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

Saturday, December 1, 2012

week ending Dec 1

Fed balance sheet shrinks in latest week (Reuters) - The Federal Reserve's balance sheet shrank in the latest week with reduced holdings of Treasuries and agency mortgage-backed securities, Fed data released on Friday showed.The Fed's balance sheet - a broad gauge of its lending to the financial system - stood at $2.834 trillion on November 28, down from $2.853 trillion on November 21. The Fed's holdings of Treasuries totaled $1.647 trillion as of Wednesday compared with $1.650 trillion the previous week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) totaled $883.54 billion compared with $900.58 billion the previous week.The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system was $79.28 billion, unchanged from a week earlier. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $11 million a day during the week from a $5 million a day average rate the prior week.

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

Fed Churns Out Record Profit from Bloated Balance Sheet - The Federal Reserve is having the most profitable year on record as its $2.87 trillion balance sheet generates a windfall of interest income. The central bank has earned $69.4 billion in the first three quarters of 2012, up from $58.2 billion in the same period last year, according to quarterly financial reports released by the Fed Thursday in Washington. The Fed earns profits from its asset holdings, which include $1.65 trillion of Treasury securities and $900.6 billion of mortgage-backed securities. Those assets were mostly acquired through two rounds of large-scale asset purchases, known as QE. The Fed pays its operating expenses from these funds and turns most of what’s left over to the Treasury. The central bank in August began publishing new unaudited quarterly reports aimed at providing “greater transparency by communicating financial information on a more frequent basis and in greater detail.” The data was previously disclosed on an annual basis when the Fed releases its audited financial statements.

Some securities purchases but no QE from the Fed yet - The Fed's latest securities purchases are still not having much of an impact on bank reserves (see discussion). The net effect of Fed's recent activities is equivalent to sterilization, although this is probably not what the central bank had intended. The result is similar to the ECB's SMP (Securities Markets Programme), which was (usually) sterilized by auctioning off term deposits (securities purchases increase reserves, while term deposits "drain" them). Without the increase in bank reserves, the US monetary base has been stable (unlike during previous balance sheet expansion programs). So far the Fed's securities purchases have not translated into quantitative easing (no "money printing" just yet).

Fed’s Evans Sees Need for $85 Billion of Asset Purchases for 6-12 Months -- The U.S. Federal Reserve may need to continue with monthly bond purchases of $85 billion for six months to a year until the labor market improves, Federal Reserve Bank of Chicago President Charles Evans said Wednesday. That’s the current combined total from Operation Twist–where the Fed has been buying $45 billion of long-term Treasury bonds a month by selling the same amount of short-term assets–and the open-ended buying of mortgage-backed securities embarked on in September, at a pace of $40 billion a month. Operation Twist is due to expire at the end of December. “My own viewpoint is that we need to continue with those asset purchases at the $85 billion pace until we see labor-market improvement. That’s likely to be at a minimum six months I would say, perhaps as long as a year,” Mr. Evans said in an interview with BNN, a Canadian business television network. He defined labor market improvement as payroll employment growth of 200,000 a month for about six months, above-trend growth, and a drop in the jobless rate..

Fed Watch: A Little Less Dovish... In the midst of an internal debate over policy communication, Chicago Federal Reserve President Charles Evans pulled back on his 3 percent inflation threshold in a speech yesterday. Arguably, as the only policymaker suggesting guidance well above the Fed's stated 2 percent target, Evans was the last true dove at the Fed. With Evan's falling in line with his colleagues, it looks like the last sliver of hope that the Fed would tolerate slightly higher inflation to accelerate the reduction of real burden has now been dashed. There is a lot of interesting material in Evan's speech, but here I focus only on his basic outlook and the implications for policy. Regarding growth: That said, monetary policymakers must formulate policy for today. In the United States, forecasts by both private analysts and FOMC participants see real GDP growth in 2012 coming in at a bit under 2 percent. Growth is expected to move moderately higher in 2013, but only to a pace that is just somewhat above potential. Such growth would likely generate only a small decline in the unemployment rate.  Of course, he added earlier that this forecast is vulnerable to the possible of an austerity bomb in 2013, but for the moment assume that issue is resolved:  Underlying these projections is an assumption that fiscal disaster will be avoided—and with this, that some important uncertainties restraining growth should come off the table. Also, deleveraging will run its course, and as it does, the economy’s more-typical cyclical recovery dynamics will take over. As the FOMC indicated in its policy moves last September, the current highly accommodative stance for monetary policy will be kept in place for some time to come.

The “Other” deposits at the Fed are likely to become bank reserves this week - Bank reserve deposits normally decrease when the Treasury’s balances at the Fed rise as the money the Treasury takes in from taxes and debt sales is withdrawn from bank accounts, which in turn causes bank reserve balances at the Fed to fall. Then, in the next week or two, the Treasury spends that money and the resulting deposits are reflected in increased reserves at the Fed. That increase also represents the creation of economic credits that show up in the economic data for that week.  Reserves also increase when the Fed settles the paper it buys from the Primary Dealers, offset by the Treasuries the dealers sell to the Fed. With the settlements of QE3 purchases now under way, reserves will begin to increase dramatically in the weeks where there are large settlements. Last week and this week are the first of those. The next week of MBS purchase settlements will be the week of December 12.  The Treasury deposited a net of $2.9 billion to its checking account at the Fed last week as the dollar amount of its revenues and net new debt sales were almost balanced by its outlays. This brought its deposit balance to near $27 billion in the week ended Wednesday.  Partly as a result, bank reserve deposits declined by $4.5 billion.  The mysterious “Other” depositors, however, added $31 billion to their accounts at the Fed. Ding-Ding-Ding and flashing lights, I think we now know what at least some the “Other” deposits are. They appear to be the Primary Dealer accounts used in their trades with the Fed’s SOMA. On November 14 the Fed settled some $36 billion in MBS purchases from the Primary Dealers. The dealers didn’t need to settle their Treasury purchases from the previous week until the following day, after the closing of the weekly Fed H41 statement, causing the cash in their accounts to bulge that day.

QE3 update: modest increase in bank reserves -US bank reserves at the Fed grew about $27bn, with the "other" category showing up in reserves this week (as Lee Adler discussed earlier). Overall the pace of reserves growth is still quite modest on a relative basis (currently reserves are at the level of early September.) Further increases are expected in December as more MBS purchases settle.Moreover, the Fed's balance sheet unexpectedly shrunk by $20bn this week. Part of the decline has to do with MBS paydown from all the mortgage refinancing activity. Certainly there is some noise in the balance sheet measures and reserves on a week-to-week basis, but the Fed is definitely being cautious. We may see a more aggressive approach to bank reserve expansion after Operation Twist (see discussion) winds down - likely early next year. There is about $50bn of short-term notes left to sell (chart below). A number of economists continue to argue that increasing bank reserves is not productive at this point in the cycle because it will not stimulate further credit expansion (while risking inflation).

Monetary policy: First, assume a can-opener - The Economist  - THOSE of us who have spent much of the past few years complaining that Federal Reserve policy was too tight to nurture a strong economic recovery are grateful for Chicago Fed president Charles Evans. Mr Evans has made two invaluable contributions to monetary policy-making. He has made himself an open advocate for a more "dovish" policy regime: a departure of sorts within the Federal Open Market Committee, where the loudest voices are nearly always those calling for tighter policy. And he has pushed the committee toward a policy framework that represents a real advance for the central bank. Perhaps more important, Mr Evans' first pass at the thresholds was surprisingly inflation-tolerant. He reckoned the FOMC should leave rates low until unemployment fell below 7%, so long as inflation remained below 3%. A tolerance for higher inflation may be a critical ingredient in recovery from the sort of recession America faced in 2007-2009, in which deflationary pressures were significant and the Fed's policy rate was stuck at the zero lower bound. It has been encouraging to watch other FOMC members come around to Mr Evans' view, and to see Fed policy inch in his direction. But Mr Evans' latest speech is a little disconcerting, because it seems to reflect a slightly more inflation-averse perspective.  He seems to have moved toward the view of Chairman Ben Bernanke, that the Fed can immaculately boost real growth without any inflationary consequences (or, if you like, "side benefits"). Mr Evans gives us this perplexing passage:

Fed’s Evans Revises Thresholds for Monetary Policy Change -  As Federal Reserve officials increasingly gravitate toward providing trigger points that would determine when monetary policy might be tightened, the chief supporter of such thresholds says his initial proposals were “too conservative.” In a speech Tuesday, Federal Reserve Bank of Chicago President Charles Evans said he believes the central bank can pursue an even lower rate of unemployment than he initially believed, without causing inflation.

Dudley Sees Unacceptable Joblessness as More QE Weighed - Federal Reserve Bank of New York President William C. Dudley said he is focusing on “unacceptably high” joblessness as he considers whether the central bank should increase its asset purchases. “I will be assessing the employment and inflation outlook in order to determine whether we should continue Treasury purchases into 2013,” Dudley, 59, said today in a speech at Pace University in New York. “The Fed will promote maximum employment and price stability to the greatest extent our tools permit, and we will stay the course.” Fed officials are considering whether to step up record accommodation to offset the scheduled expiration next month of Operation Twist, a program swapping short-term Treasuries with longer-term debt. A “number” of Fed officials said at their policy meeting last month that the Fed next year may need to expand its monthly purchases of bonds, according to the minutes of the Federal Open Market Committee’s Oct. 23-24 gathering. “Although the economy continues to expand, we must grow faster if we are to put all of our jobless workers and idle businesses back to work,” said Dudley, who is also vice chairman of the policy-setting FOMC. Consumer prices will probably increase “at or slightly below our 2 percent longer- run objective over the next few years.” Dudley said he will “focus on the labor market outlook, not just its current state” in determining whether to add to the Fed’s stimulus. Discouraged workers have “depressed the participation rate and held down the official unemployment rate,” he said.

Fed Will ‘Stay The Course’ With Stimulus Efforts, Dudley Says - The U.S. economy is likely to take a modest and ultimately transitory near-term hit from Hurricane Sandy, a key Federal Reserve official said Thursday, in remarks reiterating his continued support for central bank stimulus to aid an economy that’s growing too slowly. “The Fed will promote maximum employment and price stability to the greatest extent our tools permit, and we will stay the course” when it comes to pursuing a monetary stance aimed at promoting growth, Federal Reserve Bank of New York President William Dudley said. The official repeated his view the stimulus the central bank is now providing should be maintained even when growth picks up, saying “when we achieve a stronger recovery in the context of price stability, I’ll view it as consistent with our goals and not a reason to pull back on our policies prematurely.” 

QE through the looking glass - Even if you follow central banking, you may not have heard much about Jeremy Stein. He's a highly regarded finance economist from Harvard University who became a governor this year, and since then he has given only one speech. But judging by the contents of that speech, Mr Stein's profile seems bound to grow. The subject of the speech was the Fed’s large scale asset purchases (LSAPs), colloquially known as quantitative easing (QE). It had none of the tantalizing hints about coming Fed actions that attract headlines. Rather, it mucked about in dark, abstruse corners of corporate finance, devoting three of its 19 pages to academic references. But buried in those pages were striking insights into monetary policy. Some were the subject of David Wessel's column today in The Wall Street Journal, others of the Free Exchange column in this week's Economist. He will discuss the speech at a panel in Boston tomorrow.  One insight in particular caught my eye. Mr Stein sought to explore precisely how bond purchases stimulate economic growth. Start by asking what determines a bond’s yield. Assume investors expect treasury bill rates to average 2% this year and 4% next year. That means a two-year bond would yield 3% for its expected return to equal T-bills'. In practice, the bond will typically yield more: say, 3.5%, because investors usually want to be compensated for locking up their money, and borrowers will pay more to avoid refinancing risk.

Large-Scale Asset Purchases - Fed: Governor Jeremy C. Stein - speech - Given that the conference theme is macro-finance linkages, I thought I would try to lay out a corporate finance perspective on large-scale asset purchases (LSAPs).  I have found this perspective helpful in thinking both about the general efficacy of LSAPs going forward, and about the differential effects of buying Treasury securities as opposed to mortgage-backed securities (MBS).  But before I get started, please note the usual disclaimer:  The thoughts that follow are my own and do not necessarily reflect the views of other members of the Federal Open Market Committee (FOMC).  I should also mention that these comments echo some that I made in a speech at Brookings last month.1   As I noted in that speech, I support the Committee's decision to purchase mortgage-backed securities (MBS) at a rate of $40 billion per month, in tandem with the ongoing maturity extension program in Treasury securities, and its plan to continue with asset purchases if the Committee does not observe a substantial improvement in the outlook for the labor market.

Don’t Be Fooled by the Fed: Stimulus Is a Sign of Dysfunction, Not Opportunity - The headline was innocuous, even a tad obvious. Yet when The Wall Street Journal reported Fed Likely to Keep Buying Bonds on Wednesday afternoon, it was a bombshell in certain circles. Fiscal cliff fears that had gripped the markets all week were suddenly less daunting, as traders relished the thought that, once again, the cavalry (a.k.a. Ben Bernanke and the Fed) would ride to the rescue with even more firepower at his disposal. While this kind of reaction clearly falls within the realm of the don't fight the Fed axiom, for some investors it was also a not-so-subtle reminder that all is not well. "As long as the Fed is providing liquidity, it's a sign that something is dysfunctional, something is wrong with the marketplace," says Charlie Smith, the chief investment officer at Fort Pitt Capital, in the attached video. "The Federal Reserve does not engender risk-taking. The Federal Reserve buffers collapse," Smith maintains, reminding viewers of the central bank's cardinal rule of existence. "It was created as a lender of last resort to provide liquidity when markets are not working."

2 charts that show the Fed is not monetizing the debt - While there’s much in Fed policy to criticize over the past decade, there’s no need to overstate things. Right now, for instance, we see lots of talk that the Fed is monetizing the debt, which would be indistinguishable from money printing. In fact, it is money printing and risks a dangerous bout of inflation. But is that really what the Fed is doing? As Ben Bernanke said last month: By buying securities, are you “monetizing the debt”–printing money for the government to use–and will that inevitably lead to higher inflation? No, that’s not what is happening, and that will not happen. Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates. At the appropriate time, the Federal Reserve will gradually sell these securities or let them mature, as needed, to return its balance sheet to a more normal size. Sure, that’s his story. But what about the claim that the “Federal Reserve purchased 77% of the net increase in the debt by the Federal government in 2011″? Economist David Beckworth puts the Fed’s bond buying in perspective with two facts of his own. First, the Fed overall holds just 15% of marketable treasuries as seen in the “All Years” category in the below chart.

The Fed, The Budget Deficit, and The Facts - My last post generated some heated push back from the hard-money types.  That post showed the Fed sill has about the same share of treasuries, 15%, as it did before the crisis.  Thus, the large run up in public debt over the past four years has been funded mostly by individuals, their financial intermediaries, and foreigners.  The Fed has not been the great enabler of the government deficits as claimed by the hard-money types.  This fact seems to have been very uncomfortable for them because they largely ignored it.  Instead, they quibbled with my definition of debt monetization and resorted to ad-hominen attacks.   Given these responses, it is probably too much to hope for further meaningful engagement with them. But in the event some are still listening, here are some additional points I hope they consider. First, safe asset yields across the globe have been falling for the past four years.  Even more remarkable, is that the yields have been falling in a similar pattern.  This can be seen in the figure below which shows the long-term government yields for Canada, Germany, Japan, the United States, and the United Kingdom.  U.S. monetary policy cannot explain this worldwide phenomenon.Second, the Fed and U.S. Treasury Department have been pursuing opposite objectives with regard to the maturity of the publicly-held debt.  The Fed has been trying to shorten the maturity with Operation Twist while the Treasury Department has been trying to extend it.  The figure below sums up this tension nicely. Third, even if the Fed were responsible for the low yields it has failed to generate upward inflationary pressures.  

Is it a sin for the central bank to help reduce debt? -   There is a great deal of discussion about the appropriate goals for monetary policy. Should it just be targeting inflation, or should central banks also include the output gap in their objective function? Perhaps they should target nominal GDP. However, hardly anyone would dream of suggesting that monetary policy should help reduce government debt, by lowering interest rates or raising inflation. It is just accepted that we should only use costly (in welfare terms) increases in taxes, or costly cuts in government spending, to achieve debt reduction. What I have called the consensus assignment for economies with their own currency is that the central bank stabilises demand and inflation, and the government through fiscal policy manages government debt. The first part of that assignment does not work at the zero lower bound (ZLB), although some economists find it difficult to admit this. But equally there are circumstances where the second part of the assignment is far from optimal, and where it is useful to have the central bank help reduced debt. Circumstances like when debt is much too high.

Personal Consumption Expenditures: Price Index Update -The November Personal Income and Outlays report for October 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 year-over-year (YoY) rate of 1.74% is an increase from last month's adjusted 1.61%. The Core PCE index of 1.56% is decrease from the previous month's adjusted 1.67%.  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. 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: (See the January 25, 2012 Press Release here.)  For a long-term perspective, here are the same two metrics spanning five decades.

The Curse Of The Reserve Currency -- Is reserve currency status an economic blessing or a curse? The answer might seem obvious, as reserve currencies have been shown to confer lower borrowing costs on their issuers. But what of the borrower who, enticed by low interest rates, borrows more than they can pay back? Naturally the result will be a default. However, for the issuer of a reserve currency that is unbacked by a marketable commodity, such as gold, in the event that they borrow too much, they can just print more currency. While this avoids default indefinitely, it also hollows out the economy, erodes the capital stock, reduces the potential growth rate and, eventually, leads to a dramatic devaluation of the currency and loss of reserve status. History has not been kind to countries that have followed this path. In my view, the grave investment risks associated with the US dollar’s inevitable and potentially imminent loss of reserve status are not priced into financial markets.

U.S. Dollar: The Biggest Moral Hazard Of Them All - A recent Wall Street Journal article describes the dollar as the "King" among currencies, given its reserve-currency status. It got me to thinking: Is it the King, or the King of All Moral Hazards? Kevin Dowd, in a Cato piece entitled "Moral Hazard and the Financial Crisis," defines moral hazard this way: "A moral hazard is where one party is responsible for the interests of another, but has an incentive to put his or her own interests first...." New York Times Journalist Shaila Dewan defines it as "the undue risks that people are apt to take if they don't have to bear the consequences." To illustrate the concept of moral hazard, let us think back to the days when U.S. politicians decided to bail out failing investment banks with taxpayer funds. Under more normal circumstances, and for the markets to work properly, Congress should have required these banks to fail and to bear the consequences of their actions. Decision-makers must have reasoned that the immediate damages resulting from bank failures would outweigh the long-term damages resulting from bailing them out, in spite of the fact that a bail-out would only reward the banks' foolhardy risk-taking and encourage them to do more of it. This is a perfect illustration of moral hazard, because the decision put the risk on the backs of taxpayers, not the decision-makers themselves. (For the sake of our argument, we shall assume that all of Congress wasn't outright bought by Goldman Sachs, et al.) How do I get from there to the dollar? In 1944, during the Bretton Woods negotiations, the U.S. government gladly allowed its money to become the reserve currency of the world. In spite of the breakdown thirty years later of a crucial detail of the agreement (the dollar's tie to a certain weight of gold), the U.S. dollar continues to have hegemony over the other currencies of the world.

Welcome to the Currency War, Part 5: The Dollar Gets Serious Competition - Not so long ago the dollar was the world’s only reserve currency. Everything else was one (or several) steps down in terms of safety and liquidity, and major financial institutions acted accordingly, accumulating dollars for the risk-free parts of their portfolios. Global demand for dollars was, as a result, effectively infinite, which meant the US could borrow whatever it wanted, secure in the knowledge that the Treasury bonds it created would find willing buyers. But quietly, over the past couple of decades, the dollar has been joined at the top by the euro, yen, pound sterling and Swiss franc. And now the list of legitimate reserve currencies has expanded to include Canadian and Australian dollars:  Aussie, Canada dollars termed reserve currencies The Australian and Canadian dollars, the world’s leading commodity-rich currencies, are being formally classified as official reserve assets by the International Monetary Fund, marking the onset of a multi-currency reserve system and a new era in world money. In a seemingly innocuous yet highly portentous move, the IMF is asking member countries from next year to include the Australian and Canadian dollars in statistics supplied by reserve-holding nations on the make-up of their central banks’ foreign exchange reserves. The technical-sounding measure, reflecting growing diversification of the world’s $10.5 trillion of reserves, is likely over time to exert wide-ranging impact on world bond and equity markets.

Spending Probably Cooled, Investment Fell - Consumer spending probably cooled in October and business investment dropped, showing how superstorm Sandy and the looming fiscal cliff are hindering U.S. growth at the end of 2012, economists said before reports this week. Household purchases rose 0.1 percent last month, the smallest advance since June, after increasing 0.8 percent in September, according to the median estimate from 52 economists surveyed by Bloomberg before Nov. 30 figures from the Commerce Department. Orders for durable goods fell 0.8 percent in October, economists forecast another report to show. Sandy shuttered some retailers in the Northeast, temporarily countering the benefits of gains in consumer sentiment that are brightening the holiday-shopping outlook. At the same time, the prospect that the economy will stumble should lawmakers not be able to ward off tax increases and government spending cuts scheduled for 2013 may be prompting companies to put off replacing outdated equipment.

The U.S. economy grew 2.7% last quarter - The economy grew at a 2.7 percent pace in the third quarter of 2012, not the 2 percent pace previously estimated. That’s the latest verdict from the Bureau of Economic Analysis today, which went back and updated its GDP numbers as better data rolled in. On the surface, this looks like a good sign—the economy was growing even faster than we thought. The revision also makes President Obama’s reelection seem a bit less mysterious, seeing as how the economy was actually trundling along at a healthy clip in the months leading up to November. But the details of the report aren’t entirely positive. About 0.7 percentage points of growth between July and September came from an anomalous spike in federal defense outlays. We’ve already dissected that strange surge in military spending — experts say it most likely came from the Pentagon looking to spend through its existing budget authority before the end of the fiscal year (and before the sequester spending cuts clamped down). What’s more, another 0.8 percentage points of growth came from faster-than-expected inventory accumulation. Businesses were restocking at a faster rate, but sales weren’t necessarily keeping up. Final sales growth actually got revised downward from 2.1 percent to 1.9 percent. Many analysts think it’s unlikely that companies will keep stockpiling inventory next quarter — if anything, they’re likely to cut back a bit as sales slow.

GDP Q3 Second Estimate at 2.7%, In Line with Expectations - The Second Estimate for Q3 GDP came in at 2.7%, close to expectations. This is a welcome increase from the 2.0% in last month's Advance Estimate. The consensus I generally feature was for 2.8%. Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.7 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.  The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.0 percent The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, federal government spending, residential fixed investment, and exports that were partly offset by negative contributions from nonresidential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased slightly.  The acceleration in real GDP in the third quarter primarily reflected upturns in private inventory investment and in federal government spending, a deceleration in imports, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by a downturn in nonresidential fixed investment and decelerations in exports and in PCE. [Full ReleaseHere is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product. I've also included recessions, which are determined by the National Bureau of Economic Research (NBER).

Update: Second Estimate of Q3 GDP Shows More Growth - The second estimate of Q3 Real GDP, released today indicates that output grew slightly faster at 2.7% than previously estimated at 2%. On the face of it this seems like good news because it implies a more robust recovery than the earlier estimate. Unfortunately there are reasons to temper that optimism.  Much of the increase was due to an upward revision in the Q3  change in inventories which increased from$34 billion to $61 billion.  Unfortunately, these inventories could dampen growth in the fourth Quarter as firms work them off.  Net Exports were also revised upwards and added significantly to the increase in estimated GDP growth.The fundamentals that we look to  for evidence of a robust recovery were not encouraging. Real consumption growth was revised downwards from 2% to 1.4% and real private non-residential investment declined 2.2% in the third quarter in contrast to the 3.6% increase in the second. There has been a lot of concern about the drop off in capital spending and many observers attribute it uncertainty about Europe and fiscal policy.  Whatever the reason, the consequences for future output growth cause for concern. In a departure from our usual format we present many of the series in both per-capita terms and levels in the following graphs.

Visualizing GDP: Q3 Second Estimate Boost from Private Inventories - The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. The improvement in today's 2.7% Second Estimate over the 2.0% Advance Estimate is largely attributable to a substantial change in private inventories of the Gross Private Domestic Investment component of GDP. My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product. Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 0.99 of the real GDP). This is an increase from the 1.42 PCE of the 2.0 GDP in the Advance Estimate for Q3. Here is a more detailed look at the changes between the Advance and Second Estimates. I mentioned the significant revision to change in private inventories, but we can also see a number of other areas of revision.

GDP Revised Upward to 2.7% Growth for Q3 2012 Q3 2012 real GDP shows 2.7% annualized growth, revised from 2.0% in the advance report. There was a significant upward revision to inventories, yet consumer spending was revised down. Exports were revised up as trade statistics became more complete. Q2 GDP was 1.25%.  A quarterly GDP of 2.66%, unrounded, is slightly above treading water economic growth. Consumer spending was barely breathing in Q3. Government spending alone attributed for 0.67 percentage points of Q3's 2.66% GDP. The change in private inventories alone contributed 0.77 percentage points to Q3 GDP. The drought negatively impacted economic growth as farm inventories reduced GDP by –0.39 percentage points. Government spending and inventory build up isn't exactly the kind of economic activity news we want to see. While these both add to economic growth, overall weak demand is still present in the economy.  As a reminder, GDP is made up of: Y=C+I+G+(X-M) where Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports*. The below table shows the percentage point spread breakdown from Q2 to Q3 GDP major components. GDP percentage point component contributions are calculated individually.

Ugly Q3 GDP Confirms Personal Consumption Collapsing; Headline "Growth" Driven By Government, Inventory Accumulation -  One glance at today's second read of Q3 GDP may leave some with the false impression that the US economy is soaring, because after sliding to 1.3% in Q2, and after a preliminary read of 2.0% in the first Q3 estimate, today's print, which missed estimates of a 2.8% print, did nonetheless rise to 2.7%. "A stunning success", the administration sycophants would say. Absolutely wrong. Because a quick glance at the underlying numbers shows the true picture of the economy which contracted far more than most expected, with personal consumption collapsing to 1.4% Q/Q, on hopes of a 1.9% rise, and down from 2.0%. In fact, at 0.99% personal consumption expenditures - the core driver of 70% of the US economy - were a tiny 36% of the headline number. Ironically today's second GDP revision was far worse when analyzed at the component level, than the first Q3 estimate, which while lower overall at 2.0%, at least had personal consumption nearly 50% higher at 1.42%, or well over half of the total contribution. So what drove "growth" in Q3? Nothing short of the most hollow and worst components of GDP: Government Spending, which soared to 0.67% of the annualized number, the first positive print in years, and of course, Inventories, which were responsible for 30% of the headline number. Finally, and most importantly, Fixed Investment, aka CapEx, was a meager 0.1%, or the lowest GDP contribution since Q1 2011. Without CapEx there is no corporate revenue growth (and future hiring intentions) period.

Third Quarter GDP Revised Upward, Not Necessarily Good News - The big economic news today came in the form of the Commerce Department’s first revision to the third quarter GDP numbers which showed that the economy grew at the stronger than expected rate of 2.7%: Even as the government said that the United States economy grew faster than first estimated in the third quarter, economists warned that the rate of expansion could slow sharply before the end of the year as worries mount about the fiscal impasse in Washington. The Commerce Department said Thursday that gross domestic product expanded at an annual rate of 2.7 percent in the three months ended Sept. 30, well above the 2 percent estimate it initially made in late October. But the revision was driven by increased inventory accumulation and a jump in federal spending — factors unlikely to be repeated in the current fourth quarter, economists said. What’s more, the revised figures show spending by businesses on equipment and software declined by 2.7 percent in the third quarter, the first decrease since the end of the recession in mid-2009 and a sign of just how cautious many companies have become amid the uncertainty in Washington and slowing growth in Asia and Europe.

Q3 GDP - The Devil Is In The Details - The good news this morning is that the 2nd estimate of the third quarter (3Q) GDP was revised up from 2.0% initially to 2.7%.  This is up sharply from the 2Q print of 1.3%. However, the combination of rising levels of unsold goods (inventory), slowing sales growth and declining incomes all point to weaker GDP growth in Q4 and into the early quarters of 2013.  Look for GDP growth in the 4Q to decelerate to 1.5% to 1.7%. While there is currently not an official recession in the U.S. economy, as of yet, the details of the current economic growth are not ones of robust strength. If we are correct in my assumptions the economic underpinnings will continue to negatively impact fundamental valuations as profit margins continue to be compressed. While most of the media, and mainstream analysts, continue to focus on the state of the economy from one quarter to the next - the trend of the data clearly shows the need for concern.  Of course, this also why Bernanke is already considering QE4.  As we stated previously, while economic growth did pick up this quarter it is the makeup, and more importantly the sustainability, of that growth is what we need to continue to focus on.

Stronger Third Quarter Makes Outlook Weaker - The U.S. economy last quarter grew at one of the speediest paces so far in this recovery. But the revisions in Thursday’s gross domestic product report raise worries about production going forward. The Commerce Department said real GDP expanded at a 2.7% annual rate last quarter, better than the 2.0% reported a month earlier. Only two other quarters have seen better growth rates since the recovery began in mid-2009. The source of the better growth, however, isn’t good for the outlook. Almost all of the revision came from the inventory sector. Inventory contributed 0.77 percentage point to GDP growth last quarter, a swing from the 0.1 point drag reported a month ago. The problem with growth coming from inventory accumulation is that businesses headed into the fourth quarter with extra goods on shelves or in warehouses. If demand isn’t solid enough to move that merchandise out the door, an overhang of inventories will mean less orders and production. Those production cuts might come in the fourth quarter or they could be a drag in early 2013, just as some type of fiscal restraint (higher taxes or federal spending cuts) filters through the economy. How important were inventories to GDP? Excluding them, real final sales grew 1.9% last quarter, down from the 2.1% reported earlier and not much better than the 1.7% rate of the second quarter. The unexpectedly high rate of inventory building caused economists at Goldman Sachs to lower their estimate of fourth-quarter GDP. They wrote in a research note, “We believe that underlying momentum going into Q4 was weaker than we anticipated. As a result we revised our Q4 GDP tracking to 1.5% from 1.7%.”

A few comments on GDP Revision and Unemployment Claims - GDP Revision: Although Q3 real GDP growth was revised up from 2.0% annualized to 2.7%, the underlying details were disappointing. There were three main sources for the revision: 1) Personal consumption expenditures (PCE) increased at a 1.4% annualized rate,  revised down from 2.0%.  This means PCE contributed 0.99 percentage points to real growth in Q3 (revised down from a 1.42 percentage point contribution in the advance release), and 2) the change in private inventories added 0.77 percentage point contribution to growth (revised up from -0.12), and 3) exports were revised up to a 0.16 percentage point contribution (revised up from -0.23). This suggests weaker final demand in the US than originally estimated. Also Justin Wolfers at Bloomberg discusses the weak Gross Domestic Income (GDI) data: The Bad News in Today's Happy Growth Report.  Sluggish growth continues. Unemployment Claims: A reader sent me some "analysis" on the initial weekly unemployment claims report released this morning that was incorrect. The writer wrote that the 1) the 4-week moving average was at the highest level this year, 2) that there were 30,603 fewer layoffs in New York "last week", so 3) the recent increase in the 4-week average can't be blamed on Hurricane Sandy. The first point is correct. The 4-week average is at the highest level since October 2011, but the conclusion about not blaming Sandy is incorrect.

Real GDP Per Capita: Another Perspective on the Economy - Earlier today we learned that the Second Estimate for Q3 real GDP came in at 2.7%, up from the Advance Estimate of 2.0%. Let's now review the numbers on a per-capita basis. For an alternate historical view of the economy, here is a chart of real GDP per-capita growth since 1960. For this analysis I've chained in current dollars for the inflation adjustment. The per-capita calculation is based on quarterly aggregates of mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data is available in the FRED series POPTHM. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale. I've drawn an exponential regression through the data using the Excel GROWTH() function to give us a sense of the historical trend. The regression illustrates the fact that the trend since the Great Recession has a visibly lower slope than long-term trend. In fact, the current GDP per-capita is 10.2% below the regression trend. The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 19 quarters beyond the 2007 GDP peak, real GDP per capita is still 1.45% off the all-time high following the deepest trough in the series. Here is a more revealing snapshot of real GDP per capita, specifically illustrating the percent off the most recent peak across time, with recessions highlighted. The underlying calculation is to show peaks at 0% on the right axis. The callouts shows the percent off real GDP per-capita at significant troughs as well as the current reading for this metric.

Chicago Fed: Economic Activity Slower in October - The Chicago Fed released the national activity index (a composite index of other indicators): Economic Activity Slower in October Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.56 in October from 0.00 in September. All four broad categories of indicators that make up the index decreased from September, and only two made positive contributions to the index in October. The index’s three-month moving average, CFNAI-MA3, decreased from –0.36 in September to –0.56 in October—its eighth consecutive reading below zero. October’s CFNAI-MA3 suggests that growth in national economic activity was below 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. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. This suggests economic activity slowed, and growth was still below trend in October. According to the Chicago Fed: The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

Chicago Fed: Economic Activity Slower in October - According to the Chicago Fed's National Activity Index, September economic activity slowed from the previous month, now at -0.56. The indicator has been negative (meaning below-trend growth) for six of the past eight months, and the all-important 3-month moving average has been negative for all eight of those months and 21 of the last 27 months. Here are the opening paragraphs from the report: Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.56 in October from 0.00 in September. All four broad categories of indicators that make up the index decreased from September, and only two made positive contributions to the index in October.  The index's three-month moving average, CFNAI-MA3, decreased from –0.36 in September to –0.56 in October — its eighth consecutive reading below zero. October's CFNAI-MA3 suggests that growth in national economic activity was below 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]  Elsewhere in the PDF report it is noted that Hurricane Sandy negatively affected industrial production in October. 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. The index is constructed so a zero value for the index indicates that the national economy is expanding at its historical trend rate of growth. The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity.

The Philly Fed ADS Business Conditions Index - The Philly Fed's Aruoba-Diebold-Scotti Business Conditions Index (hereafter the ADS index) is a fascinating but little known real-time indicator of business conditions for the U.S. economy, not just the Third Federal Reserve District, which covers eastern Pennsylvania, southern New Jersey, and Delaware. Thus it is comparable to the better-known Chicago Fed's National Activity Index, which is updated monthly (more about the comparison below).Named for the three economists who devised it, the index, as described on its home page, "is designed to track real business conditions at high frequency." It is based on six underlying data series:

  • Weekly initial jobless claims
  • Monthly payroll employment
  • Industrial production
  • Personal income less transfer payments
  • Manufacturing and trade sales
  • Quarterly real GDP

The accompanying commentary goes on to explain that "The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions."The first chart shows the complete data series, which stretches back to 1960. I've highlighted recessions and the current level of this daily index through its latest data point.

Fed's Beige Book: "Economic activity expanded at a measured pace" - Fed's Beige BookEconomic activity expanded at a measured pace in recent weeks, according to reports from contacts in the twelve Federal Reserve Districts. Cleveland, Richmond, Atlanta, Chicago, Kansas City, Dallas, and San Francisco grew at a modest pace, while St. Louis and Minneapolis indicated a somewhat stronger increase in activity. In contrast, Boston reported a slower rate of growth. Weaker conditions in New York were attributed to widespread disruptions at the end of October and into November caused by Hurricane Sandy. Philadelphia reported general weakness that was exacerbated by the hurricane. ...  Among key sectors, consumer spending grew at a moderate pace in most Districts, while manufacturing weakened, on balance. Seven of the twelve Districts reported either slowing or outright contraction in manufacturing, and two others gave mixed reports. ... And on real estate: Overall, markets for single-family homes continued to improve across most Districts with the exception of Boston and Philadelphia. Residential real estate markets in the New York District were mixed but generally firm prior to the storm. Selling prices were steady or rising. Boston, New York, Richmond, Atlanta, Kansas City, and Dallas noted declining or tight inventories.

Fed’s Beige Book: District-by-District Summary - The Federal Reserve‘s latest “beige book” report noted that the economy expanded at a “measured pace” across most of the U.S., though some areas reported weaker conditions due to superstorm Sandy. The following is a district-by-district summary of economic conditions in the 12 Fed districts for October and early November:

America’s Political Recession, by Brad DeLong - The odds are now about 36% that the United States will be in a recession next year. The reason is entirely political: partisan polarization has reached levels never before seen, threatening to send the US economy tumbling over the “fiscal cliff”... Obama broadly follows Ronald Reagan’s (second-term) security policy, George H.W. Bush’s spending policy, Bill Clinton’s tax policy, the bipartisan Squam Lake Group’s financial-regulatory policy, Perry’s immigration policy, John McCain’s climate-change policy, and Mitt Romney’s health-care policy... And yet he has gotten next to no Republicans to support their own policies. ... There are obvious reasons for this. A large chunk of the Republican base, including many of the party’s largest donors, believes that any Democratic president is an illegitimate enemy of America, so that whatever such an incumbent proposes must be wrong and thus should be thwarted. ... Moreover, ever since Clinton’s election in 1992, those at the head of the Republican Party have believed that creating gridlock whenever a Democrat is in the White House ... is their best path to electoral success. That was the Republicans’ calculation in 2011-2012. And November’s election did not change the balance of power anywhere in the American government...

Did Social Security and Medicare Crash the Economy? - The talk in Washington these days might lead people to think that the main cause of the economic downturn is the Social Security and Medicare benefits being paid to retirees. After all, we have people from both parties giving us assurances that cuts to these programs are an essential part of any budget deal. This is the sort of topsy-turvy thinking that passes as conventional wisdom in Washington. In case it's necessary to remind people, our economy plunged due to the collapse of a Wall Street fueled housing bubble. The loss of demand from the collapse of the housing bubble both led to a jump in the unemployment rate from which we have still not fully recovered and also the large deficits of the last five years. Prior to collapse of the bubble, the budget deficits were quite modest. In 2007 the deficit was just 1.7 percent of GDP, a level that can be sustained indefinitely. The reason that we suddenly got large deficits was the economic downturn which caused tax revenue to plummet and increased spending on programs like unemployment insurance. We also had temporary measures that included tax cuts like the payroll tax holiday and various spending programs that further raised the deficit.

Update: The Recession Probability Chart - A few weeks ago, I mentioned a recession probability chart from the St Louis Fed that was making the rounds. (see below). This graph shouldn't be interpreted as indicating a new recession. Jeff Miller at a Dash of Insight discussed why: Debunking the 100% Recession Chart. Now the author, University of Oregon Professor Jeremy Piger, posted some FAQs and data for the chart online. Professor Piger writes:  How should I interpret these probabilities as a recession signal? Historically, three consecutive months of smoothed probabilities above 80% has been a reliable signal of the start of a new recession, while three consecutive months of smoothed probabilities below 20% has been a reliable signal of the start of a new expansion. Here is the chart from FRED at the St Louis Fed. Obviously we haven't seen three consecutive months above 80%. Those arguing this chart indicated a 100% probability of a new recession knew nothing of Piger's work.

ECRI Sticks With Recession Call - The ECRI is sticking with its "US is already in recession" call based on four coincident indicators. Very few agree, but for what it's worth (perhaps nothing) I am one of those in agreement. Here is a Bloomberg video to consider. Also consider The Tell-Tale Chart by the ECRI. Following our September 2011 recession call, we clarified its likely timing in December 2011. Based on the historical lead times of ECRI’s leading indexes, we concluded that, if it didn’t start in the first quarter of 2012, it was very likely to begin by mid-year. But we also made it clear at the time that you wouldn’t know whether or not we were wrong until the end of 2012. And so it’s interesting to note the rush to judgment by a number of analysts, already asserting that we were wrong. So, with about a month to go before year-end, what do the hard data tell us about where we are in the business cycle? Reviewing the indicators used to officially decide U.S. recession dates, it looks like the recession began around July 2012. This is because, in retrospect, three of those four coincident indicators – the broad measures of production, income, employment and sales – saw their high points in July (vertical red line in chart), with only employment still rising.

There's Another Recession Out There Somewhere... Now & Forever -- Lakshman Achuthan of Economic Cycle Research Institute toured the TV circuit again yesterday to revive and defend his firm's long-standing forecast that recession risk is high (see interviews on Bloomberg, and Yahoo Finance). He asserted that the recession started several months ago, noting that this past July marks the peak in the current business cycle for the U.S. The supporting evidence for this analysis, he explained, is patently clear in the behavior of three indicators. It all sounds plausible, but there's plenty of room for doubt too. The main problem is the ambiguity of the model, as it was outlined. It doesn't help Achuthan's position that ECRI's recession forecast has been kicking around since September 2011, when the firm warned that "the U.S. economy is indeed tipping into a new recession" and "if you think this is a bad economy, you haven’t seen anything yet." By most accounts, the recession has yet to arrive. But Achuthan begs to differ and says the proof is now visible in three indicators: industrial production, personal income, and sales (manufacturing, wholesale and retail). As an accompanying ECRI essay published yesterday explains: Reviewing the indicators used to officially decide U.S. recession dates, it looks like the recession began around July 2012. This is because, in retrospect, three of those four coincident indicators – the broad measures of production, income, employment and sales – saw their high points in July (vertical red line in chart), with only employment still rising. The "tell-tale chart," according to ECRI, is as plain as the nose on your face. Judge for yourself:

The Big Four Economic Indicators: Personal Incomes Hit by Sandy - Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method. There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:

  • Industrial Production
  • Real Personal Income (excluding transfer payments)
  • Employment
  • Real Retail Sales

The weight of these four in the decision process is sufficient rationale for the St. Louis FRED repository to feature a chart four-pack of these indicators along with the statement that "the charts plot four main economic indicators tracked by the NBER dating committee."Here are the four as identified in the Federal Reserve Economic Data repository. See the data specifics in the linked PDF file with details on the calculation of two of the indicators. This morning we got the last of the Big Four for October: Real Personal Income Excluding Transfer Payments, the red line in the chart below. Real PI Less TP declined 0.1% in October. The BEA report points out that 24 states were impacted by Hurricane Sandy, which hit land on October 29th but began its toll on the economy prior to actual landfall. The BEA press release states:

Fourth Quarter Looking Worse and Worse - U.S. consumer spending fell in October, partly reflecting the effects of superstorm Sandy. The bad start to the fourth quarter of the year, coupled with a mixed third-quarter gross domestic product report out earlier this week, was enough to trigger downgrades to a handful of forecasts. Macroeconomic Advisers chopped three-tenths of a percentage point from its fourth-quarter tracking estimate, and now expects 1.1% growth. “Unexpected weakness in real [personal consumption expenditures] in October combined with weakness in personal income through October suggests less PCE growth in the fourth quarter,” the firm said. Barclays Bank reduced its GDP tracking estimate by four-tenths of a point to 1.8%, but cautioned that a rebound in consumer spending could boost that later this year. “All in all, clearly a very soft start to consumption in 4Q,” Barclays said.

Vital Signs Chart: Middling Recovery - The economic recovery remains weak. Gross domestic product grew at an annualized pace of 2.7% in the third quarter, above the government’s earlier estimate of 2%. But much of the growth came from temporary factors like government spending on defense. Consumer spending, a big part of the economy, was soft, while businesses throttled back their investing.

What’s holding back the economy, in 10 charts - Lately, there has been quite a bit of excitement that the big overhang of debt left over from the financial crisis may be starting to ease. Treasury Secretary Timothy F. Geithner has noted that there’s been a “significant reduction” of debt, and a number of indicators point to American households getting their finances in better shape. But there’s still big debate between the world’s top economists and President Obama about whether more should have been done to address the debt overhang. Here’s the story of that overhang – in 10 charts. When the housing market collapsed, Americans were left with all the debt they had taken on during the housing bubble. But their homes were worth much less, leaving families buried in debt. The following chart shows how home values (the red line) declined greatly, while mortgage debt (the blue line) has only come down a tad. While all economists agree that this has been a problem, some have argued the problem has been largely offset the Federal Reserve’s policies,  which have dramatically reduced interest rates. Homeowners may have huge debts, the thinking goes, but they have been able to refinance at historically low interest rates. In this chart, the blue line shows the Fed’s benchmark interest rate, while the red line is the 30-year mortgage rate.

Morgan Stanley’s Doom Scenario: Major Recession in 2013 - The global economy is likely to be stuck in the “twilight zone” of sluggish growth in 2013, Morgan Stanley has warned, but if policymakers fail to act, it could get a lot worse. The bank’s economics team forecasts a full-blown recession next year, under a pessimistic scenario, with global gross domestic product (GDP) likely to plunge 2 percent. “More than ever, the economic outlook hinges upon the actions taken or not taken by governments and central banks,” Morgan Stanley said in a report. Under the bank’s more gloomy scenario, the U.S. would go over the “fiscal cliff” leading to a contraction in U.S. GDP for the first three quarters of 2013. In Europe, the bank’s pessimistic scenario assumes a failure of the European Central Bank (ECB) in cutting rates and a delay of its bond-buying program.

Goldman Sachs: "Moving Over the Hump" - To end the week on a slightly upbeat note, here is a multi-year forecast from Goldman Sachs economists Jan Hatzius and Sven Jari Stehn: The US Economy in 2013-2016: Moving Over the Hump. A couple of excerpts, first on next year:  We expect US economic growth to remain below 2% in the first half of 2013. The step-up in the pace of fiscal retrenchment is likely to outweigh the healing in the private sector and the bounce-back from the disruptions associated with Hurricane Sandy. The risk to our forecast is tilted to the downside; a full fiscal cliff outcome would likely result in renewed recession.   ... And over the next few years: The key theme of our 2013-2016 economic forecasts is the “great race” between recovery in the private sector and an offsetting contraction in the government sector. ... Beyond 2013, however, we see a pickup to an above-trend growth pace as the fiscal drag abates to ½%-1% of GDP. ...  the private sector is likely to deliver an impulse of around 1½ percentage points to real GDP growth in 2014-2015. Even with a continued drag from fiscal policy, this should result in solidly above-trend growth of 3% or a bit more. This would still not be a very rapid recovery by the standards of past cycles, but it would be clearly better than the 2%-2½% seen in the recovery so far. Goldman sees housing starts at a 900 thousand annual rate in the first half of 2013, and around 1 million in the 2nd half of next year  They are forecasting new home sales at around a 400 thousand annual rate in the 1st half, and picking up to close to around 500 thousand (annual rate) in Q4.

How to Save the Global Economy: Raise the Minimum Wage. A Lot. - by James K. Galbraith | Foreign Policy - Americans can't spend, their government won't spend, and the tax cuts of both George W. Bush and Barack Obama are set to expire soon. The U.S. Congress can't pass an infrastructure bank, and the country can't fix the banking system or the foreclosure mess. Everything is blocked up. Is there anything we can do that would make a difference? Yes. Raise the U.S. minimum wage. By a lot -- let's say, to $12 an hour, from the current rate of $7.25. Ron Unz, publisher of the American Conservative, put this idea in my head, and the more I think about it, the better it seems.  Unz was writing in the context of the politics of immigration; Unz argues that a high minimum wage would be a self-enforcing deterrent against abusive employers seeking cut-rate help. Jobs for the undocumented would dry up. Those who hold onto their jobs -- the vast majority of low-wage workers and especially those with U.S. citizenship, English fluency, experience, and skills -- would gain a big advantage. The plan isn't just good for Republicans -- it's good for the economy. What would workers do with the raise? They'd spend it, creating jobs for other workers. They'd pay down their mortgages and car loans, getting themselves out of debt. They'd pay more taxes -- on sales and property, mostly -- thereby relieving the fiscal crises of states and localities. More teachers, police, and firefighters would keep their jobs.

2013 Looks a Lot Like 1937 in Four Fearsome Ways - It’s hard to imagine stock indexes dropping by half today, or unemployment rising past 15 percent, as they did in the “depression within the Depression.” But the parallels are visible enough to be worth tracing. They have to do with the danger of big government, and can be captured in a few categories.

  • -- Pre-election spree that sets records. Most important, even in 2012, when the crisis was long past, the government went on a spree, spending the equivalent of 24.3 percent of the economy, more than the 24.1 percent for the year earlier.
  • -- Bath of cold water afterward. After this year’s election, President Barack Obama made it clear that budgeting was his priority: “I’m ready and willing to make big commitments to make sure that we’re locking in the kind of deficit reductions that stabilize our deficit, start bringing it down, start bringing down our debt. I’m confident we can do it.”
  • -- Fearsome attack on the status quo. In his first news conference on Nov. 14, Obama went out of his way to make clear his tax increases would fall on the rich: “What I’m concerned about is not finding ourselves in a situation where the wealthy aren’t paying more or aren’t paying as much as they should.”
  • -- Fallout from first-term legislation. Obama signed his health-care act in 2010, postponing much of its enforcement until 2013, after the election. Now that the effects of the act are so proximate, markets are wondering whether they or investors can handle the changes demanded.

The Four Debt Ceiling Possibilities For 2013 - If the US Dollar was not the world’s reserve currency and US Treasury IOUs were not the world’s preferred holding of reserves behind their own currencies and financial systems, the Treasury’s debt limit would have been done away with a long time ago. But the US Dollar IS the world’s reserve currency so the debt of the US government IS the underpinnings of the global financial system. That being the case, the system stands or falls on the continuing perception that Treasury debt paper is a viable form of “reserve” and that the debt of the US government will NEVER become “unsustainable”. An announcement by the US government that it was getting rid of any “limits” to its debt-generating capacity would put that perception at risk - quite possibly at grave risk. That is the reason why the debt limit remains - even though it has not been an impediment to ever increasing Treasury indebtedness for well over half a century. It is easy to laugh at the seeming absurdity of a Treasury “debt limit” and many people do. Take it away, however, and the fiction that sovereign debt is “sustainable” - let alone any “confidence” in its eventual repayment - would be MUCH harder to maintain. Absurdities abound in history, and the more abject the absurdity, the more tenacious it tends to be. Today, a US Treasury debt “limit” is a very necessary absurdity.

Debt limit: The other fiscal fight - President Barack Obama made a demand of House Speaker John Boehner near the end of their first White House meeting on the fiscal cliff: Raise the debt limit before year’s end. Boehner responded: “There is a price for everything.” A nd with that exchange, described by sources familiar with the Nov. 16 session, an issue that has been overshadowed by the fiscal cliff showdown moved to the forefront of already complicated negotiations to avert more than $500 billion in spending cuts and tax increases by the new year. With bitter memories of the 2011 debt-limit standoff still fresh, both sides are engaged in another aggressive round of hardball. (PHOTOS: Fiscal cliff's key players) Within a few months, Congress will once again need to increase the nation’s borrowing capability. Obama and congressional Democrats, still stung by the last bruising fight, want to hike the debt ceiling without drama. But Boehner wants to use the debt limit to extract more concessions from Democrats. He told Obama at the White House that it’s “my leverage,” although he added that he’s flexible on when it should be done. Most of the attention so far has focused on income tax increases and the entitlement program changes that could affect every American. But the debt ceiling holds equal, if not greater, importance for the economy and the political fortunes of both parties. Rating agencies are threatening another downgrade of U.S. debt if Congress strains to increase the borrowing limit like it did last year.

The dangerous fiscal deadline isn’t Dec. 31 – it’s February 2013: The debt ceiling has largely taken a backseat to the looming fiscal changes that are scheduled to take effect on Dec. 31. But unless it’s dealt with in the lame duck Congress, we’re going to hit another debt limit come February 2013, according a new analysis by the Bipartisan Policy Center. That means that Congress and the White House could be forced to come to a significant deficit agreement before February, even if they simply decide to extend all the tax cuts and suspend the sequester before the new year. Otherwise, the debt ceiling could not only threaten the markets but also cost the government even more than it’s already spending. The Bipartisan Policy Center predicts that we’ll actually reach the debt limit the last week of December, but the Treasury can use so-called “extraordinary measures” to buy the country some more time. It could, for instance, raise more cash by temporarily divesting from government bonds for government employees’ retirement savings, among other measures to reduce the debt for a short period of time. Altogether, the center believes that the government could raise $197 billion through such measures, which would be enough to stave off the debt limit until February 2013. It’d be very difficult for the government to buy more time than that: Even if we had sharp, sudden austerity and let the entire package of spending cuts and tax hikes take effect on Dec. 31 — i.e. go over the cliff — it would only buy the government another week or so, the BPC estimates.

Social Security and the National Debt - In this season of fiscal brinksmanship, the topic of Social Security has once again come to the fore. Republicans are generally in favor of cutting benefits, although they are bit afraid to say so after the demise of George W. Bush’s privatization “plan”; Democrats are generally in favor of not cutting benefits. But many liberals have another argument: Social Security is irrelevant to the whole issue of deficits and the debt, since the program cannot have any impact on either. I think this is a misleading argument. This could take some time to explain, as I’ll try to go through it carefully. The standard liberal argument goes like this: Social Security has its own funding scheme that is walled off from the rest of the federal government. Employees pay payroll taxes into the Social Security trust funds, and benefits are paid out of those trust funds. The crux of the argument is that Social Security, by law, may not spend money that it does not have in its trust funds.  It is impossible for Social Security to incur a deficit over the long term, since it can only spend money it already collected. In the words of Dean Baker: “Social Security is prohibited from spending any money beyond what it has in its trust fund. This means that it cannot lawfully contribute to the federal budget deficit, since every penny that it pays out must have come from taxes raised through the program or the interest garnered from the bonds held by the trust fund.”

U.S. Treasury vs. Fed: You Say Long, I Say Short - With much fanfare, the Federal Reserve has been buying long-term U.S. Treasury bonds — $1.6 trillion worth. But while the Fed is subtracting from the market’s stock of long-term Treasurys, part of its campaign to bolster the U.S. economy, the U.S. Treasury Department is adding to the supply of long-term Treasurys by selling more of them. It seems to be fighting the Fed, as Chairman Ben Bernanke has acknowledged. During the financial crisis, Treasury did a lot of short-term borrowing because it needed a lot of money fast. Since then, it has been methodically doing much of its borrowing at longer maturities. As of the end of September, the weighted average maturity of the Treasury’s debt outstanding (both held by private investors and held by the Fed) was 64.4 months, well above the 30-year average of 58.1 months.  This has raised a few eyebrows. After all, shouldn’t the Fed and the Treasury both have the same goal here: strengthening the pace of U.S. economic growth? And if the Fed’s approach has so much merit, couldn’t the Treasury be doing much of this itself by borrowing short?

China’s U.S. Debt Buying Seen Limited, Former Adviser Says - China may limit its purchases of U.S. Treasuries because the central bank has reduced its buying of dollars at home, according to a Chinese academic who has served as a government adviser. The People’s Bank of China has “noticeably” reduced its purchases of dollars from local banks to allow commercial banks to trade among themselves, Ding Zhijie, dean of finance at Beijing’s University of International Business and Economics, said in a Nov. 23 interview. That may cap the nation’s foreign- exchange reserves and consequently its demand for U.S. government debt, he said. The scaled-back intervention is part of a shift toward managing the currency through the daily price fixing, Ding said. A reduction in China’s U.S. debt holdings may help defuse criticism by some American politicians that their country is becoming too dependent on the world’s second-largest economy. “We are now witnessing a big change -- China’s official foreign-exchange reserves will be stable or even fall slightly in the coming years,” said Ding, who advised the government on creating the nation’s sovereign wealth fund. “That means China’s new purchases of Treasuries will be limited and as you can already see, purchases have already started ebbing in the last couple of months.”

Dark Matter: A Quick Revisit - Back in the days before the 2007-8 financial crisis, one of the big sources of anxiety among (some of us) macroeconomists was the US current account deficit, a measure of how much the US was borrowing from the rest of the world each year. After running deficits for most of the 1980s, an export boom helped bring the current account back into a small surplus in 1991 (aided, that year, by the financial assistance the US received from other countries to pay for the Gulf War). The deficit began to grow again in 1992, and in the mid-2000's seemed to be on an ever-increasing path. The flow of borrowing naturally generated an increasing net stock of debt - the United States' foreign liabilities exceeded its assets in 1986, and the net international investment position (assets minus liabilities) became increasingly negative during the 2000's. Seven years later, the US current account remains in deficit, though much less so: US Current Account (% of GDP), 2001-2011 That is, the US is still borrowing from the rest of the world, but at a reduced pace. The value of the US' net foreign assets has been volatile as markets and currencies have gyrated over the past several years, but the official data says the US is even more in debt to the rest of the world now:

Incredible Credibility - Krugman - There’s an interesting mix of contrast and similarity between the policy debates in Britain and the United States right now. In both countries — as in every country that retains its own currency and has debts denominated in that national currency — interest rates are near record lows:  However, Very Serious People tell very different stories in the two nations. In the United States, we supposedly have low borrowing costs despite our budget deficit — and if we don’t implement Bowles-Simpson immediately, the bond vigilantes will attack. Really! This time we mean it! Meanwhile, in the UK, the official line is that the low rates are a reward for all that fiscal austerity — and VSPs get upset and abusive if someone well-informed points out that a much better explanation is that investors expect the economy to remain weak, and hence for short-term rates to remain very low, for a long time. Let’s unpack this a bit. It’s very hard to come up with any reason why either the US or the UK might default, since they can simply print money if they need cash. And given the absence of real default risk, long-term interest rates should be more or less equal to an average of expected future short-term rates (not exactly, because of maturity risk, but that’s a fairly minor detail). So if you expect the US and UK economies to be depressed for a long time, with the central bank keeping rates low, long rates will be low too — end of story. But won’t that money printing cause inflation? Not as long as the economy remains depressed.

The fastest deficit reduction in generations - We learned about a month ago that the U.S. budget deficit for the most recent fiscal year fell to $1.089 trillion, $200 billion smaller than it was last year, and nearly $300 billion smaller than when President Obama took office. For many on the left, the news was discouraging -- the deficit should be going up, not down, as we invest in job creation and economic growth. For the right, the complaints stayed the same -- the deficit that exploded under Bush/Cheney was still too high. But regardless of ideology, the fact remains that there's been an enormous drop in the size of the deficit in the first half of the Obama era. How enormous? Matt Yglesias flagged this item from Investors Business Daily noting a tidbit that's generally ignored in the larger political debate over the nation's finances: "Believe it or not, the federal deficit has fallen faster over the past three years than it has in any such stretch since demobilization from World War II." As the political world obsesses over the ongoing debt-reduction talks, I hope it's not too much to ask that policymakers remember that the deficit is already shrinking at an aggressive pace.

Fiscal Cliff Update: 'Little Progress Toward A Compromise In Past Ten Days" - Two Fridays ago, a truly unexpected deus ex machina appeared for those still clinging to long stock positions: politicians, in this case John Boehner and Nancy Pelosi, who held a press conference in which they defined the recently launched "Fiscal Cliff" talks as "constructive." In reality, this appearance was nothing but a photo opportunity for talking heads and one which as Nancy Pelosi herself admitted later, served simply to halt what then looked like an assured free fall in the markets. Since then the ongoing rally in stocks and the EURUSD has been predicated on the "constructiveness" of the talks actually being real. Judging by the latest update from Reuters, Goldman will likely be right, if only in the short term. As Reuters admits, " U.S. lawmakers have made little progress in the last 10 days toward a compromise to avoid the harsh tax increases and government spending cuts scheduled for Jan. 1, a senior Democratic senator said on Sunday." That this update comes after the "big" market swoon into the recent lows from November 16, is certainly cause for alarm, because it means that at least one more violent market whipsaw to the downside will have to take place before there is any cliff progress to report.

Fed’s Fisher Warns Temporary Fiscal Cliff Fix Could Be Destructive - A temporary fix to the “horrific” U.S. federal budget deficit that fails to give businesses any clarity on tax and regulatory policy could have destructive effects on the U.S. economy, a Federal Reserve official warned Tuesday. U.S. businesses are in a “defensive crouch,” Dallas Fed President Richard Fisher said in a speech to a conference sponsored by the Levy Institute. If U.S. leaders provide only a temporary solution to the looming deadline of combined tax hikes and spending cuts, known as the fiscal cliff, “that fix may well have an effect” on the economy, Mr. Fisher said.

OECD: U.S. Should Avoid Fiscal Cliff, Pare Deficits Gradually - U.S. officials looking to tackle federal deficits should do so only gradually, avoiding sharp austerity measures such as the “fiscal cliff” that could derail the economy, officials from the Organization for Economic Cooperation and Development said in a report Tuesday. The group’s latest global economic outlook suggests the U.S. economy is improving at a measured pace, helped by improvements in household balance sheets and housing market gains. Assuming policy makers successfully avoid the combination of tax increases and spending cuts slated to hit the economy at the beginning of 2013, the U.S. economy is projected to grow 2% next year and 2.8% in 2014.

Against Willful Denseness, The Gods Themselves Contend In Vain - Krugman - From the very beginning of the Lesser Depression, the central principle for understanding macroeconomic policy has been that everything is different when you’re in a liquidity trap. In particular, the whole case for fiscal stimulus and against austerity rests on the proposition that with interest rates up against the zero lower bound, the central bank can neither achieve full employment on its own nor offset the contractionary effect of spending cuts or tax hikes. This isn’t hard, folks; it’s just Macro 101. Yet a large number of economists — never mind politicians or policy makers — seems to have a very hard time grasping this basic concept. Thus, Ryan Avent is driven to distraction by Tyler Cowen suggesting that it’s OK to have austerity now because growth in the third quarter was fairly strong. As Ryan says, the right time for austerity is when “the economy is on the way to putting the zero lower bound well in its rear-view mirror” — that is, when we’re well out of the liquidity trap. Meanwhile, Brad DeLong is driven into shrillness by Alberto Alesina still, after all these years, writing as if there’s no difference between spending cuts in normal times and spending cuts when you’re up against the zero lower bound. We’re not talking about stupid people here; clearly, there’s something about the notion that the rules for policy depend on the situation that some economists just don’t want to understand.

New Congress: Fewer moderates make deals harder - When the next Congress cranks up in January, there will be more women, many new faces and 11 fewer tea party-backed House Republicans from the class of 2010 who sought a second term. Overriding those changes, though, is a thinning of pragmatic, centrist veterans in both parties. Among those leaving are some of the Senate's most pragmatic lawmakers, nearly half the House's centrist Blue Dog Democrats and several moderate House Republicans. That could leave the parties more polarized even as President Barack Obama and congressional leaders talk up the cooperation needed to tackle complex, vexing problems such as curbing deficits, revamping tax laws and culling savings from Medicare and other costly, popular programs."This movement away from the center, at a time when issues have to be resolved from the middle, makes it much more difficult to find solutions to major problems," said William Hoagland, senior vice president of the Bipartisan Policy Center, a private group advocating compromise.

Don't Believe The Reports Of Progress On The Fiscal Cliff - In spite of what you may be reading elsewhere, we are no closer today to avoiding the fiscal cliff than we were the day after Election Day. All of the so-called progress to date has been one of three things: the media looking for a story, a misunderstanding of what it's going to take to get a deal or hype. For example, the big fiscal cliff-stories over the past two weeks have been...

  • 1. Reports about congressional leaders saying nice things and using a positive tone after a first meeting with the president at the White House to discuss the cliff.
  • 2. Reports about how White House and House Budget Committee Republican staff have been working on fiscal cliff options during the Thanksgiving recess.
  • 3. A report about how three GOP senators -- Lindsay Graham (SC), John McCain (AZ) and Saxby Chambliss (GA) -- all said on Sunday talk shows that they would be willing to break the no-tax pledge.
  • 4. Reports about corporate CEOs urging Congress and the president to prevent the cliff from occurring.
  • Let's take these in turn.

Pete Davis: 60% Chance We Go Over The Fiscal Cliff -CG&G alum Pete Davis put out the note below on the fiscal cliff to his clients last Tuesday and graciously allowed me to reprint it in full. Fiscal Cliff: It's way too early to count on a deal.  Sure senior staff are talking.  Paul Ryan's staff met at the White House yesterday.  They're trying to set the broad outlines of a compromise -- dollar amounts of revenue increases and spending cuts.  They're working up options.  It's going to be another week before President Obama and congressional leaders meet for their first substantive talks.  In my experience, the first thing that happens in such a meeting, after opening statements and procedural matters, is they reject all of the options the staff prepared.  Then they start arguing among themselves.  After an hour or two, they tire of that and walk out on camera and tell the world they made progress.  The staff goes back and works all night on new options, and they meet again, and again, and again.   This won't get resolved easily.  Here's my short list of impediments:

There Will Be No Quick Fiscal Cliff Deal - How hard is it to understand that, if there is a deal (and I continue to believe it's more unlikely than likely) to avert the fiscal cliff, it won't come much before the January 1 deadline? If you've been reading CG&G for the past two years, you already know why: Congressional Republicans in general and House GOP'ers in particular have been saying since Election Day 2010 that the Gingrich Republicans of the mid-1990s compromised too early with Bill Clinton on the budget and would have gotten much better deals if they had only held out longer. The tea partiers have been especially adamant that their leadership has to drive the hardest bargain possible by not agreeing to anything early in the process. And that's the strategy House Republicans in particular have followed ever since on anything having to do with revenues and spending: wait until the last possible moment. The debt ceiling deal from last August that produced the Budget Control Act and the sequester part of the fiscal cliff was the ultimate example of that. So let me ask again: Why is anyone surprised that no negotiating sessions on the fiscal cliff between the White House and Congress are scheduled this week? Why is anyone shocked that statements made about the cliff since Congress returned from the Thanksgiving recess seem to have gotten more strident rather than less? How is it possible that the two sides seem further apart now than they were a week or so ago? The answer: It was both totally predictable and absolutely predicted.

Federal Spending is VERY Popular. Episode 8: Cut Nothing But The Pentagon - Another CG&G alum, the ever-alert and budget-aware Bruce Bartlett, last week sent me yet another poll showing how popular federal spending has become. Take a look at question 15 of the poll from The Economist and YouGov, which was completed just a week or so ago. It shows that only 19 percent of respondents support reductions in Social Security and only 21 percent support them in Medicare. Medicaid reductions are supported by more -- 31 percent -- but definitely not anything close to a majority. Military spending reductions are supported by a majority -- 51 percent -- but that's obviously just in general terms. My guess is that specific Pentagon programs would not be embraced by anything close to that number.

Bargaining Among Thieves, Thugs, Cheats, Liars and Naïfs - Now that he is safely reelected, President Obama is reassembling the crowd of thieves, thugs, cheats and liars he gathered for his first run at a Grand Bargain I, The Betrayal, but this time he is adding a Veal Pen full of naïfs to help him press his case. It’s painful to watch.  The Republicans field the same crowd of thugs that shot down the first Grand Bargain in a hissy fit over tax hikes. Voters threw out some of them, and a bunch more quit. But our President, fresh off a crushing victory, decided to give them one more chance to disrespect him by acting out their infantile fantasies of bravely fighting the Muslim Kenyan Socialist.  Obama thinks the election will encourage the Republicans to act like human beings and remember the needs of their constituents. And they will. Mitch McConnell and John Boehner can be counted on to carry the water of their billionaire constituents and screw the rest of the country. The hyper-rich may have lost the presidency, but their serving-men will fight to destroy Obama’s second term even harder than they did his first, and if the country goes into a second recession, well that’s too bad. The thieves who steal money from every human on the planet want tax cuts, dammit, and they don’t want their precious corporations to pay taxes, dammit, and the odious twins will do their damnedest to accomplish the wishes of their masters.  Across the aisle there are plenty of lame duck Blue Dog Democrats who were always willing to dishonor the legacy of the Democratic Party and screw their constituents in search of some mythical middle ground between themselves and the true believers on the back bench of the Crazy Party. These losers get one more chance to insist that Obama bow to their wishes.

The Media's Role in Driving the "Fiscal Cliff" Imagery - Linda Beale - The mainstream media has been fed a steady diet of releases from interested parties (like right-leaning propaganda tanks) about the need to adopt austerity measures, often cast as needing to save the country from out-of-control spending and unprecedented deficits and debt. At the same time, the mainstream media has generally given up investigative journalism to engage in sports-like "he said-she said" journalism:  it treats most fiscal issues as a contest between left-leaning and right-leaning groups to be described by each side's post position--i.e., as a merit-based race between equally valid positions.  Without the investigative wherewithal for in-depth research, there's much less information about whether and how the facts may support one side and not the other.  We see it on climate change, where a scientific consensus is treated as just another opinion contrasted with the wishful opinions of anti-environmental corporatists.  We see it on evolution, where belief-based creationism is taught in schools alongside fact-supported scientific theory, with the two sides reported in the news as though they represent equally valid educational positions.    It shouldn't be surprising, therefore, that this approach surfaces in spades when it comes to the so-called "fiscal cliff".

Fiscal Cliff An Artificial Crisis -  Real News Video - Michael Hudson: Fiscal cliff was manufactured to shift more of the burden of the crisis onto ordinary people

Why the Fiscal Cliff is a Scam - This is a very good, high level interview of Jamie Galbraith by Paul Jay of Real News Network. It explains how the fiscal cliff scare was created and why Obama and the Republicans are united in fomenting a false sense of urgency. This is the sort of piece I’d suggest sharing with friends and relatives who’ve been unable to miss the news coverage and want to get up to speed.

Why is the White House's Council of Economic Advisers Helping the Republicans? - Robert Reich - If the President’s strategy is to hold his ground and demand from Republicans tax increases on the wealthy, presumably his strongest bargaining position would be to allow the Bush tax cuts to expire on schedule come January – causing taxes to rise automatically, especially on the wealthy. So you’d think part of that strategy would be reassure the rest of the public that the fiscal cliff isn’t so bad or so steep, and that at the start of January Democrats will introduce in Congress a middle-class tax cut whose effect is to prevent taxes from rising for most people  But today (Monday) the White House’s Council of Economic Advisers issued a report today warning that if Congress allows the Bush tax cuts to expire January 1and the Alternative Minimum Tax to kick in, the middle class will face sharply-rising taxes. The result, says the Council of Economic Advisers, could slow consumer spending by 1.7 percent next year, and slow overall economic growth by 1.4 percent. The loss of $200 billion in consumer spending is just about what American families spent on all the new cars and trucks sold in the U.S. in the last year, according to the report. About $36 billion less would be spent for housing and utilities, $32 billion less for healthcare, and $26 billion less for groceries and at restaurants

The “fiscal cliff” fraud - As the US Congress reconvenes following the Thanksgiving Day holiday, the media is once again ratcheting up its propaganda offensive over the so-called “fiscal cliff.” Behind the orchestrated wrangling between the Obama administration and congressional Republicans over averting the supposed catastrophe of automatic tax increases and budget cuts due to take effect January 1, the details of plans to impose unprecedented cuts in Medicare, Medicaid and Social Security are being worked out behind the backs of the American people.There is bipartisan agreement between the two corporate-controlled parties to slash social programs upon which tens of millions of working people rely for health care and retirement income. The main issue under debate is how to package the cuts so as to best confuse public opinion and obscure what is really happening.In this, President Obama is taking a leading role. His primary concern is to make the slashing of social programs that keep millions out of poverty seem necessary, while providing this reactionary attack with a fig leaf of “fairness.”

Democrats Angling to Ignore Base in Fiscal Slope Deal - I pretty much don’t buy that fiscal slope talks are “heating up,” but I do know this: the overriding goal of the top levels of the Democratic Party at this point is to ignore their base in service to a deal. I’m not sure it even matters what that deal is, as long as they look more “responsible” than the other side. Don’t take my word for it, take David Plouffe’s: “The only way that gets done is for Republicans again to step back and get mercilessly criticized by Grover Norquist and the Right, and it means that Democrats are going to have to do some tough things on spending and entitlements that means that they’ll criticized on by their left,” Plouffe said at his alma mater in conversation with former McCain campaign manager Steve Schmidt. The senior White House adviser repeated Obama’s opposition to extending the Bush tax cuts on those earning more than $250,000 a year, but expressed openness to a tax reform deal that could potentially lower what the wealthy pay. “What we also want to do is engage in a process of tax reform that would ultimately produce lower rates, even potentially for the wealthiest,” he said, referring to benefits from corporate tax reform. Plouffe added that while the White House wants to engage in comprehensive tax reform, they know they must also “carefully” address the “chief drivers of our deficit”: Medicare and Medicaid.

CEO Council Demands Cuts To Poor, Elderly While Reaping Billions In Government Contracts, Tax Breaks: The corporate CEOs who have made a high-profile foray into deficit negotiations have themselves been substantially responsible for the size of the deficit they now want closed. The companies represented by executives working with the Campaign To Fix The Debt have received trillions in federal war contracts, subsidies and bailouts, as well as specialized tax breaks and loopholes that virtually eliminate the companies' tax bills. The CEOs are part of a campaign run by the Peter Peterson-backed Center for a Responsible Federal Budget, which plans to spend at least $30 million pushing for a deficit reduction deal in the lame-duck session and beyond. During the past few days, CEOs belonging to what the campaign calls its CEO Fiscal Leadership Council -- most visibly, Goldman Sachs' Lloyd Blankfein and Honeywell's David Cote -- have barnstormed the media, making the case that the only way to cut the deficit is to severely scale back social safety-net programs -- Medicare, Medicaid, and Social Security -- which would disproportionately impact the poor and the elderly.  As part of their push, they are advocating a "territorial tax system" that would exempt their companies' foreign profits from taxation, netting them about $134 billion in tax savings, according to a new report from the Institute for Policy Studies titled "The CEO Campaign to ‘Fix’ the Debt: A Trojan Horse for Massive Corporate Tax Breaks" -- money that could help pay off the federal budget deficit.

Medicare and the Cliff Negotiations - There’s a useful piece in the WSJ this AM on some of the costs and benefits of one the entitlement cuts that has been raised in fiscal cliff discussions: raising the Medicare eligibility age from 65 to 67. The savings, according to the piece, amount to about $150 billion over ten years.  But you’ve got to net out a number of costs against that figure.

  • –Some seniors will work longer—that’s already occurring, of course—and remain on their employer’s plan.  Since older workers are relatively more expensive to insure, this will push up employers’ costs of coverage.
  • –A new source of coverage for 65-66 year-olds will be the health care exchanges set up by the Affordable Care Act in 2014.  But there’s a cost here too—coverage for family members with incomes up to 400% of poverty (around $90,000 for a family of four) includes a government subsidy.
  • –Since the exchanges must cover these older persons at “community rates,” their move from Medicare to private insurance means private prices in the exchanges will vary less by age than they do now.  According to a Kaiser Family Foundation study, that will drive up premiums for everyone in those exchanges by 3% (for young adults, by 8%).
  • –Some 65-66’ers will be uninsured which raises the incidence and costs of uncompensated care.

The piece leaves out an important point that should also be noted in these discussions about raising the retirement or eligibility age for social insurance: while older persons are living longer on average, there’s a significant gradient by income, with life expectancy up only slightly among older men in the bottom half of the income scale.  Unfortunately, healthy, wealthy, aging policy makers often take themselves to be the sole reference people here…they are not.

It’s Not a Fiscal Cliff, It’s an Austerity Crisis - Washington is not known for the stunning clarity with which it frames and addresses tough issues. But has there ever been a debate so mired in confusion as the one around the so-called fiscal cliff? The trouble starts with the term “fiscal cliff,” which misstates the nature of the problem and provides no hint of how to solve it. I prefer the term “austerity crisis,” which at least describes the real issue -- too much austerity, imposed too quickly. (This has the added advantage of sidestepping an increasingly inane discussion over whether the problem is really a “cliff,” “curb,” “slope” or perhaps a “bomb.”) Here is the crux of it: Depending on what you throw into the pot, the sum of the expiring Bush tax cuts along with currently mandated spending cuts would equal somewhere between $500 billion and $700 billion in deficit reduction in 2013. That’s more than enough fiscal contraction to throw the U.S. into recession. The tax increases alone would reduce the average family’s take-home pay by more than 6 percent. Because everyone agrees that’s a bad thing, Congress could pass a law, tomorrow, preventing it. Done. But Congress won’t pass that law. Although the problem may be too much austerity too quickly, most everyone in Washington is insisting that the solution should encompass much, much more. In theory, this crisis should be easily resolved: If you have too much austerity, lighten the load. The reason the austerity crisis has become so messy is that the connection between the problem and its solution has been severed.

Why the Fiscal Cliff is the Wrong Thing to Worry About - When asked what it was like living through the German bombing of Crete during World War II, British novelist Evelyn Waugh replied that it began impressively enough but went on far too long. The same might be said for the current debate over the Fiscal Cliff. This issue loomed large during the Presidential campaign, but now promises to become an endless and tedious dispute. In the end there will probably be an unsatisfying compromise that avoids disaster but solves nothing important, while little attention is paid to America’s fundamental economic problems. The essence of the debate is that the Federal government has been running an ultimately unsustainable deficit of more than $1 trillion a year. A variety of changes in taxes and government spending are scheduled to go into effect in 2013 that would reduce this deficit by as much as $645 billion. That would bring the deficit down to a tolerable level, but poses two problems. First, more than two-thirds of the financial burden of this reduction would fall on the middle class – something both political parties have promised they would avoid. Second, there is genuine disagreement as to whether such a sudden drop in the deficit would be a drag on a still-weak economy.

When You Come to a Fiscal Cliff, Take It - That's my main point in a Faculty Forum Q&A posted to the Dartmouth website last week.  Eight plus years of blogging, and you know what to expect:

    • What would you like to see happen? - Our biggest problem is that we’ve become accustomed to having a tax system that doesn’t raise enough revenue to cover our expenses. We’d be closer to it if we allowed all the policies in the fiscal cliff to actually revert. It’s not ideal to have them all revert at once, but that’s better than continuing to kick the can down the road. When you come to a fiscal cliff, take it.
    • Having the policies all revert is being portrayed in media coverage as the worst possible thing that could happen.   No. Continuing what we’re doing is worse. Look, I’ll pay more in taxes, you’ll pay more in taxes—we’ll all pay more in taxes. The fact that we’re paying more taxes means that we’re covering more of our own bills.
    • If taxes go up, how do we avoid an economic slowdown? We don’t have a problem that private consumption is too low. We have a problem that public investment is too low. If you were really worried about a decline in economic activity, you would let everything revert, and then you would commit to spending an extra $350 billion per year on public infrastructure, even if it had to be debt-financed. I would ramp up public investment in infrastructure and other critical national needs like roads, civilian defense, disaster infrastructure, smart grids, and basic research and development. All of these are needs that we’ve been neglecting.

A Way to Avoid the Fiscal Cliff without Creating Another One - So far the fiscal cliff debate has mainly been about whether tax revenues should be on or off the table with little mention of spending. But the economics of the debate—as distinct from the raw politics—make no sense without considering spending. So consider an alternative way to present and discuss spending proposals. It involves the following chart, and while not everyone likes to use charts, this one is far more digestible than those multitrillion dollar sums thrown around. And it suggests away to avoid the fiscal cliff.Starting on the lower left of the chart a history line shows the sharp rise in federal spending as a share of GDP from the year 2000 to the present. It then splits into four lines corresponding to different year-by year spending paths which were proposed in the months leading up to the budget deal of last year:

  • The top line is the Administration’s spending proposal made in February 2011.
  • The next line shows the result of the budget deal of the summer of 2011, but it does not include the additional sequestration reductions that were part of the deal.
  • The third line is the Simpson-Bowles spending proposal which was put forth in their December 2010 report.
  • The fourth line is a “pro-growth” proposal made by Gary Becker, George Shultz and me in the Wall Street Journal on April 4, 2011.
  • Two other proposals worth noting on the chart:
    • spending with sequester cuts from the 2011 deal; it’s close to Simpson-Bowles
    • the House Budget resolution of March 2012; it’s close to the pro-growth line.

Fiscal Cliff: Why Congress Might Have to Mess with the 401(k) - One of the earliest fears about tax-favored savings accounts like IRAs and 401(k) plans was that when this pool of savings grew large enough Congress would not be able to resist tapping it to help solve the nation’s debt problems. We’re about to find out if those fears—persistent for three decades—have been justified. Everything including the sacred mortgage deduction is on the table as lawmakers wrestle with the fiscal cliff, a year-end avalanche of scheduled spending cuts and tax increases. With a combined $10 trillion sitting in IRAs and 401(k) plans, retirement accounts make a juicy target. Much of this money has never been taxed, and under current law never will be. To maintain this savings incentive the government “spends” $100 billion a year in the form of tax breaks to those who stash money in these kinds of accounts. Now, a new study suggests this tax incentive does little to change saving behavior. Some lawmakers, no doubt, are wondering: Why keep an expensive tax incentive that does not incent?

9 Greedy CEOs Trying to Shred the Safety Net While Pigging Out on Corporate Welfare - Lynn Parramore - A gang of brazen CEOs has joined forces to promote economically disastrous and socially irresponsible austerity policies. Many of those same CEOs were bailed out by the American taxpayer after a Wall Street-driven financial crash. Instead of a thank-you, they are showing their appreciation in the form of a coordinated effort to rob Americans of hard-earned retirements, decent medical care and relief for the poorest.Using the excuse of a phony, manufactured crisis known as the “fiscal cliff” – which isn’t a crisis at all, as economist James K. Galbraith has succinctly explained — they are gearing up to pull the wool over the public’s eyes by cutting Social Security, Medicare and Medicaid. The CEOs are part of the Fix the Debt campaign run by the Center for a Responsible Federal Budget, which plans to unleash tens of millions pushing for a deficit reduction deal that favors the rich.You can be sure that many more CEOs in addition to the names on the list below sympathize with plans to shred the social safety net and enjoy windfall tax breaks. But these Scrooges are so bold as to publicly announce their desire to pick the pockets of fellow Americans while simultaneously pigging out at the corporate welfare trough. Multitasking! A generation ago, an American CEO would think twice about announcing utter disregard not only for his neighbors and employees, but also for the economy, which can’t prosper when income is consistently redistributed upward (see Nobel laureate Joseph Stiglitz’s The Price of Inequality for more on that theme). But in the present culture — even after the Occupy Wall Street movement – these business barons feel perfectly comfortable trumpeting their desire to get richer at your expense.Here’s a sample of the Fix the Debt CEO Council Hall of Shame. (Download the complete list at the organization’s Web site.)

Public opinion on entitlements: People would rather cut defense.: Among D.C. politicians, all Republicans and most Democrats favor cuts in spending on Social Security, Medicare, and Medicaid (i.e. "entitlements"). Some big policy disagreements exist about how you want to do that, but the main disagreement is that Democrats want such cuts to be part of a "balanced" deficit reduction strategy while Republicans reject tax hikes. Defense spending reductions, meanwhile, are much less popular. There's a nontrivial bloc of congressional Democrats who favors major reductions, but that's not a stance embraced by party leadership or recent presidential candidates.But as a recent Economist/YouGov poll confirms—key result replicated above—public opinion is pretty different. An overwhelming 71 percent of the population says it favors spending cuts to reduce the budget deficit, but cuts to Social Security, Medicare, and Medicaid are all unpopular. Defense cuts, by contrast, poll pretty well. The modern-day version of the guns or butter choice is guns or grandma's hospital bills, and the public clearly prefers grandma's hospital bills.

Fighting Fiscal Phantoms, by Paul Krugman - These are difficult times for the deficit scolds who have dominated policy discussion for almost three years. One could almost feel sorry for them, if it weren’t for their role in diverting attention from the ongoing problem of inadequate recovery, and thereby helping to perpetuate catastrophically high unemployment.  What has changed? For one thing, the crisis they predicted keeps not happening. Far from fleeing U.S. debt, investors have continued to pile in, driving interest rates to historical lows. Beyond that, suddenly the clear and present danger to the American economy isn’t that we’ll fail to reduce the deficit enough; it is, instead, that we’ll reduce the deficit too much. Given these realities, the deficit-scold movement has lost some of its clout. ... But the deficit scolds aren’t giving up. Now yet another organization, Fix the Debt, is campaigning for cuts to Social Security and Medicare, even while making lower tax rates a “core principle.” That last part makes no sense in terms of the group’s ostensible mission, but makes perfect sense if you look at the array of big corporations, from Goldman Sachs to the UnitedHealth Group, that are involved in the effort and would benefit from tax cuts. Hey, sacrifice is for the little people.

More Austerity Advice From the Very Rich: Buffett On Deficits! -- Warren Buffett’s recent op-ed in the New York Times is making a stir because it calls for a minimum tax on high incomes above $One million annually. But I was much more interested in some deficit targeting he proposes which exposes his ignorance about the sectoral financial balances model of macro-economics, and reveals him as a deficit hawk whose advice, if followed would be unsustainable and lead the United States into another deep recession. I’ll comment on a couple of paragraphs in Buffett’s op-ed. Our government’s goal should be to bring in revenues of 18.5 percent of G.D.P. and spend about 21 percent of G.D.P. — levels that have been attained over extended periods in the past and can clearly be reached again. But assuming even conservative projections about inflation and economic growth, this ratio of revenue to spending will keep America’s debt stable in relation to the country’s economic output. So, our goal ought to be running deficits of 2.5% and this is Warren Buffett’s idea of fiscal responsibility. Now here’s an accounting identity from macroeconomics, called the Sectoral Financial Balances (SFB) model in which the economy is divided into three sectors, and in all the balances are financial flows over a period of time: Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0. Now, let’s say that the income of the private sector exceeds the amount it pays to the other two sectors by 6% of GDP, so that the private sector has a surplus. And let’s say that the income of the foreign sector in dollars exceeds what it spends on US goods and services by 4% of US GDP, leaving it with a surplus, and the US with a current account (trade) deficit, then what does the formula say MUST happen to the Government balance?

Now Touring, the Debt Duo, Simpson-Bowles - Theirs is an improbable buddy act that is making for unlikely entertainment from campuses to corporations on a most serious subject: the federal debt. The proof of their appeal: some business groups pay them $40,000 each per appearance. Really. To discuss budgets and baselines.Ladies and gentlemen, coming soon to your city or town (if they have not been there already, and maybe even if they have) are the latest odd couple of politics: the 67-year-old Democratic straight man, Erskine B. Bowles of Charlotte, N.C., and his corny 81-year-old, 6-foot-7 Republican sidekick, Alan K. Simpson of Cody, Wyo. Since the perceived failure two years ago next week of the bipartisan fiscal commission they led for President Obama, they have been on the road, sometimes solo but often together, perfecting a sort of Off Broadway show that has kept their panel’s recommendations alive, and made them a little money as well. That so many people from Bellevue, Wash., to Sanibel Island, Fla., and from Waterville, Me., to Dana Point, Calif., talk about “Simpson-Bowles” (or “Bowles-Simpson”) as if it is shorthand for the solution to the nation’s fiscal woes — even though few know its devilish details on tax increases and spending cuts — is testament to the men’s indefatigable efforts. And so is the fact, not unrelated, that both the men and their plan could still play a role as Mr. Obama and Congressional leaders negotiate to avert a looming fiscal crisis in January.

Counterparties: Who is Fix the Debt? - Under the auspices of the organization Fix the Debt, the (self-serving) CEOs of companies like Goldman Sachs, Honeywell, Microsoft and UPS have amassed a reported $43 million budget to convince Washington to avoid the fiscal cliff and to make broad cuts to bring down the national deficit. The organization, which has Alan Simpson and Erskine Bowles as co-founders and policy gurus, says in its core principles that deficit-cutting policy should be enacted now, but implemented gradually. It’s also for reforming Medicare and Medicaid and “pro-growth tax reform, which broadens the base, lowers rates, raises revenue and reduces the debt”. Fix the Debt’s website includes a set of “CEO Tools“, including a presentation that “you can leverage to communicate the debt story in a visual way”, and a sample letter to employees. Morgan Stanley’s James Gorman seems to have written his own version of that letter. According to the WashPost’s Tom Hamburger, Fix the Debt has managed to displease both liberals and some business groups: That agenda of cutting corporate taxes has drawn fire from some within the business community, especially small firms and partnerships that do not pay corporate taxes but instead pay taxes on business earnings according to individual income tax rates. There are also the familiar fingerprints of Pete Peterson, especially in the emphasis on cutting entitlements. Michael Hiltzik has called Peterson the most influential billionaire in US politics, and it’s easy to see why. Fix the Debt is project of the Committee for a Responsible Budget, which is, in part, funded by Peterson’s foundation. Many of the members of Fix the Debt’s coalition are similarly funded by Peterson and/or founded by his former employees. From 2007 to 2011, Ryan Grim and Paul Blumenthal report, Peterson has spent almost half a billion dollars of his own money crusading against the national debt.

CEOs Optimistic After ‘Fiscal Cliff’ Meeting - President Barack Obama’s renewed outreach to America’s top executives took a seemingly positive turn Wednesday, as a group of business leaders emerged from a White House meeting convinced the Obama administration would move soon on a deficit-reduction plan. “There was a real sense of optimism that the leadership and the President appeared to be focused on making a resolution that, if it happens, could help unleash even more growth and job creation than perhaps anyone has previously expected,” Comcast Corp. Chief Executive Brian Roberts said in an interview. The meeting between Mr. Obama and roughly a dozen chief executives was at least the third in two weeks. These gatherings have become a key part of the White House’s strategy to build external support for a deal to reduce the deficit through a combination of tax increases and spending cuts. Several of the CEOs who met with Mr. Obama on Wednesday also met with Democrats and Republicans in Congress earlier in the day. The executives’ message seemed to be consistent to that of the White House and lawmakers: Cut a deal, and the sooner the better.

To All the Mewling, Itty-Bitty Pissants - Except for a few rare individuals who recall, if only vaguely, the meaning of a phrase such as "the honor of being human," the behavior of liberals and progressives even before Obama begins his second term is something to behold -- something to behold, that is, in the lower reaches of a museum that exhibits hideous deformities of the human mind and spirit. It would be an error to describe such people as monsters, for that would grant them a stature they are incapable of attaining. Their sole motive and purpose is to forbid themselves from taking on even one of the qualities we associate with human beings, to the extent we regard the human animal as evincing a minimal degree of conscience and awareness. If we regard thinking as the distinguishing characteristic of human existence, their only commandment is to prevent, under any and all circumstances, the merest possibility of even a faint glimmer of an actual thought from coming into existence. Obama and his fellow criminals in Washington doubtless will enjoy a festive holiday season, secure in the knowledge that whatever future brutalization and depredation of the lives of "ordinary" Americans they plan -- the large-scale destruction of Social Security, Medicare, and every other remnant of a safety net that still exists, the vast expansion of the surveillance and police state, the enlargement of the Murder Program abroad -- the liberals and progressives will offer no resistance beyond brief, muted murmurs of mild displeasure. "Oh, dear," they will say and write, "is this really the best we can do?" Then Obama and other leading Democrats will tell them once more that they must remember to be "practical," that times are tough and difficult choices must be made. Besides, remember how awful those obstructionist Republicans are! Reassured that none of it can be helped -- it's not as if anyone they care about, anyone on their side, can actually be blamed or held responsible -- the liberals and progressives will go along with the dismantling and eventual destruction of everything that makes a decent mode of living possible.

Republicans, Democrats Differ on Taxes as Fiscal Cliff Looms - U.S. Republican legislators expressed a preference to raise federal tax revenue by limiting deductions rather than by raising rates to avert the so-called fiscal cliff, as Democrats pushed for higher rates on upper- income earners.  “I would be very much opposed to raising tax rates, but I do believe that we can close a lot of loopholes,” including limits on how much people can deduct for charitable giving and home mortgage interest payments, Senator John McCain, an Arizona Republican, said on “Fox News Sunday.”  Senator Richard Durbin of Illinois, the second-ranking Democrat in the chamber, said any deal to reduce budget deficits should include tax increases on the wealthy.  “Let the rates go up to 39 percent. Let us also take a look at the deductions. Let’s make sure that revenue is an integral part of deficit reduction,” Durbin said on ABC’s “This Week.”  Democratic President Barack Obama and congressional leaders are trying to find a compromise in the next few weeks to avert the fiscal cliff, which would trigger $607 billion in tax increases and spending cuts beginning in January.

GOP warns of shutdown over filibuster -  A partisan war is brewing that could bring the government to a screeching halt as early as January — and no, it’s not over the fiscal cliff. It’s all about the filibuster. Democrats are threatening to change filibuster rules, in what will surely prompt a furious GOP revolt that could make those rare moments of bipartisan consensus even harder to come by during the next Congress. Here’s what Senate Majority Leader Harry Reid is considering: banning filibusters used to prevent debate from even starting and House-Senate conference committees from ever meeting. He also may make filibusters become actual filibusters — to force senators to carry out the nonstop, talkathon sessions. Republicans are threatening even greater retaliation if Reid uses a move rarely used by Senate majorities: changing the chamber’s precedent by 51 votes, rather than the usual 67 votes it takes to overhaul the rules.

Republican Senators Negotiating with President Romney - Sahil Kapur listened to Senators Graham and John McCain so we didn’t have to: Republican lawmakers are increasingly abandoning Grover Norquist’s no-taxes pledge and declaring a willingness to raise tax revenues as part of a deal to avoid the severe austerity measures set to take effect in January. On the Sunday talk shows, Sens. John McCain (R-AZ) and Lindsey Graham (R-SC) called for raising revenues by scaling back tax deductions and credits. “I would be very much opposed to raising tax rates, but I do believe we can close a lot of loopholes,” McCain said on “Fox News Sunday.” He said that could be achieved by imposing “a limit on the amount of deduction on charitable giving, a limit on the amount you can take on your home loan mortgage deduction.” Graham, who has previously spoken out against Norquist’s pledge, reiterated his position on ABC’s “This Week,” arguing that he will support higher taxes if Democrats agree to meaningful entitlement cuts. “ I will cap deductions. If you cap deductions around the $30,000, $40,000 range, you can raise $1 trillion in revenue, and the people who lose their deductions are the upper-income Americans.” These two have jumped on the Saxby Chambliss bandwagon offering the President something similar to what Mitt Romney campaigned on – entitlement spending cuts with base broadening. But no increases in tax rates including no increases on those already very low tax rates on capital income. If we don’t eliminate the tax break for capital, then the notion that we are raising revenues from upper-income households rings hollow. This is the same old GOP trickery that strives to reign in deficits by socking it to the poor and the middle class. Excuse me but Mitt Romney lost the election. If elections are to have consequences, President Obama should reject this Trojan Horse.

Fiscal Cliff Showing Many GOP Budget Beliefs To Be Myths - Other than the fact that we’re now two weeks closer to its tax increases and spending cuts going into effect, not much has really changed about the fiscal cliff since my last column was published two weeks ago. Yes, we’ve heard reports about staff discussions. Yes, four Republican senators — Saxby Chambliss of Georgia, John McCain of Arizona, Lindsey Graham of South Carolina and Bob Corker of Tennessee — said publicly that they’re willing to break the no-tax-increase pledge, although doing it by raising rates — the administration’s preference — still doesn’t seem to be acceptable. Yes, some CEOs of companies whose customers will have less to spend if the tax increases go into effect said the fiscal cliff should be prevented. And, yes, a number of Republican and Democratic governors whose states will lose some of the federal financial support they receive have said it would be a terrible thing. All of that is largely irrelevant. Without the White House and House Republicans seeing eye to eye — and they still definitely don’t — we’re no closer to a deal to stop the fiscal cliff than we were before the start of the Thanksgiving recess. But that doesn’t mean the budget debate hasn’t been substantially changed by what’s already happened. To the contrary, some of the most commonly held budget beliefs and fiscal fish tales have now been shown to be deceptive, disingenuous, misleading and just plain wrong.

Boehner Really In The Hot Seat On Hurricane Sandy Aid - I first posted about the budget dilemma Hurricane Sandy presented to congressional Republicans in general and House Speaker John Boehner (R-OH) on October 31. At that time I said there were three questions: First, how much aid will be needed and what will it be used for?  Second, will congressional Republicans demand reductions in other spending to offset the impact of the new Sandy-related aid?  Third, how will House Speaker John Boehner (R-OH) deal with this situation? The questions are now starting to be answered.

  • 1. The total amount of aid that will be requested by the states affected by Sandy will be between $80 billion and $100 billion.
  • 2. House and Senate Republicans seem poised to demand offsetting spending cuts for the aid.
  • 3. Boehner does indeed have a huge political problem that's will be made even larger than I had assumed in March by what is certain to be an unrelenting demand for the additional spending from the suddenly very popular Republican New Jersey Governor Chris Christie.

A Small But Important Point Re A Fiscal Cliff Solution - The idea that we could raise needed revenue by capping deductions of high-income families as opposed to raising their tax rates is gaining some traction (economist Greg Mankiw supports the alternative in the NYT this AM).  For example, households with income above $250,000 would be able to deduct only $50,000 from their annual tax bill.  Since wealthy families usually deduct a lot more than that, this would be a progressive way of gaining new revenue (though there are arguments about how much–certainly, well under the President’s $1.6 trillion opening bid). But there’s a real problem with this approach versus the rates approach: you create another–dare I say it–tax cliff.  Under the  higher rates approach, only the marginal dollar above $250,000 is taxed at the new, higher rates.  So a household that earns just above the threshold won’t notice the change. But if their deductions were suddenly capped, they’d notice it big time.  Imagine a household earning $249,000 and deducting  $70,000 from their taxes–if their income then goes over the threshold, they’d face a $20K tax increase.  The only fair way to solve this is to phase in the capped deductions, which of course leads to revenue loss.

Sanders Applauds White House for Taking Social Security Off the Table in Deficit Talks - – Sen. Bernie Sanders (I-Vt.) today welcomed White House assurances that Social Security benefits won’t be cut as part of negotiations on a year-end deficit-reduction deal. “This is a step in the right direction for more than 55 million Americans who have earned Social Security benefits today and every working American who will receive Social Security benefits in the future,” said Sanders, the founder of the Senate Defending Social Security Caucus. “The simple truth is that Social Security has not contributed a nickel to the national debt so it makes no sense for it to be part of deficit negotiations,” he said. “The American people have been clear that Social Security is enormously important to their well-being and that it should not be cut. The election and poll after poll show clearly that the American people want the wealthiest people and the largest corporations in this country, who are doing phenomenally well, to play a significant role in reducing the deficit,” Sanders added. White House spokesman Jay Carney said on Monday that Social Security should be addressed separately from the lame-duck deficit negotiations. “We should address the drivers of the deficit and Social Security currently is not a driver of the deficit,” Carney said.

There are no "per se" tax or spending caps: lame duck negotiations no place for Medicare/Medicaid cuts - Linda Beale - There is a huge effort by some--like the Peterson Institute, the Simpson-Bowles comedy tour, and right-wing propaganda tanks--to cast Medicare as impossible to sustain because of the current trend in health care costs.  The argument goes this way:

  • health care costs in the US are rising
  • the population that is eligible for Medicare in the using is rising as baby boomers age
  • Medicare costs will therefore inevitably increase
  • even though Medicare costs are rising less rapidly than non-Medicare health care costs those increases will eventually require significantly higher government outlays
  • the US has unprecedented levels of debt and annual budget deficits
  • the US spends too much compared to its tax revenues
  • therefore the US can't afford to pay those increasing amounts for Medicare health care costs
  • therefore we should cut back on eligibilty for, and benefits from, Medicare.

But this argument has several fatal flaws that include the following:

  • debt is extraordinarily cheap right now
  • deficit spending by the government is vital when there isn't private spending
  • spending priorities have to be determined: 
  • We've already built in various cuts to the spending for Medicare and Medicaid (possibly too much) and the question of what the costs will be ten years down the road depend in part on what else we do along those lines and how those things work out.

Unemployment Extension Would Add 300,000 Jobs, CBO Says - Fully extending the current level of jobless benefits provided by states and the federal government through next year would add the equivalent of 300,000 jobs by slightly boosting spending and growth in 2013, the nonpartisan Congressional Budget Office estimated in a report released Wednesday. Among the issues lawmakers must settle before year-end is whether to continue providing extended federal jobless benefits, which are slated to end on Dec. 29. States generally provide the first 26 weeks of jobless benefits to people who have left their job involuntarily, but the federal government has been paying for additional weeks of benefits since 2008. Extending the current slate of extended federal jobless benefits would cost roughly $30 billion and increase gross domestic product by 0.2% in the fourth quarter of 2013, according to estimates from CBO, the independent budget arm of Congress. Because the unemployment insurance program puts money in the pockets of people likely to spend it, the subsequent boost in demand for goods and services would likely create about 300,000 full-time jobs, according to the report.The nonpartisan agency also analyzed several ways lawmakers could partially extend the benefits for 2013. Any option that stretches the program through all of 2013 would boost GDP by $1.10 for every dollar of cost, the CBO estimated. One option would be to only extend the first phase, or 14 weeks, of federal jobless benefits through 2013, at a cost of $14 billion for the year. People who are receiving federal unemployment benefits are eligible for up to four “tiers” of federal aid, depending on the unemployment rate in their state. However, all states are eligible for the first tier of benefits, which is why it is the most expensive.

CBO: Extending unemployment saves 300,000 jobs - If you’ve read our fiscal cliff explainer, you’ll know that a bunch of tax hikes and spending cuts are scheduled to kick in at the end of 2012. Right now, lawmakers are mainly focused on the big items here—the expiration of the Bush tax cuts and the sequester. Yet there are a number of smaller changes scheduled for the end of the year that aren’t getting nearly as much attention. For example, some 2 million Americans are set to lose their unemployment benefits in December, once a federal program to help the jobless expires. Another 1 million Americans could see their benefits disappear by April. So does it make sense to extend this program, given that U.S. unemployment is still high at 7.9 percent? As it happens, the Congressional Budget Office just released a new report on this subject. CBO’s conclusion: It would cost $30 billion to extend the program for another year. But doing so could save 300,000 jobs by the end of 2013, compared with what would happen under current law.

William Black on HuffPost Live - NEP’s William Black appeared on Huff Post Live’s Sound Off hosted by Mike Sacks. The topic was tax hikes on the middle class. You can view the clip below or if you want to go to HuffPost Live – click here.

Most Americans Face Lower Tax Burden Than in the 80s - NYT  - “It feels like the harder we work, the more they take from us,” said Mr. Hicks, 55, as he waited for a meat truck one recent afternoon. “And it seems like there’s an awful lot of people in the United States who don’t pay any taxes.” These are common sentiments in the eastern suburbs of St. Louis, a region of fading factory towns fringed by new subdivisions. Here, as across the country, people like Mr. Hicks are pained by the conviction that they are paying ever more to finance the expansion of government. But in fact, most Americans in 2010 paid far less in total taxes — federal, state and local — than they would have paid 30 years ago. According to an analysis by The New York Times, the combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980. Households earning more than $200,000 benefited from the largest percentage declines in total taxation as a share of income. Middle-income households benefited, too. More than 85 percent of households with earnings above $25,000 paid less in total taxes than comparable households in 1980. Lower-income households, however, saved little or nothing. Many pay no federal income taxes, but they do pay a range of other levies, like federal payroll taxes, state sales taxes and local property taxes. Only about half of taxpaying households with incomes below $25,000 paid less in 2010.

Fiscal cliff failure would hurt Christmas spending, White House warns - A failure to reach a deal over the year-end automatic spending cuts and an expiration of tax breaks – known collectively as the fiscal cliff – would hit consumer spending and economic growth in the holiday season, according to the White House. As Congress resumed after the Thanksgiving break and after the busiest shopping weekend of the year in the US, the Obama administration released a prediction that consumer confidence would take a significant hit if a deal was not reached. Sales figures for the holiday weekend were encouraging: total spending was $59.1bn, 12.8% higher than last year, according to a survey from the National Retail Federation. An estimated 139.4m adults visited US stores and websites from Thanksgiving through Sunday, up 6.4% from last year. But Monday's report from the White House National Economic Council, entitled The Middle-Class Tax Cuts' Impact on Consumer Spending and Retailers, warned that consumer confidence, currently at a five-year high, was at risk. "The hard-earned rise in consumer confidence will be at risk if the middle-class tax cuts are not soon extended with a minimum of political drama," it said. If Congress fails to act, the report states, every American family's taxes will automatically go up, "including the 98% of Americans who make less than $250,000 a year, and the 97% of small businesses that earn less than $250,000 a year. A typical middle-class family of four would see its taxes rise by $2,200."

White House warns of $200bn consumption fall - In speech after speech on the campaign trail until his convincing re-election in early November, Barack Obama promised that he would not allow taxes to rise for middle-class families in his second term. With barely a month left before the year-end deadline for urgent budget talks, Mr Obama is singing from the same song sheet as he readies for a showdown with Republicans in Congress. If Congress and the White House fail to reach a new budget agreement, the US economy will be hit by a $600bn combination of automatic tax increases and spending cuts in 2013 – a scenario known as the fiscal cliff likely to trigger a new recession. In a report released on Monday, just as talks with Congress were to resume after the Thanksgiving holiday, the White House warned failure to avert higher taxes on middle-class families in the talks would sharply cut economic output next year. The report, by the White House’s National Economic Council and Council of Economic Advisers, says lifting taxes on the middle class, combined with other measures, could reduce consumer spending by $200bn and reduce 2013 gross domestic product by 1.4 per cent. “Economic theory and recent experience” both dictate that “nearly all of the rise in [middle-class] taxes would translate directly in to reduced consumption”, the report says. So far, however, while some Republicans have begun bending on the issue of higher government revenues, they have shown little sign of acquiescing to Mr Obama’s key demand, that tax rates rise for the wealthy.

Geithner deployed for fiscal cliff talks - President Barack Obama has dispatched Tim Geithner, Treasury secretary, to Congress for a series of meetings on Thursday with leaders of both political parties in a bid to jolt negotiations to avert the fiscal cliff. Mr Obama’s move comes as the Federal Reserve reported that alarm about the looming tax hikes and spending cuts was spreading across a swath of US business, based on the central bank’s regular collection of anecdotal reports from executives around the country. A number of contacts across [Fed] districts expressed uncertainty about business conditions for the months ahead as the firms and their customers waited for the outcome of federal budget negotiations,” the Fed said. The concern relayed by the Fed came in the middle of a frenzied day of activity and positioning by US political leaders facing an urgent end-of-year deadline to reach an agreement, or see the economy potentially plunge back into recession. In a sign that negotiations are intensifying, Mr Geithner and Rob Nabors, a top White House official, will on Thursday morning meet with John Boehner, the Republican speaker of the House of Representatives, as well as senior House Republicans including Paul Ryan, the party’s vice-presidential nominee this year.

Tim Geithner’s Lead Negotiating Position on Fiscal Slope Should Cause Concern - The White House absolutely wants the Treasury Secretary to be deeply involved with budget issues. But we know this because they’ve already designated current Treasury Secretary Timothy Geithner in the lead negotiating role on the fiscal slope. So while Lew may have the resume, Geithner already has the job, and he has indicated he will not step down until the negotiation gets resolved somehow. Which leads us to the question of why Timothy Geithner has any business leading a domestic fiscal policy negotiation. Here’s the curriculum vitae. Geithner spent close to 15 years in international monetary and financial policy at Treasury, and then went right to the New York Fed, a monetary policy position. While at Treasury he has primarily dealt with financial reform and financial market policy. He has never taken the lead on anything around taxes, social insurance, and his views on this subject, at least from his public comments, are completely pro forma.  What we know about Geithner, we know about his willingness to protect banks at all costs, and his unwillingness to use the tools to provide meaningful debt relief for ordinary families suffering from the collapse of the housing bubble. Geithner was picked for his ability as a “pragmatic deal-maker,” say unnamed aides. Lew was disfavored by Republicans because he actually knew the ins and outs of the federal budget. Geithner just hasn’t delved in at that level. Moreover, “pragmatic deal-maker” is a clear buzzword for someone willing to give up whatever possible just to reach a deal, as Robert Reich notes

The 'Go Fast' and 'Go Big' Fiscal Challenges - Laura D’Andrea Tyson - Washington faces two urgent fiscal challenges in the next few months. Before the end of the year, the lame duck Congress, the most polarized in recent history, must negotiate an agreement with President Obama to protect the still fragile economic recovery from the so-called fiscal cliff — the $600 billion in spending cuts and tax increases scheduled to begin to take effect on Jan. 1. Then, early next year, a newly elected but still divided Congress must approve an increase in the federal debt limit. Failure to do so in a timely way would damage confidence, posing yet another threat to the economy’s continued healing. These two challenges are manifestations of the long-running fiscal challenge confronting the country: the fact that the federal debt is rising at an unsustainable rate. That’s why a political deal to address the fiscal cliff and the debt limit in the near term should be linked to a credible framework to put fiscal policy on a sustainable path in the long term.By the end of this year, policy makers need to “go fast” to address the fiscal cliff and debt limit and to “go big” to establish the broad outlines of a significant multiyear deficit-reduction plan.The economy continues to operate far below its capacity. The unemployment rate is at least two percentage points higher than what most economists consider consistent with a full recovery. Other measures, such as the high rate of long-term unemployment and the low labor-force participation rate, reflect an impaired labor market.

Against grand bargains: A long-term deficit deal is impossible, and the quest for one is hurting us. - The fiscal cliff is confusing, even to the Washington legislators arguing about it. On the one hand, the cliff consists of rapid deficit-reducing tax increases and spending cuts. On the other hand, the people most adamant about the need to avoid the cliff are calling for deficit reduction. I listened to No. 2 Senate Democrat Dick Durbin give a fiscal-cliff speech on Tuesday framed around the idea that “deficit reduction is a progressive cause.” The main anti-cliff group is even named Fix the Debt. Congress has structured the rules so that only an agreement on long-term deficit reduction—a grand bargain—can prevent the growth-killing, short-term deficit reduction of the fiscal cliff. But that’s no coincidence. Proponents of the grand bargain to resolve long-term fiscal questions don’t favor a bargain because they want to avoid the fiscal cliff. They deliberately created the fiscal cliff in hopes that the emergency would set the stage for a grand bargain. It’s a strategy they hit upon only after their previous hope that the 2011 debt-ceiling crisis would force a bargain proved futile. The problem is that the quest for the grand bargain is essentially a quest for the impossible. Whereas ginning up crises to force Congress to strike that impossible bargain is wreaking real tangible harm on the country. Whatever happens during the lame-duck session, the best thing for America would be for the great and the good in Washington and corporate America to drop their fixation with the grand bargain.

Obama Calls on Citizens to Ask Congress to Slit Their Throat -  Yves Smith - If this weren’t so terrible, it would be funny. The Administration is worried that there won’t be a fiscal cliff deal by year end. Per Bloomberg: The co-chairman of President Barack Obama’s 2010 fiscal commission said it’s unlikely the president and Congress will reach a deal by the end of this year to avert the so-called fiscal cliff. Erskine Bowles, also a former chief of staff to President Bill Clinton, estimated there is a one-third probability the sides will strike a deal by the end of this year.  “I’m really worried,” Bowles told reporters. “I believe the probability is we’re going over the cliff.” Yves here. Given the Bowles visit with Obama, this means (as we’ve indicated from the get go) that Obama really has his ego invested in getting a deal done by year end.  In fact, NOT getting a deal done is far better for everyone except the uber rich. As Paul Krugman has stressed, going into 2013 with no deal in place is not a dramatic event, and would substantially weaken the Republican’s bargaining position as far as preserving tax breaks for the wealthy are concerned. And if the Administration wanted to preserve middle cut tax relief, like lower payroll taxes, it can make that retroactive to the start of 2013.  Letting the negotiations go into 2013 also increases the odds of preserving Social Security and Medicare in their current form, since they will not be affected at all by the automatic budget cuts that would kick in in the absence of a deal.

Bungee-Jumping Over the Fiscal Cliff - Robert Reich - What’s the best way to pressure Republicans into agreeing to extend the Bush tax cuts for the middle class while ending them for the wealthy?The President evidently believes it’s to scare average Americans about how much additional taxes they’ll pay if the Bush tax cuts expire on schedule at the end of the year. He plans to barnstorm around the country, sounding the alarm.The White House has even set up a new Twitter hashtag: “My2K,” referring to the extra $2,200 in taxes the average family will pay if all the Bush cuts expire. Earlier this week the Council of Economic Advisers published a report detailing the awful consequences of going over the so-called “fiscal cliff.”But isn’t this fear-mongering likely to buttress Republican arguments that the Bush tax cuts should be extended for everyone — including the rich? Republicans will say (as they have a thousand times before) that the rich are the “job creators,” so we should tackle the budget deficit by cutting spending rather than raising anyone’s taxes.

Obama Donors Getting Lots of Face Time in Fiscal Slope Meetings - The President and senior Administration officials have met with lots and lots of people about the fiscal slope in the wake of the election. Everyone, in fact, but most of the House Republican deciders who will determine the bulk of the deal. But as it turns out, many of the meeting attendees included Obama campaign bundlers. Membership has its privileges, after all. A West Wing meeting with Obama on Wednesday afternoon included Yahoo CEO Marissa Mayer, who bundled between $100,000 and $200,000 for Obama’s campaign; Comcast CEO Brian Roberts, who gave $20,000 to the DNC; and Archer Daniels Midland CEO Patricia Woertz, who gave more than $33,000 to Obama and the DNC combined, Federal Election Commission records show

READ: The White House’s fiscal cliff proposal - Republican aides are circulating what they say is the White House’s opening bid on the fiscal cliff. Here’s a summary of the main components:

  • Immediate increase in both top marginal rates, as well as capital gains and dividends: +$960 Billion
  • Additional taxes: +$600 Billion
  • 2009-level estate tax
  • AMT and business tax extenders: -$236 Billion
  • Payroll tax extension or alternative policy: -$110B
  • Bonus depreciation extension
  • $50 billion stimulus package in FY13
  • Mass refi mortgage proposal
  • Deferral of sequester
  • Savings from non-entitlement mandatory programs
  • Extension of unemployment insurance: $30 billion
  • Medicare SGR Patch: $25 Billion
  • Increase in the debt limit to avoid requiring Congress to vote to increase

GOP Rejects Cliff Offer From Obama - President Barack Obama made an opening bid in budget talks with Republicans that calls for a $1.6 trillion tax increase, $50 billion in infrastructure spending in 2013 and new power to raise the federal debt limit, a provocative set of demands that Republicans said represented a step backward in efforts to avoid looming tax increases and spending cuts.John Boehner said after the budget talks on Thursday that the White House 'has to get serious.'The proposal marked an opening salvo in negotiations over the fiscal cliff and represented a particularly expansive version of the White House's wish list, with a heavy focus on tax increases and spending proposals—including keeping in place a payroll-tax cut and extended unemployment benefits.Republicans haven't put any comparable offer on the table. They have indicated willingness to accept $800 billion in revenues over 10 years, half the amount Mr. Obama proposed. And they have sought far more in spending cuts in exchange for their concessions on taxes."No substantive progress has been made in the talks between the White House and the House over the last two weeks," House Speaker John Boehner (R., Ohio) said after meeting with Treasury Secretary Timothy Geithner Thursday and speaking to Mr. Obama by phone Wednesday night. "The White House has to get serious."The talks, which have weeks to go, will likely result in many twists and turns, with the White House offer a potential starting point for negotiations. It already has signaled it isn't wedded to raising the top income-tax rates all the way back to peak Clinton-era levels. Both sides have a good sense of what concessions they are willing to offer, but neither wants to go first for fear of losing leverage.

White House Plan on Fiscal Crisis Draws G.O.P. Ire - Treasury Secretary Timothy F. Geithner presented the House speaker, John A. Boehner, a detailed proposal on Thursday to avert the year-end fiscal crisis with $1.6 trillion in tax increases over 10 years, $50 billion in immediate stimulus spending, home mortgage refinancing and a permanent end to Congressional control over statutory borrowing limits.The proposal, loaded with Democratic priorities and short on detailed spending cuts, met strong Republican resistance. In exchange for locking in the $1.6 trillion in added revenues, President Obama embraced the goal of finding $400 billion in savings from Medicare and other social programs to be worked out next year, with no guarantees. He did propose some upfront cuts in programs like farm price supports, but did not specify an amount or any details. And senior Republican aides familiar with the offer said those initial spending cuts might be outweighed by spending increases, including at least $50 billion in infrastructure spending, mortgage relief, an extension of unemployment insurance and a deferral of automatic cuts to physician reimbursements under Medicare. “The Democrats have yet to get serious about real spending cuts,” Mr. Boehner said after the meeting. “No substantive progress has been made in the talks between the White House and the House over the last two weeks.”

Will We Be The Lamest Generation? - Matt Yglesias is now hawking an initial White House budget proposal that is apparently being negotiated by Tim Geithner.   Predictably, the two-stage proposal involves entitlement “savings” and cuts in both stage one and stage two, and backs off a bit on higher tax rates on the rich.  In exchange, the White House gets some more stimulus spending.  Yglesias advises Republicans to tell Obama: … he can have his stimulus and he can even have higher tax revenue if he really wants it, but that the price is giving up his obsession with higher rates. Is he more interested in soaking the rich or in creating jobs? I don’t think Obama says no to a deal like that, and if he does lots of sensible liberals (like this guy) will call him out on it. Then we can put this sorry episode behind us, proclaim the Grand Bargaining Era done for, and hopefully move on to other things. It seems strange to endorse a grand bargain in order to move on and proclaim the Grand Bargaining Era over.   Yglesias follows up today with a few more cautionary words for “sensible liberals”, and issues some implicit admonishments to the left.   He instructs us on the true purpose of taxation: The proper goals of a budget negotiator are to maximize cuts to bad programs and minimize cuts to good ones. When higher taxes helps achieve the latter goal, that’s great. When it doesn’t, then who cares? The fact is, though, that our national government doesn’t just borrow in its own currency – it issues that currency.  And so its ability to spend is not constrained by its tax revenues.   We don’t need to tax the the rich – or anyone else for that matter – in order to spend.  We only need taxes as a way of managing excess demand and preserving a stable currency while achieving other public purposes.

Republicans Take Aim at Entitlements - Senate Minority Leader Mitch McConnell outlined potential changes to Medicare and Social Security in an interview Friday, providing fresh clarity on the concessions Republicans would like to see from Democrats on cutting the costs of the federal entitlement programs.  Mr. McConnell (R., Ky.) said bipartisan agreement on higher Medicare premiums for the wealthy, an increase in the Medicare eligibility age and slowing cost-of-living increases for Social Security could move both parties closer to a budget deal that averts the so-called fiscal cliff, the combination of spending cuts and tax increases that start in early January unless Washington acts.  In return for the support of Democrats, he said, Republicans would agree to include more tax revenue in a budget deal, though not from higher rates. "Those are the kinds of things that would get Republicans interested in new revenue," Mr. McConnell said. Democrats played down Mr. McConnell's comments and framed the debate from their own point of view: If Republicans instead agreed to raise income-tax rates for high earners, a deal to avoid the fiscal cliff could be quickly reached.  House Minority Leader Nancy Pelosi (D., Calif.) said there was "nothing new" in Mr. McConnell's comments. A senior administration official said the White House would make no new offers until Republicans changed their opposition to raising top tax rates.

Obama Warns of Prolonged Talks as Republicans Rebuff Plan - President Barack Obama and House Speaker John Boehner stood their ground with opposing plans to avert the fiscal cliff and warned there was no quick path to a solution.  Obama has proposed a framework that would raise taxes immediately on top earners and set an Aug. 1 deadline for rewriting the tax code and deciding on spending cuts, according to administration officials. It calls for $1.6 trillion in tax increases, $350 billion in cuts in health programs, $250 billion in cuts in other programs and $800 billion in assumed savings from the wind-down of the wars in Iraq and Afghanistan, according to the officials, who asked for anonymity.  Boehner said less than 30 minutes later during a news conference at the Capitol in Washington, that the proposal, presented to congressional leaders by Treasury Secretary Timothy F. Geithner, did nothing to move talks along. “There’s a stalemate, let’s not kid ourselves,” he said.

Stalemate: Obama Warns of Prolonged Talks as Republicans Rebuff Plan - The word of the day is "stalemate".  Last year the Republicans had a chance to accept spending cuts to tax hikes at a 10-1 ratio. They declined. Now president Obama does not want to bargain. Who can blame Obama (except Republicans)? We may disagree, but that is part of the platform that got him elected.  The Republicans do not want to bargain either. And who can blame them (except Democrats)? Regardless, Republicans blew a golden opportunity last year and that chance is gone. Obama has the upper hand now, and nothing will change that setup. I certainly am opposed to tax hikes without something substantial in return. Yet, if Obama holds his ground, the only way to have some cuts across the board right now is for the fiscal cliff to happen.  Could it be that the best political outcome may actually be the dreaded "fiscal cliff"? The fiscal cliff will hit military spending but why shouldn't it? The US could easily defend itself on half its current budget actually.

Boehner Threatens No Votes on Senate Bills If Democrats Push Through Filibuster Reform - John Boehner, who is not now nor has ever been a Senator, has nonetheless decided to insert himself into the debate over Senate rules reform. Boehner threatened to ignore all bills coming from the Senate passed with the help of a reformed filibuster, which is really all bills, since ending the filibuster on the motion to proceed would apply to all legislation. Boehner said that Reid’s threat “is clearly designed to marginalize Senate Republicans and their constituents while greasing the skids for controversial, partisan measures.” He added, “Any bill that reaches a Republican-led House based on Senate Democrats’ heavy-handed power play would be dead on arrival.” Though the rules change would not occur until next year, Boehner suggested that it might poison the atmosphere even sooner, “at a time when cooperation on Capitol Hill is critical.”

DC to NE – Drop Dead!  - Man is this bad timing. If granted, the cost to the Feds would be reflected in the 2013 budget. Good-bye to any hope of improvement in the overall deficit picture if this nut has to be paid. The $80b that has been requested is more than the revenue from a reversal of the +$250k Bush tax cut. It comes to $530 for every worker in America. The 2011 Budget Control Act limits annual payments of disaster relief to $11B. So the $80B is going to require a special spending bill. That’s not going to be easy to achieve in Washington with all the Cliff/money issues that are now on the table. NY’s big Democratic Senator, Chuck Schumer is very much in the middle of this. He knows he has problems with this request. From The Hill: “There is no doubt this is going to be a hard fight. It comes in the middle of strenuous negotiations around the fiscal cliff.” Schumer is a weasel; he also had this to say about the process of getting the necessary legislation passed: I am working to keep the quest for Sandy aid separate from the talks and to preserve a tradition of not offsetting disaster relief. Separate? How can you keep $80B separate? The issue of not offsetting the cost of a disaster by reducing other spending is not going to come easy. Some Republicans are going to insist that there be cuts in the budget to offset a big portion of the Sandy clean up.

Tax the Rich, Take Your Hands Off Medicare: Overwhelming US Majority A large majority of US citizens would like to see higher taxes on the rich and oppose cuts to Medicare as an answer to the US deficit, according to a poll released Wednesday by the Washington Post and ABC News. Roughly sixty percent of those asked stated that they would like to see higher income taxes on those in higher income brackets -- $250,000 and greater. Only 37 percent opposed a progressive tax system. Those who answered with “strong” support for raising taxes on the rich were roughly double the number with "strong" opposition: 42 percent for vs. 23 percent against. Seventy-three percent of Democrats and 63 percent of independents support higher taxes on the rich. 59 percent of Republicans oppose it. Additionally two-thirds of Americans oppose a raise in Medicare eligibility age from 65 to 67 as is proposed by many Republican lawmakers. Only 30 percent support it.

What Would Happen - If the Bush tax cuts all lapsed? Several weeks ago, Jim proposed breaking up the fiscal cliff into manageable pieces -- which seemed like a reasonable approach. As we await counterproposals to the Administration’s proposal, it might be useful to consider what would happen if agreement proves elusive, and all the Bush tax cuts were to lapse (along with other tax reductions), reverting to the tax rates of the Clinton years. Because the Republicans feel so strongly about impending defense cuts, we can be pretty sure that the sequester will be held in abeyance (probably along with the AMT patch). Clearly, this is not an optimal outcome. I much prefer the President’s proposal (described here), which includes letting the rates rise on the top bracket (as I outlined in this post). But EGTRRA and JGTRRA (aka the Bush tax cuts) have constrained our fiscal policy for a decade, and as Jeff Frieden and I discussed in Lost Decades, contributed to the financial crisis of 2008. With ever greater impact on tax revenues going forward, these provisions should end (although I would prefer to delay rate increases on middle incomes).Were this scenario (all taxes revert, sequester held in abeyance) come to pass, GDP would be close to flat by end-2013, relative to end-2012, using the mid-point multiplier estimate from the CBO.

Taxes and Transfers Have Become Less Effective at Reducing Inequality - I’m working on a paper based on a model of an economy with high and growing levels of income and wealth inequality.  I’ll say more about it later, but in coming days, time permitting, I’ll post snippets that might be of interest.  For example, one prediction generated by this model is that policy makers advocate on behalf of the beneficiaries of inequality for regressive changes in taxes and transfers.  They inveigh against both progressive taxation and social insurance. Any of that ring a bell?? So here’s a figure, using very comprehensive CBO income data to show that, in fact, taxes and transfers have become less of a bulwark against rising inequality.  Each bar in the figure shows the percent increase in the Gini Index (a measure of income concentration) under three different definitions of income.  Using just market income, the Gini rose 23%, 1979-2007.  Adding government transfers, the Gini actually rose more—by 26%.  This may seem a bit confusing to those who recognize that transfers are equalizing, but the source of such confusion is the conflation of levels versus changes.  Of course, the Gini index is lower at any point in time after transfers (and taxes), but less so over time.  Thus, both transfers and taxes have become less effective in reducing market based inequality, a trend the model would predict.

Inside America’s Tax Battle by Laura Tyson -  America’s recent presidential election answered the question of whether an increase in revenues will be part of the country’s long-run deficit-reduction plan. The answer is yes: there is now bipartisan agreement on the need for a “balanced” approach that includes revenue increases and spending cuts. But there are still deep political and ideological divisions about how additional revenues should be raised and who should pay higher taxes. If a preliminary agreement on these questions is not reached by the end of the year, the economy faces a “fiscal cliff” of $600 billion in automatic tax increases and spending cuts that will shave about 4% from GDP and trigger a recession. The majority of citizens agree with President Barack Obama that tax increases for deficit reduction should fall on the top 2-3% of taxpayers, who have enjoyed the largest gains in income and wealth over the last 30 years. That is why he is proposing that the 2001 and 2003 rate cuts for these taxpayers be allowed to expire at the end of the year, while the rate cuts for other taxpayers are extended. So far, Obama’s Republican opponents are adamant that the cuts be extended for all taxpayers, arguing that increases in top rates would discourage job creation. This claim is not supported by the evidence. Recent research finds no link between tax cuts for top taxpayers and job creation. In contrast, tax cuts for the bottom 95% have a positive and significant effect on job growth.

Tax Cuts, Tax Rates and Tax Shares - Last week, the Internal Revenue Service posted the latest individual income tax data for tax year 2010. Supporting the Republican worldview, the data show that the share of total income taxes paid by the rich increased; supporting the Democratic worldview, they show that the wealthy’s share of total income increased more, leading to a decline in their average tax rate. Sorting through these competing facts is a bit like determining whether the glass is half-empty or half-full, but I’m going to try. I will start with the top 1 percent of income taxpayers, who are unambiguously rich by any definition of the term. In 2010, this group included all tax filers with adjusted gross incomes above $369,691. Remember that A.G.I. excludes many forms of income, including benefits such as employer-provided health insurance, unrealized capital gains and interest on tax-exempt municipal bonds.Conservatives like to contend that the increasing share of federal income taxes borne by the wealthy shows that they are carrying the rest of us on their backs, so to speak. Indeed, the percentage of all income taxes paid by the top 1 percent has risen to 37.4 percent from 33.2 percent in 2001. This necessarily means that the share of the bottom 99 percent has fallen. The following table shows that in fact the share of total income taxes borne by those with lower incomes has indeed fallen. For example, the bottom 90 percent of tax filers now pay 29.4 percent of all income taxes, compared with 36.3 percent in 2001.

Will the Payroll Tax Cut Fall Silently Off the Cliff? - If a tax cut is scheduled to expire, but the focus of the debate is elsewhere, will people notice? Will the average family be surprised when their taxes rise by $1,000 or more next year, even if most of the rest of the 2001-2003 tax cuts are extended for all but the wealthiest Americans? That’s precisely what could happen to a family earning $50,000 when the current law reducing payroll taxes by 2 percent expires at the end of the year. This same thing was scheduled to happen at the end of 2011, but politicians assured us then this was a bad idea. This year, they don’t appear as concerned. According to my colleagues at the Tax Policy Center, the expiration of the payroll tax cut would increase taxes by $115 billion in 2013. This provision affects more households than any other, yet President Obama and others have been strangely silent – arguing instead about the fate of the 2001-2003 tax cuts. As I noted last month on TaxVox, focusing only on the 2001-2003 tax cuts ignores important changes to the Child Tax Credit for very low-income families that will expire at the end of 2012. But the payroll tax cut affects nearly every worker. No doubt, the 2010 version was expensive and poorly targeted. But it had its roots in a better-designed predecessor – the Making Work Pay (MWP) tax credit– that might offer a palatable step down from current policy, without sending those who remain vulnerable over the cliff.

When You’re Trying to Decide if We Need to Renew the Payroll Tax Break, Picture This - It’s just a slide…in both senses of the word…of the real earnings—pretax, which is important—of middle-wage workers: blue collar workers in manufacturing and non-managers in services, adjusted for inflation.  And it’s not inflation holding back these wage rates—it’s the weak economy.   This series starts in 1964, and in nominal terms, it’s never grown more slowly than it has this year. So it is to his great credit that the President proposed another round of the payroll tax break, or something like it, as part of his opening bid for the cliff negotiations (here’s some background from my CBPP colleague Chuck Marr on this venerable idea).  With unemployment still way too high, we need to continue to support workers’ paychecks and temporarily offset some of the fiscal contraction from the tax increases and spending cuts that are likely to come out of the cliff negotiations.

The Growing Burden of Payroll Taxes - Payroll taxes and corporate income taxes accounted for an equal share of federal tax revenue in 1969. By 2009, payroll taxes generated more than six times as much revenue. We’ve become reliant on payroll taxes, and a goal of a tax overhaul should be to reform and reduce them, permanently. First, some background. The share of federal tax revenues coming from payroll taxes has doubled since the 1970s, to about two-fifths of revenue. The payroll tax, underwriting social insurance programs, nearly surpassed the individual income tax as the single largest source of federal tax revenue in 2009.Since payroll taxes finance Social Security and part of Medicare, cost growth in these programs pressures policy makers to raise those taxes. In particular, pressure from the Social Security disability insurance program and Medicare Part A has been intensifying.  The number of disability recipients has increased nearly sixfold since 1970. Disability outlays exceeded revenues by roughly $34 billion in 2011. And costs are likely to continue growing because shrinking labor market opportunities for noncollege-educated workers are likely to continue well past this recession. The Congressional Budget Office’s long-run projections for the program support this conclusion. Pressure on the payroll tax from Medicare Part A is even worse. Health cost growth has steadily outpaced inflation, and the pattern shows no sign of abating. Fundamental economic forces – such as Baumol’s cost disease, which describes the phenomenon of rising costs in industries less conducive to automation – will most likely continue to increase health care costs steadily. The primary argument for severing the link between these growing programs and the payroll taxes is that the tax is regressive: It uses a flat rate on income up to $110,100, does not apply to most income above that threshold and does not apply to nonlabor income, like capital gains. Because of this relatively regressive nature, payroll tax cuts tend to be a more effective stimulus than typical income tax cuts – and thus are a more effective way for Washington to respond to recessions.

Should We Increase Dividend Taxation? 3 Views - In the NYTimes this morning, Steven Rattner joined a number of others (e.g. Laura Tyson) in calling for higher dividend tax rates. There are three main views on the efficiency costs of dividend taxation:

  1. Old View: The old view (Poterba and Summers) thinks that dividend taxation affects the discount rate firms use and thus dividend tax rates distort investment decisions.
  2. New View: The new view (Auerbach and Hassett) says that’s true for younger firms but for mature firms such as General Electric or Ford, dividend taxes are just lump sum levies and they don’t affect the level of investment.
  3. Agency View: There is also the Chetty-Saez view that emphasizes how dividend tax rates can affect agency issues within the firm. In particular, when dividend taxes are lower, managers can’t get away with as much because powerful shareholders care more about what they do and crack down on pet projects.

Bottom line: the old and the agency view think dividend taxes are pretty bad and distortionary, whereas the new view thinks that for a substantial share of firms (i.e. those that are mature), dividend taxes are lump sum and thus very efficient.

Lindsey Graham: Republicans Must Be Open To Raising Tax Revenues - Appearing Sunday on ABC's "This Week," Sen. Lindsey Graham explained his disagreement with Grover Norquist's no-taxes pledge and said his party needs to put tax revenues on the table for debt reduction. Well, what I would say to Grover Norquist is that the sequester destroys the United States military. According to our own secretary of defense, it would be shooting ourselves in the head. You'd have the smallest Army since 1940, the smallest Navy since 1915, the smallest Air Force in the history of the country, so sequestration must be replaced. I'm willing to generate revenue. It's fair to ask my party to put revenue on the table. We're below historic averages. I will not raise tax rates to do it. I will cap deductions. If you cap deductions around the $30,000, $40,000 range, you can raise $1 trillion in revenue, and the people who lose their deductions are the upper-income Americans. But to do this, I just don't want to promise the spending cuts. I want entitlement reforms. Republicans always put revenue on the table. Democrats always promise to cut spending. Well, we never cut spending. What I'm looking for is more revenue for entitlement reform before the end of the year.

The Sticking Point on Taxes Gets Less Sticky - Lori Montgomery’s front page story in today’s Washington Post sounds like a downer, entitled (in the print edition) “Taxes still the big ‘cliff’ hang-up.” Indeed, really since the George W. Bush Administration it’s always been differences over tax policy that have prevented policymakers from coming up with a bipartisan approach to deficit reduction.  (The bipartisan “compromises” have always been deficit increasing–a result of mutual “grabbing” instead of the mutual sacrifice that’s needed.)  Lori reports: For the first time in decades, a bipartisan consensus has emerged in Washington to raise taxes. But negotiators working to avert the year-end “fiscal cliff” remain far apart on crucial details, including how taxes should go up and who should pay more.Neither side gave ground in an opening round of staff-level talks last week at the Capitol. As President Obama and congressional leaders prepare for a second face-to-face meeting as soon as this week, the divide over taxes presents the biggest obstacle to replacing the heap of abrupt tax hikes and spending cuts, set to hit in January, with a less-traumatic debt-reduction plan.People in both parties are exploring ideas for bridging the gap. Without a deal on taxes, there is not much hope for agreement on a broader strategy for restraining the national debt that also tackles the skyrocketing cost of federal retirement programs such as Social Security and Medicare.

Grover Norquist Pledge Dwindles — Republicans Call For More Tax Revenue - Add Republicans Lindsey Graham, John McCain and Peter King to the list of top party members in Congress who are increasingly breaking with conservative Grover Norquist's "Taxpayer Protection Pledge." All three said on Sunday talk shows that they are willing to add more tax revenues as part of a deal to avert the so-called "fiscal cliff" in January, a position that is becoming commonplace among Republicans despite the fact that it would violate Norquist's pledge to not raise taxes. It's important to note that this isn't exactly a new position within the Republican Party. The first day after the election, House Speaker John Boehner said he was willing to accept more revenues as part of a deal. And no Republicans have been willing to signal any willingness toward raising taxes on incomes above $250,000, which President Barack Obama has said is necessary for him to sign a bill. Nevertheless, the fact that more Republicans — including Georgia Sen. Saxby Chambliss — are breaking rank is becoming a major theme of the fiscal cliff negotiations.

Grover, They’re Just Not That Into You Anymore - Some pledges are meant to be broken, once the only reason you’re keeping them is because those you’ve made them to keep telling you (in not such nice ways) “but you promised.”   And so it goes with the pledge so many in this town have made to this man named Grover.  On the front page of today’s Washington Post, Aaron Blake writes: Norquist, a zealous, self-promoting Washington icon who ­presides over a weekly meeting of top conservative players, has quietly amassed an extraordinary amount of power in the Republican Party without ever being elected to office. The 56-year-old president of Americans for Tax Reform is a former Reagan-era operative who launched his pledge in 1986, wheedling and cajoling so many GOP lawmakers into signing it over the years that it has become a Republican rite of passage. He keeps the source of his power, the original signed pledges, in a secret fireproof safe. But now some Republicans are openly pining for the days when Norquist’s specter didn’t loom over their budget dealings. Among them is strategist John Weaver, a former top adviser to Sen. John McCain (Ariz.) and moderate 2012 presidential candidate Jon Huntsman Jr.“The party and conservative movement will no longer be held hostage by a Washington, D.C., lobbyist,” Weaver said. “Obviously the party will always be the one standing for lower tax rates and more efficient government, but to compete for the right to govern nationally, party leaders must — and ultimately will — act responsibly.”

Grover Still Matters - Last week I wrote a post arguing that Grover Norquist’s Taxpayer Protection Pledge is alive and well and still a binding constraint on Republican lawmakers. The media continue to push the story of Republicans renouncing the pledge, however, and who knows, I could turn out to be wrong. Maybe some Republicans will vote to reduce deductions without a compensating reduction in marginal rates. Even in that world, however, the pledge will still have a major impact. All this focus on the pledge makes it seem as if the few apostates—Peter King, Lindsey Graham, etc.—are making some enormous, admirable stand on principle. In fact, all they are saying is that they might be willing to close a few loopholes and keep tax rates where George W. Bush left them; they are still adamantly opposed to increases in tax rates (even though those increases, set to take effect on January 1, are the result of Bush’s choosing to use reconciliation to pass his tax cuts). The specter of the pledge has allowed them to dress up a tiny concession—conservatives should want to get rid of distortions anyway, since they distort economic choices—as a major move to the center. In return for breaking the pledge, they can demand that Democrats agree to major changes to entitlement programs.

Why the President is Not So Keen on Just Limiting Deductions - From the White House blog.  Bottom line: If you apply a $25,000 deduction cap only to households with income above $250K, phase in the cap gradually as income rises above $250K, and exclude charitible giving from the cap, you increase revenue by only $450 billion over ten years.

TPC’s New Tax Calculator Examines Fiscal Cliff Options -- As a lame-duck Congress once again faces an impending deadline for dealing with expiring tax cuts, TPC has released a new Tax Calculator to compare potential outcomes. We obviously don’t know what the outcome of negotiations between Congress and the White House will be but have modeled four possibilities:

  1. 2012 tax law (with an AMT patch). This is what you’re paying this year, assuming Congress gets around to patching the alternative minimum tax for 2012.
  2. 2013 tax law. This is what you’ll pay if Congress doesn’t act and we go over the fiscal cliff for all of next year.
  3. The Senate Democratic plan, which would extend the expiring Bush-era income tax cuts for a year for all but the top 2 percent of taxpayers and extend the credits originally enacted by President Obama in 2009, but allow the temporary payroll tax cut to expire.
  4. The Senate Republican plan, which would extend the Bush-era income tax cuts for everyone, but would allow the 2009 credits and the temporary payroll tax cut to expire.

(More details on these plans, including their treatment of the AMT and estate taxes, are available here.) To make things easy, you can look at ready-made examples or create your own case.

Ignorance as an excuse - Via Greg Mankiw I read a response to the argument by Peter Diamond and Emmanuel Saez that the top marginal tax rate in the US should be raised to about 73%. I do not want to enter into the substance of the debate but instead discuss the logic used by the criticism of Diamond and Saez work. The authors of the response present a contrast between the willingness of Peter Diamond to offer a concrete policy recommendation with the answers that two other Nobel Prize winners (Tom Sargent and Chris Sims) gave after receiving their prize. When asked in 2011 what should the government do to help growth, Sims answered: "I think part of the point of this prize in the area that we work in is that answers to questions like that require careful thinking, a lot of data analysis, and that the answers are not likely to be simple. So that asking Tom [Sargent] and me for answers off the top of our heads to these questions — you shouldn’t expect much from us." And when asked for a specific policy conclusion he added: "If I had a simple answer, I would have been spreading it around the world."

Corporate tax should be fair and shared - Many multinational companies that appear to be operating successfully in Britain pay little or no corporation tax in this country. It is not difficult to understand why ordinary people on wages and salaries, and small British companies that pay tax at the normal rate on their profits, are angry. The origin of the problem is simpler to describe than to address. If a business operates in many countries, and makes a profit, in which country is the profit earned? One answer is that the profit belongs to the country from which the business is managed, or controlled, or headquartered. This was a natural principle before multinational operations became as common as they are today, and vestiges of that approach are still to be found in the tax systems of most countries. That rule could not and does not work very well, however. If a business makes money around the world, countries around the world will want to tax it. It is hard to identify the place where a company is controlled or managed or headquartered. It is often easy to shift that location if the effect is to reduce the corporate tax bill. That would matter less if all countries taxed profits in the same way and at the same rate. But they don’t. Even in an enlightened, co-operative world, different countries would choose to tax companies at different rates. There is an argument that low rates of corporation tax are one enticement a business friendly government can use to attract economic activity from other jurisdictions, and that such tax competition is beneficial. I am not sure this argument is very strong – the outcome is a beggar-my-neighbour process in which the winning country’s gain is necessarily smaller than its rival’s loss.

Could Higher Taxes Stimulate Academic Research? - Academic economists are well paid by their universities but many superstar academics do additional consulting.   If President Obama raises the marginal tax rate on the high earning economists,  some of these economists will act like economists and will substitute away from discretionary consulting as the after tax wage from consulting declines. Assuming the substitution effect dominates the income effect (i.e that labor supply slopes up), these academic stars may actually do MORE academic research.  I recognize that they could simply take more leisure but for most academics leisure and academic research are perfect substitutes. If these superstar economists return "to the game" and get the "eye of the tiger" back (think of Rocky III) , economic research progress will accelerate and there will be a positive externality for the academy and for society as a whole.   Junior faculty will learn more from their newly engaged senior colleagues and graduate students will learn from the Jedi Masters.  So, the point of this blog post is that an unintended consequence of raising taxes on the rich will be an acceleration of progress in academic economics.  This excites me!

Small businesses, tax cuts, and reporting -  The Washington Post article is   Obama calls for small business tax breaks.   The article uses the  Tax Policy Center original under the title Temporary Tax Relief to Create Jobs as the source for the reporting. The WP article notes: "The last time the country had a similar proposal to the tax subsidy was during the Carter administration, according to the Tax Policy Center. Research by the Labor Department found that few firms knew about the tax policy, but those that did increased employment notably."  But from their source it actually notes:  "The last experience the United States had with a credit for incremental employment was with the new jobs credit enacted at the beginning of the Carter Administration in 1977. Evaluations of that credit and how it came about found that most firms were either unaware of the credit or did not respond to it. Research based on a Department of Labor survey found that only 6 percent of firms who knew about the credit said that it prompted them to hire more workers. Firms that were aware of the credit, however, increased employment about 3 percent more than other firms. " The actual statement:  In summary, the effect of this proposal on employment is very uncertain. In theory, an incremental jobs credit could be a cost-effective way of raising employment in the short run and some research suggests that the 1977 credit did increase jobs, although the evidence on that is far from conclusive. The effectiveness of any jobs subsidy depends greatly on both the details of the proposal, still to be finalized, and on how employers perceive its potential benefits when making hiring decisions.

Republicans Propose to Raise Marginal Tax Rate on "Job Creators" and the Post Doesn't Notice - Dean Baker -  Folks who have been awake during the last six months recall that the Republicans opposed raising marginal tax rates on the wealthy as the highest principle of politics and economics. That is why it should have been a huge news story when they proposed a plan that would do exactly this, but only for the less wealthy who fall in that esteemed group they call "job creators." Remarkably the Post article that reported on this change totally ignored this break with Republican theology. The break comes in the form of what the Post describes as a "bubble tax" which it claims that Republicans are proposing. The bubble tax would phase out the lower tax brackets (e.g. the 10 percent tax bracket for income under $17,900 and the 15 percent bracket for income between $17,900 and $72,500). This phase out implies an increase in the marginal tax rate over the period of the phase out. For example, if the phase out for couples occurs between the income range of $250,000 and $750,000 it would be roughly equivalent to an increase of 5 percentage points in the marginal tax rate over this income interval. That would actually be a larger increase in the marginal tax rate for people in this income range than just letting the Bush tax cuts expire. (Of course the phase out could be more gradual, but then it would raise less money.) The income levels that would be most affected by this sort of restructuring of the tax code includes the overwhelming majority of small business owners who the Republicans have blessed as "the job creators." Given this change in positions by the Republicans, it might have been appropriate to headline this piece something like: "Republicans throw "job creators" under the bus to limit taxes for the very rich."

Today's Crazy Idea: Let's Get Rid of Tax Brackets for the Rich! - A few days ago I wrote a post about rich people who didn't understand how marginal tax rates worked, and therefore thought that under President Obama's plan they'd suddenly face a big hike in their tax bill as soon as they passed Obama's magic $250,000 threshold. Today I extend an abject apology to these people. That may not be how the tax code works now, but apparently it's not crazy to think that negotiators in Washington are discussing exactly that: One possible change would tax the entire salary earned by those making more than a certain level — $400,000 or so — at the top rate of 35 percent rather than allowing them to pay lower rates before they reach the target, as is the standard formula....“A Democrat familiar with the proposal called it plausible, but said its future would depend on an official scoring of how much revenue it would raise. White House and Congressional aides “are looking at lots of creative options,” I'll make several observations here. First, it's crazy. Under this plan, when you crossed the magic threshold from $399,000 to $401,000, you'd suddenly owe about $30,000 in extra taxes. You really would have an incentive not to make more money if you were near that cutoff point. The dumb urban legend would become fact. Second, it's a gift for the super rich at the expense of the merely ordinarily rich. It would have a big effect on someone making $400,000, but only a tiny effect on someone making, say, $10 million a year, since their effective tax rate would stay at 35%, instead of going up to 39.6% for the vast bulk of their earned income. This implies that Republicans are willing to throw the ordinarily rich under the bus in order to save the super rich.

The Stiffs and the Players - Krugman - The contortions Republicans are going through in an attempt to avoid raising tax rates are quite something, and they pose something of a puzzle: why are they making noises about raising revenue by limiting deductions, while still screaming bloody murder at any hint of a rise in tax rates? One possible answer is that they’re still imagining that they can pull a fast one — that they can sell supposed revenue raisers that don’t actually raise much revenue, or that they can find a way to renege on whatever agreement might be reached by appealing to the various interests with a stake in particular deductions.Another possible answer, which I guess I have to mention, is that they sincerely believe that letting the top rate go back up to Clinton-era levels would have a devastating effect on incentives. On second thought, never mind.But there’s a third possibility, which Nate Silver and Josh Marshall both raise in slightly different ways: they may be trying to protect the players at the expense of the $400,000 a year working stiffs. Nate has a chart:

Tax Reform & the Effective vs Marginal Rate Debate - A new tax reform idea was floated in this NYTimes article: One possible change would tax the entire salary earned by those making more than a certain level — $400,000 or so — at the top rate of 35 percent rather than allowing them to pay lower rates before they reach the target, as is the standard formula. I’m pretty confident this will be considered, but, as stated, tax liabilities for someone earning $399,999 will increase very sharply if she earns one more dollar. As such, they will probably have to gradually phase this in. Beyond the politics of it, an implicit idea behind this proposal involves the effective versus marginal rate debate, i.e. do people make decisions based on marginal tax rates (as economists frequently assume) or based on effective tax rates. Koichiro Ito of Stanford has a compelling paper that provides “strong evidence that consumers respond to average price rather than marginal or expected marginal price.” If distortions and efficiency costs from taxation result from behavioral responses, and average or effective tax rates (rather than marginal tax rates) determine behavior, then the difference in efficiency costs between (1) these proposed tax reforms and (2) increased top marginal rates may not be as big as many people seem to think.

More Than Taxing the Rich Is Needed to Fight Economic Inequality - Rarely have we experienced such a confluence of arguments in favor of raising taxes on the rich. After a hard-won re-election fought mainly over taxes and spending, President Obama arguably has a mandate from voters to tap the wealthy to address our budget woes. Multimedia Graphic Government’s Effect on Income DistributionWhat’s more, raising more money from the wealthy might go a long way toward righting our lopsided economy — which delivered 93 percent of our income growth in the first two years of the economic recovery to the richest 1 percent of families, and only 7 percent to the rest of us. Yet while raising more taxes from the winners in the globalized economy is a start, and may help us dig out of our immediate fiscal hole, it is unlikely to be enough to address our long-term needs. The experience of many other developed countries suggests that paying for a government that could help the poor and the middle class cope in our brave new globalized world will require more money from the middle class itself. Many Americans may find this hard to believe, but the United States already has one of the most progressive tax systems in the developed world, according to several studies, raising proportionately more revenue from the wealthy than other advanced countries do. Taxes on American households do more to redistribute resources and reduce inequality than the tax codes of most other rich nations.  But taxation provides only half the picture of public finance. Despite the progressivity of our taxes, according to a study of public finances across the industrial countries in the Organization for Economic Cooperation and Development, we also have one of the least effective governments at combating income inequality. There is one main reason: our tax code does not raise enough money.  

For fairness and job creation, the Buffett Rule is a no-brainer - Warren Buffett wrote a great New York Times op-ed in which he illustrated the ridiculousness of the claims that higher tax rates on the rich will cause them to forego profitable investments. As he points out, the decline of tax rates on the rich over the last few decades have only served to further fuel their skyrocketing incomes at the expense—rather than to the benefit—of everyone else. Making the highest income households pay a fair share of taxes is important for the principles of fairness itself: the concept of vertical equity stipulates that tax burdens should be proportionate to a taxpayer’s ability to pay, so as income rises, so too does the share of income paid in taxes (and thus effective tax rates). As my colleague Andrew Fieldhouse calculates, very high-income households start to see their effective individual income tax rate start to fall, as the preferential treatment of capital gains and dividends undermine the basic tenant of our progressive income tax that effective tax rates should rise with income. This implies the burden of taxation is being shifted from those best able to pay to those more burdened by higher effective taxation.

A Minimum Tax for the Wealthy - Warren Buffett - SUPPOSE that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.” Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist. Between 1951 and 1954, when the capital gains rate was 25 percent and marginal rates on dividends reached 91 percent in extreme cases, I sold securities and did pretty well. In the years from 1956 to 1969, the top marginal rate fell modestly, but was still a lofty 70 percent — and the tax rate on capital gains inched up to 27.5 percent. I was managing funds for investors then. Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered. Under those burdensome rates, moreover, both employment and the gross domestic product (a measure of the nation’s economic output) increased at a rapid clip. The middle class and the rich alike gained ground. So let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities.

The Other Side of Warren Buffett’s Common Sense Tax Argument - Over the years, Warren Buffett has gotten a lot of miles out of his folksy charm and ability to distill elaborate financial concepts into plain English. And recently, proponents of higher tax rates for the wealthy have gotten a lot of miles out of those qualities too — as the world’s fourth richest man has advocated repeatedly for just that policy. This week, Mr. Buffett was at it again — this time in the New York Times Op-Ed section — calling for, among other things, a higher capital gains tax rate. For years, capital gains have generally been taxed at a lower rate than ordinary income, partly in order to spur investment. The idea is that if taxpayers spend their money by investing in wealth-creating enterprises, then we’ll all be better off than we’d be if they simply spent their money consuming luxury goods or expensive vacations. But Warren Buffett took aim at this logic, writing: “Suppose that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.” Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.”So who is right? Economists on the left — like Jared Bernstein, former chief economic adviser to Vice President Joe Biden — argue that the evidence shows that higher capital gains tax rates do not lead to less investment.

Master of Tax Avoidance - Warren Buffett has an op-ed in today's NY Times on one of his most popular themes: The rich should pay more in taxes.  At first blush, his position seems noble: A rich guy says that people like him should pay more to support the commonweal.  But on closer examination, one realizes that Mr Buffett never mentions doing anything to eliminate the tax-avoidance strategies that he uses most aggressively.  In particular:
1. His company Berkshire Hathaway never pays a dividend but instead retains all earnings.  So the return on this investment is entirely in the form of capital gains.  By not paying dividends, he saves his investors (including himself) from having to immediately pay income tax on this income.
2. Mr Buffett is a long-term investor, so he rarely sells and realizes a capital gain.  His unrealized capital gains are untaxed.
3. He is giving away much of his wealth to charity.  He gets a deduction at the full market value of the stock he donates, most of which is unrealized (and therefore untaxed) capital gains.
4. When he dies, his heirs will get a stepped-up basis.  The income tax will never collect any revenue from the substantial unrealized capital gains he has been accumulating.
To be sure, there are pros and cons of changing the provisions of the tax code of which Mr Buffett takes advantage. Tax policy always involves difficult tradeoffs.  But it seems odd to me that whenever Mr Buffett talks about taxing the rich more, the "loopholes" that he uses never seem to enter into the conversation.

The 0.1% Circles the Wagons: Buffett Pumps for Dimon as Treasury Secretary - Yves Smith - Well, given that our current Treasury secretary was forgiven for being a tax cheat (Turbo Timmy never did settle up for his underpaid taxes that were beyond the IRS statute of limitations), there is a certain logic in upping the ante with his replacement. Having a Treasury secretary who is a slam-dunk case for criminal Sarbanes-Oxley violations (see here and here) as well as running a bank where the auditors signaled the worst level of accounting failure short of signaling “going concern” worries is par for the course for the ever-risinng level of corruption among what passes for our elites. So what is Buffett’s angle in recommending Dimon? Is it simply that he’s the least tainted looking bank exec around (well, least tainted only if you put on super thick rose colored glasses?). Wells Fargo, a long-standing Buffett investment, is piling on mortgage exposures, even more so that the other major player in the residential mortgage space, JP Morgan. Dimon has such a monster ego if he were in the Treasury, he’d make sure to protect JPM from any “unforeseen” events. But the real reason for Buffett’s enthusiasm is really simple. Dimon is the loudest mouthpiece of the utterly shameless banking industry bullshit. He’s rejected the idea of international capital rules, calling them “anti-American.” That’s code for “American banks [along with international banks] might make less money, can’t have that.” And he’s ranted about journalists being overpaid. Dimon is so full of himself that he chewed out two central bankers: Bernanke and Mark Carney of Canada, soon to be the governor general of the Bank of England. Carney, an ex Goldmanite, was less easily cowed than Bernanke and (for those who had heard of the Dimon temper tantrum, which certainly included readers of Reuters and the Financial Times) gave him a bureaucratic dressing down in a speech the following day

With Higher Taxes Looming, Bonuses May Come Early - Some highly paid workers may be getting an extra Christmas present this year: an early bonus. Firms in bonus-heavy industries like finance, law and consulting typically pay their annual bonuses after Jan. 1, once the firm’s (and employee’s) previous calendar-year performance can be fully assessed. But now, anticipating higher income tax rates in 2013, some companies have decided to distribute their bonuses by Dec. 31 instead. At Ares Management, a financial services firm, employees have been told they will receive bonuses in mid-December instead of mid-January. A spokesman for the company declined to comment about its compensation practices. Paying bonuses early – not more, not less, just early — can save high-income employees quite a bit of cash. That is because a series of tax changes scheduled to kick in at the end of the year will cause income received in 2013 to be taxed at higher rates than income received in 2012.

Is Stability Creating Fragility? - Early this week,JPMorgan Chase announced that it had achieved “another major milestone” in the attempt to transform one of the most important markets in the financial system. Almost no one noticed. The reason why no one noticed is because the market in which JP Morgan’s [milestone was crossed—the tri-party repo market—is almost as obscure as it is important. The tri-party repo market is at the center of our financial markets. It’s where cash gets converted into credit that gets used by securities dealers to fund their operations. But its operations are little studied by specialists and academics, much less publicly discussed. The basic mechanics of the tri-party repo market are relatively straightforward. There are, as you can probably guess, three legs that prop up this market. The first leg are the primary dealers of Wall Street, the banks and securities broker-dealers (as well as some hedge funds) that require cash from investors to fund their securities portfolios. The second leg are the investors with tons of cash on hand—big banks, mutual funds and money market funds, Fannie and Freddie, and Japan’s ministry of finance—who lend it out to the securities dealers. The third leg are the “clearing banks” that facilitate the deals between the first two. There are two of these: JP Morgan Chase and Bank of New York Mellon

Simpler Is Better - On Saturday, The Wall Street Journal ran one of its trademark editorials making fun of government red tape—the massive regulations required to implement the Affordable Care Act; the 398 different rulemakings necessary to carry out the Dodd-Frank Act, and a great deal more. I seldom agree with the Journal’s editorial page, but it makes an unintentional point: Government regulations have become so complex that they can’t do their job. Or at best, the sheer complexity makes the government sitting ducks for the mischief of industry lobbyists looking to further complicate the rules with loopholes. But where does the complexity come from? It comes from the metastasized abuses of the private sector and the success of the business elite in getting government to pass laws with plenty of room for industry to maneuver. The Glass-Steagall Act of 1933, by contrast, was simplicity itself. It ran just a few pages and didn’t need 398 different rulemakings to carry it out. The act provided that you could either be a government-insured commercial banker or a risk-taking investment banker. Full stop. It drew a nice, simple bright line. The trouble crept in when industry lobbying succeeded in blurring the line.

Top Culprit in the Financial Crisis: Human Nature - Carmen Reinhart and Kenneth Rogoff have spent countless hours studying financial crises and debt bubbles. And unfortunately for those with an upbeat economic forecast, their news is not good. For one thing, they expect growth to remain challenged for a long time, thanks in part to the aftermath of the debt binge of the 2000s. "In the advanced economies, think of trend growth being a percentage point lower for a decade more, possibly even two decades more," says Rogoff, a Harvard economics professor who in 2009 co-authored This Time Is Different, with Reinhart, who teaches about the international financial system at Harvard's John F. Kennedy School of Government. The two recently came to Manhattan, where they had a lively discussion with a Barron's editor. They agree that the proper regulatory framework to prevent another severe crisis is achievable. "But can we stay there?" Reinhart asks. For the answer to that question and many others, read on.

Mirabile Dictu! Regulators Using Trading Scandals to Push for Tougher Capital Requirements - Yves Smith - Most news reports on financial regulatory reform hew to a few storylines: banks pushing back in private and winning on diluting regulatory reform; banks attributing lousy profits to new regulations (with a notable lack of proof of this convenient blame-shifting); bank regulators demonstrating capture, corruption and incompetence.  So it’s refreshing to see a contrasting storyline: Regulators threatening to get tough. Whether they will or not is an entirely different matter, but even noising up that they might do something is more pushback than we’ve seen in a while.  And the newest reason is that the recent (more accurately, ongoing) spate of trading scandals had led the authorities to fret that current capital levels don’t make sufficient allowance for operational risk.  The Financial Times article on this new show of regulatory resolve cited the recently-tried UBS trading scandal and the JP Morgan London Whale fiascos as the proximate causes. It’s curious not to see the recent poster child of operational failures, MF Global, included. Admittedly, it’s wasn’t a too-big-to-fail concern, but it had operational breakdown on multiple fronts, including lack of proper controls over cash movements and inadequate intra-day reporting. I nevertheless found parts of this piece surprising, and not in a good way. For instance: Regulators are particularly concerned that banks may not have enough capital to cover losses from operational risk and may not be doing enough to tackle potential problems when many are slashing back-office staff and technology expenditure…. Technology and infrastructure issues are critical, including business continuity, outsourcing and data protection, people and conduct problems as well as mis-selling and other product-related problems. As a rule of thumb, roughly 50 to 75 per cent of a big bank’s capital requirements stem from credit risk, 10 to 20 per cent from operational risk and the rest from trading. Regulators are already rethinking the capital rules for credit and trading, and operational risk is next on the agenda.

SAC Capital: Feds Are Probing Insider Trading Scandal - SAC Capital, the giant hedge fund run by billionaire Wall Street titan Steven A. Cohen, informed its clients on Wednesday that the firm is under investigation by the Securities and Exchange Commission, according to multiple reports. In a brief 8 a.m. conference call, Tom Conheeney, SAC’s president, told clients that the $14 billion hedge fund has received a so-called Wells Notice from the SEC, which is often a precursor to formal charges, according to multiple reports. SAC is grappling with the fallout from a federal insider trading investigation, following the arrest of one of its former portfolio managers, Mathew Martoma, who is accused of orchestrating a $276 million fraud. Martoma, who appeared on $5 million bail in U.S. federal court on Monday in New York City, has been charged with misusing information he got from a University of Michigan doctor involved in an important pharmaceutical drug trial in 2008. Martoma, a 38-year-old graduate of Stanford Business School, has been charged with one count of conspiracy to commit securities fraud and two counts of securities fraud; each fraud count carries up to 20 years in prison. He was arrested by the FBI at his home in Boca Raton, Fla., last Tuesday morning. On Monday, a federal judge affirmed his bail and ordered Martoma and his family to surrender their passports. In other words, he’s not going anywhere.

Why Robert Khuzami Would Be a Terrible Choice to Head the SEC - Yves Smith - Given that the Obama Administration appears to think that missing-in-action Attorney General Eric Holder has been doing a fine job, it probably isn’t surprising to see the SEC’s head of enforcement, Robert Khuzami, included on a short list of names rumored to be under consideration to head of the agency. I am old enough to remember when the SEC was feared on Wall Street, and it was due to the effectiveness of its enforcement head, Stanley Sporkin. The SEC’s lousy reputation is the direct outcome of its terrible record on enforcement. Promoting Khuzami to lead the SEC would cement this institutional failure.  Let’s look at the SEC’s record of enforcement fiascoes under Khuzami. The only thing he can claims is getting some bigger fry than usual on the insider trading front: Raj Rajaratnam, Rajat Gupta, and closing in on the SEC’s big target, Steve Cohen. Well, I suppose it’s nice that the SEC is becoming a better one-trick pony. But the wake of the biggest financial crisis in three generations was the time for the agency to up its game, and the SEC has failed miserably. We’ll s go through some examples of glaring Khuzami failures. Mind you, I’ve had to restrain myself; I could easily have written a post three times as long.

CFTC Cracks Down on Intrade -- CFTC Press Release: The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil complaint in federal district court in Washington, DC, charging Intrade The Prediction Market Limited (Intrade) and Trade Exchange Network Limited (TEN), Irish companies based in Dublin, Ireland, with offering commodity option contracts to U.S. customers for trading, as well as soliciting, accepting, and confirming the execution of orders from U.S. customers, all in violation of the CFTC’s ban on off-exchange options trading. Intrade and TEN jointly operate an online “prediction market” trading website, through which customers buy or sell binary options which allow them to predict (“yes” or “no”) whether a specific future event will occur, according to the CFTC’s complaint. Specifically, according to the complaint, from September 2007 to June 25, 2012, Intrade and TEN operated an online “prediction market” trading website, which allowed U.S. customers to trade options products prohibited by the CFTC’s ban on off-exchange options trading. Through the website, Intrade and TEN allegedly unlawfully solicited and permitted U.S. customers to buy and sell options predicting whether specific future events would occur, including whether certain U.S. economic numbers or the prices of gold and currencies would reach a certain level by a certain future date, and whether specific acts of war would occur by a certain future date.

New Financial Overseer Looks for Advice in All the Wrong Places - The financial industry is obsessed with President Obama's second-term regulatory appointments. Who will be Treasury secretary? Who could head the Federal Housing Finance Administration? But hardly anyone is paying much attention to the Office of Financial Research. This entity was created by the Dodd-Frank Act to conduct independent research on the sweeping risks to the financial system. Ah, right, another group of Washington wonks who will issue reports carrying vague warnings of risks looming sometime in the uncertain future. Yawn. I hadn't paid much attention either. But then I spoke to Ross Levine, an economist and specialist in regulation at Haas School of Business at the University of California, Berkeley, and I finally got it. The Office of Financial Research is a great idea. And as I grasped it, I felt a minor sense of horror, as when you see a precious ring slip off a finger in slow motion and go down the drain while you are powerless to stop it. The office is looking as if it will be a tool of the financial services industry, instead of a check on it. Its main role is to serve the Financial Stability Oversight Council, providing the systemic risk overseer with data and analysis of where the nukes are buried. But the Office of Financial Research was hobbled from the get-go by a poor design. It is housed in the Treasury Department, while ostensibly being independent of it. It has a small budget. And it has to report to the very regulators it is supposed to report on.

Bankers, Lawmakers Take Aim at Basel Rules - Several banking and insurance executives on Thursday took aim at bank-capital standards being developed by U.S. regulators, amid bipartisan criticism about how the proposed rules could impact banks and the economy.The so-called Basel III rules, designed to strengthen banks’ ability to withstand financial turmoil, also came under fire at a hearing on Capitol Hill from lawmakers who are concerned about how they will affect community banks in their districts, and whether they will impede consumers’ ability to get mortgages and other loans. The proposal “may force out of business a lot of community and regional banks,” said Rep. Carolyn Maloney (D., N.Y.) at a House subcommittee hearing.

Dropping the Ball on Financial Regulation - Simon Johnson - With regard to financial reform, the outcome of the November election seems straightforward. At the presidential level, the too-big-to-fail banks bet heavily on Mitt Romney and lost; President Obama received relatively few contributions from the financial sector, in contrast to 2008. In Senate races, Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio demonstrated that it was possible to win not just without Wall Street money but against Wall Street money. More broadly, this political shift coincides with and matches a significant change of views within the regulatory community. To pick these up, you need to listen carefully, but the signs are unmistakable. The Federal Deposit Insurance Corporation is firmly in the hands of sensible people. The Federal Reserve governor Daniel Tarullo is making all the right noises, including about the need for a cap on the nondeposit liabilities of our largest banks. Even Bill Dudley, the president of the New York Fed and a former Goldman Sachs executive, now acknowledges that too-big-to-fail is still with us. If the New York Fed is getting past denial, we are making progress. At the Treasury Department, however, the tone and the content of messages on financial reform sound increasingly discordant. Recent signals suggest that appeasing powerful players within the financial sector is still high on the agenda for Treasury Secretary Timothy Geithner.

Can Open Source Ratings Break the Ratings Agency Oligopoly? - Yves Smith - One of the causes of the financial that should have been relatively easy to fix was the over-reliance on ratings agencies. They wield considerable power, suffer from poor incentives, in particular, that they can do terrible work yet are at no risk of being fired thanks to their oligopoly position, and are seldom exposed to liability (they have bizarrely been able to argue that their research is journalistic opinion, which gives them a First Amendment exemption). But they are not big enough moneybags to be influential donors, nor are they critical to the financial infrastructure.  Yet they’ve managed to stymie meaningful reforms. Scarecrow and Jane Hamsher detailed how Standard & Poors started threatening to downgrade US debt just as provisions in Dodd Frank that would have made them liable for their opinions, just like other experts, were moving towards a vote. And, mirabile dictu, they managed to get that provision stripped from the bill.  Note that the EU is in the process of imposing rules that would make the ratings agencies liable for “mistakes in case of negligence or intent.” This presumably would apply only on ratings of issuers based in the Eurozone; if a European investor relied on ratings to invest in a US security, these rules would not apply. Some commentators are skeptical of other provisions, namely, ones to curb sovereign debt ratings and restrict ownership of ratings agencies. At the same time, even though ratings of structured products have proven to be sorely wanting, investors still prefer having a bad metric to no metric, particularly since that allows them to shift blame if Something Bad Happens (“everyone else in the industry uses them, we would have lost business if we tried something different”).

Record Corporate Profits - United States corporate profits reached a record high in the third quarter of this year, even adjusted for inflation, according to a report from the Bureau of Economic Analysis. The increase from the second quarter was entirely a result of stronger business at home. Profits received from American-owned businesses abroad fell slightly in the third quarter, which may not be surprising given the recession in Europe and the slowdown in China. Additionally, all of the growth in domestic corporate profits was accounted for by the financial sector. Domestic profits of financial corporations rose $71.3 billion in the third quarter, after falling $39.7 billion in the second. Domestic profits of nonfinancial corporations, on the other hand, decreased $1 billion in the third quarter, after rising $27.8 billion in the second quarter.

Fed Must Watch Markets Closely, Official Says - Central bankers must maintain a constant and active vigilance over central markets as part of a bid promote financial stability, a top official from the Federal Reserve Bank of New York said Tuesday. Speaking at gathering held at the New York University‘s Stern School of Business, Simon Potter, who heads up the New York Fed’s critical Markets Group, said real-time information is critical to good policy making. The Markets Group is charged with implementing the monetary policy goals set forth by the central bank’s Federal Open Market Committee. Mr. Potter’s job is to lead the implementation of central bank policy. As such, his speech dealt primarily with the lessons he learned as a bank economist at the New York Fed during the financial crisis. He didn’t make any forward looking comments about monetary policy or the economy. Mr. Potter became head of the Markets Group earlier this year.

Head Of The Fed's Trading Desk Speaks On Role Of Fed's "Interactions With Financial Markets" -  In what is the first formal speech of Simon "Harry" Potter since taking over the magic ALL-LIFTvander wand from one Brian Sack, and who is best known for launching the Levitatus spell just when the market is about to plunge and end the insolvent S&P500-supported status quo as we know it, as well as hiring such sturdy understudies as Kevin Henry, the former UCLA economist in charge of the S&P discuss the "role of central bank interactions with financial markets." He describes the fed "Desk" of which he is in charge of as follows: "The Markets Group interacts with financial markets in several important capacities... As most of you probably know, in an OMO the central bank purchases or sells securities in the market in order to influence the level of central bank reserves available to the banking system... The Markets Group also provides important payment, custody and investment services for the dollar holdings of foreign central banks and international institutions." In other words: if the SPX plunging, send trade ticket to Citadel to buy tons of SPOOSs, levered ETFs and ES outright. That the Fed manipulates all markets: equities most certainly included, is well-known, and largely priced in by most, especially by the shorts, who have been all but annihilated by the Fed. But where it gets hilarious, is the section titled "Lessons Learned on Market Interactions through Prism of an Economist" and in which he explains why the Efficient Market Hypothesis is applicable to the market. If anyone wanted to know why the US equity, and overall capital markets, are doomed, now that they have a central planning economist in charge of trading, read only that and weep..

How Are We Going to Create Jobs in America With Stock Offerings Like These - America doesn’t have a jobs problem; it has an IPO problem.  The lack of jobs can be directly correlated to the misallocation of capital by Wall Street to financial wagers instead of directing the flow of capital into job producing growth industries.  A review of the 201 initial public offerings (IPOs) at the New York Stock Exchange so far this year, shows that 99 were financial wagers on old debt and/or equity instead of new listings of real companies making real products to create real jobs.  The 99 IPOs were closed end mutual funds or ETFs (Exchange Traded Funds).  Another 11 listings were banks or financial firms.  One of the financial firms is KKR Financial Holdings LLC.  This is how it describes itself on its web site: “KFN, is a New York Stock Exchange-listed specialty finance company with expertise in a range of asset classes. KFN’s core business strategy is to leverage the proprietary resources of its manager with the objective of generating both current income and capital appreciation. KFN is externally managed by KKR Financial Advisors LLC, a wholly-owned subsidiary of KKR Asset Management LLC, which is a wholly owned subsidiary of Kohlberg Kravis Roberts & Co. L.P.”  Does that sound like a growth industry with a breakthrough innovation that will jumpstart jobs in America? 

Glass-Steagall, the Four Horsemen, and the Crippled Job Market -  Committees in both the Senate and House of Representatives have now begun to look beyond the Wall Street carnage of 2008 to the intractable problem of creating jobs in America.  There is concern that the framework of Wall Street is creating structural impediments to job creation.  Those concerns are very real. In November 2009, David Weild and Edward Kim authored a study for the accounting firm, Grant Thornton LLP titled “A Wakeup Call for America.”  The study made the following startling findings: Since 1991, the number of U.S. exchange-listed companies is down more than 22 percent, and when adjusted for real GDP growth (inflation-adjusted), that percentage balloons to a startling 53 percent.360 new listings per year — a number we’ve not approached since 2000 — are required to replace the number of listed companies lost in the U.S. In fact, the U.S. has averaged fewer than 166 IPOs per year since 2001, with only 54 in 2008. (Those numbers do not include listings of funds, ETFs, REITs.) Up to 22 million U.S. jobs may have been lost because of the broken U.S. IPO market.

Ex-Hedge Fund Manager to Face $276 Million Insider Trading Case - A former hedge fund portfolio manager charged in one of the biggest insider trading cases in history was due in a New York federal court after an investigation that touched on the activities of one of the nation’s wealthiest financiers. Mathew Martoma’s court date Monday was expected to be largely procedural, though there could be some discussion of the $5 million bail set for him last week in Florida. He was arrested at his home in Boca Raton, Fla., but the case is based in New York. While working for CR Intrinsic Investors LLC between 2006 and 2008, Martoma exploited an acquaintance with a medical school professor to get confidential, advance results from tests of an Alzheimer’s disease drug, Manhattan U.S. Attorney Preet Bharara’s office said.Then Martoma used the information to make more than $276 million for his fund and others, prosecutors said. First he led other investment advisers to buy shares in the drug companies, and then he and the others ditched their investments before the public found out about the drug trial’s disappointing results, allowing them all to make big profits and avoid huge losses, according to prosecutors.

Five Questions on the FSOC’s Proposed Recommendations for Money Market Mutual Fund Reform - Treasury blog - Earlier this month, the Financial Stability Oversight Council (the Council) voted unanimously to advance proposed recommendations for money market mutual fund (MMF) reform for public comment.  Here are five frequently asked questions about MMFs:

B of A CEO Apparently Can’t Remember Anything - Taibbi - Thank God for Bank of America CEO Brian Moynihan. If you're a court junkie, or have the misfortune (as some of us poor reporters do) of being forced professionally to spend a lot of time reading legal documents, the just-released Moynihan deposition in MBIA v. Bank of America, Countrywide, and a Buttload of Other Shameless Mortgage Fraudsters will go down as one of the great Nixonian-stonewalling efforts ever, and one of the more entertaining reads of the year.  In this long-awaited interrogation – Bank of America has been fighting to keep Moynihan from being deposed in this case for some time – Moynihan does a full Star Trek special, boldly going where no deponent has ever gone before, breaking out the "I don't recall" line more often and perhaps more ridiculously than was previously thought possible. Moynihan seems to remember his own name, and perhaps his current job title, but beyond that, he'll have to get back to you. The MBIA v. Bank of America case is one of the bigger and weightier lawsuits hovering over the financial world. Prior to the crash, MBIA was, along with a company called Ambac, one of the two largest and most reputable names in what's called the "monoline" insurance business.

 Regulate U.S. Markets Like the Nuclear Industry - With the uncertainty of the U.S. presidential election behind us, it’s time for regulators of financial markets to get serious about preventing market malfunctions -- from out-of-control algorithms to initial public offerings marred by technology breakdowns. To some wary investors, these incidents show that the markets are unstable, unreliable and tilted against them. Given the extraordinary complexity of today’s lightning-fast equities markets and the speed of technological change, there is no single solution. Yet a logical place to start is a fresh approach to the regulation of U.S. stock exchanges. For the past two decades, the Securities and Exchange Commission has overseen exchanges by inspecting them occasionally and urging them, voluntarily, to examine themselves, file annual reports, and notify the agency of planned technology changes and significant system outages. In the past year, the SEC has also charged two exchanges, Direct Edge and the New York Stock Exchange, with unintentional rule violations, and may be investigating cases against others.The SEC has highlighted these enforcement actions as proof that it’s getting tough on exchanges. In fact, the actions reveal regulatory failures. If Direct Edge had weak internal controls that caused a significant glitch in November 2010, as the SEC alleged, why did the commission grant it a license to operate as an exchange just four months earlier?

Why Doesn't Someone Undercut Payday Lending? -A payday loans works like this: The borrower received an amount that is typically between $100 and $500. The borrower writes a post-dated check to the lender, and the lender agrees not to cash the check for, say, two weeks. No collateral is required: the borrower often needs to show an ID, a recent pay stub, and maybe a statement showing that they have a bank account. The lender charges a fee of about $15 for every $100 borrowed. Paying $15 for a two-week loan of $100 works out to an astronomical annual rate of about 390% per year. But for those who think like economists, complaints about price-gouging or unfairness in the payday lending market raise an obvious question: If payday lenders are making huge profits, then shouldn't we see entry into that  market from credit unions and banks, which would drive down the prices of such loans for everyone? Victor Stango offers some argument and evidence on this point in "Are Payday Lending Markets Competitive," which appears in the 2012 issue of Regulation magazine. Stango writes: "The most direct evidence is the most telling in this case: very few credit unions currently offer payday loans. Fewer than 6 percent of credit unions offered payday loans as of 2009, and credit unions probably comprise less than 2 percent of the national payday loan market. This “market test” shows that credit unions find entering the payday loan market unattractive. With few regulatory obstacles to offering payday loans, it seems that credit unions cannot compete with a substantively similar product at lower prices.

FDIC’s Hoenig Calls for More Rigorous Bank Exams - U.S. regulators should return to more rigorous regular examinations of the nation’s largest banks, a top regulator said Friday, providing more detail on his plans to rein in the biggest financial institutions. Thomas Hoenig, a board member of the Federal Deposit Insurance Corp. and a big-bank critic, called on regulators to perform full examinations of the biggest banks, rather than relying on models, stress tests or scrutinizing financial statements. “Effective bank supervision requires that authorities systematically examine a bank and assess its asset quality, liquidity, operations, and risk controls, judging its risk profile and whether it is well managed,” Mr. Hoenig said in remarks prepared for a speech in New York.

Unofficial Problem Bank list unchanged at 857 Institutions - Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The number of unofficial problem banks grew steadily and peaked at 1,002 institutions on June 10, 2011. The list has been declining recently. This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Nov 23, 2012. (repeat from last week, table is sortable by assets, state, etc.)  As expected, a very quiet week for the Unofficial Problem Bank List as it went without change. You have to go back to January 6th of this year for the last time it went a week unchanged. The list stands at 857 institutions with assets of $329.2 billion. A year ago, the list held 980 institutions with assets of $400.5 billion. Next week, the FDIC will likely release its actions through October 2012 and the Official Problem Bank List as of September 30, 2012. The difference between the two lists will likely drop from 187 at last issuance to the low 170s. Note: The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public. (CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.) As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest.

The Next Mortgage Crisis - Mortgage debt is falling and house prices are rising. A new cycle has begun. Previously underwater borrowers are able to refinance to much lower payments and increase their disposable income. Foreclosure sales are avoided by improved expectations of the borrower, lender, and housing investors. General confidence and consumption rebounds. Lenders lower their loss reserves, increase lending, and even hold loans on their balance sheet. Inflation will rise and the Fed will unwind their massive balance sheet. That cascade of change is good for almost everyone, but it will cause interest rates to rise in a couple of years, and someone will be exposed. That someone is probably mortgage REITs, who borrow short duration money in order to buy longer duration MBS and profit from the yield spread. Some mortgage REITs manage their risk by hedging interest rates with derivatives, and by buying adjustable rate mortgages rather than 30-yr fixed rates. But other REITs have spent little to manage their interest rate risk, which has allowed them to prosper greatly in a period of falling yields, and to grow into behemoths.Higher interest rates reduce mortgage refinancing, which causes a REIT's interest revenue to remain at the old, lower mortgage interest rate while their cost of borrowing simultaneously rises. After prolonged prevarications, a particularly risky REIT or two will falter. Their funding will dry up, and they will no longer be able to buy MBS. This drop in MBS demand will cause mortgage yields to rise higher and slow prepayments even more, including on borrowers who would have otherwise moved to another house.

Timiraos: "The FHA’s Biggest Loser" - A frequent topic on this blog back in 2005, 2006, 2007 and even in 2008 were FHA loans and DAPs (seller financed Down-payment Assistance Programs). With DAPs, the seller "donated" the down payment to a non-profit (for a fee of course), and the non-profit gave the down payment to the buyer.  This allowed people to get around the FHA's down payment requirement, and to buy for no money down. For nerdy details, see Tanta's DAP for UberNerds DAPs were finally banned in 2008 after wrecking havoc on the FHA's finances. From Nick Timiraos at the WSJ: FHA’s Biggest Loser: No-Money-Down Mortgages A big chunk of the losses leading to a $16.3 billion shortfall have come from programs that allowed home sellers to fund down payments via nonprofit groups that provided them to buyers as a “gift.” After trying for years, the FHA finally prevailed on Congress to shut down the programs in late 2008, but not before the agency backed billions in risky no-money-down loans as home prices were dropping fast...Seller-funded down-payment assistance loans accounted for just 4% of outstanding loans at the end of September, but they represented 13% of all seriously delinquent mortgages, according to a recently released audit. The audit said that had the FHA not allowed the programs to go forward, then the mortgage program’s $13.5 billion net worth deficit would have turned to a positive $1.77 billion. The FHA made many bad loans in fiscal years 2008 and 2009 (from October 2007 through October 2009) when private capital left the mortgage market, and the FHA saw a huge surge in market share. With falling house prices, and low down payment loans, many of these borrowers defaulted.

The FHA may not need a bailout after all - As expected, the FHA is having a tough time with its mortgage insurance fund (the Capital Reserve Account), which moved into negative territory this year (about $16bn in the red). The agency simply hasn't been charging enough for insurance on the extremely low down-payment (almost 30x leverage) mortgages it guarantees (see discussion). The media and some politicians have been expecting the agency to tap taxpayer funds in order to recapitalize the insurance fund (in Q3 of 2013). But a recent report from Barclays suggests that it may not have to. Here are some reasons:
1. One of the worst performing components of the FHA's portfolio is made up of seller-funded down-payment mortgages. The agency no longer insures such transactions. However these legacy positions are proving to be painful.WSJ: - A big chunk of the losses leading to a $16.3 billion shortfall have come from programs that allowed home sellers to fund down payments via nonprofit groups that provided them to buyers as a “gift.” After trying for years, the FHA finally prevailed on Congress to shut down the programs in late 2008, but not before the agency backed billions in risky no-money-down loans as home prices were dropping fast. With no additional such mortgages since 2008, this seller-funded portfolio is shrinking in size relative to the whole portfolio and is expected to become less problematic soon.
2. The fund capitalization calculation does not include the brisk origination business and improved fees the agency has been enjoying recently. In the last two years, the FHA has been steadily increasing its mortgage insurance premiums (MIPs) - something the agency should have done years ago.

LPS: Mortgage delinquencies decreased in October, Percent in foreclosure process lowest since August 2009 - LPS released their First Look report for October today. LPS reported that the percent of loans delinquent decreased in October compared to September, and declined about 7% year-over-year. Also the percent of loans in the foreclosure process declined sharply in October and are the lowest level since August 2009. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 7.03% from 7.40% in September (delinquencies increased seasonally in September). Note: the normal rate for delinquencies is around 4.5% to 5%. The percent of loans in the foreclosure process declined to 3.61% from 3.87% in September.  The number of delinquent properties, but not in foreclosure, is down about 10% year-over-year (400,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 19% or 412,000 year-over-year. The percent (and number) of loans 90+ days delinquent and in the foreclosure process is still very high, but the number of loans in the foreclosure process is starting to decline fairly quickly.

Fannie Mae, Freddie Mac Mortgage Serious Delinquency rates declined in October - Fannie Mae reported that the Single-Family Serious Delinquency rate declined in October to 3.35% from 3.41% September. The serious delinquency rate is down from 4.00% in October last year, and this is the lowest level since March 2009.The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.Freddie Mac reported that the Single-Family serious delinquency rate declined in October to 3.31%, from 3.37% in September. Freddie's rate is down from 3.54% in October 2011, and this is the lowest level since August 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.  Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure".

Where Are the Foreclosures? - Bloomberg has a story Foreclosure Wave Averted as Doomsayers Defied. I think it's a great example of defining deviancy downward. There's no question that we haven't seen a foreclosure tsunami in the wake of the federal-state servicing fraud settlement. But there was little reason to expect one and let's not lose sight of the big picture--foreclosure levels are still incredibly high.  Here's why it didn't make a lot of sense to expect a huge pick up in foreclosures: there simply isn't the system bandwidth to handle them. Servicers really can't move significantly more foreclosures through the courts/trustee systems if they wanted. States have adopted all kinds of approaches that have significantly slowed down the foreclosure process. If I started a foreclosure in New York state today, I probably wouldn't have title and possession until early 2015. To the extent they could, it would risk pushing down housing prices and triggering more defaults. Moreover, the banks' plan for several years has been to slowly recognize losses against earnings. If all defaults had been foreclosed at once, the banking system would look a lot less solvent. The game plan has always been to run the clock.  Hence all the "kick the can down the road" mods. As a result, what we're likely to see is not a foreclosure tsunami, but rather an extended foreclosure high-tide. 

Congress Urged to Save Expiring Mortgage Relief Tax Break - Congress has been urged to extend a $1.3 billion federal tax break on write-offs of mortgage debt that may expire at the end of the year even as lenders are increasingly cutting loan principal to help troubled borrowers. The Mortgage Debt Relief Act of 2007 enables borrowers to avoid paying income taxes on the amount of principal that’s forgiven as part of a loan modification or during a short sale in which they sell their homes for less than they owe. If the measure expires, homeowners would have to count such debt reduction as money they earned. Whether Congress will act by the end of the year remains to be seen. The fate of tax break is largely bound up in the negotiations over the fiscal cliff. Though Democrats and some Republicans have called for the extension, the debt forgiveness measure would probably come as part of a broader package of tax- law changes. The expiration of the tax break comes at the same time that federal policies are making short sales and other forms of debt forgiveness more common. Advocates for homeowners and mortgage industry participants say the break’s expiration could jeopardize progress made this year working through the backlog of troubled loans resulting from the housing market crisis.

JPMorgan's forecast for 2013 shadow inventory - As discussed earlier the housing shadow inventory is in part being fed by re-defaults on modified mortgages. One of the comments we got (h/t rjs0) was that the recent spike in re-defaults (see post) may have been caused by the release of iPhone5 (impulsive borrowers would forgo mortgage payments to buy a new phone). That's a frightening thought (and an amazing achievement for Apple). The larger picture however points to a decline in shadow inventory in 2013. JPMorgan anticipates 650K of re-defaults (could be worse if Apple comes up with a new popular product) and 1.2 million of new delinquencies. At the same time existing delinquencies are working their way through the "python" (see post from a year ago) - modifications, short sales, and liquidiations. The forecast is a net 380K reduction

Vital Signs Chart: Record Low Mortgage Rates - Mortgage rates have again dropped to their lowest levels on record. The rate for a 30-year fixed mortgage fell to 3.31% last week from 3.34% a week earlier and nearly 4% a year ago. Low rates are encouraging more Americans to buy homes or refinance their mortgages. Many investors expect the Federal Reserve to continue buying mortgage-backed securities to keep rates low and spur demand.

Freddie Mac: Mortgage Rates Near Record Lows - From Freddie Mac today: Mortgage Rates Virtually Unchanged - Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgage rates virtually unchanged and remaining near their record lows ...  30-year fixed-rate mortgage (FRM) averaged 3.32 percent with an average 0.8 point for the week ending November 29, 2012, up from last week when it averaged 3.31 percent. Last year at this time, the 30-year FRM averaged 4.00 percent.  15-year FRM this week averaged 2.64 percent with an average 0.6 point, up from last week when it averaged 2.63 percent. A year ago at this time, the 15-year FRM averaged 3.30 percent.  This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®. The Freddie Mac survey started in 1971 and mortgage rates are currently near the record low for the last 40 years. It usually takes around a 50 bps decline from the previous mortgage rate low to get a significant refinance boom, and refinance activity has picked up. There has also been an increase in refinance activity due to HARP.

In order for the private sector to step into the mortgage market, g-fees need to rise - We've had a number of e-mails asking about the difference between the FNMA bond coupon and the actual mortgage rates (see discussion). The financing costs that the US government (the GSEs) pays is of course lower than the mortgage rate charged to the consumer. Much of that difference is from the so-called g-fees. Since the government effectively guarantees mortgages funded via the GSEs, it needs to get paid for that guarantee. In the past g-fees were significantly underpriced relative to the private sector. That was part of the reason for the housing bubble - the financing was artificially cheap. It was also the reason the GSEs' government bailout was so expensive - Fannie and Freddie didn't charge enough for the risk they took (and didn't reserve enough capital). That's about to change. The only way to shift at least some of the mortgage business to the private sector (currently the GSEs and the FHA own or guarantee over 90% of the US mortgage market) is to price the risk closer to where it would be priced in the private sector. Otherwise the private sector will never enter this market - other than to sell the mortgages banks originate to the government and keep the origination fees (which is what banks do now).The taxpayer also needs to recoup the Fannie and Freddie rescue expenses. That means the GSEs will need to raise their g-fees, which according to JPMorgan is exactly what they plan to do (chart below).

FHFA: HARP Refinance Boom Continued in September - Note: HARP is the program that allows borrowers with loans owned or guaranteed by Fannie Mae or Freddie Mac - and with high loan-to-value (LTV) ratios - to refinance at low rates.  Fannie or Freddie are already responsible for the loan, and allowing the borrower to refinance lowers the default risk. From the FHFAThe Federal Housing Finance Agency (FHFA) today released its September Refinance Report, which shows that Fannie Mae and Freddie Mac loans refinanced through the Home Affordable Refinance Program (HARP) accounted for nearly one-quarter of all refinances in the third quarter of 2012. More than 90,000 homeowners refinanced their mortgage in September through HARP with more than 709,000 loans refinanced since the beginning of this year. The continued high volume of HARP refinances is attributed to record-low mortgage rates and program enhancements announced last year.  In September, half of the loans refinanced through HARP had loan-to-value (LTV) ratios greater than 105 percent and one-fourth had LTVs greater than 125 percent. In September, 19 percent of HARP refinances for underwater borrowers were for shorter-term 15- and 20-year mortgages, which help build equity faster than traditional 30-year mortgages. Note: the automated system wasn't released until the end of March - and there were some issues with that system - so HARP refinances didn't really pickup until sometime in Q2. Now they are on pace for around 1 million refinances this year.   These "underwater" borrowers are current (most took out loans 5 to 7 years ago), and they will probably stay current with the lower interest rate. This table shows the number of HARP refinances by LTV through September of this year compared to all of 2011. Clearly there has been a sharp increase in activity. Note: Here is the September report.

HARP and QE3 will keep mortgage refi humming in 2013 - US mortgage prepayment speeds have accelerated to the highest level since 2004 recently. Most assume that this is all coming from recent mortgages with low loan-to-value ratios. As rates decline, those who took out a mortgage in 2010 for example are now refinancing it. But there is a bit more to the story. If one looks for example at the 5%, 30-year FNMA pool (these are loans paying roughly 5.5% interest on average), a different picture emerges. The pre-2009 "vintage" mortgage prepayment speed for these high coupon mortgages is higher. The chart below shows CPR (prepayment rate) by mortgage origination year. The short-term prepayment forecast from Credit Suisse looks similar. It means that the older mortgages with homes that are more likely to be "under water" are actually refinancing faster..The short-term prepayment forecast from Credit Suisse looks similar. It means that the older mortgages with homes that are more likely to be "under water" are actually refinancing faster.

LPS: House Price Index increased 0.1% in September, Up 3.6% year-over-year - The timing of different house prices indexes can be a little confusing. LPS uses September closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted. From LPS: U.S. Home Prices Up 0.1 Percent for the Month; Up 3.6 Percent Year-Over-Year Lender Processing Services ... today released its latest LPS Home Price Index (HPI) report, based on September 2012 residential real estate transactions. The LPS HPI combines the company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 15,500 U.S. ZIP codes. The LPS HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales. The LPS HPI is off 22.8% from the peak in June 2006. Note: The press release has data for the 20 largest states, and 40 MSAs. LPS shows prices off 54.4% from the peak in Las Vegas, 46% off from the peak in Riverside-San Bernardino, CA (Inland Empire), and barely off in Austin and Houston. Looking at the year-over-year price change, in May, the LPS HPI was up 0.4% year-over-year, in June the index was up 0.9% year-over-year, 1.8% in July, 2.6% in August, and now 3.6% in September. This is steady improvement on a year-over-year basis.

MBA: Purchase Mortgage Applications increase, Refinance Applications decrease From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey This week’s results include an adjustment for the Thanksgiving holiday. ...The Refinance Index decreased 2 percent from the previous week. The seasonally adjusted Purchase Index increased 3 percent from one week earlier.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.53 percent from 3.54 percent, with points remaining constant at 0.40 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.  This graph shows the MBA mortgage purchase index.  The purchase index has been mostly moving sideways over the last two years, however the purchase index has increased 8 of the last 10 weeks and is now near the high for the year.

Case-Shiller: Comp 20 House Prices increased 3.0% year-over-year in September - S&P/Case-Shiller released the monthly Home Price Indices for September (a 3 month average of July, August and September). This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities), and the quarterly National Index. From S&P: Home Prices Rise for the Sixth Straight Month According to the S&P/Case-Shiller Home Price Indices Data through September 2012, released today by S&P Dow Jones Indices for its S&P/Case-Shiller1 Home Price Indices ... showed that home prices continued to rise in the third quarter of 2012. The national composite was up 3.6% in the third quarter of 2012 versus the third quarter of 2011, and was up 2.2% versus the second quarter of 2012. In September 2012, the 10- and 20-City Composites showed annual returns of +2.1% and +3.0%. Average home prices in the 10- and 20-City Composites were each up by 0.3% in September versus August 2012. Seventeen of the 20 MSAs and both Composites posted better annual returns in September versus August 2012; Detroit and Washington D.C. recorded a slight deceleration in their annual rates, and New York saw no change.

Home Prices Rise Across the Country in September - In real estate, it’s all good — the data, that is. Housing prices rose all over the country in September, according to two data series released this week. The S&P/Case-Shiller 20-city composite home price index, a widely watched national measure released today, showed home prices gaining 3.0% over a year ago. Just as importantly, that index marked its sixth straight month of price increases. The Lender Processing Services Home Price Index, a slightly more bullish index because of the way it adjusts for foreclosure sales, was released Monday afternoon, and reported a price increase of 3.6% year-over-year in September. Both indices showed broad strength in the real estate markets. On a seasonally adjusted basis, 18 of the cities in the S&P/Case-Shiller composite showed gains, with only Chicago  dropping 0.7% from August and Tampa remaining flat. Atlanta, which had been lagging the housing recovery, appears to have come off the mat; the city posted a 1.7% increase in home prices from the previous month.

A Look at Case-Shiller, by Metro Area - Home prices extended their winning streak in the third quarter, according to the S&P/Case-Shiller indexes. The composite 20-city home price index, a key gauge of U.S. home prices, was up 0.3% in September from the previous month and increased 3% from a year earlier. Eighteen of the 20 cities posted annual increases in September. Chicago and New York notched annual declines. Thirteen cities posted monthly increase. On a national basis, home prices were up 3.6% from the previous year in the third quarter. The report marks the latest signal of stabilization in the long-suffering housing market. “Home price gains are becoming more widespread across cities, and some of the largest rebounds have been in areas that were most heavily affected during the initial housing slump. We expect this trend to persist into next year as part of a broad-based housing recovery that includes starts, sales, and prices,”  Read the full S&P/Case-Shiller release..

Case-Shiller House Price Comments and Graphs - Case-Shiller reported the fourth consecutive year-over-year (YoY) gain in their house price indexes since 2010 - and the increase back in 2010 was related to the housing tax credit. Excluding the tax credit, the previous YoY increase was back in 2006. The YoY increase in September suggests that house prices probably bottomed earlier this year (the YoY change lags the turning point for prices). The following table shows the year-over-year increase for each month this year: The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 31.4% from the peak, and up 0.3% in September (SA). The Composite 10 is up 4.2% from the post bubble low set in January 2012 (SA). The Composite 20 index is off 30.7% from the peak, and up 0.4% (SA) in September. The Composite 20 is up 4.7% from the post-bubble low set in January 2012 (SA). The second graph shows the Year over year change in both indices. The Composite 10 SA is up 2.1% compared to September 2011. The Composite 20 SA is up 3.0% compared to September 2011. This was the fourth consecutive month with a year-over-year gain since 2010 (when the tax credit boosted prices temporarily). The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices. Prices increased (SA) in 19 of the 20 Case-Shiller cities in September seasonally adjusted (15 of 20 cities increased NSA). Prices in Las Vegas are off 59.1% from the peak, and prices in Dallas only off 4.8% from the peak. Note that the red column (cumulative decline through September 2012) is above previous declines for all cities.

Price Rise Shows a Better Balanced U.S. Housing Market - The best evidence that the U.S. housing sector is recovering is the recent gains in home prices. Tuesday brought two reports on home values. The third-quarter S&P/Case-Shiller nationwide home price index was up 3.6% from its year-ago level, its second year-over-year gain. The Federal Housing Finance Agency uses different price methodology but came to the same basic conclusion: its third-quarter U.S. price index for purchased homes increased 4.0% from a year ago. The uptrend in prices shows supply and demand are in better balance in both new and existing home markets. Of course, new home construction feeds more into gross domestic product but demand for both types of housing is good for consumer confidence and leads to future home-related purchases such as appliances, textiles and landscaping services. Rising home values also filter through positively into other economic data. Home equity remains one of the main components of household wealth, and the rise in home prices is making homeowners feel richer while also offsetting the recent decline in stock values. (Of course, for a sustainable economic housing outlook, homeowners cannot fall into the credit trap seen during the boom: Homes are not ATMs to be tapped to finance purchases like vacations and cosmetic surgery. Luckily, more stringent bank-lending standards make that prospect less of a threat.) Another benefit of rising prices: fewer forced sales that could retrigger an oversupply of properties on the market. Economists at IHS Global Insight cite CoreLogic data showing the recent rise in home values means about 1 million fewer homeowners are underwater with their mortgages. .

Real House Prices, Price-to-Rent Ratio - Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio.  As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation. For the Case-Shiller National index, real prices declined slightly in Q3, and are up 1.7% year-over-year. The nominal Case-Shiller National index is up 3.6% year-over-year. Real prices, and the price-to-rent ratio, are back to late 1999 to 2000 levels depending on the index.The first graph shows the quarterly Case-Shiller National Index SA (through Q3 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through September) in nominal terms as reported.  In nominal terms, the Case-Shiller National index (SA) is back to Q1 2003 levels (and also back up to Q3 2010), and the Case-Shiller Composite 20 Index (SA) is back to August 2003 levels, and the CoreLogic index (NSA) is back to December 2003.  The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to mid-1999 levels, the Composite 20 index is back to June 2000, and the CoreLogic index back to February 2001. On a price-to-rent basis, the Case-Shiller National index is back to Q3 1999 levels, the Composite 20 index is back to July 2000 levels, and the CoreLogic index is back to February 2001.

Update: Case-Shiller House Prices will probably decline month-to-month Seasonally starting in October - This is just a reminder: The Not Seasonally Adjusted (NSA) monthly Case-Shiller house price indexes will show month-to-month declines soon, probably starting with the October report to be released in late December. The CoreLogic index has already started to decline on a month-to-month basis. This is not a sign of impending doom - or another collapse in house prices - it is just the normal seasonal pattern. Even in normal times house prices tend to be stronger in the spring and early summer, than in the fall and winter. Currently there is a stronger than normal seasonal pattern because conventional sales are following the normal pattern (more sales in the spring and summer), but distressed sales (foreclosures and short sales) happen all year. So distressed sales have a larger negative impact on prices in the fall and winter. In the coming months, the key will be to watch the year-over-year change in house prices and to compare to the NSA lows in early 2012. As an example, the September CoreLogic report showed a 0.3% month-to-month decline in September from August, but prices were up 5.0% year-over-year. That was the largest year-over-year increase since 2006. I think house prices have already bottomed, and that prices will be up close to 5% year-over-year when prices reach the usual seasonal bottom in early 2013.

New home sales decline 0.3% - -- New home sales declined 0.3% in October, according to a government report released Wednesday. Despite the monthly drop, sales were still up 17% from a year earlier. New houses sold at an annual rate of 368,000 in the month, down from 369,000 in September, according to a report from the U.S. Census Bureau and the Department of Housing and Urban Development. The September sales were revised downward from 389,000. October sales fell far below expectations from economists, who had forecast they would rise to 388,000, according to New home sales are an important component of the nation's overall economic activity, because they create construction jobs and spur the purchases of appliances, furnishings and other home goods. Despite October's decline, the new home market has been showing steady signs of improvement. The market has increased more than 20% so far this year. The pace of home building has also gone up, rising to its highest level in more than four years in October, according to a separate government report last week.

New home sales fall 0.3% in October - After a spike in September, new single-family home sales fell 0.3% to 368,000 last month, according to the U.S. Census Bureau. Sales dropped from September’s 389,000, but were 17.2% higher than a year ago when only 314,000 units were sold. In October, the median sales price of a new home was $237,000, while the average sales price was $278,900. “The Commerce Department doesn't note any specific reasons for the downward revision to September but it does note that Hurricane Sandy had only a minimal effect on October, hitting at month end and in an isolated area of the country,” said research firm Econoday. “Sales in the Northeast, which in any case is by far the least active region in the report, fell 32 percent in the month.” At the end of October, the number of new homes for sale reached 147,000, representing a 4.8-month supply of homes at today's sales pace. “Attention turns tomorrow to the pending home sales index which will offer an advanced indication on existing home sales which, like new home sales, have had difficulty gaining much steam,” said Econoday.

US Sales of New Homes Dip 0.3 Percent in October - U.S. sales of new homes fell slightly in October and the September sales pace was slower than initially thought. The Commerce Department said Wednesday that new-home sales dipped 0.3 percent in October to a seasonally adjusted annual rate of 368,000. That’s down marginally from the 369,000 pace in September, which was revised lower from an initially reported 389,000. Sales are still 20.4 percent higher than the same month last year. Still, new-home sales are well below the annual rate of 700,000 that economists consider healthy. Sales fell a sharp 32.3 percent in the Northeast, but the government said Hurricane Sandy had only a minimal effect on the housing data because it hit at the end of the month. The improvement in the new-home market this year follows other reports that show the housing market starting to recover more than five years after the bubble burst.

New Home Sales at 368,000 SAAR in October - The Census Bureau reports New Home Sales in October were at a seasonally adjusted annual rate (SAAR) of 368 thousand. This was down from a revised 369 thousand SAAR in August (revised down from 389 thousand). The first graph shows New Home Sales vs. recessions since 1963.  Sales of new single-family houses in October 2012 were at a seasonally adjusted annual rate of 368,000 ... This is 0.3 percent below the revised September rate of 369,000, but is 17.2 percent above the October 2011 estimate of 314,000.The second graph shows New Home Months of Supply. The months of supply increased in October to 4.8 months. September was revised up to 4.7 months (from 4.5 months).  The all time record was 12.1 months of supply in January 2009.  This is now in the normal range (less than 6 months supply is normal).Starting in 1973 the Census Bureau broke inventory down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was just above the record low in October. The combined total of completed and under construction is also just above the record low since "under construction" is starting to increase. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In October 2012 (red column), 29 thousand new homes were sold (NSA). Last year only 25 thousand homes were sold in October. This was the third weakest October since this data has been tracked (above 2011 and 2010). The high for October was 105 thousand in 2005.

New Home Sales Decrease -0.3% for October 2012 - October New Residential Single Family Home Sales decreased -0.3%, or 368,000 annualized sales. July through September were all revised considerably lower. September was revised down from 389,000 to 369,000, which instead of the originally reported 5.7% increase gives a 0.8% change from August. August's single family new home sales were revised from 368 thousand to 366 thousand homes sold and July's annualized new home sales are now 366,000. Instead of that new home recovery so much touted new home sales are flat and less than May's 369,000 annualized sales. As we've repeatedly cautioned, beware of this report for most months the change in sales is inside the statistical margin of error and will be revised.  New single family home sales are now 17.2% above October 2011 levels, but this figure has a ±21.2% margin of error. A year ago new home sales were 314,000. Sales figures are annualized and represent what the yearly volume would be if just that month's rate were applied to the entire year. These figures are seasonally adjusted as well.  Case in point, the Northeast region was a -32.3% monthly decline in new home sales with an error margin of ±32.6%. The Midwest region saw a monthly new home sales surge of 62.2% yet this monthly percentage change has a ±80.5% margin of error, in other words, almost statistical noise. There are some blaming flat new home sales on Superstorm Sandy. The Census believes Sandy's impact was minimal and as we can see the flat sales were going on long before the storm hit on October 29th.  The average home sale price was $278,900, a -4.3% drop from last month's average price of $291,400. If one thinks about it, these prices are outside the affordability of most wages as it is.

Surprise: Right After The Election, New Home Sales Tumble From Downward Revised Two Year High - There are those who may be surprised that last month's number of Seasonally Adjusted New Home Sales, which was then reported at 389K, and which number hit the airwaves days before the Obama reelection, was the highest since April 2010. We are not among them, as we were fully expecting today's number to be a major revision of the September number lower - as just happened, with the whopper of a print revised far lower to 369K - but doubled down with the additional miss of expectations of Seasonally Adjusted annualized new home sales of 390K for October when in reality only 368K were sold. All these numbers are annualized. When observed on an as is basis, in October there was a grand total of 29,000 new homes sold in the entire USA, with the Northeast representing a whopping... 2,000 of this. Oh and of the 29,000 houses sold, 9,000 were not even started. And finally, for those who enjoy pointing out the rise in home prices driven only and exclusively by foreclosure inventory stuffing and removal of all such real estate from the open markets, both the median and average new home price ($237,700 and $278,900) printed at at the lowest since June. Oh wait, we know: Sandy's fault. Which explains all bad data. When the data is good, it is nobody's fault.

Vital Signs Chart: Sales of New Homes - Sales of newly built homes slowed in October. New single-family homes were sold at an annual rate of 368,000 last month, a 0.3% decline from September but 17.2% higher than a year earlier. The housing market is gathering steam, but its recovery is uneven. Sales slumped 32% in the Northeast last month, while jumping 62% in the Midwest and 9% in the West.

New Home Sales and Distressing Gap - New home sales in October were below expectations at a 368 thousand seasonally adjusted annual rate (SAAR). And sales for September were revised down from 389 thousand SAAR to 369 thousand. This has led to some worrying about the housing recovery, as an example from Reuters: New Home Sales Drop 0.3%, Cast Shadow on Recovery The data leaves the pace of new home sales just below the pace reported in May, suggesting little upward momentum the market for new homes. Yes, new home sales have been moving sideways for the last 6 months. However sales are still up significantly from 2011, and I expect sales to continue to increase over the next few years. New home sales have averaged 361,000 on an annual rate basis through October. That means sales are on pace to increase 18% from last year. Most sectors would be pretty upbeat about an 18% increase in sales. But even with the significant increase this year, 2012 will be the 3rd lowest year since the Census Bureau started tracking new home sales in 1963. This year will be above 2010 and 2011, but below the 375,000 sales in 2009.   I expect sales to double from here within the next several years as distressed sales continue to decline.The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through October. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren't able to compete with the low prices of all the foreclosed properties.

NAR: Pending Home Sales Index increases in October - From the NAR: Pending Home Sales Rise in October to Highest Level in Over Five Years The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 5.2 percent to 104.8 in October from an upwardly revised 99.6 in September and is 13.2 percent above October 2011 when it was 92.6. The data reflect contracts but not closings. ...Outside of a few spikes during the tax credit period, pending home sales are at the highest level since March 2007 when the index also reached 104.8. On a year-over-year basis, pending home sales have risen for 18 consecutive months. Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in November and December.  However, because of the increase in short sales that take longer to close, some of these contract signings are probably for next year.

Analysis: Housing Recovery Uneven - Sales of new homes in the U.S. slipped 0.3% in October and the previous month’s figures were worse than first estimated, a sign that the housing recovery remains uneven. Michelle Meyer, senior U.S. economist at Bank of America/Merrill Lynch, discusses today’s home-sales report with the Wall Street Journal Online’s Jim Chesko.

Housing Recovery: What Has Been Forgotten - As of late there has been a flood of commentary written about the housing recovery pointing to the bottom in housing and how the revival in housing will drive economic growth in the years ahead. Just recently USA Today wrote: Six years since the start of the greatest housing collapse since the Great Depression, one doesn't have to look very far to see signs of a recovery. Nationally, home prices are rising after more than a 30% drop since mid-2006. More good news arrived Tuesday, as the Standard & Poor's/Case-Shiller home price index reported third quarter prices were up 3.6% from a year ago and September's 20-city index reached its highest level in two years. Foreclosures have slowed in most of the country after having decimated hundreds of U.S. cities. Rather than being a drag on the U.S. economy, housing is now seen as a contributor to growth.  It is true that the revival in the housing market is a positive thing and is certainly something that everyone wants. However, the hype surrounding the nascent recovery to date may be a bit premature. The chart below shows the Total Housing Activity Index which is a composite index of new and existing home sales, permits and starts. The blue dashed box represents encompasses the much ballyhooed recovery since the recessionary lows.

Just Released: Press Briefing on Housing Conditions and the Economic Impact of Superstorm Sandy on the Region – NY Fed - At today’s regional economic press briefing, we provided an update on housing conditions as well as an initial assessment of superstorm Sandy’s economic impact on the region.  The housing sector is an important part of the overall economy, and it has played a key role in shaping the Great Recession and the recovery that has followed. While our region was largely spared the worst of the housing bust, many households—particularly in northern New Jersey and areas around New York City—continue to feel its economic consequences. Fortunately, housing conditions here have begun to show signs of steady improvement. At the same time, it’s important to recognize that housing conditions in the region’s most depressed markets remain sluggish. In addition, owing in large part to the long foreclosure process in New York and New Jersey, our region faces a large and growing backlog of foreclosures. So, while there have been some encouraging signs in our region’s housing markets this year, going forward there are still some significant challenges to broadening and sustaining the recovery that’s under way.  One immediate challenge is rebuilding and recovering from Sandy. Geographically, it appears that the hardest-hit areas were the coastal communities of Queens, Staten Island, Brooklyn, Long Island, Lower Manhattan, and the New Jersey shore. Physical damage to the region was primarily to homes and personal property, commercial property, and infrastructure. An immediate housing priority is the provision of shelter to those whose homes were severely damaged. As such, housing task forces have been formed to identify local housing needs, catalog vacant rental housing units, and investigate temporary housing options. On the business front, the focus has been on securing gap financing for firms to finance short-term cash flow while they restart their operations and await insurance settlements.

The Housing Recovery: From REO-To-Rent To Containers-To-Condos - With REO-to-Rent now yesterday's trade, the Baltic Dry Index stumbling along near its lows (along with a glut of containers), and a 'recovery' in US housing, what better than to leverage all of these themes; to wit, as ABC News reports, the first U.S. multi-family condo built of used shipping containers is slated to break ground in Detroit early next year. So forget Trailer Parks, now the increasingly mothballed ports of America will be wonderful waterfront property courtesy of your very own (slightly used) cargo container. One proponent of this 'cargotecture' warns that although containers can be bought for as little as $2,500, they should not be thought of as a low-cost housing solution. Tempted? We are sure; below are several current developments.

The Asset Price Meltdown and the Wealth of the Middle Class - I find that median wealth plummeted over the years 2007 to 2010, and by 2010 was at its lowest level since 1969. The inequality of net worth, after almost two decades of little movement, was up sharply from 2007 to 2010. Relative indebtedness continued to expand from 2007 to 2010, particularly for the middle class, though the proximate causes were declining net worth and income rather than an increase in absolute indebtedness. In fact, the average debt of the middle class actually fell in real terms by 25 percent. The sharp fall in median wealth and the rise in inequality in the late 2000s are traceable to the high leverage of middle class families in 2007 and the high share of homes in their portfolio. The racial and ethnic disparity in wealth holdings, after remaining more or less stable from 1983 to 2007, widened considerably between 2007 and 2010. Hispanics, in particular, got hammered by the Great Recession in terms of net worth and net equity in their homes. Households under age 45 also got pummeled by the Great Recession, as their relative and absolute wealth declined sharply from 2007 to 2010.

Home Equity Loans Make Comeback Fueling U.S. Spending -  Home equity lines of credit that fueled a spending spree during the U.S. property boom are back. After six years of declines, lending for so-called Helocs will rise 30 percent to $79.6 billion in 2012, the highest level since the start of the financial crisis in 2008, according to the economics research unit of Moody’s Corp. Originations next year will jump another 31 percent to $104 billion, it projected. Lending tied to real estate is reviving as record-low mortgage rates spur the housing recovery while an improving job market makes it easier for people to borrow. A rise in home equity lines is in turn helping the economy, fueling purchase of goods like televisions and refrigerators. Consumer spending, the biggest part of the economy, accelerated to a 2 percent annual rate last quarter from a 1.5 percent pace in the prior period. “If house prices continue to rise, home equity lending will keep rising,”“Lenders have been worried about the ability of consumers to pay back their loans, and as the economy improves, that concern is easing.” The median U.S. home price will probably gain 8 percent this year, the fastest pace of growth since 2005, according to the Mortgage Bankers Association in Washington. The amount of equity homeowners had in the second quarter rose by $406 billion to $7.3 trillion, the highest level since 2007.

NY Fed Mortgage Debt Data Says No US Recovery - Let me try to keep this short and still make the point I want to make. Lately, I've seen a huge amount of people talking about an economic recovery, certainly in the US, so much so that people who disagree with that assessment are labeled "doomer" or things like that. Again. It's an easy thing to do. I'll start with a graph from this New York Fed report. It depicts the - almost - 10-year development of US household debt, which culminates in a total of $11.31 trillion at the end of Q3 2012. The conclusion many people draw from the graph is that total debt is "still" falling. And that is supposed to mean that things are going well, or better if you will. But when I look at the graph, that's not the first thing I notice. What I see is mortgage debt at around $5 trillion in Q1 2003 and, after a peak just over $9 trillion in Q3 2008, slightly lower, at $8.03 trillion (the report provides the exact number), in Q3 2012. Which means that mortgage debt may have come down by about 11% over the past 4 years (while home prices, mind you, fell 33%, as per Case-Shiller), but it's still 60% (!) higher than it was in 2003. And one thing is certain: it can't stay there, and it won't. We can discuss till we're blue in the face how much it still has to go on the way south, and we can argue about how long that will take, but I would think the main point is very clear. That is, an economic recovery in the US is not possible when households still have to deleverage to the tune of $2-3 trillion. And no, it's not different here, or this time, and no, Americans cannot carry a 40% mortgage debt increase in 10 years either, so another $2 trillion move south is really the minimum.

Falling Mortgage Balances Offset Rising Student, Auto, Credit-Card Debt - Americans cut their debt further in the summer, with falling mortgage balances more than offsetting increases in other types of borrowing, new data show. Household debt — the money Americans owe on home, auto and student loans, credit cards and other types of consumer debt — fell by $74 billion in the third quarter to $11.31 trillion as of Sept. 30, the Federal Reserve Bank of New York said Tuesday. The drop reflected a continued decline in mortgage debt, as some households paid down balances while others lost their homes in foreclosure. Americans have reduced their debts by more than $2 trillion since household debt peaked in summer 2008, a process called deleveraging. Economists say the process will put households on a sounder financial footing in the long term, though it has sapped consumer spending and slowed growth in the short term.

Fed Says Household Debt Declined 0.7% in Third Quarter - Household debt in the U.S. fell 0.7 percent during the third quarter as a decline in real-estate borrowing outpaced rising student and auto loans, according to a Federal Reserve Bank of New York survey. Consumer indebtedness shrank by $74 billion to $11.31 trillion, according to a quarterly report on household debt and credit released today by the Fed district bank. Mortgage debt declined by $120 billion to $8.03 trillion, the lowest since 2006. Home-equity lines of credit fell by $16 billion, even as mortgage originations increased for the fourth straight quarter. “The increase in mortgage originations, auto loans and credit-card balances suggests that consumers are slowly gaining confidence in their financial position,” Americans have cut debt by $1.37 trillion from the peak in the third quarter of 2008, according to the New York Fed’s data. Borrowing outside of home financings climbed by 2.3 percent in the third quarter to $2.7 trillion as auto debt increased by $18 billion, student loans rose by $42 billion and credit-card balances grew by $2 billion, the survey showed.

Fed: Consumer Deleveraging Continued in Q3, Student Debt increases - From the NY Fed: Decrease in Overall Debt Balance Continues Despite Rise in Non-Real Estate Debt In its latest Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of New York announced that in the third quarter, non-real estate household debt jumped 2.3% to $2.7 trillion. The increase was due to a boost in student loans ($42 billion), auto loans ($18 billion) and credit card balances ($2 billion). During the third quarter of 2012, total consumer indebtedness shrunk $74 billion to $11.31 trillion, a 0.7% decrease from the previous quarter. The reduction in overall debt is attributed to a decrease in mortgage debt ($120 billion) and home equity lines of credit ($16 billion), despite mortgage originations increasing for a fourth consecutive quarter.“The increase in mortgage originations, auto loans and credit card balances suggests that consumers are slowly gaining confidence in their financial position,” said Donghoon Lee, senior economist at the New York Fed. “As consumers feel more comfortable, they may start to make purchases that were previously delayed.” Here is the Q3 report: Quarterly Report on Household Debt and Credit

Six Charts To Summarize The NY Fed's Un-Deleveraging Report - The NY Fed's quarterly smorgasbord of everything debt-related to the good old American household has little fresh and exciting from the top-down as the nation in aggregate (according to the data) continues to delever - though ever so slightly this time (-0.7% to $11.31tn of total consumer indebtedness) driven mostly by a drop in mortgage indebtnedness (defaults?). However, bottom-up things are a little more interesting; aside from the aforementioned Student Loan debt bubble going 'pop', the glorious states of California, Nevada, New Jersey, and New York each have a little something special for us to focus on as our nation (rightly so) slides uncomfortably down the deleveraging path and along with average collections at record highs, surging auto loans, and jumps in Nevada's new foreclosures, there's a little here for everyone. As Keynesian Yoda might have said, "Deleveraging is the path to the dark side; deleveraging leads to reduced credit demand; reduced credit demand leads to less growth; and less growth leads to suffering," though he might have also added (on the de minimus deleveraging that actually occurred): "size matters not."

U.S. Household Debt Is Totally Out Of Control -- We have a stunning chart today which illustrates why taking on boatloads of student debt is not a good "investment" for most young people. The New York Fed has updated the household debt numbers for Q3:2012. Read it and weep. In its latest Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of New York announced that in the third quarter, non-real estate household debt jumped 2.3 percent to $2.7 trillion.  The increase was due to a boost in student loans ($42 billion), auto loans ($18 billion) and credit card balances ($2 billion).   The Quarterly Report on Household Debt and Credit is based on data from the New York Fed’s Consumer Credit Panel, a nationally representative random sample drawn from Equifax credit report data.  During the third quarter of 2012, total consumer indebtedness shrank $74 billion to $11.31 trillion, a 0.7 percent decrease from the previous quarter.  The reduction in overall debt is attributed to a decrease in mortgage debt ($120 billion) and home equity lines of credit ($16 billion), despite mortgage originations increasing for a fourth consecutive quarter.      “The increase in mortgage originations, auto loans and credit card balances suggests that consumers are slowly gaining confidence in their financial position,” said Donghoon Lee, senior economist at the New York Fed.  “As consumers feel more comfortable, they may start to make purchases that were previously delayed.”

Rolling Jubilee Is a Spark—Not the Solution - The Rolling Jubilee kicked off a lively debate about the root causes of mass indebtedness, the government’s double standard where debt relief is concerned (why do banks, not people, get bailed out?), the powerful, coercive morality of debt repayment and the significance of activists entering the debt-buying industry. Looking ahead, the Rolling Jubilee has served as a kind of beacon, inspiring experts and laypeople alike to share their ideas for the next wave of the movement. The Rolling Jubilee is proving to be wildly effective public education, exposing the seedy underbelly of the debt system and the inequities it perpetuates. For the best part of a week—an eternity in the world of social media—regions of the Internet vibrated with discussion and crowd-sourced information about the internal workings of this murky marketplace. How many borrowers, hounded by collection agencies, knew how cheaply their harassers had bought out their loans? How many knew that original lenders get to “charge off” their defaulted accounts and take a tax break—another kind of bailout—before bundling them into portfolios for sale on this shadowy, secondary market?The Rolling Jubilee was not designed to be a feasible, long-term solution to the debt crisis in and of itself. Instead, it is a “bailout by the people, for the people,” a chance to offer others support and solidarity where the government has failed them. While critics like Yves Smith and Doug Henwood have focused on the limits of this tactic, what interests us are the possibilities this experiment opens up, the good will that is fostered, the conversations that it sparks and the new ideas and action plans that are percolating. Who knows where the jubilee will roll next or what its impact will be? Regardless, organizers are well aware that the result of debt cancellation, even on a mass scale, would be negligible unless it was coupled with a far deeper restructuring of our economic system. That is the prize our eyes are on, and that’s why Strike Debt chapters are now springing up in cities all across the country.

Household Income Stagnates, Again - Inflation-adjusted median annual household income was more or less flat in October, stuck at $51,378. That figure comes from Sentier Research’s analysis of the government’s Current Population Survey data, which is charted below. Gray areas indicate periods of official recession (which economists define as when the economy is actively shrinking, as opposed to growing). Annual median household income has been circling around the $51,000 mark for about two years, even though the recession officially ended more than three years ago. In fact, October’s median household income measure was 4.7 percent lower than its counterpart of $53,937 in June 2009, the official end of the Great Recession. Labor market measures usually trail other economic indicators (like manufacturing orders or some other categories of business spending), but measures of the job market and workers’ incomes have been particularly atrocious in this recovery. As you can see in the chart, incomes were relatively stagnant during the last expansion, too, indicating that flat living standards may have deeper causes than just the most recent business cycle.

Median Household Incomes: The "Real" Story - The traditional source of household income data is the Census Bureau, which publishes annual household income data each September for the previous year. Sentier Research, an organization that focuses on income and demographics, offers a more up-to-date glimpse of household incomes by accessing the Census Bureau data and publishing monthly updates. Sentier Research has now released its most recent update, data through September (available here as a PDF file). The data in their report differs from the Census Bureau's data in three key respects:

  1. It is a monthly rather than annual series, which gives a more granular view of trends.
  2. Their numbers are more current, the latest through October 2012. In September the Census Bureau released the 2011 annual numbers (going on nine months into the next year).
  3. Sentier Research uses the more familiar Consumer Price Index (CPI) for the inflation adjustment. The Census Bureau uses the little-known CPI-U-RS (RS stands for "research series") as the deflator for their annual data. For more on that topic, see this commentary.

Sentier makes the data available in Excel format for a small fee (here). I have used the latest data to create a pair of charts illustrating the nominal and real income trends during the 21st century. The first chart below chains the nominal values and real monthly values in October 2012 dollars. The red line illustrates the history of nominal median household income in today's dollars (as of the designated month). I've added callouts to show the latest value and the real monthly values for the January 2000 and the peak and post-peak trough in between.The blue line in the chart above paints the grim "real" picture. Since we've chained in October 2012 dollars and the timeframe has been inflationary, the earlier monthly values are adjusted upward accordingly. In addition to the obvious difference in earlier real values, we can also see that real incomes peaked before the nominal.

Vital Signs Chart: Stalling U.S. Incomes - U.S. incomes stalled this year after rising toward the end of 2011. Real median household income was up 1.2% on a seasonally adjusted basis in October from this year’s low of $50,757 in April. That’s according to a new study of Census data. At $51,378, median income is slightly above its year-ago level of $51,089, but well below the prerecession level of $54,761 in October 2007

Seasonally adjusted U.S. household median income - The source is here.

Household Services Expenditures: An Update - New York Fed - This post updates and extends my July 2011 blog piece on household discretionary services expenditures. I examine the most recent data to see what they reveal about the depth of decline in expenditures in the last recession and the extent of the recovery, and find that the expenditures appear to be further below the peak identified earlier. I then compare the pace of recovery for discretionary and nondiscretionary services in this expansion with that of previous expansions, finding that the pace in both cases is well below that of previous cycles. In summary, household spending continues to be constrained by a combination of credit conditions and weak income expectations. The chart below updates a similar chart from my previous post showing the extent of the decline in real per capita discretionary services expenditures from the previous peak. (A zero value in this chart and the following chart indicates that expenditures were above their previous peak.) The differences between this chart and the prior one result from two factors: the release of data for additional quarters; and the revisions of previously released data.

Consumer Spending in U.S. Grows Less Than Forecast - Consumer spending in the U.S. grew less than forecast in the third quarter, underscoring why Federal Reserve policy makers are zeroing in on fighting unemployment to spur the world’s largest economy. Household purchases climbed at a 1.4 percent rate, the smallest gain in more than a year and down from a previously reported 2 percent advance, revised figures from the Commerce Department showed today in Washington. Gains in inventories and a smaller trade deficit more than offset the slowdown to propel gross domestic product to a 2.7 percent rate, exceeding the 2 percent pace previously reported. “The economy is moving forward at a moderate pace,” . “The pace of consumer spending was disappointing, but it seems less worrisome given that some other sectors of the economy are doing better, like housing.”

Consumer Spending in U.S. Declines as Sandy Reduces Wages - Bloomberg: Spending by U.S. consumers unexpectedly declined and incomes stagnated in October as superstorm Sandy kept some in the Northeast from getting to work or from shopping at malls and car dealerships.Purchases decreased 0.2 percent, the weakest reading since May, after a 0.8 percent gain in the prior month, Commerce Department figures showed today in Washington. The median estimate of 79 economists surveyed by Bloomberg called for no change in so-called nominal sales. Incomes were unchanged, held down by a drop in wages caused by Sandy, Commerce said. The storm shuttered hundreds of retailers when it made landfall on Oct. 29, temporarily countering the benefit from rising consumer sentiment that has brightened the holiday- shopping outlook. Faster job and wage gains would help stoke household spending after a third-quarter slowdown, helping explain why the Federal Reserve is pursuing policy aimed at spurring employment. “Holiday sales will be a little weaker than we originally thought and part of the blame is that hurricane Sandy took out some of the momentum,”

Personal Income unchanged in October, Spending decreased 0.2% - The BEA released the Personal Income and Outlays report for October:  Personal income increased $0.4 billion, or less than 0.1 percent ... . Personal consumption expenditures (PCE) decreased $20.2 billion, or 0.2 percent....The October estimates of personal income and outlays reflect the effects of Hurricane Sandy, which made landfall in the United States on October 29. The storm affected 24 states, with particularly severe damage in New York and New Jersey. BEA cannot quantify the total impact of the storm on personal income and outlays because most of the source data used to estimate these components reflect the effects of the storm and cannot be separately identified. However, BEA did make adjustments where source data were not yet available or did not reflect the effects of Sandy. The largest of these adjustments was for work interruptions, which reduced wages and salaries by about $18 billion (at an annual rate). Real PCE -- PCE adjusted to remove price changes -- decreased 0.3 percent in October, in contrast to an increase of 0.4 percent in September. ... The price index for PCE increased 0.1 percent in October, compared with an increase of 0.3 percent in September. The PCE price index, excluding food and energy, increased 0.1 percent in October, the same increase as in September.  ...Personal saving -- DPI less personal outlays -- was $410.1 billion in October, compared with $391.3 billion in September. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 3.4 percent in October, compared with 3.3 percent in September.The following graph shows real Personal Consumption Expenditures (PCE) through October (2005 dollars). This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE. According to the BEA, Hurricane Sandy impacted PCE in October, but the BEA could not quantify the total impact - however PCE in October was weak. A key point is the PCE price index has only increased 1.7% over the last year, and core PCE is up only 1.6%.

Personal Income Hit By Sandy, Real Consumer Spending Decreases -0.3% for October 2012 - The October personal income and outlay's report is not good news. Consumer spending decreased -0.2% from last month, and when adjusted for inflation was a -0.3% decline for October. Consumer spending is another term for personal consumption expenditures or PCE. Real personal consumption expenditures are hugely important to economic growth as consumer spending is about 71% of GDP. Real means adjusted for inflation. Superstorm Sandy hit consumer spending and personal income as $18.2 billion in annualized wages were lost in October, attributable to the storm. Personal income had no change from last month as did disposable income. Yet, when adjusted for inflation, actual disposable income decreased -0.1%. Take away inflation and government payments, personal income decreased -0.1% (see further below). People had less real money to spend in October as was true in September. Graphed below are the monthly changes for real personal income (bright red), real disposable income (maroon) and real consumer spending (blue).  Below are the real dollar amounts for real personal income (bright red), real disposable income (maroon) and real consumer spending (blue).  Consumer spending encompasses things like housing, health care, food and gas in addition to cars and smartphones. In other words, most of PCE is most about paying for basic living necessities. Graphed below is the overall real PCE monthly percentage change. October is the first month for Q4, so the drastic decline in real PCE doesn't bode well for forth quarter economic growth.

Tapped Out US Consumer Makes, Spends Less In October, Real Income Falls For Third Month - It was only appropriate that on a day in which our chart of the day confirmed that the US consumer is getting increasingly more broke, we got an update of Personal Income and Personal Spending, both of which missed expectations and declined substantially. October income printed at 0.0%, down from 0.4% in September, and below expectations of 0.2%, while spending plunged from 0.8% all the way into negative territory at -0.2%, missing expectations of an unchanged print. Counterintuitively, the spin is that this miss was due to Sandy, when this makes absolutely zero sense: as a reminder Sandy only hit in the last 4 days of October, which means it had no time to impact income, and if anything it prompted an increase in spending as consumers stockpiled ahead of the landfall. But that's why they call it spin. Of course, none of this should come as a surprise: the implied savings rate in September hit a multi-year low of 3.3%, which means going forward the blend of spending and savings will be unpleasant for stocks as consumers have no choice but to rebuild savings once more. And finally, the most disturbing metric, and one which is a red flashing light for all those predicting yet another economic renaissance in 2013, is that real Disposable Income declined by 0.1%: the third decrease in 3 months, confirming that on an inflation adjusted basis the consumer peaked in the summer, and it is all downhill from here.

Is October's Weak Spending & Income Report Another Victim Of Sandy? -- Personal income and spending in October was sluggish, and that's the charitable interpretation. But any talk of weak growth these days is quickly followed by the word "hurricane," along with the excuse that the devastating storm that struck the Northeast U.S. in late-October took a bite out of what would have been a more favorable profile for the month. There's a lot of debate about how much to blame on the weather, if at all. The Bureau of Economic Analysis notes in its income and spending report today that the storm was a factor in some degree that reduced wages and salaries. The implication, of course, is that what nature has taken away the economy will replace down the line. As such, the weather factor is an issue for the future, for good or ill. Meantime, on to the numbers as reported this morning. Disposable personal income (DPI) was flat last month, posting the weakest reading since November 2011's decline. Personal consumption expenditures (PCE) fared even worse, retreating 0.2% in October—the first monthly decrease since June and the steepest drop since May. In short, today's numbers aren't encouraging by any stretch of the imagination. Given the general climate, between the fiscal cliff risk in Washington and recession in Europe, no one will be comforted by today's data dump. But the numbers aren't overwhelmingly awful either when considered in a longer-term context.

Real Disposable Income Per Capita: Third Month of Contraction - Earlier this morning I posted my latest Big Four update featuring Real Personal Income Less Transfer Payments. Now let's take a closer look at a different calculation of incomes: "Real" Disposable Income Per Capita. The recent trend continues to look bleak, but at least for the October data, the Hurricane Sandy effect is a transitory detractor from incomes. Adjusted for inflation, per-capita disposable incomes have been struggling for the past two years and are currently at about the level first achieved in October of 2006. Most of 2011 saw a slow decline in incomes, a trend that began reversing in November of last year. Modest income growth continued for eight consecutive months. However, for the past three months the trend reversed in August, and the latest data point makes the third consecutive month of contraction. 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. Do you recall what you we're doing on New Year's Eve at the turn of the millennium? Nominal disposable income is up 49.9% since then. But the real purchasing power of those dollars is up a mere 14.2%. Let's take one more look at real DPI per capita, this time focusing on the year-over-year percent change since the beginning of this monthly series in 1959. I've highlighted the value for the months when recessions start to help us evaluate the recession risk for the current level.

The US Government Just "Adjusted" Away $40 Billion In Real Disposable Income - Perhaps the Bureau of Economic Analysis was hoping that today's cornucopia of ugly income and spending data would be enough for those who keep track of the US government's Department of Truth shennanigans and ignore the meat behind the numbers. Whatever the reason, the real story in today's Personal Spending data was not the consumer weakness, but the unceremonious revision of historical data, which as the chart below mysteriously whacked away a whopping $40 billion in real (i.e., inflation adjusted) disposable income. Because as the chart below shows, somehow, somewhere starting in March and continuing through the last month just before the election (the September data was released on October 29 or a week before Obama's reelection), $40 billion in cumulative disposable income evaporated. Where it went, and/or why it had been counted in the first place is anyone's guess. But one thing is certain: 0.25% of annualized GDP was just whacked away. One wonders: how many more such retroactive revisions will we see before reality and economic propaganda myth are finally superimposed?

Income The Out Door: From BEA: Personal income increased $0.4 billion, or less than 0.1 percent, and disposable personal income increased $0.8 billion, or less than 0.1 percent, in October, according to the Bureau of Economic Analysis. Personal consumption expenditures decreased $20.2 billion, or 0.2 percent. In September, personal income increased $47.8 billion, or 0.4 percent, DPI increased $42.1 billion, or 0.4 percent, and PCE increased $84.0 billion, or 0.8 percent, based on revised estimates. Real disposable income decreased 0.1 percent in October, compared with an increase of less than 0.1 percent in September. Real PCE decreased 0.3 percent, in contrast to an increase of 0.4 percent. The year over year percent change charts are a disaster...

Number of the Week: Disposable Income Isn’t Coming Back Soon - 1.2%: The increase in disposable personal income per capita since the recovery began, adjusted for inflation. Disposable income growth hasn’t kept up with broader economic expansion during the recovery, and it’s likely to remain under pressure for the foreseeable future. Income after taxes, or disposable personal income, per capita has grown just 1.2% since the recovery began in June 2009 through the third quarter of this year. By contrast, inflation-adjusted gross domestic product per capita has increased 4.7% over the same period. To be sure, GDP fell further than income during the recession, but the path of recovery has been steadier for economic growth as a whole than individual income. Consumers have managed to prop up growth in recent quarters. Increased spending accounted for more than a third of the 2.7% GDP growth recorded in the third quarter. Job gains have helped boost spending, but without advancing incomes it will be hard for consumption to drive economic growth. Economists chalked up much of an October decline in per capita disposable personal income to disruptions from Hurricane Sandy, but there are other factors that suggest a rebound isn’t necessarily in the cards. Despite recent improvements, there’s still a lot of slack in the job market. Unemployment remains high, and employers don’t face as much pressure to raise wages with such a large pool of potential new workers.

Analysis: Hard to Tell Signal From Sandy Noise in Spending Report - Consumer spending fell in October. The Wall Street Journal Online’s Tom Ortuso and Fact and Opinion Economics Chief Economist Robert Brusca take a look at why and what it means going forward.

The impact of Sandy on PCE, Chicago PMI at 50.4 - I've receive several questions about the impact of Hurricane Sandy on PCE. Sandy hit New York city on October 29th. We have an example of a hurricane hitting at the end of a month. Katrina hit on August 29, 2005, so we can look back at the real PCE numbers then.
July, 2005: $8,886.8 (Billions of chained (2005) dollars; seasonally adjusted at annual rates)
Aug, 2005: $8,854.9 (Katrina hit on Aug 29th, decline of $32 billion)
Sept, 2005: $8,817.0 (decline of $37 billion)
Then PCE increased in October and November to $8,833.8 and $8,878.4, respectively. This time for real PCE:
Sept, 2012: $9,641.9
Oct, 2012: $9,612.4 (Sandy hit on Oct 29th, decline of $29 billion)
So Sandy will probably impact November PCE, and any impact on PCE from the storm will be mostly over in December. From Joe Joe Weisenthal at Business Insider: CHICAGO PMI RISES TO 50.4 — But Huge Drop In New Orders ChicagoPMI rose back ... 50.4 was a hair shy of estimates. The new orders index fell to 45.3 from 50.6. On the other hand, employment rose to 55.2 from 50.3.

Sandy Impact Is Blowing Around Consumer Outlook - The Commerce Department reported Friday that personal income was flat in October versus the previous month and nominal spending fell 0.2%. The report noted there were effects from Sandy but Commerce could not quantify the total impact. The largest adjustment was an $18 billion drop in wages and salaries because of work interruptions. After accounting for price changes, real consumer spending began this quarter slightly down from its average in the third quarter, when real spending increased at an annual rate of only 1.4%. Households aren’t the only sector that looked peaked this quarter. The latest reports on factory activity also were lackluster, even in places not hit by the storm. On Friday, the Chicago chapter of the Institute for Supply Management said area factory activity is barely expanding this month, and new orders are contracting. “Combined with national anecdotes from the Beige Book and Fed manufacturing surveys from other regions of the country, this release suggests a fairly tepid baseline of manufacturing activity in November,” said economists at Goldman Sachs in a research note. Of course, economists don’t expect consumer spending to stay in the red through the quarter. Replacing items lost in the storm will drive a lot of spending.

Despite Fiscal Shadow, Consumer Confidence Rises - Despite stagnant incomes and the threat of fiscal contraction scheduled for the end of the year, consumer confidence rose again in November, reaching its highest level since February 2008. Source: The Conference Board, via Haver Analytics. Numbers are seasonally adjusted. Consumer confidence has been rising for the last three months, and the latest pickup was driven by more buoyant expectations for the economy, as opposed to consumers’ assessment of current conditions. In fact, for the last four years, consumers have been consistently more positive about the future of the economy than its present, which is the reverse of their attitudes for most of the expansion that preceded the financial crisis. Consumers over 55 have shown an especially sharp gain in confidence in the last few months, although consumers of all ages are still less positive about the economy than they were before the recession began.

Consumer Confidence at Its Highest Level Since February 2008 - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through November 13. The 73.7 reading was above the consensus estimate of 73.0 reported by This is the highest level for this indicator since February 2008. The consumer has proven impervious to the savagery of Hurricane Sandy and the incessant fear-mongering about the Fiscal Cliff. Here is an excerpt from the Conference Board report. "The Consumer Confidence Index increased in November and is now at its highest level in more than four and a half years (76.4 Feb. 2008). This month's moderate improvement was the result of an uptick in expectations, while consumers' assessment of present-day conditions continues to hold steady. Over the past few months, consumers have grown increasingly more upbeat about the current and expected state of the job market, and this turnaround in sentiment is helping to boost confidence."  Consumers' appraisal of current conditions was relatively unchanged in November. Those saying business conditions are "good" declined to 14.4 percent from 16.5 percent, while those saying business conditions are "bad" deceased to 31.5 percent from 33.0 percent. Consumers' assessment of the labor market improved. Those claiming jobs are "plentiful" increased to 11.2 percent from 10.4 percent, while those claiming jobs are "hard to get" held steady at 38.8 percent.

Vital Signs Chart: Consumer Confidence Holds Up - Americans feel better about the economy. The Conference Board’s confidence index rose for the third consecutive month to 73.7 in November, its highest level since February 2008. Despite the effects of superstorm Sandy and worries about the looming “fiscal cliff” of spending cuts and tax increases, expectations for future economic conditions improved. Consumers also grew more positive about getting jobs and buying homes.

Restaurant Performance Index indicates contraction in October - From the National Restaurant Association: Restaurant Performance Index Fell to its Lowest Level in 14 Months as Operator Optimism Plunged The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 99.5 in October, down 0.9 percent from September. In addition, October represented the first time in 14 months that the RPI fell below 100, which signifies contraction in the index of key industry indicators.  The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 99.3 in October – down 0.6 percent from a level of 99.9 in September. While same-store sales remained positive in October, declines in the labor and customer traffic indicators outweighed the performance, which resulted in a Current Situation Index reading below 100 for the third time in the last four months.

Retailers Blame Drop In Black Friday Sales On Black Thursday - With all bad news on the tape now having a suitable "explanation", be it a prior president, a tropical storm, the weather being too hot, the weather being too cold, the weather being just right, but never, ever someone actually taking blame for the fact that life is what happens when corporate CEOs (and sovereign presidents) are busy making "priced to perfection" plans. So it is with what is now a confirmed flop of a Black Friday, which according to ShopperTrak saw sales drop by nearly 2% to $11.2 from 2011, which in turn was a 6.6% gain over 2010 (and would be revised to far lower once all the refunds and exchanges to cash took place in the two weeks later). This occurred despite a 3.5% increase in retail foot traffic to 307.7 million store visits. The nominal drop in retail sales also occurred despite a nearly 1% increase in the total US population over last Thanksgiving, and a 2% Y/Y inflation. But fear not: the ad hoc excuse for this "surprising" loss in purchasing power is already handy: it is all Black Thursday's fault, or the latest idiotic attempt by retailers to cannibalize their own future sales by diluting the exclusivity of Black Friday, and which will force all retailers to follow the sovereigns in a race to the bottom

Stop The Holiday Shopping Media Circus, by Tim Duy: I feel as if every December I need to mentally prepare myself for the onslaught of inane media coverage of the holiday shopping season. This year, however, we seem to have a few more voices of reason and common sense. Barry Ritholtz, a long-time veteran of the Black Friday Media Wars, sees signs of hope: Over the years, I have been rather annoyed (perhaps too much) at the annual foolishness over Black Friday forecasts. Each year, we hear breathless predictions of ridiculous increases in consumer spending — holiday shopping rises 16% this season! — which turn out to be wildly over-optimistic, and are never confirmed by the actual data....This year, the idea seems to have spread into the mainstream: Lots of coverage about it, with a few choice quotes from you know who tossed in for good measure. Ritholtz provides a host of links on the subject, but a recent entrant is missing. Neil Irwin at the Washington Post delivers the truth about Black Friday: Black Friday is here, and if you happen to derive pleasure from streaming around big box stores or mega malls as part of a teeming horde, well, who am I to judge another person’s sources of enjoyment. Let’s just not pretend that it means anything... ...sales over Thanksgiving weekend tell us virtually nothing about retail sales for the full holiday season—let alone anything meaningful about the economy as a whole.  So if it is a meaningless event from an economic perspective, what explains the media obsession?

Sales at Nation’s Retailers Fell Short of Expectations in November - Sales at stores open at least a year declined in November at major American store chains, including Macy’s, Nordstrom, Kohl’s and Target, sending a shiver through the retail world Thursday.The reporting period included Thanksgiving and Black Friday, the official kickoff of the critical holiday shopping season. Early reports regarding those days had been mixed, and the individual retailers’ dim results suggest a big challenge in the coming weeks for retailers. Craig Johnson, a retail consultant, said that early November was weak across the board and not just in the Northeast, which was hit by Hurricane Sandy in late October. “The traditional post-Black Friday lull, normally starting the following week, started on ... Black Friday,” Mr. Johnson wrote in an e-mail. Activity in shopping malls slowed down starting about noon that Friday, he said, “right about the time the early bird specials expired, and long after the Thanksgiving evening doorbuster items were all sold out — leaving financially stressed consumers with little reason to shop” so many weeks away from Christmas.

Weekly Gasoline Update: Prices Up Slightly - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Gasoline prices at the pump fell slightly, breaking a string of six consecutive weekly increases. Rounded to the penny, the average for Regular and Premium both rose one cent. Regular is up 21 and Premium 24 cents from their interim weekly lows in the December 19, 2011 EIA report. As I write this, shows only one state, Hawaii, with the average price of gasoline above $4. This week no states have prices above $3.90, down from two states last month.

Durable Goods Orders Partially Recover From Last Month's Major Dip - The November Advance Report on October Durable Goods was released this morning by the Census Bureau. Here is the summary on new orders:  New orders for manufactured durable goods in October increased slightly to $216.9 billion, the U.S. Census Bureau announced today. This increase, up five of the last six months, followed a 9.2 percent September increase. Excluding transportation, new orders increased 1.5 percent. Excluding defense, new orders increased 0.1 percent.  Machinery, up two consecutive months, had the largest increase, $0.9 billion or 2.9 percent to $30.9 billion. Download full PDF  That "slight increase" in today's news release was slight indeed: 0.02 percent. To one decimal place, new orders came in at 0.0 percent, but that was above the consensus of -4.0 percent. Year-over-year new orders are down 1.1 percent. If we exclude both transportation and defense, "core" durable goods orders rose 1.6 percent, up from the previous month's 0.3 percent. Year-over-year core goods are down 3.5%. The first chart is an overlay of durable goods new orders and the S&P 500. An overlay with unemployment (inverted) also shows some correlation. We saw unemployment begin to deteriorate prior to the peak in durable goods orders that closely coincided with the onset of the Great Recession, but the unemployment recovery tended to lag the advance durable goods orders.

The Trend For Durable Goods Orders Remains Weak - New orders for durable goods were flat last month, the Census Bureau reports. That follows a strong 9.2% gain in September. Stripping out the volatile transport sector, however, reveals that new orders jumped a respectable 1.5% in October. Meantime, business investment gained some ground last month, with new orders for non-defense capital goods ex-aircraft rising 1.7%--the best month since May. Corporate America's willingness to invest isn't dead yet. Even so, new orders for big-ticket items overall remains sluggish. Today's report suggests that the bottom isn't falling out on this leading indicator, at least not yet, but the numbers are still well short of offering robust confidence for arguing that demand is strong.  Still, today's modest bit of good news is a surprise for economists, who expected that the October report would post a sizable retreat. “Demand for durable goods has stabilized,” Ryan Wang, an economist with HSBC Securities, tells Bloomberg. “It’s a positive sign.”  Fair enough, but it's a positive sign that's also precarious in the current climate. Looking at the year-over-year trend in durable goods orders reminds that this indicator certainly isn't impressing the bulls. The headline number is generally treading water these days while business investment continues to fall relative to year-earlier levels. October's revival is welcome, but one month is weak tea against the recent trend.

Durable Goods Come In Stronger Than Expected, Sandy Not Blamed - With most pundits expecting a weak Durable Goods report today from the month of October, it was only logical that the final print would come better than expected. Sure enough, the October headline durable goods printed at 0.0%, on expectations of a -0.7% decline from a downward revised September 9.2%. It was in the non-volatile Ex-Transportation index that saw a pick up of 1.5%, missing modestly the expectations of a 2.0% print, and down from 1.7% last month. From an investment standpoint,  Capital Goods Orders nondefense ex-aircraft rose 1.7% on expectations of a drop to -0.5%, up from a downward revised -0.4%. One wonders just what seasonal adjustment factors were used in this particular data set which saw the NSA data drop from $63.1 billion last month to $61.8 billion currently. Needless to say, inventories of manufactured durable goods, having increased 33 of the past 34 month, just hit an all time high of $374.4 billion, rising 0.4% in the month, following a 0.2% increase in the month ago.

Chart Of The Day: Continued Collapse In Capital Goods New Orders Confirms US Is In Recession -- While the just released Durable Goods orders report for October came in modestly better than expected (which many thought would be a decline due to Hurricane Sandy), the primary driver of this continues to be record durable good inventory accumulation. Excluding the noise, and focusing only on real, non-noisy economic strength metrics such as New Capital Goods Orders (technically defined as the year over year change in Non-Defense Capital Goods Excluding Aircraft), a very different and far uglier picture emerges. In fact, the October Y/Y Plunge of -8.1% in this major indicator was the biggest drop since 2009.

The ''Real'' Goods on Today's Durable Goods Data - Earlier today I posted an update on the November Advance Report on October Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation. Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer an alternate historical context in which to evaluate the standard reports on the nominal monthly data. Economists frequently study this indicator excluding Transportation or Defense or both. Just how big are these two subcomponents? Here is a stacked area chart to illustrate the relative sizes over time. Finally, here is the chart that I believe gives the most accurate view of what Durable Goods Orders is telling us about the long-term economic trend. The three-month moving average of the real (inflation-adjusted) core series (ex transportation and defense) per capita helps us filter out the noise of volatility to see the big picture.

Analysis: Signs Businesses Hunkered Down - Orders for long-lasting manufactured goods outside of auto and aircraft increased in October for the second straight month, signaling the sector may be rebounding from a mid-year slow down. LPL Financial economist John Canally takes a look at the report with The Wall Street Journal Online’s Mike Weinstein.

Dallas Fed: Regional Manufacturing Activity "Growth Stalls" in November - From the Dallas Fed: Growth Stalls and Company Outlook Worsens Texas factory activity was little changed in November, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, came in at 1.7, indicating output barely increased from October. Other survey measures suggested flat manufacturing activity in November. The new orders index came in at 0.4, suggesting that demand was unchanged from October. Perceptions of broader business conditions worsened in November. The general business activity index fell to -2.8, returning to negative territory. The company outlook index moved down to -4.8, registering its first negative reading since April. The employment index edged up to 6.7 in November, with more than 20 percent of firms reporting hiring compared with 15 percent reporting layoffs. The hours worked index dipped from -5.9 to -7.1.  This was below expectations of a reading of 4.7 for the general business activity index

Richmond Fed Manufacturing Index Rises: Manufacturers in the central Atlantic region say activity is expanding this month, the Federal Reserve Bank of Richmond reported Tuesday. Service sector revenues also improved this month. The Richmond Fed's manufacturing current business conditions index rose to 9 this month from -7 in October. Numbers above zero indicate expanding activity. The Richmond Fed contrasts with three other regional Fed surveys released earlier this month that showed factory activity contracting in New York, Philadelphia and Dallas. The first two regions were hit by superstorm Sandy, but the Dallas contraction is not weather-related. The Richmond subindexes generally improved in November. Its shipment index jumped to 11 from -9 in October, and the new orders increased to 11 from -6. The employment index gained to 3 after holding at -5 for three consecutive months. But the workweek index fell to 2 from 3 last month. Price pressures are easing this month. The current prices paid index dropped to 1.99 from 3.21 while the prices received declined to 1.72 from 1.99.

Richmond Fed Manufacturing Composite: A Welcome Improvement   This particular Fed region represents Virginia, Maryland, the Carolinas, the District of Columbia and most of West Virginia.  The complete data series behind today's Richmond Fed manufacturing report (available here), which dates from November 1993. The chart below illustrates the 21st century behavior of the diffusion index that summarizes the individual components. Today the manufacturing composite rose into expansion territory at 9, which is a welcome rebound from -7 last month. Because of its highly volatile nature of this index, I like to include a 3-month moving average to facilitate the identification of trends (now at 2.0).Here is a key excerpt from the Richmond Fed's overview. Manufacturing activity in the central Atlantic region advanced moderately in November following a slight pullback in October, according to the Richmond Fed's latest survey. All broad indicators — shipments, new orders and employment — landed in positive territory. Other indicators were mixed, however. Capacity utilization was virtually unchanged, while backlogs fell further from its October reading. Moreover, the gauge for delivery times steadied, while finished goods inventories grew at a slightly quicker pace and growth in raw materials edged lower. How representative is this mid-Atlantic region to the larger economy? I calculated the correlation between the Richmond Fed Manufacturing Composite and the ISM PMI Composite Index, which I reported on earlier this month here. It is an impressive 0.83. Is today's Richmond composite a clue of what to expect in the next PMI composite? We'll find out when the next Manufacturing ISM Report on Business is released on December 3rd. Here is a snapshot of the complete Richmond Fed Manufacturing Composite series

Kansas City Region Reports Manufacturing Contraction - Another factory report from a regional Federal Reserve bank released Thursday shows manufacturing in November is struggling across many parts of the U.S., raising worries about nationwide industrial production. The latest dismal report comes from the Kansas City Fed in Missouri. The Kansas City Fed’s manufacturing composite index declined to minus-6 in November from minus-4 in October. On a year-over-year comparison, the composite index slowed to 9 from 11. Readings above zero denote expansion. “We saw a decline in regional factory activity for the second straight month, and firms have put hiring plans on hold for the next six months” said Chad Wilkerson, an economist at the bank. “However, overall production and capital spending are expected to rise moderately in coming months.”

Kansas City Fed: Regional Manufacturing Activity "Eased Further" in November - From the Kansas City Fed: Tenth District Manufacturing Activity Eased Further  The Federal Reserve Bank of Kansas City released the November Manufacturing Survey today. “We saw a decline in regional factory activity for the second straight month, and firms have put hiring plans on hold for the next six months” said Wilkerson. “However, overall production and capital spending are expected to rise moderately in coming months.” Several contacts noted uncertainties about the upcoming fiscal cliff, and a few producers cited delayed deliveries and reduced orders from the East Coast as a result of the Hurricane Sandy. Price indexes moderated slightly. The month-over-month composite index was -6 in November, down from -4 in October and 2 in September. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. This marked the first time the composite index has been negative for two straight months since mid-2009. Manufacturing slowed at durable goods-producing plants, while nondurable factories reported a slight uptick in activity, particularly for food and plastics products. Other month-over-month indexes were mixed in November. The production index was unchanged at -6, while the new orders and order backlog indexes declined for the third straight month to their lowest levels in three years. In contrast, the employment index increased from -6 to 0, and the shipments and new orders for exports indexes were less negative. Most of the regional manufacturing surveys were weak in November (Richmond was the exception). Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Chicago Fed’s National Activity Index Slumped in October - A dip in production across the U.S in October, thanks in part to Hurricane Sandy, helped cause a major national economic indicator to fall to its lowest reading since 2009. The Federal Reserve Bank of Chicago said Monday its National Activity Index’s three-month moving average dropped to -0.56 in October from -0.36 in September. The last time the three-month average was this low was November 2009, as the U.S. was clawing back from the recession. The one-month reading, a more volatile number, fell to -0.56 in October from a flat reading of zero in September making this six of the last eight months that the index has been in the negative. A negative reading indicates sustained U.S. economic performance as below-trend.

Ugly Chicago PMI Best Captured By Respondent: "The Economy Really Seems To Be Hanging On A Thread" - Just like yesterday's atrocious second Q3 GDP revision needed at least 1 minutes of work (so about 60 seconds more than most algos are willing to put into it) before the true gist of the economic data ugliness could be truly captured, so the true story in today's Chicago PMI - usually a critical advance indicator to the Manufacturing ISM (except lately of course: under central planning any historical correlations make no sense) - only appeared into view following a more than cursory glance. Sure enough, while the headline number printed above 50 for the first time since August, 50.4 to be specific, on expectations of a 50.5 increase, up from 49.9, the bulk of this was driven by the most counterintuitive driver: i.e. Prices Paid, which directly correlates with collapsing profit margins, printing at a 16 month high - inverse deflation is everywhere these days it seems, while the all critical New Orders plunging to the lowest since June 2009 or 45.3 from 50.6, and finally inventories declining from 49.6 to 47.1: which makes sense after as disclosed yesterday it was inventory accumulation in Q3 that accounted for 36% of US economic "growth." What good news there was was in Production, Backlogs and Employment: the same Employment we have been told to ignore in all other data series due to the impact of Sandy.

Business confidence volatility is unhealthy for economic growth - The ISI Group combined four US regional Fed indices with Markit Manufacturing PMI to create a comprehensive US manufacturing index (chart below). A pattern of growth starts followed by fairly sharp corrections emerges. Some have speculated that this volatility, at least in part, can be explained by the Eurozone uncertainty flare-ups: Greece (2010), Italy (2011), Spain (2012). The pattern also exists in the economic surprise indices (see post-1 and post-2).What's particularly concerning is that subsequent recovery has not been as strong as the previous "cycle". Businesses are becoming increasingly skeptical about spurts of growth. A similar pattern can also be seen in the ISM Business Confidence measure.Anecdotal evidence suggests that the current "cycle" will not go into its full upswing until there is clarity with respect to the US fiscal situation.  But already some are talking about a strong first quarter of 2013 induced by Hurricane Sandy reconstruction expenditures - and then possibly another dip next summer, repeating the pattern once again. In the long run, this volatility in confidence is highly undesirable because it inhibits capital investment and hiring, forcing corporations to sit on cash (or pay cash out in dividends).

New technology could reduce dependence on economies-of-scale model - Recent advances in digital fabrication technologies have the potential to revolutionize how companies build products and target consumers. Manufacturers can now produce many customized products and prototypes ‘when needed, as needed’ with the same economics as high volume production.  DF technologies will transform many industries including apparel, consumer & industrial products and healthcare — as well as local economies, which may experience a manufacturing revitalization.   Savvy manufacturers are exploring how they can leverage these new technologies to compete better. The rapidly evolving field of DF is doing for manufacturing what the Internet did for information-based goods and services.  DF turns traditional, volume-based manufacturing economics upside down. In the conventional “subtractive” production model, the existence of scale economies means that it costs much more money to produce one unit than it does to produce say 100,000 units.  When DF technologies and approaches are employed, it now becomes cost effective to manufacture much smaller batches of customized products on demand, while shortening the cycle time between design and production.

Skills Don't Pay The Bills - Nearly six million factory jobs, almost a third of the entire manufacturing industry, have disappeared since 2000. And while many of these jobs were lost to competition with low-wage countries, even more vanished because of computer-driven machinery that can do the work of 10, or in some cases, 100 workers. Those jobs are not coming back, but many believe that the industry’s future (and, to some extent, the future of the American economy) lies in training a new generation for highly skilled manufacturing jobs — the ones that require people who know how to run the computer that runs the machine. This is partly because advanced manufacturing is really complicated. Running these machines requires a basic understanding of metallurgy, physics, chemistry, pneumatics, electrical wiring and computer code. It also requires a worker with the ability to figure out what’s going on when the machine isn’t working properly. Throughout the campaign, President Obama lamented the so-called skills gap and referenced a study claiming that nearly 80 percent of manufacturers have jobs they can’t fill. Mitt Romney made similar claims. The National Association of Manufacturers estimates that there are roughly 600,000 jobs available for whoever has the right set of advanced skills. Eric Isbister, the C.E.O. of GenMet, a metal-fabricating manufacturer outside Milwaukee, told me that he would hire as many skilled workers as show up at his door. Last year, he received 1,051 applications and found only 25 people who were qualified. He hired all of them, but soon had to fire 15. Part of Isbister’s pickiness, he says, comes from an avoidance of workers with experience in a “union-type job.” At GenMet, the starting pay is $10 an hour. Those with an associate degree can make $15, which can rise to $18 an hour after several years of good performance. From what I understand, a new shift manager at a nearby McDonald’s can earn around $14 an hour.

The Fake Skills Shortage - Krugman - Kudos to Adam Davidson for some much-needed mythbusting about the supposed skills shortage holding the US economy back. Whenever you see some business person quoted complaining about how he or she can’t find workers with the necessary skills, ask what wage they’re offering. Almost always, it turns out that what said business person really wants is highly (and expensively) educated workers at a manual-labor wage. No wonder they come up short.And this dovetails perfectly with one of the key arguments against the claim that much of our unemployment is “structural”, due to a mismatch between skills and labor demand. If that were true, you should see soaring wages for those workers who do have the right skills; in fact, with rare exceptions you don’t. So what you really want to ask is why American businesses don’t feel that it’s worth their while to pay enough to attract the workers they say they need.

That Shortage of Skilled Manufacturing Workers is Really a Shortage of Employers Willing to Pay the Market Wage – Dean Baker : News stories have been filled with reports of managers of manufacturing companies insisting that they have jobs open that they can't fill because there are no qualified workers. Adam Davidson at the NYT looked at this more closely and found that the real problem is that the managers don't seem to be interested in paying for the high level of skills that they claim they need. Many of the positions that are going unfilled pay in the range of $15-$20 an hour. This is not a pay level that would be associated with a job that requires a high degree of skill. As Davidson points out, low level managers at a fast-food restaurant can make comparable pay. It should not be surprising that the workers who have these skills expect higher pay and workers without the skills will not invest the time and money to acquire them for such a small reward. If these factories want to get highly skilled workers, they will have to offer a wage that is in line with the skill level that they expect.

Obama to Close "Skills Gap"; Where? How? Why is the Middle Class Shrinking? Living Wages - President Obama says there is a "skills gap". A quick search says that many misguided souls believe the president. For example Forbes writer Rich Karlgaard says The Skills Gap Exists. Karlgaard believes the "gap is sure to grow as the population ages and industries from health care to manufacturing are altered by technology. Outsourcing to China won’t be the answer, either. Its population is aging the fastest of all the major economies." Vicki Needham writing for The Hill says Skills gap is hampering labor market. Needham, citing a report by Deloitte says "job creation in the United States is hampered by a lack of highly skilled and adaptable workers whose talents don't match current job openings". The Atlantic comments on Solving the Manufacturing Skills Gap. Eighty percent of the manufacturing companies in the United States say they cannot find enough workers with the proper skills to fill open positions at their facilities. That's the number President Barack Obama cited, as he announced the Military-to-Civilian Skills Certification Program, in June 2012.  The above columnists express widely believed economic hooey.

The Insourcing Boom - Six factory buildings, each one the size of a large suburban shopping mall, line up neatly in a row.  By the 1960s, the sixth building had been built, the union workforce was turning out 60,000 appliances a week, and the complex was powering the explosion of the U.S. consumer economy. The arc that followed is familiar. Employment kept rising through the ’60s, but it peaked at 23,000 in 1973, 20 years after the facility first opened. By 1984, Appliance Park had fewer employees than it did in 1955. In 2011, the number of time-card employees—the people who make the appliances—bottomed out at 1,863. By then, Appliance Park had been in decline for twice as long as it had been rising.Yet this year, something curious and hopeful has begun to happen, something that cannot be explained merely by the ebbing of the Great Recession, and with it the cyclical return of recently laid-off workers. On February 10, Appliance Park opened an all-new assembly line in Building 2—largely dormant for 14 years—to make cutting-edge, low-energy water heaters. It was the first new assembly line at Appliance Park in 55 years—and the water heaters it began making had previously been made for GE in a Chinese contract factory. On March 20, just 39 days later, Appliance Park opened a second new assembly line, this one in Building 5, to make new high-tech French-door refrigerators. These refrigerators are the latest versions of a style that for years has been made in Mexico. Another assembly line is under construction in Building 3, to make a new stainless-steel dishwasher starting in early 2013. Building 1 is getting an assembly line to make the trendy front-loading washers and matching dryers Americans are enamored of; GE has never before made those in the United States. And Appliance Park already has new plastics-manufacturing facilities to make parts for these appliances, including simple items like the plastic-coated wire racks that go in the dishwashers.

The problem with the return of manufacturing - Charles Fishman has an upbeat cover story in the new Atlantic, talking about how manufacturing is making its way back from China to America. As the world demands an ever-more nimble manufacturing sector, able to produce smaller quantities of goods more quickly, it makes sense to make those goods here rather than be forced to spend a month shipping them over from China, especially with shipping costs rising. On top of that, Chinese manufacturing costs are rising too: inputs from labor to natural gas are getting much more expensive. (Natural gas costs four times as much in China as in the U.S., while James Fallows reports that a typical Foxconn salary is now $400 a month, three times what it was six years ago.) Fishman’s enthusiasm for bringing the designers closer to the means of production — it really does make for much more efficient assembly lines — means that he papers over the reality of what America’s new manufacturing-sector workers are being paid: There’s a huge difference between $13.50 per hour and $21 per hour: the latter is something you can actually live on, something you can consider to be a career. The former is not. And that’s a problem, as Adam Davidson explains: the reason that people aren’t going to college to learn the skills needed on a modern manufacturing assembly line is simply that those skills aren’t valued highly enough. Even McDonald’s, where there were noisy strikes today, looks attractive in comparison:

CONFERENCE: The Return of Full Employment Policy - Date: December 3, 2012 Venue: Paasitorni, Sirkussali, Helsinki It is often argued that the era of full employment and Keynesian economic policy is over. Most orthodox economists claim that, in the long run, real full employment cannot be achieved with demand management policies. Active demand management is, thus, deemed to be too costly and inflationary.Top Post-Keynesian economists James K. Galbraith and L. Randall Wray, however, argue that achieving full employment through demand management is still perfectly possible. They suggest that, in order to achieve full employment and carry out democratic economic policies, governments have to break out from the pressures of the private bond markets. Come to hear Galbraith and Wray for the most important economic policy event of the year! The event is free and open to everyone. We do ask participants to register in advance. The event will be streamed live at .

US Postal Service headed for its own fiscal cliff - Is the US government ready for another bailout? This time it's the US Postal Service, which is quickly headed for bankruptcy. Technology simply passed them by - faster than anyone had expected. For example a large percentage of US teens these days don't even know how to write a "snail mail" letter and where to put the stamp and the return address. Clearly the USPS has been trying to keep up with the changes by upgrading its offerings (like same day delivery) and its technology. It has also been shrinking its workforce. In fact according to the U.S. Bureau of Labor Statistics, we now have fewer postal employees than any time since the late 60s. CBS: - Changes are coming to U.S.P.S. offices and staffing in the coming year. Donahoe said about half of the nation's post offices are "changing." "We're in the process of doing something called The POST Plan. We have 26,000 post offices across the country. We're changing about 13,000 -- half of them to part-time hours. That keeps them open, keeps the town's identity. The zip code, no change there. But we can do a lot more efficiently, there's no reason to have a place open eight hours a day if you have an hour's worth of business."  By the end of 2013 the workforce will also have to be reduced. "We have reduced our workforce by 280,000 people over the last 10 years, 35 percent," Donahoe said. "We're in the process right now this year of another 40,000. Our people do a tremendous job. They are very efficient."

Hostess Liquidation Approved, Along With $1.8 Million in Executive Bonuses -  A federal judge has blessed the Hostess liquidation, after labor and management failed to reach agreement on an equitable solution. This isn’t surprising at all; management was basically set up to liquidate the company and strip the assets.  It’s just the 18,500 employees who will be out of luck; even if some of them get retained after the fire sale, getting absorbed into a new company almost certainly means that they will not all get their jobs back. Meanwhile the executives will get a BONUS for all this: The company behind iconic treats such as Ho Hos and pantry staples like Wonder Bread now has the bankruptcy court’s full blessing to start seeking buyers for its 30 brands and 36 plants with a skeleton staff at its helm. A group of the company’s top executives—19 officers and high-level managers—deserve extra compensation as they wind down operations, Judge Robert Drain of the U.S. Bankruptcy Court in White Plains, N.Y., said at a Thursday hearing.

Poor management, not union intransigence, killed Hostess  - Let's get a few things clear. Hostess didn't fail for any of the reasons you've been fed. It didn't fail because Americans demanded more healthful food than its Twinkies and Ho-Hos snack cakes. It didn't fail because its unions wanted it to die. It failed because the people that ran it had no idea what they were doing. Every other excuse is just an attempt by the guilty to blame someone else. Hostess management's efforts to blame union intransigence for the company's collapse persisted right through to the Thanksgiving eve press release announcing Hostess' liquidation, when it cited a nationwide strike by bakery workers that "crippled its operations." That overlooks the years of union givebacks and management bad faith. Example: Just before declaring bankruptcy for the second time in eight years Jan. 11, Hostess trebled the compensation of then-Chief Executive Brian Driscoll and raised other executives' pay up to twofold. At the same time, the company was demanding lower wages from workers and stiffing employee pension funds of $8 million a month in payment obligations.

The real reason for almost all big business failures - The commonly voiced view of business, red in tooth and claw, a Darwinian landscape where only the fit survive may hold for small to mid-sized operations, but with big business, survival is surprisingly easy. As a rule it is only the remarkably unfit that die. When you see a big company go under you can generally find a history of incompetent management and stupid or shortsighted decisions. Though as narrative-obsessed as their political brethren, business journalists tend to be notably averse to stories built around the question "what happens when you give the keys to an idiot?" That's a shame because some of the most entertaining accounts start with that premise.  A surprising number of "news" stories are actually press releases in only slightly rewritten form and PR department go to great lengths to avoid statements that make their bosses look like morons.  Given these factors and the uncomfortable cognitive dissonance that journalists often feel when forced to report that a major corporation's management is incompetent, they will almost always pass over the obvious narrative and opt instead for one of these three standards:
1. the company was made obsolete by new technology;
2. it was doomed by changing markets;
3. it just couldn't get good help.

How Corporate America Is Turning Into a Cult and Why It’s Harming the American Employee - I used to work for a large organization. One afternoon, all the staff in my department were herded into a giant conference room, and informed that due to budget cuts within the year over half of us present would lose our jobs. Fresh from a leadership course at the University of Corporate Doublethink, our bushy-tailed manager "reframed" the concept for us. "Don't see this as a negative" he advised. "We like to see this as us empowering you to take on new opportunities." Over the last decade or so, a growing disconnect has developed between the bizarre and almost cult-like rhetoric and practices that companies use with their staff, and the increasingly grim reality of being an employee in modern day Corporate America.  For example, anyone stumbling upon the Walmart careers website might be forgiven for thinking that Google had malfunctioned and directed them instead to the Scientologists, whose recruitment site features a collection of testimonials virtually indistinguishable in their tone of robotic devotion.Over at "Walmart People," Lois Givens, Personnel Manager at store number 992 assures us: "If you live your whole entire life according to the Walmart culture and three basic beliefs, life becomes a lot easier." Shana Bailey, Director of Store Operations emotes: "To this day, I continue to grow and learn, and the Walmart family is always there for me every step of the way," while Patricia Graham of the Distribution Centers adds: " Walmart is my Life (capitalization her own). When I think about it, it's amazing how many aspects of my life are touched and made better by Walmart."

With Biggest Strike Against Biggest Employer, Walmart Workers Make History Again - For about twenty-four hours, Walmart workers, union members and a slew of other activists pulled off the largest-ever US strike against the largest employer in the world. According to organizers, strikes hit a hundred US cities, with hundreds of retail workers walking off the job (last month‘s strikes drew 160). Organizers say they also hit their goal of a thousand total protests, with all but four states holding at least one. In the process, they notched a further escalation against the corporation that’s done more than any other to frustrate the ambitions and undermine the achievements of organized labor in the United States.

Has Wal-Mart been good or bad? - There’s lots to agree with in Peter Suderman’s 17-part Twitter defense of Wal-Mart (which was inspired by this discussion on Saturday’s “Up With Chris Hayes”). Wal-Mart’s low prices do primarily benefit low-income consumers. Wal-Mart’s low wages are not really that low, at least when compared with the prevailing wages in the retail sector. Wal-Mart’s executive class does make a lot of money, but not enough to move the dial on employee pay.  But Wal-Mart’s effect on its own employees pales in comparison to its effect on its supply chain’s workers, and its competitors’ workers. As Barry Lynn argued in his Harper’s essay “Breaking the Chain,” and as Charles Fishman demonstrated in his book “The Wal-Mart Effect,” the often unacknowledged consequence of Wal-Mart is that it has reshaped a huge swath of the American, and perhaps even the global, economy. Wal-Mart has become so big and so pervasive that it effectively sets prices for everyone who sells to it, and everyone who competes against it. It has lowered prices for American workers — even those who don’t shop at Wal-Mart — even as it has done much to destroy the American labor movement and to encourage the offshoring of American jobs. It has changed how goods are shipped, packaged and produced. It has, at different times, encouraged devastating environmental practices and admirable ones. Any accounting of Wal-Mart’s effect on workers has to go far beyond a simple look at the wages they themselves pay to their direct workforce. See, for instance, this Wall Street Journal article on what happened in Thailand after Wal-Mart demanded higher standards from its shrimp suppliers.

Is Wal-Mart the enemy? - It’s been a week since the Wal-Mart strike of Black Friday. Strike, perhaps, is a misnomer. No one tried to stop sales at any Wal-Mart stores. There were no picket lines to cross. And the essence of a strike, to withhold labor, did not happen. These were protests organized to generate headlines on the most important shopping day of the year. And they did generate headlines. If that’s all they did, then Wal-Mart won. If they are the start of something, the beginning of an organizing “marathon,” they will be a turning point. It’s impossible to know now. Because what Wal-Mart really fears, strikes to shut down their ability to generate massive profits, isn’t what the organizers are seeking. Black Friday did not show a real fight. It was like shadow boxing, or a test to gauge the strengths and weaknesses between workers and Wal-Mart. I spent some time at one of these megastores last week, and what I really noticed were the kids. The best way to understand Christmas in modern America is to watch how children react to the intense marketing directed their way. Kids are the purest representation of our values, because they haven’t yet learned to disguise their desires and feelings. They don’t yet know they are being marketed to, they want what they want, and they are going to bug their parents to get it. In fact, piggybacking on innocence is a standard tactic in children’s marketing, known as accentuating “the nag factor.” But they also want to be adults, to help, to be taken seriously.

What Kind of Walmart Do We Want for Our Country?: On a talk show this past Sunday, Walmart worker Greg Fletcher spoke about the realities of struggling to provide for his family on the company's infamous low wages. David Frum, a conservative columnist at Newsweek, pointedly asked Greg whether he got the Earned Income Tax Credit, a tax refund meant to supplement the earnings of low-wage workers. Greg said he did, and then added with a smile, "... although if I made enough to not receive it, that'd be okay too." And that's the crux of the debate about Walmart's low-wage business model. Is America in the 21st century going to be defined by living wages and respect on the job, or will it continue down its current path, where firms shed all responsibility for their workers and the rest of us are left to figure out how to support our families, our friends and our neighbors?

How Badly Do We Want Our Cheap Stuff, No Matter How It's Made and At What Cost? - Officials now believe the fire at the Tazreen factory in Bangladesh that killed at least 124 workers, making it the most deadly fire in an industry with an already deadly history, was deliberately set. Even as Walmart, the second largest buyer of goods from Bangladesh, reluctantly acknowledged its connection to the sweatshop, the International Labor Rights Forum cited a dozen other brands made there and called for an investigation and fair compensation; angry protesters marched for safer working conditions; company executives labelled themselves "the victims" because they paid the families of the dead $1,230 each, or $130,000, out of their yearly sales of $36 million; and The Rude Pundit rudely wondered at what point we carry blame for insisting on cheap stuff made by young women working in non-union, slave-like conditions in deathtraps for 21 cents an hour.

Wal-Mart’s strategy of deniability for workers’ safety - Over the weekend, a horrific fire swept through a Bangladesh clothing factory, killing more than 100 workers, many of whose bodies were burnt so badly that they could not be identified. In its gruesome particulars — locked doors, no emergency exits, workers leaping to their deaths — the blaze seems a ghastly centennial reenactment of the Triangle Shirtwaist fire of 1911, when 146 workers similarly jumped to their deaths or were incinerated after they found the exit doors were locked. The Bangladesh factory supplied clothing to a range of retailers, and officials who have toured the site said they found clothing with a Faded Glory label — a Wal-Mart brand. Wal-Mart says that the factory, which had received at least one bad report for its fire-safety provisions, was no longer authorized to make its clothing but one of the suppliers in the company’s very long supply chain had subcontracted the work there “in direct violation of our policies.” If this were an isolated incident of Wal-Mart denying responsibility for the conditions under which the people who make and move its products labor, then the Bangladeshi disaster wouldn’t reflect quite so badly on the company. But the very essence of the Wal-Mart system is to employ thousands upon thousands of workers through contractors and subcontractors and sub-subcontractors, who are compelled by Wal-Mart’s market power and its demand for low prices to cut corners and skimp on safety. And because Wal-Mart isn’t the employer of record for these workers, the company can disavow responsibility for their conditions of work.

Grayson: Walmart is ‘the largest recipient of public aid in the country’ - Representative-elect Alan Grayson (D-FL) said Monday that he will put mega-retailer Walmart squarely in his sights during the next Congress for the company’s liberal use of public assistance programs to supplement their workers’ wages. Speaking to Current TV host Cenk Uygur on Monday’s episode of “The Young Turks,” Grayson called Walmart “the largest recipient of public aid in the country,” saying their low wages force workers to take food stamps, housing assistance and Medicaid just to get by. “The taxpayer pays for the earned income credit,” he said. “The taxpayer pays for Medicaid. The taxpayer pays for unemployment insurance when they cut hours down. And the taxpayer pays for other forms of public assistance like food stamps. I think the taxpayer is getting fed up of paying these things when, in fact, Walmart could give every employee its got, even the CEO, a 30 percent raise and still be profitable.”

McJobs Should Pay, Too: Inside Fast-Food Workers’ Historic Protest For Living Wages - The term "McJob" has come to epitomize all that's wrong with the low-wage service industry jobs that are growing part of the U.S economy. "It beats flipping burgers," the cliché goes, because no matter what your job might be, it's assumed to be better than working in a fast-food restaurant.  Today in New York City, though, hundreds of workers at dozens of fast-food chain stores are walking out on strike, demanding better of those jobs. At McDonald's, Burger King, Wendy's, KFC, Taco Bell, and Domino's Pizza locations, workers have been organizing, and today they launch their campaign. They want a raise, to $15-an-hour from their current near-minimum wage pay, and recognition for their independent union, the Fast Food Workers Committee.  This is the first multi-franchise effort among fast-food workers to organize and demand better conditions, and it's coming on the heels of viral strikes at Walmart stores around the country. Yet this campaign was building before the first Walmart worker walked out. Jonathan Westin, Organizing Director for New York Communities for Change, which led the effort to organize the fast food workers, said that they've had over 40 organizers talking to workers around the city. They've found that overwhelmingly, those workers can't afford basics like food, rent, or a Metrocard to get to work.

Modernity Bites - It interests me to reflect that the way things are temporarily is the way people define normality, and think things will always be, so that if you are living in a big city like New York where so much remaining wealth is concentrated, and you are dazzled by the whirr and flash of things, including all the pretty young people drilling into their iPhones, you might expect a longer arc to the moment at hand. Out here in the provinces it's a different story. The exhaustion is palpable. I dropped into the mall at mid-day on Sunday to take the pulse on the ballyhooed post-Thanksgiving ritual shopping frenzy and the place was like a ghost town. The sparse stream of supposed "consumers" had the dazed, beaten-down look of people pushed beyond the edge of some dark threshold, like displaced persons in a low-grade war zone.   Their behavior seemed ceremonial, though, mere acting-out as opposed to acting. They were not carrying bags with purchases. I saw almost nobody actually shopping, that is, fingering the merchandise, in either the two department stores I passed through or the smaller shops lining the corridors. There were strikingly few clerks in either the big or little retail operations and you got the feeling that these stores were now expected to run on automatic pilot, with a skeleton crew of employees because the margins just aren't there anymore. They are going through the motions of being in business, and when Christmas is over some will not be there anymore. America has had enough, notwithstanding the latest YouTube videos showing crazed mobs fighting over worthless plastic crap at the "Black Friday" WalMart openings elsewhere around the country.

Special Report: Silicon Valley’s dirty secret – age bias (Reuters) - When Randy Adams, 60, was looking for a chief-executive officer job in Silicon Valley last year, he got turned down from position after position that he thought he was going to nail — only to see much younger, less-experienced men win out.Finally, before heading into his next interview, he shaved off his gray hair and traded in his loafers for a pair of Converse sneakers. The board hired him. "I don't think I would have been able to get this CEO job if I hadn't shaved my head," Such are the pressures in Silicon Valley, where the start-up ethos extols fresh ideas and young programmers willing to toil through the night. Chief executives in their 20s, led by Facebook founder Mark Zuckerberg, are lionized, in part because of their youth. Many investors state bluntly that they prefer to see people under 40 in charge. Yet the youth worship undercuts another of Silicon Valley's cherished ideals: that anyone smart and driven can get ahead in what the industry likes to think of as an egalitarian culture. To many, it looks like simple age discrimination - and it's affecting people who wouldn't fit any normal definition of old.

The Steady Devaluation of Labor - [The] minimum wage, in constant dollars, has had its ups and downs since 1970 but the overall trend indicated by the straight black line is down. The numbers show that the American economy puts less value on the entry level worker than it did in 1970. Why is that? Are minimum wage workers less intelligent now than they were forty years ago? Are they lazier? The reason probably has a lot to do with the rise of the global economy and cheaper Chinese labor. It may also have to do with basic attitudes toward labor. Some see labor as a commodity, while others believe it is not.  Representative Steve King (R-IA) on the floor of the House of Representatives last year:  "Labor is a commodity just like corn or beans or oil or gold, and the value of it needs to be determined by the competition, supply and demand in the workplace."

Startling Statistics on Workplace Abuse - A little holiday story caught our eye. Work is the last thing people are grateful for. Research suggests that employees who feel appreciated are more productive and loyal. But that message hasn't reached many of those in charge. Some bosses are afraid employees will take advantage of them if they heap on the gratitude. Other managers believe in thank-yous but are nervous about appearing awkward or insincere—or embarrassing the employee they wish to praise.A common attitude from the corner office is "We thank people around here: It's called a paycheck," Generally work life in America has gone downhill and downhill fast. We're not talking about the millions who can't find a job, or the stagnant wages, but for the ones still working, it's anything goes at work, including bullying and abuse.  Bullying in the workplace is common. In 2007, before the recession half of all workers had at least witnessed some form of workforce bullying. Of those bullied, 57% were women. A 2010 Careerbuilder survey showed 37% of all employees directly experienced workplace bullying.

When Domestic Workers Suffer, Our Economy Suffers - What kind of economy do we want in this country? This abstract question has been put to the test in concrete ways, most recently with the protests against Walmart. (To catch yourself up, read the fantastic coverage from fellow Nation writer Josh Eidelson.) As the nation’s—and the world’s—largest private employer, it has a huge impact on the economy. But perhaps more importantly, low-wage, low-benefit, unstable service sector jobs like those in Wally World are our economic destiny. So more than just the job quality for striking Walmart workers is at stake; the quality of one of the fastest growing job categories is also being decided. There’s another area where this couldn’t be truer: domestic work. The nannies, elder caregivers and housecleaners of today inhabit a rapidly growing occupation. As the baby boom generation ages and women continue to seek work outside the home, these jobs will become even more critical—and in demand. No wonder that the Bureau of Labor Statistics predicts that home care aide jobs will grow by 70 percent, far faster than most occupations, over the next decade. While harder to track, domestic workers’ jobs are also on course for that rate of growth.  So what do these jobs look like? Unlike the conditions at Walmart, which while not the most transparent company is still under the watch of federal labor regulators, domestic work is performed in the home, exempt from many labor laws and mostly made invisible.

Applications for U.S. Jobless Aid Fall to 393,000 - The number of Americans seeking unemployment benefits fell 23,000 to a seasonally adjusted 393,000 last week. It was the second straight drop after Superstorm Sandy had driven applications much higher earlier this month. A Labor Department analyst said Thursday that the storm had little effect on last week’s data. Applications had spiked to 451,000 three weeks ago after Sandy battered the East Coast, closing businesses in the Northeast and cutting off power to 8 million homes in 10 states. People can claim unemployment benefits if their workplaces are forced to close and they aren’t paid. The four-week average of applications, a less volatile measure, rose to 405,250 last week. That figure has been elevated by the storm. Superstorm Sandy made landfall on Oct. 29. The government reported last week that the storm caused benefit applications to jump by 75,000 in just New York and New Jersey in the week that ended Nov. 10. Applications also rose in Connecticut in Pennsylvania because of Sandy. Before the storm, weekly applications had fluctuated this year between 360,000 and 390,000. Meanwhile, employers have added an average of nearly 157,000 jobs a month. That’s barely enough to lower the unemployment rate, which was 7.9 percent in October.

Q3 GDP Revised Up, Jobless Claims Down - One up, one down. That's a good thing when it comes to the latest macro data points. GDP in the third quarter increased at a faster pace than initially reported and jobless claims continue to fall in the wake of the storm-related surge that drove new filings skyrocketing earlier in the month. The GDP news is a convincing sign that the economy continues to roll along in a slow-growth mode. The post-hurricane decline in jobless claims is also a positive, although the rate is a bit sluggish. What does it all mean? Let's take a closer look, starting with today's update on initial claims. New filings for unemployment benefits dropped 23,000 last week to a seasonally adjusted 393,000. That's the second decline in as many weeks and another clue for thinking that the surge in claims for the week through November 10 was a one-time event that was driven by havoc unleashed by Hurricane Sandy. I said as much two weeks ago and the numbers published since offer support for this view.

Weekly Initial Unemployment Claims decline to 393,000 - The DOL reports: In the week ending November 24, the advance figure for seasonally adjusted initial claims was 393,000, a decrease of 23,000 from the previous week's revised figure of 416,000. The 4-week moving average was 405,250, an increase of 7,500 from the previous week's revised average of 397,750. The previous week was revised up from 410,000. 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 405,250. This sharp increase in the 4 week average is due to Hurricane Sandy as claims increased significantly in the impacted areas (update: claims increased in NY, NJ and other impacted areas over the 4-week period - some of those areas saw a decline this week). Note the spike in 2005 related to hurricane Katrina - we are seeing a similar impact, although on a smaller scale. Weekly claims were about at the consensus forecast. And here is a long term graph of weekly claims:

Weekly Unemployment Claims at 393K: The Sandy Effect Is Wearing Off - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 393,000 new claims number was a 23,000 decrease from a 6,000 upward adjustment of the previous week as the impact of Sandy wears off. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, rose to 405,250. Given the impact of Hurricane Sandy, the four-week MA will show a lessening skew for the next three weeks or so. Here is the official statement from the Department of Labor:  In the week ending November 24, the advance figure for seasonally adjusted initial claims was 393,000, a decrease of 23,000 from the previous week's revised figure of 416,000. The 4-week moving average was 405,250, an increase of 7,500 from the previous week's revised average of 397,750. The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending November 17, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending November 17 was 3,287,000, a decrease of 70,000 from the preceding week's revised level of 3,357,000. The 4-week moving average was 3,296,250, an increase of 6,250 from the preceding week's revised average of 3,290,000.  Unlike last week, today's report contained no footnote references to the hurricane's impact on the data.Here is a close look at the data over the past few years (with a callout for 2012), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks. In the callout, note the red dots for the past four weeks. These clearly illustrate the data anomaly from Sandy.

November Jobs Growth Seen Held Back by Sandy - National data showing the impact of superstorm Sandy on economic activity will arrive next week. The most important will be November’s payroll report set for next Friday. Although Sandy made U.S. landfall in late October, the Labor Department conducts its payroll survey around the 12th of each month, so the October data was in the can when the storm hit. The November report will capture lingering impacts on the labor markets, including workers who could not get to their jobs because of bad weather.

How Long Can You Collect Unemployment Benefits? When job losses skyrocketed in 2008, Congress passed emergency measures to supplement state-level unemployment insurance programs, which generally offer six months of benefits. At their peak, the federally backed programs extended benefits to up to 99 weeks in some — though never all — states. (Read related article.) Congress has repeatedly extended the benefits amid persistently high joblessness, but the programs have also grown more restrictive over time. Many states no longer qualify for the most generous programs, which are pegged to states’ unemployment rates, and Congress has also cut back the maximum weeks available even to the states that do qualify. New York now offers the longest-lasting benefits, at 83 weeks, and no other state qualifies for more than 73 weeks. In several states, benefits now run out after less than a year. All of the main federal programs are due to expire at the end of the year unless Congress acts to extend them. The following maps show the maximum duration of benefits in each state by year. View them as a slideshow here:

Deadline Looms for Long-Term Unemployed - More than 40% of the nearly five million Americans who receive unemployment insurance are set to lose those benefits if federal programs expire as scheduled at year-end. Some economists worry that cutting off those benefits could harm the economy by leaving millions of Americans with less money to spend on everything from food to fuel. Others argue that overly generous benefits are helping to prolong joblessness. About 2.1 million Americans receive payments through federally backed emergency unemployment programs, which Congress adopted starting in 2008 as a temporary supplement to state-level programs funded primarily with taxes on employers, which generally offer six months of benefits. That number has tumbled from more than 3.5 million at the start of the year and a peak of more than six million in early 2010, reflecting not just the gradual improvement of the job market but also new limits that have pushed hundreds of thousands of workers off the rolls before they could find jobs. Already this year, hundreds of thousands of people have exhausted their jobless benefits. Now, virtually everyone left in the federal programs would lose their benefits if the programs expire as scheduled at year-end. Congress has repeatedly extended unemployment benefits amid high joblessness, and it could do so again. But the programs have gotten caught up in the fight over the "fiscal cliff," a package of tax increases and spending cuts due to take effect early next year. Some Democrats are pushing to extend benefits again, but the programs must contend not only with Republican opposition but also competing priorities such as business and individual tax breaks.

Unemployment benefits cost: $520 billion - Jobless Americans have collected more than half a trillion dollars in benefits over the past five years. State and federal unemployment insurance programs have cost roughly $520 billion, according to a Congressional Budget Office report released Wednesday. The price of continuing this safety net will be the subject of intense debate in Congress as lawmakers decide whether to extend the deadline to file for federal benefits beyond year's end as part of the fiscal cliff negotiations. Extending federal jobless insurance next year could cost as much as $30 billion, according to the CBO analysis. The federal government has spent far more on unemployment insurance in recent years than it had in previous economic downturns because of the unprecedented response to the Great Recession. Federal benefits were extended to a record 99 weeks in November 2009. That safety net was extended multiple times until this year, when Congress extended the deadline to file but shortened the duration the jobless can receive checks.

Down But Not Out: Yahoo! Readers Share Their Stories of Unemployment and Job-Hunting Yahoo Joins the Gawker series on unemployment…First Person: How I Feed My Family Without a Job - It should be easy for me to find a job working in an office. I have 31 years of experience with more than 15 years as an office manager in the manufacturing and construction industries. I have excellent references and pride myself on my accounting, computer and people skills. When President Obama took office, the construction industry dried up and manufacturing continued to migrate overseas. Plants and factories halted their multimillion dollar expansions and many have downsized or closed, and I am afraid things will only get worse as Obamacare and the fiscal cliff hangs over the head of everyone and hits small businesses particularly hard. I have tried to switch industries, putting in close to 100 applications for any type of office work that I can find, including entry-level, when there was an opening. I received only a handful of interviews and was told that the company "cannot afford to pay you what you are worth," even when I practically beg for minimum wage.

Inequality is not just about taxes and education - Zachary Goldfarb wrote an interesting piece on President Obama’s commitment to fight rising economic inequality as president. Lots of it rings true—the president has indeed expressed concerns about rising inequality and many of his policy initiatives (particularly the coverage expansion included in health reform) will indeed do much to ensure that rising inequality no longer provides as daunting a barrier to low– and middle-income households’ living standards growth. What’s consistently depressing in the inequality debate as waged around D.C. politics, however, is the telescoping of the debate into being all about tax rates and educational attainment. Goldfarb repeats a piece of ossified conventional wisdom in his piece, writing, “The data show that rising inequality is largely the result of a changing economy that handsomely rewards people with better skills or credentials—a college education—and leaves people with a basic education at a disadvantage.”  This just isn’t right. Check out how wages for college graduates have fared in the past decade.

When Work Is Punished: The Tragedy Of America's Welfare State - Exactly two years ago, some of the more politically biased progressive media outlets (who are quite adept at creating and taking down their own strawmen arguments, if not quite as adept at using an abacus, let alone a calculator) took offense at our article "In Entitlement America, The Head Of A Household Of Four Making Minimum Wage Has More Disposable Income Than A Family Making $60,000 A Year." In it we merely explained what has become the painful reality in America: for increasingly more it is now more lucrative - in the form of actual disposable income - to sit, do nothing, and collect various welfare entitlements, than to work. This is graphically, and very painfully confirmed, in the below chart from Gary Alexander, Secretary of Public Welfare, Commonwealth of Pennsylvania (a state best known for its broke capital Harrisburg). As quantitied, and explained by Alexander, "the single mom is better off earnings gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045."

Applying Evidence to Social Programs - Despite a myriad of new government programs and spending over the last 40 years, the system has failed to improve economic and social well-being for an astonishingly large segment of the American population. There is a different way forward, focused on increasing the effectiveness of existing funds. This way forward could be an excellent fit as the administration and Congress ponder a second-term agenda for President Obama with little new money to spend. Census Bureau data show that over the last 40 years, average yearly income of the bottom 40 percent of U.S. households – now at $20,221 – has changed little after adjusting for inflation. In education, although the college graduation rate has risen, the high school graduation rate peaked around 81 percent in the early 1970s. Since then, it has been stuck between 75 and 80 percent. Department of Education data show that reading and math achievement of 17-year-olds – the end product of our K-12 educational system – has not improved over 40 years, despite a 90 percent rise in public spending per student (adjusted for inflation).

War on the Weak, the Elderly, the Disabled, the Outsider - videos

The Benefits of the Safety Net - A new working paper (abstract; PDF) examines the effects of in utero and childhood access to the social safety net, specifically food stamps: A growing economics literature establishes a causal link between in utero shocks and health and human capital in adulthood. Most studies rely on extreme negative shocks such as famine and pandemics. We are the first to examine the impact of a positive and policy-driven change in economic resources available in utero and during childhood. In particular, we focus on the introduction of a key element of the U.S. safety net, the Food Stamp Program, which was rolled out across counties in the U.S. between 1961 and 1975. We use the Panel Study of Income Dynamics to assemble unique data linking family background and county of residence in early childhood to adult health and economic outcomes. The identification comes from variation across counties and over birth cohorts in exposure to the food stamp program. Our findings indicate that the food stamp program has effects decades after initial exposure. Specifically, access to food stamps in childhood leads to a significant reduction in the incidence of “metabolic syndrome” (obesity, high blood pressure, and diabetes) and, for women, an increase in economic self-sufficiency. Overall, our results suggest substantial internal and external benefits of the safety net that have not previously been quantified.

The Choice to End Poverty - On Monday, at an event marking the release of the Half in Ten campaign’s new report—“The Right Choices to Cut Poverty and Restore Shared Prosperity”—Angela Sutton, a Witness to Hunger in Philadelphia, talked about why it’s so critical to protect investments in low-income families during the upcoming deficit debate. Sutton was shot at age 14, raped twice (including by her father), didn’t graduate high school and was homeless at 16. “For two years, I slept in an abandoned car, slept in the snow, ate out of trashcans,” she said. “I was supposed to be a statistic, left for dead.” Sutton said a Section 8 voucher and food stamps helped her find stability. She graduated from Drexel University with an associate’s degree and is now working towards her bachelor’s. “We need to keep fighting for people that want the American Dream,” she said. “We don’t want a handout, we want to be able to help each other.”

Some insurance companies to Sandy victims: You are covered for hurricanes, not floods - Thousands of families still struggling in the aftermath of Sandy are learning that some insurance companies don’t seem to think the storm was a hurricane. Alex Savoie’s broker told her that her family’s Rockaways home was covered for hurricanes, so when Sandy trashed the place, she assumed she’d be okay. To Savoie’s surprise, the insurer said she wasn’t covered because the damage was caused by a flood — not a hurricane. Because she doesn’t have flood insurance, she’s out of luck. “They told me I’m at the end of the line,” Savoie, 41, said this week, standing inside the gutted remains of her first floor on Shore Front Parkway in the Rockaways. “The bottom line is very simple. I had hurricane insurance. It should cover a hurricane.” Homeowners in low-lying areas across the city have found themselves in the same situation. They’re turning to the feds in droves after their insurers won’t pay up. About 220,000 homeowners in New York City and Long Island have registered for emergency housing cash from the Federal Emergency Management Agency.

Sandy Cost New York $42 Billion, According To Source In Governor's Office — Top political leaders in New York put their heads together Monday on big requests for federal disaster aid as Gov. Andrew Cuomo announced that Superstorm Sandy ran up a bill of $32 billion in the state and the nation's largest city. The cost is for repairs and restoration and does not include an additional accounting of over $9 billion to head off damage in the next disastrous storm, including steps to protect the power grid and cellphone network. New York Mayor Michael Bloomberg had announced earlier in the day that Sandy caused $19 billion in losses in New York City – part of the $32 billion estimate Cuomo used. New York taxpayers, Cuomo said, can't foot the bill. "It would incapacitate the state. ... Tax increases are always a last, last, last resort." Cuomo met with New York's congressional delegation to discuss the new figures and present "less than a wish list." The delegation, Cuomo and Bloomberg will now draw up a request for federal disaster aid. States typically get 75 percent reimbursement for the cost of governments to restore mass transit and other services after a disaster.

Cuomo Cites Broad Reach of Hurricane Sandy in Aid Appeal -  Gov. Andrew M. Cuomo, making a case for tens of billions of dollars in federal aid, declared on Monday that Hurricane Sandy had been “more impactful” than Hurricane Katrina, the deadly storm that struck the Gulf Coast in 2005.Hurricane Sandy, which arrived in New Jersey and New York on Oct. 29, “affected many, many more people and places than Katrina,” Mr. Cuomo, a Democrat, told reporters at a news briefing. He said the comparison between the two hurricanes “puts this entire conversation, I believe, in focus.” Mr. Cuomo said the recent storm would cost New York State nearly $42 billion, and he huddled in his Midtown office with the state’s Congressional delegation, as well as Mayor Michael R. Bloomberg and the Nassau, Suffolk and Westchester County executives, to strategize on lobbying Washington for financial assistance. Mr. Cuomo acknowledged that more people had been killed by Hurricane Katrina, but said that Hurricane Sandy had had a greater economic impact because of the dense population in the New York City area. He said Hurricane Sandy had destroyed or damaged more units of housing, affected more businesses and caused more customers to lose power.

Chris Christie: Hurricane Sandy New Jersey Damage Will Cost At Least $29.4 Billion: (Reuters) - Superstorm Sandy caused at least $29.4 billion in overall damage in New Jersey, according to a preliminary analysis released by Governor Chris Christie's office Friday. The estimate of the damage caused by the storm, which ravaged the Northeastern U.S. coastline late last month, includes personal property, business, infrastructure and utility damage, Christie said in a statement. The statement said the preliminary cost estimate is "inclusive of aid received to date and anticipated from federal sources," including the Federal Emergency Management Agency and the Small Business Administration. Christie said it was a "conservative and responsible estimate" that could be revised higher, Christie said. Last week, New York Governor Andrew Cuomo said he planned to ask the federal government for $30 billion in disaster aid for the state. Earlier this month, New York City Comptroller John Liu said the storm was costing New York City $200 million a day in lost economic activity, with that amount likely to top out at about $1 billion. "This preliminary number is based on the best available data, field observations and geographical mapping, and supported by expert advice from my Cabinet commissioners and an outside consulting company," Christie said

Hurricane Sandy: New Jersey Rebuilding Ahead Of Thoughtful Decisions? - Some advocates fear that rebuilding efforts could take shape on New Jersey's storm-devastated shore before thoughtful decisions can be made about just how the area should be rebuilt. The federal government brought thousands of tons of stone, sand and riprap to repair an inlet that the storm ripped open, reconnecting the bay and ocean in a narrow section of barrier island in Mantoloking. The state is repairing Route 35 where it was washed away by that breach and two others nearby. Also, state action has also made it easier to rebuild damaged infrastructure such as roads and water pipes. Jeff Tittel, director of the New Jersey chapter of the Sierra Club, objects to the state's decision to allow permanent roads, water pipes and other infrastructure to be built to replace ruined ones. He said it makes sense to allow temporary facilities. "But it shouldn't be permanent. Now, we're giving a blanket waiver," he said. "That's just throwing money out to sea."P> 

Life in Post-Apocalyptic New Jersey: Climbing the water tower to defend our honor - Riverdaughter - I read a post by Chicago Dyke at Corrente this afternoon that was a little disturbing.  CD thinks that Chris Christie’s request of $36 billion is too much.  I think Chicago Dyke has a distorted perception of who actually lives here in New Jersey but I’ll address that in a minute.  Here’s my response to her from my comment at Corrente (edited) with an additional point that I think any liberal would love to sign on to: First, we in NJ have been footing the bill for the rest of the country for years now. For every dollar of taxes we send to DC we get $.61. That’s right, we lose almost 40 cents of every dollar. We make up for the shortfall by paying the most punitive property taxes in the country. While I would LOVE to send my $.39/dollar of taxes to Michigan, it usually gets sucked down by Mississippi and Alabama who hate us for our freedoms. Second, this is the densest state in the nation. There are a lot of buildings and a lot of people. And real estate here is not cheap. Third, the businesses wiped out at the Jersey shore are seasonal. There’s not a whole lot going on there in the winter. The shore businesses make their money from May to September. Imagine if you were the owner of a store in a mall and the mall burned to the ground before Christmas.  Now, imagine thousands of stores in that predicament. There are many people who will lose their shirts and their jobs next year if these businesses can’t be rescued.  The problem can be somewhat alleviated next year if we start now.

Washington must stop the creeping rust - Last summer India had the largest power outage in human history affecting 600m people. So it stung when my visiting Indian mother-in-law pointed out that America’s east coast, including Washington, was “as bad as India”. Then it was a so-called derecho storm, which left 6m US homes without power for days in the searing heat. Last month it was Superstorm Sandy, which left 10m households shivering. Forecasters predict a heavy late December cold snap that is bound to cause blackouts. It is hard to pinpoint the date at which Americans developed an Indian – or perhaps British – fatalism about the declining quality of their infrastructure. When my British mother spent several months in the US in the 1950s, it was dazzlingly futuristic. There was air-conditioning, an icebox in every fridge, ubiquitous neon lights and an open road on which even the working class could afford to drive. But bit by bit over the past 30 years, the world’s first truly modern infrastructure has shown its age. It has been starved by a generation of under-investment. And Americans have adapted around it. At some point in the next 12 months, we will discover whether the US has the will to bring its infrastructure into the 21st century. If all goes well, Congress will take steps to avert a fiscal cliff before January 1. As part of that deal lawmakers will schedule another ticking time bomb for late 2013, before which they will have to strike a larger bargain or hit another fiscal cliff. The likelihood is that Congress will shrink the already meagre federal investment budget. The hope, as the Brookings Institution Metropolitan Center puts it, is that Congress will “cut to invest” rather than doing so crudely across the board.

Highway Grants: Roads to Prosperity? - FRBSF Economic Letter - This Economic Letter examines new research on the dynamic effects of public investment in roads and highways on gross state product (GSP), the total economic output of a state. This research focuses on investment in roads and highways in part because it is the largest component of public infrastructure in the United States. Moreover, the procedures by which federal highway grants are distributed to states help us identify more precisely how transportation spending affects economic activity. We find that unanticipated increases in highway spending have positive but temporary effects on GSP, both in the short and medium run. The short-run effect is consistent with a traditional Keynesian channel in which output increases because of a rise in aggregate demand, combined with slow-to-adjust prices. In contrast, the positive response of GSP over the medium run is in line with a supply-side effect due to an increase in the economy’s productive capacity.  We also assess how much bang each additional buck of highway spending creates by calculating the multiplier, that is, the magnitude of the effect of each dollar of infrastructure spending on economic activity. We find that the multiplier is at least two. In other words, for each dollar of federal highway grants received by a state, that state’s GSP rises by at least two dollars.

Bad Connections - Since 1974, when the Justice Department sued to break up the Ma Bell phone monopoly, Americans have been told that competition in telecommunications would produce innovation, better service and lower prices.  What we’ve witnessed instead is low-quality service and prices that are higher than a truly competitive market would bring.  After a brief fling with competition, ownership has reconcentrated into a stodgy duopoly of Bell Twins — AT&T and Verizon.  The AT&T-DirectTV and Verizon-Bright House-Cox-Comcast-TimeWarner behemoths market what are known as “quad plays”: the phone companies sell mobile services jointly with the “triple play” of Internet, telephone and television connections, which are often provided by supposedly competing cable and satellite companies. And because AT&T’s and Verizon’s own land-based services operate mostly in discrete geographic markets, each cartel rules its domain as a near monopoly.  The result of having such sweeping control of the communications terrain, naturally, is that there is little incentive for either player to lower prices, make improvements to service or significantly invest in new technologies and infrastructure. And that, in turn, leaves American consumers with a major disadvantage compared with their counterparts in the rest of the world.

Sewage Flows After Hurricane Sandy Exposing Flaws in System - — The water flowing out of the Bay Park sewage plant here in Nassau County is a greenish-gray soup of partially treated human waste, a sign of an environmental and public health disaster that officials say will be one of the most enduring and expensive effects of Hurricane Sandy.In the month since the storm, hundreds of millions of gallons of raw and partly raw sewage from Bay Park and other crippled treatment plants have flowed into waterways in New York and New Jersey, exposing flaws in the region’s wastewater infrastructure that could take several years and billions of dollars to fix. In New York State alone, Gov. Andrew M. Cuomo has estimated that about $1.1 billion will be needed to repair treatment plants. But officials acknowledge that they will have to do far more. Motors and electrical equipment must be raised above newly established flood levels, and circuitry must be made waterproof. Dams and levees may have to be built at some treatment plants to keep the rising waters at bay, experts say. Failure to do so, according to experts, could leave large swaths of the population vulnerable to public health and environmental hazards in future storms.

Disaster Economics - February 1, 1953, a fierce, sustained storm created a huge surge in the North Sea off the coast of Holland. Floodwaters overtopped the dikes, swallowing half a million acres of land and killing nearly two thousand people. Within weeks of the storm, a government commission issued what came to be known as the Delta Plan, a set of recommendations for flood-control measures. Over the next four decades, the Dutch invested billions of guilders in a vast set of dams and barriers, culminating in the construction of the Maeslant Barrier, an enormous movable seawall to protect the port of Rotterdam. Since the Delta Plan went into effect, the Netherlands has not been flooded by the sea again. In the aftermath of Hurricane Sandy, which brought havoc to the Northeast and inflicted tens of billions of dollars in damage, it’s overwhelmingly clear that parts of the U.S. need a Delta Plan of their own. Sandy was not an isolated incident: only last year, Hurricane Irene caused nearly sixteen billion dollars in damage, and there is a growing consensus that extreme weather events are becoming more common and more damaging. The annual cost of natural disasters in the U.S. has doubled over the past two decades. Instead of just cleaning up after disasters hit, we would be wise to follow the Dutch, and take steps to make them less destructive in the first place. There is no dearth of promising ideas out there, such as building a seawall beyond the Verrazano-Narrows Bridge (the Dutch engineering firm Arcadis has proposed a movable barrier, like the Rotterdam one), burying power lines in vulnerable areas, and elevating buildings and subway entrances. The question is whether we can find the political will to invest in such ideas. Although New York politicians like the City Council Speaker, Christine Quinn, and Governor Andrew Cuomo have called for major new investment in disaster prevention, reports from Washington suggest that Congress will be more willing to spend money on relief than on preparedness. That’s what history would lead you to expect: for the most part, the U.S. has shown a marked bias toward relieving victims of disaster, while underinvesting in prevention. A study by the economist Andrew Healy and the political scientist Neil Malhotra showed that, between 1985 and 2004, the government spent annually, on average, fifteen times as much on disaster relief as on preparedness.

AP IMPACT: NYC Flood Protection Won't Be Easy — Inside tunnels threading under a Houston medical campus, 100 submarine doors stand ready to block invading floodwaters. Before commuters in Bangkok can head down into the city's subways, they must first climb three feet of stairs to raised entrances, equipped with flood gates. In Washington, D.C., managers of a retail and apartment complex need just two hours to activate steel walls designed to hold back as much as a 17-foot rise in the Potomac River. #If metropolitan New York is going to defend itself from surges like the one that overwhelmed the region during Superstorm Sandy, decision makers can start by studying how others have fought the threat of fast-rising water. And they must accept an unsettling reality: Limiting the damage caused by flooding will likely demand numerous changes, large and small, and yet even substantial protections will be far from absolute. #Sandy's toll is overwhelming. But finding the money and political will to build a proposed system of giant storm barriers at the mouth of New York Harbor will likely be very difficult. Even at a cost of up to $27 billion, such barriers would leave large parts of the region unprotected. #So government, businesses and property owners will need to consider taking smaller steps — on land — to minimize the impact of flooding, with or without sea barriers.Researchers are working on still other strategies, like 16-foot-wide inflatable plugs being developed at West Virginia University to seal off subways and tunnels from water. #But there's no single cure-all.

Cost of Coastal Living to Climb Under New Flood Rules -  New York and New Jersey residents, just coming to grips with the enormous costs of repairing homes damaged or destroyed by Hurricane Sandy, will soon face another financial blow: soaring flood insurance rates and heightened standards for rebuilding that threaten to make seaside living, once and for all, a luxury only the wealthy can afford.Homeowners in storm-damaged coastal areas who had flood insurance — and many more who did not, but will now be required to — will face premium increases of as much as 20 percent or 25 percent per year beginning in January, under legislation enacted in July to shore up the debt-ridden National Flood Insurance Program. The yearly increases will add hundreds, even thousands, of dollars to homeowners’ annual bills. The higher premiums, coupled with expensive requirements for homes being rebuilt within newly mapped flood hazard zones, which will take into account the storm’s vast reach, pose a serious threat to middle-class and lower-income enclaves. In Queens, on Staten Island, on Long Island and at the Jersey Shore, many families have clung fast to a modest coastal lifestyle, often passing bungalows or small Victorian homes down through generations, even as development turned other places into playgrounds for the well-to-do.

End Federal Flood Insurance - IT’S no surprise that it can be very expensive to live near the ocean. But it may come as a surprise to American taxpayers that they are on the hook for at least $527 billion of vulnerable assets in the nation’s coastal flood plains. Those homes and businesses are insured by the federal government’s National Flood Insurance Program.  You read that right: $527 billion, which is just a portion of the program’s overall liability of $1.25 trillion, second only to Social Security in the liabilities on the government’s ledgers last year, according to government data.  The flood insurance program was created by Congress in 1968 to fill a void: because of the risk, few carriers provided flood insurance. Now, private insurers offer flood insurance in a partnership with the government — but taxpayers shoulder all the risk. It has turned out to be a bad bet. It is long past time for the government to stop subsidizing home and business owners who live and build in dangerous flood zones. Homeowners and businesses should be responsible for purchasing their own flood insurance on the private market, if they can find it. If they can’t, then the market is telling them that where they live is too dangerous. If they choose to live in harm’s way, they should bear the cost of that risk — not the taxpayers. Government’s primary role is ensuring the safety of its citizens, so the government’s subsidizing of risky behavior is completely backward.

Is This the End? - NYTimes- WE’D seen it before: the Piazza San Marco in Venice submerged by the acqua alta; New Orleans underwater in the aftermath of Katrina; the wreckage-strewn beaches of Indonesia left behind by the tsunami of 2004. We just hadn’t seen it here. (Last summer’s Hurricane Irene did a lot of damage on the East Coast, but New York City was spared the worst.) “Fear death by water,” T. S. Eliot intoned in “The Waste Land.” We do now. There had been warnings. In 2009, the New York City Panel on Climate Change issued a prophetic report. “In the coming decades, our coastal city will most likely face more rapidly rising sea levels and warmer temperatures, as well as potentially more droughts and floods, which will all have impacts on New York City’s critical infrastructure,” said William Solecki, a geographer at Hunter College and a member of the panel. But what good are warnings? Intelligence agents received advance word that terrorists were hoping to hijack commercial jets. Who listened? (Not George W. Bush.) If we can’t imagine our own deaths, as Freud insisted, how can we be expected to imagine the death of a city?

Just Released: New York’s Latest Beige Book Report Points to Weakening in the Aftermath of Superstorm Sandy -The regional economy experienced a weakening in the aftermath of superstorm Sandy, according to the New York Fed’s latest Beige Book report. Eight times a year, each of the nation’s twelve Federal Reserve Banks produces a report on current economic conditions in its District, based on largely anecdotal information obtained from a variety of regional business contacts. The New York Fed’s report covers New York State, northern New Jersey, and southwestern Connecticut.   In the newest report—based on information collected through November 15—many businesses across the New York City metropolitan region reported losses in activity due to widespread disruptions from Sandy. Prior to the storm, however, the general consensus was that business conditions were holding steady. In upstate New York, which wasn’t affected directly by the storm, most contacts reported business as usual, though there were scattered signs of softening in housing, manufacturing, and vehicle sales. Some contacts upstate did note some indirect effects from the storm’s disruptions—largely to supply chains.    As to the types of businesses adversely affected by Sandy, many retail stores and hotels in Lower Manhattan and elsewhere in the metropolitan area were without power for a number of days. Even when stores were able to reopen, it was often difficult for both workers and potential customers to access them. Even in areas that didn’t lose power or sustain flooding or damage, businesses were adversely affected—for example, attendance and revenue at Broadway theaters were exceptionally low, not only in the week of the storm (when they shut down for two days) but also in the following week. The trucking industry was also disrupted, as many terminals and warehouses sustained heavy flooding.  The labor market showed marked signs of softening after the storm. However, this softening was viewed as a brief lull in hiring activity, as many firms were shut down or without key recruitment personnel. Still, it should be noted that few contacts in manufacturing or other sectors expect their firms to reduce headcount in the months ahead.

White House expected to seek billions in Sandy disaster aid -(Reuters) - The White House is expected in the coming days to send Congress a multi-billion dollar request to fund recovery from Superstorm Sandy, which caused an estimated $71 billion in damages in New York and New Jersey. Congressional aides said there was no clear indication of the request's size, but some said it would likely be at least $11 billion.The Federal Emergency Management Agency's disaster relief fund had access to about $7.8 billion as Sandy slammed the U.S. East Coast on October 29, causing widespread destruction in coastal New York and New Jersey. Lawmakers and analysts also said Congress will need to shore up the heavily indebted National Flood Insurance Program in the face of $12 billion in payouts resulting from Sandy, ranked as the second-worst disaster in U.S. history.

Hurricane Sandy: Staten Island Survivors - As we head into the Thanksgiving weekend, thousands of families in the northeast face a difficult holiday season. For those still reeling from the effects of Superstorm Sandy, emotions are still raw and futures are uncertain. Reuters photographer Mike Segar visited Staten Island last week, spending time with residents hard-hit by Sandy. He collected not just their portraits but their stories, as they stood amid the wreckage of what had been their homes, businesses, and places of worship. While there was anger and sadness on display, there was also a sense of gratitude for the outpouring of help from afar, and the groundswell of support from friends and neighbors. [19 photos]

Bankruptcy unattractive option for Detroit - The city appears to be careening closer to bankruptcy as political and legal battles continue to stall fiscal reforms required by the state for the release of millions in critical bond funding. But financial and legal experts warn that Detroit — which would be the biggest city ever to file for bankruptcy protection in American history — should steel itself for a long, costly process involving a litany of unknowns if the state allows it to proceed. "The way the laws are now, it's a really messy option," said Kenneth Whipple, a retired businessman and member of the city's Financial Advisory Board created by Gov. Rick Snyder to help monitor Detroit's finances. "There aren't any cities as big as Detroit in as complicated a legal structure that have gone that way." The city and state have been at an impasse over specific reforms Detroit must meet as part of a "milestone agreement" to claim $30 million in state bond funding currently being held in escrow.

Michigan State Senator Suggests Eliminating The City Of Detroit -Detroit has been a city with problems for decades now. Thanks in large part to the decline of the auto industry as well as the general trend of residents leaving northern cities for the Sun Belt, the city has lost a large segment of its population and entire areas of the city have been essentially abandoned. In the ten years between the 2000 and 2010 Censuses, the city lost a quarter of its residents. Earlier this year, the city announced plans to turn off up to 40% of its street lights. It is, in other words, the poster child for a city in a permanent state of decline. Now, one member of the Michigan Legislature is proposing dissolving the city entirely: (CBS Detroit) – It would no doubt be controversial, but the idea of dissolving the fiscally struggling city of Detroit and absorbing it into Wayne County is being tossed around in Lansing. WWJ Lansing Bureau Chief Tim Skubick reports some state Republicans are talking about giving the city the option to vote itself into bankruptcy. And mid-Michigan Senator Rick Jones said all options should be considered — including dissolving the city

Despite Ruin, Library Offers Books and Community - It was the little things, the sudden absence of everyday fixtures, that disoriented residents in the Rockaways in the days after the storm, as much as the loss of house and home. The traffic lights had gone dark. Where was one to get a prescription filled? And oh, what about books due at the library?  The Rockaways still look like ghost towns. But the community libraries are there — if only in the form of a bus, parked in front of the gutted, muddy Peninsula branch. Days after the storm laid waste to four Queens Borough Public Library branches in the Rockaways, a colorful mobile library bus has hummed just outside its former location on Rockaway Beach Boulevard, offering warmth, power outlets, emergency information and books.  National Guard patrolled the streets. Recovery centers had not yet opened. So the library, a natural community center, stepped unto the breach.  “People were just wandering back and forth in shock; they didn’t know what else to do,” Joanne King, the communications director for the Queens library system, said of the first day the bus opened. “When they saw the library bus parked out there, they just burst into tears.”

U.S. officials tell state to use same standards to grade charter schools - Federal education officials have denied Pennsylvania's request to evaluate charter school achievement using more lenient criteria, saying they must be assessed by the same standard as traditional schools. The rejection means Pennsylvania cannot substitute a less stringent method for measuring "adequate yearly progress," the federal benchmark known as AYP. Critics said the formula artificially inflated charter schools' performance for political reasons. "I cannot approve this ... because it's not aligned with the statute and regulations," U.S. Assistant Education Secretary Deborah Delisle wrote. Under Pennsylvania law, every charter school is considered its own district. So by using the grade span methodology, about 59 percent of charters made AYP -- a figure that supporters touted, comparing it with the 50 percent of traditional schools that hit the target. Yet only 37 percent of charters would have made AYP under the individual school method. Delisle ordered Pennsylvania to re-evaluate charter schools' AYP status using that standard by the end of the fall semester.

District managers got raises, but school police say they got screwed: SIGNING ON THE dotted line usually means a done deal. Not where the school district is concerned. The school police union was told in the summer that the district would disregard negotiated and mandated 3 percent raises in a contract because it was in "financial distress." That excuse further infuriated union members after the Daily News reported Monday that district-sanctioned wage hikes of 13 percent to 49 percent were given to 25 higher-paid, nonunion employees. "It doesn't seem like the right thing to do," school police officer Elliott Feldman said Wednesday night in a phone interview. "It leaves a bad taste in your mouth." Michael Lodise, president of the School Police Association of Philadelphia, summed it up: "My members were smokin' [mad]."

California school districts face huge debt on risky bonds - Two hundred school districts across California have borrowed billions of dollars using a costly and risky form of financing that has saddled them with staggering debt, according to a Times analysis. Schools and community colleges have turned increasingly to so-called capital appreciation bonds in the economic downturn, which depressed property values and made it harder for districts to raise money for new classrooms, auditoriums and sports facilities. Unlike conventional shorter-term bonds that require payments to begin immediately, this type of borrowing lets districts postpone the start of payments for decades. Some districts are gambling the economic picture will improve in the decades ahead, with local tax collections increasingly enough to repay the notes. CABs, as the bonds are known, allow schools to borrow large sums without violating state or locally imposed caps on property taxes, at least in the short term. But the lengthy delays in repayment increase interest expenses, in some cases to as much as 10 or 20 times the amount borrowed.

UK education sixth in global ranking - The UK's education system is ranked sixth best in the developed world, according to a global league table published by education firm Pearson. The first and second places are taken by Finland and South Korea. The rankings combine international test results and data such as graduation rates between 2006 and 2010. Sir Michael Barber, Pearson's chief education adviser, says successful countries give teachers a high status and have a "culture" of education. International comparisons in education have become increasingly significant - and this latest league table is based upon a series of global test results combined with measures of education systems, such as how many people go on to university. This composite picture puts the UK in a stronger position than the influential Pisa tests from the Organisation for Economic Co-operation and Development (OECD) - which is also one of the tests included in this ranking. The weightings for the rankings have been produced for Pearson by the Economist Intelligence Unit.

Finland's Education System Best In World - A new global league table, produced by the Economist Intelligence Unit for Pearson, has found Finland to be the best education system in the world.  The rankings combined international test results and data such as graduation rates between 2006 and 2010, the BBC reports.  For Finland, this is no fluke. Since it implemented huge education reforms 40 years ago, the country's school system has consistently come in at the top for the international rankings for education systems.  But how do they do it?  It's simple — by going against the evaluation-driven, centralized model that much of the Western world uses.

Can Community Colleges Put Americans Back to Work? - Community colleges have long played a key role as an entryway to better career opportunities for adults in the workforce. But with the job market more competitive than ever and the unemployment rate stubbornly stuck near 8%, community colleges across the country are launching new initiatives that are more aggressive in helping unemployed Americans find jobs. The U.S. Department of Labor is pouring $2 billion into community college job retraining courses across the United States as part its Trade Adjustment Assistance program, which provides a variety of resources to unemployed individuals seeking new work. The money, administered in $500 million increments between 2011 and 2014, is being awarded to community colleges to develop programs to quickly teach workers new skills and establish relationships with businesses that have job openings. Pennsylvania, which received one of the largest initial grants at $20 million, recently launched JobTrak PA, a collaborative effort between 14 of the state’s community colleges to help retrain more than 3,000 workers around the state over the course of three years. The programs take on a different form in different parts of the country, based on the labor needs in a given area—in Pennsylvania, schools are training people in advanced manufacturing, health care information technology, or new energy jobs. The “fast-track” courses, some of which can be completed in as few as 12 weeks, offer industry-recognized certificates in various sectors, sometimes for free, to workers that meet high-school-level reading and math requirements and successfully complete an interview.

Growth In College Tuition Vs. Growth In Earnings For College Graduates - This is a great chart from Citi (just tweeted by Tracy Alloway) that says a lot about why people are worried about student debt. Citi The New York Fed reported yesterday that student debt loads have now hit $956 billion, up $42 billion from last quarter.

Online Courses and the Future of Higher Education- Online courses began around 1990 with the growth of more widespread access to the Internet. They spread rapidly in the United States during the last half of the 1990’s buoyed by the dot-com boom, and fell sharply after that bubble burst. During this early period, online courses typically charged fees. Some of the courses catered to individuals who wanted to improve their job prospects, others were meant solely for intellectual enjoyment, while some could be used to obtain college degrees. For-profit schools with physical facilities, such as DeVry University and the University of Phoenix, were often sponsors of online courses, although a few of these courses were sponsored by nonprofit universities. What is new about the MOOCs (which stands for “massive open online courses”) is not the use of the Internet to instruct in particular subjects, but that they are free, and they often are sponsored by some of the very best universities, such as MIT, Harvard, and Stanford. Since they cost little if anything to take, it is much easier for the MOOCs to get massive enrollments than the fee-charging courses offered during the earlier boom in online courses. Aside from typically being free, the other unique aspect of MOOCs is that many of them are sponsored by known, often well-known, private and public universities. Since so far these universities get no revenue from the MOOCs they offer, the motivation is teaching to much larger audiences, favorable publicity for the universities involved, and the prospect of eventually earning revenue from these courses by charging fees or in other ways. The cost of offering these courses is typically not large since even the super star professors who sometimes lecture in online courses are quite cheap, and they may even do it without receiving any payment since they too want to spread knowledge and their influence.

MOOCs—Implications for Higher Education—“MOOCs,” an acronym for “massive open online courses,” denotes an important, possibly a revolutionary, development ineducation. These courses are online, free of charge, open to anyone in the world who has a laptop and an Internet connection, and offered by entities with strange names such as coursera, codeacademy, edX, khanacademy, and udacity. The offerors are mainly university consortia or university-affiliated. Moreover, and critically, the universities are elite universities like Stanford, Berkeley, Harvard, and Columbia. Not that online education is new; there are adult-education online courses such as are sold by The Teaching Company; there are even online college degree programs, offered mainly by for-profit colleges. What is new is the scale and potential of free online education offered by, or in conjunction with, the nation’s leading universities. The courses, like conventional college courses, are sequenced by difficulty, enabling the student to progress from beginner to advanced. The courses cover not only a very broad range of technical subjects such as math, statistics, computer science, the natural sciences, and engineering, but, increasingly, also courses in the social sciences and the humanities. MOOCs ae not offered for credit; they do not count toward an undergraduate or graduate degree; they are (at present) for people who want to obtain not a credential but skills or knowledge, whether for enjoyment or to put to some practical use. Anyone anywhere in the world can enroll; individual MOOC courses are attracting tens of thousands of students. There are frequent quizzes embedded in each online courses, and sometimes there are mid-course or end-of-course exams as well. These exams are graded by peer groups (other students enrolled in the course—in one program a student’s exam is graded by five other students and the grade on the exam is the average of the grades given by the five graders). Some students form online study groups, or in-person groups with students who live nearby.

2012's Worst Paying College Degrees - analyzed the data in its online salary database and has revealed the college degrees that go along with the jobs that have the lowest median pay for their respective career professionals in its 2012-13 College Salary Report. Note - these figures represent the typical annual combination of pay, bonuses, commissions and profit sharing earned by people who have been successful in working in these fields for at least 10 years and were willing to participate in's survey, which means the reported median incomes will likely be inflated above each field's actual median incomes....

Student Loan Debt Rising, and Often Not Being Paid Back -  Americans have been getting better at paying off their debt in the last year, with a glaring exception: student loans. Total consumer debt fell again in the third quarter, according to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit. This figure has been falling for four years. As consumer debt has been falling, so have consumers’ delinquency rates. As of Sept. 30, 8.9 percent of outstanding household debt was in some stage of delinquency, with 6.6 percent at least 90 days late. Bucking this trend is student loans. Student loan debt has been growing every quarter since at least 2003, the earliest data included in the report. And delinquency rates look worse than previously believed. Outstanding student loan balances totaled $956 billion as of the end of September, rising $42 billion from the previous quarter. About half of that increase is actually newly issued debt, and the other half comes from defaulted student loans that have been newly updated on credit reports this quarter. The New York Fed calculates that 11 percent of student loans are now at least 90 days delinquent, with this rate now officially passing the “serious delinquency” rate for credit card debt for the first time.

Student loan delinquencies hit new high - Late last year, total student debt outstanding surpassed $1 trillion for the first time. Now, the problem of student loan delinquency is generating its own eye-popping numbers. New data released today shows 11% of student loans were 90 days or more past due in the third quarter, up from 8.9% in the previous quarter and 8.8% a year prior, according to the Federal Reserve Bank of New York. It’s also the highest since at least 2003, when the bank first started tracking student loan delinquencies. “It’s a red flag and a warning sign that more Americans are struggling to repay their student loans — things are bad, really bad, and getting worse,” says Rich Williams, higher-education advocate at the U.S. Public Interest Research Group, a nonprofit based in Washington. The latest data comes at a time when delinquencies on many other consumer debts, including credit cards and mortgages, are dropping. Overall, delinquency rates on outstanding consumer debt fell to 8.9% in the third quarter, from 10% a year prior, according to the FRBNY. And the rise in student-loan delinquencies could be far from over. The FRBNY’s calculation counts borrowers who are in deferment or forbearance — periods during which they can put off payments without penalty — as being current on their loans. But there’s no telling whether these borrowers will be able to keep up with payments once these temporary relief periods are over. More than 1.5 million federal student loan borrowers were in economic-hardship deferment (which is granted for hardships like unemployment) and in forbearance (which borrowers can apply for if they can’t afford to repay this debt based on their current income) at the end of September 2009, up 26% from a year prior, according to the latest data from, which tracks student loan debt. That number could be higher now given the high unemployment rates that have persisted since then.

Student Debt, Delinquencies Skyrocket - The New York Fed released their household credit and debt report yesterday, and they show increases in student loan debt relative to other forms (mortgage, credit card, auto loan and others). To keep this in perspective, mortgage debt represents 71% of all debt, and student debt represents about 8-9%. So there’s still a wide gulf here, and we shouldn’t jump to call this the “student loan bubble.” The scales of the markets are in no way similar. However, student loan debt is defaulting at higher and higher rates, and that should raise a lot of concern, since it has downstream effects for recent college graduates throughout the economy. A recent New York Fed study found that 94% of recent graduates had borrowed to help pay for their education, and average debt levels among student borrowers is $23,000. Remember, that average includes seasoned borrowers, who presumably borrowed less and also in many cases reduced the principal amount of their loans, so the average amount borrowed by recent grads is certain to be higher. Student debt is senior to all other consumer debt; unlike, say, credit card balances, Social Security payments can be garnished to pay delinquencies. As a result, it has contributed to the fall in the homeownership rate, since many young people who want to buy a house can’t because their level of student debt prevents them from getting a mortgage [...] Student loan delinquencies are getting into nosebleed territory. The Wall Street Journal, citing New York Fed data, tells us that student debt outstanding increased 4.6% in the last quarter. Repeat: in the last quarter. Annualized, that’s a 19.7% rate of increase* during a period when other consumer borrowings were on the decline.

Student-Loan Delinquencies Now Surpass Credit Cards - The proportion of U.S. student loan balances that are in delinquency — that is, unpaid for 90 days or more — surpassed that of credit-card balances in the third quarter for the first time, according to the Federal Reserve Bank of New York.  Of the $956 billion in student-loan debt outstanding as of September, 11 percent was delinquent — up from less than 9 percent in the second quarter, and higher than the 10.5 percent of credit-card debt, which was delinquent in the third quarter. By comparison, delinquency rates on mortgages, home-equity lines of credit and auto loans stood at 5.9 percent, 4.9 percent, and 4.3 percent respectively as of September.  Since the NY Fed’s data began in 2003, the share of student debt which is delinquent has nearly doubled, from a starting level of 6.13 percent, while credit-card delinquency has steadily drifted lower since peaking at 13.74 percent in mid-2010 in the wake of the financial crisis

Is the Student Loan Debt Crisis Worse Than We Thought? - A new report from the Federal Reserve Bank of New York delivers generally positive news about the economy with one glaring exception: student loan debt. The amount of debt and delinquencies are climbing, and some experts say the official numbers don’t even capture how big the problem really is.  In the third quarter, there were fewer foreclosures, increased credit card and auto lending (indicators of rising consumer confidence), and an overall drop in our collective debt load, led by decreasing mortgage debt. Student loans are another story. We added $23 billion in new debt, and the 90-day delinquency rate rose to 11%, at a time when most other types of delinquencies are going down. “Increasing delinquency rates are a very troubling sign,” says Deanne Loonin, an attorney and director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. “The problem is in part due to the poor economy, but on the federal loan side, also underutilization of flexible repayment options such as income-based repayment.”

The Scariest Chart Of The Quarter: Student Debt Bubble Officially Pops As 90+ Day Delinquency Rate Goes Parabolic - We have already discussed the student loan bubble, and its popping previously, most extensively in this article. Today, we get the Q3 consumer credit breakdown update courtesy of the NY Fed's quarterly credit breakdown. And it is quite ghastly. As of September 30, Federal (not total, just Federal) rose to a gargantuan $956 billion, an increase of $42 billion in the quarter - the biggest quarterly update since 2006. But this is no surprise to anyone who read our latest piece on the topic. What also shouldn't be a surprise, at least to our readers who read about it here first, but what will stun the general public are the two charts below, the first of which shows the amount of 90+ day student loan delinquencies, and the second shows the amount of newly delinquent 30+ day student loan balances. The charts speak for themselves.

Escalating Delinquency Rates Make Student Loans Look Like the New Subprime - Yves Smith - Now that student loans are undeniably in bubble territory, the officialdom is starting to wake up and take notice. Evidence that students were taking on so much debt as a group that it was undermining their ability to be Good American Consumers wasn’t enough. A recent New York Fed study found that 94% of recent graduates had borrowed to help pay for their education, and average debt levels among student borrowers is $23,000. Remember, that average includes seasoned borrowers, who presumably borrowed less and also in many cases reduced the principal amount of their loans, so the average amount borrowed by recent grads is certain to be higher. Student debt is senior to all other consumer debt; unlike, say, credit card balances, Social Security payments can be garnished to pay delinquencies. As a result, it has contributed to the fall in the homeownership rate, since many young people who want to buy a house can’t because their level of student debt prevents them from getting a mortgage.  But despite some pious noises about the burden that student loans place on young Americans, there’s been no willingness in the officialdom to do much about it. But that may finally be changing. The latest Federal Reserve data is grim.

70% of Jobs “Created” Don’t Require a College Education -  Yves Smith - No wonder the collision of the higher education bubble and the job market is proving to be so painful. This Real News Network interview with Jeannette Wicks-Lim shreds the idea that getting a college education is a way to get a well-paid job. While there is still an upper tier of positions that require a college education and in many cases, advanced degrees, the bulk of employment growth in this economy is in badly paid service jobs. Despite the fact that the pundit class keeps wailing how America isn’t growing enough high skilled workers to compete in the world economy, the evidence is otherwise. For instance, Gene Sperling will regularly contend that America needs more engineers. Yet engineering jobs don’t pay enough to reward the cost of getting that degree. I’ve had engineers regularly say in comments that the only way to do well with an engineering degree is to then get a law degree and become a patent/intellectual property attorney. If the US really does need more engineers for competitiveness reasons, then it needs to get the cost of their education down, much the way it subsidizes the cost of educating elite mathematicians and physicists. The proof of the notion that a college education is a bad investment for many. From the inteview: So if you look at these $10 an hour or less workers, you see that between—you know, over the last three decades, there was 25 percent of these workers who had some college experience, and now you’ve got 40 percent of these workers with some college experience.

Study Questions Tax Breaks' Effect on Retirement Savings - Every year, the government spends more than $100 billion on tax breaks to encourage Americans to save more for retirement. But a new study suggests such provisions may have little effect on the amount Americans save. The finding has particular relevance as Congress looks for ways to raise revenue by reducing tax breaks as part of the year-end budget negotiations. The researchers — Raj Chetty and John N. Friedman of Harvard, Soren Leth-Petersen and Tore Olsen of the University of Copenhagen, and Torben Heien Nielsen of the Danish National Center for Social Research — looked at Danish data, in part because analogous American numbers are much less detailed. Although there is no way to know whether the patterns in Denmark and the United States are identical, the two countries have similar pension systems, and the new research fits with previous findings about how Americans save.The researchers found that every dollar that the Danish government spent on tax breaks increased total savings by about only one cent. In contrast, policies that automatically saved a portion of a worker’s income increased total savings by a substantial amount. William G. Gale, a tax expert at the Brookings Institution, said the new research was remarkable. Automatic savings systems, Mr. Gale said, “have proven remarkably effective in raising 401(k) participation rates and to some extent contribution rates, if done right.” But it has not been clear whether people offset those increases by saving less elsewhere, he added.

Most Savers Are Passive, Little Influenced by Tax Breaks - A new study concludes that people put aside more for retirement when forced to do so than when incentivized with subsidies — a finding that calls into question the merits of one of America’s biggest tax subsidies — tax-free contributions to retirement accounts. The study, by two Harvard University researchers, suggests that relatively few people respond to subsidies — and that those “active savers” tend to already be wealthier. Most people are passive savers who tend to be little influenced by subsidies, the study found. Instead, passive savers tend to save more when prompted to do so — through policies such as automatic enrollment in retirement funds. “If you want to increase total savings you really have to go with the nudge approach,” Raj Chetty, one of the two researchers, said in an interview. “If we think that part of the purpose of those subsidies is to increase retirement savings among those individuals or households who don’t have much savings,” said his colleague, John Friedman, “you’re targeting the wrong group of people by using these tax subsidies.”

Pennsylvania Confronts $41 Billion in Pension Deficits - Pennsylvania’s two public pensions face a combined shortfall of $41 billion, and their costs will consume 62 percent of fiscal 2014 revenue growth, according to a report from the state budget office. The State Employees’ Retirement System has 65 percent of assets needed to cover projected liabilities, and the Pennsylvania Public School Employees’ Retirement System is 69 percent funded, the report said. The plans cover 817,000 people. In July, Moody’s Investors Service cut the state’s general- obligation debt rating to Aa2, its third-highest, citing rising pension obligations that will weigh on its economic recovery. Funding for state retirement plans across the U.S. fell in fiscal 2011 for a fourth straight year, to a median coverage ratio of about 72 percent, data compiled by Bloomberg show.

CalPERS seeks to sue San Bernardino over lagging pension payments - CalPERS is stepping up the pressure on San Bernardino, threatening to sue the insolvent city for failure to make millions in payments to the pension fund.The California Public Employees' Retirement System, in a U.S. Bankruptcy Court filing late Tuesday, again demonstrated it will take legal action to make sure it gets paid.Anne Stausboll, the fund's chief executive, said the action was necessary to "protect the retirement security of all CalPERS members."San Bernardino hasn't made its payments to CalPERS since filing for Chapter 9 bankruptcy protection in early August. The city owes the fund $6.9 million.

Fed's Lockhart:Payment System, Public Pensions Risk Instability  - Atlanta Federal Reserve Bank President Dennis Lockhart Tuesday identified two potential sources of financial instability which have gotten less attention than others: the payments system and public pensions. Under the Dodd-Frank Act, the Fed has been charged with monitoring potential threats to financial stability, and Lockhart said "the span of vigilance needs to be extremely broad ... Our radar should scan widely-beyond the most obvious sources of risk." Lockhart, a voting member of the Fed's policymaking Federal Open Market Committee, did not talk about the economy or monetary policy in remarks prepared for delivery to a Levy Economics Institute conference in Berlin, Germany. He first delved into risks to the U.S. payments system, which handles $4.5 trillion of transactions daily. "The fragmented nature of the payments industry and its rapid evolution is creating many points of vulnerability," he said, citing fraud and increasingly frequent "cyberattacks." "A real financial stability concern," he said, "is the potential for malicious disruptions to the payments system in the form of broadly targeted cyberattacks," noting that "just in the last few months, the United States has experienced an escalating incidence of distributed denial of service attacks aimed at our largest banks."

WaPo ignores facts on Social Security COLA - The Washington Post lead editorial today claims that the chained CPI-U is a better measure of the inflation facing the elderly than the current estimate of consumer prices used for that purpose.  The editors argue that using the chained CPI-U is therefore not just an effective way to get substantial budget savings from a major entitlement program, but also a fair way to do so.   If the current COLA is set too high because it is calculated using a measure that systematically overstates inflation, then we ought to change it. But in fact, it doesn’t.  In fact, contrary to the Post’s assertions, the chained CPI-U and the current unchained version probably understate inflation for the elderly and disabled because the mix of goods and services they purchase is much more heavily weighted toward medicine and health services, where inflation is very high, than it is for younger consumers. In addition, elderly and disabled beneficiaries spend a greater share of their incomes on necessities like rent and utilities, and are therefore less able to substitute cheaper goods and services in response to price increases. It is possible that Alan Simpson and Erskine Bowles didn’t know this when they recommended saving billions of dollars a year by reducing the COLAs on Social Security checks.  Alan Simpson wouldn’t care anyway, since in his view, anyone receiving Social Security is just a greedy geezer sucking at the teats of a great milk cow.  But the Washington Post does know better, or ought to.  Just one week ago, the Economic Policy Institute released a statement signed by 250 Ph.D. economists and more than 50 social insurance experts with doctorates in related fields opposing the use of the chained CPI-U to set Social Security COLAs because it does not reflect the actual spending patterns of beneficiaries.

Ross Douthat Argues that Social Security Would be Easier to Cut If It Were Changed from a Social Insurance Program to a Welfare Program, by Dean Baker: Ross Douthat argues convincingly that if we eliminated the link between contributions and benefits it would be much easier politically to cut Social Security. Of course he thinks ending the link would be a good idea for that reason, but his logic is certainly on the mark, people will more strongly protect benefits that they feel they have earned. The payroll tax certainly can cover the program's expenses. In fact, had it not been for the upward redistribution of income over the last three decades, which nearly doubled the share of wage income going over the cap on taxable income, the projected 75-year shortfall would be about half of its current level. Even with the current projected shortfall, if ordinary workers shared in projected productivity growth over the next three decades, a tax increase equal to 6 percent of their wage growth over this period would be sufficient to make the program fully solvent. The problem is clearly the policies that led to the upward redistribution of income..., not Social Security. It is worth pointing out that when Douthat proposes "means-testing for wealthier beneficiaries," his notion of wealthy means school teachers and firefighters, not Bill Gates and Mitt Romney.

Washington Post Takes Another Shot at Reducing Social Security Benefits - Dean Baker - It seems to really pain the Washington Post editors that retirees can collect Social Security checks that average just over $1,200 a month. The amount of ink that they have devoted in both their opinion and news pages to cutting benefits could probably fill the Great Lakes. They're at it again today pushing a cut in the annual cost of living adjustment by adopting a chained CPI as the measure of inflation.As expected, the piece uses more than a bit of sleight of hand to make its case. For example, it tells readers: Economists have developed a more realistic measure of inflation, known for obscure reasons as the “chained CPI” (consumer price index), which has averaged a little under 0.3 percentage points less per year than existing measures."  Actually, economists do not know if this index is a more realistic measure of the rate of inflation experienced by the elderly. The Bureau of Labor Statistics (BLS) has constructed an experimental elderly index that has typically shown a rate of inflation that is roughly 0.3 percentage points higher than the standard measure of inflation. This is just an experimental index and it is not "chained," which means that it does not pick up the effects of substitution among items by the elderly, however if the Post's concern is to have a "more realistic" measure of inflation then it would join the call of more than 250 economists for having BLS construct a full chained CPI. This index may end up showing a higher or lower rate of inflation than the current index, but it would give us a better measure of the inflation rate experienced by the elderly. Congress' intent in establishing the cost of living adjustment in the first place was to have benefits keep pace with inflation. An elderly CPI would do that, switching to a chained CPI is simply an underhanded way to cut benefits.

Another anti-propaganda post from NotYourSweetie -- I was going to break down why the Buffet idea about focusing all of our attention on reducing Congressional pensions and salaries is about the stupidest thing I have ever heard when NotYourSweetie, who wasn’t born here, put up a post about the use of propaganda in her home country.  She’s seen this stuff before: In the old country, they were not skilled at propaganda. They never tried to disguise it as entertainment, or news or sports. It was just that: propaganda 24/7, pretty much displacing entertainment, news or sports. Everyone knew what it was, but was helpless to do anything about it. The first time I knew I had to get out of there because it was messing with my brain was a time they decided to reduce pensions. Not stop COLA, but reduce them. I was young and couldn’t care less about that. But then I started seeing old people on TV cheering and explaining to me why this was a good thing. My threshold for absurd just exploded. But very soon, I’ll fly into the same threshold of absurdity, ironically on the very same topic: old people will tell everybody why it’s good they’ll be put on an ice floe. I’m betting that she’s as disgusted as I am that Americans are proving to be so unforgivably gullible and stupid. Turn off your TVs and radios.  The only reason propaganda is used is to make people agree to do something their common sense and wisdom otherwise tell them is brain dead stupid, like getting into a land war in Asia or voting for a less than one full term senator who came out of nowhere with bucket loads of cash.  We know that it is propaganda because even the media is referring to it that way.  It’s got to be bad. And stop listening to rich people who want you to think that pensions are something you pay for instead of deferred compensation.

Mainstream Media Give Wall Street Journal Editorial Board Cover To Misinform About Social Security - A Wall Street Journal editorial hid the relative health of Social Security, in order to argue that immediate cuts to the program should be part of any deficit reduction deal. In fact, economists say that Social Security is not a major driver of deficits. Unfortunately, mainstream media have not reported this fact, which has given the Journal cover to push for Social Security cuts. Nobel Prize winning economist Paul Krugman has pointed out: "While the United States does have a long-run budget problem, Social Security is not a major factor in that problem." Social Security does face a shortfall between the revenue the program receives and the estimated benefits it will pay out beginning in 2034. But Center for Budget and Policy Priorities economist Kathy Ruffing has also noted that, far from being in crisis, Social Security's shortfall over the next 75 years would be almost completely restored by letting the Bush tax cuts expire for the wealthiest Americans. Unfortunately, the Journal is not the only media outlet hiding the relative health of the Social Security program.A November 25 Washington Post article on progressive resistance to conservative demands for Social Security cuts falsely claimed that Social Security's costs are "skyrocketing" and "fast-growing." In addition, a New York Times article reported that Republicans were pushing for Social Security cuts to restrain the deficit while the White House said the program "is not currently a driver of the deficit," but made no attempt to ascertain whether Republicans or the White House were correct.

Durbin: 'Social Security Does Not Add One Penny To The Deficit' Sen. Dick Durbin (D-IL) said Sunday on ABC's "This Week" that Social Security should be left alone when it comes to deficit reduction. "Social Security does not add one penny to the deficit," he said. "Not a penny." Medicare, however, faces more compelling near-term solvency problems, he said, but he argued that it could be adjusted without harming beneficiaries. "Those who say don't touch it, don't change it, are ignoring the obvious," Durbin said.

Why rich guys want to raise the retirement age: If you want talk about cutting Social Security, talk about cutting it. It’s a reasonable point of view. You’re allowed to hold it. But “cutting” Social Security is unpopular and people don’t like to talk about it. So folks who want to cut the program have instead settled on an elliptical argument about life expectancy. Social Security, they say, was designed at a time when Americans didn’t live quite so long. And so raising the retirement age isn’t a “cut.” It’s a restoration of the program’s original purpose. It doesn’t hurt anything or anyone. The first point worth making here is that the country’s economy has grown 15-fold since Social Security was passed into law. One of the things the richest society the world has ever known can buy is a decent retirement for people who don’t have jobs they love and who don’t want to work forever. The second point worth making is that Social Security was overhauled in the ’80s. So the promises the program is carrying out today were made then. And, since the ’80s, the idea that we’ve all gained so many years of life simply isn’t true.

Why Raising the Eligibility Age is the 'Single Worst Idea' for Medicare Reform - Most of what’s happening now in the fiscal cliff saga is just posturing—each side is trying to appear open to compromise while at the same time assuring its base that sacred principles will be respected. But this morning, Politico reported what could be the early contours of an actual deal that’s taking shape behind the scenes. There’s a huge caveat to this story, written by Mike Allen and Jim VandeHei, because it couldn’t be any more vaguely sourced. Allen and VandeHei refer only to “top officials,” “veterans of this budget fight,” and so on, so it’s impossible to discern who is feeding them this information and why. But assuming for a moment it’s true, there are some details sure to give progressives indigestion. In exchange for Republicans agreeing to tax increases—including rate hikes—on the top two percent of earners, this is what is allegedly being talked about for entitlement reform:There is only one way to make the medicine of tax hikes go down easier for Republicans: specific cuts to entitlement spending. Democrats involved in the process said the chest-pounding by liberals is just that — they know they will ultimately cave and trim entitlements to get a deal done. […] Sen. Dick Durbin (D-Ill.) told “Morning Joe” on Tuesday that he could see $400 billion in entitlement cuts. That’s the floor, according to Democratic aides, and it could go higher in the final give and take. The vast majority of the savings, and perhaps all of it, will come from Medicare, through a combination of means-testing, raising the retirement age and other “efficiencies” to be named later. These are truly damaging concessions. While means-testing might only reduce benefits of wealthy seniors, it begins a transition where Medicare is less an earned-benefit program and more of a welfare program, which would certainly leave it more vulnerable to political attacks down the line.

Media elites: Cut Medicare! -  With various Republicans making headlines recently for suddenly, shockingly appearing open to considering small tax hikes on wealthy people, it can seem sometimes that some fundamental shift has just transpired in the national political conversation surrounding the national debt and government spending. I assure you, that is not remotely the case. Joe Scarborough, America’s blogger, made a very good point in his Politico blog, the other day: While Barack Obama did promise to raise taxes on rich people, and then he won the election, Republicans should continue refusing to raise taxes on rich people because they also won elections. It may be the case that millions more Americans voted for Barack Obama than Mitt Romney. It may also be true that Americans voted for a significantly more liberal (and still Democratically controlled) Senate. And some crazy people have been pointing out that more people nationwide voted for Democrats to represent them in the House than for Republicans. And, sure, the thing Obama has been promising to do since 2008 — when he also won the election by lots of votes — is raise taxes on rich people. But Americans will totally understand if Republicans refuse to do this thing everyone wants to do.

Ok, here’s my theory about why the Masters of the Universe want to kill the social insurance programs - We know that Social Security does not add to the deficit.  In fact, we have a trust fund worth almost $3 trillion dollars.  Sure, that trust fund has taken a hit in the past four years because so many people are out of work and can’t pay their taxes but once people are working again, the kitty will start to grow again.  And if all that is needed is a couple of tweaks to solve the minor shortfall, it’s really not as damaging to the economy or rich people’s ability to spend ungodly amounts of money on themselves as they pretend. So, it’s not a deficit problem- at least not from the government’s side of things.  Sure, Medicare does need to be fixed but that requires some spine stiffening on the part of the Democrats to crack down on providers.  The Social Security trust fund is solid and fixable and millions of us late boomers paid into the surplus funds to cover our own retirements.  What isn’t solid and fixable is the 401K system, which really is a Ponzi scheme.  Pretty soon, a lot of aging baby boomers will be taking money out.  That’s going to hurt someone’s bottom line.  The bonuses and skimming going forward isn’t going to be nearly so lucrative as it was over the past two decades.  In the past couple of decades, many companies ditched their pensions for the 401K.  Let the kids pay for their own retirements.    But once that money starts to get withdrawn, the salad days will be over.  So, Wall Street must get more people into 401Ks or they won’t be able to continue strip mining.

Contra the Deficit Scolds, We Can Keep Medicare and Medicaid Strong Simply By Keeping Them Intact - This diatribe bestowed upon Rep. Raul Grijalva on CNBC, which has become Fiscal Cliff TV, is really priceless, with the anchor accusing Grijalva of tanking the market because he refuses to cut benefits for poor people and seniors. The means testing angle is really a joke here, too. Medicare is already means-tested. To means-test it more, in a way that will actually capture enough revenue to matter, you would have to dip into the middle class to make the math work. Similarly, this idea that this is the “wealthiest generation of retirees in history,” when they just suffered a financial crisis and the stripping of their wealth right before their retirements, is ridiculous. In reality, we cannot be secure enough in the long-term projections about Medicare and Medicaid to take a hacksaw to the benefits today.

Health Care Entitlements - Congressional Republicans are insisting that big cuts to Medicare and Medicaid be on the table in the negotiations over the so-called fiscal cliff and deficit reduction. That stance is largely a political move against two programs, which have been critical to the public welfare for the past half-century. Postelection polls show that large majorities of voters for both President Obama and Mitt Romney opposed making large Medicare cuts as a way to reduce the budget deficit. And, the fact is, the Obama administration has already pledged to extract more than $1 trillion in savings over the next decade from these programs. There is not much more that can be cut without hurting the most vulnerable Americans. The Affordable Care Act contains provisions that will reduce projected Medicare spending by $716 billion over 10 years, primarily by reducing the annual increases in Medicare reimbursements for hospitals, nursing homes and other health care providers and by reducing unjustified subsidies paid to private Medicare Advantage plans. During the campaign, the Romney-Ryan ticket criticized the president for making such a big cut and even fatuously promised to restore all of it. On top of those savings, President Obama, in his budget for fiscal year 2013, proposed cutting another $340 billion from Medicare spending over 10 years through tactics like requiring drugmakers to pay rebates to Medicare in some circumstances; reducing payments to some health care providers for treating patients just released from the hospital; reducing coverage of bad debts that hospitals and skilled nursing homes have failed to collect from patients; and charging higher premiums to high-income beneficiaries.

Audit finds billions in unverified Medicare spending -Medicare has paid doctors and hospitals billions of dollars to switch from paper to electronic health records without verifying that the new systems meet required quality standards, according to a federal audit released Thursday. The funds, which total $4 billion, have been distributed since 2011 under an incentive program aimed at encouraging various types of medical providers to computerize their record-keeping systems. The report by the inspector general of the Department of Health and Human Services identified a range of ways that the program is vulnerable to fraud, and recommended that the Obama administration introduce stronger safeguards. The program was adopted by Congress as part of the 2009 economic stimulus package, and is expected to distribute a total of $6.6 billion before it expires in 2016. Doctors can get grants of up to $44,000; hospitals can receive about $2 million. However, to qualify, providers must “meaningfully use” the technology to improve health care in accordance with a detailed set of criteria — employing it to update immunization registries, for instance, or to issue prescriptions electronically.

Raising Medicare Age Would Increase Costs? - NPR’s Julie Rovner makes a novel argument: Raising the Medicare eligibility age would actually increase the cost of Medicare. Let’s focus on those 65- and 66-year-olds. In Medicare, they’re currently the youngest and healthiest people. So by delaying their entry into the program, says Neuman, you raise costs for everyone else already there. The result would be that “people on Medicare pay higher premiums,” she said. “That’s because you’re taking the healthiest people out of the Medicare risk pool, leaving sicker people to pay higher premiums.” At the same time, those same 65- and 66-year-olds would be the oldest and, likely, among the sickest people remaining in the insurance pools of the working-age population, particularly in the new health insurance exchanges. “That means that they are raising the average risk of people in the exchanges, so that younger people in the exchanges, everybody in the exchanges, will see premiums rise, but especially so for those who are younger,” [Tricia Neuman, senior vice president of the nonpartisan Kaiser Family Foundation and director of its Medicare Policy Project] says. That’s because under the federal health law for the first time, insurance companies won’t be able to charge older people many times more than younger people for the same insurance coverage.

Unaffordable Cost Seen for Some Under Affordable Care Act - To Megan Hildebrandt, President Barack Obama’s Affordable Care Act means she can no longer be denied health insurance because of her lymphatic cancer. There’s a big catch: Coverage for the 28-year-old artist and many other Americans without insurance will come at a potentially unaffordable cost. Hildebrandt, who relies on hospital charity, will face more than $1,000 in annual premiums, by one estimate, and probably more in out-of-pocket expenses even with new federal subsidies. She and her husband have a combined income of $25,000. “It’s great that I’m not going to have to pay some hugely impossible amount,” said Hildebrandt, who lives in Austin, Texas. “Though now I’m in the health-care system and still have to pay money that we can’t really afford.”

A Question for ACA Implementation Gurus... »  I understand that CMS has absolutely no desire to encourage more cream-skimming, and every desire and internal incentive to make sure that those who treat more difficult patient populations are not financially penalized by doing so.  I understand that as a country we are spending twice as much as western European countries while lagging 2 years behind them in life expectancy and 20% behind them in treatment coverage. I understand that the hope is that it will be cheaper and quicker to treat your 32 million new Medicaid and exchange-based insured now that they are showing up regularly with insurance rather than showing up in severe crisis only. But Massachusetts has been walking down this exchange-and-public-program-expansion road for six years now, since Mitt Romney signed RomneyCare. Massachusetts has been vacuuming up doctors and nurses from Costa Rica and elsewhere and still has been finding that the cost of treating your state population is higher when 97% are insured than it was when 88% were insured. And there aren't enough loose doctors and nurses in the rest of the world for the ACA to vacuum up enough of them to meet the needs of not 1 state but 50 states.

Health Care Thoughts: EMR Cluster Mess - The 2009 stimulus bill kicked off the process to install electronic medical records (EMR) tied into electronic health records (EHR) networks. The stimulus bill included financial rewards for installing systems and meeting “meaningful use”standards.Couple of problems, with unfair heat aimed at the Centers for Medicare and Medicaid Services. First, it is difficult to really audit the “meaningful use” standards, even if the auditors were available, so we really don’t know if the stimulus money is being used properly. This was a problem baked into the cake. Second problem , the physician office systems tend to direct docs through a check-a-box, drop-down-box, and standard language environment. The entered information (in many systems) then interacts with a coding program to send billing codes to the appropriate billing system. Now it seems some physicians using EMRs may be coding higher than physicians who are not.  Is this higher coding fraud, lack of training, incompetence or could it be the docs were under-documenting and under-coding previously. We won’t know for a while, with billions at risk, and the docs at risk for civil and criminal actions. Third, THE BIGGEST PROBLEM, EMRs just do not seem to work as neatly as the vendors promise and the bureaucrats imagine. Like many panacea remedies, the implementation is tougher than the dream.

Welcome to the Future of Your Health Insurance. It Sucks. - Yves Smith - There have been numerous reports about the shortcomings of Obamacare which its boosters have either ignored or shouted down. And troublingly, the attitude is often “I got mine” as in “My kids are now covered under my policy” without questioning what the narrow and broader issues are. Well, I’ll tell you I got mine too. My current policy, which on paper is actually quite good, has a lifetime cap. Under the ACA, it is grandfathered and the cap is removed. And I’m still here to tell you that the future sucks. This deal enriches Big Pharma and the health insurers at the expense of the public at large. And the result of that will be a worsening of the already lousy health care system in the US. And I can give you a feel for what your future is likely to look like. It’s not pretty.  Let’s start with some of the inaccurate praise heaped on the ACA: It covers the uninsured. No, it only cover some of the uninsured. The CBO scored the ACA as leaving 30 million still uninsured as of 2022. It will cover people with preexisting conditions. Um, maybe, until you need costly care. The ACA preserved a loophole you can drive a truck through: But the bill has a giant loophole: insurers can continue to cancel policies in the case of “fraud or intentional misrepresentation” as they do now. And the bar for fraud, per established case law, is remarkably low. Forgetting to tell your insurer about a past ailment, no matter how minor, qualifies. Say you forget to tell your new insurer that you had acne or a concussion in your teen years. That will more than do. Insurers NOW frequently go over the records of people who have costly conditions or major surgeries with a fine toothed comb looking for ways to rescind policies. For instance, in 2010, Reuters reported: WellPoint was using a computer algorithm that automatically targeted them and every other policyholder recently diagnosed with breast cancer. The software triggered an immediate fraud investigation, as the company searched for some pretext to drop their policies, according to government regulators and investigators.

U.S. birthrate plummets to its lowest level since 1920 - The U.S. birthrate plunged last year to a record low, with the decline being led by immigrant women hit hard by the recession, according to a study released Thursday by the Pew Research Center. The overall birthrate decreased by 8 percent between 2007 and 2010, with a much bigger drop of 14 percent among foreign-born women. The overall birthrate is at its lowest since 1920, the earliest year with reliable records. The 2011 figures don’t have breakdowns for immigrants yet, but the preliminary findings indicate that they will follow the same trend.   The decline could have far-reaching implications for U.S. economic and social policy. A continuing decrease could challenge long-held assumptions that births to immigrants will help maintain the U.S. population and create the taxpaying workforce needed to support the aging baby-boom generation. The U.S. birthrate — 63.2 births per 1,000 women of childbearing age — has fallen to a little more than half of its peak, which was in 1957. The rate among foreign-born women, who have tended to have bigger families, has also been declining in recent decades, although more slowly, according to the report. But after 2007, as the worst recession in decades dried up jobs and economic prospects across the nation, the birthrate for immigrant women plunged. One of the most dramatic drops was among Mexican immigrants — 23 percent.

Study: 1.3 million overdiagnosed for breast cancer in US - More than a million US women have received unnecessary and invasive cancer treatments over the last 30 years, thanks to routine mammograms that detected harmless tumors, scientists said Thursday. The results throw new doubt over the effectiveness of an already controversial cancer screening tool that is aimed at detecting tumors before they spread and become more difficult to treat. To reach the one million figure, researchers compared the number of breast cancer cases detected at early and late stages among women over 40 between 1976 and 2008. Their analysis showed that, since mammograms became standard in the United States, the number of early-stage breast cancers detected has doubled — in recent years, doctors found tumors in 234 women out of 100,000. But in that same period, the rate of women diagnosed with late-stage breast cancer has dropped just eight percent — from 102 to 94 cases out of 100,000. “We estimated that breast cancer was overdiagnosed — i.e., tumors were detected on screening that would never have led to clinical symptoms — in 1.3 million US women in the past 30 years,”

Pretty much everything you read about cancer from authoritative sources is likely to be worth taking seriously - Here is my paraphrase of the most important results from a study by Schoenfeld and Ioannidis in the current issue of the American Journal of Clinical Nutrition:

  • Meta-analyses do fairly well at correctly stating their conclusions.  Meta-analyses are quantitative literature reviews that combine results from across studies, essentially increasing the sample size and breadth.
  • For example, Schoenfeld and Ioannadis looked at 9 meta-analyses showing an association between consuming particular foods (I think of foods such as fruits and vegetables) and reduced risk of cancer. For all 9, the results were statistically significant at conventional levels (p<.05).
  • Schoenfeld and Ioannadis looked at 4 meta-analyses showing an association between consuming particular foods (I think of foods such as processed meats) and increased risk of cancer.  For 3 of the 4, the results were statistically significant at conventional levels (p<.05).
  • While the meta-analyses did well at reporting results, individual studies sometimes report results in their abstracts even when they were not statistically significant.  Some of these reported results may be attributed to random happenstance rather than real cancer effects. This is why it is unwise to change eating habits with every new study.  It is wiser to rely on the balance of scientific evidence connecting particular foods to cancer risks and benefits.

Heart Gadgets Test Privacy-Law Limits - The small box inside Amanda Hubbard's chest beams all kinds of data about her faulty heart to the company that makes her defibrillator implant. Ms. Hubbard herself, however, can't easily get that information unless she requests summaries from her doctor—whom she rarely sees since losing her insurance. In short, the data gathered by the Medtronic implant isn't readily accessible to the person whose heartbeat it tracks. "This is my health information," said Ms. Hubbard, 36 years old. "They are collecting it from my chest."The U.S. has strict privacy laws guaranteeing people access to traditional health files. But implants and other new technologies—including smartphone apps and over-the-counter monitors—are testing the very definition of medical records. Medtronic says federal rules prohibit giving Ms. Hubbard's data to anyone but her doctor and hospital. "Our customers are physicians and hospitals," said Elizabeth Hoff, general manager of Medtronic's data business. Medtronic would need regulatory approval to give patients the data, she said. It hasn't sought approval because "we don't have this massive demand."

High-Fructose Corn Syrup Linked to Diabetes - Countries that mix high-fructose corn syrup into processed foods and soft drinks have higher rates of diabetes than countries that don’t use the sweetener, a new study shows. In a study published in the journal Global Health, researchers compared the average availability of high-fructose corn syrup to rates of diabetes in 43 countries. About half the countries in the study had little or no high-fructose corn syrup in their food supply. In the other 20 countries, high-fructose corn syrup in foods ranged from about a pound a year per person in Germany to about 55 pounds each year per person in the United States. The researchers found that countries using high-fructose corn syrup had rates of diabetes that were about 20% higher than countries that didn’t mix the sweetener into foods. Those differences remained even after researchers took into account data for differences in body size, population, and wealth. There were no overall differences in total sugars or total calories between countries that did and didn’t use high-fructose corn syrup, suggesting that there’s an independent relationship between high-fructose corn syrup and diabetes

Smoking ‘rots’ brain, says King’s College study - Smoking "rots" the brain by damaging memory, learning and reasoning, according to researchers at King's College London. A study of 8,800 people over 50 showed high blood pressure and being overweight also seemed to affect the brain, but to a lesser extent. Scientists involved said people needed to be aware that lifestyles could damage the mind as well as the body. Their study was published in the journal Age and Ageing. Researchers at King's were investigating links between the likelihood of a heart attack or stroke and the state of the brain. Data about the health and lifestyle of a group of over-50s was collected and brain tests, such as making participants learn new words or name as many animals as they could in a minute, were also performed. They were all tested again after four and then eight years. Decline The results showed that the overall risk of a heart attack or stroke was "significantly associated with cognitive decline" with those at the highest risk showing the greatest decline. It also said there was a "consistent association" between smoking and lower scores in the tests.

One Of My Favorite Charts On The Power Of Vaccines - I’m posting this because I found the graphic in a file folder on my computer and didn’t want to lose it. It’s originally from my profile of Bill Gates from last year’s Forbes Power List issue. The data (and the original version of the graph) come from the New England Journal of Medicine. This is a graph of what happened when the vaccine against rotavirus, a major cause of infant diarrhea, was introduced in Mexico. See that series of mountains? Those are the big peaks in deaths that were caused each time rotavirus season came around. After the vaccine was introduced (one rotavirus vaccine is made by Merck; there’s also a GlaxoSmithKline vaccine), those mountains just get sheared off. Those are kids who are not dying as a result of a vaccine a short period of time after its use. To me, it’s a very dramatic graph and evidence of the power that pharmaceutical products can have to improve people’s lives in the right circumstances.

As drug industry’s influence over research grows, so does the potential for bias - For drugmaker GlaxoSmithKline, the 17-page article in the New England Journal of Medicine represented a coup. The 2006 report described a trial that compared three diabetes drugs and concluded that Avandia, the company’s new drug, performed best. What only careful readers of the article would have gleaned is the extent of the financial connections between the drugmaker and the research. The trial had been funded by GlaxoSmithKline, and each of the 11 authors had received money from the company. Four were employees and held company stock. The other seven were academic experts who had received grants or consultant fees from the firm. Whether these ties altered the report on Avandia may be impossible for readers to know. But while sorting through the data from more than 4,000 patients, the investigators missed hints of a danger that, when fully realized four years later, would lead to Avandia’s virtual disappearance from the United States: The drug raised the risk of heart attacks.

Pharmaceuticals difficult to treat in drinking water - The emerging threat of pharmaceuticals, everyday chemicals and personal care products in drinking water may be the most difficult that water treatment plants have faced. Lake Michigan takes 99 years to “turn over,” meaning chemicals that entered the lake a century ago may only just be exiting, the Alliance for the Great Lakes reported just this week. The report says that surface water in Lake Michigan contains six of 20 “priority” chemicals, or emerging contaminants identified by environmental engineers from Michigan State University. They include flame retardants and a cholesterol-lowering drug. After treatment, only a fire retardant remained in ready-to-drink water. Experts say that membrane bioreactors may remove some pharmaceuticals while treating wastewater, but they cannot catch all of the diverse medicines.

SARS-like virus concerns WHO - A patient from Qatar has been confirmed with a new virus related to SARS, while health officials are investigating whether it may have spread between humans after close contact in Saudi Arabia. Germany’s Robert Koch Institute said Friday that the Qatari patient fell ill in October with severe respiratory problems. He was brought to Germany for treatment in a specialty clinic, recovered after a month and was released this week. As a precaution, the World Health Organization advised medical authorities around the world to test any patients with unexplained pneumonias for the new coronavirus, from a family of viruses that cause the common cold as well as SARS. Previously, WHO had only advised testing patients who had been to either Qatar or Saudi Arabia, the two countries with all six reported cases. “Until more information is available, it is prudent to consider that the virus is likely more widely distributed than just the two countries which have identified cases,” WHO said.

U.N. Committee Calls For An End To Centuries-Old Practice Of 'Baby Boxes'- For centuries, European mothers who felt they were incapable of caring for a newborn could leave the baby in a "foundling wheel," a rotating crib set up at the entrance to a convent or a place of worship. Today, there's a debate over the modern version of the practice: the baby box. At least 11 European countries, as well as Russia and India, now have baby boxes, sometimes known as baby windows or hatches. A little door, usually outside of hospitals or charity organizations, leads to a padded, insulated cradle equipped with motion detectors to alert nurses. There are no security cameras, allowing an adult to discreetly and safely leave a child. All U.S. states have some form of "safe haven" or "Baby Moses" laws that allow parents to hand over infants at places like hospitals or police stations. But in a meeting last month, the United Nations Committee on the Rights of the Child decided that baby boxes only encourage parents to give away babies, and is now advocating for a complete ban on the practice.

Air pollution may be factor in autism, researchers report - Researchers have found that exposure to traffic-related air pollution during pregnancy is associated with autism, according to a new study released on Monday. The study, published online in the Archives of General Psychiatry, found evidence that pollution may affect the developing brain among children whose mothers lived in areas where there was poor air quality. "We've known for a long time that air pollution is bad for our lungs, and especially for children. We're now beginning to understand how air pollution may affect the brain."

Coal epidemiology: Burning coal harms children and worsens asthma and heart disease. - But while politicians have been busy obscuring their views on coal, public health researchers have been accumulating ever clearer data. Emissions from coal-fired power plants and other coal-burning sources have been linked to neurological and developmental deficits in children, a worsening of asthma, and cardiovascular disease and other health woes. Coal-burning is bad, bad, bad for your health—and looking ahead, the best we can hope for is that it will get marginally better. Coal was partly responsible for two spectacular deadly smogs in the mid-20th century. In October, 1948, the small industrial town of Donora, Pa., was choked by “an acrid, yellowish gray blanket.” As former residents recalled: “I’d accidentally step off the curb and turn my ankle because I couldn’t see my feet.” In a few days, 20 people died and about 6,000 more fell ill. Similarly, in December, 1952, London was smothered in a smog so dense that “parents were advised not to risk letting their children get lost on the way to school, unless it was literally round the corner,” a resident recalled to the BBC. More than 4,000 deaths were attributed to the smog, mainly due to respiratory and cardiovascular complications. Both smogs helped catalyze clean air legislation, including the Clean Air Acts of 1963 and 1970, which expanded the government’s role in controlling pollution and helped to reduce coal emissions. These were some of the first, crucially important environmental laws on the books.

Fracking Our Food Supply -  In a Brooklyn winery on a sultry July evening, an elegant crowd sips rosé and nibbles trout plucked from the gin-clear streams of upstate New York. The diners are here, with their checkbooks, to support a group called Chefs for the Marcellus, which works to protect the foodshed upon which hundreds of regional farm-to-fork restaurants depend. The foodshed is coincident with the Marcellus Shale, a geologic formation that arcs northeast from West Virginia through Pennsylvania and into New York State. As everyone invited here knows, the region is both agriculturally and energy rich, with vast quantities of natural gas sequestered deep below its fertile fields and forests. In Pennsylvania, the oil and gas industry is already on a tear—drilling thousands of feet into ancient seabeds, then repeatedly fracturing (or “fracking”) these wells with millions of gallons of highly pressurized, chemically laced water, which shatters the surrounding shale and releases fossil fuels. New York, meanwhile, is on its own natural-resource tear, with hundreds of newly opened breweries, wineries, organic dairies and pastured livestock operations—all of them capitalizing on the metropolitan area’s hunger to localize its diet.But there’s growing evidence that these two impulses, toward energy and food independence, may be at odds with each other.

Outbreaks of Foodborne Illnesses Are Becoming Harder to Detect - New diagnostic tests for common foodborne pathogens such as Salmonella, Campylobacter, and Escherichia coli may hinder the ability of public health officials to detect multistate outbreaks. The problem is an inability to trace contamination to its source. In the past, when patients were suspected of having certain foodborne illnesses, doctors routinely sent a stool sample to a laboratory, which detected a range of potential bacterial culprits. (Some foodborne infections, like Listeria, are diagnosed with blood tests.) An isolate, or sample of the bacterial colony at fault, would then be forwarded to local, state or federal officials, who had the DNA tested to determine the organism's specific strain. The telling DNA sequence, or "fingerprint," was entered into the PulseNet system so that public health officials could see if samples from other newly diagnosed patients matched the information in the database. Analysis of when and where people contracted an infection of that specific strain can help lead to the source of contamination, allowing investigators to remedy the situation.

The Drug Store in American Meat - Food consumers seldom hear about the drugs oestradiol-17, zeranol, trenbolone acetate and melengestrol acetate and the names are certainly not on meat labels. But those synthetic growth hormones are central to U.S. meat production, especially beef, and the reason Europe has banned a lot of U.S. meat since 1989. Zeranol, widely used as a growth promoter in the U.S. beef industry, is known for its “ability to stimulate growth and proliferation of human breast tumor cells” like the “known carcinogen diethylstilbestrol (DES),” says the Breast Cancer Fund, a group dedicated to identifying and eliminating environmental causes of breast cancer.  Zeranol may “play a critical role in mammary tumorigenesis” and “be a risk factor for breast cancer,” agrees a recent paper from the College of Food Science and Nutritional Engineering at China Agricultural University in Beijing.Why is such a drug, that requires “Appropriate Personal Protective Equipment” for use– “laboratory coat, gloves, safety glasses and mask”–routinely used in U.S. meat production and not even labeled?

Top US Healthcare Giant: GMOs Are Devastating Health - Just days after a leading genetically modified organism (GMO) researcher spoke out against GMOs and how many pro-GMO ‘scientists’ are in bed with Monsanto or carry their own GMO patents, the largest managed healthcare provider in the United States is now publicly speaking out against GMOs. In a recent newsletter, the Kaiser Permanente company discussed the numerous dangers of GMOs in a recent newsletter and how to avoid them.  Explaining how GM ingredients have been linked to tumors and organ damage in rats in the only lifelong rat study available, the newsletter highlighted how the only real long- term research indicates that GMOs are a serious health danger. The newsletter, which you can view here, states:  “Despite what the biotech industry might say, there is little research on the long-term effects of GMOs on human health. Independent research has found several varieties of GMO corn caused organ damage in rats. Other studies have found that GMOs may lead to an inability in animals to reproduce.” The newsletter then goes on to tell readers how they can avoid GMOs in their food through buying high quality organic and looking for other non-GMO indicators. It is important to remember the organic labeling meanings when shopping organic, however, which this newsletter unfortunately does not address. Make sure you know which ‘level’ of organic you are consuming:

Farming's conservation efforts fall short | Des Moines Register editorial:  Whenever the subject of conservation is brought up, Iowa farmers inevitably plead innocent and talk about all the progress they have made to protect the soil and water from contamination by agricultural chemicals. The progress is real and worth applauding, but the fact remains that evidence suggests their efforts are still short of what is needed. The most visible evidence is the “dead zone” in the Gulf of Mexico. As this massive plume of algae fed by nutrients in runoff from the Mississippi River drainage basin decomposes and settles to the ocean floor, it starves the ocean of oxygen essential for aquatic life. The result kills fish and shellfish and shrimp or forces them farther away in search of oxygen, which has crippled the fishing industry along the Gulf shores.A small fraction of those nutrients come from municipal sewage-treatment plants and lawn chemicals. The primary source is farm chemicals, including nitrates from nitrogen fertilizer, and manure from hog confinements from Midwestern farm fields. This agricultural runoff is fouling Iowa streams, rivers and lakes. Besides killing fish, this is making some waterways unusable by humans, polluting drinking-water supplies in communities that rely on rivers and wells. Indeed, Des Moines has built one of the largest nitrate-removal plants in the world to clean its drinking water.

Fears weed killer decision a death knell for reef - Conservationists say the decision by Australia's chemical regulator to allow the continued use of a toxic weed killer could kill the Great Barrier Reef. The Australian Pesticides and Veterinary Medicines Authority has approved the continued use of most Diuron products, with some restrictions on sugarcane and pineapple crops. The herbicide is used to control agricultural weeds and algae near creeks, rivers and waterways. Nick Heath from the World Wildlife Fund says it is a sad day for the Great Barrier Reef. "The Great Barrier Reef would have to be one of the most loved parts of Australia," he said. "Yet the Government has put the reef to the sword by allowing the continued use of a highly toxic, highly long-lived pesticide call diuron, due to industry lobbying in the last few months from canegrowers and the pesticide industry.

Smaller, fewer, thinner - the future for American beef? - The country that is synonymous with steaks as big as Texas is suffering a serious shortage of cattle. The US national herd is now at an all time low. Numbers peaked at 132 million head of cattle in 1975. At the start of this year this was down to just under 91 million. Across the US, cattle are sometimes housed in what are called feedlots to be fattened for slaughter. These huge operations on average contain around 3,000 have also suffered a significant drop in numbers, down around 12.5 % on last year. All bad news for cowboys - So what is going on? There are long term factors in terms of profitability and rising costs but what's really pushing the decline right now is a potent mix of environmental issues and politics. The US has been suffering a desperate drought that has affected around 80 % of the agricultural land across the country. It has been so severe that in certain parts, farmers have been forced to get rid of their cattle as they simply don't have any pasture for them to graze on. The drought has also affected the yields of grain crops, which are estimated to be down around 13 % on last year. And because US farmers depend on grain to fatten their beef herds, this has increased pressure to get rid of cattle.

A Must-Read on Meeting the Future Challenges of Global Food Production - Recently we were asked to take part in a symposium at the Entomological Society of America annual meeting in Knoxville titled: “Feeding future generations: Expanding a global science to answer a global challenge.” The focus of that challenge was to identify ways to feed 9 billion people in 2050. What follows is a synopsis of our presentation. We preface what follows by noting that it appears to us that the multinational biotech seed and chemical companies have responded to this challenge by positioning their products as the primary solution to meeting this goal. Not incidentally, they are also using this challenge as a justification for pressing the case for the extension of their intellectual property rights through trade negotiations. As a result of our readings and discussion with others, it appears to us that much of the discussion about feeding 9 billion people by 2050 has been captured by these firms by setting up a false dichotomy.

Working wonders without water out West -  In the long rain shadow of the Cascade Mountains, where dryland wheat farmers have eked out livings for more than a century, climate change is very much an issue of the present. The rain gauge is always in the back of the mind for Mike Nichols, a wheat farmer cultivating 20,0000 acres across two counties in south-central Washington state. It has to be: Nichols doesn't irrigate, and with less than six inches of precipitation a year, his wheat crop is already on the edge of what's considered possible for dryland farming. When drought hits or if, as expected, the West gets drier, his operation will be in trouble.But there are legions of farmers in the West and Midwest dependent on dwindling aquifers and over-subscribed rivers for irrigation. If today's drought conditions continue, a whole new generation of growers may join Nichols and return to wholly rain-fed farming.

Study reveals extent of Mekong dam food security threat - The planned construction of hydropowered dams on the Mekong River in South-East Asia could jeopardise livelihoods, water access and food security for 60 million people, across Cambodia, Laos, Thailand and Vietnam, according to a study. The study reports that dams will block fish migration routes and decimate fish supplies in the lower Mekong region. As fish dwindle, communities will have to look for alternative sources of protein, such as livestock and poultry. Raising these will require more land and water, and be prohibitively expensive. "People talk about food security in relation to dams but we need to put the numbers to what that really means," says Stuart Orr, freshwater manager at World Wildlife Fund (WWF) International and co-author of the study published in the October issue of Global Environmental Change.

Biofuels and the Right to Food: Time for the US to get its head out of the sand - The U.S. Environmental Protection Agency recently decided to keep the nation’s head buried deep in the sand when it comes to biofuels policy, refusing to waive the U.S. ethanol mandate in order to ease price pressures in corn and soybeans following the severe U.S. drought. Europe, the other major market feeding its cars at the expense of the world’s people, lifted its collective head from the depths long enough last month to reduce from 10% to 5% the mandated share of transportation fuel that can come from food sources. No such acknowledgment of reality here, where 40% of our corn crop goes to make ethanol. The right to food, now recognized worldwide, demands action. So too does Olivier De Schutter, the UN Special Rapporteur on the Right to Food. “It is imprudent to support, let alone to mandate, extra agrofuel production when food prices are high and volatile,” he wrote last month.  The right to food emerged from efforts to define voluntary guidelines on the issue following the UN’s 1996 World Food Summit. The approach uses a human rights framework to assess the realization of full access to adequate food for everyone. The food price spikes of 2007-8 put the issue at the center of international policy-making. De Schutter was appointed to his position in 2008 and immediately argued for a more far-reaching response to the food crisis.

AAA warns E15 gasoline could cause car damage : The AAA says the Environmental Protection Agency and gasoline retailers should halt the sale of E15, a new ethanol blend that could damage millions of vehicles and void car warranties. AAA, which issued its warning Friday, says just 12 million of more than 240 million cars, trucks and SUVs now in use have manufacturers' approval for E15. Flex-fuel vehicles, 2012 and newer General Motors vehicles, 2013 Fords and 2001 and later model Porsches are the exceptions, according to AAA, the nation's largest motorist group, with 53.5 million members. "It is clear that millions of Americans are unfamiliar with E15, which means there is a strong possibility that many may improperly fill up using this gasoline and damage their vehicle," AAA President and CEO Robert Darbelnet tells USA TODAY. "Bringing E15 to the market without adequate safeguards does not responsibly meet the needs of consumers." BMW, Chrysler, Nissan, Toyota and VW have said their warranties will not cover fuel-related claims caused by E15. Ford, Honda, Kia, Mercedes-Benz and Volvo have said E15 use will void warranties, says Darbelnet, citing potential corrosive damage to fuel lines, gaskets and other engine components.

Europe's €50bn bung that enriches landowners and kills wildlife - There's a neat symmetry in the numbers that helped to sink the European summit. The proposed budget was €50bn higher than the UK government could accept. This is the amount of money that European farmers are given every year. Britain's contentious budget rebate is worth €3.6bn a year: a fraction less than our contribution to Europe's farm subsidies. Squatting at the heart of last week's summit, poisoning all negotiations, is a vast, wobbling lump of pork fat called the common agricultural policy. The talks collapsed partly because the president of the European council, pressed by François Hollande, proposed inflating the great blob by a further €8bn over six years. I don't often find myself on their side, but the British and Dutch governments were right to say no. It is a source of perpetual wonder that the people of Europe tolerate this robbery. Farm subsidies are the 21st century equivalent of feudal aid: the taxes medieval vassals were forced to pay their lords for the privilege of being sat upon. The single payment scheme, which accounts for most of the money, is an award for owning land. The more you own, the more you receive. By astonishing coincidence, the biggest landowners happen to be among the richest people in Europe. Every taxpayer in the EU, including the poorest, subsidises the lords of the land: not once, as we did during the bank bailouts, but in perpetuity. Every household in the UK pays an average of £245 a year to keep millionaires in the style to which they are accustomed.

Drought-Parched Mississippi River Is Halting Barges -  Mississippi River barge traffic is slowing as the worst drought in five decades combines with a seasonal dry period to push water levels to a near-record low, prompting shippers to seek alternatives. River vessels are cutting loads on the nation’s busiest waterway while railroads sign up new business and the U.S. Army Corps of Engineers draws criticism from lawmakers over its management of the river, which could be shut to cargo from companies including Archer-Daniels-Midland Co. (ADM) next month. “Our shippers are looking at alternate modes of transportation,” said Marty Hettel, senior manager of bulk sales for AEP River Operations, the barge unit of American Electric Power Co. (AEP), a utility owner based in Columbus, Ohio. “If you’re shipping raw materials to a steel mill in Chicago, you’re trying to figure out if you can go to Cincinnati or Louisville, Kentucky, unload it out of the barge and rail it up to the steel mill.” The worst U.S. drought since 1956, which dried farmland from Ohio to Nebraska, will last at least through February in most areas, according to the U.S. Climate Prediction Center in College Park, Maryland. Barges on the Mississippi handle about 60 percent of the nation’s grain exports entering the Gulf of Mexico through New Orleans, as well as 22 percent of its petroleum and 20 percent of its coal.

Plan to lower river levels could mean hike in farm input costs: Farmers in the Midwest could be looking at a sharp increase in fertilizer prices unless an agreement is reached regarding a plan that would lower levels on the lower Missouri and Mississippi rivers. The U.S. Army Corps of Engineers has announced plans to curb the flow of a reservoir on the Missouri River in order to keep water levels up in the Upper Missouri region. Ag leaders and politicians from farm states are urging the Corps to at least revise its plans in order to maintain barge traffic at current levels. Rodney Weinzierl, executive director of the Illinois Corn Association, pointed out that 75 percent of the water flowing past St. Louis comes from the Missouri River. The level is projected to drop 5 feet if the Corps goes ahead with its plan, on Nov. 22. “Fertilizer prices are already projected to go up $50 a ton unless this can be dealt with soon,” Weinzierl said at a meeting of the St. Louis AgriBusiness Club. “That’s a big deal for Illinois corn. Fifty-five percent of corn produced in Illinois goes out of state. The majority of it goes down the river.”

River vs. river: Corps manages Missouri, Mississippi rivers for conflicting goals: The Army Corps of Engineers this week began shutting flow from a Missouri River reservoir that feeds the Mississippi River, setting up a showdown between the rivers. The 2012 drought is dropping levels in both rivers. The Corps decided to slow water release Monday at Gavins Point Dam in Yankton, S.D., and conserve for the next Missouri River shipping season. But the Mississippi River below St. Louis needs that Missouri River water right now to keep the shipping channel at least nine-feet deep. That same drought is expected to drop Mississippi River levels below the Corps’ guaranteed 9-foot level by Dec. 10. So the Corps’ decision to protect Missouri River commerce next year is shutting down Mississippi River commerce this year. But it gets worse. North Dakota leaders are eager to tap Missouri River reservoirs for the state’s oil fracking boom. Forcing oil from beneath North Dakota requires hundreds of millions of gallons of water. North Dakota Gov. Jack Dalrymple says he will contest any Corps plan to restrict oil companies from using that water. So the Corps seems willing to manage the Missouri River to the detriment of Mississippi River shippers, even as North Dakota gives away water the Corps believes will be needed for navigation on both rivers.

'Exceptional' Drought Conditions Expand In The U.S., Likely Persisting Through February - The stubborn U.S. drought that hit the Southeast and Midwest hard this summer isn’t letting up. According to the latest drought monitor, conditions have worsened slightly across the country, with “exceptional drought” conditions expanding from 38 percent of the lower-48 states to 42 percent. Those conditions could last into February. The map below, which shows a wide swath of “extreme” and “exceptional” drought, has become a very familiar image over the last nine months: The U.S. drought could be the most costly extreme weather event to hit the U.S. this year. In a 2012 marked by above-average wildfires in the West, record heat waves across most of the country, a massive superstorm that rocked the East Coast, and a surprise derecho that knocked out power to millions of Americans, that’s saying a lot. Jeff Masters at the Weather Underground reports that the drought could cost the economy between $75 billion to $150 billion, making it more expensive than Superstorm Sandy.

World's rivers running on empty, paper finds: Four of the world's great rivers, including the Murray Darling, are all suffering from drastically reduced flows as a direct result of water extraction, according to new ANU research. The multi-author study examined the threats from water extractions and climate change on four of the world's iconic river systems; the US Colorado River, the South African Orange River, the Chinese Yellow River and the Murray. The researchers found that in all four basins, over a long period of time, outflows have greatly reduced as a direct result of increased water extractions, and that urgent changes in governance of water are needed to ensure the systems remain healthy and viable. "While climate change will aggravate changes in flows in river systems, current high levels of water extractions remain the principal contributor to reduced flows and degradation of these rivers,"

As Great Lakes levels plummet, Michigan town tries to save its harbor - The Great Lakes, the world’s biggest freshwater system, are shrinking because of drought and rising temperatures, a trend that accelerated with this year’s almost snowless winter and scorching summer. Water levels have fallen to near-record lows on Lakes Michigan and Huron, while Erie, Ontario and Superior are below their historical averages. The decline is causing heavy economic losses, with cargo freighters forced to lighten their loads, marinas too shallow for pleasure boats and weeds sprouting on exposed bottomlands, chasing away swimmers and sunbathers. Some of the greatest suffering is in small tourist towns that lack the economic diversity of bigger port cities. Yet they are last in line for federal money to deepen channels and repair infrastructure to support the boating traffic that keeps them afloat. “How do you like our mud bog?” . A wide expanse that normally would be submerged is now an ugly patchwork of puddles, muck and thick stands of head-high cattails. A grounded pontoon boat rested forlornly alongside a deserted dock.

Lake Lanier water level sinks to three-year low - Lake Lanier is at its lowest level since the historic drought of several years ago, and if much-needed rain doesn’t arrive soon, metro Atlanta could revisit the days of sweeping water restrictions and recreational nightmares. Monday’s reading was 1,057.82 feet above sea level, 13 feet below optimum operating level or “full pool.” The last time Lake Lanier was that low was March 2009, the waning days of a two-year drought that ravaged the state. The difference this time is that the lake levels have not been consistantly low for a long period and the region is heading into vital winter months when rains traditionally recharge reservoirs in the Southeast.An abnormally dry November in Georgia has put strains on the river system including Lake Lanier. Statewide, this is Georgia’s 17th driest year on record, going back 118 years. North Georgia is running about 3- inches below normal

PBS Raises Modern Day Dust Bowl Questions - A recent 4-hour PBS Special, “The Dust Bowl”, by Ken Burns was widely watched. The following writing is related to that show and is by the Environmental Working Group’s Senior Advisor, Don Carr (Twitter @DonEWG). Coincidentally, NOAA’s “Significant Events for October 2012″ report included this: “Strong winds combined with drought conditions to create a large dust storm across CO, KS, NE, OK, and WY on Oct 17-18 closing several major highways.” (Below, is a NASA space photo of that dust storm.) One of the take-away messages here is this — we as taxpayers do not want to decouple good land stewardship from subsidy payments to farmers — something currently on the agenda as this farm bill gets reworked.

2012 expected to be ninth warmest year on record - This year is likely to be the ninth warmest on record, with global temperatures in 2012 cooler than the average for the past decade owing to the effects of La Niña weather patterns early in the year. The estimates come as governments wrangle over the form of a proposed new global agreement on climate change, that could eventually replace the Kyoto protocol. Nearly 200 countries are meeting in Doha, Qatar, but as yet there are few signs of unity. So far this year, the current world average global temperature is 14.45C, which is between one-tenth and a 0.5C higher than the 1961 to 1990 average. The World Meteorological Organisation (WHO) used information from three global temperature sets, running from January to October, to make its estimate. But the ranking could change under further analysis, and final data will not be ready until next March.

October Was 332nd Consecutive Globally Warm Month - Twenty-seven or younger? Then you’ve never experienced a month in which the global temperature has been colder than average, according to the latest data from the U.S. National Oceanic and Atmospheric Administration. In NOAA’s monthly “State of the Climate” analysis,  the agency reported: “The average temperature across land and ocean surfaces during October was 14.63°C. This is 0.63°C above the 20th century average and ties with 2008 as the fifth warmest October on record. This is the 332nd consecutive month with an above-average temperature.” This is global data, of course, and the pattern is rather more complex at a local level. In fact, the average monthly temperature in Britain in October was 1.3 degrees Celsius below average, making it the coldest October since 2003. Scotland had its coldest October since records began in 1910. But this was outweighed by the rest of the world, including central and southeastern Europe. Croatia was 1.1 to 1.6 degrees Celsius above the 1961-to-1990 average, and Moldova was even hotter: 2.5 to 3.5 degrees Celsius above average.

Cost Of Superstorm Sandy, And Other 2012 Extreme Weather Events, On The Rise - Yesterday, New York Governor Andrew Cuomo declared that his state needs $42 billion to recover from Hurricane Sandy and to protect against future extreme weather events.  Three quarters of this sum is just for damage repair and restoration of homes, businesses, and mass transit. New Jersey Gov. Chris Christie also announced that Sandy caused $29.5 billion in economic costs there, cautioning that the estimate will likely rise after next summer’s tourism season and real estate values take a hit.Cuomo urged that mitigating damage from future storms is essential, as climate change increases the frequency and severity of extreme weather. “There has been a series of extreme weather incidents,” Cuomo said just days after Sandy’s landfall.  “We have a new reality when it comes to these weather patterns.”Senator Charles Schumer (D-NY) warned that obtaining federal funding for recovery efforts could be difficult, especially during the  fiscal showdown. Schumer saidthat an emergency supplemental appropriations bill will be introduced in December and that it “will be an effort that lasts not weeks, but many months, and we will not rest until the federal response meets New York’s deep and extensive needs.” Although New Jersey and New York account for the lion’s share of damages from Hurricane Sandy, they aren’t the only states slammed by extreme weather. Sixteen states were afflicted by five or more extreme weather events in 2011-12.  Households in disaster-declared counties in these states earn $48,137, or seven percent below the U.S. median income.  These states were ravaged by hurricanes and tropical storms, tornadoes and severe thunderstorms, floods and crippling drought.After Superstorm Sandy, droughts are the second and third most costly extreme weather events in 2011-12, respectively. Extremely dry conditions over the past two years resulted in long drought seasons that caused at least $40 billion in economic damages combined.

What Could Disappear - Maps show coastal and low-lying areas that would be permanently flooded, without engineered protection, in three levels of higher seas. Percentages are the portion of dry, habitable land within the city limits of places listed that would be permanently submerged.

Obama under pressure to show Doha he is serious on climate change - Barack Obama is being pressed for proof of his intent to act on climate change ahead of next week's United Nations global warming summit in Doha. The proof might boil down to just two words: two degrees. An early statement at Doha that America remains committed to the global goal of limiting warming to 2C above pre-industrial levels would be a clear sign. Every statement from US diplomats at the Doha negotiations will be closely scrutinised for signs that Obama will indeed make climate change a priority of his second term – and that America remains committed to the global agreement diplomats have been seeking for 20 years. Campaigners say Obama's re-election, superstorm Sandy and New York City mayor Michael Bloomberg's endorsement – predicated on climate change – put climate change back on the domestic agenda. Opinion polls suggest public concern in the US about climate change was rising even before Sandy. Campaigners argue Obama needs to engage on climate, if he wants to safeguard his legacy as president.

Is Doha the worst place in the world for a climate change summit ... or possibly the best? - Telegraph: Doha will host the latest round of United Nations talks on climate change. But can a major oil and gas hub with the highest carbon footprint per person in the world lead the way on a switch to a green economy?Doha has the largest carbon footprint per person in the world. Qataris use five times the amount of carbon than the average Briton, at 44 metric tonnes per person per year in 2009. This is largely because of energy intensive air conditioning and desalination plants for water. Because water and electricity is free, there is little incentive to cut usage. The UK spends more on gas from Qatar than any other country. In 2011 the UK spent £4.25bn on Qatari gas, 70 per cent more than our next largest import partner, Norway. This is not because the UK imports more gas from Qatar than Norway but because it is much more expensive. The tiny emirate has more than 15 per cent of the world's proven gas reserves and has talked about using “unconventional sources” in future, opening the possibility of deepwater drilling or shale.

Industrialized countries failed to provide $30 billion to tackle climate change in developing nations - Industrialised countries have failed to provide the promised $30 billion to tackle climate change in developing nations particularly the poor and least developed countries, hindering a global agreement on climate, according to an independent non-profit research institute. In 2009 at Copenhagen, industrialised countries pledged to provide $30 billion in fast start finance over a three-year period ending this year.An assessment by International Institute for Environment and Development, shows that the industrialised countries have been laggard and not transparent about providing the promised money. Of the total $30 billion promised only $23.6 billion had been committed, according to the May 2012 report of the UN Framework Convention on Climate Change. The United States, European Union and Iceland committed half or less than half of their share.

Real clothes for the Emperor: Facing the challenges of climate change - In June the United Nations Conference on Sustainable Development reconvened in Rio, twenty years after the international community first came together to develop a blueprint of sustainable development for the new millennium. In 2012, whilst faltering steps towards sustainability have been taken in some areas, on climate change we’re going to hell in a handcart – and fast! Global carbon dioxide emissions for 2011 – a year of economic recession and upheaval in the West – rose by 3.2% on the 2010 figure, which itself was up 6% on 2009. We are entering uncharted waters; 7 to 9 billion people living in a world with a climate changing at rates unprecedented in human history and beyond that at which ecosystems are attuned to adapt. This seminar laid out the case for concern and, perhaps more importantly, demonstrated how the early harnessing of human will and ingenuity may still offer opportunities to deliver relatively low-carbon and climate-resilient communities.

Evidence for Man-Made Climate Change Stronger -- Evidence that global warming is man-made is getting stronger, the head of a U.N. panel of climate scientists said, in a further blow to skeptics who argue rising temperatures can be explained by natural variations. Rajendra Pachauri spoke on the sidelines of a conference in Qatar where 200 nations are trying to reach a deal to cut emissions of greenhouse gases to avert floods, droughts, heat waves and mounting sea levels. The influential U.N. climate panel said the probability human activity was the main cause of climate change was "at least 90 percent" in its last report in 2007. "We will have a lot more information this time around on the melting of Greenland and Antarctica. I hope we will get a little more information on sea level rise," he added. Rising sea levels pose a particular threat to people living in low-lying areas, from Bangladesh to the cities of New York, London and Buenos Aires. They open up the risk of storm surges, coastal erosion and, in the worst case scenario, complete swamping of large areas of land. The last report by the U.N.'s Intergovernmental Panel on Climate Change (IPCC) gave a wide range for sea levels, saying they could rise by between 18 and 59 cm (7-24 inches) by 2100. Those numbers did not take account of a possible acceleration of a melt of Antarctic or Greenland ice, due to big uncertainties.

Report Says IPCC Needs to Address Melting Permafrost -The United Nations Environment Program (UNEP) released a report early Tuesday morning that recommended the Intergovernmental Panel on Climate Change (IPCC) address the impact of warming permafrost and the large volume of methane and carbon dioxide that will be emitted from the ground if permafrost continues to melt. The report argues that these additional emissions should be considered in any international negotiation of emissions targets and discussion of climate change policy. The UNEP report, called “Policy Implications of Warming Permafrost,” recommended that the IPCC commission a special report to address the impact of permafrost emissions. It also urged the panel to create a separate, national permafrost-monitoring network, in order to standardize and expand the monitoring of these emissions. That network would include countries such as the United States, Russia, Canada, and China, which have some of the largest areas of permafrost.

Energy officials see little hope for climate talks - Top International Energy Agency (IEA) officials offered a bleak assessment Tuesday of the prospects for global progress on preventing big temperature increases. “I am not at all [optimistic],” said IEA Executive Director Maria van der Hoeven when asked about the United Nations-hosted climate summit that got under way in Doha, Qatar, this week. “I was in Durban last year. I wasn’t optimistic there. But at least there was a kind of global engagement on climate change,” she said Tuesday, referring to last year’s U.N. summit in South Africa. “I don’t think we are going to make much progress at this moment.” She spoke to reporters after a presentation on IEA’s latest World Energy Outlook at the Carnegie Endowment for International Peace in Washington, D.C. The report warns that time is quicky running out to limit global temperature increases to 2 decrees Celsius above pre-industrial levels, which many advocates call necessary to avoid dangerous climatic changes.

UN Seeks Simplest Process in Six Years for Pollution Cuts - Envoys at United Nations global warming talks are working on streamlining their negotiation process for the first time in at least six years, a step toward drafting a treaty by 2015 mandating more greenhouse-gas limits. Delegates from more than 190 countries plan to close two parallel strands of talks and concentrate on one track, the biggest change to the process since 2007. The meeting, now in its fifth day in Doha, has avoided the rancor of the past three gatherings to focus on laying the groundwork for a deal limiting fossil-fuel emissions that would take effect by 2020.The plan would revisit the effort to enact targets that failed in Copenhagen in 2009, when the meeting dissolved into finger-pointing between rich and poorer nations over which should move first on emissions. The new effort would require the U.S., China and India, the biggest emitters, to join carbon dioxide curbs in force in the European Union and Australia. “It’s a landmark because we’re going to stop negotiating as before,” Andre Correa do Lago, Brazil’s ambassador to the talks, said in an interview in Doha. “We’re going to use what we have negotiated over the past five years to achieve things on the ground.” The agreement, due on Dec. 7 when the meeting is scheduled to conclude, won’t have an immediate impact on the climate.

New Bank of England Governor Mark Carney’s wife: an eco-warrior who says banks are rotten - The British wife of the new Bank of England Governor is a strident environmental activist who urges people to spend less money on possessions, and once declared: “Having more stuff does not make us happy.”  Diana Carney has expressed sympathy for the anti-banking Occupy movement and suggested that global financial institutions are “rotten or inadequate”.  She has described the notion that humans should halt all consumption to save the environment as a “good point” but “very hard given the way our societies function”, and has also lamented the “relentless exhortations to buy and the fact that much of our sense of self is tied up in our possessions”.  Mrs Carney, who met her husband, Mark, at Oxford, is vice-president of Canada 2020, a Left-wing think tank, and reviews environmentally-friendly products. The couple, who have four daughters with dual British-Canadian citizenship, live in Rockcliffe Park, Ottawa, one of Canada’s richest enclaves where their neighbours include ambassadors and executives. Mr and Mrs Carney bought their home for £800,000 in August 2003, but its value is believed to have risen substantially. Records suggest that they made £95,000 of improvements in 2009.  In an article this month, Mrs Carney said that income inequality in countries such as Canada and Britain was “the defining issue of our time”.

Rising CO2 ‘eating’ shells of sea butterflies - Rising acidity is eating away the shells of tiny snails, known as “sea butterflies”, that live in the seas around Antarctica, leaving them vulnerable to predators and disease, scientists said Sunday. The study presents rare evidence of living creatures suffering the results of ocean acidification caused by rising carbon dioxide levels from fossil fuel burning, the British Antarctic Survey said in a statement. “The finding supports predictions that the impact of ocean acidification on marine ecosystems and food webs may be significant.” The tiny snail, named for two wing-like appendices, does not necessarily die as a result of losing its shell, but it becomes an easier target for fish and bird predators, as well as infection. This may have a follow-through effect on other parts of the food chain, of which they form a core element.

Washington is first state to tackle ocean acidification - Washington Gov. Chris Gregoire on Tuesday ordered state agencies to take initial steps to combat ocean acidification, making it the first state to address problematic changes in ocean chemistry that threaten shellfish farms, wild-caught fish and other marine life. Gregoire signed the executive order based on the recommendation of a blue ribbon panel of experts that pointed out how increasingly acidified waters pose a direct threat to the state’s $270 million shellfish industry.

Swallowing Rain Forest, Cities Surge in Amazon— The Amazon has been viewed for ages as a vast quilt of rain forest interspersed by remote river outposts. But the surging population growth of cities in the jungle is turning that rural vision on its head and alarming scientists, as an array of new industrial projects transforms the Amazon into Brazil’s fastest-growing region. The torrid expansion of rain forest cities is visible in places like Parauapebas, which has changed in a generation from an obscure frontier settlement with gold miners and gunfights to a sprawling urban area with an air-conditioned shopping mall, gated communities and a dealership selling Chevy pickup trucks. Scientists are studying such developments and focusing on the demands on the resources of the Amazon, the world’s largest remaining area of tropical forest. Though Brazilian officials have historically viewed the colonization of the Amazon as a matter of national security — military rulers built roads to the forest under the slogan “Occupy it to avoid surrendering it” — deforestation in the region already ranks among the largest contributors to global greenhouse-gas emissions. Brazil has shifted away from colonization, but policies that regularize land claims by squatters still lure migrants to the Amazon. And while the country has recently made progress in curbing deforestation, largely by enforcing logging laws and carving out protected forest areas, biologists and other climate researchers fear that the sharp increase in migration to cities in the Amazon, which now has a population approaching 25 million, could erode those gains.

Arctic sea ice larger than US melts, UN reports; climate change happening ‘before our eyes’ - An area of Arctic sea ice bigger than the United States melted this year, according the U.N. weather agency, which said the dramatic decline illustrates that climate change is happening “before our eyes.” In a report released at U.N. climate talks in the Qatari capital of Doha, the World Meteorological Organization said the Arctic ice melt was one of a myriad of extreme and record-breaking weather events to hit the planet in 2012. Droughts devastated nearly two-thirds of the United States as well western Russia and southern Europe. Floods swamped west Africa and heat waves left much of the Northern Hemisphere sweltering.But it was the ice melt that seemed to dominate the annual climate report, with the U.N. concluding ice cover had reached “a new record low” in the area around the North Pole and that the loss from March to September was a staggering 11.83 million square kilometers (4.57 million square miles) — an area bigger than the United States. “The alarming rate of its melt this year highlighted the far-reaching changes taking place on Earth’s oceans and biosphere,” WMO Secretary-General Michel Jarraud said. “Climate change is taking place before our eyes and will continue to do so as a result of the concentrations of greenhouse gases in the atmosphere, which have risen constantly and again reached new records.”

UN: methane released from melting ice could push climate past tipping point - The United Nations sounded a stark warning on the threat to the climate from methane in the thawing permafrost as governments met for the second day of climate change negotiations in Doha, Qatar. Thawing permafrost releases methane, a powerful greenhouse gas, but this has not yet been included in models of the future climate. Permafrost covers nearly a quarter of the northern hemisphere at present and is estimated to contain 1,700 gigatonnes of carbon – twice the amount currently in the atmosphere. As it thaws, it could push global warming past one of the key "tipping points" that scientists believe could lead to runaway climate change. The UN Environment Programme (UNEP) called for the effect to be studied in detail by the Intergovernmental Panel on Climate Change (IPCC), the body of top climate scientists convened by the UN to provide governments with the most up-to-date and comprehensive knowledge on climate change. The next IPCC report will be published in several parts from next year.

Is Global Warming Happening Faster Than Expected?: Scientific American: Over the past decade scientists thought they had figured out how to protect humanity from the worst dangers of climate change. Keeping planetary warming below two degrees Celsius (3.6 degrees Fahrenheit) would, it was thought, avoid such perils as catastrophic sea-level rise and searing droughts. Staying below two degrees C would require limiting the level of heat-trapping carbon dioxide in the atmosphere to 450 parts per million (ppm), up from today's 395 ppm and the preindustrial era's 280 ppm. Now it appears that the assessment was too optimistic. The latest data from across the globe show that the planet is changing faster than expected. More sea ice around the Arctic Ocean is disappearing than had been forecast. Regions of permafrost across Alaska and Siberia are spewing out more methane, the potent greenhouse gas, than models had predicted. Ice shelves in West Antarctica are breaking up more quickly than once thought possible, and the glaciers they held back on adjacent land are sliding faster into the sea. Extreme weather events, such as floods and the heat wave that gripped much of the U.S. in the summer of 2012 are on the rise, too. The conclusion? “As scientists, we cannot say that if we stay below two degrees of warming everything will be fine,” The X factors that may be pushing the earth into an era of rapid climate change are long-hypothesized feedback loops that may be starting to kick in. Less sea ice, for example, allows the sun to warm the ocean water more, which melts even more sea ice. Greater permafrost melting puts more CO2 and methane into the atmosphere, which in turn causes further permafrost melting, and so on. The potential for faster feedbacks has turned some scientists into vocal Cassandras.

It Just Doesn't Matter - Many people still deny that 1) the Earth's surface is warming; and 2) human activity is causing it through emissions of greenhouse gases (CO2, CH4, N2O, etc.). I ceased paying attention to such folks in the mid-1990s. Global warming is an outcome in the chemistry and physics of the Earth's atmosphere. If somebody refuses to believe the science, it makes me wonder how they think the internal combustion in their car works. By magic? Maybe they think the internal combustion engine was a gift from God. Humans are what they are, but physics doesn't care. So I consider this latest result on changes in the Earth's atmosphere to be redundant. Nonetheless, the effort by scientists to "sell" anthropogenic climate change to politicians and the public continues. Science Daily reported on the global warming clincher in Human-Caused Climate Change Signal Emerges from the NoiseBy comparing simulations from 20 different computer models to satellite observations, Lawrence Livermore climate scientists and colleagues from 16 other organizations have found that tropospheric and stratospheric temperature changes are clearly related to human activities. The team looked at geographical patterns of atmospheric temperature change over the period of satellite observations. The team's goal of the study was to determine whether previous findings of a "discernible human influence" on tropospheric and stratospheric temperature were sensitive to current uncertainties in climate models and satellite data.

Science Stunner: Greenland Ice Melt Up Nearly Five-Fold Since Mid-1990s, Antartica's Ice Loss Up 50% In Past Decade -  A major new international study reconciles “an ensemble of satellite altimetry, interferometry, and gravimetry data sets” to determine polar ice-sheet ice loss with the highest accuracy to date. The study, “A Reconciled Estimate of Ice-Sheet Mass Balance” (subs. req’d) was published in the journal Science Thursday. The NASA Jet Propulsion Laboratory news release explains the study’s significance: An international team of experts supported by NASA and the European Space Agency (ESA) has combined data from multiple satellites and aircraft to produce the most comprehensive and accurate assessment to date of ice sheet losses in Greenland and Antarctica and their contributions to sea level rise. In a landmark study published Thursday in the journal Science, 47 researchers from 26 laboratories report the combined rate of melting for the ice sheets covering Greenland and Antarctica has increased during the last 20 years. Together, these ice sheets are losing more than three times as much ice each year (equivalent to sea level rise of 0.04 inches or 0.95 millimeters) as they were in the 1990s (equivalent to 0.01 inches or 0.27 millimeters). About two-thirds of the loss is coming from Greenland, with the rest from Antarctica…. “Both ice sheets appear to be losing more ice now than 20 years ago, but the pace of ice loss from Greenland is extraordinary, with nearly a five-fold increase since the mid-1990s,” [JPL's Erik] Ivins said. “In contrast, the overall loss of ice in Antarctica has remained fairly constant, with the data suggesting a 50-percent increase in Antarctic ice loss during the last decade.”

Antarctic icecap is melting more slowly than previously estimated, scientists find: The authors of the study, published in Nature, estimate an annual total ice loss of 69 billion tonnes, plus or minus 18 billion – between half and a third of previous estimates, and equivalent to only around 0.19mm of sea-level rise a year. Changes in ice mass vary across the continent. The area along the Amundsen Sea coast is losing ice at a fast and accelerating rate, whereas West Antarctica as a whole is roughly stable and East Antarctica is gaining substantial amounts of ice. Antarctica is warming due to worldwide climate change but it's still extremely cold; away from where the ice flows into the warming sea, it's very difficult for large volumes of ice to melt, so changes in ice mass in the continent's interior may have more to do with global patterns of precipitation – that is, how much it snows, replenishing ice stocks – than with the air temperature.

Ice sheet melting accounts for 20% of sea level rise since 1992 -The loss of ice covering Greenland and Antarctica has accelerated over the last 20 years, shrinking three times as much as in the 1990s and contributing substantially to sea level rise, according to a comprehensive new study of ice sheet loss conducted by 26 laboratories around the world. The study, published Thursday by the journal Science, comes weeks after Hurricane Sandy’s destruction of coastal communities in New York and New Jersey starkly highlighted the risks posed by sea level rise, especially during storm surges. Ice sheet loss means that ice that melts during the summer thaw does not return in the winter. That results in a net loss of ice in a year-to-year comparison of a given area. Supported by NASA and the European Space Administration, the study estimates that about 20% of current sea level rise can be attributed to the 344 billion tons of glacial ice lost annually in Greenland and Antarctica. (The other major factors behind sea level rise are expansion of the oceans as they warm and melting of mountain glaciers, whose waters eventually run into the sea.)

5 Charts About Climate Change That Should Have You Very, Very Worried - Two major organizations released climate change reports this month warning of doom and gloom if we stick to our current course and fail to take more aggressive measures. A World Bank report imagines a world 4 degrees warmer, the temperature predicted by century's end barring changes, and says it aims to shock people into action by sharing devastating scenarios of flood, famine, drought and cyclones. Meanwhile, a report from the US National Research Council, commissioned by the US Central Intelligence Agency (CIA) and other intelligence agencies, says the consequences of climate change--rising sea levels, severe flooding, droughts, fires, and insect infestations--pose threats greater than those from terrorism ranging from massive food shortages to a rise in armed conflicts. Here are some of the more alarming graphic images from the reports.

Study: Sea Levels Rising 60% Faster Than Projected, Planet Keeps Warming As Expected - A new study, “Comparing climate projections to observations up to 2011,” confirms that climate change is happening as fast — and in some cases faster — than climate models had projected. The news release explains: The rate of sea-level rise in the past decades is greater than projected by the latest assessments of the IPCC, while global temperature increases in good agreement with its best estimates. This is shown by a study now published in the journal Environmental Research Letters. Stefan Rahmstorf from the Potsdam Institute for Climate Impact Research (PIK) and his colleagues compare climate projections to actual observations from 1990 up to 2011. That sea level is rising faster than expected could mean that the Intergovernmental Panel on Climate Change’s (IPCC) sea-level rise projections for the future may be biased low as well, their results suggest. As Dr. Rahmstorf notes, “the new findings highlight that the IPCC is far from being alarmist and in fact in some cases rather underestimates possible risks.” The oceans are rising 60 per cent faster than the IPCC’s latest best estimates, according to the new research. The researchers compared those estimates to satellite data of observed sea-level rise. ” Satellites have a much better coverage of the globe than tide gauges and are able to measure much more accurately by using radar waves and their reflection from the sea surface,” While the IPCC projected sea-level rise to be at a rate of 2 mm per year, satellite data recorded a rate of 3.2 mm per year.

Chris Hedges: Stand Still for the Apocalypse - Humans must immediately implement a series of radical measures to halt carbon emissions or prepare for the collapse of entire ecosystems and the displacement, suffering and death of hundreds of millions of the globe’s inhabitants, according to a report commissioned by the World Bank. The continued failure to respond aggressively to climate change, the report warns, will mean that the planet will inevitably warm by at least 4 degrees Celsius (7.2 degrees Fahrenheit) by the end of the century, ushering in an apocalypse.  The 84-page document,“Turn Down the Heat: Why a 4°C Warmer World Must Be Avoided,” was written for the World Bank by the Potsdam Institute for Climate Impact Research and Climate Analytics and published last week. The picture it paints of a world convulsed by rising temperatures is a mixture of mass chaos, systems collapse and medical suffering like that of the worst of the Black Plague, which in the 14th century killed 30 to 60 percent of Europe’s population. The report comes as the annual United Nations Conference on Climate Change begins this Monday [Nov. 26] in Doha, Qatar.  A planetwide temperature rise of 4 degrees C—and the report notes that the tepidness of the emission pledges and commitments of the United Nations Framework Convention on Climate Change will make such an increase almost inevitable—will cause a precipitous drop in crop yields, along with the loss of many fish species, resulting in widespread hunger and starvation. Hundreds of millions of people will be forced to abandon their homes in coastal areas and on islands that will be submerged as the sea rises. There will be an explosion in diseases such as malaria, cholera and dengue fever. Devastating heat waves and droughts, as well as floods, especially in the tropics, will render parts of the Earth uninhabitable. The rain forest covering the Amazon basin will disappear. Coral reefs will vanish. Numerous animal and plant species, many of which are vital to sustaining human populations, will become extinct. Monstrous storms will eradicate biodiversity, along with whole cities and communities. And as these extreme events begin to occur simultaneously in different regions of the world, the report finds, there will be “unprecedented stresses on human systems.” Global agricultural production will eventually not be able to compensate. Health and emergency systems, as well as institutions designed to maintain social cohesion and law and order, will crumble. The world’s poor, at first, will suffer the most. But we all will succumb in the end to the folly and hubris of the Industrial Age. And yet, we do nothing.

Armageddon 2.0 - Bulletin of the Atomic Scientists - The world lived for half a century with the constant specter of nuclear war and its potentially devastating consequences. The end of the Cold War took the potency out of this Armageddon scenario, yet the existential dangers have only multiplied. Today the technologies that pose some of the biggest problems are not so much military as commercial. They come from biology, energy production, and the information sciences -- and are the very technologies that have fueled our prodigious growth as a species. They are far more seductive than nuclear weapons, and more difficult to extricate ourselves from. The technologies we worry about today form the basis of our global civilization and are essential to our survival.The mistake many of us make about the darker aspects of our high-tech civilization is in thinking that we have plenty of time to address them. We may, if we're lucky. But it's more likely that we have less time than we think. There may be a limited window of opportunity for preventing catastrophes such as pandemics, runaway climate change, and cyber attacks on national power grids.

How the myth of fossil fuel abundance actually impedes progress on climate change - The great fear among those working to address climate change is that the seemingly vast resources of fossil fuels waiting to be burned will send the world hurtling toward certain catastrophe. By invoking fossil fuel abundance, climate activists believe that their argument for a rapid transition to alternative energy is made more persuasive. Here is what I mean. First, despite all the hype about marginal gains in U.S. oil production, world oil production has been on a plateau since 2005. Small gains in U.S. production have been offset by declining production in the rest of the world. The news for coal production is only slightly less discouraging as one study suggests that the rate of coal production worldwide could peak as early as 2025. In the United States, while coal tonnage has remained essentially flat from 1998 through 2011, energy content has actually declined. Has the available energy from U.S. coal production already peaked? We can't be sure. But the trend suggests caution. One recent study even concluded that world coal production from existing fields may have peaked last year. But, even if the authors are 10 years early, the prospects for creating a coal economy to follow the oil one are poor at best. And finally, natural gas--much touted as a less polluting "bridge fuel" to a renewable energy future--may not be so plentiful as we are led to believe. Natural gas derived from deep shale deposits was first portrayed as so abundant that wells could simply be drilled anywhere in the vast shale basins of North America. But the record of drilling to date suggests that such deposits will yield far less than anticipated and be far more costly to develop.

Obama Signs Bill to Exempt US Airlines from EU Aviation Carbon Tax - The EU has set a tax on carbon emissions for all aircraft flying into European countries, all part of the Emissions Trading Scheme (ETS). The problem is that Obama has just signed a bill that exempts US airlines from paying that carbon tax. Specifically the bill gives the US transportation secretary the power to shield US airlines from the tax; an unusual bill, according to Reuters, as it allows US airlines to ignore EU laws. Clark Stevens, a spokesman from the White House, explained that “the Obama administration is firmly committed to reducing harmful carbon pollution from civil aviation both domestically and internationally, but, as we have said on many occasions, the application of the EU ETS to non-EU air carriers is the wrong way to achieve that objective.”

"The economics of carbon taxes" - With the growing need for reform in the US fiscal system, the idea of a tax on carbon has emerged as a possible solution. On Tuesday at AEI, four panels explored the merits and challenges of implementing a tax on carbon, discussing topics ranging from its distributional effects to its potential impact on international trade. Roberton Williams of Resources for the Future began by highlighting three advantages that a carbon tax has over outright regulation, while AEI's Aparna Mathur explained the economic reasoning behind a theoretical tax on carbon to correct for externalities of pollution. Panelists also discussed how carbon taxes would function in an international framework and their potential macroeconomic effects. Karen Palmer of Resources for the Future emphasized the difficulties posed by the complex structure of American government for a carbon tax. Donald Marron of the Urban Institute argued that carbon tax revenues could be used to lower corporate tax rates to increase economic efficiency in the US. Panelists overwhelmingly agreed that more research on the effects of a carbon tax is needed, but that it raises important questions for academics and policymakers alike.

Why Current Methods to Combat Climate Change Don’t Work - World leaders seem to have their minds made up regarding what will fix world CO2 emissions problems. Their list includes taxes on gasoline consumption, more general carbon taxes, cap and trade programs, increased efficiency in automobiles, greater focus on renewables, and more natural gas usage. Unfortunately, we live in a world economy with constrained oil supply. Because of this, the chosen approaches have a tendency to backfire if some countries fail to adopt them. But even if everyone adopted them, it is not at all clear that they would provide the promised benefits. The standard fixes don’t work for several reasons:

  • 1. In an oil-supply constrained world, if a few countries reduce their oil consumption, the big impact is to leave more oil for the countries that don’t. Oil price may drop a tiny amount, but on a world-wide basis, pretty much the same amount of oil will be extracted, and nearly all of it will be consumed.
  • 2. Unless there is a high tax on imported products made with fossil fuels, the big impact of a carbon tax is to send manufacturing to countries without a carbon tax, such as China and India. These countries are likely to use a far higher proportion of coal in their manufacturing than OECD countries would, and this change will tend to increase world CO2 emissions.
  • 3. The only time when increasing natural gas usage will actually reduce carbon dioxide emissions is if it replaces coal consumption. Otherwise it adds to carbon emissions, but at a lower rate than other fossil fuels, relative to the energy provided.
  • 4. Substitutes for oil, including renewable fuels, are ways of increasing consumption of coal and natural gas over what they would be in the absence of renewable fuels, because they act as add-ons to world oil supply, rather than as true substitutes for oil.

Top Home Electricity Users - The above chart shows the top users of electricity in a typical US home.  The data are from the EIA and date from 2001 so it might have changed a bit but probably not all that much.  Note that this is only electricity usage, not all energy usage. So if you want to conserve, you can see where are the likely highest priority places to start.  Of course, these are national averages so you can make regional or personal adjustments.  For example, if you live in the southern parts of the US, air conditioning is likely a bigger fraction of your total, while in northern climes, it's probably less.  Similarly, if you heat with electricity then space heating is likely the biggest bar for you, whereas if you don't, it will be zero.

U.S. Power Grid Vulnerable to Just About Everything - As Washington hunts ill-defined al-Qaeda groups in the Middle East and Africa, and concerns itself with Iran’s eventual nuclear potential, it has a much more pressing problem at home: Its energy grid is vulnerable to anyone with basic weapons and know-how. Forget about cyber warfare and highly organized terrorist attacks, a lack of basic physical security on the US power grid means that anyone with a gun—like disgruntled Michigan Militia types, for instance--could do serious damage. For the past two months, the US Federal Energy Regulatory Commission (FERC) has been tasked with creating a security strategy for the electric grid and hydrocarbon facilities through its newly created Office of Energy Infrastructure Security. So far, it’s not good news. “There are ways that a very few number of actors with very rudimentary equipment could take down large portions of our grid,” warns FERC Chairman Jon Wellinghoff. This, he says, “is an equal if not greater issue” than cyber security. FERC’s gloom-and-doom risk assessment comes on the heels of the recent declassification of a 2007 report by the National Academy of Sciences. It could cause massive blackouts for weeks or months at a time. But this would only be the beginning, the Academy warns, spelling out an “end of days” scenario in which blackouts lead to widespread fear, panic and instability.

Preventing Armageddon Would Cost Only $100 Million … But Congress Is Too Thick to Approve the Fix - The government has thrown tens of trillions of dollars at the big banks, even though bailing out the big banks hurts – rather than helps – the American economy. See this, this and this. (And it doesn’t take a PhD economist to guess that using bailout funds to buy gold toilet seats and prostitutes is probably not the best way to stimulate the economy as a whole).. Nobel prize winning economist Joe Stiglitz says that the $3-5 trillion spent on the Iraq war alone has been very bad for the American economy. See this, this and this. Security experts – including both hawks and doves – agree that waging war against Iraq and in other Middle Eastern countries weakens national security and increases terrorism. See this, this, this, this, this, this, this and this. And yet Congress refuses to spend a mere $100 million to prevent Armageddon. Specifically, well-known physicist Michio Kaku and other members of the American Physical Society asked Congress to appropriate $100 million to harden the country’s electrical grid against solar flares. Congress refused. Kaku explains that a solar flare like the one that hit the U.S. in 1859 would – in the current era of nuclear power and electric refrigeration – cause Armageddon. Not only could such a flare bring on multiple Fukushima type accidents, but it could well cause food riots nationwide. Kaku explains that relief came in for people hit by disasters like Katrina or Sandy from the “outside”. But a large solar flare could knock out a lot of the power nationwide. So – as people’s food spoils due to lack of refrigeration – emergency workers from other areas would be too preoccupied with their own local crisis to help. There would, in short, be no “cavalry” to the rescue in much of the country.

The High Cost Of Our Throwaway Culture - As I said in my previous column, we are the biggest force in moving the planet’s rocks and sediments around. Our global extractions are environmentally damaging and depleting some resources to the extent that they are in danger of running out. Many of those resources find their way into the goods, gadgets and machines that we find indispensable in our everyday lives. But do we really need so much stuff, or are we simply addicted to the new? There's no doubt that our consumption of resources from food to gadgets has risen dramatically over the past 60 years, and much of the world seems to be in the grip of a shopping epidemic. But is there a conscious effort driving it?  There have been many times during my travels when I've needed something repaired, from rips in my backpack, to holes in my clothes, zippers that have broken or memory cards that have lost data. In rich countries, such items often would be thrown away and replaced with new ones without a second thought. But the developing world is still full of menders, make-doers and inspired users of others’ scrap. I’ve seen a bicycle in Nairobi made from bits of car, a colander and a leather belt; aerials made from all manner of implements; and houses constructed out of old boat sails, rice sacks and plastic drinks bottles.

Hopes of Home Fade Among Japan’s Displaced - The mayor of Okuma, a town near the Fukushima Daiichi plant that was hastily evacuated when a huge earthquake and tsunami crippled the reactors’ cooling systems on March 11, 2011, has vowed to lead residents back home as soon as radiation levels are low enough. But the slow pace of the government’s cleanup efforts, and the risk of another leak from the plant’s reactors, forced local officials to admit in September that it might be at least a decade before the town could be resettled. A growing number of evacuees from Okuma have become pessimistic about ever living there again. At a temporary housing complex here in Aizu-Wakamatsu, a city 60 miles west of the plant, the mostly elderly residents say they do not have that much time or energy left to rebuild their town. Many said they preferred plans that got them out of temporary housing but helped them maintain the friendships and communal bonds built over a lifetime, like rebuilding the town farther away from the plant. “I was one of those who kept saying, ‘We will go back, we will go back!’ ” said Toshiko Iida, 78, who fled her rice farm three miles south of the plant. “Now, they are saying it will be years before we can go back. I’ll be dead then.”

The New Future Of Energy Policy - Not surprisingly, in the weeks since the historical hurricane made landfall, new attention is being paid to the mounting costs that coastal world megacities may face. Intriguingly, however, this new conversation about climate, energy policy, and America’s reliance on fossil fuels comes after a five-year period in which the U.S. has dramatically lowered its consumption of oil and seen an equally dramatic upturn in the growth of renewable energy. The combination of declining oil use and a greater reliance on the global powergrid is going to shape energy and climate policy. Especially at a time when the concerns of climate change – or, rather, rising seas and the greenhouse dangers of fossil fuel dependency – are being increasingly raised. This will make for a rather muddled and complex array of diverging policy initiatives. Moreover, as new oil supplies emerge from domestic American sources, the dream of resurrecting this cheap oil era will no doubt come back around several more times. But none of these new resource plays will change the trajectory of global oil supply much, nor will they lower the price of oil. So far, new oil supply mostly offsets declines elsewhere – but at substantially higher marginal cost. This should now be clear.

While Germany Is Headed for 80% Renewable Energy, We’re Getting Left in the Dust - When you think of places with great potential for solar energy, what comes to mind? Maybe the American Southwest, perhaps the Middle East. What probably doesn’t come to mind is Germany — and yet Germany is leading a global revolution in renewable energy, with solar playing a key part. In the U.S., we now get 6 percent of our energy from renewables, which is exactly where Germany was in 2000. And then it passed the Renewable Energy Act and jumpstarted a movement known as Energiewende. Twelve years later, Germany gets over 25 percent of its energy from renewables and it is surpassing all of its benchmarks to be 80 percent renewable-powered by 2050. 25 percent of Germany’s electricity now comes from solar, wind and biomass. A third of the world’s installed solar capacity is found in Germany, a nation that gets roughly the same amount of sunlight as Alaska. A whopping 65 percent of the country’s total renewable power capacity is now owned by individuals, cooperatives and communities, leaving Germany’s once all-powerful utilities with just a sliver (6.5 percent) of this burgeoning sector.

UK to Shift Focus from Renewable Energy to Natural Gas - The UK government has finally released its long overdue energy policy, and it seems that Chancellor George Osborne won. The problems that were facing the coalition decision makers in regards to setting the new energy bill were three fold:

1.    Sufficient power must be available to meet demand.
2.    Energy bills must not increase too much.
3.    Carbon Emissions cannot increase in order to stick to pre-set targets, in fact they need to fall.

Meeting all three has not been an easy task, and it is made harder by two decades of under-investment in the nation’s energy infrastructure. To start with the three factors must be prioritised. The lights must stay on, that is obvious; and by law the carbon emissions must begin to decrease. That just leaves cost as the only option that could show a bit of give. Unfortunately that bit of give means higher bills for consumers; by how much is currently unknown.

Will India Surge Ahead Of The West In Renewable Energy?  - This August, power shortages in India that left 300 million in the dark made it very clear that one of the world’s fastest growing economies was facing an energy crisis. Less clear is how realistically to solve it. Many firms are looking for new sources of oil to fulfill India’s growing energy demands, but this could prove to be painfully expensive. On the brighter side, solar energy and other renewable resources are already being rapidly harnessed in the non-Western world, and they are becoming cheaper and cheaper. As of June 2012, 31 percent of India’s energy came from renewable resources, including hydroelectric power, while only 9 percent of the United States’ did as of the end of 2011. In a 2009 McKinsey &amp; Company survey, India was rated the top producer of solar energy in the world, just above the United States, with an annual yield of 1,700 to 1,900 kilowatt hours per kilowatt peak (kWh/KWp). However, demand for energy in India will only continue to grow, and the question is whether energy will continue to come mainly from fossil fuels or from renewable energy sources

Ukraine is ripe for US gas exploration - If prospective partners’ discount rates, or, to look at it another way, time horizons, are compatible with each other then there’s a good chance they can make a deal, assuming they both agree the cash is there to be had. Right at the moment, investors and US domestic gas directed exploration and production companies don’t seem to be matching up in this way. Not with gas at $3.50-$4.00 a mmbtu in the American market. Nor can money and onshore gas drilling get together in the EU, even with natural gas selling at $9.50 to $11.00. The time horizon on getting any public support or regulatory approvals for drilling is too far away, in truth not even visible. In Ukraine, though, gas-directed independent North American exploration and production companies, the Ukrainian government, and even the previously obstructionist local oligarchs finally seem to have converging interests and compatible discount rates. Since there are already gas prospects that can be better developed than they have been, an extensive domestic pipeline network, and a gas price on offer at about $12 per mmbtu – that’s around three times the US price – the material pre-conditions are also present. Contrary to the common perception outside North America, the major international hydrocarbon companies have not been the principal developers of new gas resources. The majors have, historically, waited for small and midsize independents to find new fields, do the initial development, make all the mistakes and take any early losses, then acquired the reserves by buying out the independents.

Natural-Gas Exports Could Lift U.S. Trade and Economy - By greenlighting exports of liquefied natural gas, Obama can hasten production of an abundant U.S. resource and open a new avenue of international trade. The president can also give growth a much needed jolt: Liquid natural gas exports could add billions to the U.S. economy, create tens of thousands of long- term jobs and help narrow the trade gap. Demand for liquefied natural gas is high in Europe and Asia, where the fuel costs $10 to $16 per million British thermal units -- far more than the $3.70 it fetches in the U.S. Yet the U.S. doesn’t yet have facilities to liquefy gas for export. Exporting LNG to countries that aren’t free-trade partners with the U.S. requires a permit. This year, the administration approved such a permit for Cheniere Energy Inc. (LNG), allowing the company to build an LNG export facility in Louisiana. However, this triggered complaints from congressional Democrats and U.S. manufacturers, who argued that foreign sales would drive up the price of natural gas in the U.S. In response, the administration suspended issuing new permits to companies applying to build U.S. export facilities (18 such applications are pending), saying it needed to study the impact of LNG exports on domestic prices. It has twice delayed finishing its analysis, and a final report is now expected by year-end. Allowing exports would almost undoubtedly lead to a slight increase in U.S. gas prices, but that’s not necessarily a bad thing and shouldn’t be used as justification for preventing LNG exports.

Can natural gas live up to potential? –As nations seek alternative fuel sources in an effort to reduce petroleum use, the world is paying increasing attention to natural gas as an efficient option. Multi-stage fracturing and horizontal drilling have allowed natural gas supply to grow in North America, and if these techniques continue to be implemented, the door will be open for a number of countries to start producing potentially vast amounts of energy. Consider Russia, which has the largest amount of recoverable natural gas in the world – more than 4,500,000 billion cubic feet of natural gas, not including potential undiscovered resources in the region. Between Russia and Siberia, there’s a mean of 1,385,046 billion cubic feet of undiscovered natural gas, offering impressive potential for expansion. The United States, while not comparable in size to Russia, still has much to gain from a potential domestic energy increase. The U.S. places after Russia as having the second-highest amount of recoverable natural gas available. It’s true that there has been controversy over shale, with some critics pointing to what they claim are the adverse side effects of the so-called fracking drilling process used to tap natural gas, such as the release of methane. However, supporters point to the huge potential –the Eagle Ford Shale in Texas, for example, was responsible for nearly 327.5 billion cubic feet of natural gas production in 2011. From January to July 2012 alone, over 182 billion cubic feet were produced.

Small Towns Get Boost From Oil, Gas as Wealth Shifts Away From Cities - The Great Recession hit small towns hard. Many saw factories close and jobs dry up. But according to a new analysis, small-town America is actually experiencing an economic revival thanks to an oil and gas boom. According to government data analyzed by USA Today, inflation-adjusted income has increased 3.8% per person between 2007 and 2011 for the roughly 50 million Americans who live in small cities, towns, and rural areas. Compare that to almost the same percentage drop (3.5%) in metropolitan areas, and a shift in wealth begins to emerge, one flowing from cities to rural regions. The trend is especially strong in places that participated in the recent boom in oil and gas. North Dakota, for example, quickly became the country’s No. 2 oil-producing state over the last several years thanks to a discovery of shale gas there. North Dakota’s unemployment rate also currently sits at 3%, by far the lowest in the U.S., and that dynamic has played out across the country. The states with the lowest unemployment rates are in the middle of the U.S. Along with North Dakota, Nebraska, and South Dakota have unemployment rates below 5%, while Iowa, Utah, and Wyoming have rates just above that mark.

Polluters Must Pay: When BP and its drilling partners caused the Deepwater Horizon oil spill in the Gulf of Mexico in 2010, the United States government demanded that BP finance the cleanup, compensate those who suffered damages, and pay criminal penalties for the violations that led to the disaster. BP has already committed more than $20 billion in remediation and penalties. Based on a settlement last week, BP will now pay the largest criminal penalty in US history – $4.5 billion. The same standards for environmental cleanup need to be applied to global companies operating in poorer countries, where their power has typically been so great relative to that of governments that many act with impunity, wreaking havoc on the environment with little or no accountability. As we enter a new era of sustainable development, impunity must turn to responsibility. Polluters must pay, whether in rich or poor countries. Major companies need to accept responsibility for their actions.

Polluters Must Pay In ‘The New Era Of Responsibility’: Jeffrey Sachs - In a momentous verdict last week, BP was ordered to pay the largest criminal penalty in U.S. history for its role in the Deepwater Horizon oil spill. However, while polluters are increasingly being held accountable for their crimes in the developed world, many global companies continue to enjoy relative impunity for environmental damage caused in poorer countries: as exhibited by the lack of reparation in the Niger Delta.When BP and its drilling partners caused the Deepwater Horizon oil spill in the Gulf of Mexico in 2010, the United States government demanded that BP finance the cleanup, compensate those who suffered damages, and pay criminal penalties for the violations that led to the disaster. BP has already committed more than $20 billion in remediation and penalties. Based on a settlement last week, BP will now pay the largest criminal penalty in US history – $4.5 billion. The same standards for environmental cleanup need to be applied to global companies operating in poorer countries, where their power has typically been so great relative to that of governments that many act with impunity, wreaking havoc on the environment with little or no accountability. As we enter a new era of sustainable development, impunity must turn to responsibility. Polluters must pay, whether in rich or poor countries. Major companies need to accept responsibility for their actions.

BP Temporarily Banned From Contracts With U.S. Government - BP, which agreed to plead guilty to criminal charges after the worst oil spill in U.S. history, will be suspended from winning new contracts from the federal government, the U.S. Environmental Protection Agency said today.The EPA said it imposed the ban because the company’s conduct during the 2010 Deepwater Horizon disaster showed a “lack of business integrity.” The action doesn’t affect existing contracts, and BP said it already was working to get the ban lifted. The incident killed 11 people and caused the largest environmental disaster in U.S. history, it said. BP on Nov. 15 reached a settlement with the Justice Department, agreeing to pay $4.5 billion to end all criminal charges and resolve securities claims relating to the Gulf explosion. At the time, the company said it hadn’t been advised of any government action on contracts and specialists said it might escape even a temporary ban. The suspension “sends the signal to BP, and incidentally to the whole oil and gas drilling industry, that the United States will take strong steps to protect itself against a recurrence of that tragedy,”

BP Suspended from New U.S. Government Contracts - BP is being temporarily suspended from new contracts with the U.S. government, the Environmental Protection Agency says. Two weeks ago, BP agreed to plead guilty to charges involving the deaths of 11 workers on the Deepwater Horizon oil rig, which exploded and sank in April 2010, setting off the nation’s largest offshore oil spill. BP will also plead guilty to lying to Congress about how much oil was spewing from the blown-out Macondo well The agency said Wednesday that the suspension is due to BP’s “lack of business integrity as demonstrated by the company’s conduct with regard to the Deepwater Horizon blowout, explosion, oil spill, and response.”

US bans BP from pitching for new government work - BP's recent run of good fortune ended yesterday as the US government accused it of showing "a lack of business integrity" over the Gulf of Mexico oil spill and temporarily banned it from pitching for new federal contracts. In a decision with potentially far-reaching financial and reputational consequences, the Environmental Protection Agency (EPA) has temporarily suspended BP from bidding for new oil and gas exploration licences, contracts to supply fuel to the Department of Defence and all other government business until it can prove "it meets federal business standards". However, the suspension does not affect existing agreements between BP and the US government. David Buik, of Cantor Index, said: "This is awful. It's temporary, but for how long? It could have massive repercussions on shareholders and on dividends." Although Mr Buik and other analysts cannot yet assess the likely extent of the damage on BP, they agree that it at least represents a setback for the oil giant after a string of positive developments, and could deal a sizeable blow to its bottom line and reputation.

EPA Suspends BP From New Federal Government Contracts - The Environmental Protection Agency has temporarily suspended BP from any new contracts with the federal government. In a statement, the EPA attributes this action to “BP’s lack of business integrity as demonstrated by the company’s conduct with regard to the Deepwater Horizon blowout, explosion, oil spill, and response, as reflected by the filing of a criminal information.” BP just entered into a criminal settlement with the Justice Department over the Deepwater Horizon disaster, pleading guilty to 14 criminal charges, including one misdemeanor violation of the Clean Water Act and one misdemeanor violation of the Migratory Bird Treaty Act. Two rig workers were charged with manslaughter and former BP Vice President David Rainey was charged with obstruction of justice for withholding information about the amount of oil spilled into the Gulf of Mexico.Despite the settlement, however, the EPA suspended new contracts with BP. There are still outstanding civil penalties to be determined, potentially through a trial process. And the EPA has a role in those civil penalties for violations of the Clean Water Act. In its statement, the EPA made it sound like they merely engaged in standard practice, for the federal government to “conduct business only with responsible individuals or companies.” This is a temporary suspension on new government contracts, and does not affect existing contracts. So BP will not get evicted from their current rigs in the Gulf of Mexico, for example

The BP Spill: What's the Monetary Cost of Environmental Damage?: A couple of weeks ago, Attorney General Eric Holder announced at a press conference in New Orleans: "BP has agreed to plead guilty to all 14 criminal charges – admitting responsibility for the deaths of 11 people and the events that led to an unprecedented environmental catastrophe. The company also has agreed to pay $4 billion in fines and penalties. This marks both the single largest criminal fine – more than $1.25 billion – and the single largest total criminal resolution – $4 billion – in the history of the United States." But as Nathan Richardson of Resources for the Future points out, the criminal penalty is a small slice of what BP will end up paying: "But remember that this criminal settlement is only a small part of BP’s liability. Earlier this year, BP reached a preliminary $7.8b class settlement with a large number of private plaintiffs (fishermen, property owners, etc.) harmed by the spill. That agreement is currently under review by a federal district court judge. This is in addition to $8b in payments made to private parties who agreed not to litigate (from BP’s oil spill “fund”). Future payments to private parties are likely as claims on the fund are resolved or as those who were not part of the class settlement pursue separate claims. BP also claims to have paid out $14b in cleanup costs. But that’s not all.BP still must face civil suit from the federal government (and states) over natural resources damages. ... BP also faces civil penalties under the Clean Water Act, which would quadruple from $5.5b to $21b if gross negligence is found. In other words, BP will pay out the largest criminal settlement in U.S. history and it will be only a small share of its total liability."

Oil sands producers could feel squeeze as pipeline capacity tightens - Plans are under way to build oil pipelines south, west and east, but even if they are successful they’re not going to alleviate today’s problem: Many of Canada’s oil pipelines are full and it’s only a matter of time before they choke off oil growth. Already, analysts are warning the next steps will be production shut-ins and the rationalization of oil sands projects so only the less expensive go ahead. Coping strategies are expected to come into focus as producers announce their investment plans for 2013 over the next few days and weeks, starting with Canadian Oil Sands Ltd. on Thursday. Pipeline capacity has been getting tighter because of surging production from Alberta’s oil sands and from tight oil fields across North America. Space will be substantially smaller than demand in December, when Enbridge Inc. will “apportion” space on a number of its key pipelines – Line 5, Line 14, Line 6B, Line 6A/62, Line 4/67, Line 4. Kinder Morgan Inc. is apportioning space so that only 30% of producers’ hoped-for volume gets into its regularly oversubscribed TransMountain pipeline in December.

Second US Tar Sands Mine, Owned by Former ExxonMobil and Chevron Exec, Approved in Utah - MCW Enterprises Ltd., a Canada-based corporation, announced on Nov. 19 that it has received all necessary permits to streamline tar sands extraction at its Asphalt Ridge plant located in Vernal, Utah starting in December.  The announcement comes just weeks after U.S. Oil Sands Company received the first ever green light to extract tar sands south in the United States.  Recently changing its name from MCW Energy, MCW Enterprises Ltd. owns MCW Oil Sands Recovery LLC as a wholly owned subsidiary. The company's CEO, R. Gerald Bailey -- often also referred to as Raymond Bailey or Jerry Bailey -- is the former President of Exxon Arabian Gulf and also served as an Executive for Texaco (since purchased by Chevron) for 15 years.  MCW's website explains that its stake in the Asphalt Ridge is a "proven/probable resource of over 50+ million barrels of oil" and that it "is seeking other oil sands leases in Utah, which contains over 32 billion barrels of oil within 8 major deposits."   Bailey told Flahrety Financial News that he sees this first project as a crucible, or testing grounds, with the potential for more extraction to come down the road.  "This is really going to be a technology play," he stated. "I don't plan to build another Exxon out there in the desert."

Refinery Insights and Nonsense ala Exxon - It is true that the refinery margin turned negative for the last two months of 2011 as retail gasoline prices were temporarily falling as oil prices rose. The only other time the refinery margin turned negative was towards the end of Bush’s term in office when gasoline prices were plummeting even ahead of the fall in oil prices. Deep recessions will do that. Of course, we all know that gasoline prices and hence refinery margins recovered after Obama became President – a fact that Republicans reminded us of during the recent Presidential campaign. But I would never confuse Exxon Mobil with being a pure refinery:  U.S. crude oil production in 2010 was 5.5 million barrels per day. But U.S. refineries processed 15.2 million barrels of oil per day – almost three times more oil than was produced in the U.S. That means U.S. refiners, like ExxonMobil, have to purchase millions of barrels of crude oil – at market prices – to produce gasoline and other products for American consumers. For example, in 2010, ExxonMobil spent $198 billion purchasing oil around the world for its refining operations. But their 10-K filing for fiscal year ended December 31, 2011 reads:  Divisions and affiliated companies of ExxonMobil operate or market products in the United States and most other countries of the world. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products.

Gas tanker Ob River attempts first winter Arctic crossing: A large tanker carrying liquified natural gas (LNG) is set to become the first ship of its type to sail across the Arctic. The carrier, Ob River, left Norway in November and has sailed north of Russia on its way to Japan. The specially equipped tanker is due to arrive in early December and will shave 20 days off the journey. The owners say that changing climate conditions and a volatile gas market make the Arctic transit profitable. Built in 2007 with a strengthened hull, the Ob River can carry up to 150,000 cubic metres of gas. The tanker was loaded with LNG at Hammerfest in the north of Norway on 7 November and set sail across the Barents Sea. It has been accompanied by a Russian nuclear-powered icebreaker for much of its voyage.

'By 2035, We Project Oil Imports into the US of Only 3.4 Million Barrels a Day' - Fatih Birol, chief economist of the International Energy Agency and chair of the World Economic Forum’s Energy Advisory Board, discusses his projection that "the United States will become the world’s leading oil producer within a few decades": Q. The new report has attracted great press attention for its projection that the United States may soon become the world’s leading oil producer. Can you discuss what you see as the greatest implications of this change, in terms of energy security, geopolitics and carbon emissions? A. The most striking implications concern U.S. oil imports and international oil-trade patterns. The upward trend in production is partly responsible for a sharp fall in U.S. oil imports. By 2035, we project oil imports into the United States of only 3.4 million barrels a day, which implies a substantial (60 percent) reduction in oil-import bills. North America as a whole actually becomes a net oil exporter. In international oil markets, this accelerates the shift in trade patterns toward Asia, raising the geostrategic importance of trade routes between Middle East producers and Asian consumers. But what should attract equal attention … is the essential role played by energy efficiency. I believe that energy efficiency has been an epic failure by policymakers in almost all countries. Its potential is huge but much of it remains untapped. Compared with today, savings from more rigorous vehicle fuel-economy standards could prompt a 30 percent fall in U.S. oil demand by 2035.

Musings: If You Believe The IEA, Our Energy Worries Are Over: Earlier this month, as part of its annual energy outlook, the International Energy Agency (IEA) published a study suggesting that by 2015 the United States will become the world's largest gas producer and by 2017 the largest oil producer if one includes crude oil, natural gas liquids and biofuels. That status, however, will be short-lived as Saudi Arabia is projected by the IEA to regain its number one oil producer position by about the mid 2020s. Given the growth in U.S. and Canadian hydrocarbon production in recent years, coupled with slowing demand growth, energy imports will fall until eventually North America becomes a net oil exporter about 2030 and the U.S. becomes nearly energy self-sufficient by 2035. The idea that North America has entered a new Golden Age of petroleum production has been growing over the past year with numerous studies attempting to define the implications of this development. Exhibit 15 on the next page shows BENTEK Energy's take on how the squeeze on non-North American oil imports will unfold. While their forecast only goes out to 2020, it shows that oil imports to North America will have declined sharply. One assumption in this forecast, and we assume in the EIA's, also, is that Canadian oil sands output has unfettered access to U.S. oil markets.

High demand means world needs all of Canada’s oil: IEA -- Global demand for crude is growing so strongly that the world needs “every single drop of Canadian oil,” the International Energy Agency’s chief economist said on Monday, playing down fears that growing U.S. production could hit Canadian exports. Fatih Birol said that even if U.S. output rises as much as the agency expects, the country would still need to import four million barrels a day and that Canada is an obvious supplier. In its annual forecast this month, the IEA said the United States could come close to energy self-sufficiency by 2035, largely because of the boom in development of unconventional light oil resources. Canada is the single largest supplier of energy to the United States, sending around 2 million barrels a day to its southern neighbor. Much of the Canadian crude comes from Alberta’s oil-rich tar sands, where operating costs are higher than in regular fields, and the IEA’s forecast prompted fears that the biggest export market for the oil sands could shrink.  But Birol, asked about potential risks for the oil sands if U.S. output rose, said he did not see any.

Why Oil Is Going To Zero  - Every trader in the oil market is fascinated by the recent price action. The last few months have seen an onslaught of negative news developments that should have sent the price of Texas tea to the moon. Instead, it has fallen, from a high of $110 in February to as low as $84 last week. What gives? The normal explanation is that the market is anticipating that the economy will plunge into a headlong recession in 2013. But the economic data is not indicating that anything like that is on the immediate horizon. To find an accurate explanation we will have to delve deeper into the black commodity's long-term fundamentals. It is clear that high oil prices are curing high prices. Oil hit a bottom of $10 a barrel in 1998, when it was worth less than the barrel holding it. That is when the industry obtained its last raft of tax subsidies from Washington. After that, it rocketed to $149. The big guess is how close we get to the last bottom. If world peace breaks out -- a distinct possibility if Iran folds its nuclear program in response to unremitting US pressure -- then oil could lose a risk premium that many in the industry estimate at $30-$40/barrel.

The oil industry is undergoing a major structural change. - Lifted from comments from this post US to be leading producer of oil is Spencer England's comment about structural change in the oil markets. Obvious to some but bears repeating for a lot of us, as we discuss environmental issues or gasoline prices in the media more than structural economic impacts: Spencer says: The development of fracking and the tar sands means that the oil industry is undergoing a major structural change. Use to be that one of the thing that made the oil industry very unique was that virtually all their costs were sunk or fixed costs and variable costs were relatively insignificant. Under this cost structure if prices fall it still pays to produce oil when prices fell as long as revenues covered the variable costs. So falling prices did not lead to falling output. But now the marginal supply of oil is from tar sands or fracking where variable costs are very high. Moreover, the marginal costs of bringing in new oil from these sources is now in the $80 to $100 range. So now, when prices fall, at the margin some producers will withdraw from the market and output will fall. This is creating a fairly solid floor, the price for oil at about $80 -- where oil bottomed last year and again this year.

Exhaustible Resources and Economic Growth - Oil is fundamentally a depletable resource – once a barrel is extracted from the ground and burned, it is gone. Nevertheless, world oil production has continued to increase steadily for the last century and a half. Most economists attribute this to technological progress. Each year our methods for finding oil become more sophisticated, and our extraction methods more efficient. Unquestionably this progress has been quite remarkable, with oil now being produced by wells that begin a mile below the surface of the sea and proceed for several more miles through rock to get to the oil-bearing formations.  Technological progress is not the only reason that oil production has increased over time. The industry was born in the Oil Creek District of Pennsylvania in 1859. Figure 1 shows annual crude oil production for the states of Pennsylvania and New York since then. Production from the original Oil Creek District reached its maximum level in 1874, and total production from the two original oil states peaked in 1891. There was a resurgence of production as a result of secondary and tertiary recovery methods developed in the 1920s, though these were never enough to return production to where it had been in the 19th century.

The Great Oil Fallacy - That’s the headline for a piece I published in The National Interest last week. Opening paras Among the unchallenged verities of U.S. politics, the most universally accepted is that of the crucial strategic and economic significance of oil, and particularly Middle Eastern oil. On the right, the need for oil is seen as justifying an expanded and assertive military posture, as well as the removal of restrictions on domestic drilling. On the left, U.S. foreign-policy is seen through the prism of “War for Oil,” while the specter of Peak Oil threatens to bring the whole system down in ruins. The prosaic reality is that oil is a commodity much like any other. As with every major commodity, oil markets have some special features that affect supply, demand and prices. But oil is no more special or critical than coal, gas or metals—let alone food. This piece expands on my earlier argument that the US has no national interest at stake in the Middle East, just a set of mutually inconsistent sectional interests and policy agendas. I don’t talk about climate change explicitly, but we’ll never have a sensible debate about climate change until oil is demystified.

Discounted Saudi Crude Shaped Refiners’ Political Contributions, Paper Finds - One would think that, as a global commodity, any particular grade of oil would fetch a similar price regardless of where it was sent, but for a 12-year stretch Saudi Arabia sold crude to U.S. refiners at a substantial discount. To judge from the political contributions they made, the refiners appreciated the gesture. From 1991 to 2003, Saudi Arabia was the top supplier of foreign crude to U.S. refiners, a position it maintained as a way of supporting its political alliance with the United States. To keep the flow of Saudi crude to the U.S. high amid growing competitions from countries like Mexico, Saudi Aramco, Saudi Arabia’s national oil company, put a lower price on the crude it sold to the U.S. than to other countries. In 2001, U.S. refiners paid about $21 a barrel for Saudi crude, while Asian refiners paid over $27. All told, U.S. refiners got a discount worth $8.5 billion over the 12-year period, calculates Jennifer Peck, an economics Ph.D candidate at the Massachusetts Institute of Technology.

Iran to voluntarily curb crude oil export - A couple of weeks ago the IEA announced that Iran's oil exports have spiked to 1.3 million barrels per day (mbpd) in October from 1 mbpd in the summer. The explanation seems to be increased purchases from Asia. Reuters: - The IEA said Iranian oil output rose by around 70,000 barrels per day (bpd) to 2.7 million bpd in October [from 2.63 million barrels per day in September]. Iranian exports jumped to 1.3 million bpd from 1.0 million seen in the two previous months.  "China and South Korea appear to account for the lion's share of the increase in Iranian imports," the IEA said in its monthly report.  The jump in imports could have brought Iran an additional $900 million last month, according to Reuters calculations based on the price for its oil of $100 a barrel. Iran has been able to rename and "re-flag" its cargo ships multiple times to get around the sanctions. Some cargoes exchange and blend crude directly from ship to ship off the coast of Malaysia - with non-Iranian ships then headed for destinations "unknown". But as discussed earlier, China wants to develop a more reliable source of crude, which will be coming via a pipeline from Russia (see post). The Russian crude oil pipeline will open up a whole new market (ESPO) in the Sea of Japan. This is expected to reduce demand for Iranian crude. Possibly in response to these dynamics, Iran all of a sudden announced today that it will cut exports back to the low levels of the summer: 1 mbpd in 2013 (vs. 1.3 mbpd from the latest IEA number).

Iran Positioned to Threaten Oil Lanes - In mid-December, the U.S. military will have only one aircraft carrier positioned in the Persian Gulf region for the first time in two years. At the same time, the Iranian navy said it was kicking off a 10-day exercise in the region. Oil prices spiked when Iran early this year threatened to close oil-shipping lanes in the region. If talks scheduled for December between Tehran and the IAEA turn sour, there exists for Iran the potential to exploit the security vacuum in the region and use its defensive position for geopolitical gain. The U.S. Navy announced that, for about two months, there will be only one aircraft carrier based in the Middle East region because of unexpected repair work needed on USS Nimitz.  A Navy commander said it was the "right thing to do" to leave the military one carrier short in the region, a first since December 2010. At the same time, the Iranian navy announced plans to conduct a 10-day drill to display what Tehran said was a way for the Islamic republic to "display its might and deterrence power." In January, oil prices were moving fast beyond the $100 per barrel mark in part because of tensions with Iran, which had threatened to shut down the Strait of Hormuz in response to increased sanctions pressure. The U.S. Energy Department describes the strait as the "world's most important oil checkpoint." Last year, about 17 million barrels oil per day traveled through the area, which represented about 35 percent of the world's maritime oil shipments. Iraq, Saudi Arabia and the United Arab Emirates have pipelines in place to compensate for any closure, though each of those has their limitations.

Did China's Oil Consumption Decline 4% in 2011? - That's what the EIA currently says.  See the chart above (red line).  BP doesn't agree, showing them up by 5.5% over 2010.  Although the Chinese economy has undoubtedly been slowing of late, it's hard to believe it was sufficient to cause a fall in oil consumption, which would be unprecedented since the time of the 1980 oil shock. More likely the EIA just has an error of some kind.  I took a screenshot just so that if they fix it later, I can satisfy myself I wasn't dreaming:

Copper Shortage Seen Extending as China Accelerates: Commodities - Copper supply shortages will extend into the first half of next year as an accelerating Chinese economy more than doubles the pace of growth in global consumption even as mines extract a record amount of metal. Demand will outpace supply by 316,000 metric tons in the first six months, more than all copper in London Metal Exchange warehouses, before a surplus emerges in the second half, Barclays Plc estimates. Production has lagged behind consumption since 2010, according to the International Copper Study Group. The metal may average $8,300 a ton in the second quarter, 6 percent more than now and the most in a year, according to the median of 21 analyst and trader estimates compiled by Bloomberg. China, which uses 41 percent of the world’s copper, is rebounding from seven quarters of slowing growth after the government approved a $161 billion subways-to-roads construction plan in September. It’s being joined by central banks from the U.S. to Europe to Japan, who also pledged more stimulus. Housing starts in the U.S., the second-largest consumer, reached a four- year high last month and business confidence unexpectedly strengthened in Germany, Europe’s biggest economy.

Indebted Dragon: The Ponzi Scheme Driving China's Construction Economy - In Indebted Dragon, Professor Lynette Ong from the University of Toronto discusses how the Chinese economy relies on land as collateral to borrow money while paying the interest on the loans by selling and leasing the land. Ong notes this makes China susceptible to two problems: a real estate bubble and political instability stemming from displaced farmers who land has been taken from them. The subtitle to Ong's article is "The Risky Strategy Behind China's Construction Economy". I suggest "Ponzi Scheme" is a more apt description than "Risky Strategy". Let's take a closer look. For four decades, the Chinese economy has grown by between seven and ten percent each year. It is the envy of the world, despite its relatively sluggish recent performance. Visitors to Beijing, Shanghai, and other major Chinese cities are quickly awed by impressive skyscrapers, glittering shopping malls, new highways, and high-speed rail lines, all of which leave the impression that China is a developed economy -- or at least well on its way to becoming one. Even in some smaller cities in inland provinces, government buildings make those in Washington and Brussels appear meager. In an area of Anhui Province that is officially designated an "impoverished county," the government office block looks exactly like the White House, only newer and whiter.Underwriting the impressive facade, however, is an incredibly risky strategy. Governments borrow money using land as collateral and repay the interest on their loans using funds they earn from selling or leasing the same land. All this means that the Chinese economy depends on a buoyant real estate market to keep grinding. If housing and land prices fall dramatically, a fiscal or banking crisis would likely soon follow. Meanwhile, local officials' hunger for land has displaced millions of farmers, leading to 120,000 land-related protests each year.

Latest indicators show China avoiding a hard landing - We are starting to see early signs of business activity stabilization in China. Two leading indicators are particularly helpful:

  • 1. The November HSBC/Markit flash PMI went into expansion territory for the first time in over a year. Hongbin Qu, Chief Economist at HSBC: - “As November’s flash reading of HSBC manufacturing PMI bounced back to the expansionary territory for the first time in 13 months, this confirms that the economic recovery continues to gain momentum towards the year end. However, it is still the early stage of recovery and global economic growth remains fragile. This calls for a continuation of policy easing to strengthen the recovery.”
  • 2. The November MNI China Business Survey recovered sharply, particularly on a seasonally adjusted basis - as adjusted by the ISI Group (chart below). Just as an aside, the ISI Group continues to do great work on China economic research.

These latest figures seem to indicate that a "hard landing" in China has been avoided, at least for now. If the trend continues, both China and the US should provide some support to global growth.

China’s ubiquitous ghost cities - One of the tentative signs of improvement in China’s economy in the past few months has been the apparent reduction in inventory of residential apartments.Real estate investment was responsible for about 13 per cent of China’s GDP last year, and is a key destination for financially-repressed Chinese household savings, so it’s an important sector. Yet assessing the true state of housing inventory in China is not easy (shocking, we know). Last month we wrote about a sceptical view of China’s property inventories from Mark Williams of Capital Economics, in which Williams pointed out that only those properties that are “approved for sale” are included in inventory statistics — which probably excludes a lot of finished properties. To illustrate this, Williams noted that there appeared to be a rather large spike that had appeared in housing starts but was yet to appear in housing completions:

IMF discovers Chinese over-investment - A new IMF working paper lays out what many China sceptics have been saying for years: the country has too much investment, and households are bearing the costs. Yes, you might have heard this many times on FT AV, from the likes of Michael Pettisand more recently, from George Magnus, but now it’s appearing in venues such as the IMF (even if the paper warns this ‘should not be reported as representing the views of the IMF’). The paper concludes that the level of over-investment is in China is equivalent to about 10 per cent of GDP, and perhaps as high as 20 per cent. The cost to households averages at about 4 per cent of GDP over the past decade, it estimates, with another 0.2 per cent to SMEs, who have higher funding costs due to the ‘two-tier’ financial system that favours large companies. One of the authors, Liu Xueyan, is a senior fellow in the Institute of Economic Research at China’s powerful National Development and Reform Commission. The paper ‘should not be reported as representing’ the NDRC’s views, either — yet it is another indication that China’s economic imbalance and the cost of correcting it are familiar topics to the country’s leaders*. Stefan Wagstyl has a good overview of the paper at Beyondbrics, so we’ll just jump straight to the juicy bits: how bad could this be?

Urban Job Growth in China - After I wrote last week's big post on the size of the construction industry in China, it occurred to me that one constraint that China might face on its urbanization process could be somewhat novel.  This is that the sheer speed of China's urbanization is unprecedented and risks running out of people young enough to be willing to migrate at a significantly earlier stage than other countries that have engaged in this kind of catch-up growth (which spread their growth out over more generations of humans).Thus, it's desirable to have more granular data on the urbanization process than the decadal census data I showed last time.  Poking about the national statistics site, I found annual data on the number of jobs that are urban vs rural which seems a somewhat helpful proxy.  The data only go through 2010; that isn't ideal but it's what we have. The plot above shows the fraction of all jobs that are urban (red, left scale), and the absolute increase in the number of urban jobs (green, right scale).  You can see that the rate of growth is slowing down somewhat, but no decline in the urbanization had set in as of 2010.  You can also see that the financial crisis of 2008 did cause a modest slowing in the urbanization process.  It may be that the seeming slowdown in the Chinese economy has had a similar effect in 2011/2012, but we won't know for a while.

The decade of Xi Jinping - The transfer of power in China from the outgoing regime led by Hu Jintao to the incoming leadership of Xi Jiping has occurred without a hitch. This is a mark of increased political maturity in China. In fact, the hand-over has been described by Citigroup economists as the first complete and orderly transition of power in the 91 year history of the Chinese Communist Party. During President Hu’s decade, China’s real GDP per capita rose at 9.9 per cent per annum. China accounted for 24 per cent of the entire growth in the global economy, and Chinese annual consumption of many basic commodities now stands at around half of the world total. Perhaps the most important question in the world economy today is whether China’s economic miracle can continue in the decade of Xi Jinping. The IMF forecasts shown in the graph above suggest that the miracle will persist, but many western economists disagree. China’s re-emergence as a global economic powerhouse is by now fairly well understood. Following the Deng Xiaoping reforms after 1978, and the opening of the economy to domestic and international markets, China has engaged in a process of economic catch-up similar to that which Japan and Korea achieved in earlier decades. The question for the next decade is whether this growth process will prove to be self-limiting. The experience of other Asian economies suggests that, one day, this will indeed happen. The supply of under-employed labour in rural areas will be drained, the growth of manufacturing will peak, and the ability to import superior technology from other economies will run out of rope. A slowdown in growth is therefore inevitable. The only questions are when, and by how much?

U.S. Treasury Declines to Name China Currency Manipulator - China isn’t a currency manipulator under U.S. law, though the yuan “remains significantly undervalued” and needs to rise further, the Treasury Department said.  China “has substantially reduced the level of official intervention in exchange markets since the third quarter of 2011,” the Treasury said in a statement accompanying its semi- annual currency report to Congress yesterday. The yuan has gained 9.3 percent in nominal terms and 12.6 percent in real terms against the dollar since June 2010, the Treasury said.

Factoring in the Falling Dollar for US-China Trade - In a article, we indicated that the U.S. Census' data on the value of U.S.-China international trade was overstating the growth in the value of that trade because of the falling value of the U.S. dollar with respect to China's currency, the renminbi (or as its often referred to in foreign exchange, the yuan):  Here, we see that the growth of China's exports to the United States is continuing its trend of slow growth, while following its typical seasonal pattern. Typically, China's exports to the U.S. peak each year in the period from August to October, in advance of the U.S.' holiday shopping season.  In reality, because the value of the U.S. dollar has been falling with respect to the value of China's currency since early 2010, the value of trade shown in the chart above represents a lower quantity of actual goods and services traded today than what similar values in 2010 would indicate.  Today we're going to show that's exactly the case. In our first chart, we're showing the value of goods and services imported by the United States from China priced in both U.S. dollars, as reported by the U.S. Census, and priced in Chinese yuan, going by the official exchange rate recorded by the U.S. Federal Reserve.

The East Asian Miracle 2.0 - Almost 20 years ago, the World Bank released a groundbreaking report -- The East Asian Miracle -- that called worldwide attention to the economic success of eight economies in the region, leading to a discussion on the extent to which policies followed by them could be replicated. In a recent Economic Premise -- "Avoiding Middle-Income Growth Traps" -- Pierre-Richard Agénor, Michael Jelenic and I suggest that the region can now provide a new round of lessons: "The features of East Asia's experience in transitioning from middle- to high-income status provide important lessons for other countries that are attempting to follow suit."

Meanwhile, in Japan..., by Tim Duy: Back in September, I wrote: What I expect to happen is this: The Bank of Japan will be forced into outright monetization at some point; a soft default in the form of higher inflation will occur. And dramatically higher inflation, I fear. Japan has not had inflation for two decades. I suspect they will experience all that pent-up inflation in the scope of a couple of years. Sure enough, the battle begins. Almost lost in the holiday weekend, from Reuters last week: ....the LDP said on Wednesday that on its return to power it would set a 2 percent inflation target with an eye to revising the law governing the Bank of Japan so as to boost cooperation between the government and the central bank..called for bold monetary easing through cooperation between the government and the central bank on debt management, but it made no mention of Abe's calls for the BOJ to buy debt to finance infrastructure projects. The response from the Bank of Japan was swift: But BOJ Governor Masaaki Shirakawa dismissed many of Abe's proposals, including the possible revision of the Bank of Japan law, a step critics say is aimed at clipping the central bank's independence and forcing it to print money to finance public debt that is already double the size of Japan's economy."Central bank independence is a system created upon bitter lessons learned from the long economic and financial history in Japan and overseas countries," ...Shirakawa was adamant the central bank would not directly underwrite government debt because bond yields would spike and hurt the economy."No advanced country has adopted such a policy," he said.  Shirakawa is correct. Modern central banks may have lost some control over inflation at times, but I don't think any has engaged in outright monetization of government debt. Yet despite Shirakawa's insistence to the contrary, I still think that is exactly where Japan is headed. More central bank history in the making.

Neoliberal Mythologies - It’s hard enough for ordinary citizens to keep up with the routine crony rackets the American plutocracy runs with their lackeys in Washington to rob us blind and lock us in the neo-feudal cages they are trying to build out of the bones of what was once the US middle class.  But the task of keeping up with the scams becomes even harder when central bankers promulgate myths and hide behind shibboleths designed to prevent the public from grasping just how much power we all still possess to seize control of our own destinies. Tim Duy calls attention to a platform proposal by Japan’s Liberal Democratic Party to revise the law governing the Bank of Japan so as to improve cooperation between Japan’s central bank and the elected branches of Japan’s government.   Former Prime Minister Shinzo Abe, likely to be returned to power on December 16th, has called for the BOJ to buy debt directly from the government – although that call is apparently not part of the LDP’s official platform.As Duy notes, the BOJ has dismissed these proposals in the sacred name of central bank independence.  BOJ Governor Masaaki Shirakawa rehearsed the established neoliberal pieties about central bank purity: And on the topic of direct BOJ purchases of government debt, Shirakawa sniffed: No advanced country has adopted such a policy. Note Shirakawa’s snooty invocation of the supposedly high-falutin’ standards of “advanced” countries.   Duy, curiously, concurs with Shirakawa’s statement: Shirakawa is correct.  Modern central banks may have lost some control over inflation at times, but I don’t think any has engaged in outright monetization of government debt.  I suppose that if we lean very heavily on the term “outright” Duy is correct.  But I would argue that Duy is only being fussy here, and that central banks like the BOJ and the Fed monetize a portion of their governments’ debts routinely – even if they do not purchase the debt directly.

Japan Manufacturing Contracts at Sharpest Rate for 19 Months; New Orders and Output Plunge; Watch the Yen - In Japan things have gone from Grim to Grimmer. The Markit/JMMA Japan Manufacturing PMI™ shows Japanese manufacturing sector contracts at sharpest rate for 19 months in November. Key points:
Output and new orders both continue to decline
Capital goods producers register sharpest falls in production and sales
Inventories and employment cut amid subdued economic outlook
Summary: Operating conditions in the Japanese manufacturing sector continued to worsen in November. The deterioration was driven by falls in output, new orders and employment as the economic climate remained difficult. Amid an uncertain outlook, manufacturers also cut inventory levels and lowered purchasing activity. Investment goods producers also recorded the steepest fall in staffing levels during November. With the consumer and intermediate market groups also registering reductions in employment, a net fall in total manufacturing payroll numbers was recorded for the second month in succession.

Japan approves $10.7 billion stimulus package - Tokyo today approved $10.7 billion in fresh spending to help boost Japan's limp economy, just weeks before an election the ruling party is expected to lose. The $10.7 billion in spending was more than double a package announced in October as the country gets set for polls that are expected to usher in Japan's seventh prime minister in six years. However, the move, which came as official data showed Japan posted a surprise uptick in factory production last month, threatened to trigger vote-buying criticism from opposition lawmakers. The spending will focus on boosting growth in a range of sectors, including healthcare and agriculture, as well as on public works projects following last year's quake-tsunami disaster. Opinion polls suggest Prime Minister Yoshihiko Noda and his Democratic Party of Japan will be defeated by the country's main opposition leader Shinzo Abe, who heads the Liberal Democratic Party. Abe has vowed to spend heavily on public works and pressure the Bank of Japan into launching aggressive monetary easing measures to boost growth if his party wins the December 16 vote.

Vital Signs Chart: Slumping Yen - Japan’s yen has slumped against the dollar. On Thursday, the value of 100 yen was $1.21, down four cents this month. Many investors think the Bank of Japan will further ease monetary policy, which tends to lower the yen’s value. In recent years, the yen has soared against the dollar, making Japan’s exports less competitive overseas and hurting its economy.

Kabul Bank fraud profited elite, leaked audit says: Afghanistan's failed Kabul Bank was involved in a fraud that funnelled almost $900m into the pockets of a small number of the political elite, an independent auditors' report says. One of President Hamid Karzai's brothers, Mahmoud, is said to be a beneficiary. He denies any wrongdoing. Details of the audit were revealed in a leaked report seen by the New York Times newspaper. Revelations of corruption led to a run on the bank in 2010. Foreign donors bailed it out fearing its failure could lead to the collapse of Afghanistan's fragile economy. But according to the report by Kroll Associates, when the bank's assets were seized, the vast majority of its loans - almost $900m (£561m) - were made to just 19 people and companies. Investigators from Kroll found 114 rubber stamps for fake companies used to give forged documents a more legitimate look, the Times reported.

Counting the Cost - The pivot to Asia - AlJazeera video - The United States has been making effort to refocus its military, trade and economic ties with the part of the world that is actually still growing - Southeast Asia. But as ever it is not as simple as that because Barack Obama, the US president, has been touring Southeast Asian nations, trying to persuade them to join a trade-free agreement called the Trans-Pacific Partnership. The catch is that the agreement excludes China.

Saxo Bank warns of 2014 Australian recession - Australia could face a recession within two years unless the dollar and interest rates fall and major labour market reforms are introduced, a leading economist warns. Saxo Bank chief economist Steen Jakobsen warns that with the mining investment boom expected to peak in 2013, Australian authorities need to do more to ensure other sectors of the economy can pick up the slack. He fears if no action is taken, then Australians could be staring at a recession in 2014. ‘‘You have an excellent starting point, you have the ability to both fiscally and monetarily support and mitigate the effects of this slowdown,’’ the prominent Copenhagen-based economist said. ‘‘If nothing happens, if we have a political vacuum leading to nothing being done next year and the price (of the Australian dollar) remains above where it needs to be then, yes, absolutely a recession is possible.’’ Greater workplace flexibility and the abolition of some indirect taxes are necessary to reduce unit costs and making businesses more competitive, Mr Jakobsen says, with a federal election due in the second half of 2013, he knows action on that front is unlikely.

Who’s to blame for Dutch disease? - It’s slowing dawning on the press that we’ve made a mistake hanging our economic future so exclusively upon China. There are a number of quite good takes on this today but The Australian has a quote from former White House adviser, Pippa Malmgren, that is to the point: A FORMER financial adviser to the White House says Australia made a big mistake in neglecting trade and investment links with the US and other major economies while it became fixated on selling commodities to China over the past 10 years. …”Why do Australians restrict themselves to the flight to Shanghai and Beijing?…It always makes sense to diversify, but for whatever reason Australia didn’t diversify over the past decade; they’ve just said ‘the US is history, China is the future. And now the US is coming back to life and China is weakening — and for Australia it’s too late to rejig the model. I think Australia has made a very big mistake in that they have pegged their future principally on China. It would behove Australians to focus more on the one market which has always been there for them, which is the US…In fact Australia is about the only country that is not a net beneficiary of the fact that manufacturing is leaving China. So why isn’t Australia attracting it? Because Australia pegged its future not only exclusively on China but exclusively on resources.”

The RBA will lower rates to blunt the impact of slower mining investment - Australian mining investment growth has been tremendous in the past couple of years, with current financial year inflow of some 7% of the GDP. Companies like Fortescue have tapped the hot US junk bond market to pump cash into mining operations. At the same time non-mining investment has been declining, making Australia's economy more vulnerable to a downturn in demand for raw materials. But the party is about to end. In spite of China's recent mild economic rebound (see discussion), infrastructure spending is not going to generate the demand for iron ore and coal that it used to. Mining firms need to shift their focus. What makes it particularly painful for Australian mines however is their high costs relative to the competition. Mining labor costs have grown at over 4% per year since 2009. And as other nations with large mining sectors have seen their currencies devalued, the Australian dollar has remained relatively strong - making Australian product more expensive. With investment in Australia's mining sector slowing, the nation will need to transition to other sources of growth. To help with the transition, the RBA is likely to lower rates again in December

Tens of Thousands of Egyptians Protest Morsi’s Power Grab - from Yves Smith - This Real News Network interview with Hamid Dabashi discusses the drivers and ramifications of Mohammed Morsi’s usurpation of democratic checks on the president. Dabashi mentions a New York Times story: The New York Times yesterday had a new article about the understanding that is emerging between Obama and Morsi so far as Gaza is concerned—and Obama has a deeply corrupting influence.  While that no doubt has some truth, I believe this is the story Dabashi was referring to, “Egyptian President and Obama Forge Link in Gaza Deal,” and I was struck by these passages: Over the course of the next 25 minutes, he and President Mohamed Morsi of Egypt hashed through ways to end the latest eruption of violence, a conversation that would lead Mr. Obama to send Secretary of State Hillary Rodham Clinton to the region. As he and Mr. Morsi talked, Mr. Obama felt they were making a connection. Three hours later, at 2:30 in the morning, they talked again…. Mr. Obama told aides he was impressed with the Egyptian leader’s pragmatic confidence. He sensed an engineer’s precision with surprisingly little ideology. Most important, Mr. Obama told aides that he considered Mr. Morsi a straight shooter who delivered on what he promised and did not promise what he could not deliver.

Argentina nearing technical default - Argentina CDS spread has blown out to new highs last week. In spite of Argentina's government driving the nation's economy into the ground (see discussion), this widening was caused by increased risks of the so-called "technical default" rather than deteriorating economic conditions. For years, bond holders of Argentina's government debt (issued under NY law), who did not participate in Argentina's restructuring plan from the 2001 default, have been fighting to be treated equally (pro rata) with those who had accepted the restructuring terms. But Argentina has insisted that that those who did not play ball in their restructuring plan - the "holdouts" - should get nothing. Last week however a US judge gave Argentina a Thanksgiving surprise by ruling in favor of the holdouts. That means the holdouts will need to be paid everything that the restructuring participants got over the years, including all the interest. JPMorgan: - Last Wednesday, District Judge Griesa issued his decision in the pari passu ruling ahead of Thanksgiving ... in favor of holdout creditors. Griesa defined a pro rata payment formula that requires full upfront payment by Argentina to holdouts of US$1.3 billion... The judge told Argentina's lawyers that the nation needs to put $1.3 billion into escrow by December 15th, pending the Appeals Court’s ruling. If Argentina fails to do so and the country's appeals process in the US is exhausted, the sovereign CDS will be triggered.

Argentina and America – of Vulture funds and Justice - Argentina told to pay hedge funds $1.3bn Was the headline in the FT on Thursday 22nd November 2012. The judge who made the ruling, Thomas Griesa, said “After 10 years of litigation this is a just result.” I’m not so sure. In my opinion the headline and the ruling it reports are just the tip of a shit-berg. Like all bergs the fatal mistake is to think the bit you can see above the water is all there is. In my opinion if you look beneath the surface, almost everything which this article and the case it reports on claim to show, is turned on its head. The visible tip Argentina borrowed money, got in to trouble and defaulted on its creditors. What could be simpler? That was back in 2001. Since then the bond holders, or some of them at least, have pursued Argentina through their home courts in America and a judge sitting in Manhattan’s Southern District Court has finally ruled in their favour. Justice at last for the bond holders. The rule of law, majestic, like a shining island of ice. Now lets take a peek beneath the waterline.

Argentina Rebels Against America's "Judicial Colonialism" - The ongoing debacle surrounding Argentina's holdout over holdouts appears to be escalating (in rhetoric at least) once again. As Reuters notes, negotiations or voluntary payment by Fernandez's government appear almost impossible. Economy Minister Hernan Lorenzino called Griesa's ruling "a kind of judicial colonialism". "The only thing left is for Griesa to order them to send in the (U.S. Navy's) Fifth Fleet," Lorenzino told reporters, outlining Argentina's plans to file an appeal against Griesa's ruling with the 2nd Circuit Court of Appeals in New York on Monday. Many specialists think it unlikely that the appeals court will reinstate the stay. "It may be an issue of process, but Argentina will struggle to justify why it refuses to pay the $1.3 billion," Eurasia Group analyst Daniel Kerner wrote last week. "Argentina has the resources to meet the payment, so in the end it will be a political decision (and) there does not seem to be any political support for paying the holdouts at all." The Argentina case surely brings into clear view the murkiness of investing in sovereign debt and the increasing difference between ability-to-pay and willingness-to-pay.

Argentina playing last cards in court battle with bondholders - Argentina will make a last-ditch attempt this week to stall a U.S. court ruling that has shaken the nation's strategy to put a 2002 debt crisis behind it and fueled fears of a fresh default. A decade since it staged the biggest sovereign default in history, Argentina faces a stark choice between depositing $1.3 billion before Dec. 15 to pay "holdout" creditors who rejected two debt restructurings, or jeopardizing payments to all its bondholders. About 93 percent of bondholders agreed in 2005 and 2010 to swap defaulted debt from the 2002 default for new paper at a steep discount. But U.S. District Judge Thomas Griesa last week ordered Argentina to pay the holdouts, led by Elliott Management Corp's NML Capital Ltd and Aurelius Capital Management, who rejected the swaps and are fighting for full repayment in the courts. The ruling was a huge setback for Argentina's combative, left-leaning President Cristina Fernandez, who calls the holdout funds "vultures" and has vowed never to pay them. It also dismayed investors who took part in the two debt swaps and fear the G20 country will now enter into "technical default" on about $24 billion in restructured debt.

Fitch lowers Argentina rating on probable default - Fitch Ratings lowered its rating on Argentina further into junk-territory, noting a default by the South American country is probable. Fitch downgraded Argentina's foreign currency issuer default rating to double-C, placing it in highly-speculative territory, from B. The firm had placed its rating on Argentina on review for a downgrade last month due to increased uncertainty about the country's ability to pay its external debt. The outlook is negative. Fitch noted the increased probability that Argentina will not service its restructured debt securities on a timely basis reflects a U.S. federal court's recent move that barred Argentina from paying investors who swapped their holdings of defaulted sovereign bonds for new securities unless it also pays investors who are suing for full repayment.

Argentina debt repayment order frozen - A US appeals court has put on hold a New York judge's order for Argentina to pay $1.3bn into escrow for holders of its defaulted debt by December 15, quelling fears of an imminent default. The Second Circuit Court of Appeals granted the stay and set a hearing for February 27. There was no immediate reaction from the Argentine government. Last week, Judge Thomas Griesa of New York ordered Buenos Aires to make the escrow payment at the same time as it is due to pay more than $3bn to holders of restructured debt. The government had requested the stay in an emergency motion filed late on Monday and has since floated the idea of asking congress to lift a so-called lock law in order to reopen a debt swap to holdout creditors led by the US fund Elliott Associates, but with a tough writedown. The holdouts refused debt swaps in 2005 and 2010, which restructured about 93 per cent of the almost $100bn on which Argentina defaulted in 2001. The government is barred by law from making them any better offer. "We are waiting for the appeals court decision. Until there is a decision on the matter, we have nothing to add to what we have said in recent days," Hernán Lorenzino, the economy minister, told reporters hours before that court ruled.

How The Ruling On Argentina’s Sovereign Debt Could Seriously Mess Things Up For Greece - Nouriel Roubini has an interesting paper out on how New York Judge Thomas Griesa's ruling on Argentina's sovereign debt payments could impact the entire world, especially Greece.  If you're just tuning in, Argentina has all but lost a lawsuit against it spearheaded by hedge fund billionaire Paul Singer. Singer bought Argentine bonds in 2001 when the country's economy collapsed and he wants all his money for them.  Argentina refuses to pay him, though, saying that he didn't take the opportunity to restructure that debt in 2005 and 2010 like most other bondholders did. Last week, Judge Griesa sided with Singer. Argentina is appealing, but it's not looking good.  Business Insider has already touched on what this means for the sovereign bond market. In a nutshell, what's the point of restructuring if you (a creditor) can hold out and get more money? In Argentina's case, as in any case, it pits creditor against creditor.  Argentina made this argument, but Judge Griesa essentially replied that this is an argument that has never been settled before, so they just need to deal with his interpretation of the law.

The Rise Of Mexico - NEXT week the leaders of North America’s two most populous countries are due to meet for a neighbourly chat in Washington, DC. The re-elected Barack Obama and Mexico’s president-elect, Enrique Peña Nieto, have plenty to talk about: Mexico is changing in ways that will profoundly affect its big northern neighbour, and unless America rethinks its outdated picture of life across the border, both countries risk forgoing the benefits promised by Mexico’s rise. The White House does not spend much time looking south. During six hours of televised campaign debates this year, neither Mr Obama nor his vice-president mentioned Mexico directly. That is extraordinary. One in ten Mexican citizens lives in the United States. Include their American-born descendants and you have about 33m people (or around a tenth of America’s population). And Mexico itself is more than the bloody appendix of American imaginations. In terms of GDP it ranks just ahead of South Korea. In 2011 the Mexican economy grew faster than Brazil’s—and will do so again in 2012.

Mexico rising - LAST week I wrote a short post on Mexico's improving economic fortunes and its bright outlook. Conveniently, the most recent issue of The Economist features a special report on Mexico, which includes a long look at the country's promising economy. The changing dynamics of global market potential are indeed part of the story: The price of oil has trebled since the start of the century, making it more attractive to manufacture close to markets. A container can take three months to travel from China to the United States, whereas products trucked in from Mexico can take just a couple of days. AlixPartners, a consultancy, said last year that the joint effect of pay, logistics and currency fluctuations had made Mexico the world’s cheapest place to manufacture goods destined for the United States, undercutting China as well as countries such as India and Vietnam. Here's the striking result:

Devaluation increases Venezuela's debt burden on the economy - Pressured by the growing gap between expenditure and income, it is very likely that the Venezuelan Government devaluates the local currency (bolivar) in 2013. Such an action may increase the amount of bolivars it will receive per the so-called petrodollars, yet this may bring about negative effects on the State's accounts as the burden of the country's debt will increase. A higher impact of the debt on the economy means that the market will increase its risk perception and the country will end up paying higher interest rates to obtain new financing. Likewise, the principal amount payable and accrued interest demands a larger portion of the budget, lessening funds for health, education, and infrastructure. University professor and economist José Guerra along with his colleague, Luis Oliveros, has evaluated the debt's trend to explain how devaluation eases the burden of the debt in local currency. According to the economist, the Government will require fewer petrodollars to pay its debt. However, it will also reduce the size of the economy, that is to say, Gross Domestic Product (GDP) whereas the debt in US dollars remains the same. Guerra stressed that if the current foreign exchange rate (VEB 4.30 per US dollar) is kept, if all the country's liabilities are included and economic growth for 2012 is projected, Venezuela's current debt may account for 57% of the GDP.

Cuba: A Trip Back to 1959 -This was a trip back in time, to 1959. For one thing, a majority of the (few) autos on the street in Havana are large American cars from the 1950s. Most are beautiful. One hears about the cars, but I had thought the reports must be exaggerated. Cuba’s economic system is out of Alice in Wonderland. It has one of the world’s longest lasting dual exchange rate systems. Currently the cost of dollars in the market is 25 times higher than the official rate of one peso per one dollar. This means that a worker in the hotel sector or restaurant sector who is able to keep dollar earnings has an income 25 times higher than one who must turn them in to the government. The island long ago developed an advantage in skilled services such as medicine and education. But doctors and professors earn far less than those who join the fledgling private economy. The latter features 178 possible approved jobs. The possible choices on the list by design make no use of an educated person’s skills. They include waiter, bathroom attendant, taxi driver, automobile battery repairman, mule driver, and wheel barrow operator. Most people are still employed by the state, however. Perhaps American consumer society has too many goods available; but Cuba has far too few. Most things that one would want — a toaster to make breakfast, leather to make shoes, tools for auto repair, software to upgrade a computer, spare parts to keep all those appliances from the 1950s running, …everything - is only available either by rationing, waiting in line, or going to the black market. Many are not available at all. How can such a system have persisted for so long? Why doesn’t everyone see the folly?

Bank of Canada, Facing Challenges, Has a Fresh One: Finding a New Boss - The surprise departure of Mark Carney as Canada’s top central banker leaves a vacancy at the Bank of Canada at a time when it’s balancing a slowing economy against the need to increase rates as households build up debt to record levels. Mr. Carney was tapped Monday to lead the Bank of England, the central bank of Great Britain. He will remain as Governor of the Canadian central bank until June 1, 2013. He takes up his new job in July. In a news conference with Finance Minister Jim Flaherty, Mr. Carney said it was a “difficult decision, but the right decision.” The Bank of Canada said its board of director will shortly form a special committee comprised of independent directors to select Mr. Carney’s successor. The appointment is subject to approval by Mr. Flaherty and the federal cabinet.

The Bank of Canada Governor is Wrong on Too Big To Fail and Wrong on Canada’s Banking System - As a Canadian, perhaps I should feel a surge of patriotic pride now that Mark Carney has been designated the new head of the Bank of England – quite a step up for the current governor of the Bank of Canada.  There is no question that Mr. Carney is a market-savvy guy (he did, after all, work for the vampire squid), and his experiences as Chairman on the Financial Stability Board (FSB) suggests that he is sensitive to the ongoing systemic risks present in our increasingly complex global banking system. That said, his recent attack on the Bank of England’s Andy Haldane in a Euromoney interview last month,  does give one some cause for concern, particularly as it evinces the usual complacency that most Canadians seem to feel about the basic soundness of their own banking system, which essentially upholds the universal banking model as a viable one.  By contrast, in his famous “dog and frisbee speech” delivered last August at Jackson Hole, Wyoming, Haldane suggested that: “Regulation of modern finance is almost certainly too complex. That configuration spells trouble… Because complexity generates uncertainty, it requires a regulatory response grounded in simplicity, not complexity.” In contrast to Andy Haldane, Governor Carney  is comfortable with the “universal banking” model, so long as they have sufficient capital buffers and do not put taxpayers at risk.  Well, there’s a number of things to be said in response to that.  For one, even though Canada’s banks are large within the context of the Canadian economy, their asset size is still relatively paltry in relation to, say, JP Morgan/Chase.

Hockey Lockout Weighs on Canadian GDP - Canada’s economy grew a paltry 0.6% in the third quarter. On a monthly basis, it was flat in September from August. One clear drag: a lingering National Hockey League lockout. Canada’s statistics agency didn’t actually break out the NHL effect. (Though in hockey-crazy Canada, there may be an argument for that.) But in its monthly report, it does have a line item, “arts and entertainment,” which slid 2.6% on the month. The agency specifically cited the lockout as hitting this subset of the economy. And that’s just September. The league so far has cancelled 422 games through Dec. 14, and there’s a possibility the whole season could be scuppered.

International Capital Flows Slow Down - I'm not sure why it's happening or what it means, but some OECD reports are showing that international investment flows are slowing down in late 2012, whether one looks at international merger and acquisition activity or at flows of foreign direct investment. For example, the OECD Investment News for September 2012, written by Michael Gestrin, is titled "Global investment dries up in 2012." The main focus of the report is on international merger and acquisition activity, and Gestrin writes:  "After two years of steady gains, international investment is again falling sharply. After breaking $1 trillion in 2011, international mergers and acquisitions (IM&A) are projected to reach $675 billion in 2012, a 34% decline from 2011(figure 1) ... At the same time as IM&A has been declining, firms have also been increasingly divesting themselves of international assets. As a result, net IM&A (the difference between IM&A and international divestment) has dropped to $317 billion, its lowest level since 2004 ...""IM&A has declined more sharply than overall M&A activity. This is reflected in the projected drop in the share of IM&A in total M&A from 35% in 2011 to 29% in 2012 (figure 2). IM&A is declining three times faster than domestic M&A, suggesting that concerns and uncertainties specific to the international investment climate are behind the recent slide in IM&A, rather than IM&A simply following a broader downward trend."

The global economy is weakening again - OECD - If you’ve been following economic events over the past five years, the headline on this posting – which is also the opening line from the OECD’s latest Economic Outlook – won’t surprise you. In the wake of the financial crisis, a pattern has emerged: global recovery is weak, doesn’t last long, and soon gives way to a slowdown if not outright recession. A major factor behind this latest slowdown is a loss of confidence, and that in turn is being fuelled in part by events on either side of the Atlantic. In Europe, despite progress in creating systems to shore up the euro, governments still have some way to go before finally fixing the single currency. In the United States, legislators have until only the end of next month to steer away from the “fiscal cliff”. Tipping over the edge would automatically raise taxes and cut government spending. “If policymakers in the United States fail to reach agreement on tax hikes and spending cuts, they face a ‘fiscal cliff’ that could tip an already weak economy into recession,” warns Pier Carlo Padoan, the OECD’s Chief Economist in this video. Assuming the US doesn’t go over the cliff, the OECD is forecasting that the American economy will grow by 2.0% in 2013, slightly down on this year’s estimated 2.2%. For Europe, it sees a contraction of 0.1%, a slight improvement on 2012’s estimated decline of 0.4%.

Is Global Economic Growth Persistent? - This post is a commentary on University of Utah physicist Tim Garrett's recent paper How persistent is civilization growth? (pdf). Garrett models the global economic system as a physical system which is subject (like any other) to the laws of thermodynamics (see here). In my post Wealth And Energy Consumption Are Inseparable, I discussed a fundamental result in Garrett's work which of the utmost importance as we consider the future path of global industrial civilization. I'll repeat that result here. In a prior study (Garrett, 2011), I introduced a simple economic growth model designed to be consistent with general thermodynamic laws. Unlike traditional economic models, civilization is viewed only as a well-mixed global whole with no distinction made between individual nations, economic sectors, labor, or capital investments. At the model core is a hypothesis that the global economy's current rate of primary energy consumption is tied through a constant to a very general representation of its historically accumulated wealth. Observations support this hypothesis, and indicate that the constant's value is λ = 9.7 ± 0.3 milliwatts per 1990 US dollar. It is this link that allows for treatment of seemingly complex economic systems as simple physical systems.

Global Manufacturing: A McKinsey View - The McKinsey Global Institute has published an intriguing report, "Manufacturing the future: The next era of global growth and innovation." Here's a passage that to me captures much of the overall message, along with many of the controversies about manufacturing.   "The role of manufacturing in the economy changes over time. Empirical evidence shows that as economies become wealthier and reach middle-income status, manufacturing’s share of GDP peaks (at about 20 to 35 percent of GDP). Beyond that point, consumption shifts toward services, hiring in services outpaces job creation in manufacturing, and manufacturing’s share of GDP begins to fall along an inverted U curve. Employment follows a similar pattern: manufacturing’s share of US employment declined from 25 percent in 1950 to 9 percent in 2008. In Germany, manufacturing jobs fell from 35 percent of employment in 1970 to 18 percent in 2008, and South Korean manufacturing went from 28 percent of employment in 1989 to 17 percent in 2008.  In short, the manufacturing share of GDP and employment tends to follow an inverted-U shape, and the United States and other high-income countries are on the downward side of that inverted U, while China, India, and others are on the upward side of their own inverted U.

Hugh Hendry: ‘We’re in the death spiral of mercantilism’ - Yves Smith - video - You have to give a fund manager points for admitting to having a “history of contentious posturing.” Hugh Hendry’s also a reformed gold bug, which shows an unusual flexibility of thinking (once people join the gold cult, they seldom leave). Even if you don’t necessarily agree, his talk will serve as a useful grist for thought (hat tip Ian Fraser). Hendry discusses the end of an broadly adopted national strategy, mercantilism, and what he sees as the implications.

Blackrock Eyes Global Infrastructure Debt Market - Blackrock Inc. (BLK) has hired a management team to set up a unit for investments into the international infrastructure debt market, The Financial Times reports Sunday. The infrastructure unit, which will operate out of London, may encourage other financial groups and funds to invest in infrastructure, the FT said. Jim Barry, chief investment officer of renewable power and infrastructure at Blackrock, said the group was being set up in response to clients who wanted "relatively safe assets that offer higher yields than government bonds," the FT said.

‘We Reacted Immediately to Symptoms of Crisis’ - In late 2008 and early 2009, all three of Iceland's major banks collapsed amid the financial crisis. Now, the country is experiencing economic growth once again and unemployment is falling. Economy Minister Steingrimur Sigfusson explains to SPIEGEL how it was done.

German Lawmakers Reject Swiss Tax Deal -  — Switzerland was stymied Friday in its drive to reach a tax deal with Germany after opposition lawmakers in Berlin rejected an agreement that would have allowed Germans with Swiss bank accounts to pay taxes without divulging their identities.  The Swiss government is trying to repair relations with its European neighbors and the United States, which have been pressing it to lift its vaunted bank secrecy.  The German opposition lawmakers argued that the proposed law was too lenient on tax dodgers and would not fully restore the revenue Germany was losing. They may also have been unwilling to hand Chancellor Angela Merkel a victory on the issue before elections next year.  Social Democrats and Green Party members of the upper house of the German Parliament, the Bundesrat, voted largely along party lines to block adoption of the proposed tax agreement. The measure had already passed by a wide margin in the Bundestag, the lower house, where Ms. Merkel’s Christian Democrats and their partners hold a majority. “If the deal had passed, tax dodgers and their accomplices would have let out a sigh of relief,” . “Now it’s the honest taxpayers that can exhale.”

450,000 Businesses Shut Down in Italy; Non-Performing Loans Jump 15.3%, Write-Downs 21.6%  - Here are a couple of interesting economic links from Italy courtesy of reader Andrea. The translations from Italian are a bit choppy, but the gist of the articles is easily understandable.  From Thompson Financial News: Non-Performing Loans Jump 15.3% Non-performing loans amounted to approximately 117.6 billion, 1.8 billion more 'than in August and 15.6 billion in more' than in September 2011, marking an annual increase of 15.3%.With regard to loans net of write-downs at the end of September totaled 67.2 billion, about 1.5 billion more 'than a month before and almost 12 billion more' than in September 2011, with an annual increase of 21.6%. La Stampa reports 450,000 Businesses Shut Down in Italy in Three YearsIn just three years, from 2010 to 2012, about 450,000 companies closed with a loss of over 300,000 jobs, while the Italians caught up in terms of wear [usurious loans] increased to 600,000. These are the data provided by Sos enterprise-Confesercenti usury-day. In particular, wear Italian capital Rome and Naples are confirmed. It is "wear submerged, chameleon, now violent now` hit and run 'which marks a difference between the demands of incredible help and legal reality." [Bankruptcy looms]

Italian Consumer Confidence Falls to Record Low on Recession - Italian consumer confidence fell to a record low this month as households grew more pessimistic about the economic outlook after the country’s fourth recession since 2001 entered its second year. The confidence index fell to 84.8, the lowest since the series begin in 1996, from a revised 86.2 in October, the national statistics office, Istat, said in Rome today. The reading was lower than the median forecast of 86.3 in a survey of 13 economists by Bloomberg News. The Italian economy shrank for a fifth quarter in the three months through September as export gains failed to offset the effects of weak domestic demand. The contraction contrasted with signs of a recovery in Germany and France, the region’s two biggest economies. Italy entered into recession in the second half of 2011 as the global slowdown aggravated the effects of Prime Minister Mario Monti’s austerity measures aimed at taming a public debt of 2 trillion euros ($2.55 trillion).

What's The Matter With Italy? - Krugman - Italy is often grouped with Greece, Spain, etc. in discussions of the euro crisis. Yet its story is quite different. There were no massive capital inflows; debt is high, but deficits aren’t. The most striking thing about Italy is a remarkably dismal productivity performance since the mid to late 1990s. Here’s a comparison of Italian with French productivity, as measured by output per worjer, from the Total Economy Database: I’ve been reading many attempts to explain what happened; while there’s a lot of interesting stuff about everything from regulation to firm size to export mix, I really don’t see anything that feels like a slam dunk. And no, it’s not just a too-big welfare state — France’s welfare state is even bigger. I’m not going to answer this; truly, I don’t know. But it’s important.

More About Italy - Krugman - Dean Baker, in correspondence, makes an interesting point about the mysterious productivity collapse in Italy — namely, that a big chunk of it could be a statistical illusion. This is always something you should consider when you see something strange in economic data. Here’s the story: Italy, with its combination of extensive regulations and weak enforcement, used to have a lot of “black labor” — workers who weren’t on the books, so as to evade various government-imposed requirements. But then came reforms that made keeping part-time workers, etc., on the books less onerous — and the hidden labor came into the open. Measured GDP wasn’t affected, because statisticians were already making imputations for the shadow economy; so the result was a decline in measured productivity. One thing I like about this story is that it makes sense of another anomaly: wide divergence in different measures of Italian cost competitiveness, for example in this IMF study (pdf). Here’s a chart of estimated real effective exchange rates:

Euro Ministers Take Third Swing at Clearing Greek Payment - Euro-area finance ministers try for the third time this month to clear an aid payment to Greece and forge a blueprint to keeping the country a solvent member of the currency bloc. Finance chiefs from the 17-member single currency return to Brussels tomorrow, less than a week after an all-night meeting failed to yield agreement and days after a European Union summit broke up without a proposed seven-year budget. At stake at the euro meeting is the continuation of a three-year mission to return Greece to financial health. “There’s no time to waste” in finding a solution for Greece, Chancellor Angela Merkel told reporters in Brussels Nov. 23. The German leader and French President Francois Hollande agreed that ministers must make a breakthrough at the meeting, French aides told reporters. Efforts to resolve the European debt crisis have stumbled after the European Central Bank gave leaders more time with its September pledge to purchase sovereign debt. Divisions were on display today in Spain, as voters in Catalonia voted on whether to take a step toward independence for the region, risking the country’s fragmentation.

Catalans overwhelmingly elect candidates promising a break-up vote - Catalonia has delivered a sweeping mandate to political parties pledging to hold a referendum on independence in elections that place the northern Spanish region on a collision course with Madrid. In a vote billed as “the most decisive elections in the history of Catalonia” by Artur Mas, the region’s president, pro-referendum parties won 87 of the Catalan parliament’s 135 seats. Following weeks of intense debate about Catalonia’s future relationship with Spain, turnout was 69.5 per cent, the highest for a Catalan regional election in nearly 30 years. The vote comes amid pressure from various regions around Europe for more independence, including proposals for a referendum on the issue in Scotland in 2014. Spain’s central government has said any move to push ahead with a referendum on independence for Catalonia, which has an economy the size of Portugal’s and makes up about a fifth of Spanish output, would be illegal and against the Spanish constitution.Catalonia has built up a debt pile of €42bn, the largest of all of Spain’s 17 regions, and is currently locked out of international capital markets. Earlier this year the region was forced to request an emergency €5bn credit line from Spain’s central government to avoid defaulting on payments.

Divisive Election in Spain’s Catalonia Gives Win to Separatist Parties - Voters in Catalonia delivered victory to separatist parties in a regional election on Sunday, raising the likelihood that Spain’s most powerful economic region will hold an independence referendum that Madrid has vowed to block.  But even as voters set up a fight with the central government by rewarding the independence cause, they delivered no clear message about who should lead it. The party of Artur Mas, the Catalan president who called the election two years ahead of schedule, actually lost seats in the regional parliament, falling to just 50 seats in the 135-seat body, from 62 in the last vote.  As a result, before holding any referendum on independence, Mr. Mas will first have to strike alliances with smaller parties that share his separatist goal, but not his economic and social agenda. After a vote that he had described as “the most significant in the history of Catalonia,” Mr. Mas told supporters that his referendum project was on track, while recognizing his party’s failure to consolidate its grip on power.

The case for and against Catalonia's independence - Against independence, The Economist: Under Spain’s constitution of 1978, Catalonia enjoys more self-government than almost any other corner of Europe. It runs its own schools, hospitals, police, prisons and cultural institutions. It lacks only tax-raising powers and the Ruritanian trappings of statehood, which nationalist politicians appear to be hungry for. As for the self-deception, this is sometimes farcical: Catalan public television offers a weather forecast that includes provinces that have been part of France since 1659, but no meteorological information for Zaragoza or Madrid. And most Catalans still seem happy to be both Catalans and Spaniards. Support for independence has risen mainly because Catalans think it would offer relief from recession. It would not. An independent Catalonia would have more fiscal revenues, but it would also have a higher debt burden than Spain. The argument that Catalans should not subsidise feckless Andalusians is a dangerous one: apply that more widely and the euro zone would fall apart. Indeed, far from welcoming Catalonia as an independent member, the euro zone’s leaders hardly yearn for an extra nation-state. All that said, the Catalan problem cannot be wished away. Roughly three-quarters of the next Catalan parliament is likely to vote for the right to decide. The constitution says only the Spanish parliament can approve a referendum—and it will not do so. The constitution has in general served both Spain and Catalonia well—but there is a case for updating it.

Spain’s bad-debt ratio up to record 10.7 percent - The Bank of Spain says the level of bad debt in the country's banks has risen to a record 10.7 percent of their loan total. The bank said Monday the amount of loans at risk of not being paid in September totaled (EURO)182 billion, up from (EURO)179 billion in August _ the 15th monthly increase in a row. Many Spanish banks are loaded with toxic real estate investments since the country's property market collapsed in 2008. The 16 other countries that use the euro have agreed to lend Spain up to (EURO)100 billion to help support these banks. Recession-hit Spain is considering applying for further aid, a petition that would allow the European Central Bank to begin buying its bonds so as to lower Spain's borrowing costs.

Europe Demands Nationalized Spanish Banks Fire 8,000 To Transfer First Bank Bailout Tranche -For those still unsure why Spain PM Mariano Rajoy is fighting tooth and nail to avoid requesting an official activation of the ECB's SMP reincarnation: the OMT, which is a conditional bond buying program supposedly pari passu with the private market (but not really) here is an explanation. While Spain already requested, and received, a bailout of its banking system, which according to eronous analyses by firms such as Oliver Wyman will be at most €60 billion, and which according to others (such as us) will eventually end up costing orders of magnitude more once the green light for extortion is open for the New Normal modified vigilantes, said bailout would come with full conditions. Today we learn what a major condition of the first bank bailout tranche disbursement will be. It should come as no surprise to our readers- recall that in May when discussing the absolute lack of any actual austerity implementation we said, that "In fact, the epicenter of the current meltdown - Spanish banking - has seen only de-minimus headcount reduction over the past few years - so who is tightening their belts?" It seems someone at the Troika was paying attention, because as El Pais reported, European condition number 1 will be an epic bloodbath of pink slips come Monday, with Spanish banks expected to fire thousands of bank workers immediately and shut down 1,000 branches.

Bankia junior debt holders loss seen at 10 to 50 pct - Junior debt holders in Spain's nationalised lender Bankia will take losses ranging from 10 to 50 percent of face value of their investments as a condition for receiving European aid, a source involved in the negotiations said on Tuesday. "A deal has been clinched on swapping these instruments with Bankia shares and the discount applied will depend on the instruments," the source said on condition of anonymity.

Spain About to Whack Hapless Smaller Savers Conned into Buying Bank Preference Shares as a Condition of its Bank Rescue - Yves here. We’ve flagged in earlier posts how the Spanish banking crisis had the potential to become destabilizing politically, as if Spain wasn’t already at considerable risk of upheaval. Spanish depositors were pushed to convert their deposits into preference shares, which they were told were just as safe. That of course was never true.This was a simple desperation move by the banks to save their own skins, customers be damned, by raising equity from the most unsophisticated source to which they had access. And now that that gambit failed, these shareholders are due to have those investments wiped out unless the Spanish authorities can cut a deal to spare them. The conditions of a bank rescue, which Spain did try to resist, was to have equity holders wiped out, or at least haircut. And that plan is now about to be set in motion. Having losses imposed on small savers who were in many cases conned by their own bank to buy these preference shares is going to do serious harm as well as further delegitimate the government.

Europe Is Divided Again -- This Time It's Creditors vs. Debtors - George Soros video: The European Union used to be what psychologists call a "fantastic object," a desirable goal that fires people's imagination. I saw it as the embodiment of an open society -- an association of nations which gave up part of their sovereignty for the common good and formed a union in which no nation would have a dominant position. The euro crisis is now threatening to turn the European Union into something fundamentally different. The member countries are divided into two classes -- creditors and debtors -- with the creditors in charge. Germany, as the largest and most creditworthy country, occupies a dominant position. As a result of current policies, debtor countries pay substantial risk premiums for financing their debt and this is reflected in their cost of financing in general. This has pushed the debtor countries into depression and put them at a substantial competitive disadvantage that threatens to become permanent. This is the result not of a deliberate plan but of a series of policy mistakes. Germany did not seek to occupy a dominant position and is reluctant to accept the obligations and liabilities that it entails. I have called this the tragedy of the European Union.

Milking The Budget - Contrasting attitudes to farming have dogged the European project at least since Britain joined in 1973, through budget rows and wider clashes between protectionists and free-traders. As European Union leaders began their latest budget fight at a summit on November 22nd, one thing was certain: the EU will go on spending disproportionate sums on farmers. Yet, at a time of harsh domestic austerity, it can ill-afford the extravagance of the common agricultural policy (CAP). Worse, the CAP favours big producers over small ones, and rich western countries over poor eastern ones. The EU still spends some 40% of its budget on agriculture, an industry that generates less than 2% of GDP and employs less than 5% of the workforce. No other group of workers gets such coddling. Steel, coal and shipyard workers lost their jobs en masse when uncompetitive industries slimmed down; car workers are now following suit. Yet rural peasants must be preserved.

Protesting farmers spray European Parliament with milk - Angry farmers protesting at falling dairy prices in the EU have sprayed fresh milk at the European Parliament and riot police in Brussels. Thousands of dairy farmers, accompanied by hundreds of tractors, descended on the Belgian capital on Monday for two days of demonstrations. Disruption has continued, with EU officials hindered from reaching their offices by tractors blocking roads. Farmers want an increase of up to 25% in their prices to cover costs. EU milk is often sold at below production costs due to a drop in international demand and increased competition. The European Milk Board (EMB), which is co-ordinating the protest, says small farmers are being forced out of business.

The Different Paths of Greece and Spain to High Unemployment - NY Fed - Euro area GDP remains below its 2007 level due to the global financial meltdown and the subsequent sovereign debt crisis in the periphery countries. Unemployment rates make it clear that some countries have fared much worse than others—the rates in Spain and Greece today are over 25 percent and are much higher than rates in the next highest, Portugal (15.7 percent), and in the euro area (11.6 percent). Quite a change from 2007, when Spain and Greece had lower unemployment rates than the euro area as a whole. In this post, we show that while the unemployment rates in the two countries are similar today, the paths have been very different. The employment decline in Greece, like in the euro area, has been proportional to the country’s steep decline in GDP; Spain’s employment has fallen much more than output, due in part to its notable labor market flexibility. A look at total employment for Greece and Spain in the chart below shows the large percentage declines in the two countries since 2007. Job losses started earlier in Spain, with the collapse of a housing bubble, while Greece managed to keep employment levels stable, in line with the euro area as a whole, before its sovereign debt crisis caused very steep declines in employment beginning in 2010. In both countries, employment in 2012 is down roughly 15 percent from 2007 levels.

How Spain ended up with 25% unemployment rate - The media has given a great deal of attention to Spain's extraordinarily high unemployment rate, which has exceeded that of the US during the Great Depression (see post). But how did Spain get from 8% unemployment in 2008 to 25% now?  The latest work from the NY Fed shows that two factors made Spain's labor force different from the rest of the Eurozone (including Greece).
1. Before the financial crisis almost 13% of Spain's labor force was in construction. That compares to roughly 8% in the Eurozone and under 6% in the US. The housing bubble and regional infrastructure "pet projects" (funded by cheap sovereign and regional debt financing) in Spain provided a great deal of support to the labor market. Just as a reference point, the US lost 29% of total construction jobs from the peak (45% of residential construction jobs). If the US had double the percentage of jobs in construction as Spain did, the results would have been devastating.
2. Spain had a uniquely large temp labor force, with some 32% of employees working under a temporary contract in 2007. Europe as a whole was half that. That allowed companies in Spain to quickly reduce staff by cutting temporary employees (a great deal of the temp employment was actually in construction). The layoffs provided Spanish firms with flexibility but also contributed to a much more rapid reduction in labor force than elsewhere in Europe.

ECB And IMF Propose New ‘Radical’ Greece Debt Plan - The European Central Bank (ECB) and the International Monetary Fund (IMF) have proposed a radical new sovereign debt restructuring plan for Greece, the second such plan in a year, German daily Der Spiegel’s online paper said on Sunday. The plan includes a further write-down of 50 percent of the nominal sum, which would allow a lowering of Greece’s debt to 70 percent of GDP by 2020, from the projected 144 percent, the paper says. Greece has already been allowed to write off around 100 billion euro in debt to its private creditors. However, that failed to prevent a rise in debt levels because of the contraction in the economy, which was worse than expected. At the moment, the lion’s share of the 300 billion euro owed by Greece is in the hands of the Eurozone nations, ECB and IMF. Germany, the main donor to the loan program for Greece, is against additional restructuing of the Greek debts, Der Spiegel reports. This could require a meeting of the Eurogroup – the third this year – after the last one in Greece on November 26 failed to produce an agreement on whether to give Athens further help.

European Finance Ministers Meet Again on Greece - Finance ministers from the euro zone and the International Monetary Fund patched up their differences over a bailout for Greece early Tuesday with a spate of measures bringing closer the release of long-delayed emergency aid. The parties reached the deal after their third meeting in three weeks aimed at finding alternative ways of giving Greece relief in light of opposition by creditors like Germany and the Netherlands to so-called haircuts that would involve forgiving some Greek debt. The decisions “will certainly reduce the uncertainty and strengthen confidence in Europe and in Greece,” Mario Draghi, the president of the European Central Bank, said as he left the meeting. For Greece, the agreement means euro zone ministers have unlocked loan installments totaling 43.7 billion euros ($56.7 billion). Most of that money would start to be paid out in December, with further payments during the first quarter of next year on the condition that Greece continued to fulfill its pledges under the bailout plan.

Euro zone, IMF agree on Greece debt deal - Euro-zone finance ministers, the European Central Bank and the International Monetary Fund reached a deal early Tuesday in Brussels that is expected to see them release more financial aid to Greece. The euro-zone finance ministers, known collectively as the Eurogroup, said in a statement that a worse macroeconomic situation and delays in implementing assistance have resulted in a weaker outlook for Greek government finances.  The Eurogroup members said that the “necessary elements are now in place” for member states to approve a European Financial Stability Facility (EFSF) disbursement to Greece of 43.7 billion euros ($56.8 billion), with the formal go-ahead expected by Dec. 13. Greece’s debt targets were also tweaked, with government debt now targeted to fall to 124% of gross domestic product by 2020, and to substantially less than 110% of GDP by 2022. Eurogroup members said in a statement they are prepared to consider various measures to support Greece, including:

  • Lowering interest rates on the Greek Loan Facility by 100 basis points
  • Cutting guarantee costs for Greece’s EFSF loans by 10 basis points
  • Possibly deferring interest payments on EFSF loans by 10 years.

Euro zone, IMF reach deal on long-term Greek debt  - (Reuters) - Euro zone finance ministers and the International Monetary Fund clinched agreement on a new debt target for Greece on Monday in a breakthrough towards releasing an urgently needed tranche of loans to the near-bankrupt economy, officials said. After nearly 10 hours of talks at their third meeting on the issue in as many weeks, Greece's international lenders agreed to reduce Greek debt by 40 billion euros, cutting it to 124 percent of gross domestic product by 2020, via a package of steps. The deal should open the way for a major aid installment needed to recapitalize Greece's teetering banks and enable the government to pay wages, pensions and suppliers in December. However, discussions were continuing on the methods to be used to lower Athens' debt burden, including a possible debt buyback and a lowering of interest rates on loans to Greece. The euro strengthened against the dollar after news of a deal was reported by Reuters. "It's going very slow, but we have financing and a Debt Sustainability Analysis. We've filled the financing gap until the end of program in 2014," one official engaged with the talks said. A second official confirmed the figures. Greek Finance Minister Yannis Stournaras said earlier that Athens had fulfilled its part of the deal by enacting tough austerity measures and economic reforms,

A mere three weeks later, a Greek debt deal (?) - A deal, a late-night press conference, an inevitable fudging of the numbers. You know the rules. Eurogroup officials will hold a press conference on Monday night at 11pm CET – or at least, that’s the time given in this link… Reuters reported at pixel time that the IMF and the Eurogroup have reached a draft deal on cutting Greek debt, using a target of 124 per cent debt-to-GDP by 2020. If it sticks, that’s above the IMF’s former ’120 by 2020′ red line, but is also 20 percentage points lower than the 2020 ‘baseline’ of 144 per cent of GDP. Reuters also says they have a Debt Sustainability Analysis drawn up! That’ll be pleasant reading. (But it also looked like discussions were continuing as we went to pixel.) Which particular combination of measures is needed for that reduction – a reduction in official loan margins, a return of profits on some ECB holdings of Greek bonds, a loan-financed buyback of bonds issued under the PSI only eight months ago, and a holy terror of anything resembling an official write-down – well, we’re about to find out.

Eurozone agrees deal with IMF to cut Greek debt by €40bn - The Eurozone has agreed a deal with the International Monetary Fund to unblock the Greek bailout with a package of measures worth €40bn (£32bn) aimed at bringing an immediate 20pc reduction to the country's debt. The complex deal brings an end to a dispute between the EU and the IMF over the viability of Greek debt and gives the go-ahead by 13 December to an urgently needed €34.4 billion instalment of the international aid programme to Greece. Another €9.3 billion will be paid in three "tranches" in the first three months of next year. The euro hit a one-month high, rising 0.3 per cent to $1.3010, and Asian shares rose in morning trading after news of the deal was announced. Jean-Claude Juncker, the chairman of the Eurogroup of the single currency's finance ministers, said the agreement would bring new hope to Greece. "This is not just about money. This is the promise of a better future for the Greek people and for the euro area as a whole, a break from the era of missed targets and loose implementation towards a new paradigm of steadfast reform momentum, declining debt ratios and a return to growth," he said.

Greece's Creditors Reach Deal on New Aid - Greece's international creditors reached a deal to end an impasse over the country's rescue program and unlock long-delayed loan payments, though the plan left officials with a host of challenges to cut the government's debt burden. Finance ministers from the 17-country euro zone and the International Monetary Fund struck a deal in Brussels to cut Greece's debt to a level below 124% of gross domestic product by 2020, officials said. To satisfy IMF concerns that Greece's debt must fall even more to be considered "sustainable," euro-zone ministers agreed to bring the government's debt to under 110% of GDP in 2022. The deal will allow Greece to receive loan payments of about €44 billion ($57 billion) to be paid in three installments early 2013, tied to Greece's implementation of the continuing measures, said Eurogroup president Jean-Claude Juncker. The deal will lower Greece's debt through a mix of interest-rate cuts on loans to Athens, a buyback of Greek debt at sharply discounted prices and the European Central Bank returning profits linked to its holdings of Greek bonds to the Greek government. "The ECB welcomes the deal," European Central Bank President Mario Draghi told reporters early Tuesday. "It will reduce uncertainty, and increase confidence in Europe." Greece's debt currently stands at more than 170% of GDP, a level that Greek officials have said would fall to 144% in 2020 without further measures. The IMF has said the 2020 level needs to fall below 120% if Greece is to nurse itself back to economic health.

Greece Kicks The Can For The Third Time - SocGen's Take: "More Will Be Needed" - It took the charming three tries for Greece to get its third "bailout", which incidentally does not bail out anyone except the hedge funds who went long GGBs because the only actual winners resulting from yesterday's transaction - those benefiting from Europe's AAA club fund flows are hedge funds as explained previously. As for Greece, what the "deal" did was buy it more time to get its hockeystick GDP forecast in order as the only thing that may win the country some future debt forgiveness is hitting an unbelievable 4%+ current account surplus and GDP growth of a ridiculous 4.5% per year. That said, of the cash proceeds going to Greece, to be released in three tranches, totaling €43.7 billion, only a de minimis €10.6bn for budgetary financing, i.e., the Greek population (read government corruption) and €23.8bn in EFSF bonds for bank recapitalisation, read keeping German and French banks solvent. Once the €10.6 billion runs out in a few months, the strikes will resume. So what does this third, latest, greatest and certainly not last can kicking exercise mean? Simple: in the words of SocGen, a short-term reprieve has been hard bought, nothing has been fixed, and "more will be likely."

    The Latest Greek Debt Deal: Why This Time Is Different - I must admit to having tuned out the Greek debt crisis a bit. So when I began reading this morning about the latest agreement reached by European Union leaders, I expected my eyes to glaze over as usual. But instead, I got the news equivalent of a caffeine jolt. This time was different. The reason is that Europe’s leaders have finally mustered the political will to take a political risk: The framework of the deal, which you can read in this formal statement  issued at the end of the latest conference, does make progress in helping Greece bring down its debt level by potentially inflicting losses onto official creditors. Europe’s finance ministers agreed to sharply lower the interest rate charged on some bailout loans, while other loans will see interest payments deferred. Meanwhile, the maturities on all of the bailout loans will be extended. By making such concessions, European policymakers hope to shrink Greece’s debt burden to 124% of GDP by 2020 (a relaxation from the original 120%) and to 110% or lower by 2022. In all, the measures taken should reduce Greece’s debt by a hefty 20% of GDP. The governments also agreed to finally release a tranche of bailout funds to Greece that had been held up for weeks, which will allow Athens to keep itself afloat.

    Greece to Spend New Loans on Debt Buyback – Greece will use fresh loans for debt buyback at discounted prices, Greek Finance Minister Yannis Stournaras said on Tuesday after eurozone finance ministers and the IMF reached a deal on a much-needed bailout for the country. “Greece plans to complete the debt buyback by December 13,” Stournaras told Greek TV. After their third meeting in three weeks, that lasted about 13 hours, the eurozone finance ministers and the IMF patched up their differences over long-delayed bailout aid to debt-laden Greece and agreed to unlock loan tranches totaling 43.7 billion euros ($56.4 billion). Most of the funds are expected to be disbursed in December, with further payments in the first quarter of next year on condition that Greece continues to deliver on its austerity pledges under the bailout plan. Stournaras said the decision by the Eurogroup and the IMF to provide over 43 billion euros in fresh loans, extend loan maturities, lower interest rates on loans and allow sovereign debt buyback on the market at discounted prices will put an end to speculation about Greece leaving the eurozone or defaulting.

    Portugal, Ireland to Benefit From Greek Deal, Gaspar Says - Portugal and Ireland will benefit after European finance ministers eased the terms on emergency aid for Greece, Portuguese Finance Minister Vitor Gaspar said. “This agreement limits the risks for Greece and for the euro area,” Gaspar said in parliament in Lisbon today. “Portugal and Ireland, which are program countries, will benefit through the conditions opened in the framework of the European Financial Stability Mechanism, according to the principle of equal treatment adopted in the euro-area summit in July 2011.” Gaspar was referring to the European Financial Stability Facility, said an official at the Finance Ministry. European finance ministers cut the rates on Greece’s bailout loans, suspended interest payments for a decade, gave that country more time to repay and engineered a Greek bond buyback at a meeting in Brussels that ended early today.

    Portuguese parliament passes unpopular austerity budget - The Portuguese parliament on Tuesday approved an unpopular austerity budget thanks to the absolute majority of the two governing conservative parties. The entire opposition voted against the budget while thousands of people demonstrated against it in several parts of Lisbon. The 2013 budget cuts spending in areas such as pensions and health care. But it is mainly based on tax increases upon income, property and other areas, which even Finance Minister Vitor Gaspar has described as "enormous." Prime Minister Pedro Passos Coelho is implementing austerity measures agreed with the European Union and the International Monetary Fund, which granted Portugal rescue funding worth 78 billion euros (100 billion dollars) in 2011. Communist representative Antonio Filipe said a "moribund government" had adopted "the worst budget in memory." Ecologist representative Heloisa Apolonia said that either the budget or the government was about to fall. Telmo Correia from CDS, the conservative ally of Passos Coelho‘s centre-right Social Democratic Party, warned that budgetary instability could lead to Portugal having to abandon the euro.

    Portugal Approves New Austerity Hikes - Portugal hopes to see its revenues rise by 30 percent next year, which could enough to secure further bailout payments and to allow the country to participate on international credit markets. On November 27th the parliament of Portugal voted on the national budget plan for 2013, approving an array of new taxes, tax increases, and spending cuts aimed at increasing the government’s revenues by EUR 5.3 billion. As part of the new tax package, from 2013 all individual taxpayers will be required to pay a new social solidarity tax of 2.5 percent on their incomes. At the same time, the threshold for the top marginal tax rate will be reduced from EUR 153 000 per year to EUR 80 000 per year, and the top tax rate will be increased from 46.5 percent to 48 percent. Middle income earners will be most affected by the planned tax increases, with the tax on earnings between EUR 7 000 and EUR 20 000 per year rising from 24.5 percent to 28.5 percent. It is expected that the tax hikes will cumulatively raise the government’s tax revenues by nearly 30 percent, and will help the country reach its deficit reduction goal of 4.5 percent. The tax hikes are intended to help Portugal reach the financial targets set out by the European Central Bank and International Monetary Fund, as part of the country’s EUR 78 billion bailout package.

    Credit-Rating Companies to Face Sovereign-Debt Curbs in EU Plan - Credit rating companies face curbs on when they can assess government debt and restrictions on their ownership under draft plans agreed upon by the European Union to limit the industry’s influence and tackle conflicts of interest. Investors will also get the right to sue ratings companies if they lose money because of malpractice or gross negligence in the plans agreed upon yesterday by lawmakers from the European Parliament and Cyprus, which holds the rotating presidency of the EU. “With this agreement, we are taking another important step towards financial stability.” French bonds and U.S. Treasuries have both made gains since the countries were stripped of their AAA credit ratings, in a signal that downgrades may have little bearing on a nation’s borrowing costs. The return on France’s sovereign debt has been 8.9 percent since Standard & Poor’s stripped the country of its AAA status in January, more than double the rest of the global government bond market, according to Bank of America Merrill Lynch indexes.

    Greek Debt Buyback: Another Idiotic European Idea Or A Step Toward An Actual Solution? - Where will the €10bn for the buyback come from? This is far from clear but it is hard to imagine it being found anywhere other than the bailout funds, meaning a new transfer of around €9bn will be needed. This again poses significant political problems as leaders in Germany, the Netherlands and Finland (to name but a few) try to convince their parliaments (and public) that this is not more money into a black hole. It has been suggested that some of the other mechanisms mentioned below could be used to fund the buyback, but this looks impossible since they are being tapped to fill the existing funding gap. These substantial obstacles to a successful debt buyback are crucial since the IMF has already stated its on-going participation in the Greek bailout hinges on this policy. The likes of Finland and the Netherlands have also previously stated that IMF involvement is requirement if they are expected to continue to aid Greece. With a plan on the buyback expected to be in place by 13 December, to allow for the release of the next tranche of bailout funds, this deal could hit a wall even sooner than many expected.

    The Fairy Tale - There is no deal here. There is a fantasy of projections and some wishful thinking but no deal. There is not even an agreement on disbursement as codified in the last paragraph. The odds on Greece reaching a primary surplus in the next several years are about 1 degree off of Kelvin's Absolute Zero. The deferral of interest payments and the extension of the loans have some meaning but are nowhere close to bridging the deficit gap. All of this of course has to go back to the nations' Parliaments and it may not be as readily accepted as some hope. There is not even a definitive agreement yet to give Greece more money. The debt buy-back is governed under British law and while they are once again going after the private sector bondholders there is no CAC to enforce any action though there is the obvious falsification of prior claims that "it will never happen again." What we have here are more promises, a concocted ruse and an agreement on a concept that is actually no deal at all. I would also say that Mr. Draghi lost a good deal of credibility tonight touting this statement as an agreement that would "reduce uncertainty." Ms. Lagarde's statement: “The initiatives include Greek debt buybacks, return of Securities Market Programme (SMP) profits to Greece, reduction of Greek Loan Facility (GLF) interest rates, significant extension of GLF and European Financial Stability Facility (EFSF) maturities, and the deferral of EFSF interest rate payments." is also factually incorrect as these are "maybe" proposals for the most part as stated in the EU official pronouncement. What we have here is one more "huff and puff" and no agreement by any definition that I would find acceptable.

    New Greek Deal Solves Almost Nothing - WSJ: The latest accord between Greece and its creditors came with as many questions as answers, and far more “maybes” than “definitelys.” The markets are usually happy enough just to have some kind of deal. Still this one leaves all the main problems unresolved and promises the euro crisis is going to be with us for years. The deal, struck last night, frees up some $57 billion for Greek financing, and sets out some broad goals for the Aegeans over the next decade. But it has the smell of a weak compromise all over it, and you can bet your bottom euro that this whole mess will be revisited soon.Look at the key metric of Greece’s debt load. Under previous bailout deals, the goal was to get Greece’s debt-to-GDP ratio down to 120% by 2020 from its current range around 170%. The 120% figure itself was an arbitrary goal, a number that is only slightly more sustainable that 140% or 170%. Under the new deal, the goal is now to get the country’s debt-to-GDP ratio down to 124% by 2020, a tacit admission that the old deal was unworkable. The IMF was earlier pushing for an even lower number, but backed off. Still, the Fund is likely to continue pushing for sharply lower debt targets, since it warned the debt level will have to be much lower before Greece can borrow in private markets again. All this points to the fact that Greece will remain a problem for many years.

    Greece prepares bond buyback, but there is always plan "B" - Greek government debt yield hit a new post-restructuring low, nearing 16%.Who is buying this paper? The Greek government of course (plus those who bought these bonds for speculation). The idea is for the government to buy debt at a discount and "retire" it, reducing the indebtedness level by the amount of the discount. NY Times: - The troika has calculated that if successful, the debt buyback, together with other means of debt relief, could help Greece reduce its debt to 124 percent of gross domestic product in 2020 and even further after that, from about 175 percent now. But the current holders, knowing this information, may try holding back to see if they can get a better price, now that there is a big buyer in town. Plus those who have not marked this debt to market (which apparently is the case for some Greek banks) will realize a loss upon sale and may not be eager to sell right now. NY Times: - a number of hurdles remain that could mean delays in reducing Greece’s debt. For one, Athens will also have to persuade bondholders to sell back their debt at a price that is attractive to the government. Bondholders will hold out for as much as they can get.In addition, some of those bondholders are beleaguered Greek banks. The government bonds they hold count as bank capital and pay a high rate of interest, reflecting the risk attached to the debt. Writing down the value of the bonds, and forgoing that capital and income, will eventually leave the banks even worse off than they are now. That may require the troika to send even more aid to Greece in the future to recapitalize the banks, analysts say. 

    A look at Greece's key financial figures - European and global financial leaders agreed Tuesday to release (EURO)44 billion ($57 billion) in critical loans to Greece and provide billions in debt relief to help the country stabilize its ailing economy. Here's a look at some of Greece's main economic and financial statistics.

    • - Greece is in its fifth year of recession. Over the previous four, the economy contracted by 20 percent. The European Union expects the country's economy to contract 6 percent this year, to (EURO)195 billion ($250 billion), and another 4.2 percent next year.
    • - The country's unemployment rate hit 25.4 percent in August, according to Eurostat, the EU statistics agency. The government hopes to bring it down to 10 percent by 2016. Among young people - aged between 15 and 24 - the jobless rate was 57 percent in August.
    • - Greece's government debt is projected to rise to 189.1 percent of gross domestic product in 2013, above the 182.5 percent predicted in the preliminary draft submitted at the start of October, and up from the 175.6 percent forecast for this year. As part of Tuesday's loan deal, the IMF and the euro finance ministers agreed to get Greece's debt down to a new target of 124 percent of GDP by 2020. This would be done by cutting about (EURO)40 billion from the country's debt between now and the end of the decade.
    • - Greece's government budget deficit is projected at 5.2 percent of GDP in 2013, up from 4.2 percent predicted in the preliminary draft of the budget - but still an improvement from the 6.6 percent predicted for this year.

    New Meaning of the Word Voluntary; Bond Buyback Balancing Act - It is a deep stretch of the imagination to twist arms and appeal to "patriotic duty" in an effort to coerce someone to do something they really do not want to, then call the action "voluntary". It is yet another thing to claim something is voluntary yet tell them it is "required". The latter has happened (again), when it comes to Greek debt.  The Financial Times reports Athens banks told of debt buyback ‘duty’ Yiannis Stournaras made clear the country’s four largest banks, which together hold about €17bn of government bonds, would be required to sell their entire holdings even though the buyback is billed as “voluntary”. It was the “patriotic duty” of Greek bankers to ensure the success of the buyback, due to be launched next week by the country’s debt management agency with up to €14bn of additional European funding, Mr Stournaras said on Wednesday. Yet Athens bankers appeared reluctant to be forced into a sale that would weaken their balance sheets and discourage local investors from participating in rights issues expected early next year as part of a €24bn recapitalisation of the sector.“The banks stand to lose some €4bn by having to sell their bonds at around 33 cents on the euro,”

    Greek deal frays as IMF threatens walk-out on debt buy-back impasse - The eurozone's debt relief plan for Greece has hit serious trouble within days as banks and pension funds balk at fresh losses, raising fears that the package could unravel before a deadline in mid-December. The International Monetary Fund said on Thursday that it would not disburse funds under its part of the EU-IMF package unless the eurozone delivers on a bond "buy-back" scheme, which is supposed to cut Greece’s burden by 10pc of GDP and is deemed crucial for restoring long-term viability. If the IMF withdraws, Finland and Holland will also pull out of the programme. "This has become a really big problem," said Raoul Ruparel from Open Europe. The dispute comes as Moody’s said the EU-IMF deal to unlock €44bn in bail-out payments to Athens merely papers over cracks and does little to alleviate Greece’s "extreme economic and social fragility". "We believe that the country’s debt burden remains unsustainable," it said. Moody’s warned that there can be so lasting solution until EU states and official creditors agree to write down their holdings, now the lion’s share.

    Analysis: Euro zone debt forgiveness lies ahead in Greek mire - Within minutes of euro zone finance ministers reaching a deal to cut Greece's debt late on Monday, commentators on Twitter were dismissing it as another exercise in "kicking the can down the road". To an extent that is true. Under the agreement, the euro zone and the International Monetary Fund will give Greece two more years to reach its budget goals and will find another 44 billion euros ($57 billion) to keep the country afloat in the meantime. But while a degree of can-kicking may be going on, there was a critical element in Monday night's deal that goes a lot further than any other step taken so far in the debt crisis to get Greece back on its feet. Implicit was an understanding that Greece will undergo some form of official-sector debt restructuring - with euro zone countries forgiving a portion of Greece's debt - at some point in the future, the sort of last-ditch measure usually reserved for impoverished states in Africa and Latin America.

    Germans lament “never-ending story” of Greek aid (Reuters) - German lawmakers and media accused the government on Wednesday of deceiving taxpayers over the true costs of saving Greece and said the euro zone would eventually have to write off much of its Greek debt. The Bundestag, the lower house of Germany's parliament, is expected to vote on Friday on the package of measures agreed by euro zone finance ministers this week which aim to cut Greek debt to 124 percent of gross domestic product by 2020. The Bundestag's approval is not in doubt but the chorus of anger and frustration reverberating among German newspapers and lawmakers highlights the growing political risks for Chancellor Angela Merkel ahead of next September's federal elections. The government insists a writedown of debt by Greece's official creditors would be illegal and is unnecessary, but the skepticism is growing, even within its own party ranks. "Without a haircut Greece will never be able to service its debts," said Carsten Schneider of the opposition Social Democrats (SPD) on Wednesday in the Bundestag.

    Germany's response to the Greek debt crisis seen hampered by Merkel's upcoming re-election bid - German Chancellor Angela Merkel's upcoming re-election battle is shaping Europe's response to bailing out debt-ridden Greece. Her strategy: Do just enough to keep Greece afloat but spare German voters — for now — the news that even more of their money will be required to get the Greeks back on their feet. Merkel has led Europe's biggest economy since 2005. The greatest risk to her re-election bid, pollsters and analysts say, is a dramatic worsening of Europe's debt crisis — such as Greece exiting the eurozone, or a Greek debt write-off costing billions in German taxpayer money. A deal reached Tuesday by the 17 nations that use the euro is a patchwork of measures to plug new shortfalls in Greece's budget and trim its debt load over the coming years. But it stopped short of forgiving some of the country's debt — having eurozone creditors like Germany take a so-called "haircut." "Greece's debt is not sustainable, even with the new measures, so the problem will be back in 2014 at the latest,"

    Germany displaces China as US Treasury’s currency villain - The US Treasury has issued a damning criticism of Germany’s chronic trade surplus in its annual report on worldwide exchange rate abuse, although it stopped short of labelling the country a currency manipulator. Treasury officials told Congress that internal balances within the eurozone are disrupting the global trade structure, with almost nothing being done by north Europeans states to curb their huge surpluses. The report said Germany’s current account surplus is running at 6.3pc of GDP, and Holland is even worse at 9.5pc. Yet the countries still cleave to fiscal austerity policies that constrict internal demand. The EU’s new tool for cracking down on intra-EMU imbalances is "asymmetric" and does not give "sufficient attention to countries with large and sustained external surpluses like Germany". While the eurozone as a whole is roughly in trade balance, the EMU regime of austerity in the South without offsetting stimulus in the North is creating a contractinary bias, holding back global recovery. The US Treasury said eurozone surplus states have "available room" for fiscal stimulus but refuse to act, despite repeated pledges by EU leaders that more must be done to foster growth. "They have not yet made any concrete proposals capable of yielding meaningful near-term results."

    German Unemployment Rose for an Eighth Month in November - German unemployment climbed for an eighth straight month in November as Europe’s debt crisis curbed company investment and economic growth. The number of people without a job increased a seasonally adjusted 5,000 to 2.94 million, the Federal Labor Agency in Nuremberg said today. Economists forecast a gain of 16,000, the median of 37 estimates in a Bloomberg News survey shows. The adjusted jobless rate held at 6.9 percent. Separately, a gauge of economic confidence in the euro area unexpectedly rose. With the 17-nation currency bloc in recession and growth slowing in emerging markets, German firms are postponing investment and hiring decisions. The unemployment rate rose for the first time in three years in September. While Europe’s largest economy expanded 0.2 percent in the third quarter, latest reports suggest growth may grind to a halt in the fourth as export demand wanes.

    Germany Seen Recession-Bound in Poll Showing Euro Crisis - Germany, Europe’s largest economy, will be tipped into recession as the sovereign debt crisis roiling its neighbors extends into the new year, according to the Bloomberg Global Poll. Even as European leaders laud their latest fix for Greece’s debt woes, 53 percent of 862 investors, analysts and traders who are Bloomberg subscribers said this week they think Germany’s economy will drop into a recession for the first time in more than three years. Sixty-four percent expect Europe’s debt turmoil to deepen again despite recent signs of calming in its financial markets. A slump in the German economy would remove a rare engine of demand for the rest of the continent, probably extending the euro-area-wide recession that was confirmed last quarter. A contraction would also pose a challenge for Chancellor Angela Merkel who is seeking a third term in elections next year amid domestic disquiet with three years of supporting Europe’s debt- lashed governments.

    French Jobless Claims Jump to 14-Year High on Stalled Economy - French jobless claims jumped to a 14-year high as a stalled economy prompted companies to trim payrolls and investment. The number of people actively looking for work rose by 45,400, or 1.5 percent, to 3.103 million, the Labor Ministry said today in an e-mailed statement from Paris. Economists predicted an increase of 28,600, according to the median of six forecasts gathered by Bloomberg News. The increase brings jobless claims to their highest since April 1998, increasing pressure on President Francois Hollande to tackle labor rules and costs in a push for competitiveness that he has promised by year-end. With almost no economic growth in more than a year, French business confidence is near a three-year low and companies including Alcatel-Lucent SA and PSA Peugeot Citroen (UG) have announced plans to cut thousands of jobs in recent months as demand for their products slumps.

    French Unemployment Highest in 14 Years (And It's Going to Get Much Worse) - According to Google translation from Le Monde, October marks the 18th consecutive month of rising unemployment. A second article from Le Monde discusses the Rise in Unemployment for October. Unemployment has risen sharply again in October. According to statistics released Wednesday, November 27 by employment center and the Ministry of Labour, the number of applicants for employment who had no activity during the month (Class A) increased by 46,500 people, including DOM. In September, he had jumped nearly 47 000 people. Worse, counting the unemployed reduced activity (category B and C), the increase reached 73,600 people!  Such explosion had not been seen since March 2009. With 4,870,800 people registered at employment center, the number of job seekers Class A, B and C reached a level never seen before, as far back as statistics. For those in category A, the level was not as high for fourteen years, in May 1998.  Those outside France need a bit of perspective on various classes of unemployment cited above. This is my understanding, pieced together from two different sources.

    • Class A: Jobless people that have had no activity at all during the past month.
    • Class B: Jobless people having worked less than 78 hours during the past month ("short reduced activity")
    • Class C: Jobless people having worked more than 78 hours during the past month ("long reduced activity").
    • Class D: Looking for a job, but currently sick, or in internship, or in state-sponsored "professional development" courses, etc
    • Class E: Those in state-sponsored low-pay "community service" jobs

    Alarm as Italian unemployment hits record high - There was widespread alarm in Italy on Friday when Istat said unemployment in the recession-hit country had reached a record high approaching three million. The number of people out of work in Italy reached 2.87 million in October, the national statistics agency said, adding that this was the highest level since monthly records began in January 2004 and since quarterly records started in the fourth quarter of 1992. The unemployment rate rose 0.3% to 11.1% of the working population in October compared to September and 2.3% over October 2011, Istat said. Again, this was the highest monthly rate, in percentage terms, since January 2004. Italy's biggest trade-union confederation, the left-wing CGIL, said it feared unemployment will get even worse next year because of the recession, which Italy is not forecast to emerge from until the second half of 2013. "On the job front 2013 will be even worse than 2012, which has already been the toughest year of the economic crisis," said CGIL Secretary-General Susanna Camusso. Camusso also called on unemployment benefits to be boosted given the expected rise in unemployment levels. Istat said the worrying rise was caused by there being some 95,000 more Italians out of work in October than in September, a 3.3% rise on absolute terms. Compared to October 2011, there were 644,000 more jobless, a rise of 28.9% in absolute terms, the statistics agency said. The level of youth unemployment is particularly disturbing. The jobless rate among 15-to-24-year-olds in October was 36.5%, the highest since monthly records began in January 2004 and quarterly records started in the fourth quarter of 1992, the statistics agency said. Some 639,000 15-to-24-year-olds are looking for jobs, Istat said.

    Eurozone Unemployment Hit Another Record High - Another month, another record unemployment rate for the economy of the 17 European Union countries that use the euro. Figures released Friday by Eurostat, the EU’s statistics office, showed that the recession in the eurozone pushed unemployment up in the currency bloc to 11.7 percent in October, the highest level since the introduction of the euro in 1999. The rise from September’s previous record of 11.6 percent was anticipated after the eurozone returned to recession in the third quarter, commonly defined as two consecutive quarters of negative growth. While the eurozone’s unemployment has been inching upward since June 2011, the equivalent rate in the U.S. has fallen to below 8 percent as the world’s largest economy continues its recovery from recession. In October, it stood at 7.9 percent. Eurostat found that 18.7 million people were out of work across the eurozone, an increase of 173,000 on the previous month and 2.2 million higher than the year before. The wider 27-nation EU that includes non-euro countries such as Britain and Poland had an unemployment rate of 10.7 percent in October and a total of 25.9 million out of work.

    Eurozone unemployment hits record high of 11.7pc - Recession in the eurozone forced a further 173,000 people out of work during October and pushed the unemployment rate to a record high of 11.7pc. Almost 26m people across Europe are now out of work, according to the EU's statistics agency Eurostat, with an 18.7m majority of those living in the eurozone. The rate has been climbing steadily during the debt crisis. During September the eurozone unemployment rate was 0.1 percentage points lower at 11.6pc, while in the same period in 2011 it was 10.4pc. The north-south divide in Europe also remains clear, as Austria has an unemployment rate of just 4.3pc, Germany 5.4pc and the Netherlands 5.5pc. Meanwhile, troubled Greece has a rapidly rising rate of 25.4pc and in Spain 26.2pc of people are out of work. The worst victims of rising unemployment in the eurozone are those under 25. Youth unemployment across the single currency area has now reached 23.9pc, up from 21.1pc in the same month last year. Spain's youth unemployment rate has soared to 56pc. Greece publishes data a month behind much of the rest of the eurozone, but figures from August show that 57pc of young people were out of work.

    Euro-Area Unemployment Rises to Record 11.7% on Recession - The euro-area jobless rate rose to a record in October as the fiscal crisis and tougher austerity measures deepened the region’s economic woes. Unemployment in the 17-nation single-currency bloc increased to 11.7 percent from 11.6 percent in September, the European Union’s statistics office in Luxembourg said today. That’s the highest since the data series started in 1995 and is in line with the median estimate of 34 economists in a Bloomberg News survey. Inflation eased to 2.2 percent in November, the slowest rate in almost two years, separate data showed.The euro-area economy has shrunk for two successive quarters, forcing companies to cut costs to help weather the downturn, and economists foresee a further contraction of 0.3 percent in the fourth quarter, the median of 25 forecasts in a separate Bloomberg survey showed. The Organization for Economic Cooperation and Development this week forecast contractions of 0.4 percent and 0.1 percent this year and next.

    Spain eurozone crisis: Where jobs are a lottery  -- In a Spanish town where one in three people are without a job, getting one can depend quite literally on the luck of the draw. Alameda is surrounded by neat rows of olive trees that stretch for miles towards the distant sierra. Two hours east of Seville, the town is a maze of narrow streets lined by orange trees and whitewashed houses. The mayor, Juan Lorenzo Pinera, seems to know most of the people he passes in the town square. Many of them shout greetings or stop to ask him a question. Since Spain's housing bubble burst, the thing most people want to know is whether he has any work going. "The situation is very difficult," he says. "All the men who were working in construction lost their jobs, and now many of them are no longer eligible for government help. "We have families who have been thrown out of their homes and everyday people come to the town hall asking for food." He has come up with an idea to share out the work that is available at the town hall: a jobs lottery.

    Goldman: No recovery for Spain until 2015 - Spain's large temp labor force (see discussion) should help reduce unemployment quickly, once recovery takes hold. But given the sorry state of the banking system (see post), when do economists actually expect Spain's economy to begin growing again? The latest forecast from Goldman shows that it will be some three years before even a modest real GDP growth should be expected.What's amazing is that earlier this year many mainstream economists were projecting a "short and shallow" recession (see discussion). In fact economists have been consistently lowering their forecasts all year. The chart below from Goldman shows the consecutive worsening of the 2013 forecast for Spain's GDP growth. Given Spain's limited ability to grow its debt levels (simply because the market and the EMU will not let them), the debt to GDP ratio is expected to level off just under 100% on a gross basis. And just for reference (and many people will take issue with this comparison), the US is already at 100% debt to GDP on a gross basis.

    Cameron's Foolish Bluster; Monti Asks Cameron for Up-or-Down Vote on UK Membership in EU - I frequently disagree with Financial Times writer Wolfgang Münchau, especially on keeping the eurozone and EU intact. Today, I largely agree (but sometimes for opposite reasons) with Münchau's take in Britain’s bluster serves the eurozone well. Münchau: The singular importance of the budget negotiations, and of British prime minister David Cameron’s insistence on an EU budget freeze, lies in what they reveal about the future of the EU itself. A frozen budget means that the EU is stuck with what it does. Forget the Agenda 2020, or any other pretence at growth-enhancing policies. What the fraught budget negotiations tell us is that the process of European integration – at the level of the EU – is largely completed. In that sense it matters little whether the UK, for example, stays inside or not. In formally leaving the EU, there would be no need for the UK to give up on any existing rights, including the right to take up work and residence in the EU and, of course access to the single market – whatever that is worth. The terms of a withdrawal from the EU are freely negotiable. Even now, it does not feel that different, apart from the temperature, whether you are in Britain inside the EU, or in Norway outside the EU. From the point of view of the EU, Münchau is largely correct. The EU can blunder along in its creation of an economic nannyzone with or without the UK, but not with or without Germany.

    Banking reform: Do we know what has to be done? - The crisis has revealed the vulnerabilities of the Eurozone financial sector and the critical role the sector plays in the real economy. It also made it clear that the Eurozone banking system needs fixing. But what reforms should we implement? It is critical that much better legislation be both discussed and implemented if we wish to properly regulate the financial sector. This column opens a Vox debate on banking reform whose aim is to stimulate an open and broad-ranging discussion on banking reform.

    Offshore secrets revealed: the shadowy side of a booming industry - The existence of an extraordinary global network of sham company directors, most of them British, can be revealed. The UK government claims such abuses were stamped out long ago, but a worldwide joint investigation by the Guardian, the BBC's Panorama and the Washington-based International Consortium of Investigative Journalists (ICIJ) has uncovered a booming offshore industry that leaves the way open for both tax avoidance and the concealment of assets. More than 21,500 companies have been identified using this group of 28 so-called nominee directors. The nominees play a key role in keeping secret hundreds of thousands of commercial transactions. They do so by selling their names for use on official company documents, using addresses in obscure locations all over the world. This is not illegal under UK law, and sometimes nominee directors have a legitimate role. But our evidence suggests this particular group of directors only pretend to control the companies they put their names to. The companies themselves are often registered anonymously offshore in the British Virgin Islands (BVI), but also in Ireland, New Zealand, Belize and the UK itself. More than a score of UK agencies sell offshore companies, several of which also help supply sham directors.

    At Least Half of the 21,500 Companies Revealed by the Guardian/ICIJ Offshore Investigation Have Connections With Rogue Agent GT Group - It seems to be tax haven week in the UK. The BBC’s Panorama has an investigative TV series, and in parallel, The Guardian and the ICIJ are publishing some of the underlying research, including some colorful undercover video. Here’s the frame A worldwide investigation aimed at stripping away the anonymity that binds together one of the most shadowy aspects of Britain’s financial industry: the offshore company. In a unique collaboration, the Guardian and BBC Panorama have sifted through many gigabytes of data obtained by the Washington-based International Consortium of Investigative Journalists. Among the findings was information that helped us to identify more than 20 offshore incorporation firms operating out of the UK, several of which help supply sham directors. The Guardian also gives this data table, which shows a group of 28 nominee directors controlling no fewer than 21,500 companies in three continents. This blog has something to add to that analysis. The New Zealand company register is very easy to access, so for convenience, let’s just concentrate on the New Zealand companies in that list, and look at the connections implied by the various company agents the nominee directors have worked with in New Zealand. We get a shorter list, with a startling implication: of the 21,500 companies in the ICIJ investigation, just under 11,000 were or are controlled by 16 nominee directors who have worked closely with GT Group, the maverick company registration agent that formed the companies behind the biggest moneylaundering scheme ever detected; oh and a giant fraud in the Ukraine, and oh yes, arms smuggling to Iran

    Mark Carney to the Bank of England -- You might think I have a lot to say about this. (A top UK newspaper just emailed asking me to write something.) I don't. I have very little to say. And what I do have to say is fairly obvious. I think Britain needs him more than Canada does, because the British economy is in worse shape than the Canadian economy. (I was touching wood as I wrote that, because, for example, Canadian house prices have been falling a little recently and I can't be certain that they won't fall a lot.) And the Bank of England is more involved in supervising financial intermediaries than is the Bank of Canada, and that would probably be Mark Carney's comparative advantage. I can think of two good candidates (I'm not going to say who) to replace him as Governor at the Bank of Canada. There are almost certainly many other good candidates whom I know nothing about. I hadn't heard of Mark Carney before he became Governor.

    Bold Canadian takeover of Threadneedle Street - Congratulations and best wishes to Mark Carney. When he becomes governor of the Bank of England next June, he will assume one of the three or four most important roles in global finance. In fact, it will be a role much broader than that of his immediate predecessors at the Bank, who have not been directly responsible either for microprudential supervision of financial entities, or for the macro-prudential supervision of the financial system as a whole. Under the new regulatory structure designed by Chancellor George Osborne, the new governor will now assume responsibility for both of these tasks, as well as for monetary policy.It has proven difficult to find a British candidate for the role who is equally prepared for each of these three separate tasks. The retiring governor, Sir Mervyn King, is a distinguished and brilliant macro-economist whose legacy includes the Bank’s Inflation Report, a development followed by countless other countries, and which has been one of the few elements of macro-economic policymaking to survive the financial crisis broadly intact.

    Counterparties: Canada’s wonkiest export - The Bank of England has imported its next governor. Mark Carney, 47, currently the head of Canada’s central bank, will take over from Sir Mervyn King on July 1. the BoE’s release is at pains to point out that “as a Canadian citizen he is a subject of Her Majesty The Queen”; it also mentions that he used to work for Goldman Sachs — just like ECB chief Mario Draghi, Italy’s Mario Monti, and William Dudley of the New York Fed. This appointment marks a new breed of central banker, Neil Irwin writes. Unlike King or Ben Bernanke, both academic economists, Carney’s schooled in the “messy, legalistic world of overseeing banks and financial markets”. This will be particularly important because the BoE will soon resume bank oversight. Carney’s also the head of the Financial Stability Board, and has become arguably the biggest champion of Basel III. He’ll be keeping his job at the FSB, FT Alphaville notes. What will Carney’s term as the head of BoE be like? For one, count on the push for higher bank capital standards to continue. In this Reader’s Digest Canada interview, Carney said Canada made it through the financial crisis because “our banks had more capital than most banks around the world”.You can also expect Carney to speak his mind: his dictum is “complacency is really the enemy in finance”,

    Goldman's Global Domination Is Now Complete As Its Mark Carney Takes Over Bank Of England - Back on July 3, we made an explicit and very simple prediction: "now that the natural succession path at the BOE has been terminally derailed, it brings up those two other gentlemen already brought up previously as potential future heads of the BOE, both of whom just happened to work, or still do, at... Goldman Sachs:  Canada's Mark Carney or Goldman's Jim O'Neil. Granted both have denied press speculation they will replace Mervyn King, but it's not like it would be the first time a banker lied to anyone now, would it (and makes one wonder if this whole affair was not merely orchestrated by the Squid from the get go... but no, that would be a 'conspiracy theory'.)" We are, once again, 100% correct, and have beaten all the bookie odds which had Tucker as a favorite and Mark Carney as along odds outsider. Pity: all one needs to realize and remember how the events in the world play out is to remember one simple thing: GOLDMAN SACHS RUNS IT. Everything else is secondary.

    Carney a ‘significant positive’ for banks - Banks should welcome the appointment of Mark Carney as the next Governor of the Bank of England, according to leading industry analysts. In a note to clients, UBS said the surprise decision to hire Mr Carney to replace Sir Mervyn King next year was a “significant positive turn for both the economy and the banks”. UBS said it did not expect Mr Carney to be as tough on lenders as his predecessor, predicting an end to what it called an “increasingly challenging UK regulatory agenda”. “While we do not expect any reopening of issues such as ring-fencing, we consider the new governor less likely to pursue a further tightening of UK standards already well above Basel requirements in capital, funding and liquidity,” wrote the analysts. Mr Carney’s approach is likely to put him at odds with some senior officials at the Bank of England. In an interview last month with Euromoney, the incoming governor criticised a speech given by Andy Haldane, the Bank’s executive director for financial stability and a leading contender for a deputy governor role, as lacking a “proper understanding of the facts”.

    UK banks face up to £50bn shortfall - British banks will have to raise £20bn-£50bn of new capital or dramatically restructure their businesses after the Bank of England made it clear it did not trust the way they value their books. The BoE’s new Financial Policy Committee yesterday said banks must report capital ratios which reflect a “proper valuation” of their assets and a “realistic assessment” of the cost of recent scandals, such as the manipulation of Libor and mis-selling of insurance products. The demand comes shortly after the International Monetary Fund called on European lenders to shore up balance sheets and adds to growing concerns that risk-weighted capital ratios are exaggerating the health of the global banking system. Sir Mervyn King, BoE governor, declined to quantify the level of capital needed to rectify the situation, saying only that it was “material”. But the central bank’s financial stability report published estimates of each of its concerns that suggested banks would have to raise between £20bn and £50bn in aggregate.

    BoE tells banks to crack down on bonuses - Bankers are facing a fresh crackdown on bonuses ahead of the New Year pay round under moves by the Bank of England to overhaul award structures.Banks have been told to lengthen directors’ incentive periods from three years to between five and eight years. It could also be made harder to qualify for a bonus, by penalising risk, while awards will increasingly be paid in bail-in debt. In its Financial Stability Report (FSR), the Bank stressed “the importance of these concerns for UK banks’ current remuneration round”. The latest crackdown follows a warning from the Financial Services Authority that deferred bonuses should be clawed back this year in the wake of the scandals involving the mis-selling of interest rate derivatives and the rigging of Libor rates. City bonuses are already expected to be down to a total of £1.6bn, from £4.4bn in 2011 and a high of £11.6bn in 2007, according to the Centre for Economics and Business Research.

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