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

Saturday, April 7, 2012

week ending Apr 7

Fed's Balance Sheet Contracts In Latest Week -- The Fed's asset holdings in the week ended April 4 were $2.868 trillion, compared with $2.880 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $1.669 trillion, up from $1.665 trillion a week earlier. The central bank's holdings of mortgage-backed securities held steady at $836.79 billion. The Fed's portfolio has tripled since the financial crisis of 2008 and 2009 as the central bank bought government bonds and mortgage-backed securities in an effort to keep interest rates low and stimulate the economy. Thursday's report showed total borrowing from the Fed's discount lending window was $7.07 billion on Wednesday, compared with $7.06 billion a week earlier. Commercial banks borrowed $12 million from the discount window, compared with $1 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.490 trillion, compared with $3.475 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts totaled $2.757 trillion, compared with $2.741 trillion in the previous week. Holdings of federal agency securities fell to $732.67 billion, compared with $733.98 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--April 5, 2012

FOMC Minutes: No Push for QE3 - "Several members" were concerned that the unemployment rate would be elevated, and inflation subdued in late 2014. That would suggest further action now, but, later in the discussion, "a couple of members" indicated further action might be necessary if the "economy lost momentum". So it doesn't seem like there is any push for QE3 in the short term.  From the Fed: Minutes of the Federal Open Market Committee, March 13, 2012. Excerpts:  With the economic outlook over the medium term not greatly changed, almost all members again agreed to indicate that the Committee expects to maintain a highly accommodative stance for monetary policy and currently anticipates 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 for the federal funds rate at least through late 2014. Several members continued to anticipate, as in January, that the unemployment rate would still be well above their estimates of its longer-term normal level, and inflation would be at or below the Committee's longer-run objective, in late 2014.

Federal Reserve leaning away from QE3 -  While the debate over "QE3" continues within the Federal Reserve, it seems more policymakers are leaning away from supporting further stimulus. At the central bank's last policymaking meeting1, Fed officials continued to discuss whether they should buy more assets in a third round of quantitative easing, commonly known as QE3.  But only "a couple" members were in favor of more stimulus, as opposed to two months earlier, when a "few" did so.  "A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate consistent rate of 2% over the medium run," minutes released Tuesday said. The Fed's language on the overall economy also seemed more upbeat than in January, pointing to "encouraging" jobs data.

Fed steps back from further easing - The US Federal Reserve has stepped back from another round of quantitative easing, with only two out of 10 voting members saying it “could become necessary”, according to the minutes of its March meeting. That is in marked contrast to January when a “few” members of the rate-setting Federal Open Market Committee thought that economic conditions could justify another round of asset purchases “before long” and several more thought that additional QE might be needed. The change suggests the Fed is unlikely to launch a third round of quantitative easing, QE3, unless the economic outlook weakens. The minutes triggered a sharp rise in the dollar, a sell-off in gold and a rise in Treasury yields. Markets had been pricing in a high chance of further easing after Fed chairman Ben Bernanke said last week that the pace of decline in the US unemployment rate might not be sustainable. The S&P 500 ended the day down 0.4 per cent, 10-year Treasury yields rose by 9 basis points to 2.28 per cent, and gold fell by 1.9 per cent to $1,646 an ounce. The minutes suggest that the bulk of the FOMC is happy to keep policy very loose – including a forecast that interest rates will remain close to zero until late 2014 – but thinks that growth will be strong enough to meet their objectives if they do so. The minutes do not rule out further easing if the outlook deteriorates.

Few Signs of Further Fed Action in Latest Minutes -The prospect that the Federal Reserve will begin a fourth round of asset purchases appears to be fading as the economy improves. The members of the Fed’s policy-making committee barely discussed new efforts to bolster growth during their most recent meeting in mid-March, according to an account of that meeting released by the Fed on Tuesday.  While the committee remains committed to its existing efforts to stimulate growth, the account said that there was no support for additional measures like new asset purchases unless “the economy lost momentum” or inflation settled below the 2 percent annual rate the central bank considers healthy.  The account suggested the committee was unlikely to announce any new measures after its meeting scheduled for this month, as some investors had expected. And markets responded as if the Fed had pulled back on the reins of the economy. Stock market indices fell, while the interest rates on Treasury securities climbed. The reaction was brief, however, and some analysts cautioned against overreaction, noting the Federal Open Market Committee could still announce new steps this year.

Fed Watch: Fed Minutes Confirm Policy on Hold - The minutes of the most recent Federal Reserve meeting were not exactly what one would call a page turner. Much of the contents had already been covered in recent speeches to varying degrees, culminating with an unexpectedly sanguine view of the economy: participants generally saw the intermeeting news as suggesting that economic growth over coming quarters would continue to be moderate and that the unemployment rate would decline gradually toward levels that the Committee judges to be consistent with its dual mandate. While a few participants indicated that their expectations for real GDP growth for 2012 had risen somewhat, most participants did not interpret the recent economic and financial information as pointing to a material revision to the outlook for 2013 and 2014. The recent flow of data has done little to alter the Fed's basic outlook that the recovery will continue to grind along at a pace slower than hoped for but fast enough such that no additional easing is required. And on the prices side of the equation, inflation expectations remain anchored, and any pass-through from higher oil and gas prices will be temporary. As expected, some participants were concerned about inflation prospects: One participant pointed to inflation readings and a high rate of long-duration unemployment as signs that the current level of output may be much closer to potential than had been thought, and a few others cited a weaker path of potential output as a characteristic of the present expansion. These concerns, however, were largely dismissed by the rest of the committee:

Fed Meeting Minutes Squash Hopes for QE3 - Despite the slow recovery, and despite the fact that there is little reason to worry that an outbreak of inflation is just around the corner, the Fed is not inclined to ease policy further through QE3 unless the incoming economic data over the next few months turns unexpectedly negative.  That view is not unanimous -- there are members of the Fed who would like to see more stimulus, just as there are those who think the Fed should already have started to reverse policy. The resulting gridlock means that Federal Open Market Committee, the part of the Fed that oversees monetary policy, as a whole does not endorse a change in present policy.  That is not unexpected given the statements that FOMC members have made recently. But for those of us who think the Fed could and should be doing more and that more action does not carry much, if any, inflation risk, it's disappointing to hear that more action is all but off the table.  But what about the other concern, that the Fed will tighten policy too soon? Is there anything in the minutes to suggest the Fed will abandon its commitment to keep interest rates low through 2014? I am somewhat encouraged on this point. While the Fed is not ready to provide further stimulus, it is also not enthralled with the speed of the recovery and the outlook for the future, which remains subdued. It does not appear that there is any inclination to abandon the interest-rate commitment. That could change if the incoming data are stronger than expected, or if inflation unexpectedly accelerates, but presently this is not a worry.

Fed Signals No Need for More Easing Unless Growth Falters - The Federal Reserve is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target.  “A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below” 2 percent, according to minutes of their March 13 meeting released today in Washington. That contrasts with the assessment at the FOMC’s January meeting in which some Fed officials saw current conditions warranting additional action “before long.”

Markets Fear End of Stimulus - Fears that the central banks of Europe and the U.S. may soon end efforts to support financial markets as well as fresh concerns about the health of Europe's weakest countries drove down stock markets around the world Wednesday.  European Central Bank President Mario Draghi indicated he would be hesitant to undertake more monetary easing, citing concerns about inflation. That surprised investors who had been relying on the ECB to help support the region's economy and financial markets. Adding to concerns, an auction Wednesday of Spanish government bonds was met with surprisingly lackluster demand. The disappointing sale was a reminder to investors that Europe's problems are far from over, and prices of European sovereign bonds fell, sending yields higher. The euro also dropped against the dollar. Stock indexes from New York to Frankfurt to Tokyo fell sharply. In Germany, the DAX index dropped 2.8%, its biggest one-day fall in a month. Japan's Nikkei Stock Average tumbled 2.3%, its worst day since Nov. 10. The slide began in the U.S. Tuesday after signs from the Federal Reserve that it won't immediately embark on a new round of bond buying. That dashed hopes of investors who had anticipated a new program would further juice financial markets and the economy.

Markets’ Focus on QE3 Doubts Misses Fed’s Worries About Jobs - Stocks appear to be voting a preference for Federal Reserve-induced stimulus to spur U.S. economic growth over mounting evidence of the real thing. That’s one way to read market reaction to Tuesday’s release of minutes from the mid-March meeting of the rate-setting Federal Open Market Committee. Stock and bond prices are down, the dollar is up. Higher rates and a stronger dollar would accompany the notion of a strengthening economy, of which we have had some plain evidence, but shouldn’t that also be good for stock prices? What’s more likely afoot is no macroeconomic assessment, but a presumed lowering of the odds of another big dose of Fed policy easing, or even the prospect that short-term rates won’t hold at zero for more than two more years, as the Fed has announced as a reasonable scenario. Recent data, while certainly not conclusive, have shown a resilient and growing U.S. economy, albeit at levels that leave little to celebrate. Presumably we knew before Tuesday’s release of minutes that consistent growth in the face of a long-standing and aggressively easy Fed policy lowers the chances of even more monetary stimulus.

Has the Fed Boosted the Stock Market? - You bet. And aggregate demand for goods and services, too. If the Fed had not expanded its balance sheet in the past few years, the weakest U.S. economic recovery in the post-WWII era would have been even weaker and U.S. stock prices would have suffered. Chart 1 shows the year-over-year percent changes in monetary financial institution (MFI) credit. Private MFI credit is made up of the sum of loans and securities of commercial banks, savings & loan associations and credit unions. Total MFI credit is private MFI credit plus assets on the books of the Federal Reserve, i.e., Fed credit. The median year-over-year change in private MFI credit from Q1:1953 through Q4:2011 was 7.5%. In 2009, private MFI credit began what turned out to be its most severe contraction since the early 1930s. Although private MFI credit resumed growth in the second half of 2010, the rate of growth has been far below its long-run median rate of 7.5%. Even with the Fed’s second round of quantitative easing QE) from November 2010 through June 2011, total MFI credit, private plus Fed, has been growing well below the long-run median rate for private MFI credit. But without QE2, credit creation for the U.S. economy would have been even weaker.

Fed’s Williams: Economy Still Needs Aggressive Central Bank Support - The Federal Reserve should continue to provide stimulus aggressively to the economy, a U.S. central bank official said Tuesday. But in light of the recent improvement in the economy, the policy maker, John Williams of the Federal Reserve Bank of San Francisco, didn’t discuss the possibility the central bank will have to consider delivering even more stimulus, as he has in past remarks. “It’s essential that we keep strong monetary stimulus in place,” Williams said in the text of a speech that was to be delivered before a gathering held at the University of San Diego School of Business Administration. “High unemployment, restrained demand and idle production capacity are national in scope. These are just the sorts of problems monetary policy can address.” But unlike in past speeches, Williams, a voting member of the monetary-policy-setting Federal Open Market Committee, didn’t discuss the potential need for the Fed to go beyond what is already planned.

Fed’s Bullard: 2014 Rate Timeline May Be Hurting Economy - The Federal Reserve may actually be hurting the economy when it says it expects short-term interest rates to stay very low until late 2014, a U.S. central bank official said Thursday. “The 2014 language in effect names a date far in the future at which macroeconomic conditions are still expected to be exceptionally poor,” Federal Reserve Bank of St. Louis President James Bullard said in a speech in St. Louis. “This is an unwarranted pessimistic signal for the [Federal Open Market Committee] to send,” given that the economy is recovering and forecasters can’t really tell what will happen that far down the road. He worries that if the economy improves in a way that would cause the Fed to move away from its current pledge, it could undermine confidence in the monetary policy-making process.

Big Banks See Fed Raising Rates in Third Quarter 2014 - Wall Street’s biggest banks slightly pushed out their expectations for when the Federal Reserve will start raising interest rates, according to a survey the New York Fed conducted ahead of the central bank’s March meeting. The median projection of primary dealers–who serve as counterparties to Fed market interventions–was that the Fed will raise interest rates in the third quarter of 2014, according to the survey released Wednesday. That’s a modest shift from the previous survey, which showed that ahead of the Fed’s January meeting, primary dealers expected an increase in interest rates to begin in the second quarter of 2014.

Why QE is being mis-sold - Ah, the elusive liquidity trap. Does it exist? Is it here? And what does it mean for monetary policy? Those are critical questions which are not currently being addressed by policymakers, according to a new paper presented at the Banque of France. In fact, many policymakers are still under the mistaken belief that no such thing as a liquidity trap exists. So what counts as a liquidity trap?The authors see it as the following: A liquidity trap is a circumstance in which the private sector is deleveraging in the wake of enduring negative animal spirits caused by the bursting of joint asset price and credit bubbles that leave private sector balance sheets severely damaged. In a liquidity trap the animal spirits of the private sector cannot be revived by a reduction in short-term interest rates because there is no demand for credit. This effectively means that conventional monetary policy does not work in a liquidity trap. The point here is that conventional monetary policy cannot work because the economy’s demand for credit is saturated. In a liquidity trap, the transmission mechanism becomes broken. The other point the authors hint at strongly is that central bankers like Ben Bernanke are accutely aware of this fact — and you just have to read Bernanke’s 2003 paper on Japan’s deflation to understand that. The reason central bankers will never admit it, however, is because to do so would be to admit irrelevance.

Corridors and Floors in Monetary Policy - NY Fed - As part of its prudent planning for future developments, the Federal Open Market Committee (FOMC) has discussed strategies for normalizing the conduct of monetary policy, when appropriate, as the economy strengthens. One issue, raised in April 2011, is whether the longer-run framework for implementing monetary policy will be a corridor-type system or a floor-type system. What do these terms mean, and how do they relate to monetary policy? In this post, I describe the key differences between these two approaches to implementing monetary policy and some of the advantages offered by each.

On the Limits to Monetary Policy - Narayana Kocherlakota - speech, President, Minneapolis Fed

Architect of Fed's 'Operation Twist' quits‎  - Brian Sack, head of the trading desk at the New York Federal Reserve, who was at the centre of the central bank’s extraordinary intervention in financial markets, has resigned from his position and will leave in September. He will remain in his current role as executive vice-president of the markets group and manager of the system open market account for the Federal Open Market Committee, until June.  That is when the Fed’s Operation Twist, in which it is buying longer term bonds in an effort to force down interest rates, and of which Mr Sack was one of the intellectual architects, comes to an end. He will act as an adviser until he leaves in September. “Brian’s service to the Bank over the past three years has been critical to our response to the financial crisis and the country’s economic recovery,” said William Dudley, president of the New York Fed. “I accepted his resignation with great regret and wish him well.” Mr Sack has not yet taken a new position outside the bank, according a person close to the situation. But if he chooses to go to Wall Street he will be highly sought after.

The Big Easing - More than three years after the financial crisis that erupted in 2008, who is doing more to bring about economic recovery, Europe or the United States? The US Federal Reserve has completed two rounds of so-called “quantitative easing,” whereas the European Central Bank has fired two shots from its big gun, the so-called long-term refinancing operation (LTRO), providing more than €1 trillion ($1.3 trillion) in low-cost financing to eurozone banks for three years. For some time, it was argued that the Fed had done more to stimulate the economy, because, using 2007 as the benchmark, it had expanded its balance sheet proportionally more than the ECB had done. But the ECB has now caught up. Its balance sheet amounts to roughly €2.8 trillion, or close to 30% of eurozone GDP, compared to the Fed’s balance sheet of roughly 20% of US GDP. But there is a qualitative difference between the two that is more important than balance-sheet size: the Fed buys almost exclusively risk-free assets (like US government bonds), whereas the ECB has bought (much smaller quantities of) risky assets, for which the market was drying up. Moreover, the Fed lends very little to banks, whereas the ECB has lent massive amounts to weak banks (which could not obtain funding from the market). In short, quantitative easing is not the same thing as credit easing.

Beware of Rule by Central Banks - The recent exchange on the nature of banking among Paul Krugman, Scott Fullwiler, Steve Keen and others has been feisty and instructive. But some readers might be left wondering whether the whole exercise is too wonky by half. The anatomical details of banking systems might be juicy and interesting for the academics who like to dissect those systems and dig deep into their entrails. But how significant are the details for practical questions of public policy? They are in fact very significant. The functional details of institutions matter, and without understanding how the banking system actually works it is impossible to distinguish causes from effects in our attempts to guide that system toward the service of the public good. Conventional textbook models of banking and monetary systems are responsible for widespread commitment to the money multiplier and loanable funds models of the relationship between central bank reserves and the volume of bank lending. Relying on these models, some prominent economists and pundits have been telling us throughout our recent economic crisis that we can address the problems of a stagnating economy and persistently high unemployment with the reserve management tools of monetary policy alone. Even worse, some monetary policy hyper-enthusiasts seem to view the Fed has having vast powers to manage the nation’s overall spending level and adjust the nation’s money supply up and down though mysterious and occult mechanisms that extend well beyond the grubby plumbing of the credit system. The Wizard of Fed, it seems, can control the economic minds of Americans though imperious pronouncements on his expectations for the future. Hundreds of millions of Americans, one is led to believe, pay close attention to the Beloved Leader and await his determinative dicta, and then adjust their own behavior accordingly.

John Taylor Reveals His Inner Market Monetarism - John Taylor has a new post praising Robert Hetzel's new book, "The Great Recession, Market Failure of Policy Failure?".  As you may recall, Market Monetarists (MM) claim Robert Hetzel as one of their own since he has been making the argument since early 2009 that tight Fed policy ultimately caused the Great Recession. What is remarkable about Hetzel making this standard MM argument is that he did so as a Fed insider.  Now it seems John Taylor is becoming sympathetic to the idea (my bold): So with this interpretation, there is a clear connection between the too easy period and the too tight period, much like the connection between the “go” and the “stop” in “go-stop” monetary policy, which those who warn about too much discretion are concerned with. I have emphasized the “too low for too long” period in my writing because of its “enormous implications” (to use Hetzel’s description) for the crisis and the recession which followed. Now this does not mean that people are incorrect to say that the Fed should have cut interest rates sooner in 2008. It simply says that the Fed’s actions in 2003-2005 should be considered as a possible part of the problem along with the failure to move more quickly in 2008. John Taylor appears to be really close to my view of monetary policy over the past decade:  it was too loose in the early-to-mid 2000s and was too tight beginning in 2008. 

Instruments, indicators, targets, transmission mechanisms and goal variables (my pathetic attempt at a general theory of monetary policy) - I’m just going to assume an NGDP policy goal; the post will be too long to waste time defending it.  (I defend it in this National Affairs article.)  It seems logical that you would want to adopt a policy that is expected to succeed.  Thus monetary policy should be set in such a way that the expected growth in NGDP is equal to the desired growth in NGDP.  That means (according to Lars Svensson) that policy should target he forecast, i.e. that the optimal policy target is expected NGDP growth.  Svensson prefers to target the internal central bank forecast (presumably because he worries about a circularity problem with targeting market forecasts.)  However there are at least two NGDP targeting proposals that use market forecasts and avoid the circularity problem.  Hence I’ll assume NGDP futures prices are the optimal policy target, as they are much more closely correlated with expected future NGDP than are any of the other proposed targets (interest rates, exchange rates, M2, etc.)

Targets, Instuments, and the Zero Bound (Wonks Only) - Paul Krugman - I’ve been rereading Larry Ball’s impressive and disturbing what-happened-to-Ben-Bernanke analysis — an analysis that, I happen to know, has caused much consternation in some circles. (“Surely it can’t be just groupthink! There must be very good reasons the Fed hasn’t done more!”) And I think there’s a way to further refine Ball’s analysis, making more sense of Bernanke’s retreat from earlier positions — albeit one that still doesn’t cast a very flattering light on the Fed. Ball starts from what many of us already noted: Bernanke’s harsh early-naughties critique of the Bank of Japan’s inadequate response in the face of the zero lower bound — its “self-induced paralysis” — applies with almost eerie precision to the Bernanke Fed. So the question is what happened. Ball gets much more specific by pointing to an apparent shift in 2003, following an FOMC discussion of policy at the zero bound, in which BB appears to fully endorse the much more limited view of its policy options offered by Vincent Reinhart.

Greenspan defends Bernanke over GOP attacks -Alan Greenspan has decried the Republican presidential candidates’ attacks on Ben Bernanke, his successor as chairman of the US Federal Reserve as “wholly inappropriate and destructive,” weighing into the nomination contest as it nears a tipping point.The state of the economy has been the paramount issue throughout the gruelling campaign, with the candidates trying to outdo each other in their attacks on both President Barack Obama and Mr Bernanke.Mr Greenspan has sharply chastised the presidential hopefuls for their verbal barrages against his successor. “Anyone has the right to criticise Federal Reserve policy, but it is wholly inappropriate and destructive to engage in ad hominem attacks,” Mr Greenspan told the Financial Times, adding that he had been “very much impressed with the depth of his [Mr Bernanke’s] skills” during the three years they worked together. “Moreover, the notion that Fed board members, once appointed, can be ‘fired’ by the president for their ‘policy views’ is inaccurate. Policy views are explicitly protected by statute,” he said. Mr Bernanke, a Republican who was appointed Fed chairman in 2006 by President George W. Bush, has been vilified by the left for not anticipating the 2007 financial crisis and by the right for his response to it, such as instituting the Troubled Asset Relief Program that helped stabilise the banking sector.

Ben Bernanke With ABC’s Diane Sawyer; Do You See What I See? - ABC news released a video on its site of Diane Sawyer’s interview with Federal Reserve Chairman Ben Bernanke, aired on Tuesday. Aside from the light moments of the conversation with the veteran journalist of 60-Minutes fame, Bernanke appeared obviously strained, tired and defeated in response to Sawyer’s pointed questions regarding U.S. jobs, the economy and inflation. A look at the written transcript of the interview reveals nothing newsworthy from Bernanke. However, after watching the Q&A, the viewer should come away with a sense that Bernanke knows he’s lost control—a sense that market forces and politics have become too strong at this juncture of the Kondratiev cycle to avert a catastrophe. He also knows he’s lost credibility with the international financial community.   Watch the Diane Sawyer interview, then contrast Bernanke’s tenor with his demeanor during his Dec. 6, 2010 interview on CBS News 60-Minutes, when he assured the world of his ability to halt inflation within 15 minutes if inflation appeared to run out of control.

A Teachable Money Moment – Krugman -  Let me offer a stylized description of the role of the Fed. Think of it as choosing a point on a downward-sloping demand curve for monetary base, the sum of bank reserves and currency in circulation. And yes, that is what the Fed does; its power comes from the fact that the Fed, and only the Fed, can add to or subtract from that stock of monetary base. So the picture looks like this, with the downward-sloping line representing the demand for base, and A representing the point the Fed chooses: Now how, as an operational matter, does the Fed get to A? It could set the level of monetary base, and let the interest rate pop out as a result, or it could set the interest rate, and let the base pop out. In practice, these days — but not always in the past — it sets the rate: the FOMC tells the open-market desk in New York to hit a target rate. Why do it that way? Well, that demand curve fluctuates over time, and the Fed has decided that on a day-to-day or week-to-week basis it would rather see the base move around than the interest rate bounce up and down. But that’s a narrow, technical issue. At a basic level it doesn’t really matter: in the end, the Fed can use either technique to choose any point it wants on that curve.

The Fed’s IOUs Can Cripple the Economy in 2013 - Does Fed Chair Ben Bernanke know what he’s doing? We better hope so. Every tweet and cluck from the Open Market Committee has the power to move markets, as we saw again yesterday. Traders dumped stocks after reading the minutes from the central bank’s March 13 meeting; the report hinted at a slightly better job market and doused hopes for another round of quantitative easing.   With fiscal policy frozen, monetary stimulus is the only game in town. Not only is the Fed rolling the dice that near-zero interest rates will promote growth and not light the inflation fuse, the central bank is playing with ever-bigger chips.  The recent release of the Fed funds flow data confirmed just how big those chips are. Treasury securities outstanding at the end of 2011 totaled $10.2 trillion, up from $9.2 trillion a year earlier, a rise of a little more than one trillion dollars that helped finance our deficit. Who picked up all those low-interest securities? Foreigners bought a mere $287 billion, while the Fed picked up most of the slack, buying $642 billion as part of its quantitative easing program.

Fed Policy and Inflation Risk - During the past four years, the United States Federal Reserve has added enormous liquidity to the US commercial banking system, and thus to the American economy. Many observers worry that this liquidity will lead in the future to a rapid increase in the volume of bank credit, causing a brisk rise in the money supply – and of the subsequent rate of inflation.   That risk is real, but it is not inevitable, because the relationship between the reserves held at the Fed and the subsequent stock of money and credit is no longer what it used to be. The explosion of reserves has not fueled inflation yet, and the large volume of reserves could in principle be reversed later. But reversing that liquidity may be politically difficult, as well as technically challenging. Anyone concerned about inflation has to focus on the volume of reserves being created by the Fed. Traditionally, the volume of bank deposits that constitute the broad money supply has increased in proportion to the amount of reserves that the commercial banks had available. Increases in the stock of money have generally led, over multiyear periods, to increases in the price level. Therefore, faster growth of reserves led to faster growth of the money supply – and on to a higher rate of inflation. The Fed in effect controlled – or sometimes failed to control – inflation by limiting the rate of growth of reserves.

Trimmed Mean PCE Inflation Rate, FRB Dallas - February 2012: The trimmed mean PCE inflation rate is an alternative measure of core inflation in the price index for personal consumption expenditures (PCE). It is calculated by staff at the Dallas Fed, using data from the Bureau of Economic Analysis (BEA). The trimmed mean PCE inflation rate for February was an annualized 1.4 percent. According to the BEA, the overall PCE inflation rate for February was 3.8 percent, annualized, while the inflation rate for PCE excluding food and energy was 1.6 percent.The tables below present data on the trimmed mean PCE inflation rate and, for comparison, the overall PCE inflation and the inflation rate for PCE excluding food and energy. The tables give annualized one-month, six-month and 12-month inflation rates. The following chart plots the evolution of the distribution of price increases in the monthly component data over the past year. The chart shows the percentage of components each month, weighted by their shares in total spending, for which prices grew between 0 and 2 percent (at an annual rate); between 2 and 3 percent; between 3 and 5 percent; between 5 and 10 percent; and more than 10 percent.

Untangling Inflation Worries - Inflation may be mild and falling, but that doesn't stop anyone from worrying. A new survey by MFS Investment Management, for instance, reports that investors are more concerned about inflation over the next 12 months compared with their financial advisors. Sixty percent of investors surveyed say they're worried about rising inflation over the next 12 months, according to the MFS Investing Sentiment Survey. Conversely, only 41% of financial advisors think that rising inflation is a concern for investors in the year ahead. The disconnect arises amid a backdrop of mild and falling inflation lately. Annual consumer price inflation was 2.9% in February, the Bureau of Labor Statistics reports, down from the low-3% range last year. Ignoring the brief deflation spell during the Great Recession, official measures of inflation are currently near their lowest levels in half a century, and it may be headed lower still, considering the recent decline in the annual pace. But that doesn't mean it "feels" like inflation is low.

Not Enough Inflation, by Paul Krugman -A few days ago, Alan Greenspan spoke out in defense of his successor. Attacks on Ben Bernanke by Republicans, he told The Financial Times, are “wholly inappropriate and destructive.”  But why are the attacks on Mr. Bernanke so destructive?  The attackers want the Fed to slam on the brakes when it should be stepping on the gas; they want the Fed to choke off recovery when it should be doing much more to accelerate recovery. Fundamentally, the right wants the Fed to obsess over inflation, when the truth is that we’d be better off if the Fed paid less attention to inflation and more attention to unemployment. Indeed, a bit more inflation would be a good thing, not a bad thing. For at least three years, right-wing economists, pundits and politicians have been warning that runaway inflation is just around the corner, and they keep being wrong. Do you remember the tirades about “debasing the dollar” around this time last year? Do you remember the scorn heaped on Mr. Bernanke last spring when he argued that the bulge in inflation taking place at the time was just a temporary blip caused by gasoline prices and would soon recede? Well, he was right. At this point, inflation is once again running a bit below the Fed’s self-declared target of 2 percent.  Now, the Fed has, by law, a dual mandate: It’s supposed to be concerned with full employment as well as price stability. And while we more or less have price stability by the Fed’s definition, we’re nowhere near full employment. So this says that the Fed is doing too little, not too much.

Dan Kervick: Contra Krugman, Why Increasing Inflation is Not Likely to Increase Employment -  Yves here. I have a mild quibble with part of the argument below, which is based on a study I find badly constructed. Having lived through the 1970s, I can attest that a certain level of inflation does lead people to spend faster to beat rising prices. But my sense it that effect does not kick in until inflation is perceived to be meaningful, say somewhere over 4-5% a year, and I suspect the effect is backwards looking (ie, consumers base their forecasts not on official projections, but on their own recent experience). The study cited covers only durable goods and only the period from 1984 onward, where inflation levels were markedly lower than in the 1970s. Finally, marketing consultants have pretty much abandoned asking questions (“would you buy X”) as a way to assess demand. It’s just not reliable. But the conclusion in the piece is nevertheless is probably correct, since modern central bankers are so inflation-averse that they would be unlikely to tolerate it getting to anywhere near the level needed to induce anticipatory spending.

The Slowing Velocity of Money - What Is It Telling Us? - There is a relatively little discussion about one particular parameter of the economy, the velocity of money. As you will see in this posting, recent changes in the velocity of money may be a harbinger of things to come for the economy. Let's start with a bit of background information and some definitions. The velocity of money, according to the Federal Reserve, is a ratio of the nominal (before inflation adjustments) GDP to a given measure of the supply of money, either M1 or M2. WTF? Here are a couple of definitions that might help. First, M1 is the most liquid measure of the money supply and includes all physical money including coins and currency plus demand deposits (chequing accounts); basically money that is available immediately. Second, M2 includes the aforementioned components of M1 plus money market funds, savings deposits and all time-related deposits. Now, let's go back to the velocity of money. Putting Fedspeak into terms that mere mortals can understand, the velocity of money can be thought of as how often the money supply "turns over" or the number of times a single dollar is used to purchase the goods and services that comprise the GDP in a given period of time. The velocity of money can also be thought of as the average frequency with which a unit of money is spent or how many times a given dollar bill is spent by all of the consumers that spend it as it works its way through the American economy in a given period of time.

What’s all the fuzz about money? - In response to the 2008 global meltdown, there are really two arguments for what needs to happen next. One is fairly straightforward: We need to change the financial system through which money flows - though of course, the debate is on what precisely needs to be changed. But there is a more fundamental debate growing throughout the world of autonomous media and its productive publics: What if money itself needed to be changed? This is not a debate about the financial system per se, but actually an argument about the intrinsic "design" of money. But, isn't money just money? No, it isn't, and paradoxically, though the debates precedes its emergence, the internet played a big role in teaching us a new truth: Money is designed, and that design matters. And this is what we have come to understand about money: It is not a neutral means of payment, but a tool that is designed to benefit some people, and inevitably hurts others. Call it an expression of protocollary power, or call it value-sensitive design - it matters! Remember, every traditional society and religion, as Islam still does today, considered lending at interest a grave sin. Why was that? For a very simple reason. If you ask for interest in a static pre-modern society and you need to repay more than you have borrowed, then you can only take it from someone else, thereby destroying the social fabric of non-growing societies.

U.S. Domestic Income Grows Strongly in Q4 2011, Outpacing Growth of GDP - According to the final figures released this week by the Bureau of Economic Analysis, U.S. Gross Domestic Income grew at a strong 4.4 percent annual rate in Q4 2011. Growth of GDI outpaced that of GDP, which was unrevised at 3 percent, itself the strongest of the year. As the chart shows, it was the second consecutive quarter that GDI had grown faster than GDP. In theory, gross domestic product and gross domestic income are equal. Every act of production must, by definition, generate income for someone in the form of wages, rents, interest, or profits. In practice, the BEA measures the two using two different data sets. It calculates GDP as the sum of expenditures on consumption, investment, government purchases, and net exports. GDI is the sum of observations of compensation of employees, proprietors income, corporate profits, and other income items. Not surprisingly, the two do not match, partly because of differences in methods and partly because of errors and omissions.  The BEA calls the difference between GDI and GDP the statistical discrepancy. It was unusually large in Q4 2011. Does the difference in GDI and GDP growth have any real significance, or is it a mere statistical quirk? Some optimists think that the stronger growth of GDI over recent quarters shows that GDP is understating the true pace of economic activity. If so, it would help explain why the job market is performing more strongly than the GDP data would suggest. For example, as I detailed in this recent post,  the employment gap is closing significantly faster than the output gap.

Room to grow - The latest data flurry continues a string of good American economic news. Last week, the Bureau of Economic Analysis released its third estimate of growth in the fourth quarter of 2011. The overall GDP figure was unchanged, but the report also gave us our first look at the performance of Gross Domestic Income, an alternative measure of output theoretically identical to GDP, but which often differs in practice and which has been found to be a good predictor of future GDP revisions. While GDP grew at a 3.0% annual pace in the fourth quarter, GDI rose by 4.4%. The finding suggests that GDP growth may eventually be revised upward, and that recent, faster job growth isn't necessarily out of line with underlying economic performance. Indeed, GDI has consistently pointed toward a healthier recovery than GDP indicated (while during recession GDI sketched out a more severe downturn than GDP):We also learned last week that consumer spending was strong in February while consumer confidence rose in March. And according to new figures released this morning, American manufacturing activity grew at a faster pace in March than in February. First-quarter growth is not expected to be as rapid as that in the last quarter of 2011, but it should at least come close to trend growth.

Fed's Pianalto Sees 2.5% Economic Growth in 2012, 3% in 2013 - Federal Reserve Bank of Cleveland President Sandra Pianalto said the U.S. economy is gradually improving and will probably grow at 2.5 percent this year and around 3 percent next year. “I am seeing more evidence that our economic expansion is becoming self-sustaining,” Pianalto, a voting member on the policy-setting Federal Open Market Committee, said today in a speech in Marietta, Ohio. “Labor market information has been promising over the past few months.” A recovery in the labor market is signaling that the economic recovery is gaining strength. Employers probably added 203,000 jobs in March, according to the median of 72 estimates in a Bloomberg survey, after February’s report showed that companies hired 227,000 workers in February to cap the best six months of gains since 2006.

An Elusive Relation between Unemployment and GDP Growth: Okun’s Law : Economic Trends : Federal Reserve Bank of Cleveland: The unemployment rate fell from 9.1 percent to 8.3 in 2011, but real GDP grew only 1.6 percent. That is much lower than its average growth of 2.6 percent since 1985. The slow GDP growth has led some observers to question how sustainable the recent improvement in the labor market is. Implicit in this suspicion is the idea that the unemployment rate can improve only so much given the modest growth of economic activity. This idea is based on an empirical relationship sometimes referred to as Okun’s law, which is essentially a simple rule of thumb that associates the growth rate in real GDP to changes in the unemployment rate observed around the same time. We argue that the pace of improvement in the labor market (as measured by the unemployment rate) is, to a large extent, consistent with the pace of the recovery in GDP. Looking at the relationship between these two macro variables in slightly different ways shows that, if anything, the recession had a larger impact on unemployment than one might have anticipated, and what we’re seeing during the recovery is not necessarily puzzling.

Unemployment rising too fast, then falling too fast … going forward, it should (unfortunately) be just right - Has the unemployment rate fallen “too fast” given underlying output growth over the past 18 months? Applying a simple Okun-type relationship between changes in unemployment and the difference between growth rates of actual and potential GDP (or, changes in the output gap) would indicate so.  Federal Reserve Chairman Ben Bernanke noted this “too low” unemployment last week (so have Tim Duy and others). While there’s definitely some interesting stuff to examine here, we should first point out the one thing that nobody disagrees about. Going forward from now, the best estimate for what another 24 months of 0.8 percent average output gap reduction will buy us is the one provided by the classic Okun-style relationship:  A very slight fall – about 0.4 percentage points – in the unemployment rate. This cautionary tale about what to expect going forward is sometimes lost as people point out that the too rapid fall in unemployment recently is the mirror image of the too-rapid rise in unemployment in late 2009 and 2010. The graph below shows the actual unemployment rate and the one predicted by regressing two-year changes in unemployment on the two-year change in the output gap, as well the square of the change in the output gap.

Five Years After Crisis, No Normal Recovery - Carmen M. Reinhart and Kenneth S. Rogoff  - With the U.S. economy yielding firmer data, some researchers are beginning to argue that recoveries from financial crises might not be as different from the aftermath of conventional recessions as our analysis suggests. Their case is unconvincing.  The point that all recoveries are the same -- whether preceded by a financial crisis or not -- is argued in a recent Federal Reserve working paper. It was also discussed in a recent article in the Wall Street Journal.  It is mystifying that they can make this claim almost five years after the subprime mortgage crisis erupted in the summer of 2007 and against a backdrop of an 8.3 percent unemployment rate (compared with 4.4 percent at the outset of the financial crisis). Our research makes the point that the aftermaths of severe financial crises are characterized by long, deep recessions in which crucial indicators such as unemployment and housing prices take far longer to hit bottom than they would after a normal recession. And the bottom is much deeper. Studies by the International Monetary Fund concluded much the same.

Forget GDP: The Radical Plans to Go Beyond Growth - Gross domestic product – and the very idea of growth that it is meant to measure – is under attack these days by a small, radical group of academics who are calling for a shrinking of the world’s developed economies through voluntary reductions in production and consumption. This kind of contraction, they argue, is needed to preserve environmental resources and rebalance inequalities between developed and emerging economies.  To these proponents of “degrowth” – who will be holding a conference in Montreal next month – GDP is a failed economic indicator ready to be consigned to the scrapheap of history. “A fixation on economic growth is at the root of our environmental issues and social inequalities,” reads a press release for the conference. Those ideas fall far outside the realm of mainstream economic thought, but at the same time, more and more traditional economic thinkers – who still believe strongly in the need for growth – have suggested that growth as we know it is not enough. One of them is President Obama’s nominee to head the World Bank, Dartmouth College President Jim Yong Kim. 

Deleveraging Conumdrum - We are squarely in the “deleveraging” phase for the global economy.  Somehow the enormous accumulated debts built up over many decades need to be reduced, which I believe must result in sub-par economic growth for the most over-indebted developed economies – or more directly stated the global economy as a whole.  The struggle to “deleverage” is a major reason why the economic “recovery” in the U.S. has been the most disappointing on record, and why Europe and Japan are once again experiencing contractions in their economies.  This deleveraging process must occur, and the path that policymakers choose will have major ongoing implications for the global economy for the indefinite future.  Any investment manager who chooses to ignore the implications of these policy decisions does so at the expense of his or her clients. So now that we have entered the “deleveraging” phase for the global economy, what are the options for reducing the massive amount of debt in the system?  Any analyses must start with a very basic (and disturbing) premise:  The amount of accumulated debt (private and public) and promises to pay (entitlements) are so large, that it is reasonable to believe that these debts can never actually be paid back, under any rational normalized growth rate assumptions.  Then assuming one buys into my premise, what alternatives do policymakers have for reducing the amount of debt in the global economy?

Is the Wimpy Recovery Now Morphing Into A Recession? - We’ve just begun coming to grips with the Wimpy Recovery. Are we actually in for another recession? That was the implication of a couple of economic reports I read this week, including one by ITG Investment Research, which tracked how the pace of this recovery (which was never great to begin with) has by some measures been slowing, most particularly among middle income consumers and industries producing for overseas markets. One of the most interesting snippets from the report: While there are fewer goods on sale in American malls and retail shops than there were last year around this time, what is on sale is being discounted at much steeper rates — and not just at dollar stores, but at outlets catering to middle as well as lower income people. That’s not surprising given that the gains we’ve seen during this recovery have mainly accrued to the upper classes. Stocks are up, but it’s mostly rich people who own those. The residential real estate market, where most Americans keep the majority of their wealth, is still down. (I saw Robert Shiller for lunch last week and he said we’ve got years of pain still to go on that front.) Salaries are also down – there’s been almost no growth in real income throughout the wimpy recovery.

The Recovery According to Ed “We are not in a recession” Lazear - In Tuesday’s WSJ, Edward Lazear argued that we are now experiencing the “Worst Economic Recovery in History”. Before dissecting this remarkable document, it would behoove the reader to recall that while he was Chair of George W. Bush’s Council of Economic Advisers, he stated unequivocally in May 2008 (also in the pages of the WSJ): "The data are pretty clear that we are not in a recession." He wrote this less than five months before US GDP took a remarkable dive; in 2008Q4 q/q growth was -8.9 percent SAAR. In the available series, this loss was only exceeded in 1958Q1 (-10.4 percent). Lazear writes: Indeed, that was the expectation [that the economy was in rapid catch-up mode and would eventually regain all that had been lost]. As economist Victor Zarnowitz of the University of Chicago argued many years ago, the strength of the recovery is related to the depth of the recession. Big recessions are followed by robust recoveries, presumably because more idle resources are available to be tapped. Unfortunately, the current post-recession period has not followed the pattern.  After recounting the Reinhart-Rogoff thesis, Lazear essentially dismisses it, apparently in favor of John Taylor’s argument that the crisis was Fed induced. I want to take exception to the argument that the expectation was for a rapid recovery.

America’s hall of mirrors recovery - Robert Reich - The economy added only 120,000 jobs in March – down from the rate of more than 200,000 in each of the preceding three months. The rate of unemployment dropped from 8.3 to 8.2%, mainly because fewer people were searching for jobs – and that rate depends on how many people are actively looking. It's way too early to conclude the jobs recovery is stalling, but there's reason for concern. Remember: consumer spending is 70% of the US economy. Employers won't hire without enough sales to justify the additional hires. It's up to consumers to make it worth their while. But real spending by American consumers (adjusted to remove price changes) this year hasn't been going anywhere. It increased just 0.5% in February, after an anemic 0.2% increase in January. The reason consumers aren't spending more is simple: they don't have the money. Personal income was up just 0.2% in February – barely enough to keep up with inflation. As a result, personal saving as a percentage of disposable income tumbled to 3.7% in February, from 4.3% in January. Personal saving is now at its lowest level since March 2009. American consumers, in short, are hitting a wall. They don't dare save much less than they are now because their jobs are still insecure. They can't borrow much more. Their home values are still dropping, and many are underwater – owing more on their homes than the homes are worth.

Some Dreary Forecasts From Recovery Skeptics - When a lackluster jobs report came in on Friday morning, some economists, investors and forecasters were hardly surprised.  Call them permabears. A solid six months of good and getting-better data — fewer Americans claiming unemployment benefits, rising industrial production and improving economic sentiment among them — have failed to convince them of the strength of the recovery.  Some offer outright dire predictions. There is the Economic Cycle Research Institute, a New York-based forecasting firm, which foresees a new recession1. There is A. Gary Shilling & Company, a consulting firm in Springfield, N.J., which argues that the economy will weaken through the rest of the year.  There is also the asset manager John P. Hussman. Last month, he wrote in a research note that “while investors and the economic consensus has largely abandoned any concern about a fresh economic downturn, we remain uncomfortable,” given the deterioration of certain leading measures, like consumption growth.  Others — call them the baby bears, perhaps — simply offer what they say are more realistic assessments of both the weakness of the economy and the tepid pace of the recovery, despite a few months in which a spate of reports surprised to the upside.

You Ain't Seen Nothing Yet - Part One - Watching pompous politicians, egotistical economists, arrogant investment geniuses, clueless media pundits, and self- proclaimed experts on the Great Depression predict an economic recovery and a return to normalcy would be amusing if it wasn’t so pathetic. Their lack of historical perspective does a huge disservice to the American people, as their failure to grasp the cyclical nature of history results in a broad misunderstanding of the Crisis the country is facing. The ruling class and opinion leaders are dominated by linear thinkers that believe the world progresses in a straight line. Despite all evidence of history clearly moving through cycles that repeat every eighty to one hundred years (a long human life), the present generations are always surprised by these turnings in history. I can guarantee you this country will not truly experience an economic recovery or progress for another fifteen to twenty years. If you think the last four years have been bad, you ain’t seen nothing yet.

The 15 Trillion Dollar Party - There are two major trends taking place that are shaping up as a recipe for disaster. On the one hand, we have massively indebted governments around the world desperate for tax revenues and, on the other, steadily growing multi-trillion underground economies whose main goal is to avoid paying them. According to a recent study, the amount of uncollected tax revenues in the U.S. is estimated around a whopping 500 billion dollars per year1—enough money to bailout most of Europe.  At 8 percent of GDP, the underground or shadow economy in the U.S. is much smaller percentage-wise than other nations like Greece (25 percent), Italy (27 percent), or Thailand (70 percent)2, yet, given our overall size, America's untaxed economy is larger than “the official output of all but the upper crust of nations across the globe…bigger than the GDP of Turkey or Austria.”3 Question is: How long will the government allow this to last?

Does the World Believe America Will Pay Its Debts? - If you spend any time reading about economics on the internet, you’re aware of the many virtual pamphleteers who loudly portend the impending downfall of the American government and global financial system in general. It’s become somewhat fashionable to proclaim America a banana republic, arguing that she is financing her debt with central bank purchases of government bonds, a strategy that is unsustainable and often ends in a blaze of hyperinflation and economic collapse. No serious observer really believes that the U.S. faces this fate in the near term.  But a strand of this thinking has made its way into the mainstream and is distorting the debate about the federal government’s attempts to steer the economy out of a recession. Lawrence Goodman opined in the Wall Street Journal last week that, “Demand for U.S. Debt Is Not Limitless.”  In the piece, Goodman takes aim at those who have argued that demand for U.S. debt is strong, and that regardless of what the rating agencies say, the marketplace believes the U.S. will pay its bills. In particular, he highlights the “stunning” fact that in 2011 the Fed purchased 61% of the debt issued by the Treasury, up from negligible amounts prior to the 2008 financial crisis. This, he added, “not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.”

Is There a Fiscal Crisis in the United States? - Simon Johnson - There are two competing narratives about the federal government budget in the political mainstream today. The first is that we are, or soon will be, in crisis, because of runaway government spending. To avoid this crisis, we should cut spending by a great deal and as soon as possible. The second view is that all talk of a fiscal crisis is essentially a hoax; we have a jobs crisis, and we should spend as much as necessary to get us out of the deep recession. From this perspective, we should fix the budget once the economy is back on an even keel. Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, is very much in the first camp, as seen in his proposed budget, which passed the House last week. President Obama is substantially in the second camp, as he demonstrated with his strong anti-Ryan remarks in a speech on Tuesday. Both views are dangerous, in very different ways. The raw numbers on the total level of federal government debt would seem, at first glance, to favor the “sky is falling” view. Total federal government debt held by the public stood at $10,883,217,233,063.87 at the end of April 2.  So the debt is just under $35,000 a person.  But we do not have to pay down the debt. Investors around the world have chosen to buy United States government debt, and they continue to regard it as a “safe asset” despite the continuing low level of interest rates. Investors will hold the debt of a well-run company or government as long as they expect to receive interest payments – a very long time.

Bring Back Fiscal Policy - The recent exchange on the nature of banking among Paul Krugman, Scott Fullwiler, Steve Keen and others has been feisty and instructive.  But some readers might be left wondering whether the whole exercise is too wonky by half.   The anatomical details of banking systems might be juicy and interesting for the academics who like to dissect those systems and dig deep into their entrails.  But how significant are the details for practical questions of public policy?  They are in fact very significant. The functional details of institutions matter, and without understanding how the banking system actually works it is impossible to distinguish causes from effects in our attempts to guide that system toward the service of the public good.  Conventional textbook models of banking and monetary systems are responsible for widespread commitment to the money multiplier and loanable funds models of the relationship between central bank reserves and the volume of bank lending.  Relying on these models, some prominent economists and pundits have been telling us throughout our recent economic crisis that we can address the problems of a stagnating economy and persistently high unemployment with the reserve management tools of monetary policy alone.

The Political Path to Full Employment - Paul Krugman argues in a recent New York Times column that right-wing critics of Ben Bernanke and his colleagues are trying to bully the Fed into a misguided obsession with inflation, and that “the truth is that we’d be better off if the Fed paid less attention to inflation and more attention to unemployment. Indeed, a bit more inflation would be a good thing, not a bad thing.” Krugman is absolutely right to lament conservative pundits’ and politicians’ obsessions with inflation when tens of millions of Americans are languishing in unemployment, with all of the personal, social and economic misery and waste that unemployment entails.  But his argument, which assumes that the Fed can boost employment by engineering higher inflation, is problematic.  I believe this is the wrong approach.  The Fed’s ability to boost employment is very limited, well-intentioned citations of the Fed’s full employment “mandate” notwithstanding.  Rather than looking to central bankers and the banking system to accomplish a task for which they are not really cut out, we should turn our attention back toward fiscal policy as the primary tool for bringing the country up to full employment and keeping it there.   And rather than seeking engineered inflation as the mechanism for boosting spending and employment, we should implement the MMT job guarantee proposal to achieve full employment and price stability at the same time.

Jobs Report Show Weakness. Will Policymakers Respond? - The Employment Report for March was weaker than many analysts expected. The unemployment rate fell slightly from 8.3 percent to 8.2 percent, and on the surface that seems like good news. But the 120,000 jobs created during the month is barely enough to keep up with population growth, the labor force participation rate actually fell from 63.9 percent to 63.8 percent, and the employment to population ratio also fell from 58.6 to 58.5 percent. Thus, the fall in unemployment mainly reflects fewer people searching for jobs rather than more people finding jobs. This is just one month's worth of data, and monthly data can be noisy so it's not time to panic yet. The recovery could pick up steam again next month. But the possibility that it won't pick up, e.g. because unseasonably good weather distorted the numbers for the last few months, has to be taken seriously by policymakers. Those in charge of monetary and fiscal policy must realize that forecasts have both upside and downside risks, and that doing too little if economic growth turns out to be slower than expected is far more costly than doing too much because economic growth exceeds projections.

U.S. Economy Needs Stimulus, Not Soothsayers - Here’s something you don’t often hear an economist admit: We have very little idea where the economy will be next year. ...Why? Data are imperfect. Theories are coarse. Models oversimplify. The economy is constantly evolving and can’t be subjected to controlled experiments. Economic cycles are infrequent, so our understanding of them necessarily proceeds very slowly.  Serious forecasters embrace uncertainty, giving rise to the much-derided stereotype of the two-handed economist. But this is exactly what we need. Like a meteorologist who warns you to pack an umbrella because there’s some chance of rain, economists can assess the risks that lie ahead in a way that helps policy makers prepare for the future. To do so, they must examine both the rain and the shine scenarios, and weigh the cost of action - - or inaction -- in both cases. Consider the current economic-policy debate. Most forecasters suggest that as the recovery slowly grinds on, unemployment will fall to about 7.5 percent by the end of 2013, from the current 8.3 percent. While this isn’t great progress, it is fast enough that some have argued against further stimulus.  We know, though, that the consensus forecast is highly likely to be wrong. Unemployment could fall to 6.5 percent, or rise to 8.5 percent. Each of these possibilities needs to be considered, and weighed according to its potential benefit or harm.

Geithner Calls for More Government Action - Treasury Secretary Timothy Geithner on Wednesday said that despite marked improvement since the financial crisis, more needs to be done to strengthen the U.S. economy and Washington leaders need to act. “The challenges facing the American economy today…are about the barriers to economic opportunity and economic security for many Americans and the political constraints that now stand in the way of better economic outcomes,” Geithner said in remarks prepared for a speech before the Economic Club of Chicago. In the speech, Geithner said the actions taken in 2008 and 2009, including massive stimulus spending, helped avoid a much deeper depression. He then echoed President Barack Obama comments earlier this week, saying that plans floated in Congress and on the campaign trail to deeply slash government spending will not lead to additional growth. “There is no economic or financial case for using the fear of future deficits to cut as deeply into core functions of the government, to weaken the safety net or fundamentally alter Medicare benefits,” He instead called for additional investment in education, infrastructure and aid to boost exports.

Framing fiscal stimulus arguments - It struck me reading DeLong and Summers that Keynesians like myself often inadvertently provoke opposition. When we discuss temporary increases in government spending, we typically assume it is debt financed. Furthermore, as the interest on higher debt has to be paid for, we generally assume taxes increase to do that. So even though our increase in government spending is temporary, both taxes and debt end up being permanently higher. At a rather basic and non-intellectual level, I think this puts many people off from the start.      Instead we could start with a temporary balanced budget increase in spending. That way neither taxes nor debt are higher in the long run. In addition, for anyone who has done their post graduate training in the last twenty years that is the natural way to start thinking about what is going on. Or if we want to avoid tax increases altogether, why not finance any increase in debt by reducing government spending rather than raising taxes? If raising debt in the long run is a problem (and I think there are good reasons why it might be), then why not use lower government spending after the stimulus not just to pay the interest on debt, but to pay off all the additional debt incurred by the stimulus. When you think about all these possibilities, the standard choice of debt finance paid for by permanently higher taxes is really the least likely to win friends.

A Quick Boost for the Economy — a $12 Minimum Wage - The Real News video - James K. Galbraith: Raising the minimum wage would boost demand and give millions a better wage

Justice Department Probing Widespread Stimulus Fraud - In what is shaping up as another troubled chapter in the saga of the Obama Administration’s economic stimulus program, the Justice Department is investigating whether billions of dollars worth of federal highway and transportation programs are rife with fraud and abuse. About $48 billion of the $825 billion authorized by Congress and the administration under the 2009 American Recovery & Reinvestment Act (ARRA) went to support existing highway and transit infrastructure projects, like the massive Fulton Street Transit Center project in lower Manhattan. Eighty-eight percent of those funds have been spent, and nearly 80 percent of the projects have been completed as part of the government’s efforts to create new jobs.  But federal investigators have uncovered widespread financial management problems with many of the projects. As of early March, federal authorities were investigating 66 cases of alleged false statements, bid rigging, fraud and embezzlement, according to a report by Calvin L. Scovel III, the Department of Transportation’s inspector general. Justice Department lawyers are scouring 47 of those cases for potential prosecution, according to Scovel.

Beware of Budget Gimmickry - It’s clear that the United States is entering a long period of budgetary confrontation. Sooner or later, meaningful action on the budget deficit will be necessary. And despite the best hopes of budget hawks, the likelihood of a grand bargain that will solve our problem once and for all is extremely remote. Because all of the options for meaningful deficit reduction – tax increases, in particular – are extremely unpopular, it is inevitable that accounting gimmicks will be called upon to give the illusion of progress. Budgetary gimmickry is at the heart of Europe’s continuing debt problem. According to a 2010 article in The New York Times, Wall Street firms arranged for countries like Greece to borrow funds in ways that circumvented European Union budgetary rules by using financial derivatives that were hidden off-budget. Often, borrowing was disguised as an asset sale so that the borrowing receipts were classified as revenues rather than debt. In Europe, governments sometimes took over the pension plans of private companies or public enterprises. In the short term, the government gained assets that appeared to reduce borrowing; but in the process it incurred a liability for future pension payments that was not immediately apparent on the government’s books. Another instance of hidden borrowing involves currency swaps. The trickery involves cases where a nation specifies borrowing and repayments in foreign currencies at different exchange rates. Something like this got Italy into financial trouble some years ago and Greece more recently, according to the article in The Times.

Hidden Dangers Makes Fiscal Cliff More Treacherous - I’ve noticed a cottage industry of late in getting people to care about the “fiscal cliff,” the combination of measures that will hit at the end of the year producing a significant fiscal drag. The three measures are: the expiration of the Bush tax cuts, the end of the payroll tax cut and extended unemployment insurance, and the “trigger” from the Budget Control Act of across-the-board cuts to defense and discretionary spending. I’ve written about the Bush tax cuts, which I think we may be better off letting expire, with a follow-up of some more progressive tax changes. But today, Jim Dyer and Scott Lilly (former Republican and Democratic staff directors on the House Appropriations Committee, respectively) explain what they believe are dangers from the trigger: One problem is the apparent belief that slicing $110 billion out of a $3.6 trillion budget is no big deal. The truth is that those cuts will come from a much smaller part of the budget — and in a time frame that will make them impossible to absorb without major dislocation for the economy at large as well as for government bureaucrats. Some of the most serious damage will be directed not at the big programs about which the two parties have deep and long-standing disagreements but at basic, critical functions of government that are broadly supported by members of both parties. Take U.S. marshals, who, among other things, protect judges and juries during federal court proceedings. Some recent analysis indicates that the U.S. Marshals Service will have to furlough (suspend salary payments) every deputy marshal in the country for five weeks during the nine-month sequestration period

Congress fails on infrastructure. Again. - On Friday, President Obama signed the Surface Transportation Extension Act of 2012. Odds are you didn't hear about it. There wasn't a signing ceremony in the Rose Garden, and no one on the Hill rushed to the cameras to take the credit. The White House's statement was less than 50 words, and neither John Boehner, Nancy Pelosi, Harry Reid, or Mitch McConnell even issued a press release. And for good reason: Each and every one of them is ashamed of this bill. As they should be. "Surface transportation" is the poetic term Congress uses for the bills that fund the nation's transportation infrastructure. When you drive a smooth road, pass safely over a bridge, or even use public transit, your journey can probably be traced back to some surface transportation act or another. Typically, these bills set funding levels and federal priorities for a period of years. The 2005 surface transportation bill for instance, spanned four years. But, on September 30, 2009, SAFTEA-LU -- yes, that's actually the 2005 Act's acronym -- ran out. And since then, Congress has passed, and Obama has signed, nine short-term extensions. Nine. Another stopgap was all they could manage. The Surface Transportation Extension Act of 2012 extends federal funding for 90 days. That means states have 90 days in which they actually know how much transportation funding there will be, and how Washington will apportion it. Come June 30th, however, the stopgap stops, and Congress will either have to pass some long-term legislation or pass a 10th stopgap.

Long-Term Surface Transportation Bill Unlikely Before Election - Late last week, the President signed a 90-day surface transportation extension, the ninth of his Presidency. This is getting to the point where we have to look at the failure to deliver a long-term transportation bill as an impediment to economic recovery. Think about the typical scenario. You’re a municipality that wants to build a new highway to connect to a growing edge suburb. Or you want a new light rail system to drive people to downtown and the new convention center. But these are long-term projects. You have to be secure in the knowledge that financing will stay in place through the life of the project, or else you end up with a half-formed rail line to nowhere that becomes the signature image from the opposition in your re-election campaign. A natural political conservatism sets in if the funding cannot be guaranteed, and the ambitious plans get scaled back. This has probably happened dozens of times during these nine short-term extensions. Heck, even a two-year bill, which the Senate passed, doesn’t allow for that much certainty; previous transportation bills have stretched four years or more. Federal participation in surface transportation funding has simply not been predictable for almost three years. And that makes it nearly impossible for local agencies to plan ahead. Now we learn that this will probably be the reality for another year

The Impossibility of Defense Cuts - Apparently the thing we need to keep ourselves safe is a fast, lightweight ship that can sweep mines, launch helicopters, fight submarines, and perform other assorted duties—but can’t withstand heavy combat. I don’t claim to know if we really need the Littoral Combat Ship to ensure our national security. According to an article in the Times, John McCain—the Republican Party’s last presidential nominees and one of the Navy’s more famous veterans—is critical, although other Republicans and the administration are in favor of it. I do know that the Littoral Combat Ship is a classic example of why it’s so hard to reduce budget deficits. You have local politicians who want the jobs. You have a large group of representatives who are reflexively pro-military and will vote for anything the Pentagon wants, and even things the Pentagon doesn’t want. (You have Mitt Romney, who bemoans the fact that the Navy has only 285 ships, the fewest since 1917. Would he rather have the Royal Navy of 1812, which had 1,000 ships, or our navy, with eleven aircraft carrier groups—while no other country has more than one?) You have a procurement and development process that stretches on for years so that even when a weapons system turns out to be a dud, it has to be kept alive because it’s too big to fail—there is no other alternative. Both the Center for American Progress and the Project on Governmental Oversight have recommended cutbacks in the Littoral program. Yet there is no practical way to check its momentum.

The Most (And Least) Valuable Committees In Congress, In 1 Graph : Planet Money : NPR: Most of the nitty-gritty action in Congress happens in committees. Not surprisingly, campaign contributions flow to members of the committees that big donors are really interested in — like, say, the ways and means committee, which oversees the tax code. This makes a huge difference to lawmakers, who need a steady stream of donations to fund their re-election campaigns. Both parties rank each committee for its fundraising potential. There are lists of the A, B, and C committees, and fundraising targets for the members. Those lists aren't public. Many lawmakers say these lists exist, but no one would give one to us. So we created our own list, based on publicly disclosed fundraising numbers. At our request, Lee Drutman of the Sunlight Foundation, crunched data going back to the early '90s. The analysis found that Ways and Means is the most valuable committee for fundraising. Lawmakers on the Ways and Means committee raise an extra $250,000 a year compared to the average Congressman. The judiciary committee was the worst. Congressmen on that committee raised $182,000 less than the average Congressman 

The Bowles-Simpson Cult - Krugman - A brief shout-out to Stan Collender, the mild-mannered budget analyst who finally says what must be said: the Very Serious People who keep pushing the Bowles-Simpson deficit plan as some kind of talisman of fiscal responsibility are delusional and deeply unserious: B-S and some of their biggest supporters then made a huge mistake when they expressed surprise and extreme disappointment that the Obama administration didn’t make the co-chairs’ recommendation the basis of its fiscal 2012 budget, that is, the first one it submitted after the commission ended. That demonstrated a level of political tone deafness that seriously hurt the credibility of what had now become a B-S cult. They were seriously suggesting that the Obama White House unilaterally support the tax increases and spending cuts included in the two co-chairs’ plan even though it was virtually guaranteed that the GOP would never agree to do the same and would punish Democrats for doing so.

Paul Ryan’s Radical Budget - Last week, when House Republicans passed Paul Ryan’s budget resolution, Ryan, the Budget Committee chairman, said that Congress had a “moral obligation” to get the country’s finances under control, and that the vote was a necessary response to a looming “debt-driven crisis.” What he didn’t mention was that it was also a vote to gut the federal government.  Because Ryan presents himself as a reasonable technocrat who’s just making the tough choices that other politicians shirk, that may sound like an exaggeration. But the simple truth is that his plan is not an evenhanded attempt to solve America’s long-term budget problems. It’s a profoundly radical document, its proposals skewed by ideological biases. Raising taxes, of course, is out of bounds. The same goes for using federal power to hold down Medicare costs, which will be the key driver of future budget deficits. Instead, House Republicans would cut spending on almost everything else the government does. According to an analysis by the Congressional Budget Office, the Ryan plan would, by 2050, reduce federal spending to its lowest point, as a percentage of G.D.P., since 1951. And since an aging population, with rising health-care costs, means that a hefty chunk of government spending will be going to retirement and health-care benefits, hitting Ryan’s target would require drastically shrinking everything else.

Pink Slime Economics, by Paul Krugman -  On Thursday Republicans in the House of Representatives passed what was surely the most fraudulent budget in American history.  And when I say fraudulent, I mean just that. The trouble with the budget devised by Paul Ryan, the chairman of the House Budget Committee, isn’t just its almost inconceivably cruel priorities, the way it slashes taxes for corporations and the rich while drastically cutting food and medical aid to the needy. Even aside from all that, the Ryan budget purports to reduce the deficit — but the alleged deficit reduction depends on the completely unsupported assertion that trillions of dollars in revenue can be found by closing tax loopholes.  And we’re talking about a lot of loophole-closing. As Howard Gleckman of the nonpartisan Tax Policy Center points out, to make his numbers work Mr. Ryan would, by 2022, have to close enough loopholes to yield an extra $700 billion in revenue every year. That’s a lot of money, even in an economy as big as ours. So which specific loopholes has Mr. Ryan, who issued a 98-page manifesto on behalf of his budget, said he would close?  None. Not one. He has, however, categorically ruled out any move to close the major loophole that benefits the rich, namely the ultra-low tax rates on income from capital.

Bonus Fraudulence - Krugman - A further note on today’s column: one impression the Ryan budget manifesto (pdf) tries to create is that the loopholes it would close — whatever they are — largely benefit the top 1 percent, so the budget isn’t really as reverse Robin-Hood as it looks. Am I the only one repelled by the tackiness of Ryan’s presentations? I mean, they don’t even look like serious analyses — it’s all gee-whiz charts that look like they’re straight out of USA Today. It says something for our media culture that so many pundits mistake this for real wonkery. But back to the main point: those numbers (which are actually about “tax preferences”) come from the Tax Policy Center (pdf). And if you actually read the TPC report, you find that the big tax preferences benefiting the top 1 percent are the preferential rates on dividends and capital gains — precisely the tax rates Ryan insists must not be raised. Relative to the bigger fraudulence of relying on pink slime to balance the budget, this is secondary. But it’s still revealing.

Cuts to SNAP in the Ryan budget - For many years, the Food Stamp Program enjoyed reliable bi-partisan political support.  Even as the U.S. entitlement program for cash assistance was cut and converted to a block grant in the 1990s, food stamps remained largely unharmed.  Leading Republicans such as Senator Bob Dole joined leading Democrats in supporting food assistance for low-income Americans. Now, at a time when U.S. household food insecurity is near record levels, the nation's largest food assistance program -- under its newer name the Supplemental Nutrition Assistance Program (SNAP) -- is targeted for the most severe cuts ever in its 50-year history.  According to the Center on Budget and Policy Priorities, GOP Congressman Paul Ryan's proposed budget plan for 2013-2022, approved by the House of Representatives Thursday in a partisan vote, would cut SNAP by $133.5 billion, or 17 percent, over ten years. Rick Santorum, according to the New York Times, said the budget didn't go far enough. The New York Times editorial yesterday disagreed.  The Times said the proposed cuts "would mean a loss of $90 worth of food a month" for the average household.  If you read the Center on Budget's analysis carefully, clearly the Times should have said "a loss of $90 worth of food stamps in a month"

Obama trashes trickle-down economics -- President Obama thoroughly denounced the budget plan favored by House Republicans on Tuesday, calling it "thinly veiled social Darwinism" that will only exacerbate income inequality in America. The president's address, delivered to the American Society of Newspaper Editors, also marked the first time that he has called out Mitt Romney, his likely challenger, by name.  That passing reference, in which Obama linked the former governor of Massachusetts to the budget written by Rep. Paul Ryan and adopted by his House colleagues, marks an opening volley in a bitter campaign that will stretch until November. "One of my potential opponents, Governor Romney, has said that he hoped a similar version of this plan from last year would be introduced on day one of his presidency," Obama said. "He said that he's very supportive of this new budget and he even called it marvelous, which is a word you don't often hear when it comes to describing a budget." But Romney was not the main target on Tuesday. That distinction was reserved for Ryan, his budget and trickle-down economics.

Obama Attacks House G.O.P. Budget - President Obama opened a full-frontal assault on Tuesday on the federal budget adopted by House Republicans, condemning it as a “Trojan horse” that would greatly deepen inequality in the United States, and painting it as the manifesto of a party that has swung radically to the right. Warning against what he said would be severe cuts to college scholarships, medical research, national parks, and even technology to make accurate weather forecasts, Mr. Obama said the Republican budget was “so far to the right, it makes the Contract With America” — Newt Gingrich’s legislative manifesto of 1994 — “look like the New Deal.” Mr. Obama’s scathing attack, in a speech to a meeting of editors and reporters, was part of a broad indictment of the Republican Party that included the president’s likely opponent in the fall, Mitt Romney. The House budget, and the philosophy it represents, Mr. Obama said, is “antithetical to our entire history as a land of opportunity and upward mobility for everyone who’s willing to work for it — a place where prosperity doesn’t trickle down from the top, but grows outward from the heart of the middle class.”

Obama Finally Follows My Advice. Here’s One More Suggestion. - Okay, okay.  I know that Obama doesn’t read AB.  So I know that his decision, reflected in his speech today at a lunch with Associated Press editors and reporters, to finally—finally—start refuting the Republicans’ economics proposals with actual examples and statistics, was not prompted by my repeated laments here that Obama just doesn’t do specifics, i.e., statistics and other facts, when speaking to the general public, which until now he's rarely done anyway.  And my primal pleas that he do so.  So the first sentence in the title of this post is facetious.  The second sentence in the title is not. The New York Times is reporting on its website: President Obama opened a full-frontal assault Tuesday on the budget adopted by House Republicans, condemning it as a “Trojan horse” and “thinly veiled social Darwinism” that would greatly deepen inequality in the country.… In the latest of a series of combative speeches, the president said Americans could not afford to elect a Republican president at a time of fragile economic recovery, with a weak job market and a crushing national debt from “two wars, two massive tax cuts and an unprecedented financial crisis.”

Someone Is Wrong In The Times* - James Stewart has doubled down on his infatuation with Paul Ryan. Ryan’s budget, he says, is a viable centrist starting point for budget negotiations, and attacks from “left and right” are mere “partisan rhetoric.” This is several different kinds of crazy. First, Stewart repeats his belief that Ryan’s plan would increase taxes on investment income. But that belief has no basis other than Stewart’s own belief that it would be a good idea. As I pointed out before, Ryan’s own budget argues against raising taxes on capital gains and dividends. The only thing Stewart can find is Ryan’s apple-pie platitudes about the need for tax reform. But Ryan’s own vision of tax reform, as evidenced by his budget’s own words, doesn’t include higher capital gains taxes. (In addition, as a signatory to the Taxpayer Protection Pledge, Ryan is sworn to “oppose any and all efforts to increase the marginal income tax rate for individuals and business.” That sounds to me like it includes the capital gains tax rate, which is a marginal income rate.) This is further evidence of columnists’ ability to project their own fantasies onto Paul Ryan’s handsome face. More generally, Stewart pins high hopes on Ryan’s embrace of tax reform. But all Ryan’s budget actually says about tax reform can be summed up in two points: tax reform is good; and tax rates should be lower (25 percent for the top individual rate and for the top corporate rate, both down from 35 percent today).

Ryan In Two Numbers – Krugman - Last year, when Paul Ryan first made a big splash with his budget proposal, many commentators — some of them pretending to be moderates or at any rate only moderate conservatives — lavished praise on its fiscal responsibility. Then people who actually know how to read budget numbers weighed in, revealing it as a piece of mean-spirited junk. Now, on round two, the nature of the discussion has changed; instead of hearing about how wonderful Ryan is, we’re hearing about what a big meanie Obama is for saying nasty things about Ryan’s plan — a plan that is “imperfect” and maybe cuts a bit, but not really that bad. Except that it really is that bad. I could do this in detail, but you can learn everything you need to know by understanding two numbers: $4.6 trillion and 14 million. Of these, $4.6 trillion is the size of the mystery meat in the budget. Ryan proposes tax cuts that would cost $4.6 trillion over the next decade relative to current policy — that is, relative even to making the Bush tax cuts permanent — but claims that his plan is revenue neutral, because he would make up the revenue loss by closing loopholes. For example, he would … well, actually, he refuses to name a single example of a loophole he wants to close. So the budget is a fraud. No, it’s not “imperfect”, it’s not a bit shaky on the numbers; it’s completely based on almost $5 trillion dollars of alleged revenue that are pure fabrication.

The Simple Analytics of Soaking the Rich (Wonkish) - Paul Krugman - So President Obama is going after the Ryan plan; good. And better yet, he’s taking on the underlying economic premise, which is that low taxes on the rich are the answer to, well, everything, and good for everyone. For this premise is just bad economics. I’ve written about this before, drawing on Diamond and Saez, but I thought I’d try a different take. The way Diamond and Saez do the analysis is to argue that because the rich are rich, their marginal utility of income is very low, which means that at the margin their income doesn’t matter for social welfare. So they should be taxed at the rate which maximizes revenue, which is 1/(1+ε) — where ε is the elasticity of labor supply from the rich. And since we have a lot of evidence suggesting that ε is quite low, the appropriate tax rate for the rich is quite high — 70 percent or more. But what if the rich in their Galtian goodness supply something nobody else can? Call it J, for jobcreation. Doesn’t the imperative to encourage J mean that we should keep their taxes low? Actually, no. So here’s my alternative way to think about it: we can think of society as a whole — or, if you like, society not including the top 0.1 percent — as having monopsony power over the rich. The picture looks like this:

The Paradox of "Taxing the Rich" - The share of income taxes paid by the top 1% of income earners has hovered at around 40% for the past several years. This is the highest share in the history of Internal Revenue Service (IRS) tax statistics and due largely to the progressivity of the tax system rather than income concentration. Since 2004, the pre-tax income share of the top 1% has been around 20%. This means that the share of income taxes paid by the top 1% is about twice as large as their share of income. Even when including all federal taxes, including payroll taxes that are paid back to contributors in the form of Social Security and Medicare benefits, the tax share of the top 1% is still about 50% greater than its income share.Despite the fact that the top 1% is contributing a disproportionate share of tax revenues (however defined) relative to income, the Occupy Wall Street movement believes that increasing tax rates on the “rich” should be a top domestic policy priority. So, why the disconnect?

"Nontaxpayers are Overwhelmingly Elderly" -- Matthew Yglesias: A somewhat strange myth has taken hold in some precincts of American conservative opinion that some vast swathe of the population isn't paying taxes. In fact everyone pays sales taxes and other state and local taxes, and as Adam Looney and Michael Greenstone write for the Hamilton Project almost all working-age people pay federal tax on their income. The main bloc of people who don't pay income or payroll taxes are elderly people. Old people tend not to work, and many old people don't have much in the way of investment income either. But it's not like they're freeloading, they're just people who paid taxes in the past when they were working.

Of Janitors and Job Creators – Krugman - I want to follow up on what I had to say about the economics of tax rates on the rich, this time using a comparison some may find helpful. Let me start with a policy argument: Middle-class Americans should, in their own self-interest, support a huge increase in the Earned Income Tax Credit, even though this would have a large budgetary cost. Why? Because this would lead to an increase in the supply of menial labor, driving down the prices of things middle-class Americans buy and raising their real earnings. OK, I don’t think anyone — even among those who would like much more aid to the working poor — would make this argument. If your goal is to aid the middle class, you should aid the middle class — not try some roundabout route of subsidizing the labor of some other group, in the hope that the gains will trickle up. Now, let’s consider another policy argument: Middle-class Americans should, in their own self-interest, support tax rates on the wealthy that are well below the rates that would maximize revenue. Why? Because lower tax rates will encourage more effort on the part of the wealthy, which in turn will increase the earnings of the middle class. Unlike the first argument, this is a claim lots of people — essentially the entire Republican party — is making. But it’s the same argument! One version calls for subsidizing menial labor to aid the middle class; the other calls for sacrificing potential revenue gained from the wealthy, which is in effect a subsidy to elite labor, in order to aid the middle class. And both are equally bad economics.

The Fable of the Century - Robert Reich  - Imagine a country in which the very richest people get all the economic gains. They eventually accumulate so much of the nation’s total income and wealth that the middle class no longer has the purchasing power to keep the economy going full speed. Imagine that the richest people in this country use some of their vast wealth to routinely bribe politicians. They get the politicians to cut their taxes so low there’s no money to finance important public investments that the middle class depends on – such as schools and roads, or safety nets such as health care for the elderly and poor. Imagine further that among the richest of these rich are financiers. These financiers have so much power over the rest of the economy they get average taxpayers to bail them out when their bets in the casino called the stock market go bad. They have so much power they even shred regulations intended to limit their power. These financiers have so much power they force businesses to lay off millions of workers and to reduce the wages and benefits of millions of others, in order to maximize profits and raise share prices – all of which make the financiers even richer, because they own so many of shares of stock and run the casino. Now, imagine that among the richest of these financiers are people called private-equity managers who buy up companies in order to squeeze even more money out of them by loading them up with debt and firing even more of their employees, and then selling the companies for a fat profit. Although these private-equity managers don’t even risk their own money they nonetheless pocket 20 percent of those fat profits. And because of a loophole in the tax laws, which they created with their political bribes, these private equity managers are allowed to treat their whopping earnings as capital gains, taxed at only 15 percent – even though they themselves made no investment and didn’t risk a dime.

Top 1% Reduced Taxes in Last 3 Years but Probably Gained Income Share - Citizens for Tax Justice came out with a nice report today showing that the overall U.S. tax system is just barely "progressive," which is to say that as your income goes up, so does your tax rate. While the federal income tax is progressive in this sense, many state and local taxes, such as sales and property taxes are regressive in that lower income people pay higher percentages of their income than do higher income people. The following table from CTJ makes this crystal clear:As the right-hand portion of the table shows, as income rises federal taxes (individual and corporate income, estate tax, etc.) increase as a percentage of income, from 5.0% of income for the lowest 20% of earners to 21.1% for the top 1% of taxpayers. Meanwhile, state and local taxes move in exactly the opposite direction, from 12.3% of income for the lowest 20% to 7.9% for the top 1%. As CTJ further points out, for every income group the share of total taxes they pay is extremely close to their share of total income (in fact, the biggest difference is 1.7 percentage points).

More on Private Equity, Carried Interest, Wealth, and Romney - Linda Beale - Those who've read much of this blog are aware of the various arguments against the notion that private equity firms are "do-gooders" that we should encourage and even subsidize (through the carried interest provision). On the whole, I believe they are part of a harmful trend towards consolidation of enterprises that weakens links to communities, makes caring for workers seem like too great a cost, and encourages over-leveraging and instability that ultimately is devastating to the economy. Add to that the egregiously inappropriate tax treatment of "carried interest" paid to managers, and you have a wealth-building machine for a small, elite group that does not pay its fair share of the tax burden and whose activities are likely a net social detriment. Specifically, private equity firms historically have looked for good, stable businesses with decent cash flows, low leverage and decent but not high profits that they can take over, leverage highly (to pay for the acquisition and to provide quick funds to fuel their own ultra-high profit demands), with the cash flow from the ongoing business paying off the debt. The result in these leveraged buyout cases may be that a stable busienss with a profit of 5-6% that spent what was needed on maintenance and new investment, expanding gradually and paying its workers a decent wage and its owners a small but decent profit becomes an overleveraged company that is less stable and has to use more of its cash flow to pay off the debt.

We’re #1! U.S. Officially Has the Top Corporate Tax Rate. Or Not. - As of April 1st, the United States assumed the title of having the highest corporate tax rate in the world. The dubious feat was widely reported after Japan officially lowered its headline corporate tax rate Sunday from 39.5% to 38.01% — below the U.S.’s average combined federal-state rate of 39.2%.The occasion gave low-tax advocates the opportunity to complain about the burdensome American tax regime and its deleterious effects on investment, growth, and employment. Those on the left countered that the effective corporate tax rate, or taxes paid after loopholes are factored in, is actually much lower than 39.2%. Indeed, by one measure, corporations only paid an effective rate of 12.1% in 2011, although that phenomenon was a product of temporary tax credits for investment.  The unfortunate truth is that tax policy is so nuanced that it’s difficult to make clear-cut statements as to the relative onerousness of tax policy between countries. Indeed, even the corporate tax figure used in the media to report this story is a rough estimate. The 39.2% headline rate being reported in the press is the federal rate of 35% plus the average corporate tax rate of the individual states, which vary widely. Effective rates for individual corporations will differ greatly depending on a company’s industry and home state, among other factors.

Cashless: The Coming War on Tax-Evasion and Decentralized Money - If you knew that you could live in luxury for the rest of your life but that by doing so it would absolutely destroy the future for your children, your grandchildren and your great-grandchildren would you do it?  Well, that is exactly what we are doing as a nation.  Over the past several decades, we have stolen 15 trillion dollars from future generations so that we could enjoy a dramatically inflated level of prosperity.  Our 15 trillion dollar party has been a lot of fun, but what we have done to our children and our grandchildren has been beyond criminal.  We ran up the greatest mountain of debt in the history of the planet and we are sticking them with the bill.  Sadly, both political parties have been responsible for the big spending that has been going on.  Both Democrats and Republicans have run up huge budget deficits when in power.  But instead of learning the hard lessons of the past, both political parties continue to vote for even more debt.  They would rather continue to steal trillions of dollars from future generations than have the party end and have to face the consequences.

Finance as Wealth Transfer Mechanism: An Interview with James Galbraith - His latest book is ‘Inequality and Instability: A Study of the World Economy Just Before the Great Crisis’ (also available on Kindle). Interview conducted by Philip Pilkington.

New Limits on Courting U.S. Officials Vex Lobbyists - Tough new limits proposed on the way special interests could court executive branch officials have prompted a fierce counterattack from lobbyists who fear they will end a cherished Washington ritual: hosting federal workers at events like conferences, cocktail parties, galas and movie screenings.  Filmmakers and farmers, gun makers and real estate agents, and people in dozens of other industries say the rules under consideration by the Obama administration would choke off their ability to have a mutually beneficial dialogue with government officials. As a result, they say, public policy would be made in a vacuum, and federal rules would be more unrealistic and unworkable.  The proposal would extend restrictions now on political appointees to more than two million government workers. Federal employees could no longer accept “gifts of free attendance” at the many seminars, receptions and other social gatherings held by registered lobbyists and lobbying organizations as a matter of course in Washington.

Things I Should Not Be Wasting Time On - Krugman - I see that Scott Fullwiler has what he thinks is a slam-dunk refutation of what I’ve been saying about banking. Actually, not. Leave aside the continuing confusion between the argument that banks can create inside money — which nobody denies — and the claim that they can create unlimited amounts of inside money, never mind the size of the monetary base, which is what is at issue. Oh, and you know, I do know about T-accounts. Nick Rowe gets to the heart of it: when you push this argument, it always ends up with an appeal to the notion that the central bank will always supply as much monetary base as the markets demand, at a fixed interest rate. As Nick says, under current central-bank operating strategies this is true in the very short run — the 6 weeks between open-market-committee meetings; but that’s just an operating-strategy issue. What happens after 6 weeks? It all depends on what the CB targets; this says nothing at all about how much traction monetary policy has on the economy at large. One thing I might add, however, is that even the 6-week elastic supply of base is a decision — and has by no means always been true. The Fed didn’t introduce Fed-funds targeting until the 1980s. Before that, the interest rates at which banks could borrow additional reserves fluctuated day by day, often by a lot:

Philip Pilkington: Nobel Laureate Paul Krugman Selectively Quotes Rival to Stitch Him Up After Losing Argument - Oh, its a dark day, my friends. A pall has been cast over the econoblogosphere. Yes, Paul Krugman has just used the New York Times website to undertake a vicious stitch-up on an intellectual opponent who should have, by rights, won the original argument. Here’s how it went down. Post-Keynesian economist and sometimes Naked Capitalism contributor Steve Keen wrote a cogent article critiquing a Paul Krugman paper on Minsky and debt deflation. The key issue was that the so-called money multiplier does not function to restrict credit growth in modern economies operating on a floating exchange rate with a central bank that targets interest rate. We dealt with this briefly the other day and pointed out the flaw in Krugman’s argument.  Krugman then started to get overwhelmingly negative comments from his usually receptive audience. Many were people who worked in banks trying to appeal to Krugman’s good sense so that he might consider that he failed to understand some fundamental things about modern banking. No luck there.  Then Scott Fulwiller ran a comprehensive rebuttal here on Naked Capitalism yesterday. It was a one-two punch. Krugman fell back on a post written by Nick Rowe. Rowe’s post was dodgy in the extreme. He made up a quote — specifically that “the money supply is demand-determined” — called it gibberish and then undertook a ‘deconstruction’ of the quote… that he had made up. I called his rhetorical tactics sophistical in the comments section. He called me rude. Fine. All in good fun, right? But then Krugman did something outwardly nasty and underhanded. He put up a quote from Keen’s second post about DSGE models that he took completely out of context so that Keen would appear ignorant of the matter he was discussing. You can find Krugman’s original post here, but just in case he decides to take it down here is a screenshot.

Ptolemaic Economics in the Age of Einstein - Steve Keen - We all know that it’s not really the Sun “rising” at all: that implies that the Earth is fixed while the Sun rotates around it, whereas ever since Copernicus we have known that, though it looks that way to a naïve observer on Earth, that’s not what really happens. However, not merely before Copernicus, but for a very long time after him, many people continued to believe that that was how it really is: that the Sun does rotate around the Earth, that the Earth is not merely fixed, but fixed at the Centre of the Universe, and not merely the Sun but all Celestial bodies rotate around it in perfect spheres. Ptolemaic astronomers fought to suppress the new, more accurate, but to them heretical and false model of the Universe. Why the brief discourse on Astronomy? Because reading what Paul Krugman is saying about banking feels like reading a Ptolemaic Astronomer describing sunrise today as if that’s actually what’s happening. He is dismissive of the view that banks can “create credit out of thin air”—so dismissive in fact, that anyone unacquainted with the empirical evidence might be fooled into believing that his case is so strongly supported by the facts that it’s not even worth the bother of citing the empirical data that backs it up.

Money, the financial system and the Federal Reserve - We seem to be moving forward with this discussion on monetary policy, banking, and reserves. Things seemed to be veering wildly off track but I have seen a huge number of good comments in the last 24 hours. Now, John Carney does a good job of summarising some of the initial forays in this back and forth that started between Steve Keen and Paul Krugman but that has since branched out. I am going to try my hand at framing the discussion here in order to weed out a lot of the extraneous stuff. Where there are mistakes, I will fix them accordingly as they are pointed out. I think this is pretty important, so please pay attention to this one. The comments from the last post I wrote and from a follow on post by Tom Hickey at Mike Norman’s blog got at the heart of the debate and so I will try to characterise what was said. We have been living in a world predominated by floating exchange rates and currency non-convertibility for forty years now. Nevertheless, most of economics world seems to take a fixed exchange rate, Bretton Woods, or gold standard view of money and banking. In that world, as Warren Mosler quipped, bank lending is reserve constrained with the interest rate an endogenous variable via bank competition for reserves.

Hubris leads to incompetence: the Rowe & Krugman edition - Well a strange lull has fallen on the battle field this evening as the respective sides dig in and at least one side licks its wounds.  The last salvo in the battle was launched by Nick Rowe.  Unfortunately he simply misrepresented (to use parliamentary language) what Keen had said, making Keen look like a neophyte.  Rowe starts by accurately quoting Keen arguing that (see Rowe’s comments here): “Firstly, there are similar underlying principles to the DSGE models that now dominate Neoclassical macroeconomics, and these underlying principles clearly fail to describe the real world. They are: 1. All markets are barter systems which are in equilibrium at all times in the absence of exogenous shocks—even during recessions—and after a shock they will rapidly return to equilibrium via instantaneous adjustments to relative prices; 2. The preferences of consumers and the technology employed by firms are the “deep parameters” of the economy, which are unaltered by any policies set by economic policy makers; and 3. Perfect competition is universal, ensuring that the equilibrium described in (1) is socially optimal.” However Rowe then goes on to say: 3 is totally wrong. *Everybody* knows that New Keynesian DSGE models assume imperfect competition.

Keen vs. Krugman cage match: Will there be a round 2? - The interview proper is from 4:19-19:10 — if you skip the blog war background and the boxing animation (!) at the beginning.

The Keen/Krugman Debate: A Summary - Paul Krugman and Steve Keen have been debating endogenous versus exogenous money – as well as some other issues – for the past few days. The debate appears to have drawn to close, so here I offer a summary for those who can’t see the wood for the trees.

  • 1. Krugman reads Steve Keen’s paper and rejects it; specifically, he rejects endogenous money, asserting that banks need deposits before they can lend.
  • 2. Keen responds, noting that banks do not require savings before they make a loan, as they can create loans and deposits simultaneously through double entry bookkeeping. The CB has to provide the reserves required for whichever loans they do make in the short term, else the economy will grind to a halt.
  • 3. Nick Rowe weighs in, with a comment thread well worth reading. He sides with Krugman overall but appears to agree with at least some of what endogenous money proponents are claiming, including the the double entry accounting view of money creation.
  • 4. Krugman, however, continues to deny this, claiming that CBs have monetary control, and citing a paper by James Tobin to support his point of view. He fails to note that, not only did nobody ever assert that the CB has no control whatsoever over monetary activity, but Tobin also wrote a paper called ‘Commercial Banks as Creators of ‘Money’‘, in which he agrees with the view that Krugman opposes.
  • 5. Scott Fullwiler schools Krugman on how banking actually works in the real world.
  • 6. Krugman makes a post where, through a sleight of hand, he seems to acknowledge that banks can create money, but goes on to straw man endogenous money proponents by saying that they claim that they said there is no limit to this process. Of course, that’s not true – the only claim is that reserves are not the limit, the actual limitations being capital, risk and interest rates.
  • 7. Krugman, unfortunately, goes on to make another post, one in which he effectively asserts that the Central Bank has complete control of the money supply, something completely contradictory to what he said before and blatantly falsified by the failure of monetarism in the 80s.
  • 8. Krugman and Rowe both parade their ignorance by making it clear they have not read Keen’s latest post properly, and falling straight into his characterisation of DSGE. Keen responds. Krugman says the debate is over.

When safe assets return - Like so many others, FT Alphaville has spent much of the past year thinking about collateral shortages in the shadow banking system and how safe assets function as a kind of currency. But it’s about time someone actually calculated just how much money these assets might represent. And so, courtesy of the same crew that brought you the unwanted mutant offspring of the most important chart in the world, we begin with this chart of private and public “shadow money” in the US: That’s from the latest note on shadow banks from Jonathan Wilmot, James Sweeney and team at Credit Suisse, and it is superb — in this blogger’s opinion, the single best concise explanation of the collateral issue that we’ve come across. There’s a lot packed into the ten pages and we can cover only some of it here, so we recommend a full read at this link.

How to Prevent a Financial Overdose - THE Food and Drug Administration vets new drugs before they reach the market. But imagine if there were a Wall Street version of the F.D.A. — an agency that examined new financial instruments and ensured that they were safe and benefited society, not just bankers.  How different our economy might look today, given the damage done by complex instruments during the financial crisis.  And yet, four years after the collapse of Bear Stearns, regulation of these products remains a battleground. As federal officials struggle to write rules required by the Dodd-Frank law, some in Congress are trying to circumvent them. Last week, for instance, the House Financial Services Committee approved a bill that would let big financial institutions with foreign subsidiaries conduct trades that evade rules intended to make the vast market in derivatives more transparent.  Which brings us back to the F.D.A. Against the discouraging backdrop in financial oversight, two professors at the University of Chicago have raised an intriguing idea. In a paper published in February, Eric A. Posner, a law professor, and E. Glen Weyl, an assistant professor in economics, argue that regulators should approach financial products the way the F.D.A. approaches new drugs.  The potential dangers of financial instruments, they argue, “seem at least as extreme as the dangers of medicines.”

The FDA approach to regulation - FINANCE can be dangerous—or useful. New financial products can potentially mitigate risk, lower the cost of capital and increase its availability, fuelling growth. Some innovations have made financial markets safer and more resilient. It’s the role of regulation to let good innovation flourish and keep the bad from causing harm. What should the ideal regulatory body look like? Should firms be able to create a new product, sell it and only face stringent regulation once it seems dangerous? Or should financial regulation face a process similary to that for new medicines? Pharmaceutical firms must convince the Food and Drug Administration (FDA) that their product is safe and valuable before it can be marketed. Eric Posner and Glen Weyl recommend the latter course. There are many practical problems with their proposal, but what disturbs me is the moral distinction they draw. They claim there are two types of investors: those who seek safety (so why are they buying anything other than insurance and inflation-linked bonds?) and speculators seeking profit. Mssrs Posner and Weyl want to limit speculation because in a profit-seeking transaction there's always a loser.

JPMorgan chief Jamie Dimon blasts governments for 'making the recovery worse' - Bad and uncoordinated policies have "made the recovery worse than it otherwise would have been", Mr Dimon wrote in his annual letter to shareholders. "You cannot prove this in real time, but when economists 20 years from now write a book on the recovery, it may well be entitled 'It could have been much better'."  New regulations, he said, have slowed bank lending at "precisely the wrong time".  JPMorgan weathered the financial crisis better than most of its rivals and Mr Dimon, known for his combativeness, has become something of a spokesman for Wall Street since. Although the 56 year-old insisted that he agreed with the intention of much of the regulation, the letter added that the "result of the financial reform has not been intelligent design". JPMorgan will spend about $3bn (£1.9bn) over the next few years to ensure that it is compliant with new regulations.  The 38-page letter, the longest missive yet from Mr Dimon to investors, came alongside the disclosure that he earned $23m in 2011, matching his compensation in 2010. The bank made record profits of $19bn last year.

Dimon Letter Derides Contrived, Confusing Financial Rules - Jamie Dimon, chairman and chief executive officer of JPMorgan Chase & Co. (JPM), used his annual letter to shareholders to rail against “contrived” and confusing financial rules that he said may stymie lending. U.S. and international officials “made the recovery worse than it otherwise would have been,” Dimon wrote in the letter released yesterday. They almost botched the U.S. debt-ceiling vote, constrained bank leverage “at precisely the wrong time” and adopted bad and uncoordinated policy, he wrote. Dimon, 56, defended a banking industry that has been besieged by new rules and public contempt after lax mortgage lending contributed to the worst economic slump since the Great Depression. He championed the use of derivatives and the right of banks to lobby lawmakers, and hailed the U.S. economy and corporations as engines of job growth. “We have hundreds of rules, many of which are uncoordinated and inconsistent with each other,” Dimon said in the 38-page letter, his longest since becoming CEO in December 2005. “Complexity and confusion should have been alleviated, not compounded.”

Volcker Rule Would Cause Irreparable Damage To The Muppets – And Much More Broadly - A major new research report – released this weekend by the renowned international consulting firm, IMS – finds conclusively that implementation of the proposed Volcker Rule would damage not just the irreplaceable Muppets but also “all children-oriented television or other media-based educational program content.” The logic in the report is straightforward and, quite frankly, compelling.  The Volcker Rule – which aims to limit proprietary trading and excessive risk-taking by the country’s largest banks – would reduce the ability of “too big to fail” institutions to bet heavily on the price of commodities used to produce puppets (mostly cotton, but also apparently wood, aluminum, and some rare earths.) “In response to the changing demands of their customers, banks have expanded their role of providing financial resources and services to include risk management and intermediation services to [various kinds of puppets]” (p. ES2) These services are highly profitable and of great value to the skilled artisans who produce puppets, but if the very biggest banks are not allowed to engage in these activities, then no one else will.

Regulators Move Closer to Scrutinizing Nonbanks - The Financial Stability Oversight Council, the country’s top financial regulatory body, moved closer on Tuesday to increasing its oversight of nonbank financial institutions, like hedge funds, private equity firms and insurers.The 10-member council, headed by the Treasury secretary, Timothy F. Geithner, voted unanimously to adopt a rule that will designate some of those firms as “systemically important financial institutions,” and put them under stronger regulatory supervision. The rule “is an important tool provided in Dodd-Frank for extending the perimeter of transparency, oversight and prudential supervision over parts of the financial system that can be a particularly important source of credit to the economy and potentially important source of risk,” Mr. Geithner said during the 10-minute meeting. The oversight council will now begin a three-part process of determining which firms are subject to additional scrutiny from regulators. The Dodd-Frank financial regulatory reform law, which passed in the summer of 2010, automatically put banks with more than $50 billion in assets under stricter standards.

NYSE Margin Debt At Highest Since July Means Threat Of Margin Calls High  - As so often happens, every time there is a ramp in the stock market, especially one which is not accompanied by retail buying, those who are buying, are forced to do so on increasingly more margin, as there is only so much cash in the market without booking actual profits. Sure enough, as of the end of February, margin debt was $289 billion, the highest since July 2011, while Net Free Credit (Free Credit Cash plus Credit balances in margin accounts less Margin Debt) of negative $33 billion (meaning investors have negative net worth) was the lowest also since July. What does this mean? Simply said, that if the cross asset rout continues, which means bonds yesterday, and stocks and commodities today, the margin calls will once again resume, as they used to in the fall of 2011, leading to a toxic liquidation spiral, pushing prices even lower. So in keeping with the times, and sticking heads in the sand, watch out for that 3pm call from your repo desk. Best idea would be to just let it go through to voicemail.

Are commodity derivatives good or bad? New evidence from high-frequency data - Trade in commodity derivatives – such as oil futures – has grown tremendously over the last few decades. Some believe that the "financialisation" of commodity markets has made them more efficient. Others worry that financialisation has resulted in greater price distortions and volatility. This column presents high-frequency trading data suggesting that the sceptics may have a point.

Finance expert says speculators are behind high oil and gasoline prices - Financial speculators are gambling on oil the same way they gambled on the housing market a few years ago — a frightening prospect for the fragile economy, a Democratic congressional committee was told Wednesday. "It is similar to the gambling Wall Street did on whether or not people would pay their subprime (below-market rate) mortgages in the mortgage meltdown," said Michael Greenberger, a law professor at the University of Maryland and a former federal regulator of financial markets. "Now they are betting on the upward direction of the price of oil." The housing industry collapse helped trigger the deep recession that began in late 2007 and whose effects are still felt today. The economy is slowly recovering, Greenberger said, but it could come to a halt unless oil prices come down. Today's routine $4-and-higher prices for a gallon of gasoline have nothing to do with conventional supply-and-demand forces, Greenberger said. He formerly directed regulation of market trading in futures contracts and derivatives for the Commodities Futures Trading Commission.

Frank says he will fight derivatives bills -  U.S. Representative Barney Frank said he will fight efforts by House Republicans to loosen restrictions on derivatives trading that were included in the 2010 financial oversight law that bears his name. The full House later this month, when members return from a break, is expected to vote on two bills that would constrain regulators as they write tough new rules to regulate the $700 trillion over-the-counter derivatives market. Frank, in a release on Monday, said the bills go too far and that Democrats will offer amendments to scale back the changes."Thoroughly hoping to take advantage of the fact that public attention is now focused on the budget and the healthcare bill, House Republicans are moving substantially to weaken the regulation of derivatives, which Congress adopted in 2010," Frank said in a statement.Frank said that if changes sought by Democrats are defeated he will urge the Senate and President Barack Obama to reject the bills.Providing more oversight and transparency to the derivatives market was a top priority for supporters of the 2010 Dodd-Frank financial oversight law.

In Wake of Groupon, Critics Wary of JOBS Act - A little-noticed provision in the new JOBS Act would allow companies to iron out disagreements with regulators behind closed doors before they go public—a provision that might have prevented investors from finding out about Groupon Inc.'s early accounting questions until after they had been resolved. The provision, part of the bill passed by Congress and expected to be signed by President Barack Obama this week, would enable companies to submit confidential drafts of their initial-public-offering documents to the Securities and Exchange Commission before they file publicly. Critics say that measure would allow a company like Groupon, which had well-publicized disagreements with the SEC over its accounting last year, to resolve such issues under the radar, without investors learning of them until later although still before any IPO. The provision is getting increased attention in the wake of Groupon's disclosure of further accounting problems. The company, which offers discounted deals to consumers, said Friday it was revising fourth-quarter revenue downward and that it had a material weakness in its internal controls, the policies and procedures designed to avoid financial error.

JOBS Act Jeopardizes Safety Net for Investors - Maybe President Obama should have bought shares in Groupon’s I.P.O. If he had, he would understand what some Groupon investors may be feeling as he prepares this week to sign a new piece of legislation to help start-ups get financing. Had he purchased $10,000 worth of shares on the open market on the first day of public trading for Groupon, the online coupon company based in his hometown Chicago, he would have lost a good chunk of his investment, putting him in the red by almost $4,100 today. So Mr. Obama may want to weigh the fate of Groupon’s investors as he sits down on Thursday to put his signature on the Jumpstart Our Business Startups Act. That legislation is intended to help start-ups raise capital and go public, but may also lead to many more money-losing, Groupon-like I.P.O.’s. The measure, known as the JOBS Act, is a well-intentioned bill with bipartisan support aimed at making it easier for small businesses to find investors early and to continue to grow in the public markets by lowering some of the bureaucratic barriers. It also promotes “crowdfunding,” a mechanism by which entrepreneurs can raise up to $1 million online from individual investors with minimal financial disclosure.

Wall Street Examines Fine Print in a Bill for Start-Ups - Wall Street is examining whether it will benefit from a little-known section of a broad new law that President Obama is expected to sign on Thursday. Provisions tucked into the so-called JOBS Act, or the Jumpstart Our Business Startups, will roll back some major securities regulations and parts of a landmark legal settlement struck almost a decade ago. That 2003 settlement built a Chinese wall between Wall Street research analysts and investment bankers, an effort to prevent analysts from improperly promoting stocks to help their firms drum up business from corporate clients. Under the new legislation, some of those restrictions would be eased when it comes to smaller companies, so-called emerging growth companies.

Investors’ Prying Eyes Blinded by New Law - Along with its outside auditors, StoneMor Partners L.P. discovered flaws in 2006 and 2007 in the way it reported some of its revenue, and the cemetery owner and operator restated its results. Had the errors occurred under the new JOBS Act, they may have never been brought to light. That is because the act, which President Obama signed into law Thursday, allows some smaller, newer public companies to avoid outside audits of their so-called internal controls, like the one conducted for StoneMor. The waiver is one of many JOBS Act changes that ease regulation, with the intent of helping small enterprises raise capital and avoid costs. The act was aimed at concerns that small companies are overly constrained by regulation, particularly the Sarbanes-Oxley law passed a decade ago in the wake of the scandals at Enron Corp. and WorldCom. Mr. Obama said the act will "help entrepreneurs raise the capital they need to put Americans back to work."

The JOBS Act Signing: A Giant Step for Entrepreneurship in America - The JOBS Act reduces many of the regulatory barriers that have, up to this point, made it nearly impossible for young startups to raise much-needed capital from investors. If hundreds of Members of Congress and thousands of young American entrepreneurs, myself included, are correct — and I believe we are — this historic moment is going to redefine business as we know it. Among other capital formation measures, including the expansion of mini-IPOs, the amended JOBS Act includes an edited version of Congressman Patrick McHenry’s “crowd funding bill,” which allows startups and small businesses to raise up to $1 million annually through a number of small-dollar donations using web-based crowdfunding platforms. Even amid concerns about the long-term potential investor fraud (which was answered, in part, by an amendment from the Senate designed to protect non-accredited investors), the United States Congress still went forward and did the right thing: they stepped up, with majorities in both the House and the Senate, to overwhelmingly support a bill that many young entrepreneurs feel will significantly improve the U.S. startup ecosystem.

Ex-Con Man Says JOBS Law Makes Guys Like Him Rich - I’m sure the last thing U.S. lawmakers were looking for in their zealous bipartisan push for the Jumpstart Our Business Startups (JOBS) Act was the inconvenient feedback of a seasoned investment fraudster -- albeit one who says he’s rehabilitated and now lectures on the techniques scammers use. Though the JOBS Act was packaged as a plan to streamline rules to help small companies crank out jobs, even its cheerleaders have come up with scant evidence the law will boost employment much, if at all. In an election year when pragmatic politicians are laboring to come off as allies of deep-pocketed business donors, the JOBS Act is a slapdash attempt at securities-law deregulation, plain and simple. He says he’s baffled that President Barack Obama plans to sign a law today that amounts to an open invitation for fraud. “I wish legislators would consult with people like me before they write something like this,” he says, sounding dead serious about the offer. “I could tell them, ‘I know what your intent was with this wording, but we can get around it so easily, it cracks me up.”’

Something for Nothing? - The so-called JOBS act is a victory of faith over basic logic. The motivating idea seems to be that if we reduce the regulations that govern the process of raising capital, small companies will find it easier to raise money, and that money will translate into jobs. Many people have pointed out some of the problems with the bill: recently, for example, Andrew Ross Sorkin highlighted the potential for companies to take advantage of investors, and Steven Davidoff pointed out that regulation is probably not the reason for the decline in the number of small company IPOs. There are a couple of more fundamental misunderstanding I want to focus on, however. First, it’s not clear that relaxing regulations will actually make it cheaper for companies to raise money. Sure, eliminating the independent audit requirement will save companies a few bucks. But what really affects the cost of capital is not out-of-pocket fees but the price that investors are willing to pay for equity. The less confidence that investors have in a company’s prospects, the cheaper that company will have to sell its stock. If small companies are allowed to provide less information to investors, that could simply make it more expensive for them to raise money. Second, and more important, it is definitely not true that more capital for everyone is always a good thing. The point of the financial system is to allocate capital to its most productive uses. The housing bubble, if nothing else, should have convinced us of that point. There are plenty of startups that are are risky and should face a high cost of capital; there are plenty of others that have no business raising money at all. (Think back to the Internet bubble, for example.) Making it easier for such companies to raise money is a bad thing, not a good thing.

Why was the JOBS Act so hard to cover? - Bloomberg, yesterday, and the NYT, today, have come out with big news articles about the dangers and complications inherent in the JOBS Act. The NYT has found a Davis Polk note to clients saying that the JOBS Act represents “the most significant legislative loosening in memory of restrictions around the IPO process and public company reporting obligations”. As Ben Walsh documents, this is something which was well known to the opinion side of most news organizations weeks ago, but only seems to be dawning on the news side right now, after it’s too late. The obvious conclusion to draw here is that lobbyists are better at influencing journalists than journalists are. When a bill is contested by powerful lobbyists, you can be quite sure that there will be a lot of coverage, in the press, of what the bill does and who opposes it and why. On the other hand, when a bill like the JOBS Act is opposed merely by regulators and op-ed journalists and a handful of politicians, its inherent problems can end up being ignored by the “straight” side of the news media until it’s already comfortably passed both houses of Congress.

Jobs Act 2012 a Recipe for Fraud - - Yves Smith - It is hard to say enough bad things about the Jumpstart Obama’s Bucket Shops act in a short space. I’m in the UK now, and a contact asked me to explain it to him. When I told him of some of the major provisions, he could not believe what he was hearing. He said (correctly) that it was a great boon for conmen and aside from a few companies who were early to raise money under the new law, would make obtaining equity funding more difficult and costly for legitimate operators.  This Real News Network interview with Bill Black gives an overview:

Charles Biderman and Chris Martenson: The Problem With Rigged Markets - Here is a fascinating Chris Martenson interview with Charles Biderman. This interview highlights the Ponzi-like, artificial nature of the current stock market rally. It reminds me very much of the 2003-2007 bull market that ended in tears. I have included a chart of what I called at the time 'The Great Reflation' at the end.

Chart of the day: The alarming fall in syndicated lending - The chart of the day comes from Thomson Reuters LPC, and shows total global volume of syndicated lending, on a quarterly basis, going back to 2003. Syndicated lending is the big and boring part of the bank-loan market — the bit where huge corporations borrow so much money that they need to line up a consortium of banks to get the deal done. As you can see, in boom years syndicated lending can reach $1 trillion per quarter, so this is an enormous market. And as you can also see, very clearly, it seems to have fallen alarmingly this year — not the kind of thing you want to see in a global economy which is supposed to still be in the early stages of a recovery. The big picture here is that in healthy years, the world does about $800 billion or more in syndicated lending per quarter; of that, somewhere north of $400 billion comes from the Americas. By that criterion, the global lending market has been healthy since the fourth quarter of 2010. But it’s not any more. Total lending in the first quarter of 2012 was just $646 billion, down 20% from the first quarter of 2011, and down 29% from the previous quarter. The Americas also saw their lowest total since the third quarter of 2010, but there the really bad news is hidden elsewhere: a good 70% of total issuance in the Americas is refinancings, where companies roll over their existing debt. Just 30% of the total is represented by new money coming in to the market. And if you think things are bad in the Americas, they’re much worse in Europe.

Clients Raise Questions About MF Global Checks - MF Global customers who closed their accounts in the brokerage firm’s final days have been fuming for months about how the firm mailed checks to them, instead of promptly transferring the money electronically as usual. Many of those checks arrived after the bankruptcy filing, and subsequently bounced. Now customers are taking action, trying to show that MF Global delayed the return of their money to cover the firm’s own bills and stay afloat. They are amassing client documents and submitting them to federal investigators in hopes of building a criminal case against MF Global executives. While clients of MF Global say that it was unprecedented for the firm to abandon a longstanding business practice to wire money to customers who were closing accounts, the documents are not definite proof of wrongdoing. In recent weeks, federal authorities have come to suspect that MF Global’s actions amount to sloppy record-keeping, rather than criminal fraud. It is unclear whether investigators are already aware of the checks, or if they will find the information useful.

JPMorgan Chase Knew MF Global All Too Well - I suspect that JPMorgan Chase (JPM) knows a lot more about MF Global than the bank's in-house lawyer let on in her Congressional testimony last week. Diane Genova, deputy general counsel for JPM's investment bank, mostly answered lawmakers' questions about a much-discussed $200 million overdraft on a London account that MF Global allegedly used customer funds to cover. But JPM had an extensive relationship with Jon Corzine's brokerage, giving the megabank a bird's-eye view of the firm’s finances before and after it failed. As such, JPM must have at least a clue about the other $1.4 billion of MF Global customer funds that have gone missing. As MF Global's largest unsecured creditor, for example, JPM was first to the courthouse to protect its rights after the Oct. 31 bankruptcy filing. And as Genova told the House Financial Services Oversight and Investigations Committee on March 28, MF Global maintained a large number of cash demand deposit accounts at JPM. Four of these accounts in the U.S. were designated as customer segregated accounts. MF Global also cleared agency securities through JPM, Genova said. The brokerage had two revolving credit facilities in which JPM was the administrative agent for a syndicate of other banks. And MF Global had securities lending and repurchase arrangements with JPM, the largest of which involved MF Global borrowing U.S. Treasuries from JPM's securities lending clients and posting agency securities as collateral.

JPMorgan in Talks Over Missing MF Global Customer Money - JPMorgan Chase is in talks with the authorities to turn over customer money that disappeared from MF Global when the firm went bankrupt last year. The development, announced this week by the trustee tasked with returning money to MF Global customers, suggests that a substantial sum of client funds is still sitting at JMorgan. The statement from the trustee, James W. Giddens, said that he and JPMorgan “are presently engaged in substantive discussions regarding the resolution of claims.” If the talks break down, Mr. Giddens could sue JPMorgan to recover the customer cash. But the case could take years to wind through the courts, delaying the return of money to clients, who are still owed about $1.6 billion. The trustee’s announcement came after a five-month “investigation of the actions of JPMorgan,” regarding the bank’s “activities in connection with MF Global,” the statement said. The trustee noted that JPMorgan has cooperated with the investigation. The trustee’s team of lawyers and forensic accountants have interviewed witnesses and traced the outflow of customer money from MF Global. A JPMorgan spokeswoman declined to comment.

Financiers and Sex Trafficking - THE biggest forum for sex trafficking of under-age girls in the United States appears to be a Web site called  This emporium for girls and women — some under age or forced into prostitution — is in turn owned by an opaque private company called Village Voice Media. Until now it has been unclear who the ultimate owners are.  That mystery is solved. The owners turn out to include private equity financiers, including Goldman Sachs with a 16 percent stake.  Goldman Sachs was mortified when I began inquiring last week about its stake in America’s leading Web site for prostitution ads. It began working frantically to unload its shares, and on Friday afternoon it called to say that it had just signed an agreement to sell its stake to management.

On Goldman's Fascination With Pimping And Prostitution - Overnight, the NYT's Nicholas Kristof penned an article which exposes Goldman, already deeply embroiled in muppetgate damage control, as being a 16% indirect owner in Backpage, an "emporium for girls and women - some under age or forced into prostitution... which has 70 percent of the market for prostitution ads, according to AIM Group, a trade organization." Up until now Backpage, shielded by its Village Voice Media which owns it, and is also a private company, has had its ownership structure far from the public's view, until now that is. Kristoff writes: "Village Voice Media has been able to resist pressure partly because, as a private company, it doesn't disclose its owners. But I've obtained documents that, with some digging, shed light on who's behind it... The two biggest owners are Jim Larkin and Michael Lacey, the managers of the company, and they seem to own about half of the shares. The best known of the other owners is Goldman Sachs, which invested in the company in 2000 (before Backpage became a part of Village Voice Media in a 2006 merger)."  Yet some may be surprised to learn that this is not the firm's only expansion into the world of monetized prostitution. As the chart below shows, as of Q4, 2011, the firm also happens to be the top ten owner of Adult Friend Finder (Nasdaq: FFN), a company which recently went public, and which is nothing more than a porn portal for women, who can sell their "assets" to the highest bidder (and where any men members have to pay a monthly fee).

Sex on the Internet: Sizing Up the Online Smut Economy - Cynics have long held that the secret driving force behind the spread of the Internet, and new technologies in general, has been our insatiable desire for all things sexy. Actually, this wasn’t so much a secret as something close to conventional wisdom in the 1990s, when one expert confidently declared that porn and other so called “adult services” were, as he put it, the “No. 1 income generator on the Internet.” These days, of course, there are plenty of other “income generators” on the internet, ranging from online shopping to dopey Facebook games, and there is so much free porn so readily available online it’s hard to imagine who exactly is paying for any of it. But porn – and those “adult services” – still generate a boatload of cash. The “escort” ads that ended up so embarrassing Goldman Sachs are only a small part of the puzzle. According to The AIM Group, which tracks such things, is the dominant player in the healthily growing “prostitution advertisement” industry online, generating some $26 million in revenues in the last 12 months. Other players in this market, with names like and, added another $10.6 million in revenues to the pile. (The former big Kahuna in the field, Craigslist, reluctantly shut down its own adult listings in 2010.) Porn — perhaps because it, unlike prostitution, is often legal — is a much bigger business online, though reliable numbers on the industry are hard to come by, and misinformation abounds. (Both proponents and opponents of online porn have reasons to exaggerate.) One factoid making its way around online, and even into the pages of Wikipedia, is that “the internet pornography industry has larger revenues than Microsoft, Google, Amazon, eBay, Yahoo, Apple and Netflix combined.” That’s just plain wrong.

How High CEO Pay Hurts the 99 Percent - While most Americans struggle to make ends meet, the CEOs of major U.S. business corporations are pulling eight-figure, and sometimes even nine-figure, compensation packages. When they win, the 99 percent lose. We rely on these executives to allocate corporate resources to investments in new products and processes that, in a world of global competition, can provide us with good jobs. Yet the ways in which we permit top corporate executives to be paid actually gives them a strong disincentive to invest in innovation and training. The proper function of the executive is to figure out how to develop and use the corporation’s productive capabilities (business schools call it “competitive strategy”). But that’s not happening. In effect, U.S. top executives rake in obscene sums by not doing their jobs. When all the data from corporate proxy statements are in within the next month or so, they will show that 2011 was another banner year for top executive pay. Over the previous three years the average annual compensation of the top 500 executives named on corporate proxy statements was “only” $17.8 million, compared with an annual average of $27.3 million for 2005 through 2007. Yet even in these recent “down” years, the compensation of these named top executives was more than double in real terms their counterparts’ pay in the years 1992 through 1994.

CEOs and the Candle Problem -In America we have a motivation problem : money. I'm not a communist. I love capitalism (I even love money), but here's a simple fact we've known since 1962: using money as a motivator makes us less capable at problem-solving. It actually makes us dumber.  A number of years ago I watched a CEO make a long series of really bad decisions. He gutted his company of most of its long-term potential. It bothered me for years because I couldn't understand why. This CEO is an intelligent, affable person. Let's call his company "Company X". I had several conversations with him over a five year period. He seemed like a good man for the job. His actions in the boardroom didn't jibe with the person I thought I had talked with.  For confidentiality reasons I cannot provide details about Company X. Think of the following as a modern day parable. For the sake of litigious prudence, let me state that details of the story have been sufficiently altered as to claim, "All characters appearing in this work are fictitious. Any resemblance to real persons, living or dead, is purely coincidental."

Capitalism’s Dirty Secret: Corporations Don’t Create Jobs, They Destroy Them - Lynn Parramore - For the last four decades, U.S. corporations have been sinking our economy through the off-shoring of jobs, the squeezing of wages, and a magician’s hat full of bluffs and tricks designed to extort subsidies and sweetheart deals from local and state governments that often result in mass layoffs and empty treasuries. We keep hearing that corporations would put Americans back to work if they could just get rid of all those pesky encumbrances – things like taxes, safety regulations, and unions. But what happens when we buy that line? The more we let the corporations run wild, the worse things get for the 99 percent, and the scarcer the solid jobs seem to be. Yet the U.S. Chamber of Commerce wants us to think that corporations – preferably unregulated! – are the patriotic job creators in our economy. They want us to think it so much that in 2009, after the financial crash, they launched a $100 million campaign, which, among other things, draped their Washington, DC building with an enormous banner proclaiming “Jobs: Brought to you by the free market system.” But the truth is that unfettered corporations are just about the worst thing for creating decent jobs. Here’s a look at why, and where the good jobs really come from.

How American Corporations Transformed from Producers to Predators - In 2010, the top 500 U.S. corporations – the Fortune 500 – generated $10.7 trillion in sales, reaped a whopping $702 billion in profits, and employed 24.9 million people around the globe. Historically, when these corporations have invested in the productive capabilities of their American employees, we’ve had lots of well-paid and stable jobs. That was the case a half century ago. Unfortunately, it’s not the case today. For the past three decades, top executives have been rewarding themselves with mega-million dollar compensation packages while American workers have suffered an unrelenting disappearance of middle-class jobs. Since the 1990s, this hollowing out of the middle-class has even affected people with lots of education and work experience. As the Occupy Wall Street movement has recognized, concentration of income and wealth of the top “1 percent” leaves the rest of us high and dry. What went wrong? A fundamental transformation in the investment strategies of major U.S. corporations is a big part of the story.

Three Corporate Myths that Threaten the Wealth of the Nation - The wealth of the American nation depends on the productive power of our major business corporations. In 2008 there were 981 companies in the United States with 10,000 or more employees. Although they were less than two percent of all U.S. firms, they employed 27 percent of the labor force and accounted for 31 percent of all payrolls. Literally millions of smaller businesses depend, directly or indirectly, on the productivity of these big businesses and the disposable incomes of their employees. When the executives who control big-business investment decisions place a high priority on innovation and job creation, then we all have a chance for a prosperous tomorrow. Unfortunately, over the past few decades, the top executives of our major corporations have turned the productive power of the people into massive and concentrated financial wealth for themselves. Indeed the very emergence of “the 1%” is largely the result of this usurpation of corporate power. And executives’ use of this power to benefit themselves often undermines investment in innovation and job creation. These corporations do not belong to them. They belong to us. We need to confront some powerful myths of corporate governance as part of a movement to make corporations work for the 99%. To start, we have to recognize these corporations for what they are not.

• They are not “private enterprise.”
• They should not be run to “maximize shareholder value.”
• The mega-millions in remuneration paid to top corporate executives are not determined by the “market forces” of supply and demand.

Whose Corporations? Our Corporations! - Historically, corporations were understood to be responsible to a complex web of constituencies, including employees, communities, society at large, suppliers, and shareholders. But in the era of deregulation, the interests of shareholders began to trump all the others. How can we get corporations to recognize their responsibilities beyond this narrow focus? “It is literally – literally – malfeasance for a corporation not to do everything it legally can to maximize its profits. That’s a corporation’s duty to its shareholders.” Since this sentiment is so familiar, it may come as a surprise that it is factually incorrect: In reality, there is nothing in any U.S. statute, federal or state, that requires corporations to maximize their profits. More surprising still is that, in this instance, the untruth was not uttered as propaganda by a corporate lobbyist but presented as a fact of life by one of the leading lights of the Democratic Party’s progressive wing, Sen. Al Franken.  The notion that the law imposes a duty to “maximize shareholder value” – a phrase capturing the notion that profits are mandatory and it is the shareholders who are entitled to them – is so readily accepted these days because it jibes perfectly with assumptions about economic life that constantly come down to us from business and political leaders, from academia, and from the preponderance of the media. It is unlikely to occur to anyone under the age of 40 to question this idea – or the idea that the highest, or even sole, purpose of a corporation is to make a profit – because they have rarely if ever been exposed to an alternative view. Those in middle age or beyond may have trouble remembering a time when the corporation’s focus on shareholders’ interests to the exclusion of all other constituencies –customers, employees, suppliers, creditors, the communities in which it operates, and the nation – did not seem second nature.

Why People Hate the Banks - A few months ago, I was standing in a crowded elevator when Jamie Dimon, the chief executive of JPMorgan Chase, stepped in. When he saw me, he said in a voice loud enough for everyone to hear: “Why does The New York Times hate the banks?” It’s not The New York Times, Mr. Dimon. It really isn’t. It’s the country that hates the banks these days. If you want to understand why, I would direct your attention to the bible of your industry, The American Banker. On Monday, it published the third part in its depressing — and infuriating — series on credit card debt collection practices. You can’t read the series without wondering whether banks have learned anything from the foreclosure crisis, which resulted in a $25 billion settlement with the federal government and the states. That crisis was the direct result of shoddy, often illegal practices on the part of the banks, which caused untold misery for millions of Americans. Part of the goal of the settlement was simply to force the banks to treat homeowners with some decency. You wouldn’t think that that would be too much to ask. But it was never going to happen without the threat of litigation. As it turns out, this same kind of awful behavior has been taking place inside the credit card collections departments of the big banks. Records are a mess. Robo-signing has been commonplace. Collections practices hurt primarily the poor and the unsophisticated, just like foreclosure practices. (I sometimes wonder if banks would make any profits at all if they couldn’t take advantage of the poor and unsophisticated.)

Deepthroat: Debt Collector Edition - The American Banker has been running an important series on credit card debt collection (here, here, and here) that Joe Nocera highlighted in his NY Times column today. The story that they're telling, however, is only part of the picture. To fully understand the debt collection industry, it's necessary to take Deepthroat's advice, and "follow the money."  I haven't gone very far down this rabbit hole, but it's clear to me that there's another important angle to this story, namely, who is funding the debt collectors.  A lot of debt collection is done by law firms, because if you can't convince the borrower to pay on unsecured debt, then you've got to go to court in most cases. So enter the law firms. These aren't law firms as anyone would traditionally recognize them, however.  Instead, collections law firms are the dystopia of the legal industrial complex. These firms take the theory of the firm serious and rather often the "firm" is little more than an lawyer or two and their law license. Everything else, from the office equipment to the support staff, is contracted out. Most of the work is done by non-lawyers, and the lawyers are essentially renting out their law license to firms that supply the equipment and staffing. Instead of rent-a-BIN or rent-a-charter, it's rent-a-license lawyering. Robosiging?  Of course--the whole point of the operation is to be industrial.  It's transaction processing with a legal heksher. And it is the antithesis of the sort of judgment and counsel that lawyers have traditionally prided themselves as providing.

Joe Nocera Highlights Bank’s Debt Collection Practices - I’ve been following Jeff Horwitz’ excellent series on credit card debt collection at American Banker, which I’ve chronicled in a couple posts. The short version is that the attention to detail in credit card debt information is as thorough and well-kept as it is in foreclosure and mortgage information. Now Joe Nocera has picked up on this series and brought it from more of a trade publication to the pages of the paper of record. Good for him. You can’t read the series without wondering whether banks have learned anything from the foreclosure crisis, which resulted in a $25 billion settlement with the federal government and the states. That crisis was the direct result of shoddy, often illegal practices on the part of the banks, which caused untold misery for millions of Americans. As it turns out, this same kind of awful behavior has been taking place inside the credit card collections departments of the big banks. Records are a mess. Robo-signing has been commonplace. Collections practices hurt primarily the poor and the unsophisticated, just like foreclosure practices. (I sometimes wonder if banks would make any profits at all if they couldn’t take advantage of the poor and unsophisticated.) Not only are the banks ripping off customers by selling their debt to collection agencies with wrong information, they’re really ripping off the collection agencies. They have put them in a position where all the records about the credit card debt are essentially unverifiable. And it’s given people harassed by these debt collectors a very simple path to eliminating the issue totally: just contest the debt in court and watch the collection agency melt away:

American Banker on Credit Card Debt Collections - Jeff Horwitz at the American Banker has been doing some great reporting on abusive debt collection practices in the credit card industry. Joe Nocera's column took up the subject today. Robo-signing and other abuses have been a problem for a while with credit card debt collections, and Horwitz and Nocera do a public service by drawing attention to the problems. The situation cries out for congressional hearings and for regulatory investigation. It is great to see the Consumer Financial Protection Bureau make debt collection practices one of its top priorities. Horwitz's articles at the American Banker include:

Maria Aspen at American Banker separately reported how the sloppy sales of delinquent credit card accounts and shoddy debt collection practices were a nightmare for one Maryland woman.

Occupy Groups Reimagine The Bank - Groups within the Occupy Wall Street movement are trying to overhaul the banking system and even dream of creating a new kind of bank. Occupy isn't in the headlines so much these days, but work continues behind the scenes. The Alternative Banking Group of Occupy Wall Street meets weekly in different places. Members are older than some might think — in their 30s, 40s and 50s — and many work or formerly worked in the financial industry. "We have almost no consensus opinion, except that the system is not working," says Cathy O'Neil, who often facilitates the group that is working on legislation and regulation to reform the financial system. "A lot of these people are from finance or have a background in law or SEC regulation. There's lots of people from banks and hedge funds." She herself was a quant — a quantitative analyst at a hedge fund. She even worked with former Treasury Secretary Larry Summers for a while, but she got disillusioned. Within the Alternative Banking Group are smaller groups working on specific projects. O'Neil talks about their plans for a mobile app to help people move their money away from large banks.

Small Banks Shift Charters to Avoid U.S. as Regulator - An increasing number of the nation’s more than 600 savings and loan associations are fleeing the comptroller’s office as they navigate a shifting regulatory landscape. The Dodd-Frank financial reform law closed their longtime regulator, the Office of Thrift Supervision, and moved them to the comptroller. A few of these institutions are trying to become credit unions, and many others are choosing state oversight. Nationally, 35 have applied to switch from national to state charters since July 2011.  While the banks say that they are looking for a regulatory agency that understands them, some former industry experts have expressed concern that the financial institutions are regulator shopping.  The Office of Thrift Supervision was a notoriously easy supervisor, said James Gilkeson, a former regulator at the comptroller’s office. “Going to state and credit union regulators is clearly a search for the next best thing,” he said.

Why’s the Govt Keeping Wall Street’s Secrets? - Getting what should be public information about major Wall Street firms can be maddeningly difficult.  Bloomberg News discovered this in its ultimately successful effort to get information on the $1.2 trillion in “secret loans” the Fed doled out during the financial crisis. And I’ve had no small experience of it myself. At first, when I asked the SEC about documents related to Lazard’s role in the Hartford-Mediobanca scandal starting in 1968 and ending in 1981, the agency told me it could not release the information. When I reminded the FOIA administrator that the SEC had already released the information, years before, to another journalist, the agency dug up the 40 boxes of unindexed, unorganized documents and invited me to a warehouse in Pennsylvania to take a look. After an hour or so, the clerk asked me if I was done with my review. But that bit of beginner’s luck turned out to be a fluke. To this day, the SEC has given me nothing -- zilch, nada -- about Bear Stearns or Goldman Sachs. After the Lazard book was published, the State Department sent me a thin file that was, supposedly, what it had in its possession about Felix Rohatyn’s three years as the U.S. ambassador to France. I opened the envelope and discovered that most of the 10 or so pages had been redacted.

Have Four Pension Funds Blown Up the $8.5 Billion Bank of America Settlement? - Yves Smith - A ruling in the Retirement Board of the Policemen’s Annuity and Benefit Fund of the City of Chicago et al v. Bank of New York Mellon is a game-changer in mortgage investor litigation. Readers may recall that we’ve moaned about the failure of investors to sue originators, servicers, and trustees for their grotesque violations of contractual and other duties. Generally, the reluctance to take action is the consequence of terrible incentives. The “investors” are often fee whores agents, meaning fund managers who are hired by the parties that actually have money, such as pension funds. The fund managers don’t want to devote time and money to suing, even though they have a fiduciary duty to their investors, nor do they want to jeopardize their relationships with bank that they think they need for market intelligence and trade execution. But a ruling on Tuesday by Judge William Pauley against Bank of New York on 26 Countrywide securitizations may have opened the floodgates to trustee litigation. Heretofore, trustees have effectively told investors to pound sand when they’ve petitioned them to take action against servicers, relying on their belief that it would be unlikely that they’d be able to get a day in court, thanks to the barriers built into the PSA. But four pension funds which are investors in $30 billion of Countrywide trusts, sued under the Trust Indenture Act of 1939. I haven’t seen the actual original filing or Pauley’s ruling, but here is the background, per Alison Frankel:

There Will Be Cheating: Another Gift to Big Banks Hidden in Obama’s Principal Reduction Strategy - If you ask a homeowner who has tried to get a government-certified mortgage modification from a bank, half the time you’ll hear a story of lost paperwork, incompetence, and interminable phone calls to call centers with unhelpful staffers. Recent foreclosure mitigation programs designed by the government are not merely poorly conceived, they are poorly implemented.  In discussing principal write-downs, one must take this into account. Who is going to do the writing down?  Who will be eligible?  What about homes with second mortgages?  Most importantly, is there a good database that can match those second mortgages to first mortgages? The Government Accountability Office has shown, as recently as March of 2011 that there are serious operational problems with the second lien write-down program implemented by Treasury to date.  Bluntly speaking, the GAO reports, Fannie doesn’t have the computer systems and quality databases to match second mortgages with first mortgages. The administration, the banks, and Fannie/Freddie have an impressive track record of operational failure when it comes to implementing mortgage modification programs in the mortgage market. HAMP, the administration’s major housing initiative, bombed not just because of program design, but because of severe operational problems. These kinds of loan modification programs have created bitter mistrust; debtors often send in papers, are given inconsistent instructions, and never hear back on pending loan modifications.  Sometimes, debtors will get a loan modification, and after nine months or so of paying on-time, they’ll get a foreclosure notification out the blue.  Some of this is because of misaligned incentives in the bank servicing model, but some is a simple lack of operational competence in the form of inadequate record-keeping, staffing and training, and quality assurance.

Probe of Insurers Gains Steam - New York's top financial regulator is expanding an investigation of insurers that force homeowners policies on borrowers after turning up evidence that consumers were charged too much, according to people familiar with the situation. Benjamin M. Lawsky, superintendent of the New York Department of Financial Services, is issuing new subpoenas and formal document requests to several insurers, demanding justification for how their rates and loss ratios were calculated, these people said. The loss ratio is the percentage of premiums collected by an insurer that is paid out to policyholders. Based on information gathered in initial inquiries since the probe was launched in October, Mr. Lawsky and investigators believe those payouts are as little as 20 cents on the dollar, compared with estimates to regulators of 55 cents. Insurers issue such "force-placed" policies to homeowners who miss mortgage payments or allow their homeowners' policy to lapse. Critics say that rates are often exorbitant, partly because of close ties between insurers, agents, mortgage servicers and brokers. Mr. Lawsky's investigation also is scrutinizing those relationships, these people said.

Foreclosure Fraud Settlement Rubber-Stamped by a Federal Judge - A federal judge in DC swiftly approved the foreclosure fraud settlement yesterday. Actually four of the consent orders with the five largest mortgage servicers were approved Wednesday, but we only learned publicly of the approval of all five settlements yesterday. Some investor groups had talked about challenging the terms of the settlement, but this approval happened so quickly, and without even so much as a hearing, that they had no time to react. This is the very definition of a rubber stamp. But the real news on this approval, dug out by Nick Timiraos, is this sentence: “Nothing from the consent judgment entered into court in the $25B foreclosure settlement may constitute ‘evidence against Defendant.’”

Foreclosure Inquiry by Federal Reserve Focuses on 8 More Firms - Federal regulators are poised to crack down on eight financial firms that are not part of the recent government settlement over home foreclosure practices involving sloppy, inaccurate or forged documents. Last week, a senior Federal Reserve official recommended fines for these additional firms, raising questions about how deep foreclosure problems run through the banking industry. In addition, judges, lawyers and advocates for homeowners say that people are still losing their homes despite improper documentation and other flaws in the foreclosure process often involving these firms.  The eight firms cited by the Federal Reserve — HSBC’s United States bank division, SunTrust Bank, MetLife, U.S. Bancorp, PNC Financial Services, EverBank, OneWest and Goldman Sachs — should be fined for “unsafe and unsound practices in their loan servicing and foreclosure processing,” The recommendation is the culmination of an investigation begun nearly two years ago over accusations that bank representatives had been churning through hundreds of documents a day in foreclosure proceedings without reviewing them for accuracy, a practice known as robo-signing.

Foreclosure reforms to widen - State and federal officials who recently completed a $25 billion settlement with five of the nation’s largest banks over shoddy foreclosure practices have begun discussing how to apply some of the terms of that deal to a wider array of financial firms. The landmark agreement finalized in February in part forces the five major banks to overhaul flawed and fraudulent foreclosure practices that had become common in recent years. Those changes include forbidding “robo-signing” of documents and providing a single point of contact to homeowners, who in the past often faced foreclosure from the banks even as they were negotiating ways to remain in their homes.  Officials have repeatedly said they hope to see similar reforms at other banks and financial firms, where many of the same questionable practices have persisted.  “We want to apply the servicing standards to other servicers,” said Patrick Madigan, an assistant Iowa attorney general who helped to negotiate the recent federal-state settlement. “Loan servicing has been a mess for the past four or five years. Reforming that industry is very important and very challenging.”

GSEs & Principal Reduction: How HAMP Helps More Underwater Homeowners - Treasury Blog - Recently, various sources have alleged that large banks will get a windfall if Fannie Mae and Freddie Mac (the GSEs) reduce the principal balance on first lien mortgage loans that are owned or guaranteed by the GSEs. The claims arise from a concern that if the GSEs reduce the principal balance on a GSE first lien mortgage loan, any investor holding a second (and subordinated) lien on the property stands to benefit unfairly. In fact, the principal reduction program that we have asked the FHFA to allow the GSEs to participate in, the principal reduction alternative of the Home Affordable Modification Program (HAMP), is designed to protect against exactly this result. Of course, not all under water GSE loans have second liens. But if they do, under HAMP, where a first lien mortgage is modified, then the holder of an eligible second lien must modify that lien proportionately if they are a participant in the Second Lien Modification Program (2MP). Most major servicers are participants in 2MP, so most will be obligated. Thus, any HAMP modification that includes principal reduction would trigger an obligation on the part of a participating second lien holder to write an eligible second down to the same degree. It is also worth noting that Treasury-paid incentives to first lien holders apply to matched second liens, though those incentives are less than the ones for first lien modifications, in light of their subordinated status.

Treasury’s Ridiculous Defense of their Second Lien Policies - Gretchen Morgenson’s story, confirmed as an issue by FHFA Acting Director Ed DeMarco, about banks being enriched by Fannie and Freddie principal reductions if their second liens aren’t wiped out is simply an expression of reality. If the seconds are allowed to stand, the banks make money on the increased ability to pay on the seconds as a result of reducing principal on the firsts. That’s just basic logic. The rebuttal was that nobody seriously thinks that the seconds shouldn’t be wiped out if the firsts get written down. That’s not true, as Felix Salmon had to grudgingly admit. Now we get confirmation that it is, in fact, government policy to maintain seconds while writing down firsts, from no less than the US Treasury Department. Treasury official Michael Stegman wrote a blog post that depressingly refers to “various sources” rather than citing Gretchen Morgenson herself (I guess I should be comforted that I’m not the only person to whom this happens). So here’s his defense against a windfall for the banks: he says that, in fact, second liens will not have to be wiped out in the event of a principal reduction on the first lien, but only written down pari passu. This is the same standard in the foreclosure fraud settlement with respect to second liens. You cannot with a straight face say to anyone even marginally sophisticated about housing policy that this represents anything but a violation of accepted lien hierarchy. The seconds are supposed to take the full hit before the firsts get touched. That’s why they are considered junior liens in the first place.

Lawler comments on FHA Single-Family Mutual Mortgage Insurance Fund Quarterly Report to Congress - From economist Tom Lawler: Last week HUD released the FHA Single-Family Mutual Mortgage Insurance Fund Quarterly Report to Congress for the first quarter of FY 2012 (ending 12/31/2011), which gave some insights into the disturbing rise is the number of seriously delinquent FHA-insured SF loans, as well on the surprising slow pace of foreclosure resolutions. At the bottom of this post is a table summarizing SDQ rates by FY endorsement. And here is a chart from the report showing SDQ rates by calendar year origination and months of seasoning.Needless to say, this is not a pretty picture.In the discussion on the sizable jump in the FHA’s SF SDQ rate, the report said that  “(t)wo factors appear to be driving this result. The first is the persistency of loans in 90-day delinquency as lenders attempt to craft workout plans, and persistency of loans in foreclosure processing. The second is that the historically large FY 2009 and FY 2010 books-of-business are at the age where their serious delinquency rates are increasing toward their life-cycle peaks. Because those books are much larger than is the new FY 2011 book, their loan-age seasoning patterns are not offset by the low default rates on recent endorsements.”The report did not mention the sharp falloff in FHA modifications in the second half of 2011.

FHFA's DeMarco: FHFA to make decision on GSE Principal Reductions this month - From a speech today by FHFA acting director Edward DeMarco:  - It has been well-publicized that there is one form of loan modification that FHFA has not embraced, that being principal forgiveness. To be clear, the disagreement is not about helping borrowers. FHFA, with the Enterprises, has been making great efforts to assist troubled homeowners with underwater mortgages who have the ability to make a mortgage payment and a willingness to do so. While we are currently evaluating the recent Treasury changes to HAMP regarding principal forgiveness, I would like to explain the position we have taken to date. The fundamental point of a loan modification is to adjust the borrower’s monthly payment to an affordable level. We have seen repeatedly that what matters most in successfully helping borrowers is a meaningful reduction in the monthly payment to an amount that helps stabilize the family’s finances. Indeed, we have found that payment reduction, not loan-to-value, is the key indicator of success in loan modifications. Moreover, this approach recognizes that three out of every four deeply underwater borrowers in Fannie Mae’s and Freddie Mac’s book of business today are current on their loans.. This should be recognized and encouraged, not dampened with incentives for people to not continue paying. As I have stated previously, we are currently evaluating the recent Treasury Department proposal to HAMP regarding principal forgiveness and expect a decision this month.

LPS: February Foreclosure Starts and Sales Reversed Prior Month’s Increases - LPS released their Mortgage Monitor report for February today.  According to LPS, 7.57% of mortgages were delinquent in February, down sharply from 7.97% in January, and down from 8.80% in February 2011.  LPS reports that 4.13% of mortgages were in the foreclosure process, down slightly from 4.15% in January, and down slightly from 4.15% in February 2011.  This gives a total of 11.7% delinquent or in foreclosure. It breaks down as:
• 2,059,000 loans less than 90 days delinquent.
• 1,722,000 loans 90+ days delinquent.
• 2,065,000 loans in foreclosure process.
For a total of 5,846,000 loans delinquent or in foreclosure in February.This graph shows the total delinquent and in-foreclosure rates since 1995. The total delinquent rate has fallen to 7.57% from the peak in January 2010 of 10.97%, but the decline has halted. A normal rate is probably in the 4% to 5% range, so there is a long ways to go. The in-foreclosure rate was at 4.11%, down from the record high in October 2011 of 4.29%. There are still a large number of loans in this category (about 2.07 million).   This graph provided by LPS Applied Analytics shows foreclosure starts and sales.

Investors Buying Up Foreclosures by the Thousands - With home prices down more than a third from their peak and the market swamped with foreclosures, large investors are salivating at the opportunity to buy perhaps thousands of homes at deep discounts and fill them with tenants. Nobody has ever tried this on such a large scale, and critics worry these new investors could face big challenges managing large portfolios of dispersed rental houses. Typically, landlords tend to be individuals or small firms that own just a handful of homes.  But the new investors believe the rental income can deliver returns well above those offered by Treasury securities or stock dividends. At the same time, economists say, they could help areas hardest hit by the housing crash reach a bottom of the market.  This year, Waypoint signed a $400 million deal with GI Partners, a private equity firm in Silicon Valley. Gary Beasley, Waypoint’s managing director, says the company plans to buy 10,000 to 15,000 more homes by the end of next year. Other large private equity investors — including Colony Capital, GTIS Partners and Oaktree Capital Management, in partnership with the Carrington Holding Company — have committed millions to this new market, and Lewis Ranieri, often called the inventor of the mortgage bond, is considering it, too.

Foreclosures give rise to new industry - Waypoint, which owns 1,100 houses and is buying five more a day, is betting that converting foreclosures into rentals is a better way to make a profit. Other firms, such as Landsmith in San Francisco, are now cropping up and pursuing the same strategy in Arizona, California and Nevada. With many suburban homes selling for half their peak values and demand for rentals from prospective tenants climbing, Waypoint was earning a return of 8 to 9 percent on its capital as of Dec. 31, according to a quarterly report. That beats the 6.3 percent gain in the BI NA Multifamily REIT Index, which tracks the performance of 27 apartment-building operators. The home rental market boasts a total property value of $3 trillion, according to Morgan Stanley housing analyst Oliver Chang. Yet institutions have long shunned it as too scattered and impractical to be profitable. Oaktree Capital Management, the investment firm co-founded by billionaire Howard Marks, announced a $450 million deal with Carrington Capital Management to acquire and convert foreclosed single-family homes into rental properties. Carrington rents out more than 3,000 houses in California and other states. Starwood Capital Group is poised to enter the foreclosure-to-rental market, according to an investor familiar with its plans. So, too, are Zell and the real estate arm of Apollo Investment Management.

New mortgage rule on disputed debts might hamper homebuyers seeking FHA loans - A little-noticed mortgage rule change that took effect April 1 could create hassles for significant numbers of homebuyers who plan to use low-down-payment FHA financing this spring. The change affects anyone with one or more “collection” accounts buried away in national credit bureau files. These include medical, student loan, retail and other debts reported — correctly or incorrectly — as unpaid by creditors and subsequently sent to collection agencies. In a reversal of its previous policy, the Federal Housing Administration says it will no longer approve applications where the borrowers have outstanding collections or disputed accounts with an aggregate of $1,000 or more. Previously the agency took a more lenient approach, allowing lenders to review borrowers’ overall credit situations and approve applications despite the presence of such accounts. Under the new rule, when collection items total $1,000 or more, the accounts will need to be paid off over a period of several months or be paid in full at or before the closing. In cases where the collections or disputed debts are attributable to identity theft, credit-card theft or unauthorized use of the applicant’s credit — or when collection accounts total less than $1,000 and are at least two years old — the new rule may be waived. Borrowers who have encountered “life events” such as death, divorce or loss of employment may also provide documentation to their lenders to support a waiver, according to a policy clarification issued by the agency.

Where Housing Once Boomed, Recovery Lags - The official statistics say that the national economy has been growing for almost three years, and that Maryland is growing faster than most states. But in Prince George’s County, where housing prices have fallen more than anywhere else in the state, there is scant evidence of renewed prosperity.  Auto sales are slowly improving nationwide, but car dealers here say the arrival of spring and tax refunds are failing once again to bring buyers to their lots. Contractors who built homes say they are glad for work fixing roofs.  A growing body of research suggests that the recent recession may have brought an enduring shift in the geography of American growth. Places like Gwinnett County near Atlanta, Lake County, north of Orlando, and San Joaquin County in California’s central valley, where housing booms were fueled by borrowed money, may now become long-term laggards under the weight of those debts. Various kinds of economic activity, including auto sales, fell more sharply and are rebounding more slowly in areas that had the highest debt burdens at the peak of the boom in 2006, according to a series of recent studies.

New empirical evidence of long-lasting effects of mortgage crisis -- Debts left over on consumers’ balance sheets from the mortgage crisis have had particularly serious and long-lasting effects on the economic health of those localities where the crisis hit the hardest, according to what appears to be some  interesting and important evidence discussed in an article in today’s New York Times. Of course, the notion that such balance-sheet issues are crucial is a key part of the macroeconomics we work on here, and very much in the tradition of Godley, Minsky, and other heterodox economists.

Fighting Over the American Home: Handcuffs versus Hope and Change - Over the past four years, we’ve watched as public officials pushed financial and legal power to the large banks – the latest episode in this saga was the mortgage settlement between state officials, Federal regulators, and the banks themselves. But there is also an undercurrent of resistance to this, resistance which could be growing stronger over time. So what comes after the mortgage settlement? Will there be yet another multi-billion dollar transfer of wealth from taxpayers to banks in the near future? If I’m reading the tea leaves correctly, I suspect the answer is, yes.  This time, it will flow through Fannie and Freddie, government entities that are responsible for trillions of dollars of mortgages. There’s been a deeply bitter fight over this giant pot of money, centering around Federal Housing Finance Agency (FHFA) acting head Ed DeMarco. DeMarco controls Fannie and Freddie, and so far, he has refused to write down principal for homeowners on GSE controlled mortgages. But Treasury has been attempting to get DeMarco to change his mind, using the prospect of simply paying off Fannie and Freddie with bailout funds. Housing finance isn’t just a question of money, it involves the deep fabric of America – the home, savings, the rule law and the meaning of property, and the very space of the nation. It’s also a question of politics, and realigning interest groups that had been allies or opponents. With that in mind, it’s worth looking at how the last few years of bailouts and foreclosures have clarified factions in our politics.

Looking at a Foreclosure Ground Zero: Jacksonville, Florida -  Yves Smith  - Ben Geddes of the Florida Coastal School of Law, working with April Charney, has been putting together Google Maps of vacant properties in Jacksonville, with the aim of cataloging all of Jacksonville and northeastern Florida. These images help give a sense of the scale of the problem in high distress areas. Here is the overview map of all vacant real estate owned (REO) as far as they had gotten on March 28. You can visit that map here to zoom in.  The maps as of today break out properties over $100,000 for those that were bought in at auction for less. Here is the +$100,000 view:

There is No Health Care Tax on Most Home Sales. Really. - It is the unfounded rumor that never dies: You will have to pay a 3.8 percent federal health care tax on the sale of your house. For all but a handful of taxpayers, this is not true. It is wrong. It is urban myth. It is the revenue equivalent of death panels or the Halliburton conspiracy to start the Iraq war. This is one of those seemingly immortal Internet stories. You know the ones: They usually start with the assertion that, “They don’t want to know this but….” In the words of one blogger, “Obamacare will impose a 3.8 percent tax on all home sales and real estate transactions.” Umm, no it won’t. Yes, the health law will impose a 3.8 percent tax on investment profits and other non-wage income starting in 2013. But that tax applies only to couples with adjusted gross income of $250,000 (or individuals with AGI of $200,000). About 95 percent of households make less than that, and will be exempt from the law no matter what.In addition, couples who sell a personal residence can exclude the first $500,000 in profit from tax ($250,000 for singles). That would be profit from a home sale, not proceeds. So a couple that bought a house for $100,000 and sold it for $599,000 would owe no tax, even under the health law.

Wells Fargo on Housing: Better Days Ahead, Prices to bottom mid-year - Wells Fargo economists put out a special commentary on housing this morning: Spring Came Early for the Housing Market:The latest data on home prices also came in a little better than expected, and the survey data from the NAHB/Wells Fargo Homebuilders Survey as well as anecdotal reports from builders and realtors all suggest better days are ahead for the industry. ...We have nudged our forecast for home sales and new home construction slightly higher, as the spring selling season appears to have gotten off to a strong start. ... the anecdotal evidence is hard to dismiss. Most builders and realtors report significant gains in buyer interest and sales. Moreover, the gains are organic rather than incentive induced. Unfortunately, conservative appraisals and tight mortgage underwriting continue to undermine a large number of deals. We suspect that the undertow from these two hindrances will subside over the course of this year, as the fog surrounding shadow inventories lightens up a bit and more lenders come back to the market....We expect home prices to definitively bottom by the middle of this year, as the backlog of foreclosures finally begins clear. For properties not in foreclosure, prices have probably already bottomed, but should remain relatively low nonetheless given the competition and perceived competition from foreclosures.

Jamie Dimon's "Brain Freeze" and Comments on Housing - The WSJ has JPM CEO Jamie Dimon's letter to shareholders. A couple of excerpts: I suspect that the mortgage crisis will be the worst financial catastrophe of our lifetime. What the world experienced was almost a collective brain freeze ... It was a disaster hidden by rising home prices and false expectations, and once that price bubble burst, we all were in trouble. We need to write a letter to the next generation that says, “Never forget: 80% loan to value and verify appropriate income.”...But [JP Morgan] did participate in this disaster by originating mortgages that wouldn’t have been given a decade earlier (and won’t be given a decade later). Some people didn't experience a "brain freeze", but unfortunately most lenders did. I think lender's will forget again, but hopefully not for some time. And on housing:  There has been a tremendous focus on the fact that housing prices remain depressed and, in fact, are still going down some. The large “shadow inventory” of homes in delinquency or foreclosure that has not yet hit the sale market adds to the fears that this will continue for a long time. New home construction still is very depressed – so, to most, the future looks bleak. However, if one looks at the leading indicators, all signs are flashing green – the turn is coming if it is not here already.

Banks Fail To Maintain Foreclosed Homes In Minority Neighborhoods: Report - Six of the nation’s largest banks have consistently failed to aggressively market and maintain foreclosed homes in communities of color, according to the results of a nine-month long investigation released Tuesday. The investigation by the National Fair Housing Alliance, a Washington, D.C.-based nonprofit that investigates, tracks and researches housing discrimination, studied the way banks market and maintain vacant foreclosed homes in nine metro areas and found “overwhelming” and “troubling“ evidence that banks consistently market and maintain foreclosed homes in the nation’s predominantly white neighborhoods differently.  Bank-owned homes in communities of color were 42 percent more likely to have visible maintenance problems such as overgrown grass, hanging gutters, and damaged eaves or siding than those in comparable white neighborhoods. Foreclosed homes in mostly black and Latino neighborhoods were 34 percent more likely to be littered with trash and debris, and 82 percent more likely than bank-owned properties in white communities to have broken or boarded-up windows. Vacant and foreclosed bank-owned homes in white neighborhoods were 33 percent more likely to be designated with professional real estate signs that were visible from the street. Homes in black and Latino neighborhoods had signs made of construction paper or cardboard, or had no for-sale signs at all.

Existing Home Inventory declines 20% year-over-year in early April - Another update: I've been using inventory numbers from HousingTracker / DeptofNumbers to track changes in inventory. Tom Lawler mentioned this last year. According to the for (54 metro areas), inventory is off 20.4% compared to the same week last year. Unfortunately the deptofnumbers only started tracking inventory in April 2006. This graph shows the NAR estimate of existing home inventory through February (left axis) and the HousingTracker data for the 54 metro areas through early April. Since the NAR released their revisions for sales and inventory, the NAR and HousingTracker inventory numbers have tracked pretty well.  Seasonally housing inventory usually bottoms in December and January and then starts to increase again through mid to late summer. So seasonally inventory should increase over the next several months. The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the early April listings - for the 54 metro areas - declined 20.4% from the same period last year. The year-over-year decline will probably start to slow since listed inventory is getting close to normal levels. Also if there is an increase in foreclosures (as expected), this will slow the year-over-year decline.

Warm weather, improved economy bringing out homebuyers and sellers this spring - In the real estate business, there is a budding sense of optimism these days.  A warmer winter, a stronger sense of job security and a general feeling that home prices have stopped dropping are fueling a new outlook. Springtime is traditionally a busy buying and selling season for homeowners: the weather is nice, and buying now gives new homeowners time to settle in before school starts in the fall. But this year, activity started earlier and there are already stories of double-digit visits at open houses, bidding wars and homes sold within days. The reasons are numerous, according to real estate agents. Potential buyers are tired of waiting on the sidelines, worrying that prices could drop further. Interest rates are still at historic lows, but are starting to creep upward, which in turn gives buyers a sense of urgency to make a move. And sellers, long reluctant to accept the reality that their homes’ values have declined, are increasingly willing to list them at realistic prices.

CoreLogic: House Price Index falls to new post-bubble low in February, Rate of decline slows - Notes: This CoreLogic House Price Index report is for February. The Case-Shiller index released last week was for January. CoreLogic HPI is a three month weighted average of the last three months and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® February Home Price Index Reports Month-Over-Month Increase, When Excluding Distressed Sales CoreLogic February Home Price Index (HPI®) report shows national home prices, including distressed sales, declined on a year-over-year basis by 2.0 percent in February 2012 and by 0.8 percent compared to January 2012, the seventh consecutive monthly decline. Excluding distressed sales, month-over-month prices increased 0.7 percent in February from January. The CoreLogic HPI® also showed that year-over-year prices declined by 0.8 percent in February 2012 compared to February 2011. Distressed sales include short sales and real estate owned (REO) transactions. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was down 0.8% in February, and is down 2.0% over the last year. The index is off 34.4% from the peak - and is now at a new post-bubble low. The second graph is from CoreLogic. As Mark Fleming noted, the year-over-year declines are getting smaller - this is the smallest year-over-year decline since 2010 when prices were impacted by the housing tax credit.

Trulia announces new "mix adjusted" House Asking Price Monitor, Prices up 1.4% from Q4 - This is an interesting new asking price monitor from Trulia. Usually people report median asking prices, but unfortunately the median is impacted by the mix of homes. However Trulia adjusts the asking prices both for the mix of homes listed for sale and for seasonal factors. Of course this is just asking prices, not sales prices, but this might provide an early hint at changes in house prices.  This has the advantage of giving a much earlier look at prices than the repeat sales indexes. As an example, the recent Case-Shiller report was for "January". But that was really a three month average of November, December and January - and the index is based on recorded closing prices - so some of this index was based on contracts signed last September. That is 6 or even 7 months ago. The Trulia monitor will be released monthly, and the report today is for asking prices in March. From TruliaTrulia today launched the Trulia Price Monitor and the Trulia Rent Monitor, the earliest leading indicators available of trends in home prices and rents. Based on the for-sale homes and rentals listed on, these Monitors take into account changes in the mix of listed homes, reflecting trends in prices and rents for similar homes in similar neighborhoods through March 31, 2012. Nationally, asking prices on for-sale homes – which lead sales prices by approximately two or more months – were 1.4 percent higher in March than one quarter ago. Prices increased month over month 0.9 percent in March and 0.6 percent in February.

Home Prices Seen Dropping 10% in U.S. on Foreclosures: Mortgages - As many as 1.25 million of America’s least cared for homes are headed for auction after a year-long probe into foreclosure practices kept them off the market.  Sales of repossessed properties probably will rise 25 percent this year from 1 million in 2011, according to Moody’s Analytics Inc. Prices for the homes could drop as much as 10 percent because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc. That month, 43 percent of foreclosures were delinquent for two or more years, from a 21 percent share in 2010, according to Lender Processing Services Inc. in Jacksonville, Florida.  Homes stockpiled less than a year sell for about 35 percent below the value set by lenders, according to a March 15 report by the Federal Reserve Bank of Cleveland. At two years, the loss is close to 60 percent. A surge of cheap foreclosures may erode prices in the broader real estate market, even as the economy expands and residential building increases, said Karl Case, one of the creators of the S&P/Case-Shiller home-price index.

Moody’s Foresees 10% Drop in US Housing Prices - - Yves Smith - Recall when yours truly attended Americatalyst, a real housing/mortgage nerd conference last November, and the panel that was asked to forecast housing had no one predicting more than a 2-3% decline? I was gobsmacked because no one seemed to be acknowledging the huge number of foreclosures in process plus those likely to happen (“shadow inventory”).  Moody’s has focused on one aspect of the issue and does not like what it sees. Recall this Moody’s forecast follows one from Fitch of an 8% to 10% decline in housing prices. From Bloomberg: Sales of repossessed properties probably will rise 25 percent this year from 1 million in 2011, according to Moody’s Analytics Inc. Prices for the homes could drop as much as 10 percent because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc. That month, 43 percent of foreclosures were delinquent for two or more years, from a 21 percent share in 2010, according to Lender Processing Services Inc. in Jacksonville, Florida. Prices for repossessed properties could drop as much as 10 percent because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc.  “The longer a foreclosed home is in the mill, the bigger the losses,” "We have a bulge of these properties coming through the system.”

The Coming Housing Finance Train Wreck - Yves Smith - The interaction of immovable objects and inexorable forces is seldom pretty. One example is housing finance in the US. If no one blinks, an ugly situation could get even worse. One the one hand, we have the complete lack of resolve on the part of the officialdom to fix the abuses in the private label securitization market, which prior to the crisis, accounted for 60% of mortgage financing. The weak risk retention rules in Dodd Frank don’t cut it, and the sell side (the major banks) have been completely unwilling to consider reforms, such as those proposed by the FDIC in early 2010, that would have addressed enough of the problems to entice investors back into the pool. (The FDIC’s plan include one year seasoning before a loan could be sold into a securitization, 5% risk retention, loan level disclosure, and no CDOs.) Instead, we have wishful thinking from what Matt Stoller has called the hope and change school of “how we fix housing”.  Given that securitization contracts proved to be meaningless – originators lied about what they were selling, trustees refused to intervene as required to do by contract in the light of clear problems with the loans (and are now trying to get their own get out of jail free cards per the example of Bank of New York in its settlement with Bank of America), and servicers scam borrower and investors – it is hard to fathom would anyone with an operating brain cell have anything to do with this market. Private capital is on strike until better regulations are in place or memories fade, and the losses are so great that market participants say it will be a decade before there is another private securitization market in the US. This has more serious implications that you might think.

Choices Shrink for Subprime Set -A shakeout in the storefront-loan business may make credit even tighter for millions of borrowers with less-than-stellar credit histories.  The loan shops are no longer battling for customers as much as fighting for their footing amid an uncertain landscape. Springleaf, which is 80% owned by Fortress Investment Group, last month said it had stopped making new loans in South Florida and 14 states, including New York, New Jersey and Michigan. The Evansville, Ind., company also is closing 210 stores, or nearly 20% of its branches. Meanwhile, Citigroup wants to sell its OneMain business, which has some 1,300 branches nationwide. Springleaf's pullback, a result of the company's inability to borrow money cheaply, is the latest twist in the subprime-lending shakeout that started early in the financial crisis. Already, the shutdown of the subprime-mortgage market has forced multiple companies to close hundreds of storefront-lending locations and cut loan origination by hundreds of billions of dollars. As a result, individuals with weaker credit have had a hard time securing new mortgages. And even though they still have access to nonreal-estate loans and bank credit cards, volumes of those consumer-finance loans, while stable in recent years, are down sharply from 2007 levels.

Construction Spending declines in February - This morning the Census Bureau reported that overall construction spending declined in February: The U.S. Census Bureau of the Department of Commerce announced today that construction spending during February 2012 was estimated at a seasonally adjusted annual rate of $808.9 billion, 1.1 percent (±1.3%)* below the revised January estimate of $818.1 billion. The February figure is 5.8 percent (±1.8%) above the February 2011 estimate of $764.2 billion.  Private construction spending was also declined in February:This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted.Private residential spending is 63.5% below the peak in early 2006, and up 10% from the recent low. Non-residential spending is 32% below the peak in January 2008, and up about 15% from the recent low. Public construction spending is now 13% below the peak in March 2009. The second graph shows the year-over-year change in construction spending. On a year-over-year basis, both private residential and non-residential construction spending are positive, but public spending is down slightly on a year-over-year basis. The year-over-year improvements in private non-residential are mostly due to energy spending (power and electric).

Construction Spending Declined, -1.1%, in February 2012 - The Census, part of the Commerce Department, today released the monthly construction spending report. This is a monthly tally, reported seasonally adjusted, annualized, of how much money was spent on construction. Spending was $808.9 billion in February. The survey has been done since 1960. The below graph shows just how badly construction spending imploded since 2008. Dollars are not adjusted for inflation, so the overall decline is even more dramatic. For February construction spending decreased -1.1% from January. Construction has been one of the most decimated sectors from the recession and housing bubble collapse. From this time last year, construction spending is up 5.8%. Taking a two month sum, construction spending is up 7.4%, or $111.3 billion from January and February of 2011 when construction spending was $103.7 billion. Private construction spending decreased -0.8% overall, with private residential construction having no change from last month. Below is the graph for residential construction spending. Private, non-residential construction declined -1.6% from January. Commercial private construction was down -3.0%, office building was down -2.6%, lodging declined -2.8% from January, transportation and power both down -2.1% from January. Below is total private nonresidential construction spending, which for February was $527.3 billion. Public construction spending overall is down -1.7% from January. Below is the report breakdown.  FRED has a host of construction spending graphs by individual sectors. Covered is spending on highways, sewers, commercial, manufacturing, water supply and so on. .

Vital Signs: Warm Weather Fails to Lift Construction - Construction spending slowed in February. Winter weather in much of the country may have been warmer than normal, but that didn’t lift construction. Overall spending fell 1.1% on a seasonally adjusted basis to an annual rate of $808.86 billion. January’s reading was reduced to $818.07 billion. In February, spending on both private and government projects declined.

One Of The Biggest Myths About The Strong Economy Has Now Been Debunked - One of the persistent arguments we hear is that the strength the economy is showing through the first quarter is the result of favorable weather conditions, and that as soon as we return to more seasonal temperatures, we're going to see some giveback. Well, it is true that the weather has been unseasonably warm throughout the country. Probably everyone has seen some variation of this chart from Goldman measuring Heating Degree Days, and how they're way down this year. But it's really dicey to connect the warm weather to the stronger economy, and in fact there's plenty of counterevidence, including today's construction report. Construction was supposed to be one sector that would OBVIOUSLY benefit from the warm weather, and yet it hasn't. For the last two months, constructions pending has been negative. Further confirming this number is the fact that construction employment actually fell in the last month. So clearly, the #1 sector that would supposedly benefit from warm weather is not doing so hot (ominously, we might add). There are other ways in which the warm weather is clearly acting as a drag on the economy. Capacity utilization and industrial production numbers have been subpar lately thanks to the fact that utilities aren't operating at full pressure. The rail industry is seeing weak volume due to low coal volumes.

Census Data Offers Look at Effects of Recession - The Census Bureau offered the first detailed picture of population shift in the United States since the end of the recession, releasing data that showed that population growth in outer suburbs — the fastest growing areas in the last decade — all but ground to a halt in 2010 and 2011, as the painful effects of the housing crisis lingered.  The country’s outer suburbs, often referred to as the exurbs by demographers, were at the forefront of the country’s population growth for most of the last decade. New houses mushroomed in those areas as young families bought homes on credit that was easy to get, following the tradition of moving to the suburbs to begin adult lives.  But when the housing market collapsed, growth in those areas slowed drastically. The economic recovery has not revived population growth in those areas and, according to an analysis by William Frey, a demographer at the Brookings Institution, has only served to flatten it further. Population in the country’s outer suburbs grew at just 0.4 percent in the year ended last July, down from 1 percent in the previous year and a peak in 2006 of more than 2 percent.

Will the Housing Bust End the Emergence of Suburban Sprawl? - Kaid Benfield from the Natural Resources Defense Council takes a look on the bright side in regards to the foreclosure crisis, postulating that it will sound the death knell for exurban communities and sprawl: The subject of the Great Recession came up, and I volunteered that I thought the persistent economic slump had hurt both good and bad development. But I offered that it had hurt bad development (e.g., land-consuming, totally automobile-dependent subdivisions on the suburban edge) more than good, given that new, speculative development in sprawling outer locations had virtually ground to a halt. (What you see on the ground now that looks new was actually invested and entitled a decade or more ago.) Many city infill and redevelopment projects, by contrast, are going forward and even commanding market premiums for their urban locations. Housing values have declined much more, on a percentage basis, in sprawling subdivisions as compared to walkable, centrally located neighborhoods, many of which have even held steady or increased in value.

Owning Regains Appeal - Climbing rents for apartments are combining with a continued decline in home prices to push once-reluctant home buyers into finally taking the plunge, say economists and real-estate agents, helping what appears to be a good start to the housing industry's all-important spring selling season. Although increased buying activity from investors and second-home purchasers are also factors behind the recent pickup in home sales, real-estate agents say they are fielding more calls from anxious tenants complaining about rising rents. "The rental market has been incredibly hot," said Ronald Peltier, chief executive of HomeServices of America Inc., which owns real-estate brokerages in 21 states. He says rising rents, coupled with slumping home prices and interest rates near record lows, are boosting demand for homes at entry-level prices. Average apartment rents rose by 2.7% last year while the national vacancy rate dropped below 5% for the first time since 2001, according to a quarterly survey to be released Wednesday by Reis Inc., a real-estate research firm. The broad and sustained growth of the apartment market contrasts sharply with an uneven and tentative housing recovery. During the first quarter, average apartment rents rose and vacancy rates fell in all 82 metropolitan areas tracked by Reis, when compared with a year ago.

Home Affordability Reality Check (Part 2 of 5) - We begin where nearly every other conversation about home affordability seems to start — with the National Association of Realtors (NAR) Home Affordability Index. We first looked at this index back in August 2008, in a post appropriately titled NAR Housing Affordability Index is Worthless. Why did I come to such a harsh conclusion? “The index as presently constructed is utterly worthless.  it shows that over the course of the biggest run up in housing prices in American history, the Index remained perfectly affordable. Except for one monthly reading of 99.55 in late 2005 — a smidge below 100 — housing never dipped into the level of unaffordable over the entire giant housing boom.” So the entire run up preceding a 35% drop in prices, the NAR HAI had but one month where homes where not deemed affordable. As ridiculous as that sounds, its even more absurd when we take a look at the NAR methodology: “The index ignores factors like family savings rates, available cash assets, consumer credit, indebtedness, credit servicing obligations, inflation, income gains, and mortgage availability.” The kindest thing I can say about the Affordability Index is that it lacks context. Hence, it looks at the wrong things and ignores the important ones. The question is not whether, in the abstract  homes are theoretically affordable; Rather, the correct question is whether potential buyers can afford homes.

Reis: Apartment Vacancy Rate falls to 4.9% in Q1 - Reis reported that the apartment vacancy rate (82 markets) fell to 4.9% in Q1 from 5.2% in Q4 2011. The vacancy rate was at 6.1% in Q1 2010 and peaked at 8.0% at the end of 2009. From Reuters: U.S. apartment vacancy rate falls to decade low The U.S. apartment vacancy rate in the first quarter fell to its lowest level in more than a decade, and rents posted their biggest jump in four years ... The national vacancy rate fell 0.30 percentage points in the first quarter to 4.9 percent, the lowest level since the fourth quarter 2001, according to preliminary results Reis released Wednesday. Stripping away months of free rent and other perks designed to lure or retain tenants, effective rent rose to $1,018 per month, up 0.9 percent, the largest increase since the first quarter 2008, Reis said.  This graph shows the apartment vacancy rate starting in 2005. Reis is just for large cities, but this decline in vacancy rates is happening just about everywhere.

4% hikes expected in apartment rents - Rents are slightly increasing. Employment numbers are coming back, he said. “I have guarded optimism for the next few months.” Rents, he said, are going up. “We’re at 99.5% of where we were in 2008.” But there’s a cost to rent hikes. Long-time tenants who got rent discounts when they moved in are seeing those discounts expire, “and they’re getting quite a hit.” Many will move out. But there are plenty who are willing to pay that higher rent.. Dunlap cited projections that apartment rents are expected to go up 4% nationally. “We try to negotiate” with tenants. Perhaps they are more comfortable with an 11-month lease, or a lease for 14 or 15 months. “There’s nothing magical about 12 months.”

Shortage of Apartments Will Not Create a Building Boom - Today (April 6) GEI News has an article reporting that apartment vacancies are near an all-time low.  With all the talk about a housing glut this may come as a surprise.  It’s worth a trip through the numbers to see just what is going on.    Steven Hansen has recently reported that multifamily housing starts have seen a strong increase in recent months.  Could it be that the long drought in residential construction could be over as builders rush to meet a growing need for rental properties?  This analyst thinks not and will go through the data to explain why. One estimate for the total number of U.S. households in 2017 is 117 million.  (See below.) The above estimate is based on the extrapolation of estimates using 2000 census data.  Another estimate for the number of households in 2017 can be derived from the data from the 2010 census (number of households in 2010 = 116.7 million) which produces approximately 121 million using the slope of the trend line in the 2000 census based graph above. The following graph shows the bubble in home ownership starting in the mid-1990s. If the home ownership rate declines to the pre-bubble level of 64%, this means that 36% of residences will be rental properties by 2017, or about 43.6 million.    This would be a good number if there was not an increase in credit impairment due to mortgage defaults.

Reis: Office Vacancy Rate declines slightly in Q1 to 17.2% - From Reuters: Sluggish job growth crimps US office market rebound The national vacancy rate slipped to 17.2 percent in the first quarter, a slight improvement from 17.3 percent in the 2011 fourth quarter, according to preliminary figures from Reis. A year earlier the vacancy rate was 17.6 percent. ... The national vacancy rate has risen to levels not seen since 1993 and remains well above the cyclical low of 12.5 percent posted in 2007 ...The average U.S. office asking rent rate rose to $28.10 per square foot in the first quarter, up 0.5 percent from the 2011 fourth quarter. ... This graph shows the office vacancy rate starting in 1991. Reis is reporting the vacancy rate declined to 17.2% in Q1, down from 17.3% in Q4. The vacancy rate was at a cycle high of 17.6% in Q3 and Q4 2010. It appears the office vacancy rate peaked in 2010 and is declining very slowly.  As Reis noted, there are very few new office buildings being built in the US, and new construction will probably stay low for several years.

More: Office Vacancy Rate declines slightly to 17.2% in Q1 - Early this morning I noted that Reis reported the office vacancy rate declined slightly to 17.2% in Q1 from 17.3% in Q4 2011. The vacancy rate was at 17.6% in Q1 2011. Here are a few more comments and a long term graph from Reis.  National vacancies continued falling at a very modest pace in the first quarter, mirroring the tepid improvement in the labor market. The sector absorbed 5.998 million SF, the fifth consecutive quarterly gain in occupied stock since the beginning of 2011. Although net absorption levels remain muted, five consecutive quarters of positive net absorption provide convincing evidence that the sector is indeed recovering. ... Given the rate of improvement that the sector is experiencing, it will be years before it is able to recover the space that was vacated during the recession and early stages of the economic recovery. The national vacancy rate has regressed back to levels unseen since 1993 and remains well above the cyclical low of 12.5% from 2007 before the onset of the recession. This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual). Back in the early '80s, there was overbuilding in the office sector even as the vacancy rate was rising. This was due to the very loose lending that led to the S&L crisis.  In the '90s, office investment picked up as the vacancy rate fell. Following the bursting of the stock bubble, the vacancy rate increased sharply and office investment declined.

Reis: Strip Mall Vacancy Rate declines slightly in Q1 - From Reuters: US strip-mall vacancy falls 1st time in 7 yrs The average vacancy rate at U.S. strip malls fell for the first time in nearly seven years in the first quarter and rents inched up, but it is too early to call a rebound for a sector battered by the housing bust and recession, a report by Reis Inc showed. During the first quarter, the national vacancy rate for strip malls fell to 10.9 percent from 11 percent the prior quarter, according to preliminary figures from Reis. ... At regional malls, the first-quarter vacancy rate fell to 9 percent from 9.2 percent the prior quarter. It was the second consecutive quarterly decline for the big malls.  This graph shows the vacancy rate for regional and strip malls since Q1 2000. It appears the vacancy rate is starting to decline, but very slowly. Just like for office space, there is almost no new supply of malls being built.

Paying car loans comes first with many consumers – Many consumers say they'd rather be able to hit the road. According to a study released by credit and information management company TransUnion, consumers were more likely to pay their auto loans before their credit cards and mortgages last year. An analysis of about 4 million consumers who had at least one open auto loan, bank card and mortgage in 2011 found that about 39% of consumers were delinquent on their mortgage while current on their auto loan and credit card payments. STORY: Know your options if seeking help with debt COLUMN: If used right, credit card balance transfers can save cash In contrast, 9.5% of consumers were delinquent on an auto loan while current on their credit cards and mortgage. "Consumers need their cars to either get to work or seek employment," says Ezra Becker, vice president of research and consulting at TransUnion, citing the "still stubbornly high" unemployment rate of 8.3%. Becker also says that with a "really, really strong" used car market, consumers are more willing to protect the value of their car by staying current on payments. Whereas with the housing market still recovering and many homes worth less than what consumers owe on them, there's less motivation to make mortgage payments on a "negative asset."

Personal Saving Rate and Real Personal Income less Transfer Payments - By request, a couple more graphs based on the February Personal Income and Outlays report. The first graph shows real personal income less transfer payments in 2005 dollars. This has been slow to recover - real (inflation adjusted) personal income less transfer payments decreased slightly in February. This remains 4.2% below the previous peak in early 2008. From the BEA:  Personal current transfer receipts increased $3.0 billion in February, compared with an increase of $1.6 billion in January.   The second graph is for the personal saving rate.  The saving rate decreased to 3.7% in February. Personal saving -- DPI less personal outlays -- was $438.7 billion in February, compared with $509.5 billion in January. The personal saving rate -- personal saving as a percentage of disposable income -- was 3.7 percent in February, compared with 4.3 percent in January. This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the February Personal Income report.  After increasing sharply during the recession, the saving rate has been moving down for the last two to three years - so spending growth has increased a little faster than income growth. This was especially true in February with spending increasing 0.8% and income only increasing 0.2%.

Billion Price Update - Krugman - For some reason I seem to be seeing a resurgence of inflation scare stories, despite the fact that — gas prices aside — inflation remains quiescent. And along with the scare stories come assertions that the inflation numbers are faked, that the government is hiding the true rate.So it’s time for another look at the Billion Prices Project, which uses internet price quotes to create an inflation measure completely independent of government agencies. It’s not a perfect match for the CPI, nor should it be. But the BPP index is just as quiescent as the official number:

Americans Went on a February Shopping Spree - Warmer winter, newfound confidence, and pent-up demand sent consumers to the malls even as real income lagged Americans have a little more money to spend, and they're spending all of that and then some. In February, consumer spending increased by more than three times as much as personal income, growing by $86.0 billion, according to figures released today by the Commerce Department. That's an 0.8 percent increase over January, the largest bump in seven months. Personal income also rose, but not as dramatically, at 0.2 percent, or $28.2 billion, and disposable personal income also rose by 0.2 percent.

Sentiment Index Based on News Coverage Shows Improvement - The Dow Jones Economic Sentiment Indicator rose for the third month in a row, as job gains are providing momentum to the U.S. economy. The ESI advanced to 48.1 in March, from 47.4 in February. The ESI is now at its highest reading since December 2007, although the rate of progress last month was slower than in previous months. “The indicator suggests that employment growth remained robust during the month and that the recovery is in hand, although not yet with the ebullience of past rebounds out of recession,” said Dow Jones Newswires “Money Talks” columnist Alen Mattich. Positive coverage continues to be driven by better news on the labor markets. Better job growth will provide the money and confidence consumers need to keep lifting their spending, a key driver of U.S. economic activity. Coverage of the Federal Reserve was also positive for the outlook. Negative news was dominated by the sting of higher gasoline prices. Worries about the health of the U.S. banking system were also a negative for future growth.

Increase In Optimism Follows Rise In Spending — Consumer spending increased by the most in seven months in February as households shook off a steady rise in gasoline prices, the Commerce Department said Friday, leading economists to raise forecasts for growth in the first quarter. The Commerce Department said consumer spending rose 0.8 percent in February as demand for long-lasting goods like automobiles rose sharply. It also said spending in January was double the previously reported 0.2 percent gain.  Separately, the Thomson Reuters/University of Michigan consumer sentiment index rose to 76.2, the highest level since February 2011, from 75.3 in February. Even with gasoline at about $4 a gallon, Americans were more optimistic about the economy’s prospects in March than at any other time over the last year. “Fears that the economy was going to slow substantially this quarter were overdone. The economy is doing fairly well, given the headwinds from Europe, rising gasoline prices,” 

Can the US consumer keep spending? - Without high debt and asset price growth, the US consumer must rely on income growth or reduced savings to grow his/her personal outlays. With consumption roughly 70% of the economy, that means slower growth than yesteryear.  Friday saw the release of the Personal Income and Outlays report from the BEA and the results were consistent with this basic theory: Personal income increased $28.2 billion, or 0.2 percent, and disposable personal income (DPI) increased $18.9 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. In January, personal income increased $26.5 billion, or 0.2 percent, DPI increased $5.0 billion, or less than 0.1 percent, and PCE increased $40.9 billion, or 0.4 percent, based on revised estimates. Real disposable income decreased 0.1 percent in February, compared with a decrease of 0.2 percent in January. Real PCE increased 0.5 percent, compared with an increase of 0.2 percent. So, income growth remains lousy at 0.2% for February. Indeed, in real terms it fell 0.1%. For growth, however, the news was better with the personal consumption expenditures jumping 0.8% in the month. No prizes for guessing where the surge came from: Personal saving — DPI less personal outlays — was $438.7 billion in February, compared with $509.5 billion in January. The personal saving rate — personal saving as a percentage of disposable income — was 3.7 percent in February, compared with 4.3 percent in January.

The Era of Big Box Retail Dominance Is Coming to an End - When Best Buy Co. (BBY) said yesterday it was closing 50 big stores and opening 100 smaller ones, the world’s largest electronics retailer was adjusting to reality: The era of big-box retail dominance is coming to an end. The new mantra is small box. While Best Buy, Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) are still opening large stores, all are putting increasing emphasis on smaller ones. Best Buy plans to double the number of its smaller Best Buy Mobile stores by 2016. Wal-Mart is building as many as 100 small-format stores this year, while Target is opening five CityTarget locations.

Credit Card Borrowing Falls; Car Lending Is on the Rise — Americans took out more loans to buy cars and attend school in February but used their credit cards less frequently for the second consecutive month, the Federal Reserve said Friday. Consumers increased borrowing by $8.7 billion, the sixth straight monthly increase, the Federal Reserve said in its monthly report. The increase in borrowing was driven by an $11 billion increase in the category that includes mostly auto and student loans1. Borrowing on credit cards fell by $2 billion, after a $3 billion decline in January. Total consumer borrowing rose to a seasonally adjusted $2.52 trillion. The figure was nearly at prerecession levels and was up from a postrecession low point of $2.39 trillion reached in September 2010. Borrowing had tumbled for more than two years during and immediately after the recession2. Consumer borrowing rose by $18.6 billion in January, after similar gains in December and November. The gains for those three months were the largest in a decade.

Auto Sales Surge in March, Led by Small Cars (DETROIT) — The auto industry looks set to ride the appeal of smaller cars to its best monthly performance in almost four years. General Motors Co. said Tuesday that its U.S. sales rose 12 percent in March on solid demand for cars and small crossovers that achieve 30 miles per gallon or better on the highway. Chrysler Group’s sales jumped 34 percent as buyers went for Fiat small cars and Chrysler sedans. Sales at Ford Motor Co. rose 5 percent as sales of the Focus small car rose sharply compared with a year ago. Americans who couldn’t bear a new car payment during the economic downturn are back on the market. With gas above $4 in some parts of the U.S., buyers are leaning toward new fuel-efficient compacts like the Chevrolet Cruze and sub-compacts such as the Honda Fit to save money. Also, incentives on trucks are good enough to lure buyers who want something bigger.

U.S. Light Vehicle Sales at 14.4 million annual rate in March - Based on an estimate from Autodata Corp, light vehicle sales were at a 14.37 million SAAR in March. That is up 10.4% from March 2011, but down 4.4% from the sales rate last month (15.03 million SAAR in Feb 2012). This was below the consensus forecast of 14.7 million SAAR. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for March (red, light vehicle sales of 14.37 million SAAR from Autodata Corp). The annualized sales rate is up in Q1 from Q4. March was above the August 2009 rate with the spike in sales from "cash-for-clunkers". Only February had a higher sales rates since early 2008. The second graph shows light vehicle sales since the BEA started keeping data in 1967. This shows the huge collapse in sales in the 2007 recession. This also shows the impact of the tsunami and supply chain issues on sales, especially in May and June of last year.

Car prices at record highs - and rising  -- Cars are more expensive than ever, and experts say even higher prices are on the way. The days of big cash-back offers and other incentives that automakers depended on to sell excess cars and trucks have gone the way of manual transmissions and roll-down windows. "The industry has essentially cleansed itself of high incentives," said Jeff Schuster, senior vice president of auto research firm LMC Automotive. The deep cuts in production capacity during the restructuring of recent years, coupled with the recent rebound in demand for new cars1 from consumers, means that shoppers can't find the deals they once did. "You're going to see pricing going overall higher," said Jesse Toprak, analyst with sales and pricing tracker TrueCar. "The demand is higher and supply is more tightly controlled."

Young People Are Driving Significantly Less - People in my generation are driving significantly less than younger people only a decade ago, according to a new report by U.S. PIRG: The trend away from driving has been led by young people. From 2001 and 2009, the average annual number of vehicle-miles traveled by young people (16 to 34-year-olds) decreased from 10,300 miles to 7,900 miles per capita – a drop of 23 percent. The trend away from steady growth in driving is likely to be long-lasting – even once the economy recovers. Young people are driving less for a host of reasons – higher gas prices, new licensing laws, improvements in technology that support alternative transportation, and changes in Generation Y’s values and preferences – all factors that are likely to have an impact for years to come. [...]The recession has played a role in reducing the miles driven in America, especially by young people. People who are unemployed or underemployed have difficulty affording cars, commute to work less frequently if at all, and have less disposable income to spend on traveling for vacation and other entertainment. The trend toward reduced driving, however, has occurred even among young people who are employed and/or are doing well financially.

Weekly Gasoline Update: Regular Is Up 71 Cents in 15 Weeks 0 Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump, both regular and premium, increased another 2 cents over the past week, continuing their steady increase since mid-December. Regular is up 71 cents and premium 69 cents from their interim weekly lows in the December 19th EIA report. As I write this, shows ten states plus DC with the average price of gasoline above $4 and another nine states with the price above $3.90. Hawaii, not surprisingly, has to highest prices, averaging around $4.59 a gallon. How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's the answer. Click for a larger image  The next chart is an overlay of WTIC, Brent Crude and unleaded gasoline (GASO). Brent Crude as been consolidating at a resistance level since late February, and the WTIC end-of-day spot price is3.9 off its 2012 high set on February 24th. But gasoline continues to inch higher. The price volatility in crude oil and gasoline have been clearly reflected in recent years in both the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE).

Why Gas Prices Are Out of Any President’s Control - Everyone knows it’s dangerous to ingest gasoline or to inhale its fumes. But I am starting to believe that merely thinking about the price of gasoline can damage cognitive processing. Thus I may be risking some of my precious few remaining brain cells by writing about that topic. Here is a one-item test to see whether you are guilty of cloudy thinking about gas prices: Do you believe that they are something a president can control? Many Americans believe that the answer is yes, but any respectable economist will tell you that the answer is no. Here is why: Oil is a global market in which America is a big consumer but a small supplier. We consume about 20 percent of the world’s oil but hold only 2 percent of the oil reserves. That means we are, in economics jargon, “price takers.” Domestic production has increased during the Obama administration, but it has had minimal effects on global prices because, as producers, we are just too small to matter much. And even if domestic oil companies further increased production, they would sell to the highest global bidder.

Democrats Continue to Push Speculation Angle on Gas Prices - House Democrats have continued their efforts to keep the notion of oil speculation driving the run-up in gas prices at the head of the national conversation. Yesterday, the House Democratic Steering and Policy Committee held a hearing on over-speculation and its impact on the market, attended by, among others, Democratic Leader Nancy Pelosi. In remarks at the top of the meeting, Pelosi said, “Experts have been clear: Wall Street speculators are artificially driving up the price at the pump and causing pain to millions of American consumers.” That was the theme of the hearing, which took testimony from several expert witnesses. “The cost of gas is … irrefutable affected by rampant speculation in the oil market,” (Chairwoman of the steering and policy committee Rosa) DeLauro said. “That is something that we can, and should, do something about.” [...] Appearing before the panel, Michael Greenberger, University of Maryland law professor and former head of the CFTC’s division of Trading and Markets, told lawmakers bluntly that supply-and-demand issues are not the cause of the recent spike in fuel costs. Rather, he said, Wall Street traders are driving the price up just for the sake of driving the price up.“Gamblers, wearing Wall Street suits, have taken these markets over, are controlling the price and create investment vehicles that are designed to push the price of oil up,” he said.

AAR: Rail Traffic "mixed" in March - From the Association of American Railroads (AAR): AAR Reports Mixed Rail Traffic for March The Association of American Railroads (AAR) today reported reported U.S. rail carloads originated in March 2012 totaled 1,123,298, down 69,190 carloads or 5.8 percent, compared with March 2011. Intermodal volume in March 2012 was 928,350 containers and trailers, up 31,348 units or 3.5 percent compared with March 2011. Commodities with carload declines in March were led by coal, down 84,854 carloads or 15.8 percent from March 2011. Other commodities with declines included grain, down 9,088 carloads or 9.7 percent; chemicals, down 4,278 carloads or 3.4 percent; nonmetallic minerals, down 1,863 carloads or 9.7 percent; and farm products excluding grain, down 479 carloads or 13.3 percent. Carloads excluding coal and grain were up 4.4 percent or 24,752 carloads in March 2012 over March 2011. This graph shows U.S. average weekly rail carloads (NSA).  According to the AAR, the decline in coal is because coal is being used less for electricity generation. The second graph is for intermodal traffic (using intermodal or shipping containers): Intermodal traffic is now above the peak year in 2006.  Intermodal continued to impress in March. U.S. railroads originated 928,350 containers and trailers in March 2012, up 3.5% (31,348 units) over March 2011 and the 28th straight year-over-year monthly increase.

Ceridian-UCLA: Diesel Fuel index increased 0.3% in March - This is the UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce Index Increased 0.3 Percent in March, Compared to March 2011, the Pulse is Down 2.2 Percent: The Ceridian-UCLA Pulse of Commerce Index® (PCI®), issued today by the UCLA Anderson School of Management and Ceridian Corporation, rose 0.3 percent in March following the 0.7 percent increase in February and the 1.7 percent decrease in January. This puts the index down 2.2% from March 2011. Note: For comparison, the ATA Trucking index was up 5.1% year-over-year in February. This graph shows the index since January 2000. This index has been weaker than the ATA trucking index and reports for rail traffic. It is possible that the high cost of fuel is shifting some long haul traffic from trucks to rail (intermodal) - but it is unclear why this index is weaker than the trucking index.

Ceridian Fuel Index Up 0.3 Percent in March, Down 2.2 Percent From Year Ago - The UCLA Ceridian Pulse of Commerce Index based on real-time truck fuel usage rose slightly in March. The Ceridian-UCLA Pulse of Commerce Index® (PCI®), issued today by the UCLA Anderson School of Management and Ceridian Corporation rose 0.3 percent in March following the 0.7 percent increase in February and the 1.7 percent decrease in January. The first quarter PCI is below the fourth quarter of last year by 4.9 percent at an annualized rate. I would like to see a comparison of the current three months vs. the same three months a year ago, excluding seasonal adjustments. Workday adjustments are reasonable but should be negligible over a three month period.

Pulse of Commerce Index: A 0.3% Rise in March, But Down for the Quarter The latest Ceridian-UCLA Pulse of Commerce Index (PCI), a measure of the economy based on diesel fuel consumption, is now available. Last week the Ceridian and the UCLA Anderson School of Management announced that it "will no longer publish the accompanying monthly data interpretation report. In its place, the report will include a headline regarding the overall direction of the PCI in correlation with Industrial Production and a regional summary, all of which should be familiar from previous monthly PCI reports." Here is the commentary-free update for March: The Ceridian-UCLA Pulse of Commerce Index® (PCI®), issued today by the UCLA Anderson School of Management and Ceridian Corporation rose 0.3 percent in March following the 0.7 percent increase in February and the 1.7 percent decrease in January. The first quarter PCI is below the fourth quarter of last year by 4.9 percent at an annualized rate.  For a closer look at the data with some comparisons of the PCI with real retail sales, industrial production and GDP, see the latest report (PDF format). Mike Shedlock has posted some interesting commentary on the divergence between the PCI and retail sales. My focus on the PCI is the three month moving average of the index adjusted for population growth over the timeframe of the index. My assumption is that diesel fuel demand is highly correlated with the population dependent on its benefits. But first let's see the raw data, with and without seasonal adjustment.

Another Plunge in 3-Month Rolling Average of Petroleum and Gasoline Usage for Jan, Feb, March 2012 - Here is an update from reader Tim Wallace on gasoline and petroleum usage for the first three months of 2012. The chart shows Jan-Feb-March 2012 usage vs. the same three months in prior years. Wallace writes ... Attached please find the latest three month rolling petroleum/gasoline usage charts. The raw data that serves to create this chart is from the Weekly Petroleum Status Report by the EIA.  The latest excuse from the government is that they needed to readjust the numbers to compensate for increased export demand that they had not properly tracked in the past couple of years. However, that still does not account for the overall plunge in demand usage in the past several years - going back the USA peak usage year of 2007. Usage is now down by 13.6%, a huge decrease. The overall trend continues well down in both petroleum and gasoline. Also consider Ceridian Fuel Index Up 0.3 Percent in March, Down 2.2 Percent From Year Ago

Factory Orders Up 1.3% for February 2012 - The Manufacturers' Shipments, Inventories, and Orders report was released today. This report is called Factory Orders by the press and covers both durable and non-durable manufacturing orders, shipments and inventories. While new orders increased 1.3% from January, the first thing to notice is new orders have recovered to pre-recession levels. Core capital goods new orders increased 1.7% for the month and has recovered to levels before the recession start. Core capital goods are capital or business investment goods and also excludes defense and aircraft. Durable goods news orders was revised, from the reported 2.2% to a 2.4% monthly increase. Notice that Durable goods new orders have still not recovered to pre-recession levels. Shipments increased 0.1% with core capital goods shipments increasing 1.4% after decreasing -2.8% in January. Below is a graph of core capital goods shipments. Inventories increased 0.4% with machinery, part of core capital goods, inventories increasing 1.0%. Core capital goods inventories as a whole increased 0.4%. There still is not an inventory build up as the inventory to shipments ratio remained the same, 1.33.  Considering our sky high gas prices this is worth noting. Petroleum and Coal are part of non-durable goods, whose inventories increased 0.3% on a monthly basis.  Below is the graph of inventories to shipments ratios for Petroleum and coal, but for February. The height of the oil bubble was Summer 2008.

Manufacturing Jobs Still Matter, as Does the Dollar - Dean Baker - Eduardo Porter had an interesting column in the NYT discussing the future of manufacturing jobs in the U.S. economy and the role of trade. While the piece makes several valid points, it seriously underplays the importance of manufacturing jobs. Remarkably, it also does not discuss the trade deficit and the dollar. The piece is correct in saying that there is nothing intrinsically good about manufacturing jobs and that it makes little difference to manufacturing workers whether they lose their jobs to trade or productivity growth. Nonetheless, it is still true that manufacturing remains a source of relatively high-paying jobs for workers without college degrees. This may be the result of a historically legacy and higher than average unionization rates, but it is still the reality. The issue of trade is also important, because the loss of jobs as a result of trade deficit creates a situation that is in the long-run unsustainable.  Of course the main factor in determining the size of the trade deficit is the value of the dollar. If the dollar is over-valued by 15 percent, it means that our exports will cost roughly 15 percent more for people in other countries while imports will cost roughly 15 percent less for people living in the United States. There is no policy or set of policies that can have anywhere near as much impact on trade as the value of the dollar.

ISM Manufacturing index indicates slightly faster expansion in March - From the Institute for Supply Management: March 2012 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in March for the 32nd consecutive month, and the overall economy grew for the 34th consecutive month, say the nation's supply executives. "The PMI registered 53.4 percent, an increase of 1 percentage point from February's reading of 52.4 percent, indicating expansion in the manufacturing sector for the 32nd consecutive month. The Production Index increased 3 percentage points from February's reading of 55.3 percent to 58.3 percent, and the Employment Index increased 2.9 percentage points to 56.1 percent. Of the 18 industries included in the survey, 15 are experiencing overall growth. Comments from the panel remain positive, with several respondents citing increased sales and demand for the next few months." Here is a long term graph of the ISM manufacturing index.This was slightly above expectations of 53.0%. This suggests manufacturing expanded at a faster rate in March than in February. It appears manufacturing employment expanded in March with the employment index at 56.1%.

ISM Non-Manufacturing Index indicates slower expansion in March - The March ISM Non-manufacturing index was at 56.0%, down from 57.3% in February. The employment index increased in March to 56.7%, up from 55.7% in February. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: March 2012 Non-Manufacturing ISM Report On Business® "The NMI registered 56 percent in March, 1.3 percentage points lower than the 57.3 percent registered in February, and indicating continued growth at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 58.9 percent, which is 3.7 percentage points lower than the 62.6 percent reported in February, reflecting growth for the 32nd consecutive month. The New Orders Index decreased by 2.4 percentage points to 58.8 percent, and the Employment Index increased by 1 percentage point to 56.7 percent, indicating continued growth in employment at a slightly faster rate. The Prices Index decreased 4.5 percentage points to 63.9 percent, indicating prices increased at a slower rate in March when compared to February. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. This was below the consensus forecast of 56.7% and indicates slightly slower expansion in March than in February.

Okun’s Law, the Jobless Recovery, and Unexpectedly Fast Net Job Creation » I have found it somewhat surprising that analysts have worried about how employment growth has recently outpaced GDP, according to Okun’s Law, while others have bemoaned the slow pace of employment growth [0] [1]. Underpinning these discussions is a view that there is instability in the relationship. [2] The first thing to recall is that there are several versions of Okun’s Law. Some are expressed in levels, some in deviations from natural levels (gaps), and some in growth rates. From Figure 1, it does appear that private employment growth has been above expected, after being below expected. Figure 1 shows the growth rates of private employment against GDP over the 1987Q1-2012Q1 period -- essentially the period of the Great Moderation. Notice that from 2008Q4 onward, employment growth was below the regression line (i.e., employment was underpredicted), and continued on into the recovery period. The most recent observations have indeed been above the regression line. But there does seem to be a consistent pattern wherein contractions are associated with employment growth below that implied by the relationship that obtains over both upswings and downswings.

Conclusion: How Low Will the Unemployment Rate Go? - NY Fed -A major theme of the posts in our labor market series has been that the outflows from unemployment, either into employment or out of the labor force, have been the primary determinant of unemployment rate dynamics in long expansions. The key to the importance of outflows is that within long expansions there have not been adverse shocks that lead to a burst of job losses. To illustrate the power of this mechanism, we presented simulations in a previous post that were based on the movements in the outflow and inflow rates in the previous three expansions. These simulated paths show the unemployment rate declining to a level well below current consensus predictions over the medium term.   In this post, we run these simulations to their natural conclusion to see what happens to the unemployment rate if the current expansion lasts as long as any of the three most recent expansions. Recall that in these simulations, we assume that the inflow and outflow rates change at the same pace as they did in the expansions following the 1981-82, 1990-91, and 2001 recessions starting at thirty months into the expansion (roughly the point where we are now in the current expansion) through the start of the next recession (see the Okun’s Law post in this series for the length of each expansion). The simulated unemployment paths based on the three different scenarios are shown in the chart below

Labour markets: Stuck - MARK THOMA draws our attention to a new economic letter published at the San Francisco Fed. Its authors point out that real wage growth has been strong in the American economy since 2008. Why? One reason real wage growth has been so solid is that inflation has been low, with the personal consumption expenditures price index increasing at an average annual rate of 1.8% since the start of 2008. Low inflation means that employers cannot reduce real wages simply by letting inflation erode the value of worker pay. Instead, if they want to reduce real labor costs, they must cut the actual dollar value of wages. Employers generally avoid doing so because cuts to nominal wages can reduce morale and prompt resistance even in difficult economic times... Here is the resistence to nominal wage cuts illustrated, for 2011:

Screw Your Analysis to the Sticky Point - Krugman - Via Mark Thoma, a new paper from the San Francisco Fed offers stunning evidence on downward nominal wage rigidity, a topic I’ve written about before. What the paper shows is that many, many workers are getting precisely zero wage growth in dollar terms: And there has been a sharp increase in the fraction of zero-wage-change workers: These observations have huge implications for policy. Let me stress two implications, in particular: 1. The prevalence of zero-change wages constitutes overwhelming evidence that we’re suffering from lack of demand, not lack of supply. It also undercuts one of the favorite arguments of those claiming that we really do have a supply-side problem, the persistence of (low) inflation and positive wage growth despite the low level of employment. The reason we have positive wage growth is that workers with a good bargaining position are still managing to eke out increases, while those without aren’t facing wage cuts. More on that later today, when I have time. 2. The stickiness of wages even in the United States — which has one of the most “flexible”, aka brutal, labor markets in the advanced world, makes it clear just how huge the costs of the eurozone strategy of “internal devaluation” — getting wages down in peripheral economies, until competitiveness is regained — really is. By asking that Ireland, Spain, Portugal achieve double-digit falls in nominal wages, the Germans and the ECB are actually demanding something that basically never happens. Very important stuff.

More on Rigid Nominal Wage Growth, By Tim Duy: Paul Krugman looks at the evidence on nominal wage rigidities here and sees additional reason to believe the primary economic challenge is a demand shortfall. He concludes with this point: Oh, and someone is sure to chime in and say that this proves that the solution to unemployment is to make wages more flexible. No, it isn’t: in a liquidity trapped, deleveraging economy lower wages would actually worsen the situation. It is important to emphasize this point, and Japan provides a good example. Via the Financial Times: ..Bonuses have been coming under heavy pressure in Japan for years as part of a wider effort to restrain incomes. And while workers around the developed world have been complaining of a squeeze on incomes over the past two decades, in Japan thinner pay packets fuel wider deflation. That makes it even harder for the government to rein in its runaway debt and for the central bank to use monetary policy to boost growth... ...While policymakers bemoan the salary squeeze, political pressure is growing for heavy cuts to public sector pay as a quid pro quo for a proposed doubling of Japan’s 5 per cent consumption tax.  I think the role of role of bonuses in driving Japan's deflation is underappreciated. The bonus system allows for more flexible wages, thus allowing for the real possibility of negative nominal wage growth and thus deflation. In contrast, downward nominal wage rigidities in the US reduce the likelihood of deflation, but lessen the resolve of monetary policymakers to stimulate activity.

The Trend is the Cycle - Nir Jaimovich (Duke University) and Henry Siu (University of British Columbia) appear to have made a very interesting discovery. Evidently, there appears to be a very strong link between two much talked about phenomena: job polarization and jobless recoveries. ... What's the bottom line? After separating jobs into various categories: The conclusion is that jobless recoveries are due entirely to jobless recoveries in routine occupations. In this group, employment never recovers beyond its trough level, nor does it come anywhere near its pre-recession peak. This is in stark contrast to earlier recessions.  And the prediction is that the routine jobs lost during the recession are gone forever. If so, then we are much closer to a full recovery than most people think and it's time to start considering reversing stimulative policies.

Behind the "Trend is the Cycle", by Tim Duy - Via Mark Thoma, David Andolfatto finds evidence of a permanent component to recent job losses. Reviewing a recent paper (which I enjoyed) by Nir Jaimovich and Henry Siu. Andolfatto notes: The conclusion is that jobless recoveries are due entirely to jobless recoveries in routine occupations. In this group, employment never recovers beyond its trough level, nor does it come anywhere near its pre-recession peak. This is in stark contrast to earlier recessions. He further sees a smoking gun in this chart: And again notes:  This last figure is quite dramatic. It shows how, prior to 1990, routine employment rebounded strongly following a recession. But since 1990, it appears not to rebound at all. Indeed, the pattern appears to be one of a precipitous decline in recession, followed by a period of relative stability in the subsequent expansion. I have to admit that I was perplexed by Andolfatto's surprise with this result - the basic patterns of this chart should be easily recognizable as simply the path of manufacturing employment in the US: That employment in this sector has not rebounded after the past two recessions is not exactly a secret (there is likely some construction element in the first chart as well, but I am putting that aside for the moment). That said, I think there is an interesting question here - should we define these job losses as primarily structural (supply) or cyclical (demand)? To be honest, I admit that I have gone back and forth on this topic.

Are US Multinationals Abandoning America? - Laura Tyson -  In 2009, the latest year for which comprehensive data are available, there were just 2,226 US multinationals out of approximately 30 million businesses operating in the US. America’s multinationals tend to be large, capital-intensive, research-intensive, and trade-intensive, and they are responsible for a substantial and disproportionate share of US economic activity. Indeed, in 2009, US multinationals accounted for 23% of value added in the American economy’s private (non-bank) sector, along with 30% of capital investment, 69% of research & development, 25% of employee compensation, 20% of employment, 51% of exports, and 42% of imports. In that year, the average compensation of the 22.2 million US workers employed by US multinationals was $68,118 – about 25% higher than the economy-wide average. Equally important, the US operations of these firms accounted for 63% of their global sales, 68% of their global employment, 70% of their global capital investment, 77% of their total employee compensation, and 84% of their global R&D. The particularly high domestic shares for R&D and compensation indicate that US multinationals have strong incentives to keep their high-wage, research-intensive activities in the US – good news for America’s skilled workers and the country’s capacity for innovation.

Inflation fear and privileged service sector jobs - The greater the number of protected service sector jobs in an economy, the more likely those citizens will oppose inflation. Inflation brings the potential to lower real wages, possibly for good. How many insiders, if they had to renegotiate their current deals, would do just as well? Get the picture? This is a neglected cost of protected service sector jobs, namely that the economy’s central bank will face strong political pressures not to inflate even when a looser monetary policy would be welfare-improving. Western Europe most of all. If you see that the young people in an economy aren’t doing nearly as well as the privileged insiders, you should suspect that the privileged insiders fear renegotiation and thus fear inflation. Inflation is easier to sustain in rapidly growing economies where people are moving up various ladders quickly. Perhaps we have lost the ability and the political economy to support inflation when needed.

What Export-Oriented America Means - That is the title of my new 4000 or so word essay for The American Interest.  Excerpt: At least three forces are likely to combine to make the United States an [increasing] export powerhouse. First, artificial intelligence and computing power are the future, or even the present, for much of manufacturing. It’s not just the robots; look at the hundreds of computers and software-driven devices embedded in a new car. Factory floors these days are nearly empty of people because software-driven machines are doing most of the work. The factory has been reinvented as a quiet place. There is now a joke that “a modern textile mill employs only a man and a dog—the man to feed the dog, and the dog to keep the man away from the machines.” The next steps in the artificial intelligence revolution, as manifested most publicly through systems like Deep Blue, Watson and Siri, will revolutionize production in one sector after another. Computing power solves more problems each year, including manufacturing problems. It’s not just that Silicon Valley and the Pentagon and our universities give the United States a big edge with smart machines. The subtler point is this: The more the world relies on smart machines, the more domestic wage rates become irrelevant for export prowess. …The second force behind export growth will be the recent discoveries of very large shale oil and natural gas deposits in the United States

The return of the US manufacturer - The US manufacturing PMI released by the Institute of Supply Management (ISM) on Monday beat expectations, coming in at 53.4. But that’s not what we really want to talk about here. Instead, we want to ask the question that the team at Bank of America Merrill Lynch asked themselves in an impressive 73-chart, 43-page report last week. Namely: is US manufacturing in the early stages of a renaissance? There is a popular image of the sector as being in perpetual decline due to offshoring. However, at least some of the alleged decline had more to do with other sectors growing and thus decreasing manufacturing’s share of GDP as a percentage. With the wage gap between the US and emerging markets narrowing, a weak dollar, and a relatively inexpensive domestic natural gas supply, the manufacturing sector could see something of a comeback. Not over the near-term but rather the medium or long term. One of the implications of this is that those investing in EM countries solely because of their growth potential, primarily when that potential is to do with input cost advantages, will need to more discerning in the future about regional allocations. Having a catch-all “EM bucket” just won’t be good enough anymore. Let’s dig into some of the analysis around this by BAML’s John Inch and Neil Dutta. It’s basically one huge graphfest…

Lean Inventories Will Be Plus for Production - The inventory sector is often one of the last pieces that fits into the economic puzzle. That’s in large part because the data are delayed [just like the trade deficit] and partly because consumer and business spending play greater roles in powering growth. Just because they are last doesn’t mean inventories are an afterthought in forecasting economic activity. Inventory levels greatly determine the outlook for production. For the first half, that interplay looks like a positive–for both U.S. and global producers. Economists will have to see the total business inventory report, scheduled for April 16, to get a better idea of how inventories are contributing to–or subtracting from–first-quarter gross domestic product growth. But already available data on the factory sector support an optimistic outlook for production. What’s important is not inventory levels per se, but how stockpiles measure up when compared to sales activity. If inventories are low relative to what customers are buying, orders and production will have to be ramped up. If companies have too many goods relative to sales, ordering and output schedules will be cut back.

Vital Signs: U.S. Factories Gaining Steam - American factories saw an increase in demand during February. New orders for manufactured goods rose a seasonally adjusted 1.3% from January. The number of unfilled orders also climbed 1.3% in February, indicating that factories will need to beef up production. A separate report this week also suggested manufacturers are gaining steam after a slow start to the year.

The Promise of Today’s Factory Jobs - Master Lock, which has made locks in Milwaukee since 1921, has brought 100 jobs back from China over the last year and a half. And Mr. Bink, who has worked at the plant for 33 years and heads the United Auto Workers local, is sure more will follow. “They are making a lot of capital investment; buying a lot of new equipment,” he said. “That will create more jobs.”  Master Lock’s story dovetails nicely with the budding upturn in manufacturing employment, which has rekindled hope across a Rust Belt pummeled by 30 years of job loss. Nationwide, factories have added 400,000 jobs in the last two years, the first sustained bout of growth since the 1990s, replacing about a fifth of the positions lost during the recession. Other companies, from Otis to General Electric, are bringing home jobs once thought lost for good.  Mr. Bink’s enthusiasm has echoed from the factory floor all the way to Washington. During his State of the Union Message, President Obama wove Master Lock’s tale of repatriated jobs into a narrative of recovery that could serve him well in November. “We have a huge opportunity, at this moment, to bring manufacturing back,” the president said. “But we have to seize it.”  To do so, his administration has proposed a piñata of tax breaks and incentives intended to transform the incipient movement into a new golden age for factory jobs.

Warm weather, shrinking labor market lower unemployment - For Ivan Sachs, owner of Connecticut-based Cherry Hill Construction Co., this year's relatively warm winter has helped jump start his 55-year-old, family-run construction and demolition business for the 2012 season. "There was no real, lasting frost this year, so we were able to start post-winter work a bit early," Sachs said. "Normally we start at the end of March or the first week of April, but this year we began almost a month earlier." Sachs said his company provides an array of construction services from demolition to site development, and with the warm weather permitting an early start to business, they have already employed approximately 50 people this year. Cherry Hill's situation is not unique in the state. According to Alissa DeJonge, director of research at the Connecticut Economic Resource Center, the mild winter has allowed construction projects across the state to move forward earlier this year than usual. This trend is reflected in recent job growth across the state. January brought an increase of about 7,000 jobs, and the Connecticut Department of Labor announced on March 29 that approximately 5,500 additional private sector jobs were added in the month of February. In New Haven, unemployment fell from 12.5 percent in January to 11.7 percent in February.

Moody’s Analytics Sees More Rapid Unemployment Decline This Year - The U.S. economy is on track to grow at about 2.5% through the middle of next year before accelerating to 4% growth by mid-2014, according to a report from Moody’s Analytics. The sister company of Moody’s Investors Service also expects that the U.S. unemployment rate will drop below 8% this year. Full employment–defined as just under 6% unemployment–should be reached by late 2015. “In the coming months, however, economic data will turn a bit soft, as the effects of the warm winter fade, and surging gasoline prices have the potential to take a toll on consumer sentiment,” said Mark Zandi, Moody’s Analytics chief economist. While rising oil and gasoline prices, Europe’s debt crisis and uncertainty about U.S. government spending remain, they appear to pose less of a risk than a few months ago, the report said. Moody’s Analytics also sees the housing market near a bottom and starting to contribute to economic growth next year.  Moody’s Analytics said it now expects the unemployment rate to fall more quickly this year and next–ending next year at slightly more than 7%. The improved jobs-market outlook comes partly as a larger portion of the population is growing older and dropping out of the work force. A slowdown in immigration is also limiting growth of the labor force.

The winter of our content? How much did weather skew U.S. data? - All eyes will turn to the March employment data, to be released this Friday, to see if this improvement was real or merely a statistical illusion. The weather is usually more benign at this time of year, so any distortions from seasonal adjustments tend to be minimal. Nonfarm payrolls grew an average of 245,000 between December and February after expanding by an average of only 157,000 in the three prior months. That’s quite a jump. If March’s employment stats are as good or better than the previous three months, it could be sign that the winter’s improvement was real. But if March disappoints, it would mean that the strength over the winter was nothing but a chimera.

New Jobless Claims Fall Again Last Week - Initial jobless claims fell again last week, touching a new four-year low and signaling that the labor market will continue growing in the foreseeable future. For the week through March 31, new filings for unemployment benefits dropped 6,000 to a seasonally adjusted 357,000.  Last week’s decline was no quirk, considering that the four-week moving average of new claims also dipped to a new four-year low. There’s no seasonal issue clouding the trend either. Unadjusted claims are 12% below last year’s level, which is to say that the annual decline remains in the 10%-15% range of decrease that’s prevailed for the past 12 months.

U.S. Jobless Claims Drop to 357,000; Lowest in 4 Years  — The number of people seeking U.S. unemployment benefits fell to a four-year low last week, as layoffs slow and the job market strengthens. Weekly applications dropped 6,000 to a seasonally adjusted 357,000, the Labor Department said Thursday. That’s the fewest since April 2008. The four-week average, a less volatile measure, fell to 361,750, also the lowest in four years. The average has fallen nearly 13 percent in the past six months. When unemployment benefit applications drop consistently below 375,000, it usually signals that hiring is strong enough to lower the unemployment rate.

Vital Signs: Services Hiring Improved in March - U.S. businesses that provide services increased their pace of hiring in March from February. The Institute for Supply Management’s seasonally adjusted Services Employment Index registered 56.7 in March, up one point from February. Readings above 50 indicate expansion. March’s rise comes after the index slid to 55.7 in February from 57.4 in January. Employment gains also increased among U.S. factories in March.

Report: Private Sector Adds 209,000 Jobs in March - The private sector added 209,000 jobs in March, according to an analysis from the payroll services firm ADP. The report also noted that the economy added 23,000 more jobs in the first two months of 2012 than ADP had previously estimated. The news is ahead of  Friday’s employment situation report, when the Labor Department will announce its estimate of employment growth, including the public sector. The 209,000 figure is roughly in line with what economists predicted it would be. Bloomberg news surveyed 38 economists, who predicted job gains from 170,000 to 250,000, with the median estimate anticipating 206,000 new jobs. The gains went most heavily to the service sector, which added 164,000 jobs, while the goods-producing sector added 45,000. The report is generally in line with the consensus narrative on the recovering employment picture: We’re seeing fairly robust job growth, enough even to keep ahead of population growth, but perhaps not enough to drop the employment rate further than 8.3%. One of the reasons that the unemployment rate might linger at around that number is that, as the economy improves, more and more formerly discouraged workers will rejoin the official workforce.

ADP: Private Employment increased 209,000 in March - ADP reports: Employment in the U.S. nonfarm private business sector increased by 209,000 from February to March on a seasonally adjusted basis. Estimated gains for previous months were revised higher; the gain from December to January was revised up by 9,000 to 182,000, and the gain from January to February was revised up by 14,000 to 230,000. Employment in the private, service-providing sector increased 164,000 in March, after rising a revised 183,000 in February. Employment in the private, goods-producing sector rose 45,000 in March. Manufacturing employment added 23,000 jobs. This was slightly above the consensus forecast of an increase of 208,000 private sector jobs in March. The BLS reports on Friday, and the consensus is for an increase of 201,000 payroll jobs in March, on a seasonally adjusted (SA) basis. Government payrolls have been shrinking, so the ADP report suggests close to 200,000 nonfarm payroll jobs added in March. Note: ADP hasn't been very useful in predicting the BLS report.

Jobless Claims Keep Getting Revised Up - News Thursday that the U.S. Department of Labor revised upward its weekly initial jobless-claims number for the previous week didn’t cause much of a huge stir on financial markets, but it represented the latest in an unusual string of adjustments to the closely followed data. The Labor Department has now revised upward its first estimate of seasonally adjusted claims in 56 of the past 57 weeks, a Dow Jones analysis of claims reports found. Revisions to government data occur on a regular basis but it is uncommon for numbers to nearly always be restated in the same direction. Initial claims, which calculate the number of new applicants for unemployment insurance and are released every Thursday, are among the more timely and closely watched economic indicators. Financial markets routinely react to the data, which are seen as the freshest barometer of the labor market and the overall economy. New jobless claims have been trending downward since the middle of last year, pointing to fewer layoffs and a strengthening labor market. But the week-to-week improvement hasn’t always been as strong as the initial numbers might suggest.

US Labor Market: Increasingly Low-Wage Driven - Since tomorrow is the big NFP day, let’s take a look at some of the details of recent job creation, via today’s Bloomberg Briefing:“Improved hiring conditions and a decline in jobless claims are encouraging signs the economy is slowly healing. While these gains in the labor market may be sustainable over time, the quality of jobs driving this improvement is weak and confined to low-paying areas of the economy. This indicates that growth will remain somewhat weak throughout 2012. It also partially explains the lower rate of productivity gains observed over the past year . . . Even with the encouraging increase in hiring over the past six months, weak income gains and sluggish wage growth have been persistent features of the current economic expansion. The pace of income gains is well below that of the past two jobless recoveries and real average hourly earnings continue to decline.The strength of labor employment gains in the subsectors of leisure and hospitality, health care and social assistance, retail trade and temporary jobs, indicate a growing low-wage bias in the economy. This is due in part to excess labor market slack and indicative of broader structural issues in the labor market. Overall household spending remains historically weak and as the price of gasoline increases above $4 per gallon in coming days these factors taken together pose a risk to second quarter growth. While roughly 41 percent of the jobs created since 2010 are in the aforementioned low-wage sectors, they only account for 29 percent of the total labor force. Factoring in public sector job losses, these four low-wage-paying subsectors account for a whopping 70 percent of all gains during the past six months.

March Employment Report: 120,000 Jobs, 8.2% Unemployment Rate - From the BLSNonfarm payroll employment rose by 120,000 in March, and the unemployment rate was little changed at 8.2 percent, the U.S. Bureau of Labor Statistics reported today. The civilian labor force participation rate (63.8 percent) and the employment-population ratio (58.5 percent) were little changed in March. The change in total nonfarm payroll employment for January was revised from +284,000 to +275,000, and the change for February was revised from +227,000 to +240,000. This graph shows the jobs added or lost per month (excluding temporary Census jobs) since the beginning of 2008. Job growth started picking up early last year, but then the economy was hit by a series of shocks (oil price increase, tsunami in Japan, debt ceiling debate) - and then growth started picking up again. This is only one month, but the concern is job growth will slow again. The second graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate was declined to 8.2% (red line). The Labor Force Participation Rate decreased to 63.8% in March (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although most of the decline is due to demographics. The Employment-Population ratio decreased slightly to 58.5% in March (black line). The third graph shows the job losses from the start of the employment recession, in percentage terms.

Jobs Report: Smaller-than-Expected Gains, Topline Rate Ticks Down to 8.2% - A disappointing 120,000 jobs were added to the economy in March, well below expectations. However, the topline unemployment rate fell again to 8.2%. The revisions for January and February were mixed, with employment revised down a bit for January (to +275,000 from +284,000) and up in February (from +227,000 to +240,000). The drop in the topline rate can be explained by a small drop in both the labor force participation rate (to 63.8%) and the employment-population ratio (to 58.5%). When less people are part of the labor force, you can have drops in the unemployment rate despite modest gains in jobs.   Private-sector employment gains slowed from its average over the past three months. For the first time in a long while, the public sector didn’t really drag on employment – just 1,000 job losses for the public sector. But the private sector, which had been adding close to 250,000 jobs a month for the past three months, this time added half that, at 121,000. The establishment survey shows gains in health care (+26,000), restaurants and drinking establishments (+37,000) and a big gain in manufacturing (+37,000), but a big drop in retail trade employment (-34,000), with general merchandise stores taking the biggest hit. In more troubling news, the average workweek fell in March, down 0.1 hours. The manufacturing workweek also fell, by a larger amount, 0.3 hours. Average hourly earnings did rise, however.

Employment Situation (w/ 7 graphs) The employment report was a major disappointment. Payroll employment rose some 120,000, significantly less than the over 200,000 anticipated. Moreover, the household survey displayed a -31,000 drop in employment. The unemployment rate did tick down from 8.3%to 8.2%. But that was largely because the labor force fell -164,000 Moreover, the average work week fell from 34.6 to 34.5 hours so that the index of aggregate hours worked only rose 0.1%. The index of hours worked has been raising a red flag about the numerous other signs of stronger employment and an acceleration of economic growth. They are not showing the recent improvement that other employment data have been reporting Recently, unit labor cost has been rising faster than prices, implying margin pressure and very weak profits. To sustain profits growth, firms have to reestablish stronger productivity growth. The weakness in March employment is a strong indicator that business is trying to rebuild productivity growth and profits growth. Average hourly earnings only rose from $23,34 to $23.39 so average hourly earnings continued to slow. The year over year gain is now only 1.7%, a new record low. Moreorer, weekly earnings growth slowed to only 2.2%. The recent improvement in retail sales had been driven largely by a decline in consumer savings and their are serious questions about how long this could be sustained.

March jobs report: Hiring slows, Unemployment falls to 8,2% - Hiring slowed dramatically in March, clouding optimism about the strength of the recovery. Employers added 120,000 jobs in the month, the Labor Department reported Friday, matching economists’ expectations. The number marked a significant slowdown in hiring from February, when the economy added 240,000 jobs. ”It’s discouraging that job growth was half of what it had been the previous month,” Meanwhile, the unemployment rate fell to 8.2% as the labor force shrank by 164,000 workers, mostly due to white women leaving the job market. The hardest hit industry was retail, which lost 33,800 jobs, mostly at department stores. On the positive side, manufacturers created 37,000 jobs, professional services created 31,000 jobs, and health care added 26,000 jobs. Restaurants and bars were also a large job creator, hiring 36,900. One small bit of good news: public sector job losses continued to slow. The government has been bleeding jobs since the middle of 2010, but recently those layoffs have started to wind down. The government cut just 1,000 jobs in March, while private businesses — which have steadily been hiring for two years straight — added 121,000 jobs.

U.S. Economy Added Only 120,000 Jobs in March, Missing Estimates - The U.S. labor market continued to add new jobs last month, but at a slower rate than economists had been hoping for. The Bureau of Labor Statistics said the economy added 120,000 jobs in March, compared to the 205,000 that many analysts had been expecting, in a sign that the employment gains of recent months could be losing steam. The unemployment rate fell to a three-year low of 8.2%, due to a reduction in the number of Americans seeking work. Betsey Stevenson, a former Labor Dept. chief economist, called the report “disappointing,” writing in a Twitter message, “The recovery continues, but not at the pace we’d like.” The lackluster jobs report could strengthen calls for another round of stimulus by the Federal Reserve to boost the economy. In terms of policy, we do not believe this number alone is sufficient to propel the Fed into action at the April FOMC meeting (April 24-25). That said, the soft employment numbers certainly leave the door open for further accommodation and may shift the decision point to the June FOMC as the Fed continues to monitor the incoming data.” On the bright side, the economy has added 858,000 jobs over the last four months, the best showing in two years.

Job Growth Slows Sharply In March - Here we go again? Another spring is here and suddenly the economic data is looking weak again. Private-sector nonfarm payrolls rose in March by a slim 121,000 on a seasonally adjusted basis. That's roughly half as strong as we've been seeing in recent months. In February, for instance, private job growth was a much stronger 233,000. It's safe to say that today's number is a big disappointment and far below what most economists were expecting. Today's jobs report also raises new concerns that the economy is weaker than it appeared in recent months, giving new strength to the arguments that the warm winter has been artificially juicing the numbers.  The unemployment rate still managed to slip a bit to 8.2% last month from February's 8.3%. But this is meaningless in context with the latest evidence of weak job growth. In any case, it's suddenly a whole new ballgame for analyzing the economic outlook… again. One reading of today's report is that economic momentum generally is slowing. Indeed, the main reason for the weak jobs report is due to a reversal of fortunes in the services sector, which dominates the labor market in providing jobs. Consider that in February, services jobs rose by a seasonally adjusted 204,000, or roughly in line with the previous two months. But growth in services jobs slowed to a net rise of just 90,000 in March.

Nonfarm Payroll +120,000, Unemployment Rate Fell .1 to 8.2%, Record 87,897,000 "Not in Labor Force" - Quick Notes About the Unemployment Rate:

  • US Unemployment Rate dropped .01 to 8.2%  
  • In the last year, the civilian population rose by 3,604,000. Yet the labor force only rose by 1,315,000. Those not in the labor force rose by 2,289,000.  
  • The Civilian Labor Force fell by 164,000.  
  • Those "Not in Labor Force" increased by 310,000. If you are not in the labor force, you are not counted as unemployed.  
  • Those "Not in Labor Force" is at a new record high of 87,897,000.  
  • By the Household Survey, the number of people employed fell by 31,000.  
  • By the Household Survey, over the course of the last year, the number of people employed rose by 2,270,000.  
  • Participation Rate fell .1 to 63.8%  
  • Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Over the past several years people have dropped out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Some of this was due to major revisions last month on account of the 2010 census finally factored in. However, most of it is simply economic weakness.

Employment Rate at 8.2%, But Only 120K New Jobs - Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics: Nonfarm payroll employment rose by 120,000 in March, and the unemployment rate was little changed at 8.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment rose in manufacturing, food services and drinking places, and health care, but was down in retail trade.  Today's numbers numbers are much worse than the consensus, which was for 200K new nonfarm jobs and's own estimate of 230K nonfarm jobs. The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948. The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The January number is 3.6% — unchanged from last month. This measure gives an alternative perspective on the relative severity of economic conditions. As we readily see, this metric remains significantly higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%.  The next chart is an overlay of the unemployment rate and the employment-population ratio. This is the ratio of the number of employed people to the total civilian population age 16 and over.

March Jobs Report, First Impressions - Payrolls surprised to the downside in March as employers added only 120,000 jobs on net, well below the almost 250,000 average monthly gains of the past three months and the smallest net gain since last October.  While the unemployment rate ticked down a tenth to 8.2%, that was partly driven by a decline in the labor force (though this number is quite volatile month-to-month).  Weekly hours slid a bit as well, another indicator of a dip in labor demand off of the recent trend.The question, of course, is does this weaker report signal a true downshift in job growth, suggesting the recent acceleration was yet another false start.  Since one month does not a trend make, this in unknowable, but some indicators suggest March’s slowdown may be anomalous.  Most industries added jobs last month, though retail trade was a big exception, down 34,000. Seasonality could be playing a role in the disappointing March results.  This past winter was the fourth warmest on record, but how does that play out in the jobs report?  Retail trade provides a useful example.  Stores that expect less traffic in cold months will downsize their staffs in the winter and boost hiring in the spring.  Thus, the seasonal adjusters will add employment to the non-seasonal retail count in the winter and subtract it in the spring. But in an unseasonably warm winter, stores will move their spring hiring up a few months—folks who would have been hired in March were instead hired in Jan or Feb.  In that case, the seasonal adjustment artificially boosts the earlier months and lowers the count for March.

Jobs Report, Take #2 - As mentioned in my earlier post, we may be at the beginning of another downshift in job growth or March’s disappointing report could be an anomalous blip down in a better underlying trend.  There’s some reason to hope for the latter—I noted the seasonality issues caused by the mild winter—but we could also be seeing the impact of higher gas prices on growth, real incomes, and consumption.   Still, you really don’t want to build too big a story out of one month, especially when it’s off trend.  Look at it this way.  If you plot the monthly gains in the private sector, as I do in Figure 1 below, you clearly see the March deceleration. But if you smooth out some of the possible monthly anomalies by taking quarterly averages, and then plot average monthly gains over the past three quarters, you get the clear step function below. We don’t know which is correct.  I’d remain about as nervous as I was before.  We’re adding jobs, but at too slow a clip.  We have tools to do something about it, but I’m afraid they come under the rubric of fiscal stimulus, and those of us who would take advantage of low borrowing rates to apply such stimulus right now are in a distinct minority around here.

Labor Market Softens in March, by Tim Duy: If the employment report falls on a holiday weekend, does it make a sound? Yes it does, at least when it comes in far below expectations, with 120k nonfarm payroll gain compared to a consensus of 205k. Treasury yields collapsed on the news, and are now once again hovering around 2 percent on the ten-year bond. In my opinion, this is yet another data point that confirms what has become my baseline view of this recovery - neither an optimist nor a pessimist should one be. The economy is grinding away at rate close to its potential growth rate, perhaps a little above. Certainly not a disaster in terms of expecting another recession, but also certainly also not a success story. First off, should we be terribly concerned with the headline NFP number in and of itself? No. There is a lot of variance in the month to month changes: Reading too much into a single data point is simply a dangerous game. During the first quarter of 2012, the average gain was 211k a month. Part of the story is likely that warmer weather boosted the numbers in January and February, and there was some give-back in March - though note again the variance of this number. You almost always need some story to explain the month to month deviations from the trend. The question is whether or not this one data point should deter you from believing the trend is intact. My view is that it should not. That said, if you thought the last two reports were really indicative of the underlying trend, I would say that that was overly optimistic. Slow and steady, slow and steady.

U.S. Jobs Data: Broad Unemployment Rate Falls Sharply in March - The broad unemployment rate fell sharply to 14.5 percent in March. That is almost three full percentage points below its peak for the business cycle, reached in October 2009. The standard unemployment rate also fell. Its March rate of 8.2 percent was the lowest since January 2009. The official unemployment rate is the ratio of unemployed persons to the labor force. The broad unemployment rate, which the Bureau of Labor Statistics calls U-6, differs from the standard rate in several ways. In addition to unemployed persons, the numerator of U-6 includes marginally attached persons who would like to work but are not looking because they think there are no jobs. It also includes involuntary part-time workers who would prefer full-time work but cannot find it. The denominator of U-6 is equal to the labor force plus marginally attached workers. Many economists consider U-6 to be a better measure of the number of people who are distressed because of prevailing labor market conditions. Both the standard and broad unemployment rates are based on a monthly survey of households. Surprisingly for this stage of the business cycle, the March survey showed decreases in the number of unemployed persons, the number of employed, and the labor force as a whole.

NFP Big Miss: 120K, Expectations 205K, Unemployment 8.2%, "Not In Labor Force" At New All Time High  -- March NFP big miss at just 120K. Unemployment rate declines from 8.3% to 8.2%. Futures slide, for at least a few minutes before the NEW QE TM rumor starts spreading. The household survey actually posted a decline in March from 142,065 to 142,034. Considering Birth Death added 90K to the NSA number, the actual number was almost unchanged. And as always, as we predicted when Goldman hiked its NFP forecast yesterday from 175K to 200K saying "if Goldman's recent predictive track record is any indication, tomorrow's NFP will be a disaster", Goldie once again skewers everyone. Finally, Joe LaVorgna's +250,000 forecast was just 100% off... as usual.The unemployment rate drops to 8.2% for one simple reason: the number of people not in the labor force is back to all time highs: 87,897,000.

An unpleasant employment surprise - So that was unpleasant: I guess we’ve all just become so used to healthy jobs report that a weak one like this comes as a nasty shock. And it is a bad report: for all that the margin of error is high, and the unemployment rate (which, remember, is basically the one number which matters politically) fell, the Establishment Survey was riddled through with weakness, both in terms of February’s numbers and in terms of revisions to December and January. Even weekly earnings fell. So there’s bad news here, which is that judging by this one report, some of the steam might have gone out of the recovery. And there’s a little bit of good news too, which is that it’s just one report, not a trend, and that it has a very wide margin of error; that the economy’s still creating jobs, even if it’s not creating them as fast as we had hoped; and that it wasn’t all that long ago that a +120,000 headline figure would have been taken as something decidedly encouraging. So the expectations baseline has moved significantly upwards, and in many ways it’s the expectations baseline, rather than the numbers themselves, which drives investment.

Disappointing but not yet deja vu - THE American jobs data released will inevitably draw worrisome thoughts of deja vu. In both 2010 and 2011, the economy showed promising signs of growth early on only to see them peter out by summer time. This year, the hope went, would be different: employment rose an average of 246,000 in December through February. Economists had expected similar-sized gains in March. In fact, non-farm employment rose just 120,000, the Bureau of Labor Statistics reported today. The unemployment rate did dip, to 8.2%, a three-year low, from 8.3%. But that was primarily because the labour force shrank, by 164,000 people. The household survey, which is more volatile than the payroll survey, showed the number of people employed falling 31,000 from February. So the unemployment rate fell for the wrong reasons. Inevitably, this will draw comparisons to both 2010 and 2011. The background is eerily familiar: in the last few weeks, there has been a revival of worries about Europe, just as in 2010, and a sharp rise in oil prices, just as last year. It is troubling that retail trade was the weakest sector, shedding 33,800 jobs after a similar-sized loss in February; that might be evidence of $4 a gallon petrol biting into disposable incomes.

Behind the Disappointing Jobs Report - The March jobs report released today was disappointing. Economists had expected the nation’s employers to increase their payrolls by about 205,000 net, but instead payrolls increased by just 120,000. Many of the underlying data points in the report were soft, too. The average length of the workweek ticked down slightly, to 34.5 hours in March from 34.6 hours in February. The unemployment rate fell to 8.2 percent from 8.3 percent, but that’s primarily because people dropped out of the labor force. (Only people actively looking for work are counted as unemployed.) Until recently, the survey that the unemployment numbers come from — based on interviews with households — had been showing better job growth than the employer-based survey of payroll growth. That gave economists hope that maybe they just weren’t reaching enough of the tinier companies that were expanding. In March, though, the number of individuals surveyed at home who said they were working also fell, by 31,000, after rising an average of 484,000 in each of the previous three months. Plus, bear in mind that the margin of error on all these numbers is huge. The headline number for payroll jobs is always plus or minus 100,000 jobs, meaning that March’s gain of 120,000 is not really statistically significant from 220,000 (or 20,000).

Goldman On The Jobs Report: Payback - Goldman's Jan Hatzius has a note out on Friday's jobs report miss, and it's simply titled: Payback. After weather-related boosts in December, January, and February, the economy is now paying it back with mediocre numbers. This is clearly seen in construction numbers. Expect another bummer of a report next month. We do think the warm weather has been an important driver of stronger payroll numbers over the past few months. As we have shown, all of the acceleration in nonfarm payrolls since the fall has occurred in the (normally) cold states, and our state-by-state panel analysis suggests that weather has boosted February’s level of payrolls by 100k or a bit more. This state-level model suggests that none of the inevitable payback for this boost should have occurred yet, since March was just as warm relative to the seasonal norm as February. That said, weather-sensitive sectors such as mining and building construction did show some weakness, so we would pencil in 10k-20k for weather “payback” in March. In addition, the 37,000 drop in retail employment was partly related to one-off job reductions in the department store industry, and should probably not be included in an estimate of the underlying employment trend. Taken together, we believe that the underlying trend in payroll employment growth is around 175,000 as of the March report. At this point, we would expect the headline number for April to fall short of this figure, partly because the weather payback is likely to be substantially larger in April than in March

Employment Summary and Discussion - The number of payroll jobs added in March was disappointing, and this is reminding many observers of the slowdown in 2011. But we also have to remember that this is just one month, and that there were clear reasons for the slowdown last year. In 2011, the economy was negatively impacted by the tsunami, bad weather, high oil prices and the debt ceiling debate.  Some numbers: There were 120,000 payroll jobs added in March, with 121,000 private sector jobs added, and 1,000 government jobs lost. The unemployment rate declined to 8.2%. U-6, an alternate measure of labor underutilization that includes part time workers and marginally attached workers, declined to 14.5% from 14.9% in February. This remains very high - U-6 was in the 8% range in 2007 - but this is the lowest level of U-6 since early 2009. The participation rate decreased slightly to 63.8% (from 63.9%) and the employment population ratio also decreased slightly to 58.5%. The change in January payroll employment was revised down from +284,000 to +275,000, and February was revised up from +227,000 to +240,000. The average workweek declined 0.1 hours to 34.5 hours, and average hourly earnings increased 0.2%. "The average workweek for all employees on private nonfarm payrolls edged down by 0.1 hour to 34.5 hours in March. ... In March, average hourly earnings for all employees on private nonfarm payrolls rose by 5 cents, or 0.2 percent, to $23.39." This is sluggish earnings growth, and earnings are still being impacted by the large number of unemployed and marginally employed workers.

Alternative jobs-report summary -  TODAY, the Bureau of Labour Statistics released its March employment report. There is a 90% chance that employment rose by between 20,000 and 220,000 jobs. The change in the number of unemployed from February to March was probably between (roughly) -400,000 and 150,000, and there's a good chance that the unemployment rate is between 8.1% and 8.5%. Reported changes for important subsectors are too small relative to the margin of error to be worth discussing. In all probability, the employment growth has remained close to the recent trend of a 200,000 jobs per month increase.  This report will be widely analysed within the context of this year's political elections, despite the fact that the single most important influence on employment growth now and over the next four years will be the stance of monetary policy. As this report is consistent with recent Federal Reserve forecasts, indicating that the Federal Open Market Committee is satisfied with present employment trends, policy is unlikely to change in reaction to anything released today.

Construction Employment, Duration of Unemployment, Unemployment by Education and Diffusion Indexes - The first graph below shows the number of total construction payroll jobs in the U.S. including both residential and non-residential since 1969. Construction employment decreased by 7 thousand jobs in March, giving back some of the gains from January. Last year was the first year with an increase in construction employment since 2006, and the first with an increase in residential construction employment since 2005.Construction employment is now generally increasing, and construction will add to both GDP and employment growth in 2012. This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. The the long term unemployed declined to 3.4% of the labor force - this is still very high, but the lowest since September 2009. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed". The BLS diffusion index for total private employment was at 59.6 in March, down slightly from 60.7 in January. For manufacturing, the diffusion index increased to 67.9, up from 59.9 in February. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.

Historical perspective on monthly job growth - Atlanta Fed's macroblog - Today, the Bureau of Labor Statistics reported that, according to its Payroll Survey, 120,000 nonfarm jobs were added to the U.S. economy in March. There are a number of ways we can assess this number. First, and immediately, is the question of whether that number of additional jobs was enough to absorb the number of people who wanted jobs. Since the unemployment rate decreased slightly in March, the answer to that question is yes.  We can take another look at the jobs number, this one with a historical perspective. The chart plots the monthly change in payroll employment from January 1980 through March 2012, along with the average monthly payroll employment change that occurred during each expansionary period since 1980 (the dashed line). Abstracting from 1981, which some may not consider to be an expansionary period, the average monthly change in payroll employment has declined over successive expansionary periods, from roughly 228,000 jobs per month between December 1982 and July 1990 to 97,000 per month between December 2001 and December 2007. The current period, July 2009 through March 2012, has seen an average increase of about 71,000 jobs per month.

Number of the Week: How Long Before Job Seekers Give Up? - 21.4: The median number of weeks before someone unemployed leaves the labor force. It’s taking the unemployed longer to find a job, but it’s also taking them longer to get discouraged and give up looking. Prior to the recession that began in 2007, the median length of time an unemployed person searched before finding a job was 5.2 weeks, according to research by the Labor Department. The scarcity of available positions and large numbers of applicants pushed that number up to 10 weeks by 2011. That means that half of those who found jobs were hired less than 10 weeks since they lost their previous positions and it took longer than 10 weeks for the other half. The increasing length of job searches puts an emphasis on the large numbers of long-term unemployed. In March, there were more than 3.5 million people who have been without a job for more than a year. The likelihood of finding a job decreases the longer someone is unemployed, and that has been exacerbated in this recession. In 2000 someone unemployed for six months or more had 20% chance of finding a job the next month. By 2011 that likelihood had dropped to 10%. But even as the situation remains bleak, the unemployed are sticking with their job searches longer. Prior to the recession the median length of time someone searched for a job before dropping out of the labor force was 8.7 weeks. That had jumped to 21.4 weeks by 2011.

The Change in Public Sector Employment During the Recovery is a Drag (chart)

Don't Expect Many New Factory Jobs - Prof. Robert Lawrence from Harvard makes an interesting point in response to my Wednesday column about our misplaced hopes in manufacturing as a source of new jobs: even if every single thing we bought was “made in America” — if we stopped multinationals from outsourcing production to China and closed our doors to imports — even then, manufacturing employment would lag. The reason is simple: we are spending less and less on goods and more and more on services. In 1969, American consumers were allocating half of all their spending on consumption to goods. By 2010, that share had fallen to one-third. Spending on equipment is also falling. “Even if we had no trade deficit, given this inelastic demand, employment in goods would continue to fall,” Mr. Lawrence said.

The death and life of distance - MATT YGLESIAS has been tracking an interesting, seemingly structural trend in employment figures. This morning, he provides an update: According to the BLS, about 2 million more people were working last month than were working a year ago. But we have 10,000 fewer people working in general merchandise stores. We have 20,000 fewer people working in electronics and appliance stores. We have 17,000 fewer people working in "sporting goods, hobby, book, and music stores." Now the overall BLS retail trade category includes other stuff including things like health and personal care stores that seem healthy. But the point is that over the course of a year in which the level of economic activity has clearly risen, certain major categories of big box retail have shed jobs. Given a few months in a row of torrid overall growth, presumably some of that would stabilize. But I think you have to see this as a part of the economy that's facing a persistent decline driven by e-commerce, a decline that should only accelerate since a ton of people are going to get their first smartphone in the next 12-18 months. It's an interesting observation. The flip side to this, of course, is the rise in information technology professions. While employment in retail trade is down by more than 300,000 jobs over the past decade, employment in "computer systems design and related services" is up nearly 400,000 jobs. Crucially, these employment trends are not symmetric..

Men taking 88% of jobs in economic recovery - Men, who lost more than twice as many jobs as women during the worst economic slump since the Great Depression, have landed 88 percent of the nonfarm jobs created since the recession ended in June 2009. The share of men saying the economy is improving jumped to 41 percent in March, compared with 26 percent of women, according to the Bloomberg Consumer Comfort Index. "The recovery is a mancovery," said Heather Boushey, a senior economist at the Center for American Progress. "I don't see improvement for women in the past year, whereas for men this is the best year in years." The jobless rate for males 16 or older has dropped 2.3 percentage points since the recession ended, falling to 8.3 percent in February from 10.6 percent in June 2009. It has barely budged for women over the same period, moving to 8.2 percent from 8.3 percent, according to the Labor Department. Retailers are taking notice of the divergence, because men are propelling a revival in demand for items from pickup trucks to suits and underwear.

Australia will target US workers - United States construction workers will be encouraged to work in Australia in a bid to address Australian skill shortages and US unemployment levels. Skills Minister Chris Evans said the government would move to recognise US workers' trade skills in the US to smooth their path to Australia. "We haven't had strong recognition arrangements with the United States of America," he told reporters in Canberra this afternoon. Evans said Australia's temporary migration program had been attracting "reasonable" levels of US workers, but mainly in professional areas. According to the Department of Immigration, the US made up 7 per cent of total 457 (temporary overseas worker) visa applications from July to the end of February 2012. "We have been discussing with the (US) ambassador and American companies for some time whether or not we could do better at attracting some of that labor to meet the emerging skills needs in the Australian economy," he said. Immigration Minister Chris Bowen said that Australia would also run an a skills expo in Houston, Texas next month to try and attract skilled workers in resources, energy and infrastructure.

"Recessions and the Cost of Job Loss" - From the NBER Digest: Recessions and the Cost of Job Loss, NBER: ...Using Social Security records for U.S. workers covering more than 30 years (1974-2005), researchers Steven J. Davis and Till von Wachter explore the cumulative earnings losses associated with what they call "job displacement." They are particularly interested in the role of labor market conditions at the time of job displacement in determining the magnitude of these losses. In "Recessions and the Cost of Job Loss" (NBER Working Paper No. 17638 [open link]), they find that for men under the age of 50 with three or more years of job tenure, job loss reduces the present value of earnings by an estimated $77,557 (2000 dollars). This amount is estimated over a 20-year period using a 5 percent annual discount rate. The estimated losses are even larger for men with more job tenure, but are smaller for women. The researchers further find that earnings losses rise steeply with the unemployment rate at the time of displacement. If the unemployment rate at the time of displacement is less than 6 percent, then the average earnings loss equals 1.4 years of pre-displacement earnings. If the unemployment rate is above 8 percent, the average earnings loss equals 2.8 years of pre-displacement earnings. ... Or, to put it another way, "For high-tenure workers who experience job displacement in a recession, the losses amount to about three years of earnings at pre-displacement levels and 19% of the present value earnings of otherwise similar workers who retain jobs."

The Problem of Low-Wage Jobs - John Schmitt discusses "Low-wage Lessons" in a January 2012 paper written for the Center for Economic and Policy Research.  Define "low-wage jobs" as those that involve earning two-thirds or less of the median hourly wage: that is, those earning less than about $10/hour. As Schmitt notes: "If low-wage work were a short-term state that helped connect labor-market entrants or re-entrants to longer-term, well-paid employment, high shares of low-wage work would be less of a social concern. Indeed, if low-wage work facilitated transitions from unemployment to well-paid jobs, countries might want to encourage the creation of a low-wage sector to improve workers’ welfare in the long term." On the other side, if low-wage jobs are a near-permanent state of affairs for a substantial group of workers, or if such jobs even send a negative signal to potential future employers that this worker is going to have low productivity, then the prevalence of low-wage jobs may be of real policy concern. Given the rising levels of inequality in the U.S. economy in recent decades, it's not a big surprise that the share of workers who can be classified as "low-wage" has been rising, from about 22% of the workforce in 1979 to about 28% of the workforce by 2009.

Mapping the Laggards in the Recovery - Personal income for residents of Arizona, Florida and Nevada grew much faster than the national average during the housing boom. Since the peak of the boom in 2006, however, incomes in those states are lagging behind the national average. The pattern continued in 2011, according to the latest data on personal incomes released last week by the Commerce Department. It forms part of the growing body of evidence, which I described in an article on Tuesday, that the recession may mark an enduring shift in the geography of American growth. Regions where borrowed money fueled booms are now struggling under the weight of those debts. The map below compares the growth of per capita incomes by state over two consecutive five-year periods, from 2001-6 and from 2006-11. In the seven states shown in pink – Arizona, California, Florida, Idaho, Nevada, Utah and Wyoming – income growth outpaced the national average during the housing boom, but has lagged behind the average since the crash. They join the states marked in red, where personal income growth has lagged behind the national average throughout the last decade. The states marked in light blue, by contrast, outpaced the national average over the last five years after lagging during the earlier period. They join the dark blue states, which have maintained above-average income growth.

Good Jobs: Three Reasons There Aren’t More - Far too many American adults work in low-wage jobs. In 2010, 20 percent of adults earned a wage that would put a family of four below the poverty line.  Better jobs seem the obvious solution. The government could raise and enforce labor standards and push firms to invest in training and to create advancement opportunities for low-wage workers. Unions can also play a key role by advocating for increased wages and training opportunities within firms. The conventional wisdom focuses almost entirely on two strategies: educating people so they can escape the low wage–job trap and, for those who cannot, providing some level of support through programs such as the Earned Income Tax Credit, an income supplement conditioned on work. The idea is to let the economy generate jobs of whatever quality firms choose and then, if necessary, compensate by enabling people to avoid the bad ones or by shoring up people who are stuck. The nature of available jobs is a given.  In practice this restrictive framework condemns millions to low wages and poor working conditions. And it continues to be the norm thanks to three myths: 1) economic growth and high rates of upward mobility will solve the problem; 2) policy efforts to alter the distribution of economic rewards inevitably slow down growth and damage labor market efficiency; 3) education alone is enough to help low-wage workers get better jobs.

Times Three: That's How Much The BLS Upwardly Fudges Data During An Election Year - That the BLS perpetually distorts and manipulates data is no secret and has been reported previously both here and elsewhere numerous times. That the BLS also has a habit of leaking critical market moving data to various entities is also well known. However, we had yet to see just what the BLS is capable of when it comes to fudging and outright slaughtering economic data in a presidential election year. The result is nothing short of a 3 sigma stunner.  John Lohman explains: It has been well over a year and a half since Zero Hedge first exposed the Department of Labor’s incessant upward revisions to Initial Jobless Claims (here).  As this ridiculous bias continued, it was eventually called out by such  “non-fringe” media sources as CNBC (here). One might think that, after 18 months of exposure, the almost-as-fast-as-a-blind-and-retarded-turtle statisticians at the BLS would “find” and correct the bias.  Alas, one would be wrong.  Not only does the bias continue, it’s getting worse.  Much worse.  As illustrated in the chart below, 2012 year-to-date revisions are running 3x the long-term average.

The Employer Strikes Back - Like 1,300 other members of the Bakery, Confectionery, Tobacco & Grain Millers union (BCTGM) at American Crystal Sugar, Jacobson wasn’t fired.  She was locked out.  Crystal Sugar is wielding a powerful weapon against its workers: Its right to deny them work for refusing a worse contract after their existing one expired. Jacobson and her co-workers are left with a choice. They can hold out while non-union workers do their jobs, make huge concessions, or dissolve the union. A lockout is like an Ayn Rand fantasy for managers: Rather than let workers strike, companies stop letting them come to work.  But business often continues with non-unionized replacement workers.  By law, management can’t permanently replace the workers it has locked out.  But when a union contract expires, your boss can demand huge concessions and then lock you out without pay until you accept them. While strikes are in decline in the United States, lockouts are on the rise.  There were at least 17 last year.

Fired for Wearing the Wrong Color Shirt: The Scary Truth About Our Lack of Workplace Protections - On March 16, at least 14 employees of the Elizabeth R. Wellborn law firm, located in Deerfield Beach, Florida, wore orange shirts to work. For this style choice, they were marched into a conference room and summarily fired. Wellborn’s husband declared that the shirts were a protest against working conditions at the 275-worker law firm, and that management would not stand for such behavior.  Aren’t such tyrannical, arbitrary and callous acts illegal? Can management just throw you out on your ear, upending your life and endangering your ability to support yourself, for wearing the wrong shirt? Freedom of speech, freedom of expression, right? Wrong.

Minimum wage work leaves no margin for getting ahead or protecting your family - The possibility of getting ahead while earning the minimum wage has gotten much dimmer since 1979, a report from the Center for Economic and Policy Research (PDF) shows. The hours you'd have to work at minimum wage to pay tuition at the average public four-year college, for instance, have grown from 254 to 923. There are now more grants and loans than in 1979, partially offsetting that rise—but only partially, and the $1 trillion in student loan debt today tells reminds us where working hard and getting an education can leave you. Paying for individual health coverage in 2011 took more than twice as many hours at the minimum wage as paying for a family health insurance policy did in 1979; a family policy in 2011 while working full time at minimum wage would leave you one hour of pay in the entire year to spend on anything but health insurance.

An Altogether Different Reality - A post at CNNMoney's Term Sheet blog, "Why Dollar Stores Are Thriving, Even Post-Recession," maintains that there is more to the recent success of the U.S. dollar store industry -- including the big three, Dollar General (DG) , Dollar Tree (DLTR), and Family Dollar (FDO) -- than meeting the needs of cash-strapped consumers. The optimists better hope that is correct. Because if it isn't, history suggests the continued strength in the group is a sign that Americans are becoming more economically worse off than they were, and that any talk of a "recovery" is sorely misguided. As the following chart shows, the sector (I've used Family Dollar's share price as a proxy for the group) has loosely tracked the inverse of year-on-year changes in U.S. average hourly earnings over the past 12 or so years, which, given the recent run-up in the stock, would seem to indicate that wage growth -- and, hence, spending power -- is completely stalling out.

Households Earning Less Than $13,000 A Year Spend 9% Of Their Income On Lottery Tickets - It has often been said that lotteries are a tax on the poor. And that's a fair description. Joe Weisenthal pointed out yesterday that poor people regularly buy lottery tickets, while rich people only buy them when the jackpots have gotten huge. What's less commonly realized is just how much money poor people spend on lottery tickets. According to a 2008 study, reported by PBS, households that earn less than $13,000 a year spend a staggering 9% of their income on lottery tickets. (via Scott Heiferman). That's 9% of an income that is presumably extraordinarily hard to live on to begin with. Rich, educated people tend to ridicule lottery players because the odds against winning are so astronomical. As PBS points out, you are 17-times more likely to get hit by falling airplane parts than you are to win the lottery. And you're 50-times more likely to get hit by lightning. But poor people keep on buying lottery tickets. Why?

Income Inequality and Teenage Pregnancy - Despite a decline in births to American teenage mothers over the past two decades, the United States stands out among developed nations in that its teenagers are much more likely to give birth than their peers in Canada, Germany, Norway, Russia (a country that is still advancing on the spectrum of development) or Switzerland. A new study by Melissa S. Kearney, an economist at the University of Maryland, and Phillip B. Levine, an economist at Wellesley College, builds on their previous research looking at the link between income inequality and rates of teenage pregnancy. It turns out the connection is quite striking.In general, teenage pregnancy is more common among poor girls. But poor girls who live in places with a high level of inequality — meaning that the ratio of income at the median of the income distribution to the income at the 10th percentile of the income distribution is higher than in other places — are even more likely to become pregnant as teenagers.

Esquire Magazine: Writer wanted to help convert class war into generational war. No skills required; pays top dollar. - This could well have been the want ad Esquire used to attract a writer for its story titled, “War Against Youth.” This lengthy piece is the best compendium of warped logic and misplaced facts on this topic since the Peter Peterson financed film, IOUSA. The whole story is given away in the first paragraph: “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.” That sounds really awful. Thankfully it is not true, as readers could find by looking at the chart that accompanies the article. This is a ratio of wealth not income. This is a huge difference. Wealth adds up a household’s total assets. This means the value of their home, their 401(k) and other savings, their checking account and car. This is very different from income, which for most people means their wages and for older people their Social Security.

“Are We Headed toward a Permanently Divided Society?” « Economics for public policy: This is the question Isabel Sawhill of the Brookings Institution asks in a tightly written discussion of the factors relating inequality with opportunity. Sawhill’s answer: “at current levels of inequality in the U.S. it likely does. However, this answer is qualified in several ways.” The most important qualification is that while inequality in parental incomes determines the opportunities and prospects of children, at the same time it is also a signal of other behaviours that are equally important: education, motivation, and a strong family. Children who are advantaged at birth—by not only living in a family with income above the poverty line, but also having married parents, a mother with at least high school, and being born at a normal birth weight—are more likely to succeed in the early years, but also in adolescence and ultimately adulthood. It is not just poverty of money that matters, but also poverty of experience and expectation.

Foodstamp Usage Remains At All Time High, Record Number Of Households Receive $277 In Poverty Assistance Monthly  - While we do not know if foodstamp usage is seasonally adjusted, we do know that in January it was virtually unchanged at 46.5 million recipients. And while the actual number of recipients declined by a whisper, the number of households actually receiving benefits increased to a new record of 22.2 million. Lastly, the average monthly benefit per household slide to a multi-year low of $277.27. First the quality of jobs gets diluted, next the poverty benefits. All in line with the continued dilution of real wealth, simply so nominal indexes can hit fresh 5 year highs - today the S&P hit an intraday high not seen since December 31, 2007. Luckily, soon everyone will be rich and can retire.

Fresno to Homeless People—Get Out - “Starting last September, the city clearly made a decision to try to get rid of all the homeless encampments that there are in Fresno,” says Chris Schneider, director of CCLS, where he has worked for nineteen years. “They started doing what they call ‘cleanups’ but it’s really just destructions of the encampments. The city comes in and says, ‘You’ve got to get out of here.’ Then as soon as people set up somewhere else the police come and tell them to move on from there too. There is just less and less space to go to, while the number of homeless have risen in the bad economy.” The city claims that it stores people’s belongings, and while Schneider says that’s true for a lucky few, there are plenty of others who either watch their property destroyed or have gone to retrieve it only to find it’s not in storage as promised. Some homeless people manage to acquire new belongings, only to have the process repeated again—chased from their next dwelling and their property again destroyed. “We have people who’ve lost everything they own two or three times since October of last year,” he says. According to one of the complaints, items seized and destroyed include tents, furniture, clothing, blankets, medications, photographs, letters, and other items of personal value. This policy has been carried out during the winter months, when temperatures fell below 36 degrees “on several occasions.”

Across America, public-sector job cuts take a heavy toll — Yes, the economy's growing, the unemployment rate is inching down and America is feeling a little bit better about itself. But don't think for a minute that all the lost jobs aren't still taking a severe toll all across this nation — especially all the chopped government jobs. Since February 2010, the nation's private employers have added more than 3.9 million jobs, or roughly 164,000 per month. Over the same period, however, some 485,000 government jobs were lost. The effects of those job cuts are being felt by children, families and businesses across America. When city leaders in cash-strapped Camden, N.J., laid off more than 60 firefighters just over a year ago, many felt it created a public-safety nightmare waiting to happen. The loss of nearly one-third of the city's firefighting capacity was a calculated risk, but a necessary sacrifice in order to close a $26 million budget deficit. More than a year later, the cracks in the city's public safety armor are growing wider. Seven, sometimes eight fire companies are doing the work of eleven. Volunteer departments in neighboring towns routinely must provide backup. Firefighter injuries are up. So are response times. And during one "brownout week" each month, no Camden firefighter can take vacation or holiday time off.

ALEC and Old Yeller - Krugman - Well, whaddya know: it turns out that Governor Yells-at-people is very much an ALEC guy. From A Star-Ledger analysis of hundreds of documents shows that ALEC bills are surfacing in New Jersey, where Republican Gov. Chris Christie is trying to remake the state, frequently against the wishes of a Democrat-controlled Legislature. Drawing on bills crafted by the council, on New Jersey legislation and dozens of e-mails by Christie staffers and others, The Star-Ledger found a pattern of similarities between ALEC’s proposals and several measures championed by the Christie administration. At least three bills, one executive order and one agency rule accomplish the same goals set out by ALEC using the same specific policies. In eight passages contained in those documents, New Jersey initiatives and ALEC proposals line up almost word for word. Two other Republican bills not pushed by the governor’s office are nearly identical to ALEC models. As a resident of New Jersey, yeah, I got a problem with that.

Amnesty International accuses Arizona of abuse in prisons - Arizona's state prisons overuse solitary confinement in cruel, inhumane and illegal ways, particularly for mentally ill prisoners and juveniles as young as 14, the human-rights group Amnesty International charges in a report to be released today. According to the report, which is to be delivered to the governor and state lawmakers, Arizona prisons use solitary confinement as a punishment more than most other states or the federal government. The group found that some inmates are held in isolation for months and sometimes years, and it called on the state to use the practice only as a last resort and only for a short duration. In addition, it asked that the practice not be used against children or people who are mentally ill or have behavioral disabilities. The group also called on state officials to improve conditions for prisoners in solitary confinement and to act to reduce the high number of suicides in Arizona's prisons. document Report | document ACLU lawsuit | Suit: Inmates denied adequate care

How Many Americans In Jail - There are now more Americans in jail -- 6 million -- than there were in Stalin's Gulag, reports Fareed Zakaria, in a column called "Incarceration Nation." And it's not just a relative population thing. The U.S. has 760 prisoners per 100,000 citizens. How does that compare to other countries? It's 7X-10X as high: Japan has 63 per 100,000, Germany has 90 per 100,000, France has 96 per 100,000, South Korea has 97 per 100,000, ­Britain has 153 per 100,000, And it's also a relatively new phenomenon: In 1980, the U.S. only had 150 prisoners per 100,000 citizens. What's to blame? The "War on Drugs." More than half of America's 6 million prisoners are in jail for drug convictions, with 80% of those in jail for "possession." By the way, has the "war on drugs" worked? Um, no. There are still drugs everywhere. So, maybe it's time we stopped throwing people in the slammer for possessing them.

More states privatizing their infrastructure. Are they making a mistake? - Say you’re a state politician. Your local roads, bridges, and transit systems are all in dire need of upgrades. But there’s not much money left. Budgets are crunched. No one wants to raise taxes. And Congress is throttling back on transportation funding. So what’s left? Privatization, of course. But is privatizing infrastructure really such a good idea?There are two main ways for a state to bring in private money for transportation. The first is to sell off assets that have already been built. This is what Indiana did in 2006, under Governor Mitch Daniels, when it leased its 157-mile Indiana East-West Toll Road to an international consortium of investors for $3.8 billion. The private companies have agreed to operate and maintain the roads for 75 years. In return, they get to hike the road’s tolls each year — by either 2 percent, the inflation rate, or the increase in GDP, whichever is higher. While advocates claim that the private sector can operate these toll roads more efficiently, the major appeal of these moves is to solve short-term budget crunches. Essentially, state officials are giving up a source of revenue that’s spread out over a number of years — in Indiana’s case, tolls — and receiving a lump of cash upfront.  What’s more, the private firms are the ones that take the heat for raising fees and tolls, instead of jittery politicians.

Politicians keep placing bets - Politicians in both parties are betting that allowing more gambling will make them winners at the polls by raising revenue without appearing to raise taxes. Governors Andrew Cuomo of New York and Steve Beshear of Kentucky, both Democrats, each want seven casinos. In Kansas, where the state owns casinos, Governor Sam Brownback, a Republican, wants more gambling money to pay down state debts. In Minnesota, Governor Mark Dayton of the Democratic-Farmer-Labor party wants more gambling to finance a new stadium for the privately owned Vikings football team. Florida legislators are mulling three casinos, one in Miami. Illinois lawmakers may allow a casino in Chicago. In Texas, Governor Rick Perry says he opposes more gambling. Yet eight years ago he called the legislature into special session to allow gambling at the gas pumps to help finance schools. He lost that bet. Egging on these and other politicians is anti-tax crusader Grover Norquist, who has made “tax” the vilest four-letter word in American politics. Norquist wrote Texas politicians a letter in January saying that more gambling is better than more taxes.

Most & Least Taxing States 2012 (slide show) For the first time in 10 years, states cut taxes more in 2011 than they increased them, according to the National Conference of State Legislatures. The hesitancy to raise taxes is likely to carry over into 2012 as lawmakers face an election year, says Steven Roll, a state tax analyst with Bloomberg BNA. Exceptions to the tax-cutting trend in 2011 included a tax hike on millionaires in New York, an income tax rate increase in Illinois and a higher sales tax rate in Connecticut. Many states are also pursuing taxation of residents' purchases from online retailers more aggressively. To see how your state stacks up on income, sales, property, inheritance, estate taxes and more, read on.

Where Do Our State Tax Dollars Go? - pie graph - As the April 17 tax-filing deadline approaches, we’re taking time this week to examine where our tax dollars go.  Earlier this week, we looked at what federal tax dollars pay for.  Today, we turn to the state level. States spend more than half of our tax dollars on education and health care, on average. Click here for the latest update of our Policy Basic on this issue

Monday Map: Tax Freedom Day by State - Today we released this year's annual Tax Freedom Day report - a calendar based look at the cost of government. 2012's National Tax Freedom Day arrives on April 17th, but we also calculate a separate Tax Freedom Day for each state. Because taxes in the U.S. are generally progressive, higher income states tend to have later Tax Freedom Days, and lower income states have earlier Tax Freedom Days. Today's Monday Map shows the Tax Freedom Day for each state.

Stockton Gorged on Debt for City Amenities Before Economic Crash - In 2005, Stockton California, unveiled a gleaming new arena and ballpark on its riverfront, part of a $145 million plan to draw people downtown. The city east of San Francisco, a shipping hub for wine and almonds, is now negotiating with creditors to stave off bankruptcy. The 10,000-seat arena, a glass-walled symbol of the city’s fight against a soaring crime rate and downtown blight, was one piece of a redevelopment boom that also saw the addition of a 5,000-seat minor league ballfield, a 650-space parking garage, a 66-slip marina and the purchase of an eight-story City Hall. Today the new City Hall stands empty because the government can’t afford to move in. The parking garage may be seized by creditors because the city defaulted on $32.8 million in bonds. The shopping spree contributed to the $319 million in debt, financed mostly with seven bond issues from 2003 to 2009, tied to its general fund -- the pool of money used for most day-to- day operations, equivalent to having loans backed by the contents of a checking account. By the end of this February, Stockton found itself on the verge of insolvency from mounting retiree costs, the recession and accounting errors, City Manager Bob Deis told reporters.

Detroit back off the ledge -- Detroit has pulled itself back off the ledge. The city council narrowly approved a deal Wednesday night that grants the city the power to void contracts and slash costs amid looming financial insolvency. The deal, which provides no state funding or loans, was backed by Mayor Dave Bing and Michigan Gov. Rick Snyder. Snyder issued a statement shortly after the 5-4 vote commending the council for acting "responsibly," but said there is still work to be done. "The magnitude of the city's financial challenges means that many difficult decisions lie ahead," Snyder said. "We must build on this spirit of cooperation and be willing to act in the city's long-term interests." The city council vote avoids a more controversial step: Snyder was poised to invoke Michigan law and appoint an "emergency manager" to assume the powers of the mayor and council to run Detroit's day-to-day operations. He had until Thursday to take such action. The possibililty of a state takeover drew fierce opposition from unions -- in a city that remains a bastion of labor power.

America's Dream Unravels - It feels like you are entering a parallel universe. In reality it is just a few short steps down a plank into the neon-lit floating world of a casino ship. The location is Lake Michigan. The town is Gary, Indiana. And the host is the Majestic Star Casino. “Welcome to Majestic Star,” says a croupier. And to post-industrial America, she might add. Many cities and towns across America have been shattered by the demise of mass employment in manufacturing over the last generation. Few have been hit as hard as Gary – once a thriving hub of steel production. Some places, such as Pittsburgh, have become showcases of urban reinvention, partly by making the most of the strong medical legacy left by the departing generation of well-paid union workers (whose “Cadillac” healthcare packages spawned a robust hospital system).Almost every city, including Gary, has dug deep to fund a new sporting stadium. Convention centres are also a staple of America’s formula for urban regeneration. The jury remains out on their impact. In contrast, there is a surprisingly broad consensus among state and city officials across America about the economic virtues of gambling. Unlike the titans of football and baseball, whose new stadiums swallow huge chunks of local capital budgets, gaming companies only require a licence to gamble and a few tax breaks. It helps if there is a large population centre nearby – East Chicago virtually merges with Gary at the Illinois state border line. From Florida to California, and numerous Native American reservations in between, the impact of gambling varies, according to a welter of studies. Some show that the effect on the people around the casinos is a net negative. It can also be bad for tax revenues. One study estimated that for every dollar a gaming house invests in an area, three are subtracted by the costs of dealing with its social effects. Casinos may be a way of replacing some of the manufacturing jobs lost to China, Brazil and elsewhere. But they are also a magnet for racketeers, pimps, drugs and those living on the margins.

Should Muni Bonds Pay To Demolish Buildings? - Two Ohio Members of Congress have introduced a bill to allow states to issue tax-exempt bonds to demolish buildings. Not to build them, but to destroy them. Score this one as a bad solution to a real problem. The lawmakers, Republican Steve LaTourette and Democrat Marcia Fudge, want to allow state governments to issue up to $4 billion in revenue bonds to flatten abandoned buildings. Half would be divided among all states, the other half would be allocated only to states that Congress designates as hardest hit by the housing crisis (of which, I assume, Ohio will be one). Thanks to The Bond Buyer’s Jennifer DePaul for finding this one.    The problem is serious. Cities in Ohio and Michigan struggle with entire neighborhoods that have been nearly depopulated by the combination of foreclosures and disappearing jobs. Abandoned houses and commercial strips are magnets for crime and blight and may discourage future redevelopment. Tearing down often-gutted structures might sometimes make sense. But why should the federal government subsidize what is the most local of activities? While teardowns may be the answer in some communities, why encourage the activity even when it is not appropriate?

The Assault on Public Education -- Public education is under attack around the world, and in response, student protests have recently been held in Britain, Canada, Chile, Taiwan and elsewhere. California is also a battleground. The Los Angeles Times reports on another chapter in the campaign to destroy what had been the greatest public higher education system in the world: “California State University officials announced plans to freeze enrollment next spring at most campuses and to wait-list all applicants the following fall pending the outcome of a proposed tax initiative on the November ballot.” Similar defunding is under way nationwide. “In most states,” The New York Times reports, “it is now tuition payments, not state appropriations, that cover most of the budget,” so that “the era of affordable four-year public universities, heavily subsidized by the state, may be over.” Community colleges increasingly face similar prospects–and the shortfalls extend to grades K-12.

To Fix America’s Education Bureaucracy, We Need to Destroy It - America's schools are being crushed under decades of legislative and union mandates. They can never succeed until we cast off the bureaucracy and unleash individual inspiration and willpower.  Schools are human institutions. Their effectiveness depends upon engaging the interest and focus of each student. A good teacher, studies show, can dramatically improve the learning of students. What do great teachers have in common? Nothing, according to studies -- nothing, that is, except a commitment to teaching and a knack for keeping the students engaged (see especially The Moral Life of Schools). Good teachers don't emerge spontaneously, and training and mentoring are indispensable. But ultimately, effective teaching seems to hinge on, more than any other factor, the personality of the teacher. Skilled teachers have a power to engage their students -- with spontaneity, authority, and wit.

Dopers, by ari: This article in Vanity Fair left me thinking that it’s only a matter of time before performance-enhancing drugs become the norm rather than the exception in the academy. I mean, what happens you realize that the assistant professor that your department just hired can concentrate for hours and hours without taking a break for weeks on end? What happens when you realize that s/he is far more productive than you are because of these extraordinary powers of concentration? And then, what happens when you learn that the secret to her or his success is a prescription for methylphenidate? What are you going to do about it*? As for me, I’ll probably go out for a bike ride and then take a nap. But that’s because I’m old and pretty much past my prime already. But if I could still be a contender — whatever being a contender means — I wonder if I’d think twice and call my doctor. Now wait, before you give the obvious reply, yes, I know this already happens. Eric drinks coffee. I don’t. And that’s the only reason he’s written four books and I haven’t. Really, though, if there were a pill that would allow me to be significantly more productive, I worry that I’d think long and hard about taking it. Actually, I suspect that choice is already here. It’s just that I don’t have the right dealer.

No Increase in College Graduation Rates - Jared Bernstein (via Paul Krugman) highlights an amazing breakdown in the prospects for reducing economic inequality any time soon. Over the last 30 years, the U.S. has made no progress whatsoever in increasing college graduation rates. To be specific, 25-34 year olds in 2009 had a college degree rate of about 40%, almost exactly the same as for 55-64 year old baby boomers. In the meantime, other industrialized countries were racking up substantial gains, most spectacularly in the case of South Korea where a little over 10% of 55-64 year olds have college degrees, but more than 60% in the 25-34 age group do. If you want to understand how South Korea has gone from a poor developing country to an industrial powerhouse within our lifetimes, this is one big reason. Here are the overall results for OECD and select non-OECD countries for the two periods:  As we can see, the U.S. has fallen from a tie for second with Canada among current OECD members (Russia is not a member) to 15th in the OECD. The big question is why this is happening. One major reason is rising college costs, which have far outstripped overall inflation.

The US Has Made No Progress on College Graduation Rates in 30 Years (Chart) - Both the Center on Budget and Policy Priorities’ Jared Bernstein and University of Missouri-St. Louis political scientist Kenneth Thomas flagged some data from the Organization for Economic Cooperation and Development showing that America’s college graduation rate hasn’t improved in 30 years. “Not only are the US attain levels now behind those of 12 other countries, but we’ve made no progress in a generation,” Bernstein noted. On the chart, the blue square represents college attainment of 55-64 year olds, while the triangle represents 25-34 year olds. For the U.S., the percentages attaining a degree are nearly identical, which is clearly not the case for a host of other countries.

Recovery threatened by runaway student loan debt (Reuters)  The federal student loan program seemed like a great idea back in 1965: Borrow to go to college now, pay it back later when you have a job. But many borrowers these days are close to flunking out, tripped up by painful real-life lessons in math and economics. Surging above $1 trillion, U.S. student loan debt has surpassed credit card and auto-loan debt. This debt explosion jeopardizes the fragile recovery, increases the burden on taxpayers and possibly sets the stage for a new economic crisis. With a still-wobbly jobs market, these loans are increasingly hard to pay off. Unable to find work, many students have returned to school, further driving up their indebtedness. Average student loan debt recently topped $25,000, up 25 percent in 10 years. And the mushrooming debt has direct implications for taxpayers, since 8 in 10 of these loans are government-issued or guaranteed. President Barack Obama has offered a raft of proposals aimed at fine-tuning the system and making repayments easier. Yet the predicament of debt-burdened former students has failed to generate much notice in the GOP presidential campaign. Instead, the candidates are dismissive of government student loan programs in general and Obama's proposals in particular.

Senior citizens continue to bear burden of student loans - The burden of paying for college is wreaking havoc on the finances of an unexpected demographic: senior citizens. New research from the Federal Reserve Bank of New York shows that Americans 60 and older still owe about $36 billion in student loans, providing a rare window into the dynamics of student debt. More than 10 percent of those loans are delinquent. As a result, consumer advocates say, it is not uncommon for Social Security checks to be garnished or for debt collectors to harass borrowers in their 80s over student loans that are decades old. That even seniors remain saddled with student loans highlights what a growing chorus of lawmakers, economists and financial experts say has become a central conflict in the nation’s higher education system: The long-touted benefits of a college degree are being diluted by rising tuition rates and the longevity of debt. Some of these older Americans are still grappling with their first wave of student loans, while others took on new debt when they returned to school later in life in hopes of becoming more competitive in the labor force. Many have co-signed for loans with their children or grandchildren to help them afford ballooning tuition.

WaPo: Student Debt and Senior Citizens - From the WaPo: Senior citizens continue to bear burden of student loans New research from the Federal Reserve Bank of New York shows that Americans 60 and older still owe about $36 billion in student loans ...  it is not uncommon for Social Security checks to be garnished or for debt collectors to harass borrowers in their 80s over student loans that are decades old. The NY Fed research has some data and graph on student debt: Grading Student Loans The outstanding student loan balance now stands at about $870 billion,1 surpassing the total credit card balance ($693 billion) and the total auto loan balance ($730 billion). With college enrollments increasing and the costs of attendance rising, this balance is expected to continue its upward trend. This chart from the NY Fed shows the student debt outstanding by age. From the NY Fed:  Among people under thirty years old, 40.1 percent have outstanding student loan debt. Among people between the ages of thirty and thirty-nine, 25.1 percent have outstanding student loan debt. In contrast, only 7.4 percent of people who are at least forty years old have outstanding student loan debt. As a result, $580 billion of the total $870 billion in student loan debt is owed by people younger than forty.

Colleges Withhold Transcripts From Grads in Loan Default - More than ten years ago, Pedro Rodriguez, a talented keyboard musician, came from his colonial homeland of Puerto Rico to go to Temple University. From a low-income family, he depended heavily on student loans to finance his four-year undergraduate study. Graduating summa cum laude with a bachelor’s of music, he went on to earn a master’s degree in music from Temple and then was hired for three years to teach there as an adjunct. By the end of college, he was $62,000 in debt but was making payments regularly until Temple laid him off, allegedly because of budget cuts. Unable to find a job as a music teacher in the current economic crisis, he eventually went into default on his loans, which included Stafford, Perkins and private bank loans. Then this year, he decided to go on to earn a PhD, which would make it possible for him to get hired in his field. He applied to a top-rated university in the Northeast, but when it was time to send his school transcripts, Temple froze him out.  A spokesman from Temple confirms that it is school policy to withhold official transcripts from graduates who are in default on their student loans. As it turns out, the school is not alone; this is the position taken by most colleges and universities, though there is no law requiring such an extortionate position. They do this despite the fact the colleges themselves are not out the money. They have received the students’ tuition payments in full and are in effect simply acting as collection agencies for the federal government.

Public Worker Pensions Find Riskier Funds Fail to Pay Off - Searching for higher returns to bridge looming shortfalls, public workers’ pension funds across the country are increasingly turning to riskier investments in private equity, real estate and hedge funds.  But while their fees have soared, their returns have not. In fact, a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better in recent years, for a fraction of the fees.  Consider the contrast between the state retirement fund for Pennsylvania and the one for Georgia.  The $26.3 billion Pennsylvania State Employees’ Retirement System has more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds.  The system paid about $1.35 billion in management fees in the last five years and reported a five-year annualized return of 3.6 percent. That is below the 8 percent target needed to meet its financing requirements, and it also lags behind a 4.9 percent median return among public pension systems.  In Georgia, the $14.4 billion municipal retirement system, which is prohibited by state law from investing in alternative investments, has earned 5.3 percent annually over the same time frame and paid about $54 million total in fees.

Fitch Says Lower Calpers Investment Forecast Will Squeeze Cities - California’s most fiscally stressed cities and counties will face additional pressure from higher pension contributions because the state’s largest retirement fund lowered its investment forecast, Fitch Ratings said in a report. Cities with labor conflicts and limited financial flexibility are at the “biggest risk” from the March 14 decision by the California Public Employees’ Retirement System, known as Calpers, to reduce its investment-return forecast rate to 7.5 percent from 7.75 percent, Fitch said today. Calpers, the largest U.S. pension, lowered its assumed rate of return after the recession reduced equity and real-estate prices. The $239.1 billion fund uses the rate to calculate how much it needs in annual contributions from state and local governments to cover the cost of benefits. “Some have already taken steps to reduce labor costs, the major cost driver for most local governments, through such methods as furloughs and wage freezes or even reductions,” according to the report. “This may leave them with little flexibility to further reduce employee compensation to accommodate the increase in contributions to Calpers.”

Magical Investment Thinking -From a Times article on pension fund investing: Mr. Dear cautioned that there were big differences in how various alternative investments performed during the financial crisis. He said that Calpers’s investments in real estate had been “a disaster” and that its hedge fund investments had not met their benchmarks and were under review. But he said that its private equity holdings had easily beaten public stock returns over the last decade. “Over the longer term, that kind of outperformance represents real skill, not luck, and it’s worth paying for,” he said. Holy confirmation bias, Batman! When one asset class beats the stock market that’s skill. But when your other asset classes do badly—that’s random variation? If high returns on private equity are evidence that you should continue investing in private equity, then low returns in hedge funds and real estate are evidence that you should pull your money out of them. Public pension funds are obviously gambling on redemption. They don’t have enough money to meet their long-term commitments. They can only meet those commitments by getting unrealistic returns, so they are piling into alternative asset classes in hopes of getting those returns.

Ill. pension director suggests cuts for retired - The director of the Illinois Teachers Retirement System warns that financial troubles are so great it could be forced to consider reducing pension benefits to teachers who have already retired, according to a newspaper report Sunday. The (Springfield) State Journal-Register ( reported Saturday that it obtained a confidential memo written by Dick Ingram warning of the politically explosive possibility of whittling away pensions not just for future retirees but for those who have already left work. In the Feb. 9 memo to his board, Ingram said the state's largest pension system has been underfunded for decades and that he is no longer confident the state will continue to pay it enough money to stay above water. The state owes Ingram's fund $43 billion. He cited one forecast that the Teachers Retirement System could be insolvent by 2029. Ingram said pension funding is under severe threat from the state's unpaid bills, soaring Medicaid costs and the $85 billion in overall unfunded pension liability, which is expected to rise. "If that is the case, the only other option available that would significantly change the amount owed is to reduce past service costs for active members and retirees,"

Good NYT Piece on Public Sector Pension Funds Being Ripped Off - The NYT had a good piece reporting on the fact that public sector pension funds that have invested heavily in alternative investments (e.g. hedge funds, real estate funds and private equity funds) have done much worse than those that just held traditional investments (e.g. stocks and bonds). While the managers of these alternative investments did quite well collecting fees, the governments did not. There is a simple way to avoid this problem. If the funds made compensation for the managers of these investments almost entirely contingent on their beating a conventional market basket, then the risk would be shared. If managers are not willing to accept such contracts it implies that they don't believe they will be able to beat the returns on conventional instruments. If the managers don't believe that they can beat conventional returns, then governments should not either.

More Public Pension Scare Stories at the Post - The Washington Post is always willing to accommodate those who want to make a big issue out of budget deficits. In that spirit it ran a column today by Robert Pozen and Theresa Hamacher warning readers about "public-pension pitfalls." The piece begins by decrying the fact that almost 80 percent of state and local government employees are still covered by traditional defined benefit pensions even as these pensions are rapidly disappearing from the private sector. This may seem a bizarre complaint to most people. After all, few workers have been able to accumulate enough in 401(k)s to guarantee themselves any sort of security in retirement. In 2009, the financial wealth for the median household between the ages of 55-64 was only around $50,000, including all 401(k) assets. It is also important to remember that close to a third of state and local employees are not covered by Social Security so their public pension will be their only regular source of retirement income. Next we are told that the unfunded liabilities of these plans are $600 billion. This is supposed to sound very scary, since $600 billion is a big number. The planning period for a pension fund is typically 30 years. Over the next 30 years, GDP is projected to be over $400 trillion in today's dollars. This means that the unfunded liability is equal to about 0.15 percent of projected GDP over this period. To make another comparison, relative to the size of the economy it is equal to a bit more than 3 percent of what we are currently spending on the military. Are you scared yet?

State Public Workers Rushed to Join Pensions Before Cutbacks — Thousands of public employees across New York State rushed to sign up for pensions over the last several weeks, seeking to lock in generous retirement benefits before cuts approved by the State Legislature took effect on Sunday.  At the New York City Employees’ Retirement System, for example, more than 12,000 workers applied last week to enroll in the pension system — more than 40 times the typical weekly number of applicants. And the New York City Board of Education Retirement System received nearly 9,000 applications over the last two weeks, after enrolling only 122 new members in all of February.  “It’s just common-sense economics here,” said Stephen Madarasz, a spokesman for the Civil Service Employees Association, the state’s largest union of public workers. “You’re looking at an enormous difference in benefits.”  Lawmakers approved the changes last month, requiring most employees who joined the pension system beginning on April 1 to contribute more to their pensions while reducing how much money they are promised when they retire.

US companies using debt to cover pension shortfalls - Faced with ballooning deficits in their pension funds, US companies are increasingly turning to the bond market to help plug the gap, taking advantage of super-low borrowing costs. The 100 biggest US pension funds had a combined deficit of $326.8bn last year, pushing up charges to earnings to an all-time high of $38.3bn, according to consulting firm Milliman. That figure is expected to rise to as much as $54bn in 2012, Milliman said. To address their pension liabilities, companies are set to make record contributions into pension funds this year -- and many are turning to the debt capital markets to raise the cash.

Washington Post misdiagnoses causes of retirement insecurity - The Washington Post published a story earlier this week by Jia Lynn Yang that had all the information needed to conclude that the 401(k) isn’t working out. She reports that the 401(k) has caused serious stress for working Americans and cites some scary financial data from the Center for Retirement Research. Since Congress created the 401(k) about 30 years ago, financial unpreparedness has gotten much worse: In 1983, researchers found that 31 percent of working age households were “at risk” of losing their standard of living when they retired; by 2009, it was 51 percent.  But instead of fingering the 401(k) as the cause of the stress and retirement insecurity most of us are facing, or even blaming Congress or the employers replacing pensions with a cheaper, badly designed personal account, Yang and her editors conclude that the fault lies with the many employees who are just too “clueless,” as Ms. Lang puts it, to deal with financial responsibility. This lets the real villians off way too easily. Essentially, the big retirement-policy experiment of the past three decades has been replacing guaranteed pensions with … a tax cut, called 401(k)s. Since the 401(k) is failing so badly to achieve the most important goal our retirement system should have – the achievement of retirement security for most Americans – it should be replaced with something better, and we can put the money gained by closing the 401(k) tax expenditure to better uses.

WAPO Thinks We Should Raise the Retirement Age to 75 - Dean Baker - At least it thinks that this is a reasonable position deserving some of the paper's scarce column space. The Post printed a column today by Michael W. Hodin warning about the "inexorable" aging of the population. At one point Hodin asks: "What if we reimagined and redefined what it means to age? What if, in light of our longer lifespans, 'middle age' were 55 to 75?"  While the piece implies that aging poses some radically new problem for the world, the fact is that populations have been aging for well over a hundred years due to both increases in life expectancy and also declining birth rates. In other words, this is just a continuation of a long trend, not a departure from it. Furthermore, just as aging of the population in the past has been associated with a rise in the standard of living there is no reason to believe that this will not be the case in the future. If economies can sustain a 2.0 percent rate of productivity growth (slightly less than the average in the U.S. over the last 60 years) then output per worker hour will be almost 120 percent higher in 2050 than it is today. This increase in productivity would swamp the effect of even the most rapid growth of a population of aged dependent.

Donald Verrilli’s case for A.C.A. and the Supreme Court - It’s well known by now that Donald Verrilli, Jr., the Solicitor General, had an off day at the Supreme Court last Tuesday, when he was called on to defend the constitutionality of the individual mandate, the part of the Affordable Care Act which requires people to buy health insurance. Still, it’s worth noting the magnitude of the challenge that he was facing. The key issue in the case is whether Congress, in passing the law, exceeded its powers under the Commerce Clause of the Constitution, which allows the government to regulate interstate commerce. Consider, then, this question, posed to Verrilli by Justice Anthony M. Kennedy: “Assume for the moment that this”—the mandate—“is unprecedented, this is a step beyond what our cases have allowed, the affirmative duty to act to go into commerce. If that is so, do you not have a heavy burden of justification?” Every premise of that question was a misperception. The involvement of the federal government in the health-care market is not unprecedented; it dates back nearly fifty years, to the passage of Medicare and Medicaid. The forty million uninsured Americans whose chances for coverage are riding on the outcome of the case are already entered “into commerce,” because others are likely to pay their health-care costs.

First the Mandate, Then All Tax Incentives - Last week the Supreme Court heard a case about whether the Affordable Care Act’s health insurance mandate is constitutional. But striking down the mandate could suggest that all sorts of tax incentives are similarly unconstitutional, an economist says.Martin Sullivan wrote in Tax Notes and on Monday:The only difference between the mandate and your common tax incentive is that Congress framed the incentive as a tax penalty instead of a tax break. I recognize there might be a legal difference between the two approaches that is beyond my comprehension. But the court, Congress, and the public should understand that economically the two approaches are exactly the same. Any tax penalty can easily be redesigned as a tax incentive. So, for example, a $1,000 tax penalty for not doing X could be replaced by a tax policy whereby all individuals’ taxes are raised by $1,000 and then they are given a tax credit of $1,000 for doing X. …A tax penalty and a tax incentive have the same economic impact on affected and unaffected individuals. They have the same effect on the goals the government is trying to achieve. They have the same effect on government revenues. It is possible, then, that they have the same effect on freedom and constitutional principles.

Obama delivers warning over healthcare law - Barack Obama has delivered a surprisingly strong warning to the US Supreme Court, saying that it would be guilty of an “unprecedented” case of “judicial activism” if it overturned his signature healthcare law.On Monday the president said he was “confident” the law would be upheld, questioning how an “unelected group of people” could overturn a law approved by legislators.“I’m confident that the Supreme Court will not take what would be an unprecedented, extraordinary step of overturning a law that was passed by a strong majority of a democratically elected Congress,” Mr Obama said during a press conference with Felipe Calderón and Stephen Harper, the visiting leaders of Mexico and Canada respectively.  “For years, what we have heard is the biggest problem on the bench was judicial activism, or a lack of judicial restraint, that an unelected group of people would somehow overturn a duly constituted and passed law,” he said.

Why Health Care Isn’t Broccoli - Brookings Institution - It isn't often that the course of history turns on principles taught in freshman economics. But the fate of the health reform legislation is now in jeopardy in part because some Supreme Court justices have so far failed to grasp such principles.  The government defended the mandate that nearly everyone carry insurance by arguing that almost everyone is in the market for health care at one time or another during their lives. People who are not insured may at any time become seriously ill or suffer major injury. The health care they will need is often costly and many people will not be able to pay for it. Under the Emergency Medical Treatment and Active Labor Act of 1986 hospitals must treat everyone who needs emergency care regardless of ability to pay. As a result, hospitals and other providers get stuck with bad debts. To make up their losses on the uninsured, they must charge those who have insurance more than the cost of their care in order to make up those losses. In the jargon of economics, those with insurance are forced to 'cross subsidize' those without it. And that, in turn, boosts the cost of insurance, which is already high enough, reduces its affordability, and thereby increases the ranks of the uninsured.

The Real Trial for Healthcare Reform - Over the past couple of weeks, the Supreme Court’s hearings on President Obama’s healthcare reforms have dominated the headlines. The case is big news, of course, with huge legal and political implications. Meanwhile, the economic consequences of the healthcare debate have largely been pushed to the sidelines. In the long run, though, they may prove to be the most important part of the story.The goal of the President’s plan is to extend healthcare coverage over 10 years to 95% of the legal, nonelderly population, compared with about 83% today. More than 32 million people would gain coverage. The total cost over the decade would be $1.4 trillion, according to the Congressional Budget Office. A bit more than half of that would be paid for by a variety of taxes, fees, penalties and other charges. The rest is supposed to come from $732 billion in savings on federal healthcare programs, partly by reducing the amount the government pays for treatments covered by Medicare and Medicaid. If the Obama plan hits all of its spending targets and realizes all of its projected revenues and savings, it would have minimal impact on the federal budget deficit through 2018. But in following years, the plan would begin running a deficit that would grow to nearly $50 billion annually, according to CBO projections revised last month. In addition, there are good reasons to believe that the Obama plan will run much larger deficits starting well before 2018.

Marshall Auerback and Randy Wray: America Needs Healthcare, Not Health Insurance - In Friday’s New York Times, Paul Krugman argues that the Supreme Court conservatives grasping for reasons why Congress lacks the power to do anything that they don’t like have forgotten an important distinction: the one between a judge and a politician. We’re not sure this is correct. It’s always been the case that for all of their lofty protestations of being “above politics,” the Supreme Court has been political, whether it be the Warren Court or today’s Roberts Court.That said, we’re not sure the Supremes are wrong to question the constitutionality of a private health insurance mandate that Krugman seems so keen to defend, asking: “Is requiring that people pay a tax that finances health coverage O.K., while requiring that they purchase insurance is unconstitutional?”Historically, Krugman has been one of the most eloquent critics of the insurance-based model. Yet he makes the mistake common to many progressive defenders of Obama’s healthcare bill: He conflates two distinct issues and thereby masks the fundamental flaw underlying the entire approach. Private health insurance is not synonymous with healthcare. There is a big difference between levying a tax for a public good (i.e. healthcare) versus forcing people to buy a service from a private health insurance company, which is by no means synonymous with healthcare. Using insurers to provide funding is a complex, costly and distorting method of financing healthcare. Imagine sending your weekly grocery bill to an insurance clerk for review and having the grocer reimbursed by the insurer to whom you have been paying “food insurance” premiums—with some of your purchases excluded from coverage at the whim of the insurer. Is there any plausible reason for putting an insurance agent between you and your grocer? No. Then why should an insurer stand between you and your healthcare provider? And why should you be forced to contribute to such an arbitrary scheme?

By the Numbers: 'Medicare for All' Could Fund Prosperous Future - Gerald Friedman, professor of economics at the University of Massachusetts-Amherst, offers a graphic look at the costs and revenue possibilities of a national single-payer health care plan. "Providing universal coverage with a 'single-payer' system would change many aspects of American health care," he writes in the March/April issue of Dollars & Sense. "While it would raise some costs by providing access to care for those currently uninsured or under-insured, it would save much larger sums by eliminating insurance middlemen and radically simplifying payment to doctors and hospitals. While providing superior health care, a single-payer system would save as much as $570 billion now wasted on administrative overhead and monopoly profits. A single-payer system would also make health-care financing dramatically more progressive by replacing fixed, income-invariant health-care expenditures with progressive taxes."

Democrats Resort to Magical Thinking on Obamacare - In the span of one week, Democrats went from dismissing the possibility that the Supreme Court would strike down the 2010 law mandating individuals to buy health insurance to consoling themselves that any such action would have a silver lining.  James Carville says it would help the Democrats in the election. Washington Post columnist Eugene Robinson writes that it would make single payer -- a government health system as in the U.K. and Canada -- “inevitable.” Other liberals, and even the occasional right-of-center analyst, have echoed that point: The conservative legal challenge to President Barack Obama’s health-care overhaul could prove self-defeating.  It’s an interesting and counterintuitive analysis, but it’s almost certainly wrong. If the court undoes Obamacare, either in whole or in part, conservatives who would like to reduce the government’s role in health care are likely to get policies much more to their liking.

Congressman Ryan’s Health Care Booby Trap - Much has been said about “repeal and replace” it has become almost as much a part of GOP lexicon as “drill baby, drill”. Now, along comes Congressman Ryan, despite being rebuffed last year for the “Roadmap”, he has come along with a v 2.0. Unfortunately, he is making headway. I won’t comment on the other aspects of the new and improved Roadmap, but it seems to be just as much of a disaster as the previous one. The House has already passed it of course, and Romney, aka etch a sketch, has enthusiastically received the Congressman’s endorsement and has endorsed Ryan’s plan as well.  Ezra Klein had a great article last week about the hidden mandate in the Ryan bill , but does not discuss the fact that it will essentially eliminate employer based insurance. Now, Ryan’s plan assumes that the state based exchanges (sound familiar?) will produce a lot of savings, and he assumes that market forces will do even more. To that end, he offers a couple of tax credits. But, oh by the way, you LOSE employer based coverage under Ryan. It severs it completely. So an individual gets a 2,300 dollar tax credit (family is 5,700) to buy insurance. I can tell you now, that the average per the Kaiser Family Foundation for a single individual is much higher than 2,300.  Family plan premiums are $15,073 on average, while coverage for single employees is about $5,429.  Workers contributed an average of $921 toward the premium of single coverage and $4,129 for family plans. What this means, is, that under the Ryan plan, your single insurance premium will cost you 2,208 MORE per year out of your own pocket at current cost. Family plans will cost you 5,244 MORE per year out of your own pocket.

Health Care Budget Deficit Calculator - The U.S. health care system is possibly the most inefficient in the world: We spend twice as much per person on health care as other advanced countries, but we have worse health outcomes, including a lower life expectancy. The government, through programs like Medicare and Medicaid, pays for approximately half of the country's health care, almost all of which is actually provided by the private sector. Thus, the bulk of our projected rising budget deficits are due to skyrocketing private health care costs.  The CEPR Health Care Budget Deficit Calculator shows that if the U.S. can get health care costs under control, our budget deficits will not rise uncontrollably in the future. But if we fail to contain health care costs, then it will be almost impossible to prevent exploding future budget deficits.  The Calculator lets you see what projected U.S. budget debts would be if we had the same per person health care costs as any of the countries listed below, all of which enjoy longer life expectancies than the U.S. (Life expectancies are listed in parentheses.)  The blue line shows projected deficits based on baseline projections from the non-partisan Congressional Budget Office (CBO). This includes the projected impact of cost savings associated with the Affordable Care Act (ACA). The red line shows where the deficits would be if health care costs in the U.S. were to follow a path that does not include the projected cost savings from the ACA. By default, health care costs for other countries is based on the current health care share of gdp. You may also choose to base it on current health-care expenditures per person.

The Most Cynical Court’s Most Dangerous Decision - Supreme Court justices had trouble on Tuesday directly challenging the link between interstate commerce and Obamacare’s requirement for everyone to get some kind of health insurance. Without the requirement, healthy people will keep opting out of the market, health insurers will contain costs by denying coverage for anything with a genetic marker, and small businesses will seek states whose insurers tolerate the medical needs of their staff. How’s that for interstate? It’s no joke and it’s happening now. Instead, Alito likened the requirement to mandating the purchase of burial insurance. After all, stiffs without burial insurance are the ultimate free riders – the living pay their costs just as people with health insurance pay for treating the uninsured. So the objection he and the court’s majority are formulating is this: the Affordable Care Act (ACA) sets a precedent for the redress of other free-rider market failures like requiring burial insurance, but the legislative power to require things like burial insurance is an unacceptable expansion of the commerce clause. The objection will topple three pillars of federal economic policy making in preempting the severity of healthcare risks as a precedent-avoiding distinction, free-rider justifications of regulation and future regulatory laws that could be construed as precedents. This seems too extreme even for the defense of liberty until you consider it may change the party controlling the White House. Is it true?

Justice Dept. turns in health care homework - The #Justice Department completed its #ACA homework, dutifully sending federal judges a letter conceding that, yes, Marbury v. Madison remains good law. Federal appellate judges on the Fifth Circuit Court of Appeals, responding to President Obama's sharp comments about the Supreme Court's pending review of the health care law, had taken the highly unusual step of directing the Justice Department to submit a letter explaining the department's views of judicial review. The letter states that, lest there be any doubt, "the power of the courts to review the constitutionality of legislatoin is beyond dispute." The letter further slides in the point that "acts of Congress are presumptively constitutional" and that, "the Executive Branch has often urged courts to respect the legislative judgments of Congress."

Health Care Thoughts: Physicians "Rationing" Health Care - Nine physician panels have recommended less testing of patients presenting with various conditions and diseases and less treatment for some diagnosis.  For Details: New York Times  Much of this is low hanging fruit, such as using less antibiotics for sinusitis. Some of this is old news, my physician altered his cardiac and prostate screening years ago  Other recommendations may be more controversial. In 2009 evidenced based recommendations to do less breast cancer screening were met with a firestorm of criticism. Current recommendations to do less cancer screening may meet a similar fate. There will be another controversy, whether or not these guidelines would protect a physician using conservative treatment protocols from malpractice suits. In my experience, probably not. Eventually payment bundling and new payment schemes may accomplish the "rationing" via a different route.

Americans Cutting Back on Drugs and Doctor Visits - Patients cut back on prescription drugs and doctor visits last year, a sign that many Americans are still struggling to pay for health care, according to a study released Wednesday by a health industry research group.  The report, issued by the IMS Institute for Healthcare Informatics, said 2011 was also a breakthrough year for the drug industry, which introduced 34 new medicines, the most in a decade, to treat diseases including cancer, multiple sclerosis, hepatitis C and others.  The number of prescriptions issued to patients declined by 1.1 percent compared with 2010, and visits to the doctor fell by 4.7 percent, the report said. Visits to the emergency room, by contrast, increased by 7.4 percent in 2011, an increase that the report’s authors said was linked to the loss of health insurance resulting from long-term unemployment.

Medical Billing and Insurance Companies - Steve Lopez at the LA Times reports on the bizarre world of  the bizarre calculus of emergency room charges: Debbie Cassettari had outpatient foot surgery to remove a bone spur. She arrived at the surgery center at 8 a.m., left at 12:30 p.m., and the bill came to $37,000, not counting doctor fees. In recovery now from sticker shock, she's waiting for her insurance company to do the tango with the clinic and figure out who owes what to whom. Gary Larson has a $5,000 deductible insurance plan, but has found that his medical bills are cheaper if he claims he's uninsured and pays cash. Using that strategy, an MRI scan of his shoulder cost him $350. His brother-in-law went to a nearby clinic for an MRI scan of his shoulder, was billed $13,000, and had to come up with $2,500. Kaiser member Robert Merrilees had a colonoscopy at an affiliated surgery center, which charged $7,500. His co-pay was $15, Kaiser picked up $470, the rest of the bill "just went away." Merrillees was left scratching his head over the crazy math in medical billing.

Neuroscientists: We Don’t Really Know What We Are Talking About, Either —At a surprise April 1 press conference, a panel of neuroscientists confessed that they and most of their colleagues make up half of what they write in research journals and tell reporters. “We’re always qualifying our conclusions by reminding people that the brain is extremely complex and difficult to understand—and it is,” says Philip Tenyer of Harvard University, “but we’ve also been a little lazy. It is just easier to bluff our way through some of it. That’s one perk of being a respected neuroscientist—you can pretty much say whatever you want about the brain because so few people, including other neuroscientists, understand what you’re talking about in the first place. As long as you throw in enough jargon, it sounds science-y and legit and stuff.” People who read a lot of neuroscience news have probably noticed several consistent contradictions, says Laura Sulcus of Dartmouth College. “Some studies say that different brain regions work in concert to perform a single complex task, whereas other studies argue that a particular cognitive function—such as recognizing faces—is basically the sole domain of one region. The thing is, just because one part of the brain shows more activity than another, it doesn’t mean that it is the only piece involved. But it is just so easy to pick a neglected area, dress it up with some colorful fMRI studies and present it to the world as a distinct, functional region of the brain.

Nuclear Risks at Bed, Bath & Beyond Show Dangers of Scrap - Going shopping? Don’t forget your wallet and credit card. Or Geiger counter. The discovery of radioactive tissue boxes at Bed, Bath & Beyond Inc. stores in January raised alarms among nuclear security officials and company executives over the growing global threat of contaminated scrap metal.While the U.S. home-furnishing retailer recalled the boutique boxes from 200 stores nationwide without any reports of injury, the incident highlighted one of the topics drawing world leaders to a nuclear security meeting in Seoul on March 26-27. The bi-annual summit, convened by President Barack Obama for the first time in 2010, seeks to stem the flow of atomic material that has been lost, stolen or discarded as trash. As U.S. and European leaders tackle the proliferation of weapons-grade uranium or plutonium in countries like Iran and North Korea, industries are confronting the impact of loose nuclear material in an international scrap-metal market worth at least $140 billion, according to the Brussels-based Bureau of International Recycling. Radioactive items used to power medical, military and industrial hardware are melted down and used in goods, driving up company costs as they withdraw tainted products and threatening the public’s health.

Nature deficit disorder ‘harming children’ - UK children are losing contact with nature at a "dramatic" rate, and their health and education are suffering, a National Trust report says. Traffic, the lure of video screens and parental anxieties are conspiring to keep children indoors, it says. Evidence suggests the problem is worse in the UK than other parts of Europe, and may help explain poor UK rankings in childhood satisfaction surveys. The trust is launching a consultation on tackling "nature deficit disorder". "This is about changing the way children grow up and see the world," said Stephen Moss, the author, naturalist and former BBC Springwatch producer who wrote the Natural Childhood report for the National Trust. "The natural world doesn't come with an instruction leaflet, so it teaches you to use your creative imagination. "When you build a den with your mates when you're nine years old, you learn teamwork - you disagree with each other, you have arguments, you resolve them, you work together again - it's like a team-building course, only you did it when you were nine." The trust argues, as have other bodies in previous years, that the growing dissociation of children from the natural world and internment in the "cotton wool culture" of indoor parental guidance impairs their capacity to learn through experience.

Money Talks, Science Walks: Millions Spent to Weaken FDA - According to the Union of Concerned Scientists (UCS), the pharmaceutical, medical device, and biotechnology industries spent over $700 million in lobbying between 2009 and 2011, surpassing other special interest spending such as big oil and insurance industries. The extreme spending comes as this year's 'industry-friendly proposals' face the House and Senate, such as legislation limiting the FDA’s drug and medical device scrutiny."Congress is also considering legislation that would relax conflict-of-interest standards for federal advisory members at the FDA, allowing scientists with a financial stake in the outcome to vote on panels that approve or reject drugs and medical devices," states UCS.

USDA Seeks to Let Poultry Companies Self-Inspect Their Product - The US Department of Agriculture believes that their budget will tighten. In a letter, USDA head Tom Vilsack tells all employees that “we will have to continue our path of belt tightening.” He indicates that the House’s budget, which keeps defense spending constant, will force cuts on the other discretionary non-defense agencies like USDA, which is absolutely true. And he specifically cites the “Blueprint for Stronger Service” as a path forward to provide the same services and resources with less funds: As I have said on many occasions, the budget challenges we face are unprecedented. It is part of the reason why we must build an improved USDA through cultural transformation and our work to improve administrative services as part of the Blueprint for Stronger Service. I am proud of our efforts to date in keeping down travel, supplies, and conference expenses. While the work to find administrative efficiencies and office consolidations required difficult decisions, they allow us to hopefully keep ahead of the process and allow us some freedom to decide how best to deal with cuts. I encourage all of us to aggressively proceed with the Blueprint for Stronger Service effort. It will make the department more efficient and, over time, more effective. I will continue to keep you advised as the budget discussions unfold. I don’t think the following cost-saving measure falls inside the “Blueprint for Stronger Service” portfolio, because it certainly wouldn’t provide stronger service of any kind:

Farm-fresh infringement: Can you violate a patent by planting some seeds? - Vernon Bowman, an Indiana farmer, was a customer of Monsanto who realized that Roundup Ready soybeans had become so common in his area that if he simply purchased commodity soybeans from a local grain elevator, the overwhelming majority of those soybeans would be Roundup Ready. Commodity soybeans are significantly cheaper than Monsanto's soybeans, and they came without the contractual restriction on re-planting. So Bowman planted (and re-planted) commodity soybeans instead of using Monsanto's seeds. When Monsanto discovered what Bowman was doing, it sued him for patent infringement. Bowman argued his use of the seeds is covered by patent law's "exhaustion doctrine." This doctrine, like copyright law's first sale doctrine, holds that a patent holder's rights in a particular product are "exhausted" when the product is sold to an end user. Bowman argued that when Monsanto sold seed to a farmer, it exhausted its rights not only to that specific seed but to all of the seed's descendants. Since Bowman wasn't required to sign a licensing agreement before buying commodity seeds, he argued that he was free to plant the seeds and even to save and re-plant each season's crop for future seasons. But Monsanto countered that each new generation of seeds is a separate product and thus requires a separate patent license. In effect, Monsanto contends that Bowman is illegally "manufacturing" infringing soybeans.

Pecan Buyers Shelled by Bad Data - Early this year the government made a disclosure that startled the industry: The Census Bureau had overstated the volume of pecans going to Hong Kong, the U.K., Mexico and other countries between August 2010 and September 2011. But by the time the figures were corrected, Mr. Zedan and others in the industry believe, the faulty data had made the market for pecans even more nutty than usual. Prices were high in the early fall but then dropped sharply, he said, benefiting farmers in the eastern U.S., who harvest early, and hurting farmers further west.The episode highlights the perils of relying on government data about commodities, which can be difficult to collect and subject to revision. Market participants have complained about problems with data on gasoline demand and corn production.Nick Orsini, chief of the Census Bureau's foreign-trade division, said the pecan problem was caused by a computer malfunction that has since been fixed.

Why Are People Dying to Bring You Dinner? The Shocking Facts About Our Food System - We hear of the sweatshops behind our computers, sneakers and other attire--yet the exploitation of farmworkers has become normalized.. Cesar Chavez, the champion of farmworkers' rights who gets his annual day of state recognition this Saturday, must be rolling in his grave. It's been 37 years since Governor Jerry Brown, in an earlier life, signed the landmark agricultural labor relations act--and soon California legislators will debate whether to enforce rules to provide water and shade to the 400,000 farmworkers who harvest our food.  According to Assemblymember Betsy Butler, D-Los Angeles, author of the Farmworker Safety Act of 2012, "At least 16 farm workers have died since the state issued emergency regulations related to heat illness in 2005. Since all of the deaths were preventable, it's clear that the regulations and their enforcement are ineffective."

Neonicotinoids - resulting in the most significant negative externality of production ever? - That is a big call, with candidates such as the Union Carbide factory in Bhopal, and Chernobyl. However, the difference with these examples is the negative externalities resulted from a single catastrophic event. The negative externalities of neonicotnoids occur because of the widespread use of insecticide and only now have studies proven its devastating effects. A quote attributed to Albert Einstein states that “If the bee disappeared off the surface of the globe then man would only have four years of life left. No more bees, no more pollination, no more plants, no more animals, no more man.” A new study, published in Science, shows that an insecticide known as a neonicotinoid could be the most significant factor in “colony collapse disorder” - the term used to describe the mystery of rapidly declining numbers of honeybees. Neonicotinoids are a different type of insecticide - the seeds are coated with the insecticide so that as it grows the seedlings absorb the chemical. So, rather than needing to indiscriminately spray a whole field, there is a little bit of insecticide inside each plant. The studies show that insecticide may not be killing the bees outright, the effect is to make them lose their way - they are unable to find their way back to their hives.

Drug-resistant malaria spreading rapidly in Cambodia, Myanmar, Thailand- Deadly malaria that is resistant to drug treatment has spread rapidly to the border between Thailand and Myanmar, raising concerns of an uncontrollable epidemic, scientists said Thursday. A pair of studies published in The Lancet and the journal Science showed how the disease is moving fast into new territory and identified a region of the parasite’s genome that may be responsible for mutating in order to survive. Malaria that was resistant to treatment with the current standard therapy, artemisinin, was confirmed in Cambodia in 2006 and has since surged 800 kilometers (500 miles) westward to the Thailand-Myanmar border, the researchers said.

U.S. Rabies Outbreaks Linked To Drought, Warm Weather - Cities located in drought-stricken states around the U.S. are experiencing a dramatic spike in rabies outbreaks. The outbreaks are being linked to warm weather and drought conditions, which are forcing infected animals to seek water and food in more urban areas. That is increasing infection rates and causing headaches for cities around the country. The Wall Street Journal reported on the rash of outbreaks happening in water-deprived states: While the number of reported rabid animals declined nationwide in 2010, according to the most recent federal data, states such as South Dakota, Kansas and Texas have recently seen a jump in the number of skunks testing positive. In drought-stricken Texas, more than 1,000 animals last year were exposed to rabid skunks, double the number in 2010. “More skunks seem to have migrated to suburban areas where there is water,” said Ernest Oertli, a veterinarian with the Texas Department of State Health Services.

Drought drying out Kansas aquifers - The lack of rainfall in Kansas in 2011 led to intense declines in ground water levels around the state, according to the Kansas Geological Survey. The Ogallala Aquifer in southwest Kansas usually sees annual declines, but its drop in 2011 was one of the worst in decades. The Kansas Geological Survey said the aquifer in that region dropped an average of 3.78 feet in 2011. That’s compared to a drop of about 3 feet in 2010 and 1.39 feet in 2009. The drought that plagued the state last year was the worst in generations. Much of Kansas received 25 to 50 percent of normal precipitation last year, with rain shutting off in the fall of 2010. “The growing season was probably the worst since the 1930s,” “It was just awful.” In central and south-central Kansas, where ground water levels usually show gains or only modest declines, the water table in the Equus Beds aquifer decreased an average of 3.17 feet. The Equus Beds stretch northwest from Wichita to include McPherson and Hutchinson. The Big Bend region just west of the Equus Beds had an increase of more than 4 feet from 2007 to 2010 before a decline this year that averaged 3 feet.

March Heat Records Crush Cold Records by Over 35 To 1, Scientists Say Global Warming Loaded The Dice - The final data is in for the unprecedented March heat wave that was “unmatched in recorded history” for the U.S. (and Canada). New heat records swamped cold records by the stunning ratio of 35.3 to 1. This ratio is almost off the charts, even with the brutally warm August we had, as this chart from Capital Climate shows. For the year to date, new heat records are beating cold records by 22 to 1, which trumps the pace of the last decade by more than a factor of 10!

Paul Douglas: 18,009 meteorological records broken in March 2012 - Saying Goodbye To One Crazy March. 18,009 records in March? Good grief. I asked our (amazing) developers at Ham Weather to come up with a special graphic showing ALL records for March, to date. Here is the result. If you go to the Ham Weather site you can call up just record 24 hour rainfall reports, or all warm weather records (more than 13,000 and counting). What a month...

Video: How a warm winter impacts the economy - What sort of impact has this wacky weather had on agriculture and energy commodities? What about the general encomy? BNN finds out with Matt Rogers, president at Commodity Weather Group, and John Lonski, chief economist at Moodys. 

Scientists cite global warming for more heat waves, heavier rainfall - On Wednesday, the U.N. Intergovernmental Panel on Climate Change (IPCC) released a 594-page study suggesting that when it comes to weather observations since 1950, there has been a "change in some extremes," which stem in part from global warming.... "The IPCC report is yet another reminder of the pressing need to tackle climate risk in both the near and long term," said Mark Way, head of Swiss Re's sustainable-development activities in the Americas. "Last year in the United States, even with the absence of major hurricane impacts, the insurance industry paid out approximately $35 billion in losses due to weather-related events. Severe weather will continue to impact the economy, and society in general, until we take the necessary measures to increase our resilience." Although extreme weather in developed countries exacts a higher human toll than in industrialized nations, the high economic cost associated with recent U.S. disasters is shifting more of the financial burden on taxpayers.

George Bush’s hometown is running out of water, thanks to climate change - Payback is a bitch. The president who nixed America’s commitment to the carbon-reducing Kyoto protocol, whose administration censored reports on climate science, and whose State Department thanked Exxon executives for their “active involvement” in helping to determine climate change policy, is watching the town in which he grew up squirm in the grip of Texas’ epic, climate change-enhanced drought. Midland, Texas, where Bush learned how to talk and grew into a strapping young alcoholic, is already running on half the water it had in the summer of 2010. As the drought grinds on, water from the Colorado River Municipal Water District has become scarce. The town’s only remaining reservoir will be dry in under a year if these conditions continue — and they’re projected to. “[P]eople could get up in the morning and there’s not any water in the system,” City of Midland Utilities Director Stuart Purvis told CBS 7 News.

Colorado farms planning for dry spell losing auction bids for water to fracking projects - Front Range farmers bidding for water to grow crops through the coming hot summer and possible drought face new competition from oil and gas drillers. At Colorado's premier auction for unallocated water this spring, companies that provide water for hydraulic fracturing at well sites were top bidders on supplies once claimed exclusively by farmers. The prospect of tussling with energy industry giants over water leaves some farmers and environmentalists uneasy. "What impact to our environment and our agricultural heritage are Coloradans willing to stomach for drilling and fracking?" said Gary Wockner, director of the Save the Poudre Coalition — devoted to protecting the Cache la Poudre River. "Farm water grows crops, but it also often supports wildlife, wetlands and streamflows back to our rivers. Most drilling and fracking water is lost from the hydrological cycle forever," Wockner said. "Any transfer of water from rivers and farms to drilling and fracking will negatively impact Colorado's environment and wildlife."

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. 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.

Global warming: Polar regions changing faster than expected - Global warming is changing Earth’s polar regions faster than expected, according to the U.S. National Research Council. Ice sheets around the poles are  showing evidence of serious retreat, which is expected to continue, and perhaps accelerate over coming centuries as warm ocean currents melt the ice front faster than anyone had grasped before. As, well, sea level rise from melting polar ice sheets is today slowly affecting every shoreline on the planet. The findings were compiled in a synthesis of reports from thousands of scientists in 60 countries who took part in the International Polar Year  2007-08. The studies offer a benchmark for environmental conditions and new discoveries in the polar regions.

Amount of coldest Antarctic water near ocean floor decreasing for decades - Two oceanographers from NOAA and the University of Washington find that Antarctic Bottom Water has been disappearing at an average rate of about eight million metric tons per second over the past few decades, equivalent to about fifty times the average flow of the Mississippi River or about a quarter of the flow of the Gulf Stream in the Florida Straits. "Because of its high density, Antarctic Bottom Water fills most of the deep ocean basins around the world, but we found that the amount of this water has been decreasing at a surprisingly fast rate over the last few decades," said lead author Sarah Purkey, graduate student at the School of Oceanography at the University of Washington in Seattle, Wash. "In every oceanographic survey repeated around the Southern Ocean since about the 1980s, Antarctic Bottom Water has been shrinking at a similar mean rate, giving us confidence that this surprisingly large contraction is robust."

NSIDC, Arctic Sea Ice Report of April 4, 2012: Arctic sea ice enters the spring melt season - Arctic sea ice reached its annual maximum extent on March 18, after reaching an initial peak early in the month and declining briefly. Ice extent for the month as a whole was higher than in recent years, but still below average. As the melt season begins, researchers look at a variety of factors that may contribute to summer ice melt. While the maximum extent occurred slightly later than average, the new ice growth is very thin and likely to melt quickly. Ice age data indicate that despite the higher extent compared to recent years, the winter sea ice continues to be dominated by younger and thinner sea ice.Ice cover remained extensive in the Bering Sea, where it has been above average all winter. Ice extent was also higher than average in Baffin Bay, between Greenland and Canada, and the Sea of Okhotsk, north of Russia. These conditions stemmed from a combination of wind patterns and low temperatures. Air temperatures were 6-8 C (11-14 F) below average over the Bering Sea, Baffin Bay, and parts of the Sea of Okhotsk, at the 925 millibar level (about 3,000 feet above sea level). In the Kara Sea, where ice extent had been below average during January and February, ice extent rebounded to near-average levels in March.  Ice extent in the Barents Sea remained well below normal. In both the Barents and Kara seas, temperatures remained above normal by 4-6 C (7-11 F).

Jeff Masters: Arctic Sea ice loss tied to unusual jet stream patterns - Earth has seen some highly unusual weather patterns over the past three years, and three new studies published this year point to Arctic sea loss as a potential important driver of some of these strange weather patterns. The record loss of sea ice the Arctic in recent years may be increasing winter cold surges and snowfall in Europe and North America, says a study by a research team led by Georgia Institute of Technology scientists Jiping Liu and Judith Curry. The paper, titled "Impact of declining Arctic sea ice on winter snowfall," was published on February 27, 2012, in the online early edition of the journal Proceedings of the National Academy of Sciences. "Our study demonstrates that the decrease in Arctic sea ice area is linked to changes in the winter Northern Hemisphere atmospheric circulation," said Judith Curry, chair of the School of Earth and Atmospheric Sciences at Georgia Tech, in a press release. "The circulation changes result in more frequent episodes of atmospheric blocking patterns, which lead to increased cold surges and snow over large parts of the northern continents."

Satellites show thawing of Alaska's permafrost - Climate warming has begun to etch subtle changes to the Arctic land surface, with satellites unveiling hints about the fate of the Far North permafrost on a grand scale. One particularly unnerving animation portrays the seasonal deformation of a track of land on Alaska’s North Slope during the summers of 2010 and 2011. Watch the red shift that signals the transformation of frozen ground into squishy muck — a meltdown that then subsides several centimeters as the summer ripens into fall. In a sense, we might be glimpsing a preview of Earth’s worst climate nightmare. Once a big chunk of the home planet’s permafrost thaws in earnest, organic material frozen solid for thousands of years will decay and release vast quantities of greenhouse gases into the atmosphere, including an outsized bubble of the super greenhouse gas methane. “About half of the world’s underground organic carbon is found in northern permafrost regions,” explains this story, posted by the European Space Agency. “This is more than double the amount of carbon in the atmosphere in the form of the greenhouse gases carbon dioxide and methane.”

Arctic Warming Favors Extreme, Prolonged Weather Events ‘Such As Drought, Flooding, Cold Spells And Heat Waves’  - By showing that Arctic climate change is no longer just a problem for the polar bear, a new study may finally dispel the view that what happens in the Arctic, stays in the Arctic. The study, by Jennifer Francis of Rutgers University and Stephen Vavrus of the University of Wisconsin-Madison, ties rapid Arctic climate change to high-impact, extreme weather events in the U.S. and Europe. The study shows that by changing the temperature balance between the Arctic and mid-latitudes, rapid Arctic warming is altering the course of the jet stream, which steers weather systems from west to east around the hemisphere. The Arctic has been warming about twice as fast as the rest of the Northern Hemisphere, due to a combination of human emissions of greenhouse gases and unique feedbacks built into the Arctic climate system. The jet stream, the study says, is becoming “wavier,” with steeper troughs and higher ridges. Weather systems are progressing more slowly, raising the chances for long-duration extreme events, like droughts, floods, and heat waves.

10,000 simulations show warming range of 1.4 to 3 degrees by 2050 — A project running almost 10,000 climate simulations on volunteers' home computers has found that a global warming of 3 degrees Celsius by 2050 is 'equally plausible' as a rise of 1.4 degrees. The study, the first to run so many simulations using a complex atmosphere-ocean climate model, addresses some of the uncertainties that previous forecasts, using simpler models or only a few dozen simulations, may have over-looked. Importantly, the forecast range is derived from models that accurately reproduce observed temperature changes over the last 50 years. The results suggest that the world is very likely to cross the '2 degrees barrier' at some point this century if emissions continue unabated, and that those planning for the impacts of climate change need to consider the possibility of warming of up to 3 degrees (above the 1961-1990 average) by 2050 even on a mid-range emission scenario. This is a faster rate of warming than most other models predict. A report of the research is published in Nature Geoscience.

Global Warming & Climate Change Myths - Here is a summary of global warming and climate change myths, sorted by recent popularity vs what science says. Click the response for a more detailed response. You can also view them sorted by taxonomy, by popularity, in a print-friendly version, with short URLs or with fixed numbers you can use for permanent references.

Rick Perry criticises UK initiative to influence US climate sceptics - Rick Perry, the governor of Texas and former Republican presidential candidate, has criticised the UK's Foreign Office for funding an environmental group which aimed to "educate" Texan policymakers about climate science and "move them from a state of denial and inaction to one of acceptance and effective action".  In 2009, the Foreign and Commonwealth Office (FCO) gave £13,673 to the US-based Environmental Defense Fund (EDF) to part-fund a project entitled "Influencing climate security policy and legislation in Texas", the Guardian has learned. The money was used to fly two Texan state politicians, including the climate sceptic Republican Troy Fraser, to the UK to receive a briefing with climate scientists and government officials. A conference was also held at the Texas Capitol in Austin in which a video of Prince Charles personally addressing Texan politicians on the subject of climate change was shown. Perry, a vocal climate sceptic, described the FCO's spending on the project as "misdirected". In Texas, we base our policy decisions on sound science and what is ultimately best for our citizens. Man-made global warming remains but a theory and one where thousands of scientists remain sceptical. It would be irresponsible to put our entire economy at risk based on unproven science. Our state has one of the best success stories in cleaning our air, all while remaining the nation's leading energy producer and job creator. Given these achievements, it would seem those UK tax dollars were misdirected."

Global warming began in oceans 135 years ago, suggests study - The world’s oceans have been warming for more than 100 years, twice as long as previously believed, new research suggests. The findings could help scientists better understand the Earth’s record of sea-level rise, which is partly due to the expansion of water that happens as it heats up, researchers added. “Temperature is one of the most fundamental descriptors of the physical state of the ocean,” said the study’s lead author, Dean Roemmich, an oceanographer at the University of California, San Diego. “Beyond simply knowing that the oceans are warming, [the results] will help us answer a few climate questions.”

‘We lost’: Eco-warriors, green stars throw in towel -  More signs that the movement to stop global warming has run out of gas emerged yesterday as Bill McKibben, the founder and Keystone XL Pipeline opponent, announced that he was hanging up his hat. The surprise retirement capped a hectic week for the environmental movement, during which one leader after another declared they were giving up on the cause. “I’m bone-tired and written out. It’s time for the planet to take care of itself,” McKibben told a crowd of supporters who were sweating in the freakish early-spring heatwave that has rolled across much of the U.S.

Graph of the Day via -  'nuff said?

The Mismeasure of Wealth - Despite many successes in creating a more integrated and stable global economy, a new report by the United Nations Secretary-General’s High-Level Panel on Global Sustainability – Resilient People, Resilient Planet: A Future Worth Choosing – recognizes the current global order’s failure, even inability, to implement the drastic changes needed for true “sustainability.” The Panel’s report presents a vision for a “sustainable planet, just society, and growing economy,” as well as 56 policy recommendations for realizing that goal. It is arguably the most prominent international call for a radical redesign of the global economy ever issued. But, for all of its rich content, Resilient People, Resilient Planet is short on concrete, practical solutions. Its most valuable short-term recommendation – the replacement of current development indicators (GDP or variants thereof) with more comprehensive, inclusive metrics for wealth – seems tacked on almost as an afterthought. Without quick, decisive international action to prioritize sustainability over the status quo, the report risks suffering the fate of its 1987 predecessor, the pioneering Brundtland Report, which introduced the concept of sustainability, similarly called for a paradigm shift, and was then ignored.

Global warming denial in U.S. will help China overtake America, says top scientist, Peter Raven - One of the world's most respected scientists has slammed America's position on global warming.  Peter Raven has been a trusted adviser of U.S. presidents, popes and other heads of state on the issue since 1964. The 76-year-old American scientist and former president of the American Association for the Advancement of Science, says that an anti-climate stance has diminished U.S. prestige among world leaders. Attention is turning instead to China -- who is seen as a more positive and influential global force. Achim Steiner, the Brazilian head of the United Nations Environmental Program, told ABC News that Europe is 'looking east' to find a solution to the problem.  Mr Raven is in agreement.'Two years ago, the world was hoping for U.S. leadership on this question, global climate change, and now it has pretty well given up, with us as the only hold-out nation on the science,' he says.

Pakistan And India To Go To War Over Water? - Lahore’s “The Nation’ newspaper on Sunday published an editorial entitled, “War with India inevitable: Nizami,” the newspaper’s Editor-in-Chief and Nazaria-i-Pakistan Trust Chairman, Majid Nizami, asked his fellow citizens to prepare for a war with India over water issues. “Indian hostilities and conspiracies against the country will never end until she is taught a lesson.” At issue are Pakistan’s concerns over India’s ongoing construction of two hydroelectric dams on the upper reaches of the Indus River. Islamabad is concerned that the 45 megawatt, 190-foot tall Nimoo-Bazgo concrete dam 44 megawatt Chutak hydroelectric power project will reduce the Indus River’s flow towards Pakistan, as they are capable of storing up to 4.23 billion cubic feet of water, violating the terms of the bilateral 1960 Indus Water Treaty. The Indus, which begins in Indian-controlled Kashmir, is crucial to both India and Pakistan, but is currently experiencing water flows down 30 percent from its normal levels. The Indus is Pakistan's primary freshwater source, on which 90 percent of its agriculture depends. According to a number of Pakistani agriculture and water experts, the nation is heading towards a massive water shortage in the next couple of years due to insufficient water management practices and storage capacity, which will be exacerbated by the twin Indian hydroelectric projects, as they will further diminish the Indus’ flow.

Cities Expand by Area Equal to France, Germany and Spain Combined in less than 20 years [Planet Under Pressure 2012 PDF] - Unless development patterns change, by 2030 humanity’s urban footprint will occupy an additional 1.5 million square kilometres - comparable to the combined territories of France, Germany and Spain, say experts at a major international science meeting underway in London.

Clean Air Helps the Economy - In December, the Obama administration approved long-overdue environmental regulations requiring U.S. power plants to reduce emissions of mercury, arsenic, and other toxic metals. The Mercury and Air Toxics Standards, or air toxics rule, is expected to prevent up to 11,000 premature deaths a year and have many other health benefits. And yet conservative members of Congress oppose it. Why? Because they say it will "kill jobs." This is a familiar tactic for politicians opposed to any sort of regulation. Conservatives have been scarily disciplined in appending the job-killing label to all regulations, both old and new. As somebody who has been on the front line of this particular battle, I'm afraid to say that the tactic seems to have resonance. Of course, it has also been a disaster for those interested in a true assessment of regulation's impacts on the economy.  The rationale for attaching the job-killing label to nearly all mentions of regulation is pretty clear: Even 32 months after the official end of the recession, the U.S. continues to have a joblessness crisis. Conservatives are, in short, hoping to convert the public's justifiable concern about joblessness into support for their decades-long battle against robust environmental, labor, and financial regulations.

EPA allows ethanol makers to register E15, moving closer to approval of 15 percent ethanol gas - The federal government announced Monday it has taken a step toward wide distribution of gasoline mixed with 15 percent ethanol by allowing manufacturers to register as suppliers. While the EPA is moving the process forward by allowing the registration, E15 still must clear another set of federal tests and become a registered fuel in individual states. Ethanol makers then must convince petroleum marketers to sell it at gas stations. Most ethanol fuel sold for passenger cars and pickups today is 10 percent ethanol and 90 percent gas. The new blend that boosts ethanol to 15 percent would only be sold for use in 2001 and newer vehicles. The 20 ethanol makers that have registered to sell E15 so far include large corn ethanol manufacturers like Archer Daniels Midland Co., based in Decatur, Ill., and Cargill Inc., which has headquarters in Wayzata, Minn. Four corn ethanol makers in Iowa, the nation's leading corn producing state, also registered. Others are based in Colorado, Indiana, Kansas, Kentucky, Michigan, Missouri, Nebraska, South Dakota, Texas, and Wisconsin.

Ethanol, Minus The Corn: It Could Fuel America If It Weren't Illegal - This year American motorists will burn through 14 billion gallons of ethanol, the end product of 5 billion bushels of corn—a third of the U.S. crop—grown on 33 million acres of farmland. It arguably cuts pollution coming out of U.S. tailpipes, but at a huge cost. Since 2005, when Congress required that ethanol be added to your gas tank, U.S. corn prices have tripled. Steven Sterin thinks he has a better way. As president of the advanced fuels division at Dallas-based chemicals company Celanese, he’s supervising construction of two new plants—one in Texas, the other in China—to make ethanol. But you won’t see any vats fermenting corn here. Celanese makes its ethanol by tearing apart and recombining the hydrocarbons found in plentiful natural gas or coal. “We have the best gas-to-liquids and coal-to-liquids technology in the world,” he says. If it works, what Sterin is building will revolutionize the fuel industry. But that’s a very big if. The problem isn’t science. It’s Washington. Thanks to the 2007 Renewable Fuel Standard law, gasoline refiners are mandated to blend so much plant-based or renewable ethanol into the gas supply that it prevents Celanese or any other fossil-fuel-based ethanols from even competing for the market.

Fukushima Radiation Moving Steadily Across Pacific  - Concentrated levels found as scientists sample the Pacific for signs of Fukushima. Teams of scientists have already found debris and levels of radiation far off the coast of Japan, one year after the nuclear disaster at Fukushima. Reports are now suggesting that nuclear radiation has traveled at a steady pace. That contaminated debris and marine life could reach the US coast as soon as one year from now, depending on ocean currents. Radiation from Fukushima's nuclear disaster is appearing in concentrated levels in sea creatures and ocean water up to 186 miles off of the coast of Japan. The levels of radiation are 'hundreds to thousands of times higher than would be expected naturally' according to Woods Hole Oceanographic Institution (WHOI). Researchers are questioning how the radioactive accumulation on the seafloor will effect the marine ecosystem in the future. "What this means for the marine environment of the Northwest Pacific over the long term is something that we need to keep our eyes on," said the WHOI.

Japan's 1,000-Year-Old Warning - After a long day of field work, my colleagues and I were chatting with a community leader, Koutaro Ogata, from a fishing village called Murohama. We asked what had happened to him in the moments after the earthquake. He told us that he and his neighbors were well aware that a large earthquake would generate a large tsunami and they knew, particularly, what to do because "a thousand years ago" a massive earthquake and tsunami had all but wiped out Murohama. This story might not have captured my attention if it hadn't been for a fortuitous coincidence. The day before, an engineering colleague, Eiichi Taniguchi, had told me that researchers at Tohoku University in Sendai, Japan, had found sediments indicating that a huge tsunami had hit Miyatojima about 1,000 years ago. Intrigued by the possibility of a connection between oral history and geological evidence, I asked the community leader if "a thousand years ago" was a figure of speech or an estimate of time.To my astonishment, he indicated that it was in no way a figure of speech. Village elders had reviewed the local temple's records and found reports pinpointing a large tsunami 1,142 years ago.

World is ignoring most important lesson from Fukushima nuclear disaster - As a nuclear core designer who obtained my doctorate from Massachusetts Institute of Technology in Nuclear Engineering, I volunteered to look into the situation at Fukushima No.1 in June of 2011. Goushi Hosono, Japan’s minister of Nuclear Power and Environment, personally granted me access to the information and personnel who were directly involved in the containment operations of the post-disaster nuclear plants. My now completed investigation shows that the Fukushima accident could have been avoided if the plant had the capacity for electricity generation of any form along with the appropriate heat sink (a supply of water to cool down reactor rods). Despite the “unexpectedly high” tsunami that caused the accident, two reactors, Nos. 5 and 6, remained intact, though they were damaged to the same extent as the other four reactors by the earthquakes and tsunami. The difference was that they had an additional source of electricity beyond links to the outside grid through an air-cooled emergency diesel engine. The most important lesson of Fukushima No.1 plant, therefore, is that we should have a multiplicity of means to provide a continuous electric supply and heat sinks. This is not the same as “You should not put all the eggs in one basket.” We should have eggs and apples in a few different baskets.

A cloud of fear: Greenpeace releases infrared image of giant 'explosive' methane gas spewing from Elgin rig in North Sea - It looks like a bizarre piece of 1960s pop art -- or perhaps a highly-coloured graphic from an old-style computer game. But in reality, this neon-bright image of the North Sea is a chilling illustration of just how large the potentially explosive gas cloud spewing from the Elgin platform has become. The infrared picture, which was taken using a special camera by environmental campaigners, lays bare the extent of the leak's impact on the atmosphere. The photograph was released by the Greenpeace activists who have been assessing the potential dangers of the situation since Monday.   The infrared camera image taken by Greenpeace on Tuesday shows the scale of the gas cloud from energy giant Total's Elgin platform

Total Awaits Clearance to Return to Leaking Gas Platform - —Total SA's efforts to stem a natural-gas leak on a North Sea platform gathered pace Sunday after an onboard flare that had hampered relief plans finally went out, but the French company still faces weeks, if not months, of challenging and expensive work to end the crisis.  The end of the flare, which went out late Friday, has cut one major explosion risk, but some 200,000 cubic meters a day of highly explosive hydrocarbons are still spraying out of the wellhead platform into the atmosphere, and Total's crisis-management team is working around the clock to solve the problem.

Spot Natural Gas Prices Fall Below $2, Might Be Lowest Inflation-Adjusted Price in U.S. History? - The spot price of natural gas fell below $2 per million BTUs this week, reaching lows not seen since 2001 in nominal terms (see chart above, data here).  When adjusted for inflation, the $1.88 spot price on Monday could likely have established a new all-time record low for natural gas (EIA data only go back to 1997).  Some industry analysts expect prices to fall even lower in the coming months, due to the strong supplies and weak weather-related demand, possibly as low as $1?

Gas Glut: Looking at the Options Available to U.S. Natural Gas - With global warming driving down the demand for natural gas as a home heating fuel and natural gas drillers producing record amounts, an oversupply situation has developed quickly. Stocks of natural gas are rising. As a result natural gas prices have fallen way below profitability and drillers are scrambling to cut back production. The natural gas surplus that is in our underground storage facilities may be full before fall, forcing producers to slow production until a market for the gas can be found. There are only so many things we can do with an excess of natural gas: you can export it; burn it in power plants; turn it into other products in petrochemical plants; increase its use in vehicles; and burn it to heat buildings. Given the pace at which temperatures are rising, less, not more, home consumption seems likely so only one of these uses can be accomplished quickly - burning it in electricity generating plants. As the price of natural gas becomes cheaper, power companies are already increasing its share of the fuels used for power generation and are closing older coal-fired plants. Wherever prices are favourable we will likely see more of this in the immediate future.

Fracking and Self-Sufficiency in Gas and Oil-Becker - More or less every American president starting with Dwight Eisenhower, and prioritized by Richard Nixon, called for American self-sufficiency in energy sources. In fact, America is now about self-sufficient in natural gas, and America’s oil imports have declined as a fraction of its total oil consumption from a peak of 60% in 2005 to about 50% in 2011. Part of the decline is due to the Great Recession’s effects on US output and automobile use. Another part is due to rising prices of oil that reduced oil imports, but increased spending on these imports. A third and growing part is due to increased domestic production of oil and especially gas that is likely to continue to grow rapidly during the next decade. The main reason for the expansion in domestic gas and oil production is a technique called “hydraulic fracking”. Texas wildcatter George Mitchell was the most important person responsible for the development of the fracking method to extract gas from shale formations in the 1980s. This method uses large quantities of water under high pressure with added chemicals to crack open rocks and extract the gas, and sometimes oil, hidden in these rocks. The cost of using fracking for natural gas extraction has become so competitive that most US natural gas production comes from fracking. As a result, the price of natural gas has fallen from a peak of about $10.80 per million BTUs to $2.20 currently. Instead of building terminals that could import liquefied natural gas, energy companies are now trying to export more natural gas. US natural gas inventories are so bloated there is a possibility that the price temporarily could be forced down toward $0, or even to a negative level. Traditionally, a barrel of oil has sold for about 11 times the price of a million BTUs of natural gas. During the past few years, rising prices of oil and declining natural gas prices have raised that ratio to almost 50.

Energy Self-Sufficiency—Posner - The policy of trying to achieve economic self-sufficiency, thus eliminating the need for foreign trade, is called “autarchy” and is associated with warlike regimes, such as Nazi Germany, since war may cut off a nation from foreign markets in products essential to a nation’s war machine. Germany made long strides toward energy self-sufficiency, essential to its blitzkrieg tactics, by manufacturing oil from coal; Germany had coal reserves in abundance, but no oil reserves. The only source of oil, besides its coal, that it could count on was the Romanian oil fields, and their output was too limited to supply the German military’s fuel needs.  Autarchy is a very costly policy for a nation to pursue, because, to the extent the policy succeeds, the nation loses the opportunity to substitute foreign products for inferior or more costly domestic output. A nation that has no exports will have nothing to trade for superior or cheaper foreign products.  Nevertheless it can be sensible to be concerned about the reliability of foreign sources of commodities that are important to a nation’s power or welfare. Most of the world’s oil resources are owned either by unstable countries, ranging from Nigeria and the Sudan to Iraq and Iran, or by unfriendly countries such as Russia, or by countries that are both unstable and unfriendly, such as Venezuela, or by potentially vulnerable countries, such as Kuwait and the other Persian Gulf sheikdoms, and Saudi Arabia.

Toxins in Fracking Process Linked to Spontaneous Abortion, Birth Defects, and cancer - Not only do the chemical cocktail inserted into the ground been shown to contaminate groundwater and drinking water, but fracking fluid also picks up toxins on its trip down to the bedrock and back up again that had previously been safely locked away underground. Chemicals linked to cancer are present in nearly all of the steps of extraction -- in the fracking fluids, the release of radioactive and other hazardous materials from the shale, and in transportation and drilling related air pollution and contaminated water disposal. Some reports indicate that more than 25 percent of the chemicals used in natural gas operations have been linked to cancer or mutations, although companies like Haliburton have lobbied hard to keep the public in the dark about the exact formula of fracking fluids. According to the U.S. Committee on Energy and Commerce, fracking companies used 95 products containing 13 different known and suspected carcinogens between 2005 and 2009 as part of the fracking fluid that is injected in the ground. These include naphthalene, benzene, and acrylamide. Benzene, which the U.S. EPA has classified as a Group A, human carcinogen, is released in the fracking process through air pollution and in the water contaminated by the drilling process. The Institute of Medicine released a report in December 2011 that links breast cancer to exposure to benzene.

Shale Shocked: ‘Remarkable Increase’ In U.S. Earthquakes ‘Almost Certainly Manmade’, USGS Scientists Report - A U.S. Geological Survey (USGS) team has found that a sharp jump in earthquakes in America’s heartland appears to be linked to oil and natural gas drilling operations. As hydraulic fracturing has exploded onto the scene, it has increasingly been connected to earthquakes. Some quakes may be caused by the original fracking — that is, by injecting a fluid mixture into the earth to release natural gas (or oil). More appear to be caused by reinjecting the resulting brine deep underground. Last August, a USGS report examined a cluster of earthquakes in Oklahoma and reported: Our analysis showed that shortly after hydraulic fracturing began small earthquakes started occurring, and more than 50 were identified, of which 43 were large enough to be located. Most of these earthquakes occurred within a 24 hour period after hydraulic fracturing operations had ceased. In November, a British shale gas developer found it was “highly probable” its fracturing operations caused minor quakes. Then last month, Ohio oil and gas regulators said “A dozen earthquakes in northeastern Ohio were almost certainly induced by injection of gas-drilling wastewater into the earth.” Now, in a paper to be deliver at the annual meeting of the Seismological Society of America, the USGS notes that “a remarkable increase in the rate of [magnitude 3.0] and greater earthquakes is currently in progress” in the U.S. midcontinent. The abstract is online. EnergyWire reports (subs. req’d) some of the findings:

615 dead dolphins found on Peru beaches; acoustic tests for oil to blame? - Conservationists counted 615 dead dolphins along a 90-mile stretch of beaches in Peru, a wildlife group said Wednesday, and the leading suspect is acoustic testing offshore by oil companies. "If you can count 615 dead dolphins, you can be sure there are a great many more out at sea and the total will reach into the thousands,” Hardy Jones, head of the conservation group, said in a statement after he and an expert with ORCA Peru walked the beaches. Indeed, the head of a local fishermen's association told that he estimated more than 3,000 dolphins had died so far this year, based on what he saw in the water and on beaches.

Thousands of Dolphins Dying in Gulf Waters - The dolphins in the Gulf of Mexico are in the midst of a massive die-off. The reasons why remain a complicated and mysterious mix of oil, bacteria, and the unknown. Normally an average of 74 dolphins are stranded on the northern shore of the Gulf of Mexico each year, especially during the spring birthing season. But between February 2010 and April 1, 2012, 714 dolphins and other cetaceans have been reported as washed up on the coast from the Louisiana/Texas border through Franklin County, Florida, reported the National Oceanic and Atmospheric Administration (NOAA). 95 percent of the mammals were dead. Since many of the dead dolphins sink, decompose or are eaten by scavengers before washing up, NOAA biologists believe that 714 represents only a fraction of the actually death count. NOAA

Gulf’s dolphins pay heavy price for Deepwater oil spill - A new study of dolphins living close to the site of North America's worst ever oil spill – the BP Deepwater Horizon catastrophe two years ago – has established serious health problems afflicting the marine mammals.The report, commissioned by the National Oceanic and Atmospheric Administration [NOAA], found that many of the 32 dolphins studied were underweight, anaemic and suffering from lung and liver disease, while nearly half had low levels of a hormone that helps the mammals deal with stress as well as regulating their metabolism and immune systems. More than 200m gallons of crude oil flowed from the well after a series of explosions on 20 April 2010, which killed 11 workers. The spill contaminated the Gulf of Mexico and its coastline in what President Barack Obama called America's worst environmental disaster. The research follows the publication of several scientific studies into insect populations on the nearby Gulf coastline and into the health of deepwater coral populations, which all suggest that the environmental impact of the five-month long spill may have been far worse than previously appreciated.

Mississippi residents find death along oily Gulf shores - Since BP's catastrophic oil blowout nearly two years ago, Laurel Lockamy has gotten pretty good at photographing the dead. She's snapped images of dozens of lifeless turtles and dolphins, countless dead fish, birds, armadillos and nutria and pretty much anything that crawls, swims or flies near the white sandy Mississippi beaches of her Gulfport home. Locals say this is far from normal. Laurel's pictures can be hard to believe; photos of large bottlenose dolphins, their mouths agape and their silvery bodies stretched out like aluminum mannequins on the tar ball-littered sand as children frolic nearby in the warm waters of the Gulf. She's taken shots of rotten, decaying endangered sea turtles wasting away on the shores, sprayed with orange paint by marine mammal experts for disposal by beach cleanup crews who sometimes take days to respond. Last week was no different for Laurel, who was out taking pictures of sea life with her new Nikon lens. A strong spring storm had roiled the brown Gulf waters, apparently stirring up globs of the 200 million gallons of Louisiana crude that BP’s well spewed into the Gulf in 2010. Laurel says she found tar balls the size of bricks in the sand, spit out by the violent sea. Not far away, Charles Taylor was walking along the beach on his birthday and found four dead endangered Kemp Ridley sea turtles washed up in Waveland. They were just a few of the 40 or so decaying sea turtles that have rolled in with the Gulf waves in recent weeks, making a resurgent appearance after spiking in unusual numbers a year ago.

Way Cleared for Alaska Gas Pipeline - Exxon Mobil Corp., BP PLC and ConocoPhillips settled a long-running dispute with Alaska that paves the way for a pipeline project to ship natural gas from the North Slope, unleashing the state's massive gas reserves. The settlement between the state and the companies lets them keep their leases in the Point Thomson field, located east of the huge Prudhoe Bay field, in exchange for the promise to begin production by May 2016 at the latest.  Settling the Point Thomson dispute—where the state took away leases from the companies because of limited drilling activity—was considered a key to the future pipeline.

Oil Wells Drilled - This is just another take on the current US oil drilling boom. This is the EIA's data for the number of wells drilled through Jan 2012, split between exploratory and development wells.  You can see the huge surge since the end of the recession in mid 2009.  As usual, most of the wells are development (ie for extracting the oil from known fields). Although drilling is at a higher level than for the last twenty five years, it's only at about 2/3 of the level of the early 1980s.

Does the U.S. Really Have More Oil than Saudi Arabia? - People are often confused about the overall extent of U.S. oil reserves. Some claim that the U.S. has hundreds of billions or even trillions of barrels of oil waiting to be produced if bureaucrats will simply stop blocking development. So, I thought it might be a good idea to elaborate a bit on U.S. oil resources. Oil production has been increasing in the U.S. for the past few years, primarily driven by expanding production from the Bakken Shale Formation in North Dakota and the Eagle Ford Shale in Texas. The oil that is being produced from these shale formations is sometimes improperly referred to as shale oil. But when some people speak of hundreds of billions or trillions of barrels of U.S. oil, they are most likely talking about the oil shale in the Green River Formation in Colorado, Utah, and Wyoming. Since the shale in North Dakota and Texas is producing oil, some have assumed that the Green River Formation and its roughly 2 trillion barrels of oil resources will be developed next because they think it is a similar type of resource. But it is not. The estimated amount of oil in place (the resource) varies widely, with some suggesting that there could be 400 billion barrels of oil in the Bakken. Because of advances in fracking technology, some of the resource has now been classified as reserves (the amount that can be technically and economically produced). However, the reserve is a very low fraction of the resource at 2 to 4 billion barrels. For reference, the U.S. consumes a billion barrels of oil in about 52 days, and the world consumes a billion barrels in about 11 days.

U.S. oil inventories at historic highs -- Crude oil inventories at the Cushing, Okla., storage hub increased by to the highest level since 2009, the U.S. Energy Department said. The Energy Department's Energy Information Administration said crude oil inventories at Cushing, the delivery point for the New York Mercantile Exchange crude contract, increased 43 percent -- 12 million barrels -- from Jan. 13-March 30. "This was the largest increase in inventories over an 11-week period since 2009," the EIA said. The administration said the inventory increase was attributed to emptying the Seaway pipeline in advance of its planned reversal. Enterprise Products Partners and Canadian pipeline company Enbridge Inc. in November agreed to reverse the direction of crude oil on the Seaway pipeline so it can carry oil from Cushing to refineries along the southern coast of the United States. Reversing crude oil deliveries on the 512-mile pipeline could reduce transportation costs and accelerate development of crude oil reserves in North America.

Obama Finds Oil in Markets Is Sufficient to Sideline Iran - After careful analysis of oil prices and months of negotiations, President Obama on Friday determined that there was sufficient oil in world markets to allow countries to significantly reduce their Iranian imports, clearing the way for Washington to impose severe new sanctions intended to slash Iran’s oil revenue and press Tehran to abandon its nuclear ambitions.  One senior official who had met with the Saudi leadership, said: “There was no resistance. They are more worried about a nuclear Iran than the Israelis are.” Still officials said, the administration wanted to be sure that the Saudis were not talking a bigger game than they could deliver. The Saudis received a parade of visitors, including some from the Energy Department, to make the case that they had the technical capacity to pump out significantly more oil. But some American officials remain skeptical. That is one reason Mr. Obama left open the option of reviewing this decision every few months. “We won’t know what the Saudis can do until we test it, and we’re about to,” the official said.

Obama moves to choke Iran oil exports: President Barack Obama gave the go-ahead for robust sanctions against Iran’s energy sector Friday, judging there is enough oil on world markets to ensure the move will not hammer US consumers. With just hours to go before a deadline to decide, Obama determined the United States could punish banks and other financial institutions for buying oil from Iran, without causing a global oil shock. The step could have major implications for Tehran and its customers, forcing firms and countries to choose between trade with the United States and Iranian oil. China, South Korea, India, Japan and the European Union are major buyers of crude from Tehran. The measures call on countries to “significantly reduce” oil imports from Iran — although not stop them all together — or face being frozen out of the US financial system.

As sanctions squeeze Iran, how will the world make up the lost oil? -  The White House announced today that it is moving forward with tough new sanctions aimed at squeezing Iranian oil exports. Iran currently exports about 2 million barrels of oil a day — roughly 2.5 percent of the global market. So how will the world make up the shortfall? It’s a daunting task. Analysts predict that Iran’s exports could eventually drop by half, by 1 million barrels per day or more, after a July embargo by the European Union kicks in and the United States slaps sanctions on foreign banks that keep buying Iranian oil. Already, countries like Italy and Japan have been cutting back on purchases, and Iran’s exports fell by about 300,000 barrels daily in March, according to the Swiss oil-shipping firm Petro-Logistics SA. But even if Iranian exports do fall by that much, the rest of the world should be able to pick up the slack. Saudi Arabia has increased production by 600,000 barrels a day since this time last year, and the U.S. Energy Information Administration estimates that spare capacity in OPEC countries is at about 2.7 million barrels a day. While that’s unnervingly low by historical standards, there are signs that it might be enough for now. Global oil demand has been slackening in the first two months of 2012 — China’s consumption grew by just 160,000 barrels a day, less than expected — and the recent surge in biofuel production has given the world some breathing room.

Saudis Vow To Maintain Oil Output If Major Western Consumers Release Emergency Reserves - Saudi Arabia will likely maintain its high crude oil production even if the consumer nations of North America and Europe release emergency strategic reserves, but it will not offer a discount to attract more buyers. According to a report in Reuters, U.S. Secretary of State Hillary Clinton sought assurances from King Abdullah over the weekend that the Saudis would not respond to an inventory release by consuming nations by reducing its own production. Saudi leaders reportedly said such a drawdown was unnecessary. "Saudi production will unlikely change from the levels we see now, even if the stocks are released, because the stocks will not have an impact," an unnamed source told Reuters. "Everyone knows that Aramco [Saudi Arabia’s national oil company] is a commercial operation and it will not discount oil," he added.

China rejects Obama’s Iran oil import sanctions - China rejected President Barack Obama’s decision to move forward with plans for sanctions on countries buying oil from Iran, saying Saturday that Washington had no right to unilaterally punish other nations. South Korean officials said they will continue working with the U.S. to reduce oil imports from Iran, as other U.S. allies who depend on Iranian oil worked to find alternative energy supplies. Obama announced Friday that he is plowing ahead with the potential sanctions, which could affect U.S. allies in Asia and Europe, as part of a deepening campaign to starve Iran of money for its disputed nuclear program. The U.S. and allies believe that Iran is pursuing a nuclear bomb; Iran denies that.

S.Africa Iranian oil imports soar in Feb - South African crude oil imports from Iran leapt in February to $364 million from zero the preceding month, customs data showed on Monday, dashing the view that Pretoria has bowed to U.S. pressure to curb commercial links with Tehran.  The Revenue Service said Africa's biggest economy imported 417,000 tonnes of Iranian crude in February, a dramatic reversal of a declining trend seen since October, when it imported 467,000 tonnes. South Africa has come under Western pressure to cut Iranian crude imports as part of sanctions designed to halt Tehran's suspected pursuit of nuclear weapons, although it has been unclear how diplomatically non-aligned Pretoria is responding.Senior energy and foreign ministry officials directly contradicted each other last month as to the status of Iranian imports.However, January trade and customs data showed Iranian crude imports at zero compared with a monthly average of $280 million last year. Iran has been South Africa's biggest crude supplier, accounting for a quarter of its oil imports.

IEA keeping close eye on oil markets - -- The International Energy Agency said it was "ready to act" to oil market situations and is in close contact with its member states. Crude oil prices have declined in recent days in part because of considerations of the release of strategic petroleum reserves. The IEA last year called for a release of strategic reserves in response to declines in crude oil production during the civil war in Libya. IEA Executive Director Maria Van der Hoeven said she was "concerned" about "very high" oil prices and their potential to affect the global economy. "The IEA is closely monitoring market developments and will remain in close contact with member countries to exchange views about the oil-market situation," she said in a statement. "As we have mentioned many times, the IEA was created to respond to serious physical supply disruptions, and we remain ready to act if market conditions so warrant."

What Happens If Iran Doesn't Back Down?  If an embargo is successful in preventing Iran from selling a significant amount of oil on the world market, what would replace it? That the President or anybody else is counting on the world demand for petroleum curve to shift left in 2012 seems doubtful. And which are the countries from which increased production is anticipated? Libyan production averaged only 500,000 barrels/day in 2011, and if things go well could soon be producing a million barrels more than that daily. In the meantime, disruptions in Sudan, Syria, and Yemen have taken out a separate 640,000 barrels/day. The best hope is perhaps Saudi Arabia, which presumably has been making private statements to U.S. officials similar to this public statement from Saudi Oil Minister Ali Naimi last Wednesday: Saudi Arabia's current capacity is 12.5m barrels per day, way beyond current levels demanded, and a reliable buffer against any temporary loss of production. Saudi Arabia has invested a great deal to sustain its capacity, and it will use spare production capacity to supply the oil market with any additional required volumes.

Replacing Iran's oil production - If an embargo is successful in preventing Iran from selling a significant amount of oil on the world market, what would replace it? On Friday the White House released the following statement: there currently appears to be sufficient supply of non-Iranian oil to permit foreign countries to significantly reduce their import of Iranian oil, taking into account current estimates of demand, increased production by some countries, private inventories of crude oil and petroleum products, and available strategic petroleum reserves. That the President or anybody else is counting on the world demand for petroleum curve to shift left in 2012 seems doubtful. And which are the countries from which increased production is anticipated? Libyan production averaged only 500,000 barrels/day in 2011, and if things go well could soon be producing a million barrels more than that daily. In the mean time, disruptions in Sudan, Syria, and Yemen have taken out a separate 640,000 barrels/day. The best hope is perhaps Saudi Arabia, which presumably has been making private statements to U.S. officials similar to this public statement from Saudi Oil Minister Ali Naimi last Wednesday: Saudi Arabia's current capacity is 12.5m barrels per day, way beyond current levels demanded, and a reliable buffer against any temporary loss of production. Where have we heard something like that before? Maybe this statement from June 2004 rings some bells: Oil Minister Ali al-Naimi saidRiyadh was "fully ready" to increase its oil production in an effort to trim soaring prices to the cartel's target range of $22-28 a barrel.

The End of the Saudi Oil Reserve Margin - President Obama’s sanctions plan on Iran follows an old Mideast policy playbook. Western moves against an oil-exporting country take place with the cooperation of Saudi Arabia. U.S. strategy requires the Saudis to ramp up production and replace Iranian exports in hope of avoiding a damaging spike in prices. It’s a familiar scenario: At one time or another, the Saudis have been called upon to replace exports from Iran, Iraq, Kuwait and, most recently, Libya. The idea is to have your cake and eat it—to meet U.S. foreign policy goals without disrupting oil markets and antagonizing the American motorist. But the old playbook may have to be torn up. This time Saudi Arabia is struggling to assume its usual role as the oil market’s swing supplier. This can be seen in current market tightness and in U.S. gasoline prices, which are edging toward $4, a dangerous prospect at election time. The Obama administration’s sanctions plan acknowledges Saudi weakness. Rather than try to impose a blanket ban, it has introduced piecemeal measures, such as encouraging China and South Korea to demand discounts for continued imports of Iranian crude. For the first time, Saudi Arabia’s vaunted spare capacity appears insufficient to cover the loss of a major exporter.

Andrew Hall On Saudi "Excess Production Capacity" Promises - When it comes to energy, and specifically crude oil trading, few names are as respected, if controversial, as former Citi star trader, Andrew Hall, whose $100 million pay package in 2008 forced Citi to sell energy unit Phibro to Occidental. He currently is primarily focused on his own fund Astenbeck, where he trades what he has always traded - commodities, and primarily oil. As such, his view on the oil market is far more credible than that of the EIA, or any conflicted Saudi Interests. So what does he have to say about the biggest wildcard currently in the energy market, namely whether or not Saudi Arabia, can push its production from its recent record high of just under 10,000 tb/d to the 12,500 tb/d that would be needed to replace all lost Iranian output (a question we asked rhetorically two weeks ago). The answer? Don't make him laugh.

Iran, Oil Prices And Gambling With The World Economy - The White House last week acknowledged problems in the global oil market but said the situation was secure enough to move ahead with tighter sanctions against Iran. President Obama said he was confident about the current state of the global economy and had assurances there was enough spare capacity to buffer against a severe shock to energy markets. The measure is meant to ensure Tehran doesn't have the finances to back what's seen as a nuclear weapons program. It might be something of a political and economic gamble, however. Obama had until Friday to decide on pushing ahead with sanctions that would bar financial institutions from the U.S. economy if they don't substantially cut their oil transactions with Iran. Some countries have already decided to back away from Iranian crude and others received some concessions from Washington for at least cutting back. Concerns over Iran helped push oil prices up, however. The International Energy Agency said from Paris last week that oil prices are "very high again." IEA Executive Director Maria van der Hoeven said the agency was keeping a close eye on oil markets, noting concern because of lingering fragility in the global economy. And she's right to be concerned because last week, the Organization for Economic Cooperation and Development warned the British economy was at risk of sinking back into recession.

Unthinkable - In the drunken, drug-crazed twilight of its run as Leader of the Free World, America's collective imagination swerves from one breakdown lane to the other while the highway patrol throws a donuts-and-porn party down at headquarters and the news media searches the gutter on hands-and-knees looking for the spot where it dropped its brains.  The other day, Larry Kudlow, the king popinjay at CNBC, told viewers that the US has over a trillion barrels of oil waiting to be drill-drill-drilled on our way to "energy independence." This is the kind of malarkey that America thrives on these days, the way yeasts thrive on sugary mash. It's a complete falsehood, of course, but the working dead over at The New York Times said substantially the same thing in a front-page story the week before. The Timespersons have only one source for their stories: Daniel Yergin, chief public relations pimp for the oil industry, because he makes it so easy for them by providing all the information they will ever need. The oil and gas companies would like to direct the fire-hose of loose and easy money out there into their stock prices - building to the magic moment when, Mozillo-like, the executives can dump shares, cut, and run for the far hills where no SEC officer or DOJ attorney will ever think to look. This is just another racket in an all-rackets society.  The fantasy of energy independence therefore takes shape as a "settled matter" as we lurch toward elections. The arch-moron Mitt Romney will inveigh against Obama for holding the oil dogs back while Obama pretends to spank the oil companies for gouging the public on that alleged Niagara flow of new oil. None of them understands the true situation, which is that the USA is enjoying one last gulp of a very expensive oil cocktail with the last few dollars it can prestidigitate out of the central bank's magic box, and then there is no more even notional surplus wealth to blow on more drinks.

Saudi Arabia fact of the day - The country is not energy efficient: With domestic electricity demand rising 10% per year in Saudi Arabia, the kingdom now devours more than a quarter of its oil production—nearly three million barrels per day. International Energy Agency figures show that Saudi Arabia now consumes more oil than Germany, an industrialized country with triple the population and an economy nearly five times as large.

Oil: Burning their wealth | The Economist - BRAD PLUMER links to a Wall Street Journal story on Saudi Arabia's increasing consumption of its own oil output. The story reads: With domestic electricity demand rising 10% per year in Saudi Arabia, the kingdom now devours more than a quarter of its oil production—nearly three million barrels per day. International Energy Agency figures show that Saudi Arabia now consumes more oil than Germany, an industrialized country with triple the population and an economy nearly five times as large. The Economist actually ran a piece on this last week which came complete with snazzy map:

House of Saud to Meet Yemen's Oil Needs as Sana'a Internally Combusts - The Saudi distraction in Yemen is so great at present that the kidnapping of a Saudi deputy consul in Yemen’s southern port city of Aden on 28 March was met with only a muted response from Riyadh. Yemeni police told reporters that the Saudi diplomat was taken from outside his home by unidentified gunmen and his whereabouts remains unknown. The kidnapping appears to be likely related to a “personal” conflict between the Saudi diplomat and influential forces in Aden, and not political in nature or directly related to one of Yemen’s various conflicts. While the search is on for the diplomat, Riyadh has more important matters to deal with in Yemen.

Global Oil Production In Trouble -- All the attention may be on a loss of oil from Iran these days, but production outages in a variety of spots worldwide is causing about one million barrels of oil a day to sit on the sidelines, helping push oil and gas prices to near record highs. In places like South Sudan, Yemen and Syria the oil is offline due to violence. In Canada and the North Sea it's due to technical problems. No one outage is particularly large. But taken together, they rival the amount of oil that could be lost from Iran1 over the next few months as sanctions take hold. "There are always disruptions, but when the market is this tight, they have an impact." "It would be better for the economy if these barrels were there."  Although a variety of estimates exist, this list was compiled by CNNMoney using data from the International Energy Agency and the U.S. Energy Information Administration:

Global Oil Risks in the Early 21st Century - 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.

Big rise in US crude stocks deflates price - The oil market is showing the first signs of easing after the biggest two-week rise in US crude stocks in more than 10 years, helping to dampen fears of a shortfall. The increase helped to push down US oil prices to the lowest since mid-February. Rising gasoline prices have become a key battlefield in the US presidential race.  The US government said on Wednesday the closely watched amount of crude in storage rose by 16.1m barrels over the past two weeks, the biggest increase in absolute terms since March 2001. Commercial tanks held 362.4m barrels of crude last week, a level far above average, the US Department of Energy reported.  The increase comes as US domestic production soars and Saudi Arabia and other countries boost their output in an effort to lower oil prices. But analysts warned that the build-up reflected in part refineries going into seasonal maintenance.  Globally, “the market has been generally quite tight and remains tight”, said Francisco Blanch, head of commodities research at Bank of America Merrill Lynch. The sharp increases in US crude oil inventories contrast with relatively low levels in other western countries and comes days after the International Energy Agency, the western countries’ oil watchdog, warned of a tightening oil market.  Nonetheless, European and Asian physical oil markets are starting to show modest signs of easing for the first time in several months. The price difference between the cost of the Russian oil variety Urals and global benchmark Brent has plunged to its lowest level in 11 months, a sign that extra production from Russia, Saudi Arabia, Libya and Iraq is slowly rebalancing supply and demand.

Latest Brent-WTI Spread - The graph above shows Brent (black) and WTI (blue) oil prices - both on the left scale.  The green line is the spread between the two, and it is shown on the right scale which is shifted to allow us to see negative spreads. The dynamics of Brent prices in the last year or two consist of the run-up associated with the Arab spring and in particular the actual loss of most of Libyan production in early 2011.  Then there was a gradual erosion of prices due to increasing fears of a European financial implosion.  The ECB's LTRO operations turned the picture from one of increasing near term risk of catastrophe to more of a gradual ongoing deterioration (still with the possibility of acute crisis episodes but further off in the future).  That turned attention to fear of the effect of sanctions on Iran and/or an outright attack on Iran by Israel.  Thus, since about the beginning of the year, Brent prices have been largely heading up.  ...there seems room for Brent to go somewhat higher.  Meanwhile, the discount of WTI to Brent grew in an unprecedented manner through most of 2011  I think this is best thought of as the result of the major drilling boom in the US as seen in oil rig counts from late 2009 onward:

T. Boone Pickens: Oil Could Hit $148 Per Barrel -Tightening oil production worldwide could mean prices hitting $148 per barrel this summer, Texas billionaire investor T. Boone Pickens said Tuesday. Not even spare capacity from Saudi Arabia would be enough to make up the difference amid increasing sanctions against Iranian oil, Pickens said in an interview on “The Kudlow Report.” “It’s tight now. That’s why you have Brent North Sea $126 and you’ve got WTI at $105,” he said. “Global supply is tight. No, I don’t think they can can cover. If they do, they’ll cover it out of storage.” Asked by host Larry Kudlow how much U.S. consumers could see prices rise, Pickens issued a dire proclamation. “I don’t know how much is up. I think you can very well see the old high — $148,” he said. “I’m not saying WTI — our price here in the United States — will go up to $148. It’s been very stable around $100.” Pickens said the United States continued to enjoy some of the lowest energy costs in the world.“We have the cheapest oil by 20 percent, and we have the cheapest natural gas by 80 percent, and we have gasoline at $4, Europe at $9. So, I don’t understand why people are complaining,” he said.

Part 4: Inter-Regional Trade Movements of Petroleum to and from South America  - In Part 1, I introduced my abbreviations, data bases and analysis methods, and in Part 2, I presented the global trends. Part 3 presented the inter-regional trade movements to and from North America.   My main focus here is looking at the movements of petroleum between nine major global regions: In the past decade, North America and Africa, as petroleum import sources to South America, have increased, while the Middle East and Former Soviet Union as import sources have gone down substantially (Figure 9). Over the same period, North America as petroleum export destination for South America petroleum has gone down, while China, other Asia Pacific countries (except Japan), and Europe have gone up (Figure 10). If these trends were to continue, South America may one day become a net importer of petroleum from North America and a strong exporter to China and the other Asia Pacific countries (Figures 11 and 12). From a South American perspective, these trends might be seen as a desirable diversification of South American petroleum export destinations. From a North American perspective, this trend might be viewed as a redistribution of South America’s petroleum wealth away from North America, and towards China and other Asia Pacific countries.

Inter-Regional Trade Movements of Petroleum to and from Africa Part 5 - In Part 1, I introduced my abbreviations, data bases and analysis methods, Part 2 presented the global trends, Part 3 presented the inter-regional trade movements to and from North America and Part 4 presented inter-regional trade movements to and from South America. Up to now in the series, part 2 revealed that 2007 was the peak in the total global pool of petroleum involved in inter-regional trade movements (i.e., imports and exports between any of nine regions: North America (NA); South America (SA); Europe (EU); former Soviet Union (FS); Middle East (ME); Africa (AF); China (CH); Japan (JP); Asia-Pacific remainder (APr)). Now, as we proceed along to downside of a diminishing petroleum export pool, what are the trends suggesting how the remaining petroleum will get distributed between these nine regions? In part 3, we saw a trend for diminishing imports to North America, especially from South America, and the Middle East, with Africa and the Former Soviet Union picking some but not all of the slack. Exports, particularly petroleum products, from North America, especially to South America and Europe, is rising. In part 4, we saw that those diminishing South American exports to North America were essentially being diverted to China, the other Asia Pacific countries (but not Japan) and to Europe.

The Race for BTU - It’s important to put yourself in the minds of OECD policy makers. They are largely managing a retirement class that is moving out of the workforce and looking to draw upon its savings -- savings that are (mostly) in real estate, bonds, and equities. Given this demographic reality, growth in nominal terms is undoubtedly the new policy of the West. While a 'nominal GDP targeting' approach has been officially rejected (so far), don't believe it. Reflationary policy aimed at sustaining asset prices at high levels will continue to be the policy going forward.  While it’s unclear how long a post-credit bubble world can sustain such period of forced growth, what is perfectly clear is that oil is no longer available to fund such growth. For the seventh year since 2005, global oil production in 2011 failed to surpass 74 mbpd (million barrels per day) on an annual basis. But while the West is set to dote upon its retirement class for many years to come, the five billion people in the developing world are ready to undertake the next leg of their industrial growth. They are already using oil at the margin as their populations urbanize. But as the developing world comes on board as new users of petroleum, they still need growing resources of other energy to fund the new growth which now lies ahead of them. This unchangeable fact sets the world on an inexorable path: a competitive race for BTU.

Confusion at the Pumps  - It's Easter weekend and, if all goes as usual, motorists will be hopping mad during the holiday. Their frustration will boil over when the needle reaches the red zone and they pull into the nearest filling station: first at the pump, then at the cash register.  That's where they'll note with dismay that the oil companies never tire of playing the same old game in the run-up to Easter. As in previous years, gas prices soared in the days leading up to the Friday before Easter -- just when millions of Germans head off on vacation. Prices at German gas pumps oscillate wildly, sometimes changing several times a day. The rises and falls are far from random, however. Studies and market observers say it is an attempt by big oil to ratchet up the cost of a fill-up as high as possible.

A World without Oil - Companies Prepare for a Fossil-Free Future - A few cents more and a liter of super unleaded gasoline will cost German drivers €1.80 (around $9 a gallon). That means that someone driving a BMW 3 Series will have to pay over €110 ($150) to fill up the tank, with its 63 liter (17 gallon) capacity.  But Norbert Reithofer, the CEO of BMW, seems surprisingly relaxed for an executive whose company's products depend on gasoline and diesel. "One could see this as a threat," Reithofer says. But the auto executive actually views the rising price of fuel as "an opportunity." He is convinced that his company will in fact "derive a benefit from this."  The Munich-based automaker has invested billions of euros in fuel-saving technologies, such as efficient engines, brake energy recovery and ultra-lightweight carbon fiber car bodies. BMW is now considered a leader in the field, and the company's record sales in 2011 suggest that this is something its customers are willing to pay for. And that, Reithofer believes, is why the company will ultimately benefit from high prices at the pump.

Next Great Depression? MIT researchers predict ‘global economic collapse’ by 2030 - A renowned Australian research scientist says a study from researchers at MIT claiming the world could suffer from a "global economic collapse" and "precipitous population decline" if people continue to consume the world's resources at the current pace is still on track, nearly 40 years after it was first produced. The Smithsonian Magazine writes that Australian physicist Graham Turner says "the world is on track for disaster" and that current research from Turner coincides with a famous, and in some quarters, infamous, academic report from 1972 entitled, "The Limits to Growth." Turner's research is not affiliated with MIT or The Club for Rome. Produced for a group called The Club of Rome, the study's researchers created a computing model to forecast different scenarios based on the current models of population growth and global resource consumption. The study also took into account different levels of agricultural productivity, birth control and environmental protection efforts. Twelve million copies of the report were produced and distributed in 37 different languages.

Pictures: China's Rare-Earth Minerals Monopoly (National Geographic) - At mines like this one in Jiangxi Province, China produces 95 percent of the world's rare-earth minerals, a key resource for the future of energy.  With tongue-twisting names like dysprosium, yttrium, and neodymium, these 17 metals are found in products ranging from cell phones and computers to medical devices and jet engines. They play an important role in the coatings, magnets, and phosphors used in green technology, such as photovoltaic thin film panels, fluorescent lighting, wind turbines, and electric vehicles. On March 13, the United States, Japan, and European Union filed a World Trade Organization complaint against China for restricting exports of these minerals and driving up prices. As trade officials try to find a resolution, scientists around the world are searching for substitutes.

The Economist sees (and raises) Michael Pettis - The Free Exchange blog at The Economist has accepted my bet, and very cleverly (the bastards!) they have added a second one.  For two years I have been arguing that a Chinese rebalancing will require much slower GDP growth rates than we currently think possible and, working backwards from annual consumption growth rates of 7-8%, I have argued that this implies that China’s real GDP growth rate will average not much more than 3% annually over the rest of the decade. The key is how the transition takes place.  If there is a massive privatization program in which large amounts of wealth are transferred to the household sector, it will be possible for household consumption to grow much more quickly and so pull GDP growth behind it at higher rates than I assume.  But such a program of wealth transfer is, of course, not politically easy, and perhaps in recent events we have seen just how hard the debate over reform has become.  That is why I am not optimistic. When I first proposed that annual average growth rates would probably not exceed 3%, the consensus for Chinese growth among local academic economists over this period was 8-9%.  Since then the consensus seems to have dropped to 5-7%, and especially in the past few months I regularly hear private comments from Chinese academics expressing concern even about this growth range.  Yesterday I received a very worried email from a professor at Zhejiang University who was especially concerned that the inability of the reformers to combat what in China are referred to as the “vested interests” might result in two years of strained growth and burgeoning debt followed by a crisis. I am not as knowledgeable about the politics of the transition as he is likely to be, but his focus on the debt is, I think, spot on.

Chinese Premier Blasts Banks - Chinese Premier Wen Jiabao told a national audience on Tuesday that China's state-controlled banks are a "monopoly" that must be broken up... In an evening broadcast on state-run China National Radio, Mr. Wen told an audience of business leaders that China's tightly controlled banking system needs to change. "Let me be frank. Our banks earn profit too easily. Why? Because a small number of large banks have a monopoly," said Mr. Wen... "To break the monopoly, we must allow private capital to flow into the finance sector."  Mr. Wen's push is part of a broader set of issues over China's growth, and came on the same day that Beijing unveiled programs intended to support the development of the country's capital markets and to spread international use of the yuan. Among them, China's security regulator said it would more than triple the amount that foreigners would be allowed to invest in China's heavily restricted financial markets to $80 billion. Mr. Wen's remarks, in the export-oriented province of Fujian, are further indication that long-delayed economic reform is now at least a topic for public debate.

China Manufacturing PMI™ Decreases at Second-Fastest Rate in Three Years - The slowdown in China continues at an accelerating rate according to the HSBC China Manufacturing PMI™: March data showed manufacturing production falling for the fourth time in the past five months. Factory output was reduced largely in response to lacklustre demand from domestic and external markets. New orders fell at the fastest rate in 2012 so far, while new export business decreased for a second month in succession. Manufacturers reduced their employee numbers as a result, while purchasing activity was also down from one month earlier. There was little change on the price front, with factory gate charges falling modestly, and the rate of input cost inflation remaining somewhat subdued. Companies reported a renewed decline in manufacturing output during March, with the rate of contraction the steepest since November and the second-sharpest in three years. Behind the overall decrease in factory output was a further decline in total new business. Underlying demand weakness was broad-based across domestic and external markets, with new export business also falling moderately from one month earlier. Rates of decline in both cases were among the sharpest seen since the 08/09 financial crisis.

Fun with Trends - If current economic trends continue . . .

  • China’s economy will be 8 times as big as it is today by 2040.
  • China’s economy will surpass the size of the present global economy before 2050.
  • The US federal debt will double—from $14 trillion to $28 trillion—by 2022.
  • In 2072, the federal debt will amount to $896 trillion, or $1,629,091 for each American (assuming a US population then of 550 million).
  • By the end of the century, each American will “owe” over a billion dollars.
  • Thanks to the doubling of US households living on less than $2 per person per day between 1996 and 2011, in 150 years there will be about 1.5 billion Americans living on practically no income.
  • The number of billionaires in the world (having grown from 793 to 1210 in just two years, from 2009 to 2011) will equal the world population in only 70 years. (Given the previous trend, this is especially gratifying news: since the rate of growth in the number of billionaires in the world exceeds the rate of growth in extreme poverty in the US, this means each American will become a billionaire before his or her grandchildren plunge into desperate poverty).

China Sees U.S. as Competitor and Declining Power, Insider Says — The senior leadership of the Chinese government increasingly views the competition between the United States and China as a zero-sum game, with China the likely long-range winner if the American economy and domestic political system continue to stumble, according to an influential Chinese policy analyst.  China views the United States as a declining power, but at the same time believes that Washington is trying to fight back to undermine, and even disrupt, the economic and military growth that point to China’s becoming the world’s most powerful country, according to the analyst, Wang Jisi, the co-author of “Addressing U.S.-China Strategic Distrust,” a monograph published this week by the Brookings Institution in Washington and the Center for International and Strategic Studies at Peking University.  Mr. Wang, who has an insider’s view of Chinese foreign policy from his positions on advisory boards of the Chinese Communist Party and the Ministry of Foreign Affairs, contributed an assessment of Chinese policy toward the United States. Kenneth Lieberthal, the director of the John L. Thornton China Center at Brookings, and a former member of the National Security Council under President Bill Clinton, wrote the appraisal of Washington’s attitude toward China.

The United States as #2 - Dean Baker - Politicians in the United States must ritualistically assert that the US is and always will be the world's leading economic, military and political power. This chant may help win elections in a country where respectable people deny global warming and evolution, but it has nothing to do with the real world. Those familiar with the data know that China is rapidly gaining on the US as the world's leading economic power. According to data from the International Monetary Fund (IMF), China's economy is currently about 80 per cent of the size of the US economy. It is projected to pass the US by 2016.  However, there is a considerable degree of uncertainty about these numbers. It is difficult to accurately compare the output of countries with very different economies. By many measures China is already well ahead of the US.  It passed the US as the world's biggest car market in 2009. In most categories of industrial production it is far ahead of the United States and it is a far bigger exporter of goods and services. The number of people graduating college each year with degrees in science and engineering far exceeds the number in the US. And China has nearly twice as many cell phone and internet users as the US. A new study that carefully examined China's prices and consumption patterns concluded that it is far wealthier than the widely used data indicate. According to this study, China's economy may already be as much as 20 per cent larger than the US economy. Furthermore, even if its growth rate slows to the 7.0 per cent annual rate that many now expect, China's economy may be close to twice the size of the US economy in the span of a decade.

Taiwan sets sight on becoming yuan hub: - As China works full-speed toward expanding the role of its currency in the world, Taiwan's New Taiwan dollar (NTD) still cannot be directly converted into its counterpart from across the Taiwan Strait and vice versa. But if Beijing and Taipei sign a currency clearing agreement, and Taiwanese financial regulators further slacken the reins on domestic lenders, the island is widely believed to have what it takes to become an international offshore trading hub for the yuan. Beijing's need to safeguard Hong Kong's status as an international hub in the region seems to be the last remaining obstacle. Much ink has been spilled over the notion that the yuan is now destined to topple the US dollar as the world's foreign reserve currency. The Middle Kingdom's until recent high trade surplus, rising global market share in most, if not all, export categories, as well as seemingly guaranteed yuan appreciation are cited as key factors. The BRICS countries - Brazil, Russia, India, China and South Africa - at their late March summit called for establishment of a development bank, also agreeing to extend loans in local currencies, with analysts saying that the use of yuan is most likely.

The Arguments Against Free Trade - One of the main arguments against free trade is that, when trade introduces lower cost international competitors, it puts domestic producers out of business. While this argument isn't technically incorrect, it is short sighted. When looking at the free trade issue more broadly, on the other hand, it becomes clear that there are two other important considerations. First, the loss of domestic jobs is coupled with reductions in prices of goods that consumers buy, and these benefits shouldn't be ignored when weighing the tradeoffs involved in protecting domestic production versus free trade. Second, free trade not only reduces jobs in some industries, but it also creates jobs in other industries. This dynamic occurs both because there are usually industries where the domestic producers end up being exporters (which increases employment) and because the increased income held by foreigners who benefited from free trade is at least partly used to buy domestic goods, which also increases employment.  Another common argument against free trade is that it is risky to depend on potentially hostile countries for vital goods and services. Under this argument, certain industries should be protected in the interests of national security. While this argument is also not technically incorrect, it is often applied much more broadly than it should be in order to preserve the interests of producers and special interests at the expense of consumers.

"Monetary policy is just one damn interest rate after another" - No it isn't. Americans might be forgiven for thinking that monetary policy is just one damn interest rate after another, because nobody understands what the Fed is trying to do at any longer horizon. Canadians have less of an excuse. We know what the Bank of Canada is trying to do, because it tells us. Like many other modern central banks, the Bank of Canada targets inflation. The Bank of Canada does not have an interest rate target, except for temporary 6 week periods between Fixed Announcement Dates (and even then, it will change the interest rate target between FADs if it really needs to). It targets 2% CPI inflation. The Bank of Canada's interest rate "target" is an endogenous variable, that can only be understood as determined by the 2% inflation target plus what is happening in the rest of the economy. The Canadian money supply can also only be understood as determined by the 2% inflation target plus what is happening in the rest of the economy.

The Real Inequality Gap: Rural Poverty - As attention in comparatively rich countries continues to focus on the problem of growing inequality – the so-called 1% versus the 99% debate – it is easy to forget the most important equity problem facing the world today.  This is the continuing problem of rural poverty in developing countries, and especially the tendency of the very poor in these countries to be concentrated in the most ecologically fragile, remote and marginal rural areas.  At the recent  Mount Holyoke Conference “Development in Crisis: Changing the Rules in a Global World”, I referred to this problem as the key challenge facing environmental sustainability and poverty eradication in the developing world. We are not talking small numbers here.  Since 1950, the estimated population in developing economies on “fragile lands” has doubled.  These fragile environments are prone to land degradation, and consist of upland areas, forest systems and drylands that suffer from low agricultural productivity, and areas that present significant constraints for intensive agriculture. Today, nearly 1.3 billion people – almost a fifth of the world’s population – live in such areas in low and middle income economies.  Almost half of the people in these fragile environments (631 million) consist of the rural poor, who throughout the developing world outnumber the poor living on favored lands by 2 to 1.

BRICs Bank To Rival World Bank And IMF And Challenge Dollar Dominance - Outgoing President of the World Bank, Robert Zoellick, after just three days ago dismissing the idea of a BRICs created, new global multi lateral bank, has come around and endorsed a BRICs bank in an interview with the FT. Zoellick had initially said that a BRICs bank and potential rival to the western and U.S. dominated IMF and World Bank, would be difficult to implement given competing BRIC interests. He acknowledged that a BRICs bank was being created and said that the World Bank supported such a bank. He said that not having Russia and China as part of "the World Bank system" would be a “mistake of historic proportions”. Leaders of the BRICS nations meeting in India appear to have made much progress in creating a new global bank as the emerging economies seek to convert their growing economic might into collective diplomatic influence. The five countries now account for nearly 28% of the global economy, a figure that is expected to continue to grow.

Obama’s Blunder at the Bank - – The selection of a successor to Robert Zoellick as President of the World Bank was supposed to initiate a new era of open meritocratic competition, breaking the traditional hold that the United States has had on the job. But US President Barack Obama has let the world down even more distressingly with his nomination of Jim Yong Kim for the post. To begin with, it should have been clear that a most remarkable candidate – Ngozi Okonjo-Iweala – was already at hand. She had impressive credentials: degrees in economics from Harvard and MIT, experience working on a wide variety of development issues as a managing director of the World Bank, and stints as Finance Minister and Foreign Minister of Nigeria. (She also possesses and has amply demonstrated that rarest of qualities: a willingness to fight corruption at the expense of her job.) Moreover, Okonjo-Iweala is witty, articulate, and no wimp when it comes to taking on shoddy arguments. She is a dream candidate to lead the World Bank. What, then, does Obama’s choice tell us about the sincerity of his feminist rhetoric? Does he draw the line wherever it suits him? In fact, if Obama and his advisers could not stomach Okonjo-Iweala on the ground that she is not American, surely they could have nominated an American woman who was also vastly superior to Kim for the job.

What Should the World Bank Do? - Jose Antonio Ocampo - I have been honored by World Bank directors representing developing countries and Russia to be selected as one of two developing-country candidates to become the Bank’s next president. So I want to make known to the global community the principles that will guide my actions if I am elected – principles based on lessons learned from development experience. That experience has taught me that successful development is always the result of a judicious mix of market, state, and society. Trying to suppress markets leads to gross inefficiencies and loss of dynamism. Trying to do without the state leads to unstable and/or inequitable outcomes. And trying to ignore social actors that play an essential role at the national and local levels precludes the popular legitimacy that successful policymaking requires. Indeed, the specific mix of markets, state, and society should be the subject of national decisions adopted by representative authorities. This means that it is not the role of any international institution to impose a particular model of development on any country – a mistake that the World Bank made in the past, and that it has been working to correct. Because no “one-size-fits-all” strategy exists, the Bank must include among its staff the global diversity of approaches to development issues.

Why Ngozi Okonjo-Iweala Wants to Run the World Bank - Two candidates from emerging-market countries have been put forward for the presidency of the World Bank, along with the Obama administration’s nominee, setting up the first contested election in the history of the development institution, which is based in Washington. The American contender,  Jim Yong Kim, a global health expert and the president of Dartmouth College, is considered the favorite. On Monday, I posted excerpts from a conversation with one of the challengers, José Antonio Ocampo, a former Colombian finance minister. I also spoke with Ngozi Okonjo-Iweala, Nigeria’s finance minister, who has won the endorsement of Nigeria, Angola, South Africa, the African Union, The Financial Times and The Economist. From 2007 to 2011, Ms. Okonjo-Iweala was a managing director of the World Bank, working directly under its current president, Robert B. Zoellick. Earlier, she held a number of leadership positions in the Nigerian government. She has a doctorate in regional economic development from the Massachusetts Institute of Technology. Here are highlights from our conversation, condensed and edited.

Whose World Bank? - Joseph E. Stiglitz - Both Okonjo-Iweala and Ocampo understand the role of international financial institutions in providing global public goods. Throughout their careers, their hearts and minds have been devoted to development, and to fulfilling the World Bank’s mission of eliminating poverty. They have set a high bar for any American candidate. Much is at stake. Almost two billion people remain in poverty in the developing world, and, while the World Bank cannot solve the problem on its own, it plays a leading role. Despite its name, the Bank is primarily an international development institution. Kim’s specialty, public health, is critical, and the Bank has long supported innovative initiatives in this field. But health is only a small part of the Bank’s “portfolio,” and it typically works in this area with partners who bring to the table expertise in medicine. Rumors suggest that the US is likely to insist on maintaining the perverse selection process in which it gets to pick the World Bank’s president, simply because, in this election year, Obama’s opponents would trumpet loss of control over the choice as a sign of weakness. And it is more important for the US to retain that control than it is for emerging and developing countries to obtain it.

Russia’s External Debt Rises 3.7% in Q1 to $565 Bln - Russia’s foreign debt - calculated by international methodology that includes the corporate sector’s external liabilities - grew by 3.7 percent year on year in January-March 2012, to an estimated $565.25 billion, the Central Bank reported on Wednesday. The Russian government's foreign debt grew by 4.7 percent in the first quarter of 2012 to $34.76 billion while the foreign liabilities of Russia’s monetary authorities fell by 2.3 percent to $11.47 billion as of April 1, 2012. The external liabilities of Russia’s non-financial sector grew by 4.9 percent in January-March 2012 to $354.56 billion while the foreign debt of Russian banks to non-residents grew by 0.96 percent to $164.45 billion. Russia placed $7 billion worth of sovereign Eurobonds in late March 2012, which were not taken into account in the Central Bank’s statistics as their technical placement is scheduled for April 4.

'Even a 1-Trillion Euro Firewall Wouldn't Be Enough' - European finance ministers meeting in Copenhagen on Friday agreed to boost the euro-zone firewall to over 800 billion euros. The move marks another U-turn on the part of the Merkel administration, which recently dropped its opposition to increasing the fund. German commentators warn that even the new firewall may still be too small. German Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble, have been accused of crossing many of the "red lines" that they have set for themselves over the course of the euro crisis, making U-turn after U-turn as the crisis escalated. They officially stepped over the latest red line on Friday, when European Union finance ministers meeting in Copenhagen agreed to boost the scope of the euro zone's firewall to over €800 billion ($1 trillion). Berlin had long rejected such an expansion out of hand. On Thursday evening, in the run-up to Friday's summit, German Finance Minister Wolfgang Schäuble had said that the €800 billion capacity was "convincing" and "sufficient."  But not everyone shares his view that the sum is enough. On Thursday, French Finance Minister François Baroin called for the permanent euro bailout fund to be increased to €1 trillion, to shore up market confidence and prevent contagion in the euro crisis. "The firewall, it's a little like the nuclear option in military planning, it's there for dissuasion, not to be used,"

Spiegel Says "Even a 1-Trillion Euro Firewall Wouldn't Be Enough"; Mish Says "The Bigger the Bazooka, the More Money Will be Lost" - Eurozone bureaucrats keep upping the ante as to how big a "firewall" is needed. And at every critical juncture, German Chancellor Angela Merkel has proven she is nothing but a liar. With every demand for additional firepower, comes an inevitable cave-in from Merkel supporting the move, no matter what she says in advance. Meanwhile, the entire idea that firewalls can accomplish anything is ludicrous, given the key point that no currency unions in the absence of fiscal unions cannot and will not work. I suspect Merkel understands this, merely wanting to get Germany so deep into bailouts step by step, that it will be reluctant to leave the Eurozone.  It is high time the German Supreme court step in and stop this nonsense. However, nothing can stop Greece, Portugal, and Spain from leaving, and eventually they will. In the meantime, rest assured that every increase in firepower will be additional money of German citizens' pockets. The end-game will be a currency or banking crisis at the worst possible time.

Lagarde Warns Against Policymaker Complacency - International Monetary Fund chief Christine Lagarde Tuesday said Europe’s decision to boost its debt-crisis bailout funds should pave the way for a bigger IMF war chest, but warned against policymaker complacency that could upset a fragile global recovery. “Now that the Europeans have moved first with their firewall, the time has come to increase our firepower,” IMF Managing Director Lagarde said in prepared remarks to an Associated Press annual meeting of journalists. She later said that she had received “promising” expressions of willingness from several countries to contribute more cash to the IMF. “Now it’s a question of…the [IMF] membership deciding how much it wants to participate in the firewall,” she said. European leaders last week vowed to expand the size of their emergency funds, a move that countries such as China, Japan, Brazil and Saudi Arabia said was necessary before they lend the IMF more cash for its coffers. Lagarde is seeking to boost the fund’s lending capacity by around $500 billion to help build a larger defense against the risk of Europe’s debt crisis spiraling out of control. The IMF currently has less than $370 billion in lending reserves. “We can provide a circle of protection against global turbulence,” she said.

In Rich Europe, Growing Ranks of Working Poor - Europe’s long-running euro crisis may be cooling. But the economic distress it has left in its wake is pushing a rising tide of workers into precarious straits in France and across the European Union. Today, hundreds of thousands of people are living in campgrounds, vehicles and cheap hotel rooms. Millions more are sharing space with relatives, unable to afford the basic costs of living.  These people are the extreme edge of Europe’s working poor: a growing slice of the population that is slipping through Europe’s long-vaunted social safety net. Many, particularly the young, are trapped in low-paying or temporary jobs that are replacing permanent ones destroyed in Europe’s economic downturn.  Now, economists, European officials and social watchdog groups are warning that the situation is set to worsen. As European governments respond to the crisis by pushing for deep spending cuts to close budget gaps and greater flexibility in their work forces, “the population of working poor will explode,” To most Europeans, and especially the French, it seems this should not be happening. With generous minimum wage laws and the world’s strongest welfare systems, Europeans are accustomed to thinking they are more protected from a phenomenon they associate with the United States and other laissez-faire economies.

Ratings Disaster - Krugman - Jonathan Portes has a righteous rant about Eurocrats talking to the wrong people — namely, rating agencies: These agencies have repeatedly been proved wrong; they have flawed and frequently conflicted business models; and their ratings have no predictive power. All this is well established. Moreover, when it comes to assessing sovereign debt “credit risk” they – and I mean this quite literally – do not know what they are talking about. By that, I mean they quite simply don’t understand what they themselves are saying. And he directs us to a blog post making that case very effectively. Obviously I share that view. We saw very dramatically what the rating agencies are worth when S&P downgraded America — nothing. Bond yields actually fell. The point is that while maybe, maybe, S&P or Moody’s or Fitch know something about corporate debt, they know less than any competent macroeconomist about sovereign debt. In other news, great results from European austerity:

Greek Foreign-Bond Restructuring Rejected in Talks Last Week -- Investors in Greek bonds issued under foreign law rejected the nation's attempts to restructure the debt at talks last week. In 20 out of 36 meetings, bondholders either turned down the government's proposal, adjourned the talks or failed to achieve a quorum, according to a press release today from the Greek Public Debt Management Office. The meetings involved holders of about $26.8 billion of foreign-law notes denominated in dollars, euros, Swiss francs and yen. Investors owning $15.3 billion of securities agreed to a restructuring, leaving $11.5 billion still to be dealt with. "The key thing with the international bonds is that holders have to vote bond-by-bond rather than in aggregate," "That makes it easier for investors to block the restructuring and raises the question of what Greece can do now." Greece is trying to re-organize the rest of its debt after carrying out the biggest sovereign restructuring in history last month. The government is insisting there's no money to fully pay holders of bonds issued under international law, after it forced investors in 197 billion euros ($263 billion) of domestic-law securities to accept losses of about 70 percent.

Greece Set To Default On Foreign-Law Bonds On May 15  - Back in January, when we wrote "Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World", we said that "because while the bulk of the bonds, or what is now becoming obvious is the junior class, can be impaired with impunity (pardon the pun), it is the UK-law, or the non-domestic indenture, bonds, which are the de facto fulcrum security. And since the notional outstanding here is tiny, it is quite easy to build up a blocking stake in the bonds and to obtain full control of the process, especially since the ECB appears to have been building up its own stake in local-law bonds....As anyone who has ever overseen or participated in a bankruptcy process, the biggest trump card one can attain is to build up a blocking stake in a fulcrum security (just ask Carl Icahn) . Because it does not matter who has a majority. What matters is who has 33% + 1 of the vote to block any consensual deal." In other words, from the very beginning the ball game was all about the non-Greek law bonds, whose indentures make it impossible for a non-make whole take out settlement.

European Unemployment Still Increasing - Eurostat has released data on the unemployment rate for February, and as the extracted graph above shows, the situation there continues to worsen at an unchecked pace and is now noticeably worse than at the height of the great recession. On a per-country basis, conditions in Spain and Greece continue to be spectacularly bad: As the release observes: In February 2012, the youth unemployment rate was 22.4% in the EU27 and 21.6% in  the euro area. In February 2011 it was 21.0% and 20.5% respectively. The lowest rates were observed in Germany (8.2%), Austria (8.3%) and the Netherlands (9.4%), and the highest in Spain (50.5%) and Greece (50.4% in December 2011). So more than half of Spanish and Greek under-25s are unemployed.  Those countries will have serious political stability risks as long as youth unemployment is that high.

Unemployment in Euro Zone Hit New High in February - Unemployment in the euro zone reached its highest level in almost 15 years in February, with more than 17 million people out of work, according to figures released Monday.  Joblessness in the 17-nation currency zone rose to 10.8 percent, up by 0.1 point from January, Eurostat said Monday.  “We expect it to go higher, to reach 11 percent by the end of the year,” said Raphael Brun-Aguerre, an economist at JPMorgan in London. “You have public sector job cuts, income going down, weak consumption. The economic growth outlook is negative and is going to worsen unemployment.”  February’s level — last reached in June 1997 — marked the 10th straight monthly rise and contrasts sharply with the United States, where the economy has been adding jobs since late last year. In the European Union as a whole, Eurostat said, unemployment stood at 10.2 percent of the working population, or some 24.5 million people, rising from 10.1 percent in January

Europe Unemployment Hits Record 10.8%  — The number of people looking for work in the 17 countries that use the euro hit its highest level since the currency was introduced back in 1999, official figures showed Monday, adding to fears that the region is in recession. Eurostat, the European Union’s statistics office, said unemployment in the eurozone rose to 10.8 percent in February from 10.7 percent the previous month. The number of unemployed totaled 17.1 million, nearly 1.5 million higher than the same month a year ago. Of the 17 countries in the eurozone, seven countries had unemployment rates of above 10 per cent. The figures stand in marked contrast to the U.S. — with an unemployment rate of 8.3 percent — which has recorded solid increases in the number of people finding work over the past few months. The eighth straight month of rising unemployment will likely reinforce concerns that the eurozone is in recession just as many countries pursue austerity measures to get a handle on their crippling debt loads.Spain, whose government announced another raft of austerity measures last Friday, had the highest unemployment rate in the eurozone of 23.6 percent, with youth unemployment — those under 25 years of age — standing at 50.5 percent. The lowest rate among the euro countries was Austria’s 4.2 percent. Greece, Portugal and Ireland — the three countries that have already received a debt bailout — had unemployment rates of 21 percent, 15 percent and 14.7 percent respectively.

Unemployment in Europe goes parabolic - European unemployment figures continue to look nasty. Charts are exploding to the upside, as unemployment hits 15 year highs. The skyrocketing unemployment, and the fact that the fertility rates are insufficient, are two facts the Bazooka and the LTRO (not even with the LTRO spent on bullfights) can’t take care of. Europe’s most important charts below.

Euro-Region Unemployment Surges to 14-Year High, Nears Record - Euro-region unemployment rose to the highest in more than 14 years and manufacturing contracted for an eighth month, adding to signs the economy probably slipped into a recession in the first quarter. The jobless rate in the 17-nation euro area rose to 10.8 percent in February from 10.7 percent a month earlier, the European Union’s statistics office in Luxembourg said today. That’s the highest since June 1997 and close to the record of 10.9 percent. A manufacturing gauge, based on a survey of purchasing managers, fell to 47.7 in March from 49, Markit Economics said. “Unemployment is lagging economic developments and the situation on the labor market will likely remain difficult through 2012,” Europe’s economy has been mired in a fiscal crisis for more than two years, forcing companies to cut jobs and pushing economies from Spain to Ireland into recessions. While leaders awarded Greece a second aid package last month to help restore confidence, economic sentiment unexpectedly dropped in March. The European Commission forecasts the euro-area economy to shrink 0.3 percent this year.

Italy’s Jobless Rate Increases to Highest Since 2001 --Italy’s jobless rate rose to the highest in more than a decade in February as austerity measures meant to fight the debt crisis helped push the euro area’s third-largest economy into a recession. Unemployment increased to 9.3 percent in February, the highest since the first quarter of 2001, from a revised 9.1 percent in January, Rome-based national statistics institute Istat said in a preliminary report today. The jobless rate matched the median forecasts of six economists surveyed by Bloomberg News. Prime Minister Mario Monti is implementing a 20 billion- euro ($26.7 billion) package of spending cuts and tax increases to eliminate the budget deficit next year and trim the nation’s 1.9 trillion-euro debt. Those measures are weighing on growth, with the European Commission forecasting on Feb. 23 that the Italian economy will contract 1.3 percent this year. Euro-region unemployment rose to 10.8 percent in February the highest in more than 14 years, the European Union’s statistics office n a separate report today. 

Italian province offering €15 billion for financial sovereignty - Italy's prosperous German-speaking South Tyrol autonomous province looks to buy its financial independence from crisis-torn Rome.  ­In these painful times of severe cuts and austerity, the northern region with a population of half-a-million people stands as a safe haven amidst the storm. South Tyrol was occupied by Italy at the end of the First World War and annexed in 1919. After WW2 the Allies decided that the province would remain a part of Italy, but would be granted an important level of self-governance. The province enjoys the status of wide autonomy. Up to 90 per cent of tax revenue stays in the region, while the other 10 per cent go to Rome. But with the economic crisis taking hold over the country, every last euro seems to awaken nationalist feelings. And this is a situation the politicians are all too ready to take advantage of. Many in the region’s capital Bolzano claim their native town has never been Italian.

German Manufacturing PMI Back in Contraction, New Orders Plunge, Price Inflation Up - As expected (by me anyway), the Markit/BME Germany Manufacturing PMI® shows Germany is back in contraction. Weaker new order intakes lead to deteriorating manufacturing business conditions in March. Key Points:

  • Output growth slows to only marginal pace
  • Sharpest fall in new work for three months
  • Cost inflation highest since July 2011

Summary:The seasonally adjusted Markit/BME Germany Purchasing Managers’ Index® (PMI®) dipped back below the neutral 50.0 mark in March, thereby ending two months of marginal improvement. At 48.4, down from 50.2 in February, the index pointed to a moderate deterioration in overall operating conditions, and was the lowest since December 2011. Moreover, March’s PMI reading was six index points lower than the average for 2011 (54.8). The output and new orders components of the headline index have both moderated substantially since their highs at the beginning of last year. By sector, investment goods producers have seen the biggest slowdown compared with the rates of growth registered in early 2011. Given the complete collapse in the periphery, German manufacturing will eventually plunge hard.

Spectre of 1930s haunts Europe’s periphery - At last, it seems springtime has come to the eurozone: the sap is rising in financial markets, sovereign bond yields are subsiding and the tensions in the banking markets are easing, thanks to the mass injection of liquidity by the European Central Bank.  But Richard Koo, Nomura’s mild-mannered chief economist, begs to differ. He argues that Europe’s leaders have misdiagnosed their economic crisis and is forecasting a return to wintry conditions.  At a time of collapsing private sector demand in several member states, the eurozone’s obsession with slashing public spending will only aggravate its problems, he suggests. Its fiscal compact is more likely to kill the patient than cure it. For years, Mr Koo has eloquently defended the largely unfashionable view that Japan pursued the right policies to deal with the bursting of its bubble economy. True, Japan may not have grown much over the past two decades but a far worse outcome was avoided: the country skirted a 1930s-style depression that, Mr Koo believes, now threatens the peripheral members of the eurozone.

Dublin faces revolt over household charge - Almost half of Irish households have failed to meet a deadline to pay a new tax, raising fears that growing public opposition to austerity could undermine Dublin’s ability to implement further reforms. Just 805,500 of Ireland’s 1.6m households registered to pay the €100 household charge by midnight on Saturday in the face of a protest campaign urging a boycott of the tax. Several hundred thousand people face fines and could be taken to court if they refuse to pay. Ireland has earned praise as the “posterboy for austerity” for implementing €24bn in tax rises and spending cuts without undermining social cohesion during a four-year financial crisis. But as its export-led recovery stalls, opposition to the tax is raising questions about Dublin’s ability to implement a further €9bn in promised austerity measures over the next four years. “The danger is that the moral authority of the government to bring in new taxes is being weakened by the boycott and its legitimacy is under attack,”

Spain Record Home Price Drop Seen With Bank Pressure: Mortgages -- Spanish home prices are poised to fall the most on record this year, leaving one in four homeowners owing more than their properties are worth, as the government forces banks to sell real-estate holdings. Home prices will decline 12 percent to 14 percent, according to research and advisory company R.R. de Acuna & Asociados, after Economy Minister Luis de Guindos in February gave lenders two years to make 50 billion euros ($67 billion) of additional provisions and capital charges for losses linked to real estate. That's the most since the National Statistics Institute started tracking values in 2007. Standard & Poor's forecasts borrowers with negative equity may rise to 25 percent this year from 8 percent in 2010, based on an analysis of 800,000 mortgages. "There will be more serious price drops this year because of the government decree,"

Pain in Spain: It’s back - “SPAIN is facing an economic situation of extreme difficulty, I repeat, of extreme difficulty, and anyone who doesn’t understand that is fooling themselves.” Thus Mariano Rajoy, Spain’s prime minister, as he tried to shore up support today for an austerity budget presented last week. Mr Rajoy has plenty of evidence to rally the faint-hearted. A bond auction today raised €2.6 billion ($3.4 billion), well below the €3.5 billion maximum target. The average yield on the five-year bonds auctioned this morning rose by almost a full percentage point compared with the previous auction at the start of March. That led other euro-zone sovereign debt downward, too. Spain’s predicament also came up during today’s press conference with Mario Draghi, the president of the European Central Bank, after the ECB agreed to hold interest rates at 1% for another month. Asked what to read into rising Spanish and Italian yields, Mr Draghi said that the issue was less “a symptom of market uneasiness but rather market attention upon fundamentals”. Rough translation: get on with sorting out the public finances.

Spain's Debt to Rise to Record 79.8%; Bond Sales to Decline -- Spain's public debt will rise to a record this year as it sells almost 37 billion euros ($49 billion) of bonds to finance a budget deficit that was more than twice the euro-region limit last year. Total borrowing will reach 79.8 percent of gross domestic product after the country breached the European Union's deficit rules for a fifth year. That's the highest since before the country's return to democracy in 1978 and up from 68.5 percent last year, according to the 2012 budget that the government presented to Parliament today in Madrid. Net debt issuance will fall from 48.2 billion euros last year as the government trims its budget deficit to 5.3 percent of GDP from 8.5 percent last year, the plan says. Lawmakers began reviewing Prime Minister Mariano Rajoy's blueprint, which contains the deepest reductions in more than 30 years. The budget may fail to meet its goal of cutting the deficit by more than a third as its 27 billion euros of spending cuts and tax increases will worsen Spain's second recession since 2009, economists including Barclays Capital Antonio Garcia Pascual forecast.

Spanish unemployment hits record high, adds to deficit woes - The number of workers registered as without work climbed by 0.82 percent from the previous month to reach 4.75 million, the highest figure since the current statistical series began in 1996, the labour ministry said. The rise -- the eighth monthly increase in registered unemployed -- comes as Spain heads back into recession with the economy expected by the government to contract by 1.7 percent this year after expanding 0.7 percent in 2011. It makes it harder for the government to meet its goal of bringing the public deficit down to 5.3 percent of output this year and to within a EU-limit of 3.0 percent next year as it causes spending on jobless benefits to rise. The latest unemployment figures were released on the same day that Budget Minister Cristobal Montoro presented his government's 2012 budget to lawmakers. The budget -- approved by the cabinet on Friday -- raised various taxes and froze wages of public sector employees, but spared jobless benefits and pensions amid growing public anger at the dire economic situation.

Spain warns of soaring debt - Spain says its national debt will spiral sharply higher this year as data showed unemployment hit a record high in March, complicating efforts to stabilise the country's strained finances. Budget Minister Cristobal Montoro said borrowings of 186.1 billion euros ($A239 billion) this year will take the debt-to-GDP ratio to 79.8 per cent from 68.5 per cent in 2011, well above the EU 60 per cent limit. "Spain is a critical situation. That is what we're trying to address," he told a news conference after delivering the conservative government's cost-cutting budget for 2012 to parliament. The country's public debt ratio will still be below the average 90.4 per cent of Gross Domestic Product expected for the entire 17-nation eurozone, he added. But it has grown without interruption since the first quarter of 2008 when, after nearly a decade of fast growth and budget surpluses, the national accumulated debt amounted to just 35.8 per cent of GDP. Adding to the strain on public finances, the number of people out of work rose for the eighth straight month in March as Spain headed back to recession with the economy expected to shrink 1.7 per cent this year after expanding 0.7 per cent in 2011.

Spanish Economic Drama: Nearly 57% of Budget Devoted to Pensions, Unemployment Benefits, and Interest; Unemployment Rate Hits 23.6%; Spain Warns of Soaring Debt - Inquiring minds keep poking around at problems in Spain and everywhere one looks problems are far greater than government officials would like you to believe. Please consider this Google Translation from the Guru'sBlog Spanish Economic Drama, Over Half Federal Budget Devoted to Pensions, Unemployment and Interest Today the Minister of Finance and Public Administration, Critobal Montoro, has submitted to Congress the 2012 State Budget , and I am frightened by the huge numbers that are involved in pensions, unemployment and interest.  37.1% of total state budget will be allocated to pension payments, 9.2 % for unemployment benefits , while another 10.5% will go to interest payments (28.848 million euros, equivalent to 2.7% of GDP.In all, these three items account for 56.8% of total State Budget 2012. The AP reports Spain Warns of Soaring Debt as Unemployment Rises Spain said Tuesday its national debt will spiral sharply higher this year as data showed unemployment hit a record high in March, complicating efforts to stabilise the country's strained finances. The number of workers registered as without work climbed 0.82 percent from February to 4.75 million, the highest figure since the current statistics series began in 1996, the labour ministry said.

Spain’s Severity is Not Sustainable - The pain in Spain continues with the government releasing the country’s latest budget which has been described by some Spanish economists as ‘the most severe since Franco’: Spain’s government has announced $36 billion in new budget cuts, as it attempts to reassure the European Union that it will not need a financial bailout. The budget savings will take the form of a freezing of civil servant wages, ministerial spending cuts and new corporate taxes, announced Soraya Saenz de Santamaria, the country’s deputy prime minister, on Friday. “The ministries will see an average reduction of 16.9 per cent … there will be adjustments of over 27 billion euros [$36 billion] through revenues and through spending,” she said, after she and her cabinet colleagues passed the draft budget at a meeting in Madrid. “This government will not raise value added tax but is calling for an extra effort within corporate taxes,” she said. Overall, government spending cuts will amount to $22.7 billion. The government has also decided to freeze civil servants’ salaries, but to maintain unemployment benefits and planned pension increases.

Rajoy Says Spain in ‘Extreme Difficulty’ as Bond Demand Drops - Prime Minister Mariano Rajoy said Spain’s situation is one of “extreme difficulty” and signaled that his budget cuts are less painful than a bailout would be, as demand for the nation’s debt slumped at an auction. “Spain is facing an economic situation of extreme difficulty, I repeat, of extreme difficulty, and anyone who doesn’t understand that is fooling themselves,” Rajoy told a meeting of his People’s Party today in the southern coastal city of Malaga.  Rajoy raised the threat of an international bailout for the second time this week as he sought to defend the deepest austerity moves in at least three decades. While “no one likes” the budget presented last week, he said “the alternative is infinitely worse.”

Spain’s Death Spiral and the Hypocrisy of the Euro - Anyone out there who thinks the euro zone debt crisis is over – and you know who you are – should take a good look at what’s going on in Spain. If Italy represented the biggest threat to the euro in 2011, then Spain will be the big story of 2012. Whatever numbers you look at, Spain is in a death spiral, a self-defeating circle of recession and austerity that is sending one of Europe’s most important members into an economic dark ages. Spain today represents all of the failings of the monetary union, from its misconceived inception to its misguided approach to the debt crisis. Here’s just a brief summary of the ugly statistics: (1) The government in Madrid expects the economy to shrink by 1.7% in 2012 – its third contraction in four years. (2) Unemployment continues to rise. It is now more than 23%, and youth unemployment is above a staggering 50%. (3) Housing prices are down 22% from their peak, and are likely to continue to drop, perhaps by 20% or more. This puts extreme pressure on the balance sheets of an already shaky banking sector.

Michael Hudson on Why There is an Alternative to European Austerity - Yves Smith - Bonnie Faulkner of Pacifica Radio’s Guns and Butter show broadcast the presentation by Stephanie Kelton and Michael Hudson on “There IS An Alternative To European Austerity: Modern Money Theory” . presented at the Italian MMT Summit last month. You can listen to the recording here, or read key parts of the transcript below. (c. 19:10): “We are all overwhelmed to see how many people are here. “Our message is very simple. And that is why it is threatening. From Margaret Thatcher to President Obama, you were told that there is no alternative. And we are here—and will spend the next two days—telling you that there is an alternative. And we will spell out what the alternative is. “What we are seeing now is a fight for what is going to be the rest of the 21st century by creating a new kind of class, a new class much like the invasions of Europe a thousand years ago. A thousand years ago, invaders from the north and from Italy would grab land and grab public utilities by military means. But today—ever since the United States went off gold in 1971—aggressors can no longer afford military war. So, what you have today is a new kind of a war. It’s a financial war. You can get by privatisation and financialisation what armies used to get by force of arms. This is not the class war that people spoke of a hundred years ago. It is a financial war. And it is a war that classical economists warned against. (c. 20:51) “300 years of classical political economy sought to get rid of landlords and bankers. A hundred years ago people spoke of technology. Nobody believed that the vested interests could fight back. But they did fight back in the way that parasites do in biological nature. I’ve read in the Italian newspapers—coming over on the airplane—that people talk about parasites. And people think about parasites, as taking the host’s energy and lifeblood. But, in biology, the smart parasites do something else: They take over the brain of the host. They make the brain think that the parasite is part of the body, to be protected.

Video: Shortlist on the Wolfson Economics Prize for eurozone contingency planning I got these videos from the Policy Exchange website highlighting the Wolfson Economics Prize.  The Wolfson Economics Prize, which challenges the world’s brightest economists to prepare a contingency plan for a break-up of the Eurozone, today (3rd April, 2012) unveiled a shortlist of five finalists. The shortlisted entries, though all very different from each other, provide valuable ideas about how best to manage a member state leaving the euro. The judges have given the finalists the opportunity to address key questions about their entry. Finalists will be given until the 29th of May to develop and resubmit their entries. Everyone who has progressed to this stage will be guaranteed a £10,000 share of the prize. The winner(s) of the Wolfson Economics Prize will be announced on the 5th of July. The finalist’s essays can be seen below.

The Euro Divorce - Arnab Das and Nouriel Roubini write today in the Financial Times a commentary suggesting that Euro members should get a divorce (they call it an "amicable divorce settlement"). The current policies will not work and the only solution is the break up of the Euro area to allow some of the economies in trouble get a boost from a depreciation of their (newly created) currencies. The argument is not new but the article provides a blueprint of how it should be done, which makes the reading more interesting but, of course, it also opens up their argument to more criticism. Let me summarize their proposal before I take my turn on bringing some arguments that suggest that this might not work as well as the authors suggest. Das and Roubini want:
1. Portugal, Ireland, Italy, Greece and Spain to abandon the Euro.
2. A system of fixed exchange rates (or managed exchange rates) to be introduced in the transition where the ECB will play a strong role defending the announced targets. This system will provide during the transition, the necessary adjustment to exchange rates.
3. After a transition, all central banks will implement congruent inflation targets to avoid competitive devaluations.
4. Contracts made under domestic laws will be renominated to the new currency. Contracts made under foreign law will remain in Euros. 
Although their arguments are good I remain unconvinced that this would be a good solution. I disagree with their assessment that a one-time shift in intra-Euro exchange rates would generate enough growth. And I have (like anyone else) some "cheap" criticisms about why there are still details that need to be worked out and that in its current form this proposal cannot work.

A Centerless Euro Cannot Hold - Kenneth Rogoff - With youth unemployment touching 50% in eurozone countries such as Spain and Greece, is a generation being sacrificed for the sake of a single currency that encompasses too diverse a group of countries to be sustainable? If so, does enlarging the euro’s membership really serve Europe’s apparent goal of maximizing economic integration without necessarily achieving full political union?  The good news is that economic research does have a few things to say about whether Europe should have a single currency. The bad news is that it has become increasingly clear that, at least for large countries, currency areas will be highly unstable unless they follow national borders. At a minimum, currency unions require a confederation with far more centralized power over taxation and other policies than European leaders envision for the eurozone.

Spanish, Italian Bonds Slump on Concern Debt Crisis Will Spread - Spanish and Italian bonds led losses among Europe’s higher-yielding government securities on speculation authorities will struggle to stop the region’s debt crisis from spreading. Spain’s 10-year bonds dropped for a third day after demand fell at a debt sale yesterday and an International Monetary Fund spokesman said the nation is facing “severe” challenges. Germany’s two- and five-year note yields dropped to records as investors sought the safest assets. The slide in Spanish securities pushed 10-year yields to the highest since the European Central Bank started providing three-year loans in December in its longer-term refinancing operations. “The LTRO bid has faded away, and that was evident from the auction results yesterday. The market is still positioning for event risk, and that has supported the move back to the safest assets.”

Spanish yields rise above pre-LTRO levels - Fears that Spain could reignite the euro-zone sovereign debt crisis were underlined Thursday, with yields on Spanish government bonds rising to levels not seen since the European Central Bank injected cheap liquidity into the region’s financial system. Yields on 10-year Spanish government bonds jumped 8 basis points to 5.74%, the highest level since early December. “This is not a healthy sign. It means that at this state confidence has not returned to Spain and that markets are still suspicious,” Further, the yield premium demanded by investors to hold 10-year Spanish government bonds over benchmark 10-year German government bonds rose 0.18 percentage points to 4.03 percentage points, according to electronic trading platform Tradeweb. This is the first time since late November the spread traded above four percentage points. On Wednesday, the yield rose as much as 24 basis points after the Spanish government saw borrowing costs rise amid lackluster demand in its first bond auction since the government unveiled its latest budget plan last week. The lackluster results showed markets are doubting Spain’s ability to cut its deficit target to 5.3% of gross domestic product this year,

EU bailout not on table for Spain, says Econ Min (Reuters) - A European bailout for Spain is not on the table and would be the worst possible outcome for the euro zone's fourth largest economy, Economy Minister Luis de Guindos said in an interview with state radio late on Thursday. "We have not asked for it, it's not on the table ... it would be the worst possible outcome, it would be the last resort. Spain cannot lose its autonomy with respect to economic policy," he said.

Over 20% of All Real Estate Loans in Spain are Delinquent; Construction Firm Delinquencies Ended 2011 at 17.65%; Late Payment on All Loans Ended 2011 at 7.61% - Some rather shocking delinquency numbers (to mainstream media readers but not readers of Mish) have surfaced in Spain.  Courtesy of Google Translate please consider The default property is multiplied by ten since 2008. Since the crisis began in 2008, the Spanish financial sector accounts have been seriously damaged by late payment of real estate companies, which rose from 1.98% in the first quarter of this year to 20.9% it closed 2011. According to recent data published by the Bank of Spain of 298,267 million euros to the Spanish financial institutions were granted at the end of last year to real estate companies were delinquent 62,266 million, a figure that grew by 4,789 million in one quarter. In fact, between July and September 2011, the delinquent real estate companies stood at 18.97%, as there were 57,577 million euros a portfolio outstanding of 303,506,000. As for the interannual evolution, real estate delinquencies rose seven basis points from 13.98% recorded in the last quarter of 2010 to 20.9% one year later, for a real estate loan portfolio totaled 315,782 million then , which fell in that period 17,605 million.

Europe Needs the Bond Vigilantes - Martin Feldstein - Spain's disappointing government-bond auction this week is a sign of things to come: If Europe's debt-bound governments won't get their fiscal houses in order, the bond vigilantes will descend, pressuring them to do so. Europe's heads of state, however, still seem to think the solution is greater political unity not individual fiscal discipline. Indeed, 25 euro-zone governments are now engaged in ratifying a "fiscal compact." Its stated purpose is to prevent a repeat of the explosive increase of sovereign debts that can still threaten the solvency of those nations.Sadly, there are so many weaknesses in the treaty that it will not be any more successful at preventing large budget deficits than the earlier Stability and Growth Pact that was quickly abandoned after its rules were violated by France and Germany. The rapid growth of European sovereign debt can be traced back to the adoption of the euro in 1999. That shift to a single currency caused a sharp drop in inflation in countries like Greece, Italy and Spain. The lower inflation rates caused interest rates on their bonds to fall sharply. Governments responded to lower interest rates by borrowing more to finance expansions of their social programs.

Portugal’s unemployment rate expected to have reached record level of 15 pct in February - The percentage of the active population in Portugal with no employment is expected to have reached a record level of 15 percent in February, according to figures published in Luxembourg by Eurostat, the statistics body of the European Union. Based on figures from the National Statistics Institute and the centres of Portugal’s Institute for Employment and Professional Training (IEFP), Eurostat said that February was the seventh consecutive month in which unemployment increased. Conditions in the job market have deteriorated over the last six months after a period of relative stability and the biggest “shock” happened in the final quarter of 2011, when INE announced a rise in the jobless rate from 12.6 percent to 14 percent. In the Euro Zone, unemployment is also on the rise with rare exceptions in central Europe, such as Germany, where unemployment seems to have stabilised at a historical low (between 5 percent and 6 percent) and where there are no financing problems.

Rehn says Portugal may need “bridge” – report - (Reuters) – European policymakers should be ready to provide more help to Portugal some time in the future, European Economic and Monetary Affairs Commissioner Olli Rehn said in a Finnish television interview shown on Wednesday. “From the European Union side, it would be wise to be prepared that some kind of bridge needs to be built when Portugal returns to the markets,” Rehn told television channel MTV3. It was not clear what help he believed was needed, and Rehn added that Portugal’s situation was different to that of Greece. Portugal received a bailout of 78 billion euros (64.73 billion pounds) from the EU and the International Monetary Fund last year after its borrowing costs on the markets rose to unsustainable levels.

EU Official: Portugal Could Do Ireland Style Bond Swap - Portugal could alleviate the pressure to repay a EUR10 billion bond redemption that falls due in September 2013 by carrying out a limited bond swap like Ireland did earlier in 2012, a European Union official said Tuesday.  It is the first time the European Commission hints at a debt reprofiling for Portugal. Weiss's comment comes right after the European Central Bank Vice President and Portuguese native Vitor Constancio openly mentioned the prospect of a second bailout for the country. In January Ireland successfully completed the swap of a bond worth EUR3.53 billion that matured in 2014 with one maturing a year later and agreed to pay a higher interest to finalize the transaction that would give it more time to make the payment. At the time, the Irish bond swap was seen as a market-friendly solution to ease resumption of market access. Weiss hinted that Portugal could struggle to convince the market of its creditworthiness in 2013, when the bailout runs out and the country is supposed to start borrowing in the free market again.

Crunch Time for Greece (Case for Bank Holiday and Eurozone Exit Now): Disbursements to Greece by the EFSF and IMF "Conditional on Compliance with Conditionality" - If the second half of the title to this post seems silly, it is because it is silly. However, "disbursements to Greece by the EFSF and the IMF will still be conditional on compliance with conditionality" is an exact quote from The Second Economic Adjustment Programme for Greece, March 2012 by the European Commission. I advise not attempting to read the document. It is a mere 195 PDF pages long. However, a tip of the hat to reader Brett who did manage to slog through the entire document to discover that gem on PDF page 55. Brett also discovered some rather interesting facts regarding Greece's inability to make needed bond rollovers.

Greece's debt-to-GDP to rise to 170% - Fitch - Greece needs to stay on course with structural and fiscal reforms to bring down debt in order to stay in the euro zone, Fitch Ratings said Tuesday, and stated that continued membership depends on the "effectiveness in laying the foundations for a sustained economic recovery." The ratings agency said in a report following an upgrade of Greece's sovereign ratings to 'B' from 'Restricted Default' in March that "PSI (private sector involvement) and OSI (official sector involvement) have given Greece a window of opportunity, but it will entail a challenging internal devaluation if the program is to succeed, with little prospect of substantive economic recovery before 2014." In March, Greece completed a debt restructuring deal with its private bondholders, which should shave off 110 billion euros ($146.7 billion) of the country's public debt stock. However, Greece will still see its public debt-to-gross-domestic-product ratio rise toward 170% in 2013, Fitch estimated, before falling in 2014.

Young Greeks hit hard by the financial crisis are fleeing from the cities to the countryside - News in from Athens, where our correspondent Helena Smith says newspapers and television channels this morning all reporting that young Greeks hit hard by the financial crisis are fleeing from the cities to the countryside.Some commentators are describing it as a mass exodus. Helena writes: It's official: Greece is undergoing a mass internal migration as a result of the economic crisis that has engulfed the nation since December 2009. After years of being spurned for the bright lights of big cities, rural areas are making a comeback as unprecedented numbers of unemployed young Greeks move en masse to the countryside encouraged by government stipends to cultivate tracts of land that have been left untended for years. A survey conducted at the behest of the Agricultural Development Ministry by the polling firm Kapa Research found that more than 1.5 million Greeks were considering relocating to rural areas with one in five already having made the move. Around 75 % were under the age of 44 – the group worst hit by joblessness in a nation where more are now out of work than employed.

Greek pensioner kills himself outside parliament (Reuters) - A cash-strapped Greek pensioner shot and killed himself outside parliament in Athens on Wednesday saying he refused to scrounge for food in the rubbish, touching a nerve among ordinary Greeks feeling the brunt of the country's economic crisis. The public suicide of the 77-year-old retired pharmacist quickly triggered an outpouring of sympathy in a country where one in five is jobless and a sense of national humiliation has accompanied successive rounds of salary and pension cuts. Just hours after the death, an impromptu shrine with candles, flowers and hand-written notes condemning the crisis sprung up in the central Syntagma square where the suicide occurred. Bystanders gathered to pay their respects. One note nailed to a tree said "Enough is enough", while another asked, "Who will be the next victim?" A few hundred indignant protesters, who staged mass protests in 2011 against austerity measures imposed by foreign lenders in return for bailout loans, marched into Syntagma square on Wednesday evening. By nightfall, the crowd huddled around the suicide site had swelled to a few thousand, with some chanting: "This was not suicide - it was murder committed by the state".

Suicide rate jumps amid European financial crisis - When an elderly Greek man killed himself on a busy Athens street Wednesday, he left a note blaming the nation's financial crisis. Tragic acts like this are increasing across Europe, as worsening economies are causing rising rates of suicide. Dimitris Christoulas shot himself while standing opposite Greece's parliament building. In a note he left, the 77-year-old retired pharmacist wrote, "[the] government has annihilated all traces for my survival, which was based on a very dignified pension that I alone paid for 35 years with no help from the state. And since my advanced age does not allow me a way of dynamically reacting (although if a fellow Greek were to grab a Kalashnikov, I would be right behind him), I see no other solution than this dignified end to my life, so I don't find myself fishing through garbage cans for my sustenance." Before the financial crisis first began, Greece had the lowest suicide rate in Europe at 2.8 per 100,000 inhabitants, according to Eurostat. That has now almost doubled and is rising at an alarming rate. A Greek Ministry of Health study found the suicide rate in the first half of 2011 was 40 percent higher than the year before.

Retiree's Suicide Triggers Riots in Greece — Riot police fired tear gas and flash grenades after protests attended by some 1,500 people turned violent, and youths hurled rocks and petrol bombs outside Parliament. Authorities reported no injuries or arrests.  The 77-year-old retired pharmacist drew a handgun and shot himself in the head near a subway exit on central Syntagma Square which was crowded with commuters, police said. The square, opposite Parliament, has become the focal point of frequent public protests against Greece's two-year austerity campaign. The incident, during morning rush hour, jolted public opinion and quickly entered political debate, with the prime minister and the heads of both parties backing Greece's governing coalition expressing sorrow.  "A pharmacist ought to be able to live comfortably on his pension," said Vassilis Papadopoulos, a spokesman for the "I won't pay" group. "So for him to reach the point of suicide out of economic hardship means a lot. It shows how the social fabric is unraveling."

Thoughts on the Suicide in Greece  - As most people are already aware, a 77-year old man in Greece blew his brains out in front of the Greek Parliament yesterday in protest of the government's current euro-centric policies. In terms of social unrest, this event was neither surprising nor very exceptional, compared to what has already happened and what will happen in the near future. I have never understood why people take their own lives to get across a sociopolitical message, and I imagine I never will. But that's exactly what Dimitris Christoulas did, and his message was heard loud and clear.  Analysts such as Pritchard (though he is certainly not alone) would like to draw a fine line between the atrocities of WWII and those that are occurring now. They back away from any and all implications that there is any malicious intent on the part of Euro-centric governments, politicians and officials. But, the results of these peoples' policies are so obviously destructive to the populations of Europe and beneficial to a small minority of corporate banking elites, that it becomes almost ridiculous to think that they don't know exactly whose bread they are buttering with their policy agendas.

Syntagma Square Suicide Note Ends With Call To Young Greek People To "Hang The Traitors" - Earlier today, we remarked on the story of a 77-year old Greek, now identified as Dimitris Christoulas, who at around 9 am took his life in the middle of Athens' central Syntagma Square with a bullet to his head. His full suicide note has been released. The note, presented below, ends in a solemn call to arms to "hang the traitors of this country."

Italy politician says Monti has suicides on conscience (Reuters) - An Italian man shot himself dead on Wednesday because his company was going bust, following a wave of economy-related suicides in the country which one opposition politician blamed on Prime Minister Mario Monti's reforms.The 59-year-old Rome-based construction firm owner left a note apologising to family members and explaining that his business had failed, police said. A day earlier, a 78-year-old woman in Sicily jumped to her death because her monthly pension payments had been reduced. On Monday, a picture frame maker hanged himself because of economic difficulties. And last week, two men set themselves on fire in northern Italy due to financial woes. Both survived, one with severe burns. Opposition politician Antonio Di Pietro, leader of the Italy of Values (IDV) party, criticised the government's reform agenda in parliament, and said Monti had the suicides of people who can't make it to the end of the month "on his conscience".

Italy minister rules out further austerity measures - (Reuters) - Italian Industry Minister Corrado Passera dismissed suggestions on Tuesday that the government may have to pass further budget cuts to meet its fiscal targets, saying the focus had to be on boosting economic growth. "You don't grow with austerity. On the contrary, we have to get horizontal and sectoral actions going to ensure that we get economic growth and jobs once we have our public finances in order," he told reporters in Rome. The Financial Times quoted a confidential European Commission report on Tuesday which suggested that Rome's deficit reduction targets could be at risk from recession and high interest rates and that further consolidation measures might be needed.

Irish Fiscal Panel:May Need More Cuts To Reach Target - Ireland's Fiscal Advisory Council Tuesday said a slower-than-expected growth outlook may oblige the Irish coalition government to bring in EUR400 million more in tax increases and spending cuts to meet a key 2012 budget deficit target required by its bailout lenders. Ireland is in its second year of a program with the European Union and the International Monetary Fund that needs the government to reduce a budget deficit of about 10% of gross domestic product in 2011 to 8.6% this year. To reach that target, the government announced EUR3.8 billion in austerity measures in December. But slower-than-expected economic growth may require an additional EUR400 million in adjustments for 2012, the fiscal council said.

Eurozone Composite PMI® Signals New Recession in Eurozone - Key Points for March:

  • Final Eurozone Composite Output Index: 49.1 (Flash 48.7, February 49.3)
  • Final Eurozone Services Business Activity Index: 49.2 (Flash 48.7, February 48.8)
  • France sees renewed decline, German growth
Latest PMI data provided further evidence of a mild contraction of the Eurozone private sector economy during March. The latest decline also meant that output fell over the first quarter as a whole, raising the likelihood that the economy has fallen back into technical recession.

BIG MISS: German Industrial Production Falls 1.3% - Europe can't seem to catch a break this week. German industrial production fell 1.3 percent in February. Economists were looking for a more modest decline of 0.5 percent. Germany, the largest and perhaps most financially healthy economy in Europe, continues to show that no one country in Europe can stand alone. Global markets remain in the red this morning.

Someday, the unraveling of these problems will be blamed on austerity …over the past ten years, France has lost competitiveness. In 2000 hourly labour costs in France were 8% lower than those in Germany, its main trading partner; today, they are 10% higher (see chart 2). French exports have stagnated while Germany’s have boomed. An employer today pays twice as much in social charges in France as he does in Germany. France’s unemployment rate is 10% next to 5.8% in Germany—and has not dipped below 7% for nearly 30 years. …How can the country justify its massive public administration—a millefeuille of communes, departments, regions and the central state—which employs 90 civil servants per 1,000 population, compared with 50 in Germany? How can France lighten the tax burden, including payroll social charges, so as to encourage entrepreneurship and job creation? Here is more.  Some of the French, by the way, blame the problem on insufficiently low tax rates.  Here is an article on Europe, France, and the working poor.  In the periphery, of course, the problems are more likely selective regulation, rent-seeking, lack of trust, and sclerotic privileges, rather than the level of expenditure per se, topped off with the unworkable (and ultimately fiscal) commitment to peg the value of their bank deposits in line with those of Germany.

ECB Rates Policy is Clogged in Key Periphery Markets - Rebecca Wilder - How the Euro area (EA) will grow, according to Mario Draghi: The outlook for economic activity should be supported by foreign demand, the very low short-term interest rates in the euro area, and all the measures taken to foster the proper functioning of the euro area economy. In this post, I address Draghi’s point that the ECB 1% refi rate will support economic activity through the lens of the mortgage market. Specifically, I find that the interest rate channel is clogged in the economies that are in most desperate need of lower rates: Spain, Portugal, and Italy. Regarding ‘very low short-term interest rates’, what Draghi means is that the standard interest rate channel of monetary policy will stimulate domestic demand via increased spending by consumers and firms. If ECB policy is indeed passing through to retail credit (households and firms that borrow from banks to buy goods and services), then we should see evidence of this as falling interest rates to retail credit sectors, like those for consumer goods, home mortgage lending, loans for businesses, or even corporate credit rates to finance business investment. In mortgage markets, the Euro area average borrowing rates are indeed falling. Banks started lowering mortgage borrowing rates, on average, in September 2011 in anticipation of ECB rate cuts that eventually occurred (again) in November 2011. Specifically, average Euro area mortgage rates are down roughly .25% since the local peak in August 201

Why the ECB Expanded Its Balance Sheet By Over $1 trillion in Less Than Nine Months - Between July 2011 and today, the ECB has expanded its balance sheet by an incredible $1+ trillion: more than the Fed’s QE 2 and QE lite combined (and in just a nine month period). This rapid and extreme expansion of the ECB’s balance sheet (again it was greater than QE lite and QE2 combined… in nine months) indicates the severity of the banking crisis in Europe. You don’t rush this much money out the door this fast unless you’re facing something very, very bad. The two largest interventions were the ECB’s LTRO 1 and LTRO 2, which saw the ECB handing out $645 billion and $712 billion to 523 and 800 banks respectively. As a result of this, the ECB’s balance sheet exploded to nearly $4 trillion in size, larger than the GDPs of Germany, France, or the UK.

IMF rattles tin for more money - I need more money. That, bluntly, was the message sent out by Christine Lagarde as she warned a Washington audience that the world was deluding itself if it imagined everything was once again rosy. The argument from the managing director of the IMF came in three parts. While she saw signs of a thaw after the "longest, hardest winter in a generation", the world economy remained fragile. In tough times, the IMF will be needed as it was to help with reconstruction after the second world war, during the Latin American debt crisis and when the Berlin Wall came down. But the IMF cannot act as "a giant credit union" without financial support from its members, and Lagarde argued that the Fund's resources in relation to global GDP were three or four times higher 60 years ago than they are today. She is looking to the United States, other western nations and the bigger emerging countries to provide resources to increase the IMF's firepower. Parts of the Lagarde argument is overstated. The Fund was certainly involved in the Latin American debt crisis and the reconstruction of the old Soviet bloc, but its influence was not always benign and nor were its remedies always the right ones. But the gist of what she said was correct: the global economy is still in intensive care and could suffer a relapse at any time. In the event of a fresh leg to the crisis of the past five years, the Fund would be stretched with its current resources.

Merkel reiterates stance against common euro zone bonds -- Germany is against issuing common euro zone bonds, Chancellor Angela Merkel said on Tuesday. "We are against common European bonds," Merkel said at a discussion with students in Prague. Merkel's centre-right administration has repeatedly ruled out collectivising debt in the single-currency area by issuing joint bonds.

Germany hardens resistance to deal on banking debt - THE GOVERNMENT’S drive to restructure some of its banking debt faces a major roadblock as Germany hardens its resistance to the use of the euro zone bailout fund for that purpose. The German finance ministry is understood to be arguing in talks on the plan that an arrangement involving euro zone bailout funds is not politically feasible for the authorities in Berlin. Seven months after Minister for Finance Michael Noonan embarked on a campaign to ease the burden of the €31 billion Anglo Irish Bank promissory note scheme, the unyielding German stance presents a serious hurdle. With the EU-IMF troika due in Dublin in a fortnight for the latest review of the bailout programme, there is some expectation in Irish and European circles that a long-awaited “technical paper” on the initiative might be completed during the mission. At issue is the use of bonds issued by the European Financial Stability Facility temporary fund or the European Stability Mechanism permanent fund to replace the €31 billion Anglo Irish Bank promissory note scheme.

Germany Doesn't Have to Sacrifice, the ECB Could Just Print Money - A major Washington Post article reporting on the situation of depressed areas of former West Germany implied that Germans would have to sacrifice more in order to finance a larger bailout of Greece, Spain and other heavily indebted countries. This is not true. The major problem facing the euro zone countries right now is a lack of demand, not a lack of supply. In other words, increased resources for the indebted countries do not have to come at the expense of Germany's living standard. The European Central Bank (ECB) can simply support increased demand, as it is now doing to some extent with its $1 trillion special lending facility. This would actually leave the people in the depressed regions of western Germany better off, not worse off. Unfortunately, rather than trying to boost demand enough to restore full employment, the ECB is producing silly propaganda cartoons about the "inflation monster," which tries to scare viewers into believing that there is a realistic fear of hyper-inflation in Europe. Of course the real problem facing Europe right now is the depression monster, which is leaving millions of people out of work, but the folks running the ECB lack the competence to recognize this fact.

Meet The Uber-Kommissar: Germany Expands European Domination Plan; Will Enact European Budget Supervision Panel Greece was the beta test. Now Germany, whose plan to enact a European fiscal pact in exchange for soaring Bundesbank and economic support of the PIIGS has so far delayed the inevitable, is seeking wider powers to "supervise" European budget compliance with the terms of Merkel and Schauble's fiscal pact. Spiegel writes that "Schäuble plans to propose creating independent panels of experts at both the national and EU level, who would monitor fiscal policies in the member states, the euro zone and the EU as a whole. They would be responsible for sounding a warning if they see governments' budgetary policies straying off course." Those in charge of the panels? Academics - the same people who are in charge of the Federal Reserve (with stunning success we forgot to mention). Because having a Ph.D. is sufficient and necessary to be a central planner. As for the role of the uber-commissioner? He would be able to implement EU regulations (proposed by Germany) "without the other commissioners or the Commission president having the right to object." And there goes sovereignty, without even one shot fired.

Which fundamental issues has Europe solved? - THE calm that descended in the wake of the European Central Bank's flood of cheap, long-term bank lending has broken. A trillion euros will buy you about four months, as it turns out. What happens now? How did we get here? The establishment of the euro led to rapid growth in cross-border financial flows within the single-currency area. Savers in the richer north, tired of crummy returns on their investment, sent money flooding south, touching off a series of booms around the periphery. In some places, like Greece, this enabled an explosion in public debt. In others, like Spain, some unsustainable budget commitments were made but the period was in general a time of improving public finances (in 2007, Spain's gross government debt was just 36% of GDP, compared to 65% in Germany). Then the Great Recession struck. Capital from the north flooded home. This made the financing of government borrowing more difficult. It also left peripheral economies short of domestic demand and needing to export more to grow and finance obligations. But the booms had bid up wage rates out of proportion to productivity, leaving peripheral workers uncompetitive. The resulting growth problem exacerbated the brewing debt problems, which worsened bank problems, which in turn worsened both the growth and the debt problems.

"A Look at Credit Default Swaps and Their Impact on the European Debt Crisis" - Via the St.Louis Federal Reserve publication The Regional Economist:  CDS Spreads and the European Debt Crisis:  The Regional Economist: ...CDS spreads are an important metric of default risk—a higher spread on the CDS implies a greater risk of default by the reference entity. This feature can provide useful information as to how financial markets perceive the risk of default on corporate and sovereign debt. To illustrate this phenomenon, we study changes in the CDS spreads on the debt of European nations over the past few years. Figure 1 illustrates spreads on five-year CDS in Europe since 2005. Each series is an equally weighted index of country groupings where data are available—distressed countries in the eurozone (European Union members that use the euro as their currency), other countries in the eurozone, Western European countries that do not use the euro as currency and Eastern European countries that do not use the euro as currency. Prior to the crisis, CDS spreads were low for all of the reference countries, showing that investors placed low probabilities on these countries defaulting on their debts. Since the crisis, it is clear that investors have become increasingly wary of the distressed eurozone countries. Their CDS spreads have continued to rise, reaching newer highs each quarter. Although the CDS spread on these countries as a group was lower than that of their Eastern European peers initially, subsequent events have raised the spreads on the distressed countries' debt well beyond those for Eastern Europe.

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