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

Saturday, January 5, 2013

week ending Jan 5

Fed's Balance Sheet Expands in Latest Week - The Fed's asset holdings in the week ended Jan. 2 increased to $2.919 trillion, up from $2.909 trillion a week earlier, it said in a weekly report released Thursday. The Fed's portfolio has tripled since the financial crisis of 2008 and 2009 as the central bank bought government bonds and mortgage-backed securities in an effort to keep interest rates low and to stimulate the economy. If the Fed buys bonds at the current pace through the end of 2013, it will be expanding its portfolio by another $1.02 trillion. Ending the program could send shockwaves through markets, which have grown accustomed to repeated Fed stimulus. Thursday's report showed total borrowing from the Fed's discount lending window was $587 million Wednesday, down from $613 million a week earlier. Commercial banks borrowed $29 million Wednesday, up from $26 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts rose to $3.241 trillion, from $3.238 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.893 trillion, up from $2.891 trillion in the previous week. Holdings of agency securities fell to $311.24 billion, down from the prior week's $311.05 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--January 3, 2013: Federal Reserve statistical release

Fed Debated Ending QE in 2013 Amid Concern Over Balance Sheet -- Federal Reserve officials, expressing concern over their swelling balance sheet, began debating an end to their unprecedented bond-buying as early as this year even while preparing to boost stimulus to a new record. “Several” members of the Federal Open Market Committee said it would “probably be appropriate to slow or stop purchases well before the end of 2013,” according to minutes of their Dec. 11-12 meeting released yesterday. A “few” others were willing to let the program run to the end of the year while “a few others” didn’t give a time frame. Chairman Ben S. Bernanke is exploring the timing for concluding his four-year campaign to cut borrowing costs and combat unemployment through unorthodox monetary easing. The FOMC minutes reveal concern over the challenge of shrinking a balance sheet that may grow to more than $4 trillion while potentially distorting financial markets and providing less kick to growth.

Fed split over when to halt QE3 - Officials at the US Federal Reserve are split on whether to keep buying assets until the end of 2013, according to the minutes of their December meeting. The minutes show the new front line for debate on the rate-setting Federal Open Market Committee and give the first indication of how big the Fed’s third round of quantitative easing – so-called QE3 – may be in total.   If the Fed keeps buying at the current pace of $85bn a month for the rest of 2013, it would accumulate another $1tn in long-term assets. Under the QE3 programme, launched last September, the Fed is buying long-dated Treasury and mortgage-backed securities to drive down long-term interest rates and stimulate the sluggish economic recovery. According to the minutes, a “few” of the 12 voting FOMC members want to keep buying assets until the end of 2013. They are backed by a “few” more who want “considerable accommodation” but did not set a date. But “several” other members want “to slow or to stop purchases well before the end of 2013” and one member opposes them altogether. In standard Fed language, a few means two or three, while several might be four or five. That suggests the committee is evenly split. New voting members will rotate on to the FOMC in 2013 but they are unlikely to change its behaviour much.

At Meeting, Debate Over Length of Fed Program - Just a few months after announcing a campaign to reduce unemployment, Federal Reserve officials are already debating how soon to stop it, reflecting persistent internal divisions about the effort’s value. At a meeting in December, several members of the Fed’s policy making committee argued that purchases of Treasury securities and mortgage-backed securities should be reduced or ended “well before the end of 2013,” according to an account of the meeting the Fed published Thursday after a customary three-week delay.  The Fed announced after the meeting that it would keep buying assets until the pace of job creation improved substantially, part of an effort to increase the impact of its policies by announcing economic objectives rather than end dates. But the account shows that many members of the 12-person committee continue to think in terms of end dates, partly because they are worried about the potential costs. The concerns include the potential disruption of financial markets and the delicate balance between encouraging private borrowing and unleashing speculation. Fed officials professed less concern that the purchases could loosen the Fed’s grip on inflation. They noted that inflation remained low, and that they expected it to stay under control. “While almost all members thought that the asset purchase program begun in September had been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased,” the meeting account said.

FOMC Minutes: "Several" members expect QE3 to end in 2013 - It appears several members expect QE3 to end in 2013. Also, all but one member was in favor of economic thresholds for raising the Fed Funds rate. From the Fed: Minutes of the Federal Open Market Committee, Meeting of December 11-12, 2012. Excerpt:  In their discussion of monetary policy for the period ahead, all members but one judged that continued provision of monetary accommodation was warranted in order to support further progress toward the Committee's goals of maximum employment and price stability. The Committee judged that such accommodation should be provided in part by continuing to purchase MBS at a pace of $40 billion per month and by purchasing longer-term Treasury securities, initially at a pace of $45 billion per month, following the completion of the maturity extension program at the end of the year. The Committee also maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS into agency MBS and decided that, starting in January, it will resume rolling over maturing Treasury securities at auction. .. In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases. Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.

Minutes of the Federal Open Market Committee - FRB

The New Tell-All Fed - WITHIN moments of their release on Thursday afternoon, the minutes from the Federal Reserve’s December policy meeting caused a bond-market sell-off. Yields on Treasury bonds jumped as traders quickly dumped 10- and 30-year government bonds. What was the profound economic news that caused this mini-convulsion in the market? Did the minutes reveal a weak spot in the nation’s economic-growth prospects? Was word of December’s employment numbers, scheduled for announcement on Friday, somehow leaked? No. What spooked traders was surprise. The Fed minutes revealed deeper divisions within the central bank’s ranks about the Fed’s aggressive bond-buying efforts than many observers had supposed. The events in the bond market today are an instructive lesson in the power of communication: when the Fed speaks, the fewer surprises, the better.

Counterparties: A Fed divided - The minutes from the December meeting of the Fed’s Open Market Committee came out today and managed to include everyone’s least favorite word: “divided”. At the same time that the Fed made the unprecedented move to tie monetary policy to specific unemployment targets — promising to keep rates low until unemployment fell below 6.5% — “several” members of the committee wanted to end or slow the central bank’s asset purchasing program “well before” the end of the year. Joe Weisenthal calls today’s news the “first real signal of an eventual return to normal policy”. James Hamilton has a great look at the Fed’s $3 trillion balance sheet, through its various asset-buying programs since the crisis — QEs 1-3, if you will. The takeaway: the unprecedented programs may have helped employment “a little” and done no harm to inflation. (Bill Gross, in seemingly his millionth such warning, thinks this “inflation dragon” is flying our way right now). By almost every account, the fiscal policy has been even more heterodox. The fiscal deal just passed by Congress goes against just about every major school of economic thought and does nothing for unemployment or the deficit. Cullen Roche says the deal will cut about 1.3% from 2013 GDP; Brad DeLong puts it at more like 1.75%. To Chris Dillow, this all means the basic post-war role of politicians in providing economic certainty is gone. To Kevin Logan, HSBC’s chief economist, Congress is now the biggest risk to the economy. Justin Fox says fiscal showdowns won’t go away anytime soon — it’ll take a long while to wash the anti-government ranks out of the Republican Party. As for the Fed, Cardiff Garcia smartly warns us not to freak out: the Fed’s asset purchases are intended to juice the “near-term momentum of the economy”. If the economy sours again, the Fed could always just begin its largely unproven, possibly bubble-causing asset-purchasing program all over again

Fed’s Plosser Says Monetary Policy Thresholds Positive Step - The Federal Reserve‘s recent adoption of new monetary policy guidance is “a step in the right direction,” but it fails the test of being a systematic approach to action, a veteran central banker said Friday. The new Fed thresholds state the central bank will continue to keep interest rates low until the unemployment rate hits 6.5%, so long as expected inflation doesn’t breach 2.5%, as compared to the Fed’s target of 2%. “This is not what I would have put in place,” Federal Reserve Bank of Philadelphia President Charles Plosser told reporters on the sidelines of the American Economic Association annual gathering in San Diego. But compared to the Fed’s calendar-based interest-rate commitments, it is an improvement, the official said.

Jon Hilsenrath's 589 Word Instanalysis Of The Fed Minutes - It took the WSJ's Jon Hilsenrath, who one more time is modestly relevant in a world in which QE is implied until infinity or until the Fed loses all control of the money creation process, 12 whopping minutes to release a 589-word article analyzing the FOMC minutes. At least we know one of the people who had the embargoed version hours ago. We are confident he did not leak their content to anyone. Hilsenrath's prepared take: "A new fault line has opened up at the often-divided Federal Reserve: When to halt the bond-buying programs that are adding $85 billion a month of Treasury and mortgage securities to the central bank's assets. Minutes of the Fed's Dec. 11-12 policy meeting showed that officials were divided about when to halt the programs, with a few wanting to continue them until year-end, several others wanting to end the programs well before then and some wanting to halt them right away. While exposing the rift, the minutes left little clear indication which course the central bank would choose. In its official policy statement, it has been saying since September that it would continue the bond-buying programs until the job market substantially improves...  It is a hugely consequential decision for the Fed and likely the next big challenge for Ben Bernanke in what could be his final year at the helm of the central bank, where he has been chairman since 2006."

QE3 and beyond - Now that we've closed the books on 2012, I thought it might be useful to take a look at where monetary policy has led us over the last four years. The fireworks began when the collapse of Lehman Brothers in September 2008 led to a freezing of credit for all kinds of essential economic activities. The Fed stepped in with a number of emergency lending programs such as the Commercial Paper Lending Facility to help the commercial paper market continue to function, currency swaps to assist foreign central banks cope with emergency dollar needs, and the Term Auction Facility to provide direct liquidity to U.S. banks. These programs totaled over $1.7 trillion at the end of 2008, but have since all been wound down.  This led to the Fed's decision in March 2009 to replace the emergency lending with large-scale purchases of mortgage-backed securities guaranteed by Government Sponsored Enterprises (the light yellow region in the graph below) and to a lesser extent long-term U.S. Treasury securities (light blue). These purchases were popularly described in the financial press as the first round of quantitative easing, or QE1. Their effect was to keep the total value of assets held by the Federal Reserve from falling as the emergency lending programs declined.

“The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter”: Christina Romer and David Romer - There is little doubt that an overinflated belief in the power of monetary policy has contributed to some major policy errors. Most famously, policymakers in the mid-1960s believed that they faced an exploitable long-run inflation-unemployment tradeoff, and thus that monetary policy could move the economy to a sustained path of low unemployment and low inflation. This belief led them to pursue highly expansionary policy, starting the economy down the path to the inflation of the 1970s. The record of such errors has led many to argue that perhaps the most important attribute of a successful central banker is humility. In this paper, we present evidence that the opposite belief—an unduly pessimistic view of what monetary policy can accomplish—has been a more important source of policy errors and poor outcomes over the history of the Federal Reserve. At various times in the 1930s, faced with the Great Depression, Federal Reserve officials believed that the power of monetary policy to combat the downturn or stimulate recovery was minimal. In both the mid- and late 1970s, faced with high inflation, policymakers believed that monetary policy could not reduce inflation at any reasonable cost.

Fed’s Historic Error Is in Not Acting Boldly Enough, Paper Argues - Federal Reserve officials have been underestimating their powers and have wounded the economy in the process, a new research paper argues. That observation will certainly surprise many in light of the wide range of unprecedented actions taken by the central bank in recent years. That said, a new paper by University of California, Berkeley, economists Christina and David Romer said policy makers need to embrace the powerful tools at their disposal, believing that when they don’t, the economy pays the price. The paper will be presented Saturday at the American Economic Association annual gathering in San Diego. The research is titled “The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter.

Make nominal spending the new target - In 2012, we saw a growing consensus that the tenets of modern central banking are inadequate. After the inflationary 1970s, the big central banks moved towards inflation targeting. And for a quarter century this new policy regime seemed to work well, producing relatively stable growth and low inflation. But now it has becoming clear that something is wrong with the standard model. Consider the debate over fiscal policy. Inflation targeting was supposed to make demand-side fiscal policy obsolete. After all, both monetary and fiscal policy affect the exact same variable – total nominal spending, or what economists call “aggregate demand”. In 2012, we saw a growing consensus that the tenets of modern central banking are inadequate. After the inflationary 1970s, the big central banks moved towards inflation targeting. And for a quarter century this new policy regime seemed to work well, producing relatively stable growth and low inflation. But now it has becoming clear that something is wrong with the standard model. Consider the debate over fiscal policy. Inflation targeting was supposed to make demand-side fiscal policy obsolete. After all, both monetary and fiscal policy affect the exact same variable – total nominal spending, or what economists call “aggregate demand”.

Fed’s Lacker Warns of Potential Inflation - The Federal Reserve‘s growing balance sheet leaves the central bank vulnerable to “seemingly minor miscalibrations” in policy and may lead to rising inflation next year, Richmond Fed President Jeffrey Lacker said Friday. “I see an increased risk, given the course the committee has set, that inflation pressures emerge and are not thwarted in a timely way,” Mr. Lacker said in remarks prepared for a Maryland Bankers Association forum. “I intend to remain alert for signs that our monetary policy stance needs adjustment.” The Fed’s policy committee last month said it would start pumping more money into the financial system with new bond purchases. The effort is meant to drive down long-term interest rates to encourage borrowing, spending and investing.

Somewhere Over the Rainbow - At the beginning of the last decade I wrote that the US economy would be lucky to grow at 2% for the entire decade. Even though I was called a “big bad bear” at the time, it turns out that I was an optimist. The economy grew at 1.7%.  Last summer Bill Gross (chief investment officer of PIMCO) forecast that the US economy would grow at only 1.5% over the next decade. Recently, Jeremy Grantham of GMO (one of my investment heroes) wrote a paper called On the Road to Zero Growth, in which he forecast that “Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.”Adding further to the sentiment, Dr. Robert Gordon, a very respected economist, wrote a paper for the National Bureau of Economic Research provocatively titled Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds. Quoting from the abstract: Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. A provocative “exercise in subtraction” suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.” Even if Gordon does measure growth somewhat unconventionally, his is a very sobering forecast.

‘Cliff Shock’ Joins List of Annual Economic Risks - Forecasting the economy is hard enough. Now forecasters have to add “fiscal dysfunction” as a wild card to their computer models. No matter what happens on taxes and spending in the next week or so, one lingering impact from the current cliffhanger is that fiscal uncertainty has become the norm. As a result, even if economists are dead-on correct about the economy’s fundamentals, a future Washington standoff–another fiscal cliff–could undermine growth. Cliff shock isn’t the same as forecasting fiscal revenue and spending. Cliff shock is the political gamesmanship that holds federal finances hostage at least once a year. In the future, financial markets will be more volatile, businesses will hold back on expansion and hiring, and consumers will feel less confident about their economic futures than they would absent budget posturing. Jason Saving, senior research economist at the Federal Reserve Bank of Dallas, wonders if the U.S. has “entered an era of permanently greater polarization in Congress and permanently higher fiscal policy uncertainty.” “If that’s the case,” he writes in the Dallas Fed’s Economic Letter, “today’s fiscal cliff may be a harbinger of what’s to come.”

Economic Costs of Budget Impasse Inevitable, Experts Say - Even if President Obama and Republicans in Congress can reach a last-minute compromise that averts some tax increases before Monday’s midnight deadline, experts still foresee a significant drag on the economy in the first half of 2013 from the fiscal impasse in Washington. While negotiators in the capital focus on keeping Bush-era tax rates in place for all but the wealthiest Americans, other tax increases are expected to go into effect regardless of what happens in the coming days. For example, a two percentage point jump in payroll taxes for Social Security is all but certain after Jan. 1, a change that will equal an additional $2,000 from the paycheck of a worker earning $100,000 a year. Many observers initially expected the lower payroll-tax deduction rate of 4.2 percent to be preserved. But in recent weeks, as it became clear that political leaders were prepared to let that rate rise to 6.2 percent, economists reduced their predictions for growth in the first quarter accordingly. Largely because of this jump in payroll taxes, Nigel Gault, chief United States economist at IHS Global Insight, is halving his prediction for economic growth in the first quarter to 1 percent from an earlier estimate of just over 2 percent. That represents a significant slowdown in economic growth from the third quarter of 2012, when the economy expanded at an annual rate of 3.1 percent.

Congress Ushers in 2013 with a Resolution to Push the Economy to the Brink -  Past the final hour the House finally passed a bill to avert the fiscal cliff. The Senate had passed the legislation in the wee hours of New Years Day and after much brew ha-ha the House allowed an up and down vote on the Senate bill. We have listened to months and months of squabbling, bringing the economy to the brink over a very simple final result that could have been passed months ago.  The bill title is H.R. 8, American Taxpayer Relief Act of 2012. At one point the title changed to the Job Protection and Recession Prevention Act of 2012 , in an effort to hammer home the message Congress had set up such a poison pill with tax increases and budget cuts at the same time it would send the economy into recession. The Senate vote was 89 to 8 with 3 not voting and the House final vote was 25 to 167 with almost all Democrats voting for the bill. After final passage, President Obama immediately came out to the podium to make it clear Congress could not hold the debt ceiling hostage. Many Republicans in the House are now threatening to not raise the debt ceiling which Obama said is not up for debate. Thus, the opening salvos of Congressional battle number two have sounded and the next political bloodbath where civilians are wounded is clearly the requirement to raise the debt ceiling. The end result of last debt ceiling hostage crisis was to only lower the United States credit rating and make America in general look silly. House leader John Boehmer issued a statement on their intent to cut America's social safety net, that's Medicare and social security. Battle number three is clearly being laid out and once again American citizens are in the crosshairs.  Now the focus turns to spending. The American people re-elected a Republican majority in the House, and we will use it in 2013 to hold the president accountable for the ‘balanced’ approach he promised, meaning significant spending cuts and reforms to the entitlement programs that are driving our country deeper and deeper into debt.  Congress now moves to spending cuts legislation and the never ending drum beat is to attack social safety nets and reduce social security benefits. It is now official. The biggest threat to the United States economy is Congress and Republicans have vowed to keep this up all year.

The Economy’s Trajectory in 2013 - The agreement arrived at on New Year’s day implies that output at the end of 2013 will be between 0.6 to 1.0 percentage points higher than it otherwise would be under what was until New Year’s, current law, according to CBO’s preferred multipliers. The uncertainty arises in part from the unresolved nature of the sequester deal. 4 quarter growth by 2013Q4 would be 1% (conditional on the CBO's August 2012 forecast) assuming the sequester is held in abeyance. If the sequester is fully put into effect, growth would be under 0.6%. These are calculations based on the CBO’s preferred multipliers; it’s likely that the multipliers are higher, given the accommodative nature of monetary policy.  Using the high multiplier estimates, and assuming that no sequestration eventually occurs, then growth would be 2.3% 4q/4q. Working in the opposite direction is uncertainty. Given that the sequester issue and debt ceiling increase will come up in two months, one could reasonably expect that policy uncertainty will persist (exactly the concern many conservatives have highlighted over the past years).

Goldman's Jan Hatzius On Sectoral balances, NGDP Targeting, And The US Recovery - In a recent report, Goldman's top economist Jan Hatzius predicted that finally, the US would see a real growth acceleration in the second half of 2013. At the core of his call -- which was made in a note titled The US Economy in 2013-2016: Moving Over the Hump -- was this simple chart: Goldman SachsThe chart demonstrates a critical economic concept: Government deficits (the grey line) are essentially the mirror image of private sector savings (the dark black line). When the private sector tries to save money aggressively (as happened during the crisis) the government deficit will inevitably explode (as happened). Periods associated with small government deficits (such as the late '90s) are associated with extreme private sector leveraging. The key to understanding the economy, and forecasting growth, is to think about which sectors are increasing and decreasing their savings. In a 30-minute conversation with Business Insider conducted last Friday, Hatzius explained: "...every dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero. That’s the starting point. It’s a truism, basically. Where it goes from being a truism and an accounting identity to an economic relationship is once you recognize that cyclical impulses to the economy depend on desired changes in these sector's financial balances."

Forecast 2013: Contraction, Contagion, and Contradiction - James Howard Kunstler -  The people who like to think they are managing the world's affairs seem fiercely determined to ignore the world's true condition -- namely, the permanent contraction of industrial economies. They just can't grok it. Two hundred years of cheap fossil fuel programmed mankind to expect limitless goodies forever on an upward-swinging arc of techno miracles. Now that the cheap fossil fuels have plateaued, with decline clearly in view, the hope remains that all the rackets of modernity can keep going on techno miracles alone.  Meanwhile, things and events are in revolt, especially the human race's financial operating system, the world's weather, and the angry populations of floundering nations. The Grand Vizier of this blog, that is, Yours Truly, makes no great claims for his crystal ball gazing (Dow at 4,000 - ha!), but he subscribes to the dictums of two wise men from the realm of major league baseball: Satchel Paige, who famously stated, "Don't look back," and Yogi Berra, who remarked of a promising rookie, "His whole future's ahead of him!"  In that spirit, and as for looking back, suffice it to say that in 2012, the world's managers -- and by this I do not mean some occult cabal but the visible leaders in politics, banking, business, and news media -- pulled out all the stops to suppress the appearance of contraction, and in so doing only supplied more perversion and distortion to the train of events that leads implacably to an agonizing workout, or readjustment of reality's balance sheet. There's a fair chance that these restraints will unravel in 2013, exposing civilization to a harsh new leasing agreement with its landlord, the Planet Earth. 

The uncertain course of debt deflation - I have been re-reading Irving Fisher's "Debt deflation". Short and immensely readable, it remains one of the best explanations of financial crashes and depression in economics literature. But I am puzzled. What is going on at the moment doesn't quite fit, somehow. On the face of it, much of what has happened over the last six years fits all too well with Fisher's description of debt deflation. He identifies two prime causes of booms and busts - what he calls the "debt disease" and the "dollar disease". Over-indebtedness before the crash results in debt deflation after the crash - the "debt disease". And shortage of money in circulation leads to apparent over-production and crashing prices - the "dollar disease". The disastrous deflationary spiral experienced by the US in the Great Depression, and by several Eurozone countries at present, can be adequately explained by these two factors. But what is happening in countries such as the US and UK is much less straightforward. We had a crash, followed by sharp deleveraging in the private sector, distress selling, price crashes and bankruptcies. But then we propped it all up. Governments intervened to arrest the deflationary slide by taking distressed private debt on to public balance sheets, and central banks flooded the place with new money to prevent catastrophic price falls. The sharp deleveraging stopped and the price level stabilised - in fact in the UK the general price level actually rose. And yet we seem to be experiencing a number of features of Fisher's debt deflation spiral.

Will the U.S. Dollar Lose its Preeminence? -   I get asked once a month or so if the U.S. dollar is likely to lose its global preeminence.  John Williamson has a nice discussion of this topic in "The Dollar and US Power," which is available at the website of the Peterson Institute of International Economics. Williamson first points out that the dollar is indeed the preeminent global currency (citations omitted): " The US dollar is absolutely dominant as the intervention currency: Most countries intervene in nothing except dollars. It is the major unit in which about 60 percent of official foreign exchange reserves are held ... It was estimated in the past that close to a half of all international trade was invoiced in dollars (Hartmann 1998), as opposed to under 12 percent of world trade that involved the United States in 2011. So far as foreign exchange trading is concerned, most takes place against the dollar, resulting in a share of foreign exchange trading of about 85 percent ... For the moment, the dollar is quite unrivalled." How does the preeminence of the U.S. dollar benefit the U.S. economy? Williamson points out the classic tradeoff. On one side, the advantages of "seignorage;" on the other side, an inability to control one's own exchange rate.

The big issues in macro: the fiscal multiplier - The biggest theoretical issue in macroeconomics is “what causes unemployment”. As discussed in the last post, the classical answer, that unemployment is caused by problems in labor markets, is obviously wrong as an explanation of the simultaneous emergence of sustained high unemployment in many different countries. Unemployment is a macroeconomic problem. The central macroeconomic policy issue, then, is “what, if anything, can macroeconomic policy do to move the economy back to full employment”. If you accept that, under current conditions of zero interest rates, there’s not much positive that can be done with monetary policy[1], and you stay within the bounds of mainstream policy debate, this question can be restated as “how effective is expansionary fiscal policy” or, in Keynesian terms, “how large is the fiscal multiplier in a depression”.To restate this in more neutral terms, if the government spends more, say by employing and equipping more firefighters, what happens in the rest of the economy? The answer given by classical economics is that the newly-employed firefighters must be drawn from elsewhere in the economy, presumably in the private sector. Similarly, the production of extra firetrucks means less vehicles can be produced for other purposes. Although the exact way in which resources are reallocated can’t easily be predicted, the classical model gives the clear answer that the overall level of employment and economic activity won’t change[2]

Small deal will deliver more subpar growth - Markets are taking a day off for the new year holiday, giving traders some time to digest the news that the US Senate has passed a set of measures to avert the “fiscal cliff”. Assuming the House of Representatives endorses the package, should they cheer it or jeer it? The crucial thing about the $600bn-plus tax increases and spending cuts that were scheduled to come into force on January 1 is that the US economy was actually facing two cliffs, not one. The first part was the deliberately scheduled expiry of the 2001 Bush tax cuts and the more recent payroll tax cuts (plus the end of some other tax relief measures). The second was the self-imposed fiscal straitjacket that Congress and the White House agreed to in order to allow the government to issue more debt in 2011, without which it would have run out of money to meet all its financial obligations. This “sequester” would have taken the form of roughly $100bn being cut every year, divided in a bipartisan spirit between defence and non-defence programmes (in particular, Medicare). All told, the US was facing a fiscal tightening of roughly 4 per cent of gross domestic product – enough to cause fresh recession. The Senate bill only partially cushions the impact from going over the first cliff by making some but not all of the tax cuts permanent. On the sequester, all that the senators have achieved is postpone it by two months. Economically, then, this is a small deal. It is true that the expiring income tax cuts were the single biggest component of the looming fiscal tightening – $221bn according to the Congressional Budget Office. By making the Bush tax rates permanent for individuals making less than $400,000 a year (and households under $450,000) most of that $221bn will not be taken out of the economy, and the bit that will be taken out will have less effect on demand because the rich save more.

Fiscal Cliff To Be Fiscal Drag Amounting To 1% Of 2013 GDP - JPM's Michael Feroli, who already quantified the impact of the 2% payroll tax cut expiration at $125 billion, has estimated the impact of the Fiscal Cliff on the US economy for 2012. The verdict: 1%. This is just on the Obama tax [cut|hike]. If and when any spending cuts are actually announced or enacted, this number will only go up, as will apparently the market. From JPM's Michael Feroli:The Senate-passed budget deal is broadly in line with our prior fiscal cliff expectations, which is to say a resolution which imposes considerable near-term headwinds to growth while doing very little to address longer-run fiscal sustainability issues. The table below summarizes our current assessment of the fiscal drag associated with fiscal-cliff-related measures, which we still see subtracting about 1%-point from GDP growth in 2013.

Obama Orders Pay Raise For Congress, Federal Workers, Joe Biden: President Barack Obama gave a New Year's gift to returning members of Congress, federal workers and Vice President Joe Biden on Thursday, signing an executive order calling for an end to a years-long pay freeze. As of March 27, 2013, federal employees will see a half-percent to one percent pay increase, marking the end of a pay freeze that has been in place since late 2010. Congress hasn't seen a pay raise since 2009. According to the order, Biden's pay will increase from $225,521 to $231,900 a year, before taxes. House Speaker John Boehner (R-Ohio) will see his salary increased to $224,500 and Senate Majority Leader Harry Reid (D-Nev.) will take home an annual pay of $194,400 after his raise. While Obama's order made no mention of merit for such a raise, HuffPost's Amanda Terkel reported on Friday that the 112th Congress is set to end the session as the most unproductive since the 1940s, with only 219 bills passed by the body becoming law. The raise won't take place until the 113th Congress, meaning that outgoing members will see no effect from the order. Obama ordered the raise as he continues to negotiate unsuccessfully with congressional leaders to find a deal in order to avoid the fiscal cliff at the end of the year. If no agreement is met, over $500 billion in planned tax increases and spending cuts will be implemented.

Obama Issues Executive Order Granting Pay Raises to Congress, the Vice President, Judges; Any Raise is Too Much; Congress Approval Rating is 18% - Congress has done such a beautiful job handling the fiscal cliff and debt ceiling that president Obama felt it mandatory to issue an Executive Order Giving Biden, Congress Pay Raises President Barack Obama issued an executive order to end the pay freeze on federal employees, in effect giving some federal workers a raise. One federal worker now to receive a pay increase is Vice President Joe Biden. According to disclosure forms, Biden made a cool $225,521 last year. After the pay increase, he'll now make $231,900 per year. Members of Congress, from the House and Senate, also will receive a little bump, as their annual salary will go from $174,000 to 174,900. Here's the list of new wages, as attached to President Obama's executive order. The latest Gallup poll taken December 19, 2012, shows Congress Approval Remains at 18% During Fiscal Cliff Debate Eighteen percent of Americans approve of the job Congress is doing, as leaders continue to work toward a solution to the looming fiscal cliff. That approval rating is unchanged from last month, but remains low from a historical perspective.

U.S. officially hits debt ceiling - As promised, Treasury Secretary Timothy Geithner on Monday night formally notified Congress that the United States has reached its $16.4 trillion debt ceiling. In a letter to lawmakers, Geithner wrote that the government will take extraordinary measures to extend the deadline by which Congress must act to raise the borrowing limit. The Treasury Department noted earlier this month that while the roughly $200 billion in additional headroom would ordinarily last about two months, the uncertainty surrounding taxes and spending policies as a result of the fiscal cliff talks means it’s currently not possible to calculate the actual deadline. Read Geithner’s letter here

Debt in a Time of Zero - Krugman - I’ve had communications from a number of people asking an interesting question relating to the debt ceiling and other issues: why does the Federal government have to borrow at all? Why can’t it just print money to pay its bills? After all, haven’t people like me been saying that this isn’t actually inflationary? Now, it turns out that there really is a problem, or actually two problems — but they’re a bit subtle. First, as a legal matter the Federal government can’t just print money to pay its bills, with one peculiar exception. Instead, money has to be created by the Federal Reserve, which then puts it into circulation by buying Federal debt. You may say that this is an artificial distinction, because the Fed is effectively part of the government; but legally, the distinction matters, and the debt bought by the Fed counts against the debt ceiling. The peculiar exception is that clause allowing the Treasury to mint platinum coins in any denomination it chooses. Of course this was intended as a way to issue commemorative coins and stuff, not as a fiscal measure; but at least as I understand it, the letter of the law would allow Treasury to stamp out a platinum coin, say it’s worth a trillion dollars, and deposit it at the Fed — thereby avoiding the need to issue debt.  So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.

Krugman et al: Close the Argument by Addressing CBO’s Alternative Budget Path - Paul Krugman and a host of others are making important and highly salutary points about budget deficit hysteria.  Policy makers should listen to them.  However, unless I’ve missed it, these critics have neglected to tackle a key part of this: why the CBO’s alternative baseline showing persistent structural deficits, is wrong.  I fear that policy makers won’t listen to them anyway, but given the CBOs stature in these debates here in DC, I guarantee Krugman et al will be ignored unless they tackle this question (which isn’t hard to do).  Believe me, “CBO says current policy will generate structural deficits” is a lot more convincing to the “serious people” around here than pretty much anything else. As the figure below reveals, under this alternative scenario, the budget never achieves primary balance (deficit/GDP<3%) even as the economy is assumed to enter a normal growth path, i.e., structural budget deficits persist.  What’s in this scenario?  Full extension of the Bush tax cuts, AMT patch, doc fix, no sequester…all of which lead to higher deficits.Obviously, that doesn’t prove the anti-hysteria crowd–of which I’m a card-carrying member–wrong.  But they/we need to point out why the alternative scenario is wrong.  Which of its policy assumptions are incorrect?  How would they change them, and no hand waving allowed (I like to note, in this regard, that the Obama 2013 budget achieves primary balance by 2016, and during the cliff negotiations he’s largely been arguing for that policy set)?  Does the CBO assume slower GDP growth than they do?

Everything You Know About The Deficit Is Wrong: Fixing It Is Painless - People who insist that the US has a gigantic "spending problem" are ignorant of what really drives the deficit and the national debt, as Henry Blodget easily demonstrated in a series of charts.  Closing the deficit is not just about lowering spending, relative to GDP, but also about increasing revenue from our very low levels.  So how is that accomplished? When people talk about the deficit, they almost always use the "pain" metaphor. In almost any op-ed extolling the wisdom of the Simpson-Bowles plan, it's pointed out that we're going to need to take some pain. Obama has said that the Federal Government needs to tighten its belt, which is something that is painful. Conservatives say the government needs to go on a diet. Diets are painful. A recent USA Today headline was very standard: "Nation's soaring deficit calls for painful choices." The good news is that in economics and when talking about the deficit it doesn't need to work that way! Fixing the debt is painless! That's because the primary driver of deficits is a lack of growth. A chart that everyone needs to have seared into their brains is this one, which shows the deficit as a percentage of GDP (red line) vs. the unemployment rate (blue line).

When the Deficit Will Be Fixed - The Holy Grail for budget hawks is the “grand bargain” – some combination of tax increases and entitlement reforms that will get the deficit on a sustainable track, permanently. On paper, it always looks simple – relatively small adjustments to the growth path of revenues or big spending programs like Medicare or Social Security compound over time into big savings. The problem, of course, is getting Congress to act, because of what economists call a time-inconsistency problem. The Congress that raises taxes and cuts benefits will suffer politically, while the benefits of lower deficits will accrue to future Congresses.Historically, what has moved Congress to enact big deficit-reduction packages was the prospect of quick improvement in terms of inflation, growth and interest rates. Given that deficit reduction today is very unlikely to improve any of these in the near term, deficit hawks lack any real payoff from a grand bargain. The two problems most likely to result from budget deficits are inflation and high interest rates.  According to the Federal Reserve Bank of Cleveland, none of the preconditions that historically are necessary for a significant budget deal are now present. Inflationary expectations continue to fall and real interest rates are very low. Hence, it is impossible for politicians to promise any benefit from large spending cuts or tax increases that would materially improve peoples’ lives. The benefits are purely abstract.This suggests that we are a long way from meaningful legislative action on the deficit.

Fixing the economy, a new focus for Congress -  The Perils of Pauline melodrama over the “fiscal cliff” will drag on as Washington heads toward another “debt ceiling” faceoff that will climax over the next eight weeks or so. This farce captivates the media, but no one should be fooled. This is largely a debate about how much damage will be done to the economic recovery and who will bear the pain. There is bipartisan consensus that the tax hikes and spending cuts that Congress and the White House piled up to build the so-called fiscal cliff are too painful and will drive the economy into a recession. So the folderol is about what mix of taxes and spending cuts they can agree on that won’t be as harsh.Largely missing is any discussion of how to fix the economy, to make it work for working people once more. Just sustaining the faltering recovery won’t get it done. We’re still struggling with mass unemployment, declining wages and worsening inequality. Corporate profits now capture an all-time record percentage of the economy; workers’ wages have hit an all-time low. A little constriction, or a lot, won’t do anything to change that reality. So how about a New Year’s resolution for Washington’s political class: Vow to focus on what can be done to fix the economy, rather than on how much to lacerate it. That would require dealing with causes, not effects. And those surely would include:

Government debt: How much is too much? | The Economist - THE popularity of austerity policies has waned over the past several years thanks to evidence that it may have been counterproductive. But many are still worried by the fact that, relative to national income, government debt is now larger in many countries than at any point since WWII. Moreover, for most nations, government debt is projected to grow relative to income for years to come. This is why policymakers across the rich world have been scrambling to slow the growth of public spending while simultaneously increasing tax revenues. (America’s budget fights should be understood in this context.) Does their urgency make sense? The sovereign bond markets in America, Japan, Britain, and the euro area’s “core” do not seem to think so. These governments can borrow cheaply for decades at a time. While it is certainly possible that the markets are wrong, policymakers should probably pay more attention to investors and less to the fear-mongers, especially since economists do not know how much government debt is too much. In fact, there is good reason to think that many countries with their own currencies could become far more indebted without risking trouble. One reason is that many private investors do not own enough sovereign bonds. It is important to remember that there is an absence of evidence that governments with their own currencies are too indebted. Those who argue otherwise point to the work of Carmen Reinhart and Kenneth Rogoff, the celebrated authors of This Time is Different. Their paper “Growth in a Time of Debt” claimed that sovereign debt creates a burden on the rest of the economy. (They summarise their points here.) But, as Robert Shiller and Paul Krugman have pointed out, Ms Reinhart and Mr Rogoff never explain how public indebtedness restrains growth. There may be other forces at work, especially since sovereign debt ratios are usually at their highest after wars and financial crises.

Surplus/Deficit As A Percentage of GNP/GDP - Since we are debating the deficit, debt and upcominn sequester/tax expiration, lets take a closer look at the history of the American Surplus & Deficits over time. As you can see, going wildly into the red or black was common in the days before an income tax existed in the 19th century. The 20th century saw the two world wars and the great depression as sources of spiking deficits relative to GDP. Note the trend that began in the 1970s, accelerated in the 1980s and did not reverse til the late 1990s, only to start again in the 2000s. What occurred over these eras? The deficit eras were during the 1970s when the US went off the Gold Standard, the 1980s, during a period of huge unfunded tax cuts and massive military build up; the 2000′s saw more unfunded tax cuts, post 9/11 homeland security spending, rising military spending for 2 wars, additional domestic spending under Bush, then the financial crisis, the Obama stimulus, and even more defense spending and unfunded tax cuts and extensions. The surplus was during the late 1990s when there was an economic boom accompanied with rising taxes

Deficits, Debt, Debt Subject to the Limit, Off Budget, Trust Fund: Building your 2013 Toolkit - All of the terms in the post title have at least two usages, some of which map upon to common sense ideas from business or household budgeting, some not. Unfortunately the usages that don't tend to be those used in federal budget reporting, and the result is untold confusion. So really the only way out is to start to build your own Budget, Debt and Deficit Toolkit. And this post is intended to give you a start using sources provided by the official scorekeepers of such things: the U.S. Treasury, the Congressional Budget Office (CBO), the President's Office of Management and Budget (OMB) and the Joint Committee on Taxation (JCT). First stop is the U.S. Treasury Department's Bureau of Public Debt and their web application Debt to the Penny. This handy application allows you to track Total Public Debt and its two components Debt Held by the Public and Intragovernmental Holdings to the literal penny as of the close of the daily books the last business day but one. And a search today gave me the results for Monday the 31st (since Tuesday was a Federal Holiday) with Total Public Debt of $16,432,730,050,569.12 .  Debt Subject to the Limit is set by Congress and under current law is $16.394 trillion. With the result shown in the following official graph Debt Subject to the Limit Graph which shows total Public Debt Subject to the Limit (dark blue) passing through the Limit (orange) on the 31st. Without comment (we are just building a toolkit here) we can move from Debt to Deficit. Here things get more complicated but probably the simplest tool available to us from official sources is found in CBOs annual The Budget and Economic Outlook: Fiscal Years 2012 to 2022 and the literal top line numbers from that is Summary Table 1 (click to embiggen)

On the new purpose of government debt - FT Alphaville = Frances Coppola has whipped up an absolutely fabulous commentary on the BIS paper on safe assets, which cuts straight to the point. As she neatly expresses, in our new looking glass world… the purpose of government debt is not to fund government spending. It is to provide safe assets.” And here’s the excellent follow-up to that point: The BIS proposal for ensuring the supply of global safe assets in effect treats currency-issuing governments – especially the US – as the world’s savings banks. We can regard this proposal as a form of full reserve banking: government provides a safe deposit facility for investors, borrowing large amounts of money but putting it safely in a vault so there is no possibility of not being able to return it. This is not simply an analogy: producing debt in excess of spending needs will mean that governments become cash-rich, and if governments are running primary surpluses as well then they will be awash with surplus funds which they dare not release into the economy for fear of triggering inflation and a run on their supposedly safe assets. They will inevitably place these funds on deposit at their central banks, which amounts to putting them in a vault. Meanwhile – BIS assumes – these governments will continue to maintain strict control of public spending. Quite how the public would respond to a government that was borrowing heavily and placing excess funds on deposit at the central bank while holding down investment in the real economy would be interesting. Sometimes I think bankers forget that governments are elected by real people, who don’t give a stuff about safe assets when they are facing unemployment…..However, there is one very important point to the BIS proposal. It eliminates once and for all the idea that monetizing public debt inevitably leads to hyperinflation. The BIS model shows that monetizing debt can be done at at little risk of inflation. And for BIS, sovereign default is a disaster, because it destroys safe assets and risks the stability of the financial system.

The Strange Reality of Fiat Money - First of all, it is clear that what is called the nation’s “deficit” is, in actuality, a balance-sheet account of the fiat money the sovereign has spent into the private economy but not collected back in taxes—it is, in other words, the savings the “citizens” have managed to keep and use to grow their own business and commerce. Reducing the sovereign “deficit” will do nothing more that shrink the private wealth of the “citizens.” Second, it is clear that the nation’s “debt” was originally created as a strategy to prevent the sovereign from issuing more fiat currency that it could back-up with gold. If the sovereign currency is no longer convertible to gold, this strategy is no longer needed, and the only reason a sovereign democracy would keep it “in place” is because the “citizens”, in fact, want to continue exchanging their saved fiat dollars for Treasury bonds that pay interest. To be more specific, it is unlikely that the bonds will be owned “equally” amongst the “citizens”, but rather will be held by an elite group of financiers. While the sovereign government, in fact, has the power to “pay off” all the “national debt”at any time (by converting the bonds back into non-interest bearing fiat dollars) the financiers might well achieve the power to take effective control of the democracy to prevent this from happening. Finally, it is clear that constricting sovereign spending—in a confused effort to reduce the sovereign “deficit”—would be the height of irrational behavior on the part of a democracy. As long as there is work that can be done to improve the lives and well-being of the “citizens,” and as long as the labor and sustainable resources are available to accomplish that work in exchange for sovereign fiat dollars, it is a perverse logic that argues the sovereign cannot afford to have the work accomplished.

Austerity’s Irrationality: The Age of Economic Anorexia -  Rational public debate about the economy and government’s role in the economy is currently in extremely short supply.  In a debt-deflation, a weak economy saved from Great Depression-level misery by half-way, inadequate government action, government spending is now blamed categorically for the ills of the economy by the aggressive austerity campaign that has captured the political discussion in major capitals.  Previous flaws in the economic theory of the state and theory of money, typically consigned to the realm of different economic “tastes” or moral persuasions, are now revealed to be catastrophic gaps in most economists’ and the public’s understanding of the basics of the capitalist economy.  The predatory austerity campaigners, many originating from within the financial industry, have turned what should have been an era of greater clarity about government’s critical role in the economy into a scapegoating of government for ills perpetrated for the most part by components of the financial sector or by the subservience of the public sector to the financial sector.  Austerity policies when implemented are the equivalent of ‘economicide’ as they strangle government’s ability to spur lagging demand for real goods and services as well as government’s role in steering the economy to deal with challenges that the private sector can’t or doesn’t want to face on its own.

The Fiscal Cliff -  The first point to note is the 'cliff' metaphor. It frames the spending cuts and tax increases in terms of something scary; falling off a cliff leads to harm. The use of this metaphor is of itself an argument, and and argument that says the tax increases and budget cuts are a bad thing. Framing the changes in this way also becomes an urgent call to action, and that is exactly what is taking place (albeit with no success so far). Another problem with the metaphor is that it is not actually a cliff: For one thing, it isn't really a "cliff." The impact of the tax hikes and spending cuts will be felt gradually, over several months, so there will "be plenty of time beyond January 1, 2013 for things to get worked out." In short, the term 'cliff' is a distortion of the actuality of the situation. The most worrying aspect of this distortion is that it is driving action, and driving hurried action. Although I am completely in favour of action to reduce the deficit, this is absolutely not the way to take action. Instead, what should be taking place is a more measured look at spending and taxation, and how the activity of government is prioritised and how it might be reformed. This is a question of what constitutes the core functions of government, and elimination of non-core functions. I do not give my view here on what those core functions are, as this is a political question, but it is a question that needs to be answered. Having answered the question of core functions, the functions thus identified have to be given priority, and hard decisions made on the allocation of finite resource to each core function, and how the underlying purpose of the function can be retained, whilst reducing the costs of the function. It is also about what share of the wealth of a country will be given over to the use of the government, and accepting that the government must operate from tax receipts and not use borrowing to dishonestly bribe the electorate with tax breaks now at future cost and provision of services funded with borrowed money at future cost.

Going Over the Cliff Is the Only Way to Save the Government - Jeffrey Sachs -  Everyone is confused about the Fiscal Cliffhanger. Obama is struggling to make a deal to prolong most of the Bush-era tax cuts. The Republicans are holding back. Yet if a deal is reached, the federal government and the long-term purpose of the Democratic Party are both likely to be ruined for years to come. If the deal fails, the Democratic Party can at long last return to what should be its core purpose: using government to promote the public wellbeing.  The main point is this. If no deal is reached, the Bush tax cuts end. We would return roughly to the tax schedule of the end of the 1990s, when the macro-economy performed reasonably well and the budget was near balance. Federal government revenues would rise by around 2.5 percent of GDP per year compared with the current tax schedule. According to the CBO, the federal tax system would collect 20-21 percent of GDP in the second half of this decade. This is a bare minimum of what's needed for effective government.  Let's be clear. In an ideal world, there are better and more progressive ways to get to 21 percent of GDP in federal tax revenues than by personal income taxes alone. A partial list would include: a wealth tax on large fortunes (e.g. 1 percent on net worth above $5 million); an end to tolerating tax havens like the Cayman Islands; an end to the tax deferral of overseas corporate income; a crackdown on abusive transfer pricing; and a tax on carbon emissions). The problem is that neither the Administration nor the Congress is proposing these measures, and in the meantime, a deal now that extends the Bush tax cuts will be a severe loss of revenues for years to come without any offsetting gains.

America’s Deceptive 2012 Fiscal Cliff – Part 2 [Part 1] Today’s economic warfare is not the kind waged a century ago between labor and its industrial employers. Finance has moved to capture the economy at large, industry and mining, public infrastructure (via privatization) and now even the educational system. (At over $1 trillion, U.S. student loan debt came to exceed credit-card debt in 2012.) The weapon in this financial warfare is no longer military force. The tactic is to load economies (governments, companies and families) with debt, siphon off their income as debt service, and then foreclose when debtors lack the means to pay. Indebting government gives creditors a lever to pry away land, public infrastructure and other property in the public domain. Indebting companies enables creditors to seize employee pension savings. And indebting labor means that it no longer is necessary to hire strikebreakers to attack union organizers and strikers. Workers have become so deeply indebted on their home mortgages, credit cards and other bank debt that they fear to strike or even to complain about working conditions. So debt peonage and unemployment loom on top of the wage slavery that was the main focus of class warfare a century ago. The aim of financial warfare is not merely to acquire land, natural resources and key infrastructure rents as in military warfare; it is to centralize creditor control over society. In contrast to the promise of democratic reform nurturing a middle class a century ago, we are witnessing a regression to a world of special privilege in which one must inherit wealth in order to avoid debt and job dependency.

America’s Deceptive 2012 Fiscal Cliff – Part 3 - Quantitative easing as free money creation – to subsidize the big banks. The Federal Reserve’s three waves of Quantitative Easing since 2008 show how easy it is to create free money. Yet this has been provided only to the largest banks, not to strapped homeowners or industry. Ben Bernanke’s helicopter only flies over Wall Street to drop its money. An immediate $2 trillion in “cash for trash” took the form of the Fed creating new bank-reserve credit in exchange for mortgage-backed securities valued far above market prices. QE2 provided another $800 billion in 2011-12. The banks used this injection of credit for interest rate arbitrage and exchange rate speculation on the currencies of Brazil, Australia and other high-interest-rate economies. So nearly all the Fed’s new money went abroad rather than being lent out for investment or employment at home. U.S. Government debt was run up mainly to re-inflate prices for packaged bank mortgages, and hence real estate prices. Instead of alleviating private-sector debt by writing down mortgages in line with the homeowners’ ability to pay, the Federal Reserve and Treasury created money to support property prices – to push the banking system’s balance sheets back above negative net worth. The Fed’s QE3 program in 2012-13 created money to buy mortgage-backed securities each month, to provide banks with money to lend to new property buyers.

America’s Deceptive 2012 Fiscal Cliff, Part IV– Why Financial and Tax Reform Should Go Together - Taxes pay for the cost of government by withdrawing income from the parties being taxed. From Adam Smith through John Stuart Mill to the Progressive Era, general agreement emerged that the most appropriate taxes should not fall on labor, capital or on sales of basic consumer needs. Such taxes raise the break-even cost of employing labor. In today’s world, FICA wage withholding for Social Security raises the price that employers must pay their work force to maintain living standards and buy the products they produce. However, these economists singled out one kind of tax that does not increase prices: taxes on the land’s rental value, natural resource rents and monopoly rents. These payments for rent-extraction rights are not a return to “factors of production,” but are privatized levy reflecting privileges that have no ongoing cost of production. They are rentier rake-offs. Land is the economy’s largest asset. A site’s rental value is set by market conditions – what people pay for being able to live in a good location. Landlords do not create this site value. But speculators may seek to ride the wave by buying property on credit, where the rate of land-price gain exceeds the interest rate. This “capital” gain is the proverbial free lunch. It is created by public investment, by the general level of prosperity, and by the terms on which banks extend credit. In a nutshell, a property is worth whatever a bank will lend, because that is the price that new buyers will be able to pay for it.

Brewing Up Confusion, by Paul Krugman -  Howard Schultz, the C.E.O. of Starbucks,..posted an open letter urging his employees to promote fiscal bipartisanship by writing “Come together” on coffee cups. In the letter,  In reality, however, all he did was make himself part of the problem. And his letter was actually a very good illustration of the forces that created the current mess.  In the letter, Mr. Schultz warned that elected officials “have been unable to come together and compromise to solve the tremendously important, time-sensitive issue to fix the national debt,” First of all, it’s true that we face a time-sensitive issue in the form of the fiscal cliff: unless a deal is reached, we will soon experience a combination of tax increases and spending cuts that might push the nation back into recession. But that prospect doesn’t reflect a failure to “fix the debt” by reducing the budget deficit — on the contrary, the danger is that we’ll cut the deficit too fast.  How could someone as well connected as Mr. Schultz get such a basic point wrong? By talking to the wrong people — in particular, the people at Fix the Debt, who’ve been doing their best to muddle the issue.  Maya MacGuineas, the organization’s public face, writes of the need to “make hard decisions when it comes to averting the ‘fiscal cliff’ and stabilizing our national debt” — even though the problem with the fiscal cliff is precisely that it stabilizes the debt too soon. Clearly, Ms. MacGuineas was trying to confuse readers on that point, and she apparently confused Mr. Schultz too.

The middle class languishes as the super-rich thrive  - UC Berkeley economist J. Bradford DeLong observed last week that we're not heading toward the fiscal cliff so much as waiting for the "austerity bomb" to detonate. The lighted fuse on that bomb, he computed, has already cut likely growth in real gross domestic product for 2013 to 2.5% from 3%. The policy positions on both sides presage smaller government, which is not the right prescription for an economy still struggling to recover. There will be lower federal spending at a time when the government participation in the economy is still crucial; there will be less take-home pay for the middle class and the working class, who pump almost everything they have into the marketplace. The disagreement in Washington is no longer whether to cut, but where and by how much; and whether the seemingly inevitable end of the payroll tax holiday for working men and women will be balanced by continuation of their reduced income tax rates.

New High: 73% Say Government Should Cut Spending to Help Economy - Half of all Americans want more government action to deal with the economy. But the action they are looking for is to cut government spending. Overall, 73% of Likely Voters nationwide believe the federal government should cut spending rather than increase it in reacting the nation’s current economic problems. The latest Rasmussen Reports national telephone survey shows that just 18% are looking for an increase in spending. (To see survey question wording, click here.) That’s consistent with earlier data showing that just 19% want to see more stimulus spending at this time.  The survey of 1,000 Likely Voters was conducted on December 12-13, 2012 by Rasmussen Reports. The margin of sampling error is +/- 3 percentage points with a 95% level of confidence. Field work for all Rasmussen Reports surveys is conducted by Pulse Opinion Research, LLC. See methodology.

Fiscal Talks Resume With Deadline in Mind -  Negotiations over a last-ditch agreement to head off large tax increases and sweeping spending cuts in the new year appeared to resume on Sunday afternoon after Republican senators withdrew a demand that any deal must include a new way of calculating inflation that would lower payments to beneficiary programs like Social Security and slow their growth.  Senate Republicans emerged from a closed-door meeting to say they agreed with Democrats that the request — which had temporarily brought talks to a standstill — was not appropriate for a quick deal to avert the tax increases and spending cuts starting Jan. 1. To hold the line against raising taxes on high-income households while fighting for cuts to Social Security was “not a winning hand,” said Senator John McCain, Republican of Arizona. The concession could be a breakthrough, but Senate Republicans were still balking at an agreement, adopting a new argument that Democrats wanted to raise taxes just to increase spending, not to cut the deficit. That concern appeared to center on a Democratic proposal to temporarily suspend across-the-board spending cuts to military and domestic programs as talks resumed on a larger deficit deal.

Senators trade proposals into night to avoid ‘fiscal cliff’  Senate negotiators labored late into Saturday over a last-ditch plan to avert the “fiscal cliff,” struggling to resolve key differences over how many wealthy households should face higher income taxes in the new year and how to tax inherited estates. Reid and McConnell have set a deadline of about 3 p.m. on Sunday for cinching a deal. That’s when they’re planning to convene caucus meetings of their respective members in separate rooms just off the Senate floor. At that point, the leaders will brief their rank and file on whether there has been significant progress and will determine whether there is enough support to press ahead with a proposal. If all goes according to plan, the leaders would roll out the legislation Sunday night and hold a vote by at least midday Monday, giving the House the rest of New Year’s Eve to consider the measure.

US Senate locked in talks on compromise - Democrats and Republicans in the Senate were locked in talks on Saturday in an effort to find a compromise on the fiscal cliff, with the aim of putting a proposal to a vote as early as Sunday to meet the end-of-year deadline. However, the two sides were tussling over who should take the initiative to present a bill to the Senate to prevent the large tax rises and spending cuts that will kick in from January 1. The talks are being led by Harry Reid, the Democratic Senate majority leader, and Mitch McConnell, the Republican minority leader. President Barack Obama said on Friday he was “modestly optimistic” that a last-minute budget deal could be struck after an hour-long White House summit between Democratic and Republican congressional leaders. The meeting followed days of gloom in which congressional leaders traded barbs over which side was to blame for the stalled talks. Mr Obama said in his weekly radio address that: “Leaders in Congress are working on a way to prevent this tax hike on the middle class, and I believe we may be able to reach an agreement that can pass both houses in time.”

Over The Fiscal Cliff – Blindfolded - The United States government is about to go over the “fiscal cliff.”  The really sad part is that the people of the United States are going with it, but they are blindfolded.  Intentionally blindfolded by their own government. The OMB (“o” stands for opaque) report: OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P. L. 112–155), Appendix B. Preliminary Sequestrable / Exempt Classification, classifies accounts as sequestrable, exempt, etc. One reason to be “exempt” is funds were already sequestered elsewhere in the budget. Makes sense on the face of it. But for 487 entries out of 2126 in Appendix B, or 22.9%, are being sequestered from some unstated part of the government. Totally opaque. Unlike the OMB, I am willing to share an electronic version of the files: Satisfy yourself if I am right or wrong. You can make it the last time the US government puts a blindfold on the American people.

Two Reporters Say The Fiscal Cliff Negotiations Are Going Badly - Today is the day that Harry Reid and Mitch McConnell are supposed to be negotiating a deal on the Fiscal Cliff. Two of the top reporters covering the Fiscal Cliff, John Harwood of CNBC and Ben White Of Politico, have ominous tweets on this weekend's negotiations so far.

Boehner To Reid “Go F– Yourself” - More news from the Republican meltdown: It was only a few days before the nation would go over the fiscal cliff, no bipartisan agreement was in sight, and Reid had just publicly accused Boehner of running a “dictatorship” in the House and caring more about holding onto his gavel than striking a deal. “Go f— yourself,” Boehner sniped as he pointed his finger at Reid, according to multiple sources present.Reid, a bit startled, replied: “What are you talking about?”Boehner repeated: “Go f— yourself.”The harsh exchange just a few steps from the Oval Office — which Boehner later bragged about to fellow Republicans — was only one episode in nearly two months of high-stakes negotiations laced with distrust, miscommunication, false starts and yelling matches as Washington struggled to ward off $500 billion in tax hikes and spending cuts. Combine this odd behavior with Majority Leader Cantor’s no vote and we might have a challenge on our hands Thursday when Republicans elect a new speaker for the 113th Congress. It’s being reported that there are 20 Republicans are willing to band together to unseat John Boehner. The only real success of the “fiscal cliff” vote may have been the destabilizing of the House Republicans

Deal Would Do Little To Shrink Deficit- The last-minute tax and spending deal being discussed in the Senate would do little to reduce the deficit, and could actually expand it, leaving difficult choices about Medicare, Social Security, and the country's borrowing limit until next year. White House and congressional negotiators had originally envisioned a package of tax and spending changes that would reduce the deficit between $3 trillion and $4 trillion over 10 years. Their goal was to start reversing the country's stubbornly large budget deficit and stabilize the nation's debt, which is near $16.4 trillion. The White House wanted these changes to include more than $1.2 trillion in new taxes over 10 years and include a number of spending reductions, including a plan to slow the growth of Social Security benefits that had rankled liberal allies. Many Republicans had agreed to include a more modest level of new taxes as part of any deal, and wanted more fundamental changes to Medicare and Social Security to limit the growth of the costly entitlement programs. Those large-scale talks stalled two weeks ago. The menu of options now under consideration is more focused on tackling a shorter-term problem: imminent deadlines that if missed would lead to tax increases and spending cuts.

Cliff Update: Better to Go Over than Accept a Bad Deal - The fiscal deadline otherwise known as the fiscal cliff has been in place for a very long time.  The Bush tax cuts were extended for two years back in 2010.  The “supercommittee” failed to come up with a budget agreement over a year ago.  And yet here we are, with Congress cramming into the night to try to kludge something together by this afternoon so it can go the House tomorrow, hours before the deadline. According to the WaPo: If all goes according to plan, the [Senate] leaders would roll out the legislation Sunday night and hold a vote by at least midday Monday, giving the House the rest of New Year’s Eve to consider the measure. “According to plan??”  That’s the plan?!? This isn’t just scarily dysfunctional government…it’s freakin’ embarrassing. If Senators McConnell and Reid hammer out a budget deal that can pass their caucuses, Rep Boehner is likely to take it up in the House.  If it passes there—and since it will include a tax increase, it will take D votes to get to 218—the President will presumably sign it before the ball drops in Times Square. I can’t imagine anyone will call that a success, but we will have avoided going over the fiscal cliff.  But at what cost?

Biden, McConnell continue ‘cliff’ talks as clock winds down - Vice President Biden and Senate Minority Leader Mitch McConnell (R-Ky.) continued urgent talks Monday over a deal to avoid the “fiscal cliff” after Democrats offered several significant concessions on taxes, including a proposal to raise rates only on earnings over $450,000 a year. With a New Year’s Eve deadline hours away, Democrats abandoned their earlier demand to raise tax rates on household income over $250,000 a year. Democrats also relented on the politically sensitive issue of the estate tax, according to a detailed account of the Democratic offer obtained by The Washington Post. They promised instead to hold a vote in the Senate that would guarantee that taxes on inherited estates remain at their current low levels, a key GOP demand. McConnell was holding out to set the income threshold for tax increases even higher, at $550,000, according to people close to the talks in both parties.

Lindsay Graham: I Will Destroy America’s Solvency Unless The Social Security Retirement Age Is Raised -  Although official Washington is currently fixated on the so-called “Fiscal Cliff,” the biggest threat to American prosperity is the debt ceiling, which must be raised in February to prevent economic catastrophe. If Republicans refuse to reach a deal on the so-called cliff, the Congressional Budget Office predicts that they will spark a new recession in 2013. But if Republicans block action on the debt ceiling, they will make that potential recession look quaint. Without raising the debt ceiling, the United States will be forced to embrace austerity so severe it will lead to “a bigger GDP drop than that experienced during the Great Recession of 2008.” But in an interview on Fox News Sunday this morning, Sen. Lindsey Graham (R-SC) threatened to oppose this must-pass bill unless Social Security benefits are taken away from millions of future retirees:I’m not going to raise the debt ceiling unless we get serious about keeping the country from becoming Greece, saving Social Security and Medicare [sic]. So here’s what i would like: meaningful entitlement reform — not to turn Social Security into private accounts, not to take a voucher approach to Medicare — but, adjust the age for Social Security, CPI changes and means testing and look beyond the ten-year window. I cannot in good conscience raise the debt ceiling without addressing the long term debt problems of this country and I will not

GOP Senators Want To Take Debt Ceiling Hostage In Order To Raise Retirement Age - Two Republican senators want to use the threat of an economic meltdown to raise the retirement age and cut Medicare. Sens. Bob Corker (R-TN) and Lamar Alexander (R-TN) introduced a plan today that would raise the federal debt limit by $1 trillion in exchange for $1 trillion in cuts to Medicare, Medicaid, and Social Security, as The Hill reported: The Corker-Alexander dollar-for-dollar plan has several components. It would structurally reform Medicare by creating competing private options giving seniors greater choice of healthcare plans. It would not, however, cap Medicare spending. The plan would also give states more flexibility to manage Medicaid programs and prevent states from “gaming the federal share of the program with state tax charges.” It would gradually raise the Social Security retirement age and use the “chained CPI” formula to calculate cost-of-living adjustments, curbing the growing cost of benefits.

The Hostage Drama Begins - Krugman - It sure looks as if we’re going over the fiscal cliff, but that may be the least of our problems. The debt ceiling is a much bigger and more dangerous issue, and it looks very much as if Republicans are set to destroy the full faith and credit of the United States if they can’t get their way. The key thing to remember — and what the GOP hopes you won’t understand — is that raising the debt ceiling only empowers the president to spend money that he’s authorized to spend by Congressional legislation; nothing more. Conversely, a party that refuses to raise the debt limit is saying that it’s prepared to inflict vast damage on America in order to achieve things that it couldn’t achieve through actual legislation — in effect, that it’s prepared to use vandalism to subvert the constitutional process. Still, that’s where they’re going.

Democrats Balk at ‘Chained CPI’ Provision in White House Entitlements Proposal «: According to the Congressional Budget Office, moving to the chained CPI would save $112 billion over 10 years by reducing the growth in Social Security benefits paid to retirees and people with work-related disabilities. Another $72 billion would come from new revenue because a lower inflation rate is likely to move many households more easily into higher tax brackets, which are pegged to inflation. Many economists consider the chained CPI a more accurate measure of inflation because it takes into account the adjustments in consumption that people make in response to price changes. But under chained CPI, the rate of inflation would rise more slowly than it does now. That means that people who receive government benefits adjusted to inflation would see their benefits grow more slowly each year than under the current method.  CBO says, for instance, another $33 billion could be generated by moving all government programs serving millions of people with disabilities, veterans or people in poverty onto the chained CPI. That would include roughly 8 million people who receive benefits from Supplemental Security Income, which helps low-income people with disabilities. Another 3.2 million people receive disability benefits from the Veterans Administration.

Fiscal Cliff: GOP Gives In On Social Security Cuts In Stalled Talks - Tense "fiscal cliff" negotiations on Capitol Hill Sunday inched forward slightly as Republican senators agreed to take Social Security cuts off their list of immediate demands. The cut that GOP leaders had proposed -- picking up on a now-defunct offer from President Barack Obama -- involved basing Social Security cost-of-living adjustments on a chained consumer price index (CPI), which grows more slowly than current measures of inflation and therefore would give seniors less in benefits as time went on. But Senate Republicans realized in a caucus meeting Sunday afternoon that the idea was a loser for now, even if they might return to it in reaching a larger deal later on. "CPI has to be off the table because it's not a winning argument to say benefits for seniors versus tax breaks for rich people," said Sen. John McCain (R-Ariz.). "We need to take CPI off the table -- that's not part of the negotiations -- because we can't win an argument that has Social Security for seniors versus taxes for the rich.” "There's a realization that in spite of the president's apparent endorsement of a chained CPI that that proposal deserves more study," said Sen. Susan Collins (R-Maine). "My guess, based on what Democrats are saying is that that reform would not happen during this stage of the negotiations."

    Chief Justice Prods Congress to Resolve Budget Talks and Control National Debt = Chief Justice John G. Roberts Jr. used his year-end report on the federal judiciary to give Congressional budget negotiators a little nudge. “Our country faces new challenges, including the much-publicized ‘fiscal cliff’ and the longer-term problem of a truly extravagant and burgeoning national debt,” he wrote. “No one seriously doubts that the country’s fiscal ledger has gone awry. The public properly looks to its elected officials to craft a solution.” The chief justice said that his branch of the government provided an example of doing much with few resources. The federal judiciary makes do with a budget appropriation of about $7 billion, he wrote, “a mere two-tenths of 1 percent of the United States’ total budget of $3.7 trillion.” “Yes,” he went on, “for each citizen’s tax dollar, only two-tenths of one penny goes toward funding the entire third branch of government!” In the report, Chief Justice Roberts said the judiciary was doing what it could to cut costs in rent, salaries and computer services. The Supreme Court “continues to set a good example,” he said, asking for a smaller appropriation in the last fiscal year than in the previous one. This fiscal year, the request rose slightly, “largely in response to new judicial security needs,” he said. He did not elaborate.Pentagon To "Temporarily" Fire 800,000 If No Cliff Deal; Chaos To Ensue - Just in case the stakes in the final episode of the 2012 season of the "Fiscal Cliff" soap opera, and a 30 second advertising block was not selling for a record amount, here comes the Pentagon with a warning that it may fire almost 1 million civillians their services will be required but unpaid if there is no Cliff deal. From the WSJ: "Mandatory federal spending cuts designed to be prohibitively drastic will become a reality on Wednesday if negotiators remain unable to reach an agreement to avert the reductions. Illustrating the gravity of the cuts, the Pentagon plans to notify 800,000 civilian employees that they could be forced to take several weeks of unpaid leave in 2013 if a deal isn't struck, and other agencies are likely to follow suit. The cuts, which members of both parties have referred to as a "meat ax," are the product of a hastily designed 2011 law that required $110 billion in annual spending reductions over nine years to reduce the deficit. Their severity, representing close to 10% of annually appropriated spending, was intended to force Democrats and Republicans to come together on a broader package of deficit-reduction measures, which would replace the cuts. That effort failed, raising the prospect of the cuts' taking place."

    China commentaries demand U.S. responsibility on "fiscal cliff" - China's official Xinhua news agency demanded on Tuesday that the United States live up to its global economic responsibilities, put political infighting aside and sort out the "fiscal cliff" mess. "Being the world's only superpower and the issuer of the dominant global reserve currency, the United States has a unique role and an unshirkable duty to help cure the ailing global economy," one of its English-language commentaries said. "In today's economically interconnected and interdependent world, it is more of a benefit than of a burden that Washington honors its global responsibility," the state-run agency added. "Should Washington fail to pull itself from the escarpment, the repercussions would throw the whole world into a cold winter of stagnant growth and laggard recovery." A second commentary said the fiscal cliff debacle was a clear example of how poorly the U.S. political system worked.

    Fiscal-Cliff Notes: Economists Weigh In - Bank of America-Merrill Lynch: “The cliff negotiations have devolved into two unpalatable options: (1) extend just the middle income tax cuts and extended unemployment benefits and allow about two-thirds of the cliff to happen, or (2) go over the cliff in [its] entirety. In our view, given the short time frame and legislative hurdles, the latter appears much more likely … Over the coming weeks we expect politicians to agree to a series of partial patches, with some parts of the cliff delayed and others allowed to expire. The result would be a series of awkward decision points with attendant pressure on consumer, business and investor confidence. But we continue to believe the cliff will be mostly resolved before the end of the first quarter. In our view, the biggest risk to this expectation is a protracted battle over raising the debt ceiling, which will be reached by late February or early March, after extraordinary measures … The ugly news is that going over the cliff reduces the urgency of getting a deal done. Once the deadline is violated, what induces the two sides to stop fighting and start compromising? Doesn’t going over the cliff suggest that each side believes the short term damage from going over the cliff is not as bad as the long term “damage” of a “bad” compromise? … We have not changed our forecast, for a growth recession, but no outright recession. On a positive note, so far the economy has held up somewhat better than expected. On a negative note, the political developments have been somewhat worse than expected. Resolving the cliff is just the beginning of the fiscal challenges for 2013, and it is not off to an auspicious start.”

    Senate negotiators search for deal to avoid the ‘fiscal cliff’ - There were signs of renewed effort in the talks to resolve the “fiscal cliff” crisis late Sunday afternoon. For one thing, direct talks had begun between Senate Minority Leader Mitch McConnell (R-Ky.) and Vice President Biden. Republicans exiting a mid-afternoon caucus meeting said that McConnell had excused himself to take a call from the vice president. Those two Washington veterans have become the capital’s unofficial closers, hammering out the agreement that resolved a fight over tax cuts in late 2010, and the debt-ceiling crisis in August 2011. But their task could could prove far more difficult this time around.

    Senate negotiators yet to reach 'fiscal cliff' deal as clock winds down - Vice President Joseph Biden and Sen. Mitch McConnell were locked in urgent talks late Sunday over the “fiscal cliff” after Democrats offered several significant concessions on taxes, including a proposal to raise rates only on earnings over $450,000 a year. With a New Year’s Eve deadline hours away, Democrats abandoned their earlier demand to raise tax rates on household income over $250,000 a year, as President Obama vowed during the recent presidential campaign.They also relented on the politically sensitive issue of the estate tax, according to a detailed account of the Democratic offer obtained by The Post, promising to stage a vote in the Senate that would guarantee that taxes on inherited estates remain at their current low levels, a key GOP demand. Still, McConnell (R-Ky.) was holding out to set the income threshold for tax increases even higher, at $550,000, according to people close to the talks in both parties. And he was protesting a Democratic proposal to raise taxes on investment profits for households with income above $250,000. The two sides were also sharply at odds over automatic spending cuts set to decimate budgets at the Pentagon and other federal agencies next month. Democrats were seeking to delay the cuts, known as the “sequester,” until 2015, without identifying other savings to compensate. They were also pressing to extend unemployment benefits, farm subsidies and Medicare payments to doctors, again without offsetting cuts as Republicans demand.

    Cramming with Cliff Notes: Something to Watch Out For - Not all tax threshold deals are created equal.  Read on. It ain’t over til we’re over but awfully hard to see a path that resolves the cliff before the deadline.  As I noted earlier, this isn’t necessary a bad thing–compared to what we’ve been hearing come out of the frenzied last-minute negotiations, there’s likely a better deal on the other side of the cliff. What do I mean by better?  One that raises at least $1 trillion in tax revenue (over 10 years), an amount that the deal was converging towards, extended UI benefits, and targeted spending cuts, not across the board sequestration. They’re surely arguing over the income tax threshold but if you’re still following this stuff–and if your disgust level has finally been breached, believe me, I understand–keep an eye on the details.  When the President offered Rep Boehner to raise the income tax rate only on households over $400,000, that deal actually included higher capital gains and dividend rates (currently at 15% up to 20%), along with the repeal of certain exemptions starting on incomes of $250,000.  That’s why even with the higher threshold for the income tax rate, that tax deal still raised over $1 trillion over ten years.

    Spending sequester emerges as key to deal - A Senate "fiscal cliff" deal on Sunday appears to be threatened more by differences on spending cuts rather than on whose taxes will go up on Jan. 1. Senate Democrats and Republicans are hung up on how to deal with $109 billion in sequestered cuts to defense and non-defense spending that forms part of the fiscal cliff of cuts and tax hikes. Senators and their aides say that both sides are closer on how to extend the Bush-era tax rates, with Democrats willing to back off their demand that taxes go up for everyone making more than $250,000 per year. “That is gone. The president already said $400,000,” Sen. Kay Bailey Hutchison (R-Texas) told reporters. While Hutchison and other Republicans want to keep the estate tax as is — with an exemption up to $5.2 million — the GOP is also showing flexibility. “It can’t go to a million,” she said. But the sequester is proving to be a hard nut to crack. Hutchison said Democrats are demanding that the deal turn off two years of automatic spending cuts, not just those in 2013. “If you have a two-year moratorium, you are not really getting the heart of the problem, which is spending,” Hutchison said. Democratic aides said the party wants to use the new tax revenue from allowing Bush-era rates to expire to offset the cost of eliminating the sequester.

    "Fiscal Cliff" Deal - From Ezra Klein:
    1. Details on the deal: 39.6% tax rate for individual income over 400k/family income over $450k. AMT patched permanently.
    2. Dividends and cap gains taxes at 20% of the $400k/$450k levels. PEP at $250k. Pease at $300k.
    3. UI and business cuts extended through 2013. Stimulus cuts for 5 years. Medicare cuts stopped with offsets. Payroll cut expires.
    4. Sequester unclear. Prez wants to offset with taxes and spending cuts. R's only want to offset with spending cuts.
    5. Estate tax set at $10m exemption but 40% rate.
    6. Deal raises about $600b -- and maybe a bit more -- in taxes over 10 years. As always details can change, but that's where it is now.

    The World's Worst Poker Player - Krugman -  Many reports in the past hour or two suggesting that Obama is about to cave on the fiscal cliff — water down his tax demands in return for some minor Republican concessions — concessions that won’t involve taking the debt ceiling off the table. Let’s hope this is wrong. Is it really possible that Obama still doesn’t understand that every time he does this — especially if it comes just a few days after stern statements about how he won’t give it — it just reinforces the Republican belief that he can always be bullied into submission? If he cuts a bad deal on the fiscal cliff today, he more or less guarantees that just a few weeks from now Republicans will go all out on using the debt ceiling to extract more concessions.So far, these are only reports on background, so maybe the truth isn’t that bad. But suddenly that sinking feeling, the sense that you’ve got a leader you can count on to wimp out when it matters, is back.

    Fiscal Cliff Talks: AFL-CIO Urges Lawmakers To Put Brakes On Deal - Shaking up the "fiscal cliff" negotiations as they enter their closing stages, one of the top labor leaders in the country urged Democrats on Monday night to put the brakes on the deal and reconsider an even-further scaled-down proposal. Richard Trumka, president of the AFL-CIO, tweeted his opposition to a proposal that would raise tax rates only on incomes above $400,000 for individuals and $450,000 for couples, while inviting future debt-reduction standoffs just months down the road. "Its not a good #fiscalcliff deal if it gives more tax cuts to 2 percent and sets the stage for more hostage taking," Trumka wrote. Trumka added, "We cannot set the stage for further destabilizing hostage taking from Republicans in the form of another debt ceiling crisis and another sequester crisis." AFL-CIO officials said that Trumka supports a fallback option, which would include an extension of lower Bush-era tax rates below $200,000 for individuals and $250,000 for couples, as well as an extension of unemployment insurance and a pledge to deal with the sequestration spending cuts in the coming weeks.

    Shape of Fiscal Deal Emerging, but Spending Still at Issue - Vice President Joseph R. Biden Jr. and Senator Mitch McConnell, the Republican leader, on Monday reached agreement on a tentative deal to stave off large tax increases starting on Tuesday, but remained stuck on whether and how to stop $110 billion in across-the-board spending cuts in 2013, an official familiar with the negotiations said.Under the emerging deal, income taxes would rise to 39.6 percent from 35 percent on income over $400,000 for single people and $450,000 for couples. Above those income levels, dividends and capital gains tax rates would also rise, to 20 percent from 15 percent. The official familiar with the deal stressed that taxes would rise in some sense on the top 2 percent of earners, as Mr. Obama had wanted. That is because the deal would reinstate provisions to tax law, ended by the Bush tax cuts of 2001, that phase out personal exemptions and deductions for the affluent. Those phaseouts, under the agreement, would begin at $250,000 for single people and $300,000 for couples.

    The Cliff Deal in the Offing -From what I’m picking up in the ether (and from Ez Klein’s tweets and from here) it sounds like a deal is forming to avoid the cliff.

    • –The income tax rate for households with income above $450,000 goes from 35% to 39.6% ($400,000 for individuals);
    • –Couples with incomes above $300,000 would lose some tax exemptions from which they currently benefit;
    • –Dividend and capital gains rates go from 15% to 20% but only for households above $450,000;
    • –The estate tax goes to a 40% rate up from 35% and a $5 million exemption for an individual’s estate, $10 million for couples;
    • –Sequester is unresolved; AMT and doc fix (payments to Medicare docs) get patched;
    • –Another year of extended unemployment benefits;
    • –Raises $600 billion in revenue;
    • –Nothing on the debt ceiling!

    Fiscal-Cliff Deal 'In Sight,' Said to Include 1-Year Doc Fix - The emerging agreement, which still needs approval by the Democratic-controlled Senate and the Republican-controlled House, also would delay a 26.5% cut in Medicare pay for physicians for 1 year, according to published reports. When these votes will occur, however, is anyone's guess. It is possible the final ayes and nays will not be uttered until later this week.  Megan Whittemore, a spokesperson for House Majority Leader Eric Cantor (R-VA), told Medscape Medical News that the House will go into action as soon as the Senate gives it something to consider. "There's little difference between [us] voting tonight or tomorrow," Whittemore noted. However, after she made her remarks, the House adjourned for the day with a plan to meet again at noon on January 1.

    Your fiscal cliff deal cheat sheet - The White House and the Senate have finalized the details of their deal to avert the fiscal cliff.  The bill basically follows the framework that came out earlier this afternoon from the McConnell-Biden talks, with key additional details. Here’s the rundown of what it’s likely to look like:

    • — Tax rates will permanently rise to Clinton-era levels for families with income above $450,000 and individuals above $400,000. All income below the threshold will permanently be taxed at Bush-era rates.
    • — The tax on capital gains and dividends will be permanently set at 20 percent for those with income above the $450,000/$400,000 threshold. It will remain at 15 percent for everyone else. (Clinton-era rates were 20 percent for capital gains and taxed dividends as ordinary income, with a top rate of 39.6 percent.)
    • — The estate tax will be set at 40 percent for those at the $450,000/$400,000 threshold, with a $5 million exemption. That threshold will be indexed to inflation, as a concession to Republicans and some Democrats in rural areas like Sen. Max Baucus (D-Mt.).
    • — The sequester will be delayed for two months. Half of the delay will be offset by discretionary cuts, split between defense and non-defense. The other half will be offset by revenue raised by the voluntary transfer of traditional IRAs to Roth IRAs, which would tax retirement savings when they’re moved over.
    • The 2009 expansion of tax breaks for low-income Americans: the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit will be extended for five years.
    • — The Alternative Minimum Tax will be permanently patched to avoid raising taxes on the middle-class.
    • — The deal will not address the debt-ceiling, and the payroll tax holiday will be allowed to expire.
    • — Two limits on tax exemptions and deductions for higher-income Americans will be reimposed: Personal Exemption Phaseout (PEP) will be set at $250,000 and the itemized deduction limitation (Pease) kicks in at $300,000.
    • —The full package of temporary business tax breaks — benefiting everything from R&D and wind energy to race-car track owners — will be extended for another year.
    • — Scheduled cuts to doctors under Medicare would be avoided for a year through spending cuts that haven’t been specified.
    • — Federal unemployment insurance will be extended for another year, benefiting those unemployed for longer than 26 weeks. This $30 billion provision won’t be offset.
    • — A nine-month farm bill fix will be attached to the deal, Sen. Debbie Stabenow told reporters, averting the newly dubbed milk cliff.

    Lousy Deal on the Edge of the Cliff - Robert Reich - The deal emerging from the Senate is a lousy one. Let me count the ways:

    • 1. Republicans haven’t conceded anything on the debt ceiling, so over the next two months – as the Treasury runs out of tricks to avoid a default – Republicans are likely to do exactly what they did before, which is to hold their votes on raising the ceiling hostage to major cuts in programs for the poor and in Medicare and Social Security.
    • 2. The deal makes tax cuts for the rich permanent (extending the Bush tax cuts for incomes up to $400,000 if filing singly and $450,000 if jointly) while extending refundable tax credits for the poor (child tax credit, enlarged EITC, and tuition tax credit) for only five years. There’s absolutely no justification for this asymmetry.
    • 3. It doesn’t get nearly enough revenue from the wealthiest 2 percent — only $600 billion over the next decade, which is half of what the President called for, and a small fraction of the White House’s goal of more than $4 trillion in deficit reduction. That means more of the burden of tax hikes and spending cuts in future years will fall on the middle class and the poor.
    • 4. It continues to exempt the first $5 million of inherited wealth from the estate tax (the exemption used to be $1 million). This is a huge gift to the heirs of the wealthy, perpetuating family dynasties of the idle rich.

    When You’ve Lost Ezra Klein …President Obama campaigned for re-election on one central theme: those who’ve done well in America should pay more of their fair share. If you asked the lowest-information voter of 2012, s/he could probably tell you that Obama wanted to raise taxes on people making more than a quarter-million dollars a year. $250,000 was a number woven into every speech he made. And, now, he seems to have abandoned even this benchmark as part of his ‘negotiation’ on the fiscal cliff. Ezra Klein, loyal Administration mouthpiece, has noticed: But after Obama won on a platform that was barely about anything aside from letting those tax cuts expire, it seemed inevitable he’d get it done. It was his due. To the GOP’s delight, that no longer seems to be the case. In the Obama-Boehner negotiations, the White House offered to raise the threshold from $250,000 to $400,000. McConnell, in his negotiations with Harry Reid and now Joe Biden, has been trying to raise that to $500,000. It’s clear to the Republicans that they will get past the fiscal cliff with a smaller tax increase than they thought. Perhaps much smaller. Huzzah!

    Obama spearheads social counterrevolution - If Washington “goes over the cliff,” the impact will be felt most directly by working people, including tax increases that will effectively cut take-home pay for workers by 7 percent and the immediate elimination of unemployment insurance for 2 million long-term jobless, followed soon after by the cutoff of benefits for another 1 million people. Federal workers will face unpaid furloughs, and essential social programs, from energy assistance to child nutrition to education grants, will be hit with across-the-board cuts.This is only the beginning. The fiscal cliff is the first in a series of artificial deadlines established for the New Year. There will be another deadline in late February over raising the federal debt ceiling—the same issue that became the pretext in August 2011 for a bipartisan agreement to cut over $1 trillion in social spending over the next decade. In March, the “continuing resolution” adopted before the election to authorize federal spending for six months will expire. Each deadline will be utilized as the occasion to go after the most important federal social programs: Social Security, Medicare and Medicaid, which provide retirement income and pay for health care for tens of millions of elderly, disabled and poor people. The phony debate over a minuscule tax increase for the rich—which will be quickly replaced with “comprehensive reform” to lower income and corporate taxes next year—is intended to conceal this reactionary agenda.

    Conceder In Chief? - Krugman - Viewed on its own, it’s a bad and upsetting deal but not as terrible as initial rumors had it. But the strategic consequences are likely to be very bad indeed, and in very short order too.  Basically, he could have gotten the whole of the Bush high-end tax cuts reversed, which would mean close to $800 billion in revenue over the next decade. What he couldn’t get, or at least couldn’t count on getting, were various spending items. This included the extension of unemployment benefits and various “refundables” on things like the Earned Income Tax Credit, that is, pieces of tax legislation that end up having the government cut checks to families instead of the other way around. So what Obama appears to have done is trade away part of the revenue from high-income taxpayers in return for some of the spending items he wanted. Extended unemployment benefits for a year, and the refundables either extended in perpetuity or for 5 years. The revenue loss seems to be on the order of $150 billion, or maybe a bit less. The reasons it isn’t bigger is that while the threshold for the top marginal rate is moving up to 450K, the thresholds for other things — phaseout of deductions, higher taxes on dividends and capital gains — aren’t going up, they’re staying at 250K.And at least one positive thing can be said: no giveaway on Social Security, Medicare, or Medicaid. Basically, no spending cuts at all.

    How Bad is the Deal to Avoid the Fiscal Cliff? - Tim Noah makes the case that is so bad that we should kill it. Tim also provides an update from Sam Stein and Ryan GrimThe preliminary fiscal cliff deal being negotiated by Senate Minority Leader Mitch McConnell (R-Ky.) and Vice President Joe Biden would achieve up to $790 billion in revenue over the next decade. Some of that money would be offset by extensions of tax credits and other stimulative policy, leaving roughly $715 billion in debt reduction over that same time period. Because the revenue is counted over a decade, much depends on a variety of inexact assumptions, which is why the White House calculation of the total revenue raised by the deal is only $600 billion … Under the framework, the Bush-era tax cuts would be extended permanently for individuals at $400,000 and joint filers at $450,000. A second Senate Democratic source familiar with the state of play confirmed those details. The top rate on ordinary income would go back to 39.6 percent and raise an estimated $370 billion in revenue over 10 years. The same thresholds would be applied for capital gains and dividends, with the top rates in that case going up to 20 percent -- a concession to Republicans (the rate on dividends was set to return to 39.6 percent) but not far from the president's position during the campaign. Left unaddressed, at the moment, are the $1.2 trillion in sequestration-related cuts that will be triggered on Jan. 1. The parties are arguing over how long to stave off the cuts, and whether and how to offset them. So what if we do not get as much 10-year deficit reduction as some had hoped? Wasn’t the real concern how much immediate austerity we would get without a deal?

    Let’s Give Up on the Constitution - AS the nation teeters at the edge of fiscal chaos, observers are reaching the conclusion that the American system of government is broken. But almost no one blames the culprit: our insistence on obedience to the Constitution, with all its archaic, idiosyncratic and downright evil provisions. Consider, for example, the assertion by the Senate minority leader last week that the House could not take up a plan by Senate Democrats to extend tax cuts on households making $250,000 or less because the Constitution requires that revenue measures originate in the lower chamber. Why should anyone care? Why should a lame-duck House, 27 members of which were defeated for re-election, have a stranglehold on our economy? Why does a grotesquely malapportioned Senate get to decide the nation’s fate? Our obsession with the Constitution has saddled us with a dysfunctional political system, kept us from debating the merits of divisive issues and inflamed our public discourse. Instead of arguing about what is to be done, we argue about what James Madison might have wanted done 225 years ago.

    Deal's Likely Impact: More Slow Growth - Brace for painfully slow growth, but not necessarily a recession. The deal struck Monday between the White House and Senate Republicans would prevent the sudden across-the-board spending cuts and a jump in income-tax rates that had raised fears of a 2013 recession. But it would leave in place tax provisions—and tee up more battles over budget policy—that are likely to weigh on economic growth in the new year. The biggest hit to 2013 growth appears likely to come from the payroll-tax holiday's expiration on Monday. The workers' share of the Social Security payroll tax had been lowered by two percentage points for the past two years, to 4.2% from 6.2%, amounting to an annual income boost of $1,000 for a typical U.S. family earning $50,000 a year. The rise in payroll taxes would amount to about $125 billion a year, or about 0.8% of the nation's overall output, according to J.P. Morgan Chase. According to many forecasters, that would slow the pace of U.S. economic growth by about half a percentage point next year, a sizable amount for an economy growing about 2% a year.

    Perspective on the Deal - Krugman -To make sense of what just happened, we need to ask what is really at stake, and how much difference the budget deal makes in the larger picture. So, what are the two sides really fighting about? Surely the answer is, the future of the welfare state. Progressives want to maintain the achievements of the New Deal and the Great Society, and also implement and improve Obamacare so that we become a normal advanced country that guarantees essential health care to all its citizens. The right wants to roll the clock back to 1930, if not to the 19th century. There are two ways progressives can lose this fight. One is direct defeat on the question of social insurance, with Congress actually voting to privatize and eventually phase out key programs — or with Democratic politicians themselves giving away their political birthright in the name of a mess of pottage Grand Bargain. The other is for conservatives to successfully starve the beast — to drive revenue so low through tax cuts that the social insurance programs can’t be sustained. The good news for progressives is that danger #1 has been averted, at least so far — and not without a lot of anxiety first. Romney lost, so nothing like the Ryan plan is on the table until President Santorum takes office, or something. Meanwhile, in 2011 Obama was willing to raise the Medicare age, in 2012 to cut Social Security benefits; but luckily the extremists of the right scuttled both deals. There are no cuts in benefits in this deal. The bad news is that the deal falls short on making up for the revenue lost due to the Bush tax cuts. Here, though, it’s important to put the numbers in perspective. Obama wasn’t going to let all the Bush tax cuts go away in any case; only the high-end cuts were on the table. Getting all of those ended would have yielded something like $800 billion; he actually got around $600 billion.

    Obama’s wrong: This ‘cliff’ deal still raises taxes on the middle class: This afternoon, President Obama spoke while surrounded by an ad hoc group of “middle-class Americans” who he promised would be protected from tax hikes by the 11th-hour “fiscal cliff” proposal. That’s not what’s going to happen. “For the last few days, leaders in both parties have been working toward an agreement that will prevent a middle-class tax hike from hitting 98 percent of all Americans starting tomorrow,” he said. “Preventing that tax hike has been my top priority, because the last thing folks, like the folks up here on this stage, can afford right now is to pay an extra $2,000 in taxes next year.”But Obama is wrong: Taxes will rise on the middle class even if this deal passes, because it doesn’t include an extension of the payroll tax holiday. That means that the paychecks for more than 160 million Americans will be 2 percent smaller starting in January, as the payroll tax will jump from 4.2 percent to 6.2 percent. And a huge number of those hit will be middle class or working poor (Two-thirds of those in the bottom 20 percent would be affected by a payroll tax hike.). 

    Payroll Tax Cut Expires; How Much More Will You Pay? - The fiscal cliff deal reached by the White House and Senate Republicans wouldn’t extend the payroll-tax holiday. The biggest hit to 2013 growth appears likely to come from this tax break's expiration on Monday. The workers’ share of the Social Security payroll tax had been lowered by two percentage points for the past two years, to 4.2% from 6.2%, amounting to an annual income boost of $1,000 for a typical U.S. family earning $50,000 a year. It provided an increase of as much as $2,202 this year for a worker earning $110,100, the maximum wage subject to the payroll tax.The end of the tax break would effectively raise taxes for all wage earners next year, a potential surprise for many despite the expected extension of most individual income-tax rates. That would mean the highest tax burdens since 2008 for most U.S. households, before the Obama administration pushed a tax credit in the 2009 stimulus law and the payroll-tax break. Enter Your Annual Pretax Income:

    Counterparties: Resolution without reconciliation - The fiscal cliff deal is here — at least in the Senate. The President confirmed in an afternoon appearance that a deal was “close”, but offered no specifics and blasted Congress for their procrastinating ways. It’s not even clear that the latest deal would have the support to be put to a vote in the House, let alone pass.Depending on which baseline is used, the deal includes between $600 billion and $800 billion in debt reduction, Ezra Klein tweeted; Sam Stein and Ryan Grim report that this will come “almost entirely through revenue hikes.”  But as Justin Wolfers tweeted, any last-minute deal that doesn’t include raising the debt ceiling pretty much guarantees another round of panicked negotiations. The latest deal raises income taxes for families who earn more than $450,000 per year or individuals who earn more than $400,000. Taxes on inheritances larger than $10 million for families or $5 million for individuals would increase to 40% from 35%. Left unaddressed is the “sequester”, which would result in painful automatic spending cuts. Gone also are cuts to social security, through “chained CPI”, which Republicans abandoned on Sunday. Still, Joshua Green judges the whole thing a winner for the GOP, not least because “Republicans would hold onto their greatest point of leverage” — their ability to hold the country hostage over debt-ceiling negotiations. Paul Krugman isn’t happy that this deal won’t raise the debt ceiling. Matt Yglesias thinks the last-minute haggling is pointless, with Congress already having missed its chance at a “grand bargain”. The Dallas Fed wonders if “the real question today is whether we have entered an era of permanently greater polarization in Congress and permanently higher fiscal policy uncertainty”.

    Add-On to Budget Deal Would Stop Milk Prices From Doubling - A budget deal between Vice President Joe Biden and Senate Republican leaders would extend most U.S. farm support programs for a year and end fears, at least until autumn, that the retail price of milk could double. The extension, included at the request of Senate Minority Leader Mitch McConnell, rankled some farm-state lawmakers who’d pushed for an overhaul of dairy support programs and had pushed for action instead on a five-year agriculture bill.“It does guarantee current policy continues and milk prices will not go up,” said Senate Agriculture Committee Chairwoman Debbie Stabenow. “But if you’re a small dairy farmer, it doesn’t help you a bit.” The Senate passed the farm provision early today as part of legislation to undo more than $600 billion in tax increases and spending cuts. The measure, passed on an 89-8 vote, now goes to the House for consideration.

    Congress poised to miss fiscal deadline (Reuters) - The United States looked on track to tumble over the "fiscal cliff" at midnight on Monday, at least for a day, as lawmakers remained reluctant to back last-minute efforts by Senate leaders to avert severe tax increases and spending cuts. The U.S. House of Representatives might not vote on any "fiscal cliff" plan before midnight, possibly pushing a legislative decision into New Year's Day, when financial markets will be closed, said a Republican aide. The Senate plan was heavy on tax increases and light on spending cuts, raising concerns that it would repel rank-and-file lawmakers, particularly in the Republican-controlled House. As Senate Republican leader Mitch McConnell and Vice President Joe Biden kept working on unresolved parts of the deal, there was deep discontent among Senate Democrats. "The caucus as a whole is not sold" on the proposal, said a Senate Democratic aide. "We just don't have the votes for it." If Congress fails to act, about $600 billion in tax increases and government-wide spending cuts will begin taking effect after midnight, harsh measures that could push the U.S. economy into recession.

    Senate Passes Legislation to Allow Taxes on Affluent to Rise— The Senate, in a predawn vote two hours after the deadline passed to avert automatic tax increases, overwhelmingly approved legislation on Tuesday that would allow tax rates to rise only on affluent Americans while temporarily suspending sweeping, across-the-board spending cuts. The deal, worked out in furious negotiations between Vice President Joseph R. Biden Jr. and the Republican Senate leader, Mitch McConnell, passed 89 to 8, with just three Democrats and five Republicans voting no. Although it lost the support of some of the Senate’s most conservative members, the broad coalition that pushed the accord across the finish line could portend swift House passage as early as New Year’s Day. Quick passage before the markets reopen on Wednesday would be likely to negate any economic damage from Tuesday’s breach of the “fiscal cliff” and largely spare the nation’s economy from the one-two punch of large tax increases and across-the-board military and domestic spending cuts in the New Year.

    Tax loophole or policy fix? It can be in the eye of the beholder - The early debate on the fiscal cliff has mostly focused on the two biggest changes that are set to take effect on Jan. 1: the Bush tax cuts and the automatic spending cuts under the sequester. But yet another major piece will be in play: dozens of temporary tax provisions that make up one-eighth of the $450 billion of the fiscal cliff’s deficit reduction, according to the Tax Policy Center’s Donald Marron, who testified at the House hearing. They run the entire gamut of domestic policy, spanning energy (e.g., production tax credits for wind power), business (e.g. a tax credit to spur investment in low-income communities), housing, transportation, charity, and disaster relief. Technically speaking, many of the tax extenders—like the NASCAR tax break—have already expired: Congress, consumed by the payroll tax debate, didn’t renew them at the end of 2011. But most of their revenue impact won’t happen until Fiscal Year 2013, when people start doing their taxes for 2012. So the real debate over the extenders has been deferred to the end of the year. There’s bipartisan consensus that this isn’t the best way to make policy: having short-term tax provisions that are constantly sunsetting but are often renewed (and applied retroactively) creates a huge amount of uncertainty, and the current political gridlock has makes the situation even worse.

    Who foots the "grand deal (no capitalization on purpose)" costs. -Everything You Need to Know about the Fiscal Cliff Deal "Wonkblog" Zachary Goldfarb This was the model to describe what would happen if the Grand Deal increase in taxes fell upon those Household Taxpayers making greater than $200,000 (individual) and $250,000 (family) (Tax Policy Center) . Slight error in the chart also, the 20-60% should be 20-40% of Household Taxpayers. The impact should be similar.  The Bill Itself: ‘‘American Taxpayer Relief Act of 2012’’ I have not had time to go through this bill with a fine tooth comb yet. Amazing how they can write 157 pages of strike this and insert this in a matter of days. While it does not look that alarming, Obama has again displayed his feet are made of sand which wash away with the tides of adversity. An abbreviated cheat sheet can be found here: "Your fiscal cliff deal cheat sheet" Wonkblog Suzy Khimm The big winner of the day? Milk subsidies will continue.

    Senator Harkin “No deal is better than a bad deal” - Senator Tom Harkin (D-Iowa) just left the floor of the Senate after saying he would rather go over the “fiscal cliff” than make the Bush tax cuts permanent. Harkin noted the only real difference between America today and America at the time of the Clinton tax rates was that the rich had gotten richer and were now trying to protect their wealth. He specifically noted the attempt to make the estate tax cuts permanent and said the Clinton tax rates were fine by him. Watch the Senate Feed Live.

    No Deal! House Expected To Adjourn Without Fiscal Cliff Vote - Even if the Senate comes up with a deal tonight the United States of America is still likely to go off the “fiscal cliff”: President Obama said Monday that Congress is making progress on a short-term “fiscal cliff” deal, but it is increasingly clear as a midnight deadline approaches that Washington will have to fix the impending tax hikes and spending cuts retroactively. House Republicans advised members Monday afternoon that no votes were expected on a final deal tonight, but cautioned that the situation is “very fluid.”… Speaker John Boehner, R-Ohio, has said he will bring to the floor whatever passes the Senate, but he has cautioned that his chamber reserves the right to amend — or defeat — the proposal. This is in no way surprising given how this has played out. But one wonders – can Boehner get this done Tuesday? Wednesday? Ever?

    House Planning No Budget Vote Means Tax Increases Start - Bloomberg: The U.S. House of Representatives doesn’t plan any votes on the federal budget tonight, meaning that Congress for now will fail to avert $600 billion in tax increases and spending cuts set to start at midnight.Taxpayers and investors won’t see immediate effects of the changes, which would accumulate over a matter of months. Congress could reverse them by acting retroactively early in 2013. There are signs it may do that.  The only House votes still scheduled for today are on non- budget items, according to the chamber’s schedule. Republicans left open the option to return if needed. House Republicans gathered in a private conference meeting late this afternoon in Washington time, and Senate Republicans also were meeting.

    Thank G-d for House Republicans - Dr. Black hits the latest good news from Capitol Hill: The House has signaled that it isn't going to play ball today And I am no longer the only economist noting that the House--not for the first time--is forcing the Administration to do what it should have been ready to do all along. In fact, Brad DeLong cites Tim Noah,* Scott Lemieux and Jon Chait(!), Aging Ezra, and Paul Krugman and Noam Schreiber,** while Jared Bernstein, last seen being willing to further reduce Senior Purchasing Power for a pair of dirty socks, puts it directly: The thing that worried me most in the endgame is that the [White House] would be so intent on a deal that they’d lock in too few revenues with no path back to the revenue well, and that they’d leave the debt ceiling hanging out there.... Those fears will be realized unless the President really and truly refuses to negotiate on the debt ceiling and is willing to blow past those who would stage a strategic default. If he is not, and if this cliff deal passes, then I fear the WH may have squandered its hard won leverage.That last is apparently politico-speak for "look who just s*at the bed." Thank G-d for House Republicans. Otherwise, this Administration would have killed itself long ago.

    US goes over fiscal cliff (video)

    US To Officially Go Over The Fiscal Cliff - As we forecast back in November, it is now official that the House will not vote on any deal out of the Senate, assuming there is one which there won't be of course, later today, which means America will officially slide off the Fiscal Cliff. And now cue everyone being very hopeful and optimistic a deal will get done momentarily, if not sooner, in 2013. Of course, we all know just how far optimism takes America's dysfunctional Congress. The biggest irony in all of this is that the only winners today were the much hated "1%"-ers, whose taxes may or may not go up, who just got to book major year end profits on this last minute ramp. The remainder of America's population can quietly look forward to 2013 with "hope" and "optimism" that in 2013 Congress will finally stop being dysfunctional. Good luck. Oh, and before we forget, America just breached its debt ceiling: now the pillaging of various government retirement funds begins.

    The Fecal Cliff - Izvestia: “Tentative Accord Reached to Raise Taxes on Wealthy”. Pravda: “Obama, Republicans reach deal on fiscal cliff; Senate vote expected tonight”. Man, I’m experiencing this tremendous body hit, a huge relief from tension. Not. And maybe I’m too cynical… … but when you compare the Eisenhower top rate (91%) with the piddling 39.6% in this “tentative accord,” it all seems less exciting. Especially when you know that the next move is cuts. Ezra Klein lays out the next rounds of kabuki*: It would be going too far to say White House officials are thrilled with this package. But it looks pretty good to them. As they see it, it sets up a three-part deficit reduction process. Part one came in 2011, when they agreed to the Budget Control Act, which included more than a trillion dollars in discretionary spending cuts. Part two will be this deal, which is $600 billion — and maybe a bit more — in revenue. And part three is still to come, but any entitlement cuts that Republicans want will have to be matched by revenues generated through tax reform. If Republicans want $700 billion in further spending cuts and the White House insists on $700 billion in tax reform, they’ll end up with more revenue than in Obama’s final offer to House Speaker John Boehner. But again, again, again, entitlement cuts and tax increases (especially on the rich) are not commensurate: A “sacrifice” where some give up luxuries and others give up necessities is in no way “shared.” A marginal sacrifice for the rich is not commensurate to core sacrifices for the rest of us. But the tropes of official Washington carefully brush this reality away.

    U.S. Budget Compromise Deal Reached  —U.S. President Barack Obama and Senate leaders Monday reached a New Year's budget agreement that would let income-tax rates rise for the first time in nearly 20 years, maintain unemployment benefits for millions of people and blunt the impact of spending cuts that were looming as part of the so-called "fiscal cliff." The long-sought compromise, which will raise taxes on income over $450,000 for couples, was approved by the Senate in the early morning hours Tuesday. The House was expected to consider it later in the day. "While neither Democrats nor Republicans got everything they wanted," President Obama said in a statement, "this agreement is the right thing to do for our country and the House should pass it without delay." He said it would "grow the economy and shrink our deficits in a balanced way." Despite concerns raised by some Senate Democrats earlier in the day, the bill was approved by a strong 89-8 vote, with a majority of both parties in support. One of the most strident opponents was Democratic Sen. Tom Harkin of Iowa. Speaking on the Senate floor shortly before the vote, he declared the compromise benefited the wealthiest Americans at the expense of those who could afford it the least. "Maybe now we are all believers of trickle-down economics. Not I," Mr. Harkin said, declaring he would vote against the legislation. The other seven senators voting against the bill were Democrats Tom Carper of Delaware and Michael Bennet of Colorado and Republicans Charles Grassley of Iowa, Mike Lee of Utah, Rand Paul of Kentucky, Marco Rubio of Florida and Richard Shelby of Alabama.

    Both sides get wins in tax deal - The key part of the agreement would extend Bush-era tax rates for individuals making $400,000 and less in annual income and families making $450,000 and less. Higher incomes will be subject to a 39.6 percent tax rate, up from 35 percent.   The president had wanted the threshold to be $200,000 for individuals and $250,000 for families, while Republicans had pushed for a higher threshold.  But Obama and Democrats won concessions from Republicans to reduce the deductions wealthier taxpayers can use, by imposing rules known as "PEP and Pease." These tax provisions that limit the deductions wealthier people can use would be reintroduced under the deal.  PEP, the personal exemption phaseout, reduces the value of each personal exemption by 2 percent for each $2,500 above a specified threshold until the exemption is completely phased out. Pease, named after a former congressman, cuts itemized deductions by 3 percent of adjusted gross income above specified thresholds, but not by more than 80 percent, according to a summary by the Tax Policy Center.  Under the deal, phaseouts of the deductions would begin at $250,000 for individuals and at $300,000 for families. The two provisions had been set to come back to life next year if Congress had taken no action, but with a $174,000 threshold for individuals. The deal would also generate more revenue from investment income in a win for Democrats.

    Fiscal Deal Would Only Set Stage For a New Year of Mini-Cliffs - Sure, the deal extends the middle class tax cuts permanently, but part of that extension involves accepting a huge swath of the Bush administration's tax policy legacy. The deal also defines the wealthy as those who earn close to half a million a year. That's hardly a tax just to benefit the middle class. Even high-income earners in expensive states like New York or California would be hard-pressed to define anyone making $395,000 as just another hard-working Joe. That’s a huge political victory for the Republicans because it ensures that the Bush-era cuts have become part of our accepted reality. “This is now part of the tax code,” says Roberton Williams, a senior fellow at the Tax Policy Center. “Any change in taxes is now measured relative to that.” The package also does not raise as much revenue as the White House had proposed (just $600 billion to the administration's original request of $1.2 trillion). The small-scale deal in play does little to boost economic growth because the package does not contain stimulus money and quietly does away with the payroll tax holiday. Nor does not it streamline the tax code, the pet project of the business lobbyist groups, or deal with the deficit in a meaningful way, as the Wall Street Journal aptly laid out. The biggest takeaway is that the package shoves many of the tough decisions about long-term tax and spending policy into January and February, when lawmakers will face not only the debt ceiling but also the sequester: a moment that Republicans view as ripe for an overhaul of entitlement programs. And, they're right to anticipate that this will be a time when the Democrats will give ground on spending cuts and potentially the social safety net.

    I Do Not Understand the Obama Administration...- DeLong - The big reason to make a deal before January 1, 2013 was that detonating the "austerity bomb" would impose 3.5% of fiscal contraction on the U.S. economy in 2013, and send the U.S. into renewed recession. It was worth making a good-enough deal--sensible long-run revenue increases and tax cuts to close the long-run fiscal gap plus enough short-term fiscal stimulus to make the net fiscal impetus +1.0% of GDP--in order to avoid renewed recession. But by my back-of-the-envelope count, the deal the Obama administration has agreed to still leaves a net fiscal impetus of -1.75% of GDP to hit the U.S. economy in 2013. That is only 40% of the way back from the "austerity bomb" to where we want to be. That isn't enough to make it worthwhile to make a deal before the new congress. After Boehner's reelection as Speaker and after the expiration of the Bush tax cuts eliminates the U.S.'s structural deficit, the politics become very different...

    Short-term relief, and little else - AMERICA, it appears, will go over the fiscal cliff after all, if only for a few days. But if all goes as planned, the worst of the cliff, a withering combination of tax increases and spending cuts, will be avoided.A deal nearing completion in the Senate would make permanent the tax cuts first enacted by George Bush in 2001 and 2003 and due to expire tonight, except for the wealthy. The marginal rate for individuals earning more than $400,000 and couples earning more than $450,000 would rise from 35% to its pre-2001 rate of 39.6%, while deductions would be curbed for some people earning as little as $250,000. Estate taxes would go up, but not to pre-2001 levels, while rates on capital gains and dividends, now 15%, would go up to 20%, still less than their pre-2001 rates. Tax credits for families, workers and college students first introduced in Mr Obama’s stimulus plan will be extended five more years. While passage in the Senate seemed certain, its fate in the House is more of a wild card. Partisans on both sides hate the deal: liberal Democrats because it does not raise rates on everyone earning more than $250,000, as Mr Obama had long demanded; Republicans, because they are being asked to approve the first increase in tax rates in two decades while getting no spending cuts in return.  Nonetheless, passage seems likely, if only because both sides realise the alternative would be much worse. If the country entered January with no deal in sight, taxes would rise on the vast majority of households, a hit worth more than $300 billion, or 2% of GDP, per year. Since the House will not vote until January 1st at the earliest, taxes will rise, at least for a day. But most households won’t notice since employers should be able to withhold taxes at the same level as last year by the time the first paychecks of January go out.

    Wind energy tax credits survive as Congress passes fiscal cliff deal — The wind energy industry in the U.S. breathed a sigh of relief as Congress passed a fiscal cliff deal on Tuesday that included an extension of the wind energy tax credits for wind projects that start in 2013. The wind energy tax credits — which began in the early 1990s but have  expired at least three times over the years — were set to expire at the end of 2012, and if expired, would have frozen wind project construction in the U.S. The American Wind Energy Association says that the extension of the credits will save 37,000 jobs and revive business at 500 wind factories. However, the boom and bust cycle will still have an effect on the wind industry, as “layoffs had already begun, as companies idled factories because of a lack of orders for 2013,” says the AWEA.The New York Times recently reported that the credits could provide a 2.2 cent tax credit for each kilowatt-hour generated by a wind project in the first 10 years, or a payment of 30 percent of the construction cost. The tax credits led to a boom in wind power in 2012, and new wind power installations represented 44 percent of all new electricity capacity created in the U.S. in 2012, according to the Energy Information Administration. President Obama says he plans to sign the legislation shortly.

    The Budget Deal: What We Have Left Undone - Making fiscal policy is never going to be easy, but it would be easier if we broke the process down into a logical sequence of steps. Here are those steps, as I see them:

    1. Decide how large a government we want in terms of government purchases and transfer payments. Any such number will necessarily have to be a political compromise.
    2. Agree on a set of budget procedures for prioritizing line items within the constraint imposed by (1), and then follow the agreed procedures.
    3. Determine the tax revenue needed to support the desired level of spending. This amount should be consistent with long-term considerations of sustainability.
    4. Agree on a set of rules for adjusting spending and revenue over the business cycle. The rules should allow for a prudent amount of cyclical stimulus and restraint as appropriate, while maintaining consistency with decisions (1) and (3).
    5. Agree on a tax structure that collects the amount of revenue required by (1), (3), and (4) in a way that is consistent with efficiency (broadest feasible base, lowest feasible marginal rates) and fairness (another political compromise).

    Which of these five steps did Congress accomplish in 2012? Not one of them.  That conclusion will hold whether or not the House approves the last-minute stopgap measure passed by the Senate on New Year’s Eve.

    The global cost of fiscal indecision -  The fiscal prognosis is, amazingly, probably fuzzier today than it has been in weeks: the only thing that seems certain is that no one has a clue what’s going to happen, especially in the House. But amidst the chaos of the intraday news chase, I think two broader stories have failed to get the attention they deserve. The first is that we have now officially reached the debt ceiling. Naively, I had assumed that any fiscal-cliff deal would automatically include raising the debt ceiling — after all, after going through the present legislative nightmare, who’s going to have any appetite for another one immediately afterwards? And yet, astonishingly, it seems as though even if the fiscal cliff does manage to get averted, the debt ceiling will remain in place, and raising it will require its own separate legislation. The second broad narrative is the slow death of the Grand Bargain. If and when we do get some kind of fiscal cliff deal, it will be a patched-together hodgepodge of policies designed with exactly one goal in mind: finding a piece of legislation which is capable of getting, somehow, through Congress. It will not be a shiny new tax code which radically rethinks US fiscal policy to put us on a healthy long-term footing: instead we’ll just get something better than the fiscal-cliff alternative of doing nothing at all. So if you were hoping that the cliff might finally give us the opportunity for a deep rethink of something like the mortgage-interest tax deduction, or even tax expenditures more generally, think again. And other reforms are similarly not going to happen.

    Kill This Deal - Dear House and Senate Democrats, Your president has sold you out. A deal will likely be announced today canceling the scheduled income-tax increase on all family income below $450,000, instead of the promised $250,000 threshold, which was already too high. It will also extend unemployment benefits and what my colleague Jon Cohn calls the "refundables," i.e., tax credits for lower- and middle-income people, and it will cancel Milkageddon, which is all good. But it isn't clear what it will do about the automatic cuts in the "sequester," and the deal doesn't appear to include extension of the payroll tax cut, which even Bill Kristol wants to extend. Also, the Democrats mostly caved on letting the inheritance tax rise. Oh, and the deal gives Republicans carte blanche to take America hostage all over again in a month or two over raising the debt limit.  Please vote against this bad deal so we can greet the new year on the far side of the fiscal cliff, which, notwithstanding the hysteria that the Washington Post is doing its best to spread (with an assist from the Senate chaplain!), is not the Slough of Despond. It is the Promised Land, a place where Democrats will have considerably more leverage than they have today to compel a quick deal far more to their liking. The White House means well, but it has bargained incompetently. As Jonathan Chait points out, any worry on the White House's part that it will be undercut by Senate Democrats too eager to make an even-worse deal is matched by a well-founded fear on the Senate Democrats' part that the White House won't hang tough. And anyway, the president has veto power, for crying out loud! Ezra Klein reports that the Democrats think they can make a deal now, force another tax increase later, and still get Republicans to back down on the debt ceiling. This is delusional. Any Republican who at this point believes Democrats will drive a hard bargain must be judged a fool.

    Navigating the fiscal badlands - The episode points to two lessons. One is the curious persistence in Washington of this cult of deficit responsibility as state religion to which all participants must at least nominally pay respects if they hope to be considered serious. Not that government borrowing is never a problem, of course. In the short term, in an economy running close to potential, public borrowing could lead to higher interest rates, thereby crowding out private investment and reducing growth. This is obviously not a concern at the moment; indeed, it would be quite encouraging to wake up and find oneself back in a world in which private demand for credit was so robust that government deficits were a real problem. And in that case, government deficits still wouldn't be that big a problem. In a robust economy tax revenues would be higher, spending needs lower, and deficits smaller. And in a robust economy—especially one with higher interest rates—we might expect the multiplier on fiscal cuts to be smaller, maybe even zero, since the central bank could very easily offset austerity with more expansionary policy. In the short run, there is a strong case to be made that true deficit hawks put a return to strong economic growth as the single highest priority, by a long shot.

    Congress Kicks the Fiscal Can off the Front Stoop - In the end, it looks like Congress isn’t even going to kick the fiscal can down the road. Assuming the House passes the deal agreed to by the Senate on New Year’s Eve, lawmakers will barely get that battered tin container it off the front stoop. The agreement preserves nearly all of the 2001-2010 tax cuts (with a few key exceptions) and delays most scheduled automatic spending reductions for two months. In effect, for all of the recent over-the-top budget drama, the deal preserves the unsustainable fiscal status quo, which is to say Congress will continue to spend far more than it is willing to collect in taxes. Worst of all, it sets up yet another fiscal crisis in just a few months when, in short order, the federal government reaches its legal borrowing limit and yet another temporary measure keeping government agencies operating expires. The fiscal cliff deal permanently extends nearly all the tax cuts enacted from 2001 to 2010. One key provision makes permanent the Alternative Minimum Tax “patch” that until now has been extended only one year at a time. That patch would keep about 28 million households off the AMT in 2013 alone. The deal extends for five years some refundable tax credits that were intended as temporary stimulus in 2009 and 2010.

    CBO Estimates "Obama Tax Cut" To Add $4 Trillion To Deficit Over Next Decade - Two things:

    • First - it is no longer the "Bush (temporary) tax cut" - it is now the "Obama (permanent) tax cut", with a loophole for the 1%ers (whose big picture "impact" we showed previously)
    • Second - according to the just released scoring by the CBO, the total impact to the US budget deficit of said permanent tax cuts, will be a $4 trillion increase in the deficit over the next decade. In reality, due to the CBO's perpetual optimistic bias, this number will likely be orders of magnitude lower than what it ends up being.

    U.S. Senate "fiscal cliff" bill adds 4 trillion USD deficit: CBO - (Xinhua) -- The Congressional Budget Office (CBO) on Tuesday said the Senate-passed bill to avert the "fiscal cliff" would add roughly 4 trillion dollars to federal deficit over a decade, largely because it would extend low tax rates for most Americans. In an analysis released on Tuesday, the nonpartisan CBO said compared with the current law, the plan brokered between the White House and the Senate late Monday night would add nearly 4 trillion dollars to the nation's deficit over a decade. The extension of Bush-era tax rates for most American households under the bill would add about 3.6 trillion dollars to the deficit over the next decade, the CBO said. The plan would prevent tax rate rise on individuals with annual income below 400,000 dollars and households making up to 450,000 dollars.

    Obama Deal Adds $3.97 Trillion to Deficit Over 10 Years; Only 5 Republicans Voted Against; White-Flag Surrender For all the pissing and moaning over the fiscal cliff, there was never much of a "cliff" in the first place. Worse yet, every delay made matters increasing irresponsible in terms of addressing the deficit. The final result, as passed by the Senate, watered down budget cuts from $600 billion to a mere $12 billion. Moreover, the extension of the tax cuts will add almost $4 trillion to the deficit over 10 years according to CBO analysis of the American Taxpayer Relief Act. Nonetheless, that was not enough for liberal democrats who thought they did not get enough out of the deal. The "Fiscal cliff" moves to House, where a slim hope remains that Republicans will punt this bill a mile high. In a rare late-night show of unity, the Senate voted 89 to 8 to raise some taxes on the wealthy while keeping income taxes low on more moderate earners. Republicans, unhappy that the bill contained over $600 billion in tax increases but only around $12 billion in spending cuts, said they may change it more to their liking and send it back to the Senate. Party leaders planned to take the temperature of rank-and-file lawmakers over the afternoon before deciding on a course of action."My recommendation would be not to take a package put together by a bunch of sleep-deprived octogenarians on New Year's Eve," said Representative Steve LaTourette, a moderate Republican from Ohio who is a close ally of House Speaker John Boehner.

    Senate’s New Year’s Cliff Deal Shifts Pressure to Boehner - The U.S. Senate passed a bipartisan budget deal two hours after income tax cuts expired, reaching an after-deadline deal to undo the potential economic harm of $600 billion in tax increases and spending cuts. The vote early today in Washington shifts the pressure to House Speaker John Boehner, who hasn’t said if he’ll accept the agreement or change it. He will face difficulty mustering Republican votes for any bill with higher taxes for 2013 than they were in 2012.The Senate bill, passed 89-8, would make permanent the tax cuts for most households that expired at midnight, continue expanded unemployment benefits and delay automatic spending cuts for two months. The agreement isn’t the grand bargain on deficit reduction lawmakers hoped for when they created the conjoined tax-and- spending deadlines over the past three years. Instead, if the agreement becomes law, it would avert most of the immediate pain and postpone Congress’ fiscal feud for just two months -- until a February fight over raising the $16.4 trillion debt limit.

    House Takes On Fiscal Cliff -  House Republicans reacted with anger Tuesday afternoon to a Senate-passed plan to head off automatic tax increases and spending cuts, putting the fate of the legislation in doubt just hours after it appeared Congress was nearing a resolution of the fiscal crisis.Lawmakers said that Representative Eric Cantor of Virginia, the No. 2 Republican, indicated to his colleagues in a closed-door meeting in the basement of the Capitol that he could not support the legislation in its current form. Many other Republicans were voicing stiff objections to a plan that they saw as raising taxes while doing little to rein in spending. Several conservatives assailed it on the House floor as the chamber convened at noon for an unusual New Year’s Day session. “There’s not a lot of support for the bill as is. I personally hate it,” said Representative John Campbell, Republican of California. “The speaker, the day after the election, said we would give on taxes, and we have, but we wanted spending cuts. This bill has spending increases. Are you kidding me?” Aides said that Speaker John A. Boehner, who had pledged to put any measure the Senate passed on the House floor for a vote, was mainly listening to the complaints of his rank and file and had not taken a firm position on the legislation, though he had clear reservations.

    House vote on fiscal cliff compromise remains in doubt - With just two days to spare before work to pull the U.S. back from the so-called fiscal cliff would have to start over again from scratch, resistance from House Republicans on Tuesday threw into doubt whether a last-minute compromise measure could come to a vote Tuesday.Senators passed the bipartisan agreement in the middle of the night by an overwhelming vote of 89-8. It would raise income taxes on single earners with annual incomes above $400,000 and married couples with incomes above $450,000. It would also block spending cuts for two months, extend jobless benefits for the long-term unemployed, prevent a 27 percent cut in fees for doctors who treat Medicare patients and prevent a spike in milk prices.  House Democrats called on Speaker John Boehner, R-Ohio, to bring the measure to a vote, but some House Republicans were pushing back, insisting that the compromise didn't cut enough spending.Rep. Spencer Bachus, R-Ala., told reporters that the Republican majority in the House was likely to send the bill back to the Senate with more spending cuts. "I would be shocked if this bill didn't go back to the Senate," he said. "I think we're there on more revenue, but, you know, there is more revenue but no spending cuts." A Republican member told NBC News on condition of anonymity that 37 of 40 members who spoke on the bill opposed it. He said many of his colleagues were demanding "illogical concessions," including billions of dollars in extra spending cuts that Democrats wouldn't be able to live with.

    House Republican anger clouds fate of ‘fiscal cliff’ deal - A hard-fought bipartisan compromise passed in the Senate early Tuesday to spare all but the richest Americans from painful income-tax hikes teetered on the edge of collapse as angry House Republicans denounced its lack of spending cuts. While House Speaker John Boehner considered whether to bring the Senate-passed measure to the floor for a vote Tuesday, Majority Leader Eric Cantor told fellow Republicans in a closed-door meeting that he opposed the legislation negotiated by Vice President Joe Biden and Republican Senate Minority Leader Mitch McConnell and passed by the Senate 89-8 shortly after 2 a.m. Cantor told the group he could not back the bill in its current form, according to two officials in the room, which could leave open the possibility of an attempt to modify the package and send it back to the upper chamber. But Democrats there have signaled that changing the compromise risks killing it. A report released by the Congressional Budget Office Tuesday complicated matters further still. The nonpartisan group "scored" the Biden-McConnell compromise as likely adding nearly $4 trillion to the federal deficit over 10 years, hardening opposition among many Republicans seeking further spending cuts.

    "G.O.P. Anger Over Tax Deal Endangers Final Passage" - NYT is reporting Eric Cantor and many other House Republicans will not vote for the Senate (89-8) passed Hr8 bill American Taxpayer Relief Act of 2012. Again another line is drawn in the sand for the President and whether he will use the political advantage the Repubs and Teabaggers keep forcing on him to knock the chip off their shoulders. "Go ahead, knock it off, I dare you" sneer on Cantor's face just begs for the President to begin to exercise some of the political capital he gained from being re-elected to a second term and the Repubs backing themselves into the corner. Meanwhile Boehner, the Republican eunuch can be seen scurrying in the background not committing to a stance on the Senate passed HR8. So is this the golden moment where the President finally grows a pair and takes on a Republican party which protects 3 million household taxpayers without regard for the other 151 million? Or is this the moment, the President apologizes to the Republicans for asking for too much and slinks off to the Oval Office to begin his proposal a sellout of SS, Medicare, Medicaid, CHSCH in answer to House Republican? The stage is once again set for the President to emerge as a real statesman and kill the Groundhog Day scenario in which Congress appears to be stuck. The President does not appear to be a true Chicago City street-wise kid for which so many of them are recognized.

    Citi's Worst Case Scenario Coming True: House To Amend Bill, Send Back To Senate - It seems all is not going according to plan in D.C.. Perhaps it was the $4 Trillion deficit rampage the CBO just scored, or that the Republicans awoke from their slumber but as House meetings end, it appears Citi's worst case scenario is about to take place - the bill is going back to the Senate with spending cut amendments. As Politico notes, amending the bill would throw into serious flux the carefully negotiated agreement between Senate Minority leader Mitch McConnell and Vice President Joe Biden. While headlines noted the possibility, Rep Spencer Baucus (via Robert Costa) just confirmed the deal will "go back to the Senate." One thing is clear, Politico adds: there is serious disdain among House Republicans for what the Senate did in the middle of the night. Retiring Rep. Steve LaTourette of Ohio asked House Republicans why the House would “heed the votes of sleep deprived octogenarians,” according to a source in the meeting.

    House Republicans Drop Bid to Add Spending Cuts to Bill - House Republicans abandoned their effort to add spending cuts to the Senate’s budget legislation and one member predicted the measure will be passed tonight. Oklahoma Representative Tom Cole said he expects the House to pass the Senate bill unchanged with a “substantial” bipartisan vote. The House Rules Committee scheduled an 8:10 p.m. meeting to set the parameters for the vote.House passage of the Senate bill would avert $600 billion in automatic tax increases and spending cuts that take effect starting today. The Senate passed its plan on an 89-8 vote early this morning. “Let’s accept the wins that we have and live to fight another day,” Cole said in an interview on Bloomberg Television. House Speaker John Boehner had offered fellow Republicans two options, including allowing a vote on the Senate bill if party members couldn’t show they had a majority vote to amend it with spending cuts sought by many Republicans.

    "Fiscal Cliff": House Passes Bill, Obama says he will not debate default ceiling - From the WaPo: House passes ‘fiscal cliff’ bill - The vote was 257 to 167, with 85 Republicans joining with nearly all of the chamber’s Democrats. President Obama, whose vice president, Joe Biden, crafted the deal with Senate Minority Leader Mitch McConnell (R-Ky.), was preparing to address the nation. After the bill passed, President Obama spoke briefly. Mr. Obama said this bill was "just one step", that he is "open to compromise" on the deficit, but that the default ceiling (aka debt ceiling) was off the table (taking a page from Ronald Reagan).

    Congress Ushers in 2013 with a Resolution to Push the Economy to the Brink - Past the final hour the House finally passed a bill to avert the fiscal cliff. The Senate had passed the legislation in the wee hours of New Years Day and after much brew ha-ha the House allowed an up and down vote on the Senate bill. We have listened to months and months of squabbling, bringing the economy to the brink over a very simple final result that could have been passed months ago. The bill title is H.R. 8, American Taxpayer Relief Act of 2012. At one point the title changed to the Job Protection and Recession Prevention Act of 2012 , in an effort to hammer home the message Congress had set up such a poison pill with tax increases and budget cuts at the same time it would send the economy into recession. The Senate vote was 89 to 8 with 3 not voting and the House final vote was 25 to 167 with almost all Democrats voting for the bill.After final passage, President Obama immediately came out to the podium to make it clear Congress could not hold the debt ceiling hostage. Many Republicans in the House are now threatening to not raise the debt ceiling which Obama said is not up for debate. Thus, the opening salvos of Congressional battle number two have sounded and the next political bloodbath where civilians are wounded is clearly the requirement to raise the debt ceiling. The end result of last debt ceiling hostage crisis was to only lower the United States credit rating and make America in general look silly. House leader John Boehmer issued a statement on their intent to cut America's social safety net, that's Medicare and social security. Battle number three is clearly being laid out and once again American citizens are in the crosshairs.

    Thoughts on the Fiscal Deal, by Tim Duy: Mark collected some reactions to the fiscal deal. Brad DeLong doesn't understand the Obama Administration: The big reason to make a deal before January 1, 2013 was that detonating the "austerity bomb" would impose 3.5% of fiscal contraction on the U.S. economy in 2013, and send the U.S. into renewed recession. It was worth making a good-enough deal--sensible long-run revenue increases and tax cuts to close the long-run fiscal gap plus enough short-term fiscal stimulus to make the net fiscal impetus +1.0% of GDP--in order to avoid renewed recession. But by my back-of-the-envelope count, the deal the Obama administration has agreed to still leaves a net fiscal impetus of -1.75% of GDP to hit the U.S. economy in 2013. That is only 40% of the way back from the "austerity bomb" to where we want to be. I completely agree with DeLong's policy recommendation; there is no reason to abandon near-term stimulus in the context of long-run fiscal consolidation. Indeed, I believe that any austerity at this point is foolhardy, and only serves to prolong the exit from the zero-bound. But DeLong's recommendation was never on the table to begin with. From day one this has been a debate about the extent of the austerity, not a debate about austerity itself. Does anyone have the sense that President Obama does not fundamentally believe in the pursuit of deficit reduction sooner than later? I keep coming back to this observation from Bruce Bartlett: In a little-noticed comment on Spanish-language television on December 14, Obama himself confirmed this typology of today's political spectrum. Said Obama, "The truth of the matter is that my policies are so mainstream that if I had set the same policies that I had back in the 1980s, I would be considered a moderate Republican."

    Over the Cliff and Yet Back in the Same Place - It’s as if we’ve just survived a near-death experience.  Like we followed the light and even saw the pearly gates and then miraculously were sucked back down into our bed overnight!  We technically “went over” the fiscal cliff at midnight yesterday, and yet here we are today celebrating more extended tax cuts as the best way our policy leaders know how to compromise. So  The Washington Post’s Ezra Klein (in his “Wonkblog”) stayed up for the finale to post a nice summary of what was agreed to, “everything you need to know about the fiscal cliff deal.” Most of the press accounts characterize the deal as the Republicans eventually caving on raising taxes on the rich.  But the Brookings Institution’s Bill Gale points out that taxes are actually going way down, not up, relative to our one-day, near-death experience of the current law baseline–and thank goodness for the Republicans, because technically the minority of them who voted in favor of the deal did not violate the No New Taxes pledge. The Congressional Budget Office tells us how big a tax cut it is, relative to current law revenues; the answer is it’s a $3.639 trillion tax cut over ten years.  Just for perspective, that’s well more than double the initial ten-year cost of the Bush tax cuts (of approximately $1 1/2 trillion) when they were first passed in 2001.  Of course, when the Bush tax cuts were originally passed, the official cost was a huge understatement of the real cost because of: (i) an expiration date before the end of the ten-year budget window, and (ii) the offsetting revenue increases scheduled to come in from the Alternative Minimum Tax (AMT), as more people were pushed onto the alternative tax when their ordinary income tax liabilities fell. 

    Fiscal Cliff & Budget Talks 2013 - Cheat Sheet - Explained in 3D infographics

    What the Fiscal Cliff Deal Really Means for Taxes and Spending - Everyone trying to sort out the fiscal cliff deal is getting hopelessly tangled in budget baselines.  Are taxes going up? Or are they going down?  There is an easier way: Forget the multiple baselines. Just look at what is happening to total spending and total revenues. My Tax Policy Center colleagues ran the numbers and they tell two important stories—one about budget policy and the other about budget politics. The policy story is simple: The cliff deal (plus expected economic growth) does begin to reduce the deficit to levels approaching sustainability, though the red ink begins to flow faster after about five years.  And since TPC’s projections include some optimistic assumptions about both spending and tax revenue, deficits could be even higher than the estimates.The political picture is even more challenging.  Under the agreement, revenues in 10 years will reach about 19.4 percent of Gross Domestic Product, and that is at the very high end of what most Republicans say is tolerable. Spending will exceed 22 percent, at the low end of what many Democrats think is acceptable given the aging of the population.  Looking at taxes and spending as a share of GDP shows just how tough it will be for the parties to reach a fiscal compromise.

    Fiscal cliff reveals how dysfunctional Republican nihilism makes US politics -  So the United States went over the fiscal cliff. This was about as surprising a development as when the boat sank at the end of Titanic (the movie). Instead, it is yet further evidence of the extraordinary, almost mind-boggling level of dysfunction that exists at the highest level of the US government. Since Republicans won the House of Representatives in 2010, the country has staggered from one pointless fiscal showdown after another. In every case, Congress and the president have repeatedly kicked the can down the road rather than pass legislation that either made serious efforts to right the country's fiscal imbalances, or would stimulate economic growth. Meanwhile, the US economy continues to underperform; unemployment remains frustratingly high; climate change is worsening; the immigration system is a mess; the nation's infrastructure is still falling apart … and I could go on. In fact, this Congress is the least productive since the 1940s. About 16 months ago, when I wrote my first column for the Guardian, it was titled "The Dysfunction That Lies at the Very Heart of American Politics." Somehow, things have only gotten worse since then – and my expectations for the future are not high.

    Fiscal Cliff... check, Debt Limit...? - Nomura - The US House of Representatives passed a bill yesterday to partially bridge the ´fiscal cliff´notes esteemed Nomura economist Lewis Alexander. However, he feels that by extending the Bush Tax Cuts for most taxpayers and reprogramming the composition of the Budget Control Act of 2011 (BCA) spending cuts, only the easy part has been achieved so far. Now a new Congress will have to roll their sleeves up and tackle the hard part, namely reducing long term spending, raise additional revenue and increase the debt limit.  Looking forward, Alexander notes that there are a number of considerations to keep in mind.  Firstly, the full ´fiscal cliff´ has not been avoided, merely the can has been kicked slightly down the road for now. The deal in place implies a significant tightening of fiscal policy this year with payroll taxes going up and federal spending being cut by the amount anticipated in the BCA. He writes, “Taken at face value, the deal appears to entail somewhat more fiscal drag for 2013 than we had assumed in our forecast.” Secondly, he comments that the US now faces a difficult debate over raising the debt limit. He feels that an increase in the debt ceiling will have to be done around the end of February. At this point the Treasury has not given a specific date but Alexander suspects that it may come in the next few weeks, but it has been indicated that there is about two months of headroom. The upcoming negotiations are likely to be even more difficult and contentious that the ones just completed.

    Harry Reid Throws Down the Gauntlet In Front of … Obama. Hurray. Obama pushed forward despite strong reservations expressed by top congressional Democrats — especially Reid — who privately described it as a "bad deal" that would increase Republican leverage in future budget fights. … Reid figured Democrats could get a more favorable agreement if they waited. When Reid saw an offer that Obama had considered pitching to McConnell on Sunday, which included provisions opposed by Senate Democrats, the majority leader crumpled up the document and tossed it into the burning fireplace of his Capitol office.-- The fiscal cliff deal that almost wasn't,, Politico, today  Although he’s been strongly criticized by many liberals for caving on the $250,000 floor for a raise in the income tax rates after saying repeatedly that that was a ‘must’ for him, Obama was, in my opinion, right to sign off on the ultimate deal, in which the rate for incomes above $450,000 will rise to 39.6%--not the earlier-discussed possible compromise of 37% for incomes above $250,000--and in which capital gains taxes also will rise, to 20% for that same group.   I suspect that a huge factor in Obama’s preference for this deal rather than going over the cliff and forcing an up-or-down House vote on the rate rise on incomes above $250,000 was the issue of the expiration of extended unemployment-compensation benefits for about two million people, the loss of which, whether for a few weeks or permanently, would have been devastating for the people affected and surely would not have helped the economy.  Extension of those benefits may well have been a casualty even of a successful post-cliff bill lowering the floor for the rise in income tax rates.  So might the Earned Income Tax Credit, which of course benefits members of the 47% who Mitt Romney and many other Republican politicians do not think it’s their job to worry about.

    So Who Won the Fiscal Cliff Fight?: Obviously, former President George W. Bush. Despite how much he has been vilified in the years since his departure from office, the Congress and the President yesterday decided to ratify almost all of his tax policy agenda. As Joe Wiesenthal of Business Insider noted, "The difference between the Obama Tax Cuts and the Bush Tax Cuts?  Obama's are permanent*." Joe also pointed out, quite astutely, that even if top marginal tax rates are not lower than in the Clinton years, taxpayers with the highest incomes are still paying lower taxes because all the tax rates below the top are lower. Who's laughing now?  Not me. In over eight years of blogging, you won't find a single word of praise for the Bush-Obama tax cuts. As a matter of revenue, we now permanently have a tax system that will not raise enough revenue to cover our expenditures. As a matter of policy, we continued to constrain our choices based on whether some portion of legislation that wasn't popular enough to pass initially without explicit sunsets should be continued or not. The proper course of action for President Obama was to allow all the sunsets to occur and then to force the Republicans to propose legislation to achieve their political objectives. Instead, he surrendered his political advantages and handed it to them without a fight. What an abject failure of leadership. I am reminded this year, as I was last, of a statement by Paul Tsongas in his Call to Economic Arms, "It takes toughness to lead a people toward their preservation no matter how disquieting the journey may be."

    Less Austere, Still Senseless - Relative to what might have been, one shouldn’t be too depressed about the fiscal cliff deal.  There are no cuts to the country’s most successful anti-poverty program, Social Security, and no rise in the Medicare eligibility age.  Relative to the basic macroeconomic logic of the situation, however, the fiscal cliff deal is a policy mistake.Contrary to a wildly successful marketing campaign, the fiscal cliff was a crisis of too much austerity.  The deal approved by the House last night either cancels or delays for two months much of the austerity that was planned for 2013, but in the end we are still left with austerity-lite.If you insist on looking at it from the old “current law” baseline (which is to say, the law as it would have been if we had “gone over” the cliff), this deal expanded the deficit by some $4 trillion.  However, from the perspective of the baseline that matters for economic growth and employment, fiscal policy in 2013 will be more contractionary than it was in 2012.  Some already-existing measures like the expanded unemployment insurance benefits and a number of tax credits benefiting those with low incomes will continue, but there is no new stimulus in this deal; no infrastructure investment; no move to shore up public payrolls.  And relative to 2012, the government will be sucking even more demand out of the economy in 2013.  The most significant item in this respect is that the payroll tax holiday is set to expire, raising the rate on the employee side from 4.2 to 6.2 percent, meaning substantially reduced purchasing power this year for those who earn less than $110,000 (incomes above that level are not subject to the payroll tax).  Given the still-high unemployment rate—and the fact that this budget constraint is purely self-inflicted—this should be considered a big policy failure.

    Brad DeLong Has Me Worried - By Stephanie Kelton - Brad DeLong is worried.  And now I’m worried.  He’s worried about “unfunded tax cuts,” which, he says, are “bad juju” in the long run.  I don’t mean to pooh-pooh his juju, but what the heck is an “unfunded tax cut”?  Here’s Brad’s postObama needs a policy to fund these tax cuts--not in the short-term or (probably) in the medium-term but in the long run. What is that policy going to be? Carbon tax? Include health and other benefits in the tax base? Cut defense spending? Lower the top bracket amount down to $100K?This kind of talk worries me a lot.  It worries me because it perpetuates the myth that the U.S. government  is essentially a giant household, constrained by the availability of cash-on-hand or the risk appetites of the money lenders, who could turn off the spicket a moment’s notice, hurtling us toward a Greek-style debt crisis.  Not all of this is part of DeLong’s argument, but his fundamental point — that today’s tax cuts will have to be “paid for” with higher taxes or spending cuts in the future – suggests we’re living on borrowed time.  It helps the deficit scolds, and it hurts progressives who lack a compelling counter narrative to defend against the deafening cry for “shared sacrifice”. Tax cuts don’t “cost” the government in the way DeLong’s post implies.  Tax cuts leave taxpayers with more money to spend, but they don’t compromise the government’s ability to spend later.  Nor is the debt ratio a binding constraint, as Scott Fullwiler has been explaining in his series this week.

    "We now permanently have a tax system that will not raise enough revenue to cover our expenditures" - This is worth repeating. Andrew Samwick writes, seconded by Mark ThomaSo Who Won the Fiscal Cliff Fight?: Obviously, former President George W. Bush. Despite how much he has been vilified in the years since his departure from office, the Congress and the President yesterday decided to ratify almost all of his tax policy agenda. As Joe Wiesenthal of Business Insider noted, "The difference between the Obama Tax Cuts and the Bush Tax Cuts? Obama's are permanent*." Joe also pointed out, quite astutely, that even if top marginal tax rates are not lower than in the Clinton years, taxpayers with the highest incomes are still paying lower taxes because all the tax rates below the top are lower. Who's laughing now?  Not me. In over eight years of blogging, you won't find a single word of praise for the Bush-Obama tax cuts. As a matter of revenue, we now permanently have a tax system that will not raise enough revenue to cover our expenditures.

    CLASS act pushed over fiscal cliff - One sad outcome of yesterday’s vote didn’t get much attention: The demise of the Community Living Assistance Services and Supports Act (CLASS). As many TIE readers know, CLASS was designed as a national voluntary insurance program for working adults who might someday face functional limitations. After a five-year vesting period, people with specific functional limitations would receive cash benefits, roughly on the order of $75/day. These benefits could be used to purchase specific services people require to live independently: a wheelchair ramp, maybe some direct care services, maybe modifications to a home or a vehicle to accommodate some disability:It was an appealing vision. I was planning to enroll myself. I guess I’ll need a backup plan. The fiscal cliff agreement, passed Tuesday night in the House, repealed CLASS.

    Fiscal Deal: A few things to like - Since most people are complaining about the fiscal agreement, I'll point out a few positives ... first, remember the "fiscal cliff" was about too much austerity too quickly. The "fiscal cliff" included expiring tax cuts (income, payroll), expiring spending (unemployment insurance, etc.) and the "sequester" (mostly defense spending cuts). The sequester has been delayed for two months, so we don't know the size of the cuts yet, but ...
    1) There was an agreement, and earlier in January than I expected!
    2) It appears the amount of austerity will not drag the economy into a new recession. I would argue for a different mix of policies, but reducing the amount of austerity was achieved - and this was a key goal for the fiscal agreement.
    3) Although long term debt sustainability is still an issue, the deficit is declining right now - and will decline further in 2013. David Wessel at the WSJ wrote about the declining deficit a few weeks ago: Putting the Brakes on Cutting the Deficit The deficit—the difference between government revenue and spending—is shrinking even before the year-end fiscal cliff or a last-minute compromise to avoid it. In the depths of the most recent recession, the fiscal year that ended Sept. 30, 2009, the deficit was 10.1% of gross domestic product, the value of all the goods and services produced. Since then, the deficit has declined to 9% of GDP in 2010, 8.7% in 2011 and 7.0% in fiscal 2012. Private analysts predict the deficit will be between 5.5% and 6.0% of GDP in fiscal 2013, depending on the outcome of the budget talks.

    So the ‘fiscal cliff’ has been addressed. The next priority should be to address the fiscal cliff. - The House and Senate passed a budget deal over the long weekend. Headlines reported it as a deal about the “fiscal cliff.” It wasn’t. It had some good and some bad elements, but it did nearly nothing to address the actual problem that was always meant to be described by the (terribly misleading, but also terribly sticky) phrase “fiscal cliff.” This problem is simply described: the still-weak U.S. economic recovery would have been damaged by the range of tax increases and spending cuts that were set to begin taking effect on Jan. 1, 2013, because these would have reduced overall demand in the U.S. economy, and weak demand remains the reason why unemployment is too high. We tried to describe this problem and even put numbers to each of the main components of the “fiscal cliff” in a September report. Some key punchlines of this analysis were that the problem posed by the “fiscal cliff” was that deficits would shrink too quickly in the coming year, and that while the Bush-era tax cuts for upper-income households were the most politically contested part of the cliff, it was the automatic spending cuts (including the end of extended unemployment insurance benefits) and the payroll tax increase that were, by far, the most economically damaging parts of the cliff. In fact, the fate of upper-income tax rates was almost irrelevant, one way or the other, to economic recovery in the coming year.

    After the Deal on Taxes – Where Are We Going on Expenditures? - Jonathan Weisman reports on the deal that passed the Senate:  In one final piece of the puzzle, negotiators agreed to put off $110 billion in across-the-board cuts to military and domestic programs for two months while broader deficit reduction talks continue ... Democrats were incredulous that the president had ultimately agreed to around $600 billion in new tax revenue over 10 years when even Mr. Boehner had promised $800 billion. But the White House said it had also won concessions on unemployment insurance and the inheritance tax among other wins. Before spring arrives, we will have to face up to the issue of spending cuts. I suspect that the Republicans will insist that these cuts represent at least $600 billion over the next ten years and that none of these cuts come from the defense department. In other words, the Republicans will want cuts in Social Security, Federal expenditures on health care (think Medicaid and SCHIP), and a host of large cuts in other small Federal programs. But why not reduce defense spending? Progressives should call for all of this $600 billion over the next ten years – which turns out to be a mere 0.3% of the decade’s potential GDP. After all, current defense spending is running at 5.3% of GDP. Barney Frank recently made this case. Progressives need to continue to hammer this argument. We may not get all of the cuts in government spending from defense but if we don’t make this argument, I fear that the Republicans will get all they want at the end of the day.

    Why the Fiscal Cliff Deal Should Have Included Social Security -  Yesterday’s deal to avoid the fiscal cliff offers quick fixes for the country’s most urgent financial problems but will also add almost $4 trillion to the deficit over the next 10 years. Cuts in discretionary spending and entitlements have therefore become even more essential, but the fiscal cliff deal has postponed negotiations over spending for at least another couple of months. Moreover, one major government program is likely to be omitted from those discussions: Social Security. Although much attention has been paid to ending the temporary reduction in Social Security payroll taxes, little has been said about modifying the program’s benefits. Indeed, these are likely to be kept off the table entirely during future negotiations over spending cuts. This omission is usually justified on the grounds that Social Security does not contribute to the deficit. However, the program does add to the growth of the national debt.

    $449,999 A Year Is The New Middle Class - It’s the law: The House of Representatives voted Tuesday night to approve a Senate bill to avert a feared fiscal cliff.  The measure that sought to maintain tax cuts for most Americans but increase rates on the wealthy passed the Democratic-led Senate overwhelmingly early in the day… The legislation would raise roughly $600 billion in new revenues over 10 years, according to various estimates Despite the median income for most American households being roughly $50,000, the top tax rate for households subject to the 39.6% rate is cut off at $450,000 while the median income for most individual Americans is roughly $26,000, the top tax rate for individuals subject to the 39.6% rate is cut off at $400,000. Just keep saying shared sacrifice (over and over again). Most of the Bush tax cuts were made permanent and the payroll tax cut holiday was allowed to expire raising taxes immediately on workers. Left out was the carried interest: The top rate for dividends and capital gains starts at the $400k/$450k level.  Note:  this increase is in addition to the 3.8% add-on tax for capital gains and dividends included in the health bill.  In addition, nothing done specifically on carried interest.

    It’s Time for Rahm’s Retards to Act - By the time I post this, the Republicans in the House of Representatives may already have torpedoed last night’s fiscal cliff budget deal.  But the miserable lessons of both the budget deal and the White House political strategy that engendered it stand in any case: the Obama administration is both economically incompetent and hostile to progressive values.   The political tally sheets of policy pundits like Paul Krugman, Brad DeLong, Matt Yglesias, Timothy Noah, Robert Reich and Jeffrey Sachs make no sense to me.  I really don’t care who won, who lost, who blinked, who glared, who caved and who prevailed in a stupid negotiation between two stupid parties over the best way to wreck our economy and punish the American people.  I also can’t relate at all to those who think the “debt crisis” is a real phenomenon and whose main criticism of the deal is only that it does not suck enough tax revenue out of the economy.  What I see is that if this deal passes:

    • 1. The payroll tax is coming back right away.  That’s a major recessionary blow.
    • 2. A bunch of spending cuts are going to be implemented in a couple of months.  That’s also recessionary.
    • 3. The debt ceiling is still in place.  This means Republicans will soon be able to extort more recessionary cuts in exchange for raising the debt ceiling.
    • 4. Some rich people’s taxes are going up a little, which is more than fine with me, but the tax increases are not offset by additional spending as they should be.  So the tax increases will also be recessionary.
    • 5. There will be no direct action at all on employment and growth. The US government is still dead in the water as the prosperity of the country is eroded, so mass unemployment will continue to be a recessionary drag on the US economy. 

    So to me, this deal is a recession package. Welcome to the double dip!  I guess Obama has learned nothing from the experience of his Tory pal, David Cameron, or from the other countries in Euro Austerityland who have engineered a second punishing recession for their people.  Or maybe Obama is doing it to us on purpose, to inflict more conservative shock treatment on the US social contract that Pete Peterson, Erskine Bowles and Alan Simpson have convinced him we can’t afford.

    Randy Wray Appears on Beneath the Surface - Randy Wray is appearing on Beneath the Surface with Suzi Weissman. The discussion is about the good, bad and ugly of the Fiscal Cliff with Randy  on economic prospects and John Nichols on the political fallout. The show airs at 5:0o-6:00 pm Pacific on Friday January 4, 2013 on Pacifica Radio – and streamed live from KPFK. It will be archived at KPFK after the broadcast as well.

    Congress’s manufactured non-solution to its manufactured fiscal cliff crisis - It is a habit of the United States Congress never to congratulate itself until it has utterly failed to accomplish what it set out to do. Needless to say, the Congress is particularly delighted with its work in leaping over the fiscal cliff last night.  Of course, it will never be put that way. Amid the usual Washington smoke and mirrors, lawmakers will talk about the benefits of the deal: it will cut taxes; it has come in time to avoid the real fiscal cliff; it will reduce the US budget deficit; it will represent a bipartisan agreement to fix America's debt problems.It does precisely none of those things. The much-praised deal is as thoughtless and hasty as you would expect from anything cobbled together at the last minute. Lawmakers should regard it not with self-congratulatory glee, but with suitable shame at their failure to think through major issues that impact the American economy. As the humorist Andy Borowitz concisely put it on Twitter this morning: @BorowitzReport Praising Congress for the fiscal cliff deal is like giving an arsonist an award for putting out his own fire.

    It’s better than it looks - Democracy, in its messy way, worked. An election had a real impact on public policy, moving it in a more progressive direction. Thus, for the first time since 1990, a significant number of Republicans voted to raise taxes — and they raised them most on the very rich. House Speaker John Boehner allowed a bill to become law on a vote in which far more Democrats (172) than Republicans (85) said “aye.” The old rule that Republicans would allow floor action only on bills that could pass with GOP votes was swept away, at least this time. The cliff deal made our tax code more progressive. The top income tax rate is back up to 39.6 percent. Capital gains taxes, cut repeatedly since the 1970s, were raised. Consider: The provisions enacted Tuesday night, combined with the tax hike in the Affordable Care Act, mean that capital gains taxes will now be 18.8 percent for couples with annual incomes of more than $250,000 and 23.8 percent for couples earning over $450,000.  True, Democrats caved in by failing to tax dividends as ordinary income, as the government used to. Capital gains should also be taxed as ordinary income or, at the least, at around 30 percent. But is this progress? The answer is yes.

    ‘Cliff’ Deal is a Decent Start for Low-Income Americans - If you had told me in recent months that on January 2, 2013, we would have unemployment insurance extended for a year, an improved child tax credit and earned income tax credit extended for five years and no cuts to food stamps (SNAP), Medicaid or Social Security—I would have told you that you were out of your mind. I understand that the criticism coming from the left about this deal is based largely on where things stand for the next round of negotiations, and also a concern that the deal didn’t raise sufficient revenues to avert substantial cuts down the road. But I’m troubled by the lack of attention being paid to how this deal benefits the more than one in three Americans living below twice the poverty line—earning less than $36,000 annually for a family of three, and the 46 million Americans living below the poverty line (less than $18,000 annually for a family of three). I’m reminded today of a politically active homeless woman I spoke with earlier this year, who—although she is disgusted with Republican policies—was even more frustrated with “so-called progressives” (her words) whom she said talk about caring about poor people but fail to sufficiently speak up about their issues, bring them into their advocacy work and address their concerns in an ongoing and substantive way. So let’s look at some of the particulars of this deal and how they affect low-income Americans.

    U.S. now on pace for European levels of austerity in 2013: For years now, economists like Paul Krugman have been criticizing countries in Europe for engaging in too much austerity during the downturn — that is, enacting tax increases and spending cuts while their economies were still weak. But after this week’s fiscal cliff deal, the United States is now on pace to engage in about as much fiscal consolidation in 2013 as many European nations have been doing in recent years — and more than countries like Britain and Spain. A back-of-the-envelope calculation suggests Congress has enacted around $336 billion in tax hikes and spending cuts for the coming year, an austerity package whose total size comes to about 2.1 percent of GDP. (That’s merely the size of the cuts and taxes; it’s not necessarily the effect on growth.) This includes the expiration of the payroll tax cut, which will raise about $125 billion this year. It includes $68 billion in scheduled cuts to discretionary spending from the 2011 Budget Control Act. It includes $24 billion in new Obamacare taxes and $27 billion in new high-income taxes. And it includes about $92 billion from the now-delayed sequester cuts — assuming that these either take effect or are swapped with other cuts.

    Eight Corporate Subsidies in the Fiscal Cliff Bill, From Goldman Sachs to Disney to NASCAR  - Throughout the months of November and December, a steady stream of corporate CEOs flowed in and out of the White House to discuss the impending fiscal cliff.  What wasn’t mentioned is what these leaders wanted, which is what’s known as “tax extenders”, or roughly $205B of tax breaks for corporations. With such a banal name, and boring and difficult to read line items in the bill, few political operatives have bothered to pay attention to this part of the bill. But it is critical to understanding what is going on. So without further ado, here are eight corporate subsidies in the fiscal cliff bill that you haven’t heard of.

    • 1) Help out NASCAR - Sec 312 allows anyone who builds a racetrack and associated facilities to get tax breaks on it. This one was projected to cost $43 million over two years.
    • 2) A hundred million or so for Railroads - Sec. 306 provides tax credits to certain railroads for maintaining their tracks.  This is worth roughly $165 million a year.
    • 3) Disney’s Gotta Eat - Sec. 317 is a relatively straightforward subsidy to Hollywood studios, and according to the Joint Tax Committee, was projected to cost $150m for 2010 and 2011.
    • 4) Help a brother mining company out – Sec. 307 and Sec. 316 offer tax incentives for miners to buy safety equipment and train their employees on mine safety. Taxpayers shouldn’t have to bribe mining companies to not kill their workers.
    • 5) Subsidies for Goldman Sachs Headquarters – Sec. 328 extends “tax exempt financing for  York Liberty Zone,” which was a program to provide post-9/11 recovery funds.  Goldman got $1.6 billion in tax free financing for its new massive headquarters through Liberty Bonds.
    • 6) $9B Off-shore financing loophole for banks – Sec. 322 is an “Extension of the Active Financing Exception to Subpart F.” Very few tax loopholes have a trade association, but this one does. This strangely worded provision basically allows American corporations such as banks and manufactures to engage in certain lending practices and not pay taxes on income earned from it. According to this Washington Post piece, supporters of the bill include GE, Caterpillar, and JP Morgan. Steve Elmendorf, super-lobbyist, has been paid $80,000 in 2012 alone to lobby on the “Active Financing Working Group.”
    • 7) Tax credits for foreign subsidiaries –  Sec. 323 allows US multinationals to not pay taxes on income earned by companies they own abroad.
    • 8) Bonus Depreciation, R&D Tax Credit – These are well-known corporate boondoggles. The research tax credit was projected to cost $8B for 2010 and 2011, and the depreciation provisions were projected to cost about $110B for those two years, with some of that made up in later years

    From NASCAR to rum, the 10 weirdest parts of the ‘fiscal cliff’ bill: By now, we’ve heard all about the big stuff in the fiscal cliff bill that finally passed on Tuesday. The Bush tax cuts will become permanent for all individual income below $400,000 (and family income below $450,000). The sequester spending cuts will be delayed two months. And so on. But Congress also managed to include all sorts of corporate tax breaks and other arcane provisions into the final bill, covering everything from electric scooters to NASCAR racetracks to taking the subway to work. Most of these tax breaks were already longstanding provisions — Congress has been working to renew them all year. They’re just being extended again for another year (or sometimes two), at a total cost of roughly $77 billion. So let’s take a look at 10 of the more curious tax provisions in the fiscal cliff bill—it offers some insight into how messy the tax code is, and will continue to be for another year. (You can find the full text of the cliff bill here, with the individual tax extenders in Title II and the corporate tax extenders in Title III.)

    How corporate tax credits got in the 'cliff' deal - The "fiscal cliff" legislation passed this week included $76 billion in special-interest tax credits for the likes of General Electric, Hollywood and even Captain Morgan. But these subsidies weren't the fruit of eleventh-hour lobbying conducted on the cliff's edge -- they were crafted back in August in a Senate committee, and they sat dormant until the White House reportedly insisted on them this week. The Family and Business Tax Cut Certainty Act of 2012, which passed through the Senate Finance Committee in August, was copied and pasted into the fiscal cliff legislation, yielding a victory for biotech companies, wind-turbine-makers, biodiesel producers, film studios -- and their lobbyists. So, if you're wondering how algae subsidies became part of a must-pass package to avert the dreaded fiscal cliff, credit the Biotechnology Industry Organization's lobbying last summer. Some tax lobbyists mostly ignored the August bill "because they thought it would be just a political document," one K Streeter told me. "They were the ones that got bit in the butt."Here's what happened:

    Yes, Virginia, The Rich Did Very Well With the Fiscal Cliff Deal - Yves Smith = The Real News Network has conducted a series of interviews on the fiscal cliff deal, and the two most recent are worthwhile in and of themselves, and are also good tools for persuading those who fallen for the idea that Obama got a good deal to reexamine their view. With the Vichy Left now trying to soften up the public for Social Security and Medicare “reform,” it’s particularly important to keep an accurate scorecard on what has already gone down.  The newest chat, with economist James Henry, focuses on how the deal on estate taxes allows the rich to pass on wealth to their children, allowing inequality to persist across generations. And he reminds us that a lot of Congressmen are rich enough that this provision will benefit their families.

    Cliff Resolved - Deficit Set To Explode - In a stunning turn of events the Republican controlled House of Representatives passed the Senate's bill to raise taxes with no cuts to spending. In my post earlier today I detailed the various tax increases, and few spending cuts, that was passed by the Senate. I also stated that There are two big issues with the current bill that will keep it from passing in the House without substantial amendments: The cuts to spending are too small ($15 billion) relative to $620 billion in tax hikes over the next decade, and; There are no measures to control future spending. In its current form the deficit will increase in 2013 as higher taxes lead to lower economic growth. It is not just higher taxes on the "rich" but also on the middle class as the payroll tax cut expires leading to a 2% increase in taxes. The direct cost of the increase in payroll taxes will be roughly $125 billion equating to a drag of 1% on GDP alone. Slower economic growth in 2013, combined with no spending reforms, will lead to an expansion of the deficit in 2013. This is a point that is not lost on the Republican controlled House. Clearly I was wrong as 85 Republicans, including Boehner and Ryan, defected from the majority and voted for the bill along with a broad majority of the Democrats. However, the battle lines are now drawn for the "debt ceiling" debate in the weeks ahead. The Republicans are clearly stating that they are going to square off with the White House to demand spending cuts to offset the new tax increases.

    Fiscal Cliff Deal Moves Nation Closer to Bankruptcy - The nation’s political establishment has ridiculed the fiscal cliff deal for its failure to make the tough decisions. But what tough decisions are possible when one party to a negotiation doesn’t think they need to be made? Speaker Boehner has repeatedly cited the President Obama’s refusal to countenance spending cuts as the reason talks on a “grand bargain” kept breaking down. The President offers token programmatic changes that would do nothing to alter the long run debt trajectory in exchange for tax increases on the most volatile, least reliable segment of the income base. The President wants both to spend too much and then collect far too little in taxes to pay for it. This negligence will ultimately end in disaster. According to the IMF, to achieve a public debt level consistent with long-run solvency, the U.S. must achieve a fiscal adjustment of 17.9% of GDP ($2.7 trillion in 2013 dollars) between 2014 and 2020. This would require immediate budget savings of about $600 billion per year, increasing at a rate of about $400 billion per year for the next five years. This is about 3x as much cumulative deficit reduction as the $4 trillion figure typically used in “grand bargain” discussions and it excludes the associated interest savings that President Obama wants to credit.

    America Is Having the Wrong Fiscal Argument  - This week’s agreement on the fiscal cliff is disappointing. Although President Obama can claim victory on such important measures as extending unemployment insurance for the long-term unemployed, he agreed to raise the income threshold for the tax hikes he sought from $250,000 to $450,000. Most important, he failed to secure an agreement to mitigate future social-spending cuts, meaning Social Security and Medicare will still be on the table in the next few months. This leaves the Republicans in a position to once again employ brinksmanship when it comes time to raise the debt ceiling, which could be as soon as mid-February. At that time, they may well succeed in their demands for serious and unnecessary social-spending cuts. It’s more than a little unfortunate that the United States was boxed into the fiscal-cliff situation in the first place. That the nation is adopting a contractionary policy with an unemployment rate of nearly 8 percent is absurd. And that there is such a widespread consensus — accepted by the media as simple common sense — that substantial deficit reductions must be made in 2013 to solve a deficit problem that won’t begin seriously until in the 2020s, is a question for future historians and maybe psychologists. Even the current compromise, which rescinds the payroll tax cut and includes significant tax breaks for others, takes significant spending power out of an economy that is too weak withstand the move.

    Some Perspective on the Fiscal Cliff Deal - I’ve been debating the fiscal deal all day–just had a rousing conversation on the Larry Kudlow show, arguing with Jimmy Pethokoukis and Larry about the characteristics and implications of the deal.  As my readers know, I judge it as an incomplete step mostly in the right direction, but whether we’re able to continue in that direction depends wholly on the resolution of forthcoming challenges, most notably, the debt ceiling. One problem here is that people are throwing around all kinds of numbers and talking points that are pretty untethered to reality.  In one debate today, Maya McGuiness and others were going on about major entitlement “reform”—i.e., cuts, Jimmy P and Larry were all wound up about the fact that there were hardly any spending cuts in the deal (Larry had a slide that had the ratio of tax increases to spending cuts at 41/1!  I point out the up until yesterday, the cuts to revenue ratio was $1.5 trillion/0—and yes, I know that’s not a real ratio). We need to organize our thinking here.  For example, let’s start by agreeing on a fiscal goal and the most common one—one I would hope we could all agree on—is to stabilize the debt/GDP ratio within the 10-year budget window.  That is, just get to a point where the debt is growing less quickly than the GDP (I think Larry and Jimmy agreed with this, so that’s good). As my CBPP colleague Bob Greenstein points out, this deal doesn’t get you there.  It’s $1.2 trillion short.  The President explicitly would like to achieve that deficit reduction through balancing spending cuts with further revenue increases.  Republicans, predictably, want out of the tax-increasing business.

    U.S. credit ratings test is yet to come - Credit rating agencies are likely to hold off passing judgment on the U.S. fiscal cliff deal until they have a clearer picture about the fate of the debt ceiling and longer term plans to reduce borrowing. The New Yearagreement between the White House and Congress raised taxes on the richest Americans but postponed much of the toughest political wrangling on automatic spending cuts for another two months. Also, the bill does not address the $16.4 trillion debt ceiling, which was hit on Monday. Instead, the Treasury Department will deploy "extraordinary measures" to allow additional borrowing of about $200 billion, in effect buying the United States about two months to raise the official limit. The last time Congress negotiated the debt ceiling it prompted Standard & Poor's to strip the country of its coveted AAA credit rating. The agency criticized ineffective decision-making in Washington and the lack of a plan to stabilize the country's debt in the medium term.

    Moody's: US fiscal cliff deal not enough to maintain top rating - According to Reuters Moody's rating agency stated on Thursday that the US should make a greater effort in order to avoid the fiscal cliff and to maintain its AAA rating. The deal which was struck on Tuesday between Democrats and Republicans, with the aim to avoid automatic year-end tax increases and budget cuts, improves the current situation but does not lay foundations for lowering debt ratios in the medium term, the rating agency said. Moody's senior credit officer Steven Hess told Reuters that the agency would wait for the outcome of the measures adopted by the US government before making decisions on the rating outlook or the rating itself. Meanwhile, Standard and Poor's, which reduced the US rating to AA+, declared that there was still much to do and that the agreement does not influence the negative outlook on the country's debt rating.

    Why Economists Are United in Their Hatred of the Fiscal Cliff Deal - One of the truths revealed by the debate over the fiscal cliff is that lawmakers in Washington are in bitter disagreement over the cause of and solution to our economic malaise. There is the Keynesian camp, which believes that the economy is being hindered by a general lack of demand, and that the government needs to spend more in order to get the economy going again. Then there is a faction of economists — let’s call them the uncertainty hawks — who believe that businesses and individuals would be more willing to make the investments necessary to spur economic growth if they had a clearer idea of future tax bills and government spending levels. And finally there are the deficit hawks, who believe economic growth is being hampered by large federal deficits and debt, and that the best way to encourage economic growth is to shrink the deficit, mostly through reducing government spending. With the recent deal over the fiscal cliff, however, a strange thing happened: Despite the fact that many of these camps’ ideas are in direct opposition with one another, the final deal ended up satisfying nobody — causing economists across the ideological spectrum to declare the deal a dud. Here are their respective reasons:

    Fiscal fights threaten US policy goals (Financial Times) -- Moments after the fiscal cliff was averted, President Barack Obama strode to the White House podium to thank congressional leaders from both parties and remind them of other policy challenges ripe for bipartisan co-operation. What followed was an ambitious list of second-term priorities: immigration reform, climate change, lifting domestic energy production and gun control, on top of perhaps the most important issue, finding ways to lift the economy and incomes. The measured peace offering from Mr Obama to Republicans in Congress, however, will run up against a much more rancorous reality on Capitol Hill and promises to make any second-term gains painfully difficult. The confrontation over the fiscal cliff legislation, which Mr Obama signed into law late on Wednesday night, has further undermined relations between Mr Obama and his most important negotiating partner in Congress, John Boehner, the Republican House speaker. "I don't think either of them regards the other as being able to deliver his own troops,"

    Beijing warns US of 'fiscal abyss' -China has for the second successive day attacked the United States over the "fiscal cliff" drama, highlighting concerns of inflation returning to developing markets, financial volatility in global markets and the ceaseless ability of the world's largest economy to print its own currency. In an English commentary on its website yesterday, Xinhua News Agency said that while US politicians have reached a budget deal, the chronic budget deficit and total debt of US$16.4 trillion (HK$127.92 trillion) is a "fiscal abyss." The article appeared shortly before the US House of Representatives finally passed a budget deal a day after the deadline. The bill received 257 "yea" votes to 167 "nays" after a tension-filled day on Capitol Hill. Incidentally, most Republicans voted against the bill. The Biden-McConnell deal would permanently raise tax rates on annual income over US$400,000 for individuals and US$450,000 for families. The deal will postpone spending cuts to avoid a sudden reduction of US$600 billion in deficits that could hurt the economy, while delaying the start of the US$1.2 trillion in automatic spending cuts over 10 years, known as the "sequester."

    US has been let down by its leadership - Nouriel Roubini - The deal reached in Washington on New Year’s day prevented the US economy from falling off the so-called fiscal cliff. However, given the dysfunctional nature of the American political system, it won’t be long before there is another crisis.Two months, in fact. If no action is taken by March 1, $110bn of spending cuts will commence. At about the same time, the US will hit its statutory debt limit, known colloquially as the debt ceiling. That is only the beginning. Later in 2013, and not before time, a bigger debate on medium-term fiscal consolidation will begin. This will lead to another dispute between Republicans, who want to shrink the size of the federal government, and Democrats, who want to maintain it but are unsure how to pay for it.So expect a big fight about entitlements, and a series of little fights over tax reform: should the US introduce a value added tax? A flat tax? Higher (or lower) income taxes? A carbon tax? Should we close corporate tax loopholes to raise more revenue? It’ll soon get messy.President Barack Obama and his allies will argue that the deal concluded on Tuesday raises only $600bn of revenues over 10 years rather than their initial target of $1.4tn – and therefore there is further room for tax rises, at least for the wealthy. Republicans will argue that spending should now be radically cut, since this week’s deal did not address that side of the national balance sheet. (Even the 2011 debt ceiling deal reduced prospective spending by $1tn).In the meantime, the likely fiscal adjustment in 2013 will be about 1.4 per cent of gross domestic product. (Spread between the expiry of the payroll tax cut, the increase in the tax rates of the rich, and some eventual cuts to spending.) This translates into a 1.2 per cent of GDP drag on the economy during the year.

    Are Dead Men Ruling Our Democracy? - My Urban Institute colleague Gene Steuerle says yes: politicians have gone too far trying to control future policies and spending. (video)

    What Will Make These Fiscal Showdowns Stop? -   But here's the most important thing about The United States of Ambition: Despite all its awesomeness, its central prediction hasn't panned out at all. Ehrenhalt thought that the intense demands of modern electoral politics naturally favored Democrats — because they believed in government and were thus able to sustain their interest in and enthusiasm for politicking and governing for decades on end. Republicans might still win a lot of presidential elections, and would occasionally get caught up in waves of outrage that swept ambitious, committed conservatives into power. But eventually they'd always lose interest and go back to, say, running businesses, allowing Democratic careerists to sneak back in to dominate statehouses and Capitol Hill.

    The Ongoing War: After the Battle Over the Cliff, the Battle Over the Debt Ceiling - Robert Reich - “It’s not all I would have liked,” says Republican Senator Lindsey Graham of South Carolina, speaking of the deal on the fiscal cliff, “so on to the debt ceiling.” The battle over the fiscal cliff was only a prelude to the coming battle over raising the debt ceiling – a battle that will likely continue through early March, when the Treasury runs out of tricks to avoid a default on the nation’s debt. The White House’s and Democrats’ single biggest failure in the cliff negotiations was not getting Republicans’ agreement to raise the debt ceiling. The last time the debt ceiling had to be raised, in 2011, Republicans demanded major cuts in programs for the poor as well as Medicare and Social Security. They got some concessions from the White House but didn’t get what they wanted – which led us to the fiscal cliff. So we’ve come full circle. On it goes, battle after battle in what seems an unending war that began with the election of Tea-Party Republicans in November, 2010. Don’t be fooled. This war was never over the federal budget deficit. In fact, federal deficits are dropping as a percent of the total economy.

    Obama’s tax threshold concession bodes ill for debt ceiling talks - Dean Baker - There are three points that people should recognize about the fiscal cliff deal that appears to have been agreed by President Obama and the Republicans in Congress. The first is the simple and obvious point that we have gone over the cliff. There was no deal approved by Congress and signed by President Obama before the 1 January deadline. This is important because the budget reporting on the "fiscal cliff" repeatedly asserted that the country and the economy faced dire consequences from not having a deal reached by this deadline. They repeatedly asserted that we risked a recession, grossly misrepresenting forecasts from the Congressional Budget Office, and others predicted the consequences of leaving higher tax rates and large spending cuts in place for the whole year. There was also the prediction that the financial markets would melt down if there was no deal approved by the deadline. While the markets are not yet open, they actually rallied on the last day of 2012 on the news that the outlines of a deal had been agreed, even though the deadline would almost surely be missed. In other words, the financial markets responded as many of us non-insiders predicted. As long as it was clear that a deal would be forthcoming, they didn't give a damn about the fiscal "cliff" deadline. Chalk this one up as yet another example of the experts – the people who report on the budget and the economy for the Washington Post and other major news outlets – not having a clue.

    After fiscal win, Obama warns Congress on debt fight (Reuters) - Speaking after winning a "fiscal cliff" victory, President Barack Obama vowed on Tuesday to avoid a repeat of last year's divisive fight with Congress over an extension of the nation's borrowing authority. "While I will negotiate over many things, I will not have another debate with this Congress about whether or not they should pay the bills they have already racked up," Obama said in remarks in the White House.

    Backlash pushes Republicans to seek cuts - A conservative backlash against Republicans over their deal with Barack Obama to lift taxes has hardened the party leadership’s resolve to demand huge spending cuts as the price for increasing the country’s borrowing limit. Mitch McConnell, the Republican Senate minority leader, rejecting Mr Obama’s statement that he would not negotiate over the issue, said the debt ceiling debate in coming months was the ideal time to force the administration to cut outlays. “The President may not want to have a fight about government spending over the next few months, but it’s the fight he is going to have, because it’s a debate the country needs,” Mr McConnell said in an opinion article on Mr McConnell, who is up for election in 2014, and his Republican colleagues in the Senate, have been stung by criticism on the right for their role in brokering a deal with the White House over the fiscal cliff. The final deal, negotiated between Mr McConnell and Joe Biden, the vice-president, was passed overwhelmingly in the Senate, marking the first time Republicans in Washington have voted for income tax increases in more than two decades.

    The Supreme Court and the Next Fiscal Cliff - Simon Johnson - Unfortunately, the legislation that passed the Senate late on New Year’s Eve and the House on Jan. 1 sets up another fiscal-cliff-type experience – with a fight over extending the debt ceiling looming in about two months. And the outcome then could well be a significant slowdown in the economy and a struggle that might end up in front of the United States Supreme Court. About the end of February, the Treasury Department will have exhausted its legal authority to borrow. Congressional authorization will be needed to allow additional federal government debt to be issued; this is the debt ceiling. The last time the United States came close to hitting the debt ceiling, in summer 2011, a game of chicken was played on Capitol Hill and with the White House – with many Congressional Republicans insisting that the debt ceiling would not be extended unless there were matching spending cuts. This led to the Budget Control Act of 2011, which created the now-infamous sequester mechanism: if politicians could not agree on ways to limit spending (and raise taxes), automatic spending cuts would kick in for both domestic and military programs of the government. Under the New Year’s Day legislation, this sequester was postponed until the end of February. But the greater danger is that world markets will be plunged into chaos when the debt ceiling is not extended, because this creates the prospect that the United States government will be unable to make payments on its existing obligations unless it breaks the law or makes vast spending cuts.

    That Bad Ceiling Feeling -  Krugman - More thoughts about the fiscal deal: One good thing is that the deficit scolds are furious: they had their hearts set on exploiting this crisis to push through benefit cuts, and it didn’t happen — part of the larger good news that Obama didn’t gut Social Security or Medicare this time around. And as I pointed out yesterday, the numbers are disappointing, but the disappointment isn’t that big a deal. Let me offer more detail on that. Before the deal, it was widely expected that Obama could get $800 billion in revenue. You may wonder how this reconciles with the much bigger numbers in his original proposal; the answer is that part of this came from the estate tax, on which he couldn’t count on backing from Senate Dems, but most of it came from going beyond just getting rid of the Bush tax cuts — he was proposing that itemized deductions be turned into tax credits at a maximum of 28 percent, which would have collected a lot of additional revenue from people in the 39.6 bracket. And that wasn’t something he could get just by going over the cliff. So the disappointment, to simplify, is that he got $600 billion instead of $800 billion. Now, you want to scale that by the size of the fiscal problem.

    Putting the Pains in their Place - As part of his Tuesday night statement on the fiscal cliff deal he had just concluded with Congress, President Obama boldly affirmed that he would not negotiate over the debt ceiling, implicitly raising the dire specter of government default to defend his position:Now, one last point I want to make — while I will negotiate over many things, I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed. Let me repeat: We can’t not pay bills that we’ve already incurred. If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic — far worse than the impact of a fiscal cliff. Now this is the kind of thing that tends to make star-struck Democrats weak in the knees.  Partisan Democrats are always extraordinarily impressed by ejaculations of tough talk from President Obama.  But they often have difficulty distinguishing the stagy theatrics of tough talk from the drab backstage reality of tough action.  And unfortunately, every time Obama succeeds in turning some policy debate into a theatrical tilt with Republican leaders, progressives lose.  They lose because Obama’s Democratic supporters will usually follow him almost anywhere – so long as he gives them an emotionally gratifying “win” in the end.  Of course, they will allow Obama himself to define the rules and objectives of the games he is playing, and thus to implicitly define what constitutes winning.

    Why The 2013 'Debt Ceiling' Debacle Will Be Worse Than 2011 - Having passed the 'easy-do-nothing' bill that created a 5% uplift in US equities, D.C. have left the most difficult set of issues for last: entitlement reform, which Republicans have said they will insist upon in return for raising the debt limit, and tax reform, which the President has said he will insist on in return for entitlement reform. The upshot is that reaching an agreement on the next debt limit increase could be at least as difficult as the last increase in August 2011. As Goldman notes, the next debate on the debt limit will be the fifth "showdown" on fiscal policy in the last two years. Adding further angst, in the summer of 2011 politicians had started the debate some three months prior to the real deadline. This time it appears that nothing serious will happen until the 11th hour as usual, meaning far more last minute volatility. However, one new twist to this now familiar routine may come from the rating agencies, which look likely to be more active in 2013 than they have been since 2011

    Republican Strategy: “When you’re playing with house money, it makes sense to go all in on every hand.” -- David Atkins succinctly nails the situation we face: No matter what Obama does, Republicans won’t care and won’t fold…This is what makes the poker analogy so often used to criticize the President’s negotiating tactics such a weak metaphor. Obama is often said to be the worst poker player in history, consistently bluffing then folding. But the problem with that analogy is that Republican House members aren’t playing with their own chips: they’re playing with the country’s. The Republican electoral chips are stashed safely in gerrymandered hands, and any losses over fiscal cliffs or debt ceilings only hurt the President and the nation’s perception of government. There’s no downside for the GOP in bluffing every time in the hopes that the President will fold. Why not? When you’re playing with house money, it makes sense to go all in on every hand. When you’re playing chicken and your opponent has thrown their steering wheel out the window, the only alternative to losing is to do likewise. Obama is justifiably reluctant to do so, because he actually cares about America and the rest of the world, and is unwilling to destroy them for electoral advantage. For the gritty details of Republican gerrymandering and Democratic-voter disenfranchisement, see Sam Wang here and here.

    Republicans Prepare to Wave White Flag Again, This Time On Debt Ceiling; "Temporary, Partial, Non-Threats" - Having totally collapsed on deficit reductions in fiscal cliff non-negotiations (agreeing to a mere $12 billion in cuts down from an Obama offer of $600 billion), Republicans are already offering signs they will once again wave the white flag when it comes to the alleged battle over the debt ceiling. Reuters reports Bigger fights loom after "fiscal cliff" dealPresident Barack Obama and congressional Republicans looked ahead on Wednesday toward the next round of even bigger budget fights after reaching a hard-fought "fiscal cliff" deal that narrowly averted potentially devastating tax hikes and spending cuts. Let's stop right there for a second. What "hard fight" was there? It certainly took a lot of time to reach a deal, but there never was much of a fight. Every day Republicans offered more and more concessions until deficit reductions were whittled down to a mere $12 billion or so from a starting point of $600 billion.  Senate Republicans immediately waved the white flag of surrender as only 5 Republicans voted against the deal. This was a pathetic case of retreat, retreat, then surrender, with every retreat making the president more confident he would get his way.

    Rep. Ellison: ‘If Republicans want to do cuts,’ then cut corporate welfare | The Raw Story: Appearing on “The Young Turks” Thursday, Rep. Keith Ellison (D-MN) agreed with Republicans that cuts are needed to restore the nation’s fiscal outlook, but he wants to look in the last place conservatives are interested in curtailing: corporate welfare. “If Republicans want to have a conversation about cuts, we should have a conversation about cuts,” Ellison, a member of the Congressional Progressive Caucus, told host Cenk Uygur. “Let’s start with Medicare Part D and say, ‘If you want to save money, you want to cut the deficit, let’s let there be competitive bidding for Medicare Part D prescription drugs. That would save about $150 billion.” He added that eliminating oil, gas and coal tax breaks and subsidies would leave “another $100 billion” in government coffers. Ellison also suggested that America’s nuclear arsenal could be trimmed down to save even more money. “My point is, if Republicans want to do cuts, we should do cuts, but we’re not going to hurt America’s working class and poor to do it.”

    Rep. Grayson: Republicans using debt ceiling as ‘legislative terrorism” - Rep. Alan Grayson (D-FL) blasted Republicans on Thursday night for planning to use the federal debt ceiling as leverage in the ongoing battle over government spending. He said Republicans saw the debt ceiling as “a device to extract concessions they would otherwise never be able to accomplish.” “That is why it is legislative terrorism,” Grayson continued. “They are using the debt ceiling as a means to cut Social Security benefits, cut Medicare benefits, cut unemployment insurance, cut anything of any use to any ordinary human being in this country simply because they want more money for tax cuts for the rich.” Republicans previously refused to raise the federal debt ceiling in 2011 unless Democrats agreed to significant budget cuts. The battle over the debt ceiling resulted in the United States having its credit rating downgraded and ultimately lead to the so-called fiscal cliff crisis. Watch video, courtesy of MSNBC, below:

    Get Ready For Another Debt Ceiling Fight - As I noted when it passed, the resolution of the tax portion of the Fiscal Cliff problem only solved, at most, half of the problems facing the country in the year months of 2013.  For one thing, the bill that Congress passed on Tuesday explicitly kicked the can on half of the issues that were coming due on the end of the year by delaying the Sequestration Cuts by two months. In addition to that, the Continuing Resolution that Congress passed to fund the government expires in early March. Both of those pale in significance, though, to the biggest battle of all, the extension of the Federal Government’s borrowing authority, which ran out at the end of 2012 but which we’ll be able to avoid at least through mid-February thanks to some creative accounting at the Treasury Department. I speak, of course, of the infamous “debt ceiling.” I can’t recall the financial markets ever getting in an uproar over the possibility that this might not happen as they did in the summer of 2011. That, of course, was thanks in large part to a Republican House that insisted that any increase in the debt ceiling must be accompanied by spending cuts. In addition, there were a not insignificant number of Republican Members of Congress who suggested, absurdly, that we didn’t need to raise the debt ceiling at all. In the end, of course, we raised the debt ceiling but did so in a deal that, in the end, created the very Fiscal Cliff that Congress only partly avoided earlier this week.

    Geithner Said to Plan Departure Before Debt Ceiling Deal - Treasury Secretary Timothy F. Geithner finds himself in a familiar position: eager to resume life outside government and facing contentious negotiations with Congress over raising the federal debt ceiling.The last time he was in this predicament, in June 2011, President Barack Obama persuaded him to stay. This time, Geithner has indicated to White House officials he wants to carry through with his plan to leave the administration by the end of this month, even if a deal on the debt limit isn’t in place, according to two people familiar with the matter Geithner’s departure would increase pressure on the president to name his successor at Treasury. White House Chief of Staff Jack Lew remains the leading contender for the Treasury job, according to the people, who requested anonymity to discuss the private talks. Geithner, 51, is the only remaining member of Obama’s original economic team and was a key figure in the taxpayer- funded bailouts during the 2008 financial crisis. He’s also had a principal role in negotiations with Congress on the budget deal and in past deliberations over the debt ceiling. Because Lew’s experience in financial markets is thin, Obama may seek to name a Wall Street executive as deputy Treasury secretary, the people said.

    Boehner Says He'll No Longer Negotiate with Obama: House Speaker John Boehner (R-OH) "is signaling that at least one thing will change about his leadership during the 113th Congress: he's telling Republicans he is done with private, one-on-one negotiations with President Obama," The Hill reports. "During both 2011 and 2012, the Speaker spent weeks shuttling between the Capitol and the White House for meetings with the president in the hopes of striking a grand bargain on the deficit. Those efforts ended in failure, leaving Boehner feeling burned by Obama and, at times, isolated within his conference." Instead, he'll try to "pass bills through the House that can then be adopted, amended or reconciled by the Senate."

    Is a $1 Trillion Coin a Good Way to Avoid Another Debt Ceiling Impasse? - The basic problem is this: Constitutionally, the Congress is in charge of both deciding how much money the government should spend, and deciding how much money the government can borrow. The current House of Representatives, dominated by conservative Republicans, doesn’t want to spend anywhere near as much money as current law dictates the government must. They don’t have enough power to change the law as it stands. But they can use their ability to block further debt issuance as a bargaining chip to force those spending cuts. Critics of this bargaining strategy view it as legislative terrorism. They say that House Republicans can’t accept their lack of control over the government, so they are willing to risk the United States government defaulting on its debt and all the nasty consequences that would result from that in order to force their vision of the size of government into existence. So for those who believe the debt ceiling is a harmful anachronism that allows minority factions in the government to hold the majority hostage, there are a few clever strategies for obviating the debt ceiling altogether. One, first highlighted in the Summer of 2011 by Yale Constitutional Law Professor Jack M. Balkin, is for the Treasury to use a loophole in the law meant to enable it to issue commemorative coins in order to issue two $1 trillion platinum coins, and then deposit them with the Federal Reserve. The Fed could then deposit funds with the Treasury in return.

    When Governing Means Lurching Between Phony Crises - The vote last night in the House of Representatives brought to a close the latest Washington master class in dereliction of duty. After a few days of arguing about who won or lost, we can move on to the next manufactured crisis.  In itself, not much of a surprise, the fiscal-cliff deal avoids most of the tax increases and postpones almost all of the spending cuts that were about to be triggered. Throughout this farce, financial markets had refused to believe that the U.S. government would inflict a recession rather than strike a budget agreement, especially because they knew that, all posturing aside, the distance between the two parties was small.  Let’s hope they react with similar equanimity to the next pointless quarrel, over the debt ceiling. Treasury Secretary Timothy Geithner told Congress last week that the current limit on government borrowing was about to be reached. He said “extraordinary measures” (essentially, shuffling funds among government accounts) would be used to prevent the debt from breaking through the ceiling.  How long can that go on? Geithner wasn’t sure. Maybe two months under normal circumstances, he said, but “given the significant uncertainty that now exists with regard to unresolved tax and spending policies for 2013, it is not possible to predict the effective duration of these measures.”

    Battles of the Budget, by Paul Krugman -  The centrist fantasy of a Grand Bargain on the budget never had a chance. Even if some kind of bargain had supposedly been reached, key players would soon have reneged on the deal — probably the next time a Republican occupied the White House.  For the reality is that our two major political parties are engaged in a fierce struggle... Democrats want to preserve the legacy of the New Deal and the Great Society — Social Security, Medicare and Medicaid — and add to them what every other advanced country has: a more or less universal guarantee of essential health care. Republicans want to roll all of that back, making room for drastically lower taxes on the wealthy. Yes, it’s essentially a class war.  The fight over the fiscal cliff was just one battle in that war. It ended, arguably, in a tactical victory for Democrats. The question is whether it was a Pyrrhic victory that set the stage for a larger defeat.  Why do I say that it was a tactical victory? Mainly because of what didn’t happen: There were no benefit cuts. This was by no means a foregone conclusion.

    Despite Deal, Taxes Rise for Most Americans - While the tax package that Congress passed New Year’s Day will protect 99 percent of Americans from an income tax increase, most of them will still end up paying more federal taxes in 2013. That’s because the legislation did nothing to prevent a temporary reduction in the Social Security payroll tax from expiring. In 2012, that 2-percentage-point cut in the payroll tax was worth about $1,000 to a worker making $50,000 a year. The Tax Policy Center, a nonpartisan Washington research group, estimates that 77 percent of American households will face higher federal taxes in 2013 under the agreement negotiated between President Barack Obama and Senate Republicans. High-income families will feel the biggest tax increases, but many middle- and low-income families will pay higher taxes too. (MORE: Congress Approves Fiscal Cliff Deal, Signaling Future Fights) Households making between $40,000 and $50,000 will face an average tax increase of $579 in 2013, according to the Tax Policy Center’s analysis. Households making between $50,000 and $75,000 will face an average tax increase of $822. “For most people, it’s just the payroll tax,”

    Bigger Tax Bite for Most Households Under Senate Plan - Only the most affluent American households will pay higher income taxes this year under the terms of a deal that passed Congress on Tuesday, but most households will face higher payroll taxes because the deal does not extend a two-year-old tax break. The legislation, which was forged in the Senate and overcame resistance in the House late Tuesday will grant most Americans an instant reversal of the income tax increases that took effect with the arrival of the new year. Only about 0.7 percent of households will be subject to an income tax increase this year, according to the Tax Policy Center, a nonpartisan research group in Washington. The increases will apply almost exclusively to households making at least half a million dollars, the center estimated in an analysis published Tuesday.  But lawmakers’ decision not to reverse a scheduled increase in the payroll tax that finances Social Security, while widely expected, still means that about 77 percent of households will pay a larger share of income to the federal government this year, according to the center’s analysis.  The tax this year will increase by two percentage points, to 6.2 percent from 4.2 percent, on all earned income up to $113,700.  Indeed, for most lower- and middle-income households, the payroll tax increase will most likely will equal or exceed the value of the income tax savings. A household earning $50,000 in 2013, roughly the national median, will avoid paying about $1,000 more in income taxes — but pay about $1,000 more in payroll taxes.

    Senate's Deal Means Higher Tax on 77% of Households - The budget deal passed by the U.S. Senate today would raise taxes on 77.1 percent of U.S. households, mostly because of the expiration of a payroll tax cut, according to preliminary estimates from the nonpartisan Tax Policy Center in Washington. More than 80 percent of households with incomes between $50,000 and $200,000 would pay higher taxes. Among the households facing higher taxes, the average increase would be $1,635, the policy center said. A 2 percent payroll tax cut, enacted during the economic slowdown, is being allowed to expire as of yesterday. The heaviest new burdens in 2013, compared with 2012, would fall on top earners, who would face higher rates on income, capital gains, dividends and estates. The top 1 percent of taxpayers, or those with incomes over $506,210, would pay an average of $73,633 more in taxes.

    Tax Impact of the Senate Cliff Compromise–Courtesy of TPC - Fascinating little table from the number crunchers at the Tax Policy Center–who generously gave up their New Years holiday so we could compare results of the Senate cliff compromise under different baselines.Compared to current law (column 1)–full sunset of the Bush tax cuts for everyone, no AMT patch, no payroll tax cut, and a lot of other unrealistic assumptions, of course everyone’s taxes go up.  According to the CBO score of the Senate bill–now being debated in the House–against that baseline, which as of today is actually the fiscal law of the land (though likely to be so for just a few more hours), the bill loses $4 trillion over 10 years. A more realistic comparison is to current policies (col 2) were most of 2012′s policies extended into 2013.  Most importantly, this baseline assumes the Bush tax cuts are all extended but the payroll tax break goes away, so it doesn’t show any impacts until you get to the high income peeps who face higher rates under the new Senate bill.But in terms of what people will actually experience next this year, it’s the last column you want to look at (‘modified current policy’).  In that one, the baseline assumes that the payroll tax is extended, so you see what it’s loss means to households at different income levels–middle income folks lost around $1-2K from the expiration of the payroll tax break.  The higher liabilities for high income people come largely from the new ACA taxes they now face (3.8% on investment income).

    TPC Tax Calculator Shows What Avoiding Fiscal Cliff Means for Taxpayers -  Following Congress’s last minute passage of legislation averting a plunge off the fiscal cliff, TPC has released a new Tax Calculator that lets users examine the effects of the American Taxpayer Relief Act of 2012 (ATRA). As with earlier versions, the new calculator compares income and payroll tax liabilities under alternative scenarios:

    1. ATRA, the tax law that will apply in 2013.
    2. 2012 tax law (with an AMT patch). This is what you paid in 2012, including the now-expired payroll tax cut and a patched AMT.
    3. Pre-ATRA 2013 tax law. This is what you would have paid if Congress hadn’t acted and we’d gone over the fiscal cliff for all of 2013.

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

    The "Fiscal Cliff" and the Coming Retirement Crisis of the Middle Class - On January 1, Congress approved a tax and spending bill to avert the so-called "fiscal cliff" combination of tax hikes and spending cuts that would have created deflationary pressure on the United States (though Yglesias questioned the conventional wisdom of whether it would necessarily cause a recession). Let's take a look at the deal in some detail, then proceed to the gruesome details of what will happen around the Ides of March. From Think Progress, here are some of the more critical parts of the deal.
    1) The Bush tax cuts expire on only about 0.7% of households, those earning more than $400,000 per year as an individual or $450,000 for a couple. This brings in $600 billion over 10 years. Since rich people don't spend as much of their income as the poor and middle class do, this is less deflationary than a tax increase on the middle class, as I discussed in November.
    2) With the expiration of the temporary 2% payroll tax cut, 77% of households will see their taxes go up. Indeed, every single income group will, on average, see their taxes increase, as shown below (via Matt Yglesias):

    The V-shaped nature of the Fiscal Cliff Fix - Richard Green  - Here is a first approximation of the change in effective tax rates as a result of the deal (the effective rates   are based on changes in payroll and income taxes). The builds in a 2 percentage point increase in payroll taxes us to the income cap of $110,100, and a 4.9 percentage point increase in marginal tax rates above $400,000.  The rates actually rise a teeny bit faster for those above the $400,000 threshold, because the tax on capital gains is increasing by 5 percentage points, but this doesn't change the basic point of the picture, which is that it is not until income reaches around $560,000 that the change in effective tax rates at the high end of the distribution match the rate at the low end.

    Obama Just Raised Taxes On The Middle Class - More bad news from the fiscal cliff.While taxes will increase now on those making $250,000 $450,000, the truly substantial tax increases will come on the middle class via the expiration of the payroll tax cut: The payroll tax cut that boosted paychecks for millions of Americans over the past two years has expired. Early Tuesday morning, the Senate passed a deal Tuesday to avert the feared fiscal cliff on an 89-8 vote. The Senate package would put off budget cuts for two months and preserve Bush-era income tax cuts for individuals earning less than $400,000 or couples earning less than $450,000. The House is expected to vote on the bill today or Wednesday. However, the payroll tax holiday introduced under President Obama in 2010 was not included in the deal and technically expired at 12:01 a.m. Monday. Should this benefit not be renewed, 125 million households will see their paychecks shrink, according to the Tax Policy Center… Should the payroll tax cut not be renewed, the Social Security payroll tax rate would revert from 4.2% to 6.2% on the first $113,700 in earnings.

    Tax Progressivity: Update - Here are the effective federal tax rates (total taxes as a percentage of income) for 2013 under the new tax law, as estimated by the Tax Policy Center, for various income groups:
    Bottom fifth: 1.9
    Second fifth: 9.5
    Middle fifth: 15.6
    Fourth fifth: 19.0
    Top fifth: 28.1
    80-90 percentile: 21.5
    90-95 percentile: 23.4
    95-99 percentile: 26.3
    Top 1 percent: 36.9
    Top 0.1 percent: 39.6

    After Fiscal Deal, Tax Code May Be Most Progressive Since 1979 - With 2013 bringing tax increases on the incomes of a small sliver of the richest Americans, the country’s top earners now face a heavier tax burden than at any time since Jimmy Carter was president. The last-minute deal struck by the departing 112th Congress raised taxes on a handful of the highest-earning Americans, with about 99.3 percent of households experiencing no change in their income taxes. But the Tax Policy Center estimates that the average family in the top 1 percent will pay a federal tax rate of more than 36 percent this year, up from 28 percent in 2008. That is the highest rate since 1979, at least. By some measures, the tax code might now be the most progressive in a generation, tax economists said, while noting that every American is paying a lower burden currently than they did then. In fact, the total federal tax rate is still vastly lower for the very rich than it was at any point in the 1940s through 1970s. It has risen from historical lows, but is still closer to those lows than where it was in the postwar decades

    At Long Last, A Permanent Patch for A Dreaded Tax - A tax meant only for the wealthy but that paralyzed much of the middle class for decades has been permanently de-fanged. Score one, at least, for the eleventh-hour fiscal cliff deal. The dreaded Alternative Minimum Tax hasn’t gone away. But this law, which has been modified 19 times since 1969, will need no more patches. Like Social Security benefits, the AMT is now indexed to inflation. That means the income threshold for falling under the AMT will rise automatically each year. If you don’t pay it this year, you won’t pay it next year or any year thereafter—at least not without an income boost that outstrips inflation.

    Too Much Wishful Thinking on Middle-Class Tax Rates - Greg Mankiw  - IN the continuing fiscal negotiations between President Obama and House Republicans, both sides have, from the very beginning, agreed on one point: Taxes on the middle class must not rise. But maybe it’s time to reconsider this premise. An unwavering commitment to keep middle-class taxes low could be one reason the political process has become so deeply dysfunctional. Let’s start with the problem: the budget deficit. Under current policy, the federal government is spending vastly more than it is collecting in tax revenue. And that will be true for the next several decades, thanks largely to the growth in entitlement spending that will occur automatically as the population ages and health care costs increase. As a result, the ratio of government debt to the nation’s gross domestic product is projected to rise, substantially and without an end in sight. That can happen for a while, or even a long while, but not forever. At some point, investors at home and abroad will start questioning our ability to service our debts without creating steep inflation. It’s hard to say precisely when this shift in investor sentiment will occur, and even whether it will strike in this president’s term or the next, but when it does, it won’t be pretty. The United States will find itself at the brink of an unprecedented financial crisis.

    Greg Mankiw Says We Have to Tax the Middle Class More - Dean Baker -That is the explicit argument in his NYT column today. What is more interesting that what he says is what he doesn't say. There is no mention whatsoever of the possibility of taxing Wall Street, an idea that is now being pushed even by the International Monetary Fund. The U.K. raises between 0.2-0.3 percent of GDP on tax that only hits stock trade, leaving options, futures, and other derivative instruments unaffected. This would be roughly $500 billion over the course of a decade in the United States. Japan had a tax that raised 1.0 percent of its GDP in the late 80s. That would be roughly $2 trillion over the course of a decade. Robert Pollin and I outlined a structure of taxes that could raise a comparable amount here. Anyhow, the middle class might be in Mankiw's sights when it comes to taxes, Wall Street obviously is not. The biggest item on the other side of the equation is health care. Our costs are hugely out of line with the rest of the world. We pay on average more than twice as much per person for our health care as people in other wealthy countries with little to show for it in terms of outcomes. If our per person costs were comparable to those in other countries we would be looking at long-term budget surpluses, not deficit.  We could look to fix our health care system or failing that allow people to take advantage of the more efficient systems in other countries by promoting trade in health care services. But this is apparently also not on Mankiw's agenda. These measures would likely be bad news for the drug companies, medical equipment industry, and highly paid medical specialists. In short, if we assume a world where we can't take any measures that would hurt the wealthy, then we will probably have to raise taxes on the middle class. However the rest of us may not want to accept Mankiw's assumption here.

    "We are all in it together," and benefits taxes - Tyler Cowen says that the Republican Party should propose raising taxes on everyone because, "we are all in it together." To some extent, this is a benefits tax view--a view that we should pay to society our fair share of what we get from society.  But the implication of this is not necessarily that everyone should sacrifice in order to put us all on a sustainable fiscal path. With Ronald Reagan's election in 1980, the US saw a sea change in tax and regulatory policy.  While the policy was suppose to benefit everyone, it clearly hasn't.  For the bottom quintile of the income distribution, income has risen about 5 percent since 1982 (the first year in which Reagan's policies bit); for the next quintile, it has risen 8 percent; for the next, 11 percent, for the next, 20 percent, and for the highest, 45 percent.  But most of the highest quintile didn't do so well--the top 5 percent has seen average household income rise by 68 percent. So let's begin by holding the bottom quintile harmless in doing any kind of deficit reduction.  But what of the remaining quintiles?  If we look at the share of income growth by quintile (excluding the meager income growth of the bottom quintile), we find that 3 percent went to the second quintile from the bottom; 7 percent to the next; 18 percent to the next, and 73 percent to the top quintile.  So little has gone to the second and third quintile from the bottom that one could make a case that they should be left alone as well.

    This Is How Much Your Taxes Will Rise If We Fall Off the Fiscal Cliff - Until or unless Congress actually does something, 2013 will be the year of tax increases. Big tax increases.The fiscal cliff is a bit of a misnomer, but when it comes to taxes, the metaphor is apt. If all of the tax cuts, credits, and deductions set to expire at year end do in fact expire, incomes will fall off a tax cliff. Median earners will have 4 percent less in take-home pay in 2013 than they otherwise would; households making a million dollars or more would have 11.4 percent less.You can see what a fully armed and operational tax cliff would mean for different earners in the chart below from the nonpartisan Tax Policy Center. But not all tax cuts, credits, and deductions are created equal. Some hit much harder than others, and some hit different earners much harder than other earners. The chart below, again from the indispensable Tax Policy Center, breaks down which tax provisions are worth what to different earners. It's pretty crazy that nobody in Washington is fighting to keep the payroll tax cut.

    The Estate Tax Is a Huge Giveaway in the Fiscal-Cliff -This latest cliff intersects with our two other unhappy certainties, death and taxes, when it comes to the estate tax. It's been a rather bizarre decade for what Republicans call the "death tax," but what should more properly be called the inheritance tax. Back when George W. Bush came into office, he slashed the estate tax, and gradually phased it out until 2010, when there was no estate tax. Since then, Congress has set it at a 35 percent rate, with a $5 million exemption, indexed to inflation -- but that's set to expire, along with everything else, in the new year, and revert back to its Clinton-era levels. Those Clinton-era levels of a 55 percent rate and a $1 million exemption are much, much higher than what's being talked about as part of a fiscal cliff deal. According to Sam Stein and Ryan Grim of the Huffington Post, the latest proposal that really, really might turn into an actual deal would set the estate tax at a 40 percent rate, with a $5 million exemption, indexed to inflation. In other words, the first $5 million of any estate would not be taxed, but the rest would be at a 40 percent rate, with that $5 million exemption growing each year with inflation. And remember, these are exemption levels for singles; the exemption level for surviving spouses is double this.

    Fiscal uncertainty undermining the muni markets - The US fiscal negotiations are putting pressure on the muni bond markets. ETF Trends: - The tax hoopla has depressed municipal bonds, with high-grade 10- and 30-year munis comparably yielding as much as taxable Treasury securities at 1.79% and 2.73%, respectively, writes Randall W. Forsyth for Barron’s.  According to reports from trading desks, bids have become more scarce as a greater number of investors are sitting on the sidelines and waiting it out as the fiscal cliff goes down to the wire.  Congress has reportedly proposed levies on high-income investors in munis as part of of the deficit plan.  More pessimistic muni observers are wondering if taxes could be imposed retroactively on tax exempt securities. George Friedlander of Citi, though, believes this is a “pernicious concept” that could destroy confidence in the federal government’s ability in the capital markets.

    Elizabeth Warren Keeps Low Profile, for Now - When she is sworn in this January, Elizabeth Warren might be expected to follow a fairly well-established model for making the switch from national figure to freshman senator: Keep your head down and stay out of the limelight. So far the Massachusetts Democrat has declined most interview requests, and she kept her answers brief at a postelection news conference. The question is whether she will stick to the script."I've never gotten the feeling that she is a background person," said Sen. Bob Corker (R., Tenn.), who met with his future colleague for about 45 minutes earlier this month to discuss banking issues. Ms. Warren, 63 years old, will serve on the Senate's banking committee, where Mr. Corker is a member. Ms. Warren, a longtime critic of banks in her role as a Harvard professor, rose to national prominence as chairwoman of the congressional oversight panel created to police the federal government's financial bailout. In that position, she sharply criticized the Treasury Department's handling of the program, publicly clashing with Treasury Secretary Timothy Geithner during televised hearings and saying Wall Street caused the crisis.

    The four business gangs that run the US: IF YOU'VE ever suspected politics is increasingly being run in the interests of big business, I have news: Jeffrey Sachs, a highly respected economist from Columbia University, agrees with you - at least in respect of the United States. Sachs says four key sectors of US business exemplify this feedback loop and the takeover of political power in America by the ''corporatocracy''. First is the well-known military-industrial complex. ''As [President] Eisenhower famously warned in his farewell address in January 1961, the linkage of the military and private industry created a political power so pervasive that America has been condemned to militarisation, useless wars and fiscal waste on a scale of many tens of trillions of dollars since then,'' he says. Second is the Wall Street-Washington complex, which has steered the financial system towards control by a few politically powerful Wall Street firms, notably Goldman Sachs, JPMorgan Chase, Citigroup, Morgan Stanley and a handful of other financial firms.Third is the Big Oil-transport-military complex, which has put the US on the trajectory of heavy oil-imports dependence and a deepening military trap in the Middle East, he says.Fourth is the healthcare industry, America's largest industry, absorbing no less than 17 per cent of US gross domestic product.

    Beancounters, having resolved not to resolve differences in derivatives netting, instead have cool new footnotes | FT Alphaville: Netting of the mark-to-market of derivatives positions is attractive. It’s more efficient when it comes to posting and receiving margin, decreasing the amount of operational and counterparty risk. The ultimate in netting efficiency is, of course, the newest too-big-to-fail institutions — central counterparties (CCPs) and clearinghouses. There’s another place where offsetting positions is attractive: financial statements. It can make a big difference. Citi demonstrates this with estimates of what derivatives exposures (including repos, brokerage receivables, and associated collateral) would look like if you applied full netting instead of that dictated by respective accounting standards: Think about this in terms of things like leverage ratios, where assets go in the numerator. If a bank has a lot of derivatives liabilities, it’s optimal to offset those against derivative assets as much as possible in order to get leverage down. Shame then that European and US banks aren’t on an equal footing on this. As the above graph demonstrates, US GAAP allows more offsetting than the International Financial Reporting Standards (IFRS) that all major European banks (bar Credit Suisse, because the Swiss are weird*) follow. Hence how the dark blue bar representing GAAP banks in the above doesn’t move much for the full “net” exposure estimates to the right, but the light blue IFRS bar does.

    JPMorgan to BofA Get Delay on Rule Isolating Derivatives -JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS) and Bank of America Corp. won a delay of Dodd-Frank Act requirements that they wall off some derivatives trades from bank units backed by federal deposit insurance. Commercial banks including the Wall Street firms may get as long as an additional two years -- until July 2015 -- to comply with the rules, the Office of the Comptroller of the Currency said in a notice yesterday. The so-called pushout provision was included in the 2010 financial-regulation law as a way to limit taxpayer support for risky derivatives trades. The Commodity Futures Trading Commission and other regulators need to complete swap rules to allow “federal depository institutions to make well-informed determinations concerning business restructurings that may be necessary,” the OCC said in the notice. Dodd-Frank requires that equity, some commodity and non-cleared credit derivatives be moved into separate affiliates without federal assistance. Regulators including Federal Reserve Chairman Ben S. Bernanke had opposed the provision, saying it would drive derivatives to less-regulated entities. In February, the House Financial Services Committee approved with bipartisan support legislation that would let banks keep commodity and equity derivatives in insured units by removing part of the rule.

    Fed’s Yellen: Tougher Rules Needed to Strengthen System - New rules designed to strengthen some of the financial system’s most complex corners are needed to prevent another financial crisis, Federal Reserve Vice Chairwoman Janet Yellen said Friday. Measures included in international agreements, as well as the Dodd-Frank overhaul in the U.S. will help ensure banks and trading in areas such as the over-the-counter derivatives market become more stable, Ms. Yellen said in a speech at a lunch hosted by the American Economic Association and American Finance Association. She didn’t discuss monetary policy in her remarks, which focused tightly on financial regulations.Tougher capital requirements for banks, as well as other measures aimed at managing the interconnectedness of banks will help rein in risks, Ms. Yellen said. Stronger capital rules “are not the only tool,” she said. “Multiple channels for reform initiatives will enhance systemic stability.”

    Financial reform battle continues over Dodd-Frank law - The fate of financial reform may be decided in the coming year as congressional leaders on both sides of the aisle attempt to modify the Dodd-Frank Act. In the two years since Congress passed the far-reaching regulatory overhaul, lawmakers have railed against the law for either not going far enough to reform Wall Street or being too burdensome to the industry. Republicans have sought to dismantle Dodd-Frank through a series of failed bills, placing Democrats on the defensive despite their own misgivings about the law.Republicans remain motivated to gut key statutes, as evidenced by the failed “Plan B” proposal to avert the fiscal cliff. GOP leaders tucked language into that bill that would have cut automatic funding to the Consumer Financial Protection Bureau and stripped regulators of the power to unwind “too-big-to-fail” institutions. If the bill is indicative of things to come, critics say, polarizing ideology may continue to prevent lawmakers from working together on technical fixes to Dodd-Frank. They point out that the makeup of the House and Senate will generally be the same in the next Congress, raising fears that gridlock will continue.

    What’s Inside America’s Banks? - For the past four years, the nation’s political leaders and bankers have made enormous—in some cases unprecedented—efforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. This hasn’t worked. Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash. Consider JPMorgan’s widely scrutinized trading loss last year. Before the episode, investors considered JPMorgan one of the safest and best-managed corporations in America. One reason was that the firm’s huge commercial bank—the unit responsible for the old-line business of lending—looked safe, sound, and solidly profitable. But then, in May, JPMorgan announced the financial equivalent of sudden cardiac arrest: a stunning loss initially estimated at $2 billion and later revised to $6 billion. It may yet grow larger; as of this writing, investigators are still struggling to comprehend the bank’s condition.

    The Great Bank Escape by Anat Admati - This year has proven to be yet another replete with futile efforts to manage the outsize grip that banks and bankers have on the world economy. The global financial system remains distorted and dangerous. Since the 1980’s, “shareholder value” has increasingly become the focus of corporate governance. Managers and board members often receive stock-based compensation, which gives them equity ownership rights and, in turn, creates a powerful incentive to maximize the market value of their companies’ shares.But actions taken in the name of shareholder value often benefit only those whose wealth is closely tied to the company’s profits, and may actually be harmful to many shareholders. Despite their claims that they are pursuing shareholder value, the actions of top managers, in particular, often reflect only their own interests, rather than those of shareholders who often hold the great majority of the shares. This discrepancy can be seen clearly in the banking sector. Before 2007, banks enjoyed high returns and soaring stock prices. But excessive indebtedness and losses on the risky investments that had been made triggered the global financial crisis and led to the failure, or near-failure, of many major financial institutions

    Not Holding My Breath But… Eliot Spitzer: ‘We’ve turned a corner’ – Wall Street Should Expect Criminal Cases in 2013 - “Viewpoint” host Eliot Spitzer reviews the year in Wall Street headlines and looks ahead to 2013 in this Web exclusive video. Spitzer argues that “it has not been a great year for Wall Street,” citing the Libor scandal, JPMorgan’s “London whale” and various insider trading allegations. But the big banks may not be “too big to indict” much longer. I think the Justice Department finally has awakened to the reality that simple money damages and money penalties aren’t enough. And there are going to a lot more criminal cases brought against institutions. And that will shake up the inner sanctum of senior management as they come to grips with the reality of the obligation to plead guilty — not individually, perhaps, but at a corporate level,” Spitzer says.

    Experts back Deutsche whistleblowers - Accounting experts say Deutsche Bank appears to have improperly accounted for billions of dollars of credit derivatives trades by failing to value adequately the risk that its trading counterparties could walk away. The Financial Times reported this month that US regulators were examining claims from three former Deutsche employees who have accused the bank of failing to recognize $4 billion-$12 billion in paper losses on complex derivatives, known as leveraged super seniors, with a notional value of $130 billion. The trades involved Deutsche buying credit protection from investors on highly-rated corporate debt. When the financial crisis hit in 2007, the value of this insurance increased and Deutsche booked profits. But the complainants argue that it failed to properly account for the risk of its counterparties walking away from the trade rather than paying out on the insurance - known as "gap risk" - which rose along with the value of the insurance and could have led to big losses.

    Who’s Really Behind the Takeover of the New York Stock Exchange - If the general public knew the history of the company that has announced it is acquiring the New York Stock Exchange, there would be a loud clamor for the anti-trust division of the Justice Department to become involved.  But the larger question is, where has the Justice Department been on this issue for more than a decade?  The company planning to acquire the New York Stock Exchange in an $8.2 billion cash and stock deal is the Atlanta-headquartered Intercontinental Exchange, known on Wall Street simply as ICE.  ICE went public in 2005. There are two paragraphs in its offering statement that are simply breathtaking:  “In May 2000, our company was formed, and Continental Power Exchange, Inc. contributed to us all of its assets, which consisted principally of electronic trading technology, and its liabilities, in return for a minority equity interest in our company. In connection with our formation, seven leading wholesale commodities market participants acquired equity interests in our company, either directly or through affiliated entities. We refer to these leading commodities market participants, or their affiliates, as the case may be, as our Initial Shareholders. Our Initial Shareholders are BP Products North America Inc. (formerly known as BP Exploration and Oil, Inc.), DB Structured Products, Inc. (formerly known as Deutsche Bank Sharps Pixley Inc.), The Goldman Sachs Group, Inc., Morgan Stanley Capital Group Inc., S T Exchange Inc. (an affiliate of Royal Dutch Shell), Société Générale Financial Corporation and Total Investments USA Inc. (an affiliate of Total S.A.).

    Open data is not a panacea - I’ve talked a lot recently about how there’s an information war currently being waged on consumers by companies that troll the internet and collect personal data, search histories, and other “attributes” in data warehouses which then gets sold to the highest bidders. It’s natural to want to balance out this information asymmetry somehow. One such approach is open data, defined in Wikipedia as the idea that certain data should be freely available to everyone to use and republish as they wish, without restrictions from copyright, patents or other mechanisms of control. I’m going to need more than one blog post to think this through, but I wanted to make two points this morning. The first is my issue with the phrase “freely available to everyone to use”. What does that mean? . When important data goes public, the edge goes to the most sophisticated data engineer, not the general public. The Goldman Sachs’s of the world will always know how to make use of “freely available to everyone” data before the average guy. Which brings me to my second point about open data. It’s general wisdom that we should hope for the best but prepare for the worst. My feeling is that as we move towards open data we are doing plenty of the hoping part but not enough of the preparing part.

    Data Brokers: Too Much Information - I keep coming back to the FTC’s report on new consumer privacy guidelines issued early in the year. Not only do the guidelines give a sense of the agency’s view on online data protection, but it also suggests what new legislation may eventually look like. . In the FTC words, information or data brokers, are “companies that collect personal information about consumers from a variety of public and non-public sources and resell the information to other companies.”  Sent to nine data brokers, the FTC order requested specific information on the source of their data, how the data is maintained, and consumer’s ability to access and correct inaccurate information.It’s no secret that the FTC has its own ideas about how these brokers should be doing their job. In their guidelines, the FTC calls for a voluntary privacy framework that would support several “substantive” principles, which include data security, reasonable collection limits, sound retention practices, and data accuracy.  The key point is that consumers don’t have a direct relationship with these companies, and the broker is in the business of selling this data to others.

    Google Set to Dodge Federal Antitrust Lawsuit with FTC Deal: Report - Internet search giant Google is poised to avoid a major federal antitrust lawsuit after a nearly two-year government investigation into its Web search business, Bloomberg reported late Wednesday. The agreement, which was expected, will conclude the Federal Trade Commission’s probe into whether Google has used its search market power to unfairly harm rivals. A group of Google’s competitors, including Microsoft and Yelp, has been lobbying the government for several years in an effort to prod federal officials to go after the search giant on antitrust grounds. Google dominates the Web search space, with about 70% market share. Google’s agreement with the feds, which is expected to be announced Thursday, is a significant blow to its rivals, some of which were hoping the federal government would file a high-profile lawsuit against the company, as it did with Microsoft in the 1990s.

    The Federal Trade Commission closes its antitrust review - Google Blog  = The U.S. Federal Trade Commission today announced it has closed its investigation into Google after an exhaustive 19-month review that covered millions of pages of documents and involved many hours of testimony. The conclusion is clear: Google’s services are good for users and good for competition.  Larry and Sergey founded Google because they believed that building a great search experience would improve people’s lives. And in the decade-plus that’s followed, Google has worked hard to make it quicker and easier for users to find what they need. As we made clear when the FTC started its investigation, we’ve always been open to improvements that would create a better experience. And today we’ve written (PDF) to the FTC making two voluntary product changes:

    • More choice for websites: Websites can already opt out of Google Search, and they can now remove content (for example reviews) from specialized search results pages, such as local, travel and shopping;
    • More ad campaign control: Advertisers can already export their ad campaigns from Google AdWords. They will now be able to mix and copy ad campaign data within third-party services that use our AdWords API.

    In Google Patent Case, F.T.C. Set Rules of Engagement for Battles - The Federal Trade Commission’s antitrust investigation of Google focused mainly on the company’s lucrative search business, while its inquiry into the tech giant’s handling of patents seemed an afterthought. Yet even as Google made only a few voluntary promises on search, it agreed to a legal settlement on patents that Jon Leibowitz, the commission chairman, called a “landmark enforcement action” that applies to huge high-tech markets like smartphones and tablet computers. The commission action by no means spells the end of the smartphone patent wars, a global conflict in which major corporations including Apple, Samsung and Google have spent billions amassing patent portfolios and then suing and countersuing one another in courts around the world. But legal experts say Google’s settlement with the F.T.C. signals progress in clarifying the rules of engagement in high-tech patent battles, and thus could ease them. “The agreement represents a significant stride forward in reducing the confusion and uncertainty that currently surrounds how these patents can be used,”

    Banks Deeply Involved in FBI-Coordinated Suppression of “Terrorist” Occupy Wall Street - Yves Smith - If you had any doubts of the veracity of former IMF chief economist Simon Johnson’s depiction of the financial crisis as a “quiet coup,” a pre-Christmas release of FBI documents should put them to rest. While I linked to a discussion of the results of the Partnership for Civil Justice’s FOIA of FBI materials on Occupy Wall Street, I was remiss in not writing them up earlier. Both the Partnership for Civil Justice and Naomi Wolf at the Guardian (hat tip Scott A) provide good overviews. The PCJ also published the FBI documents it obtained.  If you’ve been following the story of the official response to Occupy Wall Street, it was apparent that the 17 city paramilitary crackdown was coordinated; it came out later that the Department of Homeland Security was the nexus of that operation. The deep FBI involvement is a new and ugly addition to this picture. Several impressions emerge from reading the summaries and dipping into the FBI documents:The FBI deemed OWS to be a terrorist organization and went into “guilty until proven innocent” mode. Many of the FBI descriptions of possible OWS actions or those of affiliated organizations like Adbusters consistently look to have taken the most inflammatory snippets and presented them out of context.  The FBI also seems to believe that there is no such thing as peaceful protest, that any non-violent activity has the potential to turn violent and therefore should be treated as violent. One document to corporate “clients” warned:

    On Vampire Capitalism and the Fear of Inoculation - Capital,” Marx wrote, “is dead labor, that, vampire-like, only lives by sucking living labor, and lives the more, the more labor it sucks.” Vampires sucked the blood of the sleeping in Ancient Greece and spread plague in Medieval Europe, but after the industrial revolution, novels began to feature a new kind of monster, the well-dressed gentleman vampire who would become an enduring mascot for capitalism. The thought of an ambitious vampire sucking the life out of honest workers was resonant in a country where the value had so recently been sucked out of nearly every home. We were reminded of the vampirism behind the housing crisis, which was set off by a rash of “predatory” loans to homeowners who lacked the ability to repay them. These loans, bundled and sold to investors, came to be known as “toxic assets” when they lost their value. The understanding that capital can itself be toxic leads, almost inevitably, to a fear of capitalism polluting every endeavor. At the close of the 2009 H1N1 pandemic, when it was clear that the flu had not caused the high mortality rates health officials had initially feared it would, the chair of the health committee for the Council of Europe accused the World Health Organization of colluding with pharmaceutical companies and creating a “false pandemic” to sell vaccines. The WHO met this accusation with equanimity, their spokeswoman saying, “Criticism is part of the outbreak cycle.” The organization then invited twenty-nine independent influenza experts from twenty-six countries to evaluate its actions during the pandemic.

    Big Depositors Seek a New Safety Net -On the first day of the New Year, $1.5 trillion of bank deposits will lose an unlimited government guarantee that was granted during the financial crisis to assure skittish customers that their cash was safe. For a handful of boutique firms that service banks, it’s a boon for business.  The accounts losing the insurance are used by businesses, municipalities and other entities like nonprofits that are willing to forgo any interest in order to have immediate access to their large pools of cash.  These accounts hold about 20 percent of all deposits in United States banks. Starting Jan. 1, only $250,000 in each noninterest bearing account will be backed by the Federal Deposit Insurance Corporation.  Now a scramble is under way to make sure these customers do not withdraw large sums out of banks, particularly community banks that have benefited from the guarantee. Because a depositor is barred from spreading out $1 million into four accounts within the same bank, many smaller banks are turning to a handful of specialized cash-management firms that can split up deposits into multiple $250,000 chunks and distribute them among a network of banks, each of which can insure $250,000.

    Unofficial Problem Bank list declines to 838 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Dec 28, 2012.   The FDIC released its enforcement action activity for November 2012 this week. As a result, seven banks were removed and four banks were added. The changes leave the Unofficial Problem Bank List with 838 institutions with assets of $313.1 billion. A year ago, the list held 970 institutions with assets of $391.2 billion. For the month, the list count declined by 18 and assets fell $13.3 billion. The count decline of 18 matches the highest amount recorded back in April 2012.After the passage of the fourth quarter, it is time for a refresh of the transition matrix. As seen in the table, there have been a total of 1,606 institutions with assets of $808.9 billion that have appeared on the list. Removals have totaled 768 institutions or nearly 48 percent of the total. Failures continue to be the leading removal cause as 347 institutions with assets of $290.4 billion have failed since appearing on the list. Removals from unassisted mergers and voluntary liquidations total 129 institutions. While there has been an acceleration in action terminations in 2012, the pace has slowed down some during the fourth quarter. In all, actions have been terminated against 292 institutions with assets of $129.6 billion, with 40 terminations occurring in this quarter.

    Why Isn’t the Thirty-Year Fixed-Rate Mortgage at 2.6 Percent? - New York Fed - As of mid-December, the average thirty-year fixed-rate mortgage was near its historic low of about 3.3 percent, or half its level in August 2007 when financial turmoil began. However, yield declines in the mortgage-backed-securities (MBS) market, where bundles of mortgage loans are sold to investors, have been even more dramatic. In fact, all else equal, had these declines passed through to loan rates one-for-one, the average mortgage rate would now be around 2.6 percent. In this post, we summarize some of the findings from a workshop held at the New York Fed in early December aimed at better understanding the drivers behind the increased wedge between mortgage loan and MBS rates.   The chart below shows the recent evolution of the gap between the two rates (the “primary-secondary spread”) as measured by the difference between a representative yield on newly issued agency MBS (the “current coupon,” or secondary rate) and the average thirty-year fixed loan rate (the “primary rate”) from the Freddie Mac Primary Mortgage Market Survey. The spread has increased 70 basis points, on net, from around 45 basis points in 2007 to about 115 today, implying that declines in the primary rate have been smaller than those in the secondary rate. So, why is the primary rate at 3.3 percent and not at 2.6 percent today?

    Spare the Stimulus, Spoil the Recovery: We are now halfway into our own lost decade. Five years ago this month, the economy started to collapse in the largest downturn since the Great Depression. Though the recession has officially been over since 2009, we’ve had a slow and uneven recovery. Unemployment, which dropped from 8.3 percent in January to 7.7 percent in November, remains far too high.  But 2013 could be a turning point for the economy. The housing market, which has held the recovery in check since the crash, started to show signs of life this past year. The Federal Reserve recently stepped up its monetary policy, pledging to continue its efforts to stimulate the economy until unemployment falls to 6.5 percent. No less important, the public rebuked the politics of extreme austerity in November, handing President Obama a second term. Government actors played an important role in keeping the economy going in 2012, and will need to do the same to sustain the recovery into the new year. Housing got as bad as it was likely to get in 2012, hitting a bottom over the summer. For most of the last four years, the Obama administration has kicked the can, hoping the recovery would boost the housing market. This past year, the administration started to coordinate better in using housing as a driver of recovery. In March, the administration significantly expanded the Home Affordability Refinancing Program (HARP),which allows people with underwater mortgages to refinance. However, recent studies have found that a lot of the relief homeowners should receive through HARP is being captured by Wall Street, which isn’t passing along the full savings of record-low mortgage rates to consumers.

    Pending Foreclosure Fraud Settlement Achieves New Level of Abject Regulatory Failure - Yves Smith - After too many years to count of regulatory failure and limp-wristed reforms, it’s hard to be surprised. Nevertheless, I hope to convince you that a yet another mortgage settlement, leaked on New Year’s Eve when hopefully no one would notice, achieves the difficult task of reaching a new level of dereliction of duty.  This latest bank gimmie comes in the retrading of consent orders that were entered into in April 2011. Readers who followed the mortgage beat closely may recall that the OCC broke with other banking regulators, the DoJ, and HUD in entering into its own consent decrees in the hope of undermining the mortgage negotiations. But this OCC settlement (which the Fed joined) was in some ways broader that the one entered into by 49 state attorneys general and various Federal agencies in early 2012, in that it involved the 14 major servicers, while the later state/Federal deal was limited to the biggest five. The banks piously promised to shape up, and were required to conduct reviews of foreclosures performed in a specified time frame if consumers asked for them, plus conduct a review of a sample of other foreclosures.  Now a number of observers, including yours truly, called out these settlements as patently ridiculous and rife for abuse Why? Rather than act like a proper regulator, and oversee the review process itself, the OCC outsourced it to consultants hired by the banks! Yes, the OCC would get to review them for conflicts of interest, but who are we kidding? And it was even worse than you can imagine, since the OCC accepted that conflicts would be the norm. Now fast forward to the “settlement” revelation of New Year’s Eve, courtesy the New York Times. The first nasty bit is that this deal has been under discussion with the 14 servicers in the consent decree for a month or so, with no inclusion of representatives of borrowers, which is already a big warning sign. Here are the key bits: Banking regulators are close to a $10 billion settlement with 14 banks that would end the government’s efforts to hold lenders responsible for foreclosure abuses like faulty paperwork and excessive fees that may have led to evictions, according to people with knowledge of the discussions….

    Stench Rises on Rumored $10 Billion Settlement to End Wall Street Foreclosure Fraud Investigation - In April 2011, the Office of the Comptroller of the Currency (OCC), the top regulator of national banks in the U.S., signed consent orders with 14 of the largest banks and mortgage servicers requiring that they hire “independent” consultants to review 2009 and 2010 foreclosure actions to determine financial injury to borrowers and provide financial compensation for that injury.  Borrowers that suffered injuries were to receive financial awards up to a maximum of $125,000 under these consent orders.  Now, out of the blue, major business media are reporting that this legally adopted plan has been scrapped and a quick fix will soon be announced to fine the whole lot of banks a cumulative $10 billion and call it quits on the investigation.  The speciousness of the original OCC plan has been challenged by the General Accountability Office, ProPublica, and a host of consumer advocates.  The GAO found that the letters sent to borrowers who may have been wronged in the foreclosure process were written over their heads and failed to mention any specific dollar amounts they might be entitled to – thus removing the incentive to wade through the legalese.  ProPublica found that in at least one case, that of Bank of America, “supposedly independent, third-party reviewers would sit at a computer, analyzing each homeowner’s case by going through hundreds of questions, such as whether the bank had properly reviewed a homeowner for a modification or had charged bogus fees. But the reviewers weren’t starting from a blank slate. Bank of America employees had already supplied the answers, which the reviewers would have to override if they did not agree.”

    OCC Foreclosure Reviewer: “Independent” Reviews Were Controlled by Banks, Which Suppressed Any Findings of Harm to Foreclosed Homeowners - Yves Smith - You simply must read this post if you care at all about the rule of law or can stand to see the gory mechanisms by which “regulation” has now become a fig leaf for criminal corporate conduct.  Reader Luxtexente submitted this comment yesterday, describing his experience as a Claim Reviewer for one of the 14 servicers, in theory working under the direction of Promontory Group and the OCC. He makes clear, contrary to other banks, which hired very junior people who had little understanding of real estate law and foreclosure procedures (see Adam Levitin and Abigail Field for examples) or foreclosure review firms who held themselves out as experts but have yawning gaps in their knowledge, that he and many of the other reviewers he worked with were very well qualified to screen servicer records. He describes how these reviews were systematically gutted. Remember, the review firms were supposed to be independent, selected according to criteria set by the OCC and paid for by the banks, but supposedly not accountable to them. We had dismissed that idea early on as ridiculous. But as Luxtexente tells us, it was much worse than that. It wasn’t simply that the consulting firms airbrushed out unflattering findings so as not to ruffle their current and hoped-for future meal tickets. The banks were actively involved in overseeing the project and the results were shameless rejection of any and every possible basis for borrowers getting recompense. He provides numerous examples of unquestionably abusive conduct, such as foreclosing on homeowners in non-judicial states without advertising the notice of sale as required by law, or failing to send a notice of acceleration. Enough of the reviewers understood state law requirements that they would find many, often over a dozen, violations on a single file. So how did the bank and the OCC conspire to solve this problem? They redefined the review process so as to omit matters of law. I am not making this up.

    U.S. Mortgage Firms Said to Near $10 Billion Settlement -U.S. regulators led by the Office of the Comptroller of the Currency will replace a largely fruitless effort to find victims of botched foreclosures at the 14 biggest mortgage servicers with flat penalties, five people briefed on the talks said. Bank of America Corp., Wells Fargo & Co. (WFC), JPMorgan Chase & Co. (JPM) and New York-based Citigroup Inc. (C) are among servicers that may make concessions totaling about $10 billion, said the people, who requested anonymity because the discussions are private. The funds would compensate borrowers whose homes were wrongfully seized using faulty paperwork and aid homeowners in danger of default, the people said.The penalties would supplant a system allowing borrowers who lost homes in 2009 and 2010 to seek compensation after foreclosure reviews. The program, which housing advocates said failed to reach its intended targets, was set up under consent decrees the banks signed with regulators in 2011. It drew 356,000 applicants out of what the advocates said were 4.4 million eligible borrowers. Today is the application deadline and no borrowers have yet received compensation, the OCC said.

    Fed Holds Up $10 Billion Mortgage Pact With Banks, OCC - The largest U.S. banks and the Office of the Comptroller of the Currency have agreed to a $10 billion settlement that would halt a lengthy review of thousands of foreclosure cases, according to people familiar with the discussions. But a final deal is being held up by the Federal Reserve, the people said. The banks and the OCC would like to wrap up a pact as soon as this weekend, these people said, ahead of the release of 2012 results starting next week. The terms under discussion would have 14 large banks pay a total of $3.75 billion in cash and the balance in other forms of borrower relief, these people said. It is unclear why the Fed has yet to sign off on the deal, which would potentially compensate borrowers who went through foreclosures in 2009 and 2010. The Fed declined to comment. The Fed and the OCC have disagreed about exactly how payments to consumers under the settlement would be determined, said two people familiar with the talks. Two members of Congress on Friday urged regulators not to rush into a deal. A person familiar with the negotiations said the deal was also facing opposition from smaller banks that say the terms favor larger lenders, which could face billions of dollars in costs if a deal doesn't take place.

    Court Rules Unrecorded Mortgages Received Through The FDIC Receivership Of WaMu Are Voidable - On the Friday before Christmas,  the Michigan Supreme Court quietly handed down a significant ruling that will affect nearly $3.75 billion worth of mortgages former Washington Mutual mortgages that JPMorgan Chase acquired from the FDIC after Washington Mutual went into FDIC receivership in 2008.The Michigan Supreme Court in their 4-3 ruling states that the mortgages are currently unenforceable because JPMorgan Chase can not claim operation of law. The court ruled JPMorgan Chase did not acquire Washington Mutual as a corporate entity. Instead they acquired assets of the company through a third party. Therefore a chain of ownership must be recorded with the Register of Deeds where the property is located. However, the courts ruling did leave open the possibility that JPMorgan Chase could go back and record a mortgage assignment. However, JPMorgan Chase faces two major obstacles in doing so. The first being if when the FDIC has concluded the liquidation of Washington Mutual and damages owed to homeowners they may have already illegally evicted from their homes.

    Michigan Supreme Court Rules $3.75 Billion Of JPM Chase Held Mortgages Are Voidable - On the Friday before Christmas, while the media was focused on the funerals of the victims of the Sandy Hook massacre and pre-Christmas retail sales figures, the Michigan Supreme Court quietly handed down a significant ruling that will affect nearly $3.75 billion worth of mortgages former Washington Mutual mortgages that JPMorgan Chase acquired from the FDIC after Washington Mutual went into FDIC receivership in 2008.The Michigan Supreme Court upheld a Michigan Court of Appeals ruling from January that calls for a strict interpretation of a Michigan law that states that if a foreclosing party is not the originating note holder they must be able to show a record chain of the mortgage. MCL 600.3204(3) states:If the party foreclosing a mortgage by advertisement is not the original mortgagee, a record chain of title shall exist prior to the date of sale under section 3216 evidencing the assignment of the mortgage to the party foreclosing the mortgage.

    Fannie Mae, Freddie Mac Mortgage Serious Delinquency rates declined in November - Fannie Mae reported that the Single-Family Serious Delinquency rate declined in November to 3.30% from 3.35% October. The serious delinquency rate is down from 4.00% in November last year, and this is the lowest level since March 2009. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate declined in November to 3.25% from 3.31%, in October. Freddie's rate is down from 3.57% in November 2011, and this is the lowest level since August 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.  Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure". In 2009, Fannie's serious delinquency rate increased faster than Freddie's rate. Since then, Fannie's rate has been falling faster - and now the rates are at about the same level. Although this indicates ongoing progress, the "normal" serious delinquency rate is under 1%.  At this pace, it will take several years until the rates are back to normal

    Bill filed to speed up foreclosures in Florida - A “faster foreclosures” proposal that faced sharp consumer outcry and protest last year has resurfaced in a more moderate form this year, with a new bill filed by Rep. Kathleen Passidomo, R-Naples, Thursday. The bill, HB 87, offers a slew of changes to the civil procedures governing foreclosures in Florida—the state with the highest foreclosure rate in the country. Most of the provisions appear to be aimed at speeding up and cleaning the foreclosure process, which currently takes  more 600 days to run its course in Florida. The bill would require mortgage lenders to certify that they have the correct paperwork proving they have the right to foreclose. Paperwork problems gummed up the foreclosure system in Florida and across the nation in 2010 and 2011, leading to a massive $25 billion mortgage settlement with banks accused of using faulty documents to foreclose on homeowners. The bill also gives condominium associations the ability to speed up the foreclosure process when a bank is moving too slowly. Condo associations have been forced to shoulder significant maintenance costs while banks carry out foreclosures. Banks have been accused of purposefully slowing down the process in order to limit their costs.

    Tax Bill: Cancelled Mortgage Debt Relief extended for one year in Senate Bill - Taxprof has posted the Senate version of the bill: H. R. 8 It appears that the Mortgage Debt Relief Act of 2007 will be extended for one year. 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). Here is the text from H.R.8:

    (a) IN GENERAL.—Subparagraph (E) of section 108(a)(1) is amended by striking ‘‘January 1, 2013’’ and inserting ‘‘January 1, 2014’’.
    (b) EFFECTIVE DATE.—The amendment made by this section shall apply to indebtedness discharged after December 31, 2012.
    This is helpful for foreclosures, mortgage modifications, and for short sales (so the seller can sell the house for less than is owed, and not have to pay taxes on the debt forgiveness). This provision had wide bipartisan support and was expected to be included

    CoreLogic: Existing Home Shadow Inventory declines 12% year-over-year -- From CoreLogic: CoreLogic® Reports Shadow Inventory Continues Decline in October 2012  CoreLogic ... reported today that the current residential shadow inventory as of October 2012 fell to 2.3 million units, representing a supply of seven months. The October inventory level represents a 12.3 percent drop from October 2011, when shadow inventory stood at 2.6 million units.  CoreLogic estimates the current stock of properties in the shadow inventory, also known as pending supply, by calculating the number of properties that are seriously delinquent, in foreclosure and held as real estate owned (REO) by mortgage servicers but not currently listed on multiple listing services (MLSs). Transition rates of “delinquency to foreclosure” and “foreclosure to REO” are used to identify the currently distressed unlisted properties most likely to become REO properties. Properties that are not yet delinquent but may become delinquent in the future are not included in the estimate of the current shadow inventory. Shadow inventory is typically not included in the official reporting measurements of unsold inventory. This graph from CoreLogic shows the breakdown of "shadow inventory" by category. Note: The "shadow inventory" could be higher or lower using other numbers and methods; the key is that their estimate of the shadow inventory is declining

    Freddie Mac: Mortgage Rates Near Record Lows - From Freddie Mac today: Mortgage Rates Start the New Year Near All-Time Record Lows Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgage rates continuing to hover near their all-time record lows ...  30-year fixed-rate mortgage (FRM) averaged 3.34 percent with an average 0.7 point for the week ending January 3, 2013, down from last week when it averaged 3.35 percent. Last year at this time, the 30-year FRM averaged 3.91 percent.  15-year FRM this week averaged 2.64 percent with an average 0.7 point, down from last week when it averaged 2.65 percent. A year ago at this time, the 15-year FRM averaged 3.23 percent.  The Freddie Mac survey started in 1971 and mortgage rates are currently near the record low for the last 40 years. This graph shows the 15 and 30 year fixed rates from the Freddie Mac survey since the Primary Mortgage Market Survey® started in 1971 (15 year in 1991).

    Housing: 2.5% Year over Year change in Asking Prices - According to housingtracker, median asking prices were up 2.5% year-over-year in December. We can't read too much into this increase because these are just asking prices, and median prices can be distorted by the mix. As an example, the median asking price might have increased just because there are fewer low priced foreclosures listed for sale.Note: The Trulia asking price index is adjusted for both mix and seasonality, but the housingtracker data is just the median, the 25th percentile and 75th percentile - and is impacted by both changes in the mix and seasonality.But with those caveats, here is a graph of asking prices compared to the year-over-year change in the Case-Shiller composite 20 index.The Case-Shiller index is in red.  The Case-Shiller Composite 20 index was up 4.3% year-over-year in October, and will probably be up close to 6% in 2012.The brief period in 2010 with a year-over-year increase in the repeat sales index was related to the housing tax credit.Also note that the 25th percentile took the biggest hit (that was probably the flood of low end foreclosures on the market).

    Trulia: Asking House Prices increased in December - Press Release: Asking Prices Up 5.1 Percent Nationally Year-Over-Year, While Rents Rose 5.2 Percent -In December 2012, asking prices increased 5.1 percent nationally year-over-year (Y-o-Y), marking a huge turnaround from being down 4.3 percent in December 2011. Moreover, not only are prices rising, these gains have accelerated in the last year. Quarter-over-quarter price changes were 0.8% in Q1 (March 2012), 0.4% in Q2 (June 2012), 1.4% in Q3 (September 2012), and 2.3% in Q4 (December 2012), seasonally adjusted. Asking home prices increased the most in Phoenix, which rose 26.0 percent Y-o-Y in December 2012; however, Las Vegas and Seattle experienced the year’s most dramatic price turnarounds. Both had price gains of more than 10 percent in 2012 after declines of more than 10 percent in 2011. Nationally, rents rose 5.2 percent Y-o-Y. Throughout 2012, rent increases Y-o-Y remained around 5 percent, even though asking price increases accelerated and have almost caught up with rent gains at year’s end. Locally, rents rose most in Houston, Oakland and Miami. Rent increases surpassed price increases by a wide margin in Houston, Chicago, Philadelphia, and Baltimore. In contrast, prices grew much faster than rents in Phoenix, Las Vegas, Riverside-San Bernardino, and Sacramento. More from Jed Kolko, Trulia Chief Economist: Asking Home Prices Up 5.1% in 2012, Huge Turnaround After Falling 4.3% in 2011

    All You Wanted to Know About Housing in Three Minutes - There’s a terrific video at Bloomberg News that will tell you everything you want to know about housing in just under 3 minutes. Unfortunately, the video hasn’t gotten much attention, probably because it veers from the MSMs fairytale about a housing recovery. Even so, I have transcribed the interview below so that readers can judge for themselves whether housing is really bouncing back or it’s just a bunch of baloney. Keep in mind that Robert Shiller, who predicted both the and housing bubbles, is widely regarded as the nation’s top housing market expert. Also, the S&P Case-Shiller Home Price Index, which he co-founded, is the benchmark index for home price trends in the country’s 20 largest cities. Here’s the interview (with some commentary): Bloomberg anchor: “According to the latest Case-Shiller Home Price Index, which we got yesterday, home values are up over 4 percent on the year. Can this positive housing news weather the fiscal cliff and all the uncertainty into 2013? For a closer look at what the housing recovery means for the economy, we turn to Robert Shiller of Yale University, the co-founder of the Case-Shiller Home Price Index.

    Construction Spending Dropped in November - Spending on U.S. construction projects unexpectedly fell in November as home building slowed and federal government outlays plummeted. Construction spending decreased by 0.3% from a month earlier to a seasonally adjusted annual rate of $865.99 billion, the Commerce Department said Wednesday. It was the first time spending declined since March. Economists surveyed by Dow Jones Newswires had forecast a 0.7% increase.Figures for October were revised down to a 0.7% gain from an initially estimated 1.4% advance.

    Construction Spending declined in November - In November 2012, private residential construction spending was the largest category for the first time since 2007 - but spending is still very low (at 1998 levels not adjusted for inflation). Residential construction is usually the largest category for construction spending, but there was a huge collapse in spending following the housing bubble (as expected).  The Census Bureau reported that overall construction spending decreased in November:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during November 2012 was estimated at a seasonally adjusted annual rate of $866.0 billion, 0.3 percent below the revised October estimate of $868.2 billion. The November figure is 7.7 percent above the November 2011 estimate of $804.0 billion.  Private residential construction spending increased, but both private non-residential and public construction spending declined: Spending on private construction was at a seasonally adjusted annual rate of $589.8 billion, 0.2 percent below the revised October estimate of $590.8 billion. Residential construction was at a seasonally adjusted annual rate of $295.3 billion in November, 0.4 percent above the revised October estimate of $294.2 billion. Nonresidential construction was at a seasonally adjusted annual rate of $294.5 billion in November, 0.7 percent below the revised October estimate of $296.5 billion. ... This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 56% below the peak in early 2006, and up 33% from the post-bubble low. Non-residential spending is 29% below the peak in January 2008, and up about 30% from the recent low. Public construction spending is now 15% below the peak in March 2009 and just above the post-bubble low. The second graph shows the year-over-year change in construction spending.

    Homeowners Fare Better Than Renters at Paring Debt - The expiration of the payroll-tax holiday means that despite the last-minute resolution of the Fiscal Cliff, most working Americans will see more money taken out of their paychecks this month than last. But the bigger tax hit may be offset somewhat by another, longer-term development: U. S. households are spending less of their income to service debt than at any time in nearly three decades. As the Journal reported last month, households spent 10.6% of their after-tax income on required debt payments in the third quarter of 2012. That figure, known as the Debt Service Ratio, is at its lowest level since 1984. A broader measure known as the Financial Obligations Ratio — which includes not only debts but also other required payments such as rent, auto leases and homeowners’ insurance — fell to 15.7%, down from nearly 19% before the financial crisis. The fallout from the crisis, of course, explains much of the decline. Since the housing bubble burst, Americans have gone through a long, painful process of deleveraging, only some of it voluntary. Families have paid off debts, but they’ve also lost homes to foreclosure and declared bankruptcy to get out from under burdensome payments. Stricter lending standards have made it more difficult for many Americans to take on new debt during the recovery, while still-raw memories of the recession have made even some qualified borrowers wary of overextending themselves. And low interest rates, driven down by unprecedented intervention by the Federal Reserve, have meant lower payments for those who do borrow or who can refinance existing debt.

    Bankruptcy Filings Fall Dramatically in 2012 - The 2012 calendar year bankruptcy statistics from Epiq Systems hit my in-box last night. They show that total U.S. bankruptcy filings declined in 2012 by 14.1 percent. Specifically, there were just over 1,185,000 filings in 2012 as compared to 1,380,000 in 2011. The decline will not come as any surprise to regular readers of the blog. Bankruptcy filings have been declining since November 2010 and fell consistently throughout 2012. The question is whether bankruptcy filings will continue to decline. In a previous post, I thought they might level off in 2013, and I am working on a more complete analysis.

    Vital Signs Chart: Median Income Ticks Up - U.S. incomes ticked up in November after moving sideways for much of 2012. Real median household income was up 1.6% from the 2012 low of $50,516 in April. That’s according to a new study of census data. At $51,310, median income is slightly above its year-ago level of $51,276, but well below the prerecession level of $54,286, five years earlier in November 2007.

    More hard evidence for fiscal negotiations impacting consumer sentiment - Some analysts remain doubtful that the fiscal impasse in Washington is having a material impact on the US consumers (as discussed here). But once again we see the uncertainty showing up in consumer survey numbers. Last week's Conference Board confidence index exhibited a considerable decline.The same analysts argue that this decline is small in comparison to the Eurozone crisis-induced drop in confidence a year ago (discussed here). But one should consider two factors that make the latest confidence numbers a cause for concern.
    1. The number came in some 5 points below expectations - a surprise to many economists:
    2. The most compelling evidence is the divergence between consumer "expectations" and "present situation" (as the chart from Goldman shows). Consumers view the current conditions as the best since the start of the recovery, yet are extremely uneasy about the future.

    Restaurant Performance Index indicates slight contraction in November - From the National Restaurant Association: Restaurant Performance Index Improved in November but Remained Below 100 for Second Consecutive Month The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 99.9 in November, up 0.5 percent from October. However, November marked the second consecutive month in which the RPI stood below 100, which signifies contraction in the index of key industry indicators.  The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 99.8 in November – up 0.6 percent from a level of 99.3 in October. Although restaurant operators reported net positive sales and traffic results in November, softness in the labor and capital spending indicators outweighed the performance, which resulted in a Current Situation Index reading below 100 for the fourth time in the last five months. (see graph)

    Retail Sales Confirm "You Can't Spend What You Don't Have" - Despite all the rancor about seasonally-adjusted ad hoc beats of holiday week retail sales (amid burgeoning discounts), the trend (post the Hurricane Sandy-driven surge) in GAFO (General Merchandise, Apparel and Accessories, Furniture and Other Sales) retail sales is most explicitly lower. As Bloomberg Brief notes, consumer incomes are in a fragile state and between the ATRA deal and a 'stable' at best unemployment picture, it seems that the YoY change in retail sales is indicating per capita disposable income is set to decline further. As Rich Yamarone concludes: it appears "You can't spend what you don't have." It seems 'tax-the-rich' is also misfiring as those making over $90k per year report recent spending at its lowest for this time of year since 2008.

    Hundreds Of American Shopping Malls Should Be Demolished - America has too many malls.  I’ve recently blogged that many traditional brick-and-mortar retailers are being threatened with "economic destruction" by their advantaged online competition. In an interview with Bloomberg TV, anchorwoman Nicole Lapin asked about the implications of this dynamic on retail real estate. I said I hadn’t studied it, but I thought the ramifications would be very big and very negative (I believe the phrase "apocalyptic" was used).  I’ve since had the opportunity to spend some time looking at this issue, and I believe we’re seeing clear signs that the e-commerce revolution is seriously impacting commercial real estate. Online retailers are relentlessly gaining share in many retail categories, and offline players are fighting for progressively smaller pieces of the retail pie. A number of physical retailers have already succumbed to online competition including Circuit City, Borders, CompUSA, Tower Records and Blockbuster, and many others are showing signs of serious economic distress. These mall and shopping center stalwarts are closing stores by the thousands, and there are few large physical chains opening stores to take their place. Yet the quantity of commercial real estate targeting retail continues to grow, albeit slowly. Rapidly declining demand for real estate amid growing supply is a recipe for financial disaster.  There are very few thriving physical retailers these days outside of the daily consumables markets. I did a quick analysis on the high-level health of the National Retail Federation’s list of the Top 100 retailers in 2012, focusing on merchandise retailers that would likely be located in malls (removing grocery, drug, restaurant and online retailers). I looked at three measures of retailer health: total sales growth, comp store sales growth and number of stores.

    Weekly Gasoline Update: The 2012 Twin Peaks -  Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Gasoline prices at the pump rose last week. Rounded to the penny, the average for Regular and Premium were up four cents. According to, Hawaii has the highest gasoline price, averaging $3.95. New York is second at $3.72. At the other end of the price range, four states have average prices under $3.00: Colorado is the cheapest at $2.96; the other three are Wyoming, Oklahoma and Utah. How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's a visual answer.The year 2012 was certainly a roller coaster ride for gasoline. The adjacent thumbnail shows the range for Regular and Premium. From the last week of 2011 we see near twin price peaks. Regular and Premium both peaked in early April, up 21.0% and 19.2% respectively. They hit interim lows in early July, only a few cents above the 2011 year end prices. They hit their second (slightly lower) high in mid-September and then fell to December 2012 lows two weeks ago, essentially at the anniversary of their December 2011 lows. The next chart is a weekly chart overlay of West Texas Intermediate Crude, Brent Crude and unleaded gasoline end-of-day spot prices (GASO). WTIC is listed at 91.74, up 3.00 from last Monday. GASO hit its intraday high at 3.43 on April 3rd. It closed today at 2.76, up 0.04 from last Monday.

    Amidst Drilling Boom, Average Price For U.S. Gasoline Hit Record High In 2012 - The U.S. is experiencing a domestic oil boom that could soon make it the world’s largest liquid fuels producer. And how has that surge in production impacted gasoline prices?  In 2012, Americans paid more for gasoline than ever before. According to figures from AAA, the average price of gasoline in 2012 was $3.60 per gallon, making last year the most expensive in history. Here’s what the organization reported on December 31:Today’s national average price for a gallon of regular unleaded gasoline is $3.29. While this price is more than 10 cents less than one month ago, it is 4.5 cents more expensive than one week ago and 1.6 cents more than one year ago. The year ended with an annual average of $3.60 per gallon – the highest on record and nine cents more expensive than the previous high of $3.51 in 2011.

    Location looms large in pump prices at California gas stations - Record gasoline prices in 2012 and calls for investigation of California's fuel markets have brought into focus a persistent peculiarity of the state's service station world: the wild swings in price any brand has from one location to the next. The two motorists were buying the same grade of gasoline, which more than likely came from the same refinery in El Segundo. Yet the prices they paid differed by 80 cents a gallon, or by more than $10 to fill an average 13-gallon tank. Such price strategies aren't common in other retail businesses. When buying a sweater from a department store, for instance, a shopper can expect to pay the same price at the chain's other stores in a region. In fuel retailing, however, "location can affect prices," said Tom Kloza, chief oil analyst for the Oil Price Information Service in New Jersey. "If you have few competitors and are near an airport or a rail terminal, you can price more aggressively." But consumer advocates say the practice hurts drivers who don't always have the time and information to shop for the best deal. "They call it zone pricing. We call it redlining," said Charles Langley of the Utility Consumers' Action Network in San Diego.

    Dallas Fed: Regional Manufacturing Activity "Slow Growth and Improved Company Outlook" in December - From the Dallas Fed: Texas Manufacturing Activity: Slow Growth and Improved Company Outlook  - Texas factory activity edged up in December, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 1.7 to 2.7, which is consistent with slow growth.  Most other survey measures also indicated manufacturing activity crept up in December. The capacity utilization index returned to positive territory with a reading of 1.8, implying utilization rates ticked up from last month. The shipments index jumped to 11.3 after a reading near zero last month. The new orders index, however, remained near zero, suggesting demand was flat in December. Labor market indicators were flat in December. The employment index came in at -1, its lowest reading in over two years, with about 17 percent of employers reporting hiring and the same share noting layoffs. The hours worked index turned positive after two months in negative territory; however, at a reading of 1, it suggested hours worked barely changed.  This was below expectations of a reading of 1.0 for the general business activity index. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

    MarkIt PMI shows "solid expansion of manufacturing sector" in December- From MarkIt: PMI at seven-month high in December, signalling solid expansion of manufacturing sector - The final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) was 54.0 in December, down slightly from the flash estimate of 54.2, and signalled a further expansion of the U.S. manufacturing sector. Moreover, up from 52.8 in November, the headline PMI indicated the strongest rate of growth since May. One-in-five companies reported an increase in new orders, with the overall rate of growth the fastest since April. Moreover, new export orders increased for the second month running and at the strongest pace since March. “Firms are also taking on more staff, suggesting that the underlying improvement in demand pushed any worries about the ‘fiscal cliff’ to backs of manufacturers’ minds in the closing weeks of the year. [“With recent indications that growth is also picking up in other key economies around the world, notably in emerging markets such as China and Brazil, and that the Eurozone’s economic crisis is easing, U.S. companies should benefit as stronger demand lifts exports in early 2013. While economic growth may disappoint in the fourth quarter compared to the 3.1% rate of expansion seen in the third quarter, the recent run of positive PMI surveys towards the end of 2012 suggests that prospects have begun to look a little brighter for the new year.”

    ISM Manufacturing Beats, Construction Spending Misses - The first two economic indicators of 2013 are in and are a beat and a miss. The beat was in the December ISM Manufacturing printed at 50.7, higher than the 50.5 expected, and up from November's 49.5. This is happening even as 7 of the 18 manufacturing industries in December report growth while 9 reported contraction: go figure. Looking at the component data, New Orders remained flat at 50.3. The index was driven higher by Backlog of Orders +7.5, Exports +4.5, Supplier Deliveries +4.4, Employment +4.3, and Prices + 3.0. The declines were in Inventories and Production, down -2.0 and -1.1 respectively. The miss was in November Construction Spending, which printed at -0.3%, down from a downward revised October 0.7% (from 1.4%), and well below expectations of a 0.6% print: this was the biggest miss in 10 months, and the first negative print in 10 months, which however will likely be blamed on Sandy

    ISM Manufacturing index increases in December to 50.7 - The ISM manufacturing index indicated expansion in December. PMI was at 50.7% in December, up from 49.5% in November. The employment index was at 52.7%, up from 48.4%, and the new orders index was at 50.3%, unchanged from November. From the Institute for Supply Management: November 2012 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in December, following one month of contraction, and the overall economy grew for the 43rd consecutive month, "The PMI™ registered 50.7 percent, an increase of 1.2 percentage points from November's reading of 49.5 percent, indicating expansion in manufacturing for only the third time in the last seven months. This month's PMI™ reading moved manufacturing off its low point for 2012 in November. The New Orders Index remained at 50.3 percent, the same rate as in November, indicating growth in new orders for the fourth consecutive month. The Production Index registered 52.6 percent, a decrease of 1.1 percentage points, indicating growth in production for the third consecutive month. The Employment Index registered 52.7 percent, an increase of 4.3 percentage points, indicating a resumption of growth in employment following only one month of contraction since September 2009. Both the Exports and Imports Indexes registered 51.5 percent, returning both indexes to growth territory following consecutive periods of contraction of six and four months, respectively." Here is a long term graph of the ISM manufacturing index.This was slightly above expectations of 50.5% and suggests manufacturing expanded in December.

    ISM Manufacturing Business Activity Index Moves Out of Contraction Territory - Today the Institute for Supply Management published its November Manufacturing Report. Today's headline PMI at 50.7 percent is showing a return to expansion after a month of contraction. The consensus was for 50.5 percent. Here is an analysis from the report: The PMI™ registered 50.7 percent, an increase of 1.2 percentage points from November's reading of 49.5 percent, indicating expansion in manufacturing for only the third time in the last seven months. This month's PMI™ reading moved manufacturing off its low point for 2012 in November. The New Orders Index remained at 50.3 percent, the same rate as in November, indicating growth in new orders for the fourth consecutive month. The Production Index registered 52.6 percent, a decrease of 1.1 percentage points, indicating growth in production for the third consecutive month. The Employment Index registered 52.7 percent, an increase of 4.3 percentage points, indicating a resumption of growth in employment following only one month of contraction since September 2009. Both the Exports and Imports Indexes registered 51.5 percent, returning both indexes to growth territory following consecutive periods of contraction of six and four months, respectively. 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

    Welcome jump in the manufacturing PMI - Nobody really expected 2012 to end with good news for manufacturing but, according to the Markit-CIPS purchasing managers' index, it did. Manufacturing expanded at its fastest rate for 15 months in December, which was welcome after a difficult few months. This is Markit's summary: "The UK manufacturing sector ended 2012 on a positive note, with levels of production and new orders rising at faster rates in December. The labour market also showed signs of stabilising, with employment broadly unchanged over the month. "The seasonally adjusted Markit/CIPS Purchasing Manager’s Index (PMI) rose back above the 50.0 no-change level in December, recording a 15-month high of 51.4. The average PMI reading in Q4 (49.5) was above that in Q3 (48.1), while the average over 2012 as a whole was only 49.2. "Manufacturing output increased for the second month running, with the rate of growth accelerating sharply to a 20-month high. The sharpest gains were reported by consumer and intermediate goods producers."

    ISM Manufacturing PMI Expands to 50.7% for December 2012 - The December 2012 ISM Manufacturing Survey shows PMI increased by 1.2 percentage points to 50.7% and is now in expansion from contraction. This is the 3rd time in seven months manufacturing PMI has been in expansion. Overall the report is a bounce from last month's lows.  The best thing from this month's ISM report are the comments from manufacturing survey responders. One seemed thrilled the election was over, another mentioned the poetic forward economic visibility is foggy and Machinery manufacturers observed something interesting from their Chinese suppliers: Many Chinese sources are coming to us with cost reductions to maintain their current business volumes. New Orders had no change from last month's 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. The Census reported manufactured durable goods new orders as low growth, 0.7% in November where factory orders, or all of manufacturing data, will be out January 4th. 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.

    Manufacturing - Down, But Not Out, by Tim Duy -- As usual, the first major release of the month is the ISM manufacturing report. The headline number edged up: That said, I really can't get terribly excited by this improvement - looks to me that it continues to hover around the 50 mark. Good only in the sense that the bottom hasn't dropped out from under manufacturing, which I didn't expect at this point. Aggregate new orders were also not exciting, flat at 50.3: New export and import orders, however, both improved: In neither case, however, would I say the downtrend of recent months has been broken. A similar story holds for the employment subindex: Altogether, the ISM data continues to suggest that manufacturing hit a slow patch - unsurprising, given global news and the uncertainty surrounding the path of US fiscal policy - but fears of recession remain premature. Indeed, I still believe that absent a more significant fiscal contraction, it is difficult to envision a recession when the housing market and auto sales continue to improve. Bottom Line: The ISM data continue to point toward slow growth in manufacturing, but fall short of a more ominous story.

    Analysis: Manufacturing Straddles Expansion-Contraction Line - Wells Fargo economist Tim Quinlan talks with Jim Chesko about today’s report showing that U.S. manufacturing expanded slightly in December, as the Institute for Supply Management’s index of national factory activity rose to 50.7 in December from 49.5 the previous month. Quinlan also offers a skeptical view of Washington’s fiscal-cliff deal on taxes and spending.

    U.S. Light Vehicle Sales at 15.3 million annual rate in December - Based on an estimate from WardsAuto, light vehicle sales were at a 15.31 million SAAR in December. That is up 13% from December 2011, and down 1% from the sales rate last month. This was above the consensus forecast of 15.1 million SAAR (seasonally adjusted annual rate). Note: Some of the increase in November was a bounce back from Hurricane Sandy that negatively impacted sales at the end of October, and sales might have been boosted slightly in December from some storm related bounce back. This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for December (red, light vehicle sales of 15.31 million SAAR from WardsAuto). Sales in 2012 were just over 14.4 million, 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.

    Factory Orders Flat in November - U.S. factory orders were roughly flat in November, reflecting lower oil prices. Orders for manufactured goods rose only $211 million to $477.65 billion, the Commerce Department said Friday. Economists surveyed by Dow Jones Newswires had forecast a 0.1% increase. Despite the soft headline number, orders for durable goods–items meant to last at least three years–rose a healthy 0.8%, led by demand for metals and machinery. The figure was revised up from a previously reported 0.7% gain. Orders for motor vehicles climbed by 2.8%, while the volatile civilian aircraft sector plummeted 13.8%. Excluding transportation, factory orders rose 0.2% during November.

    AAR: Rail Traffic "mixed" in December - From the Association of American Railroads (AAR): AAR Reports Mixed Annual and Monthly Traffic for December The Association of American Railroads (AAR) today reported mixed 2012 rail traffic compared with 2011. U.S. rail intermodal volume totaled 12.3 million containers and trailers in 2012, up 3.2 percent or 374,918 units, over 2011. Carloads totaled 14.7 million in 2012, down 3.1 percent or 476,322 carloads, from 2011. Intermodal volume in 2012 was the second highest on record, down 0.1 percent or 14,885 containers and trailers, from the record high totals of 2006. ...“Coal and grain typically account for around half of U.S. rail carloads, so when they’re down, chances are good that overall rail carloads are down too, as we saw in 2012,” said AAR Senior Vice President John T. Gray. “That said, a number of key rail carload categories showed solid improvement in 2012, including categories like autos and lumber that are most highly correlated with economic growth. Meanwhile, intermodal just missed setting a new volume record in 2012.” This graph shows U.S. average weekly rail carloads (NSA).  U.S. railroads originated 1,086,990 carloads in December 2012, down 4.2% (48,071 carloads) from December 2011 and an average of 271,748 carloads per week. Except for a tiny increase in January, year-over-year total U.S. rail carloads fell each month in 2012 compared with the same month in 2011 ... In December 2012, as in every prior month in 2012, year-over-year U.S. rail carloads would have increased if not for a decline in coal carloadings. Coal carloads totaled 446,233 in December 2012, down 13.3% (68,372 carloads) from December 2011. The second graph is for intermodal traffic (using intermodal or shipping containers): Intermodal traffic is near peak levels (black line).

    ISM Non-Manufacturing Index increases in December - The December ISM Non-manufacturing index was at 56.1%, up from 54.7% in November. The employment index increased in December to 56.3%, up sharply from 50.3% in November. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: December 2012 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in December for the 36th consecutive month,  "The NMI™ registered 56.1 percent in December, 1.4 percentage points higher than the 54.7 percent registered in November. This indicates continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 60.3 percent, which is 0.9 percentage point lower than the 61.2 percent reported in November, reflecting growth for the 41st consecutive month. The New Orders Index increased by 1.2 percentage points to 59.3 percent. The Employment Index increased by 6 percentage points to 56.3 percent, indicating growth in employment for the fifth consecutive month at a significantly faster rate. The Prices Index decreased 0.4 percentage point to 56.6 percent, indicating prices increased at a slightly slower rate in December when compared to November.This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

    US Services Add Jobs On Fiscal Cliff Worries - Remember when the US economy was spun as shaking in its boots due to the "threat" from the fiscal cliff? Neither do US services. According to the just released Services ISM, the composite index spiked to a 56.1 print, a big beat of expectations of 54.1, and back to early 2012 levels. The biggest boost? Employment, which soared from 50.3 to 56.3, a jump in 6 points. It would appear that the Fiscal Cliff was an opportunity for financial firms, which were already laying off tens of thousands, to add many more. Or some other such convoluted logic which has become simply laughable now: even the ISM's own Nieves can't figure it out, saying the jump in employment was "surprising." Other components seeing an increase: New Orders up+1.2 to 59.3, and naturally Inventories + 3.0. Declines were recorded in Business Activity, -0.9 to 60.3, Prices down -0.4 to 56.5, Order Backlogs down -4.0 from 53.3 to 49.5, Inventory Sentiment whatever this is, down -4.5 to 58.0, and Imports down -6.5, to 49.0.

    Small business recession explains poor sentiment - According to Intuit, after a gradual recovery since 2009, US small business revenues have been consistently declining for most of 2012. Recent declines have lasted for 9 consecutive months (in black below) and are visible across all major industries. The smallest decline has actually been in the real estate sector, where revenues haven't grown since 2005. The ongoing declines in revenue explain the persistent weakness in small business sentiment in recent months (see discussion).

    Paul Krugman on tech's great divergence - We were intrigued by a recent piece by New York Times columnist and Nobel Prize-winning economist Paul Krugman called "Robots and Robber Barons." The column, along with some other posts Krugman put up on his blog, took a look at a question we're familiar with: Are robots eating our jobs? I went on a cross-country journey in the last year looking at technology and what it's doing to the American workforce. With people like Krugman now looking at this controversial issue more seriously as well, we wanted to get his take.  "Up until about ten years ago," says Krugman, "you could look at what was happening in the United States and say look, all those fears about automation, all those fears that the jobs would go away haven't come true. But if you look at the last ten years there is a pretty dramatic dropoff. Of the total income being generated in this country, a substantially smaller fraction is now going to workers of any kind -- including highly skilled workers -- and more is going to whoever it is that owns the capital. Which is the kind of thing you would expect to happen if you would have a certain kind of technological change where robots are taking away people's jobs and forcing people to accept lower wages to stay employed."  Is all of this because of a quickening pace of technological change? Krugman says no.

    More fiscal implications of a rising capital-share of income - Paul Krugman has been talking capital-bias and rising profit-shares recently. I was going to write about the implications of this for Social Security and Medicare, but he got there first. Below, I put some (very rough) numbers on how much a rising capital-share of income impacts the current financing of these programs.  The broad issue in a nutshell is that a rising share of overall income in recent years (even decades) has been accruing to owners of capital rather than to workers (or, if you like, accruing to owners of physical and financial capital rather than to owners of human capital). I might immodestly note that there are substantial sections on this topic in both the wages and the incomes chapter of The State of Working America, 12th Edition.For now, I’ll just talk about some of the interesting tidbits from State of Working America and then sketch out one implication of these rising capital-shares for current fiscal policy debates.

    The big issues in macroeconomics: unemployment - Following up my previous post, I want to look at the main areas of disagreement in macroeconomics. As well as trying to cover the issues, I’ll be making the point that the (mainstream) economics profession is so radically divided on these issues that any idea of a consensus, or even of disagreement within a broadly accepted analytical framework, is nonsense. The fact that, despite these radical disagreements, many specialists in macroeconomics don’t see a problem is, itself, part of the problem. I’ll start with the central issue of macroeconomics, unemployment. It’s the central issue because macroeconomics begins with Keynes’ claim that a market economy can stay for substantial periods, in a situation of high unemployment and excess supply in all markets. If this claim is false, as argued by both classical and New Classical economists, then there is no need for a separate field of macroeconomics – everything can and should be derived from (standard neoclassical) microeconomics. The classical view is that unemployment arises from problems in labor markets and can only be addressed by fixing those problems. Within the classical camp, Real Business Cycle theory allows for cyclical unemployment to emerge as an voluntary response to technology shocks and changes in preferences for leisure – hence Krugman’s snarky but accurate quip that, according to RBC, the Great Depression should be called the Great Vacation. More generally, on the classical view, long-term unemployment has to be explained by labour market distortions such as minimum wages, unions, restrictions on hiring and firing, and so on.

    Weekly Initial Unemployment Claims increase to 372,000 - The DOL reports: In the week ending December 29, the advance figure for seasonally adjusted initial claims was 372,000, an increase of 10,000 from the previous week's revised figure of 362,000. The 4-week moving average was 360,000, an increase of 250 from the previous week's revised average of 359,750. The previous week was revised up from 350,000. 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 360,000. Weekly claims are very volatile during the holiday season, but the 4-week average finished 2012 near the low for the year.

    Weekly U.S. Jobless Aid Applications Rise to 372K — More Americans sought unemployment benefits last week, though the winter holidays likely distorted the data for the second straight week. The Labor Department says weekly applications rose by 10,000 to a seasonally adjusted 372,000 in the week ended Dec. 29. The previous week’s total was revised higher. Many state unemployment offices were closed last week for the New Year’s holiday. As a result, the department relied on estimates for nine states. Two weeks ago, the department estimated 19 states because of Christmas closings.

    Weekly Unemployment Claims Unexpectedly Jump to 372K - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 372,000 new claims number was a 10,000 increase from a 12,000 upward adjustment of the previous week. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, rose to 360,000. Here is the official statement from the Department of Labor:In the week ending December 29, the advance figure for seasonally adjusted initial claims was 372,000, an increase of 10,000 from the previous week's revised figure of 362,000. The 4-week moving average was 360,000, an increase of 250 from the previous week's revised average of 359,750. The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending December 22, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending December 22 was 3,245,000, an increase of 44,000 from the preceding week's revised level of 3,201,000. The 4-week moving average was 3,224,250, an increase of 6,500 from the preceding week's revised average of 3,217,750.  The unemployment report footnotes for the previous week's unadjusted data identifies one state with a decrease of more than 1,000 layoffs (California, where claims fell by 11,789) and 21 states with an increase of more than 1,000 new claims (Ohio topping that list with 8,795 new claims). 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.

    Gallup Poll Suggests Private Sector Hiring Down Since April -  Gallup reports U.S. Job Creation Steady in December, but hiring in the nongovernment job sector stalls. The following charts (trendlines added by me) reflect answers to Gallup's question: Based on what you know or have seen, would you say that, in general, your company or employer is 1) hiring new people and expanding the size of its workforce, 2) not changing the size of its workforce, 3) letting people go and reducing the size of its workforce.There appears to be even less momentum from this perspective. However, the first chart is simply a subtraction of the numbers in the second chart. From this perspective, private hiring peaked in April of 2012 and has since been in a very slow decline. Meanwhile, states and local governments have been adding workers since the beginning of the year although it is highly doubtful they can afford such actions with private sector running at stall speed at best. Bear in mind, two things: First, the survey represents what people perceive to be happening at their employer. Actual hiring or firing may be different. Second, these charts only show direction not size. Thus, a small-sized company laying off a single person counts as much as a larger company that is hiring 40. Of course, the opposite is true as well 

    ADP: Payrolls Increased At A Faster Pace In December - The economy's pace of jobs creation accelerated in December, according to this morning's update of the ADP Employment Report. Private sector payrolls increased by 215,000 last month, a robust increase from November's upwardly revised 148,000 gain. That's the biggest monthly gain since February. The implication, of course, is that tomorrow's official report on payrolls from the US Labor Department will deliver upbeat news as well. “The job market held firm in December despite the intensifying fiscal cliff negotiations in Washington," says Mark Zandi, chief economist of Moody’s Analytics, in an ADP press release today. "Businesses even became somewhat more aggressive in their hiring at year end. Most encouraging is the revival in construction jobs, although the December gain was likely lifted by rebuilding after Superstorm Sandy. The job market ended 2012 on a more solid footing.”

    Survey: US Employers Add 215K Jobs in December - A private survey shows U.S. businesses sharply increased hiring in December, helped by a surge of new construction jobs created to help rebuild from Superstorm Sandy. Payroll processor ADP said Thursday that employers added 215,000 jobs in December. That’s more than November’s total of 148,000, which was revised higher. The survey showed companies added 39,000 construction jobs last month. That was partly in response to the storm but also an indication of the housing recovery under way. The increase in hiring took place before Congress and President Barack Obama reached a deal to avoid sharp tax increases from hitting most Americans, a sign that uncertainty surrounding the fiscal cliff did little to slow the job market.

    ADP: Private Employment increased 215,000 in December -- From ADP: Private sector employment increased by 215,000 jobs from November to December, according to the December 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 November 2012 report, which reported job gains of 118,000, was revised upward by 30,000 to 148,000 jobs. Mark Zandi, chief economist of Moody’s Analytics, said, “The job market held firm in December despite the intensifying fiscal cliff negotiations in Washington. Businesses even became somewhat more aggressive in their hiring at year end. Most encouraging is the revival in construction jobs, although the December gain was likely lifted by rebuilding after Superstorm Sandy. The job market ended 2012 on a more solid footing.”This was above the consensus forecast for 150,000 private sector jobs added in the ADP report. Note:  The BLS reports on Friday, and the consensus is for an increase of 157,000 payroll jobs in December, on a seasonally adjusted (SA) basis.  ADP hasn't been very useful in predicting the BLS report, but maybe the new method will work better. This is the 3rd month for the new method

    ADP Employment Report Shows 215,000 Private Sector Jobs Gained in December 2012 - ADP's proprietary private payrolls jobs report shows a gained of 215,000 private sector jobs for December 2012. The effects of superstorm Sandy resulted in a monthly 39,000 construction jobs boom. Last month Sandy caused an estimated 86,000 jobs to be lost even though ADP's November payrolls were revised up by 30,000 to 148,000. Graphed below are the reported private sector jobs from ADP. This report does not include government, or public jobs.  This month manufacturing yet again was hammered with a loss of 11,000 more jobs. Trade/transportation/utilities showed the strongest growth with 53,000 jobs. Financial activities payrolls increased by 14,000 and Professional/business services jobs grew by 37,000.  For the year, the private sector has added 1.7 million jobs according to ADP and the fiscal cliff dent wasn't so bad after all. We also have ADP's older three level breakdown in jobs by business size. Small business, 1 to 49 employees, added 25,000 jobs, medium defined as 50-499 employees, added 102,000 and large business added 87,000 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 Private Payrolls Spike To 215K, Above Expectations On Spike In Construction Jobs - Now With Infographic - Yet another headscratcher in the endless litany of Baffle with BS data, this time from the ADP Private Payrolls report, traditionally a laughing stock when it comes to its NFP forecasting powers (we will spare readers the correlation scatterplot which shows a 0 correlation), which not only revised its November print from 118K to 148K (just so it mysteriously coincides with the November NFP number of 146K), but saw the December private jobs number surge to 215K on expectations of a 140K print. The primary reason for the spike, a +39K surge in construction jobs, supposedly in the aftermath of Sandy, as well as some +53 job additions in trade, transportation and utilities. Also, how ADP gets +14K financial jobs in the peak financial layoffs month (to avoid year end bonuses of course), is anyone's guess. And while we should worry about that unemployment rate rapidly approaching the 6.5% Bernanke QE4EVA threshold end (don't worry, tomorrow we will find that the labor participation rate mysteriously has started to grow again to actually push the unemployment rate higher now that the Obama re-election is no longer an issue), we definitely should not worry about America's manufacturing renaissance, as the country lost yet another 11,000 manufacturing jobs - the 6th month in a row with mfg job declines (sorry Ohio, better luck next time).

    U.S. Payroll to Population Rate Improves in December: The U.S. Payroll to Population employment rate (P2P), as measured by Gallup, was 44.4% for the month of December, a slight improvement over 43.7% in November. The current P2P rate still does not match the levels of employment seen in July through October, which exceeded 45% and were the highest since Gallup began tracking P2P in January 2010. Gallup's P2P metric is an estimate of the percentage of the U.S. adult population aged 18 and older who are employed full time by an employer for at least 30 hours per week. P2P is not seasonally adjusted. These results are based on Gallup Daily tracking interviews, conducted by landline and cell phone, with more than 27,000 Americans throughout December. Gallup does not count adults who are self-employed, working part time, unemployed, or out of the workforce as payroll-employed in the P2P metric. Because of seasonal fluctuations, year-over-year comparisons are helpful in determining how much of the monthly changes are the result of seasonal hiring patterns and growth in permanent full-time positions. December's P2P measure was up 0.6 percentage points over the 43.6% from December 2011.

    December Employment Report: 155,000 Jobs, 7.8% Unemployment Rate - From the BLSNonfarm payroll employment rose by 155,000 in December, and the unemployment rate was unchanged at 7.8 percent, the U.S. Bureau of Labor Statistics reported today....The change in total nonfarm payroll employment for October was revised from +138,000 to +137,000, and the change for November was revised from +146,000 to +161,000.The headline number was at expectations of 157,000. Employment for October was revised down slightly, and November payroll growth was revised up. The second graph shows the unemployment rate. The unemployment rate was unchanged at 7.8% (The November unemployment rate was revised up from 7.7% as part of the annual household report revision). The unemployment rate is from the household report and the household report showed only a small increase in employment. The third graph shows the employment population ratio and the participation rate. The Labor Force Participation Rate was unchanged at 63.6% in December. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although a significant portion of the recent decline is due to demographics. The Employment-Population ratio decreased to 58.6% in December (black line). I'll post the 25 to 54 age group employment-population ratio graph later. The fourth graph shows the job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions. The dotted line is ex-Census hiring.

    155K New Jobs, Unemployment Rate at 7.8% - 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: Nonfarm payroll employment rose by 155,000 in December, and the unemployment rate was unchanged at 7.8 percent [from an upward revision for November], the U.S. Bureau of Labor Statistics reported today. Employment increased in health care, food services and drinking places, construction, and manufacturing.  Today's nonfarm number is higher than the consensus, which was for 150K new nonfarm jobs. The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948. Unemployment is usually a lagging indicator that moves inversely with equity prices (top chart). The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The latest number is 3.1% — unchanged from 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%.  The next chart is an overlay of the unemployment rate and the employment-population ratio. This is the ratio of the number of employed people to the total civilian population age 16 and over. The inverse correlation between the two series is obvious. We can also see the accelerating growth of women in the workforce and two-income households in the early 1980's. Following the end of the last recession, the employment population has three times bounced at 58.2% — a level that harkens back to the 58.1% ratio of March 1953. The latest ratio at 58.6% is in the middle of a consistently narrow range (58.2% to 59.3%) since the end of the last recession.For a confirming view of the secular change the US is experiencing on the employment front, the next chart illustrates the labor force participation rate. We have now dropped to a level first seen in January 1979.

    A Decent Employment Report - From the BLS: Nonfarm payroll employment rose by 155,000 in December, and the unemployment rate was unchanged at 7.8 percent, the U.S. Bureau of Labor Statistics reported today.  A classic good and bad news headline.  The number of jobs is good but certainly not great.  However, the fact the unemployment rate didn't drop is a concern.  Statistically, the number of unemployed increased by more or less the same amount as the civilian labor force.  This means that more people entered the labor force, probably seeking employment.  Total nonfarm payroll employment increased by 155,000 in December. In 2012, employment growth averaged 153,000 per month, the same as the average monthly gain for 2011. In December, employment increased in health care, food services and drinking places, construction, and manufacturing. It's interesting that for the last two years overall employment growth as averaged 155,000/month consistently.  That's not the most impressive rate of growth, as it's barely more than needed to absorb the population growth and hence, meaningfully lower the unemployment rate.  It also indicates there is a clear concern on the part of businesses regarding the hiring of new personnel.  In December, the average workweek for all employees on private nonfarm payrolls edged up by 0.1 hour to 34.5 hours. The manufacturing workweek edged up by 0.1 hour to 40.7 hours, and factory overtime was unchanged at 3.3 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged up by 0.1 hour to 33.8 hours. (See tables B-2 and B-7.)  Average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $23.73. Over the year, average hourly earnings have risen by 2.1 percent. In December, average hourly earnings of private- sector production and nonsupervisory employees increased by 6 cents to $19.92. (See tables B-3 and B-8.) Increases in hours worked and the overall workweek are always welcome.  In addition, these figures usually move in small increments, so the small rise is no surprise or overly concerning.

    US Labor Dept Says Private Sector Jobs Rose 168k In December - Private-sector payrolls increased by a seasonally adjusted 168,000 in December, the Labor Department reports. That's a bit shy of my average econometric forecast that was published yesterday, and considerably lower than the ADP estimate of last month's rise in payrolls. Nonetheless, today's jobs report reflects a modest pace of growth that provides another encouraging data point for expecting that the full December economic profile will show an economy that continues to expand. The labor market grew last month in all the major goods-producing categories and across most of the services sector. The main exception: retail trade, which shed 11,000 jobs, a sharp retreat from November's 63,000 gain. Looking beyond the monthly data, however, suggests that the pace of private-sector jobs creation remained on a modest-growth track through the end of 2012. Private-sector payrolls increased 1.7% in December vs. a year earlier, or in line with the annual growth rate that's prevailed since last spring.  The labor market, in sum, continues to grow modestly, as it has for most of the past year. Despite the uncertainty linked to the fiscal cliff debates in Washington last month, jobs growth rolled on. Perhaps the number of new positions would have been higher if the Beltway crowd wasn't so dysfunctional in managing the nation's budget. In any case, there are no obvious signs of doom in today's jobs report in terms of evaluating the business cycle.

    December jobs report: a lukewarm end to 2012 - 2012 closed out with a lukewarm report. By now you probably know the headlines: +166,000 jobs and the unemployment rate steady at 7.8%. October and November were revised up by +14,000. The broader U-6 unemployment rate stayed at 14.4%.  As I usually do, let's first look at the more forward-looking indicators in the report, which tell us where we are likely to go from here. These were mixed, with somewhat of a positive bias:
    - Manufacturing added 25,000 jobs.
    - The manufacturing workweek increased 0.1 hours to 40.7 hours.
    Since manufacturing generally leads the rest of the economy, this is good. The workweek is one of the 10 official LEI and so will boost the December report. The positive revisions to prior months are also a good sign, as this generally happens in expansions but not in recessions. But on the other hand, while the household report showed 28,000 jobs gained, this is still below the number of jobs 2 months ago. The household report tends to turn first at inflection points.
    - 600 temporary jobs were lost. Temporary jobs also tend to lead.
    - the number of workers unemployed for 0 - 5 weeks increased by 80,000. This is a more forward looking indicator than initial jobless claims.

    Today’s Jobs Report–Steady as She Goes, but She Needs to Go Faster - Today’s employment report shows steady employment growth, fast enough to keep the jobless rate from rising, but not fast enough to knock it down much. December’s payrolls were up 155,000 and the unemployment rate held steady at 7.8%.  Factories and construction sites added jobs—25,000 and 30,000 respectively—an improvement over recent months.  On the other hand, the public sector shed another 13,000 jobs, driven exclusively by local governments, the continuation of a longer-term negative trend as localities struggle with budget constraints. Hourly wages and average weekly hours got a bit of a bump up as well, so weekly earnings are up 2.4% over the past year.  Since inflation recently has been tracking at around 2%, that’s a slight gain in real pay (important, because starting this month, most workers will take a 2% hit to their paychecks due to the expiration of the payroll tax break, a casualty of the fiscal cliff deal).  There was also some evidence of more folks moving from part-time into full-time jobs.The main, first-take point here is that this is a glass-half-full-glass-half-empty jobs report, and more broadly speaking, job market.  In the near term, market and political volatility over the recent fiscal craziness is not particularly evident in job market, which has been moving along at about a trend growth rate.  Uninspiring—and not fast enough to provide the opportunities we need, but steady and pretty resilient to everything from Congressional wound-infliction and hurricanes. Over the longer term, say the last two years (2011 and 2012) employment averaged about 150,000 jobs a month, or 1.8 million jobs added in both those years.  That’s enough to slowly open up job opportunities for the unemployed and to absorb new labor force entrants.  But the key work is “slowly.”

    Unemployment Rate 7.8% and Unemployed Duration Drops for December 2012 - The BLS employment report shows a 7.8% unemployment rate for December. November was revised up from a 7.7% to 7.8% unemployment rate, but due to a change in the BLS annual seasonal adjustment revisions. This article overviews the statistics from the Current Population Survey of the employment report and the words to describe December are little change.  The labor participation rate stayed the same 63.6%. The labor participation rate is at artificial lows, where people needing a job are not being counted. No change isn't good actually for it means that those who dropped out of the labor force are staying out of the labor force. 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 increased by 28,000 in a month to a total of 143,305,000 employed people in the U.S. That is almost static in terms of labor flows, although this figure varies widely from month to month. Below is a graph of the Current Population Survey employed.  Those unemployed increased by 164,000 to a new level of 12,206,000. Below is the change in unemployed and as we can see, this number also 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 actual job growth.

    U.S. Economy Adds 155,000 Jobs in December; Can We Expect a Better Labor Market in 2013? - With the Labor Department’s announcement today that the U.S. economy added 155,000 jobs in December and that the unemployment rate held steady at 7.8%, one comes to a depressing realization: The average monthly job creation in 2012 of 153,000 jobs was exactly the same as it was in 2011. Depending on whom you ask, this number is either right around what is needed to keep up with the growth of the labor force, or a touch above it. In other words, for two years of economic recovery, the labor market in America has been doing only slightly better than treading water, and much of the improvement in the unemployment rate can be attributed to people dropping out of the labor force either because they’ve given up looking for work or because they’ve retired.This isn’t to say that today’s report was bad news. The numbers showed slight upticks in manufacturing employment, the average length of the workweek, and even a seven cent rise in average hourly pay for workers. In addition, employment gains in November were revised upwards in this report by 15,000 jobs. Also, this report is measuring the month of December, which was during the height of the fiscal cliff showdown, an event many economists believed would depress business activity and hiring.

    Unemployment Unchanged at 7.8 Percent, Economy Adds 155,000 Jobs, by Dean Baker: The unemployment rate remained at 7.8 percent in December, the same as the revised number for November. The unemployment rate has essentially been unchanged the last four months. Interestingly, while the unemployment rate has fallen by 0.7 percentage points from its year-ago level, the employment-to-population ratio (EPOP) is unchanged at 58.6 percent, just 0.4 percentage points above the low for the downturn. The establishment survey showed the economy adding 155,000 jobs in December. This is virtually identical to the 151,000 average over the last three months and the 154,000 average over the last year.There was little very new in the demographic distribution of unemployment. White men continue to do somewhat better than white women, with the unemployment rate for white men dipping by 0.2 percentage points to 6.2 percent, putting it marginally below the 6.3 percent rate for women. The unemployment rate for white men had peaked at 9.6 percent in Oct-Nov of 2009 when the unemployment rate for white women was just 7.3 percent. The unemployment rate for African Americans rose by 0.8 percentage points to 14.0 percent, indicating that a 1.3 percentage points drop reported in November was an aberration. The big job gainers continue to be the over 55 cohort, with employment growth of 32,000 in December, more than the 28,000 overall employment gain for workers 16 and older reported in the household survey. Over the last year, older workers have accounted for 1,777,000 of the 2,409,000 reported gain in employment. The biggest losers have been the 45-54 cohort, who have seen their employment fall by 288,000 over this period. In both cases the gender split has been close to even. All the duration measures of unemployment fell in December. The median duration of unemployment is now 2.6 weeks below its year-ago level; the mean 2.8 weeks lower; and the share of long-term unemployed is down by 3.7 percentage points. On the other side, the number of discouraged workers is up 123,000 from the year-ago level, the largest increase since December of 2010. The job growth in the establishment survey continues to show some erratic seasonal patterns. Retail reported a loss of 11,300 jobs after adding a total of 107,000 the prior two months. The decline was driven by a loss of 18,700 jobs in clothing. This reflects earlier hiring for the holiday shopping season. Jobs for couriers fell by 10,800 in December, a decline that will almost surely be reversed.

    Employment Report Nothing If Not Consistent, by Tim Duy: The employment report for December 2012 continues the trend of remarkable consistency: On his Twitter account, Neil Irwin runs the numbers: Consistency! Dec. payrolls (+155k); 3 mo avg (151k); 6 mo avg (160k); 12 mo avg (153k); 24 mo. avg (153k). No exciting year-end ramp up like at the end of 2011, just more of the same. Something a little different, however, in the wage data: Statistical bounce? Or evidence of enough improvement in labor markets that firms actually need to step up the pace of wage growth? I would certaintly see that as good news, although I will let the equity analysts puzzle over what that means for corporate margins. Aggregate hours worked made a healthy gain in December: suggesting that the underlying economy continues to chug along at a moderate pace despite the ups-and-downs of quarterly GDP reports. Construction gained 30k jobs. This may be a Sandy-related increase or, as some will suspect, a reflection of improving housing starts: On the latter point, I would add that the construction sector still looks employee-heavy relative to the level of starts:Prior to 2006, the ratio held remarkably steady at 4. This suggests to me that housing starts need to go higher until construction firms begin hiring more aggressively. Until then, expect firms to increase the hours of existing workers. Manufacturing gained 25k, seemingly at odds with the softness of recent months reported by the ISM and core-manufacturing orders data. Professional and business services gained just 19k, with the subcategory of temporary help basically flat - is this where fiscal cliff angst impacted hiring? Education and health services had a solid, although expected, gain of 65k, leisure and hospitality gained 31k.

    155,000 Jobs Added in December, Unemployment Rate 7.8% - A surprisingly uneventful report, as BLS reports that 155,000 Jobs were added in December, right on top of the 156,000 expected, and in line with the number needed to keep up with the growth in the population, or at least the Old Normal growth. The unemployment rate was 7.8%, vs the 7.7% expected: who else is surprised that the rate is now rising with Obama reelected and when a lower unemployment rate means an earlier end to QE4EVA? The November unemployment rate was revised from 7.7% to 7.8%, just so headlines can proclaim the rate was unchanged, even though it was fractions away from a 7.9% print, compared to November initial 7.7%. According to the Household survey a materially less, or 28,000 jobs were added even as the number of unemployed rose by 164K. Average hourly earnings for all employees rose 0.3% in December from November, compared to the 0.2% expected. The confusion continues as the BLS reports retail jobs were mysteriously down by 19,000 even as every retailer announced it was hiring the kitchen sink, while manufacturing jobs supposedly rose by 25,000 while the ADP report reported 6 months of reductions in a row. Construction jobs increased by 30,000. The Underemployment rate, U-6, remains steady at 14.5%. ADP, which will certainly be revised lower now, remains a farce.

    Another Stagnant Jobs Report - The monthly unemployment report doesn’t have quite the political meaning it did during the election, but that can’t hide the truth that it continues to show an economy that is, at best, struggling: American employers added 155,000 jobs in December, about apace with job growth over the last year, the Labor Department reported on Friday. The biggest gains were in health care, food services, construction and manufacturing, and the government sector showed modest job losses, the report said. The unemployment rate was 7.8 percent, the same as in November, whose rate was revised up from 7.7 percent. Over the course of 2012, the country added 1.8 million net jobs, despite continued job losses in the government sector and anxiety and uncertainty related to a looming fiscal tightening. Economists are unsure of what the rest of the year holds for the American job market, but most are forecasting more of the same: hiring fast enough to stay just ahead of population growth, but still too slow to make a sizable dent in the 12.2-million-person backlog of unemployed workers.

    THE EMPLOYMENT SITUATION - (6 graphs) At first glance the December employment report shows that the trends throughout 2012 were unchanged in December. But within the report there were some greater signs of strength. Private payroll employment showed a gain of 155,000 and the household survey reported a much smaller gain of only 28,000. These changes are about the same as they have been all year. Private payroll employment was up 166,000 as government employment fell again. But on a year over year change the two reports are still showing very similar gains. The workweek increased from 33.7 to 33.8 the second consecutive month of a 0.4% gain. As a result, the index of aggregrate hours worked rose 0.5% after a 0.4% jump last month. These are some of the largest gain this cycle and the chart shows how the rate of gain is moving back up to the trend experienced earlier in the cycle. Moreover, average hourly earnings rose 0.3%. The year over year increase and the smoothed three month growth rate strongly suggest that wage growth is bottoming. This is good news. But on the other hand it is exactly the type of change the inflation hawks are warning us about.

    Establishment Survey +155,000 Jobs; Household Survey +28,000 Jobs; Unemployment Rate Revised Up, Flat Since September - The establishment survey report of +155,000 jobs was about what most expected. However, beneath the surface, this report looks weak. The household survey shows a gain of a mere 28,000 jobs. The unemployment rate stayed the same although the number of people unemployed rose by 164,000.December BLS Jobs Report at a Glance:

    • Payrolls +155,000 - Establishment Survey
    • US Employment +28,000 - Household Survey
    • Involuntary Part-Time Work -220,000 - Household Survey
    • Baseline Unemployment Rate +.00 at 7.8% - Household Survey
    • U-6 unemployment +.00 to 14.4% - Household Survey
    • The Civilian Labor Force +192,000 - Household Survey
    • Not in Labor Force  -16,000 - Household Survey
    • Participation Rate +.00 to 63.6 - Household Survey

    Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data. Quick Notes About the Unemployment Rate

    • Last month it was reported the US unemployment rate fell -.2 to 7.7%
    • This month the unemployment rate was reported flat at 7.8% (so last month was revised up)
    • In the last year, those "not" in the labor force rose by 2,199,000
    • Over the course of the last year, the number of people employed rose by 2,436,000
    • Long-Term unemployment (27 weeks and over) was 4,766,000 a decline of 16,000
    • Ratio of long-term unemployment to overall unemployment is 39.1%. Once someone loses a job it is still very difficult to find another.

    Payrolls Tread Water Once Again in December 2012 - The BLS unemployment report shows total nonfarm payroll jobs gained were 155,000 for December 2012. October was revised down by 1,000 to 137,000 job and November was revised up, from 146,000 to 161,000 in employment gained. Many in the press are implying this is a good report when the monthly gain represents the very weak job growth America have been experiencing for the last two years. The BLS employment report is actually two separate surveys and we overviewed the current population survey in this article. The start of the great recession was declared by the NBER to be December 2007. The United States is now down -3.961 million jobs from December 2007, five years ago. The ongoing employment crisis just hit the half decade anniversary.  The below graph is a running tally of how many official jobs are permanently lost, from the establishment survey since Decemember 2007.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 1.2 percentage points. The financial sector, only shrank 0.2 percentage points as it's share of payroll jobs, in spite of being the maelstrom behind the recession. Manufacturing, of which the auto industry is a part, has contracted an entire percentage point as share of total jobs. While some will blame technological advances, we suspect offshore outsourcing continues. Our manufacturing sector erodes and the only real growth field is in health care. From these two pie charts we can see the job market has changed into more crappy, low paying service jobs.

    Dismal December jobs report shows another lost year for US workers - While the December jobs report — 155,000 net new payrolls, 7.8% unemployment rate — was more or less in line with official analyst expectations, plenty of Wall Street economists thought it just might surprise to the upside. Maybe 200,000 jobs or more went the “whisper” estimates. It didn’t happen.Instead it was same old, same old. The increase in total nonfarm payroll employment was only a smidgen better than the average 2012 employment growth of 153,000 jobs per month. And that was exactly the same as the average monthly gain for 2011. And at that pace, the US won’t return to pre-Great Recession employment levels until after 2025, according to the Jobs Gap calculator from the Hamilton Project.Indeed, if the labor force participation rate last month, 63.6%, were the same as in December 2011, 64.0%, the “official” or U-3 unemployment rate today would be 8.4%, only a bit better than the December 2011 rate of 8.5%. In addition, average hourly earnings rose by just 2.1% over 2012, about the same as inflation. That means real wage growth was pretty much flat.Hard to call that progress. In fact, 2012 was another lost year for American workers. Let’s run through some more of the December numbers to gain some perspective:

    Why Flat 7.8% Jobless Rate Isn’t All Bad News - The U.S. unemployment rate was unchanged at 7.8% in December and a broader rate that includes discouraged workers was also flat at 14.4%, but there was some encouraging news behind the numbers. The increase in the main unemployment rate was driven in part by positive factors. In November, the rate increased even as Americans dropped out of the labor force. That was likely due in part to superstorm Sandy, as we explained last month. Last month it appears that the Sandy effect was at least partially reversed. The labor force increased, as more people were seeking jobs. That continues a trend seen earlier last year and could be a sign of confidence in the state of the labor market. The number of people who say they are working increased by 28,000. Not exactly gangbuster numbers, but an increase from the prior month. Meanwhile, even though there were 164,000 more people unemployed, the total work force rose by a larger 192,000. The Labor Department noted that 262,000 of the total unemployed were reentrants who are looking for work again. Another positive sign was seen in the broader unemployment rate, known as the “U-6″ for its data classification by the Labor Department. In December, the number of part-time workers who would like full-time jobs tumbled by 220,000. The decline in the number of workers part-time for economic reasons could come from them either losing their jobs or finding full time work. But considering the very modest uptick in the number of unemployed, it’s likely that most of part-timers were able to find full-time positions.

    Cliff? What cliff? - It’s been a month of high drama on the economic policy front as leaders in Washington grappled with the fiscal cliff. But out in the real world, not many people seemed to care as the economy did just fine. Non-farm employment advanced 155,000, or 0.1%, in December from November, the federal government reported today. That was right on expectations, as was the unemployment rate, which remained at 7.8%, unchanged from November. (The November figure was revised from 7.7% as Bureau of Labour Statistics conducted its annual revamp of seasonal factors.) Job growth was also better than the trend of 130,500 for the year.  There were no obvious black marks in the report. November payroll growth was revised up to 161,000 from 146,000. Within December’s numbers, total private payrolls rose 168,000 as government returned to its familiar role as a drag on overall hiring. Construction and manufacturing both posted solid gains, encouraging signs for two sectors which customarily set the trend for the overall economy. Retail trade did slump 11,300, which will be taken as a sign of a flagging consumer, especially since retailers reported disappointing holiday sales. But that drop followed two months of robust gains. Average weekly hours rose to 34.5 from 34.4, and wage growth has also picked up. Hourly earnings were up 0.3% on the month and 2.1% on the year. The household survey showed employment growth of just 28,000. The household and payroll surveys often diverge, and that gap is not especially large. The labour force did grow enough to keep the participation rate (the share of the population working or looking for work) unchanged at a still depressed 63.6%. Including discouraged workers and involuntary part-timers, the broader measure of underemployment was unchanged at 14.4%.

    Video: Digging Into December Jobs Numbers - WSJ's Rolfe Winkler, Sudeep Reddy and Phil Izzo analyze December's unemployment numbers. Also, Barron's columnist Brendan Conway outlines what the numbers mean for the markets.

    Analysis: Solid, if Unspectacular, Job Growth - Senior Economist Gus Faucher of PNC Financial Services talks with Jim Chesko about today’s Labor Department report showing that the U.S. economy added 155,000 nonfarm jobs in December, while the unemployment rate held steady at 7.8% after an upward revision to the November figure.

    The BLS Jobs Report Covering December 2012: Good, Bad, Indifferently Bad, Take Your Pick - The current BLS jobs report covering December 2012 states, without qualification, that the official or U-3 unemployment rate remained unchanged at 7.8%. It is only on page 5 of the pdf in a table that you find that the November rate was originally reported (a few days before the election) as a more favorable 7.7% down from 7.9%. This revision is part of the BLS’ yearly revision of its numbers in the Household (people) survey. This complicates matters because revisions to the Establishment (jobs) survey will not happen until next month. There is also the further wrinkle that in the February report covering January Household data will reflect updated estimates from the Census going forward but not backward, meaning that the Household data for January 2013 cannot be directly compared with data from December 2012 and before. The way the BLS stretches its yearly revisions out over 2-3 months means that about a quarter of the time, its reports have even more problems than they usually have. I also had an interesting experience of déjà vu this month. I was watching NBC Nightly News last night and they had a preview of this month’s jobs report. I could have misheard and I have tried unsuccessfully to track down a transcript but I could have sworn I heard their business correspondent report offhandedly that experts thought this month’s jobs creation would be in line with last month’s 161,000. The problem with this is that the November jobs number cited by NBC is the revision for November in the December report. In other words, NBC I believe broke the embargo on the December report by some 14 hours and its prediction that this month’s report would be much like last month’s report wasn’t a prediction at all.

    Why Jobs Must Be Our Goal Now, Not Deficit Reduction - Robert Reich  - The news today from the Bureau of Labor Statistics is that the U.S. job market is treading water. The number of new jobs created in December (155,000), and percent unemployment (7.8), were the same as the revised numbers for November. Put simply, we’re a very long way from the job growth we need to get out of the gravitational pull of the Great Recession. That would be at least 300,000 new jobs per month. All of which means job growth and wage growth should be the central focus of economic policy, not deficit reduction. Yet all we’re hearing from Washington — and all we’re likely to hear as Republicans and Democrats negotiate over raising the debt ceiling — is how to cut the deficit. The typical American worker’s paycheck will drop this week because his or her Social Security tax will rise, from 4.2 percent to 6.2 percent. That’s nonsensical. We need to put more money into the pockets of average workers, not less. The first $25,000 of income should be exempt from Social Security taxes altogether, and we should make up the difference by eliminating the ceiling on income subject to Social Security taxes.

    Services Still the Backbone of Job Growth, Data Shows - Reports on Friday on the nation’s job market, factory activity and the service sector painted a picture of a national economy that was growing late last year. This was despite the concern that the economy might be tipped back into recession by a federal budget dispute that was settled on Tuesday.Employers added 155,000 jobs in December, approximately matching the solid but unspectacular monthly rate of the last two years. Companies increased their orders in November for manufactured goods, reflecting investment plans, even though total orders were unchanged for the month, the Commerce Department said in a second report. Back-to-back increases in core capital goods followed a period of weakness that raised concerns about business investment, which has been a driving force in the economic rebound. Analysts say they think that companies will increase spending on computers and other equipment to expand and modernize now that Congress and President Obama have reached a deal on taxes, removing uncertainty that had been weighing on business investment. In a third report, a gauge of service companies’ activity expanded in December by the most in nearly a year, driven by an increase in new orders and hiring, a trade group said. The industry group, the Institute for Supply Management, said its index of nonmanufacturing activity rose to 56.1 in December from 54.7 in November. It was the highest level since February and above the 12-month average of 54.7. Any reading above 50 indicates expansion. Companies had a “year-end surge” in orders, in the words of one executive surveyed by the institute. Services have been a crucial source of job growth, creating about 90 percent of the net jobs added since January. For all of 2012, the economy added 1.69 million service jobs, about the same as in 2011. Many of the new jobs are in low-paying retail and restaurant industries. The increase conflicted with a Labor Department report Friday that said the economy added just 109,000 service jobs last month, the fewest since June. One important difference between the two reports is the inclusion of construction jobs in the institute’s index. The government index excludes that category, which would have raised the December total by 30,000.

    Where The Jobs Are: "55 And Older" - A good jobs report? Sure, if one is 55 and over. In December the American jobs gerontocracy continued its relentless course, and as the two charts below summarize since Obama's first term, some 2.7 million jobs in the 16-55 year old category have been lost. The "offset": 4 million jobs for Americans between 55 and 69. For all those young people graduating from college (with $150,000 in student loans) who are unable to get a job, here is our advice: tell your parents, and grandparents, to retire already. Oh wait, they can't because Bernanke destroyed their savings. Oops - better luck next time.

    Women's Unemployment Surpasses Men's - For the first time in more than six years, the unemployment rate for adult women (those over age 20), seasonally adjusted, has surpassed that for adult men. Federal Reserve Bank of St. Louis Women’s unemployment rate is in blue, men’s in red. Data are seasonally adjusted. This reversal was first noted by Joan Entmacher, vice president for family economic security at the National Women’s Law Center. During the recession, men had borne the brunt of job losses, which were disproportionately in male-dominated industries like construction and manufacturing. Over the course of the recovery that began in mid-2009, however, these sectors have improved a little, while the female-dominated public sector has been shedding workers. As you can see in the chart above, the unemployment rate for adult men (red line) has fallen sharply since early 2010. That trend is due in part to stronger hiring of men, but also to a more discouraging development: men are dropping out of the labor force in very high numbers. The unemployment rate for adult women (blue line) never got nearly as high as that for men, but then it has not fallen by much either. Like men, women were leaving the labor force in droves from 2009 to 2011. Women’s participation rates appeared to stabilize somewhat last year.I should note, by the way, that the unemployment rate for male teenagers is still much higher than that of females: 25.9 percent compared with 21.2 percent.

    Four Years Later, 28,000 More Jobs - For jobs, the past four years have been a wash. The December jobs figures out today indicate that there were 725,000 more jobs in the private sector than at the end of 2008 — and 697,000 fewer government jobs. That works into a private-sector gain of 0.6 percent, and a government sector decline of 3.1 percent. In total, the number of people with jobs is up by 28,000, or 0.02 percent. How does that compare? It is by far the largest four-year decline in government employment since the 1944-48 term. That decline was caused by the end of World War II; this one was caused largely by budget limitations. The only other post-1948 four-year drop was during Ronald Reagan’s first term, when government employment fell 0.6 percent. Going back to Dwight Eisenhower, there have been only two administrations that turned in a worse performance in private-sector job growth. There were small declines in Eisenhower’s first term and in George W. Bush’s first term. Mr. Bush’s second term posted a scant 1.1 percent gain in private-sector employment — a gain that was wiped out during the first two months of 2009. Over all, Mr. Obama’s first four years narrowly — and preliminarily — escaped being the second four-year presidential term since World War II to suffer net job losses. The first was George W. Bush’s first term.

    Employment Report Comments and more Graphs - Here is a table of the change in payroll employment on an annual basis (before benchmark revisions - the revision through March 2012 will be released next month and will show more jobs added based on the preliminary estimate):  Employment growth in 2012 was mostly in line with expectations.  A little good news - it appears we are near the end of the state and local government layoffs (see last graph), but the Federal government layoffs are ongoing. Look at the table - four consecutive years of public sector job losses is unprecedented since the Depression. The first graph below shows the employment-population ratio for the 25 to 54 age group. This has been moving sideways lately, and that shows the labor market is still weak. Also seasonal retail hiring slowed sharply in December (3rd graph) - but overall seasonal hiring suggests a decent holiday retail season.  Here are a several more graphs...Since the participation rate has declined recently due to cyclical (recession) and demographic (aging population) reasons, an important graph is the employment-population ratio for the key working age group: 25 to 54 years old. In the earlier period the employment-population ratio for this group was trending up as women joined the labor force. The ratio has been mostly moving sideways since the early '90s, with ups and downs related to the business cycle.According to the BLS employment report, retailers hired seasonal workers at a slow pace in December. Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year.The number of part time workers declined in December to 7.92 million from 8.14 million in November. These workers are included in the alternate measure of labor underutilization (U-6) that was unchanged at 14.4% in December.  This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 4.77 million workers who have been unemployed for more than 26 weeks and still want a job. This was down slightly from 4.78 million in November, and is at the lowest level since June 2009. This is generally trending down, but is still very high. Long term unemployment remains one of the key labor problems in the US.

    Graphs for Duration of Unemployment, Unemployment by Education and Diffusion Indexes - This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. The general trend is down for all categories, but only the less than 5 weeks is back to normal levels. The the long term unemployed is at 3.1% of the labor force - and the number (and percent) of long term unemployed remains a serious problem. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older) Unfortunately this data only goes back to 1992 and only includes one previous recession (the stock / tech bust in 2001). Clearly education matters with regards to the unemployment rate - and it appears all four groups are generally trending down.  Although education matters for the unemployment rate, it doesn't appear to matter as far as finding new employment (all four categories are only gradually declining).Note: This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed". . The BLS diffusion index for total private employment was at 63.2 in December, up from 56.6 in November. For manufacturing, the diffusion index increased to 59.3, up from 51.2 in November.  Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. From the BLSFigures 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.

    Number of the Week: 649,000 Out of Work for Over 3 Years - 649,000: The number of Americans who have been unemployed for at least three years. When economists talk about the long-term unemployed, they are usually referring to people who’ve been out of work for more than six months, or perhaps more than a year. By those standards, the unprecedented epidemic of long-term unemployment in the U. S. is at last showing tentative signs of easing. The number of Americans who have been unemployed for 27 weeks or longer fell to 4.8 million in December, down from 5.6 million a year ago, though it remains exceptionally high by historical standards. The totals for people out of work for one or even two years have shown similar declines. But for the longest of the long-term unemployed, the news is far grimmer. There are 649,000 Americans who have been looking for work for three years or more, essentially unchanged from a year ago. 213,000 of them have been out for at least four years — a number that’s actually ticked up slightly in the past year — and 85,000 have been unemployed for at least five years, meaning they lost their jobs in the first months of the recession and haven’t worked since. The numbers are far from precise. Like all unemployment figures, the data on unemployment duration are based on a monthly survey of about 60,000 American households. Respondents are asked how long it’s been since they last worked — someone who says he’s been out of work for three years will be marked down as unemployed for 156 weeks, even if the real figure is 150 or 165. Until 2010, the Labor Department didn’t even collect statistics on durations beyond two years.

    Back in America: Is "Reshoring" Overblown? - There's an interesting feature over at The Atlantic on how more American manufacturers are moving back to the United States since expected savings from moving more production to the likes of China didn't materialize. To be sure, the world economy has also changed since the offshore fad peaked (see this earlier post on why offshoring and outsourcing are not synonymous--and why the article should have been entitled the "reshoring boom" instead of the "insourcing boom" to be more accurate). How has the world changed? They given the following bullet points:

    • Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
    • The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
    • In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
    • American unions are changing their priorities.
    • U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.
    These are all to an extent true-especially the one about the excesses of American organized labour being reined in. Moreover, as the article does state, there isn't much logic in sending production half a world away if you're mainly just going to service the US market. (Mexico makes more sense for that.)

    Robots Don’t Destroy Jobs; Rapacious Corporate Executives Do - Profits without prosperity is now starting to get attention in the mainstream press. In his New York Times op-ed, “Robots and Robber Barons” (Dec. 9, 2012), Paul Krugman seeks to explain why, with corporate profits up, labor compensation is down. As part of the ongoing digital revolution, he argues, robots are throwing American workers out of their jobs. In addition, he claims that corporations are making high profits through price gouging, and are not sharing these gains with their employees.   Krugman is on to something important that needs to become part of the national policy debate. But he is off target in blaming a combination of automation and monopolistic practices for the disconnect between profits and prosperity. Automation is not the problem. As part of a process that could reconnect profits and prosperity, the US economy needs more, not less, corporate investment in automation. A company that successfully invests in automation creates far more, and typically better, jobs than those it destroys. Indeed, the study of industrial history reveals that when a nation’s leading companies fail to make sufficient investments in automation its economy runs into trouble.

    Let’s be straight on ‘investing in our middle class’ - The White House continues to maintain that it is investing in the middle class going forward, yet this clearly is not true. This is important to understand as we move toward further budget deals that could make matters worse. The White House statement on the fiscal deal says: “This agreement will also grow the economy and shrink our deficits in a balanced way – by investing in our middle class, and by asking the wealthy to pay a little more.” And an accompanying fact sheet claims: “this agreement ensures that we can continue to make investments in education, clean energy, and manufacturing that create jobs and strengthen the middle class.” As my colleague Ethan Pollack has pointed out, this is inconsistent with President Obama’s frequent bragging point that his budget brings the non-security portion of the budget down to record-low levels—“the lowest level since President Eisenhower.” The fact is that if you lower domestic discretionary spending, you necessarily are reducing public investments in education, research and infrastructure. As a reminder, here’s Ethan’s analysis of infrastructure, education and research and development spending in the Obama Fiscal 2013 budget

    New Immigration Battle: Driver's Licenses - In a sign of growing opposition to President Obama's immigration policy, Iowa has become the latest state to deny driver's licenses to young illegal immigrants who receive deferments from deportation. Iowa joins Michigan, Nebraska and Arizona in denying licenses or non-operator identification cards because, officials say, Obama's deferred action program doesn't grant legal status in the United States. Officials in each state cite laws restricting the licenses to foreigners who reside here legally. The program, which began in August, offers a renewable two-year reprieve for qualified young people who were brought to the United States as children. Recipients also gain permission to work here legally. So far, more than 355,000 applicants have been accepted and nearly 103,000 have been approved, according to the latest government figures.

    Unemployment and Poverty in America: 75 Economic Numbers From 2012 that are Almost too Crazy to Believe…: The mainstream media continues to tell us what a “great job” the Obama administration and the Federal Reserve are doing of managing the economy, but meanwhile things just continue to get even worse for the poor and the middle class. It is imperative that we educate the American people about the true condition of our economy and about why all of this is happening.  If nothing is done, our debt problems will continue to get worse, millions of jobs will continue to leave the country, small businesses will continue to be suffocated, the middle class will continue to collapse, and poverty in the United States will continue to explode. Just “tweaking” things slightly is not going to fix our economy. We need a fundamental change in direction. Right now we are living in a bubble of debt-fueled false prosperity that allows us to continue to consume far more wealth than we produce, but when that bubble bursts we are going to experience the most painful economic “adjustment” that America has ever gone through. We need to be able to explain to our fellow Americans what is coming, why it is coming and what needs to be done. Hopefully the crazy economic numbers that I have included in this article will be shocking enough to wake some people up.

    Chicago registers its 500th homicide of 2012 – the highest number since 2008 - Rahm Emanuel’s first full year as Chicago mayor ends on a tragic note: The city marked its 500th homicide Thursday evening, making 2012 the deadliest year in the city since 2008. Overall, Chicago homicides are at a historic low compared to decades past – 928 in 1991, for example. But the last time Chicago homicides topped 500 was in 2008, when the number was 513. After that, murders had been falling. In 2011, there were 433 homicides. Why homicide rates trend up or down is not easily explained by a single year, and it most certainly requires examining a series of complex factors including systemic unemployment, economic disenfranchisement, easy access to weapons, and – specifically in Chicago – the dismantling of public housing that started two decades ago and has coincided with the closings of public schools in distressed neighborhoods. “The public-housing and school policies did a lot to undermine the fabric of marginalized communities on the South and West Sides of Chicago. That unraveling of the fabric continues to drive the desperation, the depression, the self-medication that contributes to a lot of this violence,”

    Community Center Says It Has Been Told to Cease Its Storm Relief Program - More than two months after the hurricane, hundreds of people still rely on the relief program at the center, said Aria Doe, the executive director of a group that runs after-school programs there. It was Ms. Doe who started the relief program after the storm. So far, she said, about half a million dollars’ worth of food, diapers and other items donated by people and organizations from as far away as Japan and Norway have been distributed, while doctors and other health care workers have provided free medical care. But just before Christmas, Ms. Doe said, officials from the New York City Housing Authority, which owns the building, told her to stop the relief efforts before the end of the year so that the center could be cleaned, and turn over supplies to city-run relief operations. In an e-mailed statement housing authority officials said that their agency and the Department of Youth and Community Development, which contracted with Ms. Doe’s group to run the after-school programs, wanted academic and community services to resume. “We need to inspect the center in order to begin necessary cleanup and remediation work so that we can transition the facility back to a community center space,” the officials wrote, adding that on Monday they planned to meet with people from the center “to discuss the cleaning process and next steps in restoring services.”

    Sandy Recovery Spurs Hiring From Furniture to Plumbing - Furniture dealers are among the businesses seeing a boom in orders as consumers in the Northeast recover from the worst Atlantic storm on record. The disaster that killed more than 100 people in 10 states, wreaked billions of dollars in damage and forced the first two-day shutdown of U.S. stock trading for weather since 1888 is also providing unexpected opportunities for companies assisting in the rebuilding and the employees they’ve hired to help. Construction, plumbing, sand supply, tree removal, road repair and structural engineering are among services spread thin.  Sandy has probably increased the demand for construction workers by at least an additional 30,000, The economic boost of post-storm reconstruction probably will occur over the next year or two, and Baumohl said he expects “a real big, V-shaped rebound” in construction over the next six to 12 months.  “We’re going to see a significant multiplier effect with all these jobs that are going to be generating income for these workers, which are then going to spend that additional income in the economy,” Baumohl said. The rebuilding effort could add 0.4 percentage points to U.S. growth in 2013, he said.

    Billions in Aid for Hurricane Sandy Victims in Danger of Stalling - A bill to provide tens of billions of dollars in federal aid to states pummeled by Hurricane Sandy was in danger of dying Tuesday night as the House seemed headed for adjournment without taking up the legislation.The developments in the House dealt a major blow to leaders from the storm-battered region, who had been pushing top Republicans in the chamber to adopt a $60.4 billion aid package that the Senate passed last week. Lawmakers and a top Republican aide said late Tuesday that Speaker John A. Boehner, a Republican from Ohio, appeared unwilling to introduce any Hurricane Sandy aid legislation before the chamber adjourns in the next day or so. If the legislation is not introduced before the session ends, it would have to be reintroduced in the new Congress and passed by both chambers.

    Congress Vacations While Sandy Victims Freeze - People in New York and New Jersey are huddled in the cold and dark and apparently the US Congress cannot manage to vote for Superstorm Sandy relief before they go on their vacations. Nothing I am about to say should in anyway suggest that I take what happened in New Orleans less seriously, but there is one major difference between the (unacceptably) slow-moving reconstruction aid in Louisiana vs. the Northeast in autumn and winter: the weather. Today in New Orleans, it’s mid 50’s sweater weather. Nobody’s going to freeze to death there in homes that are without power. In the NYC metro area, it’s 24 derees at the hour I am writing this. People can die from exposure in that kind of cold. John Boehner is so captive to the likes of Eric Cantor and Paul Ryan that he is refusing to allow the Sandy aid vote to come to the floor. Even GOP lawmakers from the Northeast are taken aback by this willingness to let fellow Americans freeze to death for the sake of politics. The New York Post quoted Rep. Michael Grimm protesting House Speaker John Boehner’s decision not to allow the vote for Sandy relief: For the first time, I’m not proud of the decision my team has made. I’m going to be respectful and ask that the speaker reconsider his decision. It’s not about politics, it’s about human lives and human dignity and I pray that he understands that.

    Was Hurricane Sandy Relief A Casualty Of The “Fiscal Cliff” Deal? - Somewhat lost in the shuffle last night was a disastrous response to a disaster: The fiscal cliff may have been averted Tuesday, but the next political fight was waiting in the wings and exploded just minutes later when House Speaker John Boehner announced he’d postpone a vote on a Hurricane Sandy relief bill until the 113th Congress was sworn in… Democratic leaders were blindsided by Boehner’s decision to punt the $60 billion relief bill until the 113th Congress. The bill passed the Senate with bipartisan support in December and was slated to get to the floor and easily pass before the clock ran out on the 112th Congress. Democrats were not the only ones blindsided.  “This has been a betrayal of trust,” says GOP Rep. Peter King of New York. “We were told at every stage that this was definitely going on. It is inexcusable. It is wrong. It is unprecedented in this country for the United States Congress to walk away from a natural disaster.”…

    VIDEO: Governor Christie Slams Boehner For Not Passing Sandy Relief - In a press conference today New Jersey Republican Governor Chris Christie slammed Speaker Boehner for failing to allow a vote on Hurricane Sandy Relief. After issuing a joint press release with Governor Cuomo of New York, Christie went on the offensive against Boehner and the House Republicans. “There is only one group to blame,the House Majority and John Boehner.” “Last night, the House Majority failed most the basic test of leadership and they did so with callous disregard to the people of my state.” “It was disappointing and disgusting to watch.” Another interesting aspect to the conference was Christie celebrating Eric Cantor’s role in pushing the Sandy bill before making this cryptic statement. “He’s [Boehner] the speaker of the house and tomorrow is another day.” It is no secret Christie hopes to one day lead the Republican Party, does he want John Boehner out of the way first?

    Sandy Backlash: "Don't Give A Penny To Republicans" Demands House Republican - We have become used to the whining of Chuck Schumer but when a House Republican blasts his own, it seems the dysfunction runs deep (or the fair did not quite meet the balanced). NY Rep. Peter King lashes out at the pork-laden 'deal' we all just witnessed (and the market cliff-gasm'd over) as the failure to vote on the relief measure for Superstorm Sandy prompted him to exclaim the GOP leadership has "turned its back on those people" who continue to suffer. As CNN reports, King said he was "chasing [Boehner] all over the House," and reminded House Republicans that they seem to "have no problem finding New York when they want money," and the frustrated Congressman added, "I would not give one penny to [The Republicans] based on what they did to us last night." Simply put, King proclaims that a number of Republicans may "kiss their seats goodbye...because if you can't provide the most basic assistance for your district, who needs you in Congress?"

    Peter King near tears, threatens to quit Republican Party for blocking Sandy relief - Republican New York Congressman Peter King was near tears on Wednesday as he threatened to leave the Republican Party, while excoriating the leadership and other members after they reversed course and refused to pass a relief package for victims of Hurricane Sandy. In an emotional interview with CNN, King pointed a finger directly at House Speaker John Boehner (R-OH) for the failure to bring Sandy aid up for a vote after passing a bill to avert the so-called fiscal cliff. “Boehner is the one,” the New York Republican explained. “He walked off the floor. He refused to tell us why. He refused to give us any indication or warning whatsoever… I’m just saying, these people have no problem finding New York — these Republicans — when they’re trying to raise money. They raise millions of dollars in New York City and New Jersey, they sent Gov. [Chris] Christie around the country raising millions of dollars for them. I’m saying, anyone from New York and New Jersey who contributes one penny to the Republican Congressional Campaign Committee should have their head examined. I would not give one penny to these people based on what they did to us last night.”

    FEMA Says Flood Insurance Program Will Be Broke By Next Week Without New Aid Bill: The federal government's mandatory flood insurance program will exhaust its borrowing authority and run out of money to pay claims from Hurricane Sandy sometime next week, Federal Emergency Management Agency officials said Wednesday. The Senate passed a $60.2 billion storm relief bill last week that included $9.7 billion for federal flood insurance, but House leaders unexpectedly failed to bring the bill to the floor for a vote Tuesday night, saying the bill would be taken up by the new Congress. "We urge timely congressional action with regard to the pending supplemental to continue to meet survivor needs," Dave Miller, a FEMA official, said in a statement. FEMA's announcement came as House Republican leaders faced mounting criticism, much of it from within their own party, for their decision to scrap a planned vote on the aid package for states devastated by Hurricane Sandy. Among the fiercest critics of the failure of the Republican-controlled House to take up the aid bill was New Jersey Gov. Chris Christie, who lambasted Congressional leaders for putting politics ahead of storm victims.

    Amid backlash, Boehner schedules Sandy vote - CBS News: Amid vociferous criticism from both the right and the left, House Speaker John Boehner is agreeing to hold a vote this week for a bill providing relief for states hit by superstorm Sandy, though the measure -- the first of two -- will represent only a fraction of the larger $60 billion package. Boehner, changing his position just minutes after bearing the brunt of a scathing attack from Gov. Chris Christie, R-N.J., said he will hold a vote Friday for a $9 billion provision that will cover flood insurance for regions impacted by Sandy. He said Congress will vote on a $51 billion package when Congress reconvenes on January 15. "Getting critical aid to the victims of Hurricane Sandy should be the first priority in the new Congress, and that was reaffirmed today with members of the New York and New Jersey delegations," Boehner said Wednesday afternoon in a joint statement with House Majority Leader Eric Cantor, R-Va. "The House will vote Friday to direct needed resources to the National Flood Insurance Program. And on January 15th, the first full legislative day of the 113th Congress, the House will consider the remaining supplemental request for the victims of Hurricane Sandy."

    Update: Senate Joins House In Passing Sandy Aid Bill : The Two-Way : NPR: The Senate just passed, by unanimous agreement, a bill that injects more than $9 billion into the insurance program that will assist those hit hard by Superstorm Sandy last October.President Obama had urged passage and is expected to quickly sign the bill.Our original post:By an overwhelming, bipartisan majority, the House of Representatives on Friday passed legislation that puts more than $9 billion in the pipeline to pay flood insurance claims filed by those who were in the path of Superstorm Sandy when it swept over New Jersey, New York and surrounding states in late October.

    Here Are the Republicans Who Voted 'No' on Hurricane Sandy Relief Funds: Friday, Congress finally approved a $9.7 billion package to pay flood insurance claims from Hurricane Sandy. The measure was supposed to come to a vote earlier in the week, but was tabled by House Speaker John Boehner, drawing much criticism from both Democrats and his fellow Republicans alike. The measure passed unanimously through the Senate, but 67 members of the House of Representatives voted "no" to assisting people who were left, at best, powerless or homeless by a hurricane in November.

    How greed and politics nearly destroyed the coast - The beachfront’s devastation was years in the making, fueled by greed, elitism and self-interests that left much of the area ill-prepared for the blow from superstorm Sandy. Significant parts of the shoreline in Ocean and Monmouth counties were left vulnerable — despite more than a decade of warnings from experts, residents and some local officials. Life-saving protection, which covers 24 of the 50 miles of largely developed oceanfront in the two counties, was stalled in many areas by defiant beachfront and business owners, multiple local governments and a fractured shore-protection system that allowed hundreds, perhaps thousands, of individuals to decide how, when, where, and even if, beaches and dunes should be built. With Congress and the White House mulling the $37 billion Gov. Chris Christie has requested to rebuild New Jersey, little has been discussed on how to prevent damage from the next Sandy. The state has yet to make public a detailed list of where the money would go. Just one line in its request points to the state’s future: $7.4 billion for “Additional mitigation and prevention costs.” At the root of New Jersey’s disconnected approach to shore protection is the state’s traditional home rule. For decades, local politics have trumped statewide initiatives simply because of their numbers: 566 municipalities, 585 school districts and 21 counties, each dependent on local property tax money for survival.

    Debts Trigger Rapid Decline of American Cities - SPIEGEL ONLINE - The US government's investment in its economy has declined steadily since the 1970s. Publicly held assets accounted for 72 percent of the country's gross domestic product in 1975; today, that amount is under 55 percent. The mayors of individual American cities have certainly initiated construction projects, such as stadiums or community centers, sometimes using borrowed funds, but there is no overarching plan. The federal government no longer undertakes large-scale projects as it did with the Hoover Dam in the 1930s or the interstate highway system in the 1950s.

    Connecticut Student Suspended For Writing In Poem That She “Understands” Why Adam Lanza “Pulled The Trigger”  - We have often discussed the continuing crackdown on student free speech in high schools. The latest such case involves Courtni Webb, a seventeen-year-old student at California’s Life Learning Academy who was suspended for writing in a poem in a personal notebook that she “understand[s] the killings in Connecticut.” A teacher appears to have spotted the poem and the statement that “I know why he pulled the trigger. Why are we oppressed by a dysfunctional community of haters and blamers?” Webb was promptly reported and suspended. Once again, I fail to understand why students are punished for expressing their feelings and thoughts. I would rather address such feelings in a teachable moment as opposed to, as here, teaching students about the constant threat of censorship and discipline for free speech. What is particularly problematic is that the student was not glorifying violence but denouncing the bullying and isolation that often comes with high school. Webb insisted that “Never in my life have I heard that you couldn’t mention a tragedy that happened. I didn’t say that I agree with it, I said I simply understand it.”

    College Costs: Will Tuition Discounts Get More Students to Major in Sciences? - How much money would it take to get an English major to switch to engineering? Would a $1,000 discount on tuition every year do the trick? What about $5,000? What if switching majors not only reduced students’ debt load but also made it much more likely they’d find a job after graduation? Would that be enough to change their mind? These are the questions Florida is debating as it looks for ways to steer more students into high-paying fields that employers are eager to cultivate. Governor Rick Scott’s task force on higher education recently suggested freezing tuition at state schools in “strategic areas,” like engineering, science, health care and technology, while letting the cost of humanities and other majors rise.

    Online Education and College Degrees at Far Lower Prices is the Future; Virtual Classrooms to Reach 1 Billion People - I received an interesting email from "James in Arizona" today. James offers this comment on online education.  I ran across this website while exploring various online options for my daughter (in high school, but she’s very computer savvy, so I’m looking for options to expand her interests/basis). It is EdX, an online education group started by Harvard and MIT, but other universities are joining.  Hopefully this online education program will finally put a torpedo in the expense of college. Here is a sample of free courses offered in the video above.

    • Foundations of Computer graphics
    • Circuits and electronics
    • Artificial intelligence
    • Software as a service
    • Quantum Mechanics and Quantum Computation
    • Introduction to Solid State Chemistry

    Families Shoulder Heftier Burdens as College Debt Swells - ProPublica: It's been a year of eye-popping records for student debt. Outstanding student loan debt surpassed credit card debt, with one government estimate pegging total student loan debt at more than $1 trillion. Such staggering figures drew renewed attention to the fact that rising higher education costs and falling government support for state colleges and universities has burdened individual students and their families with immense debt — all at a time when new graduates face anemic prospects for getting a decent job.  Increasingly, the debt burden falls on parents, not just students. As we reported [1] with The Chronicle of Higher Education, the federal Parent Plus loan program allows parents to borrow big from the federal government to fund their children's college education when grants, scholarships and federal student loans (which are capped at strict dollar amounts) don't suffice. Borrowers with low income, or even no income at all, can still get the loan so long as they pass a check on their credit history. The Parent Plus program has increasingly been the solution for families coming up short on funds for college — but as we noted, it can be dangerous when families, desperate to give their child the advantages of a costly college education, borrow more than they can handle.

    Scope of Student Debt Crisis Holds Generation Back - It’s been called a debt bomb waiting to explode. The next bubble on par with the subprime mortgage mess. A crisis that’s taking a toll on an already-weak economy.  Whichever scary word you prefer, there’s no doubt that student-loan debt looms as a major long-term problem facing the country’s population of college graduates and beyond. There’s no shortage of data that tell the story. Outstanding student loan balances rose to $956 billion as of Sept. 30, an increase of $42 billion from the second quarter of 2012, according to a Federal Reserve Bank of New York November report on household debt. And that’s an 80% increase from five years ago, when total student loan debt totaled $530 billion. (Meanwhile, in October, the Consumer Financial Protection Bureau clocked outstanding student loan debt in the U.S. at $1 trillion.) Student-loan debt has achieved the dubious honor of exceeding credit-card debt, auto-loan debt and mortgage debt: Overall consumer debt dropped by $74 billion in the third quarter, continuing the nearly four-year trend of falling household debt, driven largely by a decline in mortgage debt, the New York Fed noted. The quarter-to-quarter increase also boosted the delinquency rate for student loans – 11% of student-loan balances were 90 or more days delinquent. What’s more, this figure likely understates the actual delinquency rates because nearly half of these loans are in deferment or grace periods, and therefore temporarily not in the repayment cycle, the New York Fed noted.

    Pa.’s teacher pension system coming up short - When it comes to teacher pensions, Pennsylvania has the fourth largest unfunded pension liability in the nation, according to a recent report that argues the pension systems in most states are not only unfair to taxpayers, they also are unfair to teachers. The National Council on Teacher Quality compared pension plans in all 50 states, looking at unfunded liabilities and other factors. Nationwide, the report estimates teacher pensions systems have almost $325 billion in unfunded liabilities. Pennsylvania makes up slightly more than 6 percent of that total, with an unfunded liability of $19.7 billion – equal to $1,563 for every man, woman and child in the state. And the report argues the problem is worse than the numbers suggest “due to unrealistic assumptions and projections about returns on investments.” It cites one expert who predicted in 2010 that no state will meet its projected returns.

    Atlanta to San Diego: 7 cities' pension problems

    • Atlanta: The city faces an unfunded pension liability of $1.5 billion at last estimate.
    • Baltimore: Mayor Stephanie Rawlings Blake called her city's $1.2 billion pension liability a "crisis" in 2010 that had the potential to bankrupt the city.
    • Chicago: The city's six pension funds are about 50 percent funded, and have a current unfunded liability of $26.8 billion.
    • Cincinnati: The pension fund for most city employees and retiree health care was underfunded by about $713 million at the end of 2011.
    • Philadelphia: The city's unfunded pension liability was $4.5 billion as of July 1, 2012.
    • Providence, R.I.: Saying a $900 million pension liability was threatening to put the city in bankruptcy,
    • San Diego: The city's pension investments tumbled nearly 20 percent in 2009, raising its unfunded pension liability from $1.3 billion to $2.11 billion.

    Cities chart course through pension morass - In Philadelphia, pension costs doubled in a single decade. Cities in Rhode Island dimmed streetlights, raised taxes and put off road repairs. Stockton, Calif., fell into bankruptcy. Unpaid bills from decades of retirement promises made to public workers, combined with a lackluster economy and steep Wall Street losses, have built up a financial mountain that threatens to overwhelm budgets and operations in cities and counties across the country. While it hasn't gotten the attention of the "fiscal cliff" in Washington, the pension crisis at City Hall could have similar effects as mayors are forced to raise taxes, cut government services or renege on retirement promises made to police officers, firefighters, teachers and other public workers.

    Social Security and the current fad of being balanced and comprehensive -- Salon writer  Natasha Lennard reports that a sticking point around Social Security stalled 'fiscal cliff' back and forth rejoinders between the two parties, but also points out that the topic continues to be on the table (and has been offered by President Obama before these talks a couple years ago).   Notice both parties using the same language of "part of a balanced, comprehensive agreement" as the fix is in without looking at other parts of the budget...these back and forth sallies are bi-partisan in appearance, but do not address the current version of 'fical cliff' responsibilities.  A free gift to the political players and the cover of the moment, a matter not even related to current fiscal responsibility, nor to the real world impact it has on poverty and seniors, nor the carefully thought out and responsible plans offered to address real issues. Aides to Republican Senate Minority Leader Mitch McConnell presented the Social Security proposal, which included a method of calculating benefits with inflation. The plan would lower cost of living increases for Social Security recipients. Democrats were swift to reject the offer.  A Democratic aide told ABC News that the proposal was a “poisoned pill” in the current negotiations. However, it should be noted that President Obama has suggested a similar proposal within the context of negotiations on a broad deficit-reduction deal. Such a measure had been taken off the table in discussions over a scaled-back, short-term agreement.

    Dr. Black Did It as a Shorter; Here’s the Data - The problem with waiting overnight to post is that other people figure out the same thing:  If the true CPI-E increases faster than CPI, then chained-CPI is worse, not better.It’s actually worse than that. The measure by which Social Security is raised turns out not to be what we usually call CPI (Consumer Price Index for All Urban Consumers), but CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers): What George W. Bush referred to as “the miracle of compound interest” works both ways. Seniors see their Purchasing Power decline every year. So when Jared Bernstein, Sensible Centrist, says: I support the change [to Chained CPI]—it’s a more accurate measure of price growth (though a chained index for the elderly would be better), and I’m sure it’s coming, so I want to get something for it. That ‘something’ is an offset from the benefit cut for poor, old elderly. It would be nice to think he was Ernest Lee Sincere. But we know  Jared Bernstein is not innumerate, so we have to assume he’s acting from malice aforethought, since this took me less than 20 minutes to put together from scratch, including the normalization:

    Scheduled vs Payable Benefits: three definitions of Solvency - When it comes to Social Security there are three definitions of 'Solvency', one used by the 'Actuary' another by the 'Defender' and the third by the 'Reformer'. For the 'Actuary' 'Solvency' is mostly a value free concept. Social Security is solvent when all income from all sources equals all costs leaving Trust Fund assets equalling 100% of the next years projected cost. This is known as having a 'Trust Fund Ratio' of 100. If the Trust Funds are projected to be solvent for the upcoming 10 year window Social Security is judged to be in 'Short Term Actuarial Balance'. If the Trust Funds are projected to maintain that solvency, or at least end up with it without going into the hole over a 75 year period it is judged to be in 'Long Term Actuarial Balance'. And since 2003 the Trustees added an additional measure of solvency measured over the 'Infinite Future Horizon'.  And as such 'involvency' represents that point here Cost exceeds Income to the extent that Trust Fund assets are driven below a TF Ratio of 100. Or in an alternative formulation when those assets are driven to zero. At which time we have a scenario as depicted in the above figure: a sudden reset of payable benefits from the schedule (where they were topped off by asset redemptions) to the new payable equal to then current income from taxation.  In percentage terms that sudden reset amounts to right on 25% of then current scheduled benefits and it is that discontinuity that defines 'solvency crisis'. But here is where 'defenders' and 'reformers' depart.  For Social Security Defenders the crisis is one of a cut in benefits and the solution is putting in place policy that would maintain the scheduled benefit. For Social Security 'reformers' the crisis is more political, the risk that a reset in benefits from 'scheduled' to 'payable' will result in demands that the schedule be maintained via transfers from outside the dedicated income stream of FICA and tax on benefits. As a result the proposed solutions to this same 'solvency crisis' via benefit reset are diametrically opposed with defenders advocating measures to maintain current scheduled benefits while reformers see their task as reconciling future retirees to accepting then payable.

    Entitlement reform: Cuts on the sly | The Economist - TO THOSE on fixed incomes, including many retirees, inflation is the enemy. Workers can generally expect their wages to rise with inflation (if not in one-for-one lockstep). But after retirement income is set, and erodes in real terms as prices increase. Some retirees are protected; their pension benefits increase with inflation each year. That protection may now be vulnerable. A smaller cost-of-living increase is a sneaky, and sometimes only barely legal, way to cut benefits when a pension is under-funded. Indexing benefits to inflation is expensive, but it’s not always appreciated. The value of inflation indexation is less apparent early in retirement, particularly when inflation is dormant, as has been the case since the mid-1980s. That may help explain a new enthusiasm for fiddling with indexation as a means to address funding shortfalls in a financially-strapped post-crisis world. Dutch defined-benefit plans only offer conditional indexation; benefits will in some cases go up by 100%, 50% or even 0% of inflation, depending on the health of the particular pension fund. State defined-benefit pension plans in America are increasingly considering tinkering with their indexation rates. The hope is this will provide a loophole for states to cut benefits. That’s because pension benefits, at least in nominal terms, are often guaranteed by state constitution.

    Reasons Joseph Stiglitz and Other Top Economists Think Means-Testing Medicare & Social Security Is a Destructive Idea By Lynn Parramore - In Washington-speak, “means-testing” is a scheme to deny or reduce Medicare and Social Security benefits for people who are “too wealthy” in the name of saving money. It’s a counterproductive, harmful idea, but one that well-intentioned liberals often get snookered into embracing. It’s easy to see why. Economic inequality has exploded to dangerous levels, and the argument for means-testing seems to appeal to a powerful sense that the rich are getting more than their fair share at the expense of everyone else. Combine this with the deficit hysteria promoted by conservatives, and the trap is set. Don’t fall into it. The truth is that means-testing is a sneak attack on vital programs meant to weaken and eventually destroy them. There’s a reason why an ultra-conservative like Paul Ryan pushed means-testing during the presidential campaign. And there’s a reason why private equity billionaire Pete Peterson, enemy of Social Security and Medicare who served in Richard Nixon's cabinet, makes a special point of bringing up means-testing when he is talking to liberals.Conservatives push means-testing because it’s a highly effective political strategy for getting liberals and progressives to act against their own values and interests — so effective that some economists billing themselves as liberal, such as Jared Bernstein, a former adviser to the Obama administration, sometimes talk about means-testing as if it’s a reasonable idea. Bernstein recently went on CNBC and said that means-testing “sounded like a good idea” and characterized people opposed to it as “fringe.”

    Remember this the next time they demand Medicare cuts -- From Sam Baker: House Republicans signaled Thursday they will not follow rules in President Obama’s healthcare law that were designed to speed Medicare cuts through Congress. The House is set to vote Thursday afternoon on rules for the 113th Congress. The rules package says the House won’t comply with fast-track procedures for the Independent Payment Advisory Board (IPAB) — a controversial cost-cutting board Republicans have long resisted. The rules package signals that Republicans might not bring up Medicare cuts recommended by the IPAB — blocking part of a politically controversial law, and resisting Medicare spending cuts. Remember how the ACA works. If Medicare spending rises too quickly, the IPAB makes recommendations on how to cut spending. If Congress doesn’t agree to those recommendations, they have to vote to override them, and propose cuts of their own. If they don’t, the spending cuts go into effect. The Republicans are now saying that they will not abide by those procedures. They will refuse to enact the cuts the IPAB makes. I don’t know if that’s legal or not; someone with more legal knowledge will have to tell me. But I hope you will all remember this the next time they demand that someone cut Medicare spending.

    The Complexities of Comparing Medicare Choices - The roughly 50 million Americans covered by the federal Medicare program have a choice of receiving their benefits under the traditional, free-choice, fee-for-service Medicare program or from a private, managed-care Medicare Advantage plan. The private plans have a steadily increasing number of enrollees — currently 13 million, or 27 percent of beneficiaries. A fundamental question that has engaged health-policy researchers and commentators for some time is whether coverage of Medicare’s standard benefit package under Medicare Advantage plans is cheaper or more expensive than it is under traditional fee-for-service Medicare. The answer is yes. The latest round in the debate over the question was begun in August 2012 by Zirui Song, David M. Cutler and Michael E. Chernew in their paper “Potential Consequences of Reforming Medicare Into a Competitive Bidding System.” In that paper, the authors explored how much more above their regular Part B premiums the elderly would have had to pay in 2009 to either a Medicare Advantage plan or to traditional Medicare if the much-debated Ryan-Wyden plan for Medicare had been in place that year. That plan would have established a Medicare Exchange — a federal version of the insurance exchanges envisaged under the Affordable Care Act — on which Medicare beneficiaries could have chosen among private health plans that would compete with traditional Medicare on the same terms, that is, on the same competitive platform. Each private plan would have had to offer a benefit package that covered at least the actuarial equivalent of the benefit package provided by the traditional fee-for-service Medicare. Medicare’s contribution (or “premium support”) to the full premium for any of these choices, including traditional Medicare, would have been equal to the “second-least-expensive approved plan or fee-for-service Medicare” in the beneficiary’s county, whichever was least expensive. That premium support payment would have been adjusted upward for the poor and the sick and downward for the wealthy.

    For-Profit Nursing Homes Lead in Overcharging While Care Suffers - A report by federal health care inspectors in November said the U.S. nursing home industry overbills Medicare $1.5 billion a year for treatments patients don’t need or never receive.  Not disclosed was how much worse it is when providers have a profit motive. Thirty per cent of claims sampled from for- profit homes were deemed improper, compared to just 12 percent from non-profits, according to data Bloomberg News obtained from the inspector general’s office of the U.S. Department of Health and Human Services via a Freedom of Information Act request.  The figures add to the case -- advanced by health care researchers and Medicare overseers in at least six government and academic studies in the last three years -- that the rise of for-profit providers is fueling waste, fraud and patient harm in the $2.8 trillion U.S health care sector. At nursing homes, 78 percent of $105 billion in revenues went to for-profits in 2010, up from 72 percent in 2002, according to the latest available government breakdowns.

    Health Care Thoughts: While We Were Busy with the Election - As we were busy watching the election the Obama administration agreed in late October to settle a class-action lawsuit with disability advocates on Medicare services for the disabled and those with chronic conditions. Medicare has historically required for certain coverage there be a likelihood of medical of functional improvement before services would be authorized. This precluded coverage for those with chronic conditions or disabilities and unlikely to see improvement. This is a significant change which, when put into full operation, will be a improvement in coverage for some patients and a major relief for their families. How long this will need to be put into full effect? I am not certain but will certainly keep an eye on it.

    The health-insurance markets of the (very near) future -   An online health-insurance exchange is coming to your state. How effective will it be? That is an increasingly important question in the United States. In June 2012, the Supreme Court upheld the legality of the country’s Affordable Care Act, passed by Congress and signed into law by President Barack Obama in 2010. The program mandates private-sector health insurance for all citizens, and provides subsidies for those who otherwise could not afford it. Insurance-plan choices will be available through exchanges, or marketplaces; most people will be able to study plans and sign up for one online. As of December, nearly 20 states have elected to run exchanges themselves; the federal government will run the exchanges in other states. And therein lies a key issue: Creating a consumer-friendly exchange is no easy task. It is hard enough to know what kinds of foods we should eat, which cars to drive, or which apps to use. Selecting an insurance plan is a far more complex decision.

    Fiscal Deal Kills New Funding for Health Co-ops - The fiscal cliff deal, approved by Congress on New Year's Day, eliminates most of the more than $1.4 billion in remaining funding from the federal health law for new nonprofit, customer-owned health plans designed to compete against the major for-profit insurers. That means the Obama administration won't be able to approve loans to any additional co-ops. In the past 2 years, the Department of Health and Human Services has awarded nearly $2 billion in loans to 24 proposed state co-ops. Those loans won't be affected by the cut."We were blindsided by the elimination of funds," said John Morrison, president of the National Alliance of State Health Cooperatives. "The health insurance industry is getting its way here by torpedoing co-ops in the 26 remaining states. This is not about budgets; it is about those health insurance giants killing competition at the expense of millions of Americans who will pay higher premiums because of it."But some House Republicans have said the co-ops were a way for the administration to reward its political friends. Sponsors of the co-op plans already under way include the Freelancers Union in New York, a farmers' union in Colorado and the Connecticut State Medical Society. Critics also have been skeptical the co-ops could compete with more established insurers, such as Aetna and UnitedHealthcare

    Questcor Finds Profits, at $28,000 a Vial - THE doctor was dumbfounded: a drug that used to cost $50 was now selling for $28,000 for a 5-milliliter vial.  “I’ve never seen anything like this,” Dr. Lazaro, a rheumatologist in Lafayette, La., says of the price increase.  How the price of this drug rose so far, so fast is a story for these troubled times in American health care — a tale of aggressive marketing, questionable medicine and, not least, out-of-control costs. At the center of it is Questcor, which turned the once-obscure Acthar into a hugely profitable wonder drug and itself into one of Wall Street’s highest fliers.  At least until recently, that is. Now some doctors, insurance companies and investors are beginning to have doubts about whether the drug is really any better than much cheaper alternatives. Short-sellers have written scathing criticisms of the company, questioning its marketing tactics and predicting that its shareholders are highly vulnerable.

    Chart of the day: Health care spending by age and country - Dan Munro has a post up at Forbes: The Year In Healthcare Charts. Though they’re all worth a look, this is the one that dilated my pupils: This is, apparently, from a year 2005 study. What happens to Americans when they turn 55? Don’t blame Medicare. It doesn’t kick in until age 65. My guess is that at 55+, people tend to initiate health care episodes (visit doctors) more. You see evidence of that in all countries depicted. But, in the U.S. much more so than elsewhere, once you check in, more stuff is done to you or for you. More tests. More return visits. More intensive end of life care. Let’s face it, more unnecessary procedures. I call it “clinical capture.” Yes, perhaps Americans are also a bit sicker by age 55 (e.g., more diabetes). But, wow, it really is hard to explain why they should cost as much more as depicted, relative to residents of other countries, at 55+ and yet nearly the same below that age. This chart really shocks me.

    Fructose Sugar May Cause Weight Gain - Foods that contain the sugar fructose may cause people to gain more weight than foods that contain the sugar glucose, a new study suggests. Consuming glucose signals to the brain that you've eaten, and thus satiates appetite. By contrast, eating fructose does not, said the researchers, from Yale University School of Medicine.The results suggest that the pervasiveness of high-fructose corn syrup in Western diets — the sugar is found in many processed foods and beverages, including juice and soda — may contribute to the obesity epidemic, experts say. But other experts argue that the findings should be interpreted with caution. The study examined the brain's response to pure fructose and pure glucose. However, processed foods generally contain a combination of fructose and glucose (high-fructose corn syrup, for example, contains about 55 percent fructose and 45 percent glucose.) For this reason, it's not possible to say how the results would play out in the real world

    Obese who refuse to exercise 'could face benefits cut' - Overweight or unhealthy people who refuse to attend exercise sessions could have their benefits slashed, in a move proposed by Westminster Council. GPs would also be allowed to prescribe leisure activities such as swimming and fitness classes under the idea. The Tory-controlled council said the aim was to save £5bn from the NHS budget when local authorities take over public health provision from April.

    Global Flu Pandemic 'Inevitable,' Expert Warns - A new global flu pandemic within the next couple years is inevitable, one prominent flu vaccine manufacturer says. [Can they get any more blatant? See: 'V for Vendetta' sub-plot, if you want to know what happens when a tyrannical government conspires with pharma-terrorists to create a worldwide pandemic.] Joseph Kim, head of Inovio Pharmaceuticals, which is currently working on a "universal" flu vaccine that would protect against spread most strains of the virus, says the world is due for a massive bird flu outbreak that could be much deadlier than the 2009 swine flu pandemic. Last year, Ron Fouchier, a Dutch flu researcher, genetically modified a strain of H5N1 so that it was transmissible between ferrets, which are often used to test human-to-human transmissibility. At the time, Fouchier said he had created "probably one of the most dangerous viruses you can make." [Now, why would he do that?] Paul Keim, a geneticist with the U.S. National Science Advisory Board for Biosecurity, echoed that sentiment: "I can't think of another pathogenic organism that is as scary as this one," he said. "I don't think anthrax is scary at all compared to this."

    Bigger Brains Come At A Cost: -- Swedish researchers bred two different lines of guppies, selecting one for larger brains and one for smaller. The fish quickly modified until brains were nine percent larger in the big-brained line than in the other. Not surprisingly, when 48 guppies were given learning tests, large-brained female fish outperformed small-brained females. However, males from both lines scored about the same, possibly because the female guppies' visual system was more suited to the type of intelligence test used. But big brains also had a downside—the brainier fish had smaller guts, by 20 percent for males and 8 percent for females. Plus, the large-brained guppies produced 19 percent fewer offspring. In order to provide energy to their bigger brains, the egghead fish made sacrifices that may be evolutionary disadvantages. It may indeed be possible to be too smart for your own good.

    Crime Is at its Lowest Level in 50 Years. A Simple Molecule May Be the Reason Why. -  I've written several posts recently about the idea that America's great crime epidemic, which started in the 60s and peaked in the early 90s, was caused in large part by lead emissions from automobiles. Long story short, we all bought lots of cars after World War II and filled them up with leaded gasoline. This lead was spewed out of tailpipes and ingested by small children, and when those children grew up they were more prone to committing violent crimes than normal children. Then, starting in the mid-70s, we all began switching to unleaded gasoline. Our kids were no longer made artificially violent by lead poisoning, and when they grew up in the mid-90s they committed fewer violent crimes. This trend continued for two decades, and it's one of the reasons that violent crime rates have dropped by half over the past 20 years and by more than that in our biggest cities. It's one of the great underreported stories of our time: big cities today are as safe as they were 50 years ago. That's the short version of the story. The long version of the story is on the cover of the current issue of Mother Jones, and today it's available online for the first time.  Click here to read it. The chart on the right illustrates the basic data that inspired the lead hypothesis: it shows lead emissions starting in 1935 overlaid with the violent crime rate 23 years later. The two curves match almost perfectly.

    America's Real Criminal Element: Lead - In city after city, violent crime peaked in the early '90s and then began a steady and spectacular decline. Washington, DC, didn't have either Giuliani or Bratton, but its violent crime rate has dropped 58 percent since its peak. Dallas' has fallen 70 percent. Newark: 74 percent. Los Angeles: 78 percent. There must be more going on here than just a change in policing tactics in one city. But what?  What are we missing? Experts often suggest that crime resembles an epidemic. But what kind? Karl Smith, a professor of public economics and government at the University of North Carolina-Chapel Hill, has a good rule of thumb for categorizing epidemics: If it spreads along lines of communication, he says, the cause is information. Think Bieber Fever. If it travels along major transportation routes, the cause is microbial. Think influenza. If it spreads out like a fan, the cause is an insect. Think malaria. But if it's everywhere, all at once—as both the rise of crime in the '60s and '70s and the fall of crime in the '90s seemed to be—the cause is a molecule. A molecule? That sounds crazy. What molecule could be responsible for a steep and sudden decline in violent crime? Well, here's one possibility: Pb(CH2CH3)4.

    Toxic rats, mice spur rodenticide battle - Poisoned rats and mice are spreading toxic chemicals into the ecosystem despite widespread pressure from federal regulators, wildlife officials and environmentalists to remove the most harmful rodenticides from store shelves.  A coalition of environmental and public health groups urged state regulators this month to reject 2013 registration renewals for the dangerous pesticides known as brodifacoum, bromadiolone, difethialone and difenacoum.  The lethal compounds, which are known as second-generation anticoagulants, interfere with blood clotting, resulting in uncontrollable bleeding and a slow, agonizing death, according to the demand letter signed by the Center for Biological Diversity, Californians for Pesticide Reform, Earthjustice and the American Bird Conservancy.  The coalition wants the California Department of Pesticide Regulation to end the use of the rodenticides, which toxics experts say can also kill hawks, owls, foxes, mountain lions and other predators that capture poisoned rodents or scavenge their contaminated carcasses.  The rodenticides have also been linked to the poisoning of pets and children, said attorney Jonathan Evans, the toxics and endangered species campaign director for the Center for Biological Diversity. "There is no reasonable justification to have the worst of the worst toxic rat poisons still on the market," Evans said, "especially since there is a range of other options."

    A Broken Political System Begets Cheap Milk and an Opportunist’s Farm Bill for 2013  - How did last minute deals in fiscal cliff legislation give us a new farm bill? Legislation to avert the “fiscal cliff” passed late Tuesday. It included a new farm bill policy. After months of bickering and in-fighting while agriculture committee policy-makers worked to draft new farm bill legislation to set policy for the next five years, we have a final outcome that preserves the status quo, plus. We have a partial extension of the 2008 farm bill through the end of this fiscal year — which averts “a sharp rise in milk prices” that would have occurred in the absence of a new farm bill. Pleeese. Did anyone really think that lawmakers would let milk prices go up? Of course not. But it was a good headline that distracted us from the real farm policy issues. By kicking the can down the road in last minute legislation, we have rewarded southern cotton growers and agribusinesses by renewing direct commodity payments for yet another season for corn, soybeans and cotton, after the proposal to drop them in a new five-year farm bill was nearly a done deal many months ago that had bipartisan support. 

    Recent patterns of crop yield growth and stagnation : Nature Communications : Nature Publishing Group: In the coming decades, continued population growth, rising meat and dairy consumption and expanding biofuel use will dramatically increase the pressure on global agriculture. Even as we face these future burdens, there have been scattered reports of yield stagnation in the world’s major cereal crops, including maize, rice and wheat. Here we study data from ~2.5 million census observations across the globe extending over the period 1961–2008. We examined the trends in crop yields for four key global crops: maize, rice, wheat and soybeans. Although yields continue to increase in many areas, we find that across 24–39% of maize-, rice-, wheat- and soybean-growing areas, yields either never improve, stagnate or collapse. This result underscores the challenge of meeting increasing global agricultural demands. New investments in underperforming regions, as well as strategies to continue increasing yields in the high-performing areas, are required.

    Unlocking sorghum's gene bank: Adapting agriculture to a changing climate - (—Climate change poses a major challenge to humanity's ability to feed its growing population. But a new study of sorghum, led by Stephen Kresovich and Geoff Morris of the University of South Carolina, promises to make this crop an invaluable asset in facing that challenge. Just published in the Proceedings of the National Academy of Sciences (PNAS), the paper puts genetic tools into the hands of scientists and plant breeders to help accelerate their ability to adapt sorghum to new conditions.  The team behind the current PNAS publication – which also included researchers at Cornell University, the International Crops Research Institute for the Semi-Arid Tropics in India and Niger, the University of Illinois and the U.S. Department of Agriculture – used genotyping-by-sequencing (GBS) to determine the individual genetic makeup of 971 sorghum varieties taken from world-wide seed collections. The scientists identified more than a quarter million single-nucleotide polymorphisms (SNPs); that is, single letters in the genetic code where individual variants of sorghum can differ

    Human genes engineered into experimental GMO rice being grown in Kansas: Unless the rice you buy is certified organic, or comes specifically from a farm that tests its rice crops for genetically modified (GM) traits, you could be eating rice tainted with actual human genes. The only known GMO with inbred human traits in cultivation today, a GM rice product made by biotechnology company Ventria Bioscience is currently being grown on 3,200 acres in Junction City, Kansas -- and possibly elsewhere -- and most people have no idea about it.  Since about 2006, Ventria has been quietly cultivating rice that has been genetically modified (GM) with genes from the human liver for the purpose of taking the artificial proteins produced by this "Frankenrice" and using them in pharmaceuticals. With approval from the U.S. Department of Agriculture (USDA), Ventria has taken one of the most widely cultivated grain crops in the world today, and essentially turned it into a catalyst for producing new drugs.Expect Higher Food Prices in 2013 - A USDA economist says Americans will be paying more at the grocery store in 2013. "Inflation's going to pick up in 2013 over what we have seen in 2012. So we are looking ahead at a year of above normal food price inflation," says economist Ricky Volpe of USDA's Economic Research Service. Volpe says to expect food price inflation of 3% to 4% in 2013. He says the drought affecting two-thirds of the nation is partly to blame. "The major impact of the drought in the Midwest, higher corn prices leads to higher feed prices, leads to higher animal prices, and higher prices for all animal products," Volpe says. He adds that consumers will see especially higher prices for beef. "We are still faced with historically low inventory for cattle in the U.S.," Volpe says. "So we still have supply that's low relative to demand. We have strong inflation; that's not going anywhere, and the drought is only exacerbating that." Egg and dairy prices will also be higher as drought drives up feed costs.

    GM food: British public ‘should be persuaded of the benefits’ - The British public should be persuaded of the benefits of genetically modified food, the environment secretary will tell the UK's farming industry on Thursday, in a key signal of the government's intent to expand agricultural biotechnology and make the case for GM food in Europe. Owen Paterson, the Conservative secretary of state for the environment and who has chosen to highlight GM technology in his first major speech to farmers, will tell the Oxford Farming Conference: "We should not be afraid of making the case to the public about the potential benefits of GM beyond the food chain - for example, reducing the use of pesticides and inputs such as diesel. I believe that GM offers great opportunities but I also recognise that we owe a duty to the public to reassure them that it is a safe and beneficial innovation." He added: "As well as making the case at home, we also need to go through the rigorous processes that the EU has in place to ensure the safety of GM crops." His support will dismay many green campaigners who have argued against GM development or for tighter controls on it. However, some farmers would like to know more about the technology as it is being used extensively in other countries.

    Poland bans cultivation of GM maize, potatoes -  Poland on Wednesday imposed new bans on the cultivation of certain genetically modified strains of maize and potatoes, a day after an EU required green light for GM crops took effect. The centre-right government of Prime Minister Donald Tusk imposed farming bans on German BASF's Amflora strain of potato and US firm Monsanto's MON 810 maize or corn, according to a government statement Wednesday. The ban on specific strains essentially uses a legal loophole to circumvent the EU's acceptance of such products. Tusk had vowed to ban genetically modified (GM) crops in November on the heels of a Senate approval for the registration and sale of GM crops, which had been banned in Poland until then.

    Why did a Train Carrying Biofuel Cross the Border 24 Times and Never Unload? - A cargo train filled with biofuels crossed the border between the US and Canada 24 times between the 15th of June and the 28th of June 2010; not once did it unload its cargo, yet it still earned millions of dollars. CN Rail, the operator of the train, stated their innocence in the matter as they had only “received shipping directions from the customer, which, under law, it has an obligation to meet. CN discharged its obligations with respect to those movements in strict compliance with its obligations as a common carrier, and was compensated accordingly.” Even so, they still managed to earn C$2.6 million in shipping fees. The cargo of the train was owned by Bioversal Trading Inc., or its US partner Verdero, depending on what stage of the trip it was at. The companies “made several million dollars importing and exporting the fuel to exploit a loophole in a U.S. green energy program.” Each time the loaded train crossed the border the cargo earned its owner a certain amount of Renewable Identification Numbers (RINs), which were awarded by the US EPA to “promote and track production and importation of renewable fuels such as ethanol and biodiesel.” The RINs were supposed to be retired each time the shipment passed the border, but due to a glitch not all of them were. This enabled Bioversal to accumulate over 12 million RINs from the 24 trips, worth between 50 cents and $1 each, which they can then sell on to oil companies that haven’t met the EPA’s renewable fuel requirements.

    Food vs. Fuel in 2013 - In coming days, the Environmental Protection Agency’s to-do list will include setting a standard for the amount of advanced biofuels that refiners will be required to blend into gasoline and diesel supplies in 2013. The question is tricky because production in one category, cellulosic fuel from nonfood sources like corn cobs, stalks, wood chips and garbage, has not met the target set by Congress. . The quotas were laid out in 2007 when Congress established a renewable fuel standard. Under its targets, production of cellulosic fuel was supposed to hit one billion gallons next year, up from 500 million in 2012, 250 million in 2011 and 100 million in 2010. But so far output is near zero because no one seems to have hit on a commercially successful recipe. So far the E.P.A. has had little choice but to repeatedly waive nearly all of the cellulosic requirement, but this has led to bitter complaints from the refiners, who say they are still required to use small quantities of a fuel that does not exist or face fines. Even as the agency waived most of the cellulosic requirement, it kept intact a larger 2.75 billion-gallon quota for “advanced” biofuels in general, which includes cellulosic, ethanol made from Brazilian sugar cane and biodiesel made mostly from soybeans. Production of biodiesel or sugar-cane ethanol is favored because each process emits relatively little carbon dioxide, the predominant greenhouse gas, meaning it has an advantage on the global warming front.

    Insurers paid $40B for Sandy, drought - Natural disasters cost insurers $65 billion last year, with the United States accounting for nine-tenths of the bill and superstorm Sandy prompting payouts of $25 billion, a leading insurance company said yesterday. However, Munich Re AG said that the total insured losses worldwide were down from a record $119 billion in 2011, when devastating earthquakes in Japan and New Zealand cost the industry dearly. The company said total economic costs in 2012 from natural disasters worldwide — including uninsured losses — amounted to $160 billion, compared with the previous year’s $400 billion. Sandy, which battered Eastern coastline areas at the end of October, killed at least 125 people in the United States and 71 people in the Caribbean. New York, New Jersey and Connecticut were the hardest-hit U.S. states. Munich Re estimated insured losses from Sandy at $25 billion and total losses at $50 billion, though it cautioned that the figures are “still subject to considerable uncertainty.” That made it the year’s most costly disaster — but several other events in the U.S. meant that the country accounted for 90 percent of insured costs and 67 percent of overall losses, the company said. Over the past decade the well-insured U.S. on average accounted for 57 percent of insured losses and 32 percent of overall costs.

    Great Drought of 2012 continuing into 2013 - Rain and snow from the massive winter storm that swept across the nation over the past week put only a slight dent in the Great Drought of 2012, according to the latest U.S. Drought Monitor report. The area of Iowa in extreme or exceptional drought fell 9 percentage points to 32 percent, thanks to widespread precipitation amounts of 0.5" - 1.5". However, the area of the contiguous U.S. covered by moderate or greater drought remained virtually unchanged from the previous week, at 61.8%. According to NOAA's monthly State of the Drought report, the 61.8% of the U.S. covered by drought this week was also what we had during July, making the 2012 drought the greatest U.S. drought since the Dust Bowl year of 1939. (During December of 1939, 62.1% of the U.S. was in drought; the only year with more of the U.S. in drought was 1934.) The Great Drought of 2012 is about to become the Great Drought of 2012 - 2013, judging by the latest 15-day precipitation forecast from the GFS model. There is a much below-average chance of precipitation across the large majority of the drought region through the second week of January, and these dry conditions will potentially cause serious trouble for barge traffic on the Mississippi River by the second week of January. The river level at St. Louis is currently -3.6', which is the 9th lowest level of the past 100 years. The latest NOAA river level forecast calls for the river to fall below -5' by January 4. This would be one of the five lowest water levels on record for St. Louis. At this water level, the river's depth will fall to 9' at Thebes, Illinois, which is the threshold for closing the river to barge traffic. The Army Corps of Engineers is working to dredge the river to allow barge traffic to continue if the river falls below this level, but it is uncertain if this will be enough to make a difference, unless we get some significant January precipitation in the Upper Mississippi watershed. The river is predicted to set a new all-time low by January 13 (Figure 4.)

    Barge companies fear Mississippi River shutdown because of water levels -- As politicians and barge companies express fear of a shutdown or significant disruption, the U.S. Army Corps of Engineers is tackling one of two significant problems presented in the drought-stricken Mississippi River. The Corps, aware that barge traffic could be disrupted as early as next week because of sharply lower water levels, can't do anything about ice forming in northern portions of the river, impeding adequate water flow. But it is using contractors to remove rock formations in the river near Thebes, Illinois, to help maintain a 9-foot-deep channel for navigation, said St. Louis District spokesman Mike Petersen. Blasting, one of the removal measures, began December 21. The removal of 890 cubic yards of limestone will continue until the end of January, Petersen told CNN on Thursday. Dredging has been ongoing since early July.

    Water Fight: Drought, Farming, Fracking And The Midwest’s Tense Shipping Situation - Politicians across the Midwest are continuing to press the President to declare a state of emergency on the Mississippi River to allow barge traffic to keep flowing. Fresh on the heels of the worst drought in half a century, people whose livelihoods depend on the river were hoping to recoup some small profits later in the fall, but no such luck. Barges need at least 9 feet of channel to operate.  But even though the Coast Guard will make the call on whether the shipping channel in St. Louis will remain open, its ultimately the U.S. Army Corps of Engineers who controls the fate of river commerce. The Corps' decision to hold back water in reservoirs on the Missouri River is part of a set plan to conserve water for the spring shipping season and recreational use. But people downstream on the Mississippi need that water right now.  “We estimate that $7 billion in cargo will stop moving on the Mississippi River if a nine-foot channel cannot be maintained through the winter months,” Cutting the flow from dams in South Dakota will reduce water levels in St. Louis by 3 to 4 feet. Realizing that this might effectively kill shipping on the Mississippi over the near term, a group of Midwest politicians including Illinois Senator Dick Durbin are asking President Obama to declare an economic emergency and authorize the Army Corps to reopen the dams. But upstream states are saying, “not so fast.”  South Dakota, for example, is calling dibs on millions of gallons of water for use in the states oil-fracking boom.

    Mississippi River Could Close to Barge Traffic Within Days - Drought may cause traffic on the Mississippi River – which is used to transport everything from grain to petroleum to coal – to a halt as soon as this weekend. And the stoppage could last for months. The lack of precipitation throughout much of the country has brought about drought conditions that the National Climatic Data Center has called the worst since the 1950s. Water levels on the river are lowest in a 180-mile stretch between St. Louis and Cairo, Ill., sometimes referred to as the Middle Mississippi. That’s where the U.S. Army Corps of Engineers has been dredging to maintain a 9-foot channel to allow barges and boats to pass. Most vessels can’t travel in waters any shallower. According to the American Waterways Operators (a trade group representing the tugboat, towboat, and barge industry) and Waterways Council (a national public policy organization), a traffic stoppage could occur as soon as this weekend, halting a $180 billion transportation industry. The groups estimate that a disruption in the Mississippi River’s supply chain could affect more than 8,000 jobs, $54 million in wages and benefits, and 7.2 million tons of commodities worth $2.8 billion.

    Dust Bowl Wilting U.S. Wheat as Funds Turn Bearish - The worst U.S. drought since the 1930s Dust Bowl is damaging wheat crops across the world’s biggest supplier, at a time when hedge funds are the most bearish on prices in seven months.  About 61 percent of the country is mired in a dry spell that the government says will last at least until March in states growing the most winter wheat. With dormant crops already in the worst condition since records began in 1985 and global inventories headed for a third annual drop, Chicago futures may rise as much as 25 percent to $9.50 a bushel this year, the median of 32 analyst estimates compiled by Bloomberg shows. That raises the prospect of prices reversing their 20 percent drop since a July peak, a retreat that spurred hedge funds to start betting on more declines in December. The prolonged drought is increasing concern that supplies will tighten because there is also dry weather in Argentina and Australia. Heat waves in the Black Sea last year curbed cargoes until the next harvest and a lack of rain is slowing barge traffic on the Mississippi, which handles about 60 percent of U.S. grain exports.

    Extraordinary Snowfall Needed to Relieve Drought - Despite getting some big storms last month, much of the U.S. is still desperate for relief from the nation's longest dry spell in decades. And experts say it will take an absurd amount of snow to ease the woes of farmers and ranchers. The same fears haunt firefighters, water utilities and many communities across the country. Winter storms have dropped more than 15 inches of snow on parts of the Midwest and East in recent weeks. Climatologists say it would take at least 8 feet of snow — and likely far more — to return the soil to its pre-drought condition in time for spring planting. A foot of snow is roughly equal to an inch of water, depending on density. Many areas are begging for moisture after a summer that caused water levels to fall to near-record lows on lakes Michigan and Huron. The Mississippi River has declined so much that barge traffic south of St. Louis could soon come to a halt. Out West, firefighters worry that a lack of snow will leave forests and fields like tinder come spring, risking a repeat of the wildfires that burned some 9.2 million acres in 2012.

    Jakarta sinking as water supplies dry up - Experts in Indonesia are preparing to build a huge wall to stop the ocean from swamping parts of Jakarta. Some suburbs in the capital already go underwater when there is a big tide but the problem is expected to get even worse. Jakarta is sinking by up to 10 centimetres a year and Indonesia's national disaster centre says with oceans rising, large parts of the city, including the airport, will be inundated by 2030. Flooding and high tides are already causing problems for some residents in the city of 10 million people. In 2009 the council built a small sea wall, but the ocean still pushes its way up through the drains and into homes. But while some suburbs still go under and the roads are rivers, residents across town have the opposite problem. Juriah lives next to a new development, one of the many pushing skywards as Indonesia's economy booms, but the water supply to her suburb has disappeared. "Because the development project next door sucks up all the water, the water stopped since the project started - about three months ago. That's what caused it I think," she said

    Australia wildfires: Thousands stranded in Tasmania: Wildfires on the Australian island of Tasmania have stranded thousands of people and destroyed at least 100 homes. Much of Australia is experiencing a heatwave, and temperatures in the Tasmanian state capital Hobart earlier reached a record high of 41C. Some took shelter on beaches on the Tasman Peninsula, which remains cut off. A flotilla has brought in supplies and hundreds have been evacuated by sea. The BBC's Nick Bryant in Sydney says large swathes of south-east Australia are suffering from the worst fire conditions since the Black Saturday disaster almost four years ago, when 173 people in rural Victoria lost their lives. He says there has been a combination of a record-breaking heatwave, high winds and drought, with Tasmania by far the worst hit.

    Sydney to be spared worst of giant heat wave - A “quirk” of the weather combined with geography will spare residents of Sydney and regions along the NSW coast from the scorching temperatures searing much of the country. Sydney and centres such as Newcastle and Wollongong will barely reach 30 degrees over the next week while most other state capitals face days of blistering heat closer to 40 degrees or higher between now and Monday. National records, including the highest average temperature of 40.17 degrees hit on December 21, 1972, may tumble in coming days as the massive heatwave covers most of the continent. The all-time record of 50.7 degrees at Oodnadatta Airport in South Australia on January 2, 1960, may also be challenged.

    EPA Grants California Clean Air Act Waiver To Implement Clean Car Emissions Rules - The Environmental Protection Agency has granted California a Clean Air Act waiver allowing the state to set new standards to control emissions of various pollutants, including greenhouse gases, for passenger vehicles through 2025.  The waiver, announced in a Federal Register notice signed Dec. 27, allows California to implement its Advanced Clean Cars Program. The program includes regulations to phase in stricter fleet average standards for 2015-2025 model year cars and light-duty trucks to further reduce nitrogen oxide and hydrocarbon emissions, increase engine durability requirements from 120,000 miles to 150,000 miles, and impose new particulate emissions standards on gasoline-powered cars.  California's regulations also set new greenhouse gas emissions limits for 2017-2025 model year cars and light-duty trucks.  California set an emissions limit of 166 grams of carbon dioxide-equivalent per mile by 2025, comparable to the federal standards set by EPA. The rules rely on off-the-shelf technologies, including variable valve controls, direct injection, turbochargers, cylinder deactivation, engine stop-start, low-emitting refrigerants for air conditioning systems, and improvements in transmissions.

    Alaska's boreal forests undergoing transition - In almost every patch of boreal forest in Interior Alaska that Glenn Juday has studied since the 1980s, at least one quarter of the aspen, white spruce and birch trees are dead. "These are mature forest stands that were established 120 to 200 years ago," said Juday, a professor of forest ecology at the University of Alaska Fairbanks' School of Natural Resources and Agricultural Sciences. "Big holes have appeared in the stands." Juday presented his observations of boreal forest trees on remote and road-accessible plots along the Tanana River downstream of Fairbanks and in the White Mountains National Recreation Area. He also included results from tree-coring trips he and his colleagues performed down the Tanana, Yukon and Kuskokwim rivers.the Interior, Juday sees significant numbers of dead trees, which he attributes to higher air temperatures here since the mid-1970s. Along with less moisture available to trees, some of the warmer temperature events have triggered infestations of insects, like the aspen leaf miner, the larvae of which reduces the efficiency of leaves. Warmer temperatures have reduced other trees' ability to produce sap, which helps prevent insect attack. The result has been trees pushed to their limits.  

    Dark Snow Project crowd-source funding for Greenland ice sheet research - Wildfire, increasing with climate change [1, 2, 3], deposits increasing amounts of light-absorbing black carbon [soot] on the cryosphere [snow and ice], multiplying the existing heat-driven ice-reflectivity feedback [a.k.a. albedo feedback].  The relative importance of increasing wildfire [and changing industrial soot pollution] to cryospheric heating remains poorly known. Snow/ice cores down to the 2012 summer soot layer on Greenland input to new field and lab spectral and microscope technology in concert with satellite remote sensing, automatic weather station data, and numerical modeling, could be used to gauge fire's role in amplified Arctic climate change and Greenland ice sheet mass loss.  On the heels of an [open access] publication predicting 100% surface melting on Greenland months before actuality, we're now attempting to launch the first of its kind crowd-funding of an Arctic expedition to Greenland to measure the radiative impact of wildfire and industrial soot from the 2012 (and possibly 2013) fire seasons.

    Update of Greenland Ice Sheet Mass Loss: Exponential? by James Hansen and Makiko Sato -  Shepherd et al. (2012) provide an update of the mass loss by the Greenland ice sheet (and the Antarctic ice sheet). They compare several analysis methods, achieving a reasonably well-defined consensus. The data is 2-3 years more current than data we employed recently (Hansen & Sato, 2012), so a new look at the data seems warranted. A crucial question is how rapidly the Greenland (or Antarctic) ice sheet can disintegrate in response to global warming. Earth's history makes it clear that burning all fossil fuels would cause eventual sea level rise of tens of meters, thus practically wiping out thousands of cities located on global coast lines. However, there seems to be little political or public interest in what happens next century and beyond, so reports of the IPCC (Intergovernmental Panel on Climate Change) focus on sea level change by 2100, i.e., during the next 87 years. IPCC (2007) suggested a most likely sea level rise of a few tens of centimeters by 2100. Several subsequent papers suggest that sea level rise of ~1 meter is likely by 2100. In contrast, the future sea level rise of greatest concern is that from the Greenland and Antarctic ice sheets, which has the potential to reach many meters. Hansen (2005) argues that, if business-as-usual increase of greenhouse gases continue throughout this century, the climate forcing will be so large that non-linear ice sheet disintegration should be expected and multi-meter sea level rise not only possible but likely.

    "Changes in Arctic sea ice result in increasing light transmittance and absorption," - Arctic sea ice has declined and become thinner and younger (more seasonal) during the last decade. One consequence of this is that the surface energy budget of the Arctic Ocean is changing. While the role of surface albedo has been studied intensively, it is still widely unknown how much light penetrates through sea ice into the upper ocean, affecting sea-ice mass balance, ecosystems, and geochemical processes. Here we present the first large-scale under-ice light measurements, operating spectral radiometers on a remotely operated vehicle (ROV) under Arctic sea ice in summer. This data set is used to produce an Arctic-wide map of light distribution under summer sea ice. Our results show that transmittance through first-year ice (FYI, 0.11) was almost three times larger than through multi-year ice (MYI, 0.04), and that this is mostly caused by the larger melt-pond coverage of FYI (42 vs. 23%). Also energy absorption was 50% larger in FYI than in MYI. Thus, a continuation of the observed sea-ice changes will increase the amount of light penetrating into the Arctic Ocean, enhancing sea-ice melt and affecting sea-ice and upper-ocean ecosystems.

    Light Absorption Speeding Arctic Ice Melt -  The record-setting  disappearance of Arctic sea ice this fall was an indication to many climate scientists and ice experts that the pace of climate change was outstripping predictions. Now a new study published this week in the journal Geophysical Research Letters provides a look at a dynamic that may further accelerate the process: the rate at which the ocean underneath the ice absorbs sunlight. The bottom line of the study, which was done by four scientists, three at the Alfred Wegener Institute for Polar and Marine Research in Bremerhaven, Germany, and one from the department of aerospace engineering sciences at the University of Colorado, Boulder, is that the ocean under newly formed ice (“first-year ice” in the scientists’ terminology) absorbs 50 percent more solar energy than the ocean beneath older ice (“multiyear ice”). This means that the more the ice melts in late summer, the more first-year ice replaces multiyear ice, and the warmer the ocean beneath the ice becomes, accelerating the melting process. One sentence of the study says it all: “a continuation of the observed sea-ice changes will increase the amount of light penetrating into the Arctic Ocean, enhancing sea-ice melt and affecting sea-ice and upper-ocean ecosystems.”

    Economic wave may course through icy, but melting, Arctic - In a twist to the debate over global warming, melting Arctic sea ice is making it easier to transport the fossil fuels that produce the planet-warming gases, which appear to be causing it to thaw in the first place. As a result, a record number of tankers have gained access to an emerging shipping route, creating a potential industrial boon in the remote Arctic. The increasingly ice-free route runs from Europe to Asian markets through the Bering Strait, which divides Alaska and Russia. It can be 40 percent shorter than the southern alternative of shipping through the Suez Canal. Russian President Vladimir Putin has vowed to turn it into one of the world’s “key trade routes of international significance in scale,” as Russia moves to export Arctic oil and gas to China and other hungry economies in the Far East. The Russian leader predicted in 2011 that the route could rival the Suez Canal eventually. Arctic sea ice melted to a record low in September, according to the National Snow and Ice Data Center, when ice covered just 24 percent of the Arctic Ocean, compared with at least twice that amount three decades ago. Norway’s oil minister, Ola Borten Moe, said that if the melting trend continued, he foresaw a time when a range of cargo broader than the current petroleum products, iron ore and coal would be transported through the Arctic waters along the route. “That will not only be important for energy production, but also for all kinds of transportation of goods,” he said recently at the Brookings Institution, a research center in Washington. “This could change the dynamics between Europe and Asia"

    U.S. Credit Extension May Revive Stalled Wind Industry - The one-year extension of a U.S. tax credit for wind power includes modified terms that may revive an industry that’s expected to stall this year. The production tax credit was due to expire at the end of 2012 and the extension was part of yesterday’s passage of the bill to avert the so-called fiscal cliff that would have imposed income tax increases for most U.S. workers. Unlike past extensions, Congress is now allowing the credit to cover wind farms that begin construction in 2013, not just those that go into operation. Uncertainty last year over whether the policy would be renewed is a key reason the U.S. is expected to install 4,800 megawatts of turbines this year, down from an estimated 11,800 megawatts in 2012, Bloomberg New Energy Finance said in a November report.

    Why Japan's 'Fukushima 50' remain unknown - In fact there were never 50 of them. Hundreds of workers stayed at the plant, braving high levels of radiation to bring the reactors under control. Many are still there today. And yet almost nothing has been heard from them. No awards, no newspaper articles or TV interviews. We don't even know their names. It took us weeks to track one man down and persuade him to talk to us. Even then, he insisted we could not photograph him or use his name. We meet on a rainy day at a Tokyo park, far away from any crowds. The young man describes how he and a group of other nuclear workers were sent back in to the plant after the first reactor explosion. "The person who sent us back didn't give us any explanation," he says. "It felt like we were being sent on a death mission." I put it to him that what he and his colleagues did was heroic, that they should feel proud. He shakes his head, a slightly anguished look on his face. "Ever since the disaster, I haven't had a day when I felt good about myself," he says. "Even when I'm out with friends, it's impossible to feel happy. When people talk about Fukushima, I feel that I am responsible."

    Fusion Energy’s Dreamers, Hucksters, and Loons - Just a few weeks ago, a bunch of fusion scientists used South Korean money to begin designing a machine that nobody really thinks will be built and that probably wouldn't work if it were. This makes the machine only slightly more ludicrous than the one in France that may or may not eventually get built and, if and when it's finally finished, certainly won't do what it was initially meant to do. If you've guessed that the story of fusion energy can get a bit bizarre, you'd be right. For one thing, the history of fusion energy is filled with crazies, hucksters, and starry-eyed naifs chasing after dreams of solving the world's energy problems. One of the most famous of all, Martin Fleischmann, died last year.* Along with a colleague, Stanley Pons, Fleischmann thought that he had converted hydrogen into helium in a beaker in his laboratory, never mind that if he had been correct he would have released so much energy that he and his labmates would have been fricasseed by the radiation coming out of the device. Fleischmann wasn't the first—Ronald Richter, a German expat who managed to entangle himself in the palace intrigues of Juan Peron, beat Fleischmann by nearly four decades—and the latest schemer, Andrea Rossi, won't be the last.

    'Carbon pirate' acquires Amazon resources - Al Jazeera - Understanding the importance of preserving the land and resources ancient Amazon tribes have protected for so long, Angel Yaucate is going from one community to the next, alerting people of a looming threat: they could lose their land. Two years ago, Australian businessman David Nilsson arrived in the region offering tribal leaders succulent amounts of money in exchange for land rights. But Nilsson is known in Australia to be a carbon pirate. He seeks land for carbon rights to sell them in the international carbon credit market. And in Peru he found a treasure. In the Amazon jungle, 70 million hectares is home to one of the largest carbon dioxide reserves in the world - a valuable territory for countries looking to compensate for their excessive greenhouse gas emissions. In Peru, Nilsson targeted the Amazonian Yagua tribal communities, who have owned extensive territory and resources for centuries. The Yaguas live mainly on agriculture and fishing. They are among Peru’s poorest people. So when Nilsson offered for his company, Amazon Holding, to pay them millions of dollars, most of the Yagua leaders signed agreements. . The Yanayacu tribal leaders were the only ones who did not sign.

    Bipartisan Pair Of Senators Calls For Investigation Into U.S. Taxpayer Losses From Coal Exports - Senators Ron Wyden (D-OR) and Lisa Murkowski (R-AK) have called on Secretary of the Interior Ken Salazar to investigate if U.S. taxpayers are getting shortchanged by companies mining coal from public lands and exporting the resource to other countries. That’s according to a report from Reuters today. Senator Wyden is Chairman of the Senate’s Energy and Natural Resources Committee, and Senator Murkowski is the ranking member. Wyden and Murkowski said they were concerned that coal companies are not paying high enough royalties on coal mined on public lands. According to another Reuters article in December, companies are valuing coal at lower domestic prices rather than higher international prices so they “can dodge the larger royalty payout when mining federal land.” If any violations of the law have occurred, companies should be required to cure any gap in royalty payments and, if misconduct has occurred, civil penalties should be levied,” reads Wyden and Murkowsi’s letter. Approximately 43 percent of the coal produced in the U.S. comes from public lands managed by the government and owned by all Americans. Public lands are home to some of the richest coal deposits in the nation, mostly located in Wyoming and Montana’s Powder River Basin.

    Taqa signs $12bn coal plant deal with Turkey - The National: Abu Dhabi plans to develop coal-fired power plants across Turkey at a cost of up to US$12 billion (Dh44.08bn). The UAE and Turkey signed an agreement yesterday that will see the Abu Dhabi National Energy Company, known as Taqa, spearhead the massive project. Growing ties in the energy sector between the two countries could even see Abu Dhabi invest in Turkey’s budding nuclear programme, Turkey’s energy minister said. “We believe that the Turkish investment climate is right. We can only say that we will increase our investment in Turkey,” said Mohamed bin Dhaen Al Hamli, the UAE’s Energy Minister, who flew to Ankara to sign the agreement alongside his Turkish counterpart. Yesterday’s deal clears the way for Taqa, a company that is majority-owned by Abu Dhabi, to build and operate a power generation base totalling 7,000 megawatts, or about 10 per cent of Turkey’s electricity needs by the time the plants are completed.

    Europe’s dirty secret: The unwelcome renaissance - WHILE coal production and use plummet in America, in Europe “we have some kind of golden age of coal,” says Anne-Sophie Corbeau of the International Energy Agency. The amount of electricity generated from coal is rising at annualised rates of as much as 50% in some European countries. Since coal is by the far the most polluting source of electricity, with more greenhouse gas produced per kilowatt hour than any other fossil fuel, this is making a mockery of European environmental aspirations. How did it happen? As American utilities shifted into gas, American coal miners had to look for new markets. They were doing so at a time when slowing Chinese demand was pushing down world coal prices, which fell by a third between August 2011 and August 2012 and is below $100 a tonne. These prices make European utilities willing buyers. European purchases of American coal rose by a third in the first six months of 2012.Compared with the rock-bottom price of gas in America, coal is not all that cheap. But it is a bargain compared with the price of gas in Europe. Although gas can be carted around in liquid form, that is expensive and the infrastructure required is still patchy; for the most part, gas is shifted through pipelines, and tends to be used close to where it originates. So whereas coal has world-market prices, gas has regional prices, often linked in one way or another to the oil price. Many European gas contracts were negotiated years ago with the Russian gas giant, Gazprom, and despite a wave of renegotiations European gas prices have stayed high. In the summer of 2012 they were more than three times the American gas price and more expensive than coal. Gazprom has said it will cut prices—probably by around 10%—in 2013, but that may make little difference.

    Why does World Coal Consumption continue to Grow? - A primary reason why coal consumption is rising is because of increased international trade, starting when the World Trade Organization was formed in 1995, and greatly ramping up when China was added in December 2001. Figure 1 shows world fossil fuel extraction for the three fossil fuels. A person can see a sharp “bend” in the coal line, immediately after China was added to the World Trade Organization. China’s data also shows a sharp increase in coal use at that time. China and many other Asian countries had not previously industrialized. The advent of international trade gave them opportunities to make and sell goods below the cost of other countries. In order to do this, they needed fuel, however. The fuel the West had used when it industrialized was coal. Coal had many advantages for a newly industrialized countries: it often can be extracted without advanced technology; it is relatively cheap to extract; and it is often available locally. It can be used to make many of the basic items used by industrialized countries, including steel, concrete, and electricity.

    ‘Alarmingly High Methane Emissions’ from Natural Gas Extraction - New research on "alarmingly high methane emissions" brings further environmental scrutiny to natural gas extraction including fracking, and illustrates how the boom in the industry may well be a plan for climate disaster. The findings, led by researchers at the National Oceanic and Atmospheric Administration (NOAA), were presented at the American Geophysical Union (AGU) meeting in San Francisco, the journal Nature reports, and reiterated data the team first noted in February of 2012 that 4% of the methane produced at a field near Denver was escaping into the atmosphere. The team also presented preliminary findings from a Utah study that suggested an even higher rate of methane emissions—9% of the total production. NOAA describes methane as 25 times more potent of a greenhouse gas than CO2. "We were expecting to see high methane levels, but I don’t think anybody really comprehended the true magnitude of what we would see," . Jeff Tollefson explains in Nature that the percentage of methane leaked is key to determining whether switching to natural gas from coal-fired generators has a climate benefit; it must be less than 3.2% for that to be the case, he writes.

    NOAA Confirms High Methane Leakage Rate Up To 9% From Gas Fields, Gutting Climate Benefit - Researchers with the National Oceanic and Atmospheric Administration (NOAA) have reconfirmed earlier findings of high rates of methane leakage from natural gas fields. If these findings are replicated elsewhere, they would utterly vitiate the climate benefit of natural gas, even when used to switch off coal. Indeed, if the previous findings — of 4% methane leakage over a Colorado gas field — were a bombshell, then the new measurements reported by the journal Nature are thermonuclear: … the research team reported new Colorado data that support the earlier work, as well as preliminary results from a field study in the Uinta Basin of Utah suggesting even higher rates of methane leakage — an eye-popping 9% of the total production. That figure is nearly double the cumulative loss rates estimated from industry data — which are already higher in Utah than in Colorado. The Uinta Basin is of particular interest because fracking has increased there over the past decade. How much methane leaks during the entire lifecycle of unconventional gas has emerged as a key question in the fracking debate. Natural gas is mostly methane (CH4).  And methane is a far more potent greenhouse gas than (CO2), which is released when any hydrocarbon, like natural gas, is burned — 25 times more potent over a century and 72 to 100 times more potent over a 20-year period.

    US shale oil boom is fueling a huge boom for railroads, with oil shipments by rail doubling in just two years - According to the Association of American Railroads, shipments of oil by rail this year will top 540,000 carloads, which will be a 46% increase over last year’s count of about 370,000 carloads.  And the number of train cars carrying oil this year will be almost double the number of carloads in 2010. The Associated Press has a story today about how the U.S. oil boom has created a huge boom for U.S. railroads to transport the oil from oil fields in North Dakota and Montana to refineries around the country, here’s an excerpt: Energy companies behind the oil boom on the Northern Plains are increasingly turning to an industrial-age workhorse – the locomotive – to move their crude to refineries across the U.S., as plans for new pipelines stall and existing lines can’t keep up with demand. Union Pacific Railroad CEO Jack Koraleski said hauling oil out of places like North Dakota will be a long-term business for railroads because trains are faster than pipelines, reliable and offer a variety of destinations. Delivering oil thousands of miles by rail from the heartland to refineries on the East, West and Gulf coasts costs more, but it can mean increased profits – up to $10 or more a barrel – because of higher oil prices on the coasts. That works out to roughly $700,000 per train.

    Is Shale Oil Production from Bakken Headed for a Run with “The Red Queen”? - In this post I present the results from an in-depth time series analysis from wells producing crude oil (and small volumes of natural gas) from the Bakken - Bakken, Sanish, Three Forks and Bakken/Three Forks Pools - formation in North Dakota. The analysis uses actual production data from the North Dakota Industrial Commission as of July 2012 from what was found to be a representative selection of wells from operating companies and areas.  The reference in the title to the Red Queen from “Through the Looking-Glass” by the English author Lewis Carroll who was also a mathematician and logician, is deliberate to create associations with the Red Queen’s statement "It takes all the running you can do, to keep in the same place".  After presenting, discussing and concluding the results from the study presented in this post, the reference to the Red Queen was found to be an apt analogy to describe why technology and/or price cannot overcome the inevitable fact that field size and well productivity declines in most plays, whether in shale or any other plays. Put in a different way: shale plays do not get a pass on the laws of physics or the history of play and basin developments.The potential and technology for extraction (production) of shale/tight oil has been around for several decades.

    EPA allowing oil companies to inject drilling and fracking waste into aquifers below Northern Colorado - Energy companies are being allowed to pollute drinking water aquifers with oil and gas drilling and fracking waste in Northern Colorado and Denver. Over the past 13 years, the U.S. Environmental Protection Agency has exempted only the oil and gas industry from the federal Safe Drinking Water Act to allow the disposal of waste brine and hydrocarbon-containing fluids into drinking water aquifers deep underground. The injections are occurring east of Fort Collins in northern Weld County, including one directly beneath an animal sanctuary, a Coloradoan investigation shows. The law requires applicants for the exemptions to prove that aquifers can’t be used for drinking because the water is so deep underground that it’s too expensive or too impractical to ever be tapped. But Colorado water experts say you can never say never. State water planners say it’s possible — but extremely expensive — to reach that drinking water today, but they warn that they can’t discount the possibility the water will become scarce and valuable enough here that Colorado may one day need to look for it deep underground.

    New Fears Over Fracking Groundwater Contamination - It is found that high concentrations of salts, including those of radium and barium, are present in the flowback waters from late-end fracking operations, lending fears over potential groundwater contamination. The amounts of the various salts are greater than those in the water-mix used in the fracking operation, and their specific concentrations are consistent as having arisen from an underground aquifer that was set-down during the Paleozoic era.  Researchers at the University of Pennsylvania analysed samples taken principally from four different sources. These were brines recovered from 40 conventional oil and gas wells in the state; flowback waters from 22 Marcellus gas wells, collected by the Pennsylvania Bureau of Oil and Gas Management; two more samples of Marcellus flowback waters from a previous study; and similar waters from 8 horizontal wells taken by the Marcellus Shale Coalition. The results showed that the flowback waters contained a very high degree of salinity, which is inconsistent with the concentrations of salts contained in the waters used for the fracking operations. Rathermore, it appears that these additional elements stem from the Paleozoic era, which was the earliest of three geologic eras of the Phanerozoic eon, and lasted from around 541 - 252 million years B.P. The Paleozoic is subdivided into six geologic periods, which in decreasing order of age are: the Cambrian, Ordovician, Silurian, Devonian, Carboniferous and Permian. The Paleozoic was a period of dramatic geological, climatic, and evolutionary change, and it follows the Neoproterozoic Era of the Proterozoic Eon, and leads-on to the Mesozoic Era.

    Fracking Activities Enter Urban Areas - Fracking in many ways has been the saviour of the US. It has created a boom in natural gas production, and also allowed oil production to increase massively. As a result it is a fairly popular amongst the US population, especially those in areas which are benefitting the most such as Texas and North Dakota. However it will be interesting to see just how long that popularity lasts now that fracking activities are moving from remote countryside locations to urban areas, close to people’s homes. Some cities, even those in the heart of oil and gas country have moved to ban fracking within their limits. Tulsa, Oklahoma, (once the self-proclaimed oil capital of the world) has completely banned fracking within the city limits. Planning for the first ever natural gas well in the city of Dallas was blocked last week, and the town of Longmont, near Denver, is currently battling attempts to overturn its own fracking ban.  There are also some towns that have accepted fracking. Gardendale, a suburb in west Texas, has seen oil companies drill 51 wells over the last few year. Debbie Leverett, a local resident, said that, “you can hear it, you can smell it, and you are always breathing it. It's just like being behind a car exhaust.”

    Flooding Caused Pipeline Spills In 8 States In Past 2 Decades, Report Finds: — Pipeline spills caused by flooding and riverbed erosion dumped 2.4 million gallons of crude oil and other hazardous liquids into U.S. waterways over the past two decades, according to a new report from federal regulators. The Department of Transportation report to Congress was crafted in response to a 2011 spill into Montana's Yellowstone River. The spill highlighted concerns about federal pipeline rules that require lines to be buried just 4 feet below riverbeds – scant cover that can quickly be scoured away by floodwaters. The Associated Press obtained the report this week before its public release. Regulators found flood-related pipeline spills since 1993 in California, Texas, Iowa, Louisiana, Montana, Nebraska, South Dakota and Kentucky. Of the 2.4 million gallons of oil, gasoline, propane and other hazardous liquids released, less than 300,000 gallons was recovered. Although those accidents account for less than 1 percent of the total number of pipeline accidents, the consequences of a release in water can be much more severe because of the threats to drinking water supplies and the heightened potential for environmental damage.

    Cyberattack threat in Canada’s oil patch raises risk of disruptions, stolen data - Even as worries grow about foreign investors encroaching on the Canadian oil patch, other fears are mounting: Cyberattacks targeting Canada’s oil-and-gas industry and other major energy firms around the globe are occurring with disquieting frequency. Last March, three confidential ‘amber’ alerts were issued by the U.S. Department of Homeland Security warning of attacks against U.S. and Canadian natural gas pipeline companies. In September, Telvent Canada Ltd., a company that helps manage 60% of all oil and gas pipelines in the Western hemisphere, experienced a mysterious cyberattack that compromised its security systems and internal firewall. The industry is acknowledging potential problems. “Hacking groups of all sorts from different places attack the Canadian energy industry hoping to disrupt operations, steal intellectual property, commit fraud or steal services,” said Travis Davies, a spokesman for the Canadian Association of Petroleum Producers. “Most Canadian companies … are taking this threat seriously. Many have specialized security personnel. CAPP has a cyber security working group where member companies that have robust security programs can share best practices and non-competitive intelligence with others that may not.”

    U.S. Oil Imports in October Fell to Lowest Level Since 2000 - U.S. crude imports fell 9.2% in October from a year earlier to 8.091 million barrels a day, the lowest amount of imported crude since January 2000, according to U.S. Department of Energy data released today (see blue line in top chart above). The data are the latest illustration of how the drilling boom in North Dakota and other states is remaking the U.S. energy picture. The year-over-year drop of 816,000 barrels a day in crude imports was the eighth straight decline from year-earlier levels. The drop in crude imports came as domestic crude output rose 15.9%, or 935,000 barrels a day from year-earlier levels to 6.820 million barrels a day, EIA data show. That’s the highest since December 1993 (see red line in top chart).“The surge was led by North Dakota, which saw its output rise in October to 747,000 barrels a day from 729,000 barrels a day.

    North American Rotary Rig Counts The U.S. rotary rig count was down 11 rigs at 1,763 for the week of December 28, 2012. It is 244 rigs (12.2%) lower than last year.  The number of rotary rigs drilling for oil was down 13 at 1,327. There are 134 more rigs targeting oil than last year. Rigs drilling for oil represent 75.3 percent of all drilling activity. Rigs directed toward natural gas were up 2 at 431. The number of rigs currently drilling for gas is 378 lower than last year's level of 809. Year-over-year oil exploration in the U.S. is up 11.2 percent. Gas exploration is down 46.7 percent. The weekly average of crude oil spot prices is 9.7 percent lower than last year and natural gas spot prices are 9.8 percent higher than last year.  Canadian rig activity is down 180 at 204 for the week of December 28, 2012 and is 17 (7.7%) lower than last year's rig count. Canadian drilling falls rapidly in the spring to avoid environmental damage moving drilling equipment during the spring thaw and rainy season. With wide weather related seasonal swings, even year-over-year comparisons can lead to incorrect conclusions.

    The Political Implications of America’s Oil & Gas Boom – James Kwak Interview - As we begin a new year we wanted to take a look at the current energy landscape and see what the future holds for the global economy, America’s oil and gas boom, whether renewables will continue to be a favourite amongst investors and whether we should be focusing more attention on conservation and energy efficiency rather than our continuous effort to increase supply. In the interview James talks about:

    • The political implications of America’s oil & gas boom
    • How the shale boom will impact climate change
    • Why China may be forced to change its political system
    • An easy way to solve the debt crisis
    • Why we should expect a comeback from coal in the future
    • Why we must invest in renewable energy
    • Why cheap energy isn’t vital to economic growth
    • How Obama’s second term will alter the energy landscape
    • Why we need to focus on conservation
    • Why we shouldn’t take note of the doom and gloom predictions

    Rosy Forecast of Cheap Oil Abundance, Economic Boom a Myth - Headlines about this year's "World Energy Outlook" (WEO) from the International Energy Agency (IEA), released mid-November, would lead you to think we are literally swimming in oil. The report forecasts that the United States will outstrip Saudi Arabia as the world's largest oil producer by 2017, becoming "all but self-sufficient in net terms" in energy production - a notion reported almost verbatim by media agencies worldwide, from BBC News to Bloomberg. Going even further, Damien Carrington, head of environment at The Guardian, titled his blog: "IEA report reminds us peak oil idea has gone up in flames."On the one hand, it's true: There are more than enough fossil fuels in the ground to drive an accelerated rush to the most extreme scenarios of climate catastrophe. But while the new evidence roundly puts to rest the "doomer" scenarios advocated by staunch "peak oil" pessimists, the global energy predicament is far more complicated.

    Shale Oil Might Be Less Awesome Than We Think - How much new oil production can the United States get from shale formations like Bakken or Eagle Ford? The usual estimate is in the neighborhood of 3 million barrels per day by 2020, but I've read a few suggestions that this may be a considerable overestimate. The problem is that shale oil wells decline very rapidly, which means you have to drill a lot of wells to keep production at that level. James Hamilton recently attended a lecture by David Hughes of the Post Carbon Institute, and he passes along some hard numbers on this. According to Hughes, the average well declines about 70% in its first year and about 30% per year over the succeeding four years. In the case of Bakken, which is the biggest shale formation currently active, this means that it might well hit its expected production rate of 1 million barrels per day, but it will then decline very rapidly, down to almost nothing within a few years. The chart on the right shows just how fast the decline occurs. If this turns out to be accurate, and if it applies to other shale formations as well, the United States will never hit that 3 million barrel target. Declines in early fields will begin sooner than expected, and production from later fields will barely be able to keep up. By 2030 or so, shale oil might be played out completely. Shale oil is still likely to be important, but if Hughes is right, it might be less important than we think.

    How Accurate are Long-Term Government Oil Forecasts, Can we Trust them? - Looking back at forecasts made in the year 2000 by the U.S. EIA, the IEA, and the NIC, it becomes obvious that drawing an upward line on a chart does not make an oil forecast magically come true. All were considerably off the mark. ExxonMobil's oldest forecast available online dates back to 2006. It, too, has proved wide of the mark. First, let's see by how much each forecast missed. Reports issued in the year 2000 by the U.S. EIA and the IEA contained similar projections. The U.S. EIA forecast that total world liquid fuel supplies would reach 93.2 million barrels per day (mbpd) in 2010. The IEA forecast 95.8 mbpd. Though the NIC report did not provide an explicit forecast for 2010, the implied forecast was around 92 mbpd. All those numbers include not only crude oil and lease condensate which constitute the proper definition of oil, but also natural gas plant liquids (only a fraction of which can be substituted for oil) and refinery processing gain (which is the result of applying energy to break oil into its components, causing the final volume to expand). We can now check those numbers. Actual total worldwide liquid fuel production for 2010 was 87.1 mbpd. All three groups overestimated production by a considerable margin. This helps to explain the colossal miss on prices. The U.S. EIA report included a price projection for crude oil of about $28 a barrel for 2010 (adjusted for inflation). The actual average price for oil traded on the New York Mercantile Exchange in 2010 was $79.61. The 2000 IEA report forecast an inflation-adjusted price for oil in 2010 only 25 cents higher than the U.S. EIA forecast.

    Exxon Mobil moves ahead with $14-billion Hebron oil field off Newfoundland - Exxon Mobil Corp said on Friday it is moving forward with the next major offshore oil project in the North Atlantic, the $14-billion Hebron development off the Newfoundland coast, boosting its investments in Canada’s most oil-rich regions. Exxon Mobil, the U.S. oil major, said it will produce 150,000 barrels of oil a day at Hebron using a massive concrete gravity-base structure like the one employed at the Hibernia project, which has been operating in the iceberg-prone region since the late 1990s. First production is scheduled for 2017. The green light for Hebron, the fourth major offshore Newfoundland oil project, is a positive development for energy operations in harsh operating conditions in a week in which the industry came under intense fire for an accident in the Far North.

    Worsening oil bottleneck could cost Canada $1 trillion, shock government revenues (with video): Federal and provincial governments are reeling from the impact of the lack of pipelines and new markets for Alberta crude - an alarming dilemma that could cost Canada more than a trillion dollars in lost economic activity. With no quick fixes in sight, both the federal Conservatives and the Alberta Tories led by Alison Redford are now readjusting revenue projections and deferring plans to balance their respective budgets. Alberta's oilsands bitumen is selling at a $36-a-barrel discount because of a glut of oil in the United States and a lack of pipelines to get the Canadian product to the eastern and western coasts and down to the Gulf of Mexico. The Canadian Energy Research Institute (CERI) has estimated that if three major pipeline expansion projects don't get built, the country will forgo as much as $1.3 trillion of gross domestic product and $276 billion in taxes over the next two decades.

    Shell drill ship runs aground on island off Alaska - Royal Dutch Shell PLC's foray into Arctic offshore drilling has suffered a serious setback after one of its two Alaska drilling rigs ran aground in shallow water off a small island. Officials at a unified command center run by the Coast Guard, Shell, state responders and others said the Kulluk grounded Monday night on rocks off the southeast side of Sitkalidak Island, an uninhabited island in the Gulf of Alaska. The Kulluk was being towed by a 360-foot anchor handler, the Aiviq, and a tugboat, the Alert. The vessels were moving north along Kodiak Island, trying to escape the worst of a North Pacific storm that included winds near 70 mph and swells to 35 feet. Sitkalidak is on the southeast side of Kodiak Island.

    Breakaway Oil Rig, Filled With Fuel, Runs Aground - An enormous Shell Oil offshore drilling rig ran aground on an island in the Gulf of Alaska on Monday night after it broke free from tow ships in rough seas, officials said. Enlarge This Image Petty Officer 1St Class Sara Francis/United States Coast Guard, via Associated Press The Kulluk is one of two rigs that Shell has used to drill test wells off the North Slope of Alaska as part of the company’s ambitious and expensive effort to open Arctic waters to oil production. The rig, the Kulluk, which was used for test drilling in the Arctic last summer, is carrying about 139,000 gallons of diesel fuel and 12,000 gallons of lubricating oil and hydraulic fluid, the officials said. A Coast Guard helicopter flew over the rig after the grounding at 8:48 p.m. and “detected no visible sheen,” said Darci Sinclair, a spokeswoman for a unified command of officials from Shell, Alaskan state agencies and other groups that has been directing the response since the troubles with the rig began last Thursday. Ms. Sinclair said that more overflights were planned after daybreak on Tuesday, and that the unified command would be monitoring the fuel situation as it planned further actions. “The focus will be around salvage,” she said.

    Shell drill spill? - It all sounds so simple: Arctic sea ice is retreating, so let's get over there and start some off-shore drilling! Unfortunately the Arctic isn't a friendly place, not to humans and not to oil executives.  Commenter Lodger links to this ominous news article about the Kulluk, "a $290 million offshore oil rig operated as part of Shell’s Arctic drilling efforts in summer", that has washed up at Ocean Bay on Sitkalidak Island, close to Kodiak Island's southeast shores.  All of it is worth a read, but here's the most interesting bit: It's been a tumultuous several days for the Kulluk, which saw itself disconnected from the tug boats charged with moving the vessel from Alaska to the Lower 48 for the winter. For Shell, which has invested more than $4.5 billion to drill for oil and gas in Alaska’s Arctic, the latest troubles raise questions about how prepared the company -- as well as the Coast Guard -- are for problems in the far north.The Coast Guard's Alaska headquarters at Kodiak are located relatively nearby the grounded Kulluk, making response efforts easier than in the Arctic, where the agency has no base. That has some Alaskans wondering what would happen if similar troubles ever occur in the much more remote and hostile Arctic Ocean. "The implications of this very troubling incident are clear -- Shell and its contractors are no match for Alaska’s weather and sea conditions either during drilling operations or during transit,"

    Rig Grounding Revives Debate Over Shell’s Arctic Drilling - This week’s grounding of a rig off the coast of Alaska adds to a series of mishaps in Royal Dutch Shell Plc (RDSA)’s seven-year quest to tap the vast oil reserves of the Arctic and emboldened critics who say it can’t be done safely. The drill ship Kulluk broke free of a tow boat in a storm Dec. 31 and remained upright though stranded last night on the coast of Sitkalidak Island, about 60 miles (97 kilometers) southwest of the town of Kodiak. The crew was evacuated and there were no signs the vessel was leaking diesel or drilling chemicals it carried, according to the U.S. Coast Guard.The Kulluk’s grounding caps a series of episodes that have dogged Shell’s effort to tap Arctic oil. Environmental groups today said they would ask President Barack Obama to suspend all current and pending Arctic drilling permits until operators prove they can work safely in the region’s harsh conditions.

    Shell Kulluk Ship Investigation Called For By House Democrats: Calls for federal scrutiny of Royal Dutch Shell PLC drilling operations in Arctic waters swelled Thursday with a request for a formal investigation by members of Congress. The House Sustainable Energy and Environment Coalition called on the Interior Department and the Coast Guard to jointly investigate the New Year's Eve grounding of the Shell drilling vessel Kulluk on a remote Gulf of Alaska island, and a previous incident connected to Arctic offshore drilling operations in 2012. The coalition is made up of 45 House Democrats. "The recent grounding of Shell's Kulluk oil rig amplifies the risks of drilling in the Arctic," they said in a joint statement. "This is the latest in a series of alarming blunders, including the near-grounding of another of Shell's Arctic drilling rigs, the 47-year-old Noble Discoverer, in Dutch Harbor and the failure of its blowout containment dome, the Arctic Challenger, in lake-like conditions." The coalition believes these "serious incidents" warrant thorough investigation, the statement said.

    Cleaning House: Will Obama Go After the Big Boys? - The ban on BP (NYSE:BP) is only the tip of the iceberg. In the wake of oil spills, deaths, murky war contracts, sharing of government secrets and other lapses in ethics, Obama’s 2012 house-cleaning project will continue into the New Year. Cleaning up the messes of the past decade of contractual chaos in the US is a formidable task, and so far the Obama administration has slapped bans on more than 3,800 contractors in 2012—though the punishments aren’t exactly tough.   The most highlighted case is that of BP Plc (BP/), suspended last month from new federal contracts for an undefined period. Eleven people were killed in the 2010 Deepwater Horizon oil spill—the worst in US history and the company was accused by the Environmental Protection Agency (EPA) of demonstrating a “lack of business integrity”. BP will survive the punishment—which isn’t as stringent as it could be as it has no effect on existing contracts. But we may see a carve up of the company in the New Year, in the aftermath of a settlement it reached with the US Justice Department to pay $4.5 billion in return for an end to criminal charges and to cover securities claims as a result of the spill.  Why is this case getting the bulk of the media attention? Because the government doesn’t typically want to punish the big boys—especially big oil–so it’s a significant precedent that certainly has some other big players worried about what 2013 will bring.

    McKibben To Wall Street Journal: ‘Fossil-Fuel Companies Have Become Outlaws Against The Laws Of Physics’ - Bill McKibben has a letter responding to an error-riddled Wall Street Journal op-ed — though I guess that’s redundant. This one attacks clean energy and the fossil-fuel divestment effort McKibben supports. McKibben writes: Robert Bryce’s Dec. 17 op-ed (“Harvard Needs Remedial Energy Math“) attacking campus efforts to have universities divest themselves of holdings in fossil-fuel companies is interesting for what it omits: even the slightest attempt to rebut the mathematical logic that shows fossil-fuel companies have become outlaws against the laws of physics. Here are the numbers: In order to prevent the two-degree Celsius rise in temperature that even the most conservative governments on earth have committed to avoiding, scientists tell us we can burn enough coal and oil and gas to produce 565 gigatons of CO2. Unfortunately, the planet’s fossil-fuel companies, and the countries that operate like fossil-fuel companies (think Venezuela and Kuwait), have five times that much in their reserves. It’s what their share prices are based on; they obviously plan to burn it; indeed, they spend hundreds of millions of dollars daily looking for more. If their business plan is carried out, the planet tanks. Mr. Bryce is entirely correct that it will be hard to move away from fossil fuels, an enormous engineering challenge. But the Germans are demonstrating it can be done, and the most recent studies shows that we could rely on renewables for our power upwards of 99% of the time as early as 2030 if we got to work. Which we won’t, if the fossil-fuel industry continues to exert its massive financial muscle to block change. That’s why students in 189 campuses have so far risen up to demand divestment—this is the great moral challenge of our time, and maybe, given the stakes, of all time.

    Arctic energy rush runs into a reality check - Mark 2012 as the year the Arctic rush for oil and gas was put on ice. The harsh reality of finding – and the even more cumbersome process of extracting – petroleum from beneath a frozen ocean with little or no infrastructure nearby, coupled by the expensive price tag, have dented industry’s plans to exploit the polar region.Beefed-up technology designed for Arctic work has crumbled during testing. Exploration programs have been cancelled. Other seismic testing missions have come up empty. And some companies even swore off ever drilling for oil in the Arctic. “This year was a more sobering one,” In 2011, they started to make decisions to drill. This year, they started to assess the real costs.” Gazprom’s Prirazlomnaya platform, built with a massive concrete base, or caisson, to exploit oil found 60 kilometres off Russia’s northwestern coast in the Pechora Sea, was suppose to be the first project to actually exploit this newly-discovered potential, said Babenko. But the company has repeatedly postponed first production because Gazprom could not ensure the site’s safety, said Babenko. The Russian petroleum giant’s website says production was slated to begin in 2012 but there are no updates and no declarations that the platform is operating. The much bigger Shtokman natural gas field – set way out in the Barents Sea hundreds of kilometres from shore – has also fallen through for the time being. Despite years of preparation and partnership with other global oil giants, Gazprom iced the project due to costs, says an August Financial Times report on the company’s plans.

    Rosneft leads Russian oil output to new high (Reuters) - More crude from state-owned top producer Rosneft kept Russian oil output the highest in the world last year, ahead of Saudi Arabia, Energy Ministry data showed on Wednesday. Crude output edged up almost 1 percent to a new post-Soviet high of 10.37 million barrels per day (bpd), but the increase could halt this year due to depleted oil fields in West Siberia. Russia, whose proceeds from oil gas constitute around half of budget revenues, aims to keep its crude production at no less than 10 million bpd until 2020. The Kremlin has increased its share in the oil industry to over 50 percent after top oil producer Rosneft clinched an agreement to acquire Anglo-Russian TNK-BP for around $55 billion in a cash-and-stock deal. After the acquisition, expected to be completed in the first half of this year, Rosneft will become the world's largest listed oil producer with hydrocarbon output of some 4.6 million barrels of oil equivalent per day.

    OPEC Top Three Oil Producers - The above graph shows the oil production of Saudia Arabia (top panel) and Iran and Iraq (lower panel).    You can see the sanctions-induced deterioration in Iran's production, as well as the beginning of the rise in Iraqi production which I expect to go on in fits and starts for many years, assuming the country can remain politically stable.  Iraq has now surpassed Iran in production to become OPEC's second largest producer. In the meantime, Saudi Arabia, after reaching a new production high in mid 2012 has been slightly ramping back production in the last few months. In each case, the lines on the above graph are the averages of the available sources.  I posted the details on Iran the other day.  The Saudi graph is here: It's interesting that the rig count is hitting new highs suggesting that ongoing investment is new/replacement capacity is significant. The Iraqi graph is here:

    Middle East's steady evolution in energy could be undone in a flash - 2012 saw more of the unsteady unfolding of events already set in motion: Libya's shaky recovery from its successful uprising against Muammar Qaddafi, continuing growth in US oil and gas production, sharp tightening of sanctions on Iran, and rapid progress of solar power technology amid cut-throat competition. We can venture a guess at six things to watch for in Middle East energy in 2013: three that will happen, and three that are to be hoped for. Total petroleum production in the United States will jump ahead of Russia and come close to dethroning Saudi Arabia as the world leader. The juggernaut of shale oil and gas will roll on relentlessly, despite all the efforts of environmentalists, including Matt Damon in his anti-fracking film Promised Land. This surge, combined with growing production from Iraq, will put pressure on Saudi Arabia. The kingdom will have to cut back its record-high oil output in the second half of the year, or even earlier, to sustain prices around $100 per barrel - unless there is another major geopolitical upset.

    OPEC to Cut Crude Exports on Demand Trough, Oil Movements Says - The Organization of Petroleum Exporting Countries will cut crude shipments this month by 1 percent as demand tapers off after peaking for the northern hemisphere winter, according to tanker tracker Oil Movements. The group that supplies about 40 percent of the world’s oil will export 24.02 million barrels a day in the four weeks to Jan. 19, down 250,000 barrels from the previous period, the researcher said today in an e-mailed report. The figures exclude Angola and Ecuador. “The mid-winter trough is the end of the season for long- haul crude coming into the Atlantic basin,” Roy Mason, the company’s founder Mason said by phone from Halifax, England. The reduction may also signal that Saudi Arabia is trimming production to balance global supply and demand, he said. Brent crude traded at about $112 a barrel in London today, having gained 3.5 percent last year in its weakest performance since 2008. OPEC is pumping about 1.4 million barrels a day more than its official target of 30 million, data compiled by Bloomberg show. Middle East shipments will slide 1.3 percent to 17.68 million barrels a day in the period, compared with 17.91 million in the four weeks to Dec. 22, according to the report. That figure includes non-OPEC members Oman and Yemen.

    OPEC oil output falls in Dec, lowest in a year-survey - OPEC oil output fell in December to its lowest in more than a year as Iranian exports dipped again because of sanctions, top exporter Saudi Arabia cut output and supplies from Iraq eased, according to a Reuters survey. Crude supply from the Organization of the Petroleum Exporting Countries averaged 30.62 million barrels per day (bpd), down from a revised 30.71 million bpd in November, the survey of sources at oil companies, in OPEC and consultancies found. OPEC output is now down by 1.13 million bpd from its April 2012 peak of 31.75 million before the European Union implemented an oil embargo on Iran and as Saudi Arabia lifted output to bring prices down from a year-high $128 a barrel. The survey indicates Saudi Arabia trimmed output in the last two months of 2012 in response to lower demand, helping to bring OPEC supply the closest it has yet been to its 30 million bpd output target since it was set a year ago. With oil prices above Riyadh's preferred $100 a barrel but with expectations of slower demand in early 2013, OPEC left the target unchanged at a meeting last month, leaving the door open to informal supply tweaks depending on demand. "Saudi Arabia still holds the key for changes in OPEC output," said Carsten Fritsch, analyst at Commerzbank in Frankfurt. "Most of the others produce close to maximum." December's OPEC total is the lowest since November 2011 when the group also produced 30.62 million bpd, according to Reuters surveys. The biggest decline in supply came from Iraq, the world's fastest-growing exporter, due to technical and political setbacks. Supply declined to 3.05 million bpd from 3.20 million bpd in November, the survey found.

    Oman budget break-even oil price jumps in 2013 | Reuters: (Reuters) - Oman is banking on oil prices staying high this year to fund heavy spending on job creation and social welfare, according to plans released on Wednesday. Finance Minister Darwish al-Balushi told a news conference that Oman, whose revenues come mostly from oil and gas exports, would need an oil price of $104 per barrel in 2013 to balance its state budget. This 'break-even' oil price has been rising since scattered street protests over economic conditions and political issues in 2011 prompted aggressive government spending to head off potential social discontent. Balushi did not give last year's break-even price, but economists polled by Reuters estimated it at around $83, up from $66 in 2011. Brent crude oil was trading at $112 in global markets on Wednesday. "Last year we created 36,000 jobs for Omanis by spending 300 million rials ($780 million)," Balushi said. "This year we will create 56,000 jobs, of which 20,000 will be in the government sector." The International Monetary Fund estimates that unemployment among Omani citizens may have exceeded 20 percent in 2010. Government officials say that estimate is far too high and that the number of registered unemployed was reduced by three-quarters to about 17,000 last year, in a population of roughly 2 million Omani citizens.

    U.S. Allies Ignore Washington’s Iran Sanctions - Since the U.S. began its “global war on terror” in late 2001 in the wake of al Qaeda’s U.S. attacks, two of its most stalwart Muslim allies have been Turkey and Pakistan. Since then Turkey has provided the Pentagon access to its massive aerial facility in Incirlik, a crucial component in both Iraq and Afghanistan, along with providing troops to the NATO led and U.S. commanded International Assistance Security Force currently battling the Taliban in the latter. Pakistan has also provided crucial infrastructure logistical assistance to ISAF forces. But there are now policy divergences between Washington, Ankara and Islamabad over Iran’s civilian nuclear program, which both the U.S. and Israel maintain masks a covert program to develop nuclear weapons, a charge that Tehran strongly denies. Washington first imposed unilateral sanctions on Iran in 1979 and has more recently led efforts in the United Nations Security Council to impose increasingly stringent sanctions on Iran’s hydrocarbon industries and energy exports. But it is on the issue of Iranian natural gas imports that both Turkey and Pakistan have diverged from U.S. policy interests, not so much opposing sanctions as – simply ignoring them, putting the Obama administration in the uncomfortable position of ratcheting up pressure and alienating two crucial U.S. allies, more discreetly ignoring the actions, further weakening Washington’s attempts to play sanctions hardball with other nations, while complicating relations with U.S. ally Israel.

    Report: Iran orders evacuation of Isfahan, near nuke site - Iranian officials on Wednesday ordered residents of Isfahan to evacuate the city, the BBC reported, sparking renewed concern a nearby uranium enrichment site is leaking radioactive material. According to the report, the edict calls on Isfahan's one-and-a-half million people to leave the city “because pollution has now reached emergency levels.” Iranian officials previously denied that a leak occurred at the facility, and accused the West of fabricating the story in order to create “tumult” in the region.

    Bolivia takes over Spanish-owned energy suppliers - Bolivia has brought two Spanish-owned electricity supply companies under state control. President Evo Morales accused the subsidiaries of the Spanish company, Iberdrola, of overcharging consumers in rural areas. Mr Morales said rural households had been paying three times more for their electricity than people in urban areas. The left-wing president has previously nationalised oil, telecommunications and energy-generating companies. "We had to see that the quality of electricity service is uniform in rural as well as urban areas," Mr Morales said. He added that his decree was in line with the South American country's constitution, which says that the public interest is above private interests when it comes to the supply of energy.

    China PMI Surges To 19-Month High - US (And Chinese) Equities Sigh - There was a time when the US was the cleanest dirty shirt; it seems now, given the US equity futures' (total lack of) reaction to tonight's 19-month-high surge in the ever-trustworthy over-invested mal-allocated Chinese PMI that for once, all that matters is domestic issues. HSBC's China PMI surged to 51.5, its highest since May 2011 and the Shanghai Composite is even shrugging it off as new export orders fell slightly (but of course all that matters is the top-line); and not wanting to burst anyone's bubble but - a majority of survey respondents (nearly 85%) reported no change in the level of outstanding business, employment levels also remained broadly similar in December, with nearly 92% of panelists noting no change to workforce numbers. But apart from that, the drop in inventories (and jump in input prices) apparently was enough to jerk this idiotic barometer of whatever it is to something that purports to show the best manufacturing growth in 19 months. It seems clear that our Chinese 'friends' at the PBoC are telegraphing that we are on our own - there will be no easing from them in this environment - Trade accordingly...

    China Manufacturing PMI Shows Modest Growth; Don't Expect Bounce to Last - The HSBC China Manufacturing PMI™ shows modest growth this month. The index is at 51.5 with growth above 50. After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 51.5 in December, up from 50.5 in November, signalling a modest improvement of operating conditions in the Chinese manufacturing sector. Moreover, it was the highest index reading since May 2011.Input prices at manufacturing plants continued to increase in December, and for the third successive month. The rate of inflation eased slightly from November but remained marked overall. Average tariffs also increased during December, after remaining broadly similar in November. Output charges rose at an accelerated pace that, although modest, was the quickest in 14 months. Anecdotal evidence suggested that tariffs were raised in line with rising market demand and higher input costs. Purchasing activity rose at a marked rate in December, the fastest since March 2011. Exactly 17% of panellists reported increased input buying. Consequently, stocks of purchases also rose. Even though the pace of stock accumulation was only slight, it was the quickest in two years. Rises in input buying and stocks of purchases were generally associated with higher new order volumes.

    The Post-Productive Economy: Take a look at these farm houses which I saw under construction in remote areas of Yunnan province China. They were not unusual; farmsteads this size were everywhere in rural China. Note the scale of these massive buildings. Each support post is cut from a single huge tree. The massive earth walls are three stories high and taper toward the top. They are homes for a single extended family built in the traditional Tibetan farmhouse style. They are larger than most middle-class American homes. The extensive wood carvings inside and outside will be painted in garish colors, like this family room shown in a finished home. This area of Yunnan is consider one of the poorer areas in China, and the standard of living of the inhabitants here would be classified as "poor." Part of the reason is that these homes have no running water, no grid electricity, and no toilets. They don't even have outhouses. But the farmers and their children who live in these homes all have cell phones, and they have accounts on the Chinese versions of Twitter and Facebook, and recharge via solar panels

    New Chinese law requires children to visit elderly parents -- According to the BBC, China has now passed a law that will require adult children to visit their parents, failing which legal action can be taken against the children: “Reports suggest a growing number of elderly Chinese have been abandoned or neglected by their offspring. Chinese state media reported earlier this month that a woman in her nineties had been forced by her son to live in a pigsty for two years. Newspapers are full of such stories, or of tales of children trying to seize their parents’ assets, or of old people dying unnoticed in their homes.” According to the BBC, one-eighth of the Chinese population is over the age of 60, and most of them live alone. It is unclear how often visitations must be made under the new law.

    Chinese think tank: conflict inevitable between Japan, China over Senkakus - With the rise of China as Asia's leading economic power, a Chinese government think tank says the nation's conflict with Japan over the Senkaku Islands is inevitable at a time when its bilateral relations are changing as a consequence. The Chinese Academy of Social Sciences (CASS) also said in its annual report that the two countries’ relationship will enter into a highly unstable period. While thinking that the conflict over the islands could be prolonged, China is now paying attention to what action the new Japanese government, headed by Prime Minister Shinzo Abe, will take.The “report on the development of the Asia-Pacific region” points out that China’s rapid development is raising anxieties in surrounding nations, forcing them into taking precautions and requiring them to accept the “readjustment” of the power balance. As for the Senkaku Islands, the report explained that Japan’s right-wing groups, which have gained strength through the country’s two decades of a sluggish economy called “the lost 20 years,” regarded U.S. policy of “pivoting to Asia” as the best opportunity to nationalize the islands. In September, Japan purchased three of the five Senkaku Islands, called the Diaoyu Islands in China, from a private landowner.

    Should Japan "reflate"? - In Japan, the term "rifure" stands for "reflation" or "reinflation", meaning a (hypothetical) Big Push by montary policymakers to end the decades of deflation in that country. The question of whether Japan should "reflate" is the biggest question in Japanese macroeconomic policy circles. Now, I've gone on the record as a skeptic regarding the power of central banks to fine-tune the macroeconomy.  Also, I've cast doubt on the idea that Shinzo Abe, the current hero of the Japanese "reflationist" camp, is really committed to following through on the radical changes he's proposed. Still, I think that if Japanese politicians and policymakers were willing to try a big push for reflation, it would be a good idea. I explain why in an article (in Japanese) published on the Japanese econ blog site Agora. Here is an English translation of my main argument: [T]he gains [of an attempt at reflation] seem disproportionate to the risks. Reflation has the potential to help Japan solve three of its biggest problems at once: 1) the slow economy, 2) deflation, and 3) the huge national debt. Monetary easing will probably lower Japan’s unemployment a bit, and will also cause the yen to weaken, helping exporters. It will also erode the real value of the national debt, which at over 140% is the highest in the developed world.

    Japan Follow-Up, by Tim Duy:  Some follow up to last week's piece on Japanese monetary policy: First, I think there are some obvious implications for US policymakers: The Federal Reserve has all but given fiscal policymakers the green light to accelerate debt issuance to support stimulus efforts. Matthew O'Brien at the Atlantic points out that while the Fed is willing to tolerate inflation slightly as high as 2.5%, the Fed's forecast remains at 2.0% or below through 2015. So the Fed is willing to tolerate higher inflation, but not willing - or able - to generate higher inflation. The ball is thus passed to fiscal policymakers to do the job. Fiscal policymakers, however, have fumbled the ball. Badly. Austerity looks to be a done deal; it is only the level of austerity that is at issue.  Second, a thread is making the rounds claiming that Japanese Prime Minister Shinzo Abe is all bark, no bite. Joshua Wojnilower argues that Abe is a closet austerian, thus ultimately the actual stimulus enacted will be of the short-term, low-power variety. Noah Smith is less diplomatic, pointing out that Abe's first time at the helm was something of a disaster because Abe fundamentally has a narrow focus: Smith has a theory: So why is Abe making all this noise about revoking central bank independence, setting hard inflation targets, etc.? I have a hypothesis: He is talking down the yen.That said, if Abe wants a sustained depreciation, is is going to take something more than just talk. After all, look at what has been accomplished over the past ten years:

    The Japan Story Continues to Evolve, by Tim Duy: Evolving economic policy in Japan is an excellent distraction from the fiscal cliff story. From my perspective, the most interesting idea Abe floated was forcing the Bank of Japan to buy government debt to support additional fiscal stimulus. Noah Smith countered that Abe is unlikely to experiment with monetary policy and will simply fall back on a mercantilist policy. While I think it is too early to ignore the fiscal policy aspect, it is increasingly clear that Abe thinks the future of Japan is in its past. From Ambrose Evans-Pritchard:Premier Shenzo Abe is to spend up to one trillion yen (£7.1bn) buying plant in the electronics, equipment, and carbon fibre industries to force the pace of investment, according to Nikkei news. This on the back of: The disclosure came just a day after Mr Abe vowed to revive Japan's nuclear industry with a fresh generation of reactors, insisting that they would be "completely different" from the Fukishima Daiichi technology. I imagine that should advanced civilizations ever travel to the Earth, they would be amazed that we allow fission reactors on the surface of the planet. I am amazed after by this after the lessons of Chernobal and Fukishima. It sounds as if Japan is trying to go backwards in time to the 1980's. Especially when combined with an obvious intent to devalue the Yen for mercantilist reasons:He has set an implicit exchange range target of 90 yen to the dollar, instructing the Bank of Japan to drive down the yen with mass purchases of foreign bonds along lines pioneered by the Swiss. Finance minister Taro Aso brushed aside warnings that naked intervention would anger trade partners and damage Japan's strategic alliance with the US. "Foreign countries have no right to lecture us," he said, accusing the West of failing to abide by a G20 pledge in 2009 to forgo competitive devaluations.

    Japan Rebuke to G-20 Nations May Signal Moves to Weaken Yen -- Japanese purchases of foreign bonds to weaken the yen may become more likely as the nation rejects trading partners’ rights to criticize its currency policies. “Foreign countries have no right to lecture us,” Finance Minister Taro Aso told reporters at a briefing in Tokyo on Dec. 28. He said that the U.S. should have a stronger dollar and questioned whether major Group of 20 nations had stuck to pledges from 2009 to avoid competitive currency devaluations. Japan’s new Prime Minister Shinzo Abe may accept trade friction as a cost of spurring growth and countering deflation through a looser monetary policy and weaker yen. The currency is set to complete its biggest annual decline in seven years after Abe’s Liberal Democratic Party secured a landslide victory in this month’s lower-house election. During his campaign, Abe said foreign-bond purchases were a possible monetary tool. “The LDP wants to boost stock prices before the upper- house election in July next year, and the easiest option for them is to weaken the currency,” said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-biggest bank by market value. “The explicit policy to weaken the yen is likely to upset the U.S. and China.”

    Yen Touches 18-Month Low Against Euro on Abe’s Currency Policy - The yen and dollar weakened against higher-yielding currencies after U.S. lawmakers passed a bill undoing income-tax increases, helping avoid the so-called fiscal cliff and damping demand for refuge assets. The U.S. currency fell versus most of its major peers even as Republicans vowed to fight President Barack Obama for spending cuts in exchange for raising the debt ceiling. A gauge of volatility dropped the most since June. The Australian and New Zealand dollars rallied, while the yen slid beyond 87 per dollar for the first time since July 2010 after Japanese Prime Minister Shinzo Abe reiterated his goal to weaken the currency. “The move today is really all about the fiscal cliff,” Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview. “The reaction seems to be a very classic risk-positive move. It’s a bit of a relief rally now that we did happen to get a deal.”

    Japanese 30-Year Yield is Highest Since 2011.  - Thirty-year yields climbed to levels unseen since December 2011, tilting the so-called yield curve to the steepest level in 17 months. Japan’s newly installed Prime Minister Shinzo Abe said in a New Year’s statement that “bold” monetary policy is one of the three prongs of his economic measures.  The yield on the 30-year bond touched 1.995 percent, the most since Dec. 2, before trading at 1.99 percent as of 3:21 p.m. in Tokyo from 1.975 percent on Dec. 28, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker.  Japan’s Nikkei 225 (NKY) Stock Average jumped 2.8 percent after the Standard & Poor’s 500 Index in the U.S. on Jan. 2 reached its highest close since September. The yen touched 87.83 per dollar, the weakest since July 28, 2010, extending its longest series of weekly declines since 1989.

    Japan's Growing Sovereign Debt Time Bomb - Today's Tokyo has become a permanent mecca of consumption, its boroughs seemingly divided according to target markets. For years, the world's third-largest economy has been unapologetically living on borrowed cash, more so than any other country in the world. In recent decades, Japanese governments have piled up debts worth some €11 trillion ($14.6 trillion). This corresponds to 230 percent of annual gross domestic product, a debt level that is far higher than Greece's 165 percent. Such profligate spending has turned Japan into a ticking time bomb -- and an example that Europe can learn from as it seeks to tackle its own sovereign debt crisis. Japan, the postwar economic miracle, has never managed to recover from the stock market crash and real estate crisis that convulsed the country in the 1990s. The government had to bail out banks; insurance companies went bust. Since then, annual growth rates have often been paltry and tax revenues don't even cover half of government expenditures. Indeed, the country has gotten trapped in an inescapable spiral of deficit spending.

    Currency Manipulation, the US Economy, and the Global Economic Order: The United States must eliminate or at least sharply reduce its large trade deficit to accelerate growth and restore full employment. The way to do so, at no cost to the US budget, is to insist that other countries stop manipulating their currencies and permit the dollar to regain a competitive level. A US strategy to terminate currency manipulation, especially if undertaken together with some of the other countries that are adversely affected by the practice (including Australia, Canada, the euro area, Brazil, India, Mexico, and numerous developing countries), would be fully compatible with its international obligations. The proposed coalition should first seek voluntary agreement from the manipulators to sharply reduce or eliminate their intervention. If they do not do so, however, the United States should adopt four new policy measures against their currency activities: (1) undertake countervailing currency intervention (CCI) against countries with convertible currencies by buying amounts of their currencies equal to the amounts of dollars they are buying themselves, to neutralize the impact on exchange rates, (2) tax the earnings on, or restrict further purchases of, dollar assets acquired by intervening countries with inconvertible currencies (where CCI could therefore not be fully effective) to penalize them for building up these positions, (3) treat manipulated exchange rates as export subsidies for purposes of levying countervailing import duties, and (4) hopefully with other adversely affected countries, bring a case against the manipulators in the World Trade Organization that would authorize more wide-ranging trade retaliation.

    Egypt's central bank running dangerously low on foreign reserves - Egypt is learning the hard way that free elections by themselves do not produce a democratic state (see discussion). Nor do free elections necessarily translate into prosperity. With the new constitution in place and Muslim Brotherhood consolidating power, capital is flowing out of the country. The Egyptian pound (EGP) is under pressure as it hits new lows, while the central bank is spending foreign reserves to keep the pound from collapsing. It's becoming a losing battle. BBC: - Egypt is grappling with a crippling budget deficit and dwindling foreign reserves. The central bank has spent more than $20bn in foreign reserves to support the pound since a revolution against former President Hosni Mubarak in 2011. With hard currency reserves running tight, the central bank is now imposing currency controls.

    Egyptian pound hits record lows; banks running out of dollars - The Egyptian pound (EGP) came under further pressure again this morning (see earlier discussion), with the central bank no longer able or willing to maintain the previous currency peg.  BBC: - The Egyptian pound has fallen further against the US dollar, despite efforts by the country's financial authorities to halt its slide on the money markets.  The renewed decline came as the central bank held the second in a series of currency auctions.  It sold $74.8m at a cut-off price of 6.3050 Egyptian pounds to the dollar, less than the equivalent price of 6.2425 in Sunday's first auction. The auctions are aimed at rationing the availability of dollars, in a first step towards allowing the Egyptian pound to float freely.  As always the government is "not concerned" about this situation..

    What is actually going on in Iceland  - Since people continue to spread the factually dubious statement that Iceland “told creditors &amp; IMF to go jump, nationalised banks, arrested the fraudsters, gave debt relief and is now growing very strongly, thanks” I find I have to write this here thing.

    • 1. Iceland told IMF to go jump, go away, left the IMF program etc. No it didn’t. Just look at the IMF’s country overview page for Iceland and read the reports. Even a cursory look should tell you that Iceland didn’t throw the IMF out of the country and that the IMF’s praise for Iceland and our government is effusive and that Iceland followed the IMF’s advice to a tee. There are other details there, if you read through the archives, that are interesting, such as the fact that in several cases, especially when it came to the banks, Iceland actually went further along the libertarian axis than the IMF recommended.
    • 2. Iceland told the creditors to go jump.Yes and no. Iceland didn’t bail out the collapsed banks, but that wasn’t for the want of trying. If you read through the Report of the Special Investigation Commission you’d find out that the Icelandic government tried everything it could to save the banks, including asking for insane loans to pay off the banks’ debts. The report:

    Three Jobs Not to Defer in 2013 - IMF Blog - With the New Year, we all hope to put the global financial crisis behind us. We also need to do more to secure our future. Beyond our current economic and financial problems, there are long-term issues that we all know about, but that get too little attention in an era when policymakers are so fully engaged in slogging away at more immediate problems. Unfortunately, long-term issues unaddressed today will become crises tomorrow. So we had better lengthen our focus, see what looms on the horizon, and do more to steer the global economy in a better direction. Policymakers around the world have been hard at work mending their economies. In the coming year, they will need to carry on supporting growth while correcting imbalances by:

    • providing accommodative monetary policy;
    • striking a balance on fiscal adjustment—tightening where possible but taking care to support short-term growth;
    • completing banking sector cleanup and making financial systems safer;
    • implementing reforms to boost productivity and growth potential.

    A rebalancing of global demand toward dynamic markets, including emerging economies, should also help complement all of these efforts. These are the core issues of the day and we will all focus on them. But we must also put several long-term issues onto our action agenda

    IMF Details Errors in Calling for Austerity - The International Monetary Fund is revising its metrics on how fast governments should cut their budgets, with the IMF’s top economist making the case that Europe’s fiscal diets were too severe. In a new paper published Thursday, IMF Economic Counsellor Olivier Blanchard and research-department economist Daniel Leigh show the IMF recommended slashing budgets too fast early in the euro crisis, starving many economies of much-needed growth. In “Growth Forecast Errors and Fiscal Multipliers,” Messrs. Blanchard and Leigh calculate IMF and European economists underestimated the euro-for-euro effect of cutting government budgets. While economists expected that cutting a euro from the budget would cost around 50 cents in lost growth, the actual impact was more like 1.50 per euro.

    IMF Admits More Mistakes - I’ve commented numerous times over the the last 3 years that I considered the IMF’s position on Europe dangerously misguided as I felt it was based more on ideology than evidential analysis (see more here). I have posted on a near-daily basis over the last 2 years on the slow downfall of the euro-zone under what I considered to be a policy framework that was doing more harm than good due, in part, to the fact that it underestimated the feedback from on-going government sector austerity in an environment of private sector balance-sheet retrenchment. (See more here) Since Christine Lagarde took over as the head of the IMF I have noted a quite a few times that the organisation was slowly steering itself away from it’s previous position of “expansionary fiscal consolidation” and appeared to be finally taking notice of its own research that demonstrated its errors. Of note in recent weeks is that the IMF has been offering new guidance to the Eurozone which is in-line with my previous prediction.  The International Monetary Fund and European Commission officials have encouraged France and its eurozone partners not to fixate on deficit reduction targets if it would exacerbate the bloc’s debt crisis. The head of an IMF mission in France, Edward Gardner, urged officials in Paris last week to consider their 2013 budget targets “in a broader European context.” The IMF and the EU Commission expect the French public deficit to amount to 3.5 percent of gross domestic product (GDP) next year. They do not believe France can reach its 3.0 percent goal, the eurozone limit, without additional measures that could aggravate an already tenuous economic situation.

    Negative rates on deposits would force Eurozone core banks to repay their LTRO funding - There is concern among some Eurozone banks that the ECB may push the deposit rates on excess reserves into negative territory next year. In fact the 12-month EUR OIS rate (the so-called EONIA swap rate), which is the market expectation of where the overnight rates will be next year, briefly dipped below zero recently.If that were to happen, banks would in effect be penalized for holding excess reserves at the ECB. Such action would force those who are able (more likely the core banks) to pay down their borrowings from the ECB (otherwise they are paying 1% for the LTRO funding and then paying again for depositing the cash at the ECB). JPMorgan: - Core banks are more susceptible to negative deposit rates. The first response by core banks would be to repay back most of the extra funds they borrowed via the 3y LTROs, which they can do from January 30th. We previously argued that core banks could repay €100bn of 3y LTRO funds as yield compression makes carry trades less attractive. But an ECB deposit rate cut to -25bp could induce them to pay back perhaps all of the €140bn they borrowed on net via the 3y LTROs.

    Monti to face two key challenges in his bid for re-election - Mario Monti's decision to run in the next Italian election is a positive development for the future of Italy and the stability of the Eurozone. At this stage the last thing the global economy needs is the return to fears of the euro area breakup, particularly if it's driven by Italy. Those who profess that Italy should consider exiting the union simply don't comprehend the impact such an event would have on the global financial system. And Monti has been instrumental in bringing credibility to Italy's commitment to stay in the union. Bloomberg: - Italian Prime Minister Mario Monti said he will lead a coalition of centrist political parties that support his agenda of fiscal rigor and pro-European policies in February elections, marking a de-facto bid for a second term. However Mario Monti will face two key challenges in his attempt to remain Italy's prime minister.
    1. Italy's consumer recession is worse than it was in 2008. There is no question that a portion of the voters will blame it on Monti's policies, which were inevitable in order for the Italian government to remain solvent. Italy in effect has undergone its version of the "fiscal cliff".
    2. Berlusconi will continue to undermine Monti's efforts. He will level accusations and spread rumors in order to vilify the current prime minister. His recent approach is to label Monti as a "leftist" (even though Italy's business community generally supports Monti).

    Another year in thrall to the central bankers - Many year-end reviews of market behaviour in 2012 have rightly argued that the role of the central banks has once again proven critical, trumping all other factors, including the state of the global economic cycle. In fact, two brief statements by ECB President Mario Draghi have been the decisive events in the global financial system this year.The first, which actually took place in the early hours of a eurozone summit on 9 December 2011, was Mr Draghi’s favourable assessment of the latest political moves towards fiscal union. This unleashed the ECB’s Long Term Refinancing Operations in the first half of the year. The second, on 26 July 2012, came when Mr Draghi said that the ECB would do “whatever it takes” to keep the single currency intact. This led to the launching of the Outright Monetary Transactions programme in September. Although still unused, the mere possibility of unlimited ECB bond buying in Spain and Italy via the OMT was enough to produce a powerful rally in global risk appetite, despite mounting concerns about the US fiscal cliff.

    Draghi’s Liquidity Bluff Will Be Called - Mario Draghi’s pledge to do “whatever it takes” to save the euro has been widely hailed as a watershed event. Both the markets and euro politics have since been operating on the premise that the euro’s survival is ensured. Unfortunately, that is not a safe assumption at all. Not only because even agreement on the Single Supervisory Mechanism, the easiest element in any banking union-to-be, proved to be anything but easy. But even more so since concentrating energies on preventing future crises is somewhat premature anyway, as long as the current one remains largely unresolved. The point is that the policy strategy that has been adopted for overcoming the crisis, with or without any ECB liquidity promise in support of government bonds (i.e. Outright Monetary Transactions), is doomed to fail. The underlying causes of the crisis have been thoroughly misdiagnosed, and the medication ill-conceived as a result, while reforms of the flawed euro policy regime are so ill-designed as to ensure the euro’s final demise.

    French Council Strikes Down 75% Tax Rate -- France’s Constitutional Council on Saturday struck down the Socialist government’s plan to impose a 75 percent marginal income tax rate on the wealthy, a measure that figured prominently among the campaign promises of President François Hollande and that had become a divisive emblem of his approach to cutting the budget deficit.  Prime Minister Jean-Marc Ayrault quickly pledged that the government would reintroduce a revised version of the tax for next year to address the criticisms of the Constitutional Council, which ruled that the measure did not tax affected households equally.  The 75 percent rate was always a symbolic political gesture, as Mr. Hollande himself has acknowledged. Tax revenues from the measure would have reached just a few hundred million dollars, little more than a bucket of water in France’s deficit sea; the budget deficit is about $112 billion this year.  The council ruled that the tax was unfair because it would have applied unevenly to different households with the same combined income. A couple making a combined 1.5 million euros a year, for instance, would be exempt from the tax so long as both partners earned less than 1 million euros individually. If one partner earned more than 1 million euros, however, the couple would have been required to pay the 75 percent rate on their combined earnings of more than 1 million.

    French Court Says 75% Tax Rate on Rich Is Unconstitutional - President Francois Hollande’s 75 percent millionaire-tax is unconstitutional because it fails to guarantee taxpayer equality, France’s top court ruled today. The tax, one of Hollande’s campaign promises, had become a focal point of discontent among entrepreneurs and other wealth creators, some of whom have quit French shores as a result. The ruling comes as the president seeks to cut France’s public deficit to 3 percent of gross domestic product next year from a projected 4.5 percent this year.“In deficit terms, it’s truly negligible.” The court said Hollande’s plan would have added extra levies of 18 percent on individuals’ incomes of more than 1 million euros ($1.32 million), while regular income taxes and a 4 percent exceptional contribution for high earners would have been based on household income, an e-mailed statement shows. As a result, two households with the same total revenue could end up paying different rates depending on how earnings are divided among members of those households. That runs counter to a rule of equal tax treatment, the Paris-based court said

    France vows to maintain tax hit on rich - France’s Socialist government has vowed to continue squeezing the rich, despite the rejection of its controversial 75 per cent tax rate by the country’s constitutional council. President François Hollande was forced to axe his 2013 budget proposal to impose the high marginal rate on incomes above €1m when the council struck it down on Saturday.-- "A fiscal earthquake", "armed robbery", "tax napalm". Descriptions of the income tax increases facing Portuguese families from January 1 make the fiscal cliff looming in the US sound tame by comparison. But Pierre Moscovici, finance minister, said the 75 per cent rate was an important element in what he called the government’s policy of social justice. He insisted the council ruling was a technical, not fundamental, objection and promised to introduce a revamped proposal in the New Year. “Our objective is to maintain an exceptional, temporary tax for the most rich,” he told the Financial Times. He “respected” criticism of the government’s tax policy, including from abroad, but it had been exaggerated, he said. “France remains an attractive country for investment. We have no intention to make France inhospitable, but we are in a period of crisis.”

    Portugal set for major tax rises as 2013 budget hits -- Portugal's president has signed into law a controversial 2013 budget imposing big tax increases. The budget takes effect on Tuesday, but correspondents say it may yet be challenged in the constitutional court. For most Portuguese workers the tax rises are equivalent to more than a month's wages. The standard income tax rate is rising from 24.5% to 28.5%. The savings are Portugal's toughest in living memory, aimed at meeting the terms of a 78bn-euro (£64bn) bailout. Although President Anibal Cavaco Silva signed the budget there is speculation that he may ask the constitutional court judges to check its legality. Earlier Portugal's Finance Minister, Vitor Gaspar, admitted the tax rises were "enormous", but were "another determined step toward recovery". There have been big street protests against the cuts and on 14 November there was a general strike by angry workers hit by economic hardship.

    Portugal braced for ‘fiscal earthquake’ -- "A fiscal earthquake", "armed robbery", "tax napalm". Descriptions of the income tax increases facing Portuguese families from January 1 make the fiscal cliff looming in the US sound tame by comparison. Lisbon plans to lift income tax revenue by more than 30 per cent, raising the effective average rate by more than a third from 9.8 to 13.2 per cent. Anyone receiving more than the minimum wage of €485 a month, including pensioners, will also pay an extraordinary tax of 3.5 per cent on their income. The increases, which the centre-right government has itself described as "enormous", are designed to ensure Lisbon meets deficit-reduction targets agreed with international lenders as part of a €78bn bailout. But the scale of the tax rises and uncertainties over whether they will produce the desired results have exposed Pedro Passos Coelho, the prime minister, to stinging criticism from both left-wing political opponents and senior figures close to the governing coalition parties. Read more: Eurozone still has mountain to climb "This is a kind of armed robbery of the taxpayer. It will not just penalise the middle class, it will kill them off,"

    Portugal’s austerity budget sent to court to ‘assess its fairness’ - Portugal's president Aníbal Cavaco Silva said that he will send Budget 2013 to the Constitutional Court, after the austerity budget was deemed controversial. The Portuguese president himself said that the budget didn't treat citizens fairly, and hit some of them worse than others. Addressing the nation on television, Cavaco Silva admitted that tax hikes and a reduction in social services would affect everyone, but some more than others. "This situation raises questions about the just and equal share of the burden," he said. The tax rises for most workers are equivalent to a month's wages.

    Portugal warns EU-IMF troika to back off on austerity demands  - Portugal's president has ordered a legal inquiry into the country’s austerity policies and threatened a showdown with creditors over the draconian terms of its EU-IMF bail-out. President Anibal Cavaco Silva called for urgent action to halt the “recessionary spiral”, warning Europe’s leaders that the current course had become “socially unsustainable”.  In a speech to the nation, he said Portugal would “honour its international obligations”, but in the same breath called for a tough line with the European Union-International Monetary Fund Troika over the pace of fiscal tightening under Portugal’s €78bn (£63bn) loan package. “We have arguments, and we should use them firmly,” he said.  “Fiscal austerity is leading to declining output and lower tax revenue. We must stop this vicious circle,” he said, cautioning the Troika that there would be no way out of the crisis until policy was set in the interests of the “Portuguese people” as well as foreign creditors.  His sombre speech was a reminder that Europe’s crisis is far from over.  Portugal’s jobless rate has risen from 13.7pc to 16.3pc over the past year, reaching 39pc for youth, even before the full impact of austerity hits.

    Euros discarded as impoverished Greeks resort to bartering - Angeliki Ioanitou has sold a decent quantity of olive oil and soap, while her friend Maria has done good business with her fresh pies. But not a single euro has changed hands – none of the customers on this drizzly Saturday morning has bothered carrying money at all. For many, browsing through the racks of second-hand clothes, electrical appliances and homemade jams, the need to survive means money has been usurped. "It's all about exchange and solidarity, helping one another out in these very hard times," enthused Ioanitou, her hair tucked under a floppy felt cap. "You could say a lot of us have dreams of a utopia without the euro." In this bustling port city at the foot of Mount Pelion, in the heart of Greece's most fertile plain, locals have come up with a novel way of dealing with austerity – adopting their own alternative currency, known as the Tem. As the country struggles with its worst crisis in modern times, with Greeks losing up to 40% of their disposable income as a result of policies imposed in exchange for international aid, the system has been a huge success. Organisers say some 1,300 people have signed up to the informal bartering network.

    Troika Says 80% Greek Debt Uncollectible - Because of austerity measures and even as it’s pressing Greece’s coalition government to go after tax evaders who owe more than $70 billion, the country’s international lenders have admitted that 80 percent of the country’s debt can’t be collected for a number of reasons, leaving it to workers to pay the freight. The inefficiency of Greece’s tax collection mechanism combined with the inability of people to pay because of repeated pay cuts, tax hikes and slashed pensions resulted in 12 billion euros ($15.89 billion) in uncollected debts in the first 11 months of 2012, up up 1 billion euros ($1.32 billion) over the same period in the previous year. It’s likely to get worse instead of better as new pay cuts, tax hikes and slashed pensions kicked in on Jan. 1 and with a $17.45 billion spending cut and tax hike budget plan approved for 2013-14 as tax evaders continue to skate free. Finance Ministry data shows that the combined total of both old and new debts to the state now stands at 55.5 billion euros ($73.41 billion) and much of it may not be collected. The ministry found that 1.13 million periodic statements for Value-Added Tax (VAT) for the first 11 months of 2012 have not been submitted by enterprises and the self-employed, which means that they have withheld the VAT received from customers for sales made or services provided and not paid it to the government.

    Greeks fight back against corruption - Ordinary Greeks are finding ways of fighting back against endemic levels of corruption in their country, with a number of websites now allowing people to report cases of bribery. Kristina Tremonti's first brush with "fakelaki" came when her grandfather needed urgent treatment at a public hospital in Kalamata, southern Greece. Treatment is supposed to be free. Fakelaki is the Greek term which means "little envelope", but has come to describe a wide range of bribery. It is pronounced "fakk-el-akee". "He's actually a war veteran and he was diagnosed with terminal prostate cancer," she said. "One night he had incessant bleeding and we had to rush him to hospital. We were faced with absolute negligence. Nobody gave us the time of day - they were very disrespectful and basically ignored my grandfather." "We sort of picked up the cue that they were expecting a bribe, so as soon as my mother reached into her purse and gave them the amount - which I believe now was 300 euros (£240; $395) - he was submitted to the operating room within an hour."

    Merkel warns Germans of tough economic times ahead - Chancellor Angela Merkel has warned that the German economic climate in 2013 will be "even more difficult". In her new year message, she also cautioned that the eurozone debt crisis was far from over. However, she did say that reforms designed to address the roots of the problem were beginning to bear fruit. Her comments appeared to contradict German Finance Minister Wolfgang Schaeuble who said last week that the worst of the crisis was over. In a taped interview to be broadcast later on Monday, Mrs Merkel urged Germans to be more patient. "I know that many people are naturally concerned going into the new year," she said. "The economic environment will not in fact be easier but rather more difficult next year. But we shouldn't let that get us down; rather it should spur us on."

    Germany’s Downward Trend - THE newspaper headline said: “German Economy to Become a Midget.” But the accompanying article in Die Welt was not without substance. It reported on a survey by the Organization for Economic Cooperation and Development which projects German growth falling to an average of 1.1 percent over the period from 2011 to 2060 [pdf]. That’s at the bottom of a sample pile of the world’s critical industrial and emerging economies, about half the rate of the United States’ or Britain’s expansion, behind France, Italy and even Greece, and left in the dust by India, China, Indonesia and Mexico.  Still, starting now, the O.E.C.D. considers that the German economy will trend downward over a half century at levels increasingly under 1.5 percent growth, which, while not total stagnation, means little more than marking time. Germany in 2013 is also a country whose banks are in notoriously risky condition; whose population is expected to lose 17 million inhabitants by 2060; and whose domestic automobile industry is reported to have produced 500,000 fewer cars in 2012 than the previous year.   In the short term, the Bundesbank asserts real G.D.P. growth will top out at 0.7 percent in 2012 and 0.4 percent in 2013. Not good. After a return to levels of around 1.5 percent, the O.E.C.D. said in another assessment that, without significant reform programs, Germany’s rate of expansion would dip under 1 percent from 2020.

    Squeezed Out: Rocketing Rents Become Election Issue in Germany - The exploding costs and dwindling supply of urban housing are slowly pushing Germans of average means out of the cities. As September's national election approaches, politicians are jockeying to find viable solutions to a problem they helped create. The fight against what has been dubbed "rent shock" is forcing its way onto the political agenda. Germany will hold national parliamentary elections in September 2013, and no party wants to be accused of not taking voters' concerns about housing seriously. About half of German voters rent their houses or apartments. And even those who own their homes have often heard stories from family members or friends about skyrocketing costs, brazen brokers and overpriced hovels. 

    60% of Spanish Companies are Losing Money, Social Unrest Evident; Unemployment Rate Drops  Via Google translate from Libre Mercado, Joan Rosell, the president of the Spanish Confederation of Employer Organizations (CEOE) has estimated 60% of Spanish Companies are Losing Money; some key snips: In an interview with the newspaper La Razon, Rosell said that "social unrest is evident and the business world is no exception."  The private sector "has already made ​​all the restructuring that had to do and the decline in employment in the private sector has virtually stopped. Now is the time for restructuring the public sector." After defining the first year of Mariano Rajoy's government as a year of shock, Rosell has considered that the Spanish economy has "superfluous fat on many sides: Central government, regional and local. We are a hyper-regulated country". Still, the CEOE president has identified several dynamic sectors in the economy, such as tourism, and exports (automobile, capital goods, power and chemical), and Rosell points out that Spain is gaining positions and externally against France , Italy or Germany. According to the Financial Times, Spain's unemployment rate fell in December. This is the first drop in unemployment since July. However, that drop follows heavy job losses in the prior two months.

    Mutual Guarantee Society: Spain Proposes State Guarantee of Bank Loans to Small and Medium Businesses - Lending in Spain has all but dried up. Banks don't want to (or cannot) lend because they are capital impaired and there are too few creditworthy risks.  In such an environment, lending is not wise. It will lead to more losses. But that is not how government bureaucrats think. Prime minister, Mariano Rajoy is preparing measures to 'desbancarizar' save the economy and SMEs He acknowledged President Mariano Rajoy in balance the first year of government: the main problem of the economy to start recovery is the lack of financing for SMEs [Small and Medium Enterprises]. With that goal-getting liquidity regrease economic system, the government last a number of measures to facilitate the financing of small and medium enterprises. Or what is the same, it is 'desbancarizar' the Spanish economy far too dependent on credit institutions in granting loans or other financing of productive activity. The Government is considering the creation of new instruments for SMEs operate with the State guarantee, which is considered key to boost economic activity. At the same time, they want to boost mutual guarantee societies, an instrument in the hands of the regions that did not just start with all its potential. In parallel, the Ministry of Economy is betting big on the credits of the ICO for SMEs, about 22,000 million euros in 2013 for self-employed and SMEs.

    Spain Plunders 90% Of Social Security Fund To Buy Its Own Debt - With Spanish 10Y yields hovering at a 'relatively' healthy 5%, having been driven inexorably lower on the promise of ECB assistance at some time in the future, the market has become increasingly unsure of just who it is that keeps bidding for this stuff. Well, wonder no longer. As the WSJ notes, Spain has been quietly tapping the country's richest piggy bank, the Social Security Reserve Fund, as a buyer of last resort for Spanish government bonds - with at least 90% of the €65 billion ($85.7 billion) fund has been invested in increasingly risky Spanish debt. Of course, this is nothing new, the US (and the Irish) have been using quasi-government entities to fund themselves in a mutually-destructive circle-jerk for years - the only difference being there are other buyers in the Treasury market, whereas in Spain the marginal buyer is critical to support the sinking ship. The Spanish defend the use of pension funds to buy bonds as sustainable as long as it can issue bonds - and yet the only way it can actually get the bonds off in the public markets is through using the pension fund assets. The pensioners sum it up perfectly "We are very worried about this, we just don't know who's going to pay for the pensions of those who are younger now," or those who are older we would add.

    World's 100 richest people got $241 billion richer in 2012 -  The richest people on the planet got even richer in 2012, adding $241 billion to their collective net worth, according to the Bloomberg Billionaires Index, a daily ranking of the world's 100 wealthiest individuals. The aggregate net worth of the world's top 100 stood at $1.9 trillion at the market close Dec. 31, according to the index. Of the people who appeared on the final ranking of 2012, only 16 registered a net loss for the 12-month period.Amancio Ortega, the Spaniard who founded retailer Inditex, was the year's biggest gainer. The 76-year-old tycoon's fortune increased to $57.5 billion, a gain of $22.2 billion, according to the index, as shares of the retailer that operates the Zara clothing chain rose 66.7%.

    Eurozone data still poor - It was a global PMI data day yesterday and it started well in Asia. Vietnam showed some weakness but  Indonesia , South Korea, Taiwan , India and China all recorded manufacturing expansion in December 2012. Both the US and the UK also managed a good result but, as usual, it was the Eurozone that disappointed. The US-exposed Ireland managed some gains and a bit of good news from The Netherlands saw it record just on the downside of stable, but that’s where the up-side ended. Spain, France , Greece and Italy showed further contraction and the possible new entrant, the Czech Republic, looked very poor. But once again the big downside disappointment  was Germany which continues to suffer the feedback effects of European austerity. Output falls at sharper pace during December amid fastest drop in new orders for four months.

    • New order volumes fall for eighteenth successive month
    • Steeper contraction in manufacturing output
    • Job shedding continues in December

    Business conditions in the German manufacturing sector deteriorated again during December, as highlighted by further declines in both output and new orders. The reduction in overall new work was the sharpest in four months, despite new export orders falling at the least marked pace since March. Lower workloads and fragile confidence regarding the business outlook in turn contributed to a moderate fall in employment numbers during the latest survey period.

    Switzerland and Britain are now at currency war - It seems you can’t debase your coinage these days even if you try. The Bank of England is straining every sinew to drive down sterling with quantitative easing, and what happens? The Swiss National Bank trumps Threadneedle Street with an outright blitz of Gilt purchases. They just print it, and buy. The Swiss and UK central banks are effectively fighting a "low intensity" currency war against each other. It has come to this. Here is the offending chart from the IMF: And this is what the Swiss did to Euroland a quarter earlier: One awaits with curiosity to see what will happen when Japan – fifteen times the size – kicks in with its own nuclear plans to drive down the yen, and Asia follows suit. The latest IMF data of central bank holdings (`COFER’) shows the biggest jump in sterling bonds by advanced central banks ever recorded. It jumped from $79bn to $98bn in the third quarter. These holdings are usually stable so it is obvious that the SNB is responsible. The Swiss are already sated on eurobonds as they frantically intervene to hold the franc at €1.20. By their own admission, they have been diversifying energetically.

    Banks fear ‘risk to City’ of EU exit - Some of the City’s largest banks are privately warning the Treasury that moves towards Britain leaving the European Union would be a disaster for the City and would jeopardise confidence in the economic recovery. Senior banking and business figures spoken to by The Sunday Telegraph have revealed growing disquiet at Government plans for a referendum where one option could be an exit from the EU. One senior banking executive said: “The whole issue has the potential to be very destabilising for the City. “It risks playing with the future of the British economy for the next 30 years.” Large foreign banks based in London are thought to be most concerned about the growing political campaign for Britain to leave the EU.

    Slaying the inflation monster - In recent articles in the Telegraph and the FT, Andrew Sentance called for the (permanent) end of quantitative easing and a return to higher interest rates in 2013 to counteract inflationary pressures in the UK economy. His reason for this is that that UK inflation has been higher than the Government's 2% target for most of the last five years, despite the Bank of England continually forecasting its imminent fall, and there are developing domestic and global pressures which will push up inflation over the next few months. The first thing to consider is Sentance's analysis of the causes of the present above-target inflation. He notes correctly that world commodity prices, especially foodstuffs, have risen and are likely to continue to rise in 2013. Part of the rise in commodity prices can be attributed to the QE programmes undertaken by the US, UK and Japanese central banks since 2009: part also can be attributed to investors seeking safe havens for their money: and part to other factors, such as increasing demand from emerging markets, the Iran stand-off affecting oil prices, and drought in the US and Central Europe affecting food prices. None of these except QE can be attributed to the domestic economic environment in the UK. They are all, without exception, external pressures. For some reason Sentance completely ignores the main cause of the recent spike in CPI inflation, which is the introduction of higher student tuition fees. Their effect will be felt in higher CPI figures for a year, just as the Government's VAT rise increased reported CPI for a year. But why these are included in CPI at all is a mystery to me, since they are by any reasonable definition investment rather than consumption, and they only affect a relatively small, largely homogenous group of people.

    Triple-dip threat rises as UK service sector shrinks -  Britain's services sector shrank for the first time in two years in December, increasing the likelihood that the country is "triple-dipping" back into a recession.Concerns the UK is “triple-dipping” back into recession rose on Friday, as a closely-watched gauge of the services sector showed output fell for the first time in two years. Markit’s purchasing managers’ index (PMI) threw up a reading of 48.9 for December, where anything below 50 signals activity in the sector contracted. Nick Beecroft, an analyst at Saxo Capital Markets, called it a “pretty disastrous” result. The reading signalled that, except for 2010’s snow-hit December, activity in the sector is shrinking for the first time since early 2009. Then, stock markets were only just recovering from their post-crisis lows. Despite the pick-up seen in the previous day’s manufacturing PMI, the latest surveys together tally with a fall in the UK’s headline growth in the fourth quarter, according to economists. Services companies from insurers to hairdressers account for around three quarters of the UK economy, dwarfing manufacturing at 10pc.

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