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

Saturday, April 16, 2011

week ending Apr 16

US Fed balance sheet grows to record in latest week - The U.S. Federal Reserve's balance sheet grew to another record size in the latest week, as the central bank bought more bonds in an effort to support the economy, Fed data released on Thursday showed.  The balance sheet expanded to $2.649 trillion on April 13 from $2.633 trillion on April 6. The central bank's holding of U.S. government securities grew to $1.375 trillion on Wednesday from last week's $1.358 trillion total. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) held steady in the latest week at $937.16 billion. The Fed's holdings of debt issued by Fannie, Freddie and the Federal Home Loan Bank system fell to $130.89 billion from $132.50 billion the prior week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $21 million a day in the week ended Wednesday, down from an average daily rate of $30 million last week.

US Fed Balance Sheet Expands To $2.67 Trillion - The Fed's asset holdings in the week ended April 13 climbed to $2.670 trillion, from $2.653 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $1.375 trillion on Wednesday, from $1.358 trillion the previous week. Meanwhile, Thursday's report showed total borrowing from the Fed's discount window fell to $17.86 billion Wednesday, from $18.49 billion a week earlier. Borrowing by commercial banks slid to $2 million Wednesday, from $23 million a week earlier. Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts climbed to $3.409 trillion from $3.406 trillion. U.S. Treasurys held in custody on behalf of foreign official accounts rose to $2.650 trillion from $2.644 trillion. Holdings of agency securities fell to $758.93 billion from the previous week's $762.96 billion.

Fed Balance Sheet Holdings, Excess Reserves Hit New Record; Agency Prepayments Plunge - In the week ended April 13, the Fed's balance sheet hit a new all time record of $2.65 trillion, primarily due to an increase of $15 billion in Treasury holdings by the Fed (chart 1). Not surprising to those who have read our previous post on the matter, prepayments to the Fed have all but dried out, and for the third time in a row there were no MBS prepayments, which at $937.2 billion have declined by just $12 billion since the beginning of March: so much for magnetization demand arising from QE Lite (chart 2). Excess reserves continue to surge increasing by $29 billion in the last week. The increase at this point is more than just one accounting for the $195 billion SFP program unwind (which finished last month): should the economy really improve and banks start lending, all hell may well break loose. At this point the surge in excess reserves (liabilities) is rapidly overtaking the increase in Fed assets since the beginning of QE2 (chart 3). "Other Fed Assets" hit a fresh new ridiculous total: $125 billion, an increase of $2.5 billion over the prior week (chart 4).  If this number is indeed a form of capitalized POMO commission to the PDs, then America likely has a right to know. Lastly for those still curious, the Fed's asset maturing within 1 year are $143 billion (chart 5). Putting this all together, presents the following picture: in a period during which the Fed's assets increased by $203 billion, GDP increased by about 1.5%, once all revisions are in the books.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--April 14, 2011

FRB: H.3 Release--Aggregate Reserves of Depository Institutions and the Monetary Base - April 14, 2011

Interest rate risk and the Fed - The Federal Reserve today is holding $1.4 trillion in U.S. Treasury securities, which is $600 billion more than it held four years ago. The maturity of those securities has also increased significantly. In April 2007, more than half of those securities were one year or shorter. Today, the fraction is down to 8%.  Since 2007, the Fed has also acquired $132 billion in debt from Fannie Mae, Freddie Mac and the Federal Home Loan Bank, and $937 billion in mortgage-backed securities guaranteed by Fannie, Freddie, or Ginnie The Fed is currently paying banks 0.25% interest on those reserves, and is collecting an average interest rate of 4% on its long-term securities. That netted the Fed a healthy profit of $80 billion in 2010, which it returned to the U.S. Treasury. In effect, the Fed is borrowing short and lending long, making a huge profit on the difference, and handing it back to the Treasury. But of course, that only works in your favor when the short rate is below the long rate. At the moment, the short rate is well below the long rate, and historically that has been the average relation. But if short rates rise, is the Fed exposed to a loss on its portfolio?

Odds of Fed Losing Money on Balance Sheet Are Low - A rising interest-rate environment is unlikely to cause the Federal Reserve to lose money on its vast holdings of Treasury, agency and mortgage securities, a central-bank report released Monday said. The report from the Federal Reserve Bank of San Francisco addresses a matter that hasn’t received much attention from central-bank watchers. The issue at hand is that the Fed’s current balance sheet counts some $2.4 trillion in securities that are thus far a money maker for the Fed. Indeed, the Fed, which sends its profits back to the Treasury Department, returned $80 billion last year. But the current era of rock-bottom interest rates can’t last forever. With the economy recovering and inflation pressures pushing higher, albeit from very low levels, eventually the Fed will begin to tighten monetary policy, much as the European Central Bank did last week. The way the Fed will tighten policy isn’t clear, given the wide range of tools now available to the central bank, nor is there any clarity about the ultimate stopping point of a tightening campaign, But, all the same, higher short-term interest rates over time means the Fed will make less money. If an unexpected surge of inflation caused the Fed to tighten policy very aggressively, it is possible that the Fed could start to lose money on its holdings.

Fed's Yellen says too soon to start reversing policy - The U.S. economy is still not strong enough for the Federal Reserve to start reversing its extremely accommodative monetary policy, a top Fed official said on Saturday. "Economic conditions do not yet call for the Fed to exit from its unconventional policies," Janet Yellen, Fed Vice Chair, said during a panel discussion at Yale. Yellen's comments focused on how the Fed handled the challenge of boosting economic growth once it reached the "zero bound" on interest rates in December 2008. Her caution on reversing policy too soon were at odds with some of the Fed's hawks, who have been urging a quick reversal to get ahead of rising inflation. On Friday, Dallas Fed President Richard Fisher called on the Fed to stop "spiking the punch bowl" with accommodative policy. The Fed may need to end its $600 billion bond-buying program earlier than its expected end in June, Fisher said.

Yellen Says Fed Won’t Repeat Mistakes of ’70s - The Federal Reserve is unlikely to have to raise interest rates soon because the surge in global commodity prices should have a temporary impact on U.S. inflation, a key Fed official said Monday. However, Fed Vice Chairman Janet Yellen said in prepared remarks that the U.S. central bank will keep a close eye on inflation developments to avoid the mistakes of the 1970s, when high oil prices led to sharp increases in consumer prices. The sharp rise in prices for oil, grains and other commodities appear “unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy,” Yellen said. The Fed’s No. 2 official, an influential member of the central bank’s policy-setting body, has been a staunch supporter of the Fed’s loose monetary policy, including the controversial purchase of government bonds that are due to run until June.

Kansas City, Dallas Feds Want Discount Rate to Rise - Ten of the Federal Reserve‘s 12 regional offices last month voted to keep emergency borrowing cheap for banks, judging that the rise in global commodity prices poses a bigger threat to U.S. economic growth than to inflation. Pointing to a still fragile economic recovery, most directors at the Fed’s district banks voted to keep the discount rate unchanged at 0.75%, according to minutes released Tuesday. Only directors from the Kansas City and Dallas Fed renewed their call to increase the rate to 1%. The Fed Board in Washington — which has the final say on the rate charged to banks on short-term emergency loans — voted to keep the discount rate steady. “Directors expressed concerns about the downside risks posed by rising energy and other commodity prices and by increased fiscal stringency at all levels of government,” the minutes show. While rising commodity prices can put upward pressure on inflation in the near-term, most Fed officials predicted inflation to remain low further out.

Dudley Says Fed Shouldn’t Rush to Tighten Policy ‘Too Early’  - William C. Dudley, president of the Federal Reserve Bank of New York, said the U.S. central bank shouldn’t rush to tighten monetary policy.  “We’re probably going to have excess slack in the U.S. labor market at least through the end of 2012, and that’s one reason that colored my view that we shouldn’t be overly enthusiastic about tightening monetary policy too early,” Dudley told a forum in Tokyo today.  Fed Policy makers at a meeting last month differed over whether to start removing stimulus this year, according to minutes of their March 15 meeting. “A few participants indicated that economic conditions might warrant a move toward less- accommodative monetary policy this year; a few others noted that exceptional policy accommodation could be appropriate beyond 2011,”

Fed officials signal policy to stay on course The recent surge in oil prices is no prelude to broader price increases that would force the Federal Reserve to raise interest rates, top Fed officials said on Thursday in what appears to be the predominant view at the central bank. The comments, from Minneapolis Fed President Narayana Kocherlakota and Fed Board Governor Elizabeth Duke, echoed recent remarks by Fed Chairman Ben Bernanke, adding to expectations the central bank will stay on course with its $600 billion debt-buying program through the end of June and will not look to reverse its super-easy monetary policy any time soon. Daniel Tarullo, also a Fed governor, identified himself as in the same camp, saying there are no signs that higher overall inflation, spurred by surging energy and commodity prices, will translate to underlying inflation. Tarullo, answering questions while speaking on a panel in Washington, said commodity prices are notoriously volatile

Discouraged Workers  Complicate Fed's Response to Jobless Fall - The sharpest drop in unemployment in more than a quarter century obscures a simple fact: The jobs market still isn’t working for many Americans.  Some 6.3 million people have been out of work and looking for a job for more than six months. The employment-to-population ratio is lower than it was when the recession ended as companies have been slow to add to payrolls. And big sources of hiring in the past -- government, health care and retailing -- may not be able to reprise that role in the future as lawmakers limit outlays and consumers curb spending.  “The trends are a little bit scary,” said Nobel laureate Michael Spence, a professor at New York University. “There’s been a break in an important part of the social contract” for many Americans who are finding they can’t get ahead.  Mixed messages from the jobs numbers make decisions more difficult for Federal Reserve Chairman Ben S. Bernanke and his central bank colleagues as they wrestle over monetary policy.

Dudley says would surprised if Fed didn't complete QE2 (Reuters) - It would be very surprising for the United States not to complete a second round of quantitative easing (QE2) given doubts about the health of job markets, a top Federal Reserve policymaker said on Tuesday."On the subject of monetary policy, we would be very surprised if we didn't complete QE2. Therafter, the hurdle of QE3 is higher," New York Federal Reserve President William Dudley said at a business event in Hong Kong. "On unemployment, we have seen the rate decline from 9.8 percent to 8.7 percent, but it is not clear that the strength in employment that we have seen in the past few months will be sustainable," he said. Dudley said in Tokyo on Monday that the Fed shouldn't be too enthusiastic about tightening monetary policy soon as there is still significant slack in the economy.

Fed’s Dudley on QE3; ECB’s Stark on More Rate Increases - Federal Reserve Bank of New York President William Dudley and European Central Bank executive board member Jurgen Stark shared a stage in Hong Kong Tuesday, as the divergent paths of the ECB and the Fed become more apparent.  Here are highlights from the Q&A session at the event, organized by the Institute of Regulation and Risk North Asia. Dudley on QE2 and QE3:“I’d be very surprised if we didn’t complete QE2 [referring to the Fed’s second round of quantitative easing]. After that, though, the hurdle for QE3 is higher… One reason we embarked on QE2 was we really were worried about the risk of deflation in the U.S… Now the risks of deflation are greatly diminished. So one of the motivations behind QE2 is no longer in place.” Stark on why the ECB lifted rates and what comes next: "We see this as a step toward normalization. But please don’t ask me what the new normal is going to be. The president of ECB [Jean-Claude Trichet] made clear this is not to be seen as the first step in a series of interest rate hikes. I think he is absolutely right. Because we meet every month, more often than the FOMC [Federal Open Market Committee] and we have more opportunities to discuss the situation and also to take decisions.”

Fed’s Evans: Monetary Policy Tightening This Year Unlikely - Tightening of Federal Reserve monetary policy likely lies well into the future as inflation pressures are unlikely to rise in a significant fashion, a key Fed official said Friday. As long as the price-pressure outlook plays out in the likely way, “I’ll be surprised if I’m advocating a tightening in policy” this year, Federal Reserve Bank of Chicago President Charles Evans said. “I certainly think strong policy accommodation continues to be appropriate because the unemployment rate is 8.8% and inflation continues to be low, certainly on an underlying basis,” the official said.He added “as long as year-over-year underlying inflation, core inflation, is 1.5% or lower, I am extremely doubtful we need an adjustment in monetary policy.” He noted 2% is where he believes inflation should be, and explained “as we get up toward 2%, we would want to make some adjustments to policy.”

The Best Way to Narrow the Fed's Mandate - I have a new article up at National Review Online where I argue that the best way for Congress to narrow the Fed's mandate is through nominal GDP level targeting.  One point mentioned in the piece is that because a nominal GDP target ignores aggregate supply shocks it dominates an inflation target.  This applies equally well to a price level target.  Another way of thinking about this is that movement in the price level is a symptom of all underlying shocks, whereas movement in nominal spending is an underlying shock itself (i.e. an aggregate demand shock).  The Fed will be far more effective if responds directly to the underlying shock over which it has influence--the aggregate demand shock--than responding indirectly to an imprecise symptom of that shock. The importance of nominal spending shocks can be seen in the three figures below.  The first  figure shows the growth rates  of nominal GDP with the blue line, real GDP with the red line, and the GDP deflator (i.e. inflation) with the green line.  The figure reveals that changes in nominal spending get translated largely into changes in real economic activity.  (See Marcus Nunes for more analysis on this figure.)

Satyajit Das: Economic Uppers & Downers - Quantitative easing (”QE”) is the currently fashionable form of voodoo economics favoured by policymakers in the US. QE, loosely “printing money”, entails central banks buying government bonds, which are held on the central bank’s balance sheet to inject money into the banking system thatcan be exchanged by banks for higher return assets, such as loans to clients. The purchases also increase the price of governments bonds, reducing interest rates. Advocates of QE believe that it will lower interest rates promoting expenditure, growth, reduce unemployment and increase the supply of credit to underpin a strong economic recovery. In reality, QE is primarily directed at boosting asset values, subsidising banks, weakening the currency, helping the government finance its deficits and creating inflation.

The Fed's Most Dangerous Game: Checkmate - The Fed's game plan--sink the U.S. dollar to goose corporate profits, reinflate asset prices and create "modest inflation"--is now the most dangerous game on Earth. As overleveraged assets from real estate to stocks imploded in 2008 and early 2009, the Federal Reserve rushed to flood the global economy with zero-interest dollars. This did a number of things the Fed reckoned were necessary:

  • 1. It gave U.S. banks and other insolvent financial institutions an unlimited pool of money to borrow at zero interest and leave on deposit at the Fed, where it earned risk-free interest.
  • 2. It enabled a vast global "carry trade" in dollars: speculators could borrow unlimited dollars at no cost, and then deploy the cash around the world to chase higher yields in stocks, commodities, etc.
  • 3. It allowed banks to lend profitably in the U.S., as their cost of money was reduced to essentially zero, and to pour "hot money" into U.S. stocks, creating a virtuous cycle of ever-rising equity prices.
  • 4. With the bulk of U.S. corporations' growth and earnings coming from overseas sales, then a plummeting dollar boosted their profits effortlessly, further goosing U.S. stocks.
  • 5. With savings earning nothing, U.S. investors were driven into the "risk trades" of the stock market and commodities, a flow of funds which reinflated asset bubbles.
  • 6. A rising stock market not only offered an illusion of "growth" but it bailed out pension funds and set the stage for Wall Street to reap billions of dollars from the resurgence of mergers and acquisitions, IPOs and derivatives.

Discount Borrowing by U.S. Branches of Foreign Banks - NY Fed - Liberty Street - To help contain the economic damage caused by the recent financial crisis, the Federal Reserve extended large amounts of liquidity to financial firms through traditional lending facilities such as the discount window as well as through newly designed facilities. Recently released Federal Reserve data on discount window borrowing show that some U.S. branches and agencies of foreign banks were among the most active users of the window. In this post, we explain why U.S. branches borrow at the discount window. We also discuss two main reasons why these branches had a large need for dollars during the crisis and how discount window loans to them helped stabilize the financial system and the real economy in the United States

NY Fed: Foreign Bank Borrowing Helps U.S. - Active emergency borrowing by U.S. foreign bank branches from the Federal Reserve during the financial crisis ensured those institutions had access to dollars, which in turn provided important support to the financial system in its darkest hours, research from the Federal Reserve Bank of New York released Wednesday argues. At issue is the usage of the discount window, the Fed’s longstanding and primary tool to provide emergency liquidity to commercial banks. The facility got a heavy duty workout over the course of the financial crisis. The Fed recently lost a long running court battle against lawsuits filed by Bloomberg LP’s Bloomberg News and News Corp.‘s Fox Business Network, and it was forced to disclose the names of borrowers during the course of the financial crisis. News Corp. is the owner of Dow Jones & Co., publisher of The Wall Street Journal. When the names of the borrowers were released, a wide range of observers were taken aback by the number of foreign banks that had tapped the Fed’s discount window.

The Real Housewives of Wall Street - Why is the Federal Reserve forking over $220 million in bailout money to the wives of two Morgan Stanley bigwigs?
America has two national budgets, one official, one unofficial. The official budget is public record and hotly debated: Most Americans know about that budget. What they don't know is that there is another budget of roughly equal heft, traditionally maintained in complete secrecy. After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the "official" budget in size — a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

The Fed Set Itself Up to Fail - Imagine that you are in a game where you are required to pick a strategy for each round that you think will maximize global benefits. You are the principal strategist, and each round every other player will evaluate your strategy for efficacy against a common goal using proprietary information. What is the optimal strategy in this game? Is it to announce everything you’ll play this round, or is it to announce your intended target, and never specify a time frame? I hold that the latter is the optimal strategy. Why? For three reasons:

  1. Time is always and everywhere a binding constraint.
  2. The optimal goal in any game is to minimize binding contraints.
  3. You invite critcism either way.

Don't Like "Money Printing"? Then Stop Borrowing. Whip Inflation Now! There's a widespread conception that "money printing" by the government causes inflation, and that "money printing" = government deficit spending. But people don't realize that:  Government deficit spending is only one of four flows that affect inflation. Here's how borrowing prints money: You borrow $10 from the bank. You give them nothing more than an IOU, and they credit your account for $10, created out of thin air. Voila! Money printing.  That's the essence, but in practice it's a bit more complicated. The bank is required (by their charter) to hold reserves (money) on deposit in their account at the Fed to "cover" that loan. But -- ah, the beauty of fractional-reserve banking -- they only need one extra dollar in their reserve account to cover the ten-dollar loan. Where do they get the dollar? They sell $1 in treasury bonds (also, originally, created out of thin air) to the Fed. The Fed credits the bank's reserve account with $1, and adds a $1 Treasury IOU to the Fed's assets. (This is also more complicated in practice, but that's the essence.) Meanwhile you've got $10 to spend. So yeah -- there's government debt involved, but of the ten dollars that were printed in this transaction, the Treasury/Fed printed one, and your private bank printed nine.

Another Pitch For Nominal GDP Targeting - The idea that the Fed's monetary policy should focus on stabilizing the growth rate of nominal GDP has been discussed at length by several economists since the Great Recession delivered an attitude adjustment in the land of macro. In fact, it's an idea that's been around in formal terms at least since the 1980s. But it's not obvious that there's any progress at the central bank, or in policy circles generally, for moving toward this worthy strategy, and so supporters of the concept keep on talking (and writing). The latest comes from David Beckworth, who lays out the reasoning in a concise essay in National Review.  Beckworth explains that The simplicity of this approach can be illustrated by considering how the Federal Reserve would have responded to the sharp downturn of 2008–09 had it been targeting nominal GDP. During this time, the financial system was in distress and, as a result, there was a rush for liquidity. The rise in demand for highly liquid assets meant less spending and a drop in economic activity. Had the Federal Reserve been targeting nominal GDP at this time, it would have provided enough liquidity to fully offset the spike in liquidity demand. Such a response would have stabilized actual and expected nominal-GDP growth in 2008–09 and prevented the collapse of the economy. It is that simple.

Satyajit Das: Deflating Inflation/ Inflating Deflation - Quantitative easing (”QE”), the currently fashionable form of voodoo economics favoured by policymakers in the US, is primarily directed at boosting asset values and creating inflation. By essentially creating money artificially, central bankers are seeking to return the world to stability, growth and prosperity.The underlying driver is to generate growth and inflation to enable the problems of excessive debt in the economy to be dealt with painlessly. It is far from clear whether it will work. QE is designed to create inflation, at least just at the correct level. Given that one of the objectives of central banks is to keep inflation under control, it is ironic that they now want to create more inflation. Higher inflation would reduce the value of debt. Inflation may also induce more consumer spending, as people accelerate purchases, anticipating higher prices in the future. The ability of QE to generate inflation relies on Milton Friedman’s observation that “inflation is always and everywhere a monetary phenomenon.” The quantity theory of money holds that the supply of money multiplied by velocity (the rate at which it circulates) equals nominal income, the product of real output and prices. Increasing money supply increases nominal income, boosting real output and/ or prices.

Fed's Yellen: Inflation Transitory, will not "impede the economic recovery" - From Fed Vice Chair Janet Yellen: Commodity Prices, the Economic Outlook, and Monetary Policy. Yellen discusses the recent surge in commodity prices and the possible impact on underlying inflation. She doesn't think the increase in commodity prices will impege the economic recover.  A few excerpts:  [T]he recent run-up in commodity prices is likely to weigh somewhat on consumer spending in coming months because it puts a painful squeeze on the pocketbooks of American households. In particular, higher oil prices lower American income overall because the United States is a major oil importer and hence much of the proceeds are transferred abroad. Monetary policy cannot directly alter this transfer of income abroad, which primarily reflects a change in relative prices driven by global demand and supply balances, not conditions in the United States. Thus, an increase in the price of crude oil acts like a tax on U.S. households, and like other taxes, tends to have a dampening effect on consumer spending.  Fortunately, considerable evidence suggests that the effect of energy price shocks on the real economy has decreased substantially over the past several decades.

Yellen’ won’t help - I’m going to wonder off the reservation a little today and talk about the Fed, its balance sheet and risk assets. Janet Yellen is Vice Chair to Ben Bernanke at the Fed. She is one of the Fed Governors. I always thought she was pretty switched on but last night she gave a speech  that has me flabbergasted:  In my remarks today, I will make the case that recent developments in commodity prices can be explained largely by rising global demand and disruptions to global supply rather than by Federal Reserve policy… In my view, the run-up in the prices of crude oil, food, and other commodities we’ve seen over the past year can best be explained by the fundamentals of global supply and demand rather than by the stance of U.S. monetary policy. She’s joking isn’t she? She must be! Nope, Yellen believes that it’s all about the growth of the emerging economies and says:  In my view, the run-up in the prices of crude oil, food, and other commodities we’ve seen over the past year can best be explained by the fundamentals of global supply and demand rather than by the stance of U.S. monetary policy.

Fed Officials Present Diverging Views on Inflation - U.S. Federal Reserve officials Thursday gave different views on what should be done about surging commodity prices, underscoring a deepening divide about inflation at the Fed and among major central banks. Fed Board governors Daniel Tarullo and Elizabeth Duke, two regulatory experts who seldom talk about the economy and monetary policy, went out of their way to talk down inflation worries caused by the higher prices for oil, grains and metals. By contrast, citing a “remarkable turn of events” where commodity prices have surged, Philadelphia Fed President Charles Plosser said he is growing worried about waiting too long to rein in inflation. Top decision-makers at the Fed, including Chairman Ben Bernanke, don’t believe the central bank should rush to raise interest rates because the commodity price increase is likely to have a temporary impact on broader inflation. But a vocal minority at the U.S. central bank is growing restless–and policymakers in other parts of the world are also taking a different approach. Reflecting the dominant view at the Fed, Tarullo and Duke indicated it’s not yet time to tighten credit because the economy remains fragile and the U.S. central bank may regret moving too soon.

Mauldin: The Curve In The Road - Bernanke (and Dudley) have been testifying that inflation is not an issue. But what signs and maps are they reading? Bernanke specifically invokes inflation expectations as being most important, and he contends they are low. They both note that the "output gap" (more on it later) is still high and that wage inflation is unlikely in a period of high unemployment. But, as Greenspan recently said, "The problem is, none of these indicators will tell you when inflation is about to take hold." The Economic Cycle Research Institute wrote what I think is a very powerful editorial about the problem with Fed policy and inflation. I will quote some of the more important paragraphs, but you can read the piece in its entirety at "By using good cyclical indicators, you can - and we do - correctly forecast when inflation is about to take hold. "And it's precisely because the Fed - first under Mr. Greenspan and now under Mr. Bernanke - adamantly believes that inflation turning points can't be predicted, that the current U.S. recovery stands in danger of being snuffed out prematurely.

Core Inflation - A widely-held view, reflected in recent FOMC statements and statements on policy by various Fed officials, is that, in fulfilling the price-stabilization element of the Fed's mandate, the Fed should focus on a core price index that omits the most volatile prices. There are various ways to construct core price indices, including dropping food and energy prices, the Cleveland Fed's median CPI measure, the Dallas Fed's trimmed mean price index, and the Atlanta Fed's sticky price index. There are basically two arguments here. The first argument, represented in this this piece by Laurence Meyer is purely statistical. The Fed should pay no attention to food and energy prices, as movements in these prices tend to be transitory. The second argument in favor of using core inflation measures, comes from New Keynesian (NK) theory. In NK models, welfare losses arise from relative price distortions, but the problem arises only for the sticky prices, not for the more-volatile flexible prices. Now, this speech by Charles Plosser got me thinking...

Fed Watch: On the Logic of Inflation Hawks - Richmond Federal Reserve President Jeffrey Lacker: Businesses thus far have absorbed input price increases, presumably believing that competitors would not follow suit, which suggests that they believe that overall inflation will remain low. The responsibility of the Federal Open Market Committee (FOMC) is to validate these expectations by conducting monetary policy in such a way that inflation does not accelerate. That's not always an easy task at this point in a recovery. With hindsight, I think it is fair to say that policymakers overestimated the extent to which high unemployment would keep inflation from accelerating, and as a result, waited too long to withdraw monetary stimulus. Four years of 3 percent inflation may not have been the worst of all possible outcomes, but I do not consider it a success.  Note that Lacker changes the goalpost – rather than focus on core-inflation, he shifts the focus to headline inflation of 3%. Why? Because otherwise he needs to face the fact that core-inflation averaged a mere 25bp above trend over the 2004-2007 period:

Chicago Fed Paper: Commodity Prices Don’t Push Core Inflation - Rising commodity prices don’t push up underlying rates of inflation much and doesn’t require a policy reaction from the Federal Reserve, a new paper co-authored by the leader of the Chicago Fed says. The research, released Monday, wades into the contentious subject of whether a sharp increase in commodities prices, be they food, energy or raw materials, will drive a coming surge in inflation. Most central bankers have thus far argued the reduced role of commodity prices in the functioning of the U.S. economy mean that underlying inflation will likely remain under control.  Some Fed officials are also uncomfortable with the risk of being complacent in the face of a potential inflation threat, and recent surveys of inflation expectations show the broader public is growing more worried about price pressures, at least over the near term outlook. The Chicago Fed paper counts as a co-author bank president Charles Evans. He currently holds a voting role in the interest rate setting Federal Open Market Committee, and he is one of the central bank’s staunchest supporters of the still ongoing $600 billion bond buying program known as QE2.

Annals of Well, Duh (Commodity Prices) - Krugman - The Chicago Fed has a new paper (pdf) showing that shocks to commodity prices do not, in fact, presage higher core inflation. Actually, it’s quite a good little piece — and kudos to Charles Evans, the Chicago Fed’s president, for putting his name on it in these days of fanatical inflation hawks.But the result should come as no surprise. Here’s the IMF index of commodity prices versus core inflation since 1993: IMF, BLS  If commodity price rises lead to broader price inflation this time around, it will be a first.

Wages lag pace of inflation - Inflation is back, with higher prices for food and fuel hammering American consumers, and this time it really hurts. It's not just that prices are rising, it's that wages aren't. Previous bouts of inflation usually have meant a wage-price spiral, as pay and prices chase each other upward. But now, paychecks are falling further and further behind. In the past three months, consumer prices have been rising at a 5.7 percent annual rate while average weekly wages have barely budged, increasing at only a 1.3 percent annual rate. And the particular prices that are rising are for products that people encounter most frequently in their daily lives and have the least flexibility to avoid. For the most part, it's not computers and cars that are getting more expensive, it's gasoline, which is up 19 percent in the past year, ground beef, up 10 percent, and butter, up 23 percent. Inflation typically is the symptom of an economy overheating. Workers can't keep up with the demand for the vast array of things they make. Abundant dollars pursue scarce goods and services, forcing prices and wages up. The solution is simple enough -- central banks, such as the Federal Reserve, hike interest rates, applying brakes to the economy

Fun With Government Statistics -The New York Times' Floyd Norris explains why the government does not include house prices in calculating the inflation rate. Until 1983, the Consumer Price Index (CPI) included housing costs. But then the index was changed. No longer would home prices directly affect the index. Instead, the Bureau of Labor Statistics makes a calculation of “owners’ equivalent rent,” which is based on the trend of costs to rent a home, not to buy one. The current approach, the B.L.S. says, “measures the value of shelter to owner-occupants as the amount they forgo by not renting out their homes.” If house prices were included directly in the CPI, we would "officially" be experiencing massive deflation in "core" CPI (excluding food & energy). But using owner's equivalent rent (OER) yields a far different outcome. You can easily see that house prices are looking for the bottom again, but OER is skyrocketing. We might even go so far as to say that the "official" inflation rate which heavily influences the interest rate policy of the Federal Reserve is complete nonsense.

U.S. Import Prices Increase More Than Forecast on Higher Food, Fuel Costs - Prices of goods imported into the U.S. rose in March at the fastest pace since June 2009, led by a gain in crude oil and the biggest jump in food costs since 1994.  The 2.7 percent increase in the import-price index followed a 1.4 percent rise in February, Labor Department figures showed today in Washington. Economists projected a 2.1 percent gain, according to the median forecast in a Bloomberg News survey. Prices excluding fuel rose 0.6 percent.  Growth in emerging economies and a decline in the value of the dollar are leading to higher costs of commodities that Federal Reserve policy makers view as “transitory.” Still, companies such as the Jones Group Inc. (JNY) are beginning to pass on some of the higher raw materials costs to consumers, while seeking ways to maintain demand.  “The weak dollar and higher oil and commodity prices continue to lift inflation,”

The Fed Obliterates the Savings Ethic - Depression babies learned early that "saving for a rainy day" was not something one hopes to do but a requirement. The saying originated when most people worked on the farm. And when it rained, the fields were too wet to plow, and the farmer — not to mention the hired hands — made no money. There is no caveat to the counsel that says, "Keep six months of savings around if the money is earning at least six percent." Even if the money sits there all shiny, not earning a thing, it's the liquidity and insurance against the unknown that's the issue. Unfortunately, a central bank's debauchery of the currency serves to raise people's time preferences and impair their judgment. In a blog post recently, I highlighted the advice of life coach and author John P. Strelecky, who advises people to spend their tax refunds on an experience they will remember forever, rather than saving the few hundred or thousand dollars that the IRS may be giving back.

Food And Energy Inflation Hits Poor Hardest - Economist Mark Thoma draws attention to a Cleveland Fed study on household income and food and energy expenditures by income quintile. Households in the top 20 percent of the income distribution spend 11.6 percent of total expenditures on food and energy, which adds up to 7.9 percent of disposable income. For the bottom 20 percent these shares rise to 20.4 percent of expenditures and a whopping 44.1 percent of after-tax income!.  The poor obviously are hit much harder by food and and oil price rises. This result illustrates a more general point: We do not all experience the same rate of inflation. People with chronic illnesses experience a much higher inflation rate due to the higher rate of inflation for medical services and drugs. For those astutely wondering why food and energy expenditures are a larger fraction of total expenditures than of total income for the bottom 20 percent, there is a much higher fraction of households in this quintile which may be using savings and credit markets to consume above their annual income. Likely categories are the unemployed, business owners with temporary losses, students living on loans, and retirees drawing down their nest eggs.

Rising oil prices beginning to hurt US economy - Just when companies have finally stepped up hiring, rising oil prices are threatening to halt the U.S. economy's gains. Some economists are scaling back their estimates for growth this year, in part because flat wages have left households struggling to pay higher gasoline prices. Oil has topped $108 a barrel, the highest price since 2008. Regular unleaded gasoline now goes for an average $3.69 a gallon, according to AAA's daily fuel gauge survey, up 86 cents from a year ago... "The surge in oil prices since the end of last year is already doing significant damage to the economy," says Mark Zandi, chief economist at Moody's Analytics.

Pumped Up? - The U.S. economy has finally started to create jobs at a reasonable clip. Inflation is still low. Corporate profits are healthy, and surveys of business conditions suggest that the recovery is, as the Federal Reserve recently put it, “on a firmer footing.” So are happy days here again? Hardly. Last month, consumer confidence plunged, and pundits are still talking about the possibility of a double-dip recession. But, economically speaking, the source of the anxiety is something much more specific: high prices at the gas pump. The price of oil has risen thirty dollars a barrel since February and more than forty per cent since last summer, and the fear is that expensive oil may bring stagflation,High oil prices are generally bad for the U.S.—oil spending goes largely to foreign producers, leaving less money for American goods and services—but if you look just at the dollars involved the terror they inspire is somewhat mysterious. Gas is a relatively small percentage of most household budgets, and prices are now about eighty-five cents a gallon higher than they were twelve months ago, which translates into a few hundred dollars more a year. That’s not trivial, particularly for lower-income Americans, but it’s not devastating. In fact, it’s less than the increase in income that most Americans will get this year as a result of the new payroll-tax cut.

Are We At The Upper Range For "Safe" Inflation? - For the second consecutive month, consumer price inflation rose by 0.5% last month on a seasonally adjusted basis, the Labor Department reports. That’s the highest monthly rate in nearly two years. Higher energy and food costs are the key drivers for the higher inflation. In a world where inflation is bubbling around the globe—in China and India, for example—today’s news on U.S. inflation can’t be dismissed. But neither should today's U.S. numbers be overstated. Although the consumer price index (CPI) rose at a relatively high pace last month, it’s still well within the range we’ve seen in recent years. Meanwhile, core inflation (CPI less food and energy prices) actually dipped in March. Unless you’re expecting a sustained rise in food and energy prices from here on out, then there’s a case for arguing that inflation’s not set for a dramatic upside breakout.

Core Measures show low inflation in March - Earlier today the BLS reported: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in March on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.7 percent before seasonal adjustment. The index for all items less food and energy rose 0.1 percent in March, a smaller increase than in the previous two months. The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.6% annualized rate) in March. The 16% trimmed-mean Consumer Price Index increased 0.2% (3.0% annualized rate) during the month.  Over the last 12 months, core CPI has increased 1.2%, median CPI has increased 1.2%, and trimmed-mean CPI increased 1.5%.  This graph shows these three measure of inflation on a year-over-year basis.  These measures all show that year-over-year inflation is still low, but increasing lately.  Note: You can see the median CPI details for March here.A little good news: Core CPI increased at an annualized rate of 1.6% (down from 2.4% in February), median CPI 1.6% annualized in March, and trimmed-mean CPI increased 3.0% annualized (high, but down from 3.8% annualized last month).

Core Inflation Rises, but Is Still Low - Friday’s inflation report was mostly as economists expected it to be. Core inflation — which excludes food and energy prices and is a better guide to future inflation — rose slightly less than expected, but only slightly.  How worrisome is core inflation? The Federal Reserve certainly needs to watch it. If it continues to accelerate, that would suggest the Fed may need to raise interest rates sooner than it now plans. But core inflation remains very low historically. Here it is over the last three months, compared with historical trends: And here it is over the last year, again compared historically: The recent signs of economic weakness remain a much bigger risk than inflation.

Prices Outside Food, Energy Still Tame, but on the Rise - Rising gasoline and food prices aren’t news. They have been increasing a lot so far this year. When setting monetary policy, Federal Reserve officials have labeled rising commodity prices as transitory. Fed policymakers, however, should take note: other prices are also creeping higher. While core inflation isn’t about to run out of control, a further uptrend is likely as companies attempt to cover their rising input costs by marking up their own price lists. In recent speeches, U.S. central bankers have sounded almost defensive about rising commodity prices. The usual sound bite is that very accommodative Fed policy hasn’t increased commodity prices, and increased commodity prices don’t matter much. Instead, the Fed watches core inflation — which excludes volatile food and fuel prices. [To be fair, a few Fed officials are increasingly concerned about the inflation potential of rising food and energy costs. But their opinions aren't dominant.]

Not yet time to worry about inflation - SHOULD the Fed be worried about rising inflation? With new consumer price figures out, a handful of Fed officials are arguing that the central bank is at risk of falling behind the curve. Tim Duy discusses comments from Richmond Fed President Jeffrey Lacker here, and Luca di Leo rounds up statements from Board of Governors members Tarullo, Duke, and Yellen and Philadelphia Fed head Charles Plosser here. The members of the Federal Open Market Committee that are worried about inflation are mostly basing their arguments on headline inflation figures (I say mostly, because Dallas Fed President Richard Fisher seems to be basing his views on his gut). And indeed, headline consumer prices are were up 2.7% in the year to March. But the Fed tends not to focus on headline inflation. Yesterday, Mr Tarullo explained fairly clearly why that was the case—core inflation is a better predictor of future inflation than is headline inflation. Why? Because headline inflation is often driven by volatile and transitory components like food and energy, and because American institutions don't pass through headline increases to the extent that other economies do. Paul Krugman posts a nice chart here that illustrates the point; commodity costs may shoot all over the place but core inflation has been remarkably stable over the past two decades.

CPI (5 graphs) In March the CPI increased 0.5% bringing the year over year change to 2.7%. I will leave the analysis of the CPI to others and just discuss some of the implications. First, this caused my Fed policy index to turn positive for the first time since 2008. This index is a form of a Taylor Rule but it gives inflation and the unemployment rate an equal weight as compared to most versions of the Taylor Rule that give inflation roughly double the weight of unemployment or growth. But this implies hat the Fed should allow QE 2 to expire this spring. Moreover, it raises a real possibility that the Fed may raise feds funds in the second half of the year.Second, I will look at the not seasonally adjusted (NSA) core CPI. In a low inflation environment firms tend to raise prices once a year, typically at the start of the year. As a consequence in the NSA core CPI over half the annual increase occurs in the first quarter of the year. The third quarter pop stems largely from tuition, home owners equivalent rent and new car prices. In the first quarter of 2011 the NSA core CPI rose 0.852% as compared to 0.469% in 2010. This is the first time since 2004 that the NSA core CPI was higher than in the prior year. If the average that some 55% of the annual increase occurs in the first quarter holds this year it implies that in 2011 the December to December increase in the core CPI will be about 1.55% or about doulbe the 2010 gain.

U.S. Can No Longer Rely on Importing Low Inflation - For years, the U.S. counted on the rest of the world to supply loads of T-shirts, shoes and toys. The U.S. also imported an item not found on any ship’s manifest: low inflation. That trend is now ending, a shift that will complicate the consumer outlook and future Federal Reserve decision-making. Prices for all imports jumped a larger-than-expected 2.7% in March. Compared to a year ago, prices have surged 9.7%, the biggest gain since April 2010. Not surprisingly, energy prices powered the jump. The cost of foreign fuels was up nearly 29% over the past year. Other commodities were also more expensive. During the year ended in March, the import price of foodstuffs increased 20%, copper soared 31% and aluminum was up 14%. Fed officials have dismissed the impact of higher commodity costs. Earlier this week, Vice Chairman Janet Yellen and New York Fed President William Dudley discounted the notion that rising commodity prices would trigger a broader pickup in U.S. inflation.

US Inflation Rate: Inflation Using Volcker-Era Methodology…After former Federal Reserve Chairman Paul Volcker was appointed in 1979, the consumer price index surged into the double digits, causing the now revered Fed Chief to double the benchmark interest rate in order to break the back of inflation. Using the methodology in place at that time puts the CPI back near those levels. Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.  Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter’s web site, “Near-term circumstances generally have continued to deteriorate,” said John Williams. “Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem.”

U.S. economy is improving but energy costs are a drag, Fed says - The U.S. economy continued to improve over the last month on gains in manufacturing, but firms are feeling the effects of higher energy and raw material costs, the Federal Reserve said Wednesday. "While many districts described the improvements as only moderate, most districts stated that gains were widespread across sectors, and Kansas City described its economic gains as solid," the U.S. central bank said in its "beige book" summary. "Manufacturing continued to lead, with virtually every district citing examples of steady improvement, often with reports of increased hiring," the Fed said. The anecdotal summary of economic conditions looked unlikely to move the Fed away from its policy of keeping interest rates extraordinarily low and completing its $600-billion Treasury bond purchase program by the end of June.

Two Stories: Fed sees economic improvement, Fed releases mortgage lender enforcement actions - Fed's Beige BookReports from the twelve Federal Reserve Districts indicated that economic activity generally continued to improve since the last report. While many Districts described the improvements as only moderate, most Districts stated that gains were widespread across sectors, and Kansas City described its economic gains as solid. Real estate markets for single family homes for the most part either were little changed from low levels or continued to weaken across all Districts. ... Commercial real estate activity remained weak across all Districts, although seven reported slight improvements since their last report.• From the Fed: Federal Reserve issues enforcement actions related to deficient practices in residential mortgage loan servicing and foreclosure processing. This includes LPS and MERS.

Beige Book: Companies Want to Pass on Higher Prices - Higher costs for commodities and raw materials led some companies to raise prices, says today’s beige book from the Federal Reserve. But the report notes the ability to pass on higher prices to consumers varied across regions and sectors.See an interactive look at conditions in each Fed district. The idea that rising commodity prices could spread into broader inflation measures remains a key concern of Fed officials but with wage pressures subdued, there was little sign of concern about inflation in the book. Meanwhile, the beige book doesn’t usually cover geopolitical developments, but these are not usual times. Today’s book says uncertainty remained high in several regional economies, with many companies worried that unrest in North Africa and the Middle East could lead to oil prices rising further, as well as the consequences of Japan’s earthquake and nuclear crisis. The Fed banks in Boston, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, and Dallas all noted that companies in their areas had or expect disruptions to sales and production as a result of the tragedy in Japan.

Japan Turmoil Disrupting U.S., Fed Survey Finds - The Japanese earthquake may be having more of an impact on the U.S. economy than previously believed, according to the Federal Reserve’s latest Beige Book survey of current economic conditions released on Wednesday. A majority of the Fed’s 12 regional districts reported “actual or expected disruptions to sales and production” as a result of the Japan earthquake.  Surprisingly most of the districts that reported difficulty as a result of the Japan tragedy were on the East Coast or in the middle of the country.  The Minneapolis Fed said it was surprised when a quick survey of the factories in its district showed that 41% of them indicated that they had been unfavorably impacted by the disaster in Japan. One contact said that plastic resin shipments had been delayed.  In Boston, firms that use electronic components in their production seemed the most concerned.  “Inputs from Japan are expected to be in short supply soon if they are not already,” the Boston Fed reported.  In Atlanta, the auto and information technology sector saw temporary interruptions on the horizon.

The sails go limp - THIS morning, the Census Bureau released new trade data, and the news isn't great. The trade deficit fell in the month of February, but only because the decline in exports was smaller than the decline in imports. The revisions to forecasts of first quarter output are coming in fast and furious. Morgan Stanley's researchers have dropped expected real GDP growth in the first quarter to 1.5%, from 1.9%. And Macroeconomic Advisers also cut their projection to 1.5%, down from 2.1%. In January, Macroeconomic Advisers were anticipating growth of 4.1%. But that was before rising oil prices, disaster in Japan, and austerity fever. Real output growth of 1.5% is not very good, it should go without saying. It's below the trend growth rate, at a time when the economy should be roaring ahead at substantially more than trend growth. America still has a real output gap of about $800 billion, not to mention 13.5m unemployed workers to worry about. This week, we asked the members of Economics by invitation, our guest network of economists, to tell us what is wrong with America's labour market. You should read all the responses, but I'm partial to Scott Sumner's view when he writes:

G.D.P. Forecast for First Quarter Slides - When 2011 began, Macroeconomic Advisers, a forecasting company, expected that America’s economic output would shape up to rise at a 4.1 percent annual rate in the first quarter, the highest pace in over a year.  But economic reports coming in over the last few months have been increasingly disappointing. Today, after an especially weak report on February’s trade deficit, the group’s economists lowered their first quarter G.D.P. estimate to a sorry 1.5 percent annualized. If borne out, that rate would be slower than each of the last two quarters, at a time when the economy desperately needs to be rocketing forward so that companies will hasten their hiring. The Commerce Department will release its preliminary number for first quarter G.D.P. on April 28. .

Here come the downgrades for Q1 GDP Growth: Part III - More downgrades today ... Note: Part I (my call) and Part II. From MarketWatch: Q1 GDP estimates slashed post-trade data (ht jb)  Morgan Stanley slashed their estimate to 1.5% from 1.9% after what they called "a very weak report." RBS Securities cut their estimates to 1.7% from 2% ... And from Catherine Rampell at Economix: G.D.P. Forecast for First Quarter Slides Today, after an especially weak report on February’s trade deficit, the [Macroeconomic Advisers'] economists lowered their first quarter G.D.P. estimate to a sorry 1.5 percent annualized. So Macroeconomic Advisers' forecast has gone from a "paltry" 2.3% to a "sorry" 1.5%! The advance GDP report will be released on Thursday April 28th. Still time for more downgrades. What comes after "paltry" and "sorry"? Putrid?

Q1 GDP estimates slashed post-trade data - The trade data for February has led several economists to mark down their already-battered estimates for first-quarter growth. Morgan Stanley slashed their estimate to 1.5% from 1.9% after what they called "a very weak report." RBS Securities cut their estimates to 1.7% from 2%, and adding that while some of the cooling reflects special factors, "the combination of slowing growth and rising prices puts the Fed in an increasingly uncomfortable position." RDQ Economics, which is waiting until Wednesday's retail sales report to adjust their numbers, said "the quarter is looking very soft from the expenditure side."

US Fed’s Dudley: Growth Could Disappoint in First Quarter U.S. growth could disappoint in the first quarter but the outlook remains better than it was a year ago, New York Federal Reserve President William Dudley said Tuesday. He said the recent earthquake in Japan and rising oil prices have lowered the outlook over the last couple of months but still, “the outlook for growth is better than it was last summer.”“It looks like first quarter growth will be somewhat disappointing, compared with a few months ago, and come in at 3% or a bit less. I think there is some question about how oil prices will play with consumer confidence,” And he said it is premature at this point to talk about exiting from quantitative easing. “We can exit and will exit when time comes but that doesn’t mean that exit is close at hand.”Dudley said inflation should peak at 2.5% to 3.0% and so far there are no signs of second-round inflationary effects.

Fed Watch: Q1 Growth Looking Weak – Will it Affect the Fed? - In my last post I argued the Fed will tend to look through an transitory inflation increase – especially any that can be traced back to commodity prices – as the economy marches toward potential output, and thus not rush into policy tightening. The string of downgrades to Q1 growth, however, is a reminder there is no guarantee that march will continue in a timely fashion. To what extent will the Fed tolerate growth that falls short of their forecasts? What is the tipping point for QE3? Start with the most recent Fed economic projections from the January FOMC meeting. Although Q1 is looking weaker than anticipated, I doubt the projections will change much, as most policymakers will try to look through any one number to the underlying trend. The Fed is looking for Q4/Q4 growth in the 3.4-3.9 percent range this year. The longer run projection is 2.5-2.8 percent, a common estimate of potential growth, so the Fed projects closing the output gap by roughly a percentage point this year. The downgrades to Q1 forecasts arguably place that forecast in jeopardy. Again, I don’t think the Fed will see it that way. I think they will see it as noise, especially if they are not picking up a lot of anecdotal information otherwise – I anticipate today’s Beige Book release to signal the recovery continues, with concern about energy prices eating into consumer spending.

Budget Cuts Raise Doubt on Course of Recovery The budget deal struck last week amounts to a bet by the Obama administration that the loss of $38 billion in federal spending will not be the straw that breaks the back of a fragile economic recovery.  The proposed federal spending cuts, which were decided late Friday, do not amount to much by themselves, about 0.25 percent of annual domestic activity. But they join a growing list of minor problems impeding growth, economists said, including higher fuel prices and bad weather, Europe’s creeping malaise and the effect of the Japanese earthquake.  The impact of those problems, combined with growing cuts in spending by federal, state and local governments, has led some experts who had forecast that the economy would expand by more than 4 percent in 2011 to retreat toward a 3 percent growth rate. And it raises the question of how many more small cuts the president can afford.  Diane Swonk, chief economist at Mesirow Financial, a Chicago investment firm, said she had cut her forecast for 2011 to 3.3 percent, from 4.2 percent. And if growth falls below 3 percent, she said, “You’re just running on a treadmill. You’re not getting anywhere.”

G.D.P. Estimates Slide Further - Earlier this week we wrote that several prominent economic forecasters had lowered their estimates of gross domestic product growth in the first quarter of this year. Today saw even further declines. Macroeconomic Advisers, a forecasting firm, lowered its estimate to just 1.4 percent annualized, when just a few months ago they had pegged the number at 4.1 percent. Capital Economics likewise brought its estimate down to 1 percent, writing in a client note:Every data release last week seemed to necessitate a further downward revision to our first-quarter GDP growth forecast. By the end of the week when the dust had finally settled, that estimate was down to only 1% at an annualised pace. Indeed, there is now even a decent outside chance that the economy contracted outright. The median estimate on Bloomberg is 1.8 percent annualized, although many of the usual forecasters have not yet submitted their numbers.

Recession by End of Year? - John Taylor, CEO of FX Concepts, a currency trading firm with $8 billion under management says "We'll be in a recession by the end of the year. Three reasons: QE2 will end, Republicans are running the House, and the price of gas is heading up."Taylor also takes a look at global currency programs in foreign exchanges and he also discusses the problems facing the ECB.Taylor thinks interest rates should be 5% in Germany and 0% in Greece but that is impossible. I don't know where they should be because rates should be set by the free market not a bunch of central planners. Moreover, it was government bureaucrats not the free market that created an EU currency union with no fiscal controls on individual countries.. Here is a link to the Taylor video if the above frame does not play.

Satyajit Das: Voodoo Economics Redux -- Policy makers have two major mechanisms through which they can influence the economy. Using fiscal policy, governments can adjust the level of spending relative to tax inflows. Using monetary policy, governments or, in modern times, “independent” central banks can adjust interest rates and the supply of money to manage the availability and cost of credit as well as inflation . Ultimately, both mechanisms are designed to influence the level of demand in the economy, creating the economic “nirvana” of the “right” level of growth, unemployment and inflation. At the start of the global financial crisis, policy makers resorted to age-old remedies, increasing budget deficits and cutting interest rates. The only way out of the problem of excessive debt was strong growth and inflation. Growth would increase the income and cash flows of indebted individuals, companies and countries enabling them to more easily pay back debt. Inflation would help debt repayments, reinforcing increases in incomes and cash flows, at least in nominal terms. Inflation would also reduce the real (inflation and purchasing power adjusted) level of borrowings, reducing the level of leverage within the financial system.

U.S. Dollar: Review And Outlook - We believe that continued U.S. dollar weakness may be a consequence of the diverging monetary approaches central banks are taking around the globe. While many international central banks have been on a tightening path, raising rates (i.e. central banks of: Australia, Brazil, Canada, China, India, Norway, Sweden, to name but a few), the U.S. Federal Reserve (Fed) has been conspicuous in its continued easing monetary policy stance. Indeed, while other central banks have been shrinking the size of their balance sheets, the U.S. Fed’s balance sheet continues to expand on the back of ongoing quantitative easing policies.  Inflation manifests itself through a decline in purchasing power of the dollar, or said another way, weakness in the value of the dollar. Indeed, from the date of Bernanke’s Jackson Hole speech through March 31, 2011, the U.S. dollar declined 8.52%, as measured by the U.S. Dollar Index (DXY). 

Is the dominance of the dollar bad for America? - The conventional wisdom about the global dominance of the U.S. dollar is that it brings tremendous benefits to the American economy. U.S. firms can conduct their business internationally in their own currency, mitigating exchange-rate risks and transaction costs. Most of all, the U.S. government can finance its deficits at extremely low cost since dollar-denominated assets are in such demand. That's why there is always so much consternation about the possibility that the dollar will lose its No.1 status as the financial state of the U.S. deteriorates. But Michael Pettis, a finance professor at Peking University, offered just the opposite view in a recent essay in the Financial Times. Pettis argues that the U.S. would be better off if the dollar wasn't the world's premier reserve currency, and that the U.S. should actively work towards ending dollar dominance: His basic point is that the dominance of the dollar is forcing the take on debt – the primary factor behind the economy's recent disasters, and the primary concern about the health of the U.S. economy in future.  Here's Pettis:

Bad Financial Reporting 101 - Krugman - I’ve written many times about the way financial reporters interpret every uptick in interest rates as proof that the bond vigilantes have arrived; when rates slump again, somehow the issue disappears; and then when interest rates rise, even if it’s back to the previous level, it’s the bond vigilantes all over again. Here’s a new twist. It’s an interesting fact that right now US long-term interest rates and German long-term interest rates are almost equal. That’s a significant change: a year ago US rates were about 70 basis points higher. And the Bloomberg article knows why it has happened: it’s because Washington is now ready to cut spending. This isn’t reported as a speculation, or a possible explanation; it’s reported as a fact. But, you know, it isn’t. In fact, the narrowing spread between Treasuries and bunds could equally well be taken as a sign that debt and deficits don’t matter much: stern, austere Germany doesn’t seem to be gaining any rate advantage. It has become increasingly clear that the ECB is looking for reasons to raise rates, while the Fed plans to maintain easy money; that in itself says that long-term rates, which reflect expected future short-term rates, should be expected to move in the direction they have.

Interest Rate Convergence - Krugman - Last year Germany ran a deficit of 3.3 percent of GDP; the United States more than 10; Britain similar to the US, but now embarked on a harsh austerity program. Very different, you might think. Yet as of the time of posting, US borrowing costs were within 3 basis points — .03 percentage points — of Germany, while Britain was about 20 basis points higher. You might almost think that deficits aren’t making much difference here.

IMF Fiscal Chief: Europe Debt Situation Improving Faster Than U.S.’s - The debt situation across the Atlantic is improving at a faster pace than in the U.S., even though the main fiscal risks to the global economy are currently centered in Europe, the International Monetary Fund‘s fiscal chief said Tuesday. Carlo Cottarelli, head of the IMF’s fiscal affairs department, urged the U.S. to move soon in agreeing to a plan to contain the country’s public debt, which in 2010 rose to more than 90% of gross domestic product, or the economy’s total output. In an interview, he stressed the U.S. must implement budget cuts before interest rates begin to rise as markets start to doubt the country’s ability to cut its debt. “If I look at fiscal fundamentals, I see the situation in Europe improving faster than in the U.S.,” he said, adding that Portugal should be the last euro-zone country to need a bailout from the European Union and the IMF.

IMF urges U.S. to move quicker to cut debt ratios (Reuters) - The International Monetary Fund on Tuesday urged the United States to outline credible measures to reduce its budget deficit, pressuring the White House to detail plans to ratchet down record debt levels.President Barack Obama on Wednesday will offer proposals for reducing the nation's debt, aiming to seize the high ground in a debate over how best to cut red ink. Republican lawmakers are pushing for deep spending cuts inreturn for agreeing to raise a limit on the nation's ability to borrow. The IMF said "a major" adjustment will be needed in the United States next year to put the budget back on track. "Market concerns about sustainability remain subdued in the United States, but a further delay of action could be fiscally costly, with deficit increases exacerbated by rising (bond) yields," the IMF said in its "Fiscal Monitor" report. The IMF noted that while most advanced economies were taking steps to rein in budget gaps, Japan and the United States -- two of world's largest economies -- have delayed action to nurse their recoveries.

U.S. must cut deficit soon, IMF says - The International Monetary Fund urged the United States on Tuesday to accelerate efforts to slash the budget deficit.  “It is important the United States undertakes fiscal adjustment sooner rather than later,” said Carlo Cottarelli, director of the IMF Fiscal Affairs Department.  The U.S. is projected to have a fiscal balance as a percentage of GDP of -10.8% in 2011, the biggest percentage among advanced countries.  IMF officials are worried that delay in slashing the deficit might cause the bond market to lose faith in the U.S. ability to cut its deficit, which would push interest rates higher and possibly destabilize the global economy.  Markets have a tendency to react “late and abruptly” to deteriorating fiscal conditions, the IMF noted in its Fiscal Monitor Report, a review of global deficit issues.

Geithner seeks to reassure on US debt - Senior US officials sought to allay concerns about a future debt crisis in the world’s largest economy, saying the country had taken a leap towards fiscal discipline with President Barack Obama’s new deficit plan. In separate comments on Thursday, Jack Lew, White House budget director, and Tim Geithner, Treasury secretary, played down the political tensionsover fiscal policy, expressing confidence that Republicans and Democrats would quickly reach a deal to repair the US’s long-term finances. “There is a shared sense of urgency in Washington on fiscal issues,” said Mr Lew, in a video interview with the Financial Times.  Mr Geithner – speaking at an FT-Bertelsmann conference – said that despite differences on how to reach those targets, the US had made a “fundamental shift ... that makes it very hard for future presidents, future congresses to decide that you can live with the risk of higher deficits in the future”.

U.S. Treasuries 'Ponzi scheme': ex-PBOC official - A former adviser to China's central bank said on Monday that China should have retreated from the U.S. government-bond market and instead allowed the yuan to appreciate more freely, warning that U.S. sovereign debt was akin to a giant Ponzi scheme, according to a newswire report that cited an editorial on Caixin Media Group's website. Yu Yongding, a former member of the People's Bank of China monetary-policy committee and now a member of a state-run policy group, said allowing appreciation of the yuan against the U.S. dollar under a free-floating currency regime would have reduced China's need to acquire U.S. Treasuries. He likened the U.S. Treasury market to a "giant Ponzi scheme," arguing that Federal Reserve buying of Treasuries has artificially kept bond prices high, but that they would eventually fall to levels which reflected fundamentals of the U.S. economy

Pimco's Gross betting against U.S. debt - Gross, who manages the world's biggest bond fund and has spent recent months jawboning1 about the dangers of U.S. debt, has placed a $7 billion bet against Treasury bonds, according to the latest statistics2 released by his Pimco Total Return fund.  Gross made a splash last month by selling3 all the big bond fund's Treasury holdings and calling the federal budget a Greek tragedy4 in the making. Now he has gone one better, leaving the $236 billion fund with a short position in U.S government debt for the first time since February 2009 – and putting a third of the fund's assets in cash.The last time Gross was short Treasuries, he was also short cash, in a timely bet that the U.S. economy and financial markets would rebound from their meltdown lows. This time, however, he appears to be expecting something altogether different.

U.S. Debt: The Biggest Trouble Is Yet To Come - Last week's budget wrangles in Washington remind me of reality TV. You watch it like you watch a train wreck. While Republicans and Democrats have (temporarily) avoided shutting down the federal government, you almost wish they wouldn't have. At least then, they would have been forced to confront the economic consequences of their own political gridlock before reaching the next and much bigger deadline – the raising of the deficit ceiling, which may need to happen as early as five weeks from now if Geithner can't find a way to move money around the books to cover things until July. When the deadline comes, if we see the kind of absurd political infighting that we've seen over the past few weeks around the budget, the consequences could be much, much more deadly, and not just for the U.S. If we'd have had a government shut-down last week it wouldn't have been good – lots of people would loose their jobs, and growth could contract as much as a percentage point. But if America were allowed to default on its national debt (which would be the consequence of not raising the debt ceiling) for even a day or two, it could trigger a bond market collapse, a spike in global interest rates, and a financial fiasco that could make the collapse of Lehman Brothers look tame.

Fight Over Debt Ceiling Looms for Congress and Obama The down-to-the-wire partisan struggle over cuts to this year’s federal budget1 has intensified concern in Washington, on Wall Street and among economists about the more consequential clash coming over increasing the government’s borrowing limit.  Congressional Republicans are vowing that before they will agree to raise the current $14.25 trillion federal debt ceiling — a step that will become necessary in as little as five weeks — President Obama2 and Senate Democrats will have to agree to far deeper spending cuts for next year and beyond than those contained in the six-month budget deal agreed to late Friday night that cut $38 billion and averted a government shutdown3.  Republicans have also signaled that they will again demand fundamental changes in policy on health care, the environment, abortion rights and more, as the price of their support for raising the debt ceiling.   In a letter last week4, Treasury5 Secretary Timothy F. Geithner6 told Congressional leaders the government would hit the limit no later than May 16. He outlined “extraordinary measures” — essentially moving money among federal accounts — that could buy time until July 8

Debt Ceiling Crisis Looms After Budget Deal - After a government shutdown was avoided1 on Friday with a $38 billion trimming from the 2010 baseline budget, lawmakers have a new hurdle to overcome: passing an increase on the Federal Debt Limit to avoid defaulting on interest payments on the national debt -- a battle that will be over not billions, but a trillion dollars.  Currently the federal debt limit stands at $14.294 trillion. In order to keep the federal government functioning, this must be raised significantly by May 16th -- or "catastrophic" consequences will result, according to Treasury Secretary Tim Geithner2, who added that this week's financial crisis was "modest in comparison3" to what is coming down the road. Without action by congress, a number of government programs will wind up halted, limited or delayed -- including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds.

Now for the real budget war - Halfway through the fiscal year, and countless partisan power plays later, Congress finally managed to reach a deal on the 2011 budget1. Its signature feature: $38.5 billion in spending cuts or, as it's referred to by the key players, "the largest spending cut in American history." The negotiators came to their senses with only an hour and a half to spare before a scheduled government shutdown. The brinkmanship2 is worrisome, given the much more difficult budget battles ahead -- namely, raising the debt ceiling and dealing with long-term deficits in the 2012 budget. Handling those as poorly as lawmakers did the 2011 budget would have far worse consequences than a temporary government shutdown ever could. President Obama is expected to address the long-term debt in a speech this week. But first up for Congress is the debt ceiling, or legal borrowing limit. Treasury has warned that it now expects U.S. borrowing to hit the $14.294 trillion limit no later than May 16.

Why the debt limit fight will be different - Both a debt limit increase and a continuing resolution are typically considered must-pass bills. If a must-pass bill is not enacted into law, something very bad happens, such as a government shutdown or the U.S. government defaulting on a debt payment. I can think of at least three reasons why the debt limit fight should differ from the recently concluded battle on FY11 appropriations. First, a temporary continuing resolution has a hard deadline, while a debt limit increase does not. Second, defaulting on a debt obligation is potentially far more serious than a temporary government shutdown. The damage is also more dispersed and harder to understand than troops not getting paid and national parks shutting down.  All the financial market and economic policy types (including me) are terrified of running out of room because it’s never happened before and the worst case scenarios are really, really bad.Third, a freestanding debt limit increase bill doesn’t contain any spending cut, so there is no “natural” fiscal policy that should obviously included.

Graphic: A History of Debt Celings That Keep Going Up - Congress has raised the federal debt ceiling limit nine times in the past 10 years, and Treasury officials say the government will hit the current $14.3 trillion limit no later than May 16.  Without another increase, the government will either default on its bonds or have to slash spending by about 40 percent. Republicans say they won't vote for an increase without big additional cuts in spending.

GRAPHIC: 10 Years, 10 Broken U.S. Debt Ceilings - Since the debt limit’s introduction in 1917, Congress has never failed to raise it. But now, in the midst of a serious spending debate, some Republicans may threaten to hold the increase hostage unless they see substantial cuts in government spending. Sen. Kelly Ayotte, R-N.H, said on Wednesday, “As a new member of the Senate, I refuse to perpetuate this cycle. We cannot let this moment pass us by and I cannot in good conscience raise our debt ceiling without Congress passing real and meaningful reforms to reduce spending. That plan should include a Balanced Budget Amendment, statutory spending caps, spending cuts, and entitlement reform.' To be clear, reaching the debt ceiling would not directly trigger a government shutdown in the way a failure to negotiate a budget would. And the debt is not to be confused with the deficit, which represents the difference between spending and revenue, but is vulnerable to its effects.

Obama Girds for Struggle With Republicans Over Debt Limit…The struggle last week to avert a government shutdown may be little more than the warm-up for a much bigger battle in coming months over raising the debt limit.The U.S. government is projected to slam into the $14.3 trillion legal cap on government borrowing sometime this spring. As the price of their vote to allow the government to go further into debt, congressional Republicans are demanding far deeper cuts than the $38 billion they got last week in the deal to fund the government for the last six months of the 2011 fiscal year. Failing to raise the debt ceiling would have much more dire consequences than a shutdown, with Treasury Secretary Timothy Geithner predicting last week that it would “call into question the willingness of the government of the United States to meet its obligations,” and “shake the basic foundations of the entire global financial system.” That is why Republicans see the vote as their best chance this year to force President Barack Obama to accept dramatic reductions in the federal budget, this time perhaps measured in trillions, rather than billions.

The president welcomes debt reduction -- A NUMBER of writers on the left have been frustrated with what looks like terrible White House bargaining over the issue of an increase in the debt ceiling. Virtually everyone who matters in Washington, including the Repubilcan leadership, agrees that the debt ceiling must be raised and will ultimately support an increase in the debt limit. It is therefore difficult to see how the Republican leadership can credibly argue that it won't support an increase in the debt limit unless it gets what it wants. And it's therefore very hard to understand why Barack Obama would accept that he must negotiate with the Republicans. Kevin Drum writes: I think we should at least admit the possibility that Obama is neither stupid nor insane. Sticking firmly to a negotiating position is hardly rocket science, after all, and  it's hardly plausible that Obama doesn't get this. So surely the most likely explanation for his position is that he wants Republicans to make demands on him. Maybe he wants to cut spending but would rather give the appearance of having been forced into it. I don't know. But he's pretty obviously inviting Republicans to do this, not just stumbling into it accidentally. The only question is why.

What Will It Take To Pass The Debt Limit In June? - Repeatedly over the last few weeks, Wall Street clients have asked me to give odds on a big budget deal this year, one that would knock a trillion dollars or more off of the deficit over the next 10 years and would allow Republicans to support a debt limit increase.  I've said I didn't see much chance of a big deficit reduction, but I may have to revise that. President Obama will address the nation Wednesday night to back such a deficit reduction effort.  I still wouldn't put more than 33% odds on enactment yet, but that's a big jump from 5%.  Starting last fall, I've told my Wall Street clients to expect disruptions to the Treasury markets this spring and a series of short-term debt limit increases as we nibble at the deficit.

Insolvent and Going Deepercmartenson - The US budget process is entirely out of control and, by extension, its fiscal future is rather bleak. All one has to do is back up two steps, entirely ignoring the meaningless budget scuffles currently ongoing in DC, to see that the federal government's fiscal situation is in complete shambles. In fact, as things currently stand in terms of spending and revenues, the US government is insolvent - as its liabilities vastly exceed its assets on a net present value basis.  First there will be a fiscal/funding crisis that will originate in the bond market, specifically the US Treasury market. Interest rates will shoot up and either austerity will be imposed on the US, in a rather unpleasant and draconian way (the bond market is rather remorseless), or it will be self-imposed (not very likely). My estimations indicate this process will begin before the end of 2012. Next, if the US fails to heed the edicts of the bond market and tries to maintain spending in the face of rising interest rates, or tries to print its way out of trouble, the risks increase that the US dollar will suffer a major decline. Let's say that this process will begin a year after the start of the fiscal crisis.

Republicans responsible if country defaults: Geithner (Reuters) - Treasury Secretary Timothy Geithner on Thursday told Republican lawmakers that they would shoulder the blame if the country got too close to defaulting on its debt and roiled markets worldwide by not approving a debt limit increase. In yet another warning about the perils of not allowing the U.S. to borrow more to fund already spending already approved by Congress, Geithner said it would be deeply irresponsible for lawmakers to use debt limit negotiations for political gains.Congress must agree to raise the $14.3 trillion debt ceiling or the legal amount that the country can borrow. But Republicans have said they are unwilling to do so without reforms on government spending and have threatened to take negotiations to the deadline. "(Lawmakers) will say there's leverage in it, we can advance it. But that would be deeply irresponsible and they will own the risk," Geithner said.

Do as Wall Street does, not as it says - YESTERDAY, a colleague at Democracy in America warned that a debt-ceiling fight could potentially raise America's borrowing costs, needlessly increasing the country's fiscal burden. I'm somewhat sceptical; as my colleague acknowledges, previous debt ceiling fights have not generated much of a move in bond markets. But Matt Yglesias finds evidence that Wall Street is prepared to punish Washington this time around: House Speaker John Boehner has been reaching out to top Wall Street players asking how close Congress can get to the May 16th deadline (or July 8th drop-dead date) for raising the debt limit without seriously unnerving financial markets. The questioning is not going over well. “They don’t seem to understand that you can’t put everything back in the box. Once that fear of default is in the markets, it doesn’t just go away. We’ll be paying the price for years in higher rates,” said one executive. Boehner’s office last night would not confirm the conversations.

Social Security & the Debt Limit - This seems an opportune time to explain the actual relation between Social Security and Public Debt and the paradoxical effects on debt from cuts to future benefits. Because all else held even all this does is increase real debt over the medium term (25 years) while reducing purely theoretical debt over the God help us Infinite Future Horizon. Conceptual unpacking in Extended.As usual a good starting point for the serious student is the Budget Concepts and Budge Process (pdf) section of the Analytical Perspectives of the Budget (html index) released each year by OMB to illustrate the President's budget both conceptually and historically. But even beofre citing definitions I would like to direct Kossacks (and any visitors-welcome!) to a very handy web tool maintained by Treasury called Debt to the Penny which true to its name will give you total federal debt to the penny at the end of any specified business day or over date ranges.

Cantor: U.S. Will Hit Its Debt Ceiling - House Majority Leader Eric Cantor (R-VA) suggested Tuesday that Congress will allow the country to hit its debt ceiling, and continue to hold out for dramatic spending cuts while the nation approaches a genuine default. "I think Treasury has, if I'm not mistaken, has put ... out a notice that there is a window within which we have to act in order to avoid the eventual default of this country on its debt," Cantor told reporters at his weekly Capitol briefing. "And I believe that that outside deadline is early July."The country will hit the debt ceiling well before early July. In letters last week, Treasury Secretary Timothy Geithner warned Senate Majority Leader Harry Reid (D-NV) and House Speaker John Boehner (R-OH) that the country will hit its debt limit no later than May 16. If Congress hasn't acted by then, the Obama administration will have to take unusual measures to avoid a default -- but they can only buy themselves about six weeks. By about July 8, the country will be in default no matter what. Republicans view that "outside deadline" as the actual deadline, which means they're ready to walk to the brink if it means securing yet-to-be-named concessions.

Slate: What Republicans Want Added to the Debt Ceiling Vote - Brinksmanship has already started over the upcoming debt limit vote, even if we don't know when the debt limit will be reached. I reported yesterday that House Majority Leader Eric Cantor was still talking through the possible concessions Republicans will ask from Democrats in order for the vote. Here's what the back bench is saying.

  • Rep. John Culberson, R-Tex.: I urge you to attach a full repeal of Obamacare to the debt ceiling increase legislation.  No other amendments or legislation should be attached. Pass the bill, save America from default and repeal Obamacare, or protect Obamacare at the price of defaulting on our national debt.
  • Rep. Bob Goodlatte, R-Va.: Goodlatte said he hasn't decided on concessions for such a move, but said he might attach his support for a higher ceiling to his pet legislative project — a Constitutional amendment to require balanced federal budgets, he said.
  • Rep. Mick Mulvaney, R-S.C., I've said that I'd be more than willing to consider voting for the debt increase if it comes with structural, real structural, what I call cultural change to Washington.

Right-Wing Bullies Will Hold The Nation Hostage Again - I hope the President decides he has to take a stand, and the sooner the better. Last December he caved in to Republican demands that the Bush tax cut be extended to wealthier Americans for two more years, at a cost of more than $60 billion. That was only the beginning — the equivalent of my cupcake. Last night he gave away more than half the sandwich — $39 billion less than was budgeted for 2010, $79 billion less than he originally requested. Non-defense discretionary spending — basically, everything from roads and bridges to schools and innumerable programs for the poor — has been slashed. The right-wing bullies are emboldened. They will hold the nation hostage again and again. In a few weeks the debt ceiling has to be raised. After that, next year’s budget has to be decided on. House Budget Chair Paul Ryan has already put forward proposals to turn Medicare into vouchers that funnel money to private insurance companies, turn Medicaid and Food Stamps into block grants that give states discretion to shift them to the non-poor, and give even more big tax cuts to the rich. There will also be Republican votes to de-fund the new health care law.

Report: Wall Street execs warn Boehner on debt ceiling brinksmanship - Politico:Republicans are growing increasingly concerned about the impact a bruising fight over raising the nation’s $14.29 trillion debt ceiling could have on U.S. financial markets. House Speaker John Boehner (R-Ohio) has had conversations with top Wall Street executives, asking how close Congress could push to the debt limit deadline without sending interests rates soaring and causing stock prices to go lower, people familiar with the matter said. Boehner spokesman Michael Steel said Tuesday night that he was not aware of any such conversations. Republicans are busily making a long list of absurd demands in exchange for raising the debt-limit ceiling, but they are running a bluff. There's not a chance in hell they will block an increase in the debt limit.

Fear the Bond Market - A showdown over the debt limit is coming down the pike, and despite warnings from Timothy F. Geithner, Ben S. Bernanke and many  economists about the potential catastrophe that could result, the game of chicken has continued. But it appears that bond traders are now weighing in. Politico reports: House Speaker John Boehner (R-Ohio) has had conversations with top Wall Street executives, asking how close Congress could push to the debt limit deadline without sending interests rates soaring and causing stock prices to go lower, people familiar with the matter said. Ezra Klein notes that Republicans may back down because they do not want to upset Wall Streeters, who have donated large sums to the G.O.P. (and Democrats too, really). But there’s a more fundamental cost at stake: If there is fear that the government will default on its debt, the costs for the government to borrow will go way up, as would be the case with any borrower. What do higher government borrowing costs mean? For one,  the federal debt will become even harder to pay off, which is obviously not the desired effect. And two,  a rise in long-term interest rates could derail the recovery.

Defaulting on debt is not the end of the world - The NYT had a piece on the implications of the United States hitting its debt ceiling and running the risk of defaulting on its debt. The article exclusively presented the views of people who portrayed hitting the debt ceiling and defaulting on the debt as being an end of world scenario. It would have been useful to present the view of people who do not consider a default on the national debt to be the worst possible outcome. While there can be little doubt that a default on the U.S. debt would lead to a financial crisis and would likely permanently reduce the role of the U.S. financial industry in world markets, it is also likely the case that the United States would rebound and possible rebound quickly from a default. The experience of Argentina may be instructive in this respect. Argentina defaulted on its debt at the end of 2001. Its economy fell sharply in the first quarter of 2002 but had stabilized by the summer and was growing strongly by the end of the year. By the end of 2003 it had recovered its lost output. Its economy continued to grow strongly until the world recession in 2009 brought it to a near standstill.

"You'll End Up With Kleptocrats Rather Than Technocrats" -- Noah Smith: ...In a well-functioning economy, the government and the private sector complement rather than cannibalize each other. No country's private sector will ever get rich without the infrastructure, schools, research, legal system, police, army, etc. that only the government can and will provide in sufficient quantity. Private businesses should usually not try to take over these functions, just as the government should usually not attempt to build factories, dictate bank lending, or refine petroleum. To maintain this balance, one thing we need is a strong free-market ideology that prevents the government from overstepping its bounds. But we also need high-quality technocrats in the government - technocrats who are dedicated enough or well-paid enough to resist the efforts of rational, self-interested, profit-seeking businessmen to use the government as a cash cow. If you demonize technocrats, all you'll succeed in doing is in making the technocrat profession a disreputable one. And all that will get you is...low-quality, easily corruptible technocrats. The danger of Marxism is long past. The danger of becoming a failed state is real and big and increasingly immediate. ...

Debt Jumped $54.1 Billion in 8 Days Preceding Obama-Boehner Deal ...The federal debt increased $54.1 billion in the eight days preceding the deal made by President Barack Obama, Senate Majority Leader Harry Reid (D.-Nev.) and House Speaker John Boehner (R.-Ohio) to cut $38.5 billion in federal spending for the remainder of fiscal year 2011, which runs through September. The debt was $14.2101 trillion on March 30, according to the Bureau of the Public Debt, and $14.2642 on April 7. Since the beginning of the fiscal year on Oct. 1, 2010, the national debt has increased by $653.4 billion.

A brief word about the budget deal - THE timing of the deal struck on spending priorities for the remainder of the fiscal year was such that the government actually was shut down for a few minutes, before a one week stopgap resolution (which buys the time to complete legislation on the actual compromise) could be passed. But the damaging, uncertain duration halt to government operations that many feared has, it seems, been averted. My colleague has some details here, and of the process he writes: Congressmen from both parties are congratulating themselves on the historic nature of the deal. It does cut spending by an unprecedented amount, especially considering that half of the year has already passed. Moreover, it entails concessions from both sides. For all this heady talk, however, the deal-making has been far from edifying. The Democrats brought events to this pass by neglecting to pass a budget last year, when they had control of both the House and the Senate. The Republicans, in a naked display of opportunism, they seemed willing to bring the government to a standstill over riders that had nothing to do with the budget. I think it's worth remembering a few important things. First, the federal government did not need to cut spending in this fiscal year. There is no immediate fiscal crisis; on the contrary, yields on American government debt remain extraordinarily low. Second, macroeconomically speaking, now is a bad time to be cutting spending.

Are We Really Supposed to Be Impressed By This? - So our leaders finally came to a literal “eleventh hour” agreement to narrowly avoid a government shutdown–an agreement to cut $38 billion from the remainder of this fiscal year’s federal budget.  To put that cut in perspective, the Washington Post made the graphic above. In his weekly address, President Obama is proud of this just-latest demonstration of “bipartisan compromise”.This “biggest annual spending cut in history” is the $38 billion out of the $3.5 trillion just-annual budget (or just above 1 percent), as shown in the graphic.  And as unimpressive as this picture is, it still leaves out both the budget outlook beyond this year (which is not getting any better) and the entire “other side” of the federal budget–the revenue side.  But of course, the revenue side of this issue is even uglier and more hypocritical than the (direct) spending side is.

The Era of Perils of Pauline Budgeting - The continuing resolution debate that took the federal government to the brink of a shutdown Saturday was as close to a classic “Perils of Pauline” silent movie ending as you can get. Once the common political wisdom changed from the continuing resolution being the most important budget fight of the year to it being just the opening act, the budget was untied and taken off the railroad track just as the train was about to run over it.While everyone from federal employees to D.C. residents with trash to be collected may have breathed a big sigh of relief, it’s important to know that this latest episode in “The Perils of the Federal Budget” will not be the only one this year with a cliffhanger ending. Each one of the next steps is just as likely to be decided only after the federal fiscal version of a dastardly deed is threatened and is on the verge of happening. The fiscal 2012 budget resolution is next.

Macroeconomic Impact of the Budget Deal - Last night's deal on the budget cuts $37.8 billion in spending.  I haven't seen the exact composition yet, but most of it is presumably "domestic discretionary spending" - i.e., the stuff that counts as government purchases in the national income accounts. Generally we do our macroeconomic calculations at 'annual rates', and since there is about six months left in the fiscal year covered by the budget (i.e., the government budgets start in October), the cut is $75.6 billion at an annual rate.  The most recent GDP estimate is an annual rate of $14,871 billion for the fourth quarter of 2010, so lets call it $15,350 billion for the second third quarters of 2011 (based on roughly 5% nominal GDP growth, consistent with FOMC members' forecasts); that implies the cuts are 0.5% of GDP at an annual rate. If we put the multiplier at 1.75, which is the midpoint of the CBO's range of estimates, the cuts reduce GDP by 0.875% at an annual rate.  The rule of thumb known as Okun's law says that, for every percentage point less of GDP growth, the unemployment rate increases half a percentage point.  So, over the course of a year, that would put unemployment at 0.4375 higher.  Since this is over six months, we're talking about an 0.22 point increase in the unemployment rate.  On a labor force of 153.4 million, that translates to a loss of 337,500 jobs.

From the GOP: Budget Cuts for FY 2011 -  From the House Appropriations Committee (Republican), courtesy of TPM: First, relating to this post on the early plans for cuts take a look at the hit to NOAA. (First column is relative to FY2010 budget enacted, and second column relative to FY2011 request.) Page 2 from House Appropriations Committee via TPM.  Given the small likelihood of tsunamis and the fact that we don't need to worry about global warming [0] [1], this makes a lot of sense. (By the way, record highs of 80 degrees in Madison on Sunday!). On a different note, I find it incredibly interesting to see where other large cuts are placed. Page 2 from House Appropriations Committee via TPM.  WIC stands for "Women, infants and children", and is described here:  WIC provides Federal grants to States for supplemental foods, health care referrals, and nutrition education for low-income pregnant, breastfeeding, and non-breastfeeding postpartum women, and to infants and children up to age five who are found to be at nutritional risk.

An Offensive Response to the Budget 'Crisis' - A budget is more than a passel of numbers. It is a statement of a country’s values and priorities. And the priorities in the budget deal struck Friday night offend. Republicans have doubled down on their reverse Robin Hood agenda. When they speak of “fiscal responsibility,“ get out your decoder ring. Because what they really mean is that middle-class and working Americans should shoulder the responsibility of tackling debts and deficits. And—natch—in this budget, the toughest cuts will come from education and health. But so far, the president has failed to challenge the inside-the-Beltway narrative of debt and deficit “crisis,” or lay out a vision of a government working for the common good. It’s time to reset the debate and focus on rebuilding an already frayed social contract. An honest discussion would address the real source of our long-term debt: not Social Security and Medicare, not so-called entitlements, but a broken healthcare system dominated by powerful drug, insurance and hospital lobbies. A people’s budget would champion a fair tax system and call for an end to costly wars that are breeding insecurity

Will the Budget Cut Deal Hurt the Economic Recovery? - The budget deal struck by President Obama and John Boehner and other Republicans struck over the weekend will cut $38.5 billion from government spending in the next year. Generally, when the government spends less that slows the economy, just like when consumers or companies spend less. That was afterall the reason many people thought a government shutdown, which would have temporarily slashed government spending and furloughed 800,000 government workers, would have hurt the economy. Thomas Lam, who follows the US  for OSK-DMG Economics Group, says the budget deal could reduce real GDP growth by at least 0.4%. The unemployment rate, which recently stood at 8.8%, could end up anywhere from 0.2% to 0.4% higher than it would have been without the deal. And Lam is not alone. Nor is he the most worried. Diane Swonk, chief economist at Chicago-based Mesirow Financial, says negative impact of the budget deal could be more than double Lam's estimate or 0.9%. She now estimates that GDP will grow 3.3% in 2011, down from a pre-deal estimate of 4.2%.

2011 04 09 Government Budget Fraud (video)

Don't savings lower the deficit? - AP's John Taylor describes a part of the federal budget debate that needs clarification for the average voter and others regarding this current round of 'negotiations': Some $18 billion of the spending cuts involve cuts to so-called mandatory programs whose budgets run largely on autopilot. To the dismay of budget purists, these cuts often involve phantom savings allowed under the decidedly arcane rules of congressional budgeting. They include mopping up $2.5 billion in unused money from federal highway programs and $5 billion in fudged savings from capping payments from a Justice Department trust fund for crime victims Both ideas officially "score" as savings that could be used to pay for spending elsewhere in the day-to-day budgets of domestic agencies. But they have little impact, if any, on the deficit.

Why the Budget Agreement is a Game Changer - The budget agreement that emerged from last week’s negotiations literally changes the direction of federal spending. As the chart shows the Obama Administration’s proposed increase in discretionary spending for 2011 has been reversed in the course of the negotiations into an actual decrease in discretionary spending. A year ago the Administration’s budget called for an increase in discretionary spending of about $39 billion. Remarkably the agreement calls for a decrease of about the same amount. No one could have predicted such a turn around one year ago.  Of course this is the first step of a longer term budget strategy. The next step is the 2012 budget and associated reforms. But this first step helps establish the credibility needed for the budget strategy to increase economic growth and encourage private investment.

Line By Line | Talking Points Memo - The GOPers on the House Appropriations Committee released a chart of the cuts in the federal budget for the rest of fiscal year 2011. It's a pretty handy reference point for the top line numbers across the board. cut funding for a tsunami warning center

Final Spending Cuts, Program by Program | TPM Document … 9 pp

Job training programs cut in budget deal - Facing recession-weary audiences across the country, President Obama frequently highlighted the possibilities of job training for the unemployed. The new fields of green technology, advanced manufacturing or clean energy would require new skills that job training programs could provide. More education would bolster the workforce and the economy. And at a community college “summit” in October, Obama touted the colleges’ role in providing workerswith skills to take advantage of new opportunities.“These are places where workers can gain new skills to move up in their careers,” he said. “These are places where anyone with a desire to learn and to grow can take a chance on a brighter future for themselves and their families.”But details of the budget compromise this week between the president and congressional leaders show federal funding for job training programs has taken a significant hit — more than $870 million in all. Included are cuts to occupational training grants at community colleges, green jobs classes and a program to help low-income older people acquire work skills.

Two Notes on the Continuing Resolution - From the appropriations committee summary of the continuing resolution (i.e, the budget deal):  The legislation also eliminates four Administration “Czars,” including the “Health Care Czar,” the “Climate Change Czar,” the “Car Czar,” and the “Urban Affairs Czar.”  Anastasia screamed in vain. And: For the Department of Transportation, the bill eliminates new funding for High Speed Rail and rescinds $400 million in previous year funds, for a total reduction of $2.9 billion from fiscal year 2010 levels.    I didn't realize it was possible to throw trains under the bus.  Petty and shortsighted.

Obama is Bad at Losing, Budget Edition - At the end of last year I wrote a post about how President Obama is bad at losing. I like that conceptual model because the idea that President Obama is bad at losing – that he loses in a way that conflicts his base, concedes too much to his opponents and doesn’t leave liberalism in a better position to fight next round  - is robust to many different ideas about the current state of Democratic Party. Regardless of whether or not you think President Obama is a progressive surrounded by failing institutions, a Rubinite centrist who puts on a good show, a political neophyte who is perpetually getting rolled by his adversaries or someone who hates fighting and prefers either floating above the fray or getting the half-a-loaf quickly, the way he is losing his battles should worry you about the longer-term project of liberalism and the Democratic Party. The idea that Obama is terrible at losing jumped back at me now that we’ve gotten to another loss. The budget deal was a huge win for Speaker Boehner. Let’s chart the proposals that had been offered:

Celebrating Defeat - Krugman - Ezra Klein gets this right, I think: it’s one thing for Obama to decide that it was better to give in to Republican hostage-taking than draw a line in the sand; it’s another for him to celebrate the result. Yet that’s just what he did. More than that, he has now completely accepted the Republican frame that spending cuts right now are what America needs. It’s worth noting that this follows just a few months after another big concession, in which he gave in to Republican demands for tax cuts. The net effect of these two sets of concessions is, of course, a substantial increase in the deficit. I also think that Ezra is right that the Obama people are counting on a growing economy to pull them through. The judgment was apparently that it was OK to move policy in the wrong direction, because the economy was strong enough to weather the shock, and that it was more important to look centrist than to defend good policy. Of course, that didn’t work out too well last year, did it?

Smoke and Mirrors Watch - Here's AP reporter Andrew Taylor digging into the $38 billion in spending cuts that Republicans agreed to and finding that an awful lot of it is smoke and mirrors: Instead, the cuts that actually will make it into law are far tamer, including [...] $2.5 billion from the most recent renewal of highway programs that can't be spent because of restrictions set by other legislation. Another $3.5 billion comes from unused spending authority from a program providing health care to children of lower-income families. ....The spending measure reaps $350 million by cutting a one-year program enacted in 2009 for dairy farmers then suffering from low milk prices. Republicans also claimed $5 billion in savings by capping payments from a fund awarding compensation to crime victims. Under an arcane bookkeeping rule — used for years by appropriators — placing a cap on spending from the Justice Department crime victims fund allows lawmakers to claim the entire contents of the fund as budget savings. And this report from CBS News notes two other phantom cuts: $1.7 billion left over from the 2010 census and $2.2 billion in subsidies for health insurance co-ops that are going to be funded anyway via the healthcare reform bill. This stuff alone adds up to $27.4 billion, all of it money that wouldn't have been spent anyway.

Budget deal: CBO analysis shows initial spending cuts less than expected - A federal budget compromise that was hailed as historic for proposing to cut about $38 billion would reduce federal spending by only $352 million this fiscal year, less than 1 percent of the bill’s advertised amount, according to the Congressional Budget Office. Although that analysis dampened enthusiasm for the deal among many Republicans on Thursday, the House and the Senate approved the measure with bipartisan support. President Obama is expected to sign the bill Friday, officially ending the prospect of a government shutdown. The findings from the budget office warned that the deal may never come close to delivering on its promises. The analysts found that $13 billion to $18 billion of the cuts involve money that existed only on paper and was unlikely to be tapped in the next decade.  The problem — in the murky mathematics of the federal budget — is that not all “spending” is really spending. Understanding why requires knowing that the government does not work like a savings bank.  Instead, Congress usually gives agencies the authority to draw from Uncle Sam’s one gigantic checking account. The agencies can’t take money out of this fund until they’re ready to spend it. And that’s where it becomes complicated.

How do $38.5 billion in cuts become $350 million? - So how do the $38.5 billion in 2011 cuts become $352 million when the CBO looks at them? Well, they don’t, not really. They become more like $20-$25 billion. But that’s still a lot less than $38.5 billion. And to understand what happened, you need to understand an important quirk of the budget process. There’s a difference between the amount of money an appropriations committee has to spend (their “budget authority”) and the amount of money they actually do spend (their “outlays”). The numbers you hear — $38.5 billion in cuts, if you’re measuring by what we spent in 2010, or $78.5 billion, if you’re measuring against the president’s 2011 budget request — are talking about “budget authority.” But some of that money wouldn’t have been used anyway. The Census Bureau, for instance, had $2 billion or so sitting around that it didn’t end up needing.  It probably just wouldn’t have been used. It’s like the philosophers always wondered: If a tree never grows in the forest, can it really be cut? The authority/outlay distinction doesn’t get you down to $352 million, however. Rather, that’s what you get if you’re only looking at money saved by the end of this year.

The Budget Deal May Fall Apart - On Friday, The White House and the GOP came to a budget agreement to fund the government for the rest of Fiscal Year 2011, averting a government shutdown. But they didn't actually vote on the deal. They voted on a 1-week continuing resolution so they could wrangle up the details for an official vote this week. And that might not work out. The buzz out of DC is that the number of GOPers who will vote 'no' is growing. John Podhoretz at Commentary thinks that over the next 72 hours, there will be a big anti-deal groundswell, and that we will ultimately have a government shutdown, with the GOP getting the brunt of the blame. Even if this isn't the case, it's pretty ominous for the bigger debates -- the debt ceiling, the 2012 budget -- that are due to begin in just weeks. As we noted this weekend, the whole reason the GOP caved on certain issues, was because they knew the much bigger fights were right around the corner.

Stiglitz: Of the 1%, By the 1%, and for the 1% and the Downward Spiral Into the Abyss - As we can see, the 'crisis' of the US budget impasse was averted, and the theater came to an end. Now the real work of creating a sustainable budget can begin. Listen to what Stiglitz has to say, and think about it. He is not perfect, the documentary Inside Job was not perfect, but start thinking for yourselves, and stop taking the easy route of allowing others to think for you, and mouth their slogans. They are only too willing to tell you what to think, what is real even if your eyes say no, if you let them.The pigmen are going to be unrelenting in their attacks on the middle class and the poor. The attacks are threefold:

    • - resisting financial and political reform which caused the crisis in the first place..
         - blaming the victims, and compelling them to take the greatest pain of the bailouts, and continuing bailouts and subsidies to the financial class through spending reallocations.
    • - shifting the impulse to reform from financial reform to 'tax reform' that further supports the monied interests. Cut taxes for the wealthiest as your primary agenda using a variety of deceptive means like promoting a consumption tax, of a flat income tax with offshore havens and loopholes, so the burden falls most heavily on those who spend the greatest percentage of their labor on subsistence, basic needs.

Fighting for a People's Budget - Obama made the right choice in defending Social Security, Medicare, and Medicaid, and pushing instead for healthcare reform—even putting negotiating drug prices on the table. He again refused to renew the Bush tax cuts for the wealthy—a pledge he has made and broken in the past. He also called for cuts in a defense budget that has contributed 2 out of 3 dollars in increased discretionary spending since 2001. Yet in many ways his approach continues to legitimize the inside-the-beltway consensus that spending cuts must lead the way toward achieving fiscal responsibility. Just as the Simpson-Bowles Commission proposes, for every $1 raised by closing tax loopholes on wealthy Americans, the President proposes $2 in spending cuts. Two-thirds of those cuts would come from education, health and other social programs, while only one-third comes from the military budget. While the president speaks eloquently of his vision of “shared sacrifice,” in reality it is still a budget that hits the poor and the middle-class hardest while wealthy Americans and the military are asked to sacrifice far less.

Taxes and Spending for Beginners - Over the long term, we are projected to have large and growing federal budget deficits. Assuming that is a problem, which most people do, there seem to be two ways to solve this problem: raising taxes and cutting spending. Today, the political class seems united around the idea that spending cuts are the solution, not tax increases. That’s a given for Republicans; Paul Ryan even proposes to reduce the deficit by cutting taxes. But as Ezra Klein points out, President Obama and Harry Reid are falling over themselves praising (and even seeming to claim credit for) the spending cuts in Thursday night’s deal. And let’s not forget the bipartisan, $900 billion tax cut passed and signed in December. The problem here isn’t simply the assumption that we can’t raise taxes. The underlying problem is the belief that “tax increases” and “spending cuts” are two distinct categories to begin with. In many cases, tax increases and spending cuts are equivalent — except for the crucial issue of who gets hurt by them.*

Poll: Americans Strongly Support Budget Deal, And Credit Dems For Averting Shutdown - Nearly six in ten Americans approve of the eleventh hour budget deal struck between Congress and the White House to avert a government shutdown, according to a CNN poll released on Monday. And what's more, a plurality give Democrats the most credit for making it happen. In the poll of American adults, 58% said they approved of the budget deal, compared to 38% who disapproved.  Additionally, the poll found that a 48% plurality of respondents credited Obama and Congressional Democrats the most for preventing a government shutdown. Thirty-five percent of respondents gave more credit to Republicans, while 11% thought both sides were equally responsible. While majorities of both Democrats and independents support the compromise, a plurality of Republicans dislike it, with fully half of them saying that their party gave up too much ground on the deal.

Pain of British Fiscal Cuts Could Inform U.S. Debate - In the United States, the debate over how to cut the long-term budget deficit is just getting under way.  But in Britain1, one year into its own controversial austerity program to plug a gaping fiscal hole, the future is now. And for the moment, the early returns are less than promising.  Retail sales plunged 3.5 percent in March, the sharpest monthly downturn in Britain in 15 years. And a new report by the Center for Economic and Business Research, an independent research group based here, forecasts that real household income will fall by 2 percent this year. That would make Britain’s income squeeze the worst for two consecutive years since the 1930s.  All of which has challenged the view of Britain’s top economic official, George Osborne, that during a time of high deficits and economic weakness, the best approach is to aggressively attack the deficit first, through rapid-fire cuts aimed at the heart of Britain’s welfare state.

Balanced-budget plan: How Congress could cut the deficit to zero in eight years by literally doing nothing. - The Simpson-Bowles blue-ribbon deficit commission longs to slash Social Security and defense spending. The Bipartisan Policy Center's Alice Rivlin and Peter Domenici yearn for a value-added tax. Rep. Paul Ryan's politically deft, economically daft plan conspires to shift the burden of health care spending, cut taxes for the rich, and make up the difference wi One might think that we need all of these big plans, these grand bargains, because of the enormity of the fiscal challenge the country faces. The United States is swimming in a sea of red ink, with trillion-dollar annual deficits and an unfathomably gigantic cumulative debt.  But the truth is we don't need any of these plans. Every one of them is entirely unnecessary for balancing the budget and eventually reducing the debt. They may even be counterproductive. Thus, Slate proposes the Do-Nothing Plan for Deficit Reduction, a meek, cowardly effort to wrest the country back into the black. The overarching principle of the Do-Nothing Plan is this: Leave everything as is. Current law stands, and spending and revenue levels continue according to the Congressional Budget Office's baseline projections. Everyone walks awayth fantastical supply-side growth assumptions. And President Obama is likely to embrace the Simpson-Bowles recommendations when he announces his long-term budget plan on Wednesday.

Slate's Do-Nothing Balanced-Budget Plan - Annie Lowery's provocative piece about budget policy is making the rounds this morning.  There is a lot to enjoy and a lot of familiar ground to disagree with, but the essential point is worth repeating: So how does doing nothing actually return the budget to health? The answer is that doing nothing allows all kinds of fiscal changes that politicians generally abhor to take effect automatically. First, doing nothing means the Bush tax cuts would expire, as scheduled, at the end of next year. That would cause a moderately progressive tax hike, and one that hits most families, including the middle class. The top marginal rate would rise from 35 percent to 39.6 percent, and some tax benefits for investment income would disappear. Additionally, a patch to keep the alternative minimum tax from hitting 20 million or so families would end. Second, the Patient Protection and Affordable Care Act, Obama's health care law, would proceed without getting repealed or defunded. The CBO believes that the plan would bend health care's cost curve downward, wrestling the rate of health care inflation back toward the general rate of inflation. Third, doing nothing would mean that Medicare starts paying doctors low, low rates. Congress would not pass anymore of the regular "doc fixes" that keep reimbursements high. Nothing else happens. Almost magically, everything evens out.

When You Are Engulfed in a Deficit Crisis - Many of my friends on the left are coming closer to my view that plans to tackle the budget deficit are highly overrated, in part because there is no pressing deficit crsis and in part because the lack of a pressing threat makes it highly unlikely that any plan will actually work. From Yglesias Annie Lowrey writes about the fact that if we stick to the current law baseline the budget deficit goes away. Nobody has to do anything. Congress merely needs to refuse to do the things that make up the “current policy” baseline where we do doc fixed and extend tax cuts and add AMT patches. I think that this is an important point not because doing nothing is optimal policy, but because it highlights the worthlessness of long-term deficit reduction plans. If the goal is to produce a projection that says the budget will be balanced in the medium term, then we’ve already achieved that—the current law baseline projection says the budget will be balances. If the goal is to produce a deficit reduction plan that’s credible with the markets and allows us to maintain low interest rates and low inflation, then we’ve already achieved that—the status quo is low interest rates and low inflation. In other words, there’s nothing that changing current law could possibly accomplish. I say at times that a plan to solve America’s fiscal problems is not only at hand but one I have used successfully many times: get drunk and hope the problem goes away.

Do nothing, sure, but how? - YESTERDAY, Slate's Annie Lowrey made the point that Congress could eliminate the (primary) deficit if it wanted to, simply by doing nothing: The New York Times' David Leonhardt was thinking along similar lines:If Congress takes no action in coming years, what will happen to the budget deficit? It will shrink — and shrink a lot. This simple fact may offer the best hope for deficit reduction. As federal law currently stands, some significant tax increases are set to take effect in coming years. The most important is the scheduled expiration of the Bush tax cuts at the end of 2012. I don't know that these writers are necessarily advocating this course of action. Both acknowledge that this wouldn't necessarily be the ideal way to eliminate the deficit; it would rely almost entirely on tax increases, for instance. But they do seem to imply that the hemming and hawing in Washington over just how to cut the deficit is misplaced given what seems like a relatively easy opportunity to do something useful by simply doing nothing.

Paul Ryan’s Budget Proposal—Posner - Paul D. Ryan, the Republican Congressman who is the chairman of the House of Representatives’ Budget Committee, has proposed an ambitious plan for capping federal expenditures and eventually eliminating, or at least greatly reducing, the national debt. The plan is detailed, and I will omit most of the details. The significance of the plan lies not in its details, or indeed in any of its proposals, but rather in the willingness of a major politician to challenge entitlements spending. This is only part of the plan but it has great symbolic significance, displays political courage, may open a productive dialogue, and challenges President Obama to propose his own plan for limiting such spending, which he has thus far been too timid (or politically realistic!) to do.

Ryan’s Plan Neither Serious nor Courageous - What the meteoric career of Paul Ryan demonstrates is how easily impressed we are whenever a politician purports to restore solvency by punishing the poor and the elderly (while coddling the rich). The Wisconsin Republican congressman’s fiscal plan has won rave reviews from both the usual right-wing suspects and some self-styled centrists, who have praised him and his proposals as “serious,” “courageous” and even “uplifting.” By now, however, those who have actually examined the Ryan plan with care and competence know that those acclamations are highly exaggerated, which is probably a far too polite description.  If a serious budget is a budget that eventually curtails deficits and reduces the national debt within the foreseeable future, the Ryan plan is a joke—as the most casual reader ought to be able to understand. His own published version of the plan doesn’t offer any real estimates past a decade from now, when he still anticipates a substantial deficit. Beyond that, he cites Congressional Budget Office numbers that indicate the budget will at last achieve balance in the year 2040—or more than a quarter-century from today.

Risky Business - The sweeping budget blueprint that House Budget Committee Chairman Paul Ryan, R-Wis., released this week marked the fifth time since 1980 that Republicans have followed an electoral breakthrough by attempting to restructure Medicare or Social Security. Each of the previous efforts ended in tears, largely because the GOP’s approach failed to attract support beyond its core coalition. Ryan’s plan, by seeking to end Medicare as it now exists, reprises the same risk—at a time when the GOP is growingly increasingly reliant on votes from white seniors. From this trail of wreckage, one lesson is clear: Restructuring entitlements without bipartisan support is a high-wire proposition. Even expanding entitlements on a party-line basis isn’t easy. Although the Medicare prescription drug plan that Republicans passed with little Democratic support in 2003 has been popular, Democrats are still struggling to sell the American people on the new entitlement to health insurance that they established last year over unified GOP opposition.

A Word From Those Who - Krugman - I’ve been reading various “news analyses” of the Ryan plan, and I’m feeling depressed. In the past, I’ve complained about false equivalence — of “views differ on shape of the planet” type reporting. But what I’m seeing here is worse: supposedly objective, even-handed reporting that actually prejudges the issue according to current conventional wisdom. The stories I have in mind say things like this: “There are those who criticize the Ryan plan, saying that it’s too radical/goes too far.” As a card-carrying member of Those Who, I protest. This is just wrong. People like me don’t say that the Ryan plan is too radical; we say that it’s a fraud. The spending cuts are largely fake, either because they’re just magic asterisks or because they wouldn’t survive politically; the revenue estimates are fake, because they combine huge tax cuts with vague assurances that extra revenue will be found by closing loopholes. There’s no there there — except for big tax cuts for the rich and pain for the poor.

The Ryan Plan - As I have pointed out before, a bipartisan group of ten former CEA chairs (including your humble blog host) has endorsed the Bowles-Simpson commission report as a starting point for dealing with the long-run fiscal imbalance.  So readers might like to know that Bowles and Simpson themselves have called the Ryan plan a positive step. If you want to learn more about the Ryan plan, you can look at this side-by-side comparison of two plans or read this CBO report.   CBO makes clear that it believes there are substantial budgetary savings in the Ryan plan, but to a large extent these are because "the government’s contribution [to Medicare] would grow more slowly than health care costs, leaving more for beneficiaries to pay."  Many on the left view such a change in entitlements as too draconian, but they have not offered a real alternative.  If they did, it would have to include substantial, broad-based tax increases, which those on the right would view as draconian.

Imbalanced Budget: Ryan Gives Wealthy a Free Pass - House Budget Committee Chairman Paul Ryan’s budget plan has been the talk of Washington this week. Most of the discussion has revolved around his proposal to privatize Medicare and slash many federal programs to the bone. Less attention has been paid to the tax side of Ryan’s plan, which is every much as radical as the spending side. One would think that a comprehensive budget proposal designed primarily for the purpose of reducing budget deficits and the national debt would put at least some of the burden on the revenue side of the equation. First, it would reduce the need to cut spending so heavily and improve the chances of passage; unless Ryan is only interested in scoring points with the Tea Party crowd, he will need the support of at least some Senate Democrats and President Obama if he wants any aspects of his plan enacted. Second, Ryan’s plan puts an exceptionally heavy emphasis on cutting programs like Medicaid and food stamps that primarily aid the poor, while the well-to-do are essentially held harmless because they don’t benefit much from federal spending. The one government spending program that arguably benefits the wealthy disproportionately is national defense because, as UCLA economist Earl Thompson has argued, it protects their capital. And that’s the one major program Ryan lets off the hook almost completely.

The Ryan Plan: The Biggest Risk Shift Ever - There are lots of ways to talk about Rep. Paul Ryan’s dramatic budget plan, none of them kind. It’s a massive cut in benefits to the poor and elderly. It’s another giant tax cut to the well-off. It doesn’t reduce the national debt at all, according to the Congressional Budget Office. It doesn’t just reduce costs in Medicare and Medicaid, it effectively eliminates those vital Great Society programs. Its extreme budget austerity would doom the hesitant economic recovery and condemn the economy to a slower growth path for decades to come. All those statements are true. But a better way to look at the the Ryan plan is in the context of some of the big shifts in the economy and government programs over the last few decades. Seen this way, it would be yet another step, the biggest yet, in shifting economic risk onto individuals and families.

Paul Ryan in Your Pockets: Government by People Who Hate You - Dean Baker- House Budget Committee Chairman Paul Ryan put out a budget proposal last week that will leave the vast majority of future retirees without decent health care by ending Medicare as we know it. According to the Congressional Budget Office (CBO) analysis, most middle-income retirees would have to pay almost half of their income to purchase a Medicare equivalent insurance package by 2030. They would be paying much more than half of their income in later years.This sort of broadside against the living standards of the middle class might have been expected to draw an outraged response in a nation that exalts the lifestyle and values of the middle class. Instead the punditry rallied around Mr. Ryan's plan to deal with the problem of run-away entitlement spending, crediting it for being "serious" even if they did not embrace all the details.If there is any doubt that our political system is controlled by an elite who is completely removed from the bulk of the population, this response to the Ryan plan ended it. There is nothing at all serious about the Ryan plan. It is naked attempt to redistribute yet more money to the country's rich at the expense of everyone else.The proposal to end Medicare relies on market efficiencies to get health care costs under control, as though we had not tried this before. Has Representative Ryan never heard of Medicare Advantage or Medicare Plus Choice? Doesn't he know that we already have the opportunity to see the effectiveness of private insurers in containing health care costs in the vast non-Medicare insurance market?

Why the Clinton ‘95 strategy might not work this time - In 1995 a new Republican House and Senate majority passed two bills. The first slowed the growth of government spending and balanced the budget. The second cut taxes. Because Medicare and Medicaid spending accounted for much of projected future spending growth, most of the savings in the Balanced Budget Act of 1995 came from Medicare and Medicaid. President Clinton vetoed both bills. In 1995 and 1996 he had two fiscal messages:

  1. 1995: “Republicans are cutting Medicare and Medicaid to pay for tax cuts for the rich.”
  2. 1996: “Medicare, Medicaid, Education, and the Environment.”

Guest Post: Latest from Cato...Kaiser Health News carries an article from Michael Cannon from Cato Institute on the benefits of Ryan's proposal on Medicare. Cannon is wrong. First, he begins by advocating for repeal by comparing the roughly 500 billion in cost of the program to the overall debt and deficit, never mentioning that the 500 billion is actually over 10 years. Next he proceeds to Medicare savings, and concludes that there were no mechanisms to constrain Medicare savings...and he's right here.  Then he talks about vouchers, and the proposal by Congressman Paul Ryan.  Here's what he says:  Second, the budget should restrain Medicare spending by giving enrollees fixed vouchers they can use to purchase any private health plan of their choice. Poor and sick enrollees should get larger vouchers, but the average voucher amount should grow only at the overall rate of inflation. Because vouchers enable seniors to keep the savings, they will do what ObamaCare won't: reduce the wasteful spending that permeates Medicare. Seniors will choose more economical health plans and put downward pressure on prices across the board....nearly 30 percent of Medicare's costs could be saved without adverse health consequences." In other words, vouchers come with a huge built-in margin of safety: seniors could consume one-third less care without harming their health.

Medicare for Beginners - The basic “problem” with Medicare is that its liabilities are projected to grow faster than its revenues indefinitely because health care costs are growing faster than GDP (and Medicare’s revenues are a function of wages).* The “solution” proposed by Paul Ryan is to convert Medicare from an insurance program, which pays most of your health care expenses, to a voucher program, which gives you a certain amount of money that you can try to use to buy health insurance. I’ve described the main problems with this approach already: it transforms a large future government deficit into an even larger future household deficit, and on top of that it shifts risks from the government to individual households. Today I want to look at this from a different angle. We created Medicare in the 1960s because retired people did not have another viable way of getting affordable health insurance. Medicare forces workers to pay for retirees’ health insurance, but since workers become retirees someday, it’s in their own interests to do so, assuming the system remains in place.

Who Wants a Voucher? - In yesterday’s post, I compared two ways of solving the long-term Medicare deficit: (a) increasing payroll taxes and keeping Medicare’s current structure or (b) keeping payroll taxes where they are and converting Medicare into a voucher program. As a person who will need health insurance in retirement, I prefer (a), but others could differ. Today I want to ask a different question. Let’s say Medicare does become a voucher program along the lines proposed by Paul Ryan. So workers pay 2.9 percent of their wages and in retirement they get a voucher. According to the CBO, if you turn 65 in 2030, that voucher will pay for 32 percent of your total health care costs, including private insurance premiums and out-of-pocket expenses (see pp. 22-23). Would you rather have that deal or nothing at all? At that point, I think a large and powerful minority of people would prefer to just get rid of what’s left of left of Medicare. If you’re young, why would you want to pay 2.9 percent of your wages for forty-five years in order to get back a voucher that will only cover a small fraction* of your health care costs for about twenty years?

Paying for health care - Representative Paul Ryan's (R-WI) plan to address the U.S. federal deficit is an opportunity to reflect on fundamental questions of what we're trying to buy and how much we're willing to spend when it comes to the role of the government in health care. Let me begin with two premises that I take as given. (1) The historical growth of federal expenditures on health care is unsustainable. Over the last 20 years, Medicare and Medicaid expenditures grew at an 8.4% continuously compounded annual rate (data source: CBO). That's 3.75% faster per year than GDP grew, and for that difference in growth rates, federal health care expenditures as a percentage of GDP would double every 18.5 years. If those historical growth rates were to continue, federal health expenditures would rise from their current 5.4% of GDP to 10% of GDP by 2027 and 20% of GDP by 2045. Something has to give. (2) Changing the path requires denying some medical services for someone who would otherwise receive them.

Mr. President: Why Medicare Isn’t the Problem, It’s the Solution, by Robert Reich - The real problem is the soaring costs of health care that lie beneath Medicare. They’re costs all of us are bearing in the form of soaring premiums, co-payments, and deductibles. Americans spend more on health care per person than any other advanced nation and get less for our money. So what’s the answer? For starters, allow anyone at any age to join Medicare. Medicare’s administrative costs are in the range of 3 percent. That’s well below the 5 to 10 percent costs borne by large companies that self-insure. It’s even further below the administrative costs of companies in the small-group market (amounting to 25 to 27 percent of premiums). And it’s way, way lower than the administrative costs of individual insurance (40 percent). It’s even far below the 11 percent costs of private plans under Medicare Advantage, the current private-insurance option under Medicare. In addition, allow Medicare – and its poor cousin Medicaid – to use their huge bargaining leverage to negotiate lower rates with hospitals, doctors, and pharmaceutical companies. This would help move health care from a fee-for-the-most-costly-service system into one designed to get the highest-quality outcomes most cheaply.

Why Not A Public Option for Medicare? - Krugman - So, people are always asking what I would do about health care costs. One answer is that I would do all the things that are in the Affordable Care Act, and more. But if you want a really radical proposal — but one that, unlike privatization, actually has strong evidence on its side — why not add a true public option to Medicare?  I mean creating a network of hospitals and clinics actually run by the government — a civilian VA, as Phillip Longman puts it — and giving Medicare recipients the option of using that system. The public option would be required to spend significantly less per risk-adjusted recipient than traditional Medicare. And if it couldn’t provide care that seniors wanted given that restricted budget, it would have no takers and would close. But the actual experience of the VA suggests, of course, that such a system would have major cost advantages — and that it could be used to achieve major cost savings.

Saving Privatizing Ryan - Krugman - The initial swooning has died down to some extent — but I’m struck by the extent to which news stories are still covering for Paul Ryan. I’ve already noted how “news analyses” write as if the objections of the critics were simply that his plan is too radical, as opposed to what people like me are actually saying, which is that it’s a fraud. So today I read in the Washington Post that  The Republican plan would cut spending on domestic programs while protecting the military and preserving George W. Bush-era tax cuts that disproportionately benefit high earners. Um, no. It proposes huge additional tax cuts for high earners, over and above the Bush tax cuts; $2.9 trillion dollars’ worth just over the next decade. My best guess here is that the press corps shies away, consciously or unconsciously, from giving the stark truth about this joke of a plan; after all the praise from VSPs, it’s hard either to report that knowledgeable people consider the plan a total fraud, or even to be frank about the plan’s extreme features. But saving pundits from embarrassment is not part of a reporter’s job.

My Medicare Deficit Solution - As I’ve discussed before, the Ryan Plan is just one bad idea dressed up with the false precision of lots of numbers: changing Medicare from a health insurance program to a cash redistribution program that gives up on managing health care costs. Here’s the key chart from the CBO report: Here’s how to read that chart. In 2030, under current law, a 65-year-old Medicare beneficiary’s health care will cost $60. (Obviously, this is using an index, not real dollars.) Medicare will pay $35 and the beneficiary will pay $25 in Part B premiums and cost sharing. Under the CBO’s more likely “alternative fiscal scenario,” her health care will cost $71, of which Medicare will pay $41. Under the Ryan plan, the same health care purchased in the private market will cost $100; “Medicare” will give her a $32 voucher, and she’ll pay the last $68 on her own. So what should we do? Most importantly, we have to recognize that there are two separate problems, and they are not equal. The primary problem is health care inflation. The secondary problem is the long-term Medicare deficit. That’s a secondary problem because it’s largely a result of the primary problem.

House GOP budget retains Democratic Medicare cuts - – In a postelection reversal, House Republicans are supporting nearly $450 billion in Medicare cuts that they criticized vigorously last fall after Democrats and President Barack Obama passed them as part of their controversial health care law. The cuts are included in the 2012 budget that Rep. Paul Ryan, R-Wis., unveiled last week and account for a significant share of the $5.8 trillion in claimed savings over the next decade. The House is expected to vote on the blueprint this week. Ryan's spokesman, Conor Sweeney, said the cuts are virtually the only part of "Obamacare" — the term that Republicans use derisively to describe the health care law enacted last year — that the Wisconsin Republican preserved when he drafted his budget. If left in effect, they would retain smaller payments over the next decade for hospitals, nursing homes, hospices and other Medicare providers that Democrats put in effect. In addition, federal subsidies would decline for seniors who purchase coverage through private insurance plans under Medicare Advantage, although Ryan proposed a small partial restoration in that area.

Fantasia in D - Krugman -- Nowhere was the contrast in views over health care stronger than on drugs. Obama called for using Medicare’s purchasing power to reduce drug costs; Paul Ryan, in his hissy fit response, held Medicare Part D — which specifically denies Medicare the ability to bargain — as an example of the cost savings that can be achieved through privatization (although he didn’t call it that.) It’s true that Part D has so far come in substantially cheaper than was predicted in 2003, when the Medicare Modernization Act was passed. That’s because overall spending on prescription drugs (pdf) has risen much more slowly than expected, mainly thanks to relatively few new drugs being introduced and greater use of generics:  What you really want is a comparison of costs with what happens when the government is able to bargain; and Austin Frakt has the goods: the VA pays 40 percent less than Medicare Part D.

Obama v. Ryan on Cost Control - For the better part of two years, the debate over how to control health care costs had a certain one-sided quality to it, because the Democrats had a plan and their critics did not.  All the critics had to do was attack. All of that changed this month, when House Budget Committee Chairman Paul Ryan, R-Wis., released his budget proposal and included within it radically conservative reforms of the nation's major health care programs. Ryan would repeal altogether the coverage expansions of the health law. He also would increase the eligibility age for Medicare and then turn it into what most of us would call a "voucher scheme," eliminating in 2022 the traditional government-run insurance plan for everybody who retires in that year and replacing it with a fixed financial subsidy that seniors can apply toward the cost of regulated private insurance policies. Last but not least, Ryan would transform Medicaid into a block grant. Instead of guaranteeing federal funds to cover everyone that becomes eligible for the program, Washington would simply give the states a pre-determined, lump sum of money -- and let states figure out how best to use it.On paper, the Ryan plan saves the government a lot of money, at least in the long run. But upon closer inspection, the savings turn out to be illusory, cruel or some combination of the two.

Here's How Paul Ryan's Budget Plan Screws Old People - One of the features of Paul Ryan's plan to save the federal budget is that it replaces Medicare with vouchers with which older folks can use to buy private health insurance. The idea is that this private insurance will do what Medicare does. And it might. At first. But the vouchers are linked to the CPI, not to the inflation rate of healthcare expenses (and private insurance costs). So as time goes on, barring a radical change in the inflation rate of healthcare costs, the vouchers will cover less and less of the costs that Medicare covers today. This will protect the government from rising healthcare costs. And hose seniors. (Fans of Ryan's plan say the 'competition' unleashed by the move away from government handouts will reduce the inflation rate of healthcare expenses. We suppose that's possible. But we'll believe it when we see it. The doctors we talk to say Medicare payouts are brutally low. So it's hard to imagine them going lower, at least until we have vastly more doctors.) Courtesy of Asha Bangalore of Northern Trust, here's the inflation in healthcare costs (blue line) vs the CPI (red bars):

Ryan’s bad joke - Ezra Klein - Just over a year ago, I wrote a column praising Rep. Paul Ryan’s Roadmap. I called its ambition “welcome, and all too rare.” I said its dismissal of the status quo was “a point in its favor.” When the inevitable backlash came, I defended Ryan against accusations that he was a fraud, and that technical mistakes in his tax projections should be taken as evidence of dishonesty. I also, for the record, like Ryan personally, and appreciate his policy-oriented approach to politics. So I believe I have some credibility when I say that the budget Ryan released last week is not courageous or serious or significant. It’s a joke, and a bad one. For one thing, Ryan’s savings all come from cuts, and at least two-thirds of them come from programs serving the poor. The wealthy, meanwhile, would see their taxes lowered, and the Defense Department would escape unscathed. It is not courageous to attack the weak while supporting your party’s most inane and damaging fiscal orthodoxies. But the problem isn’t just that Ryan’s budget is morally questionable. It also wouldn’t work.

Wrong Is Right? - Krugman - I like Ezra Klein; I find his blog an extremely useful source, and his analysis of health-policy issues in particular is invaluable. But my jaw dropped when I read this: Just over a year ago, I wrote a column praising Rep. Paul Ryan’s Roadmap. I called its ambition “welcome, and all too rare.” I said its dismissal of the status quo was “a point in its favor.” When the inevitable backlash came, I defended Ryan against accusations that he was a fraud, and that technical mistakes in his tax projections should be taken as evidence of dishonesty. I also, for the record, like Ryan personally, and appreciate his policy-oriented approach to politics. So I believe I have some credibility when I say that the budget Ryan released last week is not courageous or serious or significant. It’s a joke, and a bad one. Ezra is right about this plan — but the Roadmap was also a bad joke. And Ryan has been a disingenuous flake all along; if you didn’t see that from the start, it makes you less, not more, credible.

RyanCare and RomneyCare - Brian Beutler notes that Sen. John Cornyn is now saying RyanCare is “exactly like Obamacare.” Cornyn is, of course, on record favoring that ObamaCare be repealed and declared unconstitutional.  As I’ve written previously, if the exchanges in RyanCare can hold health-care costs down to the rate of inflation, then the Affordable Care Act is going to work far better than anyone currently believes. They serve a population that requires less emergency care, that is more able to make decisions, and its using subsidies that are better set up for cost control. Unfortunately, neither the exchanges in RyanCare nor in the Affordable Care Act can hold health-care costs to the rate of inflation, or even very close to it. Perhaps the best analogy for RyanCare isn’t ObamaCare, which, unlike RyanCare, includes a raft of efforts to reform how medicine is paid for and delivered in an effort to hold down its costs, but RomneyCare, which had the exchanges but no delivery-system reforms. And RomneyCare hasn’t been able to control costs, which is why Massachusetts is now trying to kick off a big effort at delivery-system reform.

Rep. Ryan on Medicaid vs. the uninsured - From Rep. Ryan’s Path to Prosperity: Recent studies have indicated that Medicaid patients are more likely to dieafter coronary artery bypass surgery, less likely to get standard care for blocked heart arteries, and more likelyto die from treatable cancer, than those with other coverage options. By some measures, such as in-hospital death rates following major surgeries, Medicaid patients fared even worse than the uninsured.  While true as stated, it should surprise nobody that I do not believe the intended impression, not for one second. Nor do I think the proposed policy will improve the outcomes of those who would become uninsured rather than have Medicaid coverage. I have seen no study that shows otherwise.

Rep. Ryan on Medicaid vs. the uninsured – ctd. - Austin sent me an email this morning with the same information he put in his previous post. As you can imagine, the continued assertion that having Medicaid is worse than being uninsured is a sore point with us. So I took it upon myself to go look up citation “22″ in Rep. Ryan’s budget proposal. That’s the one that follows the quotation Austin reprinted in his post. It’s “Ibid.” (page 40) Unless someone tells me otherwise, that means that the source is the same as the previous citation, “21″. That is (page 39): I went ahead and checked that source out. It’s a short argument about cost-shifting (which Austin already addressed here). But more importantly, it has little to do with outcomes, and absolutely does not say that you’re better off being uninsured than on Medicaid.

Rep. Ryan on Medicaid vs. the uninsured – ctd. again - Aaron just noted that in Rep. Ryan’s Path to Prosperity he cites (#21) an American Medical News article on cost shifting in support of this sentence: “For doctors who see Medicaid patients at below-market reimbursement rates, losses are shifted to non-Medicaid patients.” If by “losses are shifted” Rep. Ryan he is suggesting a causal shift of all or most of them, he’s wrong. Very, very wrong. Turns out I published a thorough literature review on cost shifting last month. (Publication here. Ungated working paper here. Start of long series of posts on it here.) I believe I can state with confidence and credibility that I know a lot about this subject. All the scholars who reviewed my paper, both before and after submission to the Milbank Quarterly, agree with me. My conclusions are not controversial among those who have really studied this issue deeply and seriously. Here they are:

An Economic Path to Prosperity or Purgatory? - There’s a reason we don’t advocate amputating arms as a solution for weight loss. We have to consider the loss of the limb in the context of how well the human body functions in the aftermath of its removal. The same principle applies to deficit reduction. And yet the President seems to be embracing a conservative agenda on deficit spending and “entitlement reform” that makes precisely this mistake. Like his counterparts in the UK, Ireland, Greece, Portugal and Spain, the President is lining up to ensure that his country doesn’t become the next Japan, even though (irony of ironies), Japan’s “lost decade” never produced a level of unemployment as high as the “recovering” US economy has today. The President, like Congressman Ryan before him, needs to consider the budget balance in the context of the dynamics of the external sector and the private domestic sector, which are intrinsically linked by national income movements. Consider the fundamentals: there is a private sector that includes both households and firms. And there is a government sector that includes both the federal government as well as all levels of state and local governments. Then there is a foreign sector that includes imports and exports. In their discussion of government deficits, both the Democrats AND Republicans fail to appreciate that there is a relationship among these 3 sectors and that one cannot look at changes in one (say, the government sector), without considering what changes in its spending patterns will do to the others.

Ryan's Five-Point Plan - Krugman - I just did a taping for All Things Considered with Douglas Holtz-Eakin, and more or less on the spur of the moment came up with a simple description of the Ryan budget plan. Basically, the plan has five points — except that only two of those points are real, while the other three are fake.  The real points are:

  • 1. Savage cuts in programs that help the needy, amounting to about $3 trillion over the next decade.
  • 2. Huge tax cuts for corporations and the wealthy, also amounting to about $3 trillion over the next decade.
  • The fake points are:
  • 3. “Base broadening” that makes those tax cuts revenue neutral. Ryan has refused to name a single tax preference that he would, in fact, be willing to get rid of; all he and his party do is keep repeating “revenue-neutral” in the hope that people believe them.
  • 4. Unspecified cuts in spending outside Medicare, Medicaid, and Social Security that would shrink the government — including defense! — back to 1920s levels.
  • 5. Replacing Medicare with vouchers that would leave most seniors unable to afford insurance. Right.

More on the Characteristics of the Heritage Foundation CDA Analysis of the Ryan Plan - Like a moth to the flame, [1] [2] I am compelled to examine the peculiar aspects of the Heritage CDA forecasts of the economy under the Ryan plan. Usually, when I look at something longer, I understand more what is going on. In the case of the Heritage CDA simulations of the Ryan plan, it just gets more and more incomprehensible. To illustrate this confusion, consider the following graphs of private employment, equipment investment, nonresidential structures investment and residential investment, under the baseline and as simulated under the Ryan plan. Red Flags! Super-High Implied Elasticities In my previous post, I highlighted the fact that the implied elasticity was too high to be plausible, using the average simulation period values. After reading some of the documentation regarding the IHS-Global model, [1] in retrospect, I think it might be more appropriate to use the end-of-simulation values, rather than mean, since the elasticity calculations are more relevant in the long run.

The Economic Effects of the Ryan Plan: Assuming the Answer... Macroadvisers -  Last week the House Budget Committee, chaired by Congressman Paul Ryan (R, WI) issued a Budget Resolution for fiscal year 2012 along with a Republican blueprint for addressing the nation’s long-term fiscal imbalance.The “Ryan plan” would squeeze discretionary spending and health care entitlements very hard, lower marginal tax rates, and expand the tax base.

  • · We agree that addressing the nation’s long-term federal fiscal imbalance is critically important, and that doing so might head off an eventual fiscal crisis that could threaten our standard of living over the long haul.
  • · The Committee’s report included a simulation analysis showing the economy strengthening immediately as a result of the fiscal contraction; that is, a negative short-run fiscal multiplier.
  • · We don’t believe this finding, which was generated by manipulating an econometric model that would not otherwise have produced the result.
  • · That analysis implied other questionable results — some of them probably unintended — including over $1 trillion of net new borrowing from abroad over the coming decade and the construction of several million unoccupied houses.
  • · We consider the analysis both flawed and contrived, and are concerned it will create the false impression among some legislators that implementation of the Budget Resolution would entail no short-run macroeconomic pain.

Lost Heritage - Krugman - Macroeconomic Advisers has a takedown of the Heritage Foundation analysis of the Ryan plan that you really have to read. Sample: Peek-a-boo. There were actually two sets of results. The first showed real GDP immediately rising by $33.7 billion in 2012 (or 0.2%) relative to the baseline, with total employment rising 831 thousand (or 0.6%) and the civilian unemployment rate falling a stunning 2 percentage points, a decline that persisted for a decade. (This path for the unemployment rate is labeled “First Result” in the table.) The decline in the unemployment rate was greeted — quite correctly, in our view — with widespread incredulity. Shortly thereafter, the initial results were withdrawn and replaced with a second set of results that made no mention of the unemployment rate, but not before we printed a hardcopy! (This is labeled “Second Result” in the table.) I’ve seen some people defending Ryan on the grounds that his plan didn’t actually rely on the Heritage simulation. Well, but right there in the document was a link telling everyone to go read that simulation; this was an integral part of the sales job, part of the proof to the faithful that this was a “wonk-tested” plan. Now you know the quality of what Ryan and friends consider wonkish.

The radical right and the US state - What does the rise of libertarianism portend for the future of the US? This is not a question of interest to Americans alone. It matters almost as much to the rest of the world. A part of the answer came with the publication of a fiscal plan, entitled “Path to Prosperity”, by Paul Ryan, Republican chairman of the house budget committee. The conclusion I draw is the opposite of its author’s: a higher tax burden is coming. But that leads to another conclusion: much conflict lies ahead, with huge implications for politics, federal finance and the US ability to play its historic role.An analysis of the Ryan plan by the Congressional Budget Office makes the point. Its “extended-baseline scenario” assumes that current law remains unchanged. Under that assumption, revenue would rise from 15 per cent of gross domestic product to 21 per cent in 2022 and on to 26 per cent in 2050. Spending would rise substantially, too, from 23¾ per cent of GDP in 2010 to 30¼ per cent in 2050. As a result, the deficit would fall from today’s levels while debt held by the public would rise to 90 per cent of GDP in 2050. As the CBO makes plain, this is an optimistic scenario. Current law includes, most notably, the assumption that the 2001 and 2003 tax cuts will expire, as legislated. Together with the impact of fiscal drag from economic growth and inflation, this generates the rising share of revenue in GDP.

Obama’s new approach to deficit reduction to include spending on entitlements - President Obama this week will lay out a new approach to reducing the nation’s soaring debt, proposing reductions in spending on entitlements such as Medicare and Medicaid and renewing his call for tax increases on the rich. In an effort to go on the offensive in the battle over government spending, Obama will look for cuts in “all corners of government,” senior adviser David Plouffe said on several Sunday talk shows. Although Obama’s health-care law is projected to curtail Medicare spending over time, “we have to do more,” Plouffe said Sunday, marking the first time the administration has made an explicit commitment to changes in entitlement programs for the purpose of deficit reduction. Contrasting the president’s approach with what Republican leaders have put forward, Plouffe said Obama will use a “scalpel” and not a “machete” as he seeks to preserve funding for education and other areas he considers crucial to the country’s long-term economic success.

Obama to Call for Broad Plan to Reduce Debt- President Obama will call this week for Republicans to join him in writing a broad plan to raise revenues and reduce the growth of popular entitlement programs. After months of criticism that he has not led on budget talks, Mr. Obama will urge bipartisan negotiations toward a multiyear debt-reduction plan that administration officials said would depart sharply from the one proposed last week by House Republicans. The Republican plan includes a shrinking of Medicare and Medicaid and trillions of dollars in tax cuts, while sparing defense spending. Mr. Obama, by contrast, envisions a more comprehensive plan that would include tax increases for the richest taxpayers, cuts to military spending, savings in Medicare and Medicaid, and unspecified changes to Social Security. Several presidential advisers interviewed in recent weeks said Mr. Obama has been torn between wanting to propose major budget changes to entice Republicans to the bargaining table, including on Social Security, and believing they would never agree to raise revenues on upper-income Americans as part of a deal.

Obama turns to his bipartisan deficit commission’s blueprint for reducing debt - President Obama plans this week to respond to a Republican blueprint for tackling the soaring national debt by promoting a bipartisan approach pioneered by an independent presidential commission rather than introducing his own detailed plan. Obama will not blaze a fresh path when he delivers a much-anticipated speech Wednesday afternoon at George Washington University. Instead, he is expected to offer support for the commission’s work and a related effort underway in the Senate to develop a strategy for curbing borrowing.  Like the House GOP budget plan, the Senate effort — led by three Democrats and three Republicans known as the Gang of Six — aims to cut about $4 trillion from the debt over the next decade. But the group is looking to reduce spending in all categories, while urging a rewrite of the tax code that would raise revenue. The Republican plan would cut spending on domestic programs while protecting the military and preserving George W. Bush-era tax cuts that disproportionately benefit high earners. The work of the Gang of Six is modeled on recommendations of the fiscal commission Obama appointed last year. On Monday, White House press secretary Jay Carney said the commission had “created a framework that may help us reach a deal and a compromise.”

The Tragedy of Defensive Politics - A New York Times story today is titled, “On Budget Dispute, Obama Casts Himself as Mediator in Chief.” To me this is chilling, if obvious. He has long been the mediator, as if he were a Sunday morning talk show host. The attitude that he must always appear calm, always work toward compromise and avoid at all costs appearing to be a rabble-rouser, is now taking an enormous toll. Like today’s media, he gives equal time to the opposition. Now we have someone representing the anti-gravity point of view, says the allegedly objective talk show host. Tell us, why do you believe gravity is a myth? Obama wants to compromise with the anti-gravity extremists rather than calling them out in a loud and angry voice, calling them what they really are.

The President Is Missing, by Paul Krugman - What have they done with President Obama? What happened to the inspirational figure his supporters thought they elected? Who is this bland, timid guy who doesn’t seem to stand for anything in particular? I realize that with hostile Republicans controlling the House, there’s not much Mr. Obama can get done in the way of concrete policy. Arguably, all he has left is the bully pulpit. But he isn’t even using that — or, rather, he’s using it to reinforce his enemies’ narrative.His remarks after last week’s budget deal were a case in point. Maybe that terrible deal, in which Republicans ended up getting more than their opening bid, was the best he could achieve — although it looks from here as if the president’s idea of how to bargain is to start by negotiating with himself, making pre-emptive concessions, then pursue a second round of negotiation with the G.O.P., leading to further concessions.And bear in mind that this was just the first of several chances for Republicans to hold the budget hostage and threaten a government shutdown; by caving in so completely on the first round, Mr. Obama set a baseline for even bigger concessions over the next few months.

The Budget Mess (II): Obama, Messina, the President's "Deficit" Commitssion, and the GOP create-a-deficit-so-you-can-cut-programs-for-everyone-but-the-elite agenda - Linda Beale - The Republicans held the government hostage til the last minute last week, averting a shutdown one-hour before the deadline with a "solution" that basically gave them what they had demanded.  Obama then says he is going to offer his own spending plan, and that it will include the entitlements that are the object of all this tax-cuts-for-the-wealthy deficit creation and deficit blather from the right.  ( One can't help suspecting that Obama's position is just a reflection of the economic advisers he has surrounded himself with, from Max Baucus's former aide Messina--favorable to tax cuts to the wealthy, including the estate tax repeal enacted under Bush-- to Tim Geithner and the rest of the crew.) Obama, in other words, has failed to show any leadership for a progressive vision and has allowed the historically illiterate and factually compromised arguments of the "starve the beast" radical right to take center stage.  He should have used his bully pulpit to relegate it to the "bats in the belfry" wings.

With Friends Like These, Who Needs the Enema Man? - Krugman - The Post says that Obama is going to more or less endorse Bowles-Simpson in his Wednesday talk. Sigh. Now, I know that Bowles and Simpson are Serious People, who say things like this: “This is a fakery,” Simpson said on Fox News. “If they care at all about their children or grandchildren, and sometimes I doubt that – I think, you know, grandchildren now don’t write a thank-you for the Christmas presents, they’re walking on their pants with the cap on backwards listening to the enema man and Snoopy Snoopy Poop Dogg, and they don’t like them!”  (I think the enema man is Eminem.) Beyond that, though, Bowles-Simpson was a really bad proposal. Its cost-containment plan for Medicare was nothing but a magic asterisk; it proposed raising the retirement age without giving any consideration to the fact that life expectancy hasn’t risen much among lower-income Americans; it arbitrarily set a cap on revenues as a share of GDP. And by endorsing an already right-leaning document, Obama will of course define the center as being somewhere between the right and the far right.

Senators Surprised by Obama’s Entry Into Fiscal Debate - A Republican leader in a bipartisan Senate group working on a debt reduction plan said Monday that President Obama1 “threw us a little bit of a curveball” with the announcement that he would deliver a speech this week on fixing the nation’s fiscal problems.  The Republican, Senator Saxby Chambliss2 of Georgia, and his Democratic negotiating partner, Senator Mark Warner3 of Virginia, said they were surprised when Mr. Obama’s senior White House strategist, David Plouffe4, said on Sunday talk shows that Mr. Obama would ask Congress to join him in writing a long-range plan5 of domestic and military spending cuts and higher taxes for the wealthy.  People familiar with the Senate group said Mr. Obama’s entry into the fiscal debate could upset the senators’ fragile unity. If the effort becomes associated with him before there is a deal, they say, it could provoke such conservative opposition that Republican lawmakers will shy away. “We just didn’t know — none of us did until yesterday,” Mr. Chambliss said, referring to the three Republican and three Democratic senators in the so-called Gang of Six6.

Obama’s “bad negotiating” is actually shrewd negotiating - In December, President Obama signed legislation to extend hundreds of billions of dollars in Bush tax cuts, benefiting the wealthiest Americans. Last week, Obama agreed to billions of dollars in cuts that will impose the greatest burden on the poorest Americans. And now, virtually everyone in Washington believes, the President is about to embark on a path that will ultimately lead to some type of reductions in Social Security, Medicare and/or Medicaid benefits under the banner of "reform." Tax cuts for the rich -- budget cuts for the poor. That's quite a legacy combination for a Democratic President. All of that has led to a spate of negotiation advice from the liberal punditocracy advising the President how he can better defend progressive policy aims -- as though the Obama White House deeply wishes for different results but just can't figure out how to achieve them. I don't understand that assumption at all. Does anyone believe that Obama and his army of veteran Washington advisers are incapable of discovering these tactics on their own or devising better strategies for trying to avoid these outcomes if that's what they really wanted to do? What evidence is there that Obama has some inner, intense desire for more progressive outcomes? These are the results they're getting because these are the results they want.

Obama's counter-punch -BARACK OBAMA'S strategy on the long-term deficit has been, for the most part, to talk tough but waffle on the specifics in the hope that a better economic and political backdrop will present itself. Unfortunately for him, that approach allowed Republicans to lay down the first marker last week with a budget plan that slashes the deficit with savage cuts to entitlements and no increase in taxes.Mr Obama has quickly responded, with a plan announced in a speech today that also promises hefty cuts to the deficit, but relying more heavily on increased taxes while allowing only modest tweaks to entitlements.Mr Obama’s plan would cut deficits by $4 trillion over the next 12 years, considerably more than the $1.1 trillion over ten years his budget promised. That is still less than what's on offer from Paul Ryan, the Republican budget committee chairman, who promised to cut the deficit by $4.4 trillion more over ten years than Mr Obama’s budget. A senior administration official says under Mr Obama’s plan the budget deficit would fall as low as 2% of GDP in the coming decade, lower than the 3% his February budget aimed for but higher than Mr Ryan’s 1.6%.

Obama outlines budget proposals in first target 2012 speech - Drawing a sharp contrast with Republican proposals, Obama suggested reductions in entitlement spending and increased taxes on the wealthy, taking into account the findings of the Simpson-Bowles debt commission, including overhauling the tax code to enhance revenue collections. Obama urged Americans to “live within its means,” calling the wealthy to share the burden, “As a country that values fairness, wealthier individuals have traditionally born a greater share of this burden than the middle class or those less fortunate.” “This is not because we begrudge those who’ve done well – we rightly celebrate their success. Rather, it is a basic reflection of our belief that those who have benefitted most from our way of life can afford to give a bit more back. Moreover, this belief has not hindered the success of those at the top of the income scale, who continue to do better and better with each passing year,” said Obama.

The Budget Speech, by Paul Krugman - Style: I liked the way Obama made a case for government at the beginning. I liked the way he accused Republicans of pessimism, of abandoning a hopeful vision of America. Good that he went after the Ryan plan — and good that he went after the cruelty of that plan. If you ask me, too many percentages. Oh, and whichever speechwriter came up with “win the future” should be sent to count yurts in Outer Mongolia.Substance: Much better than many of us feared. Hardly any Bowles-Simpson — yay!The actual plan relies on some discretionary spending cuts, this time including defense — good, although I think too much is being cut from domestic spending. It relies on letting the Bush tax cuts for the rich expire — finally! — plus unspecified reductions in tax expenditures.The main thing, though, is the strengthened role of and target for the Independent Payment Advisory Board. This can sound like hocus-pocus — but it’s not. As I understand it, it would force the board to come up with ways to put Medicare on what amounts to a budget — growing no faster than GDP + 0.5 — and would force Congress to specifically overrule those proposed savings. That’s what cost-control looks like! You have people who actually know about health care and health costs setting priorities for spending, within a budget; in effect, you have an institutional setup which forces Medicare to find ways to say no.

Two Visions for Medicare - I must applaud the President for today's speech in which he finally and at long last takes the long-term budget imbalance seriously.  There was a surprising amount of finger pointing for a person who claims to be transcending partisanship.  That is especially true in light of the fact that President Obama's proposed policies, as put forth in his own annual budgets, have never shown how he would put the economy on a path with a declining debt-GDP ratio, even after the economy fully recovers from the recession. But let's put that inconvenient truth aside for the moment.  I am delighted that these fiscal issues are now squarely on the national agenda.  If only someone could lock President Obama and Congressman Ryan in a seedy hotel room, turn off their access to cable, give them an endless supply of coffee and cold sandwiches, and not let them leave until they come to agreement, the nation could take a large step forward.

Obama: Cut spending, raise taxes on the wealthy - President Barack Obama coupled a call for $4 trillion in long-term deficit reductions with a blistering attack on Republican plans for taxes, Medicare and Medicaid on Wednesday, laying down markers for a roiling debate in Congress and the 2012 presidential campaign to come. Obama said spending cuts and higher taxes alike must be part of any deficit-reduction plan, including an end to Bush-era tax cuts for the wealthy. He proposed an unspecified "debt failsafe" that would go into effect if Congress failed to make sure the national debt would be falling by 2014 relative to the size of the overall economy. "We have to live within our means, reduce our deficit and get back on a path that will allow us to pay down our debt," . "And we have to do it in a way that protects the recovery, and protects the investments we need to grow, create jobs and win the future." Obama's speech was salted with calls for bipartisanship, but it also bristled with attacks on Republicans. They want to "end Medicare as we know it," he said, and to extend tax cuts for the wealthy while demanding 33 million seniors pay more for health care.

Understanding the President’s new budget proposal - I will describe in some detail the President’s new budget proposal, then provide a few big picture reactions to it. I have been keeping my recent posts fairly short. This one is instead more of a reference post, and it is not for the faint of heart. I hope it is useful, I know it is long. Consider yourself warned. Today the President proposed:

  1. a negotiating process;
  2. deficit and debt targets;
  3. a new budget process trigger mechanism;
  4. and new spending cuts in Medicare, Medicaid, other entitlements, and defense.

Obama, Ryan, and the Parameters of the Budget Debate - Thanks to President Obama’s speech this afternoon, we have a pretty good idea of the parameters of what promises to be an historic fiscal debate. Yet, like our friends at the car dealer, a chasm separates the two sides. This is a battle that is likely to continue beyond the 2012 elections and the offers will constantly shift. But at least we know where everyone is starting. In a sense, Obama has given us the high water mark for government spending going forward, and Ryan has provided the floor for tax revenues. Interestingly, the middle-gound may well end up being something like the plan offered by the chairs of Obama’s fiscal commission, Erskine Bowles and Alan Simpson.   But unlike most budget debates, more than dollars are at stake. As Obama himself noted today, this fiscal confrontation represents a profound disagreement about the nature of government. With that in mind, here are the opening bids on the big issues.

Obama Urges Cuts and Taxes on the Rich -- President Obama called for cutting the nation’s budget deficits by $4 trillion over the next 12 years in a speech at George Washington University2 on Wednesday, countering Republican budget plans with what he said was a more balanced approach that relies in part on tax increases for the wealthy as well as on spending cuts. Mr. Obama conceded a need to cut spending, rein in the growth of entitlement programs and close tax loopholes, officials said shortly before he spoke.  But he also insisted that the government must maintain what he called investment in programs that are necessary to compete globally. And he made clear that, despite his compromise with Congressional leaders in December, Mr. Obama would fight Republicans to end lowered tax rates for wealthy Americans that have been in place since President George W. Bush3 championed them in the last decade.  “There’s nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires,” Mr. Obama said of budget proposals put forward by Republicans in the House. “There’s nothing courageous about asking for sacrifice from those who can least afford it and don’t have any clout on Capitol Hill. And this is not a vision of the America I know.”

Not Perfect, But Good - Some of my “likes” about the President’s speech and his general “framework” for deficit reduction:

  • advocates a “balanced” approach with a mix of spending cuts and revenue increases;
  • recognizes that a lot of spending occurs in the form of “tax expenditures” which are economically efficient and also disproportionately benefit the rich, and proposes to raise additional revenue by reducing some of these tax expenditures;
  • acknowledges that the Bush tax cuts played a large part in turning the surpluses of the late 1990s into the record deficits in the following decade;
  • clarifies that the choice is not reducing the deficit versus not reducing the deficit, but reducing the deficit by cutting benefit programs versus reducing the deficit by raising taxes;

Some of my “dislikes” or at least “disappointments” about the proposed framework:

  • proposes a mix of spending cuts versus revenue increases that is probably still too heavy on the spending side, and gives the President an “opening bid” that is basically where I think he wants to end up. 
  • suggests that the broadening of the tax base/reduction of tax expenditures would be limited to households with incomes above $250K–such as those “millionaires and billionaires” the President kept referring to today.  Not clear that this would raise adequate revenue or that the President is willing to go after the largest tax expenditures or pare them back enough (even on the rich). 
  • fails to acknowledge that even the “middle-class” portions of the Bush(-now-Obama) tax cuts were deficit financed and were fiscally irresponsible
  • takes a pass on Social Security reform, just like the Ryan plan;

Just the Simple Truth - Have I mentioned my favorite part of Obama's speech yesterday? Here it is: America’s finances were in great shape by the year 2000. We went from deficit to surplus. America was actually on track to becoming completely debt free, and we were prepared for the retirement of the Baby Boomers. But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program — but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts — tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500 billion every year over the next decade. To give you an idea of how much damage this caused to our nation’s checkbook, consider this: In the last decade, if we had simply found a way to pay for the tax cuts and the prescription drug benefit, our deficit would currently be at low historical levels in the coming years.

Obama wants $400 billion in defense cuts by 2023 - US President Barack Obama on Wednesday called for cutting defense spending by $400 billion over 10 years as part of a deficit reduction plan. Wading into difficult political terrain, Obama's proposal calls for "deeper reductions in security spending," according to a White House statement providing details of the president's plan. "Just as we must find more savings in domestic programs, we must do the same in defense," Obama said in a high-stakes speech earlier. Obama said that Defense Secretary Robert Gates had already shown political courage by cutting waste in military spending and finding $400 billion in savings over the past two years. "I believe we can do that again," Obama said. But he said deep cuts would first require an elaborate assessment of the country's military missions. "We need to not only eliminate waste and improve efficiency and effectiveness, but conduct a fundamental review of America?s missions, capabilities, and our role in a changing world," the president said.

Gates: Dramatic military cuts would have ‘catastrophic’ consequences – Pentagon chief Robert Gates has warned that major cuts to US defense spending planned by President Barack Obama would require scaling back military forces, missions and capabilities. The Pentagon's stern response came after Obama unveiled a deficit-reduction plan that includes a proposed cut of $400 billion in security spending by 2023. Although the defense secretary believed the Pentagon could not be "exempt" from efforts to reduce the rising deficit, deep cuts in military spending in coming years would require difficult choices and could not be merely a "budget math exercise," Pentagon press secretary Geoff Morrell said. "The secretary has been clear that further significant defense cuts cannot be accomplished without reducing force structure and military capability," Morrell said in a statement. The warning suggested a rift between the White House and the defense secretary, who has cautioned previously that dramatic cuts in military spending could have "catastrophic" consequences. Gates apparently played no role in drafting the president's plan, as he had only learned of Obama's proposal for defense spending on Tuesday, Morrell said.

It's Still Easy: Obama's $400 billion in defense is not a cut - The $400 billion in security budget reductions between FY 2012 and FY 2023 announced by President Obama on Wednesday turn out to be even easier than one thinks.  As the New York Times reports this morning, these aren't really cuts. Using research we did at the Stimson Center, the Times notes that simply holding DOD's budget growth to inflation over those years yields $401.7 billion in savings from the current OMB budget projections. The President's goal is reached and the defense budget is actually not cut; the Pentagon keeps all its purchasing power by rising with inflation. We won't need a major strategy review to get to this target, even though the President promised one. 

Global military spending growth slowest since 2001 - Growth in global military spending slowed to its lowest level since 2001 last year as the world economic crisis hit defence budgets, Swedish think-tank SIPRI said Monday. World military spending rose only 1.3 percent in 2010 to $1.63 trillion (1.14 trillion euros), after average annual growth of 5.1 percent between 2001 and 2009, the Stockholm International Peace Research Institute (SIPRI) said as it released its latest report on international military expenditures. The United States significantly slowed its military investments last year but remained by far the biggest defence spender in the world and still accounted for almost all of global growth. Despite the slowdown, the United States' spending increase of $19.6 billion still accounted for nearly all of the $20.6 billion global increase last year. "The USA has increased its military spending by 81 percent since 2001, and now accounts for 43 per cent of the global total, six times its nearest rival China,"

House Progressives: End The Wars, Save The Economy - Representatives from the 77-member House Progressive Caucus gathered at the Capitol on Wednesday to roll out their plan to cut the deficit and put the budget back into balance. Their simple solution: pull the troops out of Iraq and Afghanistan, install a public option for health care, raise taxes on the wealthy and corporations and voila, America is fixed. The caucus plan, known as The People's Budget, was explained in some detail by Columbia University economist Jeffrey Sachs last week. Today, progressive members extolled the virtues of the plan as members sat waiting for President Obama to introduce a deficit reduction plan many Democrats worried would sacrifice necessary spending on the altar of a mistaken understanding of fiscal responsibility. The Republican budget plan authored by Rep. Paul Ryan (R-WI) "obviously would destroy our government and hit the poorest people in this country all for the sake, the obsessive sake, of lowering tax rates further for the richest people in this country." "And unfortunately, the President goes halfway," Sachs added.

Obama, Ryan, and the Shape of the Planet - Krugman - I’m already hearing some people saying, “Why don’t you subject Obama to the same kind of criticism you leveled at Ryan?’ The answer is, because Obama doesn’t deserve it. Any budget proposal will have things you don’t find convincing. I’d certainly like to know more about Obama’s proposed elimination of tax loopholes; I’d like to know how we’re going to manage with the low levels of domestic discretionary spending envisioned. But Obama isn’t proposing to somehow make $3 trillion in tax cuts revenue neutral. He isn’t proposing to shift from Medicare paying 70 percent of bills to vouchers worth only 30 percent. He isn’t claiming that we can shrink government outside the major social insurance programs — but including defense — to Calvin Coolidge levels.What the complainers want is for me to do “Shape of the earth: views differ” analysis — to pretend that Republican nonsense has an equal and opposite Democratic counterpart. But it’s not true. Obama’s budget proposal really is wonk-tested, in a way Ryan’s never was; trust me, I know the wonks!

Ryan Is Irked as Obama Picks Apart His Budget Plan -President Barack Obama never referred to House Budget Committee Chairman Paul Ryan (R., Wis.) by name, but his speech on the deficit Wednesday could have been titled Whats Wrong with the Ryan Plan.”The president said the budget blueprint Mr. Ryan outlined last week wasn’t “serious,” and “would lead to a fundamentally different America than the one we’ve known” and “paints a picture of our future that is deeply pessimistic.” Democrats had complained that Mr. Obama gave House Republicans a pass last week by not criticizing the Ryan budget. He put those gripes to rest Wednesday by dissecting one of its most fundamental reforms – the proposed changes to Medicare that would transform the popular retirement system for seniors.All the while, Mr. Ryan sat in a front-row seat in the George Washington University auditorium Wednesday while Mr. Obama unveiled his plan to constrain growing levels of federal debt.Mr. Ryan grew visibly annoyed during the speech, shaking his head in disgust.  He feverishly took notes, and when Mr. Obama finished he stood up and bolted from the auditorium.

Why a Lack of Transparency in the Administration’s Budget II is a Problem - A transparent budget proposal—such as the Administration’s first 2012 Budget presented by President Obama on February 14 or the House Budget presented by Paul Ryan on April 6—contains year-by-year tables showing the proposed path for government outlays over time. These are needed to estimate the economic impact of a budget and assess its credibility. But the second Administration budget for 2012 and beyond presented by President Obama this week contains no such information, either in the speech or in the fact sheet to go along with the speech. How can one determine the impact of a budget on the economy if one does not know the path of proposed spending? This lack of transparency is not simply an issue for policy wonks as William Galston of Brookings explains in his critique of the Administration’s Budget II. It raises questions about the credibility of the budget process.

CBPP Weighs In - Krugman - Bob Greenstein of the Center on Budget and Policy Priorities — the single best source for serious budget analysis — weighs in. He finds the Obama plan still too weighted to spending cuts and with not enough revenue increases — and I will abide by his judgment:To be sure, the President’s plan represents an important step forward in the debate. But it should be recognized that this plan is a rather conservative one, significantly to the right of the Rivlin-Domenici plan. While we worry about some particular elements of the President’s plan, we worry much more that the deficit-reduction process that’s now starting could produce an outcome that is well to the right of the already centrist-to-moderately-conservative Obama proposal, by reducing its modest revenue increases and cutting more deeply into effective programs that are vital to millions of Americans. So what we got today was much better than some of the hints and trial balloons; it’s a plan that we could live with. But it’s a center-right plan already; if it’s the starting point for negotiations that move the solution toward lower taxes for the rich and even harsher cuts for the poor, just say no.

Serious Miscalculations - Krugman - It has not been a great two weeks for some pundits. You might say that they’ve been having “serious” problems. Last week was the rush to declare the Ryan plan “serious” on the part of people who either didn’t look at the numbers or didn’t know how to look at the numbers. By the end of the week many of them were trying to climb down without quite admitting that they had been snookered. And now we had part — but only part — of the commentariat reflexively denouncing Obama’s plan as partisan and not serious, again (I suspect) without actually looking at the numbers; they just assumed that by definition a Democrat who sounds like a Democrat can’t be serious.

Who’s Serious Now?, by Paul Krugman - Last week, Mr. Ryan unveiled his budget proposal, and the initial reaction of much of the punditocracy was best summed up (sarcastically) by the blogger John Cole: “The plan is bold! It is serious! It took courage! It re-frames the debate! The ball is in Obama’s court! Very wonky! It is a game-changer! Did I mention it is serious?”  Then people who actually understand budget numbers went to work, and it became clear that the proposal wasn’t serious at all. In fact, it was a sick joke. The only real things in it were savage cuts in aid to the needy and the uninsured, huge tax cuts for corporations and the rich, and Medicare privatization. All the alleged cost savings were pure fantasy.  On Wednesday, as I said, the president called Mr. Ryan’s bluff: after offering a spirited (and reassuring) defense of social insurance, he declared, “There’s nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires. And I don’t think there’s anything courageous about asking for sacrifice from those who can least afford it and don’t have any clout on Capitol Hill.” Actually, the Ryan plan calls for $2.9 trillion in tax cuts, but who’s counting?  And then Mr. Obama laid out a budget plan that really is serious.

Insincerely Yours - Krugman - Republicans are deeply, sincerely concerned about the budget deficit. That’s why, in unveiling their plan last week, they declared themselves willing to give ground on their traditional priorities, signaling a willingness to accept higher taxes on the wealthy and reduced defense spending as part of a deficit-reduction deal. Oh, wait. You mean they didn’t do anything like that? You mean that even while warning about an imminent fiscal crisis, they actually tried to cut taxes on the rich to their lowest level since 1931? Why, you might actually think that they’re not sincerely concerned about the deficit. But that can’t be true, since they keep saying that they are. OK, you get the point. It’s truly amazing that so many commentators — people who presumably know something about the relationship or lack thereof between what politicians say and what they do — are willing to accept at face value claims of deep, sincere concern about the deficit from people whose actual priorities are demonstrated by their absolute unwillingness to sacrifice anything they want in the name of deficit reduction.

Obama Budget Plan: Changing The Debate Without Changing The Likely Outcome - As the very quick negative response yesterday from the House GOP showed, the White House was never going to get even a reluctant, grudging admission from the Republicans that the Obama administration did something even marginally positive on the budget when it announced it's new deficit reduction plan.  The targeted audience also didn't seem to be the Democratic base.  Obama gets an 80 percent approval rating from his own party.  So if the plan and speech were never going to win over Republicans and there was little value in trying to get additional Democrats, who or what was the real target?  The answer is independents, the increasingly large percentage of American voters who don't identify with either political party and the group that made the difference in the 2008 and 2010 elections.In that context the plan and speech make a great deal of sense even if it's not likely to change the outcome of this year's debate.  As Pete posted a day or so ago, the prospects for a deficit reduction plan being enacted this year may now be greater than they were when the week began, but they are still relatively small. 

President Obama’s real proposal (and why it’s risky) - Robert Reich - Paul Ryan says his budget plan will cut $4.4 trillion over ten years. The President says his new plan will cut $4 trillion over twelve years.Let’s get real. Ten or twelve-year budgets are baloney. It’s hard enough to forecast budgets a year or two into the future. Between now and 2022 or 2024 the economy will probably have gone through a recovery (I’ll explain later why I fear it will be anemic at best) and another downturn. America will also have been through a bunch of elections – at least five congressional and three presidential. The practical question is how to get out of the ongoing gravitational pull of this awful recession without cow-towing to extremists on the right who think the U.S. government is their mortal enemy. For President Obama, it’s also about how to get reelected. Seen in this light, Obama’s plan isn’t really a budget proposal. It’s a process proposal.

The Deficit Debate: Where the Public Stands - Pew - The public’s view of the deficit is often summarized as follows: Yes, Americans agree that the nation’s finances are in a precarious state and, yes, something needs to be done. Yet they overwhelmingly reject any specific ideas for reducing the deficit — particularly when it comes to changes in entitlement programs. There is some truth in that, but there is perhaps a surprising degree of variance in opinions about individual proposals to reduce the deficit. There are what might be called the Big No-Nos (70% or more oppose): These include taxing employer-provided health insurance benefits, raising the gas tax and reducing federal funding to states for education and roads. Then there are the moderate No-Nos (50% to 60% oppose); these include gradually raising the retirement age for Social Security and eliminating the home mortgage interest deduction. The public is evenly divided over trimming Social Security benefits for higher-income seniors. Still, of 12 proposals tested, only two attract majority support — freezing the salaries of federal workers and raising the Social Security contribution cap for high earners.

Taxes, Spending and Debt - A point that I’ve been trying to make but don’t have the time is the following: intuition about personal finance causes major mistakes when transferred to public finance. There are a lot of examples but one of them is common and on public display right now: raking up lots of debt is an example of spending too much money or “living beyond your means” There are several reasons why this is wrong but the one that causes the most confusion amongst the man on the street is not realizing your personal control over spending versus revenues is essentially the exact opposite of the governments control over spending versus revenues and that this is more or less by design. For the man on the street its really hard to control your revenue. You can’t easily boost your salary by 30%. Even getting a second job entails such hardship that its rarely the first or even second resort of settled middle class Americans. College students and poorer folks get second jobs all the time, which ironically gives them better intuition about how federal budgets work than a typical middle class family. On the other hand, most middle class families have a significant fraction of their income spent on “luxuries.”

Robert Samuelson Underestimates Dependence on the Government - In a column complaining that too many people are dependent on the government, Robert Samuelson failed to take note of the fact that nearly every person in the country is dependent on the U.S. Postal Service to deliver its mail.  Samuelson's column falls victim to the same sort of silliness. For example, he wants to say that Social Security beneficiaries are dependent on the government. The problem with this story is that these beneficiaries paid taxes during their working lifetime that cover the cost of their benefits.  Social Security is a retirement program that is run through the government because the government provides the service far more efficiently than the private sector. The administrative costs of the retirement portion of the Social Security program are equal to about 0.5 percent of the benefits paid out each year. By contrast, the administrative costs of privatized programs, like the one in Chile that is often held up as a model, are in the neighborhood of 15 percent of the benefits paid out. Why is it a problem that we choose to run our retirement system in the most efficient possible way? The Ryan plan for privatizing Medicare, which Samuelson smiles upon as a step forward, would add more than $20 trillion (more than $60,000 per person) to the cost of buying Medicare equivalent policies over the program's 75-year planning horizon. This $20 trillion is not the savings to the government from paying less for retirees' Medicare. This is the pure waste associated with establishing a more inefficient system of health care.

Here’s the Real Adult Conversation on Deficits: The U.S. Has a Taxing Problem - Is the "adult conversation" we've long been promised about the nation's fiscal affairs about to begin? Last week Rep. Paul Ryan put his cards on the table. As I noted, it rests on some rather absurd projections: that the budget would cause unemployment to fall to 2.8 percent, that in 40 years all discretionary spending — including defense — would equal a mere 3 percent of GDP, and that Americans are ready for massive cuts in social insurance. In the accompanying video, Republican activist Grover Norquist discusses the state of the budget with my Daily Ticker colleague Aaron Task and me:Now President Obama, who was essentially a bystander during the recent budget debate, is planning to make an address on Wednesday. Word is that he will endorse the findings of the bipartisan Simpson-Bowles fiscal commission , which he largely ignored when they were issued last December.In Washington, the numerous species of faux-fiscal hawks are enthused about the prospect of some grand bargain that would reduce the debt while not raising taxes on any of the people whose donations support Washington think tanks. I'm less enthused about the prospects for two big reasons.

Imagining the End of the Bush Tax Cuts - My column this week examines the political challenge at the center of the deficit debate: the mismatch between the government services that voters want and the taxes that they are willing to pay. I suggest that a deadlock over the Bush tax cuts – expiring on Dec. 31, 2012, as prescribed by current law — may be one of the most plausible medium-term solutions. Two notes about the column: First, the Congressional Budget Office projects that not only would the short-term deficit come under control if Congress let current law stand, but the long-term deficit would, too. Austin Frakt has reproduced the chart on the Incidental Economist blog.But these calculations assume that the Alternative Minimum Tax affects more and more families over time because Congress stops passing exemptions. The calculations also assume that Congress ignores something called real bracket creep, in which more families are hit with higher tax rates as incomes rise over time.Both of these situations seem pretty unlikely.

IRS Funding Cut Days Before Report Shows $330 Billion In Uncollected Taxes - As part of the budget deal hashed out on Friday evening, lawmakers agreed that no additional federal funds would be used to hire new IRS agents.  Then on Monday, the Government Accountability Office publicly released a study showing that, as of the end of fiscal year 2010, roughly $330 billion in federal taxes had never been paid -- an amount that, if collected, would represent nearly nine times the amount of savings as the budget itself.  The dual developments aren’t shocking. Despite evidence that a single dollar spent on enforcing the tax code could result in up to ten dollars in revenue, politicians, naturally, are reluctant to align themselves with tax collectors. And yet, the sacrificing of funds for IRS agents in the continuing resolution deal underscores a particular problem that seems bound to confront fiscally conscious lawmakers.  “Cutting back on IRS enforcement could easily cost the treasury much more in revenue than it saves,”

Ryan’s Tax Plan is not 1986-Style Reform - Charles Krauthammer (Washington Post, April 8, 2011) writes that the “most scurrilous” criticism of House Budget Committee Chairman Paul Ryan’s fiscal plan is that it would cut taxes for the rich. This would, he says, be akin to making the same claim against the Ronald Reagan-Bill Bradley 1986 tax reform. Krauthammer goes on to assert that Ryan’s plan is “classic tax reform” that … broadens the base by eliminating loopholes.The facts are otherwise. The Ryan plan, at least what we know of it, would inarguably cut taxes for the rich. It in no way resembles the 1980s tax reforms of either President Reagan or Senator Bill Bradley and Representative Dick Gephardt. And it most assuredly fails to eliminate loopholes. Ryan proposes to reduce the top individual and corporate tax rates from 35 percent to 25 percent. And his plan does call for eliminating tax expenditures in general terms. But the Ryan budget does not offer a single specific proposal to eliminate any tax break. This is hardly a repeat of the original 1980s tax reform plans.

Obama Puts Taxes on Table -  President Barack Obama will lay out his plan for reducing the nation's deficit Wednesday, belatedly entering a fight over the nation's long-term financial future. But in addition to suggesting cuts—the current focus of debate—the White House looks set to aim its firepower on a more divisive topic: taxes. In a speech Wednesday, Mr. Obama will propose cuts to entitlement programs, including Medicare and Medicaid, and changes to Social Security, a discussion he has largely left to Democrats and Republicans in Congress. He also will call for tax increases for people making over $250,000 a year, a proposal contained in his 2012 budget, and changing parts of the tax code he thinks benefit the wealthy.

What Taxes Does Obama Want to Raise? - In yesterday’s budget speech, President Obama said that one leg of his fiscal policy stool is “tax reform to cut about $1 trillion in tax expenditures.” But what exactly is he talking about? Obama mentioned only two tax increases in his speech—both golden goodies. He vowed that he would never extend the 2001 and 2003 tax cuts for high-income households beyond their (latest) expiration date of December, 2012. And he reprised a plan from his past budgets to cap the value of itemized deductions at 28 percent. The rest of the new revenue would come from unspecified changes in deductions, credits, and exclusions. And then there is the tax reform piece of all this. The White House says some cuts in tax preferences would be used to reduce the deficit and some would finance lower tax rates.  How would the new revenues be divided?  At the moment, this appears to be a state secret. As a result, I am struggling to make the president’s numbers add up

Is Tax Reform Really on the Table, or Not? - Last October I wrote a lengthy post explaining why tax reform is the best path to growth-friendly deficit reduction. At that time, six short months ago, hardly anyone in Washington was talking about tax reform. Now both the Republicans, in the Ryan plan, and President Obama, in this week's deficit-reduction speech, are trumpeting tax reform as the centerpiece of their respective proposals. Does that mean tax reform is finally on the table? Should we expect a dramatic, bipartisan breakthrough soon? I'm afraid not.Economists are in rare agreement about the basic principles of tax reform. The objective of reform should be, first, to lower marginal tax rates, that is, the rates paid on each additional dollar of income or profit, as much as possible. Low marginal tax rates minimize distortions and maximize incentives for growth and job creation. Second, for any given amount of revenue to be raised, the way to get tax rates low is to make the tax base as broad as possible, that is, to eliminate loopholes that allow some income or profit to go untaxed while  the rest bears a disproportionate share of the burden.

Fair shares and tax shares - Will Wilkinson wasn't impressed with President Obama's defense of progressive taxation yesterday: It's rather less intuitive that fairness demands that the wealthy not only pay more in taxes, but pay a larger percentage of income. But let's accept that fairness does require it. Anyway, high-earners in America do pay higher rates. In 2008, the top 1% paid 38% of all federal income taxes, and the top 5% paid 58%. Indeed, America is the industrialised world's champion of income-tax progressivity! If any country's upper-crust pays its fair share, America's does. Notice the bait and switch there? First, there's the insistence on judging tax fairness solely by federal income taxes. But if you take a look at total tax burdens (federal/state/local), America's tax system is only very modestly progressive. Second, there's the switch from tax rates to tax shares. It's true that the top 1% pay a big share of all federal income taxes, and there's a good reason for that: it's because the top 1% earn a big share of all income.

Capping Individual Tax Expenditure Benefits - This paper analyzes a new way of reducing the major individual tax expenditures: capping the total amount that tax expenditures as a whole can reduce each individual's tax burden. More specifically, we examine the effect of limiting the total value of the tax reduction resulting from tax expenditures to two percent of the individual's adjusted gross income. Each individual can benefit from the full range of tax expenditures but can receive tax reduction only up to 2 percent of his AGI. Simulations using the NBER TAXSIM model project that a 2 percent cap would raise $278 billion in 2011. The paper analyzes the revenue increases by AGI class. The 2 percent cap would also cause substantial simplification by inducing more than 35 million taxpayers to shift from itemizing their deductions to using the standard deduction. For any taxpayer for whom the 2 percent cap is binding, a cap would reduce the volume of wasteful spending and the associated deadweight loss. Even for those taxpayers for whom the cap is not binding but who are induced by the cap to shift from itemizing to using the standard deduction, the deadweight loss associated with deductible expenditures would be completely eliminated.

Are "Tax Expenditures" Really Spending in the Tax Code? - What are tax expenditures and what does the President mean by "spending in the tax code"? This was one of the topics I addressed during my recent testimony before the Senate Budget Committee.   Here is an excerpt from that testimony [for the complete testimony, click here]: According to the Joint Committee on Taxation, "tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers."[i]  These special preferences are called tax expenditures because some people consider them the equivalent of direct spending through the tax code.However, aside from the refundable cash outlay portion of some credits, tax expenditures are really not the same as direct spending. Instead, they are an attempt to achieve certain public policy goals by inducing or incenting taxpayers with the prospect of a lower tax bill. Essentially, lawmakers are trying to get taxpayers to achieve these policy objectives by using their own money, not "the government's."

Reforming Tax Expenditures Can Reduce Deficits While Making the Tax Code More Efficient and Equitable  - With the federal budget on an unsustainable path, our country’s fiscal problems need to be addressed in a way that is both effective and equitable.  Scaling back and reforming “tax expenditures” — spending that is delivered through the tax code rather than government programs — should be an important part of that effort. As the report from the Bowles-Simpson deficit commission stated, “These tax earmarks —amounting to $1.1 trillion a year of spending in the tax code — not only increase the deficit, but [also] cause tax rates to be too high.” [1]  Moreover, tax expenditures often reduce economic efficiency by providing the largest subsidies to high-income families, who are least likely to need a financial incentive to engage in the activity the tax incentive is designed to promote, such as buying a home or saving for retirement.  In other words, many of these expenditures are “upside-down.” 

Uncapping the Payroll Tax Should Be the GOPs Primary Short Term Objective - If you believe in low marginal tax rates in general and you believe in low taxes on capital then you have a best friend, its called the Payroll Tax. Your objective, singular, focused and unwavering should be to make the payroll tax the strongest revenue generator you can imagine. Forget about the income tax. It will kill itself. My long thesis is that most fiscal policy evolves in structural ways dependent upon the deep moral beliefs of the populace. Government is not viewed by most as a public policy tool or instrument for making tradeoffs. It is viewed as the temporal authority and people will want it to be a “just” temporal authority. That having been said you can stack the deck in your favor a bit, so that as the natural evolution plays out the righteous move will be the move that you wanted anyway.

The Perils of Limiting Tax Breaks - Limiting or ending tax breaks for the well-to-do has a lot of inherent appeal, both for politicians and for tax geeks. But it’s tricky to design a limit that does what you want, without doing what you don’t want. For instance, experts say it would probably be a terrible idea to simply eliminate tax deductions for people earning more than $250,000, the imaginary border fence that President Barack Obama has set up between the middle class and the well-to-do. Such a cutoff would create a perverse incentive for many people to avoid receiving that last dollar that would push them across the line. Even paring back deductions for people making more than $250,000 raises tricky questions. For example, says the Urban Institute’s Eric Toder, suppose you have income of $260,000 and $30,000 in mortgage interest. Under current law, your deduction would reduce your taxable income to $230,000 — i.e. below the income trigger. So exactly how do you design the deduction limit in your new proposal?

Survey Shows Americans Want Their Cake and Eat It Too - Surveys repeatedly show US Americans are very concerned about the deficit. However, Other surveys show that concern goes out the window when asked how they are willing to reduce it. Please consider the Gallup survey that shows Americans Oppose Eliminating Income Tax Deductions Americans make it clear they want to keep common federal income tax deductions, regardless of whether the proposed elimination of those deductions is framed as part of a plan to lower the overall income tax rate or as a way to reduce the federal budget deficit. No more than one in three Americans favor eliminating any of the deductions in either scenario. Half of respondents were asked about eliminating the deductions as part of a plan to lower the overall tax rate and the other half were asked about eliminating the same deductions to reduce the federal budget deficit.

Obama's Budget Message: You Can't Have Your Cake and Eat It Too - On April 13, President Obama attempted to change the budget debate in Washington, which has been conducted entirely on Republican terms for the last two years. In particular, he is trying to put taxes back on the table as part of the solution to the nation’s debt and deficit problem. Since voters have many other things on their minds and often get their news from partisan sources today, the only way to get their attention and possibly change their minds is to ratchet up the rhetoric and take a position just as extreme as one’s adversary. Trying to be reasonable and appeal to the center doesn’t work any more. It just makes you look weak and forces you to fight policy battles on the other side’s turf.Republicans clearly understand these rules better than Democrats, Obama especially. On the tax issue, the Republican message is simple, clear, unambiguous, and wrong. But it is repeated so relentlessly and aggressively that its logical and factual weaknesses get lost in the discussion. Rather than counter the Republican position with reason and evidence, Democrats mostly say nothing, perhaps hoping that the media will do the dirty work for them.

Tax Literarcy - Linda Beale -This is the time of year when everybody thinks about taxes, since the deadline for calendar-year taxpayers to file their 2010 tax return is fast approaching on April 18. There is a good bit of tax rhetoric out there intended to encourage people to see taxes as a bad thing.  The right-wingers talk about "starving the government"--meaning that if they can just keep taxes low enough, then revenues will lag so far behind expenditures that they can more easily convince households used to thinking in terms of balancing their own budgets that the government is "bankrupt" or "out of control" and that spending needs to be cut, period.  That's what has been going on in this year's Congressional chicken games.  The GOP, with lots of financial backing from "tea party" supporters like the Koch brothers and the major corporate lobbyists like the U.S. Chamber of Commerce, having been hitting the "yikes, it's a deficit" button and conditioning the American public to thinking that we have to cut government spending to the bone (except for the GOP's favorite boondoggle, the American military complex).There are two important things worth remembering when these "starve the government" "government is bad" "taxes are bad" ideologies are being trumpeted on every corner.

Two for Uncle Sam, One for Shareholders: The 71% NYTimes Co. Tax Rate - Just as the individual income tax falls more heavily on the affluent than the super-rich, so too does the corporate income tax. But the broader issue has gotten zero attention in the hubbub that began March 24 with The New York Times exposé on General Electric Co.'s income taxes.1  We'll get to the dispute over how GE was treated, its response, and its statement that it is "scrupulous" about its worldwide tax compliance. But first let's look at the distribution of corporate income taxes, starting with a comparison of two of the best-known brand names in the country: GE and the New York Times Co.  GE made a nearly $194 billion profit over the last 10 years and paid nearly $23 billion in income taxes. That's a real tax rate of 11.8 percent, about one-third the statutory rate of 35 percent.  The New York Times Co. made less than $2 billion in profit over the same 10 years and paid almost $1.4 billion in income taxes. That's a real tax rate of 71 percent, paid in cold, hard cash.  So the newspaper company that exposed GE paid more than twice the posted U.S. corporate rate, and its real tax rate was more than six times GE's real tax rate.

The Mindless Mantra of Wall Street: The Corporate Tax Rate Is Too High - In 2010 General Electric made $14 billion and received a $3 billion tax refund. The response by business? The 35% corporate tax rate is too high. Tax cuts, they continue to say, will spur economic growth and create jobs, and allow American companies to compete in a global economy.All very emotional. But the facts can be found in U.S. Office of Management (OMB) figures, which show a gradual drop over the years in Corporate Income Tax as a Share of GDP, from 4% in the 1960s to 2% in the 1990s to 1.3% in 2010. The unweighted global average in 2005 was 3.4%. Also coming from the OMB is the percent of Total Tax Revenue derived from corporate taxes (OMB Historical Table 2.1). The corporate share has dropped from about 20% in the 1960s to under 9% in 2010. Finally, in a U.S. Treasury report of global competitiveness (Table 5.3), it is revealed that U.S. corporations paid 13.4% of their profits in taxes between 2000 and 2005, compared to the OECD average of 16.1%. (Although the Tax Foundation notes that tax rates of other nations have fallen while the U.S. has remained unchanged.)

Today's number: 12 - That number represents the top 12 Corporations that not only don't pay taxes, and actually get a refund check from the IRS. So, lets look at a few of these fuckers and how they keep all their money and take some of our money in the form of tax rebates by using a new report put out by PublicCampaign.Org.Twelve large American corporations have been identified by news reports, nonprofit organizations, and elected officials as paying little or no federal income taxes. Collectively, these one dozen corporate tax dodgers have benefited dramatically – in tax loopholes, bailouts, and subsidies – from the more than $1 billion dollars they have invested into influencing Washington. As Americans pay their taxes this month, it is important to understand that our political system lets these corporations off the hook while the rest of us foot the bill.

Forecasters Predict Taxes to Rise, but Not Before Election - The vast majority of economists in the latest Wall Street Journal forecasting survey expect Congress to increase taxes by 2016. But only a handful expect it to happen before the 2012 presidential election. By a 6-to-1 margin, the respondents expect the U.S. will need to raise taxes some time over the next five years in order to deal with fiscal problems and the long-term deficit. “Spending cuts alone are not enough to achieve fiscal sustainabilityBut by the same 6-to-1 margin, they don’t expect any increase to hit in the next 18 months. “At best, they will make revenue-neutral reforms to the corporate tax code,” As the presidential election looms, the economists don’t expect Congress to try to pass unpopular tax increases. “It would be political suicide,”

How Big Business Gets a Free Ride by Lobbying to Raise Your Taxes - How can we reconcile the simple fact that Americans are living in one of the least taxed countries in the developed world with the reality that many working people feel they're being “taxed to death”?  Well, consider this1: in the 1940s, corporations paid 43 percent of all the federal income taxes collected in this country. In the 1950s, they picked up the tab for 39 percent. But by the time the 1990s rolled around, corporations were paying just 18.9 percent of federal income taxes, and they forked over the same figure in the first decade of this century. We – working people – paid the difference. That's because the share of our economy represented by government spending has varied by only a small margin since the 1950s, regardless of which party held Congress or the White House. With a pretty consistent picture on the spending side, every time corporate America lobbies for another tax break or loophole for the benefit of their shareholders, they are effectively raising taxes on American households – on the 90-plus percent of the population who get most of their income from wages rather than investments.

"Top Ten Tax Charts" -  From the CPBB, charts showing:

Top Marginal US Tax Rates: 1916-2010 - Here's a great graph of US income tax rates back to when personal income taxes were started from Visualizing Economics (hat tip Barry Ritholtz). You can see the marginal rate for personal income has come way down from its 1945 peak. A few months ago, Michael Hudson answered the question, "Why Did America Have A 90% Income Tax Under Eisenhower? ". He says the original premise of the income tax law was based on 18th and 19th century classical economics and the price theory of economic rent. First and foremost, Hudson says that meant to the economists of the late 19th century and early 20th century that America would get rich through productivity gains that came from the work of highly paid labour. Hudson argues that is why Asia is more productive today: because living standards are increasing.  However, to the degree one made considerably more than the average income, Hudson argues it was assumed in the early 20th century that this was the result of rent-seeking or monopoly privilege of the sort we saw during feudalism. Therefor this income was largely taxed away.

John Taylor in Favor of Higher Marginal Income Tax Rates? If Not, Why Not? - A couple of weeks ago, John Taylor posted a graph showing that since 1990, there has been a negative correlation between the Investment to GDP ratio and unemployment.  There's been some back and forth between Taylor and some of the other big boys (some of it summarized at Mark Thoma's Economists View, and even Krugman has weighed in). Lots of fun is being had by all, but it seems everyone, especially John Taylor, is missing a key point. If, as he states in his post, "the most effective way to reduce unemployment is to raise investment as a share of GDP" and if we want to reduce unemployment, then we should be raising the top marginal tax rate.. After all, going back to 1929 (that's as far back as the Bureau of Economic Analysis has data), there's a quadratic relationship between the top marginal income tax rate and the ratio of private investment to private consumption. As I note in the post in which that analysis is done (complete with a nice graph):

Taxes on the wealthy have gone down dramatically - With Tax Day fast approaching and deficit reduction all the rage, one fact deserves significant attention: the wealthy are enjoying some of the lowest taxes in generations. The Figure shows the average tax rate in 1979, 1992, and 2007, as well as the tax rate for the top 1% of households, and the top 400 households (who have an average annual income of nearly $350 million).  Since 1979, the country’s overall average tax rate—the share of income paid in taxes—has fallen slightly, but for those at the top of the earnings ladder this share has fallen dramatically. This diminished tax burden on the wealthiest has contributed to the historically low federal revenue levels we are seeing today, and in turn, to higher deficits. The Congressional Budget Office projects federal revenue in 2011 will total 14.8% of GDP—the lowest level since 1950. At the same time that the tax burden has shifted away from the wealthy, this same top income group has enjoyed  massively disproportionate income gains.  Between 1992 and 2007, a time in which income for the average household and top one percent grew 13% and 123%, respectively, the income for the top 400 households grew fully 399%.

Taxing the Rich - Increased taxes on the rich could balance the budget and end the showdown over how many billions to slash from social spending. Consider, for instance, the Fairness in Taxation Act introduced by Representative Jan Schakowsky, Democrat of Illinois, which would increase the top federal marginal income tax rate to 45 percent for married couples earning more than one million dollars a year and to 49 percent for billionaires, from the current rate of 35 percent. Historically unprecedented? Hardly. The top marginal tax rate was 50 percent in the mid-1980s and even higher in the 1950s (as the chart shows).Such a boost could raise an estimated $78 billion, more than the current Republican budget-cut goal. Even if it fell far short it would avert proposed cuts for many valuable programs, including Head Start, which provides early childhood education, and Pell Grants, which help low-income families send their children to college. Some outspoken millionaires, including the billionaire Warren Buffett, have long advocated increased taxes on the rich.

9 Things The Rich Don't Want You To Know About Taxes - As millions of Americans prepare to file their annual taxes, they do so in an environment of media-perpetuated tax myths. Here are a few points about taxes and the economy that you may not know...:

  1. Poor Americans do pay taxes.
  2. The wealthiest Americans don’t carry the burden.
  3. In fact, the wealthy are paying less taxes.
  4. Many of the very richest pay no current income taxes at all. 
  5. And (surprise!) since Reagan, only the wealthy have gained significant income. 
  6. When it comes to corporations, the story is much the same—less taxes.
  7. Some corporate tax breaks destroy jobs.
  8. Republicans like taxes too.
  9. Other countries do it better.

Tax Me, I’m Rich, Says Deep-Pocketed Group -- Patriotic Millionaires for Fiscal Strength--rich guys in favor of raising taxes on themselves and other wealthy people--say they are irritated over President Obama's failure to do just that. Nor do they believe his latest announcement that he intends to try again, says Erica Payne, founder of the Agenda project and coordinator of the Patriotic Millionaires campaign. The president, when a candidate in 2008, had recommended ending the Bush tax cuts for households earning over $250,000 a year. But he conceded that point when he signed into law in 2010 an agreement with Republicans to extend the Bush tax cuts two more years. It's that concession that has disappointed and rankled Patriotic Millionaires, curdling their feelings. "The administration cut the deal they felt they needed to cut," shrugs Payne. "But we disagreed wholeheartedly. The president's quick and easy capitulation on an issue with such solid moral elements was disheartening."One of Obama's primary jobs, she says, is to be chief educator.

Who Cheats on Their Taxes? - The United States Treasury has taxpayer integrity to thank for many of its tax collections. But some Americans are not honest with the Internal Revenue Service. Last week I explained how many taxpayers accurately report their income to the I.R.S., despite apparently low penalties for underreporting. Many economists say that people are willing to sacrifice some disposable income in order to be honest taxpayers; others say that fear of penalties is the overwhelming motivation for tax payments. Three years ago, in his Ph.D. dissertation at the University of Chicago on “Tax Compliance and Social Values,” Oscar Vela suggested both that taxpayers are honest and that they are largely so because honesty keeps them from losing income.  Dr. Vela looked at the importance of integrity in job performance in the Occupational Information Network and found that the occupations where integrity was especially valued coincided with the occupations where the I.R.S. found tax compliance rates to be the highest.

Tax Study: Scientists More Likely to Cheat Than Lawyers - Tax day comes three days late in 2011 on Monday, April 18th, instead of April 15th. But even after the deadline to file your taxes comes and goes, there will be hundreds of thousand of Americans who haven't fully paid what they owe to Uncle Sam. The annual tax gap is estimated at about $350 billion. That's the difference between what is owed in taxes every year and what gets paid on time. So who isn't paying? Scientists, it appears. A recent study looked at tax cheats and found that one of the best indicators of whose likely to pay their taxes in full is their profession. The study, by University of Chicago doctoral student Oscar Vela, looked at the percent people misrepresented their income and then ranked them by profession. There were of course some industries you would expect at the top of the list. Professions where people usually work for themselves and are often paid in cash - landscapers, electricians and general contractors. But there where some surprises. Lawyers it turns out are the most likely to pay their taxes in full. Another group of people most likely to pay their taxes in full: chief executive officers. On the other end of the spectrum are scientists, who were on average likely to understate their income by as much as 35%. Journalists didn't rank very high in tax integrity either.

No, They Can’t Just Get Along - Why can’t economists tell us what happens when government spending goes up or down, taxes change, or the Fed changes monetary policy? The stumbling block is that economics is fundamentally a non-experimental science, particularly in the realm of macroeconomics. Unlike disciplines such as physics, we can't go into the laboratory and rerun the economy again and again under different conditions to measure, say, the average effect of monetary and fiscal policy. We only have one realization of the macroeconomy to use to answer important policy questions, and that limits the precision of the answers we can give. In addition, because the data are historical rather than experimental, we cannot look at the relationships among a set of variables in isolation while holding all the other variables constant as you might do in a lab and this also reduces the precision of our estimates.

Our Polarized and Money-Driven Congress: Created Over 25 Years By Republicans (and Quickly Imitated by Democrats) -- Yves Smith - Political scientist Tom Ferguson prepared a short but important paper for the INET conference last weekend on how Congress got to be as polarized as it is today. His answer: it was redesigned quite deliberately by conservative Republican followers of Newt Gingrich starting in the mid 1980s and their methods were copied by the Democrats. Their changes resulted in firmer control by leadership (ie, less autonomy of individual Congressmen) and much greater importance of fundraising (which increased the power of corporate interests).The extent of corruption may surprise even jaundiced readers. Both houses have price lists for committees and sub-committees. Ferguson delineates some of the many mechanisms for influencing political outcomes; they extend well beyond campaign donations and formal lobbying. Even though many are by nature hard to quantify in any hard or fast way, he does categorize them and has developed some estimates (see “The Spectrum of Political Money”, starting on p. 23, and see also his summary on p. 42). Finally, Ferguson goes through conventional explanations of why politics has become so polarized (such as changing cultural attitudes) and shows why they don’t stand up. I strongly urge you to read the entire paper.

Too big to fail - SIMON JOHNSON, former IMF chief economist and now professor at MIT's Sloan School of Management, has been one of the more vocal critics of the coziness of the ties between the financial sector and the government, particularly in the United States. He spoke on Saturday evening at INET's conference in Bretton Woods on a panel on "Too Big to Fail" (or, more formally, the regulatory challenge posed by large, complex financial institutions). He has lost none of his vim. Worth a listen:

The future of banking: is more regulation needed?… Boone & Johnson - YES: Without serious reform it will soon be a case of “here we go again” If Monday’s interim report of Sir John Vickers’ commission highlights one thing, it must be this: the banking system, on both sides of the Atlantic, is more dangerous now than before the financial crisis began in 2008. The only difference is that few now think Citi, HSBC or any of the major banks could go bankrupt, like Lehman Brothers. Before 2008 “too big to fail” guarantees were a possibility; now they are a certainty – enabling banks to borrow cheaply, and take risky bets with a great deal of leverage. Executives get the upside, taxpayers get the downside.  Net US federal government debt now held by the private sector – seen by comparing Congressional Budget Office forecasts before and after the crisis – has increased by 40 percentage points to around 75 per cent of GDP. This is the heart of the immediate American fiscal crisis. Yet the political power of these banks in the US has actually risen – while in most European countries the biggest banks are also untouched. All sensible proposals to tame the sector have been declined. Jamie Dimon, JPMorgan Chase chief executive, argued in November 2009 that “too big to fail” could not be ended without a “resolution authority” for megabanks – an expansion of the power to manage orderly liquidation and impose losses on creditors. The Dodd-Frank reform legislation in the US creates such an authority, but with a big loophole: it does not apply to cross-border banks like JPMorgan or Citi. There is no cross-border resolution mechanism of any kind and none planned. For megabanks in trouble, the choice remains: Lehman-type collapse or Tarp-type bail-out.

Bank Regulation: Too Little to Succeed - Would it surprise you to learn that if a bank like Lehman Brothers were to get into trouble today, we would have no choice but to bail it out? The Dodd-Frank financial reform bill includes resolution authority that supposedly allows regulators to avoid a bailout and dismantle large, systemically important banks that get into trouble without endangering the overall banking system. But this legislation does not end the problem of too big to fail banks. If the banking system is threatened by the failure of a large bank, then resolution authority will not prevent the equivalent of a traditional bank run on the shadow banking system. Depositors can’t be certain that resolution authority will work as advertised, and as soon as they sense their funds are at risk, they will rush to withdraw them from endangered institutions. And as this fear spreads to counterparties worried about the ability of the troubled bank to meet its obligations, and in turn to the counterparties of counterparties, the overall system becomes threatened and the government has no choice but to step in to try to prevent collapse.

The Promise of Living Wills - As I’ve said before, I’ve become a big fan of the “resolution plans” (a.k.a., “living wills”) that Dodd-Frank requires. They’ll be enormously useful in resolving large financial institutions under the new resolution authority, primarily because they’ll ensure that regulators have all the information they need to actually execute a smooth resolution of a major bank (e.g., organizational structure, funding practices, trading systems, major counterparties). Resolution plans are one of those things that have the potential to be incredibly important, but that you could also see regulators basically ignoring — that is, requiring the minimum amount of information, or allowing banks to include only publicly available information, or something like that. For resolution plans to be as important as I think they can be, the regulators absolutely have to take them seriously. The Fed and FDIC approved a joint proposed rule on resolution plans earlier this week, and I’m pleased to report that they’re clearly taking resolution plans very seriously — and then some.  The proposed rule requires a ton of information, covering all major aspects of the whole financial institution, and I haven’t thought of any area that they’ve missed.

INET: Can Sovereignty and Effective International Supervision be Reconciled? The Challenge of Large Complex Financial Institutions - Cross post of the videos from an INET conference session on Large Financial Institutions that Paul Volcker described as a “Revival Meeting”… All good but Sheng for a clear-eyed Chinese take, Admati, Johnson and maybe the Panel Session.

Dissident vs Mainstream Tension at New Economic Thinking Conference - I've been spending a lot of time with a variety of economists -- mainstream and dissident -- at the Bretton Woods forum organized this week by the Institute for New Economic Thinking.   The UK's Financial Services Authority chief Lord Adair Turner gave a real tour de force last night (will post video soon) on the key economic questions that need to be rethought. The most important question he put on the table is whether economic growth is always good, particularly growth that doesn't generate jobs, happiness or enhance quality of life.  INET founding sponsor George Soros commented to me that Turner is impressive because he keeps probing, keeps wrestling with the tough questions. Soros also said that if there is a John Maynard Keynes of our time, it is Adair Turner, and I'd agree. But there is a constructive tension in this meeting. There are mainstreamers like former Treasury Secretary Lawrence Summers and former UK Prime Minister Gordon Brown who have been part of the system that created the conditions for the great financial meltdown -- and yet many feel that they have not admitted their responsibility or given a full self-critique of themselves and their governments.

Could Goldman Sachs Fail? – Simon Johnson - This link to MIT Sloan’s website provides a partial transcript and video covering the points made below.If Goldman Sachs were to hit a hypothetical financial rock, would it be allowed to fail — to go bankrupt as did Lehman — or would it and its creditors be bailed out? I posed this question on Sunday to four experts (Erik Berglõf, Claudio Borio, Garry Schinasi and Andrew Sheng) from various international organizations at the Institute for New Economic Thinking Conference, known as INET, in Bretton Woods, N.H. — and to a room full of people who are close to policy thinking both in the United States and in Europe. (Let me note, in the spirit of disclosure, that I’m on the advisory board of INET, which covered my travel expenses to the conference.) In both the public interactions (you can view the video and in private conversations, my interpretation of what was said and not said was unambiguous: Goldman Sachs would be bailed out (again). This is very bad news – although admittedly not at all surprising.  Goldman’s balance sheet fluctuates at around $900 billion; about one and a half times the size of Lehman when it failed. All sensible proposals to reduce the size of firms like Goldman – including the Brown-Kaufman amendment to Dodd-Frank financial legislation – have been defeated, and regulators show no interest in tackling Goldman’s size directly.

Haunted Economics: My Weekend at Bretton Woods -The Ghost of American World Supremacy was present, too, lurking in references to the hotel’s most historic event, which occurred in 1944 when the Bretton Woods Accord was signed here. The upshot of that deal was that financiers from 44 countries agreed to peg their currencies to the US dollar in order to stabilize the world economy, thus ending the dominance of the British pound. Fast-forward to a chilly April weekend in 2011, and you find economists from both home and abroad hinting solemnly that the days of dollar hegemony may be coming to an end. There were murmurings that America had become an untrusted global partner and an economic wild card. The spectacle of our political deadlock (the shutdown was still a possibility when the conference started) brought questions as to how America could possibly act to help effectively regulate the world economy when we could hardly address our own. It was observed that a symbiotic relationship exists between components of the international economic system, and that the China and the US, for example, were using the same vital organs: If one economy became sick, the other would suffer, too.

Why economists stubbornly stick to their guns - Last week, a group of eminent economists gathered in Bretton Woods, New Hampshire, to review responses to the financial crisis at a conference organised by the Institute for New Economic Thinking, a group founded by financier George Soros. The event led me to reflect on the phenomenon of confirmation bias, or the tendency to find evidence to support what one already believes. Three years after it began, enemies of modern capitalism look back and perceive egregious instances of the failure of the market that they had always deplored. The crash challenges established views, people will tell you, but this seems to be a recommendation to others, rather than a personal statement. Lessons have been learnt, they will say, but the lesson most people have learnt is that they were right all along.  This bias receives organisational reinforcement, too. In politics and corporate life there is strong competition to support the opinions of the great leader, be it the head of the International Monetary Fund, or a major bank. Media developments also make it all-too-easy today to find information only from sources that reflect one’s existing opinions; think Fox News or the blogosphere. In economics, the academic realm ought to be the home of pluralist discourse but the growth of peer review and journal publication has undermined this. University economists, of the sort gathered at Bretton Woods, are now under relentless pressure to conform to a narrow, established paradigm. Inexplicably most supporters of that paradigm also feel that the crisis confirmed its validity.

Bretton Woods outlook dark for America - The George Soros-backed Institute for New Economic Thinking's just-concluded Bretton Woods weekend conference of leading economists didn't actually focus on America's future, but the sum of the discussions produced a pretty grim outlook. The current political and cultural polarization of the country was seen as probably worse today than at any time since the outbreak of the Civil War exactly 150 years ago. The polarization today is being propagated by wealthy and powerful elements on Wall Street and elsewhere that fund bitter, attack dog politics and sharply polarized media commentary.  The power of big financial and corporate lobbies is such that they overwhelm reform efforts with huge lobbying campaigns. The effort to regulate the banks and establish accountability for them has failed to a large extent. The Dodd/Frank law that is supposed to re-regulate the banks fails badly because the reform of the banks to date has involved actually making them bigger and fewer. The biggest 50-odd institutions are being designated as too big too fail, but are not being subjected to any rigorous or vigorous oversight and regulation.

The Bear of Bretton Woods - The 1944 Bretton Woods conference was marked by a clash between the United States and the United Kingdom, represented by the economists Harry Dexter White and John Maynard Keynes, respectively. The UK wanted a system in which global liquidity would be regulated by a multilateral institution, while the US, for self-interested reasons, preferred a dollar-based system. Keynes failed in his quest to endow the IMF with the power to create a new international reserve unit as an alternative to the dollar. And he failed to secure agreement on measures that might force surplus as well as deficit countries, and the issuer of the international currency as well as its users, to adjust.The latter failing haunts us to this day. Countries that run chronic external surpluses, like China, and countries whose currencies are widely used internationally, like the US, do not face the same pressure as other countries to correct their policies when economic imbalances arise. Policymakers at Nanjing promised to address this problem. They called for a process to ensure that when the warning lights flashed yellow, the country in question would be compelled to correct its policies. Unfortunately, such early warning indicators are better at reflecting the last crisis than they are at preventing the next one.

Two Major Tests for Bank Regulators  - As I said in my previous post, the new Basel III liquidity requirements are a massive deal, and one of the most important aspects of financial reform, but have been almost completely ignored by commentators as well as the press. As a result, I think it would be useful for me to highlight the most important aspects of the new liquidity requirements that were left to national regulators — and that therefore are still up in the air. I’m only going to address the Liquidity Coverage Ratio (LCR) here, since the other component of the liquidity requirements, the Net Stable Funding Ratio, isn’t scheduled to be implemented until 2018, if it’s ever implemented at all (and I have serious doubts about whether it’ll ever be implemented in anything like its current form, which is barely even coherent). Broadly, the Liquidity Coverage Ratio requires internationally active banks to maintain a stock of “high-quality liquid assets” that’s sufficient to cover cash outflows in a 30-day stress scenario. In other words, banks are required to have enough cash or cash-like instruments on hand to survive a really horrible, financial-crisis-level 30 days, in which the funding markets all but shut down. The cash outflows in the stress scenario are calculated by applying “run-off rates” to each source of funding (e.g., unsecured wholesale funding, repos, etc.). Most of the action/controversy here is in the different run-off rates used. (I gave a more detailed explanation of the LCR here and here.) There are, in my opinion, two major issues that still have to be determined by national regulators: (1) the run-off rate for market valuation changes on derivatives transactions; and (2) the definition of, and run-off rate for, so-called “non-contractual contingent funding obligations.” This post will address the first issue. My next post will deal with the second issue (which I’ve come to the conclusion should absolutely be called “the Citigroup rule”).

The Citigroup Rule - My previous post looked at one of the two major issues in Basel III’s all-important liquidity requirements that still have to be determined by national regulators. This post will look at the other major issue that was left to national regulators, which I’m trying to get people to call “the Citigroup rule.” To recap, the main component of Basel III’s liquidity requirements, the Liquidity Coverage Ratio (LCR), requires internationally active banks to maintain a stock of “high-quality liquid assets” that’s sufficient to cover cash outflows in a 30-day stress scenario. The cash outflows in the stress scenario are calculated by applying “run-off rates” to each source of funding (e.g., unsecured wholesale funding, repos, etc.). Most of the action/controversy here is in the different run-off rates used.

White House Seeks New Agency Chief - White House officials seeking someone to run the Consumer Financial Protection Bureau have so far failed to find a nominee, with several candidates rebuffing the administration's overtures, according to people familiar with the process.  One concern of some: That accepting would undercut Elizabeth Warren, the Harvard law professor and consumer advocate who is currently a special adviser to the president charged with setting up the bureau. She remains a hugely popular figure among many Democrats and anathema to many Republicans. The nascent bureau must have a director in place by July 21 in order to get a slate of broad powers to attack fraudulent and abusive financial practices.  That deadline could result in the White House nominating Ms. Warren, now a special adviser to the president charged with setting up the bureau. She is believed to want the job but her candidacy likely would trigger a Senate confirmation battle. President Barack Obama could avoid that fight by appointing her during a congressional recess before July 21.

Might Elizabeth Warren Get the CFPB Nod After All? - - Yves Smith  - A Wall Street Journal report suggests that Elizabeth Warren might wind up getting nominated to head the Consumer Financial Protection Bureau despite fierce Congressional opposition because other possible nominees have turned down the job, in many cases because they want Warren to have it. I’d be delighted to be proven wrong, since I do think Warren is the best choice, but I see the odds of this happening as zero:

  • 1. Obama is moving further and further to the right. As Glenn Greenwald points out: Like most first-term Presidents after two years, Obama is preoccupied with his re-election, and perceives — not unreasonably — that that goal is best accomplished by adopting GOP policies. The only factor that could subvert that political calculation — fear that he could go too far and cause Democratic voters not to support him — is a fear that he simply does not have..
  • 2. A Warren nomination would be over Geithner’s dead body. He has succeeded in extending his influence beyond that of a typical Treasury secretary; he has no reason to have a media-genic regulator crossing swords with him (as Warren would).

Attacks on the CFPB are Attacks on the Middle Class - The GOP won lots of concessions in the deal to avert a shutdown late Friday night, but one of them might at first seem surprising: a requirement that the newly created Consumer Financial Protection Bureau be audited annually and studied by the Government Accountability Office. While it might seem weird to tack this on to a budget deal, the agency has become a point of focus for many in the Republican Party. On the Wednesday before the shutdown deal, House Republicans unveiled a host of legislation aimed to weaken it. Among their proposals is replacing the single job of director with a five-member committee, making it easier to overturn and veto its new rules, and preventing it from using its powers until it has a permanent director. All of this is likely to slow down the reforms and regulations that the agency has been tasked with creating in order to ensure a financial marketplace that works for consumers. The GOP’s attacks couldn’t come at worse time for middle class Americans. While many studies look at life below the poverty line, a new study tried to figure out how much money is needed to simply attain financial stability. Its findings about how much it costs to meet basic needs without government support are stark: According to the report, a single worker needs an income of $30,012 a year — or just above $14 an hour — to cover basic expenses and save for retirement and emergencies. That is close to three times the 2010 national poverty level of $10,830 for a single person, and nearly twice the federal minimum wage of $7.25 an hour. A single worker with two young children needs an annual income of $57,756, or just over $27 an hour, to attain economic stability, and a family with two working parents and two young children needs to earn $67,920 a year, or about $16 an hour per worker.

How has the financial system changed? (And what to do about it) - Atlanta Fed's macroblog - The subject of this post's title was, in essence, the centerpiece of the most recent edition of the Atlanta Fed's annual Financial Markets Conference, convened this year in Stone Mountain, Ga. (just outside Atlanta). In terms of formal papers, the conference was bookended by work that came to very similar conclusions but from very different angles. From the vantage point of recent developments in micro banking structure, Arnoud Boot offered this diagnosis: "A fundamental feature of more recent financial innovations is their focus on augmenting marketability. Marketability has led to a strong growth of transaction-oriented banking (trading and financial market activities). This is at least in part facilitated by the scalability of this activity (contrary to relationship banking activities). It is argued that the more intertwined nature of banks and financial markets induces opportunistic decision making and herding behavior. In doing so, it has exposed banks to the boom and bust nature of financial markets and has augmented instability."Taking the very long view, Moritz Schularick presented (from a paper co-authored with Alan Taylor) pretty compelling evidence that the ongoing shift from relationship banking to transactions-based banking has fundamentally altered the nature of financial developments on real activity in modern economies:

Guest Post: Too Much Finance? - Yves Smith - One of the recent disturbing indicators of the triumph of the doomsday machine known as modern finance is Timothy Geithner’s vision that banks will continue to grow via increased penetration of emerging economies. From a recent interview by Noam Scheiber in The New Republic: He told me he subscribes to the view that the world is on the cusp of a major “financial deepening”: As developing economies in the most populous countries mature, they will demand more and increasingly sophisticated financial services, the same way they demand cars for their growing middle classes and information technology for their corporations. “I don’t have any enthusiasm for … trying to shrink the relative importance of the financial system in our economy as a test of reform, because we have to think about the fact that we operate in the broader world,” : “Now financial firms are different because of the risk, but you can contain that through regulation.” As anyone one with an operating brain cell realizes, “can contain” is not the same as “have contained” or “have a snowball’s chance in hell of containing”. Simon Johnson was also not happy with the Geithner vision of US financial firms occupying even bigger swathes of the world economy.  This post is important because it tackles a very basic question: when does the financial sector become so large as to be unproductive? And the answer is at levels of GDP that the US passed shortly after 1980.

Everything You Wanted to Know about the Tri-Party Repo Market - New York Fed Liberty Street Economics - The tri-party repo market is a large and important market where securities dealers find short-term funding for a substantial portion of their own and their clients’ assets. The Task Force on Tri-Party Repo Infrastructure (Task Force) noted in its report that “(a)t several points during the financial crisis of 2007-2009, the tri-party repo market took on particular importance in relation to the failures and near-failures of Countrywide Securities, Bear Stearns, and Lehman Brothers.” In this post, we provide an overview of this market and discuss several reforms currently under way designed to improve functioning of the market. A recent New York Fed staff report provides an in-depth description of the market

Rating Agencies Repeatedly Caved To Banks’ Demands And Helped Cause Crisis, Report Finds - The major credit rating agencies repeatedly sold out to Wall Street banks, so addicted to short-term profits that they repeatedly sacrificed the accuracy of their reports to maintain a competitive edge, a two-year government investigation has concluded. Rather than assess risk accurately, two major rating agencies sold their top seals of approval to their investment bank clients, blessing products that the agencies themselves knew to be undeserving, the Senate Permanent Subcommittee on Investigations concluded in a report released Wednesday. By repeatedly debasing their standards, these agencies helped banks sell shoddy securities to unsuspecting investors, inflating the value of assets that turned out to be worth far less, the report has found. The senate panel, led by Carl Levin (D-Mich.) and Tom Coburn (R-Okla.), levels a two-part charge against the rating agencies: Not only did these companies help inflate a dangerous bubble, the report says, but they also bear responsibility for popping it, as their abrupt downgrades of mortgage-linked securities in 2007 helped set off the panic that caused markets around the world to collapse.

Big banks are government-backed: Fed's Hoenig - Big banks like Bank of America Corp (BAC.N) and Citigroup Inc (C.N) should be reclassified as government-sponsored entities and have their activities restricted, a senior Fed official said on Tuesday. The 2008 bank bailouts at the height of the financial crisis and other implicit guarantees effectively make the largest U.S. banks government-guaranteed enterprises, like mortgage finance companies Fannie Mae and Freddie Mac, said Kansas City Fed President Thomas Hoenig. "That's what they are," Hoenig said. He said these lenders should be restricted to commercial banking activities, advocating a policy that existed for decades barring banks from engaging in investment banking activities. "You're a public utility, for crying out loud," he said. The Kansas City Fed president has been a vocal critic of rescuing the biggest banks rather than allowing them to fail. He has criticized the Fed's easy money policies in the wake of the crisis.

Simon Johnson Explains "What The Banks Did To Us" And Why "Seriously -- Goldman Sachs Can't Fail" - Simon Johnson, the former IMF chief economist who is now a professor at MIT's Sloan School of Management recently spoke at INET's conference in Bretton Woods on a panel on 'Too Big to Fail.' He told the room that Goldman is still too big too fail; it simply has to be bailed out if it fails at this point. We've transcribed part of his speech: 'Who in the room thinks that if Goldman Sachs hit a rock, a hypothetical rock -- I'm not saying they have, I'm not saying they will -- today, who here thinks they would be allowed to fail, like Lehman Brothers did, unimpeded by any government bailout, starting Monday morning? Can Goldman Sachs fail?' Then he explains what the banks did to us. "What's the public loss? Larry Summers said from this podium yesterday that the TARP money would be repaid from banks and that's probably true, but that's not the cost. Is it 8 million jobs lost? Is it a 6% fall in unemployment and we're still 5% down below the peak? Is it the increase in net federal government debt held by the private sector in the United States? "Compare the congressional government office medium term forecast for debt to GDP on that measure before the crisis and after the crisis. It's a 40% increase. That is a serious banking crisis. "THAT's the cost we're looking at. That's what the banks did to us. They got bailed out. And we have done nothing significant that will prevent this from happening again."

Senate panel slams Goldman in scathing crisis report (Reuters) - In the most damning official U.S. report yet produced on Wall Street's role in the financial crisis, a Senate panel accused powerhouse Goldman Sachs of misleading clients and manipulating markets, while also condemning greed, weak regulation and conflicts of interest throughout the financial system. Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations, one of Capitol Hill's most feared panels, has a history with Goldman Sachs. He clashed publicly with its Chief Executive Lloyd Blankfein a year ago at a hearing on the crisis. The Democratic lawmaker again tore into Goldman at a press briefing on his panel's 639-page report, which is based on a review of tens of millions of documents over two years. Levin accused Goldman of profiting at clients' expense as the mortgage market crashed in 2007. "In my judgment, Goldman clearly misled their clients and they misled Congress,"

Matt Taibbi "Justice Department Has No Appetite To Take ANY Cases Against Wall Street Executives" CNN video -  Anderson Cooper: Eliot Spitzer, Matt Taibbi and Carl Levin go after Goldman Sachs.

America Is a "Failed State" with a "Dual Justice System ... One for Ordinary People and then One for People with Money and Enormous Wealth and Power" - It is now mainstream news that none of the big financial criminals have been prosecuted. The New York Times is running an article today entitled 'In financial crisis, no prosecutions of top figures', which has been picked up as the leading front-page story by MSNBC. The story even quotes Bill Black: But their policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here. And as Tyler Durden reported yesterday, the chair of the Financial Crisis Commission, Phil Angelides, said today: I think there's a great concern in this country on two fronts. One is there's a question here, do we have a dual justice system? One for ordinary people and then one for people with money and enormous wealth and power. Secondly, we need deterrents. To the extent laws were broken, we need deterrents. If someone robs a 7-11, they took $500 and they were able to settle the next day for $50 and no admission of wrongdoing, they'd knock over that 7-11 again. And we've seen time after time where people and firms have made tens, one hundreds, billions of dollars. They've settled charges for pennies on the dollar

Skimpy Coverage of Levin-Coburn Report From WSJ, NYT - So here are some of the main things you don’t know about the Levin-Coburn report if you just read The Wall Street Journal and/or The New York Times papers, and missed good coverage by McClatchy, The Huffington Post, and Bloomberg (and a bit of so-so from the FT): That Senator Carl Levin, who chairs the subcommittee that release the report, wants to refer Goldman Sachs CEO Lloyd Blankfein and other Goldman executives to the Justice Department for prosecution for lying to Congress and for defrauding investors. Everybody reported that but the two big papers. Today, in a second-day story, the Financial Times looks at the possibility of a criminal case against Goldman.

  • — That Goldman screwed a client in a manner similar to how Wachovia worked over the Zuni Indian Tribe, for which Wells Fargo (which acquired Wachovia) had to pay an $11 million fine last week. The Huffington Post has that, reporting that it involved selling a slice of the infamous Timberwolf “shitty deal” for 42 percent more than Goldman had marked it.
  • — That Goldman’s Hudson-Mezzanine-2006-1 deal, which the Journal got a scoop on a couple of weeks ago, looks like another Abacus, the deal that cost Goldman $550 million. Here’s McClatchy’s second-day story:

Durbin, Dimon, and interchange -- Dick Durbin’s bodyslam of Jamie Dimon on the subject of debit interchange is, simply, a must-read. If Durbin ever had any dreams of a cushy sinecure on JP Morgan’s board, those have surely now been quashed forever — but being able to write a letter like this on official US Senate letterhead makes it oh so very worth it: He’s also not afraid to get personal:It’s always difficult for a sitting US senator to pick a fight with a US citizen, because it’s so hard to fight back: it can look like very much like bullying. But Jamie Dimon is no ordinary US citizen, and in fact has more power than Dick Durbin or any other senator. When it comes to bullying, the financial industry clearly has much more control of Congress than Congress has over the financial industry. Durbin, here, is just standing his ground in the face of an astonishing onslaught of mendacious lobbying from Dimon and his minions. Good for him!

US investigates banks over credit crisis ‘cartel’ claim -The US authorities are considering invoking anti-cartel laws against some of the world's biggest banks, in an investigation into whether they colluded to manipulate interest rates during the credit crisis. An investigation by the US Justice department and the Securities and Exchange Commission, the Wall Street regulator, is examining if banks published misleading data to play down the effects of the escalating crisis between 2006 and 2008.The inquiry is focused on the calculation of the London Interbank Offered Rate, known as Libor, which is central to the operation of financial markets. The price of trillions of dollars of loans and derivatives are set with reference to Libor, and it became one of the most closely watched measure of stress in the financial markets during the crisis.The US is examining suspicions that banks fed in misleading information, either to keep Libor artificially low or to hide the fact that their own borrowing costs were spiking higher – something that could have triggered a panic by their shareholders and clients.

Banks Near Deal With SEC - U.S. securities regulators are in talks with several major Wall Street banks to settle fraud allegations related to mortgage-bond deals that helped unleash the financial crisis, according to people familiar with the matter. The expected settlements, some of which could be reached as soon as next week, collectively mark the biggest attempt by enforcement agencies to hold Wall Street accountable for its role in the subprime mortgage bust. The cases highlight the aggressive tactics banks used to sell these securities to investors who suffered big losses. They also show how the banks' desire to keep the $1 trillion mortgage securities business going helped fuel the housing bubble. The Securities and Exchange Commission is aiming to reach a series of settlements with individual firms over the sales of the investments, rather than a big industrywide deal, according to people familiar with the matter.  The settlements are expected to vary significantly among banks—but few, if any, are expected to surpass the $550 million penalty that Goldman Sachs Group Inc. paid last year to settle allegations that it misled investors in a mortgage-bond investment called Abacus 2007-AC1.  Goldman didn't admit or deny the allegations.

William Black: Why aren’t the honest bankers demanding prosecutions of their dishonest rivals? -  This is the second column in a series responding to Stephen Moore’s central assaults on regulation and the prosecution of the elite white-collar criminals who cause our recurrent, intensifying financial crises. Last week’s column addressed his claim in a recent Wall Street Journal column that all government employees, including the regulatory cops on the beat, are “takers” destroying America.This column addresses Moore’s even more vehement criticism of efforts to prosecute elite white-collar criminals in an earlier column decrying the Sarbanes-Oxley Act’s criminal provisions: “White-Collar Witch Hunt: Why do Republicans so easily accept Neobolshevism as a cost of doing business?” [American Spectator September 2005] This column illustrates one of the reasons why elite criminals are able to loot “their” banks with impunity – they have a lobby of exceptionally influential shills. Moore, for example, is the Wall Street Journal’s senior economics writer. Somehow, prominent conservatives have become “bleeding hearts” for the most wealthy, powerful, arrogant, and destructive white-collar criminals in the world.

How is combatting fraud like socialism? You have to be a Wall Street Journal reporter to get that one...Linda Beale - Yves Smith at Naked Capitalism links to a great smack-down of the Wall Street Journal's lapdog corporatist reporting on behalf of the big banks and multinational corporations.  It's William Black, Why aren't the honest bankers demanding prosecutions of their dishonest rivals? Apr. 12, 2011. Stephen Moore, calls government employees and regulatory agents "takers" that are destroying America.  Earlier, he had written about Sarbanes-Oxley as a "white collar witch hunt" with an article that labeled regulatory action "Neobolshevism".  Here's just a taste of Black's response: Moore, for example, is the Wall Street Journal’s senior economics writer. Somehow, prominent conservatives have become “bleeding hearts” for the most wealthy, powerful, arrogant, and destructive white-collar criminals in the world. People like Moore not only spur neutralization, they actively campaign to minimize the destructiveness of elite white-collar crime and to deny the regulators and the prosecutors the resources to prosecute the criminals.

Why Isn’t FCIC Peter Wallison Facing Criminal Prosecution After He Lied To Congress? - In his latest Bloomberg op-ed, FCIC Commissioner echoes his perjured testimony, wherein he claimed that the Commission ignored the discredited analysis of his colleague at the American Enterprise Institute. The FCIC "never investigated what information about Fannie and Freddie’s loans was available at the time," writes FCIC Commissioner Peter Wallison in an op-ed piece for Bloomberg. It's a new slant on the same lies he put forth in his written dissent and in his prepared testimony before Congress. Those lies could not be more obvious, and they provide the foundation for his dishonest claims about the mortgage crisis.  Specifically, he claims that the FCIC refused to examine the loan data on the GSEs and the research and analysis of his colleague at the American Enterprise Institute, Edward Pinto. Pinto claims that subprime and Alt-A loans constituted half of the total loans outstanding, and that a big share of those loans were held or guaranteed by Fannie and Freddie.

In Financial Crisis, a Dearth of Prosecutions Raises Alarms It is a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?  Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. But a private meeting in mid-October 2008 between Timothy F. Geithner, then-president of the Federal Reserve Bank of New York, and Andrew M. Cuomo, New York’s attorney general at the time, illustrates the complexities of pursuing legal cases in a time of panic.  Mr. Cuomo, as a Wall Street enforcer, had been questioning banks and rating agencies aggressively for more than a year about their roles in the growing debacle, and also looking into bonuses at A.I.G.  According to three people briefed at the time about the meeting, Mr. Geithner expressed concern about the fragility of the financial system. His worry, according to these people, sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.

US watchdogs to sue executives of failed banks - US regulators are expected to file up to 100 lawsuits against executives and directors of failed banks in the next two years, as they seek to hold people accountable for management failings and recover billions of dollars, industry experts said.The Federal Deposit Insurance Corporation is only now beginning to step up its efforts to make an example of overly aggressive executives or inattentive directors of the 348 banks that have failed since 2008. The FDIC says the failures have cost its insurance fund $59bn. However, analysis by Nera Economic Consulting of material on the FDIC’s website suggests it has lost $80bn. Insurers who write policies known as D&O, which are held by directors and officers to protect them in the event of a bank failure, are likely to be liable for much of the money the FDIC aims to recover. Many have tightened up their terms, making it difficult for the 884 banks that remain on the group’s watch list to renew cover. The FDIC has authorised the filing of suits against 158 directors in total seeking more than $3.5bn. But of those, it has brought only six cases so far against 44 officials totalling $1.5bn, with the lion’s share of recoveries, about $900m, expected to come from Washington Mutual, the failed lender acquired by Wells Fargo.

Unofficial Problem Bank list at 978 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Apr 15, 2011. Changes and comments from surferdude808:  The FDIC remembered how to close banks by shuttering six this Friday and the OCC released its enforcement actions through mid-March 2011, which contributed to many changes to the Unofficial Problem Bank List.  In all, there were 13 removals and nine additions that leave the Unofficial Problem Bank List with 978 institutions and assets of $429.4 billion this week, compared to 982 institutions and assets of $433.2 billion last week. Only five of the six failures were on the list and it is interesting how three years into the current crisis institutions are failing wherein a formal enforcement action may not be found in the public domain.

Executive Pay Soars in 2010 - Rarely has the view from the corner office seemed so at odds with the view from the street corner. At a time when millions of Americans are trying to hang on to homes and millions more are trying to hang on to jobs, the chief executives of major corporations like 3M, General Electric and Cisco Systems are making as much today as they were before the recession hit. Indeed, some are making even more.  The disparity is especially stark as companies are swimming in cash. In the fourth quarter, profits at American businesses were up an astounding 29.2 percent, the fastest growth in more than 60 years. Collectively, American corporations logged profits at an annual rate of $1.678 trillion.  So far, this recovery has not trickled down. After two relatively lean years, C.E.O.’s in finance, technology, energy and beyond are pulling down multimillion-dollar paychecks. What many of these executives aren’t doing, however, is hiring. Unemployment, although down from its peak, stood at 8.8 percent in March. And few economists predict the jobless rate will drop substantially anytime soon.  For the average C.E.O., however, the good times have returned. The median pay for top executives at 200 major companies was $9.6 million last year. That was a 12 percent increase over 2009,

Is Paying for Performance Such a Hot Idea? -- Yves Smith - Pay for performance has become virtually a religion in America. As a result, evidence that it doesn’t work as advertised is seldom heard in polite company. Most of the caveats raised about bonuses in the business media relate to the design of particular pay arrangements rather than the general concept. These awards often reward short-term risk-taking or just dumb luck, and may be excessive relative to an individual’s real value added (as in they attribute too little value to the existing franchise and firm resources).An article in New Scientist (hat tip reader Kevin S) raises more fundamental issues. It explains how performance-linked bonuses can be demotivating and lead employees to game the system rather than do their best work. Using money or other rewards is useful when the task at hand in tedious. But perversely, these inducements are demotivating when the task is inherently interesting:

CMBS issuance update and the B-piece buyer problem - In search of further proof that the CMBS market is back, FT Alphaville stopped by a presentation on the topic hosted by S&P on Tuesday. We’re planning a deeper look into CMBS later, but for now here are some data points and trends related to issuance that we picked up while we were there:

  • 1) Total issuance in the first quarter totaled $8.7bn, roughly on schedule to meet the expected $35bn target that analysts have been predicting since the end of last year. Here’s a slide showing all of the quarter’s multi-borrower deals (as opposed to those collateralised with a single loan), accounting for 92 per cent of total issuance:
  • 2) Check out the bottom three rows of the next chart, where you’ll see that deal sizes, the number of loans collateralising each deal, and the number of tranches all continue to increase on the transactions we saw in the earlier stages of the market’s recovery last year:

Manhattan DA Investigates Bear Stearns Mortgage Traders - Could some Wall Street bankers finally end up behind bars for fraud in connection with the financial crisis? Up to now, we haven't seen any high profile criminal prosecutions of bank execs, but that may soon change. The Manhattan District Attorney is going after several key former Bear Stearns mortgage bond traders for allegedly misrepresenting securities and for an alleged double-dipping scheme, reported here in January by Teri Buhl. She writes a follow-up today breaking this news in the Distressed Debt Report. How hard will it be to throw these former Bear execs -- all of whom now hold prominent positions at other financial firms -- in jail?  Tragically, Buhl's article is behind a pay wall. But it reports that the Manhattan DA hasn't determined if they will ultimately charge the former Bear traders with a misdemeanor or a felony -- it depends on whether they can prove intent to defraud.

Louisiana Bankruptcy Court Ruling Confirms Claims Made Against Lender Processing Services in Class Action Filings - Yves Smith - A ruling in a Louisiana bankruptcy court case, In re Wilson, provides compelling evidence that many of the assertions made by Lender Processing Services, which both acts as the servicing platform and provider of default services for mortgage services industry, about how limited its role and hence its legal liability is, simply do not comport with reality.  In very simple terms, LPS claims that it is simply an information hub, acting as a middleman of sorts between servicers, borrowers, and law firms, providing “information services” of various sorts. Some pending lawsuits, including one launched as a class action in bankruptcy (Federal) court, contends that LPS has been engaging in impermissible splitting of legal fees (which is subject to disgorgement) as well as charing fees that have not been disclosed to the court (a huge no-no in bankruptcy court, where every disbursement is required to be reported). The Chapter 13 bankruptcy trustee for Northern Mississippi has joined that case, both in her own name and on behalf of all Chapter 13 bankruptcy trustees as a class. I strongly suggest you read this Louisiana decision in full. It provides an amusing contrast of LPS’s PR about what it does, versus a client’s account.

Initial Award of Frederic Mishkin Iceland Prize for Intellectual Integrity: Calomiris, Higgins, and Mason Paper on Mortgage Settlement -- Yves Smith - It seems more than a bit peculiar that, per American Banker, financial services industry participants have paid for three academics to issue a lengthy paper attacking a leaked draft settlement between state attorneys general and mortgage servicers. We have pointed out in multiple posts that the state AGs bargaining position is weak due to the lack of investigations. If the banks don’t like the terms, they can tell the AGs to see them in court.  But far more interesting is how embarrassingly bad this paper, “The Economics of the Proposed Mortgage Servicer Settlement,” by Charles Calomiris, Eric Higgins, and Joe Mason, is, yet how the economics discipline continues to tolerate special-interest-group- favoring PR masquerading as research.  In real academic disciplines, investigators and professors who serve big corporate funders have their output viewed with appropriate skepticism, and if they do so often enough, their reputation takes a permanent hit. Scientists who went into the employ of tobacco companies could anticipate they’d never leave that backwater. Even the great unwashed public knows that drug company funded research isn’t what it is cracked up to be.  But in the never-never realm of reality denial within the Beltway, as long as you can get a PhD or better to grace the latest offering from the Ministry of Truth, it gives useful cover to Congresscritters or other message amplifiers who will spout whatever big donor nonsense they are being asked to endorse this week.

Critical Signs in Foreclosure Talks -Hopes are fading for a far-reaching settlement between regulators and banks over improper home foreclosures as some regulators press ahead to reach their own settlements with banks that others involved in the talks deem weak. The dispute pits federal regulators against state attorneys general, who are seeking stiff penalties and comprehensive changes in the way banks foreclose on homeowners and modify loans. Advocates of tougher sanctions accuse federal banking regulators, including the Office of the Comptroller of the Currency and the Federal Reserve, with going easy on the banks. Federal regulators are on the verge of sending their orders, and federal and state officials are scrambling to maintain an uneasy alliance as talks reach a critical point and test whether there can be a universal settlement. Over the past two months, differences between federal and state officials emerged over the proper remedies to potentially fraudulent foreclosure-filing practices. Those divisions have raised the prospect that states and federal agencies may ultimately issue their own orders independently.

Federal Reserve issues enforcement actions related to deficient practices in residential mortgage loan servicing and foreclosure processing - The Federal Reserve Board on Wednesday announced formal enforcement actions requiring 10 banking organizations to address a pattern of misconduct and negligence related to deficient practices in residential mortgage loan servicing and foreclosure processing. These deficiencies represent significant and pervasive compliance failures and unsafe and unsound practices at these institutions. The Board is taking these actions to ensure that firms under its jurisdiction promptly initiate steps to establish mortgage loan servicing and foreclosure processes that treat customers fairly, are fully compliant with all applicable law, and are safe and sound. The 10 banking organizations are: Bank of America Corporation; Citigroup Inc.; Ally Financial Inc.; HSBC North America Holdings, Inc.; JPMorgan Chase & Co.; MetLife, Inc.; The PNC Financial Services Group, Inc.; SunTrust Banks, Inc.; U.S. Bancorp; and Wells Fargo & Company. Collectively, these organizations represent 65 percent of the servicing industry, or nearly $6.8 trillion in mortgage balances. All 10 actions require the parent holding companies to improve holding company oversight of residential mortgage loan servicing and foreclosure processing conducted by bank and nonbank subsidiaries

Banks to Pay Victims of Botched Foreclosures in Settlement - The 14 largest U.S. mortgage servicers must pay back homeowners for losses from foreclosures or loans that were mishandled in the wake of the housing collapse, the first of a set of sanctions regulators are seeking against the companies. The settlement announced today between servicers and banking regulators could help the U.S. Justice Department determine the size and scope of fines for the flawed practices, regulators said.  Officials from the Justice department, the Department of Housing and Urban Development and 10 state attorneys general met with banks today, the second such meeting to negotiate a global settlement, Associate U.S. Attorney General Tom Perrelli said. The group is discussing potential fines and whether servicers should be required to reduce the principal on some home loans.

Regulators Issue Weak Consent Orders to Whitewash Mortgage Abuses - Yves Smith  - Last week, we inveighed against an effort by Federal banking regulators to undermine the 50 state attorney general settlement negotiations on foreclosure and mortgage abuses. This affair is becoming a pathetic spectacle, in that the state initiative, which looks to be an exercise in form over substance, still might prove to be enough of a nuisance to the banks that the Powers that Be in Washington feel compelled to do what they can to hamstring it. The first effort was to have a joint settlement, which we dismissed as a barmy idea given the disparity in state and Federal issues. Not surprisingly, the Feds withdrew after the first negotiating session with the banks.  The current end run is apparently led by the Ministry of Bank Boosterism more generally known as the OCC and comes via consent decrees that were issued Wednesday (we’ve made that inference given the fact that John Walsh of the OCC presented the findings of the so-called Foreclosure Task Force, an 8 week son-of-stress-test exercise designed to give the banks a pretty clean bill of health, as well as media reports that the OCC was not participating in the joint state-Federal settlement effort).  This initiative is regulatory theater, a new variant of the ongoing coddle the banks strategy. It has become a bit more difficult for the officialdom to finesse that, given the extent and visibility of bank abuses. Accordingly, the final consent decrees are more sternly worded and more detailed than the drafts we saw last week, and also talk about imposing fines. But reading them reveals that there is much less here than meets they eye.

Banks Are Off the Hook Again - Americans know that banks have mistreated borrowers in many ways in foreclosure cases. Among other things, they habitually filed false court documents. There were investigations. We’ve been waiting for federal and state regulators to crack down.  Prepare for a disappointment. As early as this week, federal bank regulators and the nation’s big banks are expected to close a deal that is supposed to address and correct the scandalous abuses. If these agreements are anything like the draft agreement recently published by the American Banker — and we believe they will be — they will be a wrist slap, at best. At worst, they are an attempt to preclude other efforts to hold banks accountable. They are unlikely to ease the foreclosure crisis.  The report of the investigation has not been released, but we know that robo-signing was not an isolated problem. Many other abuses are well documented: late fees that are so high that borrowers can’t catch up on late payments; conflicts of interest that lead banks to favor foreclosures over loan modifications.  The draft does not call for tough new rules to end those abuses. Or for ramped-up loan modifications. Or for penalties for past violations. Instead, it requires banks to improve the management of their foreclosure processes, including such reforms as “measures to ensure that staff are trained specifically” for their jobs.

Senator Levin Claims Goldman Execs Perjured Themselves Before Congress on Mortgage Testimony - As readers may know, the Senate Permanent Subcommittee on Investigations just issued another report, Wall Street and the Financial Crisis. This is a far more focused and damning document than the Financial Crisis Inquiry Commission report, which was produced at considerably more expense and was undermined by dissent among its commissioners (which in fairness appears to have been by design).  Senator Carl Levin, in releasing the report, took aim at Goldman’s truthiness in its testimony before Congress and called on Federal prosecutors to examine whether Goldman committed perjury. Two issues are at stake. First it the Goldman claim that it lost money on its housing bets and was not net short housing (or at least not for long). Second is the notion that the firm was acting merely as a market marker, which basically means caveat emptor, if clients made bad bets, Goldman was merely acting as a neutral middleman. While Goldman made the usual pious denials, the evidence in the report supports the Levin charges. It notes: Overall in 2007, its net short position produced record profits totaling $3.7 billion for Goldman’s Structured Products Group, which when combined with other mortgage losses, produced record net revenues of $1.2 billion for the Mortgage Department as a whole.

Proposed Bill on Foreclosure Fraud and Servicer Standards Shows Shortcomings of Attorney General and Federal Regulatory Responses - Yves Smith - It’s more than a tad ironic that Senator Carl Levin released a strongly-worded report on Wall Street’s role in the financial crisis, focusing on abuses and failures of oversight in the residential mortgage and CDO markets, when the officialdom is engaged in yet another whitewash of further crisis fallout, that of servicing and foreclosure related abuses.  One effort at pushback comes via a bill proposed today by Senator Sherrod Brown and Representative Brad Miller, the Foreclosure Fraud and Homeowner Abuse Prevention Act of 2011. While some provisions need further work, it’s an ambitious and badly needed effort that targets many servicer abuses. Unlike other efforts at servicing reform, this one considers the needs of investors as well as of borrower. That matters because investors are treated badly by servicers and currently face obstacles to disciplining them. Many of the bill’s requirements are sound, such as eliminating the exemption that MBS trustees now have from the Trust Indenture Act, limiting some of the banks’ avenues for “extend and pretend”, ending dual track, improving disclosure of fees and charges, and allowing borrowers to challenge foreclosures if the bank has not considered a loan modification, with an obligation to offer a principal mod when it makes sense for investors. Foreclosure Fraud and Homeowner Abuse Prevention Act Explanation

Foreclosures continue to trend down in first quarter 2011 - On the surface, the foreclosure crisis seems to be easing. The number of foreclosure notices filed during the first three months of 2011 fell 27% compared with the first quarter of 2010, according to a report from RealtyTrac released Thursday. Only 681,000 properties got hit with some type of filing -- a notice of default, a scheduled auction or a foreclosure sale -- during the quarter, one for every 191 households. There were 215,046 borrowers who lost their homes, down 17% year-over-year. That improvement was in sharp contrast to other recent housing market metrics, with sales of existing and new homes very weak and home prices still sliding.

RealtyTrac: Foreclosure Activity Increases in March, Down in Q1 - From RealtyTrac: Foreclosure Activity Decreases 15 Percent in Q1 2011 RealtyTrac® ... today released its U.S. Foreclosure Market Report™ for the first quarter of 2011, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 681,153 U.S. properties in the first quarter, a 15 percent decrease from the previous quarter and a 27 percent decrease from the first quarter of 2010....Foreclosure filings were reported on 239,795 U.S. properties in March, a 7 percent increase from the previous month but still down 35 percent from March 2010, when 367,056 homeowners received a foreclosure notice – the highest monthly total in the history of the RealtyTrac monthly report since its inception in January of 2005. “The nation’s housing market continued to languish in the first quarter, even as foreclosure activity fell to a three-year low,”

Processing delays cut foreclosure activity by 27% in 1Q 2011: RealtyTrac - RealtyTrac's March housing study reports a 15% decrease in foreclosure activity between the fourth quarter of 2010 and the first quarter of 2011, as well as a 27% decline compared to the same period a year ago. The online foreclosure property marketplace cites extended processing timelines as the main culprit for the drag. "Weak demand, declining home prices and the lack of credit availability are weighing heavily on the market, which is still facing the dual threat of a looming shadow inventory of distressed properties and the probability that foreclosure activity will begin to increase again as lenders and servicers gradually work their way through the backlog of thousands of foreclosures that have been delayed due to improperly processed paperwork." More than 681,000 homes, or one in every 191, received a foreclosure filing during the quarter, according to RealtyTrac's data. In March alone, almost 240,000 properties received a filing, up 7% from February but down 35% from the year-ago period.

Distressed Sales are Simply Part of the Process of a Deflating Bubble Beat the Press - USA Today had a piece that reported that distressed house sales are likely to depress house prices for years to come. The piece never refers to the housing bubble. This is remarkable since it is impossible to understand the housing market without reference to the bubble. At its peak, the bubble pushed house prices more than 70 percent above their long-term trend values. The fall in prices to date has brought prices closer to their long-term trend, but the market still has to fall another 15-20 percent to return to its trend level. Distress sales are part of this process, but the main point is that house prices are still well above the level that would be supported by the fundamentals of the market in large parts of the country.

The housing gamble: What if home prices remained stagnant until 2020? 6 charts laying out the argument for stagnant or declining home prices for another 10 years. Peak in dual income households, home prices still inflated relative to incomes, Federal Reserve unable to hold mortgage rates low forever.  It is hard to imagine that the cornerstone of the American dream would somehow become a bad investment for the next decade.  For decades every generation was conditioned into believing that housing was the best investment a family could make.  For many it provided a stable home for retirement once the mortgage was paid off.  One third of all homes in the United States that are owner occupied have no mortgage.  Yet this mindset of buying and paying off a mortgage has largely been lost.  No mortgage burning parties in the digital age.  It may be making a comeback not because people want this but because there is no other financial choice.  Given the current domestic and global trends, it is likely that housing will be suffering another troubled decade from 2011 to 2020 just like it experienced from 2001 to 2010.  I want to lay out six charts as to why I believe housing will have difficulty moving up in price in the next ten years.

Existing Home Inventory is confusing too - As I’ve noted many times before, in a number of markets around the country the “fallout” rate for pending sales has been much higher over the last few years than was the case many years ago, especially in the “more depressed” markets. As such, an inventory number that excludes ALL pendings, including contingents and “CAPAs,” doesn’t seem “quite right.”  Now inquiring minds probably want to know: what do other MLS “mean” when they report the number of “active listings” or “months’ supply,” and what do they report to the National Association of Realtors, which uses the “months’ supply” measure supplied by the MLS in the sample it uses to estimate national home sales and the national inventory of existing homes for sale? On the first question the answer for many is “I don’t know,” as only some report a breakdown by type of listing. And on the second question, the answer I got from a NAR spokesperson was “it depends on the local MLS!!!”

Case Shiller 100 Year Chart - In 2006, just as the Housing market was peaking, the NYT ran this graphic of the 100-year Case Shiller chart. It showed how radically overvalued Housing had become. Two years later, TBP reader Steve Barry updated that graphic, including the projected Home Price mean reversion. (See versions for 2008, 2009 and 2010). Its time to update this for 2011. Note the 2009 tax credit wiggle:

More US home price declines ahead, Moody's economist warns - Economist Mark Zandi expects the U.S. economy to continue to recover this year and do even better in 2012. But he’s less bullish about the housing market. “Housing prices will probably not hit bottom until the very end of 2011,” Zandi, chief economist with Moody’s Analytics, told an audience Thursday morning at a briefing for executives.  Zandi, whose predictions about the home market have been closely followed for years, thinks prices around the country will drop “another 5 percent or so.” However, Moody’s still considers home values in Texas’ major markets — including Dallas-Fort Worth — overvalued because the state has not seen the degree of price declines the rest of the country has seen.

10 US Housing Markets At Risk Of A Major Collapse - Even the baseline scenario in places like Las Vegas and Miami is grim, where Case Shiller projects a 21% decline in home prices from 2010 to 2012.But in one scenario it could be worse. 6.7 million delinquent mortgages are waiting to flood the market around the country -- and with near-zero cure rates most of them will. Another 2 million homes in foreclosure are being held off the market by banks.Economist Keith Jurow says distressed asset investors are ignoring this threat: "If you are an investor thinking of buying one or more properties in Miami-Dade County, for example, you need to know that 24.9% of all active first liens there were seriously distressed. This means that more than 91,000 properties are almost certainly going to be dumped onto the market. Will that exert downward pressure on prices? Absolutely."Distressed mortgages represented over ten percent of all mortgages in ten large markets, as of Q3 2010.

Twin Cities home prices down 15 percent; 4 in 10 sales are foreclosures - The Twin Cities median home price fell more than 15 percent last month to $140,000 from a year earlier, according to data released today.  The Minneapolis Area Association of Realtors reports that the price decline in the 13-county metro area came amid a 4 percent drop in the number of closed sales to 3,154 last month versus the year-ago period. "Foreclosure sales accounted for roughly 40 percent of (pending sales) and 43 percent of closings," The price of traditionally sold properties decreased 4 percent to $192,000 last month versus a year earlier. Meanwhile, foreclosure prices decreased 11 percent to $105,000 and short sale prices decreased 7 percent to $134,950.  Pending sales, an indicator of future activity, decreased nearly 18 percent from March 2010 to 4,162 purchase agreements signed last month.

Slow housing market convinces owners to fix up rather than move out - As the housing market languished even as the economy improved, Majeski determined the financially prudent course would be to fix up the house a little at a time, starting with replacing the windows and renovating the bathrooms. It is a choice more homeowners are making these days and one that is lifting the fortunes of the long-suffering home improvement industry. Seasonal hiring at Lowe's Cos., the nation's No. 2 home improvement retailer, is up 15 percent this spring as homeowners, feeling more secure in their jobs, tackle maintenance projects delayed during the recession. Midwest regional chain Menard Inc. is expanding again. It plans to build 12 stores this year, up from four in 2010. And Home Depot Inc., the largest home improvement retailer, reported in February its first annual sales increase since 2006, before the housing market crashed. The home improvement business is stabilizing despite the continued weakness of the housing market, Home Depot Chief Executive Frank Blake said at the time.

Housing Lock is not a Major Part of this Crisis, Plus Scatterplots of Deleveraging! - Last year I thought that “housing lock” – where people couldn’t move because they were underwater – was a minor but important part of our unemployment and economic crisis.  Now I think it’s not an issue, with a small probability that it is either a very small issue or perhaps even a plus. But many people still think this is important, and its understandable because its an easy idea to understand. Let’s go over a few things we know about “housing lock” now from the latest research that we didn’t know before:

  • “In the available data, negative equity does not make homeownersless mobile [...] Homeowners with extremely negative equity are especially mobile.” (Sam Schulhofer-Woh.)
  • The 2007–2009 recession is not associated with any additional decrease in interstate migration relative to trend.” (Greg Kaplan and Sam Schulhofer-Wohl.)
  • …preliminary studies by other researchers have also found little evidence that house lock has reduced migration or raised unemployment in the past several years.” (Molloy, Smith, Wozniak.)
  • differences in the staying rate across states by house-price changes suggest that the overall effect of housing lock is likely to be small” (John Schmitt and Kris Warner of CEPR.)

Got that? According to all the recent research, there’s been no sudden change in mobility related to the housing crash. It looks like people with high negative equity might have even higher mobility than others, meaning they are more likely to rent out their place or simply walk away.

Renting vs. Buying at the High End -A couple of years ago, when prices fell sharply in many high foreclosure low end areas, we discussed a probable "hard floor" for low end house prices. The price floor would come from investors paying cash and buying low end properties to rent.  Of course this investment strategy doesn't work well in negative absorption areas like Detroit (areas with a declining number of households), but in many areas this is exactly what has happened. However this doesn't work for high end areas. Lauren Beale at the LA Times starts with an example: Leasing is in fashion among wealthy house hunters  [A] five-bedroom house in the Sunset Strip area priced at $3.5 million for sale ... the owner recently accepted a short-term lease [for] $10,000 a month to rent. Why buy when you can't rent for about half the cost? And the renter is not taking the risk of further price declines.

Housing Starts: Vacant Units and Unemployment Rate -- An update to a couple of graphs ...  The first graph shows total housing starts and the percent vacant housing units (owner and rental) in the U.S.  Housing starts are through February, and the combined vacancy rate through Q4 based on the Census Bureau HVS vacancy rates for owner occupied and rental housing.The good news is the total vacancy rate is declining (and based on recent Reis' data, the vacancy rate will fall further in Q1 2011). We know that the homebuilders will complete a record low number of housing units in 2011, and the declining vacancy rate suggests more households are being formed than net housing units added to the housing stock, or in other words, the excess supply is being absorbed.   The second graph shows single family housing starts (through February) and the unemployment rate (inverted) through March. Note: there are many other factors too impacting unemployment, but housing is a key sector. You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. Housing starts (blue) have declined recently - but have mostly moved sideways for the last two years. This is one of the reasons the unemployment rate has stayed elevated compared to previous recoveries.

Fade the Consumer Credit Headline (For Now) -The Fed released its G.19 report on Consumer Credit last Thursday, and it stirred some optimism (see also here):The new U.S. consumer credit numbers reflect an economy that is reaccelerating, and that is very bullish for growth — as well as inflation. All in all, U.S. household credit surged by $7.62 billion in February, ramping up faster than at any other time since June 2008.I respectfully beg to differ.  While the story gives a passing nod to the rise in student loans, the fact of the matter is that student loans are virtually the whole story, and the downward trend/trajectory in credit, save that category, has really not reversed. Let’s have a look:What we’ve got above is Total Revolving, Total Non-revolving, and Total Non-revolving minus TOTALGOV (the category that includes student loans).  Without the increase in student loans — which is to say the green line and the blue line — the trend in credit (both revolving and non) continues downward.But let’s take a look at exactly how much the TOTALGOV (i.e. Student loan) series is goosing non-revolving credit:

Retail Sales increased 0.4% in March - On a monthly basis, retail sales increased 0.4% from February to March (seasonally adjusted, after revisions), and sales were up 7.1% from March 2010.  This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline). Retail sales are up 16.0% from the bottom, and now 2.5% above the pre-recession peak.  The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993.Retail sales ex-gasoline increased by 5.8% on a YoY basis (7.1% for all retail sales).  Here is the Census Bureau report: Retail sales ex-gasoline were only up 0.1% in March - and this shows the impact of higher gasoline prices.

Retail Sales Rose In March As Inflation Fears Emerge For Food, Gas Prices...‎Retail numbers from the Commerce Department Wednesday show that consumers have found more spending momentum to meet rising commodity and materials costs that are already being passed directly to consumers, with food prices, apparel, and most noticeably gasoline prices all rising in the first quarter of 2011. Grocery prices increased 6.5% in March from early January, an annualized increase of 26%, according to a report from Consumer Growth Partners. The group called the rise the “sharpest in a generation.” The overall basket of household staples was held to a lower 2.4% increase due to flat or slightly declining prices in health and beauty care and other non-edible household items, however. A 25% increase in gasoline prices this year combines with higher food costs to take $18 billion out of monthly household spending on discretionary items. “Criticizing the Fed is above my pay grade, but what folks tell us is they really don’t care about the supposedly low ‘core inflation’ rate—they only care about what they’re seeing at the gas station and the supermarket—costs that are crushing the consumer,” said CGP President Craig Johnson.

The Consumer Spending Slowdown Is Threatening The Economic Recovery - Household income, adjusted for inflation, is growing 2 percent 4 percent inflation last quarter ate up the rise in wage-and-salary income. Average hourly earnings are growing 1.7 percent, half their pre-recession pace. Consumers are struggling. Despite the pickup in job growth in recent months and the big 2 percent cut in payroll taxes starting in January, their inflation-adjusted spending in the first quarter appears to have grown at only about half the fourth quarter’s 4 percent clip. The reason: Higher costs for energy and food, which make up nearly a fourth of household budgets, are cutting deeply into consumers’ buying power. Household incomes already face significant headwinds, and this new challenge raises one more question about consumers’ ability to power a strong and durable recovery. Poor income growth has been the biggest constraint on consumer spending throughout this recovery, which will be two years old in June. That’s especially true as households face the dual pressures to pay off past debt and to save more to make up for lost wealth. Since the recession ended, inflation-adjusted after-tax income has grown at only a 2 percent annual rate, the slowest pace in any of the past five recoveries.

Inflation Stokes Fears Over Shopper Resilience — As gasoline prices rose by a third in the past year to an average of $3.80 a gallon, with cotton costs more than doubling, and with other inflationary pressures also looming on the horizon, worries about the resilience of U.S. consumers have intensified. About 74% of American consumers believe higher prices could cut into their spending in the months ahead, with 71% saying higher energy prices could cause them to curb their spending in the coming months, up from 54% at the same time last year, and 47% of them point to higher medical costs, according to a Deloitte survey of 1,050 consumers between March 1 and March 3.  Higher gasoline prices are a concern, analysts said, among retailers including Wal-Mart Stores Inc , Target Corp. and Dollar General Corp who serve the lower-income segments of the retail market and whose store locations are typically reached by automobile.

Drivers start to cut back on gas as prices rise - Soaring gas prices are starting to take a toll on American drivers.  Across the country, people are pumping less into the tank, reversing what had been a steady increase in demand for fuel. For five weeks in a row, they have bought less gas than they did a year ago.  Drivers bought about 2.4 million fewer gallons for the week of April 1, a 3.6 percent drop from last year, according to MasterCard SpendingPulse, which tracks the volume of gas sold at 140,000 service stations nationwide.The last time Americans cut back so much was in December, when snowstorms forced people to stay home.  Before the decline, demand was increasing for two months. Some analysts had expected the trend to continue because the economic recovery was picking up, adding 216,000 jobs in March.

Gas Pains - The budget battle between President Barack Obama and House Republican leaders may have pushed angst about rising gasoline prices temporarily off Washington’s center stage, but voters haven’t forgotten. The price of regular gasoline hit a national average of $3.79 as of April 11, the Energy Information Agency reported Monday. That’s up nearly 19% since Feb. 21. Regular gas prices are now higher than they were during the same week in April 2008. By June 16, 2008, the average price of regular hit $4.00 a gallon, touching off a political and economic storm. The official prediction from the EIA is that gasoline prices will stop short of the $4 a gallon level, peaking by early summer at $3.91 a gallon. For residents of coastal California and certain other parts of the country (including Chicago) that prediction’s already out of date. Regular’s already above $4 a gallon in those places, in part because of regional requirements for cleaner burning blends.A Reuters/Ipsos poll released Wednesday says 69% of respondents say the country’s on the wrong track, and high gas prices are a big reason for the sour mood.

POLL-High gas prices makes Americans gloomy, hit Obama rating (Reuters) - Rising U.S. gasoline prices have damaged confidence in the country's future and forced Americans to change their spending habits and lifestyles, a Reuters/Ipsos poll on Wednesday found. Sixty-nine percent of Americans said they think the country is on the wrong track, the highest such rating since President Barack Obama was inaugurated in January 2009. Ipsos pollster Cliff Young said the pessimistic outlook was due mostly to high gas prices, which rose to an average of $3.79 a gallon last week, up 11 cents from the week before. Sixty-eight percent of Americans said high gas prices had forced them to cut back on other expenses and 62 percent said they had chosen to drive less because of the cost.

Beyond 'Surviving': Defining Economic Security - As President Obama and members of Congress debate national budgets, Shawn McMahon has been calculating individual and family budgets. He's the research director for Wider Opportunities for Women, a group that works with low-income women and families. The nonprofit group just released its Basic Economic Security Tables index, which measures the minimum income workers need to achieve basic economic security. "We're not talking about surviving," McMahon tells Morning Edition host Renee Montagne. "We are talking about economic security that allows people to live day to day without fear of a lot of the economic insecurity that we've been seeing in recent years." According to the report, to achieve economic security the average minimum income needed for a family with two workers and two young children is $67,920 — that's with both parents working, and earning just over $16 an hour. And a single worker with no children needs to make about $30,000 a year, which means working full-time and earning twice the minimum wage.

Gas Prices: Are We at the Breaking Point? - Gas stations might want to think about offering direct deposit.On Wednesday, the government announced the monthly number for retail spending and it included a disturbing figure for those of us who have been hoping for a strong recovery. Excluding gas purchases, consumers spent just 0.1% more in March than they did a month ago. That's not a recovery. That's treading water. Compare that to the big gains in December and January and the recovery looks like it has run out of, well, gas. Here's the most troubling stat and why you might think you are pumping your paycheck right into your car: In the past month, American's handed over $0.11 of every dollar they spent at the gas station. That's the highest that figure has been since the beginning of the recession, and it is nearly 30% more than what we typically have spent on gas and other car-related items. So will the recovery stall at the pump? Well there is more evidence for that.

Gas Prices Climbing Toward $5 Per Gallon --Records set in 2008 could fall. At one time, $5 per gallon gas seemed like a far-fetched idea, but that is no longer the case. As of Monday, the average price for a gallon of regular unleaded gasoline in the Chicago area is $4.11, compared with $3.71 a month ago, and about $3.10 a gallon at this time a year ago. Some experts say $5 per gallon gas is possible by Memorial Day-or sometime in summer. Others caution that reaching that mark is unlikely over the next six weeks. In Chicago, the prices keep rising to near-record levels–with no relief in sight. Right now, oil markets are so skittish that records set in 2008 could fall.

Rising gas and food prices driving people to food banks -- Rising food and gas prices are some of the the driving forces to why people are going to food banks for the first time.  Food Lifeline in Shoreline has seen a 24% increase in people using the food bank overall. The food bank is also seeing a new trend more working people and families, who don't qualify for food stamps, are needing their help.  Driving around Seattle Tuesday, gas prices hovered around $4.00 for a gallon of regular unleaded gas. According to AAA, in the Seattle-Bellevue-Everett area drivers are paying an average of $3.90. Gas prices jumped 22 cents in a month from $3.68. And compare to last year, drivers are paying almost a dollar more for a gallon of gas. The average was $3.06.  Along with rising crude oil prices, consumers are also paying more for groceries. According to the Bureau Of Labor Statistic's most recent Consumer Price Index report, the price for grocery staples like milk, bread, vegetables and meat are up 2.8 % from last year.

Cotton Prices Heat Up This Summer - If you can't wait to shed that scratchy wool sweater for a cool new cotton T-shirt this summer, prepare yourself. The price hikes on cotton goods that are coming your way will be decidedly uncool. This summer, shoppers will be paying 10% to 15% more on all cotton products, according to a new industry survey. "I can't recall a time when we've seen this type of retail price [increase] on cotton products," For years, raw cotton prices had been falling, keeping a lid on retail prices for shirts, socks, dresses, home furnishings and other cotton merchandise. But that trend dramatically changed over the past year, as cotton prices soared to record highs following a global supply shortage. As raw cotton prices surged, manufacturers and sellers have fought to insulate shoppers from paying more for cotton products. But that's ending, with producers and sellers saying they're no longer able to eat up the additional costs to their business.

Is Inflation Here to Stay? Price Rise Nears a 30-year High - I finally have a touch of inflation fever. But it's just a touch. Sniffles. The government reported the Consumer Price Index, the most important monthly gauge of inflation, on Friday for March and it showed that inflation is rising at the fastest pace in more than a year. On average, prices are up 2.7% in the past 12-months. But if you take the past four months alone, prices are on pace to rise nearly 6% a year. That's the fastest jump for inflation in nearly 30 years. The last time inflation topped 6% was in 1982.So why don't I have a full-blown case of inflation fever? Here's why: The main culprit, probably unsurprisingly to anyone who drives a car, in pushing up inflation is gas prices, up an amazing 28% in the past year. Food prices were up, as well, but not nearly as much, just 2.9%. Take away food and energy, and inflation was basically non-existent in March, up just 0.1%. By that measure inflation is on pace to be up just 1.2% in the next year, which is among the lowest rates of price increases in decades.

Number of the Week: The ‘China Price’ Also Rises - 5.2%:

Annualized growth in the price of Chinese imports to the U.S. Beware the “China price.” During much of the past couple decades, American companies’ efforts to shift their production to low-cost locales — China in particular — have helped keep a lid on inflation in the U.S. That benefit may now be reversing itself. Some of the advantages that made China a magnet for global manufacturing are fading. Under pressure from U.S. officials, China is gradually allowing its famously cheap currency to rise against the dollar. At the same time, Chinese workers’ wages are increasing at an annual rate of as much as 30%. In one sign of the effect of those changes in the U.S., the average price of goods imported from China rose at an annualized rate of 5.2% in the three months through March, according to the Labor Department. That’s the fastest pace since August 2008.

U.S. Economic Optimism Plummets in March - Gallup - Americans' optimism about the future direction of the U.S. economy plunged in March for the second month in a row, as the percentage of Americans saying the economy is "getting better" fell to 33% -- down from 41% in January. It is also down three points from the 36% of March 2010. Optimism in March essentially matches last year's low points: 32% in July, 33% in August, and 32% in September. However, it remains higher than it was throughout 2008 and early 2009.Economic Optimism Declines Across Demographic Groups:While upper-income Americans remain more optimistic than their lower- and middle-income counterparts, optimism among both groups declined substantially in March. Despite Wall Street's strong first quarter performance, the percentage of upper-income Americans saying the economy is getting better fell to 41% in March from 50% in January, leaving it at the same level as a year ago. Lower- and middle-income Americans' economic optimism also fell in March, to 32%, from 40% in January.

Study: Suicide Rates Rise and Fall with Economy From the CDC: CDC Study Finds Suicide Rates Rise and Fall with Economy The overall suicide rate rises and falls in connection with the economy, according to a Centers for Disease Control and Prevention study released online today by the American Journal of Public Health. The study, "Impact of Business Cycles on the U.S. Suicide Rates, 1928–2007" is the first to examine the relationships between age-specific suicide rates and business cycles. The study found the strongest association between business cycles and suicide among people in prime working ages, 25-64 years old.  The overall suicide rate generally rose in recessions like the Great Depression (1929-1933), the end of the New Deal (1937-1938), the Oil Crisis (1973-1975), and the Double-Dip Recession (1980-1982) and fell in expansions like the WWII period (1939-1945) and the longest expansion period (1991-2001) in which the economy experienced fast growth and low unemployment.

Consumers, Data Diverge on Labor Market Strength - When discussing jobs, most attention is given to the monthly employment report, issued the first Friday of each month. Payrolls have risen at a healthy 160,000 monthly rate so far this year. But that number is the net change in payrolls. The February Jolts report, released Wednesday, shows job cuts have come down tremendously since the recession, and just as importantly, more businesses are seeking workers once again. Companies posted 3.1 million job openings at the end of February up from 2.7 million in January.  Despite more job postings, though, consumers think the demand for labor is as miserable as it was during the depths of the recession. According to the March consumer confidence survey done by the Conference Board, only 4.4% of respondents think jobs are plentiful. That percentage hasn’t changed much over the past two years and is near the 4.7% posted in March 2009, when layoffs totaled a massive 796,000. What the two reports suggest is that businesses are looking for more workers, but consumers still think labor markets stink. What could explain the gap?

NFIB: Small Business Optimism Index decreases in March - From National Federation of Independent Business (NFIB): Hiring Up, But Optimism Down in MarchThe Index of Small Business Optimism gave up 2.6 points in March, falling to 91.9. Four components rose or were unchanged, while six lost ground. The “hard” components of the Index (job creation, job openings, capital spending plans and inventory plans) added two points while the “soft” components (the other six in the table above) gave up 31 points. Index was driven by weaker expectations for real sales gains and business conditions and a marked deterioration in profit trends. The decline in the percent of owners expecting higher real sales and better business conditions in six months alone account for 76 percent of the decline in the Index. The first graph shows the small business optimism index since 1986. The index decreased to 91.9 in March from 94.5 in February. This has been trending up, although the level is still very low. This graph shows the net hiring plans for the next three months. Hiring plans decreased slightly in March. Weak sales is still the top business problem with 25 percent of the owners reporting that weak sales continued to be their top business problem in March. In good times, owners usually report taxes and regulation as their biggest problems.

CFOs: Revenue Surge Needed to Boost Hiring - Despite double-digit gains in corporate earnings over the past six quarters, it would take much stronger-than-expected revenue growth for businesses to be comfortable adding employees, according to a new survey. Chief financial officers at large North American companies polled by Deloitte LLP said it would take a 20% surge in revenue before they felt comfortable adding to their payrolls.The quarterly survey released Thursday found that nearly half of respondents would seriously consider adding employees if revenues rose 20%, but few would be moved by a 5% increase. A 10% bump in revenue would only be a major hiring consideration for 11% of CFOs. Worse yet, perhaps, actual growth isn’t expected to reach such heights: respondents estimate top line growth at North American companies will be just 8.2% this year.

LA Port Traffic: Exports increased sharply in March - The first graph shows the rolling 12 month average of loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported - and possible hints about the trade report for March. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, this graph shows the rolling 12 month average.  On a rolling 12 month basis, inbound traffic is up 17% and outbound up 9%. The 2nd graph is the monthly data (with strong seasonal pattern).  For the month of March, loaded inbound traffic was up 2% compared to March 2010, and loaded outbound traffic was up 11% compared to March 2010. This was the third highest month for exports ever, and the highest since the peak in 2008. This suggests the trade deficit with China (and other Asians countries) probably decreased in March.

Empire State Manufacturing Survey indicates faster growth in April - From the NY Fed: Empire State Manufacturing Survey The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved at an accelerated pace in April. The general business conditions index rose for a fifth consecutive month, reaching 21.7, its highest level in a year [up from 17.5]. The new orders index jumped 17 points, to 22.3, and the shipments index shot up 27 points to 28.3. The indexes for both prices paid and prices received rose to their highest levels in more than a year, indicating that price increases continued to accelerate. The index for number of employees climbed to 23.1 [from 9.1], while the average workweek index edged down to 10.3. This was above expectations of a reading of 17.0. This is the first regional survey released for April and shows that manufacturing is continuing to expand.

Industrial Production, Capacity Utilization increased in March -- From the Fed: Industrial production and Capacity Utilization Industrial production increased 0.8 percent in March and rose at an annual rate of 6.0 percent for the first quarter as a whole. Manufacturing output advanced 0.7 percent in March, its fourth consecutive month of strong expansion; factory production climbed at an annual rate of 9.1 percent in the first quarter.   The rate of capacity utilization for total industry rose 0.5 percentage point to 77.4 percent, a rate 3.0 percentage points below its average from 1972 to 2010.  This graph shows Capacity Utilization. This series is up 10 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 77.4% is still "3.0 percentage points below its average from 1972 to 2010" - and below the pre-recession levels of 81.2% in November 2007.  The second graph shows industrial production since 1967. Industrial production increased in March to 93.6, however February was revised down from 93.0 to 92.8. So the increase was reported at 0.8% but would have been 0.6% without the downward revision. Production is still 7.0% below the pre-recession levels at the end of 2007.

Rail Woes Hit Auto Deliveries -  Already rattled by a looming shortage of made-in-Japan parts, Detroit auto makers are struggling with rail shipping woes that are stalling deliveries of finished vehicles. As the U.S. economy contracted during the recession, railroad operators put hundreds of thousands of rail cars into storage and cut their staffs. Now that shipments of autos, coal and consumer goods are rising again, the nation's railroads don't have enough rolling stock for fast deliveries.  The rail industry, which ran at slower speeds in the first quarter due to heavy snow storms, also was caught off guard by the quarter's 11.4% surge in automotive railcar demand as auto makers ramped up production As of March 1, 1.53 million railcars were in use, down from 1.6 million on July 1, 2009, when the recession was in full swing, according to the most recent data released by the Association of American Railroads.

More Americans leaving workforce - The share of the population that is working fell to its lowest level last year since women started entering the workforce in large numbers three decades ago, a USA TODAY analysis finds. Only 45.4% of Americans had jobs in 2010, the lowest rate since 1983 and down from a peak of 49.3% in 2000. Last year, just 66.8% of men had jobs, the lowest on record. The bad economy, an aging population and a plateau in women working are contributing to changes that pose serious challenges for financing the nation’s social programs. “What’s wrong with the economy may be speeding up trends that are already happening,” says Marc Goldwein, policy director of the Committee for a Responsible Federal Budget, a non-partisan group favoring smaller deficits. For example, job troubles appear to have slowed a trend of people working later in life, putting more pressure on Social Security, he says.

Shock employment figures: Fewer than 46% of Americans have jobs - The percentage of Americans who have jobs has fallen to the lowest point in three decades and now hovers just above 45 percent of the total population, according to an analysis of labor data published by USA Today. The report, based on figures provided by the Census and the Bureau of Labor Statistics, showed that at 36.7 percent, Mississippi had the lowest percentage of population working. Employment rates were also low in California and Arizona, where just over 37 percent had jobs. At 55.8 percent, North Dakota had the highest rate of employed residents. Overall, 45.4 percent of Americans were working, the lowest since 1983. Employment peaked at 49.3 percent in 2000. 'The bad economy, an aging population and a plateau in women working are contributing to changes that pose serious challenges for financing the nation's social programs,' the paper noted. The news comes at a time when Republican senators have unveiled a plan to raise the retirement age, which would force more Americans to search for jobs that just aren't there.

Jobless Rate Is Not the New Normal, by Christina Romer  - Before the recent recession, in the view of many economists, the lowest sustainable rate of unemployment... — a level known as the normal or natural rate of unemployment — was around 5 percent. The turmoil of the last few years, however, has shaken up the economy. Is it possible that it has affected the natural rate of unemployment — increasing it to 8 or even 9 percent? Such a climb would imply that the prospects for a rebound in output and employment have been greatly reduced — and that high unemployment would be our new normal.  This is implicitly the view of some Federal Reserve policy makers, who say that there is nothing more the central bank can do to lower unemployment. And it’s the view of those who say “structural” factors are the main cause of our current high unemployment, which stood at 8.8 percent in March. Fortunately, there is a more compelling explanation. Strong evidence suggests that the natural rate of unemployment actually hasn’t risen very much. Instead, the elevated unemployment rate appears to reflect mainly cyclical factors, particularly a lingering shortfall in consumer spending and business investment.

Christina Romer, Part III - I know this will confirm Tim Duy's view that I pick on Christina Romer for no good reason (see here and here), but here goes anyway.  This week's, by Christina Romer is on sectoral reallocation. Romer starts with what is either a mischaracterization, or a misinterpretation of the views of others:  The turmoil of the last few years, however, has shaken up the economy. Is it possible that it has affected the natural rate of unemployment — increasing it to 8 or even 9 percent? This is implicitly the view of some Federal Reserve policy makers, who say that there is nothing more the central bank can do to lower unemployment. And it’s the view of those who say “structural” factors are the main cause of our current high unemployment, which stood at 8.8 percent in March. Romer seems to be saying that other people are saying that 8 or 9 percent unemployment is the "new normal," i.e. permanent. I may have missed something, but I don't think anyone is saying that.

Job Openings on the Rise - Some very good news on the jobs front: The number of job openings rose at their fastest pace in almost seven years in February, according to a new report from the Labor Department. Of course the total number of job openings is still below pre-recession levels, since this total had fallen so far during the downturn. But even so, the monthly rise is a welcome development for the nation’s 13.5 million unemployed workers. The growth in job openings, coupled with the drop in the number of people unemployed, means that the ratio of unemployed workers to openings has fallen quite dramatically. The figure in February was 4.4, down from a high of 6.9 in July 2009. Layoffs and discharges are also near their record low level from the previous month. They have been quite low for a while, as the chief problem plaguing the job market during the recovery has not been layoffs but tepid hiring.

BLS: Job Openings increase in February, Highest since 2008 - From the BLS: Job Openings and Labor Turnover Summary  There were 3.1 million job openings on the last business day of February 2011, the U.S. Bureau of Labor Statistics reported today. The job openings rate (2.3 percent) increased over the month. The hires rate (3.0 percent) and total separations rate (2.9 percent) were little changed over the month. The following graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  This report is for February, the most recent employment report was for March.  Notice that hires (purple) and total separations (red and blue columns stacked) are pretty close each month. When the purple line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. In general job openings (yellow) has been trending up - and are up 23% from February 2010.

New Jobless Claims Unexpectedly Rise Above 400k - New filings for jobless benefits rose by 27,000 on a seasonally adjusted basis last week—the biggest weekly increase in nearly two months. New claims, as a result, moved above the 400,000 mark for the first time in five weeks. It all adds up to a disappointment, but it’s too soon to wave the white flag. This is a volatile series and so no one should read too much into any one number. Meanwhile, the four-week moving average is still well below 400k, and so it’s not obvious that the recent downtrend has been broken.  Still, there’s no getting around the fact that economists were expecting a much lower figure. As Bloomberg reports, “Economists projected claims would be little changed at 380,000, according to the median estimate in a Bloomberg News survey. The increase in claims traditionally seen at the end of a quarter was larger than usual this year, a Labor Department spokesman said as the figures were released to the press.”

Lucy and the Economic Football -The National JournalThe White House shows little sign of worrying about a dip in growth and how it might affect the unemployment rate, which has fallen by a percentage point since the year began but still sits at 8.8 percent, danger territory for an incumbent president seeking reelection.Obama advisers largely believe, instead, that the economy has moved on from what White House officials call a “Phase 1” recovery—in which the government was forced to cut taxes and spend heavily to pump up consumer demand and rescue the nation from the brink of another Great Depression.Now, the officials believe, the recovery has reached “Phase 2,” where the prospects of a double-dip recession are slim, expanding growth can survive a hit in government spending, and the total level of spending cuts is less important than the composition of them. (That reasoning helps explain why the White House was willing to agree to $38.5 billion in cuts to the current-year budget in negotiations last week, while insisting on protecting education and research programs the administration sees as key drivers to future growth.) I hope they’re right — but as I recall, they believed exactly the same thing around this time last year. And remember, here’s how job growth has been going:

Allocating stimulus between unemployed and would-be employer - This post grew out of an interesting discussion at Mark Thoma’s blog, where he asked “What can we do to help the unemployed?” One statement by a commenter, Britonomist, jumped out at me: “What if there was a guaranteed citizens income, as in, you are always guaranteed at least a minimum amount of income whether you are employed or not, BUT, the minimum wage is also abolished? The minimum wage wouldn't be needed as workers would already have a very large bargaining position, since they do not depend on employment to survive.” I chimed in that perhaps the better idea would be to increase incentives for employers to hire and expand. Giving people an alternative to getting employment (because of guaranteed income) might actually take away incentives to look for work. My default is that all businesses want to create and develop customers, that nothing can ever take away that incentive, otherwise they wouldn't be in business. It's just that cost pressures sometimes get in the way of hiring.

McDonald's plans to hire 50000 in one day - The Golden Arches is serving up a golden opportunity for out-of-work Americans. The restaurant plans to hire 50,000 new employees nationwide on Tuesday, April 19 during its National Hiring Day. With 50,000 job openings nationwide, that means every McDonald's restaurant is planning to hire an additional four to five people; a location in Henderson is no exception. "50,000 people, that's a lot of hiring," Assistant Manager Alexandrea Brown "It's definitely going to help a lot of people."

Ikea’s Third World outsourcing adventure — in the U.S. -Nathaniel Popper's doozy of a story in the Sunday Los Angeles Times detailing labor strife at Ikea's first American factory is getting a lot of attention in the blogosophere, and for good reason: It's chock full of globalization irony.Ikea seems to be treating its American workers at a furniture plant in Danville, Virginia a good deal worse than it does its Swedish workers back at home. The workers are trying to unionize; in response Ikea has hired the famous union-busting-specializing law firm Jackson-Lewis. Nothing particularly out of the ordinary for American labor relations in the 21st century, but in Sweden, eyebrows are being raised.Laborers in Swedwood plants in Sweden produce bookcases and tables similar to those manufactured in Danville. The big difference is that the Europeans enjoy a minimum wage of about $19 an hour and a government-mandated five weeks of paid vacation. Full-time employees in Danville start at $8 an hour with 12 vacation days -- eight of them on dates determined by the company.What's more, as many as one-third of the workers at the Danville plant have been drawn from local temporary-staffing agencies. These workers receive even lower wages and no benefits, employees said.

Mexicans Work the Longest Hours - According to a new report from the Organization for Economic Cooperation and Development, people in Mexico spend more hours of their day working than the people of any other country. The average Mexican devotes 10 hours a day to paid and unpaid work, like cleaning, child care and cooking at home. Belgians, on the other hand, spend the least time each day working, about seven hours, among the 29 countries covered.That compares with an overall O.E.C.D. average of eight hours a day. In the United States, people spend about eight and a quarter hours a day doing paid and unpaid work — that is, 4 hours 49 minutes a day in paid work or in study, and 3 hours 26 minutes doing unpaid work. (The averages are for the entire population, 15 to 64 years old, whether employed outside the home or not.) The main reason Mexicans spend so much time working is because they do so much unpaid work, more than four hours each day, the highest of all the countries evaluated by the O.E.C.D. Most of that work is housework, especially cooking.

Gary Becker’s Immigration Plan - Gary Becker thinks we should let almost any immigrant in, and charge them $50,000. Those who can’t pay the costs up front would be offered a student-style loan, which they would have to pay back. He also suggests that the government could set a quota each year and auction off the rights to immigrate here. Becker argues that the welfare state would prevent us from moving to a system of completely free entry. He also points out that a disproportionate number of U.S. immigrants come here for family reunification rather than work reasons when compared to other countries. I can, and have, get behind this system. I would also be for a system of gradually opening the gates more and more, and seeing what happens as we approach full and free entry. I think there is a chance that fully open gates would cause some bad consequences, and that it would be a radical experiment that ended somewhat quickly. Maybe everything would go just fine, and people would believe it was going just fine (the former is not nearly sufficient). But maybe it wouldn’t. More immigration is so fundamentally important that in deciding what system to pursue, likelihood of system survival is hugely important.

The ordeal of immigrating legally - Here's a guy who was born in Britain, our closest ally in the world. He did his undergraduate work at Oxford University, and holds two post-graduate degrees from Harvard University. He speaks fluent English, and is better versed in American civics than the vast majority of US citizens. Tremendously successful in his career, he's a huge net plus for the federal treasury, and a small a financial risk as can be imagined: if his employer shuttered tomorrow, he could survive on donations from readers, or get a lucrative book contract without trying, or start doing more speaking engagements and survive on fees alone. Finally, Andrew had an immigration lawyer - one imagines a very good one - helping him through this years long process. Despite all that, it took this man, an ideal immigrant as measured by the self-interest of the receiving country, 18 years just to get permission to stay permanently!

Net Migration and Regional Adjustment - How do regions adapt following economic calamities that displace large numbers of workers? In the best case scenario, they reinvent themselves. For example, economist Ed Glaeser documents the several times that Boston rose from the ashes following collapse of its shipping and old line manufacturing industries. In a similar vein, Detroit hopes to rebuild as an economy based on logistics, energy, and high-tech manufacturing—especially next generation automotive technology and production.  However, in many more instances, rather than a quick turnaround, cities and regions undergo a painful adjustment period that leaves them smaller than in their heyday. In the process of adjustment, economists have shown that, following an economic shock, unemployment rises for several years before returning to more normal levels. Using the steel- and auto- related job losses in the early 1980s as an example, a paper discusses the long-run effects of massive job losses. The authors found that after an initial spike in the unemployment rate in the impacted local economies, the rate converged back to the national average after five or six years. However, high out-migration (and low in-migration) led to this reduction in unemployment, rather than an increase in new jobs.

Inequality: The 1% solution - The Economist - And another thing we don't have in common is that I largely agreed with Joseph Stiglitz's article in Vanity Fair, which my colleague describes as an example of self-refutingly absurd liberal ideology. To sum up the basic thrust of what I agree with in Mr Stiglitz's piece: I think the rich are getting much, much richer, while regular people (in the developed world, which is what we're talking about here) are at best treading water. I think that wealth brings power, and the fact that the rich are getting much, much richer relative to everyone else means that the rich also exert increasing influence over the economy, government and society. I think income mobility and equality of opportunity have declined in America over the past 40 years, to the point where America is now more segregated by class divisions than many European countries. I think a major reason for these shifts has been the increasing dominance, since the Reagan era, of an ideology that is indifferent to or actively celebrates inequality of income. I think this ideology is bad: bad for the economy, bad for society, bad for art and culture, bad for the moral character of those who subscribe to it. My chief difference with Mr Stiglitz is that I think his confidence that inequality will eventually lead to a vociferous political reaction against wealthy financial elites in America is misplaced.

Study Ties Suicide Rate in Work Force to Economy - The suicide rate increased 3 percent in the 2001 recession and has generally ridden the tide of the economy since the Great Depression1, rising in bad times and falling in good ones, according to a comprehensive government analysis released Thursday.  Experts said the new study2 may help clarify a long-clouded relationship between suicide and economic trends.  While many researchers have argued that economic hardship can raise the likelihood of suicide in people who are already vulnerable — like those with depression3 or other mental illnesses — research has been mixed. Some studies have supported such a link, but others have found the opposite: that rates drop in periods of high unemployment, as if people exhibit resilience when they need it most.  Using more comprehensive data to nail down economic trends, the new study found a clear correlation between suicide rates and the business cycle among young and middle-age adults. That correlation vanished when researchers looked only at children and the elderly. It may not be the case that economic troubles cause suicide attempts4, but they can be factors.

Dispatches (XIII): Gov. Walker: "It doesn't save any [money]" - That is Governor Walker's answer to the question of how much money rescinding collective bargaining for public unions saves the state government. From the Capital Times: Kucinich said he could not understand how Walker's bill to strip most collective bargaining rights from nearly all public workers saved the state any money and therefore was relevant to the topic before the committee, which was state and municipal debt.  When Walker failed to address how repealing collective bargaining rights for state workers is related to state debt or how requiring unions to recertify annually saves money -- one of the provisions in Walker's amended budget repair bill -- Kucinich tried one more time. "How much money does it save Gov. Walker?" Kucinich demanded. "Just answer the question." "It doesn't save any," Walker said. "That's right. It obviously had no effect on the state budget," Kucinich replied

Mirabile Dictu! Walker Admits in Testimony That Ending Collective Bargaining Won’t Save Money - Yves Smith - From the Capital Times: Kucinich said he could not understand how Walker’s bill to strip most collective bargaining rights from nearly all public workers saved the state any money and therefore was relevant to the topic before the committee, which was state and municipal debt. When Walker failed to address how repealing collective bargaining rights for state workers is related to state debt or how requiring unions to recertify annually saves money — one of the provisions in Walker’s amended budget repair bill — Kucinich tried one more time.“How much money does it save Gov. Walker?” Kucinich demanded. “Just answer the question.”“It doesn’t save any,” Walker said.“That’s right. It obviously had no effect on the state budget,” Kucinich replied. Case closed.

Detroit budget crisis: Workers face big blow to benefits - Detroit Mayor Dave Bing is expected to present Tuesday both a proposed 2011-12 financial plan that contains $200 million in cuts and additional revenue needed to balance the city's $3.1-billion budget, and a five-year deficit elimination plan that will include deep cuts to employee health care and fringe benefits. Bing's budget address before City Council will lay out his plan to suspend payment of a special allocation to the city's two pension funds next fiscal year, and his intent to ask the city's 48 collective bargaining units to renegotiate contracts in the hopes of gaining concessions. Bing is expected to explain that without the concessions, the city is in danger of having the state name an emergency financial manager -- someone with the power to dissolve the existing contracts anyway, according to sources familiar with the mayor's plan.

Broke US States' $48 Billion Debt Drives Unemployment Assistance Cuts - Missouri state Senator Jim Lembke had enough of what he calls Washington’s runaway spending. So he and three fellow Republicans in the state with an unemployment rate of 9.4 percent blocked $105 million in federal aid for those out of work.  “It’s not free money -- it’s borrowed money from China,” he said in interview. “We’ve got to send a message to Washington: Stop the spending, stop the madness.”  In the nation’s capitals, from Trenton, New Jersey, to Phoenix, Arizona, tax-leery businesses and the Republican politics of fiscal restraint are making unemployment benefits the next program to face cuts because of the fiscal turmoil that’s persisted since the recession ended almost two years ago. States slashed spending and raised taxes during the past three years to eliminate deficits in their general budgets. Now, more than half have run out of cash in their unemployment trust funds after joblessness, now 8.8 percent, peaked at 10.1 percent in October 2009. They have borrowed more than $48 billion from the federal treasury to pay benefits.

State Unemployment Cutbacks Mean Fewer Federal Benefits - Cutbacks to state unemployment insurance programs come with a long-lasting consequence: Residents also won’t be able to access full federal benefits. (Read more on cutbacks.) States that have shortened the duration of their unemployment insurance programs will be eligible for fewer weeks of federally funded benefits over the long term, according to Labor Department officials. The Labor Department uses the number of weeks of unemployment a state offers to help determine how many weeks of federal benefits its residents are eligible for. While most states offer 26 weeks of jobless benefits, a handful have approved or proposed trims to the maximum number of weeks. In Michigan, for example, jobless workers will receive a maximum of 20 weeks of state unemployment benefits beginning in 2012. Illinois dropped its unemployment offerings by one week. And a proposal in Missouri would cap state-offered benefits at 20 weeks. As a result, workers in those states will have access to fewer weeks of federally funded benefits, one of the long-term impacts of states’ efforts to cut their spending.

U.S. Federal Budget Cuts to Hit Cash-Strapped Cities, Transit - U.S. cities and local governments will lose funds for community redevelopment projects, public transportation and police and fire departments as part of the budget agreement that averted a federal government shutdown.The agreement struck between President Barack Obama and Congressional leaders will cut funding for the Department of Housing and Urban Development’s community development fund by $942 million to $3.5 billion, according to a list released today. It also eliminates $680 million from public transportation grants, more than $700 million from low-income housing, and $786 million from grants for local agencies that respond to emergencies. “It’s definitely going to have an impact at the local level,” said Greg Minchak, a spokesman for the National League of Cities in Washington. “This is going to mean projects aren’t going to go forward, cities are going to have to reprioritize what they’ve been working, and we’re going to see layoffs because of this.”

Municipal Budget Shortfalls - While the budget difficulties facing states and the federal government are getting a lot of attention, we hear much less about the fiscal woes of cities and other local governments.  This is partly because following 50 states is easier than tracking almost 90 thousand local governments (including over 19 thousand cities, 17 thousand townships, 3 thousand counties and over 14 thousand school districts).  But these local governments provide critical public services and even though the economy is improving, cities and other local governments are probably facing their toughest year yet.  When the National League of Cities surveyed members in 2009, it estimated that the municipal sector would face a budget shortfall of $56-$83 billion in the 2010-2012 period.  Nearly 90 percent of city finance officers reported difficulties meeting their fiscal needs in 2009, and three-quarters of city officials reported that overall economic and fiscal conditions had worsened in 2010. Conditions are especially bad in the West, where 91 percent are reporting worsening conditions, compared to 76 percent of Northeast cities. Part of the problem facing cities has to do with their revenue sources. Property taxes are “backward looking,” so it took some time for the declines in house prices to translate into declining property tax revenues.  But it also has to do with shrinking payments from other levels of government.  When states face budget shortfalls one of the things they cut is money to local governments.  According to the National Council of State Legislators, about 14 states cut local funds in 2010 and 2011.

US muni bond demand slips into big freeze - A feared meltdown has yet to materialise. Instead, the US municipal bond market, blighted by concern that struggling states and cities could default on their obligations, has gone into a deep freeze. Sales of new bonds have plunged as retail investors, traditionally the biggest buyers of municipal debt, have fled. The first quarter of the year will record the lowest amount of quarterly new issuance in more than a decade. At $44bn, the amount raised will be less than half the new bonds sold by this time last year. California, the state that issues the most debt, may not sell bonds this year if it cannot balance its budget in time, potentially shuttering infrastructure projects. The muni issuance freeze has raised questions over whether local infrastructure plans, from roads in New Jersey to schools in Minnesota, will find the kind of cheap funding that the $3,000bn muni market has in the past provided.

Old bills keep piling up for Illinois -  Illinois has emerged from the worst of a violent financial storm, but the sun isn’t shining yet. A jump in revenue, some short-term borrowing and an income tax increase weren’t enough to keep the state’s backlog of bills from growing during the past year. The state owes vendors, social service providers and schools, among others, $19 million more than it did last March, according to a report from Illinois Comptroller Judy Baar Topinka. Unpaid bills, some of which are from October 2010, totaled $4.5 billion at the end of March, according to the report. With such a large pile of IOUs, Topinka’s office said it has to prioritize who gets paid first. Short-term borrowing, debt payments and Medicaid payments are first in line. “We’ve got a huge deficit problem. Part of it is unpaid bills and part of it’s that we’re spending more on programs than our revenues will support, and we also have costs going up,”

Illinois businesses to see tax increase - - Starting next year, Illinois businesses will see a tax increase and the recently unemployed will lose a week of unemployment benefits. That's because of a compromise bill passed this month in the Illinois Legislature. The Rockford Register Star reports the deal is part of a longer-term plan to help contribute to Illinois' depleted unemployment trust fund, which is $3 billion in debt to the U.S. Treasury. Illinois Department of Employment Security spokesman Greg Rivara says the tax increase and benefit cut are expected to generate about $100 million for the unemployment fund next year, or about 3% of its current debt. Illinois is among more than 30 states that have borrowed money from federal officials to keep jobless benefits going. Illinois has borrowed more than $40 billion so far.

Oakland facing cuts to 80 percent of discretionary spending -- The city will have to cut 80 percent of its discretionary spending by July, and with one exception -- maybe two -- nothing is off the table, Mayor Jean Quan and her staff said Monday. Quan, the City Council and the heads of most city departments met in a grueling daylong retreat at the Joaquin Miller Community Center to consider how to handle a structural budget deficit now estimated at $58 million, a figure that puts the city $12 million deeper in the hole than Quan's first reports. The meeting was designed in part to give Quan a sense a priorities from the council, which will have to vote on a final budget in time for the July 1 beginning of the next fiscal year. Department heads made the case for their staffs, offering arguments why they should be spared the deepest cuts and proposing ideas should those cuts be mandated.

Fear Of State Takeover Hangs Over Detroit Budget (Reuters) - Detroit must cut $200 million in spending or face a takeover by the state of Michigan, Mayor Dave Bing said on Tuesday. With the city's population dropping to a 100-year low, while its budget deficit is projected to climb to $1.2 billion by fiscal 2015, Bing outlined a plan to the city council to balance Detroit's finances over five years. That plan includes cuts in personnel costs, a one-year suspension of a payment to employee pensions, and a temporary gambling tax increase."If we are unable or unwilling to make these changes, an emergency financial manager will be appointed by the state to make them for us. It's that simple," Bing said in his budget address.In March, Governor Rick Snyder signed into law a bill that bulks up the state's ability to intervene in fiscally troubled local governments and appoint someone to oversee them. The new law also gives state-appointed financial managers the power to modify or end collective bargaining agreements with public sector workers -- a move that sparked pro-union demonstrations in the state capitol earlier this year.

Number Turning to Homeless Shelters Rises - The Coalition for the Homeless says an all-time high number of New Yorkers turned to shelters last year. The coalition says a record 113,553 people — including 42,888 children — slept in shelters run by New York City in fiscal year 2010. That's an 8 percent increase over the previous year. The coalition released its annual State of the Homeless report Monday. The group is calling on Mayor Michael Bloomberg to make greater use of federal housing programs like Section 8 vouchers to move families to permanent homes. Homeless Services Commissioner Seth Diamond says the coalition is being unrealistic if it expects the city will receive more federal housing subsidies. He said the city's priority is helping homeless people find jobs.

Number of New York City homeless reached record in 2010 (Reuters) - Homelessness has reached an all-time high in New York City because of the recession and the policies of New York mayor Michael Bloomberg, who once vowed to cut homelessness by two-thirds.City officials complained that the report by the Coalition for the Homeless was skewed and overlooked an improvement in the current fiscal year, but acknowledged public spending cuts impeded their efforts to combat homelessness. The rise is fueled in part by the effects of the financial crisis and recession from 2007 to 2009. A record 113,553 different people slept in municipal homeless shelters in fiscal 2010, up 9 percent from the previous year and up 39 percent from fiscal 2002 when Bloomberg took office, the coalition said. In 2004, Bloomberg pledged to cut homelessness by two-thirds within five years but the number of people spending the night in homeless shelters hit a record of nearly 40,000 people one night in February 2011, the report said.The homeless in fiscal 2010 included nearly 43,000 children, a 9 percent increase that the coalition blamed on Bloomberg policy change that put a strict time limit on paying rent subsidies for the homeless.

Schools face hard spending choices with stimulus funds running out - As lawmakers around the country debate their states' budgets, they're staring over the edge of a massive fiscal cliff -- the point where about $100 billion in federal stimulus money for education will run out.  The end of that money will compound states' severe budget woes and is likely to lead to thousands of layoffs and the elimination of popular school programs around the country.  The bulk of the money, part of $814 billion provided under the American Recovery and Reinvestment Act passed in 2009, went to save the jobs of teachers and other school employees, as state and local revenue dried up during the prolonged economic downturn. Lawmakers in many states drew criticism for making deep cuts in state education spending and replacing the money with stimulus dollars, thus avoiding cuts elsewhere in their budgets.  States are required to have spent most of their education stimulus money by September, and most will burn through it by the end of the current academic year, budget officials say.

Detroit to send layoff notices to all its public teachers (Reuters) - The emergency manager appointed to put Detroit's troubled public school system on a firmer financial footing said on Thursday he was sending layoff notices to all of the district's 5,466 unionized employees.In a statement posted on the website of Detroit Public Schools, Robert Bobb, the district's temporary head, said notices were being sent to every member of the Detroit Federation of Teachers "in anticipation of a workforce reduction to match the district's declining student enrollment." Bobb said nearly 250 administrators were receiving the notices, too.The district is unlikely to eliminate all the teachers. Last year, it sent out 2,000 notices and only a fraction of employees were actually laid off. But the notices are required by the union's current contract with the district. Any layoffs under this latest action won't take effect until late July.

All 5,466 of Detroit Public School Teachers to Receive Layoff Notices - This is what the recession looks like in a country that’s decided to disinvest in public education. Reuters reports that Robert Bobb, the emergency financial manager appointed to address the Detroit’s bleeding public school system, has decided to send notices to all 5,466 unionized public school teachers. And 250 administrators will get layoff notices as well. Detroit’s public school system is facing a steep $327 million budget deficit that’s been aggravated by slipping enrollment and decreased state investment. The district-wide layoff announcement is but one of the emergency steps Bobb’s taken to deal with the financial emergency. Back in February Bobb ordered half the district’s schools shut down. He later announced that 41 of those schools would become charter schools. Bobb’s been shutting down schools for two years in a row, though. In 2010 he shut down 45 of the district’s then-179 school system. Back in 2005 before Bobb was hired Detroit had to shut down 34 schools to deal with what was then a $200 million budget deficit. Bobb’s Feburary plan approved consolidating schools and class sizes of up to 60 students.

Hedge Fund Gamblers Earn the Same In One Hour As a Middle-Class Household Makes In Over 47 Years - We live in a very, very rich country.  Historians are certain to look back at this period and wonder why the richest country in history consumed itself in a struggle over how many teachers to fire. Just take a look at the latest reports on what the top hedge fund managers haul in. In 2010 John Paulson led the list with a record $4.9 billion in personal earnings. That’s a whopping $2.4 million an HOUR. Here’s a factoid to make you wretch: It would take the median US household over 47 years to earn as much as Paulson pocketed in just 60 minutes. The top 25 hedge fund earners took in $22.07 billion in 2010. Thanks to a generous tax loophole these billionaires will pay a top tax rate of 15 percent instead of 35 percent. Closing that loophole on just those 25 individuals – just 25 guys who wouldn’t miss a penny of it -- would raise $4.4 billion, which is enough to rehire 126,000 laid-off teachers.

School bosses apologise for classroom 'auction' of black elementary schoolchildren School bosses have apologised for a controversial classroom lesson involving the mock auction of black students. During a fourth grade teacher’s lesson on the Civil War, children at a school in Norfolk, Virginia were separated by race. White students at Sewells Point elementary school were allegedly told to stand on one side of the classroom and African-American and mixed race students on the other. It is claimed the African-American American and mixed race students were then offered up for sale in a mock auction. The school principal has apologised for the lesson involving the pupils aged nine and ten years old and has vowed to make sure it never happens again.

Diminishing returns to school - MATT YGLESIAS comments on a new Brink Lindsey paper (on which more later) that addresses the role of neoliberal economic ideas in the context of a growth slowdown. Mr Yglesias writes:[T]o offer an observation in defense of the “big government” (i.e., high levels of spending on public services) fork of the neoliberal tree, it seems to me that it’s a mistake to talk about this without talking about human capital stagnation:There’s an image of the United States out there as the land of free market capitalism. And certainly there’s something to that. But it’s also the case that throughout our history, America has traditionally been the best educated country in the world.  It's clear to me that educational attainment is increasing slower than it used to, and it's clear to me that this has contributed to the growth slowdown since the 1970s. I also think it's pretty clear that America's current set of policies toward education is sub-optimal, resulting in a substantial number of undereducated (or as Lauryn Hill might have it, miseducated) young Americans.But I've been persuaded by Tyler Cowen's "Great Stagnation" argument that a big new investment in education, or a big improvement in education policy, is unlikely to have a correspondingly large impact on growth, for the simple reason that most of the low-hanging educational fruit has already been picked.

College Enrollment Fell Slightly in 2010 - The share of recent high school graduates enrolled in college by the October after their graduation fell slightly in 2010, according to a new report from the Labor Department. Of the high school class of 2010, 68.1 percent of graduates were enrolled in college by October. The comparable share for the previous year’s high school class was 70.1 percent. Both classes, however, had higher college enrollment rates than those from previous decades: As you can see, the portion of high school graduates who go immediately into college has been rising over the years, largely because of the influx of women into the nation’s institutions of higher learning. Last year, the college enrollment rate among women who were recent high school graduates was 74 percent, and for men it was 62.8 percent. More temporary factors — like the business cycle or a military draft — also appear to affect young people’s decisions to go college. For example, the weak economy may help explain why a record share of high school graduates chose to enroll in college in 2009.

Credit Cards on Campus: One Student’s Tale of Disaster - Student loans are easily the biggest financial issue for most new college graduates. The average total: $24,000. But credit card debt is right there, averaging $4,100 for new grads, and in some ways it’s far more insidious than the debt students incur to get an education. Interest rates are higher on credit cards, which are also a more convenient way to overspend. Card companies may regularly raise your limit, allowing you to get deeper in the hole. I’ve spent a fair amount of time reporting the issues with student loans. You can read my recent series here. Now I’d like to highlight the financial threat of credit cards on campus by recounting one student’s tale of disaster. This story has a freakishly happy ending. But it still stands as an illustration of how easily and thoroughly the credit card industry can victimize students.

Burden of College Loans on Graduates Grows - Student loan1 debt outpaced credit card debt for the first time last year and is likely to top a trillion dollars this year as more students go to college and a growing share borrow money to do so. While many economists say student debt should be seen in a more favorable light, the rising loan bills nevertheless mean that many graduates will be paying them for a longer time. “In the coming years, a lot of people will still be paying off their student loans when it’s time for their kids to go to college,” said Mark Kantrowitz, the publisher of FinAid.org2 and Fastweb.com3, who has compiled the estimates of student debt, including federal and private loans.  Two-thirds of bachelor’s degree recipients graduated with debt in 2008, compared with less than half in 1993. Last year, graduates who took out loans left college with an average of $24,000 in debt. Default rates are rising, especially among those who attended for-profit colleges4.

Student Loans: The Anti-Dowry - Student loans are getting a nasty reputation. But until I read this in The New York Times I had never heard them referred to as an “anti-dowry.” It’s a clever description. The basic argument is that kids today leave college owing so much money that they must put their life on hold until they get their debts under control. This may mean boomeranging home with parents for years, or forestalling any kind of serious relationship with a potential life partner. Says The Times: "In some circles, student debt is known as the anti-dowry. As the transition from adolescence to adulthood is being delayed, with young people taking longer to marry, buy a home and have children, large student loans can slow the process further.” In other words, where once upon a time young couples were given a push into adulthood through land, money or other assets in a bride’s dowry, today this transition is retarded by the presence of so much student debt, or, well, anti-assets. Student debt now surpasses outstanding credit card debt, and the balance will reach $1 trillion sometime next year. The aggregate student loan balance is growing $2,853.88 per second, according to Check out the organization’s student debt clock here. It’s not as dramatic as the national debt clock. But the idea is the same. We’re digging a fast hole.

How Worrisome Is Student Debt? - Student loan debt has risen to its highest level ever, with starting balances averaging $24,000 among the two-thirds of graduates who borrowed for their degree, Tamar Lewin noted in an article in The New York Times on Monday. This increase has heightened longstanding concerns that college students are borrowing too much.  Economists tend to be less troubled by the trend, Ms. Lewin noted, viewing student loan debt as a worthwhile investment that pays off over a lifetime. Many economists even raise the concern that an irrational aversion to debt may lead some capable students to forgo college. So should we stop worrying about student debt? Or are students and their families right to be alarmed? The key question is this: Are graduates better off, even with all that debt, than if they hadn’t gone to college at all?  The answer seems clear: even with $24,000 in debt — comparable to the cost of a new midsize car — the average four-year college graduate is likely to be substantially better off over the long term than someone with only a high school education, data show. Yet there are at least three reasons this level of debt may be troubling.

Guest Post: Students - You Are Exploited Debt-Serfs - Students and parents, wake up: your only salvation lies in political engagement and action. Of all the exploitative systems in the U.S., none is more rapacious than the Education Cartel. Like the proverbial frog that is unaware that it's being boiled because the water temperature rises so gradually, college students and their parents are unable to recall what higher education was like before students were herded into debt-serfdom. Apologists for the Education Cartel like to blame Corporate America or the banks, but the reality is that the Federal and State governments and the employees of the Cartel are willing partners in the exploitation and fraud. How did we get to the boiling-water point where students are expected to take on $100,000 or more in debt to attend college--even a mediocre one? Answer: immensely profitable Government-backed loans. If the Central State wasn't partnered with the Education Cartel, today's debt-serfdom would be impossible.

Part of Maryland pension hike to go towards balancing state budget - A major concern in the just-adjourned Maryland General Assembly session was how to tackle an estimated $19 billion unfunded liability in the state pension system. As elected officials tried to close the gap and keep the benefit system intact, one change they approved was an increase in employee contributions. Instead of the current 5 percent, all employees will now contribute 7 percent of their salaries.  However, about two-thirds of that new revenue is expected to go to the general fund, not the pension fund. The state Department of Budget and Management has estimated that the extra 2 percent of contributions will generate about $185 million in fiscal 2012, said Michael D. Golden, a spokesman for the Maryland State Retirement and Pension System. Of that new revenue, $120 million will go to the state's general fund, said Shaun Adamec, a spokesman for Gov. Martin O'Malley.

'Til death, do we party? - At the Kauffman bloggers forum last week we had several interesting discussions about Tyler Cowen’s Great Stagnation hypothesis. He believes that improvements in our lives from technology have been less dramatic in the last few decades than in previous periods. The improvement in quality in life from 1900 to 1950 is much larger than it was from 1950 to 2010, for instance. It’s an exciting and contentious idea, but I can think of at least one area of life which has changed dramatically, presumably for the better, since the 1950s: retirement. The length and quality of a typical retirement has increased. Since the 1950s we live longer and retire younger, which means the length of retirement has increased. The quality of retirement also has improved. Virginia Postrel pointed out that in the 1960s being 75 years old probably meant you were weak or feeble. I recently sat next to a 75-year old on a plane, toting an iPad and on her second trip to Europe this year, and this was not shocking.

First Look at 2012 Cost-Of-Living Adjustments and Maximum Contribution Base -The BLS reported this morning: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 3.0 percent over the last 12 months to an index level of 220.024 (1982-84=100). For the month, the index rose 1.1 percent ..." CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). Here is an explanation ...The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W1 for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months.This graph shows CPI-W since January 2000. The red lines are the Q3 average of CPI-W for each year.The COLA adjustment is based on the increase from Q3 of one year from the highest previous Q3 average. So a 2.3% increase was announced in 2007 for 2008, and a 5.8% increase was announced in 2008 for 2009.In Q3 2009, CPI-W was lower than in Q3 2008, so there was no change in benefits for 2010. And CPI-W in Q3 2010 was also lower than in Q3 2008, so once again there was no change in benefits.Currently CPI-W is above the Q3 2008 average. The recent increase is mostly because of the surge in oil prices. CPI-W could be very volatile this year - and will depend on energy prices - but if the current level holds, COLA would be around 2.1% for next year (the current 220.024 divided by the Q3 2008 level of 215.495).

Why Raising Social Security’s Tax Cap Wouldn’t Eliminate Its Shortfall - If one surveys left-of-center commentators about how to solve Social Security’s financing shortfall, one suggestion is heard more frequently than all others: increase the amount of worker wages subject to the Social Security payroll tax. The rationale is usually presented much like this:

  1. Social Security taxes are currently only applied to the first $106,800 (indexed) of wages. This cap is said to shield high-wage workers, and thus to be regressive and unfair.
  2. The current cap was set in 1983 to expose 90% of total national wages to the Social Security tax. Because of inequality in income growth since then (the rich growing richer), the amount of wages escaping such taxation has grown from 10% to about 15%. It is said that if we raise the tax, we will return to historical intent and also address the erosion of income equality since 1983.
  3. If we raise the cap on taxable wages, it is said, we would only affect a very small number of workers, the very richest Americans.
  4. If we raise the cap on taxable wages, it is said, we will make significant headway in reducing the Social Security shortfall.

The Burden of Supporting the Elderly - As part of its giant data release on Tuesday, the Organization for Economic Cooperation and Development has put together numbers on the old-age support ratio. That refers to the number of people who are of working age (20 to 64 years old) relative to the number of people over retirement age (older than 65). One reason for America’s fiscal problems is that the population is aging, meaning that there are relatively many old people to care for and relatively few young workers to support them. (Immigrants are helping with this burden, though.)  The United States is by no means the most challenged in this regard: The chart above shows that as of 2008, there were 4.7 working-age Americans for each retirement-age American, a figure projected to fall to 2.6 by 2050. Compare that to Japan, where the number was 2.8 in 2008, and will fall to about 1.2 by 2050.

JP Morgan Warns Of "Logan's Run" Entitlement Reform - JP Morgan's Michael Cembalest gives a chilling analogy to America's future: the 1976 film Logan's Run. In the film, a world with insufficient resources maintains its equilibrium by killing everyone over the age of 30 (in the original book, the age was 21). The narrative revolves around how people are tracked through imprints in their hands, and how the protagonist tries to escape. It’s just a movie, but it taps into American fears about who makes these choices, and how they make them. With 30% of Medicare expenses taking place in the last year of life, and with government healthcare spending outstripping education spending by 10x over the last 50 years, this issue will be very hard to sort out. JP Morgan's chief investment officer, Cembalest says entitlement costs are unsustainable: 'The United States (its politicians and its citizens) have jointly created a leviathan of entitlement obligations which are 10 times the real cost of all its wars since the American Revolution.'"

Governors Cut Taxes — and Medical Aid to the Poor - In Maine and elsewhere, it's an early test for 'tea-party'-backed Republicans who say the strategy will create jobs and boost state economies. In their drive to cut medical assistance to the poor while pushing tax breaks benefiting the affluent, congressional Republicans are following the lead of a group of governors who have championed this approach to balance state budgets.The strategy — reprising the supply-side economics of the Ronald Reagan era — has caught on with conservatives who say that lowering taxes for corporations and wealthy taxpayers will boost state economies. But the moves are sparking a debate in capitols from Arizona to Wisconsin to Maine over who is being asked to sacrifice and whether the strategy will produce more jobs. The issue is also emerging as an early test for "tea party"-backed governors and legislators who swept to power on pledges to remake government by cutting taxes and slashing government programs.

Health Care Seriousness vs. Reality - Jim Hamilton has a post on health care that excellent because it illustrates precisely what is wrong with conventional wisdom on this issue. First he saysThe historical growth of federal expenditures on health care is unsustainable. Over the last 20 years, Medicare and Medicaid expenditures grew at an 8.4% continuously compounded annual rate (data source: CBO). That’s 3.75% faster per year than GDP grew, and for that difference in growth rates, federal health care expenditures as a percentage of GDP would double every 18.5 years. If those historical growth rates were to continue, federal health expenditures would rise from their current 5.4% of GDP to 10% of GDP by 2027 and 20% of GDP by 2045. Something has to give. In a very tiny sliver of a way this is true. It is impossible for some segment of GDP to grow by more than GDP indefinitely. However, this will not happen. GDP growth will mechanically converge to health care growth. No intervention is necessary. See below.

Guest post: No Assumptions for a Change - Assumptions are often incorrect and the assumptions are incredibly inaccurate in primary care and in basic health access. When one starts with the assumption of more pay, then it is easy to rationalize more training or more complexity of care - even when there is little evidence other than assumption.Primary care is often more difficult than specialty care. A major reason is that the design of health care in the United States destroys primary care delivery. Reasons for primary care to be challenging are the complexity of the patients, the lack of support staff, the lack of primary care trained support staff, the lack of experienced support staff, the broad scope of primary care, the lack of respect for primary care by those who clearly have little clue regarding primary care delivery, and participating in smaller operations that are neglected by the health care design. The fragmentation of care with even more fragmentation on the way is a problem. The required context of care includes major care provided by Americans most left out of the designs for health and education – who often cannot access care other than the basics.

Two Major Differences Between America And The Rest Of The Developed World - The OECD released a massive pack of data on the developed world this week. America performs well on things like household income and tolerance; and badly on things like health and voting rates. But there are two measures where the U.S. is far and away the worst. First, the U.S. prison population is 760 prisoners in 100,000. The next closest country is South Africa at 329 prisoners, while the OECD average is 140 prisoners. Second, U.S. health spending is 16 percent of GDP. The next closest country is France at 11.2 percent of GDP, while the OECD average is 9.0 percent. This means that Americans cost more to take care of -- even while their benefits are worse. Social spending is low on pensions, but high on prisons. Health spending is off the charts, but obesity and life expectancy are worse than average.

How American Health Care Killed My Father - After the needless death of his father, the author, a business executive, began a personal exploration of a health-care industry that for years has delivered poor service and irregular quality at astonishingly high cost. It is a system, he argues, that is not worth preserving in anything like its current form. And the health-care reform now being contemplated will not fix it. Here’s a radical solution to an agonizing problem.

Children told to be tested for HIV after flu vaccines reused --Colorado Department of Public Health and Environment (CDPHE) suggests children who received tampered vaccines be tested now and again six months from date of second dose for blood-borne pathogens like Hepatitis B, Hepatitis C and HIV. A clinic in Northern Colorado is advising parents of children who received a pediatric flu shot from their offices to get tested for some blood-borne diseases including HIV, Hepatitis B and Hepatitis C after their vaccine syringes were shared between patients. Med Peds Clinic of Fort Collins sent a letter on April 6 stating a medical assistant at the office... placed used syringes in a box marked "second doses," which also contained unused, fully-filled pediatric vaccines.

Enemy lurking inside your fridge: Half of meat in America contains harmful bacteria - Almost half of the meat and poultry sold at stores across America contains a type of bacteria that is a common cause of infection in people. Researchers bought 136 packages of chicken, turkey, pork, and ground beef at 26 grocery stores or supermarkets in five cities and found that 47 per cent contained Staphylococcus aureus, known as S. aureus or staph. Nearly half of the contaminated samples contained strains of that bacteria that are resistant to at least three antibiotics, such as penicillin and tetracycline. Some strains were resistant to a half dozen or more.

Radioactive iodine in city water spurs enhanced testing - The Philadelphia Water Department announced yesterday that it is enhancing its testing procedures and reviewing treatment technology after federal environmental officials found radioactive iodine in the city's drinking water. The level of Iodine-131 found at the Queen Lane treatment plant is the highest of 23 sites in 13 states where the particles have appeared following the massive radiation leaks from the Fukushima Daiichi nuclear power plant in Japan. Lower levels were found at the city's two other plants. But the Iodine-131 in Philadelphia may have no connection to Japan, officials say. The U.S. Environmental Protection Agency told the Daily News yesterday that Philadelphia water samples from last August contained nearly twice as much radioactive iodine as the recent samples collected after the Fukushima disaster.

Vegetable Bandits Strike As Food Prices Soar - The high price of produce, especially for tomatoes after the deep winter freezes, has attracted more than heightened attention from consumers. A ring of sophisticated vegetable bandits was watching, too.  Late last month, a gang of thieves stole six tractor-trailer loads of tomatoes and a truck full of cucumbers from Florida growers. They also stole a truckload of frozen meat. The total value of the illegal haul: about $300,000.  The thieves disappeared with the shipments just after the price of Florida tomatoes skyrocketed after freezes that badly damaged crops in Mexico.  That suddenly made Florida tomatoes a tempting target, on a par with flat-screen TVs or designer jeans, but with a big difference: tomatoes are perishable.  “I’ve never experienced people targeting produce loads before,”  “It’s a little different than selling TVs off the back of your truck.”

Don't Treat Dirt ... Like Dirt - Without dirt, we would not eat. And, like oil or coal, dirt is a nonrenewable resource. When topsoil disappears from erosion, it takes thousands of years for that layer of dirt to build back up. And we're running out of it.  This is one of those problems that people have known about for a very long time. Pliny the Elder wrote about it. And as The New York Times points out today, the U.S. government has been fighting soil loss for decades: Because this problem has been studied for centuries, there's a lot of information out there about how to fix it or, at least, minimize its impacts. Even better, soil conservation techniques make farming more profitable in the long run. They can be more labor intensive up front, however, and short-term incentives push farmers, particularly ones renting land, to tear up land and begin farming it without worrying about the fate of the dirt they're mining for nutrients.

Soil Erosion Far Worse Than Reported In American Farmlands, According To New EWG Report - If the American classic song is right and “this land was made for you and me,” then why are we paying to have it destroyed? This is the question presented in the video for the new Environmental Working Group (EWG) report, "Losing Ground."  EWG, working with Iowa State University, has found that erosion in Iowa is much worse than previously reported. In some regions, soil loss was found to be 12 times greater than the stated average, as storms stripped up to 64 tons of soil per acre of land.  The organization blames irresponsible farming practices for putting America’s land and water at risk. As the video says, pesticides, fertilizers, and manure run into water, which “renders our water undrinkable, our beaches unfit to swim in, and has created an area in the Gulf so contaminated that aquatic life has to flee or die.” There is little incentive for farmers to stop erosion, and EWG places part of the blame on Washington. According to The New York Times, “Enforcement is needed more than ever, environmentalists say, because high crop prices provide a strong incentive for farmers to plant as much ground as possible and to take fewer protective measures like grass buffer strips.” As EWG states, while wealthy landowners receive taxpayer money, “the rest of us, and the environment, pay the price.”

Hope dwindling for farmers as drought lingers in Oklahoma, Texas - Following what has been the driest four-month period since before the 1930s Dust Bowl, hope is dwindling, if not already lost, for wheat farmers of Oklahoma and Texas who desperately need rain. The forecast is not looking promising. Any hits to U.S. agriculture amid rising food and gas prices will only add to the strain on the wallets of families and individuals across the nation and the globe, with the U.S. being the world's largest exporter of wheat and corn. According to Agricultural Meteorologist Dale Mohler, the percentage of U.S. wheat considered "poor" or "very poor" increased from 32 to 36 in just the past week due to lack of rain in the southern Plains and Southwest. "There will not be much of a crop in western Texas and western Oklahoma," Mohler said, "Now the focus is on Kansas and eastern Oklahoma."

EPA: New Radiation Highs in Little Rock Milk, Philadelphia Drinking Water - Milk from Little Rock and drinking water from Philadelphia contained the highest levels of Iodine-131 from Japan yet detected by the Environmental Protection Agency, according to data released by EPA Saturday. The Philadelphia sample is below the EPA's maximum contaminant level (MCL) for iodine-131, but the Little Rock sample is almost three times higher.  The Philadelphia sample is below the EPA’s maximum contaminant level (MCL) for iodine-131 in water, but the Little Rock sample is almost three times higher. However, the Food and Drug Administration observes a much higher standard for milk, and all milk samples collected so far are well below that level.Nonetheless, the EPA does not consider the milk dangerous because the MCL is set for long-term exposure, and the iodine-131 from Japan’s Fukushima-Daichi nuclear accident is expected to be temporary and deteriorate rapidly.

Japan Rice Buying May Outstrip Supply on Hoarding, Marubeni's Shibata Says - Japanese consumers may almost double rice purchases this fiscal year, driven in part by contamination “rumors” surrounding the nation’s worst earthquake and nuclear disaster, as demand outstrips crimped domestic production.  Hoarding may result in purchases of as much as 15 million metric tons, from about 8 million tons last year, making it impossible for Japan’s farmers to meet demand after a quake- generated tsunami washed over paddies in an area representing 18 percent of the country’s output, said Akio Shibata, head of the research unit at Marubeni Corp., in an interview in Tokyo.  “Stockpiles may be depleted, creating a shortage and boosting imports,” Shibata said. Effects of the March 11 quake and tsunami, which swept aside machinery and damaged farms in Japan’s northeast, could last “for years,” he said.

China Increases Ban On Japanese Food Imports - CHINA has expanded a ban on imported food and farm produce from Japan amid growing fears of radiation contamination. The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) said that starting from Friday, China has banned imports of foodstuffs and edible farm produce along with fodders from 12 areas in Japan, compared with only five Japanese counties blacklisted on March 24. AQSIQ demanded importers of food, edible farm produce and fodders from other Japanese areas should also provide documents issued by Japanese government agencies while applying for quarantine in China.

China Pork Binge Driving Iowa-Sized Soy Imports on Shortage - All the soybeans in Iowa won’t be enough to meet the anticipated surge in China’s imports over the next four years as the nation feeds a record pig herd and drives bean prices to an all-time high.  China, which doubled meat consumption in the past two decades, may boost international soybean purchases 33 percent to 66.9 million metric tons by 2014, a 16.6 million-ton increase that is more than Iowa, the largest U.S. grower, produced last year, government data show. U.S. farmers are cutting back on planting, meaning prices will rise 21 percent to $16.80 a bushel by Dec. 31, a Bloomberg survey of 20 analysts shows.  Almost half the world’s pork comes from China, which has 689 million pigs and will be responsible for all of this year’s increase in global supply, the U.S. Department of Agriculture estimates. That’s adding to China’s dependence on raw-material imports from Brazil to Australia to the U.S., making it vulnerable to inflation that Premier Wen Jiabao has pledged to combat without derailing economic growth.

Biofuel Pushes Millions Of People Towards Poverty - The growing production of bioethanol increases the shortage of food. Corn, sugar, other types of farm crops are required for the production of the biofuel. In addition, the growth of sowing for the green fuel reduces the square of lands designated for food cultures, which leads to smaller harvest and higher prices on food.  According to experts' estimates, the number of undernourished people in the world will exceed the level of one billion people already in near future. According to the UN, there were not more than 925 million of such people last year. The growing prices on food push people towards poverty and puts pressure on most vulnerable layers of the population - those who spend over 50 percent of their income on food. As a result, when prices increased by 15 percent from October to January, as many as 44 million more people found themselves below the poverty line, WB specialists said. FAO's index dropped for the first time in eight months in March - by 2.9 percent. The growing prices on food and fuel push farmers and other agricultural productions towards growing most lucrative "fuel" cultures, which can only add more fuel to the fire. Neither Europe, nor the USA intend to revise their standards which stipulate the constant increase of the share of natural fuel in their consumption. In the USA, the use of biofuel by 2022 is expected to reach 36 billion gallons a year (more than 160 billion liters). In the EU, ten percent of car fuel is to be produced from plants by 2020.

Food price hikes could push millions to poverty - As global food prices rise near record highs, the World Bank warned Thursday that further spikes could push millions more people deeper into poverty. The organization that loans money to developing nations said its global food price index was up 36% in March from levels a year earlier. The increase was driven by sharp boosts in prices for corn, wheat, soybeans and other staples. Despite a modest drop versus the month before, the index remains near its 2008 peak.The surge in global food prices has already driven 44 million people below the "extreme poverty line," which the World Bank defines as living on just $1.25 a day. An additional 10% increase in food prices would cause another 10 million people to fall below the poverty line, while a 30% spike would lead to 34 million more poor, according to the World Bank.

Pacific salmon may be dying from leukemia-type virus - In Canada's Fraser River, a mysterious illness has killed millions of Pacific salmon, and scientists have a new hypothesis about why: The wild salmon are suffering from viral infections similar to those linked to some forms of leukemia and lymphoma.For 60 years before the early 1990s, an average of nearly 8 million wild salmon returned from the Pacific Ocean to the Fraser River each year to spawn. Now the salmon industry is in a state of collapse, with mortality rates ranging from 40 percent to 95 percent.  Losses were particularly high in elevated river temperatures; warmer water makes it more difficult to deliver oxygen to the tissues of salmon. Seven of the last 10 summers have been the hottest on record for the Fraser River. But experts say it's too soon to pin the blame on global warming.

A single source for clean water and fuel - ALGAE are being put to work performing a unique double duty: cleaning up sewage waste while simultaneously producing biofuel.All algae feast on phosphates and nitrogen-containing compounds, converting them to lipids. Some of these oils can be converted to biofuel, but only a few algal species produce lipids of the right type and quantity to be easily converted to fuel. In theory, though, algae are a perfect renewable fuel source. The main obstacle is that brewing the right nutrient mix can be prohibitively expensive. Now, in work for a master's thesis, Eric Lannan, a mechanical engineer at Rochester Institute of Technology (RIT) in New York and colleagues have identified three types of microalgae - Scenedesmus, Chlorella and Chlamydomonas - that efficiently convert nutrients to fuel on a diet of municipal waste water, while happily living in its harsh, salty environment. In a lab test, it took just three days for the algae to gobble up 99 per cent of the ammonia, 88 per cent of the nitrate and 99 per cent of the phosphates in a broth resembling that from a domestic sewage treatment plant, turning themselves into rich sources of fuel even as they purified the water.

NSIDC, Report of April 5, 2011: Ice extent low at start of melt season; ice age increases over last year - Arctic sea ice extent for the month of March 2011 was the second lowest in the satellite record. Sea ice reached its maximum extent on March 7; extent on this date tied for the lowest winter maximum extent in the satellite record. Air temperatures over most of the Arctic Ocean were above normal. New data on ice age shows that the amount of older, thicker ice has increased slightly over last year. [This last, I find really amazing. The sea ice looks to be the crappiest ever. It continues to flow out to the north Atlantic both via the Nares Strait and between Greenland and Svalbard.  The fjords all around the coast of Greenland did not really freeze over as they had in past years -- we know that the temperature of the ocean waters around Greenland are rising.  I expect we are going to have an awful melt season this summer.]

Budget battle torpedoes NOAA Climate Service - The EPA’s efforts to regulate greenhouse gasses as a pollutant under the Clean Air Act survived the FY11 budget battle.  But climate hawks came out on the short end of another, lower-profile but no less vital, struggle related to the climate monitoring efforts of the National Oceanic and Atmospheric Administration, or NOAA. E&E’s Greenwire (subs. req’d) reported today on an overlooked rider to H.R. 1 and also included in the final deal on the full year continuing resolution that the House and Senate will vote on this week: The continuing resolution that would fund the government through the end of September would block funding for a new National Climate Service and any new catch-share fishery programs — the two keystone efforts from NOAA Administrator Jane Lubchenco. Details of the resolution were announced early this morning…  If lawmakers include similar language in fiscal 2012 spending bill, it could halt the effort to create the new agency, which would be akin to the National Weather Service.

Weather Satellites on the Chopping Block - As my colleagues Eric Lichtblau, Ron Nixon and I report in summary form in Thursday morning’s paper, the budget deal moving through Capitol Hill slashes funds that the Obama administration requested for a satellite program considered vital for the nation’s weather forecasting. That raises the prospect of less accurate forecasts and other problems, some of them potentially life-threatening, starting in 2016. Jane Lubchenco, head of the National Oceanic and Atmospheric Administration, warned at a Senate hearing on Wednesday that the cutbacks would probably lead to a serious gap in satellite data, undermining National Weather Service forecasts.  Research by her agency suggests that without the type of capability that the proposed satellites were expected to provide, the weather service might fumble forecasts of future events similar to the huge snowstorms that hit Washington and New York the last two winters. Forecasters would still have access to data from satellites not affected by the cutbacks, but those would offer less detailed coverage of the country, which is why the weather forecasts would become less accurate.

Congress Turns A Blind Eye To Climate Science - Last week was a bewildering one for those who recognize the abundance of compelling scientific evidence showing that the climate is changing mainly due to human activities and that these changes pose risks to human health and welfare. While the news cycle was dominated by the down-to-the-wire budget negotiations in Washington, ongoing unrest in the Middle East, the nuclear crisis in Japan, a major congressional debate on climate change regulations took place in the House (and Senate) that vividly demonstrated how far off the rails we’ve gone in public discourse of climate science and policy. Let me state right off the bat that I tend to shy away from directly discussing politics. At the same time, I recognize that climate science has become so politicized that it’s impossible to steer clear of politics entirely. This is understandable considering that many of the potential solutions to climate change could involve major policy changes, from federal regulations of emissions from cars, trucks, and power plants to a carbon tax on gasoline.

Budget resolution includes rider to reinstate Bush’s wilderness drilling policy - The budget agreement unveiled today includes a gift from the Grand Oil Party to its big energy benefactors:  It blocks the Interior Department from implementing a policy to protect pristine public lands from development. The rider to the FY2011 continuing resolution prevents Interior from using funds to implement the wild lands policy through the end of this fiscal year: For the fiscal year ending September 30, 2011, none of the funds made available by this division or any other Act may be used to implement, administer, or enforce Secretarial Order No. 3310 issued by the Secretary of the Interior on December 22, 2010. Secretarial Order No. 3310 is the wild lands policy announced late last year by Interior Secretary Ken Salazar, which restored a decades-old practice of allowing interim protections for Bureau of Land Management areas prized for recreation, wildlife, and other non-commercial uses.

Obama calls for more energy investments while proposing to cut deficit $4 trillion - Slams GOP for a "vision of our future that's deeply pessimistic." - President Obama promised today to trim the federal deficit by $4 trillion over a dozen years through new spending cuts, tax hikes and tax reform. But one thing he said he wouldn’t do is stop investing in clean energy. Obama gave his big deficit reduction speech today (text “as prepared for delivery” here).  One of his harshest economic critics, Nobelist Paul Krugman, liked the style — and on substance said it was “Much better than many of us feared.” On energy it was pretty good too.  As E&E News reports: But the president said that unlike the Republican budget that was unveiled this week, his plan will trim $4 trillion from the deficit while also protecting crucial recovery and investments that the country needs. The way [the Republican] plan achieves those goals would lead to a fundamentally different America than the one we’ve known certainly in my lifetime,” Obama said. “A 70 percent cut to clean energy. A 25 percent cut in education. A 30 percent cut in transportation. Cuts in college Pell Grants that will grow to more than $1,000 per year. That’s their proposal. … They paint a vision of our future that’s deeply pessimistic.”

Rand Paul Crusades Against Energy Efficiency Standards - The Senate Energy and Natural Resources Committee may have entered a new era of partisanship.  The committee famous for working across party lines faced heavy resistance yesterday from Republican Sen. Rand Paul of Kentucky as it marked up its first legislation of the new Congress.  The tea party favorite voted against bipartisan energy efficiency and hydropower measures from panel Chairman Jeff Bingaman (D-N.M.) and ranking member Lisa Murkowski (R-Alaska).  The efficiency measure (S. 3981 (pdf)), which would strengthen and improve energy efficiency standards for a number of consumer products, drew particular attention from Paul. He offered an amendment that would remove the enforcement authority from a broad law that imposes efficiency standards on a number of products. The bill under consideration yesterday would amend that law to add the additional appliance standards.  "I think that to be consistent with a free society, we should make them voluntary," Paul said of the standards, before launching the committee into a discussion of Ayn Rand's 1937 novel "Anthem" about individual choice.

Renewable Energy Investment Drops 34% to Lowest in Two Years New investment in renewable energy dropped to the lowest in two years in the first quarter, weighed down by low natural gas prices in the U.S. and subsidy cuts in Europe, Bloomberg New Energy Finance said.Money flowing into the industry through asset finance, share sales, venture capital and private equity fell more than a third to $31.1 billion in the first three months of the year from a record $47.1 billion in the fourth quarter of 2010, the London-based researcher said today in a statement. Countries including Germany and Spain have announced reductions in the guaranteed prices that they pay for electricity from renewable sources while in the U.K. the government is reviewing the rates. Gas in the U.S. in September fell to its lowest price since 2002 amid a glut in production.

Some Thoughts on Energy Independence - The President's new initiative on increasing energy independence inspired much commentary on how much it was aspirational, rather than realistic; see for instance this extensive NYT article. In this post, I want to consider whether reduced dependence on imported energy is a worthwhile objective. Oil Price Shocks: How Important in the Past? What are the macroeconomic consequences of oil shocks. Jim has covered this extensively [paper]. A recent article by Prakash Loungani recounts Jim's take on the impact of oil price hikes in the lead up to the recession. Loungani notes Olivier Blanchard's recent work with Marianne Riggi asserting a smaller impact on GDP in recent decades due to decreasing real wage rigidity and enhanced monetary policy credibility [VoxEU] paper based upon estimates derived from structural VARs.Chapter 3 of the IMF's World Economic Outlook, just released today, has an extensive discussion of the role of oil in macroeconomic performance. One interesting table highlights the differences in views regarding the impact of an oil shock.

The limits to solar thermal energy - It is very commonly assumed that we can move from fossil fuels to renewable energy sources without significant change in the lifestyles and systems of rich countries. People might think that some things would have to be quite different, such as the kinds of cars they drive, but it seems to be taken for granted that the transition could be made without any threat to the growth economy, the free enterprise market system, or affluent living standards. I do not think this is so and for some years have been trying to clarify the situation. My 2007 book (Trainer 2007) set out the situation in the light of the evidence I was able to find to that point in time. A shorter and updated 60 page summary of the situation as I now see it is available at Whether or not renewables can save consumer-capitalist society depends heavily on solar thermal electricity, because unlike wind and photovoltaic energy it can be coupled with large scale storage and so can deal much more effectively with the problem of the intermittency of wind and sun. But can it enable total dependence on renewables? My analysis of the situation is given in the 40+ paper available at

Pass The Boone Pickens Bill - On Wednesday, amid all the hullabaloo over the budget battles, a simple, discrete and largely overlooked bill was dropped into the Congressional hopper. Sponsored by two Democrats and two Republicans — that’s right: an actual bipartisan piece of legislation — its official title is the New Alternative Transportation to Give Americans Solutions Act, or the Nat Gas Act, for short. People in the know, however, call it the Boone Pickens bill. Boone has spent most of his career drilling not for oil but for natural gas, which he knows more about than just about anyone. His late-life occupation has been running a natural gas-oriented hedge fund, which has made him, at the age of 82, a billionaire several times over.  Out of that deep knowledge has come a powerful belief: that the country’s energy salvation depends on moving away from the fuel we don’t have — namely, oil, where imports, some of which come “from our enemies” (to quote Boone), account for two-thirds of our oil needs. Instead, we should move to a fuel we have in abundance: natural gas. Most experts say there is enough natural gas in the ground to last a century; Boone’s convinced that modern drilling techniques will allow us to find enough for several centuries.

Is Natural Gas About to Make a Comeback - Today’s surprise release of figures showing a shocking draw down in natural gas supplies throws a great spotlight on what has undoubtedly been the red headed step child of the energy space for the last three years. While oil prices have been soaring to near all-time highs, gas prices have plummeted from a high of $18 per million BTU’s to as low as $2. Gas is now selling for one fifth of the cost of crude on an adjusted BTU basis. You would think that people would be in love with natural gas already. This simple molecule, CH4, produces only half the greenhouse gas emissions of oil, and is easily available in large quantities in the US though a web of interstate pipelines. The byproducts of its combustion are only water and carbon dioxide, not the noxious sulfur and nitrous oxides that diesel fuel spews off. Half the electric power plants in California already burned the stuff.

In Iran, natural gas price increases stirring anger - Iran’s parliament has warned President Mahmoud Ahmadinejad that resentment is building over sharp increases in the price of natural gas, which has risen at least 10-fold on average in recent weeks, and that public protests could follow. Official media have reported on crowds complaining in the offices of the National Iranian Gas Co. since a two-week national holiday ended April 4. In Tehran, many people are refusing to pay their bills. The price increases follow the implementation in December of a plan by the Ahmadinejad government to cut off state subsidies, forcing the prices of many staples, including gas, electricity and bread, to rise to market level.

Gas from ‘fracking’ could be twice as bad as coal for climate: study - Shale gas, produced by "hydraulic fracturing" or "fracking," could create as much as twice the greenhouse gasses as coal, according to a study soon to be published by Cornell University professors. Over the past few years, the Washington D.C. consensus has been that shale gas is better for the environment than coal. President Obama has praised natural gas and given it partial credit in his proposed "clean energy standard." But Cornell Prof. Robert Howarth argues in the new study that making natural gas available through "fracking" contributes more to global warming than conventional gas and coal over 20 years. "Natural gas is composed largely of methane, and 3.6% to 7.9% of the methane from shale-gas production escapes to the atmosphere in venting and leaks over the life-time of a well," a pre-publication version of the study (.pdf) -- obtained by The Hill -- said.

New study questions shale gas as a bridge fuel - Leakage of methane from fracking boosts shale gas global warming impact; National Academy review is warranted - I was a (relatively) early booster of shale gas as a potential game changer for greenhouse gas mitigation. But there were always lurking concerns about the impact of methane leakage in from the unconventional gas extraction process known as hydraulic fracturing, since methane is a considerably more potent greenhouse gas (GHG) than carbon dioxide.  Now three Cornell University professors have published a major analysis in Climatic Change, “Methane and the Greenhouse-Gas Footprint of Natural Gas from Shale Formations,” that seeks to quantify the impact of the leakage from the best available data. They find a leakage rate large enough to seriously undercut gas’s GHG benefit even in high-efficiency combined cycle plants — and one that is all-but-fatal to any GHG benefit from using natural gas as a transport fuel. That conclusions is doubly true if one looks at the GHG impact over a few decades, rather than a century.

Gas From Fracking More Damaging to Climate Than Coal? - Yves Smith - I’m pretty amazed that no one looked into the greenhouse gas impact of fracking until now. One of the big rationales for fracking, which is already controversial due to reports of damage to aquifers, is that it was abundant in North America and also produces comparatively little in the way of carbon emissions.  The problem, per a study soon to be published by Cornell University, is fracking results in the release of methane, one of the most potent greenhouse gases, apparently enough to undercut the claims that it is relatively “clean”. From NewsWise: Extracting natural gas from the Marcellus Shale could do more to aggravate global warming than mining coal, according to a Cornell study published in the May issue of the peer-reviewed journal Climatic Change Letters. While natural gas has been touted as a clean-burning fuel that produces less carbon dioxide than coal, ecologist Robert Howarth warns that we should be more concerned about methane leaking into the atmosphere during hydraulic fracturing. Natural gas is mostly methane, which is a much more potent greenhouse gas, especially in the short term, with 105 times more warming impact, pound for pound, than carbon dioxide. He estimated that as much as 8 percent of the methane in shale gas leaks into the air during the lifetime of a hydraulic shale gas well – up to twice what escapes from conventional gas production.

Key ‘geoengineering’ strategy may yield warming, not cooling -- Whitening clouds by spraying them with seawater, proposed as a “technical fix” for climate change, could do more harm than good, according to research.Whiter clouds reflect more solar energy back into space, cooling the Earth. But a study presented at the European Geosciences Union meeting found that using water droplets of the wrong size would lead to warming, not cooling.As science advisor John Holdren resasserted in 2009 of strategies such as space mirrors or aerosol injection, “The ‘geo-engineering’ approaches considered so far appear to be afflicted with some combination of high costs, low leverage, and a high likelihood of serious side effects.“

The Planet Strikes Back - In his 2010 book, "Eaarth: Making a Life on a Tough New Planet," environmental scholar and activist Bill McKibben writes of a planet so devastated by global warming that it's no longer recognizable as the Earth we once inhabited. This is a planet, he predicts, of "melting poles and dying forests and a heaving, corrosive sea, raked by winds, strafed by storms, scorched by heat." Altered as it is from the world in which human civilization was born and thrived, it needs a new name -- so he gave it that extra "a" in "Eaarth."The Eaarth that McKibben describes is a victim, a casualty of humankind's unrestrained consumption of resources and its heedless emissions of climate-altering greenhouse gases. True, this Eaarth will cause pain and suffering to humans as sea levels rise and croplands wither, but as he portrays it, it is essentially a victim of human rapaciousness. With all due respect to McKibben's vision, let me offer another perspective on his (and our) Eaarth: as a powerful actor in its own right and as an avenger, rather than simply victim.

Tepco Says Damaged Fukushima Nuclear Plant Was Hit by a 15-Meter Tsunami - Tokyo Electric Power Co. said the tsunami generated by last month’s earthquake was as high as 15 meters at its crippled nuclear station, which has been leaking radiation since the surge knocked out backup power systems.  The utility provided its first assessment of the height of the tsunami since the March 11 quake, after criticism from the government and evacuees that it was slow in responding to the disaster. The base of the station is about 10 meters (33 feet) above sea level.  “Most of the area around the reactor buildings and turbine housings was swamped,” the utility known as Tepco said in a statement late yesterday.

Japan fails to stop radioactive discharge into ocean - Japanese nuclear power plant operator TEPCO expects to stop pumping radioactive water into the ocean on Monday, days later than planned, a step that would help ease international concern about the spread of radiation from a smashed nuclear plant. Prime Minister Naoto Kan's Democratic Party was likely to be punished at Sunday's local polls for his handling of the massive earthquake and tsunami that ravaged Japan's northeastern coast on March 11, killing 13,000 and triggering the world's worst nuclear accident since the 1986 Chernobyl disaster. China and South Korea have also criticized Japan's handling of the nuclear crisis, with Seoul calling it incompetent, reflecting growing international unease over the month-long atomic disaster and the spread of radiation.

Japan nuclear crisis raised to 'Level 7' emergency --Japan raises nuclear alert level to seven --Fukushima Daiichi power plant emergency now on par with 1986 Chernobyl warning 11 Apr 2011 Japan is to raise the nuclear alert level at the Fukushima Daiichi power plant to a maximum seven, putting the emergency on a par with the 1986 Chernobyl disaster. The government came under pressure to raise the level at the plant after Japan's nuclear safety commission estimated the amount of radioactive material released from its stricken reactors reached 10,000 terabecquerels per hour for several hours following the earthquake and tsunami that devastated the country's northeast coast on 11 March. That level of radiation constitutes a major accident, according to the INES scale.

Japan Lifts Atomic Alert to Highest Level, Matching ChernobylJapan raised the severity rating of its nuclear crisis to the highest, matching the 1986 Chernobyl disaster, after increasing radiation prompted the government to widen the evacuation zone and aftershocks rocked the country.  Japan’s Nuclear and Industrial Safety Agency today raised the rating to 7. The accident at the Fukushima Dai-Ichi station was previously rated 5 on the global scale, the same as the 1979 partial reactor meltdown at Three Mile Island in Pennsylvania.  The stricken nuclear plant, located about 220 kilometers (135 miles) north of Tokyo, is leaking radiation in Japan’s worst civilian nuclear disaster after a magnitude-9 quake and tsunami on March 11. Tokyo Electric Power Co. said its plant, which has withstood hundreds of aftershocks, may spew more radiation than Chernobyl before the crisis is contained. “If the leaks continue, the total radiation from the reactors may exceed” that from Chernobyl, Junichi Matsumoto, general manager of one of the utility’s nuclear divisions, said in Tokyo today.

Fukushima I Nuke Plant: Reactor Pressure Vessels with Holes at the Bottom, Underground Tunnel Flooded with Radioactive Water -- So what? Says the world, by ignoring the news completely. This is just unreal. The Reactor Pressure Vessels in the Reactors 1, 2 and 3 are likely to have holes at the bottom, as TEPCO urges us to "imagine a hole at the bottom", and it's not even in the headlines in Japanese news sources. Nothing on English news sources. Am I hallucinating? No. I go to the link from my yesterday's post, and the Asahi article is updated with additional information with underground tunnel from the Reactor No.2 all flooded with highly contaminated water which has possibly have been draining into the ocean. From Asahi Shinbun update (in Japanese)。  TEPCO announced that 1000 milli-sievert radiation was detected from the water from the underground tunnel from the turbine building of the Reactor 2 and the vertical duct [to the tunnel?].

Japan needs to build sarcophagus over Fukushima reactor - experts…Cooling nuclear reactors and spent fuel pools, radioactive dust suppression and building protective encasements are the top priorities for Japan's crippled Fukushima plant, experts said on Tuesday. "I don't think the construction of protective reactor shells can be avoided but the question is what they will be like," Leonid Bolshakov, director of the Nuclear Energy Safety Institute, said in an interview with RIA Novosti. Yet it is too soon to put the Fukushima accident in the same league with Chernobyl, he added. "A total of 100 kilocuries of radioactive material has been released in Japan. I'd like to remind you that in the Chernobyl accident 50 megacuries were released," he said.Other experts agree that the sarcophagus might be the best option to contain the accident. "That's probably right," said Hugh Price, a retired Compliance Officer with EDF Energy. "The fuel has partly melted, and escaped through the breach in the donut under the reactor, and the containment area. That has led to the high level of contamination outside the reactor," he said.

Burial of Japan reactors trickier than Chernobyl: pump firm…(Reuters) - Encasing reactors at Japan's Fukushima nuclear plant in concrete would present much more of a challenge than Chernobyl, according to an executive of the firm whose pumps are helping cooling efforts there. "In Chernobyl, where a single reactor was encased, 11 trucks were in action for a number of months. In Fukushima we're talking about four reactors," Gerald Karch, chief executive of the technical business of unlisted machinery maker Putzmeister, said in an interview with Reuters. He said that while no decision had been made in Japan, concrete encasing would be the most sensible solution once the crippled Fukushima Daiichi plant has cooled down. "In my opinion, when a closed-circuit cooling system has been developed and successfully set up, there will be no other option but to encase the reactors in concrete," he said. He added, however, that the logistics of such an operation -- getting all the necessary trucks on site, for example -- would present a real challenge for plant operator Tokyo Electric Power Co (TEPCO).

ZeroHedge: Fukushima Vs Chernobyl - Compare And Contrast - Zero Hedge predicted from the very beginning that unfortunately Fukushima would end up being an as serious, if not more so (just consider the extremely high concentration of human and other capital in proximity to Fukushima: unlike the USSR there is little to none displacement capacity) catastrophe than Chernobyl. Yesterday's final hike in the incident severity level, which started at 4 and hit the highest , 7, is simply yet another confirmation of this although in absolute terms Fukushima still has a ways to go before surpassing the Soviet accident: Choernobyl leaked a total of 5.2 million terabecquerels of radioactivity, Fukushima has so far leaked 500,000 terabecquerels. In the meantime what little progress is being made is promptly shadowed by all the incremental bad news that keep being disclosed (the most recent debacle is the discovery of extremely radioactive strontium just off the plant). Yet to be sure, there are differences between the two situation. Courtesy of Reuters, here are the key comparisons and differences between the two.

Hitachi, GE Submit Plan to Dismantle Fukushima Nuclear Plant - Hitachi Ltd. and General Electric Co. submitted a plan to dismantle the crippled Fukushima Dai-Ichi plant they helped build as Japanese engineers battle to contain the worst nuclear crisis since Chernobyl. The proposal, which also involves Exelon Corp. and Bechtel Corp., was submitted April 8, said Yuichi Izumisawa, a Tokyo-based spokesman at Hitachi, Japan’s second-largest maker of nuclear reactors. The Hitachi-led proposal will vie against plans from groups led by Toshiba Corp. and Areva SA as Tokyo Electric Power Co. begins preparing to clean up a nuclear disaster that’s led to the evacuation of hundreds of thousands of inhabitants.

Temperatures rise at No.4 spent fuel storage pool - The Tokyo Electric Power Company, or TEPCO, says the water temperature in the spent fuel storage pool at the No. 4 reactor in the crippled Fukushima nuclear plant has risen to about 90 degrees Celsius. It fears the spent fuel rods may be damaged. TEPCO took the temperature on Tuesday using an extending arm on a special vehicle. It found the temperature was much higher than the normal level of under 40 degrees. To cool the fuel, TEPCO sprayed 195 tons of water for 6 hours on Wednesday morning. The company thinks the pool's water level was about 5 meters lower than normal, but 2 meters above the fuel rods. TEPCO believes the water level is likely to rise by about one meter after the water spraying on Wednesday. TEPCO says high levels of radiation at 84 millisieverts per hour were detected above the water surface, where radiation is rarely detected.

Potential dispersion of the radioactive cloud over The Northern Hemisphere… This animation displays a potential dispersion of the radioactive cloud (Caesium 137 Isotope) after a nuclear accident in reactor Fukushima I. The continuous release rate is very uncertain, thus the calculations have to be interpreted qualitatively. Dispersion in the near surface level (Level 1), in appr. 2500 m height (Level 12) and in appr. 5000 m height (Level 16).

Radiation risks from Fukushima ‘no longer negligible’ - The risks associated with iodine-131 contamination in Europe are no longer "negligible," according to CRIIRAD, a French research body on radioactivity. The NGO is advising pregnant women and infants against "risky behaviour," such as consuming fresh milk or vegetables with large leaves.In response to thousands of inquiries from citizens concerned about fallout from the Fukushima nuclear disaster in Europe, CRIIRAD has compiled an information package on the risks of radioactive iodine-131 contamination in Europe.The document, published on 7 April, advises against consuming rainwater and says vulnerable groups such as children and pregnant or breastfeeding women should avoid consuming vegetables with large leaves, fresh milk and creamy cheese. The risks related to prolonged contamination among vulnerable groups of the population can no longer be considered "negligible" and it is now necessary to avoid "risky behaviour," CRIIRAD claimed.

Japan Nuclear Crisis Goes Global - Radiation is spreading around the world as a small nuclear wasteland grows near the heart of Japan. The desperate struggle to restart the crippled reactors' own cooling systems in order to bring them under control is producing little to no results, and is shrouded in uncertainties.  Powerful aftershocks of the level nine earthquake that triggered the crisis threaten to obliterate what little progress has been achieved. Economic and political shock waves are similarly difficult to predict, but will likely also be felt strongly around the globe.  These are some of the main updates on the Fukushima crisis from the past week or so. On Tuesday, the Japanese government raised its assessment of the severity of the crisis by two notches simultaneously, from level five to level seven, the highest on the International Nuclear and Radiological Event Scale (INES), on par with the worst nuclear disaster in the history of the world, that in Chernobyl in 1986.  According to the International Atomic Energy Agency (IAEA), a level seven accident indicates a "major release of radioactive material with widespread health and environmental effects requiring implementation of planned and extended countermeasures".

How nuclear apologists mislead the world over radiation - Soon after the Fukushima accident last month, I stated publicly that a nuclear event of this size and catastrophic potential could present a medical problem of very large dimensions. Events have proven this observation to be true despite the nuclear industry's campaign about the "minimal" health effects of so-called low-level radiation. That billions of its dollars are at stake if the Fukushima event causes the "nuclear renaissance" to slow down appears to be evident from the industry's attacks on its critics, even in the face of an unresolved and escalating disaster at the reactor complex at Fukushima. Proponents of nuclear power – including George Monbiot, who has had a mysterious road-to-Damascus conversion to its supposedly benign effects – accuse me and others who call attention to the potential serious medical consequences of the accident of "cherry-picking" data and overstating the health effects of radiation from the radioactive fuel in the destroyed reactors and their cooling pools. Yet by reassuring the public that things aren't too bad, Monbiot and others at best misinform, and at worst misrepresent or distort, the scientific evidence of the harmful effects of radiation exposure – and they play a predictable shoot-the-messenger game in the process.

Radioactive Human Embryos: Our Nuclear Legacy? -To put lipstick on the pig of radioactive fallout, we hear from nuclear cheerleaders that common activities like watching TV and airline travel also expose us to radiation. True enough, although they never mention that airline pilots and flight attendants do have higher rates of breast and skin cancer.[3]But equating those very different types of radiation is like equating the damage of being hit with ping pong balls (photons) with being hit by bullets (beta particles). Your TV doesn't shoot bullets at you. Even if your TV was only shooting a few bullets per show, you probably wouldn't watch much TV. Furthermore, the damage done by these radioactive "bullets" can vary tremendously depending on which organs are hit. To carry the analogy one step further: spraying a few bullets into a large crowd can hardly be considered safe for everyone in the crowd, even if the ratio of bullets per person is very low.  Bioaccumulation causes an increasing concentration of many contaminates as one moves up the food chain. That's why beef is much higher in dioxins than cattle feed, tuna fish have much higher mercury than the water they swim in and fetal blood has higher mercury levels than maternal blood.[4]Radioactive iodine, cesium and strontium, all beta emitters, become concentrated in the food chain because of bioaccumulation. At the top of the food chain, of course, are humans, including fetuses and human breastmilk.

Guest Post: No, The Gulf Oil Spill Is NOT Old News - While the Japanese nuclear crisis might upstage the Gulf crisis, it hasn’t gone away. As the Wall Street Journal notes today: Vladimir Uiba, head of Russia’s Federal Medical-Biological Agency… compared the contamination of seawater by the Fukushima complex with an oil spill in the Gulf of Mexico by BP PLC last year, and said, “The BP oil spill has caused far more serious impact on the environment than the Fukushima accident” ….  Gulf residents are still getting sick, the number of dolphins and whales killed by the spill appears to be many times higher than officials previously believed. Dead turtles are washing up in Mississippi. And see these photos from my favorite photographer, Julie Dermansky:

What's Up With Oil Prices? - Oil prices in New York remain north of $110 this morning--the highest in three years. What’s behind the spike in prices? There's no shortage of opinion, and it's not necessarily in agreement. For some perspective, several oil analysts opine on what's happening via a fresh round of interviews, courtesy of Integrity Research Associates. Here are some excerpts: Matt Smith, Summit Energy: “The recent rise in crude has predominantly been a risk premium added to prices rather than a change in supply.” Peter Zeihan, STRATFOR: “The majority of it is driven by speculative activity.” James L. Williams, WTRG Economics: “Inventories are high, which should be a bearish indicator for prices. However, there is a legitimate war and revolution supply interruption risk premium, which increases every time there is a potential problem in an exporting country, and this supply interruption risk premium tends to be greater the lower our spare capacity is.

Surprised by Gas Price of $4 a Barrel? Try $8.35 in Germany - While American drivers are spooked by $4-per-gallon gasoline prices in the U.S., they may be shell-shocked on other continents like Europe. In London, gas was $8.17 per gallon in March, and in Istanbul, Turkey the price was $9.63, according to DailyFinance. Leah McGrath Goodman, author of "The Asylum: The Renegades Who Hijacked the World's Oil Market," said at least two factors contribute to the variance in global gas prices. First, countries that produce their own oil have lower prices. Second, different governments choose to subsidize or tax citizens for purchasing gas.  "Every country is different, obviously," Goodman said. "Some countries have amazing subsidies. In Libya, even with its conflict, its low price has a lot to do with the fact that the government can choose to charge people a lot less."

Are Oil Prices Driven by Speculators? - Fascinating chart above via David Wilson of Bloomberg.It very much suggests that while Speculators may not have been the prime mover on the 2008 Oil peak, the specs seem to be a very large portion of the current push. By comparing the net number of contracts owned by non-commercial oil traders (Source: Commodity Futures Trading Commission).Crude 5.8% the first two days of this week, suggested that speculative demand for oil may be declining.

The Contango Game: How Koch Industries Manipulates The Oil Market For Profit - In recent weeks, gas prices around the country have surged to levels unseen since the 2008 oil spike. However, market fundamentals are not driving the nearly $4.00/gallon gas prices. In fact, under the Obama administration, oil production is at record highs and there isadequate global supply of crude. As Commodity Futures Trading Commission (CFTC) commissioner Bart Chilton has explained, rampant oil speculation, which is at its highest level on record right now, is to blame for current prices. While much of the attention on oil speculators has rested on the backs of investors and commodity traders, the petrochemical conglomerate Koch Industries occupies a unique role in manipulating the oil market. Koch has little business in the extraction process. Instead, Koch focuses on shipping crude oil, refining it, distributing it to retailers — then speculating on the future price. With control of every part of the market, Koch is able to bet on future prices with superior information. As Yasha Levine notes, Koch along with Enron pioneered a number of complex financial products to leverage its privileged position in the energy industry.

BP Alaska president pleads for lower state taxes -Alaska must lower its state oil production taxes to attract the investment needed to boost dwindling flow in the Trans Alaska Pipeline System, the president of BP's Alaska unit told a pro-industry group Thursday. "I will stake my career and my reputation that this will make a big difference to Alaska and it will be good for all Alaskans," BP Exploration (Alaska) President John Minge said. Alaska's North Slope holds enough untapped oil to continue production for decades, he said. "I absolutely see 50 years more," he said. But without a major change to the state taxes, Alaska's oil patch faces a grim future, said Minge, whose company operates Prudhoe Bay and other large North Slope oil fields. It is one of the three major oil producers in Alaska and holds a 47 percent ownership share of the Trans Alaska Pipeline System. Flow through TAPS, currently averaging a little less than 640,000 barrels per day, is the lowest sustained level since the system began operating in 1977, he noted. Oil flow peaked in 1988 at over 2 million barrels per day.

Republicans push bills to boost offshore oil drilling - Republican lawmakers in the House of Representatives on Wednesday pushed a trio of bills through a congressional committee that would boost offshore oil drilling and ease some regulations on oil companies. Republicans said the bills would reverse the Obama administration energy policy of the last two years that they claimed has reduced domestic oil production and made the United States more reliant on foreign suppliers and vulnerable to oil price spikes. "Congress must take action to increase energy production," said Representative Doc Hastings, who chairs the House Natural Resources Committee that approved the three bills. The legislative action comes as oil and gasoline prices are soaring and the Energy Department forecasts U.S. oil production in the Gulf of Mexico will decline by 190,000 barrels per day this year and in 2012.

Oil and trouble - THE IMF is rolling out its World Economic Outlook today, and it has already made public two analytical chapters of the report. One is on trends in the market for oil and the potential impact of rising prices on global output. Here's the summary text: The persistent increase in oil prices over the past decade suggests that global oil markets have entered a period of increased scarcity. Given the expected rapid growth in oil demand in emerging market economies and a downshift in the trend growth of oil supply, a return to abundance is unlikely in the near term. This chapter suggests that gradual and moderate increases in oil scarcity may not present a major constraint on global growth in the medium to long term, although the wealth transfer from oil importers to exporters would increase capital flows and widen current account imbalances. Adverse effects could be much larger, depending on the extent and evolution of oil scarcity and the ability of the world economy to cope with increased scarcity. Sudden surges in oil prices could trigger large global output losses, redistribution, and sectoral shifts. There are two broad areas for policy action. First, given the potential for unexpected increases in the scarcity of oil and other resources, policymakers should review whether the current policy frameworks facilitate adjustment to unexpected changes in oil scarcity. Second, consideration should be given to policies aimed at lowering the risk of oil scarcity.

Oil prices new worry for outlook: IMF - The International Monetary Fund (IMF) has warned that rising commodity prices, particularly oil, pose a threat to the strengthening global economic recovery. In its latest World Economic Outlook, the IMF says downside risks continue to outweigh upside risks to a recovery that is gaining strength, albeit in an unbalanced way. New downside risks are building on account of commodity prices, notably for oil, and related geopolitical uncertainty, as well as overheating and booming asset markets in emerging market economies, the Washington-based institution says. IMF economic counsellor Olivier Blanchard says that inflation may well be higher for some time but the IMF's latest forecasts suggest it will not have a major adverse effect on growth.

Crude Oil Futures Decline From 30-Month High as IMF Cuts Growth Forecasts...Oil fell from a 30-month high after the International Monetary Fund cut its growth forecasts for the U.S. and Japan, indicating high oil prices pose a risk to global economic expansion.  Crude tumbled as much as 1.1 percent as the IMF’s World Economic Outlook predicted higher oil prices and the pace of job gains will restrain the U.S. economic recovery. Oil also fell after the African Union said Libyan leader Muammar Qaddafi agreed to a cease-fire plan.  The IMF “clearly engendered some downward price pressure across a number of financial markets, including crude oil,” said Jason Schenker, president of Prestige Economics, an energy advisory firm in Austin, Texas. “We’re looking at pretty solid global growth, it’s just a deceleration of growth.”

EIA sees more demand, higher prices for gasoline -- U.S. drivers will consume more gasoline this summer, but they will also pay $1.10 a gallon more for the privilege, the Energy Information Administration said Tuesday in its short-term outlook report. Retail prices are forecast to peak at $3.91 a gallon in early summer, and average $3.86 a gallon during the driving season, which started April 1 and will end Sept. 30. Prices averaged $2.76 a gallon last summer. The agency also projected a 0.5% increase in gasoline consumption compared to the previous summer. With the projected increase in gasoline prices, vehicle fueling costs for the average U.S. household will be $825 higher this year than in 2010.

"Shouldn't we be taxing gas more heavily?"-  The essential problem is that the heavier my vehicle, the safer it is for me and the more dangerous it is for you.  Now, if we could all commit to smaller lighter cars, we'd pay less for our cars, have better gas mileage, and be no less safe, since when it comes to car-on-car collisions, its mainly relative size that matters.This sets up a classic prisoner's dilemma in which it's smart for one and dumb for all to buy bigger, heavier vehicles. That basic tension is pretty well known, I think. What Anderson and Auffhammer did was measure, with apparent extraordinary accuracy, the size of the external cost of extra vehicle weight.  That is, they estimated how much more likely someone is to die in a car accident if the opposing vehicle weighs a little more.  I'm going from memory here, but I recall the number was something like a 50% increase in the odds of fatality for a 1000 lb. increase in vehicle weight.  They estimated this using a huge database of actual vehicle-on-vehicle collisions and the estimate seemed amazingly robust. Using EPAs measure for the value of a statistical life (something like $5.8 million/life) and information on vehicle mileage, there were able to convert that weight externality into a near-equivalent gasoline tax.  That tax didn't exactly match an appropriate tax on weight, but it turned out to be extremely close. The take home number:  $1/gallon. 

U.S. airlines may set record for fuel costs in Q1  (Reuters) - U.S. airlines may set a record for fuel costs when they report quarterly results in coming weeks, paying about $3 billion more this year so far and muddying what had been a strengthening recovery. Estimates calculated by the Air Transport Association show that fuel as a percentage of operating expenses could hit between 35 and 40 percent, compared with the high-water mark of 36 percent set in the third quarter of 2008. "We've got to be awfully close to that," John Heimlich, the trade group's chief economist, told Reuters in an interview. "That wouldn't be established, though, until we see them report out." The ATA projects the 2011 first-quarter fuel bill will be about $3 billion higher than for the year-ago period -- a rise from $8.8 billion to $11.8 billion, or about 35 percent.

Gas Prices Rise, and Economists Seek Tipping Point - Gas prices are approaching record highs, but so far most Americans do not appear to be drastically cutting back their driving or even their spending as they did in 2008. The question, economists agreed, is what happens if prices continue to go up and remain high. Prices for a gallon of regular unleaded gas are topping $4 at more service stations nationwide, revisiting the bleak territory of three years ago, when the average price for a gallon of regular gas reached a peak of $4.11 on July 17, 2008, according to the Oil Price Information Service... “Once we cross the $4 threshold, the pain will become more palpable, and it is going to show up more noticeably in the reduction in future consumer spending,” said Bernard Baumohl, the chief global economist for the Economic Outlook Group. He predicted that “spending on discretionary goods will be diminishing as the price of gasoline keeps moving higher.”

As OPEC sleeps, oil nears the tipping point - Last week, crude oil launched like an artillery rocket over the $113 handle to close at a high of $113.48. Aside from  Moammar Gadhafi's attacks on Libya's oilfields, there are also concerns about upcoming elections in Nigeria -- another important oil exporter in Africa. As I discussed in a recent MSN Money column, the oil supply situation is extremely tight. Any disruption of the more than 2 million barrels per day coming out of the Niger River delta will have a huge impact on prices. For more, review my column here. The trouble is OPEC -- the cartel that holds the world's spare production capacity -- doesn't seem worried as soaring crude oil pushes the economy to the brink. Consumer confidence is already plunging fast. Instead of reassuring statements and a proactive policy stance, we're getting just the opposite. Iraq's deputy prime minister, along with the oil minister of the United Arab Emirates, indicated to a conference in Paris recently that OPEC saw no need to respond the latest price rise by increasing output. The minister, Hussain al-Shahristani, said, "We have not seen any serious impact on world growth." And thus, they don't feel like they need to act, since oil at $113 only further pads the coffers of oil producers in the Middle East and elsewhere. Deutsche Bank economists have flagged oil at $125 a barrel as the economy's breaking point, a level that would push us back into recession. We're getting awfully close.

IEA: March Oil Supply Down 0.7mbd - The IEA has released their summary of March oil supply.  The key point is this: Global oil output fell 0.7 mb/d to 88.3 mb/d in March on reduced Libyan crude supply. Non-OPEC production rose 0.2 mb/d to 53.3 mb/d, even as unrest and strikes in Yemen, Oman, Gabon and Ivory Coast shuts in an average 0.1 mb/d of crude in March and April. Non-OPEC 2010 supply is left at 52.8 mb/d, while stronger Canadian production lifts the outlook by 0.1 mb/d to 53.7 mb/d for 2011. OPEC crude supply fell by 890 kb/d in March to 29.2 mb/d, on a near-70% drop in Libyan output. Effective OPEC spare capacity stands at 3.91 mb/d, with Saudi Arabia accounting for 3.2 mb/d. The ‘call on OPEC crude and stock change’ is cut by 0.4 mb/d for 1Q11 to 29.8 mb/d. The average ‘call’ for 2011 is also 29.8 mb/d, unchanged from 2010 but 0.6 mb/d above March OPEC production. The sharp fall in OPEC output suggests that Saudi Arabia did little or nothing to compensate for the loss of Libyan output. So, as so often, we are left to wonder what the 3.2mb/d of supposed Saudi spare capacity really means if it's nowhere to be seen whenever the world actually needs it. It's sort of the unicorn of the oil world - the horn keeps getting longer in the telling, but we've never actually seen one.

Saudi Arabia did not make up for Libyan Oil -  The OPEC MOMR came out late yesterday, but it adds to the picture from the IEA report mentioned yesterday morning.  In particular, I can now present revised graphs for total liquid fuel production.  Here's the last three year view (not zero scaled): Note that the rise that's been going in since last fall has now been abruptly interrupted by the Libyan situation, and total oil production has fallen by about 0.5mbd.  This is about 0.6% of global production, but given that the world economy has been growing rapidly and needing about another 0.5mbd/month, the shortfall over what would have happened in a counterfactual world with no Middle Eastern unrest is more like 1.2% of global production. In terms of the price production picture, this has put us much more into territory akin to the 2005-2008 oil shock. We can put situation almost entirely down to two things: the fact that Libyan production has plummeted, and that Saudi Arabia has made no significant move to compensate.  In fact, Saudi Arabia slowed down production increases that it had been making in prior months. 

Where is Saudi’s excess capacity when you need it? - Exactly how high do oil prices have to rise before Saudi Arabia will start using it supposed three million barrels of spare capacity?  Does Saudi Aramco intend to stay on the sidelines watching Brent crude prices - already $120 per barrel - climb as high as $200 (U.S.) per barrel, while blaming speculators for distorting market fundamentals?  Or is the emperor simply wearing no clothes? Is Saudi Arabia, and by extension, OPEC, already tapped out, barely struggling to make up for the loss of 1.3 million barrels of oil exports from a now non-producing, war-torn, Libya?  Even less credible than the country’s official estimates of its reserve capacity is the notion Saudi Arabia could bring down today’s triple-digit oil prices but instead chooses not to  No country in the world is more dependent on a healthy global oil market than Saudi Arabia, which pumps out nine million barrels a day. And it is no mystery a further increase in oil prices will lead to another oil-induced recession and a subsequent collapse in world oil demand and prices.

IEA: Oil Market to Tighten Further - In two indications that high oil prices are denting demand, the International Energy Agency pointed to signs that growth in the world's demand for oil may be slowing and Saudi Arabia reversed a late-February production increase because of tepid demand for the extra barrels. The oil market looks set to tighten further this year, with oil inventories shrinking as supply disruptions and political tensions in the Middle East and North Africa look set to persist for months, the International Energy Agency said Tuesday. However, although today's supply picture could imply rising prices, there are preliminary signs that the current high cost of oil may already be reducing demand growth, the IEA said. "The surest remedy for high prices my ultimately prove to be high prices themselves," it said.

Chapter 3 of the IMF's World Economic Outlook, Oil Scarcity, Growth & Global Imbalances -The persistent increase in oil prices over the past decade suggests that global oil markets have entered a period of increased scarcity. Given the expected rapid growth in oil demand in emerging market economies and a downshift in the trend growth of oil supply, a return to abundance is unlikely in the near term. This chapter suggests that gradual and moderate increases in oil scarcity may not present a major constraint on global growth in the medium to long term, although the wealth transfer from oil importers to exporters would increase capital flows and widen current account imbalances. Adverse effects could be much larger, depending on the extent and evolution of oil scarcity and the ability of the world economy to cope with increased scarcity. Sudden surges in oil prices could trigger large global output losses, redistribution, and sectoral shifts. There are two broad areas for policy action. First, given the potential for unexpected increases in the scarcity of oil and other resources, policymakers should review whether the current policy frameworks facilitate adjustment to unexpected changes in oil scarcity. Second, consideration should be given to policies aimed at lowering the risk of oil scarcity.

TheOilDrum: Crude Oil and Liquids Capacity Additions: 2011-2015 - This analysis is designed to demonstrate why we believe that productive capacity relative to consumption will be sufficiently tight over the next several years to elevate crude prices to the investment cost of the marginal unit, about $100 per barrel. In fact, if annual non-OECD demand continues to grow at 3.5 percent or 1.4 Mb/d per annum, we expect another episode of deficit comparative inventory that will elevate spot prices above this mid-cycle price.  We model expected net global crude oil and liquids capacity additions from 2011 to 2015 by examining announced and underway projects and by estimating underlying decline in the extant resource base. Our modeled volumes do not include natural gas liquid (NGL) production unless stated otherwise. Also, we provide several scenarios to account for uncertainty in eventual volumes, on-line schedule and decline rate.  As seen in Exhibit 1, average gross new supply additions of 1.0 and 3.0 Mb/d per year have occurred since 2003. But our forecast here has annual additions moving from 2.2 Mb/d in 2011 to 1.2 Mb/d in 2015. Net of the annual decline of the underlying world resource base, about 3.6 percent, our forecast shows at loss of productive capacity of 1.8 to 2.2 Mb/d to 2015.  

Believers in 'peak oil' preparing for when a fill-up costs $100 - Hawaii may have only a few electric cars so far, but state law requires large public parking structures to have at least one charging station. As many as 320 of the 2-foot-tall systems are expected to be installed across the state. It is part of the answer to the looming crisis of peak oil, which is defined as the time when global oil extraction reaches its maximum rate and the rate of extraction declines. Of course, like those who resist the idea of global warming, there are those who scoff at the fears of peak oil. But we aren't making dinosaurs anymore, and even bellowing "Drill baby, drill!" doesn't magically make hydrocarbons appear. For some, the idea of peak oil is still too hard to swallow, but the International Energy Agency (IEA) in its October 2010 "Annual World Report" stated that peak oil actually "arrived in 2006." Richard Ha, a Big Island farmer and environmentalist, says the Earth is likely approaching or already at a state of peak oil. "There will come a time when producing one barrel of oil will cost the same as one barrel is worth," Ha said.

What Japan's Disaster Tells Us about Peak Oil - For large parts of eastern Japan that were not directly hit by the tsunami on 11 March 2011, including the nation’s capital, the current state of affairs feels very much like a dry-run for peak oil. This is not to belittle the tragic loss of life and the dire situation facing many survivors left without homes and livelihoods. Rather, the aim here is to reflect upon the post-disaster events and compare them with those normally associated with the worst-case scenarios for peak oil. The earthquake and tsunami affected six of the 28 oil refineries in Japan and immediately petrol rationing was introduced with a maximum of 20 litres per car (in some instances as low as 5 litres).  On 14 March, the government allowed the oil industry to release 3 days’ worth of oil from stockpiles and on 22 March an additional 22 days’ worth of oil was released. The Tokyo Electric Power Company (TEPCO), which serves a population of 44.5 million, lost one quarter of its supply capacity as a result of the quake, through the closedown of its two Fukushima nuclear power plants (Dai-ichi and Dai-ni), as well as eight fossil fuel based thermal power stations. Subsequently, from 14 March 2011 onwards, TEPCO was forced to implement a series of scheduled outages across the Kanto region (the prefectures of Gunma, Tochigi, Ibaraki, Saitama, Tokyo, Chiba, and Kanagawa).

Saudi oil response to Libya ‘limited’ - Saudi Arabia increased its oil output in response to Libya’s crisis by less than had been thought, producing fewer than 9m barrels per day in March, according to the International Energy Agency. In its latest oil market report, released on Tuesday, the IEA described the response by Opec, the oil-producers’ cartel, to the loss of Libyan supply as “limited”. The turmoil in Libya has taken more than 1m b/d off the market, leading to an overall fall in production among Opec’s 12 members of 890,000 b/d between February and March. Saudi Arabia, which controls about three-quarters of Opec’s spare capacity, raised its output in the first quarter of 2011, producing an average of 310,000 b/d more than during the final quarter of 2010. But Saudi production remained flat in February and March, averaging 8.9m b/d in both months. Earlier estimates suggested that the kingdom had raised its output by more than 400,000 b/d compared with the end of 2010 to reach a total above 9m b/d.

NBC’s Brokaw: Saudis ‘So Unhappy' With Obama They Sent Emissaries to China, Russia Seeking Enhanced Ties - Reporting from Baghdad, Iraq yesterday, NBC’s Tom Brokaw said the Saudi Arabian monarchy is “so unhappy with the Obama administration for the way it pushed out President Mubarak of Egypt” that it has sent senior officials to the Peoples' Republic of China and Russia to seek expanded business opportunities with those countries.After remarking on the difficulty of establishing democracy in the Middle East, Brokaw said that Defense Secretary Robert Gates “will face some tough questions in this region about the American intentions going on now with all this new turmoil, especially in an area where the United States has such big stakes politically and economically.”Warning Signs for Copper Market - As analysts and investors seek clues to the strength of the recent rally in commodity prices, some are taking a closer look at the copper market, where warning signs are emerging. Copper prices have almost quadrupled after a two-year rally, largely driven by the belief that China, the world's largest copper user, has an insatiable appetite for the metal.  But Chinese buyers are now facing the double whammy of higher copper prices and the government's aggressive moves to tighten credit. Moreover, evidenceevidence has recently surfaced of previously unreported copper stockpiles, a sign that much of the purchased copper hasn't been put to use.

Peak Uranium - And Other Threats To Nuclear Power - We have nearly all heard about Peak Oil despite doubts on very basic elements like how we define “oil” compared with oil condensed from natural gas, but the possibility of there simply not being enough uranium to keep present and planned reactor fleets going is new.The case for Peak Uranium is made by several nuclear experts, such as Dr Michael Dittmar of CERN  In brief, Dittmar argues that the most worrying problem is the belief that uranium is plentiful. It is in fact quite a rare mineral, with a crustal abundance about 4 parts per million, ranking it far less abundant than many minerals and metals we consume in large quantities. The world’s 440-odd nuclear plants (Japan having lost several, making it difficult to give an exact number in operation) ate through about 68,000 tons of uranium in 2010, but uranium mining industry supplied only 55,000 tons. The rest came from secondary sources including mining stocks, reactor building company stocks, reprocessed “spent” fuel, recycled atomic warheads, and military uranium sources, among others.

Steel Price Softens As Supply Solidifies - The world's steelmakers are increasing output despite softer demand, pushing down prices.  In a few countries, notably Brazil and the U.S., steel prices remain high, thanks to steady demand in the former and limited output in the latter. Many U.S. plants that had shut down or pared production during the recession haven't yet gone back online fully. AK Steel Holding Corp. in February said it would increase, by $50 a short ton, prices for all of its carbon, flat-rolled steel products, a move followed by other U.S. steelmakers. The world's steelmakers are increasing output despite softer demand, pushing down prices. ... But U.S. prices—especially for hot-rolled steel, a key component used in most steel products—could be headed lower too

Commodities boom may be over, warns Goldman Sachs  -- Oil and metal prices fall after trader predicts drop in demand for copper and platinum. Oil and metal prices fell back on Tuesday after Goldman Sachs warned that the recent commodities boom is probably running out of steam. Four months after advising its clients to put their money into crude oil, copper, cotton and platinum, the Wall Street firm declared that they should close the trade. The "CCCP basket", as it is dubbed, has delivered profits of around 25% since December, when Goldman tipped it. "Although we believe that on a 12-month horizon the CCCP basket still has upside potential, in the near term risk-reward no longer favours … the basket," said Goldman's commodity team in a research note. Goldman argued that the high oil price, and the economic damage caused by the Japanese earthquake and tsunami, is likely to dent demand for copper and platinum.

The Economic Impact of Natural Disasters -- Due to rising population, climate change, and environmental degradation, natural disasters are increasing in frequency. They are also becoming costlier and deadlier, according to Swiss Re, a reinsurance company. In 2009, natural disasters cost insurers about $110 billion. In 2010, the cost was double that, at $218 billion. According to the World Bank, there are several factors that affect a country’s vulnerability to natural disasters: its geographic size, the type of disaster, the strength and structure of its economy, and prevailing socioeconomic conditions. In a globalized economy, all these factors, as well as others, also play into how the world’s finances will be affected.

Japan Update: Cars, Cigarettes, And Confidence In Short Supply - Emerging statistics are telling us how hard Japan’s economy was hit by the earthquake and tsunami a month ago, plus two big aftershocks. With expected total casualties of over 25,000, plus all sorts of primary and secondary economic disruption to a manufacturing-intensive economy, it’s no surprise that the disaster is reaching far into the lives of the Japanese, and rearranging trade patterns all over the world. U.S. automakers could be looking at a boost in sales, if only for a few months.The Wall Street Journal reports a sharp drop in attitudes of Japanese retailers and other service providers. No surprise there, but it’s a step back to the dark days of Japan’s recent deep recession: People are buying food, but holding off on restaurants, hotels and hairdressers. While some of the decline is due to the Japanese tendency to self-restraint, or jishuku, there are still supply disruptions and power outages.

Japan's Crisis: One Month Later - Japan is just in the beginning of the long term recovery effort from the earthquake that struck off northeastern Japan on March 11. The crisis alert level from the damage to the Fukushima Nuclear Power Plant has now been raised to the highest level of impact, the same as the Chernobyl Russia incident 25 years ago. Searchers continue to look for the dead, displaced Japanese live in shelters, protests continue over use of nuclear power, Japan's economic engine may be disrupted, the massive cleanup of debris is just underway, aftershocks are feared and many continue to mourn those who were lost. The photos collected here are from one month to the day of the quake and beyond. -- (36 photos total)

Japan Sees Greater Hit to Economy Than First Estimated on Nuclear Crisis -Japan’s Economic and Fiscal Policy Minister Kaoru Yosano said the March 11 earthquake may result in a larger hit to the economy than previously seen, indicating a greater appetite for stimulus one month after the disaster. “The damage to the economy may be bigger than we initially expected,” Yosano told reporters today in Tokyo. “In addition to disruptions in the supply chain, we have the added seriousness of the situation with the nuclear power plant,” he said, referring to the Fukushima Dai-Ichi crisis that officials today said has a severity rating matching Chernobyl in 1986.  Prime Minister Naoto Kan may need to turn to additional debt sales or to tax increases in coming months, given opposition at the central bank to funding deficit spending. A record of the Bank of Japan’s meeting last month showed today that officials refrained from any discussion of specific additional monetary stimulus they would be prepared to endorse.

BOJ’s Shirakawa Gives Update on Economic Impact of Japan Crisis - Japan’s central bank Governor Masaaki Shirakawa gave a tempered but positive update on his country’s progress in dealing with a string of disasters that struck last month.  Mr. Shirakawa, governor of the Bank of Japan, said Wednesday at the Council on Foreign Relations that the damage to Japan isn’t likely “to have a significant impact on the global economy.” Shortly after the disaster, the Bank of Japan stepped up its asset purchases, in a bid to shore up stability and confidence in financial markets. The BOJ also took steps to increase liquidity and get funds to quake-stricken areas. A week after the disaster, central banks around the world collectively acted to contain the yen, which surged following the quake, potentially jeopardizing Japan’s recovery. With regard to mending the country’s broken supply chain, Mr. Shirakawa cited economists who forecast a remedy will be in place by June or July, but declined to speculate himself. “Japanese manufacturers have no choice but to lose out to foreign competitors,” in Korea and Taiwan who are stepping in to provide key parts, such as microcomputers used in cars and smartphones, he said.

Japan’s Economy Takes a Hit - On Wednesday, the Cabinet downgraded its outlook for the economy, the first such move in six months. Its regular survey of industry, conducted in late March, showed a record drop in confidence, to the lowest point since early 2009. A regular Reuters survey has shown similar results. Comments by government ministers suggest that the government is forecasting—hoping for—a short shock to the economy, followed by a strong rebound later in the year. That's generally what happens following a major natural disaster, and it's the path that Japan followed after the Kobe earthquake in 1995. There are grounds, however, to argue that this time might be different. First, the crisis isn't over. How quickly can the situation at the nuclear power plant in Fukushima be brought under control? TEPCO remains unable to provide any kind of timeline. How bad will the blackouts be during summer? Keidanren, Japan’s leading business association, is trying to get the government to accept voluntary power cuts, rather than the mandatory outages planned. Will there be more damaging aftershocks? That's the forecast.

Japan mulls 'disaster bonds' - Japan is considering issuing special bonds to fund reconstruction following last month's massive earthquake and tsunami, and imposing a new tax to repay the debt, according to a report.The new bonds would be used to finance the rebuilding of infrastructure, creating jobs and supporting local businesses, the Nikkei newspaper reported on Saturday, without citing sources.Prime Minister Naoto Kan's embattled government has already said it is eyeing an initial budget of more than four trillion yen ($48 billion) to finance the first wave of reconstruction in Japan's devastated northeast. The total cost from collapsed or damaged houses, factories and infrastructure such as roads and bridges is estimated at 16-25 trillion yen over the next three fiscal years, according to the Cabinet Office.

Japan More Vulnerable to Loss of Manufacturing Jobs - One reason Japan is more vulnerable to an exodus of manufacturing jobs is that it has more manufacturing to lose than the U.S. and some other developed economies. Japan’s corporate managers place a high premium on the benefits of producing things domestically by preaching the mantra of mono-zukuri, or making things well. Japanese manufacturers have tried to strike a delicate balance of keeping production at home even as the population shrinks. Even the inexorable rise of the yen against the dollar has become a cost of doing business — more annoyance than an insurmountable obstacle. Japan has a 13% market share in shipbuilding, third after South Korea and China. About two thirds of the machine tools made in Japan are exported, according to the Japan Machine Tool Builders’ Association. As a result, Japan’s economy remains more dependent on manufacturing than almost any other developed country. In Japan, 17.2% of workers were in manufacturing in 2009; in the U.S., about 10% are, a tally by the U.S. Bureau of Labor Statistics show.

Manufacturing compensation costs in China, 2008 - Even as China ascends as a major economic player in the global economy, its position in the international landscape of labor costs has not changed dramatically. As measured in U.S. dollars, Chinese hourly labor compensation costs in manufacturing were roughly 4 percent of those in the United States and about 3 percent of those in the Euro Area in 2008. [Chart data] China's costs were roughly on par with those of some developing countries like the Philippines, but lagged noticeably behind those of other countries like Mexico and Brazil. Average hourly compensation costs in China were $1.36 in 2008. China's hourly compensation costs remain far below those of many of its East Asian neighbors like Japan ($27.80) and Taiwan ($8.68), but are roughly on par with those of others like the Philippines ($1.68)

China changes how it reports GDP - The National Bureau of Statistics is bringing China’s gross domestic product data closer to international standards, but will likely ignite some controversy along the way. On Friday, the bureau is scheduled to issue economic data for the first quarter, and for the first time it will include a measure known as the quarter-on-quarter seasonally adjusted annualized rate of growth of gross domestic product. Why does that matter? Well, GDP is the most complete measure of the size and growth rate of the Chinese economy, and China’s GDP growth rate—which has consistently hit 10% or more a year—has been the most potent symbol of its rapid rise. But till now, the growth rate of China’s GDP each quarter has not been measured in a way that is comparable with that of the U.S. or other major economies. That’s because the statistics bureau has compared the size of GDP in a given quarter to its size in the same quarter a year earlier—a “year-on-year” measurement—whereas the U.S. Bureau of Economic Analysis, for example, compares GDP in a given quarter to the one immediately preceding it, adjusts it to take into account seasonal factors, and multiplies by 4 to come up with an “annualized” figure.

China: Q1 2011 GDP Grew At 9.7% - The first quarter 2011 gross domestic product (GDP) of China increased by 9.7% over the same period of last year in real term, vs. the estimate of 9.4% and 9.8% in the last quarter of 2010.  For the first time, the National Bureau of Statistics releases the quarter-on-quarter GDP growth, which was 2.1% for the first quarter.  Industrial production for March increased by 14.8% over a year ago, vs. estimate of 14.0%.  Retail Sales in March increased by 17.4% over a year ago, vs. estimate of 16.5%. Overall a very strong set of numbers, but there are worries.  Inflation has hit another high in March, highlighting the continued risk of overheating, and it appears that the economy isn’t slowing down enough to curb prices.  Fixed asset investment rose 25% in the first quarter of 2011 compared to the same period of last year, which is still a high rate.  Within that, real estate investment rose 34.1% in first quarter.  Although there was a trade deficit in the first quarter, the trade balance actually bounced back to positive in March, and foreign exchange reserve continued to accumulate.  In short, the economy is probably rebalancing, though it appears to be happening too slowly. 

China’s Bad Growth Bet - Roubini - China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible – most likely after 2013 – China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium. Despite the rhetoric of the new Five-Year Plan – which, like the previous one, aims to increase the share of consumption in GDP – the path of least resistance is the status quo. The new plan’s details reveal continued reliance on investment, including public housing, to support growth, rather than faster currency appreciation, substantial fiscal transfers to households, taxation and/or privatization of state-owned enterprises (SOEs), liberalization of the household registration (hukou) system, or an easing of financial repression.

Changing China’s Growth Path - Spence - China is poised to begin its transition from middle-income to developed-country status. Relatively few economies (five to be precise, all in Asia: Japan, South Korea, Taiwan, Hong Kong, and Singapore) successfully managed this transition while sustaining high growth rates. No country of China’s size and diversity has ever done so. China’s 12th Five-Year Plan, adopted last month, provides the road map it will follow.  Yet it is not really a plan; rather, it is a coherent interconnected set of policy priorities to support the economy’s structural evolution – and thus to maintain rapid growth – over the period of the plan and beyond. So a great deal is at stake, both internally and externally. Growth in the world’s emerging economies now depends on China, the main export partner for a growing list of major economies including Japan, South Korea, India, and Brazil.

China's foreign reserves: Who wants to be a triple trillionaire? (The Economist) BY THE end of last year, China's foreign-exchange reserves amounted to $2.85 trillion. Although China ran a rare trade deficit in the first quarter of this year on April 14th the country's central bank released new figures showing that its reserves at the end of March had soared above $3 trillion. China’s central bank has a lot of money but not a lot of imagination. It keeps a big chunk of its reserves in boring American government securities. That means it can count on getting its dollars back. But it frets about how much those dollars will be worth should America succumb to inflation or depreciation. So what else could China do with the money? Instead of the dollar, China might fancy the euro. China could buy all of the outstanding sovereign debt of Spain, Ireland, Portugal and Greece, solving the euro area’s debt crisis in a trice. And it would still have almost half of its reserves left over.

China's forex reserves pass 3 trillion USD for first time - China's foreign exchange reserves exceeded the mark of 3 trillion U.S. dollars for the first time at the end of March 2011, representing an increase of 24 percent from a year earlier and maintaining its top position around the world, according to data released by the central bank on April 14. The foreign exchange reserves increased by 197 billion U.S. dollars in the first quarter. China's foreign exchange reserves were up by as high as 197 billion U.S. dollars in the first quarter of 2011 from 2.9 trillion U.S. dollars at the end of 2010, with 84 billion U.S. dollars in January, 60 billion U.S. dollars in February and 53 billion U.S. dollars in March. According to the method released by the State Administration of Foreign Exchange (SAFE) for estimating the amount of "hot money," the flow of "hot money" is a result of subtracting the trade surplus, a net inflow of foreign direct investments (FDI) and overseas investment returns of the foreign exchange reserves from the increment in the foreign exchange reserves.

China's $3 Trillion Reserves Show G-20 Task as Wen Resists Yuan Pressure - China’s foreign-exchange reserves exceeded $3 trillion for the first time, highlighting global imbalances that Group of 20 finance chiefs aim to tackle at meetings in Washington. China’s currency holdings, the world’s biggest, swelled by $197 billion in the first quarter to $3.04 trillion, the central bank said yesterday. New loans were a more-than-estimated 679.4 billion yuan ($104 billion) in March, it said. Premier Wen Jiabao’s policy of controlling the currency, along with trade surpluses and flows of capital into the fastest-growing major economy, have boosted the reserves by $1 trillion in two years

Overheating China - AS MY colleague points out, India may have grown faster than China in 2010. China can still hold its own in the eye-popping growth-rate category, however. In the first quarter of 2011, the Chinese economy grew at a 9.7% pace, and inflation rose at 5.4%. Both figures were above expectations, and inflation is becoming a serious problem within China. Food prices are rising at a 12% annual rate, which is an unsettling development in a country where households spend a third of their budget on food items. Why isn't China doing more to contain inflation? Bob Davis explains: The [People's Bank of China], indeed, often doesn't know about monetary decisions until it is informed by higher-ups, Chinese officials say.Under the current system, interest rates or bank-reserve requirements must be approved by China's State Council, a group of 10 headed by Premier Wen.  More fundamental questions of monetary and exchange-rate policy are decided by the Communist Party's nine-member Politburo Standing Committee, headed by China's president and party chief, Hu Jintao.

IMF: Chinese Yuan Substantially Weaker Than Fundamentals Warrant - Although China’s currency policy is boosting domestic economic activity, it could be putting the global economic recovery at risk if Beijing doesn’t allow faster appreciation of the yuan, the International Monetary Fund warned Monday. Rebalancing of global demand remains a major concern for the sustainability of the recovery over the medium term, the IMF said in its 2011 World Economic Outlook. Unless the U.S. soon begins earnestly getting its fiscal house in order, China allows the yuan to appreciate at faster pace and European and emerging nations implement ambitious economic restructuring, “little progress will be made with respect to rebalancing and the recovery will stand on increasingly hollow legs,” the IMF said. The fund said China’s currency “still appears substantially weaker than warranted by medium-term fundamentals.” Beijing’s policy of building its foreign exchange reserves, necessary to keep a tight lid on the value of the yuan, appears to be motivated by a desire to preserve competitiveness, the IMF said. The comments will likely give rhetorical ammunition to the U.S., which has been trying to get its largest trading partner to hike its currency to equalize the trade relationship.

China set to become exporter of inflation - A few years back we talked of the China Effect - where the rapid transformation of the Chinese economy and the huge growth of high volume low labour-cost manufacturing was acting as a supply-side cause of lower prices in the world economy. A decade or more of this may be coming to an end as the Chinese economy risks experiencing several more years of higher inflation and slower economic growth.  This article from the Telegraph “China inflation threat underestimated” reports on research from economists at Legal & General Investment Management that pinpoints of some of the inflationary impulses in the Chinese economy - notably the surge in credit, higher food and other commodity prices and the rapid rise in wage costs in urban areas as cities find the pool of cheap labour from the countryside is not running behind demand and creating labour shortages.  This piece from the Economist provides a super chart on what has happened to Chinese wage costs in recent times.  China’s tricky wage dynamics Despite recent increases - wages in Chinese manufacturing in 2008 were still only about 4 per cent of those in the USA.

China reports first quarterly trade deficit in seven years - China’s first quarterly trade deficit in seven years may ease pressure on the world’s biggest exporter to allow faster appreciation of the yuan. Asia’s largest economy had a deficit of $1.02 billion in the first three months of the year compared with a surplus of $13.9 billion a year earlier, the customs bureau said on its website today. Imports jumped 32.6 percent to a quarterly record of $400.7 billion, helped by stronger domestic demand and higher global commodity prices, the bureau said.  China’s trading partners, including the U.S., say faster yuan appreciation is needed to help address global imbalances that contributed to the financial crisis. Premier Wen Jiabao said last month exchange-rate reform must be gradual to maintain social stability, and that boosting domestic demand is the best way the nation can contribute.

Trade Deficit decreased in February to $45.8 billion - The Department of Commerce reports[T]otal February exports of $165.1 billion and imports of $210.9 billion resulted in a goods and services deficit of $45.8 billion, down from $47.0 billion in January, revised. February exports were $2.4 billion less than January exports of $167.5 billion. February imports were $3.6 billion less than January imports of $214.5 billion.  The first graph shows the monthly U.S. exports and imports in dollars through January 2011. Both imports and exports declined slightly in February (seasonally adjusted). Still exports are now above the pre-recession peak.  The second graph shows the U.S. trade deficit, with and without petroleum, through February.  The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.The petroleum deficit decreased in February as the quantity declined even as import prices continued to rise - averaging $87.17 in February, up from $72.92 in February 2010. The trade deficit with China was $18.8 billion (NSA) in February. The oil and China deficits are essentially the entire trade deficit.

India Inflation Quickens to 8.98%, Increasing Pressure on Interest Rates -- India’s inflation accelerated more than economists estimated in March as the cost of fuel and manufactured goods rose, putting pressure on policy makers to raise interest rates in Asia’s third-largest economy.  The benchmark wholesale-price index rose 8.98 percent from a year earlier after an 8.31 percent gain in February, the commerce ministry said in a statement in New Delhi today. That exceeded all 28 estimates in a Bloomberg News survey, where the median forecast was for an 8.36 percent increase.  Expansion in India’s $1.3 trillion economy has boosted consumer demand and spurred manufacturing, car sales and credit growth, stoking price risks and prompting the central bank to raise rates eight times since early 2010. Inflation in the first quarter has exceeded the Reserve Bank of India’s forecast that price increases would be 8 percent by the end of March this year.

Inflation, Here and There (Wonkish) - Krugman - Inflation is now a big and growing problem in emerging economies. Why? It’s the combination of the liquidity trap in advanced economies and the unwillingness of emerging nations to let their currencies rise. The story runs like this: in advanced economies, the collapse of housing bubbles and the overhang of debt run up during the Great Moderation is leading to persistently depressed demand, even with very low policy interest rates. The result is low returns to investment; not much point in adding to capacity when you’re not using the capacity you have. Meanwhile, emerging economies have plenty of demand, in part because they’re emerging, in part because they didn’t share in the big debt runup. So what the world economy “wants” to do is have large capital flows from North to South, and, correspondingly, large current account deficits in the emerging world — which would, of course, help the advanced economies recover. But since the doctrine of immaculate transfer is false, the transmission mechanism by which capital flows get translated into trade balances has to involve a rise in the relative prices of goods and services produced in the emerging nations. The natural and easy way to get that would be via currency appreciation; but governments don’t want to see that happen. So the invisible hand is in effect getting the same result — gradually — by pushing up nominal prices in these countries.

BRICS demand global monetary shake-up, greater influence (Reuters) - The BRICS group of emerging-market powers kept up the pressure on Thursday for a revamped global monetary system that relies less on the dollar and for a louder voice in international financial institutions.  The leaders of Brazil, Russia, India, China and South Africa also called for stronger regulation of commodity derivatives to dampen excessive volatility in food and energy prices, which they said posed new risks for the recovery of the world economy.  Meeting on the southern Chinese island of Hainan, they said the recent financial crisis had exposed the inadequacies of the current monetary order, which has the dollar as its linchpin.  What was needed, they said in a statement, was "a broad-based international reserve currency system providing stability and certainty" -- thinly veiled criticism of what the BRICS see as Washington's neglect of its global monetary responsibilities.

Economics Focus: BRIC Wall - In 2010 China overtook a limping Japan as the world’s second-largest economy. It looks sets to catch America within a decade or two. India and Brazil are growing rapidly. The past few years have reinforced the suspicion of many that the story of the century will be the inexorable rise of emerging economies. If projections of future growth look rosy for emerging markets, however, history counsels caution. The post-war period is rich in examples of blistering catch-up growth. But at some point growth starts to disappoint. Gaining ground on the leaders is far easier than overtaking them. Rapid growth is initially easy because the leader has already trodden a clear path. Developing countries can borrow existing technologies from countries that have already become rich. Advanced economies may be stuck with obsolete infrastructure; laggards can skip right to the shiniest and best. Labour productivity soars as poor economies shift workers from agriculture to a growing manufacturing sector. And rapid income growth among young workers boosts savings and fuels investment. But the more an emerging economy resembles the leaders, the harder it is to sustain the pace. As the stock of borrowable ideas runs low, the developing economy must begin innovating for itself.

Do the BRICS believe in free markets? - Today on China's Hainan Island, the leaders of the BRIC countries – Brazil, Russia, India and China – met for their latest summit, which this time included South Africa. These now regular blabber-fests have arisen (in theory) to better promote the views of the emerging world on key global issues like economic reform, security and climate change. The idea seems to be to create sort of a developing nation G-7. But generally, these summits have been real snoozers, producing statements of such vague blandness that they make G-20 resolutions read like Harry Potter page-turners. But should we expect anything more? Though all developing economies, the original BRICs in fact have little in common. Unlike the old G-7, which were uniformly liberal democracies and advanced economies, the BRICS have vastly divergent political systems, levels of development, economic interests and foreign policy priorities. They also have some serious disputes among themselves. Brazil has been an open critic of China's distorted currency regime, while China and India spar over border disputes. Yet out of this recent summit, something has emerged on which they all can agree – a preference for controlling markets when it suits them. As the BRICS gain in influence, that thinking could drastically reshape global economic policy.

Putin Says W.T.O. Rules Don’t Apply - Prime Minister Vladimir V. Putin of Russia interrupted a speech on the economy by a deputy minister on Friday to sharply rebuke him for suggesting that the government should abide by World Trade Organization rules on import tariffs. Russia is not yet a member of the global trade group but is applying to join. Trade officials in both the United States and the European Union say Russia has met nearly all requirements after cracking down on pirating, agreeing to stricter rules against counterfeited pharmaceutical drugs and negotiating with Finland on tariffs for round-log timber exports, a particular sticking point. So it came as a surprise when Mr. Putin interrupted the speech of a deputy minister of economy, Andrei Klepach, to say he would order Russian officials not to obey W.T.O. rules.

Martin Wolf: Doha is weakening the WTO - I am copying here Martin Wolf's comments on the Doha Round, as expressed on the CUTS-tradeforum. I find them remarkable because Martin simultaneously explodes three myths about the trade regime. First, he dismisses the "bicycle theory" of trade negotiations, which says that the trade regime will fall back into protectionism unless you keep liberalizing it. Second, he states that the fundamental motives behind Doha were political rather than economic. And third, he argues that Doha is doing more damage than good to the multilateral trade regime.

The Breakdown Of Economic Expansion In The 21st Century - Although the International Monetary Fund (IMF) assures us that global economic growth is proceeding apace, there are good reasons to believe that GDP numbers recording that growth exaggerate the economic expansion underway. The United States has experienced a statistical recovery in which GDP grows due to the enormous fiscal and monetary stimulus, but without creating many jobs, and despite the fact that the housing market is only a pale semblance of what it once was. Growth in the European Union is jeopardized by the debts of several of its member countries. Japan's economy was languishing before the devastating earthquake. The emerging economies are said to be booming, but the growth numbers in China are suspect. Do newly constructed ghost cities where no one lives count? Or newly constructed ghost malls? We have witnessed a substantial breakdown of economic expansion in the developed (OECD) economies, and there are good reasons to believe that whatever growth the emerging economies are experiencing will not last forever as many optimists predict. Does it seem plausible that China's future growth will be as vigorous and longlasting as Japan's long expansion (circa 1960-1989) after World War II?

Global imbalances and the paradox of thrift - The global imbalances are widely seen as a problem, especially by the US government and US economists. People critical of global imbalances often blame the surplus countries and their currency manipulation. This column introduces a Policy Insight that argues that the basic problem has been the inefficiency of the world’s financial sector, which led to unfruitful investment in the US rather than productive investment in emerging economies.

Is inequality a hazard or an indicator? - AN INTERESTING IMF analysis finds that growth spells tend to last longer in places with relatively low levels of income inequality: We found that high “growth spells” were much more likely to end in countries with less equal income distributions. The effect is large. For example, we estimate that closing, say, half the inequality gap between Latin America and emerging Asia would more than double the expected duration of a “growth spell”. Inequality seemed to make a big difference almost no matter what other variables were in the model or exactly how we defined a “growth spell”. Inequality is of course not the only thing that matters but, from our analysis, it clearly belongs in the “pantheon” of well-established growth factors such as the quality of political institutions or trade openness. The upshot? It is a big mistake to separate analyses of growth and income distribution. A rising tide is still critical to lifting all boats. The implication of our analysis is that helping to raise the lowest boats may actually help to keep the tide rising!

Sweden Predicts Surplus, Plans Tax Cuts as Economy Beats Europe - Sweden predicted a budget surplus and raised its economic growth forecast for the next two years, allowing Europe’s fastest-growing economy to cut taxes while the rest of the region struggles through austerity cuts.  The largest Nordic economy will expand 4.6 percent this year, compared with the 4.8 percent predicted last month, the government said in its spring fiscal policy bill released today in Stockholm. The government raised its forecast for growth in 2012 and 2013 and predicted a widening surplus over the next four years as unemployment falls. “In a situation when many other countries are experiencing austerity and weak economies, Sweden’s economy is growing stronger,” Finance Minister Anders Borg said. “We must use this to ensure that more people find work and that welfare initiatives can be implemented.”

ASML Bookings Drop 27% as Japan Earthquake Hurts Some Chipmakers - ASML Holding NV, Europe’s biggest chip-equipment maker, said first-quarter orders fell 27 percent as clients took more time to place orders because of shorter delivery times and disruptions by the Japanese earthquake. The Veldhoven, Netherlands-based company booked systems worth 845 million euros ($1.2 billion), compared with 1.17 billion euros a year earlier. Orders dropped 63 percent from the record fourth quarter.“This is without any doubt lower than expected,” analysts were looking for the order intake to exceed 1 billion euros in the first quarter. “Also the outlook for the second quarter seems weak.” ASML, the maker of machines that produce chips for Apple Inc.’s iPods and Nokia Oyj’s mobile phones, said that some of its customers are taking more time before placing orders because of a shorter lead time for its most advanced immersion-systems. Some semiconductor manufacturers also delayed deliveries in the wake of the March 11 Japanese earthquake.

Iceland Rejects Icesave Debt Deal - Icelandic voters appeared Sunday to have rejected a government-approved deal to repay Britain and the Netherlands $5 billion for their citizens' deposits in the failed online bank Icesave. Partial results of a national referendum suggested the "no" side had gained more than half the votes -- a reflection of enduring anger over the economic havoc wrought by Iceland's risk-taking bankers. Full results were not due until later Sunday. With partial results in from all six of Iceland's constituencies, the no side had almost 57 percent of the votes and the yes camp just over 43 percent. Icelanders overwhelmingly rejected a previous deal in a referendum last year. The government hoped a "yes" vote on an improved offer passed by parliament would finally resolve a dispute that has caused friction among the three countries and complicated Iceland's recovery from its economic collapse in 2008.

Icesave ‘no’ vote wins in Iceland referendum - Voters in Iceland gave a resounding "no" in a referendum on whether to approve a renegotiated deal to compensate Britain and The Netherlands over the 2008 collapse of Icesave bank, according to near-complete results quoted Sunday by RUV public radio.With 70 percent of the vote counted, the "no" vote was 57.7 percent against 42.3 percent "yes", a result that will embarrass the Reykjavik government. Around 230,000 voters were asked to decide on the proposal to pay back Britain and the Netherlands 3.9 billion euros ($5.6 billion) they had spent on compensating 340,000 of their citizens who lost money when Icesave, an online bank, went under at the height of the global financial crisis

Iceland rejects UK repayment deal - Broadcaster RUV estimated that 63pc of voters rejected the deal in a referendum, while the Icelandic prime minister and finance minister admitted the "no" side "appears" to have won.  The "no" side had campaigned that the agreement would put "an incredible financial burden on Icelanders" and insisted "there never was any legal obligation for Icelandic citizens to shoulder the losses of a private bank". The first proposal to pay back the UK, and also the Netherlands, was overwhelming rejected in January 2010 by 93pc, as the island nation's population objected to being punished for the woes of their banking industry and the high interest rates of 5.5pc.  Under the new deal, proposed following talks between the countries, Iceland would have paid a lower interest rate of 3.3pc to Britain.

Why Iceland Voted ‘No’  - About 75% of Iceland’s voters turned out on Saturday to reject the Social Democratic-Green government’s proposal to pay $5.2 billion to the British and Dutch bank insurance agencies for the Landsbanki-Icesave collapse. Every one of Iceland’s six electoral districts voted in the “No” column – by a national margin of 60% (down from 93% in January 2010).The vote reflected widespread belief that government negotiators had not been vigorous in pleading Iceland’s legal case. The situation is reminiscent of World War I’s Inter-Ally war debt tangle. Lloyd George described the negotiations between U.S. Treasury Secretary Andrew Mellon and Stanley Baldwin regarding Britain’s arms debt as “a negotiation between a weasel and its quarry. The result was a bargain which has brought international debt collection into disrepute … the Treasury officials were not exactly bluffing, but they put forward their full demand as a start in the conversations, and to their surprise Dr. Baldwin said he thought the terms were fair, and accepted them. … this crude job, jocularly called a ‘settlement,’ was to have a disastrous effect upon the whole further course of negotiations …”

UK to sue Iceland for £2.3bn debt to savers - Britain and the Netherlands plan to sue Iceland for €4 billion (£3.5 billion) paid to Icesave depositors after the country voted against the payment of the money for a second time in a referendum. Almost 60% of Icelanders voted against a plan to pay the British and Dutch governments money owed for bailing out savers of the Landsbanki online savings arm in 2008, Britain is owed £2.3 billion of the total amount. The ‘no’ vote comes despite a revision of the original repayment plan to allow a longer period in which to pay and a reduced interest rate.  The Icelandic people do not believe the taxpayer should pay for the failure of a private institution. Britain and the Netherlands have now said there is no more room for negotiation and will now turn to the international courts to decide who is liable to pay.  ‘We have an obligation to get that money back and we will continue to pursue that until we do,’ said UK Treasury minister Danny Alexander (pictured).

Is the Iceland referendum a harbinger for popular unrest in the eurozone? - The people of Iceland voted on Saturday to reject a newly negotiated plan to repay €4bn to the UK and the Netherlands to compensate the two countries for losses incurred by the bankruptcy of Icelandic banks. This is the second No vote on the Icesave scheme, and has met with severe disappointment by British and Dutch ministers. For us in the eurozone, the interesting question is whether the popular uprising in Iceland might be replicated in the eurozone, especially in Ireland, where a majority of the population wants the bank bondholders to share the costs.  The case now goes to the Luxembourg-based EFTA court, according to the FT. Icelandic politicians have pledged that Iceland will pay its debt, but the electorate had ruled that they want the court to make a ruling on the issue. The FT also remarked that the No Vote might endanger Iceland’s bid to join the EU.  The Dutch finance minister, Jan Kees de Jager, expressed outrage over the referendum result, according to Reuters, saying the decision was bad for Iceland, and bad for the Netherlands.

The ECB Tightens - The European Central Bank just announced an increase its policy interest rate from 1% to 1.25%.  Their decision highlights some current monetary policy dilemmas. Core versus overall measures of inflation.  As ECB President Jean-Claude Trichet explained: The increase in inflation rates in early 2011 largely reflects higher commodity prices. Pressure stemming from the sharp increases in energy and food prices is also discernible in the earlier stages of the production process. Those worries are ill-founded, says Paul Krugman: Overall eurozone numbers look very much like US numbers: a blip in headline inflation due to commodity prices, but low core inflation, and no sign of a wage-price spiral.  Former Fed governor Larry Meyer had a nice op-ed on the subject in the Times last month. Inflation targeting and "credibility." A temporary energy-price driven inflation spike may be harder for an inflation-targeting central bank like ECB to brush off.  The goal of inflation targeting is to make monetary policy credible - i.e., to keep inflation expectations anchored - but it only works if the announced target is met. The optimum currency area problem.  Or, really, the problem that the euro zone isn't one.  The single currency means a single monetary policy.  That works if the economies of Europe move together, but they aren't.  This map of unemployment rates across Europe illustrates the problem:

ECB policy is tight - has been for some time - Rebecca Wilder - The ECB dove in and hiked its policy rate by 25 basis points to 1.25%. I had the pleasure of listening to Wolfgang Munchau on Thursday, and he reiterated what I reluctantly understood: the ECB's strict inflation target is ridiculously simple for such a complex region; but more importantly, the Governing Council is just itching to tighten. Eurointelligence blog highlights the various interpretations of the ECB's shift in policy: Thomas Mayer at Deutsche Bank suggests that the ECB's normalization is appropriate, while David Beckworth and others (links at Beckworth's site) are more sympathetic to the impact on the Periphery. They highlight that relative price fluctuations could facilitate the much-needed redistribution of capital flows (i.e., the current account); and furthermore, that ECB policy is even too tight for the core (a google translation of Kantoos Economics). Yours truly has written extensively about this - among others, here's one, another, and another. Who's right? Ultimately time will tell. But I do suspect that we haven't seen the end of this crisis. The ECB is squeezing out liquidity when more liquidity is needed. Furthermore, the core remains subject to export shocks via external demand; and there's building evidence that global growth will slow (see this excellent post on global PMIs by Edward Hugh).

Euro Divergence (Slightly Wonkish) - Just as a reminder that others have problems: Cezmi Dispinar points me to a post with an excellent chart about the problem of adjustment: Sorry that it’s in German — but it shows unit labor costs, with 1999=100. The red line is Germany; the black line is France; the green line is the ECB’s 2 percent inflation target; the blue line is southern Europe. The point is that the introduction of the euro led to a period of low interest rates in southern Europe, triggering an inflationary boom; when the boom ended, they were left uncompetitive with northern Europe. And the ECB is in effect demanding that all the removal of that competitiveness gap take place via deflation in the south, none of it through inflation in Germany.

Portugal Told to Make Deeper Deficit Cuts to Gain $116 Billion EU Bailout - Europe’s wealthy countries looked to Portugal to resolve the year-old euro debt crisis by coming up with “sustainable” deficit cuts to pave the way to an 80 billion-euro ($116 billion) bailout. Confident that Portugal will be the last aid seeker, German Finance Minister Wolfgang Schaeuble pushed the feuding political parties in Lisbon to unite behind an austerity package in the thick of an election campaign. “It’s up to Portugal to decide,” Schaeuble told reporters today at a meeting of European finance officials in Godollo, Hungary. Portugal “has to deliver sustainable measures for reducing the deficit.” Finnish Finance Minister Jyrki Katainen, a candidate for prime minister, said Portugal must enact deficit cuts that go beyond the measures rejected last month in parliament. “The package must be really strict because otherwise it doesn’t make any sense,” Katainen said yesterday. “The package must be harder and more comprehensive than the one the parliament voted against.”

In Portugal Crisis, Worries on Europe’s ‘Debt Trap’ - Greece, Ireland and now almost certainly Portugal have access to hundreds of billions of dollars in emergency European aid to help them avoid defaulting on their debt. But the aid is really just more loans, and the interest rates the countries are paying, if a little lower than what the private market would charge, are still crushingly high. Their pile of debt gets bigger with every passing day. Moreover, the price of these loans has been a commitment to slash government spending far more drastically than domestic leaders would have the desire or the political power to accomplish on their own. Economists call this “the debt trap.” Escape from the trap generally requires devaluation of the currency, which cannot happen among countries that use the euro as their common currency, or strong economic growth, which none of the three have, or some kind of bankruptcy process, which all three forswear. Add to that the likelihood that all three countries will continue to have unstable governments until they figure a way out, and Europe’s financial crisis has no end in sight.

Political fights could unravel Portugal's bailout - Portugal's massive rescue package was threatened on two sides Monday -- by internal political squabbling and external bailout fatigue among EU neighbors -- and it was not clear whether the proposed deal would last. A delegation from the International Monetary Fund, European Central Bank and European Commission -- bodies that will raise the estimated euro80 billion ($115.5 billion) bailout for Portugal and oversee its use -- is expected in Lisbon on Tuesday for initial talks. European finance ministers agreed Friday to put up the money Portugal needs, making it the third country in the 17-nation eurozone to accept a huge financial lifeline. But a domestic political spat about the scope and terms of the bailout package threaten to slow negotiations and prolong Portugal's plight just as it needs to honor debt repayments amounting to more than euro11 billion ($15.9 billion) over the next three months.

Finland may block Portugal aid - There is increasing doubt about whether national political systems are ready to back up the European Council’s “whatever it takes” pledge, as political support for the European rescue packages is waning in Finland, where parliamentary approval is required for the aid to Portugal to become effective. Reuters quotes a finance ministry as putting the odds of a veto at 50%, adding that the situation ahead of Sunday’s election was getting tighter by the day. Finland’s political parties are vying to prove their eurosceptic credentials in the view of the rising popularity of the True Fins. Polls suggest that half of Fins are opposed to a bailout. The Social Democrats are now campaign for a debt restructuring of Portugal.  The Bundestag’s revolt against the ESM procedures also gathered pace (see our morning briefing yesterday), after the publication of the court of auditor’s report warning that the liabilities for the German taxpayers may be higher than foreseen so far. MPs are angry at Wolfgang Schäuble for informing only the Bundestag’s budgetary committee on negotiations around the EMS and not the entire parliament. There are tricky issues to be solved. There is for example the five-year period in which the participating states contribute the paid in capital with a total volume of €80bn. In case of a big rescue operation the states may have to top up their participation. It is unclear what the parliament’s influence would be. The parliamentarians of the three coalition parties CDU, CSU and FDP want to work closely together to get a maximum of Bundestag involvement.

Piggybacking - THE announcement on April 6th that Portugal will become the third euro-area country to receive a bail-out was not well received in Germany. As the largest euro-area country, it is contributing 20% or €52 billion ($75 billion) to the bail-out funds of the three profligate countries, mostly via the euro area's European Financial Stability Facility. This is dwarfed however, by Germany's banks' exposure to the three countries, which totals €230 billion. Only around 12% of this is sovereign or public debt, but a sovereign default could easily lead to a slew of domestic bank and corporate defaults too, to which the country is far more exposed. America is also footing a cool €14 billion via the IMF's contribution to the bail-out. But it too seems to have got good value for money—its banks have a total of €144 billion in exposure to the three countries.

Forget The Bailout: The Euro Rate Rise Could Finish Off Southern Europe - Portugal's request for a bailout from its European partners may have been the most visible symptom of the crisis in the eurozone, but the decision taken in Frankfurt to press ahead with an interest rate rise could have a far more corrosive impact on the euro's long-term future. Analysis by City consultancy Fathom, obtained exclusively by the Observer, shows that because the interest rates on the bailouts provided to Greece and Ireland track the European Central Bank's lending rate, a series of increases could push these countries – and Portugal – into default. "If the ECB continues to tighten policy, the impact is clear: default is more or less inevitable," says Fathom director Danny Gabay. "Greece is clearly on an unsustainable path." Fathom also warns that Spain remains vulnerable, despite Madrid insisting last week that its economy is much healthier than Portugal's and its debts are much more manageable. Spanish banks must roll over debts worth more than 5% of GDP this year, and more than 9% in 2012, in addition to the government's financing needs. A two-point increase in the interest Madrid pays in the bond markets – much of which could come from the ECB, even without a further loss of confidence from bond investors – would, on Fathom's calculations, force Spain into a fiscal crisis.

ECB Rate Hikes could Kill Greece, Ireland, Portugal, and even Spain! - On Sunday, new analysis of the recent actions by the ECB was published in the Observer (Guardian). The British media outlet hired consultancy firm Fathom to evaluate the bailouts of different European member states and the possible outcome. The study concluded that the bailouts are not the biggest threat for Europe. The renewed hawkish stance by the ECB, which led to the recent interest rate hike, is far more dangerous! Via the Observer: Analysis by City consultancy Fathom, obtained exclusively by the Observer, shows that because the interest rates on the bailouts provided to Greece and Ireland track the European Central Bank’s lending rate, a series of increases could push these countries – and Portugal – into default' “If the ECB continues to tighten policy, the impact is clear: default is more or less inevitable,” says Fathom director Danny Gabay. “Greece is clearly on an unsustainable path.”

Greece, Ireland, Portugal Will Likely Restructure, Pimco's Kashkari Says -- Europe’s most-indebted countries will probably need to restructure their borrowings as bailouts fail to solve their fundamental challenges, Pacific Investment Management Co.’s Neel Kashkari said.  “Greece, Ireland, Portugal, simply have too much debt, more debt than their economies can afford,” Kashkari, head of new investment initiatives at Pimco, said today in an interview on “InBusiness with Margaret Brennan.” “It’s likely they’ll need to restructure or default. The question is, how do you do that in an orderly manner without causing contagion to Spain and other countries and causing chaos?”

The Road to the Euro Crisis - Krugman - Just a note: I see that some readers are confused when I talk about how the coming of the euro led to low interest rates in the European periphery. It’s actually very clear in the data: Eurostat  As the euro became a done deal, countries that had previously had to pay a large interest premium found themselves able to borrow on the same terms as Germany; this translated into a big fall in their cost of capital. The result was bubbles, inflation, and in the aftermath of the bubbles and inflation, what you see now.

Call for Low Rates Is Lost on Euro Zone - The International Monetary Fund appeared to warn the European Central Bank on Monday against further interest rate increases, saying that the euro area is still in a fragile state. The warning may not have much effect, though. The European bank’s president, Jean-Claude Trichet, emphasized last week that the central bank will not be swayed by outside pressure.  In its World Economic Outlook published Monday, the I.M.F. suggested that there is no reason to raise the benchmark interest rate “as long as inflation pressures remain subdued.”  That is in fact the case, the report said. In most countries, factories are still not operating at capacity, while higher prices for oil and other commodities are likely to be temporary.  “This argues for low policy rates for now to support the recovery and help offset the dampening short-term effects of fiscal consolidation on domestic demand,” the report said.

Germany Warns on Greek Debt, Defying Efforts to Snuff Out Crisis - Germany warned that deficit-scarred Greece might need more financial relief, reviving European debt concerns just as Portugal seeks an 80 billion-euro ($116 billion) aid package. German Finance Minister Wolfgang Schaeuble said it is unclear whether Greece, the root of the year-old debt crisis, will need another cut in its bailout rate or a further extension of repayment terms to return to fiscal health. "We, also the Greek government and the Greek colleague, can't say for good today whether that's enough," . "Whether that is enough and how this continues will have to be monitored closely." Germany's doubts conflicted with official assertions that Greece is on the right track, defying efforts to put an end to the crisis that threatened the survival of the euro, postwar Europe's signature economic achievement. Last week's increase in European Central Bank interest rates for the first time in almost three years throws a further cloud over weaker economies.

Just half of all Germans back Portugal rescue - A NARROW majority of Germans is in favour of the EU’s multi-billion-euro bailout package for crisis-hit Portugal, a poll suggested yesterday, with 90 per cent believing it would not be the last.  A poll for a German newspaper showed 50 per cent agreed with the EU’s decision to bail out debt-wracked Portugal to the tune of around €80bn (£70.7bn).  According to the survey, 45 per cent believed it was the wrong decision. However, nine out of 10 of those polled thought that Portugal would not be the last Eurozone country to fall, as speculation mounts that Spain could be the next country to need a bailout from Brussels.

Draghi’s chances of succeeding Trichet are “getting better by the day” - This is from Reuters, whose reporters have spoken to a number of officials in European capitals, and who all concur that Mario Draghi is now by far the leading candidate for the top job at the ECB. Even Germany is now supporting him, and the article says Angela Merkel has decided not to invest political capital in the search for an alternative. An unnamed German official is quoted as saying that they will not put up a candidate on the grounds that he is German. Another official from a small country confirmed that no opposition was ever heard from Germany. A French source has also corroborated that trend, saying Draghi’s chances were “getting better by the day”. There are still some French officials who express hope of a candidature of Christian Noyer, while Liikanen and Mersch are both no longer considered as candidates. Interestingly, the article also said that Klaus Regling apparently fell out of favour in Berlin due to some of his comments during the crisis. (We are not surprised by this development. Draghi is clearly so ideally suited to this job, and so clearly without rivals that it would be hard to block him. Interesting the comment that Merkel does not want to invest any political capital in nominating a German candidate. We also think that the European Council prefers a candidate with some political experience, given the strong interactions these days between the ECB and the European Council.)

Bundestag to torpedo a key element of the ESM deal - This is a cracker of a story in this morning’s FT Deutschland. Following a report by the German Court of Auditors (see below), CDU and FDP members of the Bundestag’s powerful budget committee want to break a key element in the ESM deal – that the ESM board, by a simple majority, can ask member state to provide additional capital, so-called callable capital. The Bundestag wants to subject the automatism to a vote in the Bundestag, which would torpedo a central idea of an ex-ante capitalisation rule. (We would add that this would probably kill the ESM’s AAA-rating, which depends on a dependable arithmetic relationship between the fund’s own capital and its lending). Under the ESM agreement, it would take a simple majority of the ESM’s governing board to demand an increase in capital, should one be needed. The FTD quotes the fiscal spokesman of the FDP as saying that the automatism was unconstitutional (a point on which he is, unfortunately, right in our view. We also interpret the Constitutional Court’s verdict on the Lisbon Treaty in the same way. For this reason we also expect the Court, in its ruling on the EFSF/ESM to place additional restrictions on the mechanism, which may fundamentally alter its nature.)

Portuguese, Greek Yields Rise to Records on Debt Concerns; Dollar Weakens - Bonds of Europe’s most-indebted nations fell, sending Portuguese and Greek yields to records, on concern countries will restructure debt. Stocks dropped as jobless claims rose in the U.S. and a senator called for a probe of Goldman Sachs Group Inc. Portugal’s five-year yields climbed as high as 10.49 percent, while the Greek 10-year yield topped 13 percent for the first time since at least 1998 and credit swaps on Greece signaled a 60 percent chance of a default within five years.  German Finance Minister Wolfgang Schaeuble told Die Welt newspaper that Greece may need to renegotiate its debt and Moritz Kraemer, head of S&P’s European debt evaluation team, said bondholders may see a 50 percent to 70 percent “haircut” on their securities in the nation restructures.

Greek, Portuguese Bonds Slump as Schaeuble Proposes Restructure - Greek and Portuguese bonds led a slump in the securities of Europe’s most indebted nations amid mounting investor concern that some may be forced to restructure their debts.  The declines pushed the yields on Greek and Portuguese 10- year bonds to euro-era records after German Finance Minister Wolfgang Schaeuble said that Greece may need to renegotiate its debt burden if an audit in June questions its ability to pay creditors. Standard & Poor’s said the risk of such an event has risen. Greek two-year yields climbed the most since January 27.  “Schaeuble’s comments bring the prospect of restructuring back onto the table,”“It gives the market plenty of time to fret. If we have to wait until June, there’s the prospect of event risk in the future, which leaves the market open to speculation and spread- widening.”  The yield on 10-year Greek debt jumped 36 basis points to 13.27 percent as of 4:38 p.m. in London, the highest since at least 1998 when Bloomberg began collecting the data. The two- year note yield surged as much as 103 basis points to 17.96 percent

Germany Would Back Greece Debt Restructuring, Hoyer Says - A Greek debt restructuring “would not be a disaster” and Germany would back a voluntary effort to ease the struggling euro member’s payment terms, Deputy Foreign Minister Werner Hoyer said. The euro and Greek bonds fell after his comments. The remarks by Hoyer were the most explicit by a European official showing a 110 billion-euro ($159 billion) bailout for Greece may fail to prevent the first default by a euro country. His message contrasts with Greek Prime Minister George Papandreou’s pledge to avoid a restructuring. Greece has “done a tremendous job in reforming the country,” Hoyer, who is minister for European affairs, said in an interview today in Berlin. “Whether all this is enough, whether the results will be there soon enough, is a different question. We are looking at the economic developments, the fiscal developments in Greece and we are worried.”

Greece May Need Debt Restructuring, Schaeuble Tells Die Welt - German Finance Minister Wolfgang Schaeuble said Greece may have to seek debt restructuring if an audit in June questions its ability to pay creditors, Die Welt reported, citing an interview.Greece would have to negotiate to ease its debt burden since creditors can’t be forced to take losses until Europe’s permanent rescue system for the euro starts up in mid-2013, the Berlin-based newspaper cited Schaeuble as saying in comments published today.“We will have to do something” if the review by the International Monetary Fund and European authorities in June raises doubts about Greece’s “debt sustainability,” Schaeuble was quoted as saying. “Then, further measures will have to be taken.”The comments echo Schaueble’s remarks at a meeting of finance ministers in Hungary last week. He told reporters April 9 that loan relief granted in March may be inadequate to restore Greece’s financial health, even as the officials ruled out debt restructuring.Yields on two-year Greek notes climbed to 17 percent today from as low as 6.62 percent in May 2010 after the bailout.

ECB raises stakes on Greek debt restructuring - Lorenzo Bini-Smaghi, the most prolific campaigner against default, told il Sole24 ore that the ECB had carried out an analysis on the potential impact of a Greek debt restructuring, and found it would imply the failure of a large part of the Greek banking system, as the Greek banks hold a large portion of the Greek sovereign debt. (Another reason is that Greeks would transfer all their deposit to foreign banks, a process that is already partially under way). At the point the Greek banks would no longer have access to ECB liquidity, and would have to end their support for the corporate sector. He said that since Greece does not have a primary balance, a default at this time would lead to the cessation of pension and other social payments. The Greek economy would collapse, with devastating economic and social consequences. He said the other countries should stop pushing Greece into a catastrophe. In what we would understand to be an indirect reference to Wolfgang Schäuble, he said that talk about restructuring had seriously negative effects on market sentiment.  Talk about Greek restructuring and the possibility of a Finnish No on a Portugal EFSF rescue package unsettled the bond markets, as peripheral debt came under heavy pressure, with Greek two year yields spiking to 17%. 10-year bond spreads (see table below) went up across the board.

Will German Push for Greece Restructuring Tank the Greek Banking System? - Yves Smith - Funny what a difference a few months makes. Whenever this blog would suggest that Greece, and potentially other eurozone members, might have to restructure their debts, the idea was treated by some readers as a nefarious euroskeptic plot, particularly since badmouthing embattled governments could worsen their conditions by raising their funding costs. It might now be accurate to upgrade discussion of a Greek default to being an Anglo-Saxon plot. Germany is now at a loggerheads with the ECB, since the German officialdom now appears to think that it’s better to restructure Greek debt now than lend money to it only to have to write it down in the not-too-distant future. That’s an astonishingly sensible position and contrary to the past political reflex to keep trying to kick the can down the road. Not that the German motivations are noble, mind you. Bloomberg tells us:Chancellor Angela Merkel’s deputies are raising what has been a taboo issue for European officials — a restructuring by a euro member — to show its unwillingness to contribute to more bailouts...Germany is the largest contributor to European Union rescue funds, which have been tapped by Ireland, Greece and Portugal.“This is part of a gambit in negotiations,” Schmieding said. “If Greece doesn’t get access to markets, the funds will probably run out sometime in 2012. That, I think, is the German message: Don’t count on us to add more money.”So the open question is: are the Germans really serious about a restructuring or is this just an effort (given known ECB opposition to a restructuring) to put the boot on Greece’s neck?

EURO GOVT-Greek 5-year CDS extend rise above 1100 bps (Reuters) -The cost of insuring Greek government debt against default extended their rise above 1,100 basis points on Thursday, hitting new record highs due to growing talk it will have to restructure its debt. Five-year credit default swaps (CDS) on Greek government debt were last 58 bps up on the day at 1,105, according to data monitor Markit. This means it costs 1.105 million euros to protect 10 million euros of exposure to Greek bonds.  "It's all about Greece, the talk of restructuring is pushing other sovereign spreads wider as well," said Markit analyst Gavan Nolan.  Portuguese 5-year CDS were 24 bps up on the day at 598 bps, while Spanish, Italian and Irish CDS also rose about 10 bps.

Inevitable, while delayed, remains inevitable - THE Financial Times' Jennifer Hughes writes: In an interview with the Financial Times, George Papaconstantinou said Greece needed more time to convince international investors of its commitment to reform its finances. Separately, Wolfgang Schauble, Germany’s finance minister, told Die Welt newspaper that, if a study already under way showed Greece’s debt levels were unsustainable, “further measures” would have to be taken. When asked what those could be, he ruled out any involuntary restructuring before 2013, but warned investors could face losses after that point. The comments were enough to reverse a recent rally in eurozone sovereign debt. Indeed they were. Both Greece and Portugal saw yields on their debt rise to new crisis highs. Irish and Spanish yields also leapt. Just last week, The Economist argued (again): [T]he debts of Greece, Ireland and Portugal are unpayable and must be restructured. With all three countries now being “rescued”, the politicians at Europe’s core should start work immediately on an orderly restructuring of their debt. That will require a boldness that Europe’s policymakers have lacked. But it is a prerequisite for drawing a line under the European debt mess.

Anger begins to infect Europe’s prosperous core - No sooner had Portugal succumbed to a bail-out than European Union officials were gearing up for “The Battle for Spain” – ensuring the eurozone’s fourth-largest economy is not consumed by the contagion that last week claimed its neighbour. But those concerned about the EU’s ability to fight that battle should turn to the other end of the continent, where Finland could this weekend elect the eurozone’s first truly Eurosceptic prime minister The collapse of Portugal’s government and the success of a hitherto unknown populist in Sunday’s Finnish elections may seem unrelated. But Timo Soini, head of the anti-EU True Finns party, was quick to the make the connection in an interview with the Financial Times earlier this year. “If the Portuguese thing comes before the Finnish elections, that will mean quite a fierce discussion and protest,”  “People just don’t get it, don’t want it.” It is a sentiment that appears to be spreading. Popular anger at bail-outs, austerity and general economic uncertainty has already toppled leaders on the eurozone’s periphery: first in Ireland, then Portugal and arguably Spain. Now, anger is beginning to infect Europe’s prosperous core, where mainstream parties are losing ground to populist outsiders playing on resentment and frustration triggered by austerity and falling living standards. In France, President Nicolas Sarkozy’s centre-right UMP party took a drubbing in regional elections last month amid a strong showing by the far-right National Front. In Belgium, Flemish nationalists have prevented the formation of a government for a year and, observers say, are likely to emerge even stronger if forced into another election. The minority Dutch government has relied on the anti-EU party of nationalist Geert Wilders to keep it in power for six months.

Moody's cuts Ireland rating to just above junk - Moody's on Friday cut its credit ratings on Ireland by two notches to just above junk status, citing an "expected decline" in government finances that is set to hamper the indebted nation's recovery. "Moody's Investors Service has today downgraded Ireland's foreign- and local-currency government bond ratings by two notches to Baa3 from Baa1," a statement said. It added that the outlook on the ratings "remains negative" -- meaning further downgrades are possible. Downgrades by ratings agencies like Moody's can ramp up borrowing costs on markets for those hit, making their funding problems more difficult to manage, while eurozone member Ireland is already struggling to service its huge debt. The new ratings for Ireland -- which recently needed an international bailout worth 85 billion euros ($123 billion) -- is just one notch above BB, or junk status.

Moody’s Cuts Ireland Rating Two Levels, Outlook Negative - Ireland’s credit rating was cut two levels by Moody’s Investors Service to the lowest investment grade as the government struggles to lower the budget deficit and restore economic growth.  Moody’s reduced the rating to Baa3 from Baa1, leaving the country’s outlook on negative, according to an e-mailed statement today. That’s the same rating as Iceland, Tunisia, Romania and Brazil. Standard & Poor’s on April 1 cut Ireland’s rating one level to BBB+ with a stable outlook. Irish taxpayers may spend as much as 100 billion euros ($145 billion) trying to solve Europe’s worst banking crisis as the country draws funds from last year’s bailout. Ireland is trying to convince investors at home and abroad it has finally plugged the hole in its lenders after four failed attempts following the collapse of the country’s property boom in 2007. Irish debt restructuring is not a “plausible scenario,”

Irish regulator says Anglo’s senior bonds at risk (Reuters) - Ireland may try to impose losses on senior bondholders in two defunct lenders if they need more capital, the banking regulator said on Wednesday, potentially putting the country on a collision course with the ECB. The Frankfurt-based European Central Bank, which is helping keep Irish lenders afloat, is opposed to Ireland hitting senior bondholders with any losses in case it sparks contagion within the euro zone, exacerbating the bloc's debt crisis.Matthew Elderfield, head of financial regulation at Ireland's central bank, said the government accepted the ECB view that it should not impose losses on senior bondholders in the country's four remaining lenders, but Anglo Irish Bank and Irish Nationwide, which are being wound down, were being viewed differently."Anglo and INBS (Irish Nationwide Building Society) possibly something will happen in the future but for the principle four banks going forward the government's position is quite clear," Elderfield told a Reuters Newsmaker event on Wednesday.

U.K. Retail Sales Plunged Most on Record in March, BRC Says -  U.K. retail sales dropped by a record in March as accelerating inflation squeezed households’ finances and concerns about job cuts prompted consumers to cut back, the British Retail Consortium said.  Sales at stores measured by value fell 1.9 percent from a year earlier, partly due to the timing of Easter in 2010, the London-based BRC said in a report today. That’s the biggest drop since the series began in 1995 and compares with a 1.1 percent gain in February. On a like-for-like basis, which excludes new store openings, sales fell 3.5 percent, the most since 2005. U.K. households are seeing their spending power eroded at the fastest rate in more than 60 years as food and energy costs soar and the aftermath of the recession restrains wage increases. Signs of a faltering economic recovery as well as the government’s value-added tax increase and the deepest spending cuts since World War II are undermining consumer confidence.

George Osborne’s cuts: Say goodbye to Britain and hello to Austeria - There really ought to be a new name for the country that George Osborne wants to create. This month, the chancellor began making the sharpest cuts in public spending seen since 1945; if he completes them, Britain will be an utterly different place – one that we might call Austeria. On a warmish spring Saturday, Austeria doesn't look that bad. Teens mob high streets stocking up on their summer wardrobe; wage slaves have a slew of bank holidays to look forward to. But flick through the City pages of this or any other paper and you can see the difference. Nearly every day, one or another big company warns that profits are likely to disappoint shareholders. The former boss of Asda warns of a "retail recession" that will last two years. The chief executive at Dixons blames Osborne for those spending cuts and that rise in VAT. The difference between Britain last spring and present-day Austeria is this: a tepid recovery from a severe recession has evaporated. As cabinet minister Jeremy Hunt admitted on BBC1's Question Time, the economy is flatlining. Employers in both public and private sectors are laying off workers, while those in jobs are worried about losing them. Couple that with surging inflation and the Austerian economy is a harsh place for workers.

How to raise interest rates and lower unemployment at the same time - In the UK there are calls to raise short term interest rates sooner rather than later as retail price inflation is close to 5 per cent.   Although there are no signs that inflation has fed into wages, one should not be complacent. If inflation accelerates in China, import price rises will put pressure on UK inflation that the monetary policy committee will not be able to ignore. Should the UK raise rates while unemployment is still at 8 per cent and the Treasury is implementing an austerity programme? My answer is yes. But we are now operating with a technicolour policy and there is more than one way of raising rates. The traditional way to tighten monetary policy in a recovery is to sell assets to reduce the size of the central bank’s balance sheet. In the past there was only one asset to sell; short term debt. In the brave new world of QE, central banks must decide which assets  to sell.  Should they raise overnight rates by selling short term assets or should they reverse QE and sell off long term assets first? My answer is that the Bank should tighten monetary policy by raising the rate that it pays on deposits held by commercial banks at the Bank of England.

The Independent Commission on Banking Interim Report – Quick Take - Quick take on stability aspects: well trailed moderation (or pusillanimity) in that it preempts radical breakup; tougher capital requirements than Basel III, plus CoCos; leaves liquidity regulation to Basel, and shadow banking regulation to the Financial Stability Board.The main stability-related points of the report are summarized below. As trailed, no bank breakup: Banks must have greater loss-absorbing capacity and/or simpler and safer structures. One policy approach would be structural radicalism – for example to require retail banking and wholesale and investment banking to be in wholly separate firms. Another would be to be laisser-faire about structure and to seek to achieve stability by very high capital requirements across the board. The Commission, however, believes that the most effective approach is likely to be a complementary combination of more moderate measures towards loss-absorbency and structure.The Commission buys the argument that there is an advantage to universal banking, and that seems to be enough to kick the idea of a full breakup into the long grass:

Vickers' banking report not enough to reduce risks to us all in global banking - David Cameron's government should shudder at the realization that Britain's major banks have over £6 trillion of liabilities, four times the size of the UK economy. UBS and Credit Suisse are five times the size of the Swiss economy. Such sums constitute a time bomb with the potential to create mass financial devastation – just ask Ireland. The preliminary report from Sir John Vickers's Independent Commission on Banking – a dream team of talents – is due out today, but we already have strong hints of the likely proposals. With implicit parallels to the radioactive waste spewing from the tsunami-damaged Fukushima nuclear plant, Vickers has called for the risk from systemic banks to be 'neutralized or contained' in a manner 'beyond the prospective requirements of Basel III'.

The nightmare of taking on ‘too big to fail’ - Britain’s Independent Banking Commission has recognised that it is better to create a structure that secures the right incentives than to try to control behaviour arising from the wrong incentives. I expected it would do so; that was the conclusion of an article I wrote 20 years ago with another academic economist, Sir John Vickers, who led the commission.  It has also recognised that the objective of regulation is not to prevent bank failures. Governments cannot prevent them – though they can bail out failed banks. Such an objective would stifle innovation and undermine management autonomy and responsibility. Institutions that run into trouble – like Lehman Brothers and Northern Rock – should be able to fail without unacceptable consequences for the financial system. Too big, or too complex, or too diversified, to fail cannot be tolerated in a competitive market economy. A government backstop gives an overwhelming competitive advantage to large established firms and encourages the kind of risk-taking in which risk-takers receive much of the upside and little of the downside. So the commission correctly focuses on increasing competition and on the separation of retail and investment banking. The analysis is effective, the direction of travel is right. But are the specific measures they propose sufficient to achieve the outcomes they seek?

If The Banks Forsake London, Where Might They Go? - Would they dare to quit London? Could it be a case of "bye bye banks"? Faced with a threat of swingeing reforms, Britain's top financial institutions have been hinting they're in Britain out of choice, not duty, and could move elsewhere. A five-strong independent commission chaired by Sir John Vickers will tomorrow deliver its interim findings on the shape of the financial industry. The panel is likely to urge chancellor George Osborne to force a degree of separation between banks' high-street branches and their City trading floors. HSBC is in the middle of a triannual review of where it wants to be based. Headquartered in London since 1992, is looking into a return to Hong Kong and is even reported to be receiving overtures from Paris. Meanwhile, Barclays, under US-born chief executive Bob Diamond, is being buttered up by New York mayor Michael Bloomberg, who declared that it would be "great" if the British bank relocated to the Big Apple.

All you need to know about the Banking Commission report - All you need to know about the Banking Commission report can be summarised in this FT report: Shares in Britain’s biggest banks rose on Monday following the publication of a government-sponsored report into the future of the sector.Shares in Barclays were among the strongest performers after the Independent Commission on Banking, chaired by Sir John Vickers, failed to call for the break-up of Britain’s largest banks. Banks think they have got away with it, again. And they have. The splitting up of banks was the obvious thing to do. Ring fencing is a poor second best that can easily be circumvented by the banks through intra-group lending, much of which will no doubt be hidden offshore.

Banking Report: Still too big to fail - It’s hard to imagine a more respected operative to answer the question – “what’s to be done about the banks?” Sir John Vickers is the Master of All Souls College Oxford, a former Chief Economist at the Bank of England, a former regulator, and a man whose academic research focuses on the economics of competition and regulation. But is his report, in a sense, an Inside Job (see my blog on the Oscar winning documentary that spells out who got us into the banking meltdown and who is still in the system pulling the levers). Inside Job in the sense that the changes will take place inside the institution, there will be no external sign for wider society to see. Vickers’ interim report is no revolutionary manual. His rejection of a complete separation between “casino” banking and “retail” banking calms City nerves. Firewalls between these activities are his solution.

Why Fences, Walls And Other Myths Cannot Save Us From Bankers' Risks - The "Independent Commission on Banking" has been charged with recommending reforms to our banking sector that protect the UK's "financial stability". This is vital.  The reckless behaviour of Britain's biggest banks has imposed untold damage on the domestic economy, harming the livelihoods of millions of ordinary firms and households. So the ICB's work will have a significant impact, for better or worse, on the future prosperity of the British people. Tomorrow, the ICB publishes its interim report, with its final verdict due in September. The report's well-flagged conclusion is that universal banks – which combine high-street banking and riskier investment banking under one roof – should "ring-fence", or "subsidiarize", their component parts.  While a politically elegant compromise, this is a wholly inadequate response to the UK's banking dilemma – a dilemma shared by much of the Western world. For the IBC's solution is built on a series of myths, myths that have been ruthlessly promoted by the UK banking lobby.

Banks face $3.6 trillion "wall" of maturing debt: IMF - The world's banks face a $3.6 trillion "wall of maturing debt" in the next two years and must compete with debt-laden governments to secure financing, the IMF warned on Wednesday. Many European banks need bigger capital cushions to restore market confidence and assure they can borrow, and some weak players will need to be closed, the International Monetary Fund said in its Global Financial Stability Report. The debt rollover requirements are most acute for Irish and German banks, with as much as half of their outstanding debt coming due over the next two years, the fund said. "These bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources," the IMF said.

Zoellick Sees Economic Risks From Food Prices, Debt, Inflation -- World Bank President Robert Zoellick said the global economy faces risks from inflation, sovereign-debt woes and rising food and energy prices.  “The world is coming out of one crisis, the financial and economic crisis, but we are facing other risks and tumultuous changes,” . Europe’s debt crisis, repeated natural disasters and political turmoil in the Middle East all pose risks to the recovery, even as emerging markets face rising inflation and a risk of overheating, he said.  Zoellick urged the Group of 20 nations to take action to shore up the economy and curb rising hunger. “This is not a time for complacency,” Zoellick said. “The best way for the G- 20 to show it’s alive and active is to do things.”  The Washington-based World Bank is planning ways to help African countries in the midst of political transition, like Tunisia, Egypt and the Ivory Coast, Zoellick told reporters. The bank’s financial arm, the International Finance Corp., will meet this week with multilateral development banks on the agenda.

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