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

Saturday, December 22, 2012

week ending Dec 22

Fed's Balance Sheet Grows in Latest Week - The Fed's asset holdings in the week ended Dec. 19 increased slightly to $2.922 trillion, up from $2.919 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities decreased to $1.659 trillion on Wednesday from $1.661 trillion a week earlier. The central bank's holdings of mortgage-backed securities rose to $933.39 billion from $928.80 billion a week ago. The Fed's portfolio has tripled since the financial crisis of 2008 and 2009 as the central bank bought government bonds and mortgage-backed securities in an effort to keep interest rates low and to stimulate the economy. Thursday's report showed total borrowing from the Fed's discount lending window was $864 million Wednesday, up from $ 827 million a week earlier. Commercial banks borrowed $34 million Wednesday, up from $5 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts rose to $3.234 trillion, up from $ 3.221 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.883 trillion, up from $2.867 trillion in the previous week. Holdings of agency securities fell to $315.20 billion, down from the prior week's $318.29 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--December 20, 2012: Federal Reserve statistical release

A major change in Bernanke’s policy – FT - There have been three important developments in central banking in the past week, which together indicate that their approach to inflation targeting, one of the few features of pre-2007 policy orthodoxy which has survived the financial crisis, may now be subject to radical change. (See Robin Harding on the “quiet revolution” at the central banks.) It is greatly premature to declare that inflation targeting is dead, but things are clearly on the move. In the UK, the incoming Bank of England governor Mark Carney has suggested nothing less than the abandonment of the short-term inflation objective altogether, and has mooted the possibility of a nominal GDP level target, which is a beast with very different stripes. In Japan, the new Abe government intends to impose a higher (2 to 3 per cent) inflation target on the central bank, which can probably be hit only by pushing the yen lower. In the US, there has been a clear shift in the Fed’s policy reaction function, or “Taylor Rule”, increasing the weight placed on unemployment and reducing the weight on inflation. The nature and importance of the Fed’s policy shift has not yet been fully understood, because it was not really spelled out by Chairman Bernanke in his press conference this week.

Plain English - Atlanta Fed's macroblog - Gavyn Davies writes in The Financial Times that he sees a major shift in attitude at the Fed: In the US, there has been a clear shift in the Fed's policy reaction function, or "Taylor Rule", increasing the weight placed on unemployment and reducing the weight on inflation. The nature and importance of the Fed's policy shift has not yet been fully understood, because it was not really spelled out by Chairman Bernanke in his press conference this week. I'd score that comment about half accurate. Here's what the Chairman actually said in that press conference: QUESTION: Mr. Chairman, what prompted the Committee to make the decision at this particular time to specify targets? And by taking an unemployment rate that is quite low compared to currently, does that shift the balance of priorities in terms of your dual mandate…more in the direction of reducing unemployment rather than inflationary pressures? BERNANKE: …It is not a change in our relative balance, weights towards inflation and unemployment, by no means. First of all, with respect to inflation, we remain completely committed to our 2 percent longer- run objective. Moreover, we expect our forecast, as you can see from the summary of economic projections, our forecasts are that inflation will actually remain—despite this threshold of 2.5 [percent]—that inflation will actually remain at or below 2 percent going forward… I think both sides of the mandate are well-served here. There's no real change in policy. What it is instead is an attempt to clarify the relationship between policy and economic conditions.

Try, Try Again - Atlanta Fed's macroblog - As a regular, satisfied customer of The Wall Street Journal's "Heard on the Street" feature, I was a bit distressed to read this, from an item titled "Bonds Beware Central Bank Regime Change": in the U.S., the Federal Reserve has announced that future monetary policy tightening will depend on a hard target for falling unemployment and a softer target for rising inflation expectations. That looks like a tilt toward growth as the priority over inflation. When The Financial Times and The Wall Street Journal in quick sequence publish articles that seem to misinterpret Fed communications, I have to surmise that the message isn't getting through and bears repeating and further explaning. Earlier this week, in response to the alluded-to FT article, I addressed the charge of a "tilt toward growth as the priority over inflation," noting that Fed Chairman Ben Bernanke clearly indicated in last week's press conference that there has been no "change in our relative balance, weights towards inflation and unemployment...." It is true that the Committee's threshold for considering policy action was expressed in terms of a realized value for unemployment and a forecast value for inflation. But that choice, as the Chairman explained in that press conference, was motivated by the nature of the two different statistics: ... the Committee chose to express the inflation threshold in terms of projected inflation between one and two years ahead, rather than in terms of current inflation. The Committee took this approach to make clear that it intends to look through purely transitory fluctuations in inflation, such as those induced by short-term variations in the prices of internationally traded commodities, and to focus instead on the underlying inflation trend.

The Fed rolls the dice - It was big news last week when the Federal Reserve announced that it wants to maintain its current low-interest rate policy until unemployment, now 7.7 percent, drops to at least 6.5 percent. The Fed was correctly portrayed as favoring job creation over fighting inflation, though it also set an inflation target of 2.5 percent. What was missing from commentary was caution based on history: the Fed has tried this before and failed — with disastrous consequences. By “this,” I mean a twin targeting of unemployment and inflation. In the 1970s, that’s what the Fed did. Targets weren’t announced but were implicit. The Fed pursed the then-popular goal of “full employment,” defined as a 4 percent unemployment rate; annual inflation of 3 percent to 4 percent was deemed acceptable. The result was economic schizophrenia. Episodes of easy credit to cut unemployment spurred inflation... By 1980, inflation was 13 percent and unemployment, 7 percent. ... Today’s problem is similar. Although the Fed has learned much since the 1970s ... its economic understanding and powers are still limited. It can’t predictably hit a given mix of unemployment and inflation. Striving to do so risks dangerous side effects, including a future financial crisis.

The Omnipotent Fed idea - Since the Fed started its new policy of "QE infinity" (which it stepped up on Wednesday), acclaim has been heaped upon the economists who have promoted a policy of NGDP targeting (or "NGDP level path targeting"), which bears some resemblance to "QE infinity". Chief among these economists is Scott Sumner, who promotes his ideas mainly through his blog; Sumner was recently named one of Foreign Policy Magazine's top 100 global thinkers, and economics pundits from Tyler Cowen to Matt Yglesias have credited Sumner as being the intellectual force behind the Fed's new policy. However, Scott is far from a solitary crusader; he has been assisted by David Beckworth, Ryan Avent, Andy Harless, Steve Randy Waldman, Joe Weisenthal, Evan Soltas, and a number of other bloggers and pundits. Additionally, my own graduate advisor, Miles Kimball, has promoted similar ideas on his blog and in his academic work. I generally support the idea of an activist Fed, unconventional monetary policy, etc. However, I do have a misgiving about a key element of the case made by the aforementioned crop of monetarists. This is the notion of an "Omnipotent Fed" which I mean not that the Fed can create stars and galaxies, but that the Fed can set NGDP to be whatever it wants. If this assumption is wrong, NGDP targeting (or similar policies) may simply not work.

Fed’s Lacker: New Rate Guidance Sets Up Potential Conflict - The Federal Reserve‘s new strategy for explaining how long it plans to keep short-term interest rates near zero could set up a conflict between the central bank’s two main goals, Federal Reserve Bank of Richmond President Jeffrey Lacker said in a speech Monday. The central bank’s new communications strategy sets up a “potentially problematic tension between two competing commitments–one to price stability and the other to an unemployment rate threshold,” Mr. Lacker said Monday in remarks prepared for the Charlotte Chamber of Commerce‘s Annual Economic Outlook Conference. The Fed last week spelled out for the first time its plans to leave rates very low until the unemployment rate falls to 6.5% or lower, so long as inflation forecasts stick near its 2% target and long-term inflation expectations remain stable. The Fed has a responsibility to support both stable prices and maximum employment.

The hawkish nature of the Evans Rule -From Bloomberg Businessweek: The Fed Turns Aggressively Dovish with 'Evans Rule'The headline above seems to capture the general sentiment surrounding the FOMC's recent  policy announcement. The recent move is characterized by many as "dovish" in nature because ...the Fed will keep short-term interest rates near zero as long as unemployment remains above 6.5 percent and the inflation it expects in one to two years is no higher than 2.5 percent. That replaces the previous plan to keep rates near zero until mid-2015. Given the slow pace of job growth, the current plan could mean that rates stay super-low past mid-2015. Sure. Of course, the FOMC could alternatively have just extended the "lift off" date into the more distant future (as they have done in the past). But that's neither here nor there. What I want to talk about is the move to a state-contingent policy that makes explicit reference to the unemployment rate. St. Louis Fed President James Bullard has long advocated a move to state-contingent policy (see here). The actual form of the policy turned out to be one subsequently advocated by Chicago Fed President Charles Evans (hence, the "Evans Rule"). Maybe it's not perfect, but perhaps it's a move in the right direction.

Is the 20-Year Inflation Targeting Detour About to End? -- Harvard's Jeffrey Frankel says nominal GDP targeting's time has finally come: It is time for the world’s major central banks to reconsider how they conduct monetary policy... Monetary policymakers in some countries should contemplate a shift toward targeting nominal GDP – a switch that could be phased in gradually in such a way as to preserve credibility with respect to inflation. Indeed, for many advanced economies, in particular, a nominal-GDP target is clearly superior to the status quo. The conventional wisdom for the past decade has been that inflation targeting – that is, announcing a growth target for consumer prices – provides the best framework for monetary policy. But the global financial crisis that began in 2008 revealed some drawbacks to inflation targeting...A nominal-GDP target’s advantage relative to an inflation target is its robustness, particularly with respect to supply shocks and terms-of-trade shocks. Frankel reminds us that NGDP was first widely discussed in the 1980s, but then fell out of vogue with the advent of inflation targeting in the early 1990s.  Recent developments indicate that this almost 20-year detour into inflation targeting may now be ending as noted  by Matt O'Brien over at the Atlantic: It's okay if you have that Animal Farm feeling. There's been a revolution, but nothing has changed. The Fed still thinks it's first rate hike will come in 2015-ish, and it's still buying $85 billion of bonds a month. This is a true fact. But it undersells the intellectual shift at the Fed. It's gone from mostly thinking about inflation to creating a framework to guide its thinking about inflation and unemployment. And it's done that in just a year.

JP Morgan Admits That "QE Will Offset Almost All Of Next Year’s Government Deficit" - There was a time when it was nothing short of economic blasphemy and statist apostasy to suggest three things: i) that the Fed's canonic approach to monetary policy, in which Stock not Flow was dominant, is wrong (as we alleged, among many other places, here); ii) that the Fed is monetizing the deficit, thus enabling politicians to conceive any idiotic fiscal policy: the Fed will always fund it no matter how ludicrous, converting the Fed effectively into a political power and destroying any myth of its "independence" (as we alleged, among many other places, most recently here in direct refutation of Bernanke's sworn testimony); and iii) that by overfunding bank reserves, the same banks are left with one simple trade - to frontrum the Fed in its monetization of the long-end, in the process destroying the bond curve's relevance as an inflationary discounting signal, with more QE, leading to tighter 10s, flatter 10s30s, even as the propensity for runaway inflation down the road soars, in the process eliminating any need for the massively overhyped, and much needed to rekindle animal spirits "rotation out of bonds and into stocks" trade (as we explained, first, here). Well, that time is now officially over, with that stalwart of statist thinking, JPMorgan, adopting all of the above contrarian views as its own, and admitting that once again, the Fed and conventional wisdom was wrong, and fringe bloggers were right all along.

What Does the Monetary Exit Path Look Like? --  John Taylor recently wrote, assuming the central tendency forecast of the FOMC, the announced buying spree will bring reserve balances to about $4 trillion in mid-2005. The risk is two-sided. If the Fed does not draw down reserves fast enough during a future exit, then it will cause inflation. If it draws them down too fast, then it will cause another recession. Taylor used to be rather highly regarded in the field of monetary economics, but he has fallen out of favor with KruLong, Scott Sumner, and others. Still, I think his concerns deserve a response.  I am not sure what Richard Fisher means by“Hotel California” monetary policy, but it sounds as though he, too, is worried about the exit path. My response would be that I am not concerned about the inflation-or-recession dilemma. I do not see a knife-edge there. I can picture a gradual transition from high unemployment to moderate unemployment, with inflation rising but staying under control–say, 3 percent. But suppose we do reach a point where the Fed has hit its unemployment target and inflation is around 3 percent? And at that point the Fed is sitting on a balance sheet of close to $4 trillion. And assume that fiscal policy still consists of running huge deficits as far as the eye can see.  When the Fed starts selling securities to limit the rise in inflation, what happens in the government bond market? There I do see the possibility for a knife-edge, or two very different equilibria.  My worry is that a transition by the Fed from buyer to seller in the bond market could be the trigger that sends the markets to the bad equilibrium.

The Unemployment Rate and Central Bank Policy-Becker -  Low inflation and “full” employment have been statutory goals of the Federal Reserve for the past 35 years. Often, however, inflation received the most attention, as when former Fed chairman Paul Volcker in the early 1980s sharply raised interest rates and put the economy in recession in order to wring inflationary expectations out of the system. On December 12th, Ben Bernanke, the chairman of the Fed, indicated that the Fed would pursue what one might think is simply a variant of the full employment target by keeping nominal interest rates close to zero until the US unemployment rate dips below 6.5%-it is currently 7.7%- or until inflation is forecast to exceed 2.5%. The challenge facing this proposal is that while an unemployment rate target may seem to be just the flip side of the full employment target, unemployment can be nudged by other government policies in ways that have little effect on employment.The present high level of unemployment in the US in good measure reflects the slow rate of recovery of real GDP and employment from its recession levels. According to "Okun’s Law”, the recovery in employment from a recession is simply related to the recovery in real GDP (see the discussion of Okun’s Law in my blog post on 11/4/2012). Okun’s Law implies that a central bank can use the recovery in real GDP as a proxy for the recovery in employment toward a full employment goal.

Unemployment, Inflation, and the Fed—Posner - As Becker points out, the unemployment rate is a misleading figure because it ignores discouraged workers, who have left the labor force (the denominator in calculating the unemployment rate, where the numerator is the number of full-time employed), and workers involuntarily working part time. But that is to say that the Fed’s choice of 6.5 percent unemployment as the level below which the Fed will stop flooding the economy with money is conservative, in the sense that at that rate the underutilization of the labor force is considerable and warrants extraordinary measures. Similarly, an inflation rate of 2.5 percent is low, suggesting that the Fed will stop flooding the economy with money well before inflation reaches a dangerous level.  I am not a macroeconomist, but my sense is that macroeconomics is so complex, in the sense of involving so many interactive forces, that no one understands it fully. For example, it may seem obvious that “hand outs,” such as unemployment insurance, food stamps, and Medicaid, increase unemployment by reducing the financial pressure on an unemployed person to seek work. On this ground, Casey Mulligan, whom Becker cites, has argued that the hand-outs have prevented poverty from increasing during the current depression, and that this is a bad thing because poverty makes unemployed people search harder for jobs. The other side of this coin, however, is that the hand-outs increase the amount of money that people have and can spend on consumption, and consumption drives production, which in turn drives employment. If there are no jobs to be had, searching for a job has no payoff. Of course there may be methods of increasing consumer incomes that do not involve making work less attractive, such as Keynesian public projects that increase employment directly, or income tax reductions. Those are fiscal measures impeded by the dysfunctional character of our political system, from which the Federal Reserve is largely immune; and so the burden of speeding the economy’s recovery has fallen on the Fed.

QE Doesn't Create Jobs... So Why Is the Fed Targeting Employment With It? - Last week the US Federal Reserve surprised yet again by announcing QE 4: a program through which it would purchase $45 billion of US Treasuries every month. Between this program and the Fed’s QE 3 Program announced in September, the Fed will be monetizing $85 billion worth of assets every month ($40 billion worth of Treasuries and $45 billion worth of Mortgage Backed Securities) ad infinitum. Indeed, the Fed’s new policies are anchored to its goal of getting employment down to 6.5%. This means the Fed will buy these assets non-stop until employment gets down to 6.5%. First and foremost, QE does not create jobs. The UK has announced QE efforts equal to an amount greater than 20% of its GDP and has not seen any meaningful job growth. Similarly, Japan has announced nine rounds of QE for a combined effort equal to 20% of its GDP over the last 20 years and job growth remains dismal there. Based on this, the Fed’s decision to anchor its QE efforts to employment is a bit hard to swallow. Instead, it’s much more likely that the Fed sees something “bad” coming down the pike and is moving preemptively to shore up the system again. Indeed, while most analysts claim the Fed has been printing money day and night, the truth is that the Fed’s balance sheet didn’t budge much at all for most of 2012. Indeed, as late as mid-October the Fed balance sheet was actually $50 billion smaller than it was the year before.

Bernanke – the rebel with a cause - To understand Ben Bernanke, it helps to set aside the ubiquitous pictures of today’s 59-year-old: the controlled beard, the pristine shirts, the worn-down weary look. Instead, search for a snap of the freshly minted graduate who gazes from the pages of the 1975 Harvard yearbook.  Mr Bernanke sports no tie and no blazer. He has a loud checked shirt, long hair and a tremendous, rebellious handlebar moustache. The moustache may be gone, but the US Federal Reserve chairman remains a rebel – and the world is better off for it.  The fact that he is sometimes pilloried only underlines his fortitude.  Mr Bernanke’s first gamble as Fed chairman was to inject $1.5tn into frozen financial markets in late 2008. In comfortable hindsight, this lender of last resort activism looks like a no-brainer: the Fed averted a 1930s-style depression and made a profit to boot. Mr Bernanke’s second gamble was to drive the Fed’s policy rate in effect below zero by buying long-term securities. Again, this prompted uproar: wouldn’t the Fed’s “quantitative easing” result in inflation? Newt Gingrich, the erstwhile Republican presidential hopeful, called Mr Bernanke “the most dangerous, inflationary” Fed chairman in history. " However, Mr Bernanke has been vindicated. The Fed’s measure of core inflation has plodded along quietly at less than 2 per cent. Now Mr Bernanke has launched his third gamble. In laying out the next phase of the Fed’s bond-buying plans, he has shifted from the familiar commitment to buy a specified amount over a specified period. Instead, he has emphasised that the Fed will buy however many bonds may be needed to achieve its objectives. There is no limit to the quantity and no limit to the duration. Quantitative easing is quantitative no more.

Central banking: How durable is the emerging NGDP consensus? - THOSE who want central bankers to focus to changes in nominal incomes (NGDP or NGDI growth) rather than the pace of consumer price increases (CPI or PCE inflation) have made tremendous progress over the past few years, at least when it comes to persuading economists and pundits. Even policymakers seem to be increasingly interested in the idea. In the short term, a nominal income target, coupled with the notion of "catch-up growth," would provide central bankers with much more leeway to engage in monetary stimulus, particularly by affecting people's expectations. (The exact nature of how this works is unclear). In general, the theoretical appeal of a nominal income target is that it would do a better job than an inflation target at shielding the economy from supply shocks.  A central bank that focused on nominal incomes would avoid an excessively tight policy response compared to a central bank that targeted the rate of consumer price inflation. But a central bank with a nominal income target would also have to be tighter than one with an inflation target during a commodity glut or during a period when the world's labour supply increased. Worryingly for the advocates of an NGDP target, this means that the emerging consensus may not be politically durable. People have gotten used to the idea of monetary tightening in response to faster inflation. How would they feel if, in the face of higher output growth but falling inflation, the central bank failed to ease, or even tightened, in order to stick to its NGDP target?

Central banks can phase in nominal GDP targets without damaging the inflation anchor - The time is right for the world’s central banks to reconsider the framework they use in conducting monetary policy. The US Federal Reserve and the ECB are still grappling with sustained economic weakness, despite years of low interest rates. In Japan, Shinzō Abe, the new prime minister from the Liberal Democratic Party (LDP), was elected on the promise of a new, more expansionary monetary policy (Financial Times 2012). In the UK, Mark Carney, the incoming Governor of the Bank of England, is open to new thinking.Monetary policymakers would do well to consider a shift toward targeting nominal GDP; Carney is evidently considering precisely this. They could phase in such a switch in two steps, in such a way as to preserve credibility with respect to inflation. A number of monetary economists pointed out the robustness of nominal GDP targeting after monetarist rules broke down in the 1980s.1 “Robustness” refers to the target’s ability to hold up in the long term under various shocks. The context at that time was the need in advanced countries for an explicit anchor to help bring expected inflation rates down. The status quo regime to achieve this, during the heyday of monetarism, was a money growth rule. Relative to the money growth rule, the advantage of nominal GDP targeting was robustness with respect to velocity shocks in particular.

What have monetary and fiscal policymakers learned from the Great Recession? - Monetary policy took an important step forward last week when the Federal Reserve made it clear that unemployment would receive more weight in its policy decisions, and inflation would be less of a priority. The Fed has not, by any means, abandoned its commitment to price stability. But it is more willing than it has been in the past to remain focused on the unemployment problem even if inflation drifts temporarily above its target value. There is always room for the Fed to do better. I would like, for example, to see even more tolerance for inflation as we try to reduce the unemployment rate.  But the Fed is clearly reassessing its policy procedures in light of the experience of the Great Recession, and making changes to try to improve its current and future policy performance. I wish I could say the same about fiscal policy. In a deep recession, monetary policy alone is not enough to give the economy the best chance at recovery, fiscal policy is also needed. But gridlock in Congress motivated by differing ideologies and obstructionist politics stands in the way an effective response from fiscal policy authorities.

Santelli And Schiff On Bernanke's "Roach Motel Of Monetary Policy" - From the government-induced structural unemployment malaise to the implosion of our entire 'artificial economy', Peter Schiff and Rick Santelli explore the dark side of monetary policy in this brief clip. On the Fed's new policy and potential exit strategy, Schiff notes that "the Fed is constructing goalposts so it never actually hits them; the Fed is never going to tighten." While Santelli tends to agree with Schiff on the eventual collapse of the USD under this never-ending Fed easing scenario, he notes that getting a fix on that USD weakness is hard given everyone is racing to debase. Schiff notes, oil prices, gold prices, food inflation, and real assets all send the signal that Bernanke chooses to ignore and on the topic of 'monetization' which Bernanke seemed so 'put off' by during the press conference last week, Sch-antelli both seemingly (obviously) conclude that the mere mention of an exit at some point in the future by the great and powerful Oz does not preclude the fact that 90% of current Treasury issuance ends up on the Fed's books... leaving the fact that selling any of this "would make 2008 look like a Sunday picnic."

Behind the Numbers: PCE Inflation Update, November 2012 - Dallas Fed - Underlying consumer price inflation, as measured by the Dallas Fed’s trimmed mean PCE inflation rate, continued at a modest clip in November. The trimmed mean inflation rate for November was an annualized 1.3 percent, following an annualized 0.8 percent rate in October. For the six months ending in November, the trimmed mean has averaged an annualized 1.4 percent. This is identical to its average rate over the six months ending in October.The 12-month trimmed mean rate—which is a good rule-of-thumb forecast of headline, or all-items, PCE inflation over the coming 12 months—ticked down to 1.6 percent from 1.7 percent in October. The headline PCE price index, meanwhile, fell at an annualized 2.6 percent rate in November, weighed down by a sharp decline in the price of gasoline (7.3 percent on a monthly basis, or almost 60 percent annualized). Gasoline prices have continued their decline in December, though so far not by enough to produce another negative headline inflation rate. On either a six- or 12-month basis, headline PCE inflation is currently close to trimmed mean PCE inflation. The six-month headline rate for November was an annualized 1.5 percent, unchanged from October. The headline index’s 12-month rate for November was 1.4 percent, down from 1.7 percent a month earlier.

Trimmed Mean PCE Inflation Rate - Dallas Fed - The trimmed mean PCE inflation rate for November was an annualized 1.3 percent. According to the BEA, the overall PCE inflation rate for November was -2.6 percent, annualized, while the inflation rate for PCE excluding food and energy was 0.5 percent. The tables below present data on the trimmed mean PCE inflation rate and, for comparison, the overall PCE inflation and the inflation rate for PCE excluding food and energy. The tables give annualized one-month, six-month and 12-month inflation rates. Components included and excluded from this month's Trimmed Mean The following chart plots the evolution of the distribution of price increases in the monthly component data over the past year. The chart shows the percentage of components each month, weighted by their shares in total spending, for which prices grew between 0 and 2 percent (at an annual rate); between 2 and 3 percent; between 3 and 5 percent; between 5 and 10 percent; and more than 10 percent

Personal Consumption Expenditures Price Index Update:  The December Personal Income and Outlays report for November 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 1.42% is a decrease from last month's adjusted 1.72%. The Core PCE index of 1.47% is decrease from the previous month's adjusted 1.57%. On the chart below I've highlighted 2 to 2.5 percent range. Two percent has generally been understood to be the Fed's target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place. I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But PCE is a key measure of inflation for the Federal Reserve, and the price increase in oil and gasoline, although now well off their interim highs, puts consumer behavior in the spotlight.  For a long-term perspective, here are the same two metrics spanning five decades.

Fed May Get Its Hope for More Inflation in 2013 - The policymakers at the Federal Reserve may feel like they’re herding cats. Politicians are complicating the economic outlook with their fiscal-cliff shenanigans. And monitoring the labor markets is made more difficult because people keep dropping out of the workforce and thus skew the official unemployment rate. But it looks as if inflation may follow the Fed’s expectations for 2013. According to the latest projections by Fed board members and regional presidents, core consumer inflation–as defined by yearly increase in the personal consumption expenditure price index excluding food and energy–is projected to run between 1.6% and 1.9% next year.

The safe asset shortage - EVERYONE needs to save. People need to be able to cover unexpected expenses and income reductions, to say nothing of retirement. To accomplish this, we buy equities and bonds, hoard gold coins and physical currency, open bank accounts, accumulate real estate, purchase insurance coverage, and even stock up on canned food. All of these savings vehicles help us hedge out different risk exposures we face in our daily lives. However, relative to what people want right now, there may not be enough of these “safe assets” available. This would help explain the negative real yields on TIPS and inflation-indexed government bonds issued by other countries. Why would there be a relative shortage of safe assets? One reason is that people are more aware of downside risk than in the past, thanks to the collapse in middle class wealth and the massive increase in joblessness; there is more demand for safe assets. This is actually healthy and overdue. In fact, there is good reason to think that the process still has a long way to go.* The safe asset shortage can also be attributed to the fact that many assets previously thought of as “safe” are no longer seen that way, whether they are Italian government bonds or subprime mortgage securities. Thus, the supply of safe assets declined even as the demand for them soared. Izabella Kaminsky has written many thoughtful posts on this subject in the context of the collateralised lending markets. I was reminded of this because of a conversation I had over Twitter with David Beckworth, an economist who writes the Macro and Other Market Musings blog. We agreed that there are too few safe assets relative to the demand. But where I thought the government ought to issue more Treasury bonds to satiate investors, he thought that the solution was to induce the private sector to “create” more safe assets. I doubted whether that is possible.

When it Comes to the Fed and Jobs, Robert Samuelson Is Worried About Inflation and Martians - Dean Baker - Last week the Fed announced that it would continue to maintain its zero interest rate policy until the unemployment rate fell below 6.5 percent. While the Fed has always targeted low unemployment in addition to low inflation as part of its legal mandate, this was the first time it had explicitly tied its monetary policy to an unemployment target instead of just an inflation target. This decision has Robert Samuelson very worried. Samuelson warned that the last time the Fed tried to target both inflation and unemployment was in the 1970s and complains that this ended disastrously. Both parts of Samuelson’s claim are wrong. In fact, in the decades since the 1970s the Fed has maintained a commitment to lowering unemployment in addition to inflation, even if its priority was always on the latter. It would be very difficult to explain the decision to lower interest rates in the 1995 and again in the recession in 2001 except by a concern over excessive unemployment. This concern is certainly reflected in the transcripts of the meetings from these years. The only difference between last week’s announcement and the Fed’s past actions was the decision to explicitly set an unemployment target for its monetary policy. In the past, analysts would have found it necessary to review the minutes and public statements by members of the Fed’s Open Market Committee to infer a target. The notion that inflation just exploded out of the blue in the 1970s is also inaccurate, as an examination of price movements of that decade shows.

Do We Have Another Financial Bubble On Our Hands? Or Three? - More than two years ago, economists started talking about a bubble in Treasury bonds that would eventually burst, just as the bubble and the housing bubble had. If that happens, the prices of long-term bonds could fall by 10% to 20%. So far, that bond bust hasn’t materialized. But one of the characteristics of bubbles is that they often go on longer than anyone expects. What is most troubling now is that the problem is spreading beyond Treasuries. Excessive borrowing and ultra-low interest rates are now distorting all the debt markets. As a result, there is no longer just one bubble – there are many. The details vary, but debt bubbles have two things in common. First, there is a big increase in borrowing often promoted by government policies and sometimes accompanied by a decline in lending standards. Second, there is a huge increase in the amount of money available that keeps interest rates low. Sometimes the cash comes from the government and sometimes it is provided by the banking sector, as it was during the housing bubble. The current debt market bubbles are largely the result of Federal Reserve Chairman Ben Bernanke’s decision to pump huge amounts of money into the banking system.

Economists Forecasting Moderate 2012 Growth - Business economists believe the country will see modest growth in 2013 with strength coming from a further rebound in housing which will help offset weakness in business investment. In its latest survey of top forecasters, the National Association for Business Economics says it is looking for the economy to grow in 2013 by 2.1 percent after 2.2 percent growth in 2012. That would continue the same tepid growth the country has seen since the Great Recession ended in mid-2009. Growth at that pace is not strong enough to make a significant improvement in unemployment. The NABE economists believe unemployment will average 7.7 percent for all of next year, right at the level it reached in November. The 48 NABE economists on the survey panel had essentially the same outlook as their previous forecast in October. While they have modest expectations for 2013, they do see growth slowly improving as the year progresses.

Economic Forecast Is Sunnier, but Washington Casts a Big Shadow - Economists see a number of sources of underlying strength in the economy, but for the growth to gain traction, they say, political leaders need to avoid the broad tax increases and spending cuts now being debated. The nascent housing rebound, the natural gas boom, record profit margins, a friendlier credit market for small businesses, along with pent-up demand for autos and other big purchases, could in combination unleash growth and hiring that the economy needs. “Underneath all the shenanigans in Washington, there’s a lot of strengthening,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.... Estimates for the last quarter of 2012 are hovering around an unusually weak 1 percent annualized rate. That dismal pace is driven partly by drags from Europe’s recession and China’s slowdown; partly by companies readjusting after potentially overstocking their back-room shelves in the third quarter; and largely by worries about the so-called fiscal cliff of spending cuts and tax increases set for early 2013.

The Most Important Charts Of 2012 - There's no better way to understand the world than with charts. Business Insider reached out to its favorite analysts, economists, and traders to get their most important charts of 2012. The responses we received vary dramatically, and the insights are revealing. All of the big stories of the year are here: the rally in Treasuries, the year in stocks, the euro crisis, the changing nature of global energy, and the era of the central banker. We'd like to express our huge thanks to everyone who contributed to this feature. Click here to see the charts>

The Economy in 2012, in 34 Charts - Okay, so the fiscal cliff isn't exactly the end of the world. It's just a particularly premature dose of austerity, which is bad enough. But if we've learned anything the past two years, it's that this Congress will find a way to muddle through after it's exhausted all other options, including voluntary default. And that's really been the theme of 2012. Whether it was slow, steady growth in the U.S. (but no recession), a slow, steady recession in Europe (but no implosion), or a slow, steady slowdown in China (but no hard landing), 2012 was the year of muddling through. And the year of the central banker. And the U.S. election. We figured we'd sum it up the best way we know -- in graphs. We asked some of our favorite professors and writers to chip in, and here are their 34 favorite economic charts of 2012. Ross Perot has nothing on us. [All Atlantic commentary is in italics. The contributors' descriptions come under each chart.]

Top 10 Economic Charts of 2012 - by WSJ Staff - As the year draws to a close, we dug up our 10 favorite economic charts that ran in the Wall Street Journal this year.

U.S. Economy Grew 3.1% Last Quarter, More Than Forecast - The U.S. economy grew at a 3.1 percent annual rate in the third quarter, more than previously reported, reflecting the first gain in state and local government spending in three years, more consumer purchases and a smaller trade gap.  The revised gross domestic product reading exceeded the highest projection in a Bloomberg survey and compared with a previously estimated 2.7 percent gain, according to Commerce Department figures released today in Washington. The median estimate of economists called for a 2.8 percent advance.  The world’s largest economy will be hard-pressed to maintain that pace of growth this quarter as global demand cools and companies limit spending and hiring ahead of looming tax increases and spending cuts. While a stronger housing market will provide some cushion, the Federal Reserve is pursuing record stimulus aimed at driving bigger gains for the expansion.

GDP Q3 Third Estimate at 3.1%, Higher Than Expectations - The Third Estimate for Q3 GDP came in at 3.1 percent, higher than expectations. The consensus I generally feature was for GDP to remain unchanged from the second estimate at 2.7 percent. 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 3.1 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "third" 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 "second" estimate issued last month. In the second estimate, the increase in real GDP was 2.7 percent The increase in real GDP in the third quarter primarily reflected positive contributions from PCE, private inventory investment, federal government spending, residential fixed investment, and exports that were partly offset by a negative contribution from nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.  The acceleration in real GDP in the third quarter primarily reflected upturns in private inventory investment and in federal government spending, a downturn in imports, an upturn in state and local government spending, and an acceleration in residential fixed investment that were partly offset by a downturn in nonresidential fixed investment and a deceleration in exports. [Full ReleaseHere is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. 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).

GDP Revised Up to 3.1% for Q3 2012 - Q3 2012 real GDP shows 3.1% annualized growth, revised from 2.7% in the second estimate. Consumer spending increased more than previously estimated, exports were greater and imports were much less. Q2 GDP was 1.25% in actuality, 1.3% is a rounded figure.  A quarterly GDP of 3.1%, is above treading water economic growth. Consumer spending was revised upward. Government spending alone attributed for 0.75 percentage points of Q3's 3.1% GDP. The change in private inventories alone contributed 0.73 percentage points to Q3 GDP. The drought negatively impacted economic growth as farm inventories reduced GDP by –0.38 percentage points.  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.  The below table summarizes the revisions to Q3 GDP components from this revision and the second. These GDP component revisions are from a percentage point contribution to Q3 GDP growth, not against themselves. Consumer spending, C in our GDP equation, showed slightly negative to flat growth in comparison to the 2nd quarter. Durable goods consumer spending contributed a 0.66 percentage points to personal consumption expenditures. Motor vehicles & parts alone remained at 0.25 percentage points. In nondurable goods spending, adjusted for prices gasoline personal consumption subtracted –0.08 percentage points from Q3 real GDP.  Imports and exports, M & X are greatly impacted by real values and adjustments for prices from overseas and they were revised. Import growth in real dollars slowed further, now adding 0.11 percentage points to GDP growth while export growth increased significantly between revisions. Exports still are much less of a contribution to GDP than in Q2. The below graph shows real imports vs. exports in billions. The break down of the GDP percentage change to point contributions gives a clear picture on how much the trade deficit stunts U.S. economic growth.

Final Q3 GDP Prints 3.1% - Government, Inventories Account For Half; Fixed Investment Negligible - Moments ago the BEA released the final Q3 GDP number, which printed at 3.1%, up from the second GDP guesstimate 2.7% reported last month, the first 3%+ print since Q4 2011 when, just like today, everything was coming up roses and when growth was on the horizon. Sadly, just like then, reading between the lines reveals more of the same disappointing components, with nearly half of the entire 3.1% annualized growth being derived from Government (0.75) and Inventories (0.73%), combined adding 1.48% (more than in the second revision) of the 3.1% print. Annualized Personal Consumption as a portion of the final number rose modestly from 0.99% to 1.12%, but still is well below the 1.42% in the first Q3 GDP estimate. It is this number that will be closely watched once the preliminary Q4 GDP number is released in a one month. Recall that Q4 GDP is currently tracking between 0.5% and 1.5% depending who you ask. Finally, the most important real growth factor for the US economy - fixed investment - remained stubbornly flat, at a mere 0.12%, virtually unchanged from the first revision's 0.10%. In other words, in Q3 companies stubbornly refused to invest in capital investment i.e. CapEx, and will continue to do so as long as the Fed makes "investing" in dividends and buybacks a more rewarding option. Expect the same pattern to continue in Q4 only this time the Sandy and Fiscal Cliff excuses will be espoused by all the economic apologists.

Q3 GDP Revised UP, Some Troubling Areas Remain - The BEA released the third estimate of GDP and its components, showing real GDP increasing 3.1% for the third quarter–the second estimate came in at 2.7% and the advance estimate at 2.0%. The increase was higher than consensus expectations. As we stated in an earlier post though, you may want to keep the celebration in check. Although final sales perked up, 2.4% in Q3 compared to 1.7% in Q2, and residential investment increased 13.5%, nonresidential structures investment was flat, 0%, and equipment and software investment was down -2.6%. In fact, the overall trend in nonresidential investment over the last year is a significant cause for concern. It also coincides with the slowdown in employment growth. Federal Government spending was revised up to 3.9%,  from a previous  3.5% in the second estimate. The major part of the increase was driven by a large 9.5% increase in Federal Government spending and a big part of that was defense spending: National defense spending rose 12.9%. Overall, the increased Federal spending accounted for .75 percentage points of the 3.1% growth in real GDP, and Personal Consumption expenditures accounted for about 1/3 of the increase, 1.12 percentage points .  Note that the government spending increase was the first increase in 8 quarters. The last time government spending fell for 8 consecutive quarters was the unwinding of the Korean War, from 1953:Q3 to 1955:Q2.

GDP Rises to 3.1% in Final Q3 Estimate, But the Main Drivers Won’t Last - The economy grew at a faster rate than expected in the third quarter, according to the final revision on GDP released today. GDP increased at a relatively healthy 3.1% clip in Q3, a step up from the 1.3% increase in the final revision in Q2. Both figures are annualized. The Bureau of Economic Analysis explains how they arrived at this figure. The acceleration in real GDP in the third quarter primarily reflected upturns in private inventory investment and in federal government spending, a downturn in imports, an upturn in state and local government spending, and an acceleration in residential fixed investment that were partly offset by a downturn in nonresidential fixed investment and a deceleration in exports. It’s that uptick in both private inventory and government spending that actually troubles people. Because those are two areas where what goes up must come down. Government spending, which is set on an annual basis, seemed to cluster in Q3, but overall it has contributed negatively to growth since mid-2010. It’s not going to stay elevated like that even for another quarter; budget authorization wouldn’t allow it. Similarly, building up private inventory in one quarter will lead to stagnancy in the next, simply because businesses won’t restock until their inventory gets bought down a bit.

Visualizing GDP: Q3 Third Estimate Boost from Net Exports - 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 changes in contribution to today's 3.1 percent Third Estimate from the 2.7 percent Second Estimate were primarily seen in the general increase in Net Exports (Exports minus Imports) with assistance from Personal Consumption Expenditures in services and Government Consumption Expenditures, specifically at the state and local level. 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 1.12 of the 3.1 real GDP. This is an increase from the 0.99 PCE of the 2.7 GDP in the Second Estimate for Q3.

Imports and Real GDP Growth -- The following statement recently caught my interest: Spoiler alert: We could already be in a recession. This is not the conventional wisdom. The common narrative goes some like talks look ugly, but in the end things will get resolved either before Jan. 1 or later in the month and the economy gets a new lease on life. See MarketWatch’s fiscal-cliff page. The recession signal is being sent from the latest U.S. current account deficit report released earlier Tuesday. According to the data, imports are now down two months in a row having fallen 8.4% in the third quarter and 2% in the prior quarter.  This is a rare event and has definitely raises the recessionary “red flag,” according to Robert Brusca, chief economist at FAO Economics. When the economy weakens, imports weaken rather quickly, Brusca notes. The last time imports declined for two quarters was in 2009, the end of a four-quarter slide in imports during the Great Recession. Fewer imports is a sign that domestic demand is faltering. A recession is “a real risk,” Brusca said. I don't think we're currently in a recession, so I wanted to run the numbers on this statement.  What I found was really interesting.  Consider the following scatter plots.

Who Needs Global Trade Anyway: FedEx Shipments Imply Subzero GDP - Of course, for those still curious about such old school metrics as actual economic performance, untainted by Fed intervention (such as $85 billion in offsetting flow per month), here is one chart, showing the correlation between total FedEx package shipments and Real GDP. And no, sorry, you can't blame this one on Sandy, on the Cliff, or any of the other spin talking points. From Bloomberg: "The level of FedEx package shipments began to slump as early as the first quarter of 2012 and now appears to be signaling weaker economic conditions for 2013. In late March, FedEx made mention of cooling conditions, with CFO Alan Graf noting the economy was not as strong as  the company hoped it would be a year earlier. According to Fred Smith, FedEx CEO, Fundamentally, what’s happening is that exports around the world have contracted and the policy choices in Europe and the United States and China are having an effect on global trade."

GE's Jeff Immelt: "We've Definitely Seen A Slowdown In The Fourth Quarter" - In what is likely the fist major under the radar profit warning of the current quarter, GE chief, and Obama Job Tzar, Jeff Immelt warned during GE's annual outlook meeting held earlier in Manhattan that the "economic uncertainty" in the current quarter has resulted in an investment "pause" that has resulted in a slowdown of corporate sales. Put into numbers, GE is now calling for about 8% growth this year, from a 10% forecast barely two months ago. Read: Q4 sales, and thus earnings, are set to be a major disappointment. And while no superstorms were blamed in this particular sales warning, the fiscal cliff did feature prominently. As the WSJ reports, "[Immelt] said ongoing jitters over the so-called "fiscal cliff" of tax increases and government spending cuts contributed to the trend." Then again, it is just as likely that the tapped out US consumer, whose savings rate is tumbling, whose real disposable income is now declining on a year over year basis, and whose real wage growth is decidedly negative, would be tapped out even if Obama and Boehner were not playing constant cat and mouse. But whatever the reason for the slowdown may be, one thing is certain: "Clearly, there has been an investment pause in certain industries," Mr. Immelt said. "We've definitely seen a slowdown in the fourth quarter."

Chicago Fed: Economic Activity increased in November - According to the Chicago Fed's National Activity Index, November economic activity increased from the previous month, now at 0.10. However, this indicator has been negative (meaning below-trend growth) for seven of the past nine months, and the all-important 3-month moving average has been negative for all nine of those months and 22 of the last 28 months. Here are the opening paragraphs from the report: Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.10 in November from –0.64 in October. Two of the four broad categories of indicators that make up the index increased from October, but only the production and income category made a positive contribution to the index in November.  The index's three-month moving average, CFNAI-MA3, increased from –0.59 in October to –0.20 in November—its ninth consecutive reading below zero. November's CFNAI-MA3 sug- gests 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.  The CFNAI Diffusion Index also moved up in November, increasing to –0.15 from –0.31 in October. Thirty-nine of the 85 individual indicators made positive contributions to the CFNAI in November, while 46 made negative contributions. Forty-four indicators improved from October to November, while 41 indicators deteriorated. Of the indicators that improved, 13 made negative contributions. [Download PDF News Release]  Elsewhere in the PDF report is a key mention of the positive effect from Sandy recovery.

Chicago Fed National Activity Index Pulls Back From The Brink - -The Chicago Fed National Activity Index (CFNAI) posted a sharp rise in November, an indication that "economic activity increased" last month, the Chicago Federal Reserve reports. CFNAI's three-month moving average moved higher as well, rising to -0.20 last month. That's close to The Capital Spectator's average econometric forecast for CFNAI of -0.26, which was published yesterday. A reading above -0.70 for CFNAI's three-month average suggests that the economy is growing, which is also the message in today's news on personal income and spending for November. "Two of the four broad categories of indicators that make up the index increased from October, but only the production and income category made a positive contribution to the index in November," the Chicago Fed notes. Nonetheless, today's rebound is significant because there was no margin for error left after October's update, which left the three-month average of the index just above the recession-level mark of -0.70. The November estimate, by contrast, moves the index well above that danger zone.

Counterparties: 2013 — The year of meh - The NYT and the WSJ have officially weighed in on the US economy in 2013, and the sound they’re making is something of a collective meh. The NYT says things will be “pretty good next year — assuming Washington does its part”. The WSJ is barely more positive, saying next year will be a “more normal, though hardly robust, period of growth”. (Both pieces focus on economic growth, rather than the much more pressing problem of unemployment.) Economists think that growth above 3% next year is as equally likely as a recession — they’re both given 24% odds, according to a WSJ survey. In a separate survey by NABE, economists predict GDP will grow by just 2.1% in 2013, after 2.2% growth in 2012. NABE respondents predict “little improvement” in consumption, and slowing corporate profit growth, and slowing spending on equipment and software. The 2013 outlook isn’t pretty, but it’s not terribly frightening either — unless you’re one of the 12 million officially unemployed Americans. Hale Stewart points to some bright spots, not the least of which is that consumer debt is nearing a 30-year low. Consumer confidence and auto sales are solidly back in pre-recession territory, and there’s more and more evidence of a housing market rebound. Bill McBride, for his part, is on the “modest” growth 2013 team, but he identifies two big upsides for next year: residential investment is rising, suggesting construction employment will soon follow, and state and local governments have largely stopped slashing jobs.

What Will Benefit from Global Recession? The U.S. Dollar - Many times what “should” happen does not happen. For example, global stock markets “should” decline as the global economy free-falls into recession, as global recession is not exactly an ideal scenario for rising corporate sales and profits or demand for commodities. Yet global markets are by and large rising significantly. A similar tug-of-war is playing out between those who feel the U.S. dollar “should” decline in the years ahead and those who see the dollar strengthening significantly. Those who feel the dollar should decline look at the Federal Reserve’s money-creation operations (buying $85 billion a month of mortgages and Treasury bonds) and see money expansion that devalues the existing base of dollars. Thus they feel the dollar “should” decline, and any rise in the dollar versus other currencies, oil and gold are temporary. Those on the other side are dollar bulls, of which I am one; I have consistently been presenting the case for a stronger dollar since early 2011. We see other dynamics in play that “should” push the dollar much, much higher. The technical case is encapsulated in this chart, courtesy of our Chartist Friend

Spending Probably Rose in U.S., Home Sales Climbed - A jump in auto sales last month is among the evidence that the world’s largest economy is rebounding from the damage caused by superstorm Sandy. Improving property values and falling fuel costs are helping brace consumers against the more than $600 billion in tax increases and government spending cuts that will take effect in January without action from Congress.  “There is a lot of nervousness about the fiscal cliff, so I think how that gets resolved will be important to what happens next,” Retail sales rose 0.3 percent last month after a 0.3 percent decrease in October, the Commerce Department reported last week. Ten of 13 major categories showed gains, led by a 1.4 percent increase at auto dealers, a 2.5 percent jump at electronics outlets and a 0.9 percent pickup at clothing stores.  Cars and light trucks sold in November at a 15.5 million annual rate, the fastest pace since February 2008 and up from 14.2 million in October when Sandy kept East Coast shoppers away during dealers’ busiest time of the month, data from Ward’s Automotive Group show.

Avoiding Fiscal Cliff Won’t Spur Growth - A majority of economists surveyed said lawmakers will avoid across-the-board tax hikes and steep government spending cuts but say averting the fiscal cliff will do little to propel stronger economic growth immediately. More than 90% of economists polled said Congress won’t raise tax rates on all Americans in January and a similar percentage say budget slashing will be deferred, according to National Association for Business Economics survey of 48 professional forecasters released Monday. But avoiding what’s largely seen as a threat to the economy is unlikely to spark more robust growth in the next year. The economists predict the gross domestic product will increase by 2.1% in 2013, a tick below the 2.2% advance they anticipate for 2012.

Time for China to rethink position in US treasuries - China increased its holdings of US government bonds to $1.16 trillion in October, up $7.9 billion from the previous month, once again making the country the largest foreign creditor of the US, according to data released Monday by the US Department of Treasury. But as the US faces a ballooning deficit, sluggish economic growth and a looming "fiscal cliff", now is a good time for China to be cautious about how much it is spending on US debt. The US federal government was facing a deficit of $120 billion at the end of October, above the $114 billion predicted by economists. Meanwhile, the US public debt has tripled over the last decade, hitting $16 trillion by the end of September, according to US treasury data. What's worse, if the US plunges off the rapidly-approaching "fiscal cliff", the US government will have to initiate a series of tax increases and spending cuts which will drag down the anemic US economy and diminish the country's repayment abilities.

Vital Signs Chart: Federal Government Spending - Spending by the federal government is boosting the country’s economic growth. U.S. government expenditures and investment rose at a 9.5% seasonally adjusted annual rate during the third quarter, following a year of declines. However, cuts in federal spending that are slated to kick in if the U.S. goes over the “fiscal cliff” could weigh on overall economic growth.

Charting US Debt And Deficit Since Inception -- In the recent aftermath of the US just concluding its fourth consecutive fiscal year with a $1 trillion+ deficit, we have been flooded with requests to show how the current fiscal situation stacks up in a big picture context. Very big picture context. For all those requests, we present the following chart showing total US Federal debt/GDP as well as Deficit/(Surplus)/GDP since inception, or in this case as close as feasible, or 1792, which appears to be the first recorded year of historical fiscal data. We can see why readers have been so eager to see the "real big picture" - the chart is nothing short of stunning.

Further Notes on One Trillion Dollars - Paul Krugman  - Yesterday I noted that the preoccupation with the size of the current deficit — which, as everyone reminds us, is ONE TRILLION DOLLARS — is completely misguided. Since then I’ve done some more arithmetic, which solidifies the point. So, in fiscal 2012 (which ended September 30) we did in fact have a federal deficit of $1.1 trillion (pdf). The question is, however, whether this deficit represents, as everyone claims, a fundamental mismatch between what we want and what we’re willing to pay for — or whether it’s mainly just a reflection of the depressed state of the economy. For starters, we need to be aware that we don’t need a balanced budget to have a stable fiscal situation; all we need is for debt to grow no faster than GDP. At the beginning of fiscal 2012, federal debt in the hands of the public was $10 trillion. Meanwhile, most estimates of long-run growth and inflation put them at a bit more than 2 and 2 respectively; so we can reasonably say that nominal GDP growth can be expected to be more than 4 percent per year. If debt grew at 4 percent, it would grow by $400 billion. So the deficit should be scaled down by that much.That still leaves $700 billion. Where’s that coming from? OK, revenues were $2.45 trillion, which was 15.7 percent of GDP, at $15.5 trillion. The CBO estimates, however, that potential GDP — what the economy would have produced at full employment — was $16.5 trillion over the same period. And if the economy had been at potential and revenue had been a historically normal 18 percent of GDP, revenue would have been more than $500 billion more than it was; even if revenue had been only 17.5 percent, it would have been almost $450 billion more than it was.

That Terrible Trillion, by Paul Krugman - I find myself in a lot of discussions about U.S. fiscal policy, and the budget deficit in particular. And there’s one thing I can count on…At some point someone will announce, in dire tones, that we have a ONE TRILLION DOLLAR deficit.  No, I don’t think the people making this pronouncement realize that they sound just like Dr. Evil in the Austin Powers movies.  Anyway, we do indeed have a ONE TRILLION DOLLAR deficit,... actually $1.089 trillion. ... What the Dr. Evil types think, and want you to think, is that the big current deficit is a sign that ... a debt crisis is just around the corner, although they’ve been predicting that for years and it keeps not happening. ... But more often they use the deficit to argue that we can’t afford ... programs like Social Security, Medicare and Medicaid. So it’s important to understand that this is completely wrong. ... So, let’s talk about the numbers. The first thing we need to ask is what a sustainable budget would look like. The answer is that in a growing economy, budgets don’t have to be balanced to be sustainable. ... Right now, given reasonable estimates of likely future growth and inflation, we would have a stable or declining ratio of debt to G.D.P. even if we had a $400 billion deficit. You ... should take $400 billion off the table right away.  That still leaves $600 billion or so. What’s that about? It’s the depressed economy — full stop.

Assimilated by the Peterson Borg - Paul Krugman - Oh, dear. This is embarrassing. Yet another Peterson deficit-scold front group has emerged, running a full-page ad in the Times. This time a bunch of national-security types, who should know better — plus Paul Volcker, who really should know better — have signed on. It’s the usual stuff: demanding that our leaders put together a fiscal framework that results in substantial deficit reduction over the next 10 years and structural changes to our fiscal policies that eventually balance the budget over the long term The language on taxes seems a bit more open to higher rates than in the past, and they actually call for defense spending cuts. But what makes the whole thing absurd is that they want all of this as part of “the resolution of the fiscal cliff by the end of the year”. That is, in the next two weeks. Look, we aren’t going to get a Grand Bargain this month, or for that matter in the next couple of years; the GOP is still in total denial, insisting that revenue come from closing loopholes they won’t name and that there be big cuts in spending they won’t identify. The only way we could even get anything pretending to be a Grand Bargain would be for Obama to surrender completely, as he almost did in 2011; and a bargain like that wouldn’t even deliver deficit reduction, because you know that Republicans would end up reneging on the revenue parts. So this is ridiculous — and the fact that all these people don’t realize that is in itself evidence of the bubble in which Very Serious People still live.

The True Burden of Government - Famously, Milton Friedman always said that the true burden of government is what it spends, not what it taxes. While correct up to a point, his statement has unfortunately led many conservatives to believe that the budget deficit is of no economic importance. That is to say, they believe there is nothing to be gained by reducing the deficit unless it results from lower spending, because that and that alone reduces the burden of government, and reducing the burden of government is the only thing that will raise growth. However, as I explained last week, there is a cost from deficits in the form of interest on the debt. If government revenues are too low to finance the level of spending that voters insist upon, spending automatically rises. Eventually, interest on the debt can only be paid with higher taxes, even if all spending except for interest is abolished. Put another way, the amount of future spending cuts or tax increases necessary to stabilize government finances will always have to be larger when spending increases or tax cuts are deficit-financed. That is because interest increases the size of the future fiscal adjustment. Compounding means that the longer an adjustment is put off, the larger it must eventually be. And of course, debt default is simply a form of tax that falls disproportionately on bondholders; inflation is a tax paid by everyone.

Heritage at the Cutting Edge - -- The Heritage Foundation's blog criticizes my recent post thusly: [Chinn] ignores the fact that Heritage Foundation economists, like most academic macroeconomists, have put away the old Keynesian model in favor of modern alternatives. I thought it useful to see some of this advanced analysis in action at Heritage. From Heritage Foundation's Ron Utt --  In the real world, the additional federal borrowing or taxing needed to provide this additional $1 billion means that $1 billion less is spent or invested elsewhere and that the jobs and products previously employed by that $1 billion thus disappear. Regardless of how the federal government raised the additional $1 billion, it would shift resources from one part of the economy to another, in this case to road building. The only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven... This sounds at worst a lot like S ≡ I [or (T-G) + S ≡ I ] to me, and at best the Classical model I outlined in my post. Certainly doesn't sound like an intertemporal model.  The critique continues:

Congress' Money Vault - The Heritage Foundation (quoting Menzie Chinn who is himself quoting Heritage): Spending-stimulus advocates claim that Congress can “inject” new money into the economy, increasing demand and therefore production. This raises the obvious question: From where does the government acquire the money it pumps into the economy? Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another. So obviously I love, love, love this. Because – of course – the vault thing is meant to be a sarcastic figuration demonstrating how silly stimulus-spending advocates are being. Yet, it turns out there is almost literally, a vault full of money waiting to be distributed. To be specific it is excess reserve accounts at the Federal Reserve, which in the modern world are actually electronic. But, these are the literal decedents of vault cash and can be exchanged for vault cash on demand.

To solve our debt problems, let’s sell Alaska - The prospect of once again hitting the federal debt ceiling has provoked the ritual round of hand-wringing about the intractable nature of this $16 trillion conundrum. But there is a simple, elegant option that involves no tax increases, no spending cuts and just a bit of imagination. Sell Alaska. That’s right. Put the entire state — from Juneau to Deadhorse, from the Bering Strait to the Beaufort Sea — on the auction block. Absurd? No more absurd than the spectacle taking place right now as we skid closer to the “fiscal cliff.” Selling real estate at top dollar is all about timing, and now’s a great time to unload the Klondike state. The federal government, which owns 69 percent of Alaska, could cash in on the vast, resource-rich state at a time when oil prices are high and wild salmon is flying off the shelves at Whole Foods. Selling Alaska could fetch at least $2.5 trillion and maybe twice that amount, enough to lop off a huge chunk of the national debt and perhaps as much money as President Obama and House Speaker John Boehner hope to save or raise over the next decade.

Economists on the Ineffectiveness of Fiscal Policy; Sh@t Is All F@#^ Up and Bullsh@t Weblogging »  Four years ago there were quite a number of economists of reputation and thought to be of note who stridently and aggressively argued that the increases in federal spending in the Recovery Act would not boost employment and production: consider Gary Becker of the University of Chicago, Casey Mulligan of the University of Chicago, David K. Levine of Washington University in St. Louis, John Cochrane of the University of Chicago, Robert Lucas of the University of Chicago, Edward Prescott of Arizona State University, Eugene Fama of the University of Chicago, Luigi Zingales of the University of Chicago, Michele Boldrin of Washington University in St. Louis, and a host of others. What is sauce for the goose is sauce for the gander. If extra federal spending and reduced tax collections in the Recovery Act could not boost production and employment, the reduced federal spending and increased tax collections from going over the fiscal cliff cannot reduce production and employment and does not risk sending the American economy into renewed recession.Yet not a one--not a single one--of the economists who were so strident in their condemnations of the ineffectiveness of the Recovery Act is out there now saying that the fiscal cliff is not of concern. None of them. Zero. Nada. Shunya. Sifr.

Why conservatives shouldn't fear the fiscal cliff - I have a new article up at the Huffington Post. Basic idea: Conservatives tend to believe in the power of forward-looking expectations. That will tend to reduce the impact of the fiscal cliff - yes, even the distortionary part - because if people are forward-looking, they will have been expecting taxes to go up ever since Reagan raised deficits in the 80s, and this will dramatically reduce the impact of the cliff. Excerpt: [A]ccording to a central tenet of conservative economics, the fiscal cliff is not going to be a big deal. I'm talking about the principle known as "Ricardian equivalence."...  Ricardian equivalence has become a pillar of conservative thinking about economic policy. When President Obama was preparing the 2009 "stimulus" bill, a number of economists -- including Robert Barro himself -- took to the editorial pages to vigorously protest. Deficit spending, they argued, couldn't boost the economy, because people would expect future taxes to pay for today's spending, and would cut back accordingly, exactly canceling out the "stimulus."  By the same logic, conservatives shouldn't be worrying about the fiscal cliff. Yes, taxes will go up if we go over the cliff. But according to Ricardian equivalence, people have known all along that this would have to happen at some point, and they have been planning accordingly...

‘Fix the Debt’ is really ‘Protect Defense Contractors’-  Who really loves the idea of sticking it to seniors and poor people in the fiscal cliff curb negotiations? Well, it's of course our old friends Simpson and Bowles and their great big corporate lobbying machine Fix the Debt.  You ever wonder why they have it in for the olds and the poors? Well, take a look at this analysis by Public Accountability Initiative.

  • 38 Fix the Debt leaders have ties to 43 companies with defense contracts totaling $43.4 billion in 2012. Fix the Debt leaders profiting from defense spending include the group’s co-chairs, steering committee members, and CEO council members; they have ties to these companies as board members, executives and CEOs, and lobbyists.
  • Boeing (with $25.1 billion in defense contracts) and Northrop Grumman (with $8.5 billion) lead the pack. Boeing CEO W. James McNerney, Jr. is on Fix the Debt’s CEO Council, and Northrop Grumman board member Vic Fazio is on Fix the Debt’s steering committee.
  • Four other Fix the Debt-linked companies have more than $1 billion in 2012 defense contracts: GE ($2.1 billion), Textron ($2 billion), Honeywell ($1.5 billion), and World Fuel Services ($1.2 billion).
  • The 38 Fix the Debt leaders with ties to defense contractors drew at least $401 million in compensation from the 43 companies in 2011—an average of $10.6 million each.[...]

In case you were wondering, no, Fix the Debt is not advocating any defense cuts as a means of reducing the debt and deficit. But their "core principles" include Social Security, Medicare and Medicaid reforms. Go figure.

The Corporations versus the American People Battleground is the Fiscal Cliff - We have lobbyists controlling the fiscal cliff debate and the messaging: By posing as populists hostile to “government social engineering,” the Right succeeded in duping large numbers of middle-class Americans into seeing their own interests – and their “freedom” – as in line with corporate titans.Corporations are literally posing as grassroots activists with media appearances, twitter accounts, social media, major articles and dedicated websites, all in an effort to hoodwink the American people into signing onto having their social security cut along with their health benefits. Pundits and Lobbyists all make huge riches ranting and prattling on how someone is stealing food stamps or how Grandma should have her social security benefits cut and denied health care. Corporate controlled financial press puts biased choices for their 1% audience. Those still ethical and objective cannot type fast enough to confront all of the lies on the fiscal cliff. We are being barraged with corporate money funded digital bitstream lies on an minute by minute basis. Everyday we hear of controversy where there is none. Choices which are not. Take for example the never ending attack on social security. Congress, or should we say the corporations who control them, want to reduce your benefits. Even the name, entitlements tries to imply social security and Medicare are benefits you did not earn, when in fact you did. Let's be clear, there is no crisis in social security. No, the American people do not have to suffer.

Post Confuses “Cliff” and Deficit Reduction - It's getting harder and harder to figure out what the Washington Post wants us to be worried about as the budget standoff approaches some sort of resolution. A front page Post article today warned readers that some tax increases and spending cuts are still likely to take effect on January 1, even if there is an agreement to extend the Bush tax cuts for the bottom 98 percent of households and to fix the alternative minimum tax and some other expiring provisions. The Post accurately points out that these residual tax increases and spending cuts will have the effect of slowing the economy. However, the residual tax increases and spending cuts can also be called "deficit reduction" of the sort that the Post has been demanding to combat the deficits that have been causing it to hyperventilate for years. It was possible to point to many of the tax increases and spending cuts that were associated with the "cliff" as accidents that no one actually wanted to see go into effect, but the residual tax increases and spending cuts are likely to be there in large part by design. While this will be bad news for an economy that desperately needs more stimulus (i.e. larger deficits), and also for the people directly affected, this is exactly the policy that the Post and other Washington establishment figures from both parties have been demanding. It would have been worth pointing out that the resulting hit to the economy is exactly what most advocates of deficit reduction presumably want if they understand the impact of the policies they advocate.

A thin Post piece on the cliff’s consequences - Since election day, the so-called “fiscal cliff” has moved to the top of the political news agenda, and CJR has already critiqued the shallow reporting and false frames on display in much of this coverage. Unfortunately, some of the reporting on the purported economic consequences of the “cliff” isn’t much better. Consider an article earlier this week from The Washington Post, reporting in part that people are rushing to sell assets before year-end to avoid possibly higher taxes on investment gains. The story is a model of how not to do it. “Financial advisers and accountants say people are trying to avoid the higher taxes that will take effect in 2013 if Washington does not avert the ‘fiscal cliff,’” reporters Michael A. Fletcher and Dina ElBoghdady write up high in the article. Investors named? None. Named sources? One policy analyst, one accountant, one lawyer who claims he is “swamped” with business, one financial planner, and one real estate agent (not even a broker, but a sales agent).

The Fiscal Cliff Hoax - Our Collapsing Economy and Currency - Is the “fiscal cliff” real or just another hoax? The answer is that the fiscal cliff is real, but it is a result, not a cause. The hoax is the way the fiscal cliff is being used. The fiscal cliff is the result of the inability to close the federal budget deficit. The budget deficit cannot be closed because large numbers of US middle class jobs and the GDP and tax base associated with them have been moved offshore, thus reducing federal revenues. The fiscal cliff cannot be closed because of the unfunded liabilities of eleven years of US-initiated wars against a half dozen Muslim countries–wars that have benefited only the profits of the military/security complex and the territorial ambitions of Israel. The budget deficit cannot be closed, because economic policy is focused only on saving banks that wrongful financial deregulation allowed to speculate, to merge, and to become too big to fail, thus requiring public subsidies that vastly dwarf the totality of US welfare spending. The hoax is the propaganda that the fiscal cliff can be avoided by reneging on promised Social Security and Medicare benefits that people have paid for with the payroll tax and by cutting back all aspects of the social safety net from food stamps to unemployment benefits to Medicaid, to housing subsidies. The right-wing has been trying to get rid of the social safety net ever since Franklin D. Roosevelt constructed it, out of fear or compassion or both, during the Great Depression. Washington’s response to the fiscal cliff is austerity: spending cuts and tax increases. The Republicans say they will vote for the Democrats’ tax increases if the Democrats vote for the Republican’s assault on the social safety net. What bipartisan compromise means is a double-barreled dose of austerity.

Congressional Spending Problem in Easy to Understand Format; It's Only Make Believe - Since 2000, how much has your average hourly wage gone up? If you are in the upper crust, the answer may be staggering. If not, perhaps the following chart more closely resembles your experience.

  • The average hourly earnings was $13.75 on January 1, 2000.
  • The average hourly earnings is currently $19.84.
  • Since 2000, average hourly earnings are up 44.29%

Bear in mind, those are averages. Don't be surprised if you are much worse off because of distributional skew (huge wage increases at the high end pull the average up). Moreover, the above chart does not reflect sales taxes, property taxes, state income taxes, gasoline taxes, fees, etc., all of which are way higher now than in 2000. In other words, the chart reflects average hourly wages, not spendable income. Actual spendable income is up far less than 44%.  It's a peculiar thing how the CPI does not properly account for tax hikes. While pondering those thoughts, please consider federal spending.

A Strange Time For A Deficit Deal - Jon Chait edges toward agreeing with me that the political impact of a deficit reducing deal is to empower Republicans to enact tax cuts without an equivalent impact on the ability of Democrats to enact useful spending programs.  But he's not fully on board, noting that this isn't a real law of politics I'm appealing to just a tendency. To strengthen my argument I really do think it's important to note that the substantive argument for deficit reduction right now is weak. Above you will find a chart of interest payments on the federal debt as a share of GDP and see that right now it's fairly low. What's more, that ratio is almost certainly going to head downwards over the next few years as the economy recovers and deficit reduction measures already in place are implemented. So there's no payments crisis to address. There's also no sign of high interest rates crowding out private sector investment. So there's no real substantive reason to want large deficit reduction right now. It's a political issue, but there's a sound political argument that the politics of fiscal policy make large-scale deficit reduction useless.

“Deficit” is the Wrong Word and Concept - The only economic school that has a plausible account of fiat-currency issuing governments’ monetary role in the economy and the flow of funds between the three main sectors of the economy, the Modern Money (MMT) school, has discovered that in fact government deficits are absolutely necessary for economic growth and they represent no strain on a monetarily sovereign government issuing a non-convertible floating currency, like the US, UK, Canadian, Australian, and Japanese national governments. In the era of fiat currencies, these governments cannot run out of their currency which they create via spending on goods and services available for sale in that currency. These governments with their central banks are the source of the US dollar, pound sterling, Canadian dollar, Australian dollar and yen, respectively without the intermediation of bond markets. Even in the era of the gold standard, a similar principle applied as government spending over taxes collected grew in order for economies to grow, limited by the availability of the element Au in metallic form, the supply of which grew in the “golden age” of the gold standard. Monetary sovereign governments’ ability to create and spend their own currencies’ in any amount has a role in enabling economic growth to occur at all. A necessary though not sufficient component of economic growth is a net growth in the supply of money in circulation or in savings. Bank and other private sector-to-private sector loans have no net effect in the growth of money, even though they temporarily create money that is circulated in the economy before its repayment; bank lending is not the reuse of other people’s money but the creation of new money in the hope of making a profit in the form of interest. The repayment of the loan zeroes out the loan principle leaving only the sum of interest payments which, in aggregate across the entire economy, come from another source, ultimately government deficit spending. Through loan creation, banks can temporarily create money but not “mint” it.

Expect Much More Budget Crises - Yglesias - Hoping the fiscal cliff will be resolved by Christmas? By New Years? You're out of luck, or so I argue in a new column, because it ends up tied in with the debt ceiling issue that will result a few months later. A key issue is that I think a lot of players in Washington are currently underestimating the administration's resolve to not make any further concessions over the debt ceiling. Obama doesn't have a reputation in DC for driving a hard bargain or for standing firm, so he's having some trouble being credible on this. But to the best of my ability to ascertain, I'm quite certain they're not going to fold on this point. The little gnomes who work in the government and study such things very sincerely believe that the 2011 debt ceiling crisis has a large negative impact on the economy, and therefore very sincerely believe that there's no point in a budget deal that doesn't take the debt ceiling weapon off the table. The debate Republicans are having right now is just about whether to try to punt on the fiscal cliff and move forward to the debt ceiling where they think they have more leverage. In a sense they do, but while the White House is happy to make substantial concessions in pursuit of a fiscal cliff grand bargain that also eliminates the debt ceiling they are really truly firmly opposed to a replay of the 2011 debt ceiling experience. So this fight is going to keep going on for a while.

Farm bill faces pivotal week -  Most U.S. farm support programs expired on Oct. 1 and livestock programs lapsed a year earlier. The Senate passed a five-year farm bill, as did the House Agriculture Committee. House leaders have said they plan to “deal” with the farm bill in the lame-duck session but have not tipped their hand as to how. The most likely path for the farm bill would be to use it as part of a deal to avert the more than $500 billion in tax increases and spending cuts known as the fiscal cliff. The Senate farm bill cuts the deficit by $23 billion and the House bill cuts it by $35 billion, over ten years. To take a ride on the fiscal cliff vehicle, however, House and Senate agriculture committees will have to work out their differences. Those differences fall into two broad categories: food stamps and commodity subsidies. The House farm bill cuts food stamps by $16 billion and the Senate bill trims $4 billion. The differences on these are being sidelined for now as both sides try to resolve the politically easier issue of commodities.

Senate debates $60.4 billion Sandy aid package — Democrats on Monday began trying to push $60.4 billion in emergency spending for Superstorm Sandy victims through Congress by Christmas. Republicans responded: Not so fast. The Senate opened debate on the aid measure seven weeks after the storm swept up the East Coast, causing extensive damage in New York, New Jersey and Connecticut and killing more than 120 people. Several Republicans say they're sympathetic to Sandy victims, but they favor a smaller aid package for the moment and suggest cutting other federal programs to pay for parts of it. They say some measures in the bill — including money for salmon fisheries in Alaska, new government cars and an Amtrak expansion project — smack more of congressional pork than disaster aid. GOP Sens. John McCain of Arizona and Tom Coburn of Oklahoma released a list of what they called "questionable" spending in the bill, including $5.3 billion for the Army Corps of Engineers with no statement of priorities about how to spend the money, $125 million for the Department of Agriculture's emergency program for restoring watersheds damaged by wildfires and drought, and $50 million in subsidies for tree planting on private properties

Senate Republicans Plan Smaller Storm-Aid Bill - — Republicans in the Senate, seeking to substantially trim a Hurricane Sandy aid package being sought by Democrats, are planning to unveil a $23.8 billion emergency spending plan to finance the recovery efforts of states devastated by the storm. The move by Republicans comes as the Senate has opened debate on a $60.4 billion aid bill brought by Democratic leaders. Democrats largely based their proposal on one that President Obama sent to Congress nearly two weeks ago. The alternative aid package is being introduced by Senator Dan Coats, Republican of Indiana. Democrats say it is a token proposal intended to give cover to Republicans who will not vote for the larger bill. Democrats in Congress and leaders from the storm-battered region say that states are counting on Congress to provide a large and quick infusion of money, both to continue cleaning up damage and to begin longer-term projects to help them prepare for future storms. “This proposal is not even within the ballpark of what New York and New Jersey need,” said Senator Charles E. Schumer, Democrat of New York. “To provide just a quarter of what the states’ governors requested is nowhere near good enough, and will leave business owners, homeowners and municipalities that were devastated without the resources they need.

The Entitlements Debate - One of the most influential ideas in Washington these days is that Social Security and Medicare are on the verge of going bust. Earlier this month, Senator Lindsey Graham warned of the “imminent bankruptcy” of these insurance programs for the elderly, and Republican leaders are citing the threat of insolvency as a reason that entitlement reform must be part of any fiscal-cliff deal. The argument sounds reasonable enough, but it’s really a bid to turn the great political strength of these programs—the fact that they were designed to be self-supporting—into a weakness.  Unlike most government programs, Social Security and, in part, Medicare are funded by payroll taxes dedicated specifically to them. Some of the tax revenue pays for current benefits; anything that’s left over goes into trust funds for the future. The programs were designed this way for political reasons. When F.D.R. introduced Social Security, he calculated that funding it through a payroll tax rather than out of general tax revenue would make people think of the program not as welfare but as an entitlement—as something that they had paid for and had a right to. Many liberals initially opposed the idea, because payroll tax rates aren’t progressive (everyone pays the same rate) and because they tax only labor income. But the system proved as resilient as F.D.R. had predicted, and when Lyndon Johnson introduced Medicare, in the nineteen-sixties, he adopted it, too. Over the years, Social Security and Medicare taxes have risen sharply, to the point where payroll taxes account for thirty-six per cent of all federal revenue. Today, most American households pay more in payroll taxes than in income tax. Yet there’s little public hostility to these taxes, and the programs they fund remain enormously popular.

Boehner in Bargaining Phase: Calls for Millionaire’s Bracket - House Speaker John Boehner’s latest offer sheet to the President in the fiscal slope negotiations includes an increase in tax rates on people earning $1 million a year, the first time that the Republican leader has proposed any tax rate hike. The White House, seeking rises on tax rates above $250,000, rejected the offer. Boehner didn’t solely offer the millionaire’s bracket, he also wants social insurance cuts in exchange: Boehner also wants to use a new method of calculating benefits for entitlement programs known as “chained CPI,” which would slow the growth of Medicare and other federal health programs and save hundreds of billions over the next decade. The speaker’s offer would not include extending federal unemployment benefits, and it is unclear how it would address sequestration — the tens of billions in spending cuts scheduled to go into effect for the Pentagon and other federal agencies starting Jan. 2. And Republicans remain unyielding on agreeing to raise the U.S. debt limit as part of any agreement to avoid the fiscal cliff.

Is Boehner Capitulating on Tax Hike Boost? Blame Game Posturing - House speaker John Boehner made an incremental move in Obama's direction in regards to tax hikes. Specifically, Boehner offered to raise income tax rates on households earning more than $1 million a year in exchange for containing the cost of federal entitlement programs. Discussion are private, and president Obama rejected the offer. Specifically, the president wants hikes on those making more than $250,000. Obama also wants to avoid making significant reductions in entitlement programs such as Social Security and Medicare.  On the surface, this appears to be a major change in attitude by Boehner. Previously, Boehner wanted to avoid all tax hikes, instead offering the closing of loopholes to raise revenue. Is this move a sign of capitulation or blame game posturing? I suggest the latter. Public opinion polls show a majority of people behind some tax hikes on the wealthy. Boehner now has an offer on the table.There may be one more move in Obama's direction to something like tax hikes on those making $500,000 or more. However, each move Boehner makes in the president's direction will likely require (and should require), a move by Obama in Boehner's direction.

Fiscal Cliff: We May Be Getting Somewhere…or Not - It needs a lot of work, but Rep. Boehner’s latest fiscal cliff offer moves the ball down the field.  Here it is, as I understand it:

  • –Tax rates go up on households with incomes above $1 million (the top 0.3%!) as opposed to $250,000 raising allegedly $460 billion over ten years (but see below on this).
  • –Another $500 billion in revenue over 10 years from unspecified tax reform changes next year, so awfully iffy stuff relative to President’s proposal.
  • –Extend debt ceiling for a year (but see below).
  • –Chained CPI in; higher Medicare eligibility age out.
  • –They’re pretty far apart on spending cuts, with Rep Boehner throwing around unrealistically large numbers without specifying where you’d find the savings.

Still, this is progress…as I read somewhere, “now they’re haggling over price” which means real negotiations are underway.  However, that far from guarantees resolution before we go over the cliff:

  • –I’ve seen no convincing evidence that Boehner can bring his troops along.
  • –The$1 million income threshold is simply too high to raise the needed revenue and far below where the WH is.

No Deal, Continued - Krugman - So Boehner and McConnell have conceded the principle of higher tax rates on the wealthy. But we’re nowhere close to a deal, for two reasons. First, you can only have a bargain, even potentially, if each side is willing to offer something better than the other side’s “threat point” — what it could get without a deal. For Obama, the threat point is letting all the Bush tax cuts expire, then proposing a middle-class tax cut that Republicans almost surely would not be able to block. The trouble with this proposal, from Obama’s point of view, is that it still doesn’t raise as much revenue as he wants, and that it also doesn’t provide stimulus via payroll taxes and extended unemployment benefits. But that’s what he can get at minimum. So what are Republicans proposing? A “deal” that offers even less revenue, no stimulus, and comes at the price of big social insurance cuts. Why should Obama be interested?

A ‘fiscal cliff’ deal is near: Here are the details - Boehner offered to let tax rates rise for income over $1 million. The White House wanted to let tax rates rise for income over $250,000. The compromise will likely be somewhere in between. More revenue will come from limiting deductions, likely using some variant of the White House’s oft-proposed, oft-rejected idea for limiting itemized deductions to 28 percent. The total revenue raised by the two policies will likely be a bit north of $1 trillion…. On the spending side, the Democrats’ headline concession will be accepting chained-CPI, which is to say, accepting a cut to Social Security benefits. Beyond that, the negotiators will agree to targets for spending cuts. Expect the final number here, too, to be in the neighborhood of $1 trillion… contentious issues in the talks will be left up to Congress. The deal will lift the spending sequester, but it will be backed up by, yes, another sequester-like policy. I’m told that the details on this next sequester haven’t been worked out yet, but the governing theory is that it should be more reasonable than the current sequester. That is to say, if the two parties can’t agree on something better, then this should be a policy they’re willing to live with. On stimulus, unemployment insurance will be extended, as will the refundable tax credits. Some amount of infrastructure spending is likely. Perversely, the payroll tax cut, one of the most stimulative policies in the fiscal cliff, will likely be allowed to lapse, which will deal a big blow to the economy….

The flawed logic of the 'fiscal cliff' - Stephanie Kelton - Look, up in the sky! It's a "fiscal cliff." It's a slope. It's an obstacle course. The truth is, it doesn't really matter what we call it. It only matters what it is: a lamebrained package of economic depressants bearing down on a lame-duck Congress. This hastily concocted mix of across-the-board spending cuts and tax increases for all was supposed to force Congress to get serious about dealing with our nation's debt and deficit. The question everyone's asking is this: On whose backs should we balance the federal budget? One side wants higher taxes; the other wants spending cuts. And while that debate rages, the right question is being ignored: Why are we worried about balancing the federal budget at all? You read that right. We may strive to balance our work and leisure time and to eat a balanced diet. And when it comes to our personal finances, we know that the family checkbook must balance. So when we hear that the federal government hasn't balanced its books in more than a decade, it seems sensible to demand a return to that kind of balance in Washington as well. But that would actually be a huge mistake. History tells the tale. The federal government has achieved fiscal balance (even surpluses) in just seven periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, 1920-30 and 1998-2001. We have also experienced six depressions. They began in 1819, 1837, 1857, 1873, 1893 and 1929. Do you see the correlation? The one exception to this pattern occurred in the late 1990s and early 2000s, when the dot-com and housing bubbles fueled a consumption binge that delayed the harmful effects of the Clinton surpluses until the Great Recession of 2007-09.

Rumors of a Deal - Krugman - It sounds as if Ezra Klein is hearing more or less the same things I’m hearing: Republicans willing to give up a lot more on tax rates, although not fully undoing the Bush tax cuts in the 250-400 range; additional tax hikes via deduction limits in a form that hits the wealthy, not the upper middle class (28 percent and all that); unemployment extension and infrastructure spending; but “chained CPI” for Social Security, which is a benefit cut. Unlike what we’d heard from Republicans before, this contains stuff that Obama can’t get just by letting us go over the cliff: more revenue than he could get just from tax-cut expiration, unemployment and infrastructure too. But it has a cost, those benefit cuts. Those cuts are a very bad thing, although there will supposedly be some protection for low-income seniors. But the cuts are not nearly as bad as raising the Medicare age, for two reasons: the structure of the program remains intact, and unlike the Medicare age thing, they wouldn’t be totally devastating for hundreds of thousands of people, just somewhat painful for a much larger group. Oh, and raising the Medicare age would kill people; this benefit cut, not so much. The point is that we shouldn’t be doing benefit cuts at all; but if benefit cuts are the price of a deal that is better than no deal, much better that they involve the CPI adjustment than the retirement age.

Fiscal Cliff: Chained CPI - Ezra Klein at the WaPo WonkBlog wrote earlier today: A ‘fiscal cliff’ deal is near: Here are the details: Boehner offered to let tax rates rise for income over $1 million. The White House wanted to let tax rates rise for income over $250,000. The compromise will likely be somewhere in between. More revenue will come from limiting deductions, likely using some variant of the White House’s oft-proposed, oft-rejected idea for limiting itemized deductions to 28 percent. The total revenue raised by the two policies will likely be a bit north of $1 trillion. ... On the spending side, the Democrats’ headline concession will be accepting chained-CPI, which is to say, accepting a cut to Social Security benefits. Chained CPI is a relatively new series (started in 2002), and measures inflation at a slightly lower rate than CPI or CPI-W - and over time this would add up both for Social Security payments and also for revenue (tax brackets would increase slower using chained CPI than using currently). From the BLS: Frequently Asked Questions about the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) The graph shows the year-over-year change in headline CPI, CPI-W, and chained CPI.  There isn't much difference on a year-over-year basis, but notice the blue line is mostly below the other two all the time. Those small differences add up over time as the following table shows.

Social Security has no place in ‘fiscal cliff’ negotiations - If reports are correct, Congress and President Obama are currently considering resolving the fiscal showdown by, among other things, cutting Social Security benefits through changing the cost of living adjustment. It is ridiculous. It is outrageous. Historically, Social Security, defined-benefit (DB) pensions, and private savings successfully formed the foundation of middle-class retirement security. But DB pensions have declined in the private sector: only 18 percent of workers are covered, compared to nearly 40 percent in 1980. And since the early 80s, stagnant wages have caused the net worth of the bottom 60 percent of households to decline; the typical household approaching retirement age has less than the equivalent of two years’ worth of income saved in a retirement account—if they have retirement savings at all. Social Security remains the most reliable and effective part of the nation’s provision of retirement security, and for many households, retiree benefits averaging less than $15,000 a year are their sole source of income. Our current deficits largely stem from the economic downturn, the Bush tax cuts, overseas wars, an unpaid-for expansion of prescription drug benefits, and a failure to control the excesses and abuses of the financial industry. In fact, over the last few decades, Social Security was running a surplus, providing cover for ill-advised revenue and spending decisions that Republicans now refuse to rescind. And over the long run, Social Security is legally prohibited from adding to the deficit.

Stealth Target of Defense Spending Cuts: America’s Highly Effective Socialized Medicine Provider, the VA System, and Military Benefits Generally - Yves Smith - One element of the coming budget pact that is not getting One element of the coming budget pact that is not getting the attention it warrants is a covert effort to gut military benefits by privatizing them. Privitization has rarely delivered on its promise of delivering better performance and/or lower costs. Indeed, in the military, it has served as an egregious ground for looting. And curiously the officialdom has chosen to turn its eyes to it. The forms of war profiteering have been numerous as the traditional protections against abuses in contracting, such as not allowing the firm that designed a contract to bid on it, have either been eroded through a misguided vogue for deregulation or simply ignored. The manufactured fiscal cliff crisis means that more profiteering is coming to the military, this by fundamentally changingthe relationship of soldiers to the armed forces. An article in Open Democracy describes how servicemembers were once assured of a high level of benefits in return for the sacrifices made. But the military, which resisted the blandishments of neoliberals, started to succumb in the 1990s. Tellingly, the Army changed its logo from “The Army Takes Care of Its Own” to ““The Army Takes Care of its Own so that They Can Learn to Take Care of Themselves.” This reflected a basic change in attitude: The contracting out of the Pentagon’s support coincided with neoliberal efforts to combat “dependency” in the military. Policies forcing recipients of public assistance programs to achieve “independence” – largely through mandating employment requirements – had been gaining ground in conservative and neoliberal policy debates in the late 1980s and early 1990s. They also took hold in the military, where in the early 1990s the military retrenched its support for soldiers and their families. As the Army pulled back on spending for support services and contracted out services, for example, it also instituted programs to teach soldiers and their spouses “self-sufficiency.

Aides wary as Boehner paves way for fiscal deal - John Boehner, the Republican speaker of the House of Representatives, crossed the Rubicon on taxes. In a call with Barack Obama, the US president, that day, he abandoned his party’s long-held opposition to higher tax rates – saying that he could make an exception for millionaires in order to avert the fiscal cliff. Mr Boehner’s move was rejected by Mr Obama, who is pushing for tax rates to increase for households earning more than $250,000 a year, well below the $1m threshold proposed by the Republican speaker. But it set the stage for an acceleration of the talks that could yield a deal just in time for the year-end deadline to prevent a $600bn combination of automatic tax increases and spending cuts that has been threatening to tip the US back into recession. Even if there is no agreement, Mr Boehner’s concession on tax rates – a matter of principle that has long been sought by Mr Obama – could pave the way for a more limited fallback option in which middle-class tax cuts are extended. This would avoid the worst of the contraction in the fiscal cliff, even in the absence of any other broad deficit reduction measures. As Mr Obama and Mr Boehner met again at the White House on Monday for a new round of private talks, congressional aides remained cautious that a deal was finally in hand. One senior Republican staffer in the Senate complained that Mr Obama was still not willing to put sufficient spending cuts on the table and had not tempered his tax demands enough. “There are a lot of major arguments. Tell me one concession the White House has made?,” asked the Republican aide. “Every story I’ve read on the issue has one thing in common: the White House saying no.”

Obama makes a substantial counteroffer on fiscal deadline - President Obama trimmed his demand for tax increases on the wealthy Monday, making a substantial counteroffer as he and House Speaker John A. Boehner reconvened privately at the White House. Crucial differences remain, but the quickened pace of the budget talks suggested the men are engaged in a serious effort to bridge the partisan divide before the holidays — and before the year-end "fiscal cliff" leads to economically dire tax increases and spending cuts. The president offered to raise tax rates on household income above $400,000, according to a source familiar with the talks who was not authorized to speak publicly about them. The rate would rise from 35% to 39.6%. The president campaigned for reelection on a plan to require households with incomes above $250,000 to pay more, and, until recently, had emphasized that his victory and postelection polls showed that the public agreed with him. Obama's overture came after Boehner suggested Friday in a phone call that he would be willing to raise tax rates for those earning more than $1 million — a major concession for the Ohio Republican, who had resisted any increase in the top rates. Aides on both sides were buoyed after that conversation, even though the White House rejected the offer. After Monday's session, both sides remained optimistic. One senior administration official who requested anonymity to discuss the White House's thinking said the talks reflected "a more robust level of engagement." Boehner panned the president's proposal, however, in an indication of the difficulty the speaker will have convincing his party's conservative flank to approve any deal with a tax rate increase.

Obama offers fiscal cliff tax concession - US President Barack Obama offered to back away from his position that tax hikes should begin at $250,000 in annual income, delivering a fresh concession to congressional Republicans as talks to avert the fiscal cliff intensified in Washington. The White House proposal would leave lower tax rates in place for everyone except those earning $400,000 or more a year. Republican leaders had asked for a higher limit but the offer suggests there is a narrowing in the gap between the two sides. A person familiar with the talks also said Mr Obama was no longer seeking a permanent mechanism to increase the US debt limit, but would settle for a two-year increase in America’s borrowing authority. In a further concession to Republicans, Mr Obama agreed to apply a less generous measure of inflation to government calculation, which would result in lower benefits in the Social Security pension scheme over time, the person added. The White House plan came as the shape of a deal to avert the US fiscal cliff – which would entail a mix of $600bn in spending cuts and tax increases next year – was at last emerging, with at least $1tn in new taxes, up to $1tn in fresh spending cuts and an increase in America’s debt ceiling. Negotiators are scrambling to reach an agreement before the end-of-the-year deadline. Mr Obama and John Boehner, Republican speaker of the House of Representatives, held their third face-to-face meeting in eight days at the White House amid signs of growing momentum in the talks. Tim Geithner, Treasury secretary, was also present. After details of Mr Obama’s new offer emerged, a spokesman for Mr Boehner rejected the bid, saying it “cannot be considered balanced”. But he added that it represented a “step in the right direction” and expressed hope that discussions with Mr Obama would continue. A person familiar with Mr Obama’s proposal stressed it was not the White House’s final offer, leaving room for more compromise.

In new 'cliff' bid, Obama seeks $1.2 trillion in revenue: source - In a major counteroffer that moves the White House and congressional Republicans closer to resolving the "fiscal cliff" standoff, President Barack Obama is now seeking $1.2 trillion from higher tax revenues, including increased rates on those earning more than $400,000 a year, a source familiar with the negotiations said on Monday. In exchange, the president is willing to agree to $1.22 trillion in spending reductions, including some cuts achieved by changing the way cost of living adjustments are made to Social Security retirement benefits and other programs. By raising the threshold for tax increases to $400,000 from $250,000, the president is yielding on the level he had sought during his successful campaign for re-election in November "We view this as a good offer that shows we have met the Republicans more than halfway on spending and halfway on revenues," the source said. House Speaker John Boehner's office called the president's bid a positive, if flawed step toward a compromise on an impasse that many – from governments to businesses to private citizens – have been urging the two sides to resolve. "Any movement away from the unrealistic offers the President has made previously is a step in the right direction, but a proposal that includes $1.3 trillion in revenue for only $930 billion in spending cuts cannot be considered balanced,".

Edging Closer to a Deal on the Cliff? - Yet another counter-offer just out, this time from the President.  As I noted earlier, they could close a deal this week, or it could still fall apart.  A month ago, I was at 75/25 we’re going over.  I’m now 60/40 we’re not.  At this point, the biggest outstanding question is less can they agree on numbers—that’s still big, but they’re moving closer with each offer.  It’s: can Rep Boehner deliver the votes in the House?  See here for details of the President’s latest (from the NYT): The White House plan would permanently extend Bush-era tax cuts on household incomes below $400,000, meaning that only the top tax bracket, 35 percent, would increase to 39.6 percent…[However, base broadeners, like the President’s proposal to cap deductions at 28% for incomes above $250,000 would still be in the deal.  Also, cap gains and dividends go to 20% above $250,000...JB] …the president’s plan would cut spending by $1.22 trillion over 10 years, compared with $1.2 trillion in cuts from the Republicans’ initial offer. Of that, $800 billion is cuts to programs, and $122 billion comes from adopting a new measure of inflation that slows the growth of government benefits, especially Social Security. …The White House is also counting on $290 billion in savings from lower interest costs on a reduced national debt. …Of the $800 billion in straight cuts, the president said half would come from federal health care programs; $200 billion from other so-called mandatory programs, like farm price supports, not subject to Congress’s annual spending bills; $100 billion from military spending; and $100 billion from domestic programs under Congress’s annual discretion.

A Fiscal Deal Is Emerging—But Is It Any Good? - An agreement on the "fiscal cliff" may be near. On Friday, House Speaker John Boehner endorsed the idea of higher tax rates on upper incomes--a real concession that allowed serious negotiations to go forward. Over the weekend, he and President Obama spoke by telephone. On Monday, they met at the White House. They could reach an agreement within the next few days—not a detailed blueprint for legislation, mind you, but an agreement on the basic principles. Of course, all the usual caveat apply. Talks could break down all over again, congressional delegations could throw a fit, and so on. The terms are still murky and, presumably, under discussion. The details will make a huge difference. But the broad outlines, first reported by Ezra Klein in the Washington Post on Monday afternoon, are coming into view. There would be new revenue, slightly in excess of $1 trillion over ten years. The money would come from households with high incomes; exactly how high is not yet clear. Republicans would have a chance to propose tax reforms that would raise some of the revenue by closing loopholes, rather than raising rates, but if they failed to construct—and enact—such a package then the money would come from tax proposals similar to the ones Obama has proposed, which focus mostly on higher rates. There'd be cuts to spending, somewhat larger than what Obama put on the table. The deal would call for adjusting cost-of-living increases in Social Security, known as the "chained CPI," but it would not raise the Medicare eligibility age. The rest of the cuts would be unspecified, left for Congress to work out on its own. Some kind of automatic cuts would kick in if Congress failed to find the money.  Boehner also proposed an incremental increase in nation's debt ceiling, effectively giving Treasury enough borrowing power to cover the government's bills for the next year.

How Does the Deal Look? - You are going to hear a lot about chained CPI. If you want to know why progressives hate the idea, this explains it. It's basically statistical manipulation that is used to lower the cost of living adjustments the government makes to various programs, including Social Security. It means less money for you and me in retirement.  However, just because chained CPI is unfair and unjustified, that doesn't mean that the president isn't in the process of brokering a worthwhile deal. In a negotiated compromise with asshole Republicans, there has to be at least a couple things we hate included. The question in this case is: what do we get in return and what to we get to keep instead?  It's not possible to answer those questions definitively until we see the whole package. Democratic advocates of chained CPI see it as more palatable than increasing the retirement age for Medicare. I can't argue with that, but we don't need to do either thing if we just off the cliff. So, what do we get for not going over the cliff? It appears that we get quite a lot. We get an extension of unemployment benefits and a no-drama extension of debt ceiling. We get a modest stimulus bill focused on much-needed infrastructure projects. We limit itemized deductions for the rich. We get a permanent solution for the Alternative Minimum Tax and the Medicare Doc Fix. We avoid rattling the markets or further jeopardizing our credit rating. We regain control over the budget rather than having to put the pieces back together after sequestration takes place.  The Republicans reportedly get tax protection for people making under $400,000 a year, cuts to Social Security cost of living adjustments, a commitment to do tax reform this year, and significant cuts in discretionary spending. Also, the payroll tax holiday expires. That's probably a good thing, although it will take a bite out of the economy.

Obama’s Latest Fiscal Slope Offer: I’m Missing the Part Where Republicans Give Up Something - I noted the emerging fiscal slope deal yesterday, and we have additional developments on that front. The headlines here is that the Obama Administration narrowed the demand they maintained for four years, for tax rates to increase above $250,000, and they would agree to a benefit cut for Social Security and $400 billion in unspecified Medicare cuts, and in exchange they would mostly extend current law on a few fronts (but not all) and get an unspecified amount, no more than $50 billion, in infrastructure spending. Also we’d all be back here in two years with a third debt limit showdown in 2014. The New York Times has probably the best pure rundown of what the President offered. Let’s bullet-point:

  • Taxes. “The White House plan would permanently extend Bush-era tax cuts on household incomes below $400,000, meaning that only the top tax bracket, 35 percent, would increase to 39.6 percent. The current cutoff between the top rate and the next highest rate, 33 percent, is $388,350.” This would raise somewhat less than the $800 billion envisioned by allowing the top two tax rates to rise. However, the White House’s revenue offer stands at $1.2 trillion, above that $800 billion number. Where’s the rest coming from? According to Jared Bernstein, the top capital gains and dividend tax rates would rise to 20% above $250,000 in income, and there would be some deduction cap, similar to the 28% rate on deductions above $250,000 that Obama has put in nearly every one of his budgets. But the details there are unclear.
  • Spending. “The White House says the president’s plan would cut spending by $1.22 trillion over 10 years, compared with $1.2 trillion in cuts from the Republicans’ initial offer. Of that, $800 billion is cuts to programs, and $122 billion comes from adopting a new measure of inflation that slows the growth of government benefits, especially Social Security. The White House is also counting on $290 billion in savings from lower interest costs on a reduced national debt … Of the $800 billion in straight cuts, the president said half would come from federal health care programs; $200 billion from other so-called mandatory programs, like farm price supports, not subject to Congress’s annual spending bills; $100 billion from military spending; and $100 billion from domestic programs under Congress’s annual discretion.”

Boehner Wants CUTS to Social Security and Medicare, not "Changes" - For some reason the Washington Post has a hard time accurately reporting the nature of the budget discussions between President Obama and Speaker Boehner. It told readers today: "In exchange for the higher rates for millionaires, Boehner is demanding changes to federal health and retirement programs, which are projected to be the biggest drivers of future federal borrowing." Of course Boehner is not looking for random "changes" to these programs, he is looking for "cuts" in the programs. While the next sentence points out that Boehner is seeking "savings" from these programs, there is no reason to obscure what is at issue by using "changes." It is also worth noting that under the law, Social Security cannot contribute to the deficit. It was set up by Congress as a stand alone program that can only spend money from its designated revenue stream. All official budget documents show the "on-budget" deficit which excludes revenue and spending from Social Security.

Social security cuts offered...why? Irresistible to Obama. -- There is no crisis with Social Security. Social Security is not going broke. Social Security adds NOTHING to the deficit. Social Security is not welfare. There are many options to address issues for the program, which are not offered as part of Pres. Obama's  insistence on keeping  Social Security on the table and front and center.  Perhaps the 'chained cpi' is abstract enough to look harmless, and trying to 'fix' a possible problem decades in advance doesn't appear to be simply weird??   From comments comes this note from Dale Coberly.  There are several other plans  carefully thought out that fix things if needed... A reader suggested I check the results of the "one tenth of one percent tax increase" against the recent bad news from the Trustees.  I looked at the result of increasing the tax one tenth of one percent for each the employee and the employer whenever the Trustees project short term actuarial insolvency. The results were the same as before the recession: an average increase of one half of one tenth of one percent increase on the combined employer-employee tax over the seventy five year actuarial window results in no insolvency whatsoever.  The effect of the Recession has been to move forward about six years the date of the first one tenth of one percent increase to about 2018. By 2033 the tax would have been increased about one and a half percent for each, while wages will have gone up about 25%. Workers will have MORE money in their pockets AND will have paid for a longer retirement at a higher standard of living.There is no crisis. Social Security is not going broke. Social Security adds NOTHING to the deficit. Social Security is not welfare.

The media discover the ‘chained CPI’ – And the more they dig, the rougher it looks - Except for Los Angeles Times columnist Michael Hiltzik, and a few stray media outlets there had been little media attention to possible changes in the way Social Security cost-of-living adjustments would be calculated. That is, until the last several days. Almost as if on cue, Beltway columnists came forth with their takes on what is called the “chained CPI,” a method of calculation that is near the top of the wish list for DC deficit hawks and budget cutters.  Why is the chained CPI (chained Consumer Price Index) so attractive to such people? As we reported a couple of weeks ago, it cuts spending and raises revenue. The Congressional Budget Office Office estimates it could produce some $217 billion in savings over ten years, with about $145 billion coming from cuts to Social Security benefits and other government pensions.  It’s a juicy target for another reason, too: the public knows next to nothing about it. Its obscurity may have led Slate to characterize it as “the sneaky plan to cut Social Security.” The headline on a blog post by The Atlantic’s Derek Thompson called it “The Sneaky, Complicated Idea That Could End the Fiscal Cliff Showdown.”   The idea behind “chaining” is to allow for the way people substitute cheaper goods and services when prices rise. Timothy Noah gave a good description of why the Chained CPI may not measure the cost of living with as much accuracy as its advocates promote. “Would chaining really bring Social Security benefit increases in line with spending patterns? Actually no,”  Healthcare is the biggest expense for many of the elderly, and consumes a larger share of their budgets than does for the rest of the population. If you need a heart bypass, you can’t substitute a hernia operation, the way someone might substitute chicken for steak.

More on Chained CPI, the Benefit Cut for Social Security on the Table in Fiscal Slope Discussions - I’ve explained the latest Obama offer on the fiscal slope, but I saved the discussion of the chained CPI, which I described the technical details of here. First of all, this is a benefit cut of about 0.3% a year, as Dean Baker points out. He adds that “This loss would be cumulative through time so that after 10 years the cut would be roughly 3 percent, after 20 years 6 percent, and after 30 years 9 percent.” Actually if we started using chained CPI in 2002, we’d be 3.6% behind today. That’s well over $1,000 a year, and the situation grows worse over time. So the greatest impact would be on the oldest seniors, which happens to correlate with the poorest. If you think that senior citizens have had it too good for too long, getting that sweet sweet cost of living adjustment to make them unfairly wealthy, then maybe you think chained CPI is a solid idea. If you think that the highest expense for a senior is medical costs, that seniors don’t exactly comparison shop when they need medical care, that they cannot substitute along those lines, and that a cost of living index that features that substitution effect prominently doesn’t correspond to the real costs seniors face, well, you would be right. And that’s why we have a Consumer Price Index for the elderly, which isn’t getting used here: The Bureau of Labor Statistics (BLS) has constructed an experimental elderly index (CPI-E) which reflects the consumption patterns of people over age 62. This index has shown a rate of inflation that averages 0.2-0.3 percentage points higher than the CPI-W [...] While the CPI-E is just an experimental index, if the concern is really accuracy, then the logical route to go would be for the BLS to construct a full elderly CPI. While this would involve some expense, we will be indexing more than $10 trillion in Social Security benefits over the next decade

Obama Considering Chained CPI Deal, and Why That’s a Bad Idea - According to reliable sources, the Obama administration is seriously contemplating a deal under which the annual cost of living adjustment for Social Security benefits would be indexed to the chained consumer price index rather than the CPI for wage and clerical workers (CPI-W) to which it is now indexed. This will lead to a reduction in benefits of approximately 0.3 percentage points annually. This loss would be cumulative through time so that after 10 years the cut would be roughly 3 percent, after 20 years 6 percent, and after 30 years 9 percent. If a typical senior collects benefits for twenty years, then the average reduction in benefits will be roughly 3 percent. There are a few quick points worth addressing:  These are taken in turn below.

  1. The claim that the chained CPI provides a more accurate measure of the cost of living;
  2. Whether Social Security benefits are now and will in the future be sufficient to allow for a decent standard of living for retirees; and
  3. Whether this is a reasonable way to be dealing with concerns over the budget.

Why including Social Security in a deficit deal is a perverse embrace of fraud on a generation of workers -Social Security is solvent for many years to come thanks to its hefty Trust Fund. So what people who claim Social Security contributes to the deficit are really saying is that a generation of workers has been defrauded. They’re saying that all the surpluses Social Security generated through payroll taxes, in order to have enough money to pay the Boomers back later, has been stolen and spent on other things, like wars and tax cuts and cost overruns. They’re saying all those Treasury notes in the Social Security Trust Fund aren’t worth the paper they’re printed on. They’re saying it was all a big con, at the expense of hard-working Americans. (They’re thinking: Lucky the payroll tax is capped, or it would have been the rich who were fleeced, too.) They’re saying: All those working people, now that they are old, aren’t actually owed anything; that money’s all gone; they’re just a drag on the budget; and because they are a drag on the budget, we need to find some way for them not to get as much as we said they would get — so that we can save some of that money for other things instead, like oil subsidies, and tax cuts for the super-rich.

Though Liberals Carp at Chained CPI, Pelosi Says She Could Live With It - Many of what would be described as the liberal left of Congress have weighed in against using the chained CPI to calculate cost of living increases in Social Security benefits. Here’s a representative sample from Sen. Jeff Merkley:We had an election, and the voters sent a message to Congress to focus on jobs and fairness — not cutting benefits for people who have worked all their lives and are now making ends meet on fixed incomes. The formula we use to adjust cost-of-living changes for seniors needs to reflects the real costs they face, not the budgetary fantasies of Washington.  I mean that’s precisely it. You will hear virtually nobody claim that chained CPI represents a more accurate way of determining the cost of living for senior citizens on Social Security, because if they were honest about it, they would tailor an inflation index to the real costs of seniors. The only benefit to chained CPI is that it saves the government money at the expense of senior citizens. That’s it. It’s a back-door way of lowering the benefit. Even if you agree with the methodology of the substitution effect, that people will manage the cost of living by purchasing less expensive products, you have to ask yourself if seniors have been getting away with murder all these years under the old rules. And considering they get an average annual benefit of just $13,000, and that almost half of them use that as their only form of income, without savings or anything else to fall back on, the very idea is preposterous. And the public, who has a working knowledge of Social Security benefits and how far they stretch, agrees. Regardless of the carping of a few of those liberals and the majority of the country, however, Nancy Pelosi basically gave the game away: she will force her charges to stick with the President.

Social Security: Will Obama Cave?: Once again, President Obama seems to be on the verge of folding a winning hand. Widely leaked reports indicate that the president and House Speaker John Boehner are making a fiscal deal that includes hiking tax rates back to the pre-Bush levels with a threshold of $400,000 rather than the original $250,000, and cutting present Social Security benefits. Obama, the reports say, will now settle for as little as $1.2 trillion in tax increases on the rich rather than the $1.6 trillion that he had originally sought. The difference, in effect, will come out of the pockets of workers, retirees, the young, and the poor. Especially foolish is the cut in Social Security benefits, disguised as a change in the cost-of-living adjustment formula. Before getting to the arcane details of the formula, here’s the bottom line. The proposed change will save only $122 billion over ten years, but it will significantly cut benefits for the elderly. Because the cut is in the form of a change in the Consumer Price Index (CPI), the longer you live, the more is the total cut. On average, the cut is about 3 percent a year, but if you live twenty years after you start drawing benefits (the average), that adds up to over ten thousand dollars. Put this in the context of the reliance of the elderly on Social Security. More than 70 percent of all recipients depend on Social Security for more than half their income. The average Social Security benefit is less than $15,000 a year, and in recent years all of the cost-of-living adjustments and more have gone to defray the annual increases in Medicare premiums and other health costs.

Can We Please Stop Pretending Obama is “Capitulating” on Social Security? - Everywhere you look, the media narrative is that President Obama is “capitulating” to Republicans by agreeing to cuts in Social Security benefits. And I have to ask, where is this collective political amnesia coming from? Obama has made a deliberate and concerted effort to cut Social Security benefits since the time he took office.  FDL reported on February 12, 2009 that the White House was meeting behind closed doors to consider ways to cut Social Security benefits, and that the framework they were using was the Diamond-Orszag plan, which was co-authored by OMB Director Peter Orszag when he was at the Brookings Institute. The birth of the now-ubiquitous “catfood” meme came on February 18, 2009 with this FDL headline: Hedge Fund Billionaire Pete Peterson Key Speaker At Obama “Fiscal Responsibility Summit,” Will Tell Us All Why Little Old Ladies Must Eat Cat Food. As I wrote in August of 2010, Peterson’s keynote spot was the worst kept secret in town; I knew about it because I had been on a conference call with about 40 representatives of various DC interest groups, many of whom had received written notice from the White House that Peterson was scheduled to headline the event. But nobody wanted to go on the record for fear of jeopardizing their relationship with the administration in its early days. After FDL broke the news, Peterson was “disinvited” from the summit. Both he and the White House denied everything, but Robert Kuttner subsequently confirmed in the Washington Post that Peterson had, in fact, been scheduled as the keynote speaker that day

Alan Grayson Explains Why He Opposes A Conservative Plan To Unravel Social Security That Starts With A Chained CPI - Let me get right to the point. I'm against the proposed "chained CPI" cut in Social Security because it substantially undermines the protection against inflation that Social Security recipients enjoy under current law. The existing cost of living adjustment ("COLA") already understates actual increases in the "cost of living"; the chained CPI would exacerbate the problem. I understand that the vast majority of Americans-- including, quite possibly, most people reading this-- have no burning desire to learn anything about the chained CPI. It has, however, become a major part of the "fiscal cliff" negotiations, and so it has become one of those things that people have to learn about, for their own protection. Where we are now in the fiscal cliff negotiations is that Speaker Boehner is talking about reducing the federal deficit in the exact same way that Governor Romney did-- Boehner says that he wants to, but he won't tell us how. President Obama, boxed in by the poll-driven sense that he must-must-must propose something "balanced," is "balancing" the reduction of tax breaks for the rich against the reduction of the protection that seniors have against inflation. On the merits, however, reducing that protection is undeserved, unwise and unfair.

Cliff Hanger: The President's Unnecessary and Unwise Concessions - Robert Reich - Why is the President back to making premature and unnecessary concessions to Republicans? Two central issues in the 2012 presidential election were whether the Bush tax cuts should be ended for people earning over $250,000, and whether Social Security and Medicare should be protected from future budget cuts.  The President said yes to both. Republicans said no. Obama won.  But apparently the President is now offering to continue to Bush tax cuts for people earning between $250,000 and $400,000, and to cut Social Security by reducing annual cost-of-living adjustments.  These concessions aren’t necessary. If the nation goes over the so-called “fiscal cliff” and tax rates return to what they were under Bill Clinton, Democrats can then introduce a tax cut for everyone earning under $250,000 and make it retroactive to the start of the year.  They can combine it with a spending bill that makes up for most of the cuts scheduled to go into effect in January. Republicans would be hard-pressed not to sign on.  Social Security should not be part of any such deal anyway. By law, it can’t contribute to the budget deficit. It’s only permitted to spend money from the Social Security trust fund.

Robert Reich criticizes Obama for caving on Social Security - Former Labor Secretary Robert Reich on Tuesday night criticized President Barack Obama for agreeing to adjust the measure of inflation for safety net programs like Social Security. During an appearance on Current TV, Reich said the President was “chipping away at Social Security and Medicare by fiddling with the formula for inflation” amid the ongoing budget negotiations. The proposed changes to the measure of inflation — called “chained CPI” — would lead to smaller cost-of-living increases for Social Security beneficiaries. “The way the inflation index was developed, if for example one year the price of food went up by five percent then the cost-of-living would go up in terms of what you would get as a retiree,” he explained. “But what this new formula would do is it would assume that you as a retiree if food prices went up or if a certain kind of food went up you would substitute something else. That is, if chicken went up you would substitute a cheaper kind of food.” Reich said chained CPI would result in a decline of living standards for the elderly.

Even Some “Liberal” Journalists Are Losing Their Bearings on Obama’s Social Security Sellout - The White House appears to be willing to accept a deal that will change the way Social Security's inflation rate is calculated -- a complicated way of making massive cuts to the program without saying so. The Washington Post's Ezra Klein wrote last week, "Here is a sentence you won’t hear politicians or policy wonks saying in the next few weeks: 'We should pay Social Security beneficiaries less in the future and push a lot of people into higher tax brackets.' Here is a sentence you almost certainly will hear: “Let’s adopt chained CPI.” Welcome to the dark art of obscurantist deficit reduction." This "dark art" works by switching the inflation adjustment calculation from one that increases the benefit payments to keep up with the increasing costs of basic necessities such as food (this one is called Consumer Price Index-Urban, or CPI-U) to another calculation, one that assumes that if prices skyrocket people will make substitution in their spending (called Chained CPI). Switching to the chained CPI calculation would dramatically decrease the Social Security benefits as seniors age; as one study shows, it will cut the benefits of a 95-year-old by 9.2 percent, decreasing their annual benefit by $1,611. The problem with this decrease -- and with calculating Social security using chained CPI in general -- is that seniors often can't and don't make spending substitutes. Moreover, these cuts get worse as people age, so changing to Chained CPI is essentially taking money away from the oldest women in country -- and it will affect not only future Social security recipients, but those currently using its benefits. The public overwhelming opposes changing the inflation calculation; according to one poll, 60 percent of Americans think the switch is "unacceptable."  But a good number of liberal opinion writers are accepting the concession anyway, following Paul Krugman's lead and using squeamish and defeatist language -- classic Krugman: "as of last night I was marginally positive, right now marginally negative" -- that tacitly lends their approval to this plan (it wouldn't if the vociferously opposed it and called it a sellout). Here are five prominent writers who have lost their moral bearings on this issue:

How Democrats Became Liberal Republicans -Many on the left are puzzled by Barack Obama’s apparent willingness to support dramatic reductions in federal social spending. It is only because Republicans demand even more radical cuts in spending that Obama’s fiscal conservatism is invisible to the general public. But those on the political left know it and are scared.  Yesterday, left-leaning law professor Neil Buchanan penned a scathing attack on Obama for abandoning the Democratic Party’s long-held policies toward the poor, and for astonishing naiveté in negotiating with Republicans. Said Buchanan: “The bottom line is that President Obama has already revealed himself to be unchanged by the election and by the last two years of stonewalling by the Republicans.  He still appears to believe, at best, in a milder version of orthodox Republican fiscal conservatism – an approach that would be a fitting starting position for a right-wing politician in negotiations with an actual Democrat.  Moreover, he still seems to believe that the Republicans are willing to negotiate in good faith.” Others on the left, such as New York Times columnist Paul Krugman, former Secretary of Labor Robert Reich and others raise similar concerns. They cannot understand why Obama, having won two elections in a row with better than 50 percent of the vote – something accomplished only by presidents Dwight Eisenhower and Ronald Reagan in the postwar era – and holding a powerful advantage due to the fiscal cliff, would seemingly appear willing to gut social spending while asking for only a very modest contribution in terms of taxes from the wealthy.

In Fiscal Cliff Deal, Don’t Chain Grandma to Smaller Social Security Checks -News is out today that a deal to avert the fiscal cliff is nigh. The New York Times is reporting that President Obama’s latest offer, which is close to Speaker Boehner’s dreams and desires, will permanently extend the Bush tax cuts on income below $400,000 and raise them above that bracket. In return, there will be spending cuts. One big component of those cuts is a change in how Social Security benefits are calculated, shifting to using the chained CPI. What sounds like a complex accounting measure will mean a serious benefit reduction for those who are elderly and impoverished. And guess who will get hit hardest? If your guess rhymes with schwomen, you’re correct. A Brad DeLong put it yesterday, “’Chained-CPI’ is code for ‘let's really impoverish some women in their 90s!’” This change would end up reducing benefits by about .3 percent each year and will hammer elderly women. The National Women’s Law Center calculates that the typical single elderly woman would see her monthly benefits reduced by $56 at age 80. It reports that this is “an amount equal to the cost of one week’s worth of food each month.” Perhaps they’ll start substituting cat food for provolone. But these cuts get even worse over time as the reduction adds up. By age 95, the NWLC reports that her benefits will be down by over nine percent, the equivalent of nearly two weeks of food. Even with a “bump up” in later years, the graph below from the NWLC shows how quickly benefits will erode with the chained CPI:

Fault lines also appearing on Democratic side in fiscal debate - For weeks, Democrats in Congress have been relishing the division and sniping within Republican ranks over whether to raise tax rates. But as negotiations over the budget crisis wear on and shift to a debate over spending cuts, the tables are turning. Democrats last week aired their own internal battles in the war over the federal deficit. In a petition, a newspaper column, letters and sharply worded comments, top Democrats on Capitol Hill warned the president to protect the social safety net and step back from previous proposals to make major changes. White House officials insist nothing is off the table, tacitly acknowledging that the president is weighing potential changes to Medicare, Medicaid and Social Security as he negotiates with House Speaker John A. Boehner (R-Ohio). Although both sides have been reluctant to put details in writing, any deficit reduction deal will almost certainly require significant alterations to these entitlement programs. Boehner made a fresh offer in a phone call with the president Friday: The speaker would agree to allow tax rates to rise on those earning more than $1million in exchange for “substantial” reductions in spending and entitlements, according to an aide familiar with the negotiations who was not authorized to speak about the details.

Child Murderer-in-Chief Announces Hateful Cuts, Issues Veiled Warning Threat to First Graders  - Today it’s not just me: Glenn Greenwald and George Monbiot both called President Obama a Child Murderer. Obama has killed 9 times as many children with Drones as the Sandy Hook shooter did, and has shown NO remorse. In fact, he laughs and jokes about killing children with Coward Drones. With his ha-ha funny Coward Drones, President Obama has Murdered at least 178 children. We must as a country find some way to turn him over the the International Criminal Court in the Hague for prosecution. If we don’t, we are helping him Murder more children.  Today President Obama announced Hateful slashes to benefits slated for the very poorest and most vulnerable people in our country: This is so that the richer half of the country won’t have to pay the automatic tax increase that he himself signed into law, but now calls “The Fiscal Cliff.” Make no mistake about it: These cuts do constitute a monumental Hate Crime, and they are sure to kill lots of children. President Obama seems to be letting his apparent Hatred of children get in the way of his governing.  In Hateful anti-child Propaganda [reminiscent of 1984's newspeak], President Obama calls the richer half of the country “the Middle Class.” He calls the emergency life support system that’s keeping poor children alive “entitlements,” with its negative connotation, calculated to make the listener feel that those lazy poor kids are not entitled to anything. Let ‘em wither!

The Lie of the Year Should Be Obama’s Promise Not to Raise Taxes on the Middle Class - For five years Obama repeatedly and unequivocal promised not the raise taxes by one penny on anyone making less than $250,000. He did so in ads, campaign stops, emails, and interviews. There is probably no other single policy proposal that was more central to both of Obama’s presidential campaigns. Millions likely voted for Obama based on this firm promise. Yet even before Obama’s second term begins, he has rushed to break this campaign promise. Obama has pushed for a deficit deal that includes a switch to chained-CPI. Switching to a lower inflation measure would not only cut Social Security benefits, it would end up being a significant tax increase on the middle class by causing tax brackets to raise more slowly. While the tax increase would be very small at first, over the next decade it would mean the middle class will pay ten of billions more in taxes.

Update on Fiscal Cliff - From Suzy Khimm at the Wonkblog: Five sticking points in the fiscal cliff deal President Obama’s latest fiscal cliff offer has brought the outlines of a final deal into focus. But there are still some major sticking points and outstanding questions that have to be resolved before a final deal will be able to pass Congress. Here are the five issues Khimm identifies:

1) Will low-income seniors be protected from Social Security cuts? If so, how?
2) Will House Republicans go along with tax hikes?
3) How much short-term stimulus will survive in a final deal?
4) What kind of enforcement mechanism will be attached to the health-care cuts?
5) How will the debt ceiling be resolved?

And on the AMT from Mark Koba at CNBC: Will 'Fiscal Cliff' Deal Include Cap on the AMT? President Barack Obama's latest proposal in the "Fiscal Cliff" talks includes an offer to permanently cap the Alternative Minimum Tax ... Right now, some 29 million more Americans—in addition to the current 4 million—could be subject to the AMT in their 2012 returns if no agreement is reached on the fiscal cliff. ... That's because the AMT has never been indexed to inflation, so every year more Americans are caught up in it.

A rough 24 hours for the White House - Here’s how the last 24 hours have gone for the White House.  On Monday, they delivered an offer to House Speaker John Boehner that included genuine concessions. They brought their revenue request down from $1.6 trillion to $1.3 trillion. They dropped their demand that the Bush tax rates expire for all income over $250,000 a year, offering a new threshold of $400,000 a year. They brought their debt-ceiling demand down from no more debt ceiling crises ever to no debt ceiling crises for two years. They agreed to some form of chained CPI as a way to cut Social Security benefits. On Monday night, Boehner rejected their offer, and on Tuesday, Boehner unveiled “Plan B” — a proposal to walk away from the talks, vote on a plan to make the Bush tax rates permanent for all households with income under $1 million, and then go home for the holidays.  Between Monday night and Tuesday morning, Boehner apparently got an earful from his leadership team. They were angry, I’m told, over three main elements of the emerging deal. First, they don’t think there should be even a two-year lift in the debt ceiling, as that removes their leverage to bargain for spending cuts in 2013 and 2014. Second, they worry that the tax revenues will be locked in but that there’s no guarantee that Congress will get the entitlement cuts done. Third, they think that the spending cuts should be counted without interest and after subtracting the cost of extended unemployment insurance and infrastructure spending.

The Deal Dilemma - Krugman -- First things first: cutting Social Security benefits is a cruel, stupid policy — just not nearly as cruel and stupid as raising the Medicare eligibility age. But sometimes you have to accept bad things in pursuit of a larger goal: health reform should have included a public option — heck, it should have gone straight to single-payer — but a flawed route to universal coverage was better than none at all. The question about this looming deal is whether the end justifies the means. Unfortunately, it’s not nearly as clear a case as the health care deal, and I’m agonizing, big time; as of last night I was marginally positive, right now marginally negative.Let’s talk about what’s going on. First of all, the comparison has to be with what we think Obama can get if he goes over the cliff; if that happens, all the Bush tax cuts expire, and he can propose and probably get accepted a new round of middle-class cuts — but nothing else: no extension of unemployment benefits (another cruel, stupid action), no infrastructure spending to boost the economy. So how does the possible deal differ? It doesn’t raise rates on the second-highest bracket, which means that the tax hike on earned income only falls on those making $400,000 or more. As I understand it — the reporting is weirdly silent on this, but it’s what I got from my own conversation with an SAO* — is that taxes on unearned income are going back to pre-Bush levels: capital gains at 20 instead of 15 percent, dividends taxed as ordinary income. If I’m wrong about that, this is easy: no deal.

That Old Sick Feeling - Krugman - Here we go again — or so I find myself fearing.  Obama’s fiscal deal offer was already distressing — cuts to Social Security, and a big concession, it turns out, on taxation of dividends, retaining most of the Bush cut (with the benefits flowing overwhelmingly to the top 1 percent). It wasn’t clear that the deal would have gotten nearly enough in return.But sure enough, it looks as if Republicans have taken the offer as a sign of weakness, as a starting point from which they can bargain Obama down. Oh, and they’re not giving up at all on the idea of using the debt ceiling for further blackmail.In other words, all of a sudden it’s feeling a lot like 2011 again, with the president negotiating with himself while the other side enjoys the process.S o Obama needs to draw a line right now: no further concessions. None. He’s already given too much. Yes, this probably means going over the cliff. So be it: it’s less bad than the alternative.

What the Fiscal Cliff Looks Like - As President Obama and House Speaker Boehner negotiate a deal to avoid the fiscal cliff, Foreign Affairs presents an infographic showing the tax cuts and new taxes on the table, and who will pay.

Careen Off the So-Called Fiscal Cliff" It's Silly Season at the NYT - Ever since the election the Wall Street gang has been trying to build up scare stories around the budget standoff between the President and the Republican House. The term "fiscal cliff" is a central part of this campaign since it implies that something ominous happens if there is no deal by the end of the year. As every economist and budget analyst knows, it makes virtually no difference whatsoever if there is a deal 10 days before the end of the year or 10 days after. However if the Wall Street gang can build up enough fear then it will lead to more pressure to get a deal before the end of the year. Since President Obama will be on much better negotiating turf after the end of the year and the tax cuts have already expired, a deal struck this year will likely be more favorable to the Republicans. The NYT seems to have joined in this effort, telling readers that we may "careen off the so-called fiscal cliff" if there is no deal. This sort of silly and inaccurate metaphor is best left for fiction. It has no place in a serious newspaper.

Bill Black: Let’s Celebrate the Failure of the July 2011 Great Betrayal - In July 2011, President Obama and Speaker Boehner reached an agreement in principle on a deal crafted to inflict $4 trillion in austerity by raising taxes modestly, slashing social spending, and beginning to unravel the safety net. The deal would have been a disaster for America. Unemployment was 9.1%. The deal would have thrown us back into a recession and caused unemployment to surge. Recessions and increased unemployment cause tax revenues to fall and increase demand for social services (e.g., for unemployment compensation) – they produce large deficits. Austerity kills jobs and frequently increases deficits. The Eurozone is the latest demonstration of this fact. We should, therefore, all be celebrating the failure of the July 2011 austerity deal. We almost committed an act of economic self-mutilation of tragic proportions. Instead, because of the failure to adopt austerity in July 2011 we followed an economic policy based on modest stimulus. As predicted by most economists (including my UMKC colleagues) that policy produced modest growth and modest reductions in unemployment. The recovery produced the sharpest reduction in budgetary deficits in modern U.S. history. The Eurozone’s leaders’ austerity policies forced many nations back into recession. Austerity was most draconian in the periphery where it produced Great Depression levels of unemployment, particularly for young adults. The dominant media meme about the “fiscal cliff” is that it is an insane austerity program that would force the U.S. back into a gratuitous recession and cause large increases in unemployment. Logically, that should cause the media to recognize that the far more severe austerity blows that Obama and Boehner sought to inflict on the U.S. in July 2011 at a time when our economic recovery was much weaker than it is today would have been disastrous and that we should be overjoyed that the deal fell apart.

Fiscal Cliff: Let's Call Their Bluff! – Ellen Brown - The "fiscal cliff" has all the earmarks of a false flag operation, full of sound and fury, intended to extort concessions from opponents. Neil Irwin of The Washington Post calls it "a self-induced austerity crisis." David Weidner in the Wall Street Journal calls it simply theater, designed to pressure politicians into a budget deal:The cliff is really just a trumped-up annual budget discussion.... The most likely outcome is a combination of tax increases, spending cuts and kicking the can down the road. Yet the media coverage has been "panic-inducing, falling somewhere between that given to an approaching hurricane and an alien invasion," according to the Post. In the summer of 2011, this sort of media hype succeeded in causing the Dow Jones Industrial Average to plunge nearly 2000 points. But this time the market is generally ignoring the cliff, either confident a deal will be reached or not caring. The goal of the exercise seems to have been to dismantle Social Security and Medicare, something a radical group of conservatives has worked for decades to achieve. But with the recent Democratic victories, demands for "fiscal responsibility" may just result in higher taxes for the rich, without gutting the entitlements.

John Boehner's fiscal cliff ‘Plan B’ going nowhere in Senate - House Republicans are launching a parallel strategy to avert the fiscal cliff, seeking to pass a bill that would hike tax rates on income over $1 million, while extending rates on the rest of Americans. Unveiled by Speaker John Boehner (R-Ohio) at a closed party meeting Tuesday, the legislation has already been declared dead on arrival by Senate Majority Leader Harry Reid (D-Nev.) and the White House, who argue it’s still weighted too heavily in favor of the wealthy. House Democrats would not help Boehner cull together the 218 votes he needs to get the bill passed, the No. 2 House Democrat, Maryland Rep. Steny Hoyer, said. The vote, expected to happen this week, is designed to provide cover for House Republicans if the nation goes off the fiscal cliff and income tax rates jump on everyone. If President Barack Obama keeps accusing Republicans of only looking out for the wealthiest, the backup plan allows them to respond it’s not true. Though talks between Obama and Boehner the last several days have yielded clear progress, there’s a long way to go. It remains to be seen whether the GOP fallback plan will jump-start negotiations again.

Boehner's Plan B Is Going To Make It Harder: Why I'm Still Not Optimistic About A Fiscal Cliff Deal - Yes, I'm still pessimistic about a fiscal cliff deal before January 1. While the odds of avoiding the cliff seemed to improve yesterday as the headlines screamed that Obama and Boehner had moved closer to each other, it was clear to me that, if they had improved at all, it was only marginally. To my mind it's still better than 3:1 that we go over the cliff. Here's why. First, this was always going to be a two-step process: Obama vs. Boehner, then Republicans vs. Democrats. Even if the first step was successful, the second step was always going to be problematic. And an agreement in the first step would likely make the second more difficult. That, in fact, is exactly what happened over the past 24 hours. The rumor that Obama and Boehner were close energized the rank and file in the House and Senate, who have not been part of the negotiations and had little stake in the outcome. By this morning, both the White House and House Republicans had rejected what the other had offered. In other words, the only thing the first and the second step in the negotiating process has produced over the past 24 hours is hard feelings. There is no meeting of the minds and no sense that going over the cliff has to be avoided.

Boehner Challenges Obama With 'Plan B' Showdown - House Speaker John Boehner pressed his backup tax plan Wednesday despite a White House veto threat, saying it will be approved Thursday by the GOP-controlled House. "Then the president will have a decision to make," Boehner said. "He can call on the Senate Democrats to pass that bill, or he can be responsible for the largest tax increase in American history." Earlier in the day, President Barack Obama threatened to veto Boehner's "Plan B," pressing instead for a deal to avert the "fiscal cliff." He said the two sides were only a few hundred billion dollars apart, and he hoped to get the job done before Christmas. "Plan B" calls for extending tax cuts for people making up to $1 million. The White House immediately rejected it Tuesday, saying it was unbalanced and didn't go far enough on seeking more revenue from the wealthy. Obama said he would continue to work with Boehner and was prepared to do "tough things." But he said he would not compromise on his demand that he be given authority to raise the debt ceiling without Congress' approval.

Boehner Delivers Plan B Ultimatum - John Boehner just gave a “press conference” that clocked in at under a minute, where he took no questions and basically said that Democrats could either pass his “Plan B” proposal, which extends Bush-era tax rates on the first $1 million of income and does basically nothing else, or “be responsible for the largest tax increase in American history.”  In saying this, Boehner is trying to talk Americans out of the opinion they’ve already formulated, that the GOP would be responsible if the nation started down the fiscal slope. Instead, he’ll leave on the table what is a very favorable deficit offer, and do this millionaire’s bracket gambit, which the Senate has already said cannot pass, and which the White House has already said they’ll veto. The President very explicitly laid out his offer, and all the public gets from Boehner is a tax cut bill. I don’t see how that flies among the public. I have to assume that Boehner is pretty confident he can pass the millionaire’s bracket through the House. Then the Senate will refuse to pass the House bill and demand that the House passes the Senate bill, with its $250,000 threshold. And at that point, we’ll be at an impasse, with both sides focused only on the tax side of the fiscal slope – and really only tax RATES, not all of the other expiring tax measures – and nobody talking about the spending side. The “threat” of falling over the slope is what Boehner’s counting on.

Boehner’s Choice - I’ve been trying to figure out what House majority leader John Boehner is up to.  He ably negotiated a plan with the President that of course has tax increases—once Obama won reelection, that was baked in the cake—but has trophies for his side too: the chained CPI, a trillion in spending cuts on top of the trillion in cuts they’ve already gotten, the debt ceiling still looming out there somewhere. And yet, instead of leading the nation away from the cliff, he’s leading his caucus over it.  He’s pushing his benighted Plan B and will apparently waste tomorrow voting on it.  I assume he has the votes to pass it but so what?  It’s dead in the Senate and the President has already promised a veto.The only reason I can see for pursuing that course is that he’s more interested in keeping his job as leader in the new Congress than in resolving the cliff for the good of the nation.  When you consider his numbers—something like 60 Tea Partiers and almost no moderates—it seems undeniable that the only way he gets the House to pass a bona fide compromise, like the plan he and the President have hammered out, is with a large majority of Democrats.And at that point, he’s passed a $1 trillion tax increase with the help of a bunch of D’s and his chances of getting elected as leader in the next Congress are zilch.

Conservatives Spar Over Boehner's Fiscal Cliff 'Plan B' - Shortly after Grover Norquist's Americans for Tax Reform gave Republicans the go-ahead to vote for House Speaker John Boehner's "Plan B," two top conservative groups urged GOP representatives to vote "no" on the measure.  While ATR gave Boehner some cover, Heritage Action and Club for Growth came out against Boehner's new plan, which would see taxes revert to higher rates on incomes above $1 million per year or more while permanently preserving the cuts for anything less. It's a plan that once was rather unthinkable to Republicans because of its tax increases, and one that conservative groups signaled they will continue to oppose.  Heritage accused Boehner of embracing "the other side’s political gimmick, as is the case with the Schumer-Pelosi tax plan." The Club for Growth, meanwhile, said it wouldn't "buy into Washington-speak, suggesting that these are actually tax cuts." Some conservatives believe Norquist's group is looking for political cover from its all-or-nothing pledge. All of the groups' sentiments are significant as Boehner looks to secure the votes needed to pass "Plan B." There are 241 Republicans currently in the House. If no Democrats vote for the plan, Boehner can only afford to lose a maximum of 23 members of his own party. 

John Boehner’s Plan B would raise taxes on the poor -While the bill makes permanent the expansion of the Child Tax Credit (CTC) signed into law by George W. Bush as part of the 2001 tax cut deal — which bumped the credit from $500 to $1,000 — it does not extend an expansion that was passed as part of the 2009 stimulus package, and has been renewed since then, allowing poor families to refund more of the credit. Nor does it extend the stimulus’s expansion of the Earned Income Tax Credit (EITC), by far the most important anti-poverty program the federal government has, or the American Opportunity Credit (AOC), which provides tuition assistance for middle-class families. That has a huge impact on lower-income families. The Tax Policy Center hasn’t projected the distributional effect of extending the AOC, but it has estimated those effects for the stimulus expansions of EITC and CTC:The working poor, on average, would see taxes go up between $1,000 and $1,500 dollars. Barely anyone making over $100,000 would see a tax increase, and as a percentage of income, middle and upper middle class people making between $40,000 and $100,000 a year would see taxes go up less. But low income families earning $10,000 to $30,000 a year really take a beating under Boehner’s plan. Of course, if we do nothing, then the 2001 provisions expire as well and poor families are really in for a bruising.

Rich Make Out Like Bandits in Fiscal-Cliff Negotiations -- Staring at the fiscal cliff, which would have raised taxes on income, capital gains, dividends, and estates taxes, the wealthy had reason to fear.  The first several weeks of the fiscal-cliff hostage situation gave them more reason to fear. President Obama held steadfastly to the notion that taxes should go up for everybody earning more than $250,000. He continued to deploy the (successful) campaign rhetoric and argue that we shouldn’t protect tax breaks for the wealthy as we go after social programs that benefit the poor. Poll after poll has revealed that letting taxes rise on the rich is popular, even among Republicans. Meanwhile, a failure to act would significantly alter the tax code, and not in favor of the wealthy. But the developments of this week should cause the posh to take heart. Instead of getting soaked, it looks like the rich will receive a gentle spray of spring water.

Say Goodbye to the Government, Under Either Fiscal Plan -  As President Obama and Speaker John Boehner negotiate to resolve the looming fiscal crisis, Americans might be forgiven for believing that the nation’s problems would be solved if they could only agree on whether to raise $1.2 trillion or $1 trillion in new taxes over the next 10 years, or whether they should cut $850 billion rather than $1.2 trillion more in government spending.This is not, unfortunately, the case. The frenzied partisan horse-trading has glossed over what is arguably the central issue of any debate over long-term fiscal policy: the kind of role we expect the government to play in the nation’s future. Not only have our political leaders failed to lay out a vision of what they hope the budget will achieve, they are pulling the wool over Americans’ eyes about the kind of budget we are about to get.  The truth is that both the president and House Republicans have agreed to shrink a critical part of the government to its smallest in at least half a century. This is regardless of which trillion-dollar proposal gains the upper hand.

Fiscal Cliff—The Well Orchestrated Dance - As the Democrats and Republicans continued their political theater this past week, coming closer step by step to an agreement on the so-called Fiscal Cliff (aka ‘Austerity American Style’), it has become increasingly clear that the key to a final agreement is how much and how to raise taxes. Given the offers and latest positions of Obama-Boehner in recent days, both are one, possibly two, steps at most away from a final agreement in principle on the tax issue. And once the tax side of the fiscal cliff debate is resolved, the spending cuts issue will quickly fall into place. Since November 2010 and the publication of the Simpson-Bowles report, both sides have been always in agreement on the target of $4 trillion in deficit cuts. The contention has always been how much tax increases vs. how much spending cuts. Within the tax side of the equation, how much will the wealthiest 2% pay vs. how much the middle class will have to pay in a ‘broadened tax base’; while on the spending side, how much to cut military spending vs. how much to cut social programs, and social security-medicare-medicaid, in particular.

Obama Proud of His Fiscal Slope Offer, For Some Reason - For some reason, liberals are agonized by the fact that a Presidential press conference about gun safety legislation devolved into questions about the fiscal slope. As if this has never happened before, or that reporters are Constitutionally obligated to stay on topic. Anyway, the President had to defend his latest offer, with its spending cuts commensurate in level with the sequester, benefit cuts to Social Security, concession on marginal tax rate increases by moving the dividing line to $400,000 a year and allowing open the opportunity for debt limit hostage taking down the road. And he basically bragged about the wise centrism of his offer. He called it the “largest piece of deficit reduction we’ve seen in the last 20 years” and said it would resolve out deficit and debt issues for the next 10 years. Because that’s how things work, right? Deficit scolds just go into hibernation once some mythical level of stabilization gets reached. Obama basically ignored the implications of the benefit cut in Social Security, and ignored the regressive tax increase for everyone associated with the move to chained CPI. He mainly expressed puzzlement that Republicans haven’t taken his deal, since he’s gone “more than halfway” in their direction. Um, that answers his own question. If by doing next to nothing, they can watch the President give up on things he long demanded – he said he would veto anything that extended the Bush-era tax rates above $250,000, and that he would not “play the game” anymore on the debt limit – then why wouldn’t they just keep sitting still and letting the President come to them? As Paul Krugman points out: But sure enough, it looks as if Republicans have taken the offer as a sign of weakness, as a starting point from which they can bargain Obama down. Oh, and they’re not giving up at all on the idea of using the debt ceiling for further blackmail

Fiscal cliff talks take downward turn as Boehner presses for ‘plan B’  - Talks over a deal to avert the fiscal cliff appear to have collapsed into a war of words, with President Obama telling Republicans in Congress to "peel off the partisan war paint" and a spokesman for House speaker John Boehner calling the White House's posture "bizarre and irrational". Obama attempted to lay the blame for the lack of progress on the Republicans in the House of Representatives. "They keep on finding ways to say no, instead of finding ways to say yes," Obama told a news conference on Wednesday. But the president said he was still optimistic that he could reach an agreement with Boehner, the speaker of the House and the Republican leader in Congress, insisting that the two sides were not that far apart. "I'd like to get it done before Christmas. There's been a lot of posturing up on Capitol Hill instead of going ahead and getting stuff done, and we've been wasting a lot of time," Obama said. Boehner himself issued a terse response, calling on the president to back the "plan B" legislation being prepared by House Republicans, designed to avert looming tax increases for households earning less than $1m. "The president will have a decision to make. He can call on Senate and House Democrats to pass this bill. Or he could be responsible for the biggest tax increase in American history," Boehner said

"Fiscal cliff" talks turn sour, Obama threatens veto - Talks to avoid a fiscal crisis appeared to stall on Wednesday as President Barack Obama accused Republicans of digging in their heels due to a personal grudge against him, while a top Republican called the president "irrational." Boehner and Obama have each offered substantial concessions that have made a deal look within reach. Obama has agreed to cuts in benefits for seniors, while Boehner has conceded to Obama's demand that taxes rise for the richest Americans. However, the climate of goodwill has evaporated since Republicans announced plans on Tuesday to put an alternative tax plan to a vote in the House this week that would largely disregard the progress made so far in negotiations. Obama threatened to veto the Republican measure, known as "Plan B," if Congress approved it. Boehner's office slammed Obama for opposing their plan, which would raise taxes on households making more than $1 million a year and is a concession from longstanding Republican opposition to increasing any tax rates. "The White House's opposition to a backup plan ... is growing more bizarre and irrational by the day,"

Obama and Boehner Split on Fiscal Plan - Hopes for a broad deficit-reduction agreement faded on Wednesday as President Obama insisted he had offered Republicans “a fair deal” while Speaker John A. Boehner moved for a House vote as early as Thursday on a scaled-down plan to limit tax increases to yearly incomes of $1 million and up, despite Senate opposition and Mr. Obama’s veto threat.The impasse was clear as Mr. Obama and Mr. Boehner separately spoke to the television cameras instead of each other, after a weekend of private negotiations amid grieving over the shootings in Newtown, Conn., had narrowed their differences enough to raise optimism about a far-reaching deal to stabilize the nation’s debt. First Mr. Obama and then Mr. Boehner faulted the other side for the impasse, and ultimately the failure, if a year-end deal could not be reached to stop automatic tax increases and the indiscriminate spending cuts in military and domestic programs known as the “sequester.” The president, saying he had gone “at least halfway” toward Republicans’ demands, evoked Hurricane Sandy and the Newtown school massacre to prod lawmakers to compromise for the nation’s benefit.

White House Said to Tell Business Groups Talks Stall - Obama administration officials told leaders of business and financial services groups that negotiations with House Speaker John Boehner have deteriorated in the past 24 hours, a person familiar with the meeting said. Obama said at the White House that he offered congressional Republicans a “fair deal” and accused them of “posturing” in the talks. Republicans need to “take the deal” he offered, the president said.  Boehner, who is pressing Obama to accept deeper spending cuts and a higher income threshold for tax-rate increases, said if the president doesn’t accept the Republican plan he’ll be responsible for “the largest tax increase in American history.” The $4.6 trillion tax increase over the next decade, scheduled to start taking effect in January, would be about 2.3 percent of the U.S. gross domestic product. In those terms, it would be smaller than a 1942 tax increase during World War II, which was 5 percent of GDP according to the Treasury Department.

House Scraps Vote on Boehner’s Tax Plan Lacking Support - House Republican leaders canceled a planned vote tonight on Speaker John Boehner’s plan to allow higher tax rates for annual income above $1 million amid stalled budget talks. “The House did not take up the tax measure today because it did not have sufficient support from our members to pass,” Boehner, an Ohio Republican, said in a statement. “Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff." Harry Reid, a Nevada Democrat, is Senate majority leader. Boehner said he will call President Barack Obama, said Representative Steven LaTourette of Ohio. A House leadership announcement said the chamber will hold no more votes until after the Christmas holiday and will return "when needed." "The odds go up that we go over the fiscal cliff," said Representative Rob Bishop of Utah, a Republican. Texas Republican Joe Barton said, "It was just too big a hill to climb."

Obama Saved, Boehner Sabotaged by 'Lunatic Wing' -- Update to the post earlier today about Obama being "Saved by 'Republican Back-Benchers'Boehner Sabotaged by Lunatic Wing of Republican Party, by Kevin Drum: Even after larding up his Plan B bill with lots of goodies, John Boehner apparently couldn't get his Republican caucus to support it. So he's now pulled the bill and adjourned the House, promising only to return after Christmas "when needed."\This is truly an epic fail. Boehner couldn't even get a piece of obvious political theater passed. He's completely unable to control the lunatic wing of his own party. It's hard to say what's next. What's next, it seems, is the blame game over which party caused us to go over the fiscal cliff, but I think it's pretty clear who should be held responsible.

Boehner Bails on Plan B - The House leadership tried desperately to pass “Plan B,” the main part of which was an extension of the Bush tax cuts on the first $1 million of income. In truth, all of the other giveaways in it would actually result in lower taxes for many wealthy earners, but tax rates have this weird power, especially within the Republican caucus. And you could just feel today that conservatives weren’t willing to pass the bill, even at that ridiculously high level. John Boehner and the leadership added a sweetener in the form of a package that eliminated the sequester on defense spending and applied it to more discretionary spending cuts, and even that barely passed, tainted by the association to Plan B.We waited for a vote. And waited. Then the House Republicans held a closed caucus. And then Boehner had to come out and call the whole thing off. The House did not take up the tax measure today because it did not have sufficient support from our members to pass. Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff. The House has already passed legislation to stop all of the January 1 tax rate increases and replace the sequester with responsible spending cuts that will begin to address our nation’s crippling debt. The Senate must now act. This is astonishing. Boehner spent three days talking up Plan B, which you just don’t do without the votes in hand. But conservative groups rule the House, and they turned against a bill that gives tax breaks to everyone making up to $1 million, along with enough reductions in other taxes to soften the blow for those poor millionaires. But House Republicans just aren’t going to do it, on this or any tax increase.

Doomsday for the Cliff Deal - All over an unwillingness to convince his colleagues to let tax rates come back up (as scheduled) on (even) the very richest, any “deal” between Boehner and Obama is off –at least until after Christmas: House Speaker John A. Boehner threw efforts to avoid the year-end “fiscal cliff” into chaos late Thursday, as he abruptly shuttered the House for the holidays after failing to win support from his fellow Republicans for a plan to let tax rates rise for millionaires. The proposal — Boehner’s alternative to negotiating a broader package with President Obama — would have protected the vast majority of Americans from significant tax increases set to take effect next year. But because it also would have permitted tax rates to rise for about 400,000 extremely wealthy families, conservatives balked, leaving Boehner (Ohio) humiliated and his negotiating power immeasurably weakened. The Post article goes on to quote from Boehner’s issued statement: “The House did not take up the tax measure today because it did not have sufficient support from our members to pass. Now it is up to the president to work with Reid on legislation to avert the fiscal cliff,” the statement said, referring to Senate Majority Leader Harry M. Reid (D-Nev.).  But how will it help to leave the Senate Democrats to work with the President on a plan?  The whole problem has been the lack of bipartisanship and the willful disregard for “common ground” policies that both sides could not exactly “love” but at least come to tolerate.

Republicans Fail Math Test - Last night, House Speaker John Boehner canceled the vote that he himself had scheduled as a maneuver to put pressure on President Obama. There weren’t enough Republican votes for Plan B and the Democrats sure weren’t going to give him a win. While I doubt it had tremendous impact, Red State’s Erick Erickson put out an URGENT call yesterday morning that explains why Republican Members were afraid of the bill: This disastrous idea is being pushed by Speaker John Boehner and Majority Leader Eric Cantor and will do nothing other than put Republicans on record supporting tax increases that should be the sole responsibility of President Obama. Fortunately, groups like Club for Growth and Heritage Action for America are opposing the bill. Sigh. The so-called Bush Tax Cuts had an expiration date. Republicans used their power in Congress, including resorting to unprecedented sabotage on the debt ceiling vote, in order to get it extended multiple times. Now, it’s set to expire again with the New Year. There’s nothing Republicans can do to stop that.

Boehner abandons plan to avoid ‘fiscal cliff’ - House Speaker John A. Boehner threw efforts to avoid the year-end “fiscal cliff” into chaos late Thursday, as he abruptly shuttered the House for the holidays after failing to win support from his fellow Republicans for a plan to let tax rates rise for millionaires. The proposal — Boehner’s alternative to negotiating a broader package with President Obama — would have protected the vast majority of Americans from significant tax increases set to take effect next year. But because it also would have permitted tax rates to rise for about 400,000 extremely wealthy families, conservatives balked, leaving Boehner (Ohio) humiliated and his negotiating power immeasurably weakened. No one could say late Thursday what will happen next. Just 11 days remain until the new year, when more than $500 billion in automatic tax increases and spending cuts will begin to take effect, threatening to undermine the sluggish recovery and prompt a new recession.

Dragged to the Fiscal Slope - Implications of "I am not a member of an organized political party. I am a Republican." The collapse of Speaker Boehner’s Plan B has been interpreted as signaling that the Speaker never had the votes from his caucus for any deal with the President. [1] If this interpretation is correct, then we should prepare for something like the following trajectory of GDP: I included a 2013Q4 projection of GDP assuming tax increases for income less than $250K are eventually eliminated (green square). In light of this evening’s events, I think this seems a bit optimistic –- it is not clear that the right wing of the Republican Party would allow a partial tax cut; all or nothing seems to be the current stance. In any case, this estimate is based upon the August 2012 CBO projection. To the extent that one believes the current-law trajectory of GDP is lower, the implied level of 2013Q4 GDP is commensurately lower. As CBPP’s Chad Stone has pointed out, the CBO projection assumes immediate implementation of the provisions. Some could be delayed until some agreement could be made, thereby possibly avoiding a downturn (e.g., the green square in my optimistic scenario). One can only hope.

Cliff Dive: What the Heck Happens Now? - The House Republicans have failed to pass their benighted Plan B.  But other than “Republicans are in deep disarray” what does that mean for near-term fiscal policy—should we prepare the trimmings for a Merry CLIFFMAS? In fact, once Rep Boehner turned away from the compromise he was hammering out with the President earlier in the week, the odds of going over the cliff significantly jumped.  Plan B was nothing more than theatrics—designed to show the world that Leader Boehner could muster his troops, even if it was for a cliff solution that was going nowhere in the Senate or White House.  Unfortunately for him, that little bit of theater turned out badly, and Boehner’s leadership is at risk. Unfortunately for the rest of us, it’s impossible to imagine a plausible deal being made with these House R’s.  If Boehner decided to go for a compromise with a bunch of D votes, he could likely get to 218 and passage.   But John Boehner teaming up with Nancy Pelosi to pass a tax increase—even on just the top few percent—is not…um…a likely outcome. So over the cliff we go.  What happens next?

Congress Probably Can’t Avoid Fiscal Cliff, Brady Says -  Congress won’t reach a deal this year to avert the so-called fiscal cliff of automatic spending cuts and tax increases scheduled to start in January, a senior House Republican predicted. “With the clock ticking, it just becomes increasingly unlikely we can come together before New Year’s Day,” Representative Kevin Brady, a Texas Republican, said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. House Speaker John Boehner and President Barack Obama will continue talking over the next 10 days, Brady said. He didn’t rule out using Obama’s latest offer to Republicans as the basis for an eventual agreement with additional spending cuts added. “Why don’t they move that bill out of the Senate and so that the House can take up those provisions, if they’re real, with real, authentic spending cuts, and then let’s see if we can’t build that bridge,” said Brady, a member of the tax- writing Ways and Means Committee. “We are having trouble building that bridge from our side.”

Fiscal Cliff Extra - So I'm trying to game out this fiscal cliff thing now that it seems to be becoming a matter of urgent practical importance:

  • It seems likely at this point that there will be no agreement before Jan 1st given that Speaker Boehner cannot deliver his caucus (about 90% certain of this).
  • I assume that Obama will not be so weak as to immediately capitulate to the right wing of the house Republicans (about 90% certain of this too).   
  • So then we go over the "cliff", payroll taxes and income taxes rise, defense spending falls, etc
  • Public blames Republicans, but hard-core right-wing Republicans don't care what the public (aka "liberal media" and "biassed pollsters") think.
  • The federal deficit falls, but not to zero, so, very shortly, we hit the federal debt ceiling again.
  • Republicans refuse to raise the debt ceiling unless all their demands are met.
  • Obama gets to choose between the various constitution-stretching options to ignore the debt-ceiling, or capitulating to whatever the conservative wing of the Republicans will vote for (and never being able to look his progressive friends in the eye again).
  • In the meantime, the economy goes in the tank due to the combination of the reduced spending power of the taxpayers and government contractors, and uncertainty over whether the federal government will honor its debt or not.
  • Public is furious, but none of the players face reelection for two years, so no change in positions in the short term.

Will Boehner’s speakership survive until Plan C?: Over the past three days, Boehner has focused all attention on “Plan B”: an effort to strengthen his hand in negotiations with President Obama by passing backup legislation that would extend the Bush tax cuts for all income under $1 million. Tonight, Boehner lost that vote. In a dramatic turn of events on the House floor, he pulled the legislation. In a statement released moments ago, he said, “The House did not take up the tax measure today because it did not have sufficient support from our members to pass.” Boehner lost.Plan A, which was a deal with Obama, was put on ice, many believe, because Boehner couldn’t wrangle the votes to pass anything Obama would sign. Plan B failed because Boehner couldn’t wrangle the Republican votes to pass something Obama had sworn he wouldn’t sign. The failure of Plan B proved something important: Boehner doesn’t have enough Republican support to pass any bill that increases taxes — even one meant to block a larger tax increase — without a significant number of Democrats. The House has now adjourned until after Christmas, but it’s clear now what Plan C is going to have to be: Boehner is going to need to accept the simple reality that if he’s to be a successful speaker, he’s going to need to begin passing legislation with Democratic votes.

Call the fiscal cliff bluff - Ellen Brown - The "fiscal cliff" has all the earmarks of a false-flag operation, full of sound and fury, intended to extort concessions from opponents. Neil Irwin of the Washington Post calls it "a self-induced austerity crisis". David Weidner in the Wall Street Journal calls it simply theater, designed to pressure politicians into a budget deal:  The cliff is really just a trumped-up annual budget discussion. ... The most likely outcome is a combination of tax increases, spending cuts and kicking the can down the road.  Yet the media coverage has been "panic-inducing, falling somewhere between that given to an approaching hurricane and an alien invasion. In the summer of 2011, this sort of media hype succeeded in causing the Dow Jones Industrial Average to plunge nearly 2,000 points. But this time the market is generally ignoring the cliff, either confident a deal will be reached or not caring.  The goal of the exercise seems to be to dismantle Social Security and Medicare, something a radical group of conservatives has worked for decades to achieve. But with the recent Democratic victories, demands for "fiscal responsibility" may just result in higher taxes for the rich, without gutting the entitlements.  The problem is that no deal is going to be satisfactory. If we go over the cliff, taxes will be raised on everyone, and gross domestic product is predicted to drop by 3%. If a deal is reached, taxes will be raised on some people, and some services will be cut. But the underlying problems - high unemployment and a languishing economy - will remain. More effective solutions are needed.

Either Way We’re Going Over the Cliff -- The frantic negotiations in Washington to avoid the fiscal cliff in January may appear to be mostly a battle over higher taxes on the rich. At the moment, negotiations seem to have hit a temporary impasse. But the strenuous debate between President Obama and House Speaker Boehner over how to stave off the $700 billion or so of automatic spending cuts and tax hikes scheduled for 2013 is obscuring a larger and far more disturbing issue: whichever way the negotiations go, the result will be slow economic growth next year at best, and possibly outright recession. A fair observer might ask why the US is doing this to itself. Both Obama and Boehner say they want to reduce deficits by roughly $2 trillion over the next 10 years—in this major issue, they are closer together than is commonly realized. The battle centers around whether it should be through tax increases (Obama) or spending cuts (Boehner). But even if the underlying goal were justifiable—and it is based on very cautious estimates of future growth rates—there is no compelling economic argument for beginning this process in 2013. Taking $700 billion of buying power out of the economy in its current state, as the fiscal cliff does, would be a body blow, leading to outright recession and unemployment rates of up to 10 percent or higher. Economic recovery would not be immediate, and unemployment rates could well remain above 8 percent indefinitely even once recovery had begun. But a compromise that reduces that impact to $300 billion, or even $200 billion, by reinstating many tax cuts and reducing spending cuts, will still rob the economy of a huge amount of buying power at a time when it needs every penny. The result will be tepid growth in 2013, just when the economy seemed to be gathering momentum—and little progress on reducing unemployment.

Obama admits he’s already conceded more than warranted - President Barack Obama, in his painfully bad press conference: I have gone at least halfway in meeting some of the Republican concerns. At least halfway? So he's admitted that he's already met them in the middle, and likely gone past the middle into Republican territory. And we're still two weeks out from the fiscal cliff deadline, with Republicans sitting around waiting for the inevitable further concessions Obama will make.  Not that it matters that Obama has public opinion on his side. He had that in 2011 too, and pissed it away because of his pathological desire to find "consensus" regardless the cost. People elected him not because of his leadership style, which earned terrible marks, but because they expected him to look out for them. He might want to validate those expectations.

Obama Again Proves Why the GOP Should Always Bet on Him Folding - During this fiscal cliff fight, the Obama team has only \drawn two lines in the sand. The first was on raising the tax rate for people making over $250,000 a year.  The other was refusing to allow raising the debt ceiling to be used for political gain. On both of these demands Obama has already folded like a tissue in a rainstorm. A compromise on the tax rate is not that surprising. While the Obama team was firm on this point it always seemed more like a negotiation ploy than a real line in the sand.The fold on the debt ceiling, though, has basically destroyed any negotiating creditability Obama might had left with Congressional Republicans. President Obama repeatedly said he was not going to “play that game.” His team said they see the debt ceiling issue has have historic significant. The White House claimed they had a duty to the future to break this dangerous habit. The President used the strongest possible language to say he would not hold on this issue, yet two weeks later he completely folds. This is just the latest in a long pattern of behavior by Obama. Obama always seems to blink first. By this point it would frankly be idiotic for any Congressional Republicans to believe Obama will hold firm during a negotiation

Hoyer Pushes Plan to Pass Obama Offer With Bipartisan Mix - So Democrats have reached the bargaining phase of the fiscal slope debacle. It’s hard to say whether they’re pushing this because they think they have an opportunity to avoid the austerity bomb or because they know they have no partner on the other side, but either way, the result is the Democratic leadership, at least in the House, taking control of a plan that would, among other things, cut Social Security benefits as well as benefits for any of the 50 federal programs with a cost of living adjustment or income-based eligibility standard, and begging John Boehner to work with them to pass it. Steny Hoyer had this to say on CNBC today. “John Boehner could not get his own bill through the Republican majority. What John Boehner I think can do is come to an agreement with the president and get half of his people or a little more than half of his people” to reach a bipartisan agreement. That’s the conventional view – Boehner could abandon his right flank and join hands with the majority of Democrats on something that can pass. But on with Andrea Mitchell, Hoyer went further. He specifically said that the vehicle for such a deal could be the last Obama Administration offer, which would increase tax rates above $400,000, extend unemployment benefits, and include a process for a total of $1.2 trillion in tax increases and $930 billion in spending cuts, including switching to the chained CPI for Social Security and other social program benefits, as well as tax brackets. There are other parts to the deal as well (a permanent patch for the alternative minimum tax and the doc fix, a two-year stand-down on the debt limit), but those are the highlights. Hoyer basically said that he could bring Democrats along with half the votes for such a deal, while Republicans could get the other half

Get Ready for a Potentially Really Brutal Debt Ceiling Fight in a Year or Two - Just two weeks ago President Obama was taking a very firm stand on the debt ceiling. He was claiming he would never again allow something so dangerous to be used as a political bargaining chip, but almost immediately he crumbled like a sandcastle at high tide. President Obama went from demanding a permanent solution to the debt ceiling to accepting only a two year increase from Republicans as part large budget deal. There is still some disagreement on this point. Speaker John Boehner wants a one year increase while Obama wants a two year increase, but in the grand scheme of things this difference is minor. What is important is that Obama appears ready to effectively agree that a temporarily debt ceiling increase is a concession from Republicans in a deal. When Republicans in 2011 for the first time threatened to use the debt ceiling to make demands and the President went along with it, that “weaponized” the debt ceiling. But what Obama is prepared to do now is even more dangerous, that is to “normalize” this behavior. Even worse, by destroying his own credibility on the issue Obama has made it now infinitely harder for him to try to fix this problem in the future. Obama claimed he learned his lesson and won’t allow Congress to play games with the debt ceiling again, but then quickly folded. What this means is if in a year or two Obama tries to claim this time he is serious about not playing games with the debt ceiling, no one will believe him.

Reading the tea leaves on financial markets and fiscal austerity - By now, it’s (finally) becoming well-recognized that the term “fiscal cliff” confuses more than it clarifies. The worst problem with it is that it presents the sharp fiscal contraction baked into current law for 2013 as a single monolith, when in fact it’s the result of a bunch of separable tax increases and spending cuts. Given that our previous effort at renaming the “cliff” clearly failed, I now officially nominate “à la carte austerity” as a new entry.  A second problem with the “cliff” metaphor is that it carries the strong implication that if this à la carte austerity is not solved by Jan. 1, then economic chaos will ensue. This is clearly wrong. If nothing is done to address the fiscal contraction throughout the entire first half of next year, then yes, the economy will re-enter recession. But we will not be slammed back into recession Jan. 2 if this isn’t solved by then. I should note one important caveat to this: fiscal austerity will be very “cliffy” indeed for about two million of the most vulnerable Americans, as extended unemployment benefits will see a hard cutoff by the end of December. So if policymakers are trying to manage this situation with maximum efficiency and compassion, it seems that extending the longer unemployment benefits is an obvious place to start, even if other elements of the à la carte austerity are not solved. Yes, I’m not holding my breath either.

Playing Taxes Hold ’Em, by Paul Krugman - A few years back, there was a boom in poker television — shows in which you got to watch the betting and bluffing of expert card players. Since then, however, viewers seem to have lost interest. But I have a suggestion: Instead of featuring poker experts, why not have a show featuring poker incompetents — people who fold when they have a strong hand or don’t know how to quit while they’re ahead?  On second thought, that show already exists. It’s called budget negotiations, and it’s now in its second episode.

The chart that shows why JPMorgan calls the fiscal cliff ‘nothing but theatrics’ - Economist Michael Feroli of JPMorgan makes a great point in a new report about the fiscal cliff. Almost whatever the outcome, he points out, it will do little to nothing to change the nation’s lethal long-term budget trajectory. Focusing, as the current negotiations do, on a completely arbitrary ten-year budget window is a complete distraction. The national debt will still be rocketing higher: In the chart [above], the green line indicates the CBO’s projections for publicly-held debt as a percent of GDP assuming a continuation of current tax and spending policies. In this scenario debt-to-GDP is projected to reach 247% in 30 years time. The President is currently pushing for $1.2 trillion of revenue over 10 years, or about 0.6% of GDP over that same horizon. Assuming that increase in revenue as a share of GDP persists after 2022, and taking account of the saving from reduced federal debt service payments, publicly-held debt (the yellow line) will still amount to 226% of GDP in 30 years.

Congressional Cliff Theatrics: What’s At Stake - At a time when we very much need our policy makers to be forging compromise, House Republicans are screwing around with their plan B.  I’ve gone through the economics and politics of this folly, but I keep coming back to my role as Cassandra-on-the-economy (an increasing lonely role here in DC). A few days ago, I plotted the plight of the unemployment rate.  Even with a decent compromise resolution we’re looking at high jobless rates for the next few years. But today, when the revised GDP growth rate for the third quarter of this year come out at 3.1% real, I went back and looked at what the CBO predicted re the path of real GDP if we go over, and stay over, the fiscal cliff (remember, a fiscal bungee jump would not invoke anything like the recessionary impact of staying over). The figure below shows annualized real quarterly growth rates for GDP with actual data through 2012Q3 and the CBO forecasts after that.  As you can see, if we go over and stay over, the swing in real growth is sharp and quick.  We go from growing about 2.5% in the second half of this year from contracting at a highly recessionary rate of about 3% in the first half of next year.

What Adjusting the Price Index Would Mean for Taxpayers - So what’s this all about? At its heart is a technical argument about what measure of inflation best captures the fact that people respond to price changes. The model that Congress may adopt assumes that people adjust their behavior when prices rise (or fall). So, if beef gets more expensive, they buy chicken. By buying the less expensive fowl, a shopper’s cost of food does not go up as much as it would if he stuck with beef. As a result, the rate of food inflation is a bit less than otherwise. While the traditional CPI reflects some of this, another version, called chained CPI, may do a better job. At first, this is one of those arguments only economists could love, except for the real world consequences: Taxes and government benefits are adjusted each year to account for cost-of-living changes, and the way those are measured directly affects taxes and benefits.Adjusting Social Security this way would reduce projected benefits by about $100 billion over a decade, according to a 2010 Congressional Budget Office analysis. What would chained CPI mean for taxpayers? The Tax Policy Center, in a 2011 analysis, projected such a shift would boost taxes by an average of about $140 in 2021 under a current policy baseline (where today’s tax rules remain in place). Compared to current law, (that is, where all the 2001-2010 tax cuts expire), it would raise taxes by about $75. 

Wealth and Redistribution Revisited: Does Enriching the Rich Actually Make Us All Richer? - Steve Roth - In a recent post I built a model with one rich person and ten poorer people to ask: does redistribution from rich to poor make us all more wealthy? The conclusion was Yes. Jump back there to see a quick rundown of the model’s assumptions. Michael Sankowski at Monetary Realism put the model through its paces, and provide feedback by email. He pointed out one very interesting thing: total wealth accumulation in the model increases (faster) with redistribution in both directions — from rich to poor and poor to rich.(Note that redistribution could take infinite forms — traditional welfare, education and health-care spending, tax preferences for rich people’s investment income, corporate subsidies, etc. This is systemic redistribution we’re talking about here. Like this model, the system just does it.) Here’s what that looks like, with starting wealth of $2 million, divided 50/50 between the rich person and the ten poorer people. (click for larger):

The Mythical Marginal Tax Rate Cure-All -- For Republican supply-siders, denying that marginal tax rates are the sole way to induce or impede economic growth is equivalent to apostasy.  As the debate rages anew -- President Barack Obama wants to raise the top rate to 39.6 percent from 35 percent -- the records of the incumbent president's two predecessors give supply-siders political heartburn. President Bill Clinton raised marginal tax rates in 1993. Over the next few years and beyond, economic growth flourished, unemployment plummeted and the budget picture brightened. In 2001 and 2003, President George W. Bush cut marginal rates. Over the next few years and beyond, the economy stagnated, unemployment rose and the deficit ballooned. Clearly, there were other important factors than taxes: the technology boom of the 1990s benefitted Clinton; terrorism and wars hindered Bush. Both sides know that isn't a sufficient explanation. Daniel Mitchell, of the Cato Institute, asserts that Clinton's record of surpluses was a result of spending restraint. There are numbers to support that; it's also true that federal revenue increased 37 percent in the four years after the 1993 tax increase.

Don’t fight a tax on deductions -- James Stewart has a long attack this weekend on the one idea from the presidential campaign which managed to receive genuine bipartisan support: the cap on deductions. He’s a first-rate reporter and columnist, so it’s worth going into some detail about all the different places he’s wrong.Stewart starts off his column by summing up his two main arguments against a cap on deductions: Without addressing larger tax preferences, like a lower rate on capital gains, it does almost nothing to cure the so-called Buffett problem, in which Warren Buffett’s secretary pays a higher effective rate than her billionaire boss. It doesn’t even raise much revenue. Saying that a cap on deductions doesn’t cure the Buffett problem is a bit like saying that some random bit of Dodd-Frank doesn’t solve too-big-to-fail, or wouldn’t have prevented the 2008 financial crisis. It’s true, but it’s irrelevant. You can’t approach the current fiscal negotiations with the idea that solving the Buffett problem is a necessary precondition for any fiscal-policy tweak: you’d never get anywhere if you did. The task right now is to come to an agreement on a set of policies which will raise revenues and cut expenditures; a cap on deductions does exactly that. And what’s more, while it won’t mean Warren Buffett paying a higher tax rate than his secretary, it will at least reduce the distance between them. As for the idea that a cap on deductions “doesn’t even raise much revenue” — well, that’s in the eye of the beholder. The dog not barking here is that Stewart never actually comes out and say how much money a cap on deductions would raise. Here are the numbers, from the Tax Policy Center: a cap at $50,000 would raise more than $700 billion over ten years, while a cap at $25,000 would raise some $1.2 trillion. That’s real money. Even if you exempt charitable donations from the cap, you’re still raising almost $500 billion at the $50,000 level, and more than $800 billion with a $25,000 cap.

How to fix costly and unjust US tax system, by Lawrence Summers - Sooner or later the American tax code will be reformed. ...So far, the debate has focused on scaling back provisions of the tax code that have favored activities traditionally deemed to be valuable..., reducing reliefs for charitable contributions, taxes paid to state and local governments, home mortgages, employer-provided health insurance and many less important provisions. There are reasonable arguments ... in each case. But taking only the “limit tax incentives” approach to tax reform has several major defects. [lists] ...What is needed is an additional element, one that has largely been absent to date: the numerous exclusions from the definition of adjusted gross income... There are far too many provisions that favor a small minority of very fortunate taxpayers. ... it should not be possible to accumulate and transfer large fortunes while avoiding taxation almost entirely. Yet this is all too possible today. ... [lists several ways] ...I believe it is plausible to raise $1tn over the next 10 years by going after provisions that cause what adds to wealth and spending not to be regarded as income. It has been observed that the greatest scandals are not the illegal things that people do but the things that are fully legal. This is surely true with respect to a tax code in urgent need of reform.

The Charitable Deduction and Why It Needs to Stay - Robert Shiller - WHATEVER else we do about the tax code, we need to save the charitable deduction, which has done so much good in our country and springs directly from some of our deepest values. That deduction is in danger of being altered or even eliminated. The Bowles-Simpson Report of 2010, for example, called for replacing the charitable deduction with a small tax credit, and defended the change on the principle that we should “lower rates, broaden the base” and “simplify the tax code.” That guiding principle was also cited at the time of the Tax Reform Act of 1986, and echoes of it are heard increasingly today. But it should not be our defining principle, even if it would help promote economic growth. After all, our nation has been defined as both self-reliant and charitable. We trust one another, and not just the government, to make important decisions and to take action. Self-reliant does not mean selfish: while it is important that we manage our personal finances responsibly, we also have a deep tradition of giving to others. Many of us believe that we have obligations to others that only we can interpret, through our own consciences. In fact, in 2011 the Charities Aid Foundation of Britain ranked the United States No. 1 among countries globally in its World Giving Index. Religious organizations, universities and colleges and other social groups rely highly on voluntary contributions. The generosity of individual Americans is a good part of the reason that churches are so active in our communities, that our universities are the best in the world, and that we have practically the only significant, small, private liberal arts colleges on the planet. We have to clear our minds of the idea that the charitable deduction is a “loophole” that benefits the rich at society’s expense. Income that is freely given away should not even be considered as taxable income.

Let the Bush tax cuts expire, there are better options - One of the unfortunate side effects of the political dysfunction that has increasingly gripped the nation’s capital is a habit of lurching from one crisis to the next rather than taking time to do a bottom-up assessment of the effectiveness of current policy. The Bush tax cuts are a great example of this. Republicans want to extend all of the Bush tax cuts, while Democrats generally support extending the tax cuts for only the bottom 98 percent of households. But few end up debating whether these tax cuts are actually optimal policy, and if perhaps a better replacement exists. This is unfortunate, because the Bush tax cuts are pretty poor policy; in a decade of existence, they have accomplished none of the goals they were intended to achieve. Under practically any measure, the economy performed exceedingly poorly in the years following the Bush tax cuts. Of the 10 economic expansions since 1949, the economic expansion from 2001 to 2007 ranks last in GDP growth, investment, job creation, and employee compensation. Economic growth was actually 50 percent faster during the 1990s—a time of higher tax rates—than during the 2000s. The Bush tax cuts are particularly poorly-designed for the current economic situation. Effective job creation policies are those that address the demand shortfall that continues to hold back full recovery. Yet the Bush tax cuts disproportionately go to taxpayers who simply save the money, trading public savings for private savings but doing little for the economy itself. This is why the Bush tax cuts for the rich cost about five times as much as extending the low-income tax credits, yet the job impact is about the same.

Should Working Class Families Pay Higher Tax so High Income People Can Pay Less? - Somehow, the fiscal cliff tax debate has taken a truly weird turn.  Democrats and Republicans seem hell-bent on protecting millions of high-income people from deficit-cutting tax hikes. President Obama started all this four years ago when he redefined the middle class as individuals making $200,000 or less and couples making up to $250,000, and vowing they would never, ever pay a penny more in taxes. This promise exempts 98 percent of households from paying higher taxes to reduce the deficit—a goal most of them say they support.But that was just the start. Earlier this week, pressured by House Speaker John Boehner, Obama reportedly agreed to define the protected middle class as those making as much as $400,000, and the gossip around town is that he might even up the bidding to $500,000.  All this seems to be headed in exactly the wrong direction.For his part, the speaker has taken an even stranger turn by going rogue with his Plan B. He’d raise taxes on those making $1 million or more, who account for only about 0.2 percent of households. And he’d raise taxes on those making $50,000 or less. The result: Working families would help cover some of the revenue that’s lost from protecting those making between $200,000 and $1 million. Indeed, under the speaker’s plan, according to a new Tax Policy Center analysis, almost no one making between $200,000 and $1 million would pay more in tax than what they’d pay under today’s rules. 

How The Super Rich Avoid Paying Taxes - If you’re wondering how the ultra-rich avoid paying taxes, here’s a handy infographic that explains it:

Buffett Knows That Tax Rates Matter - Consider how every business-school student, investment banker and investment analyst on Earth has been taught to choose whether to invest in a specific project or company. You make a spreadsheet (a napkin will do sometimes). You put in your best guess of the future cash flows, and you discount those cash flows back to the present at some required rate of return you believe reflects the risk entailed. Of course, opinions about the future cash flows and the proper discount rate can vary widely, but the essential methodology is ubiquitous. Nobody who pays taxes and has ever done this exercise has failed (while sober) to use after-tax cash flows in this calculation. Somewhere in the spreadsheet there is a number, say 20%, or 28%, or a Gallic 75%, representing the taxes you’ll pay on the assumed cash flow—and you only count the amount you’ll get after paying this tax. If you turn the tax rate up high enough, projects or companies that looked like good investments become much less attractive and vice versa. Mr. Buffett is undoubtedly right that rich people will continue to invest some amount in something regardless of the tax rate (except for a 100% rate!). He’s also undoubtedly right that an investment that easily clears all hurdles will likely still be attractive after a small tax increase. But life, and the investment decision, occurs at the margin. Fewer and smaller investments will be made if the after-tax prospects are worse.

Toppling Over the Fiscal Cliff Could Cost low-Income Families $1,000 in Reduced Tax Credits - The 2001-10 tax cuts placed substantial emphasis on “pro-family” tax reform. The more prominent features favoring families with children included a doubling of the Child Tax Credit (CTC) to $1,000 per child and making it broadly refundable, increasing the Earned Income Tax Credit (EITC) for families with at least 3 children, increasing the point at which the EITC starts to phase out for married couples, increasing the credit rate of the Child and Dependent Care Tax Credit (CDCTC) for some families, and increasing the expenses eligible for a CDCTC for all families. If left in place, in 2013 families with children would see over $43 billion in benefits from these provisions. But  absent Congressional action, these expanded benefits will disappear over the cliff. Should the EITC, CTC, and CDCTC revert to their pre-2001 form, the Tax Policy Center estimates nearly three-quarters of all families with children will see their taxes rise or net rebates decline by an average of almost $1,200, compared with what they would pay if the provisions were extended. Keep in mind  those changes would be in addition to  the broad tax hikes that would  affect nearly all working families such as  the expiration of the payroll tax cut  and any increase in marginal tax rates for all families with income above the tax entry thresholds.

Over ‘fiscal cliff,’ fiscal pain to accelerate -  This is what the other side of the “fiscal cliff” looks like. If President Obama and Congress fail to reach a deal to avoid hundreds of billions of dollars of tax hikes and federal spending cuts, many Americans will feel the pain with less money in their paychecks in the first week of the New Year.On Friday, Jan. 4, middle-class Americans who get paid that day would see take-home pay decline by an average of about $25, according to calculations based on data from the nonpartisan Tax Policy Center. That’s the effect of higher taxes on just under one week of pay in a bimonthly check. In wealthy areas such as Washington, the average tax hike for someone earning more than $100,000 would be roughly $130, reflecting higher taxes on nearly one week of pay.The tax hikes would result from the expiration of the payroll tax holiday, which has been in effect for two years, and the George W. Bush tax cuts, which have been in effect for a decade. The impact in the first week would be modest. The following weeks would be much uglier.

Why the Fiscal Cliff May Cost You $6,000 in 2013 - You can’t turn on the television or open a magazine these days without hearing the term “fiscal cliff.” What gets less sustained attention is how the cliff, should it fail to be averted, will affect the individual taxpayer. This is primarily because the American tax code is very complicated, and the changes set to go into affect are manifold — so when the time comes, each of us is going to experience our own private cliff dive. The well-off will be the hardest hit in dollar terms. Besides large marginal tax rate increases, the wealthy are most exposed when it comes to big hikes in capital gains and dividend increases, because they tend to generate more of their income from investments than those lower down the income ladder. And the more money you make, the better chance there is that you get hit with the Alternative Minimum Tax, which absent Congressional action will ensnare 31 million taxpayers in 2013, up from 4.3 million in 2012, according to the Tax Policy Center. But by no means are families in the middle class exempt from serious fiscal-cliff related pain. In fact, one could argue that certain members of the middle class would suffer the most from our collective cliff dive — not because they’ll get hit with the biggest tax bill (again, the rich win that prize) but because their relatively modest incomes are going to take a disproportionately large hit.

A New Job Description for Treasury Secretary - NYT - Four years later, the financial crisis has dissipated and the president himself has become more sure-footed in economic policies and politics. But his choice of a Treasury secretary to replace Mr. Geithner, who has said he does not wish to stay for a second term, is still extraordinarily important. The economy, though no longer in extremis, is still weak; in the current quarter, growth is expected to slow to about 1 percent, not nearly enough to spur job creation and reduce unemployment. This, in turn, presents a fundamentally different challenge for President Obama, and for the person he chooses. The task now is to revive growth and create jobs, and for that Mr. Obama needs a secretary who will champion and execute an agenda in which the interests of Wall Street give way, at long last, to the public need for broad and shared prosperity. On budget issues, that means a secretary who can explain to the public — and sell to Congress — the need for lasting, substantial investment in infrastructure and education. In the near term, there must be a push for more safety-net spending, both to preserve and create jobs and to position the economy for stronger growth. The widespread notion that such spending is incompatible with a healthy budget is a triumph of bad politics over sound policy, and it will fall to the secretary to counter the calls for premature austerity with a strategy to couple needed spending with deficit reduction that takes hold as the economy recovers. On tax reform, the next secretary must make the case for higher taxes, raised progressively from both the personal and corporate income tax, while fostering an overdue debate on new sources of revenue, including energy taxes, a financial transactions tax and a value-added tax. Comprehensive tax reform, which is vital for a strong economy, requires everything to be on the table, not rejected out of hand as politically infeasible.

Quelle Surprise! The Geithner Doctrine Not Only Puts Banks Above the Law, It Also Serves to Excuse Their Bad Behavior - Yves Smith - Our Treasury Secretary, also known as the Bailouter in Chief and “Foamy,” has a default explanation for why ordinary citizens must bend over every time banking interests are threatened. The more formal statement of this policy is the Geithner Doctrine, which is “nothing must be done that will destablize the banking system.” However, Geithner also subscribes to the Humpty Dumpty School of Language, in which words mean what he chooses them to mean, nothing more or less. So “destabilize” means “hurts the profits or reputation of” and “banking system” means “any bank that is pretty big and/or well connected”.  The most clear-cut example of the Geithner Doctrine in action was when New York State Banking and Financial Services Superintendent Benjamin Lawsky filed an order against Standard Chartered for violations under New York law for money laundering with Iranian banks, among other things. Astonishingly, Federal regulators went on the warpath against Lawsky. As we wrote in August: But the Treasury and Fed are also in an uproar, although they have no one to blame but themselves for their discomfort. The Treasury (supposedly the lead actor in investigating “terrorist financing” and violations of economic sanctions; the Office of Foreign Assets Control is a Treasury operation), Fed, DoJ, District Attorney of New York and the DFS were all investigating Iran transfers at various banks, including SCB, since 2010. The others has settled; SCB was still under investigation and seemed to believe it would get a clean bill of health.

Why don’t bad ideas ever die? -  What is it about us and this intellectual voodoo? We keep repeating the same mistakes over and over. It is maddening. Let’s count the ways:

  • 1 Shareholder value: Short-term focus on quarterly earnings leads to a decline in long-term research and development, typically to the detriment of a company’s long-term prospects. Short-termism and stock-option compensation causes management to focus on immediate quarterly returns. It has also led to earnings “management,” accounting fraud and a raft of management scandals.
  • 2 Homo economicus: A primary principle underlying classical economics, it states that humans are rational, self-interested actors possessing an ability to make objective, intelligent judgments about matters of investing and money. This turns out to be hilariously wrong. We are all too often irrational, frequently emotional and regularly engage in behaviors that work against our self-interest.
  • 3 Economics as a science: Consider how wrong the economics profession has been about, well, nearly everything:
  • 4 Austerity: Conceived from the puritanical idea that we must pay a penance for our sins, the Austerians (as we like to call them) insist that a post-bubble economy can be cured with spending cuts and tax increases, producing a balanced budget.  Greece was forced to adopt austerity measures as part of its financial-rescue terms. It pushed the country into a depression. Austerity measures in Britain and Ireland and Spain — indeed, everywhere they have been imposed in Europe — have all led to recessions. Despite the wealth of evidence showing that this is a terrible idea, it refuses to die.

US banks call for easing of Basel III - US banks are making a last-minute push to ease new global liquidity requirements, arguing that they would need to come up with an additional $800 billion in easy-to-sell assets under the proposed standards. The banks argue that they have increased their holdings of liquid assets by $700 billion - or about half the $1.5 trillion shortfall identified in the US at the end of 2010. Rather than raising the difference, they want to relax new Basel III bank safety rules."The US banking industry is significantly more liquid than it was even just two years ago," said Bob Chakravorti, chief economist at the Clearing House, which represents the 11 largest US commercial banks."With certain recalibrations to the proposed Basel III requirement that are more reflective of market conditions, the industry would meet the proposed liquidity requirement and be well positioned to withstand a future financial shock."A report by the Clearing House, which will be released today, was shared with the Basel Committee on Banking Supervision before it met last week to discuss revisions to the global liquidity rule known as the liquidity coverage ratio. The standards must be approved by central bankers and supervision heads from the committee's 27 member countries.

Last-Ditch Attempt to Derail Volcker Rule - Simon Johnson - In a desperate attempt to prevent implementation of the Volcker Rule, representatives of megabanks are resorting to some last-minute scare tactics. Specifically, they assert that the Volcker Rule, which is designed to reduce the risks that such banks can take, violates the international trade obligations of the United States and would offend other member nations of the Group of 20. This is false and should be brushed aside by the relevant authorities. The Volcker Rule was adopted as part of the Dodd-Frank financial reform, at the suggestion of Paul A. Volcker (the former chairman of the Federal Reserve Board of Governors), to limit the kinds of risk-taking that very large banks could undertake. But in a last-ditch attempt to block it, the United States Chamber of Commerce has sent a letter to the United States Trade Representative asserting: The Volcker Rule is discriminatory, as foreign sovereign debt is subject to the regulation, while Unted States Treasury debt instruments are exempt. U.S.T.R. should conduct a very close examination to ensure the Volcker Rule does not violate any of our trade obligations. This statement is correct with regard to the point that there are exemptions in the current version of the Volcker Rule for banks’ holdings of United States government debt, i.e., there are fewer restrictions on their holdings of Treasury obligations than on their holdings of foreign government debt. But the idea that this violates the spirit or letter of our international obligations is flatly wrong. Perhaps that is why the letter doesn’t point to any particular provisions of any specific trade agreements.

Counterparties: 2012 — The year of bank fraud -- It’s been a relatively decent year for financial stocks: they’ve had their best performance since 2003. It’s truly been a boom year, though, in investigations, lawsuits, fines, and settlements at the world’s biggest and most important banks. There are 28 banks on the FSB’s list of systemically important financial institutions, and as Felix writes, “pretty much the whole financial sector is still trading at less than book value”. What follows is a list of notable accusations, admissions and settlements in 2012 alone. (It’s long, so just scroll down if you just want the links):

LIBOR Scandal: Yep, It’s as Bad as We Thought - When the LIBOR interest-rate fixing scandal broke wide open over the summer, I asked whether it was “The Crime of the Century.” The answer to that question relied on whether banks were understating their LIBOR submissions in order to appear stable at the height of the financial crisis, or whether LIBOR manipulation was a more widespread phenomenon involving collusion across financial institutions in order to profit off of derivative trades. With the announcement yesterday of a $1.5 billion dollar fine, paid to regulators in the U.S., U.K., and Switzerland, against Swiss bank UBS., we have our answer. The British Financial Services Authority published a 40-page notice announcing the action, and it is rife with damning evidence that UBS employees were colluding among themselves and with traders and brokers at other institutions to manipulate interest rates for their own profit. The FSA found that compared to Barclays, the transgressions at UBS were worse: “UBS’s misconduct is, although similar in nature, considerably more serious than Barclays’ because it was more widespread within the firm . . . More individuals, including Managers and Senior Managers, participated in or knew about the manipulation and there were more instances of individual manipulation, across more currencies. Furthermore, the extent to which UBS colluded with others was significantly greater and involved financial rewards being paid to Broker Firms.”

36 UBS Bankers To Be Implicated In Liborgate, Criminal Charges To Be Filed - As the fallout of Liborgate escalates, the next big bank to be impacted in the fallout started by Barclays civil settlement "revelation" is set to be troubled UBS, already some 10,000 bankers lighter, where as many as three dozen bankers are reported by the implicated in the fixing of the rate that until 2009 was the most important for hundreds of trillions in variable rate fixed income products. Only instead of attacking the US or even European jurisdiction, where the next big settlement is set to hit is Japan: a country whose regulators as recently as half a year ago promised there were no major issues with Libor, or Tibor as it is locally known, rate fixings. And while this most recent development will have little material impact on UBS' ongoing business model, the one difference from previous settlements is that it will likely include criminal charges lobbed against some of the 36 bankers. From the FT: "UBS is close to finalising a deal with UK, US and Swiss authorities in which the bank will pay close to $1.5bn and its Japanese securities subsidiary will plead guilty to a US criminal offence. Terms of the guilty plea were still being negotiated, one person familiar with the matter said on Monday, adding that the bank will not lose its ability to conduct business in Japan.

Libor Conspiracy Expands: UBS Reaches $1.5 Billion Settlement in 5-Year Scheme Involving Bribes and Payoffs -  UBS, the global banking behemoth based in Switzerland, has agreed to settle charges over rigging the international interest rate benchmark known as Libor with U.K., U.S. and Swiss authorities.  The total settlement with all regulators will total approximately $1.5 billion.  Later this morning, the U.S. Department of Justice and the Commodity Futures Trading Commission, which levied the bulk of the fines, will announce their findings.  The U.K.’s Financial Services Authority (FSA) earlier today revealed the details of an expansive conspiracy to rig rates that involved traders, managers, chat rooms, standing orders, at least 2,000 documented efforts to rig rates, and bribes and payoffs to other brokers.  According to the FSA:  UBS, through four of its traders, colluded with interdealer brokers to attempt to influence the Japanese Libor submissions of other banks. The brokers were in regular contact with various panel banks that contributed Japanese Libor submissions. The UBS traders (one of whom was a manager) were directly involved in making more than 1000 documented requests to 11 brokers at six broker firms.

UBS fined $1.5-billion after traders bribed brokers to fix Libor rate - UBS AG’s US$1.5 billion fine for rigging global interest rates expands the scandal to include bribery and highlights the influence of a trader in Tokyo who colluded with other banks to align their submissions. The employee led efforts to influence Japanese Yen Libor submissions by paying brokers as much as 15,000 pounds (US$24,400) a quarter and offering a payment to another for helping him keep that day’s rate low. The banker, identified by regulators as Trader A, worked at UBS in Tokyo from 2006 to 2009 and directly contacted employees at other banks to influence their submissions at least 80 times. “I need you to keep it as low as possible,” Trader A wrote to the broker on Sept. 18, 2008, referring to six-month yen Libor. “If you do that … I’ll pay you, you know, US$50,000, US$100,000… whatever you want … I’m a man of my word,” according to transcripts released by the U.K. Financial Services Authority Wednesday. UBS was ordered to pay about US$1.5 billion to U.S., U.K. and Swiss regulators for trying to rig global interest rates, including the London interbank offered rate, over a six-year period. Regulators found that traders at the Zurich-based bank made more than 2,000 requests to its own rate submitters, traders at other banks and brokers to manipulate rate submissions through 2010.

Quelle Surprise! UBS Gets a Cost-of-Doing-Business Fine for “Epic” Libor Fraud - Yves Smith - After the media uproar about HSBC’s deep involvement in the dirtiest sort of money-laundering, UBS’s mere Libor-fixing might look a tad pale. But the notice by the FSA clearly states that it regarded UBS’s conduct as far worse than that of Barclays, where the chairman, CEO, and president all stepped down. Of course, that was mainly because they dared try to shift blame to the Bank of England, claiming they’d gotten tacit approval, and the Bank would have none of it. But the severity of the sanctions against Barclays set a bar that hasn’t been met in subsequent regulatory actions. And Barclays is important because it shows the idea that you can’t go after top executives is a fiction. Barclays soldiers on despite the loss of its three top officers. Clemenceau was right: “The graveyards are full of indispensable men.” By contrast, Barclays is paying $1.5 billion in fines among three regulators: the FSA, the CFTC, and Finma, a Swiss regulator. The Department of Justice’s Lanny Breuer called the fraud “epic” yet only two staffers are targeted for prosecution: the apparent main actor, trader Mark Hayes, and his colleague Roger Darin, who are charged with mail fraud, price fixing, and conspiracy. Yet the FSA’s notice says that 40 individuals at the bank were involved in Libor manipulation, including 4 senior managers, and another 70 individuals were aware of it.  Bloomberg gives a good overview of the scheme if you don’t have time to read the FSA’s notice. The gaming was so extensive that the FSA noted that “every Libor and Euribor submission in currencies and tenors in which UBS traded is at risk of having been improperly influenced”.

Sometimes UBS traders manipulated Libor just to mess with each other - The last of the UBS Libor settlements to come out was the U.S. one and it has some of the best quotes. There’s the yen swaps trader who said “I live and die by these libors, even dream about them.” There’s … I mean, there is the life and career of Bart Chilton, in toto; here is a thing he said: Every so often, folks wonder if some in the financial sector believe that having a business conscience is nonsense. Financial sector violations are hurtling toward us like a spaceship moving through the stars. All too often, penalties have been a simple cost of doing business. That needs to change. Particularly good are the exhibits to the criminal complaint against Tom Hayes and Roger Darin. We’ve previously met Hayes, cleverly disguised as Trader A; he was the senior yen swaps trader at UBS in Tokyo. Darin was the short-term rates trader “in Singapore, Tokyo, and Zurich,” though probably not all at once; he and his team submitted yen Libors for UBS. You can guess what happened when they got together! But you don’t have to guess because there are lots of transcripts of their chats in the exhibits.1 Here is a problematic one:

Lessons learnt from $1.5bn settlement - UBS this week became the first major financial institution to enter a guilty plea to US authorities in two decades – and the first to have two former traders issued with criminal charges as part of the global probe into interest-rate manipulation. But in relative terms, the plea by UBS’s Japanese subsidiary and the $1.5bn fine the Swiss bank must pay to settle allegations that it had rigged Libor and other lending rates was a bargain. It could have paid more, had it not won partial immunity by being the first bank to co-operate with the authorities. The UK’s Financial Services Authority, for example, gave it a 20 per cent discount on its fine, reducing it to £160m, while the bank disclosed last year that it had signed a partial leniency agreement with the US Department of Justice’s antitrust division. The total settlement of $1.5bn – with US, UK and Swiss authorities – sends a strong message to other banks under investigation, including Royal Bank of Scotland . Stephen Hester, RBS chief executive, says the bank is hoping to conclude a settlement by the end of February, and people familiar with the talks say it expects to pay more than the $450m fine paid by Barclays – but less than UBS. In announcing the charges against UBS and its two former traders, Lanny Breuer, chief of DoJ’s criminal division, called it “one of the most significant scandals to ever hit the global banking industry”. The settlement was a “very robust, very real and very appropriate resolution”. But some lawyers say it will chill companies’ willingness to co-operate, hampering the probe into the rigging of Libor.

Fannie, Freddie may have lost $3 billion in Libor: watchdog - Mortgage finance giants Fannie Mae and Freddie Mac may have suffered more than $3 billion in losses due to manipulation of the benchmark interest rate known as Libor, according to an internal memo by a federal watchdog. The estimate was provided in a memo obtained by Reuters that was sent to Freddie and Fannie's regulator, the Federal Housing Finance Agency, by its inspector general. The watchdog urged the regulator to consider whether or not the losses warranted a lawsuit against the banks that set Libor. "We conducted a preliminary analysis of potential Libor-related losses at Fannie and Freddie and shared that with FHFA, recommending that they conduct a thorough review of the issue," a spokeswoman for the inspector general's office said when asked about the memo. Dozens of U.S. and European banks are under scrutiny for allegedly rigging Libor, which has an impact on borrowing costs throughout the global economy. Libor is intended to measure the rate at which banks lend to one another and is used as a benchmark to set borrowing costs on financial instruments, including derivatives and mortgages.

Report Says Libor-Tied Losses at Fannie, Freddie May Top $3 Billion - Fannie Mae and Freddie Mac may have lost more than $3 billion as a result of banks' alleged manipulation of a key interest rate, according to an internal report by a federal watchdog sent to the mortgage companies' regulator and reviewed by The Wall Street Journal. The unpublished report urges Fannie and Freddie to consider suing the banks involved in setting the London interbank offered rate, which would add to the mounting legal headaches financial firms such as UBS and Barclays face from cities, insurers, investors and lenders over claims tied to the benchmark rate. The report was written by the inspector general for Freddie and Fannie's regulator, the Federal Housing Finance Agency. In response to the report, the FHFA said the companies had begun exploring potential legal options, according to a letter sent from the FHFA to the inspector general last month. Analysts from the inspector general's office said in the internal report, dated Oct. 26, that Fannie and Freddie likely lost more than $3 billion on their holdings of more than $1 trillion in mortgage-linked securities, interest-rate swaps, floating-rate bonds and other assets tied to Libor from September 2008 through the second quarter of 2010, which the report says was the height of banks' alleged false reporting of the interest rate. That figure is among the largest potential losses reported amid the unfolding Libor scandal and comes as federal officials remain mum on how the alleged manipulation cost the government.

Goggle's Bermuda hideaway/HSBC's too-big status: time to rein in the corporations! - If you are a company that depends on IP for a lot of your revenue, you may be able to avoid considerable taxes by funneling profits from subsidiaries in high-tax countries into a Bermuda shell company.  Google avoided about $2 billion in worldwide income taxes in 2011 by shifting about 80% of its total pretax profits-- $9.8 billion -- into Bermuda.  See Jesse Drucker, Google Royalties Sheltered in No-Tax Bermuda Soar to Nearly $10 Billion,  Meanwhile, the US decided not to take action against HSBC for its fraudulent behavior because it was considered so big that it could damage the financial system (again) to interfere with its continuing corporate existence.  See  Glenn Greenwald,HSBC, too big to jail, is the new poster child for US two-tiered justice system, noting that "one of the world's largest banks, HSBC, spent years committing serious crimes, involving money laundering for terrorists; 'facilitating money laundering by Mexican drug cartels'; and 'moving tainted money for Saudi banks tied to terrorist groups' " but US officials decided "not to prosecute HSBC for accepting the tainted money of rogue states and drug lords on Tuesday, insisting that a $1.9bn fine for a litany of offences was preferable to the 'collateral consequences' of taking the bank to court").

HSBC Bankers Get No Jail Time for Terrorist Financing While Somali Sentenced for Charity - This past week, the Justice Department announced that HSBC Bank had agreed to forfeit $1.256 billion and “enter a deferred prosecution agreement” for engaging in money laundering that involved the financing of drug cartels and groups with ties to terrorism. The agreement indicated there would be no criminal prosecution. Not one bank executive or lower-level banker would be put on trial and possibly sentenced to jail for his or her role in allowing money to be transferred to drug cartels or terrorists. Meanwhile, that same day, Nima Ali Yusuf, 26, a Somali woman who fled war-torn Somalia when she was a child, was sentenced to eight years in prison for sending $1,450 to “members of a terrorist organization in her native country.” The scale of the crime committed by Yusuf is incredibly minor and insignificant when compared to the acts engaged in by bank executives at HSBC.Laid out in detail in a Senate report released in July of this year, HSBC was engaged in banking with the Al Rajhi Bank, which is run by members of the Al Rajhi family alleged to have been “major donors to al Qaeda or Islamic charities suspected of funding terrorism.” They established “their own nonprofit organizations in the United States that sent funds to terrorist organizations, or used Al Rajhi Bank itself to facilitate financial transactions for individuals or nonprofit organizations associated with terrorism” in the years after the September 11th attacks, according to the report.

The Second Great Betrayal: Obama and Cameron Decide that Banks are above the Law - Bill Black - One of the “tells” that reveals how embarrassed Lanny Breuer (head of the Criminal Division) and Eric Holder (AG) are by the disgraceful refusal to prosecute HSBC and its officers for their tens of thousands of felonies are the false and misleading statements made by the Department of Justice (DOJ) about the settlement.  The same pattern has been demonstrated by other writers in the case of the false and disingenuous statistics DOJ has trumpeted to attempt to disguise the abject failure of their efforts to prosecute the elite officers who directed the “epidemic” (FBI 2004) of mortgage fraud.  HSBC was one of the largest originators of fraudulent mortgage loans through its acquisition of Household Finance. Three recent books by “insiders” have confirmed earlier articles revealing the decisive role that Treasury Secretary Geithner has played in opposing criminal prosecutions of the elite banksters and banks whose frauds drove the financial crisis and the Great Recession. Geithner’s fear is that the vigorous enforcement of the law against the systemically dangerous institutions (SDIs) that caused the crisis could destabilize the system and cause a renewed global crisis.  I have often expressed my view that the theory that leaving felons in power over our largest financial institutions is essential to producing financial stability is insane.  Geithner, it turns out, is very sensitive to that criticism.  I will return to that subject after setting the stage.

HSBC Management's Criminal Activity Above the Law: Justice for Some: There is a disturbing trend in the US where corporate executives are able to commit serious crimes such as money laundering and outright theft (does MF Global ring a bell) and escape criminal prosecution and even personal fines by hiding behind the personhood of the corporation and a wall of implausible deniability. You can fine a corporation, even by levying a very large penalty when judged by individual terms. But that is just a cost of doing business for the company that is absorbed by the system and the shareholders that sustain it. And in the case of the TBTF banks, they are being supported by an ongoing government subsidy of cheap money from the public. And the management that actually committed the crimes is allowed to continue on without serious personal penalty. This is a 'live and let live' attitude amongst the privileged class, a type of professional courtesy. This is the 'CEO Defense' in which managers are paid enormous, outrageous compensation for their skills, but when criminal activity is exposed, they claim to know and do very little for that pay, and in fact claim to be barely involved with the business that they manage. This is not capitalism, this is corporatism, a form of organized crime. This is the moral hazard of the credibility trap. Because there is little doubt that HSBC management has done things for and with other very important people that makes them truly above the law. This is the menace of entitlement and privilege. And what is most discouraging is how easily they can turn the righteous anger of the people at this injustice into an attack on the weak, the elderly, the children, the 'other.' And this is our shame, and our own complicity.

Mainstream Media Finally Awakens to the Fact that Big Banks Are Criminal Enterprises - Alternative financial media have noted for years that:

Where is Judiciary Chairman Patrick Leahy on Big Bank Crimes and Obama? - Last week’s big revelation on banking is that it is now official Department of Justice policy under Obama that big banks and their executives are above the law. HSBC was caught laundering money for both terrorists and drug dealers, and DOJ officials told the New York Times that they would not prosecute the bank under money laundering statutes, lest the financial system be destabilized. This was shocking, but consistent with policy made explicit by DOJ’s Head of Criminal Division Lanny Breuer back in September. One key question is why it is that Judiciary Chairman Patrick Leahy, a former prosecutor, is utterly unwilling to do any investigation or oversight into this critical policy question? Leahy runs the Judiciary Committee in the Senate, and it would be impossible to find a more obvious topic for that committee to address. It’s not that there isn’t interest in the Senate. Senator Chuck Grassley, a Republican, and Senator Jeff Merkley, a Democrat, both blasted Eric Holder for this decision. Republican Senator Chuck Grassley is the ranking member on the committee, which means he’s the de fact Republican Chairman. He went after Holder aggressively: What I have seen from the Department is an inexplicable unwillingness to prosecute and convict those responsible for aiding and abetting drug lords and terrorists.  I cannot help but agree with an editorial in the New York Times that ‘the government has bought into the notion that too big to fail is too big to jail.’

Neil Barofsky Meets with Occupy Wall Street - Yves Smith -- Neil Barofsky met with several Occupy Wall Street working groups Sunday for nearly two hours. One of his major themes was that the unwillingness to mete out meaningful punishments to miscreant banks means that the authorities are providing incentives to engage in criminal activity. It’s now more profitable to break rules than abide by them. Barofsky stressed that the current form of corruption was worse than having officials take bribes; at least you could catch people like that and when you did, their behavior was recognized as outside the pale. By contrast, Barofsky stressed that the officialdom honestly believes things that most of us would regard as nonsensical, such as bank executives can be relied upon to behave responsibly, the SEC and Department of Justice have done a good job on the financial services front given their limited resources. Barofsky stressed didn’t see a way to break the dynamic. He believes a crisis is inevitable, given that we are now rewarding predatory, destructive behavior, and thinks that financial services industry critics and the public need to be ready to put forward a reform agenda when it occurs.This, needless to say, is not the most cheery prognosis. Some participants pointed out that we just went through a global financial crisis and nothing much got fixed in its wake. Barofsky said that some important measures in fact almost got through, such as Brown-Kauffman, which would have imposed size limits on banks. It had the votes to pass both houses until Larry Summers and Timothy Geithner lobbied key Congressmen personally. He also said there is much wider recognition of the problem, as well as more people who have credibility on the side of reform.

UK Gets Tough on Missold Swaps; What Excuse Does the US Have? - Yves Smith - Even though the executive branch of the English government has as much of a soft spot for its banks as America’s does, its regulators are less craven than ours* (admittedly, ours set such a low standard that it is not all that hard, and the UK’s relative advantage may be about to go into reverse with the appointment of a new head of the Prudential Regulation Authority, since the designee presumptive believes big banks can’t be prosecuted). Consider another way that England departs from the US: it’s already devised a program to compensate victims of misrepresented swaps (usually interest rate). In the US, municipalities have been shellacked by being on the wrong side of these trades, with the bankruptcy of Jefferson County serving as the poster child for both how much corruption was involved and how damaging the consequences can be. In the UK, the preferred chump customer was small businesses, but the bad outcomes were very much the same. The FSA has established a scheme through which the eleven biggest banks involved have agreed to join an FSA sponsored program to compensate victims of mis-sold swaps. The problem is that the scheme is moving forward too slowly, which has led some MPs to demand that swap payments for transactions already flagged as probable mis-sellings be suspended until the investigation is completed. From the Telegraph:Banks must be forced to offer a moratorium on payments that thousands of small businesses are still being forced to make on interest rate swaps, according to a group of MPs investigating the scandal.

The President's Remarks At Newtown - This is not a society; it's a loony bin. There is clearly a difference between in kind between mass killings and foreclosure robo-signings, predatory loans, usurious interest rates and a million other abominable practices I could name, but all these things are of a piece. Violence is violence, whether it's carried out by some deranged kid or some money-crazed banker in lower Manhattan. I have likened America to a giant game of Survivor, and that's a good analogy, but it's good to remember that crazy is crazy, whether it's a "game" on TV or a typical day in the life of an American citizen. Oh, did that Big Corporation just ship your job overseas? I guess you've just been kicked off the island! Too fucking bad, hey? Well, I'm here to tell you—fuck this insane, intolerable bullshit. That's my anger talking, but I have every right to be angry about what's happened to this country, and so do you. I don't see anything ordinary citizens can do about it, but resistance can take many non-violent forms. I am not interested in perpetuating a vicious circle of violence, but I am interested in letting the assholes know—and we know who they are—just how we feel about the immoral, outrageous, violent shit they do.

New York Fed: Progress Being Made in Improving Tri-Party Repo Sector - The Federal Reserve Bank of New York reported in a statement Thursday progress in reducing the risk created by a key market where dealers go to finance trading positions.The bank said J.P. Morgan and the Bank of New York Mellon have both made key changes that will reduce the amount of intraday credit in the tri-party repo market, the New York Fed said. The tri-party repo market allows bond dealers to borrow and lend securities. The New York Fed has been pressuring market participants to reform their market sector as part of a bid to strengthen the overall state of the financial system.

Trashing the Balance Sheet?: Amidst all of the talk of special dividends and the anticipated tripling of marginal income tax rates on dividends in 2013, non-financial corporations have quietly been re-jigging the liability side of their balance sheets. Equity is out. Debt — in all forms — is in. The Federal Reserve Board reports non-financial corporate businesses bought back $308.9 Billion in equities through the 3rd Quarter, paid for by $365.3 Billion in new debt. While this pace, on an annualized basis, represents a moderation compared to 2011, it still represents a significant restructuring of corporate balance sheets. There are three undercurrents impelling corporate treasurers to leverage up the balance sheet.The first is the historically low level of interest rates. Today the Baa-10 Year Treasury spread stands at 292 bps, down 37 bps from one year ago. The second reason is the uncertainty surrounding the preferential income tax rate accorded to dividends. Finally, uncertainty remains rife. Europe remains a mess. No one is really certain what is happening in China. Japan is still in doldrums. Emerging markets do not appear as buoyant. And, stateside, we may through inaction and intransigence push the U.S. economy back into recession. Under most scenarios, aggregate demand is unlikely to expand at a robust pace. If so, buying back shares may prove to be a better way to engineer earnings-per-share growth than building factories

US corporate credit market looking extraordinarily rich - One of the "side effects" of the Fed's monetary expansion is all the capital flowing into spread products, particularly corporate credit. Corporate bond yields are hitting record lows across the ratings spectrum. An average junk bond in the Merrill HY index now yields some 6.3%.Even emerging markets corporate HY bond yields are near all-time lows. In fact credit looks highly overpriced relative to US equities. And equities are not exactly cheap at this stage, particularly given some 2% GDP growth expectations in the US. Goldman's relative value model now shows corporate credit at the richest levels in at least three decades.

Wall Street banks rake in highest returns since 2003 as workers suffer - For employees at the biggest Wall Street banks, 2012 brought a humbling post-crisis reality of job cuts, lower pay and tarnished reputations. For investors, it was a happier story. The 81-company Standard & Poor’s 500 Financial Index is up 27% this year, its largest annual increase since 2003, led by a 104% gain in Bank of America Corp. The index beat the broader S&P 500 Index for the first time since 2006. There is a level of angst this year that is just unprecedented. It’s just a profound sadness and dissatisfaction .Shareholders, impatient for the industry to boost profit, were rewarded as Wall Street firms cut jobs and pay, and exited businesses. The shrinking unnerved employees, who watched the chiefs of two big banks lose their jobs and others contend with a drop in deal making and stock trading, stiffer regulations, trading losses, rating downgrades and scandals involving interest-rate manipulation and money laundering.

US banks face rise in bad loans cover - The US accounting standards setter has unveiled tough new rules that will increase the amount of money banks have to set aside to cover soured loans and bonds. The proposed rules from the US Financial Accounting Standards Board are likely to prove controversial among bankers, as well as FASB’s counterparts at the International Accounting Standards Board. FASB has yet to undertake an official study estimating the impact of the proposed rules, but its chairman, Leslie Seidman, said on Thursday that feedback from financial institutions indicated banks might have to increase their loan loss reserves by 50 per cent. The board will further examine the impact of the rules as it collects industry reaction, which is expected to continue into next year. “We do expect some increase in the reserves for financial institutions, but that’s something we’ll be learning more about during the comment period,” Ms Seidman said. Under current US accounting rules, banks are required to set aside money for bad loans largely using a so-called “incurred loss” model, meaning they do not have to “reserve” for soured loans until losses are considered probable or have already been incurred. That methodology has led to violent swings in the amounts of money banks put aside in loan loss provisions in recent years. FASB’s proposal would shift banks to an “expected loss” model in hopes of avoiding the shocks experienced in the financial crisis. Under this model, banks would have to immediately estimate the amount of potential losses they might incur on loans, or bonds, and set aside money to cover them.

Fed Truncates Non-Performing Loan Data Series; Is the Fed Hiding Something? - Reader Wendy pinged me with a question I have no answer for: What happened to the Fed data series on non-performing loans?  Here is the link:  Assets at Banks whose ALLL exceeds their Nonperforming Loans (LLRNPT). Wendy writes ... The original series showed how banks always had 90% or above allowance for loan and lease losses until the 2008 financial crisis. It then dropped like a stone to 15%. It has been gradually struggling up since then and is now 35%. The old data series showed how pathetically inadequate the reserves are and how slow the recovery (actually, non-recovery since about 2/3 of loan and lease losses are not covered!).  The new series makes the "recovery" look significant. I'm amazed that the Fed did this. I do not know when this happened, or why, so I cannot comment on that. However, I have a few historical charts to show from late 2009, and I have some thoughts on the data series following the charts.

Bank Deposits Surge $2 Trillion More Than Loans: Credit Markets - Deposits at U.S. banks exceed loans by an unprecedented $2 trillion as the threat of a slowing economy tempers borrower demand and lenders preserve tightened standards.  Cash deposited at firms from JPMorgan Chase & Co. to Bank of America Corp. expanded 8.7 percent this year to a record $9.17 trillion through Dec. 5, Federal Reserve data show. That outpaced a 3.7 percent gain in loan assets to $7.17 trillion. The gap between what banks take in and lend out has surged since October 2008, the month after Lehman Brothers Holdings Inc. collapsed, when loans exceeded deposits by $205 billion. U.S. consumers paring debt loads and banks tightening lending practices that fueled the credit bubble in 2007 are limiting the reach of the Fed, which has sought to spur spending by holding its benchmark interest-rate at almost zero for four years. The low rates are limiting investment options, making savers content to hold their cash at lenders

Menace to Solvency  - If you thought there was one lesson from the financial crisis of the last 5 years, it would likely be that governments need to have the ability to cut themselves loose from large financial institutions, meaning that they have the power to liquidate or restructure them without incurring massive fiscal obligations. And when people look around for a model of how this process might actually work, they cite the US Federal Deposit Insurance Corporation (FDIC). It may be worth noting therefore that in the spending cuts bill hastily assembled by US Congressional Republicans on Thursday to drum up votes for their fiscal cliff solution, the FDIC would have lost its expanded 2010 Orderly Liquidation Authority to liquidate or restructure bank holding companies, bank affiliates, or non-bank financial intermediaries (like AIG) — its power prior to then only included banks that it directly insured. It’s not like the bill proposed a better alternative — had it passed, it would have been simply a reversion to the 2008 situation, which worked out so well with Lehmans and AIG. And this was being presented as a solution to the country’s long-term economic problems. Lesson: the fiscal cliff isn’t just about fiscal policy. There are other very damaging agendas being pursued under its cover.

Unofficial Problem Bank list declines to 845 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 since then. This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Dec 14, 2012.  Changes and comments from surferdude808:  Similar to last week, the only changes this week to the Unofficial Problem Bank list were removals. In all, there were four removals, which leaves the list at 845 institutions with assets of $312.9 billion. A year ago, the list held 974 institutions with assets of $398.3 billion.

Demand for commercial real estate loans on the rise - Investors seem to be showing a great deal of interest in US commercial real estate. The Fed's survey of loan officers is showing rising demand for commercial real estate loans, which has recovered dramatically. Some of this increase is driven by renewed activity in the CMBS market, as search for yield has created more opportunities for property loan securitization. According to JPMorgan, interest-only loans (equivalent to "balloon" mortgage) are on the rise and average loan coupon has been declining.

Bank of America Delinquent Loans Mean Losses: Mortgages - Bank of America Corp. has amassed $64 billion of mortgages that are at least six months delinquent and have yet to enter foreclosure, more than twice the amount held by its four largest competitors combined. The loans are monitored as part of February’s $25 billion settlement between the top five U.S. lenders and state attorneys general over allegations of abusive foreclosure practices. Bank of America’s stockpile of deteriorating debt is mostly from its 2008 acquisition of Countrywide Financial Corp., once the nation’s largest mortgage provider. Wells Fargo & Co. (WFC), the biggest U.S. servicer, has $15.3 billion of such unpaid loans. The data, published last month by the monitor of the settlement, highlight Bank of America’s vast backlog of delinquencies, and the years it will take to work through them as borrowers fall further behind and losses mount for investors in mortgage-backed securities. While the Charlotte, North Carolina-based bank has begun modifications for many of its 275,000 homeowners at least 180 days behind as of Sept. 30, some will join the already clogged U.S. foreclosure pipeline. “There’s just a long tail to work out all of these loans, which are severely delinquent at this point,” . “It just shows the amount of work that’s still left to do.”

Six Month + Delinquent Mortgages Amount To More Than Half Of Bank of America's Market Cap - For those curious why many people are scratching their heads how the market cap of Bank of America has nearly doubled in the past year, here it is: "Bank of America Corp. has amassed $64 billion of mortgages that are at least six months delinquent and have yet to enter foreclosure, more than twice the amount held by its four largest competitors combined." $64 billion is more than half the market cap of Bank of America as of this moment.

Banks Seek a Shield in Mortgage Rules - As regulators complete new mortgage rules, banks are about to get a significant advantage: protection against homeowner lawsuits. The rules are meant to help bolster the housing market. By shielding banks from potential litigation, policy makers contend that the industry will have a powerful incentive to make higher quality home loans. But some banking and housing specialists worry that borrowers are losing a critical safeguard. Industries rarely get broad protection from consumer lawsuits, and banks would seem unlikely candidates given the range of abuses revealed during the housing bust. “A lot of bad things are done in the name of expanding access to credit, as we found out,” said Sheila C. Bair. The legal protection stems from the Dodd-Frank Act, the sweeping regulatory overhaul passed in 2010 to help repair the financial system. The legislation mandated that loans be affordable, but Congress conceded that banks might fear the legal consequences if the mortgages did not comply. So lawmakers created a type of home loan that would have legal protection, called a “qualified mortgage.” In practice, the protection will make it harder for borrowers to sue their lenders in the case of foreclosure.

Blackstone Bets on Failed Loans as FHA Bailout Looms: Mortgages -- Hedge funds and private-equity firms are betting on delinquent home loans being sold by the U.S. Federal Housing Administration as the government agency accelerates debt sales to avert a bailout and stem foreclosures. Investors including Lewis Ranieri’s Selene Investment Partners and One William Street Capital Management LP paid an average of 36 cents on the dollar in an FHA auction of 9,500 nonperforming loans, the Washington-based agency said this month. Bayview Financial LP, a firm backed by Blackstone Group LP, paid as little as 26 cents. The FHA, which faces a projected $16.3 billion shortfall because of failing loans made during the housing crash, is preparing to sell more than 40,000 delinquent mortgages next year to fortify its insurance fund after disclosing it may need a Treasury Department subsidy for the first time in its 78-year history. The FHA doesn’t have the legal authority to use some workout tactics investors employ, such as principal forgiveness.

Tide starts to turn for mortgage securities - You won’t hear the phrase “subprime mortgage” on a Wall Street securitisation desk any time soon, but you might start hearing more about private-label mortgage-backed securities in 2013. There’s no need to run for the hills. This could be the next step in the US housing market returning to health and stability. From investors through bankers to policy makers, there is agreement that the US needs to wean its mortgage market off government life support, so the question now is how big and what kind of a role will there be for private capital. Answering that question will have to wait for Congress to deal with the fiscal cliff – but after that, it could be an auspicious year for tackling long-term reform of housing finance, says Barbara Novick, head of government relations at BlackRock. “Where we stand today, we have house prices improving, inventory declining, housing is starting a recovery and the trends are good. The political environment is such that you can address housing. If they miss this window, they miss it for a long time. This is the sweet spot, 2013.” The market for private-label securities – that is, mortgage-backed bonds issued without a government guarantee – dried up with the financial crisis. Now, new mortgages are either held on lenders’ books or securitised by the government-owned finance agencies Fannie Mae and Freddie Mac, which charge a fee to guarantee the underlying mortgages against defaults.

The Mortgage Scam Against Widows, and Why No Mortgage Lender Should Ever Get Legal Immunity - Dealbook had an item yesterday about the qualified mortgage rule and the bid by mortgage lenders to acquire a “safe harbor,” essentially a shield against consumer lawsuits, in the process. I’ve already gone over this topic and continue to oppose giving banks a safe harbor of any kind on the merits. But just to shift gears away from the precise details for a moment, consider why you would want to give any entity that does something like this protection from legal exposure: Geraldine Bates lost her husband to kidney failure last year. Now, she has fallen behind on her mortgage payments and is terrified that she will lose her home in Jacksonville, Fla. Ms. Bates, 70, is caught in a foreclosure trap that is ensnaring widows across America: she cannot get help lowering her payments until her name is added to the mortgage note, but the lender says she must be current on payments before that can happen [...] Just as the housing market is recovering, a growing group of homeowners — widows over the age of 50 whose husbands alone were holders of the mortgage — are losing their homes to foreclosure because of a paperwork flaw that keeps them from obtaining loan modifications.

Table of Short Sales and Foreclosures for Selected Cities in November - Economist Tom Lawler sent me the table below of short sales and foreclosures for a few selected cities in November. Keep this table in mind when the NAR releases existing home sales on Thursday. The NAR headline number will probably be around 5 million SAAR, but there are other signs of significant change in the housing market. First, inventory has declined sharply, and there is very little inventory in many areas. Second, it appears that the share of conventional sales in certain markets has increased significantly (these are normal sales - not foreclosures or short sales). Both the decline in inventory, and the increase in conventional sales, are signs of moving towards a more normal housing market. Look at the right two columns in the table below (Total "Distressed" Share for Nov 2012 compared to Nov 2011). In every area that reports distressed sales, the share of distressed sales is down year-over-year - and down significantly in most areas. The NAR will release some distressed sales measurements Thursday from an unscientific survey of Realtors - and I have little confidence in the survey results - but these local reports suggest distressed sales have fallen sharply in many areas.Last month, CoreLogic sent me their data on distressed and conventional sales showing the percent of distressed sales falling.  If we use the NAR estimate for sales, and CoreLogic's estimate of distressed share, conventional sales are now back up to around 3.8 million SAAR. The NAR reported total sales were up 10.9% year-over-year in October, but using this method, conventional sales were up almost 18% year-over-year.

Lawler: Foreclosure Share Way Down, But Not All-Cash Share; Suggests Investor Purchases of Non-REO Properties Up Sharply - From economist Tom Lawler: While most areas have experienced a significant decline in the foreclosure share (as well as the overall “distressed-sales” share of home sales this year, it’s sorta interesting to note that the all-cash share of homes purchases has not fallen, at least in areas where data on financing are available. E.g., here is a table showing the “all-cash” share of home purchases this November compared to last November in selected markets. All data are based on realtor association/MLS reports, save for the Southern California, which are Dataquick’s tabulations based on property/mortgage records. Also shown are the foreclosure and short-sales shares of home sales. Note that for Sothern California the foreclosure and short-sales shares are share of resales, while the all-cash share is the share of total sales. Note also that I don’t have the foreclosure and short sales shares for the Baltimore and DC metro areas, but only for the whole area covered by MRIS. However, the Baltimore and DC metro areas account for about 77% of total home sales through MRIS, so ... While in most of these areas the foreclosure sales share of resales in November was down considerably from last November, as was the overall “distressed” sales shares, the all-cash-financed share of home sales was actually higher this November than last November in many areas, and in other areas it was little changed from a year ago. Most analysts (and realtors) believe that investors make up a substantial share of all-cash purchases. Given that the all-cash share of purchases is flat to higher while the foreclosure share of purchases is down considerably, it appears as if investors have considerably increased their purchases of non-foreclosure properties over the last year.

LPS: Mortgage delinquencies increased in November, "In Foreclosure" Declines - LPS released their First Look report for November today. LPS reported that the percent of loans delinquent increased in November compared to October, and declined about 9% year-over-year. Also the percent of loans in the foreclosure process declined further in November and are the lowest level since 2009. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) increased to 7.12% from 7.03% in October. Note: the normal rate for delinquencies is around 4.5% to 5%.  The percent of loans in the foreclosure process declined to 3.51% from 3.61% in October.  The number of delinquent properties, but not in foreclosure, is down about 10% year-over-year (434,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 18% or 388,000 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 now declining. LPS will release the complete mortgage monitor for November in early January.

Why Gretchen Morgenson should not trust Edward Pinto - The Times piece, penned by columnist Gretchen Morgenson, relays the findings of a controversial new report from Edward Pinto of the conservative American Enterprise Institute. Pinto's study takes on an important issue—the performance of FHA-insured home loans—but draws conclusions based on ideology rather than a cold appraisal of the facts. By relying entirely on one man's misleading data and unfounded opinions, Morgenson has done a grave disservice to a critical federal program.  The report in question argues that the FHA is "financing failure" for working-class families by peddling high-risk loans to unworthy borrowers, based on an analysis of loans insured in 2009 and 2010. Pinto concludes that the agency's basic business model—insuring long-term, low-down-payment loans to borrowers with less-than-perfect credit—puts homeowners at an unacceptably high risk of default with negative consequences for communities.  Nothing could be further from the truth.... . Pinto focuses on the cost of foreclosure without considering the FHA's contribution to these neighborhoods since the crisis began. If FHA insurance weren't available under reasonable terms, it would have been much more difficult for low- and moderate-income families to get mortgage credit since the crisis began. As a result, home prices would have declined precipitously beyond already-depressed levels – by as much as 25%,according to one estimate from Moody’s Analytics – leading to far more foreclosures on all homes, not to mention additional job loss, lost household wealth and a far deeper or more prolonged recession.  That counter-cyclical support is a key part of the agency's mission, and it understandably comes with some costs. If the foreclosure crisis were a fire, Pinto would be blaming the firefighters for getting the house wet.

The CRA Did Not Cause the Housing Bubble - There's an interesting new paper out on the role of the Community Reinvestment Act and the housing bubble. The paper, called "Did the Community Reinvestment Act (CRA) Lead to Risky Lending?" (ABBS). It is a serious economic analysis, which is a major departure from much of the post-2008 grumbling about the CRA. By exploiting the differences in lending behavior within census tracts between banks that are undergoing CRA exams and those that aren't, ABBS find that undergoing a CRA exam is correlated with a rise in mortgage lending and that those loans perform more poorly than those made in the same census tract by institutions not undergoing CRA exams. In other words, the CRA encouraged more lending and as a result it resulted in less prudent lending.  There's already some smart commentary on the paper from Mike Konczal. I would add this. There are two separate issues with the CRA. The first is whether CRA caused the bubble, and the second is whether CRA is a good idea generally. My take from ABBS is that the answer to the first question is clearly no--indeed, it seems to provide further evidence of the key role of private-label securitization--while the second question is unanswered.  Assuming ABBS's analysis is correct, the paper shows pretty clearly that the CRA did not play a significant role in fomenting the housing bubble. While the CRA may have lead to more risky lending, what is most striking about the paper's findings are how small in magnitude the CRA's effects are. While ABBS find statistically significant impacts, the magnitudes are really small:  5% more lending in the six quarters surrounding a CRA exam and 15% higher default rate.  That's not a 15% default rate.  That means a 1.15% default rate instead of a 1% default rate or a 6.9% default rate instead of a 6% default rate. This sort of change is a drop in the bucket relative to what happened during the housing bubble.   

Fannie Mae: Housing market 'has turned the corner' - Despite lower expectations for the economy's progress as a whole this quarter, home sale and price trends suggest housing finally represents "a tailwind to growth," according to a monthly economic outlook released today by Fannie Mae's Economic & Strategic Research Group. "The housing market has turned the corner and a sustained recovery is under way," the report said, despite some significant challenges that remain ahead, including tight lending conditions, uncertainty surrounding mortgage regulations, and the fiscal cliff. Home prices have seen strengthening year-over-year gains over the last several months and prices are expected to end the year on a positive note for the first time in six years, Fannie Mae economists said. They projected the median price of an existing home would rise 4.2 percent on an annual basis in 2012, to $173,000. They expected the median price of a new home to increase 4 percent, to $236,000. Fannie Mae is projecting that median prices of both new and existing homes will rise an additional 1.7 percent in 2013. 

US consumer developing a taste for ever-falling mortgage rates - US homebuyers have come to expect constantly declining mortgage rates. After all, any recent increases in mortgage rates have been fleeting - just waiting a month or two would generally result in a lower rate. That expectation of cheaper mortgages has resulted in higher sensitivity to rate fluctuations. And now that the 30-year rate has stopped declining (see discussion), some buyers are sitting back and waiting for the rate to go lower.Reuters: - Applications for home mortgages fell to their lowest level since early November last week and the purchase index fell after a five-week climb, an industry group said on Wednesday.  The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 12.3 percent in the week ended December 14. The MBA's seasonally adjusted index of refinancing applications fell 13.8 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, fell 4.8 percent, dropping from its high point on the year.Many had expected that the Fed's latest action will push rates even lower, but that wasn't the case. Econoday: - Higher mortgage rates in the December 14 week cooled activity at mortgage bankers where purchase applications fell 5.0 percent, a drop that ends five straight weeks of gains. The report notes that rates increased, not decreased, following the Fed's decision last week to buy an additional $45 billion of Treasuries per month.

MBA: Mortgage Applications decline sharply - From the MBA: Refinance Applications Fall to Lowest Level in Over a Month in Latest MBA Weekly Survey The Refinance Index decreased 14 percent from the previous week to the lowest level since week ending November 2, 2012. The seasonally adjusted Purchase Index decreased 5 percent from one week earlier. ... “Despite the Federal Reserve’s announcement last week that it would purchase an additional $45 billion in Treasury securities per month as part of its continuing quantitative easing effort, rates increased in the second half of the week,”  “As a result, refinance applications dropped sharply to the lowest level in over a month.”The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.50 percent from 3.47 percent, with points increasing to 0.44 from 0.36 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This graph shows the MBA mortgage purchase index. Although the purchase index declined 5% this week, the 4-week average is up about 25% from the post-bubble low.

Report: Housing Inventory declines 17% year-over-year in November - From November 2012 Real Estate Data Flat list prices—a leading indicator of future house price trends—most likely signal a slowdown in the recent rate of house price appreciation. At the same time, historically low inventories suggest that significant price concessions on the part of home sellers may be coming to an end. How these potentially offsetting trends play out in the housing market will depend on a variety of factors, including potential buyers’ optimism regarding the continued strength of the overall economy. The total U.S. for-sale inventory of single family homes, condos, townhomes and co-ops (SFH/CTHCOPS) dropped to its lowest point since 2007, with 1.674 million units for sale in November, down 16.87 percent compared to a year ago and more than 45 percent below its peak of 3.1 million units in September 2007, when began monitoring these markets. The median age of the inventory was also down by 11.4 percent on a year-over-year basis. However, the median list price in November ($189,900) was the same as it was a year ago despite the significant gains observed earlier in the year. ...The national for-sale inventory of SFH/CTHCOPS in November (1,674,412) decreased (4.69 percent) from what it was in October and was down by 16.87 percent on an annual basis. Note: only started tracking inventory in September 2007, but this is probably the lowest level in a decade.  On a month-over-month basis, inventory declined 4.7%, and declined in 133 of 146 markets. Going forward, I expect to see smaller year-over-year declines simply because inventory is already very low.

Housing: Inventory down 24% year-over-year in mid-December - Inventory declines every year in December and January as potential sellers take their homes off the market for the holidays. That is why it helps to look at the year-over-year change in inventory. According to the for (54 metro areas), overall inventory is down 23.9% year-over-year and probably at the lowest level since the early '00s. This graph shows the NAR estimate of existing home inventory through October (left axis) and the HousingTracker data for the 54 metro areas through mid-December. Since the NAR released their revisions for sales and inventory last year, the NAR and HousingTracker inventory numbers have tracked pretty well. On a seasonal basis, housing inventory usually bottoms in December and January and then increases through the summer. So inventory will probably decline a little further over the next month before increasing again next year. The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the mid-December listings, for the 54 metro areas, declined 23.9% from the same period last year.

FNC: Residential Property Values increased 3.7% year-over-year in October - FNC released their October index data last night. FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 0.4% from September to October. From FNC: Home Prices Up 0.4% in October; Year-Over-Year Growth Acceleration Continues Based on recorded sales of non-distressed properties (existing and new homes) in the 100 largest metropolitan areas, the FNC 100-MSA composite index shows that home prices nationally were up 0.4% in October. This was the eighth consecutive month that prices moved higher, leading to a total appreciation rate of 5.1% year to date. The year-over-year growth has accelerated rapidly since first turning positive four months ago. Foreclosures as a percentage of total home sales were 17.6% in October, down from 26.7% at the beginning of the year or 23.5% a year ago. The year-over-year trends continued to show improvement in October, with the 100-MSA composite up 3.7% compared to October 2011. The FNC index turned positive on a year-over-year basis in July - that was the first year-over-year increase in the FNC index since year-over-year prices started declining in early 2007 (over five years ago).

Zillow forecasts Case-Shiller House Price index to increase 4.1% Year-over-year for October --- Zillow Forecast: October Case-Shiller Composite-20 Expected to Show 4.1% Increase from One Year AgoOn Wednesday December 26th, the Case-Shiller Composite Home Price Indices for October will be released. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will be up by 4.1 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will be up 3.1 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from September to October will be 0.3 percent for the 20-City Composite and 0.1 percent for the 10-City Composite Home Price Index (SA). All forecasts are shown in the table below and are based on a model incorporating the previous data points of the Case-Shiller series, the October Zillow Home Value Index data and national foreclosure re-sales. Zillow's forecasts for Case-Shiller have been pretty close.  Right now it looks like Case-Shiller will be up close to 6% for 2013 (through the December / Q4 reports to be released next year).

Existing Home Sales in November: 5.04 million SAAR, 4.8 months of supply - The NAR reports: November Existing-Home Sales and Prices Maintain Uptrend Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 5.9 percent to a seasonally adjusted annual rate of 5.04 million in November from a downwardly revised 4.76 million in October, and are 14.5 percent higher than the 4.40 million-unit pace in November 2011. Sales are at the highest level since November 2009 when the annual pace spiked at 5.44 million. ...Total housing inventory at the end of November fell 3.8 percent to 2.03 million existing homes available for sale, which represents a 4.8-month supply 4 at the current sales pace; it was 5.3 months in October, and is the lowest housing supply since September of 2005 when it was 4.6 months. Listed inventory is 22.5 percent below a year ago when there was a 7.1-month supply. Raw unsold inventory is now at the lowest level since December 2001 when there were 1.89 million homes on the market.This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in November 2012 (5.04 million SAAR) were 5.9% higher than last month, and were 14.5% above the November 2011 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory declined to 2.03 million in November down from 2.11 million in October. This is the lowest level of inventory since December 2001. Inventory is not seasonally adjusted, and usually inventory decreases from the seasonal high in mid-summer to the seasonal lows in December and January. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

A few factoids from today’s report on existing-home sales - A few highlights from today’s report on existing-home sales from the National Association of Realtors:

  • 1. The median sales price of $180,600 for homes sold in November was the highest median price for the month of November since 2007.
  • 2. Total housing sales volume in November of $88.8 billion was 26% above a year ago, based on an increase in the average sales price of 9.1% in November and an increase in home sales of 15.5%.
  • 3. Home sales in November of 5.04 million units was higher than home sales in November 2007 of 4.46 million units.
  • 4. The median sales price in November increased by 10.1%, which was the third consecutive month of a double-digit price increase, which last occurred in late 2005.  It was also the ninth consecutive monthly year-over-year price gain, which last occurred from September 2005 to May 2006.

Existing Home Sales: Another Solid Report - Based on historical turnover rates, I think "normal" sales would be close to 5.0 million, so existing home sales at 5.04 million are pretty close to normal. However a "normal" market would have very few distressed sales, so there is still a long ways to go.  One key to returning to "normal" are more conventional sales and fewer distressed sales. Not all areas report the percentage of distressed sales, but the areas that do have shown a sharp decline in distressed sales, and a sharp increase in conventional sales. The NAR reported total sales were up 14.5% from November 2011, but conventional sales are probably up more than 20% from November 2011 (and distressed sales down).  And what matters the most in the NAR's existing home sales report is inventory. It is active inventory that impacts prices (although the "shadow" inventory will keep prices from rising). For existing home sales, look at inventory first and then at the percent of conventional sales. The NAR reported inventory decreased to 2.03 million units in November, down from 2.11 million in October. This is down 22.5% from November 2011, and down 30% from the inventory level in November 2005 (mid-2005 was when inventory started increasing sharply). This is the lowest level for the month of November since 2000.  Inventory will be even lower in December and January - the normal seasonal pattern - and then start increasing in February. This graph shows inventory by month since 2004. In 2005 (dark blue columns), inventory kept rising all year - and that was a clear sign that the housing bubble was ending. This year (dark red for 2012) inventory is at the lowest level for the month of November since 2000, and inventory is sharply below the level in November 2005 (not counting contingent sales).   The months-of-supply has fallen to 4.8 months.  Since months-of-supply uses Not Seasonally Adjusted (NSA) inventory, and Seasonally Adjusted (SA) sales, I expect months-of-supply to fall further over the next couple of months before increasing in February. The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Existing Home Sales: The Increase in Conventional Sales - There are two keys to the existing home sales report: 1) inventory, and 2) the number of conventional sales. I've written extensively about the decline in inventory, but here is more data on conventional sales. First, on distressed sales from the NAR (the inverse of conventional):  Distressed homes - foreclosures and short sales sold at deep discounts - accounted for 22 percent of November sales (12 percent were foreclosures and 10 percent were short sales), down from 24 percent in October and 29 percent in November 2011. Unfortunately the NAR uses an unscientific survey to estimate distressed sales. However CoreLogic estimates the percent of distressed sales each month - and they were kind enough to send me their series. The first graph below shows CoreLogic's estimate of the distressed share starting in October 2007. Note that the percent distressed increases every winter. This is because distressed sales happen all year, and conventional sales follow the normal seasonal pattern of stronger in the spring and summer, and weaker in the winter. The seasonal impact of distressed sales is why the Case-Shiller seasonal adjustment increased in recent years. Also note that the percent of distressed sales over the last 6 months is at the lowest level since mid-2008, but still very high.  This is the lowest percent of distressed sales for November since 2007. The second graph shows the NAR existing home series using the CoreLogic share of distressed sales.

US housing prices revert to long-term per capita income growth - Over a long period, home prices tend to follow growth in per capita income. After bouncing off the recent lows, home prices have once again reverted to their long-run growth trend. Historically, incomes (total incomes of everyone over 15 years of age divided by the population size) have grown at roughly 5% per annum (although this growth has been more modes recently). In the next few years house price appreciation (HPA) will likely stay in that range as well (or lower). In fact the CME Case-Shiller futures are forecasting the average HPA to be just above 3% per year in the next three years. And unless incomes in the US somehow experience a dramatic upturn, HPA should stay subdued.

US Housing Starts Slowed to 861K in November - U.S. builders broke ground on fewer homes in November after starting work in October at the fastest pace in four years. Superstorm Sandy likely slowed starts in the Northeast. The Commerce Department said Wednesday that builders began construction of houses and apartments at a seasonally adjusted annual rate of 861,000. That was 3 percent less than October’s annual rate of 888,000, the fastest since July 2008. Still, the decline follows months of strong gains. Housing starts remain on track for their best year in four years, and the housing market overall appears to be sustaining its recovery. An encouraging trend was that applications for building permits, a sign of future construction, rose to 899,000 in November, the most since July 2008.

Housing Starts at 861 thousand SAAR in November - From the Census Bureau: Permits, Starts and Completions  - Privately-owned housing starts in November were at a seasonally adjusted annual rate of 861,000. This is 3.0 percent below the revised October estimate of 888,000, but is 21.6 percent (±12.5%) above the November 2011 rate of 708,000. Single-family housing starts in November were at a rate of 565,000; this is 4.1 percent below the revised October figure of 589,000. The November rate for units in buildings with five units or more was 285,000.  Privately-owned housing units authorized by building permits in November were at a seasonally adjusted annual rate of 899,000. This is 3.6 percent above the revised October rate of 868,000 and is 26.8 percent above the November 2011 estimate of 709,000. Single-family authorizations in November were at a rate of 565,000; this is 0.2 percent below the revised October figure of 566,000. Authorizations of units in buildings with five units or more were at a rate of 307,000 in November. The first graph shows single and multi-family housing starts for the last several years.Multi-family starts (red, 2+ units) decreased slightly from October.Single-family starts (blue) decreased to 565,000 thousand in November.The second graph shows total and single unit starts since 1968.

New Residential Construction Housing Starts Decline by -3.0% for November 2012 - The November 2012 Residential construction report showed housing starts decreased, -3.0%, from October. Both October and September was revised downward. October was revised from 894,000 housing starts to 888,000. September was revised down by 20,000, from 863,000 to 843,000. Housing starts have increased +21.6% from a year ago, outside the ±12.5% margin of error, but almost a halving from last month's reported year ago percentage increase of +41.9%. For the month, single family housing starts decreased -4.1%. Apartments, Townhouses & Condos or 5 units or more of one building structure, increased +1.4%. Home construction statistics have massive error margins, so don't bet the farm on the monthly percentage changes. The annual change is still significantly outside the margin of error. Housing starts are defined as when construction has broke ground, or started the excavation. One can see how badly the bubble burst on residential real estate in the below housing start graph going back all the way to 1960.  New Residential Construction housing starts has a margin of error way above the monthly percentage increases. This month has a error margin of ±14.3% percentage points on housing starts so the monthly percentage change is significantly within the margin to be considered accurate. That's why one should not get too excited on the monthly percentage change.  Single family housing is 75% of all residential housing starts. Below is the yearly graph of single family housing starts going back to 1960. Year 2012 is not complete, thus not shown in the below graph. Single family housing starts have increased by +22.8% from a year ago with a ±9.9% error margin.

Housing Starts Fall In November, But Outlook Remains Bright - Housing starts fell 3% last month, the Census Bureau reports. The retreat is the first monthly setback since July, although the drop isn't a big surprise, as I discussed earlier today, before the numbers were released. More importantly, November's red ink doesn't appear particularly troubling in terms of the outlook because it doesn't change the overall momentum profile. The annual trend in new housing construction continues to rise at a strong pace, largely because demographics and demand are again pushing homebuilding activity higher.  Even a growing market for new residential construction doesn't expand each and every month. One reason for thinking optimistically that new starts will reach higher levels in the months ahead is the ongoing increase in newly issued building permits, which increased nearly 4% in November to a four-year high.  Stepping back and looking at the annual trend reveals that both permits and starts continue to advance by a healthy 20%-plus on a year-over-year basis. The November pace for this pair of indicators is at the lower end of annual increases posted in 2012, but short of a recession there's no reason to expect that the housing market's recovery is about to run off the rails.

Housing Starts, Permits Unimpressive, Saved By "South" Surge - There was little excitement in today's November housing starts and permits numbers, the first of which missed expectations of 872K modestly, and was down from 894K to 861K on a seasonally adjusted, annualized basis (64.6K unadjusted, non-annualized, the lowest since March; the Northeast unadjusted print was 25% lower than a year ago!). The prior two months were also revised lower from from 863K and 894K to 843K and 888K. On the other hand, permits which are nothing more than an opportunity cost fee for an application filed with the local housing office, rose from 868K to 899K. Curiously enough, this was the one series that was supposed to benefit from Sandy, as builders would step up reconstruction efforts in the hurricane impact areas. Alas, that did not happen, in the impacted Northeast Region, as both Starts (73K) and Permits (76K) came at multi month lows (in the case of permits, this was the lowest print of all of 2012). What did drive housing starts and permits? The "South" where both categories saw the respective data prints jump to the highest since 2008. The same south which was promptly featured in our "Interactive Guide to the Housing Recovery." The housing bubble is back in full force.

Vital Signs Chart: Housing Starts Edge Down - Home construction slipped in November. Housing starts fell 3% from a month earlier to a seasonally adjusted annual rate of 861,000. Construction climbed for three consecutive months, helping the housing market inch back toward health. Housing starts are still up 21.6% from a year earlier. Permits, a sign of future activity, also rose in November.

Comments on Housing Starts - A few key points:
• Housing starts are on pace to increase about 25% in 2012. This is a solid year-over-year increase, and residential investment is now making a positive contribution to GDP growth.
• Even after increasing 25% in 2012, the approximately 770 thousand housing starts this year will still be the 4th lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the three lowest years were 2009 through 2011). Starts averaged 1.5 million per year from 1959 through 2000, and demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will come close to doubling from the 2012 level.
• Residential investment and housing starts are usually the best leading indicator for economy. Nothing is foolproof, but this suggests the economy will continue to grow over the next couple of years.
Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. These graphs use a 12 month rolling total for NSA starts and completions. The blue line is for multifamily starts and the red line is for multifamily completions. The rolling 12 month total for starts (blue line) has been increasing steadily, and completions (red line) is lagging behind - but completions will follow starts up (completions lag starts by about 12 months). This means there will be an increase in multi-family deliveries next year, but still well below the 1997 through 2007 level of multi-family completions. The second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer.

2013 Housing Forecasts - Towards the end of each year I collect some housing forecasts for the following year.  Here was a summary of forecasts for 2012. Right now it looks like new home sales will be around 370 thousand this year, and total starts around 770 thousand or so.  Tom Lawler, John Burns and David Crowe (NAHB) were all very close on New Home sales for 2012.  Lawler was the closest on housing starts. The table below shows several forecasts for 2013. (several analysts were kind enough to share their forecasts - thanks!) From Fannie Mae: Housing Forecast: November 2012  From NAHB: Housing and Interest Rate Forecast, 11/29/2012 (excel).  I haven't worked up a forecast yet for 2013. I've heard there are some lot issues for some of the builders (not improved until 2014), and that might limit supply. In general I expect prices to increase around the rate of inflation, and to see another solid increase in 2013 for new home sales and housing starts.

Another look at US household formation, and why it matters - James Sweeney of Credit Suisse has written one of the more optimistic (and convincing) notes we’ve come across about the near-term trajectory for US housing. Its optimism is based mainly on its analysis of expected household formation growth, which Sweeney finds has been underestimated by most observers. The note includes a good discussion of the ways in which healthy household formation growth can have powerful multiplicative effects throughout the rest of the economy. ... But the two really interesting points in the Sweeney note are that 1) household formation growth can grow meaningfully even under relatively pessimistic assumptions for the US economy, and 2) even modest assumptions of household formation growth can have an have an unexpectedly big impact on the rest of the economy. from the Credit Suisse research noteSo how many households will form? A reasonable estimate, in our view, is somewhere between the strong and base case views, meaning 6-8 million over the next five years. Demographics alone should create 5.7 million, with the rest driven by a labor market recovery that falls short of our strong scenario. We need not assume such high numbers to demonstrate the powerful forces formation can unleash. Even the base case scenario of 5.7 million will drive a substantial pick-up in residential investment. The extremely low levels of housing starts and permits over the past few years means a large number of new housing units will likely need to be built.

Architecture billings rose to a 5-year high in November, and indicates construction activity will increase in 2013 - From The American Institute of Architects (no link available yet): “Billings at architecture firms across the country continue to increase. As a leading economic indicator of construction activity, the Architecture Billings Index (ABI) reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the November ABI score was 53.2, up from the mark of 52.8 in October (see red line above). This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.6, up slightly from the 59.4 mark of the previous month (blue line in chart).” “ The 53.2 reading for the Billings Index in November was the highest level since November 2007, five years ago, and continues the upward trend in billing activity for architectural services that started four years ago. As a leading indicator of future construction activity, we can expect this year’s gains in construction and building activity to continue into next year.

AIA: Architecture Billings Index increases in November, "Strongest conditions since end of 2007"  - Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Architecture Billings Index Signaling Gains for Fourth Straight Month Billings at architecture firms across the country continue to increase. As a leading economic indicator of construction activity, the Architecture Billings Index (ABI) reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the November ABI score was 53.2, up from the mark of 52.8 in October. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.6, up slightly from the 59.4 mark of the previous month. . “The real question now is if the federal budget situation gets cleared up which will likely lead to the green lighting of numerous projects currently on hold. If we do end up going off the ‘fiscal cliff’ then we can expect a significant setback for the entire design and construction industry.”
• Regional averages: Northeast (56.3), Midwest (54.4), South (51.1), West (49.6)
• Sector index breakdown: multi-family residential (55.9), mixed practice (53.9), commercial / industrial (52.0), institutional (50.5)

This graph shows the Architecture Billings Index since 1996. The index was at 53.2 in November, up from 52.8 in October. Anything above 50 indicates expansion in demand for architects' services.This increase is mostly being driven by demand for design of multi-family residential buildings, but every building sector is now expanding. New project inquiries are also increasing. Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

Builder Confidence increases in December, Highest since April 2006 - The National Association of Home Builders (NAHB) reported the housing market index (HMI) increased 2 points in December to 47. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Continues Improving in December Builder confidence in the market for newly built, single-family homes rose for an eighth consecutive month in December to a level of 47 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This marked a two-point gain from a slightly revised November reading, and the highest level the index has attained since April of 2006.Two of the HMI’s three component indexes are now above the critical midpoint of 50. The component gauging current sales expectations rose two points to 51 in December, while the component gauging sales expectations in the next six months slipped one point, to 51. The component measuring traffic of prospective buyers increased one point, to 36. This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the December release for the HMI and the October data for starts (November housing starts will be released tomorrow). This was at the consensus estimate of a reading of 47.

Vital Signs Chart: Home-Builder Confidence at 6-Year High - Conditions for new-home construction are improving. Builder confidence in the market for new single-family homes has climbed for eight consecutive months, the National Association of Home Builders said. The group’s sentiment index rose in December to 47, up two points from November to a six-year high. Readings above 50 signal more builders view sales conditions as good than poor.

US Business Confidence Surges, Even As Fiscal Cliff Uncertainty Jumps - The December reading of Morgan Stanley's proprietary Business Conditions Index* is out and the results are a bit counterintuitive, but overall they appear to be bullish. The headline index surged 15 points to 51% in December, which makes up for much of the 20 point slide we've seen in the last two months. The tumble in October and November had been attributed to elevated uncertainty caused by the fiscal cliff. Interestingly, "reports of uncertainty created by the fiscal cliff jumped dramatically in December to another new high," according to Morgan Stanley's US economics team. "Given that fiscal cliff uncertainty is up and hiring plans deteriorated, it’s unclear what drove the year’s largest increase in expectations." As seen in the breakdown below, the manufacturing and services sub-indices both jumped. The expectations sub-index also exploded higher. Like the markets, which are also up despite policy uncertainty, it appears that businesses think all of this fiscal cliff hubbub is just fleeting noise in an otherwise favorable business backdrop.

Final December Consumer Sentiment declines to 72.9 - The final Reuters / University of Michigan consumer sentiment index for December declined to 72.9, down from the preliminary reading of 74.5, and was down from the November reading of 82.7. This was below the consensus forecast of 75.0. The recent decline in sentiment is probably related to Congress and the so-called "fiscal cliff". This is similar to the sharp decline in 2011 when Congress threatened to force the US to default (not pay the bills). I still think an agreement will be reached in early January - there is no drop dead date - but you never know. 

Michigan Consumer Sentiment Falls Below Expectation - The University of Michigan Consumer Sentiment final number for December came in at 72.9, a decline from the December preliminary of 74.5 and a dramatic decline from the November final of 82.7. Today's number was below the consensus of 74.8. See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is 15% below the average reading (arithmetic mean) and 13% below the geometric mean. The current index level is at the 21st percentile of the 420 monthly data points in this series. The Michigan average since its inception is 85.3. During non-recessionary years the average is 87.8. The average during the five recessions is 69.3. So the latest sentiment number of 72.9 puts us at the low end of the range between the average non-recession and recession mindsets. It's important to understand that this indicator can be somewhat volatile. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average.

US CPI Drops Sharply in November; Inflation Expectations Remain Well Anchored - U.S. Consumer price inflation, which has been unusually volatile over the past year, turned sharply negative in November. According to data released today by the Bureau of Labor Statistics, the all-items CPI fell at an annual rate of 3.7 percent during the month of November. That was the most rapid rate of decrease since the worst months of recession in late 2008. Much of the recent volatility in the CPI has come from the energy sector, particularly gasoline. Consumer inflation spiked at the end of the summer when gasoline prices rose 8.6 percent in August and 6.7 percent in September. Gas prices then fell by 0.5 percent in October and by 6.9 percent in November. To remove the transient effects of changes in highly volatile prices, economists use various measures of underlying inflation. The most widely cited is the core CPI series published by the BLS, which removes the food and energy components of the all-items CPI. The core CPI rose at a 1.33 percent annual rate in November. The Cleveland Fed takes another approach to measuring underlying inflation. Its 16-percent trimmed mean indicator removes the 8 percent of prices that increase the most in a given month and the 8 percent that increase least (or decrease most), whether they are food, energy, or something else. The 16-percent trimmed mean CPI rose at an annual rate of 1.64 percent in November. The following chart shows these two underlying inflation measures along with the all-items CPI.

All 50 States Have Gas Below $4 for First Time in 2012 - Gasoline prices have been falling for weeks, and have now reached a new low for the year. The national average pump price of regular gasoline fell 9.2 cents a gallon last week to $3.248 a gallon today, the lowest price since December 2011, AAA Daily Fuel Gauge reports. Prices have fallen each day this month on rising supplies and are down 16% since mid-September. AAA spokesman Michael Green says Missouri posts the lowest average price in the country at $2.955. Hawaii has the nation’s highest price at $3.979.

U.S. gas prices 'crash' -  Gas prices have plummeted 46 cents a gallon over the past two months, according to a survey released Sunday. "This has been a true price crash," said Trilby Lundberg, publisher of the Lundberg Survey. The average price of a gallon of regular gasoline is $3.38, down nearly a dime over the past three weeks, Lundberg said. "This crash began back when refining problems around the country were being fixed, one after the other, at the same time that our seasonal gasoline demand was shrinking," she said. Crude oil prices have also dropped after having risen steadily. Prices at the pump should drop even more in the coming days, as refiners cut how much they're charging distributors and retailers, Lundberg said. The national average is about 8 cents higher than the average a year ago.

Don’t Believe the Gasoline Hype - Retail gasoline prices in some U.S. markets are expected to approach the $3.00 per gallon mark by the end of the year. Declining oil prices, coupled with a series of encouraging economic figures, have helped ease prices at the pump for American drivers in time for the busy holiday season. This year saw seasonal anomalies brought on by hurricanes, refinery outages and geopolitical issues. The Christmas miracle of cheap gasoline, however, was anticipated by the U.S. Energy Department early last month, suggesting it’s no miracle at all. Factory output in the United States remains below rates from early this year, though November figures suggest there's been a sharp increase as the east coast recovers from Hurricane Sandy. The Federal Reserve said the manufacturing sector saw its biggest gain in about a year with a 1.1 increase in November. While characterized as modest, the U.S. Labor Department said the consumer price index dropped 0.3 percent. Gasoline prices last month fell on average by more than 7 percent, the largest decline in four years. That followed a slide of 0.6 percent that began in October. Though holiday travel may erase some gains in discretionary spending, the Labor Department said household earnings were on the rise just in time for Christmas.

Vehicle Miles Driven: Population-Adjusted Hits Another Post-Crisis Low - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through October. Travel on all roads and streets changed by 0.3% (0.9 billion vehicle miles) for October 2012 as compared with October 2011. The 12-month moving average of miles driven increased only 0.51% from October a year ago (PDF report). And the civilian population-adjusted data (age 16-and-over) has set another post-financial crisis low. Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1987. My start date is 1971 because I'm incorporating all the available data from the DOT spreadsheets.

Do Consumers Benefit from Energy Efficiency Regulations? Lawrence Berkeley National Laboratory does a lot of work on energy efficiency regulations, and they asked us to do some data analysis to accompany new energy efficiency standards that were being proposed by the Department of Energy.  I think it presents some fairly compelling evidence that energy efficiency regulations may be beneficial in ways not typically considered We obtained a big dataset that tracks sales of all washing machines sold at a large fraction of retailers throughout the country.  These are proprietary data that LBL had to purchase, so unfortunately we cannot share the raw data.  They are monthly data that start well before a 2007 increase in the stringency of clothes washer efficiency standards and continue until well after 2007.  Importantly, the standards change only banned the manufacture, not the sale, of low efficiency washers. Unsurprisingly, we found prices of the banned low-efficiency units started increasing a bit before the ban took effect supplies dwindled, and the price increases and falling quantities continued awhile after the ban. People who really wanted the old, less-efficient washers were clearly worse off because the old washers become more expensive and probably more difficult to find.   As people shifted their purchases away from the banned units and toward the more efficient units, sales of the efficient units soared.   One may normally expect prices for high-efficiency units to also rise as demand shifted.  But they didn’t.  Instead prices fell sharply around the time of the policy change, just as sales started to rise.  

Personal Income increased 0.6% in November, Spending increased 0.4% - The BEA released the Personal Income and Outlays report for November:  Personal income increased $85.8 billion, or 0.6 percent ... in November, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $41.3 billion, or 0.4 percent....Real PCE -- PCE adjusted to remove price changes -- increased 0.6 percent in November, in contrast to a decrease of 0.2 percent in October. ... The price index for PCE decreased 0.2 percent in November, in contrast to an increase of 0.1 percent in October. The PCE price index, excluding food and energy, increased less than 0.1 percent, compared with an increase of 0.1 percent.  Personal saving -- DPI less personal outlays -- was $436.7 billion in November, compared with $404.6 billion in October. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 3.6 percent in November, compared with 3.4 percent in October.The following graph shows real Personal Consumption Expenditures (PCE) through November (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. Personal income increased more than expected in November and PCE for October was revised up.  The "two month method" for estimating Q4 PCE suggests PCE will increase close to 2.2% in Q4 - more growth than most expect - although this estimate is probably a little high because PCE was strong in September. Still better than expected .

Real Disposable Income Per Capita: A Strong Rebound - 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 November data shows a strong reversal of the contractionary pattern in recent months. 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 November of 2007. 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, the trend reversed in August, and incomes slumped for three months. But the November data has shown a surprisingly strong reversal to the upside. Let's hope this trend change has some staying power. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. The BEA uses the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000.  Nominal disposable income is up 50.8% since then. But the real purchasing power of those dollars is up only 15.2%. 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.

Three Aces For November: Income, Spending & Durable Goods Orders - Today's November updates for personal income and spending, along with fresh data on durable goods orders, offer another round of encouraging news on the side of growth. For those who argue that the economy is collapsing, today's numbers offer a sharp rebuke. In fact, similarly robust numbers for November have been published for other indicators in recent weeks. Earlier this month I projected that the broad profile of economic activity in November was on track to improve over October, and today's updates all but seal the deal. The main point is that the risk of a recession, based on the numbers in hand, continues to look like a low-probability event in the here and now. That's been the message all along, and it remains the case today. Let's take a closer look at today's updates, starting with personal income and spending. Clearly, November was a month for revival in consumption and income. Disposable personal income (DPI) increased by 0.6% last month, the most since February. Personal consumption expenditures also rebounded sharply, rising 0.4%. Both of those gains, by the way, were widely expected, as I noted earlier today, a few hours ahead of the releases.

    November Disposable Income, Durable Goods Soar: Sandy's Fault? - Something funny happened on the way to another "it's all Sandy's fault" justification for economic data misses today: it flipped. Because while in November, Personal spending was expected to surge above personal spending (which printed up 0.4%, in lined with expectations), instead what the BEA - best known for producing such accurate series as the US GDP - reported is that Personal Incomes soared by a whopping 0.6% in November, double the expectations and compared to a 0% print in October. The reason? "Private wage and salary disbursements increased $41.1 billion in November, in contrast to a decrease of $16.3 billion in October.  The October decrease in private wages and salaries reflected work interruptions caused by Hurricane Sandy, which reduced wages and salaries by $18.2 billion at an annual rate." And the stunning data did not end there: real Disposable Income soared by a whopping 0.8% following a drop of -0.1% in October. As the chart below shows, this was the biggest monthly surge in Real Disposable Income in years. The result of all this is that savings, which would have otherwise dropped to a fresh 5 year low, rose to 3.6%. And concluding the wonderful data in the month when the impact of Sandy was to be most acute, we got Durable data, which blasted through the roof, if only on a Seasonal Adjusted basis: with Durable Goods rising 0.7%, on expectations of 0.3%, and the last month revised from 0.0% to 1.1%, while Capital Goods orders non-defense ex-aircraft surged 2.7% on expectations of an unchanged print (with the highest expectation being 1.0%), with the last one revised from 1.7% to 3.2%. (Of course, non-seasonally adjusted durable goods data plunged but who's counting).

    LA area Port Traffic: Down in November due to Strike - Note: Clerical workers at the ports of Long Beach and Los Angeles went on strike starting Nov 27th and ending Dec 5th.  The strike happened after the holiday shipping period, so the slowdown isn't expected to impact holiday related shopping. I've been following port traffic for some time. Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for November. LA area ports handle about 40% of the nation's container port traffic. Some of the LA traffic was routed to other ports, so this data might not be very useful this month. The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.  On a rolling 12 month basis, both inbound and outbound traffic are down slightly compared to the 12 months ending in October. In general, inbound and outbound traffic has been mostly moving sideways recently. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). For the month of November, loaded outbound traffic was down 7.5% compared to November 2011, and loaded inbound traffic was down 3% compared to November 2011.

    ATA Trucking Index rebounds in November -  Truck tonnage was negatively impacted by Hurricane Sandy in October, and bounced back in November. From ATA: ATA Truck Tonnage Index Rebounds 3.7% in November The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index jumped 3.7% in November erasing October’s 3.7% drop. (The 3.7% decrease in October was revised from a 3.8% contraction ATA reported on November 20, 2012.) November’s gain was the first since July of this year. As a result, the SA index equaled 118.0 (2000=100) in November versus 113.8 in October. Compared with November 2011, the SA index was up 1%, after contracting 2.1% on a year-over-year basis in October. Year-to-date, compared with the same period last year, tonnage was up 2.8%. ...“Sandy impacted both October’s and November’s tonnage readings,” ATA Chief Economist Bob Costello said. “But it was still good to see tonnage snap back in November.” Trucking serves as a barometer of the U.S. economy, representing 67% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9.2 billion tons of freight in 2011. Motor carriers collected $603.9 billion, or 80.9% of total revenue earned by all transport modes. Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index.

    Industrial Production Does a Post Superstorm Sandy Bounce, Increases 1.1% for November 2012 Hurricane Sandy has really wreaked havoc with industrial production's monthly percentage changes. Sandy wiped out almost a full percentage point of October's manufacturing production even though the storm hit New Jersey on October 29th. Manufacturing resumed in November, causing a 1.1% increase in manufacturing production. Twenty percent of industrial production activity is in counties affected by the storm and 3-4% of industrial production related employment is in the same areas.  Overall, The Federal Reserve's Industrial Production & Capacity Utilization report, G.17, shows a monthly increase of 1.1% in industrial production for November 2012. October showed a revised -0.7% change. The industrial production statistical release is also known as output for factories and mines. Manufacturing output jumped by 1.1%, mining increased 0.8% and utilities gained 1.0% from October. Total industrial production has increased 2.5% from November 2011 and is still down -2.5% from 2007 levels, going on an incredible five years. Here are the major industry groups industrial production percentage changes from a year ago, which might be artificially high since many factories were playing catch up after after the storm.

    • Manufacturing: +2.7%
    • Mining: +3.0%
    • Utilities: +0.7%

    Just Released: December Empire State Manufacturing Survey -- Issued this morning, the December 2012 Empire State Manufacturing Survey report suggests that manufacturing activity continued to decline modestly in New York State, with only moderate lingering effects from superstorm Sandy. The headline general business conditions index, which gives a broad reading on overall manufacturing activity for the state, remained negative for a fifth consecutive month. The level of this index has fluctuated between -5 and -10 over the five-month interval, and has changed little since the storm. Specific activity indexes for December were mixed. The measure for new orders dipped below zero but only slightly, while the shipments index remained in positive territory. However, the indexes for both the number of employees and the average workweek were more negative.    December responses from manufacturers in downstate New York generally showed more widespread declines than those from upstate establishments—especially on the new orders and employment measures—suggesting that superstorm Sandy has had some lingering negative effects. Still, responses from upstate businesses, which represent more than two-thirds of the respondent pool, were generally negative as well. This part of New York was not directly affected by the storm, although a number of manufacturers noted that they were affected indirectly—some positively, some negatively.

    Empire State Manufacturing Surprises to the Downside (Sandy Notwithstanding) - Until the past few months I've not routinely reported on monthly manufacturing data, regional or otherwise. However, now that I'm tracking the Big Four economic indicators, which includes Industrial Production, I'm watching these indexes more closely. This morning we got the latest Empire State Manufacturing Survey. The diffusion index for General Business Conditions was not good. There are a variety of components to the diffusion index for those who wish to dig deeper. But at the top level, here is a snapshot of New York State's General Business Conditions. The -8.1 was substantially below the consensus of 2.0.Here is a chart illustrating both the General Business Conditions and Future General Business Conditions (the outlook six months ahead): Here is the opening paragraph from the report. The one positive note was the modest improvement in future business conditions.

    Empire State Manufacturing index indicates further contraction - From the NY Fed: Empire State Manufacturing Survey The December 2012 Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to decline at a modest pace. The general business conditions index was negative for a fifth consecutive month, falling three points to -8.1. The new orders index dropped to -3.7, while the shipments index declined six points to 8.8. At 16.1, the prices paid index indicated that input prices continued to rise at a moderate pace, while the prices received index fell five points to 1.1, suggesting that selling prices were flat. Employment indexes pointed to weaker labor market conditions, with the indexes for both number of employees and the average workweek registering values below zero for a second consecutive month. Indexes for the six-month outlook were generally higher than last month, although the level of optimism remained at a level well below that seen earlier this year. The index for number of employees rose five points to -9.7, while the average workweek index declined three points to -10.8. The general business condition index declined from -5.22 in November to -8.1 in December - the fifth consecutive negative reading. This was another weak manufacturing index and below expectations of a reading of 0.0.

    New York Manufacturing Activity Contracts Again - An index covering New York manufacturing activity shows contracting activity in December for the fifth month in a row, according to the Federal Reserve Bank of New York‘s Empire State Manufacturing Survey released Monday. The Empire State’s business conditions index slipped to -8.1 in December. That’s down from -5.2 in November. Readings below zero reflect shrinking activity. Economists surveyed by Dow Jones Newswires had expected the index to improve to -1.0. The New York Fed survey is the first of several regional Fed factory reports due in the coming days, including regional gauges from Philadelphia and Kansas City. The tepid New York reading raises concerns about a slowdown in factory activity elsewhere in the U.S., though this month’s report reflected some lingering region-specific effects from a late-October superstorm that inflicted the northeastern coastline.

    Empire State Manufacturing Index Declines 5th Straight Month; Profit Squeeze Underway - Inquiring minds are taking a peek at the Empire State Manufacturing Survey, a publication of the Federal Reserve Bank of New York. The December 2012 Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to decline at a modest pace. Points of Interest:

    • General business conditions index was negative for a fifth consecutive month, falling 2.9 points to -8.1
    • New orders dropped 6.8 point to -3.7
    • Shipments dropped 5.8 points to +8.8
    • Prices paid rose 1.5 points to +16.1
    • Prices received fell 4.5 points to +1.1
    • Number of employees remains in contraction although the index rose 4.9 points to -9.7
    • Average work week fell 2.9 points to -10.8

    Philly Fed Rejects Ongoing Contraction Indicated By New York Fed - Three days ago the New York Fed released the December print Empire State index which showed a broad contraction across all key verticals. Today, in fine "keeping them baffled with bullshit" form, the Philly Fed swing precisely the other way, and despite expectations for a second consecutive negative print of -3 to be precise, up from -10.7 last month, the General Business Activity indicator printed at 8.1, the highest print since April, with New Orders at 10.7, the highest since February, and Employment at 3.6, the highest since April. Naturally, the algos pretending to trade on news, took this news and ran futures higher, even though this implies a sooner end to Fed easing (wink wink), having done precisely the same with the NY Fed data on Monday, when inversely it implied an even more infinite QE4EVA. Needless to say, all economic data in the US at this point is completely meaningless, with regional distortions, seasonal adjustments, political pressures and overall central planning making a mockery of the US economic data apparatus. The good news, of course, is that economic data has ceased to matter long ago. The only thing that matters now: how will the House vote later today.

    Philly Fed Manufacturing Bounces Back - Business conditions for mid-Atlantic manufacturers this month improved dramatically, according to a report released Thursday by the Federal Reserve Bank of Philadelphia. The Philadelphia Fed said its index of general business activity within the factory sector increased to 8.1 in December from -10.7 in November.Economists surveyed by Dow Jones Newswires expected the latest index to improve only to -2.1. Readings under zero denote contraction, and above-zero readings denote expansion.The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. Today's report shows a strong pickup at year end, moving from -10.7 last month to 8.1. Moreover, the 3-month moving average has risen to 1.0 after six months of negative readings. Since this is a diffusion index, negative readings indicate contraction, positive indicate expansion. Here is the introduction from the Business Outlook Survey released today: Manufacturing activity rebounded this month, according to firms responding to the December Business Outlook Survey. Following reported declines in business activity in late October and early November from the effects of Hurricane Sandy, most of the survey's measures showed notable improvement this month. The survey's broad indicators of future activity also showed improvement this month. (Full PDF ReportThe first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. In the next chart we see the complete series, which dates from May 1960. The average absolute monthly change across this data series is 8.1, which suggests that the 18.8 point change from last month is quite significant, which is not surprising, given the impact of Sandy on last month's data.

    Misc: Philly Fed Mfg Shows Expansion, Q3 GDP Revised Up, FHFA House Prices increase - From the Philly Fed: December Manufacturing Survey  - The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of ‑10.7 in November to 8.1 this month. This is the highest reading since April and is slightly above the reading before the post-storm decline in November. Labor market conditions at the reporting firms improved marginally this month. The current employment index, at 3.6, registered its first positive reading in six months ... The survey’s future indicators suggest improved optimism among the reporting manufacturers. The future general activity index increased from 20.0 to 30.9, its highest reading in three months. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through December. The ISM and total Fed surveys are through November.The average of the Empire State and Philly Fed surveys increased in December, but is just back to 0. This is the highest combined level since May, but still suggests another weak reading for the ISM manufacturing index.

    Earlier: Chicago Fed National Activity Index improves, Kansas City Fed Mfg Survey shows contraction - A couple of reports from earlier this morning:  The Chicago Fed released the national activity index (a composite index of other indicators): Economic Activity Increased in November Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.10 in November from –0.64 in October. Two of the four broad categories of indicators that make up the index increased from October, but only the production and income category made a positive contribution to the index in November. The index’s three-month moving average, CFNAI-MA3, increased from –0.59 in October to –0.20 in November—its ninth consecutive reading below zero. November’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. From the Kansas City Fed: Tenth District Manufacturing Activity Declined Further Tenth District manufacturing activity declined further in December, though by a smaller amount than in October or November. Factories’ production expectations were somewhat more optimistic than last month, but a higher share of firms plan to decrease employment in coming months. Approximately half of all contacts cited fiscal policy uncertainty as having impacted their hiring decisions. Price indexes mostly increased, particularly for future raw materials, with the increase driven heavily by food prices. The month-over-month composite index was -2 in December, up slightly from -6 in November and -4 in October ... The employment index decreased from 22 to 13 after rebounding solidly last month.

    Why The Manufacturing Jobs Are Not Coming Back - There are a plethora of reasons underpinning the fact that manufacturing jobs are not coming back to the USA. Perhaps the simplest is purely economic. As McKinsey notes in a recent report, manufacturings' role in job creation shifts over time as manufacturing's share of output falls and as companies invest in technologies and process improvements that raise productivity. A critical finding is that as manufacturing's share of national output falls, so does its share of employment - following the inverted 'U' curve below. Manufacturing job losses in advanced economies have been concentrated in labor-intensive and highly tradable (read globalizable) industries such as apparel and electronics assembly. Thanks to the increased productivity and a 'high' credit-enabled standard-of-living, the US has simply priced itself out of the global manufacturing business (and so is China as its GDP per capita rises). Unless Americans are willing to put the twinkie (and iPad) down, those jobs will continue to bleed overseas (to India based on the chart below) building the ever-more self-fulfilling vicious circle of a nation dependent on state-aid to survive as only the 'unlucky' few remain employed.

    Normalized Unemployment Rates; Cyclical vs. Secular Forces - Many have heard of normalized P/E ratios based on 10-year earnings averages and the concept of reversion to the mean. To the best of my knowledge no one has attempted to normalize unemployment rates based on demographic trends, although some have attempted unemployment normalizations based on changing definitions of the meaning of unemployment. The following participation rate chart defines the problem. The above chart first appeared in my post Boomer Demographics and the Unemployment Rate. It is from a series by reader Tim Wallace. (click on link for rest of the series). I added trendlines, a vertical black line, and circles to the chart. Definitions and Notes:

    • The participation rate is the ratio of the civilian labor force to the total noninstitutionalized civilian population 16 years of age and over.
    • The noninstitutionalized civilian population consists of civilians not in prison, mental facilities, wards of the state, etc.
    • The labor force consists of those who have a job or are seeking a job, are at least 16 years old, are not serving in the military and are not institutionalized.
    • There are strict requirements on what constitutes "seeking a job". Reading want-ads or jobs on "Monster" does not count. One actually needs to apply for a job, go on an interview, or send in a resume.
    • Please see Reader Question Regarding "Dropping Out of the Workforce" for an explanation of how the BLS determines someone is actively seeking a job.

    On the Other Side of the Cliff - Remember the unemployment rate?Even with a positive resolution of the fiscal cliff (and you can fill in ‘positive’ any way you like) awaiting us on the other side is the still highly elevated unemployment rate.How high and for how long?The figure below shows a bunch of forecasts of the jobless rate over the next few years, along with the CBO estimate of the full employment unemployment rate as a reference point.The most pessimistic trend is the other CBO line, as that assumes we go over and stay over the cliff.  The most optimistic is Moody’  Their model foresees faster growth in coming years than the others, in part because they believe the rate of household formation (and the related higher investment and consumption) will soon accelerate after being suppressed by the housing bust and Great Recession.Goldman Sachs researchers expect real GDP growth to be about 3% in 2014-15 (Moody’s expects about 4%).  My own forecast (JB) is similar to GS but a bit more pessimistic because I assume the labor force participation grows more quickly as the economy recovers, putting upward pressure on the jobless rate.At any rate, relative to full employment, we’re looking at elevated unemployment for years to come. 

    Americans Seeking Unemployment Aid Rises by 17,000 — The number of Americans applying for unemployment benefits rose last week by 17,000, reversing four weeks of declines. But the number of people seeking aid is consistent with a job market that continues to grow modestly. Unemployment claims rose the week of Dec. 15 to a seasonally adjusted 361,000 from a revised 344,000 the week before. The less-volatile four-week moving average fell 13,750 to 367,750, lowest since late October. Applications had surged in early November after Superstorm Sandy, then dropped back. Just over 5.4 million people were receiving some type of unemployment benefit the week ended Dec. 1, down from nearly 7.2 million a year earlier.

    Weekly Initial Unemployment Claims at 361,000 - The DOL reports: In the week ending December 15, the advance figure for seasonally adjusted initial claims was 361,000, an increase of 17,000 from the previous week's revised figure of 344,000. The 4-week moving average was 367,750, a decrease of 13,750 from the previous week's unrevised average of 381,500. The previous week was revised up from 343,000. The following graph shows the 4-week moving average of weekly claims since January 2000.

    Jobless Claims Rise, But Remain Near 2012 Lows - Jobless claims increased by 17,000 last week to a seasonally adjusted 361,000. The pop isn't surprising, nor is it particularly worrisome at this point. As I noted earlier today, before the report's release, my average econometric forecast called for a gain to 361,000. That's exactly what we got—a freak incident of specificity, no doubt. In any case, the higher level of claims looks like noise within the range that's prevailed for much of this year. As a result, today's number, despite what you might hear otherwise, is mostly a yawn.New filings for jobless benefits in the neighborhood of 360,000 suggests more of what we've seen in recent months: a labor market that's growing modestly. Last week's four-week average for claims was just under 368,000, or near the lowest levels for this year.

    Weekly Unemployment Claims at 361K: Higher Than Expected - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 361,000 new claims number was a 17,000 increase from a 1,000 upward adjustment of the previous week. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, fell to 367,750. Here is the official statement from the Department of Labor:  In the week ending December 15, the advance figure for seasonally adjusted initial claims was 361,000, an increase of 17,000 from the previous week's revised figure of 344,000. The 4-week moving average was 367,750, a decrease of 13,750 from the previous week's unrevised average of 381,500.  The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending December 8, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending December 8 was 3,225,000, an increase of 12,000 from the preceding week's revised level of 3,213,000. The 4-week moving average was 3,240,500, a decrease of 33,500 from the preceding week's revised average of 3,274,000.  Today's seasonally adjusted number was above the consensus estimate of 345K. However,  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 spike in red dots for associated with Sandy. The most recent dot puts us back at pre-Sandy levels.

    Initial Unemployment Claims 361,000 While Over 2 Million to Lose Benefits for Week of December 15th, 2012 - The DOL reported Initial weekly unemployment claims for the week ending on December 15th, 2012 were 361,000, a 17,000 increase from the previous week of 344,000. Superstorm Sandy's devastating effects should be normalizing out by now, so this is a troubling increase in initial unemployment filings.  There were 2,096,545 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending December 1st. Beyond the fiscal cliff insanity, these people are due to run out of benefits after December 29th. The National Employment Law Project predicts over 3 million people will run out of unemployment benefits by the end of Q1 2013. Extending emergency unemployment benefits so far has not been a major piece of the fiscal cliff so called grand bargain. Cutting social security and other social safety nets are part of the Congressional fiscal cliff deal. This means millions will be further thrown into poverty on December 29th. This is an economic doomsday scenario, yet is not receiving much of a mention by Congress.  USA today reports the costs for one year to extend unemployment benefits is $30 billion. Over 40% of the unemployed have been so 27 weeks or longer.  Each dollar the government pays out in jobless benefits yields $1.42 in economic output because the unemployed tend to spend virtually all their payments, and it has a substantive positive effect on the economy. says Mark Zandi, chief economist of Moody's Analytics.  The four week moving average decreased 13,750 to 367,750 as Sandy's effects dissipate. In the below graph we can see we still are not at pre-recession initial weekly unemployment claims levels. If anyone recalls, even before the Great Recession the job market was not so hot. Below is the four week moving average, set to a log scale, from January 1st, 2007.

    A projected 13.1 percent of workers will be unemployed at some point in 2013 - New data show that 14.9 percent of the workforce was unemployed at some point in 2011, much higher than the official 2011 unemployment rate of 8.9 percent. How can this be? Each month, the official unemployment rate provides the share of the labor force unemployed in that month. But this understates the number of people who are unemployed at some point over a longer period, since someone who is employed in one month may become unemployed the next, and vice versa.  So the official annual unemployment rate—which is actually the average monthly unemployment rate for the year—is much lower than the share of the workforce that experienced unemployment at some point during the year. The figure below, from The State of Working America, 12th Edition (and updated with new data from the Bureau of Labor Statistics) shows both the official unemployment rate and the “over-the-year” unemployment rate—the share of workers who experienced unemployment at some point during the year. Using the ratio of the over-the-year unemployment rate to the official unemployment rate in 2011, we can project the over-the-year unemployment rate for 2012 and 2013. It is likely that 13.1 percent of the workforce, or more than one in eight workers, will be unemployed at some point next year.

    Number of the Week: Without Unemployment Extension, Millions to Lose Benefits - 2.1 million: The number of Americans who will lose their jobless benefits on January 1 if Congress doesn’t extend emergency unemployment programs. Most of the focus during the drawn-out (and apparently now stalled) negotiations over the “fiscal cliff” has been on taxes — who should pay more, who should be spared and how much additional revenue the government should raise. Less discussed has been the imminent expiration of nearly all federal emergency unemployment programs, which now provide benefits to 2.1 million job seekers. Congress created the programs starting in 2008 as a temporary supplement to regular state-administered unemployment insurance, which in most states provides 26 weeks of payments. At their peak, federal programs provided up to 99 weeks of benefits to 6 million unemployed workers. Congress has repeatedly extended the emergency benefits amid continued high unemployment, and the White House is pushing to do so again. But even before the cliff negotiations bogged down, the prospects of another extension was uncertain. The recent drop in the unemployment rate to 7.7% may have made the issue appear less pressing — although the jobless rate remains well above where it was when Congress first enacted the programs in 2008. Indeed, even before the year-and deadline, the federal programs have been shrinking. The Extended Benefits program, the final step in the multi-tiered structure, once provided benefits to more than a million job seekers; after a major cut back earlier this year, it now serves fewer than 45,000. The more widely available Emergency Unemployment Compensation program, known as EUC, has seen its rolls fall to about 2 million from nearly 6 million at its peak.

    How Long Will it Take to Get to 6.5 Percent Unemployment?  -  Last week, the Fed announced its intention to keep interest rates at historic lows until the unemployment rate drops below 6.5 percent, so long as projected inflation remains below 2.5 percent. The Fed has now explicitly linked its interest-rate policy with future economic conditions. But how long it will take to reach 6.5 percent? In today’s analysis, The Hamilton Project presents a range of estimates of when the unemployment rate will reach the Fed’s benchmark. The chart below shows how long it will take to reach an unemployment rate of 6.5 percent based on different assumptions of monthly job growth.

    Why the unemployment rate might soon stop falling - Over the past year, the U.S. unemployment rate has fallen rapidly, from 8.7 percent last November to 7.7 percent today. But a new paper from the Federal Reserve Bank of San Francisco suggests that this decline could soon stall out. Why is that? Not because the U.S. economy is about to slow down. Rather, it’s because a number of discouraged workers who had previously dropped out of the labor force may soon start searching for jobs again. That’s good news for the economy, but it means that the official unemployment rate could flat-line for a year or two — even if the economy’s improving. Remember, the official unemployment rate only measures people who are part of the “labor force” — that is, people who either have jobs or are actively looking for work. Since 2007, the U.S. labor force participation rate has shrunk dramatically:

    Will the Unemployment Rate "Stay Around 8% as Late as Mid-2014"? - An Economic Letter from the SF Fed warns that, as discouraged workers return to the workforce with improving economic conditions: ...the unemployment rate could stay around 8% as late as mid-2014, despite continued job growth. Progress in reducing the unemployment rate is a key factor in keeping consumer confidence and spending high enough to sustain recovery. And policymakers use the unemployment rate as a gauge of economic progress. A stall in reducing the unemployment rate would undoubtedly be viewed as a significant disappointment.

    American Dream Fades for Generation Y Professionals - Generation Y professionals entering the workforce are finding careers that once were gateways to high pay and upwardly mobile lives turning into detours and dead ends. Average incomes for individuals ages 25 to 34 have fallen 8 percent, double the adult population’s total drop, since the recession began in December 2007. Their unemployment rate remains stuck one-half to 1 percentage point above the national figure. Three and a half years after the worst recession since the Great Depression, the earnings and employment gap between those in the under-35 population and their parents and grandparents threatens to unravel the American dream of each generation doing better than the last. The nation’s younger workers have benefited least from an economic recovery that has been the most uneven in recent history.  “This generation will be permanently depressed and will be on a lower path of income for probably all of their life -- and at least the next 10 years,” . Professionals who start out in jobs other than their first choice tend to stay on the alternative path, earning less than they would have otherwise while becoming less likely to start over again later in preferred fields,

    Visualizing Teens Working Full or Part Time - Today's data visualization exercise features the Bureau of Labor Statistics' data reporting the number of U.S. teens working either full or part-time, which goes back to January 1968. Our first chart improves on the BLS' data, by showing how both full and part-time working 16 to 19 year olds make up the complete teen employment scene:  Looking at the chart, we see that full-time jobs for teens peaked in 1979, while we see that part-time jobs for teens peaked in 1999. Overall, the number of part-time jobs for teens has been more stable than the number of full-time jobs, which have been declining since 1980.  The decline in full-time jobs for teens is especially visible in our second chart, which shows how the relative share of full-time jobs for teens has declined in stages over time:  As a short primer to the reasons why the decline in the relative share of full-time jobs for U.S. teens looks the way it does, we'll point you to one document, which reveals the history of both the U.S. federal and California's minimum wages. Note the timing of when major shifts occur in our two charts with the dates listed....

    Vital Signs Chart: Meager Wage Gains - U.S. workers are seeing their pay barely inch up — or not climb at all. Compared with a year earlier, inflation-adjusted average hourly earnings remained flat in November. Compared with a month earlier, average hourly earnings rose 0.5%. Inflation remains low, with consumer prices up just 1.8% from a year ago — an increase that was enough to offset meager wage gains.

    A Real Right to Work - All Americans willing and able to work have a right to paid employment. If the private sector can’t generate sufficient jobs, the public sector should provide them. This definition of “right to work” obviously differs from the one that Republican legislators in Michigan deployed when they passed a new law absolving workers from the responsibility of paying union fees even if they gain contract benefits from them. But perhaps their actions will dramatize the need to challenge their framing and reclaim the genuine meaning of the phrase. Most of us live in a world in which paid employment is the only avenue to economic self-sufficiency. Without it, families maintained by working-age adults are largely dependent on the kindness of strangers, otherwise known as extended unemployment insurance and food stamps. Yet, for more than four years, this nation has tolerated levels of unemployment that have essentially made it impossible for most of those seeking paid employment to find it, with a ratio of unemployed workers to job openings of more than three to one.

    You Hate “Right To Work” Laws More Than You Know. Here’s Why - The Michigan GOP apparently blindsided everyone with the union-busting "right to work" laws they just rammed through the state. Certainly my labor friends were caught off-guard tactically by the Republicans’ speed and choice of battleground.  Today, in most of America, unions have it bad. And part of the reason it’s bad is because we no longer know how to organize. Imagine trying to organize workers in your call center or warehouse, or your software gaming firm or your human rights NGO, as they’re doing at Amnesty International. The pressures against you — from worker cynicism and colleagues’ fear of losing their jobs, to personal relations with your boss and superiors, the bills you have to pay, and simple questions like "how do I organize" and "how do I know I won’t be screwed" — not to mention the inevitable appearance of company snitches, provocateurs, and just run-of-the-mill assholes and idiots... I’m not even talking here about your company’s ability to fire you, demote you, abolish your department, slash your pay, pretty much whatever the Hell they want ever since Reagan busted the air traffic controller’s union... This is the lot of American labor organizers in 2012 , except for in a few remaining pockets of America where union power and memory is still strong and tightly woven into the local cultural DNA.  Michigan is one of those places, which is why crushing labor power there would be as inspiring to the rightwing oligarchs who just got creamed at the polls as, say, the rise of the Tea Party was in early 2009

    The U.S. Labor Market: Status Quo or a New Normal? - The recession of 2007 to 2009 caused such high and persistent unemployment that it led many to conclude that the labor market had undergone structural changes, making it difficult or impossible to return to pre-recession employment levels. But in The United States Labor Market: Status Quo or A New Normal? (NBER Working Paper No. 18386), Edward Lazear and James Spletzer suggest that cyclical, not structural forces, are behind the surge in unemployment from 4.4 percent in the spring of 2007 to 10 percent in the fall of 2009, and the slow decline since then. "[T]he current recession does not appear fundamentally different from prior ones, except that it is worse," they conclude. They fail to find "any compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the pattern of persistently high unemployment rates." Instead, they note that "the evidence points to primarily cyclic factors." The authors note that there are a number of ongoing, long-term industrial and demographic shifts in the labor market, but that none of these factors can explain the recent rise in unemployment. For example, the relative decline in U.S. manufacturing jobs has been under way for a half century, and the rise in female employment dates back to the second half of the twentieth century. The U.S. labor force is also aging, but again this is a long-term trend.

    Interview with James Galbraith (Part 2) - Here's the second part of the interview with Jamie Galbraith conducted by Roger Strassburg for (Part 1, Speech): Interview of James Galbraith (Part 2): RS: In the U.S., ever since the firing of the air traffic control folks, unions have really gone down in the U.S. Do you see any possibility that that could ever change? JG: Well, a couple of things about that. I think that the role of the firing of the Professional Air Traffic Controllers is exaggerated in this story. PATCO was one of two unions that actually endorsed Reagan in the 1980 election, the other one being the Teamsters. PATCO then turned around and challenged him in a way that was very ill-advised, and suffered, of course, catastrophic consequences. But that wasn't the reason why the rest of the labor union went into decline at that time. And the fact that Reagan appointed anti-labor people to the National Labor Relations Board also wasn't decisive. What was decisive was the recession, the huge hit to industrial jobs in the Midwest in '81, '82. You had a massive collapse of heavy industry in the U.S., bankruptcies all over the spectrum. I can remember the names of a lot of firms that aren't with us anymore as a result of that period. And that's when the American equivalent of IG-Metall suffered its severe reverses. Since that time, there is at least one part of the union sector which has grown quite rapidly and that's the Service Employees International Union, the public employees union.. They were the firewall, and that's what brought Jerry Brown back to the governership in California. And the consequence of that is Proposition 30 this year, which basically ends the era of no tax increases in California.

    Walmart VP: When Workers Ask About Unions, Management Tells Them Benefits 'Might Go Away' -- In an interview with Bloomberg Businessweek, a top Walmart official said the company has evaded unionization in part by reminding workers what benefits “might go away” if they organized. Interviewed for this week’s Businessweek  cover story on the current labor campaign facing the company, Walmart Vice President of Communications David Tovar told reporter Susan Berfield, “We have human resources teams all over the country who are available to talk to associates, and we will get questions about joining a union. We would say, ‘Let us remind you of all that Walmart offers, and of what might go away. Quarterly bonuses might go away, vacation time might go away.’ ” The article did not make clear when, where, or how frequently Tovar said such comments were made. Walmart did not immediately respond to a mid-afternoon request for comment regarding the meaning or context of Tovar’s statement.

    The Bribery Aisle: How Wal-Mart Used Payoffs to Get Its Way in Mexico - Wal-Mart longed to build in Elda Pineda’s alfalfa field. It was an ideal location, just off this town’s bustling main entrance and barely a mile from its ancient pyramids, which draw tourists from around the world. With its usual precision, Wal-Mart calculated it would attract 250 customers an hour if only it could put a store in Mrs. Pineda’s field. One major obstacle stood in Wal-Mart’s way. After years of study, the town’s elected leaders had just approved a new zoning map. The leaders wanted to limit growth near the pyramids, and they considered the town’s main entrance too congested already. As a result, the 2003 zoning map prohibited commercial development on Mrs. Pineda’s field, seemingly dooming Wal-Mart’s hopes. But 30 miles away in Mexico City, at the headquarters of Wal-Mart de Mexico, executives were not about to be thwarted by an unfavorable zoning decision. Instead, records and interviews show, they decided to undo the damage with one well-placed $52,000 bribe.

    Counterparties: Bushmasters and baksheesh --We found out in April, thanks to the NYT’s David Barstow, that Wal-Mart de Mexico was a corrupt organization and that the US parent company had seemingly no interest in what was going on there. But just how bad did things get? Barstow’s now back, showing that the corruption at Mexico’s largest employer was systemic and integral to its growth: Wal-Mart de Mexico was an aggressive and creative corrupter, offering large payoffs to get what the law otherwise prohibited. It used bribes to subvert democratic governance — public votes, open debates, transparent procedures. It used bribes to circumvent regulatory safeguards that protect Mexican citizens from unsafe construction. It used bribes to outflank rivals. Through confidential Wal-Mart documents, The Times identified 19 store sites across Mexico that were the target of Wal-Mart de Mexico’s bribes… Over and over, for example, the dates of bribe payments coincided with dates when critical permits were issued. Again and again, the strictly forbidden became miraculously attainable.

    Wal-Mart bribery case: Law will take its own course, govt says - Times of India - Government today said that law will take its own course if investigations establish that there has been any violation by global retail giant Wal-Mart in its attempts to gain entry into the Indian market. It also said that it was not proper to make any judgement one way or the either before probe is completed."If at all any investigation does conclusively establish that there has been a violation of the Indian will take its own course," Information and broadcasting minister Manish Tewari told Karan Thapar's Devil's Advocate on CNN-IBN.

    McDonald’s for Christmas? Burger Chain Asks Franchisees to Make It Business As Usual - A Big Mac probably isn’t your idea of Christmas dinner, but McDonald’s is asking its franchisees to stay open on Christmas Day — a day when even Wal-Mart, which caught flack for opening on Thanksgiving evening this year, closes its doors. “Our largest holiday opportunity as a system is Christmas Day,” McDonald’s COO Jim Johannesen wrote in one of two memos that was sent to franchisees and obtained by Advertising Age magazine. “Last year, [company-operated] restaurants that opened on Christmas averaged $5,500 in sales,” he wrote. Johannesen also said one reason behind the improvement in the chain’s November sales figures was that 6,000 more restaurants were open on Thanksgiving Day (the company has around 14,000 in the U.S.), which boosted sales to the tune of an extra $36 million, Ad Age estimates. The article quotes unnamed company insiders who say that franchisees being open on Thanksgiving accounted for nearly 40% of the chain’s November sales growth.

    Merry Christmas to You, Too:  McDonald’s has told its franchise holders that if they approach scheduling properly, by Christmas enough of their employees will be so desperate that they will work on Christmas without asking for overtime pay – a concept that McDonald's does not acknowledge as applying to any of their employees. Ever.

    Are Your Wages Set in Beijing? - In that context, the fact that the United States had a lot of highly-skilled manufacturing workers who had an immense productivity edge was no longer an effective factor in world production. Thus the claim is that an awful lot of the rise in inequality in the United States between 1980 and today is the result of this global pressure on the American economy. Back in the mid 1990s when I was working for the Clinton Administration, I wrote a bunch of memos about how this was then nonsense--that is, it was simply too small to matter. Since the mid 1990s, this factor has become significantly larger. But I’d say it’s still in fourth place as far as the increase in U.S. inequality is concerned. First place has been the education factor--the fact the United States is no longer clearly the most educated country in the world, and the education system is no longer is putting downward pressure on wage inequality. Second place is the shift in the tax and transfer system--the fact that our tax and transfer system as a whole is less progressive than it was a generation ago, and that in fact it’s regarded as Kenyan Muslim socialism to even return taxes on the rich back to their levels of the Clinton Administration. ... Third are the social structural and economic changes that allow the princes of Wall Street and the plutocrat CEOs to successfully charge what they do charge. ...

    Robots confusing economists -- Chatter on the econosphere has been abuzz on robots and income inequality recently, stirred into action by Paul Krugman’s NYT piece last week, and subsequent follow up.We have Nick Rowe using this talk to support a general equilibrium approach to economics and make the mathematical case here.  Previously we have seen Google Chairman Eric Schmidt explain how robots will may result in income inequality.  A good summary of the whole blog-versation is here.Debates like this, which used to take place in coded and mathematical language inside economic journals, are now raging online for all to see.  And it reveals the usual shallowness and confusion of economic thought on very critical matters – matters on which the common person assumes economists are experts. Any economist who sees robots as anything more than another incremental change in the technology embedded in our capital stock is utterly confused. Similar debates raged a century ago when people called their contemporary robots ‘machines’.  But it is these very machines, the modern incarnations we might call robots, that are the methods by which we increase our productive capacity.

    Robots and Liberalism -  People know my beat by now, so everyone has been directing my attention to Paul Krugman’s recent musings on the pace of automation in the economy. He moves away from his earlier preoccupation with worker skills, and toward the possibility of “‘capital-biased technological change’, which tends to shift the distribution of income away from workers to the owners of capital.” He goes on to present data showing the secular decline in labor’s share of income since the 1970′s. He then notes that his position “has echoes of old-fashioned Marxism”, but reassures us that this uncomfortable realization “shouldn’t be a reason to ignore facts”. The implication of those facts, he says, are that neither the liberal nor conservative common sense has anything to say about our current predicament: “Better education won’t do much to reduce inequality if the big rewards simply go to those with the most assets. Creating an “opportunity society” . . . won’t do much if the most important asset you can have in life is, well, lots of assets inherited from your parents.”

    Inequality: power vs human capital - David Ruccio points to labor's falling share of income in the US and says: We need to talk much more about profits and who owns capital. And, in addition, who appropriates and distributes the surplus and to whom that surplus is subsequently distributed. This is like saying a man should put his trousers on before leaving the house. It's good advice, but it shouldn't need saying. A nice new paper by Amparo Castello-Climent and Rafael Domenech at the University of Valencia supports his point. They point out that there's no correlation between inequality of human capital and inequality of incomes. This is true across time.. And it's true across countries... This is a challenge for the neoclassical view that income inequality is due to inequality of marginal productivities. ...Instead, the more obvious possible reason for the lack of link between human capital and income equality is simply that inequality reflects not differences in productivity but differences in power which themselves arise from institutional differences. Inequality is higher in south America than in Japan or South Korea simply because south America has extractive institutions which enable a small minority to exploit the masses, whereas Japan and South Korea do not.

     Firms & Rising Inequality - Some of the most prominent theories of rising wage inequality emphasize changes in the supply of highly-educated workers, skill-biased technical change, changing labor market institutions, as well as variation in wages across occupations, industries, and geography. David Card has highlighted some problems and puzzles for some of these prominent theories and has been focusing on the role of firms. His 2011 speech to the Society of Labor Economists highlights some of his thinking on these issues, and his recent paper with Pat Kline and Joerg Heining models and quantifies the importance of firms for rising wage inequality.Roughly speaking, they show that working for a “good firm” has been quite important for wage growth and that “good workers” are increasingly sorting to good firms. By good firms and workers, they mean firms and workers with large firm and individual fixed effects in wage regressions. In other words, you can take the same guy and move him from the typical firm to a good firm and his wages will really go up. In particular, they find: The rise in the variance of the person component of pay constitutes about 40% of the rise in the variance of wages, the rise in the establishment component constitutes about 25%, and their rising covariance explains about a third.

    The Unequal State of America: a Reuters series - Washington-Inequality Income: In the town that launched the War on Poverty 48 years ago, the poor are getting poorer despite the government's help. And the rich are getting richer because of it. The top 5 percent of households in Washington, D.C., made more than $500,000 on average last year, while the bottom 20 percent earned less than $9,500 - a ratio of 54 to 1. That gap is up from 39 to 1 two decades ago. It's wider than in any of the 50 states and all but two major cities. This at a time when income inequality in the United States as a whole has risen to levels last seen in the years before the Great Depression. Americans have just emerged from a close presidential election in which the government's role as a leveling force was fiercely debated. The right argued the state does too much; the left, too little. The issue is now at the center of tense negotiations over whose taxes to raise and what social programs to cut before a Jan. 1 deadline. And the government's role will be paramount again next year if Congress takes up tax reform. The federal government does redistribute wealth down to struggling Americans. But in the years since President Lyndon Johnson took aim at poverty in his first State of the Union address, there has been an increasingly strong crosscurrent: The government is redistributing wealth up, too - especially in the nation's capital. The beneficiaries are not the billionaire financiers and celebrities who have come to personify income inequality in the 21st century. Yet the Washington elite are just as much part of the trend, having influenced laws and decisions that alter the entire country's distribution of income.

    This Week in Poverty: Kristof’s Swing and Miss -- In a somewhat bizarre op-ed last Sunday, New York Times columnist Nicholas Kristof acknowledged, “I’m no expert on domestic poverty,” and then seemingly set out to prove it. He drew a dangerous and brazen, anecdotally based conclusion that the Supplemental Security Income (SSI) program, which benefits one of the most vulnerable populations in the country—low-income children with disabilities and their parents—must be cut and those resources diverted to early education initiatives in order to help children escape poverty. The thrust of Kristof’s argument is based on a secondhand account of parents in Appalachian Kentucky who allegedly pulled their children out of a literacy program in order to continue receiving disability benefits.

    More Young Americans Are Homeless - Duane Taylor was studying the humanities in community college and living in his own place when he lost his job in a round of layoffs. Then he found, and lost, a second job. And a third.Now, with what he calls “lowered standards” and a tenuous new position at a Jack in the Box restaurant, Mr. Taylor, 24, does not make enough to rent an apartment or share one. He sleeps on a mat in a homeless shelter, except when his sister lets him crash on her couch. Across the country, tens of thousands of underemployed and jobless young people, many with college credits or work histories, are struggling to house themselves in the wake of the recession, which has left workers between the ages of 18 and 24 with the highest unemployment rate of all adults. Those who can move back home with their parents — the so-called boomerang set — are the lucky ones. But that is not an option for those whose families have been hit hard by the economy, including Mr. Taylor, whose mother is barely scraping by while working in a laundromat. Without a stable home address, they are an elusive group that mostly couch surfs or sleeps hidden away in cars or other private places, hoping to avoid the lasting stigma of public homelessness during what they hope will be a temporary predicament.

    How the Right Is Wrong About Happiness, by Jeff Sachs - Today's op-ed page of the Wall Street Journal sheds more light on how conservative elites thoroughly misunderstand and misrepresent the role of government in a decent society. Arthur C. Brooks, president of the American Enterprise Institute, a conservative think tank, makes an empirical claim that government social spending lowers happiness of the recipients by making them "dependent on unearned resources." ... The claim is false because the countries that have the highest spending on social programs are far and away the happiest. ... They end up with economic prosperity that is broadly shared, very low poverty, low unemployment, social fairness, lower health care costs than in the United States, longer vacation times, guaranteed maternity and paternity leave, better pre-school and many more benefits that make people happy, and help them to raise happier and healthier children. ... Brooks reports that going on the welfare rolls is correlated with feeling "inconsolably sad over the past month." Well, duh. Perhaps, Mr. Brooks, their life has taken a hard turn. If the sadness were merely the result of inscribing in a welfare program, they wouldn't do it.

    A Major New Report On Child Welfare In the United States - Since last Friday, our minds have been focused on children.  Those who lost their lives in the Newtown, Conn. tragedy on Friday.  Newtown is, I now know although I’d never heard of it before Friday, an upscale midsize town that serves largely as a so-called bedroom community for families like shooter Adam Lanza’s.   So a major new research report released today detailing the breathtaking increase in child poverty and surprisingly broad-based decrease in several measurements of child welfare in the United States since 2000 is, or at least until Friday was, not really—or rather, not directly—about the children of idyllic Newton and upper-middle-class bedroom communities like it.  But it is quite directly about huge swaths of other American children.  And its revelations should play a central role in the outcome of what had been, until Friday, the major ongoing news story of the month: the “fiscal cliff” chess game. The report, called the 2012 National Child and Youth Well-Being Index (CWI), is this year’s edition of an annual report produced by the Foundation for Child Development (FCD), a national, private philanthropic organization, and the Child and Youth Well-Being Index Project at Duke University.   The annual report is a comprehensive measure of how children are faring in the United States, based on a composite of 28 key Indicators of well-being, grouped into seven Quality-of-Life/Well-Being Domains. These Domains are: Family Economic Well-Being, Safe/Risky Behavior, Social Relationships, Emotional/Spiritual Well-Being, Community Engagement, Educational Attainment, and Health.

    Remember the Children - Robert Reich - America’s children seem to be shortchanged on almost every issue we face as a society. Not only are we failing to protect our children from deranged people wielding semi-automatic guns.We’re not protecting them from poverty. The rate of child poverty keeps rising – even faster than the rate of adult poverty. We now have the highest rate of child poverty in the developed world.And we’re not protecting their health. Rates of child diabetes and asthma continue to climb. America has the third-worst rate of infant mortality among 30 industrialized nations and the second-highest rate of teenage pregnancy, after Mexico.If we go over the “fiscal cliff” without a budget deal, several programs focused on the well-being of children will be axed — education, child nutrition, school lunches, children’s health, Head Start. Even if we avoid the cliff, any “grand bargain” to tame to deficit is likely to jeopardize them. The Urban Institute projects the share of federal spending on children (outlays and tax expenditures) will drop from 15 percent last year to 12 percent in 2022.At the same time, states and localities have been slashing preschool and after-school programs, child care, family services, recreation, and mental-health services. Why?

    Number of Americans on Food Stamps Hit Another Record High -  It doesn't look like President Obama will be able to shed his reputation as the food stamp president any time soon. According to new data from the USDA, the number of people on food stamps has hit another all time high of 47,710,324 which is up by 600,000 from August. To be fair, this number is a bit distorted due to disaster relief from Hurricane Sandy. A report from the Senate Budget Committee showed last week that the government is spending the cash equivalent of $168 a day per household receiving welfare and living under the poverty line.

    Millions live on $2 a day in America. The problem isn’t just the safety net, it’s the whole economy - Millions of Americans are living in the kind of poverty you generally associate with those "you can save a child for the price of a cup of coffee a day" ads. Deep poverty, defined as 50 percent or less of the official poverty level, hit a new high in 2010, with 20.5 million people—6.7 percent of the population—in deep poverty. But sociologist Kathryn Edin and H. Luke Shaefer, a social work professor, are looking at a level below deep poverty, occupied by nearly 1.4 million households: In doing so, they relied on a World Bank marker used to study the poor in developing nations: This designation, which they dubbed "extreme" poverty, makes deep poverty look like a cakewalk. It means scraping by on less than $2 per person per day, or $2,920 per year for a family of four.  In a report published earlier this year by the University of Michigan's National Poverty Center, Edin and Shaefer estimated that nearly 1 in 5 low-income American households has been living in extreme povery; since 1996, the number of households in that category had increased by about 130 percent. Among the truly destitute were 2.8 million children. Even if you counted food stamps as cash, half of those kids were still being raised in homes whose weekly take wasn't enough to cover a trip to Applebees. This is in line with the Agriculture Department's finding that 20 percent of households receiving food stamps had no cash income in 2010.

    Counterparties: Poor America - You can call 2012 the year of bank fraud, the year of the 47%, the year of the housing recovery – or you can call it just another year of persistent, widespread American poverty. Reuters has an interesting look at how we’re (not) responding. The economy is “grinding through a prolonged stretch of rising poverty and income inequality“, but America has decided that “the able-bodied poor don’t deserve much help”: [There are] 12.2 million adults of working age, with no children at home, who were living below the poverty level in 2011. That’s up nearly double from two decades ago. And of those, 5.6 million received no assistance from any of the major five federal programs, a Reuters analysis of Current Population Survey data found. That’s the highest number since 1992, the first year for which comparable records are available. There were 46 million Americans living below the official poverty line in 2011, up from 31 million in 2000; the number remains scary no matter which measure of poverty you use. And even as the rural population falls, the rural poverty rate has continued growing, as it has since the 1960s. Today’s poor look like America: young people, for instance, are the “new face of a national homeless population”. And of course unemployment factors in: poverty rates skyrocket as the unemployed approach 27 weeks without a job. Congress, for its part, replaced extended Federal unemployment benefits this August “with drug testing, stricter work-search requirements, and leeway for states to run innovative training programs”. This, despite our increasingly troubling long-term-unemployment problem.The Economist indicts Obama for not discussing poverty on the campaign trail, but adds that America’s poor are “beyond the aid of any single administration”.

    Breaking the hold of corporate welfare on America’s incarceration industry - The US department of justice released a report this week (pdf) showing that 26 states have recorded decreases in their prison populations during 2011. California boasted the biggest decline of over 15,000 prisoners and several other states including New York and Michigan reported drops of around 1,000 prisoners each. This is the third consecutive year that the population has declined, and as a result, at least six states have closed or are attempting to close approximately 20 prisons.  But sadly, because incarceration has become a virtual jobs program in many states and because certain corporations are profiting handsomely from the incarceration binge that has been in place for the past few decades, the reduction in prison populations and prison closures is being met with huge resistance.According to a recent report by the Sentencing Project called On the Chopping Block (pdf), which detailed all the prison closures and attempted closures in the past year, several state governors have been dragged into legal battles with state employees and unions who want the prisons to stay open. In Illinois, for example, Governor Pat Quinn's decision to close down four state facilities, among them the troubled Tamms super maximum security prison, has been challenged in court by the prison employees' union, the American Federation of State, County and Municipal Employees (AFSCME). In New York State, Governor Andrew Cuomo has met with similar opposition to his (mostly successful) attempts to close down unneeded state prisons, including several juvenile facilities. The juvenile facilities had been mired in controversy for years, due to outrageous costs and allegations of mistreatment of the kids who ended up there. Yet, the closure was met with fierce opposition from state employees because of fears of job losses.

    State Unemployment Rates decreased in 45 States in November - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally lower in November. Forty-five states and the District of Columbia recorded unemployment rate decreases and five states had no change, the U.S. Bureau of Labor Statistics reported today. .. Nevada continued to record the highest unemployment rate among the states, 10.8 percent in November, followed by Rhode Island at 10.4 percent. North Dakota again registered the lowest jobless rate, 3.1 percent. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are below the maximum unemployment rate for the recession. The size of the blue bar indicates the amount of improvement - Michigan and Ohio have seen the most improvement - New Jersey and Connecticut are the laggards. The states are ranked by the highest current unemployment rate. Only two states still have double digit unemployment rates: Nevada and Rhode Island. In early 2010, 18 states and D.C. had double digit unemployment rates.

    State Jobless Rates Show Broad Improvement - Unemployment fell across most of the U.S. in November, though Superstorm Sandy, which hit the Northeast in late October, sliced tens of thousands of jobs in New York and New Jersey, the Labor Department said Friday.The national unemployment rate fell to 7.7% in November, the lowest since December 2008 — but largely because Americans stopped officially looking for jobs. Some people surveyed said they were unavailable to work while busy cleaning up storm damage, though the Labor Department said Sandy didn’t substantively affect the national job-market figures. Friday’s data suggest this year’s slow but steady improvement in the jobs market — the economy added 146,000 jobs last month, around its monthly average for the past two years — is becoming broad-based. Forty-five states and the nation’s capital saw unemployment rate decreases in November; not one state posted a rise, a contrast with October, when seven states posted unemployment rate rises. Louisiana, Alabama, Nevada, and Tennessee saw the biggest drops in unemployment. In Alabama, the jobless rate fell to 7.5% from 8.1% a month before. (Last week, Federal Reserve officials said they didn’t expect to start unwinding their policy of low interest rates, which are designed to spur spending and investment, until the national unemployment rate falls below 6.5%.)  New York and New Jersey, which were hit hard by Sandy, saw levels of employment fall even as their unemployment rates, which are drawn from different surveys than the employment counts, tumbled. New York’s unemployment rate fell to 8.3% from 8.7%, but it lost 33,500 jobs — the biggest month-to-month decrease in payrolls in the country in November. New Jersey’s jobless rate fell to 9.6% from 9.7%, but it lost 8,100 jobs. “November data for New Jersey and New York reflect the impact of Hurricane Sandy, as well as underlying economic trends,” the Labor Department said.  See the full interactive graphic.

    State Unemployment and Payrolls for November 2012 - The November state employment statistics show a drop in unemployment rates exceeding actual job growth. No state's unemployment rate increased for November. Only five states had no change in unemployment, 45 plus the District of Columbia showed declines. The November national unemployment rate was 7.7%. Below is the BLS map of state's unemployment rates for the month.  There are now only two states with unemployment rates above 10%, Nevada at 10.8% and Rhode Island, at 10.4%. California dropped below 10% for the first time since the start of the great recession jobs slaughter with a 9.8% unemployment rate. There are now just three states have unemployment rates above 9%, California just mentioned, New Jersey at 9.6% and North Carolina at 9.1%. Michigan's unemployment rate dropped to 8.9% unemployment rate, Connecticut is 8.8% and Illinois is 8.7%. The states with the lowest unemployment rates are North Dakota at 3.1%, Nebraska at 3.7% and South Dakota with a 4.4% unemployment rate.  Payrolls on the other hand are not growing in ratio to the dropping unemployment rates. While jobs increased in 30 states, payrolls actually shrank in 20 plus the District of Columbia. From the report are the most significant percentage changes per state from last month in jobs.  Louisiana experienced the largest over-the-month percentage increase in employment (+0.9 percent), followed by Hawaii, Nevada, and North Carolina (+0.8 percent each). The District of Columbia experienced the largest over-the-month percentage decline in employment (-0.7 percent), followed by Nebraska and New York (-0.4 percent each).  Superstorm Sandy did show up a tad yet it's clear the BLS is not assuming the effect is all due to the storm and could be underlying economic trends. The largest over-the-month decrease in employment occurred in New York (-33,500), followed by Indiana (-9,100) and New Jersey (-8,100).

    North Dakota Population Booms Amid Low Unemployment - Unemployment in the U. S., at 7.7%, remains high. Unemployment in North Dakota, at 3.1%, is about as close to zero as a state ever gets. Perhaps it should come as no surprise that people are moving there in droves. North Dakota’s population grew by 2.17% between July 2011 and July 2012, making it the fastest growing U. S. state, according to new Census Bureau data released today. The rapid growth is a big turnaround for North Dakota, which was just the 37th-fastest growing state between 2000 and 2010. But by last year, its growth had picked up to make it the sixth fastest. This year, it wasn’t even close; no other state grew by even 2%. It’s no mystery what changed. An oil boom in the Western part of the state has turned North Dakota into the nation’s second-largest producer of crude, after Texas, and led to a surge in demand for workers — not just for drillers, but also truck drivers, construction workers, burger-flippers and pretty much every other kind of job, skilled and unskilled. As word of hiring frenzy spread, job seekers began heading to North Dakota in search of work. The state’s rate of natural population growth, change based on births and deaths alone, is right about the national average. But its rate of net migration is the nation’s highest by far at 16.8 new entrants per 1,000 residents. The vast majority of the new residents came from inside the U. S.

    What Are the Costs of Superstorm Sandy? - NY Fed - Superstorm Sandy has had widespread effects in the tri-state region. Early estimates of the total national costs have been in the range of $30 billion to $50 billion. More recently, the New York State governor’s office has estimated state costs to be $32.8 billion, while the New Jersey governor’s office has calculated state costs to be $29.5 billion; these figures exclude mitigation costs—money spent to protect against future storms. It is important to remember that such figures incorporate two distinct types of costs: first, direct costs related to the destruction of physical assets, such as buildings, automobiles, bridges, and roads; and second, indirect costs related to the loss of economic activity resulting from the disruption. This post outlines the differences between these two types of costs, and also discusses what these cost measures typically neglect to include.

    The Welfare Costs of Superstorm Sandy - NY Fed - As most of the New York metropolitan region begins to get back to normal following the devastation caused by superstorm Sandy, researchers and analysts are trying to assess the total “economic cost” of the storm. But what, exactly, is meant by economic cost? Typically, those tallying up the economic cost of a disaster think of two types of costs: loss of capital (property damage and destruction) and loss of economic activity (caused by disruptions). But there is another important type of economic loss that often is not estimated or discussed in policymaking decisions: loss of welfare or deterioration in quality of life. Here we focus on how superstorm Sandy (and other such disasters) can have widespread adverse effects on quality of life, and provide some illustrations of how one can try to put an approximate dollar value on this type of cost. 

    How Will We Pay For Superstorm Sandy? - New York Fed - While the full extent of the harm caused by superstorm Sandy is still unknown, it’s clear that the region sustained significant damage and disruption, particularly along the coastal areas of New York, New Jersey, and Connecticut. As we describe earlier in this series, the economic costs associated with natural disasters are generally thought to arise from the damage and destruction of physical assets and the loss of economic activity. These costs can be substantial, running into the tens of billions, and impose significant stress on the affected communities. In this post, we assess who will ultimately pay the economic costs imposed by the storm. Based on data from recent hurricane events, it is likely that the federal government and private insurance companies will more than cover the aggregate costs. In the short run, though, there may be strains on state and local governments as well as on individuals and businesses as they await reimbursement.

    The Path of Economic Recovery from Superstorm Sandy - NY Fed - Superstorm Sandy caused damage and disruption to a wide swath of the New York-New Jersey region. The high winds and storm surge resulted in significant physical damage to residential property, commercial real estate, and the power and transportation infrastructure. Everyday activities such as commuting, shopping, and traveling were impeded or in some cases prevented. As a number of communities across the region continue to cope with the damage and ongoing disruptions, there’s concern about if and when activity will return to normal. To address this issue, this post looks at regional employment patterns following four past disasters—Hurricanes Andrew and Katrina, the 9/11 attack on the World Trade Center, and the earthquake in Northridge, California—to gauge how the economic recovery from superstorm Sandy might play out. These past events generally suggest that any employment declines resulting from Sandy are likely to be reversed fairly quickly, and that a permanent loss of jobs in the region, while possible, isn’t likely.

    New York State Budget Balanced With Gimmicks, Study Says - New York state relies on gimmicks and nonrecurring revenue to pay for rising pension costs and the most-generous Medicaid benefits in the U.S., said a group led by former Federal Reserve Chairman Paul Volcker and former Lieutenant Governor Richard Ravitch. Annual pension contributions may increase 31 percent to $10.6 billion by 2015 from about $8.1 billion in 2013, and would probably need to rise by an additional $14.8 billion if the state were to adopt a 5 percent assumed rate of return on invested assets, instead of the current 7.5 percent, the State Budget Crisis Task Force said in a report issued today. In 2009, New York spent $9,056 per enrollee in Medicaid, the federal-state health program for the poor. That’s 69 percent higher than the U.S. average, according to the report. Even with a cap instituted last year, the state expects to pay $22.8 billion in fiscal 2014, an 8 percent increase from last year, the group said. “Retirement obligations and health care are outdistancing revenues at an ever-increasing pace, and it’s hard to believe New York finances will remain sustainable unless there’s dramatic economic recovery at a 7 to 8 percent rate,” Ravitch said in an interview. That’s not likely to happen, he said.

    New York infrastructure faces $89 billion gap in 20 years: official - New York State and its local governments face a shortfall of up to $89 billion for infrastructure funding over the next 20 years, the state's top financial official said on Thursday. The collective shortfall is for transportation, water and sewer facilities throughout the state, New York Comptroller Thomas DiNapoli said in a report. New York and its cities, counties and authorities need to spend $250 billion on water, sewer and highway systems in the coming two decades, but only about $161 billion in such spending is planned, he said. Struggling local governments have attempted to maintain their systems during the recession, he said, even while some have been hit with lowered property tax collections and increasing expenditures in other areas. Adding to the problem are ballooning construction and energy costs, which have grown faster than the rate of capital spending, his report found.

    Stockton Should Raise Taxes, Sell City Hall, Judge Told - The bankrupt city of Stockton, California, should raise taxes, cut employee benefits and close or sell city hall to repay bondholders, Assured Guaranty Corp. said in court papers.  The city could raise $9.6 million in taxes and save $24.4 million through cuts to services and labor costs, Assured said in a court filing made public today. The bond insurer is among a group of creditors trying to persuade a federal judge to dismiss Stockton’s Chapter 9 bankruptcy case and force the city to solve its financial problems outside of court protection. Assured accused Stockton of ignoring budget options to justify filing bankruptcy and forcing bondholders and other creditors to take less than they are owed.  “A municipality cannot budget itself into insolvency to gain access to Chapter 9 or use Chapter 9 to harass or target certain groups of creditors,” Assured said in papers filed Dec. 14 in U.S. Bankruptcy Court in Sacramento, California

    School Officials Decide Dinosaurs Were In Fact Not Created on the Sixth Day - In response to Bobby Jindal's admittedly impressive efforts to instill more godliness in Louisiana schools by passing a sweeping voucher plan giving $11 million of taxpayers' money to private schools that teach Creationism - which a judge has since ruled unconsitutional - the sensible members of the school board of New Orleans Parish have had enough. Last night they voted to ban any science textbooks that "present creationism or intelligent design as science." They also banned any history textbooks "adjusted in accordance with the State of Texas revisionist guidelines and ruled no science teacher "shall teach any aspect of religious faith as science," thus ensuring students will no longer learn that dinosaurs roamed the Garden of Eden, the Trail of Tears was God's way of bringing heathens to Christ, and globalization is a precursor to the Rapture. One point for reason. Miles to go.

    Tennessee Considers Training And Arming Schoolteachers To Protect Against Shootings - Tennessee has emerged this week as a center of the "the answer is more guns in schools" sentiment following the Newtown, Conn. elementary school shooting. A member of the Republican-controlled legislature plans during its upcoming session to introduce a bill that would allow the state to pay for secretly armed teachers in classrooms so, the sponsor told TPM, potential shooters don't know who has a gun and who doesn't. Tennessee Gov. Bill Haslam (R) has said the idea will be part of his discussions about how to prevent a shooting like the one in Newtown from happening in the Volunteer State. As has been seen following other mass shootings, there's a strong segment of the gun rights lobby that says the answer to events like the one in Newtown is more guns in more places. But they've said the recent massacre shows how important it is to put guns into elementary schools, where even gun-friendly states like Tennessee don't currently allow them.

    Oklahoma Republican’s bill would arm teachers and train them like law enforcement - A Republican lawmaker in Oklahoma thinks that he can prevent another horrific mass school killing like the one in Newtown, Connecticut by arming teachers and giving them the same training as law enforcement. “The reality of this situation is this man performed a great evil thing and that could have possibly been prevented had we been prepared to meet force with force,” state Rep. Mark McCullough told KOKH on Monday. McCullough plans to introduce legislation that would give school teachers and administrators the right to carry firearms in school. Under current law in Oklahoma, it is a felony to possess a gun on school property.

    Rick Perry tells tea party: Allow more guns in schools - Texas Gov. Rick Perry (R) says that schools in his state will be safer when school districts are given the ability to allow staff to carry guns.  Speaking to a cheering crowd of Northeast Tarrant County Tea Party members on Monday, the Texas governor called last week’s shootings at an elementary school in Connecticut an evil act but insisted that new gun laws were not the answer.

    The Impact of Superstorm Sandy on New York City School Closures and Attendance - NY Fed - On October 29, superstorm Sandy hit the tri-state area, flooding streets, highways, tunnels, buildings, and homes, and crippling the region’s public transit system. At least ninety-four people in New York and New Jersey were killed. Downed power lines and damaged transformers plunged downtown Manhattan and coastal areas into days and weeks of darkness. The damage is still being assessed, but costs are sure to be in the tens of billions. Schools were no exception to this devastation, both in infrastructural damage and in disruptions to students’ education. The storm shut down all 1,750 New York City public schools for a full week, and many remained closed, damaged, or were relocated in the following week. A few schools will not return to their normal locations until 2013. In this post, we analyze the impact of Sandy on New York City schools and assess how the storm might affect students’ educational outcomes.

    Number of homeless students hits new record: Over 1 million - The number of homeless students in America topped one million for the first time last year as a result of the economic recession, a number that has risen 57 percent since 2007. The US Department of Education found that of these 1,065,794 children, many lived in abandoned homes, cheap hotels, stations, church basements and hospitals. Some spent their time sleeping over at the houses of various friends whenever they could. Others fell victim to drugs and sexual abuse, in some cases trading sexual acts for food, clothing and shelter or selling illegal drugs. The McKinney-Vento Homeless Assistance Act of 1987 requires pubic schools to register homeless children. The Department of Education report was only able to compile data from those currently enrolled in school, which indicates that there may be many more homeless children or infants living on the streets without an education. The southern US state of Georgia has in recent years always had the highest number of homeless children. As many as 45,000 homeless kids and teens are on the street or in a temporary shelter each night in Georgia, 14,000 of which are in Atlanta.But the states that reported the largest year-to-year increases in the June report were Kentucky at 47 percent, Utah at 47 percent, Michigan at 38 percent, West Virginia at 38 percent and Mississippi at 35 percent. In Michigan, where unemployment is above the national average, every county reported an increase in the number of homeless students.

    Why Chinese immigrants choose America - Americans may complain about the quality of their schools, but for the most recent wave of Chinese immigrants, it’s the No. 1 draw. According to the 2012 Annual Report of Chinese International Migration published this Monday, China is undergoing a mass migration of its citizens overseas, with the United States being far and away the top destination. (Canada and Australia were second and third.) In 2011 alone, nearly 90,000 Chinese were granted US permanent residency. “Affluent and educated elites are the main force in emigration,” the report said, calling this trend the third large-scale overseas migration in China’s modern history. More than 45 million Chinese were living abroad as of 2010 — the highest such figure in the world. In 2011, roughly 150,000 Chinese obtained permanent residence in other countries. This exodus has particularly drawn on China’s richest and best educated. One in four Chinese who are worth more than $16 million have emigrated, and another 47 percent are considering emigrating, according to recent findings by the Hurun Report. So why are they all leaving? Several factors are playing into the brain drain, including “political reform, infrastructure improvements, pollution, and education," according to the immigration study. But the single biggest motivation for 80 percent of emigrees: to find a better education for their children.

    Only one of the top 9 occupations expected to create the most jobs this decade (nursing) requires a 4-year college degree - The chart above shows the 30 occupations that are expected to experience the largest job growth between 2010 and 2020, according to employment forecasts from the BLS. Between 2010 and 2020, the BLS estimates that the total number of U.S. jobs will increase by 20.4 million, from 143 million in 2010 to 163.5 million by 2020. The number of jobs created this decade in the top 30 fastest growing occupations – 9.3 million – will represent almost half of all of the new jobs created by 2020.  What’s really interesting is that only five of the top 30 occupations expected to create the most jobs by 2020 require a college degree or more (nursing, post-secondary teachers, elementary school teachers, accountants and physicians), and ten of the fastest growing occupations don’t even require a high school diploma. Moreover, of the top nine occupations expected to create the most jobs this decade, only one (nursing) requires a 4-year college degree.  The total amount of student loan debt carried by college graduates now exceeds $1 trillion for the first time, and many college graduates are having trouble finding jobs. Given the job forecasts for this decade, perhaps this is more evidence that we’ve completely oversold the value of a 4-year college degree, at least for many of the college majors. Students graduating from college this decade with degrees in nursing, education or accounting will have great career opportunities, but many of their classmates may not be so fortunate (unless they go to medical school or get a doctoral degree).

    The dirty secret of economics education- It's hardly a secret to anyone who's worked in an economics department: some students enrol in economics because they want to study something that seems vaguely useful, but they don't have the grades, or the mathematics and language skills, to make it in business or engineering.  Economics programs typically have relatively few essay requirements, and require little by way of verbal skills. Relative to traditional arts and humanities subjects, the reading lists are short and manageable. The math gets challenging at more advanced levels, but most of undergraduate economics requires nothing more than high school level calculus. My third year course (open to non-majors) requires about grade 10 or 11 level algebra. As a result, at most Canadian universities, economics attracts some students who are not strong academic performers (if they were, they were be in their first choice, business), and who don't have much intrinsic interest in economics. They just want a qualification that will help them to get a job.

    Readers Share Their Student Debt Reasons and Experiences - In my post Trends in College Tuition vs. Bachelor’s Degree Wages; Interesting Demographics of Student Loan Debt History I noted skyrocketing student loan debt, especially in the age group 30-39. See article for details. Since 30-39 is not the typical school demographic, I asked readers 30 years or older who are sitting on a pile of student debt to share their stories and reasons. A summary of reasons and email snips from readers follows.

    1. Interest rates are so low they encourage not paying off loans
    2. Interest rates are so high and job salary so low that debts cannot be paid back
    3. Economic incentives for special ed teachers and others
    4. Divorce sends middle-aged mothers back to school to get a job
    5. Divorce and child payments sends middle-aged men back to school seeking better opportunities
    6. Pressure to get into management, and management requires additional school
    7. Exploitative ads
    8. Deferred payments
    9. Employers unnecessarily require college degrees 
    10. Those who get married after high school decide to go back to school later in life
    11. Parents co-sign loans shifting debt responsibility to higher age group
    12. Job loss sends middle-aged persons back to school hoping for better opportunities

    More seniors trapped in children’s student debt -The early-morning calls from debt collectors continued even after her massive stroke, waking Bella Logan to daily reminders that she owed $75,000 in student loans. Logan is 94. The federal government garnisheed $200 a month from Robert Austin’s Social Security checks for years for student-loan debt, leaving Austin without money he needed for medications. He is 83. After Ray Stockman’s wife died, he wanted to move but was turned down three times for apartments because a student-loan debt had sunk his credit rating. He is 78. Each of their names is attached to student loans for their children’s college educations — loans that the children didn’t repay and that scarred the parents’ financial lives. “We paid our dues; we worked all our life and tried to do right by our kids,” said Stockman, of Kent, in northeastern Ohio. “But these loans can come back and haunt you in ways you would never think about.” As tuition costs have skyrocketed and access to credit has tightened, more students are turning to their parents and grandparents for help. If the elders don’t have the cash, they have limited options. Among them: sign a federal parent PLUS loan or co-sign on a private student loan from a bank.

    How retirees can cope with Fed's "new normal" - (Reuters) - If you are still wondering whether we are in a "new normal" investment climate of ultra-low interest rates, wonder no more: Federal Reserve Chairman Ben Bernanke settled any lingering doubts last week when he guaranteed rates will stay near zero at least through the middle of 2015 -- or until the jobless rate falls to at least 6.5 percent, or the inflation rate jumps above 2.5 percent. Bernanke's unprecedented announcement(see might be good for the economy, but it is bad news for retirees, who already have suffered through four years of historically-low interest rates. Ultra-low interest rates have inflicted all manner of pain on retirement. Insurance companies have raised the price of annuities and long-term care policies as a result of low returns on bond-oriented investment portfolios. Pension plans have had trouble meeting their investment objectives, forcing them to reduce their funded ratios and creating political and fiscal havoc for plan sponsors. The most direct problem facing retirees, however, is how to generate income from retirement savings. The traditional reliance on low-risk bonds and certificates of deposit just does not work in this rate environment, and higher-yielding products come with unattractive levels of risk.

    A Light in the 401(k) Tunnel - ANOTHER dispatch from 401(k) limbo: In August, this column examined the plight of some 40 employees at Penn Specialty Chemicals, a small company that went bankrupt in 2008. They were supposed to receive their 401(k) savings when the company collapsed. Instead, the bankruptcy trustee has withheld distributions, pending approval from the Internal Revenue Service. While the employees have waited, administrative fees on their accounts have piled up. During 2009 and 2010, for example, $111,463 in fees was charged against the roughly $4 million that the accounts held. The particulars of this case are unusual. What is not unusual is for 401(k)’s to be frozen when sponsors go bankrupt. Penn Specialty sold most of itself to a French chemicals concern in July 2008 and told its workers they could shift their plans to the acquirer or maintain them with Vanguard, which keeps the records for the Penn Specialty plan. Many, especially those nearing retirement, stuck with Vanguard. Now they can’t touch their money. Why return to this unpleasantness now? Hopeful news for Penn Specialty 401(k) holders — and others in this kind of mess — may be on the horizon. Last week, the Labor Department proposed a rule that it says will prevent cases like this from dragging on. The rule outlines three relatively straightforward conditions that a trustee must meet when terminating a plan. If the trustee performs these functions, the I.R.S. has essentially agreed not to challenge winding down the plan. Previously, trustees were subject to some liability if they did not receive I.R.S. approval.

    Calpers Bankruptcy Strategy Pits Retirees vs. All Others - The California Public Employees’ Retirement System is trying to rewrite the rules for bankrupt cities, claiming that it should get paid before almost everyone else, including bondholders. The biggest U.S. public pension fund would set a legal precedent should courts adopt Calpers’s position that, as an arm of the state, it is exempt from rules that apply to other creditors in the Chapter 9 bankruptcy cases of San Bernardino and Stockton. A Calpers victory would threaten public services in a city trying to reorganize in bankruptcy, or in an extreme case, cause a city to disincorporate, attorney James E. Spiotto said in an interview.  “Chapter 9 was never intended to cause the liquidation of a municipality or the reduction of services,” said Spiotto,  “What Calpers is doing is threatening the basic tenet of Chapter 9.” About 400 miles north, creditors of Stockton are fighting Calpers in court as well, arguing that the pension fund shouldn’t be given preferential treatment and urging the city to take an aggressive stance in negotiations.  San Bernardino will battle Calpers in a federal court in Riverside, California, on Dec. 21 over two related legal issues: whether Calpers can sue the city to force it to make about $7 million in missed payments and whether the city should be kicked out of bankruptcy.

    Kevin Drum on Why the Social Security Trust Fund is Real - Kevin Drum has a short and sweet analogy for the position that the assets in the Social Security Trust Fund are real:  Now, suppose this surplus had been invested in corporate bonds. What exactly would that mean? It means that workers would be giving money to corporations, who would turn around and spend it. In return, the Social Security trust fund would receive bonds that represent promises to repay the money later out of the company's cash flow. In effect, it gives workers a claim on the cash flows of the company at a later date in time. When that time comes, the company would have to pay up, which would make it less profitable. If the company was already unprofitable, it would make their deficit even worse. If that's what had happened, there would be no confusion about the trust fund. Everyone agrees that corporate bonds are real things, and that the corporations who sell them have an obligation to pay them back, even though it means less money for shareholder dividends. He then substitutes treasury bonds for corporate bonds and draws the same conclusion. QED!

    Unraveling The Mysteries Of Social Security - Let's start with The 2012 Annual Report of the social security board of trustees (pdf). This text appears on page 2. At the end of 2011, the OASDI program was providing benefits to about 55 million people: 38 million retired workers and dependents of retired workers, 6 million survivors of deceased workers, and 11 million disabled workers and dependents of disabled workers. During the year, an estimated 158 million people had earnings covered by Social Security and paid payroll taxes. Total expenditures in 2011 were $736 billion. Total income was $805 billion, which consisted of $691 billion in non-interest income and $114 billion in interest earnings. Assets held in special issue U.S. Treasury securities grew to $2.7 trillion. Based on Bruce Krasting's account, I had initially reported that social security ran a deficit, but if we count the interest income from U.S. Treasury securities, social security ran a surplus of $69 billion. Otherwise, based on 2011 tax collections alone, social security ran a deficit of $45 billion. If that's not clear to you, do the math. Now, what about that T-bill income and the $2.7 trillion trust fund? I will quote David Kay Johnston, who was interviewed by Aaron Task in Social Security Is the Best-Funded Government Program (video below, Daily Ticker, December 13, 2012). Social security is the best-funded government program we have. It has its own dedicated stream of income, last year it ran a surplus of close to hundred billion dollars...

    Chained CPI Will Reduce Your Social Security Benefits - There is a war on social security and America is losing the battle. One constant in the fiscal cliff negotiations is the agenda to cut your retirement benefits by a ruse, a lowering of the inflation adjustment. Congress and the Obama administration are out to do the old switcheroo and swap out the current CPI-W inflation measurement tool for one called chained CPI. Using Chained CPI instead of CPI-W will reduce the adjustment for inflation. Every year social security is adjusted to keep up with inflation. As we noted in our CPI overview, chained CPI cuts benefits by reducing the cost of living adjustments, known as COLA, to social security benefits. COLA is designed to keep up with inflation, yet chained CPI assumes, wrongly, one can substitute some goods for others as prices increase. We confirmed that the current proposal is to simply swap out CPI-W for chained CPI and use the same formulas to calculate the annual COLA adjustment to account for rising prices. We overviewed the formula to calculate cost of living adjustments earlier. Below is a graph of the current COLA adjustments. Let's assume someone in year 2000 had an monthly social security benefit of $1000. Below are the COLA increases for this person using the current COLA adjustments using CPI-W and then the COLA adjustments using chained CPI.

    A Social Security cut could lead to higher Latino and black elder poverty - As my colleagues have shown, the “chained” cost-of-living adjustment for Social Security being discussed between President Obama and House Speaker John Boehner is a cut to benefits. The AARP Public Policy Institute’s report, Social Security: A Key Retirement Income Source for Older Minorities, helps us to think about how this cut might affect different racial groups. Nearly one-in-five (18.7 percent) of the Hispanic elderly lives in poverty. For African Americans, the rate is one-in-six (17.1 percent) (Figure A). A cut to Social Security benefits runs the risk of significantly increasing these rates. Latinos and blacks tend to have lower lifetime earnings and this fact results in lower levels of Social Security income. But it is also the case that these groups have less wealth and therefore depend on Social Security more. Figure B shows that roughly one-in-four Latino (25.4 percent) and black (26.3 percent) Social Security beneficiaries rely on Social Security for 100 percent of their income. For these individuals, Social Security cuts will hurt the most.

    Workers will have MORE money in their pockets AND will have paid for a longer retirement at a higher standard of living - There are a number of well thought out plans to handle the problems proposed by opponents of Social Security and also those concerned about its sustainability. To have our political and media debate confined to one item like chained-cpi should make any reasonable voter pause and wonder "Is that all? How dumb can we be?" Take a breath and a half hour to review trhe fact that there a a lot of alternatives...don't let your politician quote you a bumper sticker slogan. There are plenty of alternatives that won't cut benefits for a well functioning program that could deliver a decent result. "Workers will have MORE money in their pockets AND will have paid for a longer retirement at a higher standard of living."   Social Security cuts offered...why? According to the 2010 CBO report Options for Social Security the chained CPI will "solve" about one third of the projected shortfall. Since a tax raise of forty cents per week per year over the same time would solve the entire projected shortfall, it looks as though the chained CPI is going to save workers about 13 cents per week per year while their wages are going up eight dollars per week per year. Everyone interested in actual SS numbers should read that CBO 2010 report 'Social Security Policy Options' or just refer to special figure 1. CBO scored 30 different policy options taken in isolation and although some would interact if enacted together for the most part you can treat the fixes as a cafeteria plan and mix and match to reach your 0.6 target. The point being that most obvious changes to SS have already been scored, all you need to do is Google the cited document.

    Our ‘How-to Manual’ for Betraying Seniors and People with Disabilities - Pity those poor politicians who want to cut Social Security benefits by changing the way cost of living adjustments (COLAs) are calculated. They want to be counted as among the "serious people in the room." You know, the folks who are willing to "compromise" the well-being of everyday Americans and vulnerable seniors and people with disabilities to claim credit for striking a "grand bargain." But they're in a bind. Most, including President Obama and Speaker Boehner, have acknowledged that Social Security has not and cannot contribute a penny to the federal debt. Nearly all are on record as promising that they will never, ever cut the benefits of today's seniors and people with disabilities. They've seen those pesky polls showing that the American people, Republicans, Independents and Democrats, alike, strongly oppose benefit cuts. Constituents understand that playing around with the way COLAs are calculated is a benefit cut, pure and simple. They state their opposition in polls; some have expressed their opposition by calling or even paying visits to the offices of those elected to represent them. Yes, pity those poor politicians. They don't want to be held accountable, they certainly don't want to lose the next election, but they don't want to take their constituents' side in opposition to Wall Street CEOs, elite media, and others pushing for bad policy. These politicians sorely need a "way out" and we are pleased to help by summarizing five lessons from our path-breaking new book, "Betraying Seniors and People with Disabilities: A How to Manual for your Garden Variety Politician."

    Making the Innocent Pay for the Crimes of the Elites - I live in a high-rise on the north side of Chicago. My building is full of older people. When the elevator comes, I hold the door for the people with walkers, people wearing braces and casts from falls, and people who move too slowly to exit or enter. It’s safe to say that not one of them had anything at all to do with the Great Crash. They didn’t vote to cut taxes during a war. They didn’t vote to cut taxes on the rich. They didn’t vote to destroy the regulatory system that protected us from the financial sector. They didn’t push fraudulent loans on unsuspecting homebuyers. They didn’t create innovative securities to sell to unsophisticated investors. They didn’t shortchange pension plans to benefit executives and shareholders. We know who did this. It was craven politicians whose votes opened the door to destruction of the economy. They did it to benefit a small number of very rich people, and their servants in the financial sector. Once the doors were open, the rich burst through and wrecked the economy. The plutocrats and their servants in the financial sector have paid no price. They are richer than ever, and their control over the public discourse and national and state legislatures is stronger than ever. The politicians paid no price either. They got re-elected time after time, and continued on the path of rewarding failure, and refusing to help the people whose lives were destroyed. Now, in a lame duck session, following an election in which the people began to kick out the Blue Dogs and some of the worst of the Tea Party conservatives, a re-elected Obama has one more chance to accomplish this goal. He wants to cut Social Security benefits in an ugly and sneaky way. He wants to cut Medicare and health programs that disproportionately benefit poor and sick. He wants to cut food stamps at a time when food insecurity is greater than ever. In exchange, he gets some magic beans from the Republicans that will magically improve the economy. Dday explains the miserable deal in more detail here.

    Medicare Spending Isn't Out of Control - As I explained in my previous post, traditional Medicare, which still attracts about 75 percent of all Medicare beneficiaries, affords its enrollees free choice of providers and therapy. In the jargon of health-policy wonks, it is “unmanaged.” Thus, it would not be surprising if unmanaged Medicare spending were, indeed, out of control. But some caution is in order. A really wise guy in the crowd, one familiar with relevant data, might challenge you with: “Oh, really? In what sense is Medicare spending out of control?” That query might have been prompted by the following data. These data, most of which have been published by the Office of the Actuary, Centers of Medicare and Medicaid Services, of the Department of Health and Human Services (see Table 16), show that in most periods Medicare spending per Medicare beneficiary has risen more slowly than per-capita spending under private health insurance. The exceptions are the period 1993-97, when private managed-care plans appeared to be able to hold down their outlays on health care better than did Medicare, and 2002-7, because there was a jump in spending as Medicare began, in 2006, to cover prescription drugs under the Medicare Prescription Drug, Improvement and Modernization Act of 2003. So anyone claiming that “Medicare spending is out of control” can fairly be asked to explain on what data that assertion is based. The responses might be interesting.

    New South Carolina bill pushes jail sentences for state workers implementing ‘Obamacare’ - A Republican lawmaker in South Carolina has introduced legislation that would send state and federal officials to jail for implementing the Affordable Care Act. According to U.S News & World Report,, the proposal, which has been has been prepared by state Rep. Bill Chumley (R) for next year’s legislative session, threatens state officials with up to two years in jail and a $1,000 fine for enforcing the law. Federal officials could be sent to jail for five years and be fined $5,000 for enacting the legislation. “I think we’re within our rights to do this,” Chumley said. “It’s an obligation, I swore an oath to uphold the Constitution and protect the people.”

    Obama to Run Most Health Marketplaces as States Opt Out - More than half of the state exchanges to be created under the 2010 U.S. health-care overhaul are expected to be run by the federal government, offering insurers and consumers uniform criteria in those areas.  While a final tally won’t come until at least today, 32 states have said they’ll let the U.S. build all or most of their exchanges or are expected to, according to Avalere Health, a Washington-based consultant. Sixteen and Washington, D.C. said they plan to build their own, with the rest unclear. That puts the onus on the Obama administration to set up the marketplaces at the heart of the Affordable Care Act’s mandate to expand medical coverage to as many as 30 million people.  The first six states to win U.S. approval for their exchange are split on what their programs will look like, with some requiring insurers to compete for access based on pricing and products. For the states likely to adopt the federal exchange plan, U.S. health officials have said any insurer can offer services if minimal standards are met. “This enables the federal government to ensure there’s some level of consistency nationally,” said Dan Mendelson, chief executive officer of Avalere. “From that perspective, they see that as a positive.”

    Costs Pose Barrier To Medical Care For Nearly One In Three Americans: Report: Over the last year, nearly one in three Americans have forgone medical care due to costs, according to a new report from Gallup. The percentage -- 32 percent -- is higher than any previously recorded by Gallup. Last year, 30 percent said they had forgone medical care for cost reasons; 12 years ago, 19 percent said they'd forgone it for cost reasons. The report, based on 1,015 U.S. adults who completed phone surveys from Nov. 15 and 18 this year, shows that the likelihood of forgoing care for cost reasons differs by coverage. People who don't have health insurance were the most likely to say they'd put off care -- 55 percent, compared with 30 percent of those who were privately insured. Twenty-one percent of people with health care from Medicare or Medicaid said they'd forgone care for cost. The report also showed that more people are likely to put off medical care for a serious condition than for a non-serious condition -- 19 percent versus 13 percent this year.

    A Partial List Of Things That “Pro-Life” Conservatives Support - Based on the right’s passionate and indignant opposition to any and all policies that would curtail them:

    • Deaths from gun violence.
    • Deaths from war.
    • Deaths from drone attacks.
    • Deaths from torture and mistreatment of military detainees.
    • Deaths by execution.
    • Deaths from tainted food and poorly tested drugs.
    • Deaths from accidents in mines, oil rigs, nuclear plants, or any other unsafe workplaces.
    • Deaths from polluted air and water.
    • Deaths from infrastructure collapses.
    • Deaths from lack of health care.
    • Deaths from poverty and starvation.
    • Deaths from natural disasters.
    • Deaths from abnormal pregnancies.
    • Extinction of endangered species.

    The right’s definition of “life” as fetuses and corporations is as narrow and misguided as their definition of “civility” as the absence of swear words.

    Decreased prevalence of diabetes in marijuana users: cross-sectional data from the National Health and Nutrition Examination Survey (NHANES) III - The study included participants of the NHANES III, a nationally representative sample of the US population. The total analytic sample was 10 896 adults. The study included four groups (n=10 896): non-marijuana users (61.0%), past marijuana users (30.7%), light (one to four times/month) (5.0%) and heavy (more than five times/month) current marijuana users (3.3%). DM was defined based on self-report or abnormal glycaemic parameters. We analysed data related to demographics, body mass index, smoking status, alcohol use, total serum cholesterol, high-density lipoprotein, triglyceride, serum 25-hydroxy vitamin D, plasma haemoglobin A1c, fasting plasma glucose level and the serum levels of C reactive protein and four additional inflammatory markers as related to marijuana use.  Results Marijuana users had a lower age-adjusted prevalence of DM compared to non-marijuana users (OR 0.42, 95% CI 0.33 to 0.55; p<0.0001). The prevalence of elevated C reactive protein (>0.5 mg/dl) was significantly higher (p<0.0001) among non-marijuana users (18.9%) than among past (12.7%) or current light (15.8%) or heavy (9.2%) users. In a robust multivariate model controlling for socio-demographic factors, laboratory values and comorbidity, the lower odds of DM among marijuana users was significant (adjusted OR 0.36, 95% CI 0.24 to 0.55; p<0.0001).  Conclusions Marijuana use was independently associated with a lower prevalence of DM. Further studies are needed to show a direct effect of marijuana on DM.

    Beta blockers are busted – what happens next? -  IT IS very rare for new evidence to question or even negate the utility of a well-established class of drugs. But after four decades as a standard therapy for heart disease and high blood pressure, it looks like this fate will befall beta blockers. Two major studies published within about a week of each other suggest that the drugs do not work for these conditions. This is a big surprise, with big implications. The first beta blocker, Inderal, was launched in 1964 by Imperial Chemical Industries for treatment of angina. This drug has been hailed as one of great medical advances of the 20th century. Its inventor, James Black, was awarded the Nobel prize in medicine in 1988. The 20 or so beta blockers now on the market are very widely used - almost 200 million prescriptions were written for them in the US in 2010. They are standard issue for most people with heart disease or high blood pressure. This may now change. A large study published last month in The Journal of the American Medical Association found that beta blockers did not prolong the lives of patients - a revelation that must have left many cardiologists shaking their heads (JAMA, vol 308, p 1340). The researchers followed almost 45,000 heart patients over three-and-a-half years and found that beta blockers did not reduce the risk of heart attacks, deaths from heart attacks, or stroke.

    Malpractice study: Surgical 'never events' occur at least 4,000 times per year in U.S.: After a cautious and rigorous analysis of national malpractice claims, Johns Hopkins patient safety researchers estimate that a surgeon in the United States leaves a foreign object such as a sponge or a towel inside a patient's body after an operation 39 times a week, performs the wrong procedure on a patient 20 times a week and operates on the wrong body site 20 times a week. The researchers, reporting online in the journal Surgery, say they estimate that 80,000 of these so-called "never events" occurred in American hospitals between 1990 and 2010 -- and believe their estimates are likely on the low side. The findings -- the first of their kind, it is believed -- quantify the national rate of "never events," occurrences for which there is universal professional agreement that they should never happen during surgery. Documenting the magnitude of the problem, the researchers say, is an important step in developing better systems to ensure never events live up to their name. "There are mistakes in health care that are not preventable. Infection rates will likely never get down to zero even if everyone does everything right, for example,"

    Hackers backdoor the human brain, successfully extract sensitive data  - With a chilling hint of the not-so-distant future, researchers at the Usenix Security conference have demonstrated a zero-day vulnerability in your brain. Using a commercial off-the-shelf brain-computer interface, the researchers have shown that it’s possible to hack your brain, forcing you to reveal information that you’d rather keep secret. As we’ve covered in the past, a brain-computer interface is a two-part device: There’s the hardware — which is usually a headset (an EEG; an electroencephalograph) with sensors that rest on your scalp — and software, which processes your brain activity and tries to work out what you’re trying to do (turn left, double click, open box, etc.) BCIs are generally used in a medical setting with very expensive equipment, but in the last few years cheaper, commercial offerings have emerged. For $200-300, you can buy an Emotiv (pictured above) or Neurosky BCI, go through a short training process, and begin mind controlling your computer.

    The National Intelligence Council’s (NIC) Global Trends Report: NIC Publications

    Monsanto’s Roundup Devastating Gut Health, Contributing to Overgrowth of Deadly Bacteria - Much of the public forgets the gut when it comes to warding off the flu and other more threatening diseases, but the gut—and its army of beneficial bacteria—are essential in protecting us from harm. That’s why eating genetically modified and/or conventionally farmed food could be a direct assault on your own health. Most recently, research has shown that Monsanto’s herbicide, known as Roundup, is destroying gut health, threatening overall health of animals, people, and the planet significantly.  The journal Current Microbiology recently published a study that caught Monsanto’s Roundup herbicide’s active ingredient, glyphosate, suppressing beneficial bacteria in poultry specimens. Given that gut health is directly linked to chronic illnesses and overall health, this isn’t exactly welcome news for people who can’t always afford or who lack access to organic, locally grown food. But it gets worse. While good bacteria died, highly pathogenic bacteria were unaffected by glyphosate. These pathogens include several strains of Salmonella and the class Colstridia, anaerobic bacteria known to be some of the deadliest known to us, including C. tetani (tetanus) and C. botulinum (botulin). Although botulin is used to ease overactive muscles and in Botox, America’s most popular cosmetic procedure, it takes but 75 billionths of a gram to kill someone weighing 75 kg (165 lbs).

    Sowing Scarcity - Farmers of old had to worry about parasites infesting their fields. The solution was to douse the plants in chemicals, but this often killed the crops along with the parasites. Roundup Ready soybeans are the technological fix to a technological problem; their DNA is modified to make them resistant to the Roundup pesticide. As of 2012, they accounted for 93 percent of all soy crops in the United States. But as Vernon Bowman discovered, these futuristic seeds carry a sort 28 of legal parasite, one bearing alien property claims that threaten to destroy the independent farm entirely.It turns out that Bowman was trying to obey the terms of Monsanto’s license agreement and dutifully threw away the seeds from his crop of Roundup Ready soy rather than save them for next season. But he also bought off-brand seeds from a grain elevator that had been “contaminated” with Monsanto’s designer version. When he replanted the seeds from the supposedly off-brand plants, he left himself open to legal action. The appeals court that ruled against him was untroubled by the implications of enforcing the patent when virtually all available stocks of soybean seeds contained the Roundup Ready genes: “While farmers, like Bowman, may have the right to use commodity seeds as feed, or for any other conceivable use, they cannot ‘replicate’ Monsanto’s patented technology by planting it in the ground to create newly infringing genetic material, seeds, and plants”. What Monsanto owns is not a thing but a self-replicating pattern, which opens up the possibility that Monsanto will soon control all soybean seeds everywhere.

    The Vertical Farming Scam - Why, after more than a decade, does the idea of “vertical farming” keep gathering momentum? Why hasn’t it collapsed under its own weight of illogic? And why is media coverage of vertical farming almost universally positive, often enthusiastically so? I suppose we shouldn’t be surprised when a fantasy persists and thrives despite being unrealistic; after all, that’s what fantasies do. And the vertical-farming concept, unlike, say, creationism, aims at worthy goals. But when a pipedream comes to be regarded, wholly uncritically, as a means of fixing our broken food system, it becomes a dangerous distraction. Out here in Kansas, for example, farmers and agribusinesses often back up their resistance to much-needed systemic change by claiming that America’s urban-suburban majority has no understanding of what it takes to produce food. And when they learn that city people are wanting to stack fields of crops one above the other, you can be sure that their convictions are reinforced. Vertical farming, as originally conceived by Dickson Despommier, a professor of public health at Columbia University, would involve using the floorspace of tall urban buildings for growing food plants through largely hydroponic methods. This is envisioned as a way to integrate food production with dense human populations, increase production per unit of land area, protect crops against pests without the use of chemicals, and take vulnerable agricultural soils out of production by relocating crops to cities. It can, in fact, achieve none of these goals.

    Milk Prices Could Double as Farm Bill Stalls - Forget the fiscal crisis and the automatic budget cuts. Come Jan. 1, there is a threat that milk prices could rise to $6 to $8 a gallon if Congress does not pass a new farm bill that amends farm policy dating back to the Truman presidency.Lost in the political standoff between the Obama administration and Congressional Republicans over the budget is a virtually forgotten impasse over a farm bill that covers billions of dollars in agriculture programs. Without last-minute Congressional action, the government would have to follow an antiquated 1949 farm law that would force Washington to buy milk at wildly inflated prices, creating higher prices in the dairy case. Milk now costs an average of $3.65 a gallon. Higher prices would be based on what dairy farm production costs were in 1949, when milk production was almost all done by hand. Because of adjustments for inflation and other technical formulas, the government would be forced by law to buy milk at roughly twice the current market prices to maintain a stable milk market. But the market would be anything but stable. Farmers, at first, would experience a financial windfall as they rushed to sell dairy products to the government at higher prices than those they would get on the commercial market. Then the prices customers pay at the supermarket would surge as shortages developed and fewer gallons of milk were available for consumers and for manufacturers of products like cheese and butter.

    'Peak Farmland' Is Here, Crop Area to Diminish (Reuters) - The amount of land needed to grow crops worldwide is at a peak, and a geographical area more than twice the size of France will be able to return to its natural state by 2060 as a result of rising yields and slower population growth, a group of experts said on Monday. Their report, conflicting with United Nations studies that say more cropland will be needed in coming decades to avert hunger and price spikes as the world population rises above 7 billion, said humanity had reached what it called "Peak Farmland". More crops for use as biofuels and increased meat consumption in emerging economies such as China and India, demanding more cropland to feed livestock, would not offset a fall from the peak driven by improved yields, it calculated. If the report is accurate, the land freed up from crop farming would be some 10 percent of what is currently in use - equivalent to 2.5 times the size of France, Europe's biggest country bar Russia, or more than all the arable land now utilized in China.

    How to manage post-harvest loss - The need to increase food production has become a policy mantra. Populations are growing, so we need more food. But much of what is produced never makes it past the farm gate, especially in developing countries. Eliminating those losses is a way to increase food availability without requiring additional resources or placing additional burdens on the environment. Post-harvest loss (PHL) happen at every stage of the supply chain, but in developing countries losses are the most significant. Harvesting, drying and storage are all stages which see substantial losses, both quantitative (physical losses caused by rodents, insects or infestations) and qualitative (loss of quality and value). The extent of these losses is substantial but measuring them can be notoriously difficult. Estimates range from 5 to 30% or more, and in sub-Saharan Africa alone the value of PHL overall is thought to be around $4bn (£2.5bn) a year. This represents a vast amount of food, along with the wasted cost and effort of producing it. "One of the main arguments in favour of PHL reduction is that it is a more resource-efficient means of increasing food supply than just producing more food," says Rick Hodges, visiting professor of grain post-harvest management at the Natural Resources Institute. "The wasted land, water, labour and agricultural inputs need to be taken into account, not only the lost food."

    Beef's Raw Edges: The Kansas City Star, in a yearlong investigation, found that the beef industry is increasingly relying on a mechanical process to tenderize meat, exposing Americans to higher risk of E. coli poisoning. The industry then resists labeling such products, leaving consumers in the dark.  The result: Beef in America is plentiful and affordable, spun out in enormous quantities at high speeds, but it's a bonanza with hidden dangers. Industry officials contend beef is safer than it's ever been. Increasingly, Big Beef runs mega-plants to produce high volumes of meat quickly. The Tyson Fresh Meats facility in Dakota City, Neb., is the largest beef plant in the world, employing some 4,000 workers on 26 acres under one roof

    Agricultural producer support declining over time - We hear all sorts of generalizations about U.S. farm policy. Some say U.S. farm programs are too stingy and should provide more help to farmers, especially small farmers. Others say U.S. farm programs are a boondoggle that just makes rich farmers richer. Still others say farm programs make consumers fat by encouraging too much cheap food. Instead of generalizing, it is important to think quantitatively. One good data source is the Producer Support Estimates (PSE) from the Organisation of Economic Cooperation and Development (a club for the world's upper-income countries). I use this data source in several chapters of my forthcoming book from Routledge/Earthscan called Food Policy in the United States: An Introduction.The PSE data measure diverse agricultural programs and policies in a consistent way across countries and over time.  One problem with the PSE is that it can seem a little complex.  To provide an orientation, Rebecca Nemec and I created the following data gadget.  Nemec is a graduate student at the Friedman School at Tufts and the teaching assistant for my class on U.S. Food Policy.  The top panel shows broad categories of support for agricultural producers.  The bottom panel shows more detail about each broad category in turn. 

    U.S. Throws Gas on Sugar Market - A resurgence of U.S. ethanol imports is shaking up the $1.6-trillion world sugar market. Commodities investors increasingly are betting that rising U.S. demand for sugar-based ethanol will reduce supplies of the sweetener and curb a decline in prices, which recently have fallen to 28-month lows. Imports from Brazil, which distills most of its ethanol from sugar cane, have risen nearly ninefold this year through October, compared with the same period in 2011, according to the U.S. Department of Agriculture. U.S. demand for foreign-made ethanol jumped after an import tariff that had been on the books for three decades expired in January. U.S. ethanol imports are expected to surge again next year, with the vast majority coming from Brazil. The sugar market is starting to feel the effects. Both sugar ethanol and corn ethanol, which is produced mainly in the U.S., have a similar chemical composition and are blended with other fuels to create cleaner-burning gasoline used in cars.Commodities investors, analysts and ethanol producers say the opening of America's ethanol market and rising demand for sugar-based ethanol in the U.S. and Brazil could end the recent slide in sugar prices. Futures prices have fallen 17% this year because many traders are expecting a big sugar crop out of Brazil next year.

    Trail, B.C. Smelter Decision May Have Ripple Effect Beyond Teck: A Washington state judge has ruled that Teck is liable for the costs of cleaning up contamination in the Columbia River south of the border from decades of dumping slag and effluent from the company's Trail operations. In a decision announced late last week, Judge Lonny Suko ruled that, "for decades Teck's leadership knew its slag and effluent flowed from Trail downstream and are now found in Lake Roosevelt, but nonetheless Teck continued discharging wastes into the Columbia River." Suko noted that the company admitted treating the international waterway as a free waste disposal service. Specifically, the judge in Yakima, Wash., found that from 1930 to 1995, Teck intentionally discharged at least 9.97 million tons of slag that included heavy metals such as lead, mercury, zinc and arsenic. The judge also found that Teck knew the hazardous waste disposed of in the Columbia River was likely to cause harm.Some believe the landmark case could have implications for mining and other industrial interests on both sides of the border. The Canadian government, the province of British Columbia and the U.S. National Mining Association have all intervened in the case to argue that the issue should be resolved bilaterally.

    Pollution from car emissions killing millions in China and India- An explosion of car use has made fast-growing Asian cities the epicentre of global air pollution and become, along with obesity, the world's fastest growing cause of death according to a major study of global diseases. In 2010, more than 2.1m people in Asia died prematurely from air pollution, mostly from the minute particles of diesel soot and gasses emitted from cars and lorries. Other causes of air pollution include construction and industry. Of these deaths, says the study published in The Lancet, 1.2 million were in east Asia and China, and 712,000 in south Asia, including India. Worldwide, a record 3.2m people a year died from air pollution in 2010, compared with 800,000 in 2000. It now ranks for the first time in the world's top 10 list of killer diseases, says the Global Burden of Disease (GBD) study. The unexpected figure has shocked scientists and public health groups. David Pettit, director of the southern California air programme with the Natural Resources Defence Council (NRDC), said: "That's a terribly high number – and much more people than previously thought. Earlier studies were limited to data that was available at the time on coarse particles in urban areas only."

    The Water Gap: Interior Department Warns Of Water Shortages In The Colorado River Basin Due To Climate Change - Climate change and population growth will have serious effects on the water supply in the Colorado River Basin over the next 50 years, according to a newly-released federal study. The study, which was funded by the U.S. Department of the Interior’s Bureau of Reclamation and the seven Colorado River Basin states, says that by 2060, the gap between river supply and water demand in the region will be 3.2 million acre feet. That’s more than five times the amount of water consumed annually by Los Angeles alone, and means that water management policies will need to be rethought in the Colorado River Basin states. Secretary of State Ken Salazar said the study should serve as a “call to action” to state and federal governments to create a plan for the future of the Colorado River. “As a result of the projected population growth in the Southwestern states, and all of the states on the Colorado River Basis, and the reality of a changing climate, we’re going to be putting ever increasing demands on the Colorado River Basin,” Salazar said at a Colorado River Water Users Association conference in Las Vegas. The study considered different scenarios of population growth and climate effects to come up with its projection. Under a warming climate scenario, it predicts a flow reduction in the Colorado River of about 9 percent, along with other climactic effects:

    Drought conditions deepen throughout the Carolinas - Conditions are dry across the Carolinas, and there may not be much relief in sight. Most of South Carolina is now in moderate or severe drought, and all of the state's 46 counties are now in some drought stage, according to the state agency that monitors the conditions. Drought conditions are moderate across more than half of North Carolina, primarily in the central part of the state. On Tuesday, the South Carolina Drought Response Committee upgraded the drought status in every county by one level. Conditions were most dire in 12 of the state's western counties, where the drought was determined to be severe. The middle of the state was in moderate drought, while the eastern and coastal areas were the least severe. The last time this many South Carolina counties were in severe drought was winter 2008, according to state climatologist Hope Mizzell. Most places in severe drought have received less than half of normal rainfall amounts over the last two months, she said. In North Carolina, 16 counties are reporting abnormally dry conditions. Without adequate winter rainfall, there could be bigger problems in store next spring and summer, officials say.

    Still Hurting In The Heartland: The Historic Drought Continues - The Paul Reveres of climate change may find New Yorkers and New Jersyans joining their ranks. This is a case where “fugetaboutit” should become “do something about it”. While the spotlight is on Sandy, however, let’s not forget the weather victims who’ve become yesterday’s news.  The people who lost their homes in Colorado’s super-fires are still hurting. Wildfires burned a record 8 million acres in the United States last year and more than 6 million acres through August of this year. NASA scientists say wild fires will get worse in the years ahead. The historic drought is still underway. In the mountains of Colorado where I have a home, wells are running dry. The drought is affecting 80% of the country’s farmland, bankrupting farmers, ranchers and small businesses, destroying crops, and killing livestock. The U.S. Department of Agriculture says families everywhere will start to feel the ripple effect next year with higher prices for beef, pork, poultry and dairy products. Meanwhile, water levels are still dropping on the Mississippi River, impacting billions of dollars freight normally shipped by barge. In parts of New Orleans, the damage remains depressing seven years after Hurricane Katrina. In the Lower Ninth Ward, citizen groups are working to restore their neighborhood, but there are still more boarded houses and empty lots than new homes. Last August, Hurricane Isaac flooded communities along the Gulf Coast in Louisiana and Mississippi.  Communities in the Midwest and Southeast are still putting themselves back together after the outbreak of monster tornadoes last spring – the year’s first billion-dollar disasters.  Joplin, Mo., still hasn’t recovered from the tornado that tore it apart back in May 2011.

    Rock blasting set on drought-plagued Miss. River - Barge operators along a key stretch of the Mississippi River braced Monday for months of restricted shipping as crews prepared to begin blasting large rock formations that are impeding navigation on the drought-plagued waterway. The Army Corps of Engineers said contractors from Iowa and Ohio could begin demolition of the rock pinnacles on the bed of the Mississippi River south of St. Louis as early as Tuesday. They expect to remove enough rock to fill about 50 dump trucks, possibly more. The demolition of the massive formations near Thebes, Ill., coincides with an unusual move by the agency to release water from a southern Illinois lake, adding a few inches of depth to a river that is getting lower by the day - largely because of the lingering effects of the nation's worst drought in decades. The corps said a six-mile stretch of the river will be closed to shipping starting Tuesday from 6 a.m. to 10 p.m. to allow for the safe use of the explosives. Barges seeking passage will have to line up and wait for an eight-hour window when that stretch will be open, with the Coast Guard essentially acting as a traffic officer letting barges through in one direction, then the other.

    Drought's winter toll: Mississippi barges face losses while US blasts river (+video) -  Even in winter, the severe drought that plagued a great swath of the nation’s agricultural and ranching states this summer is taking a punishing toll on the nation’s economy, with the Mississippi River barging industry the latest sector to fall victim.With water levels in the river already dangerously low and continuing to fall, the US Army Corps of Engineers and the US Coast Guard embarked Tuesday on a month-long program to increase water flow and ease navigation, during which barge traffic will be severely curtailed on a 180-mile stretch of river. Barging industry officials say they expect about $7 billion in losses through the end of January as a result. The Obama administration announced the project on Monday, saying the Corps and the Guard planned to blast massive rock formations in shipping channels along a 15-mile stretch near Thebes, Ill., about 128 miles south of St. Louis. The agencies also say they will release new water from reservoirs connected to the Carlyle River in southern Illinois.In total, the $10 million project is expected to add about six inches of water depth to the Mississippi by next week, the Corps says. “Every inch counts right now. It’s not a permanent fix. But we’re using every tool at our disposal to keep commerce moving,” says Mike Peterson, a Corps spokesman.

    Book It: 2012, The Hottest U.S. Year on Record: Last week NOAA announced that 2012 was “likely” to be the warmest year on record in the 48 states, based on temperatures through November. At some point, however, likelihood turns into certainty. Does a warm December push the nation to the point where it is impossible for 2012 to be anything but the warmest year ever recorded in the U.S.? To answer that question Climate Central did the math, and the results are in. There is a 99.99999999 percent chance that 2012 will be the hottest year ever recorded in the continental 48 states, based on our analysis of 118 years of temperature records through Dec. 10, 2012. ----- Exactly how cold would it need to be not to break the record? Temperatures would have to average 14.76°F across the continent for the rest of December — a holiday season colder than any ever recorded. But that is not going to happen. So far this December the mean temperature in the contiguous U.S. has been 44.13°F. The average temperature for 117 years of previous Decembers is 33.08°F.

    November 2012: Earth's 333rd consecutive warmer-than-average month: November 2012 was the globe's 5th warmest November on record, said National Oceanic and Atmospheric Administration's National Climatic Data Center (NCDC) on Monday. NASA rated November 2012 the 2nd warmest November on record. Global temperature records begin in 1880. November 2012 global land temperatures were the 6th warmest on record, and global ocean temperatures were also the 6th warmest on record. Including this November, the 10 warmest Novembers have occurred in the past 12 years, and November 2012 was the 333rd consecutive month with global temperatures warmer than the 20th century average. The last time Earth had a below-average November global temperature was in 1976, and the last below-average month of any kind was February 1985--during the Reagan administration, when the cost of a first-class stamp was 20 cents.For almost 28 years, every month has been warmer than the average for that month in the 20th century. And, as explained in a recent blog post, this understates the situation, because it is using the average of temperatures in the 20th century, and the earth had started warming before that.

    An Odometer Moment on a Warming Planet - For those who might be keeping score, we just passed the 333rd consecutive month of global temperatures above the 20th-century average. November 2012 was the fifth-warmest November since records began in 1880, the National Oceanic and Atmospheric Administration said in its monthly climate report. The agency calculated that the 10 warmest Novembers on record have all occurred within the past 12 years.The last time global temperatures came in below the 20th-century average for the month of November was in 1976, and the last time any month came in below the average was February 1985. As always, the warmth in November was patchy. According to NOAA, eastern Russia, Australia, the central and western United States, northern Africa, and most of Europe and western Asia were warmer than average, while the eastern United States and parts of Asia and Canada were on the cool side. NOAA will not make this official until early January, but it is now virtually certain that 2012 will set a high-temperature record for the contiguous 48 states. The previous record, from 1998, will be smashed by a full one degree Fahrenheit.

    The Farming Forecast Calls for Change -  WEATHER and agriculture have always been intertwined in most every part of the world. No matter which continent, farmers have always been at the mercy of rainfall and temperature. Thus it is curious that most of the conversation surrounding climate change — how the weather has been modified by industrial activity — revolves around reducing emissions (climate “mitigation”) and not on how to modify agriculture to new weather conditions. But with the world population expected to rise by another one billion people in 15 years, we need to produce more food with less emissions while adapting to changing climates.Another round of international negotiations on climate change wrapped up in Doha, Qatar, last week without a major consensus on emissions. Strikingly, though, there was a lack of consensus on addressing agricultural adaptation. Efforts to implement a formal program that addresses the dire problem of food security ended without agreement and the issue was punted to June for additional discussion. But outside of diplomatic circles, a different consensus is forming — one that does not rely on negotiations. People are noticing that climate change has already taken hold.

    Making Cities STRONGer Against Climate Related Extreme Weather - On December 19, 2012, Senators John Senator John Kerry (D-MA), Sen. Frank Lautenberg (D-NJ) and Kristen Gillibrand (D-NY) introduced legislation to help communities reduce fatalities and damages from future climate related extreme weather events.  The Strengthening the Resiliency of Our Nation on the Ground (STRONG) Act, S. 3691, would direct: the White House Office of Science and Technology Policy to chair a high-level interagency working group to first conduct an assessment of Federal agencies’ current and planned activities related to short-and long-term extreme weather resilience across key sectors and then develop a plan to support State, local, and private and public sector resiliency efforts. S. 3691 would rely on the federal, state, and local governments to work together to develop community resiliency plans. The bill responds to the devastating floods, heavy storms, droughts, heat waves, and wildfires that recently plagued the United States.  In 2011-12 there were 21 extreme weather events that each caused at least $1 billion in damages, with a total of up to $174 billion in total damages.   And these events took at least 1,021 lives.  Two-thirds of counties in the continental U.S. were declared a disaster for at least one of these most damaging events.

    WSJ's Climate "Dynamite" Is A Dud - In a Wall Street Journal op-ed, Matt Ridley attempted to cast doubt on the severity of manmade climate change, arguing that future warming will be modest and "good" for the planet. But experts say the author flubbed the science, and continue to project that the earth will warm between 2 and 4.5 degrees Celsius (or about 3.5 to 8 degrees Fahrenheit), unless mitigating action is taken.Ridley's argument goes something like this: climate models are "unproven." Therefore, it is now possible to rely solely on "observations" -- which show that temperatures are "no higher than they were 16 years ago"--to determine that a doubling of atmospheric carbon dioxide by the end of the century would cause modest warming. Further, that amount of warming would be a "net good."  Putting aside the fact that Ridley cites a "semiretired successful financier" and an unnamed scientist to support his claims, his arguments are not well-founded. Or, as John Abraham, an IPCC reviewer and the director of the Climate Science Rapid Response Team, put it to Media Matters: the column "has such elementary errors in it that [it] casts doubt on the author's understanding of any aspects of climate change."   Let's look at each of those errors, one by one.

    Error-Riddled Matt Ridley Piece Lowballs Climate Change, Discredits Wall Street Journal. World Faces 10°F Warming - Every major projection of future warming makes clear that if we keep listening to the falsehoods of the anti-science crowd and keep taking no serious action to reduce carbon pollution we face catastrophic 9°F to 11°F [5°C to 6°C] warming over most of the United States and World (see literature review here). The Wall Street Journal, however, has published a piece, “Cooling Down the Fears of Climate Change,” that (falsely) asserts observations suggest global warming will be so low as to “be benificial.” This risible piece by Matt Ridley is so riddled with basic math and science errors it raises the question of how the Journal can possibly maintain its reputation as a credible source of news and financial analysis. Ridley and the Journal apparently don’t know the difference between water vapor and clouds. They don’t understand the basic concept of climate sensitivity. And they can’t do simple math. Naturally, the climate deniers have embraced this nonsense and spread it across the internet. I wasn’t going to waste time with the umpteenth debunking of the Wall Street Journal‘s nonsense — especially one written by someone whose “family leases land for coal mining”! But one of Ridley’s many basic mistakes is one I have seen often in the media — the confusion of the “climate sensitivity” (to a doubling of CO2 levels to 560 parts per million) with projected warming (from actual greenhouse gas levels projected for this century plus carbon cycle feedbacks). That confusion needs clearing up (again).

    Large, Old Trees Are Dying All Over The World - The world's large old trees are dying, researchers found in an article in the journal Science which appeared last week. There has been an alarming increase in death rates among trees 100-300 years old, according to the Science Daily report on that research. The report explains the importance of big, old trees in ecosystem health.— The largest living organisms on the planet, the big, old trees that harbour and sustain countless birds and other wildlife, are dying.A report by three of the world's leading ecologists in today's issue of the journal Science warns of an alarming increase in deathrates among trees 100-300 years old in many of the world's forests, woodlands, savannahs, farming areas and even in cities."It's a worldwide problem and appears to be happening in most types of forest," says lead author Professor David Lindenmayer of the ARC Centre of Excellence for Environmental Decisions (CEED) and Australian National University. "Large old trees are critical in many natural and human-dominated environments. Studies of ecosystems around the world suggest populations of these trees are declining rapidly," he and colleagues say in their Science report...

    Global warming: Sea level rise threatens Hawaii biodiversitySea level rise could threaten the breeding areas of numerous sea bird breeding areas in the northwestern Hawaiian Islands, according to a new U.S. Geological Survey study that analyzed the combined effects sea-level rise and wave action. Most climate change models predict a 1-meter rise in global sea level by 2100, with larger increases possible in parts of the Pacific Ocean. Those rising sea levels may inundate low-lying islands across the globe, placing island biodiversity at risk. The Northwestern Hawaiian Islands, which extend 1,930 kilometers beyond the main Hawaiian Islands, are a World Heritage Site and part of the Papahānaumokuākea Marine National Monument. These islands – comprising the Hawaiian Islands National Wildlife Refuge, Midway Atoll National Wildlife Refuge, and Kure Atoll State Wildlife Sanctuary – support the largest tropical seabird rookery in the world, providing breeding habitat for 21 species of seabirds, four endemic land bird species and essential foraging, breeding or haul-out habitat for many other resident and migratory wildlife species

    Can the oyster industry survive ocean acidification? — For four frustrating months in 2007, Mark Wiegardt and his wife, Sue Cudd, witnessed something unsettling at their Oregon oyster hatchery: tank bottoms littered with dead baby oysters.It turned out that "corrosive" seawater, which makes it harder for young oysters to build shells, was largely to blame. Like the atmosphere, the world's seas are burdened by our fossil fuel use and deforestation. The ocean has sponged up a quarter of the carbon dioxide humans have produced since the Industrial Revolution, steadily lowering its pH. Today's seas are 30 percent more acidic than their pre-industrial ancestors. By the turn of the century, scientists anticipate they will be 150 percent more so -- a trend that led National Oceanic and Atmospheric Administration (NOAA) chief Jane Lubchenco to call ocean acidification climate change's "equally evil twin." Even if manmade carbon emissions ceased tomorrow, the West Coast would face decades of increasingly corrosive water because the ocean is laden with CO2 from decades past and will continue to absorb the CO2 already in the air, slowly changing its chemistry. "The train has already left the station," says Richard Feely, a senior fellow at NOAA's Pacific Marine Environmental Laboratory in Seattle. "If we don't reduce carbon dioxide emissions, we'll (see) conditions that will be corrosive to more species."

    Slab of Barrier Reef sea floor collapsing, could cause tsunami, say scientists - A huge slab of sea floor near the Great Barrier Reef is in the early stages of collapse and could generate a tsunami when it finally breaks off, researchers warned Friday. Marine geologists from Australia’s James Cook University have been using advanced 3D mapping techniques on the deepest parts of the reef — below diving depth — since 2007 and have discovered dozens of sub-marine canyons. On a recent trip, they came across the one cubic kilometre slab of sea floor, the remains of an ancient underwater landslide, which is perched on the continental shelf.

    Report: Humanity Has Overshot The Earth's Biocapacity - A new report on China’s ecological footprint opens with some grim news for the planet as a whole: The demand humans place on the planet — in terms of land use, resource consumption, pollution, and so on — overshot the Earth’s threshold for sustaining that demand back in the early 1970s. Since then the gap has only grown wider. The report measures that demand by “ecological footprint,” which takes into account the area people use to produce the renewable resources they consume, the area that’s taken up by infrastructure, and the area of forest needed to absorb CO2 emissions not absorbed by the ocean. The report then compared that to the Earth’s biocapacity, which measures the amount of area available to serve all those purposes. Both factors are measured in units of global hectares (gha), which represent “the productive capacity of one hectare area of utilized land at global average biological productivity levels.” And as it turns out, humanity’s footprint now outpaces the planet’s total biocapacity to the point that it would take one and a half Earths to sustain our total level of consumption: In 2008, the Earth’s total biocapacity was 12.0 billion gha, or 1.8 gha per person, while humanity’s Ecological Footprint was 18.2 billion gha, or 2.7 gha per person. This discrepancy means it would take 1.5 years for the Earth to fully regenerate the renewable resources that people used in one year, or in other words, we used the equivalent of 1.5 Earths to support our consumption. Just as it is possible to withdraw money from a bank account more quickly than the interest that accrues, biocapacity can be reused more quickly than it regenerates.

    Climate change and economics: Goodbye New York, hello Minneapolis - WILL parts of Manhattan be left by people seeking higher, dryer ground? In the aftermath of another UN climate conference, our correspondents discuss migration and adaptation

    2013 Arctic sea ice volume expected to decrease to 2,000 km3 - Click on graph to view:

    UN Leak Shows More Evidence Humans Cause Global Warming -  A leaked draft of the UN’s most comprehensive study ever on climate change shows increasing evidence that links human activity to global warming. It is “extremely likely” mankind is responsible for more than half of the observed temperature rises since the 1950s, a United Nations agency said in a draft report. In the UN’s last study, in 2007, human influence on the temperature rise was deemed “very likely.” The document was posted by the blogger Alec Rawls on the website In that post, Rawls, who is also an official reviewer of the study, said he regards his confidentiality agreement with the UN agency responsible for the research as “vitiated by the systematic dishonesty of the report.” The report by the UN Intergovernmental Panel on Climate Change is due for publication starting in September. It will come in three parts and then a final summary, culminating in October 2014. It’s intended to guide envoys from 194 countries working on adopting a new treaty by 2015 that would fight climate change.  The IPCC said in a statement today that the leak “interferes” with the drafting process, and that the report is a “work in progress.” 

    Imports drive up UK carbon emissions -The UK's carbon emissions rose 10% from 2009 to 2010 as CO2 arising from imported goods and services soared, according to government figures released yesterday. The increase more than reverses a 19% decline recorded in 2009 as a result of the global downturn and leaves the country's carbon dioxide footprint 9% higher than it was in 1993. However, at 722m tonnes of CO2 it is 15% lower than 2004 when emissions peaked at 852mt CO2. The UK's total carbon footprint, including other greenhouse gases, also rose by five per cent between 1993 and 2010. The figures show carbon emissions associated with imported goods and services consumed in the UK have risen by 59% since 1993, as the UK economy has continued to move from a manufacturing base towards the services sector. Imports now account for almost 45% of all consumption emissions, compared with about 30% of the CO2 footprint in 1993. Meanwhile, emissions from UK-produced goods and services decreased by around 12% between 1993 and 2010 and now account for 35% of the total CO2 footprint in 2010.

    World's largest offshore wind farm slots in final turbine - Developers of the world's largest offshore wind farm, the £2bn London Array, have confirmed they are on track to reach full power next spring, after installing all 175 turbines at the 630MW project.Located in the Thames estuary, the London Array is a joint venture between Dong Energy, E.ON, and Masdar. The consortium yesterday said all the turbines are installed, 55 of which are supplying power to the grid. The remaining 120 will be connected over the coming months. "The London Array will soon be the largest operational offshore wind farm in the world," said Benj Sykes, head of Dong Energy's UK wind division. "Building offshore wind farms of this size and larger in the future allows us to harvest the advantages of scale and is an important element of our strategy to drive down the cost of energy."

    Replacing Fossil Fuels with Renewables – Part 1 - There are countless arguments for moving beyond fossil fuels, for world energy needs. Unfortunately, many hurdles must be overcome before we can feasibly count on other sources of energy to replace coal, oil and possibly natural gas, which all together provide the lion’s share of the world’s electricity generation and transportation fuels. Even if there were no greenhouse effect, all of the fossil fuels we rely on will probably be depleted within a few hundred years. If humankind is going to have a future on this planet, at least a high-technology future, it is absolutely inevitable that we’ll have to find an alternate energy pathway. Two profound questions loom over all other energy concerns: will there be enough affordable energy in the near future to sustain the world’s economies? And, if not, what are the long term solutions? There are no simple answers, today’s global energy economy is faced with increasing energy demand, depleting resources, rising energy prices, limited availability and reinforcement of countermeasures to reduce pollution and the effects of global warming. The answers depend on each region’s inventory of resources and energy needs as well as their political and cultural environment.

    Conservation Not Technology will be our Savior – Chris Martenson (Part 2) - In part 2 of our interview with Chris Martenson, economist and editor of the popular financial website Peak Prosperity, Chris talks about:

    • How tight oil is being oversold
    • An idea for solving the storage and bBattery problem
    • How price, not technology, has unlocked boom reserves
    • Why it’s about conservation now, not new technology
    • Why we should be concerned about another financial meltdown
    • Future opportunities for investors
    • Why exporting natural gas is a terrible idea
    • Why Governments should help renewable Energy innovation
    • Why net energy returns are the MOST important thing

    In part 1 Chris spoke about: Why we shouldn’t be speaking about Energy Independence, why we could see $200 a barrel oil in the near future, why peak oil is not a defunct theory, what we aren’t being told about the shale boom, and much more… Click here to read part 1

    Austerity - At Whose Cost? - Everywhere, austerity is the demand of the day. To be sure, there are seeming exceptions for the moment in a few countries - China, Brazil, the Gulf states, and possibly a few others. But these are exceptions to a demand that pervades the world-system today. In part, this demand is absolutely phony. In part, it reflects a real economic problem. What are the issues? On the one hand, the incredible wastefulness of a capitalist system has indeed led to a situation in which the world-system is threatened by its real inability to continue to consume globally at the level at which the world has been doing it, especially since the absolute level of consumption is constantly increasing. We are indeed exhausting basic elements for human survival, given the consumerism that has been the basis of our productive and speculative activities. On the other hand, we know that global consumption has been highly unequal, both among countries and within countries. Furthermore, the gap between the current beneficiaries and the current losers has been persistently growing. These divergences constitute the fundamental polarization of our world-system, not only economically, but politically and culturally. This is no longer much of a secret to the world's populations. Climate change and its consequences, food and water shortages and their consequences are visible to more and more people, many of whom are beginning to call for a shift in civilizational values - away from consumerism.

    More on the helium shortage A global helium shortage has turned the second-most abundant element in the universe (after hydrogen) into a sought-after scarcity, disrupting its use in everything from party balloons and holiday parade floats to M.R.I. machines and scientific research. ... Experts say the shortage has many causes. Because helium is a byproduct of natural gas extraction, a drop in natural gas prices has reduced the financial incentives for many overseas companies to produce helium. In addition, suppliers’ ability to meet the growing demand for helium has been strained by production problems around the world. Helium plants that are being built or are already operational in Qatar, Algeria, Wyoming and elsewhere have experienced a series of construction delays or maintenance troubles. ... The federal government’s role in helium production began in the early 20th century.  By 1925, Congress had created a helium program to make sure the gas would be available for national defense.Though the government’s role has been scaled back since then, it continues to dominate the market, effectively setting the global price and supplying enriched crude helium for sale to private refineries and plants via a 450-mile pipeline system. In October, the Bureau of Land Management raised the government’s price for crude helium to $84 per thousand cubic feet, up from $75.75.

    Fukushima plant situation ‘volatile,’ a year after cold shutdown declared - Workers are nowhere close to determining the state of melted fuel at the Fukushima No. 1 nuclear plant, a year after the government declared the damaged reactors were in a “cold shutdown” state. Storage tanks at the site are nearing capacity for radioactive water. A makeshift system is still being used to cool the nuclear fuel. And leaks of contaminated water and quake-induced collapses of plant facilities remain a threat. Although progress has been made in clearing rubble and reducing the amount of radioactive substances released from the plant, NRA Chairman Shunichi Tanaka acknowledged that preparations to decommission the reactors are only slowly getting under way. "Workers have been obliged to respond with highly stopgap measures," Tanaka said. "Many devices, such as a purifier for radioactive water, have been installed with no time for sufficient design considerations and safety screenings. “The situation surrounding the decommissioning process is volatile, so there is a need for constant reviews in securing safety."

    Huge power plant gives up on coal, the Times reports with a shrug - “Power Company Loses Some of Its Appetite for Coal.” This is the best headline The New York Times could come up with. “Eh, I don’t really want that much coal anymore,” says American Electric Power, shrugging. American Electric Power, or A.E.P., the nation’s biggest consumer of coal, announced that it would shut its coal-burning boilers at the Big Sandy electric power plant near Louisa, Ky., a 1,100-megawatt facility that since the early 1960s has been burning coal that was mined locally.Big Sandy this year became a symbol of the plight of the coal industry nationwide. Strict new environmental regulations are forcing large utilities to spend billions of dollars to retrofit old coal-burning plants or shut them down, replacing them in most cases with equipment that uses cleaner-burning natural gas.Those “strict new environmental regulations” are also known as the 40-year-old Clean Air Act, which grandfathered in the pollution of plants like Big Sandy until major retrofits were needed. Now, a major retrofit is needed.

    Coal Exports Emerging As Major Climate Fight In The Pacific Northwest - With coal prices plummeting, thanks in large part to the spike in natural gas use, coal barons are desperate to offload their lucre. Showing ever-greater verve, they’re dumping it in overseas markets, especially China. The US Energy Information Administration projects US coal exports will hit an all-time high in 2012 — some 125 to 133 million tons — more than doubling 2009 export levels and surpassing a record set in 1981. When it comes to climate disruption, these are ghastly numbers. After all, 2012 looks like it’ll be the hottest year on record for the contiguous US. The year brought devastating drought and catastrophic storms. While we can’t peg any single weather event to climate change, this is precisely the sort of climate seesaw scientists have predicted. Meanwhile, the Arctic suffered record losses in sea ice and snow cover. And globally, 2012 is on course to become the ninth hottest year ever. Revving up coal consumption — the dirtiest of fossil fuels — is not going to help matters, to say the least. That’s where the Pacific Northwest enters the picture. Last week, the Oregon Department of Environmental Quality (DEQ) staged what may well be the only public meetings on the permitting process for the US coal industry’s hail-Mary moment: to convert the western United States into a railroad and barge pipeline for coal mined in Montana and Wyoming and hauled along the Columbia River to the Pacific Ocean for export to China and elsewhere. This Morrow-Pacific coal export proposal, which is being pushed by Australia-based Ambre Energy, will annually ship overseas nearly nine million tons of coal.

    World Bank Says Poor People Need Coal - Last week, I reported on environmental groups calling foul on the World Bank for even considering a proposal to finance a new coal-fired power plant in Mongolia. Funding the Oyu Tolgoi copper and gold mine project, which also includes a 750 megawatt coal plant, was out of line with the Bank's stated concern that the world is heading to devastating and irreversible climate consequences. Rio Tinto has asked the World Bank Group's private funding arm, International Finance Corporation, for part of the money needed to start construction on the project. IFC was not able to comment at press time, but did send a lengthy email response on Tuesday. Basically they argue that poor nations need energy, that the World Bank is increasingly shifting its focus toward renewables, and that renewable energy can't meet all of Mongolia's needs. I'll post the full response, from IFC communications officer Josef Skoldeberg, and let you evaluate for yourself: The world must tackle the problem of climate change more aggressively. But this will be achieved by energy transitions by the largest consumers of coal, not by foreclosing on energy options that mean access to basic electricity for the world’s poorest people. This is not the terrain on which the battle against climate change will be won. The problem with coal emissions rests squarely in the most highly industrialized nations. If you took all the developing countries in the world and added up all their emissions together, it still would be one-third of the emissions of the United States, European Union, and China combined – just one-third. Increasingly, the World Bank Group only invests in coal in very rare circumstances - when poor countries have no other realistic options to rapidly ramp up renewable energy alternatives and power is needed for basic energy needs for hospitals, industry and factories, and to light schools, heat homes and cook meals.

    Coal to equal oil as world's top energy source within 10 years - The International Energy Agency (IEA) says that coal will catch up with oil as the world's leading energy source by 2022. In a report, the Agency says that increased demand from India and China are fuelling the push. Natural gas offers the best hope of reducing carbon emissions in the short term the report concludes. It comes as the European Union acknowledged that it has been unable to fund a single project to capture and store CO2. Economic and population growth in developing countries are spurring the drive for coal says the IEA, By 2017 the agency says global coal consumption will stand at 4.32 billion tonnes of oil equivalent, versus 4.4 billion tonnes for oil itself. "Coal's share of the global energy mix continues to grow each year," says IEA executive director Maria Van der Hoeven. "If no changes are made to current policies, coal will catch oil within a decade." The report forecasts that by 2014 China will account for more than half the world's coal consumption, while India will overtake the US in second place.

    Coal Could Surpass Oil As World's Top Energy Source By 2017  - By 2017, the world will increase its coal consumption by more than 1.2 billion tons per year — equivalent to the current coal use of the U.S. and Russia combined. That’s according to a new report on the booming coal sector from the International Energy Agency. Many have hailed the drop in U.S. coal consumption over the last year as a modestly positive trend for climate; however, that decrease is being overshadowed by a boom in developing countries, particularly China. The IEA projects that China will account for 70 percent of coal consumption by 2017: Coal accounted for 45 percent of global CO2 emissions in 2011. Without a slowdown in coal consumption, China’s carbon emissions hockey stick is about to get a lot sharper. Here’s what it looks like already:  The same could be true in India as well, a country that will account for 22 percent of growth in coal consumption. According to a recent report from the World Resources Institute, there are more than 1,200 coal plants planned around the world, most of which will be built in China and India. If all the plants in the pipeline are built, they would amount to a generation capacity four times greater than the current American coal fleet.

    With U.S. awash in natural gas, why aren’t fuel bills falling? -  Here’s a question a lot of homeowners are asking: If there is so much cheap natural gas floating around the United States, why aren’t people’s fuel bills falling? The answer is that fuel is only part of the fuel bill. A lot of what homeowners pay goes to building new power lines or tending to aging gas pipelines. In one recent rate case, a utility got a rate increase to cover pension costs.Moreover, electric utilities, burned by sudden natural gas price spikes last decade, have learned to spread out contract negotiations. For Pepco, each year it bids for a third of the electricity it needs from power suppliers. That smooths out changes in electricity prices, but it also delays the full effect of lower prices. “In the contracts we’ve been receiving, we are seeing a reduction in the supply cost that is driving the energy portions of the bills down,” said Bill Gausman, senior vice president of strategic initiatives for Pepco Holdings. “Because we’re only bidding a third of our supplies, the impact is not as big.” Most electric utilities also rely on a variety of energy sources. Cheap natural gas, the result of new supplies of shale gas in the past four or five years, is moderating fuel prices. But it is just one part of the fuel cost that includes coal, nuclear and renewables that go into a regional grid.

    The Number of Fracking Trade Secrets in Texas Will Likely Surprise You - What’s in the water? Or, to be precise, what’s in the mix of water, sand and chemicals that oil and gas drillers are sending deep underground in the drilling process known as hydraulic fracturing, or “fracking?” The answer? We still really don’t know. While Texas passed a law last December that new wells using fracking to drill have to disclose the ingredients of the 4-6 million gallons on average of fluid they send underground, there’s a loophole: trade secret exemptions. Because each company’s exact mix is proprietary, drilling companies argued during the rule making that fully disclosing the amount of each chemical in its fracking fluid would help the competition. Drillers argue that only 5 percent of the fluid on average consists of chemicals. But extrapolate 5 percent of 5 million gallons, as the Dallas Morning News did in an analysis earlier this year, and you get as many as 55,000 pounds of chemicals. What’s more, drilling companies may be exempting far more information than they agreed to under the new rule. Scott Anderson of the Environmental Defense Fund (EDF) says there are “bugs” in the system:

    What's the Fracking Problem with Natural Gas?: At least 38 earthquakes in Northeastern B.C. over the past few years were caused by hydraulic fracturing (commonly called fracking), according to a report by the B.C. Oil and Gas Commission. Studies have found quakes are common in many places where that natural gas extraction process is employed. It's not unexpected that shooting massive amounts of water, sand, and chemicals at high pressure into the earth to shatter shale and release natural gas might shake things up. But earthquakes aren't the worst problem with fracking. Hydraulic fracturing requires massive amounts of water. Disposing of the toxic wastewater, as well as accidental spills, can contaminate drinking water and harm human health. And pumping wastewater into the ground can further increase earthquake risk. Gas leakage also leads to problems, even causing tap water to become flammable! In some cases, flaming tap water is the result of methane leaks from fracking. And methane is a far more potent greenhouse gas than carbon dioxide! Those are all serious cause for concern -- but even they don't pose the greatest threat from fracking. The biggest issue is that it's just one more way to continue our destructive addiction to fossil fuels. As easily accessible oil, gas, and coal reserves become depleted, corporations have increasingly looked to "unconventional" sources, such as those in the tar sands or under deep water, or embedded in underground shale deposits. 

    Insiders Sound an Alarm Amid a Natural Gas Rush - Natural gas companies have been placing enormous bets on the wells they are drilling, saying they will deliver big profits and provide a vast new source of energy for the United States. But the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells.  In the e-mails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves. Many of these e-mails also suggest a view that is in stark contrast to more bullish public comments made by the industry, in much the same way that insiders have raised doubts about previous financial bubbles.  “Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. “Reminds you of dot-coms.” “The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work,” an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009.

    California issues proposed rules for 'fracking' -  Under pressure from state lawmakers and environmentalists, Gov. Jerry Brown's administration released draft regulations for hydraulic fracturing, or "fracking," the controversial drilling process driving the nation's oil and gas boom. The proposed rules, released Tuesday, would require energy companies to disclose for the first time the chemicals they inject deep into the ground to break apart rock and release oil. They also would have to reveal the location of the wells where they use the procedure. Though fracking has unlocked vast amounts of previously unreachable fossil fuels elsewhere, environmentalists and public health advocates in California have raised safety questions about the hundreds of chemicals used — many of them known carcinogens — and the potential for drinking water contamination.

    Fracking’s Future - Supplies of natural gas now economically recoverable from shale in the United States could accommodate the country’s domestic demand for natural gas at current levels of consumption for more than a hundred years: an economic and strategic boon, and, at least in the near term, an important stepping-stone toward lower-carbon, greener energy. But even though natural gas is relatively “clean”—particularly relative to coal burned to generate electricity—the “fracking” process used to produce the new supplies poses significant environmental risks. We must ensure that procedures and policies are in place to minimize potential damage to local and regional air quality and to protect essential water resources. We need to make sure that extraction of the gas (consisting mainly of methane, with small amounts of other gases) from shale and its transport to market does not result in a significant increase in “fugitive” (inadvertent) emissions of methane (CH4)—which is 10 times more powerful as a climate-altering agent, molecule per molecule, than carbon dioxide (CO2, the most abundant greenhouse gas). Further, we will need to recognize from the outset that cheap natural gas may delay the transition to truly carbon-free, sustainable solar- and wind-energy supplies that remain crucial in light of our worsening climate-change crisis.

    Fracking lobbyists prepare case against Matt Damon's Promised Land -  Hollywood's discovery of fracking has caused some unease in the oil and gas industry – even in the midst of America's energy boom. A leading lobby group, Energy in Depth, has put out a "cheat sheet" of pro-fracking talking points to counter any bad publicity that may arise following the release of the new Matt Damon film, Promised Land. The film, directed by Gus Van Sant, stars Damon as a gas company salesman who travels the dying towns of the American heartland, buying up drilling rights from struggling farmers. It is due for a limited release on 28 December, with a wider run in January. The film is the first Hollywood treatment of one of the most contentious issues in rural America: the boom in natural-gas production that has been unlocked by hydraulic fracturing and horizontal drilling.

    Are Fossil Fuel Corporate Interests Influencing Legislators Through the National Conference of State Legislatures? -- The National Conference of State Legislatures (NCSL) describes itself as “a bipartisan organization that serves the legislators and staffs of the nation’s 50 states, its commonwealths and territories.  NCSL provides research, technical assistance and opportunities for policymakers to exchange ideas on the most pressing state issues.”Affiliated with NCSL, is the NCSL Foundation which was created by NCSL as a  “nonprofit tax-exempt 501(c)(3) corporation that offers opportunities for businesses, national associations, nonprofit organizations and unions seeking to improve the state legislative process and enhance NCSL’s services to all legislatures.”While the descriptions sound benign, the access to legislators NCSL and the NCSL Foundation provide to fossil fuel interests and other corporate “sponsors” sounds a lot like lobbying. Sourcewatch defines lobbyists as those who do “work on the behalf of their clients or the groups they’re representing to convince the government or others involved in public policy development to make a decision that is beneficial to them.” Nowhere in the descriptions of NCSL or the NCSL Foundation is the unique access to state legislators granted to corporate funders characterized as lobbying.

    Sasol Betting Big on Gas-to-Liquid Plant in U.S. - Sasol, a chemical and synthetic fuels company based in South Africa, is converting natural gas to diesel fuel using a variation of a technology developed by German scientists in the 1920s. Performing such chemical wizardry is exceedingly costly. But executives at Sasol and a partner, Qatar’s state-owned oil company, are betting that natural gas, which is abundant here, will become the dominant global fuel source over the next 50 years, oil will become scarcer and more expensive and global demand for transport fuels will grow. Sasol executives say the company believes so strongly in the promise of this technology that this month, it announced plans to spend up to $14 billion to build the first gas-to-liquids plant in the United States, in Louisiana, supported by more than $2 billion in state incentives. A shale drilling boom in that region in the last five years has produced a glut of cheap gas, and the executives say Sasol can tap that supply to make diesel and other refined products at competitive prices. Marjo Louw, president of Sasol Qatar, says that his company can produce diesel fuel that burns cleaner, costs less and creates less greenhouse gas pollution than fuel derived from crude oil.

    Don’t Fall for the Shale Boom Hype – Chris Martenson Interview - We are in the midst of an amazing energy boom, but by sweeping the idea of peak oil under the rug we are ignoring a significant fact: the relationship between hydrocarbon reserves and flow rates are not the same as they used to be—reserves have increased but flow rates are not as high or sustainable. Perhaps the most important thing we need to pay attention to is net energy returns, on which we run society. Massive new discoveries are only netting a fraction of the returns compared to earlier decades. While we must proceed into the energy future with caution—and the knowledge that analysts may be overselling the shale boom—there are also, as always, major opportunities in this story and they can be found in the wider trends related to improving energy efficiency.  Looking at our energy future in more detail we were fortunate to speak with the well known economist and author of the Crash Course Chris Martenson. In part 1 of our 2 part interview Chris discusses:

    • Why we shouldn’t talk about energy independence
    • What the media is failing to report about the “massive” Shale discoveries
    • How oil analysts are getting the economics wrong
    • Why we could see $200 a barrel Oil in the Near Future
    • The relationship between energy and the economy
    • Why peak oil is not a defunct theory
    • Why electric vehicles are the future
    • Why natural gas should be a bridge to a new energy future
    • Why Washington just doesn’t get it

    Future production from U.S. shale or tight oil - I attended the American Geophysical Union meeting in San Francisco two weeks ago at which I heard a very interesting presentation by David Hughes of the Post Carbon Institute. He is more pessimistic about future production potential from U.S. shale gas and tight oil formations than some other analysts. Here I report some of the data on tight oil production that led to his conclusion. A number of analysts have issued optimistic assessments of the future production potential of U.S. shale or tight oil. For example, the International Energy Agency recently predicted that the U.S. would be producing over 10 million barrels per day of oil and natural gas liquids by 2020 before resuming a gradual decline. Citigroup is even more optimistic.  David Hughes has been studying detailed data on each individual well in shale gas and tight oil formations in the United States as part of a study that will be released by the Post Carbon Institute in February. The most successful new oil-producing region is the Bakken in North Dakota and Montana, which currently accounts for 42% of the U.S. tight oil total and accounts for about 1/5 of the tight oil production that is projected by Citigroup for 2022. Hughes finds that once output from a typical Bakken well begins to decline, within 24 months its production flow is down to 1/5 the level achieved at its peak. This is in line with estimated decline rates separately published by the North Dakota Department of Mineral Resources.

    The Nexen Deal Is Only the Beginning - Ottawa has made a mistake by allowing the buyout of Nexen Inc. by the China National Offshore Oil Corporation (CNOOC) and the buyout of Progress Energy Resources Corp. by Petronas of Malaysia. Apparently, the lobbying and debate behind closed doors was fierce and, in the end, a "Canadian" compromise was offered up as policy. And this equivocation -- "conscription if necessary but not necessarily conscription" -- won't work in the real world. After the approvals were announced, Prime Minister Stephen Harper framed this as the "end of a trend" not the "beginning" of a buyout frenzy by more sovereign-owned enterprises (SOEs). He ring-fenced the oil sands from further SOE buyouts unless in "exceptional circumstances" and set lower thresh-holds for Investment Canada review of foreign bids. But this is not the end. This is the beginning of the beginning. Phone calls are already being made to launch new buyouts by foreigners here. The Chinese, Russians and others have, and will, continue to game our system. I Frankly, CNOOC's bid should have been rejected out of hand and the company sent packing until Canadians could have a proper policy debate and conversation about the future of our country's economic structure. They should have been told that clear guidelines and definitions were needed and no one need apply until that was completed.

    Even While Crossing One Of World's Largest Aquifers, Keystone XL Would Not Use Advanced Leak Detection - Even after causing more than a dozen spills in 2011 from its newest tar sands pipeline — including a six story “geyser” of crude — Canadian energy developer TransCanada claimed its planned Keystone XL pipeline would “exceed” safety standards. But according to a new investigation of TransCanada’s development plans, the company does not plan to use advanced spill prevention technologies on a section of pipeline that would cross an underground reservoir providing nearly 30 percent of America’s irrigation water. InsideClimate News reported this week that TransCanada would only use standard leak detection technologies across a 19-mile stretch of the pristine Ogallala Aquifer, making bigger leaks more likely. The leak detection technology that will be used on the Keystone XL, for instance, is standard for the nation’s crude oil pipelines and rarely detects leaks smaller than 1 percent of the pipeline’s flow. The Keystone will have a capacity of 29 million gallons per day—so a spill would have to reach 294,000 gallons per day to trigger its leak detection technology. The Keystone XL also won’t get two other safeguards found on the 19-mile stretch of the pipeline over Austin’s aquifer: a concrete cap that protects the Longhorn from construction-related punctures, and daily aerial or foot patrols to check for tiny spills that might seep to the surface.

    Oil Spill Threatens Bird Sanctuary Off Staten Island -  Oil from a barge spilled into the waters off Staten Island, spreading to a bird sanctuary on an island in Newark Bay, the Coast Guard said on Saturday. The spill was detected shortly after 11 p.m. Friday at May Ship Repair, said Petty Officer Erik Swanson, a Coast Guard spokesman. Petty Officer Swanson said that fuel oil was being transferred from a barge called Boston 30 to another barge, DBL 25, when workers noticed that it was also darkening the water between the vessels. Workers placed a boom on the surface of the water to contain the oil, added absorbent materials and notified the authorities, Petty Officer Swanson said. The oil was coming from one of the Boston 30’s tanks, which was carrying 112,000 gallons. The barge is owned by Boston Marine Transport of Massachusetts. The Coast Guard has not yet determined how much oil had leaked from the tank or what caused the leak. Petty Officer Swanson added that Coast Guard helicopters surveyed the area and saw that an oily sheen had spread to the Verrazano-Narrows Bridge, about six miles to the east. Petty Officer Swanson said that the oil had also reached the Shooters Island Bird Sanctuary and the Richmond Terrace wetlands, both of which are controlled by the New York City Department of Parks and Recreation and are within several hundred yards of where the leak took place.

    Suit Seeks to Overturn a City Drilling Ban in Longmont, Colorado - An industry group representing oil and gas companies has sued a city in Colorado that outlawed hydraulic fracturing, saying voters had no right to ban the drilling practice.The lawsuit, filed on Monday by the Colorado Oil and Gas Association, seeks to overturn the ban on the contentious practice that passed by a wide margin last month in the northern Colorado city of Longmont. The measure, the first of its kind in the state, still allows oil and gas drilling within city limits, but it prohibits hydraulic fracturing, which has lifted energy production across the country but has raised concerns about air and water contamination. The oil and gas association said the ban amounted to a prohibition on all efforts to tap the estimated $500 million in oil and gas resources locked in the rocks deep beneath Longmont. “The ban is illegal, and we expect it to be overturned by the courts,” said Tisha Schuller, the president of the group.

    Oil Watch: Europe and North America, total oil products demand - Following on from 6 posts that looked at global oil production trends we now turn our attention to oil consumption / demand which in our opinion is every bit as fascinating and important to understanding the global energy system. In this post we focus on Europe and North America using JODI data (Joint Organisations Data Initiative) which is based upon figures reported by national governments which we therefore assume to be reliable. The JODI data base is not complete. Reporting began in January 2002. Most OECD countries have a complete set of reports but a number of countries like China only began to report in January 04 and many developing countries have a patchy reporting record. Russia and the former states of the Soviet Union do not report oil consumption figures at all. This group of 11 countries classified as "Europe Core" combined show near uniform demand for oil products for the past decade. We consider this to be a somewhat remarkable trend since oil prices rose from $31/bbl in 2002 to >$100/bbl in 2008 (annual averages). Following 2008 the world has witnessed the biggest financial crisis since 1929. And yet demand for oil in this group of countries has been hardly affected by these momentous events. Note that this group includes Switzerland and Norway, neither of which are members of the Euro or the EU. These 11 countries typically have strong manufacturing / exporting economies. It seems likely that none will have significant oil fired power generation. All have modern motor vehicle fleets that already deliver fuel economy much higher than in N America. All but Norway are dependent upon imported oil.

    Oil production increases to highest level since 1993 -  According to data released this afternoon by the Department of Energy, U.S. oil output increased last week to 6,863,000 barrels per day, reaching the highest level of domestic crude oil production since early May 1993, more than 19 and one-half years ago.

    Previous long-term government, industry oil forecasts badly overestimated supply; why should we listen now? "[I]f you're still operating under the assumption that the earth's petroleum--or at least the cheap stuff--is about to run out, you're not going to thrive in the new oil era. Technology is making it possible to find, produce, and refine oil so efficiently that its supply, at least for practical purposes, is basically unlimited."--Businessweek, December 14, 1998 The writer of the above sentences was reacting to oil prices hovering around $11 a barrel. He could not have known then that we were about to embark on a bull market that would take oil to its highest price ever--even adjusted for inflation--just 10 years later. And so, after oil's run, it's all the more astonishing that as Brent Crude--now the true worldwide benchmark price--stands above $100 a barrel, we are hearing a similar message about the future of oil both from official agencies and the oil industry.Looking back at forecasts made in the year 2000 by the U.S. EIA, the IEA, and the NIC, it becomes obvious that drawing an upward line on a chart does not make an oil forecast magically come true. All were considerably off the mark. ExxonMobil's oldest forecast available online dates back to 2006. It, too, has proved wide of the mark.

    Gulf states face hard economic truth about subsidies - The security and stability of the six-member states of the Gulf Co-operation Council (GCC) rests on a basic assumption. Their governments, run by royal families, have a social contract with the people that in its simplest terms effectively says: "In return for your acquiescence we will provide health, education, water, energy and other services virtually free." But what happens if the governments are no longer able to fulfil their side of the contract? What happens if the cost of subsidising all those services becomes too high to be sustainable? That question has caught the attention of Jim Krane, a Gulf analyst at the Judge Business School of the University of Cambridge. He was drawn to an astonishing figure about the price of electricity in Kuwait. "In 1966, Kuwait dropped its electricity tariff from 27 fils per kWh to 2 fils and it has remained the same ever since. That is about 1 US cent," he told the BBC. In the UK, electricity costs about 12p ($0.19) per kWh.

    Sharp reversal in the ISI Company Survey of China Sales - On page 4 of this publicly available ISI report (here) from September, there is a chart of the ISI company survey of China sales (US companies exporting to or selling in China). The comment says: "Our China Survey was unchanged this week, but is just 4 pts off the 2009 low" - as the index approached its all-time low. It never quite made it. In a remarkable turnaround, the index (according to ISI) has its biggest 3-week increase in 3 years. There is clear evidence of this improvement from companies like Yum Brands, who saw large declines in China sales that are now expected to stabilize (see Barrons post). This provides further support to the thesis that China's economic output growth has bottomed (see discussion).

    China's pension deficit climbs to 77 billion yuan - China's top think tank is reporting China's pension deficit reached some 77 billion yuan in 2011, an increase of some 9 billion yuan from a year earlier, raising worries about an unsustainable financial situation of the current pension system. In its latest report, the top think tank is worrying about an unsustainable financial situation of the current pension system. Li Yang is the vice president of Chinese Academy of Social Sciences, "Our basic pension insurance system seems to have saved a large surplus in recent years. And they have guaranteed the current needs. However, most of the surplus comes from financial subsidies by the central and local governments." Li Yang adds China's economic growth will undergo a structural slowing-down with an increasing aging population, which will affect the growth of fiscal revenue. Therefore, relying on financial subsidies to cover pension budget is unsustainable.

    World Bank fears fresh credit bubble in China on hot money flows -- China and Asia’s tigers are roaring back to life and risk a fresh credit booms unless they can choke inflows of hot money, the World Bank has warned. The Far East has shaken off the deep downturn earlier this year and looks poised to drive a fresh cycle of global growth in 2013. “China appears to have bottomed out,” said the Bank in its regional report. Asia’s powerhouse economy will rebound with 8.4pc growth next year as credit stimulus and an infrastructure blitz by local governments gain traction, with knock-on effects through East Asia. The region as a whole will grow by 7.9pc, with Myanmar at last starting to catch up as undertakes “formidable reforms”. The new risk is a return to overheating as ultra-loose monetary policies in the West trigger a “flood of capital into the region that could lead to asset bubbles and excessive credit growth” -- with the risk of sharp reversals later. “Authorities should closely monitor developments on the capital account, especially in countries that have recently experienced rapid credit growth,” it said. The Bank said Asian states should defend their economies from excess money printed by central banks in the US, Europe, and Japan by imposing short-term “capital controls” when needed. It added that exchange curbs are no substitute for “appropriate exchange rate arrangements” over the longer term, a criticism clearly directed at China’s dollar peg.

    China dispute hits Japanese exports - Japan suffered another sharp decline in exports to China in November, reflecting a slowdown in Chinese growth and the lingering damage of a territorial dispute. Falling exports to China helped push the trade deficit to Y953.4bn ($11.3bn), the third-largest monthly deficit in more than three decades, and the fifth consecutive decline. The trade deficit for this year is on course to be an annual record, given that the cumulative deficit in the year to date is Y6.8tn. The record trade deficit so far was the Y2.6tn posted in 1980. The deteriorating trade balance will put pressure on Shinzo Abe, Japan’s incoming prime minister, to fulfil his campaign promises to reflate the economy, weaken the Japanese currency and return the country to a growth path. Mr Abe, who takes office on Wednesday, has vowed to tackle the yen’s strength, which hurts Japanese exporters’ competitiveness and decreases their overseas profits. But Junko Nishioka, an economist at RBS, said a weaker yen, while boosting exports, would make imports more expensive, hurting the trade balance.

    Spotlight on Japan: Return of 'Abenomics', More Militarism, Tougher China Line; Outlook for Yen and Nikkei - The Japanese election hands former prime minister Shinzo Abe a chance for redemption according to The Guardian.  Japan's voters appear to have short memories. Shinzo Abe, who is assured of becoming prime minister after his party's resounding victory in Sunday's election, last led the country in 2006, but stepped down after a troubled year in office. Abe's first administration was marred by scandals and gaffes. Months before he quit, his Liberal Democratic party [LDP] suffered a heavy defeat in upper house elections. Behind Abe's soft-spoken manner and aristocratic background lurks a fervent nationalist, which led one liberal commentator to describe him as "the most dangerous politician in Japan". Abe has often said he went into politics to help Japan "escape the postwar regime" and throw off the shackles of wartime guilt. In its place he has talked of creating a "beautiful Japan" defended by a strong military and guided by a new sense of national pride.

    LDP victory puts Abe in driver’s seat to pick up where he left off  - The decisive victory in the Dec. 16 Lower House election for the Liberal Democratic Party places its leader, Shinzo Abe, 58, on the road back to becoming prime minister, five years after abandoning the post. In September 2006, he became the youngest prime minister after the end of World War II at age 52. However, in the July 2007 Upper House election, the LDP suffered a humiliating loss and two months later Abe abruptly resigned, citing health reasons. Facing strong criticism for his "dereliction of duty," Abe has traveled around Japan for close to five years to atone for his sudden resignation.The LDP was forced into the unfamiliar role of main opposition party after the 2009 Lower House election that allowed the Democratic Party of Japan to gain control of government. However, the DPJ-led government showed its inexperience and the once rock-solid alliance with the United States was soon on shaky ground.

    LDP Win Clears Pipes for Japan Fiscal Spigot - The magnitude of the Liberal Democratic Party’s win in Japan’s election yesterday smoothens the path for fiscal stimulus in early 2013 as incoming Prime Minister Shinzo Abe seeks to end the economy’s contraction.  The two-thirds majority won by an LDP-led coalition in the lower house enables it to override most decisions by the opposition-controlled upper house. The upper chamber will still have a say on Abe’s picks for central bank leadership, as votes on nominations can’t be overridden.  The scale of the victory may accelerate a recovery from recession next year even amid Japan’s status as the nation with the world’s biggest public debt. The yen fell to a 20-month low against the dollar today as markets assess the chance of further pressure on the Bank of Japan to expand asset purchases this week for the fourth time in three months. “Japan’s economy will probably see an uptick from around April to June as Abe focuses on short-term policies to support growth,” said Kyohei Morita, chief economist at Barclays Plc in Tokyo. “The LDP may unveil between 5 trillion yen ($60 billion) and 10 trillion yen in spending as early as next month.”

    Japan’s new government to get aggressive — Japanese voters on Sunday ousted the current government and set the stage for new prime minister who’s vowed to adopt a large stimulus, cut interest rates and take other measures to revive growth in the world’s third biggest economy. Shinzo Abe, head of the Liberal Democratic Party, won a decisive victory that could lead to dramatic changes in Japan’s economic and foreign policies. Voters appeared to give the LDP and its allies enough seats in the 480-member parliament to break the gridlock and make it easier for the new government to pass legislation. Abe, who served a one-year stint as prime minister in 2006, has said he would enact a stimulus program and push the nation’s central bank to lower interest rates, Japan is believed to have entered a recession earlier in the year. “We need to overcome the crisis Japan is undergoing,”

    Japan's incoming PM calls for central bank easing - Japan's incoming prime minister Shinzo Abe told the country's chief central banker Tuesday he wanted to set a two percent inflation target, in the opening salvo of his battle to kickstart the economy. Abe met briefly with Bank of Japan (BoJ) governor Masaaki Shirakawa at his party's headquarters, two days after the Liberal Democratic Party (LDP) scored a landslide victory in national elections. The hawkish 58-year-old Abe said he called on Shirakawa to strike a policy deal with the government that would drag Japan out of the deflationary spiral that has haunted the world's third-largest economy for years, Jiji news agency reported. "I told him I want to reach a policy accord with the BoJ for the two percent inflation target that I promoted throughout the election campaign," he was quoted as telling reporters. Shirakawa -- who had previously slapped down Abe's policy proposals and bristled at any attempt to hijack the BoJ's independence -- rejected suggestions he was summoned to the new premier's office for their meeting. However, there has been tension between the two men on policy issues, and Abe has been quoted as saying he would like to replace Shirakawa with a more like-minded central bank governor when his term ends next year.

    Will Japan’s New Prime Minister Start a Debt Crisis? - It’s back to the future for Japanese politics. The Liberal Democratic Party (LDP) crushed its rivals with an ally to gain a supermajority in the lower house of the Diet, the national parliament, which means the party’s president, Shinzo Abe, will become the nation’s next Prime Minister. This would be a repeat performance for Abe, who had a less-than-stellar stint in the Prime Minister’s job from 2006 to ’07. His term was distinguished by his miserable approval ratings and scandals among members of his Cabinet, leading to his sudden resignation in September 2007. But in the weird and wacky world of Japanese politics, such issues as competency don’t seem to matter much. Abe will get a chance to redeem himself. Can he? Looking at his policy statements, the odds don’t look good. If Abe is a blast from the past, so are his economic policies. The agenda he has forwarded during the campaign promises a return to the days of frivolous government spending and easy money — policies that have already proved unable to extricate Japan from 20 years of economic malaise. And this time around, the damage could be severe. Abe, if he follows through on his promises, could seriously weaken Japan’s already fragile financial position.

    The Duke of Wellington on the best way to start a Japanese debt crisis - I happened to read Michael Schuman's article in Time. The title is "Will Japan's Next Prime Minister Start a Debt Crisis?" .  My immediate reaction: I hope so. Because the only thing that can save Japan is a debt crisis. It's a pity Japan didn't have a debt crisis 20 years ago, but better late than never. And the longer Japan waits before having a debt crisis, the harder it will be to control. And it will have a debt crisis eventually. But can he do it? And what would be the best way to start a debt crisis?  When people don't want to hold your debt, or your money, they will spend it, which is exactly what Japan needs. But (as I said in this old post) too much of a good thing is a bad thing, because you end up with too much inflation, rather than just an end to deflation and recession. So if you get too big a debt crisis you have to offer much higher interest rates to persuade people to buy new debt to rollover the old debt. And you have to increase taxes or cut spending so they know they will eventually get repaid. I can think of two ways for Japan to start a debt crisis.

    BOJ's JGB holdings exceed ¥110 trillion; BOJ, Fed in a QE race - The Bank of Japan continues to build its holdings of Japanese government securities. The holdings crossed ¥110 trillion, now representing 23% of the nation's GDP. By comparison, the Fed's treasuries holdings represent 11% of the US GDP, while its total securities holdings (including MBS) is roughly 17.5%. Of course going forward we have a "race" between the two central banks.The currency markets seem to indicate that the BOJ will ultimately win the race, as the yen continues to weaken. This is driven by three factors:
    1. Japan is still facing worsening economic conditions, particularly weakness in manufacturing (see FT story)
    2. The new government will pressure the BOJ to do more for the economy (see post).
    3. Continuing pressure from China over the disputed island (see NY Times story) creates further downside risk for the yen.

    Bank of Japan in Tough Spot After Abe's Win -- Japan's incoming prime minister, Shinzo Abe, asked Bank of Japan Gov. Masaaki Shirakawa during a meeting Tuesday to consider a policy accord with the government to set a new target for higher inflation, the latest scene in a high-stakes drama over central bank independence. "Mr. Shirakawa said he acknowledged that he heard what I was saying," Mr. Abe told reporters after Mr. Shirakawa visited him at the headquarters of the Liberal Democratic Party. The Bank of Japan has found itself in a tight spot after Mr. Abe's landslide victory. Mr. Abe made a call for more monetary easing a pillar of his campaign and has been emboldened by the resounding win for the LDP in Sunday's general election. The election results have amplified expectations that the Bank of Japan will take new measures to boost growth, possibly as soon as this week. Mr. Abe has kept up the heat on the BOJ, saying Monday that he expected the bank to reach an "appropriate decision" when its policy board meets, starting Wednesday. But BOJ officials are seeing some bright spots in the economy, meaning they might be inclined to leave policy alone.

    Bank of Japan to mull 2 percent inflation target as Abe turns up heat (Reuters) - The Bank of Japan will ease monetary policy this week and consider adopting a 2 percent inflation target no later than in January, sources say, responding to pressure from next Prime Minister Shinzo Abe for stronger efforts to beat deflation. Turning up the heat, Abe made a rare, direct push for a higher inflation target when BOJ Governor Masaaki Shirakawa visited the headquarters of his Liberal Democratic Party (LDP) on Tuesday. "I told him that during my election campaign, I called for setting a policy accord with the BOJ and a 2 percent inflation target," Abe told reporters. "The governor just listened," he said when asked how Shirakawa responded. The LDP swept to power in Sunday's lower house election after campaigning for big fiscal spending to revive the economy and "unlimited" monetary easing to achieve higher inflation in a country mired in deflation for the past 15 years.

    Bank of Japan launches 10 trillion yen of fresh easing - The Bank of Japan has ramped-up its money printing programme by 10 trillion yen (£732m), days after the conservative Liberal Democratic Party won an election promising to boost spending and pressure the central bank for aggressive action. The expansion of the country's asset-buying programme to 101 trillion yen came in the face of heavy pressure from Shinzo Abe's incoming government to loosen its monetary policy. The BoJ's last scheduled meeting of the year had been widely seen as a test of its resilience to outside pressure from lawmakers. The move was described as "good" by a senior LDP official who was quoted by AFP as saying "it is necessary to use every possible means" to boost growth. Mr Abe’s Liberal Democratic Party (LDP) won a landslide victory on Sunday, securing a two-thirds "super-majority" in the Diet with allies that can override senate vetoes. Armed with a crushing mandate, Mr Abe said he would "set a policy accord" with the Bank of Japan for a mandatory inflation target of 2pc, backed by "unlimited" monetary stimulus.

    BOJ's QE10 Is Latest Japanese Dud Ahead Of The US Cliffhanger - Very much in keeping with the tradition of Japan's now monthly QE8 (September) and QE9 (October), last night's announcement of what is effectively QE10, left a bitter taste in the mouth of salivating habitual gamblers (f/k/a traders), after Shirakawa showed he would not bend over to Abe's political demands just yet, and left out any mention of inflation targeting, whether 2% or 3%, out of the QE10 announcement. What he did include was yet another JPY 10 billion increase in the total asset purchase fund to a total of JPY 76 trillion, increasing the size of eligible JGB and Bill purchases by JPY 5 billion each. However, since this approach has proven to be a total failure in recent months, the market immediately faded the move and the USDJPY tumbled to under 84.00 overnight

    In Japan, a Test of Inflation Targets - Japan appears to be ready to do whatever it takes to end its long run of falling prices. The Bank of Japan took limited action on Thursday, and more is expected in the new year. For two decades, Japan has provided stark evidence that chronic deflation is possible in a modern economy. Prices have fallen steadily despite extraordinarily low interest rates. The economy has stagnated. This week the Liberal Democratic Party, which had ruled Japan for nearly its entire postwar history until it was swept from power three years ago, won a landslide victory. Shinzo Abe, the prime minister from 2006 to 2007, will get another chance. Mr. Abe devoted a decent part of his campaign to criticism of the Bank of Japan, the country’s central bank. He wants the bank to pursue inflation, and to effectively print money until it gets it. At one point during the campaign he spoke of a 3 percent inflation target, although he seems to have cut that back to 2 percent. Either goal, if realized, would be a major change for the country. The inflation index used in calculations of gross domestic product is now 18 percent lower than it was at the end of 1994.

    The Yen Also Falls: To Negative Nominal Rates? - I am constantly befuddled by foreign exchange markets since they tend to display even more "irrational" behaviour than stock markets. Witness Japan and its currency. Beginning 1999 or so, Japan has conducted aggressive monetary easing via its zero-interest rate policy (ZIRP) that entails [duh] near-zero nominal interest rates. However, this and quantitative easing (QE) have done little to pull Japan out of its funk since the bubble burst in 1990. I of course think there are lessons to be learned here for Westerners who do the same Stupid Monetary Tricks, but others would say that there situations are different. No matter; after being the almighty yen for the past several years, we get news that the yen is (slightly) weakening due to the (actually quite conservative and traditionally dominant) Liberal Democratic Party beating the (once upstart but now quite entrenched and equally staid) Democratic Party of Japan in parliamentary elections. News of an LDP victory has sent the yen tumbling--or at least what passes for it in this day and age of mild rather than wild forex swings in Japan:

    A new recipe for currency friction - Growth now firmly trumps inflation in the central banking lexicon. What was already pretty clear is beyond dispute following the Federal Reserve’s new commitment to keep interest rates close to zero until US unemployment falls below 6.5 per cent. The readiness of Mark Carney, currently governor of the Bank of Canada, to consider targeting nominal gross domestic product when he takes over from Sir Mervyn King at the Bank of England next year further underlines the point. And where central bankers are failing to rise adequately to the growth challenge politicians now threaten to move in on their act – witness the determination of Shinzo Abe, Japanese prime minister-to-be, to impose a higher inflation target on the supposedly independent Bank of Japan. Of this trio of growth promoters, Mr Abe has much the toughest job because expectations of deflation in Japan are so entrenched. In the US, by contrast, there is scope for a virtuous circle. If Barack Obama can strike a budgetary deal and secure its passage through Congress the turnround in the US housing market will solidify and US business will put surplus cash to work in new domestic investment. The US thus looks set to provide a firm base for global growth in 2013. Yet it is important to recognise that this growthmanship takes unprecedented monetary experimentation to a new and higher level. That means the law of unintended consequences will cast a shadow. A commitment to keep the cost of borrowing low for a prolonged period is a wonderful incentive for increased risk taking in the markets, which could lead to bubbles. Admittedly the Volcker rule and other regulatory restraints will curb the banks’ urge to speculate. But there are plenty of non-banks ready and able to seize the opportunity. My suspicion is that the impact will be felt chiefly outside the US.

    Kyle Bass on the End of the Debt Supercycle and a Coming Massive Devaluation of the Yen; Most Difficult Time to Invest; The Belief Bubble - Late last month, Kyle Bass, managing partner of Hayman Capital, shared his thoughts in a video at the University of Virginia Darden School of Business Investing Conference with Professor Ken Eades.It is a fantastic interview that echoes many of the things I have been saying about Japan for quite some time.

    Poor Thais trapped in informal debt - The very many Thais who earn less than 10,000 per month, in both industry and in rural areas, are trapped in a cycle of usury debt and exhorbitant interest rates demanded by loan sharks, a university economist warned on Tuesday. Narong Phetprasert, an associate professor of economics at Chulalongkorn University, said the problem of informal debt had moved up demographically, from farmers in rural areas to factory workers in the cities across the country. About 14 million of the approximately 17 million daily wage workers in Thailand were in the private sector, he said, and 8-9 million of them earn only 8,000-9,000 baht per month, which is insufficient to meet today's high cost of living and raise their families. Unless they do overtime, this group of workers is likely to borrow from their bosses or co-workers and take on monthly interest rates of 8-10%, a serious problem among the workforce, Mr Narong said on Tuesday at a seminar organised by the Legal Aid Centre for Debtors and Victims of Injustice by the Justice Ministry. He said the government had been reducing the problem in rural areas through the introduction of community funds. However, the problem seems to be getting worse among factory workers and could threaten the country's industrial sector in the long run.

    Global Recovery Overshadowed by Washington: A simple glance at newsstands or listening in on TV news would make it clear that the fiscal cliff is the primary public obsession of the moment. Bloomberg's news trend, which searches for keywords and plots story counts with those keywords, shows that the fiscal cliff obsession has hit a crescendo, which unfortunately is masking what is taking place globally, a re-acceleration in economic growth. For much of 2010-2011 most global central banks were tightening monetary policy to cool overheated economies that became white-hot after massive global stimulus. Those actions achieved their purpose to a level where growth is more of a concern than inflation. In response we've now seen much of the globe ease financial conditions over the last twelve months and it appears to be finally paying off as global growth looks to pick up heading into 2013. China, the world's growth juggernaut, was widely feared to slip into a hard landing scenario as many doomsayers would have us believe. However, Chinese easing of bank reserve ratios is a strong leading indicator for manufacturing activity and suggests that the Chinese economy should pick up steam meaningfully in 2013 which will buoy global growth.Similarly to China, easing in credit conditions in Europe is likely to be supportive of European economic activity in 2013. The Bloomberg European Financial Conditions Index (red, lower panel below) recently hit a 5-year high as credit conditions in Europe continue to improve.

      Equatorial Guinea: Obiang's future capital, Oyala - Deep in the rainforest, a giant dome of steel and glass is the centrepiece of one of the most grandiose and expensive construction projects in all of Africa. The library of the new International University of Central Africa has the look of a spaceship docked in a jungle clearing. Around the dome, a sprawling campus is taking shape. Earth movers, cranes and international construction crews from as far afield as Brazil, Poland and North Korea are turning the dreams of President Teodoro Obiang - Equatorial Guinea's self-styled Guarantor of Peace and Propeller of Development - into logic-defying reality. The university is but one small part of the president's ambition to build Africa's city of the future. Oyala will be the country's new capital, a multi-billion-dollar plaything for Africa's longest-serving dictator.

      Mexico -- South Of the Border Growth Dynamo - Last week, I noted that Japan, UK and EU are all "zombie economies" -- economies that are for all practical purposes dead in the water right now.  However, other regions of the world are doing very well -- especially those south of the border.  While Mexico does have some serious problems (the drug war and over 25,000 dead come to mind, along with systemic corruption), the overall economy has actually done very well since the end of the great recession.  Consider the following data points from the Central Bank's latest Inflation Report: Overall GDP has grown strongly.   The chart on the right indicates that the quarterly percent change has been positive since 2009 and has been in the .75-1.5% range.  The chart on the right shows that the annual rate of change has been positive as well -- 4% appears to be a good average to use for the last few years. The left chart shows ANTAD sales (retailer's association) have been rising strongly over the last five years.  Also note these moved sideways during the recession.  The right side also shows retail and wholesale sales, both of which have risen since their recession lows and both of which are now above their pre-recession peaks.

      The loonie’s dark secret: Canada’s dollar coin is a hidden tax - Last month, as they prepared to deal a final deathblow to the U.S. one-dollar banknote, a United States congressional committee called in Royal Canadian Mint CEO Beverley Lepine to give her account of one of the world’s most famous dollar coins. A quarter century after its launch, more than 70% of Canadians see the loonie as a “recognizable symbol of Canada,” she said. Of those, she added, many even consider it “a national icon equal to the beaver and the maple leaf.” For years, Canadians have regarded the loonie the same way they look at universal healthcare or the metric system: A useful innovation that Americans are too stubborn to adopt. But as Democrats and Republicans alike push for a Yankee loonie, economists are sounding the alarm that legislators are doing it for all the wrong reasons: A U.S. dollar coin is more expensive, less convenient and, by the U.S. government’s own admission, is only useful as a clandestine way to pull in extra revenue.

      Grexit expectations hit new lows - Citi's call for Greece exiting the EMU in the next 12 to18 months with a 60% probability (see discussion) looks even more out of sync with current expectations. The latest survey from Barclays shows that 70% of investors do not expect any nation to drop the euro next year. This chart shows how responses changed over time. After all, the Eurozone leadership pulled all the stops out in order to prevent EMU's breakup. That included bringing in the full force of the ECB in the name of fixing the "monetary transmission" (see post) in order to provide central bank funding to periphery governments.  The betting markets seem to agree. In fact Intrade odds are 77% that no nation will exit the union next year. With Greek debt nearly converted to "zero coupon perpetual bond" (see discussion), the probability of near term default and/or exit has collapsed.

      Amount Greeks owe their state rises to 54 billion euros - There was an increase of more than 5 billion euros in the amount of money Greeks owe the state last year and stands at over 50 billion euros this year, according to figures provided to Parliament by the Court of Audit. The court informed MPs that while debts to the state stood at 38.7 billion euros at the end of 2010, they rose by 21.1 percent last year to reach 44 billion euros by the end of 2011. This was the equivalent of 21.1 percent of Greece’s GDP. Auditors said that the figure at the end of October this year had increased to 54 billion euros, or 27.7 percent of GDP. Meanwhile, the number of bounced checks in November stood at 72.5 million euros, which was down 8.2 percent on the previous month and 56.3 percent less than a year earlier.

      EU: Tax collection still lagging in Greece (AP) — Greece is failing to collect the tax it is owed and is in danger of missing key targets that need to be met to reduce the government's staggering debt pile, the European Union warned on Monday. An EU task force helping Greece overcome the financial crisis that brought it to the brink of bankruptcy said Athens still has trouble dealing with old, outstanding tax claims. With 2 months to go in 2012, it was still about a billion euros behind the EU target of recovering €2 billion ($2.6 billion). In a report it said Greece made only 88 audits of large taxpayers, well short of a 2012 target of 300, and 467 of "high-wealth individuals," below a 1,300 target. Overall, EU Vice President Olli Rehn said Greece was nevertheless tackling problems "with determination and resolve." Greece has been surviving on rescue loans from its partners in the 17-country eurozone and the International Monetary Fund since 2010.

      Greeks can't find euros to buy heating oil in winter economy - In the Greek mountain town of Kastoria, less than an hour from the Albanian border, Kostas Tsitskos, 88, can’t afford fuel to heat his home against the winter’s cold. So he and his son live in a single bedroom, warmed by a small electric heater. “One room is enough,” said Tsitskos, who lives on a 734 euro-a-month ($971) pension and doesn’t have the 1,000 euros a month he needs to buy heating oil.  Greece is facing a heating-oil crisis. With an economy that has contracted for five years and an unemployment rate at a record 25 percent, residents in northern Greece can’t heat their homes. Kastoria hasn’t received funds from the central government to warm schools and the mayor said he will close all 53 of them rather than let children freeze, a step already taken in a nearby town. Truckloads of wood are arriving from Bulgaria as families search for alternative fuels.

      The Price Of “Collective Trauma”: Greece At The Brink of Civil War - “I’m wondering how much this society can endure before it explodes,” said Georg Pieper, a German psychotherapist who specializes in treating post-traumatic stress disorders following catastrophes, large accidents (including the deadliest train wreck ever in Germany), acts of violence, freed hostages…. But now he was talking about Greece. He’d spent several days in Athens to give continuing education courses in trauma therapy for psychologist, psychiatrists, and doctors. He was accompanied by Melanie Mühl, an editor at the daily paper Frankfurter Allgemeine. And in her report, she decries how “news consumers” in Germany were fed the crisis in Greece. It was “no more than a distant threat somewhere on the horizon,” defined by barely understood terms, such as bank bailout, haircut, billion-euro holes, mismanagement, Troika, debt buyback…. “Instead of understanding the global context, we see a serious-faced Angela Merkel getting out of dark limos in Berlin, Brussels or elsewhere, on the way to the next summit where the bailout of Greece, and thus of Europe, is to be moved forward another step” But what is really happening in Greece is silenced to death in the media. There were pregnant women rushing from hospital to hospital, begging to be admitted to give birth. They had no health insurance and no money, and no one wanted to help them. People who used to be middle class were picking through discarded fruit and vegetables off the street as the stands from a farmers’ market were being taken down.

      The Probability of Greek Exit, Revisited - Yves here. This VoxEU post gives a back-of-the-envelope estimate of the odds of Greek exit from the Eurozone. In case you find the result to be reassuring, in the runup to the financial crisis, yours truly pegged the odds of a very very bad outcome at 20% to 30%, which I considered to be scarily high given the consequences (mind you, I didn’t see the alternative as good outcomes, merely less than a full blown Japan-style bubble aftermath). Keep in mind that the conventional wisdom among most economists and Eurocrats is that the cost to Greece of leaving to the country itself is so high that it will never happen. But revolutions also typically make conditions for ordinary people much worse before any improvements take place. When people are desperate, they will lash out against their perceived oppressors. Whether Greece gets to that point, and how it would escalate, are very much open questions.

      For Spaniards, having a job no longer guarantees a paycheck — Over the past two years, Ana María Molina Cuevas, 36, has worked five shifts a week in a ceramics factory on the outskirts of this city, hand-rolling paint onto tiles. But at the end of the month, she often went unpaid. Still, she kept showing up, trying to keep her frustration under control. If she quit, she reasoned, she might never get her money. And besides, where was she going to find another job? Last month, she was down to about $130 in her bank account with a mortgage payment due. “On the days you get paid,” she said at home with her disabled husband and young daughter, “it is like the sun has risen three times. It is a day of joy.” Mrs. Molina, who is owed about $13,000 by the factory, is hardly alone. Being paid for the work you do is no longer something that can be counted on in Spain, as this country struggles through its fourth year of an economic crisis. With the regional and municipal governments deeply in debt, even workers like bus drivers and health care attendants, dependent on government financing for their salaries, are not always paid. But few workers in this situation believe they have any choice but to stick it out, and none wanted to name their employers, to protect both the companies and their jobs. They try to manage their lives with occasional checks and partial payments on random dates — never sure whether they will get what they are owed in the end. Spain’s unemployment rate is the highest in the euro zone at more than 25 percent, and despite the government’s labor reforms, the rate has continued to rise month after month.

      The insufferable human drama of evictions in Spain - Recent months have seen a wave of high-profile suicides by people who were about to be evicted from their homes. The most paradigmatic case was that of a 53-year-old woman in the Basque Country, who jumped from her balcony and plunged to death as foreclosure agents made their way up the stairs of her apartment. The Wall Street Journal, meanwhile, tells the harrowing story of a Spanish locksmith who was taken aback when he pried open the door of a foreclosed apartment for police, and encountered a woman giving birth inside. According to the locksmith, it was “evident that the stress of the foreclosure had induced premature birth.” Since then, a number of high judges have spoken out against the “inhumane” foreclosure laws in Spain, which they consider to be “overly protective of the politically influential banks”. Under immense media pressure, the conservative government finally passed an emergency law allowing the most vulnerable families to be spared from eviction. Still, the new law will only cover some 120.000 people and does not tackle the root of the problem, which is the fact that the government keeps squeezing workers, students, homeowners, pensioners and the sick and disabled in order to pay for the folly of a tiny elite of gambling bankers. The human tragedy, after all, is only part of the story. The other part, as the Spanish indignados rightly point out, is the estafa: the fraud. Many of the mortgages that now shackle millions of families to unpayable debt loads, came about under highly dubious circumstances to begin with. The banks never cared if people would be able to repay their debts: as long as house prices kept rising, a defaulting family could still be evicted and replaced by another. After the bank reclaimed the property, it could just re-sell it at a profit. The fact that lives are being destroyed and families shattered in the process is wholly irrelevant for the financial imperatives of the bank.

      Spain Bad Loans Ratio Surges to 11.23% as Defaults Climb -- Bad loans as a proportion of total lending at Spanish banks climbed to a record 11.23 percent in October as the country’s economic slump led more companies and homeowners to miss credit payments. The proportion rose from 10.71 percent in September as 7.4 billion euros ($9.8 billion) of loans soured in the month to take the total of doubtful credit in the banking system to 189.6 billion euros, the Bank of Spain said on its website today. The mortgage default rate jumped to 3.49 percent in the third quarter from 3.16 percent in the second quarter, the Bank of Spain said. Spain’s economic slump, now in its fifth year, continues to drive defaults to record highs as lenders report rising impairments of corporate, home and consumer loans as well as those linked to real estate. Doubts about the ability of Spain’s weaker lenders to withstand mounting impairments of loans linked to real estate helped push the country to seek a European bailout for its banking system in June.

      Loan Default Rate Hits 11.23% in Spain, a New Record; Construction Defaults Hit 26.4%; Credit Plunges 5% - Via Google translate El Blog Salmon reports Delinquencies expose the shame of Spanish banks How could it be otherwise, the delinquency has grown back no more and no less than 11.23% during the month of October. The figure represents a new record, exposing the shame of Spanish banks. The figures from the Bank of Spain dating 189,618,000 euros in loans considered doubtful of Spanish credit institutions. Obviously, the construction sector is the hardest hit of all the arrears of the companies related to fire brick defaults in its sector to 26.4%. The worst part is that nothing suggests that delinquencies have peaked, rather the opposite. In the coming months the arrears continue to set new records because it is now that the financial sector of our country is teaching the true reality of credit in Spain. Refinancing only served to prolong the agony and convey a false sense of calm in the sector. Also via Google translate from Spanish, the Guru's Blog provides interesting charts and commentary in Banking delinquency rises to 11.23% in October. New record We began to enter the area of ​​record breaking month after month. In October defaults on loans to financial institutions and businesses in October amounted to 11.23% , which marks a new record.

      Prices of repossessed homes in Spain fall 65% - PRICES of repossessed homes sold by banks in Spain have fallen 65% this year, according to a report by ratings agency Fitch. The drop represents the sharpest decline in prices since the financial crisis began and suggests prices have fallen more than twice as much as government figures show. The decline is relative to the property’s value when the initial loan was granted, with the average price of repossessed homes having fallen 50% since 2007. “Fitch believes that the factors weighing on the Spanish residential property market will continue to deteriorate,” the report states. “The gap between original valuation and the sale price is a reflection of a distressed mortgage market, characterised by high borrower indebtedness, constrained affordability and falling property prices.” More than a million new homes remain unsold in Spain, while Spanish banks have seized more than 200,000 residential properties, leaving the market saturated.

      Spain 2012 Deficit Slippage Looms as Recession Deepens - Spain will struggle to meet its 2012 deficit target as a contracting economy hinders the impact of the deepest budget cuts in the nation’s democratic history, Deputy Budget Minister Marta Fernandez Curras said. “It will be difficult, but who says it’s impossible?” Curras told reporters in Madrid yesterday evening after Budget Ministry data showed the central-government’s shortfall through November was 4.37 percent of gross domestic product. Curras said the social security system, combining Spain’s tax-funded pensions and unemployment insurance, is expected to register a gap of around 1 percent of output in 2012. The central government and social security together have a full-year deficit goal of 4.5 percent. For now, Prime Minister Mariano Rajoy’s government has ruled out seeking European aid to curb a surge in borrowing costs while acknowledging Spain may miss its deficit target. The Brussels-based European Commission suspended its budget-cut prescriptions for the nation last month as the euro region sank into a recession.

      Insane Clown Posse - A friend of mine, the proud owner of three fancy restaurants in Emilia-Romagna, Italy, has no doubt about which way he's going to vote in the upcoming elections. "Voto Grillo," he tells me. "I'll vote for Grillo." My cousin, a highbrow math teacher, will also vote for Grillo. "Basta ladri," he tells me. "I'm fed up with thieves." Ride a bus, catch a plane, or join a line at a soccer stadium anywhere in Italy these days, and you're likely to hear someone call out, "I'm for Grillo." In the general election ballot now scheduled for February, following the surprising call by Prime Minister Mario Monti that he will step down, at least 20 percent of voters are expected to cast their ballot for Beppe Grillo, making this former television comedian one of Italy's next kingmakers. So who is this guy? Savior of the country or hapless populist? Robin Hood-cum-Garibaldi or cult leader? And just how did this tubby, gray-bearded ranter burst onto Italy's political scene?

      Berlusconi: "Italy May Be Forced To Leave The Eurozone And Return To The Lira" - Reminding the world of just the kind of truthiness that got him sacked originally by that other Italian, the Ex-Goldmanite Mario Draghi, back in November 2011, and which the world has to look forward to when Silvio Berlusconi returns to power some time in 2013, even if not as PM (a position he currently has a snowball's chance in hell of regaining based on current political polls), Reuters informs us that the Italian, who certainly has not read the Goldman book on status quo perpetuation, just said the unimaginable: the truth. To wit: "If Germany doesn't accept that the ECB must be a real central bank, if interest rates don't come down, we will be forced to leave the euro and return to our own currency in order to be competitive." Berlusconi said in comments reported by Italian news agencies Ansa and Agi. The 76-year-old media tycoon has made similar remarks in the past about the possibility of Italy, or even Germany, leaving the euro, but has often at least partially rectified them later." Not this time. Now with Germany and the Buba folding like a broken chair, Silvio is coming back and knows he can demand anything and everything, and Germany has no choice but to accept, Merkel reelection in a few months be damned.

      Monti Quits as Italian Premier, Clearing Way for Election -  Italian Prime Minister Mario Monti resigned, ending a 13-month tenure and clearing the way for elections that will focus on his crisis-fighting austerity policies. The appointed premier submitted his resignation yesterday to President Giorgio Napolitano, according to a statement from the president’s office. Napolitano asked Monti’s Cabinet to remain in power to handle routine government administration. Monti stepped down after lawmakers passed a 2013 budget law. The president has suggested Feb. 24 as the date for elections.Monti took over last year just as Italy risked becoming the next victim of Europe’s debt turmoil under former Premier Silvio Berlusconi. While he’s overseen a recovery in Italy’s bonds and repaired its tattered standing abroad, his agenda left Italians with higher taxes, rising unemployment and a shrinking economy. Monti, who has never sought elected office, may use a press conference tomorrow to announce whether he’ll sit out the election, or heed the call of a group of centrist political parties who want him to run on a platform of continued reforms for the euro zone’s third-largest economy.

      Merkel warns on cost of welfare - Europe will have to “work very hard” to maintain the most generous welfare system in the world and remain globally competitive, said Angela Merkel, the German chancellor, in an interview with the Financial Times. The key to Europe’s ability to survive the challenge of globalisation is to spend more on research and education and overhaul its tax and labour markets to restore competitiveness, she said. An unrepentant Ms Merkel, regarded by many Europeans as the author of excess austerity to curb the debt crisis in the eurozone, spelt out her determination at last week’s EU summit in Brussels to see her partners commit themselves to binding contracts for more structural reform. No final agreement was reached, but details of such contracts between eurozone countries and the European Commission are supposed to be finalised in the next six months.

      Bundesbank sees "noticeable" German GDP shrinkage - Germany's economy is headed for a "noticeable" contraction in the current quarter and will probably tread water early next year, the country's central bank wrote in its monthly report Monday, reiterating the downbeat forecast it issued earlier this month. The outlook comes as some major sentiment reports suggest that the economy, Europe's largest and one that has remained largely immune from the euro-zone crisis, could be bottoming out. "Current indicators point to a noticeable drop in economic production at the end of the year," largely due to weakness in the country's key industrial sector, the Bundesbank wrote. The outlook for German companies has "deteriorated" amid a slowdown in global growth and falling demand from the rest of the euro zone, it said. Earlier this month, the Bundesbank slashed its forecast for German growth next year to 0.4% from its June estimate of 1.6%, and warned that the nation may sink into recession over the winter months.

      Bundesbank’s downside forecast - I was feeling a little more confident in the German economy after last Friday’s PMIs, but the Bundesbank’s latest monthly report that came out overnight (German only) has put a bit of a dampener on that evaluation. I ran the summary from the report through the translator and, although it is a bit rough, you can get the overall idea. The economic performance in Germany is in the final quarter of 2012 is not expected to come close to the level of activity of the summer. After the gross domestic product (GDP) in the third quarter seasonally adjusted still up by 0.2%, the current exhibit in indicators point to a significant decline in overall production at year-end. The current weakness trend is mainly driven by the industry, which has significantly reduced their production recently. This is especially true for manufacturers of capital goods that suffer the severe restraint both domestic and foreign clients on the acquisition of new machinery and equipment. While the demand is for industrial goods from the domestic market and the euro continues downward, recently were significantly more orders from third countries, which was also due to some global settings. Positively true that the export expectations have returned to positive territory. In connection with the improvement of the business expectations, this could indicate that the cyclical weakness could be overcome in Germany soon.

      Young French Lose Hope as Prospects Fade - Youth unemployment in France has been high for some time, but it has now climbed to 26 percent. For decades, regardless of their political affiliation, lawmakers have been promising to create a better situation for young people. But exactly the opposite has happened. Labor laws protect those who already enjoy steady jobs, while the economic crisis and recession have limited the number of new jobs created. Meanwhile, housing has become both scarcer and pricier.  Some 23 percent of the country's 18- to 24-year-olds live in poverty, according to a study by the National Institute for Youth and Community Education (INJEP). These are mainly high school or university dropouts who have little to no access to health care and limited chances of improving their situations.

      French in Denial as Crisis Deepens - In the midst of the economic crisis, France's Socialists are denying reality. The minister of industrial renewal is calling for nationalization of some industries, while the president shies away from necessary structural reforms. Business leaders fear the clock has been turned back 30 years.  France's business leaders felt as if they had been set back 30 years, to a time when the first Socialist president of the Fifth Republic, François Mitterrand, began his term with a wave of nationalizations and, after two years, was forced to reverse his policy. Some even drew a comparison with 1945, when the government nationalized automaker Renault after accusing it of having collaborated with the enemy. Wasn't Montebourg, who had always been an eloquent preacher of deglobalization, dividing business owners into different camps, good and evil, patriotic and unpatriotic? The liberal economist Nicolas Baverez, who predicted "France's downfall" 10 years ago and has just written a book titled "Réveillez-Vous" ("Wake Up"), saw the wrangling over Florange as proof that the French left still hasn't accepted globalization, and acts as if the country were an economic and cultural preserve. "The idea of nationalization sends an ominous message to all investors," Baverez said.

      A Revolt Against Corporate Welfare Programs For Multinationals In France - “Foreign Investment Paradox” is what the New York Times called France’s ability to attract €42.5 billion in foreign investment through October this year. Only China and the US were ahead for the first two quarters. A paradox because it shouldn’t happen. Investors should be scared off by restrictive labor laws, high income-tax rates, high cost of labor, and now the mud-wrestling bouts over nationalizing some industrial plants [Nationalizations Take Off In France]. But turns out, astute multinational corporations pay practically no income tax.  But companies, like TI, that are packing up their marbles are not subtracted from the foreign investment total. Yet France can be a veritable gold mine: it offers tax credits of 30% of R&D expenditures of up to €100 million. For the first two years, these credits are even higher. A huge benefit for small companies. “You can recoup a lot of your R&D expenses,” said Gene Bajorinas, Vice President of Novian Health, a biotech outfit from Chicago. “It’s an ideal scenario.” As for large companies, the article cites other benefits—an educated workforce, infrastructure, and so on—to explain why Google located its headquarters for southern Europe in Paris, why Amazon is building a second distribution center, and why 171 foreign companies set up manufacturing plants in 2011, way ahead of Germany and the UK. A phenomenon Ernst and Young partner Marc Lhermitte called “paradoxical.”

      IMF Warns Europe to Commit to Debt Deal for Ireland to Exit Bailout - The International Monetary Fund Wednesday gave a stark warning that Europe must deliver on “commitments” it made to help Ireland finance its huge bank-rescue debts, if the country is to emerge from its bailout program on schedule at the end of next year. Ireland has to date met its bailout targets, but the euro-zone authorities have so far failed to detail ways Ireland might refinance legacy bank-related debts through the European Stability Mechanism, the area’s rescue fund, and whether the country will qualify for the European Central Bank’s so-called Outright Monetary Transactions program, the bond-buying plan for troubled euro nations, the IMF said in a staff report

      Moody’s Getting No Respect as Bonds Shun 56% of Country Ratings - The global bond market disagreed with Moody’s Investors Service and Standard & Poor’s more often than not this year when the companies told investors that governments were becoming safer or more risky.  Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of the 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974. This year, investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P.  For national debt, following decisions of the arbiters of credit risk is less reliable than flipping a coin for determining borrowing costs. While the companies face legal proceedings and more regulation after contributing to the worst financial calamity since the Great Depression, politicians cite the grades as one reason for austerity when Europe is in recession and the Federal Reserve has cut its growth forecast.

      UBS faces $1.6 billion fine over Libor rigging: paper - UBS faces a fine of 1.5 billion Swiss francs ($1.63 billion) to settle interest rate rigging charges, a Swiss newspaper reported on Saturday. Citing unnamed sources, Tages-Anzeiger daily said the bank would admit 36 traders around the globe manipulated yen Libor between 2005 and 2010. A UBS spokesman declined to comment. People familiar with the matter told Reuters on Friday UBS could reach a $1-billion-plus settlement and admit to criminal wrongdoing by its Japanese arm, where one of its traders manipulated yen Libor and euroyen contracts. Between 25 and 30 people have left UBS over the matter, the sources said. The Swiss bank had hoped for a softer touch from regulators by cooperating in industry-wide probes and was surprised by the size of the expected settlement, they added. A 1.5 billion franc settlement would be the biggest ever paid by the bank, recovering from a $2.3-billion trading fraud by London-based trader Kweku Adoboli for which it was fined 30 million pounds ($48.36 million) last month.

      Hidden Risks Plague Euro-Zone Bank Oversight Plan - Der Spiegel -  The agreement reached by European leaders and their finance ministers during last week's summits in Brussels could ultimately destroy Merkel's reputation as a level-headed and firm savior of the common currency.  Her strategy in the crisis has long been praised for being one focused on a series of systematic small steps. The results of last week's negotiations, however, can best be described as large steps backwards. Merkel has tirelessly called for EU leaders to push forward with the political integration of Europe. But at the most recent EU summit, she personally ensured that plans to that effect, created by European Council President Herman Van Rompuy, didn't even make it onto the agenda. At the same time, German Foreign Minister Wolfgang Schäuble voted in favor of a new banking supervisory agency under the authority of the European Central Bank. It is a plan that Germany's own central bankers view with concern. Lawyers at the Bundesbank object that the responsibilities of the new super-agency remain nebulous. The project has no "lasting, sustainable legal foundation," they say.

      PIIGS Unemployment - The above shows the latest data on unemployment in the distressed Eurozone countries.  Ireland seems to have at least stabilized, but not started to recover.  Everywhere else still seems to be actively getting worse.  Greece and Spain in particular are vying for who can dive into the abyss faster. This has got to be the largest policy failure in the developed world since the second world war.  While Europe is less prominent in the news presently, these countries cannot be considered safe or stable as long as their unemployment curves are doing this.

      EU Car Sales Drop 14th Consecutive Month; Car Sales Plunge 20.1% in Italy, 20.3% in Spain, 19.2% in France, 3.5% in Germany, Rise in UK - Car sales are up in the UK, but down 10% on average in the EU. Overall sales, including the UK, are down for the 14th consecutive month. From Google Translate Car sales plunge another 10% in Europe and UK only growsIn the markets of the European Union, in November, with the same computation of working days in November 2011, highlights the sharp rise of 11.3% for the UK, while other high-volume markets have reduced their records: 3.5% in Germany, 19.2% in France, 20.1% in Italy, and 20.3% in Spain. From January to November, the scenario is similar, with the UK as the only major market expansion (+5.4%) and Germany (-1.7%), Spain (-12.6%), France (-13.8%) and Italy (-19.7%) in contraction.The used passenger car market declined 5.6% These are dismal numbers with pronounced deterioration in Spain, France, and Germany.

      Cyprus uses pension money to pay holiday salaries - Cyprus' cash-strapped government had to get loans from state-owned companies to make sure it could pay its own workers' salaries during the holiday period, officials said Monday. Finance Ministry Permanent Secretary Christos Patsalides had urged three big companies to agree to lend (EURO)250 million ($329 million) from their pension pots in order to prevent a meltdown of the state's finances. All three indicated that they would be willing to do so. "What would be the outcome if these additional financing needs aren't secured? We'll be talking about the state declaring a suspension of payments in the next few days," Patsalides had told the Parliamentary Finance Committee before the companies agreed to the loan.

      Newest EU members go cooler on euro - The enthusiasm for the euro is cooling among the EU’s newest members in eastern Europe, as Latvia’s prime minister warned that his citizens are turning against the single currency. Valdis Dombrovskis, who led one of Europe’s toughest austerity programmes in part to keep Latvia’s euro membership hopes alive, says he faces a struggle to get the Baltic republic into the single currency by the 2014 target.  “Five years ago before the eurozone crisis everyone wanted to enter the euro, but we weren’t economically ready. Now that we are ready to enter, many have become sceptical,” said the centre-right leader. Bulgaria, which like the Baltic states has pegged its currency to the euro for a decade and is one of only three EU countries that currently meet the Maastricht entry criteria in full, has recently made clear it has no short-term plans to move towards membership. Boyko Borisov, prime minister, told the FT recently his government had no plans to join until the eurozone crisis was over. The EU’s poorest country should not have to help fund bailouts of richer states, he said.

      Carney under pressure as battle for Basel III rages - Financial protectionism and US intransigence blight the Basel III drive, testing the mettle of Basel’s chief cheerleaders, Bank of England governor-designate Mark Carney and Swedish central bank governor Stefan Ingves. The post-Lehman bid to craft harmonized global banking standards is under severe strain amid a global policy rift and fierce lobbying. Global policymakers are understandably putting on a brave face when touting progress made in implementing the Basel III accord, even after the US announced earlier this year it would postpone the January 2013 start date, triggering the ire of EU banks and calls for a tit-for-tat delay. “[Nearly] 90% of the US financial system is on a path to Basel III,” Mark Carney, Bank of Canada governor, and chairman of the Financial Stability Board (FSB) at Basel, said on December 11 in a speech to the Toronto CFA Society. “So the facts on the ground are that the core of the US banking system has built...around $300 billion of capital. It is being stress-tested back to Basel III norms, and so the core – not just the core but 90% of the US financial system – is on a path to Basel III."

      Risky banks should be split-up, says parliamentary Commission - Britain's largest banks face the constant threat of being split-up if plans to ring-fence their operation do not make them less risky, according to recommendations from the Parliamentary Commission on Banking Standards. Banks should face the constant threat of being broken up if they present a risk to the financial system, according to the recommendations of an influential group of MPs and Lords. Regulators should be given the “reserve power” to force the total separation of retail and investment banking businesses, while bank chiefs who do not ensure there is a clear division could be prosecuted, the Commission said. The Commission published its pre-legislative report on the draft Bank Reform Bill on Friday, two days after Swiss bank UBS was fined £940m by regulators in the UK, US and Switzerland for manipulating the key Libor rate on an "epic scale" and two former traders at the bank were charged with conspiracy. In what will be seen as a major challenge to the Government’s reform of the banking industry, it recommends the so-called “electrification” of the Government’s ring fence of major lenders that will require them to create a firewall between their deposit-taking arms and their riskier investment banking activities.

      U.K. Recovery Weaker Than Estimated as Deficit Widens: Economy -- Britain’s economy expanded less than previously estimated in the third quarter and the budget deficit unexpectedly widened in November, complicating Prime Minister David Cameron’s attempts to bolster the recovery. Gross domestic product rose 0.9 percent from the second quarter, down from a previous estimate of 1 percent, the Office for National Statistics said today in London. The deficit excluding government support for banks was 17.5 billion pounds ($28 billion), which compared with 16.3 billion pounds a year earlier and the median forecast of 16 billion pounds in a Bloomberg News survey of 19 economists. The Office for Budget Responsibility cut its growth forecasts this month and said Chancellor of the Exchequer George Osborne will miss his target of cutting the burden of government debt by 2015, prompting warnings that Britain could lose its top credit rating. The third-quarter growth surge may prove short lived, with the Bank of England warning the economy may shrink this quarter and forecasting stagnant output in the near term.

      What's Wrong With the UK Economy? - Last week, I looked at the UK economy's problems.  Here are some more great observations:  The UK government debt has low interest rates now because growth is low and demand for safe assets is high. British interest rates decline in response to bad news on growth, and market measures of the riskiness of gilts increase when interest rates and growth drop.  The opposite should hold – rates and market risk should rise together – if indebtedness were markets’ concern.  They don’t and it isn’t.   Private UK businesses have kept adding workers in recent years (albeit some part-time or temporary) because they view future prospects as unchanged or better.  Employers only increase staff in a flexible decentralized labour market like Britain’s when they think wage costs are competitive.  The opposite should hold – declining growth and wages should lead to permanent cuts in employment – if UK potential growth was down for most businesses.  They didn’t and it isn’t. The spreads between the interest rates that small businesses and first time mortgage borrowers must pay for loans versus established large borrowers, and the fees that those new borrowers are charged have gone up and stayed up.  If there were lack of demand for investment, the interest rates and fees that banks could charge for loans would be declining – they are rising instead.

      Oil's a drag on the economy: energy boost needed - Once it was common to think of Britain's economy as being comprised of two distinct parts. There was the onshore, or non-oil economy, and often - I am talking about three decades ago here - its performance was underwhelming. Then there was the oil economy, booming as a result of the opening up of the North Sea as one of the world’s most important sources of oil and gas from the 1970s. Combine the two and you got a healthy growth picture. Exclude oil and things were not nearly as strong.Today, the picture is reversed. The non-oil economy is far from strong but it is growing. Output in the oil economy, by contrast, is falling fast.  A few days ago we had another instalment of the economic puzzle. There was a big, 82,000 fall in unemployment over the latest three months and, official figures showed, a net rise in employment of 499,000 over the past 12 months. At a time when the economy has not grown at all, according to the gross domestic product figures, employment has risen by nearly half a million - to its highest ever number of 29.6m - and hours worked and vacancies have both increases sharply.

      Nearly half of families are worried about debts as toxic combination of runaway inflation and low wage growth means they struggle to make ends meet - Nearly half of all households in Britain are worried about their debts as the squeeze on family finances intensifies, the Bank of England warns today. A toxic combination of runaway inflation and low wage growth has left millions struggling to make ends meet in the run up to Christmas. The average household is now £22 a month worse off than they were a year ago, according to a study from the Bank, blowing a £264 hole in annual family budgets.Bank governor Sir Mervyn King has described it as the biggest squeeze on incomes since the 1920s. The Bank’s quarterly bulletin, published today, shows 11.25million households in Britain are now ‘very concerned’ or ‘somewhat concerned’ about their debts. Many have cut their spending, looked for extra work or even asked for financial help from relatives as the longest downturn for a century takes its toll.

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