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

Saturday, May 5, 2012

week ending May 5

Federal Reserve Balance Sheet Shrinks Slightly In Latest Week - The Fed's asset holdings in the week ended May 2 were $2.867 trillion, compared with $2.869 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities held steady at $1.668 trillion. The central bank's holdings of mortgage-backed securities rose slightly to $847.82 billion from $847.80 billion. Thursday's report showed total borrowing from the Fed's discount lending window was $6.80 billion on Wednesday, down from $6.95 billion a week earlier. Commercial banks borrowed $300 million from the discount window, up from $11 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.497 trillion, up from $ 3.489 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts was $2.782 trillion, compared with $2.772 trillion a week earlier. Holdings of federal agency securities fell to $715.06 billion, compared with $717.22 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--May 3 2012

Fed Comments Suggests QE3 Remains Unlikely, Despite Economic Uncertainty - In their first comments since last week’s monetary policy-setting Federal Open Market Committee meeting, central bankers appeared in strong agreement that expanding the balance sheet with more bond buying is pretty unlikely. The policy makers made their remarks in the wake of the FOMC meeting last Tuesday and Wednesday and left in place its current policy regime. Officials reaffirmed their collective view that rock-bottom rates will stay in place until late 2014, and continued forward with a $400 billion effort that sells short-dated bonds from the central bank’s $2.9 trillion balance sheet, to buy a like amount of long-dated securities.

Fed’s Plosser: May Need to Scale Back Accommodation Before 2014 - The U.S. economy’s gradual recovery still warrants the Federal Reserve‘s supportive policy stance, but potential inflationary pressures may well call for a withdrawal of accommodation sooner than expected, a top Fed official said Tuesday. “While I believe monetary accommodation is still called for, in the absence of some shock that derails the recovery, we may well need to begin to gradually scale back the level of accommodation well before the end of 2014,” Federal Reserve Bank of Philadelphia President Charles Plosser said before the CFA Society in San Diego.

Fed’s Fisher: Too Soon to Talk About Tighter Policy - Although he believes the Federal Reserve has already provided too much stimulus to the economy, a veteran central banker said Monday now isn’t the time to start calling for a tightening in monetary policy. Looking at the various programs the Fed has run to expand its balance sheet by buying bonds to stimulate growth, “it’s not clear to me [the programs have] been fully productive, or even counterproductive,” Federal Reserve Bank of Dallas President Richard Fisher said in an interview with Dow Jones Newswires, held on the sidelines of the Milken Institute Global Conference in Beverly Hills, Calif.

Fed's Williams-may need QE3 if jobless rate gets stuck   (Reuters) - The U.S. Federal Reserve may need to unleash another round of quantitative easing if the jobless rate gets "stuck" at around 8 percent or inflation drops well below the Fed's 2 percent target, a top Federal Reserve official said on Tuesday. But Federal Reserve Bank of San Francisco President John Williams, speaking at the Milken Institute Global Conference, made it clear that he does not expect the economy to underperform in a way that would force the Fed to ease monetary policy further. If the Fed were to need to act, he said, it could buy more mortgage-backed securities or could extend its current Operation Twist bond-buying program, which is due to end in June.

Fed’s Lacker: Higher Interest Rates Could Be Needed Even If Jobless Rate Doesn’t Fall - The Federal Reserve may need to start raising interest rates even as unemployment rates remain historically high, a senior Fed official said Tuesday. The unemployment rate “could well be above 7%. I think we have to prepare for that,” Federal Reserve Bank of Richmond President Jeffrey Lacker said at a Bloomberg Washington Summit. “I think it’s a misconception to think we’ve got to get unemployment all the way down to 5[%] or some number like that…before we raise rates.” Lacker was the only one of the 10 voting members of the Fed’s policy-making committee last week to oppose the group’s decision to reaffirm its plans to keep short-term interest rates near zero until late 2014. The central bank will likely need to start raising interest rates in the middle of next year to keep inflation in check, he said. The Richmond Fed president has dissented at all three meetings this year of the Federal Open Market Committee, the Fed’s policy-making body. Lacker said the central bank needs to start tightening policy when real growth rates start to rise.

Fed's Williams: need 'strong' stimulus for "quite some time" (Reuters) - With the U.S. jobless rate "far too high," the Federal Reserve will need to keep its foot on the monetary gas pedal for quite some time, San Francisco Fed President John Williams said on Thursday. The U.S. central bank has kept inflation "well under control" and near its 2 percent target, but the unemployment rate, at 8.2 percent, is still about 2 percentage points higher than the point where inflation pressures could be expected to kick in, Williams told the Santa Barbara County Economic Summit. Taken together, he said, those conditions mean "It's essential that we keep strong monetary stimulus in place for quite some time." Williams, who is a voting member this year on the Fed's policy-setting panel, did not suggest the Fed would need to add to its stimulus. The Fed has kept interest rates near zero since December 2008, and has bought $2.3 trillion in long-term securities to push down borrowing costs still further and rekindle growth after the Great Recession. Economic growth, though, will likely stay "moderate" for the next few years, Williams said, and the unemployment rate will fall to about 7 percent by the end of 2014.

Federal Reserve officials at odds on jobs view (Reuters) - The economy will likely grow at a moderate pace, inflation will stay low, and unemployment will fall, three top U.S. Federal Reserve officials on Thursday said in remarks prepared for delivery to an economic outlook summit. But their conflicting views on the workings of the labor market suggested they will continue to spar on policy, as the U.S. central bank decides the path of interest rates that have been held near zero for more than three years. Two of the Fed's more dovish policymakers - San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart - blamed high employment on sluggish demand and far-from-blistering economic growth. If joblessness stems from low growth, the reasoning goes, continued easy monetary policy can help boost employment. With inflation well controlled, Williams said: "It's essential that we keep strong monetary stimulus in place for quite some time." Lockhart likewise blamed the "relatively modest economic expansion" for restrained job growth, suggesting he is also supportive of keeping the monetary gas pedal to the floor. Philadelphia Fed President Charles Plosser, a policy-maker known for his hawkish bent, had a slightly more optimistic view of growth. He projected 3 percent GDP expansion this year and next, which could push inflation slightly above the Fed's 2 percent target.

A Rebellion at the Federal Reserve? - Chicago Federal Reserve president Charles Evans doesn't look the part of a heretic. But in the cozy, conservative club that is central banking, he certainly qualifies. While most of his colleagues at the Fed have recently taken an even more hawkish turn, Evans remains a champion of additional monetary stimulus. And on Tuesday he took an even bigger step: He became the first sitting Fed member to endorse NGDP level targeting.  The Fed famously has a dual mandate: It's supposed to promote the maximum level of employment consistent with its two-percent inflation target. In reality, this dual mandate often looks more like a single inflation mandate. NGDP level targeting would do away with this problem by rolling the mandates together. And right now, that would mean a much more aggressive Federal Reserve. The debate over NGDP level targeting and inflation targeting is part of a larger war that's been going on the past few years in the normally staid world of central banking. There are those who think the Fed's dual mandate goes too far in promoting full employment, those who think it's just about right, and those who think it doesn't go far enough.  In the end, this is really a clash over inflation. After all, we're talking about central bankers here. The first group is worried that by effectively printing more money to goose the economy (better known to in policy circles as "quantitative easing"), the Fed has already created future inflation. The second group isn't worried about the money that's already been printed, but believes that running the presses any further will create future inflation. Finally, a third group is worried that if the Fed doesn't print more money, there won't be enough inflation to keep the economy healthy. Evans belongs to the last camp.

Does Quantitative Easing Benefit the 99% or the 1%? - Paul Krugman says that QE, expansive monetary policy and inflation help the little guy (the 99%) and hurt the big banks (the 1%). Of course, followers of the Austrian school of economics dispute this argument – and say that it is only the big boys who benefit from easy money. As hedge fund manager Mark Spitznagel argues in the Wall Street Journal, in an article entitled “How the Fed Favors The 1%”: The relentless expansion of credit by the Fed creates artificial disparities based on political privilege and economic power. [We have repeatedly pointed out that Fed policy increases inequality.]Indeed, Fed policy itself has killed the money multiplier by paying interest on excess reserves. And a large percentage of the bailout money went to foreign banks (and see this). And so did most of money from the second round of quantitative easing. But let’s forget ivory the tower theories of either neo-Keynesians like Krugman or Austrians … and look at the evidence. Initially:[The] Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry. Similarly, former Secretary of Labor Robert Reich points out that quantitative easing won’t help the economy, but will simply fuel a new round of mergers and acquisitions:

Battle of the Heavy-Hitter Economists: Krugman and Bernanke Slug It Out Over Fed Policy - The lackluster U.S. economic recovery has fueled an unusually public argument between two of the most prominent economists in the country: Nobel prize-winning New York Times columnist Paul Krugman has accused Fed Chairman Ben Bernanke of not doing enough to help spur the economy. Bernanke has responded by pointing out that the Fed has already acted aggressively through two rounds of monetary stimulus and, in any event, has a responsibility to help maintain “price stability,” something that could be jeopardized by raising the target inflation rate, which Krugman advocates. Academic jargon aside, the dispute underscores the mounting frustration among pundits and policy-makers alike, caused by slowing economic growth and continued high unemployment. Krugman, for one, is clearly frustrated, as suggested by the title of his new book, “End This Depression Now!“, which goes on sale today. Krugman’s basic argument, one that he’s made for years, is that the U.S. government needs to do more — including spend more money — in order to spur the economy and help create jobs. Recent weak economic data has only emboldened Krugman, who greeted last Friday’s lackluster GDP figure in slightly sarcastic fashion. “Disappointing GDP number — we’re not growing fast enough to make any significant headway on reducing the output gap — but hey, no need for further Fed action,” he wrote on his blog.

Has Ben Bernanke Been Consistent? - - Back in the late 1990s and early 2000s, Ben Bernanke sharply criticized the Bank of Japan. He argued that even though the BoJ had cut its target interest rate to near-zero, it could and should do much more to end deflation and to stimulate Japan's economy. In the last few months, a number of critics have accused Bernanke of inconsistency: that is, the Ben Bernanke who has been leading the Fed in the aftermath of the Great Recession is not following the advice of the Ben Bernanke who was criticizing the Bank of Japan back in 2000-2003. To me, this criticism seems like pretty thin gruel: indeed, I think the accusation of inconsistency basically an attention-getting cover for a more mundane policy disagreement over whether the Fed should immediately start another round of quantitative easing. Here, I'll lay out the arguments here as I seem them.

Krugman Says Fed ‘Reckless’ to Allow High Jobless Rate - Nobel Prize-winning economist Paul Krugman suggested Federal Reserve policy makers led by Ben S. Bernanke are “reckless” for refusing to pursue higher inflation, which he said could lower U.S. unemployment.  “The reckless thing is to allow mass unemployment to continue,” Krugman, a Princeton University professor, said on Bloomberg Television’s “Street Smart” yesterday. “We have had a massive failure of our political system that has come to accept that 8 percent unemployment is the new normal and there is nothing that can be done,” Krugman said. “We’re in a low- key version of the Great Depression.”  Krugman, whom Bernanke hired at Princeton in 2000 when he was chairman of the economics department, has said the Fed should tolerate inflation of 3 percent to 4 percent to boost the economy and put Americans back to work. He was responding yesterday to Bernanke’s comments last week that pursuing such a policy would be “reckless.”

Important Economic Story Nobody is Talking About - Behind every great president stands a great central banker. There's a corollary. Behind every great central banker stands a great central banking committee. Or at least a pliant one. It's this latter reality that President Obama still has not quite recognized. And this malign neglect of most matters monetary has added a wholly unnecessary degree-of-difficulty to the economic recovery.  We're in a $1 trillion hole. That's how much income we have been losing every year since the onset of the Great Recession. Ben Bernanke and Co. have done a good job preventing a full-on replay of the Great Depression, but Ben Bernanke and Co. have not done a good job preventing a lost decade. The key phrase here is "and Co."  Bernanke doesn't set monetary policy by himself. That's what the Federal Open Market Committee (FOMC) votes on. Its structure is a bit Byzantine and not terribly important, but what is important is that the Fed Chairman usually gets his way without any dissent. That hasn't been true lately. The Fed's unconventional measures have unsurprisingly not been too popular with the FOMC's more conventional members. Unfortunately, that hasn't stopped Bernanke from trying to reach a consensus. He thinks he needs to. Bernanke recently told Roger Lowenstein that he thinks any policy that doesn't get at least a 7-3 majority simply won't be credible. This political calculation gives the hawks more policy influence than they would otherwise have.

Should the Fed do more? – Hamilton - Johns Hopkins University Professor Larry Ball, Princeton Professor Paul Krugman, U.C. Berkeley Professor Brad DeLong, University of Oregon Professor Tim Duy and Texas State University Professor David Beckworth are among those recently arguing that Fed Chairman Ben Bernanke is neglecting his own earlier academic insights into what the central bank should be doing in a situation such as the United States presently finds itself. Here's what I think they're overlooking. These academic critics would like to see the Fed announce more aggressive targets in the form of either higher rates of inflation or faster growth of nominal GDP. I will get to the issue of these targets in a moment, but first would like to discuss the mechanical details of what, exactly, the Fed is supposed to do in the way of concrete actions in order to ensure that any such announced target is achieved. The primary tool available at the moment is large-scale asset purchases, in which for example the Fed buys longer term Treasury securities with newly created reserves. There are a number of recent academic studies that have evaluated the potential effects of such an operation, which generally conclude that massive purchases could modestly reduce long-term interest rates and thus potentially provide some stimulus to aggregate demand. But note well that the Treasury could achieve pretty much the same effect if it were to do less of its borrowing with 10-year bonds and more of its borrowing with 3-month bills.

A Nice Piece by Jim Hamilton on the Fed--But with One Flaw: Risk Spread vs. Expected Inflation Effects of QE at the ZLB - I share Jim Hamilton's belief that merely taking additional duration and default risk onto the Treasury's balance sheet would not materially and significantly boost the economy. There is an effect: with less risky assets interest rates spreads will fall, and with short-term safe interest rates at the zero lower bound that means (slightly) lower spreads and (slightly) higher investment and (slightly) higher GDP. These effects are small, however. Perhaps purchasing $100 billion of ten-year Treasuries produces in the range of $10 billion of fiscal-stimulus equivalent. Perhaps not. But purchasing bonds for cash has another effect. Cash is a perfect substitute for short-term Treasury bonds now. It won't always be the case. When interest rates normalize, the price level will be roughly proportional to the high-powered money stock. Not all of today's purchases of bonds for cash will be unwound when the economy exits the zero lower bound. If we believe that the high-powered money stock will be roughly $1 trillion after exiting the zero lower bound, and if we believe that a fraction λ of marginal bond purchases won't be unwound, then an extra $100 billion of quantitative easing boosts the expected price level ten years hence by 1%--and boosts expected inflation after the next decade by an average of 0.1%/year. That is enough to spur higher spending and a more rapid and satisfactory recovery.In short, I think a 5% nominal GDP growth target is within the grasp of monetary policy--provided one understands that "monetary policy" means "print money and buy stuff that is not now a perfect substitute for cash, and doing so in a way that keeps you from unwinding your purchases completely in the future".[1]

Why monetary policy matters less every day - Resource misallocation and unemployment get “baked in” to some extent, due to hysteresis.  I also would argue that some of the long-term unemployed are revealed as having been “baked in in the first place,” once the boom demand for their labor ended and their marginal products were more closely scrutinized.. Many nominal values end up reset, more and more as time passes and as new projects replace the old. . As banking and finance heal, debt overhang is less of an AD problem.  The debt repayments get rechanneled into investment, rather than falling into a black hole. The Fed, at least right now, is not able to make a credible commitment toward a significantly more expansionary policy for very long.  Putting aside the more general and quasi-metaphysical issues with precommitment, just look at the key players.  Bernanke leaves the scene in 2014 and is a lame duck at some point before then.  Obama could be gone by the end of this year, and in any case is unlikely to be reelected with a thundering mandate.  Romney’s actual views on monetary policy are a cipher.  Either house of Congress could change hands.  There is less public support for a consensus view of the Fed today than in a long time.

The Astonishing Case of the Impenetrable Zero Bound - In a small, peaceful town there once lived three people: Abbie, Baker and Carlie. Abbie was a very wealthy aristocrat, and also a philanthropist. Her fortune and position in the town were the fruit of the hard work of her ancestors, but her life was dedicated now only to managing that fortune. She lived to make the common people of the town happy, especially Carlie, who was her personal favorite. Baker was much more selfish, and looked out for his own interests. He wasn’t terrible and mean, just obstinately self-interested. It seems he was born that way; it was in his DNA. Abbie frequently lent money to Baker, and Baker frequently lent money to Carlie. But in accordance with the ancient and venerable laws of the town, enacted to maintain a decorous distance between the aristocrats and common people, Abbie was forbidden from loaning money directly to Carlie. Nevertheless, Abbie was usually able to help out Carlie indirectly when necessary. She found that when she lent money to Baker, Baker was sometimes more willing than before to lend money to Carlie. And if Abbie loaned the money to Baker at lower rates of interest than previously, Baker would usually reduce the rate of interest he charged Carlie in turn.

Economy Face Off: Ron Paul vs Paul Krugman

Krugman on NPR - This morning while driving to work I heard a snippet from a Paul Krugman interview.  One of his comments (in reference to the Bernanke press conference) perked my interest.  I don’t recall the exact words, but he said something to the effect of: BTW, I think that I am doing him [Bernanke] a favor . . .it allows him to push back against criticism he’s been receiving from the right. If someone finds a transcript I’d be glad to correct the quotation.  This reminded me of what I wrote just yesterday: Without the criticism of Bernanke from us market monetarists, and without the criticism of Bernanke from Krugman, DeLong, Avent, Yglesias, Duy, Thoma, etc, etc, Ben Bernanke’s job would be much harder.  Without that criticism, all the pressure on the Fed would be coming from the right, and would be pushing the Fed in exactly the opposite direction from where Bernanke would like to go.  We are helping him, whether he knows it or not, and regardless of how annoying he finds our criticism..  He also pointed to all the jobs we could get from fiscal stimulus; 1.3 million to be precise.  He didn’t mention that the Fed policy he criticized (which is basically “QE2 raised core inflation to 2%, and we’re damn well going to keep it right there.”) would trim a few jobs off that estimate.  Indeed about 1.3 million jobs to be precise.

Paul Krugman’s Fairy Fantasyland - Fairytales and nursery rhymes are quite popular among the economists. Economists and economic commentators will couch magical thinking in rational sounding phrases — but that doesn’t stop it from being hokum. Some within the profession attack these juvenile tendencies. Paul Krugman, for example, has often lambasted the idea, fostered by some of his colleagues, that the current crisis is due to a lack of confidence among investors. In a flash of irony he labeled this idea that of the ‘confidence fairy‘. Of course, Krugman is absolutely right; the idea that a lack of confidence is responsible for the current crisis is a fairytale pure and simple. Our current economic problems are caused by a lack of aggregate demand. Investors are absolutely right to lack confidence at this moment in time because, just like in the 1930s, there is no rational reason to invest more because the population lacks the adequate purchasing power to consume more goods and services.  And I think Krugman and other ISLM-Keynesians would broadly agree with it. That is, peculiarly, until they start talking about inflation targeting.  Proponents of inflation targeting claim that if the central bank sets a higher inflation target investors will react to this by, well, investing more. Krugman sums it up: If the Fed were to raise its target for inflation — and if investors believed in the new target — expected inflation over the medium term, say the next 10 years, would be higher… [and] higher expected inflation would aid an economy up against the zero lower bound, because it would help persuade investors and businesses alike that sitting on cash is a bad idea.  Now, is it just me or does it appear that Krugman has just smuggled the confidence fairy in through the backdoor? Read that passage again carefully. The ‘idea’ here is to trick investors into investing by scaring them into thinking that the Fed will allow inflation to rise higher than it currently is.

The Federal Reserve Is The Vampire Squid Of Vampire Squids (video) Jim Grant, the author of the Grant’s Interest Rate Observer who often times talks about the federal reserve and has jumped on the Ron Paul bandwagon lately desiring a return to a gold standard did an interview with Bloomberg Magazine.  An interview where he calls the Fed, a vampire squid of vampire squids.  “And people get off on Goldman Sachs because it has done this and this, it is pulling wires… The Federal Reserve is the giant squid of squids, it is the vampire squid of vampire squids.”

The Best Fed News of the Week - Matthew O'Brien reports in the Atlantic that one important Fed official has taken the NGDP plunge:   Chicago Federal Reserve president Charles Evans doesn't look the part of a heretic. But in the cozy, conservative club that is central banking, he certainly qualifies. While most of his colleagues at the Fed have recently taken an even more hawkish turn, Evans remains a champion of additional monetary stimulus. And on Tuesday he took an even bigger step: He became the first sitting Fed member to endorse nominal GDP (NGDP) level targeting. This is encouraging news, but not too surprising for Charles Evans. He previously called for the Fed keep the target federal funds rate low until unemployment fell below 7% or inflation tops 3%.  NGDP level targeting is a way of doing that without unmooring long-term inflation expectations.  The Fed is still a long way off, if ever, from adopting an NGDP level target. But Evans' endorsement of the idea is a big first step in what could be a hugely important paradigm shift. Even if there isn't a large difference between the quasi-NGDP level target that is the Evans Rule and an actual NGDP level target, it's a fairly radical new way of framing policy. Rather than the central bank letting the economy recover faster, it puts the onus for a faster recovery on the central bank.

Why NGDP Targeting? - Last week, David Andolfatto challenged proponents of NGDP targeting to provide the reasons for their belief that targeting NGDP, or to be more precise the time path of NGDP, as opposed to just a particular rate of growth of NGDP, is superior to any alternative nominal target. I am probably the wrong person to offer an explanation (and anyway Scott Sumner and Nick Rowe have already responded, probably more ably than I can), because I am on record (here and here) advocating targeting the average wage level.  Moreover, at this stage of my life, I am skeptical that we know enough about the consequence of any particular rule to commit ourselves irrevocably to it come what may.  Following rules is a good thing; we all know that.  Ask any five-year old. But no rule is perfect, and even though one of the purposes of a rule is to make life more predictable, sometimes following a rule designed for, or relevant to, very different circumstances from those in which we may eventually find ourselves can produce really bad results, making our lives and our interactions with others less, not more, predictable. So with that disclaimer, here is my response to Andolfatto’s challenge by way of comparing NGDP level targeting with inflation targeting. My point is that if we want the monetary authority to be committed to a specific nominal target, the level of NGDP seems to be a much better choice than the inflation rate.

Three arguments for NGDP targeting - Nick Rowe - This is in response to David Andolfatto's questions. Nominal GDP is just one of an infinite number of variables that monetary policy might target. The probability that NGDP is exactly the best target variable is infinitesimal. I nevertheless support NGDP targeting, because I think it is probably reasonably close to that unknown best target variable; and I think NGDP level path targeting is probably better than reasonable alternatives like inflation or price level targeting. Here are three reasons why I believe that:

NGDP Targeting: Some Answers – Andolfatto - I do not believe that sticky nominal prices or wages matter (at least as far as explaining years of sub par recovery dynamics). I explain why here: The Sticky Price Hypothesis: A Critique. Consequently, Nick Rowe's reply to my post does nothing for me (although I still love the man and his blog!). On the other hand, I am not so sure about "sticky" nominal debt. I am more sympathetic to Evan Koenig's view:The analysis presented here is completely orthogonal to the literature. It does not involve goods-market or labor-market pricing frictions in any way. As our most severe economic downturns have been characterized by widespread default on financial obligations and disastrous breakdowns or near breakdowns in lending, an analytical framework that puts debt and the distribution of risk at center stage arguably has something to say about optimal policy. One of the main proponents of NGDP targeting sent me this article, so I took it to represent a main theoretical justification for NGDP targeting. And indeed, a lot of people seem to be talking about a "debt overhang" problem and a "balance sheet recession." I sort of figured (perhaps incorrectly) that the idea of getting the Fed to commit immediately to (say) a 5% NGDP target was to generate a credible temporary inflation to reverse the effect of the unanticipated and sharp decline in the price-level path (in 2008).  The mechanism people have in mind, I think, is essentially to reduce the real debt burden of debt-constrained households, to get them to start spending, and to increase aggregate demand.

David Andolfatto Can Feel More Confident About NGDP Targeting - David Andolfatto recently asked the following question about nominal GDP (NGDP) level targeting:What is the theoretical underpinning for NGDP targeting? And what is the empirical evidence that leads them to believe that an NGDP target right now is a cure for whatever ails us right now? He wants to know why proponents of NGDP level targeting are so confident that it would help the sluggish economy. Nick Rowe, Scott Sumner, David Glasner, Bill Woolsey, Mark Thoma, and Jason Raves replied to Andolfatto's first question by providing theoretical justifications for being confident.  Here I want to focus on his second question, but before doing that let me quickly note two important creditor-debtor problems that a NGDP level target would overcome in the current crisis.

David Andolfatto and the need for higher inflation - David Andolfatto has another interesting, searching post up at the moment asking “Is higher inflation really the answer?” David’s post and the question it seeks an answer to is in response to arguments made by those such as Paul Krugman, Scott Sumner and many of the market monetarist group, that higher inflation is the answer to the current economic malaise. Within his post, David asks three specific sub-questions which are; “[1] What is the theoretical mechanism linking economic prosperity to the rate at which nominal prices rise; [2] Exactly how is the Fed, given the tools at its disposal, supposed to generate higher inflation under current economic circumstances; and [3] What is the evidence to support the belief that more inflation will reduce unemployment (or increase real GDP)?” If we concentrate our analysis on economic systems which are up against the zero lower bound so that “traditional” rate setting policies of central banks are constrained, yet growth still remains below par (i.e. the current situation in the US and most G7 economies), then questions [1] and [3] are one and the same. That is in order to return growth back to adequate levels and reduce unemployment, inflation needs to be increased in order to reduce real interest rates and increase the opportunity cost of holding real money balances, so that money demand falls (velocity increases), firms start investing, households start spending and voila economic activity receives a nice kick-start

Why NGDP targeting? - These days I keep reading about NGDP targeting, as it keeps being mentioned more and more everywhere. It seems to be another zombie idea taking on more life of its own. It's basically the idea that the current crisis will permanently be solved by the Fed credibly communicating to the people that it will start targeting 4-5% annual growth in nominal GDP level, from here on. Wow. Imagine, business planners and executives will have no more compunctions about claiming to their investors that they will attain at least 5% nominal revenue growth year in year out.  If they don't achieve it via additional sales volume, the Fed is going to make sure they achieve their targets via inflation. Recessions will be a thing of the past.  Woohoo! There will be NGDP growth year after year, courtesy of the Fed,  regardless of overall business sentiment. Nobody will ever lose again on a business investment, provided everyone invests their money in the most entrenched TBTF companies.  If the Fed will work to ensure 5% NGDP growth every year, it wouldn't really mater if the return comes via aggregate demand growth. It can very easily be achieved by asset price appreciation. Now, how again is the Fed supposed to attain this yearly NGDP growth? Via monetary policy? Quantitative easing, Operation twist, swapping Treasuries for reserves? Hasn't this been largely ineffective in reviving demand for the last 2 years? Exactly how is confiscating government treasury assets from the private sector going to make them want to spend more money? And in keeping rates low, or causing more inflation, how is the Fed supposed to convince savers to stop saving, rather than doubling up on saving to make up for the lost yield?

Fed Watch: Spending Update (5 graphs) Real personal spending growth was weakish in March on the back of a solid February gain that supported spending growth for the quarter. No surprise - don't get overly optimistic or pessimistic about any one piece of data. Slow and steady is the rule: Note that the post-recession trend is slowing somewhat as the "recovery" continues, a feature more easily evident in the year-over-year numbers: Inflation continues to converge to 2 percent: The recent trend in core inflation, however, is a little above 2 percent: This may get the Fed hawks a little more nervous. With inflation hovering around 2 percent, the bar to another round of QE is pretty high. Overall, I would say this report mirrors my overall read on GDP from last week: Uninspiring but not disastrous - unless, of course, you are unemployed or have any hope of seeing a return to pre-recession spending, nominal or real. But good enough to keep the Fed on the sidelines.

Banks as creators of money - In conversation recently, I was called upon to defend the claim that banks are in the business of creating and destroying private money. This has been for me a working hypothesis for so long that I was unable to respond effectively or cogently to the argument. My interlocutor followed up in e-mail with a Cowles Foundation paper by Tobin in support of her case. Here is my response to Tobin, hopefully better articulated than I managed on the fly. In this post, I'll stick to the theoretical claim (the practical context was bank capital requirements). I agree wholeheartedly with Tobin's dismissal of the mystique of "money"—the tradition of distinguishing sharply between those assets which are and those which are not "money," and accordingly between those institutions which emit "money" and those whose liabilities are not "money," but rather than enclosing the difficult word in quotes, I prefer to try to understand it. By all means let us not draw an abritrary line between money and non-money. But Tobin is wrong to conclude that there is nothing special about money at all.

Milton's Paradise Lost – Krugman - Brad DeLong has a nice piece about the failure of Friedmanism. I thought I might add a bit on monetary policy and the Fed. When wearing his professional economist hat, what Friedman really argued was that the Fed could easily have prevented the Great Depression with policy activism; if only it had acted to prevent a big fall in broad monetary aggregates all would have been well. Since the big decline in M2 took place despite rising monetary base, however, this would have required that the Fed “print” lots of money. This claim now looks wrong. Even big expansions in the monetary base, whether in Japan after 2000 or here after 2008, do little if the economy is up against the zero lower bound. The Fed could and should do more — but it’s a much harder job than Friedman and Schwartz suggested. Beyond that, however, Friedman in his role as political advocate committed a serious sin; he consistently misrepresented his own economic work. What he had really shown, or thought he had shown, was that the Fed could have prevented the Depression; but he transmuted this into a claim that the Fed caused the Depression. And this debased and misleading version is what has filtered down to the likes of Ron Paul, who then use it to argue against the very activism Friedman was really advocating. Bad Milton, bad.

Who Determines Short Term Interest Rates? - Do you think it's the Fed? It's not. The market determines short term interest rates. Really. The Federal Funds Rate, which is set by the Fed, FOLLOWS 3 month T-Bill rates.  It does not lead the economy.  Here are some looks.  First the whole data set, going back to 1954, presented in Graph 1. Federal Funds data from FRED. T-Bill rates from a different Federal Reserve site These are tabulated monthly values.  But the T-Bill rate is set in a weekly auction, and the Fed Funds rate is set by the Fed Open Market Committee, on an arbitrary schedule, at their discretion.   Graph 1  Fed Funds and 3 Mo. T Bill Rates, 1954-2011 Not exactly lock step, but they are a couple of clinging vines.  At this scale, it's pretty hard to tell who leads and who follows.  Let's look closer at the last few decades. 

The Effect of Conventional and Unconventional Monetary Policy Rules on Inflation Expectations: Theory and Evidence: This paper has three parts. First, I provide a theoretical framework to explain how rational expectations models, where the central bank follows a conventional monetary policy rule, can be used to understand the history of interest rates and inflation in the period between 1951 and the Great Recession of 2008. Second, I use the framework developed in the first part of the paper to illustrate how the purchase of assets other than treasuries, for example, mortgage backed securities and long bonds, can influence inflation expectations when the interest rate is zero. Third, I show that the beginning of unconventional monetary policy in 2008 coincided with a significant increase in inflation expectations. I extend existing models of monetary policy by adding explicit markets for financial securities. Using this extended framework, I show that the purchase of assets, other than short term treasury bills, has a differential impact on the prices of risky securities. Unconventional monetary policy is an important tool in a central bank’s arsenal that can be used to help prevent deflation in the wake of a financial crisis.

Is the Fed's Inflation Target Symmetric? – Thoma - I just got out of a press conference with Dennis Lockhart (Atlanta Fed president) and Charles Evans (Chicago Fed president). I can't say there was any real news, but I did manage to ask a question. I asked whether the 2% inflation target was truly symmetric. I noted that the projections from members of the FOMC looked more like a ceiling than a central point, and that the comments made by Dennis Lockhart in the previous session made me wonder if, in fact, he thought there were asymmetric costs to over and under-shooting. I also asked Lockhart in particular what he is so afraid of if the inflation rate goes up temporarily. Both insisted that the target is symmetric. However, Lockhart said that we know much more about the effects of inflatio0n than deflation, and that preventing deflation was therefore job number one (which doesn't really answer the question). He didn't explain what he is so afraid of if inflation goes up. Evans, while explicitly agreeing the target was symmetric, made comments that indicated that it may not be. He said the Fed has not done a very good job of communicating its tolerance around the 2 percent target, both up and down, and they need to improve. But if the target is really symmetric, simply saying that (along with the tolerable range) is all that is required. Talking separately about tolerance for over and under-shooting isn't needed.

Symmetric goals, asymmetric risks - Atlanta Fed's macroblog - Mark Thoma has been hanging out with my boss or at least was at the same conference, where Thoma had a chance to try out his reporter chops: "I just got out of a press conference with Dennis Lockhart (Atlanta Fed president) and Charles Evans (Chicago Fed president). I can't say there was any real news, but I did manage to ask a question... I asked whether the 2% inflation target was truly symmetric." Thoma got an answer, though seemingly not one that left him totally convinced: "Both insisted that the target is symmetric. However, Lockhart said that we know much more about the effects of inflation than deflation, and that preventing deflation was therefore job number one (which doesn't really answer the question). He didn't explain what he is so afraid of if inflation goes up... Evans' and Lockhart's statements stand on their own, but we've collected some information via the Atlanta Fed's Business Inflation Expectations survey that helps me think about the Thoma question. The chart below plots the answers, collected in the January and April surveys, to the following query: "Projecting ahead, to the best of your ability, please assign a percent likelihood to the following changes to unit costs per year over the next five to 10 years."

Engle Joins Krugman Suggesting Higher Inflation for U.S. - New York University professor Robert Engle said policy makers should consider allowing slightly higher inflation as a way to spur the U.S. economy, joining fellow Nobel Prize winner Paul Krugman who says it could reduce unemployment. “A little bit of inflation would do a whole lot of good for the U.S. economy, would certainly do a lot of good for the housing market,” Engle, who won the Nobel Prize in economics in 2003, said at the Bloomberg Washington Summit hosted by Bloomberg Link today. “If we had just a little bit of inflation and house prices went up, all the sudden they’d be above the mortgages.” Krugman’s suggestion that the Federal Reserve tolerate inflation of 3 percent to 4 percent to boost the economy has been rejected by Fed Chairman Ben S. Bernanke, who said such a policy would be “reckless.” The Bernanke-Krugman debate started with Krugman’s April 24 article in the New York Times Magazine, titled “Earth to Bernanke.” In it, Krugman, who won the Nobel Prize in 2008, argued that allowing a more rapid increase in consumer prices would align with Bernanke’s comment in 2000 that the Bank of Japan should pursue faster inflation to escape deflation. 

Is higher inflation rally the answer? - A lot of people, including those who favor NGDP targeting, want the Fed to raise the rate of inflation; at least, temporarily. Three questions immediately come to mind: [1] What is the theoretical mechanism linking economic prosperity to the rate at which nominal prices rise; [2] Exactly how is the Fed, given the tools at its disposal, supposed to generate higher inflation under current economic circumstances; and [3] What is the evidence to support the belief that more inflation will reduce unemployment (or increase real GDP)? There are so many different views out there that it's hard for me to keep track of them all. My last couple of posts dealt with the idea of a NGDP target, and it's close cousin, a price-level target. I'm no expert in the area, but if I understand the logic correctly, the idea is for the Fed to reverse what was a sharp and unanticipated decline in the price-level that occurred in late 2008. The presumption is that because debt is denominated in nominal terms, an unexpected permanent decline in the price-level path increase the real value of the stock of outstanding nominal debt. In turn, this imposes a real burden on all debtors, including households with mortgages and the government sector.

Two Measures of Inflation: New Update - The BEA's Personal Consumption Expenditures Chain-type Price Index for March, released today, shows core inflation converging on the Federal Reserve's 2% target at 1.96%. In contrast, the Core Consumer Price Index, data through March, is above the target at 2.26%. The Fed, of course, is on record as using Core PCE as its inflation gauge:  Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate[SourceThe October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 0.93% was an all-time low. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both well off their respective interim highs set in September. This close-up comparison gives us a clue as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is lower than Core CPI. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that the less volatile Core PCE is their metric of choice.

The Inflation Threat Is a Bogeyman - British celebrity historian and Harvard professor Niall Ferguson thinks inflation is "really" much higher than its official number. So does celebrity politician and self-styled Austrian economist Ron Paul. And then there's John Williams of Shadow Stats. He too warns of double-digit inflation -- but curiously takes payments for his newsletter in dollars. Even more curiously, he hasn't increased its price in years. There's just one problem with the inflation monster. It's not real. The U.S. economy has added 1.9 million jobs over the past 12 months. That number is the best indicator that inflation isn't 10 percent. Here's why. A country's nominal GDP (NGDP) refers to the total size of its economy. In other words, it's the dollar size of our economy, including both inflation and real growth. Here's why it's interesting: If we work backwards from NGDP and inflation, we can infer how much real GDP grew in the past year. And we can infer from real GDP how many jobs we would expect the economy to add. The below chart shows much NGDP has grown year-over-year since the Great Recession hit. (Note: 2008 was the first time NGDP hit negative territory since 1960).

Inflation and Joblessness: The Tipping Point - Another day, another clue in the quest to understand why the Fed isn’t trying harder to reduce the rate of unemployment: John Williams, president of the Federal Reserve Bank of San Francisco, said Thursday that the nonaccelerating inflation rate of unemployment – the lowest level that can be reached without leading to inflation – may have climbed as high as 6.5 percent, compared to 5 percent before the recession. First time hearing about the nonaccelerating inflation rate of unemployment, or Nairu? No worries. It’s an important concept, but also pretty obscure. Basically, the idea is that some unemployment is good, or at least unavoidable. People change jobs. Industries disappear and workers need to be retrained. And a pool of unemployed workers limits the competitive pressure to raise wages. In technical terms, many economists – including the ones who run the Fed – believe that pushing unemployment below a certain level will cause wages and prices to rise. They call that level the natural rate of unemployment. And Mr. Williams thinks recent disruptions, which have left some workers ill equipped to find new jobs, have raised that rate as much as 1.5 percentage points.

Demand for Rental Units Could Disrupt Fed Plans - The market for rental units is out of whack. The supply among rental housing is the tightest in more than a decade as only 8.8% of units were vacant in the first quarter. And given the steep fall in homeownership rates in the U.S., the demand for rental units is the highest in 15 years. The imbalance isn’t just a headache for those seeking to lease a home. It could cause a migraine for Federal Reserve officials. That is because rents–which had been held down during the recession–are rising. According to the Commerce Department, the median U.S. rent was $721 per month in the first quarter, up 5.6% from year-earlier levels. The gain is a boon for landlords (rental income has soared about 12% in the year ended in March), but it is a bane for inflation hawks. Actual rents influence what homeowners think their own homes would rent for. And within the consumer-price report, rents and owners’ equivalent rent account for 40% of the core index that excludes volatile food and energy items. In March, yearly shelter inflation was running about 2.1%, setting a floor under core inflation, which was running at a 2.3% annual pace.

This is how the recovery succeeds or fails - MUCH as we've been talking about the meaning and importance of a rigid 2% inflation target in America, it would be useful to have a tangible example to help illustrate the point. Kathleen Madigan obliges: The market for rental units is out of whack. The supply among rental housing is the tightest in more than a decade as only 8.8% of units were vacant in the first quarter. And given the steep fall in homeownership rates in the U.S., the demand for rental units is the highest in 15 years. The imbalance isn’t just a headache for those seeking to lease a home. It could cause a migraine for Federal Reserve officials. That is because rents–which had been held down during the recession–are rising. According to the Commerce Department, the median U.S. rent was $721 per month in the first quarter, up 5.6% from year-earlier levels... Actual rents influence what homeowners think their own homes would rent for. And within the consumer-price report, rents and owners’ equivalent rent account for 40% of the core index that excludes volatile food and energy items. In March, yearly shelter inflation was running about 2.1%, setting a floor under core inflation, which was running at a 2.3% annual pace.

The 2% Catastrophe: How One Number Explains the Miserable Economy - The Federal Reserve is crucifying the U.S. economy on a cross of two-percent inflation. The Federal Reserve balance sheet contains roughly $2.5 trillion worth of Treasuries, Fannie Mae bonds and mortgage-backed securities. But there is one asset the Fed considers invaluable. Credibility. Most people think the central bank's job is manipulating interest rates, but the Fed is really in the business of making and keeping promises about the economy. Lately the Fed is obsessed with a narrow construction of credibility that is holding back the entire country.  The Fed has fetishized two-percent inflation. The Fed makes a very simple promise: It promises to keep inflation at a certain level every year. That level has changed over the past 30 years, but it's currently around 2% a year. If the economy is running too hot, the Fed raises interest rates. If it's running cold, it lowers rates. For 30 years, this worked spectacularly. Recessions were rare and shallow. Inflation was low. Then 2008 happened. Even zero interest rates weren't enough to revive the collapsing economy. That's still mostly true now. In fact, our disappointing recovery is in large part the result of a central bank target that no longer serves the economy.

US GDP Data: Private Sector Grows 2.8% in Q1 2012, Government Continues to Shrink - The private sector of the U.S. economy grew at a 2.8 percent annual rate in the first quarter of 2012, according to yesterday’s advance estimate from the Bureau of Economic Analysis. Overall growth of real GDP was 2.2 percent, pulled down by the continuing shrinkage of the government sector. Consumption spending contributed 2.04 percentage points to real GDP growth, up from 1.47 points in Q4, 2011. Much of the slowdown in growth came from the investment component, which contributed only .18 percentage points to growth, down from .78 percent in Q4. The good news was that much less of the investment component took the form of inventory buildup. Inventory growth, which contributed 1.81 percentage points to the 3 percent Q4 growth, contributed just .59 percentage points in Q1. As a result, the growth rate of real final sales was actually half a percentage point faster in Q1 2012 than in  Q4 2011. Exports continued to be a bright spot in the GDP report, as they have been throughout the recovery. Exports contributed .73 percentage points to Q1 growth, up from .37 percentage points in Q4. Growth of imports almost exactly balanced exports, so net exports were essentially flat. The steady shrinkage of the government sector continued for the sixth consecutive quarter. For the first time in a year, not a single component of government spending increased—federal, state or local; defense or nondefense. This update of a chart I first posted a couple of months ago tells the tale. Where is the “runaway growth of government” that the Tea Party keeps ranting about?

Scott Sumner on Smithianism - Scott writes The new GDP figures offer a reminder that one can’t analyze movements in GDPby looking at components of GDP.  We saw huge increases in spending on cars (pushing consumer durables up by 15.3%) and houses (up 19.1%.)  And yet overall RGDP growth fell to only 2.2%.  Why didn’t the spending on cars and houses help?  Because in the short run it’s NGDP growth that drives RGDP.  And the Fed continued its tight money policy by allowing only 3.8% NGDP growth, same as the previous quarter. If the Fed had a strict NGDP target and everyone knew what it was the Scott would be correct. However, if either the Fed doesn’t have a strict target or we don’t know what it is then Car and Houses are causal or informative, respectively.  This is because Cars and Houses pull harder on NGDP more than most sectors of the economy. If we think of the Fed trying to influence NGDP indirectly – through the interest rate or some other mechanism – then this would imply that an exogenous negative shock to the purchase of cars and houses would tend to lower the demand side pressure on NGDP and so the Fed would need to loosen its indirect target to keep NGDP growth constant. . If in the absence of some non-Fed shock the construction of new homes begins to decline, then one can say “Ah this must mean the Fed is tightening NGDP”

Will the 'Real' GDP Please Stand Up? - How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index. The charts below show quarterly Real GDP since 1960 with the official and three variant adjustment techniques. The first chart is the official series as calculated by the BEA with the GDP deflator. The second starts with nominal GDP and adjusts using the PCE Deflator, which is also a product of the BEA. The third adjusts nominal GDP with the BLS (Bureau of Labor Statistics) Consumer Price Index for Urban Consumers (CPI-U, or as I prefer, just CPI). The forth chart, prompted by several requests, adjusts nominal GDP using the Alternate CPI published by economist John Williams at I've calculated the latest GDP in all versions to two decimal places to help highlight the differences.. Suffice to say that the higher the increase in compounded annual percentage change in the deflator, the lower the real GDP. Conversely the lower the increase (or if there is a decrease), the higher the real GDP. With this in mind, consider: The BEA puts the latest compounded annual percentage change in the GDP deflator (i.e., the inflation rate) at 1.5%. That is quite low, which gives us a higher GDP number. If I make the same calculation using the compounded annual percentage change for seasonally adjusted quarterly CPI, I get an inflation rate of 2.5%, a full percent higher.

A First Look at Where GDP Will Be in 2012-Q2 - On 2 April 2012, we forecast that the U.S.' real GDP for the first quarter of 2012 would be $13,508.2 billion in terms of constant 2005 U.S. dollars. This value represents the midpoint of our projected forecast range for where GDP in 2012-Q1 would most likely be recorded.  Based on the first official estimate for GDP for 2012-Q1, we were off by about 0.05%, as the U.S. Bureau of Economic Analysis put their earliest estimate at $13,502.4 billion!  . We would anticipate that the figure for 2012-Q1 GDP will be revised upward during the next two months.  Looking forward to the current quarter (2012-Q2), and incorporating the BEA's first estimate of 2012-Q1 GDP into our "modified limo" forecasting technique, we would initially anticipate that the likely range for real GDP in the U.S. will be centered around $13,589.2 billion in terms of constant 2005 U.S. dollars. Assuming that deviations between our projected value and the actual recorded can be described by a normal distribution, we would give nearly 70% odds that 2012-Q2's inflation-adjusted GDP level will fall in a range between $13,367.7 billion and $13,649.9 billion in constant 2005 U.S. dollars.

May 2012 Economic Forecast: Continued Expansion Predicted - The Econintersect May 2012 economic index shows underlying economic fundamentals continue to show economic expansion – and the dip in the rate of growth rebounded somewhat in this forecast. As of the end of April 2012, rail’s growth year-over-year is not strong.  To support a continuing expansion view with rail data, one must ignore coal shipments or rail is contracting.  Truck shipments are pointing to a 2% growth economy this year (using GDP as the metric).  Recession markers of real GDP, real income, employment, industrial production, and wholesale-retail sales growth remain well away from recession territory. Several things are becoming apparent:

  • the “New Normal” economy is pulsing or growing in unpredictable spurts;
  • the consumer is still consuming;
  • jobs growth has disconnected from known economic fundamentals.

Growth outlook undeterred by March payroll report - The Business Cycle Index (BCI) and forecasts of it were little changed following the March 2012 nonfarm payroll employment report, even though it is an important component of the BCI and the 120,000 gain in employment was well below consensus forecasts of a little more than 200,000 jobs. The reason is that the BCI model's forecast of March payroll employment from the previous month was only 137,000 jobs, so there was little impetus to revise the BCI model outlook. Current reading and trend: The BCI is now expected to remain over 1.0 standard deviations above zero until June 2014, which represents a decent run of solid economic conditions. Financial market indicators in the construction of the BCI are at values that neither add nor subtract significantly to/from the business cycle outlook.

Chicago Fed: Economic Activity Decreased in March - According to the Chicago Fed National Activity Index, March economic activity decreased from February. This is the third consecutive monthly decline. Here are excerpts from the report: Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.29 in March from +0.07 in February. All four broad categories of indicators that make up the index deteriorated from February, with the production and income and personal consumption and housing categories both making a negative contribution to the index in March.  The index's three-month moving average, CFNAI-MA3, decreased to +0.05 in March from +0.37 in February. March's CFNAI-MA3 suggests that growth in national economic activity was near its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. . [Download PDF News Release] The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. . Postive monthly values indicate above-average growth, negative values indicate below-average growth.  The first chart below is based on the complete CFNAI historical series dating from March 1967. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of coincident economic activity. I've also highlighted official recessions.

Spring Slowdown: Is the U.S. Economic Recovery Stalling? - The disappointing economic growth figures released Friday by the federal government have raised the possibility that the U.S. recovery might be stalling — just when it appeared poised to achieve “escape velocity,” in which gains would become self-reinforcing. First-quarter gross domestic product — the most basic measure of national economic performance — grew at a lackluster rate of 2.2%, the Commerce Department said Friday, down from last quarter’s 3% rate, and below most economic forecasts of 2.5%. Growth was weighed down by a decrease in business spending and government investment, an ominous sign just when the economy needs more spending, not less, in order to keep growing. The mediocre rate of recovery has prompted some economists, most notably Princeton professor and New York Times columnist Paul Krugman, to accuse Fed Chairman Ben Bernanke of not doing enough to help spur the economy. But after two stimulus rounds that have boosted the Fed’s balance sheet to nearly $3 trillion, it’s simply not clear if the central bank has the political appetite for a third. Bernanke’s Fed prides itself on being politically independent, and in an election year, another round of stimulus could be attacked as an effort to goose the economy — and further risk inflation — to support Obama’s chances.

Data Points To Weaker Economic Momentum (Reuters) - The U.S. economy appeared to downshift as it entered the second quarter, with consumers increasing their spending only modestly last month and a gauge of business activity in the Midwest falling sharply in April. Consumer spending rose 0.1 percent in March from a month earlier when taking inflation into account, the Commerce Department said on Monday. Separately, a report from the private Institute for Supply Management-Chicago showed business cooled much more than expected in the Midwest during April. "The economy is losing a little momentum," said Gary Thayer, a macro strategist at Wells Fargo Advisors in St. Louis. The U.S. recovery had already slowed substantially in the first quarter as businesses cut back on investment and restocked shelves at a slower pace, data on Friday showed. Gross domestic product expanded at a 2.2 percent annual rate in the first three months of the year compared to 3 percent in the fourth quarter. Stronger consumer spending cushioned the blow in the first quarter, but Monday's data suggested consumers ended the period spending less freely. Consumer spending climbed 0.3 percent in March, just below the median forecast in a Reuters poll, but inflation ate up most of that gain.  After-tax income climbed 0.2 percent when accounting for higher prices, the Commerce Department said.

Recovery Measures - By request, here is an update to four key indicators used by the NBER for business cycle dating: GDP, Employment, Industrial production and real personal income less transfer payments.. These graphs show that several major indicators are still significantly below the pre-recession peaks.This graph is for real GDP through Q1 2012. Real GDP returned to the pre-recession peak in Q3 2011, and has been at new post recession highs for three consecutive quarters. At the worst point, real GDP was off 5.1% from the 2007 peak. Real GDP has performed better than other indicators ... This graph shows real personal income less transfer payments as a percent of the previous peak through February (March data will be released Monday). This measure was off 10.7% at the trough. Real personal income less transfer payments is still 4.2% below the previous peak. The third graph is for industrial production through March. Industrial production was off over 17% at the trough, and has been one of the stronger performing sectors during the recovery. However industrial production is still 4.1% below the pre-recession peak. The final graph is for employment. This is similar to the graph I post every month comparing percent payroll jobs lost in several recessions. Payroll employment is still 3.8% below the pre-recession peak. All of these indicators collapsed in 2008 and early 2009, and only real GDP is back to the pre-recession peak.

U.S. Chose Better Path to Economic Recovery - Last summer, things looked bad on both sides of the Atlantic. There were fears of double-dip recessions, and stubbornly high unemployment rates. Stock markets swooned.  Now, the pictures appear very different. The unemployment rate in the United States has been steadily falling, while the unemployment rate in the euro zone has climbed to its highest level since the currency was introduced more than a decade ago. There is still some double-dip talk in the United States, but in many European countries it is a reality.  In the United States, the Institute for Supply Management said this week that its survey of manufacturers showed continued improvement. As a group, companies say that overall business is better and that new orders are doing very well. They say they expect to continue adding workers. In the euro zone, a similar purchasing managers survey indicated that conditions were deteriorating.  In Europe this week, a meeting of finance ministers trying to negotiate details of how banks will be forced to raise capital — and whether some countries can require their banks to have more capital — produced no agreement but provided more reasons to doubt whether the banks are safe. In the United States, the Federal Reserve’s quarterly survey of lending officers indicated that lending conditions were improving.

Chomsky: U.S. and Europe ‘committing suicide in different ways’ -- In an interview with GritTV’s Laura Flanders, author and MIT professor Noam Chomsky discussed the potentially bleak future facing both the United States and the European Union. Both, he said, are facing historic crises and are going about trying to resolve them in exactly the wrong ways. According to Chomsky, we are currently living in a period of “pretty close to global stagnation” but that the world’s great powers are reacting to the lack of growth in exactly the wrong manner. “The United States and Europe are committing suicide in different ways, but both doing it.” He called European austerity measures “a disaster” and indicated that he expects them to fail, the question being more about how long it will take. The spending cuts and slashing of benefits to workers are ultimately part of a plan designed to dismantle the social contract, he said, although some governmental leaders are more willing than others to call it that.

Services Slowdown Signals U.S. Growth May Be Cooling: Economy - Service industries in the U.S. expanded less than projected and consumer confidence weakened, signaling the world’s largest economy may be cooling.  The Institute for Supply Management said today its non- manufacturing index fell to a four-month low of 53.5 in April from 56 in March. The median forecast of economists surveyed by Bloomberg News was 55.3. A reading above 50 in the Tempe, Arizona-based group’s gauge signals expansion. The Bloomberg Consumer Comfort Index fell to a two-month low last week.  Stocks extended losses as the services report added to concern global growth is slowing after European Central Bank President Mario Draghi said the economic outlook has worsened. American consumers, whose purchases rose by the most in a year in the first quarter, may find it difficult to maintain the pace of spending without faster job and wage gains,

Why the Economy is Heading for a Stall - Robert Reich - The Institute of Supply Management’s non-manufacturing index fell to a four-month low in April (53.5, down from 56 in March – still positive territory but just barely). New orders dropped to their lowest level in six months. That doesn’t bode well, especially when combined with other recent data. The Commerce Department reports that the economy as a whole has slowed from the last quarter of 2011 when it was expanding at an annual rate of 3 percent, to 2.2 percent for the first quarter of this year. And last month’s unemployment report showing only 120,000 new jobs in March was downright alarming. What’s going on? Europe is sliding into recession, and gas prices are still high. But the real problem lies closer to home. Cuts in government spending are reducing domestic demand precisely at the time when consumers are reaching the end of their ropes and can’t spend more. Consumers did all the spending they could in the first quarter. Household purchases increased 2.9 percent between January and March. That was the biggest increase since the last quarter of 2010. Absent real wage gains, that spending pace can’t possibly continue. Consumer savings are down and their debt is up. Consumer confidence dropped last week to a two-month low.

Is Constant Economic Growth Possible? - If we read the financial pages, economic growth seems to be viewed as the “normal” situation to which economies inevitably return. But is it really? If we look back over the past 50 years, or even over the past 100 years, economic growth has predominated. Over the longer term, we know that people have become more prosperous, and that world population has grown. The natural assumption is that economic growth will continue in the future as it has in the past. Let’s think about this a little further. We live on an earth with a fixed surface area. If the population of the earth keeps growing, at some point people would fill up every square foot (or square meter) of land space. Clearly that can’t happen. Also, the resources we pull from the ground aren’t unlimited–at some point the amount we pull from the ground starts to deplete. We know that at some point, perhaps far in the future, economic growth must stop. The question is really where we are now, relative to the hard limits that we know must exist. Let’s think about the situation.

Deleveraging: The bad, the good and the ugly - DELEVERAGING, history tells us (via McKinsey research) is set to be the main economic trend for years to come. But a new paper by Anat Admati and her co-authors shows (amongst lots of other things) that the term is pretty unhelpful.  The paper contains more interesting evidence on the bank capital debate, and as a part of that argument shows that deleveraging could mean either smaller balance sheets or larger ones.  Here’s a diagram: The first way to cut leverage—the ratio of assets to equity—is to reduce the amount of debt a household, firm, bank or government holds.  In order to balance the books, assets must be reduced too. If you believe that assets support some kind of real economic activity which you care about, this is bad deleveraging. But balance sheets can be bolstered without cuts in activity too, as the diagram makes clear: with more equity a balance sheet of the same size has lower leverage.  And the books can be made both larger and stronger at the same time, if equity grows proportionately more than debt. This would be good deleveraging.

Paul Krugman Appears on "The Week" and Thinks We Are Doomed » Paul Krugman:  We're Doomed: We have a terrible failure of demand — and Carly Fiorina thinks the key problem is excessive taxes on corporations (our effective rate is actually fairly low). Hey, if only we had low rates like Ireland, we could have 14.7 percent unemployment … oh well, never mind. Meanwhile, Eric Schmidt thinks the problem is a shortage of workers in some high-skill fields.  Everything makes David Walker think of the need for entitlement reform. Everything makes George Will think of Ronald Reagan. Sigh. That was my reaction after the debate on This Week, which was actually taped Friday.  I am actually not depressed by Paul's experience.  I am, however, irritated at George Stephanipoulos: he seems to have no clue as to how to do what I takes to be his job.  If you want to inform your watchers, you don't put four stopped clocks on your panel. You do not pick four people each of whom has a single ideological-institutional affiliation, and a single set of talking points from which they will not deviate no matter what. No matter what question is asked, David Walker is going to say that the solution is to cut Social Security and Medicare, Eric Schmidt is going to say the solution is to have the federal government fund the training of more high-tech workers, Carly Fiorina is going to say that the solution is to cut corporate taxes, and George Will is going to say the solution is to bring out and worship the mud-and-saliva image of Ronald Reagan he has constructed in his basement.  It is not a panel you select if you're interested in forming your viewers via any kind of interactive discussion.

How to End This Depression - NYRB - Paul Krugman - The depression we’re in is essentially gratuitous: we don’t need to be suffering so much pain and destroying so many lives. We could end it both more easily and more quickly than anyone imagines—anyone, that is, except those who have actually studied the economics of depressed economies and the historical evidence on how policies work in such economies. The truth is that recovery would be almost ridiculously easy to achieve: all we need is to reverse the austerity policies of the past couple of years and temporarily boost spending. Never mind all the talk of how we have a long-run problem that can’t have a short-run solution—this may sound sophisticated, but it isn’t. With a boost in spending, we could be back to more or less full employment faster than anyone imagines.  But don’t we have to worry about long-run budget deficits? Keynes wrote that “the boom, not the slump, is the time for austerity.” Now, as I argue in my forthcoming book*—and show later in the data discussed in this article—is the time for the government to spend more until the private sector is ready to carry the economy forward again. At that point, the US would be in a far better position to deal with deficits, entitlements, and the costs of financing them.

Video: Paul Krugman discusses his new book - Yesterday, Nobel-winning economist and New York Times columnist Paul Krugman spoke at EPI about his new book, End this Depression Now! A key point of the book and his speech is that there’s a common and very wrong belief that the economy is like a morality play: Lots of people made irresponsible decisions in the run-up to the economic collapse, and, like a hangover, they must now suffer the consequences of their actions. As Krugman points out, the majority of the people who have been hurt by this crisis do not deserve the blame. Over eight million people lost their jobs and, with an unemployment rate of more than 8 percent for more than three years now, many of those same workers, along with new entrants to the labor market, have been unable to find jobs. Their jobs disappeared through no fault of their own, and the pace of their return is nowhere near sufficient to get everyone back to work anytime soon. More importantly, Krugman points out that, unlike a hangover that needs to be waited out, we could easily fix the economy now and put these millions of people back to work. First, we should halt the fiscal austerity efforts that recently doomed the British economy. Second, we should embark on aggressive fiscal expansion to boost consumer and business spending, stimulating demand for goods and services and creating jobs. As Krugman notes, this is basic Econ 101. All we need is the political will.

The Speed Read: Paul Krugman’s ‘End This Depression Now!’ - A reliably liberal voice on the New York Times’ op-ed page, economist Paul Krugman has come out swinging for government stimulus and John Maynard Keynes, the tea party’s favorite bogeyman. In his new book, “End This Depression Now!,” he says the only thing prolonging the financial crisis is our fear of taking decisive action. Some highlights:The title of Krugman’s book isn’t just hype — he wants to rethink the current economic crisis by renaming it. “The best way to think about this continued slump, I’d argue, is to accept the fact that we’re in a depression,” he writes. “No, it’s not the Great Depression, at least not for most of us. . . . But it’s nonetheless essentially the same kind of situation that John Maynard Keynes described in the 1930s.” Krugman calls inflation “the phantom menace” — a necessary part of a healthy recovery that economists and policymakers sweat for no reason. “All that inflation fearmongering has been about a nonexistent threat,” he writes. “Underlying inflation is low and, given the depressed state of the economy, likely to go even lower in the years ahead. And that’s not a good thing. Falling inflation, and even worse, possible deflation, will make recovery from this depression much harder.”

An interview with Paul Krugman - Ezra Klein -- On Wednesday, Paul Krugman swung through town to promote his new book, “End This Depression Now!” I caught up with him at the Economic Policy Institute to talk about whether Ben Bernanke could actually end this depression, the prospect that Mitt Romney could be a closet Keynesian, and what we’ll be worrying about in 10 years. A lightly edited transcript follows.

Plutocracy, Paralysis, Perplexity, by Paul Krugman - Did the rise of the 1 percent (or, better yet, the 0.01 percent) cause the Lesser Depression we’re now living through? It probably contributed. But the more important point is that inequality is a major reason the economy is still so depressed and unemployment so high. For we have responded to crisis with a mix of paralysis and confusion — both of which have a lot to do with the distorting effects of great wealth on our society.  Put it this way: If something like the financial crisis of 2008 had occurred in, say, 1971 — the year Richard Nixon declared that “I am now a Keynesian in economic policy” — Washington would probably have responded fairly effectively. Today, Washington is marked by a combination of bitter partisanship and intellectual confusion — and both are, I would argue, largely the result of extreme income inequality.  So how did that happen? For the past century, political polarization has closely tracked income inequality, and there’s every reason to believe that the relationship is causal. Specifically, money buys power, and the increasing wealth of a tiny minority has effectively bought the allegiance of one of our two major political parties, in the process destroying any prospect for cooperation.  And the takeover of half our political spectrum by the 0.01 percent is, I’d argue, also responsible for the degradation of our economic discourse, which has made any sensible discussion of what we should be doing impossible.

Rebutting Paul Krugman: The Rest of the Story - I recently read an interesting article over at Barry Ritholtz's blog (one of my daily mandatory reads after Advisor Perspectives) triggered by one of Paul Krugman's recent commentaries, The Secret of Our Non-success. Krugman showed the following chart from the Federal Reserve Economic Data (FRED): Krugman analyzes the data this way: Obama, far from presiding over a huge expansion of government the way the right claims, has in fact presided over unprecedented austerity, largely driven by cuts at the state and local level. And it's therefore an amazing triumph of misinformation the way that lackluster economic performance has been interpreted as a failure of government spending. Before dissecting Krugman's analysis, let me point out that readers who closely read Krugman's article would correctly point out the chart shown above (taken from the FRED site directly) is a bit different from what Krugman posted in his article (shown below). To make an exact replica of Krugman's chart, one would have to make purposeful changes to the original data shown. The date range must be changed to an exact 2001 September to 2011 September and the scale had to be changed from billions of dollars to the percent change from year ago. Everyone knows that Krugman has an agenda – that's OK (author's note: both political parties have agendas). But let's highlight Krugman's agenda by telling ... The Rest of the Story!

Milken Global Conference Video: Where Will Economic Growth Come From? - Speakers:

  • Willem Buiter, Chief Economist, Citigroup
  • Terry Duffy, Executive Chairman, CME Group Inc.
  • Mohamed El-Erian, CEO and Co-Chief Investment Officer, PIMCO
  • Kevin Warsh, Distinguished Visiting Fellow, Hoover Institution, and former Member, Federal Reserve Board of Governors

Facing Up To 2012 - This is a year of uncertainty. Corporations are full of cash, issuance is down based upon lack of need at a time when interest rates are bouncing off of zero. We have had four years of Quantative Easing that has injected a tremendous amount of capital into the markets while liquidity is diminshed as the major dealers cut back on their risk exposure. The availability of decent options to place new money is becoming scarce and political considerations are more significant than economic considerations at present. The forthcoming elections in France and Greece, just days away now, will help shape the financial marketplace not just in Europe but also in the United States. The equity markets in America, typically myopic, lurch from risk-on to risk-off trades with any new significant headline issued out of the Continent. Compression in the bond markets continues as Corporate yields are at all-time lows. The largest “concerns” are yield/return and how to position yourself if Europe self-destructs and the possibility of credit/risk assets widening against Treasuries. There is a distinct difference now between U.S. securities and European securities as specifically I note “home law,” bonds denoinated in Euros, the political risk in Europe, more PSI’s and the “innovative” solutions offered by Europe for their sovereigns and for their banks. I also point to the lack of accurate data offered by Eurostat as a continuing difficulty so that many of the numbers that we are provided do not reflect the reality of the pablum that they are trying to force-feed to the world.

Learned helplessness and prolonged unemployment - Robin Wells - Yet another disappointing statistic today from the US labor market – only 115,000 jobs added in April, barely enough to keep the unemployment rate from rising given the growth in population, and a significant fall from the 154,000 jobs added in March. While not necessarily a sign that the economy is headed for another turn downward, April's job numbers signal a repeat of the pattern seen in 2011 – a recovery that is halting, unpredictable, and agonizingly slow. Frustrated workers leaving the labor force helped bring the unemployment rate down from 8.2% to 8.1%, resulting in the lowest rate of job participation (percentage of working age population in the labor force) since 1981. And it's not surprising given the continued heavy drag on the economy from high levels of household debt, high oil prices, and significant budget cutbacks by state and local governments. Moreover, the longer the economy limps along, the harder it appears to be for policymakers to accept that another outcome is possible. Months with stronger numbers will be seen as confirmation that the economy is turning the corner, and months with weaker numbers will be seen as confirmation that there's little one can do in the face of the need for longterm adjustments in the economy. Learned helplessness sets in.  The maddening willful policy blindness of our leaders is resulting in a failure to address our country's most pressing issues.

Economy's Biggest Drag Right Now Is Government - As the Obama administration's 2009 stimulus continues to wind down, the effects on the US economy are showing up in the economic data. Coming out of a steep recession, the economy should be experiencing robust output, or GDP, growth. Output growth of 3 percent in the fourth quarter of 2011 helped bring the unemployment rate down. However, the government's announcement that output growth fell to 2.2 percent in the first quarter of 2012 should give policy makers pause. The economy needs to grow by at least 2.5 percent just to keep unemployment from rising. Thus this latest figure on GDP growth does not auger well for the job market, which has seen a steady rise over the last few weeks in initial unemployment claims. In the face of weaker demand, Investment spending by business is slowing. Cutbacks in government spending at the federal as well as state and local levels are already hurting GDP growth. In the absence of federal revenue sharing with the states--the first time the federal government has not had such a program when unemployment is above 7 percent--state and local government expenditures have fallen for seven consecutive quarters.

Economy's Biggest Drag Right Now Is Government - Government has become its own worst enemy when it comes to the economy, with public spending putting a damper on growth that otherwise continues at a steady if unspectacular pace.... Before anyone starts thinking that Washington suddenly has gotten religion on spending, the bulk of the federal government cuts came from defense spending, which plunged 8.1 percent.... Government policymakers, then, face a dicey dilemma: Continue spending and risk falling further into the fiscal abyss, or cut back and deal with a prolonged future of uninspiring GDP numbers. "The dagger (from the GDP letdown) came from a second straight steep drop in federal government spending due to plunging defense outlays," observed Pierpont economist Stephen Stanley. "Boy, wait until these budget cuts start to kick in."

This Chart From The New Reinharts and Rogoff Paper Will Ruin Your Day - Everyone's talking about the paper just published controversial economists Ken Rogoff, Carmen Reinhart and Vincent Reinhart. Titled Debt Overhangs: Past and Present, the paper builds upon the research published in This Time It's Different. The authors find that in prior instances of debt levels above 90% of GDP are associated with an average growth rate of 2.3% (median 2.1%) versus 3.5% during lower debt periods. Notably, the average duration of debt overhang episodes was 23 years, implying "a massive cumulative output loss." And that's not all:"Contrary to popular perception, we find that in 11 of the 26 debt overhang cases, real interest rates were either lower or about the same as during the lower debt/GDP years. Those waiting for financial markets to send the warning signal through higher interest rates that government policy will be detrimental to economic performance may be waiting a long time. ...One might argue that financial globalization has made it easier to carry high public debt burdens, but we see no compelling evidence that this is the case for advanced countries as a whole. Moreover, do not undercount the sophistication and interconnection of national markets in the 19th century, half the timespan covered.

Government is crushing disposable income gains - One takeaway from the first-quarter GDP report is that the heroic consumer saved the nation from a really dismal winter, aided by a lift from great weather and inventory restocking. Yet it’s safe to say that neither the weather nor inventory rebuilding are likely to perform an encore any time soon. And while the American consumer is pretty dogged, things are looking pretty shaky on that front too. U.S. households saved just 3.9% of disposable income in Q1, the lowest since the last cycle’s peak in Q4 2007. In fact, the decline in saving from 4.5% in Q4 financed half of all personal consumption gains in Q1, adding one full percentage point to real GDP growth. But it’s not clear how much lower saving can go, while consumer credit growth outside of student loans has been nonexistent.  That means real disposable income gains may be the linchpin that holds things together — or not. In Q1, real disposable income grew a meager 0.6% from a year ago, holding to a sub-1% pace for a third straight quarter, which has never happened before outside of recession.

The Government Investment Drought Continues….. –Sometimes things are not what we think they are. The conventional notion is that government has become more important under President Obama, while the private sector has stagnated. Yet in some ways the data tell a different story. Take a look at this chart. The top (blue) line shows that private nonresidential investment has rebounded smartly since early 2009, when President Obama took office. Residential investment first dropped, and then mostly came back. The real problem is government investment, which is down 8.3% since the first quarter of 2009, and still falling. In other words, government spending on infrastructure infrastructure, building, and equipment is declining, adjusted for prices changes. This is just utterly bizarre. In a time when the economy is still sluggish, government investment should be the simplest thing to pump up. We need to modernize our infrastructure and bring government into the 21st century, and it’s just not happening. Here’s another angle. This chart shows net government investment as a share of GDP. According to this chart, net government investment is the smallest share of GDP in more than 40 years, and dropping.

Government stimulus moves may have ended recession - Without the unprecedented stimulus actions by the federal government triggered by the 2008 financial crisis, the Great Recession might still be going on, according to a study by Fitch Ratings.The boost from those policies helped the nation's gross domestic product increase 3% in 2010 and 1.7% last year; absent the stimulus, the U.S. "might still be mired in a recession," according to the study, done in conjunction with Oxford Economics.The U.S. economy would have seen little or no growth the last two years without the policies, the report says, and those actions appear "to have significantly softened the severity of the decline" in GDP in the year immediately after the recession ended in mid-2009.Though the Fed's monetary policy actions were helpful, fiscal stimulus by Congress and the White House "had the strongest positive impact on consumption during the recent recovery," the study found.

What stimulus? Government is holding us back - Everyone’s worried that the economy may go over a “fiscal cliff” next year, but they’re missing something essential: We’ve been falling down a “fiscal hill” for two years already. After giving the economy a huge boost in 2009 and 2010, fiscal policy has become contractionary. Now that the private sector is on the mend, the lack of government spending is the biggest factor holding back the economy. And it could get worse. The “fiscal cliff” that’s now looming over the economy refers to a big shift in federal government taxing and spending that is scheduled to go into effect on Jan. 1, based on current law. If Congress and the president don’t act before then, taxes will rise, spending will shrink, and the economy will get hit by a massive tightening in fiscal policy that would probably send the economy back into recession.  The fiscal cliff is the mirror image of the fiscal stimulus measures that politicians of both parties adopted in 2001, 2003, 2008, 2009 and 2010 to temporarily boost economic growth. The fiscal cliff owes its existence to the politicians’ need to appear serious about getting the deficits under control, even though everyone knows they aren’t.  This need to appear serious could have devastating consequences. According to the Congressional Budget Office, the impending tax hikes and spending cuts would reduce gross domestic product by about 3.6 percentage points in the 2013 fiscal year. According to Morgan Stanley economist David Greenlaw, that translates into a 5% drag on GDP during the 2013 calendar year. Read the CBO’s report.

Gross warns of U.S. credit rating downgrade: CNBC  - Bill Gross, founder and co-chief investment officer of bond giant PIMCO, told CNBC on Tuesday that the U.S. could be headed toward a credit rating downgrade if it does not tackle its deficit. Gross cited a U.S. structural deficit figure between six and eight percent greater than any other country besides Japan and the United Kingdom, and added "until we address that structural deficit then yes, we're headed to AA territory." The U.S. is currently rated AA plus by Standard & Poor's and AAA by Moody's and Fitch. While Gross currently gives the U.S. a personal credit rating of AA plus, he warned that one needs to be "very conscious" of the "fiscal cliff" near the end of the year. 

Confidence in What? - Confidence.  This is the main argument for austerity, repeated in a thousand forms but always more or less the same.  Wealthy people, who hold the reigns of the global economy, have to be propitiated, and if we can manage to ease their stress they will reward us with low interest rates and high levels of investment.  If you put it that way, it has the feel of a hostage syndrome. But Keynesians also argue from confidence.  In a slump, investors lose their urge to invest, their animal spirits.  Low investment reduces the demand for output, which validates low investment in a vicious circle.  The way to break out of it is to visibly stimulate the economy, even if temporarily.  This is the rational notion behind the old priming-the-pump metaphor. Taken at face value, this is an uneven contest.  The problem with the austerian confidence story is that it is entirely speculative, for two reasons.  First, there is no way to measure it.  One could administer a survey to rich people and ask them to rank their worries, but a survey of investor sentiments alone would not be enough to establish the link between mood and action (or inaction).  Just because I don’t like current government policy doesn’t mean I’m going to cut production.  Second, there isn’t really a formal argument that connects the diffuse sentiment encapsulated by the orthodox notion of confidence to outcomes that show up in the national income accounts.

Martin Wolf’s Liquidity Traps and Free Lunches Through Fiscal Expansion - In a good blog post for the Financial Times that did get money (mostly) right, Martin Wolf promised a Part II on the topic of appropriate monetary and fiscal policy in a “liquidity trap,” which he has provided here. Wolf also indicated he would write a piece on Modern Money Theory, an approach he does not address in either of these two articles. I look forward to that. Meanwhile, let me say that I do not disagree with the substantive points made in his Part II—which examines an article by Brad DeLong and Larry Summers. The main argument is this: when there is substantial excess capacity and unemployed labor, fiscal expansion is a “free lunch”. There really should be no surprise about that—it was a major conclusion of J.M. Keynes’s 1936 General Theory, and indeed already had some respectability even before his book. Expansionary fiscal policy can put otherwise unemployed resources to work, so we can enjoy more output. So what DeLong and Summers do is to show that given assumptions about the size of the government spending multiplier as well as a link between income growth and tax revenues (so that economic growth increases revenues from income taxes and sales taxes, for example) then it is entirely possible for a fiscal expansion to “pay for itself” in the sense that tax revenue will rise. If the “real” interest rate is low, then one can show that the “debt burden” of servicing additional government debt due to an increase of budget deficits does not rise. Hence “the fiscal expansion is self-financing.”

Citigroup’s Orszag: Fix the Government’s Economic Models! - Most of the villains of the global financial crisis are familiar by now. We’ve read volumes about reckless home-buyers and property-flippers, unscrupulous mortgage lenders, Wall Street bond desks, and credit-rating agencies. There’s also the lazy regulators and Federal Reserve policy makers who thought they had figured out the world economy. Other folks also blame yield-hungry global investors, especially China, whose gigantic savings account makes it stash cash in the U.S. and inadvertently distort the interest rates of the world’s biggest economy. But one culprit in this rogue’s gallery that tends not to get as much attention is the computer, or rather computer modeling, says Peter R. Orszag, President Barack Obama’s former budget chief and now vice chairman of global banking at Citigroup Inc. In a new column, Mr. Orszag says the models used by top regulators and economic policy makers made them think the storm brewing in the U.S. economy would be another bust–as a result they either looked the other way or figured they couldn’t do anything about it. There’s no point blaming models, of course, which simply have humans behind them. But Orszag’s missive suggests it wasn’t just greed and globalization but also an over-reliance on technology that fueled our worst economic mess since the Great Depression.

U.S. considers issuing floating-rate debt -The Treasury Department is expected to announce Wednesday whether it will begin issuing a new type of federal debt for the first time in 15 years — a reflection of the global interest in storing cash in the United States and of the government’s desire to avoid unexpected disruptions in its ability to borrow. The Treasury is considering following the advice of Wall street traders by introducing a type of investment known as a floating-rate note. The note would allow the government to borrow money for a fixed period — say, two years — while paying a variable interest rate. For global investors, the new note would help satisfy demand for an ultra-safe place to store money at a time when the availability of other safe investments has shrunk. The sovereign debt crisis in Europe and the poor record of other fixed-income securities during the financial crisis have encouraged investors to park their cash in U.S. government securities. As a result, rates on government debt have stayed extremely low despite the country’s rocketing obligations and the political gridlock in Washington that led Standard & Poor’s analysts in August to downgrade the U.S. credit rating.

Four Fiscal Charts - Krugman - I wanted a simple answer to the people who always insist that we must be having massive fiscal stimulus because we have a big budget deficit; my answer is that the deficit is a result of the depressed economy, but how do we show that without getting too much into the weeds? Well, here’s a quick and dirty approach. Suppose that spending and revenues would, in the absence of the slump, have risen at 5 percent per year — roughly GDP growth plus inflation, and actually a bit slower than actual spending growth (6 percent per year) from 2000 to 2007. With this assumption, I can draw three charts for the federal government (using CBO data) and one for state and local (using FRED) that, I think, tell the story. First, most of the surge in the federal deficit is about plunging revenue. In the figure below, the “No recession” line shows what would have happened if federal revenue had grown 5 percent per year after 2007: That’s about an $800 billion per year shortfall. What about spending? Well, it is higher than you would have expected in the absence of the slump, by around $300 billion: What’s that $300 billion about? Well, they’re mainly about the category CBO calls “income security”, mainly food stamps and unemployment insurance:

  The $7 trillion fiscal cliff -- Congress has invented a new extreme sport: Skating on the edge of a $7 trillion fiscal cliff. That's the magnitude of tax increases and spending cuts that will start to hit the economy on Jan. 1, 2013, unless Congress acts. And how Congress navigates that fiscal cliff will affect economic growth, Americans' wallets and the country's fiscal outlook. "There is about $7 trillion there that ... could be taken out of the economy in a really stupid way that would likely push us into a recession immediately," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. Indeed, economist Mark Zandi estimates that inaction by Congress could chop 3 percentage points off inflation-adjusted economic growth in 2013. In that scenario, he estimates the economy would stop growing. On the other hand, simply extending all the expiring tax policies and canceling the spending cuts could add more than $7 trillion to the country's debt over 10 years. While that would boost growth in 2013, it would hurt the economy by the end of the decade. -

Greenspan: Obama Should Have Embraced Simpson-Bowles - Former Federal Reserve Chairman Alan Greenspan on Tuesday said President Barack Obama should have immediately embraced the 2010 Simpson-Bowles deficit-reduction proposal. “The worst mistake the president made was not embracing that vehicle right away,” Greenspan said at the Bloomberg Washington Summit. The plan, designed by former Republican Sen. Alan Simpson of Wyoming and former Clinton White House Chief of Staff Erskine Bowles, would reduce the growth of the deficit by roughly $4 trillion over 10 years through a combination of spending cuts and tax increases. “It’s the ideal vehicle, which won’t get us fully out of this” fiscal situation, Greenspan said. He said the plan is ideal because it allows political compromise even if it wouldn’t now completely resolve the deep fiscal problems the country faces.

Feingold links Pelosi with Steny Hoyer for supporting Simpson-Bowles “Catfood” proposal - We recently reported that Nancy Pelosi is fully on board with the Simpson-Bowles "Catfood-for-Granny" proposal. Among our recommendations: Don't trust Nancy Pelosi. She's trying to sell out the safety net. All that verbal obfuscation simply means she's also protecting her "San Francisco liberal" brand in the process. She can't have both, but she's trying. GP's rule for dealing with Dems:  If you want something from them, threaten what they're desperate to keep. This usually means their jobs (primaries anyone?), but in a few cases it's their "brand" — their "unique selling point" — the persona (the mask) that allows them to fund-raise.  What does Pelosi want? To be the "liberal" face of the Pelosi-Hoyer axis. Threaten to take that away and you get her attention. We are therefore so glad to see Russ Feingold making the same point, and the same linkage: Russ Feingold, the former senator from Wisconsin, said in an email to supporters that Pelosi "has signaled a disturbing potential willingness to adopt a plan that could slash these benefits. And it follows a pattern: Too many House Democrats, including Steny Hoyer, are already on board."

The Jet That Ate the Pentagon - This month, we learned that the Pentagon has increased the price tag for the F-35 by another $289 million -- just the latest in a long string of cost increases -- and that the program is expected to account for a whopping 38 percent of Pentagon procurement for defense programs, assuming its cost will grow no more. How bad is it? A review of the F-35's cost, schedule, and performance -- three essential measures of any Pentagon program -- shows the problems are fundamental and still growing. Although the plane was originally billed as a low-cost solution, major cost increases have plagued the program throughout the last decade. Last year, Pentagon leadership told Congress the acquisition price had increased another 16 percent, from $328.3 billion to $379.4 billion for the 2,457 aircraft to be bought. Not to worry, however -- they pledged to finally reverse the growth. The result? This February, the price increased another 4 percent to $395.7 billion and then even further in April. Don't expect the cost overruns to end there: The test program is only 20 percent complete.

Paul Ryan – Imposing Austerity in order to Avoid It? - Paul Ryan’s interview with Jonathan Weisman included a passage that shows how utterly clueless he is noting that the Republican fiscal policy objective is to: preempt austerity – we want to prevent that bitter kind of European austerity mode which is what we will have if we have a debt crisis. In other words, cut government spending now to avoid fiscal restraint later? Does he not know that we currently suffer from a lack of aggregate demand? We should be avoiding fiscal restraint now but considering long-term measures to reduce government deficits. Then again – the prime minister of the UK seems to be just as clueless as Congressman Ryan. How well is that working out?

Mitt Romney and Paul Ryan's Budget _ Simon Johnson -  The conventional wisdom in American presidential politics is that once a candidate has secured a party’s nomination, he tends to move away from articulating the views of the party faithful toward the political center. However, in a panel discussion on Tuesday, Vin Weber, a senior adviser to Mr. Romney, indicated that the campaign might be moving toward positions on fiscal policy that were close to those proposed by Representative Paul D. Ryan of Wisconsin and his Republican colleagues on the House Budget Committee. When Mr. Ryan presented his budget in March, Mr. Romney described it as “marvelous.” In the Wisconsin primary, Mr. Ryan campaigned with Mr. Romney and speculation arose that Mr. Ryan might be the Republican vice presidential candidate. Yet Mr. Romney’s embrace of the Ryan plan during the general election campaign would represent a significant shift toward a much more extreme view on the future of government than many Romney proposals during the primaries (see this assessment of his primary proposals by the Committee for a Responsible Federal Budget, a bipartisan bipartisan fiscal watchdog focused on deficit reduction). Mr. Weber said he was not speaking for Mr. Romney; I was on the same panel, and my strong impression is that Mr. Weber was floating trial balloons.

Leonard says GOP Is intent on sabotage - Linda Beale - Andrew Leonard of Salon writes often about tax and economic issues. In Friday's column, he addressed the increasingly obstructionist tactics employed by far-right representative Paul Ryan and a coterie of other GOP representatives who are willing to sacrifice core systems in order to keep the military machine humming (and putting money into pockets of GOP arms merchant constituents) while ensuring that anything that provides aide to the less well off is labeled as a disrespected "entitlement" that can be chopped and destroyed at will. See Andrew Leonard, Sabotage: the new GOP plan, (May 4, 2012). Ryan introduced a bill on Wednesday that would achieve the Holy Grail of GOP political goals--continuing the ridiculous Reaganomics militarization by ending the sequester that would cut $600 billion from the military entitlement budget, and at the same time cutting drastically almost every single program that protects ordinary Americans. See Ryan offers bill to end sequester in bid to eliminate defense cuts, The Hill (May 4, 2012). As a commenter on the Hill piece noted, the US military budget is overblown and needs to be cut.  The U.S. Spends More On Defense than Next Top 14 Countries Combined; Wiki List of countries by military expenditures SIPRI Yearbook 2011 - world's top military spenders in 2010 (in billions).

Budget Bunk: The Old Pox-on-Both-Your-Houses Game: In Washington, all serious people routinely write columns in which they set themselves above the political fray and pronounce the Republicans and Democrats equally to blame for political gridlock and all that they see wrong with the world. Today, it is my turn. Of course, beating up on the Republicans is pretty easy these days; you mostly just have to repeat what they say. Their standard bearer, House Budget Committee Chairman Paul Ryan, has proposed a budget that eliminates the national park system, the Justice Department, federal courts, the Food and Drug Administration, and most other areas of the federal budget over the next four decades. The Democrats rely on their great myth: Bill Clinton made the hard choices, cutting spending and raising taxes. This led not only to a balanced budget, but to large surpluses.  In this story, the economy was rewarded with strong growth, low unemployment and a declining national debt, all by virtue of President Clinton's courage in reducing the budget deficit. It's a nice story, but it's long past time that we put this fairy tale to rest. In 1996, after all the "hard choices" had been made (subsequent changes on net raised the budget deficit), the CBO was still projecting a deficit of 2.5 percent of GDP (at $460 billion in today's economy) for 2000. The reason that we ended up with a surplus of $240 billion instead of a deficit of approximately the same size was that the economy grew much more rapidly than had been expected, pushing the unemployment rate down to 4.0 percent in 2000, rather than the 6.0 percent projected .

Taxes and Employment - Since the beginning of the economic crisis, Republicans have insisted that tax cuts and only tax cuts are the appropriate medicine. They almost never explain how, exactly, this would reduce unemployment other than to say it worked for Ronald Reagan in the 1980s.. If one were to take the Republican argument seriously, the linkage would have to be via the tax wedge. This is the principal means by which the government affects employment, according to the Republican economist Arthur Laffer. The tax wedge is the difference between the cost to an employer of employing a worker and the after-tax reward that the employee receives. When taxes go up, the tax wedge gets larger, costing employers more to hire workers at a given after-tax wage. Therefore, it is theoretically possible that a tax cut could increase employment by reducing the tax wedge and allowing employers to hire workers at a lower cost without reducing their after-tax wages. There undoubtedly have been times when the tax wedge was increasing because of bracket creep or legislated increases in payroll taxes that may have had a negative effect on hiring. Whether this is the case now, as Republicans assert, is a question for analysis.

Taxes and Economic Growth: Real World & Simulations - Over the past few years, I've posted many times on an unpleasant reality: despite the fact that so many people believe otherwise, in general, lower taxes do not result in faster economic growth. It is really too bad, because we could all be better off if only lower tax rates led to faster economic growth. However, the association between slower econoimc growth and lower tax rates is something we can see in data from the US, whether we use national level data, state and local data, or anything in between.  Here's a post I wrote not that long ago noting that when top marginal tax rates are below about 65% or so, cutting taxes is associated with slower economic growth and raising taxes is associated with faster economic growth. Here's something a bit more academic showing the same thing.  As I've noted before, there's a logical reason why lowering top marginal rates slows economic growth (except when top marginal rates are very high), and it should be obvious to anyone who has ever run a business: the easiest way to avoid, or at least postpone paying taxes for is not to show taxable income. If your business looks like it will show a profit, reinvest the revenues, pushing up costs and voila, you don't have any profits for the IRS to tax. But, by doing so, you are also strengthening the company, which means setting the stage for faster growth in later years. And you're more likely to follow this strategy, rather than consume your profits, the higher the tax rate.

Simon Johnson: Let ALL the Tax Cuts Expire - For more than six decades, the U.S. and its pre-eminent economy have played the dominant role in global finance. Yet at the International Monetary Fund’s recently concluded annual meeting, the U.S. did not contribute to the new $430 billion “firewall” fund to backstop European banks, should the sovereign-debt crisis take a turn for the worse. Meanwhile, the U.S. is heading for a “fiscal cliff” next January that could throw the global economy into turmoil. Are we witnessing a long-anticipated U.S. retreat from global leadership? Simon Johnson, a former chief economist at the IMF and now a professor of global economics and management at the Massachusetts Institute of Technology, says the IMF situation is only one of the leadership defaults he sees flowing from the increasingly dysfunctional U.S. political system. He and co-author James Kwak’a latest book, “White House Burning,” warns that the U.S.’s failure to deal with its out-of-balance fiscal policy will further undermine the U.S.’s global leadership role by reducing jobs, lowering living standards, increasing inequality and forcing drastic reductions in government services.In his interview with The Fiscal Times, Johnson, who writes regularly for the New York Times’ Economix blog and his own Baseline Scenario, gave some surprising answers to how the U.S. should deal with these twin crises, one home and one abroad: 

Milken Global Conference Video: Tax Reform: What's Fair Got to Do With It? - Speakers:

  • Jared Bernstein, Economic Policy Fellow, Milken Institute; Senior Fellow, Center on Budget and Policy Priorities; former Chief Economist to Vice President Joe Biden
  • Steve Forbes, Chairman and Editor-in-Chief, Forbes Media
  • William Gale, Director, Retirement Security Project, Brookings Institution; Co-Director, Urban-Brookings Tax Policy Center
  • Douglas Holtz-Eakin, President, American Action Forum; former Director, Congressional Budget Office; former Chief Economist, Council of Economic Advisors

Is the U.S. Tax System Fair? - These days, some people want to impose a new Buffett tax on millionaires while others are outraged that low income people pay no income taxes at all and still others want to cut taxes on “job creators.” All in the name of fairness. Is the tax code fair? Should it be? It all depends on what you mean by fair, of course, but at an Urban Institute panel this week, two economists, a tax historian, and a philosopher agreed that in many important ways, it very likely is not. Fairness is one of those concepts that makes economists really nervous. Because it is so subjective and impossible to measure, they usually avoid the idea entirely, preferring to stick with what they can count. Still, my Tax Policy Center colleague Gene Steuerle, Brookings Institution economist Belle Sawhill, Tax Analysts historian Joe Thorndike, and Howard University philosophy professor Charles Verharen joined moderator Greg Ip, The Economist’s U.S. economics editor, in tackling the issue. The result was a fascinating look at a complicated issue from some very different perspectives.  It is well worth watching.

Bait and Switch: Is Pope Benedict Really Against Raising Taxes On the Wealthy to Help Balance Government Budgets? via (Reuters) - Invoking Pope Benedict, Republican Representative Paul Ryan defended his budget plan on Thursday at Georgetown University, where a group of the Jesuit institution's faculty has accused him of misusing Catholic teachings to push cuts to programs that serve the poor. "The overarching threat to our whole society today is the exploding federal debt," Ryan said, speaking in a Gothic, oak-paneled auditorium on the Georgetown campus. "The Holy Father, Pope Benedict, has charged that governments, communities, and individuals running up high debt levels are 'living at the expense of future generations' and 'living in untruth.'" -- “Republican Ryan cites popeto defend budget cuts,” The overarching threat to our whole society today is the exploding federal debt?  Well, maybe. But this is an argument against raising revenues by raising taxes on the wealthy?  Or, for that matter, on anyone? What’s most angering is this deliberately disorienting, gimmicky refusal by these pols—Ryan and Romney, in particular—to acknowledge that raising revenue through taxes reduces the government’s budget deficit and debt; that lowered tax rates in the last 11 years have significantly increased budget deficits and the debt (and that that also happened in the 1980s); that budget deficits and the national debt decreased during the 1990s after tax rates were raised during the G.H.W. Bush administration; and that Ryan’s and Romney’s tax-reduction plans would, according to (apparently) all projections except their own, substantially increase the national debt.

Five Challenges for the IRS’s New Capital Gains Reporting Rules - Sellers of stocks and other assets have always had to calculate their cost basis (generally, what they paid for the investment) in order to figure their taxable capital gains. In the past, this was often a hit-or-miss experience that required lots of tedious research (occasionally with help from brokers) and more than a bit of guesswork. This year, for the first time, Congress required stock brokers to report cost basis to both the IRS and taxpayers.  Next year, mutual funds must report.  The reporting will apply only to newly-purchased stock, so there will be a long transition to the new system. The goal is to make things easier for taxpayers and improve compliance (that is, reduce mistakes, deliberate or not). This is a laudable aim, but the IRS faces a number of challenges to make this initiative work. Here are five, excerpted from a new article I wrote for Tax Notes, Basis Reporting:  Lessons Learned and Direction Forward.  

Taxation: The capital exception - GOVERNMENTS have no problem taxing capital and capital income. For a sufficiently generous definition of capital taxes (including property tax, for instance), America collects about 8% of GDP in such levies, or about a third of all government revenue raised. Economists (most of them anyway) have long been adamant that the right tax on capital is no tax at all. This result, which emerged from research in the 1970s and 1980s, long ago burrowed its way deep into the belief systems of most dismal scientists.But the models used to arrive at that conclusion rely on some often strict and unrealistic assumptions (as even the modelers responsible for them have been known to acknowledge). And some economists are experimenting with new models that develop a different role for taxes on capital, as this week's Free exchange column explains:In a new NBER working paper, Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California at Berkeley poke different holes in the conventional view. The old models, they point out, ignore inheritances. In the real world inheritances strongly influence income levels, particularly among the very rich. They point to ratios of capital to output, which are surprisingly stable over time despite tax swings. Their model finds that the optimal tax rate on inheritance could be 50-60% or more.

Summers says taxes must increase - For once, I find myself agreeing with Larry Summers.  At a conference in Washington sponsored by the Brookings Institute, he emphasized that tax cuts and spending cuts cannot appropriately resolve the US budgetary issues. “It is a near certainty that we are going to need a significant increase in revenues, and it seems to me that any discussion of tax policy needs to start there,” Summers Says U.S. Tax Overhaul Should Raise More Money, Bloomberg. Without additional taxes, "close to inconceivable" cuts to earned benefits programs like Medicare and Social Security would be required, he noted.  It's important that people start talking some sense about taxes since they are the lifeblood of a democracy and the primary way that a government can act to limit the concentration of wealth in the hands of the few that diminishes democracy by promoting oligarchy.  I suspect most of the insiders in the Republican Party know this and know that if common sense reigns, taxes will be raised on the upper crust and raised somewhat on most of the middle class, in order to ensure that the US can deal with its crumbling infrastructure, support its citizens, not just the wealthy ones, in developing their human capital, and provide a decent and sustainable standard of living for most of our people.

The 91 Percent Solution - Krugman - There’s such a blizzard of misinformation out there that it’s hard to pick any one thing to single out, but David Frum picks up on one bit from the Paul/Paul show: the remarkable way many on the right now portray the postwar years of prosperity as a triumph of libertarian principles. Yeah, it was a libertarian paradise all right — with a top marginal tax rate of 91 percent, a third of the work force in unions, and a minimum wage much higher relative to the average wage than it is today. Propose a return to those conditions now, and everyone on the right would predict utter disaster. What we actually had was unprecedented prosperity.

Rich Guy Says We Should Be Grateful For His Wealth - Krugman - So a former partner of Romney’s at Bain says, in a new book, what Romney probably believes: we should be really grateful to the rich for all the rich things they do. Because, you see, they don’t spend all their wealth building homes as big as the Taj Mahal; some of it they invest in innovation. This actually represents a break with the previous defense of the rich. Until now, the official line has been that what we need are incentives — that jaawwb creeaytohrs won’t do their thing unless we dangle the carrot of immense wealth in front of them. But now we’re supposed to think that it’s not the prospect of future wealth, but wealth in being, that’s what is really so wonderful. There are many things you could say about this, but surely high on the list is the degree of historical ignorance it requires. I mean, this argument might have some surface plausibility if the era when America didn’t have such an overweening plutocracy — the 50s and 60s, when the top 0.01% received only about a fifth the share of income that it commands today — were a time of economic stagnation and low innovation. In fact, the postwar generation experienced the best economic growth — and the fastest productivity growth — of any era in the past century.

New York Times Yet Again Demonstrates Its Fealty to the 1% -- Yves Smith - I got a message from a regular reader:I went to the first page of the New York Times today, as I normally do after checking my e-mails in the morning. I noticed, above the fold, the prominently displayed link to an Adam Davidson story from a member of the super rich trying to explain why their super richness is good for us serfs.  I ignored that link and went through the rest of the first page. There was not a single mention in the self-styled paper of record of the May 1 demonstrations by Occupy Wall Street. I had reports from people in New York that the gathering was large, yet you’d never know it happened if you started on the front page. I went to the US section next, and again, not a single mention of Occupy Wall Street. By contrast, as we noted in Links, Bloomberg made the OWS protests the lead item on its website early on May 1.

Adam Davidson Parrots Disinformation as He Extols Rule by the Top 0.1% - Yves Smith - Adam Davidson is moving up in the world. He has gone from fellating the 1% to the top 0.1%.  But bear in mind that we can’t hold Davidson solely responsible for his latest assault on common sense, decency, and most important accuracy. It was the editors of the Sunday Magazine that not only decided to showcase an interview with Mitt Romney’s uber wealthy former partner Edward Conrad (“The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy Guy“) but to give it a full 6 pages (per my browser) and put it on the magazine cover. Conrad says his new career is to “make his case for a new, decidedly pro-investor way to think about the economy.” And what follows is half-baked, largely inaccurate, unabashed propaganda.  Now admittedly, Davidson as interlocutor gets to have it both ways. He presents Conrad’s arguments pretty much straight up for the first half of the piece, and treats them and Conrad with a good deal of respect.

Who Are the Extractive Elites? -  Key to our argument in Why Nations Fail is the idea that elites, when sufficiently political powerful, will often support economic institutions and policies inimical to sustained economic growth. Sometimes they will block new technologies; sometimes they will create a non-level playing field...; sometimes they will simply violate others’ rights destroying investment and innovation incentives. An interesting article in The Economist’s Buttonwood column asks: Who are these rapacious elites in today’s Western economies? Buttonwood suggests that two plausible candidates are too-big-fail huge-risk-taking bankers and public sector employees with their cushy jobs, which they protect using their power as voters and sometimes through public-sector unions. Banks, which have huge political clout, as the world witnessed not only in the midst of the 2008-2009 crisis but again in the European debt restructuring debacle of the last two years, are a great candidate indeed. Buttonwood questions whether they have really been an impediment to prosperity. The answer is probably yes: excessive risk-taking by the banks created lots of economic distortions and is in part responsible for the crisis. But what about public-sector employees? What about unions? Don’t they, as Buttonwood suggests, also exercise their power to block new technologies and create similar distortions?

CEO pay increases 15 percent in 2011 -- New research on CEO pay found that American chief executives saw their pay increase on average by 15 percent in 2011, one year after their average compensation jumped 28 percent following two years of decline. The Guardian got an early look at interim research from GMI Ratings, a corporate governance consulting agency that provides an annual look at the compensation packages. The full analysis is expected to be out later this year. Based on the early figures, however, the firm found that the average pay package for an American CEO was roughly $5.8 million last year. For CEOs in the top 500 companies, that figure was $12.1 million. The highest paid CEO? Michael Johnson of direct marking firm Herbalife, who brought in a whopping $89,419,474, according to GMI.

Study: CEO Pay Increased 127 Times Faster Than Worker Pay Over Last 30 Years - Compensation for chief executives at American companies grew 15 percent in 2011 after a 28 percent rise in 2010, part of a larger trend that has seen CEO pay skyrocket over the last three decades. Workers, on the other hand, have been left behind.  Since 1978, CEO pay at American firms has risen 725 percent, more than 127 times faster than worker pay over the same time period, according to new data from the Economic Policy Institute: From 1978 to 2011, CEO compensation increased more than 725 percent, a rise substantially greater than stock market growth and the painfully slow 5.7 percent growth in worker compensation over the same period. In 1978, CEOs took home 26.5 times more than the average worker. They now make roughly 206 times more than workers, EPI found. The pay isn’t always tied to the performance of their businesses — as ThinkProgress has noted, CEOs at companies like Bank of America often pocket huge pay increases even as the company’s stock price plummets and jobs are cut.  Workers’ wages aren’t tied to productivity either. Despite substantial gains in productivity since the 1970s, worker pay has remained flat. According to Labor Department data cited by the Huffington Post, inflation-adjusted wages fell 2 percent in 2011. As a result, American income inequality has skyrocketed, growing worse than it is in countries like Pakistan and Ivory Coast. Wealth inequality is worse than it was even in Ancient Rome. And, as pay skyrockets and tax rates fall for the richest Americans, the rising inequality has left the bottom 95 percent of Americans saddled with more debt than ever before.

GM’s CEO Pay Gripe: $7.7 Million Isn’t Enough - Get your Kleenex ready – you’re going to need it when you read this sad story. General Motors, fresh off a year when it posted a record $7.6 billion profit and regained the title of the world’s largest carmaker, was only able to pay CEO Dan Akerson $7.7 million, including a salary of $1.7 million and more than $5.9 million in stock-based awards paid out over time. I know what you’re thinking: How can anyone get by on just $7.7 million? Yet that figure, pitiful as it is, has already become the subject of some debate. Sure, it’s more than triple what Akerson made the year before. He took over as CEO in September 2010 and earned just over $2.5 million, including salary of $566,667 and stock awards totaling about $1.77 million. But as GM pointed out in its proxy filing last week, the millions Akerson was paid just don’t match up with what a CEO of his ilk could be making.

How the 1% think about their wealth - It’s worth reading Reuters’s blockbuster this morning, revealing that Chesapeake Energy CEO Aubrey McClendon was running a secret hedge fund for his own benefit within Chesapeake’s headquarters, in the light of Adam Davidson’s profile of rich-guy apologist extraordinaire Edward Conard. McClendon, while Chesapeake CEO between 2004 and 2008, spent an enormous amount of time on his pet hedge fund, Heritage Management, which he invested in and co-owned. Chesapeake is an enormous player in the commodity markets, and of course McClendon would have had advance notice of actions Chesapeake was going to take that might well move the markets. He had every opportunity to front-run such actions at Heritage, and conversely of course he also had the ability to block Chesapeake from taking any actions which risked hurting Heritage’s positions. Whether McClendon actually did any of that is pretty much beside the point: he could have done it, and, as Tulane University’s Elizabeth Nowicki says, “the failure to disclose that you are engaging in this kind of conduct can constitute a securities fraud problem”.“A reasonable investor would want to know that the CEO could be in a situation where he’s betting against the interests of the company personally,” Nowicki said. “That, it seems to me, is a slam dunk.”McClendon didn’t merely fail to disclose the existence of Heritage: he downright covered it up.

How economists have misunderstood inequality: An interview with James Galbraith - Before 1980, few academics in the United States gave much thought to the idea of economic inequality. It just wasn’t a glaring concern. But in the last 30 years, the incomes of the nation’s wealthiest 1 percent have surged, and more and more economists have been paying attention. Yet there’s still plenty about economic inequality that’s not well understood. What’s actually driving the gap between the richest and poorest? Does it hurt economic growth, or is it largely benign? Should it be reversed? Can it be reversed? Surprisingly, there’s little consensus on how to answer these questions — in part because good data on the topic is hard to come by. In his fascinating new book, “Inequality and Instability,” James K. Galbraith, an economics professor at the University of Texas at Austin, takes a more detailed look at inequality by assembling a wealth of new data on the phenomenon. Among other things, he finds that economic inequality has been rising in roughly similar ways around the world since 1980. And this rise appears to be driven, in large part, by the financial sector — and the changes that modern finance has forced in the global economy. We talked by phone recently about his book.

Sen. Rand Paul blocks U.S.-Swiss bank data treaty  - Sen. Rand Paul is blocking an amendment to a U.S.-Swiss tax treaty, slowing Switzerland's handover of data on thousands of Americans with bank accounts hidden from the U.S. Internal Revenue Service. The protocol, negotiated in September 2009, would amend a 1996 treaty and make it more difficult for Switzerland to refuse requests from the IRS for tax information about U.S. customers of Swiss banks. The United States is cracking down on secret accounts held by its citizens at UBS AG, Credit Suisse AG, Wegelin & Co. and other financial institutions. Paul, a Kentucky Republican, said the protocol is too "sweeping" and would threaten Constitutional protections against unreasonable search and seizure. Paul said he is exercising his privilege to delay a Senate vote. "We're concerned about the due process of whether or not people have any kind of process before their records are looked at, the privacy of your banking records," Paul said in an interview last week. "There needs to be some constitutional protections to your banking records."

The Corporate-Tax Conundrum - Laura Tyson - The United States now has the highest statutory corporate-income tax rate among developed countries. Even after various deductions, credits, and other tax breaks, the effective marginal rate – the rate that corporations pay on new US investments – remains one of the highest in the world.  In a world of mobile capital, corporate-tax rates matter, and business decisions about how and where to invest are increasingly sensitive to national differences. America’s relatively high rate encourages US companies to locate their investment, production, and employment in foreign countries, and discourages foreign companies from locating in the US, which means slower growth, fewer jobs, smaller productivity gains, and lower real wages. . That is why countries around the world have been cutting their corporate-tax rates. The resulting “race to the bottom” reflects intensifying global competition for capital and technological knowhow to support local jobs and wages. Moreover, a high corporate-tax rate is an ineffective and costly tool for producing revenues, owing to innovative financial transactions and legal tax-avoidance mechanisms. A company’s legal residence and geographic sources of income can be and are manipulated for such purposes, and the incentives and scope for such manipulation are especially large in sectors where competitive advantage depends on intangible capital and knowledge – sectors that play a major role in the US economy’s competitiveness.

Economists’ Malign Influence on Taxes  - If Occupy Wall Street supporters are looking for new places to protest, they might think about picketing the economics departments of the most prestigious American universities. Not only would they find a more convivial place to camp than an ugly concrete slab in lower Manhattan, but protesting at universities would serve two purposes. First, those who are unemployed and burdened with non-dischargeable student debt — which now exceeds U.S. consumer debt —could make a point about the inutility and expense of American higher education. Second, and more important, protesters could confront another group of elites who are responsible for the financial meltdown and have yet to apologize: the nation’s academic economists. Free market economic “literature” as economists call it — and their papers frequently are works of fiction — gave succor and intellectual respectability to the decades of deregulation and tax cuts that have bankrupted the country. Congress is compromised, to be sure, but lobbyists and members need economic studies as cover for what they are doing. 

How to define a manufacturer: Corporate tax cuts spark controversy - Decoder - YouTube - President Barack Obama wants to drop the corporate tax rate from 35% to 28% and move manufacturing to a special category, with a 25% rate. Reuters columnist David Cay Johnston warns this could cause a rush of "manufacturers" looking to take advantage of the lower rate.

We're Doomed - Krugman - So you see what I mean. We have a terrible failure of demand — and Carly Fiorina thinks the key problem is excessive taxes on corporations (our effective rate is actually fairly low). Hey, if only we had low rates like Ireland, we could have 14.7 percent unemployment … oh well, never mind. Meanwhile, Eric Schmidt thinks the problem is a shortage of workers in some high-skill fields. As Dean Baker points out, businesses were saying the same thing in 1935; so were the era’s Very Serious People. Everything makes David Walker think of the need for entitlement reform. Everything makes George Will think of Ronald Reagan. Sigh. That was my reaction after the debate on This Week, which was actually taped Friday. We had what was supposed to be a spectrum of informed opinion, and which actually was a good spectrum of what passes for informed opinion. And what we got … well, watch it. More comments after it has aired.

How Might Berkshire Benefit from the Buffett Rule? - I was recently asked how Warren Buffett's company Berkshire Hathaway would benefit from a so-called Buffett Rule that would require the rich to pay at least 30 percent of their income in taxes. After thinking about it for a while it occurred to me that it is plausible that Buffett's motivation for raising this issue is not about his own embarrassment about his personal taxes, rather it's about the difference in the 35 percent capital gains tax rates paid by publicly traded C-corps like Berkshire and the 15 percent rate paid by its competitors at hedge funds and private equity firms. In short, Buffett is trying to level the playing field between Berkshire and its private competitors.

How Apple Sidesteps Billions in Taxes - Apple, the world’s most profitable technology company, doesn’t design iPhones here. It doesn’t run AppleCare customer service from this city. And it doesn’t manufacture MacBooks or iPads anywhere nearby.  Yet, with a handful of employees in a small office here in Reno, Apple has done something central to its corporate strategy: it has avoided millions of dollars in taxes in California and 20 other states.  Apple’s headquarters are in Cupertino, Calif. By putting an office in Reno, just 200 miles away, to collect and invest the company’s profits, Apple sidesteps state income taxes on some of those gains.  California’s corporate tax rate is 8.84 percent. Nevada’s? Zero.  Setting up an office in Reno is just one of many legal methods Apple uses to reduce its worldwide tax bill by billions of dollars each year. As it has in Nevada, Apple has created subsidiaries in low-tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some little more than a letterbox or an anonymous office — that help cut the taxes it pays around the world.

Behind The Lobbying Effort That Helps Save Apple $2.4 Billion In Taxes A Year - The New York Times dropped another bomb on Apple’s “iEconomy” this weekend with an expose that shows how the world’s biggest corporation evades billions of dollars in taxes by creating subsidiaries in low-tax states and countries like Nevada, Ireland, the Netherlands, Luxembourg, and the British Virgin Islands. While some of Apple’s monumental success is due to the undeniable popularity of its products, the Times reports that Apple “has devised corporate strategies that take advantage of gaps in the tax code.” This has ultimately saved the company (and thus cost the public) as much as $2.4 billion a year, according to a recent study by a former Treasury Department economist. Apple fights for favorable tax policies in the United States with a formidable army of lobbyists. According to the Center for Responsive Politics, Apple spent $2.3 million on lobbying last year and its lobbying expenditures have been steadily increasing over the past decade – in 2000, it only spent $360,000 on lobbying.A big chunk of this is spent lobbying specifically on tax policy, especially repatriation legislation, which lets firms bring profits held overseas back to the United States at a cheaper tax rate. One bill in particular, the Freedom to Invest Act of 2011, would save companies like Apple, Google, and Cisco $78.7 billion, paid for by the American people.

10 Big Businesses That Barely Pay Taxes - While the average American may be shelling out thousands of dollars each year in taxes to the federal government, many businesses are paying incredibly low tax rates, or none at all, despite raking in hundreds of millions in profits. What allows this to happen? While corporations may be considered people in other ways, they are given tax breaks and loopholes that the average person just can’t get, and with huge teams of lawyers and accountants on staff, they’re more than ready to game the system to get all they can. Officially, the corporate tax rate in the U.S. is around 35%, but many corporations pay only a small fraction of that amount, and some have even gotten hefty refunds back from the U.S. government. These tax issues have been major news lately, bringing the ire of many people who feel that corporations need to pay their fair share. Here we highlight some of the worst corporate offenders when it comes to paying little or no taxes this year and in years past.

Drivers Pay Secret Road Tax in $15 Billion for Car Repair - The nation’s capital isn’t alone in offering motorists teeth-rattling rides as U.S. lawmakers tussle over how to pay the bill for mending battered roads. Mechanics such as Giro say they see the hidden tax car owners pay every day in torn tires, misaligned front ends and bent axles. Drivers won’t get relief anytime soon. The U.S. Highway Trust Fund, which helps pay for road and transit projects in Washington and all 50 states, has been bailed out by Congress three times since 2008 for a total of $34.5 billion. The gasoline tax that supports the fund hasn’t been raised in 19 years, and with the cost of materials such as steel and asphalt on the rise, the fund is expected to have a deficit of about $10 billion this year. Car owners already are shelling out far more than that to repair damage done to their vehicles by America’s ruined streets and highways, industry and academic researchers say. Motorists pay $67 billion annually for increased fuel consumption, body dents, worn tires and premature wear wrought by pitted roads, according to The Road Information Program, a Washington-based research group. The group’s board includes representatives from construction-equipment makers Caterpillar Inc. (CAT) and Deere & Co. (DE), as well as Vulcan Materials Co. (VMC), a Birmingham, Alabama-based asphalt and concrete producer.

Bill Black: Our System is So Flawed That Fraud is Mathematically Guaranteed - Chris Martenson - Bill Black is a former bank regulator who played a central role in prosecuting the corruption responsible for the S&L crisis of the late 1980s. He is one of America's top experts on financial fraud. And he laments that the US has descended into a type of crony capitalism that makes continued fraud a virtual certainty - while increasingly neutering the safeguards intended to prevent and punish such abuse.  In this extensive interview, Bill explains why financial fraud is the most damaging type of fraud and also the hardest to prosecute. He also details how, through crony capitalism, it has become much more prevalent in our markets and political system.  A warning: there's much revealed in this interview to make your blood boil. For example: the Office of Thrift Supervision. In the aftermath of the S&L crisis, this office brought 3,000 administration enforcements actions (a.k.a. lawsuits) against identified perpetrators.  Flash forward to the 2008 credit crisis, in which just the related household sector losses alone were over 70x greater than those seen during the entire S&L debacle. So how many criminal referrals did the same agency, the Office of Thrift Supervision, make? Zero.

Geithner channels Greenspan and Airbrushes Fraud out of our Crises - William K. Black - On April 25, 2012, Treasury Secretary Geithner made remarkable statements about the role of elite financial fraud and greed in producing our recurrent, intensifying financial crises.  In this first installment I focus on the first of five problems with Geithner’s claims: (1) he does not understand the causes of prior crises, (2) he does not understand the causes of the ongoing crisis, (3) he does not understand that if he were correct about the first two points our nation would be in even greater peril and the urgency of Geithner leading a radical transformation of finance and regulation would be greater still, (4) he is not correct that we are prosecuting the elite criminals who drove the ongoing crisis, and (5) the media continues its nine-year pattern of failing to challenge Geithner’s fictions and his failures to lead the radical transformation that he should be desperately seeking given his stated beliefs about the causes of financial crises. Here are the specifics of what Geithner said about financial crises, fraud, and greed.“The wheels of justice are turning now,” . “They are not turning as fast as people would like, but we have the best system in the world for making sure we can enforce the laws of the land,” he said. Geithner suggested that holding people accountable for the wreckage caused by the recent housing collapse and the ensuing financial meltdown was not that simple since most crises were not caused by criminal activity. “Most financial crises are caused by a mix of stupidity and greed and recklessness and risk-taking and hope,” said Geithner, who helped tackle the crisis for the Bush administration when he was the head of the New York Federal Reserve.

Janet Tavakoli: Renewed Hope that Jon Corzine, President Obama's Top Tier Campaign Bundler, Will Face Criminal Charges - The Financial Times reported that many industry professionals were resigned to the idea that there would be no criminal charges in the matter of massive misuse of so-called segregated customer funds by MF Global. According to the article, MF Global's Trustee, James Giddens, is trying to sell the story that sloppy bookkeeping in chaotic final hours prior to the firm's bankruptcy was the problem. You see, according to Giddens, it was unintentional. Former MF Global customers are not buying that story. This is the computer age, and any adequate control system can more than keep up. Moreover, MF Global's officers attested that the firm's internal controls were adequate. At the very minimum it seems they should face a Sarbanes-Oxley lawsuit, and it looks as if there's even more to it than that.Behavior that Giddens is trying to pass off as sloppy bookkeeping is fraud's identical twin and a serious violation of U.S. rules. Early estimates of $600 million of impermissibly transferred customer money later climbed to $1.2 billion. Up until now, President Obama's campaign has given the appearance of an endorsement of Jon Corzine, the former CEO of MF Global, a former New Jersey governor, a former New Jersey U.S. senator and major campaign contribution bundler for President Obama. At least this is the interpretation of many who viewed the list (as of April 30, 2012) of President Obama's money raisers through the first quarter of 2012. With no clarification or footnote, Jon Corzine is shown as having raised more than $500 thousand in the roster of 2012 Volunteer Fundraisers. The re-election campaign has not disclosed the exact number.

Fracked: Why Chesapeake Energy’s Aubrey McClendon is in Hot Water - Aubrey McClendon, the billionaire CEO of natural gas giant Chesapeake Energy, opened his company’s first-quarter conference call on Wednesday by describing the last two weeks as “very challenging.” That may be an understatement — the last 48 hours alone have been dizzying. Last week, the Securities and Exchange Commission opened a probe into a billion-dollar personal loan tied to McClendon’s controversial compensation plan, which he now stands to lose, along with the title of board Chairman. Then on Wednesday, Reuters published a startling expose revealing that McClendon ran a $200 million hedge fund trading oil and gas at the same time he was leading the energy giant — raising questions of conflict-of-interest. And now, a U.S. Senator has called for the Justice Dept. to investigate Chesapeake for potential “fraud, price manipulation, conflicts-of-interest, or other illegal activities.” Meanwhile, McClendon has bet the future of Chesapeake, which is carrying over $12 billion in debt, on a rise in natural gas prices that not one analyst polled by Bloomberg — zero — expects will happen.

Chesapeake Energy, CEO Aubrey McClendon Face SEC Probe - Natural gas giant Chesapeake Energy and its CEO Aubrey McClendon are the subjects of a Securities and Exchange Commission inquiry into McClendon’s controversial compensation plan, the company confirmed on Thursday. In a statement released after the close of the stock market, Chesapeake said it had been notified by the SEC that the regulator’s Fort Worth regional office has launched an informal investigation and asked the company and McClendon to preserve certain documents related to the probe.The SEC inquiry, which had been previously reported, comes amid growing scrutiny of a controversial plan that allows McClendon to buy a stake of each of the wells that Chesapeake drills, as a well as a billion-dollar loan McClendon reportedly used to help finance the stakes. In the program, called the Founder Well Participation Program, McClendon was allowed to buy a 2.5% stake in each of the company’s thousands of wells.

Milken Global Conference Video: The Future of Capitalism - Speakers:

  • Niall Ferguson, Laurence A. Tisch Professor of History, Harvard University; Senior Fellow, Hoover Institution
  • Ana Palacio, Member, Spanish Council of State; former Minister of Foreign Affairs, Spain
  • Peter Passell, Senior Fellow, Milken Institute; Editor, The Milken Institute Review
  • Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance, University of Chicago Booth School of Business

Milken Global Conference Video: What's Happened to the American Dream? - Speakers:

  • Niall Ferguson, Laurence A. Tisch Professor of History, Harvard University; Senior Fellow, Hoover Institution
  • Jeff Greene, Investor and Philanthropist
  • Charles Murray, W.H. Brady Scholar, American Enterprise Institute; Author, "Coming Apart: The State of White America"
  • Steven Rattner, Chairman, Willett Advisors; former Counselor and Lead Auto Advisor to the U.S. Secretary of the Treasury

Dallas Fed Urges Removal of CEOs of Bailed-Out Banks - Bloomberg: The Federal Reserve Bank of Dallas said taxpayer aid to failing banks should come only after the voiding of all employment and bonus contracts and the removal of chief executive officers and boards of directors.  “A set of harsh, non-negotiable consequences” for requesting U.S. Treasury assistance might also include “clawbacks” to gain cash and stock bonuses paid the top management team during the prior two years, the Dallas Fed said today in a slide presentation on its website.  The proposal reflects Dallas Fed President Richard Fisher’s view that large U.S. banks need to be split apart because they operate with an implied government safety net that puts their risks of failure on taxpayers. Fed Chairman Ben S. Bernanke said at an April 25 news conference in Washington that policy makers were “making some progress” in averting bailouts by “substantially” increasing supervision and requiring higher levels of capital. The federal safety net should be limited to federally insured bank deposits and loans made to banks that are fully collateralized, the Dallas Fed said. Creditors of financial companies should be “put on notice that there is no federal safety net covering their transactions,” the district bank said.

Why We Must End Too Big to Fail – Now - Dallas Fed Slideshow

Bill Black: The Fraud Recipe for CEO's, Why Banks Hate Free Markets and Love Crony Capitalism, and the Dysmal Legacy of Mainstream Economists The selected notes below are from William K. Black's presentation at the Modern Monetary Theory Summit in Rimini, Italy, in Febuary of this year.  The audio is embedded in this post following the text. (excerpt) Perverse incentives produce criminogenic environments that encourage fraud. When people are able to steal a lot of money, with no threat of imprisonment, nor having to live in disgrace, an environment conducive to fraud is established. Establishing such an environment in practice requires the 3 D's: Deregultation, Desupervision, and de facto Decriminalization. Deregulation: you get rid of the rules. Desupervision: any rules that remain, you do not enforce. Decriminalisation: even if you sometimes sue the perpetrators and get a fine, you do not put them in prison.

Strike when the Iron is Hot - I am at the Milken Global Conference and it's interesting how much financial reform has faded from the agenda. Two years ago, many, many sessions were devoted to how the financial sector would need to be reformed. Financial executives and others who spoke in the sessions admitted they had screwed up, and it seemed like many people, even those on the right of the political spectrum, agreed on the need for change. There were many warnings about doing this correctly, and disagreement about what "correct" means, but there was a general acknowledgment change of some sort was coming (and needed). Last year, reform was still on the agenda, though not as much, and this year it has faded even more (there is one session devoted to global financial regulation). The main concern now is how to get the economy back to where it was before all this trouble hit.  When financial reform first came up, there was a debate about whether to do it fast while the momentum and will for reform were there even if it might be a bit rushed and imperfect versus taking more time to get it right and risking that people would forget why reform is needed. Watching the process now, I think those who wanted to do it fast (and then fix any problems later) had the better argument. Waiting in an attempt to get it right doesn't work. We won't get any new meaningful regulation at this point, event though it's still needed, and we'll be lucky to keep what we have.

Occupy the regulatory system! - Occupy Wall Street has moved. Its new address: 60 Wall Street. . But amid the din, there’s a small group holding a quieter, and far wonkier, conversation. “What are the restrictions? Does it let anyone call themselves a clearing agency? It seems like there’s a rigorous definition, but maybe there’s not,” Caitlin Kline says. “What if all you’re taking on is counterparty risk for all of these banks, but you don’t ever take any other exposure? It seems to be covered by several exemptions.” Kline, a former Wall Street trader-turned-Occupier, is a member of Occupy the SEC, an offshoot of the large movement that has burrowed deep into the regulatory process. At this moment, she’s trying to figure out if the drafting of the Volcker Rule — a provision of President Obama’s Wall Street overhaul that would restrict commercial banks from making speculative investments that do not benefit their customers — is tight enough to keep banks in check. After much discussion, the group agreed that the Volcker Rule’s earlier definition of clearing agencies, which banks use for exchanging futures contracts, was “clear and tough and good,” but decided that it was worth double-checking section 17(a) of questions that the Commodity Futures Trading Commission raised about it. It may sound like technical gobbledygook to an outsider, and, indeed, a few newcomers to Occupy the SEC seem befuddled by the group’s headlong dive into the finer distinctions between proprietary trading and market-making. But the meeting is a glimpse into one of the most surprising iterations of the free-wheeling, anarchic movement: fighting the man through the tedious and Byzantine regulatory process.

Progress Is Seen in Advancing a Final Volcker Rule - A major new rule that has drawn the ire of Wall Street is on track for completion sooner than some bankers had expected, dashing the hopes of financial industry lobbyists, who have pressed for a delay. Regulators are making significant progress on a final draft of the regulation, the Volcker Rule, and some officials expected to complete it by September and possibly as early as this summer, people with direct knowledge of the matter said. The people, who spoke on the condition of anonymity, cautioned that regulators have not set a firm date for completing the rule. The Volcker Rule aims to rein in risky trading on Wall Street. Named for Paul A. Volcker, the former chairman of the Federal Reserve, it would ban banks from placing bets with their own money, a practice known as proprietary trading. When regulators first proposed a version of the rule last year, they received a torrent of criticism from the financial industry, which complained about the length and complexity of the proposal. It was the most hostile response to any provision of the Dodd-Frank financial overhaul law, which created the Volcker Rule with the notion that banks should not make risky wagers while enjoying government deposit insurance and other types of backing.

Banks face tougher trading capital rules  - Bank trading desks face a new threat to their profitability after global regulators unveiled proposals on Thursday to force them to hold more capital against the risk of heavy losses when markets freeze.  The Basel Committee on Banking Supervision’s “fundamental review of the trading book” aims to close loopholes that have allowed banks to cut capital requirements by parking assets in their trading books.  Bankers and lawyers said the proposals, if approved, would push up capital requirments and could making buying and selling assets – as opposed to holding them to maturity – far less profitable.  The proposal is expected to hit institutions with large trading desks, such as Barclays, Goldman Sachs and Deutsche Bank, particularly hard.  Higher capital requirements could also make it harder for some European banks to gain any advantage over their US rivals when they have to stop trading with their own capital under the US Volcker rule.

Basel Seeks Tougher Boundary Between Banking, Trading Books - Banks face tougher rules on how they differentiate between assets they keep in their banking and trading books, making it harder to dodge capital rules, under proposals published by the Basel Committee on Banking Supervision today.  Lenders would have to give regulators evidence of buying and selling of securities in their trading books and face limits on their ability to shift assets between books under the plan. The risk of credit crunches would also need to be taken into account in calculations of how much cash they should keep in reserve against trading losses.  The proposals are “a vital element of the objective to achieve comparability of capital outcomes across banks, particularly those which are most systemically important,” the Basel group said in the report published on its website.  The Basel group, which brings together banking regulators from 27 nations including the U.K., U.S. and China, agreed in 2010 to more than triple the core capital that financial firms must hold. Last year, it also targeted 29 lenders including Deutsche Bank AG (DBK), BNP Paribas SA and Goldman Sachs Group Inc. (GS) for capital surcharges of as high as 2.5 percent of their assets in a bid to rein in lenders deemed too big to fail.

Mirabile Dictu! The SEC is Getting Disgusted With Lawyers Pulling the Same Tricks in SEC Investigations that They Pull in Foreclosure Land Every Day - 05/01/2012 - Yves Smith - The Wall Street Journal has an entertaining account, if your taste runs to black humor, of how legal chicanery has reached such high levels that the SEC is toying with the idea of going after it directly (hat tip reader Andrea). Officials at the securities watchdog suspect that the way lawyers have instructed clients to behave in its investigations constitutes obstruction of justice: ….some SEC officials have grown frustrated by what they claim is direct obstruction of a few investigations and a larger number of probes where lawyers coach clients in the art of resisting and rebuffing. The tactics include witnesses “forgetting” what happened and companies conducting internal investigations that scapegoat junior employees and let senior managers off the hook, agency officials say.We’re not entirely sympathetic with the SEC’s problem. With the exception of HealthSouth, it has not used false certifications under Sarbanes-Oxley as grounds for going after the certifying officers, who customarily include the CEO and CFO. Sarbox was designed, among other things, to end the use of the “I’m the CEO and I know nothing” defense. Nevertheless, the SEC’s conundrum illustrates a serious decay standards in the legal profession and in social values generally. Readers of this blog are welcome to take issue, but attorneys tell me that state bar associations will sanction or disbar only small players. The large firms all make a point of being active in the organization. That makes it socially awkward to suggest a fellow country club member peer might be up to no good, much the less to move forward with charges.

SEC Keeps Ratings Game Rigged - ProPublica: The Securities and Exchange Commission seems to think that it has done a much better job of investigating financial crisis wrongdoing than the Justice Department. And it's true. But it's like being proud that you're the "Dumb" of "Dumb and Dumber."A case the commission filed last week epitomizes a lot of what's wrong with the agency, even under the supposed overhaul by its chairwoman, Mary L. Schapiro. The agency brought a civil case against a tiny, iconoclastic ratings agency called Egan-Jones, run by the outspoken Sean Egan, accusing it of, well, essentially filling out forms wrong. Before the S.E.C. charges, Egan-Jones was best known for two things: having made some bold calls about shaky credit prospects and having a business model that was different than that of the big boys — Moody's Investors Service, Standard & Poor's and Fitch. Mr. Egan's outfit gets paid by the users of his ratings; the oligopoly gets paid by the issuers whose debt is going to be rated. You don't need to be a hedge fund quant to see the conflict of interest: the more ratings, the more profits to the ratings agencies, so the temptation is to be extra lenient. And, boy, were they.

The Banker Assault on Financial Reform - This has been a bad stretch for advocates of financial reform – and therefore for the economy as a whole. The list of delays, loopholes and obstacles is too long to fully recount, but here are a few of the most important. First, the Federal Reserve Board decided to delay by two years the implementation of the so-called Volcker Rule which was one of the stronger measures in the Dodd-Frank financial reform. A second set of potentially powerful Dodd –Frank rules –  to bring unregulated derivatives, including credit default swaps (CDS) that were at the root of the financial meltdown as well as those that are used to speculate on commodities such as oil and food under oversight and regulation -  are now being massively watered down.  The Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) are raising the “limbo” bar of regulation to a whopping $8 billion average worth of derivates each year, a figure so high that massive energy and financial speculators can easily slither underneath without being subject to serious regulation. Third, many of these exemptions and loopholes are dramatically extended in a bill before the House of representatives this week: HR 3336 entitled “The Small Business Credit Availability Act” which has nothing to do with credit to small business, but everything to do with exempting major energy companies like Koch Trading from oversight under the derivatives rules, virtually destroying any chance of derivatives regulation in the already weakened Dodd-Frank Law.

Debit Interchange Post-Durbin: Some Early Numbers - The Fed released some data on debit interchange fees since the Durbin Amendment went into effect (here in spreadsheet and here as a memo with more data). It's all still very early numbers, and things may well change. But so far a few noteworthy things have caught my eye:
(1) There is two-tier interchange pricing, just as I and other supporters of Durbin predicted. Big banks (>$10B in assets) have one pricing scheme and small banks, which are exempt from Durbin's "reasonable and proportionate" requirement have another. Many Durbin opponents said that there wouldn't be two-tier pricing and that Durbin would spell the ruin of small banks. So far that hasn't happened.  
(2) The small banks are getting a leg up on the big guys in the two-tier system. Small banks are making on average 19 cents or 50bps more on every transaction than the big boys.  That breaks down to 31 cents advantage of signature and 8 cents on PIN (where the pricing was lower to begin with, making less room for differentiation). 
(3) Interchange fees for small banks haven't moved much. It's possible to have two-tier pricing with small banks still losing revenue. That doesn't seem to have happened.
(4) The small banks' debit card transaction market share grew slightly.

Banks Seek To Put Pressure On Small Rivals - The biggest global investment banks are examining ways to block rivals from using powers given them under the Jobs Act, potentially obstructing the goals of what is a rare US bipartisan agreement aimed at promoting small businesses. The new act allows banks to publish research while raising capital for smaller companies – a dual role that larger banks have been forbidden from taking on since the “global settlement” agreed with Eliot Spitzer, the former New York attorney-general, in 2003. A provision of the Jumpstart Our Business Startups Act lets banks distribute research on “emerging growth companies”, which have less than $1bn in annual turnover, during an initial public offering or other capital raising, even if the bank is working on the deal. This relaxes previous limits. But the act, signed into law on April 5, could clash with the settlement agreement struck between US regulators and the biggest underwriters in the wake of the dotcom bubble. That settlement prevents those banks from writing pre-IPO research on companies if they are also underwriting an IPO, to avoid conflicts of interest. The settlement banks include Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Barclays, Bank of America Merrill Lynch, Morgan Stanley, Citigroup and UBS.

Telling Strength From Weakness - ARE the perils posed by too-big-to-fail banks a thing of the past? That’s what we keep hearing from Washington. Politicians who wrote the Dodd-Frank law insist that it eliminates the dangers posed by large, politically connected financial institutions. At a news conference last week, Ben S. Bernanke, the chairman of the Federal Reserve, said that higher capital and greater liquidity requirements for big banks, combined with more watchful regulators, were making our financial giants stronger and less likely to require taxpayer backstops. Outside the Beltway, however, it is hardly clear that we’ve resolved this signal threat. Big banks are bigger than ever, and they exert enormous power over regulators and lawmakers. Increasingly, smaller institutions can’t compete. So it was refreshing last week to hear Kevin M. Warsh, a former Fed governor, speak candidly and critically about the government backing that continues to support our largest banks. Equally refreshing were his prescriptions for eliminating the too-big-to-fail problem. “We cannot have a durable, competitive, dynamic banking system that facilitates economic growth if policy protects the franchises of oligopolies atop the financial sector,” Mr. Warsh told an audience at the Stanford Law School on Wednesday night. “Those ‘interconnected’ firms that find themselves dependent on implicit government support do not serve our economy’s interest.”

Is Wall Street, dissed by U.S., moving to China? - JPMorgan Chase & Co. is moving capital markets and M&A boss Jeff Urwin to Hong Kong. Wall St Journal in this story calls it a routine move to "shore up" a weak part of the company, and notes European banks that put senior people in China haven't kept them there. But veteran bank analyst Richard X. Bove' sees this as a threat to the dollar and the US standard of living. He gives two reasons for the move: Asia's growing faster than the U.S.; and "the bank will not be as constrained by U.S. regulators." More US banks are looking to leave Wall St for places where they aren't taxed and treated like enemies, he tells clients of Rochdale Research in a report today. Bove' says his banking industry sources tell him other giant banks are preparing to "move key business outside the United States" due to the "hostile" attitude of the federal and New York State governments. Politicians here "have made their careers bashing banks," while the Chinese are eager for U.S. banking help.

How Wall Street Drives Up Gas Prices - Gasoline prices have been falling in recent weeks, but they’re still close to their five-year high after climbing steeply for three years. For every penny increase at the pump, $1.4 billion per year leaves our collective pockets, creating a drag on the sluggish “recovery.” Where does it go and what caused the price explosion at the pump? It’s a common belief that oil prices are set on the world market by supply and demand. Less supply and/or more demand causes prices to rise. Oil is getting harder to find; OPEC is holding back supply; China and India are guzzling it up; Iran is threatening to blow it up. And regulations are getting in the way of drill, baby, drill — end of story. But this fixation on blind market forces ignores the fact that Wall Street is financializing the commodities markets – especially oil – as it seeks new ways to pick our pockets. The same greedy swindlers who puffed up the housing bubble and then milked it dry are now hard at work doing the same with gasoline.

The Impact of Trade Reporting on the Interest Rate Derivatives Market - NY Fed - In recent years, regulators in the United States and abroad have begun to strengthen regulations governing over-the-counter (OTC) derivatives trading, driven by concerns over the decentralized and opaque nature of current trading practices. For example, the Dodd-Frank Act will require U.S.-based market participants to publicly report details of their interest rate derivatives (IRD) trades shortly after those transactions have been executed. Based on an analysis of new and detailed data on the trading activity of major dealers, this post discusses the possible costs and benefits of reporting requirements on the IRD market. In a previous post, we examined the same question for the credit default swap (CDS) market.

Morgan Sandquist: Finance in Denial – An Intervention - This is the third part in a four-part essay by Morgan Sandquist, a member of the Occupy Wall Street Alternative Banking Group. The previous post are In Denial and The Addiction. Yves here. While I applaud the general thrust of this series, I have to take issue with one notion that this essay takes as a given that finance as currently constituted is “core to our economy” and is cautious about the costs and risks of intervention (even though it argues for that course of action). The case for decisive action is far stronger. The largest financial services firms have perpetrated the biggest transfer of wealth in history via the bailouts. They have gone unpunished for perpetrating the greatest consumer fraud in history, namely, the predatory lending in the subprime phase, the destruction of the integrity of title, and continuing abuses of court procedures.

Morgan Sandquist: Finance in Denial – Conclusion - Still sitting in our breakfast nook, with the banking industry squinting grumpily back at us through the glare of the morning sun on the perfectly polished granite table top, we can sit back, rest our hands on the table, and rather than shouting what it expects to hear, playing our part in the script of codependency, we can speak, without pleading or rancor, the truths that are beyond the script. Rather than repeating once again our expectations and the banking industry’s failure to meet them, rather than pleading with it to live up to its obligations and do what’s fair, we can speak of the mundane practical details of our life and our children’s lives after its eventual demise, of the specific process by which everything around us will be sold to pay the ruinous debts for which its insurance will prove woefully inadequate. We can make of the inevitability something tangible, rather than a vague, abstract threat. We can catalog the likely disposition of all of the banking industry’s prized possessions and family heirlooms, the eventual owners of everything it values. We won’t engage in a debate over whether the inevitable will occur, nor will we revel in the justice of it, because we’ll all suffer.

Is Wells Fargo a Lehman in the Making? - Yves Smith - Wells is in the awkward position of being a monster traditional bank, when its big retail bank competitors, Citi, Bank of America, JP Morgan Chase, also have substantial capital markets businesses. Citi has long had a leading foreign exchange and money markets business, and has a corporate cash management operation which in and of itself makes it too complicated to fail. Bank of America absorbed Merrill. JP Morgan, in addition to having a large investment banking business, also has a huge derivatives/tri party repo clearing business. That means they have more diversified sources of earnings. Whalen points out how real estate dependent Wells is. In this way, it is not unlike Lehman and Bear, subscale players in investment banking who put their chips on real estate as a way to (hopefully) grow faster and catch up with the big boys. The difference between the now-dead investment banks is that they were at a competitive disadvantage by being smaller (in a crude simplification, you have to have pretty close to 100% of the infrastructure of the leaders, and since there are real returns to scale, for instance, big network effects in trading, the further you are away from 100% of their trading volume, the worse your economics are. That means competitors can poach not just individuals but entire teams, since they will produce more on a platform with bigger activity). Wells isn’t so much at a competitive disadvantage via not being as big, but is instead a prisoner of having been overweight real estate historically.  As Whalen makes clear, Wells is engaging in accounting games to make it look better than it is. The San Francisco bank is hardly alone it that, but Whalen depicts it as worse in this regard than its peers. It is only taking losses on its least bad real estate loans, and using those to value the rest of its portfolio. On top of that, as we pointed out, Wells has been releasing loss reserves aggressively since early 2009, something which we suspect will prove to have been ill advised (oh, except for the senior executives who collected bonuses between then and now). And lacking other high margin businesses to earn its way out of its hole, Wells is doubling down in real estate lending, and on top of that, engaging in yet more dodgy accounting.

New York Pension Funds to Challenge Wal-Mart - Concerned about Wal-Mart’s reported cover-up of bribery in its Mexico operations, leaders of New York City’s pension funds said Monday they would vote their 4.7 million company shares against five directors standing for re-election to the retailer’s board at its annual shareholder meeting next month.  It was unclear whether other investors would join the city pension funds and vote against Wal-Mart’s directors. Board members at some large public companies have come under fire from shareholders at annual meetings this year, but most of the opposition has been related to executive pay practices. It is unusual for board members to be unseated by a shareholder vote.  With Wal-Mart’s internal practices under the microscope, however, some investors said the company’s annual meeting could be contentious.

The cascading waves of debt implosion – 5 charts looking at debt leverage, velocity of money, and contagion impacts from the European crisis. - If you inject money out of thin air into the banking sector but no quality jobs emerge, is the result a success?  The bailout mission statement revolved around keeping credit available for the American public.  The absolute opposite has occurred.  A massive internal credit deleveraging has been taking place but the banks have simply hoarded the money like a squirrel hogging all the nuts.  The public is dealing with a great deal of austerity in the form of higher inflation in daily good items and an employment market that is extremely constricted.  The issue continues to be that we are treating this crisis as one of liquidity when it has always been one of solvency.  What function is it giving a bank billions of additional dollars if there are so few qualified people to lend to?  We even see this restriction of money circulation when we examine the velocity of money.  We are simply injecting more debt into the economy with decreasing results.  Higher energy, food, healthcare, and other daily goods have risen beyond the average paycheck of most Americans as a consequence.

Banks Ease Rules on Lending - Consumers found it easier to get credit cards and auto loans in the first quarter of 2012, but standards for home and business loans remained tight, the Federal Reserve said Monday. The central bank's quarterly survey of senior loan officers at American banks and foreign ones with U.S. operations also showed lending demand grew across the board as banks moderately loosened credit standards for the first three months of 2012, compared with the previous quarter.  The report generally was seen as a positive sign for the economy.

Fed: On net, Domestic Banks eased their lending standards and experienced stronger demand over the last 3 months From the Federal Reserve: The April 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices Overall, in the April survey, modest net fractions of domestic banks generally reported having eased their lending standards and having experienced stronger demand over the past three months. ... However, moderate to large net fractions of domestic banks eased many terms on C&I loans to firms of all sizes, with most indicating that they had done so in response to more aggressive competition from other banks or nonbank lenders. Domestic banks also reported an increase in demand from firms of all sizes.  Regarding loans to households, standards on prime residential mortgage loans and home equity lines of credit (HELOCs) were about unchanged.. With respect to consumer loans, moderate net fractions of banks reported that they had eased standards on most types of these loans over the past three months. Here are some charts from the Fed. This graph shows the change in lending standards from the previous quarterly for commercial real estate (CRE). Lenders are now easing standards a little for CRE. A little easing doesn't mean standards are "loose", just not as tight as over the last several years. The second graph shows the change in demand for CRE loans.  Increasing demand and some easing in standards - this is another indicator suggesting the drag from non-residential investment will probably end mid-year.

The Post-Cash, Post-Credit-Card Economy - YOU walk into a cafe, order a macchiato, give your name to the barista and let him give you the once-over. That’s it. Payment made. At Home Depot on a purposeful Sunday, you load your cart with lumber and light bulbs and instead of pulling out your wallet, you type in your cellphone number and a PIN. Payment made. In London, travelers can buy train tickets with their phones — and hold up the phones for the conductor to see. And in Starbucks coffee shops here in the United States, customers can wave their phones in front of the cash register and without even an abracadabra, pay for their soy chai lattes. Money is not what it used to be, thanks to the Internet. And the pocketbook may soon be destined for the dustbin of history — or at least if some technology companies get their way. The cellphone increasingly contains the essentials of what we need to make transactions. “Identification, payment and personal items,” as Hal Varian, the chief economist at Google, pointed out in a new survey conducted by the Pew Research Center. “All this will easily fit in your mobile device and will inevitably do so.” The phone holds and records plenty more vital information: It keeps track of where you are, what you like and who your peers are. That data can all be leveraged to sell you things you never knew you needed.

Small US banks unlikely to repay bailouts - Most of the small banks bailed out by US taxpayers during the financial crisis likely will not be able to repay the Treasury department, the Obama administration has conceded.The admission came Thursday in the form of a blog post by Timothy Massad, assistant Treasury secretary for financial stability, who wrote that the agency does not expect the majority of the nearly 350 lenders still partially owned by American taxpayers to repurchase in the next 12-18 months the preferred stock Treasury received in exchange for bailing them out. Instead, as part of its divestment strategy Treasury will pursue restructurings and sales of its holdings, including combining ownership stakes in various banks into pools to be sold as securities. The department does not expect to receive the face value of its investments. Already, Treasury has valued many of its holdings below par.The recognition by the department comes after numerous government reports warned that the Treasury lacked an adequate plan to divest its remaining stake in smaller lenders, defined as those with less than $10bn in assets. The Treasury invested some $15bn in small banks, but has received only about $8.5bn in return.

Unofficial Problem Bank list declines to 930 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for April 27, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  Very busy week for the Unofficial Problem Bank List because of failures and the FDIC releasing its enforcement actions through March. In all, there were 17 removals and eight additions that leave the list with 930 institutions with assets of $361.7 billion. A year ago, the list held 984 institutions with assets of $422.1 billion. At 930 institutions, it is the lowest weekly count since December 24, 2010 when 919 institutions were on the list. During April 2012, there were 16 additions and 34 removals including 25 action terminations, six failures, and three unassisted mergers. For the month, the institution count fell by 18 to 930 and assets dropped by $15.8 billion to $361.7 billion.Five banks were closed this Friday, which is the most in one night since five were closed nearly a year ago on April 29, 2011.

Bank Loan Bundling Investigated by Biden-Schneiderman: Mortgages - New York Attorney General Eric Schneiderman and Delaware’s Beau Biden are investigating banks for failing to package mortgages into bonds as advertised to investors, three months after a group of lenders struck a nationwide $25 billion settlement over foreclosure practices. The states are pursuing allegations that some home loans weren’t correctly transferred into securitizations, undermining investors’ stakes in the mortgages, according to two people with knowledge of the probes. They’re also concerned about improper foreclosures on homeowners as result, said the people, who declined to be identified because they weren’t authorized to speak publicly. The probes prolong the fallout from the six-year housing bust that’s cost Bank of America Corp., JPMorgan Chase & Co. (JPM) and other lenders more than $72 billion because of poor underwriting and shoddy foreclosures. It may also give ammunition to bondholders suing banks. “The attorneys general could create a lot of problems for the banks and for the trustees and for bondholders,” “I can’t imagine a better securities law claim than to say that you represented that these were mortgage-backed securities when in fact they were backed by nothing.”

UBS Loses Bid to Block Fannie, Freddie Suits - A federal judge Friday denied UBS AG's UBS -0.08%effort to dismiss a lawsuit by the federal regulator for Fannie Mae and Freddie Mac alleging the Swiss bank deceived the mortgage giants into buying billions of dollars of shaky loans during the housing boom. The Federal Housing Finance Agency filed suits against UBS and 17 other banks last summer alleging that they violated federal securities law in selling nearly $200 billion of mortgage-backed securities. The suits represent one of the most sweeping actions by a federal regulator stemming from the mortgage crisis. Friday's ruling by U.S. District Judge Denise Cote of Manhattan is the first on any of the defendants' motions to dismiss the FHFA suits. The court is handling pretrial proceedings for 15 of the lawsuits filed by the FHFA. In the UBS case, the FHFA argued that Fannie and Freddie sustained losses of more than $1.1 billion on some $6.4 billion in mortgage-backed securities that the firms bought as investments between 2005 and 2007.

Freddie Mac has smaller profit; requests more aid - Freddie Mac, the government-controlled mortgage financier, posted a profit of $577 million in the first quarter and will request another helping of government aid to help sustain its operations. The company's profit was down from a profit of $676 million a year earlier, it said Thursday. The decline was driven in part by larger derivative losses, which totaled $1.06 billion, up from $427 million a year earlier and $766 million in the previous quarter. However, its provision for credit losses fell to $1.83 billion, down from $1.99 billion a year earlier and $2.58 billion in the fourth quarter thanks to slowdown in loans deemed "seriously delinquent," Freddie said. Freddie and sister company Fannie Mae do not lend to consumers; rather, they buy mortgages from banks and securitize them for purchase by investors, allowing lenders to continue making loans to consumers. The companies were put into government conservatorship in 2008 as the housing-market collapse drove a surge in losses at the companies. Since then they have stayed afloat through several infusions of taxpayer money.

Freddie Mac Asks Government for $19M in Aid After 1Q Loss - Government-controlled mortgage giant Freddie Mac is requesting $19 million in additional federal aid after posting a loss for the first quarter of this year. The requested amount is less than the $146 million that Freddie received from the government for the fourth quarter of 2011. The company received $7.6 billion for all of 2011 and $13 billion for all of 2010.  Freddie Mac said Thursday that its net loss attributable to common stockholders was $1.2 billion, or 38 cents a share, in the January-March period. That compares with a net loss of $929 million, or 29 cents a share, in the first quarter of 2011. The government rescued Freddie and larger sibling Fannie Mae in September 2008 after massive losses on risky mortgages threatened to topple them. Taxpayers have spent roughly $170 billion to rescue Fannie and Freddie, the costliest bailout of the 2008 financial crisis. It could cost about $200 billion more to support the companies through 2014 after subtracting dividend payments, according to the government. The first-quarter net loss takes into account $1.8 billion in dividend payments that Freddie made to the government, its primary shareholder.

Memo to Schneiderman Mortgage Task Force: When You are in a Hole, Quit Digging -  Yves Smith - The much ballyhooed mortgage task force seems to be hewing to the Obama play book of believing that any problem can be solved with better propaganda. Recall that there has been a great deal of not-very-convincing pushback on the revelation that this initiative has only 50 people working on it, and it’s pretty certain that they are people who were working on existing mortgage-related investigations in various Federal agencies that are simply now reporting to the task force. The latest tidbit, per Reuters, appears to prove the critics’ dim views: In addition to the 50 positions the department previously announced, the DOJ is hiring 10 new assistant U.S. attorneys in districts that include Massachusetts and Colorado, according to job listings on the agency’s website. The department is also hiring five financial analysts and auditors to help understand and identify evidence, the official, who declined to be named, said. It is also focused on civil laws, including a little-used federal statute called FIRREA, which may make such cases easier to bring. So we have yet to be completed incremental staffing of a grand total of 15? 65 people pursuing to the biggest consumer fraud in American history, when the savings & loan crisis had 1000 FBI agents tasked to it?

Yet Another Mortgage Settlement Gimmie: Conflicting Servicing Standards Play into Hands of Banks -- Yves Smith - It’s bad enough that the overhyped mortgage settlement was a big victory for the banks at the expense of homeowners and the rule of law. It let servicers out of considerable liability at very low real cost, and even that is offset by the transfer from pension funds and savers to the banks by letting them write down securitized first loans without wiping out bank owned second liens that sit behind them.  But we now learn there are other gimmies that appear to have resulted from negotiating incompetence. Remember all those months, when Iowa’s attorney general Tom Miller was heading the negotiation, and the chump public kept being reassured that they were making serious headway on the servicing standards? Well, it turns out, first, as Abigail Field pointed out in March, the deal was not done. Major elements of the servicing standards remained to be completed, namely operational aspects of compliance. Second, it turns out there is an even bigger, and more basic stuff up: the servicing standards in the settlement conflict with existing FHA servicing standards. This was one of the most overlawyered deals in history. How did this screw up take place? Answer: the bank lawyers are likely to have noticed and let it go by because it was in their interest, while the government’s side was negligent in covering the basics. For the bank lawyers, any conflict is a work/profit opportunity: everybody has to hash out how to resolve the conflict. They presumably saw it and told their clients to let it ride, since they’d be able to take the position on every point in conflict that the more permissive standard should prevail. And that is probably how it will fall out: “if you are willing to let us do it that way under the FHA standards, how can you take the position that it’s too lax under the servicing standards?”

National Mortgage Settlement Expires In 2015, Banks Battling To Keep Reforms From Becoming Permanent - The promises made by five of the nation's largest banks under the much-ballyhooed $25 billion mortgage settlement have a surprisingly short shelf life. Under the deal struck in February, Bank of America, Wells Fargo, Citigroup, JPMorgan Chase and Ally Financial pledged to stop the illegal practices that sparked false documentation and "robo-signing," which helped push many homeowners into foreclosure and caused endless headaches for millions of other borrowers.   But the legal agreements among the banks, and the states and federal government hold for only three-and-a-half years; the pledge runs out in 2015. Now many of these banks are battling California Attorney General Kamala Harris over her push to make permanent some of the settlement's most important "servicing standard" reforms by writing them into state law.

Complaint | Boyd County v MERS – 14 Kentucky Counties Sue Mortgage Electronic Registration Systems - Excerpt…Kentucky’s public policy for accurate, transparent, and current land records makes it a criminal offense to file records that are forged, are groundless or contain material misstatements. Kentucky law further provides that instruments missing complete and accurate information regarding the person preparing the instrument and the address information of a person receiving an interest in the property by way of the instrument should not be received or permitted to be recorded. Defendants have participated in a scheme utilizing material misstatements of interests in mortgages filed in Kentucky and Plaintiffs no longer intend to receive such instruments for recording. Full complaint below…

Wells Fargo’s Market Share of U.S. Mortgages Tops 33% - Wells Fargo, already the largest U.S. home lender, widened its lead in the first quarter by originating a third of all residential mortgages in the nation as some of its biggest rivals retreated.  Wells Fargo controlled 33.9 percent of the U.S. mortgage market in the three months ended March, more than three times the share for No. 2-ranked JPMorgan Chase, according to Inside Mortgage Finance, an industry publication based in Bethesda, Maryland. The first quarter’s market share expanded from 30.1 percent in the fourth quarter, which was already the highest ever posted by a single company, according to Guy Cecala, publisher of IMF.  “Wells Fargo finished the first quarter with a record high,” IMF said in an e-mail sent to subscribers. “Perhaps more significantly, Wells widened the mortgage lending gap among its competitors.” The tally for San Francisco-based Wells Fargo exceeded the combined total for the next seven largest lenders, IMF said.  Chief Executive Officer John Stumpf, 58, is taking advantage of weakness at competitors such as Bank of America Corp. to boost mortgage lending, which helped Wells Fargo post 13 straight quarters of profit. Bank of America, once the largest home lender, has cut back after recording more than $40 billion of costs tied to faulty home loans and foreclosures.

Mortgage Aid Programs Were Halted, Papers Show - The Federal National Mortgage Association and Freddie Mac approved and even initiated programs to reduce homeowner debt and save taxpayers millions, but halted them before the trials had progressed far enough to measure success, according to documents released Tuesday. The documents came to light the day after Edward J. DeMarco, the conservator who oversees the Federal National Mortgage Association, known as Fannie Mae, and Freddie Mac, missed a self-imposed deadline to release a new analysis of the cost benefits of principal reduction that would include new incentives offered by the Treasury Department. Mr. DeMarco has come under increasing pressure from Democrats to forgive debt for certain homeowners when it would both restore some equity and save the lender money by heading off foreclosure. He has opposed it, though he recently conceded it would reduce the agencies’ losses. The majority of American home loans are backed by Fannie and Freddie and are therefore ineligible for debt reduction under Treasury programs that provide incentives to lenders under a $26 billion settlement with five banks announced in February.

Romney’s new housing policy: Offering the Grim Reaper a big helping hand - The other day I went to visit an old friend of mine who I hadn’t seen in years — but now she was dying, truly dying. It was a very sobering experience. Who would have thought that this formerly enthusiastic, vibrant and energetic woman would now be reduced an almost-human shell, a mere skeleton that breathed? But the Grim Reaper eventually comes for us all. Except, of course, for me. In America, death seems to be coming earlier and earlier to those who vote. And now GOP presidential candidate Mitt Romney has come up with an even more sure-fire plan to help out his new BFF, the Grim Reaper. Now Romney wants to not only eliminate most U.S. housing subsidies, he wants to eliminate the entire department of Housing and Urban Renewal as well. That will certainly speed up the Grim Reaper’s efforts for sure. According to TruthOut, “Romney’s plan to eliminate HUD, assuming he didn’t shuffle its programs to other departments, would bring an end to critical programs like Section 8 housing vouchers and community development block grants. And eliminating housing assistance is even more problematic given the disproportionate percentage of veterans in the homeless population.” But what does Romney’s latest brilliant idea actually mean in terms of you and me? It means once again that the rich continue to get richer and live longer while the rest of us just conveniently die off too soon — because homeless people have a lot shorter life span than folks happily housed in the Hamptons.

Bankers Are Still Wrecking Housing Market Fundamentals - Regardless of the recent bullish stories on the housing market (examples here, here, here and here), housing market fundamentals are lousy. Demand in the last decade was wildly distorted by banker abandonment of underwriting and appraisals. Now bankers are worsening the crash they created. As a result, prices will just keep falling, and foreclosures cannot lead to clearing the market (regardless of what some say). Foreclosures can only make the problems worse. As a first step to seeing the problems, let’s get real about how profoundly market-distorting that lender-inflated bubble was. People who could not afford to buy homes, period, were nonetheless given loans, artificially expanding the number of people expressing demand. In addition, people who could have afforded a house, if not the house they purchased, expressed their natural demand in the ‘wrong’ segment of the market. Both distortions combined to spike prices far higher than natural demand would have driven them.  But the price peak isn’t the full measure of how far prices need to fall, because supply didn’t remain constant. The price spike drove home builders to add supply beyond what they would have to meet natural demand. This chart from the National Association of Home Builders shows that from 1978-1997 sales of new homes oscillated between approximately 0.4 to 0.8 million homes a year. . From 1997 through 2007, however, sales went from about 0.8 million to nearly 1.3 million a year and back down to about 0.8 million.

CoreLogic: 69,000 completed foreclosures in March 2012 - From CoreLogic: CoreLogic® Reports 69,000 Completed Foreclosures Nationally in March CoreLogic ... today released its National Foreclosure Report for March, which provides monthly data on completed foreclosures, foreclosure inventory and 90+ day delinquency rates. There were 69,000 completed foreclosures in March 2012 compared to 85,000 in March 2011 and 66,000 in February 2012. Through the first quarter of 2012, there were 198,000 completed foreclosures compared to 232,000 through the first quarter of 2011. Since the start of the financial crisis in September 2008, there have been approximately 3.5 million completed foreclosures. Approximately 1.4 million homes, or 3.4 percent of all homes with a mortgage, were in the national foreclosure inventory as of March 2012 compared to 1.5 million, or 3.5 percent, in March 2011 and 1.4 million, or 3.4 percent, in February 2012. The number of loans in the foreclosure inventory decreased by nearly 100,000, or 6.0 percent, in March 2012 compared to March 2011.  This is a new monthly report and will help track the number of completed foreclosures, and to see if the lenders are starting to clear the foreclosure inventory backlog following the mortgage settlement.

NY, NJ rank among five states with highest foreclosure rates; CoreLogic: While the national foreclosure inventory decreased year-over-year last month, New York and New Jersey were a couple of the states that saw an increase, putting them among the five states with the highest foreclosure rates, according to data released today by CoreLogic. Florida ranked first with a 12.1 percent foreclosure inventory rate, New Jersey came in second with 6.6 percent while New York came in fifth with 4.9 percent.New York’s foreclosure inventory rate marks an 0.8 percent increase from March 2011. There were a total of 3,681 completed foreclosures in the state for the year ending March 2012. In the New York City-White Plains, NY-Wayne, NJ region, CoreLogic recorded a 5.5 percent foreclosure inventory rate for March 2012 — a 0.4 percent increase from March 2011. The regional 90-plus day delinquency rate stayed roughly the same in March 2012 as the state-wide tallies, coming in at 8.7 percent, which is a 0.2 percent increase from March 2011. Year-over-year, there were a total of 838 completed foreclosures.

LPS: March Foreclosure Starts increase, Foreclosure Sales lowest since December 2010 - LPS released their Mortgage Monitor report for March today.  According to LPS, 7.09% of mortgages were delinquent in March, down from 7.57% in February, and down from 7.78% in March 2011.  LPS reports that 4.14% of mortgages were in the foreclosure process, up slightly from 4.13% in February, and down slightly from 4.15% in March 2011. This gives a total of 11.23% delinquent or in foreclosure. It breaks down as:
• 1,888,000 loans less than 90 days delinquent.
• 1,643,000 loans 90+ days delinquent.
• 2,060,000 loans in foreclosure process.
For a total of 5,591,000 loans delinquent or in foreclosure in March. This is down from 6,333,000 in March 2011. This following graph shows the total delinquent and in-foreclosure rates since 1995.The total delinquency rate has fallen to 7.09% from the peak in January 2010 of 10.97%. The in-foreclosure rate was at 4.14%, down from the record high in October 2011 of 4.29%. There are still a large number of loans in this category (about 2.06 million).  Most of the decline in the delinquency rate was part of the normal seasonal pattern. The third graph shows the break down of loans "in foreclosure" by process (judicial vs. non-judicial). The foreclosure inventory in judicial states is still near record highs. The last graph (all provided by LPS Applied Analytics) shows foreclosure starts and sales.Foreclosure starts increased in March, but are still down 31.1% year over year. Foreclosure sales were at their lowest point since December of 2010.

Fannie Mae and Freddie Mac Serious Delinquency rates declined in March - Fannie Mae reported that the Single-Family Serious Delinquency rate declined in March to 3.67%, down from 3.82% in February. The serious delinquency rate is down from 4.44% in March 2011, and is at the lowest level since April 2009. Some of the decline over the last two months is seasonal. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate declined to 3.51% in March, down from 3.57% in February. Freddie's rate is down from 3.63% in Feburary 2010. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.These are loans that are "three monthly payments or more past due or in foreclosure".With the mortgage servicer settlement, I'd expect the delinquency rate to start to decline faster over the next year or so.  The "normal" serious delinquency rate is under 1%, so there is a long way to go. Note: LPS reported the serious delinquency rate (including in foreclosore) was about 7.5% in March. That includes the Fannie and Freddie loans with serious delinquency rates at less than half the industry average. This is also a reminder of how bad the non-Fannie/Freddie loans are performing.

New Short Sales Guidelines from Fannie and Freddie - I mentioned this announcement two weeks ago - the San Francisco Chronicle has more: New guidelines are a tall order for short sales: Fannie Mae and Freddie Mac have issued new guidelines designed to speed up short sales and make them more consistent, but real estate agents question whether they are achievable in the real world.  ...Under the new guidelines, which take effect June 15, servicers have 30 days to review and respond to short sale offers or requests. If they need more than 30 days, they must provide the borrower weekly updates and a final response within 60 days. If the borrower is requesting a short sale under the government's Home Affordable Foreclosure Alternative program, the clock starts ticking when the borrower submits a completed borrower response package requesting consideration of a short sale....If the short sale is not under the government program, the clock starts ticking when the borrower submits a short sale offer from a potential buyer and a completed borrower response package. This doesn't seem realistic, and there doesn't appear to be any penalty for missing the deadlines. But apparently Fannie and Freddie will track the performance of servicers, and maybe they will introduces penalties.

Housing Crash Porn: One Million More Suckers Now Underwater - It is an established fact that one of the biggest drivers for the insane monetary policies of the Federal Reserve since the financial crash of 2008 was trying to save the crashing housing market. The Fed's zero interest rate policy has driven mortgage rates to historical lows below 4%, while the bank bailouts were designed, in part, to give lenders the capital to continue making home loans so the market wouldn't implode completely. The results have been, shall we say, less than impressive given that home sales and home prices remain mired near their post crash lows. As if record low mortgage rates were not enough to entice buyers back into the market, in the media there have been repeated calls that "the bottom is in" on housing as a means of trying to convince people that they are no longer risk of losing money on their "investment." So how is the second part of the strategy to save the housing industry working out? Not too well, actually. Here is Reuters with the details:More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame. That figure, provided to Reuters by tracking firm CoreLogic, represents about one out of 10 home loans made during that period. It is a sobering indication the U.S. housing market remains deeply troubled, with home values still falling in many parts of the country, and raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk.

HVS: Q1 Homeownership and Vacancy Rates - The Census Bureau released the Housing Vacancies and Homeownership report for Q1 2012 this morning.  This report is frequently mentioned by analysts and the media to track the homeownership rate, and the homeowner and rental vacancy rates. However, based on the initial evaluation, it appears the vacancy rates are too high. The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate declined to 65.4%, down from to 66.0% in Q4 2011 and at the lowest level for this survey since the mid-90s. I'd put more weight on the decennial Census numbers and that suggests the actual homeownership rate is probably in the 64% to 65% range. The Census researchers are investigating differences in Census 2010, ACS 2010, and HVS 2010 vacant housing unit estimates, but there is no scheduled date for any report. The HVS homeowner vacancy rate declined to 2.2% from 2.3% in Q4. This is the lowest level since Q2 2006 for this report. The homeowner vacancy rate has peaked and is now declining. However - once again - this probably shows that the trend is down, but I wouldn't rely on the absolute numbers. The rental vacancy rate declined to 8.8% from 9.4% in Q4. I think the Reis quarterly survey (large apartment owners only in selected cities) is a much better measure of the overall trend in the rental vacancy rate - and Reis reported that the rental vacancy rate has fallen to the lowest level since 2001. The quarterly HVS is the most timely survey on households, but there are many questions about the accuracy of this survey.

Real Estate Insanity...working off the excess inventory? - So my son and me are thinking about buying a duplex in Ohio and fixing it up this summer. He would live in half and we would rent the other side. Given the number of foreclosures this should be an easy deal, right? Wrong. The realtors tell me no one will finance the properties, not even the banks that own them. Why? It seems many of the banks did not get around to assigning "asset managers" for a year or two, which means the water pipes froze in the winter, burst in the spring and destroyed the interior of the properties. Even when asset managers were promptly assigned, many were incompetent and/or corrupt. So there are many thousands of properties with reasonable looking exteriors but with ruined interiors. Even with sweat equity labor the fix up costs will be very high. This will eventually be fixed with bulldozers.

Bad Neighbor Banks: How big lenders spread real estate blight across South Florida - Thousands of vacant homes across South Florida have deteriorated into eyesores that violate local health and safety laws, depress property values and spread blight. The owners of these homes: some of the world's biggest banks. In an extensive investigation of foreclosed homes plaguing our neighborhoods, the Sun Sentinel found more than 10,300 property code violations lodged against banks in 10 South Florida cities since 2007. Municipalities cited the banks because they had title to the homes. But some banks deny responsibility for neglected houses for reasons that ordinary homeowners could not, the Sun Sentinel found. Banks shift the blame, saying maintenance isn't their job but the responsibility of another bank or company, known as a "loan servicer." And they delay or evade accountability simply because they are faceless institutions, usually based in other states, even other countries.

Mortgage Equity Withdrawal update - The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW", but there is little MEW right now - and normal principal payments and debt cancellation. For Q4 2011, the Net Equity Extraction was minus $64 billion, or a negative 2.2% of Disposable Personal Income (DPI). This is not seasonally adjusted. This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.  There are smaller seasonal swings right now, perhaps because there is a little actual MEW (this is heavily impacted by debt cancellation right now). The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined sharply in Q4. Mortgage debt has declined by $777 billion over the last four years. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance. Note: most homeowners pay down their principal a little each month unless they have an IO or Neg AM loan, so with no new borrowing, equity extraction would always be slightly negative.

Ability-to-Repay Rule for Mortgages Nears CFPB Approval - Richard Cordray wants lenders to adhere to the most basic tenet of banking: making sure borrowers can repay. Getting them to agree on how is proving tougher. The director of the Consumer Financial Protection Bureau is aiming to discourage lenders from making home loans with risky features and outlining steps they must take to verify borrowers’ finances, as part of the “qualified mortgage” or QM regulation. Banks that follow the guidelines will gain legal protection against borrower defaults. “Here’s what should be the least surprising lending advice you’ve ever heard: If you are going to lend money, you should probably care about getting paid back,” Raj Date, the agency’s deputy director, said in a speech April 20 in Los Angeles. The rule, which may be released as soon as next month, is dividing the banking industry with the largest mortgage firms such as Wells Fargo & Co. and Bank of America Corp. siding with some consumer groups that the provision should allow certain lawsuits. Trade groups whose members include smaller lenders are holding out for a version that would protect bankers entirely from being sued, arguing that without the provision, home loans will be costlier and harder to obtain.

US Rate on 30-year Mortgage Hits Record 3.84% - Average U.S. rates for 30-year and 15-year fixed mortgages fell to fresh record lows this week, offering more incentive for Americans to buy or refinance homes. Mortgage buyer Freddie Mac said Thursday that the rate on the 30-year loan fell to 3.84 percent, the lowest since long-term mortgages began in the 1950s. That’s below the previous record rate of 3.87 percent reached in February. The 15-year mortgage, a popular option for refinancing, dropped to 3.07 percent, also a record. The previous record of 3.11 percent was hit three weeks ago. Cheaper mortgage rates haven’t done much to boost home sales. Rates have been below 4 percent for all but one week since early December. Yet sales of both previously occupied homes and new homes fell in March. Analysts suspect some of that weakness reflected a warm winter, which pulled sales that would normally occur during the spring buying season into January and February.

Freddie Mac: Fixed Mortgage Rates Average New All-Time Record Lows - This was released earlier ... from Freddie Mac: Fixed Mortgage Rates Average New All-Time Record Lows Freddie Mac (OTC: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates finding new all-time record lows ... The 30-year fixed averaged 3.84 percent, down from its previous all-time record low of 3.87 percent last registered on February 9, 2012. The 15-year fixed averaged 3.07 percent, also dropping below its previous all-time record low of 3.11 percent set April 12 of this year. The 1-year ARM also averaged a new all-time record low in the PMMS at 2.70 percent.  30-year fixed-rate mortgage (FRM) averaged 3.84 percent with an average 0.8 point for the week ending May 3, 2012, down from last week when it averaged 3.88 percent. Last year at this time, the 30-year FRM averaged 4.71 percent. This graph shows the 15 and 30 year fixed rates from the Freddie Mac survey. The Primary Mortgage Market Survey® started in 1971 (15 year in 1991).  The Ten Year treasury yield is near a record low at 1.92%.

Housing Ends Slide but Faces a Long Bottom - Nearly six years after home prices started falling, more U.S. housing markets appear to be nearing a new phase: a prolonged bottom. Hitting a bottom, of course, isn't the same as a full-fledged recovery ... The good news is that housing construction and home sales appear to have hit a floor. Home builders cut back heavily in the past four years and began construction on just 434,000 single-family homes last year, the lowest level on record. Research firm Zelman & Associates estimates builders will start construction on 540,000 homes this year, a 24% increase. ...Housing economists are debating whether that shadow inventory will spoil any housing recovery. "That'll be like a ball and chain," said Mark Fleming, chief economist at CoreLogic. "It won't prevent a recovery, but it could drag it out over several years."Ms. Zelman said the shadow inventory is "not going to result in the double dip that people always talk about." She points to a burgeoning appetite for housing from investors, who are scooping up homes that can be converted to rentals, and six years of pent-up demand from traditional buyers who feel better about their financial prospects. "The fear is gone," she said.  While the foreclosure overhang is serious, some economists say there is a less-noticed tailwind that could balance things out: the sharp decline in new construction over the past four years. "A lot of the people who talk about 'shadow inventory' don't talk about how slow the overall housing stock has been growing," said Thomas Lawler, an independent housing economist

Trulia on Houses: Asking Prices increase slightly Year-over-year in April - 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. From Trulia: Strong Housing Demand and Tightening Inventories Spark Nearly 2 Percent Rise in Asking Prices over Previous Quarter Asking prices on for-sale homes–which lead sales prices by approximately two or more months–were 0.5 percent higher in April than in March, seasonally adjusted. Together with increases in March and February, asking prices in April rose nationally 1.9 percent quarter over quarter (Q-o-Q), seasonally adjusted. The price increase unadjusted for seasonality was even higher: 4.8 percent Q-o-Q, since prices typically jump in springtime. Year over year (Y-o-Y), asking prices rose 0.2 percent nationally.This graph from Trulia shows the month over month prices changes (seasonally adjusted) as reported by the monitor. This shows asking prices were falling for most of 2011, but have turned up in early 2012. Here is a list of price and rent changes for the 100 largest metro areas.

The upward slope of Real House Prices - A year ago, Dave Altig asked Just how out of line are house prices?. Dr. Altig's post featured both a price-to-rent graph and a real house price graph originally from the NY Times based on Professor Robert Shiller's work. The price-to-rent ratio graph Dr Altig presented seemed to show that house prices were getting back to normal, but the graph based on Professor Shiller's work seemed to suggest that house prices could fall much further. Below is an updated graph from Shiller through Q4 2011. The Shiller graph has suggested to many observers that house prices track inflation (i.e. that house prices adjusted for inflation are stable - except for bubbles). Last year I pointed out the slope depends on the data series used, and that if Professor Shiller had used either Corelogic or the Freddie Mac house prices series, before Case-Shiller was available, there would a greater upward slope to his graph. An upward slope to real prices makes sense to me as I've argued before: "In many areas - if the population is increasing - house prices increase slightly faster than inflation over time, so there is an upward slope for real prices."This is the updated graph from Professor Shiller. For the underlying data for the NY Times graphic, please see Professor Shiller's Irrational Exuberance website.

Homeownership Rate Falls to 15-Year Low - The nation’s homeownership rate (seasonally adjusted) dropped to 65.5 percent in the first quarter, its lowest level since the first quarter of 1997, the Census Bureau reported Monday. At the same, the homeowner vacancy rate fell to 2.2 percent nationwide, down from 2.6 percent in the first quarter of 2011, and the rental vacancy rate dropped to 8.8 percent from 9.7 percent one year earlier. The homeowner vacancy rate is at its lowest level since the 2006 first quarter. The median asking sale price for a vacant home fell to $133,700 – the lowest level since second quarter 2005 – from $133,800 in the fourth quarter and $143,700 one year earlier. The median asking rent in the first quarter rose to $721 from $712 in the fourth quarter and $683 in the first quarter of 2011. The homeowner vacancy rates in principal cities (2.5 percent) and outside MSA’s (2.6 percent) were higher than in the suburbs (1.9 percent), the Census Bureau said in its quarterly report. The homeowner vacancy rates in principal cities and in the suburbs were lower than a year ago, while the rate outside MSA’s was not statistically different from the corresponding first quarter 2011 rate, according to the report.

CNNMoney: Homeownership falls to lowest rate in 15 years -- Homeownership in the U.S. fell to its lowest rate in 15 years during the first quarter as more delinquent borrowers lost their homes to foreclosure, forcing many to rent.  The percentage of Americans who own their homes dropped a full percentage point over the past 12 months to 65.4% during the first three months of 2012, according to the latest Census Bureau data. That's the lowest rate since 1997 and down from the peak of 69.2% reached in 2004. The rental vacancy rate dropped to 8.8% during the first quarter, down from 9.7% a year earlier and from 9.4% in the last quarter of 2011, according to Census. The growing demand has put pressure on the rental markets, said Villacorte. In many depressed housing markets, investors have been buying up distressed properties -- foreclosures and short sales -- fixing them up and renting them out.

Fewer Americans form households after recession, hampering economic recovery - The recession reduced the rate at which Americans set up new homes or apartments by at least half. Although the number of new households has begun to recover over the past year, its growth rate continues to lag behind its historic pace, according to Census Bureau statistics. More than one in five adults between ages 25 and 34 live with their parents or in other “multi-generational” living arrangements, the highest level since the 1950s, according to the Pew Research Center.  Analysts estimate that there are more than 2 million fewer occupied homes than there would have been had Americans continued moving into new homes and apartments at the rate they did before the recession. Not only are young people returning to the nest in numbers not seen in generations, but also the weak job market and increased border enforcement have caused a marked decline in immigration, hobbling another major source of new households. The slowdown has broad implications for the economy. It has trimmed demand for housing, even as the economy struggles to absorb the oversupply of new homes that came with the housing bubble and the millions of foreclosures that continue to weigh on the market.

The Rent Is Too Damn High and Getting Higher - Rental properties had only an 8.8% vacancy rate in the first quarter, the Commerce Department reported. Low availability of rental homes is pushing up costs: The median asking rent rises to $721 a month (while home prices continue to fall).

Where Are We in the Economic Cycle - I see that a lot of folks are getting depressed about the incoming data. I think this is unfortunate because the general narrative from the later half of 2011 is continuing. The economy looks to be growing reasonably well against headwinds that are likely to turn into tailwinds. Residential investment is flat and government spending declining. Yet, it is highly unlikely that these trends will continue. We have not yet seen the increase in multifamily construction I was looking for and we never see it. However, as predicted rents are rising, and the supply of housing is tight. If the multifamily supply doesn’t increase then this will cause either young homeowner, investors, or move-up landlords to soak up the inventory of single family homes and lead to an increase in the building of new single family homes. Given the way things are going the next big trend might be move-up landlords. What we are imagining here are folks who are financially stable, who notice they can rent their existing home for enough to cover the mortgage. So, they buy a new home. Because they are moving into the new home they get to enjoy Fannie-Freddie owner occupied rates on both mortgages. Yet, they are now landlords on the original home..

Lawler: Update on Home Builder Sales - From economist Tom Lawler:  Standard Pacific Homes, the 12th largest US home builder in 2010, reported that net home orders (excluding jvs) in the quarter ended March 31st totaled 934, up 43.3% from the comparable quarter of 2011. SPF’s sales cancellation rate, expressed as a % of gross orders, was 13% last quarter, down from 14% a year ago.  Beazer Homes, the 9th largest US home builder in 2010, reported that net home orders (including discontinued operations) in the quarter ended March 31sr totaled 1,511, up 26.0% from the comparable quarter of 2011. The company’s sales cancellation rate, expressed as a % of gross orders, was 22.5% last quarter, up from 20.0% a year ago. Home deliveries last quarter totaled 845, up 44.9% from the comparable quarter of last year. MDC Holdings, the 11th largest US home builder in 2010, reports results for the quarter ended 3/31/12 tomorrow. Here is a summary of some stats reported by publicly traded home builders for last quarter.

Time-to-Build and Housing - I saw a good bit of commentary suggesting that the contribution of Residential Investment to GDP was surprising. On the whole I am surprised that it is not higher, though going into the GDP report I knew I had not seen the level of Multifamily starts I had been expecting. Nonetheless, one of the important things to remember is that it takes time to build houses, and multifamily in particular takes a long time. When we look the number of total units under construction we see thi Which looks like a small and pathetic recovery. However, what matters for GDP is not level but absolute change. So here is the quarterly change in units under construction. This shows an absolute change at roughly half of levels seen during the later half of the boom. Given the sharp rise in permits I suspect the number of units under construction will grow at an increasing pace suggesting that we could soon have GDP contribution nearing levels seen during the boom.

Construction Spending increases slightly in March - This morning the Census Bureau reported that overall construction spending increased slightly in March:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during March 2012 was estimated at a seasonally adjusted annual rate of $808.1 billion, 0.1 percent (±1.4%) above the revised February estimate of $807.3 billion. The March figure is 6.0 percent (±1.9%) above the March 2011 estimate of $762.6 billion .Private construction spending increased while public spending decreased: Spending on private construction was at a seasonally adjusted annual rate of $531.9 billion, 0.7 percent (±1.3%) above the revised February estimate of $528.1 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 64% below the peak in early 2006, and up 8.4% from the recent low. Non-residential spending is 30% below the peak in January 2008, and up about 18% from the recent low. Public construction spending is now 15% below the peak in March 2009 and at a new post-bubble low. The second graph shows the year-over-year change in construction spending.

Q1 2012 GDP Details: Office and Mall Investment falls to record - The BEA released the underlying details today for the Q1 Advance GDP report. As expected, key non-residential categories - offices, malls and lodging - saw further declines in investment in Q1. The first graph shows investment in offices, malls and lodging as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q1 2008 and then declined sharply. Investment as a percent of GDP fell to a new low in Q1 and is now down 64% from the peak. This decline will probably slow mid-year based on the architectural billings index, but with the high office vacancy rate, investment will probably not increase (as a percent of GDP) for several years. Investment in multimerchandise shopping structures (malls) peaked in 2007 and is down about 68% from the peak and at a new low in Q1 (note that investment includes remodels, so this will not fall to zero). Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by about 82%. The second graph is for Residential investment (RI) components as a percent of GDP. According to the Bureau of Economic Analysis, RI includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories (dormitories, manufactured homes). Usually the most important components are investment in single family structures followed by home improvement. Investment in single family structures is finally increasing after mostly moving sideways for almost three years (the increase in 2009-2010 was related to the housing tax credit). Investment in home improvement was at a $164 billion Seasonally Adjusted Annual Rate (SAAR) in Q1 (over 1.0% of GDP), significantly above the level of investment in single family structures of $114 billion (SAAR) (or 0.74% of GDP).

Personal Income increased 0.4% in March, Spending 0.3% - The BEA released the Personal Income and Outlays report for March: Personal income increased $50.3 billion, or 0.4 percent ... in March, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $29.6 billion, or 0.3 percent....Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in March, compared with an increase of 0.5 percent in February. ... PCE price index -- The price index for PCE increased 0.2 percent in March, compared with an increase of 0.3 percent in February. The PCE price index, excluding food and energy, increased 0.2 percent, compared with an increase of 0.1 percent. The following graph shows real Personal Consumption Expenditures (PCE) through March (2005 dollars).PCE increased 0.3% in March, and real PCE increased 0.1%. Note: The PCE price index, excluding food and energy, increased 0.2 percent. The personal saving rate was at 3.8% in March.

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

US Consumer Spending Slowed in March, Income Rose - Americans increased their spending more slowly in March, suggesting some could be worried about the economy. The Commerce Department said Monday that consumer spending increased just 0.3 percent last month after a 0.9 percent gain in February. Income grew 0.4 percent following a 0.3 percent gain in February. Still, after-tax income when adjusted for inflation increased just 0.2 percent in March. The tiny gain followed two months of declines. Consumer spending accounts for 70 percent of economic growth. It rose 2.9 percent in the January-March quarter — the fastest pace in more than a year. Consumers could be cutting back because of the weak income gains and a slowdown in hiring. The government reported Friday that the overall economy grew at an annual rate of 2.2 percent in the January-March quarter, a slowdown from growth of 3 percent in the October-December period. That was mainly because of government budget-cutting and weaker business investment.

Savings Rate Rises From 4 Year Low As Spending Tumbles, Income Boosted By Government Transfer Receipts - While expectations for today's March Personal Income and Spending were for a rise of 0.3% and 0.4%, which if confirmed would have pushed the 3.7% savings rate to the lowest since 2007. Instead we got a reversion, with Income rising 0.4%, higher than expected, while Spending printed at 0.3%, the lowest since December 2011, just below expectations, and tumbling from February's 0.9% print, the biggest slide since August 2011. In real terms, spending was up 0.1% and income up 0.2%. TheMost importantly, the surprising inversion between spending and income, pushed the savings rate from 3.7% to 3.8%, just shy of 4 year lows, and the first increase in 2012, although well below the 4.9% savings rate in March 2011, which means that increasingly the consumer is tapped out. When one takes away the impact of the record warm winter (of which March data was still part of), it becomes quite clear that unless Joe Sixpack is charging everything, then Q2 GDP will be a very big disappointment.

Vital Signs: Saving Rate Trending Lower - The saving rate inched up recently after trending down. The Personal Saving Rate — what consumers have left after spending and taxes — inched up to 3.8% in March from 3.7% a month earlier. That is still below 2011’s readings in the high-4% range. A declining saving rate is one factor behind strong consumer spending but many economists expect saving ultimately to creep back up.

Is Personal Income Growth (Finally) Stabilizing? - For the second month in a row, personal disposable income (DPI) grew at a faster rate, advancing 0.4% in March—the best pace so far this year, according to today's update from the U.S. Bureau of Economic Analysis. It’s also the first month since December that DPI growth exceeded the increase in personal consumption expenditures, which gained 0.3% last month.  The improvement comes after months of sluggish growth in DPI, a downshift that has weighed on the year-over-year rate for this series and thereby darkened expectations for the broader economy. But with today’s update, it’s tempting to consider the possibility that income growth has found a floor. If so, the stability will help alleviate fears that a new recession is lurking. Technically, DPI’s annual percentage change last month fell for the sixth straight month (2.77% in March vs. 2.83% in February). But rounding those changes to one decimal point reveals the first time that DPI’s annual pace has dropped since last August. The bigger test will come in a month, when we'll learn if today's DPI news was a fluke or not.

''Real'' Disposable Income Per Capita: Still Flatlining   - Earlier today I posted my monthly update of the year-over-year change in the Bureau of Economic Analysis (BEA) Personal Consumption Expenditures (PCE) price index since 2000. My focus was on the PCE index as a measure of inflation.Now let's look at the PCE data to understand what the latest numbers are telling us about a key driver of the U.S. economy: "Real" Disposable Income Per Capita. What we discover is that, adjusted for inflation, per-capital disposable incomes have flatlined for the past 22 months and is currently at about the same level as November 2006. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000.  The BEA uses the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000. Nominal disposable income is up 49.2% since then. But the real purchasing power of those dollars is up a mere 14.6%. Real DPI per capita is at a level first attained in the Autum of 2006 and remains about 0.7% below the level at the beginning the 2007-2009 recession. In fact, this metric of consumer well-being has essentially hovered around a flatline since June of 2010.

Discrepancies on Medical Bills Can Leave a Credit Stain - When Ray White’s son was about 9 years old, he struck a tree branch while riding his bike. Within minutes, an ambulance whisked him off to the emergency room. The boy recovered, but many months and phone calls later, Mr. White’s insurance1 company still had not paid the $200 ambulance bill, even though the insurer had assured him it was covered. He finally decided it was easier to pay it himself.  But by then, it was already too late. Unbeknown to Mr. White, the debt had been reported to the credit bureaus. It was only when he and his wife went to refinance the $240,000 mortgage2 on their home in Lewisville, Tex., last month — nearly six years after the accident — that he learned the bill had shaved about 100 points from his credit score. Even with no other debts, a healthy income and otherwise pristine credit, the couple had to pay an extra $4,000 to secure a lower interest rate.

Restaurant Performance Index increases in March - From the National Restaurant Association: Restaurant Performance Index Closes Out Q1 at Post-Recession High Driven by solid same-store sales and traffic results and an increasingly bullish outlook among restaurant operators, the National Restaurant Association’s Restaurant Performance Index (RPI) matched its post-recession high in March. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 102.2 in March, up 0.3 percent from February and equaling its post-recession high that was previously reached in December 2011.  “The first quarter finished strong with a solid majority of restaurant operators reporting higher same-store sales and customer traffic levels in March,” The index increased to 102.2 in March, up from 101.9 in February (above 100 indicates expansion). Restaurant spending is discretionary, so even though this is "D-list" data, I like to check it every month - and the index was fairly strong in March

April Sales: How Retailers Fared - Retailers reported same-store sales for April that were generally softer than expected. The 18 retailers tracked by Thomson Reuters posted a 2.2% rise in April same-store sales when a 3% gain was expected. The figure compares with 11% growth a year ago, when Easter came two weeks later in April. For March and April combined, to show the shift of the Easter holiday to early April this year, retailers reported a 4.5% gain. The growth is down from a 6.4% rise over the same two months last year. See a sortable chart of how individual retailers fared. Click any column to re-sort.

More Consumers Plan Summer Travel as Sentiment Improves - U.S. consumers in May felt better about both the current economy and the future, according to a survey released Thursday. More are also planning to travel this summer. The Royal Bank of Canada said its consumer outlook index rose one point to 47.6 this month, the highest since the last economic expansion that ended in December 2007. The RBC current conditions index increased to 38.7 from 37.2 last month. The expectations index rose to 57.5 from 55.8 in April. The report said consumers are feeling slightly better about the strength of their local economies and a slightly higher proportion expect their personal finances will be stronger in six months. Even so, consumers continue to suffer from job jitters. The May jobs index fell to 53.6 after it plunged to 54.1 in April from 57.0 in March.

Recent Energy Price Movements in the Midwest - Chicago Fed - Households in the region and nationwide have been affected by rising motor fuel prices in recent months; this follows an earlier spike that took place in 2007–08. Such price spikes ordinarily pinch household incomes and spending on non-fuel items. However, at the same time, natural gas prices have been trending downward, thereby providing some relief to household budgets. This is especially true in the Midwest, where most homes are heated with natural gas that is piped in by utility companies. So, to what extent has the favorable trend in natural gas prices been offsetting the unfavorable trend in motor fuel prices? The chart below displays prices paid by household consumers for both types of fuel[1]. Prices for both natural gas and gasoline have typically moved in tandem. In many instances, this is because the two fuels are substitutes in several important markets and uses. For example, if either petroleum products or natural gas can be used in applications such as heating industrial boilers or homes, the price of one could not easily fall out of line with the other. If it started to do so, consumers would switch to the cheaper product, thereby raising its price.

Chart Of The Day: Gas Prices Are Heading Back Down - Jared Bernstein links to this chart at which does indeed seem to confirm that retail gasoline prices have peaked and are headed back down: Of more interest, I think, is this chart showing prices over the past 18 months: What this chart shows us is two-fold. First, that the run-up in prices we saw starting in January was pretty much identical to the one in 2011. Second, that the 2011 prices actually peaked at a slightly higher price than what we experienced this year.

Time To Start Looking At The Pump Prices Again  - In late February and early March, gas prices were all the rage with every media outlet quoting them ad nauseum until European distresses reclaimed the headlines and suddenly, gas prices became irrelevant once again in the minds of the politicians and media - despite only a very modest drop from their near-record highs. Retail gas prices have indeed fallen for the last three weeks and some have heralded this 13c drop as the second-coming of tax-rebates for consumers in the US. However, in the last few weeks, Crude oil prices have rallied somewhat smartly from under $101 to over $106 this morning (back to one-month highs). RBOB (wholesale gasoline) prices have also - in the last few days - started to push higher with their 'normal' few-week lag. Given the historical precedent, we would expect to see retail gasoline prices stabilize and turn up once again within the next week or two - just in time for the winter-warmth effects to wear off on the macro-economy and the summer driving season to begin - burning an ever-bigger hole in the household's pocket.

Commercial Natural Gas Prices Drop to 12-Year Low in February - According to data released this week by the EIA, the U.S. price of natural gas sold to commercial consumers fell in February to $7.97 per thousand cubic feet in February. The last time the price of commercial natural gas was below $8 was back in February 2003, and after adjusting for inflation, it’s the lowest price since early 2000, 12 years ago.   The drop in commercial natural gas prices to below $8 in February, and to levels less than 50% of the spikes in 2005 and 2008 above $16, provides evidence that American manufacturers are saving billions of dollars collectively in energy costs as inflation-adjusted prices fall to 12-year lows. Thanks to having access to the world’s cheapest natural gas, the U.S. has now emerged as one of the world’s lowest-cost manufacturing locations for producing chemicals, nitrogen fertilizers, ethylene, steel and iron.

EIA: US February Residential Gas Use At 22-Year Low For February - Reflecting warmer-than-normal temperatures in February, U.S. residential use of natural gas fell 16.7% from a year earlier to a 22-year low for the month, latest government data show. Residential gas use, at 23 billion cubic feet per day, was 11.2% below the January level, according to data released by the Energy Information Administration early Monday evening. The National Oceanic and Atmospheric Administration has said February 2012 ranked as the 17th-warmest on record in the U.S. Commercial use of natural gas, at 13.5 bcf/day in the month, was down 13.2% from a year ago and 7% below the January level. Average natural gas prices at the Henry Hub benchmark in Louisiana were at 10-year lows in February and 39% below a year earlier, spurring significant switching away from coal burning to gas consumption by utilities. Gas use by the power sector in February was the highest for the month on EIA records beginning in 2001 and was up 34.6% from a year earlier. At 23.185 billion cubic feet, demand was 10.4% above the January level.

Automakers, suppliers look to natural gas for commercial vehicles as gasoline prices soar -- Getting annoyed at paying $3.75 a gallon at the gas station? How does fueling at home for about 53 cents per gallon sound?  As gasoline prices have risen, natural gas prices have plummeted, forcing automakers and commercial vehicle buyers to consider the fuel for pickups, vans and cars.  On Monday, General Motors announced it would begin taking orders next month for commercial pickups that burn natural gas. Both Honda and Ford expect sales of their natural gas-powered vehicles to grow this year.  And last week, NatGasCar Llc, a 4-year-old Cleveland startup owned by the Dan T. Moore Co., won U.S. Environmental Protection Agency approval to convert Chrysler minivans to run on natural gas. Moore, owner of the parent company, said the minivans could make popular taxicabs in large cities.  "A guy that drives a cab 300,000 miles - that's the life span of a lot of these cabs - he ends up saving [more than] $50,000 in gasoline," Moore said. "That's more than enough to buy two more cars."

U.S. Light Vehicle Sales at 14.42 million annual rate in April - Based on an estimate from Autodata Corp, light vehicle sales were at a 14.42 million SAAR in April. That is up 9.8% from April 2011, and up 0.7% from the sales rate last month (14.3 million SAAR in March 2012). This was at the consensus forecast of 14.4 million SAAR (seasonally adjusted annual rate). This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for April (red, light vehicle sales of 14.42 million SAAR from Autodata Corp). April 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. Sales are running at over a 14 million annual sales rate through the first four months of 2012, up sharply from the same period of 2011. The second graph shows light vehicle sales since the BEA started keeping data in 1967.  Note: dashed line is current estimated sales rate. 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.

US Domestic Auto Sales - Though Feb still looks to be an outlier, strong performance continued, with the mix shifting slightly to trucks.  This along with lower incentives means that we will likely see another month-over-month increase in retail sales from autos. The data above is units. The retails sales data is revenue. Its pretty close to suggesting as well that US factories are currently under producing. Factories were set for something like a 10 Million unit year and its looking increasingly likely that we will get at least an 11 Million unit year. This is the obviously just the first month, but also so far its looking like auto sales will not subtract from GDP in Q2, given the shift into trucks.

Pulse of Commerce Index: April Gain, But a 3-Month Annualized Decline of 1.2% - The latest Ceridian-UCLA Pulse of Commerce Index (PCI), a measure of the economy based on diesel fuel consumption, is now available. Last month 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 April. The Ceridian-UCLA Pulse of Commerce Index® (PCI®), issued today by the UCLA Anderson School of Management and Ceridian Corporation rose 0.1 percent in April following the 0.3 percent increase in March and the 0.7 percent increase in February. The PCI in the three months from February to April is below the previous three months by 1.2 percent at an annualized rate.  My main interest in 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.

Slowdown points to gloom for industrials - US manufacturers may struggle to maintain earnings momentum in the current quarter as orders for industrial goods show increasing signs of slowing down. Industrial companies’ results for the first quarter have for the most part been robust so far this earnings season, with Boeing, Caterpillar and 3M all raising their outlooks for the full year and companies such as General Electric, Honeywell and DuPont comfortably beating analysts’ expectations. While the results have been hailed as proof of how manufacturing continues to lead the US out of recovery, recent data suggest manufacturers will struggle to match those earnings in the second quarter. US business investment shrank at an annualised rate of 2.1 per cent in the first quarter, down from growth of 5.4 per cent in the fourth quarter of 2011, the Commerce Department said on Friday. More videoThat followed a Commerce Department report that showed orders for US durable goods fell 4.2 per cent in March, the largest drop in three years, while the Federal Reserve said production at US factories dropped in March for the first time in four months. First-quarter corporate earnings masked this weakness by reflecting strong performance in the first two months of the year.

Chicago PMI declines to 56.2 -- Chicago PMI: The overall index declined to 56.2 in April, down from 62.2 in March. This was below consensus expectations of 60.8 and indicates slower growth in April. Note: any number above 50 shows expansion. From the Chicago ISM:   The Chicago Purchasing Managers reported the April Chicago Business Barometer decreased for a second consecutive month. After five months above 60, the Chicago Business Barometer fell to 56.2, a 29 month low. The index has remained in expansion since October 2009.  PRODUCTION lowest level since September 2009;  PRICES PAID down from March's 7 month high; New orders declined to 57.4 from 63.3, and employment increased to 58.7 from 56.3.

ISM Manufacturing index indicates faster expansion in April - PMI was at 54.8% in April, up from 53.4% in March. The employment index was at 57.3%, up from 56.1%, and new orders index was at 58.2%, up from 54.5%. From the Institute for Supply Management: April 2012 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in April for the 33rd consecutive month, and the overall economy grew for the 35th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®. "The PMI registered 54.8 percent, an increase of 1.4 percentage points from March's reading of 53.4 percent, indicating expansion in the manufacturing sector for the 33rd consecutive month. Sixteen of the 18 industries reflected overall growth in April, and the New Orders, Production and Employment Indexes all increased, indicating growth at faster rates than in March. The Prices Index for raw materials remained at 61 percent in April, the same rate as reported in March. Here is a long term graph of the ISM manufacturing index. This was above expectations of 53.0%. This suggests manufacturing expanded at a faster rate in April than in March. It appears manufacturing employment expanded faster in April with the employment index at 57.3%

ISM to Regional Factory Reports: Drop Dead - Bucking expectations, the Institute for Supply Management reported nationwide factory activity accelerated in April. Its purchasing managers’ index rose to an 11-month high of 54.8, with new orders, production and employment picking up speed. The ISM report was a refutation of several regional Federal Reserve surveys that showed factory activity slowing sharply or even contracting last month. Since manufacturing has been leading the recovery, a nationwide stumble by the sector would have raised questions about the total U.S. recovery’s health. Good factory news should calm slowdown worries, but the ISM report isn’t a sign economic growth is about to soar. Headwinds including housing and debt still loom large. On that front, the ISM report agrees with the dour regional surveys in an upbeat assessment of April labor markets on top of the 120,000 factory jobs added in the first quarter. The New York and Philadelphia Feds reported declines in their respective top-line indexes but accelerations in their employment indexes. The Kansas City Fed showed production grinding into neutral but employment still in expansion mode last month.

Breaking Down ISM Report Showing Strong Factory Expansion - (audio) Chief Economist Robert Brusca of Fact & Opinion Economics talks with Jim Chesko about the ISM report showing that the U.S. manufacturing sector’s expansion picked up in April.

Manufacturing Activity Strengthens In April - The first major economic report for April brings encouraging news. Economic activity in the manufacturing sector expanded last month, the Institute for Supply Management reports. One update must be taken in context with the broader trend, of course. Indeed, a single report can't wipe away the recent worries about another spring slowdown. Still, today's ISM news offers a timely burst of optimism that promotes the idea that the weak economic news in some corners over the past several weeks isn't necessarily the last word on what's ahead.  "This month's increase [in the ISM index] is yet another sign that the U.S. manufacturing sector has been one of the most reliable sources of growth in the U.S. economy since the Great Recession ended,"  "Manufacturing is still in pretty good shape. U.S. manufacturing will outperform its counterparts in Europe. At the points, we’re in a steady-state [economic] expansion." Indeed, the rise in ISM's overall manufacturing index to 54.8 last month—up from 53.4 in March—elevates this gauge to its highest since last June. (Any reading above 50 indicates growth.) The pop was accompanied by gains last month in ISM's employment and new orders indices for manufacturing, suggesting that there's broad improvement in the sector.

Factory growth best in 10 months; bolsters outlook - Manufacturing grew in April at the strongest rate in 10 months, easing concerns the economy had lost momentum at the start of the second quarter. The Institute for Supply Management said on Tuesday its index of national factory activity rose to 54.8 from 53.4 in March. The figure topped expectations for the reading to decline to 53.0 and was also above the top end of forecasts in a Reuters poll. A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 indicates expansion.  "ISM suggests there's no real reason to get too concerned about the path of the U.S. economy at this point." Manufacturing accounts for about 12 percent of U.S. economic activity and has been a cornerstone of the recovery from the 2007-2009 recession. ISM's gauge of employment also rose to its highest level since last June, to a reading of 57.3 from 56.1. The forward-looking new orders component racked up its best reading in a year at 58.2, up from 54.5. 

Manufacturing in U.S. Grows at Fastest Pace in a Year: Economy - Manufacturing grew in April at the fastest pace in almost a year, propelled by a pickup in orders that signaled factories will remain a source of strength for the U.S. expansion. The Institute for Supply Management’s factory index climbed to 54.8 last month, exceeding the most optimistic forecast in a Bloomberg News survey and the best reading since June, the Tempe, Arizona-based group’s report showed today. Readings greater than 50 signal growth. The world’s largest economy may pick up after slowing in the first three months of the year as the increase in bookings indicates American assembly lines will keep churning out more goods.

Vital Signs: Accelerating Manufacturing - Manufacturing growth is accelerating. The Institute for Supply Management’s index of activity in manufacturing industries rose to 54.8 in April from 53.4 in March, indicating factories have gained momentum. Readings above 50 indicate expansion. Manufacturing has been a standout through the recovery, and added steam in April despite a recession in Europe and slower growth in China.

US Factory Orders Post Biggest Decline Since March 2009 - That March factory orders declined 1.5% was not very surprising: the market was expecting a decline of 1.6%. However, this is not good news as the prior February increase of 1.3% was revised lower to 1.1%, netting out as a negative two month change. Where this number was troubling is that this 2.6% swing brought the index to its biggest decline since March 2009 when the pumping of trillions started. And some other observations from the report: Shipments, up ten consecutive months, increased $3.3 billion or 0.7 percent to $466.2 billion. This followed a 0.1 percent February increase. Unfilled orders, up twenty-three of the last twenty-four months, increased $0.5 billion or 0.1 percent to $930.6 billion. This followed a 1.2 percent February increase. The unfilled orders-to-shipments ratio was 6.17, down from 6.24 in February. Inventories, up twenty-nine of the last thirty months, increased $1.9 billion or 0.3 percent to $618.4 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.3 percent February increase. The inventories-to-shipments ratio was 1.33, unchanged from February.

US Factory Orders Fell in March by Most in Three Years — Demand for U.S. manufactured goods dropped by the most in three years in March, driven lower by a sharp fall in volatile orders for commercial aircraft. Still, more recent data suggest the decline may be temporary. The Commerce Department said Wednesday that orders for factory goods fell 1.5 percent, the steepest decline since March 2009, when the economy was mired in recession. Orders rose 1.1 percent in February. Aircraft orders plummeted nearly 50 percent. But excluding transportation goods, orders were unchanged. Demand for less durable items, such as food, chemicals and gasoline, rose 0.5 percent. The report comes a day after a private survey found that the manufacturing sector expanded in April at the fastest pace in 10 months. New orders, production and a measure of hiring all rose.

ISM Non-Manufacturing Index indicates slower expansion in April - The April ISM Non-manufacturing index was at 53.5%, down from 56.0% in March. The employment index decreased in April to 54.2%, down from 56.7% in March. Note: Above 50 indicates expansion, below 50 contraction. From the Institute for Supply Management: March 2012 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in April for the 28th consecutive month, say the nation's purchasing and supply executives. "The NMI registered 53.5 percent in April, 2.5 percentage points lower than the 56 percent registered in March. This indicates continued growth this month, but at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 54.6 percent, which is 4.3 percentage points lower than the 58.9 percent reported in March, reflecting growth for the 33rd consecutive month.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 55.9% and indicates slower expansion in April than in March.

Vital Signs: Slowing Services Growth - Service sector activity slipped. The Institute for Supply Management’s index of business activity in nonmanufacturing industries fell to 53.5 in April from 56.0 in March. Readings above 50 indicate expansion, so the April figures portray a continued but moderating pace of growth. The service sector accounts for the lion’s share of employment, encompassing everything from bankers to hair stylists.

NFIB: Small Business hiring was weak in April, "Outlook improves" - From the National Federation of Independent Business (NFIB): Job Creation Weakens in April but Prospects Improve: April was another tenuous month for small businesses, sending mixed signals about what the future holds. “On the job creation front, the news was only fair. The net change in employment per firm (seasonally adjusted) came in at 0.1; this is down from March but still positive. ... “The percent of owners reporting hard to fill job openings rose 2 points to 17 percent, one point below the January 2012 reading which is the highest we’ve reported since June 2008. Hard-to-fill job openings are a strong predictor of the unemployment rate, making the gain in openings a welcome development. The net percent of owners planning to create new jobs is 5 percent, a 5 point increase after taking a plunge in March ... Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy. This graph shows the small business hiring plans index since 1986. Hiring plans increased in April with the index at 5% compared to 0% in March. According to NFIB: “Not seasonally adjusted, 18 percent plan to increase employment at their firm (up 3 points), and 5 percent plan reductions (unchanged from March)." This is still very low.

The Declining Role of Start-Ups - Business leaders and politicians often laud the United States for its entrepreneurial culture, but the pace of start-up activity has been declining since the 1980s, a decline that – not surprisingly – accelerated during the most recent recession and its aftermath. A new report from the Ewing Marion Kauffman Foundation, using data from the Census Bureau’s Business Dynamics Statistics, shows that the number of start-ups in a given year declined from about 12 percent of all companies in the 1980s to less than 8 percent in 2010, the lowest point on record. The share of young businesses – defined as those started within the last five years – as a total of all companies also declined, to 35 percent in 2010, from 50 percent in the early 1980s. Such a decline can have a direct effect on the labor market, as new companies typically create jobs (although an increasing number are sole proprietorships). Between March 2009 and March 2010, 394,000 start-ups created 2.3 million jobs, compared to a net loss of 1.8 million jobs from all private sector employers over the same period. The Kauffman report did not address the underlying causes of the slowdown in the birth of new businesses, but suggested that the patterns “raise questions about whether the United States is becoming less entrepreneurial given the lower pace of start-ups and the smaller share of activity accounted for by young firms.”

The Do-Nothing Caucus - Krugman - Karl Smith gets shrill about Raghu Rajan’s latest (pdf), which he calls “nonsense on stilts.” He’s right — and it’s deeply depressing that stuff like this passes for wisdom. Rajan’s basic story is that we’re suffering from structural unemployment brought on by the need to move workers out of “bloated” construction, government, and finance. All I can say is, wow — has Rajan read any of the research on this subject? I mean, maybe three years ago you could casually talk about turning carpenters into something else, or whatever, but since then there has been a lot of statistical work — and the sectoral reallocation story is a complete bust. Job losses have occurred across a broad spectrum of the economy, not just in a few sectors; for example, hardly any of the rise in unemployment can be attributed to construction. Oh, and about those bloated sectors … finance maybe, although it never employed all that many people, but what exactly would make you believe that government or, at this point, construction are still bloated? Here’s employment in these sectors as a share of total employment:

Structural Unemployment and Good Jobs - Laura Tyson - Despite several quarters of growth in private-sector employment, the American economy is still far from full employment. The primary reason is weak aggregate demand, the painful and predictable consequence of a deep balance-sheet recession.The number of private-sector jobs remains nearly five million below the pre-recession peak, and the unemployment rate remains well above the 5 to 6 percent range that most economists judge as “normal” or “structural” when the economy is operating near capacity. The unemployment rate would be even higher if labor force participation rates were not hovering near historic lows, and if more workers were not settling for part-time jobs because full-time jobs are unavailable. Yet as the labor market continues its agonizingly slow recovery, there are numerous reports that job openings are going unfilled because of mismatches between the skill requirements of employers and the skills of unemployed workers. These reports have led to a debate about whether such mismatches, rather than a shortfall of demand, explain both the outsize increase in unemployment in the Great Recession and the disappointing pace of recovery. This debate is not just of academic interest; it has significant implications for policy – both macroeconomic policy and labor market policy.

No "Noticeable Increase in Mismatches in Recent Years" - Here's the conclusion from a summary of a recent FRBSF conference on whether labor market mismatches (structural issues) are holding back employment: The recent San Francisco Federal Reserve Bank conference on workforce skills examined labor market changes that may have accelerated during the Great Recession. These changes may have increased mismatches between employer needs and worker skills. In general, we find that this doesn’t appear to be the case. Estimates of the extent of skill mismatches in recent years indicate that it has been limited and is likely to dissipate. Moreover, the conference’s research presentations and a panel of workforce development specialists did not identify a noticeable increase in mismatches in recent years. Thus, concerns about growing skill mismatches may be overblown. On the other hand, successful integration of low-skilled workers into the workforce represents a continuing problem. Conference participants offered useful ideas on how to meet this challenge, stressing the roles of community colleges and well-designed training programs. The problem is lack of demand.

Milken Global Conference Video: Jobs for America - The words "private sector," "education," and "regulatory uncertainty" play a starring role in this session on job creation (this was one of the more annoying sessions I attended, especially towards the end when Richard Fisher elevates teaching Congress a lesson over job creation - he says low interest rate policy allows Congress to escape accountability, and stopping that comes first):

AP Survey: Steady Job Gains to Sustain U.S. Recovery –Hiring through the rest of 2012 will lag the brisk pace set early this year. But it will be strong enough to push the unemployment rate below 8 percent by Election Day. That’s the view that emerges from an Associated Press survey of 32 leading economists who foresee a gradually brighter jobs picture. Despite higher gas prices, Europe’s debt crisis and a weak housing market, they think the economy has entered a “virtuous cycle” in which hiring boosts consumer spending, which fuels more hiring and spending. The survey results come before a report Friday on hiring during April. The April report is eagerly awaited because employers added surprisingly few jobs in March. That result contributed to fears that the economy might struggle to sustain its recovery. But the economists think the recovery will manage to reduce unemployment to 7.9 percent by Election Day from 8.2 percent in March. Falling unemployment would boost President Barack Obama’s prospects in November. Going back to 1956, no president has lost re-election when the unemployment rate dropped in the two years before the election. And none has won when the rate rose over that time.

U.S. Applications for Unemployment Aid Drop Sharply - The number of people seeking unemployment benefits fell last week by the most in more than three months. The figure was a hopeful sign one day before the government releases the April jobs report. The Labor Department says weekly unemployment aid applications fell 27,000 last week to a seasonally adjusted 365,000. Applications are a measure of the pace of layoffs. When they fall below 375,000, it generally suggests that hiring will be strong enough to lower the unemployment rate. The four-week average, a less volatile measure, ticked up to 383,500, the highest level since December. Applications jumped last month after steadily declining since the fall. At the same time, hiring slowed in March. Those figures had sparked concerns that the job market was worsening after strong gains during the winter.

Jobless Claims Fell Sharply Last Week - New filings for jobless benefits dropped a hefty 27,000 last week to a seasonally adjusted 365,000. It appears that the downward trend in new claims is intact after all. The last several weeks had raised new doubts, courtesy of a modest rise in new claims, but today's news takes the edge off the worst fears. As always, caution is required for reading too much into any one number for this volatile series. But the trend is far less prone to short-term noise and on that score there’s cheery news in today’s update, as the following charts show. New claims for unemployment have once again turned down and are near a four-year low. Last week’s 27,000 descent is the biggest weekly fall in a year, which suggests that the labor market healing process, moderate and vulnerable as it still is, continues to roll on. The fact that exactly one year ago there was a similarly outsized decline in new claims implies that the seasonal adjustment factor for the series may be misleading us. But this charge is softened considerably when we look at the raw, unadjusted figures on a year-over-year basis.

Weekly Initial Unemployment Claims decline to 365,000 - The DOL reports:In the week ending April 28, the advance figure for seasonally adjusted initial claims was 365,000, a decrease of 27,000 from the previous week's revised figure of 392,000. The 4-week moving average was 383,500, an increase of 750 from the previous week's revised average of 382,750.  The previous week was revised up to 392,000 from 388,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 383,500. This is the highest level for the 4-week moving average since last December. And here is a long term graph of weekly claims: This was below the consensus of 378,000. However, even though weekly claims declined, the 4-week average has increased for four straight weeks and is at the highest level this year.

ADP Reports Sharply Slower Job Growth In April - The April update of the ADP Employment Report is a clear signal for keeping expectations low for Friday’s influential payrolls report from the U.S. Labor Department. Employment in the private sector grew by only 119,000 last month, according to ADP’s estimate. That’s a 41% drop in the pace of job growth vs. March’s 201,000 gain and is the slowest rate of increase since last September.  Virtually all of last month’s net gains in employment came from the services sector. Most of the cyclically sensitive goods-producing and manufacturing corners of the economy shed jobs in April, ADP reports.  The question is whether ADP’s reading of April's labor market activity is leading or lagging the government’s payrolls report. For some perspective, consider the chart below, which compares the Labor Department’s estimate of private-sector non-farm payrolls (red line) with ADP’s numbers (blue line). The two series generally track one another closely, although in any given month or two there can and will be relatively large divergences. The issue now is deciding if the latest downturn in the ADP number for April is following the March decline in the Labor Department’s update. If so, one could reason that the ADP number is merely a delayed confirmation of what we already knew a month ago, when the Labor Department reported that March job growth suffered a considerable slowdown.

ADP: Private Employment increased 119,000 in April - ADP reportsEmployment in the U.S. nonfarm private business sector increased by 119,000 from March to April on a seasonally adjusted basis. The estimated gain from February to March was revised down modestly, from the initial estimate of 209,000 to a revised estimate of 201,000.  Employment in the private, service-providing sector increased 123,000 in April, after rising 158,000 in March. Employment in the private, goods-producing sector declined 4,000 jobs in April. Manufacturing employment dropped 5,000 jobs, the first loss since September of last year.  This was significantly below the consensus forecast of an increase of 178,000 private sector jobs in April. The BLS reports on Friday, and the consensus is for an increase of 165,000 payroll jobs in April, on a seasonally adjusted (SA) basis.  Note: ADP hasn't been very useful in predicting the BLS report, but this suggests a weaker than consensus report.

US Added 115,000 Jobs In April, Huge Miss Of Expectations; Unemployment Rate 8.1% - Expectations were for an increase in non farm payrolls of 160,000, and a 8.2% unemployment rate. We got +115,000, and 130,000 privates. Unemployment rate at 8.1%, lowest since January 2009. Schrodinger is alive and well. From the release: Both the number of unemployed persons (12.5 million) and the unemployment rate (8.1 percent) changed little in April. (See table A-1.) Among the major worker groups, the unemployment rates for adult men (7.5 percent), adult women (7.4 percent), teenagers (24.9 percent), whites (7.4 percent), and Hispanics (10.3 percent) showed little or no change in April, while the rate for blacks (13.0 percent) declined over the month. The jobless rate for Asians was 5.2 percent in April (not seasonally adjusted), little changed from a year earlier. (See tables A-1, A-2, and A-3.) The number of long-term unemployed (those jobless for 27 weeks and over) was little changed at 5.1 million in April. These individuals made up 41.3 percent of the unemployed. Over the year, the number of long-term unemployed has fallen by 759,000. (See table A-12.) The civilian labor force participation rate declined in April to 63.6 percent, while the employment-population ratio, at 58.4 percent, changed little.

April Employment Report: 115,000 Jobs, 8.1% Unemployment Rate - From the BLSNonfarm payroll employment rose by 115,000 in April, and the unemployment rate was little changed at 8.1 percent, the U.S. Bureau of Labor Statistics reported today....The civilian labor force participation rate declined in April to 63.6 percent, while the employment-population ratio, at 58.4 percent, changed little.... The change in total nonfarm payroll employment for February was revised from +240,000 to +259,000, and the change for March was revised from +120,000 to +154,000. This was below expectations of 165,000 payroll jobs added.  This was a weak month, but the upward revisions to prior months was a small positive. The second graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate was declined to 8.1% (red line).  The Labor Force Participation Rate decreased to 63.6% in April (blue line). This is the percentage of the working age population in the labor force and the participation rate is at a new post bubble low. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although some of the recent decline is due to demographics. The Employment-Population ratio declined slightly to 58.4% in April (black line).  The third graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

Employment Situation - spencer - (7 graphs) This was another disappointing employment report It is looking more and more like the stronger numbers last winter stemmed more from the mild weather rather than a strengthening of underlying trends. The headline or payroll report showed a gain of 115,000 jobs-- 130,000 in private jobs and a 15,000 drop in government employment. The work week was unchanged so the index of aggregate hours worked only rose 0.1%. The previous report was revised higher so that hours worked versus trend looks a little better than it did last month. Even though the gains in hours worked is weak, compared to the other two jobless recoveries in the1990s and 2000s it looks fairly strong. My thesis from last month that the slowing of employment growth was partially a product of firms trying to rebuild productivity growth still looks valid. In the productivity report, the growth in unit labor costs slowed from 3.1% to 2.1% while the increase in the nonfarm business deflator slowed from 2.1% to 1.8% So the spread between unit labor cost is now only 0.3 percentage points versus 1.1 percentage points a quarter ago. Given that labor compensation is 58.7% of costs this should be consistent with single digit profits growth. But average hourly earnings and weekly earnings growth continue to show very modest gains. As long as wage and earnings growth remain this weak a significant acceleration of either inflation or aggregate demand remains unlikely.

Jobs Report – The Soft Side of Mediocre - As expected, today’s jobs data showed a slowing labor market. Payrolls expanded by 115,000 in April, less than hoped or expected. Upward revisions to February and March added another 53,000 jobs, however, so the overall payroll picture is better than the headline. The unemployment rate ticked down to 8.1%, the labor force participation rate slipped to 63.6%, weekly hours were unchanged at 34.5, and hourly earnings increased a measly penny from $23.37 to $23.38. Put it all together, and this report is on the soft side of mediocre. Unemployment and underemployment both remain very high, but they’ve been moving in the right direction. After peaking at 10% in October 2009, the unemployment rate has declined by about 2 percentage points. The U-6 measure of underemployment, meanwhile, peaked at 17.2% and now stands at 14.5%: (The U-6 measures includes the officially unemployed, marginally attached workers, and those who are working part-time but want full-time work.)

April Jobs Report Disappointing To Say The Least - As I noted earlier this week, there were already signs that the April jobs report wasn’t going to fall into line with the rather optimistic numbers we’d seen from November through February. Many had hoped that the disappointing numbers we’d seen in March were an anomaly and that we’d return to something more along the lines of what we saw in February. Going into this morning’s report, analysts expected that we’d see something in the range of 166,000 jobs added, not great but at least it would have been something. As it turns out, though, the pessimists were correct: The United States had another month of disappointing job growth in April, the Labor Department said Friday. The nation’s employers added 115,000 positions on net, after adding 154,000 in March. April’s job growth was less than what economists had been predicting. The unemployment rate ticked down to 8.1 percent in April, from 8.2 percent, but that was because workers dropped out of the labor force. The share of working-age Americans who are in the labor force, either by working or actively looking for a job, is now at its lowest level since 1981 — when far fewer women were doing paid work.

A Bit More on April Jobs Report - First impressions here, including anti-austerity rant.  A few more observations:

  • –One of CBPP’s Unemployment Insurance experts, Hannah Shaw, tells me the following: since the beginning of the year 17 states with unemployment rates above 6.5% have triggered off of EB (extended benefits: extra weeks of UI in high unemployment states—learn about it here), 8 of those states have unemployment rates of 8% or higher.  It’s possible that some of these folks leave the job market after their benefits run out and that could be playing a role in the low and stagnant participation rate.
  • –Hourly and weekly earnings are growing more slowly: 1.8% over the past year for average hourly earnings and 2.1% for weekly earnings.  The most recent inflation reading is 2.7%, Mar11-Mar12, meaning paychecks are not going as far as they were a year ago.  Nominal hourly earnings have been hovering around 2% for awhile, but increased hours of work were goosing weekly earnings for awhile, which were up around 3% a year ago.  That’s fading; that’s bad for family budgets and for a macro-economy that’s 70% consumption.
  • –I always like to take a look at the diffusion index in the monthly jobs report.  It’s a measure of the percent of private sector industries adding jobs, so it provides a quick look at the question of how broad-based hiring has been.  Last month, about 57% of firms added jobs, compared to 65% last month, 70% in January, and less than 20% in the heart of the Great Recession.  So, a lot more industries are expanding than in the worst of times, but there’s been a pretty broad pullback of late.

Getting Better, Slowly - The second-consecutive disappointing monthly jobs report put a damper over markets Friday morning. But there are some positive signs. One is that both March and April job figures were revised higher, by a total of 53,000 jobs. Had there been no revisions to past months, the report for May would have shown a gain of 168,000 jobs, a bit better than the consensus forecast. Instead, the reported rise is 115,000, which is the lowest gain since October. The revisions have been consistently positive in recent months, and that in itself is a sign of relative economic strength. Still, this does start to raise fears of another spring and summer slowdown, as happened in 2010 and 2011. At some point, you have to wonder if what is going on here is less economic volatility and more bad seasonal adjustments. With fewer people being hired or fired than in normal economic times, the adjustments may make some months look better than they are, and others worse. The household survey, which is the source of the unemployment figures, shows a large decline in the work force, and a decline in the number of people with jobs. That could indicate a lot more discouraged workers. Or it could be a reflection of the much greater volatility in that survey. It had been looking better than the establishment survey, and even with this report the household survey says there were 2.2 million more people with jobs in April than in the same month of 2011, while the establishment survey says there are 1.8 million more jobs.

Payroll Disaster: Nonfarm Payroll +115,000 Establishment Survey But -169,000 Household Survey, Labor Force Drops by 342,000 - Quick Notes About the Unemployment Rate:

  • US Unemployment Rate fell .01 to 8.1%  
  • In the last year, the civilian population rose by 3,638,000. Yet the labor force only rose by 945,000. Those not in the labor force rose by 2,693,000.  
  • The Civilian Labor Force fell by 342,000.  
  • Those "Not in Labor Force" increased by 522,000. 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 87,419,000.  
  • By the Household Survey, the number of people employed fell by 169,000.  
  • By the Household Survey, over the course of the last year, the number of people employed rose by 2,237,000.  
  • Participation Rate fell .2 to 63.6%  
  • There are 7,853,000 workers who are working part-time but want full-time work  
  • Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

This month was another disaster. Actual employment fell by 169,000 and the only reason the unemployment rate dropped is the civilian labor force fell by 342,000. These numbers are well past the point of believability and will be revised at some point in my opinion. 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.

Looking for the Good News in the April Jobs Report - The April jobs report from the Bureau of Labor Statistics is not a strong one. Most comments have focused on the bad news, especially the modest 115,000 increase in payroll jobs. If you look hard, there is some good news, too, although not as much or as easy to find as we would like. Start my looking more closely at the numbers for payroll jobs. The headline number was admittedly paltry. However, there were some welcome upward revisions for earlier months.  The March number was revised up by 34,000, to 154,000, and February’s by 19,000, to 259,000. All in all, the April report revealed 168,000 new jobs that we didn’t previously know about. That sounds at least a little better. Next, turn to the unemployment rate. Hey, guys! It went down last month, but no one seemed to notice, not even the BLS. Their news release said, “The unemployment rate (8.1 percent) changed little in April.” When I read that phrase, I thought it must mean that the rate changed just a fraction of a percentage point, and that only rounding made it look like a decrease from 8.2 percent to 8.1. But no, when you do the numbers, you see that the rate fell from 8.19 percent to 8.09. Looks like a full percentage point to me. The bad news is that the drop in the unemployment rate came as both the numerator (unemployed persons) and denominator (the labor force) decreased. As far as the strength of the economy goes, it would have been more encouraging to see both components increasing, even if the ratio increased at the same time.

What You Need to Know About April’s Jobs Numbers - Any way you cut it, the Labor Department’s announcement that the U.S. economy added just 115,000 jobs in April is a disappointment. Economists had been expecting 160,000 new jobs, and even that number is far below the kind of growth our economy needs to get back to full strength in the near term. At the same time, the unemployment rate dropped from 8.2% to 8.1%. So what gives? As with any Employment Situation Report, there’s a lot of noise in the numbers. Here are the three things you need to know about April’s jobs report to make sense of it:
1) Labor Participation Rate: The thing to remember about the official unemployment rate is that the Labor Department first has to estimate who is actually in the labor force before they can determine what percentage of people are unemployed. Obviously, your retired grandfather or your college student son aren’t employed. But they aren’t really unemployed either. They’re officially not in the labor force. The thing is that this “labor participation rate,” or the percentage of working-age people who are considered to be in the workforce, has been declining steadily since the recession began.

  • 2) Seasonal Adjustments: You don’t have to be an economist to know that we had a very warm winter in many parts of America. And oddly enough, that warm winter may have a lot to do with the strong numbers we saw from December through February, and the weaker numbers we’re seeing now.
  • 3) Upward Revisions: Another positive to take out of the report is that the Labor Department upwardly revised the jobs added in March by 53,000, so this report really showed more jobs being added than the headline 115,000 number suggests. And these upward revisions remind us that this is just one month of data that could also be upwardly revised in future reports.

School-Buses Drive Job Losses in Transport Sector - The transportation and warehousing sector saw the biggest job losses –17,000 — in April’s employment report. Why? Bloomberg News “The job loss in transit and ground passenger transportation stemmed from a decline in school bus-related employment. The weakness in couriers and messengers may stem from concerns expressed by major companies in recently published earnings reports over the economic climate in Asia and the United States,” the Labor Department said in a detailed analysis of industry employment data. School-related layoffs also fueled higher jobless claims last month, which could point to a seasonal anomaly effecting recent employment data. Labor Department economists prepare seasonal adjustments months in advance, and can miss the mark on exact timing of school holidays. The weather also has been a factor in recent employment numbers. The Labor report notes that a relatively warm winter weather and falling natural gas prices have led to an oversupply of natural gas. “As a result, the number of active rigs in natural gas has declined followed by a slowdown in employment growth in the mining industry.” And a warmer winter may have pulled some hiring from the building material and garden supply sector away from April and into February and March.

Is April's Slow/Low Payroll Growth Signaling The New Normal Or A New Recession? - Economists were expecting a relatively weak month for job growth in April, but today’s payrolls report from the Labor Department managed to disappoint the crowd even by the downsized standards of late. Employment in the private sector rose by a thin 130,000 on a seasonally adjusted basis, down from March’s modest 166,000 gain. April’s increase was the lowest since last August. The unemployment rate, surprisingly, managed to slip a bit to 8.1%, but that's irrelevant given today's meager gain in the working population. Most of the job growth last month, what there was of if, came from the services sector, as usual. The cyclically sensitive goods-producing sector eked out a gain of 14,000, but no one will be impressed with that slight increase.  As for the trend in private payrolls, today's update offers no reason for celebration but there's nothing unusual in today's report relative to recent history either. Granted, payrolls growth is at the lower end of the range for the past year or so. That may be a sign that the economy is weakening, although it's not beyond the pale for arguing that the last two months are just statistical noise and that better news is coming. Indeed, yesterday's large drop in new jobless claims feeds hope on that front.

People Not In Labor Force Soar By 522,000, Labor Force Participation Rate Lowest Since 1981 - it is just getting sad now. In April the number of people not in the labor force rose by a whopping 522,000 from 87,897,000 to 88,419,000.  This is the highest on record. The flip side, and the reason why the unemployment dropped to 8.1% is that the labor force participation rate just dipped to a new 30 year low of 64.3%.  Labor force participation Rate:

The pace we've come to expect - FOR the second month in a row, America’s labour market has disappointed, once again raising questions about whether the economic recovery is truly entrenched. Nonfarm payrolls rose just 115,000 in April from March. While the unemployment rate dipped to 8.1%, the lowest since early 2009, from 8.2%, it did so for the wrong reason: the labour force (those working or looking for work) shrank by 342,000. Private payrolls rose 130,000, but government payrolls shrank, something of a setback because the state and local government austerity that had created such a drag in the past two years had shown signs of easing this year. However, manufacturing payrolls did rise again, suggesting that the industrial sector, and exports in particular, remain a bright spot. Retail employment also recovered, suggesting the recent rise in petrol prices to around $4 a gallon has yet to take a big bite out of the consumer. One of the most troubling aspects of this report is that the shrinkage of the labour force means that just 63.6% of working-age adults are now actively engaged in work or looking for work. That's the lowest participation rate in decades. Part of this may be discouraged workers giving up the job hunt; the so-called "underemployment rate",  or U-6 rate to data wonks, held steady at 14.5% in April. But this rate has actually fallen faster than the overall unemployment rate since September, so the story here is more fundamental than lousy job prospects: it's a troubling sign of the slowing potential growth of the economy.

April’s jobs: Americans aren’t working - There’s a lot going on in this month’s jobs report. The headline number of jobs created — 115,000 — is miserable: it’s basically just enough to keep up with population growth. That’s the number the markets look at. The number the politicians look at, however, is the unemployment rate, which ticked down to 8.1%. That’s still high, but it’s not a statistic to beat Obama round the head with. The big news, however, lies elsewhere, in the fact that a whopping 522,000 people left the labor force last month. When more than half a million people in one month decide that they’re not even going to bother looking for work any more, there’s no way you can say you’re in a healthy recovery. Zero Hedge has the two charts which matter. First you have the number of people not in the labor force, which has been climbing steadily through the recession and the recovery, and is now approaching 90 million. The only time it fell was during the first quarter of 2010 — the census-hiring boom. This chart speaks volumes to me: it says that while Capital might not be in a recession any more, Labor still isn’t working.Then there’s the even scarier one, which is the labor force participation rate — now down to 63.6%.

Video: Analysis of Slowing Jobs Growth, Labor Force Dropouts - The U.S. economy added 115,000 jobs in April, lower than expected, as the unemployment rate slips to 8.1%. Justin Lahart, Phil Izzo and Sudeep Reddy have details and analysis on The News Hub.

Government Job Destruction - Another jobs report in the US, another month where part of the private sector's job creation was undone by continued job destruction by the government sector.  The 15,000 additional jobs lost in April brings total job losses in the government sector since January 2010 to over 500,000. While the US has not quite been experiencing European-style austerity over the past two years, that's still a pretty tough headwind to fight as it emerges from recession.

A Few Observations on the April Employment Situation - According to the BLS, nonfarm employment rose only 115,000, as government payrolls shed 15,000. The household series adjusted to conform to the NFP concept indicates an additional 1.6 million employed relative to the official series. Private sector employment now exceeds levels of 2009M01, while aggregate hours worked exceeds by 1.9% (in log terms). With revisions to the February and March data, average employment growth is 207 thousand in the first four months, as compared to 210 thousand, from the first three months indicated in the March release. Figures 1 and 2 confirm that employment growth appears to be decelerating. However, it is interesting that the household series adjusted to conform to the NFP series continues to register 1.6 million additional employed, as compared to the official NFP series. Note that the former series is a research series, developed in response to conservative economists criticisms of the official series. The household survey is smaller than the establishment, so the sampling error is about four times as large as that of the establishment survey. Further, the household series has to be adjusted for population controls (although the establishment series has to be benchmarked using data on UI tax records).

The Scariest Jobs Chart — By Far (And You Haven’t Seen It Before) - For all of the attention paid to the labor force participation rate — now at its lowest point since 1981 — much of the decline has little to do with the state of the job market and everything to do with demographics. Harm Bandholz, chief U.S. economist at UniCredit, figures that fully half of the decline in the participation rate since the end of 2007 is due to the aging of the population and, thus, should have been anticipated. Since the recession began, the 55-and-up population is up by nearly 10 million, while the 16-54 population is down by a half-million, including a 2.5 million drop among the 35-44 group. The focus of economics coverage should really be on the weakness in the jobs data that isn’t due to demographic shifts, and the data clearly show that the 16-54 population is ground zero for the jobs crisis. Job holders among this group have declined by 4.9 percentage points since the recession began — nearly twice the 2.6-percentage-point drop in their labor force participation.Based on a normalized rate of participation, Bandholz estimates the unemployment rate would have been 10.1% in April, not 8.1%. Even worse, the big fall in the employment-to-population ratio since 2007 among those 16-54 compounded an earlier slide from 2000 to 2003, which the ensuing jobs recovery barely offset.

Unemployment, Beyond the Rate - The unemployment rate is a measuring stick with many problems, one of which is that it tends to shift our focus from a human tragedy to the measuring stick itself, as if we were discussing the level of water in a reservoir. It is important to remember that we’re talking about people: almost 23 million Americans couldn’t find full-time work in April. The widely quoted “unemployment rate” of 8.1 percent reflects only the red portion of this chart, the 12.5 million people who did not work in April, and actively searched for new work. A broader “unemployment rate,” which carries the catchy name U6, includes all the people in this chart, and stands at 14.5 percent. That is a much more accurate measure of unemployment, but it too has defects. One technical caveat is that the count of people who looked for work in the last year but not in the last month, shown on this chart in green and known to labor experts as “marginally attached,” is not seasonally adjusted. (Seasonal adjustments seek to exclude recurring fluctuations, like holiday hiring or the surge of summer interns, to highlight underlying trends.) So the margin of error is slightly larger, and you won’t find this particular mash-up on the Bureau of Labor Statistics Web site. I made it myself. You’re welcome.

Economists React: ‘Deja Vu All Over Again’ for Jobs? - Economists and others weigh in on the 115,000 increase in nonfarm payrolls in April and the drop in the unemployment rate to 8.1%.

  • –It’s déjà vu all over again: just as the US economy experienced payroll softening in spring 2011, the same thing seems to be happening yet again in 2012. Today’s less-than-favorable expansion helps confirm our belief that winter’s strong hiring pace was as much about unusually warm weather as it was about the underlying employment situation. –Guy LeBas, Janney Montgomery Scott
  • –The relatively weak nonfarm payrolls in April seem to confirm the soft employment figures in March.  The drop in the unemployment rate to 8.1% is deceptive to say the least as this was driven by a drop in the participation rate to 63.6% from 63.8% previously, this is down from 64.2% a year ago – this has been driven by a stunning 2,693,000 people leaving the labour force in 12 months. –David Semmens, Standard Chartered Bank
  • –The April Participation Rate dipped to 63.6 from 63.8 in March. The March reading is the lowest since a similar reading in December 1981. We suspect the decline in the labor market participation rate is in part an artifact of the exhaustion of extended unemployment benefits, and the related shortening of benefit periods in some states owing to the recent declines in state unemployment rates. –Ray Stone, Stone & McCarthy
  • –The numbers may understate the underlying trend. Some reassurance can be gained from the fact that the ISM surveys, which act as a reliable indicator of the underlying trend in non-farm payroll growth, suggest that the economy is probably generating up to 200,000 new jobs per month, even after taking account of a weakening in the non-manufacturing sector’s growth rate in April.

The Disappointing Employment Report: Will Job Creation Improve in Coming Months? - The recovery from the recession continues to be slow. There is some hope that the recovery will accelerate in coming months, but overall the signs are not encouraging.  According to Friday's employment report, the economy created 115,000 jobs in April. That's enough to keep up with population growth, but it is not enough to make much if any headway toward reemploying the millions of people who lost jobs during the recession. Even at much higher levels of job creation, e.g. 250,000 jobs per month, it would take just under two years to reach 6 percent unemployment, according to the Atlanta Fed's job calculator. To reach 6 percent in one year requires 350,000 jobs per month. At the present rate of 115,000, it would take more than 15 years. Thus, we need an acceleration in job creation to recover in an acceptable amount of time. Should we expect that acceleration? Are higher rates of GDP growth and hence job creation just around the corner? The numbers are not encouraging. Job creation was 275,000 in January, 259,000 in February, 154,000 in March, and 115,000 for April, so we are headed in the wrong direction. Some of that may be due to good weather in January and February shifting activity forward, i.e. higher than usual job growth in the first two months balanced by lower than average in the second two. But even so, the average over the four months is still too low, and the trend is worrisome. Will the trend be reversed and the average driven higher? Unfortunately, when the components of GDP are examined, it's hard to see where the needed acceleration in the rate of job creation will come from.

Underemployment isn’t a ‘myth’ for recent college grads - As readers of this blog are well aware, the labor market remains in terrible shape in the aftermath of the worst downturn since the Great Depression; this is evident in a wide array of economic data and is not disputed in the economics profession. Graduating into said labor market (in which the level of voluntary quits remains weak) with little to no work experience or wage history isn’t an enviable position, as my colleagues detail in their new paper The Class of 2012: Labor market for young graduates remains grim. Which is why I was flabbergasted by Abigail Johnson’s and Tammy NiCastro’s recent blog post Get Over It: The Truth About College Grad ‘Underemployment.’ Their title is plenty revealing, but here’s the gist of their argument: “In recent weeks, there have been a slew of articles that reported how difficult things will be for this year’s college graduates because they can expect to be unemployed or “underemployed” … It’s not clear where the concept of being “underemployed” came from. But it’s damaging and counterproductive.”The Bureau of Labor Statistics’ (BLS) U-6 Alternative Measure of Labor Underutilization—often referred to as the underemployment rate—is not a myth. It’s defined as such: “Unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.” EPI’s State of Working America website even tracks it on a monthly basis across educational attainment, gender, and race and ethnicity. Here’s what it looks like by educational attainment:

Weather Disruptions Hit Jobs Report - After a surprising spurt of job growth earlier this year amid one of the warmest winters on record, the pace of improvements in the jobs market is trailing off –suggesting the warm weather spurred increased hiring and that now it’s pay-back time. Look at the numbers. The U.S. economy added a disappointing 115,000 nonfarm jobs last month, the government said, following an upwardly-revised 154,000 in March (from an original estimate of 120,000) and 259,000 in February (from 240,000). The average number of new jobs added to the economy from December to February — i.e., this winter — was a healthy 252,000 per month. March and April have paled in comparison with January and February. As the Journal pointed out a few days ago, warm weather makes consumers shop more and go to restaurants instead of staying home. Construction projects might take off instead of being grounded. States and cities save millions of dollars because they don’t have to shell out cash for plowing and other storm costs — in effect, a natural fiscal stimulus package.

Breaking Down Disappointing Increase in Jobs - Senior Economist Gus Faucher of PNC Financial Services talks with Jim Chesko about today’s Labor Department report showing that U.S. job growth slowed again in April. Nonfarm payrolls grew by a weaker-than-expected 115,000 last month, though February and March payrolls were revised significantly higher.

Reasons Abound for Ebb in Job Growth - The nation’s employers are creating jobs at less than half the pace they were when this year began, according to a government report released Friday.  The addition of just 115,000 jobs in April was disappointing, but economists urged no panic just yet. Maybe the unusually warm winter had encouraged companies to do their spring hiring a little early, they offered in one of several theories. Maybe high gas prices, now falling, temporarily discouraged job growth. Better yet, maybe this latest report understates how many jobs were added, since the initial estimates for earlier months have been revised upward.  But no matter which hopeful explanation you choose, America’s 13.7 million jobless workers still look pretty discouraged.  Many economists had been predicting that strong job growth early this year would persuade many people sitting on the sidelines to re-enter the job market.  Instead, for reasons that are unclear, workers continue to peel off the labor force. An estimated 342,000 Americans dropped out of the job market altogether in April. That is why the unemployment rate fell to 8.1 percent from 8.2 percent — not because more workers found jobs, but because so many people left the work force.

April Employment Summary and Discussion - Some numbers: There were 115,000 payroll jobs added in April, with 130,000 private sector jobs added, and 15,000 government jobs lost. The unemployment rate declined to 8.1%. U-6, an alternate measure of labor underutilization that includes part time workers and marginally attached workers, was unchanged at 14.5%. 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 to 63.6% from 63.8% (a new cycle low) and the employment population ratio also decreased slightly to 58.4%. The change in February payroll employment was revised up from +240,000 to +259,000, and February was revised up from +120,000 to +154,000.  The average workweek was unchanged at 34.5 hours, and average hourly earnings were essentially unchanged. "The average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours in April. ... In April, average hourly earnings for all employees on private nonfarm payrolls rose by 1 cent to $23.38. Over the past 12 months, average hourly earnings have increased by 1.8 percent." There are a total of 12.5 million Americans unemployed and 5.1 million have been unemployed for more than 6 months. These numbers are declining, but still very high.Since the participation rate has declined recently due to cyclical (recession) and demographic (aging population) reasons, an important graph is the employment-population ratio for the key working age group: 25 to 54 years old.These two graphs compare public and private sector job losses (or added) for President George W. Bush's first term (following the stock market bust), and for President Obama's current term (following the housing bust and financial crisis). The Bush term is added for comparison purposes. The number of part time workers increased slightly in April to 7.85 millon. These workers are included in the alternate measure of labor underutilization (U-6) that was unchanged at 14.5% in April - still very high, but the lowest level since early 2009.   This graph shows the number of workers unemployed for 27 weeks or more.

Why Did the Unemployment Rate Drop? - The U.S. unemployment rate dropped to 8.1% in April but a broader measure was unchanged at 14.5% and a separate survey noted that the economy added a paltry 115,000. Why the drop? This month, the decline in the jobless rate wasn’t a positive sign, as it primarily came from people dropping out of the labor force. The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force. When the unemployed no longer count as part of the labor force, both numbers decline and the unemployment rate falls.In April, the number of unemployed dropped by 173,000, but so did the number of people employed — by 169,000. That indicates that those people didn’t necessarily find new jobs, since the overall labor force declined by 342,000.

The missing five million - There’s a short term and a long-term story in today's job numbers.  But the short-term news is not as bad as it looks, while the long-term news is actually quite disturbing.  Let me explain. The sharp deceleration in employment growth in the last two months probably does not point to a sudden slowing in economic growth but rather tells us that the more brisk pace of growth earlier this year was unsustainable because much of it was due to warm weather. A second factor technical factor is that there were only four weeks between the March and April periods during which the Bureau of Labour Statistics counted the number of jobs, which often reduces the measured total of new jobs created.   Now for the bad news. The fact that things were never so great simply reinforces the picture of underlying sluggishness. True, the slide in the unemployment rate – a full percentage point since September – owes mostly to rising employment (as measured by the household survey). But the decline in unemployment has been helped by the failure of the labour force to grow more quickly. After growing for several months, it shrank in April. While it has fluctuated considerably, the labour force is only slightly larger now than in December, 2007, when the recession began. Yet in January, 2008, the Congressional Budget Office reckoned it would be some 5m larger by now, or 159.5m (see chart). What happened to those 5m people? Why aren't they showing up as unemployed?

More Graphs: 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 2 thousand jobs in April, but previous months were revised up slightly. 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. All categories are generally moving down. The less than 5 week category is back to normal levels, and the other categories are still elevated. The the long term unemployed declined to 3.3% of the labor force - this is still very high, but the lowest since August 2009. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). Clearly education matters with regards to the unemployment rate - and it appears all four groups are generally trending down. This is a little more technical. The BLS diffusion index for total private employment was at 56.8 in April, down from 64.7 in March. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. From the BLS:

The Recovery Is Really Good at Creating Bad Jobs - The picture is as bleak in the United States as it is around the globe generally. Part-time employment grew from just under 10 percent in 2007 to just over that figure in 2010. But even worse is the fact that the percentage of the workers in those jobs who would rather be working full-time doubled, from around 7 percent in 2007 to 15 percent in 2010. That’s a lot of people who aren’t working as many hours as they need to. The recovery period has also steadily created more temporary jobs than stable, lasting ones. The Richmond Fed reports that these jobs accounted for over a quarter of all new private sector jobs created here in 2010—even though they were only about 7 percent of the jobs created after the 2001 recession. Although these jobs dropped severely during the crisis, they’ve now climbed higher than they were in 2006. Beyond giving workers little stability in their lives, temporary jobs pay poorly compared to their full-time counterparts. The ILO’s analysis of nine countries showed that temporary workers are paid about 40 percent less than permanent workers, and that holds true even when controlling for individual characteristics. It may be unsurprising, then, that the report finds that around the world, “the majority of new jobs are remunerated at a rate below average wages.” Are workers who are lucky enough to be re-employed even making what they need to get by?

How Many "Discouraged" Workers? - The good folks at the U.S. Bureau of Labor Statistics divide the adult population into three groups: the employed, the unemployed, and those out of the labor force. When an employed person stops working, if they are looking for work, they are counted as unemployed; if they aren't looking for work, they are counted as out of the labor force. So how many discouraged workers are there? Actually, the same survey that is used to count the unemployed can also be used to count "discouraged workers." In fact, BLS counts "discouraged" workers as one of two parts of an overall group of people who are "Marginally attached to the labor force"  Within the overall category of "marginally attached," the first subcategory of "discouraged" workers "[i]ncludes those who did not actively look for work in the prior 4 weeks for reasons such as thinks no work available, could not find work, lacks schooling or training, employer thinks too young or old, and other types of discrimination." The other subcategory of "other persons marginally attached to the labor force ... [i]ncludes those who did not actively look for work in the prior 4 weeks for such reasons as school or family responsibilities, ill health, and transportation problems, as well as a number for whom reason for nonparticipation was not determined." Here's a graph of the data from BLS, which I made using the ever-helpful FRED tool from the Federal Reserve Bank of St. Louis.

Lower pay for new graduates follows them for life - The Wall Street Journal puts up a paywall for most articles, so unless you subscribe or engage the site with go-around software, you won't be able to read the whole piece I am going to excerpt below. And since I can't get permission for a longer excerpt as I usually do, this will be short. Reporting on a new study from the Conference Board, Kathleen Madigan writes: U.S. wage growth between 2008 and 2010 was the lowest since at least the 1960s. The big reasons: high unemployment diminished workers’ bargaining power, and many laid-off workers and graduates were “willing to accept jobs at lower wage rates than they originally expected,” the report said. [...]  Of course, not all labor groups are created equal. One very disturbing finding is how far new college graduates have fallen behind. The board found median wages for new graduates with a university degree declined in both 2009 and 2010. Even with a bounce in 2011, Levanon said the starting pay for new grads is below the pay in 2008—and that is before inflation is taken into account.

Which College Degrees Lead To Higher Unemployment [infographic] - With an ever depressing number of recent graduates looking at unemployment instead of that dream job they hoped for when graduating college. Mindflash has created an interesting infographic around the topic of which college degrees actually lead to higher unemployment.

A teen with a job becomes a rarity in US economy - Only about 25 percent of 16- to 19-year-olds currently are working, a drop of 10 percentage points from just five years ago, according to the Bureau of Labor Statistics. The percentage of teenagers who have jobs, expressed as the ratio of employment to population, hovered between 40 and 50 percent for much of the 1980s and 1990s. The percentage began dropping about a decade ago, but the declines have been especially steep since the beginning of the Great Recession in late 2007. With summer approaching and the job market showing signs of improvement, teens could have a better shot at getting hired than they have had in years. But it could take many more years for teens to resume working at pre-recession levels.Part of the issue is that fewer teens either want to work or think they can get a job. The labor force participation rate, which measures both teens who are working and those actively seeking work, also has fallen sharply since 2000.

What Immigration Means For Employment and Wages - Brookings Institution -  While employment continued to rise, today’s employment report suggests that the pace of job growth slowed. Employer payrolls increased only by 115,000 jobs, following a gain of 154,000 last month and average increases of 252,000 per month in the three prior months. At last month’s pace of job growth, increases in employment are roughly keeping up with increases in new labor market entrants and the unemployment rate was little changed at 8.1 percent. U.S. immigration policy continues to be a key issue of debate among federal and state policymakers alike. In that debate, one area of disagreement has been the impact of immigration on the U.S. labor force and the wages of American workers—particularly during today’s difficult economic times. In fact, because of the weak labor market immigration flows have changed dramatically since the start of the Great Recession—the undocumented population has declined (Passel and Cohn 2010; DHS 2012), and the number of high-skilled H-1B visas being issued was down by over 25 percent in 2010 from a 2001 peak (US State Department). As the economy continues to recover, however, it is likely that demand for immigrant labor by American businesses and the desire of immigrants to work in the United States will continue to rise. The ability of our immigration system to respond to these demands remains an important economic policy issue, both in the short term and for our country’s long-term growth strategy.

Public job losses tested Obama’s economic strategy - As the economic recovery has struggled to pick up speed, one of the biggest stumbling blocks has been job losses in state and local governments, which have been on the rise for much of President Obama’s term. Early on, Obama fought for aid that saved hundreds of thousands of these jobs, economists say. Yet a year later, when his economic advisers said another large round of aid was critical for the health of the economy, Obama declined to make it a key part of his agenda. His political advisers said such an effort would be fruitless. Republican opponents on Capitol Hill, including some who were glad to see the public sector shrink, were arguing that these jobs were not vital for the economy. Since the beginning of his term, state and local governments have shed 611,000 employees — including 196,000 educators — according to government statistics. Unlike the recovery in private-sector employment that Obama and his reelection campaign often cite — with businesses adding 4 million jobs since hiring hit its low point in 2010 — the jobs crisis at the state and local level has continued throughout his term. On Friday, new government data showed that economic growth slowed in the first three months of the year, in part because government at the local, state and federal level has been spending less money — money that could have fueled economic activity.

Productivity Slowdown to Linger - The slowdown in economic activity has been surprising and is hopefully temporary, while the easing in productivity was expected and will linger for a while. The Labor Department reported output per hour worked at nonfarm businesses fell at an annual rate of 0.5% in the first quarter. Hours worked rose at a much-faster pace than did output — a gap foreshadowed by the January-February jumps in payrolls and weak growth in gross domestic product last quarter. On a year-over-year basis, growth in productivity was down to 0.5% last quarter. In the first quarter of 2010, the year-over-year growth had been 6.1%. While the drop seems large, a slowdown isn’t unusual at this point in the business cycle. Right after a recession, productivity surges because companies rely on existing workers to increase output to meet increasing demand. Later on, faster hiring tends to lower productivity since it takes awhile for new workers to learn the ropes.

For Craftsmen, Fragile Lifeline From Craigslist  - With few places to turn, construction workers have colonized Craigslist as the cyberspace equivalent of the street corner or the Home Depot parking lot. Some are getting more than they bargained for as they search for ad hoc jobs. One Palm Beach man who previously worked on crews renovating Walmart stores agreed to clean out an apartment after a tenant committed suicide. But he drew the line at hanging up a sex swing. Still the plaintive pleas for work keep coming online. That is because carpenters, bricklayers, roofers, painters, electricians, plumbers and carpet installers have largely been left out of the economic recovery. Builders are not hiring, homeowners are deferring renovations and governments are postponing highway and bridge projects. Economists are forecasting that the Labor Department will announce on Friday that the nation’s employers added about 165,000 net jobs last month — few of them in the construction industry. The jobs that construction workers find online tend to be small: painting bedrooms, replacing ceiling fans or even installing pet doors. The pay is skimpy, they say, far less than during the boom years. Mostly, though, there is simply not enough work for the large number of overqualified odd jobbers trying to cobble together a subsistence. “You can follow the pulse of the economy just by watching what’s going on with Craigslist,” said Jerry Patterson, a carpenter in Phoenix who once had plentiful work framing new homes and remodeling older ones. “It’s a massive amount of people going for just a few amount of calls.”

Price of a Job Saved by China Tire Duties: Nearly $1 Million - President Barack Obama was so proud of the jobs saved by shutting off imports of Chinese tires he cited the action in his 2012 State of the Union Address. According to analysts Gary Hufbauer and Sean Lowry of the Peterson Institute for International Economics, known for its support of free trade, the victory had a heck of a cost: at least $936, 000 for each job saved. Bloomberg News Here’s how their analysis works: They accept Mr. Obama’s claim that the action, which was legal under World Trade Organization rules, saved 1,200 jobs. But the result of slapping heavy duties on Chinese imports was a stiff increase in tire prices. The vast majority of the tires sold in place of Chinese tires were made in other foreign countries, the analysts say. In all, Americans spent $1.12 billion more than they otherwise would have on tires. Divide that by 1,200 jobs, and the cost is $936,000 per job. But that’s not the end of the costs. The additional spending on tires – essentially the same effect as a tax – meant that Americans had $1.12 billion less to spend on other things. Messrs Hufbauer and Lowry figure that could have reduced retail employment by about 3,500 jobs. In the end, they say, the tariff was a net job killer. So who won? “Most of the money landed in the coffers of tire companies, mainly abroad but also at home,” said the analysts.

Geithner Decides to Focus on Business Concerns at the Expense of Workers in Negotiations With China - Dean Baker - That would have been an appropriate headline for a Washington Post article that essentially told readers that Treasury Secretary Timothy Geithner would focus on issues that matter to business in his discussions with Chinese leaders. The most important issue for workers in dealing with China is a drop in the value of the dollar relative to the yuan. This would reduce the price of U.S. exports to people living in China and make imports from China more expensive. That would lead to more exports and fewer imports. Also, many other countries would likely follow the lead of China if it were to raise the value of its currency relative to the dollar. This would improve the U.S. trade balance overall. Economists agree that if the United States is to achieve full employment without large budget deficits or negative private savings, as we saw during the housing bubble years, this sort of adjustment is essential. However the Post bizarrely told readers: chief among the bright spots, according to the Treasury chief and many observers, has been progress toward closing the yawning trade deficit between the two countries. U.S. exports to China have almost doubled since the beginning of Obama’s term.

Apple Has Destroyed American Jobs - After taking heat for shipping jobs to China and contracting to employers with questionable labor conditions, Apple (rather publicly) took credit for creating more than half a million jobs in the U.S. 514,000 to be exact. That figure included nearly 50,000 employees in its retail network and its corporate headquarters, where products are designed. But it also included FedEx and UPS employees who deliver its products and employees at Corning who make glass for iPads and iPhones. So Apple basically counts anyone vaguely associated with the company or its products as a job that Apple created. But what about the competitors Apple has bumped off in its relentless move to the top? What about the once-profitable markets, products, and companies it has destroyed? What happened to those jobs? Business Insider analyzed data on Bloomberg, went through dozens of 10-Ks, and read through layoff announcements to see how Apple's peers have done. What we found: Apple has destroyed nearly as many jobs as it helped create, eliminating some 490,570 positions. 

Save the Post Office: Make up for the drop in physical volume with digital services - Among the various depressing activities going on in Washington, DC this year, one of the most immediate is the plan to start the dismantling of United States Postal Service. I’ve followed this story mainly through updates from Senator Bernie Sanders: Postal Service: Pressure mounted on the House to act on a Senate-passed bill to keep hundreds of postal facilities from closing and, at Sen. Bernard Sanders’ suggestion, find ways to make up for a drop in mail volume due to e-mail, the Vermont Press Bureau reported.: “The postal reform bill passed by the Senate this week averts the decimation of the Postal Service that had been proposed as a way to save it.” Well, I’ve got a suggestion for how to make up for “drop in mail volume due to e-mail” :

  1. I would like it if the US Post Office could set up an email server with the same privacy guarantees that we have with the US Mail.
  2. Require warrants to open and access messages, attachments and contact lists (for starters).
  3. Forbid harvesting messages, attachments and contact lists (for starters) for marketing research.
  4. I would pay a reasonable price for this service.

Wal-Mart’s U.S. Expansion Plans Complicated by Bribery Scandal  -  In Los Angeles, a Wal-Mart building permit is getting a once-over. In New York, the City Council is investigating a possible land deal with the retailer’s developer in Brooklyn. A state senator in California is pushing for a formal audit of a proposed Wal-Mart in San Diego. And in Boston and its suburbs, residents are pressuring politicians to disclose whether they have received contributions from the company.  All of it in the past week.  Wal-Mart has worked hard in recent years to polish its reputation and give elected officials, community groups and shoppers a reason to say yes to their stores, especially as it pushes aggressively into big — and historically hostile — cities. Now, the revelation of a bribery scandal involving the retailer’s Mexican subsidiary is giving critics a new reason to say no.  “Overnight, the environment has shifted in terms of Wal-Mart’s strategy in big cities, in winning over local politicians,”

Not Wanting Jobs - A significant number of American voters seem to believe that the unemployed don’t really want jobs because they would prefer to live off unemployment insurance or other social benefits. These are the voters that many Republicans (and some Democrats) are reaching for when they propose to “welfarize” unemployment insurance – imposing requirements for volunteer work or blanket drug tests. Many such voters are also drawn to a particular austerity strategy my fellow Economix blogger Casey B. Mulligan laid out last week: cutting taxes for high earners and cutting subsidies for low earners. This strategy makes perfect sense if you believe that most people who are struggling to pay their bills aren’t trying hard enough. This argument appeals for several reasons. It absolves believers of any responsibility for other people’s hardships. It lends credence to the assertion that the labor market would work just fine if it weren’t jammed up by a social safety net. It lays the blame for persistent unemployment squarely on President Obama, who has urged extensions of unemployment benefits and other forms of public assistance. But the number who fall into this category is small, and so are the overall effects, especially compared with the loss of output, effort, motivation, and well-being that results when people who need a job can’t find one.

The Safety Net and Layoffs - Employment remains remarkably low five years after the housing market began its decline and four years after the financial crisis. During that time, the social safety net – government programs that help people without jobs and otherwise with low incomes – adopted new rules that made programs more inclusive and more generous. I do not think this is all a coincidence. By increasing its support for people without jobs and those with low incomes, our government has helped expand the population of people without jobs and with low incomes. The more generous the safety net, the less the incentives for labor-market participants to seek, retain and create jobs.

The Three Wedges That Separate Workers From Their Pay - Economists assure us that rising worker productivity is the key to better living. When workers produce more per hour of work, their earnings should go up correspondingly. Since 1973, that hasn’t been happening. Productivity has risen at a healthy clip, but the pay of the average worker has stagnated. That simple fact explains why younger Americans today aren’t doing any better than their parents’ generation, and sometimes worse. A sense of the part of Americans that they’re not reaping the rewards of  hard work fuels the Occupy movement and the cries of “We are the 99 Percent.” In 1994, economists Lawrence Mishel and Jared Bernstein were first to point out the gap that was already opening up between pay (low) and productivity (high). Bernstein later served as Vice President Joe Biden’s chief economist and is now a senior fellow at the Center on Budget and Policy Priorities. Mishel is president of the Economic Policy Institute. Now, Mishel has done the most careful study to date of what accounts for the productivity/pay gap. He wrote a blog post called “Understanding the wedge between productivity and median compensation growth” on April 26. He also has a longer article on the EPI website. And if that’s not enough, there’s a technical article by Mishel and Kar-Fai Gee of Canada’s Center for the Study of Living Standards published in that center’s International Productivity Monitor (PDF).

What Will Be the Fastest Growing Occupations? - Once every two years, the Bureau of Labor Statistics (BLS) releases its employment outlook. This report is perhaps the most detailed and most cited effort to provide a long-term forecast of the U.S. labor market. Recently, the BLS released its employment outlook for the 2010 to 2020 period. Below, we describe the main findings, and focus, in particular, on the results by occupation. Over that period, the BLS expects the workforce to increase at a rate of 0.7 percent per year.  It also predicts a full employment economy by 2020, adding 20.5 million jobs and lowering unemployment to 5.2 percent.  GDP growth is expected to be at 3 percent on average.  Out of its 749 occupation categories, 657 are projected to grow. In particular, the BLS predicts how the U.S. economy will return to full employment following the 2007 to 2009 recession through employment growth within various occupations. The table above showcases fifty of the fastest growing occupations, according to the BLS.  The top two occupations, personal care aides and home health aides, reflect the impact of the aging U.S. population on demand jobs.  By 2020, 36.6 percent of the population will be over the age of 55, an increase of 5.2 percent.  Two out of every five occupations on this list also demonstrate that Americans are increasing spending on health and wellness over the decade.

Do the Wealthy Work Harder Than the Rest? - A new study offers evidence that higher-educated (and therefore higher-earning) Americans do indeed spend more time working and less time on leisure than poorer income groups. In fact, while income inequality may be growing, “leisure inequality” – time spent on enjoyment – is growing as a mirror image, with the low earners gaining leisure and the high earners losing. The more surprising discovery, however, is a corresponding leisure gap has opened up between the highly-educated and less-educated. Low-educated men saw their leisure hours grow to 39.1 hours in 2003-2007, from 36.6 hours in 1985. Highly-educated men saw their leisure hours shrink to 33.2 hours from 34.4 hours. ... A similar pattern emerged for women. Low-educated women saw their leisure time grow to 35.2 hours a week from 35 hours. High-educated women saw their leisure time decrease to 30.3 hours from 32.2 hours. ... (The study defines leisure as time spend watching TV, socializing, playing games, talking on the phone, reading personal email, enjoying entertainment and hobbies and other activities.) ...

Boomers buying food for parents, cars for kids - Baby Boomers have a lot of bills to pay these days. Most of those bills aren’t theirs. They’re helping to pay medical and utility bills for their aging parents, and even buying groceries for their moms and dads. And on the flip side, they’re chipping in for everything from car insurance to rent payments for adult kids they thought flew the nest. All these handouts are creating uncertainty among the boomers about what the future holds for their own financial well-being, according to a report by Ameriprise Financial released this week. The study, titled “Money Across Generations,” surveyed more than 1,000 affluent boomers, 300 parents of boomers, and 300 children of boomers, at least 18 years old, by telephone, and found tougher economic times all around for every generation. But the Baby Boom generation of about 77 million and born roughly between 1946 to 1964 is stuck between a family rock and an economic hard place. “Boomers are feeling the pressure financially and emotionally,” . “In many cases they’re sandwiched between children who are unemployed or struggling to pay down their student loan debt and aging parents who are facing complex health and financial issues. At the same time, they’re trying to prepare for their own retirement.” About a quarter of boomers surveyed said they were saving for retirement, compared to 44 percent who were doing that in 2007, the last time this poll was taken.

The Tinder-Box Society - Robert Reich  - Payrolls used to account for almost 70 percent of the typical company’s costs. But one of the most striking legacies of the Great Recession has been the decline of full-time employment – as companies have substituted software or outsourced jobs abroad (courtesy of the Internet, making outsourcing more efficient than ever), or shifted them to contract workers also linked via Internet and software. That’s why most of the gains from the productivity revolution are going to the owners of capital, while typical workers are either unemployed or underemployed, or else getting wages and benefits whose real value continues to drop. The portion of total income going to capital rather than labor is the highest since the 1920s. Increasingly, the world belongs to those collecting capital gains. They’re the ones who demanded and got massive tax cuts in 2001 and 2003, on the false promise that the gains would “trickle down” to everyone else in the form of more jobs and better wages. They’re now advocating austerity economics, on the false basis that cuts in public spending – including education, infrastructure, and safety nets – will generate more “confidence” and “certainty” among lenders and investors, and also lead to more jobs and better wages. None of this is sustainable, economically or socially.

Manhole Lid Theft Is On the Rise - Some residents of the South Richmond Hill neighborhood in Queens were a little suspicious a couple of Sundays ago of the man in the yellow vest using an automotive jack to lift a cast-iron manhole cover out of the street by himself. “One of the neighbors I talked to said he thought he was legitimate,”  “He was wearing a vest and utility-type clothing.”  But the thief was perpetrating a once rare crime that has become increasingly common on the streets of Queens, Brooklyn and the Bronx in the past several weeks. Con Ed says that more than 30 of its manhole covers — some weighing as much as 300 pounds and all bearing the utility’s distinctive markings — have disappeared since March. In a normal year, no more than two or three of the company’s covers go missing. Based on current commodity prices for iron, a stolen manhole cover might fetch more than $30. But it costs Con Ed about $200 to replace each one, not counting the labor involved, Mr. Hardy said. That is why he and his team of 12 investigators are canvassing neighborhoods, talking to scrap dealers around the city and sharing information with the police, he said. “We just tell them that if anybody shows up with a manhole cover with a Con Ed logo on it to let us know,” Mr. Hardy said of the scrap dealers. “They understand that if it has our logo on it, it’s most likely stolen.” Still, there appears to be a black market for the covers, which is troubling to a company that has more than 200,000 manholes in its network that distributes electricity, gas and steam throughout the city and the northern suburbs.

Middle class dysphoria – What does the new American Dream look like? Inflated college tuition, lower home ownership rates, and compressed wages. - The American Dream was always tied to economic prosperity.  The ability to work and save for a respectable retirement seemed cornerstones to this vision of middle class success.  The idea that future generations would have it better seemed to also be part of this vision of economic prosperity.  The last two decades have seen a dramatic shift to this vision.  The struggle to stay in the middle class is getting more difficult since more are being pushed into the poor or working poor categories.  The recovery has been largely an odd accounting function courtesy of bailouts to the banks and massive government spending.  Today, we have the largest number of Americans on food stamps.  Those seeking to follow their desire to get a better education are saddled with a minefield of student debt and subpar institutions that simply look to steal their money and give them a piece of paper that is hardly recognized in any professional context.  The home ownership rate, the symbolism of the American Dream is drifting further into the shadows.

Debt inequality is the new income inequality - The rich are getting richer, and everyone else is going deeper into debt trying to keep up. The bottom 95% of Americans have seen debt levels balloon compared to their earnings over the past 20 years or so, as falling incomes made them more dependent on credit to maintain their lifestyles. In 1983, the bottom 95% had 62 cents of debt for every dollar they earned, according to research by two International Monetary Fund economists. But by 2007, the ratio had soared to $1.48 of debt for every $1 in earnings.  And then there's the top 5%. Their debt-to-income level actually fell during the same period, from 76 cents of debt for every dollar earned in 1983, to just 64 cents in 2007.And experts say the picture hasn't changed much since then. The debt divide is a result of the growing income gap between the wealthiest Americans and everyone else. The top 5% saw their share of total income rise to 34% in 2007, up from 22% in 1983. This excludes capital gains, which pump up the income of the rich even more since they are more likely to invest.The wealthy had so much extra money lying around that they channeled it back into the financial system, making more credit available to the rest of the nation.

Class Warfare Succeeding: Rich Vs Poor Divide Near Record As Consumer Comfort Plunges - Bloomberg's weekly Consumer Comfort Index just had its largest two-week drop in over 13 months after tracking stocks up to near four-year highs in early April. These levels are still markedly negative compared to the zero print in early 2007 and while the index has generally tracked sideways, the consumer finally seemed to go all-in when Europe's LTRO and Fiscal Compact was announced and the world's coordinated easing occurred starting in November of last year. However the divergences within the data are growing rapidly with high-income individuals near four-year highs in terms of their comfort as low-income individuals at near record-lows for comfort. The comfort spread between rich and poor has not been this wide since before the crisis and yet so many expected 'change'. Consumers finally threw in the towel as recession fatigue appeared to hit in November of last year and sentiment suddenly improved...

This Week in Poverty: Will the Poor Get Poorer in the Land of Lincoln? - At an Appropriations hearing in the Illinois State House last week, the Department of Human Services (DHS) informed the legislature that it has insufficient funds to meet its Temporary Assistance to Needy Families (TANF) obligations through the fiscal year ending in June. This is particularly disturbing since Illinois provides TANF benefits—which is cash assistance—to just 13 of every 100 families with children in poverty, according to the Center on Budget and Policy Priorities (CBPP). Prior to welfare reform in 1996 the state helped nearly 87 of every 100 families with children in poverty. Further, the benefit level is only 28 percent of the federal poverty line, or roughly $4,800 annually for a family of three, similar to that in a majority of states. According to Dan Lesser, director of economic justice at the Shriver Center in Chicago, Illinois will find the funds to pay the TANF benefits one way or another—but just how the state will do it is a significant question.“The governor has asked the legislature for a $73 million supplemental appropriation to pay for it,” says Lesser. “Historically, supplementals are approved here when they are needed. But nowadays nothing is assured. If it’s not approved, we face a real possibility of crashing the state’s child care system.” That’s because without the supplemental, Illinois will pay cash assistance by diverting money DHS had intended to use to fund the state’s childcare assistance program.

Homeless families found living in storage units - Police and health officials say the conditions were unsanitary and unsafe. Last month, South Salt Lake police, the city fire marshal and the Salt Lake County Health Department found people living in at least five units at A-1 Storage, In one unit, officials found "a makeshift bedroom with food, clothing and other living accessories," according to a search warrant released Thursday. In another there were televisions, microwaves and lamps. "We also saw recliners, work stations, heaters and air conditioning units," police wrote. Health officials also found human waste being stored in bottles and "presumably disposed of in an unknown manner," court records state. Multiple extension cords were also found running from a single outlet. At least one tenant had cut holes between the units to allow for movement. The health department closed the storage units to occupancy citing health and safety hazards as well as fire and building code violations. Police did several return visits to make sure the units remained vacated. During at least one visit, one of the tenants had returned and was evicted again. A-1 Access Storage manager Christie Andrews said that a family of three, including a 3-month-old child, was staying in one of the storage sheds. She said sometimes families can't keep up with traditional rent. 

Racial inequality and the black homicide rate - Mitchell J. Landrieu, the mayor of New Orleans, challenged us to consider whether we devalued black lives by not paying sufficient attention to the more common forms of homicide in black communities, and instead reserved our activism for homicides that could be conceived of as involving racism. Landrieu made an important point, but I think he also missed a number of other significant points. The black homicide victimization rate is six times the white rate, so this is clearly a worthy issue to address. But, it is important to note that the black homicide victimization rate was cut in half from 1991 to 1999. It declined 49 percent while the white rate declined 39 percent. Too often we assume that things are always getting worse. It is beneficial to acknowledge this dramatic positive change, while also acknowledging that there is much more to be done. Since the 1990s, however, the black and white homicide rates have basically been flat. Landrieu failed to acknowledge that much of the work done by the participants of the conference, if successful, is likely to reduce homicide rates. Homicide rates are driven by a very complex mix of psychological and sociological factors that are not yet completely understood by criminologists. Probably the majority of the conference attendees work in areas that have the potential to reduce homicide rates.

The Decline And Fall Of Suburbia- As Arch Daily notes, for decades the suburbs and the American Dream went hand-in-hand but the age-of-sprawl is ending; people are leaving the suburbs and once again flocking to cities in search of a better way of life. Whether Suburbia can be saved or not, this useful infographic looks at the key factors (from Poverty to Transportation costs to Generation Y's preferences) with a view to reinventing Suburbia as a sustainable alternative to urban life.

West Coast Unions Cave In to Democrats - The big public sector unions of California and Oregon had their courage examined recently — both were found lacking. The unions backed down from a challenge from their respective Democratic governors, before any fight could be waged. The issue at stake was whether to tax the rich of both states to offset the state deficits caused by the Great Recession, itself caused by the rich. In both cases labor unions had readymade tax-the-rich ballot measures they were preparing to wage campaigns for: in California the Millionaires Tax and in Oregon a similar measure without the flashy nickname. In both cases the Democratic governors asked the unions to back off and choose a “less controversial” path. The unions succumbed. In California’s case the unions agreed to a rotten compromise, which taxes the rich at a lower rate while including an increase in the state sales tax that disproportionally affects working and poor people — unacceptable given the dire economic circumstances that have pushed many working people into poverty. In Oregon’s case the unions agreed not to tax the rich and pursue instead the elimination of the “corporate kicker,” a reference to the refund that corporations get from the state if their revenue exceeds state economist expectations. Yet even if the refund is eliminated, it’s possible that — given the sour economy — zero revenue will be raised.

California added 885K to jobless rolls in a decade - California has seen a far greater rise in unemployment than any other state over the last decade, according to an analysis of figures from the U.S. Bureau of Labor Statistics With more than 2 million people looking for work in March, California saw the unemployment rolls grow by nearly 885,000 since the same month in 2002. According to the On Numbers analysis, a distant second in the ranking was Florida, with a 10-year gain of nearly 356,000. In percentage terms, the rise was less dramatic: California ranked seventh among states at 77 percent. Nevada and Rhode Island, each with gains of 132 percent, topped the list. The least growth was recorded by North Dakota, which saw the number of unemployed people drop over the decade by 321 — a decline of nearly 3 percent.

New York's City Council passed a living wage ordinance - On Monday, New York's City Council passed a living wage ordinance, reports Good Jobs New York's Bettina Damiani. The 45-5 vote means the Council can easily override a threatened veto by Mayor Michael Bloomberg (New York Post, May 1, via Nexis subscription service). As I analyzed in Competing for Capital, the Living Wage movement attempts to reform, rather than abolish, economic development subsidies. The basic idea is the same as performance requirements in international investment negotiations, i.e., that a company that receives subsidies has to provide additional benefits to the city providing those incentives. As its name suggest, the most common demand is that subsidized firms have to pay a specified wage that is higher than the usual minimum wage. According to Living Wage NYC, over 140 cities in the U.S. have living wage ordinances, and the idea has spread to the U.K., Canada, and New Zealand. In New York's case, the law specifies that companies receiving at least $1 million in subsidies must pay $10/hour if they provide health benefits, or $11.50/hour otherwise. This is not a lot of money in New York City, yet a study by the Fiscal Policy Institute, Good Jobs New York, and the National Employment Law Project found multiple cases where subsidized projects paid even less, such as the Bronx Gateway Mall, which the study found had starting wages of $8.80 per hour. According to the study, the city spends over $2 billion annually on economic development incentives.

The 10 States and 10 Jobs With the Most Low-Wage Workers - One in four U.S. workers -- or nearly 40 million people -- earn a salary below the federal poverty line of $23,000 for a family of four.* Who are they, where are they, and how does their education differ from the rest of the country? A wonderful new paper from the Economic Policy Institute explains it all. Let's start with where they work. The Bureau of Labor Statistics counts 22 job categories, ranging from building and grounds maintenance (which employes one in 30 working people) to office and administrative support (which employs one in six). In 2010, the category with the highest share of low-income workers by far -- nearly 75%! -- was food preparation and serving. That was followed by personal care, which also happens to be the fastest growing occupation in the next decade, according to BLS. The chart below looks at the six occupations with the highest share of low-wage workers (in RED) and also shows you their share of the total workforce (in BLUE). The upshot is that the top six six categories -- each with at least a third of their workers earning less than $23,000 -- make up more than one-third of the economy. Broadly speaking, the occupations with some of the worst pay are local-service jobs, especially in the non-tradable sector.

Another Triumph for Texas  - In Chief Executive’s eighth annual survey of CEO opinion of Best and Worst States in which to do business, Texas easily clinched the No. 1 rank, the eighth successive time it has done so. California earns the dubious honor of being ranked dead last for the eighth consecutive year. This year, 650 business leaders responded to our annual survey, up from 550 in 2011. CEOs were asked to grade states in which they do business among a variety of areas, including tax and regulation, quality of workforce and living environment. The Lone Star State was given high marks foremost for its business-friendly tax and regulatory environment. But its workforce quality, second only to Utah’s, is also highly regarded.  Florida moved up from number three last year to number two. It is perhaps no coincidence that Texas and Florida have the highest net migration of people to their states from 2001 to 2009. (By contrast, New York and California lost over 1.6 million and 1.5 million in net migration out of the states, respectively, over the same period.)

Big Employers Extorting States, Pocketing Employee Income Tax Withholding - - Yves Smith - Wonder why states are broke? It isn’t just the global financial crisis induced knock-on effects of a plunge in tax receipts and a rise in social safety net payments. Nor is it just pension fund time bombs (note that despite the press hysteria, the problem is unmanageable only in a comparatively small number of states, with New Jersey way out in front, thanks to 15 years of the state stealing from the workers’ kitty, plus a decision to take big risk at exactly the wrong moment, in 2007, which resulted in large losses). A significant unrecognized culprit is companies managing to divert tax revenue from stressed states to their coffers. The device, in this case, is demanding the right to keep state income taxes withheld from employee paychecks.  David Cay Johnson detailed this stunning development in an April 12 column and a related interview late last week (hat tip p78). He suggests that this movement is driven by banks, since financial players and private equity fund owned firms are heavily represented among these corporate welfare queens. His discovery seems to have gone largely unnoticed and I hope readers circulate this clip widely. (video)

State Budget Deficit Continues to Grow - A new report shows state tax revenues have dropped and Connecticut’s $20 billion budget is now about $200 million in the red. The consensus revenue estimates, released Monday by the General Assembly’s fiscal office and Gov. Dannel P. Malloy’s budget office, show personal income tax receipts dropped by $147 million. Malloy’s budget chief, Benjamin Barnes, said Malloy will submit a deficit-cutting plan in the coming days to the legislature. He said it will transfer funds set aside to prepay debt payments to cover the revenue shortfall. Republican legislative leaders said the growing deficit shows Malloy’s plan last year to impose $2.6 billion in tax increases over two years is not working. Senate Minority Leader John McKinney said Malloy and the Democrats have been in denial about the state’s “budget crisis.”

California tax revenue $3 billion less than target, report says - The legislative analyst’s office has a new number that is adding to California’s financial headache: $3 billion. That’s the total amount that tax revenue has lagged behind goals set by Gov. Jerry Brown’s administration in the current fiscal year. The shortfall was detailed in a report released on Tuesday by the nonpartisan office, which provides budget advice to lawmakers. Much of that gap comes from a disappointing April, the most important month for income taxes. Income taxes were $2.07 billion short of the $9.43-billion goal, and corporate taxes fell $143 million short of an expected $1.53 billion, according to the report. When April's poor results are tacked on to earlier shortfalls, the state has fallen about $3 billion behind tax goals, the LAO said. The ratings agency Standard & Poor's already cautioned Tuesday that poor tax revenue was imperiling California's financial recovery. It's unclear exactly how much this year's budget deficit will grow because of the tax shortfall. Brown's administration estimated the gap at $9.2 billion in January, but has since said it will grow.

S&P says it's concerned that Calif. lawmakers might resort to accounting tricks to pass budget — A credit rating agency on Tuesday warned that California could return to budget gimmicks this summer, in part because a court has removed an incentive for lawmakers to pass a spending plan that is truly balanced. The Standard & Poor's memo cautioned that the agency could revise its positive outlook on California's debt if the Legislature fails to pass a balanced budget by its June 15 deadline. S&P cited concerns stemming from two developments last month. First, the deficit has grown as income tax revenue in April fell nearly $2 billion below expectations. Then a Sacramento judge ruled the state controller doesn't have authority to withhold pay from lawmakers. That ruling undermines Proposition 25, a 2010 initiative approved by voters that bans lawmakers from getting paid if they fail to pass a spending plan. The initiative also lowered the legislative threshold for passing the state budget from a two-thirds vote, which requires support from both parties, to a simple majority.

Illinois Borrowing Costs Rise by 22.5%, Expect Conditions to Worsen - Illinois borrowing costs are poised to rise about 22.5%. The nominal increase is about .34 percentage points as reported by Bloomberg. Illinois plans to sell $1.8 billion of general-obligation debt tomorrow as its relative borrowing costs may increase by almost a quarter. The tax-exempt deal for the state, rated lowest by Moody’s Investors Service, includes a 10-year segment that underwriter Jefferies & Co. plans to offer to investors at 1.85 percentage points above benchmark AAA securities, according to a person familiar with the sale. Illinois’s last general-obligation sale was on March 13 for $575 million, with 10-year securities priced to yield 1.51 percentage points above benchmark tax-exempts, according to data compiled by Bloomberg. That’s 0.34 percentage points below tomorrow’s tentative pricing plan, or a difference of 22.5 percent. The state has the lowest-funded pension in the U.S., with assets equal to 45.5 percent of projected obligations, Bloomberg data show. Its backlog of unpaid bills to vendors and Medicaid obligations is more than $9 billion.

Less White Equals More Green - States and cities across the northern half of the country saved millions of dollars from a winter that was unusually warm and lacking in snow, providing a rare fiscal bonus and leaving them with surpluses of road salt and other supplies for this year's season. Ohio spent about half as much on plowing and other storm costs than the winter before. Milwaukee came in about $2 million under its $8 million budget. New York City, which had its second-warmest winter on record, saved close to $12 million of its $42.8 million snow account.  Massachusetts plans to use much of its savings to help close a budget gap at Greater Boston's transit system. By contrast, the fierce winter a year earlier forced the state to overspend its snow fund and the legislature had to allocate additional funds. The savings aren't necessarily a windfall for all cities. In ski towns where retail business fell because of fewer visitors, officials say the savings is more of a cushion against reduced tax revenue.

Jefferson County Readies for Austerity With No State Help - Officials in bankrupt Jefferson County are considering closing courts one day a week, stopping meal delivery for the elderly poor and eliminating building inspections in anticipation of the Alabama Legislature ending its 2012 session without letting it raise taxes. Even cut to the bone, it may be impossible for Alabama’s most populous county, with 660,000 residents, to emerge from the biggest municipal bankruptcy in U.S. history without more revenue, Commissioner Jimmie Stephens said in a phone interview. With no power to raise taxes, “cutting is the only tool the Alabama Constitution gives us,” he said. “Everything will be on the table, anything not mandated by the Constitution.”

Sarah Palin Claims Child Labor Laws Are Causing America To Fail - Before the establishment of child labor laws in America, children were exploited by industries. Industries took advantage of them by having them do jobs that were dangerous while paying them very little. A corporation could easily pay a child less to do the job of a higher paid adult. During the Great Depression, Democrats enacted child labor laws so that businesses would have no choice to hire unemployed adults and pay them fair wages. This helped lower the unemployment rate and gave children the opportunity to be kids and go to school to prepare for future employment as adults. But child labor laws are under attack today by conservatives who want to hand big business a cheap labor force, destroy the minimum wage, eliminate labor unions, and weaken public education.  Newt Gingrich suggested eliminating child labor laws during his failed run to capture the Republican nomination for the Presidency. Now, his biggest supporter, Sarah Palin, is claiming that child labor laws are making America fail.

Big Idea: Universal Pre-K to Teach Children and Create Jobs - It might surprise you to learn that only 58 percent of 3-to-5-year-old Americans are enrolled in any type of organized child care or early education program. The number is even lower—just 51 percent—among poor children. And less than a quarter of American kids attend preschools led by certified teachers; children in less school-like child care settings, like day care centers or in-home care, are often looked after by caretakers earning an average of less than $10 per hour, most of whom have no formal training in education or child development. Research shows that over the past two decades, the education level and salary of early child care workers have consistently declined. Meanwhile, in cities like New York and San Francisco, the children of the elite vie for seats in top private preschools, which charge as much tuition as private colleges and employ teachers who hold college and graduate degrees. Any radical rethinking of American public policy ought to start with a consideration of one of our most politically neglected populations: The majority of 3-to-5-year-olds who have no access to high-quality, low-cost educational options. As scientists have learned more about the brain, they've concluded the early years are the most crucial ones for cognitive development.  The typical middle-class 5-year old can identify all 26 letters of the alphabet on her first day of school; a 5-year old living in poverty may know only two letters. By first grade, middle-class children have double the vocabulary of their low-income peers.

Long Beach Unified board to vote on ending Head Start - In a final round of budget cuts, the Long Beach Unified Board of Education Tuesday will consider eliminating its Head Start preschool program beginning in the 2013-2014 school year. The elimination of Head Start, a preschool program for low-income families, is expected to save the district $225,000 a year. Head Start is federally funded, but the program has been encroaching on the school district's budget, officials said. Earlier this year, the board approved layoffs for all 126 Head Start employees. The board will also consider reorganizing its custodial services for a savings of $74,800. The reorganization will include reassigning 22 lead custodians to the position of basic custodian and will establish a one-year pilot program that emphasizes accountability and communication.

Atlanta Public Schools Plans To Shed 350 Positions - Atlanta Public Schools plans to shed 350 positions next year and order two employee furlough days as it attempts to cut about $47 million from its budget. The Atlanta Journal-Constitution reports that the school district on Monday announced its plans for a $565.8 million budget for the 2012-13 school year. Superintendent Erroll Davis says the goal is to reduce the district’s reliance on its savings account. The system is planning to pull about $10 million from savings to fill budget holes next year, compared to $36 million this year. Next year’s budget includes about $700,000 to cover legal fees related to the cheating scandal. Chuck Burbridge, the system’s chief financial officer, says it must bring the budget into balance.

Philadelphia school official says that without more cash, classrooms might not open in the fall: The Philadelphia School District's financial situation is so dire that without a $94 million cash infusion from a proposed city property-reassessment plan, schools might not be able to open in the fall, leaders said Tuesday night. At a district budget hearing, chief recovery officer Thomas Knudsen stressed that the district might fall off "the cliff on which we now stand so precariously" if swift action is not taken. The district's money problems, coupled with a lack of academic progress and safety issues, have prompted Knudsen to propose a total overhaul of how schools are organized and run. More students would be shifted to charter schools, and the central office would be shrunk, with district schools managed by staff or outside organizations who bid to run them. "Quite simply, if we do not take dramatic steps right now to right ourselves, we will not be able to operate," Knudsen told the School Reform Commission. The facts are sobering: The district faces a budget gap of $218 million for the 2012-13 academic year. Left unchecked, the district's deficit would climb to $1.1 billion by 2017, school officials have said.

The Big Easy’s School Revolution - Interesting op-ed in the Washington Post on schools in New Orleans. …the levees broke and the city was devastated, and out of that destruction came the need to build a new system, one that today is accompanied by buoyant optimism. Since 2006, New Orleans students have halved the achievement gap with their state counterparts. They are on track to, in the next five years, make this the first urban city in the country to exceed its state’s average test scores. The share of students proficient on state tests rose from 35 percent in 2005 to 56 percent in 2011; 40 percent of students attended schools identified by the state as “academically unacceptable” in 2011, down from 78 percent in 2005. ….Most of the buzz about the city’s reforms focuses on the banishment of organized labor and the proliferation of charter schools, which enroll nearly 80 percent of public school students, up from 1.5 percent pre-Katrina. But what really distinguishes New Orleans is how government has re­defined its role in education: stepping back from directly running schools and empowering educators to make the decisions about hours, curriculum and school culture that best drive student learning. Now, state and school-district officials mostly regulate and monitor — setting standards, ensuring equity and closing failing schools. Instead of a traditional school system, there is a system of schools in what officials liken to a fenced-in free market. Families have more choice about where their children can best succeed, they say, and educators have more opportunity to choose a school that best aligns with their approach.

Research challenges idea raising aspirations is key to education success - New research carried out by Newcastle University challenges the idea that raising aspirations is the key to improving the education of children from low-income families.  The project looked at whether the issue of low educational attainment by children from poorer backgrounds can be solved by schemes that aim to change aspirations and attitudes.  The review found that while some interventions showed some change in attitudes and had an impact on educational attainment, there was no evidence that one led to the other.  Importantly, the review found that low-income families already have aspirations for their children to go on to higher education but often other barriers can get in the way of them realising these ambitions. Liz Todd also found that teachers, policy makers and other education professionals underestimate the ambitions of young people and the aspirations that families have for their children.

Wasting Our Minds, by Paul Krugman - In Spain, the unemployment rate among workers under 25 is more than 50 percent. In Ireland almost a third of the young are unemployed. Here in America, youth unemployment is “only” 16.5 percent, which is still terrible — but things could be worse.  And sure enough, many politicians are doing all they can to guarantee that things will, in fact, get worse. We’ve been hearing a lot about the war on women, which is real enough. But there’s also a war on the young, which is just as real even if it’s better disguised. And it’s doing immense harm, not just to the young, but to the nation’s future. Tuition at public colleges and universities has soared, in part thanks to sharp reductions in state aid. So how, exactly, are young people from cash-strapped families supposed to “get the education”?  There is, however, a larger issue: even if students do manage, somehow, to “get the education,” which they do all too often by incurring a lot of debt, they’ll be graduating into an economy that doesn’t seem to want them.  You’ve probably heard lots about how workers with college degrees are faring better in this slump than those with only a high school education, which is true. But the story is far less encouraging if you focus not on middle-aged Americans with degrees but on recent graduates. Unemployment among recent graduates has soared; so has part-time work, presumably reflecting the inability of graduates to find full-time jobs. Perhaps most telling, earnings have plunged even among those graduates working full time — a sign that many have been forced to take jobs that make no use of their education.

Free college? We can afford it.-  As the National Commission on Adult Literacy reports, “The US is the only country among 30 OECD free-market countries where the current generation is less well educated than the previous one.” Once the leader in percentage of college graduates between the ages of 25-34, the United States has dropped to 12th out of 36 developed nations.  The second effect is ruinous debt. The average college graduate with loans now leaves college $25,000 in debt. Student loan debt exceeds $1 trillion and is now greater than credit card debt. And the debts are inescapable. Bankruptcy doesn’t extinguish them; even Social Security payments can be garnished to repay them.  These debts weigh down not only the holder but the entire economy. Students now graduate with a burden that forecloses choices. More and more are forced to return home to live. Marriage becomes less imaginable; public-interest work is less affordable. It is long past time that we debate real reform. Rep. Hansen Clarke, a Michigan Democrat, introduced a bill that would forgive up to $45,000 in student debt after a borrower makes 10 years of income-based payments (no more than 10 percent of income). The Occupy Student Debt Campaign is calling for free public higher education and a write-off of existing debt. In Brown’s words: “Education is really a right, and it shouldn’t be something for Wall Street to make a lot of money off of.”

Academic Blog Credit? - Martin Weller considers academic credit for blogs: The answer to … whether new approaches such as blogging constitute scholarly activity, is an emphatic yes. Which leads us to a more problematic question: How should we recognize it? … Tenure committees have increasingly come to rely upon journal-impact factors to act as a proxy for research quality. In short, we know what a good publication record looks like. But these criteria begin to creak and groan when we apply them to blogs and other online media. Simple metrics are subject to gaming, and because of the removal of the peer-review filter, may be meaningless anyway. I may have a YouTube clip of a skateboarding octopus with two million hits, but that doesn’t make it scholarly work. It’s a difficult problem, but one that many institutions are beginning to come to terms with. Combining the rich data available online that can reveal a scholar’s impact with forms of peer assessment gives an indication of reputation. Universities know this is a game they need to play—that having a good online reputation is more important in recruiting students than a glossy prospectus. And groups that sponsor research are after good online impact as well as presentations at conferences and journal papers.

How Elite Colleges Still Feed Wall St.'s Recruiting Machine - Three and a half years have passed since the onset of the financial crisis, and the public hasn’t changed the way it talks about Wall Street and its future. Journalists, politicians and even the Occupy movement have shaped our discussion by analyzing — and often attacking — the bankers at the helm. Again and again we read about the forces driving the industry today, when we should be looking to the people who will lead Wall Street tomorrow. Though recent media reports suggest that elite students are growing disillusioned by Wall Street, the numbers are unconvincing. Among the class of 2011, the financial industry was the top employer of graduates of Harvard, Duke, Columbia and even the University of Pennsylvania’s engineering school. To claim the infatuation with Wall Street has come to an end is to disregard the forces underlying this phenomenon. Until we address what is drawing students to investment banking — and what is driving them once they get there — the brain drain to Wall Street won’t change, and Wall Street won’t, either.

Are the Incentives of Colleges Aligned With Social Welfare? - The over 4,000 American private and public colleges and universities compete fiercely for students, faculty, and grants, and constitute the most competitive system of higher education in the world that provides both high quality and low quality programs. American universities are a magnet for postgraduate, and increasingly also for undergraduate, students from other countries. These two facts suggest that American universities (like Posner I use the word university to stand also for colleges) are doing a very good job of catering to the interests of students the world over. More generally, American universities are pretty successful in producing higher education that contributes effectively to social welfare, given the public policies that impinge on their behavior. American public, private non-profit, and increasingly for-profit institutions of higher education compete hard for students and faculty. As a result, they offer a variety of courses, programs, and qualities of colleges and universities that range from a bare minimum program at many public community colleges to elite education at universities like Harvard, Stanford, and Chicago. These programs cater to students of varying qualities and with different interests. Students vote with their feet by choosing some institutions and programs over others, and by traveling long distances from other countries to attend American universities. This “voting” has made American universities responsive to the interests of students, which on the whole is a very good thing since these interests reflect changing job prospects and other changes in society.

Huge Gender College Degree Gap for Class of 2012 - The chart above shows the huge college degree gap by gender for the Class of 2012 (data here).  Women will earn a disproportionate share of college degrees at every level of higher education this year, and the gender disparity is expected to increase over the next decade, so that by 2021 women will earn 148 college degrees for every 100 degrees earned by men, with especially huge gender imbalances for associate's degrees (179 women for every 100 men) and master's degrees (154 women for every 100 men). And the huge gender inequity in higher education is nothing new, women have earned a majority of college degrees in every year since 1981, see chart below.  

Can the Colleges Be Saved? - The belief that college matters deeply is both implicit and ubiquitous. It dominates upper-middle-class and upper-class family strategies, it wins buyers for magazines that offer pointless and inaccurate university ratings, it generates income for college counselors, and it sustains alumni loyalty (genetics is destiny, a fellow professor told me thirty years ago, as we thought about which colleges our children might attend and realized that we might have sealed their possibilities by our own choices). Most important, it impels tens of thousands of students and their families to spend vast amounts of money every year. The belief that college matters very little is also ubiquitous: it echoes through the dingy mansions of American public discourse. We hear such a belief when Rick Santorum criticizes President Obama for trying to ensure that as many Americans as possible should attend college, and denounces universities as snobbish institutions, divorced from reality and focused on indoctrinating the young with left-wing dogmas; when the billionaire businessman Peter Thiel offers prizes for top-ranked students willing to drop out of college and try to succeed as entrepreneurs; when writers argue that the college premium in wages is overrated and the American concern with selective admissions rests on erroneous beliefs about the practical value of higher education.

The Political Obsession with College Education Has Created an Unsustainable College Tuition Bubble - From Jeff Jacoby in today's Boston Globe:  "To ensure that anyone who wants to go to college will be able to foot the bill, Washington has showered hundreds of billions of dollars into student aid of all kinds -- grants and loans, subsidized work-study jobs, tax credits and deductions. Today, that shower has become a monsoon. The College Board, which tracks each type of financial assistance in a comprehensive annual report, shows total federal aid soaring by more than $100 billion in the space of a single decade -- from $64 billion in 2000 to $169 billion in 2010. And what have we gotten for this vast investment in college affordability? Colleges that are more unaffordable than ever. Year in, year out, Washington bestows tuition aid on students and their families. Year in, year out, the cost of tuition surges, galloping well ahead of inflation (see chart above). And year in, year out, politicians vie to outdo each other in promising still more public subsidies that will keep higher education within reach of all. Does it never occur to them that there might be a cause-and-effect relationship between the skyrocketing aid and the skyrocketing price of a college education? That all those grants and loans and tax credits aren't containing the fire, but fanning it?

Short-Term Fixes - New York Times editorial - Federally subsidized student loan rates were bound to become an election-year fight, since Congress provided only enough money for five years of low-interest rates in 2007. Now that the rates are about to double, both Democrats and Republicans are failing to do the right thing again.  Members of Congress from both parties say they want to prevent interest rates on subsidized Stafford student loans from going up in July, but they are fighting over how to pay for a solution. And by proposing quick-fix methods to pay for only a year’s worth of loan subsidies, both parties suggest they are not really serious about helping students afford college.  The Republican proposal, passed by the House last week, is unquestionably worse than the Democrats’ plan. To cover the $6 billion cost of keeping interest rates at 3.4 percent for a year, it would eliminate a farsighted fund established by the health care reform law to help states and communities prevent obesity, heart disease, diabetes, cancer and infectious diseases, among other ailments.  The Republicans never see any reason to offset the cost of tax cuts for the rich, but are always happy to raid “Obamacare” to pay for something that helps needy people, correctly guessing that the president would threaten to veto a bill because he wants to avoid paying their ransom price.

NS: Unfunded liability $511 million for teachers - The trustees for the Nova Scotia teachers pension plan say volatile world markets contributed to a $511 million growth in the plan’s unfunded liability last year. The annual report released Friday by the Nova Scotia Pension Agency says the unfunded liability for the plan is $1.65 billion as of Dec. 31, 2011. Diminished investment returns accounted for nearly half of the increase to the unfunded liability, said John Carter, chairman of the Nova Scotia Teachers Pension Plan Trustee Inc. Carter said record low interest rates also played a part in reducing the plan’s unfunded ratio. He said as a result, the trustees are looking at ways to improve the plan’s long-term health, although it is not at risk of running out of cash.

Facing Bankruptcy, Providence, R.I., Curbs Pensions - Providence, Rhode Island’s biggest city, will halt cost-of-living increases for retirees among steps to overhaul a $422.8 million pension system and avoid becoming the state’s second municipal bankruptcy. Less than three months after Mayor Angel Taveras said Providence stood on the “brink of bankruptcy,” the City Council yesterday voted 13-0 for changes that save almost $19 million a year, partly by capping benefits, according to Jake Bissaillon, the council’s staff chief. While Taveras backs the overhaul, Paul Doughty, who leads the local firefighters union, called it “a huge mistake” that will be challenged in court. Rhode Island, which had the ninth-highest jobless rate in the U.S. in February, authorized a similar overhaul of the state pension system last year, suspending cost-of-living increases and raising retirement ages for government workers and teachers. Retiree benefits have been in the spotlight since August when Central Falls, the state’s smallest city, declared bankruptcy after being overwhelmed by pension promises.

Providence Would be Devastated if Courts Block Pension Reform -The capital city will find itself back on the brink of bankruptcy if efforts to slash its unfunded pension liability by more than $236 million are overturned in court, a scenario that could put all retirees and city residents at risk, several Council members and economists said Wednesday. The warnings came after Robert Jarvis, the President of the Providence Retired Police and Firefighter Association (PRPA), claimed the city rejected his group’s offer to save the city $7.5 million annually by eliminating five and six percent cost-of-living adjustments (COLAs) for just under 600 retirees and by settling a lawsuit that would place retirees over 65 on Medicare. “The pension reform ordinance passed by the Providence City Council and signed by the Mayor this week is imperative to righting the city's financial ship,” said City Councilman David Salvatore, who is credited with leading the way on the city’s reform efforts. “If it is not fully implemented for any reason, then the fiscal health of the City, including its residents, employees and retirees, is in jeopardy. This new ordinance represents comprehensive pension reform that is in the best interest of everyone.”

Americans expect to work longer, retire later - If the date you expect to retire seems to be getting further away rather than closer at hand, join the club. The average age at which Americans expect to retire has been steadily creeping up since the mid-1990s, and has now reached 67 years old, according to a new Gallup poll. That’s up significantly from 1996, when people expected to retire at age 60. The results are consistent with other recent research into the topic, and show that Americans’ retirement plans have been dealt a significant blow thanks to the recession, financial crisis, high unemployment and housing bust. Still, younger workers are more optimistic than their older peers. Gallup’s annual Economy and Personal Finance survey, which was conducted in mid-April, found that people who are currently under age 40 expect to retire at age 65. Those who are 40 and over, and not yet retired, expect to retire at 68. As with many things, the expectation is outpacing the reality. Among retirees, Gallup found that the average age of retirement has held steady at around 60 since 2004, although that’s up from 57 in the early 1990s.

Job Insecurity, Debt Weigh on Retirement Confidence, Savings - Executive Summary Points:

  • Americans’ confidence in their ability to retire comfortably is stagnant at historically low levels. Just 14 percent are very confident they will have enough money to live comfortably in retirement (statistically equivalent to the low of 13 percent measured in 2011 and 2009).
  • Employment insecurity looms large: Forty-two percent identify job uncertainty as the most pressing financial issue facing most Americans today.
  • Worker confidence about having enough money to pay for medical expenses and long-term care expenses in retirement remains well below their confidence levels for paying basic expenses.
  • Many workers report they have virtually no savings and investments. In total, 60 percent of workers report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000.
  • Retirees report they are significantly more reliant on Social Security as a major source of their retirement income than current workers expect to be.
  • Although 56 percent of workers expect to receive benefits from a defined benefit plan in retirement, only 33 percent report that they and/or their spouse currently have such a benefit with a current or previous employer.
  • More than half of workers (56 percent) report they and/or their spouse have not tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement.
80 is the new 65 - A quarter of middle-class Americans are now so pessimistic about their savings that they are planning to delay retirement until they are at least 80 years old -- two years longer than the average person is even expected to live. It sounds depressing, but for many it's a necessity. On average, Americans have only saved a mere 7% of the retirement nest egg they were hoping to build, according to Wells Fargo's latest retirement survey that polled 1,500 middle-class Americans. While respondents (whose ages ranged from 20 to 80) had median savings of only $25,000, their median retirement savings goal was $350,000. And 30% of people in their 60s -- right around the traditional retirement age of 65 -- that were surveyed had saved less than $25,000 for retirement. As a result, many people aren't in a hurry to quit their day jobs.Three-fourths of middle-class Americans expect to work throughout retirement. And this includes the 25% of Americans who say they will "need to work until at least age 80" before being able to retire comfortably.

Retirement, Slipping Farther and Farther Away - Over the last decade and a half, Americans’ expected retirement age has slowly risen to 67 from 60, according to a new Gallup survey.. If a standard retirement age of 60 sounds relatively low, remember that the economy was booming in the 1990s and Americans’ savings were being inflated by the tech bubble. That’s about the time when housing prices began to skyrocket, which also made homeowners feel particularly wealthy. Since then, of course, both the dot-com and housing bubbles have burst. Americans have been putting their money where their mouths are, so to speak, and have been working longer and longer in recent decades. In 1996, for example, 45.8 percent of workers ages 60 to 64 were either working or looking for work. Last year, the figure was 54.5 percent. Labor force participation rates have risen for other segments of older Americans, too. While more people in their 60s and 70s want to work, the share of those older workers who have found jobs has fallen. Last year, 6.8 percent of workers 60 to 64 were unemployed. That compares with less than 3 percent in the late 1990s.

If it's so easy to fix it, fix it - THE first time someone said to me that serious concern about the future of Social Security was over-blown, right-wing-hype and that fixing it could be put off several decades I was speechless. Now I just feel sad to be hearing it more. The state of Social Security is a problem worthy of our attention. There are several relatively simple solutions. The sooner America takes action the cheaper a fix will be. True, health care poses a bigger fiscal problem; that does not justify ignoring Social Security. One doesn't ignore a broken leg because he has cancer. And true, even if America does nothing until 2033, when the trust fund runs out and revenue fails to cover benefits, it will probably not bankrupt the country. But that is also no excuse to ignore the problem; it merely punts it to future generations.According to the Social Security Administration actuary’s latest projections, if the payroll tax was increased by 2.67 percentage points now Social Security would be on firm financial footing for the next 75 years. There are better ways to reform Social Security than a simple, immediate increase in the payroll tax, but the tax figure is a good indication of the costs involved. But if we ignore the problem until the money runs out, future workers will see their taxes increase by more than 4 percentage points in 2035. Tax-payers face a 4.7 percentage-point increase in 2086.

A glimpse into Medicaid’s future A short while ago, I argued that it would be very difficult to cut Medicaid without significantly attacking benefits, beneficiaries, or physician reimbursements:Make no mistake about it, under the block grant plan in the budget proposal approved by the House, states must innovate. Even if the ACA’s Medicaid expansion were eliminated, the House budget would reduce federal Medicaid spending by $163 billion in 2022. That’s a 34% reduction 10 years from now. How can states possibly account for that difference? Where’s the magic in innovation? If states refuse to cut benefits and spend the same per enrollee, then even if the Medicaid expansion of the ACA never takes place, an additional 19 million people need to be dropped from the 2021 Medicaid rolls to meet budget cuts. Yesterday at Politico, Matt Dobias gave us a glimpse of how “innovation” might occur: House Republicans want to stop rewarding states for finding and enrolling low-income children in Medicaid and the Children’s Health Insurance Program, and public health advocates are livid. The Republicans say it’s a smart fiscal move that will better protect the program against fraud; their critics say it’s undermining years of progress states have made in identifying and enrolling a hard to serve population…

VIDEO: Payroll Taxes and the Medicare Trust Fund

In Hopeful Sign, Health Spending Is Flattening Out - The growth of health spending has slowed substantially in the last few years, surprising experts and offering some fuel for optimism about the federal government’s long-term fiscal performance. Much of the slowdown is because of the recession, and thus not unexpected, health experts say. But some of it seems to be attributable to changing behavior by consumers and providers of health care — meaning that the lower rates of growth might persist even as the economy picks up. Because Medicare and Medicaid are two of the largest contributors to the country’s long-term debts, slower growth in health costs could reduce the pressure for enormous spending cuts or tax increases. In 2009 and 2010, total nationwide health care spending grew less than 4 percent per year, the slowest annual pace in more than five decades, according to the latest numbers from the Centers for Medicaid and Medicare Services. After years of taking up a growing share of economic activity, health spending held steady in 2010, at 17.9 percent of the gross domestic product. The growth rate mostly slowed as millions of Americans lost insurance coverage along with their jobs. Worried about job security, others may have feared taking time off work for doctor’s visits or surgical procedures, or skipped nonurgent care when money was tight. Still, the slowdown was sharper than health economists expected.

Health Care Thoughts: Employer PPACA Options, More Analysis - One of the more suspenseful issues of PPACA (aka Obamacare) is the question of employer conduct in 2014 and after.   Question is, will employers drop health insurance and punt workers into the state exchange system? Some new perspectives have been added to the debate. (Both assume PPACA will not be repealed or materially altered before 2014, an issue to be settled by the 2012 election). The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) have weighed in on the question (  . (Warning, very long) This report tries to cover multiple options and scenarios, but I think it comes to a Goldilocks conclusion, not to hot and not too cold, but something in the middle of the range of possibilities.  A McKinsey and Company (MC) study reaches much different conclusions. McKinsey sees up to 30% of employers dropping employer–sponsored insurance (ESI), and perhaps more as awareness spreads and 2014 approaches. MC also suggests exploration of any number of employer options, some good for employees, some not.  My spin? If the labor market remains weak, and underemployment and limited employee options continue, more employers will drop ESI and employees will have little so say or do about it. There is a lot to digest here. More analysis required.

Opposition to the Mandate - So, one thing has continually troubled me throughout the health care debate, and this is the consistent polling showing opposition to the individual mandate. It's taken me a while, but I think that I have finally figured this out. THIS article reviewing data from the AFLAC Workforces Report shows that we are doing a terrible job in educating our public on health concerns. six out of ten workers (62 percent) think it's not very or not at all likely they or a family member will be diagnosed with a serious illness like cancer, and more than half (55 percent) said they were not very or not at all likely to be diagnosed with a chronic illness, such as heart disease or diabetes. But of course, this is not reality. This fundamental disconnect as the article notes, is more than simply problematic.. Americans may be overly optimistic when it comes to thinking they won't ever be diagnosed with a serious illness or experience an accident. one in three women and one in two men will be diagnosed with cancer at some point in their lives, and themore than 38.9 million medically consulted injuries occur in a year.

How Overpriced is US Health Insurance? - This chart says it all. The medical-industrial complex and American policymakers should be ashamed. Hat tip Business Insider.

US Health Care Still Radically More Expensive Yet Not More Effective - Health care costs in the United States continue to radically exceed those in any other industrialized nation, yet we don’t get better health care outcomes as a result; this, a basic finding of a new report from the Commonwealth Fund. The report found that in 2009 the United States spent nearly $8,000 per capita. That is a third more than the second most expensive countries, Switzerland and Norway, and roughly twice the amount your average industrialized nation spends. While some try to blame the incredibly high cost of American health care on having an unhealthy population or using too much health care, the fact is America is relatively young and has extremely low smoker rates. In addition, Americans don’t use much care relatively speaking. From the Report:Another commonly assumed explanation for higher U.S. health care spending is that the utilization or supply of health care services in the U.S. must be greater than in other countries. OECD data suggest, however, that this  assumption is unfounded, at least when it comes to physician and hospital services. There were 2.4 physicians per 100,000 population in the U.S. in 2009, fewer than in all other study countries except Japan. Likewise, patients had fewer doctor consultations in the U.S. (3.9 per capita) than in any other country except Sweden (Exhibit 4).

Health reform law to yield $1.3 billion in insurance rebates - U.S. consumers and employers will receive about $1.3 billion in rebates from insurance companies this year, according to a new study quantifying a key early benefit of the health care law that President Barack Obama signed in 2010. That will translate to anywhere between a few dollars and more than $150 for nearly 16 million consumers nationwide, the report by the nonprofit Kaiser Family Foundation found. Obama's health care law requires insurers to spend a minimum portion of customers' premiums on medical care. The provision was championed by consumer groups concerned that companies were hiking premiums to pay for executive salaries, shareholder dividends and other expenses unrelated to customers' care. Starting last year, if insurers fail to meet these targets, known as medical loss ratios, they are required to pay rebates the following year. In some cases, the rebates will go only to employers, which may pass them on to employees as rebate checks. The Kaiser study, released Thursday, analyzed rate documents filed with state regulators nationwide. The Obama administration, which is still laboring to persuade a wary public to support the landmark law, was quick to point to the study and remind the public about the new legal requirements.

Regulating Banking, Regulating Healthcare - I want to return to a point made here before. The regulation of health care in the United States is following, by fits and starts, the same pattern as did the regulation of the banking industry a century ago – and for many of the same reasons.  Competition among the various industries that make up the sector – they add up to as much as a quarter of the economy – has become destructive. Eventually, health care providers – physicians, hospitals, pharmaceutical companies, medical device makers and insurers – can be expected to quietly caucus with their Congressional overseers and design a broadly acceptable arrangement, much as bankers did in the years leading up to the creation of the Fed. They’ll follow the outlines of an approach sketched by former Sen. Tom Daschle, chief advocate of the legislative restructuring strategy that President Barack Obama adopted in 2009. One big difference between the banking industry and the health care complex is the presence in the latter of the private insurance industry.  This is an accident of history, a consequence of the adoption of a private, employer-based system during World War II. For a time after the war, Blue Cross and Blue Shield organizations covered all comers at a single price .But private insurance companies soon entered the market and, offering lower premiums to younger, healthier people, commenced the cream-skimming process that continues to the present day.

Large-Scale Analysis Finds Majority of Clinical Trials Don’t Provide Meaningful Evidence - The largest comprehensive analysis of finds that clinical trials are falling short of producing high-quality evidence needed to guide medical decision-making. The analysis, published May 1 in the Journal of the American Medical Association, found the majority of clinical trials is small, and there are significant differences among methodical approaches, including randomizing, blinding and the use of data monitoring committees. "Our analysis raises questions about the best methods for generating evidence, as well as the capacity of the clinical trials enterprise to supply sufficient amounts of high quality evidence to ensure confidence in guideline recommendations," The analysis was conducted by the Clinical Trials Transformation Initiative (CTTI), a public-private partnership founded by the Food and Drug Administration (FDA) and Duke. It extends the usability of the data in for research by placing the data through September 27, 2010 into a database structured to facilitate aggregate analysis. This publically accessible database facilitates the assessment of the clinical trials enterprise in a more comprehensive manner than ever before and enables the identification of trends by study type.

Things That Will Change the World - Overcoming spinal chord injuries (I learned a lot about the spinal chord from the first segment, e.g. the systems that control walking are at the base of the spinal column, the brain has little to do with it), remote brain controlled mechanical hands, self-directed robots, and so on: Speakers:

  • Joel Burdick, Professor of Mechanical Engineering and Professor of Bioengineering, California Institute of Technology
  • Nathan Michael, Research Assistant Professor, Department of Mechanical Engineering and Applied Mechanics, University of Pennsylvania
  • Jay Schnitzer, Director, Defense Sciences Office, Defense Advanced Research Projects Agency

Study: Life expectancies in much of U.S. compare with those in poorest nations - While life expectancies in some parts of the U.S. match those of the healthiest nations on earth, in vast swaths of this country preschoolers can expect to live no longer than their peers in some of the poorest and most strife-ridden parts of the world. That holds true in the Kansas City area, where life expectancies in Johnson County match those of Switzerland and Sweden, while those in Wyandotte County are more like what’s found in Libya or Sri Lanka. Jackson County life expectancies compare to those in Mexico and Uruguay, and Clay County’s to those in Cuba. “What are we getting for our health care dollar if we’re spending more per capita than any other country and we have the life expectancies of countries that are reeling from civil wars or natural disasters?” asked William Heisel of the Institute for Health Metrics and Evaluation. “By many measures, we should have better outcomes.” The institute, based at the University of Washington, compiled data on every county in the U.S. to calculate life expectancy each year from 1989 through 2009. It also compared county life expectancies to those in other countries.

World Food Prices Moved Lower in April - World food prices fell in April following three consecutive months of gains, pressured by declines in sugar, dairy and cereal prices that offset increases in oils and meat, the United Nations’ Food and Agriculture Organization said Thursday, but it warned that soybeans and corn could still drive prices higher later this year. Food price inflation climbed toward the top of the international agenda after hitting successive record highs in the early part of last year amid global supply concerns for cereals, sugar and cocoa. Rising food prices were also partly cited for sparking unrest that saw the leaders of Tunisia, Egypt and Libya fall. The FAO’s food price index, which measures the monthly change in international prices of a basket of food commodities, averaged 214 points in April, down three points, or 1.4%, from March. Although the index is significantly lower than record levels posted in April 2011, it remains far above the sub-200 figures that occurred before the 2008 food crisis, highlighted the FAO.

How Big Food won the childhood obesity war - In the political arena, one side is winning the war on child obesity. The side with the fattest wallets. After aggressive lobbying, Congress declared pizza a vegetable to protect it from a nutritional overhaul of the school lunch program this year. The White House kept silent last year as Congress killed a plan by four federal agencies to reduce sugar, salt and fat in food marketed to children. And during the past two years, each of the 24 states and five cities that considered "soda taxes" to discourage consumption of sugary drinks has seen the efforts dropped or defeated. At every level of government, the food and beverage industries won fight after fight during the last decade. They have never lost a significant political battle in the United States despite mounting scientific evidence of the role of unhealthy food and children's marketing in obesity. Lobbying records analyzed by Reuters reveal that the industries more than doubled their spending in Washington during the past three years. In the process, they largely dominated policymaking -- pledging voluntary action while defeating government proposals aimed at changing the nation's diet, dozens of interviews show.

As America's waistline expands, costs soar - U.S. hospitals are ripping out wall-mounted toilets and replacing them with floor models to better support obese patients. The Federal Transit Administration wants buses to be tested for the impact of heavier riders on steering and braking. Cars are burning nearly a billion gallons of gasoline more a year than if passengers weighed what they did in 1960. The nation's rising rate of obesity has been well-chronicled. But businesses, governments and individuals are only now coming to grips with the costs of those extra pounds, many of which are even greater than believed only a few years ago: The additional medical spending due to obesity is double previous estimates and exceeds even those of smoking, a new study shows. Many of those costs have dollar signs in front of them, such as the higher health insurance premiums everyone pays to cover those extra medical costs. Other changes, often cost-neutral, are coming to the built environment in the form of wider seats in public places from sports stadiums to bus stops.  Now, as economists put a price tag on sky-high body mass indexes (BMIs), policymakers as well as the private sector are mobilizing to find solutions to the obesity epidemic.

How Chemicals Affect Us - Scientists are observing with increasing alarm that some very common hormone-mimicking chemicals can have grotesque effects.  A widely used herbicide acts as a female hormone and feminizes male animals in the wild. Thus male frogs can have female organs1, and some male fish actually produce eggs. In a Florida lake contaminated by these chemicals, male alligators have tiny penises.  These days there is also growing evidence linking this class of chemicals to problems in humans. These include breast cancer, infertility, low sperm counts, genital deformities, early menstruation and even diabetes and obesity.  Philip Landrigan, a professor of pediatrics at Mount Sinai School of Medicine, says that a congenital defect called hypospadias — a misplacement of the urethra — is now twice as common among newborn boys as it used to be. He suspects endocrine disruptors, so called because they can wreak havoc with the endocrine system that governs hormones.  Endocrine disruptors are everywhere. They’re in thermal receipts that come out of gas pumps and A.T.M.’s. They’re in canned foods, cosmetics, plastics and food packaging. Test your blood or urine, and you’ll surely find them there, as well as in human breast milk and in cord blood of newborn babies.

Why You Should Be Worried About the California Mad Cow Case - Move along, nothing to see here. That sums up the USDA's public reaction to news that a downed California dairy cow was discovered to have contracted bovine spongiform encephalopathy, also known as mad cow disease. The cow had an "atypical" case of BSE, one that likely doesn't come from BSE-infected feed, but rather from a genetic mutation, the agency insists.USDA chief Tom Vilsack, ever ready to jump to the meat industry's aid at a time of need, declared on CNN, "I'm having beef tonight for dinner. And that's no lie." Global food and health agencies echoed the USDA's assessment, Bloomberg reports: "The U.S. finding of a case of mad cow disease shows the country’s surveillance system is working, according to the United Nations' Food & Agriculture Organization and the World Organisation for Animal Health."

Pink Slime and Mad Cow Just the Tip of the Iceberg - Following on the heels of pink slime, mad cow disease (AKA bovine spongiform encephalopathy—or BSE) is back this week after a California dairy cow destined for a rendering plant that makes pet food was found to have the disease. So far, it looks like the beef industry is playing down the finding, hoping to dodge a loss in sales at home and abroad. The U.S. Department of Agriculture was quick to tell Americans that our food supply is entirely safe. But the re-emergence of mad cow and the conversation around pink slime has re-opened questions about our food system. It has exposed how food safety falls inevitably through the cracks in a country where over 9 billion animals are being slaughtered per year and budgets for the departments that oversee these processes are being slashed. The incredible media coverage of both issues reflects a growing consumer interest in more transparency in what we’re eating and how it’s being produced. While this is only the fourth case of mad cow in the U.S. to date, experts argue that finding it this time was a stroke of luck. Of the 34 million cows we slaughter annually in the U.S., 40,000 are being tested by USDA for the disease, down from nearly 500,000 in 2005—about one tenth of one percent.

Will GMO labeling have its day in court? - It appears as if organizers have gathered enough signatures to put an initiative on the November ballot in California which would require the labeling of genetically engineered foods. Of all the efforts to date to mandate such labeling, this initiative seems most likely to succeed in a state known for its health consciousness and its widespread organic agriculture (which doesn't permit genetically engineered crops). But passage of the California initiative would almost certainly lead to a court battle as major producers of genetically engineered seeds seek to have the new law invalidated. We know this because the Monsanto Company, the largest purveyor of genetically modified seeds, threatened the state of Vermont with a lawsuit should its legislature pass a genetically modified organism (GMO) labeling bill. Though passed 9 to 1 by Vermont's House Agriculture Committee, the bill is likely to die because the legislature goes out of session shortly, too soon, it seems, for the full House to act. Next door Connecticut is moving a similar bill, the fate of which remains open. Labeling is an existential issue for the GMO industry. Where labeling exists such as in Europe, there is virtually no demand for genetically modified foods. Consumers do not want them.

New genetically modified crops could make superweeds even stronger - Herbicide-resistant superweeds threaten to overgrow U.S. fields, so agriculture companies have genetically engineered a new generation of plants to withstand heavy doses of multiple, extra-toxic weed-killing chemicals. It’s a more intensive version of the same approach that made the resistant superweeds such a problem — and some scientists think it will fuel the evolution of the worst superweeds yet. These weeds may go a step further than merely being able to survive one or two or three specific weedkillers. The intense chemical pressure could cause them to evolve resistance that would apply to entire classes of chemicals. “The kind of resistance we’ll select for with these kinds of crops will be different from what we’ve seen in the past,” said agroecologist Bruce Maxwell of Montana State University. “They’ll select a kind of resistance that’s more metabolism-based, and likely resistant to everything.”Next-generation biotech crops erupted into controversy with the U.S. Department of Agriculture’s ongoing review of Enlist, a Dow-manufactured corn variety endowed with genes that let it tolerate high doses of both glyphosate, an industry-standard herbicide better known as Roundup, and a decades-old herbicide called 2,4-D.

Mosquitoes Shoot Blanks in Scientist’s Air War on Dengue - U.K. biotechnology start-up Oxitec Ltd. wants to start U.S. tests of a new weapon in the war on dengue fever: genetically modifying mosquitoes that carry the disease so that their progeny self-destruct. Dengue, endemic in more than 100 countries, has begun to appear in the continental U.S., with local cases occurring in Key West, Florida, in 2009 and 2010 and in Miami last year. The virus afflicts as many as 100 million people a year globally, about 20 times the number of serious influenza cases, according to the World Health Organization. In its worst form, dengue can cause severe flu-like symptoms and fatal bleeding. Oxitec has released its GM bugs in Malaysia, the Cayman Islands and Brazil. A proposed trial in Key West has met with resistance from communities who oppose genetic modification and with confusion over regulatory oversight. Still, with no vaccines to prevent dengue and no drugs to treat the disease so painful it’s known as “break-bone fever,” the approach is seen as an increasingly viable option to limit infections. 

Flooding Spreads Invasive Species In Vermont, Iowa, Louisiana: Last year's hurricanes and flooding not only engulfed homes and carried away roads and bridges in hard-hit areas of the country, it dispersed aggressive invasive species as well. In Vermont, the floodwaters from Tropical Storm Irene and work afterward to dredge rivers and remove debris spread fragments of Japanese knotweed, a plant that threatens to take over flood plains wiped clean by the August storm. The overflowing Missouri and Mississippi rivers last year launched Asian carp into lakes and oxbows where the fish had not been seen before, from Iowa to the Iowa Great Lakes. Flooding also increased the population along the Missouri River of purple loosestrife, a plant that suppresses native plants and alters wetlands. "It's quite an extensive problem around the country and it's spreading," said Linda Nelson, aquatic invasive species expert with the U.S. Army Corps of Engineers. The agency's budget for controlling invasive aquatic plants has grown from $124 million in 2008 to $135 million for fiscal year 2012.

I prefer to call them Gulf Coast Sweet Prawns The influx of the jumbo-sized shrimp (which look more like a small lobster than the little pink crustaceans you see at the grocery store) has increased 10 times in the last year, according to a report from the USGS—from 32 in 2010 to 331 in 2011. The shrimp-eating shrimp have been spotted in waters from North Carolina to Texas. The black-and-white striped sea creatures have shown up in the Gulf of Mexico and southeast coast and, unlike their bottom-feeding cousins, are big enough—up to 13 inches long and up to a quarter-pound—to gobble up smaller shrimp. via Here is my solution to any aquatic invasive specie problem. Have the government start a covert marketing campaign designed to convince the public that the invasive specie is in fact a delicacy. They can even rename the specie to make it sound appetizing (think Toothfish to Chilean Sea Bass). But here's the catch... once the public is convinced of the delectable nature of the new exotic seafood, fail to regulate the fishery. As demand increases, prices will rise and the tragedy of the commons will eradicate the invaders. Sometimes the answers are just staring us in the face.

BBC: April is the wettest in 100 years - It has been the wettest April in the UK for over 100 years, with some areas seeing three times their usual average, figures from the Met Office show.  Some 121.8mm of rain has fallen, beating the previous record of 120.3mm which was set in 2000. Flood warnings are in place with up to 20mm to 30mm of rain forecast for southern England on Monday night.

Moscow swelters in record heat - Moscow sweltered in unseasonable heat on Sunday, with temperatures of nearly 29 degrees Celsius (84.2 Fahrenheit), a record for April since data collection began 130 years ago, authorities said. At 4:00 p.m. (1200 GMT), the temperature reached 28.6 degrees Celsius, an absolute record for the month of April,” an official from the Russian capital’s weather service told the Interfax news agency. “The previous record for the month goes back to April 24, 1950, with 28 degrees,” he added. The mercury had already climbed to 26.3 degrees on Saturday. Several central and eastern European countries recorded unseasonably high temperatures on Saturday, with a record 32 degrees recorded in northern Austria.

U.S. Seasonal Drought Outlook for May 3 to July 31 (Text) The Drought Outlook for May 3 - July 31, 2012 is based on short-, medium-, and long-range forecasts, initial conditions, and climatology. Since the release of the previous Drought Outlook issued on April 19, 2012, a slight expansion of drought occurred in the Tennessee Valley and lower Ohio Valley while drought conditions intensified across the interior Southeast. In contrast, drought improvement is noted across southern New England and southeast Florida. Since precipitation signals are weak on the seasonal time scale, this outlook is based primarily on short to medium range forecasts and climatology. Some improvement is forecast along the East Coast with improvement most likely across the south-central Florida peninsula. The protracted drought across Georgia and South Carolina is expected to persist. Persistence is also forecast in northeast Minnesota, but prospects for improvement increase farther south in southern Minnesota and northern Iowa. Some improvement can be expected across the drought areas of the central and southern high Plains, while drought is expected to persist or expand across parts of the West along with western and south-central Texas. A drier climatology supports persistence in Hawaii.

Arab Grain Imports Rising Rapidly - The Arab countries in the Middle East and North Africa make up only 5 percent of the world’s population, yet they take in more than 20 percent of the world’s grain exports. Imports to the region have jumped from 30 million tons of grain in 1990 to nearly 70 million tons in 2011. Now imported grain accounts for nearly 60 percent of regional grain consumption. With water scarce, arable land limited, and production stagnating, grain imports are likely to continue rising. Egypt is the largest grain producer in the Arab world, accounting for almost 40 percent of the region’s harvest. Its grain production has doubled over the last 20 years. But because nearly all of the country’s available freshwater and arable land is already used for agriculture, further expansion of the grain harvest is unlikely. In the 1980s, Saudi Arabia began pumping fossil water from deep underground, allowing it to farm the desert. By subsidizing wheat production at several times the world price, Saudi Arabia became the second largest Arab wheat producer in the early 1990s. At its peak, Saudi Arabia harvested more than twice the wheat it consumed, exporting the excess. But with the underground water supplies nearly depleted, wheat production has plummeted. By 2016, Saudi Arabia plans to phase out wheat production entirely. In a span of 25 years, the country will have gone from exporting wheat to relying exclusively on imports.

Water Part V: When Oil And Water Mix - In this column, the fifth and final installment on water, I want to draw your attention to some noteworthy parallels between petroleum and fresh water. By the time that the Industrial Age began in 1850 the earth had accumulated tremendous reserves of solar energy (oil) and water below ground (sub-surface aquifers). As a quick review, it is important to understand that oil is a storage medium for solar energy. Ancient algae and bacteria captured solar energy via photosynthesis and stored this energy in the chemical bonds of the molecules which made up their bodies. They then fell to the bottom of the body of water in which they lived, were buried deeply as a result of the movement of tectonic plates, and converted into liquid petroleum over time in the high-pressure, high-temperature environment underground. When we burn petroleum products like gasoline and diesel, we release the original solar energy previously captured by the algae and bacteria. At the dawn of the industrial age, this solar energy storage process had been creating our petroleum reserve over a period of approximately 300 million years. In a somewhat analogous way to petroleum, Mother Nature was also storing extra water underground. As rain seeps into the ground, some of it accumulates in porous underground structures. Humans have been tapping into these reserves for water wells for thousands of years, but until the Industrial Revolution brought improved pumps, we did not exploit underground aquifers in a significant way.

41% of Americans Live in Counties with Dangerous Levels of Air Pollution - Today, the American Lung Association released its State of the Air 2012 report, on the quality of the air in the U.S., and as these things tend to go, the good news is always tempered with some bad. Let's go ahead and get the bad out of the way. For the time period from 2008 to 2010, 41 percent of Americans -- that's a full 127 million -- lived in counties with "unhealthful levels of either ozone or particle pollution" -- the first being an invisible gas responsible for 3,700 deaths in the U.S. annually, according to one study; the second being cough-inducing soot hanging in the air that casts a haze over some cities. What does "unhealthy" mean in this context? As the association's Janice Nolen put it to the Huffington Post, "we are not yet at the point where we're providing air that doesn't send people to the emergency room," with those most at risk being the usual suspects: the young, the elderly, the poor (who tend to live in polluted areas), and those with lung or heart disease. Of course, well-intentioned people can set different standards for what constitutes air pollution, so what pertinent in these reports is how the levels of pollution fluctuate year to year. And here we see good news. In 2007-2009, 50.3 percent of Americans were living in areas with dangerous air pollution. In 2006-2008, 58 percent were. So there's improvement, which the ALA is quick to politicize by crediting the Clean Air Act right at the top of its findings. That's the bill, which George H.W. Bush once called one of his greatest legislative accomplishments, that current House Republicans are currently trying to defang.

The 10 Most Polluted Cities in the Nation - There's a pretty good chance you live in a city with air that's so polluted it's often unhealthy to breathe. Yes, you. 41% of Americans do. That's 127 million people. The American Lung Association just released its annual 'State of the Air' report, which breaks down the most polluted cities in the nation. As usual, most of them can be found in California's Central Valley. Here are the three different 'top ten' lists, according to the different kinds of pollution:

Scientists warn of far more plastic waste than previously estimated found deeper in the ocean - There is far more plastic in the world’s oceans that previously thought, scientists claimed today. Researchers believe current estimates vastly underestimate the figures because they only look at the ocean surface. Plastic waste can wreak havoc on oceans, harming fish and other organisms that ingest it, and possibly even degrading a fish's liver.It also acts as a carrier for bacteria, spreading it across oceans. The latest claim was made by University of Washington oceanographer Giora Proskurowski who noticed the issue when on a research cruise in the Pacific Ocean. He saw the water surface was littered with tiny bits of plastic -- until the wind suddenly picked up and the plastic 'disappeared.' Taking water samples from 16 feet he discovered the wind was pushing the lightweight plastic particles below the surface. In 2010, the team collected water samples at various depths in the North Atlantic Ocean. 'Almost every subsurface tow we took had plastic in the net,' Proskurowski said. 

'Warming Hole' Delayed Climate Change Over Eastern United States - Climate scientists at the Harvard School of Engineering and Applied Sciences (SEAS) have discovered that particulate pollution in the late 20th century created a "warming hole" over the eastern United States -- that is, a cold patch where the effects of global warming were temporarily obscured. While greenhouse gases like carbon dioxide and methane warm Earth's surface, tiny particles in the air can have the reverse effect on regional scales. "What we've shown is that particulate pollution over the eastern United States has delayed the warming that we would expect to see from increasing greenhouse gases," says lead author Eric Leibensperger (Ph.D. '11), who completed the work as a graduate student in applied physics at SEAS. "For the sake of protecting human health and reducing acid rain, we've now cut the emissions that lead to particulate pollution," he adds, "but these cuts have caused the greenhouse warming in this region to ramp up to match the global trend."

Big Changes in Ocean Salinity Intensifying Water Cycle - A paper in Science today finds rapidly changing ocean salinities as a result of a warming atmosphere have intensified the global water cycle (evaporation and precipitation) by an incredible 4 percent between 1950 and 2000. That's twice the rate predicted by models.  These same models have long forecast that dry areas of Earth will become drier and wet areas wetter in a warming climate—an intensification of the water cycle driven mostly by the capacity of warmer air to hold and redistribute more moisture in the form of water vapor. But the rate of intensification of the global water cycle is happening far faster than imagined: at about 8 percent per degree Celsius of ocean warming since 1950. At this rate, the authors calculate:

  • The global water cycle will intensify by a whopping 16 percent in a 2°C warmer world
  • The global water cycle will intensify by a frightening 24 percent in a 3°C warmer world

IEA warns of doubled CO2 emissions -- Global greenhouse gas emissions will nearly double by 2050 under current policies unless urgent action is taken, the International Energy Agency has warned. Issuing a stark assessment this week at a London environmental conference, the energy policy advisory group said failure to develop fossil fuel alternatives quickly will put the world on an irreversible course to a catastrophic long-term temperature increase of 6 degrees Celsius. "Under current policies, we estimate that energy use and (carbon dioxide) emissions would increase by a third by 2020, and almost double by 2050," said IEA Deputy Executive Director Richard Jones. "This would likely send global temperatures at least 6 degrees higher. Such an outcome would confront future generations with significant economic, environmental and energy security hardships," he added. The grim forecast was delivered at the third annual Clean Energy Ministerial, which brought together ministers from 23 governments for discussions on clean energy progress and opportunities. "It is my hope that they heed our warning of insufficient progress, and act to seize the security, economic and environmental benefits that a clean-energy transition can bring," Jones said.

Insurers Prepare for Climate Change…Except in U.S.: Insurance company executives are aware of the future risks posed by climate change. And yet they have been slow to prepare for the coming wave of weather-related accidents and litigation spawned by global warming changes. In a survey conducted by Ceres, a Boston-based coalition of investors and environmental groups, more than 75% of insurers acknowledged the existence of perils stemming from climate change. “Yet despite widespread recognition of the effects climate change will likely have on extreme events, few insurers were able to articulate a coherent plan to manage the risks and opportunities associated with climate change,” the Ceres report states. The Ceres study found that out of 88 U.S. insurance companies, only 11 had formal climate change risk policies and more than 60% had no dedicated management approach to assessing climate risks. Ben Schiller at Yale’s Environment 360 noted that while American insurance companies have been slow to prepare for global warming’s ramifications, their European counterparts have been getting ready for a potentially costly future.

Methane levels high above ESAS, March-April 2012 - Methane levels have been high above the East Siberian Arctic Shelf for both the months March and April 2012, as illustrated by the image below. 

Record levels of greenhouse gases in the Arctic - Carbon dioxide levels are at an all time high. The image below, with hourly averages, shows recent measurements that are well over 396 ppm. Formal figure for the week started April 22, 2012, is 396.61 ppm at Mauna Loa, Hawaii. The image below shows the atmospheric increase of CO2 over 280 ppm in weekly averages of CO2 observed at Mauna Loa. The preindustrial value of 280 ppm is close to the average of CO2 between 1000 and 1800 in an ice core from Law Dome, Antarctica. For comparison with pre-industrial times the Mauna Loa weekly data have been first deseasonalized by subtracting the observed average seasonal cycle, and then subtracting 280 ppm.  

Arts and minds - My heart keeps informing me, with its never-ending screams into my inner ears, that we must terminate this set of living arrangements before it kills us all. My brain, on the other hand, tells me it’s too late: Near-term extinction is locked in because of Fukushima (times 400 and change) and the climate-change result of exponential methane release in the Arctic. Both paths of horror indicate our species has a few decades at most, and they represent merely two of three paths to human extinction within a single human generation. Well, three I know about. There are doubtless others, including the deepening extinction crisis, but I’m trying to maintain my trademark optimism. And I’m certainly not depending on the people who claim to be in charge because I know they lost control years ago, even though they keep juggling chickens and chain saws in an effort to distract the masses.

Scientists' Arctic drilling plan aims to demystify undersea greenhouse gases - The oil and gas industry may be eyeing the energy riches under the Arctic Ocean, but scientists are even keener to start drilling in Canada's polar waters.They say the Beaufort Sea, in the western Canadian Arctic, holds clues to several environmental mysteries of global significance — chief among them why so much methane, a potent greenhouse gas, is now seeping out of the sea floor.  An international team is proposing an ambitious drilling program to extract some answers. Researchers from Canada, the United States, Europe and Korea want to drill a series of wells from the Mackenzie Delta across the Beaufort Sea. If approved, drilling could begin as early as 2015, the first holes bored into the Canadian Arctic in years.

Greenland glaciers shrinking quickly, but not worst case; ‘Glacial pace not slow anymore’ - Greenland’s glaciers are hemorrhaging ice at an increasingly faster rate but not at the breakneck pace that scientists once feared, a new study says. The loss of ice from the glaciers that cover the island is about 30 percent faster than it was a decade ago, researchers said. That means Greenland’s contribution to future sea level rise would be about 4 inches by the year 2100 if ice loss doesn’t speed up much more, a study author said.That may not sound like much, but when other causes of sea rise around the globe are added, the total could still be about 3 feet by the end of the century, researchers said. “’Glacial pace’ is not slow anymore,” said study author Twila Moon, a glacier researcher at the University of Washington. At the same time, “some of the worst-case possibilities that we had imagined are not coming true at this point,” Moon said. “So it’s not good news, but it’s not bad news.” The scientists relied on a comprehensive satellite-based survey of about 200 glaciers to make their calculations. Their research was published Thursday in the journal Science.

Lights Out for Research Satellites? - Earth-observing systems operated by the United States have entered a steep decline, imperiling the nation’s monitoring of weather, natural disasters and climate change, a report from the National Research Council warned on Wednesday. Long-running and new missions are frequently delayed, lost or cancelled because of budget cuts, launch failures, disorganization and changes in mission design and scope, the report said. In 2007, the research council, the working arm of the National Academies, issued a report highlighting research imperatives for the next decade and beyond for NASA, the National Oceanic and Atmospheric Administration and the United States Geological Survey, including the renewal of the Earth observations program. (The report issued on Wednesday was commissioned by NASA as a midterm assessment.) Although NASA responded favorably to the 2007 report, the committee said, the observational program’s budget has fallen short and changes in the program’s scope, overseen by the Office of Management and Budget and by Congress, have impeded progress.

Too Hot Not to Notice? - Bill McKibben - The Williams River was so languid and lovely last Saturday morning that it was almost impossible to imagine the violence with which it must have been running on August 28, 2011. And yet the evidence was all around: sand piled high on its banks, trees still scattered as if by a giant’s fist, and most obvious of all, a utilitarian temporary bridge where for 140 years a graceful covered bridge had spanned the water. The YouTube video of that bridge crashing into the raging river was Vermont’s iconic image from its worst disaster in memory, the record flooding that followed Hurricane Irene’s rampage through the state in August 2011.  It claimed dozens of lives, as it cut more than a billion-dollar swath of destruction across the eastern United States. I New data released last month by researchers at Yale and George Mason universities show that a lot of Americans are growing far more concerned about climate change, precisely because they’re drawing the links between freaky weather, a climate kicked off-kilter by a fossil-fuel guzzling civilization, and their own lives. After a year with a record number of multi-billion dollar weather disasters, seven in ten Americans now believe that “global warming is affecting the weather.” No less striking, 35% of the respondents reported that extreme weather had affected them personally in 2011.  As Yale’s Anthony Laiserowitz told the New York Times, “People are starting to connect the dots.”

Japan's Growing Carbon Footprint - As Japan shuts down nuclear power plants, what energy source will be used to produce its electricity?   This webpage claims that 14% of Japan's power is currently generated by nuclear plants.  If this 14% is now produced using natural gas power plants, we can do some arithmetic to calculate the marginal increment to climate change caused by extra greenhouse gas emissions. In 2008, Japan produced , 1,025,000,000,000 kWh of power. 14% of this = 143,500,000 MW of power Based on data from the U.S EGRID, the median natural gas power plant in the United States has a carbon emissions factor of 837 pounds of carbon dioxide per MW of power generated. So, this means that the transition of Japanese electricity production from nuclear to natural gas will increase annual carbon dioxide emissions by 143500000*837/2000 = 60 million tons of CO2 per year.

“A Staggering Mess” as Tsunami Debris Hits Alaska Coast Early -- Gulf of Alaska Keeper, a non-profit organization that estimates it has cleared nearly 1,000,000 pounds of plastic debris from Alaskan coasts over the past 10 years, is reporting “tons” of what it believes is likely tsunami debris washing up on the coasts of the Kayak and Montague islands. Chris Pallister, president of Gulf of Alaska Keeper, told Alaska’s KTUU TV that ““It’s a staggering mess [...] the magnitude of this is just hard to comprehend and I’ve been looking at this stuff a long time.” In an email to The SunBreak, Pallister let loose: In my opinion, this is the single greatest environmental pollution event that has ever hit the west coast of North America. The slow-motion aspects of it have fooled an unwitting public. It far exceeds the Santa Barbara or Exxon Valdez oil spills in gross tonnage and also geographic scope. Tens of thousands of miles of coastline from California to the Aleutian Islands are going to be hit with billions of pounds of toxic debris. NOAA’s latest estimate is that 1.5 million tons of largely plastic debris will hit the western United States coast.

Wind farms can cause climate change, finds new study  - Wind farms can cause climate change, according to new research, that shows for the first time the new technology is already pushing up temperatures. Usually at night the air closer to the ground becomes colder when the sun goes down and the earth cools. But on huge wind farms the motion of the turbines mixes the air higher in the atmosphere that is warmer, pushing up the overall temperature. Satellite data over a large area in Texas, that is now covered by four of the world's largest wind farms, found that over a decade the local temperature went up by almost 1C as more turbines are built. This could have long term effects on wildlife living in the immediate areas of larger wind farms. It could also affect regional weather patterns as warmer areas affect the formation of cloud and even wind speeds.

Bolivia seizes assets of Spanish power firm - Bolivia’s move to expropriate the local unit of a Spanish power grid operator, hard on the heels of Argentina’s recent takeover of YPF, sounds a warning to Spanish energy firms in Latin America and is yet another setback for the country’s embattled government, analysts said Wednesday. The loss is minor for REE, as the unit accounted for only 1.5% of total sales of EUR1.63 billion in 2011, but comes as a painful reminder that crisis-hit Spain is losing diplomatic clout after years in which Spanish companies expanded across the Americas, hailed as new conquistadors. Bolivian President Evo Morales Tuesday ordered armed forces to take over the facilities owned by Spanish power line monopoly Red Electrica Corp --20%-owned by Spain’s government--after claiming that not enough investment had been made in the country’s power grid. Spain’s government has criticized the Bolivian move, but at a lower pitch than recent denunciations of Argentina’s expropriation of the much bigger YPF, a gas and oil producer that was a key unit for former Spanish parent Repsol. Even the steps taken to punish Argentina, mostly in the shape of trade restrictions, have been widely seen as ineffective.

Bolivia Seizes Unit of Spanish Power Company Red Electrica - Bloomberg: Bolivia is nationalizing the local assets of Spain’s Red Electrica Corp. (REE), giving the government control of the Andean nation’s power grid two weeks after neighboring Argentina seized its biggest oil company. President Evo Morales signed the decree today, saying the Alcobendas, Spain-based company’s local investment was inadequate and energy should be controlled by the government, according to a statement on the presidential website. Bolivia generated 45.7 million euros ($60.4 million) in revenue for Red Electrica in 2011, less than 3 percent of total company sales.Morales, a 52-year-old ally of Venezuelan President Hugo Chavez, is echoing Argentine President Cristina Fernandez de Kirchner in citing underinvestment and strategic reasons for nationalizing the company. Fernandez seized oil producer YPF SA on April 16 from Madrid-based Repsol YPF SA. (YPFD) Since taking office in 2006, Morales has taken over gas fields, oil refineries, pension funds, telecommunications companies and a tin smelter to increase state control of the $20 billion economy.

U.S. blackout report cites lack of grid awareness - - A lack of awareness of real-time conditions on the western power grid last Sept. 8 -- rather than a single power-line problem -- was to blame for a blackout that left 2.7 million electric customers in southern California, Arizona and the Mexico border in the dark, watchdogs for the U.S. power grid said on Tuesday. A joint report from the Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Corp (NERC) recommended that transmission operators improve modeling of the western grid and coordination for emergencies between utilities. The seven-hour blackout forced flights to be canceled at San Diego International Airport, snarled traffic across the region and cut water supplies in some areas. The event started in the early afternoon of Sept. 8 with the loss of Arizona Public Service's 500-kilovolt Hassayampa-North Gila transmission line, but loss of the line did not cause the blackout that mostly affected customers of Sempra Energy, according to the joint report. The sequence of events that followed included the loss of 4,300 megawatts of generation, including the two-reactor San Onofre nuclear power station operated by Edison International's Southern California Edison utility.  Transmission operators had little idea of how problems on a neighbor's grid would impact their own, said Dave Nevius, NERC vice president. "Without a good model of your system and your neighbor's system, it's hard to handle something like this when it starts," Nevius said.

We’re half-assing the clean-energy transition - The International Energy Agency recently issued its annual progress report [PDF] on clean energy. Here’s the five-cent version: The transition to a low-carbon energy sector is affordable and represents tremendous business opportunities, but investor confidence remains low due to policy frameworks that do not provide certainty and address key barriers to technology deployment. Private sector financing will only reach the levels required if governments create and maintain supportive business environments for low-carbon energy technologies.Progress is inadequate — relative to the goal of limiting global temperature rise to 2 degrees C — on virtually every low-carbon technology except onshore wind and solar (click for a larger version of this chart): What will it cost to turn this around and hit the 2 degrees C target? A good chunk in the short term and negative dollars in the long term: Globally, the near-term additional investment cost of achieving these objectives would amount to USD 5 trillion by 2020, but USD 4 trillion will be saved through lower fossil fuel use over this period. The net costs over the next decade are therefore estimated at over USD 1 trillion. More impressively, by 2050, energy and emissions savings increase significantly as CO2 emissions peak, and begin to decline from 2015. In this timeframe, benefits of fuel savings are also expected to surpass additional investment requirements for decarbonising the energy sector.

Clean Energy Investment Must Change - Reward Innovation not Production - Over the last five years, the world's largest nations collectively engaged in a massive policy experiment: what happens when governments triple the historic rate of public investment in clean energy? In the U.S., taxpayers will have spent $150 billion between 2009 and 2014, three times more than we did between 2002 and 2007, according to a comprehensive new report, Beyond Boom and Bust, co-authored by Breakthrough Institute with scholars from World Resources Institute and the Brookings Institution. The U.S. wasn't alone. China increased its clean tech spending to $80 billion per year. Europe has had high levels of investment in clean energy since before the recession. And rather than crowding out, these public investments attracted a huge amount of private investment -- $774 billion between 2008 and 2011, up from $320 billion between 2004 and 2007. The two of us have been critical of how some of the green stimulus money was spent. Big investments to weatherize homes ended up creating few jobs and didn't have much impact on the nation's energy demand. Patchwork and overlapping subsidies and regulations allowed some rent-seeking firms to double-dip. Too much was spent on deployment and too little (less than 20 percent) was spent on energy R&D, which at under $5 billion a year is grossly underfunded compared to NIH's $30 billion and DOD's $80 billion R&D budgets.

The U.S. has a very inadequate alt fuel infrastructure - To get a sense of how many alternative fueling stations the U.S. might need some day, consider the number of locations around the nation that have gasoline pumps. The Energy Department says that there are 160,000 gasoline stations around the U.S. but just 10,000 alternative fuel stations across the 48 contiguous states. Moreover, those 10,000 stations generally offer only one of the following: biodiesel, CNG or compressed natural gas, LNG or liquefied natural gas, electric, ethanol (E85), hydrogen or propane. And, in some cases, many of those stations are private and not accessible to the public. That's according to a new Energy Department report with the following understated title: "Access to Alternative Transportation Fuel Stations Varies Across the Lower 48 States."

T. Boone Pickens: ‘The Biggest Deterrent To An Energy Plan In America Is Koch Industries’ - Billionaire energy investor T. Boone Pickens has a bone to pick with the country’s leading pollutocrats. Pickens said in an interview Wednesday with Yahoo’s Daily Ticker that Koch Industries, the company owned by Charles and David Koch, is the major stumbling block to a coherent U.S. energy policy:“The biggest deterrent to an energy plan in America is Koch Industries,” the BP Capital founder tells Yahoo’s Aaron Task. “They do not want an energy plan for America because they have the cheapest natural gas price they’ve ever had, and they’re in the fertilizer business and they’re in the chemical business. So their margins are huge. And they do not want you to have an energy plan, because if you had a plan, then natural gas prices would come up.” Watch it:

The Art Of Recycling: Converting Plastic To Oil - The days of dumping trash into overcrowded landfills may be over. Just as you would not dump gold, diamonds, or hundred dollar bills into garbage bins, you soon will hesitate to throw out your plastic water bottle, as the once typical trash is taking on a whole new value. New developments in technology seem to have done the unfathomable—and scientists have now found a means to turn plastic pollution into oil. Scientifically referred to as “Thermal Depolymerization” the depolymerization process reduces complex organic materials—usually biomass plastic—into light crude oil. Scientists originally based this process of the geological processes they believed produced fossil fuels. Utilizing pressure and heat, the process breaks down the long chain polymers of hydrogen, oxygen and carbon, decomposing them into short-chain petroleum hydrocarbons. Ultimately, the process runs off the principle that plastic was once oil, and should be easily converted back to oil, and utilized as fuel instead of material. Amazingly, plastic holds a higher energy value than just about any other type of waste.

Visualizing The Ends Of Oil - By now most of us understand that oil is powering the rapid transformation of our planet, enabling us to extract resources, intensify agriculture, manufacture goods, and transport people and objects at unprecedented rates and in unprecedented quantities. But what remains more difficult to grasp is the impact — the scale — of this transformation; and I would argue that this difficulty in comprehending profound change is to some crucial degree related to the difficulty of visualizing it. To be sure, photographs of the landscapes of oil infrastructure circulate widely in newspapers and magazines, but these images are usually pegged to a specific event (e.g., the Deepwater Horizon explosion), or else they are intentionally generic (stock images of derricks and pipelines that could be anywhere from Kansas to Kazakhstan). How then might we get beyond the over-familiar images and develop new ways of visualizing the era of oil that began in the mid 19th century with the drilling of a well in central Asia and has since reshaped the world? How might new visualizations help us understand better the effects of oil — or more accurately, the effects of our dependence on oil? And how might new visualizations spur action — and activism?  The photographs of Edward Burtynsky and Chris Jordan together make a good starting point for this investigation. Large in scale, saturated with color and often beautiful, their photographs depict scenes of petroleum industry, infrastructure and waste that few of us will ever experience in person.

How the U.S. could influence China’s coal habits — with exports - Coal exports, a favorite topic here at Wonkblog, have become a hot environmental issue of late. Coal use is shrinking in the United States thanks (in part) to cheap natural gas. So coal companies are building terminals in the Pacific Northwest to ship their surplus coal to places like China.  Over at Grist, David Roberts has an excellent overview of this story. Large U.S. mining companies such as Arch Coal and Alpha Natural Resources have seen their share prices tumble of late. They’re resting their hopes on six new export terminals in Oregon and Washington, which, once built, will enable the Pacific Northwest to ship more than 150 million tons of coal to Asia. In essence, we’d be exporting our carbon pollution overseas. So, to prevent that, environmentalists are trying to bog these projects down. So here’s a question: Would blocking these export terminals have any impact on the staggering growth in coal use in places such as China? Actually, yes: There’s some evidence that it could matter a fair bit at the margins.

Climate Activists Tell Warren Buffett Why They Are Blocking His Coal Trains, Via James Hansen - The following Letter to Warren Buffet can be found on my website. Dear Mr. Buffett: We want to inform you that on Saturday, May 5th, from midnight to midnight, we intend to prevent BNSF coal trains from passing through White Rock, British Columbia to deliver their coal to our coastal ports for export to Asia. We have chosen May 5th to take this action because it has been designated an International day of action by, with the theme “Connecting the Dots.” We can’t think of a more important connection to emphasize than the one between burning coal and putting our collective future at risk. Who we are and why we are prepared to engage in civil disobedience to stop your coal trains: We are a group of citizens in British Columbia, Canada who are deeply concerned about the risk of runaway climate change. There is a broad scientific consensus that we must begin to sharply reduce greenhouse gas emissions this decade to avoid climate change becoming irreversible. At the same time, governments and industry are eager to increase the production and export of fossil fuels, the very things that will ensure climate change does get worse.

Federal coal lease sales in Powder River Basin draw lawsuit from environmental groups - Environmentalists have filed a lawsuit seeking to derail efforts by the federal government to lease an estimated 2 billion tons of coal near two major Wyoming mines. The lawsuit filed Wednesday in U.S. District Court in Washington, D.C., targets four recent and proposed coal lease sales in the Powder River Basin. That’s an area of Montana and Wyoming that produces more coal than any other region of the country.The Sierra Club and Wild Earth Guardians say mining and burning coal from the federal leases would release huge amounts of the greenhouse gas carbon dioxide, exacerbating climate change. The Bureau of Land Management leases are near two of the world’s largest coal mines: Arch Coal’s Black Thunder mine and Peabody Energy’s North Antelope Rochelle mine. The BLM addressed climate change issues in its decision to sell the leases but said it wasn’t its place to regulate emissions from burning the fuel.

US should return stolen land to Indian tribes, says United Nations - A United Nations investigator probing discrimination against Native Americans has called on the US government to return some of the land stolen from Indian tribes as a step toward combatting continuing and systemic racial discrimination. James Anaya, the UN special rapporteur on the rights of indigenous peoples, said no member of the US Congress would meet him as he investigated the part played by the government in the considerable difficulties faced by Indian tribes. Anaya said that in nearly two weeks of visiting Indian reservations, indigenous communities in Alaska and Hawaii, and Native Americans now living in cities, he encountered people who suffered a history of dispossession of their lands and resources, the breakdown of their societies and "numerous instances of outright brutality, all grounded on racial discrimination". "It's a racial discrimination that they feel is both systemic and also specific instances of ongoing discrimination that is felt at the individual level," he said. Anaya said racism extended from the broad relationship between federal or state governments and tribes down to local issues such as education.

Why solar will thrive in India: coal is a mess —India is struggling to add more electricity capacity for the country’s rapidly growing economy, but the domestic coal industry is an absolute mess, points out articles in the New York Times and the Economist this month. That situation means that India could possibly be one of the most high-growth solar markets in the world. The New York Times’ article chalks the Indian coal problem up to: “clumsy policies, poor management and environmental concerns,” as well as “a complex system of subsidies and price controls,” and “retail electricity prices that are lower than the cost of producing power.” Essentially 80 percent of domestic coal production is managed by the government-controlled Coal India, which is hampered by the typical Indian industry problems of weak policies and corruption. The problem has gotten so bad that the lack of growth in the power sector is starting to contribute to slowing economic growth in India. And the gap between electricity demand and supply is 10.2 percent, up from 7.7 percent a year ago. When I was in India in December 2011, even wealthy locations we visited like the Hard Rock Cafe in Mumbai, and the Indian Institute of Technology in Delhi, faced rolling black outs.

Nuclear waste 'may be blighting 1,000 UK sites' - MoD under fire after report finds number of contaminated sites is far higher than previously estimated.  Hundreds of sites across England and Wales could be contaminated with radioactive waste from old military bases and factories, according to a new government report. Up to 1,000 sites could be polluted, though the best guess is that between 150 and 250 are, says a report on contaminated land by the Department of Energy and Climate Change (Decc), released last month, but previously unreported. This is far higher than previous official estimates, with evidence from the Ministry of Defence (MoD) last December suggesting that there were just 15 sites in the UK contaminated with radium from old planes and other equipment. The MoD has come under fire from former prime minister Gordon Brown for trying to evade responsibility for cleaning up the contamination it has caused. His constituency in Fife, north of Edinburgh, includes one of the most notorious examples of radioactive pollution at Dalgety Bay.

Iran Nuclear Power Plant Works at Near Full Capacity, IRNA Says - Iran’s first nuclear power plant was connected at almost full capacity to the national power grid on April 28, the Islamic Republic News Agency reported, citing Fereydoun Abbasi-Davani, who heads the Iranian Atomic Energy Organization.  The 1,000-megawatt Bushehr plant is generating 940 megawatts, Abbasi-Davani said, according to the official IRNA report.

Natural Gas shutting down Coal Power Plants - I was surprised to see this morning that it's been shut down since early March because it can't successfully bid to produce power against natural gas power plants, given the low price of natural gas: With natural gas prices undercutting the cost of coal, the AES Cayuga power plant in Lansing has not produced electricity since early March. This year, natural gas prices have dropped to lows unseen since 2002, and coal power plants around the state and country haven't been able to sell their power. "Right now, with prices where they are, we're not economically viable," AES Cayuga Plant Manager Jerry Goodenough said. The price of natural gas would need to nearly double for the plant to regain economic viability, according to Goodenough. "If gas is trading at $1.90 or $2 per million BTU, and coal is trading at $4 per million BTU, a coal plant would need to get enough from its energy bid to recover for a $4 price, and gas is only $2," he said.Coal prices vary a lot around the country - based on quality and proximity to markets.  The best time series I was able to find at the EIA website was for Central Appalachian coal, and if I'm doing the math correctly (12000 btu/lb and 2000 lb/short ton) the comparison to Henry Hub natural gas prices looks like this:

Cheap Natural Gas Heralds an Energy Revolution That Will Displace Nuclear, Coal, Wind and Solar - Fred Singer writing for the Independent Institute: "Consider the consequences of having huge quantities of cheap natural gas available. It will make new coal-fired power plants uneconomic, but it will also make new nuclear plants uneconomic. It is ironic that these two longed-for goals of radical environmentalists are being achieved simply through economics, without the need for any regulation.  But it is ironic also that cheap gas will completely remove the need for electricity generated by solar or wind—much to the chagrin of environmental zealots. And all those folks hoping that energy prices would continue to rise and that electricity costs would “skyrocket” will be sorely disappointed." The huge bonanza of cheap abundant natural gas is the most positive development in America's energy outlook in 50 years as Mort Zuckerman wrote in the WSJ last November, where he also suggested that a seismic shift in the energy landscape as large as the recent shale revolution is extremely rare.  One of the profound implications of the "shale gale" is that its remarkable abundance will displace not only coal and nuclear as energy sources, but also solar and wind energy as well, as Fred Singer points out.

Shale gas: Terminal decline no longer - In 2003, Houston-based Cheniere Energy decided to build a big terminal to import natural gas. It seemed like a good idea at the time. Domestic gas production was in decline, prices were high and the US faced shipping in large quantities of liquefied natural gas to meet rising demand. As Cheniere built its LNG terminal, the oil industry was unlocking the vast reserves of gas trapped in dense shale rocks that stretch from Pennsylvania to Texas. Techniques such as “fracking” (hydraulic fracturing of the rock) and horizontal drilling triggered a production boom. Thanks to shale, the US in 2010 overtook Russia as the world’s largest gas producer. With shale causing an unexpected supply glut in the US, Cheniere, which began life as a small oil explorer, took a radical decision: instead of importing LNG, it would export it. The volte-face highlights both the scale of a revolution that has transformed America’s energy outlook and how the repercussions of that boom are beginning to be felt far beyond the US.

For Every $1 Drop in Natural Gas Prices, Residential and Business Consumers Save $23 Billion Annually - Using data on natural gas consumption and prices from the EIA for the years 2008 and 2011, the table above shows in 2008 annual total spending on natural gas was about $235 billion for residential, commercial, industrial and  electric power customers, and by 2011, as a result of falling natural gas prices thanks to shale gas, total spending on natural gas had fallen to roughly $151 billion.  Falling gas prices resulted in savings of about $84 billion in 2011 compared to an alternative scenario where gas prices had remained at 2008 levels, which were also representative of gas prices in the previous years back to 2005.  Residential customers saved almost $17 billion in 2011 compared to 2008, commercial customers saved $10.5 billion, industrial consumers more than $30 billion and electric power companies more than $26 billion.   Between 2008 and 2011, natural gas consumption was relatively flat for all users, so that the cost savings were entirely due to falling gas prices, and not decreased consumption.  For electric power companies, their usage actually increased by about 14% between 2008-2011, but that increased consumption was more than offset by a 43% reduction in the price they paid for natural gas.   Based on the  historical consumption and price data, it's possible to make the following estimates of the annual savings on natural gas for every $1 reduction in the price of gas:
Residential consumers save $5 billion annually.
Commercial consumers save $3 billion annually.
Industrial consumers save $7 billion annually.
Electric power companies save almost $8 billion annually. 

Natural Gas Prices Up 5% on Production Report - The price of natural gas jumped by nearly 5 percent Monday after government data showed that producers are making good on promises to cut supplies. Chesapeake Energy Corp., ConocoPhillips and Encana Corp. have each said that they would take some natural gas operations offline this year. They were forced to, in part, because of their own success. U.S. supplies have ballooned to nearly 60 percent above the five-year average, after a wave of new shale drilling delivered more natural gas to the market than people were able to use. The glut pushed natural gas prices to 10-year lows this month, and some experts say the country may eventually run out of places to put it. The Energy department’s Energy Information Administration reported that the industry’s effort to downshift production appears to be making a difference. Overall production in the U.S. came to 82.36 billion cubic feet per day in February, down 0.8 percent from January. Natural gas production was still 9.3 percent higher than a year ago, but analysts said any production drop was a promising sign. On Monday natural gas futures rose 9.9 cents to end the day at $2.285 per 1,000 cubic feet, the highest since March 21.

Freedom From Gazprom Tempts Ukraine as Exxon Hunts Shale - For the first time in more than two centuries, Ukraine sees its way to independence from Moscow. That path tracks through a patch of sealed Soviet-era natural gas wells that are ready to be tapped once again and fields of shale rocks that the U.S. Geological Survey estimates will hold enough gas to fire the eastern European nation for 100 years or more. Royal Dutch Shell Plc (RDSA), Exxon Mobil Corp. (XOM), and Chevron Corp. (CVX) -- three of the world’s four largest oil companies -- bid last week for Ukrainian exploration rights.“Ukraine is low-hanging fruit,”  “Ukraine has well-known basins that have been totally undermanaged and underinvested,” he said. “There is a consensus in the industry that its potential is great.” The same technology that unlocked natural gas from shale rocks and made the U.S. the world’s largest natural gas producer is being rolled out across eastern Europe, home to the continent’s most promising prospects. If drilling succeeds, Ukraine will be able to lessen its reliance on Russian export monopoly OAO Gazprom (GAZP) for its natural gas supply, ending the economy’s vulnerability to decisions taken in the Kremlin.

Charts of the Day: Oil-Gas Drilling RIg Split Now 68-32 and Net Oil Imports Are at a 20-Year Low - Baker Hughes reported yesterday that the share of U.S. rigs drilling for oil (gas) rose (fell) to an all-time high (low) this week since the oilfield service company starting keeping records back in 1987 (see top chart above, data here).  For the week ending April 27, the oil/gas split was 68.5% to 31.5%.  The pattern displayed in the chart of switching from drilling for gas to drilling for oil started about three years ago, and follows the pattern of rising oil prices and falling natural gas prices since 2009.  Accompanying the shift in the industry towards increased drilling for domestic oil, net oil imports keep falling, and reached the lowest level in the first three months of 2012 (43.4%) in 20 years, since 1992, see bottom chart above (data here).  Update: See new chart below showing the relationship between oil prices and the share of rigs drilling for oil since 2009 (correlation coefficient of 0.886):

Chesapeake Energy Well Blowout in Wyoming Causes Evacuation, Methane “Roared” for Days - A potentially dangerous oil well blowout at a Chesapeake Energy site in Wyoming caused at least 60 and perhaps 70 residents to evacuate within 5 miles of the disaster for several days until it was contained earlier today. Chesapeake Energy was drilling the well in the Niobrara Shale region underlying parts of Wyoming, Colorada, and Nebraska. "Potentially explosive methane gas roared from the ground at the site five miles northeast of the town of Douglas," the AP reported.Residents reported hearing the roar of escaping gas six miles away. The blowout occurred Tuesday afternoon at Chesapeake's Combs Ranch Unit well site. However, workers were unable to plug the well with drilling mud until today due to shifting winds that made the site too dangerous to attempt the now infamous "Top Kill" technique.  Halliburton subsidiary Boots & Coots workers were able to shove enough mud and other materials into the well to finally stop the methane gas leaking out of the well today.Chesapeake had to resort to the "Top Kill" technique last year at a Pennsylvania gas fracking well blowout. In that case, Chesapeake used a junk shot of “a mix of plastic, ground up tires and heavy mud to plug the well.”

Past and Future at Total's Elgin/Franklin Project: Four weeks after the Elgin G4 well sprung a leak above the production platform in the North Sea, Total has spudded the first of two relief wells as backup in case the attempt to kill the well from above doesn't work. It will take 6 months to drill the wells, however, and an estimated 200,000 cubic meters of gas per day was initially being released, and reportedly enough so far has leaked to heat all of Aberdeen for a decade (a suspect claim, perhaps).  In this post, I will provide some additional background on the history of this project and what Total E&P UK's plans were prior to the leak and subsequent shutdown of all production.

Reporting of fracking and drilling violations weak (CNNMoney) -- For Pennsylvanians with natural gas wells on their land, chances are they won't know if a safety violation occurs on their property.  That's because the state agency charged with regulating the wells -- the Department of Environmental Protection (DEP) -- does not have to notify landowners if a violation is discovered. Even if landowners inquire about safety violations, DEP records are often too technical for the average person and incomplete.  While some landowners would like more transparency around safety issues, as a group they are not pushing for stronger regulations. Landowners, who are paid royalties by the companies that drill on their property, generally want the drilling to proceed. In February, CNNMoney spoke with four families in Lycoming County, Pa., about violations issued against natural gas wells on or near their property.  The families have a total of 26 natural gas wells among them. Yet none said they had ever been notified by the DEP or any of the well operators that wells near their homes had been cited for what DEP's website said were 62 safety violations over four years.

Fracking and the Environment: An Economic Perspective - When people look at “fracking”—the production of natural gas through hydraulic fracturing techniques–they see different things. Critics see polluted wells, exploding houses, and earthquakes—an environmental disaster in the making. These anti-frackers have a simple solution: ban it. In contrast, industry supporters see hydraulic fracturing as a safe technology that drillers have been using for decades without controversy and that now promises a new era of energy abundance. The pro-frackers, too, have a simple solution: get the government out of the way and drill baby, drill. As an economist, I see something still different: a familiar pattern of negative externalities and missing market signals, to which the appropriate response is unlikely to be either prohibition or laissez-faire. In economic jargon, negative externalities are effects of production or consumption that have an impact on third parties who have no voice on either the supply or the demand side of a market. Some of the externalities of hydraulic fracturing are global in nature, others local. The most important global externalities are emissions of greenhouse gasses (GHGs) that feed into climate change. (Climate change deniers may skip to the next section.)The proper response to the negative externalities of energy production and use would be to introduce price signals proportional to the harm they cause. Doing so would put an end to the free lunch that producers and consumers have long enjoyed and would curb the resulting overconsumption.

Fracking Regulation: Don’t Ask, Don’t Tell - A draft rule being considered by the U.S. Department of the Interior would require drillers for natural gas on U.S. land to disclose what chemicals are used after drilling is completed. A proposed rule version in February would have required drillers to file a complete list of chemical formulations at least 30 days before work began. The Environmental Working Group, a public interest lobby based in Washington, said in February that some of the chemicals already disclosed by the companies are implicated in cancer and reproductive damage. The February version of the regulation has been protested by energy trade groups and Republican lawmakers. Follow up: Bloomberg cites the problem specified by the Washington-based American Exploration and Production Council, other industry groups and GOP legislators: They said it could slow energy production on federal lands. Considering the glut of natural gas production that has recently driven prices down by more than 85% over the past six years ( perhaps a slowing of production would not be a bad thing. The price of natural gas has been cut in half in just the last year alone. These dramatic price declines do not indicate a production shortage. Republicans in the Senate have taken action to try to halt the imposition of more federal regulation. From Progress Ohio: Senior Senate Republicans are floating legislation that would slam the brakes on Obama administration efforts to expand regulation of the controversial oil-and-gas drilling method called "hydraulic fracturing" on federal lands.

Drillers May Frack First, Disclose Later Under Draft Plan - Bloomberg: Natural-gas companies drilling on U.S. land would be permitted to wait until after hydraulic fracturing is completed to disclose what chemicals they used, under a draft rule being considered by the Interior Department. A version in February required companies to file a complete chemical makeup at least 30 days before work began, a mandate that drew complaints from energy trade groups, including the Washington-based American Exploration and Production Council. The rule might slow energy production, they said. President Barack Obama has pledged to increase U.S. natural-gas output in a way that doesn’t hurt the environment. Delaying disclosure will make it harder for homeowners to prove that drilling was responsible for tainted water, according to Amy Mall, a senior policy analyst for the Natural Resources Defense Council in Washington. “Homeowners need the ability to show that there’s been a change in their water before and after fracking,” Mall said in an interview. “ We’re concerned that it was weakened.” Disclosure before fracking would let landowners test for the specific chemicals drillers plan to use, Mall said. Otherwise, pre-drilling tests may not detect all fracking chemicals.

New Study Predicts Frack Fluids Can Migrate to Aquifers Within Years - A new study has raised fresh concerns about the safety of gas drilling in the Marcellus Shale, concluding that fracking chemicals injected into the ground could migrate toward drinking water supplies far more quickly than experts have previously predicted.  More than 5,000 wells were drilled in the Marcellus between mid-2009 and mid-2010, according to the study, which was published in the journal Ground Water [1] two weeks ago. Operators inject up to 4 million gallons of fluid, under more than 10,000 pounds of pressure, to drill and frack each well.  Scientists have theorized that impermeable layers of rock would keep the fluid, which contains benzene and other dangerous chemicals, safely locked nearly a mile below water supplies. This view of the earth's underground geology is a cornerstone of the industry's argument that fracking poses minimal threats to the environment.  But the study, using computer modeling, concluded that natural faults and fractures in the Marcellus, exacerbated by the effects of fracking itself, could allow chemicals to reach the surface in as little as "just a few years." "Simply put, [the rock layers] are not impermeable,"   "The Marcellus shale is being fracked into a very high permeability," he said. "Fluids could move from most any injection process."

Wastewater Disposal Is an Issue in Hydrofracking - Vexed by declining revenue, officials of the Niagara Falls water utility seized on a new moneymaking idea last year: treat toxic waste from natural-gas drilling at its sewage-treatment plant once hydrofracking gets under way in New York State.Accepting the waste would both offset the drop in revenue and help keep water rates down for customers in the economically strapped region, they reasoned. But the thought of having fracking fluids trucked into the city, treated and discharged into the Niagara River frightened local residents, many of whom still recall the Love Canal environmental crisis of the 1970s. In a unanimous vote, the Niagara Falls City Council blocked the plan this spring by banning the treatment, transport, storage and disposal of drilling fluids within city limits. “We’re not going to deal with this again — a chemical disaster,” said the council chairman, Samuel Fruscione. As New York State environmental regulators fine-tune proposed rules governing horizontal hydraulic fracturing, or fracking, a controversial natural-gas extraction process, wastewater has emerged as a challenging issue for the industry and regulators.

Fracking Industry California Dreamin’: A Future California Nightmare? - The fracking industry is “California Dreamin‘,” to borrow the song title of The Mamas & The Papas age old classic. Yesterday, The Bakersfield Californian reported that another oil and gas industry giant is making its way to The Golden State: Hess Corporation. Hess has operations on six of the seven global continents and will be headed to California’s yet-to-be-fracked Monterey Shale basin, which contains some 15 billion barrels of proven recoverable shale oil, according to the Department of Energy’s Energy Information Administration. Hess also has fracking operations in three shale basins: Texas’ Eagle Ford Shale and Permian Basin, as well as North Dakota’s Bakken Shale. Other major oil and gas corporations on the scene and purchasing leases in the Monterey include Venoco, Occidental Petroleum, Frontier Energy Group, and Canadian Natural Resources Ltd. Will the frackers move in and become a “California Nightmare?” Once the fracking for the “tough oil” begins, the answer is almost assuredly ”Yes, indeed” if history has taught us anything at all.

Our Country Is Being Fracked by the Merger of Government and Big Business - Fracking is polluting water all over the country. A new study published in the journal Ground Water predicts that the highly-toxic fluids used in fracking can migrate to aquifers within a few short years. The government has officially stated that fracking can cause earthquakes. And see this. Some fracking companies now admit this fact. And yet a new law passed in Pennsylvania will allow doctors to access information about chemicals used in hydraulic fracturing, but will restrict them from sharing that information with their patients. See the writeups by Mother Jones and Truthout. The director of the Emmy-award winning documentary on fracking – Gasland – was arrested for attempting to film a Congressional hearing on fracking. Actor Mark Ruffalo was put on terror watch list after he organized showings of Gasland. The Washington Post reported in March that the FBI is investigating anti-fracking activists as potential terrorists. The state of Pennsylvania hired an Israeli-American company with extensive military and intelligence ties to put out “terror” alerts. ITRR considered opponents of fracking to be potential terrorists. Fracking companies are also using military psychological operations techniques to discredit opponents (and see this).

Shale Gas Export Boom: Planned All Along? - The race is on, full-steam ahead for the United States shale gas industry [PDF] in its quest to pipe and export gas obtained via the hydraulic fracturing process to lucrative global markets. On April 16, Cheniere Energy Inc. became the first corporation in the United States to receive approval by the Federal Energy Regulatory Commission (FERC) to export liquefied natural gas (LNG) to the global market from its Sabine Pass LNG terminal, located in Cameron Parish, Louisiana. Sabine Pass was the first of several U.S.-based LNG terminals awaiting FERC LNG export licenses to receive the go-ahead. Nearly all of these terminals were originally designed and permitted as LNG import terminals and all began construction or were bought in the early- to mid-2000s. Project developers now say they are seeking export licenses in response to changing market conditions, namely the shale gas boom.

TransCanada expected to reapply for Keystone pipeline permit as soon as Friday - The Canadian firm behind the controversial Keystone XL pipeline will reapply Friday for a federal permit to ship crude oil from the oil sands fields of Alberta to the United States, according to people familiar with the company’s plans. In January, the Obama administration denied a permit to Trans­Canada, the firm that would build the project, on the grounds that a congressionally mandated deadline of Feb. 21 did not give officials enough time to evaluate the pipeline’s impact. Since then, TransCanada has said it would proceed with plans to construct a segment that did not require a presidential permit — from Cushing, Okla., to Port Arthur, Tex.The company also unveiled a new route for the pipeline through Nebraska. President Obama, environmentalists and many Nebraskans — including the state’s Republican governor, Dave Heineman — had raised concerns that the project’s original route could imperil Nebraska’s ecologically sensitive Sandhills region, as well as the Ogallala aquifer, a major source of drinking water for state residents.

BP to start three new Gulf of Mexico oil rigs - New drilling sites brings number of BP's Gulf rigs to eight – more than it operated before the Deepwater Horizon disaster. BP is planning to start three new oil drilling rigs in the Gulf of Mexico this year. The launch of the new rigs will bring the number of BP rigs in the Gulf to eight – more than the oil giant had before the devastating Deepwater Horizon disaster three years ago. Bernard Looney, BP's executive in charge of new wells, said BP is expecting to spend $4bn (£2.5bn) on new developments in the Gulf of Mexico this year and hopes to "invest at least that much every year over the next decade".

Peak oil review - April 30 - In a week dominated by shifting economic news, oil traded in a narrow range ending up a dollar or so a barrel at week’s end with NY oil just below $105 and London just below $120. NY gasoline futures, which at one point were trading 40 cents a gallon below early April highs, recovered a bit to close out the week at $3.20, down about 20 cents from the recent highs. Natural gas futures climbed steadily during the week on a dose of colder weather in the US and the continuing reduction in drilling for gas. There has also been a surge in utilities and industrial users burning gas while it is still so cheap.The weekly stocks report showed US crude inventories increased by 4 million barrels the week before last while gasoline and distillate inventories were down by 2.2 and 3.1 million barrels respectively. Total oil products supplied to the US markets are down by 4.2 percent from the same four weeks last year. Distillates supplied are up by 0.1 percent from last year suggesting that another round of heavy diesel exporting is taking place. MasterCard’s SpendingPulse, which reports on gasoline consumption at the retail pump, says that gasoline sales the week before last were down 6.1 percent from the same week last year. SpendingPulse notes that gasoline sales show “exaggerated weakness on weekends” meaning that significant cutbacks in discretionary weekend driving. The service says that US gasoline demand for so far in 2012 is running about 8.5 million b/d as compared with 9 million b/d last year and 9.5 million b/d in 2007. This puts US gasoline demand this year at 5.5 percent below 2011.

U.S. oil imports rise in February-EIA (Reuters) - U.S. crude oil imports rose for the fourth time in five months in February, climbing 545,000 barrels per day from a year earlier, the Energy Information Administration said on Friday. Crude imports averaged 8.558 million bpd in February. Excluding a drop last month, the United States has imported more oil every month since October when compared to a year ago. The rise in imports coincided with a much smaller-than-expected decrease in February oil demand, with consumption down just 0.72 percent from a year ago. Canada remained America's biggest foreign supplier in February, exporting 2.517 million bpd, up 324,000 bpd from a year ago. Saudi Arabia was the second largest oil supplier for the United States during the month, exporting 1.407 million bpd, up 293,000 bpd from last year. Note: The data in the tables here exclude oil imports into the U.S. territories.

U.S. 'dirty oil' imports set to triple - U.S. imports of what environmentalists are calling "dirty oil" are set to triple over the next decade, raising concerns over the environmental impact of extracting it and whether pipelines can safely transport this Canadian oil. The United States currently imports over half a million barrels a day of bitumen from Canada's oil sands region, according to the Sierra Club. By 2020, that number is set to grow to over 1.5 million barrels -- or nearly 10% of the country's current consumption. The U.S. Energy Information Administration's overall Canadian oil production numbers are in-line with the Sierra Club's projected pace. Bitumen is a heavy, tar-like oil. It needs to be heavily processed in order to be turned into lighter, easier to refine, crude oil. Because bitumen is so thick, to make it more fluid and easier to move by pipeline, it gets diluted with natural gas liquids. Besides the sheer amount of energy and water needed to process and extract bitumen, environmentalists say it's more dangerous to move because it's more corrosive to pipelines than regular crude.

OPEC Output Hits Highest Since 2008: Reuters Survey - OPEC output in April has hit its highest since 2008 as extra crude from Iraq, Saudi Arabia and Libya more than compensates for the lowest Iranian supply in two decades ahead of an EU embargo, a Reuters survey found on Monday. Supply from the 12-member Organization of the Petroleum Exporting Countries averaged 31.75 million barrels per day (bpd), up from a revised 31.32 million bpd in March, the survey of sources at oil companies, OPEC officials and analysts found. As well as cushioning the impact of the looming European Union plan to embargo Iran's crude, the extra oil is filling gaps caused by an unusually large amount of supply outages globally, which have helped support oil prices this year. OPEC's total is the highest since September 2008, which was shortly before it agreed to a series of supply curbs to combat recession and collapsing demand, based on Reuters surveys. In April, the biggest increase in OPEC supply came from Iraq as a second new Gulf shipping outlet provided a boost to export capacity. Production topped 3 million bpd and rose by 230,000 bpd from last month. Saudi Arabian supply edged up in April to 10.0 million bpd, the survey found. Some customers say the kingdom, which has said it wants to see lower oil prices, has been offering them extra crude.

Iran Oil output hits 20 year lows as EU sanctions near - With the European Union (EU) sanctions just months away, Iranian oil production has dipped to its lowest level in 20 years. Iran is one of the biggest producers and exporters of crude oil in the world. JBC Energy GMBH calculates that Iran's oil output fell by 1,50,000 barrels per day to 3.2 million barrels per day. This is the lowest level of oil production since the Iran-Iraq war in 1990. Iran has been accused of developing nuclear energy for weapons purposes, an allegation Iran obviously denies. As such the US and the EU have been increasing pressure on the international community to reduce their oil imports from Iran. Latest data shows that China, India and Japan (three top consumers of Iran oil) have made reductions in oil imports from Iran. And more may be yet to come. Meanwhile, Saudi Arabia has assured that it will do everything to keep oil markets balanced. The country has been pumping record amounts of oil over the past months, which has irked the Iranian government.

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. As Western sanctions and embargoes on Iranian oil take hold, Iran’s oil sales will obviously decline, and the Saudis are the only major producer with spare capacity. 

Oil Drops Below $100 First Time Since February — The price of oil dropped below $100 per barrel for the first time since February. The dramatic drop — $5 per barrel by midday — is easing fears that high energy prices would cripple a U.S. economy that is struggling to overcome high unemployment, stagnant wages and weak growth. The catalyst was Friday’s weaker than expected report on job growth in the U.S. That added to recent signs that the global economy is weakening, meaning demand for oil should slow.Earlier this year, world oil demand looked to be rising quickly at the same time that world supplies were threatened by a host of small production outages and the prospect of drastically reduced production from Iran, the world’s third biggest exporter.Those developments raised the prospect that world supplies would be at their most tenuous just as the summer driving season in the developed world was arriving.

Where have all the oil hedgers gone? - An interesting chart from John Kemp at Reuters on Monday (click to enlarge): The chart breaks out which players are net short or long of Nymex and Ice light sweet oil at any particular time. The groups are defined by the CFTC and consist of five main categories: swap dealers; managed money; producers/consumers/merchants (a.k.a hedgers); non-reporting and other reporting entities. Focus on the green. In the chart that colour represents the positions of producers/consumers/merchants, what you could define as “the physical trade” — entities with genuine hedging needs because they deal in physical crude itself. As Kemp notes, this category has through the years typically run a net short position because companies who sell oil tend to run larger positions than those who buy oil. (Sellers, after all, have a tendency to warehouse their inventory until it is sold). Yet, since the start of 2011 the net short position held by the physical market has been dwindling in size.

Marginal oil production costs are heading towards $100/barrel - Bernstein’s energy analysts have looked at the upstream costs for the 50 biggest listed oil producers and found that — surprise, surprise — “the era of cheap oil is over”: Tracking data from the 50 largest listed oil and gas producing companies globally (ex FSU) indicates that cash, production and unit costs in 2011 grew at a rate significantly faster than the 10 year average. Last year production costs increased 26% y-o-y, while the unit cost of production increased by 21% y-o-y to US$35.88/bbl. This is significantly higher than the longer term cost growth rates, highlighting continued cost pressures faced by the E&P industry as the incremental barrel continues to become more expensive to produce. The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl. While we see near term downside to oil prices on weaker demand growth, the longer term outlook for higher oil prices continues to be supported by the rising costs of production. This is important because, as Bernstein analyst Neil Beveridge and colleagues note, the cost of producing marginal barrels of oil plays a big role in determining oil prices.

What happens when oil becomes unaffordable? - When the first OPEC oil shock hit in the 1970s, President Nixon responded by lowering the national speed limit to 55 miles per hour in a bid to conserve energy. But speed limits aren’t the only thing that can change when oil prices go up. Right now, we’re seeing that rising crude prices can influence much more than just how fast you can drive your car. High oil prices change the speed at which your economy can grow.Just as people require food, economies require energy. The relationship is straightforward: economic growth is a function of energy consumption. With national economies around the world once again forced to pay more than $100 (U.S.) for every barrel of oil consumed, a critical question must be asked -- what happens when the world’s most important source of energy becomes unaffordable?  A glance at the latest GDP numbers is already telling us the answer. Economic growth has downshifted into a much lower gear nearly everywhere you look. Europe is struggling to keep its head above water, North America is stagnating and even the hard-charging economies of the BRIC nations are starting to groan under the weight of high energy prices.

China is being buried alive in copper - What you are looking at here is a staff car park that’s currently serving as a spillover area for copper inventory storage at a major warehouse.  Standard Chartered’s Judy Zhu and Han Pin Hsi say they were simply floored by the amounts of inventory they encountered:On a routine trip to examine copper inventories in the bonded area in eastern Shanghai last week, we were astounded by how much copper is being stored in warehouses. We visited one of the biggest warehouse operators (which holds nearly one-third of the inventory in Shanghai‟s bonded area) and saw some interesting sights (Charts 1-6). Copper plates were piled to the maximum allowable height (based on weight so as not to damage the land it is sitting on).The covered warehouses were full. The staff car park was used to store copper. The driveway between warehouses was blocked by copper. The warehouse operator told us that it cannot accept additional inventory until existing inventory is shipped out. Furthermore, it’s not a unique phenomenon. Bonded warehouses all over China are just as full: The same operator told us that warehouses in Yangshan, another bonded area in Shanghai – but more remote and hence not a preferred place to store copper – is also full of copper.

China manufacturing recovery continues -- China's government says manufacturing activity continued to recover in April, with an index of purchasing managers' sentiment rising for the fifth straight month. The index released Tuesday by the National Bureau of Statistics rose to 53.3 in April from 53.1 the previous month. The index bottomed out at 49 in November. Index readings of more than 50 indicate expansion in the manufacturing sector; readings below 50 indicate contraction.  The Chinese government's report has been more positive than a separate, closely watched report from the banking company HSBC. In its preliminary April report, released April 23, the HSBC index rose to 49.1 from 48.3 in March -- an improvement that still indicates contraction. The final report will be released Wednesday. The government reading is "skewed towards larger firms and so probably exaggerates the sector's recent strength," wrote Mark Williams, chief Asia economist for Capital Economics, in a note Tuesday. Nevertheless, he said the strength of the government's reading "adds to the evidence that conditions in manufacturing have stopped deteriorating." Tuesday's reading for production at Chinese factories edged up to 57.2 from 55.2. But the index for new orders slowed, slipping to 54.5 from 55.1, indicating that the recent rebound in manufacturing could be reversed.

China Manufacturing "Expands" at Faster Pace; China Manufacturing "Contracts" 6th Consecutive Month; Confused by Conflicting Headlines? - China manufacturing is reported to be in contraction and expansion simultaneously. The Chinese government reports expansion. The HBSC PMI says China is in contraction for the 6th consecutive month. Obviously this is impossible, so the question is "who to believe?"  Bloomberg reports China’s Stocks Rise Most in Two Weeks on Manufacturing, Fee Cut China’s stocks rose the most in two weeks after manufacturing expanded at a faster pace and the nation’s two stock exchanges said they will cut trading fees by 25 percent to attract investors.  Jiangxi Copper Co. and Yunnan Copper Industry Co. (000878) gained more than 9 percent after the Purchasing Managers’ Index rose to 53.3 in April, the fastest pace in a year. Markit reports China Manufacturing Sector Operating Conditions Deteriorate at Marginal Rate:April data pointed to further reductions in manufacturing output and new business, although rates of decline were marginal in both cases.  After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 49.3 in April, up from 48.3 in March. That indicated a sixth successive month-on-month worsening of manufacturing sector operating conditions in China.

An L-shaped recovery for China? - A few days ago, I mentioned that banks were undertaking stealth easing where mortgages rates have come down somewhat and mortgages are easier to come by. With March strong loan growth, stealth easing is happening even though the more aggressive easing actions like cutting reserve requirement ratio have not happened. In his latest note, Dong Tao of Credit Suisse suggests that banks are more willing to lend then they were last year, with exports improved very slightly, the resumption of infrastructure projects and encouraged first-time home buyers, he thinks it looks like the risk of a hard landing is now removed. But beware.  This is when the good news ends. Dong Tao provides some rather interesting observations here: There is an unstated but important change in the tide lately. Firstly, we relate what we believe to be anecdotal evidence of a changing trend. One of our business contacts recently indicated that in the past few weeks, he has been approached by four banks saying that their credit lines were now available to him. This is in sharp contrast to the situation in the second half of last year. At that time, our contact was searching tirelessly for available credit lines, and banks told him “no” decisively. However, our contact was currently able to respond “no” decisively to these same banks.

China’s Vanishing Trade Imbalance - America’s economic imbalance with China has been a singular concern of policy makers for more than half a decade. Senators Charles E. Schumer and Lindsey Graham wanted to punish China for pegging the exchange rate to the dollar1 in 2005 — arguing that its policy of cheapening the currency to subsidize exports was fueling a huge trade surplus that cost American jobs.  Their bill never passed. But reducing China’s surpluses has remained at the top of the bilateral agenda ever since.  Something unexpected has happened to China’s economy, however. Its surplus with the rest of the world has largely disappeared. China’s imbalance with the United States is still likely to take center stage when Treasury Secretary Timothy F. Geithner sits down to the fourth round of the U.S.-China Strategic and Economic Dialogue this week. But he will have a harder time making the case that America’s trade deficit is somehow China’s fault.  China’s current-account surplus — the broadest measure of its trade relations, which tracks how much more China exports in goods and services than it imports — has plummeted. In 2007 it amounted to more than 10 percent of the entire Chinese economy. By last year it had shrunk to about 2.8 percent. And the International Monetary Fund estimates2 it will decline to 2.3 percent of the nation’s output in 2012, the smallest since 2001.

Why a More Flexible Renminbi Still Matters, by Kenneth Rogoff - One of the most notable macroeconomic developments in recent years has been the sharp drop in China’s current-account surplus. The International Monetary Fund is now forecasting a 2012 surplus of just 2.3% of GDP, down from a pre-crisis peak of 10.1% of GDP in 2007, owing largely to a decline in China’s trade surplus – that is, the excess of the value of Chinese exports over that of its imports. The drop has been a surprise to the many pundits and policy analysts who view China’s sustained massive trade surpluses as prima facie evidence that government intervention has been keeping the renminbi far below its unfettered “equilibrium” value. Does the dramatic fall in China’s surplus call that conventional wisdom into question? Should the United States, the IMF, and other players stop pressing China to move to a more flexible currency regime? The short answer is “no.” China’s economy is still plagued by massive imbalances, and moving to a more flexible exchange-rate regime would serve as a safety valve and shock absorber. That said, the exchange rate has received far too much focus as a lightning rod for concerns over China’s growing engagement in the global economy. The link between the exchange rate and China’s pricing advantages in world markets is wildly exaggerated. At the same time, the exchange rate is by no means the most pressing macroeconomic problem facing China today.

U.S. Highlights Concessions From China in Talks — American officials said early Friday that their annual summit meeting on strategic and economic issues with China had resulted in tangible economic concessions, despite the unprecedented diplomatic furor over a Chinese human-rights advocate seeking aid from American officials. The case of the Chinese dissident, Chen Guangcheng, has overshadowed the annual strategic and economic dialogue between Treasury Secretary Timothy F. Geithner, Secretary of State Hillary Rodham Clinton and their high-ranking Chinese counterparts. However, a senior administration official said in a telephone briefing from Beijing that China has gone further than ever in allowing competition with its powerful state-owned enterprises and creating consumption-led growth in its export-focused economy. The comments from Obama administration officials were aimed at showcasing the progress of the economic talks in the eyes of United States officials as separate diplomatic negotiations continued to resolve the matter of Mr. Chen. Further comments from Chinese economic negotiators are expected later on Friday in Beijing.

China’s Population Crash Could Upend U.S. Policy - Today’s most important population trend is falling birthrates. The world’s total fertility rate -- the number of children the average woman will bear over her lifetime -- has dropped to 2.6 today from 4.9 in 1960. Half of the people in the world live in countries where the fertility rate is below what demographers reckon is the replacement level of 2.1, and are thus in shrinking societies.  As Eberstadt points out, we can make predictions about the next 20 years with reasonable accuracy. The U.S.’s traditional allies in western Europe and Japan will have less weight in the world. Already the median age in western Europe is higher than that of the U.S.’s oldest state: Florida. That median age is rising 1.5 days every week. Japan had only 40 percent as many births in 2007 as it had in 1947. These countries will have smaller workforces, lower savings rates and higher government debt as a result of their aging. They will probably lose dynamism, as well.All these effects will, in turn, almost certainly make these countries even less willing than they already are to spend money on their armed forces. Americans who want Europe to bear more of the free world’s military burden -- or even provide for its own defense -- are probably going to be disappointed. So will those who expect Europe to take on humanitarian missions. It won’t even be able to maintain its current weight in future debates about the values of peace and democracy.

Frustrated With China, General Electric Turns Its Eye to Australia - For General Electric Co., Australia is the new China. The continent of 22 million people is set to generate more revenue for the industrial conglomerate this year than will the Middle Kingdom, with 1.3 billion. The shift stems in part from Chief Executive Jeff Immelt's shuffling of the company's business lines to emphasize energy. But it also reflects a significant rethinking of China's value for GE, which, after years of missed targets and slow growth in the country, has turned its attention to resource-rich locations that have friendlier rules for investing and fewer national champions as rivals.

Something just snapped in the economy - The Australian Industry Group Performance of Services (PSI) for April is out and shows a precipitous drop:

  • The latest seasonally adjusted Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) slumped by 7.4 points to 39.6 in April (readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decline). This was the lowest monthly reading since March 2009.
  • The sharp fall in the Australian PSI® was driven by declines in the sales and new orders components of the index, which are now both at their lowest levels in almost three years.
  • Reports of weak trading conditions were widespread across all services sub-sectors and all states.
  • Consistent with these reports and with the latest weakening in Australian inflation (with headline inflation just 1.6% p.a. in the March quarter), the input prices and average wages and selling prices indices are now back at or below the levels seen during the Global Financial Crisis.

Australia Cuts Rates to Arrest Slump —Australia's slowing economy got a shot in the arm Tuesday when the central bank cut a half-percentage point from official interest rates, signaling a shift in its focus away from fighting inflation and toward safeguarding growth amid an uncertain global outlook. It was the first cut in a decade bigger than a quarter of a percentage point, except for emergency cuts after the Lehman Brothers collapse, according to HSBC. The central bank was reacting to a slowdown in global growth, particularly in China, a big buyer of Australian natural resources. "Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year," said Reserve Bank of Australia Gov. Glenn Stevens following the decision to lower the official cash rate to 3.75%, its lowest since early 2010. "Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future," Mr. Stevens added.

Australia Cuts Interest Rates to Two-Year Low - The Australian central bank lowered its key interest rate half a percentage point Tuesday to 3.75 percent, the lowest level in two years, surprising analysts, who had been expecting a more modest cut. The uncertain global outlook — lackluster growth in the United States, the debt troubles of the euro zone and moderating growth in China — has prompted policy makers around the globe to step up their efforts to bolster growth in recent months. Australia’s reduction of its benchmark cash rate, the overnight money market interest rate, was its third cut in borrowing costs since late 2011. Still, the central bank, the Reserve Bank of Australia, struck a balanced note in its assessment of the global economy and appeared eager to avoid the impression that the larger-than-expected rate cut delivered Tuesday reflected any dire prognosis for the economy. “Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year,” Glenn Stevens, the central bank’s governor, said in a statement accompanying the rate decision. Market sentiment has remained “skittish,” and the situation in Europe will “remain a potential source of adverse shocks for some time yet,” Mr. Stevens noted.

Spotlight Australia: Collapse in Service Sector; Unrelenting Discount Wars; Catastrophic Decline in Profits; Stranded Merchandise in Warehouses - Australia in in grim shape. Retailers are going under, home prices are sinking, and there is no an enormous collapse in the entire service sector. Markit reports Australia Services Sector Slumps in April KEY FINDINGS:

  • The latest seasonally adjusted Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) slumped by 7.4 points to 39.6 in April (readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decline). This was the lowest monthly reading since March 2009.
  • The sharp fall in the Australian PSI® was driven by declines in the sales and new orders components of the index, which are now both at their lowest levels in almost three years.
  • Reports of weak trading conditions were widespread across all services sub-sectors and all states.
  • Consistent with these reports and with the latest weakening in Australian inflation (with headline inflation just 1.6% p.a. in the March quarter), the input prices and average wages and selling prices indices are now back at or below the levels seen during the Global Financial Crisis.

The World's Unbanked Poor - After the global financial crisis, banks may not be viewed as the most trustworthy organizations, but generally they are considered a safer place to keep money than stowing it under a mattress. A new World Bank report shows that the proportion of adults who have an account at a bank, credit union or other formal financial institution in high-income countries is more than double what it is in developing countries — and suggests that the very lack of such an account may perpetuate poverty. “Giving people a safe, affordable place to save their money is important,” said Leora Klapper, lead economist in the finance and private sector of the World Bank’s development research group and an author of the report. The study, based on a survey of 150,000 adults in 148 economies conducted by Gallup, estimates that there are 2.5 billion adults around the world who do not have a formal account, and that about 65 percent of them said they did not have enough money to use one. “Formal accounts and savings may help poor people smooth their consumption and weather unexpected events such as unemployment, accidents, illnesses and deaths without necessarily resorting to expensive debt,” Ms. Klapper wrote in an e-mail. “Financial inclusion enables poor people to save and to responsibly borrow — allowing them to build their assets, to invest in education and entrepreneurial ventures — and to improve their livelihoods.”

Rise of Generation Occupy -Around the world, young people—students, workers, and the unemployed—are bringing their grievances to the public square. Protests have spread throughout the world, from Tunis to Cairo, Tel Aviv to Santiago de Chile, and Wall Street to Oakland, California. The specific grievances differ across the countries, yet the animating demands are the same: democracy and economic justice. Many factors underlie the ongoing global upheavals. Protests in North Africa at the start of 2011 were fueled by decades of corrupt and authoritarian rule, increasingly literate and digitally connected societies, and skyrocketing world food prices. To top it off, throughout the Middle East (as well as Sub-Saharan Africa and most of South Asia), rapid population growth is fueling enormous demographic pressures. The protests spread from North Africa worldwide. Everywhere the fundamental concerns have been the same—political representation and the growing gaps between rich and poor—but local circumstances have of course differed. The demographic challenge stands out in the North African protests. Egypt’s population, for example, more than doubled over the course of Hosni Mubarak’s rule, from 42 million in 1980 to 85 million in 2010. This surge is all the more remarkable given that Egypt is a desert country, with its inhabitants packed along the Nile. With no room to spread out, population densities are rising to the breaking point. Cairo has become a sprawling region of some 20 million people living cheek-by-jowl, with inadequate infrastructure.

2030: The world in 5 graphs - The following are from a report published last week by the European Union’s Institute for Security Studies (ISS). They’re projections that assume today’s trends will continue in one direction only — which may not be the case.

And So The World Burns: Global April PMI Summary (table) No need for much commentary here, suffice to say that those who thought Italy's massive drop in PMI from 47.9 to 43.9 in April was bad, apparently have not seen Hungary, Australia, Norway or Switzerland. The good news? Turkey is doing well to quite well... which likely explains why they are trying to confiscate the people's gold.

UN: 50M fewer jobs worldwide since '08 - The bleak worldwide employment picture is worsening and is, in some ways, irreversible, according to a United Nations agency report of global unemployment. "This is not a normal employment slowdown," said the World of Work Report 2012, an annual survey of the global job market. "Four years into the global crisis, labour market imbalances are becoming more structural, and therefore more difficult to eradicate. Certain groups, such as the long-term unemployed, are at risk of exclusion from the labour market. This means that they would be unable to obtain new employment even if there were a strong recovery." The report, released Monday by the International Labor Organization, based in Geneva, said there are 50 million fewer jobs worldwide than at the start of the economic meltdown in 2008. It said recovery "has also stalled in other advanced economies, such as Japan and the United States" and "jobs deficits remain acute in much of the Arab region and Africa."

Global unemployment an 'alarming' situation: ILO - Fiscal austerity and tough labour reforms have failed to create jobs, leading to an “alarming” situation in the global employment market that shows no sign of recovering, the International Labour Organization says. In advanced countries, especially in Europe, employment is not expected to return to pre-crisis levels of 2008 until the end of 2016 — two years later than it previously predicted — in line with a slowdown in production. An estimated 196 million people were unemployed worldwide at the end of last year, forecast to rise to 202 million in 2012 for a rate of 6.1%, according to the United Nations agency’s annual flagship report, “World of Work Report 2012.” “Austerity has not produced more economic growth,” Raymond Torres, director of the ILO Institute for International Labour Studies, told a news briefing. “The ill-conceived labour market reforms in the short-term cannot work either. These reforms in situations of crisis tend to lead to more job destruction and very little job creation at least in the short-term,”

Why is unemployment so high in South Africa? - A few factors I imagine are important:

1) The education system is totally broken in a lot of places. As in, 12th graders can neither read nor write in any language nor figure out 3×3 in their heads.
2) Unions are crazy strong, and have been driving up wages like gangbusters, particularly in the public sector.
3) Minimum wage laws are stringent and have actually led to worker protests:
4) Inflation hasn’t been TOO bad recently (~6%), but has seen spikes to almost 14 percent not long ago:
5) There’s a highly developed sector. On average, whites are far richer than blacks.
6) Crime and inequality are incredibly bad.
7) The ANC has won every election in a landslide and is strongly allied with the unions.

Inflation-Targeting Experiment May Start in Japan… But at What Cost? - Rumors abound that a deal is fomenting in Japan that might lead to the inflation targeting proposal that so many progressives champion on their blogs being put in place (clarification: even though inflation targeting was announced in February, there are doubts in Japan as to its seriousness. Japan is famous for “administrative guidance” in lieu of action).  About two weeks ago the Japanese denied the rumors, but they’re still cropping up among investors. I’ve heard similar accounts through my channels. The latest account is of a deal between Prime Minister Noda and the LDP (the main opposition party) to amend the Bank of Japan law in return for tax increases. The LPD has already drafted a law imposing inflation targeting on the BoJ in order to bring down the stratospheric yen. The LPD bill is said to be similar to a 2010 proposal by Your Party to establish an inflation goal and make the tenure of BoJ leadership dependent on sticking reasonably close to the target.  So, should the neoclassical-Keynesian/neo-monetarist commentariat be pleased? The tradeoff looks ugly. If the rumors prove to be true, the Japanese government is going to engage in fiscal austerity by raising taxes so that they may pass a law that states that any central banker who fails to achieve specific price-rises will lose his or her job. But reducing fiscal deficits in a weak and already deflation prone economy is even more deflationary; it’s hard to see how the BoJ can hit the target in the face of this headwind.

Japan could face 'day of reckoning' if tax plans fail: Moody's - Japan could face "the day of reckoning" sooner than expected if the government fails to raise the sales tax and investors demand higher returns on government bonds, Moody's Investors Service said on Wednesday, keeping up the pressure on Tokyo to enact tax reform bills. Tom Byrne, senior vice president and regional officer, acknowledged the tax increase would leave Japan facing weaker economic growth but said the country needs to "bite the bullet" and start fixing public finances driven by swelling welfare costs. "If you don't increase taxes you'd have to issue more JGBs which moves the day of reckoning closer to the tipping point where markets demand higher risk premiums," Byrne told reporters on the sidelines of the Asian Development Bank meeting in Manila. "We tend to think there is a tipping point where things could change abruptly." Facing snowballing debt, Prime Minister Yoshihiko Noda is struggling to preserve party unity and push through a contentious plan to double the 5 percent sales tax by 2015, with opposition parties that control the parliament's upper house refusing to cooperate.

Japan switches off last nuclear power plant; will it cope? (Reuters) - Japan shuts down its last working nuclear power reactor this weekend just over a year after a tsunami scarred the nation and if it survives the summer without major electricity shortages, producers fear the plants will stay offline for good. The shutdown leaves Japan without nuclear power for the first time since 1970 and has put electricity producers on the defensive. Public opposition to nuclear power could become more deeply entrenched if non-nuclear generation proves enough to meet Japan's needs in the peak-demand summer months. "Can it be the end of nuclear power? It could be," managed to get through the summer last year without any blackouts by imposing curbs on use in the immediate aftermath of the earthquake and tsunami. Factories operated at night and during weekends to avoid putting too much stress on the country's power grids. A similar success this year would weaken the argument of proponents of nuclear power. "They don't have the polls on their side," said DeWit. "Once they go through the summer without reactors, how will they fire them up? They know that, so they will try their darndest but I don't see how." Japan has 54 nuclear power reactors, including the four at Tokyo Electric's Daiichi plant in Fukushima that were damaged in the earthquake and tsunami, culminating in three meltdowns and radiation leaks for the worst civilian nuclear disaster since Chernobyl in 1986. One by one the country's nuclear plants have been shut for scheduled maintenance and prevented from restarting because of public concern about their safety.

Down Argentina Way - Krugman - Matt Yglesias, who just spent time in Argentina, writes about the lessons of that country’s recovery following its exit from the one-peso-one-dollar “convertibility law”. As he says, it’s a remarkable success story, one that arguably holds lessons for the euro zone. I’d just add something else: press coverage of Argentina is another one of those examples of how conventional wisdom can apparently make it impossible to get basic facts right. We keep getting stories about Ireland’s recovery when there is, in fact, no recovery — but there should be, darn it, because they’ve done the “right” thing, so that’s what we’ll report. And conversely, articles about Argentina are almost always very negative in tone — they’re irresponsible, they’re renationalizing some industries, they talk populist, so they must be going very badly. Never mind this: Just to be clear, I think Brazil is going pretty well, and has had good leadership. But why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged? Actually, we know why — but it doesn’t speak well for the state of economics reporting.

A preliminary estimate for Canadian 2012Q1 GDP growth - The February GDP number came out yesterday, so it's time for my quarterly exercise in trying to come up with a preliminary estimate for quarterly GDP growth a month before Statistics Canada makes its first announcement. As regular readers will no doubt be weary of being reminded, the estimate is based on the GDP numbers for the first two months of the quarter along with the information in the LFS release for the third month. The most recent exercise is here. The number I get for the annualised growth rate for GDP in the first quarter of 2012 is 1.6%. This may seem a bit high, especially since the 0.1% increase in January was more than offset by the 0.2% drop in February. There are two reasons why the estimate came in at 1.6%:

  • December GDP growth was very high: 0.5%. Even if January and February saw no growth - which is pretty much what happened - January and February will still be that much higher than October and November.
  • The March Labour Force Survey release showed strong growth in both in employment and hours worked. The backcast I have for March GDP is 0.4%.

A Berlin Consensus? - Berlin was  an apt setting for the conference of the Institute for New Economic Thinking (INET), which I was there to attend. The conference’s theme was “Paradigm Lost,” with more than 300 economists, political scientists, systems analysts, and ecologists gathering to rethink economic and political theory for the challenges and uncertainty posed by growing inequality, rising unemployment, global financial disarray, and climate change. Almost everyone agreed that the old paradigm of neoclassical economics was broken, but there was no agreement on what can replace it.  Nobel laureate Amartya Sen attributed the European crisis to four failures – political, economic, social, and intellectual. The global financial crisis, which began in 2007 as a crisis of US subprime lending and has broadened into a European sovereign-debt (and banking) crisis, has raised questions that we cannot answer, owing to over-specialization and fragmentation of knowledge. And yet there is no denying that the world has become too intricate for any simple, overarching theory to explain complex economic, technological, demographic, and environmental shifts.In particular, the rise of emerging markets has challenged traditional Western deductive and inductive logic. Deductive inference enables us to predict effects if we know the principles (the rule) and the cause. By inductive reasoning, if we know the cause and effects, we can infer the principles.

European factories falter, Asia flourishes (Reuters) - Euro zone factories sank further into decline last month but manufacturers in Asia upped their tempo to meet growing demand from the United States and China, exposing a widening gulf between Europe and the rest of the world. Worryingly for European policymakers, a downturn that is hitting Italy and Spain hard, now appears to be taking root among core members France and Germany. The data hit the euro and dented optimism following a similar survey on Tuesday that showed the pace of growth in U.S. manufacturing picked up much more than expected. "The numbers coming out of the euro zone give no cause for comfort. The China economy is holding up, but the debt crisis in Europe is weighing on growth and its rippling across the world," said Peter Dixon at Commerzbank. "Global concerns on growth are there, despite stellar numbers from the United States." Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) dropped to 45.9 last month from 47.7 in March, slightly below a preliminary reading and marking its lowest reading since June 2009. 

Breaking the Eurozone's Self-Defeating Cycle of Austerity - It has become a ritual: every six months, I debate the IMF at their annual meetings, the last two times represented by their deputy director for Europe. It takes place in the same room of that giant greenhouse-looking World Bank building on 19th Street in Washington, DC. And each time, the IMF's defense of its policies in the eurozone does not get any stronger. Maybe, it's because most economists at the IMF don't really believe in what they are doing. The fund is, after all, the subordinate partner of the so-called "troika" – with the European Commission and the European Central Bank (ECB) – calling the shots. And most fund economists know their basic national income accounting: fiscal tightening is going to make these economies worse, as it has been doing. Those that have tightened their budgets the most – for example, Greece and Ireland – have shrunk the most, as would be predicted.The Spanish government, which on Friday announced a 52% unemployment rate among its youth, has projected that the planned budget tightening for this year would by itself take 2.6 percentage points off of 2012 growth. With the eurozone and now even the UK in recession, with the German economy shrinking and France barely growing, the rebellion against the self-inflicted harm of austerity is spreading to the richer northern countries.

European, US Austerity Drive is Suicidal: Nobel Economist Stiglitz | Common Dreams: Europe is headed down the same path that most Republicans -- and many Democrats -- are suggesting for the US: reductions in the public sector, cuts in benefits, slashing investments in infrastructure and education.  Nobel Prize-winning U.S. economist Joseph Stiglitz speaking in Vienna, Austria Thursday night said that it's a suicidal path for Europe -- and that such a policy has never worked in any large country. Youth unemployment in Spain has been at 50 percent since the crisis in 2008 with “no hope of things getting better anytime soon,” said Stiglitz, who is a professor for economics at Columbia University. “What you are doing is destroying the human capital, you are creating alienated young people.” In an interview earlier this week in The European, Stiglitz said, "When you look at America, you have to concede that we have failed. Most Americans today are worse off than they were fifteen years ago. A full-time worker in the US is worse off today than he or she was 44 years ago. That is astounding – half a century of stagnation. The economic system is not delivering. It does not matter whether a few people at the top benefitted tremendously – when the majority of citizens are not better off, the economic system is not working."

Hey, Not So Fast on European Austerity, by Christina Romer - European policy makers just don’t get it. To hear them talk, you’d think that Europe was on the right path. Troubled countries just need more of the same, they say — more fiscal austerity, more labor market flexibility, more price stability — and the European crisis will be licked.  Have they looked at their own numbers? It has been two years since moves to austerity started, but the crisis is still with us. Growth in European gross domestic product was negative in the last quarter of 2011. Unemployment in the entire euro zone in February was 10.8 percent; in Spain it was an astounding 23.6 percent. And judging from the renewed turbulence in bond markets, investors don’t believe that prosperity is just around the corner.  Fiscal austerity is normally a sensible response to a loss in confidence in a country’s solvency, as has occurred in parts of Europe. But the current situation is exceptional. Short-term interest rates are very low, so large rate reductions to offset the negative impact of budget cutting are impossible. In addition, the troubled countries of Europe are part of a common currency area. This means that the other obvious tool for stimulating growth during a time of fiscal austerity — depreciating the currency relative to that of their main trading partners — is not available, either.  The result is that austerity is uniquely destructive right now. Indeed, because of the harsh effect of budget cutting on growth, debt-to-G.D.P. ratios in Europe have continued to rise.

Growth not austerity is best remedy for Europe - Larry Summers - Once again Europe’s efforts to contain its crisis have fallen short. It was perhaps reasonable to hope that the European Central Bank’s longer-term refinancing operation to provide nearly $1tn in cheap three-year funding to European banks would halt the crisis for a while if not resolve it. It is now clear it has been little more than a palliative. Weak banks, especially in Spain, have bought more of the debt of their weak sovereigns while foreigners have sold down their holdings. Markets see banks grow ever more nervous. Again, both Europe and the global economy approach the brink. In any policy sphere a great debate always follows signs of failure. The architects of the current policy and their allies argue that the problem lies in insufficient determination to maintain the existing strategy. Others argue for a change in course, a view that seems to be taking hold among European electorates – and rightly so. There is a good chance that much of what is being urged is likely to be not just ineffective but counterproductive in terms of maintaining the monetary union, restoring normal financial conditions and government access to markets, and re-establishing growth.

Turning the Tide on Austerity - This week the Economist places François Hollande, the socialist presidential candidate who is likely to win the election in France on May 6, on its cover with the headline "The rather dangerous Monsieur Hollande". A socialist in charge of Europe's second-largest economy is apparently cause for serious concern.  But why? France is overburdened with a massive welfare state and needs to make changes, argues the Economist: "Public debt is high and rising, the government has not run a surplus in over 35 years, the banks are undercapitalised, unemployment is persistent and corrosive and, at 56% of GDP, the French state is the biggest of any euro country." But looking at the data, France actually does not seem to be doing particularly badly. A look at a few basic economic indicators over the past ten years fails to reveal any obvious signs of an economy that has been oppressed by an oversized government sector, as seen below.  Yes, the French have chosen to allow the government to perform more functions than in many other countries, but economic growth has not been notably worse than its neighbors, and its public debt burden is on par with Germany and the United Kingdom. Despite ideological wishes to the contrary, there is little evidence that countries that choose to have a larger government (within a reasonable range) perform worse economically.

Europe’s Anti-Austerity Calls Mount as Elections Near- A recession in Spain and forecasts of rising unemployment in the 17-nation euro area are amplifying criticism of the German-led austerity agenda in election campaigns this week in France and Greece. With Spain’s largest unions leading marches involving thousands of protesters in 55 cities yesterday, Prime Minister Mariano Rajoy’s government battled to prevent Spain from becoming the next country to seek a bailout. In France, where the presidential-election runoff is set for May 6, Socialist frontrunner Francois Hollande pushed back against German Chancellor Angela Merkel’s focus on deficit reduction.Hollande rebukes Berlin over crisis role - François Hollande, the Socialist candidate for the French presidency, has claimed support from across Europe for his demand for a growth plan, saying it was not up to Germany to decide what action should be taken in the face of the eurozone crisis. With opinion polls predicting he will beat President Nicolas Sarkozy in the run-off vote a week on Sunday, Mr Hollande has stepped up his insistence that he would not ratify the European fiscal discipline treaty without a renegotiation to add a package of growth measures. In a television appearance on Thursday night, Mr Hollande said: “It is not for Germany to decide for the rest of Europe. I’m getting lots of signals, direct and indirect, from other governments, even if they are conservative.” Mr Hollande was delighted on Wednesday when Mario Draghi, governor of the European Central Bank, also called for a growth pact to accompany the austerity measures being implemented across Europe, including in France.

Very Serious Bots - Krugman - Henry Farrell looks at an Economist editorial on France and wonders whether any human intelligence was involved: But I do know that this is one of the most exquisitely refined examples of globollocks that I’ve ever seen. It’s as beautifully resistant to the intellect as an Andropov era Pravda editorial. A few more years of this and the Economist won’t have to have any human editing at all. Even today, I imagine that someone with middling coding skills could patch together a passable Economist-editorial generator with a few days work. Mix in names of countries and people scraped from the political stories sections of Google News, with frequent exhortations for “Reform,” “toughminded reform,” “market-led reform,” “painful reform,” “change,” “serious change,” “rupture,” and 12-15 sentences worth of automagically generated word-salad content, and you’d be there. I wonder whether even the writer of this editorial would be able to define ‘reform’ or ‘change’ if he were asked, beyond appealing to some sort of ‘social protection bad, market good’ quasi-autonomic reflex embedded deep in his lizard brain. I also wonder whether the people in there are as cynical about their product as Andropov-era journalists were, or whether they actually believe the pabulum they dish out. I think this question can and should be asked about a lot of what passes for wisdom these days.

Suicides Have Greeks On Edge Before Election (Reuters) - On Monday, a 38-year-old geology lecturer hanged himself from a lamp post in Athens and on the same day a 35-year-old priest jumped to his death off his balcony in northern Greece. On Wednesday, a 23-year-old student shot himself in the head. In a country that has had one of the lowest suicide rates in the world, a surge in the number of suicides in the wake of an economic crisis has shocked and gripped the Mediterranean nation - and its media - before a May 6 election. The especially grisly death of pharmacist Dimitris Christoulas, who shot himself in the head on a central Athens square because of poverty brought on by the crisis that has put millions out of work, was by far the most dramatic. Before shooting himself during morning rush hour on April 4 on Syntagma Square across from the Greek parliament building, the 77-year-old pensioner took a moment to jot down a note. "I see no other solution than this dignified end to my life so I don't find myself fishing through garbage cans for sustenance," wrote Christoulas, who has since become a national symbol of the austerity-induced pain that is squeezing millions. Greek media have since reported similar suicides almost daily, worsening a sense of gloom going into next week's election, called after Prime Minister Lucas Papademos's interim government completed its mandate to secure a new rescue deal from foreign creditors by cutting spending further.  

Portraits Of Greece In Crisis - After years of building up more than $400 billion in debt, Greece was devastated by the recent global economic crisis. Fearing the fallout from a Greek bankruptcy, fellow Eurozone members provided aid packages -- under strict conditions, including the adoption of severe austerity measures. Greece is entering a fifth straight year of recession, its economy poised to shrink another 5 percent in 2012. Average unemployment is at a record 21.8 percent -- with youth unemployment (under 25) at 51 percent. Years of increasingly difficult conditions have hit the citizens of Greece hard, and the uncertainty and frustration have led some to flee, a few to take their own lives. Collected here are images from a nation in the midst of a deepening crisis. [43 photos]

Brain Drain Feared as German Jobs Lure Southern Europeans - While much of southern Europe is struggling with soaring unemployment rates, a robust Germany is desperate for educated workers, and it has begun to look south for the solution. In the last 18 months, it has recruited thousands of the Continent’s best and brightest to this postcard-perfect town and many others like it, a migration of highly qualified young job-seekers that could set back Europe’s stragglers even more, while giving Germany a further leg up. The free movement of labor was one of the founding principles of the European Union, a central part of the effort to create a single, unified market. But in more prosperous times, few workers outside of Eastern Europe felt compelled to leave home. That is changing under the pressures of the euro crisis and a harsh recession, and employers, governments and the migrants themselves are discovering that immigration, even when legal and nominally accepted, can raise tensions in ways that Europe’s founders may never have anticipated. Who wins and who loses — if anyone — is a matter of growing debate. But there is widespread agreement that Europe is rapidly entering a new era whose ramifications are only beginning to be understood. 

Satyajit Das: The European Debt Crisis Redux - The half-life of solutions to Europe’s debt problem is getting ever shorter. Recent hopes have relied on the ostensible success of the European Central Bank’s (“ECB”) LTRO – Long Term Refinancing Operation, more appropriately termed the Lourdes Treatment and Resuscitation Option. In December 2011 and February 2012, the ECB offered unlimited financing to European banks at 1% for 3 years, replacing a previous 13-month program. Banks drew over Euro 1 trillion under the facility – €489 billion in the first round and €529.5 billion in the second. Participation amongst European banks was widespread, especially in the second round where around 800 banks used the facility. The funds borrowed were used to purchase government bonds, retire or repay existing more expensive borrowings and surplus funds were redeposited with the ECB. The first entailed banks borrowing at 1% purchasing higher yielding sovereign debt, such as Spanish and Italian bonds that paid 5-6%. The LTRO provided finance for both beleaguered sovereigns and banks, which need to raise around €1.9 trillion in 2012. It helped reduce interest rates for countries like Spain and Italy. It also helped banks covertly build-up capital, via the profits earned through the spread between the cost of ECB borrowings and the return available on sovereign bonds. The sheer weight of money – at one €500 note per second it would take 63 ½ years count €1 trillion- proved successful. Financial market sentiment was overwhelmingly positive feeding a large rally in global stock markets and other risky assets. As subsequent events have exposed, there were always reasons to be cautious.

What Should Europe Do? --- Kantoos Economics offers another take on the appropriate European policy response. He rejects the standard line of thinking: One proposed solution is for Germany to employ fiscal stimulus at home, to increase domestic inflation and increase investment and spending. Simon Wren-Lewis goes as far as to argue that this is what a truly but hypothetical European government would do. I disagree: a European government would employ stimulus in the periphery, not Germany. Broadly, I agree with this, although I think we view it through a different lens. If Europe had a true fiscal authority, it would automatically redistribute resources via transfer payments and taxes from wealthly regions to less wealthy regions - thus creating demand in the periphery as it adjusts.  Kantoos puts the ball in the ECB's court: What the ECB should do is to toughen lending standards in Germany, raise collateral requirements, down payments etc., and do the reverse in Spain. This should limit investment and consumption in Germany, and encourage it in Spain. It should mimic a differentiated monetary policy, and try to come as close as possible to the respective natural interest rates. I think this approach suffers from a number of challenges. First, if capital is relatively mobile, it would be difficult to prevent a loan in Spain from making its way to Germany, so I am not sure the ECB can produce a differential monetary policy. Second, it is not clear that easing lending conditions in the periphery would encourage additional spending. I don't think it will be all that easy to reverse the process of private sector deleveraging in the periphery simply by easing lending conditions.

“A Trillion Here, A Trillion There...” – Why 90% Of The European Bank Sector’s Market Cap Is Vaporware* - Two weeks ago the BIS released the Basel Quantitative Impact Survey, "Results of the Basel, III monitoring exercise as of June 2011" which contained several very scary numbers that were noted in Zero Hedge yet which barely received any mention in the broader press. Because the numbers were all very, very large (think eyes glazing over 11-12 digits large), and because their existence meant that the long-term, chronic pain for Europe, which is and has been one of public (and selected private) sector deleveraging (which oddly enough is called “austerity” by everyone to no doubt habituate people to associate debt reduction with pain - where is "mean-reversionism" when you need it?), they, and the BIS report, were promptly buried under the dense foliage of the signal-to-noise forest. Yet it is numbers such as these, that provide us with the best possible glance at the entire forest, no matter how much the various global financial authorities enjoy inundating the hapless speculator crowd with endless irrelevant “trees” on a daily basis.

The Bundesbank Explains Its Grinder Policies - The latest victim of European austerity policies is Spain, where unemployment is at depression levels, 24% headed to 30%, and youth unemployment over 50%. Paul Krugman says that austerity is a failure, just as he and sane economists predicted. The Bundesbank, Germany’s central bank, sent a couple of envoys out to explain that Krugman is dead wrong, and even if he isn’t, the Bundesbank doesn’t care.  Dr Andreas Dombret, a member of the Executive Board, says that the formerly middle class citizens of bad countries like Spain, Italy and Greece, must pay the price for the ravages of the rich. They get crushing reductions in wages and increased unemployment, while prices and output drop. This will reassure the rich, who will then buy their country’s bonds. Dombret doesn’t explain why that’s such an important goal, so it must be obvious to everyone but me. The Germans have been good, so they don’t have to pay the rich nearly as much. Dombret says that this is a one-time deal: crush the working and middle classes today and everything will work out just fine in the long run. And it isn’t like Germany is doing nothing: it has put up huge sums of money to make sure that its banks don’t fail and bondholders don’t suffer any losses.  Dombret’s view was echoed by the President of the Bundesbank, Jens Weidmann. Weidmann says there are two problems, staggering unemployment and sovereign debt. Guess which one is important. Weidmann points to the huge stabilization fund which will protect bondholders and probably bank stockholders

Periphery Credit Crunch Extends As Banks Hoard Bonds - Fresh signs of a credit crunch in the euro zone periphery emerged Monday, as new data showed banks continuing to hoard government bonds rather than sustain credit supply in their national economies. New figures from the European Central Bank showed Spanish and Italian banks were once again heavy net buyers of euro- zone government debt in March, stacking up a total EUR44 billion. But the overall volume of loans outstanding to households and companies in those countries fell again, by nearly EUR12 billion. The data once again confound ECB hopes that the banks would put its money to use in their respective economies. Spanish banks had taken over EUR230 billion of the EUR1.02 trillion injected by the ECB at its two three-year credit operations around the turn of the year, while Italian banks had absorbed just under EUR200 billion. Since then, Spanish banks have bought nearly EUR59 billion in government bonds, while Italian ones have bought nearly EUR92 billion. In March alone, Spanish banks raised their net purchases to EUR20.11 billion from EUR15.52 billion in February, while Italian banks raised their purchases to EUR23.70 billion from EUR23.14 billion. By contrast, lending to households and non-financial corporations fell by EUR2.98 billion in Spain and by EUR9.76 billion in Italy.

S&P downgrades top Spanish banks -- Standard & Poor’s on Monday downgraded the ratings of the top Spanish banks, including Santander and BBVA, after slashing the country’s credit standing because of worsening deficit and growth problems. The banks affected include Santander and its subsidiary Banesto, BBVA, Banco Sabadell, Ibercaja, Kutxabank, Banca Civica, Bankinter and the local unit of Barclays. S&P on Friday cut Spain’s sovereign debt rating by two notches to "BBB+" and said Monday that the bank downgrades followed this action as the same considerations “could have potentially negative implications for our view of the economic risk and industry risk affecting the Spanish banking industry.” Just as S&P made the announcement, official figures showed the Spanish economy slumped into recession in the first quarter, shrinking 0.3 percent after a similar contraction in the last three months of 2011. The economy, saddled with the highest unemployment rate in the industrialized world at some 24.4 percent, has struggled since a property bubble imploded in 2008, compounding the downturn caused by the global financial crisis.

Spain is the New Greece - Nearly one Spaniard in four is unemployed, according to data released on Friday, as the country’s economic and financial predicament prompted a government minister to talk of a “crisis of enormous proportions”.The data from the National Statistics Institute showed 367,000 people lost their jobs in the first three months of the year. At this pace, Spanish job losses are equivalent to 1 million per month in the United States. That means more than 5.6m Spaniards or 24.4 per cent of the workforce are unemployed, close to a record high set in 1994. Spain has become the new Greece. Actually, in many respects Spain is now worse than Greece. The Spanish unemployment rate is already so high and unlike Athens, Madrid has made no headway in reducing its public debt levels (whereas the Greeks are close to running a primary fiscal surplus at which point they could leave and turn the problem back on to Brussels). Moreover, Spain has a huge private debt burden that is twice that of Greece. Although I have warned on these pages before that Spain’s austerity program was leading the country to disaster, my reaction to this economic catastrophe has been one of amazement. Just take a look at this employment data:

Spain in Talks Over ‘Bad Bank’ Scheme - Spain’s government and its banks are discussing a new scheme to segregate problematic property loans into one or more asset management companies to relieve the burden on struggling lenders, according to officials and bankers. The “bad bank” scheme is the latest attempt by the centre-right government of Mariano Rajoy, prime minister, to avoid an international rescue programme of the sort required by Greece, Ireland and Portugal. Ministers had decided they had no need of an Irish-style bad bank. But economists say the crisis is so dire that weak banks will need further recapitalisation of about €100bn. Government officials insist that the scheme should not be called a bad bank, because it will not be a bank and participating lenders will be able to park assets in it only if they have set aside sufficient bad loan provisions, independently valued.

Spanish lenders in talks over 'bad bank' plan, government agency confirms recession  - As their losses from mortgages grow, Spanish banks have begun discussions about creating a separate entity - a "bad bank" - to take on these assets and relieve pressure on the country's financial sector. The goal of the new organization would be to reduce the financial strain on banks and prevent the need for either a more costly government bailout or an international rescue along the lines of Greece, Portugal and Ireland. News of the bank talks on Monday emerged as ratings agency Standard & Poor's downgraded the debt of 11 Spanish banks - including Banco Santander SA, the eurozone's largest by market capitalization - because of growing concerns about the effects of Spain's shrinking economy on the banking industry. S&P warned that five other Spanish banks are at risk of a similar downgrade. The official for Spain's Economy Ministry confirmed Monday that the Spanish banking industry is discussing creating a private entity that would assume their toxic assets. The new asset management organization is designed to take the burden of trying to sell foreclosed properties off the banks and allow them to concentrate on providing credit to the private sector. The official added that banks would be able to transfer toxic assets only if they had already set aside provisions under existing government rules. The government would not inject any taxpayer money into the creation of such an entity and its role would be limited to setting up rules for how it would work. The official spoke on condition of anonymity in line with ministry rules.

Big Spanish banks slip closer to bankruptcy - Standard and Poor's downgraded the credit ratings of Spain's 11 largest banks Monday as efforts to rescue the financial institutions seemed to go nowhere. Economists expect the banks will need at least another $132 billion this year if they are to stave off bankruptcy. Despite this, the head of one the nation's largest banks insisted there is no problem. The ratings cut came because the unemployment rate - 25 percent - will lead to even more people defaulting on their mortgages. Even before unemployment skyrocketed last year, Spain's banks were reeling from a collapse in property prices which cut home values by more than 60 percent in some areas. The government is considering whether to create a holding company for the banks' toxic real estate assets. Under this plan the government would buy the banks' bad loans and create an agency with the responsibility for pursuing those who had defaulted on their loans. A similar plan was implemented in Ireland two years ago. This may be a case of swapping deck chairs on the Titanic. The banks would effectively be swapping very bad loans for Spanish bonds, an increasingly risky investment. This assumes Spain would be able to raise money for this in the first place. Spanish Prime Minister Mariano Rajoy has repeatedly said the banks would not need an EU-funded bailout, but it is difficult to see where else the money would come from.

Spain in recession as austerity bites deep - Spain sank into recession in the first quarter and economists said spending cuts aimed at meeting strict EU deficit limits, together with a reeling bank sector, would delay any return to growth until late this year or beyond. It is the second recession in just over two years for the euro zone's fourth largest economy and comes as the government tries to convince investors it will not need outside aid to put its house in order. The country is caught between pressure from its European peers to fix public finances and growing domestic resistance to austerity measures that have helped push unemployment to more than double the EU average.

Recession in Spain Breeds Pessimism in Global Markets - The contraction in Spain's economy is dimming hopes that the government will be able to cut its budget deficit as predicted and raises the specter that the country might be locked into a downward financial spiral. A recession makes it more difficult to lower the deficit, and as investors lose confidence in the country, borrowing rates rise, adding to the financial pressure. Ratings agency Standard & Poor's on Friday downgraded Spain to just three notches above junk, following up the move on Monday by lowering its rating for 11 Spanish banks. Investors are worried that Spain will not be able to support its banks, which are burdened with massive amounts of bad loans from an imploded property market. But rescuing Spain, the fourth-largest economy in the 17-country eurozone, might prove too expensive for the continent's bailout funds.

The Market Calls BS on Spain's Efforts to Cover Its Toxic Banking Debt - In a previous article I began delving into the toxic sewer that is the Spanish banking system. At the root of the problem is the previously unregulated Spanish cajas or regional/ local banks which own as much as 56% of all Spanish mortgages. To give you an idea of how bad things are with the cajas, consider that in February 2011 the Spanish Government implemented legislation demanding all Spanish banks have equity equal to 8% of their “risk-weighted assets.” Those banks that failed to meet this requirement had to either merge with larger banks or face partial nationalization. The deadline for meeting this capital request was September 2011. Between February 2011 and September 2011, the number of cajas has in Spain has dropped from 45 to 17. Put another way, over 60% of cajas could not meet the capital requirements of having equity equal to just 8% of their risk-weighted assets. As a result, 28 toxic caja balance sheets have been merged with other (likely equally troubled) banks or have been shifted onto the public’s balance sheet via partial nationalization. The markets are well aware that this policy has only spread the toxic garbage, not fixed it. Case in point, take a look at the chart for Banco Sabadell which was merged with toxic Caja de Ahorros del Mediterráneo or CAM for short.

Why We Should Worry about Spain’s Economic Pain - We should all be very worried about what’s going on in Spain. Because Spain isn’t Greece. The Greek crisis was most likely not a direct threat to the survival of the monetary union. Its economy was simply too small. The danger was in the possible contagion effect Greece might present if it outright defaulted or bolted from the union. Spain, the zone’s fourth-largest economy (after Germany, France and Italy) can do a lot of damage all by itself. If Spain ultimately requires a bailout, it would strain the resources available in the zone’s rescue fund (the European portion of which was recently boosted to a total of $925 billion) and put pressure on the zone to fatten up the fund even more, which Germany and others have been reluctant to do. Such an event would also be the biggest blow to the future of the euro yet, likely reigniting the crisis in Italy and making other bailouts more likely (especially for Portugal). With emerging markets slowing down, Europe in the toilet, the U.S. recovery uncertain, and energy prices high, a Spanish meltdown is exactly what the global economy doesn’t need right now.

Don't Forget Portugal: MS Sees A Second Bail-Out By September With A Bail-In To Follow -With all eyes firmly planted on Spain, the little-Escudo-that-could has quietly slipped off the heading-into-the-abyss list of the mainstream media. Little was made this week of the fact that 10Y Portuguese bond yields dropped to seven-month lows - except by us of course where we explained that this is almost entirely due to the CDS-Bond basis trade 'arb-du-jour' that has placed a technical bid under Portuguese bonds. As we described in detail here, the real Debt/GDP of Portugal is around 140% (notably higher than the EC estimates of 111% once contingent liabilities are take account of) and the issues that face this small nation are entirely unresolved with bank recapitalization needs of at least EUR12bn and a highly indebted private sector. The bottom-line is that optically-pleasing bond improvements recently have been entirely due to synthetic credit arbitrage and, as Morgan Stanley notes, the nation remains mired in the three risks of contingent liabilities, bank recap needs, and a grossly indebted private sector; leaving a second bailout very likely by September 2012 and the challenging debt dynamics likely to mean a restructuring.

Italy Faces 20 Billion-Euro Gap, Tremonti Tells Corriere - Italy may post an unexpected budget gap of as much as 20 billion euros ($26.5 billion) by mid-year due to the government’s austerity measures, former Finance Minister Giulio Tremonti told Corriere della Sera. The implementation of a new property tax and changes to the pension system passed in December will require extra financial resources, Corriere cited Tremonti as saying. The shortfall will also include as much as 8 billion euros to fund other programs such as Italy’s international peacekeeping missions, Tremonti said, according to the Milan-based newspaper.

Monti Pledges $5.5 Billion in Spending Cuts - Italian Premier Mario Monti pledged on Monday to make €4.2 billion ($5.5 billion) in cuts in state spending over the next six months in a bid to avoid raising sales taxes and tapped a leading private-sector turnaround expert for the job of determining just what gets slashed. Monti told journalists after a five-hour-long Cabinet meeting on the nation’s financial crisis that he hopes to avoid hiking the national sales tax from 21 to 23 percent in October by eliminating wasteful spending, implementing better purchasing policies, and possibly putting unused government properties up for sale. Avoiding a hike in the VAT sales tax isn’t completely guaranteed, Monti warned, saying “for now we can say that we hope to have, from the reduction of spending, sufficient benefits” to avoid the increase. He gave the unenviable task of deciding what gets cut in which ministry to Enrico Bondi, the Italian turnaround expert with a reputation for hard-nosed spending cuts who helped restructure the Parmalat dairy empire after its collapse in fraudulent bankruptcy last decade.

Eurozone Inflation Provides More Disappointment - Europe got more downbeat economic news Monday as inflation remained higher than expected and European Central Bank data showed only anemic growth in credit to businesses — despite its massive infusion of cheap money into the financial system. Inflation in the 17 countries that use the euro fell to an annual 2.6 percent in April, down from 2.7 percent in March but higher than the 2.5 percent expected by market analysts. Rising prices have been a consistent headache for the ECB, the chief monetary authority for the 17-country eurozone. The annual rate has remained stuck well above the central bank's goal of just under 2 percent, a target that it now says won't be reached until early 2013. The stubborn inflation rate, which the ECB blames on higher oil prices and taxes in some countries, is important to the eurozone debt crisis because it discourages the ECB from cutting its 1 percent benchmark interest rate further. Lower central bank interest rates can spur growth, but can also worsen inflation. ECB President Mario Draghi has stressed that fighting price rises is the bank's top priority.

Record-High Gasoline Further Burdens Consumers in Europe - The average retail price in the European Union’s 27 member nations surged to a peak of 1.69 euros a liter ($8.44 a gallon) on April 20 with Germany, France, the U.K., Greece, Italy and Spain all at records, according to European Commission data. The cost of gasoline at the pump in the continent, more than double U.S. levels, had made a fresh high every week since Jan. 13. U.K. gasoline advanced to a new all-time high last week.  Policy makers are confronted with an oil-price increase that threatens to curb consumers’ spending power at a time when at least six of the 17 euro nations are in recession. The continent, which is struggling to contain a sovereign-debt crisis that has already forced Greece, Ireland and Portugal to seek bailouts, has fewer ways to combat scarcities after shrinking profits and declining demand forced the closure of the most European refineries in three decades.

Austerity Fantasies - Paul Krugman  - Wow. A reader directs me to this interview with John Peet, the Europe editor of The Economist, who declares: And of the countries that were in trouble, I would say Ireland looks as if it’s the best at the moment because Ireland has implemented very heavy austerity programs, but is now beginning to grow again. From Ireland’s Central Statistical Office: See the return to growth, there at the end? Me neither. To be fair, Peet isn’t alone. The legend of Irish recovery has somehow set in, and nobody on the pro-austerity side seems to feel any need to look at the data, even for a minute, to check whether the legend is true. Amazing.

Euro and US Coordinating Austerity - To add yet one more perspective on how significant the shift to austerity among advanced economies has been since 2009, I decided to add the Euro series to a chart from Paul Krugman's blog. This is real government consumption for both the US and the Euro (17 countries) area. It is remarkable how the Euro area and the US display a strong coordinated contraction in fiscal policy starting in the first quarter of 2009 that accelerates during 2010 and 2011. This has come at a time when advanced economies (and the world) were starting a recovery from a very deep recession. No surprise that the recovery is not going as well as some thought and some countries are going back into recession.

No alternative to austerity - Spanish unemployment is nearing 25 per cent. The suicide rate is climbing in Greece. Britain is in a double-dip recession. Amid all this pain, the cry is growing louder. Austerity policies in Europe are dangerous. Someone has to stop this madness.Step forward, François Hollande, the likely winner of the French presidential election. He is campaigning as the man who will stand up to the austerity ayatollahs in Germany. His campaign is resonating – not just in Europe, but even in the US, where the grandees of the economics profession, from Larry Summers to Paul Krugman, are lining up to call for an end to Europe’s austerity policies. “Insane,” Mr Krugman calls them, with characteristic understatement. Mr Hollande says that he will replace austerity with growth. Why didn’t anybody think of that before? Unfortunately, a vacuous slogan is underpinned by ineffectual proposals. Mr Hollande’s programme stresses small, badly-targeted boosts to public spending, while virtually ignoring the structural reforms that are the only route to sustainable growth.Spending on infrastructure – “shovel-ready” projects, as President Barack Obama has called them – is, of course, a standard Keynesian solution for an economy that is caught in a downward recessionary spiral. Under normal circumstances, such spending might be a great idea.In Europe, however, there are plenty of reasons to be sceptical. If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming. The past 30 years have seen a huge splurge in infrastructure spending, often funded by the EU. The Athens metro is excellent. The AVE fast-trains in Spain are a marvel. But this kind of spending has done very little to change the fundamental problems that now plague both Greece and Spain – in particular, youth unemployment.

There is an alternative to austerity - THE backlash to the backlash against austerity seems now to be underway. For months, if not years, complaints have grown that the euro-zone's austerity-first approach to the crisis is somewhere between inadequate and counterproductive. That message now seems to be winning converts across Europe. Euro-zone leaders are increasingly acknowledging the need for a growth agenda, and the success of François Hollande in the first round of the French election is being hailed as a decisive blow against austerity. Perhaps predictably, the pushback is on. The Financial Times' Gideon Rachman captures the essence of the counterargument in a piece titled "No alternative to austerity". Mr Rachman does an excellent job constructing the framework through which most serious observers see the crisis. Unfortunately, it's deeply flawed. Let's start with his last point: do unsustainably high market interest rates signal a need for austerity? It would be peculiar if they did; Spain's fiscal and growth prospects aren't demonstrably worse than those in other places where markets are happy to lend cheaply. The problem, rather, is that Spain lacks its own currency and has therefore become stuck in a nasty loop in which financial concerns hurt growth and sovereign yields, and high sovereign yields lead to an austerity push which hurts growth and financial conditions.

Europe, in Slump, Rethinks Austerity - Spain has joined seven other euro-zone nations in recession, according to data released Monday, providing new evidence that austerity policies are failing to spark confidence in the region's economies ahead of a week of expected anti-austerity protests and a string of important national elections.  Spain's economy contracted for the second quarter in a row and the country's banking sector suffered a widespread credit downgrade, piling further pressure on the government. WSJ's Sara Schaefer Munoz analyzes its options. Almost every piece of new economic data in recent weeks has reinforced the impression that swaths of the European economy are contracting. The worsening economic picture is raising political tensions around the euro zone—both French and Greek elections this weekend are expected to castigate incumbents. A growing number of politicians, led by François Hollande, the Socialist candidate in the French presidential ballot, and by Italian Prime Minister Mario Monti, have called for a shift in the focus of policies toward growth and away from austerity. Their calls have been reinforced by the weakness of many euro-zone economies, which some economists argue undermines the contention that cutting budgets pays dividends in increased economic confidence. Among the 17 euro-zone nations, Spain joined Belgium, Greece, Ireland, Italy, the Netherlands, Portugal and Slovenia in recession. Outside the bloc, the U.K., Denmark and the Czech Republic are also in recession.

Europeans Rally To Protest Austerity --May Day demonstrations are taking place across Europe Tuesday, with protesters in Greece, Spain and elsewhere heightening pressure on governments to scale back unpopular cutbacks as recession takes hold in the region. This year' labor day celebration is serving as a rallying cry against the harsh diet of spending cuts and tax increases prescribed for the region's sovereign debt woes. Crowds are gathering in Spain's largest cities using the May Day holiday to march against the government's economic reform packages that some fear could trigger more unemployment and deepen the country's recession.

Voting Out Austerity in Europe: Could this week produce a turning point in Europe’s long, Sisyphean battle against the debt-and-banking crisis that has been ravaging it for the last two-and-a-half years? This coming Sunday, France will likely vote for Francois Hollande, a pro-Keynesian Socialist, as its new president. In Greece, on the same day, parliamentary elections will produce a hammer blow to the existing two-party system and will significantly increase the strength of the anti-Europeans on the far left and the extreme right. These elections will be held in the context of a continuously worsening economic picture in the continent, which has convinced almost everyone—with the crucial exception of the Germans—that the current recipe of one-size-fits-all austerity is leading to catastrophe and needs to be modified before it causes irreparable harm. The woes of Spain and the Netherlands, which have been the focus of concern in the last few days, illustrate the depth and breadth of the eurozone’s problems, and the failure of existing policies to tackle them. In Spain, a conservative government was elected last November with 46 percent of the vote, on exactly the platform endorsed by Berlin and Brussels: harsh austerity and structural reform, especially in the labor market, to bring down unemployment and jumpstart growth. A few weeks ago, the government produced a budget amounting to a massive fiscal adjustment of 27 billion euros for 2012, in order to bring down the deficit this year from 8.5 percent of GDP to 5.3 percent (a slowing economy had meant it had overshot its 2011 deficit target by 2.5 percent). Economists argued that the government underestimated the dynamic effects of the cuts on growth and that, in fact, achieving a 3.2 percent reduction the deficit-to-GDP ratio could require double the amount of austerity measures.

The coming revolt against austerity -It is not just the election of François Hollande in France. Adopting contractionary fiscal policies in the teeth of a double-dip recession never made sense. And yet, public debts are high and markets in endemic panic. The solution must be based on a comprehensive analysis of the situation, not on arcane debates on the strength of the “confidence factor”. It ought to combine debt restructuring, front-loaded collective fiscal expansion and long-run unbreakable commitments to fiscal discipline. The next French president is mistaken when he mentions in the same breath the Fiscal Compact and the growth objective, but he has hit raw nerves.  Mindless austerity is losing policy credibility in some Eurozone nations. This column suggests governments shouldn’t mix long-term growth and fiscal discipline nor produce another Lisbon strategy. Instead, they should adopt a framework for fiscal policy cooperation, restructure debts, and remember that fiscal discipline is for the long run.

Self defeating European austerity - Just a quick post about austerity and Spain. Much is said about the degree of fiscal consolidation that is being placed on Spain, and the difficulty that the nation is having in meeting the revised deficit target for this year of 5.3%. To illustrate why meeting this objective is proving such an acute difficulty, take a look at figures 1 through 3 below (all data is from the ECB's SDW); Figure 1 just shows the real GDP growth of Germany and Spain. As you can see, growth in Germany has experienced a much more pronounced bounce back after the recession than that of Spain. This is obviously a problem in itself when it comes to debt sustainability, in the sense that what concerns investors and the “bond vigilantes” is the debt/GDP ratio, not simply debt. Figure 2 shows the annual percentage change in governmental gross fixed capital formation as a percentage of GDP i.e. discretionary government expenditures rather than automatic stabilizers such as unemployment benefits. Whereas governmental gross fixed capital formation in Germany is relatively stable, the same figure for the Spanish economy shows a huge contraction. In fact some may well welcome this figure as a sign that fiscal consolidation is progressing nicely. Unfortunately figure 3 shows just how misplaced faith in such rapid fiscal retrenchment is. As Spain has been forced to cut all manner of discretionary public expenditures as in figure 2, automatic stabilisers such as social benefit outlays (figure 3) have increased substantially as a proportion of GDP.

Against the Financial Times's Editorial on Austerity - Brad DeLong - The Financial Times editorial on "austerity" yesterday felt like a punch to the stomach, especially coupled with the backup that Gideon Rachman provided for it. The FT is thoroughly reality-based. Its people are smart. They can do the arithmetic on both the need for long-run fiscal balance and on the devastating effects of premature short-term austerity as well as I can. Reacting to this, I asked Paul Krugman a question: I have been trying to understand why those who claim to be Friedman's intellectual disciples--especially those who hold appointments at the Becker-Friedman Institute--have not been aggressively out there condemning Bush, Bernanke, and Obama for insufficient policy activism. The natural generalization of virtually all of Friedman's work to the current situation is that the task of the government is to Stabilize the Growth Path of Nominal GDP by Any Means Necessary--which means issuing cash and buying stuff that is not a perfect substitute for cash with it until nominal GDP is on its previous growth path    Paul's reply: My best theory here is that it's political and sociological: conservative-leaning economists who should know better are driven by peer pressure to suppress their better instincts. Think about Greg Mankiw and inflation. Early on in the Lesser Depression Greg came out for inflation -- fairly high inflation! -- as the solution, to give us negative real interest rates. But he encountered a firestorm of criticism from his political allies -- and went silent. The point is that even among academics with tenure and established reputations, there is apparently enough leverage in the hands of the enforcers of right-wing orthodoxy that they end up bowing to the reign of error.

What are the alternatives to austerity for the Eurozone? - Paul Krugman’s post on the topic was revealing, compared especially to the analytic and rhetorical flourish which he applies to criticizing austerity.  You can’t fault his IQ or his knowledge of the situation, there simply isn’t much convincing to put forward.  Here is Ryan Avent, in a good post but I think it also fails to put forward a workable solution: What, then, are the alternatives to austerity? Well, first up would be an integration that would help break the diabolical loop now gutting the periphery. Creating a euro-zone-wide safe asset and a euro-zone-wide set of institutions to stand behind damaged banks would help accomplish that. America doesn’t expect Delaware to shoulder the costs of failures of banks headquartered in Delaware. That’s an important contributor to the stability of the American federal system. The euro-zone must recognise that it is the failure to build appropriate euro-zone-wide institutions—equal in scope to the considerations and resources of the central bank—that is contributing to soaring yields around the periphery and creating the illusion of the need for dramatic austerity in places that could do without it. I call this the “Germany pays for everything and accepts all the risk of moral hazard” approach.  Potential German liabilities could run in the trillions of euros and the “ball and chain” lasts forever.  I know all about Connecticut and Mississippi, but without a common electorate, not to mention a common national identity, I don’t see how this is possible. 

Austerity Alternatives - Krugman - Ryan Avent writes what I’ve been meaning to write about the backlash against the austerity backlash. It’s all about attacking a straw man. Nobody — certainly not me — believes that, say, Spain or even France can simply go back to Keynesian policies unilaterally. Instead, the point is that if European leaders want the euro to survive, they have to recognize that the austerity thing isn’t working, and offer Europe-wide alternatives. Avent: I think the reaction to Mr Hollande’s success is telling. The overwhelming criticism is a sort of “look how inappropriate fiscal expansion would be for the French economy” take. The point is that the economy that matters is that of the euro zone as a whole. And when one steps back and looks at the dynamics in play, it becomes clear that the robotic push for national-level austerity across the euro zone is undermining integration and thereby exacerbating the crisis. For in the end, Spain and others do have an alternative to endless austerity, one that may be forced on them by events: exit the euro, with all the financial and political fallout that follows. And on the current course, that’s what’s coming.

‘Dr’ Summers performs a medical miracle - James K. Galbraith - Whence comes Lawrence Summers’ medical knowledge? He writes of palliatives, of misdiagnosis, and states that “treating symptoms rather than causes is usually a good way to make a patient worse” (“Growth not austerity is the best remedy for Europe”, April 30). As to cures, Prof Summers writes of “a need to raise retirement ages, reform sclerosis-inducing regulations and restructure benefit programmes”. Yet he presents no evidence that these matters caused our troubles, and of course they didn’t – unsupervised bankers and ambitious economists did. Blaming the elderly and poor is just a prejudice, common to people who have easy jobs and private means. Bleeding them (gradually, of course) is a medieval practice. And yet, on the main point, Prof Summers gets it right. He does this by mistaking a symptom (recession) for a cause, and then prescribing a palliative (deficit spending). A minor medical miracle, perhaps! The irony is that a real doctor would likely approve. After all, fever-reducers and pain relievers, from aspirin to morphine, are in widespread medical use and have been for many years. So “Dr” Summers is on the right track for now, but as his methods show, he is still very dangerous to the sick.

Euro Area Spending Imbalances and the Sovereign Debt Crisis - NY Fed - Euro area periphery countries borrowed heavily from abroad in the run-up to the sovereign debt crisis. How were these funds used? In this post, we recap our recent Current Issues study, showing that pre-crisis borrowing by the periphery countries (Greece, Ireland, Portugal, and Spain) went mainly to finance private consumption or housing booms rather than productivity-enhancing investments. Most analysis of the crisis has focused on the need for fiscal adjustment in the periphery. A look at the drivers of the run-up in foreign borrowing, however, suggests that private spending in the periphery will also need to move to a lower plane. The fact that debts were built up without adding to these countries’ productive capacity is likely to make the needed adjustment in spending all the more difficult.

4 Ways the Euro Could Fail - The euro will not die overnight, but it seems increasingly unlikely that the common currency will survive in its present form. European countries and international financial institutions insist that they still expect the euro zone to remain intact, but they are already preparing contingency plans for some sort of breakup. The European Investment Bank, for example, recently required Greek borrowers to agree to a mechanism for repaying loans if Greece abandons the euro. No one knows, of course, precisely when a fatal euro-zone crisis will occur or exactly what might trigger it. And although the ultimate failure of the euro would cause immense economic and financial shocks worldwide, in the short run the U.S. economy might actually benefit. International investors are already pulling their money out of the most troubled European countries and moving it to safer havens. If the euro zone itself breaks up, lots of that hot money could pour into U.S. markets. Over the longer term, though, the specific impact will depend on how the euro zone unravels. Basically, there are four scenarios, listed here from most to least likely in the short run:

Venizelos Says Greece May Be Pushed Out of Eurozone – After two years of pay cuts, tax hikes, slashed pensions, a reduced minimum wage and the slated firing of 150,000 public workers imposed during his watch as Finance Minister, new PASOK Socialist leader Evangelos Venizelos has now admitted that it could all fail and Greece could still be pushed out of the Eurozone of countries using the euro as a currency. Greece administered the austerity measures on orders of the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) in return for two bailouts of $325 billion to prop up an economy killed by generations of politicians packing public payrolls with hundreds of thousands of needless workers in return for votes. And with the May 6 elections looming to elect a new leader, Venizelos again pushed for support for his party and a pro-European agenda. PASOK is uneasily sharing power with its bitter rival New Democracy Conservatives but both parties have seen their popularity plummet because of their support for austerity. Venizelos had warned Greeks against reacting with anger to punish the ruling parties, a stance he said could bring in anti-bailout parties. In an interview with the British newspaper The Guardian, Venizelos said that despite all the austerity he helped impose to keep Greece in the Eurozone, that the country could still be forced out regardless of the elections outcome.

Greece opens detention camp for immigrants as election looms (Reuters) - Greece opened its first purpose-built detention centre for illegal migrants on Sunday in Athens, a week before a national election where illegal immigration has emerged as a key issue. About 130,000 immigrants cross the country's porous sea and land borders every year, the vast majority via Turkey, and the authorities are forced to release those who are arrested because of a lack of permanent housing. With Greece in its fifth year of recession and worries over rising crime levels, illegal immigration has become a major issue in the run up of the May 6 election. The once-obscure far-right Golden Dawn, which wants to deport all immigrants, is among the parties that has benefitted most from the mood among voters, and is expected to win its first seats in parliament. Greece's ruling Socialist PASOK and conservative rival New Democracy parties have also pledged to crack down on immigration to try to win over voters. On Sunday, the first 56 immigrants were brought to the Amygdaleza detention camp in western Athens, a police official said. Dozens more are expected at the camp in the next few days, which can house up to 1,000 people, the official said. Amygdaleza is the first of about 50 camps that Greek officials say will be built by mid-2013. It consists of dozens of containers that were originally set up to house people hit by natural disasters such as earthquakes.

S&P raises Greek rating, lifting it out of default   - Standard & Poor’s raised Greece’s credit rating out of default territory on Wednesday, as expected after Athens slashed its debt by about a third by completing the biggest sovereign debt restructuring in financial history. But the firm kept Greece firmly in the junk category with a CCC rating and warned that a deep recession, unpredictable elections on May 6 and popular anger “While the exchange has, in our view, alleviated near-term funding pressures, Greece’s sovereign debt burden remains high,” S&P said in a statement, adding that it expected the debt to stay as high as 160-170 per cent of GDP in the next three years. S&P assigned Greece’s rating a stable outlook, indicating it was not planning to change the rating again soon, but it warned that risks remained. 

Bank of Spain Confirms Foreigners Dump Spanish Bonds; Spanish Banks Foolishly Load Up - Anyone with a clue is dumping Spanish bonds, and the investment community in Germany, France, and Italy is doing just that, as Spanish banks foolishly lever up on risk. Via Google Translate, please consider Bank of Spain confirmed that foreign capital flees Spanish bonds The weight of foreign capital in the total of Spanish government debt has declined considerably in the first three months of the year, rising from 50.48% at end-2011 to 37.54% last March. At the same time, the Spanish bank increases its exposure to domestic bonds to record highs of more than 170 billion euros. In the last three months the international portfolio in bonds and letters of the State has suffered a leak of nearly 62 billion euros from 281.439 billion euros down to 219.601 billion euros at March 31. Spanish banks increased their exposure to a record of 170.611 million euros, 29.16% of the total compared to 16.93% representing the end of December. Specifically, the weight of the debt portfolio of the state of Spanish banks has six consecutive months of gains, especially since last November with the purchase of more than 100,000 million.

Spain auctions $3.3 billion in mid-term debt, yields sharply higher - Spain managed to beat its targets for an auction of medium-term debt, but at sharply higher interest rates, in its first bond sale since its credit rating was downgraded over fears that it may seek a bailout. The Treasury sold €2.52 billion ($3.3 billion) in 3- and 5-year bonds Thursday. It had set a target range of €1.5 billion to €2.5 billion.The Treasury sold €978 million in three year bonds at an average interest rate of 4 percent, up from 3.5 percent at the last such auction on April 19. It also sold €1.54 billion in two categories of 5-year bonds. The yields were 4.75 percent and 4.96 percent, up from 4.3 percent on April 4. In the secondary market, the yield on Spanish 10-year bonds stood at 5.82 percent, virtually unchanged from Wednesday’s close.

Spanish, Italian Banks’ Firepower to Buy Debt Waning, RBS Says - Italian and Spanish banks are running out of cash borrowed through the European Central Bank’s three- year-loan program, diminishing their “firepower” to buy government bonds, according to Royal Bank of Scotland Group Plc. Banks in Italy have spent the equivalent of 46.4 percent of the funds they received from the longer-term refinancing operations, while Spanish ones have used up 42.3 percent, Harvinder Sian, Biagio Lapolla and Simon Peck, interest-rate strategists in London, wrote in a note to clients on April 30, citing ECB data for the period from December to March. Assuming the banks intended to use about half of the funds to buy higher-yielding sovereign bonds, Italian lenders would have had 6 billion euros ($7.93 billion) left by the end of March, and Spanish banks would have had 16 billion euros remaining, the analysts wrote. Had they to assigned 65 percent of the LTRO cash for government debt, they’d have had 31 billion euros and 46 billion euros still to spend, according to the note. Based on the rate of purchases in March, that would have meant another 1.6 months of bond purchases for Spain and less than a month’s worth for Italy, the analysts said.

ECB Loans Plant Seeds of European Disintegration - European Central Bank measures to stem the region’s debt crisis threaten instead to undermine the euro. ECB loans worth more than $1.3 trillion have been recycled into government bonds, capping borrowing costs. As Italy’s reliance on its local institutions increases and Spanish banks accelerate purchases of domestic government securities, however, the economic ties that bind the fate of euro members to each other loosen, weakening the incentives for cross-border support to defend the currency union. “As the local bond markets have become owned only by domestic institutions, there is less and less incentive for the other countries to support and bail out one of those,” said Stephane Monier, who helps manage more than $150 billion as head of fixed income and currencies at Lombard Odier Investment Managers. “Basically you’re planting the seeds for the disintegration of the euro zone.” The ECB began two rounds of extraordinary three-year loans at an interest rate of 1 percent in December in its longer-term refinancing operations. Italian banks boosted their government debt holdings to 323.9 billion euros ($428.1 billion), from 301.6 billion euros in February and 247.4 billion euros in November, according to the ECB. Spanish banks own 263.3 billion euros of government securities, up from 245.6 billion euros in February and 177.9 billion euros in November.

Euro Area Unemployment Hits Record High – Record unemployment figures for the 17 countries that use the euro released Wednesday are set to increase the pressure on Europe’s leaders to switch from a focus on harsh austerity measures to push for a pro-growth strategy. Unemployment across the 17-member eurozone rose to 10.9 percent in March — its highest level since the euro was launched in 1999 — official figures showed Wednesday. The rate was up from 10.8 percent in February and 9.9 percent a year ago, and reflects the downturn in the eurozone economy as governments pursue tough austerity measures to deal with their debts. Nearly half the countries in the eurozone are now officially in recession. The figures from European statistics office Eurostat are likely to ratchet up the pressure on the region’s policymakers to introduce more pro-growth measures alongside the spending cuts and tax increases they have already introduced in an attempt to fix their debt crisis.

Over There: Euro zone unemployment rate rises to 10.9% - From Jack Ewing at the NY Times: Unemployment Reaches Record High in Euro Zone Unemployment in the euro zone rose to a new high in March, according to figures released Wednesday, which come a few days before crucial elections in France and Greece, and which are likely to intensify calls for an easing of the region’s austerity drive.  Unemployment in the 17 countries that belong to the euro zone rose to 10.9 percent in March from 10.8 percent in February, according to Eurostat, the European Union’s statistics agency. In March 2011, the rate was 9.9 percent, a number that illustrates the deterioration of the area’s economy during the past year.  Here is the Eurostat data. Germany seems to be doing OK, but Atrios asks the key question: "I wonder who will buy German manufacturing goods when nobody else in Europe has any money." This reminds me of a quote from someone at Volkswagen last year on the possible end of the euro: “The conclusion is that overall the impact would not be so negative to our company, as we are mainly an exporter ..." My response was: Export to whom?

Euro-zone unemployment hits new euro-era high - The seasonally-adjusted unemployment rate across the 17 nations that use the euro rose to 10.9% in March from 10.8% in February, the European Union statistics agency Eurostat reported Wednesday. The number of unemployed workers across the region rose by 169,000 to a total of 17.365 million, Eurostat said. Both figures are the highest seen since the launch of the euro in January 1999, said Howard Archer, chief European economist at IHS Global Insight in London. "It now looks odds-on that the euro-zone unemployment rate will move appreciably above 11% over the coming months with an ever growing danger that it will reach 11.5%," Archer said, in a note.

No Sign of Relief in Eurozone - The March unemployment numbers for Europe are out - you can see in the graph above that the situation continues to worsen - particularly in the Eurozone itself.  The rise in unemployment rate since late 2011 seems pretty much linear with no sign of moderation yet.  The rate is now considerably above the worst point in the first dip of the great recession.

Jobless Rate Reaches New High in Euro Zone — Unemployment in the euro zone rose to a new high in March, according to figures released on Wednesday. The data came a few days before crucial elections in France and Greece, and it is likely to prompt more intense calls for an easing of Europe’s austerity drive.  Unemployment in the 17 countries that belong to the euro zone rose to 10.9 percent in March from 10.8 percent in February, according to Eurostat, the European Union’s statistics agency. In March 2011, the rate was 9.9 percent, a number that illustrates the deterioration of the region’s economy in the last year.  The monthly increase, the 11th in a row, translates into more than 17 million jobless people, and it is in line with other recent indicators showing that the euro zone economy remains distressed. Manufacturing in the region hit a 34-month low in April, according to a survey of purchasing managers released Wednesday by the research firm Markit.  Greece and France will hold national elections on Sunday, when citizens are expected to register their discontent at the decline in living standards and public services that has been a consequence of government budget-cutting. Leaders could come to power who appear unwilling to continue the austerity programs pushed by North European countries, especially Germany.

Europe's Scariest Chart Just Got Scarier-er | ZeroHedge: We were the first to note the dire state of youth unemployment in Europe here, and reiterated here, as this terrible social situation just goes from bad to worse this month. Whether youth unemployment is a proxy for sales of PlayStations or for the much more critical likelihood of widespread social unrest and eventually the dissolution of Europe's political compact is unclear but one thing is for sure - Europe's leaders will be watching this chart and quaking as nation after nation breaks to all-time high levels of joblessness for the critical tinder-box of Under-25 year-olds. The Euro-zone youth unemployment rate is back over 22% for the first time since September 1994. With Spain and Greece over 50% (and rising) and Italy now joining Ireland over 35% at the same time as Germany's youth unemployment falls below 8% for the first time since May 1993 - one can only surmise the rising tensions between the haves and the have-nots (even as Germany's PMI disappoints).

Call it a depression - IN DECEMBER, The Economist warned that without dramatic intervention the euro zone could face a new depression. Soon after, the European Central Bank sprang into action, averting an immediate financial meltdown through heavy lending to banks. The resulting calm looked like an opportunity for euro-area leaders to seize the moment and escape, once and for all, from crisis. Instead, complacency set in. The ECB's financial anaesthetic has not prevented a steady economic deterioration that now threatens to engulf—and perhaps end—the euro zone. Across the euro area, unemployment is worsening. The unemployment rate touched a new record high in March: 10.9%, up a full percentage point from the prior year. Of course, the pain is not evenly distributed. It is low and reasonably steady in the north but high and climbing in the south. Youth unemployment rates are staggering—over 50% in Greece and Spain, 36% in Portugal and Italy, rising sharply in all four.

The European Economy In April - Now that we have a chance to breathe, and look back over the last batch of PMI numbers for Europe, it becomes clear that April was just an extraordinarily bad month for economic activity. Let's go over some of the countries, and you'll see what we're talking about. In Italy, the PMI chart looks like this, which couldn't be uglier. Meanwhile, Italian job losses were the most severe in 27 months, and new orders fell at the worst pace in 3 years. Or even take Germany, which is the strongest economy by far: Output saw its first drop since December, the headline number hit a 33-month low, and employment was down for the first time since March 2010. Here's the chart of the headline number for Germany... Spanish PMI: Same story. The economy saw its fastest deceleration since the summer of 2009. The bottom line is: We knew basically all of Europe was seeing recession like conditions. April was exceptionally poor.

ECB May Soften Stance as Draghi’s Recovery Falters -- Mario Draghi may have spoken too soon.  Since the European Central Bank President predicted an economic recovery at the start of the year, data have increasingly pointed to a deepening recession. While all 58 economists surveyed by Bloomberg say the ECB will leave its benchmark interest rate at a record low of 1 percent today, Draghi last week toned down his inflation-fighting rhetoric and sounded more cautious on the economic outlook, fueling speculation that he could ease monetary policy further.  “In contrast to a month ago, the ECB’s bias will now be more toward an easing than toward an exit strategy.”  Austerity measures aimed at taming the region’s sovereign debt crisis have pushed the Netherlands and Spain back into recession and prompted French voters to revolt against President Nicolas Sarkozy with an election looming on May 6. The ECB, which has already pumped more than 1 trillion euros ($1.3 trillion) of emergency cash into the banking system, may be reluctant to add to stimulus as it presses governments to take responsibility for the crisis.

Draghi Says Rates Accommodative as Economic Outlook Worsens - European Central Bank President Mario Draghi said interest rates remain supportive and policy makers still expect a gradual economic recovery this year even as recent data cloud the outlook. Latest indicators “are not enough to change our baseline scenario, which foresees a gradual recovery in the course of the year,” Draghi said at a press conference in Barcelona today after the ECB held its benchmark interest rate at a record low of 1 percent. “We didn’t discuss any specific move in interest rates but we did discuss our general monetary policy stance, which we found accommodative in view of an economic outlook that becomes more uncertain.” Austerity measures aimed at stemming the debt crisis have pushed euro-area economies from the Netherlands to Spain back into recession. While the ECB is reluctant to add to stimulus as it presses governments to enact reforms, Draghi left open the possibility of further action when policy makers have updated economic projections in June.

Draghi's ten-year vision: What Mario means when he talks about growth - THE European Central Bank was playing away today, in Barcelona rather than Frankfurt, but the result would have been the same wherever its governing council met: a no-change score, with the main policy rate left at 1%. The ECB wants more time to assess both recent adverse economic developments and the impact of its “Big Bertha” operations in December and February which together provided banks with €1 trillion ($1.3 trillion) of cheap three-year funding. Speaking after the meeting, Mario Draghi, the ECB's president, said that these actions had averted a big credit crunch and described monetary policy as “accommodative”, with real interest rates negative in all 17 euro-area states. One positive development was that deposits were flowing back to banks in the vulnerable economies; another that April’s lending survey showed that banks were not tightening credit availability as much as before.

Draghi predicts 2012 eurozone recovery - The European Central Bank still expects a gradual eurozone economic recovery in the second half of this year, Mario Draghi, its president, said after the euro’s monetary guardian left interest rates unchanged at the record low of 1 per cent. Recent signs of a significant weakening in eurozone economic activity were not yet sufficient to justify a further loosening of monetary policy, Mr Draghi indicated after an ECB governing council in Barcelona, one of two meetings a year held outside Frankfurt, its home city. Interest rates remained at historically low levels and “accommodative”, or supportive of growth. However Mr Draghi highlighted the “prevailing uncertainty” over the eurozone economic outlook – and was careful to leave room for manoeuvre should prospects fail to improve. Analysts said the ECB was likely to revise down next month its forecasts for eurozone growth, which could lead to a change of strategy. An eventual cut in interest rates is “definitely a scenario you should not rule out”, said Jörg Krämer, chief economist at Commerzbank.  Julian Callow, European economist at Barclays, added: “It’s wait and see, but don’t expect much.”

Draghi Departs the Solar System - (video & transcript) Last night the ECB met in Barcelona and once again held on rates. Mario Draghi opening statement is below.

Europe Still Slouching Toward Catastrophe - The eurozone economy is headed toward recession again, and Ryan Avent is beside himself: Ordinarily, of course, policymakers would react to this deterioration by taking steps to stabilise the economy. What is most frightening about the euro-area picture is that this is not happening. For now, austerity remains the rule. Despite the nastiness of the economic picture, the ECB is widely expected to take no action at its meeting tomorrow. The euro area is walking, eyes wide open, into depression. Led by its periphery, which is already there. ....If, when all of this is said and done, the euro zone descends into a chaotic, costly break-up, many people will write that such a thing was inevitable, unavoidable. They'll be wrong. We are watching causation this very moment: institutions that know how and why to prevent things from falling apart and which nonetheless sit back and do nothing. It's a dismal prospect, all right, and in the future the collapse of the eurozone — if it happens — will probably become a textbook example of the difficulty of collective action, right along with climate change and the League of Nations. In the long term, Europe's periphery needs to credibly commit to even greater labor market reforms than they already have, but further reforms seem politically hopeless and no one really knows how to make them credible in any case. In the short term, Europe's core needs to pony up more money, but that's politically hopeless too, especially in the absence of credible long-term reforms in the periphery.

Saving the euro is pretty easy - Kevin Drum says that "the collapse of the eurozone—if it happens—will probably become a textbook example of the difficulty of collective action, right along with climate change and the League of Nations." Collective action is difficult, but I don't really think that's the issue here. It's of course possible to spin out an elaborate euro-saving strategy that's full of multilateral agreements and credible commitments and reforms and so forth but and then collection action does look like the problem. But the difficulty of that kind of collection action is simply why no large economic units operate that way. Nevertheless, large economic units do manage to exist. But if you look at a big place like the United States or China what you see are huge place-to-place divergences in economic vitality paired with large open-ended transfer programs. Even in smaller economies, the old West Germany has been subsidizing the old East Germany for a long time and will continue to do so for a long time. In Italy, the north helps carry the south. In the U.K., the south helps carry the north. Sometimes these things are formalized as place-to-place transfers and sometimes it's person-to-person transfers that happen to have the net impact of letting Massachusetts subsidize Mississippi. The European Union does a little of this, but the scale is tiny compared to the continent as a whole. As we saw yesterday, most individual European countries have a lot of within-country transfer payments from rich people to poor people but Europe as a whole is marked by a high level of inequality and near-total absence of transfers.

Results of French and Greek Elections Could Signal Shift on Economic Crisis - France and Greece vote Sunday in elections that will be closely watched for the future of the European Union and the euro. The votes will once again highlight the emerging crux of the euro crisis: Will democratic politics offer a solution to the economic crisis or just make it worse? Anxieties are rising again over the shared currency, and these elections are likely to be another blow to a German-designed austerity plan to cure the euro zone’s debt and banking crisis. If the French Socialist candidate, François Hollande, wins the presidency, as the polls suggest, he plans to challenge Germany, vowing to renegotiate a European Union treaty mandating deficit and debt limits in order to add a new emphasis on economic growth. “It’s not for Germany to decide for the rest of Europe,” Mr. Hollande said on the campaign trail. “If I am elected president, there will be a change in Europe’s construction. We’re not just any country: we can change the situation.” He intends, he said in a fierce debate Wednesday night with President Nicolas Sarkozy, “to give a new direction to Europe.”

Hollande Hysteria - Krugman -Today’s FT is all Hollande, all the time. Some of it is sensible; some of it is like, well, this piece by Josef Joffe, which declares that Hollande’s likely victory is “a bleak prospect for all but new Keynesians and old socialists.” I guess I should be flattered that Joffe considers the great debate to be between austerity hawks and … me. But he says that it’s a “tired” debate — because debating how to fight mass unemployment just gets boring, you know? Joffe is, however, useful as a guide to the German view, which is basically that we got ourselves competitive and restored growth, so why can’t everyone else. Somehow he never mentions that Germany’s recovery in the 2000s was driven by a huge move into trade surplus; is everyone supposed to do the same thing, all at once? What’s the Germany for “fallacy of composition”? Philip Stephens has a very good pushback against Hollande hysteria: The influential Economist has declared on its front cover that Mr Hollande is “dangerous” – though, being British, it did add a qualifying “rather” to this disobliging epithet. The would-be president, the magazine observed, “genuinely believes in the need to create a fairer society”. Well, what could be more dangerous than that?

Ireland: more austerity if EU treaty rejected - Ireland's government is warning voters they will suffer worse austerity measures if they reject Europe's fiscal treaty this month. Finance Minister Michael Noonan says the government would be forced to impose a 2013 budget containing higher taxes and sharper spending cuts if voters reject the treaty in a May 31 referendum. Eurozone members that reject the treaty will be blocked from tapping new EU rescue loans. Ireland is the only eurozone member subjecting the pact to a public vote. Anti-treaty campaigners are urging rejection in hopes of reducing budget cuts, but Noonan says the opposite would happen. "If there's a 'no' vote, the budget I'll be planning for later in the year will be dramatically more difficult than if there's a 'yes' vote," Noonan said

Madness in Spain Lingers as Ireland Chases Recovery - In the stages of death of a real estate boom, Spain is still in denial. In Ireland, they’re moving toward acceptance. The first auction of one of 2,000 unfinished housing estates takes place tomorrow at the Shelbourne Hotel in central Dublin, with sales expected to fetch cents on the euro, showing the Irish may be closer to the end than the beginning. “Ireland faced up to its problems faster than others and we expect growth there rather soon,” said Cinzia Alcidi, an analyst at the Centre for European Policy Studies in Brussels. “In Spain, there was kind of a denial of the scale of the problem and it may be faced with many years of significant challenges before full recovery takes place.” Spain, Europe’s fifth-largest economy, is the current focus of attempts to contain the region’s sovereign debt crisis, as Prime Minister Mariano Rajoy struggles to quell speculation it will need a bailout. Developers are showing similar optimism. They continue to build even with 2 million homes vacant around the country, new airports that never saw a single flight being mothballed, and property appraisers and banks reporting values have fallen only about 22 percent, said Encinar, who estimates the real decline is probably at least twice that.

France faces 40pc house price slump - France faces a property slump of Anglo-Saxon proportions as the frothiest boom in French history finally tips over, threatening the country with an economic shock just as austerity hits. "It is a gigantic bubble, all the more dangerous as it is spread across France," "It reached a paroxysm in the summer of 2011. There is a mix of incredulity and denial as it starts to burst but there can be little doubt that all levers propelling the market are disappearing." PrimeView said prices across France have jumped 160pc since 1998, though houshold incomes are up just 35pc. Paris has overtaken New York to become the world's third costliest city at €18,000 (£14,600) per square metre. The boom seemed to defy global gravity last year as southern Europe and the US battled property slumps. The mood has since darkened. "A number of clients tell me they think the market has topped and want to get out," said one French hedge fund manager. Standard & Poor's has told investors to brace for a 15pc correction. Credit Agricole says prices may fall 12pc by the end of next year, expecting a "gradual slide" that could last until 2016.

Norway Dumps Ireland, Portugal Bonds on Crisis - Norway’s sovereign wealth fund sold all its Irish and Portuguese government bonds after rejecting the Greek debt swap and warned that Europe faces considerable challenges. The $610 billion Government Pension Fund Global returned 7.1 percent, or 234 billion kroner ($41 billion), as measured by a basket of currencies, in the first quarter, the Oslo-based investor said today. Its equity holdings gained 11 percent while its fixed-income investments rose 1.6 percent. The fund, which voted against Greece’s debt swap this year because it disagreed with being subordinated to the European Central Bank, also said it reduced debt holdings in Italy and Spain amid a broader strategy to cut investments in Europe. The fund added government bonds from emerging markets such as Brazil, Mexico and India. “Predictability is important for a long-term investor and the euro-area faces considerable structural and monetary challenges,”

Grand plan to save Europe is unraveling - Europe's two-year-old strategy of austerity isn't working. And there is no Plan B. The latest evidence that government spending cuts are driving the eurozone deeper into recession came Wednesday with a report on soaring unemployment in the zone's weaker economies. Overall unemployment hit a 15-year high of 10.9 percent in March, driven by layoffs in Italy and Spain, a tenth of a point higher than in February, according to Eurostat, the European Union's statistics office. That level of joblessness hasn't been seen since 1997, before the euro was introduced to world financial markets. The average rate masks painfully high levels of unemployment in the hardest-hit countries. In Spain, which sank back into recession in the first quarter, the unemployment rate hit 24.1 percent in March, a level not seen in eurozone data stretching back to 1986. In Greece, more than one in five are out of work. In both countries, half of those under 25 are out of a job. With deep government spending cuts only beginning, economists believe the jobless rate in Europe is headed higher. "It now looks odds-on that the eurozone unemployment rate will move appreciably above 11.0 percent over the coming months with an ever-growing danger that it will reach 11.5 percent,"

Recession means new reality for Netherlands, stalwart economy of euro zone - audio -The Netherlands has long been considered one of Europe’s strongest economies and a core part of the euro zone. But now the country is technically in recession. The country needs to make some painful budget cuts, but weeks of political wrangling over that led to the dissolution of the government earlier this week.An organization that runs more than a dozen food banks in and around Amsterdam said the number of households it serves grew more than 30 percent in the first quarter of this year. “What we see now is a new group coming that maybe has bought a house, but is now without work, can’t afford to pay the mortgage, then they have problems,” But a reality check is in order here. The Netherlands is not Greece, Spain or Italy. In fact, there’s only one eurozone country that’s richer per capita: Luxembourg. Dutch unemployment and interest rates remain relatively low, and personal savings remain high. Yet the country still needs to slash more than $18 billion from its budget to meet European Union-mandated austerity targets.

Europe's next recession risk: Germany - As recession spreads across Europe, Germany may not be able to avoid being dragged down. In the past week, Spain and the United Kingdom revealed that they had slipped back into recession, with two straight quarters of economic contraction. Print Comment10 largest economies In all, 12 European economies are now officially in recession. Germany, the largest euro economy and the fourth largest worldwide, could be next: Its economy shrank 0.2% in the last three months of 2011, and it is expected to show another contraction when it releases data for the first quarter in mid-May. "It's quite likely the German economy also contracted at very modest pace in the first quarter, which would technically fulfill the recession criteria," said Christian Schulz, a London-based economist at Berenberg Bank, the oldest private bank in Germany. Overall, the eurozone economy is expected to suffer a mild recession this year as government austerity programs -- tax hikes and spending cuts -- take a toll on growth. 

The High Cost of Germany's Economic Success, Spiegel: The working world is disintegrating. On the one side are managers, specialists and members of the core workforce, who benefit from the fact that well-trained workers are scarce. On the other side is the reserve pool of workers who can be used as needed and then let go -- as contract workers or through special-order contracts, part-time work or temporary jobs. Many of these people work outside the provisions of collective bargaining agreements. Labor-market experts view this increasing flexibility as the price of success, a necessary evil that made the rise of the German economy -- from "the sick man of Europe" to the Continent's economic paragon -- possible in the first place. In fact, the German economy is in better shape than ever. Companies are reporting record profits... In March, the country had an unemployment rate of just 7.2 percent. Some companies are allowing their employees to benefit from the economic upswing through profit-sharing models. ... Still, such ideal conditions are rare. ... The majority of workers feel very little of what the Economist has dubbed "Germany's economic miracle." For decades, they have had to settle for falling or stagnating real wages, and wages and salaries have been declining for many years as a share of aggregate national income. "In no other European country has social inequality grown as strongly as in Germany,"

Core infection and eurozone PMIs - Eurozone manufacturing purchasing managers indices are out and it does not look pretty. The final Markit Eurozone manufacturing PMI hit a 34-month low of 45.9 in April, below the flash estimate of 46, as job losses accelerated to their fastest rate in over two years. Significantly,  manufacturing weakness was no longer confined to the periphery. German PMI fell to a 33-month low, conditions deteriorated sharply again in France and the Netherlands also contracted at a faster rate. (When are those elections again?) And as intra-Eurozone trade volumes slumped, even German manufacturers saw production fall for the first time in 2012 as an accelerated rate of decline in new export volumes hit hard. Unemployment rose for the first time since March 2010. In France, April’s reduction in new work was the tenth in as many months and the sharpest for three years. Job losses quickened to the sharpest since July 2010.

Is Europe in a Depression? -Another night of Eurozone PMI data, this time manufacturing, and, much the same as last time, the news was not good at all. As BeyondBrics reported the previously performing ‘core’ of Europe is now getting dragged down:Any hopes that central Europe could decouple from the troubled eurozone and continue growing were dashed when Poland, the Czech Republic and Hungary released their manufacturing PMI numbers for April on Wednesday. The numbers revealed that output in all three countries was slowing.PMIs fell below 50 – the important line dividing expansion from contraction – across the region. Hungary saw the steepest fall, dropping to 46.9 from 56.8 in March, while the Czech Republic fell to 49.7 from 52.1 and Poland – the largest economy in the CEE – saw PMI drop to 49.2 from 50.1 a month earlier. To the data in more detail: EuroZone manufacturing PMI

  • Final Markit Eurozone Manufacturing PMI at 34-month low of 45.9
  • Production declines across big-four economies for first time in the year-to-date
  • Production declines across big-four economies for first time in the year-to-date

The EU Needs A Growth Pact...Or Else -Unless the EU signs up to a Growth Compact soon, we face social, political and economic disaster. Swift action on tax, banking and investment is the way out of the crisis. Overspending by governments, we have been told, triggered this crisis. Thus the cure lies in immediate austerity, hence the German-led push for a eurozone fiscal compact. But, as demonstrated by the experiences of Greece, Portugal, Spain and Italy & now the broader EU, this course leads to biting, deep recessions, rising unemployment and worsening public indebtedness. The IMF has acknowledged as much and the latest alarming data on rising unemployment in the EU is a case in point. A focus on growth, not austerity, is the correct answer for Europe's ills.  The case for "growth-friendly austerity" relies on the argument that public cuts are compensated for by consumers and businesses spending more, and with greater efficiency. However, the collapse of confidence wherein everyone expects the economy to worsen before (if) it gets better, along with excessive levels of private indebtedness, means that consumers and firms are busy repaying debt or building rainy-day funds, not spending and investing. In terms of exports, what works for small open economies with flexible exchange rates will not work for the economic giants the EU and the Eurozone are, especially as the troubled economies of the Eurozone have fixed exchange with their largest trading partners.

Fitch: Greek Euro Exit Increasingly Likely - Fitch Ratings said Thursday that although its main view remains that the eurozone will survive the region’s sovereign debt crisis intact, the risk of alternative outcomes is rising, with a Greek eurozone exit the most likely of those alternative scenarios. If that happened, Fitch said in a report, all eurozone sovereign ratings would be placed on watch for downgrade, with Cyprus, Ireland, Italy, Portugal, and Spain most likely to be downgraded. Greece would probably have to re-denominate its debt and default again. The outcome in terms of downgrades of other eurozone countries would depend on the level of contagion originating from Greece’s exit from the euro. But even in its relatively benign “muddle through” base case, Fitch ratings believes some further eurozone sovereign rating downgrades are likely. The majority of eurozone sovereigns are on negative outlook, reflecting the economic cost of the crisis and rising political tensions that may hinder the implementation of effective policies. Fitch said that the present crisis has shown that the European Monetary Union is substantially flawed and fundamental reforms are needed to turn it into a viable structure for the long term.

One million homeowners hit by £660 a year mortgage rate rise today... and there's more pain on the way -Around one million homeowners were hit by a sharp rise in mortgage repayments yesterday. Families described the increase in standard variable rate loans by the Halifax, the Co-op and Yorkshire Bank as a ‘disaster’. Lenders came under fire for the rises as the Bank of England has not changed the base rate, currently at a historic low of 0.5 per cent, for more than three years. Research from Which? found homeowners saw the price rises as ‘devastating’, leaving them with an extra bill of around £300million over the next 12 months. For a customer with a £150,000 loan, the increase by the Halifax will add an extra £40 a month, or £480 a year. The bank, which was rescued from the brink of collapse by Lloyds in 2008, is raising its SVR from 3.5 per cent to 3.99 per cent, a move which will hit around 850,000 of its three million mortgage customers. 

Inflationary illusions - Below is a quote from Richard Williamson posted by Steve Randy Waldman, and originally posted by Tyler Cowen. Williamson says; “I think there has been a lot missing from the discussion of the UK in the blogosphere.  We didn’t have deflation (on annual basis at least), and even stripping out the effect of the VAT rise in 2011 should still show persistent inflation over 3% since 2010, UK inflation expectations seem to be significantly higher here (if falling away a little recently)I’m not really sure what is going on… If we were to just look at inflation (at expectations thereof), the country that ought to be having an AD-driven double-dip recession would appear to be the US… I am becoming steadily less convinced that [an aggregate demand deficiency] is the whole story, at least for the UK.” This quote sums up for me why inflation targeting is not the right regime to be following, and is something I touched upon a couple of posts ago.  The easy mistake to make when looking at the inflation rate is to assume that a higher (lower) rate unambiguously represents a looser (tighter) monetary policy stance. This could not be further from the truth. I agree with Richard on the fact that current low levels of growth in the UK are not pure demand side deficiencies, that is, we have not simply moved to a new equilibrium further down the same original SRAS curve. If this were the case then as Richard points out we would expect current low levels of real GDP growth to be accompanied by lower inflation.

Thinking about the Double Dip Recession in the UK - The news is well-known now: There the UK is in the first double dip recession since 1975 thanks to among other things the government’s contractionary fiscal policies. This recovery is in fact worse than that of the Great Depression [Macroscope] Here are three other observations that might not be so obvious: (1) Growth has been lackluster ever since the election of the coalition government in May 2010; (2) growth under the program of austerity has compared poorly against the (admittedly insufficiently stimulative) fiscal policy framework in the US, and; (3) UK GDP growth has been lackluster even with the depreciated pound, which is interesting given that exchange rates can act as a shock absorber. I found it notable that UK growth has been so weak ever since the implementation of the austerity program. In some ways, it’s "textbook". Figure 1 shows growth in log differences since 2009.

The high cost of Iceland’s remarkable recovery - In this small Icelandic village, sailors are making double their pre-crisis pay, haddock sales to places like Boston and Brussels are booming and unemployment is almost zero – signs of this island’s surprisingly rapid rise from the ashes of banking ruin. While much of Europe wallows in recession, the economy of this volcanic island in the mid-Atlantic is growing at a clip that has surprised many people, thanks to a currency fall – in which the crown lost almost half its value to the euro – an export and tourism boom as well as growing consumer confidence.“This is probably one of our best years,” Only a few years ago, a banking boom in which the sector’s assets grew to 10 times the country’s GDP lured many of Iceland’s 320,000 population from traditional industries into the world of finance. Fisherman got into banking and sailors speculated on booming real estate. Those heady days have gone. Gas-guzzling Land Rovers have been replaced with fuel-efficient Volkswagens, a sign perhaps of a more sober consumer mood in which economic growth is based on a steady expansion of exports rather than flash-in-the-pan speculation.

The Renegade Economist Speaks with Ann Pettifor - (video) This is the sort of talk that makes Americans jealous of the British. Heterodox economist Ann Pettifor predicted a global debt deflation in 2003 (!) and critiques conventional thinking in the economics discipline. She also has a wonderfully theatrical manner of speaking.

Bankers Shoot Selves in Foot – “Reduce Our Profits by Cutting Deficits, Please!” - Are governments really engaging in ‘financial repression’? That’s what Neil Collins over at FT Alphaville, implies. This meme has been around for quite some time. As far as I can tell it was brought into being by Austrian School types, but then went on to be taken up by more mainstream commentators like Gillian Tett and now FT Alphaville. The idea is that the government is forcing investors into buying pricey government debt by ‘repressing’ yields through their quantitative easing programs. Collins summarises: QE allows government to escape the disciplines associated with market forces by pushing bond yields down to low levels even when fiscal policy is out of control. We will leave aside Collins’ view that the UK’s fiscal policy is “out of control” for the moment and focus instead on the argument that, if it were not for the QE programs, the market would soon ‘discipline’ the government by raising yields on government debt. Actually we have a perfect experiment in this regard. During the 1990s Japan was running exceptionally large fiscal deficits after their housing and stock market bubbles blew — and what’s more, they did this without any QE program in place. Japan initiated their very first QE program in mid-2001, ten years after their financial crisis.

On Major Macroeconomic Policy Mistakes - When UK GDP fell in the last quarter of 2011, I wrote that the 2010 Budget should rank as one of the major UK macroeconomic policy errors since the war. A number of comments on that post and since have asked why I single out fiscal policy rather than monetary policy for such criticism? This is a good question, which has much more general applicability than to just the UK.  There are three charges that could be made against recent monetary policy.

  • 1) That it could have done something to prevent the financial crisis itself, by raising interest rates by more in the middle of the last decade.
  • 2) Following the crisis, central banks could have cut rates more quickly, or done more in terms of ‘unconventional’ monetary policy.
  • 3) Policy should have moved to some form of price level or nominal GDP target.

Flexibility is no sin when policy is failing - Martin Wolf - In a democracy, willingness to inflict economic pain is rarely a route to credibility. Investors will refuse to believe that the policies will survive. Once they reach that conclusion, credibility disappears.  I learnt this in 1992. With the UK economy in recession, the credibility of the government’s commitment to membership of the exchange rate mechanism of the European Monetary System came into question. Many thought that a willingness to raise interest rates when sterling came under pressure would restore credibility. It did the opposite: few believed the pain could be sustained.  This experience informs my view on the options for the UK’s government. The arguments put forward for continuing with the planned fiscal tightening are that, in its absence, credibility will be lost and interest rates on government bonds explode. I suspect the reverse will ultimately prove to be the case. In the absence of policies likely to restore economic growth, the planned fiscal tightening will itself be incredible. Investors will believe that attempts to cut fiscal deficits in a prolonged slump will ultimately force a change of course. Commitments to delivering the incredible weaken credibility. The background to such thoughts is news that the first estimate of gross domestic product showed a fall in the first quarter of 2012 and so a technical recession on the popular definition of two quarters of negative growth. Far more important is the fact that the UK economy has stagnated for a year and a half. GDP is stuck at more than 4 per cent below its pre-crisis peak, close to where it was back in the third quarter of 2006 and 9 per cent below its 1970-2007 trend.

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