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

Saturday, December 8, 2012

week ending Dec 8

Fed's Balance Sheet Grows in Latest Week -- The Fed's asset holdings in the week ended Dec. 5 increased to $2.861 trillion, up from $2.853 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities increased to $1.654 trillion on Wednesday from $1.647 trillion a week earlier. The central bank's holdings of mortgage-backed securities edged up to $883.65 billion from $883.54 billion a week ago. In September the Fed began buying $40 billion a month of additional mortgage-backed securities on an open-ended basis. Fed officials have said that they plan to continue buying bonds until the labor market improves significantly. Thursday's report showed total borrowing from the Fed's discount lending window was $959 million Wednesday, down from $1.02 billion a week earlier. Commercial banks borrowed $2 million Wednesday, down from $56 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts rose to $3.204 trillion, up from $3.202 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.850 trillion, up from $2.849 trillion in the previous week. Holdings of agency securities rose to $317.68 billion, up from the prior week's $317.02 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--December 6, 2012

Fed’s Rosengren Supports Bond Buying Into 2013 - Underwhelming U.S. economic activity will require the Federal Reserve to continue forward with its aggressive stimulus programs, and expand its balance sheet with new bond buying in the new year, a key central bank official said Monday. “Given the tepid economic recovery, high unemployment, and subdued inflation–and the uncertainty around fiscal policy–I believe an accommodative monetary policy is quite appropriate,” Federal Reserve Bank of Boston President Eric Rosengren said. “We want to see continued improvement in labor markets in the near term, and monetary policy should encourage faster economic growth to achieve that objective,” he said in the text of a speech prepared for delivery at a conference on the mortgage market, held at the New York Fed.

Fed’s Dudley Says MBS Buying Is Helping Economy - Declining mortgage rates show Federal Reserve monetary-policy stimulus is having an impact, a key Fed official said Monday. Since launching an open-ended mortgage bond-buying program in September, agency mortgage-bond securities rates have declined, and “this is solid evidence that our policy has been, and continues to be, effective–though it is certainly not all-powerful in current circumstances,” Federal Reserve Bank of New York President William Dudley said.

Key Fed Officials Laud Mortgage Buying - Key Federal Reserve officials have been offering effusive praise of the central bank’s mortgage bond-buying program, calling it a powerful tool to boost economic growth.The comments, which come ahead of next week’s policy meeting, suggest the effort will continue for months to come. There may even be some appetite to expand the initiative as they weigh a replacement for a soon-to-end program that adds long-dated government bonds to the Fed’s holdings.At the same time, some economists note cross currents buffeting bond markets that make it hard to gauge the true success of the buying. What’s more, they say the Fed may face real supply constraints in the agency mortgage bond market, limiting its ability to ramp up purchases without distorting the market.

Fed lowers mortgage rates without "printing money"  - The Fed remains in a holding pattern. Just as comparison, take a look at the pace of MBS purchases during QE1 in 2009 versus the current pace of expansion.More importantly, bank reserves are basically holding flat... ... and so is the overall monetary base (effectively no new base money has been created since the start of the QE3 program).Just the "threat" of open-ended MBS purchases by the Fed has created demand for agency MBS (see discussion), pushing MBS yields to new lows. That in return has sent mortgage rates to record lows as well. In fact today even as the 30y fixed rate hovers above absolute lows, the 15y fixed and the 30y jumbo both hit records. If lowering mortgage rates was what the Fed intended to accomplish with the latest monetary expansion, the central bank has succeeded. And so far they have done it without a significant change in bank reserves. Whether this will translate into improved economic activity and job growth remains to be seen (see discussion).

Fed Watch: Monetary Policy to Become Easier Next Week? - There are two important issues to be discussed at next week's FOMC meeting. One is the issue of specific thresholds as future policy guides. The second is the replacement for Operation Twist. Clearly, support is building for specific thresholds, and I believe policymakers will work out the details within the next meeting or two. Also, I think the general sense is that the Fed will continue to purchase long-term Treasuries after Operation Twist is complete. But will they continue to purchase the full $45 billion a month? That seems like it should be an open question, but it looks like momentum is building in that direction. St. Louis Federal Reserve President James Bullard offered his thoughts on both these topics yesterday. On the first point, he offers support for replacing the forward guidance with a set of thresholds. I don't find this to be surprising. Bullard has never been a huge fan of the time commitment implied in the current statement. Not only does it send a pessimistic signal about the economy, in theory it should respond more flexibly to evolving economic events. But in practice, the Fed is only willing to alter the date in the event of a substantial shift in the economic outlook.  Bullard cites the 6.5/2.5 unemployment/inflation thresholds recently described by Chicago Federal Reserve President Charles Evans. I am not sure that Bullard specifically endorses these figures, but he may sense the political wind is blowing in that direction.  Bullard then shifts gears to Operation Twist. Currently, large scale asset purchases come in two flavors. One is $40 billion a month in outright mortgage purchases (QE3), the other a monthly swap of $45 billion in short-term Treasuries for an equal amount of long-term Treasuries (Operation Twist). The former is open-ended, the latter concludes this month. Should it be fully converted to an outright asset purchase program? San Francisco Federal Reserve President John Williams gave his opinion last month:

Monetary Policy and Metaphysics – How Economists Try to Naturalise Terrible Policies and Disappear Into Their Own Theories - Yves here. Philip Pilkington makes an interesting argument in this post, namely, that the method preferred among mainstream economists for managing the economy encourages investors to speculate in financial instruments rather than invest in real economy assets and projects.

How cancelling central banks' holdings of government debt could be a useful thing -- We’ve run a couple of posts here on FTAV recently about how cancellation of QE debt isn’t really such a big deal: more an accounting change than anything material because both treasuries and central banks are part of the public sector. Here is an argument that this mere accounting exercise could be worthwhile — particularly if the debt-laden developed countries descend into another downturn. The reason is that, going into a crisis this time around, the leverage would be too damn high. The argument is from Morgan Stanley cross-asset strategist Gerard Minack, who says the remarkable thing about developed economy deleveraging is how little of it has happenedThe credit super-cycle ended four years ago, but leverage has hardly fallen in major economies: debt-to-GDP ratios remain historically high. Exhibit 1 shows total debt/GDP in the G3 (US, Europe, Japan).  Soo… why so much debt, then? Particularly when corporates and households are trying hard to delever? Minack says the problem is some of that deleveraging (particularly for households) is being tackled by saving more, but that won’t solve the problem, or at least not very quickly. This is because of *what* the borrowings were used to finance: mostly pre-existing assets (that were forecast to rise in value) rather than expenditure.

Why (or Why Not) Keep Paying Interest on Excess Reserves?  - NY Fed - In the fall of 2008, the Fed added new policy tools to its portfolio of techniques for implementing monetary policy. In particular, since October 9, 2008, depository institutions in the United States have been paid interest on the balances they hold overnight at Federal Reserve Banks (see Federal Reserve Board announcement). Several other central banks, such as the European Central Bank (ECB) and the central banks of Canada, England, and Australia, have somewhat similar deposit facilities allowing banks to earn overnight rates on their balances. In this post, I discuss the benefits and costs of this new tool in an environment where excess reserves in the United States have now exceeded $1.4 trillion and account for close to 95 percent of all reserves.

Not so great expectations - THOSE who criticise central banks for having acted with insufficient vigour generally argue that they have failed to talk a good game. Paul Krugman and Michael Woodford are among the best-known advocates of this view. The underlying theory is that the expectation of faster consumer price inflation causes prices to rise more rapidly as people attempt to offset the anticipated erosion of their purchasing power by spending more on goods and services. According to this model, central banks theoretically have the power to lower real borrowing costs and real debt burdens (and real wages) even when nominal interest rates have hit 0%, simply by talking convincingly. The existence of this Jedi mind trick might be desirable given the economy’s weakness. However, it is possible that simply asserting a tolerance for faster inflation over a given period of time or, more radically, altering the inflation target, might actually be counterproductive if the Fed does not—or cannot—generate sufficient increases in wages and prices. If people's expectations of inflation overshoot what they actually end up enduring, the consequence could be a nasty recession.

The Fed Credibility Argument - For once a short post, inspired by Simon Wren’s suggestion that the Fed should allow (encourage) a temporary rise in wage inflation. (The merits of such a policy being obvious to many of us given the current virtues of some extra inflation, and past decades’ wage trends.) I’ve never understood the credibility danger of the Fed announcing and executing a temporary increase in the inflation target. If the Fed said “we’re going to let (wage) inflation float a bit higher until the economy’s moving strongly back up toward capacity, then we’ll bring it back down,” and then did exactly that, wouldn’t that greatly enhance its reputation for being able to control inflation?

Explaining the Fed Credibility Argument - Following up on my last post, I actually think that there are two possible explanations for the “Fed Credibility” argument’s wide deployment, both hinted at in Simon’s response to my comment: I think the credibility argument is really about the underlying motives of the policymakers, rather than their abilities. However I also think that argument is overdone – it takes a few generations to forget the lessons of the past, and policymakers are still obsessed with the 1970s. In my words, two possibilities:

  • 1. It’s a smokescreen. Actual reason: Creditors hate (unexpected) inflation. One extra percentage point transfers hundreds of billions of dollars of buying power from creditors to debtors, annually. ‘Nuf to get a fellow’s attention. The Fed is run by creditors.
  • 2. (70s) They actually are worried — that the higher inflation target won’t work in goosing the economy or employment, so they’ll run into a stagflation situation where stomping on (spiraling?) inflation is…problematic. So they won’t be able to fulfill the second half of their promise without causing a job recession a la Volcker. Rock and a hard place.

Two Measures of Inflation: New Update - I've updated the accompanying charts with the latest Personal Consumption Expenditures price index from the Bureau of Economic Analysis. The annualized rate of change is calculated to two decimal places for more precision in the side-by-side comparison with the Consumer Price Index.  The BEA's Personal Consumption Expenditures Chain-type Price Index for October shows core inflation below the Federal Reserve's 2% target at 1.56%. The Core Consumer Price Index, also data through October, is spot on target at 2.00%. The Fed is on record as using PCE as its primary inflation gauge:  The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. [Source]  The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 1.08% was an all-time low. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both well off their respective interim highs set in September.

What to expect when you're expecting faster growth - EARLY this week, my colleague questioned the wisdom of encouraging central banks to raise inflation expectations. Having written (once or twice) on why doing so is in fact a good idea, I thought I'd respond to a few points. There are a few ways to make the argument in favour of raising inflation expectations. First, it is a continuation of standard interest policy in the unusual circumstance that the policy rate falls to near zero. When demand is too low, the central bank tries to raise it by adjusting the interest rate in order to reduce desired saving and raise desired borrowing and investing. When the nominal policy rate falls to near zero, higher inflation allows the central bank to keep pushing the real interest rate into negative territory. Higher inflation expectations are also a means to address stubbornly sticky wages and prices. Weak demand implies that there is insufficient total spending in the economy to employ available resources. The prices of those resources (like labour) could fall in response in order to prevent or eliminate a glut (unemployment). But if prices are sticky, and they are, then the process of adjustment can be slow and painful. Faster inflation helps address the problem by accelerating the downward adjustment of the real cost of labour in sectors where wages are too high.

Data revisions mean more of the same - Revisions to some of the key indicators bring us back to the same old story-- the U.S. economy continues to grow, but at a slower rate than any of us would like.The Bureau of Economic Analysis released on Thursday a revised estimate that U.S. real GDP grew at a 2.7% annual rate in the third quarter, up from the initial estimate of 2%. So things are better than we thought? Not really. The revised figures do show an improvement of 0.4 percentage points in the contribution of exports, which are now claimed to have added about 0.2 percentage points to the 2.7% growth figure instead of subtracting 0.2% as originally reported. But this was erased by a 0.4 percentage point reduction in the contribution of consumption spending. More than all of the reported improvement from 2% to 2.7% GDP growth could be attributed to a higher rate of inventory accumulation than previously estimated. To put it another way, real final sales for the third quarter were originally reported to have grown at a 2.1% annual rate, whereas the new numbers have the figure at only 1.9%. The bottom line is that growth in demand for U.S. goods and services overall remains weak, even weaker than originally reported.

Fed’s Bullard Sees 3% or Better Economic Growth if ‘Fiscal Cliff’ Is Averted - The Federal Reserve should dial back its purchases of long-term U.S. Treasury securities in 2013, James Bullard, president of the Federal Reserve Bank of St. Louis said in an interview with The Wall Street Journal. His comments come ahead of the Fed’s Dec. 11-12 policy meeting, in which officials will be deciding what to do about an expiring program of government bond purchases. Under the expiring program, known as Operation Twist, the Fed is buying $45 billion per month of long-term Treasury securities and selling a like amount of short-term securities. The purpose of the program is to drive down long-term interest rates. Operation Twist expires this month. Because the Fed is running out of short-term securities to sell to fund these purchases under this program, it is looking as an alternative at outright purchases of Treasurys, funded by the creation of new bank reserves, which amounts to money printing.

JPM Cuts Q4 GDP Forecast to 1.5%, Now Sees iPhone Sales Contribute 33% Of Growth Upside -- Remember Michael Feroli? The JPM economist who "predicted" US Q4 GDP would be boosted by 0.5% due to iPhone sales (don't laugh: yes, US GDP, not that of China where the iPhone is actually produced, but the US where the consumer merely incurs more record student loans to be able to afford it)? Well, the same JPMorganite has now cut his Q4 GDP expectation to 1.5% for all the same reasons why we penned the second Q3 GDP revision: namely ugly internals, a surge in hollow government and inventory contributions to "growth", and a collapse in the purchasing power of the US consumer (who somehow is still expected to boost Q4 GDP with iPhone sales). And while there is no mention of the iPhone in his just released downward revision, he still believes the cell phone will provide a boost to Q4 GDP. In other words, of the 1.5% in GDP growth in Q4, the iPhone will account for 33% of this! One really can not make this up.

Goldman cuts US Q4 GDP forecast to 1% (annualized) - As discussed earlier (see post), US manufacturing data for November shows shrinking inventories. This is true for both the ISM survey well as the Markit PMI index:  Goldman looks at the change in private inventories (also called "inventory investment") as a good predictor of GDP growth. The Q3 GDP exhibited relatively strong inventory accumulation, which is being reversed this quarter (as the charts above show). GS: - Inventory investment is often an important contributor to quarterly fluctuations in real GDP. Most recently, real GDP growth in Q3 saw a sizable boost from inventory accumulation. ... Given the soft early indicators from business sentiment surveys to date, and our own econometric analysis, we expect that the boost to GDP growth from inventory investment seen last quarter will not persist into Q4. Inventories will probably be a moderate drag on GDP growth into year-end. The recent decline in the series is consistent with a moderation in inventory investment in the current quarter, and hence a decline in the contribution from inventory investment to real GDP growth. A simple regression of quarterly inventory investment on our indicator [R-squared = 0.8] suggests that inventory accumulation could fall by $34 billion in Q4 ($135 billion at an annual rate) to $27 billion, enough to detract roughly a full percentage point from Q4 real GDP growth if taken at face value.

Fourth Quarter Likely to Deliver Economic Lump of Coal - In a best-case scenario, the economy would be heading out of 2012 with enough momentum to offset the fiscal drag coming in 2013. But this is not a best-case scenario. Some forecasters now see fourth-quarter growth being so meager the economy might as well be in recession. Growth is slowing even before the economy gets hit by resolution of the fiscal cliff that will likely involve some combination of tax increases and spending cuts next year. The biggest slash came from economists at the Royal Bank of Canada. RBC, which has been pessimistic on the U.S. economy for most of the year, thinks real GDP is rising at just a 0.2% annual rate, down from their earlier estimate of 1%.

A Slow Growth Rate Is the Real Threat - WITH the budget-and-tax showdown dominating headlines, most Americans probably missed an even more ominous story: according to a report by the Congressional Budget Office, America’s underlying growth rate — that is, the best the economy could do, under optimal conditions, without driving up inflation — has slowed from just under 4 percent a year in 2000 to just under 2 percent today. Why does this matter? For one thing, the combination of a lower underlying growth rate, which you could think of as the economy’s speed limit, and a less equitable distribution of that growth was a reason middle-income households did so badly and poverty went up in the 2000s. Why has the underlying growth rate slowed? It’s actually pretty simple: growth is determined by the supply of labor and capital — i.e., people and machines — and how efficiently we use those inputs to make the output, or gross domestic product. According to the report, we’re slipping on all fronts. As baby boomers head toward retirement, the growth of the labor force is decelerating; it is expected to grow about half as fast over the next decade as over the last. This problem was exacerbated by the deep recession, as even younger un- and underemployed workers got discouraged with their job prospects and left the job market (though many will be back when things pick up). Also, for years the influx of women into the labor force raised the economy’s speed limit; that trend plateaued about a decade ago.

Muddling Towards the Next Crisis: James Kenneth Galbraith in conversation with The Straddler -I think there is a tendency on the left to underestimate the success of the programs that created and sustained the middle class and the middle class mentality. There’s a tendency to focus on some statistical aspects of what’s happened to wages—median wages in particular—and to focus less on the role played by Medicaid, Medicare, Social Security, the housing programs, public education, and support for higher education, all of which gave us a population that had the attributes of a middle class society. The story that is often told about what’s happened to factory jobs, and what’s happened to wage rates, is not a good way of getting at the threat to that existence. The typical story is that median wages peaked in 1972 and have been stagnant and falling since then. As a result, it must be the case that people who are working now are much worse off than they were ten, fifteen, twenty years ago. That’s not an accurate story—at least not up until the crisis in 2008—because over that period the labor force became younger, more female, more minority, and more immigrant. All of these groups start at relatively low wages, and they all then tend to have upward trajectories. So there’s no reason to believe that life was getting worse for members of the workforce in general. On the contrary, for most members of the workforce it was still getting better.  The real threat to the middle class is not there, it’s in the erosion of the programs I just mentioned. That is to say, it’s in the attack on the public schools, it’s in the squeeze on higher education, it’s in the threat to Social Security. Millions of people have been displaced, but many, many more have lost the capital value of their homes. They won’t be able to sell and retire on the proceeds.

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

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

The weight of these four in the decision process is sufficient rationale for the St. Louis FRED repository to feature a chart four-pack of these indicators along with the statement that "the charts plot four main economic indicators tracked by the NBER dating committee." Here are the four as identified in the Federal Reserve Economic Data repository. See the data specifics in the linked PDF file with details on the calculation of two of the indicators/. This morning we got the first of the Big Four for November: Nonfarm Payrolls from the BLS, the blue line in the chart below.  At this point, the average of the Big Four (the gray line in the chart above) shows us that economic expansion since the last recession has been hovering around a flat line for the past seven months.

Paul Krugman Will Not Like These Figures - David Beckworth - See if you can figure out why: This first figure shows that aggregate demand growth has not been affected by a tightening of fiscal policy since 2010.  Specifically, it shows that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures. The same story emerges if we look at the budget deficit relative to NGDP growth: Both figures seriously undermine the argument for coutercyclical fiscal policy and suggest a very a low fiscal multiplier.  They also indicate that the Fed has been doing a remarkable job keeping NGDP growth stable around 4.5%. Monetary policy, in other words, appears to be dominating fiscal policy in terms of stabilizing aggregate demand growth.  This in turn implies that the Fiscal Cliff should not be a big deal if the Fed continues to stabilize NGDP growth around 4.5%. Yes, there would still be distributional and incentive changes if fiscal consolidation occurs, but the fiscal tightening itself should have no bearing on aggregate demand if the Fed continues to do its job. As I noted before, the Fed is the other solution to the Fiscal Cliff.  Lars Christensen agrees.

David Beckworth might be very wrong about the multiplier - Noah Smith - Via Tyler Cowen, I see that David Beckworth is claiming that recent events prove that the "fiscal multiplier" is very low. In a post entitled "Paul Krugman will not like these figures", Beckworth writes:This first figure shows that aggregate demand growth has not been affected by a tightening of fiscal policy since 2010.  Specifically, it shows that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures. The same story emerges if we look at the budget deficit relative to NGDP growth: Both figures seriously undermine the argument for coutercyclical fiscal policy and suggest a very a low fiscal multiplier.  Monetary policy, in other words, appears to be dominating fiscal policy in terms of stabilizing aggregate demand growth.Beckworth's conclusion is not necessarily valid, and illustrates the danger in drawing conclusions about structural variables from looking at correlations between macroeconomic aggregates. Here's why the conclusion might not be valid:Suppose that Keynesian demand management policy works perfectly: in other words, fiscal stimulus perfectly smooths fluctuations in aggregate demand. In that case, you will observe substantial swings in fiscal policy, but no swings whatsoever in aggregate demand. Beckworth's graphs give no measure of external shocks; hence, they are perfectly consistent with the idea that fiscal stimulus was allowed to wind down as the economy naturally recovered. (Tyler points this out.)

Paul Krugman Will Like These Figures - Okay, that title’s just riffing off of David Beckworth’s recent post titled “Paul Krugman Will Not Like These Figures”.  I really have no idea if Paul Krugman will actually like these figures.  My guess is he’ll actually hate them because they’ll show why the declining deficit is creating downside risk to economic growth.  But that’s just a guess. Anyhow, earlier this week David Beckworth (whose work I think is excellent) posted a chart (in the link above) showing how fiscal contraction in the USA hasn’t actually resulted in a decline in nominal GDP.  He’s right.  But I don’t think the story is as simple as his post implies.We focus a lot of time at Monetary Realism (also see here) on a multi-sectoral view of the economy.  The entire focus of our equation S=I+(S-I) is to drive home the point that saving is more complex than simply saying “the government’s deficit is the non-government’s surplus”.  Paul Krugman touched on this point earlier this year when he showed the chart below (see here).  That meshed well with the work we do on S=I+(S-I) because it showed the substantial improvement in gross domestic private investment relative to gross private saving

Evidence in Macroeconomics - Paul Krugman -- Noah Smith is right in his takedown of David Beckworth’s latest attempt to denigrate fiscal policy, but goes too far in his nihilism. What Beckworth does is show that there isn’t a correlation between either federal expenditures or the federal deficit and nominal GDP growth in recent years; Noah’s point is that fiscal policy is endogenous, affected by the state of the economy. When things seemed to be collapsing, Washington managed to pass a stimulus bill; when they stopped collapsing, the stimulus was allowed to fade away. So? It is, by the way, kind of dispiriting to see this kind of argument still being trotted out four years into this whole debate — and presented as if it were something new, too. Been there, addressed that; is it really so hard to make any sort of progress here? Anyway, where Noah goes too far is in asserting that this kind of thing means that we basically know nothing. Um, no — good economists have been aware of this problem for a long time, and serious work on both monetary and fiscal policy takes it into account.

Vital Signs Chart: Dollar Weakening Against China’s Currency - The dollar is depreciating against China’s currency. One dollar buys 6.2267 yuan, one of the lowest levels since China launched a modernized currency-trading system in 1994. Last week, the U.S. Treasury Department repeated that China’s currency remains “significantly undervalued” but declined again to label Beijing a currency manipulator.

Treasury Scarcity to Grow as Fed Buys 90% of New U.S. Bonds -- Even as U.S. government debt swells to more than $16 trillion, Treasuries and other dollar fixed- income securities will be in short supply next year as the Federal Reserve soaks up almost all the net new bonds. The government will reduce net sales by $250 billion from the $1.2 trillion of bills, notes and bonds issued in fiscal 2012 ended Sept. 30, a survey of 18 primary dealers found. At the same time, the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co. Even after U.S. public borrowings outstanding grew from less than $9 trillion in 2007 as the U.S. raised cash to pay for spending programs designed to pull the economy out of the worst financial crisis since the Great Depression, rising demand coupled with a drop in net supply means bonds will be scarce. “The shrinking amount of bonds in the market is lowering rates and not just benefiting the Treasury, but providing lower rates for private-sector decision-makers as well,”

Treasury Yield Update -  I've updated the charts below through today's close.  Here is a snapshot of selected yields and the 30-year fixed mortgage starting shortly before the Fed announced Operation Twist. For a eye-opening context on the 30-year fixed, here is the complete Freddie Mac survey data from the Fed's repository. Many first-wave boomers (my household included) were buying homes in the early 1980s. At its peak in October 1981, the 30-year fixed was at 18.63 percent. The 30-year fixed mortgage at the current level is a confirmation of a key aspect of the Fed's QE success, and the low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries (although the yields are up from recent historic lows of this summer). The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR.

"Voluntary Financial Repression" and Fiscal Policy - Brad DeLong - One potentially-important case outside the standard framework for thinking about fiscal policy in a depressed economy is the following: What if interest rates remained depressed not just for the short but for the long term as well? Call this case one of "voluntary financial repression". In it, the risk tolerance of investors is so low and the ability of private-sector investment banks to create safe assets is so impaired that investors are willing to pay the government to move their purchasing power forward in time. The economy is not dynamically sufficient in any standard sense, but the interest rate r on Treasury debt is lower than the growth rate g of the economy. There is then no binding government budget constraint. And the math then tells us that the government should borrow and spend--and then borrow and spend some more until it has pushed the interest rate on its Treasury debt back up above the growth rate of the economy and there is a binding government budget constraint once more. Note that this case of "voluntary financial repression" is profoundly different from other episodes of financial repression. In the past situations in which Treasury bonds have carried negative real interest rates have arisen because of government policies that require financial intermediaries to hold excessive amounts of Treasury debt. The standard argument is then that the apparent free lunch of government borrowing offered by financial repression is really the collection of an inefficient tax on banking customers. The ultra-low interest rates on Treasury debt are a regulatory tax ultimately paid by banking customers and collected for the government by the banks.

A Meme for Money, Part 1: Introduction -- L. Randall Wray - Outside of the crazies, everyone knows the US government cannot run out of money. From Greenspan to Bernanke they all understand there is zero risk of involuntary default by the sovereign issuer of a currency. And so the way that an MMTer approaches the current deficit hysteria is by pointing out that as the Federal government spends through keystrokes that credit bank accounts, it can afford anything for sale in dollars. The reaction typically goes through four stages:

  • 1. Incredulity: That’s Crazy!
  • 2. Fear: Zimbabwe! Weimar!
  • 3. Moral Indignation: You’d destroy our economy!
  • 4. Anger: You’re a Dirty Pinko Commie Fascist!

And those are our Post Keynesian/Heterodox friends. The reaction of others is far more hostile. Rather than winning the debate about unsustainability of debt and deficits, MMT loses the argument. How can that be? Because it’s immoral for the government to spend through the stroke of a key.

A Meme For Money, Part 2: The Conservative Framing -- L. Randall Wray - We all know the usual approach to money, that begins with a fantasized story about barter, the search for an efficient medium of exchange, the role of the goldsmith, and then on to the gold standard, the deposit multiplier, fiat money, and monetary neutrality—at least in the long run. It provides a perspective on the nature of money, on the primary functions of money, and on rules for proper monetary management. It frames all mainstream discussions of money—whether by economists, by policymakers and by the population at large. To put it the way that economists usually do, money “lubricates” the market mechanism—a good thing because the conventional view of the market, itself, is overwhelmingly positive. The market “meme” frames our view of the economy and society, too—the market is the place we go to exercise choice, to assert our individuality, to catch and bring home prey to the adoring family. The king of the market, of course is the highly vaunted, entrepreneurial small businessman (gender specific) who provisions society with useful work as well as consumption goods and services. Each productive member of society is appropriately rewarded with money which preserves the freedom to choose how to apportion his claim on output in a manner consistent with preferences.  It is a beautiful meme, entirely consistent with the individualistic sentiment that has dominated public discussion since Margaret Thatcher asserted that there is no such thing as society. We need an alternative meme, one that provides a frame that is consistent with a progressive social view. To be sure, in my view the conventional story is wrong—it is inconsistent with the findings of historians, anthropologists, legal scholars, sociologists, and political scientists. I’d prefer a meme that is more consistent with these findings.

A Meme for Money, Part 3: Framing the Alternative ApproachL. Randall Wray - In Part 2 we looked at the mainstream framing of discussion about money and about the economy and society more generally. Following Lakoff, my argument is that framing is important and that so far orthodoxy is winning all of the important policy debates because it has the better framing. Policy is always and everywhere a moral issue—not merely an economic issue and certainly not a technical issue. To win policy debates, we must—like orthodoxy—engage the moral issues. We can take the higher moral ground. The approach that I take is the Modern Money Theory (MMT) approach. In the discussion that follows, I will presume that readers have a working understanding of MMT.[1] It goes without saying that I believe MMT provides a correct description of the operation of modern monetary systems, so it makes sense to base our alternative meme on the correct approach to money. However, this particular post is not so much concerned with a correct theory, but rather with developing a progressive meme for money—a story of money’s origins, nature, functions, and operations that can serve as an alternative to the orthodox story briefly presented last time.

A Meme For Money, Part 4: The Alternative Tax Meme - L. Randall Wray - According to the orthodox meme, taxes are bad—the far right views them as outright theft—so the lower they are, the better. Most view taxes as necessary to “pay for” government spending, but again since in the conservative framing, government does next to nothing that is useful this represents a redistribution from productive, private, use to public waste. Hence, again, it is best to keep taxes as low as possible to “starve the beast” and to keep the private sector humming along. Yet, from the state money view, the monetary system that we’ve actually inherited is a state money system. And from that framing, the most important purpose of taxes is to create a demand for the state’s money (specifically, for its currency). Further, as we’ll see, the state really does not need tax revenue to spend and in fact really cannot spend tax revenue. Our meme: taxes create a demand for the currency, ensuring willing sellers of goods and services for money.Taxes serve two other important purposes, too. They can be used to regulate demand—by increasing costs and reducing net income. And sin taxes are used to reduce socially undesirable behavior (or tax credits are used to reward good behavior). Another use of taxes is to prevent accumulation of wealth over generations—the so-called “death tax”—although it is doubtful that in practice inheritance taxes are very effective. However, Jamie Galbraith has argued that inheritance taxes do drive charitable contributions—including university endowments—which supports a large non-profit sector serving the public interest alongside government. So in addition to driving money, taxes can be used to further the public purpose.

Paying for Lunch – MMT Style -- A common criticism of Modern Monetary Theory is that it is a naïve doctrine of free lunches.  The critics grant that a country like the United States, which issues its own freely floating fiat currency, can always make the policy choice to issue whatever quantity of that currency it deems appropriate.  The US government can spend as many dollars into the private sector economy as it chooses, without obtaining those dollars from some other source first, and it can always pay any debts that have been incurred by borrowing dollars.  But the critics will go on to charge that MMT mistakenly concludes from these few institutional and operational facts that there are no economic limits to the wealth-generating capacities of the government.  They caricature MMT as a doctrine of manna from heaven, in which the power of issuing a generally accepted medium of exchange confers the power of conjuring real wealth into existence by prestidigitation.   In short, they see MMT as a disordered syndrome characterizing people who are experiencing massive money illusion.  But this criticism misses the mark.  MMT does focus a good deal of attention on the monetary system and the banking system, and on the operational mechanisms of public and private finance.  But the whole point of analyzing and clarifying the monetary system is to help people see through the glare of the economy’s glittering monetary surface to the social and economic fundamentals that operate below that surface.  The point is certainly not to deny real limits on our capacity for economic development and progress, but to correctly identify where those limits lie – and where they don’t.  

New Records for Fiscal and Regulatory Irresponsibility - From 2009 to 2012, the US federal deficit shrank from 10.1% of GDP to 7% of GDP.  That’s the fastest deficit reduction we’ve seen in six decades—and all before the fiscal cliff has kicked in.  Here’s the chart from Jed Graham: Put this alongside a record-setting contraction of government employment and a 7.9 percent unemployment rate, and what you have is a portrait of fiscal irresponsibility.  A lot of this deficit reduction has to do with the fact that the economy is now growing (albeit feebly), instead of contracting, but looking at this chart should also reinforce how dangerous and unnecessary it is that we’ve decided to create an austerity crisis at this moment.  (This “austerity crisis,” by the way, should really be understood to include both the possibility of going over, and staying over, the fiscal cliff AND the possibility of the cliff being replaced by a “grand bargain” on deficit reduction.)  The last time the deficit was reduced at a faster rate was in 1937, when the government embraced a hard pivot to austerity and the economy tumbled back into recession.

Treasury Won’t Sell Assets to Buy Debt Limit Time - The Treasury Department has ruled out the sale of assets to buy more time before hitting the federal debt limit, a senior official said. “We do not believe that the sale of public assets, such as gold or other holdings, would be a viable or prudent course in the face of inaction by Congress on debt-limit legislation,” Assistant Secretary for Legislative Affairs Alastair Fitzpayne said in a letter to lawmakers. The debt ceiling has again moved into the spotlight as the White House and congressional Republicans spar over a tax and spending package that would avert the so-called fiscal cliff. As part of the talks, the Obama administration last week proposed a mechanism that would allow the president to increase the debt limit unless Congress can summon enough votes in both parties to block the move. That would likely avoid a replay of last year’s debt ceiling showdown, when a protracted fight over the matter undermined confidence, forced the government to pay additional interest costs and led Standard & Poor’s to strip the U.S. government of its top-notch debt rating.

The Debt Limit Is the Real Fiscal Cliff - Washington is all abuzz over the impending tax increases and spending cuts referred to as the fiscal cliff, an absurdly inaccurate term that both Democrats and Republicans have unfortunately adopted in order to pursue their own agendas. In truth, it is a nonproblem unless every impending tax increase and spending cut takes effect permanently – something so unlikely as to be effectively impossible. In my opinion, the fiscal cliff is akin to the so-called Y2K problem in late 1999, when many people worried that computers would freeze, elevators would stop running and planes would fall from the sky. Of course, nothing of the kind happened. So if the fiscal cliff is a faux problem, why do we hear that industry and financial markets are deeply fearful of it? The answer is that there is a very real fiscal problem that will occur almost simultaneously – expiration of the debt limit. Much of what passes for fiscal-cliff concern is actually anxiety about whether Republicans in Congress will force a default on the nation’s debt in pursuit of their radical agenda. No less an authority than the anti-tax activist Grover Norquist, who basically controls the Republican Party’s fiscal policy, has said repeatedly that the debt limit is where the real fight will be over the next several weeks. In a Nov. 28 interview with Politico’s Mike Allen, he was asked about the leverage President Obama has over Republicans in the fiscal-cliff debate. Mr. Norquist replied that Republicans have vastly more leverage when it comes to the debt limit.

Again with the Debt Ceiling??!! - I know…I can’t bear to go into it either.  But just because we’re still flirting with the idea of going over the fiscal cliff doesn’t mean we shouldn’t start getting nervous about the next trap Congress is contemplating setting for the American economy.  Really, with policy makers like these, who needs national enemies? I simply can’t bear to go back into this now–I posted a lot on it back in the day.So, let me hand the reins over to Crystal Ball, who provided a wonderfully entertaining rant on this on the Cycle today, and to the NYT, which posted an excellent editorial on the debt ceiling’s increasingly nerve-wracking relation to the cliff debate. Here’s some good advice from that piece:Mr. Obama said firmly on Wednesday that he had no intention of playing the Republican debt ceiling game again. This time he might want to enlist the help of every American who holds federal, state or municipal bonds, investments that would be under threat in a debt crisis. If nothing else works, he should cite the 14th Amendment’s ban on questioning the public debt, and declare an end to the debt ceiling once and for all. The country can no longer tolerate government by brinkmanship and extortion.

How to Fix the Debt Ceiling (A Bigger Threat than the Fiscal Cliff) - Failure to raise the debt limit in time to prevent default would not only create fiscal havoc internally, it could trigger an unraveling of the world’s confidence in the U.S. dollar and its Treasury securities. Because the dollar is the world’s preferred reserve currency, the “dollar economy” currently extends far beyond U.S.  borders. If worldwide confidence in the dollar began to erode, foreign countries’ desires to roll their maturing U.S. debt securities into new ones would erode as well, which would only compound the negative consequences for our economy. Again, however, the default disaster is easily avoidable — which begs the question, why not simply continue to increase the self-imposed debt ceiling? After all, it’s just a number thought up by members of Congress, who, for the last century, have been raising it just in time to avoid a first-ever default. The debt ceiling has done little if any good, but retains the potential to do catastrophic harm. Our economic history shows that debt growing in tandem with (or slightly in advance of) economic growth is harmless, even desirable. As it is currently defined, the debt ceiling is a nuke in a suicide vest. Congress invented it, Congress is wearing it, and Congress has learned how to use it to threaten opposing-party presidents. The good news is that Congress has the power to disarm it, throw it away, and replace it with something better. It’s time for Congress to do just that.

How could Washington avoid a debt ceiling default? Mint a few trillion dollar platinum coins. Seriously  - While raising the US debt ceiling has not gotten as much attention — yet — as the risk of falling off the fiscal cliff, it soon will. The limit will likely be hit by year end. And if Congress fails to raise the borrowing cap, the Treasury would likely run out of money-management options to avoid a default some time in the February. So what to do? Analyst Chris Krueger at Guggenheim Securities’s Washington Research Group outlines four options. Pay particular attention #4:

    • 1. Traditional Raise.  This would involve a straight raise in the debt ceiling without any Congressional strings or new/alternative mechanisms. 
    • 2. Raise by Congressional Disapproval.  This is the system engineered last summer.  Essentially, the Congress passes a motion of disapproval to raise the debt ceiling, Obama vetoes, and the Congress fails to override the veto. 
    • 3.  Constitutional Option.  The 14th Amendment of the Constitution states the validity of the public debt shall not be questioned.  Under this option, Obama would invoke the 14th Amendment and unilaterally raise the debt ceiling – a move that was encouraged by former President Clinton last summer in the height of the debt ceiling stare down.  This option would trigger a wave of lawsuits and a likely Supreme Court decision. 
    • 4. Platinum Coin Option.  This is even more theoretical than the Constitutional Option, though some argue that it is a stronger legal option.  There are limits on how much paper money the U.S. can circulate and rules that govern coinage on gold, silver, and copper.  BUT, the Treasury has broad discretion on coins made from platinum.  The theory goes that the U.S. Mint would create a handful of trillion dollar (or more) platinum coins.  The President would then order the coins deposited at the Fed, who would then put the coin (s) in the Treasury who now can pay all their bills and a default is removed from the equation.  The effects on the currency market and inflation are unclear, to say the least. 

Trillion dollar platinum coin - Here's one of the wilder suggestions floating around for what the President could do if Congress fails to raise the debt ceiling. The U.S. Treasury has an account with the Fed. When you write a check to the IRS, your bank's account with the Fed is debited and the Treasury's account is credited. The Treasury can use those funds to buy anything it wants, by instructing the Fed to transfer those reserves back to some bank to whose customer the Treasury wishes to make a payment. Although Congress has prescribed limits on the Treasury's ability to print currency or mint coins of copper, nickel, silver, or gold, the law specifically says that there are no restrictions on what kind of platinum coins might be issued: This provision was intended to allow the Treasury to create special platinum coins for collectors, and American Platinum Eagle coins have been issued in denominations up to $100. So what if Secretary Geithner's discretion led him to mint a couple of trillion dollar American Platinum Eagles? What would the Treasury do with a trillion dollar coin, you ask? Why, deposit it in their account with the Fed, of course. The Fed would then credit the Treasury's account with 1 trillion dollars. The Treasury could in turn then order the Fed to transfer those reserves to the accounts of any banks to whom the Treasury owes money. The result is that the Treasury's bills are all paid with money that would be newly created by the Fed.

The Best Idea for the Debt Ceiling? Abolish It Forever - There are countless ways to criticize the debt ceiling -- it's a tax on the majority party; a high-stakes yes-or-yes question; a weird, mandatory hostage crisis -- but they all arrive at the same conclusion, which is that it's a really dumb idea. The case for the debt ceiling might go something like this. Just as cars need brakes, and Ulysses needed a mast, governments need restraints. The U.S. government's ability to borrow debt has no actual limit. We will probably run deficits, large and small, for every year in the life of the republic, just as we have in our two-and-a-half-century history. But we have installed a ceiling for the purpose of forcing lawmakers to reflect on our debt and consider the tradeoffs of borrowing. In theory, restraint is a nice idea. In practice, here's how it works out.  The minority party votes against the debt limit, stealing the moment to abuse the majority about its policies -- that's why it's a tax on the majority. Then, the party in power votes in unison to raise the limit, because doing otherwise would scare international markets half to death -- that's why it's a high-stakes yes-or-yes question. And then, a few years later, the roles switch, and the abused party because the abuser -- thus re-staging our weird, mandatory hostage crisis once again.

What I Did Not Get to Say on NPR’s On Point This MorningStephanie Kelton - This morning, I appeared on Tom Ashbrook’s radio show, along with Paul Krugman and Stan Collender.  I wish there had been more time to explore Paul Krugman’s very important point that one sector’s deficit spending becomes another sector’s surplus.  This is a core point that we make all of the time on this blog.  Cutting the deficit cuts the non-government surplus dollar-for-dollar.  So any plan to cut $4 trillion in deficit spending is a plan to reduce the non-government surplus by $4 trillion.  The ordinary American will gleefully support deficit reduction (as polling shows), but I’m confident that you’d get a very different reaction if you asked them whether they support cutting their own surplus by trillions of dollars.  Almost no one recognizes that the former implies the latter. The point I make all the time is this: as long as the country — any country — runs a current account deficit (which the US does), the government’s deficit will need to be at least as large as the current account deficit, or the private sector will be in deficit.  Bigger government deficits mean, ceteris paribus, bigger private sector surpluses.  And deficit reduction means a reduction in the private sector surplus as shown below.  It’s hard to make this point in a compelling way without the visuals, which is why it works better on C-SPAN than on NPR.  But Krugman brought it up, and it is a point that progressives should work hard to emphasize.

U.S. Debt Problems: Brewing for Decades - A lot of folks have a version of chronic fatigue syndrome when the topic of budget deficits comes up. After all, wasn't there a big spat over budget deficits through most of the 1980s and into the 1990s? And wasn't there a big spat over deficits through the middle years of the George W. Bush presidency in the mid-2000s? Every time you turn around the last few years, it feels like the federal government is about to the official "debt ceiling" Thus, it's important to understand that America's current trajectory of deficits and debt is not just one more round  of political games.  What's often hard to explain is that the U.S. deficit and debt problem isn't (yet) an emergency situation that is likely to rock the U.S. economy in the next year or two or three. There's still some time for adjustments. But we really don't want to waste that time. Daniel Thornton offers useful overview and insights in "The U.S. Deficit/Debt Problem:A Longer-Run Perspective," in the November/December 2012 issue of the Review published by the Federal Reserve Bank of St. Louis. For starters, here's a figure showing U.S. annual budget deficits over time going back to 1800. There are five episodes of major budget deficits in the history of the U.S. government: the Civil War, World War I, the Great Depression, World War II, and the last few years. The deficits of the last few years don't match those of the major wars in U.S. history, but as a share of GDP, they do exceed the deficits of the Great Depression.

Democrats watch in awe as McConnell filibusters himself - Senate Minority Leader Mitch McConnell (R-KY) introduced legislation to raise the debt ceiling on Thursday, apparently with the intent of showing that even Democrats would not support such a bill. However, McConnell’s plan backfired after Senate Majority Leader Harry Reid (D-NV) called for a vote on the legislation, which would have given the president the authority to raise the federal debt ceiling on his own. The top Senate Republican was forced to filibuster his own bill. “What we have here is a case of Republicans here in the Senate once again not taking ‘yes’ for an answer,” Reid said, after McConnell announced his filibuster. “This morning the Republican leader asked consent to have a vote on this proposal, just now I told everyone we were willing to have that vote — up or down vote. Now the Republican leader objects to his own idea. So I guess we have a filibuster of his own bill, so I object.”

What Defines A Serious Deficit Proposal? - Paul Krugman  - Just a thought: if you follow the pundit discussion of matters fiscal, you get the definite impression that some kinds of deficit reduction are considered “serious”, while others are not. In particular, the Obama administration’s call for higher revenue through increased taxes on high incomes — which actually goes considerably beyond just letting the Bush tax cuts for the top end expire — gets treated with an unmistakable sneer in much political discussion, as if it were a trivial thing, more about staking out a populist position than it is about getting real on red ink. On the other hand, the idea of raising the age of Medicare eligibility gets very respectful treatment — now that’s serious. So I thought I’d look at the dollars and cents — and even I am somewhat shocked. Those tax hikes would raise $1.6 trillion over the next decade; according to the CBO, raising the Medicare age would save $113 billion in federal funds over the next decade. So, the non-serious proposal would reduce the deficit 14 times as much as the serious proposal.I guess we have to understand the definition of serious: a proposal is only serious if it punishes the poor and the middle class.

The Big Budget Mumble, by Paul Krugman - In the ongoing battle of the budget, President Obama has done something very cruel. Declaring that this time he won’t negotiate with himself, he has refused to lay out a proposal reflecting what he thinks Republicans want. Instead, he has demanded that Republicans themselves say, explicitly, what they want. And guess what: They can’t or won’t do it.  Here’s where we are right now: As his opening bid in negotiations, Mr. Obama has proposed raising about $1.6 trillion in additional revenue over the next decade, with the majority coming from letting the high-end Bush tax cuts expire and the rest from measures to limit tax deductions. He would also cut spending by about $400 billion, through such measures as giving Medicare the ability to bargain for lower drug prices.  Republicans have howled in outrage. Senator Orrin Hatch, delivering the G.O.P. reply to the president’s weekly address, denounced the offer as a case of “bait and switch,” bearing no relationship to what Mr. Obama ran on in the election. In fact, however, the offer is more or less the same as Mr. Obama’s original 2013 budget proposal and also closely tracks his campaign literature.  So what are Republicans offering as an alternative? They say they want to rely mainly on spending cuts instead. Which spending cuts? Ah, that’s a mystery. The veil lifted a bit when Senator Mitch McConnell, in an interview with The Wall Street Journal, finally mentioned a few things — raising the Medicare eligibility age, increasing Medicare premiums for high-income beneficiaries and changing the inflation adjustment for Social Security. But it’s not clear whether these represent an official negotiating position — and in any case, the arithmetic just doesn’t work.

It's Health Care Costs, Stupid - Krugman - In today’s column, I tried to emphasize a point that is weirdly absent from public discourse, at least among VSPs: the favorite VSP “solution” to the long-run budget deficit, raising the Medicare eligibility age, actually yields only minor savings. The point is that if you want to control Medicare costs, you can’t do it by kicking a small number of relatively young seniors off the program; to control costs, you have to, you know, control costs. And the truth is that we know a lot about how to do that — after all, every other advanced country has much lower health costs than we do, and even within the US, the VHA and even Medicaid are much better at controlling costs than Medicare, and even more so relative to private insurance.The key is having a health insurance system that can say no — no, we won’t pay premium prices for drugs that are little if any better, we won’t pay for medical procedures that yield little or no benefit But even as Republicans demand “entitlement reform”, they are dead set against anything like that. Bargaining over drug prices? Horrors! The Independent Payment Advisory Board? Death panels! They refuse to contemplate using approaches that have worked around the world; the only solution they will countenance is the solution that has never worked anywhere, namely, converting Medicare into an underfunded voucher system.

The Real Fiscal Risks in the United States - Simon Johnson - A great deal of attention is currently focused on the notion that a “fiscal cliff” of higher taxes and spending cuts awaits at the end of this year. The good news is that politicians are finally talking about the budget – and working hard to communicate their competing messages regarding what should be done to put public finance on a more sustainable footing. The bad news is that almost the entire national conversation on deficits and debts misses the real fiscal risks that we face.  First, the main risk is that in the near future the government will do too little by way of fiscal adjustment. The drama of the word “cliff” and the image of falling off it makes things seem more worse than they are. To be sure, if all the scheduled tax increases and spending cuts go into effect, 2013 would be a difficult year – although there is no sign that this kind of fiscal adjustment would lead to the problems of the financial crisis of 2008. The politicians will do a deal.  It will be much easier to reach an agreement in January or February, when tax rates have gone up — which they will do automatically, if there is no agreement by Dec. 31. But the deal to be struck between the White House and the Republican House will probably be too small to adequately address our fiscal issues. If we want to start putting federal government debt on a more sustainable path, we should find a path to fiscal adjustment that undoes the net effect on the budget of the George W. Bush-era tax cuts, which represent about $4 trillion over the next 10 years. You can do that through revenue or through spending reductions, but that is the right goal to aim for – putting our federal finances back closer to where they were in the late 1990s.(For a primer, I recommend this piece by my colleague James Kwak.)

Entitlements Scare Tactics - A friend asked me about last week’s WSJ op-ed by Christopher Cox and Bill Archer claiming that the government’s true liabilities exceed $86 trillion—not the  $16 trillion national debt that people usually talk about. There’s something to it, but there’s also a huge scary story in there that’s purely meant to frighten people. $16 trillion is the amount of Treasury debt outstanding at the moment. The more relevant figure is the amount of debt the federal government owes to people and institutions other than itself. If, for some reason, I lent money to my wife and she promised to pay it back to me, we wouldn’t count that as part of the debt owed by our household. The debt owed to the public is about $10 trillion these days. So where do Cox and Archer get $86 trillion? They are counting the present value of future unfunded liabilities. To take one example, if you add up all the money that Medicare Part A is expected to pay out over the next 75 years and figure out how much it would be worth today, you get a total of $21.2 trillion. If you add up all the money that Medicare Part A will bring in from payroll taxes and do the same, you get $15.6 trillion. So to make Medicare Part A balance over seventy-five years, the government would have to have $5.6 trillion that it doesn’t have today. Do the same for all of Medicare and you get a total of $38.6 trillion. This is all from Table V.F2 on page 238 of the latest trustees’ report on the Medicare trust funds. (Cox and Archer have $42.8 trillion in their op-ed; maybe they’re using an infinite time horizon instead of a 75-year timeframe.) But what does $86 trillion mean? Is it a lot or a little? And this is where Cox and Archer start telling silly stories meant to scare people. They claim that “to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually.” This is wrong on two levels.

A Symbolic Slaying - The fiscal cliff negotiation is no better than a skirmish in what promises to be an epic ten-year struggle to achieve a new fiscal compact. For evidence of that, consider Warren Buffett’s entry into the debate last week, with a suggestion that negotiators seek to bring in revenues at 18.5 percent and cap spending at about 21 percent of GDP Those were levels that had been sustained over long periods of time in the past, Buffett wrote in an op-ed column in The New York Times; they could be reached again relatively quickly. His targets wouldn’t reduce the deficit, he wrote, but they would maintain a stable ratio of debt to output.It was the right argument, but Buffett had the wrong numbers. He apparently borrowed them from the National Commission on Fiscal Responsibility and Reform, led by Erskine Bowes and Alan Simpson, now more than two years old. The first to say so was Matt Miller, a former McKinsey consultant and Clinton era advisor to the Office of Management and Budget,  along with Ezra Klein, also of the Post. If only because of the aging of the baby boom, Miller wrote, the future isn’t going to be like the past.  The number of seniors on Social Security and Medicare will nearly double in the next fifteen years, to around 77 million persons.

It’s Official: Austerity Economics Doesn’t Work, by John Cassidy: With all the theatrics going on in Washington, you might well have missed the most important political and economic news of the week: an official confirmation from the United Kingdom that austerity policies don’t work. ...One of the frustrations of economics is that it is hard to carry out scientific experiments and prove things beyond reasonable doubt. But  ... what has been happening in Britain amounts to a “natural experiment” to test the efficacy of austerity economics. That austerity has led to recession is undeniable. ... If all the pain he has inflicted had transformed Britain’s fiscal position, his policies could perhaps be defended. But that hasn’t happened. ...For the purposes of the natural experiment, the U.S. can be thought of as the control. In adopting a fiscal stimulus of gradually declining magnitude over the past four years, the Obama Administration has administered what was, until recently, the standard medicine for a sick economy. As one would have expected on the basis of the textbooks, the American economy, while hardly racing ahead, has fared considerably better than its British counterpart.

Can we cut the defense budget? - Gov. Romney said that we needed to build more ships to keep up with WWI, or something that I never understood. The US military's traditional power (ships, planes, tanks) is so overwhelming that I can't imagine any country, or even coalition of countries, fighting a traditional war. One would need a radical new technology or tactics to complete, probably along with non-traditional attacks such as swarming with many very small vehicles or guerrilla warfare. How overwhelming is the US navy? Look at this graphic. True, the USS Enterprise was just taken out of service, so now the US is down to only 10 active nuclear aircraft carriers, each of which is superior to all of the rest of the world's 12 aircraft carriers.

'Where Most Cuts Should be Coming From' - Michael Froomkin on debt negotiations: both sides have taken the Pentagon’s budget off the table even though that is where most cuts should be coming from Robert Reich: You want to cut, cut spending on the military — which now exceeds the military spending of the next 13 largest military spenders in the world combined.  Works for me.

More Than the Navy’s Numbers Could Be Sinking -- As described by the Congressional Research Service, a core mission is to influence “events ashore by countering both land- and sea-based military forces of potential regional threats…including improved Chinese military forces and non-state terrorist organizations.” This is similar to the mission described by former defense secretary Robert Gates: “to enhance…overall posture and capabilities in the Asia-Pacific region” with “numbers, speed, and agility to operate in shallow waters.” Whether or not these sentiments are only passing conventional wisdom or profound insight, they represent the current mission. Unfortunately, it is precisely those areas of operation where the mismatch between capabilities and threats is most disconcerting. The Diesel-Electric Submarine Threat To put it simply, if naval exercises in the last two decades involving foreign diesel-electric submarines had been actual combat, most if not all, U.S. aircraft carriers would be at the bottom of the ocean: as many as 10 U.S. aircraft carriers have been reported “sunk” in these exercises.

End the war on terror and save billions - As we debate whether the two parties can ever come together and get things done, here’s something President Obama could probably do by himself that would be a signal accomplishment of his presidency: End the war on terror. Or, more realistically, start planning and preparing the country for phasing it out. For 11 years, the United States has been operating under emergency wartime powers granted under the 2001 “Authorization for Use of Military Force.” That is a longer period than the country spent fighting the Civil War, World War I and World War II combined. It grants the president and the federal government extraordinary authorities at home and abroad, effectively suspends civil liberties for anyone the government deems an enemy and keeps us on a permanent war footing in all kinds of ways.   Now, for the first time since Sept. 11, 2001, an administration official has sketched a possible endpoint.  In a thoughtful speech at the Oxford Union last week, Jeh Johnson, the outgoing general counsel for the Pentagon, recognized that “we cannot and should not expect al-Qaeda and its associated forces to all surrender, all lay down their weapons in an open field, or to sign a peace treaty with us..”

Zombie Apocalypse Singled Out In Tom Coburn Report On Homeland Security Waste - There are zombie banks, the zombie apocalypse, and now, according to Sen. Tom Coburn (R-Okla.), zombie homeland security programs that spend money without adequate oversight or cost control. According to a new report by the Oklahoman, often a critic of Department of Homeland Security programs, the waste extends to a staged zombie apocalypse. In that case, the report said, DHS authorized up to $1,000 a head for law enforcers to attend a five-day security conference at a "paradise" island getaway with security industry companies. The conference featured a simulated attack -- involving the undead -- as the centerpiece.  Coburn, however, questioned why money from the Urban Area Security Initiative and state homeland security programs was used so law enforcers could bask in "the exotic beauty and lush grandeur of this unique island setting that creates a perfect backdrop for the Halo Counter-Terrorism Summit," as the sponsor, the Halo Corp. described it. Halo added: , "This luxury resort features over 460 guestrooms, five pools, three fantastic restaurants overlooking the bay, a world-class spa and state-of-the-art fitness center."

Krugman: Hasty Fiscal Fix Would Cause ‘Austerity Bomb - PBS video - Though Republicans claim $2.2 trillion would be saved by their plan for long-term deficit reduction, economist Paul Krugman calls it a “vapor plan,” with few details on where savings will come from. Gwen Ifill talks to Krugman about why he thinks reducing the deficit too fast could push the economy back into recession.

Kelton, Krugman, and Collender On Point - Stephanie Kelton appeared on NPR’s “On Point” this week with Paul Krugman and Stan Collender to discuss (do I really need to finish this sentence?) the fiscal cliff. You can listen to or download the podcast here.  (Kelton enters at roughly the 13.20 mark)

Fiscal Policy Bait and Switches - Sahil Kapur catches the Republican Senator from Utah living up to his reputation of being Whorin’ Hatch:  But what he proposed this week was a classic bait and switch on the American people—a tax increase double the size of what he campaigned on, billions of dollars in new stimulus spending and an unlimited, unchecked authority to borrow from the Chinese. Maybe I missed it but I don’t recall him asking for any of that during the presidential campaign. These ideas are so radical that they have already been rejected on a bipartisan basis by Congress. Where to start with this nonsense? First of all, the Federal budget deficit is not the same thing as our bilateral trade deficit with the Chinese, but if Senator Hatch is so worried about government deficits – he should be supporting more tax revenues. Secondly with the economy still below full employment, short-term stimulus paid for by long-term tax increases on the well to do is precisely the type of policies a lot of economists advocate. Finally, you did miss it Senator – the President did campaign on these proposals. If Senator Hatch is so exercised over bait and switches, then he needs to explain his 2005 support for this:  Ryan’s fight against Social Security has been ongoing since he pushed President George W. Bush to privatize the program in 2005

Geithner takes hard line on fiscal cliff - Tim Geithner challenged Republicans in Congress to come up with their own budget proposal as the two political parties continued to spar on Sunday ahead of the looming fiscal cliff deadline at the end of the month. Striking a hard line in the increasingly tense talks to reach a budget deal, the Treasury secretary said that Republicans, who rejected the administration’s initial proposal last week, should specify the budget cuts they want to see. “What we’re going to do is continue to look for ways we can solve this problem. But ultimately, they have to come to us and tell us what they think they need,” Mr Geithner told ABC’s This Week. “What we can’t do is to keep guessing about what works,” he said in an interview broadcast on Sunday. Mr Geithner has been leading the talks with congressional leaders on behalf of Barack Obama, two months before his planned departure from the post at the end of the president’s first term in office on January 20. On Thursday, he met John Boehner, the Republican speaker of the House of Representatives, and Mitch McConnell, the top Senate Republican, to deliver Mr Obama’s detailed opening deficit reduction plan designed to avert the fiscal cliff. But the meetings ended in disappointment, after the Republicans judged Mr Obama’s offer to be too heavy on tax increases on the wealthy, and too light on cuts to the cost of bulging government healthcare and pension programmes. Mr Obama is also making other demands – such as a permanent increase in the US borrowing limit, a more aggressive housing refinancing programme, and at least $50bn in new stimulus – that have irked Republicans.

Geithner Fight on Fiscal Cliff Invokes Dodd-Frank Resolve - When U.S. senators were picking apart the Obama administration’s plan for a stand-alone consumer- protection bureau during negotiations on the financial-rules overhaul, Treasury Secretary Timothy F. Geithner agreed to put it under the Federal Reserve to ensure that Republican lawmakers wouldn’t kill it. Geithner calculated the bureau wouldn’t be affected and backing down would help get the 2010 legislation passed. His compromise illustrates the pragmatic approach Geithner embraced in pressing for Dodd-Frank during his four years at the Treasury and will need to draw on in one final test as the administration’s lead negotiator with Congress on the so-called fiscal cliff.

Boehner ‘flabbergasted’ by Treasury secretary’s plan to avoid fiscal cliff - Republican leader John Boehner said Sunday he was "flabbergasted" by Treasury secretary Tim Geithner plan to save the nation from the fiscal cliff, in the latest show of brinkmanship over a deal to avert the year end budget crises. His statement came as Washington leaders took to the airwaves amid an escalation in the clash over how to avert the automatic triggering of massive spending cuts and the expiration of across-the-board tax cuts. Geithner went on a media blitz Sunday to defend president Barack Obama's position over the fiscal cliff. With less than a month to go, Geithner said he could not promise Congress would find a solution. If the tax rates expire and cuts are imposed as they stand, the Congressional Budget Office calculates the US will be plunged back into recession and unemployment will spike to 9.1%. "That's a decision that lies in the hands of the Republicans that are now opposing an increase in tax rates" for the wealthiest Americans, Geithner told Fox News Sunday. Geithner told CBS's Face the Nation: "Just remember to extend those tax cuts costs $1tn dollars over 10 years. There is no way we can get back to a balanced plan that put us back on the path to living within our means, protects Medicare, invests in things we need, if you extend those tax cuts."

Boehner ‘flabbergasted’ Obama offered his campaign promises in debt talks - House Speaker John Boehner (R-OH) says he was “flabbergasted” when President Barack Obama opened debt talks by offering the same public positions that he campaigned on. According to  details circulated by Republican aides last week, Treasury Secretary Tim Geithner’s offer included $1.6 trillion in taxes, $400 billion in entitlement spending cuts and $200 billion in new stimulus of payroll tax cuts and efforts to encourage homeowners to refinance. The White House also asked Republicans to raise the debt limit as part of a deal to avoid the so-called fiscal cliff. “I was just flabbergasted,” Boehner told Fox News host Chris Wallace on Sunday. “I looked at him and said, ‘You can’t be serious.’ I’ve just never seen anything like it.” The Speaker insisted that Obama’s first offer was a “non-serious proposal” because it included new stimulus measures. “They wanted to extend unemployment benefits, they wanted a new stimulus program for infrastructure, they wanted to extend some other tax breaks,” the Ohio Republican said. “And all of this new stimulus spending would literally be more than the spending cuts that he was willing to put on the table.”

Geithner Joins Boehner in Trading Blame Over Fiscal Cliff Talks - U.S. Treasury Secretary Timothy F. Geithner and House Speaker John Boehner hardened their positions over the fiscal cliff, each blaming the other for a standoff that could lead to more than $600 billion in tax increases and spending cuts in January.  “There’s not going to be an agreement without rates going up,” Geithner said in a taped interview that aired today on CNN’s “State of the Union.” Republicans will “own the responsibility for the damage” if they “force higher rates on virtually all Americans because they’re unwilling to let tax rates go up on 2 percent of Americans.” Republican Boehner said the White House is wasting time. “I would say we’re nowhere, period,” Boehner said on the “Fox News Sunday” program. “We’ve put a serious offer on the table by putting revenues up there to try to get this question resolved. But the White House has responded with virtually nothing.”  There’s “clearly a chance” that there won’t be an agreement in time to avert the fiscal cliff, Boehner said on the Fox program. “Just the threat of the fiscal cliff is already hurting the economy.”

The Full McConnell - Krugman - In his interview with the Wall Street Journal, Mitch McConnell finally mentioned a few sort-of specifics about what spending cuts the GOP wants: raising the Medicare age, charging higher premiums to affluent Medicare recipients, and changing the price indexing of Social Security. But how much does all this amount to? I’ve already noted that the CBO has estimated the fiscal savings from raising the Medicare age at $113 billion over the next decade. A study of health care options (pdf) from a few years ago put the savings from expanded premiums at $20 billion (Option 91) – that number would be somewhat higher now, but still small. I haven’t found a 10-year estimate of the Social Security indexing idea, but we can roll our own. The idea is to replace the CPI with a “chained” measure that typically rises about 0.3 percentage points less per year. Apply this to the CBO projections of Social Security spending under current policy and I get 10-year savings of $186 billion.So, if we take all of McConnell’s ideas together, we get a bit more than $300 billion. Getting this would, by the way, impose substantial hardship – seniors would be forced into inferior private insurance, and there are good reasons to believe that the true inflation rate facing seniors is actually higher, not lower, than the CPI. Still, what we’re looking at overall is a saving equal to only about one-fifth of what Obama is proposing to raise by higher taxes.

The 3 Unofficial GOP Rules That Are Making A Deficit Deal Even Harder : It's All Politics : NPR: Making an already head-splittingly difficult deal on the fiscal cliff even harder to resolve is a set of three rules by which the Republicans who run the House play.These are not official regulations; they're more shibboleths that House GOP leaders have adopted in recent years. And those rules are leaving House Speaker John Boehner, R-Ohio, little room to maneuver as lawmakers try to avoid a set of tax increases and spending cuts set to take effect at the end of the year.

  • 1. "The majority of the majority" Under this de facto rule, no bill is brought up for a vote when Republicans control the House unless a majority of their caucus supports it.
  • 2. Any increase in the debt ceiling must be matched by an equal decrease in spending
  • 3. No new taxes. After Obama's re-election, Boehner softened this rule a bit, though not enough to accommodate the tax rate increases on the wealthy that the president seeks. "We're willing to put revenues on the table, but revenues that come from closing loopholes, getting rid of special interest deductions, and not raising rates," Boehner said Friday.

Obama budget plan refuses to recognize spending is the problem - Via Politico, here are the White House numbers on its budget proposal: Given that most of the descriptions of the initial White House offer on the fiscal cliff came from the GOP, there has been some misunderstanding of what’s actually in the plan. According to people close to the matter, the proposal includes: $1 trillion in previously enacted discretionary savings from the Budget Control Act; $250 billion in new non-mandatory spending cuts and $350 billion in health care-related savings (so $600 billion in new cuts; not $400); and $800 billion in savings from “overseas contingency operations” (war savings). The $1.6 trillion in new revenues includes those from the 2013 budget proposal and allowing the top-rate Bush tax cuts to expire. OK, the president’s plan adds up to $4 trillion. Subtract the phony $800 billion from war savings and you get $3.2 trillion. Even if you give WH the $1 trillion for the previously passed BCA —  you are still talking about a plan that is 50% tax hikes. The Obama plan ignores the big problem, which is spending. It is spending that’s the aberration here. According to the Congressional Budget Office, if we keep the 2001 and 2003 tax cuts, revenue from 2013-2022 will average 18.1% of GDP, right at the historical average of 18.2% from 1970-2007. But spending, the CBO says, will average 23% of GDP, more than two points above the historical average of around 20.6% from 1970-2007. Spending is the problem

Fiscal Cliff: The Rs Counteroffer -Rep Boehner has come back with a counteroffer to the President’s opener, so the fiscal cliff negotiations are underway.  That’s good. What’s less good is the R’s offer itself.  It’s way too vague.  The time for stuff like this–”new revenue would be generated through pro-growth tax reform that closes special interest loopholes and deductions while lowering rates”–is long past.  That formulation didn’t work for Romney in the campaign, when you’d expect such vagueness.  With the cliff a few weeks away, it’s useless.  Again, this is first glance, but it looks like the R’s want to lower tax rates, claim $800 billion in new revenue from unnamed sources, raise the eligibility age for Medicare, cut Social Security benefits, and forbid dancing on alternate Saturdays. OK, I made that last part up.  But this is far from a serious offer. At some point, the R’s are going to have to actually say, with specificity, what they’re for. Those of us who want to see this calamity resolved anxiously await such a real offer.

Boehner’s Counter-Offer: How About the Ryan Budget? Bowles-Simpson? Help Me Out Here! -- John Boehner delivered a letter to the White House today about the fiscal slope, and I just find it to be weird. He starts off by calling the events of November 6 a “status quo election” where the American people expect a “fair middle ground” on fiscal issues. He then says that Republicans “presented (the White House) with a balanced framework of spending cuts and new tax revenue. Nobody has seen this and the White House has repeatedly said that Republicans have not presented them with anything specific. Then, Boehner laments the terrible partisanship of the Geithner proposal, which he frames in ways favorable to the Republican position. He says that the spending cuts in last year’s debt limit deal should not count toward total deficit reduction, saying this “confuses the public debate.” So those spending cuts, $1 trillion strong, have vanished, and don’t count toward a $4 trillion goal. Then there’s this curious line: “If we were to take your Administration’s proposal at face value, then we would counter with the House-passed Budget resolution.” Boehner proceeds to… propose the House-passed Budget resolution. That’s the one that includes the end of Medicare as we know it into a premium support program, the block-granting of Medicaid and food stamps, and massive layoffs and pay cuts for federal employees. After introducing this into the debate, Boehner says, putting on his moderate face, that given the status-quo election, it would be unwise to propose these “absolutely essential” reforms that he just spent a full page describing in detail. Then he casts about for off-the-shelf solutions to get through the fiscal slope. He name-checks the “Biden group” (which worked on cuts prior to last year’s debt limit deal), the Boehner-Obama discussions right before the debt limit deal, and the Super Committee. All of these failed miserably and came to no resolution, so then Boehner goes into left field and pulls out Bowles-Simpson.

Boehner tries to call a mulligan: In 2011, not long after an election in which Democrats were utterly routed, Erskine Bowles testified before the debt supercommittee. “I tried to think…if it was possible for you all to get to the $3.9 trillion deficit reduction,” he said. ”Given where your positions are today, I think it is. I think you can get this done.” Bowles went on to outline what came to be known as the “Bowles plan.” Calling it a plan, though, is probably a bit generous: It was mostly an exercise in taking the Republican position and the Democratic position and dividing by two. Take health care cuts: “You are somewhere between $500 billion and $750 billion of additional health care cuts,” Bowles said. “I assumed that we could get to $600 billion.” Or discretionary cuts: “You all are between $250 billion and $400 billion of additional cuts on discretionary. So I assumed that we could reach a compromise of an additional $300 billion on discretionary spending cuts.” Or tax increases: “I took the number that the speaker of the House, I had read, had actually agreed to” — he’s referring here to the leaked outlines of the Obama-Boehner talks — “and I was able to generate $800 billion.”

Republican “fiscal cliff” proposal - Linda Beale - House republican leaders have sent a letter to President Obama with their "fiscal cliff" proposal, which the Republicans cast as a "fair middle ground" and a "balanced framework for averting the fiscal cliff."  Id.  Republicans object that the administrative proposal has is unbalanced, because it has "four times as much tax revenue as spending cuts" (under a Republican claim that the Administration shouldn't count already enacted spending cuts that were part of the Administration's original proposal as part of the bargain).  And of course the Republicans don't like the idea of any stimulus measures being included in the deal or the proposal to finally do away with our arcane and unnecessary debt ceiling mess, which invites games of chicken that have no point.  They claim that they are merely supporting the Bowles-Simpson plan, which of course they are not since they are refusing all tax rate increases. The letter is written rather confusedly and is therefore somewhat ambiguous on exactly what it is offering as a concrete proposal.  One has to conclude that it isn't a concrete proposal but actually merely puffery that restates the position that the GOP wants lots of entitlement cuts, no military cuts, and no tax rate increases (but might go along, maybe, with some unspecified "loophole eilmination" for the nonce).  Let's assess this so-called "proposal."

Psychodrama Queens, Revisited - Paul Krugman - A while back I worried that the Obama administration actually believed in pundit fantasies, those elaborate psychodramas supposedly going on in voters’ minds as they contemplate whether Obama has reached out enough to the center or whatever. My point wasn’t that voters are stupid; it was that people have lives, they aren’t following politics at all closely, and they vote based on broad perceptions of where politicians stand, not on the kind of thing that pundits obsess about. At this point the Obamians seem to have learned better. But I couldn’t resist flagging a couple of examples of what voters really know. First, Public Policy Polling found that 39 percent of voters have a view, pro or con, about Simpson-Bowles. Not bad, you might think. But a quarter of voters also had views on Panetta-Burns, a plan that as it happens doesn’t exist. Meanwhile, another poll – internet-based, but by a firm with a good record — finds that, by a margin of almost four to one, people think that going over the fiscal cliff will cause the deficit to increase. In a way, I understand this: the VSPs have been pounding the drum over and over again about how deficits are bad, evil; now they are warning about a fiscal something-or-other, so how are people supposed to know that they’re suddenly worried that we’ll reduce the deficit too much? Anyway, these are useful reminders that politics isn’t about policy details, it’s about broad thrusts and whether people think you’re on their side.

Fiscal Slope Negotiations in the Context of Current Expenditures and Current Receipts - The latter is stabilizing at extremely low levels. To place matters in perspective, note that even before 2008, tax revenues were low by historical standards. That was due to tax reductions passed in 2001 and 2003 (EGTRRA and JGTRRA), which helped overheat the economy in 2006-07.  In the wake of the second Bush recession, low tax receipts and high expenditures (i.e., a deficit) is an outcome of the attempt to stimulate the economy particularly in the depth of the great recession, either through direct discretionary measures (e.g., ARRA) and automatic stabilizers. Interestingly, while receipts are rising, spending is falling even faster. This point is highlighted in this detail, in Figure 2.  Note that today, the Republican leadership came up with a proposal of $800 billion additional revenue, all to be achieved by unspecified reductions in tax expenditures, to wit: “... new revenue would be generated through pro-growth tax reform that closes special-interest loopholes and deductions while lowering rates.” While lowering rates? Doesn’t that make it harder to hit the $800 billion target? I am pervaded by a sense of déjà vu. It is of import to note that $800 billion over ten years works out to only $80 billion per year, or 0.47 percent of nominal potential GDP. (For more on the Republican proposal, see here.)

The Fiscal Cliff Is Better Than Boehner's Lousy Offer - One reality in the fiscal debate changed on Monday. And one did not. Here’s the reality that changed: President Obama can no longer accuse House Republicans of failing to present a plan for reducing the deficit. On Monday afternoon, Speaker John Boehner did just that, in a letter to the president laying out the basic parameters of what his caucus would be willing to accept—pushing up the retirement age for Medicare, reducing the growth of Social Security benefits, and closing tax loopholes to raise a modest amount of revenue. Here’s the reality that didn’t change: Obama has insisted that any deal meet several conditions—among them, higher income tax rates on the wealthy, an end to the debt ceiling drama, and stimulus for the fragile recovery. Republicans have said no way. And with this proposal, Boehner and the Republicans are still saying … no way. The new proposal merely commits to paper a few ideas that Republicans have been floating for the last few weeks. It does so with the usual level of specificity—which is to say, very little specificity at all. It’s progress, of a sort. At least both sides in the negotiation now have official positions for which they can be held accountable. For example, the offer should make clear, once and for all, which party is eager to cut benefits for seniors. (Hint: It’s the party that just proposed to cut benefits for seniors.) But the actual positions of the two parties have not changed. And that means this offer remains far from anything Obama and the Democrats should even contemplate accepting—for the very simple reason that accepting it seems far worse than going over the “fiscal cliff” on January 1.

Three-Card Budget Monte - Krugman - It goes without saying that the Republican “counteroffer” is basically fake. It calls for $800 billion in revenue from closing loopholes, but doesn’t specify a single loophole to be closed; it calls for huge spending cuts, but aside from raising the Medicare age and cutting the Social Security inflation adjustment — moves worth only around $300 billion — it doesn’t specify how these cuts are to be achieved. So it’s basically the Paul Ryan method: scribble down some numbers and pretend that you’re a budget wonk with a Serious plan. What I haven’t seen pointed out here is the longer arc of GOP strategy. Does anyone recall how the Bush tax cuts were passed? The 2001 cut was passed based on the claim that the government was running an excessive surplus; the 2003 cut on the claim that it would provide an economic boost. Then the surplus went away, and the economy did not, to say the least, perform very well. So now we face a substantial long-run deficit largely created by those tax cuts:

Boehner Purges Conservative Members from Influential Committees - As I noted, John Boehner got as much flak from his right flank on his three-page “counter-offer” as he did from his left. Conservative groups groused at the inclusion of $800 billion in revenue collection increases, even as it followed the Romney campaign pattern of lowering rates while broadening the base. Obviously they would rather do that without having to raise revenue at all. RedState put up the “white flag of surrender” to characterize the counter-offer. There’s no question it’s a more moderate offer than, say, the Ryan budget, even though Boehner heaped praise on that inside the counter-offer letter. The counter-offer looked a lot like what Boehner and President Obama worked on during the summer of 2011. But that fell apart over tax increases, and anyway, this is a first offer, which in a normal negotiation would have to move toward the middle of the two endpoints. But Boehner did something else yesterday to consolidate his power, which could prove more important than the counter-offer itself.  With a small purge of rebellious Republicans — mostly conservatives — from prominent committees Monday, Speaker John A. Boehner is sending a tough message ahead of the looming vote on a fiscal cliff deal. David Schweikert of Arizona and Walter B. Jones of North Carolina were booted from the Financial Services Committee. Justin Amash of Michigan and Tim Huelskamp of Kansas were removed from the Budget Committee; Huelskamp lost his place on the Agriculture Committee as well.

Yesterday's Most Important Fiscal Cliff News Wasn't The GOP's "Proposal" - The offer made yesterday by House Republicans to the White House to avoid the fiscal cliff got all the headlines, but there were two reasons why it wasn't the most important fiscal cliff-related story of the day. First, it wasn't really a serious offer. In spite of the fact that the letter to the White House says the House GOP wasn't going to respond in kind to what it considered a totally unlikely-to-ever-be-acceptable opening offer from Treasury Secretary Tim Geithner last week, that's exactly what it did. That made it easy for the White House to quickly dismiss it and leave the fiscal cliff negotiations where the were when the day began: not started.Second, earlier in the day, the House Republican caucus announced that House Speaker John Boehner (R-OH) had punished several GOP representatives with tea party connections for not loyally supporting the leadership the past few years by removing them from their committee assignments. This clearly was an attempt by Boehner to consolidate his power, discipline tea party members, and make it more likely that whenever he negotiates a fiscal cliff deal (January still seems more likely than December), it will be more likely to pass the House. That should strengthen his standing with the White House and put him in a better position to negotiate.

Republican DeMint Criticizes Boehner’s Deficit Plan - House Speaker John Boehner’s proposal to generate $800 billion in new revenue “will destroy American jobs” and Republicans should oppose it, Senator Jim DeMint of South Carolina said today.  The comments from DeMint, co-founder of the Senate’s anti- tax Tea Party caucus, represent a strong indictment of Boehner’s plan from a fellow Republican lawmaker. Boehner yesterday proposed a $2.2 trillion deficit-cutting plan that seeks $800 billion in revenue in the next decade from an overhaul of the tax code that would curb some breaks.  “Speaker Boehner’s $800 billion tax hike will destroy American jobs and allow politicians in Washington to spend even more, while not reducing our $16 trillion debt by a single penny,” DeMint said in a statement. “Republicans must oppose tax increases and insist on real spending reductions that shrink the size of government and allow Americans to keep more of their hard-earned money.”  Other Republicans back Boehner’s offer including House Majority Leader Eric Cantor of Virginia, Budget Committee Chairman Paul Ryan of Wisconsin, and Senate Majority Leader Mitch McConnell of Kentucky.

Heritage Foundation Slams Boehner's Fiscal Cliff Offer - The same morning Republican Sen. Jim DeMint ripped House Speaker John Boehner's fiscal cliff offer, the influential Heritage Foundation, a conservative think tank, called it "utterly unacceptable."  "[T]he Republican counteroffer, to the extent it can be interpreted from the hazy details now available, is a dud," Alison Fraser, director of the Roe Institute for Economic Policy Studies, and J.D. Foster, a senior fellow, wrote in a statement. "It is utterly unacceptable. It is bad policy, bad economics, and, if we may say so, highly questionable as a negotiating tactic."  Amy Payne, Heritage's assistant director of communications, wrote this morning that Republicans' offer "dooms future efforts at tax reform" and appears to show Republicans "caving on taxes." Heritage also whacked Boehner for not proposing more specific reforms to entitlements at a time when reforms are "badly needed."  “Beyond disappointing, the House Republican counteroffer appears at best to suggest incremental tweaks to these programs," Fraser and Foster wrote. "Without real entitlement reform — not just spending cuts — we will never fix the underlying problem.”

Who's Not Bargaining In Good Faith? = Put Social Security on the table — clearly and irrevocably. Protecting retiree benefits is the left’s political equivalent of the right’s “no new taxes” pledge. Congressional Republicans are abandoning their untenable position. Now it is time for President Obama and congressional Democrats to do the same. As long as they don’t, they aren’t bargaining in good faith, or in the national interest. Supporting retirees is now the federal government’s main activity. There’s a huge redistribution from young to old — a redistribution that will be made worse if retiree programs are largely excluded from deficit reduction, as many liberal groups urge. Either taxes will rise steeply or other federal programs (defense, food stamps, environmental protection) will be cut sharply. The young will pay more and get less. Or, given these unpalatable choices, true deficit reduction won’t happen.

Fiscal Cliff "Negotiations": So Far Just Alpha Males Pounding Their Chests - After all of the lengthy, difficult and failed budget negotiations over the past few years, did anyone really think dealing with the fiscal cliff was going to be fast, easy and painless? The discussions about avoiding or mitigating the effects of the fiscal cliff were always virtually guaranteed to be extremely contentious and far more hostile than friendly. For that reason, it’s hard to understand why anyone thought the statements made at the end of last week and over the weekend that the fiscal cliff discussions between the White House and congressional Republicans were already stalemated were an accurate representation of what was actually happening. Like the extended arguments about the shape of the table that took place before serious negotiating about ending the Vietnam War began, the only action that has occurred so far on the fiscal cliff is the White House and Republicans pounding their chests, trying to be recognized as the alpha male. Like the discussions about the shape of the table, nothing will be decided about taxes and spending until this stops.

Operation Rolling Tantrum -- Krugman - Oh, boy. This isn’t going to end, even when or if a deal is reached on defusing the austerity bomb; John Boehner has just declared that he’s going to hold the full faith and credit of the United States hostage every time we hit the debt limit. Nor will it be a case of holding the nation at gunpoint until it meets GOP demands; Republicans are signaling that they don’t intend to make any specific proposals, they’re just going to yell and stamp their feet until Obama soothes them somehow. So this is going to be nightmarish, unless Obama surrenders — which I don’t think he will (because he shouldn’t). And one thing to think about: if the next two years are, as they seem likely to be, one long Republican tantrum, the 2014 election is not going to be a normal midterm. It will instead be a referendum on GOP obstructionism, which may attract a lot more attention — and much higher turnout — than normal.

Boehner Gains Strong Backing From House Republicans - With a daunting fiscal crisis looming and conservatives outside the House torching him at every turn, Speaker John A. Boehner might be assumed to have a shaky hold on his gavel. Instead, it appears he is enjoying the broadest support of his tumultuous two-year speakership from House Republicans. As Mr. Boehner digs in for a tense fiscal confrontation with President Obama, the strong embrace from a broad spectrum of the rank and file may empower him as he tries to strike a deal on spending cuts and tax increases that spares the country a recession, without costing Republicans too much in terms of political principle. House Republicans appear to view Mr. Boehner with the same sort of respect that adult children award their parents for the sage counsel they ignored in their younger days. Should his support hold up, Mr. Boehner, who faced a frequent battering from his own members over the last two years as he tried to seal deals on various spending agreements, would be better able to negotiate from a point of relative Republican unity.

Geithner Willing To Go Over Fiscal Cliff - Treasury Secretary Timothy Geithner said Wednesday that the Obama administration was willing to allow the economy to go over the fiscal cliff if Republicans did not agree to raise tax rates on the wealthy. In an interview with CNBC, Geithner drew a harder line in the sand than the White House previously has articulated. "There is no prospect of an agreement that doesn't involve those rates going up on the top 2%," he said. The Treasury Secretary repeated President Barack Obama's tough line that he would not negotiate with Republicans if they held the economy "hostage" to threats that the debt ceiling would not be lifted. At the same time, Geithner tried to sound optimistic that the two sides would reach a deficit-reduction framework. "I think you see the broad outlines of a framework now look more inevitable," he added. Reports to the contrary were "orchestrated drama."

Geithner: Ready to Go Over 'Cliff' If Taxes Don't Rise - Treasury Secretary Timothy Geither told CNBC Wednesday that Republicans are "making a little bit of progress" in "fiscal cliff" talks but said the Obama administration was "absolutely" ready to go over the cliff if the GOP doesn't agree to raise tax rates on the wealthy. "I think they're making a little bit of progress," Geithner said. "They're clearly moving and figuring out how to try to move further." But Geithner said the White House would "absolutely" go over the fiscal cliff — triggering over $600 billion in automatic spending cuts and tax increases — unless tax rates increase on the top 2 percent of wage earners."What we're trying to do is put in place a comprehensive, balanced set of fiscal reforms that put us back on the path of living within our means," Geithner told "Closing Bell."Geithner, who is the Obama administration's lead negotiator in the cliff talks, added that if Republicans are willing to accept higher rates, "we think we can do something really good for the economy. We can make the government use the taxpayers money much more efficiently, lock in some spending savings and do some long-term reforms to entitlements."President Barack Obama told business leaders earlier in the day that a deal could be reached in a week if Republicans would accept higher tax rates on the wealthiest Americans.

White House Unyielding on Debt Limit - The White House hardened its position that Congress should raise the U.S.'s borrowing limit without preconditions, adding an unpredictable new element into the high-stakes budget talks. In a Wednesday speech to top corporate chiefs, President Barack Obama said he wouldn't negotiate with Republicans on this issue as he did in 2011. "I want to send a very clear message to people here: We are not going to play that game next year," Mr. Obama said in remarks to the Business Roundtable, a trade group. He said Washington needs to "break that habit before it starts," referring to the way Republicans would like to use the debt limit to negotiate further spending cuts. Mr. Obama was responding in part to an idea floated by some congressional Republicans to give the president the tax increases he has requested and thereby defer bigger arguments about the budget until next year. Republicans feel they would have more leverage then because the debt ceiling will need to be increased.

Obama Business Roundtable Remarks On Fiscal Cliff - In "off-the-cuff" remarks at the Business Roundtable in Washington, D.C, today, President Barack Obama was firm in a stance that he would not be "playing that game" of negotiating the raising of the debt ceiling. He said a rise in the debt ceiling would have to be a part of a deal to avert the so-called "fiscal cliff." Obama quoted John Engler, the president of the Business Roundtable, who charged in November that it's "not a good weapon for anything except destroying our own credit rating." "That is a bad strategy for America, it's a bad strategy for your businesses and it is not a game I will play," Obama said. "We are not going to play that game again next year. We've got to break that habit before it starts." This morning, the U.S. Treasury outlined the so-called "McConnell Provision," which would change the debt ceiling not into something that has to be raised, but something that has to be voted against. Under the proposal, the debt ceiling would automatically rise unless Congress voted against it. In his remarks, Obama also maintained that it's "not possible" to raise enough revenue for a fiscal-cliff deal by simply eliminating loopholes and deductions in the tax code — which is the plan House Speaker John Boehner offered on Monday.

Fiscal cliff: hopes for deal rise as hardliner Jim DeMint quits senate - Senator Jim DeMint, South Carolina's rock-ribbed conservative and hero to the Tea Party movement, has announced that he is resigning from Congress, setting off a political explosion in Washington that will be felt in the fiscal cliff negotiations and throughout the Republican party. The decision to step down from the Senate next month to become head of the right-wing think tank the Heritage Foundation shocked Washington's commentators – and makes clear that the era of Tea Party influence over the GOP has waned. DeMint made a name for himself as an unyielding voice in opposition to taxes and spending within the Republican party, regularly excoriating his own side for any signs of compromise. Just this week he made a savage attack on the Republican House offer to avert the fiscal cliff. In recent years DeMint has become a kingmaker within Republican conservative circles. But his decision to leave Congress is a further sign that the extreme conservative wing of the Republican party is weakened in the wake of the 2012 elections.

The fiscal cliff deal comes clearer: a 37% top tax rate and a higher Medicare eligibility age: Talk to smart folks in Washington, and here’s what they think will happen: The final tax deal will raise rates a bit, giving Democrats a win, but not all the way back to 39.6 percent, giving Republicans a win. That won’t raise enough revenue on its own, so it will be combined with some policy to cap tax deductions, perhaps at $25,000 or $50,000, with a substantial phase-in and an exemption for charitable contributions. The harder question is what Republicans will get on the spending side of the deal. But even that’s not such a mystery. There will be a variety of nips and tucks to Medicare, including more cost-sharing and decreases in provider payments, and the headline Democratic concession is likely to be that the Medicare eligibility age rises from 65 to 67. That’s not a policy I like much, but New York magazine’s Jonathan Chait accurately conveys the White House thinking here: They see it as having “weirdly disproportionate symbolic power,” as it’s not a huge (or smart) cut to Medicare benefits, and most of the pain will be blunted by the Affordable Care Act. But Republicans and self-styled deficit hawks see it as a big win. And Democratic House Minority Leader Nancy Pelosi, who staunchly opposes raising the retirement age, has stopped well short of ruling it out.

The GOP’s bizarre ‘doomsday plan’ - Typically, a “doomsday plan” is meant to help you survive the aftermath of doomsday. During the Cold War, for instance, the U.S. had a doomsday plan meant to protect the president and ensure the continued functioning of the U.S. government in the event of a nuclear attack.  In 2005, Congress passed another doomsday plan. It was meant to ensure the legislature could conduct business in the aftermath of a terrorist attack that killed or incapacitated most of its members.  This week, Washington is obsessed with another so-called “doomsday plan.” It’s not a plan meant to save the country in the event of a doomsday scenario. It’s a plan meant to create a doomsday scenario in the event that Republicans have to compromise on tax rates. On Monday, ABC’s Jonathan Karl explained how it would work: Republicans are seriously considering a Doomsday Plan if fiscal cliff talks collapse entirely.  It’s quite simple:  House Republicans would allow a vote on extending the Bush middle class tax cuts (the bill passed in August by the Senate) and offer the President nothing more:  no extension of the debt ceiling, nothing on unemployment, nothing on closing loopholes.  Congress would recess for the holidays and the president would face a big battle early in the year over the debt ceiling. Two senior Republican elected officials tell me this doomsday plan is becoming the most likely scenario. 

Is the Fiscal Cliff a Scam? - Levy Institute Senior Scholar James Galbraith was interviewed for a six-part series on the fiscal cliff by the Real News Network’s Paul Jay. Video of the first two parts of the interview are below; transcripts can be found here.

Why the Fiscal Cliff is a Scam (part 2) - Paul Jay of Real News Network interviews Jamie Galbraith. Yves published part 1 of this interview last week. As Yves said, you should share this with all your friends. This passage caught my eye: [GALBRAITH:] If, for example, [incompr.] suggestion which has been in the news, you raise the eligibility age for Medicare, then what you’re doing is privatizing it in part. What you’re saying is that people who have employer-based insurance or other forms of private insurance have to hang on to that when they’re 66 and into, say, 67 [incompr.] they hit the age when they can shrug it off and get onto Medicare. That’s privatization. That’s what it is. And I think that should also be off the table.

Fiscal Cliff + OMB or Fool Me Once/Twice - Call it a fiscal “cliff,” “slope,” “curb,” “bump,” or whatever, it is all the rage in U.S. news programming. Two things are clear: First, tax and fiscal policy are important for government services, the economy and citizens. Second, the American people are being kept in near total darkness about what may, could or should be done in tax and fiscal policy. House Speaker Boehner’s “proposal” to close some tax loopholes, some day by some amount is too vacuous to merit further comment. President Obama has been clear on wanting an increase in taxes for income over $250,000, but there clarity from the Obama administration stops. The Office of Management and Budget issued  OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P. L. 112–155) as a PDF file. Meaning no one could easily evaluate its contents.

Bernanke Cliff Analogy Overstates Immediate Economic Harm The image popularized by Federal Reserve Chairman Ben S. Bernanke describes an immediate plunge, not the series of compounding events that could occur if congressional leaders and the president fail to compromise.  “Cliff conjures up Wile E. Coyote, and January comes, and all of a sudden you plunge into a deep recession inevitably and it all happens fast,” said Chad Stone, chief economist at the Center on Budget and Policy Priorities in Washington. “That’s not the way things would unfurl.” He said he prefers the term “fiscal slope” to describe how the effects would accumulate gradually during 2013.  Congress created the conjoined deadlines on tax and spending policy as a way to prod itself to resolve long-running disputes on fiscal issues. The cliff metaphor has reinforced the need for action, shaping the debate for more than nine months and increasing pressure for Congress to avert at least some of the tax-and-spending changes. While negotiations have stalled over President Barack Obama’s demand for higher tax rates for top earners and congressional Republicans’ insistence on structural changes to entitlement spending, a Republican aide says those talks will narrow to conversations between Obama and House Speaker John Boehner. Failure to reach an agreement by year’s end could mean, in keeping with the metaphor, going over the cliff.  The Congressional Budget Office estimates that the U.S. would probably enter a recession in the first half of 2013 if Congress doesn’t act to avoid the tax increases and spending cuts.

Everything You Need to Know About the Fiscal Cliff Plans, in Charts - If you're reading this, it's probably too late to save yourself. We're already over the fiscal cliff plan cliff. That's a lot of cliffs, but it's not nearly as many cliffs as there are plans. From Domenici-Rivlin to Bowles-Simpson to just Bowles, there's a dizzying array of blueprints. But you know what they say: the first $2 trillion is the easiest. It's the next $2 trillion or so where things get tricky. That's where the "plan" part of the plan comes in. The Center for American Progress and Domenici-Rivlin have both offered good blueprints, but let's focus on Bowles-Simpson as a model, because of its totemic status inside the Beltway. The chart below, courtesy of the Center on Budget and Policy Priorities, looks at the savings from Bowles-Simpson over the next decade that haven't already been enacted  -- in other words, excluding the BCA. (Note: All amounts are in billions).

Briefing for Congress on the Fiscal Cliff: Lessons from the 1930s - Outgoing Ohio Congressman Dennis Kucinich arranged for me to give a briefing at Congress today on the Fiscal Cliff, and how the downturn of 1937 could be a foretaste of what will happen if the Cliff comes to pass. I argue that an attempt by the government to reduce its debt now may trigger a renewed bout of deleveraging by the private sector–and this is what appeared to happen in 1937, when confidence that the worst of the Depression was over led to the government reducing its deficit. Private sector deleveraging, which had stopped in 1934-35, began once more and unemployment rapidly rose from about 10 to almost 20 percent. The main danger with the Fiscal Cliff is therefore not what the reduction of government spending will do on its own, but that it might trigger a renewed bout of deleveraging from the $40 trillion overhang of private debt that I call the “Rock of Damocles”. Click here to download the paper I presented; Click here to download the Powerpoint slides.  Dennis Kucinich’s introduction: Steve Keen's Debtwatch Podcast

Reich video on the austerity bomb/fiscal cliff - Linda Beale - Robert Reich is at it again--producing a quick (2 1/2 minute) video with sketches to illustrate his suggested rules for Democrats in the "fiscal cliff" negotiations with the GOP.  "Reich's Rules" sound an awful lot like the stuff I've been writing on my blog, so readers may see some building of a consensus here.  (I hope.)

  • Rule 1.  "Hold your ground."  Dems won the election.
  • Rule 2. "No deal is better than a bad deal."  Bush tax cuts end.  (I'd add--the military sequester is the first real cut in the military and a start on reducing that huge 60% stake of our budget.)
  • Rule 3. "Make Republicans vote on extending the tax cuts just for the middle class."  How can they really refuse?
  • Rule 4. "Demand higher tax rates on wealthy, not just limits or deductions."
  • Rule 5. "Don't cut safety nets" (Medicare, Social Security, Medicaid, programs for the poor).
  • Rule 6.  "Don't cut investments in our future productivity" (education, basic research, infrastructure).
  • Rule 7. "Cut spending on military and corporate welfare (agribusiness, oil and gas, Big Pharma, big insurance, Wall Street)."
  • Rule 8. "Put jobs before deficit reduction" (and avoid the austerity trap).

Fairness dictates balanced approach to deficit - The fiscal cliff represents the failure of past Congresses to adequately deal with the serious fiscal problems facing this country. In 2010, President Obama and Republicans in Congress could not come to an agreement on tax reform when faced with the expiration of the Bush tax cuts, so they instead agreed to temporarily extend all of them for two years — at a cost of $800 billion. Last year, Congress was too paralyzed by ideology to do anything but pass dumb across-the-board spending cuts that punish efficient and inefficient federal programs alike. I strongly opposed both these deals and pushed instead for a comprehensive plan to meaningfully address both revenues and targeted spending cuts to reduce the deficit and move toward a balanced budget. Absent a panic generated by Wall Street to try and stampede Congress into preserving their tax breaks, we are not facing a Jan. 1 economic calamity. Congress has the power to modify the across-the-board cuts, making them targeted spending reductions. The tax increases apply only to 2013, so Congress would also have ample time to restore middle class tax relief. Republican leaders in the House remain chained to anti-tax zealot Grover Norquist and his pledge, which bars them from raising any taxes to decrease the deficit. They instead demand cuts to Medicare, Medicaid and Social Security benefits in exchange for closing tax loopholes they refuse to identify. Democrats should not agree to any deal that doesn’t restore the Clinton-era tax rates for the wealthiest Americans.

Fiscal Cliff Fictions: Let’s All Agree to Pretend the GOP Isn’t Full of It- It’s really amazing to see political reporters dutifully passing along Republican complaints that President Obama’s opening offer in the fiscal cliff talks is just a recycled version of his old plan, when those same reporters spent the last year dutifully passing along Republican complaints that Obama had no plan. It’s even more amazing to see them pass along Republican outrage that Obama isn’t cutting Medicare enough, in the same matter-of-fact tone they used during the campaign to pass along Republican outrage that Obama was cutting Medicare. This isn’t just cognitive dissonance. It’s irresponsible reporting. Mainstream media outlets don’t want to look partisan, so they ignore the BS hidden in plain sight, the hypocrisy and dishonesty that defines the modern Republican Party. I’m old enough to remember when Republicans insisted that anyone who said they wanted to cut Medicare was a demagogue, because I’m more than three weeks old.

Fiscal Cliff Propaganda Watch: Business Owner Says the Fiscal Cliff Made Him Fire His Son - Yves Smith - The lies told to sell the chump public on the necessity of enduring cuts to the social safety net are already at a breathtaking level. Where would you like to begin? The idea that big reductions in spending (going over the edge of the world off the fiscal cliff would be horrific, while only somewhat big cuts would be salutary? That Social Security “reforms” are necessary to fix the budget? Even former budget chief Peter Orszag ‘fessed up that one was not true. Or the favorite refuge of the Republicans, that raising taxes on the wealthy will hurt job creation. Ahem, we’ve pushed the low taxes model further than any other advanced economy, and the result is crumbling infrastructure, an overpriced and mediocre health care system, and record corporate profits combined with extreme measures to pay more to workers and a lack of new investment (the corporate sector has been a net saver since the early 2000s).The propagandizing nevertheless has gotten so shameless it appeared to be time to point out particularly egregious examples. I thought it would be good to establish what the benchmark is and encourage NC readers to identify similarly outlandish examples (you can e-mail me with sightings at, with “Fiscal Cliff Propaganda Watch” in the headline). This illustration comes from Bloomberg and the headline, “I Laid Off My Own Son”: A Real Fiscal Cliff Story” is a howler. The fiscal cliff hasn’t even happened; the idea that businesses are engaging in extreme measures in anticipation of it strains credulity. And we’ll see, just as banks like blaming their current underwhelming profits on big bad government action, when blowing up their customers is the proximate cause, so too is this a case of long-standing business problems being repackaged to serve a favored political message.

“Dealing with” the Cliff Is the Easy Part - Just ask Alice!  Alice Rivlin and Pete Domenici have put out “Domenici-Rivlin 2.0″ as a guidebook for policymakers negotiating and still struggling with this well-hyped “fiscal cliff” issue.  The plan’s basic, eminently sensible components are the same as the 1.0 version put out by their Bipartisan Policy Center task force:  reduce the deficit over the longer term with a balanced package of both (thoughtful) spending cuts and (thoughtful) revenue increases, but don’t do it in a “cliff-like” (sudden) manner, and in fact, throw in some deficit-financed stimulus up front.  From their summary: Now, the fiscal cliff demands that policymakers pass a law** in the coming weeks to avoid dramatic tax increases and mindless across-the-board spending cuts that would take discretionary spending to levels far below those that we recommended. CBO and other analysts have projected that if these measures take effect, they could choke off the nascent recovery, increase joblessness and send us back into recession. There is too little time remaining in the 112th Congress, however, to draft and pass legislation to fundamentally reform taxes and entitlements. Therefore, we propose a “stepping stone” approach – a “Framework for the Grand Bargain” – that will sustain near-term support for the economy, demonstrate a commitment to deficit reduction, and set the stage for the necessary broader agreement along the lines of D-R 2.0 in the 113th Congress.

Washington's Serious People Are on the War Path Against Middle-Income and Poor People: The Serious People in Washington, such as The Washington Post (both the opinion and news sections), the Wall Street Campaign to Fix the Debt, and the Republican Congressional leadership are in full budget-cutting frenzy. They demand cuts to Social Security, Medicare, Medicaid and everything else that benefits middle income and poor people because, well, because the market demands it. And we know the market demands these cuts because the Serious People told us the market demands these cuts. The fact that the cuts have the effect of redistributing income from the rest of us to the Serious People and their friends is just a coincidence. Those of us who focus on numbers and data might see that we actually have near-record low interest rates on U.S. government debt, suggesting that the markets aren't at all concerned about budget deficits. We can also point out the obvious truth that budget deficits are supporting the economy, given the loss of more than $1 trillion in annual construction and consumption demand as a result of the collapse of the housing bubble. But the Serious People in Washington don't have the time to deal with the stinkin' numbers. They have worked themselves into a full-fledged budget-cutting frenzy.

Poor Women and Children Faced With Fiscal Threat - As negotiating and posturing over the looming “fiscal cliff” continues, one phrase we hear less often than we should is “nondefense discretionary spending.” A boring string of words if ever there was one, it’s a category of spending that will play a role whether we go off the cliff or if we avoid it with a grand bargain, since it stands to see drastic cuts either way. Those abstract, boring words represent very concrete assistance to women and children living in poverty. If nothing is done and we go over the fiscal cliff, sequestration kicks in – automatic spending cuts that resulted from Congress’s failure to reach a deficit reduction deal last year. Sequestration calls for $1.2 trillion in cuts evenly split between defense and nondefense spending over the next decade. But $109 billion of that will hit in fiscal year 2013, gouging a $55 billion hole in the nondefense side. That will amount to an 8.2 percent reduction in nondefense discretionary spending. If we don’t go over the cliff, any grand bargain to avoid it will most likely have similar cuts. The Center on Budget and Policy Priorities says sequestration is “best thought of as the first stage of deficit-reduction action that is likely to consist of several measures enacted over several years.” President Obama’s recent starting bid in the negotiations includes the sequestration cuts. The Fix the Debt campaign’s CEO Fiscal Leadership Council recommends a deal that wants to “cut low-priority spending.” This category of spending is particularly easy for lawmakers on both sides of the aisle to hack at because, as David Kamin explained in The Washington Post, “cutting it is as simple as changing numbers on a spreadsheet.”

Jon Chait’s Miserable Endorsement of Raising the Medicare Eligibility Age - Since Jon Chait has never met a concession he didn’t like, he comes out with an endorsement of raising the Medicare eligibility age as part of a long-term deficit deal. So his cover for what is universally regarded as a terrible idea surely led deficit scolds seeking to use the problem to weaken the safety net to give each other high-fives. Let’s look at Chait’s reasoning. I would probably start with the fact that he’s not 64 or 65. My parents are, and until my dad reached Medicare in November, they were paying $2,500 a month on the private market for health insurance. So I’ll be happy to provide him with their phone number so he can tell them how it’s “tolerable” for them to spend two years more than they expected doing that. But soft! Here are his actual reasons. One, Democrats have to accept concessions (that’s always a good strategic place from which to begin a negotiation!), and the scolds seem to like raising the eligibility age. So let’s give ‘em what they want. This is a bizarrely content-free assertion. The phrase “If Alan Simpson and Erskine Bowles wanted you to jump off the Brooklyn Bridge, would you do it?” springs to mind. Second, he thinks that Republicans will somehow forget that this only raises $100 billion, at most, over 10 years, and will then drop any demands to hit a particular number in the negotiations.

The Obscenely Rich Men Bent on Shredding the Safety Net - New York magazine calls it a “Mass Movement for Millionaires.” The New York Times’ Paul Krugman sums up the idea: “Hey, sacrifice is for the little people.” The Campaign to Fix the Debt is a huge, and growing, coalition of powerful CEOs, politicians and policy makers on a mission to lower taxes for the rich and to cut Social Security, Medicare and Medicaid under the cover of concern about the national debt. The group was spawned in July 2012 by Erskine Bowles and Alan Simpson, architects of a misguided deficit reduction scheme in Washington back in 2010. By now, the “fixers” have collected a war chest of $43 million. Private equity billionaire Peter G. Peterson, longtime enemy of the social safety net, is a major supporter. This new Wall Street movement, which includes Republicans and plenty of Democrats, is hitting the airwaves, hosting roundtables, gathering at lavish fundraising fêtes, hiring public relations experts, and traveling around the country to push its agenda. The group aims to seize the moment of the so-called “fiscal cliff” debate to pressure President Obama to concede to House Republicans and continue the Bush income tax cuts for the rich while shredding the social safety net. The group includes Goldman Sachs’ Lloyd Blankfein, JPMorgan Chase’s Jamie Dimon, Honeywell’s David Cote, Aetna’s Mark Bertolini, Delta Airlines’ Richard Anderson, Boeing’s W. James McNerney, and over 100 other influential business honchos and their supporters. These CEOs talk about shared sacrifice, but it seems that they don’t intend to share anything but your retirement money with their wealthy friends.

The Rich Have Plenty to Give, but Forget Deficits - Galbraith : What do rich people do with money? They make the best use of it they can, and in times of high growth and strong confidence they take risks and – if they are good and lucky – reap the rewards. But the situation is different when the outlook is bleak and when real estate (especially) will be cheaper next year than today. Under these conditions, money is safe and gains value even at zero interest. So the idle balances pile up in banks and in low-risk assets like Treasury debt. But deficits are not a concern as long as unemployment is high. Taxing the rich drains those balances and gives the Treasury a revenue flow that cuts the budget deficit. The economic effect of this is nearly nil; both the private and public sectors spend almost exactly what they would have otherwise. GDP and jobs are therefore the same. The reduced deficit cannot reduce interest rates, since they are already near zero. It is a cosmetic gesture that should appeal only to “deficit hawks” – but for some reason it doesn't. I can't imagine why not. Raising middle class taxes does have economic effects. With less income, households will cut their spending, and that costs output and jobs. The same is true of cutbacks in Social Security, Medicare and Medicaid. Cutting direct public spending is even worse; since public purchases and payrolls count directly as GDP cutting them reduces GDP dollar for dollar. You have to believe in magic to think that private spending rises by more than a dollar in response.

CPI Unchained - On Wednesday I wrote about one of the most widely discussed and high-profile ideas for reducing federal spending on the elderly—raising the eligibility age for Medicare. It’s a simple idea to understand and a pretty terrible one. The other idea that comes up constantly in negotiations and rumors of negotiations and hypothetical grand bargains, by contrast, languishes in obscurity. It involves indexing Social Security benefits to the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) rather than the Consumer Price Index for All Urban Consumers (CPI-U) that’s currently in use. This change shows up in all kinds of think-tank plans and unofficial sketches, and it has at various times secured the endorsement of everyone from Dick Durbin to Eric Cantor.Conservatives love this idea because it cuts Social Security benefits. Deficit hawks love it because it might also raise taxes. And negotiators love it because nobody understands what it means. But don’t let people fool you. Even though the details are technical, this is a political question, not a technical one—a benefit cut, perhaps paired with a tax increase, and not an effort to make inflation calculations “more accurate.”

Citizens Protest Looming 'Fiscal Cliff' Budget Cuts - For the past several weeks, clusters of citizens have been protesting the opportunistically named “fiscal cliff” budget cut talks. Even though the “fiscal cliff” is really more of a fiscal curb or fiscal slope, conservative lawmakers have seized upon the media-generated panic surrounding the doomsday January 1 cutoff date as an excuse to inflict further cuts and steer the conversation away from ending tax breaks for the one percent. The push back from citizens began when activists from ACT UP protested the possible inclusion of cuts to AIDS funding during the negotiations. Activists arranged a table and chairs outside Senator John Kerry’s home in Boston as part of a mock Thanksgiving meal during which they put pill bottles on plates instead of food, saying they want Kerry to fight to fully fund AIDS programs during the negotiations. The following week, three AIDS activists from Vocal-NY were arrested after they stripped naked in the outer office of House Speaker John Boehner. In Tennessee, protesters say they are preparing to gather in downtown Jackson in order to support the Obama administration’s request to put pressure on Republicans.

If We Did Not Share in the Prosperity, Why Should We Have to Share in the Sacrifice? - When the great recession of 2008 struck, it hit some of us harder than others. Middle class families, the poor, people of color and the workers of America suffered the most, while those that caused the crisis were largely unscathed -- many even increased their wealth. Today, when we are in danger of going over the notorious fiscal cliff, some repeatedly speak of 'shared sacrifice.' But when the top 2 percent were enjoying their tax breaks and stockpiling their prosperity, there was no sharing with the masses. And instead, these individuals and groups now have the audacity to ask seniors, minorities, folks whose children fought in our wars, the disenfranchised and the most vulnerable among us to sacrifice some more. Does that seem fair to you? Simply put: if we did not share in the prosperity, then we should not be asked to share in the sacrifice. Period.  

Want jobs? Kill the Bush tax cuts and extend Emergency Unemployment Compensation - The American public wants Congress to get the economy moving and create jobs. Rightly so, given 7.9 percent unemployment and 23 million workers underemployed. So why is Speaker of the House John Boehner focused on something else? Why, for example, does he support continuing the Bush tax cuts for the very rich, which do almost nothing to boost the economy, and oppose continuing Emergency Unemployment Compensation for the long-term unemployed, which is a proven job creator, in addition to being financial life support for millions of families?Extending just the upper-income Bush tax cuts would boost GDP growth by 0.1 percentage point, increasing nonfarm payroll employment in 2013 by only 102,000 jobs—far less than one-tenth the impact of continuing the temporary ad hoc stimulus measures. Continuing EUC would do three times as much in terms of GDP growth and support 300,000 to 400,000 jobs. In terms of jobs created per dollar of budget deficit, EUC is more than five times as effective as the Bush income tax cuts for the wealthy. Combine them with the Bush estate tax cuts and they are one-seventh as effective as EUC.

How to Get a Budget Deal Instead of the Cliff - Reaching a full "grand bargain" within weeks is a nice dream, but it's probably just that—especially if the deal requires significant revenue from tax reform. Although both parties agree that our tax code is a national disgrace, fixing it is both technically demanding and politically contentious. The Reagan-era tax reform took more than two years to work out. Meanwhile, the fiscal cliff looms just weeks ahead and may already be undermining growth. You need to act soon. Time pressures demand stopgap measures that avoid going over the cliff. Many reasonable solutions can be built around the following three elements. First, avoid the cliff by settling on the broad outlines of a budget agreement and then kicking some cans down the road. Specifics can come later. (By the way, please don't kick all the cans to the same stopping point again.) Second, as "earnest money" toward an eventual deal, join hands and enact something Republicans dislike and something Democrats dislike. It will show you are serious. Third, extend the debt limit at least until the budget deal is completed, which could easily take months. A skeleton plan like that leaves many blanks to be filled in, so you'll still have plenty to argue about.

11 shocking facts about Simpson-Bowles - Ezra Klein - An important fact to keep in mind in the coming days: “The Bowles plan” that Speaker John Boehner endorsed is not the same as “the Simpson-Bowles plan.” Indeed, it’s not even the plan supported by its apparent namesake, Erskine Bowles, who insists that he was simply sketching out the evident middle ground between the members of the supercommittee.  The Simpson-Bowles plan — which Erskine Bowles does actually support — occupies strange territory in Washington: Almost every politician professes to admire it, almost none of them are willing to vote for it, and almost none of its supporters know what’s in it. So here, with an assist from the Center on Budget and Policy Priorities, are a few facts to keep in mind about the Simpson-Bowles plan. And while you’re reading this list, remember: Simpson-Bowles is a centrist proposal.

Current Revenue Solutions Will Barely Reduce the Deficit - Despite the ideological hype over revenue increases for the upper-income taxpayers and restricting itemized tax deductions, almost all the considered changes will tackle only a portion of the deficit. As the graph below indicates, the Congressional Budget Office projects a fiscal year 2015 deficit under current policy of $883 billion, not far from the $1 trillion–plus deficits in the Great Recession and its early aftermath. By comparison, the Tax Policy Center calculates that revenue gained from repealing ALL itemized deductions would be only $183 billion. Smaller limitations on itemized deductions have smaller effects: President Obama’s proposal to limit the value of itemized deductions to 28 percent would raise only $15 billion. Capping itemized deductions at $50,000 would raise $59 billion, or $38 billion if the charitable deduction was excluded. The value of all individual tax expenditures is $1.161 trillion, even larger than the deficit. But most revenue proposals—particularly those confined to a tiny portion of taxpayers and only a subset of various tax programs—also only chip away at that amount.

One in four Americans has an opinion about an imaginary debt plan - A new poll from Public Policy Polling found that an impressive 39 percent of Americans have an opinion about the Simpson-Bowles deficit reduction plan.  Before you start celebrating the new, sweeping reach of the 2010 commission’s work, consider this: Twenty-five percent of Americans also took a stance on the Panetta-Burns plan. What’s that? You’re not familiar with Panetta-Burns? That’s probably because its “a mythical Clinton Chief of Staff/former western Republican Senator combo” that PPP dreamed up to test how many Americans would profess to have an opinion about a policy that did not exist. They found one in four voters to do just that.

47% Of People Think The Deficit Would INCREASE If We Go Over The Fiscal Cliff - Were the United States to "go over the fiscal cliff," what do you expect would happen to the National Deficit?   At least according to the CBO and most economists, the correct answer is that "It will decrease." Going over the Fiscal Cliff would, according a Congressional Budget Office study, result in a reduction in the National Deficit of $607 billion between fiscal years 2012 and 2013. However that was not the most popular answer. Per the survey, 47.4% of respondents said that the deficit would INCREASE if we went over the Fiscal Cliff. Only 12.6% think it will decrease.

Why People Are Confused About the Fiscal Cliff - Krugman - Dean Baker catches the Washington Post running a Q&A under this banner: "The Fiscal Cliff. Key points about the looming national debt crisis" OK, if there’s one thing the fiscal cliff confrontation isn’t, it’s a “debt crisis”. The problem — a political standoff that may lead to damaging austerity in an economy that’s still depressed and in a liquidity trap — has nothing to do with either debt or deficits; the danger would be exactly the same if America had a balanced budget and low debt. So what’s going on with the subhed? The answer is that the Very Serious People — and there’s nothing as VSP as the WaPo — have spent years crying Deficits! Debt! Danger!, and staff at the Post can’t wrap their minds around the fact that suddenly it’s a too-rapid fall in the deficit that has those very same People terrified. It speaks to the state of confusion that all the deficit fearmongering has created. And if headline writers at a major newspaper can’t get it straight, how can you expect ordinary voters to get it?

Planning for (fiscal) miracles  - The debate in the US about how to deal with the "fiscal cliff" has produced a counterproposal by the Republicans on how to avert a crisis. The proposal is criticized by many because of its lack of details (see here, here, here and here). The way the proposal avoids dealing with the real issues and suggests solutions that do not impose a cost on anyone reminds me of some of the debates in Europe about finding a plan to deal with Greek government debt or the capitalization of Spanish banks. In all these cases you hear proposals that seem to generate resources without anyone having to pay for them. Republicans in the US want to raise revenues without increasing tax rates, cutting spending without really cutting it. And the Spanish government will bailout banks without imposing any cost on taxpayers. In some cases these proposal have no logic in others there is some logic but a lot of wishful thinking that generates economic miracles. ...

Fiscal Cliff Talks at Stalemate Over Dueling Tax Plans - Negotiations over the so-called fiscal cliff are stalled as President Barack Obama and Republicans trade offers on ways to avoid more than $600 billion in U.S. spending cuts and tax increases for 2013 that will start to take effect in January if Congress doesn’t act. Here are questions and answers about what the fiscal cliff means and what each side is demanding in the talks: Who created the fiscal cliff? Congress and Obama did. In 2010, they extended the George W. Bush-era tax cuts for two years, meaning that tax breaks on income, capital gains, dividends and estates will lapse at the end of this year. In 2011, as part of a deal to raise the U.S. debt ceiling, they set up $1.2 trillion in spending cuts to occur over nine years, starting in January 2013. In 2012, they extended a two-percentage-point reduction in the payroll tax through Dec. 31. That confluence of events is designed to put pressure on Congress to act on taxes, spending and the budget deficit. If the cliff is so bad, why can’t Congress stop it? They can, though lawmakers disagree on what to do. All sides want to continue the tax breaks for individuals making up to $200,000 a year and married couples earning up to $250,000 a year. Republicans, who control the House of Representatives and oppose tax-rate increases, see the cliff as leverage to push Obama to cut spending on programs such as Medicare and Medicaid. Democrats, who control the Senate, favor higher tax rates for top earners and fewer cuts in social programs and entitlement spending.

I Hope This Isn't True -- Krugman - Ezra Klein says that the shape of a fiscal cliff deal is clear: only a 37 percent rate on top incomes, and a rise in the Medicare eligibility age. I’m going to cross my fingers and hope that this is just a case of creeping Broderism, that it’s a VSP fantasy about how we’re going to resolve this in a bipartisan way. Because if Obama really does make this deal, there will be hell to pay. First, raising the Medicare age is terrible policy. It would be terrible policy even if the Affordable Care Act were going to be there in full force for 65 and 66 year olds, because it would cost the public $2 for every dollar in federal funds saved. And in case you haven’t noticed, Republican governors are still fighting the ACA tooth and nail; if they block the Medicaid expansion, as some will, lower-income seniors will just be pitched into the abyss. Second, why on earth would Obama be selling Medicare away to raise top tax rates when he gets a big rate rise on January 1 just by doing nothing? And no, vague promises about closing loopholes won’t do it: a rate rise is the real deal, no questions, and should not be traded away for who knows what. So this looks crazy to me; it looks like a deal that makes no sense either substantively or in terms of the actual bargaining strength of the parties. And if it does happen, the disillusionment on the Democratic side would be huge. All that effort to reelect Obama, and the first thing he does is give away two years of Medicare?

Should Congress Just Kick The Can Down The Road? - Jamelle Bouie argues that the proper way to handle the Fiscal Cliff problem right now is to delay everything that is supposed to happen after December 31st until the economy is in better shape: “We should consider pegging the sunset of these tax cuts to something non-arbitrary, like a certain amount of GDP growth, or a lower level of unemployment.”  Given our sluggish recovery, now is not the time for deficit reduction. Far from forcing responsibility now, the country would be best served by a Congress that kicked the fiscal can down the road, and focused attention on putting people back to work (preferably by taking advantage of low, low interest rates). Thankfully, there’s still time for this to happen. As the New York Timesreported this morning, the White House is at an impasse with House Republicans, who have attacked President Obama’s fiscal cliff proposal as “unserious,” even as they refuse to detail their own plan for spending cuts and revenue increases. “We’ve put a serious offer on the table by putting revenues out there to try to get this question resolved but the White House has responded with virtually nothing,” said House Speaker John Boehner, omitting the fact that neither he nor his allies have offered specifics on revenue or spending.

How the Wealthy Took Tax Cuts and Why They Now Want to Clip Social Security. - Kevin Drum, a political columnist for Mother Jones, writes a brief explanation why Republicans are demanding Social Security be ‘on the table’ for spending cuts.   Essentially, Drum explains, Social Security payroll taxes, which are paid primarily by labor and the middle class, went into surplus under Clinton and that allowed for lower income taxes on the wealthy.  Going forward income taxes will need to be raised to continue making Social Security solvent because Social Security surpluses were drained by the Bush Tax cuts.  So the wealthy now want to renege on replenishing the Social Security trust funds.Charles Krauthammer is upset that Dick Durbin says Social Security is off the table in the fiscal cliff negotiations because it doesn’t add to the deficit: This is absurd. In 2012, Social Security adds $165 billion to the deficit. Democrats pretend that Social Security is covered through 2033 by its trust fund. Except that the trust fund is a fiction, a mere “bookkeeping” device, as the Office of Management and Budget itself has written. The trust fund’s IOUs “do not consist of real economic assets that can be drawn down in the future to fund benefits.” Future benefits “will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.” What Krauthammer means is that as Social Security draws down its trust fund, it sells bonds back to the Treasury. But the idea that the trust fund is a “fiction” is absolutely wrong. And since this zombie notion is bound to come up repeatedly over the next few weeks, it’s worth explaining why it’s wrong. So here it is.

Social Security Is Contributing to the Budget Deficit In the Same Way as Peter Peterson - For some reason media fact checkers get especially irate by political figures when they make the entirely true claim that Social Security does not contribute to the budget deficit (e.g. here and here). The Post's Glenn Kessler gives a comparatively thoughtful comment in his Post column, but still comes down on the side of the adds to the deficit folks. The bottom line for Kessler is that Social Security is using interest on the government bonds it holds to pay for benefits. This is true, but lots of people use interest on government bonds to pay for things. For example, if Peter Peterson used $5 million in interest on government bonds he held to finance the start up of his Campaign to Fix the Debt would it be accurate to say that he had contributed to the deficit? I suspect that most of the facto checkers would say that it is not. Under the law, the trust fund is supposed to be treated as a bondholder like any other bondholder. This meant, for example, that the $2.7 trillion in debt held by the Social Security trust fund was included as part of the debt covered by the ceiling when the deadlock over its increase brought the country to the brink of default in the summer of 2011. If we view the bonds held by the trust fund as they are defined in law, then it makes no more sense to say that spending the interest or principal from these bonds contributes to the deficit than the spending of interest or principal by any other bondholder. Since this money is already owed by the government to the trust fund, spending from the trust fund simply changes the identity of the owner of the debt, just as if Peterson were to sell his bonds to someone else. People may not like the law governing the trust funds, but that does not make someone wrong for talking about Social Security and its trust fund as they are defined under the law.

Geithner: Social Security Should be Dealt with using a Separate Process - In the short term Treasury Secretary Timothy Geithner, who is serving as the chief negotiator in the current deficit talks, reaffirmed that Social Security is not on the immediate table. On ABC’s This Week Geithner made it clear the White House wants any changes to Social Security to be part of separate process. From ABC:GEITHNER: No. I didn’t say that. Let me clarify that. Thank you for asking me that. What the president is willing to do is work with Democrats and Republicans to strengthen Social Security for future generations. So Americans can approach retirement with dignity and with the confidence they can retire with a modest guaranteed benefit. But we think you have to do that in a separate process, so that our seniors aren’t — don’t face the concern that we’re somehow going to find savings in Social Security benefits to help reduce the other deficits. STEPHANOPOULOS: So to be clear, that is one thing that is clearly off the table. Social Security is off the table in these negotiations. GEITHNER: We are prepared to, in a separate process, look at how to strengthen Social Security, but not as part of a process to reduce the other deficits the country faces.

Payroll Tax Cut Bolsters Social Security, Report Argues - The payroll tax cut bolstered the Social Security Trust Fund, according to a new report from Congress’s Joint Economic Committee. Congress instituted a two percentage point cut to the Social Security tax withholding rate in 2010 and renewed it last year. Under current law, it is expected to return to 6.2% in 2013 after two years at 4.2%. That means most working Americans will pay higher taxes next year. (To see how much more you will pay next year, input your annual pretax salary into this calculator.) Though some lawmakers, including JEC Chairman Sen. Bob Casey (D., Penn.), have lobbied to extend the cut, many observers expect the rate will increase as part of the broader fiscal cliff negotiations. The JEC report notes the effect the cut has had on consumers’ pockets and says it boosts the Social Security Trust Fund. As part of its initial design, the reduced revenue earmarked for Social Security was recovered by transfers from the Treasury General Fund. That increases the debt, but keeps the Social Security Trust Fund at the same level it would be without the cut. Meanwhile, the JEC cites an estimate from Macroeconomic Advisers that the economic growth spurred by the tax cut led to saving or creating 400,000 jobs. The workers in those positions, which wouldn’t exist otherwise, pay into the Social Security Trust Fund making the total higher than it would be without the lower tax rate. The JEC report also notes how much the median taxpayer in each state would be affected by the elimination of the tax cut. See the full sortable list below.

Forget the "fiscal cliff" and say hello to the "agriculture abyss" - THIS week’s print edition has an article discussing another reason for Americans to fear the end of the year: the “agriculture abyss.” Farm subsidies cost America’s government tens of billions of dollars each year, even though many farmers are earning more than ever thanks to high commodity prices. Little surprise, then, that with Congress desperate to avoid painful tax increases and spending cuts, both Republicans and Democrats are prepared to eliminate direct payments to growers. Despite that bipartisan consensus, the last farm bill, passed in 2008, expired on September 30 with nothing to take its place. In June, the Senate passed a bill with bipartisan support that would eliminate direct payments to farmers and trim spending on conservation programmes and food stamps. These measures would save $23 billion over the next ten years, according to the Congressional Budget Office. The House Agriculture committee’s version would save about $35 billion over the next ten years.

Obama to Seek About $50 Billion to Aid Hurricane Sandy Recovery - President Obama plans to ask Congress for about $50 billion in emergency funds to help rebuild the states that were ravaged by Hurricane Sandy, challenging deficit-minded lawmakers while worrying regional leaders, who complained Wednesday that it was not enough.The White House will send the proposal to Capitol Hill this week, and while the final sum is still in flux, it should be between $45 billion and $55 billion, according to officials briefed on deliberations over it. That falls significantly short of the $82 billion sought by New York, New Jersey and Connecticut to clean up storm damage, as well as to improve infrastructure to prepare for future storms. Both Democratic and Republican lawmakers from the region quickly expressed disappointment in the pending request and lobbied the administration to increase it before sending it to Congress. “While $50 billion is a significant amount of money, it unfortunately does not meet all of New York and New Jersey’s substantial needs,” Two House leaders from New York also teamed up to call the administration’s request “insufficient” given the needs. “While recovering and rebuilding will be a long-term priority, it is important that the supplemental appropriations request meet what our region requires,” they said in a statement.

IMF: Budget cuts hurt growth a lot. But tax increases barely matter.: A new study (pdf) by the International Monetary Fund raises a further warning flag for fiscal cliff negotiators in the U.S. In what it bills as the first-ever study of its kind, the fund analyzed decades of data on the world’s major industrialized countries to estimate how changes in government spending or revenue affect economic output. The news isn’t good. Given current circumstances, with a U.S. economy that is growing but still trying to make up lost ground from the 2008 crisis, a one dollar change in government spending could knock as much as $1.80 in output from the economy – what fund researchers called a “statistically significant…and sizeable” outcome. One brighter spot that could also influence negotiators: the growth impact of a tax hike is estimated to be negligible. The list of measures that automatically become law absent an agreement include both spending reductions and tax increases. While the spending cuts would comprise a heavy drag on growth, the fund paper suggests that a one percent rise in tax revenue would knock just 0.1 percent from gross domestic product. Overall, however, the paper reinforces what has become the IMF’s recent mantra on cutting government deficits: in a recovery that remains vulnerable, slower is better: “When feasible a more gradual fiscal…consolidation is likely to prove preferable to an approach that aims at ‘getting it over quickly.’

Why the GOP Won't Admit That Supply-Side Economics Has Failed - Republicans understand the needs of business, we are told, and if the country would leave the economy in their hands business would boom. All we need to do is to give those at the very top of the income distribution – the “job creators” – more income through tax breaks, and then sit back and wait for the magic happen. The Bush tax cuts were a test of these claims about supply-side economic policies. To justify the tax cuts the nation was, in effect, given a business prospectus from the Republican Party. We were promised that cutting taxes on the wealthy would result in much higher economic growth and broadly shared prosperity. For those who wondered how we would pay for such a large cut to the government’s revenue stream, the Republican prospectus had a remarkable claim. The tax cuts wouldn’t cost us anything. Growth would be so strong that the tax cuts would more than pay for themselves.  The reality, of course, has been quite different. There is little evidence that the Bush tax cuts, or any other tax cuts directed at the so-called job creators, have had a noticeable effect on economic growth. Furthermore, the tax cuts have not paid for themselves as promised, and it hasn’t even been close. The Bush tax cuts have already cost us trillions in revenue, and if they are extended for high income tax payers, they will cost us roughly another trillion over the next decade.

The wrong benchmark for tax rates - The New York Times presents a comparison of average tax rates since 1980 to make the argument that most taxpayers in the US face lower taxes today that back in 1980. Greg Mankiw does not like the fact that they link the year 1980 to Ronald Reagan's policies as instead he picks the end of Ronald Reagan's second term. It is important to look at the evidence on how tax rates have changed but what should be the benchmark here? Should we be alarmed if were to find that tax rates have gone up in the last decades? Should we be pleased that tax rates have gone down? Governments need to raise revenues in a way which is consistent with their levels of expenditures. Their level of expenditures is determined by political choices (demands for services that are provided by governments) combined with the efficiency that governments have at providing those services. It is impossible to make a general argument about the need for governments to become smaller or larger over time unless one is willing to provide the details on what are the services that should or should not be provided by the government or what are the efficiency gains that could be achieved. It is only after those arguments are presented that one can talk about whether tax rates should be flat, increasing or decreasing.

If Taxes Must be Raised, Raise Average Tax Rates - In the debate on how best to resolve the so-called “fiscal cliff” of $600 billion of pending tax increases and spending cuts scheduled for January 1, 2013, President Obama is not only insisting on more tax revenue; he is demanding that this revenue be raised in the most economically counterproductive manner possible. The President demands that a deal must include increases in marginal tax rates “on the top 2%” of earners. By raising marginal tax rates, the President’s proposal would discourage additional work, savings, and investment and slow economic growth. This strategy is senseless when the same revenue can be raised in an economically neutral fashion. Yet, the President’s strange obsession with increases in marginal rates – which borders on bloodlust – seems to guarantee that Congress will either walk off the “cliff,” or agree to slow growth in an already depressed economy. It is important to note at the outset that this is NOT a debate about whether or not to raise tax rates. The President mistakenly argues that Congress is trying to prevent “rates” on high-income households from increasing. But any policy change that increases the amount of taxes owed on a given amount of income is a tax rate increase.

When $250,000 Isn't Actually $250,000 - Binyamin Appelbaum and I have an article in Friday’s paper about President Obama’s proposal to raise marginal income tax rates for married couples earning “more than $250,000.” As we note, there are lot of couples earning more than $250,000 whose tax liability would not be affected. There are two main reasons: inflation, and the very narrow way income is defined in this proposal. First, the thresholds that Mr. Obama originally staked out – $250,000 for married couples filing jointly and $200,000 for single taxpayers – referred to policies he wanted to take effect in 2009, and he has been indexing most of them to inflation so that they’re higher today. The adjusted thresholds for 2013 are $266,100 and $212,850, according to the independent Tax Policy Center. Mr. Obama uses $250,000 as shorthand for the higher-income taxpayers the increases are aimed at — perhaps for consistency’s sake, and perhaps because $250,000 is a nice round number.  Second, the thresholds refer to a specific accounting term called adjusted gross income, or A.G.I., that excludes a lot of categories of income. In other words, a lot of people might have more than $266,100 flowing into their bank accounts during the year but still have an A.G.I. below $266,100. A.G.I. includes wages, salaries, investment income and bonuses – the categories mentioned earlier that might be part of a quick mental accounting of how much you make. But it can also be reduced by subtracting items like certain business expenses; health savings account deductions; some moving expenses; contributions to some retirement accounts like an I.R.A.; alimony paid; most Social Security benefits; some income earned overseas; tax-exempt interest on municipal bonds; and college tuition, fees and student loan interest, subject to limits.

How important is the fiscal cliff for investors? Hint: Not very - The “fiscal cliff” paranoia continues unabated. Apparently, it is the only thing that matters to the markets. Every twist and turn in the negotiations is crucial to the future of the republic! Whenever the media obsess over a potential crisis, history teaches us that it is most likely to be overwrought hype. Recall the Y2k frenzy as Exhibit 1 in The People v. Really Bad Media prosecution. Want to learn just how absurdly obsessive the media have become over this? Just type “fiscal cliff” into Google Trends and you will see how, post-election, the term’s appearance in the media simply went ballistic. Where did this sudden spike in mentions begin? The Columbia Journalism Review points to coverage such as that of the financial network CNBC. Ryan Chittum, who reports on the business media for CJR, notes that CNBC began a campaign called Rise Above that blanketed its airwaves since the day after the election with pleas for a solution to the fiscal cliff. As Google’s trend chart shows, it was part of a media dogpile — at least until the David Petraeus affair sent the drones scurrying after a more salacious story.

Some Economists Doubt Dire Effects of Tax Increases - Mr. Kass, the founder of Seabreeze Partners Management, thinks much of the investing world has overestimated how hard the markets and investors would be hit if tax rates on dividends and capital gains rise at the end of the year, as the White House has proposed.  Mr. Kass can look for support to several economists who have studied past changes in tax rates and found that the shifts had less of an impact on investor behavior than was initially expected.  That’s largely because a dwindling number of investors are subject to the taxes on investment gains that are set to rise at the end of the year, with most stocks held in accounts that are exempt from taxes.  For example, only 14.7 percent of American households have mutual funds in taxable accounts, down from as high as 23.9 percent in 2001, according to data from the Investment Company Institute.  Douglas A. Shackelford, an economist who has examined the 2003 legislation that lowered the tax rates on capital gains and dividends, said that when those changes were being put in place “people thought this would be revolutionary,” setting off a wave of changes in the way companies rewarded their investors, and how investors evaluated companies.  In the end, “it made a difference, but it certainly was not revolutionary,” The limited number of investors who were subject to the changes in 2003 has grown even smaller today, he said.

Forget the Cliff, Fix the U.S. Tax System - Spoiler alert: The “fiscal cliff” will be resolved. At the 11th hour, saner heads will prevail, a deal will be struck, and the U.S. Congress will steer the economy away from its date with destruction. Congressional compromise will ensure that the scheduled tax increases and spending cuts are pared back and phased in only gradually. The real danger, then, is not that we’ll fall off the cliff. It’s that Congress will solve the problem badly, missing a once-in-a-generation opportunity to design a better tax system. Current rhetoric suggests that Congress will employ the same design principles that undergird our current shambolic tax system: populist politics, lobbying pressure, last-minute compromises and policy inertia. The result is likely to be a deal that tinkers at the edges and may even make the system worse.  Instead, imagine if simple economic insights were used to give us a better system. What would it look like? One important insight is that there’s no difference, economically speaking, between the government giving you an extra dollar or choosing to tax away one fewer dollar. Yet the budget process treats the two very differently. If the government wants to send you a regular check, it must first obtain the funds through an appropriations bill subject to annual scrutiny. If the government wants to spend money by giving you a tax break, the expenditure need only be approved once. The result is a complex tax code riddled with ineffective tax preferences for a mind-boggling array of activities.

Small business owners: Never mind taxes, don’t cut entitlements - Those real job creators, small business people, have a message for Congress and the White House. Yes, tax rates do have an impact on them, but they're just as, if not more, concerned about maintaining Medicare and Medicaid. “I’m willing to pay more taxes if that’s what’s needed to pull up the country, and my business would be okay. But cutting Medicare and Medicaid could have some really bad consequences for small businesses.” Without government-backed insurance, Black would no longer be in business. During the summer of 2010, her 71-year-old husband fell ill with pneumonia and was hospitalized for more than four weeks, much of it in an intensive care unit. He recovered, but not before the medical bills soared to more than $130,000.“Had it not been for Medicare, my business would have gone under,” Black said, noting that her business would have likely been the first thing sold to cover the expenses. “No question, I would have had to close the doors.” [...] Despite the constant rhetoric you hear from Republicans, only a small percentage of real small business owners would end up paying higher taxes on their income over $250,000; about eight percent, according to a 2011 analysis by the Treasury Department’s Office of Tax Analysis. Of course, how Republicans define "small business" isn't really how any one else defines the term. There might not be anyone in the country outside of Congressional Republicans and the one percent who really think that 237 of the nation’s 400 wealthiest people would meet the definition of a small-business person.

Republicans in capital gains tax fight - Republicans in the House of Representatives are fighting tax increases on capital gains and dividends, ruling out investment income as an acceptable source of additional revenues in increasingly urgent talks to avert the fiscal cliff. The debate on investment income highlights the difficulty in finding common ground in the talks – with less than a month to go before the US economy is otherwise walloped by a $600bn mix of annual spending cuts and tax hikes that could tip it back into recession. “We are opposed to raising rates on investment income,” one senior aide to House Republican leaders told the Financial Times, narrowing the window for compromise with Democrats and Barack Obama on taxes, a critical front in the negotiations. The part of the negotiations relating to capital gains and dividends, which are currently taxed at 15 per cent, are being watched closely on Wall Street, where anxiety is growing about the possibility of a tax hike. In a pre-emptive strike, Walmart and Oracle have issued early dividend payments and others such as Costco are making special payouts. In addition, Robert Greifeld, chief executive of Nasdaq OMX, is preparing to sell up to 1m stock options in the global exchange operator, according to a securities filing. The US president wants to raise nearly $250bn over the next decade from hiking rates on capital gains and dividends. These measures were part of the Obama administration’s opening bid to Republicans last week for a $1.6tn revenue target.

Business income or personal income - In response to Small businesses and tax cuts and reporting by Daniel Becker, reader Betty, a long time small business owner and not a sole proprietor herself in one of the richer towns of MA with a median income over $180,000 , asked: ... I've always been baffled by the Republican complaint that it would be bad for the BUSINESSES of small business owners with incomes over $250,000 to be lumped with the Rich and have their taxes go up, or not go down, if the Bush tax cuts were not extended for the wealthy. What I don't get is this: Even if the business earns millions, all business expenses are deductible. What's left that's taxable (the profit) is the PERSONAL INCOME of the owner or owners, right? So how does a higher tax adversely affect the business? Or are these large small businesses just corporations in disguise? Dan Becker replied to Betty in two excellent posts from the past: I posted back in July of 2008 specifically addressing the conflation of income and business taxes as Betty is noting. Unfortunately, too many business people don't get it either as I found after having a heated discussion with one of my colleagues. He insisted I must not be incorporated because I did not know what I was talking about. At the time I posted it, a couple others at AB commented that I was making the issue too complicated and that the average reader did not need to know such details. Here we are 2012 discussing it again. We can not expect to solve our problems is we are going to avoid deeper understanding of the words we use and the concepts those word represent. To many people really have little to no idea just what is being talked about when someone says "income tax" or "marginal rates".

Beating the 'Dividend Cliff': CEOs, Founders Cash In - The race to beat the "dividend cliff" is on - and it's generating some big pay-days for CEOs and company founders. Larry Ellison is the latest corporate chief to benefit from the spate of special dividends or accelerated dividends announced in the fourth quarter. Oracle (ORCL) announced Monday it would pay more than $800 million in next year's dividends this month. Ellison's share of the payout is $198.9 million, based on his ownership of 23 percent of the company's stock. The biggest dividend payday this quarter is for Sheldon Adelson, CEO of (LVS). He'll receive about $1.2 billion from the company's dividend. His tax savings on the distribution could be as much as $340 million - more than twice the amount that he reportedly spent to fund candidates in the 2012 election. More than 110 companies have announced special dividends totaling more than $22 billion this quarter -- more than three times last year's fourth-quarter total,according to Markit Equities Research. The payouts are aimed at beating a potential increase in tax rates for dividends 

How Amazon built a US$2-billion cash pile out of reach of U.S. tax authorities - In 2005, Amazon rented a historic five-storey building in Luxembourg’s Grund quarter, right at the bottom of a steep rock-walled valley below the old town. By setting up in Luxembourg, and channelling sales through its units there, the world’s biggest online retailer could minimise corporate taxes. It was a move with big financial consequences. Amazon’s Luxembourg arrangements have deprived European governments of hundreds of millions of dollars in tax that it might otherwise have owed, as reported in European newspapers. But a Reuters examination of accounts filed by 25 Amazon units in six countries shows how they also allowed the company to avoid paying more tax in the United States, where the company is based. In effect, Amazon used inter-company payments to form a tax shield for the group, behind which it has accumulated US$2-billion to help finance its expansion.

Eliot Spitzer: Tax the Traders! It Would Solve Economic Crisis and Stop Reckless Activity - I agree with the White House on the substance of the debate, and I think the administration’s hand gets stronger over time . But as anyone who has been through negotiations will tell you, sometimes you just need a new idea to change the dynamic.  This one is not so new; it has been around for a long time, supported by a wide range of economists, including Nobel laureate James Tobin, as well as advocates, including Ralph Nader in the Washington Post this weekend, and elected officials: a tax on financial transactions. It will give us gobs of revenue. It will fall on a sector that has generated enormous and unwarranted profits for a very few, who at the same time have benefited from huge bailouts and regulatory help and largely escaped any responsibility for their central role in creating the financial cataclysm that we are still struggling with.  Here is the idea: A tax of less than half a percent on every $100 of stock sales or sales of other financial instruments including bonds, derivatives, and options. The tax could raise anywhere from $170 billion to $350 billion per year depending how it was applied. Extend that over 10 years, and we are raising almost what the White House and Republicans agree needs to be raised in order to accomplish the objectives of a grand bargain.

Kill This Entitlement Program: The 6% Risk-Free Dividend the Fed Has Been Paying Wall Street Banks For Almost a Century - Have you looked at your checking or money market bank statement lately from JPMorgan Chase or Citibank? How about the statement showing the interest you’re earning on your mortgage escrow account with the big banks? While the country suffers through the lingering effects of the Great Recession caused by the biggest Wall Street banks, the public typically receives less than 1 percent on their deposits at the big banks, while the government has legislated a permanent, risk-free 6 percent guarantee to the Wall Street banks for their capital on deposit at the Fed.  Now that’s an entitlement program that needs to die!  The Fed requires that its member banks subscribe to “stock” in an amount equal to 6 percent of their capital and surplus.  The banks have to post half that amount with the Fed upon becoming a member; the other half is subject to call by the Board of Governors of the Federal Reserve in Washington, D.C.  The deposited capital entitles the bank to a corresponding share of “stock” in the regional Fed.  The stock is not like regular common stock: it can’t be traded, sold, pledged as collateral, gifted to family members, shorted, or aggregated to effect a takeover. It’s this “stock” that’s receiving the risk-free 6 percent dividend from the Fed. This corporate welfare program gets even better: if the shares of stock were acquired prior to March 28, 1942, the 6 percent risk-free dividend is tax exempt and the bank doesn’t have to pay corporate taxes on it.

Steve Hanke criticizes Basel III for the wrong reasons - A recent post on the Cato Institute blog by Steve Hanke paints a grim picture of the impact from increasing bank capital ratio requirements on the US economy. He compares the current situation to the Basel I accord that supposedly lost George H. W. Bush his reelection by squeezing the money supply and causing a recession (in the early 90s). And the upcoming Basel III is going to do the same. Cato Blog: - While the higher capital-asset ratios that are required by Basel III are intended to strengthen banks (and economies), these higher capital requirements destroy money. Under the Basel III regime, banks will have to increase their capital-asset ratios. They can do this by either boosting capital or shrinking assets. If banks shrink their assets, their deposit liabilities will decline. In consequence, money balances will be destroyed.  So, paradoxically, the drive to deleverage banks and shrink their balance sheets, in the name of making banks safer, destroys money balances. This, in turn, dents company liquidity and asset prices. It also reduces spending relative to where it would have been without higher capital-asset ratios.  Theoretically that's correct. However, US banks have been well capitalized for some time now (see this post from almost a year ago). Therefore Basel III by itself is not going to force significant capital increases by US banks. This of course is not the case in Europe (see discussion) and elsewhere (for example in South Korea the impact will be significant). The data in the US suggests that unlike in the early 90s, money supply continues to grow unabated. Most US banks are operating as though they are already under Basel III, even if the rules haven't been fully implemented. Therefore if there was an impact on broad money stock, we would have already seen it.

Criticizing Basel for the Wrong Reasons - This has been bugging me after some of your recent articles, but what prompted me to write was your post today Steve Hanke criticizes Basel III for the wrong reasons (see post). I think he might be right to some extent, but I believe both of you are wrong on the big picture. You implicitly assume that the problem is moving to Basel III: however, staying put on Basel I is not really an option. The problem is rather with the whole Basel project itself.  First, the extent to which Hanke is right: you point out that US Banks are currently well capitalized so the compliance with Basel should be less of a problem. That might be true if one were just to compare current tier 1 ratios with the new Basel minimums (4.5% core tier 1 plus 2.5% buffer, etc) but there are 3 other considerations:-

  • There are going to be many new deductions which can quickly cause capital to evaporate, such as for pension deficits, deferred tax assets, and particularly important for US banks, mortgage servicing rights
  • Basel III is not just adjusting the numerator of the Cooke ratio, it is also going to massively inflate the denominator. The huge increases in RWAs in the trading book in particular, in both Basel 2.5 and III, will hit banks with any investment banking businesses very hard.
  • The 2 new liquidity metrics will require banks to hold more liquidity and will act as a constraint on new on-balance sheet lending. This could severely restrict maturity transformation.

Fed’s Tarullo: More Research Needs to Be Done on Big Bank Size - A top Federal Reserve official said more research needs to be done to determine just how large big financial institutions need to be to reap the benefits of economies of scale. Fed Governor Daniel Tarullo, the central bank’s point man on regulatory policy, said in a speech Tuesday that the “paucity” of research into the benefits of being big for financial institutions means regulators and others can only “hypothesize these scale and scope economies,” according to Mr. Tarullo’s prepared remarks. As debate in Washington is swirling as to whether the biggest banks need to be broken up, big financial institutions and their lobbyists claim that size brings benefits to them, their clients and the economy. Mr. Tarullo challenged those conclusions in a speech Tuesday to a conference at the Brookings Institution, a Washington, D.C., think tank.

Global banking under siege as nations tighten local rules - Global banking, a model promoted for more than 30 years by financial conglomerates cobbled together through cross-border mergers, is colliding with the post-crisis reality of stricter national regulation.  Daniel K. Tarullo, the Federal Reserve governor responsible for bank supervision, announced plans last week to impose the same capital and liquidity requirements on the U.S. operations of foreign lenders as on domestic companies. The U.K. and Switzerland also have proposed banking and capital rules designed to protect their national interests.  Regulators want to curtail risks exposed after global banks such as New York-based Citigroup, Edinburgh-based Royal Bank of Scotland and Zurich-based UBS took bailouts in the biggest financial crisis since the Great Depression. Forcing lenders to dedicate capital and liquidity to multiple local subsidiaries, rather than a single parent, may undermine the business logic of a multinational structure.

Foreign Officials Visit Fed on Volcker Rule -- The latest visitors arriving at the Federal Reserve to weigh in on proposed limits on banks’ trading with their own money haven’t been from Wall Street. Envoys from foreign governments have flocked to the Fed, in one measure of how far concerns over the “Volcker rule” have reached. In October, representatives from the governments and central banks of Japan and Mexico visited U.S. regulators to discuss the proposal, according to notices posted on the Fed’s website. Earlier in the year, officials from Canada and the U.K. made their own visits on the same topic.  In comment letters and visits, foreign governments have worried that the regulation, which would restrict U.S. banks that enjoy a government safety net from making risky bets with their own cash, could make it harder and more expensive for banks to buy and sell other countries’ sovereign bonds on behalf of clients. The regulation exempts U.S. Treasury securities, but not the debt of other governments.

Dealer MBS positions hit record levels; Volcker Rule creates market distortions - Primary dealer holdings of mortgage-backed securities was at an all-time high last week, as the dealers take advantage of the Fed's MBS purchases. Because of the public's push for increased transparency from the Fed, it is generally not that difficult to determine which securities the Fed will be buying (see discussion). And that means easy pickings for the dealers who "front run" the central bank.So how is it that securities dealers can load up on MBS, given the impending Volcker Rule? The new regulations have a small exception to the prop trading activities restriction. US treasury and agency securities will be permitted. And MBS securities in the chart above are mostly those issued by Fannie and Freddie. It's another example of regulatory driven market distortion. Moreover, these distortions are only going to get worse, as nations such as Canada and Japan are looking to obtain Volcker Rule exceptions for their government debt. A shift into mortgage and sovereign paper and out of corporate paper is the (not so) unintended consequence of the new regulations. This ultimately hurts middle market companies, as US legislators seem to prefer to see the dealers front run the Fed on MBS rather than holding middle market corporate bonds. Of course private equity firms are loving this. With banks getting out of corporate bonds, private equity firms expand their lending business, charging much higher rates. Some readers have questioned that this is actually taking place. Well, here is a direct quote from GSO/Blackstone:Reuters: - "We really want to thank Mr. Volcker. That rule is a little bit like the Employment Act for GSO and what we do.

Volcker Rule: “Market Making” and the SEC - The last substantive update on the Volcker Rule came from the WSJ a few weeks ago. The article contains an interesting — though not altogether surprising — nugget, which highlights one of the key issues in the proposed Volcker Rule. From the WSJ: The SEC and a trio of banking regulators are butting heads over how to define the buying and selling of securities on behalf of clients, known as market-making, as well as over banks’ ability to invest in outside investment vehicles such as hedge funds, according to officials close to the discussions.  So it’s the SEC vs. the banking regulators, and apparently on multiple fronts. This divide makes sense with regard to the market-making exemption — the proposed Volcker Rule’s market-making exemption leans heavily on the SEC’s existing definition of “market maker.” In order to claim the market-making exemption, the bank’s trading activity must meet the proposed rule’s definition of “bona fide market making,” and the proposed rule explicitly states that “the Agencies expect to take an approach similar to that used by the SEC in the context of assessing whether a person is engaging in bona fide market making.” So it’s not hard to see why the SEC would be pushing for more influence over this issue. However, the Volcker Rule’s market-making exemption will need to apply to a much larger range of financial products and markets than the SEC has ever had to apply its “market maker” definition to. Because all these markets have varying levels of liquidity, different trading infrastructures, etc., bona fide market making will look different in some markets than it does in others.To address this, the proposed rule divides the universe of markets into (1) “relatively liquid” markets and (2) “less liquid” markets, and then broadly describes what legitimate market-making should look like in each.

Why It’s Worth Fighting Over Who Runs the SEC - I’ve been trying to figure out what is going on with the Securities and Exchange Commission for the past month or so, because it is the biggest weakness in our regulatory apparatus. In an interview with Neil Barofsky at Salon, he says that he would take the SEC job if offered. His plan for reform would involve rearranging enforcement priorities at the agency, and reexamine the policy whereby the SEC does not bring cases against corporations but settles without forcing an admission of guilt on particular facts.This policy has turned the SEC into an agency that issues parking tickets. Corporations can now simply build the cost of these settlements into their business model, without having to prevent fraud. Senator Carl Levin has been particularly angered by this policy. This method is “a symbol of weak enforcement. It doesn’t do much in the way of deterrence, and it doesn’t do much in the way of punishment.” That’s basically right, and it’s why Barofsky’s statement is so important. He also mentioned that he’d change the way that the Financial Stability Oversight Council, or FSOC, operates. FSOC is the board of regulators established by Dodd-Frank that has the power to break up the banks, and it hasn’t done much since the law was signed.

Time to Fire the SEC’s Khuzami: Fails to Act on Whistleblower Tips Under Dodd Frank Program -  Yves Smith As we’ve detailed in numerous posts, the performance of SEC enforcement chief Robert Khuzami has been abysmal. It was bad enough that the SEC was weak before the crisis. But the fact that the agency hasn’t upped its game in the wake of the biggest financial markets debacle in history is a colossal fail. And as we’ve pointed out, there’s good reason Khuzami has engaged in (at best) entering into settlements with banks that Judge Jed Rakoff described as mere “cost of doing business” level punishments. Any serious pursuit into the conduct at the heart of the crisis would have implicated him. He was General Counsel for the Americas for Deutsche Bank, and its senior trader Greg Lippmann was patient zero of toxic CDOs, so Khuzami was directly responsible for the failure to rein him in (specifically, note that Khuzami sued Goldman over one of 27 Abacus CDOs but did not sue Deutsche over a similar Deutsche Bank CDO program called Start).  The latest revelation makes it clear that the new head of the SEC needs to replace Khuzami. In Huffington Post, investigator John Powers describes how a well funded whistleblower program, created by Dodd Frank to prevent recurrences of the Madoff scandal, in which tips by fraud investigator Harry Markopolos were ignored. Powers describes in general terms the fraud he’s discovered, which includes a $200 million Ponzi scheme. He’s got the sort of background that the SEC ought to take seriously, and he also made clear he had the goods: I submitted a detailed report to the SEC and offered to share my confidential files, which contain hundreds of pages of courtroom-ready evidence, including copies of email correspondence, internal documents, audio recordings and witness statements. My facts and my message were clear: “The risk to potential investors is extraordinarily high and this matter warrants further investigation by the SEC.”

Khuzami Deathwatch: SEC Ignores Tips About $12 Billion of Hidden Losses at Deutsche Bank - Yves Smith - Two days ago, we said it was time to fire the SEC’s chief of enforcement Robert Khuzami, who has not provided the tough policing warranted by the biggest financial crisis in the agency’s history. Our call was based on compelling evidence of failure. Specifically, a year and a half after Dodd Frank created a $450 million whistleblower fund, which Khuzami confirmed had produced hundreds of high quality leads, the agency had taken only one referral far enough to merit a payout, that of a measley $50,000. We stressed that this was an astonishing lapse:  whistleblowers are insiders and therefore should in many cases have access to the sort of internal documents that would serve to substantiate conduct and save the SEC a ton of time. In other words, this should be a prime, potentially its best, source of leads, since the SEC would be further along in case development if any of these tips had meat (ie, both damning info and on target with a clear violation). We didn’t anticipate that the story of Khuzami’s negligence would blow so big so quickly. Today, the Financial Times reported that three separate whistleblowers charged that Deutsche Bank had mismarked up to $12 billion in exposures to make it look healthier in 2008 and 2009 than it was, yet the agency had not acted on these allegations. And this level of window dressing most assuredly would make a difference. From the Financial Times article that discusses the charges in detail: If the tier one capital had fallen by €8bn, below the upper end of the former employees’ estimates, its ratio would have fallen below the 8 per cent that German regulators were demanding at the time.

Bombshell: Deutsche Bank Hid $12 Billion In Losses To Avoid A Government Bail-Out - The FT just released a blockbuster that Europe's most important and significant bank, Deutsche Bank, hid $12 billion in losses during the financial crisis, helping the bank avoid a government bail-out, according to three former bank employees who filed complaints to US regulators. US regulators, whose chief of enforcement currently was none other than the General Counsel of Deutsche Bank at the time! From the FT: The three complaints, made to regulators including the US Securities and Exchange Commission, claim that Deutsche misvalued a giant position in derivatives structures known as leveraged super senior trades, according to people familiar with the complaints. All three allege that if Deutsche had accounted properly for its positions – worth $130bn on a notional level – its capital would have fallen to dangerous levels during the financial crisis and it might have required a government bail-out to survive.  Instead, they allege, the bank’s traders – with the knowledge of senior executives – avoided recording “mark-to-market”, or paper, losses during the unprecedented turmoil in credit markets in 2007-2009.

The Deutsche allegations - Tom Braithwaite, Michael Mackenzie and Kara Scannell of the FT have one of the wonkiest articles I can ever remember reading in any newspaper, trying to explain the mechanics behind the complaints that various former Deutsche Bank employees have taken to the SEC. Matthew Goldstein first reported on the whistleblower complaints last year, in pretty vague terms; the FT has now added a huge amount of detail. I have sympathy with all three of the sides in this story: Deutsche Bank, the SEC, and the whistleblowers. The main whistleblower in the FT story is Eric Ben-Artzi, who joined Deutsche in 2010, when the actions in question were already in the past. An alumnus of Goldman Sachs, he was assiduous about finding and defining all the various exotic risks that can crop up in derivatives portfolios, and he ultimately came to the conclusion that during the crisis, Deutsche hadn’t been marking those risks properly to market. Ben-Artzi, along with at least two other Deutsche whistleblowers, took his complaints to the SEC, which in turn heard them out but has not (as yet) accused the bank of any wrongdoing in the matter. These things are highly complex, and very hard to get a prosecution on, and frankly the SEC probably has more important things to do.

The ghost of the leveraged super senior - Debates about asset valuation can quickly turn philosophical. The FT’s story on Deutsche Bank on Thursday provides fresh fodder, carrying allegations from three ex-employees that the bank failed to properly value certain credit derivative positions and thereby created a misleading impression of its health. At first we thought, ‘umm, yeah, Deutsche Bank and others, no?’ But the mention of Berkshire Hathaway seemed an interesting twist.Then it turned out that the story is about a specific type of credit derivative:…misvalued a giant position in derivatives structures known as leveraged super senior trades… “Leveraged” super senior? Bit of an oxymoron, but hey, that’s branding for you, and it’s not your garden variety super senior. As a reminder, banks, monolines, hedge funds, etc, often entered into (plain) super senior trades with little to no cash exchanged relative to the notional size of the position. Super senior tranches were the detritus of banks’ CDO manufacturing pipelines. The coupons paid on these tranches were typically so low (think very low tens of basis points) that they weren’t interesting to investors. Banks, meanwhile, viewed them as having negligible risk due to the large amount of subordinated tranches that would have to get wiped out before super senior was impacted.

Ritholtz: 'Dot Com Bonus Envy' Stymies Wall St. Reform (video)

Virtually Speaking and Bill Black - NEP’s William Black appears on Virtually Speaking with host Jay Ackroyd (12/6). (Bill’s interview begins around the 12 minute mark)

Effort to Overhaul Money Market Funds Gains an Ally - A type of mutual fund could lose its trademark stable value of $1 a share after a crucial government official voiced his support for controversial efforts to overhaul the $2.6 trillion money market fund industry.  An array of regulators have been pushing to change the structure of money market funds so they are no longer vulnerable to the type of panic that hit one of the most prominent funds in 2008 in a major turning point of the financial crisis. The desire for changes had run up against the opposition of Luis A. Aguilar, one of five members of the Securities and Exchange Commission, and the decisive vote on the issue. But Mr. Aguilar said this week that he had changed his views on the matter and was open to new rules that would force money funds to revalue the price of their shares daily, which would result in a so-called floating net asset value, or N.A.V.   Mary L. Schapiro, the commission’s chairwoman, had proposed the floating value as one of a few options for putting tighter controls on the industry. All of them have faced fierce opposition from the sector. John Nester, a spokesman for Ms. Schapiro, welcomed Mr. Aguilar’s comments and said that the chairwoman “has never wavered from her belief that a floating N.A.V is the most principled reform approach.”

New Rules For Life Insurers – “Future Generations Have To Deal With The Financial Carnage” - During the off-hours on Sunday, when even astute observers weren’t supposed to pay attention, the National Association of Insurance Commissioners approved new rules that would allow life insurance companies to lower their reserves for future claims. Executives claimed that they could put that capital to “more productive uses,” such as blowing it on stock buybacks and acquisitions or plowing it into subprime-based CDOs or Greek sovereign debt, or whatever, to goose their paper returns—having already forgotten all about the financial crisis. “The insurance industry weathered the financial crisis well precisely because of the careful reserving state regulators have historically required,” said Benjamin Lawsky, superintendent of the New York Department of Financial Services. “To ignore the lessons of the financial crisis and deregulate the industry, allowing them to keep less in reserves, is unwise.” Others were less sanguine. Joseph Belth, Insurance Forum editor and professor emeritus of insurance at Indiana University, worried that “future generations of executives, regulators, and consumers will have to deal with the financial carnage.”

TAG: More subsidies for the TBTF banks? You bet - When Congress authorized the Transaction Account Guarantee (“TAG”) program in 2008, the measure was sold as as a temporary response to the financial crisis. The Federal Deposit Insurance Corporation now covers up to $250,000 per bank deposit account, but TAG provides unlimited coverage for non-interest-bearing transaction accounts.  The banks do not pay for the TAG insurance. The theory was that smaller banks which do not fall under the comfortable umbrella of “too big to fail” needed insurance to keep from losing important business customers.  The trouble is, the largest banks led by JPMorgan, Wells Fargo and Citigroup were the main beneficiaries.   As the Wall Street Journal noted last month:  “FDIC data show that the giant banks benefit most from TAG and rely on it for a larger share of deposits than do the little guys. So TAG is rightly seen as a subsidy for all banks, and especially giant ones.”  Yet for some reason the WSJ is the only major media outlet that is opposing this odious subsidy for the largest banks.   Banks such as WFC and US Bancorp used TAG to swell their funding base and thereby came to dominate the market for new mortgages. Together, WFC and USB now account for half of the new origination market for home mortgages.  Allowing TAG to expire at the end of this month would help to restore some competitive balance in the market for mortgage loans.  Yet there is not a peep about this important issue from the New York Times, Bloomberg, Financial Times or Reuters.  

Watch out for the second US cliffhanger - Another week, another round of shadow boxing on the edge of America’s fiscal cliff. But as Washington and Wall Street nervously try to work out whether there will be a $600bn fiscal shock on December 31, there is a second potential “cliff” investors should be watching, this time in relation to the banks. At the end of this month, the so-called Transaction Account Guarantee programme, which the Federal Deposit Insurance Corporation introduced as a supposedly “temporary” measure during the height of the 2008 financial panic, is finally scheduled to end. Outside the ranks of financial policy makers and corporate treasurers, not many people know what TAG is. Little surprise: bank insurance schemes are a mystery to most non-bankers, and TAG never sounded nearly as exciting as, say, the AIG bailout. But that little-noticed TAG has quietly had a big impact. Until it was introduced, the FDIC only guaranteed the first $250,000 worth of bank deposits – meaning that if companies or consumers had accounts holding more than that, they lost money if a bank collapsed. However, under TAG, the FDIC protects an unlimited amount of money – if that is deposited in a non-interest-bearing account. In normal times, that last caveat should be a big disincentive to use TAG. But these are not normal times. On the contrary, as fears have erupted about eurozone banks, companies and wealthy individuals have been shifting money across the Atlantic on a large scale. And as bond yields have plunged, the “cost” of using TAG relative to bonds has declined. Some savers have also been exiting money market funds, which have no protection. As a result, in the past two years the size of TAG accounts has doubled to reach $1,500bn in the third quarter of this year, representing 13 per cent of bank assets. More than half of this is from corporate accounts.

Counterparties: A series of unfortunate repositioning actions - Citigroup will fire 11,000 employees as part of a “series of repositioning actions”. The full press release is a meticulously assembled monument to business-speak. If only its first paragraph, appropriately skewered by Derek Thompson, could be laughed off as parody instead of pink slips for 4% of the company’s workers: Citigroup today announced a series of repositioning actions that will further reduce expenses and improve efficiency across the company while maintaining Citi’s unique capabilities to serve clients, especially in the emerging markets. These actions will result in increased business efficiency, streamlined operations and an optimized consumer footprint across geographies. Just five days ago, newly installed CEO Michael Corbat was faced with headlines which questioned whether Citi “had a formal cost-cutting plan”. Consider the answer an emphatic yes. The layoffs will save the company more than a billion dollars a year, about two percent of its operating costs. The cuts dwarf Citi’s previously announced plans to eliminate 300 sales-and-trading jobs, or its competitors’ much smaller reductions. The NYT’s Jessica Silver-Greenberg writes that 80% of the layoffs will be in consumer banking and back-office roles. Bloomberg’s Christine Harper and Yalman Onaran report that Citi’s global footprint is shrinking: the bank plans to “sell or significantly scale back consumer operations in Pakistan, Paraguay, Romania, Turkey and Uruguay. It will also cut branches in Brazil, Hong Kong, Hungary and Korea, as well as the US”.

4 Companies Provided Half of SPX 2012 Earnings Growth | The Big Picture: Today’s absurd datapoint comes from Slate’s Moneybox: 88% of the S&P500 earnings growth for 2012 came from just 10 firms. Just four companies—Apple, AIG, Goldman Sachs, and Bank of America—together provided a majority of overall earnings growth among large-cap companies. 

Corporate Profits for Q3 2012 - (graphs) The BEA released corporate profits for Q3 2012 along with the GDP. Corporate profits after tax shot up 5.2% from Q2 2012 to $1,752.2 billion. Corporate profits after tax are also up 18.6% from a year ago. Corporate profits with inventory valuation and capital consumption adjustments, after tax, increased 3.3% from last quarter to $1,526.6 billion and are up 4.0% from one year ago. Corporate profits with inventory valuation and capital consumption adjustments, pre-tax, increased $11.3 billion to $1,989.2 billion, or up 3.5% from Q2 and still up 8.7% from a year ago. These are profits from current production. Net cash flow, with inventory evaluation adjustment increased 2.4% from Q2 to $1,886.8 billion. This is a 1.1% change from a year ago. These are the corporate funds available for investment according to the BEA. Quarterly tax receipts for Q3 increased 4.4% from Q2 to $462.6 billion and are up 27.8% from Q3 2011. The ones who made out like bandits were the financial industries. Their profits increased 71.3% from Q3 to $460.5 billion. Nonfinancial industrials profits declined -0.1% to $1,095.1 billion. While corporate profits after tax just hit a record high as a percentage of GDP, wages just hit a record low as a percentage of nominal gross domestic product. Many are talking about this and that's the bottom line, wages and salaries are sharing less and less in the economic pie. Below are corporate profits after tax, in blue, scale on right, as a percentage of nominal GDP, against all wages dispersed on aggregate (not just corporate wages) as a percentage of GDP, maroon, scale on left.

Corporate Profits Hit Record High While Worker Wages Hit Record Low - A constant conservative charge against President Obama is that he is inherently anti-business. However, businesses keep defying the storyline by making larger and larger profits, rebounding nicely out of the Great Recession. In the third quarter of this year, “corporate earnings were $1.75 trillion, up 18.6% from a year ago.” Corporations are currently making more as a percentage of the economy than they ever have since such records were kept. But at the same time, wages as a percentage of the economy are at an all-time low, as this chart shows. (The red line is corporate profits; the blue line is private sector wages.): Corporations made a record $824 billion in profits last year as well, while the stock market has had one of its best performances since 1900 while Obama has been in office. Meanwhile, workers are getting the short end of the stick. As CNN Money explained, “a separate government reading shows that total wages have now fallen to a record low of 43.5% of GDP. Until 1975, wages almost always accounted for at least half of GDP, and had been as high as 49% as recently as early 2001.”

Number of the Week: As Companies Borrow More, Where Is Money Going? - $8.4 trillion: The amount of debt owed by U.S. corporations at the end of September. When policymakers at the Federal Reserve meet next week, one of their main agenda items will be assessing the effectiveness of their latest bond-buying program, known as “quantitative easing” or QE. A key goal of the program is to stimulate the economy by driving down interest rates, making it cheaper for companies and individuals to borrow. New data this week suggests low interest rates are indeed leading to more borrowing. But what happens with the money after that is less clear. According to the Fed’s Flow of Funds report, released Thursday, U.S. nonfinancial corporations had $8.4 trillion in outstanding debts at the end of the third quarter, up $136 billion from the second quarter and nearly half a trillion dollars more than a year earlier. The vast majority of that new borrowing came in the form of corporate bonds. The third-quarter data capture only the earliest days of the Fed’s latest bond-buying program, known as QE3, which has further driven down already low corporate borrowing rates.. Borrowing, in other words, has likely only increased in the fourth quarter. The trouble for the economy is that increased corporate borrowing doesn’t seem to be translating into increased investment. Companies spent $304 billion on capital expenditures in the third quarter, only a bit better than the $295 billion in the second. Separate data from the Commerce Department shows that after adjusting for inflation, business investment actually fell at a 2.2% annual rate in the third quarter.

Corporation Nation - Most Americans know corporations run the nation and long ago ceased to be good citizens. U.S. Corporations have endorsed a sociopathic stance of short term profits as their objective exclusive to all others. Profits above people is now the norm. Dr. Ralph Gomory, who contributes to this site and Dr. Richard Sylla have dismantled the U.S. corporation and even put it back together again in an essay published by American Academy of Arts & Sciences. The essay gives a historical narrative of the U.S. corporation, touching upon major historical events which shaped these business entities into the conglomerates we know today. The authors also propose solutions and describe options to channel business behavior to be more in concert with America. We need to structurally redefine and realign the U.S. Corporation. Excerpted below is the abstract of their paper, Stewarding America: The Corporation.

In Trouble and Paying Out -  Hostess Brands Inc. is closing after a recent standoff with its striking bakers union. But relations between the Twinkie maker and workers were poisoned months ago amid disclosures that Hostess executives received pay raises not long before seeking bankruptcy protection. Hostess's bankruptcy judge said during a hearing Thursday that the payments "will definitely be looked at" as he approved the company's request to start liquidating and lay off more than 18,000 employees. Financially ailing companies often pay bonuses and other compensation to executives, directors and private-equity owners in the months before filing for bankruptcy protection. Federal law restricts "retention" bonuses paid to such "insiders" after a bankruptcy case is filed but not before. Bonuses paid in and around bankruptcy often draw fire from creditors and employees angered by executives getting extra compensation while cutting jobs and benefits, and leaving investors with losses. To avoid running afoul of limits on bonuses that reward executives for sticking around during bankruptcy, companies craft incentive plans that compensate managers for meeting certain performance targets. But another way they can steer clear of the law's restrictions is by paying bonuses before filing for Chapter 11.

Bankruptcy means bonus time for many top executives - Last week, a federal judge gave Hostess the go-ahead to hand out $1.8 million in bonuses to executives involved in liquidating the company. That seems gross enough, until you realize that it's common practice for companies in or about to enter bankruptcy to hand out big bonuses: More than 1,600 insiders—executives and others controlling a company—received bonuses, salaries, fees and other compensation totaling more than $1.3 billion in the months before their companies filed for Chapter 11, according to a Wall Street Journal analysis of more than 80 bankruptcy cases over the past five years. Because there are rules limiting bonuses for executives during bankruptcy, companies often hand out the bonuses shortly before filing: Blockbuster Inc. paid collective bonuses totaling roughly $775,000 to a dozen top executives and managers one week before its September 2010 bankruptcy filing, according to a banker and a consultant familiar with the plan. The timing was an effort to avoid scrutiny under the bankruptcy law limiting retention plans, they said. But don't worry—Blockbuster's general counsel, who received $100,000, described the bonuses as "relatively small."

Regional banks release loss reserves to boost earnings - US regional banks have over-reserved for loan losses during 2009-2010 period, expecting a wave of defaults. Default rates however have been lower than projected and banks have been releasing these reserves into earnings in the past couple of years. According to Credit Suisse, that trend is expected to continue. CS: - US Regional Bank reserve levels have declined by 38% from the peak levels of 1Q10. However, we think reserve levels may still decline by 11% to the trough, which we estimate will form in 3Q14. As banks release reserves for existing loans (not to be confused with reserves at the Fed), the amount of loans they have on the books continues to grow. At some point (in 3Q14 according to CS), the absolute levels of reserves will begin to grow again. For now however the release in reserves is offsetting generally weaker than expected core revenues. CS: - We remain cautious on the industry as we forecast core revenues to miss expectations over the next 12 months. While our net interest income forecasts trend below consensus expectations, our long-term EPS forecasts are only modestly below expectations as we have larger reserve releases than consensus in our models. Reserve reductions are low quality drivers of earnings; however, they still support higher capital payout ratios through the annual CCAR (capital stress test) process, and also imply a faster capital growth rate.

FDIC reports Fewer Problem banks, Total REO Declines in Q3 - The FDIC released the Quarterly Banking Profile for Q3 today.  Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $37.6 billion in the third quarter of 2012, a $2.3 billion (6.6 percent) improvement from the $35.2 billion in profits the industry reported in the third quarter of 2011. This is the 13th consecutive quarter that earnings have registered a year-over-year increase. Increased noninterest income and lower provisions for loan losses accounted for most of the year-over-year improvement in earnings.The FDIC reported the number of problem banks declined: Also noteworthy was a decline in the number of banks on the FDIC's "Problem List" from 732 to 694. This marked the sixth consecutive quarter that the number of "problem" banks has fallen, and the first time in three years that there have been fewer than 700 banks on the list. Total assets of "problem" institutions declined from $282 billion to $262 billion. The dollar value of Real Estate Owned (REOs, foreclosure houses) declined from $9.5 billion in Q2 to $8.8 billion in Q3. This is the lowest level of REOs since Q1 2008. Even in good times, the FDIC insured institutions have about $2.5 billion in residential REO.

Unofficial Problem Bank list declines to 856 Institutions -  This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Nov 30, 2012.  Changes and comments from surferdude808:  This week, the FDIC released its enforcement actions through October but did not release industry results for the third quarter. Changes to the Unofficial Problem Bank List include six removals and five additions that leave the list at 856 institutions with assets of $326.4 billion. A year ago, the list held 980 institutions with assets of $400.5 billion. For the month of November, the list declined by eight institutions after 13 action terminations, three failures, two unassisted mergers, and 10 additions. The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public. (CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.) As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest.

Why Banks Are Enjoying Record Mortgage Revenue - Mortgage rates have fallen to their lowest recorded levels, but the spread between banks’ cost of funding mortgages and the rates being offered to borrowers has soared in recent months. The upshot, the thinking goes, is that mortgage rates would be even lower if banks were passing along their lower funding costs to borrowers. The Federal Reserve Bank of New York devoted a daylong conference to answer the questions of whether banks are booking higher mortgage profits as the Federal Reserve embarks on its latest effort to push mortgage rates down (answer: they are), and why (answer: there are a host of factors, but it has a lot to do with the fact that banks aren’t able to add capacity fast enough to process the demand). A paper presented at Monday’s conference tries to break this down by looking at both why the so-called primary-secondary spread is historically high. While this rate trended around 0.5 percentage point during much of the past decade, it has spiked to around 1 percentage point since 2008, and as high as 1.5 percentage point in recent weeks. The paper also looked at whether it has more to do with higher costs that banks face than with larger profits that banks have been able to charge. The authors devise a separate gauge, called “Other Profits and Unmeasured Costs,” or OPUC, which shows that profits and/or costs have risen from around $2 per $100 in loans from 2005-08 to as high as $4 in early 2009 and $5 in recent months.

MBS litigation 2.0: BofA sues trustee Wells Fargo over put-back demands - On Tuesday, Bank of America broke what I believe is new ground in mortgage-backed securities litigation. The bank brought a declaratory judgment suit against Wells Fargo, the trustee in a commercial MBS offering by BofA predecessor LaSalle Bank, requesting a judicial ruling that BofA is not required to comply with the trustee's put-back demand. The complaint, filed in federal district court in Chicago by Aronberg Goldgehn and Cadwalader, Wickersham & Taft, contends that Wells Fargo didn't comply with the terms of the governing contract, and, moreover, that some of the underlying loans the trustee wants BofA to buy back are performing just fine.The MBS trust is backed by commercial rather than residential mortgages, so it's not necessarily a harbinger of declaratory judgment claims in response to the rash of RMBS trustee suits we've seen lately. But Wells Fargo's put-back demand, as BofA describes it in the complaint, was based on the same kind of alleged underwriting deficiencies cited by investors in RMBS put-backs. Wells Fargo has been notably quick and aggressive about asserting put-backs on mortgages underlying LaSalle commercial MBS offerings, even going to trial against BofA in federal court in Oklahoma last year in a 2008 case claiming that LaSalle's underwriting process was systemically tainted. Perhaps when BofA has had as much experience with RMBS trustees as it has had with Wells Fargo on commercial MBS, we'll see similar declaratory judgment actions.

In an F.H.A. Checkup, a Startling Number - DO we have another Fannie or Freddie on our hands — another mortgage giant headed for a rescue? Like Fannie Mae and Freddie Mac before it, the Federal Housing Administration is suffering in a mortgage hell of its own making. F.H.A. officials say they won’t need taxpayers’ help, but we’ve heard that kind of line before. The F.H.A. backs $1.1 trillion of American mortgages and, by the look of things, it’s in deep trouble. Last year, its mortgage insurance fund was valued at $1.2 billion. Today that fund is valued at negative $13.48 billion. Granted, that figure, reported by F.H.A.’s auditor, doesn’t represent actual losses. It’s an estimate of the difference between future mortgage insurance premiums that the F.H.A. will collect and the expected losses on the mortgages that the agency is obligated to cover over time, combined with the agency’s existing capital resources. But the upshot is this: If the F.H.A. were to stop insuring new home loans today, it wouldn’t have the money it needs to cover its expected losses in the coming years.

HousingWire Propaganda Not To Be Believed, Part 1: Re-Analyzing the Data - Friday HousingWire ran a six-and-a-half page big bank/mortgage servicer propaganda piece called “Living Large“, by Tom Showalter. The article, subtitled “A person’s lifestyle plays into whether they will pay their mortgage after a loan modification”, purports to explain why people default on loan modifications. Instead, it spins a bank-exonerating morality play not justified by the data supposedly being interpreted. I’ll get to the morality play and the “irresponsible borrower” propaganda it represents in my next post to keep this one to readable length. First, to clearly show the wrongness of the bank-serving mythology being sold as its interpretation, I’m going recap the data the ‘article’ presents to answer the questions the underlying study apparently aimed at: why did so many people with mortgage mods made in 2009 default on those mods by 2011? And what needs to be done to make mods more successful going forward? Note: I can’t assess the data quality because I don’t have access to the underlying tables and sourcing info; I am working off HousingWire’s/Showalter’s analysis of it. I just take his numbers at face value, though as I discuss below, however, something is screwy either in the some of the data or Showalter’s reporting of it.

HousingWire Propaganda Part II: The Irresponsible Borrower Myth, Harry & Louise Style - Monday I did an analysis of a study HousingWire reported as showing that profligate borrowers were the reason many 2009 mortgage modifications failed. I analyzed the reported data to show the 2009 mods left borrowers insolvent, and said it’s not surprising that mods that leave borrowers insolvent fail. In the ‘article’, Showalter rejected the idea that mod terms mattered. Instead he claimed the borrowers’ “lifestyles” explained who defaulted and who didn’t. But here’s the thing. As I explained Monday, the key “lifestyle” choice was which debt to default on: when insolvent, did the borrower pay Peter (the mortgage servicer) or pay Paul (store/credit card debt)? Indeed, the study was a marketing   tool trying to sell the ability of a matrix invented by Veritas to identify which potential mod candidates would pay Peter, and which Paul, so the banks could modify loans only for the people who picked Peter. That focus makes the invocation of the irresponsible borrower myth in the article particularly egregious–both borrowers are trying to be responsible in the face of insolvency. Showalter pushes the ‘it’s not the mod terms, it’s the bad borrower’ idea with far more than the “Living Large” headline. He personifies the data by inventing two couples, pitched as archetypes of good and evil, probably hoping to copy the policy-killing success of Harry and Louise.

LPS: Mortgage Delinquency Rates decreased in October - LPS released their Mortgage Monitor report for October today. According to LPS, 7.03% of mortgages were delinquent in October, down from 7.40% in September, and down from 7.58% in October 2011.  LPS reports that 3.61% of mortgages were in the foreclosure process, down from 3.87% in September, and down from 4.30% in October 2011.  This gives a total of 10.64% delinquent or in foreclosure. It breaks down as:
• 1,957,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,543,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,800,000 loans in foreclosure process.
For a total of ​​5,300,000 loans delinquent or in foreclosure in October. This is down from 5,640,000 last month, and down from 6,111,000 in October 2011. This following graph shows the total delinquent and in-foreclosure rates since 1995.The second graph shows a break down of home sales by conventional, foreclosure and short sale. As the housing market slowly recovers, we'd expect distressed sales to decline and conventional sales to increase. This appears to be starting.

CoreLogic: 58,000 Completed Foreclosures in October - From CoreLogic: CoreLogic® Reports 58,000 Completed Foreclosures in October According to CoreLogic, there were 58,000 completed foreclosures in the U.S. in October 2012, down from 70,000 in October 2011 representing a year-over-year decrease of 17 percent. On a month-over-month basis, completed foreclosures fell from 77,000* in September 2012 to the current 58,000, representing a decrease of 25 percent. As a basis of comparison, prior to the decline in the housing market in 2007, completed foreclosures averaged 21,000 per month between 2000 and 2006. Completed foreclosures are an indication of the total number of homes actually lost to foreclosure. Since the financial crisis began in September 2008, there have been approximately 3.9 million completed foreclosures across the country.  Approximately 1.3 million homes, or 3.2 percent of all homes with a mortgage, were in the national foreclosure inventory as of October 2012 compared to 1.5 million, or 3.6 percent, in October 2011. Month-over-month, the national foreclosure inventory was down 1.3 percent from September 2012 to October 2012. The foreclosure inventory is the share of all mortgaged homes in any stage of the foreclosure process.  Note: The foreclosure inventory reported by CoreLogic is lower than the number reported by LPS of 3.61% of mortgages or 1.8 million in foreclosure. Many observers expected a "surge" in foreclosures this year, but that hasn't happened. However there are still a large number of properties in the foreclosure inventory in some states:

Mortgage Catch Pushes Widows Into Foreclosure - 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. In Toledo, Ohio, Florence McKinney said her efforts to seek help with her home payments yielded only confusion. 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. In the latest chapter of the foreclosure crisis, homeowners over 50 are falling into foreclosure at the fastest pace of any age group, according to nationwide data, in part because women are outliving their spouses and are unable to cope with cuts in their pensions, ballooning medical costs — and the fine print on their mortgages. While there are no exact measures of how many widows have entered foreclosure, figures compiled by AARP show the rate of foreclosures among people over 50 increased by 23 percent from 2007 to 2011, resulting in 1.5 million foreclosures.

No Foreclosure for the Holidays?  - Fannie and Freddie are reportedly enacting a voluntary foreclosure (or really eviction) moratorium for the holidays. I've got a beef with this foreclosure moratorium. It captures everything that is wrong with how the GSEs and FHFA have handled foreclosures.  First, it moralizes the foreclosure issue. This isn't a moral issue. It's a macroeconomic policy issue and FHFA is being pennywise, but pound foolish in how it handles foreclosures. It makes no more sense to give relief over the holiday season than it does to give relief solely to those homeowners who meet some set of moral criteria (e.g., not speculators). From a macroeconomic impact perspective the only thing that matters are numbers. If we are going to moralize the foreclosure issue, then we need to talk about the lending as well as the defaults; it is very artificial to only dole out relief on some moral grounds without looking at why the relief is needed in the first place.   Second, I'm not a fan of foreclosure moratoria generally. Foreclosures are not a binary good/bad issue. Instead, some are foolish and others are sensible. Servicers don't do a particularly good job distinguishing between them. That means that foreclosing on no one is a suboptimal solution, just as foreclosing on everyone is. It's frustrating that we are still in a largely binary world 5 years into the foreclosure crisis.  You'd think that servicers would have gotten better at sorting between the situations in which a mod makes no sense and those in which it does. But that would take a type of investment in skilled manpower that many servicers are unwilling to make, especially as that type of manpower will not be a valuable asset for more than a few years and is not locked into the firm.

Econ4 Video on the Housing and Foreclosure Crisis (With Your Humble Blogger in a Supporting Role) -  Yves Smith - Econ4, which is a group of reform minded economists is presenting a series of videos on major topics where it believes our policies are seriously out of whack. From their mission statement:The economic crisis we face today is not only a crisis of the economy. It is also a crisis of economics. The free-market fundamentalism that attained ideological dominance in the final decades of the 20th century has been discredited by financial collapse, global imbalances, mass unemployment, and environmental degradation. To confront these challenges, we need an economics for the 21st century. We need an economics for open minds that breaks free of the closed-minded economic dogmas of the past. We need an economics that aims to secure long-run human well-being, not an economics preoccupied with maximizing short-run output and profits. We need an economics that recognizes that we need to safeguard the Earth for our children and generations to come. We need an economics for people, the planet, and the future. Their latest video release is on housing and foreclosures. Your humble blogger is a participant.

Hurricane Sandy Victims Say Mortgage Companies Dismiss Pleas For Loan Help: The Huffington Post spoke with five homeowners who live in coastal areas of New York City, who said that they contacted their mortgage company after the storm, and either didn't hear back, or were offered insufficient relief -- a two-week grace period, for example, or a loan suspension with a lump sum due in a few months. All five owned homes that sustained significant flood damage and required expensive repairs. Most said that they missed work in the weeks following the storm, and lost wages. As a result, these borrowers said, they were forced to choose from a palette of unpleasant financial choices. Should they miss a few payments, triggering late fees and possibly a foreclosure? Should they put off replacing windows and floors, boilers and bathrooms, risking additional damage from mold and the ravages of winter? Should they take on more debt?

Update: Mortgage Debt Relief Act - The Mortgage Debt Relief Act of 2007 is set to expire at the end of 2012 and this could have a significant impact on short sales. Usually cancelled debt is considered income, but a provision of the Debt Relief Act allowed borrowers "to exclude certain cancelled debt on [a] principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief." (excerpt from IRS). If this act isn't extended, short sales could decline sharply. From Paul Reid, a Redfin real estate agent, writes:  "In an area like Orange County, where I work, the REO inventory is [minuscule]. As of this morning, there are 104 ‘Active’ REOs on the MLS in the entire county. In comparison, there is a total ‘Active’ inventory of 3,504 homes and condos. The short sale ‘Active’ inventory is 335. Where the numbers really stick out is in the ‘Pending’ sales category. As of right now, there are 6,059 homes in Orange County in escrow. Of those, only 267 homes are REOs. More than half, 3,216 homes, are short sales. The remainder are standard sales. If you remove the relief act from the equation you would likely see a significant drop in the number of short sales, but because of how slow the REO process is, you wouldn’t likely see a proportionate increase in the number of REO listings." Right now there are a large number of pending short sales in many distressed areas. They all will not close before the end of the year. There is a bipartisan push to have Congress extend the mortgage debt relief act. Here is a recent letter from several state attorneys general urging Congress to act.

Short Sales Increase As Debt Relief Tax Time Bomb Nears - I’ve had more than a few assurances that Congress would get its act together and pass an extension of the Mortgage Forgiveness Debt Relief Act, so that underwater homeowners who get some debt relief won’t have a big tax bill staring them in the face to make their financial situation even worse. But if that’s the case, you have to wonder why lenders are packing in so many short sales as we near the expiration date. Homeowners and banks are accelerating sales of properties for less than the amount owed as a U.S. law that gives them a tax break expires at the end of the year. The transactions, known as short sales, increased by 35 percent in the third quarter from a year earlier, while sales of bank-owned homes dropped 20 percent, according to a report today by mortgage data seller Renwood RealtyTrac LLC. Together, they accounted for 41.5 percent of home purchases in the quarter. Short sales have accounted for as many as 1.1 million transactions since 2009, helping to reduce the inventory of homes owned by banks that can blight neighborhoods and flood the market. Barring a last-minute extension of the 2007 Mortgage Forgiveness Debt Relief Act, homeowners will be taxed on the forgiven principal. With Congress focused on the so-called fiscal cliff, federal spending cuts and tax-rate hikes set to kick in on Jan. 1, the law may not be extended, leading to a drop in short sales and a rise in foreclosures.

Occupy Our Homes Marks First Anniversary With National Day of Action - One of the more refreshing developments of the past couple years has been the Occupy Our Homes movement, an offshoot of Occupy Wall Street. For the past year, activists have directly challenged the banks and defended homeowners facing foreclosure, consistently chalking up victories in the form of sustainable modifications. Thursday’s Occupy Our Homes’ anniversary, and they are doing a national day of action, with actions planned in at least 16 cities across the country. They’re calling it the national day of action to Reclaim Our Homes and Reclaim Our Future.The typical Occupy Our Homes action looks like this: locals find out about some homeowner in distress. They occupy the home, defending the homeowner from eviction and demanding that the lender work with the borrower. This works in a variety of creative ways, but the result is often the same: after a period of resistance, the bank figures out that it makes more sense both on a bottom-line basis and as a member of the community to just work on a sustainable modification that lets the borrower stay in the home. I don’t have a precise number, but this has happened dozens of times. These are tangible victories that you can actually see making a difference in people’s lives. Occupy Our Homes also occasionally takes over vacant properties for the homeless, matching the massive needs in our society with the real resources available. The philosophy is about a right to housing, and a right to not have that housing stolen from people by predators using criminal means.

Lawler: Single Family REO inventories down 21.7% in Q3 - The following graph is from economist Tom Lawler and shows the total REO for Fannie, Freddie, FHA, Private Label (PLS) and FDIC insured institutions. This isn't all the REO, as Lawler noted before, it "excludes non-FHA government REO (VA, USDA, etc.), credit unions, finance companies, non-FDIC-insured banks and thrifts", but it is probably over 90%. From Tom Lawler: On the SF REO front, the [FDIC insured] industry’s “carrying value” of 1-4 family REO properties at the end of September was $8.7663 billion, down from 8.0% on the quarter and down 26.3% from a year ago. The FDIC neither reports on nor collects data on the number of 1-4 family REO properties held by FDIC-insured institutions, which is annoying. Assuming that the average carrying value of 1-4 family properties at such institutions is 50% higher than the average for Fannie and Freddie (which seems broadly consistently with other data sources on average UPB balances), then a chart showing SF REO inventories of Fannie, Freddie, FHA, private-label securities, and FDIC-insured institution would look as follows. SF REO inventories for these combined sectors in September were down 21.7% from last September.  There are still quite a few properties with loans 90+ days delinquent or in the foreclosure process, but it appears these institutions are working down the number of foreclosed properties they are holding.

The Big Long - America’s residential sector was once the preserve of “mom-and-pop” investors or local developers. The role of hedge funds became apparent only when those who bet massively against the housing market—“The Big Short”, as it was later termed—made billions while their rivals floundered. By gambling that subprime mortgages, extended to borrowers with no plausible means of repaying them, would poison the financial system, John Paulson personally pocketed $3 billion after his hedge fund skyrocketed. The Big Long is now slowly taking shape. House prices have stabilised since their 2009 trough, and have even made small but steady gains in recent months. Investors convinced that a full-blown housing recovery is under way—a big “if”—are looking for ways to profit from it. The most predictable of these is to invest in mortgages, or the very same residential mortgage-backed securities that were so avidly shorted in the run-up to the crisis. It is a deep pool: the $10 trillion of home loans outstanding is second only to equities as an asset class. Over half of these mortgages are tacitly guaranteed by the government, turning them into something akin to Treasury bonds. But packaged in tax-efficient structures to which large dollops of debt are added, these can kick yields up to the 10% range: not bad in a low-interest environment.

MBA: Mortgage Applications increase, Record Low Mortgage Rates - From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey The Refinance Index increased 6 percent from the previous week. The seasonally adjusted Purchase Index increased 0.1 percent from one week earlier. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.52 percent, matching the lowest rate in the history of the survey, from 3.53 percent, with points increasing to 0.41 from 0.40 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This graph shows the MBA mortgage purchase index.  The purchase index had been mostly moving sideways over the last two years, however the purchase index has increased 9 of the last 11 weeks.  The 4-week average of the purchase index is at the highest level since 2010 (when the tax credit boosted application activity).The 4-week average is up about 25% from the low in 2011.

One in three U.S. consumers would consider a Wal-Mart mortgage: study(Reuters) - One in three U.S. consumers would consider a mortgage from retailer Wal-Mart and almost half would consider one from online  payment provider PayPal, according to a financial services study to be released on Monday. The results should be especially disconcerting for banks because the two companies don't even offer mortgages. The study shows consumers are willing to try alternative lenders as borrowers focus on price, customer service and trust in their provider when selecting a mortgage, "There is a real threat from new entrants," Hautop said. The study's results were based on online responses from 618 U.S. consumers in September. Non-bank mortgage companies such as Quicken Loans and Nationstar Mortgage Holdings Inc (NSM.N) have been gaining market share as some large banks such as Bank of America Corp (BAC.N) pull back in a business that burned them during the financial crisis. A Wal-Mart Stores Inc spokeswoman declined to comment on the survey. The retailer provides small business loans at its Sam's Club stores, but doesn't offer mortgages.

Housing: Inventory down 22% year-over-year in early December - Here is another update using inventory numbers from HousingTracker / DeptofNumbers to track changes in listed inventory. Tom Lawler mentioned this last year. According to the for (54 metro areas), overall inventory is down 22% 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 early 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 or so, 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 early December listings, for the 54 metro areas, declined 21.7% from the same period last year.

US housing supply demand curve still bullish - CoreLogic reported today that existing home sales prices officially recorded in October (probable contract average August) rose 6.3% year over year. Corelogic also collects MLS data on contract prices from which it calculates a pending home sales price index. That index portends that closed sales in November will be up 7.1% year over year. These numbers are within the range of other recently reported US national housing price trend indicators.   I looked at a new indicator from the NAR that appears to be a decent proxy measure for supply and demand.  The NAR publishes a survey of its members on their perception of buyer and seller traffic. Although no details are given regarding the methodology, the measure appears to be a diffusion index similar to other such industry surveys. What matters is not the absolute level, but the direction of the trend. As stock chartists, we would recognize the beginnings of a bullish trend with the uptick in buyer traffic from a higher low in late 2011 leading to a breakout in January 2012. That surge peaked in March, and has been stable since then. At the same time, seller traffic has continued to downtrend, making lower highs and lower lows.

CoreLogic: House Prices up 6.3% Year-over-year in October, Largest increase since 2006 - Notes: This CoreLogic House Price Index report is for October. The recent Case-Shiller index release was for September. Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® Home Price Index Marks Eighth Consecutive Month of Year-Over-Year Gains Home prices nationwide, including distressed sales, increased on a year-over-year basis by 6.3 percent in October 2012 compared to October 2011. This change represents the biggest increase since June 2006 and the eighth consecutive increase in home prices nationally on a year-over-year basis. On a month-over-month basis, including distressed sales, home prices decreased by 0.2 percent in October 2012 compared to September 2012*. Decreases in month-over-month home prices are expected as the housing market enters the offseason. ...Excluding distressed sales, home prices nationwide also increased on a year-over-year basis by 5.8 percent in October 2012 compared to October 2011. On a month-over-month basis excluding distressed sales, home prices increased 0.5 percent in October 2012 compared to September 2012, the eighth consecutive month-over-month increase. Distressed sales include short sales and real estate owned (REO) transactions.

House Prices: Case-Shiller to turn negative month-to-month seasonally in October - I expect the Case-Shiller Composite 20 Not Seasonally Adjusted (NSA) index to decline month-to-month in October. This will not be a sign of impending doom - or another collapse in house prices - it is just the normal seasonal pattern. I expect smaller month-to-month declines this winter than for the same months last year. Even in normal times house prices tend to be stronger in the spring and early summer, than in the fall and winter. Currently there is a stronger than normal seasonal pattern because conventional sales are following the normal pattern (more sales in the spring and summer), but distressed sales (foreclosures and short sales) happen all year. So distressed sales have a larger negative impact on prices in the fall and winter. In the coming months, the key will be to watch the year-over-year change in house prices and to compare to the NSA lows in early 2012. I think the house price indexes have already bottomed, and will be up about 5% year-over-year when prices reach the usual seasonal bottom in early 2013. This graph shows the month-to-month change in the CoreLogic and NSA Case-Shiller Composite 20 index over the last several years (both through September). The CoreLogic index turned negative month-to-month in the September report (CoreLogic is a 3 month weighted average, with the most recent month weighted the most). Case-Shiller NSA will probably turn negative month-to-month in the October report (also a three month average, but not weighted).  The second graph shows the seasonal factors for the Case-Shiller composite 20 index. The factors started to change near the peak of the bubble, and really increased during the bust.

Trulia: Asking House Prices increased in November - Press Release: Home Prices Rebound in Hard-Hit Atlanta, Sacramento, and the Inland Empire at the Price Recovery Accelerates in November  In November, asking home prices rose 0.8 percent month-over-month (M-o-M), seasonally adjusted–which implies an annualized growth rate of 10 percent. Year-over-year (Y-o-Y) prices increased 3.8 percent, which was also the largest yearly increase to date. Quarter-over-quarter (Q-o-Q) prices rose 2.2 percent, seasonally adjusted, another post-crisis high; in fact, prices rose 0.8 percent Q-o-Q without adjusting for seasonality (not shown in table), even though prices typically decline after the summer. Excluding foreclosures, asking prices rose 4.3 percent Y-o-Y and 1.6 percent Q-o-Q, seasonally adjusted. For the first time since the housing crisis began, Atlanta and two inland California metros—Riverside-San Bernardino and Sacramento—all experienced significantly large Q-o-Q asking home price gains. Unlike other hard-hit metros such as Phoenix, Las Vegas, and Miami, prices in these metros have been slower to bounce back, declining in February and making smaller gains in August and May. Nationally, rents rose 5.6 percent Y-o-Y, outpacing the national price gain of 3.8 percent. However, asking prices in 14 of the 25 largest rental markets actually rose faster than rents as the price recovery picks up.

Lawler: On the upward trend in Real House Prices - One of the most widely abused home price series used by folks is the long-term “real” home price chart constructed by Robert Shiller in his “Irrational Exuberance” book. While he and others have sometimes characterized his “time series” of “real” home prices back to 1890 as being a good representation of “constant quality” home prices, in fact that is not even remotely the case. There are especially serious issues with the “older” home price series used by Dr. Shiller, with the “most troubling” being that used for the 1890-1934 period. Indeed, the authors of the book from which the home price index used by Dr. Shiller came from actually argued that this index did NOT reflect the behavior of “constant-quality” home price (with evidence to support that argument), and suggested using a materially different home price index. Clearly, the “survey-based” HPI significantly understated the trend in hew home prices. In discussing factors affecting the survey-based HPI, GBW note that any long-term HPI is influenced by two potentially “offsetting” biases: value losses due to depreciation and obsolescence, value gains associated with structural additions and alterations. Here is an excerpt from GBW:“The index in its present form is subject to two major offsetting biases, viz, value losses due to depreciation and obsolescence and value increments in the form of structural additions and alterations. The price relative for 1904, for example, before conversion to a 1929 base, measures the change in price of a given set of properties between 1904 and 1934; this change is affected by the thirty years of depreciation operating on these properties and is somewhat smaller than the change in price that would be measured if this group of properties in 1934 had the same age structure as they had in 1904. Conversely, any structural additions or alterations to the properties between time of acquisition and 1934 would tend to make the actual price rise larger between these two periods than the theoretically correct price movement..

Is The Housing Recovery Just an Illusion Created by the Federal Reserve? -- It’s now conventional wisdom that the housing market — once the anchor that sank the American economy — is the ballast that’s keeping it afloat, however tenuously. The Case-Schiller index of home prices, released last week, showed a sixth straight month of year-over-year increases.  Jed Kolko, the Chief Economist for the real estate website Trulia, compiles a “housing barometer” that measures how close the real estate market is back to normal based on housing starts, existing-home sales, and delinquency and foreclosure statistics. His most recent reading put the housing market at 47% back to normal. Writes Kolko: “In the past three months, Trulia’s Housing Barometer has risen from 34 percent to 47 percent, which is the largest quarterly increase since we started tracking the recovery 18 months ago. Not only is the housing market closer to normal than at any other point since the crisis, the recovery is also accelerating.” In other words, there’s plenty of data to choose from for a housing market bull to make his case. But even if these data clearly show an incipient recovery, what exactly is the reason for it? Tim Iacano of Iacano Research believes that most — if not all — of the recent rise in home prices is a direct result of efforts by the Federal Reserve to stimulate the economy.

Construction Spending increased in October - Three key construction spending themes:
• Residential construction is usually the largest category for construction spending, but there was a huge collapse in spending following the housing bubble (as expected). Looking forward, private residential construction spending will be the largest category again very soon - but spending is still very low (at 1998 levels not adjusted for inflation).
• Private non-residential construction spending picked up last year mostly due to energy spending (power and electric), but spending on office buildings, hotels and malls is still very low.
• Public construction spending declined for several years, but the decline appears to be mostly over. Note: Public construction spending is mostly state and local spending, and the drag from state and local cutbacks appears to be ending.
The Census Bureau reported that overall construction spending increased in October:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during October 2012 was estimated at a seasonally adjusted annual rate of $872.1 billion, 1.4 percent above the revised September estimate of $860.4 billion. The October figure is 9.6 percent above the October 2011 estimate of $795.7 billion. Both private and public construction spending increased: This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted.

The Recession's Toll: How Middle Class Wealth Collapsed to a 40-Year Low - I'm about to share a statistic that you should remember every time you think about the Great Recession, and why the recovery has been so painstaking. It's going to illustrate precisely how devastating the downturn was for your typical American family, and the size of the hole we've been trying to dig ourselves out of. Ready? Here goes: Between 2007 and 2010, the median net worth of U.S. households fell by 47 percent, reaching its lowest level in more than forty years, adjusted for inflation. In other words, middle class wealth virtually evaporated in this country. A good chunk of the population got sucked through a financial wormhole back to the sixties.   Such are the findings of Edward Wolff, an economist at New York University who has produced a paper documenting the Chernobyl-like meltdown of asset values during the recession, and its impact on wealth inequality. To some degree, his work confirms what we've already more or less known; home prices, 401Ks, and the like were demolished during in the recession, and we've been reckoning with the consequences since. In June, the Federal Reserve released its own analysis of household finances, which found that median net worth (which just means a family's assets minus its debts) fell closer to 39 percent from 2007 to 2010. Wolff also uses Federal Reserve data, and approaches the net worth calculation in a slightly different way. But his study is valuable in that it gives us a clear sense of which families were set back, and how far.

U.S. Households’ Net Worth Jumps - U.S. households’ net worth increased by $1.7 trillion in the third quarter of 2012, as gains from the stock market and real estate values boosted Americans’ portfolios. A Federal Reserve report released Thursday showed that households’ total net worth rose to $64.8 trillion between July and September of this year. The value of corporate equities and mutual funds owned by households expanded $800 billion and the value of real estate owned by households increased about $370 billion, the Fed said.

Fed's Q3 Flow of Funds: Household Mortgage Debt down $1.15 Trillion from Peak - The Federal Reserve released the Q3 2012 Flow of Funds report today: Flow of Funds.  According to the Fed, household net worth increased in Q3 compared to Q2 2011. Net worth peaked at $67.3 trillion in Q3 2007, and then net worth fell to $51.2 trillion in Q1 2009 (a loss of $16.1 trillion). Household net worth was at $64.8 trillion in Q3 2012 (up $13.6 trillion from the trough, but still down $2.5 trillion from the peak). The Fed estimated that the value of household real estate increased $301 billion to $17.2 trillion in Q3 2012. The value of household real estate is still $5.5 trillion below the peak.This is the Households and Nonprofit net worth as a percent of GDP. This graph includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations. This ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles. The ratio has been trending up and increased in Q3. This graph shows homeowner percent equity since 1952. Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008. The third graph shows household real estate assets and mortgage debt as a percent of GDP. Mortgage debt declined by $86 billion in Q3. Mortgage debt has now declined by $1.15 trillion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

Household net worth improves in Q4 to highest level since 2007; real estate values increased by $1 trillion this year - The Federal Reserve released data today for the net worth of U.S. households in Q3, here are some highlights:

  • 1. The net worth of U.S. households increased to $64.77 trillion in the third quarter, which was an increase of $6.11 trillion, and more than 10%, from Q3 last year (see chart).
  • 2. Net worth in Q3 this year reached the highest level in any quarter since Q4 of 2007, when household net worth was $66 trillion (see chart).
  • 3. Since the end of last year, the value of real estate owned by U.S. households has increased by more than $1 trillion from $16.2 trillion in Q4 2011 to $17.2 trillion in Q3 this year (see bottom chart above), and is at the highest level since 2008.
  • 4. The total value of all financial assets owned by U.S. households increased by more than $3 trillion since the end of last year, from $50.39 trillion in Q4 2011 to $53.57 trillion in Q3 2012.
  • 5. The value equities and mutual funds owned by U.S. households increased by almost $2 trillion since the end of last year, from $13.36 trillion to $15.33 trillion in Q3 this year.

Flow of Funds Report - Corporate Cash at Record Highs While Households Slash Mortgage Debt for Q3 2012 - The Q3 2012 Federal Reserve's flow of funds report shows a select few gained handsomely in wealth. Household wealth increased $1.7 trillion to $62.67 trillion in Q2 2012. The gains were in stocks, $524.4 billion worth, mutual funds by $282 billion and real estate values increased. This isn't average or median household wealth as only about 54% of Americans own any stock at all, 44% mutual funds and the homeownership rate was 65.5% for Q3. Below is a graph of annual household net worth and notice the Great Recession wealth wipe out in the below graph. Household net worth—the difference between the value of households’ assets and liabilities—was about $64.8 trillion at the end of the third quarter of 2012, $1.7 trillion more than at the end of the second quarter. In the third quarter, the value of corporate equities and mutual funds owned by households expanded $800 billion and the value of real estate owned by households increased about $370 billion. Home equity was $7.714 trillion, an increase of $386.9 billion from Q2. Owner's equity as a percentage of real estate increased from 43.4% to 44.8% in Q3. Below is the graph of homeowner's equity (from table B.100, line 49). Household debt decreased at a -2.05% annualized rate and was $12.868 trillion at the end of Q3. Consumer credit increased $29.3 billion or 4.4% at an annualized rate. Home mortgages declined by another annualized -3.0% or -$72.9 billion. Household debt has been declining since Q2 2008. Believe this or not, increases in household debt are taken as a positive economic sign we we little people are then spending more, except for those of us who have to make the payments.

US Household Assets: $78.2 Trillion, Liabilities: $13.5 Trillion; Net Worth: $64.8 Trillion - As of September 30, the household balance sheet had total assets of $78.2 trillion, of which just $24.6 trillion was in the form of tangible assets (Real Estate, Durable Goods and other), or under one third of total. The balance, or $53.6 trillion, comprising of deposits, corporates, mutual funds, pension funds and other assets, was all in one way or another tied into the stock market and the viability of the financial sector. One can see why with over two thirds of total household assets embedded in the stock market Bernanke will never allow stocks to go down, even if that means monetizing every last one of them (after he is done with all fixed income of course). On the liability side, total debt remained flat with Home Mortgages declining by $0.1 trillion, primarily as a result of discharges, offset by $0.1 trillion increase in Consumer debt. Net result: household net worth at September 30, 2012 for the world's wealthiest nation was $64.8 trillion, or back to where it was in Q4 2006. Somewhere, someone's mouth is watering profusely at the mere though of applying a uniform tax on all household assets...

Household Net Worth: The ''Real'' Story - A quick glance at the complete household net worth data series in a linear chart shows a distinct bubble in net worth that peaked in Q4 2007 with a trough in Q1 2009, the quarter the equity markets bottomed. The latest Fed balance sheet shows a total net worth that is 26.4% above the 2009 trough but still 3.8% below the 2007 peak. The nominal Q3 net worth is up 2.7% from Q2 and up 10.4% year over year. But there are problems with this analysis. Over the six decades of this data series, total net worth has grown over 5000%. A linear vertical scale on the chart above is misleading because it fails to provide an accurate visual illustration of growth over time. It also gives an exaggerated dimension to the bubble that began in 2002.But there is another more serious problem, one that has to do with the data itself rather than the method of display. Over the same time frame that net worth grew by 5000-plus percent, the value of the 1951 dollar shrank to about a dime. The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index. Let's now zoom in for a closer look at the period since 2000. I've added some callouts to highlight where we are currently with regard to the all-time peak and 2009 trough.

Vital Signs Chart: Americans’ Shrinking Debt Burden - Americans are whittling down their debt. Outstanding debt held by households and nonprofits — including mortgages, student loans, auto loans and credit cards — was equivalent to 112.7% of disposable income at the end of September, compared with 116.4% a year earlier and a peak of 134.4% in 2007. Consumers are both paying off debts and seeing their after-tax incomes rise modestly.

Consumer Debt - Still A Long Way To Go - We have seen numerous articles as of late discussing how the average American family has finally delevered their household balance sheet at last. The problem is that apart from mortgage debt, whose decline has been facilitated by massive central bank and governmental intervention, other debt is still being piled on. These other debts are at substantially higher rates than mortgages and negatively impacts the consumer's ability to save.  This is why savings rates continue to fall.  As full-time employment remains elusive, the average American continues to resort to debt, and governmental support, to fill the gap between waning real incomes and their expected standard of living.  This is a game that has a finite end. The diversion of income from savings to support debt service requirements will continue to impede economic growth until such time as either debt returns to levels that are conducive for higher levels of personal savings or incomes rise. This leaves consumers trapped between the need to payoff of debts in order to free up cash flow but needing increased levels of debt to sustain their standard of living.  In the end the consumer will delever, either by choice or by force, the only difference between the two outcomes is the length of time that the current economic malaise lasts.

Deflationary Trends in Consumer Credit - A few charts from the New York Fed Quarterly Report on Household Debt and Credit will help put into perspective the deflationary forces facing the Fed. Aggregate consumer debt fell again in the third quarter, by $74 billion, continuing the nearly four-year downward trend in household debt. As of September 30, 2012, total consumer indebtedness was $11.31 trillion, 0.7% lower than its level in the second quarter of 2012 and down $1.37 trillion from the 2008 Q3 peak. Mortgage balances shown on consumer credit reports continued to drop, and now stand at $8.03 trillion, a 1.5% decrease from the level in 2012 Q2. Home equity lines of credit (HELOC) balances dropped by $16 billion (2.7%). The deleveraging (deflationary) trend in consumer debt is unmistakable. There is certainly no jump in the demand for credit card, mortgage, auto, or home equity loans.

October Consumer Credit Rises By $14.2 Billion, Government Funds 70 Cents Of Every Dollar - A month after consumer credit rose by $12 billion (revised) driven by car and student loans, even as revolving credit declined, total consumer credit in October once again rose in both revolving and non-revolving categories, up by $14.2 billion, consisting of $3.4 billion in revolving and $10.8 billion in non-revolving. This number will probably get revised lower next week. The number which will not be revised lower is the composition of sources of consumer credit, where the Government sourced 70% of all new loans (on a NSA) basis: $7 bilion of a total of $10.3 billion. For some perspective, the US government has funded $114 billion of the total $156 billion in total consumer debt in the past year. Between the Fed and Uncle Sam, who needs banks?

Modeling the Price Mechanism: Simulation and The Problem of Time -- Today’s New York Times article on rapid online repricing by holiday retailers depicts a retail world starting to approach the “flash-trading” status of financial markets: Amazon dropped its price on the game, Dance Central 3, to $24.99 on Thanksgiving Day, matching Best Buy’s “doorbuster” special, and went to $15 once Walmart stores offered the game at that lower price. Amazon then brought the price up, down, down again, up and up again — in all, seven price changes in seven days. And:The parrying could be seen with a Nintendo game, Mario Kart DS. Through Thanksgiving, as Target kept the price stable, Walmart changed prices six times, and Amazon five. On Thanksgiving itself, Walmart marked down the price to its advertised $29.96, which Amazon matched. This made me think about a Greg Hannsgen post from last May on the Levy Economics Institute’s Multiplier Effect blog, a post I’ve been meaning to write about. It looks at the pricing mechanism based on how fast prices change/adjust. The especially interesting thing about this post: It uses a dynamic simulation model to display the effects of slower and faster price adjustments, and lets you run the model yourself, right on the page, by moving a slider to change the speed of price adjustment and watch the results. (You need to install a browser plug-in from Wolfram, which only worked for me in Firefox) The gist: You wonder what will happen when markets finally start working. How about, for example, a market that changes prices and wages quickly in response to fluctuations in demand? …The pathway shown in the figure just below is followed by public production, capacity utilization, and the markup.As you move the lever to the right, you are increasing a parameter that controls the speed at which the markup changes in response to high or low levels of customer demand.

Holiday Online Sales up 14% From 2011 - Holiday season online retail sales have risen 14% so far this year from the corresponding period last year but have slowed following Cyber Monday, according to comScore Inc. Three separate days in the latest week saw more than $1 billion in spending, led by Cyber Monday, which was the heaviest online spending day on record at $1.47 billion. However, growth rates softened considerably in the wake of Cyber Monday and through the weekend, the research company reported. Holiday season e-commerce spending–from Nov. 1 to Dec. 2–totaled $21.35 billion, up from $18.7 billion over the corresponding shopping days last year. Cyber Week, from Nov. 26 to Nov. 30, saw sales of $5.46 billion.

Michigan Consumer Sentiment Falls Below Expectation - The University of Michigan Consumer Sentiment preliminary number for December came in at 74.5, an attention-grabbing drop from the November final of 82.7. Today's number was well below the consensus of 82.4. 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 13% below the average reading (arithmetic mean) and 12% below the geometric mean. The current index level is at the 25th 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 74.5 puts us at the lower end of the range between the average non-recession and recession mindsets.

Preliminary December Consumer Sentiment declines sharply to 74.5 - Click on graph for larger image. The preliminary Reuters / University of Michigan consumer sentiment index for December declined to 74.5 from the November reading of 82.7. This was way below the consensus forecast of 83.0. There are a number of factors that can impact sentiment including unemployment, gasoline prices and other concerns. Back in August 2011, sentiment declined sharply due to the threat of default and the debt ceiling debate. Unfortunately we might be seeing a repeat of that debacle.

Weekly Gasoline Update: Prices Drop Four Cents - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Gasoline prices at the pump fell last week, returning to the downward trend that was slightly interrupted last week. Rounded to the penny, the average for Regular and Premium both fell four cents. Regular is up 17 and Premium 20 cents from their interim weekly lows in the December 19, 2011 EIA report. As I write this, continues to show one state, Hawaii, with the average price of gasoline above $4. This week no states have prices above $3.90 and only one state, New York, has prices above $3.80.

Sure Enough, 2012 Will Go Down as Most Expensive Year Ever for Gas - Naturally, drivers are happy that gas prices have rapidly retreated from all-time highs. They may not be quite as pleased when realizing that they’ve never paid more for gas than they did in 2012 as a whole.  According to the AAA Fuel Gauge Report, the national average for a gallon of regular is $3.38, which is about 4¢ less that it was a week ago, 10¢ cheaper than a month ago, and roughly 50¢ lower than the 2012 high hit in early spring. Gas in California now averages $3.69, roughly a fully $1 cheaper than prices at the pump as recently as early October. Gas prices are also declining rapidly in states such as Michigan, where there was a 12¢ dip in the last week. Compared to what drivers were used to paying to fill up not so long ago, prices at the pump now don’t seem so painful. And yet, everything’s relative. In Michigan, even after the 12¢ dip, drivers were paying 15¢ per gallon more than they were at the same time last year. The country as a whole is paying, on average, 10¢ more than we were exactly 12 months ago.

Better Economy, Storm Delays Lift US Auto Sales - A better economy and havoc from Superstorm Sandy kept auto sales brisk in November. Signs of a healthier U.S. economy and purchases postponed by Sandy pushed up sales for major automakers last month. Chrysler, Nissan and Hyundai reported strong demand on everything from small SUVs to sedans on Monday. Americans are more confident about the economy than they’ve been in a while: Home values are rising, hiring is up and interest rates remain low. And that means people are willing to make big purchases. (Superstorm Sandy, which hit at the end of October, forced buyers in the Northeast to postpone purchases until November. Also, people whose cars were damaged by the storm are starting to replace them. And because the average age of a vehicle on U.S. roads is approaching 11 years, people are being forced to make costly repairs or buy a new car or truck. November sales, when calculated on an annual basis, are likely to be 15 million or more, the highest rate since March of 2008, according to LMC. That’s above the 14.3 million annual rate so far this year, even though November is normally a lackluster month due to cold weather and holiday anticipation.

U.S. Light Vehicle Sales at 15.5 million annual rate in November, Highest Since 2007 - Based on an estimate from Autodata Corp, light vehicle sales were at a 15.54 million SAAR in November. That is up 15% from November 2011, and up 9% from the sales rate last month. This is the highest level of sales since December 2007. This was above the consensus forecast of 15.0 million SAAR (seasonally adjusted annual rate), however some of the increase was a bounce back from Hurricane Sandy that negatively impacted sales at the end of October. This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for November (red, light vehicle sales of 15.54 million SAAR from Autodata Corp).Sales have averaged a 14.4 million annual sales rate this year through November, up from 12.7 million rate for the same period of 2011. Last year sales were depressed for several months (May through August) due to supply chain issues related to the tsunami in Japan.  The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Car replacement on the East Coast caused a spike in November car sales - Another economic indicator that is being blamed on Sandy - though in a positive way - is the November US auto sales (released earlier this week). The gain in auto sales clearly surprised to the up-side. Reuters: - The 15 percent sales gain in November easily surpassed the gain of 11 to 13 percent most analysts had expected. The annual sales rate in November of 15.54 million was the industry's strongest for any month since the 15.55 million rate of February 2008.  Superstorm Sandy hurt the last few days of sales in October, which finished below expectations, but many consumers simply shifted their purchases to November. In addition, the average age of cars on the road has risen to just above 11 years, and industry officials say that will continue to drive demand.  This explanation about making up for the lower October sales or the average age of US autos is wrong. Yes, the car "fleet" in the US is aging. But the November spike was about damaged cars being replaced. Many people on the Atlantic Seaboard had no choice but to buy cars in November. The positive aspect of this disaster is that in order to replace inventories, car production is sure to increase. And that in turn should improve US manufacturing PMI in the coming months (see discussion).

AAR: Rail Traffic "mixed" in November - Once again rail traffic was "mixed". Most of the decline in rail carloads was due to fewer coal and grain shipments, and intermodal was up - but the strike at the ports of Los Angeles and Long Beach limited the increase. From the Association of American Railroads (AAR): AAR Reports Mixed Rail Traffic for November Intermodal traffic in November saw an increase for the 36th straight month, totaling 934,595 containers and trailers, up 1.2 percent (11,519 units) compared with November of 2011. Carloads originated in November totaled 1,130,770 carloads, down 4 percent (47,512 carloads) compared with the same month last year. Carloads excluding coal and grain were up 5.5 percent for the month, or 30,466 carloads, compared with the same month last year.  “Coal and grain together account for almost half of non-intermodal U.S. rail traffic, so they are obviously very important to railroads. But coal and grain carloads often rise or fall for reasons that have little or nothing to do with the economy. Other commodity categories like autos, lumber, and crushed stone, sand and gravel that are more highly correlated with economic growth have been growing....This graph shows U.S. average weekly rail carloads (NSA). . The second graph is for intermodal traffic (using intermodal or shipping containers):

Los Angeles port strike triggers fears, lobbying by businesses (Reuters) - A national coalition of U.S. business groups is urging an end to a strike at the twin California ports of Los Angeles and Long Beach amid fears that a prolonged stand-off will cost the American economy many billions of dollars, and could even spread to the east coast. Trade groups led by the National Retail Federation have sent letters to U.S. President Barack Obama and leading members of Congress asking them to intervene and help end the strike at America's two busiest container harbor facilities. Those industry groups say the strike, which entered its sixth day on Sunday, is already costing $1 billion a day. The labor dispute has been triggered by 500 clerical workers at the ports, members of the relatively small Office of Clerical Union Workers. Their industrial action and clout has been significantly strengthened because some 10,000 members of the International Longshore and Warehouse Union have supported them, refusing to cross the clerical workers' picket lines. Their action has effectively shut down 10 of the two ports' combined 14 container terminals.  Industry groups say they have fresh memories of a 10-day lockout at West Coast ports in 2002. They estimate that dispute cost the U.S. economy $1 billion a day and that it took six months before the supply chains fully recovered.

Striking L.A. Port Clerks Cost U.S. $1 Billion a Day - A strike hobbling the nation’s largest port complex, affecting an estimated $1 billion of cargo a day, has halted paychecks for thousands of Southern California logistics workers before the holidays. The walkout by clerical employees at the ports of Los Angeles-Long Beach has idled thousands of workers without pay, including almost 8,000 truckers, according to Robert Curry, president of California Cartage Co., one the largest freight handlers there. “They’re dying,” Curry said. About 800 office employees represented by the International Longshore and Warehouse Union went on strike in a contract dispute Nov. 27. Other workers refused to cross picket lines. Seven of eight Los Angeles shipping terminals are shut down, according to Phillip Sanfield, a spokesman for the city-owned facility. At the adjacent Port of Long Beach, three of six are closed. Los Angeles Mayor Antonio Villaraigosa said today that the union and the Los Angeles/Long Beach Harbor Employers Association, which represents terminal operators, had agreed to use a federal mediator to help them reach consensus.

Wasted Stimulus Work Leaves River Rocks Blocking Barges - In 2009, the U.S. Army Corps of Engineers, seeking a method less expensive and damaging to wildlife than dynamiting to clear rocks from the Mississippi River, committed $5.7 million to an experimental grinding process. The project, financed by President Barack Obama’s economic stimulus program, was futile and called off after two efforts, one in 2011 and another earlier this year, totaling about four weeks. The grinding job’s failure forced expedited efforts now under way to use explosives to remove formations, called pinnacles, that are imperiling commercial navigation as the river has receded to levels approaching historic lows in some places. The corps yesterday waived some competitive bidding requirements with the goal of starting demolition by Jan. 3. “It’s been known for some time that the pinnacles need to be removed,” Merritt Lane, president of Canal Barge Co., a New Orleans-based marine transport company, said in a phone interview. “The pace of progress on that has been too deliberate from our perspective.” The corps projects that shallow water will impair navigation on the Mississippi by Dec. 11 and a record low-water mark will be set on Dec. 22. Shippers are beginning to carry less cargo, reducing the amount of water their boats displace, and to look for other means of transport for their products.

US Manufacturing Shrinks in November to 3-Year Low - A survey shows U.S. manufacturing shrank in November to its weakest level since July 2009, the first month after the Great Recession ended. Worries about automatic tax increases in the New Year cut demand for factory orders and manufacturing jobs. The Institute for Supply Management said Monday that its index of manufacturing conditions fell to a reading of 49.5. That’s down from 51.7 in October. Any reading above 50 signals expansion, while readings below 50 indicate contraction. Manufacturing grew in October for only the second time since May. Businesses expressed concerns about the “fiscal cliff.” Worries about the fiscal cliff have led many companies to pull back this year on purchases of machinery and equipment, which signal investment plans. The decline could slow economic growth and hold back hiring in the October-December quarter.

ISM: Manufacturing Activity Contracts In November - An early peek at economic activity for November tells us to keep our optimism in check. The ISM Manufacturing Index dropped to 49.5 last month, the first dip under the neutral 50 mark since August. In short, we have a new data point that turned negative for profiling the economy. Is it a robust sign that the economy’s tanking, or is this another head fake courtesy of Hurricane Sandy’s distortions on the economic trend? The answer—not to be confused with the speculation in the here and now—is waiting for us in the near-term future. That won’t stop any one from worrying now, of course. No explanation needed. The ISM index slipped to its lowest level in three years by inching below August's reading by the smallest of margins. As dips under 50 go for this metric, last month’s swoon is modest. But in the current climate of recession in Europe and the potential for something similar in the U.S. (courtesy of Washington’s fiscal follies), no one needs an excuse to wonder how it all plays out.

ISM Manufacturing index declines in November to 49.5, Lowest since July 2009 - The ISM manufacturing index indicated contraction in November. PMI was at 49.5% in November, down from 51.7% in October. The employment index was at 48.4%, down from 52.1%, and the new orders index was at 50.3%, down from 54.2%. From the Institute for Supply Management: November 2012 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector contracted in November following two months of modest expansion, while the overall economy grew for the 42nd consecutive month,  "The PMI™ registered 49.5 percent, a decrease of 2.2 percentage points from October's reading of 51.7 percent, indicating contraction in manufacturing for the fourth time in the last six months. This month's PMI™ reading reflects the lowest level since July 2009 when the PMI™ registered 49.2 percent. The New Orders Index registered 50.3 percent, a decrease of 3.9 percentage points from October, indicating growth in new orders for the third consecutive month. The Production Index registered 53.7 percent, an increase of 1.3 percentage points, indicating growth in production for the second consecutive month. The Employment Index registered 48.4 percent, a decrease of 3.7 percentage points, which is the index's lowest reading since September 2009 when the Employment Index registered 47.8 percent. The Prices Index registered 52.5 percent, reflecting a decrease of 2.5 percentage points." Here is a long term graph of the ISM manufacturing index. This was well below expectations of 51.7% and suggests manufacturing contracted in November.

Manufacturing ISM Plummets To Lowest Print Since July 2009 - So much for the 3rd Recovery (or is that 4th?) in the current depression: following the Chicago PMI which posted a solid beat on horrendous internals, today's Manufacturing ISM came in just as expected, at least by those skeptical of all the sugar high economic data the US population was spoon fed in the past few weeks. At 49.5, the headline PMI print was the lowest since July 2009, the biggest miss to expectations of 51.4 in 5 months, and down from 51.7. Also, as most know, as sub-50 print indicates a contraction in the manufacturing space, usually a precursor to overall recession. Particular data points of note: Employment down from 52.1 to 48.4; New Orders slide from 54.2 to 50.3, and in the worst news for GDP Exports declined, Imports rose and Inventories plunged - which was to be expected after a huge inventory build up in Q3 pushed GDP much higher in the period. Expect even more downward GDP recessions on today's ugly data. Finally, while the bulls would love to blame the collapse on Sandy, it was not mentioned anywhere in the release and the ISM's Holcome said just one respondent even mentioned Sandy in the release, which means the manufacturing reality will only get worse as the full impact of Sandy is internalized.

ISM Manufacturing Index - PMI Contracts to 49.5% for November 2012 - The November 2012 ISM Manufacturing Survey PMI decreased, -2.2 percentage points, to 49.5% and and is now in contraction. This is the 4th time in six months manufacturing PMI has contracted. PMI hasn't been this low since July 2009's 49.2% PMI and the employment index contracted to September 2009 levels. There is a survey reported slowdown in demand for manufacturers who are also clearly disgusted by Congress and the fiscal cliff. Superstorm Sandy is barely mentioned.  The Census reported manufactured durable goods new orders as no growth in October where factory orders, or all of manufacturing data, will be out December 5th. The ISM claims the Census and their survey are consistent with each other. To wit, below is a graph of manufacturing new orders percent change from one year ago (blue, scale on right), against ISM's manufacturing new orders index (maroon, scale on left) to the last release data available for the Census manufacturing statistics. Here we do see a consistent pattern between the two.  New Orders plunged by -3.9 percentage points, to 50.3%. New Orders inflection point, where expansion turns into contraction, isn't exactly 50% for the long term, it is 52.3%. This implies while the monthly new orders is growing, the long term is not. From the ISM:  A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders.

ISM - Outlook Declines - The recent release of the ISM Manufacturing index continues to point to signs of a slowing economy. This (49.5) reading, which is what is reported by the bulk of the mainstream media, is fairly meaningless. Remember, economic change happens at the margins.  Since the PMI is more of a "sentiment" index (it is a diffusion index that measures positive versus negative sentiment on various areas from employment to production to inventories) it is a better used as a gauge about what businesses will likely do in the future based on their current assessment of conditions. The importance of the change in sentiment is lost on most economists who have never actually owned a business.  However, it is clear that the fiscal cliff, the recent storm, and the continuing Eurozone saga are continuing to erode business sentiment.  This erosion in sentiment in turn affects economically sensitive actions such as production, employment and investment.

Struggling to Gain Traction in Manufacturing (9 graphs) The US manufacturing sector is not collapsing. But it is struggling to gain traction, and in doing so throwing up a number of signals that, in the past, have been consistent with recession. I don't think they are telling that story this time, at least not yet. But the end of the year is looking a little more fragile than we would like it to be - and while a good part of that fragility is a consequence of the international sector, it is hard to ignore the role of fiscal policy uncertainty as a depressing force on economic activity. Last week's advanced manufacturing report was hardly inspiring despite the ever so slight rise in core manufacturing orders: Compared to a year ago, this data still has a recessionary feeling: The same holds for shipments as well, although to a lesser extent: Today's ISM release confirms the softness across the manufacturing sector, with the headline number dipping below the expansion/contraction line: While the production component rose, new orders fell, only part of which can be attributed to the international situation: Somewhat disconcerting is the ongoing weakness in import orders, a sign of weak domestic demand: And, of course, the employment component was soft as well: Let's hope the employment weakness is not spreading far beyond manufacturing. Note also that the softness in recent manufacturing data is carrying forward from broader third quarter trends, notably the decline in the equipment and software component of GDP: So while the international sector is clearly a drag, the same is increasingly true of the domestic side of the equation. This seems to be confirmed by some of the anecdotal evidence in the ISM survey

ISM Manufacturing Business Activity Index Slips Into Contraction Territory - Today the Institute for Supply Management published its November Manufacturing Report. Today's headline PMI at 49.5 percent is showing a return to contraction after two months of expansion. The consensus was for 51.2 percent, but's own forecast of 50.0 was closer to the mark. Here is the report summary: Manufacturing contracted in November as the PMI™ registered 49.5 percent, a decrease of 2.2 percentage points when compared to October's reading of 51.7 percent. This is the fourth month in the last six months that the PMI™ has contracted, and the index is at its lowest level since July 2009 when the PMI™ registered 49.2 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. The chart below shows the Manufacturing series, which stretches back to 1948. I've highlighted the eleven recessions during this time frame and highlighted the index value the month before the recession starts.

ISM Manufacturing in Contraction; Expect Conditions to Worsen - US Manufacturing as measure by the November 2012 Manufacturing ISM Report On Business® is back in contraction.  The PMI™ registered 49.5 percent, a decrease of 2.2 percentage points from October's reading of 51.7 percent, indicating contraction in manufacturing for the fourth time in the last six months. This month's PMI™ reading reflects the lowest level since July 2009 when the PMI™ registered 49.2 percent. Comments from the panel this month generally indicate that the second half of the year continues to show a slowdown in demand; respondents also express concern over how and when the fiscal cliff issue will be resolved.It's tough to pin this slowdown on hurricane Sandy although I suspect some will try. Others will blame the "fiscal cliff" but that theory does not have much credence either. After all, this is the 4th contraction in six months, long before Hurricane Sandy or fiscal cliff worries. Instead, I propose global QE in the US, China, and Europe has finally played out for all that it's worth and then some. Note that export orders have contracted every month for six months, and the backlog of orders every month for 8 months. Eventually, employment had to catch up with those trends and it did. Employment fell 3.7 percentage points to 48.4. Production is up 1.3 percentage points but with new orders and exports slowing rapidly, don't expect that to last.

Analysis: Factors Other Than Sandy at Work in ISM Data - The manufacturing sector contracted in November. The Wall Street Journal Online’s Tom Ortuso and Naroff Economic Advisors President Joel Naroff take a look at the numbers

Trying to make sense of diverging US manufacturing indices - Staying with the theme of conflicting signals, today's two US manufacturing reports are pointing to opposite trends for November activity. We start with the Markit PMI report which says that the US manufacturing expanded last month. Markit: - The expansion of the U.S. manufacturing sector gained traction in November, with the final Markit U.S. Manufacturing Purchasing Managers’ Index™ rising to its highest level in six months. At 52.8, up from 51.0 in October, the PMI was higher than the flash estimate of 52.4, and signalled a moderate improvement in overall business conditions.So far so good. But another report, the ISM PMI showed something quite different. This ISM index used to be called the NAPM Survey. Some older traders still lovingly refer to it as "napalm" because it was known to move markets. The index, which has been around since 1948, shifted from expansion in October to contraction in November and came in at 49.5 vs. 51.7 consensus. It shows a rather sharp deceleration in new orders, further slowdown in manufacturing employment, and increasing weakness in exports. One positive aspect of the report showed that both the manufacturers and their clients have been shrinking inventories. Assuming these inventories will need to be replenished, manufacturing activity would pick up at a later date.

Apples and Oranges in the Manufacturing Data?, by Tim Duy: Reporting on today's spate of manufacturing numbers, Neil Irwin at the Washington Post writes: Just a few months ago, the global economy seemed to be stuck in a precarious state. Huge swaths of the world economy were either slowing down or contracting outright, and it wasn’t at all clear whether global economic policymakers would have enough gas left in their stimulus tanks to stop things from spiraling into a bad place. But the latest data in a wave of reports on the manufacturing sectors in nations around the world overnight and Monday morning suggest that the world has avoided that fate. The same cannot be said of the United States, however. I appreciate Irwin's point - many of the global manufacturing reports were better than expected, although I would say only marginally so. The European Central Bank has so far prevented a free fall on the continent; whether or not recovery is at hand or the region is faced with a long, grinding period of zero growth remains a subject of debate. Europe's fate will be decided, I suspect, by a lack of fiscal stimulus. As far as the persistence of the recent uptick is concerned, take quick look at the Markit Eurozone PMI: Where Irwin trips me up is here:All of which brings us to the United States. The Institute for Supply Management’s purchasing managers’ index fell sharply, to 49.5, from 51.7 in October. The details of the number were simply terrible. The actual level of production activity at American factories actually rose, but new orders fell 3.9 percent, which bodes ill for the future. The employment component of the survey fell to its lowest level since September 2009, which is hardly an optimistic sign for the November jobs numbers due out on Friday.This is all true, in my opinion, but I am wondering if this is an apples to oranges comparison? Irwin shifts from the Markit PMIs to the ISM PMI data. What was the Markit PMI for US manufacturing? Up, not down as the ISM reported:

Manufacturing: ISM PMI vs. Markit - The ISM manufacturing index indicated contraction in November, with the PMI declining to 49.5% (below 50 is contraction). A couple of weeks ago, the Markit PMI increased to 52.4 from 51.0 in October - a five month high - suggesting "moderate" expansion. Which was it? Contraction or expansion? Chris Williamson, Markit chief economist wrote today (ht NW): Divergence in ISM and Markit survey headline indicators masks consistent picture of sluggish expansion in fourth quarter. Two barometers of US manufacturing business conditions moved in different directions in November, but if examined in more detail both tell a similar story of modest expansion of manufacturing output so far in the fourth quarter. ...the PMIs are composite indicators derived from various survey questions, and although using the same indexes, the two surveys have different weights for each component. While the headline composite indexes from the two surveys did diverge, the discrepancies are smaller when you look at the subindices. When the Output Indexes from the two surveys are compared against the three-month change in official production data (a widely used comparison for survey and official data), the Markit index has a correlation of 94% compared with 87% for the ISM data.  Of course this commentary was from Markit (the ISM index has a much longer history).  And, however we look at the data, manufacturing is clearly weak.

Factory Orders Increase 0.8% for October 2012 - The Manufacturers' Shipments, Inventories, and Orders report shows factory new orders increased 0.8% for October. September showed a 4.5% increase whereas August had a -5.1% decline. This Census statistical release is called Factory Orders by the press and covers both durable and non-durable manufacturing orders, shipments and inventories.  Manufactured durable goods new orders, increased 0.5% for October. September durable goods showed a 9.1% increase whereas August had a -13.1% plunge in durable goods new orders. Machinery alone showed a 4.6% jump in new orders. Nondurable goods new orders increased 1.1% for October.  Transportation equipment's new orders dropped -2.3% on nondefense aircraft & parts. Motor vehicles & parts increased 3.0% in new orders.  Core capital goods new orders increased 2.9% for the month a nice improvement from September's -0.5% decline. Core capital goods are capital or business investment goods and excludes defense and aircraft.  Graphed below are the revised durable goods news orders. Markets jump on the advance report for durable goods new orders, even though it is revised almost always a week later as statistics are more complete for the month. Notice that durable goods new orders are below pre-recession 2008 levels. Shipments overall increased 0.4% and September's shipments showed a 0.7% increase. Durable goods shipments declined -0.4% while nondurables increased 1.1% on a 1.9% increase on coal and petroleum shipments. Core capital goods shipments declined -0.1% and have declined the last three months, September -0.3% and August core capital goods shipments dropped -1.1%. Below is a graph of core capital goods shipments.

ISM Non-Manufacturing Index increases in November - The November ISM Non-manufacturing index was at 54.7%, up from 54.2% in October. The employment index decreased in November to 50.3%, down from 54.9% in October. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: November 2012 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in November for the 35th consecutive month,  "The NMI™ registered 54.7 percent in November, 0.5 percentage point higher than the 54.2 percent registered in October. This indicates continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 61.2 percent, which is 5.8 percentage points higher than the 55.4 percent reported in October, reflecting growth for the 40th consecutive month. The New Orders Index increased by 3.3 percentage points to 58.1 percent. The Employment Index decreased by 4.6 percentage points to 50.3 percent, indicating growth in employment for the fourth consecutive month but at a slower rate. The Prices Index decreased 8.6 percentage points to 57 percent, indicating prices increased at a slower rate in November when compared to October. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.This was above the consensus forecast of 53.6% and indicates faster expansion in November than in October. The internals were mixed with the employment index down, but new orders up.

ISM Non-Manufacturing Business Report: Growth Improves - Today the Institute for Supply Management published its latest Non-Manufacturing Report. The headline NMI Composite Index is at 54.7 percent, signaling slightly faster growth than last month's 54.2 percent. The consensus was for 53.7 percent. Here is the report summary: The NMI™ registered 54.7 percent in November, 0.5 percentage point higher than the 54.2 percent registered in October. This indicates continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 61.2 percent, which is 5.8 percentage points higher than the 55.4 percent reported in October, reflecting growth for the 40th consecutive month. The New Orders Index increased by 3.3 percentage points to 58.1 percent. The Employment Index decreased by 4.6 percentage points to 50.3 percent, indicating growth in employment for the fourth consecutive month but at a slower rate. The Prices Index decreased 8.6 percentage points to 57 percent, indicating prices increased at a slower rate in November when compared to October. According to the NMI™, 11 non-manufacturing industries reported growth in November. Respondents' comments are mixed; however, the majority of survey respondents reflect a cautious optimism about current economic conditions.   The chart below shows Non-Manufacturing Composite. We have only a single recession to gauge is behavior as a business cycle indicator.

Vital Signs Chart: Nonmanufacturing Growth - America’s service sector expanded last month. The Institute for Supply Management’s index of nonmanufacturing businesses, which means mostly service businesses, rose to 54.7 in November from 54.2 in October and 52.6 a year ago. Readings over 50 indicate expansion. At the same time, an index of employment in the service sector, which provides most U.S. jobs, dropped to 50.3 from 54.9 in October, suggesting a slower pace of hiring.

Services Sector Expands, but Employment Growth Slows - The U.S. nonmanufacturing sector continued to expand in November, but employment barely grew, according to data released Wednesday by the Institute for Supply Management. The ISM’s nonmanufacturing purchasing managers’ index unexpectedly edged up to 54.7 last month from 54.2 in October. Forecasters surveyed by Dow Jones Newswires had expected last month’s PMI to slip to 53.5. Readings above 50 indicate activity is expanding.

Non-Manufacturing ISM Beats Expectations As Employment Index Slides - Recessionary media dynamics 101: "When in doubt, baffle with BS." As expected, Monday's collapse in the manufacturing ISM would need to be offset somewhere, and that somewhere was today's Services ISM which is where the rest of the world decided to dump the "good news."  Sure enough ISM just reported a headline number of 54.7, better than both the expected 53.5 and last month's 54.2. This was driven by a better than expected Business Activity/Production index which miraculously soared by 5.8 to 61.2, while New Orders increased to 58.1 from 55.3, and not to mention Imports which had the biggest jump in the month of +6.0 to 55.5 - nothing like reducing your GDP as an indicator of optimism. Where things get very ugly however, was the dump in Employment from 54.9 to 50.3, the lowest since July, and the collapse in prices from 65.5 to 57.0. So much for jobs and margins. But at least it wasn't "Sandy's fault." Overall: nothing to write home about especially in light of all the other recently adverse data.

Dueling Forecasts: ISM Manufacturing & Services Indexes - Yesterday's update on the ISM Services Index delivered a positive counterpoint in the November estimate vs. the discouraging slide in the ISM Manufacturing Index. One of the indicators is feeding us misleading signals about the business cycle. The manufacturing index is warning, albeit mildly, that the economy is weakening. But the services data begs to differ. “The consumer is carrying a lot more of the economic momentum into the end of the year, given the cautiousness of business leaders,” For some recent perspective on the data, the chart below tracks the non-manufacturing (services) composite index (red line) and its manufacturing counterpart (black line). Note that the services composite index only dates to early 2008 and so I've included a related services metric—non-manufacturing business activity index (blue line)—that goes back to 1997. The main point is that the services sector data is trending higher while the manufacturing index has again slipped under 50, a sign that the sector is contracting.

ISM Composite - Back To Pre-Crash Levels, But... The composite index has now regained its pre-financial crisis levels of 55.4.  However, more important than the current level is the trend of the data since the peak in 2010.  I have noted the previous peaks of data and while the index is volatile from one month to the next the declining trend of the data should be concerning to those paying attention.  As we have stated in the past "economic change occurs at the margin" so the focus on a single data point can be very misleading. With estimates for Q4 GDP being ratcheted down sharply to roughly 1% from Q3's 2.7% annualized rate - it is very likely that the latest print in the ISM Composite index is likely the peak that we will see for several months. Doing more with less has now been the mantra of businesses since the financial crisis, and despite the $30+ trillion dollars thrown at the economy since that time, there has been little movement by businesses to become more aggressive.

U.S. Small-Business Owners Pessimistic Post-Election - U.S. small-business owners are pessimistic post-election, with the Wells Fargo/Gallup Small Business Index plunging to -11 in November from 17 in July. This is the most pessimistic that owners have been about their operating environment since July 2010, when the index stood at -28. The quarterly survey was conducted Nov. 12-16, 2012, with a random sample of 607 small-business owners, representing the fourth quarter of 2012. Small-business owners grew increasingly optimistic throughout the first two quarters of 2012, with the index reaching a high of 23 in May. Prior to the beginning of the recession in 2008, index scores were generally higher than 100. The Wells Fargo/Gallup Small Business Index was initiated in August 2003. The Future Expectations Dimension of the index, in which owners rate their expectations for their business over the next 12 months, fell 19 points to -1 in November. Small-business owners' future expectations are at their lowest level since July 2010, when this dimension stood at -2.

Small-Business Owners' Hiring Intentions Plunge. U.S. small-business owners expect to add fewer net new jobs over the next 12 months than at any time since the depths of the 2008-2009 recession, according to this November's Wells Fargo/Gallup Small Business Index survey. Small-business owners' net hiring intentions for the next 12 months plunged to -4 in November, down from +10 in July and matching the previous record low recorded by the Wells Fargo/Small Business Index of -4 in November 2008. Historically, net hiring intentions have tended to be very positive, with small-business owners expecting to grow and hire more new employees than they will let go over the next 12 months. In good economic years, net hiring intentions have been in the double-digits. This has not been the case since the recession and financial crisis in 2008-2009 with net hiring intentions reaching a low of -4 in November 2008. There was considerable improvement in small-business owners' hiring expectations during much of 2012, prior to the recent November

Congress Betrays The U.S. STEM Worker Once Again - The House of Representatives is out to destroy the American Science, Technology, Engineering and Mathematics Professional. Republicans passed H.R. 6429 with the oxymoron title, STEM Jobs Act of 2012. STEM stands for Science, Technology, Engineering and Mathematics and this bill gives 55,000 foreigners a year who graduate from an American university with a Masters or PhD in these fields an employment sponsored green card. The claim is STEM jobs create other jobs. This is true, these professional occupations can spawn other jobs, as is typical with an employment multiplier effect derived from more disposable income as well as advanced research and development itself. Although STEM's multiplier effect assumes manufacturing and supportive positions are in the United States, which these days isn't usually the case. The problem is these Science and Engineering jobs are not positions in addition to, but in place of. In other words, we have worker substitution going on where Americans are fired, employers continue with their institutionalized age, sex and U.S. citizen discrimination and simply replace the fired American with a young, typically male, foreign one. Displacing an American from that job with a foreign one does nothing to increase jobs, help the economy, or innovate. Either worker can innovate and in fact many U.S. patent and copyright holders have actually been displaced already. Innovation is work sponsored. If one doesn't have a job in R&D, odds are they will not get their ideas into the market place or even registered. Worker substitution generally hurts the economy and it obviously hurts the worker being displaced. That's what is currently happening. The great STEM shortage lie has been going on for years, in spite of overwhelming statistics there is no shortage of Americans with STEM college degrees.

When Cheap Foreign Labor Gets Less Cheap - Nick Wingfield and I had an article in Friday’s paper about how some American companies are “re-shoring” manufacturing they had previously sent abroad. The scale of these efforts is still more anecdotal than widespread at this point. Still, it’s worth examining why the United States might be a more attractive place to locate your plant today than in the past. Cheap energy costs in the United States (thanks to shale gas extraction), concerns about keeping the supply chain close to the American consumer base, quality control issues and intellectual property concerns have all encouraged American companies to produce at least some of their products at home. But so have rising wages in some manufacturing bases abroad. Inflation-adjusted average wages in China, for example, more than tripled over the decade from 2000 to 2010, according to a report released Friday by the International Labor Organization. This table, taken from the report, shows that in Asia, inflation-adjusted average wages have about doubled since 2000. In Eastern Europe and Central Asia, average wages almost tripled:

The Deterioration in the Unemployment-Vacancy Relationship Is a Long-Term Unemployment Fact »   It is not an "emerging structural skills mismatch" fact. It is a "long-term unemployed lose the weak ties that help them get jobs" fact… A major empirical win for Rand Ghayad and William Dickens: "What Can We Learn by Disaggregating the Unemployment-Vacancy Relationship?":

Weekly Initial Unemployment Claims decline to 370,000 - The DOL reports: In the week ending December 1, the advance figure for seasonally adjusted initial claims was 370,000, a decrease of 25,000 from the previous week's revised figure of 395,000. The 4-week moving average was 408,000, an increase of 2,250 from the previous week's revised average of 405,750. The previous week was revised up from 393,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 408,000. This sharp increase in the 4 week average is due to Hurricane Sandy as claims increased significantly in NY, NJ and other impacted areas over the 4-week period (some of those areas saw another decline this week). Note the spike in 2005 was related to hurricane Katrina - we are seeing a similar impact, although on a smaller scale. Weekly claims were lower than the consensus forecast. And here is a long term graph of weekly claims:

Jobless Claims Fall To Pre-Hurricane Levels - New filings for jobless benefits fell again last week, offering another statistical talking point to argue that the dramatic surge in new claims for the week through November 11 was a temporary effect from Hurricane Sandy. Since then, claims have dropped for three consecutive weeks. The overall decline in the last three reports is substantial, pushing last week's claims data down to the range that prevailed before the storm hit, albeit on the high side of the pre-storm range. But for now, there's quite a bit more confidence for asserting that the claims numbers again suggest that slow growth for the labor market remains a reasonable outlook.Exhibit A is last week's drop in new filings for unemployment benefits, which retreated by 25,000 to a seasonally adjusted 370,000, or slightly below the four-week average for the week ahead of the sharp increase in claims due to the storm. As today's press release notes, the biggest drop last week among the states was a 24,000 slide in New Jersey, which—according to the Labor Department—reported "fewer storm related claims, primarily from the construction, transportation and warehousing, manufacturing, trade, and accommodation and food service industries." By comparison, the biggest state increase was 5,000 in Wisconsin.

Weekly Unemployment Claims at 370K: Back to the Pre-Sandy Range - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 370,000 new claims number was a 25,000 decrease from a 2,000 upward adjustment of the previous week as the impact of Sandy continues to abate. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, rose to 408,000. Given the impact of Hurricane Sandy, the four-week MA will show a skew for the next couple of weeks. Here is the official statement from the Department of Labor:  In the week ending December 1, the advance figure for seasonally adjusted initial claims was 370,000, a decrease of 25,000 from the previous week's revised figure of 395,000. The 4-week moving average was 408,000, an increase of 2,250 from the previous week's revised average of 405,750.  The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending November 24, a decrease of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending November 24 was 3,205,000, a decrease of 100,000 from the preceding week's revised level of 3,305,000. The 4-week moving average was 3,309,000, an increase of 7,750 from the preceding week's revised average of 3,301,250.  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 in the pre-Sandy ballpark, but the 4-week moving average will continue to remain elevated until those Sandy-related dots are more than four weeks behind the latest data.

ADP: Private Employment increased 118,000 in November - From ADP: Private sector employment increased by 118,000 jobs from October to November, according to the November ADP National Employment Report®, which is produced by Automatic Data Processing, Inc. (ADP®) ... in collaboration with Moody’s Analytics. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. The October 2012 report, which reported job gains of 158,000, was revised down by 1,000 to 157,000 jobs. Mark Zandi, chief economist of Moody’s Analytics, said, “Superstorm Sandy wreaked havoc on the job market in November, slicing an estimated 86,000 jobs from payrolls. The manufacturing, retailing, leisure and hospitality, and temporary help industries were hit particularly hard by the storm. Abstracting from the storm, the job market turned in a good performance during the month. This is especially impressive given the uncertainty created by the Presidential election and the fast-approaching fiscal cliff. Businesses appear to be holding firm on their hiring and firing decisions.” This was below the consensus forecast for 125,000 private sector jobs added in the ADP report

Jobs Forecasts Even Cloudier Than Usual - Payroll giant ADP reported an increase of just 118,000 private-sector jobs in November. But the report pointed to aberrations. “Superstorm Sandy wreaked havoc” on the job markets last month, said Mark Zandi, chief economist at Moody’s Analytics, which compiles the ADP data. The storm sliced an estimated 86,000 jobs from payrolls. But Sandy’s drag was offset by an early Thanksgiving. Retailers probably hired holiday help earlier in November than in the past. That probably added between 60,000 and 70,000 retail slots last month. Ignore those red herrings, and job growth is probably rising at 150,000, said Mr. Zandi. While better than the reported 118,000, the pace is only a bit above the rate needed to draw down the jobless rate, he said. That means unemployment will remain high for a few more years to come. Interesting, Mr. Zandi said there was little evidence that worries over the fiscal cliff was hurting the jobs market, although uncertainty has caused companies to hold back on capital spending and advertising.

November Job Growth Slows... Because Of Hurricane Sandy? - Private payrolls in the U.S. increased by 118,000 last month, according to the ADP Employment Report. As expected, that’s a slowdown from October’s 157,000 rise (on a seasonally adjusted basis). Many economists will chalk up the slower rate of growth to Hurricane Sandy’s negative influence. Maybe. For now, it’s a plausible argument. Nonetheless, today’s ADP number tells us to remain cautious on expecting anything other than a comparably lower rate of jobs growth when the Labor Department publishes the official November payrolls report on Friday. "Superstorm Sandy wreaked havoc on the job market in November, slicing an estimated 86,000 jobs from payrolls," says Mark Zandi, chief economist of Moody's Analytics, the firm that crunches the ADP numbers. "The manufacturing, retailing, leisure and hospitality, and temporary help industries were hit particularly hard by the storm." Not everyone agrees, but for the moment there’s not much to do but wait for the next number. If Friday’s Labor Department update is considerably weaker than expected, the business cycle outlook will darken further. Actually, the consensus forecast is already discounting a sizable slowdown in the government figures: a gain of around 95,000 for private payrolls in November, or half as much as October’s 184,000 pop. If that estimate holds up, Friday’s update will bend but not yet break the argument that payrolls have succumbed to the darker angels of the cycle.

ADP Employment Report Shows 118,000 Private Sector Jobs Gained for November 2012 - ADP, released their proprietary private payrolls jobs report for November 2012. This month ADP is reporting a gain of 118,000 private sector jobs. As expected, superstorm Sandy cost 86,000 estimated job losses. Graphed below are the reported private sector jobs from ADP. This report does not include government, or public jobs.  Below are the month job gains or losses for the five areas ADP covers, manufacturing (maroon), construction (blue), professional & business (red), trade, transportation & utilities (green) and financial services (orange).  This month manufacturing once again got hammered with a loss of 16,000 jobs. Construction gained 23,000 jobs, Trade/transportation/utilities also gained 22,000 jobs, Financial activities jobs increased by 13,000 and Professional/business services increased by 16,000.  Sandy's effects hit manufacturing, retailing, leisure and hospitality, and temporary help industries. Yet notice manufacturing job losses by ADP's accounting before the storm, going back six months.  We also have ADP's older three level breakdown in jobs by business size. Small business, 1 to 49 employees, added 19,000 jobs, medium, 50-499 employees, added 33,000 and large business added 66,000 to their payrolls.  Below is the graph of ADP private sector job creation breakdown of large businesses (bright red), median business (blue) and small business (maroon), by the above three levels. For large business jobs, the scale is on the right of the graph. Medium and Small businesses' scale is on the left.

ADP Print Of 118K Misses Expectations, Drops; Manufacturing Jobs Decline For Fifth Month: Zandi Blames Sandy - It was only logical, not to mention rhyming, that the new overlord of the ADP private payroll cheat sheet, Moody's Mark Zandi, would blame hurricane Sandi for today's miss in ADP private jobs, which printed at 118K, below expectations of 125K, and well below last month's downward revised 157K. To wit from Zandi: "Superstorm Sandy wreaked havoc on the job market in November, slicing an estimated 86,000 jobs from payrolls. The manufacturing, retailing, leisure and hospitality, and temporary help industries were hit particularly hard by the storm. Abstracting from the storm, the job market turned in a good performance during the month." And abstracting from reality, theoretical central planning might work. More importantly for Obama's "create 1 million manufacturing jobs in 4 years task" f(a)rce, November saw yet another 16,000 manufacturing jobs lost. Fear not though: these were almost offset by the 13,000 highly "productive" financial jobs created in the past month - perhaps all were insurance liability estimators? Finally, with Friday's NFP forecast at 87K, on a range of 15K to 145K, today's ADP report is merely yet more of the same very loud noise we have grown to love and expect from the firm which mysteriously pulled a NAR and revised its 2012 YTD jobs several weeks ago by a few hundred thousand.

U.S. Small Business Hiring Plans Plunged in November - In a sign of deep pessimism about the economy, U.S. small-business hiring plans plunged to their lowest level in four years last month, a survey released Thursday said.Small-business owners’ net hiring intentions for the next 12 months dropped to -4 in November, down from a reading of +10 in July and matching the previous record low from November 2008, according to the quarterly Wells Fargo/Gallup Small Business Index survey. The November WSJ/Vistage survey of small businesses also noted a deterioration in hiring plans. (See full results of the WSJ/Vistage survey here.) The negative reading indicates that more businesses expect to decrease the number of jobs at their company than expect to increase it–21% of owners plan to cut payrolls while only 17% plan to boost hiring. The rest expect no change.

Gallup Finds Unemployment Rate Soars Follwing Presidential Election - Two months ago, there were various prominent pundits who were furiously mocked and ridiculed by those whose job in the media it is to mock and ridicule, for suggesting what most know: that economic data is widely nuanced, massaged, adjusted, goalseeked and outright manipulated by various political interests. That someone would feign outrage by this allegation is laughable at best (and sorry, the "too many people were involved to keep it a secret" excuse is now absolute rubbish following the confirmation of Liborgate, yet another conspiracy theory until it became a conspiracy fact), yet all the "serious" outlets of insight did just that. Now that the election is over, for one reason or another "unnuanced" normalcy is about to strike back with a vengeance, as soon as tomorrow with the official release of November jobs data. And if the just released Gallup unemployment data is any indication, the amount of outright goalseeking by the fine folks at the BLS was nothing short of startling. Because after recording an adjusted unemployment rate of 7.4% in October, the November unemployment rate, based on a random sample of 29,308 adults, soared by a whopping 0.9% in one month to 8.3%, the most since the Great financial crisis itself! And furthermore, at 8.3% the unemployment rate is now the highest since May. Is it time yet for all those sellsiders to admit they were wrong weeks after producing beautiful pitchbooks of how 2013 will be "different this time" and the economy will soar? Or should we wait a few weeks first?

The jobs report Friday is going to be a giant mess - But the numbers themselves are likely to be a muddy mess, offering little clarity on the true state of the U.S. job market on the eve of the fiscal cliff. The biggest reason is Hurricane Sandy, which struck the Northeast at the tail end of October and has made most economic data in the last couple of weeks hard to parse. But the confusion goes deeper. Start with whatever any given jobs report tells us about the underlying state of the economy, namely whether hiring picked up or slowed down in the previous month. Adjust for the statistical randomness that can give misleading signals. Now add in the fact that around the holidays, the seasonal adjustment process looms particularly large and can create distortions; for example, Thanksgiving fell early this year, so retailers may have added temporary workers earlier than they usually do. Add in a looming austerity crisis of tax hikes and spending cuts scheduled to take effect Jan. 1; quite possibly, employers are holding back on hiring until a resolution is found, though with all the other things going on, it will be hard to separate that effect from everything else. And finally, account for a superstorm that shut down commerce in some of the nation’s most populous areas during the week of the jobs survey.

Jobs report likely to tell two different tales - There’s often a disparity between the unemployment rate and the number of payroll jobs added because the numbers come from two separate surveys. That disparity could be sizable in November.  The key reason is one of timing. In most months, the survey of households, which is used to calculate the unemployment rate, and the survey of businesses, which determines the number of jobs added or lost for the month, are both based on data from the week of the 12th of the month. But because the survey of households requires phone calls to thousands of homes, the government moved it up a week in November to avoid conflicting with Thanksgiving. The business survey stayed in its usual week. So in tomorrow’s report, the payroll survey will show how many people were working the week of Nov. 12, while the unemployment rate will be based on who was working the week of Nov. 5. Ordinarily, one week wouldn’t make much difference to the data. But November 2012 wasn’t a typical month. Initial claims for unemployment benefits were all over the map early in the month thanks to Superstorm Sandy, and ADP yesterday estimated the storm would subtract 86,000 jobs from the November total. Sandy struck at the end of October, meaning that when the household survey was conducted in early November, there were still widespread power outages, flooding and mass-transit snarls keeping businesses closed and workers at home.

Unemployment rate falls to lowest level since 2008 - Modest hiring continued in November and the unemployment rate fell to its lowest level in nearly four years, according to a report released Friday. The U.S. economy added 146,000 jobs in November, and the unemployment rate fell to 7.7% from 7.9% in October, the Labor Department said. While that's the lowest unemployment rate since December 2008, it fell due mainly to workers dropping out of the labor force. Economists surveyed by CNNMoney had predicted that only 77,000 jobs were added in November and that the unemployment rate had risen to 8%, factoring in distortions from Superstorm Sandy. But the Labor Department said it was still able to collect a normal level of responses to its survey, even in areas affected by the storm. "Our analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November," the Labor Department said in a press release. The Labor Department typically revises its jobs numbers several times. In Friday's report, job growth was revised lower in both September and October, subtracting 49,000 jobs from the 2012 total. Most of the revisions came from state and local education.

Unemployment Rate Drops as Economy Adds 146,000 Jobs in November - The US economy proved surprisingly resilient in preliminary November job numbers, despite the effects of Hurricane Sandy, posting a gain of 146,000 jobs, and a drop in the topline unemployment rate to 7.7%. However, because of Sandy we should expect substantial revision to the numbers. The Bureau of Labor Statistics claims that their survey response rates in the states affected by Sandy were “within normal ranges,” and that the storm “did not substantively impact the national employment and unemployment estimates for November.” This is hard to believe, especially because first-time jobless claims did show a spike from the storm. In addition, the winter months have seasonal adjustment issues around the holidays that in recent years have consistently shown a bias toward stronger job pickups. Neil Irwin has a read on these factors. Finally, the survey collection for the household survey was moved up a week, to move outside the Thanksgiving holiday. So the household survey and the establishment survey are actually measuring two different weeks. The regional and state estimates, scheduled for December 21st, will add some more clarity, as will the revisions in future months. Given all of these factors, a drop in the unemployment rate in the household survey sounds pretty good. But two major indicators, the labor force participation rate and the employment-population ratio, dropped in November. This leads to the drop in the topline rate, as more people drop out of the labor force. Total employment in the household survey was “about unchanged” in November, so the drop in the labor force accounted for the entire drop in the rate. There are still 12 million unemployed persons, 4.8 million of whom have been out of work more than 27 weeks. The establishment survey data showed downward revisions for September and October. September fell from 148,000 jobs to 132,000 jobs, and October fell more sharply, from 171,000 to 138,000. So that’s not great news, especially when the November data are so shaky. Over the year, employment has gained by 151,000 jobs per month, a slightly lower rate than the 153,000 monthly gain in 2011.

November Employment Report: 146,000 Jobs, 7.7% Unemployment Rate - From the BLSTotal nonfarm payroll employment rose by 146,000 in November, and the unemployment rate edged down to 7.7 percent, the U.S. Bureau of Labor Statistics reported today....Hurricane Sandy made landfall on the Northeast coast on October 29th, causing severe damage in some states. Nevertheless, our survey response rates in the affected states were within normal ranges. Our analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November....The change in total nonfarm payroll employment for September was revised from +148,000 to +132,000, and the change for October was revised from +171,000 to +138,000. There was uncertainty about this report because of Hurricane Sandy. The headline number was above expectations of 80,000, but both September and October payroll growth was revised down.  The second graph shows the unemployment rate. The unemployment rate declined to 7.7%.  The unemployment rate is from the household report. The unemployment rate declined because of lower participation (a decline in the civilian labor force). The third graph shows the employment population ratio and the participation rate.  The Labor Force Participation Rate decreased to 63.6% in November (blue line. This is the percentage of the working age population in the labor force..The Employment-Population ratio decreased to 58.7% in November (black line). I'll post the 25 to 54 age group employment-population ratio graph later.

November Jobs Report: First Impressions - The job market in November performed notably better than expected, especially in light of expected damage to hiring from late October’s Hurricane Sandy. The Bureau of Labor Statistics reported that payrolls grew by 146,000 last month and unemployment ticked down to 7.7%, the lowest rate since late 2008.  That decline, however, was once again driven by labor force withdrawal, so it should not be taken as a sign of a tighter job market. Analysts were expecting the impact of the storm on the most densely-packed labor markets in the country to significantly lower the job count.  But the Bureau reported that their survey response rates in the affected states were in the normal range, so they don’t believe Sandy is “substantively” distorting these numbers. Construction data may, however, reveal some storm-related effects, with jobs off 20,000 in November after growing slightly in prior months as the housing market has begun to show signs of life (we’ll have to wait for the state data release later in the month to see if the losses were in affected states). Downward revisions took 49,000 jobs off of the Sept and Oct payroll counts, so, factoring in today’s report, the average pace of payroll growth over the past three months is about 140,000 overall and 150,000 in the private sector.  That pace is consistent with an economy growing at a decent clip and with a slowly declining unemployment rate.  It is not, however, fast enough job growth to quickly reduce the large gaps in output, employment, and earnings that continue to hold back working families.

Another Screwed Up BLS Jobs Report - The incompetence of the Bureau of Labor Statistics is not legendary, but it should be. The positive bias these civil servants introduce by means of various adjustments to the jobs data is inexcusable, but is often excused, if not blindly accepted. (This is default case.) Based on the Household Survey Data, the BLS lowered the unemployment rate to 7.7%. This is the so-called "headline" number. In so far as "full" employment is often taken to be 5%, you might think we were racing toward the Promised Land. If you want to see just how many more people were not counted in the Labor Force, I suggest you look at TABLE-A16 and do some elementary math (subtraction). But here I give will give you TABLE-15, also known as Alternative Measures of Labor Underutilization. I will compare some of the numbers there with recent Gallup polling.The Gallup polling data shows a sharp uptick in both unemployment (BLS U3) and underemployment (BLS U6) in November, as shown in the next two graphs.  The BLS numbers and the Gallup numbers can not reconciled. The adjusted Gallup unemployment rate is 0.6% higher than the official "headline" BLS number. The unadjusted Gallup underemployment rate is 3.9% higher than the unadjusted BLS U6 number. These numbers are as close to apples-to-apples comparisons as we're ever going to get. These numbers are direct reflection of the difference between what private private polling reveals and positively biased government bullshit.

The Employment Situation - spencer - (8 graphs) The employment report was better than expected as Sandy apparently did not have the widely expected negative impact. But the data essentially shows that the recent trend of weak employment continued as payrolls expanded some 146,000 and the household survey showed a -122,00 drop. Private payrolls expanded some 147,00 as government employment fell about 1,000. The expansion of private payrolls was within the range of recent reports. The year over year change in both measures -- to smooth out monthly noise -- is still about the same.. The unemployment rate fell to 7.7% , but the drop was due more to -350,000 contraction in the labor force than higher employment. The average workweek was stable at 33.4 hours and the index of aggregrate hours worked rose 0.2%. For production or nonsupervisory hours worked expanded 0.4%-- a little better than the total. Average hourly earnings rose from $23.59 to $23.69. But its growth is still at record lows. Average weekly earnings growth remained very weak at about 1.7%. This is in sharp contrast to the widespread expectations that income will spike higher in the 4th quarter as individuals shift income from 2013 back to 2012 to avoid or minimize the expected tax rate increase in 2013.But the hourly wage employees in this report have little or no ability to shift income.

146K New Jobs, Unemployment Rate Drops to 7.7% - Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics, with the bracketed text added by me: Total nonfarm payroll employment rose by 146,000 in November, and the unemployment rate edged down to 7.7 percent [down from 7.9 percent last month], the U.S. Bureau of Labor Statistics reported today. Employment increased in retail trade, professional and business services, and health care.  A particularly striking BEA note in today's release, one that many analysts probably found surprising, is the following observation: "Our analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November." Today's nonfarm number is higher than the consensus, which was for 120K new nonfarm jobs. The prior month's number for new jobs was revised slightly upward to 189K from the original 184K.  The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948.  Note the increasing peaks in unemployment in 1971, 1975 and 1982.  The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The latest number is 3.1% — down from 3.2% last month. This measure gives an alternative perspective on the relative severity of economic conditions. As we readily see, this metric remains higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%.

Private Payrolls Rise More Than Forecast In November - Private payrolls increased by 147,000 last month on a seasonally adjusted basis, the Labor Department reports. That represents a considerably slower rate of growth from October's revised 189,000 jump, but today's number beat expectations by a comfortable margin. The consensus forecast compiled by, for instance, projected a lesser gain of 120,000. Meanwhile, the jobless rate reportedly fell to 7.7%. I don't pay much attention to this number—payrolls data is more informative for business cycle analysis. Nonetheless, it's hard not to notice that unemployment slipped to the lowest level in nearly four years. There's a lot of debate about the relevance of the unemployment numbers, but to the extent that this data tells us anything it's the direction of the trend, and for now that seems to be moving in a productive direction: down. Meanwhile, the relatively upbeat news for payrolls isn't a total surprise after yesterday's favorable update on weekly jobless claims. Any one employment report, of course, is suspect and so it's wise not to read too much into today's data. But when we look at November's jobs picture in historical context, the trend continues to look encouraging. The net gain in private payrolls last month represents a 1.8% rise from a year ago. That tells us that the economy's capacity to mint new jobs remains more or less unchanged vs. recent history. Since April, the annual rate of growth in private payrolls has closely hugged the 1.7%-to-1.8% range. That's mediocre compared with the glory days in the 1990s, when annual increases of 2.5% to 3.0% were common. But relative to the five years just before the Great Recession hit, 1.7%-plus looks decent.

Establishment Survey +146,000; Household Survey -122,000 Jobs; Unemployment 7.7% as Labor Force Shrinks by 350,000; No Sandy Effect - The establishment report of +146,000 jobs was about what most expected. However, beneath the surface, this report looks grim. The household survey shows a loss of 122,000 jobs. The unemployment rate dropped by .2% because the labor force fell by 350,000 and those "not in the labor force" rose by a whopping 542,000. Thus, we are back to the previous 2012 pattern of witnessing unemployment rate drop largely because of a massive increase of those "not" in the labor force.  Hurricane Sandy had no effect. The BLS reports "Our survey response rates in the affected states were within normal ranges. Our analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November."  November BLS Jobs Report at a Glance:

  • Payrolls +146,000 - Establishment Survey
  • US Employment -122,000 - Household Survey
  • Involuntary Part-Time Work -168,000 - Household Survey
  • Baseline Unemployment Rate -.02 at 7.7% - Household Survey
  • U-6 unemployment -.02 to 14.4% - Household Survey
  • The Civilian Labor Force -350,000 - Household Survey
  • Not in Labor Force  +542,000 - Household Survey
  • Participation Rate -.2 to 63.6 - Household Survey

US Unemployment Drops to 7.7 Percent, Lowest Since January 2009; Payroll Jobs Continue Steady Rise - The U.S. unemployment rate dropped to 7.7 percent in November, according to today’s data release from the Bureau of Labor Statistics. That was down 0.2 percent since October, and was the lowest rate reported since January 2009. Payroll jobs increased by 146,000 in the month, continuing a moderate but steady trend. The unemployment rate is the ratio of unemployed persons to the civilian labor force, based on a monthly survey of households. Both the numerator and denominator of the ratio decreased in November. The ratio fell because the number of unemployed persons decreased by more than the number of the employed. Both the labor force participation rate and the employment-population ratio decreased slightly, with both figures returning to the values reported in September. The BLS also reports a broader measure of unemployment, U-6, which includes people who would like to work but are not looking because they think no jobs are available, and people who are working part-time but would prefer full-time work. U-6 decreased to 14.4 percent in November, its lowest level since December 2008.  Private sector payroll jobs increased by 147,000 in November while government job decreased by 1,000. The establishment survey is subject to revision as more complete data come in. The BLS revised the previously reported job gain for October downward from 171,000 to 138,000. The September figure was revised downward from 148,000 to 132,000.Most of the new jobs were in the service sector, with retail trade showing especially strong gains. (The data are seasonally adjusted, so the data should be interpreted as meaning that stores were hiring more than the usual number of workers in advance of the holiday season.) Goods producing sectors as a whole lost jobs, although there were small gains in motor vehicle manufacturing and in mining and logging.

Unemployment Rate Edges Down to 7.7 Percent as Job Growth Slows: The unemployment rate fell to 7.7 percent in November, its lowest level since December of 2008. However, the immediate cause was a drop of 350,000 in the size of the labor market as reported employment actually fell by 122,000. The establishment survey reported job growth of 146,000. With the prior two months growth revised downward by 49,000, this brings the average over the last three months to 139,000. This is somewhat worse than the 158,000 average rate of job growth over the last year. ...The household data indicated little change from prior months. While the drop in unemployment is good news, the employment rate actually slipped down to 58.7 percent, just 0.5 percentage points above the 58.2 percent low last reached in the summer of 2011. ... On the whole, the data in the November report show pretty much the same picture as what we have been seeing over the last six months. The economy is creating jobs at a rate that is a bit faster than what is needed to keep pace with the growth of the labor market. At the current pace, we would not see the economy returning to full employment for another decade. Furthermore, there are more downside risks than upside -- for example, if there were to be severe deficit reduction as a result of the current negotiations between President Obama and Congress.

US Unemployment Rate Drops to Lowest Since December 2008 - The U.S. unemployment rate fell to its lowest since December 2008 at 7.7 percent, with the economy adding 146,000 jobs in November. The government said Superstorm Sandy had only a minimal effect on the figures. Latino jobless numbers held steady at 10 percent, after dropping slightly in September, from 11.4 to 9.9 percent. A thorough review of the report released by the Labor Department Friday offered a mixed picture of the economy. Throughout the storm, hiring remained steady in the face of looming tax increases. But the government said employers added 49,000 fewer jobs in October and September than it initially estimated. And the unemployment rate fell to a four-year low in November from 7.9 percent in October mostly because more people stopped looking for work and weren't counted as unemployed. The report "is something of a mixed bag but, on balance, it's a positive," said Paul Ashworth, an economist at Capital Economics. Sandy's effect on the figures was much smaller many analysts had predicted. The government noted that as long as employees worked at least one day during a pay period — two weeks for most people — its survey would have counted them as employed.

America's Payrolls add 146,000 Jobs for November 2012 - The BLS unemployment report shows total nonfarm payroll jobs gained were 146,000 for November 2012. But there is hidden bad news in this report. October payroll gains were revised down, from 171,000 to 138,000. September payrolls were also revised down from 148,000 to 132,000. The below graph shows the monthly change in nonfarm payrolls employment.  The BLS employment report is actually two separate surveys and we overviewed the current population survey in this post. There is even more bad news in that most jobs gained are unskilled, low paying jobs.  The start of the great recession was declared by the NBER to be December 2007. The United States is now down -4.13 million jobs from December 2007, 4 years and 11 months ago. This is just ridiculous on how long the ongoing employment crisis has been.  The below graph is a running tally of how many official jobs are permanently lost, from the establishment survey since Decemember 2007. Amazing isn't it considering the time period of the below graph.  We broke down the CES by industry to see what kind of percentage changes we have on the share of total number of payroll jobs from 2008 until now. Below is the percentage breakdown of jobs by industry for January 2008.We expected to see construction jobs shrink relative to total payrolls and it did, by 1.3 percentage points. Notice the culprit of the recession, the financial sector, only shrank 0.2 percentage points as it's share of payroll jobs. Manufacturing, of which the auto industry is a part, has contracted an entire percentage point as share of total jobs. Not all of this is job loss, productivity increases and time marches on and some jobs become obsolete. These two pie charts make it painfully obvious our manufacturing sector continues to erode and the only real growth field is in health care. Not exactly a demonstration of America being a titan of industry.

The BLS Jobs Report Covering November 2012: Hollow Gains - I suspect that the Bureau of Labor Statistics report covering November 2012 will be heralded as a solid report, but as usual there are a lot of negatives behind the headline numbers. Seasonally adjusted, 146,000 jobs were added to the economy and the unemployment rate dropped two-tenths of a percent to 7.7%. For those of you who are conspiratorially minded, after upward revisions in the months preceding the election, last month’s jobs number was cut by 33,000 and September’s 16,000. The potential labor force as represented by the noninstitutional civilian population over 16 increased 191,000 in November from 243.983 million to 244.174 million. Multiplying this by the employment-population ratio (58.7%) gives us an estimate of the number of jobs needed to keep up with population growth: 112,000. The difference between this and the number of jobs created in November is 34,000. While beating population growth, this is still a dismal number. At that rate, it would take 2 1/2 years to create a million jobs above population growth for the unemployed, and there are 12.029 million (SA, seasonally adjusted) unemployed, –even under the BLS’ highly restrictive definition of what constitutes being unemployed. Turning to the Household (people) data, the labor force declined, seasonally adjusted, 350,000 from 155.641 million to 155.291 million. Unadjusted, it declined 826,000. Basically, there was a big increase in October with the November numbers reflecting a drop back to the September levels for the unadjusted number and half way back for the adjusted one. It is unclear where the October spike came from.  These drops were reflected in the participation rate which fell three-tenths of a percent unadjusted to 63.5% and two-tenths of a percent adjusted to 63.6%.

Unemployment Rate Drops As Labor Force Participation Rate Falls Once Again - Going into today, expectations were that the combination of Hurricane Sandy and a weak economy would lead to rather disappointing jobs report, as it turned out we got numbers that were slightly better but still nothing to be impressed by: The unemployment rate edged down to 7.7 percent in November. The number of unemployed persons, at 12.0 million, changed little. (See table A-1.) Among the major worker groups, the unemployment rates for adult men (7.2 percent), adult women (7.0 percent), teenagers (23.5 percent), whites (6.8 percent), and Hispanics (10.0 percent) showed little or no change in November. The unemployment rate for blacks (13.2 percent) declined over the month. The jobless rate for Asians was 6.4 percent (not seasonally adjusted), little changed from a year earlier. (See tables A-1, A-2, and A-3.) The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 4.8 million in November. These individuals accounted for 40.1 percent of the unemployed. (See table A-12.) The civilian labor force participation rate declined by 0.2 percentage point to 63.6 percent in November, offsetting an increase of the same amount in October. Total employment was about unchanged in November, following a combined increase of 1.3 million over the prior 2 months. The employment-population ratio, at 58.7 percent, changed little in November. (See table A-1.)

The Bad News Behind the Good Jobs Numbers - The Labor Department claimed that the effect of Sandy on the report was minimal, saying in a statement, “Our analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November.”  Rather, the Labor Department claims that the jobs numbers should be analyzed without taking the storm into account at all. And by that standard, not only were the job numbers themselves fairly modest, but there are some worrying details in the report that should give one pause before celebrating these numbers too enthusiastically. The report showed a decrease in construction employment of 20,000 jobs. This is troubling — or at least confusing — if Sandy did in fact have a minimal effect on the report, as recent housing start data has been starkly positive, and just this week the Commerce Department announced that construction spending increased in October, showing the continuance of a positive trend.  And this report showed a net downward revision of 49,000 jobs. So really this report gave us a net job gain of 97,000 — a much less impressive figure than the headline 146,000. After showing a solid 0.3% gain last month, the participation rate — or the percentage of adult workers in the workforce — declined once again by 0.2%. That drop in the participation rate appears to be the primary reason the unemployment rate dropped to 7.7%, as the household survey actually showed a net decline in jobs. .

Employment Report: More Positives than Negatives - There were positives and negatives in the November employment report, and I'd like to start with two clear positives. First, seasonal retail hiring was very strong in November (see 3rd graph below). There is a fairly strong correlation between seasonal hiring and holiday retail sales, and this record seasonal hiring suggests a solid holiday season. Second, a key theme we've been discussing is that we are nearing the end of state and local government layoffs (see last graph). This has been ongoing for over 3 years, and it appears the drag from state and local governments is mostly over. Of course employment at the Federal level is still shrinking, and everyone expects more austerity in 2013. Other positives include better than expected employment growth, the decline in the unemployment rate to 7.7% (the lowest level since December 2008), a decline in part time workers, and a decline in the long term unemployed (although this is still very high).Negatives include the decline in the participation rate, the downward revision to payroll jobs in previous months, and no change in hours worked. However, overall, I think there were more positives than negatives in this report. Here are a several more graphs...Employment-Population Ratio, 25 to 54 years old This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses. According to the BLS employment report, retailers hired seasonal workers at a record pace in November. This suggests retailers are fairly optimistic about the holiday season. Part Time for Economic Reasons This graph shows the number of workers unemployed for 27 weeks or more. This graph shows total state and government payroll employment since January 2007.

No News is Good News?, by Tim Duy: The employment report offered me no reason to change my baseline opinion that the US economy continues to grow at a slow, steady pace regardless of the quarterly fluctuations we see in GDP growth. Indeed, there seems to be little news in November's numbers. This is good news in the sense that fears that the economy is slipping toward stall speed in the final quarter of the year is not yet translating into weaker job growth. The same is true for fears of the fiscal cliff, debt cliff, austerity bomb, etc. The bad news is that we are not seeing the 200k+ numbers that the Fed is leaning towards as evidence of stronger and sustainable improvement in the labor market. That means the Fed will continue to add to its stock of assets, converting most if not all of Operation Twist into an outright purchase program next week. Headline payrolls rose 146k in November, well-ahead of Sandy-impacted expectations. The BLS says that Sandy did not impact return rate of the establishment survey. But did it impact the actual numbers of reported employees? Unknown at this point. There were downward revisions to the two previous months, including a downward revision of government employees. This picture as it now stands: On average, a remarkably steady pace of job creation since last fall. The details weren't great, but weren't terrible either. Retail trade gained 52.6k jobs, indicating solid holiday hiring. Professional and business services gained 43k jobs, including 18.0k in the cyclically-sensitive temporary help sector. Construction, however, lost 20k jobs despite mounting evidence of improved residential housing activity. And nondurable goods manufacturing lost 18k. Aggregate hours continue to climb, consistent with expanding GDP: But wage growth remains abysmal: On the household side, the details were a little more spotty. Notably, the number of employed fell along with the labor force. Note that the last two months, however, saw out-sized gains in employed relative to nonfarm payrolls:

Shades of Sandy in Unemployment Rate Drop - The Labor Department said the Hurricane Sandy didn’t “substantively impact” the November jobs report, but the details used to calculate the drop in the unemployment rate make it look like the storm was affecting the numbers. As noted yesterday, there are two separate surveys used in the report and timing issues made the one used for the unemployment rate more vulnerable to Sandy impact than the one used to calculate the number of jobs added to the economy. The Sandy effect is more muted in the establishment survey, conducted a week later, which posted a solid 146,000 increase in jobs last month. The weather likely played a stronger role in the report showing a drop in the unemployment rate to 7.7%.  There were 229,000 fewer unemployed people looking for work in November, but that was overwhelmed by a 350,000 decline in the total labor force. Indeed, the number of people with jobs declined by 122,000. Did those missing unemployed just give up and stop looking for work? Possibly. But many of them may have been displaced by the storm, or they could have been helping clean out flooded basements. The definition of unemployed is that the person was was looking for a job and was available to work during the reference week. An unemployed person volunteering in Sandy cleanup may not tell a surveyor that he’s available for work, and is then counted as out of the labor force. One of the reasons we know Sandy loomed large over the survey of households is through weather-related measures. The government asks people whether they aren’t at work due to weather, and that number soared to 369,000 in November — the highest level since snowstorms crippled the Northeast in early 2011. Meanwhile, the number of people who usually work full-time but are working part time this month because of weather and other noneconomic reasons soared over one million. It normally hovers in the 100,000-200,000 range. Now, all of these people are considered employed, but the surge gives us an indication that the weather was having an impact on the labor market.

Just 11 Million More Jobs to Go - Bloomberg: The U.S. economy added 146,000 nonfarm jobs in November despite the ravages of Hurricane Sandy, according to today's preliminary estimate from the Labor Department. Now just 11 million more to go. Overall, the jobs report for November told pretty much the same story as its recent predecessors: The economy is still recovering, but not fast enough to get unemployment back to normal anytime soon. After revisions that showed slower employment growth in October, the Labor Department's estimate of average monthly job gains for the past three months stands at 139,000, just a bit more than enough to offset natural growth in the labor force. A drop in the unemployment rate, to 7.7 percent in November from 7.9 percent in October, was driven primarily by a decline in the number of people who are in the labor force and can hence be counted as unemployed. So how far are we from normal? In the decade before the recession, the employed share of the U.S. population averaged about 63.3 percent. Over the three months through November, the employment-to-population ratio averaged 58.7 percent. The difference: 11.1 million jobs. That's down from 11.7 million in August, but not much improved from the peak of 11.9 million in July 2011.

Male and Female Employment Ratios - There's a new jobs report out this morning from the BLS which seems like an opportune moment to track the gender-specific employment/population ratios that I like to keep an eye on.  In each case, these are the ratios for persons ages 25-54 (ie working age) so that the effects of demographics and retirement should be fairly minimal.  The men's ratio from 2000 on is above, and you can see that the gradual recovery following the 2008/2009 great recession has largely stalled out in 2012, even though we are still very fr from recovering the ground lost in the recession. This is part of a larger pattern since the 1970s, as this longer-term graph shows: The tendency of working-age men to actually work has been on a downward ratchet: plunging in each recession, and then failing to make up all the ground in the following recovery.  As a result, we are now in a situation where about 1 in 6 working age men don't actually work (at least not in a way the BLS can measure). It used to be arguable that this trend in the men was being partially driven by the rise of female employment: women either taking the jobs of men, or supporting non-working partners by working themselves, or both.  However, the female employment/population ratio peaked in about 1998 and now seems to have begun declining also:

Real Hourly Wages and Hours Worked: New Update - Here is a look at two key numbers in today's monthly employment report for November: Average Hourly Earnings and Average Weekly Hours. The government has been tracking the data for Production and Nonsupervisory Employees for decades. But coverage of Total Private Employees only dates from March 2006. Let's look at the broader series, which goes back far enough to show the trend since before the Great Recession. I want to look closely at a five-snapshot sequence. First, here is a chart of the Average Hourly Earnings. I've included a linear regression through the data to highlight the trend. Hourly earnings increased at a faster pace through 2008, but the pace slowed from early 2009 onward. But the hourly earnings above are nominal (not adjusted for inflation). Let's look at the same data adjusted for inflation using the Consumer Price Index. Since the government series above is seasonally adjusted, I've used the seasonally adjusted CPI, and I've chained the series to the dollar value of the latest month of hourly wages so that the numbers reflect the purchasing power in today's dollars. As we see, the difference is amazing. The decline in real wages at the onset of the recession accords with our expectations. But why the rise in the middle of the recession when the Financial Crisis began unfolding in earnest? Let's add another data series to the mix: Average Hours Per Week. About eight months into the recession, hours per week began to fall. The number bottomed a few months before the recession ended and then began increasing a few months after it ended.

Job Quality Vs Quantity: Number Of Jobs vs Average Hourly Earnings -- In light of the composition of today's NFP pickup, driven by retail, waste and administrative and hospitality and leisure, all low-wage jobs, even as Construction jobs posted their first decline in many months on the "housing recovery" and on Hurricane Sandy rebuilding, we refreshed the chart showing that there is a quality not just quantity component to the jobs number. Sadly, the quality, in the form of Y/Y change of average hourly earnings, continues to be non-existent.

Labor market ups and downs - The effects of hurricane Sandy on the labor market obviously make interpreting the data more difficult. However, the BLS issued a statement in today’s  Employment Situation report stating: ...our survey response rates in the affected states were within normal ranges. Our analysis suggests that Hurricane Sandy did  not substantively impact the national employment and unemployment estimates for November. This morning’s report shows non-farm payrolls increasing 146,000 in November with total private employment rising 147,000.  The increase is slightly lower than the average monthly employment gain in 2012 of 151,000 and of 2011 of 153,000. As seen in the graph below, both the pace and the level of the recovery of the labor market are still well below the average from the previous four cycles. Employment gains were found in retail trade, professional and business services, and health care. The report also included downward back-revisions for the previous two months of 49,000. As is well-known, the BLS procedures for employment involve an initial estimate that gets revised in each of the next two months to arrive at the “final” estimate. The chart below shows these revisions since June, 2011. The red dots represent the initial headline estimates, while the green dots and bars represent the two revisions.You can see just how much noise is in the estimation process. On average, since the start of the recovery in July 2009, the average revision from the first to the final estimate has been +30K.  It is difficult to tell if it is systematic from the graph below, but it does seem that the first revisions are relatively persistent to the previous data point. What this is visualized as in the graph below is that during times when the employment change is increasing, the BLS tends to underestimate the true value. In times when the employment change is decreasing the opposite is happening and the BLS tends to overestimate.

November Employment Diffusion Indexes -  The employment diffusion indexes are a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. From the BLS: Figures are the percent of industries with employment increasing plus one-half of the industries with unchanged employment, where 50 percent indicates an equal balance between industries with increasing and decreasing employment.The BLS diffusion index for total private employment was at 59.0 in November, down from 63.0 in October. For manufacturing, the diffusion index declined to 47.5, down from 56.8 in October. We'd like to see the diffusion indexes consistently above 60 - and even in the 70s like in the '1990s. But even 59 isn't bad and this suggests job growth was spread across a number of industries in November.

Unemployment Rate 7.7% Due to Less People in the Labor Force for November 2012 - The BLS employment report shows the unemployment rate ticked down by 0.2 percentage points to 7.7%. The reason for the unemployment rate decrease is less people participated in the labor force in November. Superstorm Sandy had little effect on the monthly employment figures. This article overviews the statistics from the Current Population Survey of the employment report. The labor participation rate decreased -0.2 percentage points to 63.6%. Less people in the labor force is the reason the unemployment rate decreased. The labor participation rate is at artificial lows, where people needing a job are not being counted. For those claiming the low labor participation rate is just people retired, we proved that false by analyzing labor participation rates by age. The number of employed decreased by -122,000 in a month to a total of 143,262,000 employed people in the U.S. Below is a graph of the Current Population Survey employed.  Those unemployed decreased by -229,000 to a new level of 12,029,000. Below is the change in unemployed and as we can see, this number swings wildly on a month to month basis, as we describe here and why you shouldn't use the CPS figures on a month to month basis to determine jobs.  Below is a graph of those considered employed, in maroon, scale on left, against those considered unemployed, in blue, scale on right, by the BLS methods. We can see, it's only recently that the growth rate of the employed has exceeded the growth rate of the unemployed. The civilian labor force also dropped by -350,000 to 155,291,000. Notice in the graph below how many more people are in the labor force than at the start of the 2008 recession. Population increases every month and this post gives details on that increase, while this one describes BLS labor concepts as well as how many jobs are needed just to keep up with the increased population.

Chart Of The Day: Jobs "Additions" By Age Group Reveals The Scariest Picture - While the GETCO algos care only about one thing: the headline NFP number derived by the establishment survey, the reality is that in November this number was strictly a divination of seasonal adjustments (which resulted in the typical for November 1.2 million "gain" in jobs), as well as who knows what other Sandy-related adjustments which the BLS has not broken down, the reality is that a more granular dig through the jobs data reveals a far uglier picture, especially for those in the prime working demographic between 25-54. This has been a sensitive issue for the pundits as ever since the arrival of the Obama administration, all the job gains have gone in the 55 and older job category as we now see age outsourcing, while jobs in the 55 and lower age group have imploded. Sure enough, the November data, when seen through the prism of the Household Survey's age distribution, is frankly horrendous. First, what that granular data shows is that instead of a 146K gain in November, there was actually a drop of 114K jobs when broken down by worker "vintage." But where it gets simply stupid, is that of the 4 age group buckets (16-19, 20-24, 25-54, and 55-69), the biggest gainer continued to be America geriatric work force, which added 177 jobs. As for that key segment of the workforce, the 25-54? Jobs here declined by a whopping 359K in November. And this is good news?

Number Of Workers Aged 25-54 Back To April 1997 Levels - When people think of the conventional battery of options the BLS applies to fudge the monthly payrolls number, the labor force participation is the first thing that comes mind: after all the thesis is that old workers are increasingly dropping out of the labor force and retiring. Nothing could be further from the truth as can be seen in this chart of workers aged 55-69, i.e. the prime retirement age. But perhaps a far more important secular issue is the complete lack of pickup in the prime worker demographic, those aged 25-54, which in November dropped by 400k to 94 MM. This is a level first breached in April 1997, in other words in the past 15 years not a single incremental job has been gained in this most productive and lucrative of age groups!

Startling Look at Job Demographics by Age - ZeroHedge had an interesting set of charts of BLS data in his post Number Of Workers Aged 25-54 Back To April 1997 Levels. I picked up on that theme and put together this chart of BLS data showing various age groups. Demographic Points of Note:

  • Employment in age group 25-54 is 94,063,000
  • Employment in age group 25-54 was 94,167,000 in April 1997
  • Total employment is 143,257,000
  • Total employment was  143,449,000 in February 2006
  • The low employment for age group 25-54 was 93,356,000 in October 2011, 28 months after the recovery began
  • Total employment at the start of the recovery in June 2009 was 140,074,000
  • Age 55 and up employment at the start of the recovery was 27,105,000 
  • Age 25-54 employment at the start of the recovery was 95,264,000
  • Age 55 and up employment is now 31,119,000
  • Age 25-54 employment is now 94,063,000

Reflections on the Recovery:

  • Since the start of the recovery, the economy added 3,183,000 total jobs
  • Since the start of the recovery, the economy added  4,014,000 jobs in age group 55+
  • Since the start of the recovery, the economy lost 831,000 jobs of those between 16-54
  • Since the start of the recovery, the economy lost 1,201,000 jobs of those between 25-54

Gallup’s job market measure show November was a terrible month - The Labor Department says the unemployment rate fell to 7.7% in November. So the US labor market must be getting stronger, right? Maybe not. That number includes part-timers and excludes discouraged workers. Is there a better number out there than what the Labor Department provides to show the true state of the jobs picture? Pollster Gallup thinks so. Its ”Payroll to Population” metric — an estimate of the percentage of the US adult population aged 18 and older who are employed full time by an employer for at least 30 hours per week — “was 43.7% for the month of November, down from 45.7% in October. This is the largest month-over-month decline in P2P since Gallup began tracking it in January 2010 … November’s P2P decline likely results from workers becoming unemployed or dropping out of the workforce altogether.” These results are based on landline and cell phone interviews with some 29,000 Americans throughout the month. Adults who are a) self-employed, b) working part time, c) unemployed, or d) out of the workforce are not counted as payroll-employed in the P2P metric. And as Gallup also notes: Traditional unemployment rates are based on the workforce, not the total U.S. adult population, so people dropping out of the workforce can actually mask a declining employment situation. Payroll to Population, on the other hand, is based on the total population, and therefore gives a more accurate representation of the job climate. November’s reading demonstrates how a shrinking workforce and rising unemployment can be a double whammy. The two-point P2P decline paints a more negative picture — but also a more accurate one — than does the 0.8-point increase in Gallup’s U.S. unemployment rate.

Residential construction jobs hit new lows in November - November saw a decline in US construction jobs. In particular, the number of residential construction jobs hit a new multi-year low. AGC: - Construction employment declined by 20,000 jobs in November while the industry’s unemployment rate hit 12.2 percent, according to an analysis of new federal data released today by the Associated General Contractors of America. The construction employment figures likely reflect the fact many contractors have already cut staff and delayed hiring new employees because of the threat of the “fiscal cliff,” according to results of a survey of member firms the association also released today.  “It is discouraging that construction employment is still struggling after more three years of expansion in the overall economy,” said Ken Simonson, the association’s chief economist. “As disappointing as these numbers are, they will only get worse if Congress and the White House allow huge tax increases and spending cuts to occur on January 1.” ..Construction firms employed 5.514 million people in November, down from 5.534 in October, Simonson noted-a decrease of 0.4 percent. The sector’s overall employment in November is 6,000, or 0.1 percent, lower than one year earlier when firms employed 5.520 million workers. Both residential and nonresidential construction lost jobs in November, with nonresidential construction suffering significantly more job losses than residential construction for the month.  Residential contractors lost 3,600 jobs in November, as residential building contractors lost 6,800 employees while residential specialty contractors added 3,200 new workers.

The Forgotten Millions, by Paul Krugman - Let’s get one thing straight: America is not facing a fiscal crisis. It is, however, still very much experiencing a job crisis.  It’s easy to get confused about the ... “fiscal cliff.” Indeed, one recent poll suggests that a large plurality of the public believes that the budget deficit will go up if we go off that cliff.  In fact, of course, it’s just the opposite: The danger is that the deficit will come down too much, too fast. ... Yet there is a whole industry built around the promotion of deficit panic. Lavishly funded corporate groups keep hyping the danger of government debt and the urgency of deficit reduction now now now — except that these same groups are suddenly warning against too much deficit reduction. No wonder the public is confused.  Meanwhile, there is almost no organized pressure to deal with the terrible thing that is actually happening right now — namely, mass unemployment. Yes, we’ve made progress... But long-term unemployment remains at levels not seen since the Great Depression: as of October, 4.9 million Americans had been unemployed for more than six months, and 3.6 million had been out of work for more than a year. So what can be done? The panic over the fiscal cliff shows that even the deficit scolds are closet Keynesians. That is, they believe that right now spending cuts and tax hikes would destroy jobs; it’s impossible to make that claim while denying that temporary spending increases and tax cuts would create jobs. Yes, our still-depressed economy needs more fiscal stimulus.

The Disappearance of (Human) Work -- Via Ed Kilgore, I see that Jonathan Rauch has a stimulating piece in National Journal about the long-term exit of men from the workforce. This is especially true of men with high-school educations or less: Both men and women have suffered from the disappearance of well-paying mid-skilled jobs in factories and offices. But they have responded very differently. “Women have been up-skilling very rapidly,” said MIT’s [David] Autor, “whereas men have been much, much less successful in adapting.” Women have responded to the labor market’s increased preference for brains over brawn by streaming through college and into the workforce—one of the great successes of the U.S. economy. Men’s rate of completing college has barely budged since the late 1970s. To women, men who either can’t or don’t earn a decent living are less necessary and desirable as mates; they’re just another mouth to feed. This helps to explain why rates of out-of-wedlock childbirth have risen to hitherto unimaginable heights among the less educated. Causality also flows in the opposite direction. The very fact of being married brings men a premium in their earnings, research shows, and makes them steadier workers, presumably because they have more stability at home. “Marriage is an institution that makes men more responsible in their pursuit of work and in their work-related duties,”

Unionizing at the Low End of the Pay Scale - They both work in the fast-food industry — Mr. Carrillo at a McDonald’s in Midtown Manhattan and Mr. Williams at a Wendy’s in Brooklyn. They both earn a little more than $7 an hour. And they both need food stamps to survive. Last Thursday, both did something they had never done before: they went on strike.  Their activism, part of a flash strike of some 200 workers from fast-food restaurants around New York City, caps a string of unorthodox actions sponsored by organized labor, including worker protests outside Walmart stores, which, like most fast-food chains, are opposed to being unionized, and union drives at carwashes in New York and Los Angeles.  Labor unions are hoping that the unusual tactics, often in collaboration with social justice activists and other community groups, will offer them a new opportunity to get back on the offensive, helping to raise the floor for wages and working conditions in the harsh, ultracompetitive economy of the 21st century.

Organizing McDonalds and Walmart, and Why Austerity Economics Hurts Low-Wage Workers the Most (Robert Reich) -- The Bureau of Labor Statistics estimates that seven out of 10 growth occupations over the next decade will be low-wage — like serving customers at big-box retailers and fast-food chains. That’s why the median wage keeps dropping, especially for the 80 percent of the workforce that’s paid by the hour.It’s also part of the reason why the percent of Americans living below the poverty line has been increasing even as the economy has started to recover — from 12.3 percent in 2006 to 15 percent in 2011. More than 46 million Americans now live below the poverty line.Many of them have jobs. The problem is these jobs just don’t pay enough to lift their families out of poverty.  So, encouraged by the economic recovery and perhaps also by the election returns, low-wage workers have started to organize.  Yesterday in New York hundreds of workers at dozens of fast-food chain stores went on strike, demanding a raise to $15-an-hour from their current pay of $8 to $10 an hour (the median hourly wage for food service and prep workers in New York is $8.90 an hour). Last week, Walmart workers staged demonstrations and walkouts at thousands of Walmart stores, also demanding better pay. The average Walmart employee earns $8.81 an hour. A third of Walmart’s employees work less than 28 hours per week and don’t qualify for benefits. These workers are not teenagers. Most have to support their families. According to the Bureau of Labor Statistics, the median age of fast-food workers is over 28; and women, who comprise two-thirds of the industry, are over 32. The median age of big-box retail workers is over 30

An economy that works for the middle class won’t happen on its own - A vital goal of economic policy should be to raise the living standards of the millions of American households who have seen their wages and living standards stagnate or decline over the last few decades. Fundamental to this is an economy that produces good, well-paying jobs.  The New York Times business section ran a story yesterday on low-wage workers and declining unionization rates, making the key points that:

  1. We are neither building an economy in which most workers earn enough to adequately support their families nor are we sufficiently using government tools to help subsidize the lower class
  2. The decline in unionization rates is adding to the woes of low-wage workers

The Times article, which focused in part on striking workers in the fast food industry, noted that workers toiling in food preparation and serving related occupations have the largest share of people earning between 0-100 percent of the poverty-wage level, at 73.6 percent. Only 3.1 percent of those workers earn over 200 percent of the poverty-wage level category. These workers, as the article points out, are “unlikely to have ever contemplated joining a union,” and as a result, far too often work irregular and uncertain hours and are less likely to receive benefits like paid sick leave or employer-sponsored health insurance.

The Culture of Dependency, Food Stamps, and Wal-Mart  - Much was said during the last election campaign about the “culture of dependency,” usually from Republicans. According to Mitt Romney, 47% of Americans are part of this culture, and it is very “unhealthy” for our society and our economy. More recently, during the rush to the so-called “fiscal cliff,” corporatist politicians and interests have been loudly proclaiming the need to cut spending on entitlements such as Social Security, Medicare, Medicaid, and Food Stamps in order to reach some Grand Bargain to balance the federal budget. These calls go hand in hand with the cries to get rid of this culture of dependency on taxpayer dollars that encourages people to be lazy and refrain from exercising their natural initiative, creativity, and entrepeneurial spirit. For example, there is a movement afoot to cut the Supplemental Nutritional Assistance Program(SNAP), more commonly known as food stamps.  Anne Goodman, the CEO of the Cleveland Food Bank, said in a Cleveland Plain Dealer editorial Saturday: “The $16.5 billion in cuts to SNAP proposed in the current House version of the farm bill would cause more than 2 million individuals to lose benefits entirely and nearly 300,000 children to lose free school meals because their enrollment is tied to their family’s SNAP participation. It would also reduce benefits by $90 per month for about 500,000 households. And it would make the lines at local hunger centers longer than any charity could possibly bear.”

Walmart: "Not Financially Feasible" To Take Minimal, Legally Required Steps to Save Workers' Lives - In the wake of last month's fire in a Bangladesh garment factory that killed over 100 workers, Bloomberg has gained access to notes from a 2011 meeting where Walmart officials decided against paying suppliers high enough prices to cover costs of needed safety improvements because they deemed it “not financially feasible for the brands to make such investments.” The meeting was attended by more than a dozen retailers, including Gap, Target and JC Penney. Over 300 Bangladeshi garment factory workers have died since 2006. Walmart reported a 9% increase in third-quarter net income, bringing their earnings for that quarter to $3.63 billion. An estimated half of Bangladesh’s garment factories don’t meet legally required work safety standards. At a fire in a nearby warehouse two days after the Tazreen factory fire, workers had to climb down a bamboo pole because they couldn’t get to the stairs; graffiti on a restroom wall there read: “Work here and your life is a living hell.” “Specifically to the issue of any corrections on electrical and fire safety, we are talking about 4,500 factories, and in most cases very extensive and costly modifications would need to be undertaken to some factories,” they said in the document. “It is not financially feasible for the brands to make such investments.”

How Walmart is devouring the food system - One out of every four dollars Americans spend on groceries goes to Walmart, as we’ve reported before, and the retail behemoth is on track to seize more than a third of the market. Get more facts about Walmart and food in this infographic from the Institute for Local Self-Reliance. (Click to embiggen.)

Raising the Price of Pizza 10 to 14 cents. . . Will pizza and food prices really have to increase to cover healthcare costs for the mostly young employees of the Olive Garden's, Denny's, and Papa John's restaurants? A 10 to 14 cents increase per pizza is being proposed by Papa Johns' to pay for the PPACA. At the same time, Papa John's is advertising a 2 million-pizza giveaway with the help of Peyton Manning "Two Million Free Pizzas" (must be a freebie?). Not sure myself how I might decide to account for the cost; but, here is a try; free pizza for 2 million NFL fans to increase sales, . . . cut employee hours to avoid the PPACA and keep the price, . . . raise prices 10 to 14 cents per pizza to have healthcare insurance for the restaurant staff, . . . or maybe a kind of half cheese/half sausage combo. . . healthcare and free pizzas with Peyton Manning promoting the social responsibility of Papa John's? Checking John Schnatter’s Math: Last year, Papa John’s International captured $1.218 billion in revenue. Total operating expenses were $1.131 billion. If Schnatter’s math is accurate (Obamacare will cost his company $5-8 million more annually), then new regulation translates into a .4% to .7% expense increase. Lets say that Papa John’s sells exactly half medium/half large specialty pizzas. Averaging the ranges for both sizes, then averaging that product yields a .86% price increase — well outside the range of what Schnatter says Obamacare will cost him. So how much would prices go up, under these 50/50 conditions, if they were to fairly reflect the increased cost of doing business onset by Obamacare? Roughly 3.4 to 4.6 cents a pie.

Millions of Long-Term Unemployed Risk Losing Benefits in 2013 - The number of workers unemployed for six months or more continued to ease in November. But it’s still a slow climb out for millions of Americans who risk losing unemployment benefits next month. About 4.8 million people have been out of work for at least 27 weeks, the Labor Department said Friday. That’s down from 5 million in October — as more people dropped out of the labor force in November — and roughly in line with September’s numbers. More than 40% of the 12 million unemployed Americans have been out of work for at least six months. (The median duration of unemployment among all 12 million was about 19 weeks.) The bulk of the long-term unemployed — 3.4 million — have been out of work for a year or more. The chance of finding a new job diminishes the longer people are out of work, hurting the economy’s long-run productivity and ultimately costing the government more through programs such as Social Security disability. The looming fiscal cliff threatens to cut off many of the people who are still looking for work. Congress has provided up to 99 weeks of unemployment benefits since the recession, cushioning people who have struggled to find work amid the slow labor-market recovery. But those benefits expire this month. About 2 million Americans receive payments through federally supported unemployment programs, which supplement state programs funded by taxes on employers. State programs tend to offer 26 weeks of benefits. That would become the limit unless Congress extends unemployment benefits again, as the White House and congressional Democrats are seeking. The length of federal benefits is pegged to state unemployment rates, which have dropped enough to pull every state away from the 99-week maximum. The longest-lasting benefits now come in New York, at 83 weeks. See the number of weeks each state offers here.

The Importance of Unemployment Insurance for American Families and the Economy | Brookings Institution: Among the many spending cuts and tax increases legislated to take effect at the turn of the year, few policies have as direct an effect on those most affected by the Great Recession than the expiration of extended unemployment insurance (UI) benefits. In the first week of January, roughly two million individuals will lose extended benefits with the expiration of legislation that temporarily increased the duration individuals can claim UI. Although these benefits make up only $30 billion of the roughly $500 billion ‘fiscal cliff,’ they have a disproportionate effect on the lives of the unemployed and their families, as well as on the aggregate economy. Whether to extend unemployment benefits—a decision currently tied up in the greater debate around the federal budget—should be motivated by consideration of the benefits and costs of the program. Advocates of an extension of UI benefits point to the fact that these benefits accrue to unemployed workers and their families and help put food on the table and pay the rent at a time of extraordinary economic weakness; in doing so, these benefits also boost the economy as a whole as UI recipients maintain consumption. Skeptics of an extension point to potential costs arising because beneficiaries may spend less time and effort searching for work, and the impact of funding the extension on the deficit. Building on previous Hamilton Project work, we show that the evidence continues to suggest that extended benefits provide a sizable boost for workers and the economy, but have little negative effect on work incentives and unemployment.

The Affordable Housing Crisis New York Times. Editorial.  - The precious few federal programs that provide rental assistance to the nation’s poorest and most vulnerable families are already underfinanced. These programs provide decent housing for about only a quarter of the low-income families who qualify for them. And with nearly nine million households teetering on the verge of homelessness, the country clearly needs more support for affordable housing, not less.   The main federal programs are traditional public housing, for which the government provides operating expenses, plus two different programs under Section 8 of the housing law, in which rents are subsidized in privately owned properties. Federal housing programs provide a lifeline for about five million low-income households that would otherwise be unable to afford livable housing at all. More than half of these households are headed by elderly or disabled people and more than a third are families that include children. These families are overwhelmingly “extremely low income,” which means they earn less than a third of the median income in the areas where they live.

Homeless - Even if the so-called economy were "recovering," the people of the USA would be stuck in a physical setting for daily life that has no future - the nightmare infrastructure of subdivision houses, strip malls, and WalMarts, all rigged up for incessant motoring. Of course, the so-called economy is not recovering because there is no more cheap oil. If oil ever gets cheap again, it will be because nobody has enough money to pay for it and surely you can connect the dots to what that hamster wheel of futility means.   In fact, the heart of our economic predicament is that the American economy came to be based on the construction of ever more suburban stuff, the financing of which, especially the houses, became the fodder for an episode of epic swindles that has left our banking system a hollowed out shell of accounting fraud. In short, we built even more stuff with no future, and ruined our society in the process. How tragic is that?    The behavioral habits, practices, and consequences of being stuck in that living arrangement may end up being at least as problematic as the physical residue of it. It has left the people in a network of alienation, anxiety, and misery that defeats exactly the mentality needed to break free of it. For the truth is we're faced with a massive necessary re-ordering of daily life in this country, and there is no vision or will to get on with job.

Still Not Spreading the Wealth Around - Obama has always claimed to want to spread the wealth around. Yet, as I stressed this June (and in my first ever blog post way back in July 2011!) that’s the exact opposite of what he has achieved. And it’s getting worse, not better. The truth of Obama’s policies (and successive administrations prior to Obama) is more concentrated wealth within the financial elites and Wall Street. Banks get bailed out. Campaign donors get stimulus money. And the middle class and future generations pay for it in taxation and the Cantillon Effect. The Obama reinflation is a rotten bubble built on rotten foundations. And the growing gap between the rich and the poor is steadily beginning to resemble neofeudalism.

The Gospel of Wealth Fails the Inequity Test in Primates - Fairness is the basis of the social contract..., we expect that when we contribute our fair share we should receive our just reward. When social benefits are handed out unequally or when prior agreements are not honored it represents a breach of trust. ... But isn’t that the way the world works? Isn’t it true, as we were so often told as children, that life is unfair? The American financial tycoon Andrew Carnegie certainly thought so and today’s economic elite have followed his example. In 1889 he used a perverted form of Darwinism to argue for a “law of competition” that became the cornerstone of his economic vision. ... In his “Gospel of Wealth”, Carnegie wrote that this natural law might be hard for the least among us but “it ensures the survival of the fittest in every department.” ... While this perspective may be common among those primates who live in the concrete jungle of Wall Street, it doesn’t hold true for the natural world more generally. Darwin understood that competition was an important factor in evolution, but it wasn’t the only factor. Cooperation, sympathy, and fairness were equa lly important... In The Descent of Man he wrote, “Those communities which included the greatest number of the most sympathetic members would flourish best, and rear the greatest number of offspring.” By working cooperatively, by sharing resources fairly, and by ensuring that all members of society benefited, Darwin argued that early human societies would be more “fit” than those societies where members only cared about themselves. ...

The Social Dimension of Prosperity - In a recent interview in The Straddler, James K. Galbraith discusses some of the points he developed in his recent book, Inequality and Instability.  One of the most important of those points is that inequality leads to a stop-and-go crisis economy of credit-fueled asset bubbles.  This economy delivers large rewards to a few fortunate predators, but delivers a lot of instability, stagnation and insecurity to the rest of us. But, Galbraith also makes some striking and important points in the interview about what he sees as mistaken places of emphasis in contemporary progressive political rhetoric.  One problem is the tendency to lose sight of the most vital systemic constituents of postwar American middle class prosperity – and also the expectations and aspirations that constituted the middle class outlook.  These key elements of prosperity are, Galbraith says, hard to measure quantitatively: I think there is a tendency on the left to underestimate the success of the programs that created and sustained the middle class and the middle class mentality. There’s a tendency to focus on some statistical aspects of what’s happened to wages—median wages in particular—and to focus less on the role played by Medicaid, Medicare, Social Security, the housing programs, public education, and support for higher education, all of which gave us a population that had the attributes of a middle class society.

Ten ways to reduce inequality without raising tax rates - More than anything, President Obama wants to fight inequality. As my colleague Zach Goldfarb has reported, that’s become the president’s major priority for his second term. To that end, he’s pushing hard to raise top marginal income tax rates back to where they were under Bill Clinton. But House Republicans have made it clear that they won’t have that, even if they concede that more revenue is necessary. There are ways for both sides to get what they want. One thing neglected by many debates about tax rates on the rich is that there is substantial inequality in the United States even before taxes. According to the OECD, the Gini index — the standard measure of income inequality — in the U.S. before taxes is 0.486. That’s less than Britain, Germany, and Italy, and on a par with France, but well above more egalitarian countries like Sweden, Denmark, Canada, or the Netherlands. That’s not an accident. There are policies that the U.S. can pursue that would reduce inequality even before you take taxes into account. If implemented, they could accomplish Obama’s goals without running afoul of GOP views on taxes.

Poverty Should Have Risen – Mulligan - When measured to include taxes and government benefits, poverty did not rise between 2007 and 2011, and that shows why government policy is seriously off track. When somebody earns, say, $10,000 by working, he should keep some of it for himself and his family rather than handing it all over to the government. By the same reasoning, when someone loses $10,000 by not working, he should get some help from the government or from others in the forms of reduced taxes and enhanced benefits but still should bear a portion of that loss himself. Economists debate the fraction of wages that workers should keep for themselves, because the optimal fraction is a trade-off between incentives, insurance, support of public goods, freedom and other factors. Libertarians and other believers in small governments might set the fraction at 80 percent or more. Other economists think that incentives have an effect on behavior, but incentive effects are small, so we can safely set the fraction at 30 percent, or even a bit less. But I thought economists agreed that the fraction should not be zero, so that people losing money by not working would bear a portion of the loss. If people with declining incomes found them entirely replaced by government help, that amounts to 100 percent taxation.

Is a bailout a tax? - I'm sure that by now, a bunch of people have piled on to this instantly notorious Casey Mulligan blog post. But let me add my voice to the chorus. Mulligan's thesis is that because poverty rates didn't rise in the Great Recession (once you factor in government transfers), poor people now face an effective 100% marginal tax rate on their income; make one dollar more, if you're a poor person, and your government benefits go down $1. Casey Mulligan's general point - that the expiration of government benefits is a form of implicit taxation - is a good one. But I don't agree with his conclusion about the Great Recession. Just because poverty rates didn't rise doesn't mean that the government imposed a 100% implicit tax rate. Why not? Because individual incentives don't (necessarily) depend on aggregate outcomes. Suppose that the government gave out cash to poor people in order to keep the poverty rate at or below 15%.  Would that make it impossible to become poor? No. Because you'd still have a chance of becoming one of the 15%. If you work less than the poor guy next door, it's possible that you'll fall into the 15% and he'll rise out of it. The aggregate poverty rate will stay the same, but now you'll be poor. In other words, there is still an individual incentive for people to work, even if the aggregate poverty level is held fixed.

Forget Fairness, Let’s Talk About Stupidity - "Fairness" in economic terms (or anywhere else in life) is a bullshit concept, as fantastical as Peter Pan's shadow or Donald Trump's self-awareness. Economic equality has never existed throughout human history since the Great Leap Forward 50,000 years ago, nor should we expect it to now. Post-kindergarten, there's no such thing as fairness. Some of your classmates turn out to be more physically attractive than you thanks to good genetics, they will live better lives than you with much less hardship and instant advantages in virtually every situation. This makes perfect sense because they are likely the product of a beautiful mother and a smart, high-earning father. Go stop by the elementary school in Westport, Connecticut if you'd like to see this demonstrated in real-life - they're inadvertently building a Master Race up there of blonde-haired, blue-eyed future hedge fund managers and tennis phenoms, it's actually quite frightening.So no, life's not fair - we make it on our wits, the connections we forge with others, the skills we learn, the lucky breaks that come our way, the sweat equity we've put into our work and the sheer statistical fortuitousness of not being struck down by a drunk driver. Some of us win big, some of us lose huge and the rest of us take what we can from this life just to get by. And it usually works out in the end, even though nothing along the way was ever "fair."

This Week in Poverty: A Wake-Up Call on Housing and Homelessness - On Capitol Hill, conversations are focused on billions and trillions, cliffs and sequestrations, and theories and suppositions about ongoing negotiations. A thankful media cheers on, discovering a new horserace to replace the one just ended.But for too many people—most of whom receive little or no attention in this town—there is nothing vague, abstract, or racy about these budget decisions.Amy Clark is the communications director for the National Low Income Housing Coalition (NLIHC), a nonprofit. She says that NLIHC staff members now regularly receive anxious e-mails from people living in public housing, or who have vouchers they use for rental assistance and whose homes are on the line. “They are trying to figure out what Congress is doing, and what sequestration is about,” Clark tells me. “It seems that no one in NYC knows what is going on with the Section 8 voucher program—not even Section 8, Mayor Bloomberg’s office, State Offices, HUD—all these offices I called and no one who answers the phone knows what is going on.”“Are those of us who have Section 8 in danger of losing our apartments?” asked another person.

Robert Reich (Cliff Notes on the Three Real Perils Ahead) - If we had a functional government America would address three “cliffs” posing far larger dangers to us than the fiscal one:

  • The child poverty cliff. Between 2007 and 2011, the percentage of American school-age children living in poor households grew from 17 to 21%. Last year, according to the Agriculture Department, nearly 1 in 4 young children lived in a family that had difficulty affording sufficient food at some point in the year. Yet federal programs to help children and lower-income families – food stamps, aid for poor school districts, Pell grants, child health care, child nutrition, pre- and post-natal care, and Medicaid – are being targeted by the Republican right. Over 60 percent of the cuts in the GOP’s most recent budget came out of these programs.
  • The baby-boomer healthcare cliff.Healthcare costs are already 18% of GDP. Between now and 2030, when 76 million boomers join the ranks of the elderly, those costs will soar. This is the principal reason why the federal budget deficit is projected to grow.
  • The environmental cliff. Global emissions of carbon dioxide jumped 3 percent in 2011 and are expected to jump another 2.6 percent this year according to scientists, putting the human race perilously close to the tipping point when ice caps irretrievably melt, sea-levels rise, and amount of available cropland in the world becomes dangerously small

Conservative Birthrate Panic: Our Hope for Better Work/Family Policies? - The ladies aren’t having enough babies and conservatives are sad. That was basically the gist of Ross Douthat’s column this weekend, which riffed off of new birthrate numbers from Pew showing that we’re at a record low. Douthat’s primary concern seems to be the false notion that demography is destiny—that our “demographic edge” means we can pwn all fellow nations and without it, a more fruitful nation is eating our lunch. (If this were true, Niger, which has the world’s highest birthrate, would have enslaved us all. We clock in at a meager 124.) But there is good reason for conservatives and progressives alike to be concerned about a falling birthrate. Many of our public policies, most notably the social safety net, are designed to have one generation support the older one—but that gets mighty top heavy with a declining number of people doing the supporting. So what can we do about bringing that rate up? Douthat goes off the rails when attributing the decline in births to a cultural “decadence” in which women can’t get beyond themselves to think about the future. But Douthat admits: “America has no real family policy to speak of at the moment.” While it feels like quite the understatement, he’s absolutely right. In a previous column he even recognized that “our policies and our institutions are increasingly out of date: they’re built for a world in which two-parent, single-breadwinner families were a near-universal norm, and they don’t take enough account of the mass entrance of women into the work force, or the mounting economic pressures on the American family.”

Baby bust -- Is the US birth rate really on the decline? A look at five myths about the country's population problems. The  release of a Pew study saying American birth rates have hit a new low kicked off a spirited discussion about the future of the country. But lost somewhere in the debate were a few basic facts about why the rates dropped and what happens next. Below, a look at five myths of America's declining fertility rate. Before getting too upset about these numbers, it's worth taking a look at how accurate they are. In an article on his personal blog, he noted two main factors that could cloud the accuracy of the numbers. One is a shift in demographics: the birth rate averages the number of children born to women aged 15-44. But, according to Bronars, there are large numbers of women at both ends of the age spectrum. Current trends in childbirth mean these women are less likely to have children than women in the middle, and as a result the number seems lower. "The changing distribution of the US population is going to drive down the fertility rate in a way that's misleading," he says.

Is America Having Enough Babies…Or is it Another Sign We're Turning Japanese? - A new study by The Pew Research Center shows that the birth rate in the United States has dropped to the lowest level since 1920, when reliable statistics were first made available. The birth rate dropped precipitously last year to only 63.2 per 1,000 women of childbearing age (which is defined as 15 to 44 years of age). That is half of what it was in 1957 at its peak. Most people aren't troubled by this -- but they should be. Here's why. Our low birth rate has tremendous implications at all levels of our society. What's more, it is yet another sign that we are turning Japanese.  People question me all the time about it - challenge me is more like it - arguing that the United States is different. That somehow, unlike Japan, we're going to escape the economic mess we've created for ourselves. Having spent more than 20 years closely involved in Japanese society as a businessman, a husband, a father, and a part-time resident, I think that's wishful thinking.

The black birth rate converges on the white rate - Among the U.S.-born, black women had the strongest birth-rate decline from 1990 to 2010, according to a recent report from Pew Social and Demographic Trends. The birth rate—the number of births per 1,000 women aged 15 to 44—declined 29 percent for blacks, 25 percent for Asians, 21 percent for Hispanics, but only 5 percent for whites. In 1990, the black birth rate was 26.1 points higher than the white rate. In 2010, it was only 4 points higher. If this trend continues, the black birth rate will soon equal the white rate.

As Companies Seek Tax Deals, Governments Pay High Price - In the end, the money that towns across America gave General Motors did not matter. When the automaker released a list of factories it was closing during bankruptcy three years ago, communities that had considered themselves G.M.’s business partners were among the targets. For years, mayors and governors anxious about local jobs had agreed to G.M.’s demands for cash rewards, free buildings, worker training and lucrative tax breaks. As late as 2007, the company was telling local officials that these sorts of incentives would “further G.M.’s strong relationship” with them and be a “win/win situation,” according to town council notes from one Michigan community. Yet at least 50 properties on the 2009 liquidation list were in towns and states that had awarded incentives, adding up to billions in taxpayer dollars, according to data compiled by The New York Times. Some officials, desperate to keep G.M., offered more. Ohio was proposing a $56 million deal to save its Moraine plant, and Wisconsin, fighting for its Janesville factory, offered $153 million. But their overtures were to no avail. G.M. walked away and, thanks to a federal bailout, is once again profitable. The towns have not been so fortunate, having spent scarce funds in exchange for thousands of jobs that no longer exist.

NYT: $80 Billion in State and Local Subsidies Annually (Updated) - In today's New York Times, Louise Story begins a series, "The United States of Subsidies," ten months in the making, with a story focusing on General Motors closures, the border war for investments between Kansas and Missouri in the Kansas City metropolitan area, and a new estimate of state and local incentives to business, $80 billion a year. Backing this up, and no doubt contributing to the long lead time, is a database of 150,000 state and local subsidy deals going back at least 20 years. Given its appearance in the country's newspaper of record, the series is sure to elevate the issue of state and local subsidies to a prominence it has never known before.  Since my 2011 estimate was $70 billion per year in total subsidies to business, and $46.8 billion in location incentives, the Times figure represents a substantial increase if accurate. Ever since David Cay Johnston reviewed my book when it first came out, he has argued that my $70 billion figure was probably an underestimate, and the new report would seem to back him up. Nevertheless, I will certainly be spending some time analyzing the database to see just what is in it. According to the story, $18 billion per year is accounted for by corporate income tax breaks, a whopping $52 billion by "sales tax relief," and the other $10 billion unspecified but most likely property tax breaks. I have some questions about these numbers, however. First, it seems to me that property tax breaks likely exceed $10 billion a year. When California axed tax increment financing earlier this year, it was generating $8 billion in tax increment all by itself.

Wonder Why States Are Broke? One Reason is Companies Play Them Off Against Each Other - The New York Times published an expose this week on Texas’s regime of business incentives, but for anybody who pays passing attention to so-called municipal and state economic development schemes, there wasn’t much news: Our states and localities are cannibalizing one another as they concoct targeted tax breaks which they use to lure corporations from their neighbors. Meanwhile, a bevy of middlemen wet their beaks by helping corporations pit sucker states off of one another and brokering deals to sell the tax credits that comprise much of the ensuing largess. Here’s the rub: Granting corporate incentives has become standard operating procedure for state and local governments across the country. The Times investigation found that the governments collectively give incentives worth at least $80 billion a year.  That’s an especially big deal for cash-strapped states, banned from deficit spending, no printing presses on hand. The $80 billion figure represents a full ten times the budget of my state of Rhode Island, and more than 15 times the amount spent from locally-generated funds. It’s the most basic of game theory dilemmas, and in a less corrupt political dynamic, one that could be solved by the intervention of sensible federal government actors, or perhaps even through the initiation of an interstate compact that had states agree to stop poaching from one another.

Seventh District Update - Chicago Fed - A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

  • • Overall conditions: Economic activity in the Seventh District continued to expand at a slow pace in October and early November.
    • Consumer spending: The pace of consumer spending, while still moderate, increased slightly.
  • • Business Spending: Growth in business spending moderated further. Inventory investment continued to slow along with capital spending on equipment and structures.
  • • Construction and Real Estate:  For the first time in several years, homebuilders reported new land development projects were underway and contacts also noted some signs of improvement in commercial real estate conditions.
    • Manufacturing: Manufacturing production decelerated. Capacity utilization in the steel industry decreased and specialty metal manufacturers also reported weaker orders. The heavy equipment and auto industries however, remained sources of strength.
    • Agriculture: Much of the District reported higher yields than had been expected during the previous reporting period, reflecting in part timely local rains, later planting, and irrigation. Nonetheless, the drought still cut the District’s output of corn and soybeans substantially relative to last year.

Minnesota state deficit pegged at $1.1 billion, more if Washington fails - Minnesota’s budget will face a $1.1 billion shortfall, state officials announced today, but that number could grow to $2.8 billion if Congress and the president fail to solve a federal budget problem. While saying today’s budget announcement was not gloomy, Commissioner Jim Schowalter of Minnesota Management and Budget declared: “There’s no relief in sight for our fiscal woes.” Senate Majority Leader-elect Tom Bakk, DFL-Cook, said the $1.1 billion deficit grows to $2 billion when inflation is considered. The budget forecast is used by state leaders to write a new budget for the two years beginning July 1, but the so-called federal “fiscal cliff” leaves what Bakk said is the most uncertain fiscal future he has seen.

Report: NC inmates forced to rub habanero pepper sauce on testicles, kiss snakes | The Raw Story: The North Carolina Department of Public Safety has asked the State Bureau of Investigation to open an investigation after six inmates claimed that guards forced them to burn their genitals with hot pepper sauce, perform simulated sex acts and kiss snakes.  N.C. Department of Public Safety spokesperson Pamela Walker told The Associated Press on Monday that one Sampson Correctional Institution staff member went on leave and another was reassigned after inmates sent a letter the U.S. District Court in Greensboro alleging civil rights violations.  The six inmates claimed that they had been forced to entertain correctional staff by pretending to have sex with each other while nude and perform other humiliating acts.“The inmates also reported being forced to gulp a super-hot ‘Exotic Hot Sauce’ purchased off the Internet and slather it on their testicles, as well as being forced to grab and kiss wild snakes while working on a road crew and throwing captured bunnies in to oncoming traffic,”

Private Prison Company Allegedly Partnered With Violent Gangs To Save Money - A new lawsuit brought by eight inmates of the Idaho Correctional Center alleges that the company is cutting back on personnel costs by partnering with violent prison gangs to help control the facility. Court documents and an investigative report issued by the state’s Department of Corrections show how guards routinely looked the other way when gang members violated basic facility rules, negotiated with gang leaders on the cell placement of new inmates, and in one instance may have even helped one group of inmates plan a violent attack on members of a rival gang. Rather than working with corporate headquarters or local authorities to combat the growing threat of gangs, CCA officials at the prison — the state’s largest, with more than 2,000 beds — used those same gangs as a way to control the rest of the inmates and save money: The inmates also contend that CCA officials use gang violence and the threat of gang violence as an “inexpensive device to gain control over the inmate population,” according to the lawsuit, and that housing gang members together allows the company to use fewer guards, reducing payroll costs. “The complaint alleges that CCA fosters and develops criminal gangs,” attorney Wyatt Johnson, who along with T.J. Angstman represents the inmates, said in a statement. “Ideally, the lawsuit should force this to come to an end.”

State laying groundwork for managed bankruptcy for Detroit - Even as the state Treasury prepares to begin another financial review of Detroit's books, a plan is being solidified in the governor's office that would guide Michigan's largest city through what is being called a managed bankruptcy. The working concept, still evolving, assumes that the state's financial review would find severe financial distress in Detroit, that Mayor Dave Bing and City Council would be unable to push through overdue restructuring, and that the process would culminate in appointment of an emergency financial manager under Public Act 72. The case would be filed under Chapter 9 of the federal bankruptcy code, according to two ranking sources familiar with the situation, following efforts to reach prenegotiated settlements with as many key creditors — unions, vendors and pension funds among them — as possible before any filing. "Clearly, we will always try to do that," one source familiar with the situation said in an interview Thursday. "You can move on a much more expedited basis if you can demonstrate that your cash is running out" — as Detroit clearly is with each passing week. The evolving bankruptcy scenario is a clear signal that Gov. Rick Snyder and Treasurer Andy Dillon have lost confidence in the ability of the mayor, his management team and council to honor their commitments under the eight-month-old consent agreement with the state, or to make any meaningful progress on restructuring.

Stateside: What would a Detroit bankruptcy bring? - As the prospect of a Chapter 9 Bankruptcy looms over Detroit, many are wondering what will become of the city. We spoke with contributor Micki Maynard and the Detroit News' Daniel Howes about restructuring the city and those who run it. “It would be very difficult for the image of the city. It would be the largest municipal bankruptcy in the history of the country. It would probably last three years and be very unforgiving to the employees and residents,” said Howes. Howes insisted that taxpayers would mostly likely have to fund the restructuring of the city. “If Detroit were a corporation it would probably already be in bankruptcy. I don’t think this will get all the way to the finish line without the federal government weighing in in some way,” said Maynard.

Health Crisis In Sandy Disaster Zones: Cold, Mold Loom As Hazards In Rockaways, Staten Island, Elsewhere: -- A month after Sandy's floodwaters swept up his block, punched a hole in his foundation and drowned his furnace, John Frawley still has no electricity or heat in his dilapidated home on the Rockaway seashore. The 57-year-old, who also lost his car and all his winter clothes in the flood, now spends his nights shivering in a pair of donated snow pants, worrying whether the cold might make his chronic heart condition worse. "I've been coughing like crazy," City officials estimate at least 12,000 New Yorkers are trying to survive in unheated, flood-damaged homes, despite warnings that dropping temperatures could pose a health risk. The chill is only one of the potential environmental hazards that experts say might endanger people trying to resume their lives in the vast New York and New Jersey disaster zone. Uncounted numbers of families have returned to coastal homes that are contaminated with mold, which can aggravate allergies and leave people perpetually wheezing. Others have been sleeping in houses filled with construction dust, as workers have ripped out walls and flooring. That dust can sometimes trigger asthma. But it is the approaching winter that has some public health officials worried most. Nighttime temperatures have been around freezing and stand to drop in the coming weeks.

With Some Hospitals Closed After Hurricane Sandy, Others Pick Up Slack - A month after Hurricane Sandy struck New York City, unexpectedly shutting down several hospitals, one Upper East Side medical center had so many more emergency room patients than usual that it was parking them in its lobby.White and blue plastic screens had been set up between the front door and the elevator banks in the East 68th Street building of that hospital, NewYork-Presbyterian/Weill Cornell. The screens shielded 10 gurneys and an improvised nursing station from the view of people obliviously walking in and out of the soaring, light-filled atrium. Since the storm, a number of New York City hospitals have been scrambling to deal with a sharp increase in patients, forcing them to add shifts of doctors and nurses on overtime, to convert offices and lobbies to use for patients’ care, and even, in one case, to go to a local furniture store to buy extra beds. At Beth Israel Medical Center, 11 blocks south of the Bellevue Hospital Center emergency room, which was shuttered because of storm damage, the average number of visits to the E.R. per day has risen to record levels. Visits have increased by 24 percent this November compared with last, and the numbers show no sign of dropping. Hospital admissions have risen 12 percent compared with last November.

Behind a Call That Kept Nursing Home Patients in Storm’s Path - Mayor Michael R. Bloomberg, acting on the advice of his aides and those of Gov. Andrew M. Cuomo, recommended that nursing homes and adult homes stay put. The 305 residents would ride out the storm. The same advisory also took administrators by surprise at the Ocean Promenade nursing home, which faces the Atlantic Ocean in Queens. They canceled plans to move 105 residents to safety. “No one gets why we weren’t evacuated,” said a worker there, Yisroel Tabi. “We wouldn’t have exposed ourselves to dealing with that situation.” The recommendation that thousands of elderly, disabled and mentally ill residents remain in more than 40 nursing homes and adult homes in flood-prone areas of New York City had calamitous consequences. At least 29 facilities in Queens and Brooklyn were severely flooded. Generators failed or were absent. Buildings were plunged into a cold, wet darkness, with no access to power, water, heat and food. While no immediate deaths were reported, it took at least three days for the Fire Department, the National Guard and ambulance crews from around the country to rescue over 4,000 nursing home and 1,500 adult home residents. Without working elevators, many had to be carried down slippery stairwells.

Storm Charity: 15% Of What? - That the practice has found some of its most aggressive expression in the aftermath of natural disasters is surely obvious to anyone who has observed the second and third chapters of Hurricane Sandy, as businesses have gone about the yoked work of advancing their interests while igniting charitable impulses, occasionally to unseemly, or at the very least, utterly confounding, effect. Last week, for instance, an obscure company called VenueBook, which offers online party planning, announced that from now through Dec. 31, it would donate 15 percent of its “proceeds” to City Harvest, which has worked to help feed storm victims. “For New Yorkers hosting holiday parties, this is the best way to give back to those in need after Sandy,” VenueBook’s chairman, Kelsey Recht, said in a news release, providing no apparent basis for the claim. As it happens, VenueBook is giving a percentage of the commission it receives from the event sites to City Harvest, but there is no real indication that using the company as a charitable pipeline would be more beneficial than discreetly asking every guest at your buffet table to please put $5 in a ceramic Santa that could then be sent to a relief agency.

Smart Grids, Stupid People - In the immediate term it’s expensive to be smart, and cheap to be stupid. In the long term, smart saves, though the math is a bit complicated. There are a handful of energy experts out there who believe that America’s utility giants could have recovered from Hurricane Sandy much better had they invested in smart grid upgrades. A number of smart grid paraphernalia would have come in handy: According to Siemens, which is one of the key developers of this technology, the greatest cost is not in the technology itself, but in the training of personnel required to effectively use it. Apparently, you have to have smart people operating a smart grid. Siemens knows. It acquired California-based eMeter in January 2012. Still, no one’s willing to put a price on implementing this technology, with too many variables to consider.

City-Paid Hotel Rooms Are No Panacea for 1,000 New Yorkers Displaced by Storm - Pia Hand’s apartment in the Rockaways still does not have heat, and the walls are infested with mold from Hurricane Sandy’s storm surge.  But for the past two weeks, Ms. Hand’s living conditions have been stunningly different: a hotel room on the 26th floor of the Doubletree Hilton in the financial district, with daily maid service and a complimentary chocolate chip cookie — warm from the oven — every afternoon.  In the wake of Hurricane Sandy, she is one of 1,000 storm evacuees who are being temporarily housed by the city in 416 rooms across 29 hotels, most of them in Manhattan. The hurricane victims, many of whom were in noisy, chaotic shelters during the storm’s immediate aftermath, now have the almost Oz-like experience of waking up in some of the city’s most desirable hotels.  But while the hotel stays have been a balm for frazzled families and individuals, they are no panacea.  For one thing, many of the hotels that have set aside blocks of rooms for storm victims do not use Frette linens or leave chocolates on pillows. Among the properties in the quickly assembled network are the Harlem Y.M.C.A., the Best Western Kennedy Airport and the LaGuardia Airport Hotel. City officials insist that in some instances, they were able to negotiate below-market rates and are paying less than $100 a night.

Chris Hedges: Katrina, All Over Again - Hurricane Sandy, if you are poor, is the Katrina of the North. It has exposed the nation’s fragile, dilapidated and shoddy infrastructure, one that crumbles under minimal stress. It has highlighted the inability of utility companies, as well as state and federal agencies, to cope with the looming environmental disasters that because of the climate crisis will soon come in wave after wave. But, most important, it illustrates the depraved mentality of an oligarchic and corporate elite that, as conditions worsen, retreats into self-contained gated communities, guts basic services and abandons the wider population.  Stores, their merchandise destroyed by the water, are boarded up and closed. Rows of derelict cars, with the tires and license plates removed and the windows smashed, line the streets. Food distribution centers, most of them set up by volunteers from Occupy Sandy Recovery, hastily close before dark every day because of the danger of looting and robbery. And storm victims who remain in their damaged homes, often without heat, electricity or running water, clutch knives against the threat of gangs that prowl at night through the wreckage. This storm—amid freakish weather patterns such storms will become routine—resulted in at least $71.3 billion in property damage in New York and New Jersey. Many of the 305,000 houses in New York destroyed by Sandy will never be rebuilt. New York City says it will have to spend $800 million just to repair its roads. And that is only the start. The next hurricane season will most likely descend on the Eastern Seaboard with even greater destructive fury. A couple of more hurricanes like this one and whole sections of the coast will become uninhabitable.

NYC Threatens to Shut Down Occupy Sandy Relief Sites - While the history of relief efforts for Sandy victims in places such as Staten Island and Red Hook is still being written, a move on Friday by New York City will probably go down as one of the stupidest moves any governmental authority EVER made: This Friday morning Staten Island police representing the mayor’s office have threatened eviction action against the crucial Staten Island hub at 489 Midland Avenue, in the heavily hit Midland Beach area. Aiman Youssef, a 42-year-old Syrian-American Staten Islander whose house was destroyed in the hurricane, has been running a 24/7 community pop up hub outside his property at 489 Midland Avenue since the day after the storm. He and a coalition of neighbors, friends and community members are serving hot food and offering cleaning supplies, non-perishables, medical supplies, and clothing to the thousands of residents who are still without heat, power, or safe housing. This popular hub is well-run, well-staffed, and has a constant hum of discussion, support, and advice as well as donations and pick ups and volunteer dispatch through another pop-up group, volunteers who call themselves “The Yellow Team.”

NYPD and Occupy Wall Street Worked Together to Prevent Post-Sandy Crime - Now that they're done pepper spraying defenseless protesters, the NYPD is working with Occupy Wall Street to combat crime. In the weeks after Hurricane Sandy, the Red Hook neighborhood in Brooklyn was without, as the New York Post puts it, "power or electricity," leaving residents and businesses vulnerable to any number of crimes. And yet, no storm-related crime was reported, despite spikes in other NYC neighborhoods. The reason? Occupy Wall Street, according to the NYPD. Police sources have credited the drop in crime to an unlikely coalition that included the NYPD, Occupy Wall Street activists, and local nonprofits working together to keep storm victims safe. "This crisis allowed us all to remove the politics and differences we had to do our job, and come to the aid of the people," said a police source yesterday. "We all rose to the occasion."

NYPD Credits Occupy with the Drop in Crime After Sandy - Hold on to your riot gear, ladies and gentlemen, because police in New York City are saying that Occupy Wall Street activists deserve credit for helping keep the city safe after Hurricane Sandy. They're not saying that publicly, of course. That would just be too much.  In case you haven't been paying attention, Sandy recovery efforts are on-going in many parts of New York City. In areas like Coney Island and the Rockaways, crime has spiked, mostly from burglaries as the communities have struggled to get back on their feet, but things have been remarkably civil in Red Hook. The New York Post reported why on Wednesday night: "Police sources have credited the drop in crime to an unlikely coalition that included the NYPD, Occupy Wall Street activists, and local nonprofits working together to keep storm victims safe." Said one of these unnamed sources, "This crisis allowed us all to remove the politics and differences we had to do our job, and come to the aid of the people. We all rose to the occasion."

After Sandy, NYC pins housing hope on repairs - Facing Superstorm Sandy's daunting toll of wreckage and displacement in the nation's largest city, officials have put much of their hopes and hundreds of millions of dollars into jump-starting repairs to make homes livable. Federal and city officials see the strategy - focusing on getting people back into their own homes, not temporary housing - as an innovative and nimble answer to the challenge of housing thousands of storm victims in a notoriously expensive and crowded area. But with relatively few homes fixed so far, questions are emerging about whether the "rapid repairs" initiative can live up to its name. More than 10,000 homeowners have signed up for NYC Rapid Repairs in the three weeks since Mayor Michael Bloomberg launched the initiative to bring in hundreds of contractors to restore power, heat and other essentials free of charge. Contractors have done initial assessments of about 7,000 homes in the city and 2,000 in similar initiatives on Long Island, but just about 400 projects have been completed so far. Officials stress that the program is still gearing up. But a community meeting last week in hard-hit Staten Island boiled over with complaints that repairs and other aid aren't coming fast enough, a familiar refrain in storm-damaged areas.

Michael Bloomberg asks Hillary Clinton to be next New York City mayor - The New York Times reports that New York City mayor, Michael Bloomberg, has urged Hillary Clinton to consider running for mayor in 2013. The paper goes on to say that Mayor Bloomberg feels Secretary of State Clinton would be his ideal replacement. Mr Bloomberg has been New York City mayor for 12 years and must stand next year. Mrs Clinton has not issued any statement on the suggestions that she might stand for NYC mayor in the 2013 election but Democrats close to her feel it unlikely. The NYT reports “As much as anything, they said, Mr Bloomberg’s encouragement seemed to reflect his lofty view of the office — and himself,”  Bloomberg, it appears, made a call to Mrs Clinton asking her to consider running for mayor some months ago. It would mean that she would have to give up her role as an international diplomat, something that she's indicated she will do in the new year, and take up a municipal post.

Renegade Democrats hand control of New York Senate to GOPNY-St. Sen: Gaze upon the horror: Renegade Democrats in the New York state Senate have, at last, come to an appalling power-sharing agreement with the Republicans, handing control to the GOP even though they represent a minority in the chamber. Power will formally rotate back and forth between Republican Sen. Dean Skelos and "Independent" Democratic Sen. Jeff Klein, whose band of rogues just added a fifth member in the form of Sen. Malcolm Smith. Remarkably, Smith used to be the Senate majority leader until he was deposed after two now-extinct Dems were bought off by the GOP. Indeed, disgust at Smith's leadership was allegedly why Klein formed the IDC in the first place; the fact that they're letting him into the clubhouse now sure looks like proof that Klein is only interested in power.

Cuomo to make $42 billion Sandy aid pitch to Congress  -- Gov. Andrew Cuomo will be in the nation's capital to meet with members of Congress as he seeks billions of dollars in federal aid to help New York recover from Superstorm Sandy. Cuomo's schedule Monday afternoon is filled with meetings in Washington with several Senate and House leaders, including Senate Majority Leader Harry Reid, House Speaker John Boehner and Democratic Leader Nancy Pelosi. The governor will be joined at some of the meetings by New York Sens. Charles Schumer and Kirsten Gillibrand and Congressmen Pete King, Michael Grimm and Bob Turner. A Cuomo administration official said on Friday that the governor will be asking Congress for $42 billion in aid to help the state recover from the late-October storm.

Saying Sandy cost up to $50 billion, New York governor asks Congress for aid- New York Governor Andrew Cuomo lobbied Congress on Monday for billions of dollars to help rebuild from Superstorm Sandy, saying the U.S. House leader wanted a reconstruction bill passed by year's end. Cuomo, a Democrat, put the damage from the late October storm at $40 billion to $50 billion for New York alone, with the total likely to rise. "We need help. These are big numbers, even for New York," he told a news conference while flanked by members of the state's congressional delegation. After meeting White House aides, House of Representatives Speaker John Boehner and other congressional leaders, Cuomo said Boehner wanted a supplemental spending bill on Sandy costs passed by the end of the year. Congressional aides said there has been no clear consensus on its size. But they said it would likely be far less than the nearly $80 billion New York and New Jersey, the states most heavily hit by Sandy, are seeking combined.

N.J. Sandy Cleanup to Cost About $29.4 Billion (AP) Cleaning up the damage caused by Superstorm Sandy will cost New Jersey about $29.4 billion, Gov. Chris Christie announced. The preliminary estimate includes damage the storm caused to personal property, businesses, transportation, utilities and infrastructure, as well as aid the state has already received and also expects to get from the Federal Emergency Management Agency and other federal agencies. Christie, though, warned that the damage estimate could go higher as the state further assesses damage caused by the monster storm that pounded the East Coast. Christie said the estimate came from “the best available data, field observations and geographic mapping,” and advice from cabinet officials and a consulting company. “We will continue to provide immediate relief for our citizens who were struck hard by Sandy,” Christie said. “But be assured, I will spare no effort and waste no time to rebuild and restore our tourism industry, our transportation and utilities infrastructure and the lives of our citizens for the long term.”

New Jersey and New York press case for $80 billion Sandy aid bill (Reuters) - New Jersey and New York officials are stepping up their campaign for $80 billion in federal aid to finance cleanup and rebuilding efforts following superstorm Sandy, despite a media report the White House will request only $50 billion. New Jersey Governor Chris Christie pressed his case for the flood-damaged region in closed-door meetings with President Barack Obama and House of Representatives Speaker John Boehner on Thursday. Senator Frank Lautenberg, a New Jersey Democrat, said the $45 billion-$55 billion range reported by The New York Times on Wednesday was not sufficient to meet estimated damages of $37 billion in New Jersey, $42 billion in New York and $3 billion in Connecticut. "We think the numbers that were supplied were reliable. We're somewhere in the $80 billion area," Lautenberg told reporters in the Capitol. "Right now, there's a difference in view as to what we need and what we can get."

Teacher’s Reward Program Charges Second-Graders for Bathroom Breaks - The mother of a 7-year-old Irving elementary school student says her son wet his pants in class after his teacher refused to let him use the restroom Thursday afternoon. "I was absolutely appalled," Sonja Cross said. "I could not believe it." The first-year teacher at J.O. Davis Elementary awards her students with "Boyd Bucks" for good behavior. Going to the bathroom outside of the three scheduled breaks costs two Boyd Bucks per trip. Cross' son, an honor roll student, needed to go to the bathroom, but he sat back down because he didn’t have any Boyd Bucks, his mother said. "He tried to hold it as much as he could, but he just couldn’t," Cross said. "He came home from school, and he was crying and really upset." Cross informed school administrators, who quickly told the teacher to stop charging her students to go to the bathroom.

New Paper: Against the Coupon State - Imagine if current neoliberal policymakers had to sit down today and invent the idea of a library. What would it look like? They'd likely create a tax credit to subsidize the purchasing and reselling of books, like much of our submerged welfare state. They might require a mandate for people to rent books from approved private libraries run by Amazon or Barnes and Noble, with penalties for those who don’t and vouchers for those who can’t afford it, like the recent health care expansion.  Or maybe they’d create means-tested libraries only accessible to the poor, with a requirement that the patrons document how impoverished they are month after month to keep their library card. Maybe they’d also exempt the cost of private library cards from payroll taxes. Or let any private firm calling itself a library pay nothing in taxes while exempting their bonds from taxation and insuring their losses by, say, paying for books that go missing. You can imagine them going through every possible option rather than the old-fashioned, straightforward, public library, open to all, provided and run by the government, that our country enjoys everyday. I have a new white paper out with New America's "Renewing the American Social Contract" series, titled "No Discount: Comparing the Public Option to the Coupon Welfare State." Here's the introduction, and here's the full pdf.

Interactive map and chart: new, common 4-year state high school graduation rates by race and ethnicity, 2010-2011

The real reason some colleges make SATs optional - I sometimes think I should write a handbook for college admission officials titled “How to Play the U.S. News & World Report Ranking Game, and Win!” I would devote the first chapter to a tactic called “SAT optional.” The idea is simple: tell applicants that they can choose whether or not to submit their SAT or ACT scores. Predictably, those applicants with low scores or those who know that they score poorly on standardized aptitude tests will not submit. Those with high scores will submit. When the college computes the mean SAT or ACT score of its enrolled students, voilà! its average will have risen. And so too, it can fondly hope, will its status in the annual U.S. News & World Report’s college rankings.

Degree Inflation? Jobs That Newly Require B.A.'s - Despite the sob stories you hear about unemployed college graduates, bachelor’s degrees have actually gotten more valuable over time. The wage gap between the typical college graduate and those who have completed no more than high school has been growing for the last few decades. In the late 1970s, the median wage was 40 percent higher for college graduates than for people with more than a high school degree; now the wage premium is about 80 percent. Some of that wage premium has to do with the changing nature of American jobs and the skills (and social networks) attained in college. Some of it may have to do with a change in the mix of students who go to college and those who don’t. As college enrollment becomes more expected of high school students — as of October 2011, 68.3 percent of 2011 high school graduates were enrolled in college — the shrinking group of students forgoing college may have other characteristics that are associated with lower wages. At the very least it seems as if more employers are using bachelor’s degrees as a signal of drive or talent, regardless of of the relevance of the skills actually learned in college. Here is a look at the 10 occupations with the biggest percentage increases in requiring a college degree.

Shocking Chart on Tuition vs. Earnings for College Grads -  Student debt levels have reached a new high – rising $42 billion in the last quarter to $956 billion, according to a report this week from the New York Fed. At the same time, tuition rates have seen a staggering 72 percent increase since 2000.  As if those two upward trends weren’t hitting students hard enough – the average earnings for full-time workers ages 25-34 with Bachelor’s degrees has also dropped 14.7 percent since 2000. The chart below from Citi shows the striking contrast:  Howard Dvorkin, author of Credit Hell, told The Fiscal Times last month: “It's hard to predict when the student loan meltdown could occur, but if the bubble explodes, the consequences will be devastating for the economy.”

Survey finds new Ph.D.s less likely to have job commitments | Inside Higher Ed: The proportion of new doctorates in 2011 who finished their degrees with firm commitments for either employment or a postdoc fell in 2011 -- across every broad disciplinary category -- according to data released Wednesday by the National Science Foundation. Among all fields, 65.5 percent of new doctoral recipients reported having a definite commitment. That's down from 71.6 percent five years earlier. There is significant variation by discipline, although the declines are present across the board. Declines have been relatively modest in engineering and physical sciences, and largest in the humanities. The data are from the annual "Survey of Earned Doctorates," a key source of information about those completing Ph.D.s -- many of whom aspire to be the future faculty members of American colleges and universities. The number of science and engineering doctorates increased by 4 percent from 2010 to 2011. While other doctorates dropped 3.1 percent, much of that decline is attributable to a recent reclassification of education doctorates as professional rather than research doctorates.

Saying No To College - So in the spring of 2010, Mr. Goering took the same leap as Mr. Zuckerberg: he dropped out of college and moved to San Francisco to make his mark. He got a job as a software engineer at a social-software company, Livefyre, run by a college dropout, where the chief technology officer at the time and a lead engineer were also dropouts. None were sheepish about their lack of a diploma. Rather, they were proud of their real-life lessons on the job.  “Education isn’t a four-year program,” Mr. Goering said. “It’s a mind-set.” The idea that a college diploma is an all-but-mandatory ticket to a successful career is showing fissures. Feeling squeezed by a sagging job market and mounting student debt, a groundswell of university-age heretics are pledging allegiance to new groups like UnCollege, dedicated to “hacking” higher education. Inspired by billionaire role models, and empowered by online college courses, they consider themselves a D.I.Y. vanguard, committed to changing the perception of dropping out from a personal failure to a sensible option, at least for a certain breed of risk-embracing maverick.  Risky? Perhaps. But it worked for the founders of Twitter, Tumblr and a little company known as Apple.

Trends in College Tuition vs. Bachelor’s Degree Wages; Interesting Demographics of Student Loan Debt History - According to the New York Fed, Student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008. Moreover, student loans balances have eclipsed both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages.  The Fed has some interesting charts on Student Loan Debt History through first quarter of 2012. Debt levels are higher now, with student debt at $956 billion through third quarter. What caught my eye however, is skyrocketing debt in the age group 30-39. Even if it took someone age 18, eight to ten years to finish college, they would still be 28 years old at most when they finished their education. Yet, student debt in the 30-39 demographic group now exceeds that of the under 30 age group. Moreover, the under age 30 group accounts for less than a third of the overall student debt. Points to Consider:

  1. Over-two thirds of student debt is held by those well outside the normal student demographic!
  2. This trend is not entirely recession-related given that it has been steady since 2005.
  3. Someone exiting military service would be covered for 36 months of in-state education by the GI Bill.
  4. Someone working for a major employer for any significant length of time would likely have some or all education expenses paid for by the company. 
  5. Those aged 30-39 would be far more likely to have steady income than someone 18-24, thereby avoiding the need to rack up as much debt.

Student Debt "Lotto" Reality - In response to Trends in College Tuition vs. Bachelor’s Degree Wages; Interesting Demographics of Student Loan Debt History I received an interesting email from "JMM" who writes ... Those who finish a degree are better off not only in income, but in reduced unemployment. Employers making hiring decisions place an emphasis on college. That is the bottom line. That trend is not going to change for a long, long time. I have known some very intelligent people that never went to school. They were disadvantaged because of it. Yes, some geniuses and talents make it without education (Steve Jobs and NBA players for example), and some people win the lottery. That doesn't make the lottery an investment strategy. Thank JMM. I happen to like your analogy to the lottery, except in reverse. Take for example the last mega-lottery with a payout to a single winner of nearly a half-billion dollars.  The odds favored entry, (assuming a single winner although a bad assumption), yet nearly everyone was a loser. I did not win either.  The school "lotto" is not as bad, but it is very bad. Some do very well, many break even, and a large percentage lose. Earnings of those who do very well, may (on average) exceed those who don't, yet the net percentage of people benefiting  may very well be negative. Regardless, the sheer number of students getting totally wiped out by going into debt to attend college is staggering, and unsustainable.

Strike Debt’s Rolling Jubilee Puts Borrowers at Risk -  Yves Smith - Last month, I criticized the well meaning but naive strategy of the Occupy Wall Street group Strike Debt for dealing with consumer debt, which is to buy severely discounted debt from debt collectors and forgive it. My main complaint was that there were more productive approaches, such as wider publicity and distribution of the Debt Resistors’ Operations Manual, providing more counseling and legal support to borrowers, and using debt purchases to develop cases against the debt sellers. By contrast, the Rolling Jubilee increases the profitability of bad system by providing more revenues to the incumbents, while the debt purchases are unlikely to do more than help a few random people. It might make for feel-good PR, but it won’t make a dent in the problem. Perversely the post got pushback on the last (and by implication, the least important) issue raised, namely, that of possible tax problems with the scheme. I wanted to revisit this issue and demonstrate why the responses of allies and members of Strike Debt have failed to put the issue to rest, and more important, why this matters. The short version is that Strike Debt maintains that there is no risk here, when as we will demonstrate, the outcome is not knowable at this juncture (yes, that is unsatisfying, but welcome to the world of tax). It’s possible that things will work out just fine for the Rolling Jubilee. But if not, the ramifications to Strike Debt and the borrowers whose debt was cancelled would be significant. Thus, to dismiss this very real possibility is irresponsible. Tax issues are nerdy. You need to be prepared to read this entire post, carefully. I’m planning to box readers about the ears if they raise issues that were addressed in the post.

Rolling Jubilee and the Pesky Tax Problem - When I checked last, Rolling Jubilee had raised $456K, and hoped to use it to wipe out over $9.1 million of debt. Unfortunately, there is a risk that some debt forgiveness will be treated as income by the Internal Revenue Service. Yves Smith gives a detailed description of the problems, and urges Rolling Jubilee to spend the money it takes to hire a serious tax lawyer. I agree with her that the FAQ on the site isn’t satisfactory, and I hope the organizers will deal with the problem. Even if they don’t, many of the beneficiaries will be OK. You only get the income problem to the extent that forgiveness of debt restores you to solvency. The IRS uses a complex rule about solvency which you can find here. Generally, the test is whether your liabilities exceed your assets. Your assets include all of your retirement accounts, even though they can’t be reached by creditors, and any equity you might have in property that is collateral for a debt. Then, you have income to the extent that after the debt forgiveness, you are made solvent. For example, suppose you have a debt of 50K and total assets of 30K. If a creditor forgives 10K of debt, you are still insolvent, so no income. If the creditor forgives 20K, you are still not solvent, and again, no income. If the creditor forgives 25K, you have income of $5K. Obviously that isn’t a good thing. Rolling Jubilee will not file the form the lender is supposed to file when it forgives debt. They may not be able to contact the debtor to say that they have forgiven the debt. In that case, the debtor might have income but not know it, and neither would the IRS. That defeats the point of forgiveness of debt, because the debtor is still worried about the debt. Still, it might solve the income problem unless the IRS forces Rolling Jubilee to file the forms.

Student-Loan Collection Targeted for Overhaul in Congress - Congress will consider overhauling debt collection in the $100 billion-a-year U.S. student loan program, replacing it with automatic withdrawals from borrowers’ paychecks tied to their income -- a system used in the U.K. Legislation that Wisconsin Republican Representative Tom Petri plans to introduce as soon as this week would require employers to withhold payments from wages in the same way they do taxes. Payments would be capped at 15 percent of borrowers’ income after basic living expenses. The bill follows growing concern about the burden of $1 trillion in outstanding student loans, which now exceed credit- card debt. Under the new system, the government would no longer need to hire private debt-collection companies and charge fees that add as much as 25 percent to borrowers’ loan balances, leaving defaulted former students even deeper in the hole. “This doesn’t mean leaving taxpayers on the hook if a student borrows too much -- everyone would still pay back what they borrow under this system,” Petri said in an e-mail. “It does mean providing much stronger protections against the kind of financial ruin that is all too prevalent in our current system.”

Student-Loan Collections Could Be Subject to Drastic Overhaul -- Bloomberg reports that Congress will consider overhauling debt collection in the $100 billion-a-year U.S. student loan program, replacing it with automatic withdrawals from borrowers’ paychecks tied to their income -- a system similar to those sued in the U.K., New Zealand and Australia. The bill, proposed by Wisconsin Republican Representative Tom Petri, would require employers to withhold payments from wages in the same way they do taxes, capping payments at 15 percent of borrowers’ income after basic living expenses. The bill follows growing concern about the burden of $1 trillion in outstanding student loans, which now exceed credit- card debt. Under the new system, the government would no longer need to hire thugs to collect, and I personally have found these student loan debt collectors to be quite formidable indeed. Never mind that the debt collectors fees can add up to 25 percent to borrowers’ loan balances, leaving defaulted former students even deeper in the hole.  This new process would streamline the confusing process of getting on a reduced payment plan if a borrower is un or under-employed, but would still provide for repayment of the student debt.

Kentucky = Worst Funded Public Pension in US - America’s public pensions have hit a new low. At a board meeting today, the Kentucky Retirement Systems (KRS) announced that its funded ratio is now 24.5%, according to former KRS trustee Christopher Tobe, beating out Illinois’ as the lowest in nation. From 2007 to the fiscal year-end of 2011 (the latest date for which data is available), KRS’ total assets dropped by more than a third, from $6.44 billion to $3.97 billion. In KRS’ 2011 annual report, Chief Operations Officer William Thielen acknowledged the dwindling funding ratio, and attributed it to a variety of causes. “Funding ratios have fallen both steadily and significantly over the last decade as a result of unfavorable market conditions, higher than anticipated retirement rates, employer underfunding…and increased expenses or annual cost of living adjustments that are not pre-funded by the employers,” Thielen wrote. It gets worse: “While improved market conditions and the increased funding in…FY 2011 have slowed the growth of the unfunded liabilities of the various systems, KRS uses a five-year smoothing method and the full effects of the market losses in 2008 and 2009 will not be realized for another three years.”

SOCIAL SECURITY…Sweet Reasonableness and Fact Checkers - Apparently the Big Liars are getting worried about the fact that "Social Security has nothing to do with the deficit." There have been a flurry of little Big Liars "proving" that in fact SS is a contributor to the Deficit. I am going to try to point out the hidden lie in a couple of these articles, beginning with the most dangerous. Glenn Kessler ( Washington Post ) sets himself up to be The Fact Checker for the Washington Post. The trouble is, of course, that in this world every liar begins by claiming himself to be the Fountain of Truth and offers to explain things to the little people who wouldn't be expected to know without his kind guidance and protection. The Devil, they say, can appear in the guise of a Franciscan monk when it suits his purposes. And Kessler adopts Sweet Reasonableness for his schtick today. "Senator Durbin," he tells us, says "Social Security has added not one penny to the deficit." Kessler explains how he previously "evaluated" similar statements and "rated" them, "true but false." Can't get any more fair and balanced than that. But Kessler is worried that this "true but false" statement will lead readers to forget that "Social Security's a long term issue that can't be deferred." I hope you notice how we are gently being led into the swamp. Most Washington Post readers will not notice. But Kessler doesn't "mean to pick on Durbin since plenty of Democrats in recent days have made similar comments." Ah, see how fair we are being. Can't blame Durbin, because all the Democrats are doing it. But Kessler "remains troubled.. given the further decline in Social Security's finances in the past year." Note we get this "further decline" as an established fact that we don't have to question. We will not even be given time to ask whether this "fact" bears on the question of SS contribution to the deficit. Remember, that's where we started.

Greedy Geezers, Reconsidered - For three decades, conservative critics have been warning that the elderly are living too well at the expense of the young. Since the early 1980s, financier Peter G. Peterson has been predicting that Social Security’s excessive generosity would crash the retirement system and the economy. Thanks to the economic boom of the late 1990s, senior bashing went into temporary eclipse. However, the Bush tax cuts, the costs of two wars, an inefficient privatized Medicare drug plan, and the financial collapse of 2008 drove the budget back into deep deficit and gave new life to the Social Security Cassandras. Unemployment soared, payroll taxes plummeted, and a deep economic slump followed. Now, Social Security is once again projected to lack the funds to pay out all of its claims, as early as 2033.  Apart from the cause and cure of Social Security’s projected deficit, there was always one fallacy at the core of the greedy-geezers fable: The vast majority of the elderly are far from wealthy. The median income of elderly Americans in 2010 was just $25,704 for males and $15,072 for females. Almost two-thirds of the elderly depend on Social Security for at least 70 percent of their entire income. The income of the very wealthy elderly is outsize, but that’s hardly a reason for cutting Social Security for everyone else. Peterson contends that “a substantial part of these [Social Security] retirement payments go to people like me”—affluent folks who can do without the money. But according to Michael Hiltzik, a business columnist for the Los Angeles Times, the $1.14 billion in Social Security payments that went to recipients earning $1 million or more in 2009 amounted to less than one-fifth of 1 percent of all benefits paid. If we want government to recapture that money, it’s far better to use the progressive income tax than to cut Social Security benefits across the board.

"The young will pay more and get less." More Nonsense from Robert Samuelson - Our old friend, Dean Baker at Beat the Press, does a good job of taking apart yet another screed by the execrable Robert J. Samuelson, faux economist for WaPo, whining about why nobody is jumping on board with cuts to "entitlements," and particularly his old bugaboo, Social Security.  Google "Dean Baker Robert Samuelson is upset" and the first hit gives you the link (Sorry, the link title is too long for me to read it and my trying to put what I saw in just sent one to the general CEPR site, bah! (Anybody out there able to tell me how to overcome this bit when urls are too damned long too read, please?).  However, I want to pound the nails in a bit more.  So, Samuelson provides this line that if there is not an adjustment to SS (and Medicare), then "The young will pay more and get less."  Dean quotes this, but does not go far enough in showing how totally ridiculous this is, even though he has pointed out recently that one reason there should be no adjustments for SS now is that the young are massively misinformed about what the not so bad fiscal situation of SS is.  Large proportions of them are fully convinced that they will receive no Social Security when they retire because it will be "bankrupt," when in fact that condition will amount to them only getting something like 120% of current retirees' benefits in real terms rather than more like 170% (a bit lower, actually).  They are totally out of it, and the main threat to them losing their future benefits is if they support the sort of dreck that Samuelson is pushing, to cut their future benefits now because otherwise they might have their future benefits cut in the future (eeeeek!).

Social Security To Up Debt By 18% Of GDP In 20 Years - Since 2007, Social Security has gone from running an $81 billion annual cash surplus to an estimated $58 billion deficit. Yet despite that $139 billion swing toward red ink, Democrats insist that Social Security hasn't added a penny to the deficit and, therefore, should be off the table in fiscal cliff negotiations. In reality, Social Security's deteriorating finances explain 15% of the $900 billion-plus increase in the overall budget deficit over the past five years. Even more striking, Social Security's cash deficit will balloon to $155 billion by 2022, the Congressional Budget Office projects. That rise amounts to more than one-third of the overall deficit increase over the coming decade if current tax and spending policies stay in place. On its current path, Social Security's cash shortfall would raise public debt by 18% of GDP through 2032 — just before the trust fund is exhausted — an IBD analysis based on the 2012 Social Security Trustees report finds.

Why "Looting" the Social Security Trust Funds is Both Legal AND Fair -   In order to achieve actuarial balance the Trust Fund principal needs to grow on net over the projection period. Which means equally that once again on net Trust Fund principal is NEVER redeemed entirely, just rolled over and AUGMENTED by retained income from interest and taxes. And in turn this augmented Fund is BY LAW invested in Treasuries, in this case a category called Special Treasuries. And like all Treasuries this means that actual cash collections in excess of benefit and admin costs are spent on other functions of government. Moreover the requirement for an ever increasing reserve means the following counter-intuitive combination of facts: Trust Fund assets are as real as real, honest to God Treasury obligations backed by Full Faith and Credit of the United States. That never have to be paid back if Social Security is maintained in normal operation. That is the Trust Fund just grows and grows to meet continued growth in anticipated cost. All you need to do is to secure it an adequate income stream via taxes to pay for whatever benefits are not covered by interest. Which under a condition of what is called 'Sustainable Solvency' means that something over 95% of cost has to come from current tax. Because the Trust Fund just isn't an investment fund. It is an operational and reserve fund that facilitates a Pay as You Go system. And any "looting" is just an unfair way of presenting the legal requirement to invest those reserves in Treasuries. (You buy a bond and the government spends the money on something. How is that looting?).

Aging Population: Old Problem, New Reality; Reflections on Difficult Trade-Offs - Here is an interesting video in which Bloomberg's Mia Saini looks at the effect of an aging population on a country's economy. Link if video does not play: Old Problem, New Reality As a consequence of the youth gap and a record low birthrate in the US, "the alternative would be to keep on increasing taxes or reduce benefits for the elderly". The US birthrate per thousand was 122.7 in 1957, it was 63.2 in 2011. In regards to the problem facing aging countries, Singapore prime minister stated "None of them have come to any very satisfactory solution because the trade-offs are difficult ones." US demographics are better than Europe and Asia, but with US Medicare and Social Security promises related to costs far greater than elsewhere, the US is in no better shape.

Walmart's New Health Care Policy Shifts Burden To Medicaid, Obamacare - Walmart, the nation’s largest private employer, plans to begin denying health insurance to newly hired employees who work fewer than 30 hours a week, according to a copy of the company’s policy obtained by The Huffington Post. Under the policy, slated to take effect in January, Walmart also reserves the right to eliminate health care coverage for certain workers if their average workweek dips below 30 hours -- something that happens with regularity and at the direction of company managers. Walmart declined to disclose how many of its roughly 1.4 million U.S. workers are vulnerable to losing medical insurance under its new policy. In an emailed statement, company spokesman David Tovar said Walmart had “made a business decision” not to respond to questions from The Huffington Post and accused the publication of unfair coverage. Labor and health care experts portrayed Walmart’s decision to exclude workers from its medical plans as an attempt to limit costs while taking advantage of the national health care reform known as Obamacare. Among the key features of Obamacare is an expansion of Medicaid, the taxpayer-financed health insurance program for poor people. Many of the Walmart workers who might be dropped from the company’s health care plans earn so little that they would qualify for the expanded Medicaid program, these experts said.

Raising the Medicare Age Is a Uniquely Terrible Idea - There is probably no single policy being seriously discussed right now that is more idiotic than raising the Medicare retirement age. Not only would this benefit cut produce only modest savings for the federal government, but it would also do it in the most inefficient way possible. It would save the government money but by causing an ever greater increase in private spending on health care. Medicare currently is significantly more cost effective than private insurance. Raising the Medicare retirement age would mean shifting many older people from a more cost effective government program to a less efficient private insurance system. This would not just force those near retirement to pay the full cost of their insurance, but since private insurance is a worse bargain these seniors would need to pay even more to get the same level of coverage Medicare would have provided. Having these older people still in the private market would raise premiums for everyone who gets private insurance. Removing these young seniors from Medicare risk pool would also require increasing premiums for everyone else in the program. Basically any other mechanism to impose austerity on people between the ages of 65-67 would produce a less bad outcome. Even raising taxes on this group or making them pay higher Medicare premiums instead would at least result in roughly a one dollar reduction in the deficit for every one dollar this group lost.

How Medicare Is Misrepresented - A common phrase in the current debate over the so-called fiscal cliff is “Medicare needs to be restructured.” The term serves as code for policies unlikely to be appealing to voters, a term that can mean everything and, thus, nothing. The question is what problem restructuring is to solve in traditional Medicare, which remains one of the most popular health insurance programs in this country. People who use this vague term should always be challenged to explain exactly why and how Medicare should be changed. Critics of traditional Medicare – even those who should know better – often accuse it of being “fee for service.” It is a strange accusation. After all, fee-for-service remains the dominant method of paying the providers of health care under private insurance, including Medicare Advantage, the option of private coverage open to all Medicare beneficiaries. Describing Medicare as fee-for-service insurance is about as thoughtful as describing a horse as “an animal that has four legs,” a characteristic shared by many other animals.  A more descriptive term for traditional Medicare would be “free choice of providers” or “unmanaged care” insurance. These features, of course, would hardly be viewed as shortcomings among people covered by traditional Medicare or their families. Neither term would be a good marketing tool among voters for proposals to abandon traditional Medicare.  In this regard, it may be helpful to list the various contractual relationships that can exist between the insured and insurers, on the one hand, and the various methods of paying the providers of care, on the other:

Study: Health reform saved consumers $1.5 billion in 2011 - President Barack Obama’s Affordable Care Act (ACA) saved American consumers $1.5 billion on out-of-pocket health insurance premium costs in 2011, a study published Wednesday (PDF) claimed. Despite this, benefits of the law were not applied equally across all health insurance markets, leading the study’s authors to propose that stronger rules are needed. Most of the savings cited by the report comes from the ACA’s requirement that medical loss ratios (MLR) stay at 80 percent, meaning 80 percent of all premium payments must be spent on actual health care. The goal of the requirement was to get premium costs down, but many of the law’s critics warned that it may not have that effect.

Mandated Employer Health Insurance Is Biased Against Small Business (in the US) - This morning’s story about the problems small business owners face in complying with the ACA doesn’t surprise me.  My first gig as an economist, way back in 1979, was a summer internship at the Small Business Administration, where, among other things, I prepared an analysis of the impact of health insurance mandates on small firms.  It was a pretty rudimentary piece of work: I was just a grad student and had not yet studied how to do applied micro analysis.  Still, I was able to see the main story line. Actually, I got two out of the three pieces of the story.  First, I saw that there are economies of scale in group health insurance, and without some form of organization above the firm level, small employers will pay a higher unit cost.  Second, and quantitatively more important, small firms in the US are substantially more labor-intensive on average, so an increase in labor costs hits them harder.  The third piece, which I missed at the time, is that wages are lower in the small business sector, so a mandated benefit of given cost will constitute a larger share of the wage bill. I concluded that, from a small business advocacy standpoint, a national health insurance program like Canada’s would be preferable to a system of employer mandates.

Can the States Sabotage Obamacare? - After surviving near-death experiences on Capitol Hill, in the Supreme Court, and during the presidential election, the Affordable Care Act is now confronted with unanticipated sabotage in conservative state capitols. The passive aggression of many Republican governors and state legislatures, who are balking at implementing key elements of the law, threatens to create severe political blowback against health care reform upon its launch in a little over a year while undermining the effectiveness of the legislation. Policy analysts always recognized that relying heavily on states to administer the act posed major challenges, but the unexpected depth and breadth of state-level resistance has created the real possibility of a fiasco come 2014. The Affordable Care Act is a far more ambitious and complex piece of legislation than the original Medicaid law was, and its rollout is occurring under more inhospitable political conditions. Obamacare extends coverage to the uninsured through two main channels, both of which were intended by Congress to intimately involve the states. One of those is expansion of Medicaid, the state-administered insurance program for low-income Americans and nursing home residents that is jointly financed by the federal and state governments. The other main mechanism for extending coverage is through the creation of so-called insurance exchanges, which are governmentally organized and regulated marketplaces where uninsured Americans and small businesses can shop for health plans while paying premiums that will be partially covered by the federal government. 

Obamacare architect leaves White House for pharmaceutical industry job - When the legislation that became known as "Obamacare" was first drafted, the key legislator was the Democratic Chairman of the Senate Finance Committee, Max Baucus, whose committee took the lead in drafting the legislation. As Baucus himself repeatedly boasted, the architect of that legislation was Elizabeth Folwer, his chief health policy counsel; indeed, as Marcy Wheeler discovered, it was Fowler who actually drafted it. As Politico put it at the time: "If you drew an organizational chart of major players in the Senate health care negotiations, Fowler would be the chief operating officer." What was most amazing about all of that was that, before joining Baucus' office as the point person for the health care bill, Fowler was the Vice President for Public Policy and External Affairs (i.e. informal lobbying) at WellPoint, the nation's largest health insurance provider.  More amazingly still, when the Obama White House needed someone to oversee implementation of Obamacare after the bill passed, it chose . . . Liz Fowler. That the White House would put a former health insurance industry executive in charge of implementation of its new massive health care law was roundly condemned by good government groups as at least a violation of the "spirit" of governing ethics rules and even "gross", but those objections were, of course, brushed aside by the White House. She then became Special Assistant to the President for Healthcare and Economic Policy at the National Economic Council. Now, as Politico's "Influence" column briefly noted on Tuesday, Fowler is once again passing through the deeply corrupting revolving door as she leaves the Obama administration to return to the loving and lucrative arms of the private health care industry:

It’s not profit that is destroying our health; it’s the private insurance business model - Many Europeans use private health insurance companies, a few of them for-profit. These Europeans enjoy better care for more people at lower cost than we do. But the European business model differs radically from that in the US. In fact, American insurance companies find the European model not only alien, but intolerable. Imagine American insurance companies playing by these European rules:

•You can set any price on your policy, but you must sell it at the same price to everyone, regardless of health.
•You must sell a policy to anyone who applies, no exceptions.
•No policy can be cancelled for any reason, not even failure to pay (the government will step in). Patients, however, can change companies without notice.
•Every policy must cover all treatable diseases. No matter what policy they purchase, patients will never risk destitution (or death) if they suffer a treatable condition.
•Your company must pay every claim from every licensed provider within 30 days. You can protest the payment, but only after you pay the bill.
•Every provider receives the same payment for the same service, regardless of patient or their insurance.
•Your records are an open book. Every dollar (or Euro) that passes through your hands is open to the public. There are no proprietary secrets.
•If you still manage to cherry pick healthier patients, the government will impose a premium to subsidize other companies with sicker patients.
With this model, European companies compete with lower prices, extra benefits, and better customer service.

A Drug Recall That Should Frighten Us All About The FDA - Forbes: The lack of efficacy for a high dose anti-depressant is really a safety issue, not a manufacturing issue. How many patients who were not adequately treated on the 150mg dose were put on the 300mg only to see their symptoms get worse because the generic did not work as promised? How many patients, doctors, and their families thought that this was simply a further deterioration of a patient’s condition and mental state? How many parents had to worry about their children when their anti-depressant seemed to stop working? How many people committed suicide taking a generic antidepressant that did not work? And the appalling part of all this is that the fact that this could have been prevented if the FDA had simply tested the drug before they approved it, or at the least heeded the hundreds of complaints.

Teens Dying From Sunbed Tanning Curb $5 Billion Industry - Teenage girls trading the risk of deadly melanoma for a year-round tan have helped spur a global backlash against the sunbed industry. Health officials from Brasilia to Sydney are banning tanning salons amid evidence that they cause malignant lesions. Use of tanning beds causes all three types of skin cancer, especially for people younger than 25 years, a study published in October from the University of California, San Francisco said. Doctors say the research, published in the British Medical Journal, should prompt tougher warnings on ultraviolet radiation-emitting tanning machines. The salons support $5 billion in U.S. annual economic activity, according to the Food and Drug Administration. In May, Vermont followed California, banning teens under 18 from indoor tanning. In Europe, laws prohibiting teens from tanning beds have been enacted in 22 countries, 18 of them since 2009. Age limits in Australia may have forced the closing of a third of sunbed operators there. “We’re seeing an uptick in melanoma cases and deaths among young women,” said J. Leonard Lichtenfeld, deputy chief medical officer with the Atlanta-based American Cancer Society. “Are we going to look back in 15-20 years from now and wish we’d been more forceful about moving this process forward?”

Scientists Warn of Sperm Count Crisis - The reproductive health of the average male is in sharp decline, the world's largest study of the quality and concentration of sperm has found. Between 1989 and 2005, average sperm counts fell by a third in the study of 26,000 men, increasing their risk of infertility. The amount of healthy sperm was also reduced, by a similar proportion. The findings confirm research over the past 20 years that has shown sperm counts declining in many countries across the world. Reasons ranging from tight underwear to toxins in the environment have been advanced to explain the fall, but still no definitive cause has been found. The decline occurred progressively throughout the 17-year period, suggesting that it could be continuing. The latest research was conducted in France but British experts say it has global implications. The scientists said the results constituted a "serious public health warning" and that the link with the environment "particularly needs to be determined". The worldwide fall in sperm counts has been accompanied by a rise in testicular cancer – rates have doubled in the last 30 years – and in other male sexual disorders such as undescended testes, which are indicative of a "worrying pattern", scientists say.

A proposal for a global ban on trans fats - While labeling strategies provide a sound public policy response to some food ingredient dilemmas, in other cases it is simpler and more effective to make do without the ingredient altogether.  Some argue that trans fats fall into the category of ingredients that should just be eliminated (with the exception of the small amount of trans fat that occurs naturally in animal food products).  These fats replaced healthier traditional oils and fats just a few decades ago, and some countries have recently been rapidly shifting back away from their use without any major food system damage. In a commentary this week for the World Public Health Nutrition Association, Vivica Kraak, Uriyoán Colón-Ramos, and Rafael Monge-Rojas recommend a near-complete global ban on trans fats. This commentary presents a case for public health professionals, practitioners, academics, industry and government representatives, funders, public-interest non-governmental organisations and consumer advocates, to collaborate to support a global trans-fat ban. Coordinated actions to remove this harmful substance from our food and eating environments will be able to contribute to reducing chronic non-communicable disease mortality by 2025.

The Case for Drinking as Much Coffee as You Like - "What I tell patients is, if you like coffee, go ahead and drink as much as you want and can," says Dr. Peter Martin, director of the Institute for Coffee Studies at Vanderbilt University. He's even developed a metric for monitoring your dosage: If you are having trouble sleeping, cut back on your last cup of the day. From there, he says, "If you drink that much, it's not going to do you any harm, and it might actually help you. A lot."  Officially, the American Medical Association recommends conservatively that "moderate tea or coffee drinking likely has no negative effect on health, as long as you live an otherwise healthy lifestyle." That is a lackluster endorsement in light of so much recent glowing research. Not only have most of coffee's purported ill effects been disproven -- the most recent review fails to link it the development of hypertension -- but we have so, so much information about its benefits. We believe they extend from preventing Alzheimer's disease to protecting the liver. What we know goes beyond small-scale studies or limited observations. The past couple of years have seen findings, that, taken together, suggest that we should embrace coffee for reasons beyond the benefits of caffeine, and that we might go so far as to consider it a nutrient.

Great Ape bill in US Senate showdown- A bill that would end invasive research on chimpanzees in the United States is this week the subject of behind-the-scenes negotiations in the US Senate. There, supporters are vying to bring it to an up-or-down vote in the coming days, while opponents are doing all they can to prevent this from happening. This revised version of the Great Ape Protection and Cost Savings Act is the subject of the maneuvering. It was crafted in recent weeks by Maria Cantwell, the Washington state Democrat who is its primary Senate sponsor. The revisions are intended to address concerns of opponents of the original bill — concerns that include the costs of  implementing it. Both versions of the bill would require  hundreds of  research chimpanzees to be retired to sanctuaries, with attendant construction costs.  This Congressional Budget Office (CBO) assessment in mid-November put the cost of such a change at $56 million between 2013 and 2017. However, this week the CBO, in a reassessment, says that the newly revised bill would cost the government nothing.

Cornstalks Everywhere But Nothing Else, Not Even A Bee - We'll start in a cornfield — we'll call it an Iowa cornfield in late summer — on a beautiful day. The corn is high. The air is shimmering. There's just one thing missing — and it's a big thing... ...a very big thing, but I won't tell you what, not yet. Instead, let's take a detour. We'll be back to the cornfield in a minute, but just to make things interesting, I'm going to leap halfway around the world to a public park near Cape Town, South Africa, where you will notice a cube, a metal cube, lying there in the grass.There were 30 different plants in that one square foot of grass, and roughly 70 different insects. And the coolest part, said a researcher to the Guardian in Britain, "If we picked the cube up and walked 10 feet, we could get as much as 50 percent difference in plant species we encountered. If we moved it uphill, we might find none of the species." Which brings me back to Iowa. Cornfields are not like national parks or virgin forests. Corn farmers champion corn. Anything that might eat corn, hurt corn, bother corn, is killed. Their corn is bred to fight pests. The ground is sprayed. The stalks are sprayed again. So, like David, Craig wondered, "What will I find?"The answer amazed me. He found almost nothing. "I listened and heard nothing, no bird, no click of insect."

Grain Prices: Crop Failures Push Food Cost Up - Consumers are expected to be hit by widespread food price hikes because crop failures have forced Britain to import foreign grain, the cost of which is at an all-time high. Experts have warned that wheat and barley prices are set to climb even further in the coming months, with knock-on effects hitting many food and drink items. The Financial Times said analysts have warned that "everything from bread and biscuits to beer to beef" would rise in price. Britain normally grows more wheat than it consumes but poor harvests this year have forced traders to import, for the first time since 2001. The head of wheat procurement at the parent company of breadmaker Hovis has also warned of the significance of the grain shortfall. "The domestic situation is more worrying than in 2007-8 during the global food crisis,"

Genetic breakthrough could guarantee wheat supplies - A group of international scientists has cracked the complex genetic code of wheat, offering the prospect of global food security in one of the world's most important crops. There are nearly 70 different varieties of wheat recommended for farming and suitable for bread, biscuits or for distilling. By improving wheat varieties, scientists hope to increase crops yields by engineering them to be more tolerant to disease, climate change, pests and other factors which currently affect harvests. Co-author of the paper published in the journal Nature, Professor Neil Hall of University of Liverpool, said: "The raw data of the wheat genome is like having tens of billions of scrabble letters. You know which letters are present, and their quantities, but they need to be assembled on the board in the right sequence before you can spell out their order into genes. "We've identified about 96,000 genes and placed them in an approximate order. This has made a strong foundation for both further refinement of the genome and for identifying useful genetic variation in genes that scientists and breeders can use for crop improvement."

Soybean seeds face Pioneer patent police - Their mission may lack the gritty urban drama of “Law and Order” or “CSI,” but investigators for Johnston-based DuPont Pioneer will be patrolling farm fields in Iowa next summer to see if farmers are complying with soybean seed patents. They’ll want to know if farmers are replanting soybean seeds a second year, in violation of a contract they sign when they purchase bags of soybean seeds for planting. If necessary, plant samples will undergo a form of agricultural forensics through DNA laboratory analysis. “The investigations will be random, and the investigators will sit down with the farmers and help them comply,” said Randy Schlatter, manager of intellectual property for DuPont Pioneer. Generations of farmers have saved seeds from one harvest to the next, in part to avoid buying new seed. But since the dawn of the biotechnology age in the late 1990s, seed companies have enforced their intellectual property rights.

The carbon footprint of food - Recently, I was in the market for a good layperson's summary of the environmental impact of food choices.  The one I liked best so far was the brief chapter on food late in the book How Bad Are Bananas?: The Carbon Footprint of Everything, by Mike Berners-Lee. Berners-Lee takes measurement seriously.  At the same time, he is completely frank about how rough some measurements are.  He doesn't waste time figuring out every last significant digit.  Instead, he stays focused on the information that really matters for making sensible lifestyle choices. Berners-Lee has a talent for explaining technical material.  As just one simple example, he has a delightfully clear explanation of a financial discount rate, an important concept for evaluating payback periods for investments (p. 188).  Other authors might be tempted to skip the topic, but Berners-Lee recognizes that the layreader can understand this issue, without needing any equations.

China aggressively acquires farmland throughout world: There are many challenging numbers confronting China's new leaders, but two are especially stark. China has 20 per cent of the world's population, but only nine per cent of the world's farmland. And even that imbalance in the amount of land available to produce food for an increasingly demanding population of 1.3 billion is getting worse by the day. China loses close to a million hectares of arable land a year to urban development. Between 1996 and 2006 nine million hectares of farmland were eaten up by China's expanding cities. Chinese are no longer satisfied with a diet of rice and vegetables. They want meat and other previously unknown foodstuffs such as dairy products that require more investment and land. So Chinese state-owned and private agricultural companies are looking abroad to countries with available arable land to feed their teeming millions. But as with the Beijing's government's approach to assuring supplies of energy and raw materials for processing, there is reluctance to depend on the global marketplace to meet the country's needs. Chinese officials and companies like to own resources and as they contemplate how to provide food security for their country their approach is no different.

Climate change will mean more malnourished children, experts warn - Food prices will more than double and the number of malnourished children spiral if climate change is not checked and developing countries are not helped to adapt their farming, food and water experts warned on Tuesday at the UN climate talks in Doha. As the UK energy secretary, Ed Davey, and ministers from 194 countries arrived for the high-level segment of the talks, the UN's Committee on World Food Security said the world would need a 75-90% increase in food production to feed the extra 2 billion people expected to be alive in 2050. But climate change could reduce yields worldwide by 5-25% over the same period. "The poor are especially vulnerable. Climate change will increase the number of malnourished children substantially. Smallholder farmers will be particularly hard hit," said Gerald Nelson, a spokesman for the high-level panel of experts convened by the committee to report on food prospects in the coming 30 years. Research from Oxfam suggests rice, maize and wheat prices could rise by up to 177% in the next 20 years if climate change is not checked. A combination of extreme events like the drought that affected North America this year and the Russian heatwave in 2008 could raise prices further than two decades of long-term prices, it said.

Record Brazil Coffee Crop Cuts Costs for Starbucks: Commodities - Record coffee harvests in Brazil, the biggest grower, are compounding a global glut of arabica used by Starbucks and Dunkin’ Donuts Inc.  Brazilian farmers will reap 50.8 million bags in 2013, a record for a so-called low-crop season, according to the median of nine analyst estimates compiled by Bloomberg. The harvest reached 55.9 million 60-kilogram (132-pound) bags in 2012, an all-time high for a peak year. Output usually drops in alternate years because of growing cycles. Prices may fall 12 percent to $1.311 a pound by June 30, the average of 14 predictions shows.

Season Has Changed, but the Drought Endures -  Even as the summer swelter has given way to frost, nearly two-thirds of the country remains in a drought, with forest fires still burning, winter crops choking in parched soil and barges nearly scraping the mucky bottoms of sunken rivers. More than 62 percent of the continental United States is experiencing moderate to exceptional drought, according to the weekly Drought Monitor report released on Thursday, compared with just over 29 percent at this time last year. Save for patches of California, Montana and Wyoming, the drought is expected to persist in most of the dry regions west of the Mississippi River over the next three months, according to the Seasonal Drought Outlook released Thursday by the National Weather Service. “It’s not looking very promising right now,” said David Miskus, a meteorologist with the National Oceanic and Atmospheric Administration’s climate prediction center. This is typically the driest time of the year, Mr. Miskus said, so precipitation will have to be far above normal levels to put a dent in regions that have been rain starved since the spring. With the Great Plains — from southern South Dakota to the Texas Panhandle — enduring the most desiccated conditions, the agricultural sector is bracing for the hardest blow. Most of the Plains and the Mississippi River Valley had less than a quarter-inch of rain over the past week, according to the Drought Monitor.

Drought Revives Old Water War Among River States - ABC News: The water wars are raging again in America's heartland, where drought-stricken states are pleading for the increasingly scarce water of the Missouri River — to drink from their faucets, irrigate their crops and float the barges that carry billions of dollars of agricultural products to market. From Montana to West Virginia, officials on both sides have written President Barack Obama urging him to intervene — or not — in a long-running dispute over whether water from the Missouri's upstream reservoirs should be released into the Mississippi River to ease low water levels that have imperiled commercial traffic. The quarrel pits boaters, fishermen and tourism interests against communities downstream and companies that rely on the Mississippi to do business. "We are back to the age-old old battle of recreation and irrigation verses navigation," said Sen. Claire McCaskill, a Democrat from Missouri. If the water is held back, downstream states warn that shipping on the Mississippi could come to a near standstill sometime after Christmas along a 180-mile stretch between St. Louis and the southern Illinois town of Cairo. But if the water is released, upstream communities worry that the toll of the drought could be even worse next year for farms and towns that depend on the Missouri.

Drought is causing "water wars" in the US; water transport at risk - The 2012 US drought has created "water wars", pitting Mississippi River transport business (barge operators and shipping groups) against the Missouri river water users (who use water for "drinking, irrigation, agriculture, industrial purposes and power production"). Stratfor: - Mississippi River barge operators and shipping groups asked U.S. President Barack Obama and the Federal Emergency Management Agency on Nov. 27 to declare a state of emergency on the Mississippi River. The low river levels are thought to be caused by the drought and the congressionally directed project by the U.S. Army Corps of Engineers to reduce the flow of the Missouri River. Numerous government representatives made similar requests throughout November. Representatives from Missouri River basin states have said increasing the flow of the Missouri is unlawful and have submitted an opposing request to deny the declaration of a state of emergency.

Water Services to Hit $1 Trillion Sales by 2020, Report Says - The global water services industry is on pace to double its annual revenues to $1 trillion by 2020 largely driven by scarcity issues and growing demand for water treatment, according to a Bank of America Merrill Lynch global research report. “A Blue Revolution – Global Water,” which is based on views of 35 analysts covering 60 companies from 18 countries, found demand for water will outstrip supply 40 percent by 2030 and close to half of the world’s population will be living in water-stressed areas. Water supplies will be increasingly tapped by agriculture, housing and industry, according to the report. Unless more sustainable water management practices are adopted, 45 percent of projected 2050 global GDP at 2000 prices could be at risk, the equivalent of $63 trillion, the report said. Growing demand for an increasingly scarce resource will create opportunities in water treatment, water management and water infrastructure, BofA said. For example, desalination could emerge as a $25 billion industry by 2025. Effective water management will enable users to cut consumption and mitigate the risks associated with shortages as well as reduce the need for capital-intensive projects.

World's big trees are dying: Alarming increase in death rates among trees 100-300 years old: — 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 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," "Research is urgently needed to identify the causes of rapid losses of large old trees and strategies for improved management. Without… policy changes, large old trees will diminish or disappear in many ecosystems, leading to losses of their associated biota and ecosystem functions."

Wood stoves, extreme cold blight air at Alaska's North Pole - North Pole, Alaska - the Fairbanks suburb, not the spot at the top of the globe - has posted some of the nation's worst air-quality readings in recent days, thanks to high levels of wood smoke streaming into stagnant cold air. Concentrations of particulates have made North Pole's air "very unhealthy," meaning children, the elderly and other vulnerable people should stay indoors and all residents should refrain from prolonged exercise, according to local government officials. The "very unhealthy" classification was given in the past few days. A search of - the government portal which monitors air quality - did not reveal any other U.S. community currently with such poor quality air. The problem stems from residents' dependence on wood-burning stoves for heat in an extremely cold region prone to pollution-trapping temperature inversions, said officials with the Fairbanks North Star Borough, the regional government. "As long as it's cold and the air is still, we have a particulate problem," said Jim McCormick, a technician with the borough's Air Quality Division. With temperatures in some spots below minus-30 degrees Fahrenheit (-34.4 C) and no relief forecast until next week, the air is expected to stay dirty, McCormick said. As of Friday, particulate pollution in North Pole was worse than in Beijing, which is notorious for chronic air pollution, a Fairbanks newspaper columnist reported, although Reuters was unable to verify the claim independently.

Megastorms Could Drown Massive Portions of California: - The intense rainstorms sweeping in from the Pacific Ocean began to pound central California on Christmas Eve in 1861 and continued virtually unabated for 43 days. The deluges quickly transformed rivers running down from the Sierra Nevada mountains along the state’s eastern border into raging torrents that swept away entire communities and mining settlements. The rivers and rains poured into the state’s vast Central Valley, turning it into an inland sea 300 miles long and 20 miles wide. Thousands of people died, and one quarter of the state’s estimated 800,000 cattle drowned. Downtown Sacramento was submerged under 10 feet of brown water filled with debris from countless mudslides on the region’s steep slopes. California’s legislature, unable to function, moved to San Francisco until Sacramento dried out—six months later. By then, the state was bankrupt. A comparable episode today would be incredibly more devastating. The Central Valley is home to more than six million people, 1.4 million of them in Sacramento. The land produces about $20 billion in crops annually, including 70 percent of the world’s almonds—and portions of it have dropped 30 feet in elevation because of extensive groundwater pumping, making those areas even more prone to flooding. Scientists who recently modeled a similarly relentless storm that lasted only 23 days concluded that this smaller visitation would cause $400 billion in property damage and agricultural losses. Thousands of people could die unless preparations and evacuations worked very well indeed.

Keep Satellites Aloft to Be Ready for Bad Weather Below - Thanks to an unbroken stream of atmospheric and oceanic measurements beamed to Earth from well- positioned satellites, meteorologists were able to predict Hurricane Sandy’s monstrous power and strange path (tropical storms typically turn right, not left) long before it hit the New Jersey coast. It’s the kind of precision we might assume can only get better, as scientists fine-tune their instruments and forecast models. Instead, in a few years, weather predictions in the U.S. are in danger of becoming less accurate. Why? Because the federal government is unprepared, at least temporarily, to operate a full complement of satellites. The gap could begin in October 2016, when a satellite put in orbit a year ago reaches the end of its expected five-year life. A replacement won’t be ready to launch until at least March 2017, and then it will take another year for its instruments to be checked out and ready to operate. That would leave a 17-month gap, during which three-to-five-day weather forecasts will be fuzzier. To assess what such a loss of data could mean, the National Weather Service recalculated its forecast from early February 2010 of “Snowmageddon,” simulating a lack of information from polar-orbiting satellites. It came up with a prediction for a moderate to heavy storm, not the huge blizzard that swamped much of the East. The revised forecast underpredicted snowfall by more than 10 inches and missed the location of heaviest snow by 250 miles.

Global warming: Fleeing the storms | The Economist - SUPERSTORM SANDY was a terrible disaster but an informative one. When the storm swept ashore, lower Manhattan flooded and went dark. A few miles south on Staten Island the storm took an awful human toll in waterside neighbourhoods inundated by the surge. In Midtown, however, the storm was little more than a gusty rain. As in everything real estate, the nature of the danger came down to location, location, location. In a new NBER working paper, Klaus Desmet and Esteban Rossi-Hansberg look at the importance of geographic variation in the effects of global warming. Some parts of the world will be rendered unpleasant or uninhabitable by sea level rise, temperature increase, droughts and storms. But people use a fairly small portion of the earth's available land area, and climate change (initially, anyway) will have relatively moderate or even benign effects on some places. In assessing the cost of warming, then, much depends on how easily people, firms, and whole cities can move from one place to another. This week's Free exchange column considers the dynamics:

Free exchange: Heated debate | The Economist: WHEN Superstorm Sandy roared ashore in late October and the lights of lower Manhattan went out, New Yorkers were given a stark vision of a possible future. Climate-change science is still a realm of great uncertainty but there is consensus that the planet is warming dangerously and that people are to blame. A recent report commissioned by the World Bank warned that the world is on track to have a global mean temperature that is 4°C above pre-industrial levels by 2100. If so, sea levels could rise by between half a metre and a metre by the end of the century, threatening hundreds of millions of people in coastal cities. Other regions would face the threats of droughts, bigger storms and changing rainfall patterns. That entails not just human costs but economic ones, too. The question that preoccupies Klaus Desmet of the Universidad Carlos III in Madrid and Esteban Rossi-Hansberg of Princeton University in a new NBER working paper* is whether there are ways to manage the impact of changing weather patterns by moving the location of economic activity. They note that roughly 90% of global production uses just 10% of available land. If that 10% is threatened, activity may at least theoretically shift to bits of the 90% made more hospitable by climate change.

Congress Takes On Sandy: 'The Elephant In This Room Is The Impact Of Climate Change' - Both the House and Senate held hearings on the Federal Emergency Management Agency’s response to Hurricane Sandy this week. In their statements, several members of the House and Senate tied the effects of Hurricane Sandy to climate change and recognized the need to rethink how communities rebuild and prepare for storms in the future. In her opening remarks during the House hearing Tuesday, Donna Edwards (D – MD) referred to climate change as the “elephant in this room,” saying a discussion on how to rethink infrastructure in light of major storms is essential to prevention efforts.“The elephant in this room that needs to be spoken about is the impact of climate change and the increasing intensity of storms, the variedness of the storms and the breadth of a storm like Sandy…I think we have to rebuild and rethink our infrastructure in those terms, and that’s something that this congress and our next congress ought to address sooner rather than later.” Rep. Edwards and others in the House and Senate hearings pointed to the need to rethink how the power grid is managed in densely populated areas; the need to improve water and sewer infrastructure that is close to coastlines; and the need to make transit infrastructure stronger as key priorities for congress and FEMA to address after Sandy. “I think at a time when we’re constantly haggling – as sometimes we need to – over budget constraints, the importance of investing in this infrastructure now so that we don’t make it more vulnerable later on needs to be high on the priority list, because the damage to us in terms of our long-term economy and competitiveness is really huge,” Edwards said.

Very warm November assures 2012 will be warmest year in U.S. history - The heat is on again in the U.S. After recording its first cooler-than-average month in sixteen months during October, the U.S. heated up considerably in November, notching its 20th warmest November since 1895, said NOAA's National Climatic Data Center (NCDC) in their latest State of the Climate report. The warm November virtually assures that 2012 will be the warmest year on record in the U.S. The year-to-date period of January - November has been by far the warmest such period on record for the contiguous U.S.--a remarkable 1.0°F above the previous record. During the 11-month period, 18 states were record warm and an additional 24 states were top ten warm. The December 2011 - November 2012 period was the warmest such 12-month period on record for the contiguous U.S., and the eight warmest 12-month periods since record keeping began in 1895 have all ended during 2012. December 2012 would have to be 1°F colder than our coldest December on record (set in 1983) to prevent the year 2012 from being the warmest in U.S. history. This is meteorologically impossible, given the recent December heat in the U.S. As wunderground's weather historian Christopher C. Burt reported, an early-December heat wave this week set records for warmest December temperature on record in seven states. December 2012 is on pace to be a top-20% warmest December on record in the U.S.

CHART: Only 0.17 Percent of Peer-Reviewed Papers Question Global Warming - The chart comes from James Lawrence Powell, a geologist, science-writer, and former professor, via DeSmogBlog. Powell reviewed 13,950 peer-reviewed scientific articles published between January 1991 and November 9, 2012 that mentioned "global warming" or "global climate change." The grand total of articles that questioned global warming or whether rising emissions are the cause: 24. That's 0.17 percent of all the literature on the topic. Powell's review covers more papers than Naomi Oreskes' oft-cited 2004 study in Science

While International Climate Negotiations Continue, the World’s Ninth Largest Economy Takes an Important Step Forward -- A little more than two weeks ago, while some 195 nations prepared to meet in Doha, Qatar, for the Eighteenth Conference of the Parties (COP-18) of the United Nations Framework Convention on Climate Change (UNFCCC) in an ongoing effort to hammer out a durable scheme of effective international cooperation, the ninth largest economy in the world took an important step forward to achieve its own ambitious greenhouse gas reduction goals.  I’m referring to the CO2 cap-and-trade allowance auction held by the State of California (which ranks just below Brazil and just above India in the size of its economy) on November 14, 2012. Under the California auction design (a single-round, sealed-bid, uniform price auction), all allowances are sold at the same price, no matter what the specific bid submitted.  This is done by awarding the first allowances to the highest bidder, then the next highest bidder, and so on until all allowances (or bids) are exhausted.  The bid for the last allowance becomes the price of all allowances sold in the auction.  The auction had two parts:  a current auction of 2013 vintage allowances, and advance auction of 2015 vintage allowances.

Why do we see unilateral action on climate change? - In keeping with expectations, recent multilateral climate change talks in Doha have achieved very little. Yet, the good news is that unilateral action is on the up. This column argues that the existing literature explaining unilateral action on climate change by and large neglects the influence of lobbying. Recent research shows that the combined presence of national interests and increased lobbying pressure -- from both business groups and environmentalists -- may create much more scope for unilateral action than previously thought. Yes, getting a ‘broad and deep‘ international treaty remains difficult, but we can look forward to increased unilateral action on climate change, spurred on by lobby groups.

Why China Is So Wary Of Ambitious International Climate Targets - From many perspectives, China is a global powerhouse. China is the world’s second largest economy in terms of gross domestic product, the world’s largest energy consumer, and a global leader in renewable energy investment. China is also the world’s biggest greenhouse gas emitter. It is no surprise, then, that when it comes to global climate change negotiations, such as the U.N. Framework Convention on Climate Change conference currently taking place in Doha, Qatar, many nations are looking for China to step up and play a role more in line with its global economic and emissions status. From a U.S. perspective, that means demanding that China play by the same rules in a future climate treaty that will be developed between now and 2015, rather than treating it as a developing country on par with Chad or the Congo. Some parties want a new treaty to require legally-binding emission reductions for all (though not the same amount for all parties). Thus far, China has refused to endorse this kind of legal framework, and instead is sticking to the interpretation of “common but differentiated responsibilities,” which creates a firewall between the obligations of developed and developing countries. This puts the United States and other developed nations in one bucket, puts China in a separate bucket along with the poorest countries in the world, and allows the latter to make only voluntary commitments to reduce their emissions (as opposed to the mandatory commitments requested of the developed countries).

Climate Change Strategies (Including Mangroves) - A UK organization called the Global Climate Project has put out its annual estimates of annual carbon emissions, and perhaps unsurprisingly, the world economy is on track to set a new record in 2012 of 38.2 billion tons, up a few percentage points from 2011.  Here's one figure from the report showing trendlines for the four largest emitters: China, the U.S., the EU, and India. Notice in particular that China is not only by far the largest carbon emitter, but is a spike-like upward trend in emissions. Emissions in the U.S. are fairly flat since the late 1990s. Emissions from India are on a path to soon surpass emissions from the EU. This next figure shows carbon emissions on a per capita basis. The U.S. economy is by far the highest in per capita carbon emissions, although the level is down a fair amount since the 1970s, and down in the last 10 years or so as well. The rise in world per capita emissions is again being driven by China in particular, as well as India and other emerging market economies.News stories on the report (for example, here2 ) quote climate change scientists to the effect that it's time to "throw everything we have at the problem." What does that mean in practice?

Is There a "Real World" Solution to Climate Talks?: The top climate official for the United Nations said she was frustrated by how far behind major economic powers were in addressing the warnings from the scientific community. World leaders gathered this week in Doha are debating the steps needed to secure a low-carbon future for developing countries while major economies address how to cut back on their own industrial emissions. The top negotiator from the United States, the world's leading economy, said talks at Doha should be based on "real world" considerations, though the bickering in the wings suggests it's the political rhetoric that's the real concern when it comes to climate talks. Delegates from nearly 200 countries wrap up climate talks in Doha later this week. U.N.-efforts there are aimed to curbing global warming that a recent World Bank report said may be accelerating at an alarming pace. Environmental ministers in Doha said more effort is needed to keep global greenhouse emissions below the danger zone. Some countries, however, are balking at the move, saying leading economies aren't serious about setting their own thresholds. "What gives me frustration is the fact that we are very far behind what science tells us we should be doing," said U.N. climate chief Christiana Figueres.

U.S. Punts on Climate Change Action, Again - The Doha Climate Change Conference wrapped up this week. You'd be forgiven if you missed it as, by all accounts, it seems to have been a lesson in futility. "The Doha caravan seems to be lost in the sand," The leadup to the conference should have made "getting lost" impossible. Hurricane Sandy wreaked tens of billions of dollars worth of damage on the U.S. east coast in late October. That thrust the issue of climate change into the presidential campaign, as New York City ground to a halt and the Jersey Shore was decimated. But climate change's time in the limelight following Sandy lasted only days. By mid-November, President Obama readily acknowledged the political reality that tackling the issues that environmentalists believe are supercharging storms is secondary to the economy. "There's no doubt that for us to take on climate change in a serious way would involve making some tough political choices," said the president. "And understandably, I think the American people right now have been so focused, and will continue to be focused on our economy and jobs and growth, that if the message is somehow we're going to ignore jobs and growth simply to address climate change, I don't think anybody is going to go for that. I won't go for that."

Climate Science Predictions Prove Too Conservative, Across two decades and thousands of pages of reports, the world's most authoritative voice on climate science has consistently understated the rate and intensity of climate change and the danger those impacts represent, say a growing number of studies on the topic.  This conservative bias, say some scientists, could have significant political implications, as reports from the group – the U.N. Intergovernmental Panel on Climate Change – influence policy and planning decisions worldwide, from national governments down to local town councils.As the latest round of United Nations climate talks in Doha wrap up this week, climate experts warn that the IPCC's failure to adequately project the threats that rising global carbon emissions represent has serious consequences: The IPCC’s overly conservative reading of the science, they say, means governments and the public could be blindsided by the rapid onset of the flooding, extreme storms, drought, and other impacts associated with catastrophic global warming.

It's Already Too Late to Stop Climate Change - But no matter what the diplomats in Doha decide over the next week, it now appears inevitable that the world will indeed hit that 2-degree mark and could well shoot past it to average global increases of 4 degrees or 6 degrees—points at which scientists predict even worse catastrophes. A scientific study published Sunday in the journal Nature Climate Change concluded that the world’s rapid increase in fossil fuel emissions now makes a global average temperature increase of 2 degrees Celsius all but inevitable. A report released last week by the U.N. Environment Program concluded that given the rapid projected increase in pollution from burning coal, oil, and gas around the world, nations’ current pledges to cut carbon emissions won’t be enough to stave off that 2-degree rise sometime before the end of the century. Moreover, a November report from the International Energy Agency found that if action isn’t taken to significantly cut carbon emissions by 2017, the existing power plants, factories, and buildings will be enough to push temperatures past the 2-degree mark. Yet another sobering report last month from the accounting firm PricewaterhouseCoopers warned that the only way the world can prevent the 2-degree rise is if the global economy cuts its carbon intensity by 5.1 percent every year from now to 2050, essentially slamming the brakes on growth starting right now—and keeping the freeze on for 37 years.

IT'S OVER: Why Everyone Is Losing Hope For Green Energy - On the surface, green energy sounds like a great idea. Unfortunately, it is extremely costly and requires heavy government subsidies. Last year, the epic downfall of Solyndra — the former solar cell manufacturer backed by the Obama administration — was one of the most notorious blows to the industry. As with most young industries, experts argue that green energy just needs time before it can reach economies of scale and become cost effective. But lately, those time frames have become extended. Meanwhile, fossil fuels like coal and natural gas continue to be devastatingly cheap. We pulled together key charts from the studies that are causing people to lose hope in green energy.

World temperature set to increase 9 degrees: study -— Levels of atmospheric carbon dioxide (CO2) are rising annually by around three percent, placing Earth on track for warming that could breach five degrees Celsius (9.0 degrees Fahrhenheit) by 2100, a new study published on Sunday said. The figure — among the most alarming of the latest forecasts by climate scientists — is at least double the 2C (3.6F) target set by UN members struggling for a global deal on climate change. In 2011, global carbon emissions were 54 percent above 1990 levels, according to the research, published in the journal Nature Climate Change by the Global Carbon Project consortium. “We are on track for the highest emissions projections, which point to a rise in temperature of between 4C (7.2F) and 6C (10.8F) by the end of the century,” said Corinne le Quere, a carbon specialist at the University of East Anglia, eastern England. “The estimate is based on growth trends that seem likely to last,” she said in a phone interview, pointing to the mounting consumption of coal by emerging giants.

NOAA sees sea level rise of up to 6.6 feet by 2100: As recovery continues from Superstorm Sandy, the U.S. government reports Thursday that flooding from future storms will likely worsen as global sea levels rise between 8 inches and 6.6 feet by the end of this century. The National Oceanic and Atmospheric Administration's latest assessment, similar to others in recent years, also says higher sea levels -- regardless of the extent of global warming -- won't stop in 2100. It says 8 million people live in U.S. coastal areas at risk of flooding and many of the nation's military, energy and commercial assets are located at or near the ocean. Despite uncertainty about the extent of sea level rise, "what we do know is that higher mean sea levels will increase the frequency, magnitude and duration of flooding" from storms, says co-author and NOAA scientist Adam Parris. He says the biggest uncertainty is the amount of water that will come from melting glaciers in Greenland and Antarctica. In the United States, NOAA finds the U.S. Gulf Coast and Chesapeake Bay will continue to experience the most rapid and highest amounts of sea level rise, because some of the land there is subsiding. It says parts of Alaska and the Pacific Northwest, where land is rising, may experience much less or no sea level change.

The Planetary Emergency :: Science today tells us that we have a generation at most in which to carry out a radical transformation in our economic relations, and our relations with the earth, if we want to avoid a major tipping point or “point of no return,” after which vast changes in the earth’s climate will likely be beyond our ability to prevent and will be irreversible.4 At that point it will be impossible to stop the ice sheets in Antarctica and Greenland from continuing to melt, and thus the sea level from rising by as much as “tens of meters.”5 Nor will we be able to prevent the Arctic sea ice from vanishing completely in the summer months, or carbon dioxide and methane from being massively released by the decay of organic matter currently trapped beneath the permafrost—both of which would represent positive feedbacks dangerously accelerating climate change. Extreme weather events will become more and more frequent and destructive. An article in the Proceedings of the National Academy of Sciences demonstrated that the record-breaking heat wave that hit the Moscow area in 2010 with disastrous effect was made five times more likely, in the decade ending in that year as compared with earlier decades, due to the warming trend, implying “an approximate 80% probability” that it “would not have occurred without climate warming.” Other instances of extreme weather such as the deadly European heat wave in 2003 and the serious drought in Oklahoma and Texas in 2011, have been shown to be connected to earth warming. Hurricane Sandy, which devastated much of New York and New Jersey at the end of October 2012, was impacted and amplified to a considerable extent by climate change.6

'Limits to Growth' Author Dennis Meadows: "Humanity Is Still on the Way to Destroying Itself"  - In 1972, environmental guru Dennis Meadows predicted in his seminal study "The Limits to Growth" that the world was heading toward an economic collapse. Forty years on, he tells SPIEGEL ONLINE that nothing he has seen since has made him change his mind.The Gift of a Sustainable Economy (Ralph Nader) The holidays, once considered a sacred time for family and celebration, have been hijacked by big companies sending out a message to the American people, playing on an endless loop from as early as November 1st all the way to the New Year: "Buy, buy, buy!" Think of all of those products that millions of Americans are purchasing as gifts for their friends and family. Where were they manufactured? Who profits from their sale? What happens to them when they break or become obsolete? Winsted, Connecticut, where I grew up, once had about a hundred factories and fabricators -- manufacturing such things as appliances, clocks, electrical equipment, clothing and more. They were the town's lifeblood -- the gears that spurred the local economy and provided jobs and goods for the town's 10,000 residents. Almost all the factories are gone now. Someone looking for a well-paying job likely has to commute an hour to Hartford, the nearest major city. 

Biofuels: A Partnership Between Our Military and Our Department of Agriculture - K. McDonald - We are in a race. A race of participants who are scrounging for liquid fuels. The thirst for liquid fuels is never-ending. This race is a competition between these thirsty tanks, the environment, geo-political situations, water, and money.  The thirsty parties are many. There are the tractors and combines in agriculture. There are the trucks which haul the just-in-time deliveries of every item, down every road, to every corner. There are the cars which take us to our jobs, to our grocery stores, and to our entertainment. There are airplanes that allow for us to travel far, for fun, and for business. There is public transportation freight trains, and industries which manufacture our chemicals, plastics, metals, vehicles, textiles, shoes, ships, airplanes, household goods, and materials. Our food system relies upon refrigeration, cooking, processing, storage, transport, and packaging. There are those trying to improve their standard of living in the developing world. The shipping industry provides us with international trade, and finally, a very thirsty military keeps all of this liquid fuel flowing smoothly.

NOAA: Arctic lost record amounts of snow and ice last year - The Arctic lost more snow and sea ice between October 2011 and August 2012 than any year other on record, a premier US science agency reported on Wednesday, delivering the fullest picture to date of a region in the throes of rapid, system-wide change. The Arctic lost record snow cover and sea ice last year – even though air temperatures were not unusually high. By the end of August, several weeks before the end of the summer melt season, Arctic sea ice had retreated to its smallest extent since satellite records began in 1979. In Greenland, virtually the entire ice sheet – 97% – sustained some degree of thawing during a period of a few days in July, including on some of the highest peaks. Meanwhile, blooms of algae sprouted beneath the permanent sea ice in the middle of the Arctic ocean, feeding off the sunlight filtering through melt pools. 

A chilling message: Ice sheets melting three times faster than 20 years ago - The polar ice sheets are melting three times faster than they were 20 years ago, according to satellite measurements. More than 4,200 gigatonnes were lost from the polar ice sheets from 1992 to 2011, an average of 223Gt a year and rising. Researchers described the losses as being at “the high end” of forecasts by the Intergovernmental Panel on Climate Change (IPCC) in 2007. The findings are based on previous satellite readings but have been combined and correlated to provide what scientists believe is “the most accurate assessment” yet of polar ice loss.Accurate calculations of how much ice is lost from Greenland and Antarctica are notoriously difficult. In 2007, the IPCC wasn’t even sure if there was a net loss or gain. Professor Andrew Shephard, of the University of Leeds, said it was “two or three times” more accurate than previous assessments. He said the implications were serious: “The ice sheets used to be a minor player in sea-level rise. Now they seem to be a substantial player.”

Latest Ice Sheet Mass Balance Estimates - The above is the key figure from a new paper in Science by Shepherd et al, A Reconciled Estimate of Ice-Sheet Mass Balance.  It's probably more meaningful to look at the right hand scale, which shows the total amount of sea level rise contribution, to date, from the melting of Greenland (blue), Antarctica (pink), and the two together.  You can see that both are melting on balance, and the melt rate is accelerating.The scientists involved in making these estimates have been doing it for a decade or so now, and are increasingly collaborating and reconciling all the different methods of doing the measurements/calculations: for example this last paper involves 47 authors and completes the reconciliation of four different methods.  So the results are presumably getting pretty solid. The big worry now has to be Greenland, which is surrounded by an Arctic Ocean that increasingly isn't frozen in the summer - the whole Arctic is warming very rapidly.  Can Greenland continue to increase it's melt rate further and further (as Hansen for instance has worried about: an exponentially growing breakdown of the ice sheets leading to 5m of sea level rise in the 21st century).  I extracted the Greenland line above and plotted it on a log plot:This is roughly a straight line; ie exponential increase in sea-level contribution with a doubling time of about four years.  There may be some indication of some slowing in the exponential, but given the fluctuations and the fairly short timeframe it's hard to say for sure.  Also hard to know how far one can safely extrapolate this rough exponential.At any rate, I don't think Hansen's fear of an exponential break-down of the ice-sheets can be clearly ruled out, and thus it remains a risk to global civilization worth tracking.

Fire and ice: Wildfires darkening Greenland snowpack, increasing melting: Satellite observations have revealed the first direct evidence of smoke from Arctic wildfires drifting over the Greenland ice sheet, tarnishing the ice with soot and making it more likely to melt under the sun. At the American Geophysical Union meeting this week, an Ohio State University researcher presented images from NASA's Cloud-Aerosol Lidar and Infrared Pathfinder Satellite Observation (CALIPSO) satellite, which captured smoke from Arctic fires billowing out over Greenland during the summer of 2012. Jason Box, associate professor of geography at Ohio State, said that researchers have long been concerned with how the Greenland landscape is losing its sparkly reflective quality as temperatures rise. The surface is darkening as ice melts away, and, since dark surfaces are less reflective than light ones, the surface captures more heat, which leads to stronger and more prolonged melting. Researchers previously recorded a 6 percent drop in reflectivity in Greenland over the last decade, which Box calculates will cause enough warming to bring the entire surface of the ice sheet to melting each summer, as it did in 2012. But along with the melting, researchers believe that there is a second environmental effect that is darkening polar ice: soot from wildfires, which may be becoming more common in the Arctic. "Soot is an extremely powerful light absorber," Box said. "It settles over the ice and captures the sun's heat. That's why increasing tundra wildfires have the potential to accelerate the melting in Greenland."

Accelerated Warming Driving Arctic Into New Volatile State | Climate Central: — Global warming is rapidly driving the Arctic into a volatile state characterized by massive reductions in sea ice and snow cover, more extensive melting of the Greenland ice sheet, and a host of biological changes, according to a comprehensive report published by the National Oceanic and Atmospheric Administration (NOAA) on Wednesday. The seventh annual “Arctic Report Card” summarizes the latest scientific observations in the fastest-warming region on Earth. Members of the international team that produced the report said Arctic climate change is likely to have broad and sweeping repercussions well outside of the Far North.The Arctic plays a key role in regulating the Earth’s climate system, since the bright white land and sea ice reflects an enormous amount of incoming solar energy back to space. However, as sea ice and land ice melt, they expose darker surfaces below, and these surfaces absorb more solar energy, leading to warming. This process, through which Arctic warming feeds upon itself and accelerates, is known as Arctic amplification. Scientists who contributed to the report described an Arctic that may already have passed a key threshold into a new state, in which even modestly warm years have major impacts. “If we are not already there, we are surely on the verge of seeing a new Arctic,” “The Arctic acts as a thermostat for the global climate,” he said. “We can expect to see Arctic change have global environmental and socioeconomic consequences.”

Arctic anomalies linked to extreme weather  - Surface temperature anomalies of 20 degrees Celsius are not uncommon in the Arctic these days. The image below shows surface temperature anomalies on November 9 and 10, 2012. Paul Beckwith, regular contributor to this blog, comments as follows on the conditions in the Arctic: “The Arctic meteorology is unprecedented at the moment. Huge ridges of high pressure are crossing the Arctic ocean cutting off the Siberian cold region from the North American region. Very little cold air is present in the entire system, and it is exhibiting very bizzare fragmentation. Nothing like a “normal” polar vortex is apparent. The ridge could just be due to this greatly reduced volume of cold air, but I suspect there is much more to the situation then that. It seems that there must be some source of heat to create this ridge. Could be warm air rising up from open water regions in the Arctic, however most of the warm water is now isolated from the atmosphere by the sea ice. It seems more likely to me that the high levels of methane with GWP > 150 or higher are causing higher long-wave absorption and heating in these regions, but I have not seen methane concentration distributions over the Arctic from AIRS satellites lately.”

What Are The Risks From Thawing Permafrost? - Every once in a while somebody makes some doomerish comments about the risks of a huge outpouring of greenhouse gases from thawing permafrost in the Arctic. In the past I've tried to assuage these fears, mostly by emphasizing other, more realistic fears. In any case, I will try one more time to place this "positive feedback" in the Arctic in proper perspective. Justin Gillis at the Green Blog takes the subject on in Grappling With the Permafrost ProblemAs I reported last year, one of the most worrisome potential feedbacks involves the permafrost that underlies a quarter of the Northern Hemisphere. Buried in that frozen ground is a lot of ancient organic material, containing twice as much carbon as now exists in the atmosphere. The permafrost is starting to warm and the carbon to escape.A new report, released Tuesday morning by the United Nations Environment Program, warns that scientists do not have a sufficient handle on the situation. It calls for new monitoring efforts and for a formal assessment of the permafrost feedback by the Intergovernmental Panel on Climate Change, the U.N. body that periodically reviews and summarizes climate science. The report will be considered in the next few days at a climate negotiating session in Doha, Qatar. If current estimates about the potential for carbon release from permafrost are correct, they mean that tackling climate change is going to be even harder than it once seemed.

Analysis: Rich Countries Spend Five Times More On Fossil Fuel Subsidies Than Climate Aid - In 2009, world leaders at the G20 summit agreed that phasing out fossil fuel subsidies should be a top priority. Three years later, with very little progress on actually repealing those subsidies, promises for reform ring hollow. Now, as diplomats gather in Doha, Qatar for an international climate summit — an event that experts say will bring very few meaningful commitments — groups are stepping up the pressure on fossil fuel subsidy reform. Rich countries spent $58 billion on fossil fuel subsidies in 2011. That’s roughly five times the amount they spent on “fast start” financing for climate adaptation and mitigation in developing countries, according to an analysis released today at the Doha climate talks by Oil Change International.The Oil Change International analysis is derived from OECD figures on fossil fuel subsidies and World Resources Institute data on international commitments for climate-resiliency projects in developing countries. It found that the average yearly commitment from developed countries for climate financing over the last three years was $11 billion — a fifth of what they spent to support the fossil fuel industry.

Report: Renewable Energy Installations Account for 46 Percent of Newly Installed U.S. Electric Capacity - According to the Federal Energy Regulatory Commission (FERC), renewable energy projects -- including solar, wind, hydroelectric, geothermal and biomass -- made up almost half of all new power generation installations in the U.S. in the first 10 months of 2012. FERC, in its most recent "Energy Infrastructure Update," reports that from January through October 2012 renewable energy installations accounted for 46.22 percent of all newly installed electrical generating capacity. Compare that to the totals for new natural-gas-fired installations: Even in this time of plummeting gas prices prompted by the controversial practice of fracking, new gas-fired power plants accounted for only 5.7 gigawatts of new capacity, or 37.8 percent of the total for the year. New coal plants built in 2012, of which there are three, total 2.27 gigawatts or 15.1 percent of new capacity, while nuclear and oil-fired plants together account for less than one percent of new capacity. On the renewables side, wind led in newly installed capacity, unsurprising what with the looming expiration of the federal Wind Production Tax Credit as developers rushed to get long-term projects installed before the deadline, sometimes prompted more by federal incentives than actual wind resources. Altogether, 5,403 megawatts of new wind generating capacity were installed in the U.S. in 2012 -- 35.8 percent of all new capacity

Rocky Flats: Life in the shadow of a nuclear bomb factory: Kristen Iverson grew up next to one of the world's most notorious nuclear bomb factories, Rocky Flats in Colorado. Shrouded in secrecy when it opened in 1953 at the height of the Cold War, many residents living nearby initially thought the plant was making household cleaning supplies. In fact, workers were building plutonium triggers for nuclear bombs. In her book "Full Body Burden: Growing up in the nuclear shadow of Rocky Flats", Iverson describes how her community was divided by the controversial work going on. She also catalogues the series of environmental safety breaches at Rocky Flats over four decades which ultimately led to the FBI raiding the plant in 1989. Weapons production ceased a year later. A huge clean-up operation is still in place at Rocky Flats and research is continuing into the long-term environmental and health effects of contamination from the complex.

Outlook for Offshore Wind: Dark and Stormy - A new worldwide survey of offshore wind installations takes a look at why it might be slow going in the United States, which still doesn’t have any. Navigant Consulting, reviewing conditions at the end of last year, found that building a wind machine offshore in Europe cost about 4 million euros (around $5.1 million) per megawatt of capacity. By comparison, wind turbines built onshore in the United States (the only point of comparison for now) cost about $2 million per megawatt. Building offshore is not all downside; for one thing, there is more wind, so identical machines onshore and at sea will produce wildly different amounts of electricity. And winds offshore tend to blow around the clock, delivering some energy during daylight, when electricity sells for a higher price in the wholesale markets. On land, the wind blows mostly at night, producing electricity at an hour when the market for electricity is depressed. The Navigant study found that costs in Europe were increasing and are now 50 to 100 percent higher than they were when the first large-scale projects were built. “The main reason is they are moving further offshore into deeper waters,” said Bruce Hamilton, a wind expert with Navigant. “The easy sites are getting used up.’’ But the wind is better farther offshore, he said, so the electricity may not cost more over all even if the machine does.

Energy development on public lands generated $12 billion in 2012 - Energy development on public lands and waters pumped more than $12 billion into federal coffers in 2012, $1 billion more than the previous year, according to the U.S. Department of the Interior. "These revenues reflect significant domestic energy production under President Obama's all-of-the-above energy strategy and provide a vital revenue stream for federal and state governments and American Indian communities," Interior Secretary Ken Salazar said in a statement. Money from the extraction of oil, gas and coal from federal land is divvied up several ways, including substantial deposits into the Land and Water Conservation Fund, which purchases land to set aside for conservation. More than $2.1 billion was sent to 36 states from royalties and other revenues collected on federal lands within their borders. Native American tribes received $718 million, up from $538 million in 2011 Another $24 million was collected earlier than in the past because of the government's program to monitor reporting errors in real time rather than through later audits.

Could synthetic fuels eliminate entire US need for crude oil, create ‘new economy’? - The U.S. could eliminate the need for crude oil by using a combination of coal, natural gas, and non-food crops to make synthetic fuel, a team of Princeton researchers has found. Besides economic and national security benefits, the plan has potential environmental advantages. Because plants absorb carbon dioxide to grow, the United States could cut vehicle greenhouse emissions by as much as 50 percent in the next several decades using non-food crops to create liquid fuels, the researchers said. Synthetic fuels would be an easy fit for the transportation system because they could be used directly in automobile engines and are almost identical to fuels refined from crude oil. That sets them apart from currently available biofuels, such as ethanol, which have to be mixed with gas or require special engines.

World Bank: We hate climate change. Now who wants more coal? -  The World Bank, an international financial institution with a mission of bringing people out of poverty, took an unprecedented step last week when it released an unflinching report about the destruction soon to be wrought by climate change. The report, “Turn Down the Heat,” painted a picture of a world scalded by a 4 degrees C temperature rise. It was hailed as a crucial step in aligning climate change action with worldwide business and development interests.  Fast-forward one measly day: The nonprofit World Resources Institute released a completely unrelated working paper [PDF] highlighting just how far the world is from abandoning our favorite fossil fuels, and avoiding the 4-degree hellscape the World Bank envisions. There are currently 1,199 coal-fired power plants under proposal around the world, according to the group. The bulk of them (76 percent, to be exact) are in China and India.The timing of these two reports seems serendipitous at first: An esteemed and central member of the world’s financial elite shouts “fire!” from a rooftop, followed immediately by the revelation that this terrifying conflagration is almost certainly on its way if we continue to burn coal along our current trajectory. The problem, though, can be found on page 19, table IV, of the WRI report on coal plants: The second-largest public international financier of coal-fired power plants around the world is — you guessed it, the World Bank Group.

Coal deal could boost exports; Mont layoffs stand - Yahoo! News: -- A pair of coal companies have struck a deal on a disputed Montana mine that both sides said could boost Asian exports through the West Coast, but won't prevent up to 75 layoffs in the short term. The deal calls for Australian-based Ambre Energy to gain full control of the Decker mine near the Wyoming border for $57 million. The company wants to ramp up production and ship fuel overseas through a pair of Columbia River ports. Cloud Peak Energy would sell its stake in Decker and receive 1,200 acres of nearby land and rail easements to help develop a new Wyoming mine. Cloud Peak also gets an option to move 5 million tons of coal annually through the expanded Millennium Bulk Terminal port proposed in Washington state, which is co-owned by Ambre and Arch Coal Inc. The Decker deal is expected to close in early 2013.

Waterkeepers Worldwide Stand Strong Against Global Impacts of Coal Trafficking – As you read this, the Army Corps of Engineers is holding a series of public hearings on a proposal to build the largest coal-export terminal in North America. A consortium of investors, myopically focused on profit, want to build the Gateway Pacific Terminal, a carbon-trafficking behemoth that is among the most ominous new climate-killing proposals to hit the U.S. in the last century.The project’s investors are seeking to construct the giant export terminal near Bellingham, Washington, a move which would significantly accelerate the deadly effects of climate change in the name of profit for the corporate shareholders. Standing in the path of this madness is a growing movement of Waterkeepers and citizens from across the globe. They are using the public hearings as an opportunity to call for environmental impact statements (EIS) that fully evaluate and report the “cumulative impacts” of export terminals on communities where the coal will be mined, transported, shipped and burned. Waterkeeper Alliance will attend the hearings on Dec. 4 in Spokane and Dec. 13 in Seattle to ask that hearing officers fully calculate the true cost to every community and waterway that will be effected by expansion of U.S. coal exports.

L.A.’s Dirty Coal Addiction Is Killing The Navajo - California as a whole has no active coal mines and only a handful of small coal-fired power plants. Nonetheless, a large percentage of the power Angelenos depend on to run their air conditioners and light their buildings comes from coal plants — plants that spew their filth hundreds of miles away, across state lines in Indian country. This filth is all out of sight and out of mind for most who call L.A. home. While California is often cited as one of the most energy efficient states in the country, coal still plays a large role in producing energy for the state. When in-state generation, (some 461 MW) is added to out-of-state coal-based electricity (approximately 3,500 MW) California ranks 28th in the United States in coal-fired power generation. Nearly all of this electricity generated by coal ends up in Southern California.Environmentalists and others have long criticized the Navajo Generating Station for polluting communities near the plant, which are largely made up of people from the Navajo Nation. Annually, the plant spews more than 19 million tons of carbon dioxide and acording to the Clean Air Task Force, a nonprofit research organization, the plant is responsible for 16 deaths per year due to its fine particle pollution. This dust-size pollution is made of up a complex mixture of soot, heavy metals, sulfur dioxide, and nitrogen oxides. It is a nasty mix of toxins that causes severe asthma and even cancer.

Native American Tribes Successfully Buy Back Stolen Sacred Land | Common Dreams: Though touted as a victory for tribes within the Oceti Sakowin, known as the Great Sioux Nation, many tribal members were opposed to the purchase of the stolen sacred lands, having to pay for something rightfully theirs. For them, the procurement of the Black Hills site is a melancholy reminder of the many US treaties that remain unfulfilled.  With a deadline of November 30, the tribal nation—which includes Lakota, Dakota and Nakota people—was able to raise the $9 million necessary to purchase the 1,942-acre parcel, known as Pe’ Sla, from Leonard and Margaret Reynolds, who canceled a public auction of the property earlier this year after tribal members expressed outrage, AP reports. Many members of the Sioux tribes were opposed to paying for something that originally belonged to them. “It’s like someone stealing my car and I have to pay to get it back,” said Tom Poor Bear, the vice president of the Oglala Lakota Tribe in South Dakota.  

The great rush: Government to give green light to mass exploration for shale gas - More than 60 per cent of the British countryside could be exploited for shale gas, government documents show, as ministers prepare to give the go-ahead for developing the country's most significant new energy source since North Sea oil. The Independent understands that Ed Davey, the Energy Secretary, will soon end the current moratorium on shale gas production, which was put in place after fracking caused two small earthquakes near Blackpool in 2011. His decision will pave the way for a significant increase in shale gas exploration. The Chancellor,George Osborne, is also expected to announce the creation of a new Office for Shale Gas to co-ordinate and speed up production as part of his autumn statement next week. Fracking, or hydraulic fracturing, is the use of pressurised liquid to propagate fractures in rock and release natural gas. Maps, drawn up by the Department of Energy and Climate Change, and seen by The Independent, show the extent of potential development. They suggest more than 32,000 square miles – or 64 per cent of the countryside – could potentially be exploited for shale gas and is being considered for exploration licences. It includes vast swathes of the South of England, the North-west and North- east and the Central belt in Scotland.

Falling Oil Prices and the Shale Boom: An Interview with Michael Levi - There’s been plenty of talk about potentially radical US foreign policy changes as a result of the shale boom. While one shouldn’t expect any dramatic US foreign policy move away from the Middle East, factors are influencing a greater focus on Asia. Only one thing is certain in this transforming world: The shale boom is real and the implications are many and difficult to predict. In an exclusive interview with publisher James Stafford, energy security expert Michael Levi, the David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change at the Council on Foreign Relations (CFR), discusses:  

•    Why oil price stability is still all about the Middle East
•    Why the oil and gas industry is heading towards transformation
•    Why oil prices could drop substantially
•    Why the US shale boom is real
•    Why the shale oil boom won’t lead to major US foreign policy changes
•    Why Keystone XL is pretty much non-essential
•    Why we won’t see any radical change in renewables in the next five years
•    The best way to achieve meaningful results on climate change

Cuomo buys more time for New York fracking decision DEC: draft regs do not signal commitment to shale gas - It’s been another frenzied week on the fracking front in Albany – with much sound and fury signifying nothing. Or not? Another deadline came and went amid confusion and contention about the timing and protocol of issuing draft regulations for shale gas development in New York. To clear things up, Governor Andrew Cuomo’s administration issued a statement Friday saying everything is still up in the air. We learned, after the administration filed draft regs to avoid a deadline that would have derailed the epic policy process, that the Governor is still undecided. The draft regulations over which officials at state Department of Environmental Conservation have toiled for the past year are not a reflection of the governor’s intentions to embrace or reject shale gas.  “If DEC decides that hydraulic fracturing cannot be safely done in New York, these regulations will not have any practical effect and the process will not go forward,” read the statement from DEC spokeswoman Emily DeSantis. “If DEC decides that the process can be done safely, these regulations would be adjusted in accordance with the health and safety requirements and issues addressed in the Supplemental Generic Environmental Impact Statement.”

Doctors’ fracking concerns being ignored - For years, New York State officials who oversee natural gas drilling have stiff-armed doctors on the public health risks of fracking. Gov. Andrew Cuomo and the state Department of Environmental Conservation did it yet again Nov. 30 by releasing draft regulations for high-volume hydrofracking before the completion of a review of the drilling technique’s potential impacts on human health. Cuomo loves to tout his personal commitment to allow science to drive his decision on the future of fracking in New York. In practice, he’s cut science off at the knees to help the drilling industry maintain the fiction that it does no harm. Physicians, scientists and medical groups in New York have been warning the governor that the health risks of fracking are real and ominous, based on evidence from fracking communities in Texas, Wyoming, Louisiana, North Dakota, Pennsylvania and other states.They note that billions of gallons of fracking wastewater -- contaminated with chemicals and radioactive elements -- can’t be effectively treated in public wastewater plants and represents an imminent threat to public drinking water supplies. And super-fine fracking sand, when regularly inhaled, can cause a progressive lung disease.

Fracking Trade Secrets Hide Health Risks From Wells - A subsidiary of Nabors Industries Ltd. (NBR) pumped a mixture of chemicals identified only as “EXP- F0173-11” into a half-dozen oil wells in rural Karnes County, Texas, in July. Few people outside Nabors, the largest (NBR) onshore drilling contractor by revenue, know exactly what’s in that blend. This much is clear: One ingredient, an unidentified solvent, can cause damage to the kidney and liver, according to safety information about the product that Michigan state regulators have on file. A year-old Texas law that requires drillers to disclose chemicals they pump underground during hydraulic fracturing, or “fracking,” was powerless to compel transparency for EXP- F0173-11. The solvent and several other ingredients in the product are considered a trade secret by Superior Well Services, the Nabors subsidiary. That means they’re exempt from disclosure. Trade-secret exemptions block information on more than five ingredients for every well in Texas. [Tweet This] Drilling companies in Texas, the biggest oil-and-natural gas producing state, claimed similar exemptions about 19,000 times this year through August, according to their chemical- disclosure reports. Data from the documents were compiled by Pivot Upstream Group, a Houston-based firm that studies the energy industry, and analyzed by Bloomberg News. Nationwide, companies withheld one out of every five chemicals they used in fracking, a separate examination of a broader database shows.

New database could shed light on shale drillers’ chemical use - A free, interactive database of company fracking reports released Wednesday offers a new tool to answer fundamental questions about drilling operations nationwide. The shale gas industry escaped federal disclosure requirements through what critics call the “Halliburton loophole,” an exemption to the federal Safe Drinking Water Act passed in 2005. But most states where hydraulic fracturing, or fracking, occurs impose some requirements on drillers to disclose information about the location, chemicals used, geologic characteristics of the site, details about the hydraulic fracture method used and methods of wastewater disposal. Eight states mandate producers place the required information into a database called FracFocus that’s run by a shale-gas-industry group called the Groundwater Protection Council. Those states are Colorado, Oklahoma, Louisiana, Texas, North Dakota, Montana, Mississippi and Pennsylvania. Unfortunately for researchers who want to analyze data to determine patterns and better understand fracking nationwide, FracFocus is difficult to use,  “They’ve got all the data, but unfortunately it’s very unfriendly with regard to aggregating all that data,” Woods said.

How Shale Oil Will Change The World - Oil shale, also known as kerogen shale, is an organic-rich fine-grained sedimentary rock containing kerogen (a solid mixture of organic chemical compounds) from which liquid hydrocarbons called shale oil can be produced. Shale oil is a substitute for conventional crude oil and the USA has a lot of it. Extracting shale oil from oil shale is more potentially costly than the production of conventional crude oil both financially and in terms of its environmental impact. Deposits of oil shale occur around the world, including major deposits in the United States of America. Estimates of global deposits range from 2.8 to 3.3 trillion barrels. This obviously will change the picture of global economics and politics. Mining oil shale involves a number of environmental impacts, more pronounced in surface mining than in underground mining. They include acid drainage induced by the sudden rapid exposure and subsequent oxidation of formerly buried materials, the introduction of metals including mercury into surface water and groundwater, increased erosion, and sulfur-gas emissions. Energy developments in the United States are profound and their effect will be felt well beyond North America — and the energy sector. The recent rebound in US oil and gas production, driven by upstream technologies that are unlocking light tight oil and shale gas resources, is spurring economic activity — with less expensive gas and electricity prices giving industry a competitive edge — and steadily hanging the role of North America in global energy trade. By around 2020, the United States is projected to become the largest global oil producer (overtaking Saudi Arabia until the mid-2020s) and starts to see the impact of new fuel-efficiency measures in transport.

Shale Shocked: Studies Tie Rise Of Significant Earthquakes In U.S. Midcontinent To Wastewater Injection - Two new papers tie a recent increase in significant earthquakes to reinjection of wastewater fluids from unconventional oil and gas drilling. The first study notes “significant earthquakes are increasingly occurring within the United States midcontinent.” In the specific case of Oklahoma, a Magnitude “5.7 earthquake and a prolific sequence of related events … were likely triggered by fluid injection.” The second study, of the Raton Basin of Southern Colorado/Northern New Mexico by a U.S. Geological Survey (USGS) team, concludes ”the majority, if not all of the earthquakes since August 2001 have been triggered by the deep injection of wastewater related to the production of natural gas from the coal-bed methane field here.” Both studies are being presented at the annual meeting of the American Geophysical Union this week (program with abstracts here). These studies, together with other recent findings, make a strong case that we need national regulations on wastewater injection to prevent induced earthquakes.

Kern County farmers take on oil industry, California - Hopkins is standing up to the oil industry — and Gov. Jerry Brown — by filing a lawsuit against the state to bar energy company Venoco Inc. from drilling an exploratory well on his farm without a full environmental review. Venoco has the mineral rights to Hopkins' 38-acre farm. Across Kern County, other farmers are waging similar fights. With oil prices booming and energy companies eager to develop new wells, the state has granted oil companies permission to drill on farms without first assessing possible harm to the environment, as called for under the California Environmental Quality Act. "I want the oil industry to make money," Hopkins said. But not if the drilling damages his farm and livelihood. The exemptions from CEQA are precisely what Brown sought late in 2011 when he replaced two top officials in the state Conservation Department with appointees who agreed to ease environmental restrictions on energy companies. In the months afterward, the department granted oil companies 19 exemptions statewide — a six-fold increase from the year before — and 14 energy firms gave more than $1.1 million to the governor's tax initiative, Proposition 30, which voters approved in November.

Ottawa dials down support for Northern Gateway pipeline, citing ‘huge challenges’ - With new options firming up to pipe Western Canadian oil to Eastern Canada, and a decision in the United States on the Keystone XL pipeline months away, Ottawa appears to be dialing down its support for the controversial Northern Gateway pipeline through northern British Columbia. In a discussion Friday with energy industry leaders in Calgary, Joe Oliver, Canada’s Minister of Natural Resources, said Ottawa is still very keen to develop new markets for Canada’s oil, but is also keeping an eye on public opinion. “If we don’t get people on side, we don’t get the social licence — politics often follows opinion — and so we could well get a positive regulatory conclusion from the joint panel that is looking at the Northern Gateway, but if the population is not on side, there is a big problem,” he said at the Canada Energy Summit hosted by the Economic Club of Canada. “We understand there are huge challenges there, and looking at that and how we can deal with it and looking at all the alternatives at the same time.”

Gulf of Mexico clean-up makes 2010 spill 52-times more toxic: If the 4.9 million barrels of oil that spilled into the Gulf of Mexico during the 2010 Deep Water Horizon spill was a ecological disaster, the two million gallons of dispersant used to clean it up apparently made it even worse – 52-times more toxic. That's according to new research from the Georgia Institute of Technology and Universidad Autonoma de Aguascalientes. The study found that mixing the dispersant with oil increased toxicity of the mixture up to 52-fold over the oil alone. In toxicity tests in the lab, the mixture's effects increased mortality of rotifers, a microscopic grazing animal at the base of the Gulf's food web. The findings are published online by the journal Environmental Pollution and will appear in the February 2013 print edition. Using oil from the Deep Water Horizon spill and Corexit, the dispersant required by the Environmental Protection Agency for clean up, the researchers tested toxicity of oil, dispersant and mixtures on five strains of rotifers. Rotifers have long been used by ecotoxicologists to assess toxicity in marine waters because of their fast response time, ease of use in tests and sensitivity to toxicants. In addition to causing mortality in adult rotifers, as little as 2.6 percent of the oil-dispersant mixture inhibited rotifer egg hatching by 50 percent. Inhibition of rotifer egg hatching from the sediments is important because these eggs hatch into rotifers each spring, reproduce in the water column, and provide food for baby fish, shrimp and crabs in estuaries.

Deepwater Horizon Chemical Dispersants 52 Times More Toxic than Oil - The Deepwater Horizon oil spill is widely considered one of, if not the, worst environmental disasters in history. Around 4.9 million barrels of oil leaked into the Gulf of Mexico, polluting vast swathes of the ocean and local beaches, and proving deadly to much of the marine life in the region. After 3 months the leak was officially halted and clean-up to this day continues, and the Gulf slowly returns to its former self. Researchers from the Georgia Institute of Technology and the Universidad Autonoma de Aguascalientes (UAA) have discovered that the chemical dispersants used to treat the oil and break it down have actually increased the toxicity of the oil by as much as 52 times. Over two million gallons of dispersants have been released to mix with the oil in attempts to break up the oil slicks and clean up the ocean. However tests have found that the mixed oil and chemical dispersant fluid vastly increase the mortality rates of rotifers, the microscopic, plankton-like animals that form the base of the Gulf’s food chain.  Roberto Rico Martinez of the UAA said that, “dispersants are preapproved to help clean up oil spills and are widely used during disasters. But we have a poor understanding of their toxicity. Our study indicates the increase in toxicity may have been greatly underestimated following the Macondo well explosion.”

Shell's Arctic Oil-Spill Gear Is "Crushed Like A Beer Can" in Puget Sound sea trial - Before Shell can drill for oil in the Arctic Ocean, it needs to prove to federal officials that it can clean up a massive oil spill there. That proof hinges on a barge being built in Bellingham called the Arctic Challenger. The barge is only one component of Shell’s plans for handling oil spills off the remote north coast of Alaska. But the Obama Administration won’t let oil drilling get under way until the 36-year-old barge and its brand new oil-spill equipment are in place. In September, a key test of underwater oil-spill equipment was a spectacular failure. It forced the energy giant to postpone drilling into oil-bearing rocks beneath the Arctic Ocean until next summer. Shell and its federal regulators have been tight-lipped about the failed test. But a freedom-of-information request reveals what happened beneath the surface of Puget Sound.

Oil 'Advocate' Mary Landrieu On Drilling: ‘You Don’t Have To Drill On Every Square Inch Of Land’ -Local regulation of oil and gas drilling was thrust into the spotlight this election when Longmont, Colorado banned drilling within its city limits.  The decision was closely watched by the energy industry because of its implications for other communities across the country. As the head of the Western Energy Alliance, an industry group against the ban put it, “We can’t afford that particular issue at Longmont.” Which is why recent comments from Senator Mary Landrieu (D-LA) are noteworthy. Landrieu, one of the biggest drilling advocates in Congress, has taken $940,174 in campaign contributions from the oil and gas industry since 1996. However, at a forum sponsored by America’s Natural Gas Alliance, Landrieu said that the industry should respect local communities and understand that some places should be set off-limits to drilling: There should be drilling zones and non-drilling zones. Just because, you know, if there was gold in the National Mall, the largest gold mine in the world, we would not allow mining in the Mall. So sometimes I think the industry—as much as I’m an advocate for it—can get a little over its heels on this.

Trends in Eagle Ford drilling highlight the search for oil and natural gas liquids - Rapid growth in horizontal drilling at the Eagle Ford shale formation in Texas, like activity described in the previous story on the Bakken formation, has resulted in significant increases in crude oil and natural gas production. Increasing natural gas volumes have also boosted production of lease condensate (recovered as a liquid from natural gas in lease separation facilities) and natural gas liquids (extracted further "downstream" at natural gas processing plants). The animated map shows that the Eagle Ford shale comprises three "windows" (roughly parallel acreage swaths). Production from these windows is increasingly liquids-rich moving generally from south to north. The circular yellow and green producing well markers signify the more "oily" wells, with the red markers representing wells that produce mostly natural gas.  In 2007, total Eagle Ford liquids production (crude oil and condensate) was less than 21 thousand barrels, none of which was from horizontal wells. In 2010, production averaged nearly 29 thousand barrels per day (bbl/d), and was approaching 60 thousand bbl/d by year's end; virtually all was from horizontal wells. Production continues to rise in 2011; according to the Railroad Commission of Texas, Eagle Ford liquids production averaged 74 thousand bbl/d through July.

U.S. oil output has increased by one million barrels per day in just 14 months; September output is highest in nearly 15 years - The Department of Energy reported today that the U.S. produced more crude oil in the month of September (almost 6.5 million barrels per day) than in any month since January 1998, almost 15 years ago (see chart above). In just a little more than a year , U.S. oil output has increased by more than one million barrels per day (bpd), from 5.42 million barrels per day in July 2011 to nearly 6.5 million barrels per day in September. The biggest contributions to the one million bpd increase in U.S. daily oil output since last summer have come from the states of Texas (612,000 bpd increase since July 2011 and the highest output in September since March 1998) and North Dakota (313,000 bpd increase and the highest output in September in any month in state history), which together accounted for 88% of the one million bpd increase in daily oil output over the last 14 months.  The other states that have contributed to the increase in daily U.S. oil production since July 2011 are New Mexico (38,000 bpd increase, now producing more oil than any time since 1981),  Oklahoma (45,000 bpd increase and the highest output in September since February 1995), Wyoming (17,000 bpd increase and the highest output since May 2000) and Utah (13,000 bpd increase and the highest output since October 1988).

U.S. monthly crude oil production reaches highest level since 1998 - U.S. crude oil production (including lease condensate) averaged almost 6.5 million barrels per day in September 2012, the highest volume in nearly 15 years. The last time the United States produced 6.5 million barrels per day or more of crude oil was in January 1998. Since September 2011, U.S. production has increased by more than 900,000 barrels per day. Most of that increase is due to production from oil-bearing rocks with very low permeability through the use of horizontal drilling combined with hydraulic fracturing. The states with the largest increases are Texas and North Dakota.  From September 2011 to September 2012, Texas production increased by more than 500,000 barrels per day, and North Dakota production increased by more than 250,000 barrels per day. Texas's increase in production is largely from the Eagle Ford formation in South Texas and the Permian Basin in West Texas. North Dakota's increase in oil production comes from the Bakken formation in the Williston Basin. Increased production from smaller-volume producing states, such as Oklahoma, New Mexico, Wyoming, Colorado, and Utah, is also contributing to the rise in domestic crude oil production.

US Oil Output Hits Nearly 15-Year High —U.S. crude-oil production reached its highest level in nearly 15 years in September, thanks in large part to the drilling method known as hydraulic fracturing, the U.S. Energy Information Administration said Tuesday. Daily production averaged nearly 6.5 million barrels, the EIA said, an increase of 16%, or about 900,000 barrels, over The U.S. could overtake Saudi Arabia and Russia by 2020. The statistics reflect the growing role of the U.S. as a dominant energy producer. Last month, the International Energy Agency said the U.S. could overtake Saudi Arabia and Russia to become the world's largest oil producer by 2020. The EIA is slated to come out this week with an early draft of its annual report, which includes an assessment of U.S. production trends The last time monthly U.S. production reached 6.5 million barrels a day was January 1998. The EIA said the states with the largest increases were Texas, with its Eagle Ford formation, and North Dakota, at the center of the Bakken Shale region. For decades, North Dakota produced fewer than 150,000 barrels a day, but that figure started surging in 2007 and reached 728,000 barrels a day in September.

Will U.S. oil consumption continue to decline? - A lot of attention has been given to the optimistic assessments of future U.S. and Iraqi oil production in the IEA's World Energy Outlook 2012. However, perhaps even more dramatic is the report's prediction of a significant long-term decline in petroleum consumption from the OECD countries. For example, the report predicts about a 1 mb/d drop in U.S. oil consumption by 2020 and a 5 mb/d drop by 2035 relative to current levels. I was curious to examine some of the fundamentals behind petroleum consumption to assess the plausibility of the IEA projections. Fuel efficiency of vehicles sold in the United States has been increasing rapidly over the last five years, meaning that the typical new car gets substantially more miles per gallon than older vehicles. If Americans just keep buying cars that are no more efficient than the typical model sold in 2012, average fuel efficiency of the existing fleet will continue to rise over time, as older cars are scrapped and replaced with new models.

EIA forecast for energy production/consumption in the US; massive spike in tight oil output Periodically the US Department of Energy publishes a long-term forecast on the state of energy fundamentals in the US. Their current projection looks as far out as 2040 (whatever that's worth). Here are some key aspects of the forecast. The tight oil (see definition) contribution to US production is quite amazing. See some comments in brackets "[ ]". EIA: -

  • 1. Crude oil production, especially from tight oil plays, rises sharply over the next decade. Domestic oil production will rise to 7.5 million barrels per day (bpd) in 2019, up from less than 6 million bpd in 2011.
  • 2. Motor gasoline consumption will be less than previously estimated ... reflecting the introduction of more stringent corporate average fuel economy (CAFE) standards. Growth in diesel fuel consumption will be moderated by the increased use of natural gas in heavy-duty vehicles. [this involves the use of compressed natural gas (CNG) in trucks, particularly municipal vehicles such as garbage trucks]
    3. The United States becomes a net exporter of natural gas earlier than estimated a year ago. Because quickly rising natural gas production outpaces domestic consumption, the United States will become a net exporter of liquefied natural gas (LNG) in 2016 and a net exporter of total natural gas (including via pipelines) in 2020. [nat gas production growth looks impressive]

According to government forecast, abundant and reliable fossil fuels will supply 80% of U.S. energy demand in 2040 - The Department of Energy released it Annual Energy Outlook today for 2013, with updated estimates of U.S. energy consumption by fuel source out to the year 2040 in Table A1 of the report (data here) .  Based on the government forecast, the fossil fuel (coal, natural gas and oil) share of U.S. energy consumption will fall only slightly in the future, from 84.3% of total U.S. energy demand in 2010 to 80.1% in 2040 (see chart above).  On the other hand, the future of renewable energy as a fuel source is not looking so bright, in terms of its contribution to America’s future energy demand.  In 2010, renewables (wood, municipal waste, biomass, hydroelectricity, geothermal, solar, and wind for generation in the electric power sector; and ethanol for gasoline blending and biomass-based diesel in the transportation sector), contributed only 6.8% of U.S. energy consumption.  Even by 2035, almost 30 years from now, all renewable energies together are expected to contribute less than 11% of the total energy demand in the U.S.

US Energy Independence: Let’s not get too Carried Away -Finally, the U.S. energy independence debate has taken a significant step towards a more serious discussion for what this actually means for Washington’s place in the world. As anyone reading my analysis (not just in Forbes, but around the world) will be aware, I’ve been banging the drum rather too loudly on the downside complexities this could bring for America. Being contrarian is a lonely place compared to pervasive group think that constitutes the ‘trans-Atlantic energy debate’ these days, but it never ceases to amaze me once the penny drops, how quickly analytical outliers become mainstream questions everyone asks. Cue Dan Yergin’s FT op-ed over the weekend, ‘US Energy Is Changing The World Again’. Get past all the normal stuff on American oil and gas gains, and Mr. Yergin finally poses some interesting conundrums:‘It is still far from clear how this shift will affect the strategic balance in the Gulf and the Middle East and US engagement – especially given the rising tension over Iran’s nuclear programme and the instability throughout the region. The debate about these considerations will be stirred by America’s future fiscal negotiations. But the question will not really be addressed until the crisis with Iran is resolved. One geopolitical impact is already clear. Rising US oil production, along with increased Saudi output, has helped provide offsetting supplies that have made the sanctions on Iranian oil much more successful than anticipated a year ago.

Scientists Find Mega-Oil Field ... 1,300 Light Years Away - Have our wishes been answered? Scientists have found an oil field which contains 200 times more hydrocarbons than there is water on the whole of the Earth.Time to wave peak oil goodbye forever … but before you do I should probably inform you of the tiny hiccup in any plan to develop this oil field. It is around 1,300 light years away. Now like me you might be wondering how oil, which is supposedly produced from organic matter buried millions of years ago, could possibly exist in space. Well it turns out that these hydrocarbons were likely created by the fragmentation of giant carbonaceous molecules called polycyclic aromatic hydrocarbons, which are produced during the death of a star. There is even a theory that molecules such as these could have served as the first organic compounds for creating life.

Aggressive US monetary policy... in Iran - Whenever we think of US monetary policy we usually think of the Fed. There's another side to US monetary policy, and its probably just as significant. Being part of the worldwide US dollar clearing & settlement system means having access to the world's most liquid payments medium: the US dollar-denominated bank deposit. As long as a nation's banks are connected to this network, goods that are produced in that nation will be infinitely more saleable. On the other hand, being cut off from it means that the same goods will be a lot tougher to move. The Iranian monetary blockade illustrates the US Treasury's ability to use banishment from the USD network, or the threat thereof, to exert incredible influence over the world.

Can Afghanistan Sort Out Its Cross-Border Water Issues? - With a vast, empty desert as a backdrop, the militants recorded the execution of Khan Wali on video. As someone held a camera, the others encircled the condemned man to read out his sentence. “This is not brutality — this is justice,” declared one of the executioners. What was Khan Wali’s crime? He was protecting one of Afghanistan’s most important resources: water. Khan Wali led a 60-man semiofficial militia tasked with defending the Machalgho dam in eastern Paktia province. Already two years behind schedule because of security concerns, the dam would irrigate about 16,000 hectares of land and produce 800 KW of electricity once completed. The government had pledged that if Khan Wali held his ground for two months, he and his men would receive weapons and cash. But Khan Wali lasted only 20 days into the mission. His remains were recovered eight days after his savage execution, his nephew Agha Jan told TIME. His upper body was completely in pieces. “We recognized him from the tattoo he had and the shoes he had been wearing — his name was tattooed on his hand since childhood.” The video of the brutal execution, which took place in mid-2011, was shared with journalists months later and uploaded to YouTube. “With such bravery, he had tried to protect the dam — and they killed him so brutally,”

China’s Manufacturing PMI Expands for a Second Month - China’s official manufacturing index rose to the highest level in seven months as new orders and export demand climbed, underscoring optimism the economy is recovering after a seven-quarter slowdown. The Purchasing Managers’ Index was 50.6 in November, the National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday in Beijing. That compares with the 50.8 median estimate in a Bloomberg News survey of 28 analysts and 50.2 the previous month. A reading above 50 indicates expansion. The report reduces pressure on China’s new leadership to roll out more policies to support a growth rebound as they push ahead with overhauling state-owned enterprises and boosting consumption. Confidence in China’s economy is at the highest in more than a year amid faith that Xi Jinping’s administration will improve the investment climate, a Bloomberg investor poll last week showed.

China PMI Rises But Misses Expectations For Fifth Month In A Row As Uncertainty Prevails - China's Manufacturing PMI missed expectations, coming in at 50.6 relative to a slightly expansionary 50.8 expectation, and up down from the 50.2 prior. This is the fifth month in a row of missed expectations but it has now risen for three months in a row, to the highest level in 8 months; but has now hovered within 0.6pts of the expansion/contraction knife-edge for six months. The PBOC's index remains above (more positive) than the HSBC version for the 20th month in the last 21 (which remains in the contractionary sub-50 range it has been in for 16 months). With the Shanghai Composite testing Jan 09 lows and the ongoing Reverse Repo delicate bank pumpathon, the relative stabilization in Services and Manufacturing PMIs is confirmed by this evening's data and provides hope for those bidding H-Shares to 16-month highs. Interestingly for all those who remain shocked at the divergence between the Hang-Seng and the Shanghai Composite, it seems clear that A-Shares investors remain skeptical of the PMI-based stabilization of macro and prefer to trust the weaker (and harder to tweak) Industrial Output data

Green shoots in Chinese manufacturing; public sector seems to be the driver - Continuing with the theme of economic stabilization in China (see discussion), the final manufacturing PMI number for November is showing that manufacturing contraction has been halted. In particular, the PMI component exhibiting some promise is the change in new orders. Clearly growth is still anemic, but for the first time in months China's manufacturing activity is showing some life. HSBC: - The volume of new orders received by Chinese manufacturers increased during October, and for the first time in a year. The seasonally adjusted index indicated the growth rate of new orders was only marginal. However, it was the second-highest index reading in the past 17 months. Nearly 20% of panellists noted an increased amount of new orders, whereas just over 18% reported a fall. A number of firms that recorded an increase in new orders attributed growth to a rising number of new clients. Much of the growth however seems to be emanating from the public sector - particularly infrastructure projects. Fox Business: - The HSBC China flash PMI - which gathers more data from smaller, privately-held firms with a strong export focus - signaled that November growth in the manufacturing sector quickened for the first time in 13 months, with a reading of 50.4 when it was published last week, reflecting a steady uptick in the economy. A PMI But analysts caution that growth has been revived through top-down easy credit to state-owned firms and infrastructure projects that lack the dynamism of China's private economy, which is struggling with credit curbs and a policy-induced slowdown in the speculative real estate sector.

Chinese Urbanization in Context - Commenter  Don Johnson raised the question of how the speed of Chinese urbanization compared to other countries.  Above are some relevant comparisons - with the US, Japan, and South Korea. Data are from the UN and the US Census Bureau. China is urbanizing much faster than the US did, and probably Japan too, but not as fast as Korea.  Of course, these are relative comparisons.  The absolute scale of China's urbanization is completely unprecedented. The Korean example doesn't seem to provide much support for my speculation that very fast urbanization processes end earlier due to running out of young people.  Instead, all three precedents seem to have slowed down sharply around the 75% point.  In the US case, this was reached in the 1960s, and we are still only 82% urban.  Some of us just like living in the country. China will reach that 75% point in about 2025 in my projection, but not until 2040 according to the UN which has them slowing down more smoothly starting soon:

External Shocks and China’s Monetary Policy - SF Fed Economic Letter - China has been running large current account surpluses over the past decade. At the same time, it has tightly controlled its exchange rate and prohibited the private sector from freely trading foreign assets. Many commentators argue that China’s large current account surpluses reflect substantial undervaluation of its currency, the renminbi (for example, see Goldstein and Lardy 2006). Although the renminbi has appreciated moderately since China began a gradual upward adjustment of the exchange rate in 2005, further appreciation is widely expected. This expectation, coupled with continuing current account surpluses, has produced substantial foreign capital flows into China.  China prohibits its private sector from freely trading foreign assets and tightly manages currency exchange rates. In the wake of the recent global financial crisis, interest rates on China’s foreign assets fell sharply, while yields on Chinese domestic assets remained relatively high, posing a challenge for China’s monetary policy. Opening the capital account would improve China’s capacity to weather external shocks, such as sudden declines in foreign interest rates. However, allowing the exchange rate to float without removing capital controls is less effective.

Uncertain foundations - Debate is raging about the effectiveness of how China’s murky shadow banking system is regulated. A red-hot housing market might not seem unusual in China, where real estate prices have soared over the past decade. But what is happening in Langfang, one hour’s drive from Beijing, and other cities is new and potentially far riskier than anything that came earlier. Since 2010, the government has tried to cool the property market and made it virtually impossible for developers to secure loans from banks. Starved of cash, developers were forced to slow down. But as the Langfang boom shows, property companies are finding funds again. The money is not coming from banks as the regulatory controls on loans to developers remain. Instead, developers are turning to China’s shadow banking system, a complex network of financing channels outside the formal banking sector. Shadow banking is flourishing in China, helping to make non-bank institutions as big a source of credit as banks themselves since July – something that has never happened before. Chinese bankers, leading rating agencies and the International Monetary Fund have all warned about risks from the surge in loosely regulated lending, with some even pointing to parallels with developed economies before the global financial crisis. But the Chinese government itself has taken a permissive stance.

A Big Asian Bellwether Confirms That Global Trade Is Accelerating : Over the weekend, we learned that South Korean exports beat expectations and jumped 3.9 percent year-over-year in November. And this is a positive signal for all of Asia and perhaps the global economy. From SocGen's Klaus Baader: South Korea exports grew at a much faster pace than we or consensus expected. Given Korea’s strong export orientation and the exceptionally timely publication of its trade statistics, this is an important signal about the health of Asian and also global trade. The implication from these data is that the recovery is indeed building. Exports were up 3.9% yoy in November after +1.1% in October and -5.0% yoy in Q3. The level of exports grew for the third month in succession (by 1.4%, albeit not seasonally adjusted) and were the highest since May. The November figures were stronger than median predictions (1.6% yoy) and much stronger than our forecast (0.0%), which was influenced by officla comments from China that Chinese November trade figures would be weak. That may still be the case, but it appears not to have had a negative impact on Korea’s exports. This strong number has been confirmed by a nice rebound South Korean manufacturing PMI.

Australia's economic data stays weak; 75% chance of rate cut - In spite of signs of stabilization in China's output, Australian economy continues to weaken. The Australian Industry Group (AIG) Performance of Manufacturing Index (discussed here) is showing an ongoing contraction.  AIG/PwC: - Manufacturing activity contracted for the ninth consecutive month in November, with the seasonally adjusted Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) recording a level of 43.6 (readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decrease). This was a drop of 1.6 points compared to the previous month.  The slump in manufacturing new orders also extended into a ninth month, reflecting weak global demand and a softening Australian economy. The new orders sub-index dropped a further 0.4 points to 43.5 in November. The only one of the 12 industries showing expansion is Food & Beverages - cheers! The weakest sectors are fabricated metals, chemicals and petroleum, and construction materials.Ironically Australia's stock market is rallying in response. Why? The expectations are rising that the RBA will now have the ammunition to decrease rates to record lows (see discussion). Another central bank comes to the rescue.

RBA's remains hawkish after the rate cut - Australia's central bank continues to surprise with their hawkish stance. In spite of lowering the benchmark rate to 3%, the RBA made comments suggesting that they are going into a holding pattern for a while. Since the RBA has never gone below 3%, it seems to represent something of a "support level". The Australian: - "People are speculating we are nearing the end of the easing cycle," "The Reserve Bank is uncomfortable about further cuts and will only make them if they absolutely have to."  UBS chief economist Scott Haslem said: "If the non-mining sector continues to improve, as we expect, this should allow the RBA to stay on hold from here, and possibly for an extended period."It's a brave thing to do for a central bank that is facing "currency wars", particularly by its competitors (see discussion). The Australian dollar has experienced a massive appreciation relative to the Brazilian real for example, making it difficult for Australia's exporters to compete. This is especially tough when global demand for natural resources remains weak.

Crime and Punishment in Australian Business (as in the Former is on the Rise, and Wondering if They Will Ever See the Latter) - Yves here. Australia is often stereotyped as being 20 years behind the US in a good way: it has a commitment to collective good, a sense of community, and a robust middle class, things that are increasingly wanting in the US. And it has those qualities along with better broadband and first class, cheap healthcare (the offsets are getting used to the seasons being the reverse of up North, having to adopt a footie team, dealing with the onerous documentation requirements of their tax authority, and having most movies get there after you can see them on international flights). The interesting quality of this article by Houses and Holes is its sense of consternation about what looks like rising corruption in Australia. I don’t mean to sound condescending, but being in a country so much further along in this ugly process, there’s an underlying trust in authorities and process evident in this piece, while those sentiments are in tatters in the US.  Most societies have a level of crooked behavior that they tolerate; the assumption seems to be that these dirty backchannels are sometimes the only efficient way to work around obstacles, and that enough bad guys will be caught and punished to keep the dubious dealing at a manageable level. You can see here a quiet sense of horror, as if someone in a movie sees their hand suddenly changing into something they don’t recognize as human and realize they may be undergoing a fundamental, chthonic transformation.

Japan Tunnel Collapse Threatens to Add to Fiscal Burden: Economy - Japan’s fatal tunnel tragedy this week escalated a political debate over infrastructure spending as the nation heads for elections, bringing focus to aging transport networks in the world’s third-largest economy. The 4-kilometer tunnel near Mt. Fuji that saw about 270 concrete slabs each weighing 1.4 tons fall and cause the deaths of nine people was built in the 1970s. Prime Minister Yoshihiko Noda yesterday said while repairs are a priority, the opposition Liberal Democratic Party’s call for broader infrastructure spending is a throwback to “wasteful pork-barrel” projects. With the LDP leading in polls before the Dec. 16 vote, the prospect of more spending would add to fiscal strains that have already seen Japan accumulate more than twice the size of its economy in debt. At the same time, failure to update the road system risks boosting production costs as an estimated 40,000 bridges reach the end of their durability in the coming decade. “Aging infrastructure multiplies the risk of damage from natural disasters and hinders the distribution of goods and people, threatening to erode the country’s productivity,” said Takashi Shiono, an economist at Credit Suisse Group AG in Tokyo. “It will further lower the Japanese economy’s potential growth.”

The Trans-Pacific Partnership: What "Free Trade" Actually Means - With the production cycle broken up and scattered around the globe, this adds enormous costs to transportation of equipment, machinery, goods and products between these nations, which in turn requires enormous quantities of oil and fuel to facilitate this transport system, and thus produces unnecessary amounts of pollution. Because of the high costs of transportation, fuel, and assembly, the value of the end product goes up, making it far more costly than if it were simply produced in one or two countries. With countries determining their exports and imports based on inflated and inaccurate statistics, populations are saddled with enormous debts and thus the financial cost of breaking up the production cycle lands on the shoulders of the population, who were already subjected to increased competition between labor forces, reduced environmental and social protections, dismantled subsidies and regulations, increased personal debt and poverty. So if “free trade agreements” are bad for people, bad for labor – at home and abroad – and bad for the environment and the nation as a whole, why are they pursued? The answer is simple: they create enormous profits for banks and corporations, whose losses are subsidized by the state. In an actual “free market,” breaking up the production cycle would be far too costly to be a rational choice for a corporation, but because the state takes on the cost of doing so (largely through its trade deficit), the process continues. When it comes to agreements like the Trans-Pacific Partnership, it is not difficult to see what the results will be: increased subsidies, protections and regulations for the benefit of large corporations and banks (notably the 600 corporations involved in secretly drafting the agreement over recent years) and decreased protections, subsidies and regulations that benefit the population, environment and society as a whole.

Why So Secretive? The Trans-Pacific Partnership: The Trans-Pacific Partnership is the most secretive and "least transparent" trade negotiations in history. uckily for the populations and societies that will be affected by the agreement, there are public research organizations and alternative media outlets campaigning against it - and they've even released several leaks of draft agreement chapters. From these leaks, which are not covered by mainstream corporate-controlled news outlets, we are able to get a better understanding of what the Trans-Pacific Partnership actually encompasses. For example, public interest groups have been warning that the TPP could result in millions of lost jobs. As a letter from Congress to United States Trade Representative Ron Kirk stated, the TPP "will create binding policies on future Congresses in numerous areas," including "those related to labor, patent and copyright, land use, food, agriculture and product standards, natural resources, the environment, professional licensing, state-owned enterprises and government procurement policies, as well as financial, healthcare, energy, telecommunications and other service sector regulations." In other words, as promised, the TPP goes far beyond "trade."

The IMF and Capital Controls - Paul Krugman  - So the IMF has now, officially, said that capital controls — limits on the international movement of funds, hot money in particular — have their uses: The International Monetary Fund has cemented a substantial ideological shift by accepting the use of direct controls to calm volatile cross-border capital flows, as employed by emerging market countries in recent years.Although the fund continued to warn that such controls should be “targeted, transparent, and generally temporary”, the policy, announced in a staff paper released on Monday, is a sharp change from the fund’s enthusiasm for liberalising capital accounts during the 1990s. Here’s the paper (pdf). This is basically a codification of recent practice; the IMF has already given a green light to capital controls in selected countries, such as Iceland. Still, it’s an interesting turnaround, another indicator of the IMF’s surprising intellectual flexibility these days. And it brings back memories of the Asian crisis of the 1990s, when I found myself in the middle of this debate.

Brazil's economy on the mend - It seems that the stabilization in the Eurozone, even potentially a temporary one, is having a healing effect on the global economy. We've seen some indications of improvement in China (see post), but now there are also positive signs in Brazil's economy. A great deal of that improvement is driven by a highly accommodative monetary policy and the recovery remains quite slow, but it's progress nevertheless (see discussion from July). Brazil's industrial production, though still weaker than expected, came in positive on a year-over-year basis for the first time since August of 2011. Reuters: - Output from Brazilian factories and mines expanded 2.3 percent in October from a year earlier, government statistics agency IBGE said on Tuesday, though less than the 2.5 percent rise forecast in a Reuters poll of 33 analysts. Industrial production dropped 3.6 percent on a year-over-year basis in September, IBGE said, revised from a 3.8 percent drop. October's figures were the first annual rise in industrial production since August 2011, when Brazil's central bank began a series of interest rate cuts aimed at protecting Latin America's largest economy from the effects of a global slowdown.

The New Rubber Boomlet - BRAZIL’S first rubber boom, sparked by the invention of the car, ended abruptly with the successful cultivation of the rubber tree in Asian plantations. Its second, supplying the Allies after Japan cut off their rubber sources during the second world war, barely outlasted the fighting. Both made millionaires of rubber bosses—and near-slaves of those who tapped and cured the latex. Now, in the Amazon’s most remote regions, rubber is making a tentative comeback. This time the rubber-tappers are trying to write the script. The aim, says Tião Viana, the state’s governor, is to make standing forest more valuable than logging and ranching so that Acre can protect trees without sacrificing development. Since 1999 the state has been mapped and zoned, with much of its forest protected as parks or reserved for Amerindians or extrativistas. Some, mostly small-scale, farmers still clear forest illegally. But the rules have broadly stuck. Some previously deforested areas must be replanted; some can be used for low-impact farming, and others are used for forest-product industries. “We don’t need to clear any more land,” says Mr Viana. “But we’re not afraid to use what has already been cleared for development.”

Holdout investors seek deposit from Argentina by December 10 (Reuters) - Investors suing over Argentina's 2002 debt default have asked a U.S. court to order the country to post a security deposit of at least $250 million by December 10, while an appeal of a lower court's order is pending. In an emergency motion filed late on Friday, the "holdout" creditors urged the 2nd U.S. Circuit Court of Appeals to modify its ruling from Wednesday that halted an order for Argentina to deposit $1.33 billion into an escrow account by December 15 on the investors' behalf. The decision eased fears that Argentina could default in the coming weeks, but the holdouts say it is too lenient and gives the government more time to plot a way around court rulings. Officials at the Argentine Economy Ministry declined to comment. The holdouts are seeking to be repaid in full on their defaulted Argentine bonds after spurning debt exchanges in 2005 and 2010 that about 93 percent of other bondholders accepted. Argentina calls the litigating funds "vultures" and has vowed never to pay them.

The Poverty Line in Low-Income Countries - For low-income countries, the appropriate definition of "poverty" is often based on the minimum level of consumption needed to keep body and soul together. For higher-income countries, poverty is almost always set as a relative measure: that is, an amount that would be too far below the standards commonly prevailing in that society. As low-income countries become better off, they typically start raising their poverty lines. As Martin Ravallion points out in "A Relative Question" in the December 2012 issue of Finance & Development:   "For example, China recently doubled its national poverty line from 90 cents a day to $1.80 (adjusted to reflect constant 2005 purchasing power). Other countries—including Colombia, India, Mexico, Peru, and Vietnam—have also recently revised their poverty lines upward." Ravallion and Shaohua Chen compiled a list of official poverty lines across 100 countries, and compare them to consumption levels per capita in each country. For the details of how it was done, see their working paper here. But here's the nice picture from Ravallion's F&D article showing the results.

World-Wide Factory Activity, by Country - Manufacturing in much of the world remained in contractionary territory in November, with an unexpected decline in the U.S. taking center stage. The U.S. Institute for Supply Management‘s purchasing managers’ index dropped to 49.5 in November from 51.7 a month earlier, indicating that its factory sector is contractions. Reading above 50 indicate expansion. In a troubling development, the weakness wasn’t mainly attributed to Hurricane Sandy, which has weighed on other economic data. Subindexes for employment and trade showed readings below 50, indicating contraction.Europe continues to struggle, with the euro zone still shrinking, though at a slower pace than a month earlier. Individual members Austria, France, Germany, Greece, Italy, the Netherlands and Spain were all contracting. In one bright spot, China’s official purchasing managers’ index was in expansionary territory and posted an increase from the prior month. But the level remains nears the break-even mark of 50.

Global MetroMonitor - Brookings Interactive - This interactive feature provides economic growth data (real GDP per capita and employment change) for the largest 300 metropolitan economies worldwide for three periods: 2011 to 2012, the latest year of a still-volatile period for the global economy; the minimum year of growth between 2007 and 2011; and 1993 to 2007, which provides the long-run trend each metropolitan area followed prior to the recession. It further shows how metropolitan areas performed relative to their countries between 2011 and 2012 and identifies the degree to which metro areas have recovered from the downturn. The interactive also provides a series of basic economic data for each metropolitan area, including industry composition of metro output, population, metro area GDP, and metro area GDP per capita.

Italy Retail Sales Sharpest Drop in 17 Months; Germany Retail Sales Stagnate as Margins Squeezed; Eurozone Retail Sales Drop Sharply - Dismal economic conditions in the eurozone accelerate to the downside as evidenced by falling retail sales. Let's take a look at the Eurozone in aggregate, as well as the three largest countries. The Markit Eurozone Retail PMI® shows Eurozone retail sales continue to fall sharply towards end of 2012.  Key points:

  • Sales fall for thirteenth month running in November
  • German sales remain flat while Italy records another severe fall
  • Rate of decline in France slows to weakest in five months
Summary of November findings: The Eurozone retail sector remained stuck in a sharp downturn during the penultimate month of 2012, according to Markit’s PMI® data. Sales fell for the thirteenth consecutive month, and remained well below the level seen one year earlier. The PMI rose slightly in November to 45.8, from October’s 45.3. The latest figure signalled a sharp fall in retail sales compared with one month previously, and the average for the fourth quarter so far (45.5) is the second-lowest since Q1 2009. Moreover, the trend for 2012 so far (45.6) is the lowest annual average of any year since the survey started in 2004. The previous record low was in 2008 (46.1).

French economy buckles as car sales collapse  - France’s industrial woes deepened last month as car sales crashed 19pc and French brands lost market share at an dramatic pace, raising fears of a serious economic crisis next year once austerity hits. Markit’s purchasing managers’ index (PMI) for French manufacturing remained stuck in slump in November at 44.5 and is now the weakest in the eurozone after Greece. "The figures are shocking," said sovereign debt strategist Nicholas Spiro. "France has been sailing dangerously close to the wind for some time but is now tipping into outright contraction." The Committee of French Automobile Producers (CCFA) said this has been the worst year for the French car industry since 1997 - and for almost half a century in total volume - with little chance of recovery next year as Paris pushes through scorched-earth fiscal tightening of 2pc of GDP to meet EU deficit targets. Sales of French cars fell 28pc in November from a year earlier, with Citroen down 26pc and state-owned Renault down 33pc. Foreign brands fell just 7.9pc. "The middle class, which tends to buy standard French cars of between €10,000 and €20,000, has been particularly badly hit by the crisis,"

Euro-zone manufacturing shrinks for 16th month -- Manufacturing activity across the 17-nation euro zone contracted for a sixteenth consecutive month in November, according to the final reading of the Markit purchasing managers' index, or PMI, for the sector released Monday. Manufacturing PMI came in at 46.2, matching a preliminary estimate, and marking the sixteenth consecutive month the index has posted a reading below the 50.0 level, signaling a contraction in activity. The index rose from 45.4 in October, marking the slowest pace of contractin in eight months, but the downturn "clearly remains severe," said Chris Williamson, chief economist at Markit. "The ongoing steep pace of manufacturing decline suggests that the region's recession will have deepened in the final quarter of the year, extending into a third successive quarter," Williamson said.

Europe’s temporary reprieve - It was a global November manufacturing PMI avalanche overnight and that included data from Eurozone. Once again the chief economist at Markit , Chris Williamson, provides a good wrap of the data: The November PMI indicated that manufacturing conditions deteriorated at the slowest rate for eight months, but the downturn clearly remains severe. The ongoing steep pace of manufacturing decline suggests that the region’s recession will have deepened in the final quarter of the year, extending into a third successive quarter. With official data lagging the PMI, the rate of GDP decline is likely to have gathered pace markedly on the surprisingly modest 0.1% decline seen in the third quarter. The picture is nevertheless starting to brighten somewhat, with the PMI appearing to have bottomed out back in July. Production and employment look set to fall at reduced rates in coming months as export demand slowly revives in markets such as the US and Asia. However, the ongoing uncertainty caused by the region’s debt crisis means business confidence clearly remains fragile and companies continue to focus on tight cost control, meaning any robust recovery still looks a long way off and prone to a set-back if the crisis worsens. As you can see from the chart below November was certainly an improvement from October in all but The Netherlands and Italy, but apart from Ireland manufacturing is still contracting across the zone.

Margaret Papandreou Linked to Lagarde List - Former Greek Prime Minister George Papandreou and his mother have denied reports in the Greek media that she’s behind the name of a civil servant with 550 million euros ($714 million) in deposits in a Swiss bank, with the former Premier saying that his family is caught in a political vendetta. Papandreou, who resigned in November of 2011 after more than two years of relentless protests against austerity measures he imposed on the orders of international lenders, was upset over the stories that suggested his mother, Margaret, who is American, was being investigated. “The publications… are clearly targeting me and the policies I implemented against all manner of political and personal interests,” Papandreou said in a statement issued in response to the Sunday, Dec. 2 editions of To Vima and Proto Thema alleging that the Financial Crimes Squad (SDOE) is probing his mother over large deposits at the Geneva branch of HSBC.

Greece Announces Terms of $13 Billion Bond Buyback to Slash Debt — In a bold bid to reduce its debt burden, Greece offered on Monday to spend as much as €10 billion to buy back €30 billion of its bonds from investors and banks. While the buyback had been expected, the prices offered by the government were above what the market had forecast, with a minimum price of 30 cents on the euro and a maximum level of 40 cents, for a discount of 60 to 70 percent. Analysts expect that the average price will ultimately be 32 to 34 cents on the euro, which would represent a premium of 4 cents above the level where the bonds traded at the end of last week. Pierre Moscovici, the French finance minister, played down concerns that the Greek debt buyback might not go as planned. “I have no particular anxiety about this,” “It just has to be very quick.” A successful buyback is critical for Greece. The International Monetary Fund has said that it will lend more money to Greece only if it is reasonably able to show that it is on target to achieve a ratio of debt to annual gross domestic product of less than 110 percent by 2022. Greece will have at its disposal €10 billion, or $13 billion, in borrowed money from Europe. Investors who agree to trade in their Greek bonds will receive six-month treasury bills issued by Europe’s rescue vehicle, the European Financial Stability Facility. The offer will close Friday. If successful, the exchange would retire about half of Greece’s €62 billion in debt owed to the private sector. The country still owes about €200 billion to European governments and the I.M.F.

Greek debt "transformed into a zero-coupon perpetual bond” - Assuming the Greek bond buyback goes through as expected (see discussion), the bulk of Greek debt will be held in the form of loans by the "official sector": EU/EFSF and IMF. And the maturity of that debt is getting extended dramatically. Credit Suisse: - Following the buyback, more than 80% of Greece’s debt will be held by the official sector and seems to be in the process of being – for all practical purposes – transformed into a “zero-coupon perpetual bond”. The average maturity on the EU/EFSF loans (which will soon represent 65% of Greek debt) is increased to 30 years, while there is a ten-year grace period. At the same time, the interest rate on the bilateral loans is below 1%, while interest payments on EFSF loans have been deferred by ten years. This is the third time that euro area countries have restructured the maturities and interest rates of their loans to Greece and they seem comfortable to continue doing so. Rather than writing down Greek debt principal now, Europe is basically kicking the can (far) down the road. For now this should work well for Greece. The official sector debt not only has "indefinite" maturity, but as Credit Suisse points out, it is also extremely cheap. The new Greek all-in interest expense (including government bonds) as percentage of GDP (event after massive GDP declines) is now below that of the Eurozone as a whole and even below that of the US. Furthermore, the interest on bonds held by the EBK (Eurosystem NCBs) is expected to be returned to Greece.

Counterparties: Greece’s latest bond deal - Greece is buying back €10 billion of bonds it issued earlier this year, at between 30% and 40% of face value. As Landon Thomas notes, the expected average price of 32-34 cents on the euro represents a “premium of 4 cents above the level where the bonds traded at the end of last week”. The program is part of the agreement Greece reached on November 27 to decrease its debt burden to 124% of GDP by 2020. That agreement allowed Greece to remain on track to receive more than €40 billion in vitally needed aid. Sober Look cites a Credit Suisse report highlighting a huge positive of the plan for the Greek public sector: Following the buyback, more than 80% of Greece’s debt will be held by the official sector and seems to be in the process of being – for all practical purposes – transformed into a “zero-coupon perpetual bond”. The average maturity on the EU/EFSF loans (which will soon represent 65% of Greek debt) is increased to 30 years, while there is a ten-year grace period. Lee Buchheit, the dean of sovereign-debt restructuring, has referred to this as the “12th of never” strategy. And it works: Greece’s interest expense as a percentage of GDP will be below the Eurozone average — and even below the US. Simone Foxman writes that the EU is looking to Greek banks, in particular, to tender into the exchange — although some Greek bankers don’t seem to be very happy about the idea. It’s unclear what the contingency plan is if enough bondholders don’t take the plunge, beyond a “complete reassesment”.The WSJ’s Matthew Dalton and Matina Stevis observe that there isn’t much more the EU can do to help Greece, if this buyback doesn’t work.

The Greek debt deal: Goodbye uncertainty, hello uncertainty: For Greece, the underlying theme of this crisis has been swapping one set of uncertainties for another. In fact, sometimes the uncertainties have been exactly the same, simply repackaged and rebranded. From George Papaconstantinou's “loaded gun on the table,” to the first bailout in May 2010, from the mid-term fiscal plan in the summer of 2011 to the October 27 haircut agreement last year, from the PSI and second bailout early this year to the European assurances ahead of this summer's elections: each development has promised stability, continued membership of the euro and better days ahead; each has crumbled into an empire of dust.Now, hopes are being pinned to the Brussels debt deal agreed in the early hours of Tuesday morning. The immense relief at an agreement being reached is both understandable and justified. The prospect of the eurozone and International Monetary Fund failing to find any common ground on how to make Greek debt sustainable would have led to potentially devastating economic and existential implications for the single currency area and Greece. However, as this relief subsides, it becomes more evident that this deal takes a stab at providing a definitive solution to Greece's debt problem but falls short, leaving the sword of Damocles dangling over the country. Even if the debt reduction program goes according to plan – and there are doubts whether it will, especially due to questions over the bond buyback scheme - Greece will still have to contend with a debt of 124 percent of GDP in 2020. It is also doubtful whether enough has been done to remove the niggling doubts about Greece’s future in the minds of investors, who are so necessary to helping change the course of the Greek economy. JP Morgan referred to the Brussels pact as a moment of "creative ambiguity."

Greece begins the buyback process - Greek government debt yields hit another post-restructuring low (14.9%), as the government offered a better than expected price for the bonds. These bonds are now quite popular in the European markets - it's not every day that one gets a buyback from a sovereign. The minimum price offered in the buyback program is 30 cents on the euro (on the longest maturity, most discounted bonds). This steep discount is necessary in order reduce the amount of debt outstanding. It looks as though the bonds will trade in the 32-34 range. Greece expects to spend about €10bn of borrowed money in order to reduce the outstanding debt level by roughly €20bn (30bn of face costing 10bn). NYTimes: - Analysts said they expected that the average price would ultimately be 32 to 34 euro cents, a premium of about 4 cents above where the bonds traded at the end of last week.The buyback will be conducted using a "modified Dutch" auction.Reuters: - The buyback will be conducted through a modified Dutch auction in which investors declare what level they are willing to sell their bonds at before Athens sets a final price.  Such an auction creates competition among investors since anyone bidding at the upper end of the range risks being left out.

Merkel prepared to consider Greek losses - Chancellor Angela Merkel has said Germany would be prepared to consider forgiving Greece some of the emergency loans it has received from the eurozone once the debt-saddled country’s budget tips into surplus. “If Greece one day handles its revenues again without taking on new debt, then we must take a look at the situation and assess it,” the chancellor told Germany’s Bild am Sonntag newspaper, although she stressed this was “not going to happen before 2014-2015”, even if Greece’s adjustment programme was on track. Ms Merkel’s government fought off a recent attempt by the International Monetary Fund to persuade eurozone governments to agree to a near-term haircut. But even Wolfgang Schäuble, Germany’s finance minister, last week hinted it could come eventually. Berlin is worried about having to take losses on its loans to Greece before the next German election in September as the opposition could use this against Ms Merkel in the election campaign. At the same time, government officials acknowledge that Greece’s problems remain so big that pretending otherwise would be untenable.

Germany warns Ireland seeking Greek deal would be ‘disastrous’ - Germany last night warned Ireland that looking for lower interest rates and longer maturity on its bailout, similar to the deal for Greece, would be "disastrous". Ireland and Portugal drew up battle lines to fight for better conditions on their bailout loans but Germany and France tried to dissuade them, warning that they should try to avoid looking like Greece. Finance Minister Michael Noonan said that he would pursue the concessions given to Greece last week when the country is exiting the programme next year. "The idea that the EFSF money will come at nominal interest rates and that the maturities will be extended by 15 years — that is an interesting idea as part of an exit strategy. "We are looking at options to make our exit strategy more sustainable and get us back into the markets at low interest rates — in this context we will be exploring what possibilities are around that," he said as he arrived for a eurogroup finance ministers meeting in Brussels.

Greek Red Tape Costs 14 Billion Euros - Greece’s slow and burdensome bureaucracy is estimated to cost the cash-strapped country a total of 14 billion euros a year, ($18.26 billion) or 6.8% of Gross Domestic Product (GDP) – almost double the European Union average of 3.5%. That was the conclusion of a recent meeting between Administrative Reform Minister Antonis Manitakis, Development and Competitiveness Minister Costis Hatzidakis and a team from the Organization for Economic Cooperation and Development (OECD) in Athens. The OECD has sent a team of advisers to Athens to work with the government on cutting red tape, with the aim of reducing bureaucracy by 25% by the end of 2013, which could mean savings of as much as 7 billion euros, ($9.14 billion.) In a deal signed between Manitakis, Hatzidakis and the OECD, as Kathimerini reports, the Paris-based organization will undertake an inspection of 13 crucial sectors before making recommendations on how red tape can be reduced in order to cut administrative and legislative costs, and to boost the country’s flagging competitiveness.

Hedge funds hold out for more from Greece (Reuters) - Hedge funds are preparing to resist Greece's attempt to cut its debt by holding out against a government bond buyback in the hope of bigger gains further down the line. Greece had to offer a higher price than expected at a 10 billion euro ($13 billion) buyback on Monday after hedge funds buying bonds pushed prices higher.

IIF Bank Group: Greek Debt Buyback Likely To Reach Target -A bond buyback plan meant to shave roughly 20 billion euros off Greece’s debt burden is likely to succeed, a circumstance that would pave the way for the International Monetary Fund to approve the next tranche of bailout financing, the Institute of International Finance said Thursday. “With the likely participation from the Greek banks, it appears likely that the buyback operation could reach the target,” the IIF said in a report. The group represents over 400 of the world’s largest financial firms and negotiated the massive debt restructuring for private holdings of Greek sovereign debt earlier this year. The IMF has said a successful bond buyback program, one of a number of ways euro officials agreed earlier this week to cut Greece’s massive debt overhang, is critical to meet the fund’s criteria for continuing to finance the program. Others, including the IIF, previously said the success of the bond buyback was uncertain, potentially putting at risk the entire Greek program and threatening to rekindle contagion fears in other ailing euro-zone economies.

S&P cuts Greece to 'selective default' - Standard & Poor's has lowered Greece's credit rating to "selective default" in light of its offer to buy back bonds at well below their face value. Greece has announced plans to spend up to $13 billion on the buyback in a bid to bring its staggering debt load under control. S&P says it sees the buyback as essentially a distressed debt restructuring tantamount to a default. The rating agency says it may raise its long-term credit rating on Greece back to junk-grade "CCC" once the buyback is complete. Greece has fallen under S&P's default rating before. It returned to junk status this spring after it completed a major debt writedown with private creditors.

'Europe’s Avoidable Collision Course' - Tyler Cowen on Europe:... Until a broad solution is enacted, the system remains within the danger zone for a broader crash. ... Unfortunately, the relevant governments — and their citizens — still don’t seem close to accepting the onerous financial burdens they need to face. And when those burdens are unjust to mostly innocent voters, no matter whose particular story you endorse, acceptance becomes that much tougher.  Still, we shouldn’t forget that a solution exists. In essence, the required debt write-down is a large check lying on the table waiting to be picked up. No one knows how costly it is, but estimates have ranged from the hundreds of billions to the trillions of dollars. It need only be decided how to divide the bill. The reality is this: The longer that the major players wait, the larger that bill will grow. That they’ve yet to split the check is the worst news of all.

Is There a Case for Optimism About the Eurozone? - Yves Smith - I know, we don’t generally do optimism here at Naked Capitalism. And truth be told, I’m having trouble accepting the Financial Times’ John Dizard’s argument that things are going to get better in the Eurozone. He has two prongs to his argument. One is that the Eurocrats realize that they have painted themselves into a corner, which is leading to a second development: they are getting more serious about promoting innovation.  Let’s look at Dizard’s first cause for cheer: It’s not just that the current euro area policy “solutions” aren’t getting more ridiculously destructive; they are; it’s that I see more recognition of this on the part of the policy tribes at the national government level. That means that there is light at the end of the European growth tunnel… we are now near the end of the game of pretending these sorts of fixes will result in a new growth cycle. Just below the level of headline making political players on both the right and the left, the next generation of policy leaders are putting together policies that could actually work. Let me play devil’s advocate. Understanding reality does not mean you have the political degrees of freedom to change trajectory. Technocratic fixes on innovation policy, which is what Dizard is hanging his hat on (we’ll get to that soon) is not going to come even close to compensating for a Eurozone-wide austerity hair shirt. I’m reminded of time when policy makers clearly knew that the course they were committed to was failed, yet they felt they had no option. For instance, the start of World War I, when no one save Germany wanted conflict, yet the what was to be the Allied Powers were locked into mutual commitments, and the communication methods of the day did not allow them to communicate and devise other approaches; they felt honor and treaty bound to declare war.

European data still poor - The Eurozone services and composite PMI data was released overnight and like the manufacturing indexes earlier in the week, the data points to a continuing slowdown across the region: The eurozone’s recession looks to have deepened in the final quarter, with GDP likely to have fallen by considerably more than the modest 0.1% decline seen in the third quarter. France, Spain and Italy continue to see strong contractions, while a milder downturn is evident in Germany.“There are signs that the recession may have reached a nadir, however, at least in terms of the rate of decline, and it is reassuring to see that the final Eurozone PMI reading came in higher than the earlier flash estimate. Services in particular surprised to the upside, contracting to the least extent for three months, while manufacturing output fell at the slowest rate for seven months. Despite the easing in the rate of decline, the region sill looks set for further contraction in the early months of 2013, as weak consumer demand in many countries combines with low levels of business confidence and falling global trade. You can see from the chart below that the rate of decline has broadly slowed, but the region as a whole remains in contraction:

Paying Dexia’s Debts: The Risks of Globalized Finance -  Yves Smith - American readers may tell themselves that the failures and stresses of European banks are Europe’s problem. That’s a simplistic view. Major European banks are significant lenders in the US, particularly to corporations. And European banks also fed heavily at the trough of US rescue facilities, as did the bank in case study, Dexia.  Dexia is a classic example of a not very sophisticated bank deciding to get into the big leagues and coming to ruin. While Dexia foundered on rapid expansion into foreign markets, other large banks have come a cropper via rapid deregulation. Here the poster children were the Japanese banks, which had been highly regulated as of the early 1980s. The Ministry of Finance acceded to US pressure and liberalized the industry, with the result that the country blew a monster real estate-stock market bubble in an astonishingly short period of time. And the big international banks press for a lax regulatory regime to stay in place, arguing that their customers want sprawling international banks. But CFOs are leery of being hostage to one or two institutions; they recognize banks have different strength; they like using major French banks in France, German banks in Germany, because they understand they’ll get better local intelligence. The officialdom is not willing to point out that reason that bank management keep pumping to preserve these mega-institutions is that bank CEO pay is a function of bank size and complexity. So top management will keep trying to build more Dexias unless the regulators make it hard or costly to do so.

Sometimes smaller is not better - LARGE banks are generally accepted to be more “systemically” dangerous than small ones, and governments are quicker to save big institutions when they run into trouble. But small institutions can still cause a lot of havoc, especially if they are all doing the same thing. The collapse of America’s savings and loan industry (thanks to bad bets on real estate that were supposed to have helped them "earn their way out" of the punishment they endured in the 1970s) cost billions of dollars. The resulting damage to the banking system was one of the factors behind the original “jobless recovery” in the early 1990s. More recently, Spain’s bubble and bust can largely be blamed on the poor decisions of its local savings banks, or “cajas.” (Decisions made possible by reckless lending from the northern countries.) Bigger players like Santander and BBVA were less directly involved. According to an article in today’s Financial Times, Germany might be vulnerable in a similar way thanks to its enormous network of savings banks that operate underneath the regulatory radar:

Spain’s unemployment heads to 5 million as banks ready for cash -- The number of people officially registered as unemployed in Spain has edged up toward 5 million as the country's recession shows few signs of abating and its struggling banks await crucial bailout cash. Spain's Labor Ministry said Tuesday that unemployment rose a monthly 74,296 in November, or 1.5 percent, to a record 4.9 million. The country's unemployment rate is released separately and quarterly. It stood at 25 percent at the end of the third quarter, with the youth unemployment rate standing well above 50 percent. The figures come a day after finance ministers from Spain's euro partners approved the release of €39.5 billion ($51.6 billion) in bailout aid for Spanish banks worst hit by the property market collapse in 2008. The funds are part of a €100 billion rescue package earmarked for Spain's banks that was agreed with the other 16 European Union countries that use the euro back in June. The loan package is designed to ease the pressure on the Spanish government so it can concentrate on managing the national finances as well as those of the regions and avoid a full-blown sovereign bailout.

Spain tax amnesty brings in less than hoped for - Spain's finance Minister says a tax amnesty aimed at raising money for the recession-hit country only raised about half of what is was supposed to. Cristobal Montoro said Monday the amnesty had bought in just €1.2 billion — short of the government's €2.5 billion target. Under the amnesty which came into effect in June and ended last Friday, undeclared assets or those hidden in tax havens could be repatriated by paying a 10 percent tax, with no criminal penalty. Spain is in the throes of second recession in three years and has 25 percent unemployment. The government's tax revenue has plummeted during the downturn as Spain's companies struggle and consumers rein in their spending.

Spain hints it could miss year-end deficit target (Reuters) - Spain softened on Tuesday its insistence it would meet its year-end deficit target of 6.3 percent of Gross Domestic Product and said "good" reductions in spending by regional governments did not guarantee the objective would be achieved. At a news conference in Madrid, Treasury Minister Cristobal Montoro declined twice to confirm Spain would meet the European Union-agreed target and instead referred to the European Commission forecast of a budget gap of 7.0 percent of economic output. "The formal target remains the same and the European Commissioner for Economic and Monetary Affairs, when he assessed the measures taken by the government said Spain's deficit could be around 7 percent of GDP," Montoro said. "What is really important is to reduce the deficit. The quicker the better but without deepening the recession... We shouldn't focus too much on this magic figure of 6.3 (percent of GDP)," he added.

Barclays more optimistic on Spain than Goldman; increased funding requirements however pose risks - Unlike Goldman, whose economists do not expect Spain's GDP growth to turn positive until 2015 (see post), Barclays is projecting a much quicker recovery. They take a somewhat "contrarian" approach to the Eurozone periphery. Barclays Capital: - ... while fundamentals do not look great, the market’s expectations are already pessimistic. In the absence of a very weak global economic picture, growth might not worsen much more than current expectations, especially as ‘hard’ nominal budget targets have been broadly shifted into relative tightening targets. We expect growth to turn positive in Spain ... [starting] from Q1 2014...Barclays however expects Spain's bonds to come under some pressure in 2013 because the financing needs may be higher than the government is currently projecting. The risks include the need for Spain to issue additional paper in order to fund the regions (see post) as well as the ECB requiring Spain to cut its dependence on short-term funding (via bills). Such scenarios would most certainly involve Spain activating the OMT program.

Vital Signs Chart: Italian Bonds Indicate Easing Worries - Italian bond yields are falling. Greece’s creditors have made a deal to reduce the country’s debt burden, reassuring some investors about the bonds of other highly indebted European countries. Bond yields fall when their prices rise. On Tuesday, Italy’s 10-year government bond yield ended down 0.11 percentage point at 4.36%, the lowest level in about two years.

The defeat of the Euro bond vigilantes? - Paul Krugman has written many blog posts downplaying the fears of a sudden increase in US government bond interest rates (what he calls the invisible bond vigilantes). Despite continuous warnings by some market commentators about the risk of high inflation and the possibility that investors start dumping US government bonds, interest rates on these bonds have gone in the opposite direction and are now lower than when some of these fears were first expressed. In Europe the evolution of interest rates for governments bonds has been very different with several countries seeing very high levels and in some cases no access to funding. The fear was due to probability of default and potentially an exit from the Euro area, not so much inflation. But after a volatile period and following the statement of Mario Draghi supporting the Euro (no action yet) and the more recent agreement for funding for Greece and Spain, interest rates are coming back to levels which are not far from the historical average during the Euro period (and significantly lower than what these countries faced before joining the Euro).Below are 10-year government bond rates for Spain and Italy.

How can we be optimistic now, when we were pessimistic six months ago? - Eurointelligence - In a recent column, Wolfgang Münchau recently discussed the state of the market sentiment in Europe and rhetorically asked: “What I cannot get into my head is why anybody would be optimistic now when they were pessimistic a few months earlier. Can someone explain this to me?” Here is an attempt at an explanation. What may appear a schizophrenic attitude of certain actors is in fact perfectly rational in the framework of a financial system where debts take the form of tradable securities. In such an environment, debts cease to represent a relationship between a debtor and a creditor with a predefined timespan for repayment. Debts are exchanged on financial markets whose functioning requires liquidity - the immediate exchangeability between assets and cash. When the market is liquid, there are willing buyers and demand for more debt securities, so that the debtor has the possibility to constantly postpone the paying off of debt by simply contracting more loans at an accessible interest rate. However, the market is effectively liquid only as long as the confidence on the ability to sell assets at any time and with no uncertainty holds. When, no matter for what specific reason, such confidence disappears, demand for more debt also disappears and the existing debt suddenly becomes “unsustainable”. By now, it should be clear that solvency, in this framework, can not be interpreted as the ability to pay one’s debt back, rather the ability to guarantee its exchangeability on the market over a virtually infinite timespan.

Merkel: Worst Of Debt Crisis May Not Yet Be Over - German Chancellor Angela Merkel warned Tuesday that the worst of the Eurozone debt crisis might not yet be over. "Nobody can credibly forecast when the European sovereign debt crisis will be fully overcome," Merkel said in a speech at a party convention of her center-right Christian Democratic Union in Hanover. "If I wanted to make it easy for me, I could say the worst is over," the chancellor reasoned. "Yet, I'm saying here explicitly that we should remain cautious." Merkel once again stressed that the crisis won't be solved overnight. "One cannot say it often enough that the European sovereign debt crisis won't be solved with one magic bullet - sometimes it's eurobonds, sometimes it's debt haircuts," she insisted. "This crisis can only be solved through a long and arduous process." The chancellor noted that "the outlook for economic developments next year will not be as good as this year and this is even more true for our European neighbors."

ECB staff sees weak economic growth through 2014 - European Central Bank staff economists revised down their euro-zone economic projections for 2012 and 2013, ECB President Mario Draghi said Thursday, painting a picture of sluggish growth. ECB staff expect 2012 gross domestic product to shrink between 0.6% and 0.4%. In 2013, GDP is expected to come in between a 0.9% contraction and growth of 0.3%, while 2014 GDP is expected to grow between 0.2% to 2.2%. ECB staff in September had forecast 2013 GDP to range between a contraction of 0.4% and growth of 1.4%. Draghi told reporters at his monthly news conference that the economy was likely to remain weak into 2013, with a gradual recovery taking hold later next year, aided by an improved global backdrop and the ECB's own accommodative monetary policy.

ECB Leaves Rates Unchanged, Significantly Downgrades 2013 Economic Forecast; Is Italy Falling Into the Abyss? - Earlier today the ECB left its benchmark rate at a record low .75% stating the rate was "very accommodating". What's more interesting is the ECB's Significant Downgrades To Growth And Inflation ForecastsThe ECB downgraded its 2012 GDP forecast to a range of -0.6% to -0.4% from -0.6% to -0.2% previously, its 2013 GDP forecast to a range of -0.9% to 0.3% from -0.4% to 1.4% previously, and said its 2014 GDP forecast was for a range of 0.2% to 2.2% growth in the euro area. On inflation, the ECB forecasts 2.5% inflation in 2012 versus a range of 2.4% to 2.6% previously. 2013 inflation forecasts were lowered to a range of 1.1% to 2.1% from 1.3% to 2.5% previously. In 2014, the ECB sees inflation in a range of 0.6% to 2.2%. In the Q&A period following the meeting, ECB president Mario Draghi refused to answer the first question from a reporter regarding whether Italy is falling into the abyss. Draghi would not address the question, but I will. Let's take a look at the Markit/ADACI Italy Services PMI® released yesterday, for clues regarding the abyss.  Key Points:

  • Business activity and new work fall at accelerated rates
  • Steepest decrease in employment since June 2009
  • Input price inflation weakest for a year

Note to Italy: Please send us more Saracenos - William K. Black - I began writing this article while returning from presenting at a conference on Modern Monetary Theory (MMT) in Reggio di Calabria, Italy. At the conference, a Calabrian professor, Francesco Aiello, urged the position that macroeconomic policies designed to take Italy out of recession should not be adopted unless they could be demonstrated to increase worker productivity.  His position was that austerity – in the form of substantial cuts to public spending – should be the default position in Italy.  I responded that forcing Italy back into a gratuitous recession and causing millions of Italians to be unemployed was a self-destructive policy that caused immense waste and great suffering – and would greatly harm productivity.  MMT policies, particularly the jobs guarantee programs my colleagues have developed would add greatly to Italian productivity in multiple areas.  In this article I emphasize one of those areas, an area that illustrates how insane Italy’s austerity policies have become. Austerity has driven unemployment among young Italian adults to over 35%.  The result is that Italian university graduates are emigrating.  This loss of Italy’s greatest source of future productivity gains is particularly crippling because Italy has far fewer university graduates than most developed nations.

Silvio Berlusconi 'to run for Italy PM again': The party of former Italian Prime Minister Silvio Berlusconi has given strong indications that he will run for office again next year. The People of Freedom (PDL) party has cancelled its leadership primary and a senior figure said Mr Berlusconi would run for PM again. Earlier on Thursday the party abstained from confidence votes in parliament. Prime Minister Mario Monti's government won votes in both houses, but the move plunged Italy into uncertainty. Mr Berlusconi, 76, resigned in November 2011 over Italy's economic troubles and was convicted of tax fraud in October of this year. He is appealing against that. He is also on trial accused of paying for sex with an under-age prostitute, in the so-called "Ruby" case. He denies wrongdoing. Despite the veteran politician's legal battles, he plans to run again for office, according to PDL Secretary General Angelino Alfano

Ireland unveils 6th straight austerity budget with ?3.5 billion ($4.5 bln) in cuts, tax hikes — Ireland’s government unveiled plans for €3.5 billion ($4.5 billion) in new taxes and spending cuts in the debt-burdened country’s sixth straight austerity budget. Finance Minister Michael Noonan told a hushed parliamentary chamber that Ireland must keep slashing its deficits down to the eurozone limit of 3 percent of GDP and it “still has a long way to go.” He said Ireland expects to report deficits of 8.2 percent this year and 7.5 percent next year, but only if the country can deliver stronger economic growth in the face of deepening cuts.His 2013 budget includes plans for a new property tax; higher taxes on the incomes of pensioners who receive more than €60,000 ($78,000) annually; and €2 billion in cuts to government spending, including on state-subsidized medical care and payments to parents based on the number of children they have. The cost of buying and keeping vehicles, already exceptionally high by European standards, was due to increase again.

Europe Bank Cuts 2013 GDP Forecast - The European Central Bank slashed its economic forecasts for 2013, offering little hope to the euro zone's weaker members as they struggle to emerge from the region's debt crisis. The central bank took no new steps to spur business activity, instead putting the onus on governments to find ways to restore prosperity across the 17-member currency zone. "We've already done much that is needed," ECB President Mario Draghi said at a news conference after the monthly meeting. Officials voted to keep their main lending rate unchanged at 0.75%, a record low and a level that Mr. Draghi called "very accommodative." The ECB, as expected, said it would continue to offer unlimited loans to banks at least through the middle of next year.Separately, the Bank of England left its key rate unchanged at 0.5% and made no changes to its bond-purchase program. The ECB didn't rule out further interest-rate cuts. The rate of inflation should decline to 1.4% by 2014, it said, well below the ECB's 2% target. And some ECB officials appear to have favored a rate cut at Thursday's meeting.

Germany's growth forecast cut by Bundesbank -Germany's central bank, the Bundesbank, has cut its growth forecast for next year, saying the country's economy might be entering a recession. Growth in 2013 is now expected to be just 0.4%, compared with a forecast in June of 1.6%, but is expected to bounce back to 1.9% in 2014. Meanwhile, industrial output fell a steeper-than-expected 2.6% in October. It comes one day after European Central Bank president Mario Draghi cut his forecast for eurozone growth. Mr Draghi blamed his move on a stagnation in core eurozone countries, including Germany, France and the Netherlands. Southern European countries, such as Spain and Italy, have been in recession for more than a year, but the malaise has spread to the rest of the single currency zone via weak export demand and falling consumer and business confidence.

Europe’s Economic War of Attrition - Europe’s economic peace remains elusive for a simple reason: governments have still not found a way to generate the trifecta of growth, employment, and financial stability. The longer this prevails, the more oxygen is sucked out of sectors that remain relatively healthy – and for three distinct reasons. First, the eurozone economy is extremely interconnected. As such, it is only a matter of time until weakness in one part migrates to other parts. Witness what is happening in Germany, a well-managed country once thought itself immune from the troubles around it. After a period of record low unemployment, economic growth has slowed markedly, reaching just 0.2% in quarterly terms in July-September. On current trends, the fourth quarter’s growth rate will turn negative.  Second, the eurozone’s bailout bill continues to rise. Cyprus is expected to join the other three “program countries” (Greece, Ireland, and Portugal) in requiring considerable official financing; and, of the other three, only Ireland is getting close to regaining normal access to capital markets. With Spain also requiring billions more to recapitalize its banks, the contingent claims on taxpayers in the core countries continue to mount. Indeed, this is one of the factors that contributed to Moody’s decision – following Standard & Poor’s – to strip France of its AAA credit rating

120 million EU citizens at risk of poverty - The number of EU citizens at risk of poverty or social exclusion rose in 2011 to nearly 120 million, the Eurostat statistics agency said on Monday as the debt crisis continues to sap the economy. It said in 2011, 119.6 million people or 24.2 percent of the population in the EU's 27 member states were at risk of poverty, social exclusion or living in very low-employment households, up from 23.4 percent in 2010 and 23.5 percent in 2008, writes LETA/AFP. Bulgaria was most affected, with 49 percent of its people listed, followed by Romania and Latvia, each on 40 percent, Lithuania 33 percent, and then Greece and Hungary on 31 percent. The Czech Republic had the lowest rate at 15 percent, with the Netherlands and Sweden each on 16 percent, and Luxembourg and Austria both at 17 percent.

French jobless rate hits 10.3 pct, highest in 13 years -- France's unemployment rate rose to 10.3 percent in the third quarter of 2012, its highest since the third quarter of 1999, from 10.2 percent in the previous quarter, data published by national statistics office INSEE showed on Thursday. Youth unemployment rose more markedly, with the jobless rate edging up to 24.9 percent, from 23.6 percent, among people under 25 years old. That was higher than any quarter on records going back to the start of 1996. On the non-ILO measure issued by the Labour Ministry, the picture is even bleaker, with October data showing mainland jobless totals at 3.1 million, the highest in 14 years. Francois Hollande, who took over in May as France's first Socialist president in 17 years, has promised to reverse the upward trend by the end of 2013.

Greek Unemployment Rate Climbed to Record 26% in September - Greece’s unemployment rate extended its record high, climbing to 26 percent in September as the country heads into a sixth year of recession. The rate rose from a revised 25.3 percent in August, the Athens-based Hellenic Statistical Authority said in an e-mailed statement today. Joblessness is at the highest since the agency began publishing monthly data in 2004. Prime Minister Antonis Samaras’s coalition government last month approved austerity measures demanded by creditors to continue receiving aid. Greece has had two bailouts, the first in May 2010, from the European Union and the International Monetary Fund. The recession and deepening labor slump have been exacerbated by spending cuts and tax increases imposed to trim a budget deficit that was more than five times the euro-area limit in 2009. The economy will shrink as much as 4.5 percent next year and unemployment is seen at over 26 percent in 2013 and 2014, the Athens-based Bank of Greece (TELL) predicted on Dec. 3.

EU health officials fear for disease control in Greece - Greek hospitals are in such dire straits that staff are failing to keep up basic disease controls such as using gloves and gowns, threatening a rise in multidrug-resistant infections, according to Europe's top health official. Greece already has one of the worst problems in Europe with hospital-acquired infections, and disease experts fear this is being made worse by an economic crisis that has cut health care staffing levels and hurt standards of care. With fewer doctors and nurses to look after more patients, and hospitals running low on cash for supplies, risks are being taken even with basic hygiene, said Marc Sprenger, director of the European Centre for Disease Prevention and Control (ECDC). "I have seen places...where the financial situation did not allow even for basic requirements like gloves, gowns and alcohol wipes," Sprenger said after a two-day trip to Athens, where he visited hospitals and other healthcare facilities. "We already knew Greece is in a very bad situation regarding antibiotic resistant infections, and after visiting hospitals there I'm now really convinced we have reached one minute to midnight in this battle,

Depression Deepens Greek Middle Class Despair With Crime - Anastasia Karagaitanaki, 57, is a former model and cafe owner in Thessaloniki, Greece. After losing her business to the financial crisis, she now sleeps on a daybed next to the refrigerator in her mother’s kitchen and depends on charity for food and insulin for her diabetes.“We are waiting every month for my mother’s pension,” Karagaitanaki said. “If my mother dies, what can I do? Everyone here is dependent on their parents' pensions.” For thousands of Greeks like Karagaitanaki, the fabric of middle-class life is unraveling. Teachers, salaries slashed by a third, are stealing electricity. Families in once-stable neighborhoods are afraid to leave their homes because of rising street crime. Even as Greece reduces its deficit and accepts a European aid package that may include a 34.4 billion-euro loan approved last month, conditions for Greece’s middle class are likely to worsen next year as austerity measures take a bigger bite, “I don’t think there is a single Greek citizen who believes that things will be better,” Tzogopoulos said. “There is no money for people to spend.”

The Austerity Campaign Turns Ambivalence about Our Own Nature Against Us - The success of the austerity campaign in capturing the American and European political process is remarkable considering that it prescribes exactly the opposite of what factually grounded economic analyses would recommend. In the current American “fiscal cliff” negotiations, the leadership of both sides of the negotiation are pushing for different forms of austerity, with no effective organized force in government working against this economic madness. Austerity is claiming victims around the world as we speak, with many of the economies of the Euro-zone now in a self-induced recession because of the politics of austerity.  Spain, Portugal, the Netherlands, Slovenia, Czech Republic, Hungary, Ireland, Greece, Great Britain, and Italy are in recession and even Germany appears to now be suffering the effects of the austerity of which its politicians were so enamored. The only economic rationality that austerity seems to serve is to bolster the political-economic position of large creditors and financial institutions, in the United States represented by Wall Street, as they hope to dismember the assets of the social welfare states of the industrialized world and find new “markets” for their speculative financial products and services.  These wealthy groups have sponsored front organizations and think tanks that push for austerity and their wealth has enabled them to bombard legislators and government leaders with analyses and propaganda.  But their push has also taken advantage of “a fifth column” within the ranks of their would-be opponents and victims. The austerity campaign has utilized a series of misunderstandings about how economies work and about human nature that stretch back many years, with roots in the most powerful of social sciences, economics.

Finnish Economy Joins Euro Area in Recession on Investments - Finland’s economy unexpectedly joined the euro area in a recession in the third quarter as the region’s debt crisis weighed on business confidence and sapped investments. Gross domestic product contracted 0.1 percent from the prior quarter, when it shrank 1.1 percent, Statistics Finland in Helsinki said on its website today. That missed the estimates of three economist surveyed by Bloomberg for growth of 0.2 percent to 0.4 percent. On an annual basis, GDP fell 1.2 percent. Finland’s economy is stalling as businesses cut investments amid concern over falling demand as the 17-nation euro area struggles to contain a debt crisis now in its fourth year. Investments fell 1.1 percent from the previous quarter, with construction spending dropping 1.4 percent, and machinery and equipment investments contracting 2.5 percent.

ECB mulls negative rates as Europe’s economic crisis deepens -The European Central Bank has slashed its eurozone growth forecasts and warned that recession will drag on into the middle of next year, sending the euro plunging below €1.30 to the dollar. Mario Draghi, the ECB’s president, said the governing council had discussed a cut in overnight deposit rate to below zero for the first time, and was "operationally ready" to do so if needed. The comment sent the euro into a nosedive, dropping from $1.3075 to $1.2950 in just two hours. "A negative deposit rate is the mother of all sell signals for a currency," said Hans Redeker, currency chief at Morgan Stanley. "You only do it if your purpose is to drive down the exchange rate to help exports. We know from Japan’s experience that you lose control of monetary policy if you go that route. We don’t think it will happen because the cost is too high, so we expect the euro to rebound." Mr Draghi struggled to explain why the ECB held its main interest rate at 0.75pc, even though it expects economic contraction of 0.3pc next year, with inflation falling below its 2pc target. He said there had been a "wide discussion", a code term implying that several members pushed for a cut. "It’s a dereliction of duty. If the outlook is so bad, get ahead of the situation and cut now,"

Is it time to write off Europe for the next decade? -The EU is a morally bankrupt blind behemoth that, in a doomed attempt to survive, destroys everything around it just to keep itself standing. In that, it is hardly different from several incarnations of the 20th century politburos in Russia and China - and those are by no means the darkest comparisons that could spring to mind. There are tons of people working in and for the EU, some of whom are smart while others are not, some who are honest and some who are just self-centred , but the apparatus has become a vortex that sucks in all of them. There many be just a small window left for Europeans to retain a grip on democracy. There's not much left. Stock markets may give the impression that things are going fine, but that is possible only because increasingly severe austerity measures are spreading rapidly, and have now reached the core, not just Greece and Spain. The EU induced illusions will keep coming fast and furious, however, until they don't. And then it will be too late for democracy.

Deficit cut is taking longer than planned  - Chancellor George Osborne has admitted that curbing the UK's financial deficit is "taking longer" than planned. But he told the BBC the government was "making progress" and that to "turn back now would be a complete disaster". Mr Osborne, who delivers his Autumn Statement on Wednesday, said well-off people would "pay their fair share". "The deficit is down by a quarter. There are a million more jobs in the private sector and to turn back now, to go back to the borrowing and the debt and the spending that Ed Balls represents would be a complete disaster for our country." He added that some people were calling for more borrowing and others for more spending cuts, but the government had "got the right plan and we should stick to that plan".

Triple Dip Recession in UK Likely -- Unfortunately, despite the post-Olympic bounce in GDP, other aspects of the UK economy look pretty grim. In manufacturing and industrial output, there has been no real recovery. In manufacturing it is not so much a triple dip recession – more a prolonged double dip. Manufacturing output is 2.1 per cent lower in October 2012 compared with October 2011; Looking at data since 2007, we see a similar pattern to GDP. Industrial production = manufacturing output, + mining + water supply + electricity, gas and steam These figures for industrial production mean Q4 growth is likely to be negative – unless there is a bounce in the service sector.

Does the UK’s AAA rating matter? -Will the UK lose its AAA and does it matter? The answer to the first question is "probably" - although the timing is uncertain. And the answer to the second question is, "Possibly not, in an economic sense, but probably a good deal, in a political sense." The reason the AAA is in jeopardy is that the government is taking a bit longer than it promised to stabilise public sector debt as a percentage of GDP. Even with the benefit of the significant new interest rate subsidy the government receives on the third of its debt held by the Bank of England, and despite a windfall of more than £28bn from the liquidation of assets held in Royal Mail's pension fund, public sector net debt is rising far faster and for longer than the Treasury hoped a year ago (although, to further confuse like-for-like comparisons, there is also a negative impact from reclassifying Northern Rock and Bradford & Bingley debt). So, on the definitions used in this country, net debt now peaks at 79.9% of GDP (the annual value of what the UK produces) in 2015-16, before falling very slightly to 79.2%. And on the eurozone's calculation, UK public sector debt reaches a peak of 97.4% in 2015/16 (remember that France lost its AAA on the basis of a profile for the evolution of its debt not conspicuously worse than the UK's - although arguably with fewer available economic remedies, because of its membership of the currency union).

Welcome to Japan-style crisis management - The so-called Macmillan Gap, named after a committee that looked into the inadequacy of small business funding in the 1930s, has re-emerged with a vengeance, as has the question of how the banks can be encouraged to play a wider role in restoring economic growth. There is no doubt that part of the problem lies in the banks’ inadequate cushion of capital. So it is entirely logical that the Bank of England’s latest financial stability report should call for the banks to bolster their capital base in order to boost their capacity for lending to industry and commerce. Yet there is a chicken-and-egg problem here that relates to investors’ readiness to stump up. For as the Financial Policy Committee itself points out, the banks sell at a discount of around a third to net asset value because of uncertainty about the value of assets that are difficult to price and a well justified conviction that the assets are overvalued.

Loss of income caused by banks as bad as a ‘world war’, says BoE’s Andrew Haldane - The financial crisis has been as economically devastating as a world war and may still be a burden on “our grandchildren”, a top Bank of England official has said. Andy Haldane, the Bank’s executive director for financial stability, added that public anger at the banks was fully justified and that pay in the industry remained too high. “In terms of the loss of incomes and outputs, this is as bad as a world war,” he said. “It would be astonishing if people weren’t asking big questions about where finance has gone wrong. “If we are fortunate, the cost of the crisis will be paid for by our children. More likely it will still be being paid for by our grandchildren. There is every reason why the general public ought to be deeply upset by what has happened – and angry.” Four years since the crisis struck, the economy is still 3pc smaller than at its peak. The scale of the problems will be exposed again on Wednesday when the Chancellor updates the country on the economic outlook and his austerity plans.

BOE's Andy Haldane Finds Impact Of Central Bank Policies As Bad As A "World War" -  Those curious why Goldman Sachs felt compelled to undertake a quiet an unexpected by most (if not us) peaceful coup of the Bank of England, it is because the oldest central bank still has among its ranks people such as Andy Haldane, who in a world populated by deranged textbook economists who don't understand that it is the central bank policies' fault the world will be forever mired in substandard growth and soaring unemployment, is a lone voice of reason (recall BOE's Andy Haldane Channels Zero Hedge, Reveals The Liquidity Mirage And The Collateral Crunch). And since the BOE has no choice but to join all its peers in a global race to the bottom (largely futile in a world in which currencies exist in a closed loop, and in which if everyone devalues, nobody devalues as even Bill Gross figured out yesterday), it is prudent to listen to Haldane's warnings while he is still in the employ of Her Majesty the Queen. Such as his latest one, in which he says that the scale of the loss of income and output as a result of the crisis started by the banks was as damaging as a "world war."

Student suicides rise along with debt burdens - The number of students taking their own lives rose by 50 per cent in four years, figures have shown. The statistics, released via a Freedom of Information request made by Ed Pinkney, the founder of Mental Wealth UK, a student mental health charity, was made public through the Office for National Statistics website last week. According to the data, between 2007 and 2011 the number of suicides by male students in full-time higher education rose by 36 per cent, from 57 to 78. The number of female student suicides per year almost doubled over that time period, from 18 to 34. According to Mr Pinkney, the figures come in the light of growing pressures on students caused by rising costs and gloomy job prospects.

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