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

Saturday, March 31, 2012

week ending Mar 31

Fed balance sheet shrinks in latest week -- Federal Reserve's balance sheet contracted slightly in the latest week, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.861 trillion on March 28, down from $2.8756 trillion on March 21.The Fed's holdings of Treasuries totaled $1.665 trillion as of Wednesday, March 28, versus $1.663 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $4 million a day during the week versus $12 million a day previously. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was $836.8 billion versus $851.3 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $96.5 billion, versus $98.99 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--March 29 2012

Fed's Plosser Calls Fed Balance Sheet Problematic - The Federal Reserve went down a dangerous road when it expanded its balance sheet with more than just Treasury securities in a bid to provide stimulus to the economy, a key central banker said."The balance sheet of the Federal Reserve has changed from one made up almost entirely of short-term U.S. Treasury securities to one that is mostly long-term Treasurys, plus significant quantities of long-term mortgage-backed securities," Federal Reserve Bank of Philadelphia President Charles Plosser said. "This concentration of housing-related securities is problematic because it is a form of credit allocation and thus violates the monetary [and] fiscal policy boundaries' that should guide the proper conduct of Fed policy, he said. When the Fed provides stimulus in the way it has over the course of the financial crisis and the recovery, it degrades the public's perception that the central bank is a neutral player in the economy, Plosser said. "When markets or governments come to believe that a central bank can freely expand its balance sheet without directly impacting the stance of monetary policy, I believe that various political and private interests will come forward with a long list of good causes, or rescues, for which such funds could or should be used," he said.

Fed Chief Bernanke Defends Bond Buys - Federal Reserve Chairman Ben Bernanke ended his college lecture series with a vigorous defense of the central bank's two rounds of bond buying to bolster the economy after the 2008 financial crisis. The Fed's purchases of Treasury securities and mortgage-backed securities were "generally successful" in lowering interest rates and helping to support economic growth, Mr. Bernanke said Thursday in his fourth lecture at George Washington University. The "lower long-term rates have, in my view and in terms of the analysis we do at the Fed, promoted growth and recovery," Mr. Bernanke said. He acknowledged, however, that the Fed's effect on the housing market was "weaker than we would've hoped." Fed officials succeeded in pushing mortgage rates to record lows, but that has failed to spur more home purchases and home construction because of problems in the housing and credit markets, he said. Federal Reserve officials haven't been uniformly supportive of the asset purchases. Among the critics is Richmond Federal Reserve Bank President Jeffrey Lacker, who has expressed doubts that the Fed's second round of bond-buying helped boost economic growth. Both Mr. Lacker and Philadelphia Federal Reserve Bank President Charles Plosser have worried the programs could stoke inflation.

Foreign Banks Borrowing Fewer Dollars - Foreign central banks have borrowed fewer U.S. dollars recently from the Federal Reserve as market conditions have improved, a Fed official said Tuesday in remarks prepared for a congressional hearing. Foreign central banks’ demand to borrow U.S. dollars through the Fed’s swap lines peaked at $109 billion in mid-February and the cost of dollar funding declined, Steven Kamin, the Fed’s director of the international finance division, said in remarks prepared for a Tuesday hearing of a panel of the House Financial Services Committee. “In recent weeks, reflecting the improvement in market conditions, usage of the swap lines has fallen back to about $65 billion,” Kamin said in his opening statement. Kamin’s prepared remarks were largely identical to those he delivered in mid-February to the Senate Banking Committee. He emphasized that the Fed’s swap agreement with other foreign central banks poses very little risk to the Fed and the U.S. taxpayer. The Fed lends the dollars to other central banks, rather than individual foreign financial institutions. The U.S. central bank has not “lost a penny” on any of the swap transactions, Kamin said.

Bernanke’s Speech Has the Market Buzzing with QE3 Hopes - The U.S. economy needs to grow faster to maintain job market momentum, Federal Reserve Chairman Ben Bernanke said in a speech Monday; as a result, the Fed will continue its low-interest rate policy, hoping to spur consumer demand and business investment. Stocks rose on Bernanke’s comments, with some on Wall Street reading hints about a third round of Fed bond purchases, or quantitative easing (QE3). Despite encouraging signs, the labor market still has a very long way to go to get back to pre-recession levels. Two years of consistent but modest job gains have brought the unemployment rate from over 9% down to 8.3%. But the U.S. economy is still 5 million jobs short of the previous peak, Bernanke said, and three percentage points above the average unemployment rate for the last two decades. “Further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,” Bernanke said in a speech to the National Association for Business Economics.

Fed Watch: Bernanke, Bullard, and QE3 - This morning Federal Reserve Chairman Ben Bernanke gave a speech that apparently was identified as proof that QE3 is still in the cards. He argues that while labor markets have shown improvement in recent months, conditions are far from normal. Moreover, he sees the problem of long-term unemployment as largely structural, and delivers what many believed to be the money quote: I will argue today that, while both cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor. Consequently, the Federal Reserve's accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well. In my opinion, to interpret this as a call for additional quantitative easing is a bit of a stretch. It sounds like simply a confirmation that Bernanke believes the current policy stance is appropriate and that the existence of long-term unemployment should not be viewed as a reason to believe that we are closing in on a resource constraint that would necessitate a tightening of the policy stance. In essence, Bernanke suggests that the recent rapid improvements in unemployment reflect largely a reversal of out-sized deterioration experienced during the recession. As such, we should not expect a slower pace of improvement given current growth forecasts. Under such conditions, I believe, Bernanke would push for another round of QE. He leaves open the possibility, however, that labor markets will continue to improve at the recent pace, in which I think QE3 is off the table. And that is where Federal Reserve President James Bullard steps in to the picture. He said pretty much the same thing in a CNBC interview:

Bernanke Just Admitted the Fed Failed... Not That More QE Is Coming  - So Bernanke provided the “QE is coming crowd with hope again this morning, using the usual ambiguous language that stock bulls convert into a definitive declaration of more QE. Here’s what Bernanke said: "If this hypothesis is wrong and structural factors are in fact explaining much of the increase in long-term unemployment, then the scope for countercyclical policies to address this problem will be more limited.  Even if that proves to be the case, however, we should not conclude that nothing can be done.” It’s the last phrase that has the QE crowd certain QE is coming. Never mind that Bernanke has been stating QE was no longer attractive as a monetary option since MAY 2011, or that the Fed has primarily been engaging in verbal, rather than monetary, intervention for nearly a year (Operation Twist 2 was just a reshuffling of the Fed’s Treasury holdings)… this one statement from Bernanke means more QE is coming.

Fed’s Plosser: ‘Much Easier to Cut Rates Than Raise Them’ - The U.S. economy is on track to grow as much as 3% and unemployment to fall below 8% this year, Federal Reserve Bank of Philadelphia President Charles Plosser said Monday. But even if the economy turns around quickly, it will take time to unwind unconventional measures and get interest rates back up, he said on the sidelines of a conference at the Bank of France. “It’s much easier to cut rates than it is to raise them,” he said.

Fed’s Rosengren: More Stimulus Is Still on the Table - The Federal Reserve should provide additional support to the economy beyond what’s already planned should weakness reemerge, a central bank official said Tuesday. “If real GDP does not grow more rapidly and unemployment remains at its current unacceptably high level, monetary policy may need to be more accommodative,” Federal Reserve Bank of Boston President Eric Rosengren said.

Four problems with aggressive monetary policy - Masaaki Shirakawa, the governor of the Bank of Japan, gave a subtle and interesting speech this weekend that may not have been totally comfortable for his hosts at the Federal Reserve.Mr Shirakawa set out four problems with aggressive monetary easing in the wake of a financial crisis. These are closely mirrored in the US debate about Fed policy but on several points he took the argument further:

  • (1) Mr Shirakawa’s first point is that loose monetary policy mitigates the pain as households repair their balance sheets, but reduces their incentive to do so quickly, not just for the private sector but for governments as well. However, he also suggests that the effectiveness of loose policy may fall over time as households that weren’t damaged by the crisis bring forward such spending as they want to.
  • (2) The second point seems the most dubious to me but would be profoundly important if true. Mr Shirakawa suggests that low interest rates might induce companies to make investments with really low returns – Japan’s endless public works, perhaps – and so low interest rates could actually cause potential growth to go down. (He doesn’t say this but I can’t imagine how this works unless some economic
  • (3) Point three is the more standard argument that flattening the yield curve too far for too long will undermine the profitability of the financial sector.
  • (4) Mr Shirakawa’s fourth point is an argument about why banks such as the Fed should worry about the effect of easy policy on global commodity prices. In essence, he says that individual central banks that concentrate on domestic inflation targets could end up causing global problems, which in turn make it hard to hit domestic inflation targets. That contrasts with Ben Bernanke’s fairly clear statement in the wake of QE2 [quantative easing] eighteen months ago, that if developing countries want to import US monetary policy, then they will have to live with the consequences.

Fed Watch: Lessons From Japan? - Via Mark Thoma, Robin Harding at the FT Money Supply blog reports on a speech given by Bank of Japan Governor Masaaki Shirakawa. The speech reportedly details the problems that emerge from aggressive monetary policy.  FT quotes key sections. The first concern is two-fold: Mr Shirakawa’s first point is that loose monetary policy mitigates the pain as households repair their balance sheets, but reduces their incentive to do so quickly, not just for the private sector but for governments as well. However, he also suggests that the effectiveness of loose policy may fall over time as households that weren’t damaged by the crisis bring forward such spending as they want to. The first sentence sounds like a rehashing of the "liquidationist" approach. We should let the economy collapse rather than provide support during balance sheet adjustment. The second part suggests that there is only so much spending that can be brought forward via low interest rates. But I think this is not really a novel idea, as we pretty much know that the effectiveness of monetary policy fades at the zero bound: At this point, if the BoJ wanted to induce additional spending, they would need to make a credible commitment to a higher inflation target. In other words, the effectiveness of monetary policy did not fade unexpectedly - it is exactly what you would expect given the zero bound problem.  The second concern is that a low interest rate environment is hurting potential growth

It's Baaack! Well, really, it never went away. - Robin Harding at FT Money Supply brings to our attention a speech made by the governor of the Bank of Japan, Masaaki Shirakawa, at the Federal Reserve's "Central Banking: Before, During and After the Crisis" conference. Both Robin and Tim Duy have been equally perplexed by some of the statements made by the governor of the BoJ, and I'm going to continue that theme here unfortunately. Firstly, Robin alludes to a view taken by Mr Shirakawa with regards to balance sheet adjustment; "Mr Shirakawa’s first point is that loose monetary policy mitigates the pain as households repair their balance sheets, but reduces their incentive to do so quickly, not just for the private sector but for governments as well. However, he also suggests that the effectiveness of loose policy may fall over time as households that weren’t damaged by the crisis bring forward such spending as they want to. “Needless to say, the effect of low interest rates is extended to those economic entities that have not suffered any damage to their balance sheets. If they bring forward future demand to the present by taking advantage of a low interest rate environment, this leads to an increase in aggregate demand. As balance-sheet adjustment continues for a long period of time, however, the amount of future demand that could be brought forward gradually diminishes even in a low interest rate environment.”" Mr Shirakawa's objection towards central banks assisting in the deleveraging process of the private and household sectors is straight from the early 20th century USA, pre-modern Federal Reserve "needs of trade" doctrine,  I (and I'm certainly not alone) simply just do not buy it.

Trichet warns of "behavioral contagion" - Jean-Claude Trichet, the former president of the European Central Bank, said Saturday that he is worried that controversial quantitative easing and other nontraditional steps that global central banks have taken since the financial crisis could be here to stay. The Fed has purchased $2.3 trillion of securities since it cut interest rates to zero in December 2008 in a bid to bring down long-term interest rates and boost economic growth. These actions have led to criticism, especially during the early days of the Republican contest for the 2012 presidential nomination, that Fed Chairman Ben Bernanke was undermining the dollar and creating conditions for a sharp rise in inflation.  Speaking to a conference of influential central bankers from around the world and leading academic experts on monetary policy, Trichet said it could still turn out that the bond-buying, asset purchases and liquidity injections by global central banks might go away after the financial system gets back on its feet. That is the optimistic scenario, he said. But Trichet said there was a “less flattering conjecture” that the extraordinary actions will be part of a new “permanent regime.”

BB Gun - As gold holders with fairly comprehensive views of global monetary policies and central banking we were asked to comment about the first of four installations of Ben Bernanke’s lecture series at George Washington University, entitled “The Federal Reserve and the Financial Crisis”. Despite thinking the lecture was woefully incomplete, diversionary and oftentimes quite disingenuous, our initial reaction was to let it go. We think our anticipated macroeconomic outcome will be ignored and denied by public policy makers up until the time they are forced to adopt it and take ownership of it. The math and political expediency behind future inflation and hyperinflation are too compelling to ignore.However, while our business is not to debate publicly, especially the Fed Chairman who must navigate multiple constituencies with various dissenting social, economic and political views, we take seriously false claims that serve to undermine our business. In our opinion the consensus view of the forces behind the general price level, borne from misconceptions about money and banking, is fundamentally wrong. Mr. Bernanke went out of his way last Monday to perpetuate that myth. (That the myth happens to be self-serving for central banks, including the Fed, and for the global banking system should not be dismissed.

The Most Important Idea Bernanke Did Not Discuss in His Lecture - Fed Chairman Ben Bernanke delivered his fourth lecture yesterday.  The Chairman covered a lot of ground in his talk but failed to discuss one of the most important ideas in understanding this crisis: the passive tightening of monetary policy.  This occurs whenever the Fed passively allows total current dollar spending to fall, either through a endogenous fall in the money supply or through an unchecked decrease in velocity.  This failure to act when aggregate demand is falling has the same impact on the stance on monetary policy as does an overt tightening of monetary policy. And the damage done by a passive tightening is no different than that of an overt tightening. The only difference is that the public is more aware of the overt form. Bernanke agrees.  Back in late 2010, he acknowledged the possibility of passive tightening and used it as a justification for stabilizing the size of the Fed's balance sheet (my bold): Any further weakening of the economy that resulted in lower longer-term interest rates and a still-faster pace of mortgage refinancing would likely lead in turn to an even more-rapid runoff of MBS from the Fed's balance sheet. Thus, a weakening of the economy might act indirectly to increase the pace of passive policy tightening--a perverse outcome. In response to these concerns, the FOMC agreed to stabilize the quantity of securities held by the Federal Reserve by re-investing payments...By agreeing to keep constant the size of the Federal Reserve's securities portfolio, the Committee avoided an undesirable passive tightening of policy that might otherwise have occurred...

Fed Has Done Enough to Protect U.S. From Europe, Official Says - The Federal Reserve has likely done enough for now to protect the U.S. economy from Europe’s ongoing financial crisis, a top U.S. central bank official told a congressional panel Tuesday. While the Fed is “actively and carefully assessing” what is happening in Europe right now, Federal Reserve Bank of New York President William Dudley said, “I do not anticipate further efforts by the Federal Reserve to address the potential spillover effects of Europe on the United States.” He added, “We will continue to monitor the situation closely.” Dudley was speaking before the House Financial Services Subcommittee on Domestic Monetary Policy and Technology in Washington. The official is vice chairman of the monetary policy setting Federal Open Market Committee, and he didn’t offer any forward guidance about the future direction of monetary policy. The bulk of his remarks were devoted to the European sovereign debt crisis and the Fed’s response so far. The central bank has been criticized by some for the reintroduction of a facility that lends dollars to the word’s major central banks. Some have argued this action amounts to stealth bailout of overseas banks. Fed officials have countered the dollar swap program is an easy way to ensure dollar liquidity remains ample, which in turn helps protect U.S. banks

The Fed Is Losing The "Race To Debase" - As we pointed out about a month ago, in "While You Were Sleeping, Central Banks Flooded The World In Liquidity" as the world was focused on headlines whether or not the Fed would step up as it always does when the market is sliding, and unleash the monetary floodgates, it was not Ben Bernanke, but eveyrone else that hit CTRL+P and took the place of the Fed, of note the primary central banking peers among the Final Four - the ECB, the BOE and the BOJ. And why not: after all the hope was that since electronic money is electronic money, and can be moved from point A to point B at the push of a button, it would be used primarily to reflate stocks around the world, but mostly where the path has least resistance - the US. What was not accounted for was that money would also be used to inflate commodities such as oil - a key factor when delaying further US-based easing in an election year. However, more than even record for this time of year gas prices, there was one even more important outcome from this chain of events. As the following chart from Willem Buiter shows, in its fake attempt to show monetary restraint, the Fed has gone straight into last place in the "race to debase." Needless to say, in a world with $25+trillion in "excess" debt (debt which would need to be eliminated simply to reduce global debt/GDP to a "sustainable" 180% per BCG), last is a very bad place to be...

Bill Gross Predicts QE3 and Operation Mortgage Twist - PIMCO founder and co-CIO Bill Gross spoke with Bloomberg Television's Margaret Brennan today, telling Bloomberg TV that the Fed will likely shift focus to mortgage securities to keep borrowing rates low when Operation Twist ends in June. Link of video: Bill Gross on Pimco ETF Ticker Change, Bonds, Fed. Partial Transcript: "I think the Fed is outcomes-oriented. They want an outcome in terms of a higher stock market, in terms of housing starts and lower unemployment. What [Bernanke] said on Monday, in terms of the employment, he suggested that up until now, we've done very well in terms of reducing unemployment but it’ll be tougher going forward if only because of structural impediments that he outlined. Going forward, he's looking at jobs, at unemployment and the housing markets. You know, future QEs will the outcome-oriented type of strategy which seeks to provide jobs and provide higher housing prices and housing starts to continue on.""I have a sense that they'll continue with the Operation Twist, but not necessarily in terms of buying longer-term bonds and selling shorter dated Treasuries. I think that's basically been played out and the pension market itself in terms of liability structure has been damaged to some extent by lower 30-year yields. I think [Bernanke] will try to do is Twist in the mortgage market. Basically, buy current coupon mortgages in agency spaces and then basically Twist by repo-ing out the Treasuries that they currently own in short-term space. So, you know, a twist on another Twist I suppose, going forward."

Economics Survey: Fed Should Hold Back From QE3 This Year - The Federal Reserve shouldn’t undertake a new round of bond buying this year, an overwhelming majority of a group polled by the National Association for Business Economics said in a survey released Monday. While the majority of the 259 economics professionals polled in the semi-annual survey thought the U.S. central bank’s previous two rounds of asset purchases have been a success, 81% of the group said the Fed shouldn’t launch a third such program this year. Fed officials have suggested they could be open to a third round of bond buying if the economy begins to weaken, but a recent uptick in the labor market may make that less likely. The Fed has nearly tripled its portfolio of assets since the financial crisis as part of its efforts to keep interest rates low to spur spending and investment.

Bernanke Says Accommodative Policy Needed to Cut Joblessness - Federal Reserve Chairman Ben S. Bernanke said while he’s encouraged by the unemployment rate’s decline to 8.3 percent, continued accommodative monetary policy will be needed to make further progress.  The drop in unemployment may reflect “a reversal of the unusually large layoffs that occurred” in 2008 and 2009, and this process may now be over, Bernanke said in a speech today in Arlington, Virginia. Reducing the jobless rate further will probably require a quicker expansion of business production and consumer demand, which “can be supported by continued accommodative policies,” he said.  Stocks rallied as some investors bet Bernanke’s comments indicate further policy easing is still under consideration. The Federal Open Market Committee on March 13 raised its assessment of the economy while repeating that interest rates are likely to stay low at least through late 2014.

Try overshooting for once, please - The Economist - YESTERDAY, Federal Reserve Chairman Ben Bernanke gave a speech on America's labour market that has central bank tea-leaf readers speculating over its implications for a new round of asset purchases—QE3. Tim Duy has what seems like the most reasonable read of the present FOMC stance.In essence, Bernanke suggests that the recent rapid improvements in unemployment reflect largely a reversal of out-sized deterioration experienced during the recession. As such, we should not expect a slower pace of improvement given current growth forecasts. Under such conditions, I believe, Bernanke would push for another round of QE - although it stills begs the question of why he doesn't push for more now given the existing forecasts. But he hasn't, so we can only infer that he thinks the costs of additional easing outweigh the benefits. Let me restate that. Mr Bernanke thinks that rapid improvement in labour markets over the past three months is a product of catch-up from previous underperformance (given observed growth in GDP). He does not appear to think the Fed's current policy is sufficient to generate labour market improvements as fast as what we've seen over the past three months. If he is wrong and the economy maintains this pace of improvement, then, as Mr Duy says, QE3 is off the table. If, however, he is right, and the pace of improvement slows, then another round of asset purchases is a real possibility.

Setting the Table for Implicit Level Targeting - This seems to be the theme building in Federal Reserve speeches and communication. Ben Bernanke today. To sum up: A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed.  Still, conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force.  Moreover, we cannot yet be sure that the recent pace of improvement in the labor market will be sustained.  Notably, recent decline in the unemployment rate may reflect, at least in part, a reversal of the unusually large layoffs that occurred during late 2008 and over 2009.  To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.Rate are improving, but “conditions remain far from normal” in the level. This links well with “economic conditions are likely to warrant an exceptionally low level for the Federal Funds rate”We are beginning to see a strong implicit recognition that the relevant economic conditions are not the growth rates of real variables but the level of those variables, particularly employment.

Monetarists should be thinking about fiscal policy -"Market monetarists" like Scott Sumner and David Beckworth frequently make the case that countercyclical fiscal policy is unimportant - that we shouldn't be thinking about optimal fiscal policy. They make (at least) two basic arguments: Argument 1: Fiscal policy doesn't matter for aggregate demand because the Fed will just cancel it out. Argument 2: The Fed is much more technocratic than Congress, and also quicker to act, so stabilization policy is best left to the Fed. I've addressed Argument 1 before, so now I want to focus on Argument 2. This is not a new argument, but Scott Sumner states it pretty concisely in this reaction to the new DeLong/Summers fiscal policy paper:

Michael Hudson on the Federal Reserve System - An interview with Michael Hudson published on the Russian website Terra America (TA). Prior to the Federal Reserve’s founding in 1913, U.S. monetary policy was conducted by the Treasury. Like the Fed, it had district sub-treasuries that performed nearly all the financial functions that the Fed later took over: providing credit to move the crops in autumn, managing government debt, and so forth. But after the severe 1907 financial crisis, a National Monetary Commission was reformed. Under the then-Republican administration, it recognized a need for more active government intervention to prevent future financial crises. However, the leading bankers sought to use the crisis as an opportunity to grab power for Wall Street, away from the Treasury. In this sense, the Fed was founded in large part to take monetary control away from Washington’s elected officials and appointees, and privatize the supply of money and credit. So its place in the U.S. financial and economic structure is to allocate credit, primarily to serve Wall Street financial interests. That explains the insistence on the financial class here and abroad in insisting on an “independent” central bank. It means that instead of serving the public interest, it serves the interests of the banking class. The hoped-for transformation of commercial banking into long-term industrial banking was not achieved.

Durable Goods, Stock Market, Fed in the Driver's Seat & Why - After reading Lee Adler of the Wall Street Examiner's article, I asked him, "Why is it the Fed's job to be propping up the stock market? Doesn't it make the whole market a Fed-controlled game, rather than what it started as - a mechanism for companies to raise money and people to invest in public companies?"Lee answered: "Bernanke has made no bones about it. He sees the stock market as a legitimate instrument of policy manipulation. It's his biggest tool, much bigger than the ones between his ears and his legs. The Fed works for the banks, and the capital markets exist as a means for 'capitalists' to extract wealth from the public. Stock markets weren't started for the purpose of enriching the public, that's for sure... The Fed has two clients, the US Treasury, and the banking system. It operates to make sure that they stay in business."Lee also noted that the history of the Fed is replete with a variety of programs where it tried to manipulate something. "The stock market manipulation is relatively new as an overt policy tool, but the Fed can't manipulate indefinitely. Eventually the unintended consequences will rise up and bite it in the ass."

Who Captured the Fed? - In principle, the Fed could stand up to the bankers, pushing back against all specious arguments. In practice, unfortunately, the New York Fed and the Board of Governors are quite deferential to financial-sector “experts.” Bankers are persuasive; many are smart people, armed with fancy models, and they offer very nice income-earning opportunities to former central bankers. We have lost track of the number of research notes from major banks pleading for easier credit, lower capital requirements, delay in implementing financial reforms or all of the above. In recent decades the Fed has given way completely, at the highest level and with disastrous consequences, when the bankers bring their influence to bear – for example, over deregulating finance, keeping interest rates low in the middle of a boom after 2003, providing unconditional bailouts in 2007-8 and subsequently resisting attempts to raise capital requirements by enough to make a difference. As the American economy begins to improve, influential people in the financial sector will continue to talk about the need for a prolonged period of low interest rates. The Fed will listen. This time will not be different.

Fed's Action Prevented 'Meltdown' - The Federal Reserve's response to the 2008 financial crisis prevented a more severe recession, Chairman Ben Bernanke said in a comprehensive defense of the central bank's actions. The Fed's efforts prevented a "total meltdown" of the financial system at a time when fears of a second Great Depression were "very real," Mr. Bernanke said Tuesday at the third of his four lectures at George Washington University in Washington. "I think the view is increasingly gaining acceptance that without the forceful policy response that stabilized the financial system in 2008 and early 2009, we could've had a much worse outcome in the economy," he said.The Fed chief defended the central bank's intervention to stop investment bank Bear Stearns Cos. and insurer American International Group Inc. from collapsing, saying the Fed's moves prevented greater shocks to the global financial system.

The Dangers of an Interventionist Fed - John Taylor - America has now had nearly a century of decision-making experience under the Federal Reserve Act, first passed in 1913. Thanks to careful empirical research by Milton Friedman, Anna Schwartz and Allan Meltzer, we have plenty of evidence that rules-based monetary policies work and unpredictable discretionary policies don't. Now is the time to act on that evidence. The Fed's mistake of slowing money growth at the onset of the Great Depression is well-known. And from the mid-1960s through the '70s, the Fed intervened with discretionary go-stop changes in money growth that led to frequent recessions, high unemployment, low economic growth, and high inflation. In contrast, through much of the 1980s and '90s and into the past decade the Fed ran a more predictable, rules-based policy with a clear price-stability goal. This eventually led to lower unemployment, lower interest rates, longer expansions, and stronger economic growth.  Unfortunately the Fed has returned to its discretionary, unpredictable ways, and the results are not good. Starting in 2003-05, it held interest rates too low for too long and thereby encouraged excessive risk-taking and the housing boom. It then overshot the needed increase in interest rates, which worsened the bust. Now, with inflation and the economy picking up, the Fed is again veering into "too low for too long" territory. Policy indicators suggest the need for higher interest rates, while the Fed signals a zero rate through 2014.

Former Fed Governor Warns of Dangers of Proposed Reforms - Former Federal Reserve governor Laurence Meyer said proposed reforms could handcuff the central bank’s authority to respond to another financial crisis and further infuse politics into what is supposed to be an independent body.  In testifying before Congress’s Joint Economic Committee, Meyer said Tuesday that a proposal to end the Fed’s dual mandate to keep prices stable and unemployment low contains “clearly partisan” provisions. “Recognize that the greatest threat to the stability of long-term inflation expectations is an assault on the independence of the Fed’s monetary policy decisions,” Meyer said, according to prepared remarks. He served as a Fed governor from 1996 until 2002. He is now senior managing director at Macroeconomic Advisers. The committee’s vice chairman, Kevin Brady (R., Texas), proposed legislation earlier this month to make controlling inflation the sole focus of the Fed as part of an effort to strengthen the value of the dollar.

Democrats to Seek Confirmation of Fed, FDIC Nominees Before Week’s End - Senate Democrats will push for the confirmation of two nominees to the Federal Reserve Board of Governors as well as three outstanding nominees to the Federal Deposit Insurance Corp. before lawmakers leave Washington for a two-week recess, a senior Democratic leadership aide said Wednesday. In order for the nominees to be confirmed, every single senator must agree not to object, which is generally difficult to accomplish. The Senate Banking Committee will vote on Thursday on the nominations of Jerome Powell and Jeremy Stein to be members of the Fed’s Board of Governors. Given the Democratic majority on the committee, the two are expected to be approved by the panel. Powell, a Republican who served in President George H.W. Bush‘s administration, and Stein, a Democrat who is an economist at Harvard University, were nominated by President Barack Obama in December to serve on the Fed board. Democrats hoped that by packaging the two together, they would encounter less resistance by Republicans. The pending FDIC nominees are Martin Gruenberg to be the agency’s chairman, Thomas Hoenig to be its vice chairman and Jeremiah Norton to be another member of its board. The administration also nominated Thomas Curry to be Comptroller of the Currency, which regulates national banks. The banking committee has already approved the nominations of Gruenberg, Curry and Hoenig, a former president of the Federal Reserve Bank of Kansas City.

Republican Senator to Block Fed Nominees - At least one Republican senator plans to oppose President Barack Obama‘s nominees to fill two vacancies on the Federal Reserve‘s Board of Governors, scuttling their chances of getting confirmed before lawmakers leave Washington for two weeks. Sen. David Vitter (R., La.) will oppose Obama’s two picks for the central bank’s board over concerns that they would hew too closely to Fed Chairman Ben Bernanke, a spokesman for Vitter said Wednesday. “I refuse to provide Chairman Bernanke with two more rubber stamps who approve of the Fed’s activist policies,” Vitter said in a statement to Dow Jones Newswires on Wednesday. Senate Democrats had planned to push for confirmation of the two Fed nominees, as well as three outstanding nominees to the Federal Deposit Insurance Corp., before lawmakers leave Washington for a two-week recess, according to a senior Democratic leadership aide. However, Vitter’s opposition prevents the confirmations from being approved by unanimous consent, which requires all 100 senators to agree on the measure.

Where the Fed’s Profits Come From - Financial documents released by the Federal Reserve last week showed that 2011 was the second-most-profitable year for the U.S. central banking system. Net income totaled $77.4 billion, down only slightly from $81.7 billion in 2010. That’s more than twice what the Fed was earning before the 2008-09 financial crisis. It’s also more than double the amount earned by Exxon, Microsoft or Apple. So why have the Fed’s profits risen so much in the past two years? Two reasons: The Fed has created more money than usual and also has invested it in higher-paying assets. Here’s why that has happened. Besides providing money we use in the form of cash, the Fed adds money to the banking system to adjust the level of interest rates. To stimulate the economy by lowering interest rates, the Fed creates money and uses it to purchase Treasury securities and other government debt, thereby releasing additional money into the banking system. Since the Great Recession began, the Fed’s stimulus policies have tripled the size of its balance sheet.

Fed Watch: Inflation: Still Nothing to See Here - The Februrary Personal Income and Outlays report came out this morning, and with it a fresh read on the Federal Reserve's preferred inflation measure, the PCE price index. On a year-over-year basis, headline inflation is trending down to the 2% target, while core is settling in just below that target. As a reminder, the Fed targets headline over the longer run, but watches core as a signal to where headline is headed. Headline is trending down to core, as expected. The Fed was right to dismiss last year's energy-induced headline increase as a temporary phenomenon. Is there any near term trends to be concerned about? The three-month core trend edged down a notch to just above 2%: Still less than the rise experienced in the first part of 2011. What about the path of prices? Still tracking along a trend below that of prior to the recession: Bottom Line: Inflation remains contained - by itself, price trends provide no reason for the Fed to turn hawkish. Moreover, there is nothing here to stop Federal Reserve Chairman Ben Bernanke from easing policy should the US recovery falter.

Floodgates - Krugman - Once again, we’re hearing warnings — including from some people who should know better — that the “floodgates” of inflation may be about to open. It’s funny how repeated total failures of prediction don’t seem to diminish the confidence of inflationistas in their insights. So this may be a waste of time. Still, here’s the Fed’s preferred measure of inflation, the personal consumption expenditures deflator, measured on a 6- month basis (short enough to catch relatively short-term trends, long enough to smooth out the noise): You may recall that early last year there was a huge fuss over a temporary rise in inflation, which was widely portrayed as the harbinger of terrible things to come. Bernanke and others tried to point out that it was mainly about gasoline, with nothing much going on in measures of domestically generated inflation; for this they (and I) were attacked fiercely. But sure enough, inflation came down. Taking a longer view, we’ve had dire warnings about runaway inflation for more than three years at this point. When do people start to consider that maybe they have the wrong model?

Personal Consumption Expenditures: Price Index Update - The monthly Personal Income and Outlays report was published today by the Bureau of Economic Analysis. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation.  The latest Headline PCE price index YOY rate of 2.32% is a decrease from last month's 2.41% (an upward revision from 2.36%). The Core PCE index of 1.90% is a decrease from the previous month's 1.93% (an upward revision from 1.88%).  I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But PCE is a key measure of inflation for the Federal Reserve, and the price increase in oil and gasoline, although now well off their interim highs, puts consumer behavior in the spotlight.  In the past, a core PCE range of 1.75% to 2% is generally mentioned as the target for the Federal Reserve's price-stability mandate. However, the Fed has now explicitly identified 2% as the long-term target:

Bernanke muted on US economic health -  A rapid fall in US unemployment may not be sustainable unless the economy starts to grow faster, said Ben Bernanke in a speech on Monday that suggests monetary policy will stay easy.  The US Federal Reserve chairman said that the decline in the unemployment rate from 9.1 per cent to 8.3 per cent over the past six months may reflect a one-off bounce back from big job cuts in 2008 and 2009.  "To the extent that this reversal has been completed, further significant improvements in the unemployment rate will probably require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies," said Mr Bernanke in a speech at the National Association of Business Economists conference in Arlington, Virginia.  The Fed has been grappling with a divergence between stronger labour market data and weaker numbers on demand and output growth. Mr Bernanke's explanation suggests that both phenomena are real but that the strength of the labour market will be temporary.  If underlying growth is quite weak and there is still a lot of slack in the labour market then it makes sense for the Fed to continue with easy monetary policy in order to speed up the recovery.

Bernanke Tells ABC Economic Recovery Has ‘Long Way To Go’ - The U.S. economy is not yet on a certain path to a full recovery, Federal Reserve Chairman Ben Bernanke said in a televised interview with ABC News on Tuesday. “It’s far too early to declare victory,” Bernanke said in an interview with ABC’s Diane Sawyer, according to a transcript of the interview to be aired Tuesday night on “World News.” The Fed chief acknowledged a brightening in the recent economic data, noting that new jobs have been created and that measures of consumer and business sentiment have improved. And Europe’s fragile economy has become less worrisome recently, he said. (Watch an excerpt from the interview.) “The financial system looks stronger and more stable,” Bernanke said. However, he cautioned that the housing market is still “pretty flat,” long-term unemployment remains a problem and that the current 8.3% jobless rate is still too high.“We need to be cautious and make sure this is sustainable,” Bernanke said. “We haven’t quite yet got to the point where we can be completely confident that we’re on a track to full recovery.”

Transcript: Diane Sawyer Interviews Ben Bernanke - ABC News

Bernanke, the Anti-Garbo - Investors are said to hang on every word spoken by the chairman of the Federal Reserve. The current chairman, Ben S. Bernanke, must be testing their patience. So far this week, Mr. Bernanke has delivered a major address on unemployment and lectured students at George Washington University on the Fed’s response to the financial crisis. He is on the cover of the current issue of The Atlantic magazine. An interview with Mr. Bernanke will be broadcast Tuesday night on ABC World News. Last week he delivered lectures at George Washington about the history of the Federal Reserve on Tuesday and Thursday, testified before Congress about the European crisis on Wednesday, and gave a brief speech Friday at a conference on central banking. Previous Fed chairmen gave speeches and appeared before Congress, but otherwise spoke very little in public. Mr. Bernanke has broken cleanly with that tradition, seeking to explain the Fed’s mission and methods through a variety of means, including town hall meetings, television interviews and press conferences.

Chicago Fed: Economic Growth in February "near average" - The Chicago Fed released the national activity index (a composite index of other indicators): Index shows economic growth near average in February Led by weaker production-related indicators, the Chicago Fed National Activity Index decreased to –0.09 in February from +0.33 in January. ...  The index’s three-month moving average, CFNAI-MA3, increased from +0.22 in January to +0.30 in February—its highest level since May 2010. February’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. This suggests growth near trend in February - still not strong growth.

Chicago Fed: US Economic Activity "Near Average" In February - The plot thickens for deciphering the next move for the business cycle… or does it? The Chicago Fed National Activity Index (CFNAI)—a broad measure of the U.S. economy—slipped last month. "Two of the four broad categories of indicators that make up the index deteriorated from January, but of these two, only the production and income category made a negative contribution to the index in February," the Chicago Fed reports. On the other hand, monthly numbers are noisy, which is why we're told to pay closer attention to CFNAI's three-month moving average, which "suggests that growth in national economic activity was above its historical trend." Putting the index's three-month average in historical perspective certainly perks up the case for thinking optimistically. Indeed, this average rose to 0.30 in February from 0.22 in January—the highest in two years. How should we read this information? The Chicago Fed advises that a value below -0.70 after a period of economic expansion "indicates an increasing likelihood that a recession has begun." By that rule, the latest reading suggests that the economy will continue growing for the foreseeable future.

Fourth-quarter GDP unrevised at 3.0 percent -(Reuters) - The economy expanded as expected in the fourth quarter while personal income grew at a much faster pace than previously thought, which should help underpin spending this quarter. Gross domestic product increased at a 3.0 percent annual rate, the quickest pace since the second quarter of 2010, the Commerce Department said in its final estimate on Thursday, unrevised from last month's estimate. That was in line with economists' expectations. The economy grew at a 1.8 percent rate in the third quarter. However, personal income was $13.162 trillion at a seasonally adjusted annual rate, $3.3 billion more than previously reported. Disposable income was $10.6 billion more than previously thought, likely reflecting the strengthening labor market. Gross domestic income, which measures output from the income side, increased at a 4.4 percent rate - the fastest since the first quarter of 2010 - from a 2.6 percent rise in the third quarter. The department also said after-tax profits increased at a 1.1 percent rate, slowing from 2.7 percent the prior quarter. The slowdown in profits reflects the increase in wage costs as companies step up hiring.

GDI: An Alternate Measure Showing Stronger U.S. Growth - The Commerce Department has (at least) two ways to measure the growth and size of the overall U.S. economy. One is to add up all the value of all the goods and services produced in the economy in a quarter or a year. That’s the gross domestic product, or GDP. The other is to add up all the income received in the economy, wages and interest and profits and so on. That’s gross domestic income, or GDI. They should tell the same story, but because it’s so hard to accurately measure a $15-trillion economy, and because the two measures rely on different data sources, they don’t always match. The GDP gets all the attention (partly because it comes out earlier), but some economists argue that the GDI may be a more meaningful measure, particularly at turning points in the economy. “Placing an increased focus on GDI may be useful in assessing the current state of the economy,” Federal Reserve Board economist Jeremy J. Nalewaik wrote in a 2006 working paper. With its third revision of fourth-quarter GDP, issued Thursday, the agency also released its GDI estimates. Here’s what they show:

  • GDP Q4 up 3.0% GDI Q4 up 4.4%
  • GDP Q3 up 1.8% GDI Q3 up 2.6%
  • FULL YEAR 2011 GDP: up 1.7% FULL YEAR 2011 GDI: up 2.1%

Q4 GDP and GDI - Early this morning the BEA released the third estimate of Q4 GDP. The BEA reported that Real gross domestic product "increased at an annual rate of 3.0 percent in the fourth quarter of 2011", the same as the previous estimate. Also in the release, the BEA reported the real gross domestic income (GDI) increased at a 4.4% annualized rate in Q4.  There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). A research paper in 2010 suggested that GDI is often more accurate than GDP. For a discussion on GDI, see from Fed economist Jeremy Nalewaik, “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity. During the worst period of the recession, GDI fell more than GDP as Nalewaik noted. In subsequent revisions, GDP was revised down showing the economy contracted more than originally reported - and closer to the original GDI reports. The opposite has happened over the last two quarters - GDI is showing stronger growth than GDP - and this suggests that 2nd half 2011 GDP might be revised up with the next annual revision that will be released on July 27th (Revised Estimates will be provided for years 2009 through 2011).

Discrepancies Between National Income and GDP, by Dean Baker: Binyamin Appelbaum has a NYT blogpost suggesting that the economy may be growing more rapidly than the GDP imply based on the fact that national income has grown more rapidly in recent quarters. ... Appelbaum points to a new paper that suggests that we should be taking an average of GDP growth and income growth as our actual measure of economic growth. If we go this route, then it implies that the recovery has been somewhat stronger (and the recession steeper) than the standard measure of GDP growth. There is an alternative story. David Rosnick and I analyzed the movement of the statistical discrepancy and found a strong inverse correlation between the size of the statistical discrepancy and capital gains in the stock market and housing. This meant, for example there was a large negative statistical discrepancy in 1999 and 2000 at the peak of the stock bubble (i.e. income exceeded output) which disappeared after the bubble burst. The same thing happened in the peak years of the housing bubble, 2004-2007. In that case also, the large gap between the income side measure and the output side measure disappeared after the bubble burst.

Will the 'Real' GDP Please Stand Up? - How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index. Now that we have the third estimate on Q4 GDP, I've updated my charts showing quarterly Real GDP since 1960 with the official and three variant adjustment techniques. The first chart is the official series as calculated by the BEA with the GDP deflator. The second starts with nominal GDP and adjusts using the PCE Deflator, which is also a product of the BEA. The third adjusts nominal GDP with the BLS (Bureau of Labor Statistics) Consumer Price Index for Urban Consumers (CPI-U, or as I prefer, just CPI). The forth chart, prompted by several requests, adjusts nominal GDP using the Alternate CPI published by economist John Williams at   Suggestion: Click on any of the charts below and use the links at the top of the chart page to toggle between the versions for a closer comparison.

No, Really, Austerity is A Really Stupid Idea - Now that we've gotten the final revision to 4Q GDP, let's take a look at the data for the last two years to see where we're growing and where we're not. The above chart simply shows the percentage change in GDP from the previous quarter. The first two quarters of 2010 were good, but then we saw a slowdown in the second half 2010. The first half of 2011 was very slow, but we see a pick-up towards the end of the year. Overall, we've seen PCEs bounce all over the place. First, notice that durables goods have grown by strong amounts on a quarter to quarter basis for the last two years. In contrast, non-durable goods purchases have been weak for the last year, as have service expenditures. Remember that durable goods purchases comprise the smallest amount of PCEs, coming in about 12%. This charts tells me that people are doing more for themselves -- that is, instead of hiring a landscape service, they're mowing their own yards, etc.. Investment also provides some interesting insight. First, we see decent quarter to quarter figures in equipment and software (the gold line). However, investment in CRE (the blue line) is fairly weak. Residential investment (the green line) is terrible, save for the 2Q10 and last quarter.

Fed Watch: Slow and Steady - Looking at the spending component of this morning's Personal Income and Outlays report for February, it still pays to focus on the path of spending rather than to become terribly hopeful or despondent about the twists and turns along that path: The 0.5% gain in February compensated for some earlier weakness in the numbers, while the overall trend holds - spending is rising about 0.18 percent per month compared to 0.24 percent prior to the recession. Spending was supported by a drop in the saving rate, down to 3.7% from 4.3% the previous month. This likely reflects borrowing for new auto purchases - note the stronger trend in durable goods spending: The acceleration in auto sales is clearly supporting this trend since the middle of last year. Apparently, what's good for Detroit is still good for America. The importance of autos in sustaining spending begs the question of what will occur when pent up demand is satisfied?  Hopefully, income growth will accelerate as the labor market improves. Otherwise, households will need to take on additional debt or running down saving rates to hold the current trend in place. Bottom Line: Consumer spending continues to rise, although the sustainability is still called into question because of the reliance of pent-up demand and falling saving rates to support underlying trends.

CEOs Expects Marked Economic Improvement This Year - U.S. corporate leaders are expecting to see a marked improvement in the economy this year as more chief executives expect sales, investment and hiring to grow in the next six months. Business Roundtable‘s first-quarter survey of 128 CEOs, released Wednesday, found that 81% expect sales to increase in the next six months–a 12 percentage point gain over the prior quarter’s survey–and 48% say their firms will increase U.S. capital spending, a 16 point jump. And 85% of those polled said staffing at their firms will hold steady or grow in the coming months. The outlook survey’s index–a composite of CEO expectations for the next six months of sales, capital spending and employment–increased to 96.9 in the first quarter of this year, from 77.9 in the fourth quarter of 2011. Readings above 50 reflect growth. The survey results “indicate greater overall economic optimism among member CEOs compared to last quarter,” Boeing Co. CEO Jim McNerney said in a statement. McNerney is chairman of the Business Roundtable.

Improving Housing Market Driving Economy: Jamie Dimon -  The U.S. housing market is very close to a bottom and there are already signs its improvement is giving a boost to the overall economy, JPMorgan Chase CEO Jamie Dimon told CNBC Wednesday. "I believe we’re very close to the inflection point. People look at prices that are still coming down but all the other signs are flashing green," Dimon said during a job fair in New York for hiring veterans. ... "the shadow inventory everyone talks about is lower today than it was 12 months ago. It will be a lot lower 12 months from now," he said.  Distressed inventory "is actually coming down, not going up. Homes for sale are about half what they were four years ago. You could come up with a pretty bullish case. If the economy grows, housing gets better, quicker."

Whose Recovery? - Robert Reich - The Commerce Department reported Thursday that the economy grew at a 3 percent annual rate last quarter (far better than the measly 1.8 percent third quarter growth). Personal income also jumped. Americans raked in over $13 trillion, $3.3 billion more than previously thought. Yet it’s almost a certainly that all the gains went to the top 10 percent, and the lion’s share to the top 1 percent. Over a third of the gains went to 15,600 super-rich households in the top one-tenth of one percent. We don’t know this for sure because all the data aren’t in for 2011. But this is what happened in 2010, the most recent year for which we have reliable data, and there’s no reason to believe the trajectory changed in 2011 or that it will change this year. In fact, recoveries are becoming more and more lopsided. The top 1 percent got 45 percent of Clinton-era economic growth, and 65 percent of the economic growth during the Bush era. According to an analysis of tax returns by Emmanuel Saez and Thomas Pikkety, the top 1 percent pocketed 93 percent of the gains in 2010. 37 percent of the gains went to the top one-tenth of one percent. No one below the richest 10 percent saw any gain at all.

Gas Prices Have Taken Air Out of US Recovery: Welch  - What looked to be a fairly robust economic recovery has turned lackluster thanks to rising gas prices and uncertainty over demand, according to author and former General Electric CEO Jack Welch. When gross domestic product growth registered a surprising 3 percent for the fourth quarter last year, Welch figured the U.S. economy was about to embark on strong growth that would outpace many of its global competitors. But since then, an unexpected surge of prices at the pump coupled with continuing tightness in credit has him rethinking his position. "It's not taking off. We're sort of relatively strong but not booming," Welch said in a CNBC interview. "I am normally to one extreme or another and I'm a little shaken about not knowing where this is going." Gasoline is nearing $4 a gallon nationwide, with the peak driving season still to come. At $3.91 a gallon, gas is up 22 cents over the past month and 33 cents from a year ago, according to AAA. The price is just 20 cents from its record high in July 2008. Despite the rise, consumer confidence had been increasing steadily. But new numbers released Tuesday showed fear creeping in about energy inflation, and the stock market registered what has become a rare losing day amid the economic unease.

Gasoline Prices and the Economy - Mark Zandi - Nothing is worse for our economy than rising energy prices. They act like a pernicious tax increase, forcing us to spend more filling up and leaving less for everything else. But unlike taxes, money spent on auto fuel doesn't pay teachers' salaries, pave roads, or lower the national debt. Indeed, much of it ends up in the Middle East.  Every penny increase in the cost of a gallon of gas costs American consumers $1.25 billion over the subsequent year. With gas prices up almost 60 cents per gallon since the end of 2011, U.S. pocketbooks are set to take a hit of approximately $75 billion this year. By comparison, the 2 percentage-point cut in payroll taxes that took effect in January 2011 is worth about $100 billion. If gasoline goes much higher, the payroll tax break will essentially cover the higher cost of fuel.  Gasoline prices always rise at this time of year, because demand picks up as people begin to travel more, and refiners blend in summer additives to protect the environment. This year, moreover, refining capacity is in shorter supply; refiners have been shutting plants, seeing slimmer profits down the road. Two large Philadelphia refineries are only the latest examples.

The Economy’s Great Fall: Are the Losses Permanent? -- DeLong and Summers, the debate over potential output, and whether Bernanke has the courage, foresight, and persuasiveness to follow Greenspan's lead: The Economy’s Great Fall: Are the Losses Permanent? I wrote this before Bernanke's speech on the labor market on Monday. He says, echoing the topic of the column:Is the current high level of long-term unemployment primarily the result of cyclical factors, such as insufficient aggregate demand, or of structural changes, such as a worsening mismatch between workers' skills and employers' requirements? ... I will argue today that ... the continued weakness in aggregate demand is likely the predominant factor. So maybe the structural impediment, inflation hawk types at the Fed will be vanquished after all. We shall see. [See Tim Duy's comments on as well.]

Bill Gross: "The Game As We All Have Known It Appears To Be Over"  - First it was Bob Janjuah throwing in the towel in the face of central planning, now we get the same sense from Bill Gross who in his latest letter once again laments the forced transfer of risk from the private to the public sector: "The game as we all have known it appears to be over... moving for the moment from private to public balance sheets, but even there facing investor and political limits. Actually global financial markets are only selectively delevering. Gross' long-term view is well-known - inflation is coming: "The total amount of debt however is daunting and continued credit expansion will produce accelerating global inflation and slower growth in PIMCO’s most likely outcome." The primary reason for Pimco's pessimism, which is nothing new, is that in a world of deleveraging there will be no packets of leverage within the primary traditional source of cheap credit-money growth: financial firms. " it is your duty to try to escape today’s repression. Your living conditions are OK for now – the food and in this case the returns are good – but they aren’t enough to get you what you need to cover liabilities. You need to think of an escape route that gets you back home yet at the same time doesn’t get you killed in the process. You need a Great Escape to deliver in this financial repressive world." In the meantime Gross advises readers to do just what we have been saying for years: buy commodities and real (non-dilutable) assets: "Commodities and real assets become ascendant, certainly in relative terms, as we by necessity delever or lever less."

Financial Armageddon: 'The American Economic Model Is Broken': A new survey of U.S. household finances by British research firm Absolute Strategy Research suggests that Americans are not only pooh-poohing the notion that an economic recovery is at hand, they are becoming resigned to the fact that the longer-term outlook isn't all that much better. A staggering 63% of respondents across the political spectrum feel that the American economic model is broken. Individuals surveyed do not agree that the prevailing paradigm facilitates equal opportunity, or that hard work and skill are rewarded. This grim view of the status quo is also represented in respondents' concerns about fairness and the distribution of wealth: a quarter of those surveyed say the next administration should make closing the gap between the rich and poor a top policy priority, and half want the next administration to make sure the wealthiest Americans pay a “fair share” of taxes. And a mere 20% of those polled believe wealth and income is distributed fairly. This survey also highlights the extent to which Americans are dissatisfied with those responsible for managing the American economy. Respondents across the political spectrum agree that policymakers have not done a good job in handling the economy over the last year, and that a focus on stimulating economic growth should be the top priority for the next administration. Republicans and Independents are the most critical of economic policymakers, but two thirds of Democrats are also critical of the handling of the economy.

The balance sheet recession, charted - Nomura’s Richard Koo has been banging on about the similarities between Japan’s balance sheet recession and the current financial malaise for a long while. His main point has always been that the financial system won’t recover unless corporates and households complete their deleveraging journey. On Wednesday he provides some charts to help illustrate the journey’s progress thus far. But there’s also the point that there was never really the same corporate issue in the US, as there was in Japan. Hence it’s the following chart, depicting the US household deleveraging journey, which is perhaps much more pertinent to the comparison:  Indeed, the similarities strike us as much more evident. As Koo himself notes: Let us now look at the situation at US households with their damaged balance sheets. As Figure 4 shows, their behavior since 2008 has mirrored that of Japanese households and companies over the last decade and a half: they are both reducing financial liabilities (paying down debt) and increasing financial assets (savings) in spite of zero interest rates. Together, the household and corporate sectors are now net savers to the tune of 5.8% of GDP. That this surplus of private savings is occurring at a time when interest rates are at zero is a clear indication the US is in a balance sheet recession triggered by the first crash in house prices in seven decades. All of which supports the idea that lessons from Japan’s Great Depression should be respected, we would say.

Chicago Fed President Charles Evans has an ingenious plan to save the American economy. Listen to it, Ben Bernanke. -  Can talking differently boost the economy? It sounds like a silly idea, but as long as the talkers have the right jobs, there’s considerable theoretical reason to believe they can make a huge difference. New research from the Federal Reserve Bank of Chicago shows that talk does matter and that the Fed could significantly improve the economy by choosing its words better. The messenger for all this was Charles Evans, the president of the Chicago Fed, who is waging a low-profile war to revive the economy by changing how the Fed speaks. Last week, at the annual Brookings Papers on Economic Activity conference, Evans tried to make this case to an elite audience of economists and policymakers. His paper, “Macroeconomic Effects of FOMC Forward Guidance,” co-written with Chicago Fed staffers, is one of the most important policy arguments out there today, arguing that the central bank could significantly stimulate the economy simply by rephrasing its statement that “economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels of the federal funds rate through late 2014.”

Demand, not Supply is Holding Back the Recovery - Federal Reserve Chairman Ben Bernanke said on Monday that he believes our unemployment problem is due mainly to lack of economic demand: Is the current high level of long-term unemployment primarily the result of cyclical factors, such as insufficient aggregate demand, or of structural changes, such as a worsening mismatch between workers' skills and employers' requirements? ... I will argue today that, while both cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor. This is an important debate because if the fall in unemployment is mostly structural, there's little that monetary and fiscal policy can do to help to speed the recovery. But if lack of demand is the main culprit, then replacing the lost demand through aggressive policy can help us recover faster

What we need for economic recovery - Consider three leading explanations for the current weak economic conditions. First, a new paper from James Stock and Mark Watson identifies demographic shifts as an important determinant of poor current economic conditions, and a likely problem going forward: …barring a new increase in female labor force participation or a significant increase in the growth rate of the population, these demographic factors point towards a further decline in trend growth of employment and hours in the coming decades. Applying this demographic view to recessions and recoveries suggests that the future recessions with historically typical cyclical behavior will have steeper declines and slower recoveries in output and employment. Second, as Karl has argued, the economy is waiting for “the kick” of an increase in sales of durables like housing and autos. Third, you have low house prices in holding back the economy by weakening household balance sheets. My question is this: do not all of these factors point towards more immigration to drive both a recovery now and a recovery from the decline in the long term economic trends? In The Great Stagnation, Tyler Cowen identified lots of immigration as one of the three main kinds of low hanging fruit that helped drive our earlier growth:

Banking Mysticism - Krugman - Reading the comments on my Steve Keen post, I had an insight: banking is where left and right meet. Both the Austrians — who believe that whatever the market does is right, unless it’s fractional reserve banking, which is somehow terrible — and the self-proclaimed true Minskyites view banks as institutions that are somehow outside the rules that apply to the rest of the economy, as having unique powers for good and/or evil. I guess I don’t see it that way. As I (and I think many other economists) see it, banks are a clever but somewhat dangerous form of financial intermediary, one that exploits the law of large numbers to offer a better tradeoff between liquidity and returns, but does so at the cost of taking on very high leverage, with all the risks that entails.The super-high leverage of banks, and the role of bank deposits as a key form of liquid assets, means that banks broadly defined are usually central players in financial crises. But that’s a quantitative thing, not a qualitative thing. I know I’ll get the usual barrage of claims that I don’t understand banking; actually, I think I do, and it’s the mystics who have it wrong.

Philip Pilkington: Krugman Makes Accusations of Fundamentalism to Defend His Own Dogma - You’re at a party and you’re having a conversation. One person interrupts, giving his view without engaging with what you’re saying. It is a presumptuous act based on the assumption that he – the speaker – already know everything there is to know about the conversation and so can simply steamroll over what everyone else says. Paul Krugman has just done the intellectual equivalent on a blog ‘contesting’ Steve Keen’s recent piece criticising his model of debt dynamics. Keen has raised these issues before and Krugman has politely ignored them. Not surprising. But while ignoring a critique is one thing, shouting over one is quite another altogether. Keen, on the other hand, has read Krugman’s paper in depth and raised criticisms that are absolutely fundamental. Krugman, it appears, simply scanned Keen’s post and then wrote up a short post accusing Keen of some sort of Minskyian ‘fundamentalism’. Keen’s criticism is that Krugman has not understood Minsky’s argument about debt dynamics at all and this has led him to construct an inaccurate debt model. Krugman claims that Keen is attacking him because Keen somehow thinks that Minsky’s analysis is Holy Writ. This is complete nonsense. Keen is attacking Krugman because his frankly lazy reading of Minsky has led him to construct a vastly inferior model to the one that Minsky’ work suggests. The essence of the problem is that Krugman assumes a ‘loanable funds’ model.  Banks do not, in fact, need reserves in order to make loans. They make loans first – ex nihilo, if you will – and raise the reserves later. This means that the only real constraint on bank lending is the interest rate as set by the central bank.

The Central Flaw in Krugman’s Argument Against Keen - The key failing in Krugman’s response to Steve Keen’s response to Krugman’s paper (PDF) is here: If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand. Krugman assumes here that people have to save (spend less) in order for other people to borrow. It’s actually the fundamental assumption, the sine qua non, of his paper (and of Krugman’s beloved IS-LM — the linch-pin of “New” Keynesianism — created by Hicks to subsume Keynes into neoclassicism, and later disclaimed and discredited by Hicks as a “classroom gadget”; see my post, and Philip Pilkington here). But that’s not how things work (and it’s the very assumption that Keen is disputing). I tried to explain this in clear and simple terms here: Think about it: You get $100,000 in wages. Your employers’ bank account is debited, and yours is credited. Your bank can lend against your higher balance; your employer’s bank can’t. Net zero.* You spend $75,000. It’s transferred from your account to other people’s/businesses’ bank accounts. Their banks can lend more, yours can lend less. Is the total stock of loanable funds affected by whether the money is on deposit at your bank, your employer’s bank, or the banks of people you bought stuff from? No.

On bank lending’s creating deposits and Paul Krugman’s response - Steve Keen - Paul Krugman has just commented (twice) on my most recent blog about my paper for INET. In one sense, I’m delighted. The Neoclassical Establishment (yes Paul, you’re part of the Establishment) has ignored non-Neoclassical researchers like me for decades, so it’s good to see engagement rather than wilful (or more probably blind) ignorance of alternative approaches. There is a bizarre asymmetry in economics: critics of Neoclassical economics like myself read Neoclassical literature avidly, no because we agree with it—far from it—but because we feel obliged to understand why they hold to their counterfactual views on the economy. Most Neoclassical economists, on the other hand, don’t even bother to consider critics within their own ranks—let alone critics from without. So to have a paper referred to is definitely a plus. In another sense, I’m appalled, because Krugman’s comments put on display that very ignorance of Neoclassical literature—let alone of alternative economic thought.

Lending, Velocity, and Aggregate Demand - JKH likes this line in Keen’s response to Krugman:The endogenous increase in the stock of money caused by the banking sector creating new money is a far larger determinant of changes in aggregate demand than changes in the velocity of an unchanging stock of money. It struck me as an empirical question: how do those changes compare in magnitude? I didn’t know offhand. Let’s start with MZM (money of zero maturity, the broadest definition of money), and GDP: There’s about $10 trillion in MZM right now, and GDP (annual spending) is at about $14 trillion.* The money stock turns over about 1.4 times per year. If money supply was unchanged — no new net lending/borrowing — but the musical chairs/logrolling game sped up so money turnover increased by 5%, because people were more optimistic — ready to take chances, consume now while worrying less about later, invest in new housing and productive capacity, etc. (“animal spirits”) — that would add $.7 trillion to aggregate demand. (5% is quite a GDP jump given no new net lending…) Now lets look at annual net borrowing/lending — annual change in debt outstanding for households and nonfinancial firms:

Banking Mysticism, Continued - Krugman - A bit of a followup on my previous post. First of all, any individual bank does, in fact, have to lend out the money it receives in deposits. Bank loan officers can’t just issue checks out of thin air; like employees of any financial intermediary, they must buy assets with funds they have on hand. I hope this isn’t controversial, although given what usually happens when we discuss banks, I assume that even this proposition will spur outrage. But the usual claim runs like this: sure, this is true of any individual bank, but the money banks lend just ends up being deposited in other banks, so there is no actual balance-sheet constraint on bank lending, and no reserve constraint worth mentioning either. That sounds more like it — but it’s also all wrong. Yes, a loan normally gets deposited in another bank — but the recipient of the loan can and sometimes does quickly withdraw the funds, not as a check, but in currency. And currency is in limited supply — with the limit set by Fed decisions. So there is in fact no automatic process by which an increase in bank loans produces a sufficient rise in deposits to back those loans, and a key limiting factor in the size of bank balance sheets is the amount of monetary base the Fed creates — even if banks hold no reserves. So how much currency does the public choose to hold, as opposed to stashing funds in bank deposits? Well, that’s an economic decision, which responds to things like income, prices, interest rates, etc.. In other words, we’re firmly back in the domain of ordinary economics, in which decisions get made at the margin and all that. Banks are important, but they don’t take us into an alternative economic universe.

Banking "mysticism" and the hot potato - Paul Krugman seems to have gotten into an argument with the MMT guys about commercial banks creating money. I'm just giving my own views on this question. Strangely, while I agree with the MMT guys on many points (banks do create money out of thin air) I end up (I think) in much the same place as Paul. Start out with an economy with no commercial banks. Just a central bank issuing currency. Suppose the central bank wants to increase the stock of money. It does not have to persuade people to want to hold more money. Money is weird like that. People accept money in exchange for the goods they sell, not because they (necessarily) want to hold more money, but because they plan to exchange that money for something else.  Money is a consumer (and producer) durable, but it's very different from other consumer durables.The stock of money is supply-determined in a way that the stock of refrigerators is not. A manufacturer of refrigerators needs to persuade people to hold more refrigerators if it wants to increase the stock of refrigerators in public hands. A manufacturer of money doesn't. That's because money is the medium of exchange. If every household only wanted to own one refrigerator, and already owned one, any extra refrigerators would be left lying on the sidewalk. That could never happen with money, if it was still being used as money. People would pick it up and spend it.

Is the Economy Growing Faster Than We Knew? - There is a pleasant surprise in the latest batch of economic data released Thursday by the Bureau of Economic Analysis. Buried deep inside the government’s revised estimate of fourth-quarter growth (revised but unchanged at 3 percent annualized) is an alternate measure of economic activity that is winning increased attention. And by that alternate measure, gross domestic income, the annualized pace of growth in the final three months of 2011 actually climbed to 4.4 percent. That’s the kind of growth we usually see during an economic recovery, the kind of growth that’s fast enough to create new jobs. Indeed, it suggests that we may have learned the answer to a fretful mystery. Until now, economists have struggled to explain why unemployment was falling so fast when the major measure of growth, gross domestic product, was rising at an exceedingly modest pace. The Federal Reserve chairman, Ben S. Bernanke, said Monday that in his view the most likely explanation was that the pace of job growth was not sustainable. The data released Thursday suggests an alternative explanation: the government’s estimate of gross domestic product may be understating the actual pace of growth. The estimate of gross domestic income may be closer to the truth.

Four Numbers Add Up to an American Debt Disaster - Consider the following numbers: 2.2, 62.8, 454, 5.9. Drawing a blank? Not to worry. They don’t mean much on their own.  Now consider them in context:

  • 1) 2.2 percent is the average interest rate on the U.S. Treasury’s marketable and non-marketable debt (February data).
  • 2) 62.8 months is the average maturity of the Treasury’s marketable debt (fourth quarter 2011).
  • 3) $454 billion is the interest expense on publicly held debt in fiscal 2011, which ended Sept. 30.
  • 4) $5.9 trillion is the amount of debt coming due in the next five years.

For the moment, Nos. 1 and 2 are helping No. 3 and creating a big problem for No. 4. Unless Treasury does something about No. 2, Nos. 1 and 3 will become liabilities while No. 4 has the potential to provoke a crisis.  In plain English, the Treasury’s reliance on short-term financing serves a dual purpose, neither of which is beneficial in the long run. First, it helps conceal the depth of the nation’s structural imbalances: the difference between what it spends and what it collects in taxes. Second, it puts the U.S. in the precarious position of having to roll over 71 percent of its privately held marketable debt in the next five years -- probably at higher interest rates.

Geithner urges no more debt-ceiling drama - Treasury Secretary Timothy Geithner Wednesday told lawmakers they would probably have to raise the debt ceiling late this year, and warned against another high-stakes showdown that could damage confidence in the U.S. "We cannot put the country through what we put the country through last July and August, with the threat of default for the first time in our nation's history hanging over the United States for a long period of time," Geithner said at a House Appropriations subcommittee hearing. "That did more damage to consumer confidence almost than was caused by the [financial] crisis in the United States." The debt limit rose to $16.394 trillion in January, part of an August debt-ceiling compromise that included hefty spending cuts. Before the summer deal, there was deep concern that Congress might not raise the cap--potentially causing widespread disruption to markets and endangering payments to government contractors, employees and retirees. Ultimately, lawmakers agreed to raise the limit by $2.1 trillion in three phases, but not before garnering warnings from ratings companies. Standard & Poor's downgraded the U.S. credit rating to double-A-plus from triple-A in early August.

Fed Is Buying 61 Percent of US Government Debt - In his attempt to explode the myth that there is unlimited demand for U.S. government debt, former Treasury official Lawrence Goodman explained that there is high perceived demand because the Federal Reserve is doing most of the buying. Wrote Goodman ,Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis.This not only creates the false impression of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits. What about Japan and China? Aren’t they the major purchasers of U.S. debt? Not any more, notes Goodman. Foreign purchases of U.S. debt dropped to less than 2 percent  of GDP (Gross Domestic Product) from almost 6 percent just three years ago. And private sector investors — banks, money market and bond mutual funds, individuals and corporations — have cut their buying way back as well, to less than 1 percent of GDP, down from 6 percent. This serves to hide the fact that the government can’t find outside buyers willing to accept rates of return that are below the inflation rate (“negative interest”) given the precarious financial condition of the government. It also hides the impact of $1.3 trillion deficits from the public who would likely get much more concerned if real, true market rates of interest were being demanded for purchasing U.S. debt, as such higher rates would increase the deficit even further. Finally it takes pressure off Congress to “do something” because there is no public clamor over the matter, at least for the moment.

The Basic Arithmetic of Self-Financing Fiscal Policy, by Brad DeLong: From my perspective, it was noteworthy that the one thing that Larry Summers's and my "Fiscal Policy in a Depressed Economy" was not challenged upon at the Brookings Institution last Friday was on our arithmetic. We were challenged on the proper estimate of the multiplier μ and challenged (quite rightly) on our guesses of the hysteresis parameter η, the share of a current downturn that is the shadow cast on future potential output. We were challenged by those saying that America's debt capacity should not be used now but should be kept ready and dry to be used in some future crisis in which using it could do much more good than it would now. We were challenged by those who think that the U.S. is on the edge of losing not just its exorbitant privilege that allows it to borrow enormous amounts at negative real interest rates but is on the point of seeing a complete revolution in interest rates that will push the rates at which the Treasury can borrow up into high single or double digits. But on our basic arithmetic we were not challenged.

A contingent economy requires contingent policies - Larry Summers  - As winter turned to spring in 2010 and 2011, many observers thought they detected evidence that the economy had decisively turned, only to be disappointed a few months later. A variety of considerations suggest that this time may be different. Employment growth has been running well ahead of population growth. The stock-market level is higher and its expected volatility lower than at any time since the crisis began in 2007, suggesting that the uncertainty hanging over business has declined. Consumers who have been deferring purchases of cars and other durable goods have created pent-up demand. The housing market seems to be stabilizing. For years the rate of family formation has been way below normal, as young people moved in with their parents. At some point they will set out on their own, creating a virtuous circle of a stronger housing market, more family formation and demand, and further improvement in housing conditions. Innovation around mobile information technology, social networking, and newly discovered oil and natural gas is likely, assuming appropriate regulatory policies, to drive significant investment and job creation.

Why More Stimulus Now Would Pay for Itself—Really! - What if borrowing money made you so much richer over the long-term that it paid for itself? It's not crazy. Millions of families make such a decision every year when they take on debt to pay for school. Indeed, investing in yourself is a bet that often pays off. But can the same be true for an entire country? Brad DeLong and Larry Summers say yes. In a provocative new paper, they argue that when the economy is depressed like today, government spending can be a free lunch. It can pay for itself.  It's a fairly simple story. With interest rates at zero, the normal rules do not apply. Government spending can put people back to work and prevent the long-term unemployed from becoming unemployable. This last point is critical. If people are out of work for too long, they lose skills, which makes employers less likely to hire them, which makes them lose even more skills, and so on, and so on. Even when the economy fully recovers, these workers will stay on the sidelines. It's not just these workers who suffer from being out of work. We all do. High unemployment is a symptom of a collapse in investment. If we don't make needed investments now, that will put a brake on growth down the line. Together, economists call these twin menaces hysteresis. And if it sets in, it reduces how much we can do and make in the future. Assuming that spending now can forestall hysteresis, then this spending might be self-financing. In other words, spending now might "cost" us less than not acting.

Scott Sumner on Fiscal Policy - You just can’t beat this closing, in my mind’s eye it was complete with a mic drop and Scott walking off stage right. Monetary policy should always be set in such a way as to produce on-target expected NGDP growth.  That’s the Lars Svensson principle.  If you do that, there’s no room for fiscal stimulus, even if the economy is currently depressed.  With a central bank that targets expected NGDP growth along a 5% growth path, you are in a classical world.  Spending has opportunity costs.  Unemployment compensation discourages work.  Saving boosts investment.  Protectionism is destructive.  And so on.  That’s the policy we should be teaching our grad students.  The optimal monetary policy.  Not a policy mix that only has a prayer of making sense in countries where the central bank is even more stupid and corrupt than the Congress.  As far as I can tell, those countries don’t exist.

Cochrane blasts austerity AND stimulus...??? - Cochrane clearly states that austerity is not just ineffectual, but is actively harming Europe. This is important. Because he then claims that increasing government spending (stimulus) would actively harm rich economies (by raising default risk, causing rising interest rates and crowding out). He could have argued that the level of government spending simply doesn't affect growth one way or another. But he didn't. He claimed that either slashing or boosting government spending would cause a significant deterioration from where we are right now. It doesn't take a genius to see the logical implication of this position: Cochrane must believe that the level of government spending is exactly optimal right now. So policymakers in every rich country (including Barack Obama) have gotten the level of government spending exactly right! That's nothing short of amazing. Who says government is inefficient  If austerity increases deficits, why wouldn't stimulus reduce deficits? Cochrane laughs at the notion, currently being advanced by Brad DeLong and Larry Summers, that increased government spending could pay for itself. But just a few sentences earlier, he claims that austerity is failing to close budget gaps! Again, let's apply simple logic.

Why White House Burning Is Wrong, Liberal Edition - Dean Baker, a leading economic commentator and author of the Beat the Press blog, has written a review of White House Burning for the Huffington Post.  I’ll skip over the nice things he said and get to Baker’s main objections, of which I think there are three. The first is that long-term fiscal sustainability is the wrong problem to be focused on: ”While the solutions do not especially upset me, I do very much disagree with the diagnosis of the problem. The most immediate issue is that we have a fire at the moment in the form of too little demand leading to too much unemployment. This is wrecking the lives of millions of workers and their families.“Johnson and Kwak understand this and certainly do not argue for deficit reduction in the short-term, but their focus on a longer-term deficit problem can be distracting from the more urgent problem.” I certainly understand this unemployment-first attitude. For many people, especially Democrats, the political story of the past two years is that all of Washington focused on deficits instead of economic growth and jobs. The villain of the story is either conservatives for insisting that deficits must be addressed now or the Obama administration for going along with them. From a policy perspective, the position of most mainstream Democratic economists is this: fix unemployment first, then deal with the national debt.

The Federal Government Spends Lots More than You Think - When we talk about the federal budget, we usually rely on the government’s official definition of “spending” which is to say the amount of money that’s run through federal agencies. But, in reality, the federal government spends a lot more than that. Using a broader definition of spending, which includes hundreds of billions in dollars of tax subsidies, my Tax Policy Center colleagues Donald Marron and Eric Toder have concluded that government spends 30 percent more than it admits. Just take a look at this chart:It shows three measures of spending in 2007.The column on the left shows how much spending shows up on government’s official books.  The one in the middle includes what Donald and Eric call Spending-like Tax Preferences (SLTP): Tax subsidies that substitute for spending. Often, Congress dropped these initiatives into the tax code solely to hide the fact that they are spending. Take the mortgage interest deduction. Instead of giving homeowners a tax subsidy, Congress could just as easily have had the Federal Housing Administration or some other agency write every homeowner a check to lower their monthly mortgage payments. Now, it may be more efficient to run this subsidy through the tax code. But a tax deduction is no less a subsidy than that check.

New CRS Report Says Base Broadening Is Hard to Do - The Congressional Research Service has released a new report by Jane Gravelle and Thomas Hungerford called “The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening.”  In a nutshell, the report could be called “Base Broadening Is Hard to Do.”  The Washington Post’s Lori Montgomery summarized it nicely on Friday, including getting this Republican staffer’s reaction to it: Republican tax aides dismissed the report as unhelpful. “Reports suggesting tax reform isn’t easy are greatly appreciated. We look forward to future reports on water being wet,” said Sage Eastman, a senior aide to House Ways and Means Committee Chairman Dave Camp (R-Mich.), whose panel drafted the principles for tax reform laid out in the Ryan budget. The CRS report emphasizes that although the 200+ tax expenditures under the federal income tax (individual and corporate) are worth over $1 trillion per year, the largest 20 of them represent 90 percent of that revenue loss.  When you look closely at that “top 20″ list, copied above from the table in the CRS report, it is easy to get discouraged about the prospects for substantial tax base broadening.  As I explained last November in Tax Notes (subscription-only access here), the largest tax expenditures look a lot more like “entitlements” than “loopholes”:

Fight over transportation bills threatens highway projects - With just four days left before the federal money runs out for highway construction projects across the country, House Republicans abruptly postponed a vote on a two-month extension Tuesday, throwing into question how a standoff between Senate Democrats and House Republicans over the transportation bill will get resolved. It was the second day in a row that House Republicans were forced to pull a temporary extension of the transportation program. A vote Monday on a three-month bill was canceled after House Democrats said they would oppose it and it became clear that the GOP didn't have the votes to get it through the House. In both cases, Republican leaders were attempting to pass these temporary extensions of the current law using House rules that require a two-thirds majority to pass, which the GOP can't get without a bloc of Democrats siding with them. House Democratic Leader Nancy Pelosi said Republicans were "wasting time" with the short-term bills and argued that the House should vote immediately on the bipartisan Senate bill passed this month that would fund transportation projects for the next two years. Senate Majority Leader Harry Reid said Tuesday that he didn't like the two-month proposal pushed by the House GOP. House Speaker John Boehner's spokesman Michael Steel blamed Democrats for the delay. "There is only one reason this bill will not be voted on tonight: House Democrats are playing political games with our nation's economy."

House Still Deadlocked on Transportation Bill With Deadline Nearing - We are four days away from the expiration of the surface transportation bill, and Congress looks no closer to actually getting an extension done. The House adamantly won’t pass the bipartisan Senate bill, but they also can’t seem to pass their own short-term extension: House Republicans on Tuesday failed for the second time in as many days to extend federal transportation funding before it expires at midnight on Saturday. “Unfortunately, this has turned into a political ‘gotcha’ game,” The extension died Tuesday following an afternoon of angry partisan acrimony, with both sides invoking Thomas Jefferson to bolster their arguments and blaming each other for past failures. The measure required that two-thirds of the House vote to suspend the rules, and it failed on a voice vote. This one was a 60-day extension, where the bill that failed yesterday extended programs for 90 days.  Without a transportation bill, eventually funding would run out for projects all over the country. The states usually pay for the projects up-front, and then get reimbursement from the feds. Without clarity on that reimbursement, they would be reluctant to continue moving projects forward. Also, the government would be unable to collect the 18.4-cent per gallon gas tax, which pays for transportation funding. While the near-term effect of this would be a gas tax holiday at a time of higher prices, it would be pretty devastating for federal finances; about $90 million a day would be lost.

Now is the Key Time to Invest in Infrastructure - Treasury - As President Barack Obama said in his weekly address this weekend, “So much of America needs to be rebuilt right now. We’ve got crumbling roads and bridges. A power grid that wastes too much energy. An incomplete high-speed broadband network. And we’ve got thousands of unemployed construction workers who’ve been looking for a job ever since the housing market collapsed. […] Right now, all across this country, we’ve got contractors and construction workers who have never been more eager to get back on the job. A long-term transportation bill would put them to work. And those are good jobs. We just released a report that shows nearly 90 percent of the construction, manufacturing, and trade jobs created through investments in transportation projects are middle-class jobs. Those are exactly the jobs we need right now, and they’ll make the economy stronger for everybody.”

A good time for infrastructure investment - THERE have been so many forehead-slapping moments in the policy-making process over the last few years that it's very difficult to choose the biggest howler of them all. One surely deserving of at least some votes is America's persistent failure to substantially increase infrastructure investment. It could certainly use it: The Congressional Budget Office estimates that America needs to spend $20 billion more a year just to maintain its infrastructure at the present, inadequate, levels. Up to $80 billion a year in additional spending could be spent on projects which would show positive economic returns. Other reports go further. In 2005 Congress established the National Surface Transportation Policy and Revenue Study Commission. In 2008 the commission reckoned that America needed at least $255 billion per year in transport spending over the next half-century to keep the system in good repair and make the needed upgrades. Current spending falls 60% short of that amount. The Treasury has just published a white paper full of reasons to favour additional investment. Even if you are sceptical of the utility of fiscal stimulus qua stimulus, now seems like a very good time to undertake much more investment than normal. As the Treasury paper points out, very low interest rates and high unemployment mean that the odds of crowding out private spending and investment are much lower than normal.

Is the GOP Still the Party of Business? -  Jonathan Weisman of the Times wrote an article about the reluctance of many Republicans in Congress to extend policies that are traditionally favored by big business (and the Chamber of Commerce), such as infrastructure spending and funding for the Export-Import Bank. This points to a split between the traditional corporate wing of the GOP and the newer, ultra-conservative tax revolt wing. Historically, the Republicans were the party of business. Businesses like to make money. That can mean a lot of different things for government policy. In some cases, they want less regulation, since regulatory compliance costs money. On the other hand, large companies often want more regulation, since they can absorb the costs of compliance better than small competitors. (See The Economist on tax preparers for a recent example.) Regulation can also be a mechanism for price fixing, as with the old Interstate Commerce Commission, which functioned as a legal cartel for railroads. Businesses definitely want lower corporate tax rates, since that increases their net income. But they also like some types of government spending. Most obviously, defense contractors like lots and lots of defense spending. Less obviously, businesses have historically been major beneficiaries of free public education, since it gave them a more skilled workforce. So in general, the business community is not obviously in favor of lower taxes or lower spending.

Paul Ryan Is Making The GOP Walk The Plank So He Can Run For President In 2016 - Here's my thinking:

  • 1. There are lots of questions about why Ryan is pushing other Republicans to vote for a budget that could be very damaging for the GOP beyond its base. Jonathan Bernstein and others are talking about it as if he's asking his GOP colleagues to take "the Ryan plunge."
  • 2. There's no chance the Ryan budget will be adopted this year. The Senate has already indicated it won't take up a budget resolution and the Ryan budget will not be acceptable to a majority of senators even if it did. That makes this week's House vote on the Ryan budget what Capital Hill insiders used call "walking the plank," that is, forcing a member of your own party to vote for something he or she knows will be politically harmful even though it has no chance of moving forward.
  • 3. One of the main questions is why Ryan is doing this if his budget has little appeal beyond the GOP base. From my perspective, that's the only constituency -- the Republican base -- Ryan actually cares about. Putting a budget together than doesn't compromise when other party leaders have been criticized for doing the opposite is something the base will remember long after the specific policies are forgotten.

Ryan Budget Takes Aim at Resolution Authority - The 2013 House Republican budget – released last week by Budget Committee Chairman Paul Ryan – includes a significant amount of language meant to convince readers that the GOP is really fed up with “crony capitalism” and, more emphatically, bailouts. And the Republicans reserve special ire for the Dodd-Frank financial reform law signed by President Obama in 2010, calling it a continuation of the bailout culture.  But while House Republicans call for repealing their other big target, President Obama’s health care reform law, in its entirety, they leave most of the Dodd-Frank law alone. For instance, the much-maligned Consumer Financial Protection Bureau didn’t merit a mention in the budget, even though the Republicans fought against it tooth-and-nail during the Dodd-Frank debate. Neither did the new regulatory regime for derivatives. Ditto for the Volcker rule, meant to rein in banks’ risky trading. Instead, the Republican budget calls for repealing what’s known in Dodd-Frank as “resolution authority”: the mechanism for dismantling failing financial firms without resorting to the ad hoc bailouts of 2008. And this specific targeting leaves little doubt that the Republicans have far more interest in pledging fealty to the financial services industry than in truly eliminating bailouts or avoiding a repeat of the 2008 financial crisis.

Ryan Would Shift the Fiscal Burden to Low and Middle-Income Households - The budget proposal House Budget Committee Chairman  Paul Ryan (R-WI) released last week  is, essentially, an effort to have low- and middle-class households bear the entire burden of closing the fiscal gap and bear the costs of financing an additional tax cut for high income households.  The Tax Policy Center (which I co-direct) analyzed the revenue policies as proposed by Rep. Ryan. We simulated the effects of repealing the AMT and reducing ordinary income tax rates to 10 and 25 percent.  These proposals would cost about $3.2 trillion over ten years, on top of the $0.3 trillion lost from repealing taxes enacted to pay for Affordable Care Act, the $1.1 trillion lost from his desired reduction in the corporate tax rate, and the $5.4 trillion lost from first extending the Bush-Obama tax cuts (which he also supports). By 2022, the tax policies he has specified would lower federal revenues to just 15.8 percent of GDP.  Talk about digging yourself a hole. Ryan claims he can fill this hole by eliminating tax breaks, which he correctly identifies as “spending through the tax code.” At first glance, this sounds like a step in the right direction: broaden the base and lower rates. Yet, like many recent proposals, the devil is in the details.  Ryan never specifies which specific tax expenditures he would cut.

Paul Ryan Finally Meets a Budget Cut He Hates - Paul Ryan is a budget hawk's budget hawk, never one to believe a government bureaucrat who self-servingly claims that a spending cut will cause real damage to his program and the people it benefits. But there are exceptions: House Budget Committee Chairman Paul Ryan (R-Wis.) expressed skepticism Thursday that U.S. military leaders were being honest in their budget requests to Congress. “We don’t think the generals are giving us their true advice,” Ryan said during a forum on the budget sponsored by the National Journal. "We don't think the generals believe their budget is really the right budget." "You don't believe the generals?" [managing editor Kristin] Roberts asked. "What I believe is this budget does hollow out defense," Ryan responded...."I think there’s a lot of budget smoke and mirrors in the Pentagon’s budget," Ryan added, saying his proposal was an "honest Pentagon budget." Just to be absolutely clear here: if we're talking about a program that helps the poor or the elderly or the sick, Ryan is eager to cut spending. In fact, he's usually eager to be the biggest budget cutter in the room. But if it's a program for the military, he won't accept spending cuts even if the military brass supports them. In fact, he insists on raising their budget.

Ryan Promises To Close Tax Loopholes, But Won’t Say Which - Appearing on two Sunday talk shows, the GOP’s top budget guru Rep. Paul Ryan promised to close enough loopholes to pay for the large tax cuts in his budget blueprint unveiled last week — but he repeatedly refused to specify any.“We’re proposing to keep revenues where they are, but to clear up all the special interest loopholes, which are uniquely enjoyed by higher income earners, in exchange for lower rates for everyone,” Ryan said on CBS’ Face The Nation. “We’re saying get rid of the tax shelters, the interest group loopholes and lower everybody’s tax rates.” The plan does not point to any such tax loopholes, nor is it expected to become law. But the House Budget Chairman’s suggested it isn’t his job to specify which ones. His message boils down to this: Trust us, we’ll get to it.

Simpson-Bowles Resurrected for House Budget Vote - The House vote on the budget will not just include an up-or-down vote on the Paul Ryan version. As per custom, several budgets will get a vote that day. The Republican Study Group introduced their budget, which slashed spending even further and more quickly than Ryan’s and cut Medicaid more deeply, today. Hardline conservatives who support the RSG plan are in fact taking credit for making Ryan’s budget even tougher. The Congressional Progressive Caucus has their Budget for All, which sees deeper deficits than the Ryan budget in FY2013 but smaller ones over time, thanks to the ending of wars and raising of taxes on corporations and the wealthy. A full rundown of that budget plan can be found here, and there are some really good components to it, like ending the mortgage interest deduction for second homes, and enacting a health insurance public option, just to pick two. And, House Democrats released their own alternative, from Budget Committee ranking member Chris Van Hollen, yesterday. It’s mainly a Budget for All-lite. But there’s another version out there, one from what I’ll term the Wanker Caucus, looking to just put Simpson-Bowles on the House floor: Monday night, a bipartisan group of House members introduced the Simpson-Bowles plan as a budget alternative to the powerful House Rules committee.  If it passed, it would unseat the GOP’s consensus plan, drafted by Rep. Paul Ryan (R-WI) as the incumbent budget for the House — and it’s hard to imagine GOP leaders allowing that to happen. But that would give the lie to the criticisms they and others have lobbed at Obama for failing to embrace the plan himself.

WTF? Bowles-Simpson Being Debated By House Today? Really? - When we last left the Bowles-Simpson Commission, it was (not at all unexpectedly) going down in flames when its two chairs --Erskine Bowles and Alan Simpson -- couldn't get the 14 votes required to move their recommendation along. In fact, and contrary to what some would have us believe, because of the lack of required support in the commission, there was no formal vote on what the co-chairs proposed and the plan was just a recommendation. The 11 B-S members who expressed support for the plan did so informally. Of particular note is that the two most important Republican congressional members of the commission -- House Ways and Means Committee Chairman Dave Camp (MI) and Budget Committee Chairman Paul Ryan (WI) -- said they would vote against the plan. Without the support of the two people who would have to guide the plan through their committees and on the House floor, it never had a chance. So much for ancient history.

A responsible budget from the Congressional Progressive Caucus - Earlier today, EPI released The Budget for All:  A technical report on the Congressional Progressive Caucus budget for fiscal year 2013, which details the composition and effect of this year’s budget alternative from the CPC. While the policies in the Budget for All reflect the decisions of CPC leadership and staff, EPI provided the CPC with technical assistance in developing, scoring, and modeling CPC policies and their cumulative budgetary impact. First and foremost, the Budget for All would address our most pressing challenges by financing up-front job creation measures and sustained public investments. Overall, the Budget for All would allocate $2.9 trillion for front-loaded stimulus and investments in human and public capital over FY2012-22 relative to current law. This would include:

  • $227 billion for a direct jobs program modeled off of Rep. Jan Schakowsky’s (D-Ill.) Emergency Jobs to Restore the American Dream Act;
  • $247 billion in increased transportation outlays relative to current law, including $50 billion in immediate investments for 2012, $53 billion in rail investments, and $30 billion for an infrastructure bank;
  • $135 billion over FY2012-2022 in tax credits to foster hiring, innovation, manufacturing, and insourcing jobs to the U.S.;
  • $183 billion to reinstate the Making Work Pay tax credit from 2013-2015 (the payroll tax holiday would be allowed to expire on schedule Jan. 1, 2013);
  • Undoing the Budget Control Act (both the discretionary spending caps and the automatic sequestration cuts), which would increase nondefense (NDD) discretionary outlays by $583 billion; and
  • $1.6 trillion in additional NDD spending for domestic priorities in areas including education, scientific research, and health.

Competing Visions - This week the House of Representatives will consider two significantly different alternatives to the president’s fiscal 2013 budget request— the Republican draft budget resolution, introduced by Rep. Paul Ryan, and an alternative introduced by the Congressional Progressive Caucus (CPC). The two budgets offer vastly different visions for the nation, and each uses the president’s budget as a baseline to compare their contrasting proposals. Rep. Ryan reduces tax rates as well as spending, finding savings largely from domestic programs that serve low-income people, including Medicaid and the food stamp program. The CPC increases revenues with higher tax rates on wealthy individuals and corporations, while adding substantial new spending for job creation and making few changes to domestic programs.

House Passes Ryan Budget Resolution - House Republicans have passed the Paul Ryan budget resolution, a sweeping plan that slashes long-term mandatory spending, goes under the discretionary spending targets set by the debt limit deal, cuts taxes for the rich and corporations, changes Medicare to a voucher program, eliminates Pell grants for hundreds of thousands of students, and generally authorizes just about every conservative wet dream you can name. And after all that, Ryan’s budget doesn’t even balance until 2040, because it’s nearly impossible to do so without anything on the revenue side. The vote was relatively close, with the budget passing 228-191. Ten Republicans voted against the budget resolution, up from four last year.  Not too many of those votes are because the budget wasn’t conservative enough: that explains Huelskamp, Amash and maybe Barton. The others face tough re-election battles, or in the case of Rehberg are running for Senate in Montana. Walter Jones is just idiosyncratic.  Other budgets got votes today as well: Conservatives with the Republican Study Committee who want to cut spending more quickly introduced their own spending plan that called for balancing the budget within five years. It was defeated earlier on a 136 to 285 vote. A Democratic budget authored by Van Hollen, which would cut deficits more slowly than the Republican plan with less severe cuts in federal programs, failed Thursday on a 163 to 262 vote. Of course, WaPo leaves out the Budget for All, the Congressional Progressive Caucus budget, which got 78 votes. More than twice of what Bowles-Simpson got, at least.

Obama budget defeated 414-0 - President Obama's budget was defeated 414-0 in the House late Wednesday, in a vote Republicans arranged to try to embarrass him and shelve his plan for the rest of the year. The vote came as the House worked its way through its own fiscal year 2013 budget proposal, written by Budget Committee Chairman Paul D. Ryan. Republicans wrote an amendment that contained Mr. Obama's budget and offered it on the floor, daring Democrats to back the plan, which calls for major tax increases and yet still adds trillions of dollars to the deficit over the next decade. But no Democrats accepted the challenge. Senate Democrats have said they will not bring a budget to the floor this year, though Republicans in the chamber have talked about trying to at least force a vote on Mr. Obama's plan there as well. Last year, when they forced a vote on his 2012 budget, it was defeated 97-0.

Tax Base Broadening? - Below Dan pulled a post questioning Jon Chait's claim that US economist's generally support a broader tax base and lower rates.  I must note that Chait made many of the points I try to make below. His main point is that it is easy to propose base broadening in the abstract but hard to eliminate actual deductions. I slipped into criticizing something he wrote in passing in the post Dan pulled over here, and I do it again after the jump. First I note that many prominent economists support a sharply higher top marginal income tax rate. The figure 70% is not rare. I am not prominent, but that happens to be the top marginal income tax rate which I support (from nostalgia -- that was the rate during my childhood in the 60s a period of notoriously slow economic growth).  Second, I think the consensus is a villager VSP consensus about what economists say (or should say or what economic theory implies or something). Similarly the VSPs are sure that economics tells us that social security pensions should be cut. Oddly many actual economists disagree. Third, I support gradually eliminating the mortgage interest deduction, so, I personally also support base broadening (in addition to raising the top rate). Here I will generally argue against base broadening, but I stress that I am making a case against it and not totally opposed.

The White House should stop coddling Buffett - In a New York Times op-ed on August 14 2011, Berkshire Hathaway chief executive Warren Buffett wrote that the US should “stop coddling the super-rich” and called for tax rates to be raised “immediately on taxable incomes in excess of $1m, including, of course, dividends and capital gains”. The next morning, at a televised “town hall” meeting in Cannon Falls, Minnesota, President Barack Obama praised Mr Buffett’s intervention. A few weeks later a “Buffett rule”, requiring that millionaires pay higher taxes as a share of their incomes than middle-class Americans, featured in the budget plan the president sent to Congress.  What Mr Buffett actually proposed would, notably, have a trivial impact on his own tax bill. This is because the “taxable income” he refers to is a minuscule portion of his total income – amounting to less than 1 per cent of his income held within Berkshire Hathaway, of which he owns 22 per cent. Mr Buffett’s share of Berkshire’s 2010 pre-tax income was a whopping $4.2bn, taxes on which amounted to more than $1.2bn – a 29 per cent rate. This income would be subject to tax again at the personal rate if it was taken out of the company but since Mr Buffett has pledged to give away his fortune he would avoid the tax he wants to increase. At the Berkshire annual meeting in 2010, Mr Buffett urged fellow shareholders to “follow my tax-dodging example”.  In any case, there is no evidence that Mr Buffett wants higher taxes on his share of Berkshire income: just a few weeks before his op-ed was published, he defended the tax-deductibility of corporate jets, telling CNBC he didn’t “really see where a business aircraft is different from a business locomotive”.

Private Jets, Buffett and Taxes - Get this: Uncle Sam is suing Warren Buffett’s company over taxes. Yes, taxes. The United States government, in a little-followed case in Ohio, filed a lawsuit this month against a unit of Mr. Buffett’s Berkshire Hathaway, seeking $366 million in taxes and penalties. The Berkshire division at the center of the suit is NetJets, the private-aircraft company that caters to the nation’s wealthiest — the people Mr. Buffett says should pay more in taxes. It is an odd twist that a company controlled by Mr. Buffett — perhaps the most outspoken businessman in the country in support of raising taxes on the “mega-rich” — is now in a dispute with the government over his company’s paying too little in taxes. Perhaps more important, the case is a remarkable window into the nation’s byzantine tax code. It is an arcane dispute that raises questions about the Internal Revenue Service’s interpretation and enforcement of its own tax rules. And it shows why even someone like Mr. Buffett would seek to challenge them.

The rich are different; they get richer - Occupy Wall Street is not known for the precision of its economic analysis, but new research on income distribution in the United States shows that the group’s sloganeering provides a stunningly accurate picture of the economy. In 2010, according to a study published this month by University of California economist Emmanuel Saez, 93 percent of income growth went to the wealthiest 1 percent of American households, while everyone else divvied up the 7 percent that was left over. Put another way: The most fundamental characteristic of the U.S. economy today is the divide between the 1 percent and the 99 percent. It was not ever thus. In the recovery that followed the downturn of the early 1990s, the wealthiest 1 percent captured 45 percent of the nation’s income growth. In the recovery that followed the dot-com bust 10 years ago, Saez noted, 65 percent of the income growth went to the top 1 percent. This time around, it’s reached 93 percent — a level so high it shakes the foundations of the entire American project.

$105,637 for Me, $80 for You! - Isn't this economy FANTASTIC? It sure is for those of us in the top 1% (1.4M) - people earning over $352,000 in annual income. We made $105,637 more Dollars in 2010 than we did in 2009 - thanks in large part to the Fed's fantastic policy of printing more and more money, which lets us borrow cheaply or invest with leverage in inflating equity as the Dollar collapses.  Sure the Dollar collapsing hurts everyone - but an extra $105,637 keeps us ahead of inflation, right?  I'm still jealous of course (good Capitalists are always jealous), as the top .01% (14,000 people) - who earn an average of $23.8M, were able to add another $4.2M to their annual incomes in 2010. That's 52,500 TIMES the average $80 increase earned by the bottom 99% (thank goodness we're not one of THEM!).  That's right, somehow, the riff-raff in the bottom 99% managed to grab 7% of the Nation's total increase in income - clearly Congress needs to make immediate changes to prevent this travesty from happening again!

The Rich Get Even Richer -  In 2010, as the nation continued to recover from the recession, a dizzying 93 percent of the additional income created in the country that year, compared to 2009 — $288 billion — went to the top 1 percent of taxpayers, those with at least $352,000 in income. That delivered an average single-year pay increase of 11.6 percent to each of these households.  Still more astonishing was the extent to which the super rich got rich faster than the merely rich. In 2010, 37 percent of these additional earnings went to just the top 0.01 percent, a teaspoon-size collection of about 15,000 households with average incomes of $23.8 million. These fortunate few saw their incomes rise by 21.5 percent.  The bottom 99 percent received a microscopic $80 increase in pay per person in 2010, after adjusting for inflation. The top 1 percent, whose average income is $1,019,089, had an 11.6 percent increase in income.  This new data, derived by the French economists Thomas Piketty and Emmanuel Saez from American tax returns, also suggests that those at the top were more likely to earn than inherit their riches. That’s not completely surprising: the rapid growth of new American industries — from technology to financial services — has increased the need for highly educated and skilled workers. At the same time, old industries like manufacturing are employing fewer blue-collar workers.  The result? Pay for college graduates has risen by 15.7 percent over the past 32 years (after adjustment for inflation) while the income of a worker without a high school diploma has plummeted by 25.7 percent over the same period.

IRS Audit Rate Nears 30% for Those Making $10 Million and Up - The Internal Revenue Service in 2011 audited 29.93 percent of taxpayers who reported more than $10 million of income, according to statistics released today.  That’s up from an audit rate of 18.38 percent in 2010 and 10.60 percent in 2009 for a group that consists of 0.01 percent of taxpayers. Overall, the agency’s rate of audits for individual taxpayers stayed constant at 1.11 percent.  “We will take a unified look at the entire web of business entities controlled by a high-wealth individual, which will enable us to better assess the risk such arrangements pose to tax compliance and the integrity of our tax system,” IRS Commissioner Douglas Shulman said in a December 2009 speech. “We want to better understand the entire economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliance of that overall enterprise.”

A Single Hedge-Fund Hustler Makes More Than 85,000 Teachers: Why Are Our Priorities So Messed Up?  - This obscene distribution of income is what we get for failing to rein in Wall Street.  Why is America’s distribution of income so colossally obscene? You have only to look at Forbes most recent listing of the top 40 hedge fund moguls – men who, like Pharaohs, sit on top of our income pyramid. Together their personal income from hedge fund hustling was $12.8 billion in 2011. The top hedge fund guru, Raymond Dalio, the founder of Bridgewater Associates, hauled in $3 billion, which comes to a whopping $1,442,308 an HOUR, (assuming he worked 40 hours a week for 52 weeks.) It would take the typical U.S. family 29.2 YEARS to earn as much as Mr. Dalio earned in one HOUR. It's hard to wrap one's head around a number as large as a billion. Here's some context...

  • That’s as much as 60,673 typical U.S. families earn: Just think about that for a moment. One person earns as much as sixty thousand hard working middle class families.
  • That’s enough to hire 85,911 entry level teachers: While we’re laying off teachers right and left to close budgets that were destroyed by the Wall Street crash, Wall Street’s top hedge fund manager earns as much in one year as tens of thousands of entry level teachers who on average earn $34,920 a year. That what we get for failing to rein in Wall Street
  • That’s enough to hire 17,143 pediatricians: How is it possible for money managers to be as “valuable” as thousands of doctors who protect the heath of our children and earn on average $175,000 a year?
  • That’s enough to wipe out the student loan debts for 120,000 graduates. The average loan burden for graduating students is now $25,000. One year of income from Mr. Dalio could wipe-out the entire average student debt of 120,000 graduates.

The Case for Raising Top Tax Rates - The wealthy are feeling defensive about their taxes. Most Americans may think the rich pay too little but, not surprisingly, only 30 percent of the rich agree. More than two-thirds of families earning a quarter of a million dollars a year or more tell Gallup’s pollsters that their taxes are too high. It is true that high-income Americans carry the biggest tax burden. While fewer than 1 in 20 families make more than $200,000, they pay almost half of all federal taxes. However they feel about the tax man, there is a case to be made that they can pay much more. The reason has nothing to do with fairness, justice or ideology. It is about economics and math. The math is easy: the federal budget over the next decade cannot be made to square without raising a lot more money. The nonpartisan Congressional Budget Office estimates that if we stay on our current path, federal debt held by the public will grow from about two-thirds of gross domestic product today to roughly 100 percent in a decade and twice that much by 2040. It is unlikely that even the most committed Republicans could reverse the trend without higher taxes.

Senate Dems unveil their tax cut proposal - Senate Democrats, led by majority leader Harry Reid, unveiled a $26 billion tax-cut bill on March 26. The proposal revives the lapsed 100% expensing provision for capital investments, extending it through the end of 2012 and would provide a tax credit for businesses that expand their payrolls this year. The expensing provision is foolish, but it looks like Senate Democrats are more interested in playing the bipartisanship game than they are in good legislation. Why is it foolish? For several reasons.
1) there is already a (temporary) bonus depreciation deduction of 50%.
2) an expensing provision that applies retroactively to already-purchased capital equipment cannot, by definition, have incentivised the purchase of that equipment.
3) It has little to do with creating jobs because corporations will simply accelerate purchases to garner the benefit but may not increase production correspondingly. It has nothing to do with good tax policy because accelerated depreciation already allows deductions faster than economic lossm amounting to yet another pure tax subsidy for businesses.
4) Companies that need to purchase equipment in order to compete will make the appropriate decision to purchase based on company revenues and expenses, without needing a subsidy from the tax code.

Soak the Rich? - I am going to discuss an article by Eduardo Porter (“The Case for Raising Top Tax Rates’) in today’s New York Times Business Section which caught my eye. Porter gives a good summary of the sea change in tax policy that was inspired by a brash young economist with a Ph. D. from the University of Chicago working in the Nixon and then Ford Administration in the early 1970s. His name was Arthur Laffer.  Porter tells the (apocryphal?) story of how Laffer drew his immortal curve for his bosses (Donald Rumsfeld and Dick Cheney — once upon a time able public servants!) on a cocktail napkin showing that any feasible amount of tax revenue could be generated by two tax rates (one high and one low) except for the maximum total revenue achievable only by a unique rate. The Laffer curve became the inspiration for what became known as supply-side economics. Despite enduring much ridicule, the Laffer curve became the central plank in the platform on which Ronald Reagan won the Presidency in 1980. Cutting taxes became the unifying principle on which almost all Republicans could agree, becoming the central pillar of conservative and eventually Republican orthodoxy. It was not always so. Barry Goldwater voted against the Kennedy across-the-board tax cuts of 1963. His vote against tax cuts, cuts supported by his chief opponent for the Republican Presidential nomination in 1964, Nelson Rockefeller did not evoke so much as a peep of protest by conservatives when Goldwater was carrying the conservative torch in his epic campaign for the GOP nomination.

Guess Who Wants to Kill Corporate Tax Reform - On the surface, large, publicly traded, U.S. firms appear united in their desire to push for a lower marginal tax rate on their profits as part of a broader corporate tax overhaul. Multiple business advocacy organizations and a string of Republican lawmakers say dropping the top federal U.S. corporate rate from 35 percent to 25 percent would boost U.S. companies to hire and invest.  However, getting to either a 25 or 28 percent rate without adding to the federal deficit can unleash a feisty conflict among businesses about who ultimately funds a rate cut. Some large companies, including Disney, UPS, and Macy’s, pay more than 35 percent effective tax rates according to their most recent annual reports, unable to take advantage of corporate tax breaks and loopholes in the code.  Companies with vast overseas operations such as Cisco, Google, and Pfizer pay 18, 21, and 22 percent effective tax rates respectively by leveraging billions in tax breaks, in most cases through stashing income abroad.  "As soon as you start talking about particular loophole-closers that’s when you divide the corporate community and the battle starts." For the former group, a 10 percent rate cut would be a flat-out gain, but for the latter group the potential loss of tax breaks and overseas tax deferral and transfer pricing maneuvers to finance lower marginal rates could mean higher tax bills. 

Bill Black: “The only winning move is not to play”—the insanity of the regulatory race to the bottom - The JOBS Act is insane on many levels.  It creates an extraordinarily criminogenic environment in which securities fraud will become even more out of control.   One of the forms of insanity is the belief that one can “win” a regulatory “race to the bottom.”  The only winning move is not to play in a regulatory race to the bottom.  The primary rationale for the JOBS Act is the claim that we must win a regulatory race to the bottom with the City of London by adopting even weaker protections for investors from securities fraud than does the United Kingdom (UK). The second form of insanity is that the JOBS Act is being adopted without any consideration of the findings of the Financial Crisis Inquiry Commission (FCIC), the national commission to investigate the causes of the current crisis.  I am not aware of any proponent or opponent of the JOBS Act (other than me) who has cited the findings of FCIC.  Everyone involved has ignored the detailed finding of a huge investigative effort.  The FCIC report explained repeatedly how the three “de’s” (deregulation, desupervision, and de facto decriminalization) had produced the criminogenic environment that drove the financial crisis.  The FCIC report specifically condemned the “regulatory arbitrage” that the worst actors exploited by choosing to be (not very) regulated by the “winners” of the regulatory race to the bottom.  The FCIC report shows repeatedly how damaging the anti-regulatory fervor in general and the race to the bottom in particular proved.

Democrats Realize Pro-Fraud Legislation Not in Their Interests - After both houses of Congress passed it, the White House is finally recognizing that the deregulatory bill they proposed and pushed is distasteful to liberals who have actually looked at it for longer than two seconds: White House allies are in an uproar over pro-business legislation embraced by President Obama, exposing a new rift in his relations with Democratic lawmakers and supporters amid his efforts since the fall to mend those ties [...] To rally skeptical Democrats, including some who were thinking of trying to keep the bill from coming up for a vote, Senate Majority Leader Harry M. Reid (D-Nev.) last week made a last-minute, behind-the-scenes appeal to let the bill proceed, according to congressional aides. The Senate voted on the legislation, although half of the chamber’s Democrats voted against passage. Congressional aides said the White House’s enthusiastic support for the bill left some Democratic senators feeling boxed in. There are only two ways to look at the JOBS Act. Either you agree with the Republican critique that regulations are a boot stamping on a human face forever, something the White House has rejected over and over again, or you think the economy will be served by a pro-fraud bill, a bill that makes it easier for companies to bilk investors and for Wall Street financiers to facilitate it. Neither makes the White House come off looking good.

Jobs Act: White House, Democrats at odds over pro-business bill set to pass - White House allies are in an uproar over pro-business legislation embraced by President Obama, exposing a new rift in his relations with Democratic lawmakers and supporters amid his efforts since the fall to mend those ties. The bill is designed to make it easier for growing companies to raise money and reduce the cost of complying with securities laws. But critics warn it would allow firms to avoid disclosing crucial financial information and elude government oversight, opening the door to fraud and investor abuse. The measure is set to pass Congress on Tuesday.To rally skeptical Democrats, including some who were thinking of trying to keep the bill from coming up for a vote, Senate Majority Leader Harry M. Reid (D-Nev.) last week made a last-minute, behind-the-scenes appeal to let the bill proceed, according to congressional aides. In the Mansfield Room off the Senate floor, Reid warned his Democratic colleagues against obstructing a measure backed by the president and standing in the way of a bipartisan effort to create jobs. The Senate voted on the legislation, although half of the chamber’s Democrats voted against passage. Congressional aides said the White House’s enthusiastic support for the bill left some Democratic senators feeling boxed in.

Bill Black on How the Jumpstart Obama’s Bucket Shops Act is Just Another in a Long Series of Fraud-Promoting Legislation - Yves here. The Washington Post reports tonight that there is some pushback about the decried-by-anyone-who-knows-bupkis-about-securities-markets-and-isn’t-on-take JOBS Act, which appears to be certain to be signed into law.  Bill Black reminds us that tons of absolutely terrible financial regulation (as in deregulation) over the last 25 years have passed with large margins.Cross posted from New Economic Perspectives. The imminent passage of the fraud-friendly JOBS Act caused me to reflect on the fact that the worst anti-regulatory travesties in the financial sphere have had broad, bipartisan support. The Garn-St Germain Act of 1982, which deregulated savings and loans (S&Ls) and helped drive the debacle, was passed with virtually no opposition. The Texas and California S&L deregulation acts – the two states that “won” the regulatory “race to the bottom” – passed with virtually no opposition. Texas S&L failures caused over 40% of total S&L losses and California failures caused roughly 25% of total losses. In 1984, a majority of the members of the House of Representatives, including Newt Gingrich and most of the leadership of both parties, co-sponsored a resolution calling on us to cease our reregulation of the S&L industry.

Deregulatory JOBS Act Gets Final Passage in the House - The House may not have been able to pass a transportation bill yesterday to enable the smooth functioning of two million construction jobs, but they did find the time to kill a bunch of investor protections and deregulate the securities markets: The House on Tuesday afternoon approved the final, Senate-passed version of the Jumpstart Our Business Startups (JOBS) Act, sending the non-controversial bill aimed at helping small companies raise capital to the White House for President Obama’s signature. The bill, H.R. 3606, was approved last week with a single Senate amendment that requires stricter reporting requirements for companies that obtain capital from “crowdfunding,” the practice of using the Internet to get many small investments. Only an establishment paper like The Hill could claim that a bill like the JOBS Act, which every leading advocate for financial regulation has called craven and stupid, is “non-controversial.” The bill, soon to become law, eliminates anti-fraud measures that have been in place for, in some cases, decades. And the compelling reason to perform such deregulation is absent; the only jobs this will create are from the team of designers of misleading acronyms hired to designate it “the JOBS Act.” Nonetheless, The Hill is right in one aspect: a pro-fraud bill like this is non-controversial on Capitol Hill. It passed 380-41. Bipartisanship, baby!

JOBS Act benefits financial criminals (MarketWatch) — If, as expected, the Jumpstart Our Business Startups (JOBS) Act that passed through Congress last week becomes law, the big increase in employment most likely will come in the investment scam business.  Criminal minds must be working overtime now, because the new legislation — which seemingly every investor- and consumer-protection group has railed against — effectively makes it open season on small investors. The legislation effectively allows a burgeoning phenomenon known as “crowd funding” to proceed virtually unfettered, with the idea that it will help new and small businesses raise capital effectively at a time when the financial-services industry has been tight about making loans and institutional investors have been rushing for safety. Crowd funding — sometimes called “crowd financing” — is used to describe a group of people who network and pool money and resources together to support an effort. It really started with charitable causes, disaster relief and political campaigns, then it spread to the arts community (where the idea was to finance, say, a movie or Broadway show), and ultimately to supplying capital for small businesses and start-up companies.  It’s a particularly appealing idea in this day and age of social media, where a cool concept can spread like wildfire and generate immediate excitement.

Banking Regulator Calls for End of 'Too Big to Fail' - An annual report from a regional Federal Reserve bank is typically a collection of banalities and clichés with some pictures of local worthies who serve on the board. And so it is with this year’s annual report from the Federal Reserve Bank of Dallas, whose pages are graced by the smiling, stolid portraits of board members who run local companies like Whataburger Restaurants. But the text is something else entirely. It’s a radical indictment of the nation’s financial system. The lead essay, which is endorsed by the president of the Dallas Fed, contends that despite the great crisis of 2008, a cartel of megabanks is still hindering the economic recovery and the institutions remain too big to fail. The country’s biggest banks look much as they did before the 2008 financial crisis — only bigger. They have “increased oligopoly power” and “remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation,” Harvey Rosenblum, the head of the Dallas Fed’s research department, wrote in the essay. Having seen the biggest banks make risky bets, crush the economy and get rewarded leaves “a residue of distrust for the government, the banking system, the Fed and capitalism itself,” Mr. Rosenblum wrote.

Barry Ritholtz on Causes of the Financial Crisis -The Wall Street money manager diagnoses the ills of America’s political and economic system in a fizzing, irreverent analysis (with promised f-bombs thrown in)  I originally thought we were going to be talking about Wall Street today. But I got the sense from some of your book choices that one of the biggest offenders wasn’t based on Wall Street at all, but on Constitution Avenue in Washington DC. When you get bit by a dog, you don’t just look at the dog, you have to look at the owner who is holding the leash. To me, a lot of the regulatory changes, and a lot of what the Federal Reserve did, stand on their own as a major factor. But if you’ve read David Hume, if you’ve studied the philosophy of causation, you have to look at what motivated those changes. I have these debates with friends. One group blames everything on big government; the other group blames everything on big corporations. The sad news is that there’s really no difference between the two: Big government and big corporations work hand-in-hand. If you want to know who is the puppet and who is the puppet master, it sure looks like Wall Street has been pulling the strings of Congress for many, many, many years. I remember the Dick Durbin quote, right in the middle of the crisis. He was astonished at all the bankers and bank lobbyists running around the halls of Congress, and said, “I can’t believe these guys – they act as if they own the place.” The fact is, it’s not an act – they do own the place.

The Age of the Shadow Bank Run —The age of the bank run has returned.  Since the end of World War II, economists have generally thought that runs on banks were dead, at least as a phenomenon in advanced nations. In the United States, for example, bank deposits are insured by the Federal Deposit Insurance Corporation, and, as a last resort, the Federal Reserve can back deposits by printing money.  The new complication is that bank deposits are no longer the dominant form of modern short-term finance. The modern bank run means a rush to withdraw from money market funds, the disappearance of reliable collateral for overnight loans between banks or the sudden pulling of short-term credit to a troubled financial institution. But these new versions are in some ways still similar to the old: both reflect the desire to pull money out of an endeavor — and to be the first out the door. And both can set off a crash.  These newer forms occur in the so-called shadow banking system, involving short-term financial credit not guaranteed by the deposit insurance umbrella. According to the Federal Reserve Bank of New York, shadow banking accounts for about $15 trillion in assets — more than the traditional banking system. But as recently as 1990, the shadow-banking total was much lower, at less than $4 trillion. The core problem is that the growth of short-term credit has been outracing our ability to protect it, and since 2008 most investors have realized that these shadow-banking transactions are not risk-free.

Shadow Banking, Bubbles and Government Debt - Tyler Cowen discusses the general implications of runs on the new (shadow) banking system. Though this point leads directly into something that I have been thinking about Another feature of this new order is that more and more financial transactions will be collateralized with the safest securities possible: United States Treasuries. Demand for them will remain high, and low borrowing costs will ease our fiscal problems. Still, the resulting low rates of return serve as a tax on safe savings, encourage a risky quest for yield and redistribute resources to government borrowing and spending. It isn’t healthy for the private sector when investors are so obsessed with holding wealth in the form of safe governmental guarantees. Its actually not clear to me that demand will remain high, in the sense that the term spread will not reassert itself. To explain a bit more:

The Wall Street multibillion scandal no one is talking about - The LIBOR trading scandal could turn out to be far worse for Wall Street than its mortgage troubles. -- Much of the talk about bad behavior on Wall Street since the financial crisis has been about mortgages with a little bit of insider trading sprinkled in. And that makes sense. Everyone immediately understands what a mortgage is. And the housing bust that resulted from all those bad home loans affected us all. And Hollywood has taught us to ooh and ah over insider trading. But there is another scandal that has come out of the financial crisis that at least to me makes the mortgage underwriting scandal look like small peanuts, and it has been heating up lately. Two weeks ago, the government disclosed that it is looking into bringing criminal cases against traders and banks that manipulated a key bank lending rate, called LIBOR. A source close to the case says the government's "may" will be dropped soon. Both Barclays and Deutsche Bank have disclosed that they have been the focus of investigations. Banks have suspended dozens of traders. Today, Credit Suisse announced that it was cooperating with regulators on the case. Traders at UBS reportedly are already working with the government on its investigation. Looking for instances in which Wall Streeters go to jail, unlike mortgages, this may be the one.

Libor Marked for Review, Could It Get Benched? - For almost three decades the British Banking Association has determined the London Interbank Offered Rate (LIBOR), the benchmark rate for much of the global financial world and over $350 trillion in securities. However, the BBA’s days of polling the rates at which large banks lend to each other and then taking the mean of the middle 50% could be numbered. On the heels of an antitrust suit by Charles Schwab against several banks, the U.S. Department of Justice has commenced an investigation into possible distortions of Libor by the BBA and the banks it polled. This investigation coincides with Canadian Competition Bureau filings asserting that one bank confessed to colluding with other banks in manipulating Libor for profit. Reacting to the new pressure and spotlight, the BBA apparently no longer “calculates and produces BBA Libor at the request of [its] members and for the good of the market.” The aforementioned statement was recently deleted from the BBA website and the calculation of the Libor rates is currently being handled by Thomson Reuters who previously handled dissemination of the benchmark rate. The financial news giant has said it will “support the BBA should any changes be recommended.” It should be noted in 2009 the BBA created BBA Libor Ltd., whose revenue stream flowed from the licensing of Libor rates, but only to “cover operating costs recharged by the BBA” according to the BBA. So what changes could be in store for what some call “the most important number”?

Ellen Brown: The Shadow Bailout: How Big Banks Bilk U.S. Towns and Taxpayers -  Interest-rate swaps are less often in the news than credit default swaps, but they are far more important in terms of revenue, composing fully 82 percent of the derivatives trade. In February, JP Morgan Chase revealed that it had cleared $1.4 billion in revenue on trading interest-rate swaps in 2011, making them one of the bank's biggest sources of profit. According to the Bank for International Settlements, interest-rate swaps are the largest component of the global OTC derivative market. The notional amount outstanding as of June 2011 was nearly $554 trillion, and the gross market value was over $13 trillion.  For more than a decade, banks and insurance companies convinced local governments, hospitals, universities and other nonprofits that interest-rate swaps would lower interest rates on bonds sold for public projects such as roads, bridges and schools. The swaps were entered into to insure against a rise in interest rates; but instead, interest rates fell to historically low levels. This was not a flood, earthquake or other insurable risk due to environmental unknowns or "acts of God." It was a deliberate, manipulated move by the Fed, acting to save the banks from their own folly in precipitating the credit crisis of 2008. The banks got in trouble, and the Federal Reserve and federal government rushed in to bail them out, rewarding them for their misdeeds at the expense of the taxpayers.

TBTF Get TBTFer: Top 5 Banks Hold 95.7%, Or $221 Trillion, Of OutstandingDerivatives - Every quarter the Office of the Currency Comptroller releases its report on Bank Derivative Activities, and every quarter we find that the Too Big To Fail get Too Bigger To Fail. To wit: in Q4 2011, of the total $230.8 trillion in US outstanding derivatives, the Top 5 banks (JPM, BofA, Morgan Stanley, Goldman and HSBC) accounted for 95.7% of all Derivatives. In some respects this is good news: in Q2, the Top 5 banks held 95.9% of the $250 trillion in derivatives. Unfortunately it is also bad news, because $220 trillion is more than enough for the world to collapse in a daisy chained failure of bilateral netting (which not even all the central banks in the world can offset). What is the worst news, is that the just released report indicates that in addition to everything else, we have now hit peak delusion, as banks now report to the OCC that a record high 92.2% of gross credit exposure is "bilaterally netted." While we won't spend much time on this issue now, it is safe to say that bilateral netting is the biggest lie in modern finance. And just to put this in global perspective, according to the BIS in the first half of 2011, global derivative gross exposure increased by $107 trillion to a record $707 trillion. It will be quite interesting to get the full year report to see if this acceleration in gross exposure has increased.

Banks’ preemptive strike against Dodd-Frank - When Deutsche Bank reorganized its U.S. operations this week in response to new banking rules, it was the latest manifestation of what both supporters and opponents of the Dodd-Frank regulatory overhaul predicted would happen: The law has pushed big banks to reorganize — to comply with the new rules on Wall Street, as well as to avoid their impact. Many of the most dramatic changes under Dodd-Frank won’t take effect for months or years. But the biggest financial firms in the United States have already started overhauling and reshuffling their operations in anticipation of the new regulatory regime. Deutsche Bank and London-based Barclays have moved their commercial banks from their U.S. subsidiaries into their global firms to avoid new, more stringent capital requirements — even though they don’t go into effect until July 2015.

How Dodd-Frank has already pushed Wall Street to change - Most of the biggest changes under Dodd-Frank haven’t even taken effect. But Wall Street reform has already prompted banks to change — both to comply with the new law and to make a preemptive strike against it, I explain in a print story today: [T]he biggest financial firms in the United States have already started overhauling and reshuffling their operations in anticipation of the new regulatory regime. Deutsche Bank and London-based Barclays have moved their commercial banks from their U.S. subsidiaries into their global firms to avoid new, more stringent capital requirements — even though they don’t go into effect until July 2015... Domestic banks have been adapting to the new regulatory regime, as well... Over the past year and a half, J.P. Morgan Chase, Bank of America and Goldman Sachs have closed their stand-alone proprietary trading desks while Morgan Stanley and Citigroup have spun theirs off... These moves could ultimately prompt the U.S. financial industry to become a relatively less interconnected system of smaller firms — another major goal for the supporters of Wall Street regulatory overhaul. But analysts caution that in complying with the new regulations, banks may also spin off risky activities into darker, less regulated corners of the financial industry.

Bank Lobby’s Onslaught Shifts Debate on Volcker Rule -  The fight over the Volcker rule is shifting in Wall Street’s favor. After a four-month lobbying blitz, U.S. regulators and lawmakers are signaling they’re receptive to delaying and revising their plan to stop banks from making speculative trades on their own accounts.Representative Barney Frank, a Massachusetts Democrat and co-author of the 2010 law mandating the ban, urged regulators last week to simplify their first draft, while a bipartisan group of senators proposed pushing back its effective date. Banking executives have long seen the rule as one of the most threatening parts of the Dodd-Frank regulatory overhaul, an assault on a lucrative line of business that comes branded with a name, that of ex-Federal Reserve Chairman Paul Volcker, garnering worldwide respect. Compliance and capital costs alone could reach $1 billion annually, the U.S. Office of the Comptroller of the Currency has said. To make their case in Washington, banks and trade associations have been pressing a coordinated campaign to get regulators from five federal agencies to scale back the draft of the proprietary-trading rule issued in October, according to public and internal documents and interviews. They recruited money managers, industrial companies, municipal officials and foreign governments to their side.

Is Dodd-Frank being rolled back while no one is looking? - It’s par for the course for the GOP-controlled House to pass bills that few people notice and that ultimately go nowhere. But it’s rare for legislators to join hands across the aisle to roll back parts of President Obama’s signature legislative achievements. That’s what happened on Monday, when the House passed two little-noticed bills that changed the derivatives rules under the Dodd-Frank Act. Both bills would place new limitations on regulating derivatives, the complex transactions that Commodity Futures Trading Commission Chairman Gary Gensler recently described as “the largest dark pool in our financial markets.” As Reuters explains, one bill provides an exemption for businesses that use derivative hedges to shield themselves against real-world risks — e.g. airlines protecting themselves against oil price spikes, farmers against fluctuating grain prices, known as “commercial end users” — so they don’t have to hold cash reserves to back up deals known as swaps. It passed the House overwhelmingly, 370 to 24.  The other bill, Reuters reports, would protect derivatives deals “between affiliates of the same company from clearing, execution, capital and margin requirements.” In other words, deals conducted between two affiliates of the same company essentially wouldn’t be subject to all of the major new derivatives regulations. That bill passed on a 357-to-36 vote.

Time to set banking regulation right - Excessive leverage and risk-taking by large international banks were among the main causes of the 2008–09 financial crisis and the ensuing sharp drop in economic activity and employment. Enormous costs were borne by taxpayers and societies at large. In reaction, world leaders and central bankers undertook to overhaul banking regulation, including by rectifying the failed Basel prudential rules with the new Basel III Accord. Many scholars have commented on the proposed reforms, especially the US’s Dodd-Frank Act. This column argues that the antidote to excessive risk-taking should come from the elimination of the subsidies of the banking charter and the implicit promise of bailout in case of major losses, and the introduction of strong incentives for management and shareholders to preserve the capital of their bank. This requires deep changes in Basel prudential rules.

E-Mail to Corzine Said Transfer Was Not Customer Money‘ - Jon S. Corzine, the former chief executive of MF Global, was told during the brokerage firm’s final day of business that a crucial transfer of $175 million came from the firm’s own money, not from a customer account, according to an internal e-mail. The e-mail, sent by an executive in MF Global’s Chicago office, showed that the company had transferred $175 million to replenish an overdrawn account at JPMorgan Chase in London. The transfer, the e-mail said, was a “House Wire,” meaning that it came from the firm’s own money. The e-mail, sent at 2:20 p.m. on Oct. 28 to Mr. Corzine and two of his assistants in New York, says the transfer came from a “nonseg” account, industry speak for a noncustomer account. But the e-mail, a copy of which was reviewed by The New York Times, did not capture the full story behind the wire, which turned out to contain customer money. MF Global employees in Chicago had first transferred $200 million from a customer account to the firm’s house account, people briefed on the matter said. Once it was in the firm’s coffers, the people said, Chicago employees then promptly transferred $175 million of the money to the MF Global account at JPMorgan in London — the account that was overdrawn.

Did Jon Corzine Lie to Congress about Missing MF Global Funds? - Last December, Jon Corzine appeared before a congressional committee investigating the spectacular collapse of MF Global, the financial broker that had gone bankrupt five weeks earlier, leaving $1.6 billion in client funds missing. In his testimony, Corzine, MF Global’s CEO at the time of the collapse, said, “I simply do not know where the money is.” But a newly disclosed Congressional memo appears to contradict Corzine’s testimony, raising questions about whether he lied to Congress. The Department of Justice and the Securities and Exchange Commission are investigating whether MF Global illegally used client funds to cover company losses. Federal securities law requires brokers like MF Global to keep client money and firm money separate — in order to protect customers if the firm fails, as MF Global did. Investigators now estimate that $1.6 billion worth of client money remains missing, including $100 million worth of commodity contracts owed to ranchers and farmers.

Latest Award of Frederic Mishkin Iceland Prize for Intellectual Integrity: Promontory Financial Whitewash of MF Global’s Risk Control - We normally limit our awards of the of Frederic Mishkin Iceland Prize for Intellectual Integrity to academic work, since the economics discipline seems increasingly to hew to the James Carville theory of motivation: “Drag a hundred-dollar bill through a trailer park, you never know what you’ll find.” However, we’ve been unduly narrow in considering who might be deserving of this recognition, so we are bestowing the award to Promontory Financial for its work on MF Global. The firm is deeply involved in the OCC foreclosure reviews and also the author of a glowing report on MF Global’s risk controls in May of 2011, a mere five months before the firm failed. Promontory has managed to establish itself as a blue chip provider of post scandal review processes (it’s often hired by boards to do forensics after rogue trader scandals). It was founded by former Comptroller of the Currency Gene Ludwig and has many former regulators on its staff. That’s a tad ironic, since one of its bread and butter businesses is based on regulatory arbitrage. Promontory is in the business of brokering deposits, which is taking deposits that exceed the FDIC limit of $250,000 per institution and spreading them around so as not to exceed the limit. It’s not clear why this should be allowed. Well off people can achieve the same results by buying bank certificates of deposit, or if they want liquidity at low risk, they can buy Treasury bills. The FDIC is not prone to pointed statements, but you can clearly see the agency’s polite unhappiness about this practice and Promontory’s role:

MF Global’s Counsel Resisted Giving Assurances on Transfers - MF Global Holdings Ltd. General Counsel Laurie Ferber twice resisted providing assurances to JPMorgan Chase that the broker was complying with rules to segregate customers’ collateral, saying language in a draft provided by the bank was too broad. Ferber said JPMorgan was “specifically interested in two transfers” that occurred the morning of Oct. 28. The first was a $200 million transfer from a segregated customer funds account at MF Global Inc., the firm’s brokerage, to a “house” account, followed by a second transfer of $175 million from the house account to a London subsidiary’s account at JPMorgan.  “Although I had no reason to believe that any non- compliant transfers from segregated accounts had occurred or would occur, I did not think that any individual officer or employee should be asked to issue such a broad certificate,” Ferber said in testimony prepared for a March 28 House Financial Services subcommittee hearing. Any employee making such an assurance, she said, would have had to personally handle all the transfers or been able to review all the transactions within the available timeframe.

Corzine Theft is Going to be the Best Show Since Watergate - Finally after five months of investigations comes the Jon Corzine MF Global bombshell Friday [Bloomberg: Corzine Ordered Funds Moved to JP Morgan].  The Bloomberg article references an e-mail written by Edith O’Brien,  the assistant Treasurer at MF Global and a memo written by congressional staffers. A few aspects are of note:  first that Corzine “gave direct instructions” to transfer $200 million in segregated consumer funds to JP Morgan for payment on an overdraft and used a lower level functionary O’Brien to carry it out.   Then in a clear violation of fiduciary responsibility JP  Morgan’s risk officer asked MF Global for a letter stating these funds were not customer segregated accounts, but then took the money anyway. The chief counsel for MF Global nixed the letter JPM sent over as “too strong”.O”Brien is to testify before Congress on Wednesday, but will plead the Fifth. This suggests she has not been offered a deal, or immunity. The captured regulatory agencies have not weighed in on this now nearly five months after this historic crime.  On the overall issue of fraud and regulatory capture, view this  Max Keiser and Mark Melin clip.

MF Global Official Pleads the Fifth in Case of Missing $1.6 Billion - Lawmakers investigating the spectacular collapse of MF Global hit a brick wall Wednesday when none of the company executives called to testify appeared to know anything about what went wrong at the firm, or the whereabouts of $1.6 billion in client funds that remains missing. One after another, senior MF Global executives denied knowledge of, and responsibility for, the eighth largest bankruptcy in U.S. history. The hearing’s star witness, meanwhile, invoked her Fifth Amendment right against self-incrimination. Former MF Global Assistant Treasurer Edith O’Brien, whose name has surfaced regarding a $200 million transfer to cover an overdraft at JP Morgan Chase, refused to answer any questions before the committee. “On the advice of counsel I respectfully decline to answer based on my constitutional right,” said O’Brien, who appeared to be clutching rosary beads she sat at the witness table. She was dismissed from the hearing and left with her lawyer.

White Collar Watch: Maneuvering for an Immunity Deal - When a witness has valuable information and may be implicated in a violation, there are delicate maneuvers between prosecutors and defense lawyers. That is playing out behind the scenes for Edith O’Brien, an assistant treasurer at MF Global, who could have crucial information about how millions of dollars of customer money went missing in the firm’s final days. Ms. O’Brien asserted her Fifth Amendment privilege against self-incrimination at a House subcommittee investigating MF Global’s collapse, but The Wall Street Journal reports that her lawyers are discussing with prosecutors her possible cooperation in the investigation. Until an agreement is reached with the Justice Department, however, she will maintain her silence. Prosecutors can grant immunity in exchange for cooperation, or reach a plea bargain for a reduced sentence. Before that can happen, prosecutors need to know what the witness will say and how credible that testimony is. There is nothing worse than making a deal before knowing what you are getting in return.

Goldman Should Stop Saying Clients Come First, Levitt Says - Goldman Sachs should stop promoting itself as “putting customers first” because the slogan ignores conflicts inherent in trading, said Arthur Levitt, the former Securities and Exchange Commission chairman and a senior adviser to the firm. “We probably ought to stop saying that because nobody really puts customers first,” Levitt, 81, said in an interview with Erik Schatzker on Bloomberg Television today. “Business is a tension between sellers and buyers.”  “Our clients’ interests always come first,” has been the No. 1 business policy at New York-based Goldman Sachs since the late 1970s, when then co-Chairman John C. Whitehead drafted a set of 14 business principles to guide the firm. Levitt’s suggestion comes 14 months after a committee on which he served issued a “business standards” report that reaffirmed Goldman Sachs’s commitment to putting clients’ interests first.  “Goldman shouldn’t play to that,” Levitt said in the interview today. “Goldman should play to their competence, which is considerable.”

Is Loaning Money at a 350% APR Evil? - In the early part of this year, a new start-up called ZestCash launched. Founded by former Google CIO, Douglas Merrill, it appears to be an attempt at short-term consumer lending with a Google-like "don't be evil" approach and markets itself as an alternative to payday loans.The venture caught my eye when mentioned in the New York Times this weekend as part of a story about Gil Ebaz's work of adding value to different services by providing better, more reliable data.  ZestCash intends to use different information and algorithms to assess the likelihood of repayment. The New York Times story suggests that this information will include cell phone bills. As someone who works a lot with data, I have little doubt that there is a lot of information that will do a better job of predicting repayment than the information currently in credit reports. Better accuracy should translate into lower interest rates for consumers. Here is the catch, ZestCash's own web site discloses that its maximum rates may have up to a 350% APR. There has been laudatory and not-so-laudatory coverage of ZestCash. As a friend of mine was fond of saying, personally I feel strongly both ways.

On the Meaningless of Contracts and the New Optionality - Yves Smith - An old saying is that contracts are only as good as the parties that enter into them. And the evidence is growing that when there is a meaningful power disparity between two parties to an agreement, the odds are high that the bigger player will elect to behave badly. This blog is rife with examples: pervasive contractual and regulatory violations in securitizations and foreclosures, banks exploiting not just ordinary consumers with “tricks and traps” but even billionaire clients; debt collection abuses; routine raiding of employee pensions while CEO pay and perquisites remain sacrosanct; and, of course, the pilfering of customer accounts at MF Global.  And conditions on the ground are even worse. Hoisted from comments:LAS says: I think you are on to something, Yves. There’s no indication of improvement either.For an example, our firm completed work for a major corporation last month (successfully) and they will not accept the invoice for our work. While we have had to lay out cash to perform the work, they have not. Although they came to us to do the work for them, they have shut down their procurement/accounts payable dept and they have kept it shut for about 2 months now. This is a major international corporation and I believe they are treating other suppliers like this, trying to make their Q1 performance look better than it is. I consider this to be theft of service. Until they re-open their procurement/accounts payable system, they are in effect refusing to acknowledge that they owe anything. Mel says: Wait till you see their next move. They’re going to run Accounts Payable as a Profit Center. Because they can.

Unofficial Problem Bank list declines to 948 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.   Here is the unofficial problem bank list for March 30, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  As expected, the FDIC released its enforcement action activity for February 2012. For the week, there were six removals and five additions, which leave the Unofficial Problem Bank List with 948 institutions and assets of $377.6 billion. A year ago, there were 985 institutions with assets of $431.1 billion. For the month of March 2012, there were 21 removals and nine additions or a net decline of 12 institutions and assets of $12.1 billion. This month there were 14 removals from action termination, which is the first month since the list has been published that action terminations greatly outpaced new additions.

FHA Bailout Risk Looming After Guarantees: Mortgages -- The Federal Housing Administration won't be able to earn its way to financial health this year, increasing the chance it will need a taxpayer bailout, based on an updated forecast from Moody's Analytics, which provides the agency's housing-market analysis. The U.S. government mortgage-insurer, which guarantees $1.1 trillion in home loans, had been counting on "robust growth" in home prices to help rebuild its insurance fund after paying out $37 billion to cover defaults the past three years, according to its annual report to Congress, filed in November. It won't get that growth until 2014, according to the latest outlook from Moody's Analytics. One measure of the market, the S&P Case-Shiller Home Price Index, will decline 2 percent in fiscal 2012, said Celia Chen, a Moody's Analytics housing economist who updated her estimate after providing the housing-market forecast for the FHA's annual actuarial report. Moody's Analytics hasn't taken a position on the FHA's future solvency, said Mark Zandi, the company's chief economist, in an e-mail. "The FHA's economic projections are surreal," said Andrew Caplin, a New York University economics professor who has testified to Congress on the agency's finances. "They must believe there will be very few readers in Congress able to critically review such a complex report."

Fannie and Freddie Charitable Donations? - I'm generally skeptical about corporate charitable donations.  My sense is that they are primarily a transfer of value from shareholders to managers, rather than a value-enhancing investment in goodwill.  So on the DC Metro, what did I see today, but a poster advertising the 2012 DC Servathon that featured the logos of a variety of corporate sponsors, including Fannie Mae and Freddie Mac. Aren't Fannie and Freddie insolvent and in conservatorship?  Whatever one thinks of corporate charitable donations, they are a lot harder to justify when the corporation is insolvent.  Critically, as far as I can tell, the sponsorship is from Fannie and Freddie themselves, NOT their charitable foundations--at least there is no indication that it is the foundations, not the GSEs involved. If that is correct, then why on earth is FHFA permitting Fannie and Freddie to make charitable donations? It is practically a fraudulent conveyance.  It is also using taxpayer money for charitable donations outside the appropriations process.  That strikes me as really problematic.  It also raises the question why FHFA will let Fannie and Freddie spend taxpayer money on charitable donations, but not on principal writedowns that might actually save taxpayers money in the long run.  

Victory in Oakland County Transfer Tax Case Paves Way for Other MIchigan Suits Against Fannie and Freddie - Yves Smith  - A few counties have filed litigation against various securitization players (originators, servicers, MERS) for the underpayment of recording fees. Similarly, New York attorney general Eric Schneiderman filed a wide ranging suit against MERS and three banks that used it and settled it for $25 million (it included a mention of $2 billion in unpaid recording fees but we were skeptical of viability of his argument). However, counties in Michigan have scored an important victory. Michigan law imposes a transfer tax on deeds recorded at the county office. Fannie and Freddie refused to pay that, claiming that they were part of the Federal government and hence exempt. That argument was clearly ridiculous and a Federal judge ruled against the GSEs.  This is going to be a boon for cash-starved Michigan counties and the state. The statue of limitations is six years, and the county treasurer estimates the damages will be $3 to $4 million to the county and between $10 and $20 million to the state. The treasurer has asked the state to allow him to keep the state’s portion of they money in his county to fight foreclosures. Good luck with that. Other counties in Michigan have related actions underway, and I’d expect any one that does not have a case in progress to file an action modeled on the Oakland case. From the Detroit News: Meanwhile, Ingham County filed a similar lawsuit and Genesee County is heading up a class-action suit. Macomb County is the first in the state to deny the lenders the exemption.

Obama Administration's New Plan to "Re-Gift" TARP Funds: Fan and Fred Take Center Stage (Again) - Thus far, the Federal Housing Finance Administration (FHFA), the conservator for Fannie Mae and Freddie Mac, has been reluctant to forgive the outstanding principal balances on mortgages owned by Fannie and Freddie. In the view of the FHFA, the reductions in principal would come at a net cost to taxpayers and would therefore be inconsistent with the agency’s mandate to limit taxpayer losses in conservatorship. To encourage the FHFA to rethink this position, the Obama Administration issued a Supplemental Directive that would use TARP funds to pay Fannie and Freddie to reduce outstanding loan balances. Specifically, Fannie and Freddie would receive as much as $0.63 for every $1 of mortgage debt they forgive. Once these payments are taken into account, the FHFA could now justify large scale principal forgiveness in cases where “principal forbearance” is currently the best loss-minimizing approach. First off, it is worth considering the basic deception of this arrangement. The FHFA won’t forgive mortgage principal because it believes doing so would increase taxpayer losses. According to Fannie Mae’s most recent credit supplement, about two-thirds of modified loans are current 12-months after a modification. New modifications that involve principal reductions would increase losses to taxpayers because the marginal increase in modified loan performance from current levels would not be sufficient to offset the losses on the principal reduction. So to avoid taxpayer losses on the FHFA line item on the budget, the Obama Administration would simply move those losses to the TARP-financed Home Affordable Modification Program (HAMP) line.

US regulator points finger over Freddie and Fannie‘ - FT - The US regulator overseeing state-controlled home loan financiers Fannie Mae and Freddie Mac has said that the companies are being pushed to accept losses to keep big US banks from writing down their holdings. In an interview with the Financial Times, Edward DeMarco, acting Federal Housing Finance Agency director, said policy makers who are pushing his agency to allow Fannie Mae and Freddie Mac to reduce borrowers’ mortgage balances, are deliberately shielding big banks from taking losses on distressed housing debt. The dispute revolves around the kind of loans financed by Fannie Mae, Freddie Mac and big US lenders – and who will foot the bill for writing down the mortgage principal owed by borrowers with negative equity. Fannie Mae and Freddie Mac finance home purchases by buying loans from lenders that are fully secured by properties. Now, as the Obama administration, Congress and at the Federal Reserve call on Fannie Mae and Freddie Mac to write down the mortgages they own or guarantee, Mr DeMarco argues that such a move amounts to a transfer of US taxpayer wealth to the biggest US lenders, whose “second mortgages” are subordinate to the debt owned or guaranteed by Fannie Mae and Freddie Mac. “If you do principal forgiveness, who is it benefiting?” Mr DeMarco asked. “Doing principal forgiveness is what would protect the big banks.”

A Bailout by Another Name - The acting director of the Federal Housing Finance Agency and overseer of Fannie Mae and Freddie Mac, Mr. DeMarco has come under increasing pressure to chuck his obligation to taxpayers and make Fannie and Freddie write down principal on mortgages held by troubled borrowers. He says, with reason, that such a program would run counter to his legal obligation to pursue only those activities that pose the least cost to taxpayers.  Representative Barney Frank, the Massachusetts Democrat who supported Fannie Mae almost to its collapse, has called for Mr. DeMarco’s resignation because he is “too rigid” on the issue. Representative Elijah E. Cummings, a Maryland Democrat and ranking member of the House Committee on Oversight and Government Reform, told a field hearing in Brooklyn last week that Mr. DeMarco “may be the biggest hurdle standing between our nation and the recovery of our housing market.”  Stabilizing the housing market is a noble and desired goal, of course. And legions of borrowers hurt by the bust genuinely need help.  But what the proponents of principal reductions at Fannie and Freddie don’t talk about is what a transfer of wealth from taxpayers (again) to large banks such a program would represent. The fact is, principal reductions by Fannie and Freddie are not the panacea that they may seem.

Gretchen Morgenson’s bizarre defense of Ed DeMarco - Ed DeMarco, the regulator in charge of Fannie Mae and Freddie Mac, has many critics, myself included, who would love him to allow Frannie to do principal reductions where it makes sense. But now he’s managed to find a defender. In Gretchen Morgenson, of all people Morgenson’s column today is utterly bizarre. She starts off by painting DeMarco as a “career public servant”, “under fire” in a “thankless job”. There are many career public servants, up to and including Tim Geithner, who can’t stand DeMarco and who think he is being deliberately obstructionist here. Morgenson then defends DeMarco from critics like Barney Frank and Elijah Cummings: What the proponents of principal reductions at Fannie and Freddie don’t talk about is what a transfer of wealth from taxpayers (again) to large banks such a program would represent. Morgenson is actually serious about this: the headline on her column is “A Bailout by Another Name”. And when she says bailout, she doesn’t mean a bailout of deadbeat homeowners, who would see their net worth jump overnight as a bunch of their obligations were written off at a stroke. No, she means a bailout of banks. On the face of it, this makes no sense. How can reducing homeowners’ principal end up as a bailout of banks?

A Poor Defense of Ed DeMarco - Dean Baker - DeMarco has drawn considerable heat as of late because of his refusal to allow Fannie Mae and Freddie Mac to do principal reductions to make it easier for underwater homeowners to stay in her home. Morgenson defends this refusal by saying that DeMarco's refusal is actually protecting taxpayers from providing yet another bailout to the banks. Her argument is that many of these underwater homeowners have second liens on their homes which are held by banks. If Fannie and Freddie do principal reductions on the first lien, then it greatly increases the likelihood that these second liens will be paid off, thereby enriching the banks at the taxpayers' expenses. (If a home goes into foreclosure, the first lien has absolute priority. Not a penny goes to the second lien unless the first lien is paid in full. This means that second loans generally have zero value in a foreclosure.) There are two problems with this story. The first is that a very large percent of F&F underwater mortgages do not have a second lien. Core Logic estimates that 60 percent of underwater mortgages do not have a second lien. The share is almost certainly higher with F&F loans than with mortgages more generally, The second issue is that the holder of the first mortgage can negotiate with the holder of the second mortgage to set terms for a principal write-down. It is possible that banks would be obstinate and refuse to make serious concessions. In this case, DeMarco with have a solid reason for refusing to go ahead with write-downs.

Calling DeMarco's Bluff? Use the GSEs' Market Power to Force 2d Lien Write Downs - There's been mounting pressure on the acting head of the FHFA, Ed DeMarco to order Fannie Mae and Freddie Mac to undertake principal reductions. DeMarco's pushed back, arguing that it's not fair for the GSEs to write-down principal when there are second liens on some of the loans that are on banks' books and the banks aren't doing write-downs (see here and here and Felix's critique here). DeMarco is arguing for strict observance of absolute priority. He notes that reducing the GSEs' first lien balances at taxpayer expense effects a bailout of the banks as it bouys the likelihood that their second liens will be repaid.  DeMarco's correct about a write-down of the firsts alone being a bailout of the banks. But his argument for doing nothing doesn't hold up for two reasons. First, there are plenty of GSE loans without seconds. There's no reason not to do write-downs on those loans. And second, the GSEs have the market power to force the banks to write down seconds as a term of doing business with the GSEs. If DeMarco's serious about dealing with negative equity, he'll start running the GSEs' like the 800 lb. gorilla they are in the housing market

Mr DeMarco, Would you consider a debt-equity swap? - From Bloomberg: The U.S. government has spent $190 billion to shore up the companies since they were taken into federal conservatorship in 2008 after their investments in risky loans soured. DeMarco said adding to the firms’ costs would be a violation of his legal responsibility to restore them to financial health.  Using principal forbearance instead of forgiveness so far has been better for taxpayers, DeMarco said. Forbearance reduces monthly payments while requiring borrowers to pay back the full amount of the loan when they sell the house. “If the borrower is successful on the modification, allows them to stay in their house and they stay in their house and start making mortgage payments, the taxpayer gets to share in the upside of that borrower’s success,” DeMarco said “If we forgive the principal up front and the borrower is successful, that upside all goes to the borrower and is not shared with the taxpayer.” There is another way to allow taxpayers to get the upside of borrowers' success--replace the debt they owe with a shared equity arrangement.  The taxpayer may be better off with principal forbearance for houses that are 10 percent underwater, because through amortization people can get themselves right-side up in a relatively short time (particularly if they can get a refinance at a low rate of interest). But for places like Las Vegas and the Central Valley of California, where many people are 40-70 percent underwater,  it is hard to see how default and large losses aren't inevitable.  A debt-equity swap would allow people to move freely, which aligning incentives between lenders and borrowers.

A Qualified Defense of DeMarco, the Administration’s Favorite Scapegoat for Its Failed Housing Policies (Updated) - Yves Smith - There’s been an interesting contretemps over an article by Gretchen Morgenson over the weekend, “A Bailout by Another Name.” Morgenson made the hardly-controversial observation that writing down Fannie and Freddie first mortgages without wiping out any relate second is a back door bailout. Remember, this was one of our key objections to the bank-friendly mortgage settlement, that a requirement to write down firsts and only write down related seconds to a degree is a subsidy to banks when if you were to believe the PR, the settlement is supposed to redress past abuses.  Morgenson also defends DeMarco’s refusal to do principal mods on Fannie and Freddie loans, arguing that he is subject to a requirement to preserve taxpayer assets and that the studies on this have been inconclusive. She adds that the focus is again incorrectly on Fannie and Freddie and not the banks. The fact that this article has gotten heated responses from Felix Salmon and Dean Baker appears to be more a function of tribalism of various sorts than about the policy issues at hand. DeMarco has become a favorite whipping boy of the Democratic party so as to distract from its abject failure to come up with remotely adequate solutions to the housing mess. And Morgenson fingers what has been the Administration’s continued top priority, that of protecting the banks.  Mind you, we are not opposing principal mods on GSE paper. This does not have to be a policy either-or. Second liens should be wiped out for stressed borrowers and principal mods made on first mortgages when the borrower looks to be viable on a lower level of mortgage payments.  But all of this noise about GSE principal mods is really a smokescreen. DeMarco has become the Administration’s favorite scapegoat as a way to divert attention from the it’s refusal to get tough the banks in order to fix the housing market.

Fannie and Freddie: Slashing Mortgages Is Good Business - New analyses by mortgage giants Freddie Mac and Fannie Mae have added an explosive new dimension to one of the most politically charged debates about the housing crisis: Whether to reduce the amount of money beleaguered homeowners owe on their mortgages. Their conclusion: Such loan forgiveness wouldn’t just help keep hundreds of thousands of families in their homes, it would also save Freddie and Fannie money. That, in turn, would help taxpayers, who bailed out the companies at a cost of more than $150 billion and are still on the hook for future losses. The analyses, which have not been made public, were recently presented to the agency that controls the companies, the Federal Housing Finance Agency, according to two people familiar with the matter. Freddie Mac’s meeting with the FHFA took place last week.

Lawler on possible Fannie and Freddie Principal Reductions - From housing economist Tom Lawler:  Several media stories, including one from NPR/ProPublica, suggest that new analysis by folks at Fannie and Freddie indicate that engaging in some principal reduction modifications may be cost effective to the GSEs. At least one of these stories, however, made what appears to be a “most erroneous” statement. E.g. a ProPublica reporter, in a follow-up article to the original NPR/ProPublica article on this issue, wrote that the GSE’s analysis suggested that “(s)uch loan forgiveness wouldn’t just help hundreds of thousands of families (stay) in their homes,” but “it would help save Freddie and Fannie money,” which “would help taxpayers…” That latter statement, however, appears to be incorrect. Other reports, including an interview with Freddie’s CEO, indicate that the GSEs’ analysis finds that principal reductions would be “cost effective” for the GSEs ONLY after factoring in the new, turbo-charged incentives Treasury would pay to the GSEs (and other lenders/investors) for doing a principal reduction under HAMP. Such incentives -- which were recently tripled, and which the administration recently agreed would be paid to the GSEs as well as other HAMP participants (the GSEs didn’t use to get any HAMP incentives) – are obviously paid for by the government/taxpayers.

NPR/Pro Publica Story on Fannie/Freddie Principal Mod Analysis Falls Apart - Tom Lawler, the housing economist and former chief economist at Fannie Mae, has a commentary up that calls into serious question that NPR/Pro Publica story about how Fannie and Freddie have some secret new analysis showing that principal reductions would be not only cost-effective for the GSEs, but cost-effective to the taxpayer. Let me say up front that I believe, based on all the analysis I have read, that principal reductions would be long-run positive over foreclosures in cases where the borrower has an ability to pay. But that’s not quite the issue here. The issue is that NPR and Pro Publica are claiming that some secret analysis exists where even Fannie and Freddie believe this. That puts the onus squarely on Ed DeMarco, and makes him more of a villain holding back the housing rebound. Lawler takes issue with one part of the NPR/Pro Publica story, the part which claims that “loan forgiveness wouldn’t just help hundreds of thousands of families (stay) in their homes,” but that also “it would help taxpayers” by saving Freddie and Fannie money. That’s not true, Lawler says, because the only way principal reductions end up saving Freddie and Fannie money is through the recently super-sized HAMP incentives for principal reductions going to them. And of course, those incentive payments, routed through TARP, come from taxpayers.

Housing Pundit Thomas Lawler and the Genesis of Lawlessness - While researching a HUD database for clues on Thomas Lawler, the frequently-cited foreclosure and heavy-metal loving “housing economist” often cited by the business media, and a favorite of Calculated Risk, I came across background information that raises more questions than it answers. In the spirit of CR’s former housing writer, Doris “Tanta” Dungey, who did not seem to hesitate to present puzzling information and ask her readers what they thought it meant, I thought I’d do the same. Tanta passed away of cancer at the age of 47 in late 2008 and it’s a shame CR has discontinued the practice. Starting in 1998 Thomas Lawler held the job of SVP Portfolio Management, SVP Financial Strategy, and SVP of Risk Strategy at Fannie Mae until he unceremoniously left in January, 2006, following an $8 billion financial fraud that occurred under his watch. Lawler, along with the rest of Fannie’s executive team, cooked the books spectacularly. That was back in the early 2000s, when a billion dollars was still real money. It’d be impossible to summarize Lawler’s ethical mosh-pit better than OFHEO, Fannie’s former regulator which morphed into the FHFA, already did so I’ll just cut-and-paste from their 2006 “Report of the Special Examination of Fannie Mae

Abigail Field: Mortgage Settlement Institutionalizes Foreclosure Fraud - The mortgage settlement signed by 49 states and every Federal law enforcer allows the rampant foreclosure fraud currently choking our courts to continue unabated. Yes, I realize the pretty servicing standards language of Exhibit A promises the banks will completely overhaul their standard operating procedures and totally clean up their acts. But promises are empty if they’re not honored, and worthless if not enforceable. We know Bailed-Out Bankers’ promises are empty, so what matters is if the agreement is enforceable. And when it comes to all things foreclosure fraud, the enforcement provisions are laughable. But before I detail why, let’s be clear: I’m not being hyperbolic. The bankers running and profiting most from our bailed-out banks are totally dishonest when dealing with the public, and their promises are meaningless.To see their dishonesty in the mortgage context, read the complaint filed in the mortgage deal, or my take on it here. But the bankers don’t limit their lying, cheating and stealing to homeowners. They abuse their clients the same way. Most broadly damaging, the bankers steal from taxpayers on a federal, state and local level and practically everybody else too. Fraud is just how they do business. When dealing with bankers, you can’t do business on a handshake.  I’ve already written about how banker-sympathetic, consumer-destructive the mortgage settlement’s “Servicing Standards Quarterly Compliance Metrics” are. But I didn’t address the rule-of-law metrics. So here goes.

Marketing $25 Billion AG Settlement to Consumers is Key to Getting Money - Our local AG's office just held a meeting for people who serve homeowners in foreclosure, to explain what the settlement means to consumers. In this blog, I share what I learned.  First, there will be money for those who are delinquent and whose loans are serviced by the five settlement banks (these funds are estimated to be about $63,000,000 in New Mexico). These funds are available for various types of assistance, including principal reduction or forbearance. Information and application forms can be found on most state AG’s web sites. As part of the settlement, banks agreed to 45 pages worth of servicing standards.  AGs also have access and oversight. There are penalties for non-compliance, though I am not sure if there are third party beneficiary rights.Second, moneys are earmarked for homeowners who are behind but cannot refinance because they are under water, as long as the homeowner's note is owned (as opposed to just serviced) by the five settling banks (an estimated $2,500,000 in New Mexico). It looks as though notes in a trust administered by one of the settling banks are eligible for this benefit as well. Third, money is set aside for state financial services, and fourth for foreclosure prevention. Fifth and finally, homeowners whose homes were foreclosed between January 1, 2008 and December 31, 2011 are eligible for direct payments. These funds are estimated to be in the range of $1,500 to $2,500 per lost home Nationwide, depending on how many people apply.

Foreclosure Deal Credits Banks for Routine Efforts - In February, JPMorgan Chase donated a home to an Iraq war veteran in Bucoda, Wash., and Bank of America waived the $140,000 debt that a Florida man still owed after the sale of his foreclosed home. Over the last year, Wells Fargo has demolished about a dozen houses in Cleveland.  Banks do things like this — real estate transactions that do nothing to prevent foreclosure — all the time. But beginning this month, they can count such activities as part of their new commitment to help people stay in their homes.   That commitment comes under the landmark $25 billion foreclosure abuse settlement between the government and five major banks2 announced last month. The settlement promises that of the $25 billion, the banks will give $17 billion “in assistance to borrowers who have the intent and ability to stay in their homes,” according to a summary3 of the settlement. But more than half of that money can be used in ways that will not stop foreclosures, including some activities that are already standard bank practices.  For example, the banks can wipe out more than $2 billion of their obligation by donating or demolishing abandoned houses. Almost $1 billion can be used to help families that have already defaulted move out.

Foreclosure Fraud 101: A Step-By-Step Look at One of the Most Common Fixes for Securitization Fail - - Yves Smith -- We’ve written from time to time that the train wreck in foreclosure-related procedures is the direct result of widespread, possibly pervasive failure to convey borrower IOUs (notes) to securitization trusts as stipulated in the governing documents (the pooling & servicing agreement). Because key actions had to be taken by dates long past, and the contracts that governed these deals are rigid, there isn’t a permissible way to get notes that weren’t conveyed properly to trusts on time there now. So the fix has been document fabrication and forgeries. We thought we’d provide a specific example for reader edification.  One thing that foreclosure defense attorneys have seen as a huge red flag of servicer chicanery is the use of allonges. An allonge is a separate piece of paper used for endorsements that is required by the Uniform Commercial Code to be “affixed” to the note and used for endorsements when there is no more space left on the note for signatures. Allonges were pretty much never seen until the robosigning scandal, since all the space on a note (meaning the back and the margins) can be used for endorsements. But they have a funny way of showing up out of nowhere and solving all the problems with a particular foreclosure. Of course, if an allonge really was “affixed,” it shouldn’t be possible for it to materialize out of nowhere.  So readers can see how this looks up close, I’m attaching this pleading from Lynn Szymoniak (the foreclosure fraud investigator who appeared on 60 Minutes and later received $18 million in settling a qui tam case as part of the national foreclosure settlement). Lynn in still embroiled in an an ongoing foreclosure fight and a major bone of contention is whether the party trying to foreclose has standing.

House Democrats Try to Stop Foreclosure Fraud Settlement Beneficiaries From Getting Hit With Big Tax Bill - Here’s an almost completely unremarked-upon side effect of the foreclosure fraud settlement: the tax implications. If you are one of the lucky few eligible to receive a principal reduction from the settlement, when the banks aren’t paying off their penalty bulldozing homes and waiving deficiency judgments, you have to reckon with this: because of the expiration of a Congressional law, every dollar you receive in principal reduction would be viewed for tax purposes as income, and thusly taxed. Most of the people needing a principal reduction are in dire financial straits; they wouldn’t need a write-down otherwise. So now, we’re going to hit them with a big tax bill that they can pay for with money they don’t have. A $50,000 principal reduction, entirely possible under this settlement, could lead to a $15,000 levy or more, depending on the income level and tax situation of the borrower. Even the $2,000 “sorry you lost your home” payments envisioned by the settlement could be subject to taxation, reducing their impact. Democratic Reps. Jim McDermott, John Larson and Shelley Berkley, members of the tax-writing House Ways and Means Committee, have recognized this, and filed legislation to remedy it, which they’re calling the “Homeowners Tax Fairness Act.” Every Democratic member on Ways and Means endorsed it.

Obama Mortgage Deal Frontman Sounds Off The Street - Iowa Attorney General Tom Miller believes he is tougher on the banking industry that many news reports would have you believe.  Little known outside his home state until bank foreclosure practices became an issue of national concern, Miller led negotiations on behalf of state attorneys general with the five largest U.S. mortgage lenders over foreclosure abuses that resulted in a $25 billion dollar settlement earlier this month.  A common narrative in press and bank analyst reports during the more than yearlong negotiations suggested Miller and a majority of other attorneys general were willing to settle the matter with the banks for $20 billion or less while granting them broad immunities regarding a wide range of mortgage-related abuses.  A smaller group of attorneys general, including New York's Eric Schneiderman, publicly announced they would not go along with a deal that granted those broad immunities, implying Miller and the others were willing to do so. At one point, Miller ejected Schneiderman from the group's executive committee, arguing New York's attorney general sought to "undermine" efforts of the other AGs to reach a deal.  In an interview last week, Miller wasn't ready to concede that he isn't as tough on the banking industry as Schneiderman or others, such as California's Kamala Harris, who were among the last ones to sign an agreement with the banks.

Sheila Bair Told Administration Its Housing Programs Would Bomb, Was Rebuffed on Better Solutions - Yves Smith - No wonder Geithner and the other financial regulators complained about Sheila Bair not being a team player. If you want to do what is expedient and you are confronted with someone who cares about fixing the problem, then yes, they aren’t on your side. And bully for them. Bair, in an interview in the National Journal (hat tip Amanda F), describes how it was clear even before it was launched that the embarrassingly bad HAMP program wouldn’t work (HAMP not only fell well short of its goals but was a cesspool of consumer abuses, with many participants losing their homes after being incorrectly told they had to be delinquent to be considered and to ignore the notices they received as their foreclosures moved ahead). This is a big deal. It’s one thing for outsiders to have said the incentives for servicers were too small to get them to play ball; quite another for a senior banking regulator with experience on that beat to see that as a big problem in advance. From the interview: Bair: They had academics and theoretical economists designing it who may have been well-intentioned, but didn’t have any practical understanding of the market or servicers or operationally what would make sense. Everything the administration has done has only helped at the margin. The timidity and incrementalism have been real problems. They just don’t want to spend money on it. They are conflicted. You get what you pay for. Trying to do this on the cheap just didn’t work and the complexity of the program, if anything just compounded the problem. The bottom line is the financial incentives were not enough. The program was too complicated and the sense of urgency we saw, and I think that frankly the president saw, I don’t think translated into a program that could be operationalized. They were relying on a voluntary program with weak economic incentives and the big servicers were not putting the resources that were needed into these big servicing operations…

Update on HARP 2 - Kathleen Pender has some details at the SF Chronicle: Harp 2 mortgage-refinance program Harp 2 got into full swing last week after Fannie Mae and Freddie Mac updated their automated underwriting systems ... Fannie and Freddie updated their systems March 17 and 15, respectively. That means lenders can now refinance any loans, and do it more efficiently. ... Banks are free to add their own requirements, and some have. Wells Fargo spokesman Jim Hines says, "We also employ minimum credit standards to ensure customers have capacity to repay the mortgage" Some banks, including Chase and Bank of America, are not refinancing loans under Harp 2 that they do not already service. ... originators - who often continue to service loans they sell to Fannie or Freddie - don't want all the headaches associated with servicing defaulted loans. That's why some lenders are still imposing loan-to-value limits and other requirementsThis means high LTV borrowers will probably have to stick with their current servicer to refinance - and the servicer can charge high fees for the refinance. Still - with the automated version - we should see an increase in HARP refinance activity.

Principal Reduction and Strategic Default - Moral hazard, moral hazard, moral hazard....  How often have we heard that as a reason for why principal reductions can't be done.  As if it were the worst thing in the world.  As an initial matter, we don't have to do principal reduction in a way that creates moral hazard, such as making principal reduction contingent on default and no strings attached. (To put it another way, we don't have to be stupid about the way we do principal reduction.) One solution would be principal reductions contingent on level of negative equity, not on default. Another would be to offer principal reductions only to those who have already defaulted (I don't like this because it penalizes those who kept paying, but the point is that it avoids moral hazard inducement). Another possibility would be to make principal reductions contingent upon paymentshared appreciation, which doesn't have to be a 50-50 split. Instead, it could be that initial appreciation goes all to the lender and then it starts to shift to the borrower. But let me suggest something counterintuitive and heterodox. Principal reduction is a case in which we WANT to encourage moral hazard. To understand why, you need to start with the understanding that our goal here is macroeconomic, not moral. The goal is stabilizing the housing market and the the economy, not balancing the moral cosmos and bringing harmony to the Force (not that there's anything wrong with that).

Not-So-Dumb Consumers Shun OCC’s Bogus Foreclosure Reviews - Yves Smith  - Consumers seem to have wised up to the fact that the Administration is not on their side, particularly as far as housing is concerned. John Walsh, the acting director of the Office of the Comptroller of the Currency, gave a speech today at the National Interagency Community Reinvestment Conference that had so many whoppers in it that it was hard to keep track of them all. But it also contained an important bit of information that suggested that homeowners aren’t buying the bank-friendly OCC’s pretense to be on their side.  Long-standing readers may recall that the OCC entered into consent decrees with 14 major servicers last April. The OCC went that route as a way to end run the CFPB, which at the time seemed to have the ear of state attorneys general. The CFPB was a threat because it was providing analyses at the state AGs’ request that suggested that the states had good grounds for seeking substantial damages from banks (note that the $20-$30 billion figure that had been leaked was mere disgorgement. Damages would have been on top of that). Can’t have that, now can we? When the consent orders was released, Adam Levitin and yours truly focused on the rife-for-abuse idea of having contractors selected by the banks perform the servicer reviews. Why do we have regulators if they can’t be bothered to do their job? And predictably, Michael Olenick, Francine McKenna and your humble blogger found examples of foreclosure review contractors with glaring conflicts.

CoreLogic: Almost 65,000 completed foreclosures in February 2012 - From CoreLogic: CoreLogic® Reports Almost 65,000 Completed Foreclosures Nationally in February: CoreLogic ... today released its National Foreclosure Report for January, which provides monthly data on completed foreclosures, foreclosure inventory and 90+ delinquency rates. There were approximately 65,000 completed foreclosures in February 2012, compared to 66,000 in February 2011, and 71,000 in January 2012. The number of completed foreclosures for the 12 months ending in February was 862,000. From the start of the financial crisis in September 2008, there have been approximately 3.4 million completed foreclosures. Approximately 1.4 million homes, or 3.4 percent of all homes with a mortgage, were in the foreclosure inventory as of February 2012 compared to 1.5 million, or 3.6 percent, in February 2011 and 1.4 million, or 3.4 percent, in January 2012. Nationally, the number of borrowers in the foreclosure inventory decreased by 115,000, a decline of 7.6 percent, in February 2012 compared to February 2011. "The pace of completed foreclosures is down slightly compared to January, running at an annualized pace of 670,000, but compares favorably to the pace of completed foreclosures in February a year ago. This is a new monthly report and will help track the number of completed foreclosures, and to see if the lenders are starting to clear the foreclosure inventory backlog following the mortgage settlement.

Fannie Mae and Freddie Mac Serious Delinquency rates declined in February - Fannie Mae reported that the Single-Family Serious Delinquency rate declined in February to 3.82%, down from 3.90% in January. This is down from 4.44% in February 2011. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate declined to 3.57% in February, down from 3.59% in January. Freddie's rate is down from 3.82% in Feburary 2010. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are loans that are "three monthly payments or more past due or in foreclosure". The serious delinquency rate has been declining, but declining very slowly. The recent sideways move for Freddie Mac would still hasn't been explained. With the mortgage servicer settlement, I'd expect the delinquency rate to start to decline faster over the next year.  The "normal" serious delinquency rate is under 1%, so there is a long way to go.

Negative equity gap nears $4 trillion - The U.S. housing market contains a nearly $4 trillion negative equity hole, according to Williams Emmons, an economist with the Federal Reserve Bank of St. Louis. Emmons made that statement while speaking at HousingWire's 2012 REthink Symposium. The Fed Bank economist said it would take $3.7 trillion, much more than the $25 billion mortgage servicing settlement and other federal housing initiatives, to get homeowners with mortgage debt back to preferred loan-to-value ratio levels. Emmons' data estimates the average LTV for those with mortgage debt is currently 94.3%. That compares to preferred LTV levels among mortgage debt holders of 58.4%, which was the average struck among mortgaged homeowners in the period stretching from 1970 to 2005. Emmons told the crowd there is no easy way to fill that gap, and the deep hole is hardly discussed among the media and policymakers. "We are sort of stuck in this," he told the crowd. "It's a sweat box we're in, and we can't get out. We are not talking about this very much … it's just too ugly." 

House Prices and Lagged Data - All data is lagged, but some data is lagged more than others. In times of economic stress, I tend to watch the high frequency data closely: initial weekly unemployment claims, monthly manufacturing surveys, and consumer sentiment. The “high frequency” data is lagged, but the lag is usually just a week or two. Most of the time I focus on the monthly employment report, GDP, housing starts, new home sales and retail sales. The lag for most of this data is several weeks. As an example, the BLS reference period contains the 12th of the month, so the report is lagged a few weeks by the time it is released. But sometimes the lag can be much longer. Tomorrow morning the January Case-Shiller house price index will be released. This is actually a three month average for house sales recorded in November, December and January. But remember that the purchase  agreement for a house that closed in November was probably signed in September or early October. So some portion of the Case-Shiller index will be for contract prices 6 or even 7 months ago!  Other house price indexes do a little better. CoreLogic uses a weighted 3 month average with the most recent month weighted the most. The LPS house price index is for just one month (not an average) and uses only closings (not recordings like other indexes that can add an additional lag). But the key point is that the Case-Shiller index will not catch the inflection point for house prices until well after the event happens. Just something to remember ...

Home Prices Fell in January in Most US Cities - Home prices fell in January for a fifth straight month in most major U.S. cities, as modest sales increases have yet to boost prices. The Standard & Poor’s/Case-Shiller home-price index released Tuesday showed that prices dropped in January from December in 16 of 19 cities tracked. The steepest declines were in San Francisco, Atlanta and Portland. Prices increased in Miami, Phoenix and Washington. Price information for Charlotte was delayed and therefore not included in the report. The declines partly reflect typical offseason sales. The month-over-month data are not adjusted for seasonal factors. Still, prices fell in 17 of the 20 cities in January compared to the same month in 2011. That suggests the housing market remains weak, despite the best winter for home sales in five years and a stronger job market.

Case Shiller: House Prices fall to new post-bubble lows in January - S&P/Case-Shiller released the monthly Home Price Indices for January (a 3 month average of November, December and January). This release includes prices for 20 individual cities, and two composite indices (for 10 cities and 20 cities). From S&P:  2012 Home Prices Off to a Rocky Start According to the S&P/Case-Shiller Home Price Indice Data through January 2012, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices ... showed annual declines of 3.9% and 3.8% for the 10- and 20-City Composites, respectively. Both composites saw price declines of 0.8% in the month of January. Sixteen of 19 MSAs also saw home prices decrease over the month; only Miami, Phoenix and Washington DC home prices went up versus December 2011. (Due to delays in data reporting, the January 2012 index values for Charlotte are not included in this month’s release).Note: Case-Shiller reports NSA, I use the SA data. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 34.2% from the peak, and down 0.1% in January (SA). The Composite 10 is at a new post bubble low (both Seasonally adjusted and Not Seasonally Adjusted). The Composite 20 index is off 33.9% from the peak, and unchanged in January (SA) from December. The Composite 20 is also at a new post-bubble low.  The second graph shows the Year over year change in both indices.The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

A Look at Case-Shiller by Metro Area - S&P/Case-Shiller reported that its home-prices indexes reached new lows in January, though the pace of decline slowed from December. The composite 20-city home price index, a key gauge of U.S. home prices, dropped 0.8% in January from the previous month and fell 3.8% from a year earlier compared to a 4.1% annual decline in the previous month. Just three cities posted monthly increases — Phoenix, Miami and Washington. Denver, Detroit and Phoenix were the only cities to post positive annual growth rates. There were no data released this month for Charlotte, N.C., due to delays in reporting. On a seasonally adjusted basis, which aims to take into account the slower selling season in the winter, things looked a little better. The overall 20-city index was flat from the previous month, and just nine cities posted monthly declines.  See a sortable table of home prices in the 20 cities in the Case-Shiller index. Read the full story. Read the full S&P/Case-Shiller release.

Home Prices in U.S. Cities Fell at Slower Pace in January - Home prices in 20 U.S. cities dropped at a slower pace in January, pointing to stabilization in the real estate market.  The S&P/Case-Shiller index of property values in 20 cities fell 3.8 percent from a year earlier, matching the median forecast of 32 economists surveyed by Bloomberg News, after decreasing 4.1 percent in December, a report from the group showed today in New York. Prices were little changed in January from the prior month, the best performance since July. Property values are steadying as a strengthening labor market underpins housing demand, which may allow the industry that precipitated the recession to contribute to growth this year. Nonetheless, the recovery in sales may be restrained by foreclosures that are putting more properties onto the market.  “We are starting to see a slightly less-negative picture,” . “We have seen some slight progress from very depressed levels, but there’s still a long, long way to go.”

Housing Prices Fall to 2003 Levels, But Demand May Be Building - It’s now officially a lost decade for home prices. With the release of the January data for the Standard & Poor’s/Case-Shiller Home Price Indexes, prices in a national composite dropped 3.8% from a year before, rolling back to the levels of early 2003. The softness, which is a slight improvement from December’s 4% year-over-year drop, had been pretty much expected by a consensus of economists. But “expected” doesn’t mean “welcome.” On a year-over-year basis, prices fell in every major metro area surveyed in the 20-city composite except for Miami, Phoenix, and Washington D.C. The factor continuing to pull prices down? The foreclosure mess. LPS Applied Analytics, a real estate data provider, notes that as of last month, a little more than 2 million homes are in foreclosure pre-sale inventory. However, the good news is that the pace of existing home sales is picking up. It’s now at 4.59 million units annually as of February.  In this scenario, though, local markets can still be hurt quite badly. In the latest Case-Shiller numbers, Atlanta continues to get ground into the floor, with prices dropping year-over-year by an astounding 14.8%. It looks like that’s due to more foreclosure competition. Foreclosure data provider RealtyTrac notes that in Georgia overall, nearly four out of every 10 sales in the last quarter were foreclosures.

Real House Prices and Price-to-Rent Ratio decline to late '90s Levels - Case-Shiller, CoreLogic and others report nominal house prices. It is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1998 and early 2000 levels depending on the index. The first graph shows the quarterly Case-Shiller National Index SA (through Q4 2011), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through January) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q3 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to January 2003 levels, and the CoreLogic index is back to February 2003. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q4 1998 levels, the Composite 20 index is back to February 2000, and the CoreLogic index back to August 1999. This graph shows the price to rent ratio (January 1998 = 1.0). On a price-to-rent basis, the Case-Shiller National index is back to October 1998 levels, the Composite 20 index is back to February 2000 levels, and the CoreLogic index is back to August 1999.

How Housing Affordability Can Falter Even as House Prices Decline - Those snapping up housing for cash are either buying to rent the homes or to speculate that a resurgent housing market will arise and they can "flip" for big profits. This segment simply isn't large enough to soak up all the millions of homes languishing in the "shadow inventory" of homes being held off the market in the vain hope prices will bubble higher. The general idea of lower home prices is that once prices fall to some magic threshold, buyers will jump in and liquidate the inventory. That notion makes two enormous assumptions: 1) Interest rates will stay near-zero when inflation is factored in. 2) Household income will stop declining. In other words, there are three inputs to housing affordability, and price is only one of them. Interest rates and disposable income are equally important.

Reality Check - The bright spot that was housing appears to be starting to slide again.  Which sucks because the housing “improvement” was an enormous part of the bull case.  Also, seasonally housing is supposed to be kicking ass right now.  But eagle-eyed Joe Weisenthal notes that every single housing market data point this week was punk:

  • Monday: Homebuilder sentiment missed, coming in at 28 vs. expectations of 30.
  • On Tuesday, housing starts came in just below expectations.
  • On Wednesday, mortgage applications for the week fell 7.4%. Also existing home sales came in at an annualized pace of 4.59 million, vs. expectations of 4.61 million.
  • On Thursday, the FHFA house price index showed no gain vs. expectations of 0.%. Last month was revised from a 0.7% gain to just 0.1%.
  • And then today we got New Homes Sales of just 313K vs. expectations of 325K. Also today, the major homebuilder KB Homes reported a big miss, and the stock is getting crushed.

Shiller: Real Chance of Japan-like Housing Slump in US - Robert Shiller, who coined the term “irrational exuberance,” is one of our favorite economists. He really nails it here on the structural shifts taking place in housing. We agree there is a generational change going on in the sector where the younger “connected” cohort groups are shunning McMansions in the ‘burbs. Also, the risks of a Japan-like multi-decade slump in housing is much higher than the markets perceive. Is Mr. Bernanke listening? Many young people are choosing to live at home for a longer period of time instead of buying. Moreover, would-be homebuyers are settling into modern apartments and condominiums, further hindering a housing rally. Shiller says the shift toward renting and city living could mean “that we will never in our lifetime see a rebound in these prices in the suburbs.” A perpetually sluggish housing market, which Shiller believes has become “more and more political,” might push the country in a “Japan-like slump that will go on for years and years.”

NAR: Pending home sales index decreases in February - From the NAR: Pending Home Sales Ease in February but Solidly Higher Than a Year Ago The Pending Home Sales Index, a forward-looking indicator based on contract signings, eased 0.5 percent to 96.5 in February from 97.0 in January but is 9.2 percent above February 2011 when it was 88.4. The data reflects contracts but not closings....The PHSI in the Northeast slipped 0.6 percent to 77.7 in February but is 18.4 percent above a year ago. In the Midwest the index jumped 6.5 percent to 93.8 and is 19.0 percent higher than February 2011. Pending home sales in the South fell 3.0 percent to an index of 105.8 in February but are 7.8 percent above a year ago. In the West the index declined 2.6 percent in February to 99.3 and is 1.8 percent below February 2011. This was below the consensus of a 1.0% increase for this index. Contract signings usually lead sales by about 45 to 60 days, so this is for sales in March and April.

Vital Signs: Pending Home Sales - Americans are buying more homes this year than in 2011. The Pending Home-Sales Index, which many economists see as an indicator of future housing activity, was 96.5 in February, up 9.2% from the same month last year. The index tracks home-buying deals that typically close one or two months after signing. A gauge of such activity in the Midwest was up 19% from February 2011.

'Best Spring in Five Years' for Housing: Toll CEO - It's been the "best spring in five years," [Toll Brothers CEO Douglas Yearley told CNBC]. In 2012 "our orders are up significantly and continue to be up significantly. I'm optimistic right now." The average price of a Toll home is $575,000. Yearley spoke the same day homebuilder Lennar reported first-quarter earnings that beat expectations, a sign to some analysts that the housing market is recovering"25 percent of our communities have seen a price increase since Jan 1. That’s encouraging. There are places where we don’t have pricing power (but) we’re not dropping prices. We haven’t dropped prices in over a year." Phoenix is hot for housing, having gone from 14 to 16 months of supply down to four or five months. "In the last month, Phoenix is back in a big way," Yearley said. "We're bumping along the bottom in certain locations but we're clearly off the bottom in other locations," Yearley said.

Grim Housing Data Shows We Have Not Hit Bottom - A new string of grim housing data confirms what economists and analysts have long predicted: the housing market has yet to hit bottom, and once it does, it will be a long slog back to health and stability. The nation’s heap of completed foreclosures remained steep, barely budging to 65,000 in February compared to 66,000 one year earlier, according to new data released by CoreLogic Thursday.  The percentage of American homeowners more than 90 days delinquent on their mortgage payments, including those in foreclosure, rose to 7.3 percent in February compared to 7.2 percent a month earlier. According to today’s report, 3.4 million properties have gone into foreclosure since the financial crisis in September 2008.  About 1.4 million, or 3.4 percent of all properties with a mortgage, were in the foreclosure process in February—a 0.2 percent drop from February 2011.   That follows new data from the S&P/Case-Shiller Index that U.S. home prices sank in January for the fifth straight month to the lowest level since 2003. Additionally, separate reports from the National Association of Realtors and CoreLogic show existing home sales and previously owned homes under contract shrank in February. The number of bank-owned homes either in the foreclosure process or seriously delinquent—the so-called shadow inventory—remained unchanged from six months earlier at 1.6 million units.

What is a Housing Recovery - There are people in the Recovery Winter camp, like myself, who argue that the upturn in housing will contribute to sustained growth in the United States, baring major unforeseen shocks. That is, unless something identifiably contractionary happens we should expect growth to become more solid, with fewer disappointments and a steady path back towards our long run trajectory. In short, a recovery. However, I am receiving a steady stream of comments noting the continued downward movement in home prices along with evidence that the uptick in new home sales and starts at the beginning of this year was a fluke. So, to be clear, I don’t think there is any reason why we should expect strongly rising single family home prices in the near future. Nor, is my baseline assumption that we will see a strong increase in single family construction. The upturn at the beginning of this year was surprising to me as well. In contrast, my thesis is first that single family construction will not fall any further. Currently new single family homes built-for-sale are running slightly behind new single family home sales. Inventory is at record lows and declining. Thus even with continued weakness in the existing home market we are not likely to see significant declines in new single family home construction. This is in large part because new single family home construction is close to or outright dominated now by custom home construction. That is homes built by owner or built by contractor for a specific owner. There is no substitute for a custom built single family home and there is no reason to expect that people in this market are going to be doing worse economically.

Consumer Credit Growing at Highest Rate in Past Decade – Unhealthy and Unsustainable? --  As many of you who frequent this space already know, I have been tracking the rates of change in the 3 month moving averages of U.S. consumer credit outstanding and retail sales since a piece we did on the subject in November of 2010. We look at aggregate consumer credit (and not merely the revolving portion more commonly associated with retail activity) because we believe that term loan borrowing—where available (chiefly student loans and autos)—frees up cash for consumption. Another way of viewing this is that transportation and education are not truly elective purchases and not leveraging those purchases would otherwise reduce overall consumption. What the numbers tell us today (as illustrated in the below graph) is that, as of January 2012, the growth rate in all forms of consumer credit on a 3 month average basis grew at a rate greater than at any time during the credit bubble. Moreover, at $2.495 trillion, outstanding consumer credit stands a 97% of its peak of $2.576 trillion in August of 2008. Deleveraging, my friends, this is not. Yesterday the Consumer Financial Protection Board reported that student loans alone likely moved past the $1 trillion milepost at year end. This not only acts as a present danger, but will reduce consumption years into the future as the present cohort of students enter their prime consuming years “pre-burdened” by indebtedness. Normally, we would rely on post-recession rapid growth to reverse the situation, but in an oversupplied, demand-impaired global economy GDP growth proves elusive.

Disposable Income Growth Is At Recessionary Level - No matter how much goes right for the economy — solid job gains, a booming stock market, a mild winter — growth continues to disappoint. The puzzle can be explained to a large extent by one simple data point: real disposable income. Year-over-year growth in real disposable income — the earnings Americans have left after taxes and inflation — is stuck below 1%, a level typically associated with recessions. It was just 0.6% in January. Why has disposable income lagged so badly while job gains in general and private-sector wages in particular are growing at a solid, if not spectacular, rate? The answer lies in large part in the unwinding of extraordinary government supports. It may seem hard to imagine that fiscal policy is anything but expansionary when deficits remain north of $1 trillion, but the reality is that some of the income props set up a few years ago are going away. The upshot: As the private economy finally starts to pick itself up, growth in the larger economy will be muted somewhat. And the drag could get worse, given the tax hikes and spending cuts scheduled to hit in 2013.

Consumer Spending Up Sharply In February As Personal Income Growth Stays Sluggish - Consumer spending rose sharply in February, the Bureau of Economic Analysis reports. Unfortunately, income growth was weak again last month, raising fresh worries about the economic outlook.  It’s tempting to focus on the spending side of the ledger, where personal consumption expenditures (PCE) soared 0.79%. Bloomberg, for instance, ran a story this morning with the headline: “Consumer Spending in U.S. Climbs 0.8%, More Than Forecast." Indeed, last month witnessed the strongest gain for PCE since August 2009. But no one should ignore the problem with disposable personal income (DPI), which rose a mere 0.16% last month. That’s slightly better than January’s near-flat 0.04% rise, but there’s not enough juice here to overcome the concern that the income trend is in trouble. The monthly numbers per se are the least of our worries. The bigger concern is that DPI's sliding growth rate shows no sign of stabilizing, much less reversing in terms of its year-over-year pace. As the second chart below shows, DPI’s deceleration on this front is becoming more pronounced, slipping to a modest 2.65% annual increase for the year through last month—the slowest in nearly two years. The fact that the rate of growth has been consistently falling for months is even more disturbing. This warning sign has been a concern on these pages for for months, and today’s update offers no reason to think differently.

US Consumer Spending Up 0.8 Pct., But Income Lags — U.S. consumers boosted their spending in February by the most in seven months. But Americans’ income barely grew and the saving rate fell to its lowest point in more than two years. The Commerce Department said Friday that consumer spending rose 0.8 percent last month. However, income grew only 0.2 percent, matching January’s weak increase. And when taking inflation into account, income after taxes fell for a second straight month. Consumers are spending more after the best three-month hiring stretch in two years. But few who already had jobs saw big pay raises. Some of the increase in spending reflected the jump in gas prices. But even after excluding inflation, consumer spending still rose a solid 0.5 percent. And the numbers show that most of the inflation was tied to gas prices. Still, the weak income growth meant Americans dipped into savings to finance their spending. The saving rate dropped to 3.7 percent of after-tax income in February. That was the lowest level since August 2009. The saving rate had been 4.3 percent in January and it had averaged 4.7 percent for all of last year.

American Spending Goes Into Overdrive As Savings Plunge To 2008 Levels - Why save when one can spend (and, more importantly, why save when one has ZIRP)? This appears to have been the motto of American consumers in the past three months when the US Savings rate has plunged from 4.7% in December to a tiny 3.7% in February: the lowest since December 2007's 2.6%, and just as the recession and the market crash was about to send everyone scrambling for the safety of bank savings. The reason: in February personal spending soared by 0.8% on expectations of a 0.6% rise, while incomes barely rose by 0.2% on a consensus rise of 0.4%. Which means the balance had to be savings funded. So even as we have seen retail weakness in the past three months, we now know that it was not only credit funded, but also forced US consumers to burn through their meager savings. And all this before the gasoline price shock hit. The question then is: with the remainder of US savings about to be tapped out on gasoline purchases, just where will the money come to fund all those priced in NEW iPad acquisitions? Or will Apple finally use up its cash hoard and start a captive lending unit, giving consumers credit to purchase its products?  At the rate the US consumer is going broke it may soon have no other option.

Consumer Spending - PCE moved forward rapidly in Feb, no doubt raising tracking forecasts for Q1GDP. Importantly, it seems that while the decline in energy consumption has slowed, it has not reversed. Regardless of what happens with the weather we should expect the official measures of energy consumption to turn north hard as the winter passes. In short, low heating during the winter  cut deeply into consumer spending measures.  However, as we pass into the Spring the seasonal adjustment will except heating expenses to fall away anyway, so it will no longer count against consumer spending estimates. This will be reflected as boom.

Consumer Spending on Energy - Today's release of personal income and expenditure data was about as expected and the January-February data suggest that first quarter real personal expenditures component of the real GDP account will show about 2% real growth. But the energy expenditures within the data has been little noticed. Normally rising energy prices dampen the economy. But this time around the warm winter, falling natural gas prices and conservation appear to be offsetting the negative impact of higher oil prices. Nominal expenditures on energy peaked at $676.8 billion in September, 2011 and fell to $610.5 billion in January,2012 before rebounding to some $636.4 billion in February, 2012. The drop from September to January was about 10% and even after the February rebound nominal consumer spending on energy was still some 6% below it's September peak. So, contrary to the standard assumption it does not appear that rising oil prices is doing that much damage to economic growth. As the chart shows, energy as a share of consumer spending was 5.78% in February as compared to the recent September peak of 6.24% and 7% at the July, 2008 peak.

Inadvertent Austerity - A cursory look at personal income statistics shows that the biggest drag on personal income right now is the decline in transfer payment from the government. At first this seems natural as the economy is recovering and automatic stabilizers like unemployment insurance work in both directions. They slow the descent into recession but as they roll off they also slow the recovery. Yet, the recent numbers were to big to explained by unemployment insurance alone. It turns out government health care spending is dropping by unprecedented amounts. Below are year over year declines in transfer payments.  The blue line is Medicaid which is now outpacing Unemployment insurance in terms of absolute year-over-year spending reduction. The red line is Medicare, which is whose year-over-year spending is not quite in decline but appear poised to make declines in the coming months. This may be why the fundamentals in health care look surprisingly weak. Job gains have slowed as well as capital expenditure.

''Real'' Disposable Income Per Capita: The Ongoing Shrinkage - Earlier today I posted my monthly update of the year-over-year change in the Bureau of Economic Analysis (BEA) Personal Consumption Expenditures (PCE) price index since 2000. Now let's look at the PCE data to understand what the latest numbers are telling us about a key driver of the U.S. economy: "Real" Disposable Income Per Capita. What we discover is that, adjusted for inflation, per-capital disposable incomes have flatlined for the past 21 months and in fact have contracted for the past two months. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000.  The BEA uses the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000. Nominal disposable income is up 48.5% since then. But the real purchasing power of those dollars is up a mere 14.3%. Real DPI per capita is at a level first attained in the Autum of 2006 and remains about 1.7% below the level at the beginning the 2007-2009 recession. In fact, this metric of consumer well-being has essentially hovered around a flatline since June of 2010.

It’s a Dead-Man-Walking Economy - I was just shopping for food and noticed that the bargain bread was on sale at two for $5. My gas costs almost as much per gallon. That’s got to hurt a lot of people, especially on the lower income rungs. I don’t need to ask; a member of my family just got a job that pays $12 per hour – about three times what I made working for the university food service back when I was in college – and it’s not enough to cover his rent and basic bills. If his wife gets similar work, they’ll make ends meet, but woe unto them if anyone in their family crashes a car or requires serious medical treatment.Actually, the trend towards both partners in a marriage having to work really started in the early ’70s – after Nixon cut all links between the dollar and gold in August of 1971. Before then, in the "Leave It to Beaver" era, the average family got by quite well with only the husband working. If he got sick or lost his job, the wife was a financial backup system. Now, if something happens to either one, the family is screwed.

‘Cash Mobs’ gather to splurge in locally owned stores (Reuters) - Flash mobs have been blamed as a factor in looting during urban riots. But now a group of online activists is harnessing social media like Twitter and Facebook to get consumers to spend at locally owned stores in cities around the world in so-called Cash Mobs. At the first International Cash Mob day on Saturday, wallet- toting activists gathered in as many as 200 mobs in the United States and Europe, with the aim of spending at least $20 a piece in locally owned businesses, according to the concept's founder, Cleveland lawyer Andrew Samtoy.

The anti–Walmart - Cashiers are barred from interacting with customers until they have completed 40 hours of training. Hundreds of staffers are sent on trips around the U.S. and world to become experts in their products. The company has no mandatory retirement age and has never laid off workers. All profits are reinvested in the company or shared with employees. A doomed Internet startup? Occupy Wall Street fantasy? Bankrupt retailer recently purchased by Walmart?No, a $6.2 billion-a-year, 79-store-supermarket chain with cult-like loyalty among its customers. Wegmans, which operates its 79 stores in New York, Pennsylvania and four other East Coast states, shows that a business can generously train its workforce and profit handsomely.Privately owned by the Wegman family, the chain employs 42,000 people – 20 times the number who work for Facebook – and defies quarterly-driven Wall Street wisdom. Executives say their most important resource is their workers.

Restaurant Performance Index increases in February - From the National Restaurant Association: Restaurant Industry Outlook Improves as Restaurant Performance Index Stood Above 100 for 4th Consecutive Month Bolstered by positive same-store sales and traffic results and an optimistic outlook among restaurant operators, the National Restaurant Association’s Restaurant Performance Index (RPI) remained above 100 for the fourth consecutive month in February. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.9 in February, up 0.6 percent from January’s level of 101.3. In addition, the RPI stood solidly above the 100 threshold in February, which signifies expansion in the index of key industry indicators. "Only seven percent of restaurant operators expect to reduce staffing levels in the next six months, the lowest level in nearly eight years.” (see graph)

BPP@MIT Annual Inflation Lowest In 2 Years: 2.2% -  The Billion Prices Project @ MIT just released daily online price index data through March 6, and annual inflation rates for the last two years are displayed in the chart above.  According to this real-time information of major inflation trends in the U.S., inflationary pressures have been subsiding for the last six months, and the current annualized inflation rate of about 2.2% through early March is the lowest rate in at least two years.  That's almost a full percent below the 3% annual rate of inflation from the CPI (NSA), providing support to the notion that the BLS measure of consumer prices overstates inflation by a full percentage point.

Personal Income increased 0.2% in February, Spending 0.8% - The BEA released the Personal Income and Outlays report for February:  Personal income increased $28.2 billion, or 0.2 percent ... in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $86.0 billion, or 0.8 percent. Real PCE -- PCE adjusted to remove price changes -- increased 0.5 percent in February, compared with an increase of 0.2 percent in January. ... The price index for PCE increased 0.3 percent in February, compared with an increase of 0.2 percent in January. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent.  The following graph shows real Personal Consumption Expenditures (PCE) through February. PCE increased 0.8% in February, and real PCE increased 0.5%. January was revised up from unchanged to a 0.2% increase.  Note: The PCE price index, excluding food and energy, increased 0.1 percent. The personal saving rate was at 3.7% in February. This was a sharp increase in spending in February (and January spending was revised up). Using the two-month method, it appears real PCE will increase around 2.0% in Q1 (PCE is the largest component of GDP); the mid-month method suggests an increase closer to 2.9%.

US Consumer Confidence Stays Flat in March - Americans’ rosy outlook about the U.S. economy remains resilient as they focus on the good in the barrage of conflicting economic news. A widely watched barometer of consumer confidence barely budged in March after hitting its highest level since before the financial crisis began in the previous month. Americans continued to be upbeat in March despite mixed economic signs. The stock market is up, but gas prices are, too. Unemployment is falling, but home prices also are declining. Lynn Franco, director of private research group The Conference Board Consumer Research Center, said in a statement that consumers “feel the economy is not losing momentum.” The Conference Board said Tuesday that its Consumer Confidence Index fell slightly to 70.2. That’s down from a revised 71.6 in February — the highest level it’s been since the same month in 2011.

Vital Signs: Consumer Confidence Slips - Americans’ confidence in the economy slipped in March, after rising sharply in February. The Conference Board’s Consumer Confidence Index fell to 70.2 from an upwardly revised 71.6 in February. With the job market showing improvement, most Americans remain upbeat about the state of the economy, but they are becoming a bit worried about the next six months, given rising gasoline prices.

Michigan Consumer Sentiment: Highest Since February 2011 - The University of Michigan Consumer Sentiment Index preliminary report for March came in at 76.2, up from the 75.3 February final report and the highest reading since February 2011. Today's number was above the's consensus forecast of 74.3 and's less optimistic 73.5. See the chart below for a long-term perspective on this widely watched index. Because the sentiment index has trended upward since its inception in 1978, I've added a linear regression to help understand the pattern of reversion to the trend. I've also highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.  To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is about 11% below the average reading (arithmetic mean), 10% below the geometric mean, and 11% below the regression line on the chart above. The current index level is at the 27.8 percentile of the 411 monthly data points in this series.  The Michigan average since its inception is 85.5. During non-recessionary years the average is 88.1. The average during the five recessions is 69.3. So the March final sentiment number of 76.2 keeps us above the recession average but well below the average for non-recessionary periods.

Consumer Concerns Shift From Jobs to Gas Prices -For consumers it’s all about jobs–except when it’s all about gasoline prices. That’s one way to interpret the small drop in March consumer confidence, as measured by the Conference Board. Attitudes about job availability remained at a high so far in this recovery, but consumers foresee a jump in inflation down the road. Although the top-line index slipped to 70.2 this month from 71.6 in February, the present situation index rose to its highest level since late 2008. One reason: consumers think the labor markets are doing better now [a view echoing results from the preliminary March survey done by Thomson-Reuters/University of Michigan.] One way to measure perceptions about job availability is to look at the percentage of consumers who think jobs are “plentiful” minus the share who think jobs are “hard to get.” The labor differential in March stayed at -31.6%, the highest level since September 2008. The labor differential tends to inversely track unemployment, so the flat reading suggests little change in March’s jobless rate from February’s 8.3%.

Signs of demand destruction: the US consumer is saying NO to high gasoline prices - The NYMEX gasoline futures price hit another recent high last week and is sure to push up gasoline prices at the pump. This development will add to the lingering concerns about the nascent US consumer recovery. Crack spreads (spread between distillates and crude oil price) have recovered from the lows of December. It means that refinery margins are now quite high, with refineries enjoying fat profits once again. As an example Valero Energy (VLO), a major US refiner is up 27.6% year to date on a total return basis. But it seems there is only so far the US consumer can be pushed before demand declines and possibly demand destruction sets in. As prices have risen over time, US gasoline demand visibly came off. US drivers are just buying less of it these days. And that trend is starting to be reflected in the levels of gasoline inventories. According to the latest EIA data, US gasoline inventories are materially above the 5-year range for this time of the year. Given the warm US winter, this can not be blamed on the weather.

US petrol prices close in on $4 a gallon - Petrol prices in the US are fast approaching $4 a gallon and wholesalers fear the possible closure of loss-making oil refineries could lead to supply shortages and even higher prices before the summer driving season. Gasoline futures have gained 26.8 per cent since the beginning of the year, outpacing gains in the Brent crude benchmark by more than 10 percentage points. Prices have returned to levels reached a year ago, when the civil war in Libya prompted western governments to release emergency stocks. The physical market is focused on the storage terminals around New York harbour, the delivery point for benchmark futures on the New York Mercantile Exchange. Though stocks appear adequate for now, traders are braced for the shutdown of half the US Atlantic coast’s refining capacity. In recent weeks the premium required to get gasoline in May instead of June has more than doubled to more than 4 cents a gallon, suggesting that traders are trying to secure supplies. On Monday, Nymex May RBOB gasoline rose 0.8 per cent to $3.4080 a gallon. “The message is, beware, there is a serious potential problem out there. It’s not one that is predictable, but there are a lot of signs of danger right now,”

Gas prices in D.C. surpass $4 a gallon - Two months before the summer driving season officially starts, average gasoline prices in the Washington region have shot past $4, the earliest they have ever surpassed that milestone, AAA Mid-Atlantic said Wednesday. And area drivers may need to brace for another bout of sticker shock at the pump. Tom Klozma of the Oil Price Information Service says national gasoline prices could peak as high as $4.25 a gallon on average this spring. That would likely translate into record prices in the District. “It took five months to reach this in 2011, and that took place just on the cusp of the summer driving season,” he added in an interview. “But this time around, for no apparent rhyme or reason other than exceptionally high crude oil prices, it is occurring less than three months into the year.”

Video: Gas Prices Explained - I missed this one from Omid Malekan a few weeks. You can tell based on a reference to winter gasoline prices being the highest ever in the video. It’s still a good primer on gas/petrol prices for those of you who are interested. Speculators probably do have something to do with oil prices though. Remember that commodities have been financialized and that means when the Fed is artificially suppressing rates, people get killed in fixed income and annuities and this buoys demand for alternative investments. It’s called risk seeking return. I wrote a premium article on this last week saying: What is clear is that the high oil prices are a tax on lower-income workers and emerging markets where a larger percentage of take-home pay is used up by food and energy. This makes the rise in oil and commodity prices generally a socially combustible issue that could lead to riots as it has in the past. Some are predicting just this for 2013… My sense is that politicians will not be able to get to grips with this problem during the election cycle because there are multiple problems (Mideast tensions, supply bottlenecks, peak oil, commodity financialization, etc). So it is likely that the oil price will rise until we hit demand destruction again. That’s my prediction of what is likely to occur.

Gasoline prices hit record: $4.67 in Chicago; $4.51 in metro area -This is a record we could gladly do without. Gasoline prices in the Chicago area shot up to their highest level ever recorded by AAA Monday, but relief may be coming. The average price of unleaded regular gas in the Chicago metropolitan area was $4.51 a gallon, surpassing by 4 cents the high of $4.47 reached May 5, 2011, according to AAA, Wright Express and the Oil Price Information Service. In the city of Chicago, the average price hit a record $4.67 a gallon Monday, the highest in the continental U.S. and up a penny from the $4.66 high that also was reached last May.

Several Reasons Why Gasoline Prices are so High - When President Obama took office, regular gasoline cost $1.85 a gallon. Now its hit $4.00 per gallon in many cities, and some analysts predict it could reach $5.00 or more this summer. Filling your tank could soon slam you for $75-$90. This winter was warm. Our economy remains weak. People are driving less, in cars that get better mileage, even with mandatory 10% ethanol. Gasoline is plentiful.  Misinformed politicians and pundits say prices should be falling.  They claim our pain at the pump is due to greedy speculators and greedier oil companies that are exporting oil and refined products. Their explanation is superficially plausible – but wrong. Energy Information Administration (EIA) data show that 76% of what we pay for gasoline is determined by world crude oil prices; 12% is federal and state taxes; 6% is refining; and 6% is marketing and distribution. Global markets set the price that refiners pay for crude oil. World prices are driven by supply and demand, and unstable global politics. That means today’s prices are significantly affected by expectations and fears about tomorrow.

For some refiners, the price of gasoline is too low - Rising gasoline prices have become a source of finger-pointing and political rhetoric – yet the economic reality for some refiners is that the price isn’t high enough. They say that gasoline prices, particularly on the East Coast, have been too low for them to operate successfully. Already, two refineries there have shut down completely and a third has gone idle as prices for fuel haven’t kept up with the surging cost of the raw material, crude oil. “In an environment like this, where the price of crude oil is rising faster than the price of the product that the refineries make, the profits get squeezed, and in some cases they’re not profits at all,” High world oil prices and declining U.S. demand for gasoline have been a major part of the problem,The result has been lower domestic gasoline production in regions where refineries rely on imported crude. Oil sold globally is more expensive than crude that is produced and refined in parts of the country with limited access to the world market. Brent crude, used as a benchmark for world oil, closed Wednesday at $124.16 per barrel, down $1.38. West Texas Intermediate, the U.S. benchmark, closed at $105.41, down $1.92.On the East Coast, where refiners rely on foreign crude, production dropped from 93 percent of capacity in 2005 to 63 percent in 2011 because of high world oil prices,

Politics And Gas Prices: In Chart Form! -- This chart setting forth the results of two different Washington Post/ABC News polls, one from 2006 and one from 2012, raises some very interesting points: A few observations:

  • In 2006, the vast majority of Democrats believed that the (Republican) Administration could do more to do reduce gas prices. In 2012, only one-third of Democrats believe that there anything more that the (Democratic) Administration can do to reduce gas prices.
  • In 2006, a majority of Republicans believed that there wasn’t much more the (Republican) Administration could to to reduce gas prices. In 2012, nearly two-thirds of Republicans say that the (Democratic) Administration could be doing more to reduce gas prices

ATA Trucking index Increased 0.5% in February - From ATA: ATA Truck Tonnage Increased 0.5% in February The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index rose 0.5% in February after falling 4.6% in January. (January’s decrease was more than the preliminary 4% drop we reported on February 28th.) The latest gain put the SA index at 119.3 (2000=100), up from January’s level of 118.7. Compared with February 2011, the SA index was up 5.5%, better than January’s 3.1% increase. Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index. The index is above the pre-recession level and up 5.5% year-over-year.

Durable Goods Orders Rebound After January's Slump -- New orders for durable goods rose 2.2% last month, taking some of the sting out of January’s sharp 3.6% tumble. February’s rebound isn’t particularly impressive next to last November’s 4.2% surge, or even December’s 3.3% increase. But the latest pop was enough to support the year-over-year pace and keep it firmly in 10%-plus territory. In short, this crucial series—economist Bernard Baumohl calls durable goods orders "an excellent leading indicator of economic activity"—remains decisively in the growth camp. Whether that's enough to offset trouble brewing elsewhere—decelerating income growth, for instance—remains to be seen. But for now, the macro news du jour looks a touch brighter. "Business spending will remain a key driver of the U.S. economy, not to the same extent as last year, but still a positive force," On the topic of looking ahead, new orders for capital goods— non-defense capital goods ex-aircraft orders—rebounded last month as well. Even better, the year-over-year change in capital goods orders continues to turn higher, rising 8.4% in the 12 months through February—the fastest pace since last October. Economists see this subset of durable goods orders as a benchmark for business investment plans.

Another Weaker Than Expected Durable Goods Order Portends Weaker Than Expected GDP - Inquiring minds are investigating Trends in Durable Goods Orders.

  1. February orders increased 2.2 percent but economists expected a 3 percent rise.
  2. January durable goods orders fell 3.6 percent.
  3. Orders for non-defense capital goods excluding aircraft rose 1.2 percent. Analysts' expected of a 2.0 percent gain.
  4. Non-defense capital goods' orders fell 5.2 percent in January.
  5. Excluding transportation which had an unsustainable sharp increase in civilian plane orders, durable goods orders were only up 1.6%. 
  6. Boeing received 237 aircraft orders in February, up from 150 in January, accounting for the 3.9 percent jump in transportation orders.
  7. Motor vehicles and parts orders rose 1.6%.
  8. Inventories of manufactured durable goods rose for the twenty-six consecutive month and are now at the highest level since

Breaking Down Durable Goods Orders - Naroff Economic Advisors President Joel Naroff talks with Jim Chesko about today s report showing that orders for long-lasting goods rose for the fourth time in five months in February. Durable-goods orders were up 2.2% last month.  Click here to listen to the analysis.

Dallas Fed: Texas Manufacturing Expansion Continues in March - From the Dallas Fed: Texas Manufacturing Expansion Continues Texas factory activity continued to increase in March, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, held steady at 11.1, suggesting growth continued at about the same pace as last month. . The general business activity index was positive for the third month in a row, although it fell from 17.8 to 10.8. Twenty-three percent of firms noted improvement in the level of business activity, while 12 percent noted a worsening. The company outlook index posted a sixth consecutive positive reading, but it also retreated slightly, falling to 9.5 from 15.8 last month. Strong employment growth continued in March, although the index edged down from 25.2 to 21.7. Twenty-nine percent of firms reported hiring new workers, while 7 percent reported layoffs. The hours worked index continued to suggest average workweeks lengthened.  The Dallas Fed asked some special questions on hiring plans too. The survey indicated that more firms expect to hire over the next six months as opposed to the previous special survey in January 2011. The reason given for hiring is "Expected growth of sales or revenue is high". More demand.

Trends in Motor Vehicle Trade—A U.S. Perspective - Chicago Fed - Motor vehicles tend to be sold near where they are produced. However, when local demand does not suffice to support a dedicated assembly plant, some vehicles are shipped across longer distances, including across oceans. The share of newly produced light vehicles (cars and minivans, sports utility vehicles or SUVs, and pickup trucks) exported from the U.S. to countries other than Canada or Mexico averaged only 4% of U.S. light vehicle production between 1996 and 2011. The share of new vehicles imported from outside the NAFTA (North American Free Trade Agreement) area was somewhat higher over this period, at 19%, as the U.S. has traditionally run a trade deficit in cars and light trucks.[1]  This blog updates our earlier analysis on U.S. vehicle exports and adds some discussion related to vehicle imports.

Rising Auto Exports Boost the Midwest - A rebound in auto exports is giving a lift to the economy, a reversal of trends that caused angst in the Midwest during economic slowdowns in the 1980s and 1990s. A new study by Thomas Klier, an economist at the Federal Reserve Bank of Chicago, finds that vehicle exports from the U.S. have nearly regained their 2007 peak, after dipping sharply during the Great Recession. Most of the vehicles shipped out of the U.S. go to Canada or Mexico, but an increasing number are going to other countries, including Korea, Mr. Klier writes. Japanese auto makers are using their U.S. factories as a source for vehicles built for sale in the Korean market, in part to offset the impact of the strong yen. Since 2006, exports of U.S. made vehicles to Korea tripled to 12,815 cars and trucks in 2011. Mr. Klier forecasts that shipments of U.S. made cars and trucks to Korea will rise further now that a South Korea-U.S. trade deal has dropped Korea’s tariffs on U.S.-made vehicles by half, to 4%.

Chicago PMI declines to 62.2, Consumer Sentiment improves - Chicago PMI: The overall index declined to 62.2 in March from 64.0 in February. This was below consensus expectations of 63.0 and indicates slower growth in March. Note: any number above 50 shows expansion. From the Chicago ISMThe Chicago Purchasing Managers reported the March Chicago Business Barometer paused after February's ten month high. While slowing, the Chicago Business Barometer marked its fifth month above 60, a 2-1/2 year period of expansion and trend data improved. Increases were seen in five of eight Business Activity Indexes, highlighted by significant advances in Prices Paid and Inventories, and a notable lengthening in lead times for Production Material.  The final Reuters / University of Michigan consumer sentiment index for March increased to 76.2, up from the preliminary reading of 74.3, and up from the February reading of 75.3.

Why Don't Young Americans Buy Cars? - Kids these days. They don't get married. They don't buy homes. And, much to the dismay of the world's auto makers, they apparently don't feel a deep and abiding urge to own a car.  This week, the New York Times pulled back the curtain on General Motors' recent, slightly bewildered efforts to connect with the Millennials -- that giant generational cohort born in the 1980s and 1990s whose growing consumer power is reshaping the way corporate America markets its wares. Unfortunately for car companies, today's teens and twenty-somethings don't seem all that interested in buying a set of wheels. They're not even particularly keen on driving. The Times notes that less than half of potential drivers age 19 or younger had a license in 2008, down from nearly two-thirds in 1998. The fraction of 20-to-24-year-olds with a license has also dropped. And according to CNW research, adults between the ages of 21 and 34 buy just 27 percent of all new vehicles sold in America, a far cry from the peak of 38 percent in 1985.

Fire up America's jobs factory - Politicians, even those who vilify corporate America, inevitably laud small businesses.  They are right to appreciate the enormous role that entrepreneurship plays in the U.S. economy, but it’s not clear how much public policy can do to conjure up entrepreneurs.  Last week, with broad support, the Senate passed an amended version of the Jumpstart Our Business Startups Act (or the JOBS Act). Because the bill had already been passed by the House on March 8, and is supported by the White House, it seems bound to become law.  The act attempts to make startup financing easier to obtain by reducing financial regulations on smaller companies. Although this approach carries risks -- light regulation makes fraud much easier -- I still support the bill, at least with the Senate’s extra safeguards. Still, we shouldn’t kid ourselves that this will be a magic bullet; American entrepreneurship needs new ideas more than new financing mechanisms.

Can Radical Efficiency Revive U.S. Manufacturing? - Industry has long formed the foundation of America's economy, from before the first Ford Model T factory to the military-industrial complex that grew out of two world wars to the robust economic growth and high-tech innovation that followed. And whereas U.S. manufacturing is experiencing a resurgence, its old foundation—built on cheap fossil fuels and plentiful electricity—is showing cracks. Rising and volatile fuel prices, supply-security concerns and pressures on the environment are wrecking balls thumping away at many of the underpinnings of our country's key industries—and thus our prosperity. Fortunately, we can render these wrecking balls harmless through a systematic drive to upgrade industrial energy efficiency. Even with no technology breakthroughs such an effort can, in just over a generation, transform U.S. industry and provide 84 percent more output in 2050 consuming 9 to 13 percent less energy and 41 percent less fossil fuel than it uses today. This scenario, outlined in Reinventing Fire, a book and strategic initiative by Rocky Mountain Institute (RMI), can help U.S. industry build durable competitive advantage and keep jobs from going overseas.

Bernanke: Labor Market "remain far from normal" - From Fed Chairman Ben Bernanke: Recent Developments in the Labor Market - A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed. Still, conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force. Moreover, we cannot yet be sure that the recent pace of improvement in the labor market will be sustained. Notably, an examination of recent deviations from Okun's law suggests that the recent decline in the unemployment rate may reflect, at least in part, a reversal of the unusually large layoffs that occurred during late 2008 and over 2009. To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.

Recent Developments in the Labor Market - Ben Bernanke speech

Major Trends in the U.S. labor market - The Conference Board - At the end of each quarter, this blog will list the U.S. labor market trends. For the first quarter of 2012, the trends are:
1. The U.S. economy continued to improve
• Growth in employment was very rapid, but the improvement in demand and production was modest.
• Consumer, business and investor confidence improved.
• Corporate profits slowed as labor costs accelerated.
• Core inflation was under control.
2. However, there were still risks to the economy.
• Government spending continued to decline.
• Most measures of home prices still declined.
• Rising oil prices due to Middle East political risk became a concern.
• The recession in Europe and slowdown in China, India, Brazil and other emerging countries hurt exports.
3. The U.S. economy is expected to grow by 2-2.5 percent (annualized) for the remainder of 2012.

Prospects for the U.S. Labor Market -  New York Fed  - The unemployment rate in the United States fell from 9.1 percent in the summer of 2011 to 8.3 percent in February. This decline, the largest six-month drop in the unemployment rate since 1984, has surprised many economic forecasters. The decline is even more surprising because recent real GDP growth appears to have been around trend at best, whereas in early 1984, growth was more than 7 percent. Our next six posts in Liberty Street Economics will discuss prospects for the U.S. labor market given this surprisingly quick decline in the unemployment rate. In this opening post, we outline some of the themes examined in this series and provide a brief summary of our conclusions. But first we develop a simple framework to place the unemployment rate in context with the rest of the labor market.

Okun’s Law and Long Expansions - NY Fed - Economic forecasters frequently use a simple rule of thumb called Okun’s law to link their real GDP growth forecasts to their unemployment rate forecasts. While they recognize that temporary deviations from Okun’s law may occur, forecasters often assume that sustained reductions in the unemployment rate require robust GDP growth. However, our analysis suggests that Okun’s law has not been a consistently reliable tool for predicting the size of declines in the unemployment rate during the last three expansions—a finding that reflects the impact of changes in the labor market since the early 1960s. We also find that the percentage declines in the unemployment rate over the third through fifth years of the last three expansions have been strikingly similar—a pattern that suggests an important role for flows into and out of unemployment in explaining movements in the unemployment rate, the subject of tomorrow’s blog post.

The Bathtub Model of Unemployment: The Importance of Labor Market Flow Dynamics - NY Fed - An alternative to Okun’s law to understand unemployment dynamics is to examine the evolution of the unemployment inflow and outflow rates. (For more on Okun’s law, see yesterday’s post.) A useful analogy is a bathtub: we can think of the unemployment rate (a stock) as the amount of water in a bathtub. Changes in the amount of water in the tub are determined by the rate at which water pours into the tub relative to the rate at which it drains out. For example, if the inflow of water is equal to the outflow, the amount of water in the tub remains constant. But if the rate of water flow into the tub is suddenly increased by turning the faucet to its maximum level, then the water level rises rapidly. A similar dynamic occurs in the stock of unemployed workers when there is a rapid increase in job losses during a recession. In this post, we focus on the flow dynamics in an economic recovery to help understand how the unemployment rate may evolve.

Skills Mismatch, Construction, and the Labor Market - NY Fed - Recessions and recoveries typically have been times of substantial reallocation in the economy and the labor market, and the current cycle does not appear to be an exception. The speed and smoothness of reallocation depend in part on the structure of the labor market, particularly the degree of mismatch between the characteristics of available workers and newly available jobs. Such mismatches could occur because of differences in skills between workers and jobs (skills mismatch) or because of differences in the location of the available jobs and available workers (geographic mismatch). In this post, we focus on skills mismatch to assess the extent to which the slow pace of the labor market recovery from the Great Recession can be attributed to such problems. If skills mismatch is much more severe than usual, we would expect the unemployment rate to remain higher for longer and the workers subject to such mismatch to have worse labor market outcomes.  We concentrate particularly on construction workers, who many have thought are prone to a high degree of skills mismatch because of the housing boom and bust. Contrary to this view, we find that (1) general measures of mismatch, after rising sharply in the recession, are now near their pre-recession level as they continue to display a pronounced cyclical pattern; and (2) construction workers are not experiencing relatively worse labor market outcomes.

Reconciling Contrasting Signals in the Labor Market: The Role of Participation - NY Fed - The contrasting movements in the employment-to-population ratio (E/P) and the unemployment rate recently have been striking and puzzling. The unemployment rate has declined 1.7 percentage points since the unemployment peak in October 2009, but the E/P ratio has increased only 0.1 percentage point.     What is missing from the chart above is labor force participation. In this post, we show that changing long-term trends and cyclical behavior in participation—especially among women—are key to understanding the recent behavior of the labor market. Going forward, we expect that women’s participation decisions will continue to be an important factor driving labor force participation and unemployment.

Are unemployed construction workers really doing better? - Atlanta Fed's macroblog - Two New York Fed economists, Richard Crump and Ayşegül Şahin, writing in Liberty Street Economics, have shared some interesting findings regarding developments in the labor market during the ongoing recovery. Their conclusion is that unemployed construction workers, according to several indicators, seem to be doing better than workers who lost jobs in other sectors.  Based on their research, job-finding rates for unemployed construction workers have increased more rapidly than for the overall pool of unemployed. While flows out of the labor force for unemployed construction workers have remained flat, they have increased for those who lost jobs in other sectors. Also, they show that construction workers who find jobs have the same distribution of earnings as other displaced workers who find a job.  These facts, according to the authors, provide support to the hypothesis that problems in the labor market cannot be blamed on the degree of mismatch between displaced construction workers and job vacancies in other sectors. In this post, we present an alternative view of the fate of unemployed construction workers by looking specifically at unemployed construction workers who find jobs in other industries. Our conclusion is that unemployed construction workers are generally experiencing relatively large wage declines (relative to what they earned before becoming unemployed). Except for the lowest-skilled workers, losing a job and having to take a new job in a new industry generally involves a wage decline. That effect is especially pronounced for construction workers who become unemployed.

Mild Winter Weather and Payroll Employment - Macroadvisers - To summarize, we estimate that unseasonably mild weather this winter has had a measurable effect on employment, with the level of employment in February 72 thousand above the level consistent with no deviation in weather from seasonal norms. Our model suggests that in the event weather in March returns to seasonal norms, the change in payroll employment will be reduced by 58 thousand. Furthermore, a continuation of seasonally normal weather into April would result in a further drag on the change in employment then of about 14 thousand. The result for March provides an estimate of the significant adjustment one should make to the headline employment number in March to more accurately judge the underlying strength of employment.

Morgan Stanley Explains Why The Next Jobs Report Is Very Likely To Turn South - In his Sunday evening note to investors, Morgan Stanley's Joachim Fels discusses the meh recovery, and touches on why the jobs report won't be as hot as previous ones: Our US team continues to see GDP tracking at a meagre 1.7% in the current quarter, and attributes most of the decent labour market data in recent months to unusually mild winter weather. In fact, the four-week average of initial jobless claims has now been very little changed for a month and the big improving trend from mid-September to mid-February has thus now stalled. Our initial forecast for March non-farm payrolls, due on April 6, is that job growth will moderate to +175k, down from the average +245k gains in the three prior months, with a bigger weather-related payback likely ahead in the spring. Moreover, softer-than-expected housing market data provided a useful reminder that, contrary to a widespread view, the sector that was the epicentre of the Great Recession may still not have bottomed yet. If our cautious view on growth is right, the Fed has more work to do and will likely implement additional easing measures in coming months, with an extension of Operation Twist, including sterilised MBS purchases. All eyes are on Ben Bernanke’s speech this Monday at the NABE conference, where he has an opportunity to push back on the market’s substantial shifting forward of expectations of the first Fed rate hike to late 2013 or 2014.

Another Four-Year Low For Jobless Claims - Initial jobless claims dropped to another four-year low last week, the Labor Department reports. That's another sign that the labor market is likely to continue expanding, perhaps at a moderately faster rate than we've seen in recent months. New filings dropped 5,000 to a seasonally adjusted 359,000 for the week ending March 24. (Today's update reflects an annual data revision going back to 2007 and so the latest numbers don't correspond with last week's report.) “The labor market is still improving at a modest pace,”  “Across almost all sectors, companies have shed as many workers as they possibly can. Now, they’re responding to the modest improvements in demand.”

US Jobless Claims Fell Last Week to Lowest Since April 2008 - The number of Americans seeking unemployment benefits dropped last week to the lowest level in almost four years, adding to evidence of an improving U.S. labor market.  Initial jobless claims fell 5,000 in the week ended March 24 to 359,000, the lowest since April 2008, the Labor Department reported today in Washington. The median forecast of economists in a Bloomberg News survey called for 350,000 claims. With the report, the government data also contain revisions dating back to 2007.  Companies are retaining workers and hiring as sales pick up along with confidence in the expansion. The pace of employment has gained momentum in the past three months, helping drive income growth that may ease the strain of higher gasoline prices.

How Well Do Initial Claims Forecast Employment - St. Louis Fed - Labor market statistics are often scrutinized for insights about the strength of economic activity, especially when the economy appears to be faltering or in the early stages of a recovery. The initial claims for state unemployment insurance benefits, which are reported weekly by the Employment Training Administration of the Bureau of Labor Statistics, represent one such statistic. Although economists have argued that data on initial claims are useful for predicting monthly changes in payroll employment, empirical evidence has been mixed.3 In one study, McConnell found that adding initial claims to a simple forecasting model enhances 1-month-ahead forecasts of changes in total employment but only for recession months.4 Moreover, McConnell found that the augmented model produces worse forecasts of the change in total employment during expansion months than does a model that includes only lagged changes in employment.  McConnell estimated her model using data for 1952-97. The recoveries of employment following the recessions of 1990-91, 2001, and 2007-09, however, were unusually slow compared with most prior postwar U.S. recessions, suggesting that structural changes may have occurred in the labor market that, among other things, altered forecasting relationships. Conceivably, then, if weak employment growth following recessions is the new normal, then the usefulness of initial claims for forecasting changes in employment may have also changed.

Question on Jobs: How Many Does It Take to Keep Up With Demographics? - John Mauldin pinged me with a question on jobs and demographics from one of his readers. In past letters you have cited the need to create 125,000 jobs per month to stay even with the growth rate in the labor force. Dick Hokenson of ISI Research has recently published reports suggesting that 75,000 jobs is a more accurate estimate based on his demographic analysis. This difference obviously has profound implications for the pace of recovery and potential improvement in the unemployment rate. Have you seen any of Hokenson's work? Do you have any insights into why his analysis is so different than consensus? Ben Bernanke has estimated 125,000 jobs a month. That is the number I have been using recently. However, based on demographics alone, I believe 75,000 is indeed the correct number. 75,000 is a number I arrived at a couple of years ago independently, for the boomer-bust years of 2013-2015. So why use 125,000 if it only takes 75,000? I do not know Bernanke's rationale, but I can explain mine.

Why We Need to Tackle the Skills Gap - I was struck this morning by two Op-Ed pieces: first, Larry Summers prescription for how to nurture the recovery in the FT, and Steven Rattner’s parsing of some new data on American inequality which found – surprise! – the rich got even richer in 2010. A whopping 93% of the additional $288 billion in income created in that year went to the top 1%; the rest of us got an $80 raise. I was surprised, frankly, that the raise was even that big. As my colleague Bill Saporito and I reported in our Wimpy Recovery cover this week, wages for the average working class person in the U.S. have been flat since the 1970s. The reason – the fact that education isn’t keeping up with globalization and technology – is the subtext in both the Summers and Rattner pieces. As Rattner points out, pay for college grads has risen nearly 16% since 1980, while pay for those without a high school diploma has plummeted by nearly 26% in the same time period. On that note, I’m discouraged by the Republican proposals to cut spending in areas like infrastructure, research, unemployment insurance, and food stamps, and particularly education. Reporting in both in Midwest and the Washington, D.C., area over the last two weeks, the most pressing problem I heard from CEOs I spoke with was the skills gap – at companies like Caterpillar, in the Midwest, they can’t find enough high-tech welders. At IBM, there are hundreds of $40K and above job listings for people with at least a two-year associates degree.

Your Daily Robot News - People have complained that Amazon factory warehouse jobs are marked by poor conditions and low pay, but this may be less of a problem in the not to distant future. Amazon has acquired robots maker Kiva systems for $775 million and they are planning on replacing warehouse workers with autonomous robots. The New York Times reports: …Kiva Systems’ orange robots are designed to move around warehouses and stock shelves. Or, as the company says on its Web site, using “hundreds of autonomous mobile robots,” Kiva Systems “enables extremely fast cycle times with reduced labor requirements.”In other words, these robots will most likely replace human workers in Amazon’s warehouses. Despite the ugly conditions that can reportedly occur at Amazon warehouses, I don’t think the workers will be better off when these jobs are replaced by robots. The article also reports on the general trend of Robots Are Stealing Our Jobs:

Almost 2 out of 10 men in their prime are not working - The recent improvements in the job market have given us reason to hope the economy is finally on the mend. But after five years of struggles, here’s a sobering reminder of how far we still have to go: Nearly two in 10 American men in the prime of their life still are not working. Nearly 83 percent of men ages 25 to 54 – traditionally the core of the nation’s workforce – were working in February, according to the most recent data from the Bureau of Labor Statistics. That sounds like a lot, and the employment to population ratio for prime-age men has been improving steadily in recent months. But it’s still significantly lower than five years ago, when about 88 percent of prime-age men were working. It’s also a far cry from the 1940s through the 1970s, where more than 90 percent of men in that age group were usually employed.

The hysteresis effect on unemployed labor, and unemployment scarring - Here is a good WSJ piece on labor market hysteresis, a topic also of recent interest to Bernanke, Summers, DeLong, and others.  I’ve been trying to learn more about that literature, and here is what I came up with.

  • Pissarides has a seminal 1992 paper on the loss of skill during unemployment.
  • This very good paper (pdf) looks at women who take time off to care for their elderly parents, though there is an endogeneity problem.Here is a much earlier 1980s paper on how intermittent labor force attachment lowers women’s wages.
  • This German paper (pdf) shows that state dependence of earnings is, and should be, much lower when the unemployment has been generally high for the labor force as a whole.  This paper finds there is not much “scarring effect’ in southern Italy, where unemployment perhaps is less socially shameful, but there is a significant scarring effect in northern Italy; social norms may matter.
  • This paper on Sweden suggests that one year out of work leads to a depreciation of skills — the skill of reading in their sample — is equal to losing five percentage points in the broader distribution of that skill.
  • Here is one paper from the psychology literature (with good cites); there are adverse psychological effects for the lower net worth unemployed but not necessarily for the higher net worth individuals.
  • Here is a whole host of papers on “unemployment scarring.“  This one, on the UK, gives a concrete number: “Our results suggest a scar from early unemployment in the magnitude of 13–21% at age 42. However, this penalty is lower, at 9–11%, if individuals avoid repeat exposure to unemployment.”

The Enduring Consequences of Unemployment - Our economic malaise has spurred a wave of research about the impact of unemployment on individuals and the broader economy. The findings are disheartening. The consequences are both devastating and enduring. People who lose jobs, even if they eventually find new ones, suffer lasting damage to their earnings potential, their health and the prospects of their children. And the longer it takes to find a new job, the deeper the damage appears to be.Not since the Great Depression have so many Americans been unable to find work for so long. But researchers have turned to the next-worst period, the early 1980s, to seek a better understanding of the likely damage.A 2009 study, to cite one recent example, found that workers who lost jobs during the recession of the early 1980s were making 20 percent less than their peers two decades later. The study focused on mass layoffs to limit the possibility that the results reflected the selective firings of inferior workers. Losing a job also is literally bad for your health. A 2009 study found life expectancy was reduced for Pennsylvania workers who lost jobs during that same period. A worker laid off at age 40 could expect to die at least a year sooner than his peers.

Bernanke: Unemployment Benefits Don’t Keep Jobless Rate High - Unemployment insurance may help encourage workers to stay in the labor force, Federal Reserve Chairman Ben Bernanke said Monday at an economics conference. Providing benefits to workers without a job likely doesn’t contribute to the jobless rate or the high level of the long-term unemployed, Bernanke said, responding to questions at the annual conference of the National Association for Business Economics. “I would not attribute the extent of long-term unemployment or the very high level of unemployment to unemployment insurance,” Bernanke said. “Unemployment insurance is a very important part of our support system, our safety net.” Lawmakers have debated how long the federal government should provide unemployment insurance to laid-off workers, with some arguing it could diminish unemployed workers’ motivation to find another job. Bernanke didn’t weigh in on how many weeks of aid the government should provide. Bernanke also said that the slow rate of wage growth is likely consistent with his view that the high rate of long-term unemployment is due to cyclical factors, rather than structural reasons. Economists generally think cyclical unemployment is caused when weakness in the overall economy pushes down demand for goods and services and therefore the need for workers that provide them. Structural unemployment reflects deeper problems, such as a gap between the skills workers have and those that employers want.

The Best Data on Middle Class Decline - The flurry of posts earlier this month on middle class decline (me, Lane Kenworthy, Matthew Yglesias, Kevin Drum) made me think some more about what the best way is to show what's happened since the peak of real wages in the early 1970s. While in my opinion there is no perfect measure, there are a lot of choices to be made, and I argue below why real wages for production and non-supervisory workers, with an adjustment for non-wage compensation, is the best single measure.

The Myth of the Myth of the Disappearing Middle Class - Brookings economist Ron Haskins puts a hurt on some numbers in this AMs Washington Post. His piece has two parts.  The first part, discussed below, has a pretty fat thumb on the scale.  The second is about how decisions regarding marriage and the pursuit of higher ed can have a profound effect on a person and family’s economic success.  I’ll leave that for now, though I should say that while I don’t often agree with him, Ron’s done solid, thoughtful work on those important issues.Which is one reason why the rest of the piece struck me as uncharacteristically misleading.  Let go piece by piece. –The argument is framed as “the myth of disappearing middle class.”  That’s a canard.  Most living standards analysts, including Ron in this piece (!), think of the middle class as some chunk in the middle of the income distribution—say the middle fifth or some variation there in (e.g., 40th to 80th percentile), which of course cannot by definition “disappear.”  I’ve been writing about middle-class economics for decades, including nine editions of the “State of Working America.  Not once did I or my colleagues argue “disappearance.”

AMR’s American Seeks Court Approval to Void Union Contracts - AMR Corp. (AMR)’s American Airlines, the third-largest U.S. airline, asked a bankruptcy judge to let it void labor contracts with union workers after failing to reach agreements on $1.25 billion in annual cost reductions. American began negotiations shortly after outlining plans for 13,000 job cuts and other concessions on Feb. 1. The airline says it needs the savings to help stem monthly losses, along with other contract changes that it says will add $1 billion a year in revenue.  “With losses mounting and oil prices rising, there is growing urgency to move more quickly,” American Chief Executive Officer Tom Horton told employees in a letter today. The request filed in U.S. Bankruptcy Court in Manhattan seeks to reject collective-bargaining agreements with the Allied Pilots Association, the Association of Professional Flight Attendants and the Transport Workers Union.

Fired for a Short Skirt? The Realities of Anti-Worker Laws in Wisconsin and Ohio | | AlterNet: The bans on collective bargaining, enacted in Wisconsin and overturned in Ohio, have had effects not just on organizing, but on workers' daily lives.

War Against Youth? - Esquire features a bizarre article titled “The War Against Youth,” which the dark subhed “The recession didn’t gut the prospects of American young people. The Baby Boomers took care of that.” The case is . . . thin. The intro is powerful, indeed. In 1984, American breadwinners who were sixty-five and over made ten times as much as those under thirty-five. The year Obama took office, older Americans made almost forty-seven times as much as the younger generation. This bleeding up of the national wealth is no accounting glitch, no anomalous negative bounce from the recent unemployment and mortgage crises, but rather the predictable outcome of thirty years of economic and social policy that has been rigged to serve the comfort and largesse of the old at the expense of the young. So, this enormous change has taken place entirely during my adult life. What, precisely, are these rigged policies? Well . . . author Stephen Marche doesn’t really say. The bits and pieces of evidence given are mostly accusatory and nonsensical. The gerontocracy begins at the top. The 111th Congress was the oldest since the end of the Second World War, and the average age of its members has been rising steadily since 1981. The graying of Congress has obvious political ramifications, although generalizations can be deceiving. Indeed. Especially since life expectancy has been steadily increasing.

My generation should repay its good luck - I belong to a lucky generation: too young to have experienced the Depression, or the second world war, or postwar austerity. The first political figure I recognised was Harold Macmillan, who told voters they had never had it so good. His statement was true, if foolish, and my contemporaries and I benefited. The government paid us to go to university. We took for granted we would choose between attractive job offers. I was quickly appointed to a post from which it was practically impossible to be fired and which offered a pension scheme with generous, index-linked benefits. I bought a flat with a mortgage whose value was wiped out by inflation. By the time I was paying a higher rate of income tax, the level had been cut from 83 per cent to 40 per cent. My life expectancy is several years longer than my father’s, and I have already considerably exceeded the age at which his father died. If young people today want to attend university, they will have to pay for tuition and borrow to meet living expenses. When they graduate, they face a much more competitive job market. Few careers will offer the job security once characteristic of middle-class employment. Defined benefit schemes have almost disappeared from the private sector, and public sector pensions are to be substantially less generous. Tax rates must rise, partly to pay for the care and medical treatment I will demand as senility advances. The only financial consolation for the next generation is the windfall when we leave them our houses.

Older Women Struggle to Make Ends Meet - The United States is aging, and a new report from Wider Opportunities for Women sheds some light on what that may mean and underscores the importance of saving for retirement. Sixty percent of women in the United States who are 65 or older do not have enough income to cover basic expenses without help, even if they are married, according to the report. That is compared to 41 percent of men in that age group. The report compares income, not including food stamps or help with utility bills, to very basic monthly expenses for housing, food, transportation and health care. For a single person, this Elder Economic Security Standard Index, developed by Wider Opportunities for Women, estimates an annual income of $19,000 to $28,000, depending on whether they own their homes outright, rent or pay a mortgage. For married couples, the necessary income to cover basic expenses ranges from $29,500 to $39,000. More than half the nation’s elderly do not make enough. But women, who typically outlive men, are more vulnerable. Nearly half of white women, 61 percent of Asian women and three-quarters of black and Hispanic women have incomes that fall below the Elder Index levels. Men 65 or older report incomes that are almost 75 percent higher than women’s.

Minding the Gap: A conversation about economic inequalityOn March 13th, I spoke on a panel at MIT with David Autor, Peter Diamond and Frank Levy (all from MIT) on inequality in the U.S. The two hour discussion on inequality went over a broad range of issues:  the alarming rise in inequality,  the nature of the ‘religion of meritocracy’ that underpins the  notion of the American dream, the role of childhood and early education in reducing inequality and the implications of inequality for distorting the way political decisions are made. The facts about inequality are better known, due to the rise of the occupy movement as well as more careful work documenting the rise of top-income inequality. In 1980, the top 1 percent of U.S. households earned about 10 percent of the nation’s income; today that top percentile receives about 25 percent of income. The top 10 percent of households accounted for a bit more than 30 percent of income from World War II until about 1980, but now receives 50 percent of all income.

Steve Rattner Misleads on Inequality in the NYT - Dean Baker - Steve Rattner seems to have found a new career in getting things wrong in the NYT. Today the topic is inequality. While Rattner is right to call attention to the growth of inequality, he is way off on the facts. Starting with a small one, he tells readers that: "Pay for college graduates has risen by 15.7 percent over the past 32 years (after adjustment for inflation) while the income of a worker without a high school diploma has plummeted by 25.7 percent over the same period." A source on that one would have been great. The data sources I know generally have wages for workers without high school degrees as being roughly stagnant over this period. A decline of 5 percent or even 10 percent would be plausible, but 25.7 percent? However the more important issue is a substantive one. He tells readers: "Government has also played a role, particularly the George W. Bush tax cuts, which, among other things, gave the wealthy a 15 percent tax on capital gains and dividends. "As a result, the top 1 percent has done progressively better in each economic recovery of the past two decades." Yes, government has played a role, but the tax cuts for the wealthy has been the less important part of the story. Most of the increase in inequality has been in before-tax income. The government has affected income distribution by changing the rules of the game in ways that allowed the wealthy to benefit at the expense of everyone else.

No more inaction on income inequality  - Two solutions stand above the rest. The US needs a more progressive tax system and one that raises more revenue. The latest data reveal that the top 1 per cent of earners got 93 per cent of all increases in after-tax personal income in 2010. That reflects, among other things, low effective tax rates for much of this group, which are largely explained by the high percentage of their income that consists of capital gains and dividends…. In the longer term, it is imperative to raise education levels. This means better secondary-school completion rates, which lead to increased university attendance. And it also means higher university completion rates, with the greater lifetime earnings that follow. In America, wide-ranging public school reforms are necessary to achieve the first goal, including better methods for teacher training, evaluation and compensation, improved curriculums and upon graduation, as a minimum, assured admission to community colleges. Fortunately, this reform movement is finally showing some signs of life. We need a big initiative to make university affordable and inclusive.

Dissecting U.S. Inequality in International Perspective - We all know that the United States has the highest level of income inequality of any high-income country. Right? But at least according to OECD statistics, this claim is only true if one looks at inequality after taxes and transfers. If one looks at inequality before income and taxes, the U.S. economy has less inequality than  Germany, Italy, and the United Kingdom, and about the same amount of inequality as France. The OECD data also offers a hint as to why this unexpected (to me, at least) outcome occurs. Start with the OECD numbers. The OECD uses the Gini coefficient to measure income inequality across high income. For an earlier post with an intuitive explanation and definition of the Gini coefficients, see here. For present purposes, it suffices to say that a Gini coefficient is a way of measuring inequality that theoretically can range from a score of zero for perfect equality, where everyone has exactly the same income, to a score of one for a situation of complete inequality, where one person receives all the income. Here's a compilation of Gini coefficients from OECD data  with the United States in the top row, followed by Canada, France, Germany, Italy, Japan, Sweden, and the United Kingdom. The OECD data for the second column is here, and data for the other columns is available by toggling the "Income and population measures" box at the top. All data is for the latest year available.

Adam Davidson Presents the Trophy Nanny as 1% Status Symbol -- Yves Smith  -- In his role as the Lord Haw-Haw of yawning income disparity, Adam Davidson reports on the world of elite nannies in his latest New York Times piece, “The Best Nanny Money Can Buy.” Child caregivers perceived to be good enough for the superrich (which means they might need to possess other skills, like speaking Mandarin, cooking restaurnt-level meals, being able to ride and groom horses or sailing) make big bucks!  Davidson interviews one Muneton, who comes from a “very poor” background in São Paulo. She immediately convinces Davidson that she is very good at doing what adults think would be fun for kids (in fairness, she does have stellar references). Muneton, who works through an agency, gets $180,000 a year, plus accommodations, plus a bonus. The family presumably pays the agency a fee, and one assumes is also covering payroll taxes.  The article makes clear that top nannies are positional goods: And, alas, it seems that there just aren’t enough “good” nannies, always on call, to go around….

Attack of the Prison People - Krugman - Predictably, the letter from Corrections Corporation of America has arrived, demanding a correction on yesterday’s column. Strangely, though, it demands that I correct statements I didn’t make, just things CCA claims I implied. I don’t think that passes the test; maybe they’ll find an actual error on second pass, but I was pretty careful precisely because I knew they’d be looking for something, anything. According to the letter, by the way, CCA does not and has not ever lobbied for or attempted to promote any legislation anywhere that affects sentencing and detention — under longstanding corporate policy. Pure as the driven snow, they are. A word about this sort of thing: anyone who steps on the toes of either corporate interests or major conservative institutions (which are often more or less the same thing) has to expect to run into a buzzsaw. The purpose of that buzzsaw is not so much to get specific corrections as to intimidate — to deter the journalist and his or her colleagues from going there again. And it works. I’ve seen it over and over.  I won’t pretend that I don’t get rattled myself. But I decided a long time ago that it’s precisely the areas that make you nervous that most need addressing.

Incarceration nation – “Mass incarceration on a scale almost unexampled in human history is a fundamental fact of our country today,” writes the New Yorker’s Adam Gopnik. “Over all, there are now more people under ‘correctional supervision’ in America - more than 6 million - than were in the Gulag Archipelago under Stalin at its height.”Is this hyperbole? Here are the facts. The U.S. has 760 prisoners per 100,000 citizens. That’s not just many more than in most other developed countries but seven to 10 times as many. Japan has 63 per 100,000, Germany has 90, France has 96, South Korea has 97, and ­Britain - with a rate among the ­highest - has 153. This wide gap between the U.S. and the rest of the world is relatively recent. In 1980 the U.S.’s prison population was about 150 per 100,000 adults. It has more than quadrupled since then. So something has happened in the past 30 years to push millions of Americans into prison. That something, of course, is the war on drugs. Drug convictions went from 15 inmates per 100,000 adults in 1980 to 148 in 1996, an almost tenfold increase. More than half of America’s federal inmates today are in prison on drug convictions. In 2009 alone, 1.66 million Americans were arrested on drug charges, more than were arrested on assault or larceny charges. And 4 of 5 of those arrests were simply for possession....

Tax Rebates Lead to Bankruptcy Filings - Jialan Wang has a blog post up summarizing her and her co-authors very interesting NBER paper estimating that at least 30,000 to 60,000 liquidity constrained households this will be priced out of bankruptcy because of the increased costs that came with the 2005 changes to the bankruptcy law. Actually, the research does not find that tax rebates lead to bankruptcy filings -- that was just a cheesy trick to get you to read the post. The researchers find that, after receiving tax rebates, people are more likely to file bankruptcy as they now have funds they can use to pay for the bankruptcy fees. They then use the randomization of the delivery of tax rebates in 2001 and 2008 to identify the effect that the higher fees caused on the bankruptcy rates of liquidity constrained households. It is a clever research design, and Credit Slips readers will want to check it out.

Food Stamp Use in L.A. Pauses At the Million Mark, Awaiting Oil's Next Move - For the first time in several years, the rate of growth in Los Angeles County food stamp use has slowed. That’s little consolation however given that total participation zoomed from just above 600,000 to over 1,000,000 people since the onset of the financial crisis. As longtime readers know, I’ve tracked the series as a backdoor view on rising energy costs–and in the case of LA County–gasoline costs in particular. | see: Los Angeles County SNAP Users vs. Price of Oil 2007-2012. Because Americans have shed over 12% of their oil consumption since the peak demand year of 2005, one outcome is that the economy is less sensitive to gasoline prices. This is accomplished by a drop in automobile ownership by household, greater use of public transportation, and perhaps by an even steeper drop in automobile adoption as young people conclude it’s pointless–and unaffordable–to maintain a car. Shall we conclude, therefore, that with recent strength in the US economy that food stamp use can actually fall, and will be less correlated with gasoline prices?

Denver targets illegal camping; critics call it a bid to criminalize homelessness - In an effort to deal with increasing numbers of the homeless on Denver's streets, the City Council is expected to consider an ordinance that would "ban unauthorized camping" throughout the city. That means people would be breaking the law by putting up tents or shelters or bedding down in sleeping bags anywhere that camping is unauthorized — meaning on the 16th Street Mall, on sidewalks, in alleys or by the South Platte River. Word of the proposed ordinance — which already has the support of Denver's mayor and many in the business community — has sparked the ire of advocates for the homeless, who call it a move to criminalize homelessness. The Colorado Coalition for the Homeless estimates about 300 to 600 people are "camping" like this every night in Denver. The National Law Center on Homelessness and Poverty surveyed 234 cities, finding municipalities are cracking down on the homeless: 24 percent prohibit begging, 22 percent prohibit loitering, and 16 percent have enacted laws making it illegal to sleep in public places. Boulder and Colorado Springs have banned camping on public property. Boulder District Court last year upheld that city's law.

You'll Never Guess What Thieves Are After Now - Thieves, especially in a tough economy and high unemployment, have been known to steal seemingly odd things that most people wouldn't think had much value. But the thieves know different. Among the vulnerable: copper pipes from building and vacant condos; freshly planted landscaping; plumbing fixtures from vacant condos. Now you can add tailgates from pickup trucks. Huh? That's right. Law enforcement in at least eight states this year have been reporting rashes of tailgate thefts. Unlike the stuff you might leave on the seat of your truck, the tailgates are not protected by locks or barriers such as windows. Thieves have become adept at wrenching the tailgates, as well as pricey accessories, off the truck.

Asians are the fastest-growing population in the u.s. - Last week, the U.S. Census Bureau released a new brief, based on 2010 Census figures, that shows that America's Asian population grew faster than any other race group over the last decade: 2010 Census Shows Asians are Fastest-Growing Race Group. According to The Asian Population: 2010 (PDF), those that identified as Asian, either alone or in combination with one or more other races -- a total of 17.3 million people -- grew by 45.6 percent from 2000 to 2010. Out of the total U.S. population, 14.7 million people, 5.6 percent of all people identified as Asian, either alone or in combination with one or more other races. Some more findings: Asians Grew by 30 Percent or More in Nearly Every State: The Asian alone-or-in-combination population grew by at least 30 percent in all states except for Hawaii (11 percent increase). The top five states that experienced the most growth were Nevada (116 percent), Arizona (95 percent), North Carolina (85 percent), North Dakota (85 percent) and Georgia (83 percent). These same five states also experienced the most growth in the Asian alone population.

State Unemployment Rates "little changed" in February - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were little changed in February. Twenty-nine states recorded unemployment rate decreases, 8 states posted rate increases, and 13 states and the District of Columbia had no change, the U.S. Bureau of Labor Statistics reported today. Forty-nine states and the District of Columbia registered unemployment rate decreases from a year earlier, while only one state experienced an increase.  Nevada continued to record the highest unemployment rate among the states, 12.3 percent in February. Rhode Island and California posted the next highest rates, 11.0 and 10.9 percent, respectively. North Dakota again registered the lowest jobless rate, 3.1 percent, followed by Nebraska, 4.0 percent. This graph shows the current unemployment rate  for each state (red), and the max during the recession (blue). Every state has some blue - indicating no state is currently at the maximum during the recession. The states are ranked by the highest current unemployment rate. Only three states still have double digit unemployment rates: Nevada, Rhode Island, and California. This is the fewest since January 2009. In early 2010, 18 states and D.C. had double digit unemployment rates.

Red States See Massive Public Sector Job Losses - The conservative Republicans who took power in Pennsylvania in 2010 have had a busy year. Republican state legislators, empowered by new control of the governorship and the state house, proposed one of the most stringent mandatory ultrasound bills in the country. The House passed a voter identification law that could block 700,000 Pennsylvanians from voting, most of them young, of color, and poor. Meanwhile, the same state legislators led a successful charge to shrink public employment. The number of government employees fell over 3 percent that year, one of the sharpest declines in any state. Before the cuts, “Pennsylvania [had] the second lowest number of state workers per capita, already,” . Yet, she says, “this past year the budget was devastating” in deeper cuts. Pennsylvania isn’t alone. Republicans seized control of both branches of the legislature in 11 states after the 2010 elections. It’s in these very states that public sector layoffs are disproportionately concentrated, leading to one of the biggest rounds of job losses for the public workforce since record keeping began. Governors and state legislators promised to focus on creating jobs and balancing budgets during campaign season—even newly elected Pennsylvania Governor Tom Corbett still claims that creating jobs is one of his “top priorities.” Instead, these newly Republican states are targeting public workers, causing a significant drop in employment in the public sector that has threatened the entire economy.

A Tiebout Solution? - Via Paul K, here’s an interesting piece of analysis by Konczal and Covert on how job losses among public sector workers in states and cities have disproportionately occurred in places where state legislatures turned red in 2010. K&C make important connections between state tax cuts and these employment outcomes, linking the losses to the sluggish national job market recovery. I found myself wondering if this isn’t some sort of Tiebout solution?  That’s a political economy model where people locate their families in places that match their political and personal preferences.  Were someone like me to end up in one of these red places, he/she might well bemoan the lack of public services, but the citizens themselves would be perfectly happy with that arrangement.  Other low tax types—say, parents devoted to home schooling who didn’t want to support public education—might locate to such places, as Tiebout predicted, while those who valued public services and didn’t mind paying for them would increasingly inhabit other places. What’s wrong with that? Well, for one, you’d have negative spillovers where the blues would end up supporting the reds, which apparently already occurs.  But I’m thinking about more global externalities.  This is a recipe for sub-optimal public good provision from the perspective of society as a whole.  Children who grow up in areas with too few public goods will later make smaller contributions to society than would otherwise be the case—they’d be less productive inputs relative to places that invested in their kids—and that effects all of us. 

Building Sustainable Communities - Fed Speech - Governor Elizabeth A. Duke

Tax Policy in the Wrong Direction: Eliminating or Reducing State Income Tax - Oklahoma, Nebraska, and my home state of Kansas are debating proposals to sharply reduce or eliminate their personal income tax. That raises important questions about how they’ll make up the revenue. And it’s bad news for low-income families, who may end up paying higher taxes and losing critical safety net programs. In 2009 (the latest year for which data are available), income taxes accounted for 27 percent of revenue in Kansas, 24 percent in Nebraska, and 17 percent  in Oklahoma, according to TPC’s State and Local Finance Data Query System (SLFDQS). Even if these states desire smaller government, it seems unlikely they’ll be able to make ends meet without the income tax as a significant source of revenues. If other states without an income tax are any guide, it may mean these states will move to replace lost revenues with property and sales taxes, according to a report released by the Center on Budget and Policy Priorities.

Zoning laws and property rights - In a nutshell, the econourbanists’ case is pretty simple: Cities are really important, as engines of the broad economy via industrial clustering, as enablers of efficiency-enhancing specialization and trade, as sources of customers to whom each of us might sell services. Contrary to many predictions, technological change seems to be making human density more rather than less important to prosperity in the developed world. Commerce intermediated at a distance via material goods has become the province of cheap workers in distant lands, and will very soon be delegated to robots. The value of human work is increasingly in collaborative information production and direct personal services, all of which benefit from the proximity of diverse multitudes. Unfortunately, in the United States at least, actual patterns of demographic change have involved people moving away from high density, high productivity cities and towards the suburbanized sunbelt, where the weather is nice and the housing is cheap. This “moving to stagnation”, in Avent’s memorable phrase, constitutes a macroeconomic problem whose microeconomic cause can be found in regulatory barriers that keep dense and productive cities prohibitively expensive for most people to live in. It is not that people are “voting with their feet” because they dislike New York living. If people didn’t want to live in New York, housing would be cheap there. 

Monday Map: State Spirits Excise Tax Rates -Today's Monday Map shows state spirits excise tax rates. Local excise taxes are excluded. "Control" states are states where the government controls sales - in these states, products are subject to ad valorem mark-up and excise taxes. The excise tax rate is calculated using a methodology developed by the Distilled Spirits Council of the United States.

House members want to use future tax receipts to pay old bills - Illinois House members Thursday laid out the outline of a new state budget, which calls for paying down $1.3 billion in old bills and making deep cuts in state programs. The House voted 91-16 to adopt two resolutions that would divide state revenues among various programs, such as education, human services and public safety. The plan also calls for using $800 million of next year’s tax receipts to reduce the backlog of unpaid state bills, now estimated at $8 billion or more. Using matching Medicaid funds from Washington, the state could pay off $1.3 billion of those bills. But after doing so, meeting pension obligations, making bond payments and other required payments, budget negotiators will be left with less money for ongoing state programs than they now have. Rep. Frank Mautino of Spring Valley, a lead House Democrat budget negotiator, estimated budgets will have to be cut 5.5 percent. The budget outline was negotiated by both Republicans and Democrats in the House.

Ridiculous Ways States Are Trying to Fix Their Broken Budgets - Faced with empty coffers, desperate governors and state lawmakers will try just about anything to improve their cash flow.

  • Puppy power: California Gov. Jerry Brown is selling t-shirts featuring his corgi, Sutter, and promises to donate $3 from each purchase to the Golden State's general fund.
  • Pole tax: In 2007, Texas Gov. Rick Perry instituted a $5 tax on strip club patrons to fund sexual-assault prevention and state health insurance. It has since brought in $15 million.
  • Frack party! After he proposed slashing the state education budget by $2 billion, Pennsylvania Gov. Tom Corbett suggested the state university system open up six of its campuses to natural-gas extraction.
  • Pass the hat: Faced with a costly court challenge to its draconian abortion consent law, South Dakota is accepting donations to cover $750,000 in legal fees. Less than $65,000 has come in.
  • Plane dealing: In 2006, then-Alaska Gov. Sarah Palin pledged to sell off the state's private jet on eBay. That didn't pan out; the jet, first bought for $2.7 million, was eventually sold for $2.1 million.
  • School's out...forever: Utah state Sen. Chris Buttars estimated that eliminating the 12th grade would knock $60 million out of the state's $700 million deficit. His fellow legislators flunked the idea.
  • The honesty tax: Arizona state Rep. Judy Burges proposed adding an "I Didn't Pay Enough" option to state income tax filings. Burges estimated it could net an extra $12 million a year; in its first year, it brought in just $13,204.
  • Venture capitol: In 2010, Arizona Gov. Jan Brewer approved the sale of three capitol buildings for $81 million. In January, Brewer said she'd buy them back from the investors the state had been leasing them from—at a cost of $106 million.

When privatisation doesn’t work -  The economist's notion of public goods has lost currency in this age of commodities, not just in the EU but particularly in the Anglo-Saxon world. Unlike today, two generations ago, economics undergraduates were taught that such goods were different from soap flakes and hamburgers. Public goods and services are things which need to be supplied – or at least regulated – by the public sector because they are by their very nature collective. Clean water, unpolluted air, education and law and order are obvious examples; there is no doubt that everybody should have such goods, not merely those who can afford to buy them privately. These days, however, the distinction between "public" and "private" has become blurred, and among mainstream economists the consensus appears to be that because the private sector is more efficient than the state, we should limit the public role almost entirely to that of supervision. In Britain, for example, the railways were privatised and an "internal market" was created within the national health service on the grounds that this improved the efficiency of service delivery for "customers". In the US, it has become common for everything from mass transport to prison services to be run for private profit. Indeed, there are some politicians who – as followers of the economist Friedrich Hayek – would abolish all forms of state supervision or control, and a few who would abolish all taxation.

More municipalities bet on bonds to cover pensions - Struggling to pay employee pensions, local governments are increasingly borrowing money to cover their obligations - exploiting a loophole in federal law that allows them to issue taxable bonds without seeking voter approval. Oakland, Calif., took a bet on its pension fund that ended up costing the city an estimated $245 million - nearly a quarter of its annual budget. That hasn't stopped the city from looking to try its luck one more time. The bets are being made using an exotic but increasingly popular financial instrument known as a pension obligation bond. Cities, counties and states use the bonds to take out high-interest loans from private investors to plug shortfalls in their employee pension funds. If the pension funds make smart investments with the borrowed money, the returns can help pay the interest due to borrowers and sometimes even spin off some extra cash to pay pension costs. If they don't, the bonds can create additional costs for taxpayers, put the retirement funds of teachers and firefighters in jeopardy, and, in the worst-case scenario, force municipalities into bankruptcy. Municipal finance experts are sounding alarms about the practice, saying that local elected officials are taking unnecessary risk because they are afraid to anger voters by raising taxes. There is also the risk of instigating powerful public employee unions if pensions are cut.

L.A. Mayor Antonio Villaraigosa calls for layoffs of city workers - Mayor Antonio Villaraigosa said today he will call for layoffs of city workers as part of his budget to be released next month. "We're going to lay off a large number of employees. I'm not going to say how many," Villaraigosa said during a speech to the City Administrative Officer Investors Conference at the Grammy Museum. The city's employee negotiating committee, which includes Villaraigosa and several City Council members, recently asked thousands of municipal workers to put off raises until the city's budget improves. In recent years, the city has laid off more than 200 city employees. Since 2008, another 4,900 workers retired early or were transferred to departments that manage their own budgets. City Administrative Officer Miguel Santana said this week the city's budget deficit for the next fiscal year is close to $220 million. The city's general fund budget, which pays for basic services, for the 2011-2012 fiscal year is $4.4 billion. It authorized the employment of 22,103 employees.

Financial Review Team Declares Emergency For Detroit; Agreement Can Avert Takeover In 10 Days - video - Detroit's financial review team this afternoon declared that the city is under a financial emergency and no consent agreement between the city and state has been adopted, a move that forces Gov. Rick Snyder to appoint an emergency manager within the next 10 days under state law.  State officials, however, are hopeful that an agreement can be reached before an emergency manager is named.  "In that 10-day window, if a consent agreement can be adopted, that's an alternative for the governor and that's what he prefers to see," state Treasurer Andy Dillon said after the review team's meeting.

Patterson: Detroit A ‘Tinderbox’ Headed For Unrest, Bankruptcy - Oakland County Executive L. Brooks Patterson believes Detroit will end up in bankruptcy. “Detroit — I’m looking only at Detroit — couldn’t survive without a manager,” Patterson told attendees at a Chamber of Commerce breakfast at Oakland University on Wednesday. “The very people who got them in that mess … without them being in control. And there’s absolutely no thoughtful management versus crisis management in the city.  “They don’t want a consent agreement which buys them some time, then they’re gonna get a manager. And a manager could say it’s hopeless and flip them into Chapter 9 bankruptcy, which is where personally think it’s gonna end up,” he said.

Providence Bankruptcy Seen as Unavoidable on Budget Gap - Providence, Rhode Island’s capital and biggest city, probably will seek bankruptcy court protection to deal with a budget deficit, Robert Flanders, the state- appointed receiver for nearby Central Falls, said today. I don’t see how they can get out of it without going there,” said Flanders, a former state Supreme Court justice and a partner at Hinckley, Allen & Snyder LLP. He put Central Falls into bankruptcy in August and has used the city’s legal status to tear up contracts with city workers and cut pension benefits

Will Stockton Be the Biggest Municipal Bankruptcy Ever? - In recent years this inland port city of nearly 300,000 people has earned several distinctions, none of them good. Twice atop Forbes' list of America's Most Miserable Cities ... Second highest violent-crime rate in California ... Second highest home-foreclosure rate of all major U.S. metro areas. Now, Stockton is on the verge of another dubious benchmark: bankruptcy. In its third straight year of fiscal emergency, the city faces a deficit of as high as $38 million on its $165 million general fund budget. As required by state law, the city council is in mediation with creditors and unions. If a deal is not reached in the coming weeks — and prospects are bleak — Stockton will become the largest municipality in U.S. history to go bust. While Stockton has been down on its luck for as long as memory serves, many residents insist its fiscal crisis is a function of bad management during the flush years of the housing boom. Long an agricultural hub for Central Valley farms and situated about 80 miles (130 km) east of San Francisco, it went through a steady financial decline that saw its once thriving downtown hollowed out by poverty and crime. Then, in the early 2000s, the housing boom drew developers back to the region in droves. Plush subdivisions went up overnight to attract families with easy credit who could not afford the Bay Area.

Stockton Gets Ratings Cut by Moody’s as Bankruptcy Option Looms - Stockton, the California city on the brink of bankruptcy, had its pension-obligation and lease- revenue bond ratings cut by Moody’s Investors Service on about $341 million in debt. Moody’s lowered the city’s 2007 pension-obligation bonds to B3 from B1 and reduced the 2006 lease-revenue bonds to Caa1 from B2, the New York-based rating company said today in a statement. The ratings are six and seven levels below investment grade, respectively. The action “reflects the growing likelihood of default and the potential for less than 100 percent recovery for bondholders as the city continues down the path of mediation and potential bankruptcy,” Moody’s said in the statement.

Chicago Public Schools sees up to $700 million deficit: report — Chicago Public Schools officials say despite layoffs and other cost cutting, the system faces a $600 million to $700 million deficit next year. The Chicago Tribune reports that during a Wednesday presentation, officials are expected to tell the school board that drops in local, state and federal revenue and growing debt obligations will result in huge budget shortages over the next three fiscal years. Schools spokeswoman Becky Carroll says with a projected $340 million increase in pension costs in 2014, the deficit could top $1 billion. Carroll says tough decisions must be made to close that gap. In addition to warning the school board of the significant challenges, CPS Chief Administrative Officer Tim Cawley is calling on the state to help by lifting some of the district's pension obligations.

Chicago school officials projecting huge deficit - Chicago Public Schools officials say despite layoffs and other cost cutting, the system faces a $600 million to $700 million deficit next year. The Chicago Tribune reports that during a Wednesday presentation, officials are expected to tell the school board that drops in local, state and federal revenue and growing debt obligations will result in huge budget shortages over the next three fiscal years. Schools spokeswoman Becky Carroll says with a projected $340 million increase in pension costs in 2014, the deficit could top $1 billion. Carroll says tough decisions must be made to close that gap. In addition to warning the school board of the significant challenges, CPS Chief Administrative Officer Tim Cawley is calling on the state to help by lifting some of the district's pension obligations.

New Head of Philadelphia Schools Blames Previous Board For Huge Shortfalls - The new head of the Philadelphia School Reform Commission blames what he calls “bad fiscal policy” of the previous SRC for the continuing financial plight of city schools. At a daylong City Council hearing today, councilmembers wanted answers on how the Philadelphia school district ended up with a current deficit of $26 million and a projected deficit in the coming fiscal year in the hundreds of millions (see related story). In testimony lasting an hour, SRC chairman Pedro Ramos spelled out in blunt terms that the previous SRC applied stimulus money to new programs rather than using it to address the long-term structural imbalance of the district’s budget.

Woonsocket budget showdown - More than 500 residents packed into Hamlet Middle School last night to decry the supplemental tax increase city officials have proposed as a partial solution to a cash crunch that’s rushing toward the city like a freight train. Recriminations aside, the Fontaine adminstration says the city may run out of cash by the first week of April, forcing the city into bankruptcy, without a comprehensive plan of raising revenue, borrowing in anticipation of collecting supplemental taxes, and cutting costs to bridge the budget chasm. The supplemental tax bill alone, calling for a 13 percent increase over current rates, would be $3.13 per thousand on residential property. That means the owner of a home worth $100,000 would pay an unplanned $313 more this year, while business properties and motor vehicles would be slapped with even higher rates.

Decentralising education: Evidence from the BRICs - In developed and developing countries alike, officials, academics, and educators are concerned about the widespread problem of failing and poorly funded public schools. The problem is not unique to developing countries such as India and Brazil, but extends to developed countries such as the US, suggesting income differences alone cannot be responsible for the poor quality of public schools worldwide. Recent academic research suggests weak teachers and ineffective instruction are the main culprits. While teachers’ unions are blamed for the poor performance of US schools and students (Coulson 2010), high rates of teacher absenteeism and crumbling infrastructure are the hallmarks of the poor quality and quantity of public schooling in developing countries.  A recent article in The Economist praises Florida’s unique success at school reform, in contrast to the nationwide effort to improve public schools. But this column presents evidence from the education policies in Brazil, Russia, India, and China that decentralisation doesn’t always work.

Student Loans on Rise -- for Kindergarten - It used to be that families first signed up for education loans when their child enrolled in college, but a growing number of parents are seeking tuition assistance as soon as kindergarten. Though data is scarce, private school experts and the small number of lenders who provide loans for kindergarten through 12th grade say pre-college loans are becoming more popular. Your Tuition Solution, one of the largest lenders in this space, says demand for the upcoming year is already up: This month, the total dollar amount of loans families requested rose 10% compared to a year ago; at that pace, the company expects its total funding to rise to $20 million for 2012-13. Separately, First Marblehead, which exited the market in 2008, reentered last year as demand for loans began to rise.  Much of this demand is coming from high-income families. Roughly 20% of families that applied for aid to pay for their children's kindergarten through 12th grade private school education had incomes of $150,000 or more, according to 2010-11 data, the latest from the National Association of Independent Schools. That's up from just 6% in 2002-03. Those who don't get approved for free aid, like grants, increasingly turn to loans, experts say. For parents who sign up for pre-college loans the risks can be significant. To begin with, they could be repaying the loans for a long time. Sallie Mae's and Your Tuition Solution's pre-college loans have repayment periods of up to three and seven years, respectively.

Here's the real truth on homework - CHILDREN are being lumbered with hours of homework every week - but the extra slog doesn't do them any good. Research reveals primary school homework offers no real benefit - and only limited results in junior high school. Only senior students in Years 11 and 12 benefit from after-school work, associate professor Richard Walker said. "What the research shows is that, in countries where they spend more time on homework, the achievement results are lower," Dr Walker, from Sydney University's Education Faculty, said. "The amount of homework is a really critical issue for kids. If they are overloaded they are not going to be happy and not going to enjoy it. There are other things kids want to do that are very valuable things for them to be doing.

PC student tests forbid dance, dinos & lots more - In a bizarre case of political correctness run wild, educrats have banned references to “dinosaurs,” “birthdays,” “Halloween” and dozens of other topics on city-issued tests. That’s because they fear such topics “could evoke unpleasant emotions in the students.” Dinosaurs, for example, call to mind evolution, which might upset fundamentalists; birthdays aren’t celebrated by Jehovah’s Witnesses; and Halloween suggests paganism. Even “dancing’’ is taboo, because some sects object. But the city did make an exception for ballet. The forbidden topics were recently spelled out in a request for proposals provided to companies competing to revamp city English, math, science and social-studies tests given several times a year to measure student progress. “Some of these topics may be perfectly acceptable in other contexts but do not belong in a city- or state-wide assessment,” the request reads. Words that suggest wealth are excluded because they could make kids jealous. Poverty is likewise on the forbidden list. Also banned are references to divorces and diseases, because kids taking the tests may have relatives who split from spouses or are ill.

What The Research On Teach For America Tells Us - I find Shanker Blog’s Matt Di Carlo to be a reliable and very fair minded source for education research coverage despite coming from a somewhat different part of the ideological spectrum than I do on education reform. He has an assessment of the literature on TFA that I recommend.  Although I don’t know this area of research very well, his discussion reflects my general impression. Here is how he summarizes: One can quibble endlessly over the methodological details (and I’m all for that), and this area is still underdeveloped, but a fair summary of these papers is that TFA teachers are no more or less effective than comparable peers in terms of reading tests, and sometimes but not always more effective in math (the differences, whether positive or negative, tend to be small and/or only surface after 2-3 years). Overall, the evidence thus far suggests that TFA teachers perform comparably, at least in terms of test-based outcomes.  Matt is correct to look to the meta lessons about TFA and teachers in general, but I disagree somewhat about the meta lesson.

What Are We Doing? - I’ve written before in support of Pell grants—federal assistance for college tuition targeted at students from low-income families.  Barriers to college entry and completion have gotten steeper in recent years, as family incomes have lagged far behind tuition increases.  Think of Pell grants as a ladder to climb over those steeper barriers. So the last thing you’d want to do is to cut rungs from that ladder.  Yet that’s exactly what the House Republican budget, authored by Rep Paul Ryan, does.  According to the White House, the budget changes “eligibility and funding under the Pell Grant formula so as to eliminate grants for 400,000 students and cut grants for more than 9 million others in 2013 alone.”   [Here's a new chart from the Dept of Ed where they apportion those lost grants by state.] And for what?  So millionaires can get a tax cut of almost $400,000, if you include both the new Ryan and the extended Bush tax cuts.

We Don't Need No Education - Krugman - Jared Bernstein has a heartfelt lament about the priorities of the American right, and in particular the way it’s determined to slash taxes for the wealthy while slashing student aid. And he gives us this chart: The squares show the percentage of older people with college education, the triangles the percentage of younger people; what we see is that almost every other nation is becoming more educated, but we’re not — and, of course, slipping rapidly down the rankings. And yes, affordability is surely the biggest single reason for our slide. So of course, the GOP wants to make the affordability problem worse. It’s hard not to see this development as tied to the growing conservative distrust of science (and presumably non-faith-based inquiry in general): But hey, I’m a pointy-headed intellectual, so you can’t trust anything I say.

They Work Hard For The Money - Krugman - OK, I wasn’t going to post anything else, but as Robert Farley says, this WaPo piece on underworked college teachers is outrageous. Yes, people like me have a very nice life — and if you want to condemn the luxurious lives of faculty at elite research universities, fine. But the idea that faculty at big state schools, let alone community colleges, have it easy is just mind-boggling. I’ve visited a lot of these places and talked to a lot of these people, largely, I’m sorry to say, because they buy lots of textbooks. But I like the people — smart, highly educated people without the ego things all too common at more prestigious schools — very much. And I always come away awed by just how hard they work — how many class preps they have to do, how much time they spend with students, all for salaries that are a fraction of what people with similar qualifications earn in the private sector. Of all the people to pick on.

Former Chancellor Levy Says Profs Should Work More - It is bad enough when someone is misrepresenting facts, but when they add hypocrisy on top of it, this is really annoying. This is the case with the latest push for bashing faculty, in this case calling for increased teaching loads without any salary increases, all supposedly to reign in rising tuition costs. I fully agree that rising tuition costs are a serious problem in US colleges and universities, but the problem has much more to do with rising spending on administrators and staff than faculty, and this latest blast from David C. Levy, former Chancellor of "New School University"  in the Washington Post, "Do Professors Work Enough?" is the worst, with its focus on faculty and no mention whatsoever of his fellow administrators and other spongers. So, he provides no evidence of falling faculty workloads (and none exists because they have not), but wants people teaching four course loads to go to five course loads in teaching oriented schools and to teach during the summers as well, apparently on a mandatory basis, whether or not students want to attend during summers. In short, he wants to turn our colleges into high schools. A sentence that shows how weirdly fixated he is follows: "Since faculty salaries make up the largest single cost in virtually all college and university budgets (39 percent at Montgomery College), think what it would mean if the public got full value for these dollars." Yeah, wow, just think of it. As it is, one could fire a quarter of the faculty at Montgomery, increase the teaching load of the rest by a third, and manage to reduce tuition by, wait for it, 8%! Wow.

Why being a professor must be the best kept secret in the job market » Reader Will Wheeler points us to this Washington Post commentary by Dr. David C. Levy on the public leaches known as faculty at public teaching Universities, and Will throws down the gauntlet daring one of us to comment. Not being one to whither in the face of a dare, her you go Will...An executive who works a 40-hour week for 50 weeks puts in a minimum of 2,000 hours yearly. But faculty members teaching 12 to 15 hours per week for 30 weeks spend only 360 to 450 hours per year in the classroom. Even in the unlikely event that they devote an equal amount of time to grading and class preparation, their workload is still only 36 to 45 percent of that of non-academic professionals. Yet they receive the same compensation. As illustrated in the excerpt above, Dr Levy (who I will refer to from this point forward as Bozo) bases his argument on the unsubstantiated fact that faculty with 100% teaching appointments, spend 12 to 15 hours per week in the classroom during the academic year and in return receive compensation similar to non-academic suckers with comparable educations who are too stupid to realize that there are greener pastures in the academic world.  After all, who wouldn't want a job where you work 20-30 hours a week for 30 weeks for the equivalent of 40-50 hour, 52 week full-time pay?  No really, who wouldn't want that job? You would have to be an idiot to work full time when you could just teach for a few hours a week for the same pay.

Why college students stop short of a degree - The "Pathways to Prosperity" study by the Harvard Graduate School of Education in 2011 shows that just 56 percent of college students complete four-year degrees within six years. Only 29 percent of those who start two-year degrees finish them within three years. The Harvard study's assertions are supported by data collected by the Organization for Economic Co-operation and Development for its report "Education at a Glance 2010." Among 18 countries tracked by the OECD, the United States finished last (46 percent) for the percentage of students who completed college once they started it. That puts the United States behind Japan (89 percent), and former Soviet-bloc states such as Slovakia (63 percent) and Poland (61 percent). The failure to complete a college education in the United States is especially marked at four-year private for-profit schools, where 78 percent of attendees fail to get a diploma after six years, according to a 2011 report from the National Center for Education Statistics.

Fitch: U.S. Student Loan ABS Resistant to Default Rates - Fitch believes most student loan asset-backed securities (ABS) transactions remain well protected due to the government guarantee on Family Federal Education Program (FFELP) loans. The Federal Reserve Bank of New York recently reported that as many as 27% of all student loan borrowers are more than 30 days past due. Recent estimates mark outstanding student loans at $900 billion- $1 trillion. Fitch believes that the recent increase in past-due and defaulted student loans presents a risk to investors in private student loan ABS, but not those in ABS trusts backed by FFELP loans.  Several macroeconomic factors are putting pressure on student loan borrowers. The main ones are unemployment and underemployment. The Bureau of Labor Statistics estimates the current unemployment rate for people 20 to 24 years old at nearly 14% and for those 25 to 34 years old, 8.7%. Underemployment is difficult to measure for these demographics, but it is likely having a negative impact.  However, we believe that ABS trusts backed by FFELP loans are unlikely to be affected by employment trends, as they are at least 97% backed by the federal government. In addition, recent securitizations have been structured more robustly and many have backup servicing agreements.

There is no student loan 'crisis' -- Total student loan debt has topped $1 trillion ... but there's no need to panic. Most borrowers have a reasonable amount of debt, and the total balance is not likely to cause major damage to the economy like the mortgage crisis did, experts say. "I don't think it's a bubble," said Mark Kantrowitz, publisher of, a financial aid website. "Most students who graduate college are able to repay their loans." This is not to say that there aren't problems with student loans, which now exceed the amount of credit card debt and auto loans. Students are taking on more debt, on average, and more than a quarter of borrowers are behind on their payments. And a hefty debt load could delay recent graduates' purchase of a home or starting a business. But all the talk of a crisis or bubble in the student loan industry is exaggerated, experts say. There's no doubt that student loan balances are rising fast, bucking the trend of other consumer debt, which fell during the Great Recession. In 2007, the total level of student loan debt was about $600 billion. But more people are going to college these days, said Sandy Baum, senior fellow at the George Washington University School of Education. This is prompted in part by the economic downturn: When people lose their jobs or the economy turns shaky, a lot of folks return to school to learn new skills or bolster their resumes.

The First Crack: $270 Billion In Student Loans Are At Least 30 Days Delinquent - Yet one bubble which the Federal Government managed to blow in the meantime to staggering proportions in virtually no time, for no other reason than to give the impression of consumer releveraging, was the student debt bubble, which at last check just surpassed $1 trillion, and is growing at $40-50 billion each month. However, just like subprime, the first cracks have now appeared. In a report set to convince borrowers that Student Loan ABS are still safe - of course they are - they are backed by all taxpayers after all in the form of the Family Federal Education Program - Fitch discloses something rather troubling, namely that of the $1 trillion + in student debt outstanding, "as many as 27% of all student loan borrowers are more than 30 days past due." In other words at least $270 billion in student loans are no longer current (extrapolating the delinquency rate into the total loans outstanding). That this is happening with interest rates at record lows is quite stunning and a loud wake up call that it is not rates that determine affordability and sustainability: it is general economic conditions, deplorable as they may be, which have made the popping of the student loan bubble inevitable. It also means that if the rise in interest rate continues, then the student loan bubble will pop that much faster, and bring another $1 trillion in unintended consequences on the shoulders of the US taxpayer who once again will be left footing the bill.

Graph of the Day: Student Debt - Although the American love affair with easy credit hit a rough patch during the recession as families delayed the purchase of new cars and ever-larger flat-screen TVs to collectively pay down nearly a trillion dollars in outstanding household debt, one sector of the credit market continued to grow unabated. Total student debt is up over 500 percent since 1999, and is predicted to reach $1 trillion this year, surpassing both total credit card debt and auto loans. By 2020, it could be as high as $1.4 trillion, leading some experts to warn that student loans "could very well be the next debt bomb for the U.S. economy.” Not all forecasts are so dire. Moody's Analytics expects that "despite its rapid growth... student lending is not likely to turn into the next subprime crisis." That's because the studen loan market is less than one tenth the size of the mortgage market that tanked the economy in 2007. And unlike residential mortgages, 90 percent of student loans are federally guaranteed.  Still, the incredible growth of student debt has sobering implications for the future of the middle class and the U.S. economy. Last year, approximately one million students graduated a four-year college in debt—more than $23,000 on average and nearly $35,000 for those attending a private school. That's one million young people whose entry into the middle class will be delayed by a decade of debt servicing.

The Next Scary Hockey Stick Chart - If Michael Mann's infamous hockey stick graph should be taken seriously as evidence that human activity is causing global climate change that must be stopped, or else it will trigger positive feedback effects that will result in a catastrophe that will ruin the lives of millions of people, what then are we to make of the following chart showing how the U.S. federal government is running up its own debt for the sake of loaning out money to college students?  In this case, the disaster that would directly affect the lives of millions of people means being forced at the direction of government bureaucrats into a dramatically lower standard of living for the sake of being able to make the payments on their student loans to the U.S. federal government, without any real hope of being able to discharge that debt through bankruptcy.  That, in turn, has the real potential to indirectly hurt millions of other people, because student loan payments are rising at the rapid pace supported by the government-subsidized cost of tuition, even though college graduates are entering into jobs that pay far below what is required to both live well and to support their super-sized student loan debt.  It is quite possible then that we have reached a point where higher education hurts the economic growth of the nation, rather than helps it:

Obama Relies on Debt Collectors Profiting From Student Loan Woe - “We’re not playing here,” Campos recalled the collector telling him in December. “You’re dealing with the federal government. You have no other options.” Campos agreed to have the money deducted each month from his bank account, even though federal student-loan rules would let him pay less and become eligible for a plan -- approved by Congress and touted by President Barack Obama -- requiring him to lay out about $50 a month. To satisfy Pioneer, Campos borrowed from friends, cut meat from his diet and stopped buying gas to drive his 82-year-old mother to doctor’s visits for her Parkinson’s Disease. With $67 billion of student loans in default, the Education Department is turning to an army of private debt-collection companies to put the squeeze on borrowers. Working on commissions that totaled about $1 billion last year, these government contractors face growing complaints that they are violating federal laws by insisting on stiff payments, even when borrowers’ incomes make them eligible for leniency. Education Department contracts -- featuring commissions of as much as 20 percent of recoveries -- encourage collectors to insist on high payments. Former debt collectors said they worked in a “boiler-room” environment, where they could earn bonuses of thousands of dollars a month, restaurant gift cards and even trips to foreign resorts if they collected enough from borrowers.

Student Debt Collectors Are Incentivized to Violate Federal-Aid Laws, Bloomberg Reports - People who have defaulted on their student loans are sometimes forced into paying back more per month than they can afford — and more than the federal government requires — because private debt collectors are given incentives to violate federal-aid laws, Bloomberg reported this week. With $67 billion of student loans in default, the Education Department is turning to an army of private debt-collection companies to put the squeeze on borrowers. Working on commissions that totaled about $1 billion last year, these government contractors face growing complaints that they are violating federal laws by insisting on stiff payments, even when borrowers’ incomes make them eligible for leniency. Education Department contracts — featuring commissions of as much as 20 percent of recoveries — encourage collectors to insist on high payments. Former debt collectors said they worked in a “boiler-room” environment, where they could earn bonuses of thousands of dollars a month, restaurant gift cards and even trips to foreign resorts if they collected enough from borrowers. In October, President Obama announced the expansion of income-based repayment programs for qualified borrowers who are struggling to pay back their student loans. Although federal-aid law does not set a minimum payment for borrowers to enter repayment plans to “rehabilitate” their loans, some debt collectors have demanded minimum payments without disclosing more affordable alternatives, Bloomberg reports.

While White House Emphasizes Easing Student Debt Burden, Fed Contractors Play Hardball - It was with some fanfare [1] that the Obama administration announced [2] last fall that it was ramping up a program [3] to help students with federal loans reduce their monthly payments. Under the program, payments are adjusted based on how much students earn — what’s known as income-based repayment. Yet, even while the administration has emphasized easing the burden for student borrowers, some contractors with the Department of Education appear to be exacerbating it. Bloomberg reported this week that some federally contracted debt collection agencies have been playing hardball with borrowers [4] who are behind, insisting on payments the borrowers can’t afford — even when federal student-loan rules allow more leniency.  The debt collectors have an incentive to be tough.  As Bloomberg explains: Under Education Department contracts, collection companies “rehabilitate” a defaulted loan by getting a borrower to make nine payments in 10 months. If they succeed, they reap a jackpot: a commission equal to as much as 16 percent of the entire loan amount, or $3,200 on a $20,000 loan.

US employs Vinnie the Kneecapper to collect student debt - On the heels of the assessment we saw from Tyler Durden, via Fitch, of the implosion of US student loan debt, which stands at over $1 trillion, increases by $40-50 billion (!!) each month (or $500-$600 billion per year), and of which 27% is already 30 days or more delinquent, John Hechinger explains for Bloomberg how the US Education Department goes about collecting this debt. Turns out, it's a case of "Eat your heart out, Tony Soprano". Hard to believe this could happen in a supposedly civilized country, but there you have it. Here are some excerpts from Hechinger's article: Obama Relies on Debt Collectors Profiting From Student Loan Woes:The debt collector on the other end of the phone gave Oswaldo Campos an ultimatum: Pay $219 a month toward his more than $20,000 in defaulted student loans, or Pioneer Credit Recovery, a contractor with the U.S. Education Department, would confiscate his pay. Campos, disabled from liver disease, makes about $20,000 a year. "We’re not playing here," Campos recalled the collector telling him in December. "You’re dealing with the federal government. You have no other options." Campos agreed to have the money deducted each month from his bank account, even though federal student-loan rules would let him pay less and become eligible for a plan requiring him to lay out about $50 a month. To satisfy Pioneer, Campos borrowed from friends, cut meat from his diet and stopped buying gas to drive his 82-year-old mother to doctor’s visits for her Parkinson’s Disease.

Obama Plans Overhaul of Student-Loan Debt Collector Practices - The Obama administration proposed requiring that debt collectors let student-loan borrowers make payments based on what they can afford, rather than on the size of their debt.  The U.S. Education Department, which hires private collectors, said yesterday it would mandate that the companies use a standard form to gather debtors’ income and expenses. If borrowers protest, they would be offered an income-based formula, which can result in payments as low as $50 a month for an unmarried person with $20,000 in income and $20,000 in loans.  The collection companies -- which receive commissions of as much as 20 percent of recoveries -- are facing complaints that they insist on stiff payments from defaulted borrowers even though the Obama administration and Congress have approved more- lenient plans, Bloomberg News reported March 26. The education department is also reviewing the commissions it pays collectors.

U.S. corporate pensions see record underfunding (Reuters) - The 100 largest pension funds run by public U.S. companies had a record funding shortfall of $326.8 billion at the end of 2011, as sagging stock prices and low interest rates combined to lower investing returns and increase liabilities, a report released on Thursday by pension consulting firm Milliman said. The shortfall at the 100 funds, which collectively manage about $1.2 trillion, means companies either will need to pour in billions more dollars of cash or press for further regulatory relief from Congress. The companies contributed $55.1 billion in 2011 but may need to add more than $80 billion this year, Milliman said. Ford Motor Co and Exxon Mobil, which run two of the largest funds, have already said they plan to add $3.8 billion and $2.9 billion respectively for 2012. And eight other companies including Boeing Co and Verizon Communications Inc, have announced planned to contribute at least $1 billion each. "With over $15 billion already committed by just 10 companies, if the rest of the big funds just keep contributions at the same level as last year, we'll be up over $80 billion," . Pension payments do not directly reduce companies' net income and can reduce taxes owed. But the cash cannot be used for other purposes like building a new factory or research and development. Lawmakers in Washington are weighing a change to a key accounting rule that dictates how companies calculate their underfunding levels.

Pension burden for local entities - More than 3,400 entities provide public pensions in New York state, and data obtained from the Comptroller's Office shows a staggering increase in their current and future cost for retirees. Everything from the local library to major medical centers are being whacked by the rising pension costs. The database below shows all of the entities in each county that pick up the tab for taxpayer-funded pensions -- and how the costs are soaring. Costs for 2011 and 2012 are based on annual invoices from February of that year. Costs for 2013 are projections. There are two separate retirement systems for state workers: the Police and Fire Retirement System (PFRS) and the Employees’ Retirement System (ERS). Many of the entities in this database make separate payments to each.

1 Big Chart: There Is No Social Security Crisis - Here's a question for the under-30 crowd: Do you think Social Security will still be around when you retire? Half of you don't. Here's why you should. The below chart, courtesy of Peter Diamond and Peter Orszag, compares what we spend on Social Security and Medicare today (blue) as a percent of GDP versus what the CBO projects we will spend on them in 2050 (red). It's a tale of two very different entitlements. What a difference 40 years makes. While Social Security and Medicare make up roughly equal portions of the budget today, the CBO expects Medicare spending to be exactly double Social Security spending by 2050. There is no "entitlements" crisis. There is a Social Security problem, and a Medicare crisis. And the Medicare crisis is really a general healthcare spending crisis -- indeed, Medicare actually spends less than private insurance does. That doesn't mean that Social Security doesn't need to be tweaked. A bump from five to six percent of GDP, as the CBO projects, isn't trivial. But checks to retirees won't bankrupt us. Fee for service for those retirees might.  So why do politicians prefer to talk about fixing Social Security? It's precisely because it's so easy to fix. Social Security is an accounting problem. Money goes in. Money comes out. If you increase the income, or decrease the outlays, you're finished.

California seeks limits on small-business self-insurance trend - Sensing a fresh threat to state and federal healthcare reforms, California insurance officials are seeking new limits on a controversial form of health coverage insurers are selling to small employers. At issue is a new type of self-insurance for small businesses with as few as 25 workers. Critics said insurers such as Cigna Corp. are using these new plans to game the system and cherry-pick companies with healthier workers. They said this could undermine a key goal of the federal Affordable Care Act to lower premiums by pooling together more healthy and sick Americans into insurance exchanges. Premiums could continue to escalate without a diverse pool of consumers. That prospect has federal health officials weighing action against this practice as well. Self-insurance, in which employers pay medical providers for their workers' care, has traditionally been used only by large employers that have the financial resources to pay for expensive medical claims. A Kaiser Family Foundation study found that 60% of U.S. workers with health coverage were in self-insured plans last year.

Health care thoughts: First major rewrite of the Americans with Disabilities Act - While We Were Busy Discussing Other Things.... the first major rewrite of regulations for the Americans with Disabilities Act went into effect March 15th. Good news and bad news for workers and employers.  Overall, what I read looks achievable from an employer viewpoint, and the Obama administration has shown some common sense (building owners who spent money to meet the prior rules will not have to immediately tear up their buildings for modifications to meet new rules). The bad news? The news regs for public swimming pools cannot not be met on time, and the administration has issued a 60 day reprieve to prevent the closer of most of the pools in the country. (Apparently there is not enough qualified equipment or enough service techs to retrofit tens of thousands of pools in any timely manner.) Eventually the administration may inadvertently shut down many of the therapy pools used by .... the disabled.  The other bad news I see is the definition of "disabled" is now murky again, after the feds and employers and the courts worked for two decades to clarify the previous definitions. This murkiness puts employers acting in good faith in jeopardy for litigation.

Health Care Thoughts: Innovation is Good Except .... when it is not politically correct. For a long time large employers have used self-funded insurance plans backed up by stop-loss insurance for large claims. I have worked with employer plans down to the 100 employee size. Now small employers are trying to cope with fast rising conventional premiums by using self-employed plans with lower dollar stop-loss coverage. Insurance companies are crafting plans for smaller businesses.  Well! California politicians and bureaucrats want to outlaw these plans, not because the plans are necessarily bad for small business or employees, but because the plans do not meet the spirit and needs of PPACA. This insurance coverage is not politically correct. Some big insurers support the state because they might lose market share in the small business market (the holiest of motives of course). Prediction: Eventually small business employers will get sick of this and dump employees on state exchanges, assuming the exchanges can be organized and operated. Writing legislation is easy. Implementing PPACA is not so easy.

A Moment of Truth for Health Care Reform -  The Supreme Court’s decision on the Affordable Care Act will have immense political importance. The law, which rivals Medicare in scope, is the biggest achievement of the Obama administration. Striking it down has become a Republican crusade.The justices, like the rest of the country, are clearly aware of the politics of the moment. But a decision on the merits will endure long after this election season — it could alter the allocation of power within American government and Congress’s authority to solve national problems. The act requires almost all individuals to obtain health insurance, either through private plans or public programs, or pay a financial penalty. It places new requirements on health insurance, like full coverage for preventive care. And it will subsidize insurance for low-income and moderate-income people, while expanding Medicaid programs in the states to cover many millions more.  Here is a look at the issues to be argued over three days this week in this extraordinary case.

Economists On Opposing Sides of Health Care Law - The big event of this week in the U.S. will be the Supreme Court discussion of the Affordable Care Act aka “ObamaCare”, a supposedly derogatory nickname now embraced by the Obama campaign. At the heart of the fight is the so-called individual mandate which requires everyone to purchase health insurance. I am not a lawyer but the main argument for canceling the individual mandate turns on whether the federal government has the right to penalize an individual if they do NOT take a certain action. There is plenty of precedent for taxing “action” but can the federal government tax “inaction”? Many amicus briefs have been filed but there are two key ones by economists. David Cutler, who worked in the Obama administration, has filed one with many co-signatories (including Akerlof, Arrow, Maskin, Diamond, Gruber, Athey, Goldin, Katz, Rabin, Skinner etc.). They say there is no such thing as inaction. A conscious decision to forego healthcare is an action and hence under the purview of existing law. Foregoing insurance also affects outcomes largely by shifting costs to others and hence is not a neutral decision. The other side of the argument is filed by Doug Holtz-Eakin with co-signatories inclusing Prescott, Smith, Cochrane, Jensen, Anne Krueger, Meltzer etc.) First, they argue that if an individual does not want to buy converage it must be because the costs outweigh the benefits. Second, they argue about the numbers, claming the costs imposed by the uninsured on the insured (“cost-shifting”) are far below the $43 billion estimated by the Government Economists and are more like $13 billion.

Justices Tackle The Big Question: Can Congress Force You To Buy Insurance? - The U.S. Supreme Court gets to the heart of the health care arguments Tuesday. Almost exactly two years after Congress passed the Obama health care overhaul, the justices are hearing legal arguments testing the constitutionality of the so-called health care mandate — so-called because those words actually do not appear in the law. The mandate requires virtually all legal residents in this country to have health insurance — either through Medicare, Medicaid or employer-provided insurance, or if you are not covered by any of these, through individual insurance that you pay for. The law provides generous subsidies if you can't afford it, but you must have health insurance, and if you don't, you pay a penalty through your income taxes. The mandate is essentially a trade-off for reducing the costs of health care policies overall and guaranteeing affordable coverage for people with previous medical conditions. The law is expected to provide coverage to some 30 million people who are currently uninsured

My ACA-Individual-Mandate Analysis Summed Up In Three Paragraphs - Beverly Mann - There are limits to what Congress can do in the name of the Commerce Clause, but because medical treatment for uninsured patients, including those traveling from one state to another, requires cost-shifting of huge amounts of money, some of it interstate, a law like the ACA is within the Commerce Clause limits.   That’s not to say that there may not be some other reason why a statute that falls within Congress’s Commerce Clause powers is unconstitutional, and although the people challenging the constitutionality of the mandate don’t expressly say this, their “freedom” and “liberty” claim is really a claim that the mandate violates the Fifth Amendment’s due process clause under a constitutional-law doctrine known as “substantive due process.” But the Commerce Clause plays no role in this, one way or another.   Sure, if the Court strikes down as beyond Congress’s authority  under the Commerce Clause a statute that requires people to do something or that bars them from doing something, then people are “free” to do or not do whatever the statute required or barred.  But that’s just incidental.  It isn’t less of an imposition on liberty for Congress to require people who can afford to do so to buy health insurance directly through the government by a tax under Congress’s taxing power (which is what the government does with Medicare) than to require then to buy it elsewhere under Congress’s Commerce Clause power.

Healthcare Jujitsu - Robert Reich - Not surprisingly, today’s debut Supreme Court argument over the so-called “individual mandate” requiring everyone to buy health insurance revolved around epistemological niceties such as the meaning of a “tax,” and the question of whether the issue is ripe for review.  Behind this judicial foreplay is the brute political fact that if the Court decides the individual mandate is an unconstitutional extension of federal authority, the entire law starts unraveling. But with a bit of political jujitsu, the President could turn any such defeat into a victory for a single-payer healthcare system – Medicare for all. The dilemma at the heart of the new law is that it continues to depend on private health insurers, who have to make a profit or at least pay all their costs including marketing and advertising. Yet the only way private insurers can afford to cover everyone with pre-existing health problems, as the new law requires, is to have every American buy health insurance – including young and healthier people who are unlikely to rack up large healthcare costs. This dilemma is the product of political compromise. You’ll remember the Administration couldn’t get the votes for a single-payer system such as Medicare for all. It hardly tried. Not a single Republican would even agree to a bill giving Americans the option of buying into it.

Supreme Thoughts - Krugman - I haven’t been weighing in on the ACA hearing at the Supreme Court; I’m not a lawyer, and while most legal experts seem to think that the case for striking the law down is very weak, these days everything is political.But I guess I should give my take, which is really quite simple. We know, or I think we know, that a single-payer system — in which the government collects taxes, and uses the revenue to provide health insurance — would be constitutional. I mean, I don’t think the court is about to strike down Medicare. Well, ObamaRomneycare is basically a somewhat klutzy way of simulating single-payer. Instead of collecting enough revenue to pay for universal health insurance, it requires that those who can afford it buy the insurance directly, then provides aid — financed with taxes — to those who can’t. The end result is much the same as if the government collected taxes from those under the mandate and bought insurance for them. Yes, the system is surely less efficient than single-payer, both because it’s more complex and because it introduces another layer of middlemen. That’s what happens when you have to make political compromises. But it is in no sense more interventionist, more tyrannical, than Medicare; it’s just a different way of achieving the same thing.

The Supreme Court and the ACA: Is Health Care Unique and Does it Matter? - One of the most important questions the Justices will likely bring up tomorrow in the deliberation about the individual mandate will be: Is health care — or health insurance — actually unique? This raises the important issue sometimes called the “broccoli question.” The general idea behind it is that if the federal government has the constitutional power to require people to buy private health insurance simply as a condition of being alive, is there is any limit to what the federal government can force you to buy or do? If it can make you buy insurance, can the government also make you buy and/or eat broccoli? The Obama Department of Justice and many of the law’s supporter have argued that health care is somehow unique. They note the health insurance market is such a large part of the economy, that everyone will eventually use a health care service at some point, that the mandate is necessary for the federal government to achieve its goal of expanding coverage. All the arguments I’ve seen for the uniqueness of health care are, in my opinion, seriously lacking as a legal and logical argument..  If the government mandated everyone to buy cars, guns, gym memberships, emergency phones, or vegetables it would result in significant changes to the economics of these products and society as a whole. If the Supreme Court decides that health care is unique for some reason that allows it to uphold the individual mandate, it will presumably do so in a way that limits the precedent it sets.

Supreme Court Justices Express Skepticism of Claim that Health Care Mandate is a Tax - Today will be the second of three days of oral argument in the U.S. Supreme Court over the constitutionality of the health care law (PPACA or "Obamacare"). Yesterday, the Court considered whether the Anti-Injunction Act applies. That law prohibits legal challenges to taxes until they are collected, and if it applies here, it means that the health care law's individual mandate cannot be challenged until 2014 when it is first assessed. While I have not reviewed the transcript of yesterday's argument (I'm preparing for congressional testimony on the topic this Thursday at 9:00 AM to the House Ways & Means Committee's Health Subcommittee), others report that the justices were for the most part skeptical of the notion that the individual mandate is a tax and thus falls under the Anti-Injunction Act, and that this skepticism was across-the-board. Reason posted a video summarizing this which I include below. Our brief in the case argues that the individual mandate is not a tax. This is important because the Government must point to some constitutional power that justifies the mandate to purchase health insurance. Their primary argument is the power to regulate interstate commerce, but secondarily they argue their power to impose taxes. We authored our brief in the case to refute the government's mischaracterization of the individual mandate as a tax, to explain why the definition they propose is unworkable, and to warn that an adverse ruling on this point jeopardizes important taxpayer protections and well-defined caselaw in nearly every state.

In the Court, Split Seems Partisan - Many legal scholars, including some conservatives, have been predicting that the Supreme Court will uphold the 2010 health care overhaul. But after Tuesday’s arguments, when several justices asked skeptical questions about the heart of the law, a political lens seemed relevant, too.When Congress passed the law, 9 out of 10 Democrats voted for it, while not a single Republican, in either the House or the Senate, did so. In the lower courts, judges appointed by Democratic presidents voted mostly — but not entirely — to uphold the law. And judges appointed by Republican presidents voted mostly — but not entirely — to overturn at least part of it.  It is obviously too early to know what the Supreme Court will do, despite the rush of commentary after Tuesday’s much-watched hearing. But skeptical questions from the bench are often an indicator of how justices will ultimately vote — and many court experts expressed surprise at the apparent agreement among the conservatives, including Justice Anthony M. Kennedy, the likeliest swing vote.

If the Mandate Fails, Single Payer Awaits - There is much consternation in liberal circles this afternoon, as the arguments before the Supreme Court about health care reform’s crucial individual mandate don’t seem to have gone very well. “A bad day for Obamacare’s supporters,” writes Ezra Klein. “I think this law is in grave, grave trouble,” said Jeffrey Toobin.I tend to give more credence to the accounts that things weren’t actually that bad—the questioning during these proceedings is not predictive of the final outcome, and Justice Anthony Kennedy has plenty of room to side with the government—but it’s worth considering what would happen if, indeed, the individual mandate is junked. One obvious option, besides just doing nothing and allowing health care costs to continue their exponential growth while more people lose coverage, is a single-payer health insurance plan. There is no doubt about the constitutionality here—the government is clearly allowed to levy taxes to fund public benefits. Medicare, for example, is not challengeable on the same grounds as Obama’s health care reform.

What the Supreme Court Could Do About Obamacare, Explained - The Supreme Court will hear oral arguments concerning the constitutionality of Obamacare—a.k.a. the Affordable Care Act, or ACA—beginning Monday. (Last week, Obama reelection campaign manager Jim Messina sent out an email to supporters noting that he and the campaign are proud of "Obamacare," thus claiming the term from their foes.) What will the justices decide? Here are a few of the probable scenarios:

You Say Tax, I Say Penalty - At first glance, this morning’s 90-minute oral argument in the first of a three-day assessment of the constitutionality of the Affordable Care Act, looks something like the court coughing up a big old drama-killing hairball. For one thing, the issue is arcane and hypertechnical: Does a 19th-century statute—the Anti-Injunction Act—which provides that “no suit for the purpose of restraining the assessment or collection of any tax may be maintained in any court by any person”—bar the Supreme Court from even hearing the health care cases until someone has refused to purchase health insurance and paid a penalty for it? Since that won’t happen until 2014, the Anti-Injunction Act offered at least one federal appeals court the attractive option of making this whole case disappear for a few more years. That now looks unlikely to happen. Because both the Obama administration and the opponents of the health care bill want the Supreme Court to decide the suit now, the court had to appoint an outside advocate—D.C. lawyer Robert Long—to argue that the court has no jurisdiction to hear the case. Forty minutes into his argument (which sounded more like a complex tax seminar than a fight over health care) Long didn’t appear to have too many buyers for the idea that these challenges should ripen on the shelf for a few more years.

'Jurisdiction'-  Beverly Mann - To the general public, all that matters are the headlines, reflecting the bottom line.  The universal consensus among reporters who attended the 90-minute Supreme Court argument yesterday on whether an 1867 law called the Anti-Injunction Act bars the Court from considering challenges to the constitutionality of ACA’s individual-mandate provision was that the justices will decide the constitutionality of the mandate provision despite the AIA.  But law geeks like me know that what also matters is how they conclude that the court has “jurisdiction”—legal authority—to decide the constitutionality of the mandate provision. That’s because federal judges are incessantly, and often spontaneously, throwing lawsuits out court, claiming that they lack jurisdiction to hear the case—a trend begun in the 1980s and accelerated exponentially, explicitly and by malignant (as opposed to benign) neglect to reverse lower appellate court rulings, by the conservative legal movement to which a majority of the Roberts and Rehnquist courts adhere.   A key part of the conservative-movement’s federal-courts-have no-jurisdiction-to-hear-any-constitutional-claims-except-the-ones-that-conservatives-want-them-to-hear jurisprudence is that federal-court jurisdiction either exists or it doesn’t, and if it doesn’t it can’t be waived by the parties.  So even if neither party claims a lack of federal jurisdiction, the judge, judges or justices in each case must raise the issue themselves if they believe jurisdiction may be lacking.

Thoughts on the Health Care Case Thus Far - I've just read through the transcript of the first two days of oral argument in the health care case. Below are my impressions of each justice's questions, followed by all references to the tax power argument so far. (We submitted a brief arguing that the mandate is beyond Congress's power to tax.)

The Economic Rationale for the Individual Mandate? - Tomorrow, the Supreme Court will hear oral arguments on the constitutionality of the individual purchase mandate, which requires most individuals to pay an annual tax penalty if they do not have health insurance by 2014. While some have portrayed the mandate as a novel and dangerous encroachment on freedom, it’s important to realize that it has a reasonably long and well-thought-out rationale supporting it. The Brief of Amici Curiae Economic Scholars in Support of Petitioners Urging Reversal on the Minimum Coverage Issue makes both the legal and economic cases for the individual mandate. It is signed by 4 Nobel Prize winners, 3 of whom (Kenneth Arrow, George Akerlof, and Peter Diamond) have won for work relevant to health economics. Four others who signed the brief have won the Arrow Award (the International Health Economics Association’s highest award), and 6 have won awards from AcademyHealth. Last Friday, on this blog, Lawrence Gostin echoed some of the brief’s content while summarizing the legal cases for and against the mandate. The mandate is necessary, he wrote, “because it ensures that health insurance spreads the risk across the entire population so there are enough healthy individuals to keep overall expenditures lower than premium costs.” This idea is so fundamental to the health insurance reforms of the ACA, I’d like dig a bit deeper into the health economics concepts and work that support it.

The Other Supreme Court Issue - Medicaid Expansion - So much attention has been paid to the individual mandate that relatively few have bothered to focus on the other questions that will be debated tomorrow in front of the Supreme Court. One involves the expansion of Medicaid, and it is absolutely worth some time. As Medicaid currently stands, it covers children in poverty, pregnant women in poverty, and parents who qualify under some pretty restrictive regulations. Adults without children, however, are often out of luck. In the majority of states, it does not matter how poor childless adults are; they cannot qualify for Medicaid. As part of the Affordable Care Act (ACA), Medicaid regulations change. Starting in 2014, all adults, regardless of whether they have children, will be eligible for Medicaid if they earn up to 133% of the federal poverty line. These changes are an enormous expansion of Medicaid, so much so that about half of the newly insured under the ACA will be getting their coverage through the program. Congressional Budget Office estimates that it will cost almost $800 billion over the next decade. To make this more palatable to states, the federal government will cover 100% of the expansion when it begins in 2014.  The way the ACA is written, unless states comply with these expansions, they stand to lose all Medicaid funding. Not just the new stuff, but the entire program. This is concerning to many states, because Medicaid is already straining their budgets. They can barely keep afloat now, so they don’t like being on the hook for new people. Florida, along with 26 other states, is bringing a case to court based on the Constitution’s Spending Clause.

Rough day for Obama health law: Kennedy among mandate skeptics - The Obama administration’s health insurance mandate faced severe skepticism Tuesday from conservatives on the Supreme Court during a pivotal morning of oral arguments on the landmark legislation. Justice Anthony Kennedy, the court’s most consistent swing vote, repeatedly voiced doubts about the mandate’s constitutionality, suggesting he could side with the court’s four staunch conservatives to overturn President Obama’s healthcare law. “That changes the relationship of the federal government to the individual in a very fundamental way,” Kennedy said. Jeffrey Toobin, a lawyer and legal analyst who writes about legal topics for The New Yorker called Tuesday a “train wreck for the Obama administration.”“This law looks like it’s going to be struck down. I’m telling you, all of the predictions, including mine, that the justices would not have a problem with this law were wrong,” Toobin said Tuesday on CNN. “I think this law is in grave, grave trouble.”

What Obama's Lawyers Couldn't Answer - If the government can force you to buy health insurance, what can't they force you to do or buy? That was the question posed by a number of Supreme Court justices throughout today's oral argument on the constitutionality of ObamaCare. And that was the question President Obama's lawyers couldn't seem to answer. That question didn't seem to bother the four liberal justices, who appeared ready to uphold the law. At one point, Justice Breyer suggested that the government could force you to buy things such as cellphones and burial insurance. The remaining justices, however, appeared highly skeptical of the government's argument. Justice Kennedy and Chief Justice Roberts, largely believed to be the "swing votes" in this case, pressed the administration's lawyer hard for any kind of limit to the President's theory. Chief Justice Roberts harshly noted that the type of insurance ObamaCare forces people to buy was completely different from the type of health care these people actually use. Justice Kennedy countered the administration's argument by saying that the government will say that every market is "unique."

Toobin: Health law ‘looks like it’s going to be struck down’ - CNN's legal correspondent Jeffrey Toobin reports that the court's conservative wing appeared skeptical of the Obama administration's arguments in favor of the individual mandate provision of the Affordable Care Act. "This was a train wreck for the Obama administration. This law looks like it's going to be struck down," Toobin said on CNN. "All of the predictions including mine that the justices would not have a problem with this law were wrong." "The only conservative justice who looked like he might uphold the law was Chief Justice Roberts who asked hard questions of both sides, all four liberal justices tried as hard as they could to make the arguments in favor of the law, but they were -- they did not meet with their success with their colleagues," Toobin said.

Supreme Ignorance - Krugman - I’ll have much more to say about the Scotus/ACA stuff later this week; right now, I have travel (and teaching tomorrow, so time will be tight until Friday). But read Henry Aaron on yesterday’s not-good day. Astonishingly, many of the justices appear not to understand that health care isn’t like the market for cars, or broccoli; even more astonishingly, the administration’s lawyer seemed unprepared to explain the difference. (The Obama administration has been weirdly inarticulate on this stuff from day one; Mitt Romney has done a better job of explaining the mandate than the president has).

Supreme Court’s Final Day of Health Care Arguments: Severability, Medicaid Expansion - On the third and final day of the Supreme Court hearings on Obamacare, the Justices will hear arguments on two separate issues. One concerns severability.  If one portion of the law is found unconstitutional, such as the mandate, does that require the Court to strike down related provisions, or even the entire law? There’s is a presumption of severability, but if some provisions are so interdependent that striking down one makes the others unworkable, they can be struck down too. And in fact, that’s what the Court will hear today: whether the individual mandate can be removed from the law while the rest of the law stays intact. Given yesterday’s arguments, this is a question that could very well come into play. Precedent suggests that the constitutionally valid parts of the law should stay in operation, with only the unconstitutional parts removed. The government will argue that three of the elements work in tandem – the individual mandate, the pre-existing condition exclusion, and community rating, which mandates that all consumers get charged at the same basic rate regardless of medical history (with a few exceptions: age, geographic location and tobacco use).

Day 3: ObamaCare at the Supreme Court -  Today was the final marathon session of oral arguments over ObamaCare. It began this morning with the question of what to do with the rest of the law if the individual mandate is struck down, a very real possibility after yesterday's hearing. On this issue, both sides agree that if the mandate falls, at least some of the other provisions must fall with it. Most of the Justices seemed skeptical that the entire law should be thrown out, but where to draw the line was a question the Court was clearly struggling with. Some of the justices hinted that the difficulty in drawing that line could mean disaster for the whole law. Others noted that the Court has never struck down the heart of a statute but left an empty shell. At one point, Justice Kennedy expressed his concern that it might be worse to pick and choose which parts to strike down than to just overturn the whole law. Justice Scalia joked that forcing the Court to go through the law's thousands of pages and provisions one by one would be cruel and unusual punishment. The day ended with the question of whether the President can force states to expand their Medicaid programs to millions of new enrollees. As I explained earlier this week, Medicaid expansions have already failed the most vulnerable populations in Illinois, and ObamaCare is only going to make the problem worse. The four liberal justices appeared highly critical of the state's argument that conditioning pre-existing Medicaid funding on new expansions is too coercive. The conservative justices also expressed some skepticism that the forced expansion was unconstitutional, though they did press the administration to define the outer limits of that power.

Reaction to the Final Hearing on the Health Law - Reaction to Wednesday morning’s Supreme Court hearing on the health care overhaul was more varied than reaction to Tuesday’s hearing. Adam Liptak covered the hearing for The Times, and The Lede is following the case with a live blog. A sampling of other analysis and reaction follows.

Broccoli and Bad Faith, by Paul Krugman -  Nobody knows what the Supreme Court will decide with regard to the Affordable Care Act. But ... it seems quite possible that the court will strike down the “mandate” — the requirement that individuals purchase health insurance — and maybe the whole law. Removing the mandate would make the law much less workable, while striking down the whole thing would mean denying health coverage to 30 million or more Americans.  Given the stakes, one might have expected all the court’s members to be very careful in speaking about both health care realities and legal precedents. In reality, however, the second day of hearings suggested that the justices most hostile to the law don’t understand, or choose not to understand, how insurance works. And the third day was, in a way, even worse, as antireform justices appeared to embrace any argument, no matter how flimsy, that they could use to kill reform.  Let’s start with the already famous exchange in which Justice Antonin Scalia compared the purchase of health insurance to the purchase of broccoli, with the implication that if the government can compel you to do the former, it can also compel you to do the latter. That comparison horrified health care experts all across America because health insurance is nothing like broccoli.

Taxes, Health Reform, and the Supreme Court - There is more to the Affordable Care Act than the individual mandate. There are also, for example, taxes. And since this is TaxVox, I thought it would be useful to think about some of those revenue provisions in the wake of the Supreme Court’s three-day hearing on the fate of the ACA. The law includes both tax increases and tax cuts. Even if the controversial individual mandate is struck down, most of those tax changes would survive—unless, of course, the High Court grants the law’s critics their fondest wish and kills the entire act. The only tax—if it is a tax at all—that relates directly to the mandate is the penalty people would owe for failing to buy insurance. Whatever High Court does to the mandate, it will be interesting to learn whether the justices decide this levy is in fact a tax or a penalty. The Obama Administration is firmly on both sides of this question, as are the opponents of the law. The ACA also includes some important tax cuts—generous credits aimed at subsidizing small businesses that buy insurance for their employees. You might not know these tax cuts are in the law given the $1 million-plus the National Federation of Independent Business reportedly paid for legal and other fees to challenge the ACA, but they are there nonetheless.

Moral Hazard and the Health Insurance Mandate - I want to return to the argument about the need for an individual mandate. A post earlier today talks about adverse selection problems in the health insurance market. These problems are driven by the fact that individuals know more about their health status than insurance companies. But there is another reason for insurance mandate as well, moral hazard (and avoiding externalities). We are, I hope, a compassionate society, one that would not let an individual suffer severe health problems, perhaps even death, if treatment is available. In an emergency, we generally give the care that is needed and ask questions later. This allows relatively healthy people to go without health insurance secure in the knowledge that if they get hit with a truly catastrophic and expensive to treat illness, society will take care of them. If we could make people pay the full cost of this wager that they won't need insurance, i.e. if society could turn it's back and say you made your choice, now live (or die) with it, a mandate wouldn't be needed. But we can't. When it comes to Social Security we recognize that people can game the system in this way -- contribute nothing during their lives and rely on the fact that society will provide for them when they are old -- and we force them to contribute. That way, they build up their own retirement funds with a long series of small contributions and, at least in part, pay their own way. They have no choice but to do so. If this didn't happen, other members of society would have to pay this portion of the bill.

Insurance or Redistribution? - Mark Thoma makes an important point about the “individual mandate” that applies equally well to health care and to Social Security: “I don’t see anything wrong with asking people to pay the expected value of their health care — a mandate to get insurance to cover the catastrophic things that society would cover in any case — to avoid this type of gaming of the system. Yes, it’s true that many healthy people will pay, remain healthy, and seem to get nothing. But that’s the wrong way to look at it. They have insurance whether they pay for it or not. Society will not let them die of a standard, treatable illness so insurance services are present. In fact, it’s the knowledge that society is providing these services that motivates many people to take a chance and go without.” This is the relatively common argument that, since people already have guaranteed access to a basic level of emergency care, they should have to pay for it. There’s a slightly different point in there that I emphasized above and that I want to focus on. Health insurance, like any kind of insurance, can be framed after the fact as redistribution. You pay health insurance premiums, you stay healthy, and therefore you “lose”—your money goes to pay for other people’s losses. But this is true of any kind of insurance. It’s equally true of homeowner’s insurance: if your house doesn’t burn down, you are the victim of redistribution from you to the people whose houses do burn down

Jonathan Gruber, Health Care’s Mr. Mandate - After Massachusetts, California came calling. So did Connecticut, Delaware, Kansas, Minnesota, Oregon, Wisconsin and Wyoming.  They all wanted Jonathan Gruber, a numbers wizard at M.I.T., to help them figure out how to fix their health care systems, just as he had helped Mitt Romney overhaul health insurance when he was the Massachusetts governor.  Then came the call in 2008 from President-elect Obama’s transition team3, the one that officially turned this stay-at-home economics professor into Mr. Mandate.  Mr. Gruber has spent decades modeling the intricacies of the health care ecosystem, which involves making predictions about how new laws will play out based on past experience and economic theory. It is his research that convinced the Obama administration that health care reform could not work without requiring everyone to buy insurance.  And it is his work that explains why President Obama has so much riding on the three days of United States Supreme Court hearings, which ended Wednesday, about the constitutionality of the mandate. Questioning by the court’s conservative justices has suggested deep skepticism about the mandate, setting off waves of worry among its backers — Mr. Gruber included.

Further Reading on Mr. Mandate - I have a profile now online about Jonathan Gruber, an economics professor at M.I.T. He helped design both the universal health care overhaul in Massachusetts and the Affordable Care Act, and is probably the economist most closely associated with the idea of an individual insurance mandate. Here’s a short bibliography on Mr. Gruber, for those interested in reading more about the professor and his work.

If Mandate Goes, How Much Goes With It?  - Justices on the Supreme Court who are leaning toward striking down President Obama’s signature health care mandate on its constitutionality stared into the abyss on the third and final day of historic oral arguments. If the mandate goes, what else goes with it? For conservative jurists like Antonin Scalia, who has preached against judicial activism but did a 180 by openly siding with plaintiffs seeking to strike down the Affordable Care Act, the answer is simple. Without the mandate, the entire act crumbles and Congress has to start over. But for most justices, especially the law’s staunchest defenders, the line is murky and deciding which sections of the law cannot be “severed” from an unconstitutional mandate would plunge the court into the messy business of legislating. Congress did not specify which sections of the law depended on the individual mandate, although it did call it “essential” to other insurance reforms like guaranteed issue, where people can’t be denied coverage based on previous health history, and community rating, where premiums cannot be determined by health status.

Supreme Court wraps up three days of historic health-care hearings -The Supreme Court closed an extraordinary three-day review of President Obama’s health-care law Wednesday, with its conservative majority signaling that it may be on the brink of a redefinition of the federal government’s power. Justices on the right of the deeply divided court appear at least open to declaring the heart of the overhaul unconstitutional, voiding the rest of the 2,700-page law and questioning the underpinnings of Medicaid, a federal-state partnership that has existed for nearly 50 years.  Much can happen between now and the expected ruling this summer, and a far more moderate tone may emerge. Broad statements come more easily in the court’s intense oral arguments than in majority opinions. Between now and the decision, supporters and foes of the law will be able to point to evidence that their side will prevail. But the rhetoric of the past three days led Solicitor General Donald B. Verrilli Jr. to make an unusual and emotional plea to the justices for restraint. He asked them to respect Congress’s judgment rather than insert themselves into a partisan battle that has roiled the political landscape since the law was passed in 2010. “The Congress struggled with the issue of how to deal with this profound problem of 40 million people without health care for many years, and it made a judgment,” Verrilli told the justices.

Wrapping Up the Supreme Court Arguments on Obamacare - I never got around to summarizing the arguments from the fourth and last health care question at the Supreme Court, looking at whether or not the Medicaid expansion in the bill is unconstitutional. If the Court found this, it would unravel decades of federal-state partnerships in social policy and would create far more chaos than striking down just the mandate. Plus, more than half of the coverage expansion in Obamacare comes from this expansion of Medicaid, so it matters at a practical level as well. Adam Bonin writes that the Medicaid expansion, based on a read of the arguments, is probably safe. He highlights this comment from Justice Sotomayor:JUSTICE SOTOMAYOR: I guess my greatest fear, Mr. Clement, with your argument is the following: The bigger the problem, the more resources it needs. We’re going to tie the hands of the Federal government in choosing how to structure a cooperative relationship with the States. We’re going to say to the Federal government, the bigger the problem, the less your powers are. Because once you give that much money, you can’t structure the program the way you want. It’s our money, Federal government. We’re going to have to run the program ourself to protect all our interests. I don’t see where to draw that line. The uninsured are a problem for States only because they, too, politically, just like the Federal government, can’t let the poor die.

Wrap Up on Today's Testimony on the Unconstitutionality of the Individual Mandate - Today I testified to Congress's House Ways & Means Health Subcommittee on the constitutionality of the individual mandate. We submitted a brief arguing that the mandate is beyond Congress's power to tax.) I was one of four witnesses; I shared the panel with Carrie Severino of the Judicial Crisis Network, Steven Bradbury of Dechert LLP, and Professor Neil Siegel of Duke University Law School. You can read my testimony and the shortened version I delivered here. The main points are that it's important that we know the difference between taxes and penalties or else we undermine taxpayer protections and the ability of state and local governments to collect fines and fees, that the individual mandate is a penalty and not a tax because its primary purpose is to change behavior and not to collect revenue, and that even if it is a tax, it's an unconstitutional one because it is a direct tax unapportioned by income. The questioning was lively, and at one point, Congressman Ron Kind (D-WI), after calling the hearing a waste of time, directed a statement at me that he voted for the bill because it raised revenue, so therefore it is a tax. Time ran out before I could respond, but this is what I would have said (and have asked to be included in the record):

The Supreme Court and the National Conversation on Health Care Reform - Once again America is having one of its “national conversations” on health care reform. This time the buzz is over arguments before the Supreme Court on the constitutionality of certain provisions in the Affordable Care Act. The justices’ rulings will be landmark decisions, because they will indirectly go much beyond the act itself to our entire system of governance. Today’s Economist Perspectives from expert contributors. A fine synopsis of the issues now before the court is provided in a report by the Henry J. Kaiser Family Foundation. The following decision tree illustrates the logical sequence of decisions. The two major substantive decisions the Supreme Court has to make are:

1. Whether Congress has the constitutional authority to mandate every legal resident in the United States to have insurance coverage for a specified package of health benefits (hereafter the “mandate”) or whether that is an issue for the states to decide.
   2. Whether Congress has the constitutional authority to expand eligibility for Medicaid benefits from the highly varied income thresholds that currently define eligibility to anyone under 133 percent of the federal poverty level (hereafter the “Medicaid expansion”).

Parties Brace for Fallout in Court’s Ruling on Health Care - The law professor side of President Obama is highly intrigued by the Supreme Court hearings over the constitutionality of his health care law. He studied a summary of the arguments aboard Air Force One as he flew back from a nuclear summit meeting in South Korea.  The political side of the president may need to draw upon his judicial patience as he awaits a ruling that will help shape the final stages of the presidential race.  For all of the fretting by liberals and the tea-leaf reading by legal analysts about the pointed questioning from the justices about the health law, there is but one certainty: There will be substantial political fallout no matter how the court rules.  Successful political races, particularly presidential campaigns, are built on planning for every likely outcome. Mitt Romney, should he secure the Republican nomination, would confront tricky political calculations regardless of the ruling, given his role in enacting a health care law in Massachusetts built around the same type of mandate at the heart of the Supreme Court case.  But for the White House and the president’s re-election team, the challenge begins immediately. They must publicly defend the law’s constitutionality and push back against suggestions that the battle is already lost, even as they privately piece together a contingency plan if the law — or part of it — is overturned.

The Nine Circles of the ACA: Nobody was doing well by the time oral arguments in the Health Care cases ended at 2:30 p.m. Wednesday. Some Justices were sniping back and forth. The lawyers were showing the strain. And Justice Antonin Scalia was telling jokes. “[Y]ou know—the old Jack Benny thing, Your Money or Your Life, and, you know, he says ‘I'm thinking, I'm thinking,’” Scalia said from the bench. “It's—it's funny, because it's no choice. ... But ‘your life or your wife’s,’ I could refuse that.” “He’s not going home tonight,” Justice Sonia Sotomayor threw in as the crowd laughed. “That’s enough frivolity for a while,” Chief Justice John Roberts (nobody’s straight man) said sternly. I think he, like me, was afraid we would never get home that night, as if the Supreme Court had sailed into some forensic dimension where the clock hands were frozen in ice. If you want to know how strange things got, consider that a Justice of the United States Supreme Court suggested that the Court should invalidate the entire 2,700-page Patient Protection and Affordable Care Act (ACA) merely to save him the trouble of reading the whole thing.

Is individual mandate in trouble? - In the fight over President Obama's health care law, this was the main event. On Tuesday, the nine justices of the Supreme Court heard arguments on the part of the law that requires all Americans to have health insurance or pay a fine. It's called the individual mandate. The Obama administration said that the mandate will make sure everyone has health care while keeping insurance affordable. Opponents say it's a dangerous new power for the government by forcing citizens to buy a product. In a rare move, the court is releasing audio tapes of the arguments. CBS News correspondent Jan Crawford reports on the justices' views. The health care law is considered President Obama's signature achievement, but Tuesday it appeared a majority of the justices were ready to describe the individual mandate another way: unconstitutional. The conservative justices--and that key swing justice, Anthony Kennedy --expressed serious doubts about the law. Justice Kennedy, who often provides the decisive fifth vote, appeared troubled that Congress for the first time was ordering Americas to buy a product like insurance. "That is different from what we have in previous cases. That changes the relationship of the federal government to the individual in a very fundamental way," he said.

Can Your State Mandate That You Buy Broccoli or Join a Gym? (And why the excoriation of Donald Verrilli is misplaced)  - The answer to the title’s question—Can your state mandate that you buy broccoli or join a gym?—depends upon which of the two possible grounds the 5-4 Supreme Court majority overturns the ACA’s individual-mandate provision.  And which grounds the majority selects also will determine whether under the Court’s new “liberty” jurisprudence, Social Security and Medicare also are unconstitutional.   That’s because if, for all their posturing about the imposition on individual liberty of having to buy healthcare insurance that the individual may not want, they ultimately base their ruling not on that imposition on individual liberty to choose whether or not to buy a health insurance policy, but instead upon—and only upon—a narrow reading of the Congress’s powers under the Commerce Clause, states will retain the right to mandate the purchase of health insurance (e.g., “Massachusetts’s “Romneycare”), and of auto insurance, and of broccoli, and of gym memberships. If, on the other hand, the Commerce Clause ground is simply the fig leaf used to segue into an individual-liberty-to-choose-not-to-buy-health-insurance ground, then the ruling also will imperil the legal underpinnings of Social Security and Medicare, because while those programs were enacted not under Congress’s Commerce Clause power but instead under its taxing power, both programs require payment for insurance—one, a retirement annuity, the other, eventual health insurance—that the individual may not want and may never use. Not everyone lives to age 65, after all.

What’s Liberty Got To Do With It? - Constitutional law is not my field.  I’ve barely been following the Supreme Court oral arguments this week because I figured (a) they would be silly, (b) we won’t know anything useful until June, and (c) with the rest of the commentariat focusing on it I would have nothing to add. But even at that distance, I can’t help but be shocked by the ludicrous nature of the proceedings, best represented by the framing of the case in terms of individual freedom and government coercion. According to the Times, the case may turn on Anthony Kennedy’s notion of liberty. What’s wrong with this? Liberty should have nothing to do with this case. The question is whether Congress has the power to impose the individual mandate under the Commerce Clause, which gives it the power to regulate interstate commerce. If the individual mandate does in fact regulate interstate commerce, then it’s fine unless it violates some other part of the Constitution. But there’s nothing in the Constitution that guarantees you “liberty” in the abstract. The Bill of Rights guarantees you various freedoms, from the freedom of speech to the freedom from unreasonable searches and seizures, but those are all specific, not general. The whole liberty thing, in the context of the individual mandate, is a pure ideological framing concocted by small-government fanatics who want the Constitution to be some kind of libertarian scripture that it isn’t.

A future without ACA? - As predicted by Ezra Klein: I think that path would look something like this: With health-care reform either repealed or overturned, both Democrats and Republicans shy away from proposing any big changes to the health-care system for the next decade or so. But with continued increases in the cost of health insurance and a steady erosion in employer-based coverage, Democrats begin dipping their toes in the water with a strategy based around incremental expansions of Medicare, Medicaid, and the Children’s Health Insurance Program. They move these policies through budget reconciliation, where they can be passed with 51 votes in the Senate, and, over time, this leads to more and more Americans being covered through public insurance. Eventually, we end up with something close to a single-payer system, as a majority of Americans — and particularly a majority of Americans who have significant health risks — are covered by the government. One question is whether having both Medicaid and Medicare (and other programs) function as a “single payer” system, but that is arguably semantics.  In any case the American system is likely to remain fragmented.  I am also not sure if this process would take a decade, as sometimes a single election cycle can feel like an eternity.  In any case, I see that as likely a superior outcome to the current ACA track.  I have never thought that a mandate is workable in a fragmented system with employer-based care and high health care costs and high income inequality.

A Health Law at Risk Gives Insurers Pause - As the Supreme Court considers the constitutionality of the federal health care law, one option that had seemed unthinkable to its designers and supporters now seems at least possible: that the court could strike down the entire law. Although it would be folly to predict what the court will conclude, policy experts, insurers, doctors and legislators are now seriously contemplating the repercussions of a complete change in course two years after the nation began to put the law into place.  Their concerns were heightened after three days of court arguments in which some justices expressed skepticism about whether the full law could stand without the individual mandate requiring almost everyone to have insurance.  “Many of us did not get the bill we wanted, but I think having to start over is worse than having to fix this,” Others say, however, the last two years have made it easier for Congress or the states to revisit the issue.  The most ambitious provisions would be nearly impossible to salvage, like the requirement that insurers offer coverage even to those with existing medical conditions and the broad expansion of the Medicaid program for the poor. Popular pieces of the legislation might survive in the market, like insuring adult children up to age 26 through their parents’ policies, along with some of the broader changes being made in the health care system in how hospitals and doctors deliver care.

All Parties Ignore the One Way to Reduce Health Care Costs: Single-Payer - Our study published this month examined 28,741 patient visits to 1,187 physicians. We found that when doctors can view X-ray results online, they actually order 40 percent to 70 percent more X-rays, including costly CT scans and MRIs. And the same holds true for blood tests. Computer vendors' promises of cost savings by eliminating paperwork have also flopped. In a previous study of 3,800 hospitals, we found that computerization actually increased hospitals' administrative costs. Make no mistake: we support clinical computing. It's an essential tool for improving medical care.  But business managers are the decisionmakers about computer purchases in most hospitals and large practices, and they're choosing off-the-shelf software that gives priority to maximizing billings and addressing management's needs. As our studies show, these management-led systems have increased health costs. Yet politicians across the political spectrum - from Barack Obama to Newt Gingrich - continue to push computerization as a health care cure-all.  It's not just vendors and consultants who fuel politicians' delusions. The cost savings promised by computerization may be vaporware, but they're painless. The realistic alternatives for medical cost control are not. Someone - insurers, patients, doctors, hospitals or drug firms - will suffer if health care costs are contained. And if computers won't save us from rising medical costs, we'll eventually have to look elsewhere for salvation.

How About a 'Do Not Treat' List? - At least some members of the Supreme Court seem to be persuaded by the idea that the government does not have the power to force us to buy health insurance. The whole idea seems specious and anti-free-market to me: if the government could legally enact Medicare for all, and tax all of us to pay for it, why is mandatory insurance not legal? It accomplishes the same thing, while minimizing government control of the health system. But I am not a lawyer, let alone a constitutional scholar. The Times, in an editorial today, responds to a question by Justice Antonin Scalia about how this differs from forcing us to buy broccoli: “Congress has no interest in requiring broccoli purchases because the failure to buy broccoli does not push that cost onto others in the system.” The answer, it seems to me, is simple. Let the health plan continue as enacted, with government subsidies and rules to assure access to health insurance for everyone. But if someone is morally offended by the idea of buying health insurance, he or she should be given counseling about the risks but then allowed to decide.Persons who decline insurance would be allowed to provide details of how they intended to pay for care otherwise, if they wished to do so, and to name a person who would be responsible for paying for the care if the patient were unable to direct payment, much as many people now have health care proxies.

As Goes Obamacare, So Goes Romneycare … and State Laws Requiring Auto Insurance? - Beverly Mann - I’ve written repeatedly now on AB that the challenge to the constitutionality of the ACA’s minimum-coverage provision (a.k.a., the individual-mandate provision) is not really a Commerce Clause challenge but instead a challenge under the Fifth Amendment’s due process clause, under what is known as the “substantive due process” constitutional law doctrine.  The Fifth Amendment’s due process clause limits what the federal government can do vis-à-vis individuals.  A clause in the Fourteenth Amendment is nearly identical, and identical in substance, to the Fifth Amendment’s due process clause, except that it limits what state governments can do vis-à-vis individuals.   SCOTUS blog’s Lyle Denniston’s early report suggests that I was right.  The outcome of the case, he predicts, will depend on whether Kennedy believes that the Court can uphold the mandate provision without opening the door to unlimited congressional mandating of purchase specific things, not because Congress lacks that power under the Commerce Clause but instead because it violates liberties protected under the Fifth Amendment’s due process clause. Denniston does not mention the Fifth Amendment, but, whether or not the justices themselves did specifically, that is the upshot.

Obamacare Has Already Transformed U.S. Health Care -  For two years, even as a debate has raged over what Republicans deride as Obamacare, the new health-care law has begun benefiting consumers and refashioning a $2.6 trillion industry. Insurers, hospitals, and doctors are forming alliances and adopting new procedures, preparing for a reshaped market that will materialize when—or if—the law aimed at covering at least 30 million uninsured Americans is fully implemented in 2018. “This is probably the most transformative period I’ve lived through,” says Dr. David Longworth, chairman of the Medicine Institute at Ohio’s Cleveland Clinic, who heads teams making the health-care changes there.  More than one of every four Americans last year received a free mammogram, colonoscopy, or flu shot, thanks to a federal law that many of them despise. Roughly 3.6 million Medicare recipients saved an average of $604 as the same law began closing a gap in their prescription drug coverage. And 2.5 million young adults were allowed to remain on their parents’ health insurance plans until their 26th birthday.

How to Replace ObamaCare - When the Patient Protection and Affordable Care Act (commonly known as "Obamacare") was signed into law in the spring of 2010, congressional opponents vowed that the fight was not over. The most disastrous features of the new law would not take effect until 2014, leaving time for a concerted campaign to avert catastrophe. But repeal will not be enough, for a simple reason: Although Obamacare would worsen many of the problems with our system of health-care financing, that system clearly does call out for serious reform. Despite the widespread public antipathy toward the new health-care law, simply reverting to the pre-Obamacare status quo would be viewed by many Americans, perhaps even most, as unacceptable. After all, a repeal-only approach would leave many of the most grievous flaws in our system of financing health care unaddressed. Chief among them would be steadily rising health-care costs, driven by the same misguided government policies that so evidently demand reform. If the problems that are today obvious to the public had been addressed by market-oriented policies over the past few decades, there would have been no political opening through which to ram Obamacare. Instead, these problems were allowed to fester; by 2009, they had become so acute that there was strong sentiment, even among some business-oriented conservatives, that "something had to be done." And as the 2010 congressional debate over Obamacare reached its climax, this sentiment — that some action, even an imperfect one, would be better than nothing — likely played a large role in enabling the health-care law to pass

Cancer v. the Constitution - “I’m very sorry to tell you this looks like a cancer of the cervix,” I said She looked surprised. “Oh.” She paused in silence as she adjusted to the news. And then quietly she added, “But the doctor back home said you could fix me up. He said you can offer free care because you have the university.” But we didn’t have free care at the university hospital. While resident salaries come from Medicare dollars, there is very little, if any, money from the State for the medically indigent. We were in the same situation as her local OB/GYN. The cost of caring for those without insurance was born by the profits from those with insurance. But medical care was becoming more expensive and what insurance companies were willing to reimburse was decreasing. In addition, with more unemployment there were fewer insured patients and more uninsured. Not a sustainable model. She needed a biopsy to confirm the type of cancer and a CT scan to see if the tumor had spread beyond the cervix. If she were lucky, she would have a some combination of a hysterectomy, chemotherapy, and radiation with a 50-65% chance of survival. If the cancer had spread, she would have radiation and chemotherapy with about a 25% chance of surviving. But the cancer surgeons were not allowed to offer an uninsured woman a hysterectomy. Every now and then they snuck someone in, claiming to the administrators that the patient was more emergent than they really were. But one surgery doesn’t cure stage 2 or 3 cervical cancer, or even stave it off for long. It takes multiple admissions and week after week of expensive chemotherapy and/or radiation.

Woman unhappy with care at St. Mary's hospital is arrested for trespassing, dies in jail: Anna Brown wasn't leaving the emergency room quietly. She yelled from a wheelchair at St. Mary's Health Center security personnel and Richmond Heights police officers that her legs hurt so badly she couldn't stand. She had already been to two other hospitals that week in September, complaining of leg pain after spraining her ankle. This time, she refused to leave. A police officer arrested Brown for trespassing. He wheeled her out in handcuffs after a doctor said she was healthy enough to be locked up. Brown was 29. A mother who had lost custody of two children. Homeless. On Medicaid. And, an autopsy later revealed, dying from blood clots that started in her legs, then lodged in her lungs. She told officers she couldn't get out of the police car, so they dragged her by her arms into the station. They left her lying on the concrete floor of a jail cell, moaning and struggling to breathe. Just 15 minutes later, a jail worker found her cold to the touch. Officers suspected Brown was using drugs. Autopsy results showed she had no drugs in her system.

No Country For Thin Men: 75% Of Americans To Be Obese By 2020 - While much heart palpitations are generated every month based on how much of a seasonal adjustment factor is used to fudge US employment, many forget that a much more serious long term issue for the US (assuming anyone cares what happens in the long run) is a far more ominous secular shift in US population - namely the fact that everyone is getting fatter fast, aka America's "obesity epidemic." And according to a just released analysis by BNY ConvergEx' Nicholas Colas, things are about to get much worse, because as the OECD predicts, by 2020 75% of US the population will be obese. What this implies for the tens of trillions in underfunded healthcare "benefits" in the future is all too clear. In the meantime, thanks to today's economic "news", fat people everywhere can get even fatter courtesy of ever freer money from the Chairman, about to be paradropped once more to keep nominal prices high and devalue the dollar even more in the great "race to debase". Our advices - just pretend you are going to college and take out a $100,000 loan, spending it all on Taco Bells. But don't forget to save enough for the latest iPad, and the next latest to be released in a few weeks, ad inf.

Heart Attack Victims Cut Risk With 2 Drinks, Harvard Study Says - Bloomberg: Men who have two drinks a day after surviving a first heart attack have a lower risk of death from heart disease than non-drinkers, Harvard researchers said, adding to evidence that moderate alcohol use may be healthy.  Men who survived a heart attack and who drank two alcoholic drinks a day had a 42 percent lower risk of death from cardiovascular disease and 14 percent lower risk of death from any cause during the study compared with non-drinkers, according to a study led by Jennifer Pai, an assistant professor of medicine at Brigham and Women’s Hospital and Harvard Medical School. The study followed 1,818 men for as many as 20 years from the time of their first heart attack.

Kunstler: Matrix of Rackets - Then I trotted obediently down the hall to the phlebotomy parlor (another windowless closet), and gave more blood for the B-12 test. Dr. X appeared briefly in the doorway and handed me a slip of paper with the name of a osteopath-naturopath in town who might better entertain my particular health concerns. One thing I didn't mention to Dr. X during this incident - nor did I mention it in last week's blog - was the fact that my girlfriend (a professional librarian and crack researcher) had discovered a website that disclosed payments from pharmaceutical companies to doctors. Dr. X, evidently, had scored about $200,000 total over a recent 18-month period, including about 20-K from Astra Zenica. I didn't bring it up with Dr N in the exam room because I did not want to turn the office visit into an adversarial event, and there's no question he would have gone batshit. But there you have it, now, like so much meat flopped out in the table.

Dying for Satisfaction: Being Happy with Your Doctor is Bad for Your Health - - Yves Smith - There is an important study in the Archives for Internal Medicine last month, which escalates an ongoing row as to whether patient satisfaction is in any way correlated with positive medical outcomes. The answer is yes, and the correlation is negative.  This finding is of critical importance, not just in understanding why American medicine is a hopeless, costly mess, but also as a window into how easy it is for buyers of complex services to be hoodwinked by their servicer provider, whether via the provider being incorrectly confident about his ability to do a good job or having nefarious intent.  Let’s deal with health care case first. The study in question was large scale, of 52,000 patients from 2000 to 2007. This summary comes from the Emergency Physicians blog (hat tip Julie W): Results of the study showed that patients who had the highest satisfaction ratings spent 9% more on health care and prescription medications than did patients who had the lowest satisfaction ratings. In addition, the most satisfied patients had a 26% greater risk of death compared to least satisfied patients. When patients in poor health were excluded, the risk of death for these highly-satisfied “healthy” patients increased to 44% more than their least-satisfied counterparts.

FDA ‘Wrong’ Not To Ban BPA, Health Advocates Say - Scientists and public health advocates expressed frustration on Friday as the U.S. Food and Drug Administration announced it will continue to allow the chemical bisphenol-A in food and beverage containers. The decision denied a request from the Natural Resources Defense Council to ban some uses of BPA -- such as in plastic food packaging and coated metal cans -- that may introduce the hormone-scrambling substance into Americans' diet. "We believe FDA made the wrong call," Sarah Janssen, senior scientist in the public health program at the NRDC, said in a statement. "The agency has failed to protect our health and safety ­-- in the face of scientific studies that continue to raise disturbing questions about the long-term effects of BPA exposures."  As The Huffington Post reported on Thursday, a court gave the FDA until Saturday to answer the 2008 petition filed by the environmental group, which referenced health effects linked to BPA. That list includes conditions that include asthma and diabetes, with fetuses, babies and young children at greatest risk. Some scientists think that hormonal changes during pregnancy, triggered by exposures to endocrine disruptors such as BPA, may also increase the risk of behavioral disorders including autism and attention deficit hyperactivity disorder.

Consumer Reports: Most medical implants never tested for safety - The majority of medical devices implanted into patients’ bodies have never been tested by the FDA, according to a stunning report from the consumer advocacy magazine Consumer Reports. The report stated that while tens of millions of Americans live with some form of medical implant in their body, few of these devices are subjected to rigorous testing. Under current FDA policy, medical device manufacturers are able to “grandfather in” new devices if they are “substantially equivalent” to a device that is already in use. Rita Redberg, M.D., a professor of medicine at the University of California, San Francisco, said that this sets up an ironic paradox. “The paradox is that companies go to the FDA and claim that a device is ‘substantially equivalent,’ but when they market it, they claim it’s ‘new and better.’”

Drug-resistant strains of TB are out of control, warn health experts - The fight against new, antibiotic-resistant strains of tuberculosis has already been lost in some parts of the world, according to a senior World Health Organisation expert. Figures show a 5% rise in the number of new cases of the highly infectious disease in the UK. Dr Paul Nunn, co-ordinator of the WHO's global TB response team, is leading the efforts against multi-drug resistant TB (MDR-TB). Nunn said that, while TB is preventable and curable, a combination of bad management and misdiagnosis was leaving pharmaceutical companies struggling to keep up. Meanwhile, the disease kills millions every year. "It occurs basically when the health system screws up," said Nunn. Treating TB requires a carefully followed regime of medication over six months. In places where health services are fragmented or underfunded, or patients poor and health professionals ill-trained, that treatment can fall short, which can in turn lead to patients developing drug-resistant strains. It's been estimated that an undiagnosed TB-infected person can infect 10 others a year. "There's a vicious circle, because when new drugs come out they are expensive, so there is no demand. Without the volume of demand, the cost will not come down. If we can't tackle this, we are going to finish up with a lot more people being diagnosed with multi-drug resistant strains, which have already replaced previously drug-sensitive strains in Eastern Europe, and so we need a huge expansion of effort, especially in places like India and China." He added: "In some areas we have probably already lost the battle."

The return of the house call - In the Netherlands, where else?: In early March, the NVVE opened the world’s first euthanasia clinic. It’s called the Levenseindekliniek, the “end of life clinic.” It serves as a point of contact for all Dutch people who want to die but don’t have a primary care physician prepared to help them do so. The clinic has mobile euthanasia teams, each of which consists of a doctor and a nurse. When an individual qualifies for the program after passing a screening, one of the teams makes a house call to inject two drugs. One puts the patient into a deep sleep, while the other stops all breathing, leading to death. The rest of the story is here.  And there is this: The sweets were distributed two years ago as part of a promotional campaign. At the time, her organization was calling for Dutch pharmacies to be allowed to sell lethal drugs to individuals with a prescription. Printed on the wrappers is the word Laatstwilpil, or “last will pill.”

Synthetic biology: the best hope for mankind's future? - The UK government has just declared that synthetic biology – the science of making novel living organisms – could lead to a new industrial revolution and should be a research priority. Many environmentalists argue instead that creating new life forms could endanger the existing ones. But it may be that synthetic biology is our best hope of preserving life on our planet. Mankind has, and continues to have, a huge impact on the planet. About 50,000 years ago, much of Australia was covered in dense rainforests grazed by large herbivores who were preyed upon by roaming marsupial carnivores. Ten thousand years later the forests, the megafauna and the carnivores were all gone. What happened? Many explanations have been proposed, such as climate change or ecosystem collapse, but a recent extensive study of pollen samples by Susan Rule and colleagues of the Australian National University points the finger at a single culprit: man. People arrived on the northern coastline about 45,000 years ago and burnt and hunted their way across the continent, leaving a trail of destruction and extinctions in their wake. A similar wave of extinctions followed the peopling of the Americas about 15,000 years ago; and also accompanied the arrival of modern man into Europe, in that case taking with it our Neanderthal cousins. Everywhere we have travelled we have squashed thousands of species beneath our boots.

Governors Plan Show Support for ‘Pink Slime’ Producers; Urge Consumers to Reconsider Product - The main producer of “pink slime” and the politicians defending the company will have a hard time persuading consumers and grocery stores to accept the product, even if the processed beef trimmings are as safe as the industry insists. Three governors and two lieutenant governors plan to tour Beef Products Inc.’s plant in South Sioux City, Neb., Thursday afternoon to show their support for the company and the several thousand jobs it creates in Nebraska, Iowa, Kansas, South Dakota and Texas. Beef Products, the main producer of the cheap lean beef made from fatty bits of meat left over from other cuts, has drawn extra scrutiny because of concerns about the ammonium hydroxide it treats meat with to slightly change the acidity of the beef and kill bacteria. The company suspended operations at plants in Texas, Kansas and Iowa this week, affecting 650 jobs, but it defends its product as safe. While the official name is lean finely textured beef, critics dub it “pink slime” and say it’s an unappetizing example of industrialized food production. That term was coined by a federal microbiologist who was grossed out by it, but the product meets federal food safety standards and has been used for years.

Pink Slime’ Defenders Line Up - It turns out not everyone hates pink slime. After being pummeled in the media for weeks, the beef additive made from leftover trimmings is getting support from the U.S. Department of Agriculture and the governors of five states, who argue it has been unfairly labeled and is actually a safe, low-cost way to make ground beef leaner. "This is an unwarranted, unmerited food scare," said Iowa Gov. Terry Branstad, who, along with Texas Gov. Rick Perry and representatives of several other states, has vowed to consume the product themselves after touring a plant where it is made on Thursday. "If there was some basis in fact to this, other than somebody's clever naming of it, then you'd say 'no you shouldn't stick your neck out on it.'" The additive, which has long been used as a cheap filler in hamburger meat without anyone knowing or caring, has become the latest example of a product to fall prey to a social-media feeding frenzy after celebrity chef Jamie Oliver detailed how it is made in a TV special. Facebook, Twitter and other social media sites took it from there. Supermarkets and school districts across the country have been shunning it after mounting public pressure.

Early exposure to germs has lasting benefits - Exposure to germs in childhood is thought to help strengthen the immune system and protect children from developing allergies and asthma, but the pathways by which this occurs have been unclear. Now, researchers have identified a mechanism in mice that may explain the role of exposure to microbes in the development of asthma and ulcerative colitis, a common form of inflammatory bowel disease. In a study published online today in Science1, the researchers show that in mice, exposure to microbes in early life can reduce the body’s inventory of invariant natural killer T (iNKT) cells, which help to fight infection but can also turn on the body, causing a range of disorders such as asthma or inflammatory bowel disease. The study supports the 'hygiene hypothesis', which contends that such auto-immune diseases are more common in the developed world where the prevalence of antibiotics and antibacterials reduce children’s exposure to microbes.

Controversial Pesticide Linked to Bee Collapse - A controversial type of pesticide linked to declining global bee populations appears to scramble bees’ sense of direction, making it hard for them to find home. Starved of foragers and the pollen they carry, colonies produce fewer queens, and eventually collapse. The phenomenon is described in two new studies published March 29 in Science. While they don’t conclusively explain global bee declines, which almost certainly involve a combination factors, they establish neonicotinoids as a prime suspect. “It’s pretty damning,” said David Goulson, a bee biologist at Scotland’s University of Stirling. “It’s clear evidence that they’re likely to be having an effect on both honeybees and bumblebees.” Neonicotinoids emerged in the mid-1990s as a relatively less-toxic alternative to human-damaging pesticides. They soon became wildly popular, and were the fastest-growing class of pesticides in modern history. Their effects on non-pest insects, however, were unknown. In the mid-2000s, beekeepers in the United States and elsewhere started to report sharp and inexplicable declines in honeybee populations. Researchers called the phenomenon colony collapse disorder. It was also found in bumblebees, and in some regions now threatens to extirpate bees altogether.

2 Studies Point to Common Pesticide as a Culprit in Declining Bee Colonies - Scientists have been alarmed and puzzled by declines in bee populations in the United States and other parts of the world. They have suspected that pesticides are playing a part, but to date their experiments have yielded conflicting, ambiguous results. In Thursday’s issue of the journal Science, two teams of researchers published studies suggesting that low levels of a common pesticide can have significant effects on bee colonies. One experiment, conducted by French researchers, indicates that the chemicals fog honeybee brains, making it harder for them to find their way home. The other study, by scientists in Britain, suggests that they keep bumblebees from supplying their hives with enough food to produce new queens. The authors of both studies contend that their results raise serious questions about the use of the pesticides, known as neonicotinoids. “I personally would like to see them not being used until more research has been done,” said David Goulson, an author of the bumblebee paper who teaches at the University of Stirling, in Scotland. “If it confirms what we’ve found, then they certainly shouldn’t be used when they’re going to be fed on by bees.” But pesticides are only one of several likely factors that scientists have linked to declining bee populations. There are simply fewer flowers, for example, thanks to land development. Bees are increasingly succumbing to mites, viruses, fungi and other pathogens.

Bee research details harm from insecticides - New research has begun to unravel the mystery of why bees are disappearing in alarming numbers worldwide: Some of the pesticides most commonly used by farmers appear to be changing bee behavior in small but fatal ways. Two new studies found that honeybees and bumblebees had trouble foraging for food and returning with it to their hives after exposure to the class of insecticides, which is widely used to protect grains, cotton, beans, vegetables and many other crops. Ironically, the relatively new pesticides have been welcomed as an environmental plus because they are, by almost all accounts, less harmful to other wildlife than previous generations of pesticides. Although the authors of the studies published Thursday in the journal Science do not conclude that the pesticides — called neonicotinoids — are the sole cause of the American and international decline in bees or the more immediate and worrisome phenomenon known as colony collapse disorder, they say that the omnipresent chemicals have a clearly harmful effect on beehives.

Beekeepers to EPA: We’re running out of time - Beekeepers have been concerned that pesticides are to blame for the bee die-offs devastating their industry for a while now. As we reported recently, their losses have spiraled out of control, putting not just the beekeepers but our entire agricultural system in peril. The concern centers around a class of pesticides called neonicotinoids, which the Environmental Protection Agency (EPA) allowed to be marketed and sold even after the agency’s own scientists’ put up red flags. And now some in the industry have decided it’s time to formally challenge EPA’s negligence. On March 21, 27 beekeepers and four environmental groups filed a petition [PDF] with the agency asking it to take clothianidin — the neonicotinoid causing the most trouble — off the market until a long-overdue, scientifically sound review is completed. The EPA asked Bayer — the manufacturer of clothianidin — to conduct a study looking at its effects on bees and other pollinators back in 2003, but allowed Bayer to sell the pesticide under “conditional registration” in the meantime. Bayer didn’t produce a field study until 2007, and in spring 2010, clothianidin was quietly granted full registration. But later that year a leaked document revealed that EPA scientists had found Bayer’s study inadequate. “By that time, the pesticide was all over the country,”  “We felt that what EPA did was illegal.”

U.S. farmers to plant the most corn in 75 years | Reuters: (Reuters) - U.S. farmers will plant the most corn in 75 years to cash in on higher prices, topping expectations at the expense of soybean and spring wheat sowings, according to a U.S. government report on Friday. The dramatic expansion raised hopes that the next harvest would ease razor-thin supplies that have kept corn prices near historic highs.The Agriculture Department, in a separate report, said supplies in storage as of March 1 were smaller than expected, making a big crop imperative. "Going forward, it's going to be all about the planting weather," said Don Roose, president of U.S. Commodities. Despite the early prospects for a bumper crop, Corn, wheat and soybean futures rose strongly on the surprisingly tight grain stocks. Corn for delivery in May went "limit up," rising by the maximum amount allowed in a day of 40 cents. The climb of 6.6 percent to $6.44 a bushel was the biggest gain for corn since Oct 11.

Court compels FDA to heed its own research on antibiotics use in livestock - Thirty five years after the Food and Drug Administration determined the routine use of antibiotics in livestock feed could pose a danger to human health, a federal court Thursday compelled the agency to act on that knowledge.  The ruling, which came in response to a lawsuit filed last year by the National Resources Defense Council and others, requires the FDA to restrict the non-therapeutic use of most penicillins and tetracyclines in livestock unless manufacturers can prove their safety.Although there is currently no timetable for action, plaintiffs believe the Federal District Court's ruling represents a massive breakthrough.  "For 35 years the FDA has done nothing on this issue and let the livestock industry police itself. In that time, the overuse of antibiotics in healthy animals has skyrocketed – contributing to the rise of antibiotic-resistant bacteria that endanger human health. Today, we take a long overdue step toward ensuring that we preserve these life-saving medicines for those who need them most – people." Friday afternoon the FDA responded to the court's decision saying only, "We are studying the opinion and considering appropriate next steps."

Insane Michigan government announces plan to destroy ranch livestock based on hair color and arrest hundreds of ranchers as felons  (NaturalNews) The state of Michigan is only days away from engaging in what can only be called true "animal genocide" -- the mass murder of ranch animals based on the color of their hair. It's all part of a shocking new "Invasive Species Order" (ISO) put in place by Michigan's Department of Natural Resources (DNR). This Invasive Species Order suddenly and shockingly defines virtually all open-range pigs raised by small family farms to be illegal "invasive species," and possession of just one of these animals is now a felony crime in Michigan, punishable by up to four years in prison.The state has said it will "destroy" these pigs beginning in April, potentially by raiding local farms with government-issued rifles, then shooting the pig herds while arresting the members of the family and charging them with the "crime" of raising pigs with the wrong hair color. This may truly be a state-sponsored serial animal killing spree. Reality check: You may think this story is some kind of early April Fools prank, but it isn't. This is factually true and verifiable through the documents, videos and websites linked below. The state of Michigan seriously intends to unleash a mass murder spree of pigs of the wrong color beginning April 1.

Scientists warn phosphorus supplies could run out, leading to famine and war - Often overlooked, phosphorus is one of three elements needed to make fertilizer. The others, nitrogen and potash, are readily available with no shortages projected. But phosphate rock — the primary source of phosphorus in fertilizer — isn't as plentiful. Scientists have estimated that minable supplies may not be sufficient to meet worldwide demand within decades. The situation could lead to higher food prices, famine and worse. […] The element, which is found in every body cell, is most concentrated in human bones and teeth. It is essential to life and, at the present time, irreplaceable. […] Reliance on the element is an "underappreciated aspect" that helped the world population grow by 4.2 billion people since 1950, according to a 2009 Foreign Policy magazine article.

How to Protect Wetlands and How Not to do it: Lessons from Tax Policy - Regulations to protect wetlands, to the extent that they reduce the economic value of affected property, are a prime example of an implicit tax. If they go so far as to reduce the economic value of the property to zero, they constitute a regulatory taking. Under the Fifth Amendment, the government must then pay compensation to the landowner. However, courts have typically found that regulations that serve a public purpose but do not reduce the economic value of a property to zero are not a taking and do not require compensation. I will leave constitutional arguments about regulatory takings to others. Instead, I would like to use the perspective of tax policy to analyze the economics of wetland protection.Wetland regulation regularly makes the news at both national and local levels. At the national level, consider last week’s Supreme Court decision in Sackett vs. EPA. (Here is a link to the case and another to a more readable summary from the Washington Post.) The case involves an Idaho couple who trucked in some fill dirt to level a lot for a home. After they had done so, the EPA informed them that they had filled a protected wetland. It issued a compliance order requiring them to remove the fill and restore the wetland, at considerable expense, or face a heavy fine. The Sacketts attempted to appeal the EPA’s order but were told such orders are not subject to judicial review.

The Winter That Wasn’t Caused ‘Stunning’ Bird Migrations - North America’s freakishly warm and dry winter caused millions of birds to change their migration patterns, citizen scientists found. Participating in the Great Backyard Bird Count (GBBC), thousands of bird watchers “recorded the most unusual winter for birds in the count’s 15-year history”: “The maps on the GBBC website this year are absolutely stunning,” said John Fitzpatrick, executive director of the Cornell Lab of Ornithology. “Every bird species has a captivating story to tell, and we’re certainly seeing many of them in larger numbers farther north than usual, no doubt because of this winter’s record-breaking mild conditions.” Unprecedented findings included more than two million Snow Geese in Missouri and “high numbers of waterbirds such as Mallards, Ring-necked Ducks, Hooded Mergansers, and American Coots, that either never left or came back early to lakes, rivers, and ponds that remained unfrozen.”

Climate change brings bats to Austin - With the emergence of warm spring weather comes the return of the Mexican Freetail bats under Congress Bridge and the remote possibility that a feared and foreign species of bat could make its way into Texas. The increase in global climate temperatures has raised concerns about the vampire bat species travelling from Mexico and South and Central America into the southern and central regions of Texas. Carin Peterson, training and outreach coordinator of the Office of Environmental Health and Safety, said even if vampire bats are not making their appearance, Austin’s surrounding caves and popular bat attraction, Congress Avenue Bridge, already have their annual bat species.

Perspective: More than 6,000 Record Highs Set! -  We've seen an amazing, historic run of record warmth in March 2012. It's been the talk of towns from Minnesota and Michigan to Tennessee and Georgia for a couple of weeks now.  First, consider the sheer number of daily record highs either tied or broken over the past two weeks. The counts in the table below are courtesy of the National Climatic Data Center (NCDC) since Mar. 9. Counts from Mar. 23 are still being tabulated and will be posted later.  If you pull out your calculator and add the numbers up from March 1 through March 22, the total exceeds 6,000!! This speaks to the widespread nature and longevity of this warm spell. By the way, there have been only about 250 daily record lows during that same time, a ratio of roughly 24 record highs for every record low.  In a typical March, particularly in the nation's northern tier, you may see, perhaps, one or perhaps two days of record warmth before a sharp cold front brings that spring tease to a screeching halt. Not so in March 2012.  When considering monthly record highs, meaning the warmest temperature on record for the month of March, according to NCDC, there have been 430 such monthly record highs tied or broken!

And You Thought That Heat Wave Was Bad? - Purdue University climatologist Matthew Huber gets plenty of death threats, but that hasn't stopped him from exploring the outer limits of just how much global warming human beings can tolerate. Whatever our recent Great American Heat Wave may or may not portend, most credible climate scientists agree that human-caused global warming is real—oh yes they do!—and most of the research out there, Huber says, predicts dire consequences for people (and other mammals) if average global temperatures rise by 6° Celsius or more.That could well happen this century: By 2100, Huber points out, the mid-range estimates predict a rise of 3°C to 4°C in average global temperatures based on current economic activities, but those studies ignore accelerating factors like the release of vast quantities of methane—a potent greenhouse gas—now trapped beneath permafrost and sea ice that's becoming less and less permanent. Other models foresee rises in the 10°C range this century; at the outer fringe, predictions range as high as 20°C. Truth is, we simply don't know exactly when we'll reach these milestones or what they will cost us. And thanks to the uncertainty, it's been hard to get nations to agree on limits.

What if July Beats Heat Records the Way March Just Did? - Last month I wrote about how global warming might not be so bad after all. Not for me, anyway. Sure, sea level is rising, threatening millions of Americans and many more millions of people around the world.  But February, which normally alternates between cold and bitterly cold in Princeton, N.J., where Climate Central is headquartered, was unusually mild. Call me selfish, but I kind of liked it. I didn’t realize at the time that March would be even warmer, and I really liked that. The average high here in central New Jersey is 50°F in March, but this month we went over 60° no fewer than 15 times (the forecast says we might do it once more before April begins). We topped 70° eight times. We hit 78° twice, and once we got all the way up to 79° — fully 29° above normal.All of that was really nice. But then I began thinking about summer . . . and thinking about how it gets kind of hot. The average high for July, the hottest month, is 85°, and of course there are plenty of days that get hotter than that. Then I thought: what would it be like around here if this coming July resembled the month just ending in term of beating the average. And I began to sweat. If July temperatures beat the averages by the same amount March temperatures did, we should see 15 or 16 days above 95°. Eight of those would top 105°. And we’d have two days at 113° and one at 114°. For comparison, the all-time high ever recorded in New Jersey is 110°.

Connecting The Dots On Climate And Extreme Weather: Must-Watch PBS Story On Devastating Texas Drought - After releasing a fantastic piece last December on the link between climate change and “mind-boggling” extreme weather, PBS is taking its coverage of the issue one step further. The PBS NewsHour has just rolled out a new series, “Coping With Climate Change,” using multi-media reporting to explore the impact that our warming planet is having on American communities. With U.S. media coverage of climate change tumbling 20% in 2011, PBS deserves a lot of credit for this new reporting effort — producing an extended, ongoing series to flesh out the economic and environmental challenges exacerbated by global warming. The latest story focuses on the unprecedented drought in Texas, which climatologist John Nielsen-Gammon said recently was “enhanced by global warming, much of which has been caused by man.” Last week, agronomists in Texas reported that the warming-fueled drought cost the agricultural sector $7.6 billion.PBS takes a look behind those numbers and tells the story of how water shortages in two Texas communities are putting residents in crisis mode. Katharine Hayhoe, a climatologist at Texas Tech University, explains why human-caused global warming could make the crisis even worse:

Extreme weather of last decade part of larger pattern linked to global warming - In 2011 alone, the US was hit by 14 extreme weather events which caused damages exceeding one billion dollars each -- in several states the months of January to October were the wettest ever recorded. Japan also registered record rainfalls, while the Yangtze river basin in China suffered a record drought. Similar record-breaking events occurred also in previous years. In 2010, Western Russia experienced the hottest summer in centuries, while in Pakistan and Australia record-breaking amounts of rain fell. 2003 saw Europe´s hottest summer in at least half a millennium. And in 2002, the weather station of Zinnwald-Georgenfeld measured more rain in one day than ever before recorded anywhere in Germany -- what followed was the worst flooding of the Elbe river for centuries.

The Problems of Interpreting Data - A few weeks ago Science published a paper which claimed that biodiversity was important for the functioning of dry grasslands. This claim was strange because the analysis suggested that biodiversity wasn't very important - it only explained about 4% of the variation in the data, whilst the abiotic components in the model explained about 50%. This caused me to look a bit deeper at the paper, and also to think a bit more about one particular aspect of the authors' argument: how we can infer processes from observational data (i.e. where we don't manipulate the conditions). In their paper, Maestre et al. argue that the effects they see will be even stronger than estimated: "[b]ecause we did not experimentally control for other abiotic and biotic factors that are known to affect ecosystem functioning, significant relationships would indicate potentially strong effects of richness on multifunctionality" Which is utter rubbish. Because the authors didn't "experimentally control for other abiotic and biotic factors that are known to affect ecosystem functioning", any significant relationships could be spurious. Denying this would mean having to accept the stork theory of reproduction.

Lack of geologists hampers climate change adaptation projects, says government - Scholarship grants for geosciences courses have been increased this year by the Department of Environment and Natural Resources (DENR) following a decline in the number of state geologists needed in mapping hazard-prone areas. Environment Secretary Ramon Paje issued the directive to the Mines and Geosciences Bureau (MGB) in an effort to encourage incoming college freshmen to take up geosciences courses to beef up the country’s geologists, including mining and metallurgical engineers.

U.S. Heat Waves to Intensify From New York to Los Angeles - Heat waves are likely to intensify and last longer from California to the U.S. East Coast as global warming takes hold, according to the United Nations’s most comprehensive report on extreme weather events.  Average wind speeds of hurricanes are likely to increase, with projected sea level rises compounding the impact of surges associated with the storms, the UN’s Intergovernmental Panel on Climate Change said in a 594-page report today that examines weather impacts from Alaska to Africa and Australia.  Coastal areas around the world, especially large cities and small islands, are particularly vulnerable to the impact of climate change and as much as $35 trillion, or 9 percent of projected global economic output in 2070, may be exposed to climate-related hazards in ports, the panel said. That may increase the need for migration, according to the authors.  “The decision about whether or not to move is achingly difficult and it’s one that the world community is going to have to face with increasing frequency in the future,”  Sea-level rise may render parts of Mumbai uninhabitable while other cities with the largest number of people threatened by coastal flooding include Kolkata, India, Rangoon in Myanmar, Miami, Shanghai, Bangkok and Ho Chi Minh City, according to the study.

Ice fishing anyone? Not in the Great Lakes, you won't! Jeff Masters: Great Lakes ice cover down 71% since 1973 - Ice cover on North America's Great Lakes -- Superior, Michigan, Huron, Ontario, and Erie -- has declined 71% since 1973, says a new study published in the Journal of Climate by researchers at NOAA's Great Lakes Environmental Research Laboratory. The biggest loser of ice during the 1973-2010 time period was Lake Ontario, which saw an 88% decline in ice cover. During the same time period, Superior lost 79% of its ice, Michigan lost 77%, Huron lost 62%, and Erie lost 50%. The loss of ice is due to warming of the lake waters. Winter air temperatures over the lower Great Lake increased by about 2.7 °F (1.5 °C) from 1973- 2010, and by 4-5 °F (2.3-2.7 °C) over the northern Lakes, including Lake Superior. Lake Superior's summer surface water temperature warmed 4.5 °F (2.5 °C) over the period 1979-2006 (Austin & Colman 2007). During the same period, Lake Michigan warmed by about 3.3 °F (1.7 °C), Lake Huron by 4.3 °F (2.4 °C), and Lake Erie showed almost no warming. The amount of warming of the waters in Lakes Superior, Huron, and Michigan is higher than one might expect, because of a process called the ice-albedo feedback: when ice melts, it exposes darker water, which absorbs more sunlight, warming the water, forcing even more ice to melt. This sort of vicious cycle is also responsible for the recent extreme loss of Arctic sea ice. The increase in temperature of the lakes could be due to a combination of global warming and natural cycles, the researchers said. They noted a pronounced 4-year and 8-year oscillation in ice coverage, which could be caused by the El Niño/La Niña (ENSO) and Arctic Oscillation (AO), respectively.

West Antarctic ice shelves tearing apart at the seams - A new study examining nearly 40 years of satellite imagery has revealed that the floating ice shelves of a critical portion of West Antarctica are steadily losing their grip on adjacent bay walls, potentially amplifying an already accelerating loss of ice to the sea. The most extensive record yet of the evolution of the floating ice shelves in the eastern Amundsen Sea Embayment in West Antarctica shows that their margins, where they grip onto rocky bay walls or slower ice masses, are fracturing and retreating inland. As that grip continues to loosen, these already-thinning ice shelves will be even less able to hold back grounded ice upstream, according to glaciologists at The University of Texas at Austin's Institute for Geophysics (UTIG). Reporting in the Journal of Glaciology, the UTIG team found that the extent of ice shelves in the Amundsen Sea Embayment changed substantially between the beginning of the Landsat satellite record in 1972 and late 2011. These changes were especially rapid during the past decade. The affected ice shelves include the floating extensions of the rapidly thinning Thwaites and Pine Island Glaciers. "Typically, the leading edge of an ice shelf moves forward steadily over time, retreating episodically when an iceberg calves off, but that is not what happened along the shear margins,"  An iceberg is said to calve when it breaks off and floats out to sea.

Must-See Global Warming Video: What We Knew In 1982 - Mike MacCracken was the first high level climate scientist that Al Gore introduced me to in Nashville, some 5 years ago. Although I knew something about the issue, and had some background reading and writing about energy and environment – Mike very quickly made me realize how much I had wrong,  and how much I had to learn. He has been a reliable and generous advisor and mentor ever since. I owe him a lot for his patience in answering questions and pointing me to people and resources I needed to be aware of. A few months ago, I became aware of a video of Mike’s presentation on Climate Change at Sandia Labs in  August 1982. The contrast between what scientists already knew even 30 years ago, and the pathetically slow response to this gathering storm, prompted me to want to find out what Mike was thinking now, with three decades of perspective

Climate Change Nearing “Irreversible” Stage - The new EPA rules on future power plants will limit but not reduce greenhouse gas emissions in the near future, and maybe ever, if natural gas prices remain low. No new coal-fired plants are really on the horizon post-2012, and while without carbon capture and sequestration equipment they couldn’t be built, nobody’s clamoring to build them. So while phasing out coal is not at all a bad thing, it’s not really being accomplished by this rule as much as by market forces. Which means that we’re looking at what amounts to a status quo as far as emissions goes. And the status quo is not only inadequate to stop climate change in the future, but the tipping point is on the verge of being reached, according to Scientific American: The world is close to reaching tipping points that will make it irreversibly hotter, making this decade critical in efforts to contain global warming, scientists warned on Monday. Scientific estimates differ but the world’s temperature looks set to rise by six degrees Celsius by 2100 if greenhouse gas emissions are allowed to rise uncontrollably.

Global Warming Close to Becoming Irreversible - The world is close to reaching tipping points that will make it irreversibly hotter, making this decade critical in efforts to contain global warming, scientists warned on Monday. Scientific estimates differ but the world's temperature looks set to rise by six degrees Celsius by 2100 if greenhouse gas emissions are allowed to rise uncontrollably. As emissions grow, scientists say the world is close to reaching thresholds beyond which the effects on the global climate will be irreversible, such as the melting of polar ice sheets and loss of rainforests. "This is the critical decade. If we don't get the curves turned around this decade we will cross those lines,"  For ice sheets - huge refrigerators that slow down the warming of the planet - the tipping point has probably already been passed, Steffen said. The West Antarctic ice sheet has shrunk over the last decade and the Greenland ice sheet has lost around 200 cubic km (48 cubic miles) a year since the 1990s. Most climate estimates agree the Amazon rainforest will get drier as the planet warms. Mass tree deaths caused by drought have raised fears it is on the verge of a tipping point, when it will stop absorbing emissions and add to them instead.

Both Coasts Watch Closely as San Francisco Faces Erosion - The explosive waves of Ocean Beach, a 3.5-mile stretch separating the city from the gray edge of the Pacific Ocean, have long been a draw for tourists, local families and an international tribe of surfers.  But every few years, stormy surf driven by the weather pattern known as El Niño grinds away at a thinning section of beach, pulling sand out to sea. Some comes back, but two years ago, bluffs collapsed and massive amounts of sand disappeared for good.  Holding back the sea here seems as impossible as holding back the fog. But planners see Ocean Beach as a top priority in a long roster of Bay Area sites threatened by inundation because of what lies on its landward side: the Great Highway, a $220 million wastewater treatment plant and a 14-foot-wide underground pipe that keeps sewage-tainted storm water away from the ocean.  The question facing at least eight local, state and federal agencies boils down to this: With California officials expecting climate change to raise sea levels here by 14 inches by 2050, should herculean efforts be made to preserve the beach, the pipe and the plant, or should the community simply bow to nature?

Carbon Map Infographic: A New Way To See The Earth Move - How can you map the world to show global data in an immediately clear way? How can you show two datasets at once to see how they compare? Kiln, a partnership of Guardian writer Duncan Clark and developer Robin Houston has come up with this beautiful new take on the globe. Watch the animated intro or click on the topics and see the map move before your eyes. Adding shading lets you compare two datasets to see how they relate – so you can see clearly how poorest countries have the fastest growing populations but the lowest emissions.

Planet’s Tug-of-War Between Carrying Capacity and Rising Demand: Can We Keep This Up? | Worldwatch Institute - The global economy continued to grow last year, world population surpassed 7 billion, and the use of energy and other natural resources generally rose. The Worldwatch Institute captures the impacts of this rising consumption and the increasingly risky state of humanity in Vital Signs 2012, the latest compilation of indicators from the Institute’s Vital Signs project. The Washington, D.C.-based environmental publisher Island Press released the book today as part of a new partnership with Worldwatch.Vital Signs 2012 provides up-to-date figures on our most important global concerns. Drawing from international agencies and organizations and from Worldwatch’s own research, the report provides authoritative data and analysis on some of the most significant global trends, including population growth, renewable energy production, and oil consumption.  “The information showcased in Vital Signs 2012 will inform governments, policymakers, NGOs, and individuals about the current state of the world’s consumption patterns, economic priorities, and environmental health, allowing for more well-informed policies and decision making,” said Michael Renner, Worldwatch senior researcher and director of the Vital Signs project. “Commitments are needed to reverse a number of harmful trends.”

Population adds to planet’s pressure cooker, but few options - The world’s surging population is a big driver of environmental woes but the issue is complex and solutions are few, experts at a major conference here say. Answers lie with educating women in poorer countries and widening access to contraception but also with reforming consumption patterns in rich economies, they say. The four-day meeting on Earth’s health, Planet Under Pressure, is unfolding ahead of the Rio+20 Summit in June.Scientists taking part have pinpointed population growth as a major if indirect contributor to global warming, depletion of resources, pollution and species loss. But they also mark it as an issue that has disappeared almost completely off political radar screens. 

Thich Nhat Hanh: maybe in 100 years there will be no more humans on the planet - The National Wildlife Federation tells us everyday that 100 plants and animal species are lost to deforestation. Extinction of species is taking place everyday. In one year there may be 200,000 species going into extinction. That is what is happening; that is not the problem of the future. We know that 151 million years ago there was already global warming caused by gigantic volcanic eruptions. They caused the worst mass extinction in the history of the planet. The 6C increase in global temperature was enough to wipe out 95 per cent of the species that were alive. Global warming already happened 251 million years ago because of volcanic eruptions and 95 per cent of species on earth disappeared. Now a second global warming is taking place. This time because of deforestation and industrialisation; man-made, maybe in 100 years there will be no more humans on the planet, in just 100 years. After the disappearance of 95 per cent of species on the earth by the mass extinction the earth took 100 million years to restore life on earth. If our civilisation disappears it will take some time like that for another civilisation to reappear. When volcanic eruptions happened the carbon dioxide built up and created the greenhouse effect that was 251 million years ago. Now the building up of carbon dioxide is coming from our own lifestyle and industrial activities.

Big setback for mountaintop mining critics - - In a corner of Appalachia where the tops of coal-rich mountains are lopped off with regularity, the Spruce No. 1 mine would stand out. Now, thanks to a judge’s ruling, the hotly contested strip mine project may move forward. The mine, proposed in Logan County, W.Va., by Mingo Logan Coal Co., a subsidiary of St. Louis-based Arch Coal, would tear up nearly 2,300 acres and fill seven miles of streams with rubble. Its footprint, according to the Environmental Protection Agency, would “take up a sizable portion” of downtown Pittsburgh. Mine opponents were encouraged when, in January 2011, the EPA vetoed a Clean Water Act permit that had been issued to Mingo Logan four years earlier by the U.S. Army Corps of Engineers. They hoped it would be the first of many overrides of Corps decisions by the Obama administration. A federal judge’s opinion, issued March 23, has thrown everything into doubt.Ruling on behalf of Mingo Logan, U.S. District Judge Amy Berman Jackson, an Obama appointee, held that the EPA had overstepped its bounds.

US to Propose First Climate Limits on Power Plants - The Obama administration proposed on Tuesday the first ever standards to cut carbon dioxide emissions from new power plants, a move likely to be hotly contested by Republicans and industry in an election year. The Environmental Protection Agency proposed the long-delayed rules that limit emissions from all new U.S. power stations, which would effectively bar the building of any new coal plants. While the rules do not dictate which fuels a plant can burn, they would require any new coal plants essentially to halve carbon dioxide emissions to match those of efficient gas plants. "We're putting in place a standard that relies on the use of clean, American made technology to tackle a challenge that we can't leave to our kids and grandkids," EPA Administrator Lisa Jackson said in a release. Republicans have already turned to the courts to forestall other EPA measures they say will drive up power costs for homeowners and businesses that are struggling to recover from the weak economy. Some Democrats from energy-intensive states are also likely to oppose the rules.

The End of Coal? New EPA Rules Will Limit GHG Emissions - After years of study, the EPA will finally release their initial greenhouse gas emissions rules for power plants, which are likely to end the construction of any coal-fired plants from this point forward. The proposed rule — years in the making and approved by the White House after months of review — will require any new power plant to emit no more than 1,000 pounds of carbon dioxide per megawatt of electricity produced. The average U.S. natural gas plant, which emits 800 to 850 pounds of CO2 per megawatt, meets that standard; coal plants emit an average of 1,768 pounds of carbon dioxide per megawatt.Industry officials and environmentalists said in interviews that the rule, which comes on the heels of tough new requirements that the Obama administration imposed on mercury emissions and cross-state pollution from utilities within the past year, dooms any proposal to build a coal-fired plant that does not have costly carbon controls. I don’t see how coal is “cheap energy.” Pollutants from coal caused a public health crisis and hundreds of thousands if not millions of preventable illnesses and deaths. No coal executive ever paid a dime for that. If they have the technology to create “clean coal” and get under the emissions limits, they can deploy it. They might have to – gasp! – pay for their own research and development to make that happen. It would be a small price to pay in exchange for all the externality costs everyone else has picked up over the years.

What’s the deal with EPA carbon rules for existing power plants? - In my post on the new EPA carbon pollution rule, I drew attention to an important distinction: The rule issued today governs new power plants only; carbon pollution from existing power plants has not yet been regulated. This matters a great deal. Today’s rule effectively means there will be no more coal plants built in the U.S., but that was more or less a fait accompli due to market forces. What to do about existing plants is in many ways a more fraught and important question. It could have much larger effects on near-term pollution from the power sector. On a conference call with reporters this morning, EPA Administrator Lisa Jackson said, “We have no plans to regulate existing sources.” That caused me a few moments of panic (and, um, a few outbursts on Twitter). If there are really not going to be any existing-source regulations, that would make this whole process a massive, massive fail.

I went ahead and created a gas tax category - Mankiw in Barrons: Harvard University economist Greg Mankiw, currently an advisor to GOP presidential hopeful Mitt Romney, has long been an advocate of a $1-per-gallon gas-tax hike phased in over 10 years (Romney won't countenance the tax). Absent the tax, politicians resort to crazy, Obama-like schemes to achieve the same end of reducing our dependence on foreign oil supplies. MANKIW PRESCIENTLY STATED during a 2006 interview conducted by CNBC's Larry Kudlow that the alternative to a simple gas tax is "an energy policy that looks like it was created in the Kremlin." "An alternative in Washington to gas taxes," he said, "is very heavy-handed regulation that's extraordinarily intrusive and not particularly effective. Things like CAFE standards"—the fuel-efficiency rules that auto manufacturers are required to follow—"and biofuel mandates are tremendously regulatory. The gas tax is really the least invasive way of getting toward our energy goals."

Great Lakes Wind Farms Agreement Reached - The Obama administration and five states have reached an agreement to speed up approval of offshore wind farms in the Great Lakes, which have been delayed by cost concerns and public opposition. Under the deal, which administration officials disclosed to The Associated Press ahead of an announcement scheduled for Friday, state and federal agencies will craft a blueprint for speeding regulatory review of proposed wind farms without sacrificing environmental and safety standards. The Great Lakes have no offshore wind turbines, although a Cleveland partnership announced plans last year for a demonstration project that would place five to seven turbines in Lake Erie about 7 miles north of the city, generating 20-30 megawatts of electricity. Offshore wind projects have been proposed elsewhere in the region, including Michigan and New York, stirring fierce debate.   Critics say they would ruin spectacular vistas, lower shoreline property values and harm birds and fish.  Supporters describe the lakes' winds as a vast, untapped source of clean energy and economic growth. Administration officials said the region's offshore winds could generate more than 700 gigawatts – one-fifth of all potential wind energy nationwide. Each gigawatt of offshore wind could power 300,000 homes while reducing demand for electricity from coal, which emits greenhouse gases and other pollutants, according to the National Renewable Energy Laboratory in Golden, Colo.

World’s First 6-MW Wind Turbine Constructed Offshore - The world’s first 6-MW offshore wind turbine went up in the North Sea this week. Wind company REpower and C- Power NV, a Belgian offshore development company, installed the wind turbine, the first of 48 for the Thornton Bank II wind farm, which is being constructed approximately 28 kilometers off the Belgian coast. The wind turbine is actually rated at 6.15 MW and is the first turbine of phase 2 of this offshore wind project — REpower has an interesting interactive image on its site where you can explore its 11 main features. The offshore turbine REpower 6M has the dimension of two family homes and the rotor star has a diameter of 126 metres, with a swept area greater than two football pitches.The installation of the first 30 turbines for phase 2 of the wind farm is planned for 2012, and a further 18 are designated for installation during a third extension stage by mid-2013. Belgium intends to get 13% of its energy from renewable energy sources by 2020.

Energy Minister delighted as Scotland beats renewable energy target - Figures revealed today that an extra 45 per cent of renewable energy was generated in Scotland last year compared with 2010. The statistics published by the Department of Energy and Climate Change statistics mean around 35% of Scotland’s electricity needs came from renewables in 2011, assuming that gross consumption in 2011 is similar to 2010. This beats the Scottish Government’s target of 31% for last year. Energy Minister, Fergus Ewing was delighted with the news. He said: “It’s official: 2011 was a record breaker with enough green electricity being produced in Scotland to comfortably beat our interim target. ”And Scotland met almost 40% of the UK’s renewables output in 2011, demonstrating just how much the rest of the UK needs our energy.

Stuff They Don't Want You to Know - Have Oil Companies Suppressed Technology? video

Court Reverses E.P.A., Saying Big Mining Project Can Proceed - — In a sharp rebuke, a federal judge on Friday reversed a decision by the Environmental Protection Agency to revoke a critical permit for one of the nation’s largest mountaintop removal mining projects.The United States District Court judge, Amy Berman Jackson, said that the E.P.A.’s unilateral decision in January 2011 to rescind the waste disposal permit for the Spruce No. 1 mine in Logan County, W.Va., exceeded the agency’s authority and violated federal law. She declared that the permit was now valid, paving the way for a mining project covering 2,278 acres to go forward.  In taking the rare step of revoking the permit, granted in 2007 by the Bush administration, the E.P.A. said that mining would have done unacceptable damage to rivers, wildlife and communities. The mine, owned by Arch Coal of St. Louis, would have buried hundreds of miles of streams under tons of residue.  The agency said at the time it was using its authority under the Clean Water Act to rescind a legally issued permit, an action it had taken only twice in 40 years and never for a coal mine.

The Nurture of Nuclear Power - Remember the brouhaha about $563 million in Obama administration loan guarantees to Solyndra, the solar panel manufacturer that went belly up last fall? Neither President Obama nor Republicans in Congress have voiced opposition to an expected $8.3 billion Energy Department guarantee to help the Southern Company, a utility giant, build nuclear reactors in Georgia. Pressed to respond to the comparison, Representative Cliff Stearns, chairman of the Energy and Commerce subcommittee on oversight and investigations, explained that the loan guarantee for nuclear power plant construction was for a “proven industry that has been successful and has established a record.” The nuclear power industry has certainly established a record – for terrifying accidents. Most recently, the Fukushima Daiichi disaster in Japan led to the evacuation of 90,000 residents who have yet to return home and to the resignation of the prime minister. It prompted the German government to begin phasing out all nuclear generation of electricity by 2022. Yet the industry has proved remarkably successful at garnering public support in the United States, ranging from public insurance against accident liability to loan guarantees. An article last year in The Wall Street Journal observed that subsidies per kilowatt hour during its initial stages of development far exceeded those provided to solar and wind energy technologies.

Texas officials OK radioactive waste dump - Radioactive waste from dozens of states could soon be buried in a Texas dump near the New Mexico border after state officials gave final approval Friday to rules allowing the shipments.  Texas lawmakers in 2011 approved the rural Andrews County site to take the waste and Friday's unanimous vote by the Texas Low-Level Radioactive Compact Commission cleared a major hurdle to allow the waste burial. Texas already had a legal compact with Vermont to take its waste. Environmentalists have argued against expanding the program to 36 more states, warning it could result in radioactive material rumbling through the state on trucks with few safeguards in case of an accident. They also say a problem at the waste dump could lead to potential underground water contamination. Dallas-based Waste Control Specialists, which owns and operates the site, says it will be safe. The waste would be entombed in concrete about 100 feet underground in an area with densely packed clay. The site still needs final approval from state environmental regulators, and company President Rod Baltzer said it could happen as early as next week.

Japan Down To One Nuclear Reactor - Japan was left on Monday with only one working nuclear reactor after Tokyo Electric Power Co. shuttered its final generator for scheduled safety checks.  The vast utility's entire stock of 17 reactors are now idle, including three units that suffered a meltdown when the tsunami hit Fukushima, as Japan warily eyes a spike in electricity demand over the hot and humid summer.  Only one of Japan's 54 units – in northernmost Hokkaido – is still working, and that is scheduled to be shut down for maintenance work in May.

Japan's Final Nuclear Reactor to Close in May - Following last year’s nuclear disaster at Fukushima caused by the catastrophic meltdown of three reactors due to an earthquake and subsequent tsunami, Japanese confidence in nuclear power has plummeted. A veritable powerhouse in the nuclear power industry before the incident, Japan now has only one of its 54 reactors running, after another was closed down today. Its reactors are being idled in order to undergo safety check-ups, and general maintenance. The Tokyo Electric Power Company (TEPCO) shut down its final reactor today, meaning that none of its 17 reactors are running at the moment. A spokesman for Hokkaido Electric Power Company, owner of Japans last working reactor, said that the plant “will go through a regular check-up from May 5, which is expected to end in August,” which means that for several months over the summer Japan will be producing no electricity from nuclear sources. Japan’s government are warily watching the spiking electricity demand during the hot and humid summer months, but are promising that there should be no power shortages.

$1.2 Million Fine for Indian Point Fire - The owner of the Indian Point nuclear plant has agreed to pay a $1.2 million penalty for a transformer explosion at its Unit 2 reactor that spilled oil into the Hudson River in November 2010. The New York State Department of Environmental Conservation said that “longstanding structural conditions” led to the failure of a containment system that should have prevented the oil from flowing into the river. Indian Point, nearly 40 miles north of Midtown Manhattan in Buchanan, N.Y., has a history of transformer problems. In 2007 a transformer at Unit 3 caught fire, and the Nuclear Regulatory Commission raised its level of inspections, noting that the plant had experienced a relatively high number of unplanned shutdowns. Citing the Indian Point 3 incident and transformer problems at other reactors, the commission later warned the entire industry to improve transformer maintenance.

1 of Japan’s damaged reactors has high radiation, no water, renewing doubts about stability - One of Japan’s crippled nuclear reactors still has fatally high radiation levels and hardly any water to cool it, according to an internal examination Tuesday that renews doubts about the plant’s stability. A tool equipped with a tiny video camera, a thermometer, a dosimeter and a water gauge was used to assess damage inside the No. 2 reactor’s containment chamber for the second time since the tsunami swept into the Fukushima Dai-ichi plant a year ago. The probe done in January failed to find the water surface and provided only images showing steam, unidentified parts and rusty metal surfaces scarred by exposure to radiation, heat and humidity. The data collected from the probes showed the damage from the disaster was so severe, the plant operator will have to develop special equipment and technology to tolerate the harsh environment and decommission the plant, a process expected to last decades. Tuesday’s examination with an industrial endoscope detected radiation levels up to 10 times the fatal dose inside the chamber. Plant officials previously said more than half of melted fuel has breached the core and dropped to the floor of the primary containment vessel, some of it splashing against the wall or the floor.

Experts: Radiation at Fukushima Plant Far Worse Than Thought - Radiation levels inside Fukushima's reactor 2 have reached fatally high levels, and levels of water are far lower than previously thought, experts say today.  The current radiation levels are so high that even robots cannot enter. Tokyo Electric Power Co. (TEPCO) says that new robots and equipment will need to be developed to deal with the lethal levels of radiation. TEPCO spokesperson Junichi Matsumoto told the Associated Press, "We have to develop equipment that can tolerate high radiation" when locating and removing melted fuel during the decommissioning. At ten times the lethal dose, the radiation levels are at their highest point yet. At the current level of 73 sieverts, the data gathering robots can only stand two to three hours of exposure. But, Tsuyoshi Misawa, a reactor physics and engineering professor at Kyoto University's Research Reactor Institute, told The Japan Times, "Two or three hours would be too short. At least five or six hours would be necessary." He added that "the shallowness of the water level is a surprise, and the radiation level is awfully high."

Very high radiation, little water in Japan reactor  - (AP) -- One of Japan's crippled nuclear reactors still has fatally high radiation levels and much less water to cool it than officials had estimated, according to an internal examination that renews doubts about the plant's stability.   A tool equipped with a tiny video camera, a thermometer, a dosimeter and a water gauge was used to assess damage inside the No. 2 reactor's containment chamber Tuesday for the second time since the tsunami swept into the Fukushima Dai-ichi plant a year ago. The data collected showed the damage from the disaster is so severe, the plant operator will have to develop special equipment and technology to tolerate the harsh environment and decommission the plant, a process expected to last decades.The other two reactors that had meltdowns could be in even worse shape. The No. 2 reactor is the only one plant workers have been able to closely examine so far. Tuesday's examination with an industrial endoscope detected radiation levels up to 10 times the fatal dose inside the chamber. Plant officials previously said more than half of the melted fuel has breached the core and dropped to the floor of the primary containment vessel, some of it splashing against the wall or the floor. Particles from melted fuel have probably sent radiation levels up to a dangerously high 70 sieverts per hour inside the container The figure far exceeds the highest level previously detected, 10 sieverts per hour, which was detected around an exhaust duct shared by No. 1 and 2 units last year.

Lethal Radiation Detected Inside Fukushima Reactor Tokyo Electric Power Company has detected extremely high levels of radiation inside one of the crippled reactors of the Fukushima Daiichi nuclear power plant. TEPCO was able to place monitoring equipment directly inside the reactor for the first time since last year's accident. A dosimeter lowered into the containment vessel of the No.2 reactor registered 72.9 sieverts, or 72,900 millisieverts per hour at maximum -- a level where a human is certain to die within about 7 minutes of exposure. It says radiation levels increased as the dosimeter was lowered inside the reactor. This suggests the nuclear fuel melted down and collected at the bottom of the vessel.The utility also learned the water level inside the vessel was only 60 centimeters, compared to the original estimate of about 3 meters. TEPCO suspects the suppression chamber at the bottom of the vessel may have been destroyed.

BP is latest energy giant to invest in Ohio's Utica shale - BP said this morning it is taking steps to lease 84,000 acres in northeastern Ohio for oil and natural gas production, the latest big energy company to invest in the Utica shale. The land is located in Trumbull County, near the Pennsylvania border, which is on the northern edge of the area that energy companies have said may hold the greatest promise for energy resources. “We see this as a great opportunity for BP and a great opportunity for the state,” said Tim Harrington, regional president for BP’s gas operations, in a conference call with Ohio reporters. He declined to say how much BP is paying for the leases. The Vindicator newspaper of Youngstown is reporting that the total is about $330 million, based on comments from landowners involved in the talks.

Why The Natural Gas Act Is Just Another Washington Boondoggle - The Natural Gas Act offers incentives worth between $3.4 billion and $5 billion to companies producing long-haul trucks that convert from the traditional combustion engine to those that operate on natural gas. It’s a big-business, big-government solution to subsidize natural gas projects in transportation and critical infrastructure. But here’s the problem. The Natural Gas Act is a poorly written, rushed, crony attempt to provide a politically convenient solution to Washington’s own four-decade failure to provide a sound, long-term energy policy. The consequences of this bill are just as potentially crippling as other past failures in government adventurism. But over the last 15 years, Congress has pushed through a swath of poorly written bills that have essentially sunk our economy, suffocated real private investment, and benefited the connected few on the backs of taxpayers through trillions of dollars in new debt.

Senate To Vote Monday To Axe Big Oil Tax Incentives - The U.S. Senate is scheduled to vote Monday on doing away with tax breaks for the largest oil and natural gas companies, a bill that has little chance of passing the Republican-controlled House of Representatives and is mostly an attempt by Democrats to force GOP lawmakers to publicly vote in favor of tax concessions to Big Oil. The bill would do away with billions in tax incentives to oil and natural gas companies like Exxon Mobil (NYSE: XOM) and ConocoPhillips (NYSE: COP) for drilling costs that stem from survey work, ground clearing, salaries, maintenance and repairs in exploration and drilling projects. President Barack Obama outlined a similar measure in his 2013 budget, in which he called for eliminating twelve tax breaks for oil, natural gas and coal companies.

Bill to end ‘Big Oil’ subsidies clears one hurdle - The Senate yesterday launched a high-profile debate on a Democratic plan to block the nation’s five biggest oil companies from taking advantage of a suite of tax breaks. Against the backdrop of rising gasoline prices, the chamber voted 92-4 to cut off any potential filibuster of the proposal, setting the stage for an election-year discussion about the issue. The bill, sponsored by Sen. Robert Menendez, D-N.J., is unlikely to be passed by the House and Senate, but the measure could fuel Democrats’ arguments that Republicans are unabashedly protecting “Big Oil” profits while motorists pay more at the pump. “People are tired of paying ridiculously high gas prices and then paying Big Oil a second time with subsidies,” Menendez said. Menendez’s measure would repeal five tax incentives for the nation’s five biggest oil companies as a way to pay for renewable-energy tax credits used by wind and solar producers.

Senate GOP allows bill repealing tax breaks for oil, with a catch - In an unusual but calculated political move, Senate Republicans declined to block a Democratic bill that would repeal tax breaks for oil companies –  choosing instead to launch a floor debate on the legislation as a way to showcase the Keystone XL pipeline and other GOP proposals aimed at curbing sky-high gas prices. Republican-led opposition will almost certainly defeat the bill on final passage later this week. But by allowing debate, the GOP hopes to harness voter angst over prices at the pump as a political weapon against President Obama’s energy policies. Republicans will especially target the White House move to postpone a decision on the Keystone pipeline between Canada and the Gulf of Mexico, an issue that has driven a wedge between environmentalists and some unions — key allies of the White House.

GOP blocks Obama's bid to end oil subsidies - Climbing gas prices have drivers looking for someone to blame. And politicians are looking to take advantage. Senate Republicans Thursday shot down President Obama's plan to cut off oil companies' tax breaks. The president says there's not much he can do to control gas prices. Nonetheless, he's working hard to appear to be trying. He came to the White House rose garden Thursday to urge the Senate to repeal $4 billion in tax subsidies for big oil companies, even though no one thinks that would lower prices at the pump. "They can either vote to spend billions of dollars on oil subsidies that keep us trapped in the past," said Mr. Obama, "or they can vote to end these taxpayer subsidies that aren't needed to boost oil production." But moments after the president's plea, the Senate voted 51-47 against the bill, with four Democrats in the majority.

Senate Republicans Protect Big Oil Subsidies As Gasoline Profits Soar  - By a nearly party-line vote of 51-47, the U.S. Senate failed to get the 60 votes needed to eliminate $24 billion in taxpayer subsidies for the five richest oil companies. The Republicans filibustered legislation by Sen. Bob Menendez (D-NJ) which would have cut the subsidies [and used the savings] to pay for investment in wind power and energy efficiency. Democrats who joined the Republicans included Sens. Mary Landrieu (D-LA), Ben Nelson (D-NE), Mark Begich (D-AK), and Jim Webb (D-VA). Sen. Susan Collins (R-ME) and retiring Sen. Olympia Snowe (R-ME) broke ranks and voted to cut the tax breaks.

Breaking Up with the Sierra Club - Long-time friend and Orion columnist Sandra Steingraber has been particularly vocal about the dangers of fracking. Her columns in recent issues of the magazine have frequently been dedicated to the issue; and last year, after receiving a Heinz Award for her work, Steingraber donated the cash prize to the fight against fracking in her home state of New York. In February, Time magazine broke the news that the Sierra Club, an old and respected environmental defender, had, for three years, accepted $25 million from Chesapeake Energy, one of the largest gas-drillers in the world. (In 2010, Michael Brune, the Sierra Club’s new executive director, refused further donations from the company.) The story prompted Steingraber to write an open letter to the Club, posted below. We invite you to read the letter, which testifies to the confusion, fear, and outrage that’s pouring out of communities in gasland—but which is also, importantly, a bold call to courage.

International Trade, an Enhanced Petroleum Transportation Network, and Gasoline Prices - Don't expect a big impact on gasoline prices from opening up an oil pipeline to the coast. I am a little late to this debate [0] [1] [2], but I wanted to highlight something that is clear from basic international trade theory. Opening up to international trade changes relative prices, and in fact raises some prices. If a pipeline were to be built which could transport oil currently produced in the Midwestern US to the Gulf Coast, then to the extent that oil in the Midwest is lower priced than on the coasts, then average US oil prices may actually rise with completion of the pipeline. The difference in oil prices in the interior US (West Texas Intermediate) and on the coasts (Brent) is shown in Figure 1. The analytics of the current situation is shown in Figure 2, which shows the Midwest US market, the US coasts, and the Rest-of-World. The world price (Brent) is at P0, and is above the autarky price for the Midwest at PAut. I’m assuming that in this case, oil cannot be shipped out to the US coasts and to the rest-of-world until the requisite pipelines are in place. (See this NYT article for discussion.)

US Well Footage Stats - The EIA has stats on the total footage of wells drilled for oil and gas exploration and development in the US.  I made the graph above from this data showing the number of millions of feet of well drilled.  Green is for oil, red is for gas, and grey is dry holes.  Dotted is exploration (trying to find new fields), whereas solid is for development wells (getting the hydrocarbons out of known fields).Unfortunately, the data only go through 2008.  Still a few interesting features stand out of the data:

  • Gas development drilling in recent years is far higher than at any time in US history as the industry exploits shale gas.
  • The industry is much more efficient than it used to be as measured by the amount of dry hole being drilled - it's now a small fraction of all drilling whereas prior to the 1990s it used to be a much more material proportion.  Clearly, all that fancy seismic-based computer modeling and precise drilling really works.
  • At least as of 2008, oil drilling was nowhere near the heights of the early 1980s (it's very likely increased significantly since, however).

Steelmakers Finds Sweet Spot in the Shale - The rising fortunes of a massive U.S. Steel Corp. plant here has much to do with what sits below: massive deposits of cheap natural gas. Shiny coils roll off the line destined for energy companies drilling in the Marcellus Shale natural-gas formations that rest below much of southwestern Pennsylvania. Production for so-called tubular goods used for pipes, tubes and joints in gas drilling has doubled in two years, says Scott Bucksio, the general manager of the plant in the sprawling Mon Valley Works, as drillers have raced to extract ever-larger amounts of gas from the shale deposits. As significant, or more so for energy-intensive steelmakers, is that newly plentiful natural gas "is also keeping costs down" said Mr. Bucksio of U.S. Steel. With prices of natural gas down more than 35% to $2.21 per million British thermal units from a year ago due to abundant supply, the company has begun replacing coal with natural gas to power its blast furnaces.  Industrywide, a ton of steel costs around $600 to produce. Using natural gas instead of coal to run the furnaces cuts the costs by $8 to $10 per ton. Based on those figures, U.S. Steel could save $133 million this year alone, according to a recent report by UBS AG, which also said the Pittsburgh-based company could save another $80 million in 2012 energy costs for nonblast furnace operations.

Shale Gale: The Energy Equivalent of the Berlin Wall Coming Down and Best Reason to Be Bullish - Natural gas futures prices fell to another 10-year low today of $2.208 per million BTUs on the New York Mercantile Exchange, see chart above.  In nominal dollars, that's the lowest price for natural gas since February 2002, and adjusting for inflation it's the lowest price since July 1995, almost 17 years ago.    Michigan-based Consumers Energy announced today that it will lower natural gas prices starting next month for 1.7 million customers by 13% -- welcome news in tough economic times and rising gasoline prices.  Customers will save about $130 million in energy costs over the next year as natural gas prices drop to levels not seen in nine years. This long-term reduction in natural gas prices comes on top of lower fuel costs from the recent mild winter, saving a typical residential gas customer about $94 compared to the previous year. Commentary from Scott Grannis today:   "It's the most dramatic change that is happening beneath the surface of the U.S. economy today. As the rest of the world struggles with oil prices that are very expensive both nominally and in real terms, the U.S., thanks to new tracking technology, is enjoying natural gas prices that are plunging. Even as crude oil prices have surged over the past 13 years from $12/bbl to over $100, the price of natural gas in the U.S. is roughly unchanged on net. That means that natural gas has dropped by an astounding 85% relative to crude oil (see recent CD post here). We've never seen anything like this.

Natural Gas Industry Must Tighten Up Methane Leaks — And Save $2 Billion Per Year In The Process -  In a stunning report last year, the National Center for Atmospheric Research concluded that substituting natural gas for coal as an energy source would actually increase global warming for many decades – unless methane leakage rates can be kept below 2%. Even though we don’t know much about the actual leakage rate for methane – the major component of natural gas and a far more potent greenhouse gas than CO2 – that NCAR study is bad news. It’s especially bad for shale gas, in part because hydraulic fracturing is believed to have a higher life-cycle leakage rate during the production and transport phases of development. In a separate NOAA study in February, researchers found that natural gas companies in a Colorado field were losing about 4% of methane during production, and that doesn’t include the losses from leaks in the pipeline and distribution system.

North Sea gas leak: sea 'bubbling' under platform -  A gas leak at Total's Elgin oil and gas platform in the North Sea, which led to the evacuation of all 238 workers, continued on Monday with observers claiming the sea looked as if it was "boiling". Workers on a standby ship at the Elgin field reportedly saw vapour clouds forming and gas bubbling on the surface of the water under the platform, triggering the emergency evacuation on Sunday afternoon.  The Rowan Viking drilling rig was also evacuated and workers taken to other nearby installations before being taken onshore.  A core crew of 19 people initially remained on board the platform but were evacuated in the early hours of Monday morning "as a precautionary measure, due to the ongoing nature of the situation offshore", Total said.  They had arrived back in Aberdeen at 3.28am, leaving the Elgin Processing Utilities and Quarters platform "unmanned and powered down" - a situation that some in the industry claimed was "unprecedented".  By early afternoon Monday Total was still unable to identify the source of the leak at Elgin, which lies 240km off the coast of Aberdeen and the gas leak was still "ongoing". It had earlier described the leak as due to a "well control" problem.

North Sea gas cloud forces evacuations - A cloud of explosive natural gas boiling out of the North Sea off the coast of Scotland has forced the evacuation of a second rig and forced coastguards to set up an exclusion zone to ward off ships and aircraft. French oil firm Total said the leak was the most serious problem it had faced in the North Sea in a decade of drilling, adding that it was taking “all possible measures” to try to identify the source and cause of the leak and to bring it under control. “It’s not going to be solved straightforwardly – it will take at least a few days,” a Total spokesman said, adding that experts were being flown in from around the world to help stop the leak. "One of the possibilities is to drill a relief well, but we hope to find another solution because that would be time-consuming," he said.

Source of North Sea gas leak found, says Total - Oil company Total believes it has found the source of the gas leak from its North Sea platform, as it sent two fire-fighting vessels to the edge of the emergency exclusion zone. The French fuel group said it had traced the leak to a gas pocket in a rock formation 4km (2.5 miles) below the seabed but 1km above the gas reservoir being tapped by the Elgin platform, which was evacuated on Sunday when the leak was discovered. In an attempt to quell fears about the risks of explosion from the gas cloud which has settled above the area, it said there were now fire-fighting ships on standby at the edge of the two nautical mile (2.3 mile) exclusion zone.

BP spill culprit for heavy toll on coral, study finds - After months of laboratory work, scientists say they can definitively finger oil from BP’s blown-out well as the culprit for the slow death of a once brightly colored deep-sea coral community in the Gulf of Mexico that is now brown and dull. In a study published Monday, scientists say meticulous chemical analysis of samples taken in late 2010 proves that oil from BP PLC’s out-of-control Macondo well devastated corals living about 7 miles southwest of the well. The coral community is located over an area roughly the size of half a football field nearly a mile below the Gulf’s surface.

Barack Hussein Obama -- the president who cooked the planet: Lessons from Obama's Keystone Cave-In -  It was a crushing defeat for enviros and clean energy activists, many of whom have waged a long and pitched political battle over the fate of the pipeline (you can read about it here and here). Obama talks a good game about developing "green" energy sources, but here he is, doubling down on oil. Although this speech was clearly political theater, I expected him to appease anti-pipeline activists by using his visit to Cushing – the belly of the fossil-fuel beast – to remind Big Oil that not only has he promised not only to yank away $4 billion in subsidies, but that oil is, as he said the other day, "the fuel of the past."  Ha!  Instead, Obama offered up a speech that would make Sarah Palin proud, reminding us how, over the last three years, "I’ve directed my administration to open up millions of acres for gas and oil exploration across 23 different states.  We’re opening up more than 75 percent of our potential oil resources offshore."  And he crowed: "We are drilling all over the place now."  And as for pipelines, he bragged that "we’ve added enough new oil and gas pipelines to encircle the earth."  Climate blogger Joe Romm rightly called the address "Obama's worst speech ever."

Planned Pipelines to Rival Keystone XL - Two major energy companies are planning to build new pipelines that will move as much as 850,000 barrels of crude oil a day from Canada to refineries along the Gulf Coast by mid-2014, in the latest effort to cope with a surge of oil production in North America. The separate projects, planned by Houston-based Enterprise Products Partners LP and Enbridge Inc. of Calgary, will compete with TransCanada Corp.'s proposed Keystone XL pipeline, a massive project to move crude from the oil sands of Alberta to U.S. refineries. Enbridge and Enterprise already operate the Seaway Pipeline, which used to move oil north—from Freeport, Texas, near Houston, to the massive oil storage hub in Cushing, Okla. Last year the companies said they would reverse the flow of that pipeline because a recent surge in Canadian and U.S. oil production has created an overabundance at that location. The reversal will let Seaway move as much as 150,000 barrels a day south to refiners by June 1 and 400,000 barrels a day by early next year by adding new pumping stations. The companies said Monday they now have enough long-term commitments from new customers to also build a new 30-inch pipeline along the same right-of-way, which will add up to 450,000 barrels per day in capacity by the middle of 2014. Two smaller pipeline projects will connect the Seaway pipeline to Enterprise's storage hub along the Houston Ship Channel and to refineries near Port Arthur, Texas. Enbridge, which is one of the largest shippers of Canadian crude oil to the U.S. with a capacity of 2.5 million barrels a day, is also going to start work on a pipeline to move oil from its existing Flanagan, Ill., pipeline hub to Cushing. The pipeline, which will run alongside an existing conduit, will have an initial capacity of 585,000 barrels per day.

While The U.S. Moves Toward Energy Independence...(NYT graphics) The nation’s reliance on foreign oil has fallen sharply since 2005, when imports made up 60 percent of the liquid fuel used. A surge of new domestic production and a decline in consumption has transformed the United States’ energy outlook.  Oil consumption typically falls when prices rise. But during recent price spikes, growth outside the United States and Europe has been so strong that consumption has continued to rise sharply, supporting high prices even as demand in the West has fallen.

We Don't Consume Resources, We Create Them - Forbes -  One of the points that economists have a really hard time getting over, probably because it is so counter-intuitive, is that we human beings don’t really consume resources, we create them. This has implications for huge swathes of the environmental movement and also for certain parts of the Peak Oil theory. For instance, when the Apache3 Corporation began drilling in the 100,000-acre Deadwood field in the West Texas Permian basin in 2010, there had only been a trickle of production there. The deep shale, limestone and other hard rocks had potential, but for years they had not been considered economically viable. The rocks were so hard, they would have likely sheared off the usual diamond cutters on the blade of any drill bit attempting to cut through. But new adhesives and harder alloys have made diamond cutters and drill bits tougher in recent years. Meanwhile, Apache experimented with powerful underground motors to rotate drilling bits at a faster rate. Now, a well that might have taken 30 days to drill can be drilled in just 10, for a savings of $500,000 a well.

Digging in the couch cushions for loose change: Or, why don't we just create more resources? - I would like to create more oil. Specifically, I'd like to create it up on my field - a gusher of light, sweet crude would be just the thing to fund my farming habit, plus provide some neat little tax benefits. Rural upstate New York has a sad lack of oil fields, and given its recession-prone economy, I think it would be just the place for some oil.  Fortunately, all I have to do, according to Forbes Magazine, is help along the development of new technologies that will extract all the oil that I'd like upstate New York to have. Because, of course as any dimwit knows, we don't consume resources, we create themPlease note that I'm not trying to state, as no economist is, that we do not live on a finite Earth. That there isn't some limit to the number of copper atoms available to us, or that oil or natural gas are out there in truly unlimited quantities. The argument is, rather, that while there are indeed such hard limits to availability they are so far away from our current situation that they're irrelevant (for example, the hard limit for tellurium is 120 million tonnes and we use 125 tonnes a year). Thus an entirely different dynamic comes into play, one in which we humans create resources by developing the technologies that make them available to us.

Oil gains as Bernanke comments hit dollar -(Reuters) - Oil prices edged higher on Monday as bearish comments from Federal Reserve Chairman Ben Bernanke were seen as increasing the probability of further growth-boosting quantitative easing, pushing the dollar lower. The U.S. economy needs to grow more quickly if it is to produce enough jobs to bring down the unemployment rate, Bernanke said, which analysts said had firmed a perception that the Federal Reserve may print more money to support the economy. "It's popped up on expectations of more quantitative easing, which has seen the dollar weakening," said Michael Hewson, analyst at CMC Markets. Brent crude futures were up 58 cents to $125.71 a barrel at 1522 GMT. U.S. crude futures were up 32 cents at $107.19.

US petrol prices close in on $4 a gallon - Petrol prices in the US are fast approaching $4 a gallon and wholesalers fear the possible closure of loss-making oil refineries could lead to supply shortages and even higher prices before the summer driving season. Gasoline futures have gained 26.8 per cent since the beginning of the year, outpacing gains in the Brent crude benchmark by more than 10 percentage points. Prices have returned to levels reached a year ago, when the civil war in Libya prompted western governments to release emergency stocks. The physical market is focused on the storage terminals around New York harbour, the delivery point for benchmark futures on the New York Mercantile Exchange. Though stocks appear adequate for now, traders are braced for the shutdown of half the US Atlantic coast’s refining capacity. In recent weeks the premium required to get gasoline in May instead of June has more than doubled to more than 4 cents a gallon, suggesting that traders are trying to secure supplies. On Monday, Nymex May RBOB gasoline rose 0.8 per cent to $3.4080 a gallon. “The message is, beware, there is a serious potential problem out there. It’s not one that is predictable, but there are a lot of signs of danger right now,”

Obama Is Humbled by the Market - If you claim to be Superman, then when the time comes, you had better be able to leap tall buildings in a single bound.  President Obama habitually made the superhero boast, especially in regard to his energy policies. Consequently, now that pump prices have topped $4 in many parts of the country, he finds himself tangled in his cape, with his approval ratings several points below the crucial 50% deemed necessary for re-election. This is a campaign crisis for the president, which is why he is focusing so much of his time on it, including two solid days last week.Obama's mistake was to advertise himself as a hi-tech guru with the added, superhuman ability to manipulate market forces to create a green-energy utopia where batteries, algae and solar cells would replace climate unfriendly fossil fuels like coal and gasoline. His lengthy litany of powers included the ability to raise the cost of these dirty fuels to reduce their pricing advantage over renewable energy. He harped that this was desirable and necessary. The political imprinting worked better than our president ever imagined. Now that gasoline prices are pinching pocketbooks, the public expects Obama to exercise his superpowers and manipulate prices lower. Protestations by Obama that market forces beyond his control are setting the prices are greeted with disdain rather than sympathy.

Government seeks comment on Atlantic oil exploration plan - The Interior Department said Wednesday it is seeking comment from the public on a plan to allow energy companies to begin seismic testing to find oil and natural reserves in the Atlantic Ocean. Officials have released a programmatic environmental impact statement on seismic testing for public review. The testing would be used to determine how much oil and natural gas is available and where the best places to drill would be, among other things. The studies also help identify archaeological and geologic hazards to avoid. Companies would use the information to determine where to apply for energy leases, although no leases are currently available in the region . Supporters of drilling argued that there needs to be a plan in place soon to sell drilling leases to make the seismic testing valuable. Environmental groups said seismic testing could harm wildlife, even before any drilling begins. "Without an Atlantic coast lease sale in their five-year plan, the administration's wishful thinking on seismic research has no ultimate purpose," the American Petroleum Institute Upstream Director Erik Milito said in a statement.

Oil rigs in U.S. at highest count since 1987 - 1,317. That's how many rigs were drilling for oil in the United States as of March 16, according to Baker Hughes, an oilfield-service firm. The number has reached its highest level since at least 1987, when the company began counting oil and gas rigs separately. This new era of "drill, baby, drill" (spurred by the growth of shale wells) is prompting private-equity firms to increase investments in the $40 billion market for pipelines and processing, which are needed to bring all that fuel to market.

US Rig Count Trends - The above chart shows the total number of oil and gas drilling rigs operating in the United States, by week since 1987 (source: Baker Hughes).  You can see the shale gas boom of the mid 2000s, which has fallen off since with lower natural gas prices.  You can also see the truly massive run-up in the count of oil rigs since 2009.  This drilling boom is what has driven the increase in recent US production, and caused the spread between WTI and Brent oil prices, as the infrastructure has failed to keep up with the increase in production. It's important to note that while the recent increase in all-liquids US production is really quite marked: the increase just in crude oil production is much less so: It's interesting to plot the rig count against the changes in oil production: Here the rigs are the blue curve on the left scale, while the production change (percentage over prior year) is the red curve on the right scale.  During most of the last few decades, production and rig count were both declining (as prices were not high enough to support aggressive exploitation of the remaining high cost reserves).  The rig count began increasing in the mid 2000s and this led to some pretty noticeable production increases starting in about 2008. Now the rig count has gone vertical and one assumes that most of the production increases from that are still to come.  However, the correlation between the rigs and production changes is quite weak so I don't think this leads to a clear quantitative prediction.

Domestic Drilling Advocates Warn Of Increased Global Demand For Oil, Dwindling Supply - All over the world, more people are buying cars and using gas as growth in the global economy increases the demand for fuel. Likewise, oil supplies are projected to get tighter and tighter. "China was at 5 million barrels a day in 2005. Today, they are at 10 (million). By 2015, they are going to be at 15-million-barrels-a-day demand," said John Hofmeister, former president of Shell Oil and founder of Citizens for Affordable Energy. "That's 10 million new barrels over 10 years. India is going from 4 to 7 (million) in the next three to four years." President Obama recognizes the coming explosion in demand. "China and India, they're growing. China added 10 million cars in 2010 -- 10 million cars just in this one country," Obama said last week. "And they're just going to keep on going, which means they're going to use more and more oil." The president, however, argues that more drilling is not the way to protect the U.S. Instead, he wants to wean the U.S. off oil by turning to alternatives, such as electric cars. "If we want to stabilize energy prices for the long term and the medium term, if we want America to grow, we're going to have look past what we've been doing and put ourselves on the path to a real, sustainable energy future," he said. The problem is, most analysts say, the transition to alternatives takes far longer than more drilling would.

Part 3: Inter-Regional Trade Movements of Petroleum in North America  - Figures 1-6 show the data somewhat analogous to the global trends presented in Part 2, while Figures 7-10 show the inter-regional petroleum export trends to and from North America (NA) which is unique to the information provided in BP reviews for the years 2000-2010. As I explained in Parts 1 and 2, the EIA, just provides import and export data for individual countries which I can sum up to correspond to my nine global regions. As such, for regions with multiple countries (i.e., all regions except China and Japan) these sums will include intra-regional and inter-regional import and export data, which I call “gross” imports or exports. In contrast, the data in the BP review allows me to derive inter-regional total petroleum imports and exports for each region. I also derived estimates of inter-regional crude and product imports and exports, by assuming that my correction factors for the totals can be equally and proportionally applied to the subtotals for crude and products.

Soaring Oil price & weakening US economy- On the Edge with Max Keiser-- YouTube: In this edition of the show Max interviews Chris Cook; a former oil market regulator. Chris Cook is an independent energy analyst and a former oil regulator who has the latest on energy markets. He talks about the soaring oil prices and its impacts on the weakening US economy. He argues that the US market is in a free fall and the US has piled debt on debt. He also comments on the role of investment banks like JP Morgan and Goldman Sacks, and the military threats against Iran on the oil price.

Iran Oil Flow Slows, and Price Fears Rise - Iran's oil exports appear to have dropped this month as buyers prepare for tough new sanctions, market observers say, and shipments are likely to shrink further if President Barack Obama determines by Friday, as expected, that markets can adjust to fewer barrels of Iranian oil. By the end of March, with three months until a European Union embargo on Iranian oil takes effect, Iran's exports are expected to fall by about 300,000 barrels a day from last month, to 1.9 million barrels daily, a nearly 14% drop, according to Swiss oil-shipping specialist Petro-Logistics SA. More aggressive measures are in the pipeline, U.S. congressional leaders and the EU say. Sanctions intended to bring Iran's nuclear program to heel could eventually leave half of Iran's oil output cut off from international markets, according to analysts and officials.  But Iran could hold off on any nuclear compromise, betting that sanctions will push oil prices so high that the country's income will hold steady—while fragile Western economies wrestle with higher energy costs. U.S. sanctions that aim to cut off Iran's central bank, the clearing house for all of Iran's oil sales, will take effect at the end of June if Mr. Obama doesn't make an unexpected move at his Friday deadline and choose to block the measures. The EU boycott will take effect at the same time, though European buyers have already started cutting back.

Countries 'Hoarding' Crude Oil, Say Analysts (BBC video) Average fuel prices hit a record high in the UK last week. Across the Atlantic, President Obama is facing mounting criticism over sharp rises in the cost of gasoline.  The main reason for higher prices at the pump is the rising cost of crude oil on the global market.  Analysts say a rise in the number of countries hoarding crude is contributing.  China is thought to be adding up to half a million barrels a day to its stockpiles.  Brian Milligan reports.

Monthly Oil Market Report - Opec - pdf - World oil demand is forecast to grow by 0.9 mb/d in 2012, unchanged from the previous report, following marginally decreased growth of 0.8 mb/d in 2011. The weak pace of growth in the OECD economies is negatively affecting oil demand and imposing a high range of uncertainty on potential consumption growth. Although US economic data points toward a better performance, the situation in Europe along with higher oil prices has resulted in considerable uncertainties on the future oil demand for the remainder of the year.

Did Libya's Oil Bubble Burst Already? - Libyan crude oil production has witnessed a notable uptick since major combat operations ended last year. In mid-2011, at the height of the international conflict, it looked as if the loss of Libyan crude oil could unravel any hopes of a global economic recovery. Crude oil prices have in general increased during the first four months of 2012, though some optimism was expressed because of Libya's return. With Tripoli headed for its first free election in 40 years, however, nothing is certain regarding the former OPEC giant. OPEC said in its monthly report for March that crude oil production was inching closer to pre-war levels of around 1.6 million barrels per day. Italian energy company Eni said that not only was oil production about 20 percent shy of the 1.6 million bpd mark but offshore exploration had resumed for the first time since Moammar Gadhafi's regime collapsed last year.

US, UK and France consider oil release to curb fuel prices - France is in talks with the United States and Britain on a possible release of strategic oil stocks to push fuel prices lower, French ministers said on Wednesday, four weeks before the country's presidential election.  Earlier in March, British sources said London was prepared to cooperate with Washington on a release of strategic oil stocks that was expected within months, in a bid to prevent fuel prices choking economic growth in what is also a US election year.  France's Energy Minister Eric Besson told journalists after the weekly ministers' meeting that the United States had asked France to join it in a possible emergency inventory release.  Such a release could happen "in a matter of weeks", Le Monde daily said on Wednesday, citing presidential sources.  "It is the United States which has asked and France has welcomed favourably this hypothesis," Besson said. He also said that the countries were awaiting conclusions from the International Energy Agency (IEA), which coordinates emergency stock releases in case of severe oil supply disruption.

France discussing strategic oil release with UK, US - (Reuters) - France is in talks with the United States and Britain on a possible release of strategic oil stocks to push fuel prices lower, French ministers said on Wednesday, four weeks before the country's presidential election.  Earlier in March, British sources said London was prepared to cooperate with Washington on a release of strategic oil stocks that was expected within months, in a bid to prevent fuel prices choking economic growth in what is also a U.S. election year.  France's Energy Minister Eric Besson told journalists after the weekly ministers' meeting that the United States had asked France to join it in a possible emergency inventory release. Such a release could happen "in a matter of weeks", Le Monde daily said on Wednesday, citing presidential sources. Crude oil prices, which have risen almost 16 percent since the start of the year, fell more than a dollar on the news.

U.S. Proposed Release of Oil Stocks, France's Besson Says - The U.S. government has proposed releasing fuel from strategic stockpiles to curb rising oil prices, French Industry Minister Eric Besson said.  The French government “welcomed the proposal,” Besson told reporters today in Paris after a weekly cabinet meeting.  France is waiting for a report from the International Energy Agency on inventories before deciding on such a move, Budget Minister Valerie Pecresse said later at a press conference. “France is accompanying the U.S. and U.K. in the IEA consultation, which could allow the release of strategic oil reserves in order to break the rising price spiral,” she said.  Tapping strategic reserves is one option being considered to counter rising oil prices, Besson said last week. The Paris- based IEA coordinated the release of 60 million barrels of crude and oil products in June after Libyan output was disrupted by an armed uprising against Muammar Qaddafi. The agency also made supplies available during the 1991 Persian Gulf War and when Hurricane Katrina damaged oil rigs and refineries in the Gulf of Mexico in 2005.

France poised to release strategic oil reserves, on US request - France’s government says it is considering releasing oil from its strategic reserves as part of a U.S.-led effort to increase supply to bring down high prices. Industry Minister Eric Besson said “the United States asked, and France welcomed this hypothesis.”Government spokeswoman Valerie Pecresse said France is waiting for recommendations from the International Energy Agency before tapping its oil reserves. She said the French government is also pressing oil-producing countries to release more oil on the markets to ease prices. Like in the United States, high gasoline prices have been an issue in the campaign for France’s presidential elections.

A New Industry to be Born from the End of North Sea Oil - Following two production peaks, one in the mid-1980s and the second in 1999 at about 7 million barrels per day, production has declined sharply to about 4 million bpd by 2007 and 3 million bpd today. However, changes to what may appear obscure tax allowances have fired up a renaissance of sorts, particularly in the development of smaller, previously less economically attractive new fields. All of which will ultimately add to the headache that decommissioning will be. According to the Economist, the British sector of the North Sea alone (Britain shares the seabed, and hence oil reserves, with Norway, Denmark and the Netherlands) is home to more than ten million tons of steel and concrete. One day, when as much oil and gas has been extracted as is feasible, the installations there will have to be removed. The Economist says dismantling the 5,000-odd wells and platforms and 10,000 kilometers of pipelines will cost around £31 billion ($49 billion) on current estimates, spurring an alternative industry in its own right. How will this be done?

Talks over oil release push down crude - Efforts by some of the world’s biggest oil buyers to co-ordinate the possible release of emergency reserves and an intervention by Saudi Arabia sent crude prices tumbling on Wednesday, raising the prospect of relief for Europe’s flagging economies and American motorists facing pump prices of almost $4 a gallon. As France’s energy minister, Eric Besson, confirmed his country was in talks with the US, UK and Japan to release billions of barrels of oil on to the market, Saudi Arabia’s influential oil minister said Riyadh would do all it could to bring prices down. Writing in the Financial Times, Ali Naimi said: “The bottom line is that Saudi Arabia would like to see a lower price. It would like to see a fair and reasonable price that will not hurt the global economic recovery.” Soaring energy prices, driven in part by tensions over Iran’s nuclear programme, are threatening a fragile US recovery and the re-election prospects of US President Barack Obama. While the discussions are at a preliminary stage and none of the countries involved has decided yet to go ahead with a release, three officials familiar with the talks said action was likely in the next three months.

US Republicans seek drilling boost if oil reserves tapped - Republicans in the U.S. Congress are proposing measures that would require President Barack Obama to allow more domestic oil production if he decides to tap emergency oil reserves. The proposals are unlikely to become law, but they give Republicans another opportunity to slam Obama's energy policy as consumers fret about high gasoline prices leading up to November's presidential election. The White House said no decisions nor specific proposals had been made. Many Democrats in Congress have said they would support using the SPR to help alleviate surging gasoline prices caused by fears that Western sanctions constricting Iran's oil exports at a time of tight supplies could hurt the economy

Saudi Arabia will act to lower soaring oil prices - Ali Naimi - High international oil prices are bad news. Bad for Europe, bad for the US, bad for emerging economies and bad for the world’s poorest nations. A period of prolonged high prices is bad for all oil producing nations, including Saudi Arabia, and they are bad news for the energy industry more widely.  It is clear that sustained high prices are starting to take their toll on European economic growth targets. They are contributing to trade balance deficits and feeding inflationary pressures. It is an unsatisfactory situation and one Saudi Arabia is keen to help address. In an interconnected world, European economic growth is in our national interest. No one benefits from a stagnating European economy and we want to do what we can to help encourage growth. Needless to say, Saudi Arabia does not control the price; it sells its crude oil according to international prices. But it remains the world’s largest producer, and the country with the greatest proven reserves, so it has a responsibility to do what it can to mitigate prices.  The bottom line is that Saudi Arabia would like to see a lower price. It would like to see a fair and reasonable price that will not hurt the global economic recovery, especially in emerging and developing countries, that will generate a good return for producing nations, and that will attract greater investment in the oil industry.

Saudi to fill in for any Iran disruption: IEA - Saudi Arabia will be able to pump enough oil to compensate for any loss of Iranian output caused by Western sanctions, the head of the International Energy Agency (IEA) said on Friday. "There is no fear of disruption of supplies and you know Saudi Arabia is going to bring more oil to the market," Maria van der Hoeven, the executive director of the agency that advises developed nations, said while attending an Asia Gas Partnership conference in New Delhi. Brent crude prices have risen 15 percent since the beginning of the year to more than $123 a barrel amid concern that much of Iran's 2.5 million barrels a day of exports will be lost to the market because of European and U.S. sanctions, which are aimed at punishing Iran for its nuclear programme. Saudi Arabia, the biggest producer in the Organization of the Petroleum Exporting Countries (OPEC), said on Tuesday it was ready to raise its output to 12.5 million barrels per day from current levels just below almost 10 million. The IEA sees no need to release oil from the strategic reserves as yet, Van den Hoeven said, adding that currently there is "no serious disruption of supplies".

A rational reason for high oil prices - "There is no rational reason for high oil prices," writes Ali Naimi, Saudi Arabian Minister of Petroleum and Mineral Resources, in today's Financial Times. Well, I can think of one-- if oil prices were lower, the world would want to consume more than is currently being produced.The graph below plots total world oil production over the last decade. After growing rapidly in earlier years, production hit a bumpy plateau. In November 2007, just before the U.S. recession began, the world was producing 84.9 million barrels each day, a little less than was produced in the spring of 2005. Although production stagnated, the demand curve continued to shift out, with world GDP growing 5.3% in 2006 and another 5.4% in 2007. Consumption of petroleum by China alone was 800,000 barrels/day higher in 2007 than it had been in 2005, meaning the rest of the world had to decrease consumption over this period.  Growth in oil production resumed after the recession, with world oil production up 2.8% in 2010 over 2009. But world GDP grew 5.1% that year, suggesting demand was once again growing faster than supply.

Consumers plot emergency oil release as Saudi decries high prices (Reuters)- Saudi Arabian Oil Minister Ali al-Naimi mounted his most direct rhetorical attack against high oil prices on Wednesday, but showed no sign of moving to increase supplies even as France joined the United States and Britain in talks for a release of strategic reserves. Two weeks after Reuters initially reported that Britain and the United States were set to agree on tapping emergency stockpiles, French Energy Minister Eric Besson said the European nation was also in talks with Washington. Le Monde reported that the move could come in a matter of weeks. At the same time, the Financial Times published a rare opinion piece by the head of the world's largest crude oil exporter, who said a feared shortage of oil supplies was a "myth" but reiterated that Saudi Arabia was ready, able and willing to meet any gap in supplies. The moves emphasized the growing concern from both sides of the market -- producers and consumers -- about the economic and political impact of the 15 percent jump in oil prices this year. But it also highlighted the different responses they are taking. Any release of strategic reserves is expected to be based on the assumption that oil markets face a shortage of crude, putting Western economies directly in opposition to the opinions offered this month by top exporter Saudi Arabia.

There Will Be Oil—and That’s the Problem - I have the cover story this week in the dead-tree/living table TIME, on the future of oil (available here to subscribers). Gas prices have dominated the political conversation for weeks—at least until the Supreme Court started its health care hearings—and with the summer driving season just around the corner, the national obsession won’t be lift any time soon. Republicans and Democrats, oil executives and environmentalists have seized the opportunity to take potshots at each other, with one side claiming that more drilling will greatly ease the pain at the pump, and the other side arguing that energy efficiency and alternative energy are the only solutions. (I lean toward the latter.) The reason gas prices are so high, of course, is because oil itself is expensive, with Brent crude over $125 barrel. And that’s largely because oil markets are spooked over possible conflict with Iran, which could take one of the world’s major crude suppliers offline—and potentially block the Strait of Hormuz, through which 20% of the world’s oil flows. Still, even fear of war in the Middle East doesn’t really explain why oil has remained so expensive as demand from the world’s biggest consumer—the U.S.—has been falling and the global economy remains sluggish. That fact—along with evidence that production of conventional oil seems to have plateaued a few years ago—has renewed fears that the world is approaching something like peak oil. The worry is that these high prices could just be the beginning, a signal that our thirst for oil is finally exceeding our supply.

Prepare for a New Era of Oil Shocks: Martin Wolf - Oil prices are up. Barack Obama is to blame. Drilling in the U.S. is the solution. This may be good politics. But it is absurd. Oil, unlike natural gas, is a globally traded commodity, whose price is set in world markets. In 2010, the U.S. produced 7.8 million barrels a day. Unlike Saudi Arabia, the U.S. lacks spare capacity: It is a price taker. Responding to his critics, Mr Obama said: “We are drilling more. We are producing more. But the fact is, producing more oil at home isn’t enough to bring gas prices down overnight.” These remarks are correct, except for the last word. Producing more oil would have next to no effect on oil prices. Moreover, if there is a specific cause for the rise in oil prices, it is the tightening of sanctions on Iran, which Republicans support. If, as many desire, military action is taken, the impact on oil prices and the world economy will be far greater. In the longer run, a big reduction in U.S. demand, still 20 percent of the world’s total, might make an appreciable difference to prices. Moreover, the relative wastefulness of U.S. oil use, compared with other high-income countries, would make such a reduction quite easy to achieve. The best way to make this happen would be to raise prices, via higher taxation. But that policy is deemed un-American. It is a policy fit only for European wimps. Yet, despite the absurd politicking, we should be concerned about the economic impact of high oil prices: A rise of $10 in the price of oil shifts $320 million a year from higher-spending consumers to lower-spending producers, within and across countries. The 15 percent rise since December 2011 would shift close to $500 billion. The real price of oil is also very high, by historical standards. Further rises would take the world into uncharted territory.

Modeling Peak Oil and the Geological Constraints on Oil Production - Geological constraints are considered in the context of a Hotelling type extraction-exploration model for an exhaustible resource. It is shown that such constraints, in combination with initially small reserves and strictly convex exploration costs, can coherently explain bellshaped peaks in natural resource extraction, and hence U-shapes in prices. As production increases, marginal profits (marginal revenues less marginal extraction cost) are observed to decline, while as production decreases, marginal profits rise at a positive rate that is not necessarily the rate of discount. A numerical application of the model to the world oil market shows that geological constraints have the potential to substantially increase the future oil price. While some non-OPEC producers are found to increase production in response to higher oil prices induced by the geological constraints, most producers’ production declines, leading to a lower peak level for global oil production.

Oil Production in the 21st Century and Peak Oil - The Deepwater Horizon incident demonstrated that most of the oil left is deep offshore or in other locations difficult to reach. Moreover, to obtain the oil remaining in currently producing reservoirs requires additional equipment and technology that comes at a higher price in both capital and energy. In this regard, the physical limitations on producing ever-increasing quantities of oil are highlighted, as well as the possibility of the peak of production occurring this decade. The economics of oil supply and demand are also briefly discussed, showing why the available supply is basically fixed in the short to medium term. Also, an alarm bell for economic recessions is raised when energy takes a disproportionate amount of total consumer expenditures. In this context, risk mitigation practices in government and business are called for. As for the former, early education of the citizenry about the risk of economic contraction is a prudent policy to minimize potential future social discord. As for the latter, all business operations should be examined with the aim of building in resilience and preparing for a scenario in which capital and energy are much more expensive than in the business-as-usual one.

Why Saudi and American bluffing won't lower oil prices (Hint: It doesn't work when people know you're bluffing) -If you have the power and the desire to bring down oil prices, the best way to proceed is to start bringing them down. The easiest and fastest method would be to make more supplies available to the world market and keep adding until you reach your target price. The less you say about what you are doing, the better. When market participants are filled with uncertainty about your intentions, they have only the direction of prices to guide them. That means the speculative players can help you achieve your goals more quickly as they panic out of their positions. This was not, of course, the path chosen by the United States, Great Britain and Saudi Arabia recently when they announced that they were contemplating intervention in the oil markets--in the form of releases from strategic petroleum reserves in the case of the United States and Britain and in the form of increased production by Saudi Arabia. It seems that while all three countries have the stated wish to bring down oil prices, they appear to lack the power or at least the desire to do so. So, they are left with bluffing. It's true that oil markets move on rumors and sentiment, but not as far nor for as long as people believe. The joint U.S.-Great Britain announcement caused oil prices to fall sharply the same day before recovering nearly the entire loss by the close. The Saudi announcement that it might increase production caused a sharper one-day fall which was largely recouped the following day.

World oil import bill heading for record $2T: IEA - Oil consumer nations are set to pay a record $2 trillion this year for oil imports if crude prices do not fall, the International Energy Agency (IEA) said on Tuesday, undermining economic recovery. Crude hit $128 a barrel this month, only $20 short of its 2008 peak, and is up more than 15 percent since January, largely because of sanctions against oil producer Iran. “For the first time the world will pay $2 trillion of oil import bills,” the IEA’s chief economist Fatih Birol told Reuters. Birol said the bill for importing nations had risen from $1.8 trillion in 2011 and $1.7 trillion in 2008. If crude were to stay at current levels for the rest of the year – about $125 a barrel for Brent and $107 for U.S. crude – oil import bills would cost 3.4 percent of GDP, up from 3.1 percent in 2011, Birol said. He said the European Union was the hardest-hit of industrialised regions on oil import costs because, when converted into euros, the average EU oil price this year was running higher than in 2008. 

Pakistan considering allowing petrol imports from India | Calcutta News.Net: Pakistan is expected to bring out a notification next month allowing import of certain goods, including petrol and food items from India, Energy Secretary Ejaz Chaudhry has said. Pakistan agreed last November to open up more trade with India by replacing a list of items its bigger neighbour can sell across the border with a shorter list of items that cannot be traded - a move regarded as key to improving commercial ties, The Dawn reports.  Pakistan has agreed in principle to grant access to imports from India under the Most Favoured Nation status, but has yet to fully implement the change. "We have granted the Most Favoured Nation status to India. Our cabinet has approved it,"

Thousands riot over fuel prices - Thousands of Indonesians protesting at plans to push up fuel prices by more than 30% have clashed with riot police. Rallies were held under tight security in big cities all over the country as parliament debated the need for a rise. Some MPs said the government had no choice but to cut budget-busting fuel subsidies, which have for years enabled motorists to fill up for roughly £1.20 per gallon. Others argued raising prices could more than double inflation to 7%. With global oil prices surging, most Indonesians realise there is little choice. But that has not stopped thousands in a nation of 240 million, many of whom live in abject poverty, from taking to the streets every day for the last week. If a price increase is approved, it will go into effect on Sunday.

China tightening the screws on Iran - China is starting to pressure Iran by reducing oil purchases from that nation (substituting with Saudi oil). Iran sells 65% of its oil to Asian nations, with China taking a large portion of that. China has two reasons to reduce purchases from Iran. One is the obvious pressure from the West that could give the US a national security based reason to slap penalty tariffs on Chinese-made goods (or at least threaten to do so). The second reason is to force Iran to ultimately sell them crude at below market prices - which may make dealing with the US threats more worthwhile (for more on such strategy see this post).  Other Asian nations have apparently joined in this effort as well: CNN: China, South Korea and Japan dramatically cut their oil imports from Iran in February following intense US efforts to persuade Asian buyers to comply with Washington sanctions on Iran's central bank. The next round of nuclear talks is likely to be held in April (with the so-called 5+1 group the US, Britain, France, Russia, China, and Germany). Iran's authorities are desperate to get this issue resolved while still saving face. Cut off from external capital, oil revenues dwindling, inflation running close to 25%, and food shortages becoming commonplace - all putting pressure on the government to ease the sanctions. The rhetoric out of Tehran will be escalating as the talks draw closer and the internal situation within Iran's borders becomes more dire.

Chinese Firm Surpasses Exxon in Oil Production; Now Largest Publicly-Traded Oil Producer — A big shift is happening in Big Oil: An American giant now ranks behind a Chinese upstart. Exxon Mobil is no longer the world’s biggest publicly traded producer of oil. For the first time, that distinction belongs to a 13-year-old Chinese company called PetroChina. The Beijing company was created by the Chinese government to secure more oil for that nation’s booming economy. PetroChina announced Thursday that it pumped 2.4 million barrels a day last year, surpassing Exxon by 100,000. The company has grown rapidly over the last decade by squeezing more from China’s aging oil fields and outspending Western companies to acquire more petroleum reserves in places like Canada, Iraq and Qatar. It’s motivated by a need to lock up as much oil as possible.The company’s output increased 3.3 percent in 2011 while Exxon’s fell 5 percent. Exxon’s oil production also fell behind Rosneft, the Russian energy company.

China faces crude oil output challenge - The oil market’s view of China is so focused on its rising demand that its domestic production receives much less attention than it deserves. China is the world’s fourth-largest oil producer, pumping more than all the members of the Opec oil cartel barring Saudi Arabia. The International Energy Agency puts Beijing’s output at about 4.1m barrels a day, after steady growth over the past two decades. Yet the upward supply trend has suffered a sudden interruption in recent months, with China witnessing the biggest year-on-year production falls since at least 1995. Chinese oil output peaked at about 4.3m b/d in early 2011 and fell back to almost 3.9m b/d by late last year. Although output flows have recovered somewhat, production remains about 200,000 b/d lower than a year ago, the biggest annual drop in more than 15 years, according to industry estimates. The fall explains in part why China is importing record amounts of crude oil: Beijing needs to fill a bigger gap between surging oil demand and falling domestic oil output. In February China imported a record 5.95m b/d – 18.5 per cent more than a year earlier – according to official data from the country’s General Administration of Customs. Domestic output had fallen 1.2 per cent in the January-February period compared with a year ago.

China’s Struggle to Slow – At the opening of the annual session of China’s parliament, the National People’s Congress (NPC), Premier Wen Jiabao announced that the government’s target for annual economic growth in 2012 was 7.5%. With the global economy still struggling to recover, Wen’s announcement of such a significant dip in China’s growth rate naturally sparked widespread concern around the world. But it is important to note that Wen was expressing a policy rather than forecasting performance. The purpose of targeting a lower growth rate, he explained, is “to guide people in all sectors to focus their work on accelerating the transformation of the pattern of economic development and making economic development more sustainable and efficient.” Fixed-asset investment is the most important engine of China’s growth. As a developing country with annual per capita income of less than $5,000, there is still significant room for China to increase its capital stock. But the growth rate of investment is too high. The issue is not whether China needs more investment, but whether China’s absorption capacity can continue to accommodate the rapid investment growth of the past decade.

Bo Xilai’s China Crime Crackdown Adds to Scandal — As Bo Xilai, the dismissed Chongqing party chief, becomes immersed in an ever-more tangled scandal, disturbing details are emerging about one of his best-known initiatives, a crusade against organized crime on which he built a national reputation.  Since Mr. Bo was fired last month after a scandal involving his police chief, a starkly different picture of his sweeping campaign to break up organized gangs — called da hei, or smash black — is coming into focus. Once hailed as a pioneering effort to wipe out corruption, critics now say it depicts a security apparatus run amok: framing victims, extracting confessions through torture, extorting business empires and visiting retribution on the political rivals of Mr. Bo and his friends while protecting those with better connections.

"China’s Stability Gambit" - Stephen S. Roach - The first principle that I learned when I started focusing on China in the late 1990’s is that nothing is more important to the Chinese than stability – whether economic, social, or political. Given centuries of turmoil in China, today’s leaders will do everything in their power to preserve stability. Whenever I have doubts about a potential Chinese policy shift, I examine the options through the stability lens. It has worked like a charm. Stability was on everyone’s mind at the annual China Development Forum (CDF) held March 17-20 in Beijing.  The formal sessions played out predictably, placing great emphasis on the coming structural transformation of China’s growth model – a colossal shift from the all-powerful export- and investment-led growth of the past 32 years to a more consumer-led dynamic. There is now broad consensus among China’s senior leadership in favor of such a rebalancing. As one participant put it, “The debate has shifted from what to do to how and when to do it.” Many of the other themes flowed from this general conclusion. A shift to services-led growth and an innovations-based development strategy were highlighted. At the same time, there was considerable concern about the recent resurgence of state-owned enterprises, which has tilted the distribution of national income from labor to capital – a major impediment to China’s pro-consumption rebalancing. The World Bank and the China Development Research Center (the CDF’s host) had just released a comprehensive report that addressed many aspects of this critical issue.

China Adjusts - The world is waiting to see whether China has successfully achieved a soft landing, slowing down the economy from its overheated state of a year ago to a more sustainable rate of growth. Some China-watchers fear it could hit the ground in a crash landing as have other Asian dragons before it. But others, particularly American politicians in this presidential election year, talk only about one thing: the trade balance.    Here the important message is that long-term forces of adjustment are at work in the Chinese economy.  Foreign perceptions need to be adjusted as well. It is true that not long ago the yuan was substantially undervalued and China’s trade surpluses were very large. But the situation is changing.  China’s trade surplus peaked at $300 billion in 2008, and has been declining ever since. In fact it even reported a trade deficit in the month of February ($31 billion, its largest deficit since 1998). It is not hard to see what is going on. Ever since the Middle Kingdom rejoined the world economy three decades ago, its trading partners have been snapping up exports of manufacturing goods, because low Chinese wages made them super-competitive on world markets.  It was known as the unbeatable “China price.”  But in recent years, following the laws of economics, relative prices have adjusted to the demand.

The Great Wall and Chinese Reforms - In the early phases of growth the relationship between institutions and income per capita is very weak (no need for radical reform) while it becomes very strong for higher levels of development. We just updated our original chart with more recent data (2010) and the result is shown below (institutional quality is measured as the average of the six governance indicators produced by the World Bank; GDP per capita is adjusted for PPP).The conclusions of our previous work remain. The chart suggests that there are two phases of growth. A first one where institutional reform is less relevant. When we look at the chart we see almost no correlation between quality of institutions and income per capita for low levels of development. To be clear, not everyone is growing in that section of the chart so it must be that there is something happening in those countries that are growing (moving to the right). Success in this region is the result of good "policies" in contrast with the deep changes in institutions that are required later (you can also call them economic reforms as opposed to institutional reforms). The second phase of growth takes countries beyond the level of $10,000-$12,000 of income per capita. It is in this second phase when the correlation between institutions and income per capita becomes strong and positive. No rich country has weak institutions so reform becomes a requirement to continue growing.

China Juggles Cyclical and Structural Challenges - China is finding out change is hard to do. Policymakers are slowing down economic activity to stop inflation from running wild. Overall, the efforts look successful. But maneuvering the world’s second largest economy presents challenges.Worries that slowdown efforts went overboard were heightened last week when an early reading of a purchasing managers’ index showed activity contracting in March. Carl Weinberg, chief economist at High Frequency Economics, was one China expert who was skeptical about the drop.  He points out PMIs are diffusion indexes which measure the difference between existing companies reporting better conditions versus those reporting problems. In China’s case, output increases because new facilities come on line while existing factories are running at pretty much full tilt. Weinberg writes, “In China, output increases by 15% per year because the number of factories increases by 15% per year.”

Apple supplier Foxconn cuts working hours, workers ask why (Reuters) - When Chinese worker Wu Jun heard that her employer, the giant electronics assembly company Foxconn, had given employees landmark concessions her reaction was worry, not elation. Wu, 23, is one of tens of thousands of migrants from the poor countryside who staff the production lines of Foxconn's plant in Longhua, in southern China, which spits out made-to-order products for Apple Inc and other multinationals.  For some Chinese factory workers - who make much of their income from long hours of overtime - the idea of less work for the same pay could take getting used to. "We are worried we will have less money to spend. Of course, if we work less overtime, it would mean less money," said Wu, a 23-year-old employee from Hunan province in south China. Foxconn said it will reduce working hours to 49 per week, including overtime. "We are here to work and not to play, so our income is very important," said Chen Yamei, 25, a Foxconn worker from Hunan who said she had worked at the factory for four years.

United States Promotes Market-Determined Exchange Rates at World Trade Organization Forum - Deputy U.S. Trade Representative Michael Punke and Treasury Deputy Assistant Secretary for International Monetary and Financial Policy Mark Sobel today began a two-day series of meetings at the World Trade Organization’s (WTO) seminar on the relationship between exchange rates and trade, where they will advocate for market-determined exchange rates as a foundation of an open global trading system. U.S. participation in the WTO seminar is premised on the importance of trade liberalization and recognition that persistently misaligned exchange rates and competitive devaluations undercut an open trading system. Ambassador Punke stated: "Real exchange rates that are aligned with fundamentals are a necessary foundation for the global trading system."

China: America's Third Largest and Fastest Growing (By Far) Export Market, 2000-2011 - Some highlights from the U.S.-China Business Council's recently released report "U.S. Exports to China: 2000-2011":
1. China is now the third-largest U.S. export market, and U.S. exports to China continue to expand rapidly. As a buyer of U.S. goods, China ranks behind only Canada and Mexico—two immediate neighbors with whom the United States has a regional free-trade agreement (see top chart above).
2. Between 2000 and 2011, total U.S. exports to China rose 542 percent, from $16.2 billion to $103.9 billion. Total U.S. exports to the rest of the world increased only 80 percent during this period (see bottom chart above).
3. Top exports to China in 2011 included agricultural products ($14.7 billion), computers and electronics ($13.7 billion), chemicals ($13.6 billion), and transportation equipment, primarily aerospace and autos ($13.2 billion).

China as the world's (unreliable) importer - Here’s another facet of a Chinese slowdown: its role as an importer. The longstanding notion of China as the world’s exporter is beginning to look a bit dated, argues Tao Wang, UBS’ China economist. Recent data shows imports have risen while exports have fallen, and Tao says China’s import power should not be underestimated: For one thing, China’s imports have far outpaced exports in the past 4 years, and trade surplus has shrunk from 9% of GDP in 2007 to 3.3% in 2011. Also, as the numerous stories in financial newspapers can testify, China has become an increasingly important market for investment goods and certain high end consumer goods. In fact, it’s increasingly important not just in total exports, but for GDP growth. Tao and team estimate China’s contribution to growth of some countries in 2011 as follows:

Michael Pettis Challenges The Economist to a Bet on China - The Economist says "China’s GDP, measured in nominal dollars, will be the world’s largest by 2018". Michael Pettis at China Financial Markets disagrees and says I would like to make a bet with The Economist.

You're on -  Michael Pettis has challenged us to a bet.  For those of you who don’t know him, Mr Pettis is a finance professor at Peking University’s Guanghua School of Management and a frequent blogger. He would like to bet that China’s dollar GDP (calculated at market exchange rates) will NOT surpass America’s in 2018. That is the year that China's economy will overtake America's if you stick with the default assumptions in our most recent* interactive chart, which allows you to plug in your own guesstimates** of future growth and inflation in the two countries, as well as the exchange rate between them.*** When he is not fretting about China’s economy, Mr Pettis runs his own record label in Beijing (Maybe Mars). If we lose the bet, he’d like us to invite one of his indie-rock bands to perform at an Economist conference. If we win, he has to give us a record deal (not really).

Emerging Asia: Two Paths through the Storm - SF Fed Economic Letter - The overall effect of the global financial crisis on emerging Asia was limited and short-lived. However, the crisis affected some countries in the region more than others. Two main crisis transmission channels, exposure to U.S. financial markets and reliance on manufacturing exports, determined how severely countries in the region were affected. Countries that were relatively less connected to global financial markets and relied less on trade fared better and recovered more quickly than countries that were more dependent on global financial and trade markets.

World Bank Nominee Kim Under Fire for “Dying for Growth” Book - - Yves Smith - The US nominee to lead the World Bank, Jim Yong Kim, has come under attack for editing a book called “Dying for Growth.” It apparently performs the cardinal sins of questioning whether a relentless pursuit of growth produces necessarily produces good outcomes and taking issue with neoliberalism. From the Financial Times:Some economists are arguing that Dying for Growth, jointly edited by Dr Kim and published in 2000, puts too great a focus on health policy over broader economic growth. “Dr Kim would be the first World Bank president ever who seems to be anti-growth,” said William Easterly, professor of economics at New York University. “Even the severest of World Bank critics like me think that economic growth is what we want.” Dr Kim, who is president of Dartmouth College and a former head of the HIV/Aids programme at the World Health Organisation, was a surprise pick for the top job at the World Bank, which traditionally goes to a US citizen. Little is known about his views on economic policy because his background is in health. But if he cannot set out a strong vision for how the World Bank will fuel growth, it may boost the campaigns of heavyweight rivals such as Ngozi Okonjo-Iweala, the Nigerian finance minister and former World Bank managing director. Dr Kim’s book contains several inflammatory lines. For example, the introduction, which he and two other academics co-authored, says: “The studies in this book present evidence that the quest for growth in GDP and corporate profits has in fact worsened the lives of millions of women and men."

The Critiques Against Jim Young Kim, Both Good and Bad - The backlash against Jim Yong Kim, President Obama’s choice for the World Bank, has begun. A couple pieces in the Financial Times make the case.  One, from Ed Luce, at least has some merit. Luce argues that the selection was a break from the past, but not enough of a break, because truly, the US shouldn’t have a monopoly on the position: I don’t disagree with this. Clearly there’s a balancing that needs to happen in international economics and finance. The monopolies over the World Bank and the IMF make no sense anymore in a changing world. Obama probably ran up against the edge of what he felt he could do politically, but that doesn’t complete the transition to an international system that respects emerging markets and their role. I understand the President’s reticence – it’s a familiar pattern – but Luce cannot really be explained away

Breakthrough Leadership for the World Bank - Jeffrey D. Sachs - Last month, I called for the World Bank to be led by a global development leader rather than a banker or political insider. “The Bank needs an accomplished professional who is ready to tackle the great challenges of sustainable development from day one,” I wrote. Now that US President Barack Obama has nominated Jim Kim for the post, the world will get just that: a superb development leader. Obama has shown real leadership with this appointment. He has put development at the forefront, saying explicitly, “It’s time for a development professional to lead the world's largest development agency.” Kim’s appointment is a breakthrough for the World Bank, which I hope will extend to other global institutions as well. Until now, the United States had been given a kind of carte blanche to nominate anyone it wanted to the World Bank presidency. That is how the Bank ended up with several inappropriate leaders, including several bankers and political insiders who lacked the knowledge and interest to lead the fight against poverty.

Has Africa really turned the corner? - The paper shows that between 1975 and 2005 the size, diversity and sophistication of industry in Africa have all declined. That is from a recent study by John Page, gated version here.  The growth has come largely through commodities.

Vital Signs: Cheaper Coffee - The price of coffee continues to tumble. Arabica coffee futures have fallen more than 40% since early May, largely on expectations of an upcoming bumper harvest from Brazil, a big grower. Although coffee rose 1% Friday to settle at $1.7875, it hit its lowest price in 18 months earlier last week. In May, coffee hit a recent peak of $3.049 a pound.

BRICS agree to local currency credits to ease dollar dependency - The BRICS - Brazil, Russia, India, China and South Africa - have agreed to provide credit to each other in local currencies. Officials say the deal will facilitate economic growth in times of crisis. ­The currency swap deal is aimed at promoting trade and investment in local currencies as well as to cut transaction costs. It’s also seen as a step to replace the dollar as a reserve currency in trade between BRICS. “The idea is in line with many interests and economic exigencies in the world economy,” Yaroslav Lissovolik, the chief economist at Deutsche Bank told RT. “The euro and dollar are no longer seen as unquestionable monopolies in the role of reserve currencies. Clearly the world needs more reserve currencies.” The deal would also increase the BRICS influence on the international arena and will make their cooperation less sensitive to sanctions from the West, experts say. "The BRICS countries are in the first rank to do the job that international financial system now needs. What the BRICS said was a very welcomed wake up call," John Kirton, the Co-Director of the BRICS Reasearch Group told RT.

Brics seek greater power in IMF in return for extra funds - LEADERS OF the world’s most powerful emerging economies have threatened to withhold additional financing requested by the International Monetary Fund to fight the European sovereign debt crisis unless they gain greater voting power at the fund. Meeting in India yesterday, the heads of state from Brazil, Russia, India, China and South Africa expressed their frustration at the slow pace of reform at the Washington-based multilateral lender, historically dominated by Europe and the US. In a joint statement, the so- called Brics nations said that there was an urgent need to “better reflect economic weights” and to “enhance the voice and representation of emerging market and developing countries” at the IMF. “We stress that the ongoing effort to increase the lending capacity of the IMF will only be successful if there is confidence that the entire membership of the institution is truly committed to implement the 2010 reform faithfully,” they said. The IMF’s shareholders agreed in 2010 to shift more of the fund’s voting weight towards emerging market nations, but the US has not passed enabling legislation. The Brics leaders also criticised western countries for their poor handling of the global economy since the financial crisis.

UH-OH: Japan’s Industrial Production Unexpectedly Falls, Raising Doubts About Economic Recovery — Japan's factory production fell in February in its first decline in three months, the government said Friday, as demand for exports weakened, despite signs of modest improvements in employment and consumer confidence. The 1.2 percent decline in industrial output in the world's third-largest economy was worse than expected and reflected lagging output in the transport equipment, electronics components and machinery industries. Output of cell phones, large passenger cars and liquid crystal devices also weakened, the government said. The devastating tsunami in March of last year — and a shift of manufacturing overseas to cut costs and reduce damage caused by the strong yen — plunged Japan's trade account into the red in 2011 for the first time since 1980. Slowing growth in powerhouse China, the debt crisis in Europe and continued frailty in the U.S. economy have bit into demand for exports, which remain the strongest driver of growth for Japan. Japan's economy shrank at an annual pace of 2.3 percent in the fourth quarter, also hit by slowing public investment due to political bickering that delayed parliamentary approval for a 12 trillion yen ($156 billion) extra budget for tsunami reconstruction. The economy contracted last year by 0.9 percent from 2010, when GDP grew a robust 4.4 percent. In 2009, the economy shrank 5.5 percent.

The Yen's Looming Day of Reckoning - Japan is on an unsustainable path of a strong yen and deflation. The unprofitability of Japan's major exporters and emerging trade deficits suggest that the end of this path is in sight. The transition from a strong to weak yen will likely be abrupt, involving a sudden and big devaluation of 30 to 40 percent. It will be a big shock to Japan's neighbors and its distant competitors like Germany. The yen's devaluation in 1996 was a main factor in triggering the Asian Financial Crisis. The justification for the low JGB yield is deflation. The real interest rate (the nominal rate plus deflation) is comparable to that in other countries. This rationale requires deflation to persist. But, deflation shrinks the nominal GDP or tax base. How could the government pay back its escalating debt by taxing a shrinking economy? It can only sustain its debt by borrowing more. This fits the definition of a particular type of Ponzi scheme.

Japan PM says he staking all on doubling sales tax —Japanese Prime Minister Yoshihiko Noda said he is staking his political career on doubling Japan's sales tax to avoid a European-style debt crisis after his Cabinet on Friday endorsed the unpopular reform. The Cabinet gave its approval to a bill that would raise the 5 percent sales tax in two stages -- to 8 percent in 2014 and to 10 percent by 2015. The bill's fate is still uncertain because it has to be debated and voted on in parliament to be enacted into law. Noda said raising the sales tax is necessary to help ease revenue shortfalls caused by the country's aging population and shrinking work force. Japan is the world's fastest aging country. With Japan's national debt already twice the size of its economy, Noda and his allies have warned that urgent steps are needed to prevent a crisis similar to the one gripping Europe.

This Is The World's Balance Sheet -It is rather surprising that in a world in which anything and everything is only about money, it is next to impossible to find a consolidated balance sheet of the world's insolvent economies (i.e., the developed countries: US, Japan and the Euro Area). So for all those seeking a visual presentation of all the liabilities that have to be inflated away by the central banks (because that's what this is all about), rejoice: the broke world is presented below in its glory. The irony is that the problem would be quite fixable if it weren't for one minor issue: the bulk of the world's assets also happen to be its liabilities! At the end of the day, this may prove to be the fatal flaw in the chairman's attempt to dilute the global liabilities, he will be doing the same with the assets.  We will follow up with an analysis of what this actually means shortly (those who have been reading in the past year can come to their own conclusions), but more importantly we well next show how the global "household" sector is invested across these three distinct economies by assorted asset class. Prepare to be rather surprised as various conventionally accepted notions are thoroughly debunked...

Illusion of Cheap Money; Major Promises in Europe But No Real Reform; Does the Bond Market Have it Wrong? 30 years of Japanisation? - Steen Jakobsen, chief economist at Saxo Bank in Denmark discusses the illusion of cheap money, bond market yields, and the lack of European reform in his latest email. In Spain, things are going from bad to worse. Last weekend's local election in Andalucia, where Spain’s centre right People’s Party failed to secure an outright majority, left Prime Minister Rajoy without a mandate to carry on with tough austerity. It was a bad start to week where we on Thursday will see a major general strike aimed at… Yes, you guessed it: Austerity measures. The European story remains one of major promises and no actual reforms. A low interest rate and an extreme sense of “security” created by the illusion of easy money and low interest rates won't last forever. As I wrote in Interest rates: the market has it all wrong, we could be on route to an exit strategy from central banks which at a bare minimum will be a goodbye to “unconventional measures” and if so, the low in interest rate cycle is in place. The only way central banks can create a proper exit from unconventional is to hand over the torch to reforms from governments and politicians. Unlikely, yes, needed? Absolutely, otherwise we are doomed to 30 years of Japanisation.

In Europe, Where Art Is Life, Ax Falls on Public Financing - European governments are cutting their support for culture, and American arts lovers are starting to feel the results.  Europe’s economic problems, and the austerity programs meant to address them, are forcing arts institutions there to curtail programs, tours and grants. As a result, some ensembles are scaling down their productions and trying to raise money from private donors, some in the United States, potentially putting them in competition with American arts organizations.  For Americans used to seeing the best and most adventuresome European culture on tour in this country, the belt-tightening is beginning to affect both the quantity and quality of arts exchanges. At least three European troupes that were expected to perform in January at the Under the Radar theater festival in New York, for example, had to withdraw as they could not afford the travel costs, and the organizers could not either.

‘Greed is the Beginning of Everything’ - In a SPIEGEL interview, Czech economist Tomas Sedlacek discusses morality in the current crisis and why he believes an economic policy that only pursues growth will always lead to debt. Those who don't know how to handle it, he argues, end up in a medieval debtor's prison, as the Greeks are experiencing today. 

Housing Bubbles, House Prices, and Interest Rates - 03/28/2012 - Yves Smith - It might surprise readers to learn that economists are still debating whether low interest rates in countries like Ireland and Spain were responsible for their housing bubbles. A new paper by Christian Hott and Terhi Jokipii at VoxEU looked at housing prices in 14 OECD countries from 1985 onward to assess the impact of protracted periods of low short term interest rates. Their conclusion was that they explained up to 50% of housing overvaluation in bubble-afflicted markets.  The interesting part of the paper is that they created a model for fundamental housing market values: We instead obtain the fundamental value by calibrating a theoretical house price model for each of the 14 OECD countries in our sample. This house price model implies that the fundamental value is given as the sum of future expected imputed rents. Imputed rents, in turn, are assumed to depend positively on GDP (as a measure of demand) and negatively on construction activities (as a measure of supply). And they compared the model price with actual prices:Now of course, one should take model-derived prices with some salt. Nevertheless, look at how, despite their sharp falls, prices in Ireland, the UK, and especially Spain, are well above their “fundamental” price. And I wouldn’t take undue cheer from the fact that US prices are close to fair value. The article mentions that in zombified Japan, real estate prices have remained below their fundamental level since the mid 1990s.

Monti Signals Spanish Euro Risk as EU to Bolster Firewall - Italy’s Prime Minister Mario Monti warned that Spain could reignite the European debt crisis as euro-area ministers this week prepare a deal to strengthen the region’s financial firewall.  Monti pointed to Spain’s struggle to control its finances ahead of a finance ministers meeting in Copenhagen starting on March 30, where officials will seek agreement to raise a 500 billion-euro ($664 billion) ceiling on bailout funding.“It doesn’t take much to recreate risks of contagion,” Monti said during the weekend at a conference in Cernobbio, Italy. Days after his Cabinet approved a bill to overhaul Italy’s labor laws, Monti praised Spain’s efforts to loosen work regulations while advising it to focus on cutting the national budget. Spain “hasn’t paid enough attention to its public accounts,” he said.

Merkel set to allow firewall to rise - Germany is poised to bow to international pressure and allow a temporary increase in the eurozone’s financial “firewall” this week, to prevent the crisis in the region’s periphery spreading to other member states. Officials in Berlin signalled on Sunday that the government would allow funds to be boosted as a way of calming financial market pressures.  Angela Merkel, Germany’s chancellor, had resisted any increase, despite pressure from most of her eurozone partners and the US administration, because she risks a political backlash from sceptical allies in her ruling coalition if it means any increase in Germany’s overall financial guarantees for its partners. But the thinking in Berlin is that she cannot resist the international pressure indefinitely. Olli Rehn, EU commissioner for monetary affairs, expected eurozone finance ministers to reach a decision at a meeting in Copenhagen this Friday.  “The key thing now is to conclude the comprehensive crisis response,” Mr Rehn said after two days of informal meetings with other European leaders in Saariskelä, a Finnish hamlet above the Arctic Circle. Senior European officials said a consensus appeared to be building behind Mr Rehn’s “mid-range” option, which would allow the €440bn European Financial Stability Facility, the current temporary rescue fund, to keep running when a new permanent €500bn fund, called the European Stability Mechanism, starts up in the middle of this year.

Euro-zone PMI shows faster contraction in March - -- A contraction in private-sector activity across the 17-nation euro zone accelerated in March, underlining fears the region has fallen back into recession, according to a preliminary composite purchasing managers index, or PMI, for the region compiled by Markit. The composite PMI fell to a three-month low of 48.7 from 49.3 in February. The services index edged down to 48.7 from 48.78 in February, while manufacturing PMI fell to 47.7 from 49.0. A reading of less than 50 indicates a contraction in activity. Economists surveyed by Dow Jones Newswires had forecast a composite PMI reading of 49.6. "The euro-zone economy contracted at a faster rate in March, suggesting that the region has fallen back into recession, with output now having fallen in both the final quarter of last year and the first quarter of 2012," said Chris Williamson, chief econonomist at Markit. A recession is widely defined as two consecutive quarters of shrinking gross domestic product.

Nervous banks hold back Europe's revival strategy - Among the piles of papers on one European diplomat's desk in Brussels is a memo with the words "growth" and "jobs" scrawled in blue ink, followed by a large question mark. "I think we're missing something," "There's a lot of talk about growth strategies, but what about the banks? They are still not lending." When EU finance ministers meet in Copenhagen on Friday, banks - and their reluctance to lend - will be high on the agenda as Europe looks to its economies at a time of austerity. Blamed four years ago for triggering the global financial crunch and Europe's ensuing debt crisis, banks are now being criticised for being too cautious. "Most small businesses feel almost hatred towards their banks," "The level of loan approvals is somewhere in the region of 50 percent. The smaller the business, the less chance you have of getting money." Europe's smaller firms are critical to the health of its economy, generating some 80 percent of all jobs in the 17-nation euro zone. A record 17 million people are unemployed in the single currency area - more than one tenth of the workforce - and the bloc is sliding into its second recession in just three years, likely pushing the jobless rate yet higher.

The new Greek yield curve - The Greek PSI (new) bonds are now actively quoted. Prices vary with maturities - roughly between €17 and €25 (17 to 25 cents on the euro). Here are the latest mid quotes by maturity.  Using Bloomberg these can be converted to yield, producing the following yield curve. This is a unique sovereign curve even for a distressed name because it starts in 2024, with nothing actively quoted prior to that. It is naturally an inverted curve that is pricing in a significant probability of a second default. Depending on the recovery assumptions, the probability of default priced into these bonds in the next 10 years is near certain (the higher the recovery assumption, the higher the implied default probability). Being subordinated to the EU/IMF rescue loans, these bonds don't stand to recover much the next time around.

Greek yields up as CDS trading put on hold - Yields on new Greek bonds have jumped sharply in the past week amid worries over a shutdown of the market in insurance-like products used to hedge the risk of holding Athens’ debt. Banks have stopped offering prices on Greek sovereign credit default swaps because a payout on new instruments could be forced immediately due to technical problems with the documentation used to settle contracts. Yields, which have an inverse relationship with prices, have leapt more than 3 percentage points to 16.93 per cent on the new 2042 Greek bond – which is issued under a debt exchange with private sector bondholders and used to set the final payout on CDS contracts – since March 12, its first day of trading. The market’s concern centres on a so-called 60-day look-back clause in standard CDS contracts, which could be used to activate a payout on new contracts in the wake of a “credit event” that was declared on March 9, when Greece secured private sector participation for its debt restructuring. Bankers fear the rising yields on Greek debt, and uncertainty surrounding the CDS trigger process, could hit sentiment in other eurozone bond markets, where borrowing costs for indebted governments have fallen from recent peaks.

Crisis: Greece, welfare bodies close to bankruptcy - The financial situation in which Greece's national insurance bodies find themselves is, to say the least, very serious. The organisations are the victims not only of the serious economic crisis in which Greece finds itself but also of the two-party system that has ruled the country for years and that has been unable or, perhaps through nepotism, has been unwilling to tackle the problem of these bodies and to reduce their deficit to the levels of other European countries. The first opportunity to do so came during the years of the Socialist government led by Costat Simitis, when the then Employment Minister and current Interior Minister, Tassos Gianitsis, attempted a reform of the national insurance system, which was blocked in its embryonic stage by the party and union mechanisms of Pasok, the party led by Simitis. The same befell the centre-right government of Costas Karamanlis, which, in order to tackle the problem, was able only to increase tax contributions for national insurance companies, taking contributions up from around 5 billion euros during the final year of the Simitis government to almost 15 billion in 2009, the last year of the New Democracy government.

Why Portugal May Be the Next Greece - When Greece celebrated its Independence Day on Sunday, there were scattered protests over the harsh austerity program aimed at stabilizing the country’s finances. The government reportedly removed low-hanging fruit from bitter-orange trees along the parade route, so it couldn’t be thrown by protesters. But, basically, the most recent bailout appears to be successful. As a result, worries about the European financial crisis have diminished somewhat. Indeed, European Central Bank president Mario Draghi has said that the worst is over for the euro currency zone. Such optimism may be premature, however. Not only does Greece remain a long-term financial concern, but in addition Portugal is on track to become a second big problem. The dangers Greece still poses are clear. Higher taxes and government spending cuts may reduce new borrowing, but such austerity policies also undermine a country’s ability to pay the interest on its existing debt. Unless accompanied by pro-growth policies, austerity can become the financial equivalent of a medieval doctor trying to cure patients by bleeding them. In addition, the bailout plan for Greece consisted of marking down the value of much of the country’s debt held by banks and other private lenders. That means entities such as the European Central Bank now hold most of Greece’s remaining debt. And so, in the event of a default, important international institutions would suffer the greatest damage.

Fitch: Portuguese Banks Still On "Shaky Ground" - Fitch ratings said today that Portuguese banks are still on "shaky ground," with liquidity pressures that make them highly dependent on funding from the European Central Bank. Their financial performance will depend on how deep the Portuguese recession is and on broader developments in the Eurozone sovereign debt crisis, Fitch said. Portugal's banks are on "negative outlook," in line with Portugal's sovereign rating, and would be downgraded if the government in Lisbon suffers a further downgrade, the agency said. The full text of Fitch's press release follows:

Full text: Moody’s takes actions on seven Portuguese banks; Outlook negative

Portugal's woes drive personal bankruptcies - Personal bankruptcies last year outnumbered company bankruptcies, accounting for 55 percent of all insolvencies in Portugal. It's the first time that has happened and is part of a gloomy catalog of record-breaking statistics. Portugal's vulnerable, debt-riddled economy was crushed last year by Europe's sovereign debt crisis. Portugal had to follow Greece and Ireland and take a (EURO)78 billion ($103 billion) bailout to dodge national bankruptcy. Lenders demanded debt-reducing austerity measures that have helped pitch the country into a steep decline. It is in its second straight year of worsening recession, and unemployment has climbed to a record 14.8 percent. Portugal's continuing troubles could yet provide the spark for another European financial emergency.

Spain Follows Greece - Back in November last year I posted on my confusion over the jubilation shown by the citizens of Spain as they elected Mariano Rajoy as their new political leader. It became obvious soon after the election that the intention was simply to continue with even more austerity. Since that post I have continually warned that although Spain is obviously a different country to Greece in regards to how its problems have manifested, it still faces significant macroeconomic challenges that were not being correctly reflected in the bond market. …. Spain which I consider to be the major unrecognised problem. The country has seen its yields tumble since December on the back of the ECB’s 3-year LTRO but there hasn’t been anything in the economic metrics of the country to support such action. Spain has 23% unemployment and still rising, the banking system is under-capitalised and still has unknown exposure to the country’s housing market collapse. On top of that the rising unemployment rates is pushing up bad loans in the banking system to 7.4%, a 17-year high, and is still rising. As I mentioned this week, since I made those comments bad loans have risen further , house prices have continued to fall and the government’s debt position has worsened. So it should come as little surprise to MacroBusiness readers that overnight the bank of Spain announced that the country has now fallen back into recession:

More pain in Spain, but it's no Greece - video - A NEW 'jobs' act in America, Europeans agree to bolster their fire wall and the race is on to succeed Robert Zoellick as World Bank president

Spain Jan-Feb Budget Deficit At 1.9% Of GDP - Spain's central government said its budget deficit stood in the first two months of the year at EUR20.7 billion, or 1.9% of the country's gross domestic product, a sign that the euro-zone's fourth-largest economy is still struggling to close a sizeable fiscal gap. The deficit includes early transfers to regional governments and other expenses that will be lower, on a monthly basis, for the remainder of the year, the ministry said in a press release. "These numbers shouldn't be taken as a definitive indication of how public accounts will evolve throughout the year," the ministry added. The data doesn't include budget numbers from local or regional governments, which accounted for much of Spain's large budget overrun last year. In 2011, Spain's overall budget deficit stood at 8.5% of GDP, well above the 6%-of-GDP target. This year, Spain's budget deficit target is 5.3% of GDP, a level that many economists consider almost impossible to achieve without triggering a major recession.

Spanish Economy Enters Second Recession, Bank of Spain Says - Spain’s economy is suffering its second recession since 2009, the Bank of Spain said, a development that obstructs the government’s efforts to reorder public finances as it prepares the budget for this year. “The most recent information for the start of 2012 confirms the prolongation of the contraction in output,” the Madrid-based central bank said in its monthly bulletin today. Spain’s gross domestic product declined 0.3 percent in the fourth quarter of last year, less than two years after emerging from the last recession. Prime Minister Mariano Rajoy will present his 2012 budget on March 30, amid growing pressure from investors and European peers to rein in the deficit, which was 8.5 percent of GDP last year. The spending plan, his first since coming to power in December, won’t increase tax on consumption nor cut civil servants’ salaries, Rajoy said today in Seoul. The previous administration slashed wages of public workers by an average 5 percent in 2010.

Spain risks years without economic growth (Reuters) - Belt tightening in the board room and the living room, deep public budget cuts and anaemic bank lending may be setting Spain up for years of economic stagnation that could eventually force it to seek a bailout. Under pressure to chop Spain's deficit to the European Union limit and stick to new fiscal rules, Prime Minister Mariano Rajoy has promised to present a budget on Friday that will be "very, very austere". With the economy on the verge of its second recession in three years, soaring unemployment and rising borrowing costs, some economists are predicting a lost decade of growth such as the one experienced by Japan in the 1990s from which it has never fully recovered. Others, including Italian Prime Minister Mario Monti, say Spain could drag the euro zone back into a deep crisis. " We've signed a suicide pact in Europe by agreeing that we all need to make cuts,"

Spain to lift power prices 5% to 7% in April: aide - Spain's government plans to increase power prices by between 5% and 7% at the beginning of April, Industry Minister Jose Manuel Soria said Tuesday in an interview with broadcaster Antena 3. The rise of what is known as "last recourse" prices--a price ceiling for mostly domestic consumers of electricity--would affect about 20 million households and small companies and will be approved at the government's cabinet meeting Friday, Soria said. The increase, Soria said, must be implemented to comply with a Supreme Court ruling forcing the government to raise prices when the annual tariff deficit surpasses EUR1.5 billion. The country's power utilities and the government itself will also shoulder part of the cost of the deficit overrun, he said

A national sex strike! Spain’s ‘high-class hookers refuse to sleep with bankers until they open up credit lines to cash-strapped families’- Spain's high-class escorts are refusing to have sex with the nation's bankers - until they open up credit lines to cash-strapped families and firms. Madrid's top-end prostitutes say their indefinite strike will continue until bank employees 'fulfil their responsibility to society' and start offering bigger loans for struggling Spaniards, it has been claimed. Sneaky bankers were trying to circumvent the protest by claiming to be architects or engineers, the sex-workers said.

Greece’s Fringe Parties Surge Amid Bailout Ire - Weeks after agreeing to an agonizing bailout deal with Europe, Greece is splintering politically ahead of national elections, raising the risk that it won't be able to make the economic sacrifices still needed to keep it in the euro.  The election, not yet scheduled but expected in April or May, is shaping up as a public revolt against Greece's political establishment, which has backed the austerity policies that are the price of financial life support from Europe and the International Monetary Fund. Mainstream politicians are increasingly painted as leading Greece into a debt trap, then impoverishing it in trying to escape.

‘Mission impossible’ for Spain’s PM – another €40bn in cuts - Spain's prime minister, Mariano Rajoy, faces the toughest week of his three months in office as he is forced to announce up to €40bn (£33.45bn) in spending cuts and taxes in a budget on 30 March, the day after a general strike. As Rajoy's conservative People's party looked set for victory in key regional elections in southern Andalucia on Sunday, other European leaders and the markets were signalling Spain as now being the biggest single threat to the stability of the eurozone. A win in Andalucia would give Rajoy unprecedented control over troublesome regional governments whose inability to reduce deficits has helped to put Spain centre-stage in the eurozone crisis. Asturias, a much smaller northern region, was also voting. Rajoy was recently forced to backtrack by fellow EU leaders who refused to accept the deficit target of 5.8% of GDP Spain set unilaterally for this year. They told him to cut to 5.3%. The EU economic affairs commissioner, Olli Rehn, has blamed attempts by Spain, the eurozone's fourth largest economy and a more potent threat than bailed-out Greece, Portugal or Ireland, to ease up on deficit-cutting for renewed pressure on sovereign debt.

Euro zone debt crisis far from over - OECD (Reuters) - The euro zone's public debt crisis is not over despite calmer financial markets this year, the OECD said on Tuesday, with a warning that the bloc's banks remain weak, debt levels are still rising and fiscal targets are far from assured. As the euro zone heads into its second slump in just three years, the Organization for Economic Co-operation and Development (OECD) said the 17-nation area needed ambitious economic reforms and there could be no room for complacency. "Market confidence in euro area sovereign debt is fragile," the Paris-based economic think tank said in a report on the state of the euro zone's health. "The outlook for growth is unusually uncertain and depends critically on the resolution of the sovereign debt crisis," it said. In a departure from forecasts by the International Monetary Fund and the European Commission, the OECD sees 0.2 percent growth in the bloc in 2012, rather than an outright contraction. While international economists are divided over just how deep any downturn will be this year, most agree that weak business confidence and budget austerity is eating into the purchasing power of European households, driving up unemployment and leaving Asian and U.S. demand holding the key to growth. 

European finance: The leaning tower of perils - A drug. A pyramid scheme. Strikingly for an initiative that is credited with saving the eurozone and financial markets from disaster, those are just two of the undignified epithets that some in the financial markets now hurl at the European Central Bank’s provision of cheap three-year loans to eurozone commercial banking groups. More video The ECB’s “longer-term refinancing operation” has sparked a big rally in global equities and has lowered borrowing costs for Italy and Spain, viewed as the countries whose fortunes will determine whether the crisis in the 17-nation single currency area intensifies again. The €1tn-plus, two-stage action by the Frankfurt-based monetary authority – taken in December and late February as the first big policy move by Mario Draghi, its new president – has demonstrably eased fears of an imminent collapse either of a European bank or even of the euro itself. But there is a dark side to the LTRO. Critics are increasingly concerned that by helping to save banks and governments now, the ECB may unwittingly be sowing the seeds for the next escalation of the crisis. That would shatter the calm in global markets of the past few months and cause renewed soul-searching about the continent’s single-currency project. “Financial markets have certainly been impressed. But this isn’t really solving anything and in some respects it is actually worsening the intricate and nepotistic relationship between banks and sovereigns,” says George Magnus, senior adviser to UBS, the Swiss bank. He describes claims by some European politicians that the crisis is over as “myopic”.Concerns over the LTRO are several, ranging from the question of banks becoming dependent on artificially cheap funding to fears about the structure of their balance sheets. But one of the main charges is that the sheer cheapness of the funds has prompted banks to go on another credit-fuelled binge, similar to what preceded the global financial crisis but this time snapping up the debt of their own governments.

Euro area credit: did the ECB wait too long? - Rebecca Wilder - The ECB released its February report on monetary developments in the Euro area. This is an important report, since it will highlight whether or not the ECB’s LTRO is ‘working’, rather if the new liquidity is passing through to the real economy via new lending. On balance, it’s probably too early to tell, since there are long lags in monetary policy – however, early signs are not good for the real economy. Ostensibly, the ECB LTRO did its job, as interbank credit has re-emerged in aggregate. Repo credit increased 4.2% over the year in February – this followed an 11.5% annual surge in January. Furthermore, short-term debt holdings jumped at a 21.3% annual pace. Banks and sovereigns have seen relief in the short-term credit markets, a product of long-term funding from the ECB. But credit availability to the broader economy is more challenged. The chart below illustrates the working-day and seasonally adjusted lending by Monetary Financial Institutions (MFIs) to the household and non-financial corporate sectors. I use the 3-month/3-month average growth rate to illustrate the credit impetus over the LTRO period. In the three months ending in February, household lending fell 0.18% compared to the average spanning September through November 2011. The drop in quarterly lending did slow, but remains in decline. Loans to non-financial corporations fell a larger 0.82% in the three months ending in February. For non-financial corporations, the pace of decline quickened since the three months ending in January.

Why Europe is on a path to financial disaster  - Take a look at some numbers – courtesy of the unseasonally optimistic IMF. Between 2011 and 2014, the IMF earlier predicted the troubled euro zone economies would grow cumulatively by between 1.7 per cent for Greece, Italy and Portugal, to 4.8 per cent for Spain and 5.7 for Ireland.  However, in recent months the IMF has been scaling back its forecasts so rapidly and so dramatically that growth by this April is expected to be -0.1 per cent for Greece, 5 for Ireland, 1.6 for Italy, 1.5 for Portugal and 3.3 per cent for Spain. Not a single Euro area member state, save for Greece, is expected to see more than a two-percentage-point increase in gross national savings. Coupled with planned fiscal consolidations, this implies negative growth in private savings as a share of GDP in every euro zone country. : Between 2011 and 2014, cumulative current account balances are likely to be deeply negative in France (-7.4 per cent of GDP), Greece (-16.9 per cent), Italy (-7.5 per cent), Portugal (-15.5 per cent), Spain (-8.2 per cent) and only mildly positive in Ireland (+4.9 per cent). The average cumulative 2012-2014 current account deficit for the PIIGS is forecast to be in the region of -8.7 per cent of GDP and for the Big 4 states -1.6 per cent.

Europe Leaks It Will Fix Crushing Debt Problem With €940 Billion Of More EFSFESM Debt - We were delighted to see that the old headline scanning algos are still in charge of the FX market following "news", which were not even news, having been expected by absolutely everyone, that the EU is about to propose an expansion of Europe's bailout fund to a total of €940 billion for one year, by merging the €440 billion EFSF and €500 billion ESM - leading to a very transitory spike in the EURUSD. From Bloomberg: "European governments are preparing for a one-year increase in the ceiling on rescue aid to 940 billion euros ($1.3 trillion) to keep the debt crisis at bay, according to a draft statement written for finance ministers. The euro-area finance chiefs will probably decide at a meeting in Copenhagen March 30 to run the 500 billion-euro permanent European Stability Mechanism alongside the 200 billion euros committed by the temporary fund, a European official told reporters earlier today in Brussels. Beyond that, they are also set to allow the temporary fund’s unused 240 billion euros to be tapped until mid-2013 “in exceptional circumstances following a unanimous decision of euro-area heads of state or government notably in case the ESM capacity would prove insufficient,” according to the draft dated March 23 and obtained by Bloomberg News."

MMT to the Rescue in the the Eurozone?  - We’ve already seen how, paraphrasing Archimedes, that financial instruments can move the world in a bad way. We have an opportunity to reverse that. Warren Mosler and I have just published a policy note at the Levy Institute that would, if implemented, bring an end to the Eurozone sovereign debt crisis. The ‘tax-backed bond’ or ‘Mosler bond’ is based on the MMT idea that fiat money gets its value because the government accepts it in the payment of taxes. As the MMTers have been saying since the Eurozone crisis began the reason that the European periphery nations are having such a hard time with their sovereign debt burdens is because they do not issue their own currencies. The policy note we have just published outlines a new approach to the problem. The country will issue new tax-backed bonds that in the event a sovereign proves unable to meet its financial obligation to its creditors can be used to repay taxes in the country in question. The policy note itself is short and readable enough (I hope), so for further information I’d ask the reader consult the document in the original. Here I would prefer to deal with the politics of the tax-backed bond approach and the chances we have of getting it accepted. Pilkington-Mosler Tax-Backed Bonds

Divided Dutch struggle to plug budget holes - After three weeks of negotiations, the Netherlands’ coalition government remains divided over the drastic budget cuts needed to slash its deficit to the European Union’s-mandated level of 3 per cent. As the conflict threatens to bring down the conservative coalition, investors have begun to worry that the country lacks the political capacity to make the reforms it needs to maintain its status as a “core” eurozone economy, along with Germany and Finland. The government entered negotiations over budget cuts on March 5 after the country's Central Planning Bureau announced that the Netherlands’ slide into recession had led to a sharp rise in its 2013 deficit, now expected to hit 4.6 per cent of gross domestic product. Mark Rutte, the Liberal prime minister, said talks would last three weeks. That deadline came and went on Monday. The government is divided over whether to tackle reforms to the housing market, labour market and the healthcare system. Adding uncertainty, last week the government lost its single-vote majority in parliament, when a dissident member of the far-right Party for Freedom (PVV) of Geert Wilders quit the party.

Germany's true debt/GDP at 140% - Over the last several weeks I have tried to bring a more accurate picture of the debts of a number of nations to you. There has been no bias and the figures have stood on their own merit. The statistical component of the European Union, Eurostat, is quite clear; they do not count guarantees or contingent liabilities as part of any nation’s debt. We might all note that if Nestle or IBM or General Electric did this they would find their senior executives jailed for Fraud but never mind; this is the methodology of the EU which quite obviously masks the truth. The problem then is not the simple math used to obtain a more accurate debt to GDP ratio but in digging out the various guarantees, contingent liabilities and obligations of any member nation of the European Union. “Time consuming” would be the accurate words because you have to sleuth around like Sherlock Holmes to come up with the data. Yes, it is all there somewhere or another but it is nowhere all together and so must be found.

Italy blames Germany, France for EU debt crisis -Italian Prime Minister Mario Monti has accused the two largest economies in the eurozone of being responsible for the region's debt crisis. Monti told reporters in Tokyo that because Germany and France failed to follow fiscal rules set out by the economic bloc, it set a poor example for other nations. "The story goes back to 2003 [and] the still almost infant life of the euro," Monti said. "It was in fact Germany and France that were loose concerning the public deficits and debts." Monti, who replaced former Prime Minister Silvio Berlusconi in November, said that both Germany and France failed failed to limit budget deficits to no more than three per cent of gross domestic product during various times since the adoption of the euro. Mario added that despite eurozone legislation that allows for punishing countries with deficits outside the accepted range, neither country was admonished.

Italian, Spanish banks continue to gorge on govt debt - ECB data (Reuters) - Banks in Italy and Spain continued their purchases of government debt in February, ECB data showed on Wednesday, providing further proof they have used the ECB's ultra-cheap 3-year funding to stock up on sovereign bonds. The new data, which captured the period just before ECB's record second injection of 3-year cash, showed Italian banks increased their holdings of securities issued by euro zone governments by a record 23 billion euros, taking their total holdings to 301.6 billion euros. Spanish banks increased their holdings of securities issued by euro zone governments by a hefty 15.7 billion euros. While the rise was smaller than January's record 23 billion, it left total sovereign holdings at a record 245.8 billion euros. The ECB data do not break down which countries' debt banks hold, but the figures are giving economists a good picture of how much of the 1 trillion euros the ECB has pumped into the market is finding its way into the government bond market. French and German banks also increased their holdings of government debt, the data showed. Greek banks increased their purchases by 4.1 billion euros, the largest rise since April 2010.

Eurozone periphery governments “encouraging” banks to buy sovereign debt - Bloomberg: “There’s a moral hazard element to this,” Ken Wattret, chief European economist at BNP Paribas SA in London, said in a telephone interview. “The ECB is clearly worried that in some countries the lower the risk premium on sovereign debt, the less urgency there will be to make some changes.” The ECB should be concerned. The Eurozone periphery governments are effectively telling their banks: don't worry about your customers for now. We ARE your main customer. Get your 1% 3-year ECB loans and buy our government debt - keep the rates low.  The banks of course are ready to oblige. After all it is a profitable trade even at these lower yields, particularly since there is no capital charge currently for banks holding their nation's government debt.

Germany Stiffs the ECB - I previously made the case that the Eurozone and Germany need to part ways.  Now it appears Germany is effectively doing that by setting up a separate monetary zone inside the Eurozone.  Here is Ambrose Evans-Pritchard (my bold):The authorities in Berlin and Frankfurt are worried that the ECB’s 1pc interest rates are too low for conditions in Germany, where unemployment has fallen to its lowest in 20 years.  The ECB’s €1 trillion (£834bn) blitz of three-year loans to banks has started to reignite monetary growth in Germany, even though the key aggregates are still collapsing in southern Europe...The German authorities are in effect preparing a form of quasi-monetary tightening to offset ECB largesse. Is this the beginning of the end for the Eurozone?

Spain Could Need Bailout By Year-End -- Spain may be pushed into an international financial bailout if it fails to come to grips with its runaway budget deficit and banking crisis, a top economist and media reports citing the European Commission suggested Wednesday. "Spain looks likely to enter some form of troika program this year," Citigroup Chief Economist Willem Buiter said in reference to financial support from the Commission, the European Central Bank and the International Monetary Fund. Separately, several Spanish newspapers reported that the Commission is pressing Spain to accelerate efforts to clean up its ailing banking sector, possibly by tapping the euro-zone's bailout fund to finance the effort. Commission officials denied the reports.

Spain’s general strike shows first signs of rebellion against austerity - With near-empty railway stations, shut factories, mass marches and occasional outbreaks of violence during a general strike on Thursday, Spaniards showed the first signs of rebellion against the reformist, austerity-preaching conservative government they voted in four months ago. Police and pickets clashed in a handful of places, but it was a largely peaceful general strike in a country whose sinking economy, with 23% unemployment, has become the focus of worry about the future of the whole eurozone area. Thousands of police officers remained on duty around the country on Thursday night as tens of thousands of flag-waving demonstrators flooded into city centres for protest marches against labour reform and austerity measures introduced by prime minister Mariano Rajoy's conservative People's party [PP]. Demonstrators brought the centres of Madrid, Barcelona and other cities to a standstill as trade unions claimed the strike was more widely supported than previous nationwide stoppages in 2010 and 2002. Rajoy's officials claimed, however, that the 2010 strike against a socialist government had received greater support.

Spain engulfed by nationwide anti-austerity strike - Spanish workers enraged by austerity-driven labor reforms to prevent the nation from becoming Europe's next bailout victim slowed down the country's economy in a general strike Thursday, closing factories and clashing with police as the new center-right government tried to convince investors the nation isn't headed for a financial meltdown. Tens of thousands held protest marches in Madrid and other cities, and the demonstrations turned violent in Spain's second-largest city of Barcelona, where hooded protesters smashed bank and storefront windows with hammers and rocks and set fire to streetside trash containers. Traffic was slowed in northeastern Valencia when demonstrators lit mattresses ablaze on a highway, and a Molotov cocktail was hurled at a police car in the eastern city of Murcia. Authorities arrested 176 protesters across Spain and said 104 people were injured in clashes, including 58 police officers. There were no immediate reports of serious injuries

Spanish general strike: Notes from the margins - Fire. Violence. Tear gas. Rubber bullets. That’s the image of Barcelona that’s beaming out across much of the Spanish and global media about M-29, the 29 March general strike. My experience, and those of many protesting here, was a whole lot less dramatic – but possibly more symptomatic of the widespread collective action against austerity that is spreading here. I didn’t go looking for the moments of greatest drama, but here are a few impressions on how the day unfolded.  * Over 1,000 people joined the march from our neighbourhood (Sant Andreu) into town. It wasn’t the 'usual suspects'. It was the regulars of our local high street – where most shops were closed – transplanted onto Meridiana, a major six-lane road into the centre of Barcelona. The good-humored march was one of numerous feeder marches that helped to bring the city to a standstill. The unions report an 800,000-strong demonstration. El Pais puts it at over 275,000.  * It isn’t hard to find evidence of clashes in the centre of town. Barricades had been lit on many of the road junctions around Diagonal, a well-off shopping district. These are being cleared away by street sweepers. But it’s the details that are telling here: the bin lorries are each placarded with 'serveis minims' [minimum service]. Most of the banks have had their windows smashed. They are cordoned off, but there is no attempt at a clean up here.

Spain Announces €27 Billion Deficit-Cutting Plan - The Spanish government on Friday delivered what it called the biggest fiscal adjustment in the country’s democratic history, unveiling a 27 billion euro ($36 billion) deficit-reduction plan that includes sharp spending cuts across government ministries and higher taxes for corporations.  With images of nationwide demonstrations and strikes against labor reforms still fresh, the weight of the budget appeared to fall on big companies and government spending. Labor unions said nearly 1 million took part in Madrid’s rally alone Thursday evening. Corporations will be asked to pay higher taxes this year, and their tax breaks will be reduced while the government said value-added-taxes would not rise. It said tax receipts for VAT would fall 2.6% as a result of weak growth in Spain. Budget Minister Cristobal Montoro said all ministries would need to reduce their budgets by around 17% this year, which was slightly higher than expected, saving a total of up to €65.8 billion. Salaries for public workers will not be reduced, but will be frozen this year. Electricity prices will rise 7%, to pay off a €24 billion electricity-tariff deficit that accumulated due to the difference between consumer prices set by the state and producer’s costs. Tariffs paid by electricity companies will rise 5%.

Eurozone Retail Sales Contract 5th Consecutive Month, Year-on-Year Sales Decline 10th Month - Eurozone retail sales fell only slightly this month, but it was the 5th consecutive month, and the worst quarter since the 1st quarter of 2010. Please consider Markit Eurozone Retail PMI® March 2012 - Retail sales in the Eurozone fell only marginally at the end of the first quarter, according to Markit’s latest PMI® surveys. The average rate of decline over the first quarter matched that seen over the final three months of 2011, which was the worst quarter since Q1 2010. The survey data again highlighted marked disparity between growth in Germany and falling sales at Italian retailers, while sales in France were again broadly flat. The Eurozone Retail PMI is a single-figure indicator of changes in the value of sales at retailers. The PMI is adjusted for seasonal factors, and any figure greater than 50.0 signals growth compared with one month earlier. The PMI remained below 50.0 in March, signalling a fifth successive monthly drop in sales revenues. Sales have fallen ten times in the past 11 months. But the index rose for the second successive survey, recovering further ground from January’s 35-month low of 42.9 to post 49.1. The latest figure signalled only a marginal decline in sales revenues. The latest PMI figure suggested that the pace of decline in retail sales as measured by the EU’s statistical office Eurostat (on a three-month-on-three-month basis) will ease in the coming months.

The Fruits of Austerity: More European Nations Slip Into Recession - In addition to the economic truth that tax cuts and growth do not have much of a relationship, what we’ve learned over the past few years is that austerity during a depression is a bonkers idea. And here’s some more evidence of that today. Britain’s latest numbers show a bigger drop of GDP than expected. Britain’s economy was even weaker than expected at the end of last year, underlining the country’s struggle to avoid another recession. GDP fell 0.3% in the fourth quarter, more than the 0.2% drop previously estimated by the Office for National Statistics. The downgrade was mainly prompted by weakness in the country’s dominant services sector. Economists had not been expecting any change to the 0.2% fall, and the news that Britain’s economy went into the new year in an even worse state will raise fears it could notch up a technical recession – defined as two consecutive quarters of contraction. If Britain is headed on the road to recession, Spain is already there, the consequence of more wrongheaded austerity policies.

Europe Moving Beyond the LTRO - So it appears, at least in the short term, that the ECB’s LTRO effect is starting to wear off as markets finally catch up on the story of the underlying economy’s of periphery Europe: Euro zone bond markets Thursday received their first jolt since the Greek debt exchange was clinched earlier this month as Italian and Spanish bond yields soared with investors rushing to book profits ahead of the end of first quarter of 2012. The sell-off in Italian debt pushed yields to their highest levels in a month, evaporating the gains made since the second of the European Central Bank’s three-year liquidity operations in February, where the ECB poured more than a half a trillion euros into the financial system. Italy had distanced itself from Spain in bond markets in recent weeks but Thursday’s rout sparked nervousness across financial markets and served a reminder that the crisis in the euro zone is far from over. As I have been explaining over the last few weeks there is renewed market focus on Spain because it is becoming apparent that its economy continues to weaken. Overnight there have been nation wide strikes protesting against labour reforms and spending cuts. Spain’s economy contains massive private sector debt created by a now failed housing market, but Spain’s economy is also tightly coupled with Portugal which is another area of concern:

Roubini: Euro Must Come Down to Dollar’s Level - The The euro needs to sink to parity with the US dollar in order to restore Europe’s peripheral economies to growth, Nouriel Roubini, the economist known as “Dr. Doom” for his bearish predictions, told CNBC Friday. “The euro zone needs a real depreciation in the periphery to achieve the restoration of growth, external balance and competitiveness,” he said at the Ambrosetti Workshop on the shores of Lake Como, Italy. “The periphery needs to have the euro closer to parity with the US dollar.” The euro has stayed at historically strong levels against the dollar despite the crisis in the euro zone. Roubini added that markets are “schizophrenic” at the moment, as they cannot decide whether to reward or punish countries such as Spain and Italy for their austerity plans. “There’s this vicious circle with the deficit that doing austerity makes the recession worse,” he said. “Without growth, the socio-political backlash will become overwhelming for some governments.” His concerns about growth are agreed to by many, as the euro zone is predicted to officially enter the second part of a double dip recession this year.

Eurozone gets $670 billion in fresh bailout funds - The 17 countries that use the euro have boosted their emergency funding for debt-troubled countries to (EURO)800 billion ($1.1 trillion) — an amount that falls short of what the currency union's international partners have said is needed to calm financial markets. Of the (EURO)800 billion, which eurozone finance ministers agreed Friday at a meeting in Copenhagen, only some (EURO)500 billion ($670 billion) is actually still available. About (EURO)300 billion is in loans that have already been used to bail out Greece, Ireland and Portugal. The International Monetary Fund and others have been calling for a financial "firewall" of as much as (EURO)1 trillion ($1.33 trillion) — just in case the vulnerable economies of Spain and Italy needed assistance. On Friday, IMF managing director Christine Lagarde congratulated European leaders on their agreement, but didn't say whether it went far enough to guarantee additional help from the IMF. "I welcome the decision of Euro Area Ministers to strengthen the European firewall. The IMF has long emphasized that enhanced European and global firewalls, together with the implementation of strong policy frameworks, are critical for ending the crisis and securing international financial stability," Ms Lagarde said in a statement.

Eurozone Boosts Bailout Fund to $1 Trillion — The 17 countries that use the euro will put up €500 billion ($670 billion) in fresh money to help countries with debt troubles — a big increase from the previous €300 billion limit, but unlikely to calm concerns that large countries like Spain or Italy will not be protected if they run into trouble. Eurozone finance ministers, who were meeting in Copenhagen, Denmark, said that — in combination with some €300 billion that had already been spent on saving Greece, Ireland and Portugal — the currency union now possesses a €800 billion ($1trillion) financial firewall that should help put an end to its two-year-old debt crisis. The eurozone has been under pressure to build a strong defense against further financial problems among its members. International institutions like the International Monetary Fund and the Organization for Economic Cooperation and Development had been calling for financial buffers of as much as €1 trillion.

Wolf Richter: Taking Bosses Hostage – A Labor Negotiating Tactic In France - At 2 p.m on Thursday, the final day of the annually required wage negotiations that were going nowhere, Bruno Ferrec, the man in charge of the nine Fnac stores in Paris, and his HR Director were “retained” by 120 of his employees at a conference room at the Hotel Ibis in the rue des Plantes in Paris. “Mr. Ferrec is in the middle of the room,” said Christian Lecanu, representative of the CGT, one of the unions involved in the negotiations. “He listens and keeps repeating, ‘the negotiations are over.’ For now, we do not know when we will let him go.” And the police did nothing. Fnac is France’s largest retail chain in the cultural and entertainment sector (books, DVDs, video games, software, consumer electronics, tickets, etc.). It even has its own literary award for fiction. It operates stores in other European countries, Brazil, Morocco, and Taiwan. But times are tough: e-commerce competition, pirated products, falling flat-screen-TV prices…. Sales for 2011 were down 3.2%.

A Civilization on Edge  - Amid Debt Crisis, Athens Falls Apart - Massoud starts walking faster as the shadows lengthen. He glances at the scratched display on his mobile phone. It's 7:15 p.m. The sun is setting behind the large apartment buildings on Patission Street, disappearing behind the few remaining classical facades where the plaster is beginning to crumble. Massoud is in a hurry. He wants to get home before dark, because that's when the people who are out to get him come out. The gangs of right-wing thugs, sometimes up to 20 at a time, approach their victims on foot or on mopeds, carrying clubs and knives. They are masked, faceless and fast. They appear suddenly and silently before striking. The neo-fascists are hunting down immigrants in the middle of downtown Athens, in the streets north of the central Omonia Square. They call it cleansing.  They hunt people like Massoud, a 25-year-old Afghan from Kabul. He has been living in Athens for five years without a residency permit, even though he speaks fluent Greek. The gangs also hunt the dark-skinned man pushing a shopping cart filled with garbage and scrap metal through the streets. Or the woman with Asian features, who now grabs her child and the paper cup with which she has just been begging in the streets.

A Lesson For Europe: Why Iceland Won't Join The Euro (video) In a brief but as usual succinct statement, MEP Daniel Hannan points out the country that decided to say no to establishment-rules and stuck to its guns by taking losses, devaluing its currency, and growing its way out of its pit of despair. The eloquent Englishman notes Iceland's current enviable position in terms of not just growth but Debt to GDP and proffers upon his European Parliamentarian peers that perhaps, just perhaps, there is a lesson in here for all European governments (cough Greece/Portugal cough). 67% of Icelanders are now against joining the Euro.

Devolution and Fiscal Policy - As I noted in my previous post, devolution can offer fiscal policy options that are just as credible as the policy mix that would be available under independence. And these options could be available without some of the costs of independence.  Let us be clear what I am talking about here when I refer to 'fiscal policy'. By fiscal policy I mean the use of variations in tax rates, tax bases, tax instruments, spending mix and spending levels to achieve economic policy objectives. These objectives can be stabilisation, growth and distribution. I focus on stabilisation here leaving growth and distribution for later posts.  The target of stabilisation is usually a level of GDP, and employment where there is no economically usable spare capacity in the economy. That is, where the output and unemployment gaps are small, or close to zero, and unemployment is almost wholly 'structural'. More technically the economy would be at the Non Accelerating Inflationary Rate of Unemployment (NAIRU), currently estimated in the UK to be around 5% of the workforce. Scotland's NAIRU should be similar.

Information, Money and Politics - A Conservative Party Treasurer is caught on camera trying to solicit £250,000 from businessmen by offering to, among other things, feed their suggestions into the policy process at No.10. Having just passed NHS Reform that will greatly increase the involvement of the private sector, David Cameron suggests privatising parts of the road network. Are we seeing either end of a single process here?     To which one might respond, as Chris Dillow does, plus ca change. Others, like Stuart Weir, take a less sanguine view. Let us look to the US, which we often need to do to see what happens next. Here we find Paul Krugman helping to uncover the activities of the American Legislative Exchange Council (ALEC). According to Krugman ALEC drafts legislation which is often adopted word for word by US states, is funded by the usual right wing billionaires and corporations, and which has a particular interest in privatisation. It or associated organisations may as a result see advantage in having laws passed that increase business for some of those privatisations, like prisons for example, although of course they would never act on that interest. And equally evident is that this could not happen here.

Total Chaos In the UK As Gas Stations Run Dry - What was a fairly minor fuel shortage sparked when gas tanker drivers in the UK threatened to go on strike has developed into what UK officials are now calling all out chaos, as drivers across the country scramble to fill their tanks amid uncertainty about when transportation services will be up and running at full capacity again.In what may be a glimpse into the future of other industrialized Western nations that are experiencing rising gas prices and labor problems, residents of the UK were queued in hours-long lines reminiscent of the 1970′s oil crisis in the United States. The lines of drivers waiting to get their daily allotment  of gas are so long that they have led police to shut down gas stations in an effort to ease traffic and avoid delays. For their part, government officials have asked drivers to remain calm, but may have inadvertently worsened the situation when Energy Secretary Ed Davey suggested that drivers concerned with running out of gas should be “topping up when their tanks go below, say, half-full… they should actually go the full hog and fill up when they can.”

Britons See Disposable Incomes Plunge Most Since 1977: Economy - Britons suffered the biggest drop in disposable income in more than three decades last year in a squeeze that may continue this year as energy prices increase. Real household disposable income fell 1.2 percent, the Office for National Statistics said today in London. That’s the biggest drop since 1977 when the then Labour government sought to cap incomes growth in an attempt to bring down inflation. The report also showed that the economy shrank 0.3 percent in the fourth quarter, more than the 0.2 percent contraction previously estimated. The Bank of England has said cooling inflation will ease the squeeze on consumers this year and help the economy to recover from the second half. While Chancellor of the Exchequer George Osborne raised the threshold before workers begin paying income tax in his budget last week, any spending pickup may be constrained by rising unemployment and higher gasoline prices. “We expect that real incomes will fall again this year, reflecting low nominal wage growth and little or no job growth,” said Michael Saunders, an economist at Citigroup Inc. in London. “Consumer spending is likely to remain subdued for several years.”

The long bust - NEW data revealed this morning that Britain's economy shrank more than initially reported in the last quarter of 2011, capping a disappointing year and continuing a very disappointing recovery. Over at FT Alphaville, Joseph Cotterill discusses a Citigroup analysis of the revision that includes this striking chart: Britain's performance since its downturn began in 2008 now looks worse than that during the Depression—and shows few signs of imminent improvement. What's gone wrong in the British economy?

UK Enjoys the Fruits of Deficit Reduction: Economy Shrinks 1.2 Percent - The NYT reported on a revision to 4th quarter GDP data in the UK that showed the economy shrinking at a 1.2 percent annual rate rather than the 0.8 percent rate previously reported. Unfortunately, the  article reported the data giving quarterly rates, so most readers probably did not recognize that the 0.3 percent decline from the third quarter translated into a 1.2 percent annual rate. Since this is written primarily for an audience in the United States, and GDP growth numbers are always reported as annual rates, the NYT should have converted the quarterly rate so that readers would understand what the number.

It's Always Time For Austerity - Krugman - Jonathan Portes makes a nice catch: when the rating agencies upgraded the UK outlook, the Cameron government hailed this as proof that austerity was working; when they downgraded it due to poor economic performance, the Cameron government declared that this showed the need for even more austerity. Meanwhile, Adam Posen (pdf) very judiciously and carefully makes the case for why Britain has done worse than the US: it’s the austerity, stupid. (Or let me put that in Parliamentary style: does the right honorable gentleman not realize that it’s the austerity, stupid?) Oh, and via Mark Thoma, Mike Konczal and Bryce Covert make a remarkable observation: US austerity — which mainly takes the form of layoffs at the state and local level — is largely concentrated in states where Republicans took control in 2010, plus Texas. So that’s why our recovery, though better than Britain’s, isn’t stronger.

Comparing the UK and US recoveries - There has been a little discussion of why the UK ‘recovery’ has been poorer than in the US following Adam Posen’s speech (a quick summary of which is here). Adam Posen makes a number of interesting points, particularly regarding bank credit. However some of the discussion has focused on fiscal policy: is greater austerity in the UK part of the explanation? In an earlier post I compared the degree of austerity in the US, UK and Euro area using OECD data, but only by comparing forecasts for 2013 with 2010 outturns. Here is a bit more detail. The broad story is unchanged. All three are tightening policy, but the UK is tightening more than the US, and the Euro area even more.[1] Notice however that on these figures the UK did not tighten more than the US from 2009 to 2011. It is 2012 and 2013 where a clear difference emerges. If we had later years this would probably continue – the underlying deficit is forecast to be in balance in the UK by financial year 2016/7. The lack of divergence from 2009 to 2011 is noted by Ryan Avent here. Does this mean that, looking at the poor performance of the UK relative to the US over the last two years, we can discount the role of fiscal policy? Of course not. Expectations matter.

Why is their recovery better than ours? - Adam Posen, Bank of England, speech (pdf)