealed because the ECB's dealings are "top secret".Earlier this month, the ECB bought Irish government debt in an effort to halt a marked slide in its price. The purchase of government bonds by the ECB was one of the emergency measures introduced in early May to stem the eurozone debt crisis, which culminated in the bailing out of Greece.
Irish Worries For The Global Economy by Simon Johnson - The consensus among officials and most of the international banking community is that the global economy has stabilized and is now well down the road to recovery. The speed of this recovery is proving disappointing – as seen in the revised second-quarter growth estimate for gross domestic product in the United States, with annualized growth down to 1.6 percent. But, according to this view, easy monetary policy and still-loose fiscal policy around the world will keep sufficient momentum going.Never mind that Japan, the United States and most of Europe are running unsustainable fiscal policies, while the Federal Reserve chairman Ben Bernanke is fretting over how to prevent deflation with a limited toolbox, and Jean-Claude Trichet, president of the European Central Bank, is calling for more fiscal tightening. To enjoy this rosy global picture, we are also told to ignore the plight of heavily indebted peripheral euro-zone nations still suffering from uncompetitive wages and prices, and concerns over default, that strangle their credit markets and growth.However, let’s be clear: Europe’s headache remains large, and this should concern all of us – just look at Ireland to see how misunderstood and immediate the remaining dangers are.
Why Market Is Now More Certain Than Ever That Greece Will Default, And A European Funding Update - One of the stealthier developments over the past months has been the ever wider creep in Greek CDS, especially in the longer-dated part of the curve. In fact, everything to the right of the 3 Year point is now wider than it was both on the eve of the Greek semi-default, and just after the announcement of the European Stabilization Mechanism (ESM). How is it that with so much firepower, better known as free money, thrown at the problem, have spreads not declined? The CFR provides one interpretation, which speculates that once European banks find a firmer footing, that Greece, with the blessing of Europe proper, will be allowed to finally sever its mutated umbilical cord, and default. The catalyst would be Greece getting its primary deficit under control, at which point ongoing bad debt funding would no longer be necessary. Of course, this hypothesis is based on two very critical assumptions: European banks, especially in the periphery, as the second attached study from Goldman indicates, are still locked out. To think that Europe will be able to get to an equal footing for all countries seems like some wishful thinking at this point, especially if the market does consider the implications of what a Greek default will do to peripheral banking.
Eurobank Stress Tests: A Failed Confidence Ploy - Yves Smith - As much as this blog was a persistent critic of the US version of the stress tests, I must hand it to the folks at the Treasury: they did an impressive job of dressing up and selling a garbage barge. The combination of consistent cheerleading, extend and pretend, and a few short squeezes did wonders for bank stock prices. The European version, like most movie sequels, was a shameless rehash that relied overmuch on franchise value. The European authorities really seemed to believe that “stress test” was a magical invocation that would strike terror in the heart of market demons and Euroskeptics. And the rally in the euro and the retreat of Euroworries from front page news would seem to support their belief (although good economic reports out of Germany were probably an even bigger confidence-booster). But the European stress tests looked to be a Potemkin process. The tests were wrapped up with remarkable speed, the sovereign debt loss assumptions were laughably low, many other elements of the test were not made public, and, as in Lake Woebegone, (almost) all the children were above average.
European banks: A glow from the east | The Economist - AFTER firefighters extinguish a blaze they usually look carefully for glowing embers before rolling up their hoses and heading off. With the worst of the banking crisis now receding in most rich countries, it is tempting to send the financial firefighters home. But wafts of smoke from eastern Europe suggest the job of stabilising Europe’s banking system is not yet done. In early August a number of banks operating in the region reported sometimes startling rises in loan losses. Among them were UniCredit, Erste Group and OTP. In Kazakhstan more than a third of outstanding debt is non-performing. In Latvia, almost a fifth of debt is going bad. In Hungary and Poland the proportion of debt that is souring is below 8%, though in both countries it is still rising and, because their economies are bigger, their bad debts can cause more havoc. Non-performing loans in Ukraine are officially below 10% of the total, but quirks in the tax law punish banks for writing off loans. The IMF reckons the true figure is closer to 30%.
Europe Manufacturing Growth Slows as Germany, Italy Ease –(Bloomberg) -- Growth in Europe’s manufacturingindustry slowed in August and export demand fell to the lowest in seven months, adding to signs the economy is cooling after the second-quarter surge. A gauge of manufacturing in the 16-nation euro region declined to 55.1 from 56.7 in the previous month, London-based Markit Economics said today. That’s above an initial estimate of 55 released on Aug. 23. It’s the 11th straight month with a reading above 50, indicating expansion. While Europe’s economy grew at the fastest pace in four years in the second quarter, companies have been largely reliant on export demand to boost sales. Stocks in Europe and the U.S. have dropped in the past two weeks on concern the global recovery is losing steam. In the U.K., manufacturing growth slowed to the weakest in nine months in August, while a gauge of U.S. factory activity probably also declined.
Not out of the woods - CONCERN that Greece's debt crisis might presage similar episodes elsewhere in the euro zone has not disappeared, despite a €750 billion ($990 billion) backstop agreed in May 2010 in concert with the IMF. Sovereign-bond spreads (the extra interest compared with bonds issued by Germany, the safest credit) have drifted back up in a handful of other countries, notably Ireland and Portugal. Attempts to tackle budget deficits through public spending cuts and tax increases have offered some reassurance to bondholders, but have also held back GDP growth. The interactive graphic above illustrates some of the problems that the European economy faces. In 2009 of the 27 countries in the European Union only Poland saw its economy expand. GDP perked up in most countries in the first half of 2010. Germany was especially sprightly in the second quarter. The economies of Austria and the Netherlands have been dragged up in Germany’s wake. But GDP in Greece has slumped, and has been sluggish in Portugal and Spain.
BBC News – Eurozone unemployment still at 10% - Unemployment in the eurozone remained at a record rate of 10% for a fifth month in a row, according to official figures. Nearly 16 million people remain unemployed in the 16 countries that use the euro, the EU's statistics agency Eurostat said. The agency also reported a fall in the rate of inflation in the eurozone. In August, prices rose by 1.6% year-on-year, down from 1.7% in July, and still below the target of 2%."I think the inflation outlook is good," said Christoph Weil, European economist at Germany's Commerzbank. "The main factors are the weak domestic demand and moderate wage inflation."
German Unemployment Drops for 14th Month as Rising Exports Bolster Economy –(Bloomberg) -- German unemployment declined for a 14th month in August after surging exports and investment fuelled record economic growth in the second quarter. The number of people out of work declined a seasonally adjusted 17,000 to 3.19 million, the Nuremberg-based Federal Labor Agency said today. Economists forecast a decrease of 20,000, according to the median of 31 estimates in a Bloomberg News survey. The jobless rate was unchanged at 7.6 percent. The German economy is leading Europe’s recovery as exports and investment surge, prompting companies from Daimler AG to Bayerische Motoren Werke AG to add workers. That may already be feeding through to consumer spending, which rose the most in almost two years in the second quarter. “Looking at order books of German companies, we’ll see this miracle continue at least this year,”
Driving Germany - WE HAVE been spending a fair amount of time exploring the strong performance of the German economy in the second quarter. German output roared ahead at a 9% pace during the second three months of the year. And as a result, we learn today, the euro zone economy grew by 1% in the quarter (not an annual rate), which was a better performance than either America or Japan turned in. A piece in the new edition of The Economist puts the burst of growth in the proper perspective:The best explanation for the uneven pattern of rich-world activity is also the most prosaic: America’s recovery is more advanced and its firms have rebuilt their stocks sooner. Europe’s business cycle tends to lag America’s by a quarter or two. Recent indicators point to greater convergence. The index of American manufacturing published by the Institute of Supply Management unexpectedly picked up from 55.5 to 56.3 in August. The corresponding indices for the euro area and Britain fell back, to 55.1 and 54.3 respectively. America’s economy may have some unique troubles, but its fortunes are still strongly tied to the rest of the rich world.
Germany’s rebound is no cause for cheer - One of the weirder experiences for anyone who lives in the eurozone is a visit to a German supermarket. I found the general price level there to be a little over half of what it is in Belgium, Italy or Spain. I also found price differences of some 30 per cent when comparing certain categories of goods on various Ebay sites in the eurozone. These differences go some way to explaining the eurozone’s divergent economic performance, and give a pointer as to what to expect in the future. The really intriguing aspect of the divergences is not how they happened, but why they are not correcting themselves. We know how they happened: Germany entered the eurozone at an uncompetitive exchange rate and embarked on a long period of wage moderation. Macroeconomists would say Germany benefited from a real devaluation against other members. But while real exchange rates tend to move around, one would not normally expect extreme misalignments to be persistent. In this case, one would expect Spanish and Italian consumers to abandon their expensive retail stores and swamp German internet sites with mail order purchases, especially for durable goods. Eventually there would be some price realignment
How Germany Is Undermining The Economic Recovery Of The U.S. And The European Union - In early February, the top financial officials of seven major industrialized countries gathered in Northern Canada to mull the state of the world economy. Many of the middle-aged technocrats embraced the spirit of the occasion, trading in their bankers’ uniforms for chinos. But, amid all the A-list bonding, the Americans seemed slightly aloof. Treasury Secretary Timothy Geithner shuffled through the first day of meetings clad in a dour-looking business suit. The U.S. delegation arrived too late to partake in the sledding. The contrast could be interpreted as a sign of things to come. Geithner had been caught off guard by the reach of the Greek fiscal crisis. Much of the problem resided with the Germans. Though senior officials, like Finance Minister Wolfgang Schäuble, were sympathetic to a bailout, their political overseers in Angela Merkel’s chancellery were conflicted. The reality was that, as the continent’s dominant economic player, Germany would find itself heavily bankrolling any such effort.
The world economy: The odd decouple | The Economist - AMERICA is used to making the economic weather. It has the world’s largest economy, its most influential central bank and it issues the main global reserve currency. In recent months, however, some rich-world economies (notably Germany’s) have basked in the sunshine even as the clouds gathered over America. On August 27th America’s second-quarter GDP growth was revised down to an annualised 1.6%. That looked moribund compared with the 9% rate confirmed in Germany a few days earlier. America’s jobless rate was 9.5% in July (figures for August were released on September 3rd, after The Economist went to press). But in Germany the unemployment rate is lower even than before the downturn. Other rich countries, including Britain and Australia, have enjoyed sprightlier recent GDP growth and lower unemployment than America. This unusual divergence within the rich world has fostered many competing theories to explain it, including differences in fiscal policies, exchange rates and debt levels. Most of these do not quite fit the facts.
What explains the strength of the German recovery? -GERMANY'S economy outperformed most of the developed world in the second quarter, growing at a 9% annual pace. While that's sizzling rate is unlikely to hold up for the rest of the year, unemployment in Germany is falling and confidence, for now, remains high. Economists have lately been debating the roots of the boom, with some arguing that the performance is little more than a dead-cat bounce, while others point toward past structural reforms, and still others suggest Germany is leaning on beggar-thy-neighbour policies. We figured it might be a good idea to ask the economists at Economics by invitation what we thought, and so we put to them the question: What explains the strength of the German recovery? There is some divergence to the views. Harold James credits Germany's export orientation, while Carmen and Vincent Reinhart point, among other factors, to the lack of leverage in the German economy. Alberto Alesina seconds this view. Scott Sumner indicates that a weakening euro cannot be ignored
A Bundesbanker’s “Jewish gene” comment shows Germans the limits of extreme central bank independence - Thilo Sarrazin, a member of the board of the Bundesbank who has just published an anti-immigrant book, is coming under pressure over remarks that “all Jews share a certain gene”. The remarks have caused outrage in Germany, and would normally mark the end of anybody’s political career. But given the Bundesbank’s ridiculously extreme form of independence, there is no legal way for Axel Weber to fire his colleague. Weber has already demoted him after a previous outrage – to the effect that Sarrazin now only deals with the central bank’s internal computer systems. FT Deutschland carries the story on the front pages, and says that the German president could dismiss Sarrazin, but only in cases of “grave misconduct”. It appears as though Germany’s political elite is unwilling to trigger this case
EU Finance Regulation Shake-Up Welcomed - In Germany, Leo Dautzenberg, a member of Chancellor Angela Merkel’s ruling Christian Democratic Union, and one of its finance policy experts in parliament, hailed Thursday night’s agreement on the EU financial supervision package as “closing an important gap in financial market regulation”. But he warned the three new EU-level watchdogs – for the banking, insurance and securities markets sectors – to use their powers over national institutions and markets with care.
Experts pessimistic about global economy - Doomsayers at a conference saw a "double-dip" recession. The best the more upbeat could offer was "subpar growth." - Is the global economy out of the woods? Or is it teetering toward a double-dip recession? Two years after a near-meltdown in the world's financial system, with the United States looking sluggish, equity markets groggy, and Europeans fighting a debt crisis, experts gathered in Italy on Friday offered a generally gloomy outlook - especially for the United States and much of the industrialized world. The doomsayers were led by New York University economist Nouriel Roubini, who warned "there is a significant risk of a double-dip recession in the United States" as well as in Japan and many European countries.
ECB Wellink: 'Irrelevant' If World Economy Sees Small 'Double Dip' In Near Term - European Central Bank governing council member Nout Wellink said Friday it is "irrelevant" if the world economy undergoes a mild second recession in the near term, adding that he is most concerned about the longer term challenges of economic restructuring. Asked at a press briefing about the likelihood of a "double-dip" recession, Wellink said: "On balance, as far as we can see now, it will go on this recovery process." "In a sense it will be irrelevant if we get a small fall back," he added. Wellink, who is also the president of the Dutch central bank, said he is more concerned with medium and long term challenges, including the exit of extraordinary fiscal and monetary stimulus programs.
BBC News Media Player –– ‘A third of large companies can’t afford to fund pension deficits’ - There is evidence of a growing pension crisis as three reports are published this morning highlighting problems with company pension schemes. Mike Smedley of KPMG claims a third of pension schemes in the UK's biggest companies are so under-funded they cannot be restored to health.
Corruption, institutions, and firm productivity - VoxEU - Does it pay to be corrupt? This column presents evidence from 22 emerging economies in Europe and the former Soviet Union on the effects of corruption on firm productivity. It finds that in a highly corrupt country, bribing officials actually has a negative effect on productivity, whereas in countries with strong institutions, it can open doors that competitors dare not touch.