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

Saturday, February 16, 2013

week ending Feb 16

Fed balance sheet grows to record, over $3 trillion | Reuters: (Reuters) - The Federal Reserve's balance sheet grew to a record large size, topping $3 trillion in the latest week, with increased holdings of Treasuries and mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet - a broad gauge of its lending to the financial system - stood at $3.056 trillion on February 13, compared with $2.997 trillion on February 6. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) totaled $1.010 trillion compared with $965.88 billion the previous week. The Fed's holdings of Treasuries totaled $1.728 trillion as of Wednesday versus $1.717 trillion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system was $74.61 billion from $75.11 billion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $7 million a day from an average of $19 million per day the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--February 14, 2013: Federal Reserve Statistical Release

Bullard Says Balance Sheet Growth Raises Fed Exit Concern - Federal Reserve Bank of St. Louis President James Bullard said central bank stimulus has been ramped up this year with the decision to increase outright bond purchases to $85 billion a month and that a growing balance sheet could be complicated to unwind.  “The current stance of U.S. monetary policy is considerably easier than it was in 2012,” Bullard said in a speech prepared for delivery today in Starkville, Mississippi. “The size of the balance sheet could inhibit” the Fed’s “ability to exit appropriately from the current very expansive monetary policy.”Bullard, who votes on policy this year, yesterday predicted U.S. growth will accelerate to 3.2 percent in 2013, a pace he said would allow the Federal Open Market Committee to consider slowing its bond buying after this spring from a rate of $85 billion a month. Policy makers have pushed the benchmark interest rate close to zero and expanded Fed assets to a record exceeding $3 trillion to fuel growth and reduce 7.9 percent unemployment.

Fed Action This Year More Powerful Than in 2012 - Changes in the way the Federal Reserve is conducting monetary policy has made the actions taken by the institution more powerful this year compared to 2012, a top central bank official said Thursday.“The current stance of U.S. monetary policy is considerably easier than it was” last year, Federal Reserve Bank of St. Louis President James Bullard said. He said changes in Fed asset buying, as well as new guidance on the factors that guide when the central bank might raise rates, are the difference.At the end of last year, the Fed replaced a program that sold short-dated Treasurys to buy longer dated government bonds with outright buying. That meant that while the monthly size of the buying was roughly the same, the balance sheet would expand, which in theory makes monetary policy more supportive of growth.

Fed’s Bullard Not Ready to End Bond Buying - A key Federal Reserve official said Wednesday that while he sees improving growth and declining unemployment in the year ahead, he’s not yet ready to call for an end to the central bank’s bond-buying. “I’m optimistic, but I’d have to see some confirmation during the year that my forecast is turning out to be the right one” before calling for an end, or a change, in the Fed’s ongoing and open-ended effort to buy Treasury and mortgage bonds, Federal Reserve Bank of St. Louis President James Bullard told reporters after a speech. “I’d want to see through the spring, at least, how the economy develops,” before making a decision. Mr. Bullard  is a voting member of the monetary policy-setting Federal Open Market Committee.

Fed vice chairman hints at longer period for low rates - Federal Reserve Vice Chairman Janet Yellen says the central bank may keep its key short-term interest rate at a record low even after unemployment falls close to a more normal level. The Fed has said it would hold its benchmark rate near zero as long as unemployment is above 6.5 percent and long-run inflation forecasts are below 2.5 percent. The unemployment rate is currently 7.9 percent. In a speech Monday to the AFL-CIO, Yellen said those are "thresholds for possible action, not triggers that will necessarily prompt an immediate increase." Her comments echoed remarks Chairman Ben Bernanke made in December after the Fed announced it would change its forward guidance for short-term rate increases. Yellen has been a close Bernanke ally on Fed policy. She is considered a top prospect to succeed him as chairman should he leave when his term ends on Jan. 31, 2014.

Kansas City Fed’s George Warns About Current Policy - The lone dissenting voice on the Federal Open Market Committee defended her hawkish philosophy Tuesday and reiterated her call for the Federal Reserve to proceed cautiously with easy money policies. Kansas City Federal Reserve President Esther George laid out her reasons for dissenting from current Fed monetary policy in a speech at the University of Nebraska Omaha on Tuesday morning, explaining her opposition to the FOMC’s current policy position. “While I share the objectives [of the FOMC],” Ms. George said, “I dissented because of possible risks and the possible costs of these policies exceeding their benefits…While I have agreed with keeping rates low to support this recovery, I know keeping interest rates near zero has its own consequences.”

George Says Fed Sale of Assets May Disrupt Markets - Kansas City Federal Reserve Bank President Esther George said the central bank may trigger instability in financial markets when it eventually begins to sell assets from its record balance sheet. The Fed’s current plan for selling securities “could be potentially disruptive to markets and market functioning,” George said today in a speech at the University of Nebraska- Omaha. “These actions are untested by the Federal Reserve and could cause an unwelcome rise in mortgage interest rates.” George dissented last month during her first meeting as a voting member of the Federal Open Market Committee, opposing a decision to press on with $85 billion in monthly bond purchases aimed at spurring growth and reducing unemployment. The buying has pushed the Fed balance sheet to $3.02 trillion. The Kansas City Fed president voiced concern that “the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations,” according to the FOMC’s Jan. 30 statement.

Yellen Says Fed’s Ballooning Balance Sheet May Generate Losses - Federal Reserve Vice Chairman Janet Yellen said the central bank’s balance sheet may incur losses that would wipe out the Fed’s remittances to the U.S. Treasury. “There is a chance that we could go through a period of time in which our income falls, and we could even take losses,” Yellen said in response to audience questions after a speech in Washington. “We’ve been paying enormous sums to the Treasury” from income on the Fed’s holdings, and “it is possible” that there will be “a period of a year, or even several years, in which those remittances fall to zero.” The central bank’s balance sheet, which has ballooned to a record of more than $3 trillion through three asset-purchase programs, has provided unprecedented windfalls to the U.S. Treasury. The Fed uses interest income from its bond holdings to cover its own expenses and sends the rest to the Treasury. In 2012, that dividend to taxpayers was $88.9 billion. Yellen said that the Fed’s policies are helpful to the nation’s finances by creating jobs and lowering long-term interest rates.

The Unwarranted "Unwarranted Pessimistic Signal" - St. Louis Fed President James Bullard gave a speech on February 14 called "U.S. Monetary Policy: Easier Than You Think It Is." He claims that Fed policy is easier now than it was in 2012, mainly due to the implementation of a "threshold rule." The rule is basically a promise that the Fed will not raise policy rates until the economy reaches certain pre-specified thresholds: 6.5% unemployment or 2.5% inflation. The Fed will wait to raise the federal funds rate target until unemployment drops below 6.5% or inflation exceeds 2.5%. Prior to implementing a threshold rule, the Committee offered date-contingent rather than state-contingent forward guidance, stating that the policy rate would likely remain near zero until mid-2015. The previous announcement that the policy rate would remain near zero until mid-2015 created a "pessimism problem," Bullard explains, because "the date could be interpreted as a statement that the U.S. economy is likely to perform poorly until that time." Bullard views the thresholds as alleviating an "unwarranted pessimistic signal" created by the date-based rule.

Why Doves Are Really Hawks - Machismo is a type of commitment mechanism.   If you’re a perfectly rational nerd, people will always expect you to do the rational thing.  You won’t be able to make credible threats unless it would be rational to carry out the threat.  And it seldom will be.   On the other hand, if you’re a tough, macho badass, people will always expect you to do the tough, macho badass thing.  You’ll always be able to make credible threats, because carrying out threats is always the tough, macho badass thing to do.  This principle has a traditional application to monetary policy.  If your central banker is a perfectly rational nerd, he’s going to let the inflation rate get too high, because he won’t be able to make a credible threat to cause a recession.  People won’t expect him to carry out the threat, because in most cases it won’t be rational to carry out the threat.  After all, how often is it really rational to cause a recession? On the other hand, if your central banker is a tough, macho badass, he’s not going to let the inflation rate get too high, because he will be able to make a credible threat to cause a recession.  People will expect him to carry out the threat, because causing a recession is the tough, macho badass thing to do (for a central banker).  So what kind of central banker do you want if you hope to keep the inflation rate from getting too high?  Obviously you want a tough, macho badass.  You want the kind of central banker that likes to pick up small animals in his talons so that he can crush them to death and serve them for dinner.  You sure as hell don’t want the kind who just likes to fly around looking pretty and making cute cooing noises.

A breakthrough speech on monetary policy - Wednesday night may have marked the “emperor’s new clothes” moment of the Great Recession, in which the world suddenly realizes its rulers are suffering from a delusion that doesn’t have to be humored. That delusion today is economic fatalism: the idea that nothing can be done to break the paralysis in the global economy and therefore that a “new normal” of mass unemployment and declining living standards is inevitable for years or decades to come. That such economic fatalism is nonsensical is the key message of a truly historic speech delivered on Wednesday by Adair Turner, chairman of Britain’s Financial Services Authority and one of the most influential financial policymakers in the world. Turner argues that a virtually surefire method of stimulating economic activity exists today and that politicians and central bankers can no longer treat it as taboo: Newly created money should be handed out to the citizens or governments of countries that are mired in stagnation and such monetary financing of tax cuts or government spending should continue until economic activity revives.

The case for helicopter money - I fail to see any moral force to the idea that fiat money should only promote private spending, Some are sure that the troubled western economies suffer from a surfeit of money. Meanwhile, orthodox policy makers believe that the right way to revive economies is by forcing private spending back up. Almost everybody agrees that monetary financing of governments is lethal. These beliefs are all false. When arguing that monetary policy is already too loose, critics point to exceptionally low interest rates and the expansion of central bank balance sheets. Yet Milton Friedman himself, doyen of postwar monetary economists, argued that the quantity of money alone matters. Measures of broad money have stagnated since the crisis began, despite ultra-low interest rates and rapid growth in the balance sheets of central banks. Data on “divisia money” (a well-known way of aggregating the components of broad money), computed by the Center for Financial Stability in New York, show that broad money (M4) was 17 per cent below its 1967-2008 trend in December 2012. The US has suffered from famine, not surfeit. As Claudio Borio of the Bank for International Settlements puts it in a recent paper, “The financial cycle and macroeconomics: what have we learnt?”, “deposits are not endowments that precede loan formation; it is loans that create deposits”. Thus, when banks cease to lend, deposits stagnate. In the UK, the lending counterpart of M4 was 17 per cent lower at the end of 2012 than in March 2009. (See charts.)

For a stimulus, boring is best - The image of helicopter money is arresting. The central bank governor flies across the country in a helicopter, a deranged grin on his face as he showers money on a grateful populace. Of course, this is not what advocates of helicopter money have in mind. They are also anxious to distance themselves from great instances of inflation – most recently that of Zimbabwe, in which the police and army have been paid with freshly minted currency rather than money raised through taxes. Nominal expenditure expands faster than the supply of goods and ever larger quantities of notes must be printed to keep the army and the police supportive of the regime. The supporters of helicopter money, or the more prosaically titled overt monetary funding, visualise something more subtle. They hope the result of more people crowding the stores with the central bank’s largesse will be more goods in the shops rather than higher prices for the same stock. Monetary policy is designed to change the composition of public sector debt and corresponding private sector assets. Fiscal policy increases or reduces the amount of public debt. This distinction amid the structure of debt and amount of debt translates into an institutional separation between responsibilities of the central bank and the finance ministry. Advocates of overt monetary funding want to blur these distinctions, encouraging central banks to fund tax cuts without creating government debt. Monetisation achieves this by issuing notes and coins, and credits given by the central bank (which are offers to issue notes and coins on request). These instruments are not really state obligations. Such currency derives value from our willingness to accept it, and thus represents a liability of us all. The issue of money is a stealth tax, which advocates of overt monetary funding hope will be paid with the increased output from monetary expansion.

Targeted Monetary Policy - An Idea I had while commenting on Reddit: I think one lesson learned from this experience is that monetary policy needs to be directed towards particular sectors of the economy rather than being a broad action. This would mean that the agency involved in setting monetary policy (a country's central bank) would actively and directly engage in important internal markets. And by engage I'm talking about buying and selling. Of course the guiding principle should be price stability rather than making profits. A central bank can make huge profits or losses - but since it has the power of seigniorage, neither should affect it in any way (it can't go bankrupt).

A monetary policy target can only be defeated by a better monetary policy target - Nick Rowe - "Monetary policy can cause bad things to happen in financial markets, which can cause bad things to happen in the rest of the economy. Therefore NGDP targeting is wrong." I made up that quote. But if I had to summarise M.C.K.'s long article in two short sentences, that is how I would do it.  Yes, if the central bank raises or lowers interest rates, this will affect financial markets. But I thought we had gone beyond thinking of monetary policy in terms of raising or lowering interest rates. Or buying or selling bonds in an open market operation. Or raising or lowering the money supply. Or raising or lowering the exchange rate. Those aren't monetary policies. Targeting 2% inflation is a monetary policy. Keeping the money supply growing at 4% per year is a monetary policy. Keeping the exchange rate fixed at $0.95US is a monetary policy. Targeting "full employment" (at least, trying and failing) is a monetary policy. Following the Taylor Rule is a monetary policy. Targeting a 5% level-path for NGDP is a monetary policy. We can debate the merits of those different monetary policies. Which one is best?

A credit vigilante arrives at the Fed ---Professor Jeremy Stein is a much respected financial economist from Harvard who in May became a member of the board of governors at the Federal Reserve. Until last week, the markets had paid him relatively little attention, but that is now destined to change. The important speech he delivered in St Louis on Thursday about credit bubbles differed significantly from one of the main planks in the Bernanke/Greenspan doctrine of the last 15 years. It does not have immediate policy implications, but it could easily do so within two years. The speech, which is nicely summarised here by Matthew Klein at The Economist, deserves to be read in full by all market participants. (One member of the FOMC told me last week that the speech was “geeky”, but that was intended, and taken, as a high compliment!) In summary, the speech argues that the credit markets have recently been “reaching for yield”, much as they did prior to the financial crash. Although not yet as dangerous as in the period from 2004-2007, this behaviour is shown by the rapid expansion of the junk bond market, flows into high yield mutual funds and real estate investment trusts and the duration of bond portfolios held by banks.

Low inflation may allow longer QE: Fed's Bullard - Current "rather low" readings on inflation may give the Federal Reserve leeway to continue buying bonds and mortgage-related assets longer than otherwise would be the case, said James Bullard, president of the St. Louis Federal Reserve, on Thursday. The Fed's $85 billion per-month asset-purchase plan has no end date. The Fed has said only that it wants to see a substantial improvement in the labor-market outlook. Being more specific about what "substantial improvement" means may be a "bridge too far" for the Fed, Bullard said in a speech at Mississippi University. Bullard favors tapering purchases rather than bringing them to a sudden stop. Some Fed officials have said they think the purchases could end well before the end of the year

Global ‘credit supernova’ turns 2013 bull to bear -  Bill Gross predicting a “Credit Supernova.” Yes, that’s what the “Bond King” sees dead ahead. He knows, his firm has $2 trillion at risk of collapsing into the “Black Hole” coming after the Credit Supernova, when the Federal Reserve cheap money finally explodes in America’s face, brings down the economy, again. Gross’s Credit Supernova metaphor is the explosive headline on his latest Pimco newsletter. So what’s a supernova? A supernova is “the explosion of a star that has reached the end of its life ... Supernovas can briefly outshine entire galaxies and radiate more energy than our sun will in its entire lifetime.” Yes, a supernova is the “explosion of a star that has reached the end of its life.” “End of its life?” Is America’s star economy burning out? Sure sounds like it: Gross is doing more than just hinting with his Credit Supernova metaphor. He’s predicting the collapse of the American economy and global financial markets, far worse than the 2008 Wall Street bank credit collapse, worse than the 2000 dot-com crash. As the folks over at Business Insider put it: “Investment banks have morphed markets with ‘Ponzi Finance.’ And time is almost up.”

U.S. Dollar Collapse? Here Are 9 Ways It Could Happen - We all know that the US dollar is losing value through inflation every year; in fact,  the dollar has lost over 97% of its purchasing power over the last century. When “real money” (i.e. backed up with intrinsic value) was used, a cup of coffee in the 1920s costed about a few cents. In a fiat world, where money’s value is ambiguous, a cup of coffee can cost upward to a 100 trillion dollars, as was the case in Zimbabwe in recent times. Just how much more can the remaining 3% be debased from the US dollar, and how fast can it happen? A slow, gradual decline can occur without any one person ever even noticing the effects– until, that is, a “black swan”event comes along and triggers the psychology of investors to quickly reverse their thinking, and here a collapse can literally happen overnight. A “black swan,” a term coined by Nassim Nicholas Taleb in his bestselling book The Black Swan, is “an event, positive or negative, that is deemed improbable yet causes massive consequences.” In his book he describes the psychology biases that makes people individually and collectively blind to a rare event. He also notes that the more complex a system is, the more prone it is to failure as there is more room for glitches and errors. This analogy can be used to describe the complexity of the US global empire, complete with its massive debt and 900 military bases around the world. This article is taking a “black swan” approach to the US dollar. Here are nine events that could trigger a black swan event that would result in a US dollar collapse. The reasons below are not in order of importance, and all them can prove to be negative for the US dollar.

Financial Crisis Cost Tops $22 Trillion, GAO Says - The 2008 financial crisis cost the U.S. economy more than $22 trillion, a study by the Government Accountability Office published Thursday said. The financial reform law that aims to prevent another crisis, by contrast, will cost a fraction of that. "The 2007-2009 financial crisis, like past financial crises, was associated with not only a steep decline in output but also the most severe economic downturn since the Great Depression of the 1930s," the GAO wrote in the report. The agency said the financial crisis toll on economic output may be as much as $13 trillion -- an entire year's gross domestic product. The office said paper wealth lost by U.S. homeowners totalled $9.1 billion. Additionally, the GAO noted, economic losses associated with increased mortgage foreclosures and higher unemployment since 2008 need to be considered as additional costs. The report, five years after the collapse of mortgage-focused hedge funds in late-2007 set off a yearlong banking panic and a deep recession, was published as part of a cost-benefit analysis of the Dodd-Frank financial reform law of 2010. The GAO tried to determine if the benefits of preventing a future economic meltdown exceeded the costs of implementing that law.

J.P. Morgan Cuts GDP Forecast on Increased Likelihood of Sequester - As government cuts are looking more likely, economists are baking them into their forecasts for 2013. Economists at J.P. Morgan thought the US would avoid the federal spending cuts known as sequestration. But now they admit that thinking is “increasingly hard to square with the political realities.”As a result, they lowered their 2013 GDP forecast to just 1.9% (on a 4Q/4Q basis) from 2.1%, with more of the drag happening in second half. J.P. Morgan expects the unemployment rate to stand at a still-high 7.6% in the fourth quarter of 2013.

Yellen to Washington, D.C.: Fiscal Austerity Slows Recovery: Last Monday, Federal Reserve Vice-Chair Janet Yellen gave the keynote speech at an AFL-CIO economic policy conference on restoring shared prosperity. Dr. Yellen began by noting that the Federal Reserve “is the only agency assigned the job of pursuing maximum employment.” She then went on to acknowledge “the gulf between maximum employment and the very difficult conditions workers face today.” That gulf is the reason behind the Federal Reserve’s on-going actions to strengthen the recovery and why there is continued need for “forceful action to increase the pace of economic growth and job creation.” Dr. Yellen described the recession as the deepest recession since World War II, and she noted that the recovery “has been significantly weaker than past experience would have predicted.” These important statements show a Federal Reserve that is focused on the critical task of creating jobs, ending mass unemployment and restoring healthy economic growth. The Federal Reserve has a so-called “dual mandate” to promote price stability with maximum employment. That is the law, passed by Congress and signed into law over thirty years ago. The Federal Reserve has often in the past been less focused on its maximum employment obligation.

Central Banks: Why Are They Alone Fighting for Growth? - Might as well end the week where I started: talking—OK, complaining—about misguided fiscal austerity.  And wondering, once again, why it’s only unelected central bankers, not politicians with jobless and wageless constituents, who are trying to do something about growth and unemployment (see figure below on the magnitudes of the liquidity they’re pumping into their economies). I began the week touting the important speech by Federal Reserve Vice-Chair Janet Yellen and will end by commenting on this related WaPo piece about how the actions of Central Banks across the globe aren’t having much impact on jobs, investment, and growth. There’s plenty of money in the world. That’s the good news. The not-so-good news: The flood of dollars, euros, yen and pounds pumped into the global economy by major central banks in recent years has yet to pay off in the form of job creation, investment and stronger economic growth. It has kept banks afloat, let corporations build large cash reserves and restructure debt and, arguably, staved off a worldwide depression. But the ultimate aim — strong and self-sustaining growth in the world’s core industrial economies — remains out of reach…

Stephanie Kelton Virtually Speaking - NEP’s Stephanie Kelton appeared on Virtually Speaking with Jay Ackroyd February 7. You can listen with the player below or visit Virtually Speaking on Blogtalk Radio. The conversation begins with the platinum coin and the the nature of fiat currency.

In a Shovel, a Cure for Our Stunted Economic Growth - The budget deficit in 2013 is expected to fall below $1 trillion for the first time in five years. Perhaps policy makers in Washington can now focus on the other $1 trillion deficit, one that gets next to no attention yet is much more threatening to the well-being of American families: our sluggish economic growth.  At the end of last year, according to the nonpartisan Congressional Budget Office, the economy was still about 5.5 percent smaller than it would have been had it avoided the recession and kept growing along its long-term potential path, making full use of the workers and equipment currently sitting idle. . By the time we recover to our potential — which the C.B.O. expects will take until 2017 — the Great Recession set off by the implosion of the housing bubble more than five years ago will have cost us nearly half of one year’s entire economic production: about $7.5 trillion.  We will be paying the price for years. The slump is hindering capital investment, stunting the careers of college graduates and encouraging workers to drop out of the labor force, potentially blighting the economy over the long term. The C.B.O. expects unemployment to remain above 7.5 percent through next year. And low growth is crimping government finances — reducing tax revenue while, at the same time, increasing the cost of programs like unemployment insurance. Last year, the budget office calculated that sluggish growth alone was responsible for more than a quarter of the budget deficit over the last four years.

Balancing the federal budget in 10 years: More gimmick than good policy - The congressional Republican goal of balancing the budget in 10 years seems a solution in search of a problem. Proponents seem more focused on the politics and optics of the idea than the economics. The 10-year goal supposedly provides a) sharp contrast to President Obama’s apathy toward the issue and b) clear and simple policy for dispirited GOPers to rally around. Perhaps that’s true. But is the party’s urgent political problem that voters think the party is squishy on spending? After all, exit polls had Mitt Romney edging President Obama on who would do a better job cutting the deficit. The public also, for now, seems to prefer cutting debt through a combination of tax increases and spending cuts. In addition, polls show the debt issue is a distant second to economic growth and job creation. Republicans have been unsuccessful in connecting America’s historically high debts and deficits to the problems Americans face in their everyday lives. The economic case here is even sketchier. First of all, balancing the budget in a decade will be difficult. The recent Congressional Budget forecast — which includes the sequester — places the 2023 deficit at $978 billion, or 3.8% of GDP. How to close that trillion-dollar gap? Discretionary spending in 2023 will be 30% below the average for the past century, which leaves entitlement cuts a better target. But following that path would mean, for instance, changing Medicare benefits for current and near-term recipients, not just for younger Americans.

Can We Stabilize the Debt with Just $670 Billion in Deficit Reduction? - In an attempt repeat the mistakes of 1937, the United States is set to put the sequestration into motion in a few weeks. This package of quickly enacted cuts will try to balance the budget by destroying a million jobs in the next two years and taking a chunk of GDP off growth. This is as the deficit is falling quickly, from 7 percent of GDP in 2012 to a projected 5.3 percent this year. Obama's target number would build off the $2.4 trillion in deficit reduction already in place through the Budget Control Act and fiscal cliff deal for a total of nearly $4 trillion. But what if we needed significantly less than $1.5 trillion at this point? What number would be necessary, under what conditions? Richard Kogan of the Center on Budget and Policy Priority (CBPP) has called for $1.4 trillion. There’s been an interesting pushback against this argument from Ethan Pollack of the Economic Policy Institute (EPI), who argues that CBPP’s numbers are far too high, and that the debt-to-GDP, or debt ratio, can be stabilized with less than half of that. Let's summarize this debate here. If stabilizing the debt is the goal, everything depends on what we mean by stabilization. CBPP wants to stabilize the debt ratio with two conditions. The first is that it will be at the current rate of 73 percent, and the second is that it will occur by 2022, or within a 10-year window. Here is EPI's chart showing the current trajectory and the numbers proposed by CBPP and President Obama:

US must do more than focus on deficit - Lawrence Summers - There should be little disagreement across the political spectrum that growth and job creation remain America’s most serious national challenge. The US economy grew at a rate of 1.5 per cent in 2012. Last week, the independent Congressional Budget Office projected that growth will be only 1.4 per cent during 2013 – and that unemployment will rise. While the CBO says growth will accelerate in 2014 and beyond, it nonetheless predicts that unemployment will remain above 7 per cent until 2016. A weak economy and limited job creation make growth in middle class incomes all but impossible, pressure budgets by restricting tax revenues, and threaten essential private and public investments in education and innovation. Worse, it undermines the American example at a dangerous time in the world. We can do better. With strains from the financial crisis receding and huge investment opportunities in energy, housing and reshored manufacturing, the US has a moment of opportunity unlike any in a long time. The economy could soon enter a virtuous cycle of confidence, growth and deficit reduction, much as it did in the 1990s. But this will require moving the national economic debate beyond its near total preoccupation with federal budget restraint. Yes, medium-term fiscal restraint is necessary to contain financial risks. But it is not sufficient. Unlike the 1990s, when reduced deficits stimulated investment by bringing down capital costs, fiscal restraint cannot be relied on to provide stimulus now when long-term US Treasuries yield below 2 per cent.

Growth and Debt Reduction - Some readers thought I buried the lead in this post on recent debates around debt stabilization.  In this conclusion to that piece, I wrote: …economic growth is really the most overlooked variable here.  At least in my lifetime, the only time I’ve ever seen the debt ratio fall in earnest was when the economy was at full employment.  Though we relentlessly target the numerator of the debt ratio, the real action is in targeting the denominator.  That doesn’t invite fiscal profligacy—if you want to hang with the cool kids, you’ve got to be a CDSH [cycical dove, structural hawk].  But it does suggest that once again, we’re looking for fiscal rectitude in all the wrong places. So where’s the evidence for that claim?  I was largely thinking about the 1990s, when real GDP grew fast enough to more than close the output gaps present in the early part of the decade.  The figure below plots output gaps, defined as the percent that potential GDP is above or below actual GDP, against percentage point changes in the debt/GDP ratio.  The circled part shows the output gap  in the 1990s moving from out -5% to +5%, against a huge slide in the debt/GDP ratio, from 49% in 1993 to about 33% in 2001. But the first part of the figure is informative as well–GDP was mostly above potential in those years, meaning there were relative few periods of negative output gaps, and the debt ratio was mostly falling. Now, of course, much of these movements are mechanical and cyclical: growth falters, output gaps grow, and as anti-recessionary measures ramp up and fewer revenues flow in, government debt rises–that’s why the negative correlation, shown in the table, is quite large (-0.78).  But that’s just another way of saying there’s no plausible reason to jam growth in the interest of deficit or debt reduction.  It won’t work.

Growth Forecast Errors and Fiscal Multipliers - This paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.

Fiscal policy and the (delayed?) federal-state divergence -- Janet Yellen notes that fiscal policy has been less of a tailwind in the latest recovery relative to the average of four previous US recoveries: Negotiations continue over the extent of spending cuts now due to take effect beginning in March, and I expect that discretionary fiscal policy will continue to be a headwind for the recovery for some time, instead of the tailwind it has been in the past. By coincidence, she chose the same four previous US recessions and recoveries that Credit Suisse economists chose in their latest GDP chart overview. You can see the whole series of charts by GDP component here, but I’ll just post these two showing state & local and federal government spending (not including transfer payments such as social security and unemployment benefits): After an extended period of severe cuts by the states, which had little choice given the requirement that they balance their annual budgets, a recovery in revenues has brought them close to a neutral or positive contribution to growth.

The Federal Deficit Chart That Should Embarrass The Budget Hawks -  Here's a pretty important fact that virtually everyone in Washington seems oblivious to: The federal deficit has never fallen as fast as it's falling now without a coincident recession. To be specific, CBO expects the deficit to shrink from 8.7% of GDP in fiscal 2011 to 5.3% in fiscal 2013 if the sequester takes effect and to 5.5% if it doesn't. Either way, the two-year deficit reduction — equal to 3.4% of the economy if automatic budget cuts are triggered and 3.2% if not — would stand far above any other fiscal tightening since World War II. Until the aftermath of the Great Recession, there were only three such periods in which the deficit shrank by a cumulative 2% of GDP or more. The 1960-61 and 1969-70 episodes both helped bring about a recession. Far steeper deficit cuts during the demobilization from World War II and in 1937-38 both precipitated economic reversals. Now the deficit is shrinking about 50% faster than it did during the booming late 1990s, when the jobless rate was falling south of 5% and tax revenues were soaring — without tax hikes.

Economists Who Could not See an Trillion Housing Bubble Say that We Need Trillion in Deficit Reduction  - In his State of the Union Address last night President Obama told the country that unspecified economists say that we need to reduce the deficit over the next decade by $4 trillion from the levels projected in 2010. It would have been worth noting that almost all of the economists who say this completely missed the $8 trillion housing bubble whose collapse sank the economy. There is no reason to believe that their understanding of the economy has improved in the last 5 or 6 years.  It would be helpful to remind listeners that President Obama is apparently having his economic policy dictated by economists who do not seem to know how the economy works.

Millions of Children are Growing Up With Unemployed Parents Because of Fix the Debt and Other Deficit Hawks - While a Washington Post piece gave extensive coverage to the Post's favorite deficit hawks in a piece on the budget deficit, it did not include anyone who could present the basic economic facts to readers. The reason the deficit expanded from just a bit more than 1.0 percent of GDP in 2007 to more than 10 percent of GDP in 2009 and 2010 was that the economy plunged following the collapse of the housing bubble. The deficit was and is filling in a demand gap in the private sector as a result of this collapse. The fact that deficit hawks would not allow the government to spend more money is keeping the economy from returning to full employment. As a result, close to 9 million people are out of work who would be employed if the economy were operating near its potential. This is forcing millions of children to grow up in families with one or both parents unemployed. It would have been helpful if the Post had presented the view of someone familiar with basic economics who could have reminded readers of these facts.

Total Federal Spending Over Time - This is a submitted-without-comment chart that I think speaks for itself.

The Most Important Chart About the Deficit You'll Ever See -  Today's deficit is about unemployment, full stop. Tomorrow's deficit is about rising healthcare costs amidst an aging society. These problems have nothing to do with each other. Which one are we trying to solve right now? Okay, wait again. I can hear you saying But the deficit is about too much spending, not too much unemployment. And that brings us to the most important chart about the deficit you'll ever see. As Joe Weisenthal of Business Insider points out with the graph below of (inverted) surplus-or-deficit-as-a-share-of-GDP and unemployment, there's historically been a pretty correlation between them. Whether unemployment spikes or recedes, deficits follow.Unemployment isn't just a human disaster. It's a fiscal one too. Higher unemployment means lower tax revenue, and higher spending on safety net programs like food stamps -- that is, bigger deficits. And that means bringing down unemployment is the only way to bring down the deficit. Trying to slash the deficit during a depression -- in other words, a liquidity trap -- will only make unemployment worse, and hence leave the deficit little, if at all, better (and perhaps worse).

Why We Need an Investment Budget - Robert Reich : No rational family would borrow to pay for a vacation but not borrow to send a kid to college. No rational business would borrow to finance current salaries but not to pay for critical new machinery. Yet that’s, in effect, what the federal government does now. The federal budget doesn’t distinguish between borrowing for current expenditures that keep things going, and future investments that build future productivity. All borrowing is treated the same. A rational federal budget would treat them differently. It would allow additional borrowing for public investments whenever the expected return on those investments is higher than the cost of the borrowing. And it wouldn’t borrow a dime if the return on the investment is less than the borrowing costs. Granted, such public returns can be hard to measure. But well-developed tools exist for doing so. Consider infrastructure. Too many roads are potholed, bridges unsafe, public transport systems outdated, pipelines bursting, and schools literally falling apart. Studies show a public return on infrastructure investment to average $1.92 for every public dollar invested.

Is Congress really going to miss its free lunch on infrastructure?:  Republican reaction to Obama’s expected proposals on infrastructure in Tuesday’s State of the Union address may be a better indicator of whether we are in for a year of real legislative give-and-take—or a return of the ugly politics of the last several years. It will also be an indication of whether the U.S. government is going to let a once-in-a-lifetime opportunity to rebuild the nation’s roads and bridges more or less for free slip through its fingers. The big question on infrastructure is whether the White House is correctly reading the politics of the moment. Could Congressional Republicans be ready to sign on to some form of large-scale investment in the nation’s transportation and energy infrastructure? Or is Obama tilting at windmills (literally, in this case).

Where Do “Facts” Come From? -  Paul Krugman --- Just a quick observation: for the past couple of days I’ve been seeing in a lot of places, including comments on this blog, the assertion that federal spending has risen 37 percent under Obama — that specific number. Does anyone know where it’s coming from? Because if I look at the actual data, I see federal spending rising from $3.475 trillion in fourth-quarter 2008 to $3.917 trillion in fourth-quarter 2012 — a rise of 12.7 percent. Obviously this is coming from somewhere, and being broadcast by Rush or somebody. But it’s still kind of amazing how a totally wrong number can become part of what everyone on the right just knows to be true. - 

Hearsay Economics - Paul Krugman - Jonathan Chait is boggled by Joe Scarborough’s latest rant. What’s really striking is Scarborough’s certainty that we’re experiencing “explosive” spending growth, which is very much not the case: How do JoScar and others like him come by such misconceptions? Well, I’ve gradually come to the realization that most of the commentariat doesn’t do what, say Martin Wolf or I do — grub around in published data, read reports, and all that. Instead, they rely on what they heard somebody say the facts are; hearsay economics. Of course, they don’t listen to any old bum on the street; they listen to people of repute, people in their circle. But the repute in question has nothing to do with technical expertise; hey, Admiral Mullen is a serious person, so if he says something on any subject, such as economics, it must be solid. And where do the reputable people get their information? Why, it’s what they heard somebody in their circle say. It’s hearsay economics all the way down.

Obama Makes Case for Government in State of Union Address -  In a State of the Union address largely focused on economic themes, he asserted that “we can’t just cut our way to prosperity” and suggested that it is time for a more balanced approach, including accepting that government has a vital role to play in ensuring economic growth and a secure middle class. “Most of us agree that a plan to reduce the deficit must be part of our agenda,” Mr. Obama said. “But let’s be clear: deficit reduction alone is not an economic plan.” In setting out how government could reach what he considers an acceptable level of fiscal stability through Medicare cuts and tax increases, Mr. Obama was doing more than trying to set the terms for the next, fast-approaching rounds in his fiscal cage match with Congressional Republicans. He was also building a broader argument that the nation needs to shift away from the focus on shrinking the government that has dominated politics for the past several years and toward a modestly more activist agenda aimed at tackling persistent inequality and the dislocating forces of a globalized, technology-driven economy. At the same time, Mr. Obama explicitly recognized the political and policy limitations of his stance after four years of budget deficits in excess of $1 trillion and broad public unease about saddling future generations with a crippling debt burden. There was no new stimulus plan, no mission to Mars, no ambitious plan to address the hangover from the housing market crash.

Obama’s State of the Union and the Great Deficit Smackdown - House Republicans say they want to balance the budget in a decade with only spending cuts and no tax hikes. In his state of the union address tonight, President Obama—perhaps channeling his new pal New Jersey Governor Chris Christie—had a response. In a word, fuhgedaboutit. Obama’s priorities: Gun control and immigration reform, along with a dozen new government programs that he says will improve the lot of the middle-class and won’t add to the deficit–but surely won’t cut it. The fiscal goal he described is the same one he’s had for months: By his count $1.5 trillion in new deficit reduction over 10 years that would stabilize the debt at slightly below current levels—a far cry from balance. The president would anchor that effort with a tax reform that he says will eliminate hundreds of billions of dollars in “tax loopholes and deductions for the well-off and the well-connected.” Of course, there are not hundreds of billions in loopholes in the Tax Code. There are, however, hundreds of billions of dollars in deductions and exclusions for mortgage interest, charitable gifts, employer-paid health insurance, and state and local taxes—none of which will be easily scaled back, even for the well off. When it comes to spending, Obama continued to express a willingness to slow the growth of Medicare, but only around the edges. One positive note: he did say he’d push the ongoing effort to pay doctors and hospitals based on quality rather than volume. This is a good idea, though also easier said than done.

Memo to the President: Actions Speak Louder Than Lofty Speeches - President Obama delivered an uplifting State of the Union address to the Nation last evening, promising “to reignite the true engine of America’s economic growth – a rising, thriving middle class.” He said it was the country’s “unfinished task to restore the basic bargain that built this country – the idea that if you work hard and meet your responsibilities, you can get ahead.” He said it was his job “to make sure that this government works on behalf of the many, and not just the few.”Unfortunately, the President’s speechwriter is not in charge of nominating candidates who could turn those lofty goals into realities. One must wonder exactly who is in charge of nominating candidates. When it comes to the most important posts that oversee Wall Street, the one industry in America that does more than any other to prevent hardworking Americans from getting ahead, it feels like Wall Street is in charge and not the man elected by the people to run the country. There are 99 percent of Americans who never received millions of dollars in compensation and bonuses from a company bailed out by the taxpayer, despite its years of corrupt dealings. There are 99 percent of Americans who never invested in an offshore account in the Cayman Islands. There are 99 percent of Americans who did not hold an executive post in a division that hid $39 billion of subprime debt off its books.

Does President Obama Really Believe in Deficit Reduction? - It should come as no surprise that President Obama began last night’s State of the Union address discussing both the economy and federal government finances. After all, much of the debate in Washington has been focused on the historically large budget deficits the federal government has been running since the financial crisis. The President called for Congress to act to reduce the deficit by $1.5 trillion over the next ten years, through a combination of tax increases and spending cuts, but he offered no real specifics on how he’d like to get there. And that lack of specifics, combined with spending proposals elsewhere in the speech, have made many Republicans skeptical that the President considers deficit reduction a priority.This sounds like the same old story we’ve been hearing for years now: Republicans accusing the President of not really caring about deficits and debt. But given the improving economy and deficit reductions already in place, Republicans may have a point this time around. Does the President really want further deficit reduction? And, perhaps more important, should he?

Remember Growth? - One thing you can say about Obama; he never fails to disappoint. Last night’s State of the Union Speech is a perfect example. In his typical lofty rhetoric, the president promised to continue to implement his regressive social and economic policies without pause provided his GOP counterparts lend a hand. Aside from his promises to slash popular social programs, Obama defended his controversial drone policy which is responsible for the deaths of hundreds of civilians in Afghanistan, Pakistan and Yemen. In thinly-veiled language, Obama stated, “Where necessary, through a range of capabilities, we will continue to take direct action against those terrorists who pose the gravest threat to Americans.”  Along with the standard blabber about the superiority of the United States, Obama reiterated the perfunctory lies about the budget deficits and his determination to slash public spending. Here’s a clip from the speech: “Most of us agree that a plan to reduce the deficit must be part of our agenda…Over the last few years, both parties have worked together to reduce the deficit by more than $2.5 trillion – mostly through spending cuts, but also by raising tax rates on the wealthiest 1 percent of Americans. As a result, we are more than halfway towards the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances. Now we need to finish the job.”

SOTU: Obama Opens Door to Grand Betrayal - Real News Video -  Bill Black: President Obama offered up "reform" of medicare and social security, that is cuts at a time of deep recession

Obama’s State of the Corporate Union - Black Agenda Report - It was an impassioned performance by a cynical politician who offers little but corporate tax incentives and continued austerity. Barack Obama peppered his State of the Union address with up-tempo buzzwords about illusory “progress,” but the president’s substantive message was that he is determined to complete the austerity bargain he struck with the Republicans in 2011. Thus, it is a sign of “progress” that “we are more than halfway towards the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances” – meaning, he will collaborate with the GOP in cutting almost $2 trillion more.  The big cuts will come from those programs that enjoy overwhelming support among Americans. He claims to be with them in spirit while opposing them in practice. “Those of us who care deeply about programs like Medicare must embrace the need for modest reforms – otherwise, our retirement programs will crowd out the investments we need for our children, and jeopardize the promise of a secure retirement for future generations.” His reasoning is identical to the Republicans, who say these programs must be bled, or die. Obama created the model to gut entitlements through his Simpson/Bowles Deficit Reduction Commission, appointed well before the GOP took control of the House. Now he pretends that the cuts have been forced upon him, but that he will acquiesce in the spirit of compromise. “On Medicare, I’m prepared to enact reforms that will achieve the same amount of health care savings by the beginning of the next decade as the reforms proposed by the bipartisan Simpson-Bowles commission.”

Per Capita Government Spending by President - This graph in this post showing real per capita growth in government expenditures under recent presidents got more attention than I expected (e.g.), probably because for many people the growth under Obama was unexpectedly low. Here's the updated version of the graph (as before, this came to me via email): Here are the notes that came with the older version of the graph: Seeing the Krugman commentary comparing real government spending under Obama and Reagan made me curious about what it looks like if you express it in per capita terms? In particular, how does the Obama period compare with other presidencies in terms of penury/austerity versus spendthriftness?To compare presidencies, I did the calculation two ways. One starts in the quarter before the president was elected (e.g., 2008Q4), the other starts in the first quarter of the presidency (e.g., 2009Q1). (The ARRA probably had some effect in Q1, but most of the change was simply economic conditions that the incoming president had nothing to do with, so I think I prefer the Q1 to Q1 method). ...

The austerity is real -- TYLER COWEN is quick to link to pieces calling into question the extent to which austerity plans have been austere. Here is the latest example. He quotes a Washington Post story, which reads: To sketch the bill’s biggest impacts, The Washington Post focused on the 16 largest individual cuts. Each, in theory, sliced at least $500 million from the federal budget. Together, they accounted for $26.1 billion, two-thirds of the total. Well, ok. But if this is so, then why is a bank like Goldman Sachs, which has little incentive as far as I can tell to stumble dumbly into rah-rah Keynesianism, warning of an ongoing, significant decline in federal government spending? Maybe lots of promised cuts turned out to be "cuts". But the record shows that total federal government outlays were 25.2% of GDP in 2009, 24.1% of GDP in 2011, and 22.8% in 2012. (Receipts rose from 15.1% of GDP in 2009 to 15.4% in 2011 to 15.8% in 2012.) Both outlays and receipts are, as a share of GDP, below pre-crisis levels. And while receipts are now forecast to rise back to pre-crisis level by 2014, outlays are expected to remain about two percentage points higher than before the recession. But the point remains that the "austerity" of 2011-2012 wasn't "austerity" but austerity. Federal government spending fell by a meaningful share of GDP over that period. So did federal government employment, which dropped by 31,000 jobs in 2011 and 45,000 jobs in 2012. What's more, we have good reason to believe that these cuts entailed positive multipliers above those we'd observe in normal times.

Fiscal Austerity is Happening Now - Ryan Avent notes that fiscal austerity is happening now: [T]he record shows that total federal government outlays were 25.2% of GDP in 2009, 24.1% of GDP in 2011, and 22.8% in 2012...Both outlays and receipts are, as a share of GDP, below pre-crisis level... the "austerity" of 2011-2012 wasn't "austerity" but austerity. Federal government spending fell by a meaningful share of GDP over that period. So did federal government employment, which dropped by 31,000 jobs in 2011 and 45,000 jobs in 2012. What's more, we have good reason to believe that these cuts entailed positive multipliers above those we'd observe in normal times. You don't have to take the IMF's word for it; even stimulus sceptics like Valerie Ramey find that Valerie Ramey find that multipliers may sometimes be above normal, and above one, during periods of economic slack.This is exactly the case that I have been making. And apparently so has Goldman Sachs. The only additional point I have stressed is that despite this austerity happening at a time of high unemployment and a large output gap, a slowdown in aggregate demand growth has failed to materialize. This does not mean fiscal policy multipliers are small--they may be large--but only that the Fed has been offsetting the drag created by the fiscal austerity.  And to boot, it has done so in an environment where the short-term interest rate is up against the zero-lower bound (ZLB).

Austere Indeed - Paul Krugman - An annoyed Ryan Avent combats claims that we aren’t seeing any real federal spending cuts. Indeed — for those of us who warned that premature austerity would undermine recovery, it’s frustrating to see the other side shift from “Austerity is expansionary!” to “Austerity? What austerity?” when it turned out that austerity did, indeed, undermine recovery. What’s the clearest way to see what’s happening? I have taken to looking at the ratio of spending to (the CBO’s estimate of) potential GDP. You don’t have to believe CBO has it exactly right to believe that a measure including normal growth and inflation is a better baseline than the raw numbers. Here’s federal spending relative to potential GDP:

READ: The White House explains how the sequester cuts would work - On March 2, the sequester spending cuts will start clamping down unless Congress votes to avert them. And on Friday afternoon, the White House explained just how those cuts would work. The sequester, recall, will cut $85.3 billion from the federal budget in 2013 and affect everything except Social Security, Medicaid, a few targeted anti-poverty programs, and the ongoing wars. The Pentagon budget would face an immediate 7.3 percent cut and domestic discretionary programs would be cut by more than 5 percent. The key feature of the cuts is that they would affect all agencies and programs equally — federal officials would not be able to pick and choose which programs get protected and which get the ax. The White House fact sheet below lists some examples of programs that would see cuts:

Sequester in the Time of ZLB - In several weeks, absent action by policymakers, the Federal government will begin implementing $85 billion worth of across-the-board cuts during FY2013 (i.e., in the months before October). [0] According to one narrative, each dollar of spending previously devoted to patrolling the South China Sea and monitoring tornadoes and winter storms will be released to the private spending, so that there is no impact on output. For the rest of us, output will likely decline relative to what would have otherwise would have occurred. How much? Given that interest rates are near zero (the “zero lower bound” or ZLB), I suspect a lot.

NC Crowdsourcing! Whither the Deficit Cliffhanger? -  Yves Smith - I’m obviously removed from the action, but I’m surprised at the complacency in DC and in the markets over the fact that the sequester is a comin’ soon. Next week Congress is out of session, and the media messaging from both sides at this point lacks the sense of urgency (in particular, front page reports of intense pow-wows) that I’d expect if a deal were to be done by the sequester deadline of early March. So I have these questions for the NC commentariat:

    • 1. Do you think there be a deal before the sequester?
    • 2. If not, how many days do you think we will be in the sequester?
    • 3. How much do you think the deal will do (on paper) to reduce the 2013 deficit (hint: we know from Europe it will only make the debt to GDP ratio worse, but we’re looking for the official beancount, not the actual down-the-road impact).
    • 4. Bonus question: what do you expect to be the most horrible feature of the deal?

On the sequester, the only way to win is not to play - As Greg noted earlier, there’s real disagreement among congressional Democrats on how to deal with sequestration. According to The Hill, Montana Senator Max Baucus, chairman of the Finance Committee, wants to avoid serious individual or corporate tax reform and set them aside for a future effort to “overhaul of the tax code so that they could be used to offset lower tax rates.” Michigan Senator Carl Levin, by contrast, wants to replace the sequester with savings from the tax code, in order to avoid large defense cuts. And of course, Republicans are prepared to let sequester cuts go through — they can just blame President Obama if the economy goes south. Even still, there are plenty in the GOP who don’t want the sequester’s cuts to military spending. Obviously, the official Democratic position is to avoid the sequester with a “balanced” package of spending cuts and tax increases. It’s the cornerstone of President Obama’s rhetoric, and it has buy-in from most Democrats in Congress. But it’s worth noting that this is not good policy at all. At most, it’s the best of several terrible options, ranging from the full sequester to the GOP’s preference for further spending cuts.

Automatic budget cuts are almost certain - In less than a month, a budget ax is set to fall on the federal government, indiscriminately chopping funding for the military and slicing money for various programs, including preschools and national parks. The $85 billion in cuts that would take effect from March 1 through September — the first installment of $1.2 trillion in reductions over the next decade — would strike just about every agency and service in an attempt to ease the budget deficit. The slashing, part of an automatic process known as sequestration, would affect the economy, government workers and average Americans in ways big and small. Economists project the budget cuts would reduce the nation's total economic output by about 0.6 percentage points this year, a significant hit when growth remains sluggish.

Republicans Propose Job Freeze to Avert Defense Cuts - Republican members of the House and Senate Armed Services committees revived a proposal to avert automatic spending cuts by reducing the federal workforce through attrition and freezing congressional salaries. The legislation would save $85 billion through Sept. 30, the same amount as the across-the-board cuts that would be divided between defense and domestic programs, said Senator Kelly Ayotte of New Hampshire. She was among lawmakers presenting the plan at a news conference Wednesday in Washington. The automatic cuts, called sequestration, will take effect March 1 unless Congress and President Barack Obama agree on an alternative. Tuesday, Obama urged lawmakers to propose a short-term package of reductions and tax-code changes, such as limiting tax breaks, to delay the reductions. “The president gave us a proposal that cuts defense spending once again,” Representative Howard “Buck” McKeon of California, chairman of the House Armed Services Committee, said at the news conference. He called Obama’s plan “irresponsible, unacceptable.”

Cancelling Sequester May/Should Be The Only Acceptable Option - Anyone involved in, observing or analyzing the federal budget knows by now that the sequester -- the across-the-board spending cuts that were triggered when the anything-but-super committee failed to agree on a deficit reduction plan -- was supposed to be so bad that Democrats and Republicans alike would do everything possible to avoid it. The problem is that it hasn't worked out as expected. Rather than be the worst-possible alternative, it turns out that the sequester is actually the best for most representatives and senators compared to the tax increases and Medicare and Medicaid reductions that one side or the other (but not both) are saying they prefer. What if instead of the sequester vs a tax increase or entitlement reduction, the choice was between a sequester and no sequester? That's the as-yet largely unspoken option: Instead of the $85 billion in across-the- board spending reductions, vs everything else, what if it was the sequester vs no sequester? The deficit will be $85 billion higher than it otherwise would be, but no one's taxes will be raised, military and domestic spending won't be cut and Medicare and Medicaid won't be touched.

No Agreement on $1.2 Trillion in Cuts as Deadline Nears - Bloomberg: Democrats and Republicans in the U.S. Congress are nowhere near a plan to avert $1.2 trillion in spending cuts about two weeks before they are set to begin.It’s the latest in a series of fiscal deadlines created by Congress that in the past two years took the U.S. to the brink of a debt default, a government shutdown and middle-class tax increases that neither party wanted. Unless lawmakers act, the across-the-board spending reductions will begin March 1. Leaving the cuts in place would shave U.S. economic growth this year by 0.6 percent and cost 750,000 jobs by the fourth quarter, Congressional Budget Office Director Doug Elmendorf said yesterday at a hearing. About half the cuts would affect defense spending, and military leaders are pressuring lawmakers to avoid them. Allowing the reductions, known as sequestration, to take effect would mean less training for Army personnel and fewer purchases of Navy vessels and Air Force fighter jets, the leaders said.

The market is shrugging off sequestration - for now - As the so-called sequestration approaches, jitters among defense contractors are becoming quite visible. 50% of the cuts are expected to hit the Pentagon budget.  Over the past few months (including the post-election period) a basket of major defense stocks has performed in line with the S&P500. And in spite of sequestration's overall negative impact on the GDP, the broad market is near multi-year highs.Market expectations seem to indicate that these cuts will be avoided - possibly at the last minute. For now however it looks as if sequestration may potentially go into effect. Bloomberg: - Democrats and Republicans in the U.S. Congress are nowhere near a plan to avert $1.2 trillion in spending cuts about two weeks before they are set to begin.. Unless lawmakers act, the across-the-board spending reductions will begin March 1.  Leaving the cuts in place would shave U.S. economic growth this year by 0.6 percent and cost 750,000 jobs by the fourth quarter, Congressional Budget Office Director Doug Elmendorf said yesterday at a hearing.  About half the cuts would affect defense spending, and military leaders are pressuring lawmakers to avoid them. Allowing the reductions, known as sequestration, to take effect would mean less training for Army personnel and fewer purchases of Navy vessels and Air Force fighter jets, the leaders said.  “It’s pretty clear to me that the sequester’s going to go into effect,” Senate Minority Leader Mitch McConnell, a Kentucky Republican, said yesterday.

Five reasons Why the Sequester’s Automatic Spending Cuts are Bad Policy - In two weeks, about $1 trillion in automatic spending cuts will begin to kick in, a testament to the inability of policymakers to reach a grand fiscal bargain. Allowing these cuts to happen would be terrible policy. Here are five reasons why:

  1. It was never intended to take effect. Sequestration was designed to be so unpalatable that Congress would have to devise a better plan.
  2. It will hurt the economy. In its recently released Budget and Economic Outlook, the Congressional Budget Office (CBO) noted that the scheduled cuts in federal spending were a primary driver of the slow economic growth projected for this year.  
  3. The sequester slashes funding for discretionary programs to historic lows, but does not cut entitlements. Nearly all of the sequestered cuts come from discretionary programs that fund government operations.
  4. The cuts are destructive and unfair.  Arbitrary, formulaic cuts mean that federal budgeters have limited discretion in how the cuts are applied. Key public programs, such as Head Start, air traffic control, and law enforcement, will be cut; disaster relief for Hurricane Sandy will be cut as well. 
  5. The federal government needs to offset the continuing contraction in state and local governments.

Sequester busting - The Senate Appropriations Committee will take a closer look at exactly what might happen if $85 billion in automatic spending cuts go into effect on March 1. Lawmakers will hear from top officials from the Office of Management and Budget, as well as Education Secretary Arne Duncan, Homeland Security Secretary Janet Napolitano, Department of Housing and Urban Development Secretary Shaun Donovan and Deputy Defense Secretary Ashton Carter. Whether the hearing will provide the sense of urgency needed to actually move a bill before the end of the month remains to be seen. There aren't exactly many positive vibes floating about Capitol Hill in regard to the spending cuts, which no one seems to want but lawmakers also can't seem to stop. There have been plenty of reports saying that the consequences for the economy are dire. The nonpartisan Congressional Budget Office estimates 750,000 lost jobs by the end of 2013 and a loss of 0.6 percent off economic growth. Speaker John Boehner (R-Ohio) on Wednesday said the House will not act unless the Senate goes first.

Keep the Sequester Totals But Add Flexibility Within - Scare stories about the automatic reduction in federal spending to start on March 1—commonly called the sequester—fall mainly into two categories. First are the concerns that reducing every discretionary budget account by the same percentage—the “meat-axe” approach—would not allow government agencies to prioritize.  Hence the scare stories of having to furlough key emergency personnel. But this complaint is easily resolved if President Obama agrees to give agencies, including defense agencies, the flexibility to adjust their budgets within the overall sequester totals. Most Republicans in Congress would agree to this.  Second, the size of the total spending reduction for FY2013 is said to be too big and will slow down the economy. But if you put the reduction into perspective, as in the following chart, you can see that this claim is greatly exaggerated and likely to be false.

Democrats pitch $110bn deal to avoid cuts - Democrats in the US Senate are proposing to replace looming automatic spending cuts with deficit reductions worth $110bn, including a minimum tax level for people earning more than $1m, reductions in farm subsidies and lower defence spending. Legislation presented by Patty Murray, chairman of the Senate budget committee, comes as across-the-board spending cuts worth $1.2tn over 10 years are due to start on March 1. These would result in government cuts of $85bn to the economy for the remainder of the fiscal year ending on September 30. Both Republicans and Democrats – as well as President Barack Obama – are adamant they want to avoid this “sequestration” but cannot agree on how to unwind the cuts and replace them with more focused savings. The bill, which was endorsed by the White House, is unlikely to help bridge the gap, however. The plan would replace sequestration until the start of 2014 and includes the elimination of some small tax breaks benefiting multinationals and oil companies but does not attack some of the bigger deductions that such businesses usually use. Even before it was announced Thursday, Mitch McConnell, the Republican Senate minority leader, dismissed it. “It’s a political stunt designed to mask the fact that they’ve offered no solutions and don’t plan to offer any. And it’s a total waste of time,” he said.

There are now four big plans to stop the sequester - On March 1, a whole bunch of deep, automatic spending cuts are scheduled to take effect. This is known as the “sequester,” a mechanism that will trim the federal government’s budget by $85.3 billion this year and by $1.2 trillion over 10 years. The trouble is, few people in Washington actually want these cuts. They were designed to be sweeping and crude — affecting everything except Social Security, Medicaid, a few anti-poverty programs, and the ongoing wars. Republicans don’t like the fact that the Pentagon’s budget gets slashed 7.3 percent this year. Democrats don’t like the sweeping, across-the-board hacks to government agencies. As such, many members of Congress would prefer to replace the sequester with something else. Here are the four of the ideas out there.

  • 1) The new plan from Senate Democrats: Replace one year of the sequester with defense cuts, domestic cuts and tax hikes.
  • 2) The old House GOP plan: Eliminate other government programs to replace the sequester cuts.
  • 3) The House Democratic plan: Fend off the sequester for one year by raising taxes and cutting farm subsidies.
  • 4) President Obama’s plan to fend off the sequester for a short while with a smaller package of cuts and tax reforms.

No Budget No Pay Really Means No Budget - Anyone who thinks H.R. 325 -- the No Budget No Pay law that House Speaker John Boehner (R-OH) wants everyone to believe will do so much and be so important -- will, in fact, make any difference is both falling for Boehner's spin and doesn't understand how the congressional budget process really works. According to the Congressional Budget Act, a "budget" is not really a budget until the House and Senate agree on a congressional budget resolution conference report, that is, each house has to adopt its own budget and then compromise with the other on a joint agreement. The House- or Senate-passed budget resolution means nothing and neither that house nor Congress as a whole is obligated to follow it. But the text of H.R. 325 makes it clear that the budget included in No Budget No Pay is not a budget resolution conference report:  In other words, No Budget No Pay doesn't require the House and Senate to compromise on a budget, just that they agree on their own budget plan.

A Bad Idea Returns: Balanced-Budget Amendment - Who was it that said there were signs of sanity and moderation breaking out in the Grand Old Party? False alarm. Just weeks after backing away from their threat to force the U.S. Treasury to default on its debts, Congressional Republicans are about to endorse another damaging economic idea that should be consigned to the history books: a balanced-budget amendment to the Constitution.  As I and many others have noted, there is no crisis that justifies immediate action to balance the budget. The deficit is falling relative to the size of the economy, and the U.S. Treasury is having no trouble selling bonds—interest yields on these bonds are at historic lows. Even if drastic action were needed, a balanced-budget amendment wouldn’t be the answer. It would encourage “creative” bookkeeping on the part of Congress, restrict the government from making much-needed investments, and risk plunging the economy back into a deep slump. And all of this without resolving the fundamental debate about the size and scope of the federal government going forward.

The Balanced Budget Amendment’s $300 Billion Error - The balanced budget amendment introduced by Senate Republicans yesterday contains a striking error. As written, it would limit federal spending much more than they claim or, I suspect, intend (I said the same back in 2011, when this first came up). The senators want to balance the budget by limiting spending rather than raising tax revenues. They thus propose the following, according to a press release from sponsor Senator John Cornyn:Prior to each fiscal year, the President must submit to Congress a balanced budget that limits outlays to 18 percent of GDP. 18 Percent Spending Cap. With limited exceptions, Congress must limit outlays to 18 percent of GDP. So what’s the error? The way the amendment would implement the spending limit: Total outlays for any fiscal year shall not exceed 18 percent of the gross domestic product of the United States for the calendar year ending before the beginning of such fiscal year, The amendment thus doesn’t limit spending to 18 percent of the current fiscal year’s GDP; it limits it to 18 percent of GDP in the previous calendar year. At first glance that may not sound like much. But it works out to be 21 months during which inflation and real growth will almost always be boosting GDP.

Let’s just end this whole thing -  Another quarter, another sign that the long-lasting fugue-state “Hey, let’s try austerity again, it’ll be awesome this time“ in Europe is really reaping benefitsA deepening recession in the 17-nation eurozone sent shares lower on Thursday amid evidence that the problems of the single currency’s crisis-hit periphery were spreading northwards to affect monetary union’s core economies of Germany and France. Despite an easing of financial tensions in the second half of the year, gross domestic product in the members of the monetary union dropped by 0.6% in the final three months of 2012, a heftier decline than the markets had been expecting.… The US grew by 2.2% in 2012 and Japan by 1.9%, while GDP in the eurozone contracted by 0.5%. Meanwhile in this country we stand on the precipice of “super austerity”. “I’ll tell you the same thing I told my Republican colleagues at our retreat,” Boehner said. “The sequester will be in effect until there are cuts and reforms that put us on a path to balance the budget in the next 10 years.”

Let the Wars Start--only when we are willing to pay for them -  LindaMBeale =  Russell Rumbaugh's A Tax to Pay for War, notes War spending--like all government spending--wrecks public finances only when more money is spent than is brought in.  ...Three years ago, the Senate Budget Committee adopted a bipartisan amendment requirement that wars be paid for.  ...[But] none of these proposals resolved the question of whether to pay for future wars through spending cuts or raising more revenue." Rumbaugh urges that we "make a choice and require a tax surcharge to pay for any military operation."  He offers three primary rationales for instituting a war surcharge: 

  • 1) Historic norms and traditions for financing wars:  we have historically made major changes in tax poli:y in connection with undertaking wars,
  • 2) Ease of implementation: The "savings" from leaving Afghanistan coupled with the passage of the Budget Control Act with a cap on military spending offer a similar opportunity for a war surcharge.  Any "necessary" military spending above the cap would result in an automatic surcharge to raise the necessary revenues. 
  • 3) Proper consideration of the costs and benefits of war:  Rumbaugh notes that a surcharge will mean that argumnents for military action "would explicitly include a call for increased taxes, forcing the question of whether the stakes in the military situation are worth the cost. 

Federal Means-Tested Programs and Tax Credits - Infographic: CBO - Federal means-tested programs and tax credits provide cash payments or assistance with health care, nutrition, education, housing, or other needs to people with relatively low income or few assets.

A New Marriage Penalty for High Earning Couples—and a Bonus for Some - Our new Marriage Bonus and Penalty calculator, despite all its Valentine’s Day finery, ignores the new 0.9 percent Medicare payroll tax hike buried in the 2010 health law. The extra levy affects only a few high-income couples but in very different ways. Lucky couples will collect marriage bonuses of up to $450. But those less fortunate—if anyone making $250,000 can be considered less fortunate—will incur marriage penalties of as much as $1,350 in additional Medicare tax. The culprit? The income thresholds for paying the tax. The new levy equals 0.9 percent of wages above unindexed thresholds—$200,000 for singles and $250,000 for married couples. Because the threshold for couples is less than double that for singles, the tax imposes a marriage penalty on couples with two high earners but gives a bonus to those with a high earner and a low- or non-earner.

A Wealth Tax Would Look Beyond Income - NYT  -- INCOME tax rates have recently been raised slightly for some affluent people, and there is pressure for additional increases. But some economists say raising marginal income tax rates on high earners may miss the mark. One reason is that the truly wealthy employ all kinds of legal means to minimize their tax liability, including shifting income around the world, deferring gains on their assets and many other sophisticated strategies. Another, though, is that taxes on ordinary income simply don’t apply to inheritance or investment, principal sources of wealth. Under legislation that Congress approved on New Year’s Day the top marginal income tax rate for 2013 has risen to 39.6 percent from 35 percent for individuals on ordinary income over $400,000 and for couples on income over $450,000, while tax deductions and credits start phasing out on income as low as $250,000. But what is being taxed is often just a small portion of the income and wealth of the very richest Americans; unearned income, including unrealized gains and gains on investments, is either not taxed or taxed at a fraction of the top rate on wages.

Corporate Tax Reform is on Obama’s Agenda, But Can He Pull it Off? - In what will probably be the usual endless laundry list of State of the Union promises, President Obama is likely to include tax reform, by which he means a rewrite of the corporate revenue code. The White House seems ready to take a run at lowering corporate rates and scaling back targeted business subsidies. So is House Ways & Means Committee Chairman Dave Camp (R-MI), who is taking the lead in both individual and corporate reform. But any corporate tax initiative will run into an odd coalition of resistance: liberal Democrats and big segments of the business community itself. Progressives are fine with ending business subsidies, of course. But only if some of the new revenue the effort generates is used to either buy down some of the automatic spending cuts due to bite over the next decade or helps reduce the deficit. Obama, by contrast, seems ready to reform corporate taxes in a way that produces the same amount of tax revenue as today’s code. The tension between these two goals becomes transparent when, for instance, Obama talks about some of his favorite business tax targets—special tax breaks for corporate jets and oil production. Sometimes, Obama vows to kill these subsidies in the name of deficit reduction. Sometimes, he’d ditch them to finance lower corporate rates. But even presidents can’t use the same money twice.

Dean Baker: Fix the Debt and a Wall Street Sales Tax: At this point everyone knows about Fix the Debt. It is a collection of corporate CEOs put together by Peter Peterson, the Wall Street private equity mogul. Ostensibly they want to reduce budget deficits and the national debt, but for some reason their attention always seems focused on cutting Social Security and Medicare. While some in this group will allow for minor tax increases, budget cuts are explicitly a priority, with these two programs firmly in their crosshairs. Given that the stated goal of this group is to reduce budget deficits, it is worth asking why taxes don't figure more prominently on their agenda. After all, the United States ranks near the bottom of wealthy countries in its tax take as a share of GDP. It is also worth asking why one tax in particular, a financial transactions tax, never seems to get mentioned in anything the group or its members do.

Yes, Virginia, the Rich Continue to Get Richer: the Top 1% Got 121% of Income Gains Since 2009 - Yves Smith - Yes, sports fans, you read that headline correctly. The top 1% has captured all of the income gains since 2009 and then some, roaring ahead while the rest of the population slipped behind. A new paper by Edmund Saez (along with his frequent co-author Thomas Piketty, a long-standing cataloguer of income inequality) estimates that the income gains to the top 1% from 2009 to 2011 were 121% of all income increases. How did that happen? Incomes to the bottom 99$ fell by 0.4%. This confirms a pattern that Matt Stoller highlighted: that income inequality increased more under Obama than under Bush. And the new Saez paper also describes how it came about. In short form, income to the top 1% is significantly influenced by capital gains. Remember, the tax reporting is not clean here: rising equity and bond markets help all those private equity and hedge fund professionals, who are able to get capital gains treatment for what ought to be labor income. But the paper also stresses that the lower orders were hit hard in the aftermath of the global financial crisis than in the dot-bomb era, which also saw a big drop in capital gains. That isn’t as hard to understand. The collapse of the dot-com mania didn’t impair the real economy overmuch because it was not fueled in a meaningful way by borrowings. By contrast, the housing bubble, and more important (in terms of damage to the financial system) the much housing exposure created synthetically by CDOs that consisted entirely or mainly of credit default swaps was highly geared, hence when it collapsed, it took credit providers down with it.

Top 1% Received 121% of Income Gains During the Recovery, Bottom 99% Lose .4%; How, Why, Solutions - I have spoken many times about "income skew" during the recovery. However, I was never able to precisely quantify the "skew". It's now possible, thanks to many readers who sent a link to a Huffington Post article on Income Gains During the Recovery. The original source of the data is a study Striking it Richer: The Evolution of Top Incomes in the United States by Emmanuel Saez. From 2009 to 2011, average real income per family grew modestly by 1.7% but the gains were very uneven. Top 1% incomes grew by 11.2% while bottom 99% incomes shrunk by 0.4%. Hence, the top 1% captured 121% of the income gains in the first two years of the recovery.From 2009 to 2010, top 1% grew fast and then stagnated from 2010 to 2011. Bottom 99% stagnated both from 2009 to 2010 and from 2010 to 2011. In 2012, top 1% income will likely surge, due to booming stock-prices, as well as re-timing of income to avoid the higher 2013 top tax rates. Bottom 99% will likely grow much more modestly than top 1% incomes from 2011 to 2012.

Affluent Americans Downbeat on Economy -Pessimism has taken hold of America’s high-net-worth households.  Two thirds of these households – those with $5 million or more in investable assets – believe that the country is worse off now than it was in 2007, according to survey findings from Northern Trust. Their view of their own finances, however, is anything but bleak. Close to three-quarters of high-net-worth Americans were confident that they will achieve their financial goals, with only one in five less confident now than they were in 2007. More than four in 10 (41%) cited improved investment returns as the main reason they feel better off today, according to the survey. Wealthy Americans were split on their primary investment objectives, with 37% leaning toward growing wealth and 23% focused on generating income. The remainder said their paramount concern was capital preservation. A different picture emerges for less affluent Americans. Confidence among the mass-affluent, or those with an average of $500,000 in assets, was severely bruised, with fewer than half expressing a high level of certainty that they will achieve their financial goals. And among the affluent, or those with an average of $2.3 million in assets, 60% expressed a high level of confidence. 

Where The US Top 5% Live - A nice interactive graphic:

Facebook: Over $1 Billion in Profits, $0 in Taxes in 2012  - Facebook Inc., which made $1.1 billion in profits in 2012, did not pay any federal and state income taxes, but instead reaped $429 million in net tax refunds, according to a report released Thursday from Citizens for Tax Justice.  Its tax dodging was made possible by taking advantage of tax deductibility of executive stock options. The company is also bringing $2.17 billion in additional tax-option tax breaks for future use, CTJ notes.

Profits and Business Investment, by Paul Krugman - Below are corporate profits (after tax and inventory valuation adjustment) and nonresidential fixed investment (roughly speaking, business investment), both measured as shares of GDP. These aren’t exactly matched figures, because not all business investment comes from corporations. Still, I think they illustrate an important point.  Business investment isn’t actually all that low; you expect it to be relatively weak in a weak economy with excess capacity, but in fact it’s about as high a share of GDP as in the middle Bush years. What’s really out of line with previous experience is the level of corporate profits, which is arguably serving as a kind of sinkhole for purchasing power.

The Difficulty of Thinking Macroeconomically - Paul Krugman worries about the macro implications of corporations scarfing up unprecedented profits while sitting on a hoard of liquid assets.  Tyler Cowen doesn’t understand why: I am confused by this argument.  I would understand it (though not quite accept it) if corporations were stashing currency in the cupboard.  Instead, it seems that large corporations invest the money as quickly as possible.  It can be put in the bank and then lent out.  It can purchase commercial paper, which boosts investment....If there is a problem, it is because no one sees especially attractive investment opportunities in great quantity. Ah, but why are these investment opportunities lacking?  Could one of the reasons be that too high a fraction of national income is being funneled into corporate profits, rather than households inclined to spend it?  What Cowen has trouble with is seeing all the pieces simultaneously in true macro fashion.   The problem is not that corporate money can’t find its way to ultimate investment, but that too much corporate money itself reduces the pull of final demand on the level of investment.  The upshot isn’t that money disappears into cupboards, but that national income is lower than it would otherwise be.

The corporate cash puzzle - Paul Krugman raises a puzzle: [C]orporations are taking a much bigger slice of total income — and are showing little inclination either to redistribute that slice back to investors or to invest it in new equipment, software, etc.. Instead, they’re accumulating piles of cash.Tyler Cowen thinks there is no puzzle: If there is a problem, it is because no one sees especially attractive investment opportunities in great quantity...That’s a problem at varying levels of corporate profits and some call it The Great Stagnation. But I'm not satisfied with this answer. If there is a Great Stagnation, and corporations see no attractive opportunities for growth, then shouldn't they just return their earnings to shareholders as dividends? Standard corporate finance theory says that companies try to generate returns for shareholders in one of two ways. Either 1) the company reinvests its earnings in the business (i.e. "business investment"), raising   the company's value and allowing shareholders to reap a capital gain, or 2) it pays its earnings to shareholders as dividends. Now, since the 1990s, we've gotten used to thinking of companies as rarely paying dividends. But the reason for that was that there were (or at least, companies thought there were) many important growth opportunities to be had; companies took their earnings and reinvested them.

The Growing Corporate Cash Hoard - Last week, the investor David Einhorn sued Apple, in which his hedge fund is a large shareholder, to prevent it from taking actions that would allow it to continue holding onto its $137 billion in cash, rather than paying it out as dividends. Mr. Einhorn’s action highlights a growing problem: many corporations are holding vast amounts of cash and other liquid assets, using them neither for investment nor to benefit shareholders. These assets are largely earned and held overseas, and not subject to American taxes until the money is brought home. Such tax-avoidance techniques, while legal, have come under increasing political attack. On Thursday, Senator Bernie Sanders of Vermont introduced legislation to end deferral and force multinational companies to pay taxes on their foreign-source income.According to the Federal Reserve, as of the third quarter of 2012 nonfinancial corporations in the United States held $1.7 trillion of liquid assets – cash and securities that could easily be converted to cash. By any measure, corporate cash holdings appear to be high and rising. According to the Federal Reserve, nonfinancial corporations historically held liquid assets of 25 to 30 percent of their short-term liabilities. But this percentage began rising in 2001 and now tends to be in the 45 to 50 percent range. In the third quarter of 2012, it was 44.9 percent.

Counterparties: Corporate America’s miserly ways - The arguments over the value of Apple’s cash are symptomatic of a much bigger issue: the corporate world’s cash hoards. According to Factset, they recently hit $1.23 trillion for nonfinancial companies, more than double pre-crisis levels. The argument this time is about how this cash stockpiling may be hurting the rest of us. Since the crisis, the left has liked to blame corporations for not using these growing cash piles to create jobs, under the assumption that big companies are sitting on this money like children refusing to share their toys. It’s more complicated than that, and Paul Krugman and Tyler Cowen (and others) are in a bit of a spat over the matter. Cowen’s position is, basically, that corporate cash hoards always lead to some sort of economic benefit — this money isn’t literally “going in the cupboard”, it’s always invested somewhere, even if it’s just safe assets like Treasuries. “If there is a proCorblem,” he writes, “it is because no one sees especially attractive investment opportunities”. Izabella Kaminzka agrees; Cullen Roche notes that corporate debt levels may justify these cash piles. Krugman’s more Keynesian view, on the other hand, sees corporate cash as a kind of economic “sinkhole”. Corporations are actually using some of their money: even given the slow economy, business investment, he writes, is “about as high a share of GDP as in the middle Bush years”. But corporate profits are near a record and that money isn’t being put to productive use. Paying workers does a lot more good than investing money in a safe haven, he says: “The point is that buying goods and services is one thing, adding directly to aggregate demand; buying assets isn’t at all the same thing”.

Can People or Corporations Have Too Much Cash? -Is it possible to have too much cash for your own good?  I believe the average 7th grader would easily recognize the inherent absurdity of such a question. However, the average economic writer does not understand what the average 7th grader does. For example, please consider Apple isn't only company with too much cash on CNN Money by author Paul La Monica.  Issuing preferred shares that pay a big dividend may not be the best use of Apple's more than $137 billion of cash and liquid investments. But hedge fund manager and Apple shareholder David Einhorn, who is pushing the maker of iEverything to reward investors with a new class of high-yielding stock, has a point. Apple should be doing something more productive with its more than $137 billion in cash. Did I mention that Apple (AAPL) has more than $137 billion in cash? And it's not alone. Several leaders in the tech and pharmaceutical industries are hoarding cash. .... Mercy! Corporations have too much cash! And they are hoarding it!My Goodness. It's no wonder their stocks are doing poorly. Why everyone knows making money is bad business and spending money isn't.Yes readers, this is the way economic writers on mainstream media think.

On cash hoarding -- Krugman’s had a go, Cowen’s had a response and now Roche has weighed in. So why are corporates hoarding cash, and is this good or bad for the economy? Krugman is of the opinion that people may be underestimating the damage corporate hoarding is doing due to an illogical and overly loyal commitment to Say’s Law. This rule, largely debunked by Keynes, states that all income ends up being spent because all products are paid with products. Thus it doesn’t really matter if corporates hoard or not, because we live in a commodity-for money-commodity exchange world. If you’re holding money, you’re really holding yet-to-be redeemed commodities, which have already been pre-allocated to the money you hold in question. Everything is a zero sum game, and only the price of the transaction absorbs supply/demand imbalances. Given that, money hoards don’t really detract from stimulation. In the Keynesian view, however, too much hoarding is always bad, largely because it represents income being turned disproportionately into savings. And once savings enter into it, a time value becomes associated with money which usually requires a return.

Interdealer Brokers Emerge as Key Enablers in Libor Scandal - Interdealer brokers, the middlemen who line up buyers and sellers of securities for banks, are emerging as key enablers in the Libor scandal after three firms paid a total of $2.6 billion for rigging global interest rates.  Employees at firms including ICAP Plc, the world’s biggest interdealer broker, and RP Martin Group Ltd., a smaller British competitor, passed on requests from derivatives traders asking rate-setters at others banks to make favorable submissions, e- mails released as part of the global probe of interest rate- rigging show. In some cases, the middlemen took bribes as payment for the services in the form of so-called wash trades, regulators said, without identifying the firms that did.  The brokers assumed greater influence as credit markets froze at the start of the financial crisis in 2007. Bankers charged with making submissions to the London interbank offered rate increasingly relied on information from the brokers to determine what figures to contribute. That left the benchmark vulnerable to manipulation by traders trying to profit from bets on derivatives. The outcome of those bets often depended on where the Libor rate fell on International Money Market dates, or IMMs, the quarterly dates when futures contracts settle.

Wall Street's Derivative Shell Game - Wall Street is now winding their way through the swiss cheese loophole maze financial reform is. Remember credit default swaps, those deadly, bad math, bad computation derivatives which were behind the financial crisis?  These same types of risky derivatives are making a comeback masked as futures.Wall street has found a new way to avoid regulation and continue their derivative CDS gambling casino and it is setting up the way for a new financial crisis.  They are re-wrapping credit default swaps and other derivatives into futures, which are exempt from Dodd-Frank. more stringent regulations. A crucial change in the way financial derivatives are packaged and sold on Wall Street is enabling traders to bypass new regulations aimed at limiting reckless speculation, enhancing the prospect of another derivatives crisis, warn some market participants. Under the Dodd-Frank financial reform law adopted by Congress in 2010, investors are required to set aside significant sums of cash to cover losses on their derivatives trades -- money they could otherwise plow into additional investments.  That policy came in response to the financial crisis that began in 2007, when major financial institutions found themselves unable to cover hundreds of billions of dollars in shortfalls on derivatives trades.But traders have recently forged a path around these so-called margin requirements in order to allow them to harvest larger profits via larger bets:  They are repackaging some derivatives known as swaps into another financial product known as futures.  Futures are less stringently regulated, meaning investors can stake out larger positions while reserving smaller amounts of cash.

CFTC Examines Gas Trades - U.S. commodities regulators are examining sharp price swings in the natural-gas market during the past year that came just before the public announcement of weekly gas-inventory data, a person familiar with the situation said. Officials in the Commodity Futures Trading Commission's market-oversight division have intensified since late last year their customary review of market data in an effort to detect suspicious trading strategies around the reports by the U.S. Energy Information Administration. The expanded scrutiny of the natural-gas market is "more than just the routine oversight and surveillance," the person said. Regulators are examining trading activity by specific firms, and the CFTC's commissioners have been briefed on the matter, this person added.

Accounting control fraud: Not just “Mitch and Murray,” but “Blake,” too -- Yves buries this idea but I think it's important: [P]roducer level employees (heads of profit centers) at all save well run firms (that list probably stops at Goldman**) are seeking to maximize their returns, and that often includes gaming the firm’s systems and pay policies. This is why Bill Black’s accounting control fraud idea is inadequate when dealing with a financial firm that has large trading operations. The looting occurs not just at the executive level, but also at the profit center level. Hence the expression, “IBG, YBG” for “I’ll be gone, you’ll be gone.” That refers to the widespread practice of doing business or putting on trades that show profits this year but have good odds of blowing up down the road.  Meaning: The rot in the financial system isn't only at the executive level*, with Mitch and Murray. It's not only downtown. It's also at the profit centers, and all down the line, wherever the Blakes of this world are making their motivational speeches:

Fed Bank Chiefs Back Money-Fund Overhaul - The leaders of all 12 regional Federal Reserve banks are throwing their weight behind a push to overhaul the $2.7 trillion money-market industry, an unusual joint action sure to fuel debate about a group of funds whose troubles threatened the stability of the financial system during the 2008 credit crisis. In a joint letter sent Tuesday to the Financial Stability Oversight Council, a board of top U.S. regulators established by the Dodd-Frank financial overhaul, the Fed bank presidents said money-fund activities in their current form could spread "the risk of significant…credit problems" from the funds to banks to the broader financial sector. The letter, released by the Federal Reserve Bank of Boston, was a response to a proposal for money-market overhaul made by the FSOC in November. The aim of the council's push: Prevent runs on money-market funds during a financial crisis, as happened in 2008 when Lehman Brothers Holdings Inc. filed for bankruptcy protection. The move sparked a run on one money fund that spread to others and forced a government backstop for the industry. The Fed presidents, representing institutions in close touch with banks and businesses across the country, said risks of runs on money funds still remain more than four years after the financial meltdown.

Bank Deals Failed to Raise Alarms - Should an investment bank worry about a client’s motives when it engages in a complex and potentially suspicious transaction?  Banca Monte dei Paschi di Siena of Italy has been just such a client. The Italian bank, which has just been rescued by the state, engaged in a series of complex deals with Deutsche Bank, JPMorgan Chase and Nomura that had the effect of giving a misleading picture of its finances. One issue relates to how Monte dei Paschi di Siena, or M.P.S., paid for its acquisition of Antonveneta, another Italian bank, in 2008. JPMorgan helped finance part of the deal by selling €1 billion, or about $1.34 billion at current exchange rates, worth of so-called Fresh notes, a type of bond that could be converted into M.P.S. equity. But the Bank of Italy objected that they were not sufficiently loss-absorbing and insisted that M.P.S. not pay money to JPMorgan to forward onto the investors unless it made a profit.

The Big Bank Debate Continues - Yesterday, Former Treasury Secretary and Citigroup director Robert Rubin disagreed with Sandy Weill’s comments on breaking up the banks: “I think that if you followed Sandy’s path and you broke up the banks in some fashion or other… The systemic risk, the too big to fail risk will move from one place to another place. For example, if you could curtail what the banks can do in terms of trading, it isn’t that the trading is going to go away. You have a large global economy that needs those activities but they’ll go to other platforms. I think the real question is, are there ways to deal with the risk?” Contributing to this debate, HPS Insight released a report titled, “Banking on our Future: The Value of Big Banks in a Global Economy.”  The points made by Rubin, JPMorgan’s Jamie Dimon, and many others are neither radical nor new. Large banks provide significant value, and the flow of credit services to less regulated entities is a substantial concern for many economists and policymakers, and has been for some time.. Posts by James Pethokoukis of AEI and Neil Irwin of The Washington Post’s Wonkblog reviewed the report. Simon Johnson of MIT published a critique in the New York Times’ Economix blog yesterday, taking a number of issues with the report. In addition, Mark Thoma’s Economist View blog cites Mr. Irwin’s article, among others, in compiling the arguments for and against breaking up the banks.

Fed's Tarullo: Biggest Banks in This Yr's Dodd-Frank Crosshairs - The Federal Reserve's point man for Dodd-Frank regulations will tell the Senate Banking Committee Thursday that this is the year the biggest banks get what's coming to them, a wide array of new rules that define capital requirements which make sure that if they falter, they will be put out of their misery in an orderly fashion that leaves taxpayers out of it. Fed Gov. Daniel Tarullo, in prepared testimony made public Wednesday night, delivers a long to-do list that includes several regulatory projects the biggest banks have been fighting with lobbyist armies, including the so-called Volcker Rule. The Fed has four priority projects this year, Tarullo said, among them "improving the resolvability of large banking firms," a euphemism for the way the biggest institutions could be gradually put to sleep if they get in trouble. If the process can be made credible, then no longer would markets give the big banks special consideration because of their too-big-to-fail guarantee of immortality. Those benefits are seen to include lower borrowing costs. The Obama administration has additionally pushed a fee to be paid by the biggest banks to compensate for the extra danger their failure could pose for the entire financial system.

Fed’s Tarullo: Notable Changes in Store With Final Volcker Rules -- U.S. banking regulators are likely to make some notable changes to rules governing banks’ capital and ability to engage in proprietary trading as they push ahead to finalize the standards this year, Federal Reserve governor Daniel Tarullo said Thursday. Mr. Tarullo told the Senate Banking Committee that regulators have learned a lot from thousands of comments they have received on the proposed regulations, but need to move to finish rule-writing in order to provide more certainty to financial firms. In an acknowledgement of criticisms from lawmakers and industry participants, he suggested the final proposals for the so-called Volcker and standardized capital rules for banks could be altered from their original form.

Maybe Too Big To Fail, but Not Too Big to Suffer - Which financial institutions are "too big to fail"? According to a report from the international Financial Stability Board, a working group of governments and central banks that tries to facilitate international cooperation on these issues, here's the list as of November 2012. This list is actually the "global systemically important banks," known as the G-SIBs, which are a subcategory of the "global systemically important financial institutions," or G-SIFIs.  Already finalized, as the Financial Stability Board (FSB) explains, are guidelines for the "domestic systemically important banks," the D-SIBs, which national governments are expected to implement by 2016. Meanwhile, the International Association of Insurance Supervisors (IAIS) has proposed a method of deciding who is a "global systemically important insurers," the G-SIIs. The Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) are now working on a method to idenfity the systemically important non-bank non-insurance financial institutions (no acronym yet available).  Meanwhile, the Financial Stability Oversight Council (FSOC) within the U.S. Department of the Treasury is working on its own lists. In its 2012 annual report, it designated eight systemically important "financial market utilities"--that is, firms that are intimately involved in carrying out various financial transactions. In addition, the Dodd-Frank legislation presumes that U.S. banks are systemically important if their holdings exceed $50 billion in consolidated assets.

Equity capital requirements: The people versus the banks - MOST of what we call money is actually short-term debt created by banks when they make loans. This means that banks are the stewards of our savings and manage the payments system. As a result, they have a privileged place in our society: governments never deliberately choose to liquidate the banking system. It always appears preferable, in the short term at least, to preserve the incumbent institutions and personnel through bail-outs. (Lending to “solvent but illiquid” firms at below-market rates is another kind of bail-out, even if it is not always called one by the authorities.) Bankers thus have every incentive to become as “systemic” as possible and to take as much as risk as possible—they know that they can almost always get these bail-outs when they need them. Moreover, the liability of the big risk-takers (i.e., the mid-level traders rather than the executives) is often quite limited.* They keep all of the upside when times are good and leave the rest of society with the tab when their bets go south. The Bank of England’s Andrew Haldane has argued that, if you properly count the cost of crises and hidden subsidies, banking as currently practised may not actually add any value. Policymakers have been trying wrestle with these problems for more than a century, most recently with the Basel accords and America’s Dodd-Frank law. But, according to The Bankers’ New Clothes, a powerful new book by Anat Admati and Martin Hellwig, these reform efforts failed to address the basic problem of the crisis: banks are too fragile. The authors persuasively argue that the solution is higher levels of equity capital throughout the banking industry as a way offset the impact of the implied government protections against failure.

One consequence of better-capitalised banks - IN MY previous post, I argued that society would be better off if banks funded more of their assets with loss-absorbing equity rather than debt. The counterarguments commonly advanced by the bankers do not stand up to the evidence. However, there is one interesting case to be made against higher equity capital ratios—although you never hear the bankers make it. This is the idea that bank debt is a public good because it is a “safe” asset. After all, most of what we call “money” is actually bank deposits and other forms of short-term debt created by financial firms. Higher ratios of bank equity to bank assets, therefore, imply a relatively lower supply of this alleged public good. Fortunately, the transition to a better-capitalised banking system can be accomplished without shrinking the supply of safe assets. Governments in countries with their own currency just need to issue more sovereign debt to offset the desirable decline in bank debt. Since the debt of banks and other big financial firms is effectively guaranteed by the state already, this would not actually add to the liabilities of taxpayers. In fact, it could increase society’s net wealth by making the financial system safer.*

Sauce for the Goose, French Style -- Michel Barnier, the Frenchman who is the European Commissioner for internal market and services, spoke in New York on Friday at a luncheon sponsored by the Atlantic Council and the Clearing House, and made the plea for the United States to adopt International Financial Reporting Standards, something that now seems very unlikely. “I continue to be disappointed by the slowness of the U.S. in moving toward internationally agreed accounting standards,” he said. “It is essential to have common basic standards. Otherwise we risk that our prudential standards will have different effects.” He warned of the risks from a return “to a fragmented system based on national or regional approaches.” Whatever the United States does, genuinely “common basic standards” are probably never going to arrive. And France can take a lot of the credit, or blame, for that.  It was France, at the behest of its banks, that nearly a decade ago insisted on a carve-out from the rules on bank accounting when the European Union agreed to adopt international standards. As a result, Europe’s banks had a choice of which rules to follow.

Stricter Capital Requirements Still on Track - The European Union’s top financial-market regulator said Friday that he was assured by the chairman of the Federal Reserve that the U.S. is on track to implement Basel III capital requirements. “I came here to make sure it is done,” said Michel Barnier, the EU’s commissioner in charge of financial-market regulation at a speech in New York City. “The answer from [Fed Chairman Ben] Bernanke and the highest levels of the Federal Reserve is that it will be the case.” Mr. Barnier said that there may be delays, both in Europe and in the U.S., in implementing the requirements fully for technical reasons. But, “the assurance I got from this visit is Basell III will be implemented,” he said.

Gangster bankers: too big to jail -- The deal was announced quietly, just before the holidays, almost like the government was hoping people were too busy hanging stockings by the fireplace to notice. Flooring politicians, lawyers and investigators all over the world, the U.S. Justice Department granted a total walk to executives of the British-based bank HSBC for the largest drug-and-terrorism money-laundering case ever. People may have outrage fatigue about Wall Street, and more stories about billionaire greedheads getting away with more stealing often cease to amaze. But the HSBC case went miles beyond the usual paper-pushing, keypad-punching­ sort-of crime, committed by geeks in ties, normally associated­ with Wall Street. In this case, the bank literally got away with murder – well, aiding and abetting it, anyway. For at least half a decade, the storied British colonial banking power helped to wash hundreds of millions of dollars for drug mobs, including Mexico's Sinaloa drug cartel, suspected in tens of thousands of murders just in the past 10 years – people so totally evil, jokes former New York Attorney General Eliot Spitzer, that "they make the guys on Wall Street look good." The bank also moved money for organizations linked to Al Qaeda and Hezbollah, and for Russian gangsters; helped countries like Iran, the Sudan and North Korea evade sanctions; and, in between helping murderers and terrorists and rogue states, aided countless common tax cheats in hiding their cash.

Elizabeth Warren Makes Promising Start in Senate Banking Committee Hearing -  Yves Smith - The progressive blogosphere seems pleased with Elizabeth Warren’s initial foray in the Senate Banking Committee. For instance, Huffington Post trumpeted, “Elizabeth Warren Embarrasses Hapless Bank Regulators At First Hearing.” While Warren fronted the question many American have asked, “Why no trials of big banks?” and made a coded reference to Aaron Swartz, it’s more accurate to say that the jury is still out on how effective Warren will be. (video)

“Revolving door” may have hurt SEC money fund reforms: report (Reuters) - Former U.S. Securities and Exchange Commission staffers who now work in the private sector may have helped derail last year's effort to reform the $2.6 trillion money market fund industry, according to a report released on Monday. The case study on money market fund lobbying is part of a 60-page report by the Project on Government Oversight (POGO). It is one example within a broader review by the non-profit government watchdog that examines in detail how the "revolving door" at the SEC may have impacted policy and enforcement decisions over a 10-year period. The publication of the report comes a few weeks after President Barack Obama nominated Mary Jo White, a former prosecutor and high-profile white collar defense lawyer, to lead the SEC. While White's nomination has generated little controversy so far, some have questioned whether her past defense of Wall Street executives could impact how she does on the job. "The revolving door is deeply embedded at the SEC and throughout the federal government," the report said.

SEC Revolving Door Fuels Wall Street's Too Big To Fail Problem - The steady flow of officials from the Securities and Exchange Commission into top corporate jobs feeds a regulatory culture of weak law enforcement and preferential treatment for big banks, according to a new report from the Project on Government Oversight. The group, a non-partisan investigative watchdog, said information it obtained through a Freedom of Information Act request shows 419 former SEC employees filed at least 1,949 disclosure statements revealing that they planned to represent a private-sector client with SEC business from 2001 to 2010. SEC employees are only required to file disclosure statements for the first two years after leaving the agency. The flood of former SEC officials pressing the agency to go easy on their new private sector clients has influenced the outcome of dozens of cases in which the SEC issues official waivers exempting companies from standard penalties, the report said. These waivers appeared especially generous in cases involving repeat offenders -- companies that the SEC sanctions for multiple violations within a few years. Big banks routinely receive this special treatment from the SEC, even after repeatedly breaking the law, the Project on Government Oversight said.

SEC To Second Circuit: ‘Please Don’t Make Us Do Our Jobs!’ - In a completely unrelated note, today the Second Circuit heard arguments from the SEC — the federal agency statutorily charged to enforce the nation’s securities laws — and Citigroup — a company targeted for securities laws violations that it refuses to admit or deny committing — on the SAME SIDE. This should be a red flag. They wanted the Second Circuit to spank Judge Jed Rakoff for having the audacity to ask the SEC to kindly do its job. The nerve of some people. Well, securities law may not be as sexy as drone strikes, but I watched the SEC try to pull off just as naked an executive power grab.  When I first got there, the TV only showed the floating face and torso of Judge Rosemary Pooler, joining the proceedings from the Northern District of New York, in a courtroom that looked eerily like the backdrop to a hostage video with sparse, utilitarian walls, a light switch and a flag. I felt bad watching her sit like an interviewee in a green room with a hundred lawyers and journos watching her every move. It felt like Legal Big Brother.

Quietly Killing a Consumer Watchdog - NYTimes Editorial - If you’d like to know why Republicans are trying to shut down the Consumer Financial Protection Bureau, take a look at three things the agency has already accomplished in its first 18 months:

Dave Dayen on How the CFPB Punted on Servicer Reform - Yves Smith - Dave Dayen has just published a story in Washington Monthly on how the mortgage standards launched by the Consumer Financial Protection Bureau fall well short of what is necessary.  Now the parts of mortgage reform that the CFPB did get sorta right, which are its qualified mortgage rules (which Adam Levitin argues are back door usury laws; they make high-spread interest rate mortgages very unattractive to originators and investors) may well be moot. Any action taken that relied on the powers that the CFPB obtained only by having a director in place could be voided, since a recent appeals court decision (which looks likely to be affirmed if taken to the Supreme Court) found recess appointments to be invalid.  Now the worst case scenario is that the CFPB could re-enact them, but that may not be as easy as it sounds. Obama would still need to get a director approved. Republicans  plan to revive efforts to undermine the agency by having it lead by a commission rather than a director and/or have it funded by appropriations, which was the mechanism used to hobble the SEC.  Dayen gives a high-level description of how the CFPB blew it on servicing reform. There seems to be a peculiar amount of denial in the Beltway as to how terrible servicing is. If you were to believe the CFPB, all you need to do is make those pesky servicers follow servicing standards and make them offer sensible mods before foreclosing. The one truly positive thing the CFPB did do was to require servicers to offer modifications.

Which Consumer Financial Education Programs Are Most Effective?: Assuming a Fact Not in Evidence - The CFPB would like your comments on “effective financial education approaches that create opportunities for consumers to improve their financial decision making capabilities.”  I thought I had blown up this myth already.  And others keep proving me right.  If you were at this past year’s Boulder Summer Conference on Consumer Financial Decision Making you know that a soon-to-be released exhaustive meta-analysis of past studies demonstrates that financial education does not produce better financial outcomes, and another study using a much larger dataset and a more robust set of controls than past work finds that financial literacy does not lead to improved financial outcomes.   I have detailed elsewhere why consumer financial education does not lead people to make the decisions and take the actions required for household financial well-being in the United States today.  But here is the quick version: 

S&P Suit Shows DOJ Knows about Wall Street Corruption - Despite the best efforts of Lanny Breuer to hide it, the complaint filed against Standard and Poor’s by Los Angeles US Attorney André Birotte, Jr. proves that the Department of Justice is fully aware of the corruption on Wall Street in the run-up to the Great Crash. The alleged facts point directly at the issuers of real estate mortgage-backed securities and collateralized debt obligations as the leading cause of the losses of the victims of S&P’s alleged frauds.  In a nutshell, the issuers, a term which deal underwriters, played a major role in creating the software and techniques used to rate RMBSs and CDOs. They used that role to delay and water down changes to the ratings systems. They played the ratings agencies against each other, and they got much higher ratings than were justified by the mortgage loans that underlay the securities. The issuers had mountains of these bad loans, and were desperate to get them off their baoks to protect their balance sheets. Those issuers include Too Big To Fail Banks, and some others as well.

Rating Victims Didn’t Know S&P’s Toxic AAA Born of Greed -  When Charles O. Prince III was chief executive officer of Citigroup Inc. from 2003 to 2007, he didn’t know about a surge in mortgage risk that his own investment bankers loaded on to its bank’s books.  Because such debt carried top credit ratings from firms such as Standard & Poor’s, few financial executives paid attention to the potential dangers. “If someone had elevated to my level that we were putting, on a $2 trillion balance sheet, $40 billion of AAA rated, zero risk paper, that would not in any way have excited my attention,” Prince told the Financial Crisis Inquiry Commission, according to a transcript of his testimony released in 2011.  Mortgage securities granted top grades started souring in 2007, leading to ballooning losses. Citigroup required a $45 billion federal rescue, the largest of the bank bailouts that put taxpayer money at risk. The Justice Department sued New York-based S&P and parent McGraw-Hill Cos. last week over the damage caused by the practices allegedly behind the inflated rankings that contributed to the biggest financial crisis since the Great Depression.

Obama S&P Case Started When Toxic Debt Masqueraded as AAA -  When the U.S. Justice Department charged Standard & Poor’s with fraud earlier this month and demanded $5 billion in restitution, it was the culmination of the Obama administration’s four-year pursuit of financial chicanery masquerading as sacrosanct credit ratings.  Two dozen lawyers were assigned to a probe they called “Alchemy,” for the medieval pseudo-science that tried to turn lead into gold, as the department modeled a federal case on an analogy for failed mortgage-debt packages. They dug into 30 million documents, found cooperating witnesses and say they’ve got the evidence to win in court on an issue President Barack Obama since 2009 has been saying helped bring the U.S. economy to the brink of collapse.“From the beginning of our effort to deal with the crisis, we had the ratings agencies high on the list,” former Representative Barney Frank, a Democrat and co-author of the 2010 Dodd-Frank financial regulation law, said in a telephone interview. “Our only frustration is that we couldn’t come up with better ways to deal with them, but we did everything we could think of in the legislation to restrict them.”

The weird, unsatisfying case against S&P - The government’s 119-page civil lawsuit against credit rating agency Standard & Poor’s for allegedly inflating the ratings it gave to residential mortgage-related securities, or RMBS, in the run-up to the crash has removed whatever lingering doubts (there weren’t many!) might have remained about just how problematic the ratings game is. But it also raises a question: Why, in cases of white-collar wrongdoing, is it often the cogs in the wheel that seem to pay the highest price? Let’s stipulate that there are weird things about this case. To lower its burden of proof, the government is using a 1989 law that is supposed to protect taxpayers from frauds against federally insured financial institutions. The result, as Bloomberg columnist Jonathan Weil has pointed out, is that the government is claiming that some of the very banks — mainly Citigroup — that packaged the securities were also defrauded by the rating agencies. Plausible? Well, yes, particularly for Citi, where the right hand often doesn’t know what the left hand is doing. And just because the banks fell for their own scam doesn’t mean it wasn’t a scam. But it’s still weird. It’s also weird that the government names some S&P executives but leaves others anonymous. And  it’s weird that the government has sued S&P but not Moody’s Investors Service, which at least in outward appearance was equally culpable. (S&P, for its part, has stated that it is “simply false” that it compromised its analytical integrity, and that it has a “record of successfully defending these types of cases, with 41 cases dismissed outright or voluntarily withdrawn.”)

On the Waiting List at the Debt-Rating Club - Many people have been disappointed that S.& P. and Moody’s Investors Service, the big and powerful companies that are supposed to assess the creditworthiness of bonds, have escaped culpability. Not only do these companies still hold sway in securities markets, they’ve also hung on to their lush profits from the glory days of mortgage origination. Given that the financial crisis began unfolding more than five years ago, it is discouraging to see how entrenched the large and established ratings companies remain. Ratings are still used to determine bank capital requirements, and investors rely heavily on them.  Over the years, lawmakers have tried to open up the duopolistic world of ratings agencies to greater competition and, therefore, better performance. But gaining regulatory approval to join the ratings arena is exceedingly burdensome. That, at least, has been the experience of R&R Consulting, a firm with a stable of highly respected credit analysts and an enviable record of having predicted the mortgage mess in 2003.

CoStar: Commercial Real Estate prices up 4.3% Year-over-year - Here is a price index for commercial real estate that I follow. CoStar notes a few key trends: 1) Sales volume has increased significantly (highest since 2004), 2) the percent of distressed sales has declined, and 3) it appears price increases have moved beyond core properties (the first to recover). There is much more in the release. From CoStar: U.S. commercial real estate posts record gain in sales volume and broadening pricing recovery to close 2012 While rising steadily over the last four years, sales volume reached nearly $64 billion in 2012, a 22% increase from 2011 and the highest annual total since 2004. Activity spiked significantly in December as investors rushed to close deals prior to year-end. In fact, at 1,593, the number of repeat sales in December reached an all-time high since CoStar started tracking the property sales used in the CCRSI. This graph from CoStar shows the Value-Weighted and Equal-Weighted indexes. As CoStar noted, the Value-Weighted index is up 37.1% from the bottom (showing the demand for higher end properties) and up 4.3% year-over-year. However the Equal-Weighted index is only up 12.8% from the bottom, and up 8.1% year-over-year. Note: These are repeat sales indexes - like Case-Shiller for residential - but this is based on far fewer pairs

Unofficial Problem Bank list declines to 820 Institutions - Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The number of unofficial problem banks grew steadily and peaked at 1,002 institutions on June 10, 2011. The list has been declining since then. Here is the unofficial problem bank list for Feb 8, 2013.  Changes and comments from surferdude808:  Two publicly traded organizations announced this week the termination of enforcement actions issued by the FDIC. The removals leave the Unofficial Problem Bank list at 820 institutions with assets of $305.0 billion. A year ago, the list held 958 institutions with assets of $ 389.6 billion.  Next week, we anticipate for the OCC to release its enforcement action activity through mid-January 2013.CR Note: The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public. (CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.) As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest.

FHA Gets Scrutiny as It Looks for a Hand - The Federal Housing Administration, a significant backer of new mortgage lending over the past five years, is facing billions of dollars in potential losses, as many loans that it guaranteed during the recession have soured. The agency's independent audit last fall showed that at its current pace, the FHA would exhaust its reserves and need $16 billion from the U.S. government to cover projected losses. That would be a blow because since its creation in 1934, the agency has never required Treasury assistance. The FHA doesn't issue mortgages. Instead, it insures lenders against losses on loans that meet its standards. ... Before the bubble burst, lenders considered the FHA's standards too stringent, and in 2006 the agency's share of the home-purchase market fell below 5%. The FHA requires borrowers to prove they earn enough to make their monthly mortgage payment—thereby ruling out "liar loans." It backs mostly fixed-rate loans—meaning no teaser rates....The most problematic loans are those insured from 2007-09, particularly from a program that allowed home sellers to make "gifts" of down payments to buyers through nonprofit groups. FHA officials belatedly prevailed on Congress to pull the plug on those risky lending programs in 2008.

The FHA and the Role of Government When Markets Fail - As he did in his second inaugural address, President Obama’s SOTU address reminded listeners that he twice ran and won on a role for government that goes well beyond that articulated by Gov Romney in the campaign or Sen Rubio in his SOTU rebuttal.One of the most important fault lines in these debates is government action to correct a failure or serious inefficiency in the market.  If you fail to see such failures, or misdiagnose them—Rubio absurdly blamed the housing bubble and bust on government lending—you risk exacerbating the problem and causing a lot of people a lot of economic pain.Let me be much more concrete here by talking about the case of the Federal Housing Administration, or FHA.  When the housing bubble burst in late 2007, the private system of housing finance collapsed.  Once gravity reasserted itself and home prices fell by more than half in some of the hardest hit states, banks were stuck holding loans worth cents on the dollar, if that.  They did what they always do in such situations: they deeply retrenched, flipping from vastly under-pricing risk to becoming hugely averse to taking on any credit risk at all.The private housing finance market essentially shut down, meaning no liquidity (the once robust—and reckless—market for mortgage backed securities disappeared overnight), no home loans, no refis, and no way forward.  Until, that is, a few government agencies, including the FHA, stepped into the breach.

Bank of America Foreclosure Reviews: Why the OCC Overlooked “Independent” Reviewer Promontory’s Keystone Cops Act (Part V- A) by Yves Smith - Today we release the two latest posts in our whistleblower series on the Bank of America foreclosure reviews, focusing on the role of the “independent” consultant hired to perform the reviews, Promontory Financial Group.  As we described in earlier posts in this series (Executive Summary, Part II, Part IIIA, Part IIIB, Part IV), and Part IVB, OCC/Federal Reserve foreclosure reviews meant to provide compensation to abused homeowners were abruptly shut down at the beginning of January as the result of a settlement with ten major servicers. Whistleblowers from the biggest, Bank of America, came forward to provide compelling evidence that the bank and its independent consultant, Promontory Financial Group, attempted to suppress evidence that borrowers had been harmed by the false and deceptive practices of the mortgages lenders. Together, they reviewed over 2500 files. When asked to estimate the percentage of harm and serious harm they found, the lowest estimate of harm was 30%, with the majority judging the rate of harm at or over 90%. Estimates of serious harm ranged from 10% to 80%. In this post and the next, we focus on how Promontory was badly conflicted and incompetent. Here we discuss how it has become a powerful, yet unaccountable shadow regulator. In the next post, we show how it made a hash of the foreclosure reviews and describe troubling questions about how they were conducted.

Bank of America Foreclosure Reviews: Why the OCC Overlooked “Independent” Reviewer Promontory’s Keystone Cops Act (Part VB) - by Yves Smith This post continues our discussion of the role of “independent” foreclosure review consultant Promontory Financial Group. Here we focus on what happened, or more important, didn’t happen in Promontory’s conduct of the reviews, and how that contrasts with the staggering fees the firm is widely believed to have earned.  David Einhorn has a saying about the companies that he has shorted: “No matter how bad you think it is, it’s worse.” Promontory’s and the OCC’s performance on the foreclosure reviews epitomize this dictum. As much as the foreclosure reviews were widely expected to be a charade, given the conflicted roles of supposedly independent review firms like Promontory, there was no reason to expect the reviews to also be an ineptly managed, costly fiasco. Promontory’s inability to man and adequately oversee the project also meant what little useful work was accomplished was done overwhelmingly by contractors and temps, who were far enough removed not to have gotten the wink and nod that no borrower harm was to be found. So individuals who have no lasting loyalty to Promontory and Bank of America, and whose confidentiality agreements are likely inoperative due to defective drafting, public policy exceptions to these agreements, and enhanced whistleblower protection under Dodd Frank, have unearthed widespread evidence at all of Promontory’s clients on the independent foreclosure reviews of borrower harm. No wonder the OCC rode to the rescue to shut the reviews down.

Big Banks Are Told to Review Their Own Foreclosures - Washington is seeking help from an unlikely group in its effort to distribute billions of dollars to struggling homeowners in foreclosure: the same banks accused of abusing homeowners with shoddy foreclosure practices. In doing so, the regulators are trying to speed the process after a flawed, independent foreclosure review delayed relief for millions of borrowers, according to people briefed on the matter. But housing advocates worry that the banks, eager to end the costly process, could take shortcuts as they comb through loan files for potential errors, in some cases diverting aid from the neediest homeowners. Regulators say they will check the work. And banks have already agreed to pay a fixed amount to troubled homeowners, creating another backstop.According to officials involved in the process, who spoke anonymously because the matter is not public, the regulators had few alternatives. Last month, the Office of the Comptroller of the Currency scuttled the foreclosure review by independent consultants because it was marred by delays and inefficiency. Instead, the regulator struck a multibillion-dollar settlement directly with the nation’s largest banks, a deal that includes $3.6 billion in payments to aggrieved homeowners. To accelerate the payments, the comptroller’s office decided to cut out the middlemen, the consultants, from the reviews. In a conference call last week, the government outlined a plan to use the lenders instead, according to people with direct knowledge of the discussion. Banks will now have to assess each loan for potential errors, which will help determine the size of the payments to homeowners.

OCC Compounds Botched Foreclosure Review Process with Barmy Plan for Distributing Peanuts -  Yves Smith - The OCC is bravely trying to spin the horrorshow of its botched foreclosure reviews as some sort of positive outcome. It is apparently now trying to present its dereliction of duty in figuring out how to compensate borrowers as no big deal. But the most amazing finesse, which a New York Times article tacitly accepts, is the OCC’s pretense that it got a good deal for homeowners in the settlement.  Just focus on the cash portion, which is $3.3 billion across the ten servicers in the settlement. 495,000 complaint letters were filed. The estimates of serious harm from the whistleblowers at the Bank of America site in Tampa Bay ranged from 10% to 80%. The average was 33%, and the estimates also clustered around 30% to 40%. So we’ll use 30%. To make the math simpler, we’ll use 500,000 x 30% x the maximum award, which was $125,000, which would seem to be warranted with “serious harm”  You get $18.75 billion.

Backdated Mortgage Assignment Comes Back To Haunt Foreclosure Lender in Juarez v. Select Portfolio Massachusetts - Noted Massachusetts foreclosure defense attorney Glenn Russell is on a roll of a lifetime, yesterday winning a rare victory on behalf of a borrower at the U.S. Court of Appeals for the First Circuit in Boston. The case is Juarez v. Select Portfolio Servicing, Inc. (11-2431) (click for opinion). It is, I believe, the first federal appellate ruling in favor of a wrongful foreclosure claimant in the First Circuit which covers the New England area, and one of the first rulings to delve into the problem of back-dated mortgage assignments. Melissa Juárez purchased a home in Dorchester, Massachusetts on August 5, 2005, financing it with reputed sub-prime lender New Century Mortgage. The mortgage was packaged and bundled into a real estate mortgage investment conduit (“REMIC”), a special type of trust that receives favorable tax treatment, ultimately being held by U.S. Bank, as trustee. Juárez could not afford the payments on the mortgage and defaulted. Foreclosure proceedings began in the summer of 2008, culminating in the sale of her home at an auction in October 22,2008. She claims, however, that lender did not hold the note and the mortgage at the time they began the foreclosure proceedings against her, and that the foreclosure was therefore illegal under Massachusetts mortgage law.

Is this the year Wall Street completes its purchase of Florida’s Court System? - After 4 years of trying, it appears Wall Street has finally purchased enough of our state legislators to enact a bill that will eliminate due process and fundamental justice in Florida foreclosure cases.  Rep. Kathleen Passidomo’s HB 87, perversely named Florida Fair Foreclosure Act, makes it much easier for mortgage companies to foreclose on residential mortgages by literally eliminating a homeowner’s right to fight the foreclosure. I could see such a law in China, North Korea, or Cuba, but I never thought I would see such an Anti-American bill proposed by Florida’s Republican Party. The basic tenant of civil jurisprudence is that the plaintiff has the burden of proving its case, just as the basic tenant in criminal jurisprudence is that an accused is presumed innocent until convicted. As Americans, we have earned our “Day in Court.” However, HB 87 actually shifts the burden to homeowners to present evidence that they shouldn’t have their house taken away. The plaintiff no longer need to present evidence at all.

Lawler: Table of Short Sales and Foreclosures for Selected Cities in January - Economist Tom Lawler sent me the table below of short sales and foreclosures for several selected cities in January.   Look at the right two columns in the table below (Total "Distressed" Share for Jan 2013 compared to Jan 2012). In every area that reports distressed sales, the share of distressed sales is down year-over-year - and down significantly in most areas.  Also there has been a decline in foreclosure sales just about everywhere. Look at the middle two columns comparing foreclosure sales for Jan 2013 to Jan 2012. Foreclosure sales have declined in all these areas, and some of the declines have been stunning (the Nevada sales were impacted by a new foreclosure law).  Also there has been a shift from foreclosures to short sales. In most areas, short sales now out number foreclosures (Minneapolis is an exception)..

Update: Table of Short Sales and Foreclosures for Selected Cities in January - Economist Tom Lawler sent me this updated table (below) of short sales and foreclosures for several selected cities and areas in January.   Look at the right two columns in the table below (Total "Distressed" Share for Jan 2013 compared to Jan 2012). In every area that reports distressed sales, the share of distressed sales is down year-over-year - and down significantly in many areas.  Also there has been a decline in foreclosure sales just about everywhere. Look at the middle two columns comparing foreclosure sales for Jan 2013 to Jan 2012. Foreclosure sales have declined in almost all of these areas (Orlando is an exception), and some of the declines have been stunning (the Nevada sales were impacted by a new foreclosure law).  Also there has been a shift from foreclosures to short sales. In most areas, short sales now out number foreclosures (Minneapolis and Orlando are exceptions).Overall this is moving in the right direction, although some areas are lagging behind.

RealtyTrac: U.S. Jan. foreclosure filings down 28% - The number of U.S. properties with foreclosure filings fell 28% in January from a year earlier, while foreclosure starts fell to a six-year low, according to market researcher RealtyTrac.  There were 150,864 U.S. properties with default notices, scheduled auctions and bank repossessions in January, a 7% decrease from December, RealtyTrac reported. One in every 869 U.S. housing units had a foreclosure filing last month.  RealtyTrac Vice President Daren Blomquist said the U.S. foreclosure landscape last month was altered by the effects of new legislation in California that took effect at the start of the year. The new law extends many of the principles in the national mortgage settlement, including a prohibition on so-called dual tracking and requiring a single point of contact for borrowers facing foreclosure, to all mortgage servicers operating in California, Mr. Blomquist noted. The law also imposes fines of up to $7,500 per loan for filing of multiple unverified foreclosure documents.  "As a result, the downward foreclosure trend in California accelerated into hyper speed in January, decisively shifting the balance of power when it comes to the nation's foreclosure activity," Mr. Blomquist said.

Report: U.S. Foreclosure Starts Decline in January due to new California Law - From RealtyTrac: U.S. Foreclosure Starts Fall to Six-Year Low in January RealtyTrac® ... today released its U.S. Foreclosure Market Report™ for January 2013, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 150,864 U.S. properties in January, a decrease of 7 percent from the previous month and down 28 percent from January 2012. “The U.S. foreclosure landscape in January was profoundly altered by the effects of new legislation that took effect in California on the first of the year,” “Dubbed the Homeowners Bill of Rights, this legislation extends many of the principles in the national mortgage settlement — including a prohibition on so-called dual tracking and requiring a single point of contact for borrowers facing foreclosure — to all mortgage servicers operating in California. In addition the new law imposes fines of up to $7,500 per loan for filing of multiple unverified foreclosure documents. As a result, the downward foreclosure trend in California accelerated into hyper speed in January, decisively shifting the balance of power when it comes to the nation’s foreclosure activity. “For the first time since January 2007 California did not have the most properties with foreclosure filings of any state. Instead that dubious distinction went to Florida, where January foreclosure activity increased on an annual basis for the 11th time in the last 13 months.” This is a tale of different states, and different laws. Mostly the non-judicial states are resolving delinquent mortgages quicker since foreclosures don't have to go through the court system. However new laws - like the "Homeowners Bill of Rights" in California - are dramatically slowing foreclosures in some non-judicial states.

Underwater and Drowning? Some Facts about Mortgages that Could Be Targeted by Eminent Domain - NY Fed - Since the onset of the subprime crisis, many places across the United States have been affected by high levels of negative equity (meaning that borrowers owe more on their mortgages than their homes are worth), an associated flood of foreclosures, and loss of local wealth. In mid-2012, a community advisory firm, Mortgage Resolution Partners (MRP) approached the government of San Bernardino County, California (a region with particularly high levels of negative equity) and pitched the idea of using eminent domain to seize privately securitized mortgage loans in order to restructure or refinance them. The MRP proposal was largely based on a plan by Cornell University law professor Robert Hockett. In late January, this controversial plan was abandoned by San Bernardino County, yet it remains under consideration in other counties. While a lot of the debate surrounding the plan has centered on value judgments and legal issues, in this post we look at available data in order to get an idea of the landscape of loans that could have been affected by such a program in San Bernardino County.

MBA: Mortgage Applications Decrease in Latest Weekly Survey - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey The Refinance Index decreased 6 percent from the previous week. The seasonally adjusted Purchase Index decreased 10 percent from one week earlier...The refinance share of mortgage activity of total applications was unchanged at 78 percent from the previous week. The HARP share of refinance applications was unchanged from last week at 28 percent. The adjustable-rate mortgage (ARM) share of activity increased to 4 percent of total applications...The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.75 percent, the highest rate since September 2012, from 3.73 percent, with points unchanged at 0.43 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.The first graph shows the refinance index. The refinance activity is down over the last three weeks, but activity is still very high - and has remained high for over a year. There has been a sustained refinance boom, and 78 percent of all mortgage applications are for refinancing. The second graph shows the MBA mortgage purchase index. The purchase index was off last week - and is still very low, but the index has generally been trending up over the last six months.

Vital Signs Chart: Mortgage Rates Highest Since September - Mortgage rates held steady last week after climbing in January. The rate on a 30-year fixed mortgage stands at 3.53%, the highest since September — though well below the 6% level seen five years ago. Low rates are encouraging Americans to buy homes or refinance their mortgages. Many investors expect the Federal Reserve to continue buying mortgage securities to keep rates low.

What drove the 30yr mortgage rate higher? - After this post in early December discussing the possibility that MBS, particularly the 30yr FNMA had become a "crowded trade", we've received numerous e-mails arguing that based on the Fed's recent actions, agency MBS has more upside. Furthermore, the US consumer got so used to mortgage rates constantly moving lower, the reversal (discussed in that post) of that trend seemed unfathomable to many. But that is in fact what happened as the 30yr mortgage rate stopped declining.This reversal in mortgage rates was in fact driven by the sell-off in long-dated agency MBS, which many argued would not happen this quickly - yet here we are.There are a number of reasons for the sell-off and the recent (mild) rise in the 30y conventional mortgage rates:
1. Dealers have built up a massive inventory of this paper, making it a bit more vulnerable to a correction.
2. Treasuries have sold off materially since early December (about 35bp yield increase on the 10y note), dragging MBS with them.
3. Some institutional investors are preparing for the Fed's eventual exit by unwinding their MBS holdings.
4. The Fed's purchases have been increasingly focused away from the 30yr FNMA, which they probably view as overpriced, and more on the GNMA and the shorter maturity FNMA (such as 15yr) bonds.

Mortgage Rates Unchanged in Latest Survey, Up slightly over last few months - From Freddie Mac yesterday: 30-Year Fixed-Rate Mortgage Unchanged for Third Consecutive Week Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates unchanged from the previous week and remaining near their record lows ... 30-year fixed-rate mortgage (FRM) averaged 3.53 percent with an average 0.8 point for the week ending February 14, 2013, the same as last week. Last year at this time, the 30-year FRM averaged 3.87 percent.  15-year FRM this week averaged 2.77 percent with an average 0.8 point. This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.  The record low in the Freddie Mac survey for a 30 year fixed rate mortgage was 3.31% in November 2012. The second 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).

Report: Housing Inventory declines 16% year-over-year in January - From January 2012 Real Estate Trend Data January, the total U.S. for-sale inventory of single-family homes, condos, townhomes and co-ops (SFH/CTHCOPS) dropped to its lowest point since started collecting these data, with 1,477,266 units for sale, down 16.47 percent compared with a year ago and less than half its peak of 3.1 million units in September 2007.  On a year-over-year basis, for-sale inventory declined in all but three of the 146 markets tracked by while list prices increased in 71 markets, held steady in 24 markets and declined in 51 markets. The number of markets experiencing year-over-year list price declines has increased in the past six months, underscoring the growing fragility of many housing markets.   Note: reports the average number of listings in a month, whereas the NAR uses an end-of-month estimate.  Since inventory usually starts to come back on the market following the holidays in mid-to-late January, the NAR will probably report a month-to-month increase in inventory for January (or a smaller decline than  This graph from shows the reported average monthly inventory over the last few years. Inventory will be important to track in 2013. There is a good chance that inventory has bottomed, or, at the least, the year-over-year declines in inventory should get much smaller.

Your New Landlord Works on Wall Street - Housing typically leads economic recoveries. As more people build equity in their homes, they feel more free to spend disposable income and increase economic activity, a phenomenon known as the “wealth effect.” So a bullish outlook for housing would seemingly augur a long-awaited recovery to Main Street. But the more you look into it, the clearer it becomes that it’s not being driven by the typical American families who lost their homes in the economic crash. In fact, it’s being fueled by the banks and hedge funds whose speculation caused that crash in the first place. If you’ve signed a lease in the past year, there’s a good chance your landlord wears a tailored suit and works on Wall Street. One of the hottest trends in the financial sector is known as “REO-to-rental.” Over the past couple years, hedge funds, private equity firms and the biggest banks have raised massive amounts of capital to buy distressed or foreclosed single-family homes, often in bulk, at bargain prices. Their strategy is to convert them to rental units for a while before reselling them when prices appreciate. The Wall Street firms are scooping up properties in the hardest-hit areas, promising high returns for the rental revenue streams—up to 10 percent annually —and starting bidding wars that have driven up some prices well above national averages. It’s the next Wall Street gold rush, with all the warning signs of a renewed speculative bubble.

FNC: Residential Property Values increased 4.9% year-over-year in December -  From FNC: FNC Index: U.S. Home Prices Hit Two-Year High The latest FNC Residential Price Index™ (RPI) shows continuing momentum in the U.S. housing market with home prices rising to a two-year high in December. Despite an unexpected deceleration in economic growth, the ongoing housing recovery has maintained its pace with steady gains in home prices, sending the index up 5.4% year to date. ... A stabilizing foreclosure market is contributing to the recovery of the underlying property values. Foreclosures as a percentage of total home sales were 17.8% in December, down from 24.0% a year ago. Based on recorded sales of non-distressed properties (existing and new homes) in the 100 largest metropolitan areas, the FNC 100-MSA composite index shows that December home prices remained relatively unchanged from the previous month, but were up 4.9% on a year-over-year basis from the same period in 2011. ... The 30-MSA and 10-MSA composite indices show similar trends of continued price momentum, relatively unchanged from November and up 5.8% from December 2011. This graph shows the year-over-year change for the FNC Composite 10, 20, 30 and 100 indexes. Note: The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals.

Record Price Jumps Are Not A Good Thing - Last month Lawrence Yun, chief economist for the National Association of Realtors, (NAR) was concerned that home prices were rising too fast.  Prices were up 7.4% year-over-year.  This month in Yun’s quarterly report he seems to be over his fears, even though prices are up 10% year-over-year.  – A growing number of metropolitan areas had higher median home prices in the fourth quarter, with the national price showing the strongest year-over-year increase in seven years, according to the latest quarterly report by the National Association of Realtors® Home sales are on a sustained uptrend, mortgage interest rates are hovering near record lows and unsold inventory is at the lowest level in 12 years.. Yun’s rationale behind his sudden optimism is a bit difficult to fathom.  Home sales are being fueled by a pent-up demand and job creation, along with still favorable affordability conditions and rents rising at faster rates. Our population has been growing faster than overall housing stock, so supply and demand dynamics are very much at play.” Yun added that more housing construction is needed to relieve some of the pressure in the market and keep home prices from overheating. Job growth is less than stellar, and here’s what “demand” looks like. [From Calculated Risk.]

U.S. Homeowners Are Repeating Their Mistakes - Despite the hit many Americans took, there’s little sign they’ve changed their dependence on homes as the mainstay of their wealth. Last year, Christian Weller, a professor at the University of Massachusetts, looked at Federal Reserve data for households run by those over 50. The number of families with what Weller calls “very high risk exposure”—a low wealth-to-income ratio, more than three-quarters of their assets in housing or stocks, and debt greater than a quarter of their assets—had almost doubled between 1989 and 2010, to 18 percent. That number didn’t decline during the deleveraging years from 2007 to 2010; its growth just slowed to a crawl. The Fed will conduct a new wealth survey in 2013, but don’t look for a rational rebalancing. The same pressures that drove families to save less before the recession are still in place: low income growth, low interest rates, and high costs for health care, energy, and education. Families have been borrowing less since 2007, but the rate of the decline has slowed. As soon as banks start lending again, Weller says, people will put their money back into housing. “The trends look like they’re on autopilot,” he says. “They don’t suggest that people properly manage their risk.”

David Graeber: Debt is bad, or something?  In the blogosphere, David Graeber is known as a sort-of-leftish guy with a tendency to fight with other people on the left (he has called Slavoj Zizek an "intellectual comedian" and carried on a lengthy feud with Crooked Timber). But in the world at large, Graeber - an anthropologist by training - is known for writing Debt: The First 5,000 Years, a history of...well, the phenomenon of debt. He has also been called the "anti-leader" of the Occupy Wall Street movement (of which I confess to being a bit of an armchair fan).  Writing in the Nation in September of last year, Graeber shared his thoughts on debt: It’s now clear that the 1 percent are the creditors...The overriding imperative of government policy is to do whatever it takes, using all available tools—fiscal, monetary, political, even military—to keep stock prices from falling...  The overwhelming majority of Occupiers were, in one way or another, refugees of the American debt system. At first, that meant student debt: the typical complaint was “I worked hard and played by the rules, and now I can’t find a job to pay my student loans—while the financial criminals who trashed the economy got themselves bailed out.”...  Reading this, one small point immediately jumped out at me - the bit about stock prices. According to Graeber, the people who control the government are A) creditors, and B) will do anything to boost stock prices. But - as anyone who reads the news should know - the main thing the government does to boost stock prices is to lower interest rates and/or print money. And yet creditors are very angry about this, first of all because they fear that money-printing will cause inflation (which erodes the value of the debt they hold), and also because they can't get much of a return on the money they lend in the future. If you don't believe me, read The Economist or Fox Business complaining about how low interest rates hurt savers (i.e. creditors).

Credit-Report Errors Cost Some Consumers - About 5% of U.S. consumers may pay more for loans and other products because of errors on their credit reports, according to a study released Monday by the Federal Trade Commission. The agency said 26% of the 1,001 consumers who participated in the study found an error in at least one of their credit reports from the three national credit-reporting agencies. The FTC said 13% of the study participants saw a change in their credit scores after their credit reports were modified to address the errors. For about 5% of the participants, the increase in credit scores placed them in a lower tier of credit risk, making it more likely they will be offered loans at lower interest rates, the agency said.

Corrupt Consumer Credit Scoring Exposed - Credit reports control way too much of an individuals life.  A bad credit score can deny someone a job, never mind a credit card and a mortgage. The four billion dollar a year consumer credit rating industry has way too much power and almost no accountability.  They would rather be sued repeatedly and lose than set up a system to actually repair inaccurate credit scores.  The FTC has a new study which shows 1 in 5 credit reports is chock full of errors.  That's 20% of Americans with gross errors on their credit report with 10% of Americans having their credit score lowered as a result.  While the FTC claims 10% of people succeed in getting bad information off their credit reports,  CBS 60 Minutes found something different.  The credit reporting bureaus won't fix the errors.   The entire system to try to repair an inaccurate credit report is a joke.  It is impossible to get errors removed from your credit report.  Credit report disputes are a  rigged game.  The credit reporting bureaus don't  list a phone number and instead route people to their websites to really sell products.  If one mails detailed documentation to fix the problems, those documents are not reviewed.   If one does manage to find a phone number, they are routed to an offshore outsourced call center where there is no help.  It is impossible to get errors removed from your credit report as detailed below.

Two very Important FTC Studies, One on Credit Reports and One on Debt Buyers - A recent FTC study of errors in credit reports is getting a lot of press. According to the most recent in a number of studies of the accuracy of credit reports, about 5% of U.S. consumers have an error on their credit report that is serious enough to increase their cost of credit. Although the credit industry is arguing that this is a small percentage (and I agree that this is a lot smaller than I expected), the head of the FTC does not consider it small. "These are eye-opening numbers for American consumers," said Howard Shelanski, director of the FTC's Bureau of Economics. "The results of this first-of-its-kind study make it clear that consumers should check their credit reports regularly. If they don't, they are potentially putting their pocketbooks at risk." The industry quickly noted that the errors in the other 95% do not affect people’s credit.  All studies on the topic of credit reports have indicated that it is difficult for the majority of people who find errors on their report to fix these errors, which has been my experience as well. Right now, I am working with a woman whose credit is trashed because of medical debts that all agree should have been paid by insurance but were not. She has signed up for one of those credit watch programs at $15 a month, that has been more trouble that it is worth.  She has been notified several times of new errors that were not errors at all. She is scared and trying to buy a safer car, to no avail.

How America’s Credit Reporting System Gets Away With 40 Million Errors - Consumer activists were rattled Monday after the FTC released a report on widespread credit reporting errors.  According to the agency, as many as one in five consumers have errors on their credit reports that could hinder their ability to apply for new credit or stick them with sky high interest rates.    The report was highlighted in a fascinating 60 Minutes segment by CBS' Steve Kroft.  "Besides having financial consequences, the whole dispute process takes an emotional toll on people," Kroft said in an extended interview.  "It's just really hard sometimes to get these things fixed. You feel like you're up against this machine and there's no way to break through. After a while I think people sometimes start to question their own sanity.... so we decided to show the consumer what it's like."   From what we've learned from his six-month investigation and two new reports on the credit reporting industry, it's more evident than ever that consumers are in need of real change. 

U.S. Retail Sales Rise 0.1% after Tax Increase - Americans barely spent more last month at retail businesses and restaurants after higher taxes cut their paychecks. The small increase suggests consumer spending may be weak in the January-March quarter. The Commerce Department says retail sales ticked up 0.1 percent last month after a 0.5 percent rise in December. January’s increase was the smallest in three months. Sales fell at auto dealerships, clothing stores and furniture stores. They rose at home-improvement stores, gas stations and online retailers. So-called core retail sales, which exclude autos, building materials, and gas stations, ticked up 0.2 percent. Economists pay close attention to core sales because they strip out the most volatile categories. Nearly all working Americans are taking home less pay because of a temporary cut in Social Security taxes that expired last month.

Retail Sales Inch Higher In January --As expected, retail sales eked out a gain in January, rising a seasonally adjusted 0.1% over the previous month, the Census Bureau reports. The rise is unimpressive, arguably due to higher tax rates that kicked in as the new year began. But the fact that consumption held its ground after two months of decent increases suggests that the appetite for spending still has the capacity for forward momentum.  Monthly data is noisy, of course, and so it’s always dangerous to read too much into the latest report. All the more reason to look at the year-over-year change for retail sales, which continues to hold at a modest pace, advancing 4.4% last month compared with the year-earlier level, or roughly in line with the rate of change in recent months. If and when the year-over-year metric for retail sales begins falling, month after month, we'll have a legitimate warning sign. All the more so if it's confirmed in similar trends in other indicators. But there’s no trouble in the numbers from that perspective in today’s report, or in an expansive review of economic and financial indicators.

Retail Sales Rose in January as U.S. Consumers Sustained Growth - Retail sales in the U.S. rose at a slower pace in January as an increase in payroll taxes took a bite out of consumers’ paychecks. The 0.1 percent climb followed an unrevised 0.5 percent increase in December, Commerce Department figures showed today in Washington. The advance matched the median forecast of 80 economists surveyed by Bloomberg. A two percentage-point increase last month in the levy that funds Social Security reduced take-home pay, countering some of the gains in household disposable income from an improving job market. At the same time, more employment, combined with higher property values and stock prices, supports consumers and adds traction to purchases that make up about 70 percent of the economy, a boon for retailers such as Gap Inc. and Target Corp.

Retail Sales increased 0.1% in Janaury - On a monthly basis, retail sales increased 0.1% from December to January (seasonally adjusted), and sales were up 4.7% from January 2012. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $416.6 billion, an increase of 0.1 percent from the previous month and 4.4 percent above January 2012. ... The November to December 2012 percent change was unrevised from +0.5 percent. Sales for December were unrevised at a 0.5% gain. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 25.7% from the bottom, and now 9.9% above the pre-recession peak (not inflation adjusted) The second graph shows the same data, but just since 2006 (to show the recent changes). Retail sales ex-autos increased 0.2%. Excluding gasoline, retail sales are up 22.8% from the bottom, and now 10.3% above the pre-recession peak (not inflation adjusted). The third graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 4.8% on a YoY basis (4.4% for all retail sales).

Retail Sales: Weak, As Expected, with Expiration of FICA Tax Cut - The Advance Retail Sales Report released this morning shows that sales in January came in at 0.1% month-over-month. Today's number is matches the consensus forecast. The current 12-month moving average for retail sales is a monthly 0.4%, and the January number outside of recessions is usually strong. January 2011 and 2012 showed gains of 0.8% and 0.5% respectively. The expiration of the 2% FICA tax cut was doubtless a factor in the weak January 2013 data. Now let's dig a bit deeper into the "real" data, adjusted for inflation and against the backdrop of our growing population. The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. The Tech Crash that began in the spring of 2000 had relatively little impact on consumption. The Financial Crisis of 2008 has had a major impact.  The green trendline is a regression through the entire data series. The latest sales figure is 4.9% below the green line end point. The blue line is a regression through the end of 2007 and extrapolated to the present. Thus, the blue line excludes the impact of the Financial Crisis. The latest sales figure is 17.3% below the blue line end point.

Retail Sales Come In Line, Ex-Autos/Gas Slight Miss - In what may come as a surprise to some, advance retail sales for January printed on top of expectations of a +0.1% increase in sequential sales, although the forecast range was very wide, from -0.7% to +0.6% as many analysts were concerned what the impact of the payroll tax expiration would be on sales. This is a moderation of the January growth when retail sales rose 0.5%.  And while the headline number was goldilocks, the core reading excluding autos and gas came at 0.2% or slightly below expectations of a 0.4% print. What was even more curious is that the commerce department said department store sales rose the most since February 2012. Retail sales “relatively flat” as end of tax holiday likely had effect, says Bloomberg Government economist Nela Richardson. In B-grade economic news,  import price index up 0.6% M/m vs est. 0.8%  increase(range 0.2%-1.2% gain); prior revised to 0.5% drop from down  0.1%.

Is the Payroll Tax Increase Hitting Retail Sales? - From the Census: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for January, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $416.6 billion, an increase of 0.1 percent (±0.5%)* from the previous month and 4.4 percent (±0.7%) above January 2012. Total sales for the November 2012 through January. 2013 period were up 4.5 percent (±0.5%) from the same period a year ago. The November to December 2012 percent change was unrevised from +0.5 percent (±0.3%). Retail trade sales were up 0.1 percent (±0.5%)* from December 2012 and 4.1 percent (±0.8%) above last year. Nonstore retailers were up 15.7 percent (±2.3%) from January 2012 and auto and other motor vehicle dealers were up 9.4 percent (±2.3%) from last year. Let's take a quick look at the data: Overall, we see weak retail sales growth in the nacro-data above.  While the year over year numbers are good, the month to month is concerning.  Some of the lack of increase could be the result of the Christmas season pulling into December, leading to a better Christmas with a bit of a January hangover.  Also note the decrease in auto sales -- not at all encouraging.  Note the bigger increases came from bread and butter retail: grocery stores increased .6%, GM increased 1.1%.  Conversely, electronic stores only increased .2%, and furniture stores sales decreased .2%.   In January we had the payroll tax increase start to bite.  We could also be seeing the beginning effects of that development taking hold.

Wal-Mart executives sweat slow February start - Wal-Mart had the worst sales start to a month in seven years as payroll-tax increases hit shoppers already battling a slow economy, according to internal e-mails obtained by Bloomberg News.  “In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal- Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. “The worst start to a month I have seen in my ~7 years with the company.”  Wal-Mart and discounters such as Family Dollar Stores Inc. are bracing for a rise in the payroll tax to take a bigger bite from the paychecks of shoppers already dealing with elevated unemployment. The world’s largest retailer’s struggles come after executives expected a strong start to February because of the Super Bowl, milder weather and paycheck cycles, according to the minutes of a Feb. 1 officers meeting Bloomberg obtained.  Murray’s comments about February sales follow disappointing results from January, a month that Cameron Geiger, senior vice president of Wal-Mart U.S. Replenishment, said he was relieved to see end, according to a separate internal e-mail obtained by Bloomberg News.

Wal-Mart executive labels February a disaster - Wal-Mart Stores Inc. shares tumbled Friday afternoon amid a report that February sales for the world’s biggest retailer are off to the worst monthly start in seven years. February monthly sales are a “total disaster,” a Wal-Mart vice president wrote in an email to executives, Bloomberg reported Friday afternoon. Disappointing sales figures were driven by payroll-tax increases that hit shoppers who were already battling tough economic conditions. “In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal-Mart’s vice president of finance and logistics, said in a Feb. 12 email to his fellow executives, referring to month-to-date sales. “The worst start to a month I have seen in my [approximately] 7 years with the company.”

Wal-Mart Says February Sales "Total Disaster", Worst Monthly Start Since 2006; Stock Drops - Wal-Mart shares are plunging as the firm reports a 'total disaster' in its February sales. Bloomberg obtained internal emails that note: "In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal-Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. “The worst start to a month I have seen in my ~7 years with the company.... That points to our competitive landscape, which means everyone is suffering and probably worse than we are” Things must not be serious over in Bentonville for this much truth to suddenly hit the tape. One senior executive summed it up perfectly - “Well, we just had one of those weeks here at Walmart U.S. Where are all the customers? And where’s their money?” The company notes the end of the payroll tax cut by Obama and asks "We need to stop the stupid."

Global Mobile Phone Sales Post First Decline Since 2009 - One of the fundamental creeds held by the proponents behind every new technology and gizmo market, including cell phones, smart phones, tablets, Sony Walkmen, 8-tracks, VHS tapes, juice extractors, tape rewinders, etc., is that their growth rate (and by implication the consumers' discretionary income), is completely dissociated with gravity and will grow at a far faster pace than global economic growth virtually in perpetuity. This is the case until empirical evidence reminds them, and everyone else, that gravity eventually always wins. Which is precisely what happened with global mobile phone sales, which in 2012 posted their first decline since the cataclysmic 2009. Gartner reports that the global cell phone market declined by 1.7% in 2012, down from 1.78 billion devices sold in 2011 to 1.75 in 2012. "Tough economic conditions, shifting consumer preferences and intense market competition weakened the worldwide mobile phone market this year," the report says.

Business Inventories Tick Up - U.S. business inventories expanded slightly in December, as businesses were stuck with extra stock at year’s end. Total inventories were up 0.1% to a seasonally adjusted $1.623 trillion, the Commerce Department said Wednesday, matching economists’ forecasts in a survey by Dow Jones Newswires. December sales rose by 0.3% to a seasonally adjusted $1.274 trillion, Commerce also reported. Retailers’ stocks increased in December by 0.5%, largely at auto dealerships and furniture stores. Excluding motor vehicles, retail inventories were up 0.3%.

Analysis: Consumers Back on Their Heels a Bit - U.S. retail sales saw a modest 0.1% uptick in January, with the gain likely held back by the fact that a higher payroll tax kicked in at the start of the new year. Compared with a year earlier, retail and food-service sales were up 4.4%. Robert Dye, chief economist at Comerica Bank, discusses the report with the Wall Street Journal Online’s Jim Chesko.

Consumer Cutbacks May Get Worse - There’s now clear evidence higher tax bills are prompting Americans to cut back — but it’ll be months before we know the full impact on the economy. The Commerce Department said today U.S. retail sales rose 0.1% in January to a seasonally-adjusted $416.6 billion. The rise came even though tax bills for most Americans went up following the expiration of a payroll-tax holiday that pulled $9 billion out of the economy in the first month of 2013. Sales at department stores climbed, echoing positive reports last week from Macy’s and Gap.  But a closer look at the report suggests spending is taking a hit. A measure of retail sales called “retail control,” which economists prefer because it gives an inkling as to how government economists will view consumption when they calculate the nation’s growth rate — weakened dramatically in January, rising only 0.1% compared to 0.7% in both December and November. There’s also evidence Americans are buying only what they need — groceries and gasoline and warm clothes — and curbing spending on discretionary purchases like cars, restaurants, and furniture.

Michigan Consumer Sentiment Again Beats Expectations - The University of Michigan Consumer Sentiment preliminary number for February came in at 76.3, up from the January final reading of 73.8. The consensus was for 73.5. See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is 11% below the average reading (arithmetic mean) and 9% below the geometric mean. The current index level is at the 29th percentile of the 422 monthly data points in this series. The Michigan average since its inception is 85.3. During non-recessionary years the average is 87.7. The average during the five recessions is 69.3. So the latest sentiment number of 76.3 puts us 7.0 above the average recession mindset and 11.4 below the non-recession average.

Preliminary February Consumer Sentiment increases to 76.3 (graph) The preliminary Reuters / University of Michigan consumer sentiment index for February increased to 76.3 from the January reading of 73.8.  This was slightly above the consensus forecast of 75.0, but still very low. There are a number of factors that impact sentiment including unemployment, gasoline prices and, for 2013, the payroll tax increase and the default threat from Congress. People will slowly adjust to the payroll tax increase, and the threat of default is now behind us ... and sentiment has improved a little.

Weekly Gasoline Update: Prices Continue to Rise - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Prices rose again over the past week. Rounded to the penny, the average for Regular and Premium both rose seven cents. Regular is up 11.0% and Premium 9.5% since their interim lows in mid-December. With the expiration of the 2% FICA tax holiday, many household budgets are being impacted by these increases.According to, two states, Hawaii and California are averaging above $4.00 per gallon. Wyoming has the cheapest gasoline at $3.05. How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's a visual answer.

Gasoline Prices increase to $4 per gallon in California -The roller coaster ride for gasoline prices continues ... From the Daily Democrat: Gas prices hit $4 in California Gas prices are above or near an average of $4 a gallon statewide, and are already well over that dreaded mark in Southern California. showed gas selling for $4.01 on Thursday, while the AAA listed the state average at $3.99 -- a jump of three cents from Wednesday, 22 cents from a week ago and 37 cents from last month... the record of $4.67 was reached on Oct. 9 [2012] ...  The skyrocketing prices could level off in a week or so, then ease for a few months before beginning their usual climb before Memorial Day. "The good news is refineries are going to get back online in the next six weeks and gasoline prices will level off and perhaps go back down below $4 per gallon." Below is a graph from for nationwide gasoline prices. Nationally prices are up over 30 cents per gallon from the low in January, and up sharply over the last two weeks.

Gas hits highest price since October: Gasoline prices have climbed past $3.60 a gallon nationally for the first time since October in the government's weekly price survey. The price of a gallon of regular unleaded stands at $3.611 in the survey released today, up 7.3 cents a gallon from a week ago and 3.6 cents from the same week last year, the Energy Informational Administration reports. Gas prices have steadily climbed since they hit a low of $3.254 for the week of Dec. 17. They haven't hit $3.60 a gallon since Oct. 22, the EIA pricing history shows. Prices typically climb as the nation comes into the spring driving season, but as the weather attests, we're still a long ways off. The news wasn't all bad. Motorists living in the lower Atlantic region and Gulf Coast actually saw price declines for the week -- both less than a penny a gallon. The West Coast had the highest priced gas, at $3.867 a gallon while the Rocky Mountains had the lowesst, at 3.274 a gallon.

Government boosts forecast for pump prices - The government on Tuesday boosted its forecast for gasoline prices this year by 11 cents to an average of $3.55 a gallon. That would be the second-highest annual average ever, behind last year's $3.63 a gallon.The revised forecast follows a more than 10 percent increase in gas prices since the middle of December. The Energy Information Administration, the statistical arm of the Energy Department, says the average gas price jumped from $3.25 on Dec. 17 to $3.61 Monday.In its monthly Short-Term Energy Outlook, the EIA primarily pins the increase on higher oil prices. Brent crude, the benchmark for many international varieties of oil imported to the U.S., rose from $109 a barrel in mid-December to about $119 in early February. That $10 increase equates to about 24 cents per gallon of gas, the EIA says. U.S. benchmark crude rose $8 a barrel, to nearly $96 in the same time frame.

Dude, where's my cheap gas? - Those who have been told that oil production is booming may be wondering why the prices of oil and gasoline are climbing again.  According to the EIA, world petroleum production in the first 10 months of 2012 averaged 88.8 million barrels a day. That's 2 mb/d, or 2.3%, higher than in 2010. The IMF estimates that world GDP grew by 7.1% between 2010 and 2012. If we used a global income-elasticity for petroleum demand of 0.75, we might have anticipated that a 5.3% increase in petroleum production over the last two years would have been necessary to keep the price of oil from rising. Ongoing conservation, for example, in the form of continued improvement in fuel economy, has been a key factor keeping the oil price from rising more in the face of world income growing much faster than world oil production. China likely consumed nearly half of the global 2 mb/d increase. The EIA reports that China increased its petroleum consumption by almost 500,000 b/d in 2011, and preliminary estimates are that China added another 420,000 barrels to its daily consumption in 2012. Moreover, about a quarter of the 2 mb/d supply increase reported by the EIA over the last two years came in the form of natural gas liquids. These hydrocarbons are in gas form at ambient pressure and temperature, but become liquid with less pressure than is required to liquefy single-carbon methane.

Infrastructure rhetoric is a bridge to nowhere - Whenever the phrase “our crumbling infrastructure” passes the lips of a politician or appears in the pages of a newspaper, I change the password on my checking account and move my wallet to the front pocket of my jeans.  It’s not that infrastructure doesn’t crumble — everything turns to dust eventually. Obviously, useful bridges, ports, airports and highways need to be maintained, and as a country grows it needs new ones. It’s just that the press allows members of the civil engineering-industrial complex to bamboozle them into believing that all calls for building infrastructure are equal. The bamboozling usually begins with a sweeping declaration about America’s shoddy highway bridges and the urgent need to repair them. Obama hit his mark in his State of the Union speech where he plugged his “Fix-It-First” program, which would mend the “nearly 70,000 structurally deficient bridges across the country.” Zakaria finds Fix-It-First insufficient, calling it a mere “Band-Aid on America’s growing cancer of failing infrastructure.” Citing the 2009 report card from the American Society of Civil Engineers (ASCE), which gave the nation’s infrastructure a “D” and estimated the cost of repairing it at $2.2 trillion, Zakaria demands the dramatic expansion of American infrastructure. The ASCE recently upped its estimate of how much should be spend on infrastructure by 2020 to $2.7 trillion (pdf), which is two-thirds greater than the feds, the states and local governments are expected to spend on it by then. Zakaria expressed even greater enthusiasm for spending infrastructure trillions in a November piece for Time.

What drove the sharp reduction in US trade deficit - Some folks in the media are making a big deal out of the US trade deficit decline in December.  The SF Chronicle: - Number of the day: 20.7 percent That's how much the U.S. trade deficit shrank in December from the previous month, the U.S. Commerce Department said Friday. The gap between imports and exports was the smallest since January 2010 and much less than the $46 billion expected by 73 economists in a Bloomberg poll. The deficit was cut by record exports of refined petroleum products to countries such as Brazil, combined with lower imports of crude oil. Yes, that's an impressive showing indeed. But let's take a look at the chart, because such numbers should not be viewed in isolation. The decline in deficit follows a sharp increase a month earlier.The deficit increase in November was driven by hurricane Sandy, and was exacerbated by the Northeast US refineries' shutdowns. Fuel output in November dropped materially. The lower imports in December are therefore distorted by the reversal of the "Sandy effect". Trade deficit excluding fuel in fact declined less sharply than the overall number in December. This is clearly a welcome result, but the real trend will not be fully visible until the January numbers are out.

The president can end currency manipulation with the stroke of a pen, halving the U.S. trade deficit and creating millions of jobs - Under existing authority, the President can execute one simple policy that would create 2.2 to 4.7 million jobs over the next three years:  End currency manipulation by a handful of countries, especially China.  This policy would boost GDP, reduce unemployment and, in budgetary terms cost nothing. It would, in fact, substantially reduce the federal deficit.  No other policy could achieve this jobs trifecta. . Since April 1998, the United States has lost 5.7 million manufacturing jobs, nearly a third of manufacturing employment and most of those job losses were due to the growing U.S. trade deficit.  Although half a million manufacturing jobs have been added since 2009, a full manufacturing recovery requires greatly increasing exports relative to imports.  Currency manipulation, which distorts trade flows by artificially lowering the cost of imports to the U.S. and raising the cost of U.S. exports, is the single most important cause of these growing trade deficits.  .  Halting global currency manipulation by making it illegal for China and other currency manipulators to purchase U.S. Treasury bills and other government assets is the best way to reduce the U.S. trade deficit, create jobs, and rebuild the economy.

Industrial Sector Slowed in January - U.S. industrial production edged lower in January as auto and other manufacturers trimmed output. Industrial output decreased 0.1% last month, the Federal Reserve said Friday. Capacity utilization slid to 79.1% from a revised 79.3% the prior month. Economists surveyed by Dow Jones Newswires had forecast a 0.2% gain in output and capacity utilization of 78.9%. Overall industrial production, which includes manufacturing, mining and utility output, was up 2.1% from a year earlier.

Fed: Industrial Production declined 0.1% in January - From the Fed: Industrial production and Capacity Utilization - Industrial production edged down 0.1 percent in January after having risen 0.4 percent in December. In January, manufacturing output decreased 0.4 percent following upwardly revised gains of 1.1 percent in December and 1.7 percent in November. For the fourth quarter as a whole, manufacturing production is now estimated to have advanced 1.9 percent at an annual rate; previously, the increase was reported to have been 0.2 percent. In January, the output of utilities rose 3.5 percent, as demand for heating was boosted by temperatures that fell closer to their seasonal norms; the production at mines declined 1.0 percent. At 98.6 percent of its 2007 average, total industrial production in January was 2.1 percent above its level of a year earlier. The capacity utilization rate for total industry decreased in January to 79.1 percent, a rate that is 1.1 percentage points below its long-run (1972--2012) average. This graph shows Capacity Utilization. This series is up 12.2 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 79.1% is still 1.1 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.6% in December 2007.   Note: December 2012 was revised up from 78.8%.  The second graph shows industrial production since 1967. Industrial production decreased in January to 98.6  (December 2012 was revised up from 98.1). This is 18.2% above the recession low, but still 2.1% below the pre-recession peak.

Industrial Production Slips 0.1% In January - Industrial production fell 0.1% in January, the Federal Reserve reports, delivering a moderately worse-than-expected reading for the start of the year. Is that a sign of trouble for the business cycle in 2013? Possibly, but we’ll need to see more dark news from this and other indicators before the broad picture issues a clear warning. For now, it’s best to consider the latest data point for industrial production as a normal fluctuation within a slow-growth context.  In any case, there’s no mistaking the recent downshift. For the last three months, industrial production has been slowing, dipping into negative territory in January. Ditto for the manufacturing component, as the chart below shows. But the trend looks brighter on a year-over-year basis. Industrial production rose 2.1% last month vs. the year-earlier level. That’s hardly ominous, if it holds. The bad news is that the annual rate of growth has been slipping recently and a 2.1% increase is tied with last October’s rise as the lowest in nearly three years.

Industrial Production Declines by -0.1% for January 2013 - The January 2013 Federal Reserve's Industrial Production & Capacity Utilization report shows a monthly decline of 0.1% in industrial production.  January's decline would have been much worse if the weather hadn't turned cold.  Utilities' output increased 3.5% for January as mining fell 1.0%.  Manufacturing alone dropped -0.4% for the month.  December was revised up to a 0.4% increase, buoyed by better manufacturing for the month.  The G.17 industrial production statistical release is also known as output for factories and mines. Total industrial production has increased 2.1% from January 2012 and is still down -1.4% from 2007 levels, going on past an incredible five years.  Even worse, manufacturing alone is still -5.8% below it's December 2007 output level.   Here are the major industry groups industrial production percentage changes from a year ago.

  • Manufacturing: +1.7%
  • Mining:            +1.8%
  • Utilities:           +5.9%

Manufacturing alone dropped -0.4%  for January, but was revised upward for  for December to 1.1%.  November was also revised upward for manufacturing production to 1.7%.  This gives a great Q4 annualized percentage change of 1.9% instead of the paltry 0.2% previously estimated.  We see another revision which should result in  Q4 GDP being better news.   Below is a graph of just the manufacturing portion of industrial production.

January Industrial Production Decline Bodes Poorly For Q1 GDP Rebound - It would appear that the channel-stuffed awesomeness of the auto manufacturing business has caught up with the inexorable reality of demand (even with uber cheap credit and subprime financing). January's Industrial Production missed positive (+0.2%) expectations and fell -0.1% for the first time in 3 months. What drove the slide? A 5.5% plunge - the largest in 6 months - in vehicle production (which dragged Manufacturing production -0.4% overall). This slide in Industrial Production does not offer much additional hope/hype for those looking to discard Q4's negative GDP print and expecting a Q1 jump

From today’s report on industrial production: Crude oil ouptut reached a 20-year high in January - The Federal Reserve reported today on industrial production for January,  with the following commentary: “Industrial production edged down 0.1% in January after rising 0.4% in December. In January, manufacturing output decreased 0.4% following upwardly revised gains of 1.1% in December and 1.7% in November. At 98.6 percent of its 2007 average, total industrial production in January was 2.1 percent above its level of a year earlier. The largest declines were in the output of motor vehicles and parts, which dropped 3.2%, and in the output of primary metals, which fell 2.6%; each of those indexes had advanced strongly in both November and December.”  One of the strongest growth sectors in January was the production of crude oil, which rose last month to the highest level since December 1992, more than than twenty years ago (see chart above).  Compared to a year earlier, crude oil production increased by more than 14%, which was the fifth straight month that crude oil output increased by 14% or more.

A note about industrial production - January industrial production was reported to have unexpectedly declined -0.1. While that isn't good, what has been lost in the story are the substantial upward revisions to November and December, shown in the graph below:  November was originally reported at 97.8. It is now 98.3. December was originally reported up 0.3 to 98.1. It is now shown as up 0.4 to 98.7.  So the -0.1 decline to 98.6 reported this morning is actually 0.3 better than the expected 98.3.  While this adds to concern that the economy is just shambling along and that the payroll tax increase and the looming sequester may be enough to derail the expansion, the revisions pretty much dispose of the claims of those who said that a recession began last July, when the industrial production index was at 97.9. I'm looking at you, Lakshman Achuthan.

Empire Fed Records First Positive Print Since July 2012 - After the January Empire Manufacturing data came at the worst level in years, it was only logical that the February print would post a massive surge of some 18 point, from -7.78 to 10.04, the highest since May 2012, the first positive print since August, and above the highest expectations whose consensus saw a rise to -2.00. The driver: a surge in the New Orders number which soared from -7.18 to 13.31, indicating that the recent northeast snowfall did little to impact manufacturing unlike various other series, whose miss was blamed on snow in the winter. And while there were increases in all subindices, the divergence between prices received, which dropped, and prices paid, which rose, implies corporate margins will continue to suffer. But in this new dot com/housing/credit bubble, who cares about such trivial things as profitability.

Empire State Manufacturing Surges to a 9-Month High - This morning we got the latest Empire State Manufacturing Survey. The diffusion index for General Business Conditions surprised to the upside. There are a variety of components to the diffusion index for those who wish to dig deeper. But at the top level, here is a snapshot of New York State's General Business Conditions. Today's surge to 10.0 from last month's -7.8 was far above the consensus of a flat 0.0. This is the best monthly reading since May of 2012. Here is a chart illustrating both the General Business Conditions and Future General Business Conditions (the outlook six months ahead):Here is the opening paragraph from the report. The February 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved for the first time since the summer of last year. The general business conditions index rose into positive territory, advancing eighteen points to 10.0. The new orders index also rose sharply, climbing twenty points to 13.3, and the shipments index increased to 13.1. The prices paid index pointed to a continued acceleration in selling prices, and the prices received index, while positive, inched lower. The index for number of employees rose for a third consecutive month and, at 8.1, registered its first positive reading since September, though the average workweek index remained negative. Indexes for the six-month outlook were noticeably higher and suggested a firming in the level of optimism about future business conditions.

Manufacturing Hubs: What and Why? - Brookings - President Obama proposed the launch of "a network of manufacturing hubs" through which industry, universities, community colleges, and governments will work together to develop and deploy new manufacturing technologies. That line in the State of the Union address probably had a lot of folks scratching their heads, wondering where it came from.  After all, we as a nation have gotten out of the habit of thinking much about manufacturing, how innovation works, and the work of inventing things. So what is it all about?As it happens, and as I wrote last summer, Obama’s manufacturing hubs proposal is not a one-off idea out of nowhere but in fact is one very smart and plausible idea that Congress and the nation really should embrace.Basically, the manufacturing hubs idea reflects an emerging consensus among a large number of industry leaders, technology analysts, and economic development professionals that regions are the place to work on technology-based development and that regions need to be anchored by hubs of collaborative R&D where industry can work with academia and government to solve tough problems and foment technology gains.

Number of the Week: Aging Fleet Could Boost Car Sales - 11.1 years: The average age of light vehicles in the U.S. last year, according to automotive-research firm Polk. Sales at auto dealers and parts stores ticked down a bit in January, but with the average age of vehicles on the road at over 11 years, the upward trend isn’t likely in any danger. Americans have been holding on to their cars and trucks longer for more than a decade. The average age of vehicles in the U.S. was 8.4 years in 1995 and steadily climbed to 10 by 2008. This was thanks in part to improved performance as vehicles just held up longer.

Small-Business Optimism Ticks Up - Despite higher taxes kicking in last month, small-business owner confidence increased again in January, according to data released Tuesday. The National Federation of Independent Business‘s small-business optimism index rose 0.9 points to 88.9 in January. But, even with two consecutive monthly gains, the NFIB said confidence among small business owners remains close to record lows.

FIB: Small Business Optimism Index increases slightly in January, Still very low - From the National Federation of Independent Business (NFIB): Small-Business Owner Confidence Barely Budges Small-business owner confidence continues to drag, according to the National Federation of Independent Business (NFIB) Small Business Optimism Index. The Index gained 0.9 points, rising to 88.9, failing to regain the losses caused by last month’s “fiscal cliff” scare. Expectations for improved business conditions increased by five points, but remain overwhelmingly low—negative 30 percent—the fourth lowest reading in survey history. Actual job creation and job creation plans improved nominally, but still not enough to keep up with population growth.This graph shows the small business optimism index since 1986. The index increased to >88.9 in January from 88.0 in December.This graph shows the small business optimism index since 1986. The index increased to >88.9 in January from 88.0 in December.

Small Businesses Struggle, Impeding a Recovery - In the recovery so far, small businesses have largely been left behind. Initially, loans were hard to come by and consumers weren’t shopping. Now, small-business owners say, Washington is throwing up additional roadblocks.In survey after survey, owners of small businesses report unbridled pessimism about the economy. The small-business optimism index from the National Federation of Independent Business — a major industry group for small businesses that surveys a sample of its members each month — is stuck at recessionary levels. In January’s report, released this week, expectations for business conditions six months from now were at their fourth-lowest reading in nearly 40 years. Comparable measures for large companies have exceeded their prerecession levels. That is partly because big companies have a larger global footprint, so they are benefiting from strong growth in places like China and India. Small businesses are more closely tied to the leaden domestic economy, said Paul Ballew, chief analytic and data officer at Dun & Bradstreet, so weak growth at home is weighing more heavily on them. That gulf in optimism between small and large companies seems to widen, though, during occasions of greater policy uncertainty and Washington gridlock — including the present. And while small businesses always grumble about taxes and regulation, they are especially likely to do so now. Asked by the National Federation of Independent Business about their “single most important problem,” small-business owners are now as likely to name taxes or government requirements as they are to name sales, which had reigned supreme from September 2008 until mid-2012.

The Most Important Problem Facing Small Businesses - For years industry groups have complained that government regulations and taxes were at the root of the weak recovery, but survey data consistently showed that demand was actually far and away the biggest problem. Until recently. As I note in my article about the gulf in economic optimism between small businesses and large ones, the National Federation of Independent Business surveys its members each month about the “most important problem” facing their business. They have 10 possible answers: taxes, inflation, poor sales, financial and interest rates, costs of labor, government requirements and red tape, competition from large businesses, quality of labor, cost/availability of insurance, and “other.” Starting in September 2008 (the month Lehman Brothers imploded), “poor sales” claimed the plurality of answers every month for more than three years. But the shares answering “taxes” and “government requirements and red tape” crept up, and since early 2012 have been more or less tied with the “poor sales” group. In fact, the share complaining about government requirements has not been this high since the mid-1990s.

Worker Owned Businesses Point to New Forms of Ownership - video - With public companies fixated on quarterly profits, which results in underinvestment and treatment of employees as disposables, companies who (gasp) pursue a long-term strategy and invest in their workforce should have a real competitive advantage. Thus worked owned enterprises aren’t simply a way to contend with the program to disempower labor; it’s also a way to take advantage of the inefficiencies of rentier capitalism.

Promoting Job Creation: Don't Forget the Old Guys - Atlanta Fed's macroblog - In a provocative article posted this week, the American Enterprise Institute's James Pethokoukis concludes that the state of entrepreneurship in the United States is, disturbingly, weaker than ever.  Pethokoukis documents a decline in jobs created by establishments less than one year old, a trend that began before the 2001 recession and has continued more or less unabated since. He specifically cites the following symptoms of trouble:

  1. Had small business come out of the recession maintaining just the rate of start-ups generated in 2007, according to McKinsey, the U.S. economy would today have almost 2.5 million more jobs than it does.
  2. There were fewer new firms formed in 2010 and 2011 than during the Great Recession.
  3. The rate of start-up jobs during 2010 and 2011—years that were technically in full recovery—were the lowest on record, according to economist Tim Kane of the Hudson Institute.

Pethokoukis makes his case with political commentary that we don't endorse and don't find particularly helpful. But we won't argue with his conclusion that more entrepreneurial start-up activity would be a good thing. Nonetheless, we get a little concerned when the conversation jumps from data on net job creation and the role of start-ups and early life-cycle firms, and moves on to policy conclusions that seem to disproportionately focus on that class of businesses specifically.

U.S. Postal Service Victimized by GOP Privatization Scheme - The massive operating deficits that have driven the U.S. Post Office to announce an end to delivery of First Class mail on Saturdays, beginning in August, are not the product of postal service ineptitude. Those deficits are not the product of increased public access to emails or from competition by private delivery services like UPS or FedEx. The U.S. Postal Service has been victimized by the Orwellian-labeled Postal Accountability and Enhancement Act of 2006 (PAEA), which embodies a scheme designed to destroy the constitutionally established U.S. Postal Service in order to privatize mail and parcel delivery. In a lame duck session, at the peak of the USPS' profitability and productivity, a then Republican-controlled Congress forced the U.S. Postal Service "to pre-fund 75 years worth of pensions" in the span of ten years, "a requirement not made of any other public or private institution." If not for the onerous and unprecedented requirements of the PAEA, the U.S. Postal Service, which is not funded by any taxes, would now be experiencing a $1.5 billion surplus.

You Should Be Outraged By What Is Being Done To Our Postal Service - You are probably hearing that the Post Office is “in crisis” and is cutting back Saturday delivery, laying people off, closing offices, etc. Like so many other “crises” imposed on us lately, there is a lot to the story that you are not hearing from the “mainstream” media. (Please click that link.) The story of the intentional destruction of the US Postal Service is one more piece of the story of crisis-after-crisis, all manufactured to advance the strategic dismantling of our government and handing over the pieces to billionaires. Here are a few things you need to know about the Postal Service “crisis”:

  • The Postal Service is the second largest employer in the United States after Walmart. But unlike Walmart, which gets away with paying so little that employees qualify for government assistance, the Postal Services is unionized, pays reasonable wages and benefits and receives no government subsidies. (Good for them!)
  • Republicans have been pushing schemes to privatize the Postal Service since at least 1996. In 2006 Republicans in the Congress pushed through a requirement that the Postal Service pre-fund 75 years of retiree costs. The Postal Service has to pay now for employees who are not even born yet. No other government agency — and certainly no company — has to do this.
  • Unlike other government agencies (like the military) since 1970 the Postal Service is required to break even. Once more: the Department of Defense is not required to break even.
  • But along with require the Postal Service to break even, Congress has restricted the Service’s ability to raise rates, enter new lines of business or take other steps to help it raise revenue. In fact, while detractors complain that the Postal Service is antiquated, inefficient and burdened by bureaucracy the rules blocking the Postal Service from entering new lines of business do so because the Postal Service would have advantages over private companies.

Fed’s Yellen Focused on Jobs - A senior Federal Reserve official signaled continued unhappiness with the state of the job market in a speech Monday, an indication the Fed hasn’t seen enough improvement in the economy yet to call off its easy money policies. Janet Yellen, vice chairwoman of the Fed board of governors, said the big gap between the difficult conditions faced by today’s workers and the maximum level of employment possible is a major factor driving the central bank’s continued efforts to boost economic growth. “My colleagues and I are acutely aware of how much workers have lost in the past five years,” which is why the Fed has taken, and continues to take, “forceful action to increase the pace of economic growth and job creation,” she said in remarks prepared for a speech at a conference hosted by AFL-CIO, the country’s largest labor federation.

Fed's Yellen: "A Painfully Slow Recovery for America's Workers" -  From Fed Vice Chair Janet Yellen: A Painfully Slow Recovery for America's Workers: Causes, Implications, and the Federal Reserve's Response. Some excerpts on the slow recovery:  In trying to account for why this recovery has been so weak, it is helpful to first consider several important factors that have in the past supported most economic recoveries. The first tailwind I'll mention is fiscal policy. History shows that fiscal policy often helps to support an economic recovery. Some of this fiscal stimulus is automatic, and intended to be. The income loss that individuals and businesses suffer in a recession is partly offset when their tax bills fall as well. Government spending on unemployment benefits and other safety-net programs rises in recessions, helping individuals hurt by the downturn and also supporting consumer spending and the broader economy by replacing lost income. However, discretionary fiscal policy hasn't been much of a tailwind during this recovery. A second tailwind in most recoveries is housing. Residential investment creates jobs in construction and related industries. Before the Great Recession, housing investment added an average of 1/2 percentage point to real GDP growth in the two years after each of the previous four recessions, considerably more than its contribution to growth at other times.

The New Reality Of ‘Economic Recovery’ For American Workers - “Deeply pessimistic” is the term used in the sobering survey, “Diminished Lives and Futures: A Portrait of America in the Great-Recession Era.” A confirmation of bits and pieces of economic data that has been trickling in over the years on this topic. Just today, for example, the Bureau of Labor Statistics reported that wages adjusted for inflation had continued their morose decline: in 2012, by 0.4% after having already declined 0.5% in 2011. It doesn’t seem much. With nominal wages rising, workers might temporarily be fooled into thinking that they’re moving ahead. But enough of those declines, and pretty soon you’re talking about some real money.  “Five years of economic misery have profoundly diminished Americans’ confidence in the economy and their outlook for the next generation,” conclude the authors of the survey. And yet, since 2007, Congress borrowed $8 trillion, nearly doubling the US gross national debt to $16.48 trillion, and the Fed printed another $2.1 trillion, all under the unholy pretext of wanting to stimulate the economy.  The survey draws a dire picture of the employment situation: 23% of the respondents had been laid off during the past four years. Of them, 10% spent more than two years looking for a job before they found one, and 22% still haven’t found one. While the economy has created jobs over the last few years, it has done so at a rate that barely kept up with the growth of the labor force.

Recovery Has Brought More Jobs for Men Than Women - SINCE the job market in the United States hit bottom more than three years ago, men have benefited from the recovery far more than woman have, with middle-aged women doing particularly poorly. From December 2009 through last month, the economy added 5.3 million jobs, according to the Labor Department’s monthly survey of households. Only 30 percent of them went to women. To some extent, that is simply a reflection of the fact that the recession hit men much harder than women, but the result has been at least a temporary reversal of the long trend of women holding an ever-increasing share of jobs. The proportion of jobs held by women, which was around 28 percent when the household survey began in 1948, rose to a peak of 47.5 percent in January 2010, just after the economy hit bottom. During that period, there was only one substantial setback to the trend, in 1952 and 1953, when the end of the Korean War brought soldiers back to the civilian economy. But in the first months of this recovery, that number fell as low as 46.6 percent, and it was at just 46.8 percent in January.

President Obama throws his support behind increasing the minimum wage - Last night’s State of the Union address laid the foundation for important policy initiatives, from investing in infrastructure and early care and education to prioritizing the creation of more manufacturing jobs.  But according to a post-SOTU briefing hosted by the White House, the “most-tweeted” element of the President’s address was his proposal to increase the minimum wage to $9.00. This proposal lays the foundation for an important conversation about increasing the minimum wage, a conversation that has already been joined by many, including our former EPI colleague, Jared Bernstein, our colleagues at the National Employment Law Project, and even Bloomberg News, which posted an article online that recognizes the positive impact such a change would have on the economy.The erosion of low wages is not news, both in the sense that it’s not a new phenomenon, and it certainly hasn’t been the focus of much media attention.  Nor is it news to families that have been struggling for decades to get ahead, only to see their real wages eroded over time.  But having the President throw his support behind increasing the minimum wage certainly is an important development.

POTUS Proposes an Increase in the Minimum Wage! - It’s a great idea, one I’ve espoused on these very pages.  The President suggested raising the federal minimum from its current level of $7.25 up to $9 by 2015 and then index it to inflation.  An increase of that magnitude would directly lift the wages of 15 million low-wage workers, according to the WH.  Clearly, in an economy where for decades growth has failed to reach our lowest wage workers, it’s time to raise the wage floor to ensure that low-wage workers have a decent shot at a fair wage.  Raising the minimum wage mostly benefits adults, and especially working women: Around 60 percent of workers benefiting from a higher minimum wage are women, and few are teenagers – less than 20 percent. Raising the minimum wage helps parents: The average worker who would benefit from a rise in the minimum wage to $9 an hour brought home 46 percent of his or her household’s total wage and salary income in 2011, according to the Current Population Survey. For a working family earning $20,000 – $30,000, the extra $3,500 per year from raising the minimum wage would cover:

  • o The family’s spending on groceries for a year; or
  • o The family’s spending on utilities for a year; or
  • o The family’s spending on gasoline and clothing for a year; or
  • o Six months of housing.

Obama Urges Minimum Wage Increase and First-Ever Indexing - Labor leaders and progressive economists hailed President Obama’s call, in Tuesday night’s State of the Union address, to increase and index the federal minimum wage. “We know our economy is stronger when we reward an honest day’s work with honest wages,” Obama told a joint session of Congress in the first State of the Union address of his second term. “But today, a full-time worker making the minimum wage earns $14,500 a year.” He urged Congress to raise the federal minimum to $9 an hour, and to “tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.” The president said it was “wrong” that a minimum wage salary would leave a family with two children below the federal poverty line, and that “in the wealthiest nation on Earth, no one who works full-time should have to live in poverty…” Washington last raised the federal minimum wage in 2007, when a Democratic Congress passed, and President George Bush signed, a bill raising the rate from $5.15 to $7.25 over the following two years. As Obama noted, 19 states currently have minimum wage rates higher than the federal level.

Obama Retrades Broken First Term Campaign Minimum Wage Promise in State of the Union Address - Yves Smith - It takes a lot of chutzpah for Obama to recycle a watered-down version of a 2008 campaign commitment and present it as his brightest, shiniest promise in the State of the Union address laying out his second term priorities. The Vichy Left was predictably over the moon at Obama’s pledge to raise the Federal minimum wage in increments to $9.00 by 2015.  When Obama ran for president in 2008, the minimum wage was $6.55 and set to rise to $7.25 in 2009 as a result of Bush Administration increases approved in 2007. Obama had vowed to increase it to $9.50 by 2011 A minimum wage of $9.50 by 2011 would have represented a 14.5% compound annual increase over the 2009 level. By contrast, $9.00 by 2015 is a 3.7% compound annual rise.

Raise the Minimum Wage! -- Here is what Obama said: We know our economy is stronger when we reward an honest day’s work with honest wages.  But today, a full-time worker making the minimum wage earns $14,500 a year.  Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line.  That’s wrong.  That’s why, since the last time this Congress raised the minimum wage, nineteen states have chosen to bump theirs even higher. Tonight, let’s declare that in the wealthiest nation on earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.  I don’t know why Obama said $9 an hour (it’s $7.25 now). Ten dollars an hour would be better. In the 2008 campaign, Obama promised to raise the minimum wage to $9.50 an hour. Factoring in inflation, that would be $10.13 today. So Obama’s shaving more than a dollar off what he promised in 2008. But since Obama hadn’t previously pushed to increase the minimum wage since he entered the White House, perhaps we should be grateful he’s now willing to call for any increase at all.

Minimum Wage 101 - In the Economics 101 textbook model, there are a couple of effects we can expect from an increase in the minimum wage in a competitive labor market. It's going to increase the cost of production and, as a result, employers may be expected to cut back on employment. But they'll also be able to pass on some of the costs to consumers. However nowadays when economists—labor or otherwise—study the labor market, they not only think about employment levels but also about flows. There are a lot of things about the labor market that don't really fit really well with the simplest competitive model of the labor market. In reality there are good jobs and bad jobs, and workers try to get to a better job whenever they can. So there's a lot of turnover and churning in the low-end of the labor market. To the extent that the minimum wage makes the lowest paid jobs better, it tends to reduce turnover and reduce vacancies. So an increase in the minimum wage may not kill jobs but kill vacancies in a low-end labor market. This is consistent with the more realistic models of the labor market. Our new work shows this for the U.S., but there is evidence from other countries as well. So minimum-wage laws may make jobs more stable while raising wage.

Raising the Minimum Wage: The Debate Begins…Again - If you, like me, are a veteran of this minimum wage scrum that’s getting underway, you’ve likely heard the arguments before.  Claim: Instead of helping low-wage workers, an increase in the minimum wage will cause them to lose their jobs. Certainly that’s the prediction from the classical model of the labor market.  And yet…we’ve had dozens of federal minimum wage increases and now have 19 states with minimums above the federal level.  Surely if the classical model were correct, we’d have clearly seen its negative impacts by now. Which makes it, like all good economic questions, an empirical one.  Thankfully, there’s been extensive research on the question which is very usefully reviewed here by economist John Schmitt of CEPR.  Pay particular attention to the results from all those natural experiments created by all the variation among the states.I’ve often said the true elasticity of job loss with respect to a minimum wage increase hovers about zero.  I’ve seen good studies finding small negatives and good ones finding small positives.  John presents this very cool graph from a “meta-analysis”—a study of a bunch of studies—showing precisely that result.  There are outliers on both sides of zero, but the strong clumping around zero provides a useful summary of decades of research on this question.

Does raising the minimum wage really help workers? - What does research on this issue tell us about the minimum wage's employment effects? It depends on which set of research studies you believe. One set of studies -- the most cited is by the University of California, Berkeley's David Card and Princeton University's Alan Krueger, who is also head of the White House Council of Economic Advisers -- finds that increasing the minimum wage does not have significant effects on employment.  Other studies reach the opposite conclusion, notably the work of David Neumark and William Wascher. They claim that workers are made worse off overall when the minimum wage goes up. More recent work such as this paper by University of Massachusetts economist Arin Dube tends to support the view that the minimum wage has minimal employment effects and is beneficial to workers, but the debate on this issue is far from over. (There's a nice summary of the empirical work on this issue, including a full set of citations to the work mentioned above, at the beginning of this paper by economist John Schmitt.)

Minimum human wages - IN HIS State of the Union speech Barack Obama warmed Democratic hearts by calling for an increase in the federal minimum wage to $9 an hour, and indexation of the wage to inflation. Predictably, an op-ed battle immediately sprang up, with half of the commentariat arguing that a higher minimum wage would simply hurt low-skill workers seeking a job (and some adding that wage subsidies would be a far better option) and the other half arguing that higher wages at the bottom of the income spectrum are long overdue. Ezra Klein falls into the latter camp, saying that the chart at right should tell us everything we need to know about the case for a minimum wage:  The empirics of the minimum wage debate are complex, but it isn't impossible to draw some conclusions. A recent Free exchange column attempted to do just that: America’s academics still do not agree on the employment effects. But both sides have honed their methods and, in some ways, the gap between them has shrunk. Arindrajit Dube at the University of Massachusetts-Amherst and Michael Reich of the University of California at Berkeley have generalised the case-study approach, comparing restaurant employment across all contiguous counties with different minimum-wage levels between 1990 and 2006. They found no adverse effects on employment from a higher minimum wage.

Who would be affected by President Obama’s proposed minimum wage increase? - Of the many proposals in Tuesday night’s State of the Union address, the one that seems to be receiving the most attention (especially in the Twitterverse) is President Obama’s plan to raise the federal minimum wage from $7.25 to $9.00 an hour by 2015. The President also called for subsequently indexing the minimum wage to rise automatically each year with the cost of living. Though some states have higher minimums, the federal minimum wage has been set at $7.25 since July 2009. In the meantime, as it always does, inflation has eroded its value. This proposal lays the foundation for an important and overdue conversation about increasing the minimum wage to combat its erosion over the past four and a half decades.  We have found that raising the minimum hourly rate to $9.00 by 2015 would directly boost the wages of over 13 million Americans. The increase would also have a spillover effect, bumping up wages for another 4.7 million workers who earn just above minimum wage. The demographic composition of minimum wage workers is often grossly mischaracterized, so let’s take a closer look at exactly who the 18 million workers who would see a raise under the president’s proposal really are. (The 18 million estimate is revised slightly from yesterday’s analysis to reflect improved methodology.) The findings that follow are largely an update to an earlier EPI analysis which was based on the somewhat higher minimum wage increase introduced by Senator Tom Harkin (D-Iowa) and Representative George Miller (D-California) as the Fair Minimum Wage Act of 2012.

The Meaning of a Decent Society - Robert Reich  - Raising the minimum wage from $7.25 to $9 should be a no-brainer. Republicans say it will cause employers to shed jobs, but that’s baloney. Employers won’t outsource the jobs abroad or substitute machines for them because jobs at this low level of pay are all in the local personal service sector (retail, restaurant, hotel, and so on), where employers pass on any small wage hikes to customers as pennies more on their bills. States that have a minimum wage closer to $9 than the current federal minimum don’t have higher rates of unemployment than do states still at the federal minimum. A mere $9 an hour translates into about $18,000 a year — still under the poverty line. When you add in the Earned Income Tax Credit and food stamps it’s possible to barely rise above poverty at this wage, but even the poverty line of about $23,000 understates the true cost of living in most areas of the country.Besides, the proposed increase would put more money into the hands of families that desperately need it, allowing them to buy a bit more and thereby keep others working.A decent society should do no less.

Why $9? - Since the State of the Union address, the minimum wage has heated up again as a political issue.  You can read my previous posts on the topic by clicking here. There is one question I would like to see some reporter ask Alan Krueger, the president's chief economist: How did they decide that $9 per hour is the right level?  Why not $10 or $12 or $15 or $20?  Presumably, the president's economic team must believe that the adverse employment effects become sufficiently large at some point that further increases are undesirable.  But what calculations led them to decide that $9 strikes the right balance?

Interview with Dube; EITC and Minimum Wage as Complements - I have an interview at the American Prospect with Arindrajit Dube on the minimum wage as a policy mechanism. I learned a ton doing it, and I hope you check it out!Meanwhile there's a lot of great material on the minimum wage coming out. Jared Bernstein addresses four of the key arguments for the minimum wage here. John Schmitt of CEPR has a great overview on the various theories on why a minimum wage hike shows little or not impact on unemployment here (wonkblog summary here).I still notice many people arguing that we should just raise the earned income tax credit (EITC) for the working poor rather than raising the minimum wage. I brought it up in the interview, but it is worth mentioning again here, even in loud, bold text: The EITC partially subsidizes employers, and as such the minimum wage is an excellent way to combat this. So it complements, rather than substitutes, for an EITC.

Two Observations on the Politics of the Minimum Wage -Krugman - It looks as if President Obama has successfully set a political trap over the minimum wage. Raising the minimum is very popular — even a narrow majority of Republicans (pdf) are for it. But Republican leaders are opposed. And they’d like people to believe that their opposition is driven by sincere concern for workers who might lose their jobs.  Well, this isn’t likely to work; the public won’t believe in their sincerity, and for good reason. Here are two examples of why it won’t wash:

  • 1. The truth is that top Republicans have so little regard for ordinary workers that they can’t even manage to pretend otherwise.  Yep: even on Labor Day, Cantor had nothing positive to say about workers, just praise for their bosses.
  • 2. Consider a working couple with two children, earning the current minimum wage. How much federal income tax do they pay? If I’m doing the math right, the answer is, none — they get a refund. (They pay plenty of payroll taxes, sales taxes, etc., but that isn’t supposed to count). In the minds of Republicans, this makes them lucky duckies, members of the 47 percent, part of what’s wrong with America. The GOP just can’t credibly claim to suddenly be deeply concerned about their job prospects.

What’s the Minimum Wage in Your State? - President Barack Obama has called for raising the federal minimum wage to $9 an hour, from $7.25 today, and to link additional increases to inflation. The proposal is likely to have a bigger impact on some states than others. Though the federal minimum is $7.25, many states set their own rates. Nineteen states and Washington, DC have minimum wages higher than the federal rate. But only Washington state, at $9.19 is higher than the president’s proposed $9. Oregon is close at $8.95. There are four states, Arkansas, Georgia, Minnesota and Wyoming that have rates on the books that are lower than the federal minimum, but the higher standard set by the government applies in those states. See the below map to see where your state stands. Click the image for more detail from the Department of Labor. (For historical minimum wage rates, click here)

Incomes Flat in Recovery, but Not for the 1% - Incomes rose more than 11 percent for the top 1 percent of earners during the economic recovery, but not at all for everybody else, according to new data. The numbers, produced by Emmanuel Saez, an economist at the University of California, Berkeley, show overall income growing by just 1.7 percent over the period. But there was a wide gap between the top 1 percent, whose earnings rose by 11.2 percent, and the other 99 percent, whose earnings declined by 0.4 percent. Mr. Saez, a winner of the John Bates Clark Medal, an economic laurel considered second only to the Nobel, concluded that “the Great Recession has only depressed top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s.” The disparity between top earners and everybody else can be attributed, in part, to differences in how the two groups make their money. The wealthy have benefited from a four-year boom in the stock market, while high rates of unemployment have continued to hold down the income of wage earners.

Weekly Initial Unemployment Claims decline to 341,000 - The DOL reportsIn the week ending February 9, the advance figure for seasonally adjusted initial claims was 341,000, a decrease of 27,000 from the previous week's revised figure of 368,000. The 4-week moving average was 352,500, an increase of 1,500 from the previous week's revised average of 351,000. The previous week was revised up from 366,000.The following graph shows the 4-week moving average of weekly claims since January 2000. The four-week average of weekly unemployment claims increased to 352,500. Weekly claims were below the 360,000 consensus forecast, and the 4-week average is close to the lowest level since early 2008

Jobless Claims Fall Again, Near A 5-Year Low - New filings for jobless benefits declined a hefty 27,000 last week to a seasonally adjusted 341,000—just over the five-year low of 330,000 for the week through January 19, 2013. This is a volatile series and so it’s best not to read too much into today’s number. That said, the latest drop is another data point in line with the trend in recent history that reflects slow but persistent healing in the labor market. The latest report shows that the four-week moving average for new claims settled at just over the 350,000 mark last week. That’s just a hair over last month’s five-year low of 351,750, which was set during the week through January 19. The basic message is that jobless claims continue to trend lower. The downward momentum has slowed recently, but that may be short-term noise. Only time will tell. But for now, it’s clear that claims continue to drift lower.

Weekly Unemployment Claims Fall Well Below Forecast - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 341,000 new claims number was a 27,000 decline from the previous week's 368,000, an upward adjustment to the previously reported 366,000. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, rose 1,500 to 352,500. Here is the official statement from the Department of Labor: In the week ending February 9, the advance figure for seasonally adjusted initial claims was 341,000, a decrease of 27,000 from the previous week's revised figure of 368,000. The 4-week moving average was 352,500, an increase of 1,500 from the previous week's revised average of 351,000.  The advance seasonally adjusted insured unemployment rate was 2.4 percent for the week ending February 2, a decrease of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending February 2 was 3,114,000, a decrease of 130,000 from the preceding week's unrevised level of 3,244,000. The 4-week moving average was 3,187,250, a decrease of 28,750 from the preceding week's revised average of 3,216,000.  Today's seasonally adjusted number was substantially below the consensus estimate of 365K. Here is a close look at the data over the past few years (with a callout for the several months), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks

Vital Signs Chart: Jobless Claims Near 5-Year Low - Unemployment-insurance claims are near their lowest level in five years. The four-week moving average of first-time jobless claims, which smooths out distortions, edged up last week to 352,500. But the figure was close to the previous week’s 351,000, the lowest level since March 2008. The drop in claims suggests companies are cutting fewer workers and the job market is improving.

U.S. Hiring Looks More Sluggish - There’s fresh evidence that the job market took a turn for the worse in the final month of 2012. Employers hired 209,000 fewer workers in December than the month before, the Labor Department said Tuesday, and they posted 173,000 fewer job openings — a sign hiring may have slowed further to start the New Year. The new data, from the government’s monthly Job Openings and Labor Turnover Survey, or JOLTS, echo the findings from the main monthly jobs report released earlier this month. That report showed job growth slowing in both December and January.

BLS: Job Openings "little changed" in December - From the BLS: Job Openings and Labor Turnover Summary There were 3.6 million job openings on the last business day of December, little changed from November ...The level of total nonfarm job openings was 2.4 million at the end of the recession in June 2009....The number of quits was 2.2 million in December compared to 1.8 million at the end of the recession in June 2009.  The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for December, the most recent employment report was for January.Jobs openings decreased in December to 3.617 million, down from 3.790 million in November. The number of job openings (yellow) has generally been trending up, but openings are only up 2% year-over-year compared to December 2011.

JOLTS - For Every Job There Were 3.4 Unempoyed in December 2012 - The BLS December JOLTS report, or Job Openings and Labor Turnover Survey shows there are 3.4 official unemployed per job opening.  Actual hires dropped 4.8% to 4.194 million.  Real hiring has only increased 14% from June 2009.  Job openings also declined by 4.6% to 3.617 million and are still, five years later, below pre-recession levels of 4.7 million.  Job openings have increased 65% from July 2009. There were 1.8 official unemployed persons per job opening at the start of the recession, December 2007.  Below is the graph of the official unemployed per job opening.  The official unemployed ranked 12.2 million in December 2012. If one takes the official broader definition of unemployment, or U-6, the ratio becomes 6.3* unemployed people per each job opening.  The December U-6 unemployment rate was 14.4%.  Below is the graph of number of unemployed, using the broader U-6 unemployment definition, per job opening.  We have no idea the quality of these job openings as a whole, as reported by JOLTS, or the ratio of part-time openings to full-time.  The rates below mean the number of openings, hires, fires percentage of the total employment.  Openings are added to the total employment for it's ratio.  Openings, hires and separations all dropped by 0.2 percentage points from November.

  • openings rate:   2.6%
  • hires rate:  3.1%
  • separations rate:   3.0%

Vital Signs Chart: 3.4 Job Seekers Per Opening - Competition for jobs increased a bit late last year. There were 3.37 job-seekers per opening in December compared with 3.18 the previous month—the first rise since July 2012. However, labor-market conditions are gradually improving. At the start of the recovery in July 2009, there were 6.7 job-seekers per opening, compared with 1.8 when the recession began in December 2007.

Regulation Not Holding Back Hiring - The belief that government regulation and taxation policies are driving high unemployment rates isn’t entirely true, new research from the Federal Reserve Bank of San Francisco says. In a report released Monday, economists Atif Mian and Amir Sufi looked at data provided by small business advocacy group the National Federation of Independent Businesses and found that, by and large, existing data ties low employment rates mostly to a lack of demand. Put another way, companies are slow to hire because they are having a hard time selling whatever it is they do. The government side, such as new financial and health-care regulations and tax increases, isn’t hurting the job market as much as many argue.

Fired America - There is a complete disconnect in Washington from the quiet desperation of American lives.   While politicians chatter talking points and claim lobbyists' agendas are somehow sane economic and labor policy, a full 23% of Americans have been fired in the last four years.   That is disposable work syndrome and that is the crisis of our time, not the rhetorical fictional spin spewing from the mouths of politicians.   Of the almost a quarter of working America fired in the last four years, a full 22%  cannot find another job.   That's roughly eight million people.  Disposable worker syndrome has affected the entire nation.   One-third of American households lost much needed paychecks over the past four years.   A full 79% of America knows someone personally who lost their job.    The great jobs slaughter has affected everyone except Wall Street and K Street.    The below graphic shows the radiating circles of economic disaster as the job loss waves crashed across working America.   These devastating  statistics are from a John J. Heldrich Center for Workforce Development survey conducted in January 2013.  We actually ran their survey percentages against the current unemployment statistics.  They match.      Of the people fired who managed to get another job,  a full 48% took a step down in position with 46% taking a job below their skill or education level.    A whopping 54% reported their new job pays less.  A third took over a 30% pay cut to get a new job.  Another third got hit with a 11-30% cut in pay.    That's economic devestation for millions of Americans, even while working.

The U.S. long-term unemployment crisis stumps economists - Michelle Hall, 44, hasn’t worked since last June, when funding ran out for her administrative job. She applies for jobs online and usually hears nothing.  “I have a lot of skills that are very applicable across the board, from file clerk to middle management.”Hall is the face of a new problem that remains poorly understood: chronic, long-term unemployment that continues even as job growth resumes across the economy. The rate of short-term unemployment—six months or less—is almost back to normal. In January it was 4.9 percent of the labor force. That’s only 0.7 percentage point above its 2001-07 average. But the rate of long-term unemployment, 3 percent in January, is precisely triple its 2001-07 average, according to a Bloomberg Businessweek calculation based on Bureau of Labor Statistics data. (Those two rates—4.9 percent and 3 percent—add up to the overall unemployment rate of 7.9 percent.) A striking statistic: The long-term unemployed make up 38 percent of all workers without jobs, double the average share and just a few notches down from the 2010-11 peak of 45 percent.

Older Workers Could Benefit if Companies Drop Insurance - As I’ve written before, older workers, once unemployed, have an extraordinarily difficult time finding re-employment. But they may get one unexpected employment booster next year: the health insurance exchanges put in place by the Affordable Care Act. That theory was just proposed to me by John Challenger, the chief executive of Challenger, Gray & Christmas, a global outplacement and executive coaching company. Here’s how it would work. Once individuals are able to buy insurance on exchanges, employers may be tempted to “get out of the health care business,” as Mr. Challenger put it. In other words, they will dump their workers onto the individual market. For most workers, this is probably a less-than-desirable outcome. But for older workers, it might be a blessing.  One potential reason that older workers have so much trouble finding work, after all, is that employers do not want to be responsible for their health care. Health care spending rises steadily by age; in fact, the health care costs of an older person are around five times those of a young adult. If employers are no longer on the hook for those health care costs, that is one less negative to be held against older job candidates.

McCain chides Republicans on immigrants: ‘What do you want to do with them?’ - : Sen. John McCain (R-AZ) on Sunday challenged Republican lawmakers who oppose a bipartisan agreement to give legal status to undocumented immigrants as a part of comprehensive immigration reform.  “The are 11 million people living in the shadows, I believe that they deserve to come out of the shadows,” the Arizona senator told Fox News host Chris Wallace.  “Under your plan — although they wouldn’t get the path to citizenship until you got this border enforcement certification — they would almost immediately get probationary legal status, which basically means that they could continue to live in this country legally,” Wallace noted. “Some of your critics on the right are saying that’s amnesty.”

Give Me Your Tired, Your Poor and Your Economists, Too - As an economist, I am often surprised at the hostility that some segments of the population express toward immigration. Most members of my profession are far more receptive to it, and for three main reasons. First, many economists, especially conservative ones, have a libertarian streak. . If an American farmer wants to hire a worker to pick fruits and vegetables, the fact that the worker happens to have been born in Mexico does not seem a compelling reason to stop the transaction. Second, many economists, especially liberal ones, have an egalitarian streak.  When thinking about immigration, there is little doubt that the least fortunate, and the ones with the most at stake in the outcome, are the poor workers who yearn to come to the United States to make a better life for themselves and their families. Third, economists of all stripes recognize that our own profession has benefited greatly from an influx of talent from abroad. In just the last few weeks, the economics department at Harvard, where I am chairman, has brought in six candidates to be considered for two assistant professor positions. Of the six, three are Americans, one is German, one is Argentine, and one is a New Zealander. The jobs will be offered to those deemed to have most promise as teachers and scholars, regardless of nationality.

Americans Struggle to Save Despite Optimism about Financial Situation -- Just half (50 percent) of Americans say they have enough money left over at the end of the month after paying for essentials according to the new, second installment of Allstate Financial's "Life Tracks" poll. More than four in 10 (41 percent) are living paycheck-to-paycheck while another 8 percent say they don't earn enough each month to pay for essentials. In the late December 2012 survey, responses pointed to an overall lack of financial management skills and resources, but a strong desire to do a better job in 2013. "This second Allstate Life Tracks Poll takes the pulse of Americans to measure the health of their personal financial situations," said Don Civgin, president and chief executive officer of Allstate Financial. "Too many Americans are faced with financial challenges today that lead to an unstable future. As financial services professionals, how we bridge that gap and bring greater awareness to the financial issues people are facing, is the true test of measurable success in our industry."

Insight: Shrinking U.S. labor unions see relief in marijuana industry (Reuters) - The medical marijuana shop next to a tattoo parlor on a busy street in Los Angeles looks much like hundreds of other pot dispensaries that dot the city. Except for one thing: On the glass door - under a green cross signaling that cannabis can be bought there for medical purposes - is a sticker for the United Food and Commercial Workers union (UFCW), the nation's largest retail union. The dispensary, the Venice Beach Care Center, is one of three medical marijuana dispensaries in Los Angeles that are staffed by dues-paying union members. Another 49 in the city plan to enter into labor agreements with the UFCW, the union says. Together, the dispensaries are a symbol of the growing bond between the nascent medical marijuana industry and struggling labor unions.

The Inequality Gap - Robert Reich, former labor secretary, has some worthwhile advice for the President's State of the Union address:  he notes that the focus should be the "central issue you want the nation to help you take action on".  That's "not immigration, guns or the environment" (though "[a]ll are important") but rather "joblessness, falling real wages, economic insecurity, and widening inequality" . See Robert Reich, Memo to Obama: Focus on the inqueality gap, He's right. "It's the economy, stupid", that old slogan from the Clinton campaign days, goes only so far.  It doesn't tell us, for example, what parts of the economy are most important--is it the stock market's well-being, and indirectly the fortunes of the very few at the top of the income distribution who own significant amounts of those items being sold on the market?  Or is it the unemployment data, with its distressing litany of continuing failure of our economy to provide decent jobs for ordinary people?  Is it the way that corporate owners and managers can use the powers of government to make unionization difficult and thereby make it much easier for corporate management and shareholders to retain all the productivity gains while workers wages stagnate (everything from Wal-Mart's tendency to tear down union fliers in worker areas (based on my personal observation) to the CEO's determination to beat unions down any way possible

Mobility: Low economic mobility is about more than just the very rich - MILES CORAK in his post argues that surname measures of mobility, by using elite surnames from the past, will measure only mobility among highly elite groups, and that there is other evidence that social mobility at these extremes, even on conventional measures, is low. I have to dissent that by measuring mobility in Sweden using surnames that were elite in 1700, we are only looking at what was happening to a tiny elite in 2012. Social mobility over 300 years had made the holders of these former elite surnames only modestly more advantaged by 2000 than the general population. Yes, they are 5.5 times more likely than the average person to be an attorney. But there are plenty of the bearers of those with aristocratic surnames in Sweden now who do not have a university degree, and who are in the middle or bottom in terms of the distribution of income and wealth. Thus if we look at taxable income by surname in 2008 we see that the noble surnames by then were distributed across the whole income distribution. This is shown in the figure. Aristocratic and Latinised surnames, both elite in 1700 are more concentrated in the upper tail, but they are present at the bottom also.

How Does Greg Mankiw Know that Wage Inequality Is Due to Technology? -- As opposed to alternatives like macroeconomists who lack skills in running the economy? Mankiw asserts as a fact that technology is responsible for the upward redistribution of income over the last three decades, but it is not clear that the evidence supports his story. After all technology had a much larger impact in increasing productivity in the decades from 1947 to 1973 yet workers shared in these gains more or less equally. If technology explains the shift those who try to explain the timing of the process, like M.I.T. professor David Autor, have had a difficult time making their case. The villains that some of us would point to are anti-union measures by government and businesses that have weakened workers' bargaining power, trade policy that was designed to put less-educated workers in competition with people in the developing world while largely protecting the most highly educated workers, patent and copyright policy that increased the rents pulled out of the economy for these monopolies, and macroeconomic policy that has led to more unemployment in the last three decades than in the early post-war period.  It is easy for Harvard economic professors to assert that technology is the cause of inequality. It is much more difficult for them to produce the data to prove their case

Caltrans Wages War With Copper Thieves - Caltrans spends about $2 million a year in replacing stolen copper wiring that powers metering lights, traffic signals, lights on freeway signs and city streetlights. Spokesman Bob Haus said in the last seven years, the state has spent $27 million on the thorny and expensive problem. There is no real way to stop the problem completely, but Caltrans has been using aluminum wire instead of copper, moving some equipment to other locations and burying pull boxes, the long, thin, metal cylinders through which the wiring runs. In the Bay Area, the Bay Area Newspaper Group first reported that a total of 59 meters have been vandalized in over the past year, and Caltrans has replaced the wiring at just 18. It can take three to four months to make repairs, and typically costs $35,000 to fix one meter. San Jose has spent as much as $160,000 to repair 500 lights. Fremont saw its repair bill jump from $62,000 for stolen streetlight wires three years ago to $438,000 last year, according to the newspaper group.

There is nothing inevitable about low economic mobility - THE fact that statistical variability overstates mobility is at the core of much of the research on inter-generational dynamics, and the use of surnames is an important advance, making innovative use of data and opening up a much longer horizon for this field of research.But there are other statistical factors that also play a role in determining the results. The suggestion that there is a good deal more persistence in economic and social status across multi-generations when compared to the research on two generations might not be entirely accurate.Two-generation studies offer summary statistics of the overall degree of generational mobility in a country under the assumption of linearity: that is, using a simple regression to the mean model in which economic advantage or disadvantage dissipates at the same rate regardless of how far a parent's economic status is above or below the average.More detailed studies have shown that in many countries the pattern may be nonlinear. My research with Canadian data, for example, reveals a great deal of mobility on average, but much more stickiness at the very top of the income distribution.

This Week in Poverty: Revealing the Real TANF -- I’ve said it before and I’ll say it again and again: the American people have been sold a bill of goods when it comes to the Temporary Assistance to Needy Families (TANF) program created in 1996. Both parties tout it as a “success,” but if you look at the numbers—and at the real lives of people who turn to the program for assistance when they are out of work—the picture is bleak, to say the least. This March, TANF is set to expire and will need to be renewed. It will mark yet another opportunity to have an honest, fact-based discussion about the program. So it was good to see a top-notch panel of experts at the Center for American Progress (CAP) yesterday talking about TANF—“Learning from the Past, Planning for the Future.” The speakers included Witnesses to Hunger member Shearine Mcghee, a former participant in the successful TANF subsidized jobs program that was created through the Recovery Act but allowed to expire in 2010. Kudos to CAP for having as one of the experts on poverty someone who has actually lived in poverty—it’s way too rare in this town, especially in Congress where public policy decisions are made without testimony from the people who are most affected

Households On Foodstamps Rise To New Record - While hardly presented by the mainstream media with the same panache dedicated to the monthly ARIMA-X-12 seasonally-adjusted, climate-affected, goal-seek devised non-farm payroll data, the three month delayed Foodstamp number is according to many a far greater attestation to the "effectiveness" of the Obama administration to turn the economy around. And far greater it is: since his inauguration, the US has generated just 841,000 jobs through November 2012, a number is more than dwarfed by the 17.3 million new foodstamps and disability recipients added to the rolls in the past 4 years. And since the start of the depression in December 2007, America has seen those on foodstamps and disability increase by 21.8 million, while losing 3.6 million jobs. End result: total number of foodstamp recipients as of November: 47.7 million, an increase of 141,000 from the prior month, and reversing the brief downturn in October, while total US households on foodstamps just hit an all time record of 23,017,768, an increase of 73,952 from the prior month. The cost to the government to keep these 23 million households content and not rising up? $281.21 per month per household.

The Underpopulation Bomb - The birth dearth/empty cradle/baby bust is upon us, threatening consequences just as dire as the overpopulation bomb that Paul Ehrlich predicted would cause mass global starvation in the 1970s. The growing percentage of elderly in the population, the root cause of many of our problems, will soon render the United States economically feeble. This dire prophecy of underpopulation has gradually made its way from the pages of Foreign Policy to The New York Times and, most recently, The Wall Street Journal. The alarmist fear-mongering is no better founded than Paul Ehrlich’s earlier panic. Oddly, both sides of the humans-as-bombs debate share certain assumptions. Both seem terrified by the costs of caring for human dependents, whether young or old, describing them as a threat to economic welfare. Both seem convinced that demography is destiny – that if we just raised the correct number of children, our problems would be solved. Both typically blame the state for interfering with the relationship between the family and the economy, either subsidizing too many births through public assistance or providing social insurance to the elderly, making them less dependent on their own children for support in old age. All three assumptions are staggeringly wrong.

Aggregate Demand and State-Level Employment - SF Fed - What explains the sharp decline in U.S. employment from 2007 to 2009? Why has employment remained stubbornly low? Survey data from the National Federation of Independent Businesses show that the decline in state-level employment is strongly correlated with the increase in the percentage of businesses complaining about lack of demand. While business concerns about government regulation and taxes also rose steadily from 2008 to 2011, there is no evidence that job losses were larger in states where businesses were more worried about these factors.

North Carolina Unemployment Insurance Bill A 'Grievous Blow' To Families: Labor Secretary: -- The U.S. Labor Department has warned North Carolina legislators that their controversial plan to slash unemployment benefits will cost the state $780 million in federal funds and cast a "grievous blow" on the state's working families. "I have no discretion to stop it," Seth Harris, the department's acting secretary, said in a statement on the state losing eligibility for federal funding. "As a result, families struggling to secure their place in the middle class will suffer a grievous blow, and the state's economy will lose $780 million in federal funds that are vital to reducing North Carolina's high unemployment rate." As HuffPost has reported, the state's lawmakers have been pushing a bill that would reduce the maximum weekly benefit for an unemployed worker from $530 to $350, as well as cut back their maximum duration to between 12 and 20 weeks. Due to federal guidelines, the cuts would mean that North Carolina could no longer take advantage of long-term unemployment insurance supplied by the federal government.

The GOP Plan to Flush Your State’s Economy Down the Toilet - The GOP has plans for a comeback. But it may cost you a lot. The idea is to capitalize on recent Republican state takeovers to conduct an austerity experiment known as the new “red-state model” and prove that faulty policies can be turned into gold. There will be smoke. There will be mirrors. And there will be a lot of ordinary people suffering needlessly in the wake of this ideological train wreck. We already have a red-state model, and it’s called Mississippi. Or Texas. Or any number of states characterized by low public investment, worker abuse, environmental degradation, educational backwardness, high rates of unwanted pregnancy, poor health, and so on. Now the GOP is determined to bring that horrible model to the rest of America. In Kansas,  the Wall Street Journal reports that Governor Sam Brownback is aiming to up his profile “by turning Kansas into what he calls Exhibit A for how sharp cuts in taxes and government spending can generate jobs, wean residents off public aid and spur economic growth.” In remarks quoted in the same article, Brownback announced that "My focus is to create a red-state model that allows the Republican ticket to say, 'See, we've got a different way, and it works.’ "

Is the Fever Breaking? - In Columbus, Lansing, and Phoenix, Republican governors are making headlines by embracing part of Obamacare. In Washington, Republican lawmakers are making headlines by seeking a new fiscal deal that avoids Pentagon cuts. What do these developments have to do with one another? Everything. They are products of the same, emerging divide in the Republican Party—one that pits conservative ideologues who preach anti-government extremism against some similarly conservative officials who actually have to govern. The two sides might not admit that such a sharp divide exists. But it’s easy to see if you’ve been following either story. In Washington, the source of controversy is the budget “sequestration,” the automatic spending cuts set to take effect on March 1. Roughly half of the cuts would affect defense spending, starting with $50 billion this year and adding up to about a half trillion dollars over the next decade. Republicans are desperate to find an alternative, but that would require making a deal with President Obama and the Democrats.

The Complexities of Obama's Universal Pre-Kindergarten Plan - The most important proposal in President Barack Obama's State of the Union address may be one that gets the least attention and, quite possibly, has the least chance of becoming law in the near future: his proposal to create a universal pre-kindergarten program. The idea is pretty simple. American children are guaranteed an education when they turn five and enter kindergarten. Before that, they may or may not have access to what we now call "pre-school," which typically depends on the resources (and sometimes the resourcefulness) of their parents. More affluent families tend to get their kids into decent day cares and nursery schools; less affluent families do not. But poor kids are the ones who need good care the most. Research suggests the first few years and particularly the first two years are critical for the development of intellectual and behavioral skills. Providing low-income kids with access to decent, affordable preschool can help make up for what they're not getting already. It can also help families—not just poor families, but middle-income families—pay for the cost of child care, which can put a real crimp in household budgets.

Details Emerge on Obama’s Call to Extend Preschool - In details that emerged early Thursday, the administration proposed that the federal government work with states to provide preschool for every 4-year-old from low- and moderate-income families. The president’s plan also calls for expanding Early Head Start, the federal program designed to prepare children from low-income families for school, to broaden quality childcare for infants and toddlers. While supporters herald the plans as a way to help level the playing field for children who do not have the advantages of daily bedtime stories, music lessons and counting games at home, critics argue that federal money could be squandered on ineffective programs. In the 2010-11 school year, the latest year for which data is available, 28 percent of all four-year-olds in the United States were enrolled in state-financed preschool programs, according to the National Institute for Early Education Research. According to W. Steven Barnett, director of the institute, which is based at Rutgers University, only five states, including Oklahoma and Georgia, have a stated objective of offering preschool slots to all 4-year-olds. While about 1.1 million students across the country are enrolled in federally financed Head Start programs and others attend private preschools, that still leaves millions of children on the sidelines.

Yes, President Obama: Working Families Desperately Need Access To Preschool--And Childcare -  Universal access to preschool would undoubtedly, as Obama noted, be hugely important for the nation’s children. But he didn’t mention another group who would see it as an enormous financial boon: working parents. In fact, while we desperately need universal access to quality early childhood education, we also need to guarantee universal access to quality childcare at all ages. Our families and our economy would see huge benefits if we made those two programs a reality for people of all income levels. Obama framed the issue mostly in terms of the benefits that would accrue to children. As he noted, “Study after study shows that the sooner a child begins learning, the better he or she does down the road… In states that make it a priority to educate our youngest children, like Georgia or Oklahoma, studies show students grow up more likely to read and do math at grade level, graduate high school, hold a job, and form more stable families of their own.” This is absolutely true. But we shouldn’t lose sight of the fact that it would also be hugely important in helping parents of all incomes go to work and know that their children are in good hands. The model of a mother who stays at home to care for children is just not the norm: in 1975, more than half of American families had a male breadwinner and a female homemaker, but that’s now dropped to just one in five.

James Heckman: In early childhood education, ‘Quality really matters.’- James J. Heckman is the Henry Schultz Distinguished Service Professor of Economics at the University of Chicago. He shared the 2000 Nobel for his work on correcting for selection biases when doing econometric studies, developing techniques which he applied to measuring everything from the economic effects of civil rights laws on African-Americans to the economic benefits (or lack thereof) of GEDs. Recently, he has done considerable work on early childhood education, including detailed studies of the Perry preschool experiment; Wonkblog interviewed him in 2010 on that subject. We spoke on the phone Wednesday night. A lightly edited transcript follows.

Report: Cities have hundreds of empty schools - Hundreds of schools in the nation’s largest cities are sitting empty as education leaders struggle to sell these potentially valuable properties. That’s according to a study released Monday from the Pew Charitable Trusts. In the dozen cities the organization reviewed, some 327 schools were sitting idle last year and for sale. That means those properties are costing districts that still have to keep them secure, insured and heated. Meanwhile, the financially strapped districts are not collecting taxes on some prime real estate to fund the schools that do survive. Pew researchers anticipate the number of for-sale buildings will swell in coming years as school districts consolidate their facilities. The data also suggests public school officials may have to take on the added roles of real estate agent, auctioneer or landlord. .

Monterey teachers' dramatic health insurance increases have a long history - The sticker shock that Monterey Peninsula Unified School District teachers experienced in January, when they saw their health care premiums rise by as much as $500 a month, has been years in the making. MPUSD teachers who elected health care coverage for themselves plus one family member are now paying almost $714 a month in premiums, nearly double what they paid the year before. The climb was even steeper for teachers who cover their entire families: They now pay $1,105 a month, up $505 from 2011. "There was no offer to work together to come up with a fair and equitable solution," April McMillan, a teacher at Foothill Elementary School in Monterey, wrote to the board of trustees. She is one of at least eight teachers who have written to complain. District administrators say they tried to give all employees plenty of notice and offered union members alternative payment plans to spread out the pain.

Finland has an education system the US should envy – and learn from - A new book has attracted much interest in the Washington DC, especially on Capitol Hill, Finnish Lessons: What Can the World Learn From Educational Change in Finland?. The book arrives after Finland scored first in science and second in reading and math on the standardized test administered by the Program for International Student Assessment. Conducted among industrialized nations every three years, American students finished 25th in math, 17th in science and 12th in reading on the latest PISA assessment. Obviously, in our global economy, this nation's international educational attainment is discouraging for our future prospects. What stands out to me is that Finnish students take only one mandatory standardized test, at age 16. Finland has the same number of teachers as New York City, but only 600,000 students compared to 1.1m in the Big Apple. Finnish teachers' starting salaries are lower than in the US, but high-school teachers with 15 years' experience make 102% of what other college graduates make. In the US, the figure is 62%. Some of Finland's students' outcomes should be especially interesting to US policy makers. Fully 93% of Finns graduate from high school – 17.5 points higher than American students. And 66% of Finns are accepted to college, a higher rate than the US and every European nation. Strikingly, the achievement gap between the weakest and strongest students academically is the smallest in the world.

How Foreign Students Hurt U.S. Innovation: International students are attractive to strapped colleges because they tend to pay full tuition or, in the case of public institutions, pay more than full price in out-of-state rates. Last year, this was taken to a new level at California State University, East Bay, a public institution just south of Oakland. The school directed its master’s degree programs to admit only non-California students, including foreign students. Even before this edict, international students made up 90 percent of its computer-science master’s program. The pursuit of foreign students by U.S. schools affects not only college access for Americans but also their careers. Back in 1989, an internal report of the National Science Foundation forecast that a large influx of F-1 doctoral students in science, technology, engineering and math — the STEM fields — would suppress wages. The stagnant salaries would then drive the American bachelor’s degree holders in these fields into more lucrative areas, such as business and law, after graduation, and discourage them from pursuing STEM doctorates. This projection was dead-on. Contrary to the industry lobbyists’ claim of student shortages in these fields, an extensive 2007 Urban Institute study found that the U.S. has plenty of STEM graduates at the bachelor’s degree level, but few go on to graduate work in the field.

Battling College Costs, a Paycheck at a Time -- If Steve Boedefeld graduates from Appalachian State University without any student loan debt, it will be because of the money he earned fighting in Iraq and Afghanistan and the money he now saves by eating what he grows or kills. Zack Tolmie managed to escape New York University with no debt — and a degree — by landing a job at Bubby’s, the brunch institution in TriBeCa, where he made $1,000 a week. And he had entered N.Y.U. with sophomore standing, thanks to Advanced Placement credits. All that hard work also yielded a $25,000 annual merit scholarship. The two are part of a rare species on college campuses these days, as the nation’s collective student loan balance hits $1 trillion and continues to rise. While many students are trying to defray some of the costs, few can actually work their way through college in a normal amount of time without debt and little or no need-based financial aid unless they have an unusual combination of bravery, luck and discipline. “I literally never went out,” Mr. Tolmie says. “There just was not time to do that.”

Should college be subsidized? - I have always struggled with how much college should be subsidized.  People who go to college almost certainly create positive externalities, and so Pigou would say there should be some subsidy.  But people who go to college also earn substantially more over their lifetimes than those who don't.  Low income people who pay state sales taxes thus subsidize high income people.  Hence the idea that people graduate with debt seems reasonable to me, because the value they get from college far exceeds what they need to invest in college, and it means they are reducing the tax burden of those who don't go to college [I should note that I was among the lucky people whose parents paid for college, so perhaps I am in no position to comment].  On the other hand, if high prices keep 18 year olds from going to college, one of the most important routes to social mobility is blocked.

Liberal Arts Majors Didn't Kill the Economy - Rarely is the question not asked nowadays. Graduates now face a tough labor market and even tougher debt burdens, which has left many struggling to find work that pays enough to pay back what they owe. Today, as my colleague Jordan Weissmann points out, young alums aren't stuck in dead-end jobs much more than usual (despite the scare stories you may have heard). But that's a cold comfort for grads who borrowed a lot to cover the high cost of their degrees.  This is far from an academic debate. If recent grads can't find good work because they didn't learn any marketable skills, there's little the government can do to help, besides "nudging" current students to be more practical. But there's an obvious question. If liberal arts majors "didn't learn much in school," as Jane Shaw put it in the Wall Street Journal, why haven't they always had trouble finding work? Are there just more of them now, or is this lack of learning just a recent phenomenon? Well, as you can see in the chart below, there's no correlation the past decade between the share of grads in the most maligned majors and the unemployment rate for college grads (which has been inverted here). It's hard to see how the nonexistent rise of liberal arts explains the decline of job prospects.

Does the Government Profit from Student Loans? - With borrowers increasingly falling behind on their federal student loan payments, some analysts are predicting taxpayers will eventually be on the hook for potentially billions of dollars in losses. For now, though, taxpayers are making a profit. That’s according to new figures from the nonpartisan Congressional Budget Office. According to CBO, the government will make $106 billion in loans to college students in the fiscal year ending Sept. 30, and will get that back plus $39 billion when the loans are paid back with interest. Next year, the government’s “profit” from the programs is expected to be $34 billion, CBO projects.

Student Loans Going the Way of Housing: Colleges are good at getting people enrolled. They get kids lined up with education loans. The money goes to pay exorbitant prices on textbooks. It pays for meal cards. Tuition is crazy high. Parents go along and shell out until their bank accounts are barren. What colleges are not good at is getting the kids degrees. And those without those degrees have a hard time getting a good job to pay back a student loan. Instead, they fall into delinquency, starting off life saddled with an unpayable debt. According to Fair Isaac Corp. (FICO), delinquencies on student loans made in the last two years have reached 15%. The pool of loans made between 2005-2007 is almost as bad, with 12.4% past due. Bloomberg reports that “almost 60% of bank managers surveyed in December expect delinquencies to worsen in six months, FICO said.” The analogy with housing is unavoidable. Do you remember 2007? The peak in the price of housing had come and gone. But the leverage of the major investment banks was peaking at over 30..

The Average American Contributed $2,733 To Their 401(k) In 2012 - While it is commendable that Bernanke has generated a wealth effect of some 12% for those few who are planning for retirement, another problem is where the funding for this increase has come from. As Bloomberg explains, while two thirds of the increase came courtesy of the stock market, or some 8% in absolute terms, the rest was from funded (and matched) contributions to accounts. This is equal to $2733 in actual money set aside for retirement in 2012, a far cry from the maximum allowed $17,500 per year, with the actual cash outflow excluding the corporate match substantially less. This amount to a measly $228 per month (less net of matching) that the average American who has a 401(k), has set aside for retirement. We understand now why Bernanke is so hell bent on hitting that Dow 32,000 bogey - without it, the average retired American will wake up very soon one day and realize that the money is gone. All gone.

Local governments to borrow $368 million to pay for state pension costs - Local governments are borrowing $368 million to pay for pension costs this year, an 81 percent increase from 2012, state records show. The state’s largest county governments, including Westchester and Monroe counties, have entered the amortization program offered by the state Comptroller’s Office, as have many libraries, cities and towns. In all, 137 public employers are borrowing through the pension fund this year to pay for the annual expense, up from 50 that did so two years ago. Last year, 133 local governments borrowed about $203 million to pay for pension costs. “The primary reason local governments are opting into the amortization program is to protect their taxpayers, because it creates more predictability in one of their largest costs,” said Peter Baynes, executive director of the state Conference of Mayors. The program, adopted in 2010, has been criticized for letting local governments borrow for costs that should be paid annually. It allows municipalities to borrow off the pension fund at about a 3 percent interest rate and lower their payments.

Increasing Social Security Benefits: An Idea Whose Time Has Come -The concept of increasing Social Security has been around for a while. Strengthen Social Security, a coalition of 320 groups, reviewed the program’s ability to meet current and future needs and concluded that benefits should be increased rather than cut. The National Academy for Social Insurance proposed increasing benefits for vulnerable groups. The AFL-CIO has called for raising benefits. We got in the game, too, suggesting that a 15 percent increase in 2011 be included as part  of a forward-thinking progressive agenda.  (That earned us our only Rush Limbaugh rant so far – that was fun). Now the idea may be re-entering the national id, beginning on the left. In a USA Today op-ed, economist and influential blogger Duncan Black (Atrios) proposed a 20 percent increase in benefits.  So did Joan McCarter at the widely-read Daily Kos site. But it’s not really a “left” position. As a recent survey from the National Academy for Social Insurance revealed, strong majorities of independents and Republicans think the idea has merit. In fact, pretty much everybody agrees – except the parties who are talking about making a “Grand Bargain”: Republican leaders who are out of step with their own rank and file, and the President and some other Democratic power players (who are really out of step with their rank and file).

Are We Underestimating the Social Security Shortfall? - Last month the New York Times printed an op-ed piece (“Social Security: It’s Worse than You Think”) by professors Gary King of Harvard and Samir Soneji of Dartmouth. Their piece asserted that the Social Security actuaries’ methods for projecting mortality are “antiquated,” prone to “interference from political appointees,” and result in projections that underestimate the Social Security financing shortfall. The piece was accompanied by a graphic showing certain “crazy” demographic projections purportedly arising under current methods, The piece created quite a stir among those who write about Social Security finances. Several experts and other pundits published commentary on the professors’ criticisms. Among those most worth reading are rebuttals by Alicia Munnell, Paul Van de Water and Kathy Ruffing. Many people have asked me for my reactions to the Times piece, I suspect for three reasons. First, as a public trustee I’m in a position to know whether the allegations hold water. Second, like the piece’s authors I’m well known to be on the pessimistic side concerning Social Security’s financial future, at least relative to other experts. And third, I’m the Republican public trustee during the Obama Administration, and so should be expected to be the first to complain if political appointees were interfering with the development of objective analytical methods. Despite my own concerns about Social Security finances, I did not find the allegations printed in the Times to be persuasive. Below I’ll present some reasons as to why, in addition to some basic background information about the trustees’ projection process.

Regular people are smarter than pundits, at least when it comes to Social Security - It is critical that we preserve Social Security even if it means increasing Social Security taxes paid by working Americans. If you agree with this statement, you’re like 82 percent of respondents to a National Academy of Social Insurance poll, including the majority in all age groups, income brackets, and party affiliations.  An even higher share (87 percent) support raising taxes on wealthy Americans to preserve Social Security, which could be done by lifting the cap on taxable earnings, currently set at $113,700. Not so fast, say some Very Serious People, who are leery of surveys that lend support for higher taxes. After telling everyone for years that our problems are caused by wanting to have our cake and eat it too, pundits are at a loss when it turns out not to be the case—at least not when it comes to Social Security. Thus, Wall Street Journal economics editor David Wessel, who recently assured an interviewer that “the problem is that the American people want more in benefits than they’re willing to send to Washington in taxes,” dismissed the NASI poll out of hand:

David Brooks Is Lost in Time - David Brooks told us again today that he doesn't like Social Security and Medicare. He does this frequently in his columns although usually while he ostensible makes some other point.  Today's other point is that the country is less forward thinking in the past. A main piece of evidence in this regard is the money that we are spending on Medicare and Social Security.  "The federal government is a machine that takes money from future earners and spends it on health care for retirees. Entitlement spending hurts the young in two ways. It squeezes government investment programs that boost future growth. Second, the young will have to pay the money back."  Both parts of this are of course wrong. Brooks assumes that the federal government would be able to collect the same tax revenue if it didn't have Medicare as if it did. That is implausible. Medicare is an enormously popular program for which people are willing to tax themselves. It is not likely that if we nixed Medicare that we could raise the same tax revenue and simply use the money for something else. (We would at least have to change the name for the designated Medicare tax.)

Risk = Freedom? - At the individual level it is absolutely true that we face a tradeoff between risk and freedom.  You can opt for a secure life, but only at the expense of creativity, individualism, moral courage and all the other Emersonian goodies.  Each one of us, every day, faces this choice.  Mostly it is just a matter of a tiny bit of risk-taking, but these moments add up, and from time to time there is a fundamental fork in the road.  We make our own freedom. But the social level is another story.  Individuals take the array of risks as given; society can choose how much risk its members will face and what their risk-freedom tradeoffs will be, at least up to a point.  If the objective is to minimize all risk of any sort, especially all risks to health and income, the result will be stultifying.  But that’s not where we are on the Great Risk Curve.  Rather, the debates we have are about whether to cut back or extend social insurance programs like Social Security and Medicare, social protections like TANF and Medicaid, and more or less regulation of finance, pollution and such.  It seems clear to me that more security of this sort, which limits the downside risk individuals face in their personal lives, reduces the cost of living freely.

Fixing Medicare: Start By Eliminating Drug Makers' Sweetheart Deal, Not Benefits: It's no surprise that American corporations spend billions of dollars each year on lobbying, trying to gain favorable treatment from legislators. What some may find a bit unnerving is the industry that's leading the pack in these efforts. You might think our nation's defense and aerospace companies, which have legions of hired guns on Capitol Hill, are the leaders. Or perhaps Big Oil, which is perpetually fighting with environmentalists and consequently needs friends in Washington to block what it considers onerous legislation or regulations.  In both cases, you'd be wrong. It's actually the pharmaceutical industry that spends the most each year to influence our lawmakers, forking over a total of $2.6 billion on lobbying activities from 1998 through 2012, according to To get some perspective on just how big that number is, consider that oil and gas companies and their trade associations spent $1.4 billion lobbying Congress over the same time frame while the defense and aerospace industry spent $662 million, a fourth of Big Pharma's total.

Virginia cuts part-time state workers hours in response to Obamacare - Virginia Gov. Bob McDonnell has ordered state agencies to cap the hours of part-time and hourly employees to 29 hours per week to avoid hitting the Affordable Care Act's 30-hour threshold that would require the state to provide health insurance coverage to those employees.  The requirement is causing confusion throughout state agencies, including at the state's community colleges, where they would have to figure out how to cap the hours for some 9,000 adjunct faculty, and at agencies that provide direct community service. “We’re trying to get a really good grasp of who we have, what are the jobs they’re doing, if they’re working more than 30 hours, is it necessary, why?” Secretary of Administration Lisa Hicks-Thomas, said in an interview Friday. Local governments face the same questions and challenges for their employees and workers in state-supported local positions, such as community services boards for people with behavioral health conditions.

Employers Screwing Workers To Sidestep ObamaCare Mandates - In a move none could have predicted, employers are cutting hours rather than comply with a mandate to provide costly benefits for workers crossing the 30 hour threshold. (“Virginia Cuts State Employees’ Hours To Avoid Providing Obamacare Coverage“): As part of his state’s new budget, Virginia Gov. Bob McDonnell (R) and his administration are trying to force potentially tens of thousands of public sector employees in the state to work fewer hours so that the government can avoid providing them health care. Under Obamacare, employers are required to offer health insurance options for any employee working 30 hours or more per week. So McDonnell and his team have slipped language into the state’s budget bill requiring that any hourly waged workers employed by the state put in no more than 29 hours a week.[...]Other public universities have made the same shift to lower hours for employees to avoid providing them with basic health benefits. But the anti-labor practice is more prevalent in the private sector, where huge number of businesses in the restaurant industry — including Applebee’s, Olive Garden, and Denny’s — seeking to pass the cost of health care onto their low-wage employees by limiting their hours. Workers who don’t receive employer-based coverage will be able to find insurance through the public exchanges

Affordable Care Act’s ‘donut hole’ fix saves seniors $5.7 billion - The Affordable Care Act’s prescription for the so-called “donut hole” in Medicare Part D has saved America’s disabled and elderly $5.7 billion on prescription drugs since being implemented, according to a report published Thursday (PDF) by the Centers for Medicare & Medicaid Services.  The patch in the law works by gradually closing the gap in coverage some Medicare recipients face when buying prescription drugs. The new law took effect in 2010 by sending a one-time check to people who reached the coverage gap, and drug prices were significantly discounted for people in the “donut hole” by 2011. About 6.1 million seniors felt the initial round of benefits, the report adds. Average savings per person should add up to about $5,000 in 2022, although an estimate predicts some could see savings over $18,000.

Health Care as an Economic Stabilizer -- It has become customary to see our health care sector as a burden on society. In some ways it is. We have developed a complicated system of financing the sector – one guaranteed to put stress on the budgets of many households and governments at all levels. Furthermore, we have structured the system so that prices for virtually any kind of health care in the United States are at least twice as high as prices for the same things in other countries. It is the main reason that health spending per capita in the United States is about double what most other nations spend. From a macroeconomic perspective, the health care sector has functioned for some time as the main economic locomotive pulling the economy along. In the last two decades, it has created more jobs on a net basis than any other sector. Oddly, not much is made of the job-creating ability of the health care sector in political debate over health policy, in contrast to discussions of military spending, where employment always ranks high among the arguments against cuts.

Obamacare: A Deception - The article below is the most comprehensive analysis available of “Obamacare” – the Patient Protection and Affordable Care Act. The author, a knowledgeable person who wishes to remain anonymous, explains how Obamacare works for the insurance companies but not for you. The author shows that for those Americans whose income places them between 138% and 400% of the Federal Poverty Level, the out-of-pocket cost for one of the least expensive (lower coverage) subsidized policies ranges from 2% to 9.5% of Modified Adjusted Gross Income (MAGI), a tax base larger than the Adjusted Gross Income used for calculating federal income tax. What this means is that those Americans with the least or no disposable income are faced in effect with a substantial pay cut. The author provides an example of a 35 year-old with a MAGI of $27,925. The out-of- pocket cost to this person of a Silver level plan (second least expensive) is $187.33 per month. This cost is based on pre-tax income, that is, before income is reduced by payroll and income taxes. There goes the car payment or utility bill. The lives of millions of Americans will change drastically as they struggle with a new, large expense – particularly in an era of no jobs, low-paying jobs and rising cost of living.

HHS Delays Basic Health Plan Option Until 2015 - The Obama administration has delayed by one year the rollout of a health program aimed at low to moderate-income people who won’t qualify for the expanded Medicaid program under the federal health law. Under the so-called Basic Health Program, some states had planned to offer government insurance to people who don’t qualify for Medicaid, but who would be hard pressed — even with federal subsidies — to afford the premiums and cost-sharing of plans offered in the new insurance marketplaces. Those earning up to twice the federal poverty level, or about $47,000 for a family of four, would have been eligible. The Department of Health and Human Services on Wednesday said it basically ran out of time to put out guidelines to get the program running by 2014. “HHS expects to issue proposed rules regarding the Basic Health Program for comment in 2013 and final guidance in 2014, so that the program will be operational beginning in 2015 for states interested in pursuing this option.” HHS said it will work with states to have the program available in 2015 and help states continue efforts to help people get coverage who don’t qualify for Medicaid.

Slower growth of health costs eases budget deficit - A sharp and surprisingly persistent slowdown in the growth of health care costs is helping to narrow the federal deficit, leaving budget experts trying to figure out whether the trend will last and how much the slower growth could help alleviate the country’s long-term fiscal problems. In figures released last week, the Congressional Budget Office said it had erased hundreds of billions of dollars in projected spending on Medicare and Medicaid. The budget office now projects that spending on those two programs in 2020 will be about $200 billion, or 15 percent, less than it projected three years ago. New data also show overall health care spending growth continuing at the lowest rate in decades for a fourth consecutive year.  Health experts say they do not yet fully understand what is driving the lower spending trajectory. But there is a growing consensus that changes in how doctors and hospitals deliver health care — as opposed to merely a weak economy — are playing a role. Still, experts sharply disagree on where spending might be in future years, a question with major ramifications for the federal deficit, family budgets and the overall economy.

Non-Profit Hospital Executive Salaries Continue to Defy Gravity and Logic -  Over the past few weeks several reports about the compensation of top executives of US non-profit hospitals and hospital systems have appeared. So it is time to do our latest round-up of incessantly buoyant hospital executive compensation, and argumentative hot air that seems to fuel it. I will first summarize the latest cases in alphabetical order by state, and then examine some common justifications for the seemingly anti gravitational nature of executive compensation in this part of health care. On was an article about the CEO of a single relatively small public hospital system: The leaders of Maricopa County’s public health-care system agreed to raise chief executive Betsey Bayless’ pay by 33 percent, bringing her salary to $500,000. That may not seem like a lot of money as executive compensation goes, but consider the context: The Maricopa Integrated Health System is a public hospital system that provides care for the Valley’s poor and uninsured. It is funded by federal and state health-care dollars and a special county levy paid by all county property-tax payers.

The Age Rating Game -- Maggie Mahar Health Care Blog discusses some of the rhetoric employed in media on how to pay for health insurance. In other words, when costs are distributed over a large group, older adults save more than younger adults lose. Still, many believe that older Boomers can and should pick up the higher tab for their own care. After all, throughout their financial lives, they have been luckier than most: they enjoyed first crack at the employment market when jobs were plentiful, and first dibs on housing when homes were affordable...Yet in recent years, the economy has not been kind to the rock ‘n roll generation. One in six is now unemployed, and from 2000 to 2011, the average (mean) after-tax income of Americans age 45 to 54 (who are now in their 50s and early 60s) plunged by 13.3 percent.By that measure, the recession has hit them harder than other age groups except Americans aged 15 to 24. Over those years, this cohort should have been enjoying their peak earning years. But as the chart below reveals, they didn’t.

AI system diagnoses illnesses better than doctors - An artificial intelligence system developed by researchers at Indiana University can diagnose illnesses and prescribe courses of treatment significantly better than a human doctor, the university said Monday. Using a computerized decision making processes similar to IBM’s wiz computer “Watson” that won the game show “Jeopardy,” researchers plugged in big medical data sources and tasked it to simulate treatment outcomes for 500 patients, most of whom suffered from clinical depression and at least one other chronic condition, like high blood pressure or diabetes. Using data from actual patient-doctor treatment sessions, computer science assistant professor Kris Hauser and Ph.D. student Casey C. Bennett compared real-life outcomes to simulated treatment regiments and found their computer was nearly 42 percent better at diagnosing illnesses and prescribing effective treatments than human doctors.

Health Officials Urge F.D.A. to Limit Sweeteners in Sodas - A group of health advocates and public health officials from major cities around the country are asking the Food and Drug Administration to regulate the amount of caloric sweeteners in sodas and other beverages, arguing that the scientific consensus is that the level of added sugars in those products is unsafe. Beverages like soft drinks are said to be the biggest source of sugars in the American diet, and a factor in childhood obesity. The group, led by the Center for Science in the Public Interest and including public health departments from Boston to Los Angeles, said that the F.D.A. pledged in 1982 and 1988 to reassess the safety of sweeteners if consumption increased or if new scientific research indicated that ingredients like high fructose corn syrup and sucrose were a public health hazard. At a news conference on Wednesday, Michael F. Jacobson, the center’s executive director, said both conditions had been met and thus the F.D.A. was “obligated” to act.

San Francisco plastic-bag ban associated with 46% increase in foodborne-illness deaths — Not! -- In my role as Health Officer of San Francisco I received a flurry of concerned calls about a research study that claimed that the 2007 San Francisco ban on plastic bag resulted in an immediate, very large increase in foodborne illnesses and deaths. From their conclusions: We find that both deaths and ER visits spiked as soon as the ban went into effect. Relative to other counties, deaths in San Francisco increase by almost 50 percent, and ER visits increase by a comparable amount.” Here is the introduction to a memo I composed in response to this study:“This memo is to respond to a recent unpublished research paper concluding that the San Francisco ban on plastic bags has led to an increase in bacterial foodborne illnesses and deaths. TBased on our review of this paper, and our disease surveillance and death registry data, the Klick & Wright’s conclusion that San Francisco’s policy of banning of plastic bags has caused a significant increase in gastrointestinal bacterial infections and a “46 percent increase in the deaths from foodborne illnesses” is not warranted.” My full memo is here: SF-Health-Officer-MEMO-re-Reusable-Bag-Study_V8-FIN

Mice Fall Short as Test Subjects for Humans’ Deadly Ills - For decades, mice have been the species of choice in the study of human diseases. But now, researchers report evidence that the mouse model has been totally misleading for at least three major killers — sepsis, burns and trauma. As a result, years and billions of dollars have been wasted following false leads, they say.  The study’s findings do not mean that mice are useless models for all human diseases. But, its authors said, they do raise troubling questions about diseases like the ones in the study that involve the immune system, including cancer and heart disease.  “Our article raises at least the possibility that a parallel situation may be present,” said Dr. H. Shaw Warren, a sepsis researcher at Massachusetts General Hospital and a lead author of the new study.

Pancreatic Cancer Cure - How is it that a 15-year old high school student discovered a very reliable detection test for pancreatic, ovarian and lung cancer when nobody else had done it?  When you follow the story, told by the student in a TED conference presentation, the reason may become clear:  There was no big money to be made in doing this.The cost of the test, which detects very early stage cancers when treatment is simple and has nearly 100% survival rates, is $0.03. Why no big money?  Lets say, for example, that 100 million tests were run per year.  If the cost for the test materials remains at $0.03, then the cost in getting the test into doctor's hands would be the bulk of the expense (plus of course the doctor's fee for administering the test).  So a distributor of the test would have a product cost of about $1.  With a 500% mark-up that means there is a $400 million gross profit per year. That sounds attractive but the cost of doing what Andraka did in the laboratories of a pharma giant would run into many millions of dollars.  Investing that amount in something that was working with materials so cheap would never pass a business plan test because the probability of success at the outset would almost certainly have been rated as low.  And the reward for success would have been discounted by that probability.

Ten Years After Decriminalization, Drug Abuse Down by Half in Portugal - Drug warriors often contend that drug use would skyrocket if we were to legalize or decriminalize drugs in the United States. Ten years ago, Portugal decriminalized all drugs. One decade after this unprecedented experiment, drug abuse is down by half: Health experts in Portugal said Friday that Portugal’s decision 10 years ago to decriminalise drug use and treat addicts rather than punishing them is an experiment that has worked.“There is no doubt that the phenomenon of addiction is in decline in Portugal,” The number of addicts considered “problematic” — those who repeatedly use “hard” drugs and intravenous users — had fallen by half since the early 1990s, when the figure was estimated at around 100,000 people, Goulao said. “This development can not only be attributed to decriminalisation but to a confluence of treatment and risk reduction policies.”Many of these innovative treatment procedures would not have emerged if addicts had continued to be arrested and locked up rather than treated by medical experts and psychologists. Currently 40,000 people in Portugal are being treated for drug abuse. This is a far cheaper, far more humane way to tackle the problem. Rather than locking up 100,000 criminals, the Portuguese are working to cure 40,000 patients and fine-tuning a whole new canon of drug treatment knowledge at the same time.

New SARS-like virus shows person-to-person transmission - (Reuters) - A third patient in Britain has contracted a new SARS-like virus, becoming the second confirmed British case in a week and showing the deadly infection is being spread from person to person, health officials said on Wednesday. The latest case, in a man from the same family as another patient, brings the worldwide number of confirmed infections with the new virus - known as novel coronavirus, or NCoV - to 11. Of those, five have died. Most of the infected lived or had recently been in the Middle East. Three have been diagnosed in Britain. NCoV was identified when the World Health Organisation (WHO) issued an international alert in September 2012 saying a virus previously unknown in humans had infected a Qatari man who had recently been in Saudi Arabia. The virus belongs to the same family as SARS, or Severe Acute Respiratory Syndrome - a coronavirus that emerged in China in 2002 and killed about a tenth of the 8,000 people it infected worldwide. Symptoms common to both viruses include severe respiratory illness, fever, coughing and breathing difficulties.

SARS-Like Virus Infecting More People Spurs Hunt for Source - A new virus related to the one that caused SARS a decade ago was reported in an 11th person this week, spurring scientists to find the source of the lethal germ. The latest case, identified in the U.K., was probably the result of human to human transmission and increases the need for countries to watch for unusual patterns of respiratory disease, the World Health Organization said yesterday. The infected person hadn’t traveled recently and is related to a person whose infection was announced Monday. The source of the pathogen, a coronavirus that emerged as recently as April, hasn’t yet been discovered, frustrating efforts to curb its spread. Cases in humans provide opportunities for the virus to mutate and become more easily transmissible among people, potentially setting off a pandemic like the Severe Acute Respiratory Syndrome that sickened more than 8,000 people, killing 774, in 2002 and 2003. “The low number spread over a long period suggests that sporadic jumping from animals to human is the most likely explanation,” Previous cases were reported in Saudi Arabia, in areas around Jeddah and Riyadh, and in Jordan and Qatar. Genetic evidence indicates the virus is most closely related to a coronavirus found in bats, the WHO said in November.

‘Totally drug-resistant’ tuberculosis spreads in South Africa as researchers warn global outbreak would be ‘untreatable’ - The world is facing outbreaks of “totally drug-resistant” tuberculosis if explosions of the bacteria in South Africa and other poorer nations are not addressed, according to a new papers published in Emerging Infectious Diseases. At this point, researchers are working to determine how the bacteria gains its invincibility, and how to isolate it. Fears are mounting in medical communities worldwide that conventional treatments would be useless against the new disease, The Daily Mail‘s health site reports. They say doctors are warning “the world is on the brink of an outbreak of a deadly and ‘virtually untreatable’ strain of drug resistant tuberculosis unless immediate action is taken.” Fears of a repeat of the 1980s outbreak in New York City that killed 90% of the people who contracted the TB strain are being cited by those urging action in poorer countries where the disease is spiralling out of control. Researchers writing in the U.S. Centers for Disease Control journal warned in two new studies that the further outbreaks of drug resistant tuberculosis could devastate populations and economies of developing nations, particularly in the drug-resistant strain’s ground zero regions, such as in South Africa. Recent reports from 2012, however, drive home the importance of isolating drug-resistant TB, since the disease has also been popping up increasingly in wealthier Western cities such as London, where, of course, it can attack rich and poor indiscriminately.

GM antibiotic resistance in China’s rivers -A new study conducted in China finds 6 out of 6 major rivers tested positive for ampicillin antibiotic resistant bacteria [1]. Sequencing of the gene responsible, the blá gene, shows it is a synthetic version derived from a lab and different from the wild type. This suggests to the researchers that synthetic plasmid vectors from genetic engineering applications may be the source of the ampicillin resistance, which is affecting the human population. The blá gene confers resistance to a wide range of therapeutic antibiotics and the widespread environment pollution with blá resistant bacteria is a major public health concern. The development of antibiotic resistant pathogens, commonly dubbed “superbugs”, are increasingly common due to the overuse of antibiotics in medical and veterinary practices, and the ever-increasing application of genetic engineering to industrial processes including agriculture, biofuel fermentation and environmental remediation on top of laboratory research. Previously, genetic engineering experiments were confined to the laboratory, but with industrial and agricultural applications becoming more common over the last decade, the chances of uncontrolled discharge as well as deliberate release into the environment has widened. One prime example is the planting of genetically modified (GM) crops, many of which carry antibiotic resistant genes.

The Ignorance Caucus, by Paul Krugman -  Last week Eric Cantor, the House majority leader, tried to sound interested in serious policy discussion. But he didn’t succeed — and that was no accident. For these days his party dislikes the whole idea of applying critical thinking and evidence to policy questions. And no, that’s not a caricature: Last year the Texas G.O.P. explicitly condemned efforts to teach “critical thinking skills,” because, it said, such efforts “have the purpose of challenging the student’s fixed beliefs and undermining parental authority.” Mr. Cantor even felt obliged to give the ignorance caucus a shout-out, calling for a complete end to federal funding of social science research. Because it’s surely a waste of money seeking to understand the society we’re trying to change.  Start with health care, an area in which Mr. Cantor tried not to sound anti-intellectual; he lavished praise on medical research just before attacking federal support for social science. (By the way, how much money are we talking about? Well, the entire National Science Foundation budget for social and economic sciences amounts to a whopping 0.01 percent of the budget deficit.)  But Mr. Cantor’s support for medical research is curiously limited. He’s all for developing new treatments, but he and his colleagues have adamantly opposed “comparative effectiveness research,” which seeks to determine how well such treatments work.

The Left’s War on Science: The left’s war on science begins with the stats cited above: 41 percent of Democrats are young Earth creationists, and 19 percent doubt that Earth is getting warmer. These numbers do not exactly bolster the common belief that liberals are the people of the science book. In addition, consider “cognitive creationists”— whom I define as those who accept the theory of evolution for the human body but not the brain. Whereas conservatives obsess over the purity and sanctity of sex, the left’s sacred values seem fixated on the environment, leading to an almost religious fervor over the purity and sanctity of air, water and especially food. Try having a conversation with a liberal progressive about GMOs—genetically modified organisms—in which the words “Monsanto” and “profit” are not dropped like syllogistic bombs. Comedian Bill Maher, for example, on his HBO Real Time show on October 19, 2012, asked Stonyfield Farm CEO Gary Hirshberg if he would rate Monsanto as a 10 (“evil”) or an 11 (“f—ing evil”)? The fact is we’ve been genetically modifying organisms for 10,000 years through breeding and selection. It’s the only way to feed billions of people.

Farmer’s Supreme Court Challenge Puts Monsanto Patents at Risk - With his mere 300 acres of soybeans, corn and wheat, Vernon Hugh Bowman said, “I’m not even big enough to be called a farmer.”  Yet the 75-year-old farmer from southwestern Indiana will face off Tuesday against the world’s largest seed company, Monsanto, in a Supreme Court case that could have a huge impact on the future of genetically modified crops, and also affect other fields from medical research to software.  At stake in Mr. Bowman’s case is whether patents on seeds — or other things that can self-replicate — extend beyond the first generation of the products.  It is one of two cases before the Supreme Court related to the patenting of living organisms, a practice that has helped give rise to the biotechnology industry but which critics have long considered immoral. The other case, involving a breast cancer risk test from Myriad Genetics, will determine whether human genes can be patented. It is scheduled to be heard April 15.  Monsanto says that a victory for Mr. Bowman would allow farmers to essentially save seeds from one year’s crop to plant the next year, eviscerating patent protection. In Mr. Bowman’s part of Indiana, it says, a single acre of soybeans can produce enough seeds to plant 26 acres the next year.  Such a ruling would “devastate innovation in biotechnology,” the company wrote in its brief.

U.S. Farmers May Stop Planting GMs after Poor Global Yields - Some US farmers are considering returning to conventional seed after increased pest resistance and crop failures meant GM crops saw smaller yields globally than their non-GM counterparts. Farmers in the USA pay about an extra $100 per acre for GM seed, and many are questioning whether they will continue to see benefits from using GMs. “It’s all about cost benefit analysis,” said economist Dan Basse, president of American agricultural research company AgResource. “Farmers are paying extra for the technology but have seen yields which are no better than 10 years ago. They’re starting to wonder why they’re spending extra money on the technology.” One of the biggest problems the USA has seen with GM seed is resistance. While it was expected to be 40 years before resistance began to develop pests such as corn rootworm have formed a resistance to GM crops in as few as 14 years.

An Environmental Journalist’s Lament: In the fall of 2006, honey bees began dying in strange and unsettling ways. Entire colonies flew off en masse and simply vanished. More than a third of America's commercially managed hives collapsed in 36 states. In Europe, India, and Brazil, many beekeepers saw up to 90 percent of their colonies fail. Scientists named the phenomenon "Colony Collapse Disorder," or CCD, and the news of the honey bee's alarming decline was reported in media outlets everywhere. With one-third of the nation's crops pollinated by bees, concerns grew about what the honey bee's decline might portend for us. How would we feed ourselves if all the bees disappeared? Speculation about the causes of the disorder ran from genetically-modified corn, to a sinister Chinese fungus, to cell phone transmissions that led foragers astray ("They get distracted talking and never get any work done," someone quipped in a beekeeper chat room). But very quickly, many journalists settled on neonicotinoids -- pesticides that are applied to more than 140 different crops -- as the likely culprit. It seemed a familiar story of human greed and shortsightedness. With their callous disregard for nature, big chemical companies and big agriculture were killing the bees -- and threatening our own survival. With the benefit of time, it has become clear that the story was a lot more complicated than that. But the rush to judgment and the end-of-days narratives it spawned should serve as a cautionary tale for environmental journalists eager to write the next blockbuster story of environmental decline. I should know. I almost wrote that story myself.

Industrial Hemp Farming Legislation Reintroduced In Congress - Congressman Thomas Massie (R-KY) and 28 co-sponsors, including House Agriculture Committee ranking member Collin Peterson (D-MN), have reintroduced legislation in Congress that requires the federal government to respect state laws allowing the cultivation of industrial hemp. Hemp is a distinct variety of the plant species cannabis sativa that contains only trace (less than one percent) amounts of tetrahydrocannabinol (THC), the primary psychoactive compound in cannabis. House Bill 525, the Industrial Hemp Farming Act of 2013, amends the Controlled Substances Act to exclude industrial hemp from the definition of marijuana. The measure grants state legislatures the authority to license and regulate the commercial production of hemp as an industrial and agricultural commodity. Eight states – Colorado, Maine, Montana, North Dakota, Oregon, Vermont, Washington and West Virginia – have enacted statutory changes defining industrial hemp as distinct agricultural product and allowing for its regulated commercial production. Passage of HR 525 would remove existing federal barriers and allow these states and others the authority to do so without running afoul of federal anti-drug laws.

Indiana soybean farmer sees Monsanto lawsuit reach US supreme court - On the one side is Bowman, a single 75-year-old Indiana soybean farmer who is still tending the same acres of land as his father before him in rural south-western Indiana. On the other is a gigantic multibillion dollar agricultural business famed for its zealous protection of its commercial rights. The legal saga revolves around Monsanto's aggressive protection of its soybean known as Roundup Ready, which have been genetically engineered to be resistant to its Roundup herbicide or its generic equivalents. When Bowman – or thousands of other farmers just like him – plant Monsanto's seeds in the ground they are obliged to only harvest the resulting crop, not keep any of it back for planting the next year. So each season, the farmer has to buy new Monsanto seeds to plant.However, farmers are able to buy excess soybeans from local grain elevators, many of which are likely to be Roundup Ready due to the huge dominance Monsanto has in the market. Indeed in Indiana it is believed more than 90% of soybeans for sale as "commodity seeds" could be such beans, each containing the genes Monsanto developed.

‘We’re farming in a polluted world’: Even organic foods are not GMO-free, industry leaders say - Those consumers who fear even the most minute amounts of genetically modified organisms in their meals will have to confront a nasty shock: even organic foods are not GMO-free, according to organic industry leaders. At an organic conference this month at the University of Guelph, Dag Falck, who operates the organic program with Nature’s Path, a North American breakfast cereal and snack-bar producer, said it was time the organic industry was more honest with its labelling. Pollen and seeds from genetically modified crops often make their way onto organic farms — and there’s no test for what the organic industry terms “cross contamination,” or trace amounts of GMOs. “Due to unavoidable, worldwide cross-pollination, no crop that has a GMO variant, no matter how regulated by the government can be guaranteed to be 100% GMO free,” Mr. Falck wrote in an email. Anyone who eats such common staples as beet sugar, canola and corn — and that means just about everybody — will be exposed.

Canadian GM Salmon Nets FDA Thousands Of Comments - Almost 30,000 comments have poured into the U.S. Food and Drug Administration about Canadian genetically modified salmon since the agency announced preliminary assessments found the altered fish pose no significant environmental impact. The response has been so strong in the past two months that the FDA was asked to extend the public comment period, and it issued a statement Wednesday to say comments will remain open an additional 60 days, until April 26. Morgan Liscinsky, spokesperson for the FDA, said the agency will review the comments after that and decide how to proceed. "FDA will complete the review of the AquAdvantage Salmon application and will reach a decision on approval," Liscinsky said in an email. "At this point it is not possible to predict a timeline for when these decisions will be made."

Gene breakthrough boosts hopes for sorghum - Sorghum (Latin name Sorghum bicolor) is a tough tropical cereal grown in dry regions of Africa, India and the southern United States. The plant is drought-tolerant but ranks far lower than corn, wheat and rice as a food because the human digestive system cannot absorb many of its calories. It is often grown as animal feed, and interest in it as a biofuel has also surged recently. But, according to a study published in the journal Nature Communications, sorghum's future may change. Scientists in Australia said they had pinpointed a tiny variant in a gene which controls an enzyme called pullulanase that helps to break down starch in sorghum, making the grain more digestible. The gene does not affect the grain's other helpful characteristics, they reported. The next step should be to cross-breed commonly grown strains of sorghum with the variety that has the genetic variant in order to boost the crop's value as a food source for humans, the study said.

Corn shortage idles 20 ethanol plants nationwide: The persistent U.S. drought is taking a toll on producers of ethanol, with corn becoming so scarce that nearly two dozen ethanol plants have been forced to halt production. The Renewable Fuels Association, an ethanol industry trade group, provided data to The Associated Press showing that 20 of the nation's 211 ethanol plants have ceased production over the past year, including five in January. Most remain open, with workers spending time performing maintenance-type tasks. But ethanol production won't likely resume until after 2013 corn is harvested in late August or September. Industry experts don't expect a shortage — millions of barrels are stockpiled and the remaining 191 plants are still producing. Still, there is growing concern about what happens if the drought lingers through another corn-growing season. "There's a lot of anxiety in the industry right now about the drought and a lot of folks watching the weather and hoping and praying this drought is going to break"

Wheat prices may rise due to supply, U.S. drought - Global wheat prices are close to bottoming out and may rise in coming months because of lingering drought in the U.S. and smaller crops in exporting countries including Australia and Russia and Argentina. Higher prices would result in costlier imports by Asian countries, higher returns to growers and switching by animal-feed millers to relatively cheaper corn instead of wheat. Benchmark wheat prices rose to a multi-year high of $9.4725/bushel July 23 but have since eased. CBOT March wheat settled at a seven-month low of $7.32/bushel Tuesday in response to rain and snow slightly easing drought conditions in parts of the U.S. The Taiwan Flour Millers' Association recently purchased U.S. Western White wheat with 9% protein around $343.77/ton, or $9.35/bushel, FOB, up by over $11/ton since mid-November. Some traders and analysts expect prices to test $350/ton if the U.S. drought continues. The United Nations Food and Agriculture Organization, in forecasts released Thursday, said global wheat inventories will decline 10% in the year ending June 30.

Cotton crops slumping most since 1993 as China buys - Cotton harvests are heading for the biggest drop in more than two decades as farmers from the U.S. to India reduce planting and China increases demand for higher- quality imports.  Crops will tumble 11 percent, the most since 1993, to 23.2 million metric tons in the year beginning Aug. 1, data from the International Cotton Advisory Committee show. Farmers will reduce sowing to 31.58 million hectares (78 million acres), a 7.7 percent decline and the largest in 11 years, according to Washington-based ICAC, which represents 41 governments. By July 2014, stockpiles will shrink 4.9 percent to 15.9 million tons, the first reduction in four years, the group’s data show.

Midwest Soil Could Take 2 Years to Recover from Drought - The Midwest suffered the worst drought in years last summer, and Midwest soil has been suffering from a drought since early 2010. As a result, crops have wilted and farmers have fallen on hard times. Now, a University of Missouri researcher says that it may take at least two years for crops and soil to recover. Randall Miles, associate professor of soil science at the MU School of Natural Resources, found that soil in the Midwest is dry down to as deep as 5 feet, where the roots of the crops absorb moisture and nutrients. "I wouldn't count on a full recovery of soil moisture any time soon," Miles said. "Even if parts of the Midwest receive a lot of snowfall and rain this spring, it will take time for the moisture to move deeply into the soil where the driest conditions exist." In 2012, Miles found that some roots had to go down as much as 8 feet to extract water. Typically, 1 foot of soil holds 2 inches of water. To recharge completely, a fully depleted soil would require about 16 inches of water over normal precipitation amounts. "The soil moisture will recharge with a hydrologic process where water moves downward from surface water and fills in the pore space found in the soil," Miles said. "However, during the winter months it is important to remember that a foot of snowfall equals about an inch of rainfall, so the soil could take some time to recharge."

Good News, Bad News Continues for Drought Across U.S. - Thursday’s release of the latest U.S. Drought Monitor brought slivers of good news for some parts of the continental U.S., while more bad news for other regions. Storms that swept across the Southeast over the past week made a significant dent in drought conditions, eradicating the areas of “exceptional” drought — the worst category. Those rains also led to significant reductions in areas of extreme, severe, and moderate drought across Alabama and North Carolina. And for the first time in more than a year, zero percent of Georgia was suffering from exceptional drought. The same storms that brought much needed rain to the Southeast and Gulf Coast states also spawned severe thunderstorms, high wind and hail events, and at least 19 tornadoes, according to the Storm Prediction Center. The heavy, prolonged rains also led to flash flooding in some areas. In much of the rest of the country, drought conditions remain dire. More than 55 percent of the lower 48 states are still under moderate drought conditions or worse, with the most severe impacts spread across the South, Great Plains and West. However, a few significant improvements were made.

NOAA: February 2012 to January 2013 Warmest on Record - January was warmer and wetter than average in the contiguous U.S., despite the persistent drought in the nation's heartland, the National Oceanic and Atmospheric Administration said Thursday. The average temperature in the lower 48 states reached 32.0°F last month. At 1.6°F above the 20th century average, January 2013 ties 1958 as the 39th-warmest January on record. That was still warm enough to make February 2012-to-January 2013 the warmest February-to-January period since record-keeping began in 1880, NOAA said in its monthly State of the Climate report. The lower 48 states were slightly wetter than usual, with an average of 2.36 inches falling in January, 0.14 inch above the long-term average. But that average figure masks a sharp divide between the eastern and western halves of the country.The West Coast, the central Rockies and portions of the Northern Plains, Southeast and Northeast were drier than normal, NOAA said. California, Connecticut and Florida each recorded one of its 10 driest Januarys.

Climate study sees possibly dire future for agriculture - Climate change could have a drastic and harmful effect on U.S. agriculture, forcing farmers and ranchers to alter where they grow crops and costing them millions of additional dollars needed to tackle weeds, pests and diseases that threaten their operations, a sweeping government report said Tuesday. The U.S. Department of Agriculture analysis said that while crops and livestock have been able to adapt to changes in their surroundings for close to 150 years, the accelerating pace and intensity of global warming during the next few decades may soon be too much for the sector to overcome. “We’re going to end up in a situation where we have a multitude of things happening that are going to negatively impact crop production,” said Jerry Hatfield, a plant physiologist with the USDA’s Agricultural Research Service and lead author of the study. “In fact, we saw this in 2012 with the drought.” The National Oceanic and Atmospheric Administration said 2012 was the hottest year ever in the United States since record-keeping began in 1895, surpassing the previous high by a full degree Fahrenheit. The accompanying drought was the worst to hit the United States in more than 50 years, leaving some crops to wither away in Midwestern fields.

Can USDA’s climate reality message take root with denialist farmers? - As Grist reported earlier this week, the USDA released a massive report on climate change and U.S. agriculture. The report may represent the agency’s most decisive move to force farmers to face reality. The short version: Climate change is real, it’s here to stay, and farmers need to start adapting before the biggest effects hit. And while this may not come as news to Grist readers, it’s worth highlighting the significance of this report. Big farm lobbying groups have been some of the most vocal critics of government action to address climate change, as well as of the very idea of anthropogenic (i.e. human-caused) climate change. A 2011 survey of Iowa farmers [PDF] found that while 68 percent believed the climate was changing, only 10 percent agree that it’s caused primarily by human-caused greenhouse gas emissions. Many an article on the extreme weather in farm country contain quotes like this one from American Farm Bureau President Bob Stallman: “We are used to dealing with extreme weather variation,” . “We’ve learned to roll with those extremes. If it gets a little more extreme down the road, we can deal with it.”

Are African-Americans More Vulnerable to Climate Change? - Several recent studies and statements by the National Oceanic and Atmospheric Administration (NOAA), the American Meteorological Society (AMS), the Intergovernmental Panel on Climate Change (IPCC) suggest that such seemingly biblical scale events are not necessarily random or attributable to weather variability alone. These groups point out that the natural weather and a backdrop of climate warming and change is now enhancing climate variability. Our climte is essentially on “steroids.”  Scientists who study weather and climate generally agree that humans are now altering the climate though some popular media outlets, blogs and political forums may give a different impression. Climate change is one of the greatest environmental challenges we face today and this will not change in the years to come. In 2004, the Congressional Black Congress Foundation (CBCF) issued a report entitled, “African Americans and Climate Change: An Unequal Burden” and more recent studies continue to sound this warning to the African American community. One can only look to Hurricane Katrina and New Orleans to get a glimpse of this reality.

Air pollution fifth leading cause of death in India: Study - Air pollution is the fifth leading cause of death in India after high blood pressure, indoor air pollution, tobacco smoking and poor nutrition, with about 620,000 premature deaths occurring from air pollution-related diseases. Like China, India faces an unprecedented public health crisis due to air pollution, the Centre for Science and Environment's (CSE) analysis of government data and the Global Burden of Disease report's data on India has shown.  The green think tank released its own assessment and the global study's India specific data on Wednesday warning that the number of premature deaths due to air pollution had increased six fold over the last 10 years.  Air pollution is now the seventh leading cause behind the loss of about 18 million healthy years of life in India due to illness. It comes after indoor air pollution, tobacco smoking, high blood pressure, childhood underweight, low nutritional status, and alcohol use.

Corporations, investors 'grabbing' land and water overseas —  As a growing population stresses the world's food and water supplies, corporations and investors in wealthy countries are buying up foreign farmland and the freshwater perks that come with it. From Sudan to Indonesia, most of the land lies in poverty-stricken regions, so experts warn that this widespread purchasing could expand the gap between developed and developing countries. The “water grabbing” by corporations amounts to 454 billion cubic meters per year globally, according to a new study by environmental scientists. That’s about 5 percent of the water the world uses annually. For countries reliant on farming and already suffering from poverty, the potential impacts are huge, said Paolo D’Odorico, a University of Virginia professor. “In many of these countries, the sum of the water being grabbed would be enough to eliminate malnourishment,” he said. Some of the more active buyers in the United States, which leads the pack in number of deals, include multinational investors Nile Trading and Development, BHP Billiton, Unitech and media magnate Ted Turner, according to the researchers. Most purchasers are agricultural, biofuel and timber investors.

RusHydro – the Monopoly that wants to Take Over Russia’s Water Services - RussHydro, the Russian Federation’s largest hydropower company, wants to take over management of the country's water and waste water services and has drafted a plan to that effect to present to the government by 10 February. The plan proposes to form a holding company with the working name OJSC National Corporation Voda Rossii, in which RusHydro would hold a controlling interest and the remaining shares would be held by a federal government agency such as the Federal Property Agency. Voda Rossii would set up a regional operator at the level of every region or municipality that would be co-owned by the local authorities.  With a 36.5 gigawatt installed electricity generation capacity, RusHydro is one of Russia's largest power generating companies, including the Saiano-Shushenskaia Hydro Power Plant (HPP), the largest in the Russian Federation.

South Americans Face Upheaval in Deadly Water Battles - People streamed into the central square in Celendin, a small city in the Peruvian Andes, the morning of July 3, 2012. They were protesting the government’s support for Newmont Mining Corp.’s plan to take control of four lakes to make way for a new gold and copper mine. By midday, there were 3,000.  Blocks away, construction worker Paulino Garcia left home on foot to buy groceries. As he approached the central square, he encountered chaos. People ran for cover as federal troops fired their weapons, One bullet struck Garcia as he watched the mayhem. It ripped open his chest and exited through his back. The 43-year- old father of two fell to the ground and died. Another three people were shot and killed, and more than 20 were wounded. It was the deadliest clash in 18 months of protests in Peru’s Cajamarca region, where many residents say Newmont’s $5 billion Conga mine will take water their villages and farms need to survive. “He died in a pool of blood,” says Adelaida Tabaco, Garcia’s widow, 38, sobbing inside her half-built adobe house in Celendin. “The only thing the people want is water for families, but the mining companies want to take it. And soldiers will kill if you get in the way.”

Desalination Seen Booming at 15% a Year as World Water Dries Up - In the Atacama Desert in northern Chile, 158,438 residents of the city of Copiapo suffered daily cutoffs of tap water last year as Anglo American Plc and other companies helped suck nearby aquifers dry for their mines. With little water left for drinking or mining, the government of President Sebastian Pinera convinced the companies to seek a solution to the water crisis 60 kilometers away from Copiapo -- on the shores of the Pacific Ocean. London-based Anglo American is spending $107 million to build a desalination plant on the coast that will pump about 120 liters (32 gallons) a second of water through the desert to its Mantoverde copper mine. Set for completion in the second half of this year, the project will provide enough salt-free water, which is used to separate copper from ore, to operate the mine. Two other companies are building similar desalination plants in an effort to keep Chile’s mining-driven economic boom alive

Video: ESA's CryoSat-2 reveals major loss of Arctic sea ice volume - An international team of scientists using new measurements from ESA’s ice mission has discovered that the volume of Arctic sea ice has declined by 36% during autumn and 9% during winter between 2003 and 2012. Satellite records show a constant downward trend in the area covered by Arctic sea ice during all seasons, but in particular in summer. The past six years have seen the lowest summer ice extent in three decades, reaching the lowest last September at about 3.61 million sq km. A team of scientists led by University College London has now generated estimates of the sea-ice volume for the 2010–11 and 2011–12 winters over the Arctic basin using data from ESA’s CryoSat satellite. This study has confirmed, for the first time, that the decline in sea ice coverage in the polar region has been accompanied by a substantial decline in ice volume

Arctic Death Spiral Bombshell: CryoSat-2 Confirms Sea Ice Volume Has Collapsed - The sharp drop in Arctic sea ice area has been matched by a harder-to-see, but equally sharp, drop in sea ice thickness. The combined result has been a collapse in total sea ice volume — to one fifth of its level in 1980.Back in September, Climate Progress reported that the European Space Agency’s CryoSat-2 probe appeared to support the key conclusion of the Pan-Arctic Ice Ocean Modeling and Assimilation System (PIOMAS) at the University of Washington’s Polar Science Center: Arctic sea ice volume has been collapsing much faster than sea ice area (or extent) because the ice has been getting thinner and thinner. Now the Natural Environment Research Council (NERC), the UK’s primary agency for funding and managing environmental sciences research, has made it official. In a Wednesday press release, they report: Arctic sea ice volume has declined by 36 per cent in the autumn and 9 per cent in the winter between 2003 and 2012, a UK-led team of scientists has discovered….The findings confirm the continuing decline in Arctic sea-ice volume simulated by the Pan-Arctic Ice-Ocean Modelling & Assimilation System (PIOMAS), which estimates the volume of Arctic sea ice and had been checked using earlier submarine, mooring, and satellite observations until 2008.

Melting 'Permafrost' Releases Climate-Warming CO2 Even Faster Than We Thought - Ancient carbon trapped in Arctic permafrost is extremely sensitive to sunlight and, if exposed to the surface when long-frozen soils melt and collapse, can release climate-warming carbon dioxide gas into the atmosphere much faster than previously thought. University of Michigan ecologist and aquatic biogeochemist George Kling and his colleagues studied places in Arctic Alaska where permafrost is melting and is causing the overlying land surface to collapse, forming erosional holes and landslides and exposing long-buried soils to sunlight. They found that sunlight increases bacterial conversion of exposed soil carbon into carbon dioxide gas by at least 40 percent compared to carbon that remains in the dark. The team, led by Rose Cory of the University of North Carolina, reported its findings in an article to be published online Feb. 11 in the Proceedings of the National Academy of Sciences.

Thawing Permafrost May Be “Huge Factor” in Global Warming - Thawing permafrost is emitting more climate-heating carbon faster than previously realised. Scientists have now learned that when the ancient carbon locked in the ice thaws and is exposed to sunlight, it turns into carbon dioxide 40% faster.  “This really changes the trajectory of the debate” over when and how much carbon will be released as permafrost thaws due to ever warmer temperatures in the Arctic, says researcher Rose Cory of the University of North Carolina.  There are 13 million square kilometres of permafrost in Alaska, Canada, Siberia and parts of Europe. As previously reported by IPS, a 2011 study estimated that global warming could release enough permafrost carbon to raise global temperatures 3 C on top of what will result from human emissions from oil, gas and coal. Human emissions are headed for 4 C of global heating, warned the International Energy Agency (IEA) this week. A rapid “decarbonization of electricity supply” is needed to avoid that future, the IEA said as it released a new book titled “Electricity in a Climate-Constrained World.”

Dramatic increase in methane in the Arctic in January 2013: Below a combination of images produced by Dr. Leonid Yurganov, showing methane levels January 1-10, 2013 (below left), January 11-20, 2013 (below center) and January 21-31, 2013 (below right). Above image shows dramatic increases of methane levels above the Arctic Ocean in the course of January 2013 in a large area north of Norway. Why are these high levels of methane showing up there? To further examine this, let's have a look at where the highest sea ice concentrations are. The image below shows sea ice concentrations for January 2013, from the National Snow and Ice data Center (NSIDC).Overlaying methane measurements with sea ice concentrations shows that the highest levels of methane coincide with areas in the Arctic Ocean without sea ice. This is shown on the animation below, which is a 1.84 MB file that may take some time to fully load.Where methane levels above the Arctic Ocean are relatively low, there still may be very high levels of methane underneath the sea ice that are still broken down by bacteria, as discussed in the post Further feedbacks of sea ice decline in the Arctic. As that post concludes, much of this methane is likely to enter the atmosphere without getting broken down by bacteria as the sea ice retreats further. Sea ice is declining at exponential pace. The big danger is that a huge rise of temperatures in the Arctic will destabilize huge amounts of methane currently held in the seabed. Comprehensive and effective action is needed now to avoid catastrophe.

Arctic Methane: The potential impact of large abrupt release of methane in the Arctic: The image displayed on the left shows that methane's global warming potential (GWP) is more than 130 times that of carbon dioxide over a period of ten years. The image featured in a video and poster produced by Sam Carana1 (2012a). IPCC2 figures were used to create the blue line. The red line is based on figures in a study by Shindell et al.3, which are higher as they include more effects. This study concludes that methane's GWP would likely be further increased when including ecosystem responses. Ecosystem responses can be particularly strong in the Arctic. As mentioned on the poster, further warming in the Arctic can cause accelerated ice loss and trigger further releases of methane from sediments under the sea. Release of methane from sediments is particularly worrying in areas such as the East Siberian Arctic Shelf (ESAS), where the sea is rather shallow (image below), causing much of the methane to enter the atmosphere without being oxidized in the water.

National Journal Warns The Economic Price Of Climate Change Is Already Here, And Growing - National Journal’s Coral Davenport has written a wide-ranging new piece laying out the myriad ways climate change, driven by human carbon emissions, is threatening the American economy. The point is backed up by myriad scientific reports: The draft of the upcoming Fifth Assessment report from the Intergovernmental Panel on Climate Change determined that, by more than a 95 percent probability, human activities are to blame over half the observed increase in the global average surface temperature since the 1950s. The draft of the Federal Advisory Committee’s Climate Assessment Report concluded that most of the United States is in for 9 to 15 degrees Fahrenheit of warming given the current path carbon emissions are following, with with ever-worsening extreme weather, sea-level rise, heat waves, deluges, droughts, storms, flooding, and ocean acidification as the result. Using specific stories ranging from Norfolk, Virginia, to Netarts Bay in Oregon, to St. Louis, Missouri, Davenport illustrates the ways these impending upheavals in the climate and ecosystems can and already are undermining Americans’ chances of recovering from the Great Recession — or of prospering in future decades.

GAO: Climate change is 'serious financial risk' to US government -For the first time ever, the federal government's watchdog agency has declared that climate change poses a potentially devastating financial threat to the government."Climate change is a complex crosscutting issue that poses risk to many environmental and economic systems — including agriculture, infrastructure, ecosystems and human health — and presents a serious financial risk," the U.S. Government Accountability Office wrote in a major biennial risk assessment published Feb. 14. "The federal government is not well positioned to address the fiscal exposure presented by climate change, and needs a government-wide strategic approach with strong leadership to manage related risks."The study highlights 30 "high-risk areas needing attention by Congress and the executive branch," according to the GAO.Two of these areas are related to climate change. The second new risk the GAO added to the 2013 list is expected gaps in environmental satellite data, which could leave communities less prepared for extreme weather events that are exacerbated by climate change. Flawed federal insurance programs have been on the risk list since March 2006 and "are not well suited to addressing emerging issues like climate change," the report noted.

Major Climate Change Bill Coming to the Senate | The Nation: Only an hour before President Obama is expected to deliver his State of the Union address—in which he might “go big” on the issue of combating climate change—two Senators announced they will introduce comprehensive climate change legislation this week, presenting a possible vehicle in the Senate for Obama’s ambitions. Senators Bernie Sanders and Barbara Boxer will outline the legislation on Thursday morning. Details are scant, though it’s being billed as “major” and “comprehensive” legislation, and will have a carbon tax, per a statement from Sanders’s office: Under the legislation, a fee on carbon pollution emissions would fund historic investments in energy efficiency and sustainable energy technologies such as wind, solar, geothermal and biomass. The proposal also would provide rebates to consumers to offset any efforts by oil, coal or gas companies to raise prices. Boxer is the chair of the Senate Committee on Environment and Public Works, so this is not a fringe effort by any means. And some heavy environmental and institutional groups will be on hand Thursday, including Bill McKibben of and representatives from the Center for American Progress, Sierra Club, Public Citizen, and the National Community Action Foundation.

Climate Change Battle Heats Up Again - Just two days after President Barack Obama challenged Congress to act on climate change in his State of the Union address, the political battle has begun. Sens.  Barbara Boxer (D., Calif) and Bernie Sanders (I., Vt.) introduced legislation Thursday that would put a price on carbon emissions and use the proceeds to roll out more clean energy and pay down some debt. It won’t go anywhere—and leading Republican lawmakers were quick to explain why—but that’s not the point. The two were responding to Mr. Obama’s ultimatum. “But if Congress won’t act soon to protect future generations, I will,” he said Tuesday night. “I will direct my Cabinet to come up with executive actions we can take, now and in the future, to reduce pollution, prepare our communities for the consequences of climate change, and speed the transition to more sustainable sources of energy. Congress last took a serious stab at climate legislation in 2009. That bill died in the Senate, thanks to bipartisan opposition; plenty of Democrats from coal-friendly and manufacturing-heavy states were leery of what the bill would do to the U.S. economy. Those same worries are kneecapping the latest legislation. Sen. Vitter has been especially concerned about any plans to introduce a “carbon tax,” an idea that in recent years has gained favor among economists of all political stripes but which remains a political non-starter. Still, the Sanders-Boxer bill may herald more fights over climate change and what to do about it.

Trolls win: Rude blog comments dim the allure of science online -The trolls are winning. Pick a story about some aspect of science, any story, scroll down to the blog comments and let the bashing begin:

  • Wonder how much taxpayer cash went into this 'deep' study?
  • I think you can take all these studies by pointy headed scientists, 99 percent of whom are socialists and communists, and stick them where the sun don't shine.
  • Yawn. Climate change myth wackos at it again.
  • This article is 100 percent propaganda crapola.
  • Speaking of dolts, if you were around in the 70s, when they also had scientists, the big talk then was about the coming ice age. And don't give me any of that carbon emission bull@!$%#.

Such nasty back and forth, like it or not, is now a staple of our news diet, and in the realm of online science news, the diatribes, screeds and rants are taking a toll on the public perception of science and technology, according to a study by researchers at the University of Wisconsin-Madison. ...

Solar: It's about to be a whole new world. - Many conservatives appear to have an unshakable, bedrock belief that solar power will never be cost-effective. Talk about solar, and conservatives often won't even look at the numbers - they'll just laugh at you. Mention that solar power recently provided almost half of Germany's electricity at peak hours, and they'll say things like "Oh, Germany's economy must be tanking, then."   But far-sighted people knew that technologies often require lots of government support to develop (basic research being, after all, a public good), and they saw that fossil fuels would have to start getting more expensive someday. And now, after decades of research and subsidies, we may be on the verge of waking up into a whole new world. The cost of solar power has been falling exponentially for the past 35 years. What's more, there is no sign at all that this cost drop is slowing. New technologies are in the pipeline right now that have the potential to make solar competitive with coal and natural gas, even with zero government subsidy. Here are a few examples:

Wind power capacity grew 20% globally in 2012, figures show | Wind power expanded by almost 20% in 2012 around the world to reach a new peak of 282 gigawatts (GW) of total installed capacity, while solar power reached more than 100GW, having more than doubled in two years. More than 45GW of new wind turbines arrived in 2012, with China and the US leading the way with 13GW each, while Germany, India and the UK were next with about 2GW apiece. "While China paused for breath, both the US and European markets had exceptionally strong years," said Steve Sawyer, secretary general of the Global Wind Energy Council (GWEC), which produced the statistics. "Asia still led global markets, but with North America a close second, and Europe not far behind."The UK now ranks sixth in the world for installed wind power, with 8.5GW. In Europe, only Germany (31GW) and Spain (23GW) have more. China leads the world with 77GW installed and the US is second with 60GW.

Solar power boom fuels increase in hazardous waste sent to dumps - While solar is a far less polluting energy source than coal or natural gas, many panel makers are nevertheless grappling with a hazardous waste problem. Fueled partly by billions in government incentives, the industry is creating millions of solar panels each year and, in the process, millions of pounds of polluted sludge and contaminated water. To dispose of the material, the companies must transport it by truck or rail far from their own plants to waste facilities hundreds and, in some cases, thousands of miles away. The fossil fuels used to transport that waste, experts say, is not typically considered in calculating solar’s carbon footprint, giving scientists and consumers who use the measurement to gauge a product’s impact on global warming the impression that solar is cleaner than it is. After installing a solar panel, “it would take one to three months of generating electricity to pay off the energy invested in driving those hazardous waste emissions out of state,”

Wind industry installs almost 5,300 MW of capacity in December - Approximately 40% of the total 2012 wind capacity additions (12,620 MW) came online in December, just before the scheduled expiration of the wind production tax credit (PTC). During December 2012, 59 new wind projects totaling 5,253 MW began commercial operation, the largest-ever single-month capacity increase for U.S. wind energy. About 50% of the total December wind capacity additions were installed in three states: Texas (1,120MW), Oklahoma (794 MW), and California (730 MW).  Wind plant developers reported throughout 2012 increasing amounts of new capacity scheduled to enter commercial operation before the end of the year. To qualify for the PTC last year, wind projects had to begin commercial operation by December 31.  On New Year's Day, Congress enacted a one-year extension of the PTC and also relaxed the rules. Under this extension, projects that begin construction before the end of 2013 are eligible to receive a 2.2 ¢/kWh PTC for generation over a 10-year period.

Energy from new Australian wind farms cheaper than from new coal or gas plants, report shows —A new study has found that in Australia electricity from new wind farms will be cheaper than that from new coal or gas power plants, which overturns the common presumption that renewables are more expensive than coal or gas. The analysis of Australia's energy options was carried out by a Sydney team belonging to the research company Bloomberg New Energy Finance (BNEF). The team modeled the prices of electricity from a variety of sources, and found electricity from a new wind farm could be supplied at $80 (AUD) per MWh, while electricity supplied by a new gas power plant would cost $116, and a new coal plant $143. These prices included the Labor government's carbon tax, but wind was cheaper even without carbon pricing being factored in. The analysis also predicted that large solar photovoltaic installations will be cheaper than coal or gas by 2020, and solar thermal and biomass systems will be at least competitive by 2030. The costs of renewables such as wind and solar are dropping but the costs of new coal and gas plants are rising, especially as the study found the four major banks in Australia were less likely to finance new fossil fuel power plants unless an expensive risk premium was included. The prices of coal and gas are also rising because of the carbon tax and export markets, especially for liquid natural gas, pushing local prices up.

Why is the U.S. Losing the Cleantech Race with China? -  The U.S. is losing the sustainable energy technology race to China. So says Chris Martenson, an economic researcher and futurist specializing in energy and resource depletion. Martinson publishes the PeakProsperity web site and is known for his video seminar, The Crash Course, and his book of the same title. Actually, Martenson claims we’re not even really trying to compete. Advances in solar, wind, and thorium are being ceded to our biggest competitor. I spoke with Martenson to find out what he meant by that contrarian statement. Martenson has much more to say about the energy future of the U.S. and the world, but around the U.S.-China cleantech competition, his first comment was “I’m a big believer in action more than words,” and in his view, U.S. policymakers are showing by their actions that they are not behind cleantech innovation and development. “I’m a numbers guy,” he told me, “and in the U.S. a startlingly small amount of money is being dedicated at national levels to renewable-energy research” — only about a billion dollars for research at national laboratories. Compare that to China’s investment: “China is going to spend $80 billion a year on renewable energy research, and $800 billion over the next decade.” China already has more installed wind power than the U.S., Martinson says.

Germany, Spain Set To Pull The Plug On Green Energy - Over ten years ago, when Europe was a bright and shining example of experimental monetarist "brilliance", and when the money was flowing, the continent decided to do the ethical thing and actively promote the pursuit and development of renewable energy through countless government subsidies. As a result, Germany and Spain became the undisputed leaders in the race for a green future, and both created similar laws to encourage the development of renewable energy. There were two problems: i) green energy, while noble in theory, is about the worst idea possible when it comes to profitability and capital self-sustainability and constantly needs governmental subsidies, and ii) it was the end consumers who would pay for the government's generosity, in the form of a surcharge on electric bills. In Germany, for example, as the industry grew (in size, and thus in losses) demand for the subsidy increased, driving the surcharge higher. In January, the surcharge, which amounts to about 14% of electricity prices, nearly doubled to 5.28 euro cents per kilowatt hour. And, as the WSJ so deftly explains, "that means ordinary consumers shoulder the lion's share of the costs for what the German government calls its "energy revolution."

Shale oil surge poses threat to renewable energy, PwC warns -A worldwide expansion of relatively cheap shale oil could put investment in renewable energy and global emissions targets under threat, as well as posing other environmental risks. The shale oil industry is still in its infancy, but has the potential to reach up to 12 per cent of global production, potentially pushing down oil prices by as much as $50 per barrel by 2035, according to a new report by consultancy firm PwC. Lower oil prices are more likely to extend production rather than simply increase it, but this could make alternative low carbon technologies less attractive, Jonathan Grant, director of sustainability and climate change at PwC, told BusinessGreen. However, the report also notes that cheaper oil could displace production from higher cost and more environmentally sensitive areas such as the Arctic and Canadian tar sands, while tax windfalls could provide finance for carbon capture and storage and other low carbon technologies. It adds that global GDP could receive a $2.7tr boost by 2035 with a 25 per cent to 40 per cent cut in global oil prices resulting from shale oil production. Under this scenario, UK GDP would receive a 3.3 per cent boost in 2035, China would see a three per cent GDP increase, US GDP would rise 4.7 per cent, and India's would climb by up to 7.3 per cent.

Manager says safety issues are ignored at Hanford nuclear site - The long-troubled project to clean up radioactive waste in Hanford, Wash., has come under attack from another senior manager, the third to assert that top executives are ignoring serious problems in the plant's design. Donna Busche, the manager of environmental and nuclear safety for San Francisco-based URS Corp., alleged in a lawsuit filed Tuesday that executives at the $13.4-billion project attempted to suppress her warnings and were working to fire her. Busche, a nuclear engineer and health physicist, alleged that pressure to meet deadlines led the company to retaliate against her for insisting on stringent safety practices at the former nuclear weapons complex. Hanford is the nation's most contaminated piece of property, home to 56 million gallons of highly radioactive sludge in underground tanks that pose a long-term risk of leaking into the Columbia River. Dozens of the tanks are already leaking and threatening the largest river in the western U.S.

Hanford nuclear tank in Wash. is leaking liquids - The long-delayed cleanup of the nation's most contaminated nuclear site became the subject of more bad news Friday, when Washington Gov. Jay Inslee announced that a radioactive waste tank there is leaking.The news raises concerns about the integrity of similar tanks at south-central Washington's Hanford nuclear reservation and puts added pressure on the federal government to resolve construction problems with the plant being built to alleviate environmental and safety risks from the waste. The tanks, which are already long past their intended 20-year life span, hold millions of gallons of a highly radioactive stew left from decades of plutonium production for nuclear weapons.On Friday, the U.S. Department of Energy said liquid levels are decreasing in one of 177 underground tanks at the site. Monitoring wells near the tank have not detected higher radiation levels, but Inslee said the leak could be in the range of 150 gallons to 300 gallons over the course of a year and poses a potential long-term threat to groundwater and rivers.

The Gradual Selling of America the Beautiful - NYT - Of the 2.27 billion acres that constitute the land area of the United States, a little less than 30 percent — about 640 million acres — belongs to you, the American citizen. It is land acquired over the years by treaty, conquest or purchase by the federal government acting on behalf of the people, and indisputably belongs to neither the states nor individuals. But in the last few decades no part of the American land mass has stirred greater controversy.  Almost four decades ago, a movement known as the Sagebrush Rebellion tried to force the federal government to give up ownership of hundreds of millions of acres, mostly in the West. A similar fever gripped Western legislatures in the mid-1990s. George W. Bush’s Interior Department basically said no to the idea that the federal government should set aside large areas of federal land for permanent wilderness protection.  Those attitudes persist. Two years ago, the Republican House basically told Interior Secretary Ken Salazar that he could not spend a penny on a program that would merely study existing federal lands for possible wilderness protection at some point in the future.  But the real threat to the public lands is not from Congress, or the state legislatures, whose laws would almost certainly be struck down as unconstitutional. The real and constant threat is more subtle, and more piecemeal. Only about a third of the 640 million acres of public land enjoy complete or high levels of protection against commercial development. Nearly all the rest is multiuse land, for logging, grazing, hard-rock mining, oil and gas development. Especially vulnerable are the 248 million acres overseen by the Bureau of Land Management.

Have coal companies been ripping Americans off even more than we already knew? - The coal industry, for as much as it whines and frets and fake-cries about how oppressive the government is, gets a pretty sweet deal. We’ve noted before than companies pay 25 cents a ton for coal from public lands and then can turn around and sell it for $35 a ton. (We’ve also mentioned that they often sell that coal to China, meaning we’re subsidizing the world’s largest consumer of coal, but that’s a whole other issue.) What makes this so much more galling is that the weepy coal companies might not even be paying for all of the coal they’re extracting. From The Hill: Interior is looking into whether mining firms lowball the value of coal excavated from federal lands to minimize the fees they pay the government. … Reuters said mining companies are underreporting the price of coal at mine sites — where royalties are assessed — then selling it to marketers that they often times own. Reuters said those intermediaries then ship the coal abroad, where they fetch higher prices.

Railroad threatens a quiet Amish way of life: They raise cattle and sheep on their farm along the banks of the Tongue River. Their children attend school in two small schoolhouses. The Amish don't use electricity, so they construct their buildings without the aid of power tools, and they work the land with horse-drawn implements. "We came west because it's not as thickly populated," David Borntreger said. "We thought it would be a good opportunity here to have our children grow up on agriculture land. We were hoping we could have a lifestyle from agriculture." Now that simple lifestyle is being threatened by a proposed railroad owned by a coal giant and two of the world's wealthiest men. The proposed line would bisect the Amish community's land and disrupt farm and ranching operations, the Borntregers said. The proposed Tongue River Railroad would open Montana's vast Otter Creek Coal Tracts — located some 15 miles to the south of the Borntregers' farm — to strip mining. According to the project's supporters, the railroad would haul an estimated 20 million tons of coal annually from Arch Coal's planned mine near the Northern Cheyenne Indian Reservation to Midwest power plants.

Too Much Flaring of Natural Gas? How a Carbon Tax could Help - After a few years when the practice was declining, flaring of natural gas is back in the news. (See, for example, Flares take shine off fracking boom in the Financial Times for Jan. 27.) Estimates indicate that natural gas flaring accounts for more than 1 percent of all the CO2 that human activity releases into the atmosphere, about as much as the entire country of Spain.  Two economic factors explain why oil producers sometimes flare associated gas rather than using it or selling it. One is the high cost of bringing the gas to market. No company would drill a gas well without pipeline access, but oil wells are a different matter. Although an oil well can produce a considerable amount of associated gas, it still constitutes a relatively small share of the total value of the energy produced. It is often worth drilling for the oil alone even if the gas is wasted. The other factor that enters into the decision to flare is the current low price of gas, brought about by the fracking revolution. Whether it is worth hooking up to the pipeline network over any given distance depends, in turn, on how much the gas is worth. Recently gas prices in the United States have been bumping along near record lows. As a recent report from puts it, “Natural gas is no longer a good business to be in; there are too many players, too many wells and no ready demand sources to soak up the surplus.” If things have gotten to the point where it isn’t even worth sinking a gas well, it is easy to see how far from economical it can be to market the associated gas from an oil well.

NY Fracking Scandal: Seven Groups Demand Conflict of Interest Investigation of Cuomo Administration - New York could soon become the newest state in the union to allow hydraulic fracturing (fracking), the controversial technique used to enable shale oil and gas extraction. The green light from New York Governor Andrew Cuomo could transpire in as little as "a couple of weeks," according to journalist and author Tom Wilber.    That timeline, of course, assumes things don't take any crazy twists or turns.   Enter a press conference today in Albany, where seven groups, including Public Citizen, Food and Water Watch, Frack Action, United for Action, Catskill Citizens for Safe Energy, and Capital District Against Fracking, called for an Albany County District Attorney General investigation of the Cuomo Administration.  They are asking "whether Lawrence Schwartz, Secretary to Gov. Andrew M. Cuomo, has a conflict of interest between his stock investments and his involvement in the state’s decision on whether to allow high-volume hydraulic fracturing for shale gas."  Schwartz - dubbed "the ringleader" of Governor Cuomo's administration - potentially has what these groups describe as a legal conflict-of-interest. A months-long DeSmogBlog investigation reveals that Cuomo's chief-of-staff actually has a direct financial interest in fracking going forward in New York state, potentially falling under the sphere of insider trading.  

No future for shale gas fracking in Germany - The German environment minister has said the extraction of natural gas using so-called fracking technology wouldn't start any time soon in Germany. He has announced that laws will be stiffened rather than softened. Germany's center-right government was working on new laws governing the use of so-called fracking technology in natural gas extraction, seeking to close existing legislative loopholes, German environment minister Peter Althaus said Monday. "The message is that we aim to limit the use of fracking rather than facilitating it," he told public radio broadcaster Deutschlandfunk. Altmaier also said that he couldn't see fracking being used anywhere in Germany in the foreseeable future, and that he wouldn't advise anyone to seek a drilling license soon. The statement followed German media reports at the weekend suggesting the conservative-led government of Chancellor Angela Merkel was seeking to push through softer rules for using the controversial technology.

Our Investment Sinkhole Problem - We are used to expecting that more investment will yield more output, but in the real world, things don’t always work out that way. In Figure 1, we see that for several groupings, the increase (or decrease) in oil consumption tends to correlate with the increase (or decrease) in GDP. The usual pattern is that GDP growth is a little greater than oil consumption growth. This happens because of changes of various sorts: (a) Increasing substitution of other energy sources for oil, (b) Increased efficiency in using oil, and (c) A changing GDP mix away from producing goods, and toward producing services, leading to a proportionately lower need for oil and other energy products. The situation is strikingly different for Saudi Arabia, however. A huge increase in oil consumption (Figure 1), and in fact in total energy consumption (Figure 2, below), does not seem to result in a corresponding rise in GDP. At least part of problem is that Saudi Arabia is reaching limits of various types. One of them is inadequate water for a rising population. Adding desalination plants adds huge costs and huge energy usage, but does not increase the standards of living of citizens.

Prices of gasoline and crude oil - West Texas Intermediate is a particular grade of crude oil whose price is usually quoted in terms of delivery in Cushing, Oklahoma. Brent is a very similar crude from Europe's North Sea. As similar products, you'd expect them to sell for close to the same price, and up until 2010 they usually did. But an increase in production in Canada and the central U.S. combined with a decrease in U.S. consumption has led to a surplus of oil in the central U.S. This overwhelmed existing infrastructure for cheap transportation of crude from Cushing to the coast, causing a big spread to develop between the prices of WTI and Brent.The Seaway Pipeline last month completed a capacity upgrade to move 400,000 b/d from Cushing down to the Gulf, though there have been some initial additional temporary infrastructure challenges with processing that new flow at the receiving end. Eliminating the Brent-WTI price differential would require that any arbitrageur could buy another barrel in Cushing and transport that additional barrel to the Coast at low cost. We're still a long way from that. We need not only to balance current flows of supply and demand, but also to work down the inventory of oil that has piled up in Cushing. Commercial crude oil inventories in PADD2, the oil district including Oklahoma, today are 50 million barrels higher than they were in 2008.

A Presidential Decision That Could Change the World: The Strategic Importance of Keystone XL - Ever since the president postponed the decision on whether to proceed, powerful forces in the energy industry and government have been mobilizing to press ever harder for its approval. Its supporters argue vociferously that the pipeline will bring jobs to America and enhance the nation’s “energy security” by lessening its reliance on Middle Eastern oil suppliers. Their true aim, however, is far simpler: to save the tar-sands industry (and many billions of dollars in U.S. investments) from possible disaster. Just how critical the fight over Keystone has become in the eyes of the industry is suggested by a recent pro-pipeline editorial in the trade publication Oil & Gas Journal: “Controversy over the Keystone XL project leaves no room for compromise. Fundamental views about the future of energy are in conflict. Approval of the project would acknowledge the rich potential of the next generation of fossil energy and encourage its development. Rejection would foreclose much of that potential in deference to an energy utopia few Americans support when they learn how much it costs.”

Koch Brothers Driving Keystone XL Pipeline from Canada to Cut Out Venezuelan Oil - Paul Jay of the Real News Network interviews Greg Palast, a BBC investigative reporter and author of Vultures’ Picnic.  Listen to it all, but here’s what I think is the key portion; it starts with a question that’s so obvious that nobody’s asking it: Why are we building a pipeline to ship oil to Texas? Texas has oil! And I wanted to know why we’re taking oil from Canada across the entire United States to Texas. And, again, it’s because the Kochs want it. Now, why do they want it? The answer is, right now they’re getting their oil—the only place they can get lots of heavy crude oil—if you want heavy crude, you’ve got to get it from a heavy dude named Hugo Chávez, the president of Venezuela. And one thing about Chávez, who I’ve known for many years, is that he doesn’t let go of his nation’s oil on the cheap. He is a cornerstone of OPEC. And Venezuela’s been selling heavy crude at a premium to the price paid in Texas, because it costs more to get heavy oil from Venezuela than it does to get light oil down the road from Texas. But they have no choice, the Koch brothers, but paying Hugo for his gunky oil, [because the Gulf coast refineries, especially those controlled by the Koch brothers in Flint Hills, can really only handle heavy crude oil].

“I want my fair share–and that’s ALL OF IT.”: The Kochs & the XL Pipeline - Greg Palast - According to the transcript of the secretly recorded tape, Charles Koch was chuckling like a six-year old. Koch was having a hell of a laugh over pilfering a few hundred dollars' worth of oil from a couple of dirt-poor Indians on the Osage Reservation. Why did Koch, worth about $3 billion at the time (now $20 billion) need to boost a few bucks from some Indian in a trailer home? Koch answered:"I want my fair share – and that's all of it."Now "all of it" includes a pipeline, the Keystone XL, which would run the world's filthiest oil, crude made from tar sands, down from Canada to his family's refinery on the Gulf Coast of Texas.

"I'd rather fight like hell': Naomi Klein's fierce new resolve to fight for climate justice - Naomi Klein, black-clad and sharp-tongued mistress of the global anti-corporate left, friend to Occupiers and scourge of oil barons, stood outside a dressing room backstage at Boston's Orpheum Theatre one night last month, a clear-eyed baby boy on her hip. "I'm really trying not to play the Earth Mother card," Klein told me over the phone the week before, as she talked about bringing Toma, her first child, into the world. But she didn't need to worry. Inside the dressing room, she'd been fielding questions from a small gaggle of young reporters alongside's Bill McKibben, who had invited her to play a key role in the 21-city "Do the Math" climate-movement roadshow that arrived at the sold-out Orpheum that night. With a laugh, Klein noted to the reporters that McKibben's devastating Rolling Stone article last summer, "Global Warming's Terrifying New Math" — revealing that the fossil-fuel industry has five times more carbon in its proven reserves, which it intends to extract, than the science says can be burned if we want to avoid climate catastrophe — had received no industry pushback.  "I mean, that's remarkable, for a piece like that, to not feel the need to correct the record in any way? Actually, we don't plan to destroy the planet."

Robert F. Kennedy Jr. arrested at Keystone XL protest in front of White House: Obama genuflects to the oil industry and Congress are their indentured servants - Shortly after noon, D.C. police began arresting the protesters, who included actress Daryl Hannah as well as prominent climate scientist James E. Hansen, Sierra Club executive director Michael Brune and civil rights veteran Julian Bond. Some of the activists tied themselves to the gates with plastic handcuffs; others sat and refused to budge despite officers’ repeated requests. Bill McKibben, co-founder of, which has helped galvanize significant grass-roots opposition to the plan, said Obama cannot ignore that the carbon-intensive process of extracting crude from Alberta’s oil sands will destabilize the planet. “Whether it’s convenient or not for our politicians, this is the test,”  This is the first environmental issue that’s brought Americans into the streets in many, many years.” Robert F. Kennedy Jr., president of the Waterkeeper Alliance, said that although he prefers to challenge projects in court, he chose to be arrested because legal avenues had been closed off by friends of the oil industry. “They have so rigged the system that we cannot go to court,” he said. He said that the oil industry had turned Congress into “indentured servants,” and that “even Obama in his State of the Union has to doff his cap to big oil and genuflect to them.”

Canada's environmental activists seen as 'threat to national security' - Monitoring of environmental activists in Canada by the country's police and security agencies has become the "new normal", according to a researcher who has analysed security documents released under freedom of information laws. Security and police agencies have been increasingly conflating terrorism and extremism with peaceful citizens exercising their democratic rights to organise petitions, protest and question government policies, said Jeffrey Monaghan of the Surveillance Studies Centre at Queen's University in Kingston, Ontario. The RCMP, Canada's national police force, and the Canadian Security Intelligence Service (CSIS) view activist activities such as blocking access to roads or buildings as "forms of attack" and depict those involved as national security threats, according to the documents. Protests and opposition to Canada's resource-based economy, especially oil and gas production, are now viewed as threats to national security, Monaghan said. In 2011 a Montreal, Quebec man who wrote letters opposing shale gas fracking was charged under Canada's Anti-Terrorism Act. Documents released in January show the RCMP has been monitoring Quebec residents who oppose fracking. "Any Canadians going to protest the Keystone XL pipeline in Washington DC on Sunday had better take precautions," Monaghan said.

Report sees flurry of ‘for sale’ signs throughout Canadian oilpatch - Ernst & Young foresees a lot of “for sale” signs being posted on energy assets around the world — and Canada’s oilpatch is no exception. The global advisory firm found 37% of oil and gas respondents it surveyed globally are either in the process of selling assets or plan to do so over the next two years. Barry Munro, who heads up Ernst & Young’s Canadian oil and gas group, said Canadian oilpatch companies face their own unique set of challenges that have made capital costlier and harder to come by. Those headwinds include difficulty in getting crude oil to market amid pipeline bottlenecks, stubbornly low natural gas prices, rising costs and regulatory delays. Shedding non-core properties is one way for companies to raise enough capital to survive, and is often a more attractive option than raising equity and diluting stock prices or loading on debt. “I think that virtually every energy company is thinking about whether they should be buyers or sellers of either specifics assets or the whole company,”

Twilight of an energy boom: Alberta’s new fiscal challenge - A squared-off concrete shell sits in a frozen field, a short distance from Highway 63 north of Fort McMurray. It was to be the first building block of the $11.6-billion Voyageur oil sands upgrader, which was taking shape in 2008 as the latest megaproject to inject adrenalin into an Alberta economy that was already riding high on its good fortune.The forlorn shell symbolizes the hollowing out of Alberta’s hopes and dreams, as it confronts an energy market that has turned dramatically against it. It is a signal of how fast Alberta has fallen, as it tumbles back to the pack of provinces with severe fiscal challenges. The provincial government has just seen $6-billion wiped off its revenues as a result of declining resource income – equivalent to the province’s annual education budget. Alberta has, in the past, seen salvation come in dramatic form: In 1999, it pulled in $2.4-billion in resource revenues. Two years later, $10.6-billion came clattering into a province that was riding a rise in natural gas prices. But the window appears to be rapidly closing on Alberta’s decade-long run, and its dream of being the economic driver of Canada in the 21st century. It may signal the end of the Alberta Advantage that has shifted the economic balance of the country westward. And if Ontario is on the ropes, and Alberta is wobbly, who will lead the country’s growth?

Despite Deepwater, Deep Pentagon Pockets for BP - If you think BP Plc. is faring poorly after the Gulf of Mexico oil spill and its subsequent suspension from government contracts, consider this: its Pentagon contracts had already doubled since the Deepwater Horizon disaster. According to Bloomberg, BP (NYSE: BP) won $1.04 billion in Pentagon contracts in fiscal year 2010 and $2.51 billion in fiscal year 2011. In November 2012, it was suspended from further government contracts. Essentially, then the Pentagon felt the coming punishment and in the meantime, ensured a fast-tracking of BP contracts to make up for the looming suspension.

Fossil fuel subsidies: billions up in smoke? - OECD Insights  - German taxpayers for instance gave 2 billion euros to coal producers in 2011. Poland’s coal producers got 7 billion euros over 1999-2011. These are just a couple of examples of the 550 measures that support fossil-fuel production or use in the OECD’s 34 member countries.  These measures had an overall value of $55 to $90 billion a year in 2005-2011 according to a new OECD report, Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 2013. Despite the many benefits for the environment and public finances of reforming fossil-fuel subsidies, lack of information regarding the amount and type of support measures in place makes it difficult to design and apply policy efficiently. Usually, lack of data is associated with developing counties, but in this case the culprits include OECD members. The International Energy Agency (IEA) has been producing data on fossil-fuel consumer subsidies in emerging and developing countries for several years using an estimation approach known as the “price-gap” method. This measures the extent to which a policy keeps domestic fuel prices below an international reference price. According to the IEA’s 2012 World Energy Outlook, fossil fuel subsidies amounted to $523 billion in 2011, up almost 30% on 2010 and six times more than subsidies to renewables.

Shale oil is no threat to oil producers - The increase in US production in the last few years has driven some reporters and even analysts to go out of their way in tendering numbers and expectations that have no bearing on realities. Take Patrice Hill in the Washington Times of February 4, 2013 reporting about a “growing school of bullish analysts believe that booming production in the US will put energy independence within reach.” And “With oil production from shale rock, oil sands and deep-sea drilling booming in the US, Canada, Brazil and elsewhere, worries about Middle East-based oil cartels and vulnerable Gulf supply lines are close to becoming things of the past.” Also Dan Denning in the Daily Reckoning recently said about US resources, “land contains enough recoverable oil and gas to make you forget about the Middle East for the rest of time.” Another outlandish statement said that the US would instantly have the world’s largest oil reserves. And “we’d never have to worry about Saudi Arabia again, or Hugo Chavez, or the mullahs in Tehran.” And “we might see oil tankers lined up waiting to export America’s tremendous oil bounty to the rest of the world.” Such unqualified reports are apparently more interested in bashing Opec, Saudi Arabia and other oil producers, in addition to propagating special interests. However, they are countered by more reasonable people and institutions whose reputation and responsibility to the public outweighs what might be popularly gained from over exaggerating resources.

The boom in U.S. oil drilling hasn’t lowered gas prices: Last year, the world pumped more oil out of the ground than ever before in history. In the first nine months of 2012, the world produced an average of 88.8 million barrels per day, about 2 million more barrels per day than in 2010. Nearly half of that increase came from new drilling in the United States. Yet oil and gasoline prices remain at elevated levels. Brent crude is still trading for around $120 per barrel, higher than it was two years ago. Here in the United States, pump prices averaged $3.59 per gallon in early February, a record for the usually calm winter months. Again, that’s all despite the recent boom in tight-oil drilling in places such as North Dakota and Texas. So why is that? The big thing to remember is that oil prices are a function of both supply and demand. If world demand for oil rises faster than producers can pump the stuff out, prices will go up. And that’s what is happening now. As James Hamilton of UC San Diego explains, China alone has consumed about half of the extra oil that’s been drilled since 2010:

The unsurprising return of dear petrol - CRUDE oil prices are creeping up again and bringing petrol prices with them. As Jim Hamilton notes, this may catch some Americans by surprise, given all the talk these days of the new American oil boom. But as he writes, while there is ever more oil being produced too little of it is petrol to keep up with surging demand: According to the EIA, world petroleum production in the first 10 months of 2012 averaged 88.8 million barrels a day. That's 2 mb/d, or 2.3%, higher than in 2010. The IMF estimates that world GDP grew by 7.1% between 2010 and 2012. If we used a global income-elasticity for petroleum demand of 0.75, we might have anticipated that a 5.3% increase in petroleum production over the last two years would have been necessary to keep the price of oil from rising. Ongoing conservation, for example, in the form of continued improvement in fuel economy, has been a key factor keeping the oil price from rising more in the face of world income growing much faster than world oil production.  China likely consumed nearly half of the global 2 mb/d increase. The EIA reports that China increased its petroleum consumption by almost 500,000 b/d in 2011, and preliminary estimates are that China added another 420,000 barrels to its daily consumption in 2012.

US is on fast-track to energy independence, report suggests - U.S. oil and gas production is evolving so rapidly — and demand is dropping so quickly — that in just five years the U.S. could no longer need to buy oil from any source but Canada, according to Citigroup's global head of commodities research. Citigroup's Edward Morse, in a new report, projects a dramatic reshaping of the global energy industry, where the U.S., in a matter of years, becomes an exporter of energy, instead of one of the biggest importers. The shift could sharply reduce the price of oil, and therefore limit the revenues of the producing nations of OPEC, as well as Russia and West Africa. Those nations face new challenges: Not only are the U.S. and Canada increasing output, but Iraq increasingly is realizing its potential as an oil producer, adding 600,000 barrels a day of production annually for the next several years. "OPEC will find it challenging to survive another 60 years, let alone another decade," the report by Morse and other Citi analysts said. "But not all of the consequences are positive, for when it comes to the geopolitics of energy, the likely outcomes are asymmetric, with clear cut winner and losers."

Fracking threatens OPEC as U.S. output at 20-year high - A surge in oil production has pushed U.S. output to the highest level since 1992, a trend expected to further reduce the nation’s reliance on the Organization of Petroleum Exporting Countries.  The world’s largest crude consumer has cut net petroleum imports from OPEC by 37 percent from the January 2008 record of 6.371 million barrels a day, according to the Energy Information Administration. Rising domestic output combined with increasing Canadian crude will further cut imports from the 12 OPEC countries by the end of 2014, according to a report today from Citigroup Inc.  Improvements in horizontal drilling and hydraulic fracturing, or fracking, have spurred drilling in states such as Texas, North Dakota and Oklahoma. The U.S. pumped 7.06 million barrels a day in the week ended Feb. 8, up 1 percent from the previous week and extending last year’s 19 percent gain, the EIA said today. “Increasing amounts of North American oil production puts pressure on OPEC to find other markets for their oil,”

US had largest increase in oil output last year since the beginning of commercial crude oil production in 1859 - The US Energy Information Administration (EIA) reported this afternoon that: U.S. crude oil production increased by 790,000 barrels per day (bbl/d) between 2011 and 2012, the largest increase in annual output since the beginning of U.S. commercial crude oil production in 1859 (see chart above). The EIA expects U.S. crude oil production to continue rising over the next two years. U.S. crude oil output is forecast to rise 815,000 bbl/d this year to 7.25 million barrels per day, and  U.S. daily oil production is expected to rise by another 570,000 bbl/d in 2014 to 7.82 million barrels per day, the highest annual average level since 1988. Most of the U.S. production growth over the next two years will come from drilling in tight rock formations located in North Dakota and Texas. Increasing tight oil production is driven by the use of horizontal drilling in conjunction with multi‐stage hydraulic fracturing, which provides both high initial production rates and high revenues at current oil prices. Additional technological and management improvements have increased the profitability of tight oil production, thereby expanding the economically recoverable tight oil resource base and accelerating the drive to produce tight oil.

No Oil without Water: Water-Tech for the Future: As much as the world is thirsty for water, investors should also be increasingly thirsty to add water-tech to their portfolios. Only 1% of the world’s water is usable - 99% is locked in glaciers or in salt-water oceans and seas. The US drought in 2012 gave us a taste of what is to come, and this year will see well over half of the US states experiencing water shortages. Water supply dictates manufacturing, agriculture and – yes – oil and gas extraction, production and refining. As water supplies diminish, water prices will rise and so too will the cost of getting hydrocarbons out of the ground. All around water-tech is a solid investment and the water industry enjoys some $620 billion in revenues. It’s a resource that will never go out of style, so it’s a short-term and long-term investment that is only going to become more profitable over the years and decades.

The Myth Of "Saudi America" The popularity of the abundance narrative waxes and wanes, and its current ascendance comes primarily on the heels of a report by Leonardo Maugeri, a former oil-industry chief and currently a fellow at Harvard's Belfer Center. When his cornucopian fantasy came out, I smelled a rat (or at least a not-too-deeply buried fish). But the International Energy Agency jumped on the bandwagon with breathless, and equally fishy, forecasts of the coming “Saudi America.” Most of the media swallowed the story hook, line, and sinker, with even the usually sober Economist rising to the bait. So what's wrong with this story? Maugeri's problems begin but don't end with an arithmetic blunder so dumb (he compounded a percentage decline incorrectly) it would make even Steve Levitt blush. The geeky geological stuff discussed at the AGU session is more interesting and ultimately more damning. The geological considerations expose a number of common threads of faulty reasoning that pervade the current crop of starry-eyed projections of endless oil abundance.

Oil and gas prices…what is the market reality - Chris Martenson at Peak Prosperity emphasizes aspects of oil and gas markets often left out of discussions, something our own Spencer England has remarked upon as well in Oil industry is undergoing a major structural change.  And I think that $80 a barrel production cost is on the low side from our new sources, being more to the $100 a barrel cost level. Past AB posts have followed the concerns of Americans early on, and address market issues where the price per barrel appears to be (Bill McBride) much lower and variable from the Middle East and Texas sweet, and also of the much more limited  quantities than promised in Tom Bozzo's On Cornucopian Views of Oil Supplies ,  and claims of  (Spencer England ) significant jobs growth for the industry. Conservation not technology will be our Saviour: Chris Martenson: Well, this is really important. The current story is something along these lines: "Hey, look at how clever we've been. Because of the magic of technology, we have discovered how to unlock these incredible oil and gas resources that we just didn't even know about before." When I talk to people who are in the oil business, they say, "Oh, no, no, we've known about those shale deposits, we've been drilling into and through them for decades. We've had horizontal drilling for decades; we've had fracking for decades. What we haven't had is $80-a-barrel oil reliably enough to support us going into those with those technologies." So what really unlocked those reserves was price. Not technology, not cleverness, not ingenuity. Don't get me wrong, there's a lot of very clever, ingenious stuff going on in those drilling actions, but price was the primary driver here.

Saudi oil income to fall by $68bn in 2013 - Saudi Arabia netted its highest income from oil exports in 2012 because of a surge in production and prices but the earnings are projected to dive by nearly $68 billion in 2013, according to a key Saudi investment firm. Although the world’s dominant oil supplier and largest Arab economy has approved a record high budget for 2013, its foreign assets will still swell by about $47 billion this year to maintain its position as having the largest official reserves in the Arab world. Higher output and prices boosted the Gulf Kingdom’s oil export earnings to an all time high of around $347 billion (Dh1.3 trillion) in 2012 but the income is forecast to tumble to nearly $279 billion (Dh1.03 trillion) this year, the Riyadh-based Jadwa Investments said. It based its projections on an expected fall in the country’s oil output to 9.6 million barrels per day in 2013 from 9.8 million bpd in 2012 and a decline in the price of Saudi crude to an average $99.4 from $106.1.

BP Energy Outlook 2030: An exercise in wish fulfillment - The oil giant’s long-term forecast—really an “exercise of imagination”—was greeted with a sort of breathless astonishment by the media who took it for a statement of fact concerning the one thing about which we cannot know anything for certain: the future. My first response to the coverage was: “Well, what did you expect the company to say?” This is the world’s third largest oil company. Of course, its forecast through 2030 is that the world will remain hooked on fossil fuels, particularly oil which, BP tells us, is going to be plentiful despite what those peak oil killjoys are saying.. Of course, they’re telling everyone they’re optimistic about oil supplies. And yet, a look at the company’s actual situation ought to lead to a much different conclusion. BP’s oil and natural gas production combined has declined about 15 percent since 2009. And, it’s not just the 2010 Gulf of Mexico oil spill that’s been plaguing the company. The oil giant’s production is declining in the North Sea, in the United States and in Africa. Even in Central Asia where BP has dominated production in Azerbaijan, it is losing production volume.

Insight: Cambodia’s $11 billion mystery (Reuters) - The remote district of Rovieng was once a battleground between Cambodian government troops and Pol Pot's genocidal Khmer Rouge. Unexploded bombs still lurk in its fields and forests. So does something more desirable - iron ore - and supposedly in such huge quantities two Chinese companies have an $11-billion plan to extract it. Their proposal - a steel plant and seaport linked by a 404-km (251-mile) railroad - has alarmed environmentalists, mystified mining and transport experts, and bolstered Cambodia's reputation as an agent for Chinese expansionism in a region where the United States is increasingly competing for influence. It is the latest in a series of mega-projects underscoring China's growing economic clout in mainland Southeast Asia, while improving China's access to supplies of raw material and ports in the Indian Ocean and South China Sea. Work will soon begin on a $7-billion railway through Laos to link China's Yunnan province with northeast Thailand. And in Myanmar work is almost finished on a $3-billion twin pipeline project to carry oil and gas to Yunnan from Myanmar's Bay of Bengal coast. The railway, port and steel project will be Cambodia's largest, with a price tag not far off the value of the country's $12.9 billion economy. The steel plant in Rovieng, in northern Cambodia, will be its first. The seaport on a Cambodian island in the Gulf of Thailand will be connected to the mainland by a 3-km (1.9-mile) bridge. The railroad will almost span Cambodia, although its exact route hasn't been revealed.

Cnooc Wins Final Approval for $15.1 Billion Nexen Buy - Cnooc Ltd., China’s biggest oil and natural gas producer, won approval to acquire the U.S. assets of Nexen Inc., its last regulatory hurdle in the $15.1 billion purchase of the Canadian energy company. The Committee on Foreign Investment in the U.S. approved the deal, now expected to close the week of Feb. 25, Nexen said in a statement today. The panel reviews takeovers by foreign- owned companies for national security implications. Cnooc’s acquisition of the Calgary-based company falls under U.S. jurisdiction because of Nexen’s Gulf of Mexico oil and gas operations, which account for about 8 percent of its output. Cnooc’s acquisition, the biggest overseas purchase by a Chinese company, prompted changes in the way Canada reviews takeovers of oil sands operators by state-controlled companies. The Canadian government approved the deal in December, announcing at the same time that it would prohibit future state- owned acquisitions in the oil sands barring “exceptional circumstances.

Russia eyes $30B oil-for-loans deal with China - Rosneft is seeking to borrow up to US$30-billion from China in exchange for possibly doubling oil supplies, making Beijing the largest consumer of Russian oil and further diverting supplies away from Europe. Four industry sources familiar with the situation told Reuters Rosneft was in talks with China’s state firm CNPC about the borrowing, which would echo a $25 billion deal the two companies clinched last decade. Back then, Rosneft and Russian pipeline monopoly Transneft borrowed money to help Rosneft acquire the assets of nationalised oil producer YUKOS while agreeing to build a pipeline to supply China with 300,000 barrels per day for 15 years. This time, Rosneft wants to borrow money as it is close to completing a $55 billion acquisition of rival TNK-BP to become the world’s largest oil producer among publicly traded firms. Russia’s leading oil company, controlled by the Kremlin, is considering ultimately doubling supplies to China, sources said. “It can be a combination of delivery options. The strategic line is to increase supplies to China,” one source familiar with the situation said.

Chinese money supply jumps - (graphs) Over the weekend China released its January bank lending and money supply data for January and the steady recovery continues with yuan loans jumping to 1070 trillion with another 1.5 trillion in shadow and other instruments.This data would also be benefiting from the shift in Chinese New Year to February, both in the sense of exaggerating the annual growth rate and in cramming loans before the break.

In China, a Vast Chasm Between the Rich and the Rest - NYT  - Last month, China reported that income inequality peaked in 2008 and has narrowed since then, though many economists believe the problem is understated. For the first time in 12 years, the government reported figures for the Gini coefficient — an indicator of inequality. It said the coefficient was 0.474 last year, down from a high of 0.491 in 2008. (Zero would represent perfect equality, and 1 would represent complete inequality.) The Gini coefficient for the United States, after taxes and transfers, is 0.378 through the late 2000s, according to the Organization for Economic Cooperation and Development. China has 2.7 million millionaires and 251 billionaires (in United States dollars). But 13 percent of its people live on less than $1.25 per day, according to United Nations data. Meanwhile, average annual disposable income in the cities is about $3,500.

Breaking China’s Investment Addiction by Zhang Monan - China’s economic growth model is running out of steam. According to the World Bank, in the 30 years after Deng Xiaoping initiated economic reform, investment accounted for 6-8 percentage points of the country’s 9.8% average annual economic growth rate, while improved productivity contributed only 2-4 percentage points. Faced with sluggish external demand, weak domestic consumption, rising labor costs, and low productivity, China depends excessively on investment to drive economic growth. Although this model is unsustainable, China’s over-reliance on investment is showing no signs of waning. In fact, as China undergoes a process of capital deepening (increasing capital per worker), even more investment is needed to contribute to higher output and technological advancement in various sectors.

China overtakes US in world trade - China has become the world's biggest trading nation in goods, ending the post-war dominance of the US, according to official figures. China's customs administration said the combined total for imports and exports in Chinese goods reached $3.87tn (£2.4tn) in 2012, edging past the $3.82tn trade in goods registed by the US commerce department. The landmark total for Chinese trade indicates the extent of Beijing's dependence on the rest of the world to generate jobs and income compared with a US economy that remains twice the size, and more self-contained. The US economy is worth $15tn compared with the $7.3tn Chinese economy. The US not only has a large internal market for goods, but also dominates the trade in services. US total trade amounted to $4.93tn in 2012, according to the US Bureau of Economic Analysis (BEA) with a surplus of $195.3bn. But like most western nations, the US deficit in the trade of goods weighs heavily and is only expected to get larger. The deficit in goods was more than $700bn compared with China's 2012 trade surplus, measured in goods, which totalled $231.1bn. Jim O'Neill, head of asset management at Goldman Sachs, said the huge market for western goods would disrupt regional trading blocs as China becomes the most important commercial partner for some countries. Germany may export twice as much to China by the end of the decade as it does to France

China Surpasses U.S. in International Trade - In 2012, China became the world's biggest trading nation, with the total value of that nation's exports and imports surpassing those of the United States. Bloomberg reports: : U.S. exports and imports of goods last year totaled $3.82 trillion, the U.S. Commerce Department said last week. China’s customs administration reported last month that the country’s trade in goods in 2012 amounted to $3.87 trillion. Since we have the data, we thought it might be interesting to see just what portion of China's volume of trade is with the United States. Our charts below show the component data for what the U.S. has imported from China, and also what the U.S. has exported to China in each month since January 1985, in terms of each nation's currency (click the images for larger versions): Taking the data just for 2012, we find that the total value of goods and services China either imported from or exported to the U.S. adds up to $536.2 billion U.S. dollars. With a total trade volume of $3.87 trillion U.S. dollars in 2012, China's trade with just the United States accounts for 13.9% of all its international trade activity. Applying similar math for the United States reveals that the U.S.' trade with China accounts for 14.0%, or just under 1/7th, of all its international trade activity. Our next chart shows the rate of growth of each nation's exports to the other, which provides an indication of each nation's relative economic health.

Don’t Be Afraid of China - Simon Johnson - I remind those who fear that Chinese banks will take over our financial system -- or the world -- that people said the same about Japanese banks in the 1980s. Yes, China’s banks are becoming larger as the economy grows. They are becoming more international, too. These changes aren’t a threat.  In fact, the opposite is true: It is financial instability in China -- and in other parts of the world -- that is the greater worry. We need to make sure our system is strong and independent enough to withstand big shocks. I hope our regulators will continue to push for higher levels of equity capital throughout our financial system.  Others say that China will steal American jobs. This fear, too, is greatly exaggerated. More trade means more growth for all.  Nonetheless, China needs to be a more responsible partner. Allowing its currency to trade more freely -- and to appreciate -- in foreign-exchange markets would be good for the world economy and for the Chinese people.  China is an important market for us. Chinese consumers want our products. Chinese companies want to work with our companies. We can cooperate peacefully and fruitfully.

Michael Pettis: Global Cooperation After the Fall (audio) About this Week’s Show:

  • -Involuntary re-balancing of the world
    -More investment is not the solution for China
    -The Financial Repression “Tax”

Japan’s Economic Minister Wants Nikkei to Surge 17% to 13,000 by March - Economic and fiscal policy minister Akira Amari said Saturday the government will step up economic recovery efforts so that the benchmark Nikkei index jumps an additional 17 percent to 13,000 points by the end of March. “It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31),” Amari said in a speech.  “We want to continue taking (new) steps to help stock prices rise” further, Amari stressed, referring to the core policies of the Liberal Democratic Party administration — the promotion of bold monetary easing, fiscal spending and greater private sector investment. The key index started rallying from around 8,600 points in mid-November. Share prices have risen largely in response to the yen’s depreciation against other major currencies on expectations for aggressive monetary easing measures by the Bank of Japan since the LDP’s return to power.

When the finance minister targets stock prices -  The Bank of Japan started on this road last month, formally adopting a 2% inflation target. That was the BoJ’s way of saying “start spending now, because your yen won’t be worth as much tomorrow as they are today”. And now the finance minister is doing his part to get the party started as well, in a highly unorthodox manner. In a speech on Saturday, he said that he wants to see the Japanese stock market rise 17% to 13,000 by the end of March. I like this move: it shows imagination, and the upside is much bigger than the downside. The worst that can happen is that it doesn’t work, and the stock market ends up doing what the stock market would have done anyway; the best that can happen is that it helps accelerate the broad recovery that everybody in Japan is hoping for this year. What’s more, Amari is not the first policymaker to talk about targeting asset prices. Minneapolis Fed president Narayana Kocherlakota, for instance, said quite clearly in 2011 that stock prices “are really going to be a central ingredient in the recovery process”, adding:In this kind of post financial crisis, post net worth driven recession, it makes sense to be thinking about asset value as a way to try to generate more stimulus than you do in a typical recession.

Yen plunges versus dollar, euro; Wall Street steps back (Reuters) - The yen slid sharply against the dollar and the euro on Monday after a U.S. Treasury official voiced support for Japan's efforts to boost growth and end deflation. Wall Street and world equity markets were little changed in light volume as a lack of major economic news gave investors little reason to push stocks higher, for now. The euro had already climbed as a European policymaker dismissed talk of intervening to weaken the currency, while U.S. stocks were unable to get further traction after hitting multi-year highs. The dollar rose as high as 94.42 yen on Reuters data, the highest since early May, 2010, and was last up 1.8 percent at 94.33 yen. The euro rose 2.1 percent to 126.46 yen, after reaching as high as 126.59 yen. The yen plunged after U.S. Treasury Undersecretary Lael Brainard said the United States supports Japanese efforts to end deflation and re-invigorate growth. The markets viewed her comments as a green light to sell the yen further, analysts said. "This suggests that the U.S. government has no problems with yen weakness and won't support any official criticism of Japan's exchange rate policies at the G20 meeting,"

Japan Reflation Deathwish Leads To A 20% Refinery Capacity Cut - As if the 20% JPY devaluation over the last few months was not enough, the Japanese government is going directly at the core of the inflation manufacturing business... they have imposed sanctions that Japan's five largest refiners cut their production by 1.1million barrels per day (or 20%). We recently noted (here and here) the rise in both the price of gasoline (at record highs) and JPY-based price of the raw material (WTI or Brent) - and it seems Abenomics can only see the upside of the inflationary cycle (as they cut supply) - as opposed to the consumer-sentiment-sapping margin-crushing deflationary impact of higher input costs to life. One thing is for sure, Abe is all-in - no matter what G-20 defense he offers.

Japanese Economy Contracts and Remains in Recession - Japan’s economy remained mired in recession late last year, shrinking 0.4 percent in annualized terms for the third straight quarter of contraction on feeble demand at home and overseas. The government reported Thursday that growth for all of 2012 was 1.9 percent, after a 0.6 percent contraction in 2011 and a 4.7 percent increase in 2010 and a 5.5 percent contraction in 2009. The figures were worse than expected, as many analysts had forecast the economy may have emerged from recession late last year as the Japanese yen weakened against other major currencies, giving a boost to Japanese export manufacturers. Prime Minister Shinzo Abe, who took office in late December, is championing aggressive spending and monetary stimulus to help get growth back on track. He has lobbied the central bank to set an inflation target of 2 percent, aimed at breaking out of Japan’s long bout of deflation, or falling prices, that he says are inhibiting corporate investment and growth. But the Bank of Japan was not expected to announce any major new initiatives from a policy meeting on Thursday. The current central bank governor, Masaaki Shirakawa, is due to leave office on March 19, and Mr. Abe is expected to appoint as his successor an expert who favors his more activist approach to monetary policy.

Japan fourth-quarter GDP shows economy still in recession - Japan's economy contracted for the third consecutive quarter in October-December, showing the country is struggling to escape from a mild recession and adding weight to the new government's push for radical policy steps to revive growth. Gross domestic product (GDP) fell 0.1 percent in October-December from the previous quarter, compared with the median forecast of 0.1 percent expansion, according to a Reuters poll. Economics Minister Akira Amari said while the economy was still showing some weakness, it was likely to resume moderate recovery helped by monetary easing, stimulus spending and an expected pick-up in global growth.On an annualized basis, the economy contracted 0.4 percent, Cabinet Office data showed on Thursday. Economists had expected a 0.5 percent annualized increase. Private consumption rose 0.4 percent from the previous quarter versus the median forecast for a 0.5 percent increase. Capital expenditure fell 2.6 percent, more than the median estimate for a 1.8 percent decline, marking the fourth straight quarter of decline.

Japan remains mired in recession - Japan secured fresh ammunition against charges that it is recklessly expanding its monetary policy and weakening the yen after evidence emerged that the country’s economy was in weaker shape than most experts had believed. Government data on Thursday that showed Japan unexpectedly remained stuck in recession last quarter could help Japanese officials at what is shaping up to be a contentious meeting of G20 finance ministers and central bankers in Moscow beginning on Friday. Measures implemented by Japan’s new government to revive the country’s slack economy will be central to a G20 debate over global foreign exchange policy in which some have cast Japan as the instigator in a brewing “currency war”. The steps – increased public spending and, especially, pressure on the Bank of Japan to adopt a looser monetary stance – have had the effect of significantly weakening the yen, to the delight of Toyota and other Japanese exporters and the irritation of some of Japan’s trading partners. The yen has fallen more than 15 per cent against the dollar since November, when the election that brought the government to power was called. In response, officials in Europe and Latin America have warned of a potentially dangerous cycle of competitive devaluations should other countries seek to weaken their own currencies to keep their economies competitive.

Quantitative Easing, Intervention, and Currency Wars - Thinking about what is driving -- and will drive -- the yen. From WSJ (2/13): Japan's new economic policies are expected to be widely discussed at this weekend's meeting of the Group of 20 finance ministers in Moscow. This week saw rocky trading in the yen after a series of conflicting reports about whether the smaller Group of Seven nations were supportive of Mr. Abe's policy. After global criticism, Mr. Abe and his advisers have toned down their talk about weakening the yen. Instead, its central bank has promised a significant new easing in monetary policy by buying bonds—similar to strategies enacted by the U.S. Federal Reserve and the European Central Bank—which policy makers say is aimed at ending Japan's long bout of deflation and often has the side effect of lowering a currency.  This clarification of potential policy measures – and the ruling out purchases of foreign currency – follows fears that Japan would directly intervene in foreign exchange markets. I think the debate over intervention is interesting, in light of what we used to think about exchange rate determination. Of course, in the old days, we typically thought of government bonds as perfect substitutes so that (sterilized) foreign exchange intervention which left the money supply unchanged had no impact. Now, presumably, we no longer believe government bonds are perfect substitutes, possibly because of differential default risk. That doesn’t necessarily mean that actual or expected (sterilized) intervention can have a quantitatively large impact. (If it’s unsterilized, then it will have an impact, but not necessarily larger than any other money base increase.)

G-7 Officially Kicks Off The Currency Wars By Denying All Currency Wars - With the world so obviously gripped in currency war even the hotdog guy has moved away from saying how technically undervalued AAPL stock is to opining on who is leading the global race to debase, it was only a matter of time before the G-7 confirmed the only strategy left is FX devaluation by denying it. Sure enough, a preliminary statement from the G-7 came earlier, in which the leading "developed" nations said, well, absolutely nothing: We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.

G-7 Said to Be Concerned About Excess Yen Moves in Statement - Bloomberg: The Group of Seven is concerned about excessive moves in the Japanese yen, an official from a G-7 nation said, adding that investors misinterpreted an earlier statement on exchange rates. The clarification spurred gains in the yen and came just hours after the world’s major industrial economies appeared to signal acceptance of a weaker Japanese currency so long as Prime Minister Shinzo Abe’s government didn’t actively pursue devaluation.The G-7’s statement -- which said nations “will not target exchange rates” -- was crafted to highlight concern about Japan giving guidance on the yen, and the country will be in the spotlight when Group of 20 policy makers meet in Moscow in three days, the official said on condition of anonymity. “The apparent volte face is a shock to all who read this morning’s statement as a green light to Japan to reflate its economy as long as measures did not directly involve targeting the yen,”

Yen steady, euro rises after G7 fires currency warning (Reuters) - The yen hovered near three-year lows against the dollar and the euro rose on Tuesday after the Group of Seven industrialized nations urged countries to refrain from competitive devaluations. The G7 statement said it remained committed to "market-determined" exchange rates, reacting to weeks of concern that the new government of Japan's monetary easing policy, which has also weakened its currency, could trigger far-reaching currency wars. "We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates," the group said. The message offered little to suggest that Tokyo is going to come under serious pressure when G20 finance ministers and central bankers meet in Moscow at the end of the week, not least because the United States is employing similar policies. Japanese Finance Minister Taro Aso welcomed the statement, saying it recognized Tokyo's policy steps were not "aimed at influencing currency markets".

Group of 7 Will Let Market Decide Currency Values.  - Seven major developed countries including the United States and Germany pledged on Tuesday to let foreign exchange markets determine the value of their currencies. In a statement, the G-7 powers said they would consult closely to avoid moves that could hurt stability. But they restated a commitment to market-determined exchange rates  “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” the G-7 said in the statement, which was posted on the Web site of the Bank of England.  Pierre Moscovici, the French finance minister, said he wanted the Europeans to present a common plan later this week during a meeting of finance ministers and central bankers of the Group of 20 nations to be held in Moscow. But the head of the German Bundesbank, Jens Weidmann, said Monday that the French initiative was a poor substitute for policy overhauls that, if implemented, would do more for growth.  Wolfgang Schäuble, the German finance minister, said there was “no foreign exchange problem in Europe” and that such issues should be discussed at the G-20 meeting in Moscow.

G-20 to vow no competitive devaluation: reports - Finance ministers and central bankers from the Group of 20 nations will repeat a vow to refrain from competitive devaluation and to monitor possible "monetary-policy spillover," Bloomberg reported Thursday, citing a draft statement. Policy makers will meet in Moscow Friday and Saturday amid concerns over the sharp decline of the Japanese yen since last fall and talk of a potential global currency war as countries seek to weaken their own currencies in a battle to gain competitiveness. A cheaper currency makes a country's exports more attractive.

Why Currency Wars May Be a Mistake -- A weakening currency is a good thing, because it boosts a country’s exports, right? Well, not necessarily. Financial analysts have written endlessly over the last few days and weeks about countries engaging in competitive devaluations to cheapen their currencies so their exporters’ goods and services cost less in foreign markets and they can therefore sell more of them. The U.S., Japan and the U.K. have all been accused of taking part, among others. The resulting strength of the euro could well have been on the agenda of the euro-zone finance ministers’ meeting in Brussels that starts Monday. And currency wars are almost certain to be discussed at a meeting of the Group of 20 finance ministers and central bank governors from 20 major economies that takes place later this week. Moreover, economic theory doesn’t support the idea that a weaker currency is an advantage in all cases. And Germany’s Bundesbank, for instance, was widely believed to support a hard Deutschmark in the days before the introduction of the euro to help keep a lid on inflation.

Preventing a Currency War - NYT - The Group of 7 industrialized countries appeared to tamp down talk of a currency war in a statement this week that said markets should determine exchange rates and that countries should use fiscal and monetary policies to achieve faster growth. It may help curb fears that stagnant economies will devalue their currencies to make their exports more affordable relative to competitors.  The statement came in response to sharp moves in currencies like the euro and the yen and calls by some Group of 7 countries like France for policies that could lead to competitive devaluations.  The yen, for instance, has fallen by about 11 percent against the dollar since the recent election in Japan of Prime Minister Shinzo Abe, who has pushed for economic stimulus and more aggressive asset purchases by the Bank of Japan to fight deflation. And last week President François Hollande of France proposed that euro-zone nations should adopt a policy to manage the value of the common currency to maintain the competitiveness of European goods. Such misguided thinking can lead only to chaos and retaliation. If all countries were to competitively devalue their currencies, the result would be a downward spiral that would benefit no one, but could lead to high inflation. Certainly in Europe, altering exchange rates is not the answer; reviving economies will require giving up on austerity, which is choking demand and investment.

Canada vulnerable to currency war, Carney warns — Bank of Canada governor Mark Carney is warning the Canadian economy would be damaged by a global currency war and that it would do little good to join the manipulators in trying to boost exports. The outgoing bank governor was speaking to a Canadian parliamentary committee Tuesday after he and Finance Minister Jim Flaherty signed a Group of Seven statement denouncing exchange rate manipulation. The statement issued in advance of the G20 meeting in Moscow later this week urges nations to set monetary policy to suit domestic conditions, not in an effort to lower the level of their currencies and gain a competitive advantage in export markets. The statement appeared aimed at Japan, the world’s third largest economy, which set in motion a series of policy actions that have contributed to a 15 per cent devaluation in the yen against the U.S. dollar over the past three months. The U.S. and Europe have also maintained extremely accommodative monetary policies, although Carney called them appropriate given the circumstances in those economies. But he acknowledged that Canadian exports are a key reason why the economy remains weak and that the strong loonie has not helped. He estimated the appreciation of the currency over the past decade or so was responsible for two-thirds of the loss in Canadian competitiveness.

Statistics Canada: Factory sales plunge most since the recession — Statistics Canada says manufacturing sales fell 3.1% in December to $48 billion, the largest decline since May 2009 and worse than expected. It says about half of the decrease reflected lower sales in the transportation equipment industry, while sales were also down in the chemical, petroleum and coal product as well as the fabricated metal product industries. The agency says sales fell in 16 of 21 industries, representing 82% of the manufacturing sector. Sales of durable goods sales were down 4.2% while non-durable goods sales declined 2.0%. Constant dollar sales decreased 3.8%, indicating that the decline in manufactured goods sold was a result of lower volumes More than two-thirds of the decline in manufacturing sales was concentrated in Ontario, although six provinces posted lower sales in December.

Another Entry on The Currency Wars, by Tim Duy: Regarding the never-ending debate on the the currency wars, Greg Ip adds an important point: ..these conventional and unconventional actions work the same way: by lowering the real (inflation-adjusted) interest rate, they stimulate domestic demand and consumption...This pushes the exchange rate down in two ways. First, a lower interest rate reduces a currency’s relative expected return...Second, higher inflation reduces a currency’s real value and thus ought to lead to depreciation. But higher inflation also erodes the competitive benefit of the lower exchange rate, offsetting any positive impact on trade. If this were the end of the story, the currency warriors would have a point. But it isn’t. The whole point of lowering real interest rates is to stimulate consumption and investment which ordinarily leads to higher, not lower, imports. If this is done in conjunction with looser fiscal policy (as is now the case in Japan), the boost to imports is even stronger. Thus, QE’s impact on its trading partners may be positive or negative..The point is that this is not a zero sum game; QE raises a country’s GDP by more than any improvement in the trade balance. The Federal Reserve is generally considered the first offender in the currency wars, yet it is often forgotten that the vast majority of the Dollar's real depreciation occurred prior to the recession:

Currency War Confusions - Paul Krugman  -- OK, people have been asking me where I stand on the “currency war” issue. My answer is that it’s all a misconception, and it would be a very bad thing if policy makers take it seriously. First of all, what people think they know about past currency wars isn’t actually true. Everyone uses some combination phrase like “protectionism and competitive devaluation” to describe the supposed vicious circle of the 1930s, but as Barry Eichengreen has pointed out many times, these really don’t go together. If country A and country B engage in a tit-for-tat of tariffs, the end result is restricted trade; if they each try to push their currency down, the end result is at worst to leave everyone back where they started. And in reality the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy. In the 1930s this was because countries threw off their golden fetters — they left the gold standard and this freed them to pursue expansionary monetary policies. Today that’s not the issue; but what Japan, the US, and the UK are doing is in fact trying to pursue expansionary monetary policy, with currency depreciation as a byproduct. Expansionary policy is what the world needs, so why is this a bad thing?

With currency controls in place, black market for dollars develops in Egypt - The Egyptian pound continues to weaken, as the central bank attempts to stem the run on the currency by imposing among other measures a tight trading range. Anecdotal evidence suggests that a number of wealthy individuals and businesses are quietly converting savings into hard currency and to the extent possible depositing funds abroad. Some are buying gold as inflation accelerates (see BW story).  Any time currency controls are imposed, a black market usually develops. And Egypt is no exception.Fox Business: - A run on Egypt's pound has left foreign currency in short supply and driven some dealers into the streets in search of people with U.S. dollars to sell, spawning a new black market. "There are no dollars. Everyone that walks in asks for dollars but supply is scarce," said one of the dealers.  The central bank took steps last week to manage the rate including narrowing the pound's trading band. The pound's decline has been reflected in a drop in Egypt's foreign reserves, which fell to $13.6 billion at the end of January - below the $15 billion level needed to cover three months' imports. The reserves stood at $36 billion on the eve of the uprising against Mubarak.

Let’s Stop Calling Countries “Markets” - Yves here. This is a pet topic of mine. Participants in public policy debates are often insensitive to how much ground they cede when they embrace the nomenclature used by their opponents. My personal bete noire is “free markets” which is actually an oxymoron. Another is “entitlements” which is code for “welfare”. Why don’t people who favor programs like Social Security call them “social insurance’? Or “economic stabilizers”? By Robin Broad: Here’s my most recent — and, I believe, imminently winnable — campaign: Let’s stop calling countries “markets” or “economies.” And while we’re at it, let’s not call any set of countries “emerging markets.” It seems like a small thing – the change in terminology from “countries” and “people” to “markets” and “economies.” But it makes countries and people – in all their diverse reality – disappear. And it puts an unspoken premium on places that are buying lots of goods from U.S. corporations. Some of us slip into this terminology ourselves, from time to time, without even thinking. But, when I hear my colleagues and students use it, I find myself cringing for all that is unsaid between the lines. And I cringed even more at a recent Washington, D.C. event when an Obama government official proudly introduced herself as someone with “emerging market” expertise.

Attempts to devalue euro could backfire, warns ECB’s Jens Weidmann - Jens Weidmann said in the text of a speech that "politically brought about devaluations" do not lead to improved economic competitiveness. He also said indicators suggest the euro is "not seriously overvalued". The euro has strengthened recently, raising concern it will hurt exports from the 17 euro countries, AP reported. French President Francois Hollande has suggested the eurozone needs to manage its exchange rate. Weidmann sits on the ECB's 23-member rate setting council and heads Germany's Bundesbank national central bank. ECB President Mario Draghi indicated the bank does not seek any particular exchange rate, which is set by markets, but is monitoring the stronger euro's effect on inflation.

The Big Mac Index: Bunfight - AN OLD beef is again dividing the world of international finance: the spectre of “currency wars”. Jens Weidmann, the head of Germany’s Bundesbank, recently fretted that central-bank efforts to revive flagging economies could lead to an “increasing politicisation of exchange rates”. Bill Gross of PIMCO, a huge bond-fund manager, reckons the world is entering a spiral of competitive devaluations reminiscent of the 1930s, as economies anxious for growth massage their currencies downward to give exporters a boost. What does burgernomics have to say?The Big Mac index is The Economist’s lighthearted analysis of foreign-exchange rates. Its secret sauce is the theory of purchasing-power parity (PPP), according to which prices and exchange rates should adjust over the long run, so that identical baskets of tradable goods cost the same across countries. Our basket contains only a Big Mac, and relies on the efforts of McDonald’s to produce identical products from the same ingredients everywhere . At market exchange rates, the Canadian version of the burger costs $5.39, compared with an average price of $4.37 in America. By our reckoning, then, the Canadian dollar is roughly 24% overvalued relative to its American counterpart. In Mexico, by contrast, a Big Mac is just $2.90 at market exchange rates, suggesting the peso is 33% below its long-run value relative to the dollar. The greenback buys much more Big Mac south of the border than north of it.

The Exchange Rate Disconnect - NY Fed - Why do large movements in exchange rates have small effects on international goods prices? This empirical regularity is a central puzzle in international macroeconomics. In a new study, we show that the key to understanding this exchange rate disconnect is to take into account that the largest exporters are also the largest importers. This is important because when exporters import their intermediate inputs, they face offsetting exchange rate effects on their marginal costs. For example, a depreciation of the euro relative to the U.S. dollar makes exports in U.S. dollars cheaper—but it also makes imports in euros more expensive. Using Belgian firm-level data, we show that exporters that import a large share of their inputs pass on a much smaller share of the exchange rate shock to export prices. Interestingly, import-intensive firms typically have high export market shares and hence set high markups and actively move them in response to changes in marginal cost, thus providing a second channel that limits the effect of exchange rate shocks on export prices. Our results show that a small exporter with no imported inputs has a nearly complete pass-through of more than 90 percent, while a firm at the 95th percentile of both import intensity and market share distributions has a pass-through of 56 percent, with the two mechanisms playing roughly equal roles. These findings have important implications for aggregate macroeconomic variables.

South America Goes Critical: Now Chavez Devalues Currency: “This May Well Be the Lighting of the Proverbial Fuse… Everywhere” -  Earlier this week Argentine President Cristina Kirchner responded to her country’s sky-rocketing inflation rates by freezing prices on food, a move Forbes magazine says will soon lead to widespread corruption in the business community and government. In Venezuela, where President Hugo Chavez has attempted to control all aspects of his country’s economy, price freezes instituted on essential goods like diapers and cleaning products over a year ago failed to curb soaring inflation which registered at over 22% last year. In response, with their quiver out of arrows, the Venezuelan government announced today that they are devaluing their national currency, the Bolivar, by over a third. The announcement had the immediate impact of increasing the price for a US dollar in Bolivar by nearly 50%. By boosting the bolivar value of Venezuela’s dollar-denominated oil sales, the change is expected to help ease a difficult budget outlook for the government, which has turned increasingly to borrowing to meet its spending obligations.

Inflationary pressure building in Brazil - Brazilian central bank's highly accommodate policy in the past year and the recent weakness in the Brazilian real has helped boost growth.But with economic growth stabilizing, the nation is beginning to face inflationary pressures (as predicted). Ultra dovish central bank policies, whether in Brazil or elsewhere, usually come at a price. Reuters: - Brazil's inflation accelerated to the fastest rate in nearly eight years in January, raising bets of an interest rate hike this year that could complicate the government's drive to reignite a near-stagnant economy.  The Brazilian currency, the real , also jumped on the news, hitting a 9-month high against the dollar after central bank president Alexandre Tombini said he was worried about inflation. Brazil's inflationary pressures are becoming broad-based instead of simply focused on a particular sector of the economy.

The BRiCs Little Inflation and Growth Problem - Consider the following charts of the year over year percentage change in inflation from Russia, Brazil and India:All three economies have an inflation rate that is running hot on an annual percentage change basis.  Russia's (top chart) dropped to a decent 3.6% in June of 2012.  But since then it has been rising.  While it appeared to plateau in he 6.5-6.6 area towards the end of last year, inflation edged higher in the latest report to 7.1%.  Brazilian inflation (middle chart) bottomed at 4.92% in July of last year, but has since been moving consistently higher, currently sitting at 6.15%.  It recently printed its highest level in 8 years.  And India's inflation has been stubbornly sitting at just over 7% for the last year.  Consider the inflation information in conjunction with the GDP data below: All three countries are seeing a drop in the GDP growth rates. The problem each of these countries faces is that to encourage growth their respective central banks would lower interest rates.  But their respectively high inflation rates make that a non-starter, forcing them ti either find other ways to encourage growth or to accept slower economic growth.

The Death Of Protectionism - Paul Krugman - Not especially relevant to any current debate, just interesting. In doing course prep for trade policy, I looked, as I always do, at the latest edition of the USITC publication on the economic effects of import restrictions — and discovered that my subject was gone. At least according to the ITC estimates, there’s almost nothing left to talk about: What happened? Mainly the end of the Multi-Fiber Agreement; also, US and world sugar prices have converged. But now that protectionism is a trivial issue, what will economists inveigh against?

Global R&D: An Overview - Reinhilde Veugelers investigates the patterns of worldwide research and development spending in a Policy Contribution for the European think-tank Bruegel: "The World Innovation Landscape: Asia Rising?"  The results are a useful reminder that thinking of China and the rest of the emerging economies as depending on low wages to drive their economic growth is so very 20th century. In this century, China in particular is staking its future economic growth on R&D spending and innovation.  As a starting point, consider snapshots of global R&D spending in 1999 and in 2009. The share of global R&D spending done by the United States, the European Union, and Japan is falling, while the share done by China, South Korea, and other emerging economies is rising.  Looking at individual countries, China has now outstripped Japan for second place in global R&D spending, and China's R&D spending is similar to that of Germany, France, and Italy combined.   Veugelers looks more closely at the group of seven countries that together account for about 71% of global R&D spending. Here is how much they spend on R&D as a percentage of their economies: by this measure, the U.S. economy does not especially stand out.

Canada’s triple whammy of data is reality check for economy - For a while, it looked like Canada’s job market would remain oblivious to the serious signs of a slumping economy. Ditto the housing sector, which had been defying forecasts of an impending slowdown for months. Now, reality appears to be putting both sectors in check. “We saw the other shoe drop for the Canadian economy,” on Friday,“And there feels like there was a bit of comeuppance.” Data showed employment fell back in January — the first time that has happened in six months — with many people simply giving up looking for work. As well, the number of new residential buildings under construction tumbled during the same month, with weaker activity in both single and multiple-unit homes, particularly in Ontario. Meanwhile, the sorry state of Canada’s trade efforts was reinforced by new figures showing exports and imports slowing, reflecting a drop in domestic and global demand. Statistics Canada said in a report the economy shed 21,900 positions last month. That drop is in stark contrast to a jump of 31,200 jobs in December and 56,300 new hires in November.

Canada’s cheap car loans have eerie trappings of housing crisis - Want a $200,000 Porsche? No problem. “There is often no down payment required to purchase your Porsche. Many initial costs can be included in your finance contract,” the company advertises on its web site...Today you can afford just about anything if you don’t have to pay for it right away. A $500,0000 house? Just come up with $25,000 now and the rest over the next 40 years. Make that now 25 years because we’ve tightened up the rules a bit for consumers. Need a $800 smartphone? That’ll be $199 up front and an agreement to pay a monthly fee for the next three years. Sure sounds like you are paying a lot more than $600 over the next three years. Should it really come as a surprise that the car industry has rebounded sharply from the bankruptcies of the last recession? The recovery has been built on debt, and car loans are now as long as 96 months or eight years. A report from credit agency Trans-Union says personal debt, excluding mortgages, is back at an all-time high thanks to car loans. Somehow in the middle of this debt debacle we are told we need to start saving money. A report from Bank of Montreal released Thursday says we need to save 9% of our income per year to meet retirement goals but we are lagging in the 3% to 4% range.

Report: Russia Hemorrhages $211.5 bn+ in illicit outflows 1994-2011 via Cyprus “Laundry Machine” -- There is a lot of kerfuffle right now about the British-linked tax haven of Cyprus, which is facing a financial crisis and calls for a huge bailout, despite widespread anger that its economy is substantially based on serving as a haven for dirty Russian money. Now, from Global Financial Integrity in Washington, D.C., a new report: Russia Hemorrhages at Least US$211.5 Billion in Illicit Financial Outflows from 1994-2011, Finds New GFI Study;  Cyprus a “Laundry Machine for Dirty Russian Money”

    • Illegal Inflows of Capital Estimated at US$552.9 Billion; Driving Underground Economy, Crime, Tax Evasion
    • US$764.3 Billion in Total Illicit Flows (Inflows + Outflows) Measured

German 2012 trade surplus soars despite weak December reports - Germany's trade surplus was the second highest in more than 60 years in 2012, pointing to an underlying resilience in Europe's largest economy, although both imports and exports disappointed in the last month of the year. Exports rose just 0.3 percent in December from November, compared with a forecast rise of 1.3 percent, and imports fell 1.3 percent against expectations for a rise of 1.4 percent . Analysts blamed poor demand from the euro zone and beyond for the weakness of exports, and Germans' reluctance to spend for the fall in imports, but pointed to signs of recovery ahead, including a 0.8 percent rise in December industrial orders.

Europe à l’Hollandaise, François Hollande’s flawed vision for Europe. LEADERS keep talking about the future of Europe, yet none seems able to offer a clear vision. Angela Merkel speaks vaguely of the need for greater “Europeanisation of national powers”. David Cameron, by contrast, wants a renationalisation of European powers—though without being too specific. This week it was François Hollande’s turn to speak about destiny. His concept, as set out in a speech to the European Parliament on February 5th, is to extend French dirigiste and socialist ideas to Europe, even where they cannot be applied to France itself. France cannot resort to devaluation to close its already large trade deficit. So Mr Hollande wants euro-zone governments to act together to bring down the exchange rate. Or take competitiveness. Mr Hollande has adopted some cautious labour-market reforms, but now he proposes a euro-zone minimum wage. Or take taxation. Having put up French taxes, he wants euro-zone countries to “harmonise” tax policies. Or take macroeconomic policy. If deficit countries must undergo austerity, then the EU as a whole should continue spending to support growth, and surplus countries should boost domestic demand to bring up the rest. The future of the euro zone, Mr Hollande suggests, will not be the Germanic notion of euro-zone members bearing individual responsibility for their economic policies, within rigid rules imposed by the centre. Instead integration must include common projects on, say, infrastructure and renewable energy, paid for by “new financial instruments”. And integration must be accompanied by greater “solidarity”, including guaranteed jobs and training for young people and, yes, Eurobonds.

French auditor warns 3 per cent deficit target at risk , signals rampant public debt - France has only a slim chance of meeting ambitious budget targets intended to stabilize the country's economy and meet European requirements, the country's auditor warned Tuesday. A pillar of the 17 group of European Union countries that uses the euro, France is the world's fifth-largest economy. Investors and economists have been scrutinizing the country's ability to control its finances and make it more competitive on a global stage. Tuesday's report was the first national audit under Socialist President Francois Hollande, who has argued that new spending was needed to stimulate growth. The report, however, said that health care and other public expenses were rising while tax revenues were failing to keep up. The budget tensions played out on a broader landscape of rising unemployment and fears that French industry will fall further behind as its economy slumps. On Tuesday, French workers for tiremaker Goodyear fired flares and paint bombs and riot police answered with tear gas in a standoff over layoffs.

Greeks forgo winter heating after jump in fuel tax - Eleni Daneel's family spends evenings in their Athens home bundled up in coats after a steep rise in fuel prices made heating their apartment an unaffordable luxury this winter. Daneel is one of a growing number struggling to keep warm after a fuel tax hike aimed at curbing smuggling and boosting revenues for the cash-strapped state sent heating oil prices up 40 percent. With Greeks already struggling under wage and pension cuts imposed by the foreign lenders that bailed their country out, many have stopped using heating oil altogether, pushing consumption down 70 percent in the last three months of 2012 from a year earlier. "Some cry, others swear. I've never experienced anything like this before, not being able to keep warm," said Daneel, 57, who supports her unemployed children and bed-ridden husband with her 400-euro monthly salary. "Why aren't we allowed to live a dignified life?"

Greek Economy Grinds To A Halt As New Construction Implodes By 66.6% - Some time ago we used to joke that the Greek economy, and by implication society, is literally falling apart due to its sacrifice at the altar of preserving the European, and thus global, status quo. It is no longer a joke, and the latest confirmation of the absolute halt in the Greek economy, which is now way beyond the liqudity trap and is now in a liquidity (and everything else) tiger cage is data on Greece Construction activity which according to data released on Tuesday by the Hellenic Statistical Authority is in complete freefall. From Kathimerini "In November 2012, total activity dropped 66.6 percent year-on-year in terms of building permits, 63.3 percent in terms of surface area and 65.4 percent in terms of volume." Just 1,156 permits were issued across the country, corresponding to 197,000 square meters and 706,900 cubic meters. In the first 11 months of last year construction activity shrank by 36.4 percent in terms of permits, 30.3 percent in surface area and 28.7 percent in volume, compared with the same period in 2011. The statistics observed in private construction activity are virtually the same as the above, as activity in the public sector has effectively ground to a halt.

Greek Consumers Most Pessimistic On Earth: 40% Have No Disposable Income - Chronicling the collapsing Greek socioeconomic reality would be an interesting business school case study of what a zombie monetary regime kept alive at all costs does to the "weakest link(s)" (most recently "Greek Economy Grinds To A Halt As New Construction Implodes By 66.6%" and "Person Trampled As Fight Breaks Out At Greek Free Food Handout"), if only there weren't real men and women suffering as a result of the stupidity and greed of a few entrenched individuals who will stop at nothing to see their paper wealth preserved at all costs. The latest salvo of the utter misery Greek society finds itself in comes from Nielsen research, which reports that Greeks are now the most pessimistic consumers on the planet, with the Greek consumer confidence index dropping to 35 points in the last quarter of 2012. That is the lowest level among a total of 58 countries surveyed and 11 points lower than the same period last year in Greece.  It gets worse.  As Kathimerini reports: "Four out of 10 Greeks told the same survey that they no longer have any disposable money left after covering their basic needs, which is the highest rate ever recorded in Greece and the biggest in the October-December period in Europe. A year earlier (in Q4 2011) that rate had stood at 34 percent and in Q4 of 2010 it had been at 25 percent."

Greek Youth Unemployment Tops 60% - Optimism it seems is all that matters (or is all that is allowed) as we are battered by dismal data left, right, and center. Of course, a reflection on the markets tells any 'smart' person that it all must get better - or why would stocks or sovereigns, or EURUSD be where it is? However, the 6 out of 10 15-24 year olds in Greece (61.7% to be exact) would beg to differ with that view of the world (as their economy grinds to a halt) - and with Spain reaching new highs at 55.6% (as well as the Euro-zone over 24%), all the bureaucratic lip-service in the world won't stop the revolt that is coming we fear.

Scavengers Stripping Greece of Metals - Greeks and foreigners desperate for money are dismantling bridges, highways and rail transit systems that required billions of euros in European Union subsidies to build, tearing off metal for scrap to sell, much if it going to China and India. The Associated Press reported that Greece’s crushing economic crisis has created super scavengers stripping the infrastructure of whatever they can. Police say they now arrest an average of four metal thieves every day, compared to a few cases every month before the crisis started in late 2009. The thieves are accused of stealing industrial cable, power-line transformers and other metal objects – triggering blackouts and massive train delays. The profile of the metal thief is also changing, authorities say, from gypsies and immigrants living on the margins of society to mainstream Greeks who have fallen on hard times. A group of men were caught trying to take apart an entire bridge and droves of immigrants can be seen pushing shopping carts around Greek neighborhoods looking in recycling bins.

Austerity’s children becoming Europe’s ‘lost generation,’ raising fears of new crisis – Children across Europe are being driven into poverty by harsh government austerity and youth unemployment is soaring, threatening to create “lost generations” that could fire up a new continental crisis. Global charity Caritas said on Thursday that around three out of every 10 children in Greece, Ireland, Portugal, Italy and Spain are in or have been pushed to the brink of poverty. Greece said its youth unemployment had now exceeded 60%. Spain’s is above 50% and Portugal has just topped 40%. Think tank Bruegel said the problem extended well beyond the debt-laden peripheral eurozone economies and could come back to reverse Europe’s slow recovery from financial crisis. In a report, Caritas said eurozone countries that have received international loans —  plus Italy, which hasn’t — are creating a huge class of poorly-educated and poorly-fed young people with low morale and few job prospects. “This could be a recipe not just for one lost generation in Europe but for several lost generations,”

Prosecuting the Messenger: Chief Greek Statistician Threatened with Jail - He was hired to bring Greece's debt statistics in line with European norms. Now, chief statistician Andreas Georgiou faces jail time for allegedly producing inflated budget deficit numbers. He says he was merely being honest, and he has plenty of support in Europe.He sounded calm and poised, certain that he had done his duty. But Georgiou, 53, also sounded dumbfounded. "It strikes me as odd," he says, "that we are being prosecuted in a European Union member state for actually following European law." ANZEIGEWhen Georgiou decided in the summer of 2010 to take over leadership of the revamped, newly independent Greek statistics service ELSTAT, he never imagined that the position could land him a jail sentence. But at the end of January, felony charges were filed against Georgiou and two senior ELSTAT staffers for allegedly inflating the 2009 deficit. In other words, at a time when the rest of the world was furious that Greece had artificially improved the country's budget statistics, Greek prosecutors are accusing Georgiou of doing the opposite. Prosecutors acted after a 15-month investigation into allegations made by a former ELSTAT board member. If found guilty, Georgiou faces five to 10 years in prison

Greek strikes continue as unemployment, poverty hit record levels - In the face of a deepening slump and growing government repression, workers throughout Greece have continued strikes and protests ahead of a general strike February 20. These struggles are being waged under conditions in which the austerity measures dictated by the European Union are creating unbearable conditions for masses of working people. The Greek government’s Statistics Agency released data on Thursday showing that unemployment has hit a new record high as the country’s economy continues to slide deeper into depression. According to the official figures, the jobless rate rose to 27 percent in November, up from 26.6 percent the previous month and 20.8 percent in November of last year. The figures indicated that anther 30,000 workers lost their jobs in November. The number of employed workers continued to fall, dropping by 0.8 percent to 3.6 million, while the number of unemployed rose once again by 1.5 percent to 1.4 million. Those described as “inactive”—including many who have given up looking for work—remained relatively unchanged at 3.3 million. Hardest hit are younger workers, with a staggering 61.7 percent of adults under the age of 24 on the unemployment lines.

Radical rescue proposal for Cyprus - A radical new option for the financial rescue of Cyprus would force losses on uninsured depositors in Cypriot banks, as well as investors in the country’s sovereign bonds, according to a confidential memorandum prepared ahead of Monday’s meeting of eurozone finance ministers. The proposal for a “bail-in” of investors and depositors, and drastic shrinking of the Cypriot banking sector, is one of three options put forward as alternatives to a full-scale bailout. The ministers are trying to agree a rescue plan by March, to follow the presidential elections in Cyprus later this month. The new plan has not been endorsed by its authors in the European Commission or by individual eurozone members. The memo warns that “the risks associated with this option are significant”, including a renewed danger of contagion in eurozone financial markets, and premature collapse in the Cypriot banking sector. It would reduce Cyprus’s outstanding debt to just 77 per cent of economic output, compared with 140 per cent in the current full bailout plan.

Rajoy releases tax returns, but fails to clear up doubts over Aznar years - Hounded by the scandal of the secret Bárcenas ledgers that allegedly show he accepted 25,000 euros a year in black money between 1999 and 2008, Prime Minister Mariano Rajoy did an unheard-of thing for a Spanish politician at the weekend: he opened up his personal finances to public scrutiny, releasing information about his income, assets and tax returns dating back to 2003. Yet these reams of data afford room for criticism. For example, the figures reveal that Rajoy raised his own salary notably in the middle of the economic crisis, just when he was telling Spaniards that the country needed to be more competitive and companies were cutting or freezing their workers’ wages.

Oligarchy at the core of Spain’s scandals - Spain has achieved a remarkable level of modernisation since its transition to democracy. Yet today it is immersed in a crisis exposing the weakness of its political and economic structures. Contrary to widespread belief, the problem is not a dynamic business sector stifled by corrupt politicians but rather a corporatist economic and political establishment blocking the nation’s creative energy. It is this that lies at the heart of the corruption scandals afflicting the country’s institutions, allegations of which have in recent days reached the very top of the Partido Popular government. Nowhere is this more acute than in an absence of competition in many sectors of the economy, where a few large corporations often benefit from barriers to entry with government acquiescence. It was this and the corresponding high profit margins – rather than excessively high salaries, as widely perceived – that made Spain uncompetitive during its last growth cycle from 1996 to 2007. The rate of increase in real wages did not exceed that of productivity. Profit margins fuelled inflation. And in response collective bargaining by workers led to increased salaries.

Spanish Core Inflation Up Even as Recession Deepens -  Spain’s core inflation rate accelerated in January as the deepest austerity measures in the nation’s democratic history sustained price increases while pushing the economy deeper into recession.  Core inflation, which excludes energy and fresh food prices, accelerated to 2.2 percent in January, the National Statistics Institute in Madrid said today. That’s more than the 2.1 percent median of four forecasts in a Bloomberg survey. Underlying prices fell 1.6 percent from the previous month.  Spain, the euro area’s fourth largest economy, is headed for a second straight year of recession as Prime Minister Mariano Rajoy’s tax increases and spending cuts undermine domestic demand. The European Central Bank last week left its benchmark interest rate unchanged amid a weak economic outlook for the region.

Forty Million Fiscal-shielded Euros Seized at MPS - Estimates of losses over derivative contracts subscribed by the Monte dei Paschi di Siena (MPS) bank for the Antonveneta takeover are running at about €730 million. The figure was totted up by the MPS board at the end of a more than six hour-long meeting on Wednesday. The impact on MPS’s accounts on 31 December 2012 of the operation code-named Santorini is €305 million, the Alexandria operation adds €273 million and the potential losses from Nota Italia come to 151.76 million. Yesterday, financial police officers seized fiscal-shielded cash and securities held at banks and trust funds for a total of about €40 million. Former chair Giuseppe Mussari and his number two Antonio Vigni now face charges of market rigging and issuing a fraudulent prospectus, as well as of criminal association for the purpose of defrauding the bank. The new MPS CEO Fabrizio Viola said: “We are the injured parties and will act to recover the money”.

Berlusconi: "Bribes Are Necessary - They Are Not Crimes"- With a week to go until the Italian elections, things are getting a little odd to say the least. The somewhat scandal prone Berlusconi, who self-declared himself leading in the polls just recently, has come out swinging in defense of his fellow business leaders' ethical egressions. The Bunga party banner-man defends bribery, "These are not crimes," he notes, as The FT reports, "bribes are a phenomenon that exists and it’s useless to deny the existence of these necessary situations..." This apparently on the heels of the Finmeccanica CEO's Indian helicopter deal bribes and Monte Paschi's derivative debacle. It would appear his argument lies somewhere betweeen, 'if everyone's doing it - then it's ok', and 'everyone's been doing it forever so why stop now?' One Italian paper, though, disgusted at the state of their nation, describes the entire political and elite establishment of 'guilty inertia' - calling for an end to what Berlusconi appears to be saying is corrupt business-as-usual. And yet we are to trust these technocrats when they say 'crisis over', all is well, recovery is here?

EU Crisis Damage Seen in Worst Quarter Since Lehman Wake - Euro-area economic data due this week will probably show the damage inflicted by the region’s sovereign debt crisis with the worst quarterly decline in output for almost four years.  Gross domestic product shrank 0.4 percent in the fourth quarter, according to the median of 45 estimates gathered by Bloomberg News. That would be the biggest decline since the first quarter of 2009, when GDP fell 2.8 percent in the wake of the collapse of Lehman Brothers Holdings Inc. The data is due to be published on Feb. 14. While measures to stem the region’s debt turmoil have helped curb sovereign bond yields from Spain to Greece, at least seven countries of the 17-nation bloc are in recession, leaving 18.7 million people out of work. The European Central Bank President Mario Draghi said last week that “economic weakness” will prevail in early 2013 even as the economy shows confidence stabilizing “at low levels.”

Are Ireland and Portugal out of the Woods? (Updated) Ireland and Portugal have, recently, tested the water of the money markets with some success. Portugal has issued 5-year bonds and Ireland is in the process of converting its unbearable promissory notes into long-term bonds, to be sold to the private sector. In addition, Ireland managed to secure the consent of the ECB’s Council to restructure the hated Promissory Notes that added a hefty 20% to its debt-to-GDP ratio back in 2010. So, on face value, two of the so-called ‘program’ Eurozone countries, wards of the EFSF and the troika, are returning to the markets. But does this mean that they are out of the woods? Is there, in other words, any justification in saying that these two countries are closer today to exiting their ward-of-the-troika status than they were last July, before Mr Draghi’s pronouncement that he will do all it takes to save the Eurozone? The answer to both questions is, I am afraid, a resounding ‘No!’ To see why this is so, it helps to remind ourselves (a) what it means to be ‘out of the woods’, and (b) what Mr Draghi’s OMT program is and how it is affeting Italy and Spain and, through them, Ireland, Portugal.

Portuguese economy shrinks more than expected in 2012 - Portugal‘s gross domestic product contracted by 3.2 per cent in 2012, more than had been expected, statistics body INE said Thursday. The European Union and the International Monetary Fund, which have granted Portugal a bailout of 78 billion euros (101 billion dollars), had forecast a contraction of 3 per cent. The recession deepened in the last quarter, when the economy shrank by 3.8 per cent. The INE attributed the fall largely to a reduction in the exports of goods and services. Portugal‘s unemployment rate meanwhile jumped to a record 16.9 per cent in the fourth quarter, INE said Wednesday. Portugal agreed to apply austerity policies in exchange for the bailout from the EU and IMF. Critics say the measures have paralysed the economy and increased unemployment.

Bringing Krugman to Europe - Well, not him, actually (I wish I could); I need to content myself with his latest post on austerity. Krugman argues that austerity is happening (it is trivial, but he needs repeating over and over again), showing that in the US expenditure as a share of potential GDP is back to its pre-crisis level (while unemployment remains too high, and growth stagnates). I replicated his figure including some European countries, and with slightly different data. I took OECD series on cyclically adjusted public expenditure, net of interest payment. This is commonly taken as a rough measure of discretionary government expenditure. I also re-based it to 2008, as most stimulus plans were voted and implemented in 2009. Here is what it gives:

Euro-Area Economy Shrinks Most Since Depths of Recession - The euro-area recession deepened more than economists forecast with the worst performance in almost four years as the region’s three biggest economies suffered slumping output. Gross domestic product fell 0.6 percent in the fourth quarter from the previous three months, the European Union’s statistics office in Luxembourg said today. That’s the most since the first quarter of 2009 in the aftermath of the collapse of Lehman Brothers Holdings Inc. and exceeded the 0.4 percent median forecast of economists in a Bloomberg survey. The data capped a morning of releases showing that the economies of Germany, France and Italy all shrank more than forecast in the fourth quarter. European Central Bank President Mario Draghi said last week that confidence in the 17-nation bloc has stabilized and the ECB sees a gradual recovery beginning later this year, though the situation is “fragile.”

Eurozone Economy Contracts .6% in 4th Quarter; France Down .3%, Germany Down .6%, Italy Down .9%; Expect ECB Jawboning on the "Strong Euro" - As expected in this quarter (but not by economists) eurozone economies contracted at the sharpest rates in four years with Germany, France, and Italy falling short of consensus estimates. The eurozone consensus was .4%. The 17-nation bloc shrank at .6% quarter-on-quarter while the broader 27-nation bloc shrank .5% quarter-on-quarter. From the above Financial Times link: Germany and France, the eurozone’s two biggest economies, both saw output shrink. German GDP shrank 0.6 per cent in the period while France contracted 0.3 per cent compared with the previous three months. Both were marginally worse than the consensus forecasts of 0.5 per cent and 0.2 per cent respectively. Italy’s economy shrank 0.9 per cent, also more than expected, and its sixth consecutive fall. Both Dutch and Austrian GDP also contracted. The figure for the wider EU – all 27 member states – was a fall of 0.5 per cent. The steep German decline reflected a sharp drop in net exports and investment in plants and machinery. Although business surveys have been much more upbeat, the weakness underscores how the recent appreciation of the euro could threaten an export-led recovery.

Surprise! Spillovers Exist! - Eurostat GDP data are out. The eurozone is in recession, and it is worse than expected (-0.6% in 2012). Austerity is not working, and is recessionary. Wow, who would have said it… Seriously, so long for the widespread optimism of a few weeks ago. The crisis is not over, we actually are in the middle of it. The way I see it, things will get worse before they get better (if they do get better).Also interesting, Germany’s export-led growth strategy is  panting. The fourth quarter of 2012 was rather bad (worse than in France, for example), and this is due to lower investment on one side, and to weaker trade (exports fell more than imports). Here is an excerpt of today’s press release of the German statistical office, Destatis:according to provisional calculations: household and government final consumption expenditure went up slightly. In contrast, gross fixed capital formation in construction decreased a bit and gross fixed capital formation in machinery and equipment was down markedly on the third quarter of 2012. The decline of the gross domestic product at the end of 2012 was mainly due to the comparably weak German foreign trade: in the final quarter of 2012, exports of goods went down much more than imports of goods.

ECB Forecasters Lower Euro-zone Growth Expectations Again - Economists once again cut their growth expectations for the euro zone for this year and next, according to a European Central Bank survey published Thursday, just as data showed the bloc's two largest economies contracting sharply at the end of last year. Forecasters now expect euro-zone economic activity to be flat this year, down from a previous prediction of 0.3% growth made just three months ago, the ECB said in its quarterly Survey of Professional Forecasters, or SPF. “Lower contributions from private and public consumption to growth for the current year and the next year are forecast, owing to prolonged uncertainty in the euro area, as well as to further fiscal consolidation,” the survey said, though forecasters noted that they expect a return to a sustained expansion of gross domestic product by mid-2013.

US banks attack Europe’s ‘Tobin Tax’  - Ahead of the European Commission revealing a plan for an international tax on financial trades, dubbed the 'Tobin tax', a coalition of American business organisations have written to the EC attacking its proposals. Bodies inlcuding the US Chamber of Commerce and The Financial Services Forum wrote to the commission objecting to "the unilateral imposition of a global financial transaction tax", the Financial Times reported. "These novel and unilateral theories of tax jurisdiction are both unprecedented and inconsistent with existing norms of international tax law and long standing treaty commitments,” the groups argue in a letter to Algirdas Semeta, the EU tax commissioner. “There is a high risk that their adoption could lead to ­double and multiple taxation, a deterioration of international tax co-operation and trade ­protectionism.” Eleven nations, including France and Germany, have so far already signed up to participate in a tax on financial transactions, which could raise an estimated €30bn (£26bn) to €35bn a year. Britain and 15 other members of the EU will not introduce the tax.

The non-precedent setting, own-law making, secretive CDS committee is having a seriously bad month - Oh boo, the committee that decides on whether credit default swap contracts should payout appears to be having trouble reaching a conclusion about whether the nationalisation of SNS Bank counts as a “credit event”. While the quantity of swaps that hang in the balance is teeny tiny, the issue itself is a big deal because it reveals some of the problems that might crop up in future bank rescues and bail-ins of debt while demonstrating yet again that CDS don’t appear to do what a reasonable person would think they do. The Isda committee first had a go at reaching a conclusion on SNS Bank on February 6th and they voted to defer a decision “pending further clarification of certain issues”. On February 12th, they met again, but ultimately resolved to “continue discussions” on Wednesday — a polite way of saying they couldn’t reach an agreement. FT Alphaville isn’t surprised. It seems like a very difficult case to us, not to mention rather embarrassing for the industry. In our minds, we are imaging that the committee of 15 (listed below), is having difficulty weighing up whether they want to strictly interpret the event using the rules they set for themselves in the 2003 Definitions, or find some errr… flexibility for appearance sake as well as the functioning/credibly of the CDS market. These guys can vote however they wish, it’s not that they are subject to any law other than that which they set for themselves (hush, hush now, financial stability is safe with them):

"Self-Inflicted Damage" Now the UK Goal; Inflation a "Cause For Optimism" - Inflation is expected to run well above the Bank of England target rate of 2% for another two years in the UK. Don't worry it's a self-inflicted goal. Moreover, Inflation is a cause for optimism says Bank of England governor Mervyn King.  The UK inflation rate will remain stubbornly high for longer than previously thought, the governor of the Bank of England has said. Sir Mervyn King now expects inflation, currently 2.7%, to rise to at least 3% by the summer and to remain above the Bank's 2% target for two years. In November he had said that inflation would fall back towards its target in the second half of this year. But the governor also said that "a recovery is in sight". Sir Mervyn King, presenting the Bank's latest Quarterly Inflation Report, 20 years after it issued its first one, said the economy had "cause for optimism"."If you like, it is a bit of a self-inflicted goal in terms of the damage done to real take-home pay, perhaps another way of trying to implement fiscal consolidation through moving up the price level," he said.

Bank of England Accepts Inflation, Bubbles - There were two essential points to be distilled from the Bank of England’s quarterly Inflation Report Wednesday that are perhaps more important to the economy than the admission that the BoE will continue to ignore its inflation target for years to come. One, outgoing Governor Mervyn King warned that the U.K.’s growth potential is lower than people used to think. And two, the central bank will continue to inflate asset bubbles. First off, Mr. King finally acknowledged that the economy’s pre-crisis trend was unsustainable. That’s a dramatic shift. For years after the crisis hit, the Bank of England argued that the economy would need to close the gap between where the economy would have been had it maintained pre-crisis trend growth and where it actually was. Now it seems to be saying this won’t happen. Of course, structural changes can help boost potential growth. Mr. King declined to outline what these might be, but they’ll include investment in infrastructure and education, as well as an unwinding of the welfare state. But for the most part, people are going to have to live with more modest expectations of the future. Meanwhile, exceptionally easy central bank monetary policy has caused the prices of financial assets to become disassociated from these more modest economic fundamentals. And there’s not a lot Mr. King proposes to do about it.

Beyond hydraulic policy - One of the more significant things Sir Mervyn King said today is this: There are limits to what can be achieved via general monetary stimulus – in any form – on its own...As time passes, larger and larger doses of stimulus are required.This won't be a surprise to those who doubt the efficacy of monetary policy when interest rates are around zero - though it might to those advocates of NGDP targets who sometimes give the impression that there's little difference between announcing a target and achieving it. There's a more general point here. King is rejecting "hydraulic macroeconomics" - eombodied in Bill Phillips' Moniac - which believes that pulling policy levers has stable, predictable effects. Of course, it's not just monetary policy which has variable effects. Fiscal multipliers also vary from time to time and place to place, depending upon whether we are at the zero bound, the extent of credit controls, the exchange rate regime and so on.Economics is not physics or engineering: there are few if any stable, reliable parameters. Though all this should be well known, it has implications which I don't think are properly appreciated.

Surprise UK retail sales drop fuels triple-dip recession fears - Cuts in consumer purchasing power and a bout of arctic weather combined in January to cut high street spending for a fourth month, fanning fears that Britain is teetering on the brink of an unprecedented triple dip recession. A month that saw administrators called in to HMV, Blockbuster and Jessops was crowned by a 0.6% fall in the volume of retail sales, leaving the underlying trend at its weakest in three years. The figures from the Office for National Statistics surprised the City, which had anticipated a healthy bounce back from December's disappointing sales on the back of strong surveys and a robust performance by John Lewis, which said on Friday its sales in early February were up 22% on a year earlier. However, evidence that the surge in consumer spending seen last summer at the time of the London Olympics faded in the autumn of 2012 and continued into 2013 rekindled fears of a third leg to the longest and deepest slump Britain has suffered since the 1920s. Jeremy Cook, chief economist at foreign exchange broker World First said: "These are truly horrible figures and alongside the revision lower of December's numbers, points to a retail landscape on its knees."

World plunges into recession in Q42012 - With the disappointing initial GDP releases for Q42012 from Europe out, the “world” as defined by 41 OECD countries across the globe, has plunged into recession. We define “recession” through two alternative definitions for our comparison, either the presence of a single negative quarter-on-quarter growth or the more traditional two consecutive negative quarterly growths. Whichever way you look at it, the number of countries in expansion plunged dramatically between 3Q2013 and 4Q2012 as shown below:Now this is a diffusion index, with each country receiving equal weightings, and so it appears that 60% seems to be a viable threshold for the definition of “global recession” using the single-quarter definition (black) and 70% is probably the appropriate threshold for the 2-quarter definition (blue). Countries in “recession” for the 18 countries we have data for so far in 4Q are: Austria, Belgium*, Czech Republic*, France, Germany, Hungary*, Italy*, Japan*, Netherlands*, Portugal*, Spain*, Greece*, U.S and UK. Countries with 2 consecutive negative q-on-q growths are highlighted with “*” next to their names. We should add that 4Q2012 GDP figures are preliminary releases, subject to revisions (we expect the US to revise upward) and we also only have data for 18 countries for the fourth quarter so far, and a heavy sprinkling of EU-based entities to boot that could be skewing the numbers to the downside. As the figures roll in during the course of the month/s we will update clients accordingly.

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