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

Saturday, February 9, 2013

week ending Feb 9

Fed Balance Sheet Grows To $3.017 Trillion Over Last Week --The Fed's asset holdings in the week ended Wednesday increased slightly, to $3.017 trillion, from $3.01 trillion a week earlier, the central bank said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $1.717 trillion on Wednesday from $1.71 trillion a week earlier. The central bank's holdings of mortgage-backed securities rose to $965.88 billion from $965.78 billion a week ago. The Fed's portfolio has more than tripled since the financial crisis of 2008 and 2009, as the central bank bought government bonds and mortgage-backed securities in an effort to keep interest rates low and to stimulate the economy. Officials at the central bank decided last week, at the end of their first policy meeting of 2013, to keep purchasing $85 billion a month of mortgage-backed and Treasury securities and signaled no intention to let up for now. Thursday's report showed total borrowing from the Fed's discount lending window was $510 million on Wednesday, down from $579 million a week earlier.

FRB: H.4.1 Release--Factors Affecting Reserve Balances - Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks February 7, 2013

Fed’s Evans: Bond Buying Likely Through Much of Year - The Federal Reserve will likely continue with its bond-buying effort for much of the current year, a top U.S. central banker said Thursday. “I’m extremely pleased with where we are” with monetary policy, Federal Reserve Bank of Chicago President Charles Evans told CNBC television. Commenting on the Fed’s current open-ended program of buying Treasury and mortgage bonds, Mr. Evans said the buying could continue through the next six months to a year. He said the bond-buying effort is designed to give the economy a shot in the arm, and he said that “we might be able to stop before 7%” on the unemployment rate. The Fed has said it will continue bond buying until there’s substantial improvement in labor markets. The jobless rate is currently at 7.9%.

Fed's Evans says QE is 'energy bar' for economy -- The Federal Reserve's bond-buying program is an "energy bar" to get the economy off to a fast run, said Charles Evans, the president of the Chicago Fed Bank, on Thursday. Comparing the economy to a half-marathon, Evans said the $85 billion per month of asset purchases is needed to get the run started. "We're loading up with carbs, energy bars. We're going to do that until we're clear that the labor market outlook has improved. It might be a half a year, it might be a whole year, could be longer," he said in an interview on CNBC. Evans said he is optimistic that momentum will pick up this year. He forecast growth at a 2.5% rate this year. But he said that the unemployment rate would still be close to 7% by the end of 2014.

Economists: Fed Won’t Stop Buying Bonds Until 2014 - Most economists don’t expect the Federal Reserve to end its latest round of bond buying until some time in 2014 or later, according to the Wall Street Journal’s latest forecasting survey. Some 65% of the 46 respondents who answered the question expect the Fed to stop buying bonds next year or later. Just nine economists think the central bank will stop its open-ended purchases before December of this year. “The Fed needs to see some sustained momentum, which it will not be confident about until the turn of year,”

Overheating and the Fed - Governor Jeremy Stein of the St. Louis Federal Reserve gave a speech on February 7 called “Overheating in Credit Markets: Origins, Measurement, and Policy Responses.” Overheating is a term he uses to describe a credit market with low interest rates, lax lending standards, and high risk-taking by investors “reaching for yield.” The problem with overheating is that it can contribute to financial instability. A boom followed by a bust can create harmful spillovers for the economy. Both monetary policy and regulatory policy can potentially address overheating. In the speech, Stein describes an approach called decoupling, which holds that monetary policy should restrict its attention to the goals of price stability and maximum employment, while supervisory and regulatory tools should be used to safeguard financial stability.  Stein does not completely buy this decoupling approach. He recognizes that low interest rates are a cause of overheating, and that the Fed, by its power to control interest rates, can address overheating in ways that regulators cannot.

Should the Fed pop bubbles by raising interest rates? -  Federal Reserve Governor Jeremy Stein gave a speech yesterday that everybody—or at least everybody in the rather small world of monetary policy obsessives—is talking about. He looked at ways monetary policy can encourage bubbles in financial markets, and argued that central banks should be ready to use their control over interest rates to address them. “I can imagine situations where it might make sense to enlist monetary policy tools in the pursuit of financial stability,” Stein said, adding that “If the underlying economic environment creates a strong incentive for financial institutions to, say, take on more credit risk in a reach for yield, it is unlikely that regulatory tools can completely contain this behavior.” Chairmen Ben Bernanke and Alan Greenspan before him were reluctant to try to use their power over interest rates to fight imbalances and bubbles in the financial markets. Their logic is that hiking interest rates to combat a bubble in this or that market would be the equivalent of fumigating an entire house after finding a small patch of mold. It may do the job, but comes at a great cost: The house is unusable for days. Similarly, if the Fed hikes interest rates to combat bubbles, it might succeed, but at the cost of slowing down the entire economy or causing a recession.

Counterparties: When two mandates aren’t enough - Should the Fed try to use interest rates to control not just inflation and unemployment, but financial markets too? In a speech earlier this week, Fed governor Jeremy Stein pushed for the Fed to change the way it approaches overheated markets, arguing that the Fed should consider raising interest rates to prevent financial bubbles. Along the way, Stein warned that the market for junk bonds and REITs might be overheating. Stein is honest about limitations of the Fed’s bubble-spotting abilities: “We should be humble,” he says, “about our ability to see the whole picture”. What’s more, even when Fed members do warn of possible bubbles, the Fed has been generally terrible at stopping them. As Neil Irwin points out, the Fed has generally been opposed to avoid raising interest rates to stop bubbles, on the grounds that doing so is “the equivalent of fumigating an entire house after finding a small patch of mold”. Or, as Ben Bernanke said, surveying the economic consensus in 2011, “monetary policy is too blunt a tool to be routinely used to address possible financial imbalances”. Much better than raising rates, Bernanke said, is to use the Fed’s regulatory powers instead. But Stein sees an advantage in using interest rates rather than regulatory brute force. Raising rates, to Stein, is a way to get past what the Fed doesn’t know and into “all of the cracks” of the financial world. What the Fed doesn’t know extends beyond the banks that the Fed regulates, and to the shadow banking system too:

Why the Fed isn’t yet monetizing US debt - Buying and selling government securities is mostly how the Fed conducts monetary policy. Sometimes it creates money — using it to purchase Treasuries to lower interest rates — and sometimes it destroys money — selling the Treasury debt it owns to raise rates. So, as a new paper from the St. Louis Fed explains, “there is a sense in which the Fed is “monetizing” and “demonetizing” government debt over the course of the typical business cycle.”But the phrase “monetizing the debt,” when properly used, refers to the Fed’s use of money creation as a permanent source of financing for government spending. So whether the Fed’s actions of recent years amount to monetizing the debt hinges on intent and duration. Is its enlarged balanced sheet a permanent state of affairs or not? If the recent rapid accumulation of Treasury debt on the Fed’s balance sheet constitutes a permanent acquisition, then the corresponding supply of new money would be expected to remain in the economy (as either cash in circulation or bank reserves) permanently as well. As the interest earned on securities held by the Fed is remitted to the Treasury, the government essentially can borrow and spend this money for free. If, on the other hand, the recent increase in Fed Treasury debt holdings is only temporary (an unusually large acquisition in response to an unusually large recession), then the public must expect that the monetary base at some point will return to a more normal level (through sales of securities or by letting the securities mature without replacing them). Under this latter scenario, the Fed is not monetizing government debt—it is simply managing the supply of the monetary base in accordance with the goals set by its dual mandate.

Fed Won’t Have Profit to Send to Treasury in 2018, CBO Projects - The Congressional Budget Office, in its annual update of its economic and budget forecast, projected that the Federal Reserve will suspend its remittances to the U.S. Treasury in 2018 as the economy improves and rising interest rates produce capital losses on the Fed’s huge bond portfolio. After paying its own bills, the Fed turns over its profits to the Treasury. Last year, the Fed sent the Treasury nearly $89 billion, a record, because of interest payments it is receiving on its expanding — now $3 trillion — portfolio of government bonds and mortgages.

Cattle Drive   -  How hilarious is the Federal Reserve's cattle drive of cash money (i.e. "liquidity") into the stock markets? I'll tell you: if that cash is outflow from bonds that pay ZIRP interest rates, then this attempt to stampede investment into the stock market is only going to succeed in ravaging the bond market and by extension the credibility of the dollar, the US banking cartel, and then the world financial system as a whole.  If bond-dumpers rush into stocks, then who are the next bond buyers at ZIRP? The USA can't keep going without continuous bond selling. Somebody has to buy the darn things. The Federal Reserve is now buying around 70 percent of US issue -- a lot of it via secondary market pass-thru shenanigans involving "Primary dealers" (a.k.a. Too Big To Fail banks, who get to cream off a premium when they flip bonds to the Fed -- tidy little racket). If the other 30 percent of issue can't find willing buyers at ZIRP then interest rates will have to go up. If interest rates go up, then interest paid out on bonds (that is "debt service") by the US government will go up catastrophically, because the aggregate debt is so colossal and most of the debt is short term, meaning that in a post-ZIRP world the interest rate ratchets up automatically every 13 weeks as bonds roll over. The US will then only be able to pretend that it can service the debt at higher interest rates. Everybody in the world will recognize this -- surely only increasing the velocity of the stampede away from bonds. The question is: how long can pretending to service debt go on before it is just called by it's real name: default? Or, if countered with additional furious computer "money" creation: hyperinflation? Either way, of course, you end up broke.

If You Think the Fed is Behind the Low Interest Rates - Think again...  Long-term government yields on safe assets across the globe have been declining since the crisis broke out.  Something more than the Fed is at work (hint: think global economy buffeted by series of bad economic shocks). For more, see here and here.

Suppose the Fed Wanted to Create More Inflation…Could They? - I’ve been meaning to comment on this interesting piece from yesterday’s NYT on how some would like to see the Federal Reserve do more then they’re already doing to stimulate growth.   Specifically, the argument goes, they should be trying harder to raise the rate of inflation, which has lately been below their 2% target. Inflation, unlike job creation, is something the Fed can control with some precision. Higher inflation could accelerate economic growth and job creation by encouraging people to spend more and make riskier investments. Yet annualized inflation fell to 1.3 percent in December, and asset prices reflect an expectation that the pace will remain well below 2 percent in the next decade. Now, there are two major arguments against this line of thinking.  The first, most dominant one is that the Fed should always be hawkish on inflation, they’re already playing with fire, and they should, if anything, do less here not more.  It’s often an argument made by those with large quantities of assets whose value would be eroded by higher inflation, or by lenders as opposed to borrowers.   That’s certainly not my argument. But the second argument is that even if they wanted to, in the current weak demand climate, even a lot more “quantitative easing”—the Fed’s bond purchase program—wouldn’t move the inflation needle much at all.   The NYT piece suggests this may be in part because Ben and Co. have been so convincing in their “we’ll-never-let-inflation-get-away-from-us” routine that prices are, in this sense, too well-anchored.  The hyper-responsible Fed would need to convince everyone, at least for a moment, that it was more reckless than it seems, and that’s hard to do.

Inflation Expectations and Lagged Inflation - I'd like to share and discuss a FRED graph.  To me it shows an alarming similarity between inflation expected over the next five years and inflation over the past year.  The red line is the nominal treasuries minus TIPS breakeven for constant maturity of 5 years -- the difference between the nominal interest rate and the real rate paid by Treasury Inflation Protected Securities.  The 5 year constant maturity TIPS rate is calculated by interpolation, because there are only a few TIPS  with a few different maturities on the market. The breakeven should be related to expected inflation, but should be lower than expected inflation as the price of regular nominal Treasuries includes a liquidity premium (which was huge during the panic of 2008).  The yellow line is the rate of growth over the precedeing year of the geometric mean of the personal consumption deflator and the personal consumption deflator excluding food and energy (AKA core inflation). The blue line is the rate of growth of the price of crude oil in West Texas times 0.03 to fit it on the same graph. To me the most striking feature of the graph is that back in the good old days before the recession, the looking forward 5 years breakeven is almost identical to the past years geometric mean of inflation and core inflation.  This shouldn't have happened.  It corresponds to extremely mechanical adaptive expectations.  The correlation is just too strong to be a coincidence.  Since the trough the comovement remains impressive but is no longer shocking. 

No Inflation? Commodities Highest Ever For This Time Of Year - While every central banker and policy-leech spews forth the government-supplied statistics on inflation - noting that all is well, carry on - we recently pointed out that Gas Prices are their highest ever for this time of year. Of course, the standard supply constraints (or technical) reasoning was applied to dismiss this as transitory (even though it has continued to rise since); but what is perhaps more worrisome is the broad-based nature of the real inflation that is leaking into our global supply chain. The 24-commodity heavy S&P GSCI index (widely recognized as a leading measure of general price movements and inflation in the world economy) has never been as high in early February as it is currently - ever. And with global growth stagnating at best, it seems a tough call to blame 'recovery' for this inflating (fastest pace in 8 years) raw material price leaking cost-push inflation (and margin-compression) into the real economy

No, there probably isn’t a bond bubble - One peculiar legacy of the financial crisis is that, among the financial commentariat, there is a tendency to see a bubble whenever the market for a particular asset rises. [N]o bubble fears are as widespread as the conviction that the markets for government bonds—in the United States in particular, but also in many other nations. It almost passes as a mark of seriousness to argue that Treasuries are the next big bubble to pop, the biggest in a long series that also included the stock market bubble of the late 1990s and the housing and mortgage securities bubble of the 2000s. It’s certainly true that bond prices could fall (and, conversely, longer-term interest rates rise). On balance, that is more likely to be for good reasons–because the economy is getting back on track–than for bad reasons, like inflation getting out of control. But I’m not particularly worried that Treasury bonds are a bubble about to pop. Here’s why. The first, and simplest reason to be skeptical of the bond bubble story is this: What defines a bubble is people buying an asset at ever-rising prices for speculative reasons, not based on the fundamental value of the asset, but because they are assuming somebody else will buy it at a higher price. I see no evidence of this behavior by buyers of Treasury bonds.

Counterparties: Not all that bursts is a bubble - If you aren’t terrified about the coming bond bubble, you should be, according to those who have taken it upon themselves to play interest-rate Paul Revere. Finance heavyweights like Lloyd Blankfein, Gary Cohn, Bill Gross, and Jeff Gundlach have each voiced their concern. Fitch has chimed in too. There’s nothing particularly new about these warnings. Businessweek’s Roben Farzad charts the “many cautionary, even alarmist, headlines” that have appeared over the last six months. Quartz’s Matt Phillips says that we are now in the fifth year of headlines warning of a spike in rates. The Washington Post’s Neil Irwin can’t find much evidence of a bond bubble, concluding that “rising rates [are] more likely to occur for good reasons — because the economy is getting back on track — than for bad reasons”.  Calculated Risk’s Bill McBride agrees: “I don’t see speculation, significant leveraged buying, storage or any of the other factors that defined a housing bubble”. There might not be a bond bubble, but that doesn’t mean bonds are a safe place to invest. On PIMCO’s website, Bill Gross has an “investment outlook” that’s more detailed than his CNBC appearances. He makes the case that rising rates aren’t themselves what scares him. Instead, it’s the increasing amount of debt required to generate growth: “In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result”. That, Gross says, is a problem akin to a supernova expanding by consuming itself. It’s also far beyond the limits of a bond bubble, and closer to arguments about the end of growth itself.

Same Old Slow Recovery - The data released last week generated a lot of news stories, first bad ones about the GDP numbers and then good ones about the employment numbers. When you put the numbers in perspective, however, the economic story is little changed from what we have been experiencing for several years now: a continued weak economic recovery. If you average out the -.5% and 3.1% growth in the third and fourth quarters, you get 1.5% growth for the second half of 2012 which is the about the same for the year as a whole, and down from 2% in 2011 and from 2.4% in 2010.  Here is an update of two charts I have used in past posts to show the weak growth compared to the early 1980s recovery and compared to the economy’s potential.  Growth is still much less than the 1980s recovery, and the gap between actual and potential GDP is not narrowing.The jobs report shows that employment growth is still barely keeping up with the growth of the population, and not nearly enough to bring labor markets to pre-recession levels. The percentage of the working age population with a job has yet to take off.  Here is an update of a chart I have used in earlier posts to illustrate this. It is the same worrisome story.

What's Wrong with this Economic Picture? -  Wall street is partying like it is March 2000.  Yet Q4 GDP showed economic contraction.  The response of the press and Wall street was to ignore Q4 gross domestic product as some sort of illusion and anomaly. We don't think so. First, the reduction in real Federal defense spending was 22.2% from Q3 and is really a record decline. Some point to Q4 being a time when defense expenditures is low, due to their need to spend their budget by Q3, the end of the fiscal year.  Indeed, defense spending did boost Q3 GDP.  Yet if we look at the below graph, federal defense consumption and investment really crashed and burned for Q4. The reduction was pretty much all services used by national defense.  These are research and development and support services for installation, weapons, personnel, transportation and travel.  There hasn't been a worse quarterly decline in defense spending on services since Q1 2000. On just the investment side, the reality is defense investment has been driving the economy, but planned defense cuts will curtail that significant.   Below is adjusted for inflation investment by federal defense. Defense spending is rarely mentioned as economic activity and a stimulative one at that, but two wars, the war on terror, and hordes of defense contractor lobbyists have been costly.  Those costs also stimulate the U.S. domestic economy.  While some blame the fiscal cliff and Simpson-Bowles for the national defense spending declines, the reality is the Obama administration is planning defense budget cuts all the way to pre 9/11 levels.   That actually will cause the economy to contract.   Who says war isn't a business?

Why has consumption been so slow to recover? - John Cochrane has a very interesting post on this topic, here is one excerpt but it is quite wide-ranging: New Keynesian models are a bit fuzzy on just why interest rates have to be so low — why the “natural rate” is sharply negative and why zero interest rates aren’t enough. Many of the formal models assume that consumer’s discount rate (rho) has declined sharply, beyond the capacity of the interest rate to follow it. If rho goes to, say -5%, with our 2% inflation, then even a zero nominal interest rate is like a 3% real interest rate. (These are deviations from trend, so one might not need actually negative discount rates to hit the zero bound. But even adding growth, it’s hard to avoid the need for a negative natural rate to cause a problem of this size.) Now, a spontaneous outbreak of thrift, to the point of valuing the future a lot more than the present, seems a bit of a strained diagnosis for the fundamental trouble of the US economy. To be fair, all the papers I’ve read say clearly that they regard the decline in the discount rate rho as a stand-in for some more complex process involving the financial crisis. For example, a more precise version of my first equation adds a “precautionary saving” term. When people are very uncertain about the future, they save more, just as if they had become much more patient.

Is "Precautionary Saving" Still a Problem? - David Beckworth - John Cochrane has an interesting post where he considers the various reasons why consumption has failed to return to its trend path. One area where I disagreed with him was this statement: "[A] more precise version of my first equation adds a "precautionary saving" term. When people are very uncertain about the future, they save more...This story seems possible for 2008 and 2009, in the depths of the financial crisis and recession. But I'm less convinced that it describes our current moment." As I noted in his comments, it does seem strange to think that almost five years later precautionary savings would still be an important part of the story.  But the data clearly shows that this is the case, as seen in the figure below. The blue line in the figure shows liquid assets (checking and cash, saving and time deposits, money market accounts, and treasuries) of households as a percent of total household assets. Now this indicator is really a measure of liquidity demand, but it gets at the same notion as precautionary savings. The red line shows the unemployment rate:

The iatrogenic explanation of post-recession stagnations - John Cochrane has been diligently working through New Keynesian macro models, and in this post he evaluates their ability to explain the long post-recession stagnation we've been experiencing, as well as their policy prescriptions. Some excerpts: The level of today's consumption depends on the whole string of future interest rates, not just today's interest rate. So, if people expect the interest rate in 2014 to be lower, that is every bit as effective in raising today's consumption as would be lowering today's rate.  Hence, "open mouth operations," "forward guidance," and "managing expectations."  If the Fed by just talking can persuade people it will hold interest rates low for a longer periods, when they are expecting rates to rise above zero, that expectation will "stimulate" today's consumption. If promises don't help, perhaps announcing a new "rule" which if followed would lead to lower rates for longer will help to change expectations. In this equation, more inflation lowers the real interest rate too. So, anything that boosts inflation is a good thing.  It's a way to lower real interest rates inside the integral and shift consumption from the future to the present. Once again, increasing expected future inflation would be just as effective as increasing current inflation. Hence, calls for the Fed to announce a higher inflation target, or at least announce that it will tolerate more inflation before beginning to raise rates, as it has

How is Inequality Holding Back the Recovery? - Is inequality holding back our weak recovery? Joe Stiglitz argues it is, while Paul Krugman argues it is not. John Judis summarizes the debate at The New Republic. I want to rephrase the question and focus specifically on the two most relevant policy points. Taxes: Stiglitz argues, "[T]he weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks."   Right now our federal government's tax structure is progressive, while state and local taxes are regressive. Meanwhile, the federal government can borrow at cheap rates and run a large deficit without a problem, while state budgets are constrained and need to be balanced. As a result, large cuts and layoffs at the state and local level have counteracted much of the federal government's stimulus that comes from running a larger deficit. Indeed, Stiglitz's point that inequality makes it harder to fund education is a real life battle: we are currently seeing education funding by state and local governments collapsing in real-time.  Here's a chart on how regressive state and local taxes are from the Institute on Taxation & Economic Policy:

Money, Wealth, and Models - Krugman - Some further thoughts inspired by the welcome hatred of the usual suspects toward yours truly. One quite common statement among the Austrianish horde is something along the lines of “It’s ridiculous to imagine, as Krugman does, that you can create real wealth by printing more pieces of paper.” Well, it may be ridiculous, but it’s also true, under certain conditions — namely, when the economy is suffering from inadequate demand. And you don’t have to use highly abstruse reasoning to see this, either; all you need to do is think in terms of some kind of model, not necessarily of the mathematical kind. The whole point of the true story of the baby-sitting coop, which brings it down to a human scale, is that it’s quite possible for economies to get into a snarl that can be solved by printing more money, or having the government spend more.I know that this is a conclusion many people hate. They really, really want to believe that bad things must have good causes — that if you are suffering from high unemployment and low output, it must be because there is something deeply wrong, probably the fault of liberals. But what was deeply wrong with the US economy in late 2008 that wasn’t true of the US economy in late 2007? Recessions happen, and any halfway plausible story about how they happen is likely to suggest that non-fundamental government interventions, like printing money, can make things better.

Good news! The economy probably didn’t shrink last quarter, after all-  Remember last week, when the government announced that the U.S. economy had shrunk at an 0.1 percent annual pace in the fourth quarter of 2012? That came as a shock to many economists, who were expecting at least modest growth. Well, perhaps those numbers were wrong. The GDP figures, after all, were only a first-pass estimate. And new trade data released Friday suggests that the U.S. economy actually grew between October and December. According to the Commerce Department, the U.S. trade deficit fell by 21 percent in December to just $38.6 billion, the smallest in three years. That’s because the country was importing less oil and exporting more of other things — particularly refined petroleum products. That means growth at the end of 2012 was likely stronger than we thought. When the Bureau of Economic Analysis initially calculated fourth-quarter GDP, it assumed that the U.S. trade deficit had actually widened at the end of the year, to about $557.1 billion. In reality, it had stayed mostly unchanged at about $517 billion. Since exports add to GDP and imports subtract, that means GDP was growing faster than calculated. Capital Economics projects that the U.S. economy actually grew at a 0.2 percent annualized pace in the fourth quarter of 2012, while Macroeconomic Advisers is expecting 0.5 percent growth.

Why Economists Don't See The Coming Recession And Popping Stock Bubble - The surprise contraction in fourth quarter GDP may just mean the third quarter's strength came from pulling growth from the fourth. While a recession could have started, it is probably still a few months away. Like other recessions, most economists will fail to warn that it is coming. In the 30 plus years I have watched, I have never seen a consensus of economists correctly forecast a recession before it started. Economists in positions of authority, particularly at the Federal Reserve and in a President's administration, virtually never publicly forecast a recession, perhaps out of concern it would be a self-fulfilling prophecy. Economists on Wall Street rarely predict recessions, perhaps because it reduces their firm's effectiveness in selling product. Wall Street economists, who predict recessions, even if they are correct, often find themselves unemployed.

A scary graph from Goldman Sachs - Ezra Klein - “On Friday,” writes Alec Phillips, an economist at Goldman Sachs, “we lowered our outlook for federal spending, to take into account the increased likelihood that cuts under sequestration take effect.”With that built into their baseline, the cuts to federal consumption and investment look deep in the coming years. Here’s their graph, which adds a bit of historical perspective: Sequestration, spending caps, and reduced war spending will together reduce real federal consumption and gross investment by 11% over the next two years,” writes Phillips. Ouch. That’s a very big drop in a very weak economy. “This is a large decline in historical context, but it is not without precedent,” Phillips continues. “This would mark the third decline in the last 50 years; the first occurred around 1970, after Vietnam War spending had peaked, followed by another around 1990 as military spending declined following the end of the Cold War and multiple rounds of spending caps were enacted.”

Brace for Uglier Economic Data as Fiscal Cliff Meets Sequester - Effects from the fiscal cliff are on course to hit just as lawmakers confront two more fiscal landmines, threatening to make economic reports over the next two months more volatile than usual. The payroll-tax increase on Jan. 1 has been taking a bite out of paychecks for more than a month, though key gauges of consumer spending for January haven’t been released yet. The last-minute passage of the fiscal cliff deal also will delay tax refunds, deferring some consumer spending and complicating the seasonal adjustments in data for retail sales and consumer spending. Both of those forces are set to hit just as the government prepares for widespread spending cuts on March 1, followed by a potential government shutdown in late March. “You’re stacking a lot of negatives on top of one another,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets. “The result of that is normally not good.”

Some Thoughts on the Recovery, Conditional Forecasting, and Proper Citations »  More analysis from the Heritage Foundation In a recent post, economist Salim Furth holds forth on the recent CBO Budget and Economic Outlook. In his explanation of why the CBO has repeatedly overpredicted growth, he writes: The release of the Budget and Economic Outlook gives economists, policymakers, and observers a framework to raise questions about the health and future of the American economy. Beyond the truism that the economy is in a nasty slump, data and theory indicate that the economy is worse than one would expect based on economic factors alone.  The policies of the past five years have systematically harmed the economy in both the short run and the long run. Policies aimed at the unemployed have decreased their rewards from work. Policies in the business sector attenuate the pressure to innovate and adapt, allow established firms to reap profits without improving their products, and shrink the overall “pie” in order to serve a bigger slice to those favored by government. Policies on taxation have twice increased tax rates on capital, discouraging investment and lowering GDP. Dr. Furth attributes overprediction by CBO and other forecasters to (1) the inherent difficulties of forecasting, (2) the debt overhang and other shocks, and (3) poor policymaking in Washington.

America's weak economic recovery under threat from reckless Congress - Do we have a solid economic recovery underway?The evidence will leave you whipsawed. Everywhere you turn, it seems, there is an economic contradiction. The experts – economists – fall back on the math of their profession. They have been shrugging that the data is "noisy", that there are flaws in the way the data is calculated. If pushed, they'll say it's a recovery, but a weak one. Even if you're not an economist, it's hard to know which indicators matter, and what they're telling us. In roughly three weeks, Congress has another chance to torpedo whatever modest economic progress we've made. Their tool will be the sequester: the package of punitive budget cuts is designed to slash at least $85.3bn from the federal budget this year, and by around $1.2tn in a decade. The cuts will reduce the national deficit, but they worry those who believe that the economy is not strong enough yet to start slashing costs – which also means slashing government jobs. The CBO predicted this week that the sequester would go into effect as soon as 1 March.

How a Nation Got Snookered by a Phony Narrative - My interest is in the narrative created by the political class and business leaders, then dutifully promulgated by the news media, on the effect that “uncertainty” was having on the U.S. economy in the months leading up to the fiscal cliff.  Republicans in Congress claimed that businesses were sitting on cash, unwilling to invest until they knew what their tax rate would be next year (as if tax rates are ever set in stone). What’s more, raising taxes on “job creators” would bring the U.S. economy to its knees. Business leaders were only too happy to adopt the Republican talking points as their own. President Barack Obama offered a middle-class variation, saying the economy would take a hit if Congress failed to absolve that group from automatic tax increases on Dec. 31. Both business- and consumer-sentiment surveys bore out the depressed mood. The Business Roundtable’s CEO Economic Outlook Survey for the third quarter, released on Sept. 26, showed a plunge in expectations for sales, capital expenditures and hiring over the next six months. The index tumbled to a three- year low of 66 from 89.1 in the second quarter. The results reflected weak overseas demand, but BRT Chairman James McNerney identified “the fiscal cliff and policy uncertainty” as the top factors pouring “cold water on economic planning.”

Uncertainty is Not Pessimism -  An article in Bloomberg today by Caroline Baum is called "How a Nation Got Snookered by a Phony Narrative." I wrote about the prevalence and power of narrative in economics a few weeks ago in the context of the Federal Reserve. Baum's interest is in a narrative promulgated by politicians, business leaders, the media, and some economists that says that "uncertainty" has been causing businesses to postpone investment and hiring. I was glad to read Caroline Baum's remark that uncertainty and pessimism are not the same. No one speaks of uncertainty during good times. There was lots of uncertainty in March 2000, when the Nasdaq Composite Index breached 5,000 as investors bought shares of Internet companies with no revenue, no profits and, in at least one case, no known business. No uncertainty back then; just a case of irrational exuberance.  In good times, the word uncertainty rarely appears in policy discussions. In bad times, it’s the default setting. Why not call it by what it really is, which is pessimism? When businesses say they aren’t going to invest because of uncertainty, what they mean is, they don’t think their investments will produce a substantial profit.

What The US Government Spent Its Money On Last Quarter - The most vocal justification provided for the disappointing Q4 GDP print by the mainstream was an increase in US government "austerity" resulting in a decline in the government contribution to the economic bottom line in the last quarter (or first fiscal quarter of 2013). Ironically, both total spending and total debt issuance in the past quarter increased, which means that far from being austere, the US actually spent more, not less, i.e., the opposite of austerity. And while it is true that Defense spending declined by a tiny amount in the past quarter compared to the year ago, it was more than offset by a surge in Medicare and Medicaid, as well as Social Security, or, as they are better known, welfare. And, as the CBO yesterday showed, these two components of US spending, which together account for half of all US spending and which couldn't be funded by all US revenues even if the government spent $0.00 for all other programs, which will soar in the coming years as US society ages, as more workers retire, and as more are reliant on Uncle Sam for the payment of every bill. So the next time someone say that the US has a defense spending problem and nothing else, show them this chart.

Government Spending in the Crisis - Paul Krugman - Not long ago, the usual suspects were going on and on about how government spending had soared under Obama, pointing to spending as a share of GDP. Some of us tried to point out that this bump represented two temporary factors: 1. GDP was depressed thanks to the crisis, so the spending share was correspondingly elevated 2. Emergency aid programs, notably unemployment benefits, were up because of the crisis. The implication of this argument was that the government spending share would decline as the economy recovered. Conservatives were, of course, having none of it — Obama was permanently enlarging the government to European size. So, how’s it going? In the figure below the blue line shows government spending at all levels as a share of GDP; the red line shows the share of potential GDP — what we’d be producing at normal employment — as estimated by the Congressional Budget Office; it’s lower than the first line because the economy is still operating well below capacity. Down we come.

Upping the Dosage Would Kill the Patient - As former Council of Economics Advisers (CEA) Chair Greg Mankiw has analogized, the Obama Administration’s policy response to the Great Recession is like medicine offered to a sick patient. The ineffectiveness of the treatment is obvious given the economy’s continued illness, as most recently evidenced by the fourth quarter GDP report, which found that the U.S. economy actually contracted by 0.1%. The question is whether the ineffectiveness of the treatment is the result of an insufficient dose of the right medicine, or whether the problem is the wrong treatment altogether.  John Makin of the American Enterprise Institute (AEI) made waves recently when he suggested that Congress heed the lessons of Japan and not “obsess” about budget deficits. Makin made the rather simple point that if spending cuts cause aggregate demand, and hence GDP, to contract, the net impact could leave the debt and debt-to-income ratios higher than would have otherwise been the case. It is inarguable that the interest rate-growth differential determines the sustainability of existing debt burdens. But Makin embraces the Keynesian conclusion that future primary deficits (the budget deficit excluding interest payments) can be positive, on net, because the incremental new debt increases the rate of GDP growth. The negative impact of increasing indebtedness is entirely offset by a wider interest rate-growth differential, which results in a lower debt-to-income ratio.

The United States of Debt Addiction -  16 point 7 trillion dollars.  That is our current national debt.  12 point 8 trillion dollars.  That is the amount households carry in mortgage and consumer debt.  We are now addicted to debt to lubricate the wheels of our financial system.  There is nothing wrong with debt per se, but it is safe to say that too much debt relative to how much revenue is being produced is a sign of economic problems.  At the core of our current financial mess is how we use debt as a parachute for any problem.  We’ve been masking the shrinking of the middle class by allowing households to take on too much debt for a couple of decades.  The results were not positive. People think that this recovery has come from organic forces when in reality, it has come because of number games and also the Fed injecting trillions of dollars into the banking industry.  Ironically these banks are using this money to speculate in markets like stocks and housing where they are now crowding out working and middle class Americans.  When you have access to a printing press with no restraints, it becomes too tempting to spend into oblivion. Addictions are never easily cured and we have yet to come to terms with our insatiable appetite for debt.

Stimulating Happiness, Revisited - Paul Krugman - Adam Davidson has a piece for the magazine on happiness economics, surveying some of the recent findings. Hey, everyone’s talking about happiness right now. Oddly, however, I don’t see many people making the obvious point about the relevance of this research to current policy. I tried to say something about this a couple of years back, but let’s try it again. As Brad DeLong keeps trying to get across, the right way to think about fiscal policy right now isn’t “eek! deficits!” but to look at tradeoffs. If we spend more now, what are the future costs? Now, actually there may not even be any future costs; there’s a pretty good case to be made that spending more now, to stimulate the economy, would actually improve the long-run fiscal picture. But even if we leave this aside, the economic case for spending now, austerity only sometime after the economy has recovered, is compelling. Most of us put that case in terms of two reasons:

  • 1. A dollar of government spending now does not come at the expense of private spending, because we have vast unemployed resources and monetary policy is up against the zero lower bound; later, that won’t be the case.
  • 2. Real interest rates are very low, indeed negative at the moment; so the opportunity cost of spending now, even if you look only at the fiscal side and ignore possible hysteresis effects on future revenues, is low.

The UK is showing us why austerity is dangerous, but are we paying attention? - With the recent news that both the United Kingdom’s and United States’ economies contracted last quarter—the U.K. by a large 1.2 percent annualized rate and the U.S. by a much smaller 0.1 percent—it’s a good time to revisit the contrasting economic situations in the U.K. and the U.S. to show just how dangerous austerity is to economic growth. First off, both countries fell into recession by experiencing a similar housing market shock, and the central banks of both countries engaged in responses of similar magnitude. And between the second quarter of 2009 (the trough for both countries) and the third quarter of 2010, both countries grew at similar rates: 2.2 percent annualized real growth for the U.K., and 2.5 percent annualized for the U.S. (according to OECD data). But in the summer of 2010, the newly-elected conservative-led coalition government of the U.K. passed and implemented an aggressive austerity budget. This budget was heavily weighted toward spending cuts—nearly 80 percent of the total fiscal consolidation—and included a 25 percent cut to non-health domestic departmental spending by 2014-15. Tax increases accounted for the remaining 20 percent, including increases in the value-added tax (essentially a sales tax). In total, this fiscal consolidation represented 2.2 percent of U.K. GDP by 2014-2015. Combined with the previous government’s planned austerity, the overall fiscal consolidation implemented totaled 6.3 percent of GDP.

Weak Economy, Wrong Debate: What is it with this economy? The Dow hits 14,000, the unemployment rate rises in January, and GDP actually falls in the last three months of 2012. Could it be that what's good for the stock market is bad for the rest of the economy? Could it be that captains of industry like weak labor markets, high unemployment, low wages -- and a Federal Reserve that has to use ultra-low interest rates to try to keep things afloat? Well, yes, but the story is also richer and more complicated. Basically, the economy is still weighted down by the legacy effects of the financial collapse of 2008 -- mortgages that exceed the value of homes, students staggering under the weight of college loans in a dismal job market, retired people for whom low interest rates mean low returns on savings, corporations looting pensions, and above all flat or declining wages. It all adds up to a very weak recovery -- but the common element is insufficient purchasing power on the part of ordinary families. And this is about to be compounded by Fiscal Cliff II, namely Congress and the president deciding that what the economy really needs is a bracing dose of deflationary budget cuts.

Video: The Debt Ceiling Explained - President Barack Obama is expected to sign in the next few days a bill that temporarily suspends the ceiling on federal debt so the U.S. Treasury can keep borrowing. When the ceiling is re-imposed on May 19, according to estimates by the Bipartisan Policy Center, the federal debt will be about $450 billion higher than the old $16.4 trillion ceiling. The center estimates that the Treasury will be able to move money around for a few months after May, but Congress will confront the need to boost the ceiling again in August or perhaps a bit later. What is the debt ceiling? David Wessel explains in a WSJ video.

U.S. Debt Rise Colors Budget Fight - A slowly improving economy and recently enacted tax increases will help bring down the federal deficit for the next few years, the Congressional Budget Office said Tuesday, but it will take another $2 trillion in belt-tightening over the next decade to begin to move the federal debt closer to historic levels. The updated CBO projections landed amid budget battles in Washington, underscoring not only the distance between the White House and Congressional Republicans on spending but also the gravity of the nation's fiscal woes. CBO projects that if Congress leaves current laws unchanged, the debt will be 77% by 2023, and it will be higher if across-the-board spending cuts are diluted or various expiring tax breaks extended. (The deficit is the difference between spending and revenues in a given year; the debt is the government's total borrowing, or the sum of past deficits.) Douglas Elmendorf, director of the nonpartisan agency that advises Congress on budget and economic matters, emphasized the risks of failing to stabilize the debt. "At this level of debt relative to GDP, our country would be incurring costs and bearing risks of a sort that we have not [had] in our history except for a few years around the end of the second World War," he said. "At the same time, bringing debt down relative to GDP requires reductions in services that we are getting from the government, or higher taxes paid to the government."

Obama signs bill averting government default - President Barack Obama has signed into law a bill raising the federal government's borrowing limit, averting a default and delaying the next clash over the U.S. debt until later this year. The legislation temporarily suspends the $16.4 trillion limit on federal borrowing. Experts say that will allow the government to borrow about $450 billion to meet interest payments and other obligations. The Senate gave the bill final approval last week and sent it to Obama, who signed it Monday.vDemocrats and Obama had warned that failure to pass the bill could set off financial panic and threaten the economic recovery. The bill includes a provision attached by Republicans in the House of Representatives that temporarily withholds lawmakers' pay in either chamber that fails to produce a budget plan.

U.S. Treasury Expects to Borrow $331 Billion in Quarter' -The U.S. Treasury Department trimmed its borrowing expectations for the first quarter of the year due to higher-than-expected receipts and lower outlays. The Treasury Department estimated Monday that it will issue $331 billion in marketable debt from January to March, down $11 billion from its estimate of $342 billion made three months ago. The Treasury said the adjustment follows more revenue and smaller expenditures the previous quarter, which left more cash in government coffers. In its quarterly estimate of borrowing, the Treasury said it issued $297 billion in debt from the start of October through the end of December 2012, compared with its earlier estimate of $288 billion. For the second quarter of the calendar year, the Treasury said it expects to issue $103 billion in debt, which would be the lowest figure in five years. The April to June quarter typically sees lower borrowing due to a surge in revenue from tax filings

US Treasury resumes borrowing, repays pension fund - The Treasury Department said Wednesday that it has resumed borrowing now that Congress has approved a temporary measure that allows the government to take on billions of dollars in debt to fund its most basic operations. Treasury said that $31 billion of the $41.3 billion that it borrowed since the suspension kicked in on Monday went to restoring two government employee pension funds. Treasury had moved money over from those funds to avoid breaching the $16.4 trillion borrowing limit. President Barack Obama signed legislation Monday that would temporarily suspend the $16.4 trillion limit on federal borrowing until May 19. Experts say that will allow the government to borrow about $450 billion to meet interest payments and obligations like Social Security benefits and government salaries. Once the suspension of the debt ceiling ends, Treasury said it would resume using extraordinary measures such as tapping the government employee pension funds. Those bookkeeping maneuvers create about $200 billion in headroom which would allow the government to keep operating possibly into August before the threat of another default.

The Federal Government’s $128 Trillion Stockpile: The Answer to Our Debt Problems? - The debate over federal government deficits and debt has consumed Washington for some time, but the arguments for the most part have focused on taxes and spending. One aspect, however, of the debate of American creditworthiness that doesn’t get discussed is what assets the federal government owns. After all, a borrower’s assets should be one of the main factors in determining the wisdom of its borrowing,  but when talking about the U.S. government’s debt burden, it seems to get left out of the conversation entirely.  And a recent report from the Institute for Energy Research (IER) makes some startling claims about how much U.S. taxpayers own in real assets. According to the report, the U.S. government owns:

  • More than 900,000 separate real assets covering more than 3 billion square feet;
  • Mineral rights, on and offshore, covering 2.515 billion acres of land, more than the total surface land in Canada;
  • 45,190 underutilized buildings, the operating costs of which are $1.66 billion annually; and
  • Oil and gas resources on and offshore worth $128 trillion, roughly 8 times the national debt of the country.

Government Purchases Versus Government Spending - It is interesting that PGL has posted a figure showing government purchases and how they have been gradually declining recently.  The recent report of GDP surprisingly declining in fourth quarter 2012 and the role of government spending in that brings this up.  What may be a problem here is that the public reports did not make this distinction, reporting on declines in "government spending," when in fact what is involved here has been a decline in government purchases.  The crucial issue here is that changes in transfer payments do not directly affect GDP, but changes in government purchases do, and it was purchases, mostly through defense spending, that declined. The problem is that a new right wing meme has erupted over whether or not "government spending" has declined.  Indeed, it did not do so during the 4th quarter 2012, at least not federal government spending.  Much as I dislike this source, one can see the numbers taken from US Treasury stats at . Furthermore, Barron's has gotten all huffy about how the Bureau of Economic Analysis reported the decline in defense spending, which indeed was mostly a decline in purchases leading to a decline in GDP.  They complain that the 22% reported number for the quarterly decline was an annualized number, and that the actual decline was only 5.32%.  This is accurate, but indeed, that decline in purchases by the DOD happened and was unexpected and played a major role in the reported GDP quarterly decline.

The Dangerous Collapse of Public Enterprise - When economists talk about the role of government in economic recovery, they often focus on the question of whether or not we need more economic stimulus.  But this fixation on countercyclical stimulus as almost the sole economic purpose of fiscal policy can really distort our understanding of the many ways in which public spending supports economic health.  Government is itself a large, diverse and important sphere of economic enterprise.  Our federal, state and local governments produce and deliver important goods and service, things that people want and need, and that they have asked their representatives to create and maintain.   And governments employ millions of people in income-earning positions to carry out all of this production.  Ordinarily, we would expect that as a society grows, government will grow commensurately along with everything else.  As our population grows and private enterprises proliferate, we need more schools and teachers, more courthouses and police stations, more public parks, more inspectors and regulators, more paved roads and street lights, and more government clerical workers.  So while it is true that government spending also stimulates additional economic activity in the private sector – just as any economic enterprise stimulates economic activity in the other enterprises it touches and affects – it is also true that the public enterprises governments oversee and the tasks governments perform are all by themselves an important component of overall economic activity.

It's All About The Baseline - Tyler Cowen: If the multiplier is 1.4, recovery should have been accelerating pretty rapidly, right? Right? Bueller?(@tylercowen) February 1, 2013 The stimulus was too small, didn't last long enough, but even so, compared to the correct baseline (which is not the one the administration put out via Romer and Bernstein, that was far too optimistic), the empirical evidence points to effectiveness. It didn't cure the economy because it wasn't large enough to do so and didn't last long enough, but it did make a difference. To take on a Cowenesque air, the correct question is not "why haven't we recovered yet," it's "where would we be without the stimulus package," and the evidence sugests we'd be worse off. However, let me turn it over to Paul Krugman who answers the common charge -- see above -- that: "Keynesians said the stimulus would fix the economy, and it didn’t, so Keynes was wrong" ...  What part of "the Obama plan just doesn’t look adequate to the economy’s need" is so hard to understand? More here.

CBO: Deficit to decline to 2.4% of GDP in Fiscal 2015 - The Congressional Budget Office (CBO) released their new The Budget and Economic Outlook: Fiscal Years 2013 to 2023.  From the WSJ: CBO Sees Rising U.S. Debt, Economic Rebound in 2014. Economic growth and recent legislation have cut the federal budget deficit in half in the past four years ... The CBO said it expected economic growth to be sluggish in 2013, in part because of a sharp drop in government spending, but it sees a better economy in 2014 as the recovery takes hold. The federal deficit for the fiscal year ending Sept. 30, 2013, is projected to fall to $845 billion, or 5.3% of gross domestic product, That is down sharply from the past four years, which each had deficits exceeding $1 trillion. The 2012 deficit amounted to 7% of GDP. The CBO projects the deficit will decline to 3.7% of GDP in fiscal 2014, and 2.4% of GDP in fiscal 2015. This graph shows the actual (purple) budget deficit each year as a percent of GDP, and an estimate for the next ten years based on estimates from the CBO.  The CBO deficit estimates are even lower than my projections.  After 2015, the deficit will start to increase again according to the CBO, but as I've noted before, we really don't want to reduce the deficit much faster than this path over the next few years, because that will be too much of a drag on the economy

CBO’s New Budget/Economic Outlook - CBO’s out with a new budget and economic analysis today, and as you can imagine we’re all just on shpilkes going through and picking out nuggets.  In order to make a lot more sense out of the numbers, we have to adjust them to be on the baseline we believe to be most realistic and that will take some number of hours. Still, there are some notable things that caught my eye at first glance.

  • –The budget deficit is expected to decline from 7% of GDP in 2012 to 5.3% this year, but that assumes the automatic cuts take place starting next month.  Deficit hawks should be happy (CBO predicts the first budget deficit below $1 trillion in years),
  • –Based on the resolution of the fiscal cliff CBO now has a somewhat sunnier view of where the economy is heading this year.  In their August report—pre-cliff resolution—they expected GDP to contract by 0.5% and for unemployment to go up from 8.2% to 8.8% (because they had to assume full cliff dive).  Now they expect real GDP growth of 1.4% over the course of this year, and for the unemployment rate to come down very slightly.
  • –CBO’s long-term budget projection used to be for the debt-to-GDP ratio to go down—it’s that “current-law” thing again.  But by locking in most of the 2001 and 2003 Bush tax cuts, the Treasury gives up $4 trillion over 10.  So, under their current baseline, debt falls as a share of GDP, 2015-2018, but it starts rising again after that.  Like I said, we’ll have a lot more to say about this probably by tomorrow.

2013 CBO Baseline Shows Areas Of Concern - The Congressional Budget Office released their 2013 outlook of the federal budget for the next decade, which projects that today's historically huge deficits will slowly shrink to merely being very large deficits in the next decade. In the Budget and Economic Outlook: Fiscal Years 2013 to 2023, the CBO sets the baseline for Congress to use when analyzing how their policy changes will affect the government’s fiscal picture. Here are a few of the main points of interest. Things will get slightly better, then get worse. The deficit is expected to shrink from 7.0 percent of GDP in 2012 to 5.3 percent in 2013. It will then continue to get smaller until 2015 (2.4 percent), at which point the trend reverses and deficits start to slowly creep up again. The vast majority of the deficit reduction comes from increases in revenue instead of reductions in spending. Both spending and revenue, as a percentage of GDP, will be higher than their previous 40 year averages. This chart shows how far from historical averages the current fiscal picture is.

CBO: Deficit Shrinking At Fastest Pace Since WWII As GDP Sputters - The main take-away from the Congressional Budget Office's new fiscal and economic outlook is that, collectively, Washington has put deficit reduction way ahead of jobs and growth. After a burst of stimulus and financial rescue outlays in 2009, the fiscal retrenchment over the past three years was arguably steeper than at any time since World War II (see chart). Now, with stimulus and bailouts no longer clouding the picture, there's no question that the deficit is shrinking faster than it has in more than 60 years. Based on existing policies, CBO projects the deficit will shrink to 5.3% of GDP in fiscal 2013, down 3.7 percentage points since 2010. Even during the '90s economic boom, the deficit never fell by more than 3 percentage points over any three-year period, but at that point the economy was growing twice as fast in real terms, producing a revenue windfall. Now, after the economy crawled ahead at a growth rate barely above 2% over the past three years, the confounding response from inside the Beltway has seemingly been, "Too fast!" Thanks to the fiscal cliff tax hikes approaching $200 billion in 2013, as well as automatic spending cuts set to take effect in March, the new fiscal and economic outlook from the Congressional Budget Office projects real GDP growth of 1.4%. The jobless rate, now 7.9%, is seen ending the year at 8%, with the average 100,000 jobs added a month not enough to keep up with growth in the working population.

Deficit to Shrink Below $1 Trillion, U.S. Agency Predicts -  The federal budget deficit will total $845 billion this year, the first time in five that the gap between taxes and spending will be less than $1 trillion, according to a government report. A combination of budget cuts and economic growth will pare the deficit to the lowest level since 2008, the Congressional Budget Office said in its first comprehensive analysis of the government’s finances since last month’s deal to put off the so- called fiscal cliff. Next year’s gap will be $616 billion, the nonpartisan agency said. The long-term budget outlook nevertheless remains grim, with baby boomers steadily swelling the ranks of Medicare and Social Security beneficiaries, according to a CBO report. The government will rack up at least $7 trillion in deficits over the next decade, the agency said, pushing the publicly held debt up to almost $20 trillion by 2023. Attachment: CBO Budget and Economic Outlook 2013 to 2023

Federal budget deficit at $854 billion, CBO says - A new government report is predicting the budget deficit will drop below $1 trillion for the first time in President Barack Obama's tenure in office.  The Congressional Budget Office analysis says the government will run a $845 billion deficit this year, a modest improvement compared to last year's $1.1 trillion shortfall, but still enough red ink to require the government to borrow 24 cents of every dollar it spends.  The agency also projects that the economy will grow just 1.4 percent this year if $85 billion in across-the-board spending cuts take effect as scheduled March 1. Unemployment would average 8 percent.  The report predicts the deficit would dip to $430 billion by 2015. That would be a relatively low 2.4 percent when measured against the size of the economy

Austerity Has Harmed The Economy According To CBO Here’s the buried lede from the Congressional Budget Office, which on Tuesday released its Budget and Economic Outlook for the coming decade: D.C.’s deficit obsession has been quite effective at cutting deficits at the expense of the still-struggling economy. “[E]conomic activity will expand slowly this year, with real GDP growing by just 1.4 percent,” according to CBO’s projections. “That slow growth reflects a combination of ongoing improvement in underlying economic factors and fiscal tightening that has already begun or is scheduled to occur-including the expiration of a 2 percentage-point cut in the Social Security payroll tax, an increase in tax rates on income above certain thresholds, and scheduled automatic reductions in federal spending. That subdued economic growth will limit businesses’ need to hire additional workers, thereby causing the unemployment rate to stay near 8 percent this year, CBO projects.”

CBO: Turns out austerity is bad for the economy — A new report from the non-partisan Congressional Budget Office adds to the mounting evidence that spending cuts have held back America’s economic recovery. According to the CBO’s budget and economic projections for the next decade, released on Tuesday, middling GDP growth over the past year is partially attributable to “scheduled automatic reductions in federal spending.”However, the CBO report doesn’t just blame spending-side austerity. It also argues that tax increases on upper income families—a proposal championed by President Barack Obama—will slow growth. Ever since President Obama won reelection in November, much of the economic debate in Washington has revolved around how best to reduce the deficit while avoiding automatic spending cuts and tax increases such as the so-called “fiscal cliff.” Republicans have typically argued for as many spending cuts and as few revenue increases as possible, while the president has called for a “balanced” approach that combines tax hikes and spending cuts. Both proposals are a form of austerity—and both, according to the CBO, slow down economic growth.

Charts: 10 Years in the U.S. Economy, According to CBO - The Congressional Budget Office outlined its economic projections along with its forecasts for U.S. budget deficits over the coming years in a report released today.Similar to other economic forecasters, the CBO expects a slowdown in growth this year, thanks in large part to cuts in government spending and higher taxes. The CBO expects fiscal contraction to trim 1.25 percentage points from growth this year. However, it sees an acceleration in growth in 2014. (Read more on the CBO report.)The CBO forecasts that unemployment will remain above 6.5% and inflation below 2.5% for at least the next two years, indicating that the Federal Reserve won’t take any action on interest rates any time soon. Those projections are broadly in line with the central bank’s own forecasts. Below see charts showing the CBO’s forecasts for major economic indicators over the next 10 years.

CBO's Scary Debt Chart Not Looking Very Scary - The CBO's latest budget projections are out today. Here's the scary debt chart: Hmmm. Not so scary after all. The CBO's projections are, of course, sensitive to both their economic forecasts and their reliance on current law. However, their economic forecast seems fairly conservative, and current law is a lot more reliable now than it was before we decided what to do about the Bush tax cuts. So CBO's projections are probably fairly reasonable. You can decide for yourself, of course, whether you find this debt projection scary even though it's flat for the next decade. Maybe you think it needs to decline to give us more headroom for the future. Maybe you think it masks the problem of growing debt after 2023. Maybe you think we're likely to have another recession over the next decade, which will balloon the debt yet again. Those aren't entirely unreasonable concerns. Still, the fact remains that debt reduction just isn't a five-alarm fire kind of problem, no matter how loudly the Pete Petersons of the world claim otherwise. In fact, if you go to page 23 of the CBO report, you'll see that federal spending is on a downward slope in almost all categories.

Economic Bounceback by 2014, Says CBO - After recessions, the U.S. economy has typically had a period of bounce-back growth, which then catches the economy up to the path of "potential GDP" it would have been on prior to the recession. One of the imponderable questions in the aftermath of the Great Recession that lasted from 2007-2009 was when--or if--this bounceback growth would arrive. The nonpartisan Congressional Budget Office offers a prediction in its just-released "The Budget and Economic Outlook: Fiscal Years 2013 to 2023" that "economic activity will expand slowly in 2013 but will increase more rapidly in 2014." In other words, the long-delayed period of bounceback growth is now at least visible on the horizon. Here's the forecast in pictures."Potential GDP" refers to how much an economy could produce with full employment of workers and productive capacity. The blue line shows growth in potential GDP; the gray line shows the actual course of the economy during the recession and its aftermath. Notice the catch-up growth, bringing the economy back to potential GDP.

What You Should Know About the Budget Outlook - The Congressional Budget Office released its latest Budget and Economic Outlook earlier this week.  As always, the Outlook provides insight into the fiscal status of the federal government. My three overarching reactions are: First, because American Taxpayer Relief Act of 2012 (ATRA) instituted tax changes that had been widely expected, the official (“current law”) baseline is now much more reflective of plausible outcomes than it has been in the past. Hence, the baseline is now a more reliable guide to the fiscal outlook. Second, unlike in long-term budget scenarios – where rising health care spending is the single most important factor – there is no “smoking gun” in the 10-year projections. Mainly, there is “just” an overall continuing imbalance between spending and taxes. Revenue is not projected to collapse, as it did in 2009-12, but rather to grow to higher-than-historical-average levels.  Spending isn’t spiraling out of control—it is at the same share of GDP in 2023 as it was in 2012. Large projected cuts in discretionary spending are offset by net interest rising to historically high levels and increases in mandatory spending. Third, while we do not face an imminent budget crisis, the data in the Outlook imply that we are not out of the woods. The 10-year budget outlook remains tenuous. Even if seemingly everything goes right – in economic terms and in political terms – we are still on the edge of dangerously high debt and deficit levels with little room to spare.

The Non-Decisive Decade - Paul Krugman - Yesterday the CBO came out with its updated budget outlook — and the release was met with a collective yawn. Why? Basically, because the projections over the next decade just didn’t show the kind of fiscal disaster everyone in DC wants to believe in. That’s not to say that the outlook is completely benign — CBO still thinks we’ll end the decade with high debt by historical standards, especially under the “alternative fiscal scenario” that assumes that some cuts that are supposed to happen under current law won’t. (I’m still waiting for the wonks at CBPP and elsewhere to do a full analysis; as best I can tell, a truly realistic scenario would lie in between the baseline and the alternative). But there’s nothing there lending comfort to the Greece, Greece I tell you crowd. And there’s one especially telling point. CBO does show rising deficits by the end of the decade — but not, it turns out, mainly because of rising entitlement spending. Here’s their chart:

U.S. Fiscal Policy is Upside Down - Reading through the new budget outlook from the Congressional Budget Office, which was released on Tuesday, three figures made the biggest impression on me: 1.4 per cent, 2.4 per cent, and 76 per cent. Taken together, these three numbers explain a good deal about what’s wrong with Washington, and how we are focussing on precisely the wrong things. Rather than tackling the projected rise in entitlement spending, which does present a long-term threat to the country’s prosperity, policy makers, particularly congressional Republicans, are intent on making short-term spending cuts across the board, which would threaten the current economic recovery. In short, they’ve got things upside down.  The 1.4 per cent figure is the C.B.O.’s forecast for how much the economy will grow this year. If you think this sounds like a low figure, you’re right. Last year, which was hardly a rip-roaring one, the inflation-adjusted gross domestic product rose by 2.4 per cent. In an economy recovering from a deep recession that has kept the unemployment rate close to or above eight per cent for four years now, we need annual growth of three per cent or higher to make a real dent in the jobless figures.

Evolving Views on Fiscal Multipliers - Context relevant estimates suggest larger, not smaller, fiscal multipliers. In its newly released Budget and Economic Outlook, the CBO has published new estimates of potential GDP. In conjunction with the most recent estimate of GDP, it appears that we are making halting progress on shrinking the output gap.With the output gap still relatively large (6.1% as of 2012Q4, in log terms), and monetary policy accommodative, it seems to me we should re-evaluate what policymakers consider the relevant fiscal multipliers. I’ve been thinking about this as I’ve written a new survey on fiscal multipliers. The interesting point is that, as I caught up on the newer and newer literature, I found that the consensus moved toward larger and larger fiscal multipliers.

CBO Report Animates Deficit Debate - Washington is wrangling about the pace and extent of further deficit reduction, with Democrats arguing that more cuts would hurt the economy in the short term, and Republicans saying inaction would do more damage in the long run. Tuesday’s report from the Congressional Budget Office, its annual update of budget and economic forecasts, neatly underscored the trade-off between these two competing positions. It said reducing the deficit over time is crucial to the nation’s long-run prosperity, but cautioned that doing it too fast would hurt a fragile economic recovery in which unemployment remains high. Enacting policies such as higher spending or lower taxes would increase the deficit while also boosting economic output from 2014 to 2016, the CBO said. The gain comes from goosing demand for goods and services. By 2017 and beyond, however, the additions to the deficit would contribute to lower output. Alternatively, policies focused on deficit reduction today would hurt output in the coming years, but lead to stronger growth in later years. That’s because of the resulting effects on national saving and domestic investment, the CBO said.

CBO Releases Latest Budget Forecast: Hilarity Ensues - We won't spend any time discussing the accuracy of the "impartial" Congressional Budget Office: we already did that in August 2011 when we showed that back in 2001 the CBO forecast total 2011 public debt would be negative $2.4 trillion; instead the real number was positive $10.4 trillion, a delta of only $12.8 trillion. We also won't spend much time on the just released CBO headline grabbing projection that the 2013 budget deficit will be under $1 trillion, or $845 billion to be precise. Instead we will show the progression of the CBO's baseline forecasts for the period 2012 and onward. We will also note that the now-forecast 2013 budget deficit of $845 billion was supposed to be a deficit of just $585 billion one short year ago, a token 40%+ error rate, but in the immortal words of Hillary Clinton: "who cares." Of course we should note that if we apply the same forecast error to the 2013 budget, it means the real final deficit print will be $1.2 trillion - just a tad more realistic. Finally, we will certainly note that while the CBO believes 2013 may see the first sub $1 trillion deficit in 4 years, a number which will decline modestly in the coming years, the deficit then proceeds to grow and grow and grow, until we reach 2024, at which point the US deficit returns to $1 trillion once again... and never gets smaller. And this is the optimistic version.

CBO underestimates revenues from expanded oil-and-gas drilling - The Congressional Budget Office is vastly underestimating the potential revenue that could be achieved by opening more federal lands to oil-and-gas drilling, according a report released Tuesday by the Institute for Energy Research (IER), a conservative think tank. Obama’s plan to avoid the $85 billion of government-wide cuts scheduled for March 1 will likely include ending subsidies awarded to the oil-and-gas industry. Obama and supportive Democrats have said nixing those incentives would save the government $40 billion through 10 years. But oil industry lobbyists have said the industry’s incentives should not be singled out, saying many other businesses are given deductions and cost-recovery mechanisms. The oil industry also said removing the incentives would stymie domestic energy production.  In all, the IER study said expanding drilling on public lands and waters would increase gross domestic product by $127 billion annually for the next seven years, and $450 billion annually through the following 30 years. It also would boost federal tax revenues by $2.7 trillion through 37 years, the study found. That paints a different picture than the August CBO report, which said lifting drilling bans would bring in about $7 billion through the next decade, mostly through selling exploration leases.

Austerity: the Political Struggle over Who Controls the Economy’s Liquidity - The austerity campaign, a favorite for the last four years of politicians and financial tycoons, remains a seemingly self-contradictory and baffling phenomenon for those who know that it goes against at least 80 years of economic wisdom regarding management of the economy.  The campaign draws on irrational strains and inconsistencies in our economic self-understanding to turn politicians against the welfare of society and the economy as a whole as well as against their own interests as political leaders.  Austerity appears to serve the perceived short-term interests of some sectors of the wealthy and the financial industry but the long-term interests of no one.  The question remains, if no one’s longer term interests are served by austerity, why is austerity being pursued, other than to satisfy the short-term greed of the few?   The austerity advocates’ eagerness to “grind the face of the poor into the dust” is not explained alone by a call to extraordinary (though likely) moral turpitude and lust for lucre.  There are other expressions of greed and sociopathy that do not take the form of enthusiasm for austerity: why does this form of moral turpitude take the shape that it does?

Social Security Does Not Add to the Debt -The Congressional Budget Office explains that our nation has two types of debts; those owed to the public and those the government owes itself.  Debt to the public is owed to investors who have purchased Treasury securities.  Debts the government owes itself are IOUs held by various government trust funds that have had surplus revenues in the past.  The Social Security program ran a surplus from 1984 through 2009 (taking in more payroll tax revenue than was paid out in benefits).  Of the estimated $16.3 trillion of accumulated federal debt through the end of 2012, $11.5 trillion was public debt and $4.8 trillion was debt held by various government trusts.  The Social Security Trust Fund holds “assets” valued at $2.7 trillion. Of course, the idea of a trust fund “asset” is controversial, since this is money the government owes itself. Trust funds are not assets to the federal government because the assets of any given fund are offset by liabilities owed by the Treasury Department; their net value to the federal government is zero.  However, the Social Security Trust Fund is an asset for the Social Security Administration.  That is, it represents a legitimate claim on the treasury backed by the full faith and credit of the U.S. government.  Beyond this, if you believe that the nation’s debt is $16.3 trillion and counting, it is inconsistent to deny that trust fund balances (which compose about 30% of the debt) are real.

Memo to Congress: To bring down the deficit, focus on jobs - Today, liberals in the House of Representatives will roll out a new plan to avert the sequester. It calls for more investment in job creation as a way to generate new revenues to bring down the deficit. It calls for a mix of new revenue increases and spending cuts — all focused on defense — that would bring the overall balance between revenues and cuts in the deficit reduction of the past two years into a one-to-one ratio. Needless to say, this plan — the creation of the Congressional Progressive Caucus — has no chance whatsoever of passing Congress. Which is exactly the point: No plan that prioritizes job creation as the best means of reducing the deficit; no plan that cuts defense while determinedly avoiding any cuts that would hurt the poor and elderly; no plan that includes equivalent concessions by both sides — could ever have a prayer in today’s Washington. It’s yet another indication of how out of whack Washington’s priorities are. You can read the plan right here. In a nutshell, it outlines three stages of deficit reduction, two of which have already happened. The first: $1.7 trillion in spending cuts Dems agreed to as part of the 2011 debt ceiling deal that ultimately led to the sequester. The second: $737 billion in new revenues that Republicans agreed to as part of the fiscal cliff deal earlier this year.

The Economic Challenge Ahead: More Jobs and Growth, Not Deficit Reduction, by Robert Reich: Can we just keep things in perspective? On Tuesday, the President asked Republicans to join him in finding more spending cuts and revenues before the next fiscal cliff whacks the economy at the end of the month.Yet that same day, the Congressional Budget Office projected that the federal budget deficit will drop to 5.3 percent of the nation’s total output by the end of this year. This is roughly half what the deficit was relative to the size of the economy in 2009. It’s about the same share of the economy as it was when Bill Clinton became president in 1992. The deficit wasn’t a problem then, and it’s not an immediate problem now. Right now the central challenge is to reignite the economy — getting jobs back, improving wages, and restoring growth. Deficit reduction moves us in the opposite direction. ...

Can the Deficit Warriors Be Appeased? - Over the last few years, there have been significant changes to the federal government’s finances—changes that have had barely any perceptible impact on the budget debate.  The federal deficit has been shrinking (from 2009 to 2012) at a faster rate than in any other period since 1937.  Most Americans have never lived through more rapid budget tightening.  A lot of this has to do with the fact that the budget deficit is automatically stabilizing as the economy recovers, just as it automatically grew due to the Great Recession, but it’s not all automatic changes.  You wouldn’t know it from the Sunday news shows, but policy changes over the last two years alone have resulted in roughly $2.4 trillion in scheduled deficit reduction—and that doesn’t even include the budget savings from the Affordable Care Act (“Obamacare”). These facts have had a difficult time breaking through to the public consciousness.  Last week, the genuinely level-headed Michael Kinsley wrote an article in Bloomberg that proceeded on the basis of the (common) assumption that while we’ve had “plenty of stimulus,” the political system is incapable of delivering significant budget tightening: Our problem, however, appears to be the opposite of the one Kinsley suggests. 

Budget Sequestration: How to Do It Right - Tyler Cowen  - UNLESS lawmakers act by March 1, the budget sequestration process will start cutting government spending automatically — reductions that would amount to $1.2 trillion by 2021. Congress and the White House agreed in 2011 to the sequestration, and many people see it as a kind of political gimmick.  But I believe that it can turn out to be a very good thing — and that most of these cuts should proceed on schedule, though with some restructuring along the way.  One common argument against letting this process run its course is a Keynesian claim — namely, that cuts or slowdowns in government spending can throw an economy into recession by lowering total demand for goods and services. Nonetheless, spending cuts of the right kind can help an economy.  Half of the sequestration would apply to the military budget, an area where most cuts would probably enhance rather than damage future growth. Reducing the defense budget by about $55 billion a year, the sum at stake, would most likely mean fewer engineers and scientists inventing weaponry and more of them producing for consumers.

The economics of budget sequestration - Here is my latest New York Times column, on how we should deal with sequestration.  One theme is that, economically speaking, we really can get away with cutting our defense budget: In the short run, lower military spending would lower gross domestic product, because the workers and resources in those areas wouldn’t be immediately re-employed. Still, that wouldn’t mean lower living standards for ordinary Americans, because most military spending does not provide us with direct private consumption. To be sure, lower military spending might bring future problems, like an erosion of the nation’s long-term global influence. But then we are back to standard foreign policy questions about how much to spend on the military — and the Keynesian argument is effectively off the table. On a practical note, the military cuts would have to be defined relative to a baseline, which already specifies spending increases. So the “cuts” in the sequestration would still lead to higher nominal military spending and roughly flat inflation-adjusted spending across the next 10 years. That is hardly unilateral disarmament, given that the United States accounts for about half of global military spending. And in a time when some belt-tightening will undoubtedly be required, that seems a manageable degree of restraint.

Overlooking $2.3 Trillion in Debt Reduction – Thoma - We have already cut around $1.5 trillion of spending from the budget. Yet Tyler Cowen says: I would view the sequestration as a kind of referendum on whether we are ever capable of cutting or restraining spending and I fear not.    He also says defense is untouchable becasue: When it comes to the defense budget, “gdp fetishism” suddenly makes a comeback. But: Two-fifths of the $1.5 trillion in savings from cutting and capping funding for discretionary programs comes from defense. I'm all for more cuts to defense too, but it's only fair to note that some cuts have been made there already. Also, why are only spending cuts mentioned when the discussion is the budget? Please don't tell me that if it's not spending cuts, i.e. if it's a tax increase, it doesn't count for budget discussions (and Keynesian economics, which is part of his discussion, does not make this distinction). Thus, note also that the American Taxpayer Relief Act (ATRA) added another half trillion in deficit reduction. Together, the $1.5 trillion in appropriations cuts, plus the $.5 trillion in tax increases in the ATRA, plus the $300 billion in interest savings amount to around a bit over $2.3 trillion in deficit reduction (see table 1 here).

Mark Thoma’s spending cuts – Cowen - Here is a Mark Thoma comment on my recent column, here is the introduction: I’m all for more cuts to defense too, but it’s only fair to note that some cuts have been made there already. Also, why are only spending cuts mentioned when the discussion is the budget?  Thus, note also that the American Taxpayer Relief Act (ATRA) added another half trillion in deficit reduction. Together, the $1.5 trillion in appropriations cuts, plus the $.5 trillion in tax increases in the ATRA, plus the $300 billion in interest savings amount to around a bit over $2.3 trillion in deficit reduction… Not once in Mark’s post does the word “baseline” appear.  In fact I covered the defense “appropriations cuts” in my piece, noting that relative to baseline, even with the sequester (much less without) defense spending is roughly constant in real terms.  Mark simply doesn’t recognize I made that point but instead portrays me as oblivious to the issue.  (Additional comments from Angus here).  I don’t see that as much evidence for our fiscal rectitude. Or let’s look at the bigger picture of the back and forth.  Take Mark’s sentence: “Also, why are only spending cuts mentioned when the discussion is the budget?”, after which he refers to tax increases.  My very last column I called for tax increases, a bit now and more later.  Mark covered that column.  What was Mark’s reaction then?  He complained that I didn’t also call for rectification of the content of government spending decisions and income shares, in both cases toward greater egalitarianism.

Deep Military Cuts Begin as Congress Dawdles - Congressional leaders appear to have reach consensus that it is safer politically to allow deep and arbitrary cuts to military budgets than it is to negotiate a large debt-reduction deal that would have names attached. With Republicans and Democrats unwilling to make difficult decisions to address budget deficits in a balanced way, the military is being forced to cut training, cancel construction projects, defer maintenance of ships, aircraft and vehicles, cancel professional conferences, halt most temporary duty assignments, and interrupt supply and equipment purchases. Quality of life for the military also is being impacted as dependents lose jobs, local economies and businesses lose contracts, and base operations, including family support programs, take immediate budget cuts. The entire Department of Defense has imposed a civilian-hiring freeze. At least 46,000 temporary employees are getting pink slips and many more employees under “term” contracts won’t see those contracts renewed. “The centerpiece is the overall federal budget and [tax] revenue...This is leadership driven. The armed services committees are almost irrelevant, which is very unusual.”

People Are Convinced That Washington Is About To Make One Of Its Biggest Blunders Since The Financial Crisis - When the debt ceiling hike was agreed to in 2011, the GOP demanded spending cuts, which Obama was obviously keen to avoid, especially in a weak economy, and needing to face re-election. So the deal was this. There would be no spending cuts until 2013, and even those spending cuts would disappear if a "super-committee" could come up with a long-term deficit reduction package. The premise of those 2013 spending cuts is that they were noxious to both parties, and that they were bad policy, and so both sides would have an incentive to avoid them. Last week, Tom Philpott writing in military newspaper Stars & Stripes, had a brutal editorial on what the sequester meant for the armed forces: Congressional leaders appear to have reach consensus that it is safer politically to allow deep and arbitrary cuts to military budgets than it is to negotiate a large debt-reduction deal that would have names attached. With Republicans and Democrats unwilling to make difficult decisions to address budget deficits in a balanced way, the military is being forced to cut training, cancel construction projects, defer maintenance of ships, aircraft and vehicles, cancel professional conferences, halt most temporary duty assignments, and interrupt supply and equipment purchases.

Obama to Urge Congress to Delay Automatic Spending Cuts - President Barack Obama will urge Congress to postpone automatic spending reductions scheduled to begin March 1 as Senate Democrats debate options for replacing part of the $1.2 trillion in across-the-board cuts. Obama will ask Congress to delay “deep, indiscriminate cuts to domestic and defense programs” in remarks scheduled for 1:15 p.m. today, according to a White House statement. “Uncertainty around the sequester is already having a negative impact on our economic growth,” according to the statement.  “The challenge we face right now is the fact that government spending is completely out of control,” Senator Mitch McConnell of Kentucky, the Republican leader, said yesterday on the Senate floor. “So to focus on a tax of any kind is to miss the point entirely.” In an interview on Bloomberg Television today, House Majority Leader Eric Cantor said Democrats and the president have been “absent” in working toward fiscal discipline. “All we hear from this president is ‘we’ve got to raise people’s taxes.’ That’s just not the answer,” said the Virginia Republican.

Top Democrats Demand More Revenue to Deal with Sequester -  Democrats are demanding that more revenue be part of any new deals.  Obama called for more revenue as part of any deal.  CBS News: One month after signing into law a “fiscal cliff” deal upping taxes on American families making more than $450,000 a year, President Obama said today there’s “no doubt” additional revenue is needed to bring down the U.S. deficit, but believes lawmakers can do it “without raising taxes again.”“I don’t think the issue right now is raising rates,” the president said . “There’s no doubt we need additional revenue, coupled with smart, spending reductions in order to bring down our deficit. And we can do it in a gradual way so that it doesn’t have a huge impact.”Reid made the demand for more revenue on This Week. From ABC News: Asserting that “the American people” are on his side, Senate Majority Leader Harry Reid, D-Nev., told me during an exclusive interview for “This Week” that any that deal reached between Republicans and Democrats to avoid the looming sequester must — “without any question” – include revenue/

Obama: Let’s Delay The Sequester Cuts. Boehner: Let’s Not - President Obama just recently concluded a brief statement in the White House Press Briefing Room in which he called on Congress to once again kick the can down the road and delay the sequestration cuts now scheduled to kick in on March 1st:President Obama on Tuesday called on lawmakers to quickly pass a new package of limited spending cuts that can head off the automatic, across-the-board reductions that are set to take effect on March 1. Mr. Obama said the Congress should delay the automatic cuts for a period of months to give lawmakers a chance to negotiate a full budget that permanently resolves the threat of the so-called sequester. Even before the President had spoken those, House Speaker Boehner was signalling opposition to the idea, which had been leaked to the press earlier today: Speaker John Boehner is signaling he will not accept revenue increases that President Barack Obama is expected to propose to delay the automatic spending cuts that take hold at the beginning of March. “President Obama first proposed the sequester and insisted it become law,” Boehner said in a statement. “Republicans have twice voted to replace these arbitrary cuts with common-sense cuts and reforms that protect our national defense. “We believe there is a better way to reduce the deficit, but Americans do not support sacrificing real spending cuts for more tax hikes,”

How scary is the sequester? - The tax deal struck to start the year extended most of the Bush tax cuts and delayed the sequester, but the stimulative payroll tax cut was allowed to expire, and is now taking a hefty bite out of paychecks. The delayed sequester is now scheduled to hit in March; its impact could cost the economy up to a percentage point of growth in 2013. Should America be worried about the rapid pace of fiscal consolidation? Stipulate first that this is no way to handle fiscal policy. America's strategy has been to try and fail to reach budget deals, then to threaten itself with clunky automatic cuts if it can't reach a deal, and then to allow most of those automatic cuts to occur in lieu of a deal. Very little of the stuff everyone agrees ought to happen to the American budget—tax reform, more public investment, efforts to rein in health-cost growth, and so on—is actually materialising. Instead the path of least political resistence is the order of the day. Further, there is very little reason to think that short-run deficit cutting is a good idea. IMF research suggests that under current conditions, with slack in the economy and the central bank's policy rate close to zero, the multiplier on government spending may be higher than normal. Rates on American government debt are at historically low levels despite steady economic growth. And the Congressional Budget Office now reckons that deficits will fall dramatically to 2014 to near primary balance, leading to stabilisation in the level of public debt to GDP by the middle of the decade.

Senator John McKeynes - From this AM’s NYT: …the potential impact of the cuts is being cited by both parties. Senator John McCain, Republican of Arizona, said the military side alone would eliminate 350,000 jobs directly, and 650,000 more that depend on the government programs. So, not only is this pure Keynesian analysis, but the Senator is recognizing both the direct and indirect effects of the cuts of jobs.  In other words, he’s got a multiplier, and it’s a big one! I can’t say how long will it be until these guys go back to saying “the government doesn’t create jobs!” but until then we need to add to our working definition of a Keynesian.  It used to be ”a Republican in a recession.”  Now it’s also “a Republican facing defense cuts.”

Obama Says U.S. Needs Revenue Along With Spending Cuts - Bloomberg: President Barack Obama said there is “no doubt” the government needs new revenue from closing tax “loopholes” and limiting deductions, along with enacting spending cuts, to reduce the federal deficit.There’s “no reason why we can’t have really strong growth in 2013,” the president said in an interview with CBS television yesterday before the network’s Super Bowl broadcast. He cited a recovering housing industry, strong manufacturing and rising car sales. Revenue could be raised through an overhaul of the tax code, he said, “and we can do it in a gradual way so that it doesn’t have a huge impact.” “There is no doubt we need additional revenue, coupled with smart spending reductions in order to bring down our deficit,” he said. “I don’t think the issue right now is raising rates.”

Ryan, Boehner blast White House for delayed budget - Rep. Paul Ryan is, to use that beautiful Washington crutch of a verb, disappointed that the White House missed its budget deadline, and the various campaign arms of the GOP are echoing that disappointment."I’m disappointed the president has missed his deadline. But I’m not surprised," the House Budget Committee Chairman said in a statement. “In four of the last five years, he’s failed to submit his budget on time.”... "For the fourth time in five years this White House has proven it does not take trillion-dollar deficits seriously enough to submit a budget on time,” Speaker John Boehner (R-Ohio) said in a statement.But of course Ryan isn't "surprised." Three weeks ago, the White House publicly warned Ryan that it would miss the Feb. 4 deadline because the fiscal cliff negotiations had dragged on into 2013 and left beaucoups uncertainty about the new baseline. It didn't set a new hard deadline, but congressional and OMB negotiators are muttering about a bill coming in early March.

House passes balanced budget bill - The House on Wednesday passed legislation that directs President Obama to submit a balanced budget plan to Congress this spring. The Require a Plan Act (H.R. 444) compels Obama to submit a supplemental budget by April 1 if his fiscal 2014 budget blueprint does not include a plan to balance the government’s books. That supplemental budget would outline a long-term deficit reduction strategy and timeline for balancing the budget. The chamber approved the legislation, shepherded by Rep. Tom Price, R-Ga., and the GOP leadership, after debating it Wednesday morning. The Democratic-controlled Senate is unlikely to take up the bill.

After spending $51B, U.S. can't verify size of Afghan security force - The United States has spent over $51 billion to help Afghanistan field, clothe, arm and house a national security force, but the special inspector general for Afghanistan reconstruction Monday said that Washington doesn't even know the size of the Afghan force it's paying for. And in a shocking statement, the IG, John Sopko, said that the numbers the U.S. is relying on from Afghan officials could be a sham, resulting in billions in waste. Sopko, whose office is in charge of auditing the near $100 billion taxpayers are funnelling to rebuilding Afghanistan, said, "It looks like our data on the forces, the Afghan National Security Forces, that we are going to be relying on, may be bogus. We don't know what supports it."

Sequester Triggers Delay in Deployment  - The Pentagon’s decision to delay the deployment of a carrier to the Middle East could give opponents of the sequester some added ammunition in their battle to undo the across-the-board Pentagon spending cuts. Sen. Kelly Ayotte (R., N.H.), a member of the Armed Services Committee, called the decision to delay the carrier deployment “deeply disturbing.” “I hope what has happened here with these very stark examples of how [the sequester] is going to undermine our national security will move people to resolve this,” Ms. Ayotte said. “There are ways forward.”... Cuts totaling $85 billion are scheduled to start March 1 and run through Sept. 30; after that, about $110 billion in annual spending cuts would kick in.

Obama to meet with Goldman's Blankfein, other CEOs Tuesday (Reuters) - President Barack Obama will meet with chief executives from 12 companies including Goldman Sachs Group Inc's Lloyd Blankfein and Yahoo Inc's Marissa Mayer on Tuesday to discuss immigration and deficit reduction. "The president will continue his engagement with outside leaders on a number of issues - including immigration reform and how it fits into his broader economic agenda, and his efforts to achieve balanced deficit reduction," a White House official told Reuters on Monday. Other chief executives include Arne Sorenson of Marriott International Inc, Jeff Smisek of United Continental Holdings Inc, and Klaus Kleinfeld of Alcoa Inc. Obama's meeting is a sign he is seeking to gather support from leading members of the U.S. business community for his top domestic priorities in the early days of his second term. Obama's principles for overhauling U.S. immigration laws include giving businesses a reliable way of verifying that employees are in the United States legally.

What's Now Happening On Federal Budget is Worse Than The Fiscal Cliff - If you followed the fiscal cliff you know that the sequester – the across-the-board spending cuts that were triggered when the anything-but-super committee failed in November 2011 to agree on a deficit reduction plan -- was delayed until March 1. Because it’s already February 7, you also know that the sequester’s now $85 billion in military and domestic program reductions are only about three weeks away. That’s the simple part. What complicates this greatly is that, while no one says they want these particular spending cuts to go into effect, every alternative seems to be much less desirable politically that the sequester reductions. This week’s proposal from the White House to delay the sequester and substitute a combination of revenue increases and other spending cuts in the meantime was rejected by House and Senate Republicans almost instantly. A Senate Republican preference to substitute more domestic reductions for the military cuts is a nonstarter with Senate Democrats. And the House Republican preference to substitute Medicare and Medicaid changes for the sequester reductions has been rejected by House and Senate Democrats.. The flexibility the Senate GOP wants is not acceptable to House Republicans because they’re afraid that the Obama administration will use the flexibility to cut programs, projects, and activities in Republican-held districts while adding funds in those represented by Democrats.

Obama Tells Democrats He Wants a ‘Big Deal’ to Trim Deficit - President Barack Obama said he wants to reach a “big deal” on the budget that will cut the nation’s deficit without slashing spending on education and research that is needed to ensure future growth. Obama said negotiations with congressional Republicans over avoiding the $1.2 trillion in automatic, across-the-board spending reductions set to begin March 1 shouldn’t push aside the effort for a broader plan to cut government debt. “I am prepared, eager and anxious to do a big deal, a big package that ends this governance by crisis,” Earlier this week, Obama called on Congress to postpone the automatic cuts and for now work on a short-term package that would combine increased revenue as well as trimming federal outlays. Obama has said he wants to curb tax breaks for top earners and change the treatment of profits in buyout deals, known as carried interest. The U.S. budget deficit exceeded $1 trillion in each of Obama’s first four years in office. While that must be reduced, he said, “it shouldn’t be just on the backs of seniors, it should not just be on the backs of young people who are trying to get a college education, it should not just be on the backs of parents who are trying to get their kids a better start in life.”

Congress’ ‘Problem Solvers’ say it’s time to commit to compromise - For the past three years, some Republican and Democratic lawmakers have sat next to each other during President Barack Obama’s annual State of the Union speech to Congress in a largely meaningless one-night show of bipartisanship. Next week when Obama addresses the House of Representatives and the Senate in a joint session, 40 lawmakers from the two parties hope to add some beef: Under their official congressional lapel pins, they’ll wear orange buttons identifying themselves as Problem Solvers and displaying their pledge, “Committed to fix not fight.” With congressional approval ratings at historic lows, the 23 Democrats and 17 Republicans say they want to move beyond mere symbolism as they tell their peers that they’ve pledged to try to end hyper-partisanship and work across the aisle to solve the country’s most pressing problems. “We’re meeting on a regular basis, Democrats and Republicans just talking about areas where we think we can work together in a bipartisan way,”

Kick That Can, by Paul Krugman- John Boehner, the speaker of the House, claims to be exasperated. “At some point, Washington has to deal with its spending problem,” ... “I’ve watched them kick this can down the road for 22 years since I’ve been here. I’ve had enough of it. It’s time to act.”  Actually, Mr. Boehner needs to refresh his memory. During the first decade of his time in Congress, the U.S. government was doing just fine on the fiscal front.  It was only when George W. Bush arrived and squandered the Clinton surplus on tax cuts and unfunded wars that the budget outlook began deteriorating again.  But that’s a secondary issue. The key point is this: While it’s true that we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt, now is very much not the time to act. Given the state we’re in, it would be irresponsible and destructive not to kick that can down the road.  Start with a basic point: Slashing government spending destroys jobs and causes the economy to shrink. This really isn’t a debatable proposition at this point. Even Republicans admit, albeit selectively, that spending cuts hurt employment. Thus John McCain warned earlier this week that the defense cuts scheduled to happen under the budget sequester would cause the loss of a million jobs.

The Train Has Already Left the Station: A Reply to Paul Krugman - Paul Krugman says now is not the time to cut government spending. Why? Because the Fed is out of ammunition and cannot possibly provide any offset to the fiscal drag such spending cuts would make: Today, by contrast, we’re still living in the aftermath of the worst financial crisis since the Great Depression, and the Fed, in its effort to fight the slump, has already cut interest rates as far as it can — basically to zero. So the Fed can’t blunt the job-destroying effects of spending cuts, which would hit with full force. The point, again, is that now is very much not the time to act; fiscal austerity should wait until the economy has recovered, and the Fed can once again cushion the impact.  There are two big problems with this analysis. First, fiscal retrenchment has already started and has been happening since mid-2010. The fiscal austerity train has already left the station and shocker of shockers, it has not caused the cataclysmic collapse in aggregate demand that Paul Krugman fears. Here is a figure from a earlier post that shows NGDP growth has been relatively stable despite the reduction in total government expenditures

Austerity, US Style, Exposed - After 2010, with "recovery" underway for them following bailouts for them, large private capitalist interests focused on three key interests. First, they wanted to ensure that the bailouts' costs were not paid for by higher taxes on corporations and the rich. By stressing government spending cuts and broad-based tax increases, austerity policies serve that interest. Second, they worried about crisis-heightened government economic intervention and power and wanted to reduce them back to pre-crisis levels. Austerity's focus on reduced government spending lessens the government's economic footprint. Austerity in the US, unlike in Europe, is renamed and packaged for the public as "deficit reduction programs" or "fiscal responsibility." Distractions such as "fiscal cliffs" and "debt ceilings" focus public attention on mere secondary details of austerity. Politicians, media and academics use such distractions to wrangle over whose taxes will go up how much and which recipients of government spending will suffer what size cuts. They do not debate austerity itself; that is, they do not debate very idea of raising mass taxes and cutting spending in a deep and long economic downturn. They do not explore the interests served and undermined by any austerity policy. So we will.

Can the Income Tax Fund the Government We Want? - Can the income tax fund the government we seem to want? Probably not. Will lawmakers create a revenue system that will? Not anytime soon. That was the consensus of four tax policy experts at an Urban Institute panel I moderated this afternoon. The panelists–historian Joe Thorndike, Urban Institute economist and tax reform veteran Gene Steuerle, Tax Policy Center co-director Eric Toder, and IRS taxpayer advocate Nina Olson– agreed that the current Swiss cheese of a revenue code is not up to the task, at least not in the long-term.   And they agreed that someday, the federal government will turn to some form of a consumption tax to help make up the difference. It may be a broad-based levy such as a Value-Added Tax or an energy tax. It might replace the current income tax, or might be added on to the existing system. But given political gridlock, any form of major reform is years away

Quelle Surprise! New York Times Takes Up Empty Threats by Rich Over Taxes -- Yves Smith - With Gerard Depardieu giving up his French passport to escape the French taxman, it’s fashionable for other rich folks to threaten to move to reduce their taxes. In the US, that consists of trying to play various states off each other, since the US taxes citizens on world wide income. The only way to escape is become a tax fugitive like Mark Rich and live in Switzerland and have people who are expert at moving your money around (I actually met one of them once, a man named Mikey. Oh and you have to read the link, the US attempted an extraordinary rendition of Rich in Switzerland sometime prior to 1992!).  The New York Times comes in on the side of the whining rich in a piece titled, “Two-Tax Rise Tests Wealthy in California.” It starts by depicting how hard pressed the wealthy are in California because they pay higher income taxes than in any other state in the US, and are also being hit by Federal “tax-the-rich” levies. Funny how there’s no mention of increased taxes on middle class folk, namely the increase in regressive payroll taxes and coming benefits cuts in Medicare and Social Security. Nor do we see a word of how many of the top rich are private equity or venture capital fund managers, and already organize their lives to have virtually all of their labor income subject to capital gains treatment. If the Times could be bothered to talk about effective income tax rates, as opposed to marginal tax rates, it would puncture the pretense that the rich are being abused.

Neil Barofsky Tells Jon Stewart How the Ego and Narcissism of Washington Preserve a Broken Status Quo from Yves Smith: Hope you enjoy this chat. I did, despite its predictably depressing conclusion. Stewart and Barofsky do a good job of conveying how DC works and why that guaranteed “a thoroughly broken financial system” would stay intact.

Are we too scared, or not scared enough? -  THE “safe asset shortage” has consumed a great deal of oxygen within the econoblogosphere over the past few years. (Those who want to catch up on the discussion can read my earlier posts here and here.) Despite widespread agreement that a problem exists, there is significant disagreement about what the problem actually is. Understandably, the different diagnoses lead to radically different prescriptions. Some say that we are too fearful of risk. From this perspective, the shortage will end as soon as people get over their craving for absolute safety and start accepting that it is okay to own assets that are “mostly safe”. In other words, risk premiums are too high. Proponents of this view point to the spread between the borrowing costs of sovereign governments and firms, as well as the unusual level of earnings yields on shares relative to yields on bonds.I have a different view: the entities capable of issuing safe assets (governments with their own currencies) have been failing to do so in sufficient size to meet investor demand. As a result, real yields have fallen significantly. Desperate to increase returns, savers have been reaching into the refuse bin in search of yield. Before the crisis, they eagerly bought securitised mortgages and asset-backed securities. That strategy did not work out so well, but investors seem to have learned little. Now they are once again taking excessive risks to capture a little extra yield by gobbling up junk bonds (for a good take on some of the risks there, see this piece), CLOs, and new securities backed by risky personal debt. The problem is that there are not enough genuinely safe assets available. Everything else is an inadequate substitute. Central banks may be exacerbating the shortage by buying trillions of dollars worth of safe assets for themselves. A recent paper by Gary Gorton and Guillermo Ordonez suggests a solution. According to them, governments with their own currencies should be running bigger budget deficits to end the shortage. These scholars argue that budget deficits are stimulative during crises because the newly issued risk-free bonds can be used by the private sector as replacements for impaired private debts. More interestingly, they confirm earlier findings that higher levels of government debt during good times make crises less likely in the first place.

The deadly quest for safety - Last week I attended a conference on Shadow Banking at Cass Business School. One of the things that struck me in the course of the two days was the disconnect between those who perceive the shadow banking system simply as a deconstructed banking system that we don't yet fully understand, and those who see it as the primary means by which money is hidden from view for the purposes of avoiding taxation. In his excellent presentation on tax havens, Ronen Palan commented that separation of fiscal and monetary policy meant that central banks didn't concern themselves with the social effects of shadow banking. In his words, they didn't "join the dots". This post is my attempt to join the dots.  Much attention has recently been focused on the shortage of safe assets in the financial system. There have been proposals for creation of a larger supply of safe assets through issuance of more government debt (Gorton, BIS) or changing the tenor of government debt from long- to short-term (Pozsar), since the shadow banking system uses short-term government debt as collateral. There have been suggestions (Singh) that the problem is not so much a shortage of safe assets as reduced velocity of collateral due to safe asset hoarding. There have also been many suggestions that the financial system should create more of its own safe assets and stop expecting government to backstop it all the time. And there is evidence that the financial system is already finding ways of circumventing tighter collateral rules through collateral transformation services, thus undermining the direction of regulation particularly of riskier activities such as OTC derivatives trading. But so far, as far as I can see, no-one is asking why the financial system needs safe assets in such quantities. What exactly is the driver behind such a desire for safety?

Did Securitization Lead to Riskier Corporate Lending? - NY Fed - There’s ample evidence that securitization led mortgage lenders to take more risk, thereby contributing to a large increase in mortgage delinquencies during the financial crisis. In this post, I discuss evidence from a recent research study I undertook with Vitaly Bord suggesting that securitization also led to riskier corporate lending. We show that during the boom years of securitization, corporate loans that banks securitized at loan origination underperformed similar, unsecuritized loans originated by the same banks. Additionally, we report evidence suggesting that the performance gap reflects looser underwriting standards applied by banks to loans they securitize.

Counterparties: Volcker with voltage --Two years after the endlessly delayed Volcker Rule was first passed, there’s been a slow, rough convergence in how the world treats too-big-to-fail banks. Today, George Osborne, the UK’s chancellor of the exchequer, announced a series of new powers that will force banks to separate their trading and lending operations — or face being broken up.  This is the year, Osborne said in a speech, “when we re-set our banking system.” In France and Germany, something similar is going on: both countries are considering Volcker-ish proposals to that would force banks to silo off everyday banking from things like prop trading and financing hedge funds. Building off of a government commission’s 2011 recommendation, Osborne’s approach, which he calls an “electrified ring-fence”, relies on four elements: the Bank of England will soon take over responsibility as a “super cop” for the economy; banks’ trading activities will be severed from their retail lending operations; the UK will somehow go about “changing the whole culture and ethics of the business”; and there will be more choice in a banking system which “verges on an oligopoly”. The FT suggests Osborne’s words are a threat; Lex wonders if that threat is mostly empty. Reuters quotes a government source saying the move was intended “to send a signal to Europe” to move faster on reform (it also says Osborne was “bowing to political pressure”). And the British Bankers Association says a clear separation between trading and banking would create “uncertainty” for the industry.

Crunch feared if collateral rules enforced - The law of unintended consequences rules in global financial markets. Attempts by regulators to stabilise one part simply create unforeseen problems elsewhere. Sometimes worryingly large holes are created – in the latest case, perhaps as large as $10tn. European parliamentarians this week debated plans to make safer the financial derivatives industry – an essential cog in the global economy – where the notional amounts outstanding on over-the-counter deals exceed $600tn. Regulators want more trades processed through transparent exchanges and cleared through “central counterparties”, back office institutions that stand between two parties in a trade, ensuring they are completed even if one side defaults. So far, so healthy. The problem is when trades are not sufficiently standardised to be cleared centrally. This might appear a technical question. But it matters a lot for the world beyond finance. Trades potentially affected include currency swaps used by multinational companies borrowing across foreign exchange markets. Regulators are pushing for non-centrally cleared trades to be backed by high levels of collateral, such as cash or government bonds. This is where the $10tn figure comes in. It is the amount of extra collateral that could be required according to estimates by the International Swaps and Derivatives Association. Admittedly the $10tn figure is based on fairly extreme assumptions about what exactly the rules would require. Still, even if lower, the volume of safe assets that would be sucked out of use by the financial system would be massive. While central banks were trying to stimulate economies using “quantitative easing”, the world’s regulators would be undermining their efforts with rules that, in effect, restrict credit supply and thus economic activity. Worried about the lack of joined up thinking, the European parliament’s economic affairs committee voted late on Monday to delay implementation of the new plans in Europe.

A simple macro model of collateral - "Regulators are pushing for non-centrally cleared trades to be backed by high levels of collateral, such as cash or government bonds. This is where the $10tn figure comes in. It is the amount of extra collateral that could be required according to estimates by the International Swaps and Derivatives Association." Here is the full FT article.  It stresses that figure of ten trillion may be too high an estimate, but a separate lower estimate still runs at $2 to $4 trillion. Let’s play out the scenario.  In some future world, what if most savings is done by corporations and also by traders at the clearinghouse, in the form of collateral.  Collateral, however, is not “smoothed” across assets but rather is an either/or decision.  They won’t take your sheepdog as collateral, nor will they take shares in small tech companies.  Most of the saving is done in the form of approved safe assets and the rest of the economy is somewhat starved for investment. I call it the return of financial repression.  Let’s see how far it is allowed to go.

Back to the futures? - HISTORICALLY, futures exchanges have been very effective at preventing the failings of individual traders from hurting others. That is one reason why America’s Dodd-Frank law introduced new rules for over-the-counter (OTC) swaps designed to make them more like futures.  In particular, policymakers want greater transparency and central counterparty clearing. If swaps are traded on exchanges rather than negotiated bilaterally, regulators and market participants should have an easier time measuring—and containing—systemic risk.  Likewise, having a clearinghouse that collects margin and is capitalised by fees from members should make it easier to cancel out positions and minimise counterparty losses in the event of default.* The easiest way to make the swaps markets behave more like the futures markets is to encourage the existing futures exchanges to create products that displace swaps. This “futurisation of swaps” has already started. Back in October, the Intercontinental Exchange (ICE) converted the energy swaps contracts it cleared into futures contracts. That was pretty easy to pull off because both ICE and its traders were already very familiar with commodity futures. In December, the CME Group started offering a more exotic product, the “deliverable interest rate swap future”. Like all futures contracts, the product is a promise by the seller to provide something to the buyer at a fixed point in the future. But instead of wheat or government bonds, sellers of this new contract agree to provide buyers with an interest rate swap, which would presumably have to be acquired from a bank or other swap dealer. ICE plans on releasing a new futures contract in April that would be based on an index of credit default swap (CDS) prices.

Too Fast To Fail: Is High-Speed Trading the Next Wall Street Disaster?- Despite efforts at reform, today's markets are wilder, less transparent, and, most importantly, faster than ever before. Stock exchanges can now execute trades in less than a half a millionth of a second—more than a million times faster than the human mind can make a decision. Financial firms deploy sophisticated algorithms to battle for fractions of a cent. Designed by the physics nerds and math geniuses known as quants, these programs exploit minute movements and long-term patterns in the markets, buying a stock at $1.00 and selling it at $1.0001, for example. Do this 10,000 times a second and the proceeds add up. Constantly moving into and out of securities for those tiny slivers of profit—and ending the day owning nothing—is known as high-frequency trading. This rapid churn has reduced the average holding period of a stock: Half a century ago it was eight years; today it is around five days. Most experts agree that high-speed trading algorithms are now responsible for more than half of US trading. Computer programs send and cancel orders tirelessly in a never-ending campaign to deceive and outrace each other, or sometimes just to slow each other down. They might also flood the market with bogus trade orders to throw off competitors, or stealthily liquidate a large stock position in a manner that doesn't provoke a price swing. It's a world where investing—if that's what you call buying and selling a company's stock within a matter of seconds—often comes down to how fast you can purchase or offload it, not how much the company is actually worth.

The .03% Solution - Last month, 11 European countries, including France and Germany, moved forward on introducing a minuscule tax on trades in stocks, bonds and derivatives. The tax goes by many names. It's often called a Tobin tax, after the economist James Tobin. In Europe it goes by the more pedestrian financial transaction tax. In Britain, it goes by the wonderful Robin Hood tax, and is supported in an often clever campaign.On this side of the Atlantic, there is a ghostly silence on a transaction tax in respectable political quarters. But that might change. This month, Sen. Tom Harkin, Democrat of Iowa, and Rep. Peter DeFazio, Democrat of Oregon, plan to reintroduce their bill calling for just such a tax. A transaction tax could raise a huge amount of money and cause less pain than many alternatives. It could offset the need for cuts to the social safety net or tax increases that damage consumer demand. How huge a sum? Harkin and DeFazio got an estimate from the bipartisan Joint Committee on Taxation, which scores tax plans. It's a hearty one: $352 billion over 10 years. The money would come from a tiny levy. The bill calls for a three-basis-point charge on most trades. A basis point is one-hundredth of a percentage point. So it amounts to 3 cents on every $100 traded.

Money Market Funds May Be Making Banking System More Unstable - Money market funds’ growing role as a source of funds for banks may be making the banking system more unstable since the funds themselves are prone to runs, a new staff study by the Federal Reserve Bank of New York concluded. The study comes as several top regulators, including Federal Reserve Chairman Ben Bernanke, have called for changes to the current structure of money funds, which they believe pose a risk to the broader financial system. The Securities and Exchange Commission staff is currently drafting a proposal to tighten rules for money funds after the industry beat back a previous effort by the regulator last year.

Fed’s Stein: Signs of Overheating in Some Credit Markets - A top Federal Reserve official in a speech Thursday said he sees some signs that credit markets may be overheating, although he said there is not an imminent threat to the wider financial system. Federal Reserve Board governor Jeremy Stein highlighted developments in several markets, including junk bonds, mortgage real-estate investment trusts and commercial banks’ securities holdings, as areas where potentially troubling trends are emerging as a result of the Fed’s easy-money policies. Mr. Stein made his remarks at a symposium at the Federal Reserve Bank of St. Louis.  Mr. Stein raised the examples as part of a broader discussion of how the central bank should look for and deal with threats to financial stability that can be brought on by overheating credit markets.

Fed Official Sees Tension in Some Credit Markets - Some credit markets are showing signs of overheating as investors take larger risks in response to the persistence of low interest rates... Fed Governor Jeremy Stein, highlighted a surge in junk bond issues, the popularity of certain kinds of real estate investment trusts and shifts in bank balance sheets as areas the central bank is watching closely... Mr. Stein gave no indication that the Fed is contemplating any change in its aggressive efforts to hold down interest rates. Rather, he described the overheating as a trend that might require a response if it intensified over the next 18 months. But the speech nonetheless underscored that the Fed increasingly regards bubbles, rather than inflation, as the most likely negative consequence of its efforts to reduce unemployment by stimulating growth. ... Central bankers historically have been skeptical that asset bubbles can be identified or prevented from popping. Moreover, they tend to regard financial regulation as the appropriate means to prevent excessive speculation and not changes in monetary policy ... But the crisis has forced central bankers to reconsider both the importance of financial stability and the role of monetary policy. ...

Modern Market Alchemy Explained: Converting Junk Debt Into Supersafe Treasurys Out Of Thin Air - From Fed's Stein: "The insurance company might approach a broker-dealer and engage in what is effectively a two-way repo transaction, whereby it gives the dealer its junk bonds as collateral, borrows the Treasury securities, and agrees to unwind the transaction at some point in the future. Now the insurance company can go ahead and pledge the borrowed Treasury securities as collateral for its derivatives trade." Thanks to the magic of FAS 140 banks can literally transform worthless garbage into supersafe Treasurys, then use that newly transformed collateral via further repo as cash to fund simple stock purchases, and at the end of the day nobody knows where the exposure came from, who the counterparty is, and what the ultimate liability is!

Is the Right Shifting Course on Dodd-Frank? -    During the 2012 election, conservatives' main goal was to either repeal Dodd-Frank completely or remove such large sections of it that it was a completely different bill. There was very little engagement with the content of Dodd-Frank itself and how to make them work better. One important example was Republican candidates like Jon Huntsman calling for bold new financial reforms that were already part of Dodd-Frank.  It now appears that the flagship policy journal on the right, National Affairs, is moving towards a reform rather than replace agenda for Dodd-Frank and financial reform. The latest issue featured an large, 7,000+ word article, "Against Casino Finance," by Eric Posner and E. Glen Weyl of University of Chicago law school. What's fascinating about the piece is less the authors' counter proposals for reform, which are lacking, than the fact that they accept two of the ideas put forward by financial reformers that have generally been resisted on the right. The first is that derivatives require regulation and the second is that prudential regulation of the largest systemically risky financial firms is necessary. Let's take those in order

This Is How Filibuster Reform Comes Back To Life - In the spirit of the bipartisan, but toothless rules reforms the Senate passed last week, Senate Minority Mitch McConnell and over 40 of his members are vowing to block confirmation of a permanent Consumer Financial Protection Bureau director unless Democrats agree to pass legislation dramatically weakening the agency. Republicans pulled the same trick in 2011. It was a back door attempt to nullify an existing law they didn’t like because they couldn’t change it via normal democratic processes. But at least back then they had a decent case for slowing Obama’s legislative juggernaut ahead of a referendum in 2012. They lost, of course, but that hasn’t deterred them one bit. For now, Richard Cordray remains CFPB director, thanks to a recess appointment. But that appointment expires at the end of the year, and could come to an end earlier thanks to the DC circuit court, which ruled that similar appointments to a different regulatory body were unconstitutional. This is a real problem. Without a director, the CFPB loses a lot of its power. But the milquetoast rules reforms that passed last week give Harry Reid no parliamentary tools to pry the GOP off its position. Short of battling it out with Republicans in the public sphere and hoping they crack, President Obama will see one of his signature accomplishments neutered by what amounts to an ad hoc legislative line item veto…by a congressional minority.

Friends of Fraud, by Paul Krugman - Like many advocates of financial reform, I was a bit disappointed in the bill that finally emerged. Dodd-Frank gave regulators the power to rein in many financial excesses; but the financial industry’s wealth and influence can all too easily turn those who are supposed to serve as watchdogs into lap dogs instead.  There was, however, one piece of the reform that was a shining example of how to do it right: the creation of a Consumer Financial Protection Bureau...  Why not leave it up to the regulators we already have? The answer is that existing regulatory agencies are basically concerned with bolstering the banks; as a practical, cultural matter they will always put consumer protection on the back burner...  So the consumer protection bureau serves a vital function. But as I said, Senate Republicans are trying to kill it. ...What Republicans are demanding, basically, is that the protection bureau lose its independence. They want its actions subjected to a veto by other, bank-centered financial regulators, ensuring that consumers will once again be neglected, and they also want to take away its guaranteed funding, opening it to interest-group pressure. These changes would make the agency more or less worthless — but that, of course, is the point.

Why the Republican CFPB Arguments Are Wrong - It's been almost two years, and the GOP still refuses to approve a Consumer Financial Protection Bureau (CFPB) director without a significant overhaul of the agency. Check out Adam Serwer at Mother Jones as well as Jennifer Bendery at Huffington Post for more on this story. Forty-three Republican Senators signed a letter last week, one that is almost exactly the same as the one they signed in July 2011, blocking Cordray's nomination because they want major legislative changes to Dodd-Frank and the CFPB. As congressional scholar Thomas Mann told Jonathan Cohn, this should be viewed as a form of modern day nullification. Dodd-Frank is the law of the land. Congress legitimately passed this law containing a CFPB designed to have certain features. Even though the GOP doesn't like it doesn't mean they can sabotage it or prevent it from working. And the CFPB needs a director to work. The letter features a high-level complaint along with three specific changes they want. Beyond the letter, these three points are so common on the right that it is probably useful to point out that they are wrong. This is drawn from Adam Levitin's Congressional testimony on the matter as well as other CFPB analysis over the years. Bold is from the letter."...we have serious concerns about the lack of congressional oversight of the agency and the lack of normal, democratic checks on its sole director, who would wield nearly unprecedented powers."

Tangle of Ties Binds SEC’s Top Ranks - Enforcement cases at the Securities and Exchange Commission go nowhere unless approved by a majority of the agency's commissioners. But conflicts for the possible new chairman and other top officials could make it harder to get to "yes." For example, SEC investigators are looking into the "London whale" trading mess at J.P. Morgan Chase and have yet to decide whether to recommend any action in the matter. Mary Jo White, nominated last month by President Barack Obama to lead the agency, wouldn't be able to vote on any case involving the New York bank for two years after taking the job. That is because J.P. Morgan recently was her client at law firm Debevoise & Plimpton LLP. Daniel Gallagher, an SEC commissioner since 2011, also would have a conflict of interest. He came to the SEC from Wilmer Cutler Pickering Hale and Dorr LLP, a law firm helping J.P. Morgan investigate the London whale and respond to government inquiries. That would leave the bare minimum—three commissioners out of five—usually needed for a quorum at the SEC. Enforcement cases approved by such a small number of commissioners are especially vulnerable to criticism by judges and defendants, securities-law experts say.

Occupy the SEC Weighs in on Nomination of Mary Jo White to Head the SEC - Yves Smith - Occupy the SEC has released one of its characteristically well-though-out and documented letters, in the form of questions it would like to see raised during the Senate hearings on the nomination of Mary Jo White to head the SEC. While individuals who have worked with White and are tough-minded about bank reform, most notably Neil Barofsky and Dennis Kelleher of Better Markets, are enthusiastic supporters of White, she has spent enough time in the private sector to raise legitimate concerns about whether she has become intellectually captured. Moreover, her history in working for the last ten years on behalf of large companies may also create such a thicket of conflicts of interest as to hamstring her ability to operate effectively, even if she is serious about compliance and enforcement. The letter also asks White to explain in some detail the incident that many have flagged as troubling, the manner in which she intervened at the SEC on behalf of Morgan Stanley CEO John Mack when he was under investigation for insider trading.  I encourage you read the letter in full. Occupy the SEC Questions for Mary Jo White Confirmation Hearing.

Commodity hedge funds lose 20% of assets - Commodities hedge funds surrendered at least 20 per cent of their assets last year after investors pulled out large sums following the sector’s worst annual performance in more than a decade, according to fund managers and investors. The average commodity hedge fund lost 3.7 per cent in 2012, according to a closely watched index compiled by Newedge, the biggest decline since the yardstick was created more than a decade ago and substantially worse than the 1.4 per cent loss of 2011. The investors’ stampede has come after several multi-billion dollar commodities hedge funds, including Blenheim and Clive Capital – the two largest – posted losses for the second year running, denting a hitherto stellar record of performance.

Friday Farce: 16 Year Old Outperforms 99% Of Hedge Funds: "Oh My Gosh, That's So Easy, I Have To Do This" - Forget Ackman, Einhorn, Bass, And Hendry. There is only one name in the world of equity market performance in 2012 - Rachel Fox, of 'Desperate Housewives' fame. With a 30%-plus performance, the day-trading debutante has turned from actress to activist as she day-trades her way through the day. The 16-year-old actress who made 338 trades last year, based mostly on technicals, ""...fell in love with the idea and the concept of being able to just buy something, have it go up, or have it go down, depending on which way you bet it and have it make you money. I thought, oh, my, gosh, that's amazing, and so easy, I have to do this." If ever there was a sign of the extreme bubble that central planning has re-created for us - it has to be this. Her advice: "you have to really just trade on your own instincts and not just be like, oh, this person says this is great, let me just go for it."

Billionaires Dumping Stocks, Economist Knows - Why Despite the 6.5% stock market rally over the last three months, a handful of billionaires are quietly dumping their American stocks . . . and fast. Warren Buffett, who has been a cheerleader for U.S. stocks for quite some time, is dumping shares at an alarming rate. He recently complained of “disappointing performance” in dyed-in-the-wool American companies like Johnson & Johnson, Procter & Gamble, and Kraft Foods. In the latest filing for Buffett’s holding company Berkshire Hathaway, Buffett has been drastically reducing his exposure to stocks that depend on consumer purchasing habits. Fellow billionaire John Paulson, who made a fortune betting on the subprime mortgage meltdown, is clearing out of U.S. stocks too. During the second quarter of the year, Paulson’s hedge fund, Paulson & Co., dumped 14 million shares of JPMorgan Chase. The fund also dumped its entire position in discount retailer Family Dollar and consumer-goods maker Sara Lee. Finally, billionaire George Soros recently sold nearly all of his bank stocks, including shares of JPMorgan Chase, Citigroup, and Goldman Sachs. Between the three banks, Soros sold more than a million shares.

3What to do with Corporate Profits? - US corporate profit margins have never been higher. Lately it has been popular to point out that higher corporate profits have come at the expense of falling employee compensation, the graphs look like something of out Marxist propaganda poster. My guess is that this will change as the economy improves: companies will invest more to satisfy greater demand, new intellectual property will spread to competition, and higher employment will increase labor's bargaining ability. But how do we speed this up? Because I fear that corporate investments have become not so much a place to investment money and earn dividends from their productivity, as much as a place to store wealth. As you can see below, undistributed corporate profits have never been higher. The problem with corporations storing wealth is that it isn't nearly as good for most of us as investing in innovation and hiring employees. Some of retained earnings are socked away for tax reasons, some are the collection of high-tech companies that are past their innovative prime, but a lot of earnings are being used to buy back company stock. These stock buy backs sound good to shareholders and corporate executives, but it is a short-term maneuver that doesn't yield any long-term gain in production or profit.

Why are U.S, Firms Holding $5 Trillion in Cash? - One of the puzzles and frustrations of the sluggish economy since the official end of the Great Recession in June 2009 is that U.S. firms are holding enormous amounts of cash--about $5 trillion in 2011. A considerable number of pixels have been spent wondering why corporations seem so reluctant to spend, and how we might entice them to do so. But I had not know that the trend toward corporations holding more in cash very much predates the Great Recession; indeed, it was already apparent back in the 1990s. Thus, along with thinking about why events of the last few years have led corporations to hold more cash, we should be thinking about influences over the last couple of decades. The first graph shows "cash and short-term investments," which include all securities transferable to cash, going back to The second graph focuses just on nonfinancial, nonutility firms--thus leaving out banks, insurance companies, regulated power companies, and the like.There are some differences in timing, but the overall upward pattern is clear.

Corporate Hoarding and the Slow Recovery - Paul Krugman - Lots of talk now about Apple’s cash hoard, which is actually kind of amazing: this is supposedly our cutting-edge technology company, and it apparently can’t find things it wants to invest in. Or more accurately, given its incredible profits, it can’t find enough things to do with all the money it makes.  So, I’ve had a mild-mannered dispute with Joe Stiglitz over whether individual income inequality is retarding recovery right now; let me say, however, that I think there’s a very good case that the redistribution of income away from labor to corporate profits is very likely a big factor. Here’s corporate profits as a share of GDP: So corporations 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.

‘It’s just amazing how Libor fixing can make you that much money’: Traders gleefully admitted rate fixing was ‘cartel’ = RBS traders gleefully admitted Libor setting had become a “cartel” as another raft of damning emails gave the reputation of the industry a fresh beating today. Senior yen traders said the practice was “getting nutss [sic]” in August 2007. One said: “its just amazing how libor fixing can make you that much money.” Another exchange in December 2007 had one trader complaining about high Libor — “ucksake. keep ours low if poss” — and threatening to “send the boys round” to rival banks. Email exchanges between derivative traders and Libor submitters in 2009 had one trader admitting “im like a whores drawers” as he pressed the submitter to lower the Libor fixing. Another Swiss franc trader in December 2008 — two months after RBS was bailed out with billions from the taxpayer — offered some “sushi rolls from yesterday” in return for a low submission of six-month Libor. Another offered to “make love” to a colleague.

Counterparties: The devil’s in the emails -- There’s a certain inevitability to RBS’s $612 million Libor-rigging settlement and the Justice Department’s civil charges against S&P for faulty ratings. Like at Barclays, Goldman Sachs, Standard Chartered, and UBS, RBS and S&P’s scandals come complete with how-could-they-put-that-in-writing electronic communications. RBS’s contributions to this now-venerable tradition come courtesy of the CFTC and FSA, and are wrapped up nicely by Dealbook and FT Alphaville. One trader asked that the rate set be at a certain level by writing to the submitter that “if u did that i would come over there and make love to you”. Another said  “its just amazing how libor fixing can make you that much money”. Believing that the US dollar Libor was being watched by the Fed, a Yen trader said “dun think anyone cares the JPY Libor”. Scattered throughout is the requisite amount of trading floor profanity, along with a decent number of emoticons. S&P’s written record was more metaphorical and sarcastic. One exec wrote that “this market is a wildly spinning top which is going to end badly”. An analyst said he had “no complaints” about his job, “aside from the fact that the MBS world is crashing, investors and the media hate us and we’re all running around to save face”. And then there’s the extended re-write of the Talking Heads’ “Burning Down the House”. That was immediately followed by another email warning “for obvious professional reasons, do not forward this song”. Given that the probability of finding something stupid or profane in millions of pages of records approaches certainty, what regulator or prosecutor could resist using such material? In RBS’s case, it appears that the bank’s own traders sealed the outcome of the CFTC’s investigation.

Stupid things traders say: The five most incriminating exchanges in the new Libor case - Investment bank traders are known to be gutsy and brash, but sometimes their behavior can be downright stupid. Take the crafty cadre of traders at the Royal Bank of Scotland, who for years schemed to rig the global interest rate known as Libor. At least 21 employees at the bank have been implicated in setting the rate artificially low or high to boost the bank’s trading profits — a ploy that has cost RBS $612 million in fines. When they thought no one was paying attention, the bank’s traders sent streams of incriminating (if not particularly grammatical) e-mails and text messages detailing their duplicitous deeds, as revealed by a CFTC investigation. Indeed, it seems to have been almost an open secret that banks were manipulating the interest rates they report to benefit their own trading positions. Check out some of the most entertaining exchanges — with some of the juiciest confessions in bold:

So God made a banker - And on the eighth day God looked down on his planned paradise and said, “I need someone who can flip this for a quick buck.”  So God made a banker.  God said, “I need someone who doesn’t grow anything or make anything but who will borrow money from the public at 0% interest and then lend it back to the public at 2% or 5% or 10% and pay himself a bonus for doing so.”  So God made a banker.  God said, “I need someone who will take money from the people who work and save, and use that money to create a dotcom bubble and a housing bubble and a stock bubble and an oil bubble and a commodities bubble and a bond bubble and another stock bubble, and then sell it to people in Poughkeepsie and Spokane and Bakersfield, and pay himself another bonus.”  So God made a banker.

Bill Black: Yglesias Mimics “Mankiw Morality” and Bashes Bastiat - Roger Erickson brought to my attention a column by Matthew Yglesias that relates to the ethical issues I was discussing in my column yesterday about Yglesias’ ode to GHB (Geithner, Holder, and Breuer’s doctrine of immunity for the largest banks). (In deference to Yves’ endocrinologist, I am renaming it GBH (Brit-speak for “grievous bodily harm”). One of my criticisms was that Yglesias makes no explicit moral inquiries about the appropriateness of the administration’s GBH doctrine, which allows the fraudulent systemically dangerous institutions (SDIs) to inflict grievous harm on us with impunity. Yglesias, instead, framed the issue as an empirical and logical issue – in the context of the Great Recession, would our financial system be better off if we held banksters and fraudulent banks accountable for their crimes or if we bailed them out? Yglesias’ position is that if the decision is made that our financial system would be better off if we bailed the banks out (a position he supports), then it follows as a matter of simple logic that we must not prosecute. “Mankiw Morality” is the term I coined to describe the mindset of theoclassical economists who think that wealth maximization is either inherently moral or transcends morality because it is “rational.”  Mankiw is a leading defender of businesses and opponent of regulation and the defender of the faith in theoclassical dogmas.

Too Big To Jail Is Here To Stay - Lanny Breuer, the Assistant Attorney General who claimed that prosecuting banks for crimes poses a risk to the financial sector and so corrupt bankers are “too big to jail” has lost his job. But the man who put him there, and who is ultimately responsible for the policy — the Attorney General himself — is here to stay. Fundamentally, Obama’s continued support for Holder illustrates that Obama is still committed to the policy of holding financiers to a lesser standard of justice than other citizens. The big banks continue to ride roughshod over the American people with the complicity of the political class.

Who Decided U.S. Megabanks Are Too Big to Jail? - Simon Johnson - Tom Hanks has a knack for playing the roles that define American generations. If Hanks turns his attention to our most recent decade, which character should he choose? My suggestion is Assistant Attorney General Lanny Breuer, the head of the criminal division at the Justice Department and the man responsible for determining whether anyone should be prosecuted for the financial crisis of 2008.In an on-camera interview, which aired recently, Breuer stated plainly that some financial institutions are too large and too complex to be held accountable before the law. Bipartisan pressure is now being applied on the Justice Department to reveal exactly how this determination was made. Breuer, however, has announced he will leave government March 1. Good luck unraveling the cover-up that must already be in place. Breuer made the comments for a documentary aired by the PBS program “Frontline.” The investigative report, titled “The Untouchables,” asked why no senior Wall Street executive has been prosecuted for apparently well-documented illegal acts, such as authorizing document forging, misleading investors and obstructing justice. Breuer was shockingly candid.

Emperors of banking have no clothes - In “The Emperor’s New Clothes,” two tailors offer to provide the emperor with beautiful and very special clothes. They claim the clothes will be invisible to people who are stupid or unfit for their jobs. Only when a child shouts: “The emperor has no clothes!” does everyone admit that the emperor is, in fact, naked.  Banks have a similar mystique. There is a pervasive myth that banks are different -- special, somehow -- from all other companies and industries in the economy. Anyone who questions this is at risk of being declared incompetent.  In fact, many claims made by leading bankers and banking experts, including academics, have as much substance as the emperor’s new clothes. But most people don’t challenge these claims, even as the claims affect policy. The specialists’ confidence is too intimidating. Even people who know better fail to speak up. The public is taken in. Some bankers may admit to mistakes leading to the financial crisis that began in 2007, but they portray the crisis as a fluke or as an accident that is highly unlikely to recur in our lifetimes. It would be costly and wasteful, they claim, to tighten regulation to forestall an event that might happen once in 100 years. Tighter regulation, we are warned, would interfere with what banks do to support the economy, and this would have serious, unintended consequences.

A Growing Split among Republicans On TBTF - - Simon Johnson - An interesting debate is developing within the Republican Party on how to approach the problem of too-big-to-fail financial institutions. On the one hand, a growing number of influential voices are pushing for measures that would limit the size of megabanks or even push them to become smaller. Richard Fisher, president of the Federal Reserve Bank of Dallas, continues to draw a lot of attention, as does Thomas Hoenig, the former president of the Federal Reserve Bank of Kansas City and now vice chairman of the Federal Deposit Insurance Corporation. And Jon Huntsman planted a strong conservative flag on this issue during his run for the presidency in 2011. This assessment is now shared much more broadly across the right, as seen in recent opinion pieces by George Will and Peggy Noonan, as well as regular analysis by James Pethokoukis of the American Enterprise Institute, some of it on the issue I write about today. Senator David Vitter of Louisiana and Jim DeMint, the former senator from South Carolina who now heads the Heritage Foundation, have also come out hard against very big banks. But some other Republicans are pushing back, as seen this week in a paper by Hamilton Place Strategies, a group headed in part by communications professionals who previously worked with President George W. Bush, John McCain and Mitt Romney.

FDIC Sues Bank Directors: What’s Wrong with this Picture? - Hidden away from the main stream big city media, on tiny Bainbridge Island, WA, the FDIC (Federal Deposit Insurance Corp.) has filed suit against ten former directors and officers of a local bank.  Bainbridge Island’s defunct American Marine Bank leaders are being sued over allegations they enabled $18 million in irresponsible loans.  The suit charges four officers and six directors of the bank with breach of fiduciary duty, gross negligence and negligence, according to documents filed in the U.S. District Court in Tacoma on Jan. 25.   The bank went under in 2010 and was taken over by the FDIC. Where can you read more about this:  In the Bainbridge Island Review, of course.  Clearly banking interests hold no special powers of influence over this media giant. Let's consider some back of the envelope numbers:

  • The charges specify $18 million in irresponsible loans made by American Marine.
  • At the time of FDIC takeover, deposits were $68 million.
  • Ratio of bad loans to deposits was 26%.

The 26% ratio for American Marine Bank is not that far above the average for all of U.S. banking.  Since we have estimated the average it is quite possible that many banks could have had ratios close to or even above the 26% level.

Banks Say Demand Grows for Loans - U.S. banks reported stronger demand for business, home and auto loans over the winter, a sign of health for the economy despite its slowdown at the end of last year. The Federal Reserve, in its quarterly survey of senior bank loan officers on Monday said demand for consumer lending — particularly for home loans — was up strongly toward the end of December and early last month. The report provides a positive sign for the U.S. economy, which contracted 0.1% in the fourth quarter of last year. Despite concerns about the so-called fiscal cliff, potential cuts to the federal budget and overall uncertainty about spending policies in Washington, American consumers have become more willing to borrow and spend in recent months. The housing market, meanwhile, has shown signs of life of late and retail sales have improved.

Fed: Some domestic banks "eased lending standards", Demand for some Loans "strengthened" -- From the Federal Reserve: The January 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices In the January survey, generally modest fractions of domestic banks reported having eased their standards across major loan categories over the past three months on net. Domestic respondents indicated that demand for business loans, prime residential mortgages, and auto loans had strengthened, on balance, while demand for other types of loans was about unchanged. U.S. branches and agencies of foreign banks, which mainly lend to businesses, reported little change in their lending standards, while demand for their loans was reportedly stronger on net.  Within consumer lending, a moderate fraction of domestic banks reported an easing of standards on auto loans, on net, while standards on other types of consumer loans were about unchanged. On balance, banks indicated having eased selected terms on consumer loans over the survey period. A moderate fraction of respondents continued to experience stronger demand for auto loans, on net, while demand for credit card loans was reportedly unchanged.

Unofficial Problem Bank list declines to 822 Institutions - Here is the unofficial problem bank list for Feb 1, 2013. Changes and comments from surferdude808:  No failures this week as it looks like the FDIC will be watching the Super Bowl instead of determining insured depositors.There were three removals this week from the Unofficial Problem Bank List. The removals leave the list at 822 institutions with assets of $308 billion. A year ago, the list held 958 institutions with assets of $389.6 billion.

Judge Rakoff Delivers Big Blow to Bank of America and JP Morgan in Flagstar Mortgage Putback Ruling - Yves Smith - Wow, one of my big assumptions about mortgage putback cases has been turned on its ear, much to the detriment of Bank of America and JP Morgan. If you thought there were pitched legal battles on this front, a key ruling by Judge Jed Rakoff means you ain’t seen nothing yet. If you are late to this brawl, putback cases are also called representation and warranty cases, or rep and warranty. They occur when investors and bond guarantors who relied on the promises made by the originators and sponsors about the quality of the loans argue that the sellers broke those promises (“representations and warranties”). The assumption among many who’ve looked at these suits is that they might not be worth all that much in the end. In past putback litigation threats (which until the crisis were settled after some initial rounds of jousting) was that it would be too costly for the plaintiff to make his case.  But Judge Rakoff’s ruling yesterday is a game-changer. On an admittedly small case, in dollar amount, Rakoff awarded bond insurer Assured $90.1 million of the $116 million it sought in damages against Flagstar over two home equity line of credit securitizations. That’s nearly 78%. Trust me, no big bank is reserving anything within hailing distance of those sort of numbers for bond insurer putback cases. Look at how underreserved Flagstar is proving to be, per Reuters:

S&P expects US lawsuit over its mortgage ratings - -- The U.S. government is expected to file civil charges against Standard & Poor's Ratings Services, alleging that it improperly gave high ratings to mortgage debt that later plunged in value and helped fuel the 2008 financial crisis. The charges would mark the first enforcement action the government has taken against a major rating agency involving the worst financial crisis since the Great Depression. S&P said Monday that the Justice Department had informed the rating agency that it intends to file a civil lawsuit focusing on S&P's ratings of mortgage debt in 2007. The action does not involve any criminal allegations. Critics have long complained about the government's failure to bring criminal charges against any major Wall Street players involved in the financial crisis. Criminal charges would require a higher burden of proof and carry the threat of jail time. If S&P is eventually found guilty of civil violations, it could face fines and limits on how it does business. S&P denies any wrongdoing and says any lawsuit would be without merit.

U.S. to sue S&P over ratings ahead of financial crisis (Reuters) - Standard & Poor's said it expects to be the target of a U.S. Department of Justice civil lawsuit over its mortgage bond ratings, the first federal enforcement action against a credit rating agency over alleged illegal behavior tied to the recent financial crisis.Shares of McGraw-Hill Cos, the parent of S&P, plunged 13.8 percent on Monday after news of the pending lawsuit surfaced, their biggest one-day percentage decline since the 1987 stock market crash, according to Reuters data. An announcement of a lawsuit is expected on Tuesday, a person familiar with the matter said. The news also caused shares of Moody's Corp, whose Moody's Investors Service unit is S&P's main rival, to slide 10.7 percent. It is unclear why regulators may be now focusing on S&P rather than Moody's or Fimalac SA's Fitch Ratings. S&P, Moody's and Fitch have long faced criticism from investors, politicians and regulators for assigning high ratings to thousands of subprime and other mortgage securities that quickly turned sour.

S&P faces civil charges for mortgage bond ratings - The Justice Department's efforts to reach a settlement with Standard & Poor's Rating Services about the ratings provided to mortgage bonds leading up to the financial crisis have failed, and it appears that civil charges will be filed by the Justice Department and state prosecutors.  See S&P says it expects U.S. civil suit over mortgage bond ratings, New York Times (Feb. 4, 2013). The suit is expected to be brought in California and focus on about 30 collateralized debt obligation deals (commonly known as "CDOs") executed in 2007 at the height of the mortgage bubble.  The Justice Department has apparently seen "troves" of damaging emails among S&P employees. S&P claims the suit is meritless, using hindsight to pinpoint a cause that wasn't understood at the time.  McGraw-Hill, S&P's parent company, lost 14% of its value after the announcement.

U.S. Sues S&P over Pre-Crisis Mortgage Ratings — The U.S. government is accusing the debt rating agency Standard & Poor’s of fraud for giving high ratings to risky mortgage bonds that helped bring about the financial crisis. The government said in a civil complaint filed late Monday that S&P misled investors by stating that its ratings were objective and “uninfluenced by any conflicts of interest.” It said S&P’s desire to make money and gain market share caused S&P to ignore the risks posed by the investments between September 2004 and October 2007. The charges mark the first enforcement action the government has taken against a major rating agency involving the worst financial crisis since the Great Depression. According to the government filing in U.S. District Court in Los Angeles, the alleged fraud made it possible to sell the investments to banks. The government charged S&P under a law aimed at making sure banks invest safely.

Should We Take the Department of Justice’s Suit Against Standard & Poor’s Seriously? -  Yves Smith - I know cynicism-hardened Naked Capitalism readers will expect the answer to the question in the headline to be “no”. But based on a summary of the filing at Bloomberg (and having conferred with lawyers on this beat), the answer looks more like “possibly yes”.  The reason to be skeptical of lawsuits against ratings agencies is that despite the monstrous damage done by crap ratings, suits against ratings agencies by aggrieved investors have gone all of nowhere. It isn’t a matter of evidence; there is overwhelming evidence that the agencies did a crappy job on structured credit ratings and that lots of investors really, truly relied on them. The issue is coming up with a legal theory.  So far, the ratings agencies have proven to be pretty much impervious to litigation. They’ve been able to rely on two lines of defense. The first, as absurd as it may seem, is First Amendment, to say that their ratings are simply journalistic opinions. There has only been some limited qualification of that position. . The court distinguished private placement ratings from public ratings, with private ratings having less First Amendment protection. Mortgage backed securities ratings were public and so this line of argument would not apply to them. CDOs were typically 144A offerings. CDOs were almost always listed on the Irish Stock Exchange, so it would be hard to argue that the ratings were not public.

NYT and WAPO Can't Find Out About Franken Amendment on Bond Rating Agencies - It's so difficult when you run a major national newspaper to find out about the laws passed by Congress and signed by the president. Clearly that would be the conclusion drawn by readers of the NYT and Washington Post's coverage of a suit brought by the Justice Department against S.&P. over its ratings of mortgage backed securities during the housing bubble. Both pieces note the obvious conflict of interest of having the rating agencies paid by the issuer. This gives the agency an incentive to provide a strong rating in order to continue to get business from the issuer. The Franken Amendment to the Dodd-Frank bill eliminated this conflict by requiring an issuer to contact the Securities and Exchange Commission (SEC), which would then arrange for a rating agency to be assigned. By taking the hiring decision away from the issuer, the rating agency would no longer have an incentive to falsify its assessment.  It is incredible that neither article mentioned the amendment. It won an overwhelming majority of votes in the Senate, attracting bi-partisan support. It would have gone into effect with the rest of the bill, except that Barney Frank, then head of the House Financial Services Committee, arranged to delay its enactment by requiring a SEC study 

S&P Analyst Joked of Bringing Down the House Before Crash - Bloomberg: Standard &Poor’s employees sang and danced to a mock song inspired by “Burning Down the House” and joked about the company’s willingness to rate deals “structured by cows” before the 2008 global financial collapse, according to a U.S. government lawsuit. Two S&P analysts in April 2007 discussed the company’s model for collateralized debt obligations, with one messaging that a deal was “ridiculous” and that S&P “should not be rating it,” according to the complaint filed Feb. 4 in federal court in Los Angeles.“We rate every deal,” the other replied, prosecutors said. “It could be structured by cows and we would rate it.” The analysts’ messages are among internal communications cited in the Justice Department’s complaint against S&P and its parent, New York-based McGraw-Hill Cos. The U.S. claims S&P, driven by a desire to increase revenue and market share, defrauded investors as it issued ratings on mortgage products while ignoring market risks. It rated more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 to October 2007, the government said.

12 Internal Emails Likely to Sway a Jury in the Standard and Poor’s Lawsuit - Late last night, the U.S. Department of Justice filed a civil lawsuit in Los Angeles against the credit rating agency, Standard and Poor’s, over alleged deceptive ratings it gave to debt instruments it rated for large investment banks on Wall Street. The suit charges the deceptive ratings were motivated by a desire to gain more business from the Wall Street firms which pay for the ratings. Ratings on debt instruments play a pivotal role in helping investors select suitable investments. Ratings of AAA through BBB- are considered investment grade with ratings below that viewed as non-investment grade or junk. And it’s not just individual investors who are impacted by ratings. Banks are legally limited in the amount of non-investment grade securities they can hold and are required to post additional capital when their investment risks rise. When rating agencies assigned AAA ratings to what were effectively junk bonds, banks were able to take on dramatically higher risks without buttressing their capital cushion, leaving them short of capital when the crisis hit. Emails released by Senate Permanent Subcommittee on Investigations:

A Flaw in the Heart of the Justice Department’s Case Against Standard & Poor’s - The weakest point of the Department of Justice's case against Standard & Poor's is the government's assumption that there was something wrong with the credit rating agency changing its standards to win more business. The 119-page civil complaint filed Monday night by the Justice Department abounds with evidence, much of it from emails and instant messages between S&P employees, that concern over the company's market share influenced its ratings decisions. For example, one employee directly complains that S&P had lost market share because its standards required 10 percent more collateral than Moody's.  But this only looks bad if you make the additional assumption that the issuers of the credit products S&P was rating did not care about the quality of the ratings. This idea that issuers recklessly demanded high ratings for even the worst bundles of mortgage-related assets is deeply ingrained in public discussions about the financial crisis. It has become part of the conventional wisdom. It has not, however, ever been established in any legal arena. Which means that the Justice Department will have to prove that issuers demanded fraudulently high ratings in order to establish the claim that the agencies engaged in fraud by changing ratings in pursuit of market share.

Rating agencies must beware of the law - It is bizarre to be reminded of the mania inside S&P and other rating agencies in the mid-2000s as they competed to satisfy banks’ demand to rate complex securities. But that was in another country and, besides, collateralised debt obligations are dead. These days, banks are reluctant to lend to prime customers, let alone anyone else. Since then, we have had a bevy of new laws designed to make rating agencies raise their standards and discourage investors from taking them too seriously. Do we really need to dig up an obscure statute from the 1980s savings and loans crisis to charge S&P within the statute of limitations, on a lower burden of proof? I am tempted to say no, let’s just move on, but I think the answer is yes. S&P could be acquitted – it denies the charge and the evidence is not conclusive. But it is clear how badly conflicted rating agencies were in the housing boom, and how weak the incentive was to behave correctly. Legal jeopardy can fill the gap, albeit belatedly. Rating agencies have faced little danger until recently, no matter how poorly they did their jobs, since they persuaded courts their ratings were nothing more than opinions, and thus protected by free-speech laws. It is no coincidence that S&P has picked as its chief US lawyer Floyd Abrams, a veteran constitutional attorney who specialises in first-amendment protection. The argument was that, since the agencies have no contract with, or fiduciary duty to, bond investors, they can publish more or less any opinion without being liable. They might be mistaken; they might be deluded; they might call something triple A steak when it’s subprime horse. Caveat emptor.

S&P Lawsuit Portrays CDO Sellers as Duped Victims - Oh, the poor suckers at Citigroup Inc. and Bank of America Corp., fooled about the stench of their own garbage by those sneaky credit raters at Standard & Poor’s. The U.S. Justice Department made some peculiar allegations in its lawsuit this week against S&P and its parent, McGraw-Hill Cos. According to the government, Citigroup was defrauded by S&P credit ratings on subprime mortgage bonds that Citigroup itself created and sold. Bank of America, too, allegedly was defrauded by S&P in the same way. If this doesn’t make sense, that’s the point. The notion is far-fetched. No wonder S&P wouldn’t agree to a settlement and told the government to see it in court. Here’s the gist. Near the end of its 119-page complaint, the Justice Department listed about two-dozen collateralized- debt obligations issued in 2007 as examples where S&P allegedly defrauded banks and credit unions. It was important that the Justice Department be able to identify such lenders as investors, because it’s suing S&P under a 1989 statute that covers frauds against federally insured financial institutions. Under the government’s theory, Citigroup and Bank of America paid S&P for ratings that convinced the banks their own CDO offal was rock-solid. And because S&P deceived them into thinking the best of their own rubbish, these banks and other lenders suffered more than $5 billion of investment losses, according to the suit.

S&P Lawsuit Fails to Take On a Defective Business Model - The temptation to cheer the federal government’s lawsuit against Standard & Poor’s for the AAA- ratings it slapped on securities that promptly blew up is understandable. S&P and other debt raters played a central role in the financial crisis of 2008 and for too long no one has managed to hold them accountable. But it’s also too bad the U.S. Justice Department didn’t find a way to take on the legal defense that’s at the heart of the ratings business: S&P, Moody’s and Fitch rely on the First Amendment to assert that their evaluations of debt securities are the equivalent of opinions, and thus constitutionally protected. The government’s lawsuit accuses S&P of falsely telling investors its ratings were accurate, independent and free of bias. Rather than deal with the First Amendment issue, the Justice Department invoked a law, adopted at the height of the savings and loan crisis in 1989, that targets fraud in cases involving federally insured financial institutions backed by taxpayers. There are some bizarre chinks in the government’s case, starting with the claim that the biggest victims of S&P’s depredations were the same banks that misled investors about the toxic securities they were peddling. To believe this line of argument, S&P fooled Citigroup Inc. and Bank of America Corp. about the quality of the very mortgage-backed securities they were creating and peddling to investors.

Credit Ratings Agencies Are Pimps of Wall Street – It’s Time to Ban Them! - Lynn Parramore - Is Eric Holder’s “See No Evil, Hear No Evil” Department of Justice finally getting serious about investigating fraud on Wall Street? At first glance, it would seem so, given the news that the Department of Justice has filed civil fraud charges against the nation’s largest credit-ratings agency, Standard & Poor’s, accusing the firm of inflating the ratings of mortgage investments and setting them up for a crash when the financial crisis struck. I suppose we ought to be grateful for these baby steps in the right direction. The ratings agencies themselves have admitted to US government enquiries recently that they took money in return for ratings that were not based on any fundamental assessments other than the cash they were being paid. They have lied about the risk of default in many corporate cases and then marked down debt when the game was up further destabilizing the financial system. Hence, to say that their behavior was at the heart of the great crisis is absolutely correct. Of course, that inevitably begets the obvious question: what took you so long and why leave it at S&P? As early as September 2004, the FBI warned that there was an “epidemic” of mortgage fraud and predicted that it would cause a financial crisis if it were not stopped. It was not contained.

National Association of Realtors tries to present FHA myths as ‘facts’ - The National Association of Realtors (NAR) is at it again. Not being satisfied with the FHA’s decades-long lending nightmare that resulted in an estimated 3.2 million dashed homeowner dreams since 1975, it is launching a new ad campaign entitled “FHA Facts”. Their “facts” are cold comfort to the half million working-class families getting loans from the FHA since 2008 who will lose their homes to foreclosure. These families will lose a sizable portion of their savings and see their credit ruined because the FHA set them up to fail. The housing lobby says that “now” is a bad time for reform. They’ve said that for over 60 years. American families who face the crushing fact of foreclosure can’t afford to wait for the housing lobby to embrace common-sense changes to restore FHA’s vital mission of providing responsible credit to working class families and first-time home buyers.

Republicans call for changes to ailing FHA - — Republicans on Wednesday argued that the financially troubled Federal Housing Administration, which may soon need a taxpayer-infused bailout, needs to be fundamentally reformed. “If FHA were a private financial institution likely somebody would be fired and somebody would be fined and the institution would find itself in receivership,” said Rep. Jeb Hensarling, Republican chairman of the House Financial Services Committee, at a hearing on the solvency of the FHA. “Instead it is merely and merrily on its way to be the recipient of the next great taxpayer bailout.” The agency insures mortgages typically made for first-time home buyers who have lower credit scores and small down payments. FHA, Fannie Mae and Freddie Mac own or guarantee more than 90% of all home mortgages. The Republican criticism comes as the agency may be close to needing its first ever taxpayer-backed bailout. The FHA’s insurance fund, at the end of 2012, was $16.3 billion short of the capital it needed to have available to cover projected future losses, according to an independent actuarial assessment conducted for the U.S. Department of Housing and Urban Development’s November annual report to Congress about FHA.

E-Mails Imply JPMorgan Knew Some Mortgage Deals Were Bad - When an outside analysis uncovered serious flaws with thousands of home loans, JPMorgan Chase executives found an easy fix. Rather than disclosing the full extent of problems like fraudulent home appraisals and overextended borrowers, the bank adjusted the critical reviews, according to documents filed early Tuesday in federal court in Manhattan. As a result, the mortgages, which JPMorgan bundled into complex securities, appeared healthier, making the deals more appealing to investors. The trove of internal e-mails and employee interviews, filed as part of a lawsuit by one of the investors in the securities, offers a fresh glimpse into Wall Street’s mortgage machine, which churned out billions of dollars of securities that later imploded. The documents reveal that JPMorgan, as well as two firms the bank acquired during the credit crisis, Washington Mutual and Bear Stearns, flouted quality controls and ignored problems, sometimes hiding them entirely, in a quest for profit.

Congress Begins Investigation of Botched Foreclosure Review Cover-Up Settlement - The more people look at the abruptly-arranged settlement of the OCC/Fed foreclosure reviews, the more they realize something does not smell right. Elijah Cummings and Elizabeth Warren have started an investigation of the settlement: Today, Senator Elizabeth Warren (D-MA) and Rep. Elijah E. Cummings (D-MD) sent a letter to Federal Reserve Chairman Ben Bernanke and Comptroller of the Currency Thomas Curry seeking documents relating to their recent settlement with mortgage servicers that ended the Independent Foreclosure Review (IFR) process. “We believe that public confidence in the settlement – the confidence necessary to speed recovery of the housing markets – will exist only if the OCC and the Federal Reserve provide additional transparency into the process used and information gathered during the Independent Foreclosure Review process,” wrote Warren and Cummings. “It is critical that the OCC and the Federal Reserve disclose additional information about the scope of the harms found to establish confidence in the sufficiency and integrity of the settlement.”…

Fresh Questions Raised Over a Bank of America Settlement - Bank of America has long rued its decision in 2008 to acquire Countrywide Financial, the subprime mortgage giant. To date, the bank has set aside some $40 billion to settle claims of mortgage misconduct that occurred before it acquired the freewheeling lender.It has been a regular refrain at Bank of America. Last month, Brian T. Moynihan, the bank’s chief executive, told Bloomberg television at the World Economic Forum in Davos, Switzerland, that carrying Countrywide was like climbing a mountain with “a 250-pound backpack.” But according to new documents filed in state Supreme Court in Manhattan late on Friday, questionable practices by the bank’s loan servicing unit have continued well after the Countrywide acquisition; they paint a picture of a bank that continued to put its own interests ahead of investors as it modified troubled mortgages. The documents were submitted by three Federal Home Loan Banks, in Boston, Chicago and Indianapolis, and Triaxx, an investment vehicle that bought mortgage securities. They contend that a proposed $8.5 billion settlement that Bank of America struck in 2011 to resolve claims over Countrywide’s mortgage abuses is far too low and shortchanges thousands of ordinary investors.

Will Federal Home Loan Banks’ Lawsuit Derail Bank of America’s $8.5 Billion Settlement? -  Yves Smith - There have been so many bailouts settlements of various bank mortgage misdeeds that it’s no doubt hard to keep them straight unless you are on this beat. But the short version is I’m delighted at this effort to throw a monkey wrench in the Bank of America settlement. It is a particularly nasty bit of self-dealing among interested parties (Bank of America, the supposed trustee for investors, Bank of New York Mellon, which had plenty of its own liability to bury), a profiteering attorney (Kathy Patrick of Gibbs & Bruns), and “investors” like the New York Fed and fund managers like Blackrock who have reason to be less than return maximizing. There is no doubt that this settlement is a screaming bargain relative to the liability that Bank of America faces on the $242 billion in principal amount of Countrywide bonds in question.  In July of 2011, six Federal Home Loan banks filed a motion demanding more information about the loans in the mortgages from the trustee, Bank of New York Mellon. Their bone of contention was that they questioned the key assumptions in the analysis that argued that the $8.5 billion amount was fair. They said that changing one key assumption would increase the fair value to $22 to $27.5 billion, and changing any of three further important assumptions would increase it even more.  Today’s piece from Gretchen Morgenson of the New York Times, which reports on a new court filing by the Home Loan banks of Boston, Chicago and Indianapolis last Friday, brings us up to date. The charges are serious.

Expert Witnesses Starting to Take on Forgeries in Foreclosures - Yves Smith - One of the things we’ve lamented since 2010, before the robosiging scandal broke, is the use of forgeries and document fabrications to remedy otherwise fatal problems with foreclosure actions, such as a lack of proper signatures on a borrower promissory note. We even once saw a case when an allonge (a separate sheet, which is required to be “firmly affixed” to the note, meant to add signatures only when there is no room left on the note) appeared at the 11th hour, with obviously questionable signatures (evidence of pixilation and shrinking to fit). But that occurred after business hours on a Thursday before a three day weekend, and effectively stymied the defense, since they could not round up a document expert quickly enough to challenge the crude forgery. It looks like document experts are finally getting their day in court. April Charney sent on this declaration by James Kelley filed in US District Court in Knoxville, Eastern District, Malin vs JP MORGAN CHASE et al. Kelly has a PhD and over 30 years of experience, including in the military. I hope readers will circulate it to people who might find it fo use. And yes, Kelley’s contact information is at the end of the declaration. Declaration of James M, Kelley

NYC Foreclosures Up 19% -- NYPost: “While foreclosures nationally fell 3 percent last year, New York City filings climbed 19 percent, or 13,116 properties, according to a new report. The outer boroughs were the hardest hit, with Queens seeing a 164 percent rise year-over-year and Staten Island rising 19 percent over the same time frame, according to RealtyTrac, which expects another spike this year. As the new numbers were released, New York Attorney General Eric Schneiderman announced a paltry $1.9 million settlement deal with robosigning giant Lender Processing Services.”

Florida Is Swamped with Foreclosures – And Deals on Distressed Homes - For deals on distressed homes, look south. According to a new study from the foreclosure-tracking firm RealtyTrac, Florida was home to 8 of the country’s top 20 metropolitan areas for highest foreclosure rates last year. By no small coincidence, 5 of the top 10 “Best Places to Buy Foreclosures in 2013″ also just so happen to be in Florida. To come up with its “Best Places”—one of the few “Best Places” lists cities would prefer to not be associated with—RealtyTrac uses data points including the number of months of inventory of foreclosure homes, the percentage of total sales that are foreclosures, and the average foreclosure discount percentage. Tally up the numbers and the hottest market for scooping up distressed properties at major discounts is the Palm Bay-Melbourne-Titusville area of Florida. By contrast, overall foreclosure activity nationally appears to have peaked in 2010, and has decreased since then in the majority of U.S. markets. Las Vegas, for instance, was named one of the worst cities for buying foreclosed homes in 2013 mainly because the market has been so hot in previous years; while a whopping 42% of home sales in Vegas are foreclosures, foreclosure filings fell 57% in 2012, and there is “only” a seven-month inventory of foreclosures currently.

Just 16% of Refinancers Increase Their Mortgage Debt - The majority of homeowners who refinance maintained or reduced their mortgage debt in the latest quarter, according to a report from mortgage-finance company Freddie Mac. Freddie Mac reported that 84% of homeowners who refinanced their first-lien home mortgage either maintained the same loan amount or lowered their principal balance by paying in additional money at the closing table, just shy of the record 85% during the fourth quarter of 2011. Of these borrowers, 46% maintained about the same loan amount, while 39% reduced their principal balance in the latest period.

Housing: Inventory down 22% year-over-year in early February - Inventory declines every year in December and January as potential sellers take their homes off the market for the holidays - and then starts increasing again in February. That is why it helps to look at the year-over-year change in inventory. According to the for (54 metro areas), overall inventory is down 22.2% year-over-year in early February and up slightly from January (on a monthly basis). This graph shows the NAR estimate of existing home inventory through December (left axis) and the HousingTracker data for the 54 metro areas through early February. Since the NAR released their revisions for sales and inventory in 2011, the NAR and HousingTracker inventory numbers have tracked pretty well.  On a seasonal basis, housing inventory usually bottoms during the holidays and then starts increasing in February - and peaks in mid-summer.  So inventory will probably increase for the next 6+ months.

MBA: Purchase Mortgage Applications Increase, Highest Since May 2010 - From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey. The Refinance Index increased 4 percent from the previous week. The seasonally adjusted Purchase Index increased 2 percent from one week earlier was at its highest level since the week ending May 7, 2010. ... The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.73 percent from 3.67 percent, with points increasing to 0.43 from 0.42 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The contract interest rate for 30-year fixed mortgages has increased for seven of the last eight weeks. This graph shows the MBA mortgage purchase index. The purchase index has increased in all but one week this year, and is now at the highest level since May 7, 2010 - and that was a spike related to the housing tax credit. The 4-week average of the purchase index is also at the highest level since May 2010Redfin: "Homebuyer Demand Takes Off in January" - From Redfin: Homebuyer Demand Takes Off in January with Home Offers up 70%, Tours up 58%

• Customers signing offers increased 70.4 percent in January, compared with an increase of 58.5 percent a year earlier.
• Customers requesting home tours were up 57.9 percent in January, compared with an increase of 52.0 percent in 2012.
The increase in homebuyer demand seen in January paired with a nation-wide inventory shortage has created an extreme seller’s market as we head into the spring home-buying and selling season. Particularly in Redfin’s Southern California markets, bidding wars involving thirty or more offers have become increasingly common. With no signs that homebuyer demand will let up any time soon, all eyes are on the nation's homeowners, builders and banks to list their homes for sale, providing some relief from this chaotic market. Note that demand always picks up in January and Redfin provides a comparison to the increase last year in their markets. I expect more inventory to come on the market over the next few months (Several potential sellers have told me they plan to list their homes soon since the market has "improved").

US Home Prices Rose Last Year by Most in 6.5 Years - U.S. home prices jumped by the most in 6 ½ years in December, spurred by a low supply of available homes and rising demand. Home prices rose 8.3 percent in December compared with a year earlier, according to a report Tuesday from CoreLogic, a real estate data provider. That is the biggest annual gain since May 2006. Prices rose last year in 46 of 50 states. Home prices also increased 0.4 percent in December from the previous month. That’s a healthy increase given that sales usually slow over the winter months.

CoreLogic: House Prices up 8.3% Year-over-year in December - Notes: This CoreLogic House Price Index report is for December. The recent Case-Shiller index release was for November. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic Home Price Index Rises for the 10th Consecutive Month in December; Biggest Year-Over-Year Increase Since May 2006 Home prices nationwide, including distressed sales, increased on a year-over-year basis by 8.3 percent in December 2012 compared to December 2011. This change represents the biggest increase since May 2006 and the 10th consecutive monthly increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 0.4 percent in December 2012 compared to November 2012. The HPI analysis shows that all but four states are experiencing year-over-year price gains. Excluding distressed sales, home prices increased on a year-over-year basis by 7.5 percent in December 2012 compared to December 2011. On a month-over-month basis, excluding distressed sales, home prices increased 0.9 percent in December 2012 compared to November 2012. Distressed sales include short sales and real estate owned (REO) transactions.This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was up 0.4% in December, and is up 8.3% over the last year.  The index is off 26.9% from the peak - and is up 9.4% from the post-bubble low set in February 2012.

Update: Seasonal Pattern for House Prices - There is a clear seasonal pattern for house prices. Even in normal times house prices tend to be stronger in the spring and early summer, than in the fall and winter. Recently there has been a stronger than normal seasonal pattern because conventional sales are following the normal pattern (more sales in the spring and summer), but distressed sales (foreclosures and short sales) happen all year. So distressed sales have had a larger negative impact on prices in the fall and winter. However, house prices - not seasonally adjusted (NSA) - have been pretty strong over the last few months - at the start of the normally weak months. This graph shows the month-to-month change in the CoreLogic and NSA Case-Shiller Composite 20 index over the last several years (Case-Shiller through November, CoreLogic through December).  The CoreLogic index has been positive in both the November and December reports (CoreLogic is a 3 month weighted average, with the most recent month weighted the most). Case-Shiller NSA turned negative month-to-month in the October report (also a three month average, but not weighted), but was only slightly negative in November.   I expect more inventory to come on the market over the next few months than during the spring of 2011 and 2012, and that might slow the price increases - but it looks like the "off-season" for prices will be pretty strong.

Trulia: Asking House Prices increased in January - Press Release: Asking Prices Up 5.9 Percent Nationally Year-Over-Year, Rents Rose 4.1 Percent  Indicating the strength of the home price recovery, asking prices rose 0.3 percent quarter-over-quarter (Q-o-Q) in January without seasonal adjustment—despite the fact that prices typically fall during the wintertime. Seasonally adjusted, prices rose 2.2 percent Q-o-Q. Moreover, prices rose 0.9 percent month-over-month (M-o-M), the highest monthly gain since the price recovery began. Year-over-year (Y-o-Y), prices rose 5.9 percent; excluding foreclosures, prices rose 6.5 percent.  With more newly-constructed multi-unit buildings coming to completion, rent gains fell behind asking price increases at the national level for the first time since the price recovery began last spring. In January, rents rose 4.1 percent Y-o-Y nationally, slowing down from 4.7 percent in July 2012. Regionally, rent gains cooled the most in San Francisco, where rents rose 2.4 percent versus 11.5 percent in July 2012.

Lawler on Housing: More Data on Cash Buyers -- From economist Tom Lawler: DataQuick reported yesterday that both the number and the share of California home sales purchased with cash (meaning no mortgage was recorded at the time of sale) hit record levels in 2012. According to DataQuick, 145,797 California condos and homes were bought without mortgage financing last year, representing a record high 32.4% of all home sales, up from 30.4% in 2011 and more than double the average “all-cash” share since 1991. Based on mailing addresses vs. property addresses, DataQuick said that “investors and vacation-home buyers” represented “roughly” 55% of all California homes purchased with cash last year. Dataquick also reported that in 2012 there were “more than” 11,700 buyers who bought more than one home for cash, and that these “multi-home, all-cash” buyers combined purchased “about” 41,450 homes, representing “about” 9.3% of total sales. Various MLS data on sales by financing indicate that the “all-cash” share of home purchases increased significantly in a wide range of markets starting in the latter part of decade, and remained high last year. Here are a few areas where either (1) local MLS produce annual stats which include data on financing type; or (2) where I went back to monthly reports.

Housing Market Already Shows Signs of a New Bubble - When housing began to simmer back in 2002, prices were rising around seven percent a year, then eight percent in 2004 and a stunning 12 percent in 2005. At the time, words like "bubble," and "unsustainable," were uttered with every monthly reading. No one had seen home prices soar like that since the mid 1970's. Historically, prices nationally rise about three to four percent a year. The market was clearly too hot, and by 2007 it had reversed dramatically, with prices falling nationally for the first time in history. Barely a year in, home prices rose over eight percent annually in December, according to a new report from CoreLogic. While still down double digits from their 2006 peak, prices are suddenly soaring again and raising some serious red flags.

Housing: Recovering, But Big Headwinds Persist - The nascent recovery of new and existing home sales may be losing some steam.

  • New home December 2012 sales were the worst year-over-year gain in 2012.
  • Pending Home December 2012 index was the worst year-over-year gain in 2012.  Pending home sales are counted when a purchase agreement is signed for an  existing home.

Both new homes sales and pending home sales are based on contract signing – while existing home sales are based on contract (closing) completion.  So both pending home sales and pending home sales offer a glimpse of the future. What is being seen is a cooling of the growth in home sales.  The evidence at this point is not strong, and could be argued it might be a transient effect. First a look at pending home sales (graph below), there was a drop in the index in December 2012. New home sales also had a drop in the the December Data.  Could this drop be a sporatic month of data (one month is not a trend).

Reflections on the Current Belief That Housing Will Come Roaring Back - You have read that the inventory of homes for sale is at the lowest level for years. According to Haver Analytics, median existing home prices rose by about 11% over the last twelve months and in the west by an even larger 20%. Most recently the Census Bureau released in December a very upbeat estimate of annualized seasonally-adjusted starts of 954,000, up over 12% from November. All this sounds wonderful and we agree that the housing market seems to have bottomed.  Starting with the simplest thing, it is hard to interpret construction numbers because “annualizing” and “seasonally adjusting” data given the extraordinary events in the housing market over the last 5 years are difficult tasks. Of that 954,000 starts cited above fully 216,000 came from the seasonal adjustment, according to Business Insider. Similarly, they stated that, over the last 12 months, we observed monthly average 67,000 permits for new privately owned housing, 65,000 starts, 54,300 completions and only 30,900 sales. Moreover, apartments represented well over 35% of total housing starts, a level over 10% more than has prevailed since the mid-1980s. The single family home market still languishes. Underneath the number are more fundamental issues that are going to take a while to resolve. First, there remains a large “potential supply” of single family homes for sale. According to BCA Research, if one adds existing homes for sale, single family homes for rent and homes held off the market for other reasons, there remain over 10 million vacant housing units or something well over 7% of the single family housing stock. Foreclosures have slowed down but still run around 1.5 million at an annual rate and delinquent mortgages have fallen but remain around 7% of all mortgages outstanding.

Robert Shiller': Home Investment A Fad - Robert Shiller, the Yale economist who nailed the housing bubble before it burst, was on Bloomberg Television with Trish Regan and Adam Johnson on Wednesday afternoon to discuss the U.S. housing market. As usual, Shiller was reluctant to declare that home prices had bottomed. He explained that the housing market is a speculative one and that there's no telling which way prices would go tomorrow. He also explained that there wasn't much reason to believe that home prices would appreciate back to levels seen during the last cycle. Regan followed up with a question that got Shiller perked up. "Then why buy a home?" she asked. "People trap their savings in a home. They're running an opportunity cost of not having that money liquid to earn a better return in the market. Why do it?" "Absolutely!" Shiller exclaimed. "Housing traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there's technical progress in housing. So, new ones are better." He continued. "So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000's. And I don't expect it to come back. Not with the same force. So people might just decide, "Yeah, I'll diversify my portfolio. I'll live in a rental." That is a very sensible thing for many people to do."

Consumer credit increases $14.6 bln in December -- U.S. consumers increased their debt in December by a seasonally adjusted $14.6 billion, the Federal Reserve reported Thursday. The increase was close to expectations. In keeping with recent trends, the surge in December credit was fueled by a jump in non-revolving debt such as student loans, personal loans and auto loans. These loans experienced an $18.2 billion jump after a $15.3 billion gain in the prior month. This is the largest gain since November 2001. Analysts have said that student loans, now captured under the federal government subcomponent, are driving credit higher. The other major category, credit-card debt, decreased $3.6 billion in the month after a $573 million increase in November. Analysts said credit card debt is not firm enough to foster a strong environment for consumer spending.

U.S. consumer credit rises, although revolving loans down (Reuters) - U.S. consumer borrowing rose in December, a hopeful sign for the strength of the economy although debt taken on through revolving facilities like credit cards fell during the month. The Federal Reserve said on Thursday consumer credit increased by $14.59 billion in December after rising by a slightly revised $15.91 billion in November. Economists polled by Reuters had forecast consumer credit rising $13.4 billion after advancing by a previously reported $16.05 billion in November. All of December's increase was in non-revolving credit, which includes auto loans as well as student loans made by the government. Non-revolving credit increased $18.22 billion during the month, the largest expansion since November 2001. Revolving credit, which includes credit cards, declined by $3.63 billion.

Fed: Consumer Credit increased $14.6 Billion in December - I rarely mention consumer credit, but the amount of credit outstanding has been steadily increasing as is normal in a recovery. This is OK if the borrowers can repay the debt, unfortunately much of the recent increase has been related to student loans - and student loan defaults are increasing. From the FedConsumer credit increased at a seasonally adjusted annual rate of 6-1/2 percent during the fourth quarter. Revolving credit was little changed, while nonrevolving credit increased at an annual rate of 9-1/2 percent. In December, consumer credit increased at an annual rate of 6-1/4 percent. Consumer credit increased $14.6 billion in December, with nonrevolving credit increasing $18.2 billion (this includes auto, student and other loans).

December Revolving Credit Slides By Most Since July As Student Loans Surge By A Record - If anyone was hoping that in the peak holiday month of December the US consumer would finally open up the purse strings and "charge" everything, we have bad news: in the last month of 2012 revolving consumer credit dipped by some $3.6 billion, a reversion of the modest increases seen in November and October, and the biggest decline in credit card debt since July of 2012. Yet overall consumer credit rose by some $14.6 billion and beat expectations of a $14 billion increase. Why? Because as we have been warning for quite a while, everyone is now piling into student debt (and NINJA Uncle Sam subprime car loans). Sure enough, non-revolving credit soared by $18.2 billion in December - a monthly record for this time series since its revision several months back - and shows that when it comes to levering up, few are using their credit cards, as increasingly more opt to rotate proceeds from their "student loans" into everyday purchases.

Vital Signs Chart: Americans Ease Up on Credit Cards - Americans put away their credit cards in December. Revolving credit, which includes credit-card debt, dropped a seasonally adjusted $3.6 billion from November to $849.8 billion. Consumer borrowing rose an annualized 6.5% in the fourth quarter on rising student and auto loans. Credit-card debt rose just 0.1%, suggesting that consumers are loath to take on more debt.

Tax Holiday Ends, Consumers Scrimp -  Most Americans who draw a paycheck saw their tax bill go up last month when a payroll-tax holiday expired. The question is whether that is prompting consumers to curb spending, just as the economy is struggling to gain traction. Some early signs suggest they are tapping the brakes. Surveys show the majority of Americans who are aware of the tax increase say they plan to cut spending, and consumer confidence has wavered. Companies like Target Corp. and women's clothier Cato Corp. say the tax increase has crimped sales. Sales figures last month were mixed. A Thomson Reuters report released Thursday showed U.S. retailers' sales growth in January was stronger than last year, but another survey, by Redbook Research, indicated January's sales growth was much weaker.  The tax increase comes at a time when consumers, who account for about two-thirds of demand in the economy, had started showing some muscle. Home buying has revived, and car sales have revved. It is possible that after the initial shock of a tax increase sinks in, consumers will just dig deeper into savings to keep spending. People also are borrowing more, but through student and auto loans, not credit cards. That suggests they remain uncomfortable about taking on debt.

Restored payroll tax pinches those with the least to spare -  Jack Andrews and his wife no longer enjoy what they call date night, their once-a-month outing to the movies and a steak dinner at Logan’s Roadhouse in Augusta, Ga. In Harlem, Eddie Phillips’s life insurance payment will have to wait a few more weeks. And Jessica Price is buying cheaper food near her home in Orlando, Fla., even though she worries it may not be as healthy.  Like millions of other Americans, they are feeling the bite from the sharp increase in payroll taxes that took effect at the beginning of January. There are growing signs that the broader economy is suffering, too.  Chain-store sales have weakened over the course of the month. And two surveys released last week suggested that consumer confidence was eroding, especially among lower-income Americans.  While these data points are preliminary — more detailed statistics on retail sales and other trends will not be available until later this month — at street level, the pain from the expiration of a two-percentage-point break in Social Security taxes in 2011 and 2012 is plain to see.

Retailers Report Strong January Sales — Major retailers including Macy’s and Limited Brands are reporting strong sales in January as shoppers went back to the stores after the winter holidays to take advantage of clearance sales.Twenty retailers reported on Thursday that revenue at stores opened at least a year — an indication of a store’s health — rose an average of 5.1 percent, according to the International Council of Shopping Centers.That’s above the mall trade group’s 3 percent estimate and marks the highest reading since August 2012 when it rose 6 percent. The worry, however, is whether shoppers, particularly budget-conscious consumers, will keep spending as they deal with rising gas prices and a payroll tax hike that took effect last month.

Payroll Taxes Hitting Home. Or Not, by Tim Duy: Last week, I posted an anecdote about employees not knowing that payroll taxes were heading up. This week I see in the New York Times:Jack Andrews and his wife are feeling the bite from the sharp increase in payroll taxes that took effect at the beginning of January. There are growing signs that the broader economy is suffering, too. Chain-store sales have weakened over the course of the month. And two surveys released last week suggested that consumer confidence was eroding, especially among lower-income Americans. Yet I also see this in the Wall Street Journal: U.S. retailers turned in strong sales for January, a time of heavy promotions to clear holiday goods and make way for early spring merchandise. January is the end of the fiscal year for most retailers, and the month serves as a good barometer of how much consumers have left over after holiday spending and provides inklings of what type of buying may lie ahead.  So which is it? How much will the tax increase weigh on the economy? Is this a case of bifurcated spending growth as higher income groups experience greater spending power via wealth impacts? Or do we simply need to wait until February to see the full impact of the tax hikes?

Restaurant Performance Index: "Softer Sales, Traffic" in December - From the National Restaurant Association: December RPI declines due to softer sales, traffic Due in large part to softer same-store sales and customer traffic levels, the National Restaurant Association's Restaurant Performance Index (RPI) declined in December. The RPI stood at 99.7 in December, down 0.2 percent from November, marking the third consecutive month in which the RPI stood below 100, which signifies contraction in the index of key industry indicators.  “Although restaurant operators reported softer same-store sales and customer traffic levels in December, they are cautiously optimistic about sales growth in the months ahead,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “However, operators remain decidedly pessimistic about the overall economy, with only 17 percent saying they expect business conditions to improve in the next six months.”  ...The Current Situation Index stood at 99.1 in December - down 0.7 percent from November and the lowest level in nearly two years. Although restaurant operators reported net positive same-store sales for the 19th consecutive month, December's results were much softer than the November performance.

Hotels: Occupancy Rate near pre-recession levels - Another update on hotels from STR: US results for week ending 2 February In year-over-year comparisons, occupancy was up 3.6 percent to 53.5 percent, average daily rate rose 6.0 percent to US$106.64 and revenue per available room increased 9.8 percent to US$57.06.  The 4-week average of the occupancy rate is close to normal levels. Note: ADR: Average Daily Rate, RevPAR: Revenue per Available Room.The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.

Weekly Gasoline Update: Prices Surge - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Prices surged over the past week. Rounded to the penny, the average for Regular rose 18 cents and Premium 17 cents. Regular is up 8.7% and Premium 7.6% since their interim lows in mid-December. With the expiration of the 2% FICA tax holiday, many household budgets will be impacted by these increases. According to, Hawaii, as usual, has the highest gasoline price, averaging $4.12, up four cents from last week. California is second at $3.92, up twenty cents from last week. At the other end of the price range, one state, Wyoming, has average prices under $3.00, down from three states last week.

Gasoline prices on the rise; may pose risk to consumer sentiment - As the winter storm pounded the Northeastern United States today, gasoline futures hit another high. The March delivery contract broke $3.06, indicating that retail prices for fuel will be going up.Already prices at the pump are the highest for this time of year. CNBC: - Nationally, retail gasoline prices have soared 11 cents in a week and nearly 30 cents in a month to $3.57 a gallon on Friday, according to AAA. Pump prices are the highest on record for early February, and are rising the fastest along the coasts. The state-wide average price of gasoline in New York is $3.92 a gallon and California gas prices on average have now surpassed the $4-a-gallon mark. Increased demand from abroad, stronger crude prices, and some refinery shutdowns are all contributing to higher prices. MarketWatch: - Consumers haven’t even seen the worst, with a perfect storm of factors driving higher prices.  Many of the issues lifting fuel prices higher are common, but they “seem to have combined at the right time,” Typically at this time of year, refineries begin their switch to the more environmentally-friendly summer-blend gasoline and perform maintenance, which “temporarily restricts supply and drives up prices,” he said.

As Gasoline's Wild Ride Begins, U.S. Paying More, Using Less - Buckle up for a wild ride. U.S. consumers are buying less gasoline and paying more for it. Prices for regular gasoline jumped 18.1 cents to $3.538 a gallon since last week, the U.S. Energy Information Administration reported Monday. That is the biggest weekly increase in nearly two years. This also comes as a sluggish economy and more fuel-efficient cars have put a lid on consumption. While less demand should cure higher prices, consumers should see little relief any time soon at the pumps. Several factors are pushing gasoline prices up. Problems with pipelines transporting crude around the nation have been the main driver of the 12% rise in U.S. crude futures over the last seven weeks. Crude is responsible for 68% of gasoline prices. Superstorm Sandy also has a lingering effect on prices at the pump. Devastation in the Northeast has delayed the replenishing of regional gasoline supplies, which has been compounded by refineries being shut down to switch from winter to summer fuel blends. The result: the EIA says mid-Atlantic inventories are 15% below the five-year average. The fact that the nation's benchmark gasoline contract--the New York Mercantile Exchange's reformulated gasoline blendstock futures--settles in N.Y. only makes matters worse. The Northeast gasoline shortage has squeezed the futures higher for the contract, which is used as a yardstick for gasoline prices across the nation.

Oil Consumption Analysis: Jobs, Robots, Manufacturing, Gas Mileage Improvement; What's the Explanation for Declining Oil Consumption? - I have posted many charts by reader Tim Wallace that highlight declining oil consumption in the US. James Beck, Lead Analyst, Weekly Petroleum Supply Team for the Energy Information Administration has also chimed in on the subject: Email From Lead Analyst, Weekly Petroleum Supply Team on Possibility of Recession. Some readers have suggested improved gasoline mileage in cars is the primary reason. However, that explanation is faulty (as Wallace and I have pointed out on numerous occasions) because mileage rates have steadily climbed over the years while the plunge in oil consumption happened abruptly at the start of the recession and never recovered. Gail Tverberg on the "Our Finite World" blog explains in her excellent post Why is US Oil Consumption Lower? Better Gasoline Mileage? Gail analyzes gas prices, miles driven, increased fuel mileage, and a decrease in industrialization. She concludes ...Decreased gasoline usage due to improved gasoline mileage amounts to 7% of the total, decreased gasoline usage because of fewer miles traveled amounts to 25% of the total, and a decrease in distillate use amounts to 17% of the savings. The majority of the decrease, 51%, comes from a decrease in the “All Other” category, which is most closely related to a decrease in industrialization.

Traffic Costs Americans $121 Billion Annually -- Americans waste $121 billion a year because of traffic congestion. AP: An annual study of national driving patterns shows that Americans spent 5.5 billion additional hours sitting in traffic in 2011. The Texas A&M Transportation Institute released a report Tuesday that found Americans are adapting to road congestion by allowing, on average, an hour to make a trip that would take 20 minutes without traffic. The Urban Mobility Report also says clogged roads cost Americans $121 billion in time and fuel in 2011. It also determined that the 10 most congested cities are Washington, Los Angeles, San Francisco-Oakland, New York-Newark, Boston, Houston, Atlanta, Chicago, Philadelphia and Seattle.The Institute provides a detailed explanation:The Planning Time Index (PTI), a measure of travel reliability, illustrates the amount of extra time needed to arrive on time for higher priority events, such as an airline departure, just-in-time shipments, medical appointments or especially important social commitments. If the PTI for a particular trip is 3.00, a traveler would allow 60 minutes for a trip that typically takes 20 minutes when few cars are on the road. Allowing for a PTI of 3.00 would ensure on-time arrival 19 out of 20 times.

ISM Non-Manufacturing Index indicates expansion in January - The January ISM Non-manufacturing index was at 55.2%, down from 55.7% in December. The employment index increased in January to 57.5%, up from 55.3% in December. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: January 2013 Non-Manufacturing ISM Report On Business®   "The NMI™ registered 55.2 percent in January, 0.5 percentage point lower than the seasonally adjusted 55.7 percent registered in December. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 56.4 percent, which is 4.4 percentage points lower than the seasonally adjusted 60.8 percent reported in December, reflecting growth for the 42nd consecutive month. The New Orders Index decreased by 3.9 percentage points to 54.4 percent, and the Employment Index increased 2.2 percentage points to 57.5 percent, indicating growth in employment for the sixth consecutive month. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. This was slightly above the consensus forecast of 55.0% and indicates slightly slower expansion in January than in December

ISM Non-Manufacturing Business Report: Slower Growth - Today the Institute for Supply Management published its latest Non-Manufacturing Report. The headline NMI Composite Index is at 55.2 percent, signaling slightly slower growth than last month's downwardly revised 55.7 percent (previously 56.1 percent). The consensus was for 55.6 percent.Here is the report summary: The NMI™ registered 55.2 percent in January, 0.5 percentage point lower than the seasonally adjusted 55.7 percent registered in December. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 56.4 percent, which is 4.4 percentage points lower than the seasonally adjusted 60.8 percent reported in December, reflecting growth for the 42nd consecutive month. The New Orders Index decreased by 3.9 percentage points to 54.4 percent, and the Employment Index increased 2.2 percentage points to 57.5 percent, indicating growth in employment for the sixth consecutive month. The Prices Index increased 1.9 percentage points to 58 percent, indicating prices increased at a faster rate in January when compared to December. According to the NMI™, eight non-manufacturing industries reported growth in January.

ISM Services Index - NMI 55.2% for January 2013 - The January 2013 ISM Non-manufacturing report shows the overall index decreased, -0.5 percentage points, to 55.2%. The NMI is also referred to as the services index and the decline indicates slower growth for the service sector.    The index also shows more inventory contraction. For those believing the Q4 GDP  inventory shed was just temporary should read on.   The comments from survey respondents can be described as upbeat, although not enthusiastically so.  New orders decreased -3.9 percentage points, business activity dropped -4.4 percentage points and new export orders popped back up by 6.0 percentage points.  Anything below 50% shows contraction for the non-manufacturing index. Below is a copy of the ISM services table, abbreviated.  Below is the graph for the non-manufacturing ISM business activity index, or current conditions, what we're doin' now meter. Business activity decreased -4.4 percentage points to 56.4%.   Here is the ISM's ordered services sector business activity list:

Services Employment Index Strongest Since 2006 - Even though January’s Institute for Supply Management headline nonmanufacturing index slipped to 55.2 from 55.7 in December, economists are encouraged by some of its underlying factors.The employment index, for instance, rose to its highest since February 2006 at 57.5. “The services side of the economy is by far the larger employment provider and the health of this component piece speaks volumes about the state of hiring,” says Andrew Wilkinson, chief economic strategist at Miller Tabak. Other key gauges, such as business activity and new orders, might have declined, but remain firmly in expansionary territory above 50.

ISM Manufacturing Index - PMI 53.1% for January 2013 - The January 2012 ISM Manufacturing Survey shows PMI increased by 2.9 percentage points to 53.1% and is in  expansion for the 2nd month in a row. This is the 4th time in eight months manufacturing PMI has been in expansion. Overall the report is actually modest expansion, although all five indexes which make up PMI were on the positive side.  This month's ISM report comments from manufacturing survey responders are all about our government and their magical ability to screw up the economy.  Four of the nine comments are reporting depressed demand and uncertainity due to the government.   Food, Beveridge and Tobacco mentioned the lasting effects of last year's drought. Midwest drought impact will be felt at least through midyear. New Orders showed  increased 3.6 percentage points to 53.3%. New Orders inflection point, where expansion turns into contraction, isn't exactly 50% for the long term, it is 52.3%. This implies while the monthly new orders is growing, but the 1st month for long term growth.   From the ISM: A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders. The Census reported manufactured December durable goods new orders growth was 4.6%, where factory orders, or all of manufacturing data, will be out this week. The ISM claims the Census and their survey are consistent with each other. To wit, below is a graph of manufacturing new orders percent change from one year ago (blue, scale on right), against ISM's manufacturing new orders index (maroon, scale on left) to the last release data available for the Census manufacturing statistics. Here we do see a consistent pattern between the two.

Orders to U.S. Factories Rose Less Than Forecast in December - Bloomberg: Orders placed with U.S. factories increased less than forecast in December, reflecting a drop in non-durable goods that partly countered gains in construction equipment and computers.  Bookings climbed 1.8 percent after a revised 0.3 percent drop in November that was initially reported as unchanged, figures from the Commerce Department showed today in Washington. The Bloomberg survey median called for a 2.3 percent gain. Demand for durable goods increased 4.3 percent, little changed from a 4.6 percent gain estimated last week, while non-durables dropped 0.3 percent on declines in petroleum and tobacco.A fourth-quarter pickup in consumer spending is spurring companies including automakers such as Chrysler Group LLC and Ford Motor Co. (F), reviving a manufacturing industry that cooled in the second half of 2012. The acceleration extended into January, according to a gauge last week that showed factories expanded at the strongest pace in nine months.

Factory Orders Rise 1.8 Percent but Miss Forecasts: U.S. factory orders increased in December even though companies trimmed their orders for goods that signal investment plans. The Commerce Department said factory orders rose 1.8 percent in December compared to November, when orders had fallen 0.3 percent. Economists polled by Reuters had forecast a rise of 2.2 percent in factory orders for December. Demand for core capital goods, a category considered a proxy for business investment plans, dipped 0.3 percent in December following strong gains of 3.3 percent in November and 3 percent in October. Orders for durable goods, items expected to last at least three years, rose 4.3 percent, slightly below the 4.6 percent estimated in a preliminary report. The increase reflected strong gains for military and civilian aircraft. Orders for non-durable goods such as petroleum products, chemicals and paper, declined 0.3 in December after a 1 percent drop in November.

Factory Orders Increase 1.8% for December 2012 -- The Manufacturers' Shipments, Inventories, and Orders report shows factory new orders increased 1.8% for December.  Without transportation equipment, new orders increased 0.2%.  November showed a -0.3% decline whereas October had a 0.8% increase.   The Census manufacturing statistical release is called Factory Orders by the press and covers both durable and non-durable manufacturing orders, shipments and inventories. Transportation equipment new orders increased 11.7% and that was all aircraft and boats. Vehicles bodies & parts new orders declined by -1.2%.   Manufactured durable goods new orders, increased 4.3% for December.  November durable goods showed a 0.6% increase whereas October had a 1.1% increase in durable goods new orders. Defense communications equipment new orders jumped 30.0% in December. Nondurable goods new orders decreased -0.3% for December, November nondurable new orders declined -0.1% and October showed a 0.5% increase. Nondurables aren't doing so swell for Q4 2012. Core capital goods new orders decreased -0.3% for December after 3.3% and 3.0% increases for the two months previous. Core capital goods are capital or business investment goods and excludes defense and aircraft.Defense capital goods on the other hand, showed a 110.3% increase in December. Graphed below are the revised durable goods news orders. Markets jump on the advance report for durable goods new orders, even though it is revised almost always a week later as statistics are more complete for the month. Notice that durable goods new orders are below pre-recession 2008 levels.

Factory Orders Ex Transports Post First Annual Decline Since July - Today's December factory orders data came as a surprise to those expecting a whopping beat of expectations in the aftermath of the superficial beat in the Durable data released last week. Instead, the headline Factory Orders missed expectations of a 2.2% rise, growing just 1.8% in December, with the November data revised lower from 0% to -0.3%. Worse news was that Factory Orders ex the meaningless and volatile transportation number (see Dreamliner), rose just 0.2% in the last month of 2012, after declining 0.2% in November. Yet the ugliest number of the day was the year over year change in factory orders ex transports, which is perhaps the best coincident indicator of general business spending, and in line with the non-defense capital goods ex aircraft series from the Durables report. This posted a -0.2% nominal drop in December, the first decline since July. All those hoping that the freeze on capital spending increases will thaw any time soon, can put all such hopes back in carbonite where they belong.

Vital Signs Chart: Increase in Manufactured Goods Orders - Orders for manufactured goods rose in December, largely because of higher military spending linked to concerns about potential cutbacks. The value of new orders for the month climbed 1.8% to $484.76 billion, the Commerce Department said. But excluding defense, orders increased just 0.3%. Demand for nondefense capital goods excluding aircraft, a gauge of corporate investment, fell 0.3% instead of rising 0.2% as previously estimated.

Analysis: Defense Spending Related to Fiscal Cliff Boosts Factory Orders - IHS Global Insight Chief Economist Nariman Behravesh talks with Jim Chesko about this morning’s report showing that U.S. factory orders rose 1.8% to $484.76 billion in December, boosted by a surge in defense spending amid concerns related to the “fiscal cliff.” Excluding defense, factory orders were up just 0.3% in the month

Boeing New Aircraft Orders Implode From 183 To Just 2 In January - After the now several week old exploding battery fiasco, Boeing is nowhere closer to resolving the recurring problem for its appropriately renamed Nightmareliner. But the worst for the company may be yet ahead: as the following chart from Stone McCarthy shows, January new aircraft orders collapsed from 183 in December to a meaningless 2 in January: a seasonally strong month, with some 150 orders a year ago, and more weakness to come as Boeing just warned its first Norwegian delivery due in April may be delayed. But while it was expected that the company's quality control failure would eventually catch up to it, the broader implication is that this month's Durable Goods number, released February 27 and of which transportation is always a key variable at least at the headline level, will be a disaster.

No Evidence of U.S. Manufacturing Revival - First the surprising good news: For the past 13 years, the rate of factory closings in the U.S. has been declining. The bad news is that over that time the rate of ribbon cuttings on new operations have consistently fallen even more.  In other words, on top of having to compete with cheaper foreign rivals, America’s factories have a demographic problem — more deaths than births. Recent signs of renewed vigor in U.S. manufacturing haven’t reversed that trend, at least not yet. In a new report, the Manufacturers Alliance for Productivity and Innovation, notes that on average 3.5% of all U.S. factories were closed in each quarter over the last 13 years. The corresponding number for plant openings: 2.9%.

AAR: Rail Traffic "mixed" in January - From the Association of American Railroads (AAR): AAR Reports Mixed Rail Traffic for January, and Week Ending February 2: Intermodal traffic in January 2013 totaled 1,168,630 containers and trailers, up 5.3 percent (58,303 units) compared with January 2012. Carloads originated in January totaled 1,339,604 carloads, down 6.3 percent (90,199 carloads) compared with the same month last year. Carloads excluding coal and grain were up 1.8 percent (12,731 carloads) in January 2013 over January 2012. In January, six of the 20 commodity groups posted increases compared with the same month last year, including: petroleum and petroleum products, up 54.1 percent or 22,892 carloads; crushed stone, gravel and sand, up 6.1 percent or 4,732 carloads, and lumber and wood products, up 14.6 percent or 2,032 carloads. Commodities with carload declines in January were led by coal, down 14.5 percent or 91,593 carloads; grain, down 11 percent or 11,337 carloads, and iron and steel scrap, down 18.7 percent or 4,675 carloads.This graph shows U.S. average weekly rail carloads (NSA).  Green is 2013. Excluding coal and grain, U.S. rail carloads were up 1.8% (12,731 carloads) in January 2013 over January 2012 Note that building related commodities were up. The second graph is for intermodal traffic (using intermodal or shipping containers):

It's the Trade Deficit, Stupid! - Congress is focused on all the wrong things to get people back to work.  We hear day after day the drone of budget deficits, yet not a word is mentioned on the trade deficit.   This is the problem Congress should be obsessed with.   Our massive trade deficit is stunting economic growth and costing America millions of jobs. EPI has a new study which shows once again, reducing the trade deficit will create American jobs.  The number one cause of our massive trade deficit is currency manipulation.  The figures are astounding.   EPI estimates 20 countries, developed and underdeveloped, made off with $700 billion more in trade by manipulating their currency in 2011. This cost the United States $400 billion in additional trade deficit for the same year.  That's a hefty amount of cash. The U.S. could stop currency manipulation with a just say no program and this doesn't even require Congress.  An executive order could declare currency manipulators can not buy U.S. assets, period.  This would stop currency manipulation in it's tracks.  Manipulators need to buy U.S. assets, in particular U.S. Treasury bonds, to keep their currencies undervalued,.  We explained the mechanics of currency manipulation and why other countries buy up U.S. assets in this article.

US Trade Deficit Drops To Lowest Since January 2010 As Crude Imports Plunge To 1997 Levels - Following November's massive trade deficit surge, when the final print of $48.7 billion was far worse than the $41.3 billion expected, it was only (il)logical that the December trade number would reverse this trend to the other extreme, which it did with the December trade balance plunging from a revised $48.6 billion to a tiny $38.5 billion - the lowest deficit since January 2010, and the biggest beat to expectations of $46 billion since February 2009. The deficit was the result of December exports which were $3.9 billion more than the $182.5 billion in November, and imports some $6.2 billion less than November's total $231.1 billion. Broken down by category, the goods deficit decreased $9.4 billion from November to $56.2 billion, and the services surplus increased $0.7 billion from November to $17.7 billion. A key driver of this move was a spike in Petroleum exports which shrunk the Petroleum product trade gap to the smallest it has been since August 2009 as the US imported the least amount of crude oil since February 1997. Whether this is due to rising domestic production, or just the ongoing collapse in end demand (which is to the US economy as electricity is China's traditional "8%" GDP) remains unclear.

Trade Deficit declined in December to $38.5 Billion - The Department of Commerce reported[T]otal December exports of $186.4 billion and imports of $224.9 billion resulted in a goods and services deficit of $38.5 billion, down from $48.6 billion in November, revised. December exports were $3.9 billion more than November exports of $182.5 billion. December imports were $6.2 billion less than November imports of $231.1 billion.The trade deficit was much smaller than the consensus forecast of $46.0 billion.The first graph shows the monthly U.S. exports and imports in dollars through December 2012.Exports increased in December, and imports decreased. Exports are 10% above the pre-recession peak and up 4.8% compared to December 2011; imports are near the pre-recession peak, and down 2% compared to December 2011. The second graph shows the U.S. trade deficit, with and without petroleum, through November. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. The decrease in the trade deficit in December was due to both a decline in petroleum and non-petroleum products. Oil averaged $95.16 in December, down from $97.45 per barrel in November. But most of the decline in the value of petroleum imports was due to a sharp decline in the volume of imports. The trade deficit with China increased to $24.5 billion in December, up from $23.1 billion in December 2011. Most of the trade deficit is still due to oil and China.

Trade Deficit Plunges by -20.7% on Oil and Gold for December 2012 - The U.S. December 2012 monthly trade deficit imploded by -20.7% to $38.54 billion.  This is the lowest monthly trade deficit since January 2010 when global trade was still affected by the recession.  We estimate Q4 GDP will be revised significantly upward as a result. December's U.S. exports increased $3.88 billion or 2.1%. Imports declined by -$6.29 billion which is a drop of -3.1% from last November and the largest monthly percentage change since February 2012.  The three month moving average gives a trade deficit of $43,1 billion and a decrease of $0.61 billion.  This is a -1.4% decline in the quarterly moving average of the trade deficit., which goes to show the monthly variance isn't necessarily something to be alarmed about.  Adjusted for prices, just the three month moving average goods part of the trade deficit by a Census accounting basis, in real dollars, gives a 1.1% annualized increase.  Both of these moving averages imply Q4 GDP trade component will be revised significantly upward. .  Real exports quarterly annualized increase for just goods is now +5.9%.   Real goods imports quarterly annualized change is now -3.5%.   From the advance GDP report, real goods imports quarterly annualized change was reported as  –2.7% and real goods exports Q4 annualized change was -7.9%.  If other elements of GDP remain the same, which they will not in the Q4 revision including inventories, Q4 GDP will turn positive and reflect growth.  Graphed below are imports vs. exports of goods and services. To state the obvious, imports subtract from GDP and exports add and why trade deficits matter.

Analysis: So Much for That GDP Contraction - The U.S. trade gap narrowed sharply in December, the biggest deficit contraction in nearly four years. The unexpected decline likely means last week’s reported contraction in GDP will be revised to a positive number. Petroleum imports fell to the lowest level in more than a decade. The deficit decreased nearly 21% to $38.54 billion from a revised $48.61 billion the month before, the Commerce Department said Friday morning. Chief Economist Robert Brusca of Fact & Opinion Economics discusses the report with the Wall Street Journal Online’s Jim Chesko.

Number of the Week: Expect Wider Trade Gap in 2013 - $2.196 trillion: The total value of U.S. exports in 2012. The U.S. looks set to grow faster than most advanced economies in 2013, but there’s a downside to being the cleanest dirty shirt in the laundry pile: a wider trade deficit. The Commerce Department reported Friday that the U.S. trade deficit narrowed sharply in December, to $38.5 billion from $48.6 billion and far below the $45.5 billion expected by economists. After adjusting for prices, the real trade gap stood at $44.14 billion. For all of 2012, the inflation-adjusted deficit shrank 1.1%, which suggests revisions will show net exports added slightly to yearly GDP growth from no impact as currently estimated. But the narrowing is likely to reverse this year. The U.S. is expected to grow faster than most of its major trading partners. According the International Monetary Fund, the U.S. should grow about 2.0% this year, better than Canada [which is forecast to grow 1.8%], the euro zone [-0.2%], Japan [1.2%], and the U.K. [1.0%]. Emerging markets such as China and Latin America will grow faster than their industrialized counterparts, says the IMF. But at a collective 5.5%, growth won’t be robust. The differences in growth rates around the world mean the U.S. will absorb more imports, but have less demand for its exports.

Investment-Unemployment Link Still On Track - When the recovery was getting started I pointed out the remarkably strong inverse relationship between fixed investment as a share of GDP and the unemployment rate, and argued that a policy that focused on getting businesses to invest more would help get the unemployment rate down.  The additional data from the past several years gives us a chance to check whether that relationship has held up. As shown in the following two charts, it has held up quite well.  The first time series chart shows that as investment has turned up as a share of GDP, the unemployment rate has fallen.  The increase in fixed investment thus far has been largely in the form of business fixed investment, though residential started to pick up last year.  The second chart is a scatter plot with unemployment on the vertical axis and the investment ratio (in percent) on the horizontal axis. The lines connecting each quarterly observation represent the path from one quarter to the next. The chart illustrates the close correlation between the two variables. It also shows that the movement of unemployment and the investment ratio during the recovery (the recent dates are marked) has roughly paralleled the path in the recession, but in the reverse direction.

The Super Bowl Power Outage and Our Terrible Infrastructure - There was a 30 minute black out during the Super Bowl last night, which seems like an appropriate time to bring up the terrible state of the US' infrastructure. Here's the report card of the US' infrastructure:

America's Infrastructure GPA: D. Estimated 5 Year Investment Need: $2.2 Trillion.  Would this be a great way to lower unemployment and get the economy moving again?  It did work for China, after all.

American Society of Civil Engineers Estimates $1.8 Trillion as Cost of Failure to Act to Fix U.S. Infrastructure by 2020: The American Society of Civil Engineers released its estimate of the cost to U.S. businesses and households by 2020 if the nation fails to invest in five areas of infrastructure in a press teleconference today. This "5th of 5 Failure to Act" report emphasizes the cumulative, interactive effect of the infrastructure deficits on each other: for example, the best port technology is hollow if goods are offloaded to backward surface transportation systems. There must be investment "across infrastructure systems," according to ASCE.  ASCE's "Failure to Act" report estimates that the percent of funding needed, versus the investment projected, will produce the following "funding gaps" by area in 2020:  Funding gaps by 2020—Surface Transportation: 49% of what is needed; Water/Wastewater: 67%; Electricity 15%; Airports 29%; Inland Waterways & Marine Ports 53%.

ASCE projects, "By 2020, the economy is expected to lose almost 3.5 million jobs," and the average household in the U.S. will lose more than $3,000 each year through 2020.

Imbalance in the infrastructure debate - Joseph's previous post builds on this thread from Mark Thoma. Each is worth reading but I think both understate the extraordinary asymmetry between the pro and con in the should-we-spend-on-infrastructure debate (distinct from the where-to-spend debate). Consider the following statements:
1. We need to repair and upgrade the country's infrastructure in the relatively near future (let's say a decade)  So far as I can tell, almost no one is willing to stand up and argue against this point.
2. The economy is not operating at full capacity. We've already stipulated that we need to build these things which means we've also agreed to tolerate at least some crowding out at some point in the future. You simply can't have one without the other; you can only seek to minimize the effect.

3. Borrowing costs for the federal government are historically low.  As a general rule, repairs don't get cheaper the longer you put them off. This tends to put the burden of proof on those arguing for a delay.

Meyer on Construction Jobs - Last week I posted an article from Trulia chief economist Jed Kolko: Here are the “Missing” Construction Jobs.  Here is another projection from Merrill Lynch economist Michelle Meyer: Construction Coming Back: One of the puzzles last year was the lack of hiring in the construction sector. Despite a 25% gain in housing starts, only a net 18,000 construction jobs were added for the year. This seemed too low, and we learned that evidently it was. The revisions yielded another 73,000 construction jobs in 2012 and 75,000 in 2011, bringing the total to 91,000 and 144,000, respectively.We think construction hiring will ramp up this year. The best way to forecast construction jobs is to look at the lagged impact of housing starts or residential investment. This comparison is easiest if we adjust construction employment for the size of the labor force. We find that the correlation between construction jobs and housing starts is the highest at 72% when housing starts are lagged by five quarters (Chart 2). Since housing starts reached a trough in 1Q11, construction jobs should have turned higher last spring. We saw some gains, but only very modest ones (which we learned after last month’s revision). The gain in housing starts accelerated in 2012, suggesting a faster pickup in construction jobs this year.

U.S. productivity down 2.0 percent in fourth quarter - U.S. nonfarm business sector labor productivity decreased at a 2.0 percent annual rate during the fourth quarter of 2012, the U.S. Labor Department reported Thursday. The decrease reflects increases of 0.1 percent in output and 2.2 percent in hours worked, during the October-December period last year. Unit labor costs, the ratio of hourly compensation to labor productivity, rose 4.5 percent in the fourth quarter. Productivity measures the amount of output per hour of work. Increasing productivity can slow job creation because it means companies can get more out of their current staff without hiring more workers

Slower Productivity Will Limit U.S. Prosperity - Last quarter was a complete mess for businesses and governments: they hired 603,000 workers but didn’t increase the amount of products they put out. That is one interpretation from the most recent set of data, and it is most likely a wrong reading that will fade away when data are revised.Last week, the Commerce Department said fourth-quarter real gross domestic product fell slightly. On Thursday, the Labor Department reported that with output nearly flat and hours worked up 2.2%, productivity–output per hour worked–fell at a 2% annual rate in the fourth quarter.

USPS Set to Stop Saturday Mail, Online Sellers Get Reprieve: Online sellers worried about a move to 5-day package delivery of USPS mail may get some relief. The Postal Service Board of Governors is meeting today, and one of the likely topics of discussion - a change to Saturday delivery that has been rumored for a long time. It looks like the official word on the change should happen ahead of that meeting according to USA Today and others. Effective August 2013, mail delivery on Saturdays will cease. However, the package delivery side of the US Postal Service business will continue to have a six day a week schedule. Delivering packages, such as those generated by ecommerce businesses, has proven a bright spot in the Postal Service's otherwise challenging business model. Email and similar fast and cheap ways to keep in contact with others, and even to send business documents, has carved into the Postal Service's revenue for years. There simply isn't a way that a company that depends on people driving trucks from point to point can match the instantaneous fulfillment of email or texting. A substantial cost savings is on the horizon should the planned Saturday cutback take place. The Postal Service is looking at an annual savings of around $2 billion a year should they cease Saturday mail delivery.

Post Office To Eliminate Most Saturday Mail Delivery - The Saturday visit from your mail carrier is about to come to an end: (AP) — The U.S. Postal Service will stop delivering mail on Saturdays but continue to deliver packages six days a week under a plan aimed at saving about $2 billion, the financially struggling agency says. In an announcement scheduled for later Wednesday, the service is expected to say the Saturday mail cutback would begin in August. The move accentuates one of the agency’s strong points — package delivery has increased by 14 percent since 2010, officials say, while the delivery of letters and other mail has declined with the increasing use of email and other Internet use. Under the new plan, mail would still be delivered to post office boxes on Saturdays. Post offices now open on Saturdays would remain open on Saturdays.

The Post Office gets tough with Congress - The fight between the Post Office and Congress is a very peculiar one. Normally, when the government owns some incredibly profligate business, it’s Congress which tries to impose efficiency gains and fiscal discipline, while the business insists that all of its spending is absolutely necessary and that it has already cut to the bone. In this case, however, the roles are reversed: the Post Office wants to change, and it’s Congress which is stopping it from doing so.The latest move from the Post Office is a bold one: to abolish Saturday delivery unilaterally, starting August 1. As Jesse Lichtenstein details in his amazing 10,000-word Esquire story about the Post Office, the organization does actually have a detailed plan for becoming fully self-reliant over the next few years. Abolishing Saturday delivery is just one small part of that plan; all of it, by law, requires Congressional buy-in. The plan may or may not be successful, but, as they say, plan beats no plan. The big problem is simple, but huge: Congress isn’t playing along, and instead is just making matters worse, unhelpfully micromanaging everything from postage rates to delivery schedules to health-care contributions.

Is the Post Office Breaking the Law by Eliminating Saturday Delivery? - In the past, the Postal Service — technically a quasi-governmental agency with Congressional oversight — has argued that it would need explicit authorization from Congress to eliminate Saturday delivery. In fact, the U.S.P.S. website still says, “Congress must elect not to renew the legislation requiring the Postal Service to deliver six days a week.” But on Wednesday, Donahoe essentially announced that he’s doing it without the blessing of Congress. ”We think we’re on good footing with this,” he said. “We think right now the opportunity exists to make the changes on our own.” In particular, Donahoe says the move is legal under the “continuing resolution” that is temporarily keeping the entire federal government from shutting down in the wake of the fiscal cliff impasse. Donahoe did not get more explicit than that, but a close reading of the continuing resolution suggests that he’s technically correct.  Congress has yet to produce an appropriations bill for fiscal year 2013. In the meantime, the federal government is operating under the continuing resolution, which expires in March. And the continuing resolution does not include any language requiring 6-day delivery.

Condemning the U.S. Postal Service’s Move to End Saturday Delivery - by Ralph Nader - The U.S. Postal Service (USPS) today continued its tradition, under the leadership of Postmaster General Patrick Donahoe, of shooting itself in the foot. The only question that remains is: When will the madness end? By ending Saturday letter delivery in August 2013, as the USPS has proposed, millions of customers who take advantage of its services will be harmed, mail service will be slowed, and the USPS’s current death spiral will deepen. It is unclear where Postmaster General Donahoe thinks he has the authority to make this change without Congressional approval. In making the move to end Saturday letter delivery, Postmaster General Donahoe has not only shown his complete disregard for the good of the USPS’s consumers, but he has also ignored the will of Congress. For decades, Congress has mandated six-day delivery. Congress must act to protect rural communities, small businesses, the elderly, and the disabled, among others by reasserting its authority over the U.S. Postal Service and stopping it from making such an irresponsible decision. Photo: Rusty ClarkPostmaster General Donahoe would have us believe that this is one of many tough decisions that must be made to save the USPS, but nothing could be further from the truth. These are the decisions that are made by a leader without a clue and without a sense of what it takes to right the ship. He has ignored calls to implement ways of expanding postal services, many of which have been urged by the Postal Regulatory Commission.

Postal Cuts Are Austerity on Steroids - The austerity agenda that would cut services for working Americans in order to maintain tax breaks for the wealthy—and promote the privatization of public services—has many faces. Most Americans recognize the threats to Social Security, Medicare and Medicaid as pieces of the austerity plan advanced by House Budget Committee chairman Paul Ryan (R-WI), and the rest of the Ayn Rand–reading wrecking crew that has taken over the Republican Party. But it is important to recognize that the austerity agenda extends in every direction: from threats to Food Stamps and Pell Grants, to education cuts, to the squeezing of transportation funding. But the current frontline of the austerity agenda is the assault on the US Postal Service, a vital public service that is older than the country. And it is advancing rapidly. On Wednesday, the Postal Service announced that Saturday first-class mail delivery is scheduled for elimination at the beginning of August—the latest and deepest in a series of cuts that threatens to so undermine the service that it will be ripe for bartering off to the private delivery corporations that have long coveted its high-end components.

U.S. Postal Service loss shrinks to $1.3 billion in October - December: (Reuters) - The U.S. Postal Service lost $1.3 billion in the October through December quarter, officials said on Friday, days after the beleaguered mail agency announced plans to cut back on Saturday delivery to save money. The Postal Service lost $3.3 billion in the same period a year earlier. This year, extra mail tied to the November elections and stronger revenue from holiday-related packages contributed to a better quarter, USPS Chief Financial Officer Joe Corbett said. But he said the Postal Service still expects to face extremely low levels of cash during 2013. "The need for such cost-saving initiatives like five-day mail delivery are borne out by the continuing loss of first-class mail and the resulting deep and unsustainable financial losses," Corbett said on Friday. "We cannot continue to operate on a precipice," he said. The mail service has been grappling with tumbling mail volumes as Americans communicate more online, and has struggled under the weight of massive required payments for future retiree health benefits. The Postal Service defaulted last year on two payments to the federal government and lost almost $16 billion during the fiscal year.

The Never Ending Little Changed Unemployment Figures for January 2013 - For months now, the words which describe the jobs crisis are little change. It is like the United States is stuck in time when it comes to the never ending dire unemployment statistics.  The BLS employment report shows a 7.9% unemployment rate for January. December's unemployment rate was 7.8%.  January also incorporates annual adjustments in the unemployment statistics.  This article overviews and graphs the statistics from the Current Population Survey of the employment report.  The biggest mistake some in the press make is to compare the December to January unemployment statistics directly.  Due to annual adjustments that cannot be done, as we explain in this post.  Fortunately the BLS offers a table estimating what the December to January changes are after removing their population controls.    The unemployment rate ticked up 0.1 percentage points to 7.9%, those employed decreased by -110,000, another 117,000 people joined the ranks of the official unemployed and yet 167,000 more were considered not in the labor force at all.  The labor participation rate stayed the same 63.6%. The labor participation rate is at artificial lows, where people needing a job are not being counted. No change isn't good actually for it means that those who dropped out of the labor force are staying out of the labor force. For those claiming the low labor participation rate is just people retired, we proved that false by analyzing labor participation rates by age.The number of employed people is now 143,322,000 employed people in the U.S. That is almost static in terms of labor flows, although this figure varies widely from month to month. Below is a graph of the Current Population Survey employed.

Stagnation Dominates U.S. Employment Situation - According to the January 2013 Employment Situation Report, the U.S. economy added just 17,000 jobs for individuals Age 16 or older in the month from December 2012 to January 2013. Or more technically, in the month from the week including 12th day of December 2012 to the week including the 12th day of January 2013. (Click the image below for a larger view.) Breaking that change down by age group, we find that the biggest gain in jobs for the month was enjoyed by U.S. teenagers, as individuals Age 16-19 saw their numbers in the U.S. workforce increase by 106,000 to reach a total of 4,508,000.  But you can't have a gain of 106,000 workers between the ages of 16 and 19 and only a net gain of just 17,000 people in the workforce for the month unless a lot of other people exited the workforce. All of those people, it would seem, were young adults between the ages of 20 and 24.  Here, the number of Age 20-24 individuals in the U.S. workforce declined by 99,000 in the month from December 2012 to January 2013, bringing the number of employed young adults in the United States to 13,471,000. Older adults fared somewhat better, as those Age 25 or older saw their numbers in the U.S. workforce increase by 10,000 to 125,343,000.

At this pace, the U.S. won’t get back to full employment until 2022 - The jobs numbers have been crunched and re-crunched, and it turns out that the U.S. economy added an average of 181,000 jobs per month in 2012. That’s a faster rate than in 2011 or 2010. But it’s also relatively sluggish, given the deep, deep hole the economy is still in. If the United States keeps adding 181,000 jobs per month, then it will take nine years and three months to get back to full employment, according to the Hamilton Project’s jobs calculator: Where does that number come from? Right now, there are 12.3 million unemployed Americans. When the economy was running at full blast at the end of 2007, there were just 7.7 million unemployed — in transition or switching between jobs, say. But on top of that, the population also keeps growing, currently adding about 88,000 new people to the labor force each month. Put all that together, and it will take about 9 years to close the “jobs gap” — to get back to the ratio of payrolls to working-age population that prevailed back in December 2007.

Seasonal Adjustments Are B.S. - I Can Handle The Truth On Employment - The recent release of the January employment figures sent the media and blogosphere abuzz with a wide variety of arguments revolving around seasonal adjustments, birth/death adjustments, household versus survey data and much more. The arguments supporting, and rebuking, the employment numbers are well documented. My friend Doug Short always does a thorough job of analyzing the data as it is presented by the BLS and is worth a read for the broad overview. I am growing weary of having to parse data to strip out various anomalies, adjustments and guesses to divine what the underlying data is really telling me about the economy. As opposed to Jack Nicholson's famous line - when it comes to economic data "I can handle the truth."  For example, while Doug points out that 157,000 jobs were created in January the actual data shows a decline of 2.84 million. This discrepancy is due to the termination of temporary seasonal hires for the holiday shopping season. It happens every year so in order to "smooth" out these seasonal variations the BLS literally adds jobs back, which for the month of January, amounted to the addition of 2.12 million artificial employees. This is simply a raw "guess." However, the torturing of the data does not stop there as the BLS then adds/subtracts an estimate of the number of businesses that were opened, or closed, during the month. This monthly birth/death adjustment, which added 314,000 jobs in January, is a complete guess and is highly subject to bias. When these issues are then combined with other reporting issues, such as not counting individuals that have unemployed longer than 52 weeks even though they can collect unemployment for 99 weeks, the calculation and reporting of the real unemployment picture becomes very cloudy. Where is the truth?

Weekly Initial Unemployment Claims at 366,000 - The DOL reportsIn the week ending February 2, the advance figure for seasonally adjusted initial claims was 366,000, a decrease of 5,000 from the previous week's revised figure of 371,000. The 4-week moving average was 350,500, a decrease of 2,250 from the previous week's revised average of 352,750. The previous week was revised up from 368,000. The following graph shows the 4-week moving average of weekly claims since January 2000.

Weekly Unemployment Claims Fall, But Less Than Forecast -  The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 366,000 new claims number was a 5000 decline from the previous week's 371,000, an upward adjustment to the previously reported 368,000. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, declined from an upwardly adjusted 352,750 to 350,500. Here is the official statement from the Department of Labor: In the week ending February 2, the advance figure for seasonally adjusted initial claims was 366,000, a decrease of 5,000 from the previous week's revised figure of 371,000. The 4-week moving average was 350,500, a decrease of 2,250 from the previous week's revised average of 352,750.  The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending January 26, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending January 26 was 3,224,000, an increase of 8,000 from the preceding week's revised level of 3,216,000. The 4-week moving average was 3,211,000, an increase of 13,750 from the preceding week's revised average of 3,197,250.  Today's seasonally adjusted number was above the consensus estimate of 360K, 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.

Retail Workweek Hits 3-Year Low In ObamaCare Shift - The fly in the ointment of January's jobs report was the apparent shift to part-time work ahead of a key ObamaCare deadline. Although retail payrolls grew by 32,600, total hours worked in the industry dipped, Labor Department data out Friday showed. The explanation? Rank-and-file retail workers logged the shortest workweek since early 2010: just 30.1 hours, on average, vs. 30.4 in December. Remarkably, aggregate hours worked in the retail sector fell below their January 2012 level, even though industry payrolls are up 200,000 over that period. A similar trend showed up in leisure and hospitality: January payrolls rose by 23,000 even as aggregate hours dipped 0.3%. Meanwhile, the ranks of part-time workers due to business conditions or because they can't find full-time work, trending lower in the past few years, rose by 212,000 to 7.8 million.

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

Graphs for Duration of Unemployment, Unemployment by Education and Diffusion Indexes - This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. The general trend is down for all categories, but only the less than 5 weeks is back to normal levels. The the long term unemployed is at 3.0% of the labor force - and the number (and percent) of long term unemployed remains a serious problem. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). down. Although education matters for the unemployment rate, it doesn't appear to matter as far as finding new employment (all four categories are only gradually declining). Note: This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed". This is a little more technical. The BLS diffusion index for total private employment was at 59.6 in January, down from 64.5 in December. For manufacturing, the diffusion index decreased to 48.1, down from 54.9 in December. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS

Makers vs. Takers: An Update - The last election cycle brought a lot of talk about “makers versus takers” in America: a dichotomy featuring entrepreneurial, taxpaying, self-reliant Americans who work hard and keep the economy going, as opposed to those who mooch off the government. As I reported in an article in Thursday’s paper, though, a new survey suggests that even those who might have the greatest cravings for government cheese still subscribe to more of a bootstrap mentality. The survey was conducted in January by the Heldrich Center for Workforce Development at Rutgers University. Asked about who should be “mainly responsible” for helping people who are laid off from work, just a quarter of people said the government. Another 42 percent said workers themselves, and 32 percent named employers. (And as you can see in the chart below, Americans are less likely to say that the government is mainly responsible for the displaced today than they were when asked in August 2010.)

Rings of Unemployment - Four out of five Americans know relatives or family friends who were laid off during the last few years or were laid off themselves, as I reported in an article on a new report from the Heldrich Center for Workforce Development at Rutgers University. In a January survey, the Heldrich Center asked Americans about their exposure to layoffs in the recession or its aftermath. A lot of respondents knew several people who had been laid off, but the researchers decided to segment responses by greatest proximity.  They found that:

  • 23 percent lost a job themselves;
  • among those not touched so far, another 11 percent said someone in their household had lost a job;
  • another 26 percent said a member of their extended family had lost a job;
  • another 13 percent said a close personal friend had lost a job;
  • if not touched by any of the conditions so far, another 5 percent said a close personal friend of someone else in the household had lost a job; and
  • the remaining 21 percent of respondents answered “no” to all these questions.

The findings were especially striking because unemployment has been unusually concentrated during the last few years, relative to previous downturns.

The Human Disaster - Paul Krugman  -- Catherine Rampell: While about 8 percent of Americans are unemployed, nearly a quarter of Americans say they were laid off at some point during the recession or afterward, according to the survey. More broadly, nearly eight in 10 say they know someone in their circle of family and friends who has lost a job. Of those laid off in recent years, nearly a quarter said they still had not found a job. Re-employment rates for older workers have been particularly bad, with nearly two-thirds of unemployed people 55 and older saying they actively sought a job for more than a year before finding one or had still not found work. But the Very Serious People — who, I would guess, are for the most part members of the 1 in five who *don’t* have anyone in their circle who lost a job — insist that all of this is as nothing compared with the threat from invisible bond vigilantes.

Who Gets Hurt Most by Higher Unemployment? - The recent CBO report projects real GDP growth to be a measly 1.4% this year, down from a rate closer to 3%, they claim, were it not for all the fiscal cuts baked in the 2013 cake:CBO estimates that economic growth in 2013 would be roughly 1½ percentage points faster than the agency now projects [i.e., 1.4%] if not for the fiscal tightening. By Okun’s rule, this suggests unemployment will stick at about 8% this year—about where it is—instead of a number a lot closer to 7% (Okun’s rule turns that 1.5% faster GDP growth into about 0.75 of a percentage point (ppt) lower unemployment).   In fact, the CBO predicts that unemployment rate this year will move from all of 7.9% in the first half of the year to 8% in the second half.   Thanks, dudes. The point I wanted to make here is that everybody’s unemployment rate ain’t created equal.  If you look at the correlation between the overall jobless rate and that of various subgroups, you’ll find that an increase in ¾’s of a point translates into a much larger increase for minorities or those with lower levels of education, and a lesser increase for say, college educated workers.

The Long and Short of It - In the post-crisis environment, issues of sustainability in the trajectory of the U.S. economy have come to the fore. However, many of these issues—persistently high unemployment, a large current account deficit, deleveraging in the household and financial sectors, and fiscal pressure—are better understood when placed in the context of changes in the economy’s structure over a broader horizon. As a follow-up to a 2012 publication, my co-authors and I are examining U.S employment, real value-added, and real value-added per job over the past two decades, while also conducting parallel analyses on Germany and Italy; this note focuses solely on the preliminary U.S. results. We separated U.S. industries into internationally tradable and nontradable components using Jensen & Kletzer’s (2005) approach. The approach determines the tradability of an industry based on its geographic concentration—the more regionally concentrated the industry, the higher its tradability (and vice versa). For example, take retail trade: its ubiquitous geographic presence implies that it is highly nontradable. The same could be said for dry cleaners, construction, and most health care services. On the other hand, mining tends to be geographically concentrated, which points to its tradability.

Long-term Unemployment: What Do We Know? - SF Fed - U.S. labor market conditions reached a low point in late 2009 and early 2010. Since then, the nation’s economy has added 4¾ million payroll jobs and the unemployment rate has fallen by over two percentage points, from 10.0% in October 2009 to 7.8% in December 2012. At the same time though, the average duration of unemployment rose from about 28 weeks to a peak of nearly 41 weeks in late 2011. Since then, it has dropped only slightly, to 38 weeks. Persistently high unemployment duration in the face of an improving labor market raises the possibility that a significant share of current joblessness is structural, or essentially permanent, in nature. This Economic Letter examines in detail unemployment duration, the characteristics of the long-term unemployed, and their prospects of finding a job. While unemployment duration remains near historical highs, the characteristics of the long-term unemployed and their recent job-finding rates suggest that a sustained cyclical recovery will largely eliminate long-term joblessness.

How Do the Long-Term Unemployed Compare to the Rest of the Labor Market? - The situation for the long-term unemployed looked significantly better after last week's jobs report. The average duration of unemployment dropped from 38.1 to 35.3 weeks over that month, which included statistical rebalancing for the population. A year ago, 43 percent of the unemployed were out of a job for more than 27 weeks; now that number is down to 38 percent. This is a good development, though it intensifies two of my larger worries about how people will view the economy.  If we think the economy is healthy, then the Federal Reserve and Congress will put the brakes on too fast, killing the possibility that full employment, the best social program we have, will really happen. There is already evidence of this happening. The sequestration, which will kill a million jobs, looks increasingly likely to happen, even though there is little long-run justification for premature austerity. The other, oddly, is that we'll think the labor market is so weak that it can no longer be helped by emgerency stimulus. Neil Irwin wrote an overview, as a result of the Scarborough and Krugman back and forth, of what I'll call "pundit macroeconomics."Let's update one of my favorite graphs around, which shows how likely it is that the unemployed will find jobs by the duration of their unemployment. I just got new data from the BLS that gives us these numbers through October 2012. Is there a relatively healthy short-term labor market, with a collapsed long-term one? Let's compare 2007, 2011, and 2012:

Everybody’s working for the…health care benefits: The Employee Benefits Research Institute recently surveyed workers and retirees on how health-care benefits factored into the timing of their retirement. The short answer is: a lot. Three-quarters of retirees said they worked longer than they would have otherwise to maintain access to their health plan. A majority of current workers agreed with a statement that said they “planned to work longer than you would like in order to continue receiving health insurance through your employer.”Study author Paul Fronstin argues that the health-care law will change all that: It will end denials of coverage for preexisting conditions and subsidize health insurance for low- and middle-income Americans. “It completely changes the playing field,” he says. “If everything goes as planned, you’ve got guaranteed issue next year. You don’t need the employer to fill the gap.”

Labor of Love - In the three decades since Hochschild published The Managed Heart, the emotional economy has spread like a noxious weed to dry cleaners, nail salons, even computer-repair shops. (Think of Apple's Genius Bars—parodied by The Onion as "Friend Bars"—where employees are taught to be empathetic and use words like "feel" as much as possible.) Back when she wrote her book, Hochschild estimated that about one-third of all jobs entailed "substantial demands for emotional labor." Today, she figures it's more like half. This is, among other things, terrible news for men, who (unlike women) are not taught from birth how to make other people happy. Perhaps that explains why men are losing ground in the service economy. What's driving this growth? Hochschild thinks it partly reflects a class-based change in consumption patterns. As income inequality reorients the consumer marketplace toward luxury services for the rich, like "destination clubs" and "concierge medicine," consumer expectations change and trickle down. The new services "set the standards for lower-cost versions" that cater to the merely affluent. Pret shops are typically located in neighborhoods that bustle with busy professionals whom Pret fusses over like the maître d' at Alain Ducasse. The more the rich get used to fawning service, the more the rest of us—or rather, the rest of us who can afford to buy a sandwich rather than brown-bag it from home—find we rather like it, too. Eventually everybody will have to act like a goddamned concierge. I don't want to believe this, but I fear it may be true.

Grin and Abhor It: The Truth Behind ‘Service with a Smile’ - No, that waitress isn't flirting with you.Neither is the barista at your local Starbucks, nor the counter server at the Pret A Manger near your office, and you might be surprised to learn that the stripper at your local club doesn't have a deep fondness for you, either.Pretending to love one's work, to be overjoyed by the ability to serve you coffee or pizza or dance for your tips, is an integral part of the job for service workers. “Service with a smile” is expected from anyone who deals with customers, and as Josh Eidelson and Timothy Noah pointed out last week at The Nation and The New Republic respectively, sometimes low-wage service employers require much more.

Bad credit ratings sinking job hunters - What many job applicants do not know is that credit reports are regularly used in hiring decisions, leaving millions of credit-scarred consumers in a Catch-22. They're broke, so they have credit woes; but those credit woes keep them from getting the work that could cure their ills."We know that about half of employers look at credit reports as part of the hiring process," says Amy Traub, senior policy analyst with Demos, a non-profit advocacy group. "If you have poor credit, one of the ways to get out of that is to get a better job. When that road is blocked, you end up in a Catch 22." Frequently, it is errors on credit reports that haunt job candidates in these situations. Emmett Pinkston, a 55-year-old retired military man, was rejected for several jobs because of his credit report. But the catch is that the nick on his report was simply a mistake -- a $8,000 debt that never belonged to him. He has disputed the charge and one of the three main credit reporting agencies has erased it, while the others are investigating. In the meantime, he's working at a job at about half his usual pay.

More states consider welfare drug testing bills —Republican lawmakers in three states this week said they will introduce legislation that would require welfare recipients to undergo drug testing in order to receive benefits. The Ohio State Senate held a second hearing Thursday night on a proposal to establish pilot drug-testing programs in three counties. Under the proposal, applicants would be required to submit a drug test if they disclose that they have used illegal substances.  Virginia Republicans are also reviving a bill that was shelved earlier this year. The 2012 version failed after the state estimated it would cost $1.5 million to implement while only saving $229,000. The bill’s sponsor says he’s found more cost effective options. In Florida, Republicans found similar results when they enacted the drug testing requirement for welfare recipients. The plan, which was touted as a cost-saving measure, turned out to be so expensive that it ultimately cost the state an additional $45,780–even after savings from benefits that were denied to applicants who failed the tests.

One graph that says much about America, and our future: the growth in jobs vs. food stamp use - Today we have a graphic that tells us much about both the recovery and the trends shaping the New America — growth in food stamps vs. jobs.  What forces drive these contrasting trends, and how will they help reshape America?  Below we see the US recovery in one graphic, from the February 4 issue of Bloomberg Briefs. It shows the weakness of the recovery, but has another and deeper lesson for us. The pressure of the Great Recession on business accelerated existing political and economic trends.  As a result the New America has an increasing fraction of jobs that are some combination of minimum-wage, temporary, part-time, and with no benefits (Wal-Mart and Amazon have perfected these tactics; see the links below). Free competition, open borders to immigration, and the destruction of private sector unions all contributed to this situation. Despite what we’re told, this was not inevitable or immutable by public policy.  The nations of Northern Europe have shown this by the successful protection of their middle classes.

Reality breaks through the Overton window - While I was looking at sources for my post on declining middle class access to first-tier college education, I came across this piece by Arthur Brooks, President of the American Enterprise Institute His main point is the possibility of reducing education costs through low-cost distance/online learning, on which I might say more another time[1]. What struck me, though was this passage: my 10K-B.A. is what made higher education possible for me, and it changed the course of my life. More people should have this opportunity, in a society that is suffering from falling economic and social mobilityThe change on this point has been striking in a matter of a few years. When I was writing Zombie Economics in 2009 and early 2010, I spent a lot of time citing work going back to the 1980s and 1990s to show that the US has less intergenerational income mobility than most European countries. At that time, the conventional wisdom was definitely that the US was characterized by equality of opportunity – there were still plenty of hacks willing to deny that inequality of outcomes had increased, including plenty at AEI.[2] The Occupy movement played a big role in focusing attention on the general issue of inequality, and once attention was focused, the facts pretty much spoke for themselves.  Instead we got arguments like this from Tyler Cowen, suggesting that maybe social immobility isn’t so bad after all.

Inequality: Predation or Skill Bias? - Thanks to Mark Thoma I have read a very interesting piece by David Altig on technological change and inequality. Altig weighs in the debate that Bob Gordon started a few months on the possible slowdown of trend productivity in the next decades. Bob’s argument is known, and makes sense: no current innovation, not even the fanciest ones, seems to have the potential to change our life as did railroads, jet planes, or, even more importantly, running water! But it is undeniable that he ventured in uncharted lands (innovation, future inventions, the future), and I am in the end incapable to take sides on the issue. I am just very satisfied that Bob’s argument is taken seriously, even by those opposing it. I found interesting Altig’s remark that “game-changing technologies have, in history, been initially associated with falling capital prices, rising inequality, and falling productivity“. He ends asking whether these trends, that we are nowadays observing, could be the indicator of yet another major “game changer”. But I was intrigued by Mark Thoma”s conclusion that even assuming that increasing inequality is a sign of major advances to come, this does not mean that nothing should be done about it:

The End of Low Hanging Fruit? - The argument that innovation and technological progress have been slowing down has been making the rounds. It was recently articulated in Robert J. Gordon’s work and in Tyler Cowen’s influential short book, The Great Stagnation: How America Ate All the Low-hanging Food of Modern History, Got Sick, and Will (eventually) Feel Better. It jumped from obscure academic discussion to public debate when The Economist Magazine turned it into a memorable cover.The idea is simple and has something to it: in the early 20th century there were many — what Tyler Cowen calls — “low hanging fruits” for the world economy to collect such as antibiotics, electricity-powered factories, radio, TV, planes and automobiles, and not least the great innovation featured on the cover of The Economist, indoor plumbing and sanitation. But these have all been exploited. As we run out of low hanging fruit, the argument goes, we are likely to run out of rapid technological progress and growth will slow down.

Obama must face the rise of the robots - - Early in his first term Barack Obama joked that he would “keep an eye on the robots in case they try anything”. He should have known resistance is futile. During Mr Obama’s presidency, IBM’s Watson has proved computers can outfox the most agile minds, drones have become America’s weapon of choice, the driverless car is now a reality and the word “app” has been detached from its origin. No longer the realm of science fiction, the rise of robots now poses the central economic dilemma of the Obama era.  With each month, the US economy becomes steadily more automated. In January the US economy added just 4,000 manufacturing jobs, and the net increase since July is zero. Yet last month, manufacturing activity rose by its fastest rate since April, according to the Institute for Supply Management. The difference boils down to robots, which pose an increasingly nagging paradox: the more there are, the better for overall growth (since they boost productivity); yet the worse things become for the middle class. US median income has fallen in each of the last five years.

News Analysis: Raging (Again) Against the Robots - NYT - Robots have once again gripped the nation’s imagination, stoking fears of displaced jobs and perhaps even a displaced human race. An alarmist segment on “60 Minutes” was only the most vivid of a recent series of pieces in respected magazines and news outlets warning about widespread worker displacement. Professors at Cambridge University and a co-founder of Skype are creating a new Center for the Study of Existential Risk, which would research a “Terminator”-like scenario in which supercomputers rise up and destroy their human overlords, presumably plotting the whole caper in zeros and ones.  In New York alone, there are four plays running this month with themes of cybernetics run amok. One is a revival of “R.U.R.,” a 1920 Czech play that was the granddaddy of the cybernetic revolt genre and that originated the current meaning of the word “robot.”  Such android anxiety has a long history. John Maynard Keynes wrote about “technological unemployment” during the Great Depression. In the Industrial Revolution, disgruntled laborers — including the original Luddites — smashed automated looms and threshing machines that “stole” their jobs. In the 15th century, scribes protested the printing press, with a futile zeal rivaled perhaps only by that of modern journalists.  Even Aristotle foretold that automation would expunge the need for labor, observing that if “the shuttle would weave and the plectrum touch the lyre without a hand to guide them, chief workmen would not want servants, nor masters slaves.”

Robot Serves Up 360 Hamburgers Per Hour  - No longer will they say, “He’s going to end up flipping burgers.” Because now, robots are taking even these ignobly esteemed jobs. Alpha machine from Momentum Machines cooks up a tasty burger with all the fixins. And it does it with such quality and efficiency it’ll produce “gourmet quality burgers at fast food prices.” With a conveyor belt-type system the burgers are freshly ground, shaped and grilled to the customer’s liking. And only when the burger’s finished cooking does Alpha slice the tomatoes and pickles and place them on the burger as fresh as can be. Finally, the machine wraps the burger up for serving. And while you fret over how many people you invited to the barbecue, Alpha churns out a painless 360 hamburgers per hour. San Francisco-based Momentum Machines claim that using Alpha will save a restaurant enough money that it pays for itself in a year, and it enables the restaurant to spend about twice as much on ingredients as they normally would – so they can buy the gourmet stuff. Saving money with Alpha is pretty easy to imagine. You don’t even need cashiers or servers. Customers could just punch in their order, pay, and wait at a dispensing window.

Obsolete Humans? Why Elites Want You to Fear the Robot Lynn Parramore - Machines have been relieving humans from drudgery and delighting us with their marvelous feats for thousands of years. When economic times are good, machines are celebrated as wonders of progress and prosperity that will improve our lives. But when times are tough, they become objects of fear. The unemployment crisis of the past four years was triggered by a Wall Street-driven financial crash, and exacerbated by policy makers who failed to do enough to stimulate the economy and to ensure that there’s enough demand for goods and services. But lately, a new argument for job insecurity has made a splash in the media: It’s the machines! Pundits predict the “end of labor,” and talk about armies of sleek robots taking over the workplace as a foregone conclusion. Dystopian fantasies worthy of a late-night sci-fi flick flood the airwaves.The 2011 book Race Against The Machine, by MIT researchers Erik Brynjolfsson and Adam McAfee, fueled the idea that machines are finally getting so smart that they’re displacing human jobs at an alarming rate and leaving stunned workers helpless in the unemployment line. This time, they warn, it’s not just factory workers or agricultural hands who will find their job snatched by a robot. White-collar workers like accountants and lawyers are losing out to machines.

Corporate Rule Has ‘Infected’ AFL-CIO Leadership, Labor Activist Contends - Longtime labor activist Harry Kelber will oppose incumbent Richard Trumka for the presidency of the AFL-CIO at the group’s convention in Los Angeles in September. Kelber feels an obligation to challenge a president who, he says, is pursuing wealth and prestige rather than the true ideals of labor activism. Kelber contends that under Trumka’s leadership, the AFL-CIO has failed to address the mounting threat against labor in the United States from the loss of bargaining rights to the refusal to adjust minimum wage standards to the push against implementing the “card check” union organizing system. The federation of labor unions is afraid of backlash, Kelber says. It supported Barack Obama in the 2008 and 2012 elections without pressing him on issues that, according to Kelber, should have been at the top of its list such as the Employee Free Choice Act to make union formation easier and single-payer health care. Members “think there’s no chance of any improvement and so they’re not fighting,” Kelber explains. “In the ’30s they fought. They got Social Security, labor laws, the CIO. Now they’re getting nothing.”

The Spirit of Enterprise: Big Business Takes Hack NLRB Ruling and Runs With It - In the wake of a highly questionable conservative Appeals Court ruling that claims to invalidate Obama recess appointments to the NLRB - and thus a host of rulings protecting workers and possibly consumers - the Chamber of Commerce and other corporate lobbying groups have issued an Action Memo gleefully advising businesses to "act fast" and challenge NLRB rulings against them by filing appeals in the same wacky court "because other circuits may not reach an equally favorable conclusion." Just to make sure, the Chamber is also seeking to invalidate 2011 union rules issued by the NLRB. Others are taking a more direct route: A massive California-based hospital company has told its unions it will not comply with at least two NLRB rulings from the past year that protect workers. Many observers expect last week's ruling "giving the finger to the NLRB" - which if upheld would invalidate an outrageous 600 appointments dating back to Reagan - will go to the Supreme Court; it remains to be seen how much ground workers will lose in the meantime.

Are Wages About to Start Rising? - Computer programmer, accountant, mechanical engineer: If you had kids in college these last few years, you probably encouraged them to enter fields of study that landed them in one of those jobs, which were among the strongest bets in a weak labor market. Yet despite the steady demand for—and low jobless rates among—these professionals during the recession and the first years of recovery, those fields experienced little wage growth between 2007 and 2011, according to data from the Labor Department. That’s finally starting to change. Earnings for those three occupations and a number of others cited in various surveys gauging the “war for talent” started to experience notable growth in 2012, the government data shows. Wages rose 3.4% from 2011 to 2012 for full-time workers in computer and mathematical occupations, 5.1% for accountants and auditors, 7.5% for electrical engineers, and 4.4% for mechanical engineers.

College grads taking more unpaid internships, jobs out of chosen field - Recent college graduates and even those who have been out of school for several years now are finding an increasingly harder time getting a job in this economy. The amount of young adults – from ages 18 to 29 – who are unemployed rose over 1.5 percent in January to 13.1 percent, according to statistics released Friday. The overall unemployment rate had a smaller increase - rising 0.1 percent to 7.9 percent - according to the Bureau of Labor Statistics. While the jobless rate has been steadily declining the past few years since the recession, people of all demographics are still suffering from the repercussions, working a job outside of their chosen field just to have a form of income, and many not even able to find work. The young adult age group makes up a large percentage of this trend, and experts believe new strategies are needed in order to bring in more jobs for the youngest group in the labor force. Grado pointed out that the actual unemployment rate for young adults would have risen to 16.2 percent last month if the declining labor participation – those who have given up looking for work due to the lack of jobs – were accounted for in the statistics.

Ezra Klein Strikes Out Big on Immigration and Demographics - Dean Baker - Ezra Klein usually can be counted on for good insights on politics and the economy, however today's piece on immigration is the sort of thing that could have been on a press release from Fix the Debt. The basic point is to tout the virtues of immigration. While there are benefits of immigration that Klein rightly highlights, much of the piece veers off into the sort of pablum readers expect from the non-Klein portions of the Post. This is especially the case where Klein dives off into demographics. "The economic case for immigration is best made by way of analogy. Everyone agrees that aging economies with low birth rates are in trouble; this, for example, is a thoroughly conventional view of Japan. It’s even conventional wisdom about the U.S. The retirement of the baby boomers is correctly understood as an economic challenge. The ratio of working Americans to retirees will fall from 5 to 1 today to  3 to 1 in 2050. Fewer workers and more retirees is tough on any economy." Klein then adds, "there’s nothing controversial about that analysis." Actually everything about that analysis is controversial, including the basic facts. (Actually, these are just wrong.) The current ratio of workers to retirees is 2.8 to 1, it hasn't been 5 to 1 since the early 1960s. It is projected to fall to 2.0 to 1 by the mid 2030s. This is not just a gottcha, it shows the fallacy of Klein's basic point.

Are Immigrants Taking Your Job? A Primer - Immigration reform is back on the table, reviving debates about whether immigration is good or bad for American-born workers. There are a lot of competing studies (and pundits) out there, but the general takeaway from conservative and liberal economists is that immigration is good for Americans’ living standards over the long run. That’s because immigrants raise the wages of native-born workers (and also lower the cost of immigrant-dense services like child care and cleaning). As scholars at the Brookings Institution’s Hamilton Project explained recently, immigrants and native-born workers are generally complements, rather than perfect substitutes: lower-skilled immigrants largely sort into farming and other manual, low-paid jobs that the native-born don’t want to do, and higher-skilled immigrants provide labor that high-tech companies cannot find enough trained American-born workers.  As a result, immigration creates new job opportunities for the native-born, with some particularly high-profile examples found in Silicon Valley. According to a Kauffman Foundation study, of the engineering and technology companies founded in the United States from 2006 to 2012, 24.3 percent had at least one key founder who was foreign-born. In Silicon Valley alone, this number was 43.9 percent. Even outside of Silicon Valley, entrepreneurship rates are higher for the foreign-born than the native-born, and start-ups are the greatest source of American job growth.

No Shortage of STEMs - A few posts back, on immigration economics, I wrote this: Watch for members of Congress to try to expand guest worker programs throughout this round of reform, particularly in STEM and computer related guest visas, like H-1B’s. There is simply no credible economic argument I’ve seen based on wage or employment trends that would support the notion that there’s a near-term shortage in these fields. The wage trends in particular simply do not reflect excess demand relative to available supply. Today, we see EPI’s Ross Eisenbrey with an op-ed in the NYT on this: WHILE genuine immigration reform has the potential to fix a seriously broken system, four senators have introduced a bill to solve a problem we don’t have: the supply of high-tech workers. The bill’s authors, led by Senator Orrin G. Hatch, Republican of Utah, argue that America would benefit from letting more immigrants trained in science, technology, engineering and math work in the country, with the sponsorship of high-tech companies like Microsoft and I.B.M. But the opposite is the case: the bill would flood the job market with indentured foreign workers, people who could not switch employers to improve their wages or working conditions; damage the employment prospects of hundreds of thousands of skilled Americans; and narrow the educational pipeline that produces these skilled workers domestically.

You're All Illegal -- Staging his own small, fierce, truth-telling protest, a Native-American man pushing a baby stroller confronted anti-immigration zealots at an Arizona rally by furiously pointing out that they are the real “illegals” for invading his country. Enough, he said, with their race-baiting, flag-waving "bogus arguments." Meanwhile, young immigrants loudly interrupted a staid Congressional hearing on immigration, protesting GOP opposition to the DREAM Act by chanting, "Undocumented and Unafraid." They were thrown out by security officials as legislators snickered. “We didn’t invite none of you. We’re the only native Americans here,” he yelled. "That’s what (the American) flag stands for – all the Native Americans you killed to plant your houses here. That’s the truth.”

More than 40% of Americans are one crisis and less than 90 days from poverty - If you suddenly lost your income, how long would you be able to live on your savings? For 43.9 percent of American households, the answer is less than three months, even if they keep their spending to the most basic needs. That's not just true of families that know they're close to poverty, either—one in four households earning between $55,465 and $90,000 are in the same boat, according to the 2013 Assets & Opportunities Scorecard. Unsurprisingly, as bad as that overall figure of 43.9 percent of families not having enough liquid assets to get through three months is, the numbers are far worse for people of color (the scorecard categories are not broken down beyond that): 62.6 percent are liquid asset poor, and white households have a median net worth of $110,973, 10 times that of households of color at $10,824.

Suicide Rate Rose During Recession, Study Finds -  The rate of suicide in the United States rose sharply during the first few years since the start of the recession, a new analysis has found. In the report, which appeared Sunday on the Web site of The Lancet, a medical journal, researchers found that the rate between 2008 and 2010 increased four times faster than it did in the eight years before the recession. The rate had been increasing by an average of 0.12 deaths per 100,000 people from 1999 through 2007. In 2008, the rate began increasing by an average of 0.51 deaths per 100,000 people a year. Without the increase in the rate, the total deaths from suicide each year in the United States would have been lower by about 1,500, the study said. The finding was not unexpected. Suicide rates often spike during economic downturns, and recent studies of rates in Greece, Spain and Italy have found similar trends. The new study is the first to analyze the rate of change in the United States state by state, using suicide and unemployment data through 2010.

Study: 22 Military Veterans Commit Suicide Every Day - The results of a new study indicate that suicide rates among veterans in the United States are increasing. An estimated 22 military veterans take their lives every day in America, according to the study helmed by Robert Bossarte, an epidemiologist and researcher who works with the Department of Veterans Affairs. “While the percentage of all suicides reported as Veterans has decreased, the number of suicides has increased,” the conclusion of the study stated. Specific trends were observed during the course of the study regarding the age and gender of veterans who most frequently committed suicide. “A majority of Veteran suicides are among those age 50 years and older. Male Veterans who die by suicide are older than non-Veteran males who die by suicide,” the study’s findings stated. “The age distribution of Veteran and non-Veteran women who have died from suicide is similar.”

The sequestration cuts and the state of the states - Lots of talk about the sequester Tuesday, with Obama’s speech and the CBO report assuming that most of the cuts (or compensating cuts of equal amount) will actually take effect. Long story short: the cuts would add to further budget deficit reduction this year but also contribute to slower economic growth, naturally. But one under-discussed part of the sequestration cuts has to do with their potential impact on the states. Pew has just updated its numbers from an earlier report, and now estimates that federal funding to states in fiscal year 2013 will be reduced by a still-non-trivial $85bn (click to enlarge the big infographic): These cuts will be immediately damaging, translating directly into reduced economic activity. As Pew notes:These cuts to federal spending would have a direct impact on state budgets. Because most states are not permitted to run a deficit, states either would have to replace the loss in federal revenues with state funds or implement budget cuts. And they would come at an especially unfortunate time now that the payroll tax cut stupidly has been allowed to expire, and with states finally showing signs of ending their post-recovery contraction.

AP Exclusive: Baltimore forecasts financial ruin : The Baltimore city government is on a path to financial ruin and must enact major reforms to stave off bankruptcy, according to a 10-year forecast the city commissioned from an outside firm. The forecast, obtained by The Associated Press ahead of its release to the public and the City Council on Wednesday, shows that the city will accumulate $745 million in budget deficits over the next decade because of a widening gap between projected revenues and expenditures. If the city's infrastructure needs and its liability for retiree health care benefits are included, the total shortfall reaches $2 billion over 10 years, the report found. Baltimore's annual operating budget is $2.2 billion.The forecast will provide the basis for financial reforms that Mayor Stephanie Rawlings-Blake plans to propose next week. The city has dealt with budget deficits for the past several years, closing a $121 million gap in 2010. But those deficits have been addressed with one-time fixes that haven't addressed the long-term structural imbalance.

Graphic: Detroit Then and Now - In 1950, Detroit was booming. Motor City had a thriving auto industry, more than 1,800,000 citizens and in less than 10 years would be the home of Motown. It was America’s fifth-largest city and appeared to herald a new social order. “In the 1950s, social scientists and journalists held up the auto industry as an example of the end of class conflict in America,” wrote Thomas Sugrue, professor of history and sociology at the University of Pennsylvania in an essay. “They argued that auto workers, who enjoyed hefty paychecks and good benefits, had become ‘embourgeoised’ — that is, they had entered the ranks of the middle class.” Then came race riots, competition in the auto industry from throughout the world, and people fleeing the city and urban decay. Now Detroit, with a population of just over 700,000, is in the middle of a review process that could end up in bankruptcy court within weeks.

US Prison Population Seeing 'Unprecedented Increase' - The research wing of the U.S. Congress is warning that three decades of “historically unprecedented” build-up in the number of prisoners incarcerated in the United States have led to a level of overcrowding that is now “taking a toll on the infrastructure” of the federal prison system. Over the past 30 years, according to a new report by the Congressional Research Service (CRS), the federal prison population has jumped from 25,000 to 219,000 inmates, an increase of nearly 790 percent. Swollen by such figures, for years the United States has incarcerated far more people than any other country, today imprisoning some 716 people out of every 100,000. “This is one of the major human rights problems within the United States, as many of the people caught up in the criminal justice system are low income, racial and ethnic minorities, often forgotten by society,” Maria McFarland, deputy director for the U.S. program at Human Rights Watch, told IPS. In recent years, as a consequence of the imposition of very harsh sentencing policies, McFarland’s office has seen new patterns emerging of juveniles and very elderly people being put in prison. “Last year, some 95,000 juveniles under 18 years of age were put in prison, and that doesn’t count those in juvenile facilities,” she noted.

Cuomo Seeking Home Buyouts in Flood Zones - Gov. Andrew M. Cuomo is proposing to spend as much as $400 million to purchase homes wrecked by Hurricane Sandy, have them demolished and then preserve the flood-prone land permanently, as undeveloped coastline.The purchase program, which still requires approval from federal officials, would be among the most ambitious ever undertaken, not only in scale but also in how Mr. Cuomo would be using the money to begin reshaping coastal land use. Residents living in flood plains with homes that were significantly damaged would be offered the pre-storm value of their houses to relocate; those in even more vulnerable areas would be offered a bonus to sell; and in a small number of highly flood-prone areas, the state would double the bonus if an entire block of homeowners agreed to leave. The land would never be built on again. Some properties could be turned into dunes, wetlands or other natural buffers that would help protect coastal communities from ferocious storms; other parcels could be combined and turned into public parkland. Mr. Cuomo has adamantly maintained that New York needs to reconsider the way it develops its coast. He has repeatedly spoken, in blunt terms, about the consequences of climate change, noting that he has responded to more extreme weather in his first two years as governor than his father, Mario M. Cuomo, did in his 12 years in the job. Last month, in his State of the State address, he raised the prospect of home buyouts, declaring “there are some parcels that Mother Nature owns.”

What deficit? Illinois lawmakers OK $2.1 billion in new spending -- Illinois, already facing a $9-billion deficit and a $130-billion pension debt, is moving to write checks for $2.1 billion in new spending. The Illinois House on Tuesday OK’d a supplemental appropriation bill that will pay $550 million in old health care bills, spend another $675 million on new construction projects, and send a little more than $30 million to the state’s beleaguered mental health and child and family service agencies. “The executive branch asked for many, many million more,” said State Rep. Barbara Flynn Currie, D-Chicago. “This represents a pretty austere response to spend more.” Currie defends the new spending, saying it is necessary. Illinois owes more than $1 billion in employee health care bills dating back months. The new spending plan would pay about half of what is owed.

Quinn’s Illinois: regulations and cronyism crush entrepreneurship - Despite the fact that Illinois already has $9.3 billion in unpaid bills, in his State of the State address Quinn advocated more government involvement in job creation and business activity: spending for roads, bridges, construction, high-speed rail, water infrastructure, technology, manufacturing and clean energy. More money for government projects requires higher revenues – this leads to calls for higher taxes, on top of the state’s highly regulated business climate. These factors explain why Illinois has one of the least competitive economies in the nation. Illinois ranked 45th in gross domestic product growth from 2000 to 2010. Illinois’ combined federal and state corporate income tax is the fourth-highest in the industrialized world. And entrepreneurship in Illinois consistently lags behind the rest of the nation. Illinois’ exploding government debt is crowding out business investment. Need evidence? Illinois has been downgraded 11 times since Quinn took office. The state has the worst credit rating in the nation.

Texas lawmakers face $5 billion budget deficit - Texas lawmakers are moving to make up a $5 billion budget deficit. Analysts from the Legislative Budget Board told the House Appropriations Committee Tuesday that the state is short $5 billion because they did not make enough money available for Medicaid and public schools. The health program for the disabled, poor and elderly will run out of money on March 31 and requires $4.4 billion to continue operating through the end of the fiscal year. The Texas Education Agency also needs $630 million to pay schools districts what they are owed from the Foundation School Program. Committee Chairman Jim Pitts told the panel that the bills must be paid. Lawmakers faced with a $27 billion budget deficit in 2011 intentionally underfunded Medicaid and cut $5.4 billion from public schools. .

The Homeless in Cities - The NY Post alerts us that this problem is growing worse again in NYC's Grand Central Station.  This is a typical "tragedy of the commons".  Who owns Grand Central Station?   When one group tries to "privatize it", how are other groups affected?    Columbia's Dan O'Flaherty has done the best economics research on homelessness.  It is clear that many of these individuals do not want to live in homeless shelters.  If the quality of these shelters improve, would more be willing to live there? Are the homeless rational utility maximizers?   Have experimentalists played games with them to learn about their degree of patience and whether their preferences are transitive and satisfy WARP axioms?  I have argued that researchers are not running enough field experiments in cities.  Have any Cambridge field experiment scholars implemented a field experiment in a city with the homeless to see if the homeless do respond to financial incentives? If they do, would the middle class of such cities be willing to scale up such programs (and pay for them) in order to protect themselves and improve the quality of life of the homeless?

Huge Increase In Homeless Students - New numbers indicate student homelessness is up nearly 50-percent over the last five years in Washington. The office of the Superintendent of Public Instruction recently released data showing that more than 27,000 students in our state were homeless last school year. Officials attribute the huge increase to improved school district reporting, job losses in our area brought on by a decline in the logging industry, as well as the overall flat economy. Superintendent office spokesperson Nathan Olson says that while the numbers are high, the state receives about $1 million to provide books, supplies and tutoring to homeless students. Olson also says the funding pays for transportation to and from school, which is the type of assistance homeless students need the most.

Time to Take On Concentrated Poverty and Education - Researchers know a lot about how various factors associated with income level affect a child’s learning: parents’ educational attainment; how parents read to, play with and respond to their children; the quality of early care and early education; access to consistent physical and mental health services and healthy food. Poor children’s limited access to these fundamentals accounts for a good chunk of the achievement gap, which is why conceiving of it instead as an opportunity gap makes a lot more sense. But we rarely discuss the impact of concentrated poverty—and of racial and socioeconomic segregation—on student achievement. James Coleman’s widely cited 1966 report Equality of Educational Opportunity has drawn substantial attention to the influence of family socioeconomic status on a child’s academic achievement. However, as Richard Kahlenberg, Senior Fellow at the Century Foundation, notes: “Until very recently, the second finding, about the importance of reducing concentrations of school poverty, has been consciously ignored by policymakers, despite publication of study after study that confirmed Coleman’s findings.”

New York Sued Over Arrest And Interrogation Of Seven-Year-Old Boy Over Missing $5 Bill At School - Wilson Reyes is one of those hardened criminals who are hard to break. Police handcuffed Reyes, threw him in a cruiser, and interrogated him for a reported ten hours. Yet, Reyes insisted he was innocent and had to be released . . . to his mother. The seven-year-old boy was accused of stealing $5 on a playground at his school. The family’s account is contained in a complaint, detailing the case against New York and the Bronx police. It began when a kid dropped $5 on the playground — money that was going to be used on a canceled field trip. When a kid fingered Reyes, he was dragged to the principal’s office after being yanked from class. He was then handcuffed by Bronx police and grilled for ten hours. Before being hauled off to the police station, Reyes was held in custody for four hours at PS X114. He was then taken to the 44th Precinct station house for another six hours of interrogation.What is most disturbing is that the parents say that police would not allow them to see their child while in custody. When they did, they found him handcuffed to a wall.

Our Autistic Son was Handcuffed and Arrested in School, We Were Not Notified - In December, 2012, a teenager went to his public school, much like any other day. The boy was an autistic special education student, who is significantly learning disabled and on a regimen of prescription medications for a number of psychiatric disorders. That day, the boy's parents began to worry when he did not come home after school. What the parents did not know was that early on that morning, armed police officers had entered the boy's classroom, handcuffed him, and had taken him away to be interrogated without a call to his parents or any attorney, then locked up for several days. The boy is our son.

"Weather To Go To College" - Does current utility bias predictions of future utility for high stakes decisions? Here I provide field evidence consistent with such Projection Bias in one of life’s most thought-about decisions: college enrolment. After arguing and documenting with survey evidence that cloudiness increases the appeal of academic activities, I analyse the enrolment decisions of 1,284 prospective students who visited a university known for its academic strengths and recreational weaknesses. Consistent with the notion that current weather conditions influence decisions about future academic activities, I find that an increase in cloudcover of one standard deviation on the day of the visit is associated with an increase in the probability of enrolment of 9 percentage points.

Updated cost projections for the Pell Grant program - The Congressional Budget Office this week released updated cost projections for the Pell Grant program – and the estimates show an unexpected surplus over the past several years. The figures are much awaited because they dictate what lawmakers must allocate to the program in the upcoming fiscal year 2014 appropriations process if they want to keep the program running at its current level of benefits and with existing eligibility rules.In 2010 and 2011, those estimates sparked panic. The program was burning through money faster than anyone expected, prompting Congress and the Obama administration to shift funding from other programs and cut parts of the Pell Grant program itself three separate times. The funding emergency was exacerbated by the fact that congressional lawmakers and the Obama administration had tried to maintain a large increase in the maximum grant, first funded without any long-term funding plan by the American Recovery and Reinvestment Act of 2009. The latest round of temporary funding was set to dry up in 2014, leaving a $5.8 billion hole in the program. In 2015, the number would jump to $8.7 billion, and stay at about that level indefinitely.

What’s the cost and financial value of college? - What’s the right price for a college education? And what is its value?  Those are crucial questions at a time of rising student debt and high unemployment. But a group of scholars and policymakers at an MIT forum on Thursday suggested that one thing about college remains clear: Expensive though it can be, higher education pays off for Americans as a whole. Indeed, the much-discussed idea of an “education bubble” — that college costs have soared too high to make a degree worthwhile — is a “dangerous myth that leads people to make bad choices,” said David Autor, an MIT labor economist who has extensively studied the relationship between education and earnings.   Instead, Autor said, the best evidence shows that a college degree leads to a lifetime earnings increase of $250,000 to $300,000, even after subtracting the cost of higher education. Those returns, Autor noted, apply to graduates regardless of their undergraduate majors: Humanities students benefit just as science, engineering or business students do.

College Endowments Remain Flat, Showing Schools Need New Source Of Revenue - A new survey released Friday made clear that declining support from state legislatures and slow growth in endowments means colleges and universities will need to find new streams of revenue or drastically scale back their operations. The annual National Association of College and University Business Officers-Commonfund survey found college endowments on average remained essentially flat for FY 2012, declining .3 percent. The sluggish performance follows a banner year of fundraising in FY 2011. Then, endowments grew 19.2 percent. Most schools own equities outside the U.S., so volatility in Europe and China created drag on schools' endowment growth, the survey concluded. Foreign returns declined 11.9 percent. Although endowments are outperforming the S&P500 over a 10-year period, growing at 6.2 percent a over a decade, they aren't expanding at the rate colleges need. Colleges need their endowments to grow by 7.4 percent over 10 years to match inflation and repay money withdrawn from endowments.

Average earnings of young college graduates still falling - Diana G. Carew, who works with Michael Mandel, reports:The latest Census figures show real earnings for young college grads fell again in 2011. This makes the sixth straight year of declining real earnings for young college grads, defined as full-time workers aged 25-34 with a bachelor’s only. All told, real average earnings for young grads have fallen by over 15% since 2000, or by about $10,000 in constant 2011 dollars. That picture is the single biggest reason why higher education in this country is in economic trouble as a sector.  And yes, I do understand that the “education premium” is robust, but that means wages for non-college workers have been hurting as well.  At some margin, when it comes to determining how much you will pay for college, the absolute return matters too.  The full article is here.

Student loans: The next housing bubble - The American system of higher education is increasingly becoming a fiscal disaster for ever-larger numbers of students who move through it. That disaster is being caused by a combination of terrible incentives, institutional greed — and the pervasive myth that more education is the cure for economic inequality. The extent of this myth is highlighted by a new report from the Center for College Affordability and Productivity, which indicates that nearly half of all employed college graduates have jobs that require less than a four-year college education. Despite such sobering statistics, the higher-education complex remains remarkably successful at ensuring that American taxpayers fund the acquisition of educational credentials that, in many cases, leave the people who obtain them worse off than they were before they enrolled. Far from being “priceless,” as the promoters of ever-more spending on higher education would have Americans believe, both undergraduate and post-graduate education is turning out to be a catastrophic investment for many young and not-so-young adults.

Student Loan Debt Crisis: How’d We Get Here and What Happens Next? - The amount of student loan debt and the rate of delinquency have been climbing for years now. If it seems like every new statistic is worse than the last, that’s because it is. Two studies released this week are no exception. Credit bureau TransUnion says that in the past five years, the average student loan debt each borrower carries has risen 30% to $23,829. More than half of student loan accounts, which add up to more than 40% of the total dollars owed, are in deferral status. This is just a temporary reprieve; students can defer for only a few years before they have to repay. The trouble is, many of them aren’t doing so. FICO Labs found that delinquencies rose by 22% in five years. For the newest group of loans it studied, delinquency rates are 15.1% — higher than the 11% cited by the Federal Reserve in a November report. Like the Fed’s study, the FICO analysis doesn’t include loans that are in a deferred status — which means the number of people who can’t afford to pay back that money may be almost twice as high as what the official delinquency rates reflect.

Student Loan Bubble Forces Yale, Penn To Sue Their Own Students - We have not been shy about exposing the massive (and unsustainable) bubble of credit being blown into the economy via Student Loans from the government. We have not been afraid to note the dramatic rise in delinquencies among these loans - and the implications for the government. However, as Bloomberg reports, it appears the impact of this exuberance has come back to bite the colleges themselves. In what can only be described as a vendor-financing model, the so-called Perkins loans (for students with extraordinary financial hardships) have seen defaults surging more than 20%. The vicious circle, though, has begun as the ponzi of using these revolving loan funds to 'fund' the next round of students is collapsing thanks to the rise in delinquencies. Schools such as Yale, Penn, and George Washington are becoming very aggressive at going after delinquent student borrowers. While financially hard-up graduates complain of no jobs, the schools are not impressed: "You could take a job at Subway or wherever to pay the bills ... It seems like basic responsibility to me,"

Yale Suing Former Students Shows Crisis in Loans to Poor - Needy U.S. borrowers are defaulting on almost $1 billion in federal student loans earmarked for the poor, leaving schools such as Yale University and the University of Pennsylvania with little choice except to sue their graduates. The record defaults on federal Perkins loans may jeopardize the prospects of current students since they are part of a revolving fund that colleges give to students who show extraordinary financial hardship. Yale, Penn and George Washington University have all sued former students over nonpayment, court records show. While no one tracks the number of lawsuits, students defaulted on $964 million in Perkins loans in the year ended June 2011, 20 percent more than five years earlier, government data show. Unlike most student loans -- distributed and collected by the federal government -- Perkins loans are administered by colleges, which use repayment money to lend to other poor students. “If you borrow to go to school, it may not be just the government that ends up coming after you if you can’t pay,”

CalSTRS reports $64 billion deficit - The trust fund that provides pensions to the state's retired teachers has a $64 billion deficit and would need a $4.5 billion-per-year infusion of revenue to become fully solvent, according to a new internal study. The California State Teachers' Retirement System produced the report in response to a legislative resolution. Its release came just days after the Legislature's budget analyst, Mac Taylor, indirectly chided Gov. Jerry Brown for ignoring "huge unfunded liabilities associated with the teachers' retirement system and state retiree health benefits" in his new budget. STRS receives money from the state, from local school districts and from teachers themselves, but is also highly dependent on investment earnings, which were clobbered during the recent recession. And while its larger cousin, the California Public Employees' Retirement System, has the power to take money from the state treasury as it sees fit, STRS must receive specific appropriations from the Legislature.

Americans Closest to Retirement Were Hardest Hit by Recession - Young graduates are in debt, out of work and on their parents’ couches. People in their 30s and 40s can’t afford to buy homes or have children. Retirees are earning near-zero interest on their savings.  In the current listless economy, every generation has a claim to having been most injured. But the Labor Department’s latest jobs snapshot and other recent data reports present a strong case for crowning baby boomers as the greatest victims of the recession and its grim aftermath. These Americans in their 50s and early 60s — those near retirement age who do not yet have access to Medicare and Social Security — have lost the most earnings power of any age group, with their household incomes 10 percent below what they made when the recovery began three years ago, according to Sentier Research, a data analysis company. Their retirement savings and home values fell sharply at the worst possible time: just before they needed to cash out. They are supporting both aged parents and unemployed young-adult children, New research suggests that they may die sooner, because their health, income security and mental well-being were battered by recession at a crucial time in their lives. A recent study by economists at Wellesley College found that people who lost their jobs in the few years before becoming eligible for Social Security lost up to three years from their life expectancy, largely because they no longer had access to affordable health care.

401Ks are a disaster - We need an across the board increase in Social Security retirement benefits of 20% or more. We need it to happen right now, even if that means raising taxes on high incomes or removing the salary cap in Social Security taxes. Over the past few decades, employees fortunate enough to have employer-based retirement benefits have been shifted from defined benefit plans to defined contribution plans. We are now seeing the results of that grand experiment, and they are frightening. Recent and near-retirees, the first major cohort of the 401(k) era, do not have nearly enough in retirement savings to even come close to maintaining their current lifestyles. Frankly, that's an optimistic way of putting it. Let me be alarmist for a moment, because the fact is the numbers are truly alarming. We should be worried that large numbers of people nearing retirement will be unable to keep their homes or continue to pay their rent. According to the Center for Retirement Research at Boston College, the median household retirement account balance in 2010 for workers between the ages of 55-64 was just $120,000. For people expecting to retire at around age 65, and to live for another 15 years or more, this will provide for only a trivial supplement to Social Security benefits.

Solutions to the Middle Class Retirement Crisis - As I have noted in three recent posts, retirement security for those currently or recently in the middle class is no sure thing. 49% of the private work force has neither defined benefit (traditional pensions) or defined contribution (401(k)) retirement plans, while public sector pensions are coming under increasing attack. The United States has the highest elder poverty rate, 25% (measured as 50% of median income), of any industrialized nation bigger than Ireland. An estimated $6.6 trillion shortfall in retirement savings shows how the shift from traditional pensions to 401(k) plans has been totally inadequate to meet people's future needs. Yet what passes for wisdom among the Very Serious People (VSP) is that we need to make a stealth cut to Social Security via a less generous inflation adjustment, while Republican plans for Medicare would shift an astounding $34 trillion in medical costs on to seniors whose income would be falling in real terms. This is a recipe for disaster. So what do we really need to do now? Several different proposals are currently in the mix, all of which would address the income shortfall to varying degrees.

Coming Soon for Our Own Good: Restrictions on Big Retirement Account Payouts - For many years, traditional defined-benefit pensions provided millions of people with an income stream they could not outlive. Along with Social Security benefits, this pension income covered all the basics and possibly then some, for as long as you lived. Personal savings was gravy. Such pensions largely have been replaced with defined-contribution plans like the 401(k), which may provide a sizable kitty at retirement. But now it’s up to the retiree to decide how to make that money last for 20 or 30 years. Most people aren’t very good at it, and their eroded Social Security benefits don’t offer much of a backstop.So the focus of retirement planning has shifted in recent years. How can retirees get the kind of lifetime income that traditional pensions once provided? The answer doesn’t seem so complicated. All you have to do is take a portion of your 401(k) and purchase an annuity, which is an insurance contract that agrees to pay a monthly benefit for life or some other specified period. Workers with no plan restrictions on lump-sum distributions cash out all assets way more often than workers with some restrictions, EBRI reports in a January brief.  Those with no plan restrictions had an annuitization rate of just 27.3%, vs. 65.8% for those in a plan with restrictions on lump-sum distributions.

The Sandwich Generation | Pew - With an aging population and a generation of young adults struggling to achieve financial independence, the burdens and responsibilities of middle-aged Americans are increasing. Nearly half (47%) of adults in their 40s and 50s have a parent age 65 or older and are either raising a young child or financially supporting a grown child (age 18 or older). And about one-in-seven middle-aged adults (15%) is providing financial support to both an aging parent and a child. While the share of middle-aged adults living in the so-called sandwich generation has increased only marginally in recent years, the financial burdens associated with caring for multiple generations of family members are mounting. The increased pressure is coming primarily from grown children rather than aging parents. According to a new nationwide Pew Research Center survey, roughly half (48%) of adults ages 40 to 59 have provided some financial support to at least one grown child in the past year, with 27% providing the primary support. These shares are up significantly from 2005. By contrast, about one-in-five middle-aged adults (21%) have provided financial support to a parent age 65 or older in the past year, basically unchanged from 2005. The new survey was conducted Nov. 28-Dec. 5, 2012 among 2,511 adults nationwide.

Low Rates Force Companies to Pour Cash Into Pensions - Ford Motor Co. expects to spend $5 billion this year shoring up its pension funds, almost as much as the auto maker spent last year building plants, buying equipment and developing new cars. The nation's second-largest auto maker is one of a who's who of U.S. companies pouring cash into pension plans now being battered by record low interest rates. Verizon Communications Inc. contributed $1.7 billion to its pension plan in the fourth quarter and—highlighting companies' sensitivity to this issue—Boeing Co. now reports "core earnings" to separate out pension expenses. "It is one of the top issues that companies are dealing with now," said Michael Moran, pension strategist at investment adviser Goldman Sachs Asset Management. The drain on corporate cash is a side effect of the U.S. monetary policy aimed at encouraging borrowing to stimulate the economy. Companies are required to calculate the present value of the future pension liabilities by using a so-called discount rate, based on corporate bond yields. As those rates fall, the liabilities rise.

Latest Pathetic Conservative Attack on Social Security: Disability Fraud Hysteria - Conservatives are not happy. Despite their best efforts, the public continues to give Social Security a big thumbs up, and the President has just launched his second term with a speech hailing the program as a force that strengthens America.  You can understand their frustration. They’ve tried so very hard to make Americans think that we cannot afford to treat sick, disabled and elderly people with dignity while we subsidize the rich and fight unnecessary wars. But the public hasn't bought their solvency fabrications. And we haven’t been fooled by various pretenses for cutting, from the “chained CPI” adjustment to extending the retirement age again.  The think-tank minions and PR units attached to these Scrooges keep themselves up at night imagining new ways to dupe the public into accepting grotesque economic inequality as the norm and a downgraded future as the price we must pay for Wall Street greed. Now the Social Security haters are taking a page from the Welfare Queen smear campaign book of the ‘90s to conjure a new scapegoat for all that is wrong with America: the Disability King. According to this meme, the problem with America’s economy and society is vast numbers of lazy, lying, good-for-nothing loafers cheating the American taxpayer through disability fraud.

One Recession Cost Is Lower Social Security Benefits - On Sunday, Catherine Rampell of The New York Times reported on the economic difficulties of those in their 50s and early 60s suffering from high unemployment and decimation of their retirement savings by the recession. Many will be forced to take Social Security benefits as soon as they turn age 62. Unfortunately, they may be risking unnecessary poverty in old age as a consequence. In 2011, 59 percent of those claiming Social Security for the first time were between the ages of 62 and 64, as shown in this figure from a recent Congressional Research Service report. Historically, the normal retirement age has been 65, but life expectancy has risen over time. In 1940, a man age 65 could expect to live an additional 12.7 years, a woman 14.7 years. Longevity for men at age 65 increased to 17.6 years by 2009 and for women to 20.3 years, according to the National Center for Health Statistics (see Table 22). Despite rising longevity, Congress created an option for early retirement at age 62 in 1961. It doesn’t appear that a great deal of thought was given to the long-term consequences of the decision.  The reason is that workers did not receive full benefits at age 62, but 20 percent less than they would get if they waited until age 65. That was thought to be an actuarially fair adjustment so that whether one retired at age 62 or age 65, one received approximately the same aggregate lifetime Social Security benefits.

DEAR PAUL KRUGMAN Please Read This about Social Security - I think the following facts would be game changers in the so-called "debate" about Social Security, if they become widely known and understood.
Social Security has nothing to do with the deficit...  In spite of tortured logic like that of Chuck Blahous who admitted grudgingly that "technically" Social Security does not affect the budget, but "in reality" if Congress has to pay back the money it has borrowed from Social Security, that will have an effect on the budget. This amounts to blaming granny for lending me her life savings. After all, if she hadn't lent it to me I wouldn't have spent it. Therefore it's her fault that I have to get a job or borrow money from someone else to pay her back.
... and therefore should not be part of the "deficit reduction" hysteria.Again, in spite of logic so tortured it gives lies a bad name: The serious folks who are so very worried about the deficit sometimes admit that Social Security has nothing to do with the deficit, "but we need to cut Social Security to give confidence to the markets.” Because even though Social Security has nothing to do with the deficit, cutting it will show "the market" that we are serious about controlling our deficit.
Social Security is not going broke. It can't go broke. It is paid for by the workers who will get the benefits. As long as they understand the value of protecting part of their savings from inflation and market losses... insuring at least a minimally decent retirement... they will want to be allowed to continue to pay for their Social Security.

MOAAAAAAAAAAAAR SOCIAL SECURITY - Everyone on the panel - including the conservative - agreed the the looming retirement crisis is fucked up and bullshit. Consensus was that increasing Social Security benefits was a nonstarter, so we must look elsewhere. The conservative (not sure he'd admit to wearing that hat, but he does wear a Heritage hat) had some good - if ultimately insufficient - ideas about how to improve our private savings regime. Ideas can be good yet still not very helpful. The more liberalish Serious person had some ideas for various add on schemes, though agreed with me that ultimately increasing Social Security was the best idea. I, of course, was there to deliver the truth bomb - we need to increase Social Security benefits. My new modest goal in life is to get this going. Liberal groups, people recruiting candidates, rich benevolent's time to turn the tide. This needs to be a key liberal position.

2013 Northwest Plan for a Real Social Security Fix -- The Northwest Plan for a Real Social Security Fix was first introduced and revised in 2009. Obviously it was never adopted. Still the basic mechanism remains the same as does the rationale and working assumptions and in what follows I am going to assume a certain knowledge of the mechanics of Social Security finance and reporting.  The NW Plan can be described in a variety of ways but here I want to present it as the answer to a question: "Under the Social Security Trustees Intermediate Cost Alternative and given current law Scheduled Benefits and Cap Formula what would be the minimally disruptive revenue only fix to deliver those benefits with no changes in retirement age?" Note the questions that are not being addressed: "Is Intermediate Cost a realistic mid-point projection?" "Are current Scheduled Benefits adequate? too generous? equitable?" "Why NOT adjust the Cap Formula?" While these are all important questions and ones the authors of the NW Plan have plenty of opinions on, they just are not the question at hand. For the purposes of establishing a baseline for further discussion the NW Plan simply assumes IC and current law benefit and cap formulae, and also adopts the Trustees tests for 'adequacy' 'solvency' and 'actuarial balance'. For the Trustees Social Security is in actuarial balance if it is projected under IC assumptions to end each year of the short term window and the last year of the long term window with an asset reserve equal to 100% or more of the next year's projected cost.

Health Care Thoughts: Law of Unintended Consequences - Unions have been enthusiastic supporters of Obamacare. But not all unions and not all unions benefits are the same. Unions with lower income members are suddenly discovering the PPACA deal is not so great for everyone. Lower income workers with union plans will not be eligible for subsidies, and now the unions want to change the rules. Unions lobbied for this early on but were denied by the Obama administration. (There is no monopoly on self-interest here, some large businesses (think Wal-Mart) will be maneuvering to dump workers into state Medicaid plans.) Employers with union plans are paying higher premiums as the working class pays for improvement in coverage mandated by PPACA. This can be critical in bid areas such as construction. Unintended consequences can be quite cruel.

Baby boomers sicker than parents' generation, study finds -- Baby boomers have more chronic illness and disability than their parents, as their sedentary habits and expanding girth offset the modern medicine that enables them to live longer, a study said. Baby boomers, the 78 million Americans born from 1946 through 1964, engage in less physical activity, are more overweight and have higher rates of hypertension and high cholesterol, according to a study released yesterday in JAMA Internal Medicine. The study, among the first to compare the generations, shows that baby boomers aren’t as healthy and active as most would believe, said Dana E. King, the lead author. They become sicker earlier in life than the previous generation, are more limited in what they can do at work and are more likely to need the use of a cane or walker, the research found.

Baby Boomers Are Fatter And Lazier Than Their Parents' Generation - Our modern world has bred a generation of inactive, fat and sick baby boomers, a new report from the Journal of the American Medical Association suggests, even though modern medicine has made great strides. In general, only 13.2 percent of baby boomers claim to be in "excellent" health, compared to 32 percent of their parents' generation. The authors write: Despite their longer life expectancy over previous generations, US baby boomers have higher rates of chronic disease, more disability and lower self-rated health than members of the previous generation at the same age. Baby boomers are the adults born between 1946 and 1964, about 78 million Americans — they make up about 26 percent of the population. Their generation was titled the boomers because they were born after the second world war, when there was a huge number of babies born. The new study analyzed data from the National Health and Nutrition Examination Surveys. They looked at two sets of people: Baby boomers who participated in the survey between 2007 to 2010, when they were between 46 and 64, and a slightly older generation, who were between 46 and 64 during the years of 1988 to 1994. Here's the results, from the article:

Drug Users Turn Death Dealers as Methadone From Bain Hits Street - Vanlieu said she got a carryout methadone dose at a clinic operated by CRC Health Corp. in Richmond, Indiana, in March, 2010, and then gave about 15 milligrams to her friend Carissa Plemons. Plemons died hours later, after ingesting a lethal mix of methadone and other drugs, according to police reports. Take-home methadone -- doses patients carry out instead of taking at clinics -- enabled the abuse, said Vanlieu, 26, who was sentenced to six years in prison for dealing the drug to Plemons. While she didn’t sell it to her friend, she said in an interview that other clinic patients often re-sold their take- homes. CRC is owned by Boston-based Bain Capital Partners LLC and is the largest U.S. provider of methadone treatment. “Some would sell it in the parking lot,” she said. Liquid methadone, used for decades to help addicts abate withdrawal symptoms as they quit heroin or other opiates, is leaking into illegal street sales via take-home doses, according to law-enforcement officials in Indiana, Kentucky, Virginia and West Virginia. Investigators in each of those states have linked such “diverted” doses to clinics operated by CRC.

Compounding pharmacies have been linked to deaths, safety failures for years - Shoddy practices and unsanitary conditions at three large-scale specialty pharmacies have been tied to deaths and illnesses over the past decade, revealing that the serious safety lapses at a Massachusetts pharmacy linked to last fall’s deadly meningitis outbreak were not an isolated occurrence, records and interviews show. The series of safety failures happened long before national attention focused on the New England Compounding Center, whose contaminated steroid shots were linked to 45 deaths and 651 illnesses.  A Washington Post analysis found that state and federal authorities did little to systematically inspect and correct hazards posed by specialty pharmacies, which custom-mix medications for individual patients, hospitals and clinics. In the lightly regulated industry, pharmacies were rarely punished even when their mistakes had lethal consequences.The Post reviewed hundreds of records, including lawsuits and Food and Drug Administration documents, and interviewed dozens of government and industry officials. The review found serious problems at three of 15 large-scale compounding pharmacies that dominate the industry. These multimillion-dollar companies mass-produce medications and ship them across state lines, often without individual patient prescriptions.

We’re going to blow up your boiler: Critical bug threatens hospital systems - More than 21,000 Internet-connected devices sold by Honeywell are vulnerable to a hack that allows attackers to remotely seize control of building heating systems, elevators, and other industrial equipment and in some cases, causes them to malfunction. The hijacking vulnerability in Niagara AX-branded hardware and software sold by Honeywell's Tridium division was demonstrated at this week's Kaspersky Security Analyst Summit in San Juan, Puerto Rico. Billy Rios and Terry McCorkle, two security experts with a firm called Cylance, allowed an audience to watch as they executed a custom script that took about 25 seconds to take control of a default configuration of the industrial control software. When they were done they had unfettered control over the device, which is used to centralize control over alarm systems, garage doors, heating ventilation and cooling systems, and other equipment in large buildings. Taking advantage of the flaw would give attackers half a world away the same control on-site engineers have over connected systems. Extortionists, disgruntled or unstable employees, or even terrorists could potentially exploit vulnerabilities that allow them to bring about catastrophic effects, such as causing a large heating system to explode or catch fire or sabotaging large chillers used by hospitals and other facilities. Attackers could also exploit the bug to gain a toehold into networks, which could then be further penetrated using additional vulnerabilities that may be present.

Humans Swap DNA More Readily Than They Swap Stories - In a new study, evolutionary psychologist Quentin Atkinson is using the popular tale of the kind and unkind girls to study how human culture differs within and between groups, and how easily the story moved from one group to another. Atkinson, of the University of Auckland in New Zealand, and his co-authors employed tools normally used to study genetic variation within a species, such as people, to look at variations in this folktale throughout Europe. The researchers found that there were significant differences in the folktale between ethnolinguistic groups—or groups bound together by language and ethnicity. From this, the scientists concluded that it's much harder for cultural information to move between groups than it is for genes.The study, published February 5 in Proceedings of the Royal Society B, found that about 9 percent of the variation in the tale of the two girls occurred between ethnolinguistic groups. Previous studies looking at the genetic diversity across groups in Europe found levels of variation less than one percent.

Stowaway Killer TB Travels Globe Fueling Screening Sales -Tuberculosis, the deadly lung disease purged from most rich nations decades ago, is hitching a ride back in unsuspecting migrants. Most cases go undetected, quietly spreading TB from Stockholm to Sydney. A latent form of the bug that isn’t detectable by standard X-ray screening can hide in bone marrow, lying dormant for years, researchers said in a study published last week. After the infection springs back to life, its carriers can spread it anew via sneezing and coughing. As global migration accelerates, an increase in cases of TB among immigrants has prompted governments to review screening procedures.“If we go on doing what we’ve always done, which is just to treat active TB, we’ll go on getting what we’ve always got, which is more and more TB,” said Ajit Lalvani, chair of infectious diseases at Imperial College London. “We’re not stemming the tide or tackling the root cause, which is the latent TB,” he said in a telephone interview. Latent TB was the most commonly diagnosed infection among migrants globally, and was found in almost half of those headed for the U.S., researchers from the Atlanta-based Centers for Disease Control and Prevention said in December.

Fukushima Rescue Mission Lasting Legacy: Radioactive Contamination of Americans  - The Department of Defense has decided to walk away from an unprecedented medical registry of nearly 70,000 American service members, civilian workers, and their families caught in the radioactive clouds blowing from the destroyed nuclear power plants at Fukushima Daiichi in Japan. The decision to cease updating the registry means there will be no way to determine if patterns of health problems emerge among the members of the Marines, Army, Air Force, Corps of Engineers, and Navy stationed at 63 installations in Japan with their families. In addition, it leaves thousands of sailors and Marines in the USS Ronald Reagan Carrier Strike Group 7 on their own when it comes to determining if any of them are developing problems caused by radiation exposure.

Sounds Of Silence: Weekly Science Sections In Newspapers Drop From 95 In 1989 To 19 In 2012 Columbia Journalism Review published the sorry statistics:

  • 95 weekly science sections in newspapers in 1989
  • 34 weekly science sections in newspapers in 2005
  • 19 weekly science sections in newspapers in 2012

Actually, the situation is even worse than those numbers indicate. They are really for daily newspapers in the U.S. that run weekly science and health sections. As a 2006 Shorenstein Center analysis cited by CJR points out, of the remaining science sections in 2005:… more than two-thirds focus primarily on health in their titles, up from about 50 percent in 1992. In comparison, the sections that self-identify as “science” dropped from 30 percent in 1992 to 12 percent in 2004. The rest—18 percent today versus 21 percent in 1992—were listed as a combination of “health” and “science.”

The Indian Women Pushed Into Hysterectomies - Thousands of Indian women are having their wombs removed in operations that campaigners say are unnecessary and only performed to make money for unscrupulous private doctors. Sunita is uncertain of her exact age but thinks she's about 25 years old. I met her in a small village in Rajasthan, north-west India, surrounded by chewing cattle and birdsong. She was covered in jewellery, from a nose-stud and rings to bangles which jangled when she gestured with her hand. Her face hardens when she tells me about her operation. "I went to the clinic because I had heavy bleeding during menstruation," she says. "The doctor did an ultrasound and said I might develop cancer. He rushed me into having a hysterectomy that same day." Sunita says she was reluctant to have the operation straightaway and wanted to discuss it with her husband first. She says the doctor said the operation was urgent and sent her for surgery just hours later.

Will reputation metrics open scientific publication? - That is the contention of Richard Price, the founder of Aaron Swartz was determined to free up access to academic articles. He perceived an injustice in which scientific research lies behind expensive paywalls despite being funded by the taxpayer. The taxpayer ends up paying twice for the same research: once to fund it and a second time to read it. The heart of the problem lies in the reputation system, which encourages scientists to put their work behind paywalls. The way out of this mess is to build new reputation metrics. As usual, there are lots of issues here: the right of taxpayers, the market power of journals, etc. But Price actually focusses on the incentives of scientists. When there are now options for scientists to disseminate their research freely, why do they submit them exclusively to journals who then put up paywalls?

Tomato Imports Deal Reached by U.S. and Mexico - The United States and Mexico have reached a tentative agreement on cross-border trade in tomatoes, narrowly averting a trade war that threatened to engulf a swath of American businesses.  The agreement, reached late Saturday, raises the minimum sales price for Mexican tomatoes in the United States, aims to strengthen compliance and enforcement, and increases the types of tomatoes governed by the bilateral pact to four from one.  “The draft agreement raises reference prices substantially, in some cases more than double the current reference price for certain products, and accounts for changes that have occurred in the tomato market since the signing of the original agreement,”

The Meat Industry Now Consumes Four-Fifths of All Antibiotics - Last year, the Food and Drug Administration proposed a set of voluntary "guidelines" designed to nudge the meat industry to curb its antibiotics habit. Ever since,  the meat industry has been merrily gorging away on antibiotics—and churning out meat rife with antibiotic-resistant pathogens—if the latest data from the FDA itself is any indication. The Pew Charitable Trusts crunched the agency's numbers on antibiotic use on livestock farms and compared them to data on human use of antibiotics to treat illness, and mashed it all into an infographic, which I've excerpted below. Note that that while human antibiotic use has leveled off at below 8 billion pounds annually, livestock farms have been sucking in more and more of the drugs each year—and consumption reached a record nearly 29.9 billion pounds in 2011. To put it another way, the livestock industry is now consuming nearly four-fifths of the antibiotics used in the US, and its appetite for them is growing. Not surprisingly, when you cram animals together by the thousands and dose them daily with antibiotics, the bacteria that live on and in the animals adapt and develop resistance to those bacteria killers. Pew crunched another new set of data, the FDA's latest release of results from its National Antimicrobial Resistance Monitoring System, or NARMS, which buys samples of meat products and subjects them to testing for bacterial pathogens. Again, the results are sobering. Here a a few highlights pointed to by Pew in an email:

States Considering Laws That Would Make it an Act of Terrorism to Report on Abuses at Factory Farms How do you keep consumers in the dark about the horrors of factory farms? By making it an “act of terrorism” for anyone to investigate animal cruelty, food safety or environmental violations on the corporate-controlled farms that produce the bulk of our meat, eggs and dairy products.And who better to write the Animal and Ecological Terrorism Act, designed to protect Big Ag and Big Energy, than the lawyers on the Energy, Environment and Agriculture Task Force at the corporate-funded and infamous American Legislative Exchange Council (ALEC). New Hampshire, Wyoming and Nebraska are the latest states to introduce Ag-Gag laws aimed at preventing employees, journalists or activists from exposing illegal or unethical practices on factory farms. Lawmakers in 10 other states introduced similar bills in 2011-2012.  The laws passed in three of those states: Missouri, Iowa and Utah.  But consumer and animal-welfare activists prevented the laws from passing in Florida, Illinois, Indiana, Minnesota, Nebraska, New York and Tennessee.

Nearly Half of All US Farms Now Have Superweeds -- Last year's drought took a big bite out of the two most prodigious US crops, corn and soy. But it apparently didn't slow down the spread of weeds that have developed resistance to Monsanto's herbicide Roundup (glyphosate), used on crops engineered by Monsanto to resist it. More than 70 percent of all the the corn, soy, and cotton grown in the US is now genetically modified to withstand glyphosate. Back in 2011, such weeds were already spreading fast. "Monsanto's 'Superweeds' Gallop Through Midwest," declared the headline of a post I wrote then. What's the word you use when an already-galloping horse speeds up? Because that's what's happening. Let's try this: "Monsanto's 'Superweeds' Stampede Through Midwest." That pretty much describes the situation last year, according to a new report from the agribusiness research consultancy Stratus. Since the 2010 growing season, the group has been polling "thousands of US farmers" across 31 states about herbicide resistance. Here's what they found in the 2012 season:

USDA: Climate Change and Agriculture in the United States: Effects and Adaptation -Climate change effects over the next 25 years will be mixed.  Continued changes by mid-century and beyond, however, are expected to have generally detrimental effects on most crops and livestock.  As temperatures increase, crop production areas may shift to follow the temperature range for optimal growth and yield, though production in any given location will be more influenced by available soil water during the growing season.  Weed control costs total more than $11 billion a year in the U.S.; those costs are expected to rise with increasing temperatures and carbon dioxide concentrations.  Changing climate will also influence livestock production.  Heat stress for any specific type of livestock can damage performance, production, and fertility, limiting the production of meat, milk, or eggs.  Changes in forage type and nutrient content will likely influence grazing management needs.  Insect and disease prevalence are expected to increase under warmer and more humid conditions, diminishing animal health and productivity.

Report: Climate to stress crops - Agriculture, a $9 billion industry in Arizona, is vulnerable to the increased heat and drought that's likely to accompany continued climate change, said a new federally commissioned report. "Farmers are renowned for adapting to yearly changes in the weather, but climate change in the Southwest could happen faster and more extensively than farmers' ability to adapt," said the report. A warmer, drier climate is projected to accelerate current trends toward transferring agricultural water to growing urban areas and could shift some crop production northward, the report said. In some rural communities, reduced crop yields from higher temperatures and scarce water will displace jobs, the new report said. The warning came from a chapter on the Southwest in the new National Climate Assessment report, written by a panel of scientists convened by the federal government.

Kansas and South Dakota winter wheat severely damaged by drought - Senior Grain Marketing Analyst Pete Lorenz spoke about severe drought conditions gripping the nation’s farm lands. "We see real risk for production problems this coming year in wheat, and in some corn areas, because of the drought," Lorenz said. “In Kansas, where I live, the state’s wheat crop is in the poorest condition it has been in 50 years. And I’ve heard South Dakota hasn’t seen crop conditions this poor in history,” Lorenz emphasized. Weather condition and potential crop losses could lead to extreme market volatility. And it makes marketing plans that much more of a necessity. A combination of all risk management tools, options, forward contracts and other marketing strategies will be needed this year. The crop insurance sign up deadline is March 15 for spring-planted crops. With inadequate subsoil moisture in western Kansas, Lorenz has heard reports of people digging six feet down, without finding moisture — encountering nothing but dust. This puts spring-planted crops at severe risk. “It will take several rain events to replenish topsoil and subsoil levels," according to Lorenz.

Hay Supplies Lowest in Five Decades - Production of hay, including alfalfa, in the top-18 hay-producing states has been declining rapidly, according to USDA’s recently released Annual Crop Production Summary. In fact, supplies of all hay are at the lowest level since 1957, according to USDA. "Lower stocks equate to lower production due to both lower acreage and the drought," says Dan Undersander, agronomist with the University of Wisconsin, Madison. "If prices stay high, it will encourage people to stay in hay, but if prices fall, they’ll move more acreage into corn." Last year, hay growers harvested 79.6 million tons of all-hay, down 11 percent from 2011’s 89.5 million tons and off 21 percent from 2010’s 100.2 million tons. Declines in acreage occurred across most of the Corn Belt, including Iowa, Minnesota, Illinois, Michigan, and Missouri. All alfalfa production, which includes baled alfalfa, greenchop, and haylage, in 2012 also fell. Area harvested in the top-18 alfalfa-producing states slipped 5 percent from 13.8 million acres in 2011 to 13.1 million last year. And 2012’s harvested acreage was nearly 10 percent lower than 2010’s 14.5 million acres. Total alfalfa production fell 19 percent from 52.7 million tons in 2011 to 42.5 million tons last year. Last year’s production is a 24 percent decline from 2010’s 56 million tons. Yield per acre of all alfalfa has also been dropping, from 3.85 tons in 2010 to 3.81 tons in 2011 to 3.24 tons last year. Thus, over the past two years, yield has plunged more than 15 percent.

Texas drought killed 301 million trees - The numbers are ugly. A whopping 301 million trees have died across state forestlands as a result of the 2011 drought, the Texas A&M Forest Service reported Tuesday. The latest count was determined after a three-month, on-the-ground study of hundreds of forested plots, as well as satellite imagery from before and after the drought. It includes trees killed directly by the drought and those so weakened that they succumbed to insects and disease. The Brazos Valley region took the heaviest hit, losing nearly 10 percent of its trees on forested land. North Texas and western northeast Texas lost 8.3 percent and 8.2 percent, respectively. Harris County is included in the 6.5 percent loss in the western section of southeast Texas. That's nearly 19 million fewer trees than the near 290 million live tree count before the drought. Far east stretches of southeast Texas got better news: a 1.3 percent loss, down 7.5 million trees from pre-drought 597.1 million live trees. The 301 million count falls about midway of the forest service's previous estimates of 100 to 500 million drought-related tree deaths.

'Just the Beginning': US Drought Kills Hundreds of Thousands of Trees - The historic drought of 2012, which continues to ravage over half of the contiguous US, has a new legacy: the death of hundreds of thousands of trees across the Midwest. An Iowa tree waits for rain. (Photo: iowa_spirit_walker via Flickr) "This is just beginning," said Purdue University plant pathologist Janna Beckerman. "I suspect we'll see trees still dying for the next two or three years." According to Beckerman, "Indiana's white cedar and Florida cypress trees began dying in late summer [...] and Alberta and Colorado blue spruce are succumbing now." The latest Drought Monitor shows that 58% of the contiguous US remains in moderate or greater drought, with this past January month considered "the worst" since the Monitor began 13 years ago, said climatologist Mark Svoboda. “We are going to be talking about drought for much of 2013 as little relief is being projected,” seconded Brian Fuchs, climatologist with the National Drought Mitigation Center at the University of Nebraska. “A lot of areas are going to go into this spring planting season with a deficit. We are seeing it already with winter wheat, and it is going to continue unless we see changes.”

Munich Re Says World Crop Insurance Costs Top Record on Drought - Global crop insurance claims were the highest ever last year after drought cut yields in the U.S., historically the biggest grower of corn and soybeans.Claims worldwide were worth about $23 billion in 2012, with $15 billion going to growers in the U.S., said Karl Murr, who heads the agriculture unit at Munich Re, the world’s biggest reinsurance company. About 85% of farmland is insured in the U.S., compared with 20% globally. U.S. corn and soybean harvests slid to a 6-year low in the past season after the most severe dry spell since 1956. “Drought was by far the single most important cause of losses in 2012,” Murr said yesterday in an e-mailed response to Bloomberg questions. “With the U.S. representing about 50% of worldwide crop insured values, they obviously took the lion’s share of payouts in 2012, dwarfing loss payouts in Europe, including eastern Europe.” Corn and soybean prices rallied to records last year on the Chicago Board of Trade as yield prospects declined and rising demand depleted world stockpiles. As of Jan. 21, U.S. farmers had collected about $12.35 billion in insurance claims since the marketing year began, surpassing the $10.84 billion at the same time a year earlier, according to the U.S. Department of Agriculture’s Risk Management Agency.

2012 Brief: U.S. ethanol prices and production lower compared to 2011 - Today in Energy - U.S. Energy Information Administration (EIA) - Spot prices for U.S. fuel ethanol were lower throughout most of 2012 compared to 2011. Prices were relatively stable during the first half of 2012, but they rose at mid-year as severe drought and scorching temperatures reduced corn yields, resulting in higher prices for corn that is used to make nearly all U.S. ethanol. Ethanol spot prices rose from a low of around $2 per gallon in mid-June to a 2012 peak of $2.61 in late July. However, that was still 30 cents per gallon lower than the peak spot price at about the same time in 2011. Ethanol prices last year did not rise above 2011 levels until December 2012.  Higher ethanol prices during the second half of 2012 were mainly the result of higher corn prices, which rose 35% from mid-June through August because of concerns that the corn crop would be affected by the worst drought in the Midwest since the 1950s, coupled with triple-digit temperatures. During the hot and dry summer of 2012, the U.S. Department of Agriculture reported that 88% of the U.S. corn crop was within a drought area. The 2012-13 U.S. corn crop is expected to be the smallest in six years at nearly 10.8 billion bushels, according to USDA's January 2013 crop forecast, 13% smaller than the 2011-12 crop. USDA indicates that about 4.5 billion bushels, or 42% of the harvest, will go to make ethanol. That level is down from just over 5 billion bushels used to make ethanol during the previous crop year.

Rising Use of Corn Ethanol Stresses Midwestern Aquifers: Scientific American: Biofuel production is often touted as a boon to rural development, but a University of Iowa engineering professor is worried about the effect of corn ethanol plants on his and other states' water supplies. At a biofuels energy symposium hosted by the Institute of Medicine of the National Academies last week in Washington, D.C., professor Jerald Schnoor said corn ethanol production facilities require large quantities of high-purity water during the fermentation process. This water is obtained from underground aquifers, and as ethanol production reaches a fever pitch in Iowa, the state's water supply is threatened. Even in 2009, Iowa state geologists warned that the Jordan aquifer was being pumped at an unsustainable rate in several counties, exceeding the state's 1975 base line within the next two decades. "We're near record devotion of acres to corn right now," said Schnoor, who also headed the Iowa Climate Change Advisory Council in 2007. Up to 40 percent of corn production in the United States now goes to ethanol fuel. Schnoor estimated that up to three-quarters of corn crops in his home state are devoted to ethanol production, stressing Iowa's groundwater sources.

2 Great Lakes hit lowest water level on record - U.S. News: Two of the Great Lakes have hit their lowest water levels ever recorded, the U.S. Army Corps of Engineers said Tuesday, capping more than a decade of below-normal rain and snowfall and higher temperatures that boost evaporation. Measurements taken last month show Lake Huron and Lake Michigan have reached their lowest ebb since record keeping began in 1918, and the lakes could set additional records over the next few months, the corps said. The lakes were 29 inches below their long-term average and had declined 17 inches since January 2012. The other Great Lakes — Superior, Erie and Ontario — were also well below average.The low water has caused heavy economic losses by forcing cargo ships to carry lighter loads, leaving boat docks high and dry, and damaging fish-spawning areas. And vegetation has sprung up in newly exposed shoreline bottomlands, a turnoff for hotel customers who prefer sandy beaches. The corps' report came as shippers pleaded with Congress for more money to dredge ever-shallower harbors and channels. Shippers are taxed to support a harbor maintenance fund, but only about half of the revenue is spent on dredging. The remainder is diverted to the treasury for other purposes.

Lake Michigan and Lake Huron hit all-time low water levels -During January 2013, water levels on Lake Michigan and Lake Huron fell to their all-time lowest values since record keeping began in 1918, said the U.S. Army Corps of Engineers on Tuesday. The two lakes (which are connected and are hydrologically the same lake) fell to a water level of 576.02'. This is 0.4" below the previous record low of 576.05' set in March 1964. The lakes have dropped 17 inches since January 2012, and are now 29 inches below their long-term average. Lake Superior is about 9" above its all-time low water level, and Lakes Erie and Ontario are just 6" below average (26 - 27" above their all-time lows), so these lakes will not set new low water records in 2013. The latest forecast calls for Lake Superior to drop 2 inches during February, Lake Michigan and Huron to drop 1 inch, Lake Erie to rise 2 inches, and Lake Ontario remain near its current level.The record-low water levels on Lake Michigan and Lake Huron are due, in part, to dredging operations in their outflow channel, the St. Clair River. The dredging, which stopped in the 1960s, is blamed for a long-term 10 - 16" decrease in water levels. The record low water levels on Lake Michigan and Lake Huron in January occurred despite the fact that precipitation over their watershed was 61% above average during the month. However, precipitation over the past 12 months was only 91% of average, and runoff into the lakes depends upon precipitation over longer than a 1-month period. Furthermore, evaporation over these lakes was much higher than average during January, making the net water supplied to the lakes (runoff into the lakes, plus precipitation over the lakes, minus evaporation from the lakes) only 63% of average.

Water Demand for Energy to Double by 2035: The amount of fresh water consumed for world energy production is on track to double within the next 25 years, the International Energy Agency (IEA) projects. And even though fracking—high-pressure hydraulic fracturing of underground rock formations for natural gas and oil—might grab headlines, IEA sees its future impact as relatively small. By far the largest strain on future water resources from the energy system, according to IEA's forecast, would be due to two lesser noted, but profound trends in the energy world: soaring coal-fired electricity, and the ramping up of biofuel production. If today's policies remain in place, the IEA calculates that water consumed for energy production would increase from 66 billion cubic meters (bcm) today to 135 bcm annually by 2035. That's an amount equal to the residential water use of every person in the United States over three years, or 90 days' discharge of the Mississippi River. It would be four times the volume of the largest U.S. reservoir, Hoover Dam's Lake Mead.

Global warming has increased monthly heat records worldwide by a factor of five -  Monthly temperature extremes have become much more frequent, as measurements from around the world indicate. On average, there are now five times as many record-breaking hot months worldwide than could be expected without long-term global warming, shows a study now published in Climatic Change. In parts of Europe, Africa and southern Asia the number of monthly records has increased even by a factor of ten. Eighty percent of observed monthly records would not have occurred without human influence on climate, concludes the author-team of the Potsdam Institute for Climate Impact Research (PIK) and the Complutense University of Madrid. The last decade brought unprecedented heat waves; for instance in the US in 2012, in Russia in 2010, in Australia in 2009, and in Europe in 2003,” lead-author Dim Coumou says. “Heat extremes are causing many deaths, major forest fires, and harvest losses – societies and ecosystems are not adapted to ever new record-breaking temperatures.” The new study relies on 131 years of monthly temperature data for more than 12,000 grid points around the world, provided by NASA. Comprehensive analysis reveals the increase in records.

NSIDC's new page for Greenland surface melt!!! - An intense Greenland melt season: 2012 in review  - Greenland’s surface melting in 2012 was intense, far in excess of any earlier year in the satellite record since 1979. In July 2012, a very unusual weather event occurred. For a few days, 97% of the entire ice sheet indicated surface melting. This event prompted NSIDC to build this Web site, with the help of two prominent experts on Greenland surface melting (Dr. Thomas Mote of University of Georgia, and Dr. Marco Tedesco of CUNY). The Greenland Ice Sheet contains a massive amount of fresh water, which if added to the ocean could raise sea levels enough to flood many coastal areas where people live around the world. The ice sheet normally gains snow during winter and melts some during the summer, but in recent decades its mass has been dwindling. For more information about the significance of the Greenland Ice Sheet and its surface melt, see About the Greenland Ice Sheet. Warm conditions in 2012 were caused by a persistent high pressure pattern that lasted much of the summer. Since September, temperatures have remained warmer than average, but dropped well below freezing as autumn and winter arrived. We review the year’s events, and introduce some general characteristics of the Greenland ice sheet.

Are we heading for 6° temperature rise? - Climate scientist Kevin Anderson believes scientists at the interface of climate and policy may have used naive assumptions when modelling for a 2°C target. They say never judge a book by its cover, but chances are a lecture entitled "Real clothes for the emperor: facing the challenges of climate change" will be fairly down-to-earth. That proved to be the case when Kevin Anderson of the Tyndall Centre for Climate Change Research at the University of Manchester, UK, gave the Cabot Annual Lecture 2012 in Bristol, UK, in November 2012. In response to an audience member who commented that most climate scientists were simply trying to pay their bills, Anderson said "I don't think it's OK to walk past a mugging on the way to pay the mortgage. Climate scientists need to be good citizens too. Our science tells us we are killing people in poor parts of the world by putting our lights on and we need to make people think about that. Scientists need to start standing up for what they believe in. By staying quiet we are legitimizing it."

NOAA monitoring of Arctic methane and CO2 halted by budget cuts - The federal government is cutting back its ability to monitor greenhouse gas emissions, and scientists are crying foul. The National Oceanic and Atmospheric Administration spends roughly $6 million per year to sample carbon dioxide, methane and nearly 20 other gases using a global network of ground stations, tall towers and aircraft. But faced with shrinking budgets and an uncertain fiscal future, NOAA has stopped measuring greenhouse gas levels at a dozen ground stations, eliminated some aircraft monitoring and cut the frequency of remaining measurements in half. The agency scrapped plans to expand its network of tall towers and is now moving to shut down some of the seven existing sites. The cuts come at a time when governments are pushing for more detailed information about sources and sinks of greenhouse gases. Scientists say the decision to shrink NOAA's monitoring network -- the world's largest -- threatens their ability to provide those answers.

GOP Congress-critters vote down hearings on climate and sea level rise - House Energy and Commerce Committee Republicans have rebuffed Democrats’ bid to require the high-profile panel to hold hearings on links between climate change, extreme weather and threats to coastal areas. On Wednesday the Committee, along party lines, voted down Democratic amendments to its formal oversight plan for the 113th Congress. One defeated amendment, from Rep. Bobby Rush (D-Ill.), would have required hearings on the role of climate change in drought, heat waves, wildfires, reduced crop yields and other effects. … A second defeated amendment, by Rep. Frank Pallone (D-N.J.), called for hearings on climate-related coastal threats including sea-level rise, more frequent and intense storms, and ocean acidification. … More votes – with a similar outcome – are expected when the meeting to approve the oversight plan resumes next week.

Boston Mayor Calls On City To Prepare For Next Climate Calamity  - Boston Mayor Thomas Menino said on Tuesday his coastal city will step up efforts to prepare for the effects of rising sea levels Boston was spared the catastrophic damage that Sandy brought to New York, New Jersey and Connecticut, which ultimately caused an estimated $25 billion in insured losses up and down the East Coast of the United States. But that was a quirk of the tide - Boston Harbor was close to its ebb when the storm arrived. "Had Sandy hit Boston during high tide our city would have experienced a 100-year flood event," which could have left more than 6 percent of its land area, including parts of all coastal neighborhoods, under water, Menino told reporters. "Today I'm directing my climate team to take a set of actions to be sure that Boston is as ready as possible for a storm like Sandy." The city's 100-year storm model anticipates a 5-foot (1.5 meter) storm surge at high tide. The risks could rise over the coming century if climate change leads to higher sea levels as many scientists forecast. A report by the Boston Harbor Association released on Tuesday estimated that with a 2 1/2-foot (0.76 meter) rise in sea levels, a 100-year storm could flood more than 30 percent of the city, including its airport and major convention centers.

Oil, climate and time: Why some problems will wait and others will not - America believed it could put off the question of slavery. It did for 73 years from the drafting of the U.S. Constitution to the beginning of the Civil War. Exclusively social problems have a way of being addressed—if they are addressed at all—over many decades. Problems such as climate change and resource depletion will not wait for that kind of schedule.The laws of physics are indifferent to the political schedules of humans. Climate change appears to be speeding up as ice melts faster and faster on Greenland and at the poles. Last year was the warmest year ever recorded in the United States. Climate change is not struggling to be emancipated or seeking the right to vote or to marry. It cannot be put off with assurances that it will have to wait until next year when the political climate might be better. Climate change is indifferent to such condescension and remorseless to boot. It proceeds whether we like it or not, whether we acknowledge it or not. The same can be said of resource depletion. We can pretend that America is heading toward so-called “energy independence,” even as worldwide oil production remains stalled for seven years running. But oil cannot be cajoled to do anything that the laws of physics will not allow.

Peak Oil solved, but climate will fry: BP report - BP's recently released "BP Energy Outlook 2030" report claims that a dramatic rise in new unconventional sources of oil -- tight oil, tar sands and NGLs -- will solve the "peak oil" problem. These new sources of "oil" are primed to gush forth and allow the world to burn lots more oil for decades to come. BP's chief executive Bob Dudley said bluntly: "Fears over oil running out – to which BP has never subscribed – appear increasingly groundless." And it's not just oil. According to BP, a combination of powerful new extraction technologies, growing populations and extremely weak climate policies mean humanity is on track to excavate and burn lots more fossil fuels of all kinds by 2030: 15% more oil, 26% more coal and 46% more methane (aka natural gas). In fact, policies still so strongly favour fossil fuels that BP predicts that two-thirds of all new energy over the next two decades will be supplied by increased fossil fuel burning. Unfortunately for just about everyone, this "most likely" energy comes with one very big downside. If we do burn that much fossil fuel we will crank the global thermostat up 4OC. And that, scientists say, will inflict climate misery on humanity for thousands of years. Out of the peak oil frying pan and into the raging climate fire. Sorry kids.

The Scary Truth About How Much Climate Change is Costing You - “I’m just a small businessman. I’m looking at my building, on the impact of this on me and my employees; but other people are going to start thinking, am I going to want to relocate my business here?” It’s a question being asked all across the region, as a series of scientific reports have singled out Norfolk as one of the nation’s cities most vulnerable to flooding and economic devastation as a result of sea-level rise—second only to New Orleans. The reason: rapidly rising sea levels due to climate change. Among the chief causes for that rise, according to the Nobel Prize-winning Intergovernmental Panel on Climate Change, are carbon emissions from burning fossil fuels, which trap heat in the Earth’s atmosphere, melting polar ice sheets and driving up the tides. Over the past century, the planet’s sea levels have risen about 8 inches. Globally, scientists now project sea levels to rise another 1 to 4 feet by the end of this century.And the story gets worse. A 2012 study by the U.S. Geological Survey determined that sea levels along the East Coast will rise three to four times faster than the global average. The study named Norfolk, New York City, and Boston as the three metro areas most vulnerable to the devastating effects of rising sea levels—ranging from the dramatic increase in storm surge, as winds scoop up water from the sea and dump more of it farther from the coast than ever before, to the steady erosion of roads, buildings, and arable soil as seawater creeps inland.

The Enduring Effects of Ozone Depletion - To get some perspective, the story of the ozone hole over Antarctica illustrates how even a relatively small perturbation in the atmosphere can have wide-reaching and long-lasting consequences. International action was taken within just two years of the discovery of the patch of thinning ozone in 1985 to put an end to the release of chlorofluorocarbons, or CFCs — an organic compound that was used in refrigerants and aerosols and is the main culprit in ozone depletion. But scientists are still discovering the rippling effects of that CFC pollution decades later. Two papers published online on Thursday in the journal Science highlight how the hole in the ozone layer, which is beginning to recover because of limits imposed on CFCs, is influencing major wind patterns, ocean circulation, concentrations of carbon in the atmosphere and even rainfall in the Amazon.Sukyoung Lee and Steven Feldstein, professors at Penn State, provide evidence that the depletion of the ozone layer, even more than greenhouse gas emissions, is contributing to the observed movement of the southern jet stream toward the pole. This leads, among other effects, to unusual rainfall patterns in the subtropics.

China's Creeping Toxic Smog Cloud Blankets Japan - These days one has to laugh with the Japanese, as the temptation to laugh at them is just so high. Because, sadly, the endless barrage of negative developments surrounding the "Land of the Rising Sun" may soon require a constitutional amendment replacing that key adjective to "Setting." And while everyone knows that Japan's economy is the Keynesian voodoo religion's event horizon laughing stock, caught between a 30 year deflationary implosion which is the only permissive factor allowing it to sustain interest payments on a 235% debt/GDP mountain, and a banking, debt and funding crisis should the government "succeed" in generating inflation, it is the intangibles that will be the proverbial straw that breaks this particular camel's back. Intangibles, such as 2011's tsunami and Fukushima explosion, which have made sure that every piece of domestic sushi will be pre self-cooked for generations. Yet glowing in the dark may have just been the beginning: now Japan also has a toxic, photochemical smog problem to boot.

US Carbon Emissions Fall to Lowest Level Since 1994 - A new report, written by Bloomberg New Energy Finance for the Business Council for Sustainable Energy (BCSE), has shown that carbon dioxide emissions in the US in 2012 were at their lowest levels since 1994. Carbon emission levels have fallen by 13% since 2007, and a total of 10.7% since 2005. This means that the US is now more than half way to achieving President Obama’s goal of cutting emissions by 17% from 2005 levels before 2020. This news works to support Obama and his environmental and renewable energy position, a stance that he has received criticism for over the years. It will also boost the credentials of the US in international global climate negotiations. Related article: The Trade-off between Aerosols and Greenhouse Gases Under Obama’s guidance the US is shifting its energy sector away from high carbon fossil fuels to lower carbon fuels, alternatives, and renewable energy sources. Oil consumption has fallen in recent years, and coal accounted for only 18.1% of the US’s energy mix last year, compared to 22.5% in 2007; renewable energies saw the largest growth. Over all energy use in the US has fallen 6.4% since 2007 and this has mostly been accredited to more efficient heating and cooling systems in commercial buildings.

Power Plant Carbon Pollution Declined In 2011 Thanks To Less Coal Burning, EPA Reports: Heat-trapping gases from U.S. power plants fell 4.6 percent in 2011 from the previous year as plants burned less coal, the biggest source of greenhouse gas pollution, according to a new government report. The report, released Tuesday by the Environmental Protection Agency, said power plants remain the largest stationary source of carbon dioxide and other greenhouse gases that trigger global warming. Power plants were responsible for 2.2 billion metric tons of carbon dioxide equivalent in 2011. The reduction from 2010 reflects a relative decline in the use of coal, the dominant U.S. energy source, and an increase in natural gas and renewable sources that produce lower amounts of greenhouse gases, the report said. Power plants produced roughly two-thirds of greenhouse gas emissions from stationary sources, the EPA said, with petroleum and natural gas systems a distant second and refineries the third-largest carbon pollution source. The annual report was the second produced by the EPA as it tracks global warming pollution by industry type and individual facility. The data include more than 8,000 facilities in nine industrial sectors that produced more than 3.3 billion tons of carbon dioxide equivalent.

Carbon Pollution Data Put Power Plants Front And Center - The U.S. Environmental Protection Agency today released plant-by-plant data on 2011 emissions of carbon dioxide and other heat-trapping air pollutants.  The data show once again that power plants are the number one source of the carbon pollution that drives climate change, churning out more than 2.2 billion metric tons of carbon dioxide to the atmosphere in 2011. Power plants are far and away the number one source of carbon pollution, responsible for two-thirds of the 3.3 billion metric tons reported by all large industrial facilities, and for 40 percent of the nation’s overall CO2 emissions.  (Overall U.S. emissions of CO2 and other heat-trapping pollutants total about 6.8 billion metric tons, including those from transportation, other industries, and smaller sources.) Total power plant CO2 emissions in 2011 were down about 4.5 percent from 2010, reflecting the shift towards burning more natural gas and less coal (a trend that continued in 2012 — see here, p.87 — and will show up in the plant-by-plant pollution reports EPA publishes next year).  Renewables and efficiency are growing fast – renewable investments increased by 23 percent from 2010 to 2011 according to the Energy Information Administration, and electric efficiency program budgets, for example, rose from $2.7 billion to $6.8 billion between 2007 and 2011.

Boosted By Methane Releases, Oil And Gas Sector Is Number Two in Global Warming Pollution - When it comes to greenhouse gas emissions, power plants are the 800-pound gorilla in the room. But a new report from the Environmental Protection Agency shows that oil and natural gas are a pretty sizable monkey on our climate back as well.Reporting for the first time on GHGs from petroleum and natural gas systems, the EPA this week said that the oil and gas sector ranked second in emissions to power plants, releasing 225 million metric tons of carbon dioxide equivalent in 2011. More than a third of that came from methane, the main constituent of natural gas, and a far more potent global warming gas than carbon dioxide.The oil and gas sector was responsible for 40 percent of total U.S. methane emissions. In terms of greenhouse gas equivalent, the sector’s overall emissions were only about 1/10th those of power plants. Emissions from petroleum and natural gas systems come from a range of activities from drilling oil and gas wells both onshore and offshore, and the processing, transmission, storage and distribution of natural gas.

Auto makers ready to give up on the electric car and invest in hydrogen - Recent moves by Japan’s two largest automakers suggest that the electric car, after more than 100 years of development and several brief revivals, still is not ready for prime time – and may never be. In the meantime, the attention of automotive executives in Asia, Europe and North America is beginning to swing toward an unusual but promising new alternate power source: hydrogen. The reality is that consumers continue to show little interest in electric vehicles, or EVs, which dominated U.S. streets in the first decade of the 20th century before being displaced by gasoline-powered cars. Despite the promise of “green” transportation – and despite billions of dollars in investment, most recently by Nissan Motor Co – EVs continue to be plagued by many of the problems that eventually scuttled electrics in the 1910s and more recently in the 1990s. Those include high cost, short driving range and lack of charging stations.

Top Chinese Manufacturers Will Produce Solar Panels for 42 Cents per Watt in 2015 : The cost of producing a conventional crystalline silicon (c-si) solar panel continues to drop. Between 2009 and 2012, leading "best-in-class" Chinese c-Si solar manufacturers reduced module costs by more than 50 percent. And in the next three years, those players -- companies like Jinko, Yingli, Trina and Renesola -- are on a path to lower costs by another 30 percent. Check out this chart outlining projected costs, which comes from GTM Research's Global Intelligence PV Tracker: With plenty of innovation still occurring in crystalline silicon PV manufacturing -- including new sawing techniques, thinner wafers, conductive adhesives, and frameless modules -- companies are able to squeeze more pennies off the cost of each panel. However, as the chart above shows, innovating "outside the module" to reduce the installed cost of solar will be increasingly important as companies find it harder to realize cost reductions in manufacturing.

First Solar May Sell Cheapest Solar Power, Less Than Coal - Bloomberg: First Solar Inc. (FSLR), the world’s largest maker of thin-film solar panels, may sell electricity at a lower rate than new coal plants earn, according to a regulatory filing from a project it purchased in New Mexico. El Paso Electric Co. (EE) agreed to buy power from First Solar’s the 50-megawatt Macho Springs project for 5.79 cents a kilowatt- hour, according to a Jan. 22 procedural order from the New Mexico Public Regulation Commission. That’s less than half the 12.8 cents a kilowatt-hour for power from typical new coal plants, according to models compiled by Bloomberg. First Solar, which said in a statement yesterday that it bought the Macho Springs project from Element Power Solar, didn’t disclose any of the state and federal incentives that will boost the company’s revenue from the project. The Macho Springs rate would be “the lowest solar power purchase agreement price we have ever seen,” Aaron Chew, an analyst at Maxim Group LLC in New York, said in an e-mail. It’s less than half the rate that First Solar will get for its Antelope Valley, Topaz, and Agua Caliente projects, he said.

Renewables now cheaper than coal and gas in Australia - A new analysis from research firm Bloomberg New Energy Finance has concluded that electricity from unsubsidised renewable energy is already cheaper than electricity from new-build coal and gas-fired power stations in Australia. The modeling from the BNEF team in Sydney found that new wind farms could supply electricity at a cost of $80/MWh –compared with $143/MWh for new build coal, and $116/MWh for new build gas-fired generation. These figures include the cost of carbon emissions, but BNEF said even without a carbon price, wind energy remained 14 per cent cheaper than new coal and 18 per cent cheaper than new gas. “The perception that fossil fuels are cheap and renewables are expensive is now out of date”, “The fact that wind power is now cheaper than coal and gas in a country with some of the world’s best fossil fuel resources shows that clean energy is a game changer which promises to turn the economics of power systems on its head,” he said.

Germany has five times as much solar power as the U.S. — despite Alaska levels of sun: Germany doesn’t get an enormous amount of sunlight, relatively speaking. Its annual solar resources are roughly comparable to Alaska’s. Just about every single region in the continental United States has greater solar potential, on average, than Germany. Yet despite those limitations, Germany has still managed to be the world leader in solar power. At the end of 2012, the country had installed about 30 gigawatts of solar capacity, providing between 3 percent and 10 percent of its electricity. The United States, by contrast, has somewhere around 6.4 gigawatts of solar capacity. Why the difference? Policy is the big factor. The German government has heavily subsidized renewable energy for years through a variety of measures. Perhaps most crucially, the country’s “feed-in tariffs” allow ordinary people to install solar panels on their rooftops and sell the power to the grid at favorable rates. (The costs are then shared by all electricity users.)

Staying Power - As evening rises over the sprawling wind farm, the temperature continues to drop, and with it the wind. Far above, the blade of a towering turbine glides slowly to a halt. A few hours ago, these turbines were churning sufficient electricity into the grid to rival two nuclear power plants, enough to keep the lights on in 5?per cent of Texas. The state's power managers knew a drop was coming, but the speed has taken everyone by surprise. The timing could not be worse. All across the state, people are coming home from work, flicking on lights, TVs and kettles. The power authority declares an emergency. Engineers request 30 megawatts of emergency power from Mexico. Supply to large industrial users is cut for more than an hour. It takes three hours before the system is finally stabilised. This isn't a good day for renewable energy and it illustrates one reason why even modest targets consistently go unmet all around the world. In 2009, intermittent renewables accounted for a paltry 3.3 per cent of world energy generation. Wind, sun and wave are simply too fickle to be counted on. But that may be about to change?- and salvation could literally come out of thin air.

Belgium plans artificial island for wind energy storage - : Belgium is planning to construct an island in the North Sea for the sole purpose storing wind energy. Wind farms, when constructed using traditional mainstream methods, will eventually require backup as their electricity market penetration increases, and when wind turbines generate surplus electricity due to unusually high wind speeds (which can happen pretty often) it goes to waste. “We have a lot of energy from the wind mills and sometimes it just gets lost because there isn’t enough demand for the electricity,” said spokeswoman for Belgium’s North Sea minister Johan Vande Lanotte. “This is a great solution,” the spokeswoman said, adding she thought it could be the first of its kind. Excess wind power would be used to pump water out of the centre of the island, and it would be allowed to flow back in, but through an electricity generating turbine to augment overall electricity production when there is a shortfall of wind energy. Vande Lanotte revealed these plans at the Belgian port of Zeebrugge late on Wednesday. Large-scale wind energy storage has been mostly just a thought for many years, worldwide, but Belgium decided to step up to the plate and put it to the test.

Europe consuming more coal - Green-friendly Europe has a dirty secret: It is burning a lot more coal. Europe’s use of the fossil fuel spiked last year after a long decline, powered by a surge of cheap U.S. coal on global markets and by the unintended consequences of ambitious climate policies that capped emissions and reduced reliance on nuclear energy.The new dependence on one of the dirtiest fuels shows just how challenging it is to maintain the momentum needed to go green, analysts and officials say, and demonstrates the far-reaching effects of America’s natural gas boom. In the United States, natural gas is now frequently less expensive than coal for power, so demand for the hard, black fuel has plummeted. Ships are steaming the coal around the world instead. U.S. coal exports to Europe were up 26 percent in the first nine months of 2012 over the same period in 2011. Exports to China have increased, too. In Germany, which by some measures is pursuing the most wide-ranging green goals of any major industrialized country, a 2011 decision to shutter nuclear power plants means that domestically produced lignite, also known as brown coal, is filling the gap . Power plants that burn the sticky, sulfurous, high-emissions fuel are running at full throttle, with many tallying 2012 as their highest-demand year since the early 1990s. Several new coal power plants have been unveiled in recent months — even though solar panel installations more than doubled last year

Study Slams Nuclear Waste Practices at Hanford - Management and disposal of radioactive waste at the Hanford nuclear reservation in Washington State, marred by problems for more than two decades, is the focus of a harsh new assessment by the Government Accountability Office. “By just about any definition,” the auditing agency says, “Hanford has not been a well-planned, well-managed or well-executed major capital construction project.” Hanford opened in 1943 as part of the Manhattan Project and operated almost continuously through 1987 as the country’s largest manufacturer of weapons-grade plutonium. Left behind at the 586-square-mile site are 56 million gallons of highly radioactive waste in aged and corroded underground storage tanks. In 1989, the Department of Energy assumed responsibility for safely disposing of this waste, which threatens to leak into the bordering Columbia River and affect downstream industry, habitat and human health. After attempting and abandoning three cleanup plans, the Energy Department in 2000 awarded a management contract to Bechtel National. The core of the project is a waste treatment and immobilization plant consisting of three buildings: a single pretreatment facility to sort high-radioactivity waste from the low-radioactivity kind and separate vitrification plants for each stream in which the waste will be combined with molten glass and then cooled for stable storage. Plant operations under Bechtel were initially scheduled to begin by 2011 with total projected costs of $4.3 billion. The budget has since swollen to an estimated $13.4 billion, and the plant’s opening has been delayed until 2019.

Documents: CEO Lupo directed illegal dump of brine - Documents released by state regulators Tuesday show that Ben W. Lupo, a partner in several companies that share an address at Salt Springs Road, directed employees there to dump up to 20,000 gallons of wastewater down a storm drain. The revelation comes five days after the incident, which occurred at Hard Rock Excavating’s headquarters, where a large storage tank, capable of holding up to 20,000 gallons of waste — including oil and brine — was being cleaned by an employee of the company. Both the Ohio Department of Natural Resources and the Ohio Environmental Protection Agency received an anonymous tip late Thursday and were on the scene within three hours. They were able to obtain photographic evidence of the dumping taking place, a source inside ODNR told state Sen. Joe Schiavoni of Boardman, D-33rd. Emergency response teams from the OEPA, U.S. EPA and ODNR managed to collect samples of the dumped substance that are being analyzed. Workers continue to mitigate the effects of the spill, where the drain entered a Mahoning River tributary behind the Toys “R” Us Distribution Center on Geoffrey Trail just off Salt Springs Road and leaked an unknown amount of oil and brine into the river.

Aubrey McClendon and the Destruction of the Natural Gas Market -  Aubrey McClendon is gone – or at least he’s on his way out from Chesapeake Energy (CHK). But the destruction of the natural gas market, where he was the ringleader in the shale gas land grab and cratering well price, is his real legacy, and not likely to be recovered from anytime soon. While Aubrey will now go into a very wealthy retirement, he leaves behind a decimated market and a long road to making natural gas a true transition fuel to energy independence and a renewable future.  The market failed us, failed all of us as a nation – because it couldn’t prevent McClendon and Chesapeake from poking holes randomly through Texas and Western Pennsylvania in search of shale gas and ultimately flooding the market with it, cratering the price and its profitability. And it is margins and profitability that make markets work. And while McClendon made himself the best paid CEO in the nation, he assured us that our necessary and important transition to natural gas would be made much more difficult, if not impossible: you just cannot support innovation without profits. It is not just “cheap gas” that is the answer to spurring economic growth, grow manufacturing and sell natural gas as a transport fuel or even as an export fuel here in the US – it is margins and it is profits.And Chesapeake destroyed that for everyone in the gas game (and destroyed themselves too), with forced development of leases, multiple joint ventures with foreign oil companies, over leverage, over production and destruction of shareholder value to the benefit of the CEO. 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. We are further away from a natural gas future, a cleaner, greener and more independent future, and we have Aubrey McClendon to thank.

Shale gas boom sparks EU coal revival - The shale gas boom in the US is having a surprise knock-on effect in Europe -- a big increase in the burning of coal by European utilities, despite EU environmental policies designed to curb the share of polluting fossil fuels in the energy mix. The trend shows how disruptive shale gas has become for traditional industries, leading to unforeseen -- and often perverse -- outcomes across the global energy system. North America's fracking revolution pushed down US natural gas prices to 10-year lows last spring, prompting electricity generators to switch to gas from coal. Unwanted at home, US coal increasingly found its way on to European markets, where it has displaced more expensive gas as a feedstock for power stations. But many experts believe coal's European revival will be shortlived, and that it is essentially the last gasp of a fuel with no long-term future.The International Energy Agency says the trend of rising European demand is "close to peaking", and by 2017 it will drop to levels slightly above those in 2011.

Colorado Communities Take On Fight Against Energy Land Leases - Here, amid dozens of organic farms, orchards and ranches, the federal government is opening up thousands of acres of public land for oil and gas drilling, part of its largest energy lease sale in Colorado since Mr. Obama took office.  In all, leases for 114,932 acres of federal land across Colorado are being auctioned off next month — a tiny piece of what Mr. Obama lauded during last year’s campaign as a historic effort to increase domestic natural-gas production. Those holes have to be drilled somewhere, and the move to lease public lands in this valley has stirred a fierce debate, one that has aligned Republican residents more closely to the government’s plans than Democrats.  Coloradans in solidly red cities west of here are the ones who have written letters to the government supporting the lease sale, saying it will bring jobs and tax revenues. In Paonia, where political lines are more evenly split, residents have come out overwhelmingly against the idea of drilling, saying it threatens a new economy rooted in tourism, wineries and organic peaches.  “It’s just this land-grab, rape-and-pillage mentality,”

US Breweries go to War against Fracking Industry - US brewers have now taken up their case against fracking, worried that any potential contamination of ground water supplies would ruin their business. The process of brewing beer requires clean water, with many breweries being built at the sites they are specifically for the mineral composition of the water. Simon Thorpe, the CEO of the Ommegang Brewery explained to NBC that “it’s all about the quality of the water. The technology surrounding fracking is still not fully developed. Accidents are happening. Places are getting polluted.” His brewery was built in Cooperstown, NY, due to the ready access to fresh water, but “if that water supply is threatened by pollution, it makes it very difficult for us to produce world-class beer here.”

Can a Small Community Throw a Monkey Wrench Into the Global Fracking Machine? - While New Yorkers anxiously await Governor Andrew Cuomo’s decision on whether to lift the state’s de facto moratorium on high-volume slick-water horizontal hydraulic fracturing, or “fracking,” Woodstock, the iconic counter-culture capital of the world, has become the first municipality to call for legislation to make fracking a Class C felony. Woodstock’s action is just one small town’s response to a rapidly escalating global war over fracking. To both sides in this war—environmentalists and citizens who oppose fracking on the one side and the gas industry and its supporters on the other—the upcoming ruling to allow or ban fracking in New York is being viewed as (you should pardon the expression) a watershed event. Decisions made in Albany and in towns like Woodstock will likely determine whether fracking goes full steam ahead everywhere, or whether its momentum can be slowed or even stopped. New York, after all, has a rich history of environmental activism and democratic movements, and anti-fracking activism has spread like wildfire over the last couple of years. New York is also home to abundant supplies of clean freshwater, an essential resource that is in crisis globally and that could be endangered by the practice.

Livestock falling ill in fracking regions, raising concerns about food - The authors compiled 24 case studies of farmers in six shale-gas states whose livestock experienced neurological, reproductive, and acute gastrointestinal problems after being exposed—either accidentally or incidentally—to fracking chemicals in the water or air. The article, published in New Solutions: A Journal of Environmental and Occupational Health Policy, describes how scores of animals died over the course of several years. The death toll is insignificant when measured against the nation’s livestock population (some 97 million beef cattle go to market each year), but environmental advocates believe these animals constitute an early warning. Exposed livestock "are making their way into the food system, and it's very worrisome to us," Bamberger says. "They live in areas that have tested positive for air, water, and soil contamination. Some of these chemicals could appear in milk and meat products made from these animals."

Alberta may offer more concessions to secure Keystone approval: envoy - Alberta could offer up new environmental initiatives for oil sands development to show the Obama administration that approving a US$5.3-billion pipeline to U.S. Gulf Coast refineries will not increase pollution, the Canadian province’s new envoy in Washington said on Monday. Alberta, anxious to tap new markets in the United States for its growing volumes of oil, has already boosted monitoring of the impacts of oil sands projects on northern waterways. It also has established a land-use plan for the region to protect some areas, said David Manning, appointed by Premier Alison Redford last week as the province’s envoy in Washington. “We have much more in our toolbox, and I think this is all about transparency and sharing information, and I’m just going to be one piece of that,” Manning told Reuters in an interview from Edmonton, where he was being briefed in advance of traveling to Washington next week. Manning said he expects much of his work to involve promoting pipelines that move Alberta energy supplies to market, initially TransCanada Corp’s long-delayed Keystone XL pipeline.

Koch Brothers Driving Keystone XL Pipeline from Canada to Cut Out Venezuelan Oil - Greg Palast: Koch brothers could save two billion dollars a year if they can replace Venezuelan heavy crude crude with Canadian tar sands - one of the dirtiest sources of carbon emissions on the planet  Watch full multipart Koch Brothers Driving Keystone XL Pipeline from Canada to Cut Out Venezuelan Oil

Northern Gateway Pipeline Poll Reveals Rift Between B.C. And Alberta - As the federal review of the Northern Gateway pipeline plan continues, British Columbians and Albertans remain divided on the project's potential benefits and problems, and whether it should even go ahead. A new poll by Insights West, a polling firm established in British Columbia last year, found only 35 per cent of British Columbians support the Northern Gateway pipeline (NGP), compared to 75 per cent of Albertans. Only 18 per cent of Albertans oppose the NGP, while 61 per cent of British Columbians are against it.The poll, conducted via Insights West's online panel and surveying over 1,000 people from the two provinces in mid-January, shows 38 per cent of British Columbians strongly oppose the pipeline, and that men in both provinces are more likely to support the project. There is general consensus that the NGP will bring some benefits to both Alberta and British Columbia: 83 per cent or more of Albertans agreed that the NGP would create new jobs, support economic growth, create new capital investment, lead to stronger relationships with countries in Asia, and increase tax revenue for the provincial government. Residents of B.C. were more skeptical, but a majority nevertheless agreed that the pipeline would bring all of these benefits.

Fossil fuel subsidies “are public enemy number one” - Fossil fuel subsidies amount to little more than an incentive to pollute and as such are “public enemy number one to sustainable development” Fatih Birol, Chief Economist at the International Energy Agency said at the European Wind Energy Association’s (EWEA) recent annual conference. Birol added that subsidies for fossil fuels-which amounted to half a trillion US dollars worldwide in 2011-keep oil and gas artificially cheap and made it hard for clean alternatives, like wind, to compete. In a blog post on EWEA’s website, it is revealed how Christian Kjaer, the association’s CEO, expressed his concern to the conference, about how Europeans are transferring a rising share of their wealth to just a handful of fossil fuel exporting countries. “In 2009 the EU spent €274 billion on fossil fuels imports – 2.1 per cent of its GDP, a level which increased by €200 billion or 70 per cent over just three years to 2012,” he said. “Today, EU citizens are spending half a billion Euros more each day on fossil fuel imports than they were three years ago,” he told the conference. “Fossil fuel subsidies do not make sense,” Birol asserted. Subsidies keep fossil fuels artificially cheap and without a phasing out of fossil fuel subsidies, we will not reach our climate targets. “I hope governments pay attention this,” Birol added.

U.S. Halts Drilling on Gulf Wells With Flawed Bolts - Bloomberg: Deep-water oil exploration has been disrupted from the Gulf of Mexico to Brazil by the discovery of faulty bolts used in safety equipment less than three years after the worst-ever U.S. maritime crude spill.  Energy explorers such as Chevron Corp., Royal Dutch Shell Plc and Transocean Ltd. said they have been directed by U.S. regulators to suspend work aboard rigs that employ General Electric Co. devices connecting drilling tubes to safety gear and the seafloor. The equipment must be retrieved so defective bolts can be replaced, the U.S. Bureau of Safety and Environmental Enforcement said in an alert issued on Jan. 29.Installing new bolts and resuming drilling may take as long as three weeks for each rig, Credit Suisse Group AG said. For oil companies paying upwards of $600,000 a day to rent the most- sophisticated deep-water vessels and another $500,000 a day to staff and supply each of them, the delays may be significant,

Concerns raised over 'useless' Arctic oil spill plan - Environmental campaigners say that a draft plan to respond to an oil spill in the Arctic ocean is inadequate and vague.  The proposal has been in preparation for two years as oil companies look to increase exploration in the region.  Greenpeace says it fails to get to grip with the risks of an accident in an extremely sensitive location. Ministers from the eight nation Arctic Council are due to discuss the plan at a meeting in Sweden tomorrow.  As summer ice in the Arctic has declined in recent years, the area has become the subject of intense interest from oil and gas companies. Estimates from the US Geological Survey indicated that there could be 60 billion barrels of oil in the region.

Why has US Oil Consumption Steadily Fallen since 2004? - United States oil consumption in 2012 will be about 4.7 million barrels a day, or 20%, lower than it would have been, if the pre-2005 trend in oil consumption growth of 1.5% per year had continued. This drop in consumption is no doubt related to a rise in oil prices starting about 2004. Oil prices started rising rapidly in the 2004-2005 period (Figure 2, below). They reached a peak in 2008, then dipped in 2009. They are now again at a very high level.Given the timing of the drop off in oil consumption, we would expect that most of the drop off would be the result of “demand destruction” as the result of high oil prices. In this post, we will see more specifically where this decline in consumption occurred. A small part of the decline in oil consumption comes from improved gasoline mileage. My analysis incidates that about 7% of the reduction in oil use was due to better automobile mileage. The amount of savings related to improved gasoline mileage between 2004 and 2012 brought gasoline consumption down by about 347,000 barrels a day. The annual savings due to mileage improvements would be about one-eighth of this, or 43,000 barrels a day. Apart from improved gasoline mileage, the vast majority of the savings seem to come from (1) continued shrinkage of US industrial activity, (2) a reduction in vehicle miles traveled, and (3) recessionary influences (likely related to high oil prices) on businesses, leading to job layoffs and less fuel use.

US must avoid shale boom turning to bust - A boom in North American oil production is under way, thanks in part to technological advances that are unlocking millions of barrels of oil that were previously inaccessible. But as these new supplies are extracted, they are facing logistical and policy hurdles above ground. Resolving these challenges is of paramount importance if we are to benefit from this vast resource. Advances in hydraulic fracturing and horizontal drilling are allowing the US oil industry to recover millions of barrels of so-called light, tight oil from shale formations across the middle of the country. US crude oil production has increased by 1.3m barrels per day in the past two years, and the US Energy Information Administration forecasts that the US will produce a further 1.4m b/d by the end of 2014. But it is no secret that once the oil is extracted from wells in the country’s midsection, it often faces a long and complicated journey to refineries, many of which are located on the coasts. Transportation bottlenecks are one of the main reasons why US crude trades at a discount to international benchmarks. It is now well-known that landlocked West Texas Intermediate crude has been trading at a deep discount to other benchmarks such as Brent since production volumes started ramping up two years ago. What is perhaps less well-known is that internal North American grades fetch even lower prices, trading at a deep discount to WTI itself. Ironically, American end-users do not benefit from this production windfall since US retail product prices are still heavily influenced by international markets. If this disconnect in prices were to continue, it could threaten the economic viability of these new supplies, potentially stopping the boom in its tracks.

Oil Prices - A while since we've looked at oil prices around here.  The chart above shows the two main benchmarks - Brent and WTI - and the spread between them.  These days Brent is a better indicator of global oil market conditions, as well as gas prices on the US coasts, while the spread of WTI to Brent is mainly measuring the fact that the boom in tight-oil production in the central US cannot be fully bought to market conveniently yet. Brent prices have been in and around the $100-$120/barrel band since the beginning of 2011.  For the last few months they've been rising and are currently somewhat above the 2011-2013 average.  If the supply flatness of 2012 continues, I'd expect them to climb quite a bit more.  However, it's not clear to me whether that supply flatness will continue.  A topic for future posts, I suppose.

Oil Prices Are Dangerous Threat, IEA Chief Economist Warns - High oil prices represent a dangerous threat to the global economic recovery that shouldn’t be ignored, the International Energy Agency‘s chief economist, Fatih Birol, said Wednesday. Oil prices averaged $112 a barrel last year, the highest annual average price in history. Prices have remained at these elevated levels in the first months of 2013, fueling concerns over their impact on the global economy. Mr. Birol said high prices pose a particular danger to the European Union, where the import bill for oil and gas could increase by more than $200 billion this year if current price levels persist.

Despite US opposition, oil trade with Iraq is legal, PM Erdoğan says: Turkey will continue its oil trade with the Kurdistan Regional Government (KRG) in northern Iraq, Turkish Prime Minister Recep Erdoğan has said, while confirming the trade as legitimate. Turkey is supporting its neighbor in its need to trade and buying petrol in return, he said during an interview with reporters on his way back from a mission to Eastern Europe yesterday. Below are his responses to questions from journalists. Is Turkey signing a broad energy agreement with northern Iraq? The central government wants to keep everything under its control. At this point they say they could do anything if the regional administration in northern Iraq does not withdraw from such business. “We would give gasoline if they want, we would give diesel if they want,” they say. But we do not have a [stance] about this [dispute], despite the American inclusion. America says you are doing wrong. No, we believe this is included in the [Iraqi] constitution. Because northern Iraq has an authorization of right on an 18 percent structure it might use this authorization with any country. And we are its neighbor. It has such a need. As their neighbor, we are helping them in meeting this need. In return we buy petrol or such things.

Iron ore price increases in China could prove to be fleeting - China continues to draw down iron ore inventories (see discussion), sharply reversing the trend of the past few years.Speculative activity in iron ore and steel is picking up sharply, particularly as short-sellers are blown out. Bloomberg: - Trading in iron ore tripled last month from a year earlier on speculation of increased demand this month after China holidays, The Steel Index said.  Swaps and options trading in iron ore across all exchanges and clearinghouses was 19.63 million tons, near the record of 20.3 million tons in September 2012 and up 215 percent from 6.24 million tons a year earlier, The Steel Index, which publishes iron ore prices, said in an e-mailed report today. Prices of ore with 62 percent iron ore content delivered to the Chinese port of Tianjin climbed 5.3 percent in January. But according to at least some researchers, this is by no means the start of another bull run in China's or global iron ore markets. Bloomberg (different story from above): - Iron ore may fall 35 percent by the year-end after advancing to $170 a metric ton in the first half as mines in China boost production, cutting import demand in the world’s largest buyer, according to Westpac Banking Corp.

Politics of pollution: China's oil giants take a choke-hold on power (Reuters) - The search for culprits behind the rancid haze enveloping China's capital has turned a spotlight on the country's two largest oil companies and their resistance to tougher fuel standards. Bureaucratic fighting between the environment ministry on the one hand and China National Petroleum Corp (CNPC) and Sinopec Group on the other has thwarted stricter emission standards for diesel trucks and buses -- a main cause of air pollution blanketing dozens of China's cities. To be sure, many sources contribute to air pollution levels that hit records in January, but analysts say the oil companies' foot-dragging and disregard of environmental regulations underscore a critical challenge facing a toothless environment ministry in its mission to curb air pollution. With widespread and rising public anger changing the political calculus, it also poses a broader question of whether the incoming administration led by Communist Party chief Xi Jinping will stand up to powerful vested interests in a country where state-owned enterprises have long trumped certain ministries in the quest for economic growth at all costs.

China’s Narrowing Policy Horizons by Yu Yongding - Back in the last quarter of 2011, when the decline in China’s investment growth accelerated, concerns about a hard economic landing intensified, particularly given the authorities’ reluctance to pursue new expansionary policies. By May 2012, however, the government had changed its mind, with the National Development and Reform Commission approving ¥7 trillion ($1.3 trillion) in new projects. That, together with two ensuing interest-rate cuts by the People’s Bank of China (PBOC), guaranteed an end to the economic slowdown in the third quarter of 2012.The Chinese economy’s performance has thus maintained the cyclical pattern familiar from the past two decades: rapid investment growth, supported by expansionary policy, drives up the economic-growth rate. Inflation follows, so policy is tightened and growth slows. But inflation remains high or rising, so more tightening is imposed. Inflation falls at last, but growth slows more than desired, owing to the overcapacity that resulted from excessive investment in the earlier phase of the cycle. At this point, policy becomes expansionary again, and the cycle begins anew: led by investment growth, the economy rebounds.Thus, the acceleration of economic growth since the third quarter of 2012 should come as no surprise. With the government still having room to wield expansionary monetary and/or fiscal policy, the economic revival was only a matter of time

China’s Last Soft Landing? by Stephen S. Roach - Once again, China has defied the naysayers. Economic growth picked up in the final quarter of 2012 to 7.9% – half a percentage point faster than the 7.4% increase in GDP in the third quarter. This was a meaningful increase after ten consecutive quarters of deceleration, and it marks the Chinese economy’s second soft landing in slightly less than four years. Despite all the talk about the coming shift to internal demand, China remains heavily dependent on exports and external demand as major drivers of economic growth. It is not a coincidence that its last two slowdowns followed closely on the heels of growth slumps in its two largest foreign markets, Europe and the United States. Just as the soft landing in early 2009 occurred in the aftermath of a horrific American-made crisis, this latest one followed the European sovereign-debt crisis. China has several sources of strength that have enabled it to withstand the tough external shocks of the last four years. Large buffers of saving (53% of GDP) and foreign-exchange reserves ($3.3 trillion) are at the top of the list. Moreover, unlike the West, which has used up most of its traditional countercyclical policy ammunition, China has maintained ample scope for fiscal and monetary-policy adjustments as circumstances dictate. Likewise, a powerful urbanization dynamic continues to deliver solid support for China’s high-investment economy, while enabling relatively poor rural workers to raise their incomes by finding higher-paying jobs in the cities.

"China Accounts For Nearly Half Of World's New Money Supply" - After having less than half the total US deposits back in 2005, China has pumped enough cash into the economy using various public and private conduits to make even Ben Bernanke blush: between January 2005 and January 2013, Chinese bank deposits have soared by a whopping $11 trillion, rising from $4 trillion to $15 trillion! We have no idea what the real Chinese GDP number is but this expansion alone is anywhere between 200 and 300% of the real GDP as it stands now. And more: between January 2012 and January 2013 Chinese deposits rose by just over $2 trillion. In other words, while everyone focuses on Uncle Ben and his measly $1 trillion in base money creation in 2013 (while loan creation at commercial banks continues to decline), China will have created well more than double this amount of money in the current year alone!

China’s January Data Gap Vexes Economists -  China’s campaign to upgrade its economic data, from plugging leaks to expanding sample sizes, is yet to tackle one gap: the monthlong delay each year in releasing some key January numbers.  Government agencies on Feb. 8 will report slower inflation of 2 percent and faster export growth of 17.4 percent, according to the median estimates of analysts for figures skewed by the timing of a weeklong Lunar New Year holiday. Data for industrial output, retail sales and fixed-asset investment won’t be publicly updated until March. growth in the world’s second-largest economy following the first acceleration in almost two years last quarter. While it’s not simple to account for the effects of a festival held on different dates each year, that shouldn’t keep the government from releasing data, according to analysts.

IMF sees 140m jobs shortage in aging China as ‘Lewis Point’ hits - We can now discern more or less when the catch-up growth miracle will sputter out. Another seven years or so - enough to bouy global coal, crude, and copper prices for a while - but then it will all be over. China’s demographic dividend will be exhausted. Beijing revealed last week that the country’s working age population has already begun to shrink, sooner than expected. It will soon go into “precipitous decline”, according to the International Monetary Fund. Japan hit this inflexion point fourteen years ago, but by then it was already rich, with $3 trillion of net savings overseas. China has hit the wall a quarter century earlier in its development path. The ageing crisis is well-known. It is already six years since a Chinese demographer shocked Davos with a warning that his country might have to resort to mass suicide in the end, shoving pensioners onto the ice. Less known is the parallel - and linked - labour drain in the countryside. A new IMF paper - “Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point?"- says the reserve army of peasants looking for work peaked in 2010 at around 150 million. The numbers are now collapsing.

China bans television ads for luxury goods in bid to ‘ditch extravagance and uphold frugality’ - The Chinese government has banned television and radio advertisements that promote expensive gifts as part of its campaign against corruption and excess. China’s media watchdog, the State Administration of Radio, Film &Television, said encouraging viewers to splash out on watches or gold helped spread “incorrect values and create a bad social ethos.” “The move is a response to the central authorities’ repeated calls for people to practise thrift and shun extravagance and waste,” a government spokesman told Xinhua, the state news agency. “Radio and television channels should fully exert their role of educating the people, carrying forward good Chinese traditions and civilised lifestyles, and taking the lead to implement the requirements of central authorities.”

As Self-Immolations Near 100, Tibetans Question the Effect - A crowd of Tibetans came here to India’s capital last week, bearing flags and political banners and a bittersweet mixture of hope and despair. A grim countdown was under way: The number of Tibetans who have set themselves on fire to protest Chinese rule in Tibet had reached 99, one short of an anguished milestone. Yet as that milestone hung over the estimated 5,000 Tibetans who gathered in a small stadium, so did an uncertainty about whether the rest of the world was paying attention at all. In speeches, Tibetan leaders described the self-immolations as the desperate acts of a people left with no other way to draw global attention to Chinese policies in Tibet. “What is forcing these self-immolations?” Lobsang Sangay, prime minister of the Tibetan government in exile, asked in an interview. “There is no freedom of speech. There is no form of political protest allowed in Tibet.” Billed as the Tibetan People’s Solidarity Campaign, the four-day gathering featured protests, marches, Buddhist prayer sessions and political speeches in an attempt to push Tibet back onto a crowded international agenda. If the Arab Spring has inspired hope among some Tibetans that political change is always possible, it has also offered a sobering reminder that no two situations are the same, nor will the international community respond in the same fashion.

It’s Monday and Robert Samuelson Is Confused - Dean Baker - The cause for complaint this morning is Japan where the new Prime Minister, Shinzo Abe, has plans for an ambitious new stimulus program. This makes Samuelson unhappy since he is much more fond of the sort of austerity that has given Greece a 26 percent unemployment rate or now threatens the United Kingdom with a triple dip recession. Samuelson tells us that Abe’s plan won’t work because it doesn’t address the structural problems in Japan’s economy, especially in its service sector. Samuelson notes that Japan has had several stimulus programs over the last two decades. He tells readers: “The lesson is that huge budget deficits and ultra-low interest rates — the basics of stimulus — have limits and can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off. The economy then needs a new fix. Too many fixes may spawn new problems (examples: excessive debt, asset “bubbles,” inflation). That’s already happened in Japan.” Yes, this is where we can see that Samuelson is badly confused. Japan did have asset bubbles, but that was back in the 1980s. At the that time the country was not pursuing any stimulus at all. In fact, it had balanced budgets and a very low debt to GDP ratio. As far as inflation, here again someone has to introduce Samuelson to the data. Japan’s problem is the opposite of inflation. Its consumer price level in 2012 was about 3 percent lower than it had been in 2000, implying an average annual rate of deflation of 0.3 percent.

World's Biggest Retirement Fund Considers Selling Its Japanese Bonds - While in the past 3 months both the USDJPY and the Nikkei index have soared on the same vague mix of promises (than can never be delivered), and threats (by central bankers, which work only as long as they remain purely abstract and are not acted upon), one security that has barely budged are Japanese bonds: without doubt the fulcrum security that will put a premature end to Abe's latest attempt to reflate an economy, whose total debt is a ridiculous 2000% of annual public revenues, and which will spend half of its annual tax income on interest expense if rates merely double from their record low levels. Until now: Bloomberg reports that Japan's Government Pension Investment Fund: the largest retirement fund in the world overseeing 108 trillion yen ($1.16 trillion), and historically the biggest buyer of Japanese bonds, "will begin talks in April about whether to reduce its 67% allocation to domestic bonds." Read: sell, which may be why we have already seen a rather steep move across the JGB complex overnight, because one the largest player in the space moves, everyone else follows as nobody wants to be the last seller left.

Japan Pension Fund Has Too Many Bonds on Abe Plan - Japan’s public pension fund, the world’s biggest manager of retirement savings, is considering the first change to its asset balance as a new government’s policies could erode the value of $747 billion in local bonds.  Managers of the Government Pension Investment Fund, which oversees about 108 trillion yen ($1.16 trillion) in assets, will begin talks in April about reducing its 67 percent target allocation to domestic bonds, President Takahiro Mitani said in a Feb. 1 interview in Tokyo. The fund may increase holdings in emerging market stocks and start buying alternative assets.  The GPIF, created in 2006, didn’t alter the structure of its holdings during the worst global financial crisis in 80 years or in response to the 2011 earthquake and nuclear disaster. Prime Minister Shinzo Abe and the Bank of Japan have pledged to restore economic growth and spur inflation, which will mean higher interest rates, Mitani said.

Japan PM Says Hyperinflation Worries 'Unfounded - Japanese Prime Minister Shinzo Abe said Tuesday in parliament that worries of the central bank's inflation target triggering hyperinflation are unfortunate and unfounded. "It's unfortunate that there are people who tout the mostly unfounded fears of hyperinflation," Mr. Abe said in a lower house plenary session. "By building a sustainable fiscal framework we will dispel such worries," he said. Mr. Abe also denied allegations by an opposition lawmaker that last month's accord between the government and Bank of Japan on the 2% inflation target threatened the central bank's independence, adding that the government will leave the methods of achieving the target up to the central bank. The prime minister also fended off criticism about his government spending its way out of stagnation, saying that his economic policies will eventually pave the way for sustainable private sector growth in the mid- to long-term.

Why "This Time Won't Be Different" For Japan In Two Charts - While Japan's recent attempt to massively reflate and break out of its "liquidity trap" - an artificial construct to explain what happens when an artificial model, created by a flawed and artificial economic theory explodes in a singularity of Econ PhD idiocy leaving billions of impoverished people in its wake, is nothing new, there are those who are rather skeptical this latest attempt to achieve what Japan has not been able to do in over 30 years will work. And while one can come up with complicated, expansive, verbose theories based on Keynesian DSGE models and other such gibberish, why this time will be different for Japan, there is a very quick and simple argument why it won't.  The simple counter-argument to this time being different is summarized in the two charts below, which show the relative asset and liability composition of the various key players in the Japanese and US market, split between the Household, Investment Trust, Pension Fund, and Insurance sectors, amounting to some $54 trillion in the US and 1.5 quadrillion yen.  The key differences are highlighted in red.

Japan Must Stick With Stimulus, Pimco’s El-Erian Says: Japan’s government has to follow through with plans for stimulus spending, monetary easing and a doubled inflation target to sustain a weakened yen, said Mohamed El-Erian, co-chief investment officer of bond giant Pacific Investment Management Co. “It is critical to go from announcement to implementation to outcomes,” El-Erian said on Bloomberg Radio’s “Surveillance” with Tom Keene. “Structural reforms is what it’s going to take to sustain moves in the Japanese markets.” Prime Minister Shinzo Abe needs to carry out stimulus spending while Japanese consumers will have to accept rising prices for goods such as oil as the yen depreciates, El-Erian said. “Japan is attempting a major paradigm shift,” El-Erian said. “That is going to fuel talk about currency wars and trade tensions.” The yen plunged 17.8 percent during the past 12 months against nine other developed-market peers tracked by Bloomberg Correlation-Weighted Indexes as Japanese officials have moved to double the inflation target to two percent.

Japan Posts Back-to-Back Current-Account Deficit in December - Japan posted back-to-back monthly current-account deficits for the first time since 1981, highlighting challenges for Prime Minister Shinzo Abe’s campaign to revive the economy. The shortfall in the widest measure of the nation’s trade was 264.1 billion yen ($2.8 billion) in December, the Ministry of Finance said in Tokyo today. The median estimate of 23 economists surveyed by Bloomberg News was for a deficit of 144.2 billion yen.  Weakness in global demand, a spat with China and increased energy imports because of nuclear plant shutdowns are weighing on the world’s third-biggest economy as Abe pushes the Bank of Japan to end deflation and spur growth. Exports to China in 2012 fell 10.8 percent from 2011, as slower Chinese growth and a territorial dispute affected a merchandise trade relationship worth 26.5 trillion yen in 2012, according to ministry data.

Record low current account surplus shows Japan's challenges - Japan posted its smallest annual current account surplus on record in 2012 as exports weakened and energy imports grew, a signal to Prime Minister Shinzo Abe that economic revival needs more than just a weaker yen and extra spending. The current account surplus is likely to continue shrinking as energy imports rise due to the closure of nuclear power plants and as Japanese exporters lose out to more competitive Asian rivals, economists say. Japan's current account surplus was 4.7 trillion yen ($50.4 billion) in 2012, Ministry of Finance data showed, a figure that seems impressive. But it was less than half the surplus recorded a year earlier and the smallest since 1985, when Japan started compiling comparable data. The deterioration was most marked at the end of the year, with Japan posting consecutive monthly deficits for the first time as the December shortfall hit 264.1 billion yen, more than 80 percent bigger than the median forecast in a Reuters poll.

Tensions Flare as Japan Says China Threatened Its Forces - Japan accused China's navy of locking weapons-guiding radar onto Japanese naval forces twice in the past three weeks, an escalation of their territorial dispute that has heightened fears of a military conflict between the Asian giants—one that could entangle the U.S. While no shots were fired, the radar at issue often precedes an attack. The incidents Japan described followed nearly two months of increasing tussles between the two air forces, including the first-ever reported intrusion by China into airspace claimed by Japan and the scrambling of advanced fighter jets by both sides. The radar incidents "were cases that could have led to an extremely dangerous situation with just one wrong move," Japanese Defense Minister Itsunori Onodera said at a news conference in Tokyo Tuesday. Diplomats and analysts say Chinese and Japanese political leaders are all anxious to avoid even a limited military confrontation, stressing that it isn't in the interest of Asia's two largest economies, linked tightly by trade and investment, to engage in a military battle.

U.S. Carmakers Urge Obama to Punish Japan for Weak Yen - President Barack Obama should tell Japan’s new government that the U.S. will retaliate for policies aimed at weakening the yen, a group representing Ford Motor Co. (F), General Motors Co. (GM) and Chrysler LLC said. Japan’s Liberal Democratic Party, which reclaimed power last month, has let the yen continue its slide against the dollar, making U.S. auto exports relatively expensive, the American Automotive Policy Council said yesterday in a statement. “We urge the Obama administration to make it clear to Japan that such policies are unacceptable and will be met by reciprocal measures,” Matt Blunt, a former Republican governor of Missouri and president of the Washington-based industry group, said in the statement.

China wades cautiously into Asian 'currency war' - Chinese authorities have responded to the dramatic fall in the Japanese yen and other Asian currencies in recent weeks by tightening their grip on the yuan and beating back market pressure for the Chinese currency to appreciate. The central bank has repeatedly stated its intention to reduce forex market intervention, and market trends have borne out such rhetoric for much of the last year. But the People's Bank of China (PBOC) has stepped up its interventions in recent weeks to head off yuan appreciation amid fears its Asian neighbors may resort to competitive devaluations to bolster their exports. "In characteristic PBOC fashion, when things are uncertain and unclear, they basically keep dollar/renminbi within a range," said Claudio Piron, head of emerging Asia foreign exchange and fixed-income strategy at Bank of America. In a break with typical practice, the PBOC has guided the yuan slightly weaker over the last two weeks, despite a fall in the dollar versus the euro.

Currency wars gaining currency around the world - Not all currencies can be weakened simultaneously, as others must appreciate NOT many countries seek a strong exchange rate. A few, including systemically important ones, are actively weakening their currencies. Yet, because an exchange rate is a relative price, all currencies cannot weaken simultaneously. How the world resolves this basic inconsistency over the next few years will have a major impact on prospects for growth, employment, income distribution and the functioning of the global economy. Japan is the latest country to say enough is enough. Having seen its currency appreciate dramatically in recent years, Prime Minister Shinzo Abe's new government is taking steps to alter the exchange-rate dynamic, and is succeeding. In just over two months, the yen has weakened by more than 10 per cent against the dollar and close to 20 per cent against the euro.

Currency War Has Started - "Devaluing a currency," one senior Federal Reserve official once told me, "is like peeing in bed. It feels good at first, but pretty soon it becomes a real mess." In recent times, foreign-exchange incontinence appears to have been the policy of choice in capitals from Beijing to Washington, via Tokyo. The resulting mess has led to warnings of a global "currency war" that could spiral into protectionism. The roll-call of forex Cassandras reads like a who's who of global finance and politics: German leader Angela Merkel, Federal Reserve Bank of St. Louis President James Bullard, Bundesbank President Jens Weidmann and Mervyn King, the outgoing governor of the Bank of England. And the list goes on. The luminaries are wrong on a couple of points. The world isn't "on the verge" of a currency war, as they seem to think, but right in the middle of one. But—and here's the good news—there is a chance this confrontation might not end as badly as, say, the destructive devaluations that followed the Great Depression or even the turmoil of the Asian financial crisis of 1997-1998.

Who is afraid of currency wars? - Worries about global currency wars have resurfaced in recent weeks, mainly because of Japanese action on the yen. This is only the latest of several such flare-ups since the 2008 financial crash. It is hard to avoid the suspicion that the unconventional monetary policies of the US, UK and others are designed to drive down their exchange rates in order to indulge in “beggar thy neighbour” policies of the type which Samuel Brittan has condemned. Currency wars strike dread into the hearts of most economists because they contributed greatly to the severity of the Great Depression in the 1930s, especially in the worst phase from 1931-33. The damage done to global trade in that period took several decades to repair, and a repeat of this nightmare cannot be entirely ruled out. However, there are very large differences between the policies pursued in the 1930s and what is happening now, and the results may also be very different. It is important to think carefully about exactly what mean by the term “currency wars”. Rickard seems to define a currency war as any policy which is deliberately designed to drive down the internal or external value of a currency, whether by domestic inflation or a decline in the exchange rate. Viewed from any economy in isolation, these two alternatives amount to much the same thing in the long run, since a rise in inflation relative to other countries will eventually be fully reflected in a lower exchange rate.

Currency wars can be quite effective - Many in the mass media continue to be confused about the concept of currency wars and any tangible effects such policies may have. Here is an example of how real the impact can be. Below is a chart of the JPY/KRW currency cross - the number of South Korean won per one Japanese yen. As Japan went on its devaluation campaign via monetary easing (see discussion), it's export sector quickly obtained a competitive advantage over its Korean rivals. The markets immediately rewarded Japanese firms with significant outperformance over their Korean counterparts. The two markets, which generally traded in tandem (except for a brief period last spring), have now diverged dramatically. The impact of yen's depreciation on Japan's industries was swift and potent, creating anxiety among South Korean businesses while encouraging Japan to keep driving the yen lower. Bangkok Post: - A surging won and waning yen are eroding the bottom lines of South Korea's export powerhouses who are feeling the pinch after years of gobbling up global market share from their Japanese rivals.  A surging won and waning yen are eroding the bottom lines of South Korea's export powerhouses who are feeling the pinch after years of gobbling up global market share from their Japanese rivals.

Currency Wars Over Before They Begin?, by Tim Duy: Are the currency wars already over? From Reuters: The finance minister's [Taro Aso] comments indicate some surprise within the government at how quickly those expectations among traders translated into declines in the yen. "It seems that the government's policies have fueled expectations and the yen weakened more than we intended in the move to around 90 from 78," Aso told lawmakers in the lower house budget committee. Surprise, when you tell market participants exactly what you intend to do, they react accordingly. Market participants received a strong signal that Japanese monetary and fiscal policy would be joined to deliver a significant boost to the economy. The early exit, some might say forced exit, of Bank of Japan Governor Misaaki Shirikawa, clearing away an impediment to such plans, only further entrenched expectations. And market participants delivered accordingly:

Venezuela Launches First Nuke In Currency Wars, Devalues Currency By 46% - While the rest of the developed world is scrambling here and there, politely prodding its central bankers to destroy their relative currencies, all the while naming said devaluation assorted names, "quantitative easing" being the most popular, here comes Venezuela and shows the banana republics of the developed world what lobbing a nuclear bomb into a currency war knife fight looks like:  VENEZUELA DEVALUES FROM 4.30 TO 6.30 BOLIVARS

Venezuela Announces Currency Devaluation - NYT  - Venezuela's government announced Friday that it is devaluing the country's currency, a long-anticipated change expected to push up prices in the heavily import-reliant economy. Officials said the fixed exchange rate is changing from 4.30 bolivars to the dollar to 6.30 bolivars to the dollar. The devaluation had been widely expected by analysts in recent months, though experts had been unsure about whether the government would act while President Hugo Chavez remained out of sight in Cuba recovering from cancer surgery. It was the first devaluation to be announced by Chavez's government since 2010, and it pushed up the price of the dollar against the bolivar by 46.5 percent. 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.

NY Fed Paper Argues Against Capital Controls - For any nation thinking of trying to clamp down on capital flowing through its borders, new research from the New York Fed has one message: think again. The paper, released Thursday and written by Bianca De Paoli and Anna Lipinska, took stock of what are called capital controls. That’s where a nation acts to restrict the flow of money in and out of their nation.  Capital controls were at one point considered by most economists to be a very bad idea because they prevented or put off needed economic adjustments or reforms. The Asian financial crisis of the late 1990s caused some economists to reevaluate the idea and argue that in times of investor panic, there may be occasions where it would be in a nation’s best interest to slow down the flow of funds.

Australian Homebuilders Can’t Give Them Away: Mortgages - Bloomberg: Australian homebuilders are resorting to discounts, gift cards and help with mortgage payments to compete for dwindling buyers as home sales slow.Stockland (SGP), Australia’s biggest residential developer, is giving rebates and gift cards of as much as A$30,000 ($31,300) in Victoria, Queensland and New South Wales states. Devine Ltd. (DVN) is matching deposits in South Australia and taking over mortgage payments for as long as a year in Melbourne. Peet Ltd. has been offering discounts of as much as A$50,000 in Western Australia, Queensland and Victoria. Central bank interest rate cuts of 1.75 percentage points since November 2011 have failed to spur housing demand amid slowing job growth. New home sales in December were 6.6 percent below the level of a year earlier, and loan approvals to build or buy new homes the same month were 31 percent below an October 2009 peak. “The discounts this time ’round are bigger than we’ve seen before because the response we’ve seen to rate cuts has been far more muted,” “Affordability based on mortgage costs has improved, but people are worried about losing their jobs. House buyer confidence isn’t there.”

Argentina Freezes Prices to Break Inflation Spiral.  - Argentina announced a two-month price freeze on supermarket products Monday in an effort to stop spiraling inflation. The price freeze applies to every product in all of the nation's largest supermarkets — a group including Walmart, Carrefour, Coto, Jumbo, Disco and other large chains. The companies' trade group, representing 70 percent of the Argentine supermarket sector, reached the accord with Commerce Secretary Guillermo Moreno, the government's news agency Telam reported. The commerce ministry wants consumers to keep receipts and complain to a hotline about any price hikes they see before April 1. Polls show Argentines worry most about inflation, which private economists estimate could reach 30 percent this year. The government says it's trying to hold the next union wage hikes to 20 percent, a figure that suggests how little anyone believes the official index that pegs annual inflation at just 10 percent.

Argentina Freezes Supermarket Prices To Halt Soaring Inflation; Chaos To Follow - Up until now, Argentina's descent into a hyperinflationary basket case, with a crashing currency and loss of outside funding was relatively moderate and controlled. All this is about to change. Today, in a futile attempt to halt inflation, the government of Cristina Kirchner announced a two-month price freeze on supermarket products.  What consumers will certainly do is scramble into local stores to take advantage of artificially-controlled prices knowing very well they have two short months to stock up on perishable goods at today's prices, before the country's inflation comes soaring back, only this time many of the local stores will not be around as their profit margins implode and as owners, especially of foreign-based chains, make the prudent decision to get out of Dodge while the getting's good and before the next steps, including such measures as nationalization, in the escalation into a full out hyperinflationary collapse, are taken by Argentina's female ruler.

Models and the macroeconomics of price controls - Nick Rowe -- I hear that Argentina has imposed [update: economy-wide] price controls. I know next to nothing about Argentina, but I have spent some time thinking about the macroeconomics of price controls. I can easily build a simple macroeconomic model showing that price controls are a good thing that can make everybody better off.  I cannot build a simple macroeconomic model showing that price controls are a bad thing. I don't think anyone else can either. Unless they assume the government price controllers are stupid. But that doesn't mean price controls are not a bad thing.My guess is that price controls may be a good thing in the short run but will be a bad thing in the long run. I can explain why I think that, but I can't build a model to show that. That's the trouble with models.

Prepaid card loaded with tax refund is recipe for waste - The desperate just got another temptation, a new prepaid bank card that lets you put your tax refund right to work on spending. MasterCard Canada says it will partner with Canada’s largest tax preparer and DC Bank, which provides prepaid cards, to create what is being called the H&R Block Advantage Prepaid MasterCard. What’s new here is that instead of getting that cheque, the money will be put directly onto a prepaid card and, let’s face it, that’s money that will be spent and not saved. You can access the money at an ATM, but you’ll face a $2.95 fee per transaction. “I think when you put a credit on the card, it says in the person’s mind, ‘I’ve got free money,’ as opposed to saying, ‘Here’s a refund, put this in your savings account,’ ” said Scott Hannah, the Vancouver-based chief executive of the Credit Counselling Society. “You put something on a [prepaid] card, what are you going to do? You have to use it. You have to spend it to use it.”

Rejected miner had 30 years experience, say unions after reviewing resumes - A mining company that was granted permits to bring 201 temporary foreign workers from China rejected multiple Canadian applicants who had exemplary qualifications, including one person with 30 years experience, say two trades unions after reviewing hundreds of refused resumes. The unions have been fighting HD Mining in court over the firm's insistence there was never a supply of qualified or interested Canadians in doing the work at the Murray River coal project near Tumbler Ridge, in northern British Columbia. The labour groups say Canadians should have had the first rights to such jobs, disputing the firm's claims it was forced to get permission to bring in temporary workers. Now the unions contend they have documents that validate their assertions.

Migrant money tops $530bn - Some developing nations are winners: France, England...others, the U.S. are very big losers. Banks take a hefty cut... Migrants billions overshadow aid.  This article is an interesting sidebar to the global economy, enormously powerful and consequential. Worth reading and thinking about. From the The Guardian: For decades it was a largely unnoticed feature of the global economy, a blip of a statistic that hinted at the tendency of expatriates to send a little pocket money back to families in their home countries. But now, the flow of migrant money around the world has shot up to record levels as more people than ever cross borders to live and work abroad. It's known as remittance money, and in 2012 it topped $530bn (£335bn), according to the latest World Bank figures. India and China were the biggest beneficiaries of remittances last year, each receiving more than $60bn, followed by the Philippines ($24bn), Mexico ($24bn), and Nigeria ($21bn). Egypt, the sixth largest, has seen the value of remittances surge from less than $9bn in 2008 to nearly $18bn last year. For some smaller economies, remittances can account for huge proportions of national income. Tajikistan and Liberia receive the equivalent of 47% and 31% of their respective GDPs from workers abroad.

Who really pays social security contributions and labour taxes? - Vox EU  - In spite of its policy relevance, academics and policymakers cannot agree on who bears the brunt of a tax on labour. This column uses meta-regression techniques to argue that economic institutions, the tax wedge definition, and the time horizon are crucial in determining who actually pays. Results based on 52 empirical papers suggest that in the long run, workers bear between two thirds of the tax burden in Continental and Anglo-Saxon economies, and nearly 90% in Nordic ones.

Rise in Oil Tax Forces Greeks to Face Cold as Ancients Did - Even in the leafy northern stretches of this city, home to luxury apartment buildings, mansions with swimming pools and tennis clubs, the smell of wood smoke lingers everywhere at night. Unemployment is at a record high of 26.8 percent in Greece, and many people have had their salaries and pensions cut, but those are not the main reasons so few residents here can afford heating oil. In the fall, the Greek government raised the taxes on heating oil by 450 percent. Overnight, the price of heating a small apartment for the winter shot up to about $1,900 from $1,300. "At the beginning of autumn, it was the biggest topic with all my friends: How are we going to heat our places?" said Ms. Pantelemidou, who has had to lower her fees to keep clients. "Now, when I am out walking the dog, I see people with bags picking up sticks. In this neighborhood, really."  In raising the taxes, government officials hoped not just to increase revenue but also to equalize taxes on heating oil and diesel, to cut down on the illegal practice of selling cheaper heating oil as diesel fuel. But the effort, which many Greeks dismiss as a cruel stupidity, appears to have backfired in more than one way.

Greek Isles Cut Off From Mainland For Sixth Day As Strikes Return With A Vengeance - When Europe's politicians boldly said a few weeks ago what they have been repeatedly saying every year for the past three, namely that "Europe is fixed" usually just before it breaks all over again, what they meant was that the various stock markets were up. Because if they were actually referring to the European economies, Europe just broke (no pun intended) once more, with the Greek economy once again back to its "new normal" baseline state: a near complete halt as the cold of winter dissipates, and protests and strikes return. In this case, the biggest losers are the thousands of people living on various Greek islands who have now been cut off from the mainland for the 6th consecutive day. And everyone else, of course, reliant on the Greek economy actually posting an uptick one of these centuries.  From Reuters: "Greek seamen extended a strike to protest against government austerity for a further 48 hours on Sunday, meaning dozens of islands will have been cut off from the mainland for six days." They were not alone: "Farmers also briefly disrupted traffic on major motorways across Greece in the latest wave of protest over budget cuts and labor reform that is needed to satisfy international lenders." And that is just the start: "Greece's biggest labor union has called a general 24-hour strike for February 20."

Greek Tax Hikes Backfire As Tax Revenues Plunge 16% - There was some hope that Greece, which for the past few months was desperately trying to show it has a primary surplus when in fact it was merely shoving unpaid bills under the rug, was at least getting its runaway deficit situation under control. This, despite what many sensible people pointed out was the return of nearly daily strikes, which meant zero government revenue as zero taxes could be levied on zero wages. Turns out the sensible people were again right, and the Greek and European propaganda machine has failed once more as the Greek Finance Ministry just reported that despite big tax hikes demanded as part of austerity measures by international lenders, tax revenues fell precipitously in January, with the Greek Finance Ministry reporting a 16 percent decrease from a year earlier, and a loss of 775 million euros, or $1.05 billion in one month. It is all downhill from here as the feedback loop of more spending cuts is activated to offset declining revenues, leading to even less revenue, and culminating with the complete collapse of Greek society.

Soros Fears 'Rebellion', Warns "The Euro Could Destroy The EU" -- From a discussion of the Dutch political system being in the pocket of Big Oil to warning that German policy stipulations and the Euro itself could "potentially destroy the European Union," amid rebellion, George Soros has drastically reduced all Euro-related exposure from his portfolio - only a few weeks after his cautious optimism that Europe is 'revived' in Davos. As Open Europe blog notes, Soros fears that "there is a real danger that the [Euro] solution to the financial problem creates a really profound political problem." The interview below with Dutch TV shows Soros grave concerns that the Southern nations are "being pushed unwittingly... into a long lasting depression," as Germany's austerity program is "counter-productive - cannot actually succeed." Just as we recently noted the similarities between the European Union and the Soviet Union, so Soros believes the 'Euro' itself is "bound to break up the European Union." It may take generations, he notes, as a terrible tragedy of "lost political freedom and economic prosperity."

Vital Signs Chart: Euro Gaining on the Dollar - The euro is gaining on the dollar. On Friday, one euro bought more than $1.37 — the most since November 2011 — before falling to $1.364. Many investors are confident the worst of the euro-zone crisis is past, pushing the euro up from $1.32 in early January. Yet the euro’s strength could stifle Europe’s recovery by making exports pricier for buyers abroad.

Europe’s Sham Banking Union - After a year in which European Union policy makers spent much time obsessing about banking union, it is time to take stock of the discussion. The question today is about whether this particular exercise will deliver the goods—whether it will help tackle the economic crisis that still looms large over Europe. There the evidence isn't good. The EU's banking union was supposed to break the "vicious circle" connecting weak banks and weak sovereigns—and to do so quickly. As a way to mitigate the risks that troubled banks pose to sovereigns, however, the plan is looking more ineffectual by the day. Although the European Stability Mechanism (ESM) can inject capital into struggling banks, a number of caveats apply. The first is that equity can only be injected into viable banks, and not the "bad banks" that various states have set up to wind down problem assets and reduce uncertainty in the financial system. The problem here is that it is exactly in these bad banks that losses are likely to arise. Under the current plan, these losses would need to be absorbed by the member states in question, adding significantly to their government debt. The second is that equity injections are not allowed to tackle "legacy losses." Given that large losses have already materialized and been recognized in banking systems in Ireland, Spain and Cyprus, this severely limits the usefulness of any direct injection of ESM equity. In fact, it's fair to say that if we did not have a legacy-asset problem, the euro crisis would not exist.

The eurozone crisis is not finished - What does it tell us about a eurozone banking union if the member states are rushing to pass unilateral legislation on financial regulation? France and Germany have, in short succession, proposed measures to ringfence banks’ proprietary trading activities. The two countries have co-ordinated their moves with each other, but with nobody else. Would not a ringfence be a power any self-respecting banking union would want to usurp? The answer is that banking will remain a national activity in the eurozone for all economically relevant purposes. The European Central Bank will become the common bank supervisor. This has indeed been agreed. But there will be no common deposit insurance. The resolution system likely to emerge later this year is also flawed. It will end up protecting only the taxpayer of the creditor countries from bank failures in the debtor countries. But it will not accelerate the resolution of the eurozone’s undercapitalised banks. The proposed legislation aims to force banks to put their proprietary trading (that is, trades made on their own accounts rather than on behalf of a customer) into separate legal entities. But this does not affect market making, for example. Erkki Liikanen, the governor of the Finnish central bank, proposed a full separation in his European Commission report, published in October. The commission has been planning an EU-wide directive, but the Franco-German action has now pre-empted the outcome.

Italian court investigates derivatives at five banks (Reuters) - Italian prosecutors are investigating derivative trades made by five of the country's biggest banks, judicial sources said on Friday, as part of an investigation that began at least a year ago before the current Monte dei Paschi scandal erupted. Monte dei Paschi (BMPS.MI), UniCredit (CRDI.MI), Intesa Sanpaolo (ISP.MI), BNL and Credem (EMBI.MI) are being investigated by a court in Trani, a small town on the southeastern coast of Italy, over derivative trades, judicial sources told Reuters. Intesa said the probe dated back to 2010 and concerned its Banco di Napoli unit. It said the deals involved were "negligible" and had no material impact on group financials. The probe is unrelated to a scandal that broke last week involving Siena's Monte dei Paschi, the world's oldest bank, after it was revealed that opaque derivatives contracts left the lender facing losses of 720 million euros. Since last week, prosecutors from three cities have launched investigations into possible fraud or lack of oversight at Monte dei Paschi, sparking concern by President Giorgio Napolitano, who warned on Friday that the national interest was at stake.

Bank Of Italy Caught Lying About Imploding Monte Paschi, Counters With Even More Ridiculous Lies - The other half of the reason for today's Italian stock market collapse is the well-known to our readers scandal involving Italian bank Monte Paschi, which also refuses to go away due to its massive political implications three weeks ahead of the Italian elections. Yet the reason why little if anything has been mentioned about what may soon be a nationalization of the third largest (and just as insolvent) Italian bank in the mainstream US press is the resulting humiliation for the current ECB head, ex-Goldmanite Mario Draghi, who has been aggressively pushing to become a bank supervisor of all European banks as ECB head, yet with every day new revelations emerge about how epically he failed to supervise a major Italian bank right under his nose as head of the Bank of Italy. The latest in this developing scnadal which not even the market can ignore any more comes once more from the Bank of Italy, which has once more changed its story. Recall that as recently as January 23 Mario Monti vowed to Davos that nobody knew nothing. This was a sentiment that was vouched by the Bank of Italy itself, which pled complete ignorance and accused then BMPS management of everything. Turns out Monti and the Bank of Italy both lied.

Berlusconi’s $5.4 Billion Giveaway Vow Draws Monti’s Scorn - Silvio Berlusconi’s campaign promise to give Italian taxpayers a cash rebate of 4 billion euros ($5.4 billion) was criticized by Prime Minister Mario Monti as an attempt to buy votes.  “We can call it a quid pro quo or even a friendly attempt at corruption,” Monti said today in an interview with RTL 102.5 radio. “Berlusconi wants to buy the votes of Italians with the money that Italians had to turn over to cover up the shortfall left in the public accounts by Berlusconi, who governed for eight of the past 10 years.”  The rivalry between Monti and Berlusconi, a three time former premier, has escalated as Italy approaches parliamentary elections Feb. 24-25. Monti replaced Berlusconi as premier in November 2011 and imposed austerity to protect Italy from the worst of the Europe’s debt crisis. “That man there, Monti, increased unemployment by half a million in 13 months of government,” Berlusconi said today in an interview televised on La7. “These are the real things. Not the baloney that people keep repeating.”

Rajoy Further Implicated in Scandal; Support Drops to 23.9% in Record Plunge - Prime minister Mariano Rajoy is now personally implicated in the slush fund scandal in Spain. Via Google translate, please consider Rajoy and his family were paid with money from Gürtel travel The front page of Monday's newspaper "La Gaceta" promises new revelations about political scandals that are playing close to the popular government of Mariano Rajoy. The fore mentioned entitled 'A Rajoy also paid travel, "about a picture of the back of the highest representative of the Spanish."His wife, his son and personal assistant flew business class to Las Palmas with money Gürtel", added the subtitle, attaching notes as evidence under seal 'exclusive'.  That should not be a surprise, but what choices do voters have?  Please consider this choppy translation from El Pais: crisis and corruption lead to PP to lower expectations. At this time, there is a ruling party with almost hegemonic majority, allowing it to act with little parliamentary scrutiny and yet have an estimate of the single vote of 23.9%, the lowest of democracy, only one year after having swept the polls. In a month and has lost six points from more than 20 points overall, without stating whether touched and thoroughly. And in theory are almost three years to allow citizens to speak at the polls.

Spanish Leader Pledges Transparency Amid Corruption Inquiry - Prime Minister Mariano Rajoy of Spain pledged on Saturday to provide “complete transparency” about his own financial assets and those of other politicians in his party to refute what he described as “apocryphal” documents showing that he and others had received regular payouts from a secret parallel account maintained by the party.In a televised address, Mr. Rajoy said he regretted the damage that the corruption allegations had caused to his image — as well as to the image of his governing Popular Party and Spain as a whole — at a time of economic and social hardship. But he predicted that “this is as far as it will go,” adding, “This party will defend itself.” Mr. Rajoy also insisted that his party had no connection to the $29 million amassed in Swiss bank accounts by a former party treasurer, Luis Bárcenas, who has been at the heart of the widening corruption scandal. His party, Mr. Rajoy said, “never gave orders to open accounts in a foreign country.” The prime minister said he would publish online his own tax returns this week. As to the financial rectitude of his colleagues, Mr. Rajoy said “all our tax contributions have been made within the strictest legality over all these years.”

Spanish Prime Minister Mariano Rajoy under pressure to quit -  Spain's Prime Minister faced calls to resign amid allegations that have embroiled senior members of the ruling conservative party in a wide-reaching corruption scandal. Alfredo Perez Rubalcaba, the socialist opposition leader, has now called on Mr Rajoy to resign for the good of the country. "Rather than the solution for this country, Rajoy has become yet another problem," he said. "He should give up his role as the head of the government and cede his place to another leader because he cannot tackle the very difficult situation confronting Spain." Detailed excerpts of accounting books that belonging to disgraced former Popular Party treasurer Luis Barcenas, who is separately under investigation after it emerged he had amassed 29m euros (£25 million) in a secret Swiss bank account, were published by left-leaning newspaper El Pais last week. Mariano Rajoy gave a televised address on Saturday in which he emphatically denied reports that he had personally benefited from a secret slush fund and pledged to provide "complete transparency" over his financial dealings.

The euro crisis: So many ways to fail | The Economist - It would be premature to declare a new flare-up for the euro-area crisis. Yet this should be a reminder to Europe that complacency is the enemy and that the single currency is still in very vulnerable shape. There are simply too many ways for things to go awry. Recent economic data have been decent, by euro-area standards. While output still seems to be contracting across much of the euro area, the pace of decline seems to be easing, for industrial activity as well as employment. Given quiescent financial markets and a growing world economy, one could imagine a return to growth for the euro-area economy by the end of the year. Yet the number of potential political stumbling blocks is sufficient to drive one to despair. Like the brewing scandal around Spanish Prime Minister Mariano Rajoy, which could potentially endanger his government. Or the distressing threat of political violence in Greece. Or the state of play in Italy, where scandal is also unfolding in the banking system, while Silvio Berlusconi continues to press his political comeback bid.

Can the Euro’s Fiscal Compact Cut Deficit Bias? - Europe’s fiscal compact went into effect January 1, as a result of its ratification December 21 by the 12th country, Finland, a year after German Chancellor Angela Merkel prodded eurozone leaders into agreement.   The compact (technically called the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) requires  member countries to introduce laws limiting their structural government budget deficits to less than ½ % of GDP.  A limit on the “structural deficit” means that a country can run a deficit above the limit to the extent — and only to the extent — that the gap is cyclical, i.e., that its economy is operating below potential due to temporary negative shocks.The budget balance rule must be adopted in each country, preferably in their national constitutions, by the end of 2013.   Will the new approach help?   The aim is to fix Europe’s long-term fiscal problem, which since the date of the euro’s inception has been evident in the failure of the Stability and Growth Pact (SGP), the crisis in Greece and other periphery countries that surfaced in 2010, and the various ways in which these countries were subsequently bailed out.     There is no reason to doubt that the eurozone countries will follow through to the extent of adopting the national rules by the end of the year.  But after that the fiscal compact will probably founder on precisely the same shoals as the SGP.

As the Eurozone tries to turn the corner, one member nation continues to lag - It increasingly looks as though the Eurozone's overall economy is close to bottoming out (as discussed here). This may be a transient effect but it's real nevertheless. The PMI numbers are still in a contraction mode, but the trend is no longer downward. Markit (Chris Williamson): - The Eurozone economic picture continues to brighten, with the final reading of the manufacturing PMI for January coming in ahead of the earlier flash estimate. The survey continues to signal an overall deterioration of business conditions, but rose to an 11-month high to suggest that the industrial sector is close to stabilising after contracting throughout much of last year. The improvement was led by Germany, which saw the strongest gain in output of all eurozone states, but rising exports are also helping to revive the manufacturing sectors of other countries, most notably Spain and Italy. There is however a major exception to this trend. France's economic conditions continue to deteriorate. Markit (Jack Kennedy): - The deterioration in French manufacturing sector business conditions continued in January. The fact that new orders fell at the sharpest rate for nearly four years is a particularly concerning development and suggests further steep falls in output are likely as we progress throughout the first quarter. Confidence seems to have evaporated in the face of an increasingly uncertain economic environment, leading manufacturers to make sharper cuts to employment, purchasing and input stocks in the latest survey period.

Germany Rebounds but ... France Economic Implosion Accelerates; Record Decrease in Service Employment in Italy - A quick look at economic data from Markit shows a recovery of sorts in Germany (it will not last) and a contraction in France at the steepest rate in four years. Meanwhile, Italy saw a PMI survey-record decrease in services employment in January.  The Markit France Services PMI®, shows service sector business activity falls at sharpest rate since March 2009. Key points:

  • Final Markit France Services Activity Index(1) at 43.6 (45.2 in December), 46-month low.
  • Final Markit France Composite Output Index(2) at 42.7 (44.6 in December), 46-month low.

Summary: French service providers signalled a further reduction in business activity during January. Moreover, the rate of contraction accelerated to the fastest since March 2009. Incoming new business fell at a slower pace, but there were accelerated declines in both backlogs and employment. Input prices rose further, but output charges decreased at a sharper rate. The seasonally adjusted final Markit France Services Business Activity Index slipped to 43.6 in January from 45.2 in December. The latest reading was indicative of a marked rate of contraction that was the sharpest for almost four years. The amount of new work placed with French service providers was down for a tenth successive month in January. Outstanding business in the French service sector decreased at a faster rate in January. The latest fall was the sharpest since August 2009.

Illusions of Stabilization -- In Germany Rebounds but ... I noted a recovery "of sorts" in Germany, a contraction in France at the steepest rate in four years, and a record decrease in services employment in Italy. Thus, it should be no surprise to see the Markit Eurozone Composite PMI® shows national divergence hits record high.Yet, in aggregate, the eurozone contraction decelerated with the eurozone composite PMI rising from 47.2 to 48.6.  So, what's it all mean? Chris Williamson, Chief Economist at Markit offered this interpretation: "The eurozone is showing clear signs of healing, with the downturn easing sharply in January and the region moving closer to stabilisation in the first quarter. ...."I disagree with Williamson. Those divergences show the eurozone is getting sicker, not healing.  If there was any healing, and certainly if there was any rebalancing, manufacturing and export growth would be picking up in Spain, in Italy, and in France at the expense of Germany. A quick check of the Markit Eurozone Manufacturing PMI will show that is not what's happening.

Is the Euro Crisis Over? - A strange calm has settled over Europe. Following Mr. Draghi’s July 2012 promise “to do whatever it takes” to save the euro, which the head of the European Central Bank followed shortly thereafter with a new program of potentially unlimited bond buying known as “outright monetary transactions,” the market panic evaporated. Since then super-high bond yields have come down to more reasonable levels, allowing fiscally and financially stressed debtor countries in the euro-zone to (re)finance their public-sector borrowing needs a lot more easily than before. Even Greece has been able to borrow in the single-digits for the first time in three years. This calming of once-panicky debt markets has led to optimistic assessments that the worst of the crisis has passed. Draghi himself declared at the beginning of the new year that the euro-zone economy would start recovering during the second half of 2013. He talked of a “positive contagion” taking root whereby the mutually reinforcing combination of falling bond yields, rising stock markets and historically low volatility would set the positive market environment for a resumption of economic growth across the euro zone. Christine Lagarde, as the head of the IMF part of the “troika” (i.e. ECB, IMF, and European Commission) managing the euro-zone crisis, declared at the World Economic Forum in Davos a few weeks ago that collapse had been avoided, making 2013 a “make-or-break year.”

Hollande warns Cameron not to hijack EU Summit - Telegraph: French President Francois Hollande has warned David Cameron not to hijack this week's European Union summit with excessive demands on cuts in the EU budget while refusing to make concessions. In his address to the European Parliament, Mr Hollande said the 2014-2020 EU budget of some €1 trillion (£860.8bn) was open to some savings but insisted the leaders at Thursday's summit should not compromise innovation and shared sectors like farming. A November summit ended in failure when Britain led opposition against proposals for a new seven-year EU budget. "I have been told a solution cannot happen with Britain. But why should one country decide for 26 others? Indeed we could have agreed at the last European summit," Mr Hollande said. "In order to let people say that this failure was a victory, we let it happen." In several remarks that could be seen as targeting Mr Cameron, Mr Hollande said "there are those who want to see cuts, others - possibly the same, who want guarantees on their own rebate".

EU budget summit: Cameron demands further cuts: British Prime Minister David Cameron says he will not accept an EU budget deal unless further cuts are made in negotiations in Brussels. European Union leaders are holding a two-day summit to try to strike a seven-year spending deal, after a previous meeting in November failed. But Mr Cameron said the figures being proposed "need to come down. And if they don't... there won't be a deal". The European Commission head called for "a spirit of responsibility" in talks. Jose Manuel Barroso said: "Further delays will send out a very negative message at this time of fragile economic recovery. The risk is that positions will harden and will be even more difficult to overcome."

EU agrees historic budget deal after all-night talks - European leaders have finally agreed a budget deal for the rest of the decade after a marathon 25-and-a-half hour negotiation session in Brussels, that will lead to the first cut in EU spending in its 56-year history. Herman Van Rompuy, the president of the European council who chaired the negotiations, broke the news on Twitter. He tweeted at 4.22pm local time on Friday: "Deal done! #euco has agreed on #MFF for the rest of the decade. Worth waiting for." David Cameron, who had demanded a cut or at least a freeze in real terms in the near €1tn (£850bn) budget, will claim victory after the European council president proposed a €34.4bn cut over the next seven years. Van Rompuy finally clinched the deal after all-night talks, which finally took shape when he tabled budget proposals at 6am following a night of haggling at the EU summit described by one official as "like a bazaar".

EU Leaders Agree to $1.3 Trillion Budget - European Union leaders have agreed to a €960 billion ($1.3 trillion) budget — a significantly cut-back sum that would represent the first decrease in a budget in the union’s history. European Council President Herman Van Rompuy said Friday that the agreement had been reached after two days of negotiations. A senior EU official said the final number for the seven-year budget was €960 billion — much less than the €1.03 trillion that the EU’s executive arm, the EU Commission, originally proposed. The two-day fight over what the EU pledged to spend on everything from infrastructure to development aid laid bare divisions over what the role of the union should be. The EU Parliament must still approve the deal — and they have suggested that such drastic cuts are unacceptable.

ECB eschews global monetary stampede - Following today’s glut of monetary policy news, markets seem to have temporarily re-assessed their recent bullishness about the euro. However, investors should not lose sight of the fundamental gap that still exists between the ECB’s preference for relatively traditional monetary policy and the aggressively unconventional approach of the other major central banks. That has not gone away. For example, the Bank of England remains in unorthodox monetary territory, as shown by its willingness to accept, for the first time, that inflation will remain above 2 per cent well beyond the two-year policy horizon. Mark Carney’s Select Committee evidence may have dashed expectations of a nominal GDP target, and he may have sounded lukewarm about more quantitative easing, but overall he remained extremely dovish, especially with regard to Fed-style forward policy guidance. Meanwhile, in comparison, Mario Draghi’s press conference was much more “old fashioned”, repeatedly emphasising that policy is still very accommodative, despite the recent rise in overnight rates and the fall in the ECB’s balance sheet [1]. Admittedly, Mr Draghi showed more concern about the rising euro than he did last month, saying it may reduce inflation risks. It is just conceivable that this could lead to a small rate cut next month. But the ECB remains much less focused on the exchange rate than some other central banks, and calls for a managed exchange rate by the French President, who received short shrift from the ECB President.

‘Volcker Rule,’ EU-Style - Two of Europe's biggest countries moved Monday to beef up laws aimed at solving the problem of banks that are considered too big to fail, but the initiatives again highlighted big differences between European countries' strategies. In the U.K., Chancellor of the Exchequer George Osborne bowed to pressure from a parliamentary commission and said he would give regulators powers to break up banks if they try to circumvent a new law forcing them to separate their retail and commercial banking activities from their riskier, market-based businesses. Meanwhile, further details emerged to suggest that a new German draft law on the separation of retail and some investment-banking activities, to be submitted to the German legislature on Wednesday, will affect more banks than first thought. A person close to the government said national supervisors will examine the case for separation, but not necessarily insist on it, if assets devoted to so-calle d proprietary trading, high-frequency trading or hedge-fund-financing operations, in a bank's so-called trading-and-available-for-sale book, make up either 20% of the bank's balance-sheet value, or surpass €100 billion ($135 billion) in value.

UK Declares New Powers To Break Up Banks - Britain's treasury chief warned the country's banks on Monday that they face being broken up if they fail to protect their retail operations from their riskier investment arms. George Osborne told executives from JPMorgan that the days of banks being "too big to fail" are over in Britain, and that taxpayers shouldn't be expected to bail out the lenders. The next time a crisis hits, he wants more options to act.  The new measure gives regulators the power to force a complete separation of a lender's retail business from its investment banking. Risky investments undermined banks' stability in 2008, leading to taxpayer bailouts of two big U.K. banks. Osborne's remarks follow recommendations from the Parliamentary Commission on Banking Standards that proposals for a "ring-fence" to protect retail banks needed to be "electrified" to discourage banks from probing for loopholes. Osborne had been reluctant to accept the idea, but faced pressure stemming from public outrage over the behavior of Britain's banks.

Mark Carney: Bank Of England's New 'Super Cop' Will Have Stunning Powers To Break Up Banks - Britain’s regulatory mandarins rejoiced last fall when Bank of Canada governor Mark Carney, the “rock star” of central banking accepted the job of head of the Bank of England. Now, the U.K. government is preparing to give Carney a seemingly unprecedented amount of power for a British central banker. Under bank reforms revealed by British Chancellor George Osborne on Monday, Carney’s Bank of England will be placed in charge of regulating the banks, and given the power to break up those banks that fail to live up to rules designed to ensure they don’t become “too big to fail.”Britain had earlier resolved to create a “ring fence” around banks’ investment branches, so that if the investment side ends up facing financial collapse (as happened with many banks operating in Britain during the financial crisis of 2008), it won’t affect the banks’ retail customers (as also happened in Britain during the crisis.)Now, the country’s Conservative government appears to be climbing down from its earlier resistance to tougher regulations, and has agreed to a plan to “electrify” the “ring fence” — in other words, if the Bank of England feels a financial institution is putting consumers at risk, it can order the bank to be broken up entirely.

IEA's shadow MPC votes 6-3 for surprise rate hike - Following its most recent quarterly gathering, the Shadow Monetary Policy Committee (SMPC) decided by six votes to three that Bank Rate should be raised on Thursday 7th February. Four SMPC members wanting an increase of ¼%, while two advocated a rise of ½%, implying a rise of ¼% on normal Bank of England voting procedures. The recommendation of a rate rise in February was the first time since September 2011 that a majority of the SMPC had voted in favour of higher interest rates. One reason was that fiscal policy seemed even further off course than was previously believed, and risked damaging the credibility of all UK policy making. Another was that the lull in the storms engulfing the Euro-zone provided an opportunity to raise Bank Rate while the markets were still reasonably calm. However, there were also some noticeable intellectual differences between the SMPC majority, who wanted a rate rise, and the approach more commonly favoured by UK policy makers and the financial media. In particular, it was believed that the almost unprecedented degree of government intervention in the UK economy in recent years was leading to major problems with aggregate supply and preventing the re-allocation of resources from Zombie sectors to those with genuine growth potential. It was also feared that sustained artificially low interest rates were leading to a growth-destroying misallocation of capital.

A case to reset basis of monetary policy - Are the targets and instruments of the UK’s monetary policy framework “fit for purpose”? For once, this ugly phrase sums up the predicament well. With the economy in the doldrums and the arrival of Mark Carney as governor of the Bank of England in July, this is the ideal time for a rigorous, comprehensive and open debate. As Mr Carney stated in testimony before the UK parliament’s Treasury select committee, the current framework is “flexible inflation targeting”. Mr Carney considers flexible inflation targeting the “most effective monetary policy framework implemented thus far. As a result, the bar for alteration is very high.” He agrees, then, with Sir Mervyn King, his predecessor, who argued in January that “the anchoring of inflation expectations has been the most successful aspect of the inflation targeting regime ... It would be irresponsible to lose that.” Yet proponents of the current regime (of which I was one) justified it not only on the proposition that it would stabilise inflation, but that it would help stabilise the economy. It failed to do so. In terms of lost output, the current slump is far worse than the inflationary 1970s and disinflationary early 1980s. Even with growth at 1.5 per cent a year from now on, output would return to its level of the first quarter of 2008 only in the first quarter of 2015: in brief, seven lost years. This is abysmal, even if a productivity collapse (with worrying longer-term implications) shielded employment.

What is the attraction of helicopter money? - The reviews of the first episode of Mark Carney and the Treasury Select Committee seem generally favourable. Of course those wanting to see inflation targeting killed off right from the start were disappointed (as they were bound to be - you cannot kill an established star that quickly), but its demise has not been ruled out. From my point of view one of the real positives from the show was the evident desire of the new Governor to have a debate about the monetary policy framework, a debate which as I noted before has been largely missing in the UK. Martin Wolf, as ever, eloquently explains (£) the reasons why we need this debate, and I’m glad to see his suggestion that we might look at earnings growth as well as CPI inflation. To put the point strongly, one reason why monetary policy is currently so passive around the world is an unjustified obsession with just one particular measure of inflation. Martin Wolf also says we need to talk about helicopter money, and the FT leader took a similar line the previous day. Here I admit I am conflicted. The macroeconomist in me wants to complain: as I have said in the past, helicopter money is either a plea for fiscal expansion - which is good, but why not call it that - or a policy for above target future inflation, which may also be good but why not call it that too? However perhaps I am being politically naive - maybe it is the only way we can get governments at the moment to undertake fiscal expansion.

FSA confirms start of full review of interest rate swap mis-selling - The Financial Services Authority (FSA) has confirmed that Barclays, HSBC, Lloyds and RBS will start the full review of their sales of interest rate hedging products (IRHPs) to small businesses. In June last year, the FSA announced that it had found serious failings in the sale of IRHPs. Today’s announcement means that these banks have agreed to work on reviewing individual sales and providing redress to customers based on principles outlined in today’s FSA report, and overseen by independent reviewers.  The decision follows intensive work by the FSA to scrutinise the pilot review of sales carried out by the banks and the independent reviewers.  The pilot was established to allow the FSA to consider the banks’ proposed approaches to reviewing sales and to ensure they would deliver the right outcome for customers. The FSA considered files containing all the evidence on individual sales of IRHPs, together with the bank’s and the independent reviewer’s assessment of each file.  Evidence from customers has also been very important in assessing sales.   In addition, the independent reviewers have provided reports covering matters such as areas of disagreement between the reviewer and the bank. 

The risk addicts - On any night of the week in London, if you go to a Gamblers Anonymous meeting, you will find a City banker turning up in tears over how much money he has just lost. This is according to Martin, a 29-year-old banker, who one night in the winter of 2011 stumbled into such a meeting, distraught at having lost nearly £200,000 playing blackjack online. Phillip is another pathological gambler who used to be a trader and who, like Martin, doesn’t want his real name appearing in the Financial Times. Until 18 months ago, he used to trade foreign exchange in a small team. Four of them would fritter away idle moments spread betting, as a result of which they lost a great deal of money – as well as a marriage apiece. What was unusual about Phillip was not that his losses were the biggest of the four but that he was the only one who sought help. “Only about 1 per cent of traders with gambling problems ever come forward,” he says. “No one wants to admit it. Partly, it’s pride, but it’s also because everyone’s scared of losing their job.” The story of Kweku Adoboli proves just how much damage a gambler on the rampage can do to the bank that employs him – as well as to himself. The former UBS banker lost $2.3bn in rogue trades but also sank £123,000 of his own money on spread betting – the most lethal sort of gambling there is, as the losses are unlimited.

Banks Should Defer Bonuses for Up to 10 Years, Jenkins Says -- Bankers’ bonuses should be deferred for as long as 10 years to hold executives accountable for risks, said Robert Jenkins, a member of a Bank of England committee charged with ensuring financial stability.  “Five years might or might not be appropriate for some categories of risk, but if we are going to rely on remuneration as a key driver of financial stability then it should probably be between five or ten years,” Jenkins said in an interview yesterday in Washington. “Ten years would capture the majority of risk cycles and therefore the gains and losses that came from any risk that was taken today.”

Labour productivity in the recession: why are the UK and US so different?: I’m afraid this post is going to seem like an episode of House, except without finding out what the patient had at the end. Indeed it is not even clear which patient, the UK or the US, has the unusual symptoms.Here are two charts, taken from a new study by the Institute for Fiscal Studies.[1] The first compares UK labour productivity in this recession and two earlier large UK recessions These are startling differences, so what can explain them? The IFS study, which builds on earlier analysis by the Bank, MPC member Ben Broadbent, and others [2], has some ideas about some things that may be going on and some things that are not, but I think its fair to say that we are still in the conjecture phase on this. So this post is mostly conjecture.  Let us start with the first chart. There are two classes of explanation for such a dramatic change. One is that the structure of the UK economy has radically changed. The other type of explanation is that the nature of the recession is different, and so the outcomes are also different. This recession has been generated by a financial crisis rather than by tight monetary policy. However, the fall in productivity growth in the UK is pretty widely spread across industries, so it is not a composition effect caused by a decline in the financial services sector. We need more clues.

Perverse incentives and productivity - The UK's labour market is something of a puzzle. Employment is at an all-time high, but unemployment is higher than might be expected from the employment figures and productivity is falling like a stone. Numerous explanations have been put forward for this apparent inconsistency, most recently by the ONS, the IFS and the TUC. Even FT Alphaville had a go at it. Needless to say, none of these bodies agree on the causes. I've read all these reports, and in my view all of them make useful contributions. If there is one certainty in this matter, it is that there isn't a simple explanation. But I think they are missing something. The other day I wrote a post asking why there was such a rise in employment when unemployment was apparently not falling a great deal. Who are all these new people, where have they come from and why weren't they working (or unemployed) before? This sparked an intense debate on twitter about the nature of the new employment. And from it emerged a picture of perverse incentives that I think goes a long way towards explaining not only the difference between employment and unemployment, but also the falling productivity since mid-2011.

 Living wage trade-offs - How should we think about trade-offs in economic policy? Some tweets by Jon Stone have raised this question.  To see the issue, take the Resolution Foundation's estimate (pdf) of the effect of fully implementing a living wage. It reckons such a policy would raise the gross earnings of around five million workers by a total of £6.5bn, though some £2.9bn of this would be clawed back by the government in the form of higher taxes and lower tax credits and benefits.However, the higher wages would cost 160,000 jobs. For the sake of argument, let's assume these numbers are roughly right. Is the cost of 160,000 jobs a good trade for higher net incomes for millions? In terms of workers' raw income, the answer's yes: the £3.6bn rise for those who keep their jobs outweighs the income lost by those losing their jobs. Measured by well-being, however, it's a closer call. Wellbeing increases only weakly with income, but falls sharply with job loss. This means that we need lots of winners from a living wage to offset the unemployment of a few.

No recovery until 2018, warns NIESR - Economic output per person in the UK will not recover its pre-crisis peak until 2018, a full decade after the recession struck, according to one of the country’s top forecasting bodies. The National Institute of Economic and Social Research (NIESR) said “real per-capita GDP” is only half way to regaining the ground lost in the slump and the slow subsequent recovery. “This represents the slowest post-recession recovery in output in the past 100 years,” the NIESR said. The institute’s prediction came as it downgraded its forecasts again, cutting its 2013 growth outlook to 0.7pc from November’s estimate of 1.1pc. Next year will also be weaker than previously predicted, at 1.5pc instead of 1.7pc. However, rather than contacting 0.1pc, it now believes GDP in 2012 was flat. The bleak picture came as a leading indicator for Britain’s beleaguered construction industry showed that it suffered a bad start to the year. Output in January fell at the same rate as in December – the fastest decline for six months – according to Markit/CIPS Purchasing Managers’ Index (PMI). The headline figure remained at 48.7, where anything below 50 indicates contraction.

U.K. Lesson: Austerity Leads to More Debt - Yesterday, I argued that U.S. fiscal policy is heading in the wrong direction, toward the economics of austerity. If you want to know where this path can lead, look across the Atlantic to poor old Blighty. For almost three years now, since the election of a Conservative-Liberal coalition, the British government has been slashing government programs and raising taxes, supposedly to reduce a big budget deficit. As I’ve written previously, the results have been pretty disastrous—both for ordinary Britons and for the public finances.  Just how disastrous was made clear yesterday by a new report from the Institute of Fiscal Studies, a London-based think tank that is widely regarded as independent and nonpartisan. In the “Green Budget,” its lengthy and detailed annual review of the U.K.’s finances, the I.F.S. pointed out that the budget deficit, far from being eliminated, was still so large that next year the Chancellor, George Osborne, will have to borrow about sixty-five billion pounds more than he had anticipated. (That’s about four per cent of the U.K.’s G.D.P.) Indeed, the hole in the public finances is so big, the I.F.S. said, that the government might well be forced to introduce a series of tax hikes following the next general election, which is expected to take place in 2015.

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