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

Saturday, March 16, 2013

week ending Mar 16

U.S. Fed balance sheet grows to record large size | Reuters: (Reuters) - U.S. Federal Reserve's balance sheet grew to a record size in the latest week with more holdings of U.S. government debt, Fed data released on Thursday showed. The Fed's balance sheet, a broad gauge of its lending to the financial system, stood at $3.147 trillion on March 13, compared with $3.091 trillion on March 6. The Fed's holdings of Treasuries totaled $1.770 trillion as of Wednesday versus $1.762 trillion the previous week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) totaled $1.061 trillion on Wednesday, compared with $1.016 trillion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system was $73.59 billion, unchanged on the week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $6 million a day compared with an average of $21 million per day the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances - Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks March 14, 2013

The Balance Sheet and the Fed's Future - The Fed's balance sheet has changed in important ways - both in size and composition - from what existed before the financial crisis. As well, other elements have been added to the policy mix. Most importantly, the Fed now pays interest on reserve balances. Taken together these changes work to make monetary policy work differently, in some respects. In other respects, policy actually works in roughly the same way, though one might think it would work differently. Changes in the balance sheet, and the payment of interest on reserves, will in the future matter for how policy decisions are made, and potentially for Fed independence. So it is important for us to figure out what is going on. In January 2007, the Fed balance sheet looked like this (reporting only the essentials):In the most recent (March 7, 2013) release it looked like this: You can see clearly the nature of the changes in what our central bank is doing. The Fed is a financial intermediary - though it has some key properties that distinguish it from commercial banks, for example. Whatever intermediation the Fed is doing, there is much more of it now than in early 2007, as the size of the balance sheet has increased by a factor that is now getting close to 4. Indeed, if the Fed's current asset purchase program - which proceeds at the pace of $85 billion per month in purchases of long maturity Treasury debt and mortgage-backed securities (MBS) - continues until the end of the year, as expected, then the peak increase in the size of the balance sheet should be a factor of about 4.8 (nominal) using January 2007 as a base period.

Alan Blinder Discusses the Fed's Balance Sheet - Alan Blinder has a piece in the Wall Street Journal on the size of the Fed's balance sheet and why it does and does not matter. Mostly this looks fine, but at the end of the article, he discusses a possible exit strategy from some difficult choices for the Fed:  Is there a way out? Here's one thing that could help. As I have argued for some time, the Fed should reduce the interest rate it pays on the roughly $1.7 trillion of banks' excess reserves. If it did so, banks would keep less cash on deposit at the Fed. The liberated funds would probably flow mainly into the money markets, but some would probably find their way into increased lending—which would give the economy a little boost. In either case, if banks wanted to hold fewer reserves—a Fed liability—the Fed could, and naturally would, shrink its assets by an equal amount. Balance sheets do, after all, balance. And that would make the eventual exit easier.This is incorrect. No funds are "liberated" if the Fed reduces the interest rate on reserves. Outside money (currency plus reserves) does not go away unless the Fed actually sells assets.

The Fed’s balance sheet and an expert commentary problem - Alan Blinder closes his op-ed in today’s Wall Street Journal:  As I have argued for some time, the Fed should reduce the interest rate it pays on the roughly $1.7 trillion of banks’ excess reserves. If it did so, banks would keep less cash on deposit at the Fed. The liberated funds would probably flow mainly into the money markets, but some would probably find their way into increased lending—which would give the economy a little boost. In either case, if banks wanted to hold fewer reserves—a Fed liability—the Fed could, and naturally would, shrink its assets by an equal amount. This is wrong. The total amount of the Fed’s liabilities doesn’t change when the banks “draw down” their excess reserves from the Fed. Only the composition of these liabilities changes. If banks have lending opportunities that they consider a better deal than the 25bps they get paid on reserves, then they’ll use those excess reserves as required reserves. Alternatively and less commonly, the banks can also have their accounts at the Fed debited when they want to convert their reserves into currency.

Bernanke Provokes Mystery Over Fed Stimulus Exit - When Ben S. Bernanke asserted last month that the Federal Reserve doesn’t ever have to sell assets, he raised questions about how the central bank can withdraw its record monetary stimulus without stoking inflation. The Fed may decide to hold the bonds on its balance sheet to maturity as part of a review of the exit strategy Bernanke expects will be done “sometime soon,” he told lawmakers in Washington on Feb. 27. This would help address concerns that dumping assets on the market will lead to a rapid rise in borrowing costs. It also allows the Fed to avoid realizing losses on its bond holdings as interest rates climb. Removing asset sales from the exit plan Fed officials agreed to in June 2011 means the central bank would stop prices from accelerating by relying primarily on its ability to pay interest on the cash it holds for banks. Given that the Fed’s total assets have reached an unprecedented level of more than $3 trillion, leaving them untouched when the economy picks up may stoke inflation, according to Dean Maki, chief U.S. economist at Barclays Plc in New York. “If the Fed doesn’t withdraw quickly enough, there’s a risk of overshooting,” Maki said. “If the Fed gets rates back to a typical level and the economy is back to what’s regarded as normal, does having an expanded balance sheet have a notable effect on the economy, on asset markets, even once rates are normalized? We haven’t really had that situation in the U.S. before.”

Easing Angst About Fed Easing - Last month, a flurry of ill-informed speculation swept through the markets: TheFederal Reserve might start backing away from its program of large-scale asset purchases ("quantitative easing"), or maybe even begin to raise the federal funds rate, before the end of the year. The talk was fueled by the release, on Feb. 20, of the minutes of the Federal Open Market Committee's January meeting. Those minutes included these words: "Many participants also expressed some concerns about potential costs and risks arising from further asset purchases." Many? Might Chairman Ben Bernanke's dovish majority be losing its hold on the Fed's policy-making body? Turns out he isn't, as Mr. Bernanke made clear in his testimony to the Senate Banking Committee on Feb. 26. "The FOMC has indicated that it will continue purchases until it observes a substantial improvement in the outlook for the labor market," he said, making it clear that no such improvement has been seen. He also asserted that "the benefits of asset purchases, and of policy accommodation more generally, are clear: Monetary policy is providing important support to the recovery." Mr. Bernanke acknowledged that "highly accommodative monetary policy also has several potential costs and risks," but he immediately and emphatically debunked them. Basically, he didn't give an inch.

The graph Bernanke should look at before ‘exiting’ anything - Here is the Federal Reserve’s mandate: “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” I don’t think it is the greatest mandate in the world, but it is the Fed’s mandate nonetheless. I tried to estimate a simple reaction function for the fed based on “employment” (rate, Civilian Employment-Population ratio) and “prices” (PCE core inflation).  The estimation period is 1990 to 2007. 2008-13 is forecast. Take a look at the forecast. The model is “forecasting” that the Fed funds target rate should be -7%! I will leave it to my readers to judge whether the fed should ‘exit’ its quantitative easing programmes or not.

Fed sets up risk of future disappointment - It feels almost indecent. This week, the S&P 500 came within two points of an all-time high even though the US unemployment rate is stuck at 7.7 per cent. The mood on Wall Street is still muted. A new record would be one of those that people are not quite sure whether to be proud of, like building the world’s largest shopping mall. It would not be a record after inflation, of course. But it is worth trying to understand how a moribund economy can produce a soaring market and why it means that stocks are not as cheap as they look. Analysts put forward several measures to argue that the market is fairly valued, even after its rapid ascent. The simplest is the price of stocks relative to corporate earnings. The flip side of those profits is a record low in the share of national income going to workers as wages. With so many unemployed, workers have little power to bargain for higher wages. But profits cannot keep growing faster than the economy forever (the limit is 100 per cent of output – at which point all work is done by slaves). Instead, wages should pick up when the economy gets closer to full employment. As US Federal Reserve chairman Ben Bernanke explained in a recent speech, however, long-term interest rates are low partly because central banks have driven them down by buying assets. If the recovery goes to plan, Mr Bernanke said, “then long-term interest rates would be expected to rise gradually towards more normal levels over the next several years”. The rise in bond yields might be 2 to 3 percentage points between now and 2017. The trauma of the recession is temporary. It does not make the assets of corporate America permanently more valuable. When bond yields eventually rise, stocks will no longer look so cheap by comparison.

Can the Fed Burst the Next Bubble Before It’s Too Late? - Federal Reserve Bank of St. Louis president Jim Bullard recently noted an important debate within the Fed about how to respond to financial bubbles. Reacting to a speech by Federal Reserve governor Jeremy Stein, President Bullard said  “My main takeaway … was that he pushed back against the Bernanke doctrine … that we’re going to use monetary policy to deal with normal macroeconomic concerns, and … regulatory policies to try to contain financial excess.” Stein argues that regulatory policy will not always work to curb financial excess, and that interest rate increases may be needed instead. As Bullard says, “raising interest rates is a way to get into all the corners of the financial markets that you might not be able to see, or you might not be able to attack with the regulatory approach.”  The Federal Reserve has evolved quite a bit on this issue since the pre-bubble days of the Greenspan doctrine. Chairman Greenspan believed that bubbles are hard to detect, and that there was little need to respond to bubbles in any case since the Fed can always limit the damage after a bubble pops. Why take the chance of falsely identifying a bubble and slowing the economy unnecessarily when there is little cost to allowing bubbles to run their course?

Key Measures of inflation in February - The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.9% annualized rate) in February. The 16% trimmed-mean Consumer Price Index rose 0.2% (2.6% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.  Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.7% (8.5% annualized rate) in February. The CPI less food and energy increased 0.2% (2.1% annualized rate) on a seasonally adjusted basis.Note: The Cleveland Fed has the median CPI details for February here. Motor fuel increased at a 180% annualized rate in February! That was a sharp increase, but prices have fallen a little in March.This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.2%, the trimmed-mean CPI rose 1.9%, and the CPI less food and energy rose 2.0%. Core PCE is for January and increased 1.3% year-over-year. On a monthly basis, median CPI was at 2.9% annualized, trimmed-mean CPI was at 2.6% annualized, and core CPI increased 2.1% annualized. Also core PCE for January increased 1.8% annualized.

Inflation is *Not* What We Should Be Worried About - Dave Henderson responds to an article called "If There's No Inflation, Why are Prices Up So Much?": ...the main thing he does in the ... article is look selectively at relative prices that have increased a lot... As noted, the article looks selectively at a few prices that have gone up a lot, and then asks "why haven’t these more rapid increases shown up in the Consumer Price Index?" They have, but they are offset by falling prices elsewhere. This is easy to see in the underlying data. This is the PCE rather than the CPI, but the story is the same (this is what the Fed monitors, and it's a better measure to look at anyway -- I used month-to-month data because it seems like the article used a similar measure -- year over year is less volatile, but again the story is basically the same). Shown below is a list of the inflation rates for the individual components that make up the PCE (the changes are from December to January, the latest data available). Notice how many prices of the goods and services consumed by a typical household fell on a month-to-month basis. Despite scare stories in the media about all the hidden inflation, it's just not there. Thus, there's no reason for the Fed to start raising interest rates to combat this phantom threat. If inflation (or the threat of inflation) does kick-up, we'll have to balance the costs of higher than expected inflation with the costs of fighting it and prolonging the recovery of output and employment -- even then, relative to a moderate outbreak of inflation I think unemployment is the more important problem to address -- but presently it's not a close call at all. Alleviating unemployment and all the struggles that come with it ought to be our top priority.

Federal Reserve Sends Record $88.4 Billion Profit To Treasury In 2012 (Reuters) - The Federal Reserve sent a record $88.4 billion in profits to the U.S. Treasury last year, audited results showed on Friday, a big payday for the government thanks to the central bank's massive bond purchases. The income came mostly from $80.5 billion in interest on Treasury bonds and mortage-backed securities, according to the annual financial statements audited by Deloitte. Total Fed bank assets stood at $2.9 trillion at the end of last year. Preliminary results released in January showed profits of $88.9 billion in 2012, a year in which U.S. government bond prices hit record highs. The central bank has in the last few years snapped up some $2.5 trillion in assets to help drag the U.S. economy from the 2007-2009 recession; unsatisfied with slow economic growth and high unemployment, it now buys $85 billion in bonds per month. The Fed regularly transfers its profits, known as remittances, to the Treasury in what amounts to payments to U.S. taxpayers. Those profits could turn to losses in the years ahead, however, if the Fed sells assets as interest rates rise.

The almighty dollar -- THE dollar has been looking relatively strong of late:  Neil Irwin discusses the trend: [T]he tendency to view the value of the dollar as a referendum on how Ben Bernanke and Jack Lew are doing their jobs on any given day misses a lot. If the economic outlook improves, whether because of policies enacted in Washington, or because of the natural resilience of the U.S. corporate sector, or because somebody finds a Saudi-sized heretofore unknown oil reserve in the middle of Kansas, the dollar will rise. What has happened in the last few months is essentially a more modest version of exactly that. The housing rebound and generally solid private sector has evidently been enough to keep growth on a steady path, so dollars look like a comparatively better investment than the alternatives around the world... If you take care of your country’s economic prospects, the value of your currency will take care of itself. I can't say for sure, as markets don't issue memos, but I would guess that Mr Irwin is right to credit America's relatively strong and stable recovery for the rising dollar. I'm a little more nervous about this development than Mr Irwin appears to be, however. And that's partly due to the fact that the currency isn't just "tak[ing] care of itself" but is reflecting real policy choices.

The Value of the Dollar Does Not Tell Us About the Strength of the U.S. Economy -  Yes, boys and girls and Arnold Schwarzenegger fans everywhere, a strong dollar does not mean a healthy economy, contrary to what Neil Irwin told us today in the Washington Post. In fact, fans of arithmetic and believers in accounting identities know that an over-valued dollar is at the root of our current economic problems. While believers in the Confidence Fairy think that investment will reach new highs as a share of GDP, and/or consumers will spend even when they have little wealth, those of us who follow data know that the only way to make up the demand shortfall created by trade deficit is with a large budget deficit. However, the Serious People say that we can't have a large budget deficit, so that means we get high unemployment. The only serious way to get the trade deficit down is get the dollar down. That will make our exports cheaper to people living in other countries and make imports more expensive for people in the United States. That means more exports and fewer imports, and therefore a smaller trade deficit. Anyhow, it is easy to show there is no direct relationship between the health of the economy and the strength of the dollar. In fact, the recovery in the first half of the Clinton administration was based to a substantial extent on the idea that a lower deficit would lead to a lower valued dollar and therefore more net exports. And, this largely worked as shown below.

Update: The Recession Probability Chart - Last November, I mentioned a recession probability chart from the St Louis Fed that was making the rounds, and that some people were misusing the chart to argue a new recession was starting in the US.  Below is an update to the chart. A few weeks later - also in November - the author, University of Oregon Professor Jeremy Piger, posted some FAQs and data for the chart online. Professor Piger writes:  Historically, three consecutive months of smoothed probabilities above 80% has been a reliable signal of the start of a new recession, while three consecutive months of smoothed probabilities below 20% has been a reliable signal of the start of a new expansion. Here is the current chart from FRED at the St Louis Fed. Right now, by this method, the odds of the US currently being in a recession are very low (close to zero). Some day I'll be on recession watch again (not in the near future), and this is one of the tools I'll be using

What is Modern Monetary Theory, or “MMT”? - Introduction Modern Monetary Theory is a way of doing economics that incorporates a clear understanding of the way our present-day monetary system actually works – it emphasizes the frequently misunderstood dynamics of our so-called “fiat-money” economy. Most people are unnerved by the thought that money isn’t “backed” by anything anymore – backed by gold, for example. They’re afraid that this makes money a less reliable store of value. And, of course, it is perfectly true that a poorly managed monetary system, or one which is experiencing something like an oil-price shock, can also experience inflation. But people today simply don’t realize how much bigger a problem the opposite condition can be. Under the gold standard, and largely because of the gold standard, the capitalist world endured eight different deflationary slumps severe enough to be called “depressions.” Since the gold standard was abolished, there have been none – and, as we shall see, this is anything but coincidental. The great virtue of modern, fiat money is that it can be managed flexibly enough to prevent *both* deflation and also any truly damaging level of inflation – that is, a situation where prices are rising faster than wages, or where both are rising so fast they distort a country’s internal or external markets. Without going into the details prematurely, there are technical reasons why a little bit of inflation is useful and normal. It discourages people from hoarding money and encourages healthy levels of consumption and investment. It promotes growth – provided that a country’s fiscal and monetary authorities manage it properly.

The I.O.U. in the U.S. Dollar - One of the strangest things to understand about Modern Money Theory is why, if government doesn’t need your tax dollars in order to spend, does government tax at all? Here is an attempt at a new and “better” explanation. It is based on the insight that the government DOES, in fact, need to collect taxes, but the “taxes” it collects are not your “tax dollars.” This may sound like gibberish, but stick with me a moment and see if the following doesn’t make sense—and cast a new light on OTHER things as well (like, for example, the “national debt”). A paper dollar, printed by the sovereign U.S. government, is nothing more—and nothing OTHER than—a tax I.O.U. which states, in effect: “The sovereign U.S. government owes the bearer one dollar of tax credit on the day taxes are due.” Because of this I.O.U. pledge, the government is able to use the paper dollar, in the MEANTIME, to purchase real goods and services from private citizens and businesses. The citizens and businesses are willing to exchange their real goods and services for the paper dollars because they will NEED the I.O.U.s (dollars) to present to the government on “tax-day”. The mental “trick” here is to realize that the ACTUAL taxes are collected when the government purchases the real goods and services—those goods and services being, in fact, the actual taxes paid. (This is perfectly logical, when you consider it, because what the government WANTS are the goods and services—NOT its own paper I.O.U.s which it can print up any time it wants.)

Treasury Scrutinizes Shortage of Notes - WSJ - The U.S. Treasury Department is probing whether traders in the $11 trillion Treasury market hoarded securities to drive up the price of 10-year notes, one of the world's most-used benchmarks. Regulators are concerned that the market function smoothly and without abnormal price activity, said people familiar with the inquiry. Anyone holding $2 billion or more of 10-year notes that mature February 15, 2023 was asked by the Treasury Friday to contact the Federal Reserve Bank of New York by March 21 to address their large positions, according to a statement. Holding large positions in Treasury bonds isn't illegal. Regulators tuned into the irregular activity in the Treasury market when they saw some $80 billion worth of loans bust up last Monday in the more than $3 trillion repo market, where financial institutions take out short-term loans to fund themselves using Treasury bonds as collateral. Rates on 10-year Treasury bonds affect the interest consumers pay on everything from mortgages and car loans and the willingness of foreign investors to finance the U.S. deficit.

Professor Krugman and Crude Keynesianism - Jeffrey Sachs  - I recently published a Washington Post op-ed called "Deficits do Matter" . The piece argues that high and rising levels of public debt are a real concern. It also makes the case that the stimulus packages that began in 2009 --which have consisted mainly of temporary tax cuts and transfer payments -- have significantly raised the public debt while doing very little to solve the nation's long-term employment and growth problems.  That op-ed and others I've recently written have discussed the policy recommendations of Professor Paul Krugman. I have argued against short-term stimulus packages. Krugman has supported them, and indeed argued that they should have been even larger. I have been against temporary tax cuts and temporary spending programs, believing that instead we need a consistent, planned, decade-long boost in public investments in people, technology, and infrastructure. Such a sustained rise in public investment should have been paid for by ending the Bush-era tax cuts in 2010, Yesterday, Krugman responded to my recent op-ed by digging in deeper on the deficit question. He argued yet again that the U.S. can and should incur more debt to pay for a short-term boost in aggregate demand. While he did not lay out a quantified plan (that has been the case from the start, so it's hard to know exactly what Krugman has in mind in a quantitative sense), the CBO has recently estimated that without the recent deficit-reduction actions of the White House and Congress, the public debt would rise to around 87 percent of GDP in a decade. I presume that Krugman would support that trajectory or something like it.

Any Way You Cut It, We've Got Big Economic Problems - The war between Paul Krugman and Jeffrey Sachs continues this weekend with a long column from Sachs contending that: the 2009 stimulus was useless; high debt levels are going to stangle us; and the only thing that matters is fixing our structural problems. Tyler Cowen says he agrees with Sachs "at least two-thirds," but it's not clear which third he disagrees with. Conversely, Mark Thoma delivers an epic beatdown, saying that Sachs "can believe whatever he wants, but the evidence is against him." I have mixed emotions. Thoma has much the better of the argument on the question of whether the 2009 stimulus was helpful. The bulk of the evidence suggests that, along with ordinary countercyclical spending, it did a lot of good. It might not have been structured ideally—Sachs is right about that—but it's better than he gives it credit for, as Ryan Cooper points out. There's not much question that we live in an imperfect world, but to say that the stimulus spending was literally useless, simply because it wasn't as good as it could have been, goes far beyond any reasonable read of the evidence.

The Strange Attack of Jeffrey Sachs on Paul Krugman - Dean Baker - In a Huffington Post column today Jeffrey Sachs picks up where he left off in a co-authored column with Joe Scarborough that appeared in the Post last week. There are two main threads to Sachs' argument. The first is that we would have been much better off with an ambituous public investment agenda than the actual stimulus package that was passed by Congress. The second is that we would have been better doing nothing than getting a stimulus of the sort we got, or even worse, getting a larger stimulus of the same variety.  It is difficult to believe that Sachs thinks he is really quarreling with Krugman on the first point. Krugman has been a vocal advocate of exactly the sort of public investment that Sachs is advocating. (There may be an issue as to whether such a stimulus should have been paid for. Sachs is advocating tax increases on the wealthy and a financial transactions tax, as has Krugman. It is not clear whether he thinks these tax increases should have been put in place in 2009 when the economy was collapsing.)The real point of disagreement is the best route if you don't get a big public investment stimulus. Sachs' position seems to be that the sort of tax cuts and modest spending increases that were part of the Obama stimulus were worse than nothing. He argues that the tax cuts were largely used to pay down debt as was the case of much of the spending, which took the form of transfers like food stamps and unemployment insurance. The net effect then is to raise the debt without providing much boost to the economy.

Counterparties: Krugman-Sachs - Fresh off debating the deficit with Joe Scarborough on Charlie Rose, Paul Krugman is now tangling with fellow lefty economist Jeffrey Sachs. At issue is the government’s post-crisis stimulus spending, and the basic tenets of Keynesianism. Or at least that’s what Sachs would have you believe. Sachs and Scarborough co-authored a Washington Post op-ed titled “Deficits Do Matter”, accusing Krugman of a crude interpretation of Keynes. Specifically, they say that short-term stimulus spending hasn’t achieved increased growth. (Krugman, by contrast, has long called the stimulus too small.) Sachs and Scarborough warn that things will only get worse as the US population ages, and healthcare costs increase.  The econoblogosphere has waded in to sort things out. Brad DeLong points to a citation error in Sachs’s op-ed: “to support the claim that Krugman said deficits don’t matter, Scarborough and Sachs point to Krugman saying explicitly that people who say deficits don’t matter are wrong”. Mark Thoma does a nice job of pointing out some of the less charitable parts of Sachs and Scarborough’s piece: Krugman doesn’t deny that the US has a long-term debt problem, and he’s backed stimulus spending because “short-run multipliers are sufficiently large, there is substantial cyclical unemployment, and our debt problems are not immediate.”

Does the U.S. risk a fiscal tipping point? - In my previous post I reviewed the recent experience of a number of countries whose sovereign debt levels became sufficiently high that creditors began to have doubts about the government's ability to stabilize debt relative to GDP. When this happens, the government starts to face a higher interest rate, which makes debt stabilization all the more difficult. Is there any danger of the same adverse feedback loop starting to matter for the United States?  Let me begin with some basics. If the government spends more than it takes in as revenue (that is, if it runs a deficit), it's going to have to roll over its existing debt as well as issue new debt to cover the current year's shortfall (that is, it's going to have to increase the debt). Thus even though the deficit may be falling from one year to the next, as long as the deficit is positive, the level of debt will be growing from one year to the next. The Congressional Budget Office reports that gross federal debt as of the end of 2012 stood at just over $16 trillion, or 102% of GDP. However, much of this is owed to other government accounts such as the Social Security Trust Fund. Many economists prefer to subtract out the sums that the government "owes" to itself to arrive at a net debt figure, sometimes referred to as debt held by the public. As of the end of 2012, federal debt held by the public was $11.3 T, or 72% of GDP.

Dwindling Deficit Disorder, by Paul Krugman -  For three years and more, policy debate in Washington has been dominated by warnings about the dangers of budget deficits. A few lonely economists have tried from the beginning to point out that this fixation is all wrong, that deficit spending is actually appropriate in a depressed economy. But even though the deficit scolds have been wrong about everything so far — where are the soaring interest rates we were promised? — protests that we are having the wrong conversation have consistently fallen on deaf ears. What’s really remarkable at this point, however, is the persistence of the deficit fixation in the face of rapidly changing facts. People still talk as if the deficit were exploding...; in fact, the deficit is falling more rapidly than it has for generations, it is already down to sustainable levels, and it is too small given the state of the economy. There are, of course, longer-term fiscal issues: rising health costs and an aging population will put the budget under growing pressure over the course of the 2020s. But I have yet to see any coherent explanation of why these longer-run concerns should determine budget policy right now. And as I said, given the needs of the economy, the deficit is currently too small. ...

Gone Deficit Gone, by Paul Krugman: So says the CBO, although not directly. Anyone who is serious (as opposed to Serious) about matters fiscal knows that it’s highly misleading just to focus on the raw deficit numbers (ONE TRILLION DOLLARS), for two reasons. First, fluctuations in the deficit tend to be driven by the business cycle... You want to take out these “automatic stabilizers” when assessing the underlying state of the budget. Second, we don’t have to balance the budget to have a sustainable fiscal position; all we need is to ensure that debt grows more slowly than GDP. ...CBO ... estimates that  ... the cyclically adjusted deficit will be $423 billion. ... A reasonable, indeed fairly conservative guess is that nominal GDP will in future grow by 4 percent per year, half from real growth and half from inflation. This means that the sustainable deficit is 4 percent of $11.5 trillion, or $460 billion. Hey, we’re there! And next year the adjusted deficit is projected to be much smaller: Yes, late this decade deficits will start to rise again thanks to rising health costs and an aging population, yada yada. But I have yet to hear a coherent argument about why the long-term problem of paying for the benefits we want — which will eventually have to be resolved through a combination of cost savings and revenue increases — should constrain our fiscal policy right now, in the midst of what remains a terrible economic slump.

February budget deficit $203.5 billion: Treasury  - The U.S. government ran a budget deficit of $203.5 billion in February, down 12% from the same month last year, the Treasury Department reported on Wednesday. The narrowing of the gap between spending and revenue in February is further indication that the deficit is on track to improve this fiscal year which ends Sept. 30. If lawmakers hold fiscal policy steady, the deficit for this year will total $845 billion, about $240 billion less than the fiscal 2012 deficit and the first deficit below a trillion since fiscal 2008, according to the Congressional Budget Office projections. The improvement in February was driven by a 19% increase in revenue compared with same month one year ago, including the expiration of a temporary payroll-tax cut at the end of 2012. For the first five months of fiscal 2013, the U.S. ran a deficit of $494 billion, $87 billion less than the same period in fiscal 2012.

US budget deficit jumps in February by $204B — The U.S. federal budget deficit jumped in February from January, though it is still running well below last year's pace. Higher taxes and an improving economy are expected to hold the annual deficit below $1 trillion for the first time since President Barack Obama took office. The Treasury Department said Wednesday that the deficit grew in February by $203.5 billion. That followed a small surplus of $2.9 billion in January. And February's gap was $28 billon smaller than the same month a year ago. Through the first five months of the budget year that began on Oct. 1, the deficit is $494 billion. That's nearly $87 billion lower than the budget gap for the same period a year ago. The Congressional Budget Office estimates the deficit will total $845 billion for the entire year. That would be down from $1.1 trillion in the 2012 budget year and the lowest since 2008. Even with the improvement, the government would be required to borrow 24 cents of every dollar it spends this year.

Why I'm more worried than Paul Krugman about the U.S. debt burden - I have been writing recently ([1], [2]) about my paper Crunch Time: Fiscal Crises and the Role of Monetary Policy, Our paper has generated some interesting discussion by Paul Krugman and Matthew O'Brien, among others, to which I'd like to respond. Our paper presents 90 pages of analysis and evidence. In fact, in my previous Econbrowser entries, I still haven't had a chance to touch on the role of monetary policy in dealing with these situations, which was one of our primary interests in the paper. I promise to bring these issues up in my next Econbrowser post. But it seems some readers were distracted by the criticisms raised by Krugman and O'Brien, or perhaps shared related concerns of their own. So I thought it might be best to take up those concerns now, and discuss the implications for monetary policy later. Krugman and O'Brien focus entirely on a single subsection of our paper which reports results from statistical regressions that try to predict sovereign interest rates as functions of conditions that prevailed in a country during the preceding year. These regressions use a panel of 20 different countries followed for a period of 12 years. Krugman and O'Brien note correctly that 13 of these 20 countries are in the European currency union, and suggest, appealing to De Grauwe's (2011) analysis of particular challenges facing the eurozone, that the experience of those 13 countries has no relevance for countries not in the eurozone. Let me begin by discussing the econometric issues and then turn to the economic issues. Here are the results from one of the regressions in dispute:

Fed Watch: The Importance of Printing Your Own Currency - Jim Hamilton is defending his recent work calling into question the sustainability of the US debt load. Brad DeLong takes a first shot at Hamilton's post here. I take issue with this paragraph: Whether a country is able to borrow in its own currency is completely irrelevant for the above calculation. Yes, it means the country likely won't technically default on the debt, and could always create new money to pay off the creditors. But as Reis (2013) and Leeper (2013) have recently explained, printing money does not generate any magical resources with which to resolve a real fiscal shortfall. The central bank could create some more inflation, but anticipated inflation does nothing to alter the above determination of the limits on government debt. This ignores the possibility of financial repression - meaning that the government can force yields on its own debt lower, thereby ensuring that inflation, even anticipated inflation, decreases real interest rates. Back to another post by DeLong: If investors start to fear that the U.S. debt trajectory is truly unstable, the immediate consequence is a fall in the dollar and an export boom, with somewhat higher domestic inflation. Because the U.S. government regulates the financial system, it can set reserve requirements where it likes--it can thus use its reserve requirements to force banks to hold Treasuries, and if it doesn't like the interest rate at which banks are holding Treasuries, it can up reserve requirements some more.

Counterparties: When debt becomes a problem - If America’s debt is a problem — and both the GOP and Democratic budget plans, to varying degrees, say it is — just when should we start freaking out about it? The recent econoblogspheric debate over this topic began with this paper by David Greenlaw and three co-authors. The paper’s findings in short: when a country’s gross debt-to-GDP ratio gets above 80%, and when it’s accompanied by persistent current account deficits, that country enters a debt “crunch time”. It becomes vulnerable to “rapid fiscal deterioration”, and suffers from “tipping-point dynamics” in the debt markets. This basically what happened to countries like Greece during the last few years — the market begins to worry about default, making it more expensive to borrow, which, in turn, makes the deficit worse. And so forth. US gross debt stood at 103% of GDP in 2011, the paper says, so we’re already in the theoretical danger zone Greenlaw and his colleagues describe. But Paul Krugman and Matt O’Brien aren’t convinced, and argue that America won’t ever become Greece. O’Brien looked at the authors’ data and noticed one rather large exception to the rule: countries that can print their own currency don’t find themselves caught in a debt crunch. “There is no evidence of a debt tipping point for countries that borrow in money they can print.” If the market began panicking about US debt, the argument goes, the Fed could simply print more money. Tim Duy argues that Japan is one big outlier to the “tipping point” theorem. Japan’s gross debt-to-GDP ratio was was 220% in 2011, it has recently started printing massive amounts of its own currency, and the cost of its debt has been steadily shrinking for the better part of a year. “Japan sticks out like a sore thumb that those preaching the unsustainability of government debt want to sweep under the rug,” Duy writes.

The United States long term debt problem - The conventional wisdom in Washington is that we have a huge long-term debt problem. But we rarely recognize that much of the expected run up in debt is derived not from out-of-control entitlement spending but rather from the assumption that future Congresses will make our budget challenges much worse by enacting new tax cuts and new spending increases without paying for them. Take that assumption away, add in the deficit reduction we’ve already enacted, and factor in the recent slowdown in the growth of health care costs, and the debt projection falls by more than 100 percentage points of GDP. That doesn't mean the long-term budget picture is suddenly rosy, but it does mean that we may not need to hyperventilate quite so much.

Can we agree that... An attempt to distill some fiscal policy truths that should be reasonably acceptable to most participants.

  • 1) The American economy (and, to varying extents, much of the rich world) is suffering from weak demand. It is not necessarily suffering exclusively from weak demand. But whether or not efforts are made to address structural issues that may constrain growth in potential GDP, there is room to improve economic performance by raising demand.
  • 2) Monetary policy should be the counter-cyclical stabilising force of first resort, whichever cyclical variable one chooses to stabilise.
  • 3) Monetary policy becomes less responsive to demand shortfalls when interest rates fall to zero. One can remain agnostic about whether this must be the case or is simply a result of central-bank preferences. But both empirical evidence and statements from central-bank officials indicate that stabilisation is incomplete at the zero lower bound.
  • 4) We should be aware of the possibility of an asymmetry in the mutedness of central bank responses at the zero lower bound. A central bank may underrespond to fiscal expansion in exactly the same way as it underresponds to fiscal contraction, but it may not; the ZLB is a lower bound, not an upper bound.

Want to Fix the Deficit? Get Real - - Ezra Klein -This week marks the beginning of the U.S. budget season. Representative Paul Ryan of Wisconsin will present the budget for House Republicans. Senator Patty Murray of Washington will, for the first time since 2009, present a budget on behalf of Senate Democrats. In a few weeks, the Barack Obama administration will publish its own budget.  Behind all these appendix-heavy documents lurks the specter of our budget deficits, which have emerged as pretty much the only problem in Washington that both parties can agree to focus on (sorry, millions of jobless Americans). But what kind of problem, exactly, do our budget deficits present? Here are three ways to think about them:

  • 1. We’re experiencing severe and measurable economic drag from today’s deficits.
  • 2. We’re not experiencing measurable economic drag from today’s deficits, but we’re worried about future deficits implied by today’s policies and demographic trends.
  • 3. We’re not experiencing severe and measurable economic drag from today’s deficits, but we’re worried about future deficits implied by today’s policies and demographic trends, and we’re also concerned about the likelihood of additional budget- busting policies that some future Congress might pursue.

Want to Cut the Debt? Try Cutting Off the Corporate Welfare Queens - In previous installments, we’ve noted that we could more than offset the need for the “sequestration” budget cuts by doing any one or combination of the following:

Here’s another way to offset the need for budget cuts: cut off the welfare queens. (Jamie Dimon – shown above- and the other Wall Street queens are the largest recipients of welfare.)

Our deficits aren't as bad as Washington thinks - Ezra Klein - This week marks the beginning of the U.S. budget season. On Tuesday, Rep. Paul Ryan presented the budget for House Republicans. Wednesday, Sen. Patty Murray will, for the first time since 2009, present a budget on behalf of Senate Democrats. In a few weeks, the Obama administration will publish its own budget. Behind all these appendix-heavy documents lurks the specter of our budget deficits, which have emerged as pretty much the only problem in Washington that both parties can agree to focus on (sorry, millions of jobless Americans). But what kind of problem, exactly, do our budget deficits present? Here are three ways to think about them:

  • 1. We’re experiencing severe and measurable economic drag from today’s deficits.
  • 2. We’re not experiencing measurable economic drag from today’s deficits, but we’re worried about future deficits implied by today’s policies and demographic trends.
  • 3. We’re not experiencing severe and measurable economic drag from today’s deficits, but we’re worried about future deficits implied by today’s policies and demographic trends, and we’re also concerned about the likelihood of additional budget- busting policies that some future Congress might pursue.

Moving the Goalposts - Ezra Klein yesterday highlighted one of the underlying problems with even apparently informed discussions of deficits and the national debt: the CBO’s “alternative fiscal scenario.” As opposed to the (extended) baseline scenario, which simply projects the future based on existing law, the alternative scenario is supposed to be more realistic. And it is more realistic in some ways: for example, it assumes that spending on Afghanistan will follow current drawdown plans, not a simple extrapolation of the current year’s spending. But the problem is that it has become excessively conservative in recent years—to the point where, as Klein says, “Policy makers, pundits and others almost exclusively use this model to stoke Washington’s deficit anxieties.” The basic problem is that the alternative fiscal scenario simply assumes, without further support, that laws will mysteriously change in ways that reduce tax revenue and increase spending (relative to current law). As I put it a while ago, “ The definitive report on our long-term budget gap implicitly assumes that we do nothing about that budget gap — that we keep cutting taxes and blocking spending cuts at every opportunity.”

We Need a Shadow CBO -  I have written before on this blog and in my Harper’s Magazine column about the distorted long-term budget projections produced by the Congressional Budget Office. The CBO’s figures are a primary source of the current alarm about the need to cut government spending even with the economy weak. To earn its “non-partisan” label, the CBO makes unrealistic assumptions that for the most part merely project past trends into the future, and sometimes don’t even do that — underscoring the need, in my view, for a “shadow CBO” that exposes the office’s outlandish assumptions and offers us a set of alternative projections based on realistic ones. The office forecasts, for instance, that U.S. debt as a proportion of GDP will be 150 percent by the early 2030s and nearly 200 percent by 2037. Michael Linden, a highly competent economist at the Center for American Progress, has made a good start at exposing the assumptions that underlie such predictions by taking a close look at the office’s June 2012 long-term forecast:

Government Debt and Deficits Are Not the Problem. Private Debt Is. - There are two quite different perspectives in the set of speeches at this conference. Many on our morning panels – Steve Keen, William Greider, and earlier Yves Smith and Robert Kuttner – have warned about the economy being strapped by debt. The debt we are talking about is private-sector debt. But most officials this afternoon focus on government debt and budget deficits as the problem – especially social spending such as Social Security, not bailouts to the banks and Federal Reserve credit to re-inflate prices for real estate, stocks and bonds. To us this morning, government deficit spending into the economy is the solution. The problem is private debt.  The problem is the carrying charges on this private debt, and the fact that debt service is eating into personal income – and also business income – to deflate the economy. Mortgage debt that is still leading to foreclosures, evictions, and is depressing the real estate market for most buyers except for all-cash hedge funds; Student loan debt, now the second largest debt in the US at around $1 trillion, is the one kind of debt that has been growing since 2008. It is depriving new graduates of the ability to start families and buy new homes. This debt is partly a byproduct of cutbacks in federal and local aid to the universities, and partly of turning them into profit centers – financializing education to squeeze out an economic surplus to invest in real estate and financial holdings, to  pay much higher salaries to upper management.

The Cyclically Adjusted Budget Balance: Shrinking Rapidly - The CBO has just released estimates of the cyclically adjusted budget balance (or, specifically, the budget balance without automatic stabilizers). The cyclically adjusted budget balance is a better measure of the fiscal stance. The evolution of this series is interesting. As CBO reported last week (and Paul Krugman highlighted), the cyclically adjusted budget deficit next year is projected to be 1% of potential GDP, under current law.One interesting observation is that the 2012Q3 value is the same as that in 1986Q3 (and only slightly greater in magnitude than that recorded in 2003Q3).

The Congress-Does-Nothing Deficit Reduction Plan - Because of some long-standing elements of our system as well as clever provisions in the Affordable Care Act, taxes will actually go up as a share of Americans’ incomes in the decades ahead—without Congress so much as lifting a finger. Obamacare applies a new surtax on high-income individuals. That’s a 0.9 percent tax on incomes above $250,000, plus another 3.8 percent on investment income. Importantly, that $250,000 threshold is not indexed to inflation at all, and so as both incomes and inflation rise, this tax will apply to more and more people—hence producing more and more revenue. An even bigger source of future federal revenue comes from Obamacare’s excise tax on “Cadillac” health insurance plans. That tax is scheduled to start in 2018 and apply a 40 percent tax on plans above certain, very high thresholds. (We’re talking family plans at $27,500 a year and more.) The threshold for the tax is indexed to a broad measure of inflation, which means that, as with bracket creep, if health care costs grow faster than inflation (and most experts expect that they will), more and more plans would eventually fall under the excise tax. The upshot? This excise tax is essentially a way of gradually ratcheting down the tax exclusion for employer-provided health insurance—one of the code’s largest tax expenditures. People might pay the excise tax, or, more likely, employers might shift from compensating their employees with pricey tax-

Vote on Continuing Resolution Due This Week —Senate lawmakers began formally debating legislation to fund the federal government through the end of September after Republicans dropped their objections to moving forward with the bill. The development puts the Senate back on track to hold a vote to approve the legislation before the end of the week, a senior Democratic leadership aide said, at which point it will have to go back to the House for further consideration. The bill funds the federal government at current levels, which includes the impact of the across-the-board budget cuts known as the sequester that began to be implemented from March 1.

Boehner: ‘So Far, So Good’ on CR - House Speaker John Boehner (R., Ohio) declined to endorse Senate changes to a bill to fund the government through Sept. 30, but he offered up the following assessment: “so far, so good.” The Senate has made minor changes to legislation to fund the federal government for the next five months — called the “continuing resolution” or CR — and is currently working its way through amendments to the bill. It is expected to vote to approve the bill either later Thursday or early next week.

Realism on Infrastructure Investment - Keith Hennessey has an excellent post on government infrastructure investment. Here are his key points:

  1. Capital investment by government often pursues multiple policy goals, some of which conflict with maximizing productivity growth. If you’re investing for long-run growth you’ll invest differently than if you also have goals to maximize short-term job creation and to change the future balance of energy sources to reduce greenhouse gas emissions (for instance).
  2. Geographic politics distorts and often dominates government investment in physical infrastructure. Highway funds and airport funds especially are allocated in part based on which Members of Congress have maximum procedural leverage over the spending bill.
  3. Non-geographic politics can distort government capital spending.  And rent-seekers come out of the woodwork, looking to leverage their connections to government officials to win infrastructure investment contracts.
  4. Once “investment” is favored, everything gets relabeled as investment. The Obama Administration has been particularly guilty of this; almost every spending increase they propose is an “investment” of some sort.
  5. There’s a difference between government investments in the commons and government spending that primarily benefits individuals.

The Federal Budget's "Health Care Problem" Isn't Quite What Everyone Thinks It Is - Among budget wonks who discuss the long-term fiscal challenge, there is something of a consensus -- the projected upward trajectory of our debt is caused primarily by the projected growth in federal health care programs. The latest CBO report, which takes into account three consecutive years of dramatically slower health care cost increases, should serve as a warning (and a reminder) that it is misleading to say the problem with the federal budget “is just a health care problem.” If one only looks at the two CBO updates over the last six months, projected 10-year Medicare spending has been revised downward by $306 billion. Projected Medicaid spending has been revised downward by $273 billion (not counting revised estimates of lower Medicaid enrollment due to the Supreme Court’s ruling on Medicaid expansion in the Affordable Care Act (ACA)). Yet even under that “better case scenario,” federal outlays for health care will soon be greater than outlays for Social Security -- placing it at the top of all federal budgetary commitments. Over the 10-year budget window, health care spending will experience growth of 1.2 percent of GDP, second fastest only to net interest. The reason is simply that the “health care problem” actually reflects the large increase in the number of people who will become eligible for Medicare due to the retirement of the baby-boom generation. Over the next 10 years, 18 million new beneficiaries are expected to sign up for Medicare.

Washington should be worrying about education, infrastructure and health care: Earlier today I tweeted, “If we got education, health care and infrastructure right, a lot of our other economic problems would take care of themselves.” Ted Glass spoke for many when he replied, “Is that all?” It’s a tall order, I admit. But Washington is spending all its time right now pursuing a “grand bargain” between the two parties, and that’s an even taller, and perhaps even impossible, order. President Obama said as much in his interview with George Stephanopoulos. “Ultimately, it may be that the differences are just too wide. It may be that ideologically, if their position is, ‘We can’t do any revenue,’ or, ‘We can only do revenue if we gut Medicare or gut Social Security or gut Medicaid,’ if that’s the position, then we’re probably not gonna be able to get a deal.” The partisan differences on education and infrastructure are smaller than they are on taxes and spending. As for health care, we’ve actually kept costs under control in recent years, we’ve already passed the Affordable Care Act, and we’re seeing movement among Republican governors to engage constructively with the law. All of which suggests that we’re entering a more productive period of implementation, reforming the reforms and building on ongoing trends — and we should focus on that.

 The undead, unnecessary, unhelpful Grand Bargain -  Washington has Grand Bargain fever, again. Thanks to the sequestration, Republican government-shrinking mania and Barack Obama’s apparently sincere desire to get some sort of huge long-term debt deal done, the Grand Bargain is looking more possible than at any point since the heady days of the National Commission on Fiscal Responsibility. For some reason, the options for dealing with sequestration — a self-inflicted made-up austerity crisis — are being purposefully and pointlessly limited to a) spending cuts, either those in sequestration or different ones, or b) spending cuts and tax increases. “Let’s just not do this, everyone” is rarely presented as a viable option. Instead, the single best end result, according to lots of pundits, Democrats and even Republicans, is tthe Mythical Grand Bargain. This is awful news, for most people. A “grand bargain” is not going to be good. But after Barack Obama had fancy dinners with some Republicans last week, everyone is again hopeful. The president is hopeful. John Boehner is hopeful. David Gergen is probably hopeful. They can all taste the Bargain. Ooh, it’ll be so great when we get that Bargain!

It's A Small Oligarchal World After All (How Do You Want Your Poison?): Dressing Up Pretty To Cut Benefits for the Poor and Lame - Yes, Obama is engaging in a charm offensive, lunching with House Budget Committee Chairman Paul Ryan. Next Thursday, he’ll join the entire GOP Senate caucus at their weekly luncheon. But will this gastronomical diplomacy actually lead to a deal to turn off sequestration, or maybe even the elusive “grand bargain” that Obama has been lusting after for almost two years? Sen. Lindsey Graham, who attended last night’s dinner and chose the other 11 senators on the guest list, thinks it’s possible. “What I see from the president is probably the most encouraging engagement on a big issue since the early days of his presidency,” Graham told reporters. “He wants to do the big deal.” The current White House plan, which includes switching the way inflation is calculated in Social Security to shave costs and reduce benefits (they euphemistically call it the “superlative CPI”) is very similar to the one Boehner proposed last autumn. It certainly entails surrendering on something many Democrats (and Americans) vehemently oppose. So, theoretically, Republicans might be interested, right?

Slate Agrees that Obama’s Vanity Drives the Grand Betrayal – and Praises the Betrayal -  William K. Black - Slate’s John Dickerson leads its (and CBS’) political reportage so his specialty is in examining what is actually driving politicians’ policies and their efforts to “spin” those policies.  Dickerson authored an article entitled “Why Obama’s Outreach to Republicans is All About Obama”  Dickerson’s theme is one I have long emphasized:  Obama is driven by concerns for his “legacy.”  In more human terms, he is intensely vain about how history will perceive him.  That is common, particularly in politicians’ final terms, and it can be a positive influence on policy.  Dickerson also agrees with my warnings that Obama sees inflicting the “Grand Bargain” on the Nation as his means of achieving his legacy.  Here is Dickerson’s introduction to his article. “Is Obama Setting a Trap for Republicans? Nah, he’s just trying to ensure his place in the history books.” Obama chose Bill Clinton, which is to say Bob Rubin, and Ronald Reagan as his models for the presidency rather than Franklin Delano Roosevelt.  The Wall Street wing of the Democratic Party and Reagan shared the same fawning attitude towards finance, and their typically bipartisan anti-regulatory policies proved so criminogenic that they produced the recurrent, intensifying epidemics of accounting control fraud that drive our rapidly escalating modern financial crises.  The remarkable fact is that none of this has discredited the policies or the policymakers.  Jacob Lew is the latest in a long line of failed protégés of Rubin that Obama has chosen as his principal financial advisors

Obama: Gap with GOP may be ‘too wide’ for grand deficit deal - President Obama struck a note of pessimism on efforts to reach a grand bargain on the deficit with Congress, saying that the gap between the two parties could be unbridgeable. “Ultimately, it may be that the differences are just too wide,” said Obama in an interview with ABC News recorded Tuesday. Obama said if congressional Republicans did not budge on their opposition to new tax revenues, he saw a deal as unlikely. “It may be that, ideologically, if their position is, ‘We can’t do any revenue,’ or, ‘We can only do revenue if we gut Medicare or gut Social Security or gut Medicaid,’ if that’s the position, then we’re probably not going to be able to get a deal,” he said. The president’s comments come ahead of his meeting with House Republicans on Wednesday on Capitol Hill. Obama has launched an outreach effort meeting with lawmakers after the battle over the sequester cuts.

Obama Tells Democrats They Must Be Open to Entitlement Changes - President Barack Obama told Senate Democrats that they should be open to changes in entitlement programs to achieve a long-term budget deal, according to several lawmakers who attended a meeting with him on Capitol Hill today. Iowa Senator Tom Harkin said Obama told Democrats during the 90-minute meeting that he wanted a broad, bipartisan deficit-reduction deal this year. Harkin said Obama rebuffed his demand, joined by Vermont Senator Bernie Sanders, for an assurance that Medicare and Social Security benefits would be remain untouched in any “grand bargain” agreement. “Of course some of us responded ‘yes, but, what is in that grand bargain?’” because “we don’t want to start whacking away at Social Security or Medicare,” Harkin told reporters. “He didn’t make a commitment but he seemed to indicate that, yes, there are other ways of solving the entitlement problems without doing that.” Obama’s meeting with Senate Democrats marked the start of three days of meetings the president has with lawmakers on Capitol Hill. He holds closed-door meetings tomorrow with House Republicans and on March 14 will meet with Senate Republicans and House Democrats. Obama didn’t make a statement while entering or leaving the meeting.

Obama asks House Dems to make concessions for big deficit deal - President Obama asked House Democrats on Thursday to give him the political room to make concessions to Republicans on entitlements as part of a deficit-reduction deal. In a meeting with the House Democratic Caucus in the Capitol Visitor Center, Obama said he won't accept anything less than a balanced approach to deficit reduction that includes new tax revenues, according to numerous lawmakers in the room. But he also reminded his troops that, with Republicans in control of the lower chamber, no deal is possible unless Democrats are willing to sacrifice some of their sacred cows. "What he basically said was that there's got to be a balanced deal," Rep. Peter Welch (D-Vt.) said just after the meeting. "And that if there's going to be revenues, then obviously there's going to be, in a Republican-controlled House, the need for us to consider some of the things we don't like. That was more or less it."

Liberals to Dem leaders: Don’t even think about touching Social Security benefits - Multiple reports out today suggest that Dem leaders in the House and Senate are edging towards supporting Chained CPI for Social Security as part of the “grand bargain” Obama wants to replace the sequester with — and that’s already sparking sharp pushback from Congressional liberals. “Why are we doing this?” Dem Rep. Keith Ellison, a co-chair of the Congressional Progressive Caucus, said to me in an interview today. Asked which is worse, continued sequestration or a grand bargain that cuts entitlement benefits, Ellison said: “It’s like saying, `Which of your kids do you want to sacrifice to the monster?’ Neither one.” Ellison is backed up by over 100 other House Dems who have pledged to fight any cuts to retirement benefits, including Chained CPI, a way of indexing Social Security benefits to inflation that amounts to a real benefits cut. At a presser today, Nancy Pelosi signaled openness to Chained CPI, saying: “If we can demonstrate that it doesn’t hurt the poor and the very elderly, then let’s take a look at it. Because compared to what? Compared to Republicans saying Medicare should wither on the vine?” Meanwhile, the Post quoted administration officials claiming both Pelosi and Harry Reid are on board with the grand bargain and are ready to rally rank and file Dems to support politically difficult cuts to retirement programs in exchange for real tax increases.

President Obama Wants to Give a Bigger Hit to Seniors on Social Security than He Did to the Wealthy on Taxes - That’s what President Obama’s aides keep saying. They generally don’t put in those terms, probably because they assume that everyone already knows, but the cut to the typical senior’s Social Security benefit from the adoption of the chained CPI would be a larger hit to their income in retirement than the increase in income taxes put in place at the start of the year is the typical affluent taxpayer. The arithmetic on the chained CPI is straightforward. It reduces benefits by an amount that increases 0.3 percentage points each year a person is retired. This means that after 10 years the reduction in the annual benefit would be 3.0 percent, after 20 years the reduction would be 6.0 percent, and after 30 years the reduction would be 9 percent.   By contrast, if we assume that a couple earning $500,000 a year is the typical household affected by the tax increase, then their additional tax burden will be 4.6 percent of their income over $450,000 or $2,300. If we assume that this couple had not unusual exemptions (or even usual ones), then their after-tax income before the tax increase would have been around $350,000. This means that the Obama tax increase would reduce their after tax income by a bit less than 0.7 percent. This means that the hit to Social Security beneficiaries from the chained CPI will be around three times as large as the hit to the typical affluent taxpayer from the Obama tax increase.

Chained CPI is not just bait; Obama actually "prefers" it -- That’s right. Barack “Grand Cuts” Obama really “prefers” to cut Social Security benefits via switching to “Chained CPI” — which reduces the cost-of-living allowance year after year after year — and he wants to do it on its merits, not just as some carrot he’s dangling before Republicans. This information comes just this week, again via Gene Sperling, one of Obama chief economic advisers, in a chat on Reddit. Thanks to Digby, we hear this from Sperling  (my emphasis and paragraphing): The cost of living question relates to how the government measures inflation. Today, we use a measure of inflation called the “CPI” or consumer price index. An alternative would be to switch to what is known as the superlative or “chained” CPI. [Note the reframing in the alternative term "superlative CPI" — if it's "superlative" it must be better.] The superlative CPI makes two technical corrections to the standard CPI: it accounts for consumers’ ability to substitute between goods in response to changes in relative prices and accounts for biases arising from small samples. Most experts agree [note: they do not agree] that the Superlative CPI provides a more accurate measure of the average change in the cost of living than the standard CPI. The President would prefer to have this adjustment in the context of a larger Social Security reform, but he has said to Speaker Boehner that if it is part of a larger agreement that would include tax reform that would raise revenue by cutting loopholes and expenditures from the most well off, that he would be willing to agree to it because in divided government, if we’re going to make progress, we have to be willing to compromise.

Talks Open Window for Deficit Deal - Two weeks of bipartisan meals, closed-door meetings and dueling budget proposals have opened perhaps one last window for the White House and Congress to reach a deficit-reduction deal before a likely fight over the debt ceiling this summer. Lawmakers say they now see a small opportunity to forge a comprehensive fiscal plan between now and July or August. That's because the dynamics in recent days have changed, with a slow, steady process replacing repeated crisis-driven fights. To broker a deal, both sides still have an enormous gulf to bridge. Wide differences remain over whether new tax revenues should be part of any package. The House and Senate budget panels advanced competing tax and spending blueprints last week, which illustrated the stark differences between Democrats and Republicans both on how to reduce the deficit and the urgency with which it should be addressed. House Republicans mobilized behind a plan that leaders say would eliminate the deficit in 10 years, a top party priority, by cutting spending, repealing the 2010 health-care law and making structural changes to Medicare and Medicaid. Senate Democrats, meanwhile, advanced a budget plan, their first since 2009, that would raise taxes and would reduce spending, though far less than the GOP plan. They say their plan would reduce the deficit but not eliminate it. The Democrats' plan would also authorize $100 billion in new spending, which they say would help short-term economic growth.

The GOP Plan to Balance the Budget by 2023 -  Paul Ryan: America's national debt is over $16 trillion. Yet Washington can't figure out how to cut $85 billion—or just 2% of the federal budget—without resorting to arbitrary, across-the-board cuts. Clearly, the budget process is broken. In four of the past five years, the president has missed his budget deadline. Senate Democrats haven't passed a budget in over 1,400 days. By refusing to tackle the drivers of the nation's debt—or simply to write a budget—Washington lurches from crisis to crisis.  House Republicans have a plan to change course. On Tuesday, we're introducing a budget that balances in 10 years—without raising taxes. How do we do it? We stop spending money the government doesn't have. Historically, Americans have paid a little less than one-fifth of their income in taxes to the federal government each year. But the government has spent more.  So our budget matches spending with income. Under our proposal, the government spends no more than it collects in revenue—or 19.1% of gross domestic product each year. As a result, we'll spend $4.6 trillion less over the next decade.

Balance the Budget? We Can Run Deficits Forever - The U.S. federal government doesn't actually need to balance its budget. Ever. Really. We could run a budget deficit every year for the next century. We'd be just fine. How do we know? Well, for one thing, we've basically always done that. Between 1929 and 2013, the average federal budget deficit as a percentage of gross domestic product has been 3.1 percent. Over those 84 years, we've run 70 budget deficits and 14 budget surpluses. The most recent projections of the Congressional Budget Office, in fact, show that in two years, we will have a budget deficit significantly smaller than the long-run average: 2.4 percent of GDP. That's remarkable given that we are only a few years into a recovery from the second-worst recession during those years. We could run a budget deficit forever and even shrink the relative federal debt burden. All we need to do is keep the long-run budget deficit smaller as a percentage of GDP than the long-run rate of GDP growth. When that happens, GDP outgrows the debt, and the debt-to-GDP ratio declines.

Paul Ryan’s New Budget: Been There, Didn’t Do That - Rep Paul Ryan’s budget as he describes it in a WSJ oped, looks a lot like the platform he and Gov Romney ran on, and lost on, last year. Repeal Obamacare and financial reform (Dodd-Frank), voucherize Medicare (after ten years), cut spending on food stamps and Medicaid by shifting them over to the states.  I call those block grants, where you give states a fixed amount regardless of need but Ryan calls it giving “states flexibility so they can tailor programs like Medicaid and food stamps to their people’s needs”. Then there’s “comprehensive tax reform” by “closing loopholes and consolidating tax rates” down to two brackets: 10% and 25%.  Again, no details yet but I’ll be shocked if any actual loopholes get mentioned, much less closed (and since taxes are a bit higher now than last year, he’ll have to offset more lost revenue). If this sounds familiar, that’s because it’s a) a rehash of the last House budget, though even though this one cuts about the same $5 trillion in spending, it claims to balance the budget sooner (by 2023) because of spending cuts and tax increases made over the past few years, and b) it sounds a lot like what Romney and Ryan ran on: cuts to low-income programs, trickle down tax cuts, and “here’s a voucher, good luck” on Medicare.

Paul Ryan’s make-believe budget - If Rep. Paul Ryan wants people to take his budget manifestos seriously, he should be honest about his ambition: not so much to make the federal government fiscally sustainable as to make it smaller. You will recall that the Ryan Budget was a big Republican selling point in last year’s election. Most famously, Ryan proposed turning Medicare into a voucher program. He offered the usual GOP recipe of tax cuts — to be offset by closing certain loopholes, which he would not specify — along with drastic reductions in non-defense “discretionary” spending. If the plan Ryan offered had been enacted, the federal budget would not come into balance until 2040. For some reason, Republicans forgot to mention this detail in their stump speeches and campaign ads. Voters were supposed to believe that Ryan was an apostle of fiscal rectitude. But his real aim wasn’t to balance the budget. It was to starve the federal government of revenue. Big government, in his worldview, is inherently bad — never mind that we live in an awfully big country.

Talkin’ Budgets All the Day Long - Spent the day talking about the House and Senate budgets in various settings and I’ll say this: you will be hard pressed to find anyone who takes the Ryan budget seriously.  Even Ryan himself seemed to almost distance himself in an interview with Larry Kudlow on CNBC.At one level, that’s good.  It’s a very troubling document.  At another level, it’s emblematic of our level of dysfunction.  It’s like the folks out on the fringe are too far out there even by their own judgment! Btw, I did feel like I got a little somewhere in a debate on the Kudlow show with a bunch of peeps including Sen. Tom Coburn.  They were all inveighing against the $1 trillion in revenue raised by the Senate budget scheduled for tomorrow, but thanks to some colleagues (h/t: EN, JF), I was able to point out that Sen. Coburn himself raises $1 trillion from closing tax loopholes in his 2011 budget plan.  After that, everyone seemed surprisingly comfortable with those revenues (though of course they wanted to use them to lower rates, not against the deficit).

Paul Ryan currency debasement. So Page 5 of his latest budget warns that on the current path "pressed for cash, the government will take the easy way out: It will crank up the printing presses. The final stage of this intergenerational theft will be the debasement of our currency. Government will cheat us of our just rewards." It's a telling discourse thanks to the deeply moralized and essentially nonsensical terms in which he frames the question of inflation. Is any increase in the measured consumer price index a form of debasement and cheating? Is today's close-to-but-below 2 percent sacrosanct? Would the 4 percent of the Reagan-Volcker years be acceptible? Later he says that "we’re enjoying historically low interest rates because the Federal Reserve is buying large amounts of our debt, and investors have retreated to U.S. securities amid global turmoil." Ben Bernanke says this is mistaken, and if Ryan wants to prove Bernanke wrong the question he has to answer is why are interest rates so low in other sovereign currency issuing countries. We've got low rates today in Sweden and Norway and Canada and the United Kingdon and Switzerland. We've got low rates in Germany and France. Is that because investors are retreating to Swedish securities amid global turmoil? Because Mark Carney was debasing the looney? How about Japan?

Ryan the Redistributionist - Robert Reich  -- “Who is going to end up making all the money in the end if Obamacare continues to be in place?” Republican National Committee chairman Reince Priebus growled Monday on Sean Hannity’s Fox News show. “It’s going to be the big corporations, right? And who gets screwed? The middle class.”The Republican Party makeover is breathtaking. Now, suddenly, instead of accusing Democrats of being “redistributionists,” the GOP is posing as defender of the middle class against corporate America — and it’s doing so by proposing to do away with the most progressive piece of legislation in well over a decade.Paul Ryan’s new budget purportedly gets about 40 percent of its $4.6 trillion in spending cuts over ten years by repealing Obamacare, but Ryan’s budget document doesn’t mention that such a repeal would also lower taxes on corporations and the wealthy that foot Obamacare’s bill. According to an analysis by the non-partisan Tax Foundation, Obamacare redistributes income from the wealthy to the middle class. This is mainly because it hikes Medicare taxes on the top 2 percent (singles earning more than $200,000 and couples earning more than $250,000, including their investment income).

Paul Ryan's "New" Plan: Squeeze the Poor, Boost the Rich -  I almost forgot that today is Paul Ryan Day, even though I wrote about it just yesterday. So what's in the 2014 version of the Ryan budget? Let's see:

  • Repeal of Obamacare (though we keep Obamacare's cuts to Medicare, as well as its new taxes).
  • Medicare would be converted into a voucher system.
  • Big cuts to Medicaid.
  • Big cuts to other domestic programs.
  • Repeal of the sequester cuts in the Pentagon budget.
  • A "simplified" income tax system with only two brackets, 10 percent and 25 percent.
  • A reduction in the corporate tax from 35 percent to 25 percent.

I'll dive into the details later. Maybe. But basically this is the same old same old. Big tax cuts on the rich, big tax cuts for corporations, and big spending increases for the military. For the poor, the middle class, and the elderly, we have big spending cuts and—though Ryan doesn't admit it—the almost mathematical certainty of big tax increases.

Is Paul Ryan an Inflation Nutter? - Paul Ryan believes the U.S. has a looming inflation problem. The reality is that Ryan has an economic credibility problem.  The latest iteration of the Wisconsin representative’s budget for the U.S. government spells out what he sees as a major threat to the economy: “Pressed for cash, the government will take the easy way out: It will crank up the printing presses. The final stage of this intergenerational theft will be the debasement of our currency. Government will cheat us of our just rewards. Our finances will collapse. The economy will stall.”  It’s a stark forecast, in which the driving force is “debasement of the currency,” which is simply a rhetorically loaded term for inflation. Ryan’s views on the economy are premised on his forecast that the country is headed for a central-bank induced monetary disaster.  This sort of fear-mongering sells well among gold bugs, doomsday preppers and other Tea Party types. But it rests on very shaky ground. So shaky, in fact, that either Ryan is being dishonest or he’s placed himself on the Spam-hoarding radical fringe, far outside any standard approach to monetary economics.

Flimflam Forever - Krugman - I took Paul Ryan’s measure two and a half years ago. All the Very Serious People were very angry with me — Ryan was the Serious, Honest Conservative, the guy centrists demonstrated their centrism by praising. But he was an obvious phony. His “plan” was all smoke (I couldn’t even find any mirrors), with all the alleged deficit reduction coming from closing tax loopholes he refused to specify plus projected reductions in discretionary spending that he also refused to specify. Meanwhile, he was pursuing radical redistribution away from the needy to the wealthy. Nothing has changed, except that the plan has gotten even crueler. So while I may do some analysis later today, the only really interesting question is how the VSPs will react. Have they had enough of the Flimflam Man? Or does hype spring eternal?

The Budget/Austerity/Catfood Moebius Strip - The Beltway wonkosphere spent most of yesterday shooting the fish in the barrel that is the Paul Ryan “Path to Prosperity” budget. Here’s a representative sample. From the looks of it, the Ryan budget for fiscal year 2014 looks mostly like the Ryan budget for FY2012 and FY2011, with the added extra of banking the tax hikes he didn’t vote for in the fiscal cliff deal. This year’s model balances the budget by 2023, but that’s largely a factor of the austerity already put into place over the last couple years. It’s not all that illuminating to see the same cast of characters make the same pronouncements on Ryan’s plans. At least the mask did slip for a moment today: in a press conference, Ryan insisted, “We are not going to give up on destroying the healthcare system.” The more noteworthy story in the budget wars was the sneak preview of the Senate Democrats’ contribution to the debate. No full package, but some topline numbers, which includes $1.95 trillion in deficit reduction over the next ten years, split between tax hikes and spending cuts, with a token $100 billion in new spending in the first year on a “jobs program.” So sequestration would get replaced with larger deficit reduction by almost a factor of two.This is smaller than Ryan’s $5 trillion in cuts, which all come from the spending side. It’s also both unnecessary and unpopular. The deficit is already shrinking too rapidly for the economy to accommodate. And you cannot find more than a couple small regions of the budget where voters would endorse the cutting.

Balanced Budget Fight Is Philosophical and Fiscal - What is so special about a balanced budget? That question is at the heart of the warring Republican and Democratic budget plans coming out this week — with Representative Paul D. Ryan of Wisconsin vowing to eliminate the federal deficit within 10 years, and Senator Patty Murray of Washington State setting a more modest goal of bringing spending closer in line with revenue over time. While economists generally agree that narrowing the government’s deficit and limiting the size of the debt are necessary in the long run, most argue that balancing the budget would not restore the nation’s still-weak economy to health in the near term. Indeed, rushing to do so with unemployment still elevated and the economy growing at only a sluggish pace could even set back the effort to reduce the deficit. “There’s nothing magic about exact balance,” said Alice M. Rivlin, a Democratic economist at the Brookings Institution who has worked with Republicans like former Senator Pete V. Domenici on bipartisan deficit-reduction proposals. “The really important thing is to keep the debt from growing faster than the economy.”

Austerity and Budgets explained - In support of Beverly's latest post and all her past postings wanting for Obama (or the Dem's in general I would say) to explain the truth about how a government's money really flows, I present this video from the Watson Institute. (via Digby at Hullaaloo.)  I happen to agree, it would be nice if our president would get it straight, but... The Watson Institute presents Mark Blyth on Austerity from The Global Conversation on Vimeo.  Of course, my pet peeve is that no one is talking about our nation's equity.  I am confident that the American family would get that part of financing as it relates to borrowing and investing.  Heck, how long was it before Amazon broke even yet they kept right on borrowing and growing?*  Or lets put it closer to home.  How many Americans purchased a home that was valued at and borrowed against for the purchase that was equal to their annual income?  What was the old rule...3 times the median income was the average home price?

Back to Work Budget: Congressional Progressive Caucus unveils left-wing budget concept.: It restores Clinton-era marginal income tax rates starting at the $250,000 threshold. It establishes new income tax brackets—45 percent at $1 million, 46 percent at $10 million, 47 percent at $20 million, 48 percent at $100 million, and 49 percent at $1 billion. Capital gains and dividends will be taxed as ordinary income. The deductibility of all itemized deductions will be capped at the 28 percent rate. The estate tax will have a $2.5 million exemption and then a series of progressive marginal rates from 55 to 65 percent. The mortgage interest tax deduction for second homes is eliminated. There's a financial transactions tax. A couple of corporate income tax deductions are eliminated. There's a kind of too-big-too-fail tax on banks with over $50 billion in assets. There's a $25 per ton carbon tax. There are also a lot of spending-side measures here. Medicare will reduce its payment rates to pharmaceutical companies down to the Medicaid level. A strong public option will bring down spending on Affordable Care Act exchange subsidies. The use of bundled payment procedures is going to be accelerated as will the Affordable Care Act state waiver process. Base Pentagon spending is reduced to 2006 levels, and farm subsidies for commodity crops are reduced. This is all counterbalanced by some new fiscal stimulus spending in the short-term, and by a medium-term vision that entails a level of non-military discretionary spending that's close to the historical level rather than far below it as envisioned by current policies.

Amidst the Madness, Let’s Not Overlook the CPC’s Budget - Allow me to join the chorus of voices in support of another budget out this week, one I fear may be overlooked, by the Congressional Progressive Caucus. Here’s the exec sum, and note what comes first: job creation!  OMG!  That’s followed by many ideas we tout here at OTE, including a financial transaction tax, ending tax preferences for investment income, a tax on carbon, spending cuts to defense, some Medicare savings (no benefit cuts), all of which creates jobs in the near term and starts the debt ratio on a downward path by 2015.  Again, for all the mishegos about balancing budgets, the economically sensible first order goal is–once the economy is reliably growing–stabilizing and then reducing the debt/GDP ratio. But wait!  This is too liberal, too Keynesian, too revenuey!  OK, but the Ryan budget’s too austere, too draconian on the poor, too regressive, too reverse Robin-Hoody.  And that’s been front page news.  All’s we’re saying is that if legislative plausibility is the litmus test, Ryan’s House budget shouldn’t get one drop of ink (or byte, I guess would be more accurate).But if its smart, timely economics and fiscal policy that forms the litmus test…well, then Ryan still doesn’t get a hearing but the CPC budget does.

The Back-to-Work Budget - Congressional Progressive Caucus - We’re in a jobs crisis that isn’t going away. Millions of hard-working American families are falling behind, and the richest 1 percent is taking home a bigger chunk of our nation’s gains every year. Americans face a choice: we can either cut Medicare benefits to pay for more tax breaks for millionaires and billionaires, or we can close these tax loopholes to invest in jobs. We choose investment. The Back to Work Budget invests in America’s future because the best way to reduce our long-term deficit is to put America back to work. In the first year alone, we create nearly 7 million American jobs and increase GDP by 5.7%. We reduce unemployment to near 5% in three years with a jobs plan that includes repairing our nation’s roads and bridges, and putting the teachers, cops and firefighters who have borne the brunt of our economic downturn back to work. We reduce the deficit by $4.4 trillion by closing tax loopholes and asking the wealthy to pay a fair share. We repeal the arbitrary sequester and the Budget Control Act that are damaging the economy, and strengthen Medicare and Medicaid, which provide high quality, low-cost medical coverage to millions of Americans when they need it most. This is what the country voted for in November. It’s time we side with America’s middle class and invest in their future.

After the Flimflam, by Paul Krugman - It has been a big week for budget documents. In fact, members of Congress have presented not one but two full-fledged, serious proposals...Unless you’re a very careful news reader, you’ve probably heard about only one of these proposals, the one released by Senate Democrats. And let’s be clear: By comparison with the Ryan plan,... this is a very reasonable plan... It is, however, an extremely cautious proposal... the plan really should be calling for substantial though temporary spending increases. It doesn’t.But there’s a plan that does: the proposal from the Congressional Progressive Caucus ... which calls for substantial new spending now ... offset by major deficit reduction later in the next decade, largely though not entirely through higher taxes on the wealthy, corporations and pollution. And it’s refreshing to see someone break with the usual Washington notion that political “courage” means proposing that we hurt the poor while sparing the rich.

Running Government Like A Business or Family - Paul Krugman - I’ve spent a lot of time trying to knock down the bad analogy between governments and individuals, and the line that the government should act like an individual family or business, and cut back when times are tough. The key point is realizing interdependence: your spending is my income, my spending is your income, and if we all try to slash spending at the same time the result is a depression. Somebody needs to step up and spend when others won’t — and the government can and should be that somebody. That said, the funny thing is that real individuals and businesses don’t behave the way the balanced-budget scolds claim. Businesses often borrow and spend when borrowing is cheap or they see high payoffs to investing; so do families. So Think Progress is doing good by pointing out how many of those deficit-fearing Congresscritters turn out to have quite large personal debts.

Taxes and Paul Ryan’s Budget - House Budget Committee Chair Paul Ryan (R-WI) has proposed a controversial  plan to balance the budget in 10 years, entirely by cutting planned spending by $4.6 trillion. While Ryan includes lots of specific spending cuts, his tax agenda is far less clear.    In some respects, the former GOP vice presidential candidate mimics the tactics of the 2012 campaign: Promise tax reform built around wildly ambitious but gauzy rate reductions without a word about how to pay for them. His plan aspires to collapse today’s seven-bracket individual income tax to a two-rate system that would raise the same amount of money as current law. It would set a top rate of 25 percent, down from today’s 39.6 percent, though it calls this merely a goal. He’d repeal the Alternative Minimum Tax and slash the corporate rate from 35 percent to 25 percent. He’d do all this while maintaining revenues at levels projected in the Congressional Budget Office baseline—19.1 percent of Gross Domestic Product in 2023. Interestingly, this 19.1% target assumes a revenue base that includes the tax hikes on high income households from Obamacare and the New Year’s Day fiscal cliff deal (the American Tax Relief Act).

House GOP Would Need $5.7 Trillion in Tax Hikes to Offset Ryan Rate Cuts - House Budget Committee Chair Paul Ryan’s (R-WI) fiscal plan promises to balance the federal budget in 10 years, make major cuts in income tax rates for both individuals and corporations, and raise the same amount of revenue as current law. If House Republicans want to do all three, they will have to eliminate trillions of dollars in popular tax preferences. The Tax Policy Center estimates that cutting individual rates to 10 percent and 25 percent, repealing the Alternative Minimum Tax and the tax increases included in the Affordable Care Act, and cutting the corporate rate from 35 percent to 25 percent would add $5.7 trillion to the deficit over the next decade. Thus, if House Republicans want to cut these taxes and still collect the revenues they promise, they’d have to raise other taxes by $5.7 trillion. The tax cuts described in Ryan’s budget would generate a huge windfall for high-income taxpayers. On average, households would get a cut of $3,000. But those in the top 0.1 percent of income, who make $3.3 million or more, would get a whopping $1.2 million on average–a 20 percent increase in their after-tax income. By contrast, middle-income households would get an average tax cut of about $900. Those in the bottom 20 percent (who make $22,000 or less) would get $40 and one-third of them would get no tax cut at all.

Effectiveness of Tax Cuts on Lifting the Economy Is Unproved -  The proposition that low tax rates produce higher economic growth has been a central plank of the Republican platform since I was a teenager in the 1980s. Since then, we have had a dot-com bubble and a housing bust. The new standard-bearer for lower tax rates, Representative Paul Ryan of Wisconsin, is for the first time younger than I am.  But while the message has not changed, the track record of the last three decades does not bear out the core proposition of Republican economic doctrine.  The argument has proved extraordinarily successful. Under Republican presidents, the top income tax rate fell as low as 28 percent, less than half the 70 percent level it was in 1980.  The top corporate income tax rate was 46 percent when President Reagan took office. Today it is 35 percent. Taxes on investment income, which primarily flows to the wealthy, are even lower. In laying out his plan for a balanced budget by 2023, Mr. Ryan has trotted out the same three elements of Mr. Kemp’s formula: drastic curbs on spending, paring loopholes in unspecified ways and cutting tax rates even further, well below the roughly 40 percent top rate on income that was reintroduced by President Obama’s recent tax increase.

It’s time to cap tax deductions - President Obama’s recent meetings with members of Congress have raised hopes that a major fiscal deal will replace the “sequester” and put the federal debt on a healthier long-term path. But the key barrier to such a deal remains the disagreement between Republicans and Democrats about the balance between raising revenue and cutting government spending. Republicans say they are against any further increase in taxes. Democrats, including the president, say that any budget deal must include additional revenue as well as spending cuts. Fortunately, Democrats indicate that they want to raise the extra revenue without increasing tax rates. Raising revenue without increasing tax rates requires eliminating or reducing the subsidies in the U.S. tax code. Such subsidies, for things as varied as hybrid cars and increased health insurance, are really the government spending through the tax code. That is why they are officially referred to as “tax expenditures.” Reducing those subsidies, then, is really cutting government spending. The resulting deficit reductions show up on the revenue side of the budget, but the economic effect is to cut government spending.

Taxing Away Inequality: A Conversation with Emmanuel Saez - Last month, U.C. Berkeley economist Emmanuel Saez spoke [See video below] to the Center for Ethics in Society at Stanford University about his pioneering research into global income inequality. A critical question his work raises is whether high taxes on the wealthy can curb inequality. Before his talk, Saez sat down with Stanford sociologist David Grusky to discuss further why taxation, though a blunt instrument, might be the best available solution.

U.S. Tax Cheats Nailed After Swiss Adviser Mails It In -  Everybody knows the danger of sending things inadvertently in an e-mail. Beda Singenberger’s case shows you also have to be pretty careful when you mail things the old-fashioned way. Over an 11-year period, federal prosecutors charge, Swiss financial adviser Singenberger helped 60 people in the U.S. hide $184 million in secret offshore accounts bearing colorful names like Real Cool Investments Ltd. and Wanderlust Foundation. Then, according to a prosecutor, Singenberger inadvertently mailed a list of his U.S. clients, including their names and incriminating details, which somehow wound up in the hands of federal authorities. Whoops! Now, U.S. authorities appear to be picking off the clients on that list one by one. Singenberger’s goof has already ensnared Jacques Wajsfelner, an 83-year-old exile from Nazi Germany, and Michael Canale, a retired U.S. Army surgeon

Report: U.S. companies keeping $166 billion in offshore tax shelters - US companies are keeping more of their profits offshore, choosing overseas tax havens amid talk in Washington about closing corporate tax loopholes, The Wall Street Journal reported Monday. The business newspaper said its analysis of 60 big American companies had found that they had collectively parked a total of $166 billion offshore last year. That shielded more than 40 percent of their annual profits from US taxes, the report said. Each of the 60 companies chosen for the analysis had held at least $5 billion offshore in 2011, according to The Journal.

USA v the World: Political Economy of Accounting - One of the more arcane debates in international political economy I am aware of from taking lots of accounting courses over the years is that which concerns adoption of accounting standards. Basel III capital adequacy standards notwithstanding, this subject matter is admittedly dull but quite important in the sense that it matters which standard is followed for corporate financial reporting to make these comparable worldwide. For the longest time, the United States has followed its own standard known as the Generally Accepted Accounting Principles (GAAP). The GAAP was perfectly alright in the past insofar as much economic activity worldwide was conducted by American MNCs. With the rise of the rest, however--especially the equally standards-happy European Union--there has been the emergence of a rival global standard known as the (surprise!) International Financial Reporting Standards (IFRS). The logic of harmonizing accounting standards is similar in that the goal is to reduce transaction costs for various stakeholders. Those reading financial statements do not need to adjust their interpretation depending on whether it's GAAP or IFRS. Companies--even American ones--only need report in a single standard instead of multiple ones even if it's not necessarily the US one and so on and so forth:

Banking Myths Hindering Reform - Global efforts to make the financial system safer are being frustrated by pervasive myths about how banks fund their activities, Bank of England policy makers said on Tuesday. At an event at London Business School to mark the launch of a book called “The Bankers’ New Clothes” by economists Anat Admati and Martin Hellwig, David Miles, a member of the BOE’s rate-setting Monetary Policy Committee, said myths about the nature and cost of capital are standing in the way of durable reform. Capital is equity and not cash to be squirreled away for an emergency, Mr. Miles said. It is “palpable nonsense” to say that asking banks to increase their capital levels will suck money out of the economy, he said, adding banker complaints about the cost of equity relative to debt are overstated.

Elizabeth Warren: What Level of Criminality Will It Take to Shut Down a Bank, (Mr. President)? - How far above the law can Banks and their management go before they will be brought to account, besides a fine that is considered a cost of doing business?  It's a good question asked in the most straight faced, almost naively innocent, manner by Senator Elizabeth Warren. Apparently amongst the Washington bureaucrats, with regard to any indictments and prosecution of financial matter 'the buck stops' with Eric Holder and his Justice Department.  Without that tool, the regulators can only levy civil fines, although often those fines are only wristslaps. And the other day Mr. Attorney General Holder said that considerations other than criminality, including instances of brazen and repeated offenses, inhibit the Justice Department from doing their jobs in prosecuting financial crimes.   Those considerations are the importance of that institution to the economy and the systemic threat that a loss of confidence might provoke.  In other words, size and power, and the fear of the consequences of enforcing the existing laws, much less reform, are at the heart of the Administration's policy towards prosecuting significant financial crimes at the highest levels.   And that policy sets the tone for the economy, and the market's attitudes towards regulation and reform. 

Lawmakers Demand Docs Over ‘Too Big To Jail’ Banks - WSJ – Two House Republicans with oversight over Wall Street said they are demanding documents from the Obama administration in the wake of Attorney General Eric Holder’s suggestion last week that some large banks may be too big to prosecute. Reps. Jeb Hensarling (R., Texas), who chairs the House Financial Services Committee, and Patrick McHenry (R., N.C.), who chairs a key subcommittee, wrote in a letter Friday to “express our deep concern” about recent comments from the administration about prosecuting large financial firms. The letter, addressed to Mr. Holder and Treasury Secretary Jacob Lew, asks the administration to turn over all documents tied to officials assessing the potential economic impact of bringing criminal or civil proceedings against a bank. There has been a surge of concern in recent months from a range of lawmakers and former regulators that not enough has been done in the wake of the financial crisis to address whether some large banks remain “too big to fail.” Lawmakers from both parties have or plan to introduce legislation targeting the largest banks in an effort to reduce their size and complexity.

Sen. Sherrod Brown explains why he wants to break up the big banks - Attorney General Eric Holder said something in Senate testimony that many had thought, but had never heard admitted at a high government level. “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them,” Holder said. Too big to fail, in other words, has become too big to jail. That’s got lawmakers talking about breaking up the banks again, if only to ensure that our basic laws can be reasonably enforced.The financial industry is taking note. Hamilton Place Strategies released a white paper last month arguing against breaking up the largest banks, arguing that they provide a useful, important role in the global finance economy. Sen. Sherrod Brown was the co-author of the Brown-Kauffman amendment that would have broken up the banks, but failed to pass during Dodd-Frank. He is currently working with Senator David Vitter (R-La.) on a new bill to help combat the Too Big To Fail. This conversation is slightly edited for length.

Addressing TBTF with tax and other policy: because "Big Banks Go Wrong, Pay Little Price" - Linda Beale - The New York Times today reiterated what many Americans lament--Big Banks went uncharged for serving as the main engine of the Great Recession that cost ordinary Americans jobs, homes and futures.  See Andrew Ross Sorkin, Big Banks Go Wrong, but Pay a Little Price, Big Banks (and especially their managers), however, made out like bandits through the socialisation of losses and privatisation of gains.  The aftermath of the crisis provided  lower cost of funds from the perceived government TBTF subsidy.  Big Bank managers made big bucks leading their institutions into disaster and "staying on" after the disaster because their "expertise" was essential.  The stock market, but not ordinary Americans' pocketbooks or paychecks,  has recovered from the recession, forging a return of lucrative M&A activity and, of course, the management of wealthy people's assets.  No Big Bank has faced criminal indictment for "the damage caused to the economy and millions of Americans" by their  sloppy mortgage financing, sloppy foreclosure procedures, and casino capitalism "bets" with credit default swaps and other derivatives. The takeaway, according to the Times article, is that "prosecutors should focus on the individuals responsible for the misconduct" rather than indict corporations, which can result in "condemnation of one person [many employees] for the actions of another. While protecting employees of rogue firms (where management and directors have pursued aggrandisement of their own status and riches at the cost of society's well-being) is important, it is not clear that the takeway outlined above is a complete answer.  Several additional components should be addressed, by a combination of Congressional and state legislative action and regulating agencies.  And actions to limit the size of corporations would have another advantage--acting as a deterrent to their power in dictating the well-being of ordinary employees, and thus helping to deflect the growth of corporatism in our society.

Big Banks Have a Big Problem - The largest banks in the United States face a serious political problem. There has been an outbreak of clear thinking among officials and politicians who increasingly agree that too-big-to-fail is not a good arrangement for the financial sector. Six banks face the prospect of meaningful constraints on their size: JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley. They are fighting back with lobbying dollars in the usual fashion – but in the last electoral cycle they went heavily for Mitt Romney (not elected) and against Elizabeth Warren and Sherrod Brown for the Senate (both elected), so this element of their strategy is hardly prospering. What the megabanks really need are some arguments that make sense.  The Old Wall Street view is that there is nothing to see – big banks know what they are doing and pose no threat to the economy. This position was in complete ascendancy before 2007 but is seldom heard today. In part, of course, the financial crisis made this view seem more than a little hard to defend.

New Rules Will Give a Truer Picture of Banks’ Size - - It sounds like a simple question. How big is that bank? But it is not. Under American accounting rules, banks that trade a lot of derivatives can keep literally trillions of dollars in assets and liabilities off their balance sheets. Since 2009, they have at least been required to make disclosures about how large those amounts are, but the disclosures leave out some things and — amazingly enough — in some cases do not seem to add up. The international accounting rules are different. They also allow some assets to vanish, but not nearly as many. As a result, it is virtually impossible to confidently declare how a particular European bank compares in size with an American bank. Much of that will change when first-quarter financial statements start coming off the printing presses in a few weeks. For the first time, European and American banks are supposed to have comparable disclosures regarding assets. Their balance sheets will still be radically different, but for those who care, the comparison will be possible. This comes to mind because these days it seems that big banks do not much want to be thought of that way. A rather angry argument has broken out regarding whether “too big to fail” institutions get what amounts to a subsidy from investor confidence that no matter what else happens, they would not be allowed to fail. The banks deny it all. Subsidy? Penalty is more like it, they say.

Underneath the Bankers' New Clothes - Anat Admati and Martin Hellwig are the authors of a new book called The Bankers’ New Clothes. This book has been favorably reviewed by John Cochrane and mostly-favorably reviewed by Matthew Yglesias at Slate, though he has a few qualms about it: Admati and Hellwig say... we should make [banks] fund a much larger share of investment—20 to 30 percent—with equity... Conventional wisdom both in the industry and among the regulatory establishment is that this would be economy-killing madness leading to huge increases in borrowing costs. Brookings Institution fellow Douglas Elliott, in one of the milder critiques, says borrowing costs would rise by about 2 percentage points... The authors’ partially persuasive reply is that this involves confusing social costs with private costs...  Less convincing is the authors’ claim that imposing stricter capital regulation would have no costs. They analogize their proposal to rules preventing firms from engaging in excessive pollution but fail to explore the analogy deeply enough. They also have two papers from 2010 and 2012 which provide the technical background for the book. We discussed the 2012 paper, "Debt Overhang and Capital Regulation," in the Berkeley macroeconomics reading group this week. I'll try and walk through it here.

Jim Himes, Former Goldman Sachs Executive, Introduces Bill To Roll Back Key Element Of Dodd-Frank - Rep. Jim Himes (D-Conn.), a former Wall Street executive, is joining Rep. Randy Hultgren (R-Ill.) to introduce legislation that would undercut one of the most meaningful elements of the 2010 Dodd-Frank Wall Street Reform Act. The bill would "allow banks to keep commodity and equity derivatives in federally insured units," Politico reported on Wednesday, meaning that banks would no longer be forced to spin off their trading desks. It would weaken Dodd-Frank's "push out" provision, otherwise known as the Prohibition Against Federal Government Bailouts of Swaps Entities, which bars federal assistance from being provided to any swaps entity. Derivatives -- which Warren Buffett has referred to as “financial weapons of mass destruction” -- are viewed as a key trigger of the 2008 economic crisis. 

Offshore London and the escape from the U.S. Dodd-Frank bill -- I will introduce this blog with a comment from Michael Greenberger, a former top U.S. regulator, in a paper that looks at the Dodd-Frank bill and its (welcome and appropriate) willingness to reach U.S. financial regulation out into other jurisdictions if U.S. taxpayers are on the hook. “Barclays has repeatedly threatened to relocate to the United States if the British government requires British banks to separate their high street retail operations from their investment banking work.  As Congressman Barney Frank has observed, the threats made by U.S. banks to migrate to the United Kingdom and the simultaneous threats by U.K. banks to migrate to the United States are reminiscent of “the 13-year-old son of divorced parents who tries to play Mommy off against Daddy.”   The threats made by banks are both empty and divisive. They are intended to weaken financial regulation on both sides of the Atlantic.

Jaw-Dropping Crimes of the Big Banks | The Big Picture: You Won’t Believe What They’ve Done …Here are just some of the improprieties by big banks:

Elizabeth Warren: What Level of Criminality Will It Take to Shut Down a Bank, (Mr. President)? - How far above the law can Banks and their management go before they will be brought to account, besides a fine that is considered a cost of doing business? It's a good question asked in the most straight faced, almost naively innocent, manner by Senator Elizabeth Warren. Apparently amongst the Washington bureaucrats, with regard to any indictments and prosecution of financial matter 'the buck stops' with Eric Holder and his Justice Department. Without that tool, the regulators can only levy civil fines, although often those fines are only wristslaps. And the other day Mr. Attorney General Holder said that considerations other than criminality, including instances of brazen and repeated offenses, inhibit the Justice Department from doing their jobs in prosecuting financial crimes. Those considerations are the importance of that institution to the economy and the systemic threat that a loss of confidence might provoke. And that policy sets the tone for the economy, and the market's attitudes towards regulation and reform. But since Eric Holder is Obama's personal representative, almost certainly acting in consultation on financial matters with the Treasury Secretary, the offensive corruption in the financial sector is the result of the President's policies. That is also known as moral hazard. And at this point he has no one else to blame.

Senate “Whale” Report Reveals JP Morgan as a Lying, Scheming Rogue Trader (Quelle Surprise!) -  Yves Smith - There is so much grist in the just-released Senate Permanent Subcommittee report on the JP Morgan London Whale trades that the initial reports are merely high level summaries, which is understandable. Even with the admirable job done by the committee in documenting its findings and recommendations, it will take some doing to pull out the critical observations and convey them to the public. Plus the hearings tomorrow should provide good theater and further hooks for commentary. But some critical findings emerge, quickly. We here at NC were particularly harsh critics of JP Morgan’s conduct, and disappointed in the media’s failure to understand that the information JP Morgan presented as it bobbed and weaved showed glaring deficiencies in risk controls. Yet the failings described in the report are even worse than we imagined. For instance, Michael Crimmins, in a post, Why Hasn’t Jamie Dimon Been Fired by His Board Yet? wrote last July: The first stunner, that JP Morgan was restating the first quarter financials, should have caused a deafening ringing of alarm bells. For a company of JP Morgan’s stature to be compelled to restate prior period financials is a very clear signal of bigger problems with their overall financial reporting. In isolation we would normally expect to see a massive selloff with an event of that seriousness. Analysts and reporters may have missed the significance since it was dropped into a footnote and overshadowed by the other disclosures. …

Out of Control – New Report Exposes JPMorgan Chase as Mostly a Criminal Enterprise -  It’s hard to summarize all of the documented instances in this report of JPM has been breaking the law, but here’s my best shot. I try to keep up on these matters, and yet some of these I’m learning about for the first time:
Bank Secrecy Act violations;
Money laundering for drug cartels;
Violations of sanction orders against Cuba, Iran, Sudan, and former Liberian strongman Charles Taylor;
Violations related to the Vatican Bank scandal (get on this, Pope Francis!);
Violations of the Commodities Exchange Act;
Failure to segregate customer funds (including one CFTC case where the bank failed to segregate $725 million of its own money from a $9.6 billion account) in the US and UK;
Knowingly executing fictitious trades where the customer, with full knowledge of the bank, was on both sides of the deal;
Various SEC enforcement actions for misrepresentations of CDOs and mortgage-backed securities;
The AG settlement on foreclosure fraud;
The OCC settlement on foreclosure fraud;
Violations of the Servicemembers Civil Relief Act;
Illegal flood insurance commissions;
Fraudulent sale of unregistered securities;
Auto-finance ripoffs;
Illegal increases of overdraft penalties;
Violations of federal ERISA laws as well as those of the state of New York;
Municipal bond market manipulations and acts of bid-rigging, including violations of the Sherman Anti-Trust Act;
Filing of unverified affidavits for credit card debt collections (“as a result of internal control failures that sound eerily similar to the industry’s mortgage servicing failures and foreclosure abuses”);
Energy market manipulation that triggered FERC lawsuits;
“Artificial market making” at Japanese affiliates;
Shifting trading losses on a currency trade to a customer account;
Fraudulent sales of derivatives to the city of Milan, Italy;
Obstruction of justice (including refusing the release of documents in the Bernie Madoff case as well as the case of Peregrine Financial).

Senate: J.P. Morgan’s Dimon withheld loss data— A Senate subcommittee report on Thursday charged J.P. Morgan Chase & Co. with ignoring its own limits on risk taking, manipulating risk models to avoid detection and ignoring warnings from traders as the bank’s CEO, Jamie Dimon, intentionally withheld investment bank profit and loss data from federal regulators. The report was commissioned to examine a $6.2 billion credit derivatives trading loss last year at J.P. Morgan’s (US:JPM) London investment office. The loss was partly attributed to a trader, Bruno Michel Iksil, dubbed the “London whale” for his large positions in credit derivatives. The report notes that the current status of the losses is unclear because J.P. Morgan dismantled the portfolio late last year, moving some funds to its investment banking unit. The panel, headed by Sen. Carl Levin, Democrat from Michigan, examined 90,000 documents, conducted over 50 interviews and reviewed over 200 taped telephone conversations and instant messages before issuing the bipartisan 300-page report. It includes dozens of examples in which trader warnings were ignored while risk managers at the institution appeared unaware of losses. It adds that the bank’s chief government regulator appeared oblivious in many instances or was denied critical information.

Emails show JPMorgan tried to flout Basel rules: Senate (Reuters) - JPMorgan Chase & Co (JPM.N) risk managers tried so hard in 2012 to get around international capital rules that they viewed their own discussions as too sensitive for email, according to a Senate report released on Thursday. The report on the JPMorgan "London Whale" scandal includes the story of a quantitative engineer for the bank who made waves internally by sending an email suggesting how the bank could rearrange its risk modeling procedures to better accommodate the ballooning risk metrics inside the chief investment office. "I think, the, the email that you sent out, I think there is a, just FYI, there is a bit of sensitivity around this topic," a member of the bank's central risk modeling group warned the engineer afterward in a phone call. "While we have repeatedly acknowledged mistakes, our senior management acted in good faith and never had any intent to mislead anyone," a spokeswoman for the bank said in response to the report. The engineer, Patrick Hagan, a math expert who had previously worked at Exxon designing chemical reactors, had written to the risk modeling group suggesting a way to "optimize the firm-wide capital charge," explaining how he could rearrange the calculations required to determine how much capital JPMorgan needed to hold to adhere to international regulatory requirements. Hagan wanted to make it so the bank needed to hold less capital. "The bank may be leaving $6.3 billion on the table, much of which may be recoverable," he wrote. "What I would do is not put these things in email," the risk group employee told Hagan on the phone.

Senate investigation finds JP Morgan hid mistakes as trade losses grew -: JP Morgan's $6.2bn London Whale trading debacle was born out of secretive trades and creative bookkeeping as the bank attempted to limit losses using a practice that one regulator called "make believe voodoo magic", a Senate investigation has concluded. The report by the Senate subcommittee on investigations, published on Thursday, detailed a series of failures in which accounts were hidden and trades were valued incorrectly to minimize losses. It also alleged that regulators were kept in the dark, a head trader's concerns went unheeded and a $51bn trading portfolio ballooned to $157bn in three months. The inquiry follows JP Morgan's own internal investigation in January and provides the first look into the emails and internal discussions at the bank around the infamous Whale trade. It centers on the secretive JP Morgan chief investment office, which accounted for as much as one-sixth of the bank's assets last year. The 300-page report alleges that JP Morgan hid losses, did not share information with its regulators, and misled the public. The report also blames the bank's regulator, the Office of the Comptroller of the Currency, and recommends reforming the way regulators oversee derivatives, the complicated financial instruments that played a role in the Whale trades and the financial crisis. The report also concludes that JP Morgan CEO Jamie Dimon, whose bonus was cut in half to $11.5m last year, knew about the sustained trading losses when he dismissed the incident as a "tempest in a teapot" in April 2012.

Ina Drew Throws Jamie Dimon Under The Bus - From the prepared remarks of Ina Drew, former JPM CIO: ... Though I did not (and do not) believe I bore personal responsibility for the losses in the synthetic credit book, in late April I began to consider whether, for the good of JPMorgan Chase, I should step down and make it easier for the Company to move beyond these issues. In the wake of the May 10 disclosures I approached Mr. Dimon and told him that I thought it would be best for the Company if I stepped down. He reluctantly agreed, and shortly thereafter I  submitted my retirement letter. Similarly, although I did not (and do not) believe that I engaged in any misconduct, I offered to give up a significant amount of  my recent JPMorgan Chase compensation, which I have done, in recognition of the size of the losses and my position as head of the business. Although asset-liability management, by its nature, involves regular ups and downs in both investment and hedging books, I had never before experienced a situation like this one. Since my departure I have learned of the deceptive conduct by members of the London team, and I was, and remain, deeply disappointed and saddened to learn of such conduct and the extent to which the London team let me, and the Company, down.

Ex-JPMorgan Exec Says Dimon Withheld Data From U.S. -JPMorgan Chase CEO Jamie Dimon held back showing federal regulators reports in May that revealed the bank had accumulated billions of dollars in trading losses, according to congressional testimony Friday from the firm’s former chief financial officer. Douglas Braunstein, who is now a vice chairman at the bank, told the Senate Permanent Subcommittee on Investigations that Dimon did not submit the daily reports for two weeks because he was concerned about “confidentiality.” Dimon ultimately acknowledged later that month that the firm had lost $2 billion on risky trades out of its London office. The losses have since been revised to more than $6 billion. The Senate hearing was held a day after the subcommittee issued a scathing report that ascribed widespread blame for losses to key executives at the firm. The report said that the executives ignored growing risks and hid losses from investors and federal regulators. After reading the report and hearing executives testify that they didn’t know who was responsible for informing regulators, members of the panel questioned whether the nation’s biggest bank had become too large to manage. The “trading culture at JPMorgan … piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight and misinformed the public,” Sen. Carl Levin, D-Mich., the subcommittee’s chairman, said Friday at the hearing.

JPMorgan: The House that Jamie Built Looks Much Like the House That Sandy Built - Much of the investing public, and I would venture many members of the research team at the Senate’s Permanent Subcommittee on Investigations that compiled the 307 page report on JPMorgan’s $6.2 billion in losses from the London Whale trade, are unaware that the company’s Chairman and CEO, Jamie Dimon, learned at the knee of the mastermind of too-big-to-fail – former Citigroup Chairman and CEO, Sandy Weill. From 1982 to 1998, Dimon was Weill’s first lieutenant, rising to the rank of President of Citigroup. Carl Levin, Chairman of the Subcommittee, released the stunning investigative report yesterday and, throughout, the level of arrogance toward regulators, the dishonesty and dissembling on earnings calls, the hiding of losses, and the specter of the imperial CEO conjured up images of the downfall of Citigroup and Weill’s role in creating the culture than burned down the house. It felt, alarmingly, like Dimon had exported the culture of Citigroup to JPMorgan Chase. Pretty much everything that Dimon led us to believe about this year-long saga has been debunked by the Senate’s investigation. Far from being some rogue-traders in London, the report informs us that “…the whale trades were not the acts of rogue traders, but involved some of the bank’s most senior managers. Previously undisclosed emails and memoranda showed that the CIO [Chief Investment Office] traders kept their superiors informed of their trading strategies.”

Live Blogging JP Morgan Senate Hearing – a Rogue Institution on the Hot Seat - Yves Smith - Yves here. I wasn’t planning on liveblogging this hearing, but listing to the introductory remarks, the knives are really out for JPM. In all the post-crisis hearings I’ve watched, I’ve never seen such unanimity between the Democrats and the Republicans on the severity of the problem and the need for more regulation. The committee made a point of having the ranking member, John McCain, take the fore in pre-hearing PR. And in the warm-up, McCain stressed how JPM completely disregarded risk limits, deceived federal regulators, and developed business model that depended assumption that the bank was too big to fail. Both McCain and Levin hammered on how the JPM illustrated much bigger problems about how JPM and other banks routinely gamed risk limits and used guaranteed deposits to gamble rather than support the real economy. Ina Drew is up. She starts with a long, pious pontification about her long career and her sincerity. Her limited substantive claim is that she learned what went wrong from the media after she quit, that she was undermined by flawed VaR model and some members of London team failed to value positions properly. This is such bullshit I don’t know where to begin. The VaR model was implemented to finesse the risk limit breaches with regulators. The unit had (inappropriately) a pricing review function within the CIO. For Drew now to claim that she didn’t know what was happening is either a wild exaggeration or proof the bank was completely out of control and therefore made false Sarbanes Oxley certifications.

US Markets Live special JPM Whale edition FT Alpahville.  interesting format, a finance nerd version of sport commentary.

Live-Blogging the Senate Hearing on J.P. Morgan Chase and the Infamous “London Whale” Episode Matt Taibbi

Counterparties: Ina the belly of the whale - Last night, the Senate Permanent Subcommittee on Investigations released its 307-page report (plus a 598-page appendix) on JP Morgan’s disastrous London Whale trades. The report comes 11 months after trades were first reported, and, as DealBook notes, it details how JP Morgan “ignored internal controls and manipulated documents”, all while withholding information from regulators. FT Alphaville’s Cardiff Garcia pulls some of the most damning excerpts. For instance, the report says that JP Morgan’s assertion that they had been fully transparent with regulators had “no basis in fact”. Or take then-CFO Douglas Braunstein’s comments on an earnings call that the CIO’s trades were a hedge against rising rates. On page 283, the report says that “none of the scenarios that Mr. Braunstein himself said he relied on indicated that the book functioned as a hedge”. Matt Philips writes that JP Morgan has lost that battle: “JP Morgan now freely admits—including Braunstein under oath this afternoon—that the CIO’s problematic position didn’t act as a hedge” and that the Senate report calls them out as proprietary trades. When JP Morgan abruptly shifted the way it valued these trades, their internal controller described them as “consistent with industry practices”. But what the controller didn’t say was that JP Morgan’s investment bank valued the exact same securities differently. This may be why regulators described the trade as a “make believe voodoo magic ‘composite hedge.’”Regulators at the Office of the Comptroller of the Currency don’t come off looking great either. As Matt Levine writes, the report makes it “clear that no one at the OCC had any idea what was going on at JP Morgan, and never asked”. The OCC also didn’t bother to look at publicly available information that could have helped them understand what JP Morgan was withholding.

Banco Popular de Puerto Rico Chief to Take Over Dimon’s Slot on NY Fed Board - The Federal Reserve Bank of New York said Friday Banco Popular de Puerto Rico leader Richard Carrion will take over a slot on its board vacated last year by J.P. Morgan Chase & Co.'s Jamie Dimon.

UBS Loses $2.6 Billion In 2012, Hands Out $2.6 Billion In Bonuses: Looks like UBS has found its magic number. The Swiss banking giant paid its top workers $2.6 billion in bonuses in 2012, according to the Swiss Broadcasting Corporation. That's the same amount the bank lost that year and just slightly more than the $2.1 billion UBS lost in the fourth quarter alone, thanks in large part to scandals and lawsuits. The executives made top dollar even as the bank agreed to pay $1.5 billion to settle allegations of Libor rigging. That's a different approach than that taken one year before, when UBS clawed back bonuses of its top-paid investment bankers after the unit posted a $1.32 billion loss thanks to a $2.3 billion rogue trading scandal, according to the Wall Street Journal. And while the loss-to-bonus ratio may be strikingly neat, it's only one way in which UBS placed pain and pay side by side. UBS announced Thursday that their CEO took home nearly $9 million as part of the bank's giant payout to senior staff, during the same year UBS said it would cut 10,000 workers in an aim to cut costs, according to Reuters. In addition, UBS welcomed its newest executive, Investment Bank Chief Andrea Orcel, with a “golden hello” of $26 million.

And the SEC Wonders Why Investors Think It's Spineless - The Securities and Exchange Commission accused the state of Illinois of securities fraud as part of a settlement disclosed today. The case is an SEC self-parody at its finest. The SEC didn't sue any individuals, as if the so-called fraud occurred by itself. The state of Illinois neither admitted nor denied the agency's findings, meaning the allegations remain unproven. The only penalty was an SEC order prohibiting the state from engaging in the same sorts of infractions again -- like breaking the law was somehow permissible before. The SEC only rarely sues repeat offenders for violating such "obey-the-law" directives, so these have little if any practical meaning. On top of that, the alleged infractions amounted to fraud in name only. The SEC accused the state of violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. Under those provisions, the SEC would only have to prove negligence, not intentional fraud. ("Negligent fraud" remains one of the great oxymorons of U.S. legalese.)

Corralling Mobsters, if Not Many Big Banks - EVERYONE knows about the mobsters and terrorists that Mary Jo White successfully put behind bars during her nine years as United States attorney for the Southern District of New York. Less well-known is Ms. White’s record bringing cases against large financial institutions during her stint as the top criminal prosecutor in New York. Ms. White, who has been nominated to become the chairwoman of the Securities and Exchange Commission, ran the Justice Department’s unit in the Southern District, which includes Manhattan, from 1993 until January 2002. She is expected to appear at a confirmation hearing before the Senate Banking Committee on Tuesday. Ms. White’s recent work as a partner at Debevoise & Plimpton, where she represented JPMorgan Chase, Morgan Stanley and other companies, has come under scrutiny. Her record as a federal prosecutor of financial crime has received less attention. Given that regulating financial firms will become her purview if she heads the S.E.C., assessing her pursuit of financial fraud as a prosecutor may provide clues to how she would run the agency. Let’s just say her prosecutorial stint did not include a lot of cases against large United States financial institutions.

The Whites Go to the SEC: Why Wall Street Still Owns Washington - At 10 a.m. tomorrow, Mary Jo White, President Obama’s nominee for Chair of the Securities and Exchange Commission (SEC), will take her seat in the Dirksen Senate Office Building while the Senate Banking Committee goes through the motions of weighing her worthiness to serve. If confirmed, this will mark White’s fourth spin over 36 years through the revolving door at her corporate law firm, Debevoise and Plimpton. White’s husband, John W. White, has had only one-spin through the revolving door – but it tells us a great deal about why Wall Street remains unrepentant and continues to pillage and plunder. On March 5, 2005, John W. White, partner at the international law firm Cravath, Swaine & Moore LLP, which represents Wall Street firms and large corporations around the world, was not at all happy with Section 404 of the Sarbanes-Oxley Act.  That’s the part of the financial reform legislation that requires the auditor of publicly traded companies to attest to management’s assessment of its internal controls for financial reporting to the public. White penned a 5-page, single-spaced letter to the Securities and Exchange Commission, outlining his objections. He wanted the rules to be watered down.  Less than a year later, White was in a position to personally get the job done. After 30 years as a corporate attorney at Cravath, Swaine & Moore LLP, representing the interests of financial firms, White was magically transported to a top slot at the SEC. On February 8, 2006, SEC Chairman Christopher Cox named White the Director of the Division of Corporation Finance.

Fortress of Lies - History has a special purgatory where it sometimes stashes feckless nations punch drunk on their own tragic choices: the realm where anything goes, nothing matters, and nobody cares. We've surely crossed the frontier into that bad place in these days of dwindling winter, 2013. Case in point: Mr. Obama's choice of Mary Jo White to run the Securities and Exchange Commission. A federal prosecutor back in the Clinton years, Ms. White eventually spun through the revolving door onto the payroll of Wall Street law firm Debevoise & Plimpton, whose clients included Too Big To Fail banks JP Morgan, Bank of America, Morgan Stanley, and UBS AG, defending them in matters stemming from the financial crisis that began in 2008, as well as other companies that needed defending from allegations of financial misconduct, such as the giant HCA hospital chain (insider trading), General Electric (now a virtual hedge fund with cases before the SEC), and the German-based Siemens Corporation (federal bribery charges).  A republic with a sense of common decency -- and common sense -- would have stopped the nomination right there and checked the "no" box on Mary Jo White just for violating the most basic premise of credibility: that trip through the revolving door that shuttles banking regulators from the government agencies to the companies they used to oversee and sometimes back again.     Has there not been enough national conversation about the scuzziness of that routine to establish that it's not okay? Does it not clearly represent the essence of dysfunction and corruption in our regulatory affairs? Didn't President Obama promise to seal up the revolving door?  And how is it possible that everyone and their uncle, from The New York Times editorial page to the Sunday cable news political shows to the halls of congress, is not jumping up and down hollering about this? Well, because anything goes, nothing matters, and nobody cares.

Elizabeth Warren Skewered the SEC’s Record for the Past Two Years - The Senate Banking committee held a confirmation hearing for two agencies — the SEC and the Consumer Financial Protection Bureau — this morning, and as you may have guessed, the standout cross-examination was from Elizabeth Warren. Warren had a ton of praise for Richard Cordray, who has headed the CFPB without being confirmed for over a year. Those who oppose his confirmation, it's worth noting, say it's because the CFPC is an imperfect organization and not because of his personal record. Warren, of course, thinks that's bunk. "From the way I see how other agencies are treated, I see nothing here but a filibuster threat against Cordray," said Warren. "The delay in getting him confirmed is bad for small banks, small credit unions...bad for anyone with an honest product... I hope you get confirmed, you have earned it Dr. Cordray." SEC nominee Mary Jo White, or more specifically, the SEC, did not get such gentle treatment from Warren. She went right for the jugular, comparing the SEC's progress (or lack thereof) on rule writing with the CFPB's. She pointed out that the SEC has missed about half of its rule writing deadlines so far. "The SEC has not yet written rules for... credit rating agencies that took money to sign off on risky deals that crashed the economy and still operate with big conflicts of interest... still no rules from the SEC to deal with derivatives that were at the heart of the finical crisis... still no rules to protect the towns and... still no rules to disclose CEO pay... I hope those are the top of your list," Warren said to White.

Senator Sherrod Brown Drops a Bombshell in Mary Jo White’s Hearing - Americans learned for the first time on March 6 of this year that the highest law enforcement agent in our country, Attorney General Eric Holder, weighs economic interests when deciding whether to enforce our Nation’s laws against criminal wrongdoers like the too-big-to-fail banks. The spectacle of warped law enforcement grew worse today during the Senate Banking confirmation hearing of Mary Jo White to head the Securities and Exchange Commission. Under questioning by Senator Sherrod Brown (D-Ohio), White admitted that even the economy of a foreign country – like Japan – is taken into consideration before bringing a criminal indictment in the U.S.  Even worse, White was forced to admit that while working for the U.S. Department of Justice as the U.S. Attorney for the Southern District of New York (from 1993 to 2002), she considered it appropriate to speak with Larry Summers (a Treasury Secretary in the Clinton administration) to weigh the economic impact of bringing an indictment.

Above the law - “The government of the United States,” wrote Chief Justice John Marshall, “has been emphatically termed a government of laws, and not of men.” This principle — grounded in the Constitution, enforced by an independent judiciary — is central to the American creed. Citizens have rights, and fundamental to these is due process of the law. Yet last week Attorney General Eric Holder, speaking for the administration with an alarmingly casual nonchalance, traduced the whole notion of a nation of laws. First, the attorney general responded to Sen. Rand Paul’s inquiry as to whether the president claimed the “power to authorize a lethal force, such as a drone strike, against a U.S. citizen on U.S. soil and without trial.” After noting that the United States has never done so and has no intention of doing so, Holder wrote that, speaking hypothetically, it is “possible to imagine” an extraordinary circumstance in which that power might become “necessary and appropriate.” This triggered Paul’s now-famous 13-hour filibuster against the nomination of John Brennan to head the CIA, as Paul (R-Ky.) promised to “speak until I can no longer speak” to sound the alarm that “no American should be killed by a drone on American soil without first being charged with a crime” and being found guilty in a court of law.

Has the SEC and U.S. Treasury Been Privatized by Wall Street - At a time when restoring trust in our financial system is critical to the Nation’s ability to grow, create jobs and restore consumer and investor confidence, President Obama has nominated two deeply conflicted individuals to head the U.S. Treasury Department and the Securities and Exchange Commission. Jack Lew has already been confirmed and sworn in as the new Treasury Secretary; Mary Jo White’s confirmation hearing will occur this morning before the Senate Banking Committee. The process surrounding Jack Lew’s confirmation hearing appeared to have been stage-managed by an invisible hand to deny the public the right to learn of his mountains of questionable dealings in the private sector. Senator Orrin Hatch, speaking during debate by the full Senate on the confirmation of Lew, had this to say about the process: “A nomination hearing was scheduled to be held only 12 calendar days after the paperwork was received, even though the nominee had not yet answered all of the questions that were submitted to him..Anonymous administration sources have decried the very notion that members of the Finance Committee had the audacity to ask hundreds of questions of Mr. Lew as part of their constitutional advice and consent responsibilities.” Allow me to expand on this description by Senator Hatch. Were it not for reporting by the New York Post, the august United States Senate with legions of attorneys and researchers would not have learned that Jack Lew had been given over $1 million in mortgage loans by the nonprofit New York University. Only through repeated rounds of questioning did the Senate learn that much of these loans were forgiven and the interest reimbursed by NYU.

After Watering Down Financial Reform, Ex-Senator Scott Brown Joins Goldman Sachs’ Lobbying Firm -During his nearly three years in the U.S. Senate, Scott Brown (R-MA) frequently came to the aid of the financial sector — watering down the Dodd-Frank bill and working to weaken it after its passage — and accepted hundreds of thousands of dollars in campaign cash from the industry. Now, the man Forbes Magazine called one of “Wall Street’s Favorite Congressmen” will use those connections as counsel for Nixon Peabody, an international law and lobbying firm. The Boston Globe noted Monday that while Brown himself will not be a lobbyist — Senators may not lobby their former colleagues for the first two years after leaving office, under the Honest Leadership and Open Government Act of 2007 — “he will be leaning heavily on his Washington contacts to drum up business for the firm.” The position will also allow him “to begin cashing in on his contacts with the financial services industry, which he helped oversee in the Senate.”

Yes, Virginia, HFT and Liquidity are Not All They Are Cracked Up to Be - Yves Smith - You may have seen a big outbreak in the academic literature and business media of defenses of liquidity for liquidity’s sake, evidently prompted by increased interest in and in the EU, implementation of transaction taxes as a way to tame speculation and secondarily raise revenues.  And other efforts to curb market manipulation are underway. For instance, the SEC and the FBI are joining forces to try to rein in predatory HFT, but are finding it an uphill battle due to the fragmentation of information:While some of the alleged tactics are the same as those used in the past, the new challenge is how they are executed. Algorithm-driven trades are issuing thousands of quotes in microseconds across numerous trading platforms, including “dark pools” that are off-exchange.Even with these impediments, however, people who are knowledgeable about HFT practices can describe how it is in fact detrimental. A useful piece by former Goldman derivatives expert Wallace Turbeville explains in depth why it is extractive. Some analysts have suggested that HFT is destructive in volatile markets by withdrawing activity when it is most badly needed, but adds liquidity in normal markets. Turbeville debunks the idea that it plays a positive role even when markets are functioning normally.

Hedge Funds Cut Bets to ’09 Low as Goldman Says Buy: Commodities - Hedge funds cut bets on a commodity rally to a four-year low on signs of surplus supply in everything from coffee to zinc before Goldman Sachs Group Inc. said prices had fallen too far and investors should buy. Speculators reduced net-long positions across 18 U.S. futures and options in the week ended March 5 by 9.2 percent to 405,885 contracts, the lowest since March 2009, U.S. Commodity Futures Trading Commission data show. They are the most bearish on copper in four years, and are also betting on declines for coffee, hogs, sugar, soybean oil, wheat and natural gas. Commodities retreated 4.8 percent since reaching a four- month high Feb. 13, even as optimism about the global economy drove the MSCI All-Country World Index of equities to a 56-month peak. Supplies will outpace demand for 12 of 18 metals and agriculture goods, according to Barclays Plc and Rabobank International. Goldman raised its three-month outlook for raw materials to “overweight” from “neutral” on March 7, saying accelerating Chinese growth will support prices.

Subprime car loan securities sales soar - Sales of risky pools of securities backed by car loans have jumped this year as investors’ search for yield takes them to corners of the market that boomed in the build-up to the financial crisis. Sales of subprime auto asset-backed securities in the US have increased year-to-date to nearly $4bn, almost double the volume during the same period of 2012, according to Deutsche Bank data. Subprime auto sales now account for 34 per cent of all auto ABS issuance, surpassing levels last seen in 2007. The jump in subprime auto ABS deals comes as benchmark interest rates remain at historic lows, encouraging a growing number of investors to buy assets with lower credit quality to capture higher yields. “The credit story in the auto market, which includes subprime ABS, is improving,” “That is largely a reaction to a better economy, an ultra-low rate environment and ongoing search for yield.” Demand for the bonds started to rebound late last year as car sales also picked up and average yields on corporate debt fell to record lows. Since then, auto debt issuers including Santander Drive Auto Receivables Trust, Hyundai Auto Receivables Trust and Ford Credit Auto Owner have inked large deals with rates near historic lows, in offerings that were largely oversubscribed, people familiar with the sales said.

… to Hold “Untouchable” Fraudsters Accountable - In this environment of federal inaction and cut-backs, it has never been more important for private citizens and investors to be given the legal tools and authority to protect themselves. During the Civil War, Lincoln adroitly dealt with rampant fraud by Union Army contractors by empowering ordinary citizens with knowledge of the crimes to take civil action against wrongdoers on behalf of the government and themselves. Often called the “Lincoln Law,” the federal False Claims Act was modernized in 1987, with Republican Senator Charles Grassley leading the effort. Since then, whistleblowers acting under its authority and protection have recovered more than $40 billion of taxpayer money otherwise lost to fraud and abuse against federal and state governments.

Usury and the Loan Shark Myth -- Consumer financial education, disclosure, and defaults all dispensed with in my prior posts, shall we move on to “substantive” regulation, dare I even say “usury”? Before we do that, I need to clear up another myth that, like the belief in the efficacy of consumer financial education, is deeply ingrained: the loan shark myth. Forthcoming is a historical expose of the relationship – or lack thereof – between credit price regulation in the small loan market and loan sharking. The author finds that what the popular culture has called loan sharking consists of two different types: violent and nonviolent. Both have been characterized by: (1) high prices, in excess of usury restrictions where such restrictions have applied, and (2) short-term, nonamortizing loans made to people who have a decent likelihood of being able to pay the interest amount due at maturity but a low likelihood of being able to pay off the principal balance, resulting in a steady stream of interest income to the lender as the loans roll over and over. It is this second feature that in the 19th Century first earned even nonviolent loan sharks their “shark” moniker – a single loan, even if it is expensive, looks harmless enough, but stealthily traps the borrower in a cycle of debt.

The Virtues of Price Caps - In the last post I discussed the potential benefits of price caps in the small loan market, one of which was to bring the price down to what consumer price shopping would produce if it were present in that market. Now I would like to turn to the potential benefit of price caps in even the most (albeit still quite imperfectly) price-competitive credit market, the mortgage market. While superficially appearing to be about price, the primary potential benefit of credit price regulation is that it can rein in risk. Even in the small loan market, the primary problem is not paying high, noncompetitive prices, but the risk of not being able to pay off the principal and then being trapped in debt servitude to a loan shark. This trap imposes social costs and high psychological costs on the borrower. The primary problem in the mortgage crisis has also been risk, the risk of default and foreclosure. Risk is intimately tied to price in both situations, but setting a “fair” or “efficient” price seems to me to be to be secondary. (Then again, I am culturally tone-deaf, so maybe fairness in pricing is really what has motivated usury restrictions over the centuries; some historical accounts, however, place the risk of debt servitude as the primary motivator).

Everything You’ve Been Told About Personal Finance Is Dead Wrong — Here’s the Truth - Lynn Parramore: Can’t save enough? Worried about your retirement? The personal finance industry is ready to prey on you. According to Helaine Olen, the lion’s share of financial advice served up by so-called experts is useless — or worse. In her must-read new book, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, she reveals that to think about money soley in a personal sense causes us to miss the problem. I caught up with Olen to discuss her take on what we’re missing, and how to think better and smarter about our financial lives.

Rigging the I.P.O. Game - When an Internet start-up called eToys went public in 1999 the offering price had been set at $20, but investors in that frenzied era were so eager for eToys shares that the stock immediately shot up to $78. It ended its first day of trading at $77 a share.  After the Internet bubble burst — and eToys, starved for cash, went out of business — lawyers representing eToys’ creditors’ committee sued Goldman Sachs over that I.P.O. That lawsuit, believe it or not, is still going on. Indeed, it has taken on an importance that transcends the rise and fall of one small company during the first Internet craze.  The plaintiffs charge that Goldman Sachs had a fiduciary duty to maximize eToys’ take from the I.P.O. Instead, Goldman purposely set an artificially low price, so that its real clients, the institutional investors clamoring for the stock, could pocket that first-day run-up. According to the suit, Goldman then demanded that some of those easy profits be kicked back to the firm. Part of their evidence for the calculated underpricing of eToys, according to the plaintiffs’ complaint, was that Lawton Fitt, the Goldman executive who headed the underwriting team and was thus best positioned to gauge the market demand, actually made a bet with several of her colleagues that the price would hit $80 at the opening.

Who Benefits from the Climbing US Stock Market? - I was listening to the radio this weekend and heard some equity market cheerleaders going on about how the melt-up in the stock market lifts almost everybody’s fortunes.  While I agree that it’s important not just for the top 1%—a lot of pension funds and 401(k)’s get a boost from the bull—the vast majority of the value of the stock market is held by the wealthiest households.   I’m sure that’s a big “duh” for a lot of readers but the idea that the market lifts all boats is probably more pervasive than you think. The figure below comes from wealth scholar Ed Wolff through EPI’s State of Working America (you should really just read their wealth chapter—one stop shopping for this info).  It shows who owns stock market wealth over time.  The little smudge at the bottom is the bottom 40% of households, and the middle fifth doesn’t do much better.  The top 1% holds over a third of equity market wealth and the top 10% holds about 80%. What does that mean in dollar terms?  In 2010, according to Wolff’s analysis, the stock holdings of the middle fifth were worth about $9,000.  The holdings of the top 10% were worth $500,000, and those of the top 1%: $3.5 million.

Margin Debt Soared in January; Sign of Top Nearing? -  WSJ: Need any more proof that US stock investors are positively giddy? NYSE says margin debt jumped 10% in January alone to $364 billion, 32% higher than a year earlier and the third-highest ever, trailing just June and July 2007. The previous instances, of course, came just a couple months before US stocks last topped out before the ongoing rally, with margin then peaking at $381 billion. So it’s pretty clear where the record January rush of cash into equity products came from. Now, what happens if things get a little frisky and some margin debt turns into margin calls?

Banks Bow to New York on Clawbacks - Three more top banks, including Citigroup will broaden their clawback policies to cover more executives, increase disclosures or add potential triggers. The moves increase to six the number of leading financial companies that have bowed to pressure from the New York City's Comptroller's Office. Capital One will become the first bank to make public the amount of pay it claws back from executives. The sixth-largest U.S. bank will disclose how much it recouped from errant workers, so long as the event that triggered the collection has been publicly disclosed in regulatory filings, a spokesman for Mr. Liu said. It is believed to be the first company to agree to disclose clawback dollar amounts. The agreements, which Mr. Liu's office plans to announce on Thursday, come after four months of negotiations. As comptroller, Mr. Liu oversees New York City's pension funds, which are major shareholders of the banks. In addition to Capital One and Citigroup, Wells Fargo also agreed to broaden clawback policies to cover misconduct that causes financial or reputational harm, although the Citi and Wells changes are less expansive than Capital One's, the spokesman said.

In major policy shift, scores of FDIC settlements go unannounced - Three years ago, the Federal Deposit Insurance Corp. collected $54 million from Deutsche Bank in a settlement over unsound loans that contributed to a spectacular California bank failure. The deal might have made big headlines, given that the bad loans contributed to the largest payout in FDIC history, $13 billion. But the government cut a deal with the bank's lawyers to keep it quiet: a "no press release" clause that required the FDIC never to mention the deal "except in response to a specific inquiry." The FDIC has handled scores of settlements the same way since the mortgage meltdown, a major policy shift from previous crises, when the FDIC trumpeted punitive actions against banks as a deterrent to others. Since 2007, 471 U.S. banks have failed, nearly depleting the FDIC deposit-insurance fund with $92.5 billion in losses. Rather than sue, the agency has typically preferred to settle for a fraction of the losses while helping the banks avoid bad press.

FDIC Hides “Scores” of Bank Settlements Since 2007 - Yves Smith - The FDIC has been doing banks a big favor by agreeing not to publish the fact that they’d engaged in sufficiently wayward behavior for the agency to threaten regulatory action and negotiate a settlement. The Los Angeles Times unearthed this practice via a Freedom of Information Act request: Three years ago, the Federal Deposit Insurance Corp. collected $54 million from Deutsche Bank in a settlement over unsound loans that contributed to a spectacular California bank failure.The deal might have made big headlines, given that the bad loans contributed to the largest payout in FDIC history, $13 billion. But the government cut a deal with the bank’s lawyers to keep it quiet: a “no press release” clause that required the FDIC never to mention the deal “except in response to a specific inquiry.”The FDIC has handled scores of settlements the same way since the mortgage meltdown, a major policy shift from previous crises, when the FDIC trumpeted punitive actions against banks as a deterrent to others. The FDIC’s excuse is unpersuasive. It amounts to, “well, we publicize big settlements, why bother with these?”

FDIC Secretly Settling Bank Cases For Years With 'No Press Release' Clause: Report: At the request of rule-breaking bankers, a top U.S. regulator has for years settled bank cases in secret, raising the bar on just how far regulators are willing to go to help the industry they regulate. The Federal Deposit Insurance Corp., which insures bank deposits in the U.S. and shuts down failing banks, has since 2007 repeatedly settled charges of banker wrongdoing by agreeing to "no press release" clauses that keep the settlements a secret, the Los Angeles Times reports. In one particularly glaring example, Deutsche Bank agreed to pay $54 million to quietly settle charges that its New York mortgage-banking subsidiary, MortgageIT, sold bad loans to another mortgage bank, Independent National Mortgage Corporation, a/k/a "IndyMac." IndyMac collapsed under the weight of bad mortgage loans in July 2008, a notable milestone in the financial crisis. In exchange for the settlement, the FDIC agreed not to announce the deal unless it was asked about it, the LAT writes. That was just one of "scores" of such settlements the LAT discovered through a Freedom of Information Act request that turned up 1,600 pages of documents.

Which Aspect of the FDIC’s Litigation Failures is the Most Embarrassing and Damaging? - Bill Black: On March 11, 2013 the Los Angeles Times published a revealing article by E. Scott Reckard entitled: “In major policy shift, scores of FDIC settlements go unannounced.” The article’s summary statement captures the theme nicely. “Since the mortgage meltdown, the FDIC has opted to settle cases while helping banks avoid bad press, rather than trumpeting punitive actions as a deterrent to others.” The article contains four key facts we did not know about the FDIC’s leadership and its litigation director. The only question is which of these three facts provides the most revealing insight into the disgrace that the FDIC has become. The first fact is that the banks and bank officers can now cut deals with the FDIC designed to keep their settlements secret. What that tells us is that the FDIC’s leaders are indifferent or clueless about deterrence and earning public respect for the integrity of the FDIC’s efforts to hold the officers who drove the crisis accountable. The second key fact that we learned from the article is that the size of the settlements, for some of the most culpable fraudulent mortgage lenders, is so embarrassingly low that the FDIC’s litigators and investigators have proven to be an embarrassing failure. Consider these settlements:“Many of the FDIC settlements reviewed by The Times are small, but others required larger payments from prominent lenders. Quicken Loans and GMAC’s Residential Capital unit, for example, separately agreed to pay $6.5 million and $7.5 million, respectively, over soured loans they had sold to IndyMac.”

Unofficial Problem Bank list declines to 805 Institutions - Here is the unofficial problem bank list for Mar 8, 2013.  Changes and comments from surferdude808:  The FDIC got back to closing a bank this week and terminated an action. In all, there were three removals this week that leave the Unofficial Problem Bank List at 805 institutions with assets of $296.4 billion. A year ago, the list held 956 institutions with assets of $383.4 billion. Next week, we anticipate the OCC will release its actions through mid-February 2013.

FHFA OIG Looks at Freddie Mac’s $1.2B Lehman Brothers Loss -The Federal Housing Finance Agency (FHFA) Office of Inspector General (OIG) has published an evaluation report detailing Freddie Mac's involvement in unsecured lending to Lehman Brothers just prior to that firm's bankruptcy.  The last Freddie Mac loan to that firm resulted in a loss of $1.2 billion. Prior to its filing for bankruptcy Lehman was the fourth largest investment bank in the United States with $639 billion in assets. Lehman traded and underwrote stocks and bonds, traded commodities, was active in the credit derivatives market, and became a major player in both commercial and residential securitization markets. Lehman sold mortgages to Freddie Mac and also served as one of its investment bankers. Lehman underwrote common and preferred stock offerings for Freddie Mac as well as various debt securities offerings.

Report Warns GSEs Could Lose Billions On Interest Rate Risk - Fannie Mae, Freddie Mac and the Federal Home Loan Banks face considerable risk of losing billions of dollars due to fluctuations in prevailing interest rates, according to a new report issued by the Federal Housing Finance Agency's Office of the Inspector General (FHFA OIG). "For example, an increase in interest rates of just one percentage point could expose Fannie Mae and Freddie Mac to an estimated loss of nearly $2 billion in the fair value of their assets, such as 30-year fixed-rate whole mortgages," says the report. Since Fannie Mae and Freddie Mac were placed into federal conservatorship in September 2008, the U.S. Department of the Treasury and the FHFA required them to reduce their portfolios to $250 billion each. However, the FHFA OIG report cites new challenges based on their shrinking mortgage portfolios. "Specifically, they contain a relatively high percentage of distressed assets, including delinquent mortgages," the report says. "It is difficult to estimate how such assets may respond to interest rate fluctuations and, therefore, it is a challenge to discern how to use derivatives to limit potential losses." The report also notes that the Federal Home Loan Banks also face interest rate risks due to their large mortgage asset portfolios.

Less Than 4 Percent of Lenders ‘Acceptable’ According To New Risk Assessment Tool - Risk profiling of mortgage license holders was one of the focuses of 2012 activity by the Multi-State Mortgage Committee (MMC) of the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators.  The committee issued a report on Friday detailing its 2012 activities which also included participation in work leading up to the $25 billion National Mortgage Servicing Settlement.   Committee Chairman Charlie Fields said the MMC's Risk Profiling Group (RPG) has been working on a risk profiling tool designed to assess an institution's risk against its peer group based on an analysis of Mortgage Call Report (MCR) data.  A risk analysis of 281 companies holding licenses in more than 15 states resulted in an unexpected result.  Only 10 of the 281 companies had data integrity high enough to be considered acceptable for profiling purposes.  These data quality concerns warranted notice to those companies informing them that they needed to rectify their filings, as they were in violation of state laws implementing the federal SAFE Act. The MMC also sent a letter to each mortgage regulator informing them of the issue.  The majority of the companies immediately responded and ultimately filed amended call reports of improved quality.  The RPG also concluded that the metric scheme it developed to identify effective risk weights appears to be quite accurate. 

Nationstar Suit Questions Servicer’s Authority to Sell Mortgage Notes - A justice for New York’s Supreme Court has ordered Nationstar to stop the auction of some of its mortgage notes through KIRP LLC, a major investor in six residential mortgage-backed security trusts sponsored by Residential Accredit Loans, filed a complaint against Nationstar over its selling of non-performing loans backing securities.  Nationstar held two two-day auctions on February 19 and March 4. A third was scheduled for March 11, but Justice Eileen Bransten authorized a temporary restraining order to stop the final sale and transfer of loans and to prevent further auctions. In its filing for a restraining order, KIRP argues that as master servicer, Nationstar has the authority to foreclose or modify the loans, not to sell them.  The memorandum goes on to note that the loans auctioned off were sold at steep discounts, causing financial harm to investors. “It appears from the prices posted on the website that the bulk auction sales, not surprisingly, resulted in sales of the loans at significant discounts,” the filing reads. “Plainly, Nationstar’s dumping of Trust assets in bulk at fire sale prices through a two-day internet auction is not an act taken “in the best interests of the Certificateholders.”

Wells Fargo Typo Victim Dies in Court - On the morning of Dec. 19, 2012, in a Torrance courtroom, Larry Delassus' heart stopped as he watched his attorney argue his negligence and discrimination case against banking behemoth Wells Fargo. His death came more than two years after Wells Fargo mistakenly mixed up his Hermosa Beach address with that of a neighbor in the same condo complex. The bank's typo led Wells Fargo to demand that Delassus pay $13,361.90 ­— two years of late property taxes the bank said it had paid on his behalf in order to keep his Wells Fargo mortgage afloat. But Delassus didn't owe a penny in taxes. One of his neighbors, whose condo "parcel number" was two digits different from Delassus', owed the back taxes.

Lawler: Table of Short Sales and Foreclosures for Selected Cities in February - Economist Tom Lawler sent me the table below of short sales and foreclosures for several selected cities in February.   Look at the right two columns in the table below (Total "Distressed" Share for Feb 2013 compared to Feb 2012). In every area that has reported distressed sales so far, the share of distressed sales is down year-over-year - and down significantly in most areas.   Also there has been a decline in foreclosure sales just about everywhere. Look at the middle two columns comparing foreclosure sales for Feb 2013 to Feb 2012. Foreclosure sales have declined in all these areas, and some of the declines have been stunning (the Nevada sales were impacted by the new foreclosure law).  Also there has been a shift from foreclosures to short sales. In all of these areas, short sales now out number foreclosures. I think this is important: Imagine that the number of total existing home sales doesn't change over the next year - some people would argue that is "bad" news and the housing market isn't recovering. But also imagine that the share of distressed sales declines 20%, and conventional sales increase to make up the difference. That would be a positive sign - and that is what appears to be happening.

Sharp Drop in US Homes Lost to Foreclosure in February -While the nation’s foreclosure woes persist, new data show they’re easing amid a resurgent housing market, rising home prices and efforts by some states to buy homeowners more time to avoid losing their homes. The number of U.S. homes repossessed by lenders last month fell 11 percent from January and declined 29 percent from February last year, tumbling to the lowest level since September 2007, foreclosure listing firm RealtyTrac Inc. said Thursday. Some states continued to see sharp increases in homes lost to foreclosure last month, including Washington, Wisconsin and Iowa. But home repossessions declined both on an annual and monthly basis in a majority of states, including past foreclosure hotbeds such as California, Georgia and Arizona. All told, 45,038 U.S. homes completed the foreclosure process in February. That’s less than half of the 102,000 homes lost to foreclosure in March 2010, when home repossessions peaked, according to the firm’s records, which go back to January 2005.

FHFA: Over 1 Million HARP Refinances in 2012 - Note: HARP is the program that allows borrowers with loans owned or guaranteed by Fannie Mae or Freddie Mac - and with high loan-to-value (LTV) ratios - to refinance at low rates.  Fannie or Freddie are already responsible for the loan, and allowing the borrower to refinance lowers the default risk. From the FHFAThe Federal Housing Finance Agency (FHFA) today released its December 2012 Refinance Report, which shows that with the number of mortgages refinanced through the Home Affordable Refinance Program (HARP) in the fourth quarter, nearly 1.1 million HARP refinances were completed in 2012 and nearly 2.2 million were completed since HARP was implemented in April 2009. The 2012 HARP performance surpassed previous estimates for the program...In December, 25 percent of loans refinanced through HARP had loan-to-value ratios greater than 125 percent. In December, 18 percent of HARP refinances for underwater borrowers were for shorter-term 15- and 20-year mortgages, which build equity faster than traditional 30-year mortgages.  Note: the automated system wasn't released until the end of March - and there were some issues with that system - so HARP refinances didn't really pickup until sometime in Q2. This program saw more participation than most analysts expected (I was more optimistic). These "underwater" borrowers are current (most took out loans 5 to 7 years ago), and they will probably stay current with the lower interest rate.

MBA: Mortgage Applications decrease, Mortgage Rates highest since August 2012 - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey - The Refinance Index decreased 5 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. “The announcement of stronger than anticipated job growth last week led to an increase in interest rates, with the 30 year fixed mortgage rate in our survey reaching the highest level in more than six months,” The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.81 percent, the highest rate since August 2012, from 3.70 percent, with points remaining unchanged at 0.39 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. emphasis added The first graph shows the refinance index. There has been a sustained refinance boom for over a year, and 76 percent of all mortgage applications are for refinancing. Refinance activity will probably slow in 2013. The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index has generally been trending up (slowly) over the last six months.

Freddie Mac: Mortgage Rates increase in latest Survey - From Freddie Mac today: Mortgage Rates up on Signs of Improving Economy - The 30-year fixed averaged 3.63 percent, its highest reading since the week of August 23, 2012. The 30-year fixed hit its average all-time record low of 3.31 percent the week of November 21, 2012. ... 30-year fixed-rate mortgage (FRM) averaged 3.63 percent with an average 0.8 point for the week ending March 14, 2013, up from last week when it averaged 3.52 percent. Last year at this time, the 30-year FRM averaged 3.92 percent.  15-year FRM this week averaged 2.79 percent with an average 0.8 point, up from last week when it averaged 2.76 percent. A year ago at this time, the 15-year FRM averaged 3.16 percent. This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®. Here is an update to an old graph - by request - that shows the relationship between the 10 year Treasury Yield and 30 year mortgage rates.   Currently the 10 year Treasury yield is 2.02% and 30 year mortgage rates are at 3.63%.  If the ten year yield stay in this range, 30 year mortgage rates might move up a little from here. The third graph shows the 15 and 30 year fixed rates from the Freddie Mac survey since the Primary Mortgage Market Survey® started in 1971 (15 year in 1991).

Freddie Mac: Mortgage rates jump; 30-year fixed averages 3.63% - Mortgage rates moved sharply higher this week, with Freddie Mac pegging the typical rate on a 30-year fixed loan at 3.63%, up from 3.52% last week and 3.31% last fall when it set an all-time record low. Freddie Mac's weekly survey of what lenders are offering to solid borrowers showed the average 15-year fixed mortgage rate rose from 2.76% last week to 2.79%. Borrowers would have paid 0.8% of the loan amount in upfront lender fees to obtain the rates. Stronger-than-expected growth in jobs and consumer spending were factors, Freddie Mac said in releasing the report Thursday. The economy added 236,000 new workers in February while retail sales rose by 1.1%, well above expectations, Freddie's chief economist, Frank Nothaft, said. With stock investors sending the Dow Jones industrial average to record highs, demand for bonds was falling. The consequence: generally rising interest rates, with the yield on the 10-year Treasury note at 2.06% Thursday morning, matching its closing high for 2013.

30-Year Fixed Mortgage Rates Surged to 9 Month High; Current Rate is 3.55%, According to Zillow Mortgage Rate Ticker - The 30-year fixed mortgage rate on Zillow(R) Mortgage Marketplace is currently 3.55 percent, up 18 basis points from 3.37 percent at this same time last week. The 30-year fixed mortgage rate peaked at 3.58 percent over the weekend, dropping to the current rate this morning. "Mortgage rates surged to their highest level in 9 months in response to an unexpectedly strong jobs report," said Erin Lantz, director of Zillow Mortgage Marketplace. "This coming week, we expect rates to gradually drift upwards on continued improvement in economic growth and consumer confidence." Zillow's real-time mortgage rates are based on thousands of custom mortgage quotes submitted daily to anonymous borrowers on the Zillow Mortgage Marketplace site, and reflect the most recent changes in the market. These are not marketing rates, or a weekly survey. The rate for a 15-year fixed home loan is currently 2.7 percent, while the rate for a 5-1 adjustable-rate mortgage (ARM) is 2.3 percent.

Report: Housing Inventory declines 16% year-over-year in February - From Spring Home Buying Season Starts Early According to®'s February Trend Data In February, the total number of single-family homes, condos, townhomes and co-ops for sale in the U.S. (1,494,218) increased by 1.15 percent month-over-month. On an annual basis, however, inventory was down by 15.97 percent. The median age of inventory of for sale listings fell to 98 days in February, down 9.26 percent from January and 11.71 percent below the median age one year ago (February 2012). Nearly all of the markets with the largest year-over-year declines in their for sale inventories in February were in California, where declines averaged 48 percent. The list includes Sacramento, Stockton, Oakland, San Jose, Orange County, Los Angeles, Seattle, San Francisco, Riverside and Ventura. These markets also experienced a dramatic decline in the median age of inventory, falling to an average of just 31 days, or 53 percent lower than it was one year ago.  Note: reports the average number of listings in a month, whereas the NAR uses an end-of-month estimate. Since inventory usually starts to come back on the market early in the year, the NAR will probably report a larger month-to-month increase in inventory for February than Inventory decreased year-over-year in 141 of the 146 markets tracks, and by more than 20% year-over-year in 43 markets.

Existing Home Inventory is up 5.0% year-to-date on March 11th - Weekly Update: One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'm tracking inventory weekly this year.In normal times, there is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer. The NAR data is monthly and released with a lag.  However Ben at Housing Tracker (Department of Numbers) kindly sent me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year. In 2010 (blue), inventory followed the normal seasonal pattern, however in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year. So far - through March 11th - it appears inventory is increasing at a sluggish rate. Housing Tracker reports inventory is down -22.7% compared to the same week in 2012 - still falling fast year-over-year.

Blackstone Said to Get $2.1 Billion Loan for Home Purchases -  Blackstone Group LP (BX), manager of the largest real estate private-equity fund, has expanded a credit line to buy single-family homes to $2.1 billion from $600 million, according to a person with knowledge of the deal. Deutsche Bank AG (DBK) leads the syndicate of banks, said the person, who asked not to be named because the loan is private. Other lenders include Bank of America Corp., Credit Suisse Group AG (CSGN), Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) Blackstone has invested $3.5 billion to buy 20,000 single- family rental homes since last year, making the New York-based company the largest investor of its type in the U.S. The firm is rushing to acquire properties as housing prices recover and as demand for rentals increases among people who can’t qualify for a mortgage or don’t want to own. Blackstone spokesman Peter Rose and Deutsche Bank spokeswoman Renee Calabro declined to comment. The firm had been trying to increase the loan to $1.2 billion.

FNC: Residential Property Values increased 5.7% year-over-year in January - From FNC: FNC Index: January Home Prices Rise 0.3% The latest FNC Residential Price Index® (RPI) indicates that U.S. property values continued to recover through January—the 11th consecutive month of rising prices. Despite the uneven pace of price gains across different geographical markets, there are clear signs that the housing recovery is increasingly widespread. A limited housing supply and declining foreclosure sales are contributing to the recovery of underlying property values. The average list-to-sale price ratio increased to 93.5 in January, compared to 90.3 during the same period a year ago; in other words, the average asking price discount dropped to 6.5% from 9.7%. Foreclosures, as a percentage of total home sales, were 20.2% in January, down from 26.9% a year ago.  Based on recorded sales of non-distressed properties (existing and new homes) in the 100 largest metropolitan areas, the FNC 100-MSA composite index shows that January home prices rose 0.3% from the previous month and were up 5.7% on a year-over-year basis from the same period in 2012. The 30-MSA and 10-MSA composite indices show similar trends of rising prices, with the 10-MSA composite accelerating more rapidly at 0.8% month-over-month and 7.2% year-over-year. The year-over-year change continued to increase in January, with the 100-MSA composite up 5.7% compared to January 2012. The FNC index turned positive on a year-over-year basis in July, 2012. This graph shows the year-over-year change for the FNC Composite 10, 20, 30 and 100 indexes. Note: The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals.

Q4 2012: Mortgage Equity Withdrawal less negative - The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW", but there is little MEW right now - and normal principal payments and debt cancellation. For Q4 2012, the Net Equity Extraction was minus $34 billion, or a negative 1.1% of Disposable Personal Income (DPI). This is the smallest negative "MEW" since Q1 2009. This is not seasonally adjusted.This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.  There are smaller seasonal swings right now, perhaps because there is a little actual MEW (this is heavily impacted by debt cancellation right now). The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined slowly in Q4. Mortgage debt has declined by $1.2 trillion since the peak. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance. With residential investment increasing, and a slower rate of debt cancellation, it is possible that MEW will turn positive again in the next few quarters.

Yes, We’re Confident, but Who Knows Why, by Robert Shiller: The recovery in housing, the stock market and the overall economy has finally gained sustainable momentum — or so it is said. That opinion seems to be based on several salient facts. Unemployment has been declining, from 10.0 percent in October 2009 to 7.7 percent last month. More spectacularly, the stock market has more than doubled since 2009 and has been especially strong for the last six months, with the Dow Jones industrial average reaching record closing highs last week and the S.& P. 500 flirting with superlatives, too.  These vital signs make many people believe that we’ve turned the corner on the economy... Hope is a wonderful thing.  For years, I’ve been troubled by the problem of understanding the social psychology and economic impact of confidence. There hasn’t been much research into the emotional factors and the shifts in worldview that drive major turning points. The much-quoted consumer sentiment and confidence indexes don’t yet seem able to offer insight into what’s behind the changes they quantify. It also isn’t clear which factors of confidence drive the separate parts of the economy.  But public thinking is inscrutable. We can keep trying to understand it, but we’ll be puzzled again the next time the markets or the economy make major moves.

Commercial Real Estate Pricing Levels Off in January Following Year-End Surge - This month's CoStar Commercial Repeat Sale Indices (CCRSI) provide the market's first look at January 2013 commercial real estate pricing. Based on 703 repeat sales in January 2013 and more than 100,000 repeat sales since 1996, the CCRSI offers the broadest measure of commercial real estate repeat sales activity.  The U.S. Value-Weighted Composite Index, which weights each repeat-sale by transaction size or value (and therefore is heavily influenced by larger transactions), ticked up by 0.7% in January, and has now increased 38% from its trough in 2010. The U.S. Equal-Weighted Composite Index, which weights each repeat-sale by transaction equally (and therefore is heavily influenced by numerous smaller transactions), began 2013 with a 2.9% monthly loss, largely due to a seasonal slowdown in trading activities after the year-end sales surge. However, thanks to its steady recovery throughout 2012, the equal-weighted index has increased 5.5% since January 2012.

Wealth, Spending and the Economy - The Federal Reserve Board last week released the latest data on national wealth. Economists were gratified to see that the net worth of Americans is very nearly back — less of a tenth of 1 percent — to where it was before the 2007 crash. At the end of that year and at the end of 2012, net national wealth was just over $66.1 trillion. The rising stock and housing markets are the primary reasons, but so is the decline in debt, which is down $822 billion since 2007.  This generally good news, however, masks the fact that the benefits of rising wealth have not been equally shared. As one can see in the table, which is based on gross assets, there has been a significant change in the composition of assets. Much more is now held in the form of such financial assets as stocks and bonds and much less in nonfinancial assets, principally home equity. Obviously, this has important distributional implications because the average middle-class family has the bulk of its wealth tied up in its home. According to the Fed, the gross value of household real estate is $5 trillion below its precrash peak: $17.7 trillion in 2012 compared with $22.7 trillion in 2006. Depressingly, the gross value of household real estate is up only about $1.4 trillion over the last year despite a 7.3 percent increase in home prices, according to the widely followed Case-Shiller Index. The nation will need to do that well annually for another three years before beleaguered homeowners are back to where they were in 2006 in terms of housing wealth.

Americans’ Debt Payments Hit Three-Decade Low - Americans’ debt payments are at their lowest level in decades. U.S. households spent 10.4% of their after-tax income on debt payments in the final three months of 2012 compared with 10.6% a quarter earlier, the 15th straight decrease and the lowest level since government tracking started in 1980, according to recently released Federal Reserve figures. Families’ debt obligations are well below their average since 1980 of 11.9%. If you include other payments that aren’t classified as debt — like rent and auto leases — the figure rises to 15.5%, but that’s still the lowest since 1981. The report is the latest proof the American consumer is finally putting the recession in the rear-view mirror. Smaller debt payments mean Americans’ paychecks can go further — allowing them to spend more on goods and services. That demand, in turn, fuels hiring and economic growth. Last month, consumer spending rose an unexpected 0.4% excluding volatile items like cars, gasoline and building materials — despite paltry income growth, rising gasoline prices and higher taxes.

Household deleveraging continues, hits new record low - The Federal Reserve's report on household debt burdens was released last week, covering the July - September quarter. According to the bank, The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.  The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio. Both measures declined substantially, after a relative pause about a year ago for several quarters. I've combined the two measures into a single graph: Both debt service payments (blue line) and total household onligations (red line) are now less than at any time since 1984. While in recent quarters the rate of decrease has slowed, debt service payment are now only 0.1% above their all time low.  Earlier this year CNBC reported that : U.S. home owners are refinancing their mortgages at the fastest clip since 2005, but the difference now is they are putting cash in, not taking it out.  At the going rate, 25 percent of all first-lien U.S. mortgages will be refinanced this year, according to LPS Applied Analytics. That represents about $7.1 billion —just through June of this year — in savings on monthly payments, This equates to about 0.6% of all retail spending per month.

You Say You’re a Homeowner and Not a Renter? Think Again. - Atlanta Fed's macroblog - As we’ve said before, we’re suckers for cool charts. The latest that caught our eye is the following one, originally created by the U.S. Bureau of Labor Statistics (BLS). It highlights the relative importance assigned to the various components of the consumer price index (CPI) and shows where increases in the index have come from over the past 12 months. It probably won’t surprise anyone that the drop in gasoline prices (found in the transportation component) exerted downward pressure on the CPI last year, while the cost of medical care pushed the price index higher. What might surprise you is the size of that big, blue square labeled “housing.” Housing accounts for a little more than 40 percent of the CPI market basket and, given its weight, any change in this component significantly affects the overall index. This begs the question: In light of the recent strength seen in the housing market—and notably the nearly 10 percent rise in home prices over the past 12 months—are housing costs likely to exert more upward pressure on the CPI? Before we dive into this question, it’s important to understand that home prices do not directly enter into the computation of the CPI (or the personal consumption expenditures [PCE] price index, for that matter). This is because a home is an asset, and an increase in its value does not impose a “cost” on the homeowner. But there is a cost that homeowners face in addition to home maintenance and utilities, and that’s the implied rent they incur by living in their home rather than renting it out. In effect, every homeowner is his or her own tenant, and the rent they forgo each month is called the “owners’ equivalent rent” (or OER) in the CPI.

CPI increases 0.7% in February, Core CPI 0.2%, NY Fed Manufacturing indicates expansion - From the Bureau of Labor Statistics (BLS): Consumer Price Index - February 2013 - The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.7 percent in February on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment. The gasoline index rose 9.1 percent in February to account for almost three-fourths of the seasonally adjusted all items increase....The index for all items less food and energy increased 0.2 percent in February. On a year-over-year basis, CPI is up 2.0 percent, and core CPI is up also up 2.0 percent.  Both are at the Fed's target. This was above the consensus forecast of a 0.5% increase for CPI (due to gasoline prices), and a 0.2% increase in core CPI.  From the NY Fed: Empire State Manufacturing Survey The general business conditions index was positive for a second consecutive month and, at 9.2, was little changed. ... Employment indexes suggested that labor market conditions were sluggish, with little change in employment levels and the length of the average workweek. Indexes for the six-month outlook pointed to an increasing level of optimism about future conditions, with the future general business conditions index rising to its highest level in nearly a year.

Inflation Comes in Higher Than Expected, Mostly Because of Gasoline -  The Bureau of Labor Statistics released the latest CPI data this morning. Year-over-year unadjusted Headline CPI came in at 1.98%, which the BLS rounds to 2.0%, up from 1.59% last month (rounded to 1.6%). Year-over year-Core CPI (ex Food and Energy) came in at an even 2.00%, up slightly from last month's 1.93%. Here is the introduction from the BLS summary, which leads with the seasonally adjusted data monthly data: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.7 percent in February on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment.  The gasoline index rose 9.1 percent in February to account for almost three-fourths of the seasonally adjusted all items increase. The indexes for electricity, natural gas, and fuel oil also increased, leading to a 5.4 percent rise in the energy index. The food index increased slightly in February, rising 0.1 percent. A sharp increase in the fruits and vegetables index was the major cause of the 0.1 percent increase in the food at home index, with other major grocery store food group indexes mixed.  The index for all items less food and energy increased 0.2 percent in February. The indexes for shelter, used cars and trucks, recreation, and medical care all rose in February. These increases more than offset declines in the indexes for new vehicles, apparel, airline fares, and tobacco.  The all items index increased 2.0 percent over the last 12 months compared to a 1.6 percent increase for the 12 months ending January. The index for all items less food and energy also increased 2.0 percent over the last 12 months. The energy index increased 2.3 percent and the food index rose 1.6 percent.  More... The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.

Gas Spike Drives US Consumer Prices Up 0.7 Percent - A spike in gas prices drove a measure of U.S. consumer costs up in February by the most in more than three years. But outside the gain in fuel costs, inflation was mostly modest. The consumer price index increased a seasonally adjusted 0.7 percent last month from January, the Labor Department said Friday. It was the biggest monthly rise since June 2009. Still, three-fourths of the increase in the index reflected a 9.1 percent surge in gas prices. That was also the largest monthly gain since June 2009. Gas prices had fallen in the previous four months. Since last month’s increase gas price have started to decline again. For the 12 months that ended in February, prices increased 2.0 percent. That’s in line with the Federal Reserve’s inflation target. Excluding volatile food and energy costs, core inflation rose just 0.2 percent in February. Over the past 12 months, core prices have risen just 2 percent.

Consumer prices soar, but inflation is in check -  U.S. consumer prices recorded their largest increase in nearly four years in February as the cost of gasoline surged, but details of the report on Friday showed no sign of a pickup in inflation to trouble the Federal Reserve. The Labor Department said its consumer price index, increased 0.7 percent last month, the largest gain since June 2009, after being flat in January. Gasoline accounted for about three quarters of the spike in consumer inflation. Economists polled by Reuters had expected the CPI to advance 0.5 percent. In the 12-months through February, consumer prices rose 2.0 percent, the largest gain since October. They had increased 1.6 percent in January. Fed officials are likely to dismiss the gasoline-driven jump in price pressures as temporary when they meet next week to evaluate the economy. Gasoline rose 9.1 percent, the largest gain since June 2009, after falling 3.0 percent in January. Gas prices at the pump, however, have declined in the past two weeks. Excluding food and energy, consumer prices rose 0.2 percent slowing from January's 0.3 percent advance.

CPI Jumps 0.7% on High Gas Prices for February 2013 - The February Consumer Price Index jumped 0.7% from January.  CPI measures inflation, or price increases.  The culprit is gas prices again, which skyrocketed 9.1% for the month and is 75% of the monthly increase.  This is the biggest monthly jump in CPI since June 2009.    Take food and energy items out of the index and CPI actually rose 0.2% from January.   Energy overall increased 5.4% and wouldn't it be nice to see stable gas prices instead of this never ending gasoline roller-coaster ride. CPI is now up 2.0% from a year ago as shown in the below graph.   Gas prices even hurt the year ago inflation rate as last month the year ago change was 1.6%. Core inflation, or CPI minus food and energy items, increased 0.2% for February.  Core inflation has risen 2.0% for the last year.  Core CPI is one of the Federal Reserve inflation watch numbers and 2.0% is their boundary figure.   The last word from the Fed is they will continue quantitative easing, which usually increases commodity prices and explains the soaring stock market. Core CPI's monthly percentage change is graphed below.  Last month core inflation increased 0.3%, the largest increase since May 2011.  The ten year average for core inflation has been a 1.9% anual increase. Core inflation's increase seems to be across the board again.    Shelter increased 0.2% and is up 2.2% for the year.  The shelter index is comprised of rent, the equivalent cost of owning a home, hotels and motels.  Rent increased 0.3% and lodging away from home, or motels, hotels jumped 1.2% for the month.  Airfares decreased -0.3% after five months of consecutive increases.    Used cars and trucks jumped by 0.8% while new autos declined by -0.3%, the largest drop since January 2010.  Graphed below is rent, where cost increases hits people who can least afford it most.

Inside the Consumer Price Index - Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I'll refer to hereafter as the CPI. The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes the lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses. For a complete breakdown and relative weights of all the subcategories of the eight categories, here is a useful link.  The chart below shows the cumulative percent change in price for each of the eight categories since 2000. Not surprisingly, Medical Care has been the fastest growing category. At the opposite end, Apparel has actually been deflating since 2000. Another unique feature of Apparel is the obvious seasonal volatility of the contour.  Transportation is the other category with high volatility — much more dramatic and irregular than the seasonality of Apparel. Transportation includes a wide range of subcategories. The volatility is largely driven by the Motor Fuel subcategory. For a closer look at gasoline, see my weekly gasoline updates. The BLS does not lump energy costs into an expenditure category, but it does include energy subcategories in Housing in addition to the fuel subcategory in Transportation. Also, energy costs are indirectly reflected in expenditure changes for goods and services across the CPI.

Producer Price Index: Third Month of Headline Increase - Today's release of the February Producer Price Index (PPI) for finished goods shows a month-over-month increase of 0.7%, seasonally adjusted, in Headline inflation. Core PPI rose 0.2%. had posted a MoM consensus forecast of 0.6% for Headline and 0.2% for Core PPI.  MoM Headline PPI has risen in 2013: -0.3% in January,0.2% in February and 0.7% in February. Year-over-year Headline PPI is up 1.8% and Core PPI is up 1.7%. Here is the essence of the news release on Finished Goods: In February, the advance in finished goods prices was led by the index for finished energy goods, which rose 3.0 percent. Also contributing to the increase in finished goods prices, the index for finished goods less foods and energy moved up 0.2 percent. By contrast, prices for finished consumer foods fell 0.5 percent.  Finished energy: The index for finished energy goods climbed 3.0 percent in February after four straight decreases. Gasoline prices accounted for most of this advance, jumping 7.2 percent. The indexes for home heating oil and diesel fuel also were factors in the increase in finished energy goods prices. (See table 2.)  Finished core: The index for finished goods less foods and energy rose 0.2 percent, the fourth consecutive advance. About twenty percent of the February increase can be traced to prices for pharmaceutical preparations, which moved up 0.2 percent. An advance in the index for plastic products also contributed to higher prices for finished goods less foods and energy.  Finished foods: Prices for finished consumer foods declined 0.5 percent in February subsequent to moving up 0.7 percent in the previous month. The index for fresh and dry vegetables accounted for most of the decrease, falling 18.0 percent.   More... Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, the YoY trend in Core PPI (the blue line) declined significantly during 2009 and stabilized in 2010, increase in 2011 and then began falling in 2012. Now, in early 2013, the YoY rate is about the same as in early 2011.

Weekly Gasoline Update: Regular Down a Nickel - It's time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Following up on the previous week's two cent decline, gasoline prices fell again last week. Rounded to the penny, the average for Regular dropped a nickel and Premium four cents. This is the second decline after eleven weeks of price rises. According to, three states, Hawaii and California and Alaska are averaging above $4.00 per gallon, unchanged from last week. Two states (New York and Connecticut) and Washington DC are averaging above $3.90, also unchanged from a week ago. Last week Business Insider featured a chart illustrating the gasoline price trend over the course of a year. However, if we dig into EIA the data, we find that over the past 20 years, the weekly high for the average retail price of all gasoline formulations occurred in May seven times, in August four times, twice in November and once January, April, June, July, September, October and December. February and March don't make the list. If history is a guide, we can expect that 2013 peak prices lie ahead.

Gas and Stock Prices: Tied Together By Speculators? - Yves Smith - If you are old enough to remember the 1970s, the idea that gasoline and stock prices would be correlated seems bizarre. The oil shock years brought stagflation, gas rationing, and a major bear market. And some economists, James Hamilton in particular, believe that the oil price runup of 2008, which helped push retail gas prices in the US over the then-critical $4 a gallon threshold, is what pushed over-levered consumers over the edge and produced the terminal phase of the financial crisis. If you hew to Hamilton’s view, that provides further support to the idea that gas prices should be negatively, or at least not strongly positively, related to stock prices. John Harvey at Forbes (hat tip Philip Pilkington) uses the following chart to show that the reverse is true, that for over a decade, stocks and gas prices have moved in synch:

U.S. Retail Sales Up Solid 1.1% in February — Americans spent at the fastest pace in five months in February, boosting retail spending 1.1 percent compared with January. About half the jump reflected higher gas prices, but even excluding gas purchases, retail sales rose 0.6 percent. The report Wednesday from the Commerce Department showed that Americans kept spending last month despite higher Social Security taxes that took effect this year. The retail sales report is the government’s first look each month at consumer spending, which drives about 70 percent of economic activity. Core retail sales, which exclude the volatile categories of gas, autos and building supply stores, rose 0.4 percent in February compared with January. Economists were encouraged by the stronger-than-expected gain in retail sales. Some said the increase means the economy may be growing faster in the January-March quarter than they had forecast.

Retail Sales increased 1.1% in February - On a monthly basis, retail sales increased 1.1% from January to February (seasonally adjusted), and sales were up 4.6% from February 2012. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for February, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $421.4 billion, an increase of 1.1 percent from the previous month and 4.6 percent (±0.7%) above February 2012. ...The December 2012 to January 2013 percent change was revised from +0.1 percent to +0.2 percent. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 27.2% from the bottom, and now 11.2% above the pre-recession peak (not inflation adjusted) Retail sales ex-autos increased 1.0%. Retail sales ex-gasoline increased 0.6%. Excluding gasoline, retail sales are up 23.5% from the bottom, and now 11.0% above the pre-recession peak (not inflation adjusted). The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 4.8% on a YoY basis (4.6% for all retail sales). This was above the consensus forecast of a 0.5% increase. Although higher gasoline prices boosted sales, retail sales ex-gasoline increased 0.6% - suggesting some pickup in the economy in February.

Retail Sales Increase 1.1% on Gas and Autos for February 2013 - February 2013 Retail Sales increased, by 1.1%.   Gasoline sales shot up 5.0% from January on higher prices. If one removes gasoline sales from retail sales, overall the increase from January would have been 0.6%.  Auto sales increased 1.1% and minus all autos & parts but including gas sales, retail sales increased 1.0% from last month.  This report should alleviate Wall Street's worries people are so tapped out they have stopped spending.    It didn't happen, yet.    Retail sales are reported by dollars, not by volume with price changes removed. For the three month moving average, from December to February in comparison to September to November, retail sales have increased 1.3%.  The retail sales three month moving average in comparison to a year ago is up 4.5%.  Retail trade sales are retail sales minus food and beverage services.  Retail trade sales includes gas, and is up 1.3% for the month, up 4.7% from last year. Total retail sales are $421.4 billion for February. Below are the retail sales categories monthly percentage changes.  These numbers are seasonally adjusted.  General Merchandise includes super centers, Costco and so on.  Online shopping making increasing gains, increasingly important in overall retail sales. Nonstore retail sales have increased 15.7% from last year.  Autos sales have increased 8.8% from a year ago.Gasoline station sales have increased 3.6% from one year ago.  Sporting goods, hobbies, books & music sales have increased 3.9% from last year.  Autos & parts sales overall have increased 7.8% from last year.  The ones that are hurting are Departments stores.  Their retail sales are down -3.8% from February 2012 with general merchandise stores overall are down -1.6% from a year ago.  Building materials, garden sales, which are large by volume, have increased 4.5% from a year ago.  Grocery stores have increased sales by 3.2% from this time last year.   Below are the February retail sales categories by dollar amounts.  

Retail Sales: The Shoppers Are Back! - The Advance Retail Sales Report released this morning shows that sales in February came in at 1.1% month-over-month. Today's number more than doubled the consensus forecast of 0.5%. The expiration of the 2% FICA tax cut contributed to weak January sales, but February has come roaring back. Now let's dig a bit deeper into the "real" data, adjusted for inflation and against the backdrop of our growing population. The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. I've highlighted recessions and the approximate range of two major economic episodes. Here is the same chart with two trendlines added. These are linear regressions computed with the Excel Growth function.  The green trendline is a regression through the entire data series. The latest sales figure is 4.1% below the green line end point.The blue line is a regression through the end of 2007 and extrapolated to the present. Thus, the blue line excludes the impact of the Financial Crisis. The latest sales figure is 16.7% below the blue line end point. We normally evaluate monthly data in nominal terms on a month-over-month or year-over-year basis. On the other hand, a snapshot of the larger historical context illustrates the devastating impact of the Financial Crisis on the U.S. economy.

February Retail Sales: The Strongest Gain In 5 Months - Retail sales increased at a faster pace in February, advancing 1.1% over January—the most since last September, on a seasonally adjusted basis, the Census Bureau reports. The gains were broad based, with most of the subsectors of sales showing positive monthly comparisons. The upbeat news extends to the crucial year-over-year measure as well, with retail sales climbing 4.6% for the 12 months through February, noticeably faster than January’s 4.2% annual pace. The message here is that consumer spending continues to rise at a modest rate, implying that economic momentum generally is still trending positive.Stripping out gasoline sales pares last month’s gain to roughly 0.6%, but even after that adjustment it’s clear that spending in February picked up. None of this would mean much if the annual rate was tumbling. But that's not the case either: retail sales continue to show a fair amount of stability for growth in the 4%-to-5% range lately. Overall, February is shaping up as another decent month for economic news. Friday’s payrolls report certainly looked encouraging, as did last week’s jobless claims update, which showed the four-week average of new filings for unemployment benefits at a five-year low.  

Analysis: Consumer Holding Up, Supporting Growth - U.S. retail sales jumped in February, driven largely by higher gasoline prices and stronger auto sales. Retail and food-service sales rose 1.1% to a seasonally adjusted $421.40 billion, the Commerce Department said Wednesday, marking the fourth-straight monthly gain and biggest rise since September. The figure was up 4.6% from a year ago. IHS Global Insight Chief Economist Nariman Behravesh discusses the report with the Wall Street Journal Online’s Jim Chesko.

Tax Refunds Rev Up Retail Sales -  Shrugging off tax increases and fiscal squabbles, U.S. consumers went shopping last month. But their source of funds suggests the spree can’t continue for long. Beating expectations, retail sales jumped 1.1% in February. While higher gasoline prices clearly had an effect–gas station sales surged 5%–they weren’t the entire story. Non-gas store receipts increased a solid 0.6%. What’s behind the spending binge? Chalk some of the gain to better labor markets. Aggregate weekly payrolls (encompassing average pay, work time and total employment) jumped 1.1% last month.

US Retail Sales Increase Sharply - From the Census Bureau: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for February, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $421.4 billion, an increase of 1.1 percent (±0.5%) from the previous month and 4.6 percent (±0.7%) above February 2012. Total sales for the December 2012 through February 2013 period were up 4.5 percent (±0.5%) from the same period a year ago. The December 2012 to January 2013 percent change was revised from +0.1 percent (±0.5%)* to +0.2 percent (±0.3%)*. Let's look at some of the data:The chart above shows that without autos, retail sales increased 1% last month,  In addition, autos sales increased 1.1% -- a strong showing and a very important development.  Consider the following chart:Above is a scatterplot chart graphing the year over year percentage change in real retail sales with real GDP.  What we see is that when real retail sales increase on a year over year basis, the year over year percentage change in real GDP will probably be positive as well.  I've averaged the monthly retail sales numbers into quarterly numbers to coordinate them with the quarterly GDP numbers.

Digging Behind The February Retail Sales Report --Sometimes you just have to scratch your head and go "hmm." That was my first reaction to the most recent release of the retail sales numbers for February, which came in stronger than expected in both the headline print (+1.1%, on expectations of a +0.5% rise), the Ex-Autos (+1.0%, Exp. 0.5%), and the Ex-autos and gas (0.4%, Exp. 0.2%). While this is certainly optimistic news that the consumer is "out there spending," which is crucially important for an economy that is 70% based on consumption, it doesn't really tell us much about where consumers are actually spending money or the trend of data overall. I wrote an article on employment recently entitled "Seasonal Adjustments Are B.S." wherein I discussed the problems, and subsequent obfuscation, with the use of seasonal adjustments to smooth out otherwise volatile monthly data. I showed in that article that by using a simple 12-month average of the non-seasonally adjusted data we can get a much better picture of the overall trend of the data as it relates to the economy. This is the same problem that arose with the release of the February retail sales data. While the headline seasonally adjusted number showed a surge in retail sales in February - the actual data showed a decline. This is shown in the chart below which shows the preliminary retail sales data for February on both a seasonally and non-seasonally adjusted basis. As you can see there was a sharp drop in retail sales in January which continued to slide into February. This is the first sequential decline in the data in the last three years. The problem, as stated above, is that the monthly non-seasonally adjusted is extremely "noisy" and therefore has to be "smoothed" in order to provide a more intelligible trend.  The chart below shows the non-seasonally adjusted (NSA), seasonally adjusted (SA) and the 12-month moving average of the NSA data.

Adjusted February Retail Sales Rise More Than Expected As Actual Retail Sales Post First Decline In Three Years - In a news release that would have been blamed on delayed tax refunds and "the weather" if it was a miss, but confirms a stronger consumer if it beat, and denies everything Wal Mart was warning about regarding February sales, today's retail sales just came stronger than expected in both the headline print (+1.1%, on expectations of a +0.5% rise), the Ex-Autos (+1.0%, Exp. 0.5%), and the Ex-autos and gas (0.4%, Exp. 0.2%). All of this of course was on a seasonally-adjusted basis (more on this shortly). This was the biggest beat of expectations since October 2011, and the biggest monthly rise in five months. The number was driven by a 5.0% jump in gasoline station sales, a 1.8% increase in Miscellaneous store retailers, a 1.6% rise in non-store retailers and a 1.1% increase in the broad retail and food services category. Declines were noted in Furniture stores (-1.6%), Electronics and Appliance stores (-0.2%), and Sporting goods and music stores (-0.9%). So on the surface all was good. The seasonally adjusted surface. because the unadjusted headline number in February actually posted the first sequential decline since 2010, as retail sales declined from $382.4 billion to $381.0 billion: this was the first sequential decline in retail sales in the month of February in three years. Yet somehow the decline actually translated into a growth of $4.4 billion on an adjusted basis, meaning the entire beat was, once more, purely in the calendar adjustment.

Number of the Week: Urban vs. Rural Spending - 32%: How much more urban households’ income was in 2011 than rural households’. Many more Americans live in urban settings than rural areas, and there’s a wide divergence in their spending patterns. Some 92% of households are considered urban by the Labor Department, which includes any person living in a defined metro area, compared to just 8% of households that are considered rural. Urban households on average spent $50,348 in 2011, the most recent year for which data are available. That was 18% more than the $42,540 spent by rural households. Urban households spend more in absolute terms in most categories, with the biggest disparity in housing. Whether it’s mortgages or rental payments, city dwellers pay more than their country cousins, due in part to higher demand and more limited supply. But there are some areas where rural consumers spend more, such as health care and transportation. They tend to be older, which explains the health-care costs, and tend to have to drive more, which explains bigger outlays for gasoline and automotive maintenance. The biggest difference between the two regions was in spending on pets. Urban households spent an average $484 on pet food; pet purchase, supplies, medicine; pet services; and vet services in 2011, compared to $716 for rural households. That difference likely has a lot to do with horses, not a particularly popular or practical pet in the city.

Census Bureau Revisions to Retail Sales - Earlier today I posted my monthly update on Retail Sales. Those of us who routinely track this series know that the Advance Estimate, which is what I reported on today, will be followed by a second estimate next month and a third estimate the month after. How big are those revisions? Big enough to warrant skepticism about the Advance Estimate? Here is a visualization of the change from the first to third estimates from January 2007 through December 2012, the most recent month for which we have data points. As we see, revisions abound, and they move in either direction. For a better sense of the magnitude of the revisions, the next chart shows the percent change from the first (advance estimate) to third (second revision). During this timeframe there were 33 upward revisions and 39 downward revisions. The absolute mean (average) revision was 0.38%, which breaks down as 0.30% for the upward adjustments and -0.46% for the downward adjustments. Are the sizes of these numbers significant? Consider: Over the same timeframe, the month-over-month absolute mean change of the latest revised retail sales series is 0.83%. A more dramatic way of thinking about this is as follows: Since 2007 the absolute second revision divided by the absolute mean advance estimate is a whopping 46%.

Consumer Sentiment Tumbles - U.S. consumers took on a darker view of economic conditions early this month, according to data released Friday. The Thomson-Reuters/University of Michigan consumer sentiment index’s preliminary-March reading declined to 71.8 from the final February reading of 77.6, according to an economist who has seen the report. Economists surveyed by Dow Jones Newswires had expected the early-March index to increase to 78.0.

Preliminary March Consumer Sentiment declines to 71.8 -The preliminary Reuters / University of Michigan consumer sentiment index for March declined to 71.8 from the February reading of 77.6.  This was well below the consensus forecast of 77.7, and very low. There are a number of factors that impact sentiment including unemployment, gasoline prices and, for 2013, the payroll tax increase and even politics (sequestration, default threats, etc).    In this case, the decline was probably related to both high gasoline prices and policy concerns. According to Reuters, a record 34 percent of those surveyed were negative about government economic policies (sequestration, etc.). Reuters also reports that buying plans were essentially unchanged.

Michigan Consumer Sentiment Plunges to Recession Levels - The University of Michigan Consumer Sentiment preliminary number for March came in at 71.8, a substantial decline from the February final reading of 77.6. The consensus was for no change.'s on estimate was for 79.0. The latest number takes us back to the range normally associated with recessions. See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is 16% below the average reading (arithmetic mean) and 15% below the geometric mean. The current index level is at the 19th percentile of the 423 monthly data points in this series. The Michigan average since its inception is 85.2. During non-recessionary years the average is 87.7. The average during the five recessions is 69.3. So the latest sentiment number puts us only 2.5 above the average recession mindset and 15.9 below the non-recession average. It's important to understand that this indicator can be somewhat volatile. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average.

Consumer Sentiment Misses By Most Ever, Slumps To 15 Month Lows - It appears paying more for gasoline and higher taxes trumps the exuberance of the equity markets as UMich Consumer Sentiment crashed in February. Printing at 71.8 on expectations of 78.0 this is the biggest miss on record based on Bloomberg data. The 71.8 level is the lowest since December 2011 as it appears that the Fed's only remaining policy tool is just not sparking that animal spirit in the real economy's anchor - the US consumer - as while current conditions did drop, it is future expectations that plunged.

Small-Business Sentiment Ticks Up - U.S. small-business leaders grew more hopeful about the economy and its outlook in February. The National Federation of Independent Business reported Tuesday that its index of small-business optimism rose 1.9 points to 90.8 as of last month. The advocacy group cautioned the gain was “no ‘surge’ into respectable territory,” and added “nothing much happened to make owners feel more confident in the future of the economy.” The NFIB also said its reading on expected businesses conditions remained “deep in recession territory.”

NFIB: Small Business Optimism Index increases in February, Still Low - From the National Federation of Independent Business (NFIB): Small Business Confidence Improves a Bit The NFIB Small Business Optimism Index increased 1.9 points in February to 90.8. While a nice improvement over the last several reports, the Index remains on par with the 2008 average and below the trough of the 1991-92 and 2001-02 recessions. The direction of February’s change is positive, but not indicative of a surge in confidence among small-business owners. ...Weak sales is still the top business problem for 18% of owners. This graph shows the small business optimism index since 1986. The index increased to 90.8 in February from 88.9 in January.

NFIB: "No Sign Of A Surge In Confidence" - The latest release of the National Federation of Independent Business Small Business Survey was a bit of dichotomy of interpretation. Is the inventory increase really a sign of optimism or is it an unwanted buildup as sales have slowed as shown by the latest wholsesale inventory report?  Are capital outlays really a sign of optimism or is it simply just required maintenance and upkeep?  The interpretation of the data is key to understanding the direction of the overall economy. Economic confidence still remains at levels lower than in 2011 or in 2008 during the depths of the financial crisis. Concerns for businesses remain weighted toward the consumer and the government.  Weak sales, government regulations and taxes are the top 3 biggest headwinds curtailing small business currently.  With the upcoming debates over the debt ceiling and the budget it is unlikely that these concerns are going to improve much anytime soon.

Auto output boosts Feb. industrial production: (AP) — A strong increase in auto output boosted U.S. factory production last month, the latest sign that manufacturing is helping drive economic growth after lagging for much of 2012. Factory output rose a seasonally adjusted 0.8% in February from January, after falling 0.3% in the previous month, the Federal Reserve said Friday. The biggest gain was in autos and auto parts, where production increased 3.6% after falling 4.9% in January. Car sales have risen steadily this year after reaching a five year high in 2012. Overall industrial production, which includes mining and utilities, rose 0.7% in February. That is the most in three months. Utility output jumped 1.6% while mining output, which covers oil and gas drilling, fell 0.3%, the third straight decline.

Industrial Production in U.S. Climbs by Most in Three Months - Industrial production rose more than forecast in February as U.S. factories turned out more business equipment and motor vehicles, showing manufacturing is helping boost the economy. Output at factories, mines and utilities climbed 0.7 percent, the most in three months and exceeding the median projection in a Bloomberg survey, figures from the Federal Reserve showed today in Washington. January production was unchanged, revised from a previously reported 0.1 percent drop. Manufacturing, which accounts for about 75 percent of all output, rose 0.8 percent, the third gain in four months. Another report today showed factories in the New York region expanded for a second month in March. The Federal Reserve Bank of New York’s general economic index eased to 9.2, from 10 in February. Readings greater than zero signal expansion in New York, northern New Jersey and southern Connecticut.

Fed: Industrial Production increased 0.7% in February - From the Fed: Industrial production and Capacity Utilization Industrial production increased 0.7 percent in February after having been unchanged in January. Manufacturing output rose 0.8 percent in February, and the index revised up for the previous two months. In February, the output of utilities advanced 1.6 percent, as temperatures for the month were near their seasonal norms after two months of unseasonably warm weather. The production at mines declined 0.3 percent, its third consecutive monthly decrease. At 99.5 percent of its 2007 average, total industrial production in February was 2.5 percent above its level of a year earlier. The capacity utilization rate for total industry increased to 79.6 percent, a rate that is 0.6 percentage point below its long-run (1972--2012) average.  This graph shows Capacity Utilization. This series is up 12.8 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 79.6% is still 0.6 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.6% in December 2007. Note: y-axis doesn't start at zero to better show the change. The second graph shows industrial production since 1967. Industrial production increased in February to 99.5. This is 19.2% above the recession low, but still 1.2% below the pre-recession peak. The monthly change for both Industrial Production and Capacity Utilization were above expectations

Industrial Production Rebounds In February - Today’s report on industrial production for February deals another blow to analysts who insist that the US economy is in imminent danger of slipping into a recession or (even more dubious) that the business cycle has already slipped off the edge. Indeed, industrial output last month accelerated, rising 0.7% in February—the best monthly gain since November. The cyclically sensitive manufacturing slice of industrial activity also enjoyed a strong month, advancing 0.8% over January’s level. Is all this misleading us about the true nature of the trend? Perhaps, but the numbers suggest otherwise once you consider that the annual change in industrial production continues to chug along at a moderate pace, rising a bit faster at a 2.5% gain for the year through last month vs. the 2.3% year-over-year rate for January. There’s still plenty of anxiety over how the fiscal follies in Washington will play out for the economy in the weeks and months ahead, but today’s update offers another encouraging number for arguing that moderate growth continues to dominate.

Industrial Output Rises on Manufacturing Rebound - U.S. industrial production rose more than expected in February on a rebound in manufacturing, showing the economy continues to gain momentum in 2013. Industrial production grew 0.7% last month, the Federal Reserve said on Friday. Economists polled by Reuters had expected industrial output to rise 0.4%. Manufacturing output rose 0.8% during the month, snapping back from a decline in January. Industry capacity utilization, a measure of how fully firms are using their resources, rose to 79.6% in February. That was the highest average since March 2008 when it was 80.1%. Officials at the Fed often look at utilization measures as a signal of how much ``slack'' remains in the economy, and how much room growth has to run before it becomes inflationary.

Empire State index stays positive in March - — The Empire State manufacturing index remained in positive territory for the second month after six straight negative readings, the New York Federal Reserve Bank said Friday. The Empire State index slipped to 9.2 in March from 10 in the prior month. The index had been negative from August through December. Economists polled by MarketWatch expected the index to hold steady at 10. See comprehensive MarketWatch economic calendar. The Empire State index is closely watched because it is the first regional manufacturing survey for the month. It is used as a gauge for the Institute for Supply Management’s reading of the health of the manufacturing sector that will be released in early April. Details of the Empire State report were also somewhat weaker. The key new orders sub-index fell to 8.2 from 13.3 and shipment slipped to 7.8 in March from 13.1 in February. Labor market conditions were mixed in the month. The report showed increasing optimism as an index of expectations of activity six months ahead rose to its highest level in almost a year.

Everyday externalities - Krugman - Via Mark Thoma, a new paper in Vox on the effects of increased rail service, making clever use of natural experiments created by changes in German ownership and regulation. The results aren’t that surprising — more frequent rail service sharply reduces pollution and other costs associated with driving — but it’s good to have this kind of solid work to back our intuition. And can I say that this is a subject that really deserves a lot more attention? Mea culpa; I haven’t written much for a while on these issues. But we know, as surely as we know anything in economics, that there are huge market failures here — that every time an individual chooses to drive during rush hour, he or she is imposing huge costs on other drivers, people who breathe the air, and more. Ideally, the right answer is to get the incentives right, and charge large fees for driving in congestion. Short of that, there are huge second-best payoffs to mass transit; if you did the accounting properly, Amtrak’s northeast corridor service (which makes money even without taking this into account) is a huge social boon, and projects like the Hudson rail tunnel should be total no-brainers.

Feds Question Boeing’s Tests of Lithium-Ion Batteries in Dreamliners - Federal authorities investigating what caused a lithium-ion battery aboard a 787 Dreamliner to catch fire are questioning the testing performed by suppliers and Boeing, pointing to a lack of a thorough test of the battery and its charging system as a complete system, either in a lab or aboard an airplane.A report by the National Transportation Safety Board does little to identify exactly just what caused the battery to catch fire, but earlier indications suggest a short circuit of a single cell within the 63-pound battery as the earliest known problem. But the report outlines several possible contributing factors to a problem that has grounded all 50 Dreamliners worldwide since Jan. 16. Of greatest concern, the agency suggests less-than-comprehensive testing of the battery, which powers many of the composite airplane’s systems, and its associated hardware, may have been a factor.

The new pope will be one of America’s biggest employers: The big news out of the Vatican is that the Roman cardinals have selected a new pope: Cardinal Jorge Mario Bergoglio of Argentina, who took the name Francis. And that got us thinking, naturally, about the economics of the Catholic Church. As it turns out, the church plays a massive role in the U.S. economy — spending some $170 billion in 2010, according to recent estimates by The Economist, with much of that going to health care services. Here’s a breakdown: Catholic institutions themselves employ over 1 million people in the United States. That means the church is one of the nation’s largest employers, behind only Walmart. It employs far more people than General Electric or McDonald’s or GM or the U.S. Postal Service.

The drone economy will create 100,000 jobs, say companies who make drones - Commercial drones, which are expected to be approved for use in the US in 2015, will create 100,000 jobs in 10 years, adding $13.7 billion to the American economy, according to a new study (pdf). The study was published by the Association for Unmanned Vehicle Systems International, a trade association with an interest in promoting the benefits of unmanned aircraft—the industry does not like the word “drone”—but its assumptions offer an interesting assessment of the sector’s opportunities. While people are bullish about using drones for a bunch of reasons, the study expects that 90% of drone sales will be for agricultural purposes. A key assumption of the study is that US farmers will adopt unmanned aircraft at similar rates to Japanese farmers after the government allowed their use in the early 1990s:

Right for the wrong reasons - TYLER COWEN has a very interesting post explaining that he agrees in principle with more liberal economic commentators on increasing infrastructure spending and running loose monetary policy, but finds it hard to agree in conversation because he thinks their framing of the issues is wrong. Substantively, he thinks the important issue on infrastructure isn't more, but better; he doesn't see why it takes so long to get things done in America, he thinks dollars are allocated inefficiently, and he wouldn't link infrastructure spending to unemployment.  Briefly, Mr Cowen is right that infrastructure in America takes far too long to build and costs much too much. We just spent a huge chunk through ARRA and couldn’t even clear up the backlogs at LaGuardia and Kennedy airports, the major gateways to America’s #1 city. We don’t seem able to build up nuclear power as significant protection against climate change. High-speed rail doesn’t seem like a good investment in the places where it is going through.

Employment Trends Index Rose in February to Highest Level Since June 2008 - A compilation of U.S. labor-market indicators rose in February to its highest level since June 2008, according to a report released Monday by the Conference Board. The board said its February employment trends index increased to 111.14 from a revised 109.93 in January. The January figure initially was reported as 109.38.The latest index is up 3.2% from a year earlier and is now at its highest mark in nearly five years.“The Employment Trends index is signaling an improving employment environment,” said Gad Levanon, director of macroeconomic research at the board. “However, even though the labor market has gained in recent months, the looming sequester is likely to slow the pace of job creation in the near term.”

Employers Report Positive Hiring Plans - Wrangling over fiscal policy in Washington hasn’t dimmed American employers’ hiring outlook. Managers report positive hiring plans for the second quarter, according to a national survey out Tuesday from temporary-staffing firm ManpowerGroup. The firm’s seasonally adjusted “Net Employment Outlook” for the next quarter came in at 11%, up from 10% during the year-ago period but down one percentage point from the first quarter of 2013. The second-quarter’s 11% outlook compares with a -2% reading recorded for the second and third quarters of 2009, when the recession was ending. Manpower surveyed more than 18,000 employers in thirteen industry sectors in the 50 states, Puerto Rico and the District of Columbia. Among them, 18% said they plan to expand their work forces during the second quarter and 5% said they plan to shrink payrolls during the period. The rest said they either expected no change in their hiring, or hadn’t firmed up their plans. Employers in all sectors said they had a positive outlook, with the Leisure & Hospitality, Professional Business Services and Wholesale and Retail Trade categories posting the highest scores.

Some Stunning Demographic Trends in Employment: I spent most of the weekend studying the latest employment report from the Bureau of Labor Statistics (BLS). My focus was the Labor Force Participation Rate (LFPR) with some specific attention to gender and age. The LFPR is a simple computation: You take the Civilian Labor Force and divide it by the Civilian Noninstitutional Population. The result is the participation rate expressed as a percent. The first chart below splits up the data since 1948 in two ways: by age and by gender. For the former, I chose the 25-64 age cohorts to represent what we traditionally think of as the "productive" (pre-retirement age) work force. It doesn't take Ph.D. in sociology to recognize some significant changes in the chart above. The growth of women in the workplace, the solid red line, was a major trend. The Age Discrimination in Employment Act of 1967 helped to stabilize the decline in the 65 and over participation rate, at least until the 11-month recession that started in December 1969. As for the age 25-64 cohorts, the participation rate for men peaked way back in May 1954 at 95.9%; for women it was 46 years later in May 2000 at 72.7%, and for the combined cohort is was in March 1998 at 80.2%. The dotted lines representing ages 65 and over also illustrate some dramatic changes. Visions of the good life in retirement, assisted by a burgeoning Social Security system, was a standard expectation for the pre-Boomer generations. However, the LFPR for the "elderly" (a term I use respectfully as a member of that cohort) flattened out in the mid-1980s and then began increasing -- slowly at first and more significantly around the turn of the century, even as the numbers for the productive cohort continued to decline. The next chart gives us a clearer look at the relative patterns of growth and contraction.

US Employers Post More Jobs, Cut Fewer Workers — U.S. employers advertised more job openings in January, suggesting that hiring will remain healthy in the coming months. Job openings rose 2.2 percent in January from December to 3.69 million, the Labor Department said Tuesday. Openings had fallen nearly 5 percent in December. They are still below November’s level of nearly 3.8 million. There were other positive signs: Employers laid off the fewest workers in January than in any month since records began in 2001. And the number of Americans quitting their jobs rose to the highest in more than four years. People usually quit when they have another job, so more quitting suggests it is easier to find work. There is still a lot of competition for open positions. About 12.3 million people were unemployed in January. That means there were 3.3 unemployed people, on average, competing for each job. In a healthy economy, that ratio is roughly 2 to 1. Rising openings and quits add to recent evidence that the job market is getting better.

BLS: Job Openings "little changed" in January - From the BLS: Job Openings and Labor Turnover Summary There were 3.7 million job openings on the last business day of January, little changed from December, the U.S. Bureau of Labor Statistics reported today. The hires rate (3.1 percent) and separations rate (3.0 percent) also were little changed in January. ...Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. ... In January, the quits rate was unchanged at 1.6 percent. The quits rate edged up for total private in January but was unchanged for government.  The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for January, the most recent employment report was for February.. Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. Jobs openings increased in January to 3.693 million, up from 3.612 million in December. The number of job openings (yellow) has generally been trending up, and openings are up 8% year-over-year compared to January 2012.  Quits increased in January, and quits are up 13% year-over-year and at the highest level since 2008. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

There Were 3.3 Unemployed Per Job Opening in January 2013 - The BLS January JOLTS report, or Job Openings and Labor Turnover Survey shows there are 3.3 official unemployed per job opening.  Actual hires increased 1.2% to 4.247 million after last month's plunge.  Real hiring has only increased 17% from June 2009.  Job openings also recovered slightly, up by 2.2% to 3.693 million, yet are still below pre-recession levels of 4.7 million.  Job openings have increased 69.5% from July 2009.  Some in the press are claiming hiring is on a rebound.   Frankly hiring is not.   Every month it is the same thing, not enough hiring and this has been going on now for over five years. There were 1.8 official unemployed persons per job opening at the start of the recession, December 2007.  Below is the graph of the official unemployed per job opening. Notice how flat tail the below graph is.  That's not an amazing recovery.   The official unemployed ranked 12.33 million in January 2013. If one takes the official broader definition of unemployment, or U-6, the ratio becomes 6.2* unemployed people per each job opening.  The January U-6 unemployment rate was 14.3%.  Below is the graph of number of unemployed, using the broader U-6 unemployment definition, per job opening. We have no idea the quality of these job openings as a whole, as reported by JOLTS, or the ratio of part-time openings to full-time.  The rates below mean the number of openings, hires, fires percentage of the total employment.  Openings are added to the total employment for it's ratio.  Openings increased 0.1 percentage points and layoffs declined by 0.1 percentage points from last month.

  • openings rate:   2.7%
  • hires rate:  3.1%
  • separations rate:   3.0%

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 around 3.1% of the labor force - and the number (and percent) of long term unemployed remains a serious problem. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). Clearly education matters with regards to the unemployment rate - and it appears all four groups are generally trending down. Although education matters for the unemployment rate, it doesn't appear to matter as far as finding new employment (all four categories are only gradually declining). Note: This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed". The BLS diffusion index for total private employment was at 63.6 in February, down slightly from 64.7 in January. This was the fifth consecutive month over 60. This index has averaged 60.5 over the last 36 months; the best three year period since the '90s. For manufacturing, the diffusion index increased to 60.6, up from 57.4 in January.

BLS Revisions to the Nonfarm Payroll Jobs Report: Earlier today I posted a commentary on Some Stunning Demographic Trends in Employment. In a footnote I commented on the unreliability of the Bureau of Labor Statistics' employment data for Nonfarm Payroll Employment, which included a link to historic revisions back to 1979 on the BLS website. I subsequently received a few emails requesting a chart to illustrate the changes. Here is a first pass as such a visualization. I took the data since January 2000 and potted the change from the first to third estimate for each month through December 2012, the most recent month for which we have three revisions. During this timeframe there were 92 upward revisions and 62 downward revisions. The absolute mean (average) revision was 46 thousand, which breaks down as 48K for the upward adjustments and 45K for the downward adjustments. Interestingly enough, the direction of revisions was upward during the brief recession of 2001 but downward during the nasty recession from December 2007 to June 2009. The message is clear: Don't take the initial monthly employment jobs data too seriously.

Jobless Claims Unexpectedly Fall as Labor Market Improves - Bloomberg: The number of Americans filing applications for unemployment benefits unexpectedly dropped last week to the lowest level in almost two months, adding to signs the labor market in strengthening. First-time jobless claims fell by 10,000 to 332,000 in the week ended March 9, the fewest since mid January, according to data today from the Labor Department in Washington. The median forecast of 49 economists surveyed by Bloomberg called for an increase to 350,000. The four-week average declined to a five- year low. Managers are maintaining staffing levels as consumers sustain spending even after a two percentage-point increase in the payroll tax at the start of the year reduced paychecks. Nonetheless, there remains a risk that the recent pickup in employment will be cut short as federal budget cutbacks prompt companies and government agencies to trim payrolls.

Weekly Initial Unemployment Claims decrease to 332,000 - The DOL reports: In the week ending March 9, the advance figure for seasonally adjusted initial claims was 332,000, a decrease of 10,000 from the previous week's revised figure of 342,000. The 4-week moving average was 346,750, a decrease of 2,750 from the previous week's revised average of 349,500.  The previous week was revised up from 340,000. The following graph shows the 4-week moving average of weekly claims since January 2000.
Initial claims remains a bright spot - Initial claims were reported at 332,000 this morning. This is the third time this year that initial claims have come in at 335,000 or less, which is the upper limit of claims I would expect in a normal expansion. At 346,750, this is also the lowest 4 week average of claims since 5 years ago in March 2008.  Last year claims stalled at a lower limit of 360,000. We have now had 11 straight weeks of data under that point.  I realize that the improvement in the economy is way too slow and has been way too slow since it started going on 4 years ago. But it is certainly better than contraction, and there has never, ever, ever been an economic contraction that wasn't preceded by a substantial increase in initial jobless claims. The fact that layoffs are running only a hairbreadth above what we would expect in a strong economy remains about the brightest spot of data in the landscape.

Layoffs Drop, but Hiring Still Languishes - Pushing businesses to add new staff positions may be a bigger challenge for the Fed than creating financial conditions that stop layoffs.U.S. companies are finally laying off on laying off. The number of workers being laid off is steadily declining. The Labor Department said Thursday that new filings for jobless benefits last week unexpectedly dropped 10,000 to 332,000, the fourth drop in five weeks. The four-week moving average, which smooths out volatility, is at its lowest level in five years. The claims drop follows other layoff news in this week’s job openings and labor turnover summary. The Jolts report showed layoffs and other discharges in January were at their lowest readings since Labor started tracking the data in 2000.

4 simple charts showing how little the US job market has recovered - The official unemployment rate, or U-3 rate, is at its lowest level since December 2008. But that number is depressed by a collapse in the labor force participation rate (itself a sign of the weak labor market.) But there are other measures that give a better sense at how little progress the supposed job market recovery has made. For instance, as the above chart shows, the gap between the broader U-6 rate — which measures labor force dropouts and involuntary part-timers — and the U-3 rate continues to be historically wide. Here’s another: While the average length of unemployment has shortened, it is still more than double its typical duration: And an unusually high percentage of Americans have been out of work for a long period time: The share of Americans working part-time for economic reasons also remains far above pre-recession lows.

How long will it take to get back to full US employment? - The US economy has added an average of 205,000 jobs the past four months. At that pace, given the current labor force participation, it would take 49 months to hit 4.5% unemployment, according to an employment calculator from the Atlanta Fed. (Over the past 15 years, we’ve had nearly four full years with the jobless rate at that level or less.) But if labor force participation should retrace half its drop since the Great Recession, it would take 73 month to return to 4.5%. Now this all assuming a) no recessions, and b) the US economy is still capable of producing such low unemployment.

An Endangered Species: Each month the Bureau of Labor Statistics (BLS) issues two separate (but companion) reports to gauge the health of the nation's workforce. The first is the firm payroll survey. BLS economists survey a wide range of businesses, of different sizes and in a multitude of industries, to determine how the size of their payrolls has changed. The other, companion report, is the household survey. In it, respondents polled are asked whether or not they were employed in the preceding month, or, if their employment status has changed. You may wonder why two reports are compiled? The answer is simple: about one in eleven Americans is self-employed. The typical self-employed individual is the sole proprietor of an unincorporated business in which he or she is the proverbial chief cook and bottle washer — providing all of the labor necessary to keep the enterprise up and running. Few such businesses have identity distinct from their owner operator. Just as the family farm is a staple icon of rural America, so too does the mom-and-pop shop remain an image of Main Street U.S.A. in towns large and small. And, just as the family farm has withered in numbers, so too has the self-employed business. Today those who report to no one but themselves just survive on the fringes of the economy. One measure to gauge the rate and extent of the disappearance of the self-employed is the ratio between respondents claiming employment in the household survey to the aggregate payrolls from the firm survey. Sixty-five years ago, in 1948, the ratio was 128. In other words, roughly one-in-five individuals accounted for their own livelihood. Today, the ratio hovers at 106, suggesting a much diminished minority are on no firm's payroll.

The Lobbyist Congressional Cheap Labor Drone Marches On - The Lobbyists are gearing up in hopes of obtaining more methods to flood the U.S. labor market with cheap, controllable foreign labor.  Foreign guest workers have been the bane of the American workforce for decades.  Instead of hiring American workers, businesses import foreign workers under Visas.  Worker displacement is so brazen, even 2009 Stimulus funds went to hire foreigners instead of Americans, in areas with unemployment rates above 30%.  Corporations have turned labor into a commodity, with Congress frothing at the mouth to give business even more of a cheap labor supply.    Upon occasion, even lobbyists slip up and speak truth about what is going on.   In one biased hearing where only corporations demanding their cheap labor testified, one accidentally admitted the purpose of a H-1B foreign guest worker Visa hire.   Multinational corporations use these foreign guest workers  to technology transfer large projects out of the United States.   In other words, businesses need these Visas in order to offshore outsource production.  The imported foreign guest worker goes right back to the offshore outsourced destination, along with the product development or service itself. Not every job is going to be a permanent job. There are instances where design team leaders or engineers are hired in the U.S. with the understanding that as the product or service being developed moves through the global supply chain, that position will move with the product or service,

About Those Wages From the February 2013 Employment Report - Many in the press are claiming the increase in wages from the February employment report implies the economy is back on track, all is well and things are all looking up. We beg to differ. The average hourly wage did increase by 4¢ to $23.82 for all those employed by the private sector and has increased 2.1% from a year ago. The below graph shows what many are cheering over. Production and nonsupervisory employees wages increased 5¢ an hour to $20.04. The problem is these wages are not adjusted for inflation. In reality a 2.0% increase over a year is historically low, as shown in the below graph for the change from one year ago in hourly wages for production and non-supervisory employees. If we divide by CPI to adjust for inflation, wages are really flat. Below is the graph for production and nonsupervisory employees hourly wages using CPI to adjust for inflation, going back to 1964.

Younger Generations Lag Parents in Wealth-Building -  Pearl Brady has a stable job with good benefits and holds two degrees, a bachelor’s and a master’s. But despite her best efforts, she has no savings, and worries that it will be years before she manages to start putting away money for a house, children and eventually retirement. Ms. Brady has plenty of company. A new study from the Urban Institute finds that Ms. Brady and her peers up to roughly age 40 have accrued less wealth than their parents did at the same age, even as the average wealth of Americans has doubled over the last quarter-century.  Because wealth compounds over long periods of time — a dollar saved 10 years ago is worth much more than a dollar saved today — young adults probably face less secure futures for decades down the road, and even shakier retirements. “In this country, the expectation is that every generation does better than the previous generation,”  “This is no longer the case. This generation might have less.” The authors said the situation facing young Americans might be unprecedented.

Meet the fastest growing job in America: 40% of its workers are on public assistance - It's the job of the future! And it's terrible! It's low-wage, low-tech, long hours, in most cases it's not covered by minimum wage or overtime protections, and it's projected to grow by 70 percent between 2010 and 2020. That's right: It's home health care work. The average hourly wage is just $9.70 an hour, according to the Labor Department.  For those in the industry who work full-time, this amounts to roughly $20,000 a year. Many health care aides only work part-time though—and they do not receive benefits. Under these conditions, it's no surprise then that about 40% of home aides rely on public assistance, such as Medicaid and food stamps, just to get by. Oh, and it's common for home health care aides, like other domestic workers, to be paid less than minimum wage. The industry that exists to skim profits off the hard, low-wage labor of this overwhelmingly female, majority minority, heavily immigrant workforce insists that things couldn't be any different, that if home health care workers got overtime, their hours would be cut, leaving them taking home even less than their current poverty income and the disabled and elderly people they care for vulnerable and without adequate care. Which is one of those signs that maybe this is an industry that needs to be radically rethought. Because "this is a needed and important job" and "this job is only worth poverty wages" should be mutually exclusive statements.

Families face tough choices in shadow of Great Recession - When you think about poverty you might think about hunger and homelessness, but you also should think about the tough financial decisions that families in need have to cope with. A new HBO documentary, "American Winter" takes a look at the tough choices Americans face. The documentary follows the stories of eight families struggling to survive in the aftermath of the Great Recession, and reveals the impact of cuts to social services, the decline of the middle class, and the fracturing of the American Dream. The makers of that documentary, Joe and Harry Gantz wanted to make the documentary to provide an intimate snapshot of the state of the nation's economy as it is playing out in the lives of many American families. "We saw that so many people were losing homes, losing jobs, working in jobs that didn't support a family even if they were working overtime. Then we saw that that was followed by cuts to social services across this country. With more need than at any time over the last 80 years, with all these cuts going on, we decided that we would do documentary that kind of looked at the human side of the equation. There's been films and books written about how Wall Street's affected, how banks were affected, so we wanted to look at how ordinary American families were affected across the country," says Joe.

Why we need to raise the minimum wage - Nearly 8 million Americans go to work every day yet still live below the poverty line. That is in part because the federal minimum wage is too low. Currently, an individual with a full-time job at the minimum wage and a family of three to support will fall below the federal poverty line. These workers, despite putting in regular hours, are struggling to provide basic necessities for themselves and their families. By allowing the minimum wage to remain at a nearly unlivable level, we have deemed certain jobs not worthy enough to meet even our country's minimum standard of living. How have we been able to keep wages so low without significant social discord? By using tax revenue and a complicated government bureaucracy to subsidize low-wage employers and supplement minimum-wage salaries. Rather than firms paying a worker's true cost and customers paying an appropriate price for the services provided by those firms, the government provides workers with "income transfers" to help them meet basic needs. These include such programs as the earned income tax credit, food stamps and Medicaid.

Hidden Costs of the Minimum Wage - Democrats are now proposing to increase the federal minimum wage to $9 an hour. News organizations have repeatedly noted that economists do not agree on the employment effects of historical minimum-wage changes (the more recent federal changes in 2007, 2008 and 2009 have not yet been studied enough for us to agree or disagree on results specific to those episodes) and do not agree on whether minimum wage increases confer benefits on the poor. That doesn’t mean that we economists disagree on every aspect of the minimum wage. We agree that minimum wages do some economic damage, although reasonable economists sometimes believe that the damage can be offset and even outweighed by benefits. More important, we agree that the extent of that damage increases with the gap between the minimum wage and the market wage that would prevail without the minimum. A $10 minimum wage does less damage in an economy in which market wages would have been $9 than it would in an economy in which market wages would have been $2. Moreover, elevating the wage $2 above the market does more than twice the damage of elevating the wage $1 above the market. (Employers can more easily adjust to the first dollar by asking employees to take more responsibility or taking steps to reduce turnover, steps that get progressively harder.) That’s why economists who favor small minimum wage increases do not call for, say, a $100 minimum wage, because at that point the damage would far outweigh the benefits.

Study on Income Redistribution Reveals Power of Core Convictions - In general, what the researchers found was that it was not too difficult to change people’s opinions about inequality—that is, to persuade them that inequality is a much bigger problem than they realized. Respondents were asked what their income was and then shown where they fell in the income distribution. Then they were shown what their incomes would be today if economic growth since 1980 had been distributed evenly across all income groups. (Short answer: A lot higher for most.) They were shown that economic growth in the U.S. has tended to be higher in times when top marginal tax rates were high, and lower in times when top marginal rates were low. Simply catching respondents up on such facts closed 40 percent of the gap between conservatives and liberals on the question of whether income inequality was “a very serious problem.” But it was very hard to change people’s policy preferences regarding what should or shouldn’t be done to create more equality—with one important exception that I’ll describe at the end of this column. Learning that inequality was a bigger problem than they knew made respondents only slightly more likely to support higher taxes on millionaires, or a higher top marginal income-tax rate, or a higher minimum wage. Opinions about the Earned Income Tax Credit and the Food Stamp program did not change to any degree that was statistically significant.

How Elastic Are Preferences for Redistribution? - A new NBER paper on inequality and preferences for redistribution:“This paper analyzes the effects of information about inequality and taxes on preferences for redistribution using randomized online surveys on Amazon Mechanical Turk (mTurk). About 5,000 subjects were randomized into treatments providing interactive information on U.S. income inequality, the link between top income tax rates and growth, and the estate tax. Both control and treatment groups were then asked their views on inequality, government, taxes and transfers. We obtain four main results.

  • First, the informational treatment has very large effects on whether respondents view inequality as an important problem.
  • Second, we find significant but quantitatively small effects of the treatment on views about policy and redistribution. Support for taxing the rich increases slightly. By contrast, support for transfers to the poor does not, especially among those with lower incomes and education.
  • Third, the treatment also decreases trust in government, potentially mitigating respondents’ willingness to translate concerns about inequality into government action.
  • Fourth, we find that informing subjects that the estate tax hits only the very richest families has an extremely large positive effect on estate tax support, including willingness to write to one’s U.S. senator about the issue.

How to Fix America's Wealth Inequality: Teach Americans to Be Cheap - There's a video making the rounds, showing America's staggering wealth inequality. As the sheer magnitude of the disparity unfolds behind the narrator's calm, steady voice, one struggles not to feel a sense of creeping horror. Did you know that the richest 1% of Americans owned 40% of the country's total wealth? I actually didn't! Now, a word of caution: A lot of that wealth inequality is actually age, not class. Young people tend to have a lot of debt and not much savings, meaning they have negative wealth (a prime example being yours truly). Also, these statistics don't include things like entitlements, or human capital (the value of your skills and education). So Americans aren't quite as unequal as the video makes out. But they are still very, very unequal. So what should we do about this? First, we need to ask ourselves if we should do anything about wealth inequality. Maybe we should just worry about consumption equality, and let the rich sit on their useless stock portfolios like Smaug the dragon sitting on his giant pile of gold. Or maybe not. First of all, living hand-to-mouth is no way to live. Wealth gives people a security cushion, meaning they don't have to borrow money if they get sick or lose their job. Security translates to peace of mind. Also, wealth affects political power; a more unequal wealth distribution means that government will be captured by a narrower range of interests. But most importantly, though there is a wealth/consumption trade-off in the short run, in the long run there is quite the opposite; the rich, it turns out, make a hefty chunk of their income from the returns that accrue to their wealth.

U.S. Birth Rates Remain Depressed - As the Wall Street Journal reports, the latest Census Bureau data suggest that the recession-related decline in migration is being reversed, but demographer Kenneth Johnson of the University of New Hampshire says that bad economic times still seem to be depressing the birth rate. Last year, he calculated, 1,135 U.S. counties — 36% of all counties — recorded more deaths than births. There haven’t been so many counties with what demographics call “natural decrease” in all of U.S. history, he says. Last year for the first time in U.S history, deaths exceeded births in two entire states. More people died (12,857) than were born (12,754) in Maine, while West Virginia has had more deaths than births for a number of years.“Once natural decrease begins in a county,” Mr. Johnson says, “it is likely to recur.”

Who Is Poor? - There are three ways of defining poverty in America: the official Census Bureau method, which uses a set of income thresholds that vary by family size and composition; an experimental income-based method called the Supplemental Poverty Measure that factors in government programs designed to help people with low incomes; and a consumption-based method that measures what households actually spend. By defining poverty according to different criteria, these three methods capture surprisingly different populations of men, women and children.  Each method suggests a different approach toward how our government should direct its poverty-fighting resources. According to the two income-based methods of calculation, poverty is increasing; according to the consumption-based method, it is decreasing. Confusingly, I am afraid, both the official method and the consumption method of defining poverty suggest that we should shift benefits away from the elderly and increase programs serving poor children and their families, but the Supplemental Poverty Measure, which is also income-based, does exactly the opposite. Needless to say, these three methods and their distinct outcomes have led to substantial disagreement among policy experts and social scientists. The lack of definition in our definition of poverty is part of the problem; it helps to answer the question of how the richest country in the history of the world could have so many people living in a state of deprivation.

New record: 15 percent of Americans on food stamps — RT USA: Government dependability is continuing to rise, with a record-breaking number of Americans enrolled to receive food stamps. The latest USDA report shows that 47.8 million Americans, which make up 15 percent of the country, are receiving the benefits. The US Department of Agriculture has announced that 47.79 million people were enrolled in the Supplemental Nutrition Assistance Program (SNAP) in December, which is up from the 46.61 million who were enrolled at the end of 2011. Most of these individuals lived in Texas – the state with the highest average of monthly participants, which was 4.04 million in 2012. California had 3.96 million participants and Florida had 3.35 million. The numbers are high, but reasonable, since those states are among the top four most populated in the US. But Washington, DC has the highest ratio of food stamp users. With a population of 617,996 and 141,147 SNAP participants, about 23 percent of city residents were dependent on food stamps in 2012. Texas falls close to the national average, with 15.5 percent of its residents eligible to receive the assistance.

Foodstamp Recipients Hit Record, Alongside Record Dow Jones And Record Debt: 20% Of Eligible Americans On EBT - Record Dow Jones, record US debt ($16,701,846,937,879.74), and now, once more, record number of Americans on foodstamps. According to the USDA, an all time high of 47,791,966 Americans closed 2012 in possession of the highly desired Electronic Benefits Transfer (EBT) card, managed by who else but JPMorgan. And with a civilian non-institutional population of 244.4 million in December, this means that a record 19.56% of eligible Americans are on Foodstamps.

Homeless in Silicon Valley - In San Jose, the heart of Silicon Valley, economic inequality can be seen from the sky. Dozens of tents and flimsy structures dot a grassy open field near the San Jose airport, which is home to more than 100 homeless people. There are an estimated 60 encampments throughout Santa Clara County, according to news reports. City officials have announced a “clean up” of the San Jose camp on Friday, March 8, where they will push people out and confiscate their possessions. Silicon Valley De-Bug, a community and youth media organization based in San Jose, interviewed the camp’s residents about how they got there and where they are headed.

Raising 5 Kids in a Tiny Camper? The Atrocious Ways America Treats Poor Women and Children - What happened to a safety net that's supposed to catch poor women and children when they fall? For $300 a month, including utilities, the family could park their leaky camper in a park in her town. She had no money. We connected at the campground and made arrangements with the manager. Stacy didn’t have the prerequisite water and sewer hoses or electrical adapters. For years, I've travelled the country meeting families in desperate straights. My 27’ motorhome teaches me how to live small, but I cringed as I left her and her under-9 troop of boys in their 13’ tin-can-home. She stalwartly said they’d make it despite sporadic child support, a host of legal and custodial issues swarming around her, unaddressed trauma lingering like storm clouds, and the challenges of raising a large family in miniscule space. Much of what I have continued to learn about the inadequacies of our so-called safety net I’ve learned from families like Stacy’s. As with everything else, it’s theory and reality. The theory—resources are available to assist families in homeless situations—is dreadfully far removed from reality. Let me explain.

In the South and West, a Tax on Being Poor -While the federal government has largely stuck by the principle of progressive taxation, the states have gone their own ways: tax policy is particularly regressive in the South and West, and more progressive in the Northeast and Midwest. When it comes to state and local taxation, we are not one nation under God. In 2008, the difference between a working mother in Mississippi and one in Vermont — each with two dependent children, poverty-level wages and identical spending patterns — was $2,300. These regional disparities go back to Reconstruction,. After Reconstruction ended in 1877, conservative Democrats — popularly labeled “the Redeemers” — rolled taxes back to their prewar levels and inserted supermajority clauses into state constitutions to ensure it could never happen again. Property taxes were frozen; income taxes were held down; corporate taxes were almost nonexistent. Practically the only tax that could rise was the one that hurt the poor the most: the sales tax. And rise it did, throughout the Deep South in the late 19th century, then spreading into the Carolinas, Georgia, Florida and the rest of the region in the 1960s and 1970s.

The Region’s Job Rebound from Superstorm Sandy - NY Fed - Last October, Superstorm Sandy caused widespread destruction and massive disruptions to the regional economy, not to mention the lives of millions of residents. More than three months later, many people remain displaced, and some are still struggling to rebuild their homes, businesses, and lives. Despite these setbacks, the process of economic recovery in the region appears to be well underway, boosted by the beginning of the cleanup and restoration process. In this post, we take an initial look at the adverse impact Sandy has had on the region’s jobs, describing the nature and extent of the employment downturn and the subsequent rebound following the storm.

Illinois Is Accused of Fraud by S.E.C. - For the second time in history, federal regulators have accused an American state of securities fraud, finding that Illinois misled investors about the condition of its public pension system from 2005 to 2009. In announcing a settlement with the state on Monday, the Securities and Exchange Commission accused Illinois of claiming that it had been properly funding public workers’ retirement plans when it had not. In particular, it cited the period from 2005 to 2009, when Illinois also issued $2.2 billion in bonds. The growing hole in the state pension system put increasing pressure on Illinois’ own finances during that time, raising the risk that at some point the state would not be able to pay for everything, and retirees and bond buyers would be competing for the same limited money. The risk grew greater every year, the S.E.C. said, but investors could not see it by looking at Illinois’ disclosures. “Without pension reform, within two years, Illinois will be spending more on public pensions than on education,” said Gov. Pat Quinn. “As I said to you a year ago, our state cannot continue on this path.”

Census: Record 1 in 3 US counties are now dying - A record number of U.S. counties — more than 1 in 3 — are now dying off, hit by an aging population and weakened local economies that are spurring young adults to seek jobs and build families elsewhere. New 2012 census estimates released Thursday highlight the population shifts as the U.S. encounters its most sluggish growth levels since the Great Depression. The findings also reflect the increasing economic importance of foreign-born residents as the U.S. ponders an overhaul of a major 1965 federal immigration law. Without new immigrants, many metropolitan areas such as New York, Chicago, Detroit, Pittsburgh and St. Louis would have posted flat or negative population growth in the last year. "Immigrants are innovators, entrepreneurs, they're making things happen. They create jobs," said Michigan Gov. Rick Snyder, a Republican, at an immigration conference in his state last week. Saying Michigan should be a top destination for legal immigrants to come and boost Detroit and other struggling areas, Snyder made a special appeal: "Please come here."

What became of Detroit? - As Detroit approaches a new turn in its difficult journey over the past several decades, the imposition of an Emergency Financial Manager by the governor of Michigan (link), many people are asking a difficult question: how did we get to this point? The features that need explanation all fall within a general theme -- the decline of a once-great American city. The city's population is now roughly 40% of its peak of almost two million residents in 1950 (link); the tax revenues for city government fall far short of what is needed to support a decent level of crucial city services; the school system is failing perhaps half of the children it serves; and poverty seems a permanent condition for a large percentage of the city. The decline is economic; it is political; it is demographic; it is fiscal; and it is of course a decline in the quality of life for the majority of the residents of the city. The poverty, unemployment, poor housing, poor health, and high crime that characterize the city must surely have an explanation. There are several standard lines of interpretation that Michiganders offer each other -- the decline of manufacturing and the auto industry; the workings of race and white flight; the uprising of 1967; ineffective and corrupt city management; and a long and debilitating contagion of rustbelt-itis in common with Cleveland, Peoria, and Gary. Each of these has a role to play in the explanation, but it is complicated to see how these factors may have intertwined in the half-century of change that led to the Detroit of 2013.

For Detroit, a Crisis Born of Bad Decisions and Crossed Fingers - This city was already sinking under hundreds of millions of dollars in bills that it could not pay when a municipal auditor brought in a veteran financial consultant to dig through the books. A seasoned turnaround man and former actuary with Ford Motor Co., he was stunned by what he found: an additional $7.2 billion in retiree health costs that had never been reported, or even tallied up. The financial crisis that has made Detroit one of the largest cities ever to face mandatory state oversight was decades in the making, a trail of missteps, of trimming too little, too late, of hoping that deep-rooted structural problems would turn out to be cyclical downturns that might melt away as the economy picked up.  Some factors were out of the city’s control. As auto industry jobs moved elsewhere over the decades, for example, Detroit lost much of its affluent tax base. Lower than expected state revenue sharing did not help, nor did corruption allegations in the administration of Kwame M. Kilpatrick, a mayor who resigned in 2008 and was convicted on Monday of racketeering and other federal charges.  But recent findings from a state-appointed review team and interviews with past and present city officials also suggest a city that over the years was remarkably badly run.

How Deadbeat Banks Pushed Detroit To The Brink - Detroit faced major challenges even before the Great Recession, with the loss of manufacturing jobs in the auto industry and the hollowing out of the urban core. But lately a new meme has arisen from supporters of the emergency manager ruling: Scapegoating the citizens of Detroit by characterizing them as a bunch of tax cheats. A report in the Detroit News asserted that only half of city property owners pay their property taxes, leaving $246.5 million uncollected annually. This figure represents the highest rate of unpaid property tax among major U.S. cities. Rather than demonizing “deadbeat” homeowners, however, we should examine who actually evades responsibility for paying taxes on those properties. Detroit has been ravaged by an unending foreclosure crisis.  In a foreclosure, the property reverts back to the bank, which then becomes responsible for all maintenance and upkeep, as well as any fees. Some banks simply ignore these responsibilities and refuse to pay taxes or keep the vacant property in good order. The more clever banks stick evicted homeowners with the bill. Across the country and particularly in Detroit, banks have engaged in “walkaways,” where they start foreclosure proceedings but then find them too costly to complete. They choose not to finish the legal steps to foreclosure, leaving the properties vacant.  Banks that walk away from homes do not have to notify the city, or even the borrower, that they have abandoned the foreclosure process. Borrowers kicked out of their homes then find themselves still responsible for property tax payments.

Only Wall Street Wins in Detroit Crisis Reaping $474 Million Fee - The only winners in the financial crisis that brought Detroit to the brink of state takeover are Wall Street bankers who reaped more than $474 million from a city too poor to keep street lights working. The city started borrowing to plug budget holes in 2005 under former Mayor Kwame Kilpatrick, who was convicted this week on corruption charges. That year, it issued $1.4 billion in securities to fund pension payments. Last year, it added $129.5 million in debt, 9.3 percent of its general-fund budget, in part to repay loans taken to service other bonds. Detroit, which is trying to avoid becoming the largest U.S. municipal bankruptcy, struggles to serve residents after revenue declined when the auto industry collapsed and the city began to empty. Michigan's Republican governor, Rick Snyder, is preparing to name an emergency manager, who will have to address debt and derivatives taken on in the last eight years. “We have no lights, no buses, poor streets and now we’re paying millions of dollars a year on our debt,” said David Sole, a retired municipal worker and advocate for Moratorium Now Coalition, a Detroit group that fights foreclosures and evictions. “The banks said they need to be paid first. But there is no money.”

Low-Income Kids Are Being Kicked Out Of Their Preschool Programs Thanks To Sequestration | ThinkProgress: The early childhood education program Head Start provides educational opportunities specifically to low-income kids. But 70,000 of those students will lose the opportunity to be in the program as a result of the drastic reductions in funding triggered by sequestration. Reports are beginning to roll in about how children will bear the brunt of Congressional inaction. In several states, programs have to decide where they will make the cuts. In some cases, that means picking which students will be kept in the program, and which will be forced to leave: Preschool is not an extracurricular activity for kids. It’s been proven to help kids learn to socialize and become well-adjusted citizens. A study in California found that “our society receives $9 in benefits for every $1 invested in Head Start children.” A Center for American Progress report found that children who don’t receive early childhood education are 40 percent more likely to become a parent as a teenager, 25 percent more likely to drop out of school, and 70 percent more likely to be arrested for a violent crime.

Report: Half Trillion Need To Update Schools - America's schools are in such disrepair that it would cost more than $270 billion just to get elementary and secondary buildings back to their original conditions and twice that to get them up to date, a report released Tuesday estimated. In a foreword to the report, former President Bill Clinton said "we are still struggling to provide equal opportunity" to children and urged the first federal study of school buildings in almost two decades. Clinton and the Center for Green Schools urged a Government Accountability Office assessment on what it would take to get school buildings up to date to help students learn, keep teachers healthy and put workers back on the jobs. The last such report, issued in 1995 during the Clinton administration, estimated it would take $112 billion to bring the schools into good repair and did not include the need for new buildings to accommodate the growing number of students. The Center for Green Schools' researchers reviewed spending and estimates schools spent $211 billion on upkeep between 1995 and 2008. During that same time, schools should have spent some $482 billion, the group calculated based on a formula included in the most recent GAO study. That left a $271 billion gap between what should have been spent on upkeep and what was, the group reported. Each student's share? Some $5,450.

Moocs are no panacea for universities - Since the first university opened in Bologna in 1088, the business of higher education has changed remarkably little. It is one of the few sectors where being older and more traditional is considered better. That is why there is so much excitement that “massive open online courses” (Moocs) might be able to revolutionise this industry. But this hope is misplaced. In the past 18 months, dozens of institutions, including Harvard, Massachusetts Institute of Technology and Stanford, have signed up to provide free online courses to anyone who wants them. Each can enrol hundreds of thousands of students. In the first week that its six courses were available, the University of Edinburgh enrolled nearly 300,000 students. Coursera, a leading platform, last month announced 90 new courses, offered in Mandarin, Spanish and other languages. Higher education certainly needs a shake-up. In the US, it costs up to $100 per student to deliver an hour of instruction. In emerging markets, the sector has not grown to match booming demand; at current growth rates, India will have more adults without a university education in 2020 than today. Just as MP3 players upset the music industry, some say online teaching will democratise higher education. Yet Moocs are unlikely to deliver immediate sweeping change.

I've got a bad feeling about this: California bill to encourage MOOC credit at public colleges - A powerful California lawmaker wants public college students who are shut out of popular courses to attend low-cost online alternatives – including those offered by for-profit companies – and he plans to encourage the state’s public institutions to grant credit for those classes. The proposal expected today from Darrell Steinberg, a Democrat and president pro tem of the state Senate, aims to create a “statewide system of faculty-approved, online college courses,” according to a written statement from Steinberg’s office. (A spokesman for Steinberg declined to discuss the bill.) Faculty would decide which courses should make the cut for a pool of online offerings. Likely participants include Udacity and Coursera, two major massive open online course providers, sources said. Another option might be StraighterLine, a low-cost, self-paced online course company. Those online providers are not accredited and cannot directly issue credit. But the American Council on Education (ACE) offers credit recommendations for successfully completed StraighterLine courses and is currently reviewing MOOCs for credit recommendations, with five from Coursera already gaining approval. Potentially credit-bearing MOOCs will likely include efforts to verify students' identities and proctored exams.

Military tuition assistance another casualty of the sequester - The sequester spending cuts are taking their toll and no one is feeling them more than the military. Active service military members in the Army, Navy and Marines will no longer get assistance to further their educations. All three have suspended their programs until the nation's fiscal situation clears up. At Fort Sam Houston, soldiers had until March 8 to apply for tuition assistance. Those who missed the deadline can no longer qualify. Those currently receiving assistance will not have it renewed at the end of the semester.

Universities Pile on Faculty Perks as Student Costs Grow - The University of Chicago paid James Madara $2.5 million in severance when he stepped down in 2009 as medical dean and hospital chief. Madara, who remained on the faculty, later joined the American Medical Association.Harvard and Stanford universities also offer real-estate loans with sweet terms, records show. While the amounts are small relative to university budgets, the perks insulate faculty and administrators from the costs upsetting many middle-class families, “It certainly gives the public a clear example of how out of touch some universities are,” Robe said. “Parents will think, ‘Here I am scraping by, raiding my retirement plan to pay for college. Why are they making me do this just to enrich these executives?’" Congress and President Barack Obama have been pushing colleges to control tuition and other costs, which can exceed $60,000 a year at a private school. In a weak job market, students are struggling to pay off $1 trillion in education loans. Exit bonuses are becoming more common among senior executives at large colleges in major cities, Typically, such “super severance” amounts to one to three times an administrator’s annual salary and bonus,

Of surveillance and scholarship - A Truthout writer named R. Lila Steinberg has made an interesting observation about our wonderful new world of surveillance. In this world, we are all presumed guilty -- and the guiltiest of all are the scholars, the researchers, and the intellectually curious. Steinberg links to this video, which features a conference on the NSA's snooping abilities and how the FBI uses this data for criminal investigation.   Since 9/11, sweeping and indiscriminate digital surveillance of all computer and telecommunications users has been conducted, and more recently, systems have been developed to store every byte of that information forever. This means that if actors within some government agency decide to target you, they can immediately access every telecommunication: email, phone call, etcetera, that you have made or sent for years, as well as every web site you have visited. So how does electronic surveillance impact scholarship? How does our constant state of cyber-nudity stifle intellectual curiosity?  By claiming falsely that reviewing materials, for example, about creationism, makes one necessarily a creationist, or reviewing materials about jihad makes one a jihadist, or that reviewing materials about anarchism makes one necessarily an anarchist, and, further, that reviewing anything or even claiming these titles is the same as actually committing any crime, the surveillance state is effectively abolishing your right to be a critical thinker.

How Washington Could Make College Tuition Free (Without Spending a Penny More on Education) -  Here's a little known fact: With what the federal government spent on its various and sundry student aid initiatives last year, it could have covered the tuition bill of every student at every public college in the country. Doing so might have required cutting off financial aid at Yale, Amherst, the University of Phoenix, and every other private university. But at this point, that might be a trade worth considering. Let's start with a quick survey of the numbers. Between graduate students and undergrads at both four-year and community colleges, students paid just under $60 billion in tuition to attend state institutions of higher learning in fiscal year 2012. That's the giant magenta slice of the graph below, released this week by the State Higher Education Executive Officers Association. And just in case that figure sounds suspiciously low to you, the Department of Education reports that in the 2009-2010 school year, public colleges made about $57 billion off tuition (page 268, for those interested).

The Law Graduate Debt Disaster Goes Critical - Last year I wrote about the quickly exploding law graduate debt disaster. It is getting worse, much worse. In 2010, only 4 law schools had graduates with average debt in excess of $135,000; in 2011, 17 law schools did. This past year 26 law schools surpassed this amount. Average law graduate debt in 2011 at both Thomas Jefferson and California Western topped $153,000. In 2012, Thomas Jefferson graduates had average debt of $168,800. Listed below are the twenty law schools with the highest average debt for the graduating class of 2012--followed in bold by the percentage of the graduating class of 2011 that landed full time jobs as lawyers (at least one year duration) within nine months of graduation (employment data from 2011 are reported because 2012 "JD required" data are still unavailable and the difference between these two years will be small):

Chart: The explosion in college debt -- From the New York Fed: Higher education is crucial to improving the skill level of American workers, especially in the face of rising skill premiums and a relatively unfavorable labor market for less skilled workers. Due to increasing enrollment and the rising cost of higher education, student loans play an increasingly important role in financing higher education, and student debt is the only kind of household debt that continued to rise through the Great Recession.

Student Debt and the Economy - The student loan debt crisis has become a drag on the economy. Younger Americans who are saddled with bankrupting payments — or credit ratings damaged by delinquency — are in no position to buy homes, save for retirement or start businesses. Related in Opinion Charles M. Blow: A Dangerous ‘New Normal’ in College Debt (March 9, 2013)The Federal Reserve Bank of New York recently released a study showing just why many young people are being strangled by student loans. It found that 43 percent of 25-year-olds had student debt in 2012, an increase from 27 percent in 2004. Unemployment and the collapse of household income in the recession only made the borrowing problem worse. According to the new study, student debt almost tripled between 2004 and 2012, and is approaching $1 trillion, while the percentage of borrowers who were more than 90 days delinquent had risen to 17 percent, from 10 percent in 2004. In addition, student loan debt was the only kind of household debt that continued to rise through the Great Recession, and it is now the second largest after mortgage debt. The student debt crisis has its roots in state cuts to higher education that began in the 1980s. By savaging support to the public colleges and universities that educate about 70 percent of the nation’s students, the states forced up tuition, causing students to borrow steadily more. The Federal Reserve study estimates that nearly 18 percent of borrowers now have student loan debts of $25,000 to $50,000, and nearly 4 percent have balances greater than $100,000. 

Research ties inequality to a gap in life expectancy - The widening gap in life expectancy between these two adjacent Florida counties reflects perhaps the starkest outcome of the nation’s growing economic inequality: Even as the nation’s life expectancy has marched steadily upward, reaching 78.5 years in 2009, a growing body of research shows that those gains are going mostly to those at the upper end of the income ladder. The tightening economic connection to longevity has profound implications for the simmering debate about trimming the nation’s entitlement programs. Citing rising life expectancy, influential voices including the Simpson-Bowles deficit reduction commission, the Business Roundtable and lawmakers on both sides of the aisle have argued that it makes sense to raise the eligibility age for Social Security and Medicare. But raising the eligibility ages — currently 65 for Medicare and moving toward 67 for full Social Security benefits — would mean fewer benefits for lower-income workers, who typically die younger than those who make more.

How Raising the Retirement Age Screws the Working Poor - Those of you who are careful readers of this blog are already aware that in recent years life expectancy has risen way more for richer people than for poorer people. The basic chart is here. Today, however, the Washington Post puts this into more concrete terms by comparing life expectancies in two Florida counties that are right next to each other. St. Johns is a well-off coastal county, while Putnam is a more working class inland county. Here's their map:  The article makes the obvious point about how this affects the debate over whether to raise the Social Security retirement age: The widening gap in life expectancy between these two adjacent Florida counties reflects perhaps the starkest outcome of the nation’s growing economic inequality: Even as the nation’s life expectancy has marched steadily upward, reaching 78.5 years in 2009, a growing body of research shows that those gains are going mostly to those at the upper end of the income ladder.

Why Grandpa Hasn't Retired - The percentage of Americans who are 65 and older will rise from 13 percent in 2010 to 20 percent by 2030 -- and, if the recent trend continues, a growing share of those elderly Americans will carry on working past the normal retirement age. In 1990, 11.8 percent of those 65 and older worked. In 2010 the figure was 17.4 percent. By 2020, the Bureau of Labor Statistics expects it to be 22.6 percent. The numbers are even more surprising for Americans older than 75. Less than 5 percent of them worked in 1990. In 2010, it was 7.4 percent. By 2020, according to the BLS, 10 percent of them will still be toiling away. Since 1990, the aging of the population would have increased the number of workers older than 55 by 9.6 million if their participation rate hadn't changed. The increase in the participation rate added another 8.7 million. The rise in participation is almost as powerful as the underlying demographic change.This is a fundamental change in the way America works. Labor-force participation rates have been declining for Americans younger than 45 -- and especially for those younger than 25. The combined effect of these changes is to shift the average American worker's "economic lifecycle." Between 1990 and 2020, the average period spent in the workforce will have shifted roughly five years later. That's a change of historical magnitude, one to be compared to the end of child labor at the turn of the century or the expansion of public high schools after World War II.

Social Security, Life Expectancy, and Income Inequality - Really impressive piece of journalism this AM from Mike Fletcher at the WaPo about the differences in life expectancy between older persons of widely different economic means.  The figure below tells the story, showing the evolution of differences in life expectancy between two Florida counties, one with income levels twice the other.  The differences are particularly stark for men. The piece importantly draws out the implications of these findings for a policy change for which many in DC are pushing: increasing the retirement age for Social Security.  The eligibility age for full benefits is already on its way up to 67 from 65, but based on the top (blue) lines in the figures below, many are calling for it to go higher still. But what about the lower lines?  Increasing the eligibility age is a benefit cut for all recipients, but it obviously falls hardest on those who’ve paid in throughout their working life but don’t stick around long enough to collect their benefits (it’s also true that lower income beneficiaries who do live long enough collect more than they put in, and visa versa for those at the top of the income scale—the benefit schedules are progressive).

Don’t Cut Social Security, Expand It -  With everyone in Washington talking again about a "grand bargain" to replace the sequestration and shrink the federal budget deficit. And that means we’re talking about using the chained consumer-price index, a lower and more accurate inflation measure, to modestly raise taxes and cut Social Security benefits over time. Back in December, I wrote that applying chained CPI to Social Security is the wrong solution to our budget problems: It’s just a way of dressing up a cut to retirement benefits at a time when retirement insecurity is rising. Despite its problems, Social Security is the best-functioning component of the U.S.'s retirement-saving system. Instead of cutting, the federal government should be expanding its role in retirement saving. I'm always struck when people talk about Social Security as "just" an insurance program, when it's in fact the most important retirement-saving vehicle. The chart below, adapted from a 2012 paper by Boston College Professor Alicia Munnell, shows the financial situation of a "typical" pre-retirement household. These are the mean holdings of a household in the middle net worth decile among households headed by people age 55 to 64.

Counterparties: Retiring the 401(k) - The first generation of 401(k) holders is retiring. Duncan Black, in USA Today, reports just how bad things are looking: 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… And that’s for people who actually have a retirement account of some kind. A third of households do not. Americans have had more than 30 years to learn the ins and outs of this massive experiment in tax-deferred investing, but as Alicia Munnell, the director the Center for Retirement Research says, “we just don’t know how to do it”. What money people do save, they tend to manage poorly. They think they can do better than the market, or tend to choose financial professionals that are bad at beating it. More education isn’t going to fix the problem. As the Economist points out, financial education can actually lead to worse decision-making. And although the 401(k) costs $240 billion a year in tax deductions, research shows it doesn’t make people save any more than they otherwise would.There’s a strong argument that defined benefit plans (like a pension, where the amount received is predetermined) should play an increasingly large role in funding Americans’ retirement. That’s the precise opposite of what has happened since the birth of the 401(k): in 1980, 38% of workers had a defined benefits plan; in 2008, 20% did.

Expansion of Medicaid Is Rejected in Florida - Rebuffing Gov. Rick Scott’s support of Medicaid expansion, a Florida Senate committee on Monday rejected the idea, all but ending the possibility that the state would add more poor people to Medicaid rolls. But the Senate panel debating the expansion proposed a compromise: to accept the federal money but use it to put low-income people into private insurance plans. Accepting the money would please the governor and a number of Floridians, while steering people away from Medicaid, which many lawmakers and residents view as troubled. The committee vote to reject a Medicaid expansion under President Obama’s health care overhaul was 7 to 4, with Democrats voting for the expansion. Last week, a Florida House committee voted to reject Medicaid expansion altogether, saying that the system was broken and that adding people to the rolls would cost taxpayers too much money in the long run. From the start, Mr. Scott knew it would be difficult for the Florida Legislature to embrace Medicaid expansion, even for only three years, which is what he proposed. The governor had staked his political career on derailing what he calls “Obamacare,” and his abrupt reversal did not endear him to conservatives in Florida or in the Legislature. Last week, he made it clear he was not going to lobby the Legislature on Medicaid, preferring to use his influence to push through raises for teachers and eliminate a manufacturing sales tax.

The Gradual Privatization of Medicaid - Over the past week, both houses of the Florida legislature have rejected the Medicaid expansion program endorsed by Governor Rick Scott. You may recall the huzzahs from the progressive world when Scott, a self-possessed anti-Obamacare warrior, decided to accept the Medicaid expansion. What didn’t get reported as much is that Scott’s announcement coincided with the go-ahead from the Administration for Florida to fully privatize their Medicaid system. The move into managed care represents an enormous cash cow for private corporate interests, including Scott’s former colleagues – he ran a health care company (notable for his racking up the largest Medicare fraud fine in history). A pilot project was seen as disastrous for almost everyone involved, save perhaps the insurers. Providers and patients alike are uneasy about full privatization.  So what was up with the Legislature’s rejection? They just want a different kind of privatization. Arkansas’ privatization, in particular – which would just completely liquidate the public Medicaid program and have the state, in the immediate term, pay for premiums for everyone up to 138% of the poverty line to purchase private health insurance. There would be no more public disposition of Medicaid for the poor. It folds Medicaid into the as-yet-untested insurance exchanges.

Projected Medicaid Spending Has Fallen by More Than $200 Billion - We’ve already noted that the Congressional Budget Office (CBO) has reduced its projection of cumulative Medicare spending over the 2011-2020 period by more than $500 billion based on a comparison of CBO’s latest estimates with those of August 2010.  The story’s basically the same for Medicaid:  CBO similarly has reduced its estimate of projected federal spending on the program over the same years by about $218 billion, or 6.4 percent.The chart below compares CBO’s projection of Medicaid spending from August 2010 with the projection that CBO released in February.  We exclude spending related to the Medicaid expansion under health reform (including the effects of the Supreme Court decision upholding the Affordable Care Act) and focus on projected spending in the underlying Medicaid program. The timing’s important because it was in late 2010 — and based on CBO’s August 2010 projections — when Fiscal Commission co-chairs Erskine Bowles and Alan Simpson issued their original budget proposal, which called for slightly less than $60 billion in Medicaid savings through 2020.  The original Simpson-Bowles proposal is often considered an appropriate starting point in evaluating whether other deficit-reduction proposals should be viewed as responsible approaches to the deficit problem.

Extending Social Security and Medicare Eligibility Ages-Becker - At the beginning, the social security system was not expensive since retirement payments were not generous, life expectancy at age 65 was then around 12 years, and coverage of the working population was quite limited. All this greatly changed during subsequent decades. Social security retirement incomes have risen greatly, partly due to highly generous adjustments for increases in the cost of living. In addition, the average person who retires at age 65 now lives for about 19 years, because life expectancy after age 65 has increased greatly. One obvious reform would be to raise the age of eligibility for both social security income and Medicare benefits. It is surprising that while life expectancy of older persons has been growing rather rapidly for the past several decades, and jobs have become less physically demanding, actual retirement ages have declined from the 1930s. The average age of retirement is now under 65 (about age 64) because a significant fraction of men and women take retirement at age 62 when workers first become eligible to receive social security retirement benefits. In light of the increase in life expectancy after age 65 and the decline in physically demanding jobs, it would be reasonable for the eligibility age for social security to rise to 68 or 70. The average age of retirement from the labor force for Japanese males is already only a little below 70, which shows that much higher retirement ages is feasible. Persons who are physically or mentally incapable of working would then opt for disability status.

Extending the Social Security and Medicare Eligiblity Ages—Posner - In principle, as Becker shows, increasing the eligibility ages for these costly federal entitlement programs would substantially reduce the federal deficit. But the size of the reduction would depend on the behavioral consequences, a complex and uncertain issue. For example, many people undoubtedly will increase the amount of private health insurance that they carry and also increase their savings for retirement. Most of these additional benefits will probably be provided by employers, resulting in an offsetting reduction in wages. Since fringe benefits receive favorable tax treatment, such a shift reduces federal tax revenues, increasing the federal deficit. Furthermore, more people will apply for social security disability benefits (the effect, if the application is successful, is that the applicant receives social security benefits before he reaches eligibility age) and receive them; in addition, the legal and other administrative expenses of obtaining such benefits are much greater than the expenses of obtaining social security at the age of eligibility.  Other people who lose eligibility if the eligibility age is raised will be able to substitute Medicaid, another costly entitlements program although less generous than Medicare and funded only one-half by the federal government (the other half is funded by the states). And because people between the ages of 65 and 70 are on average healthier than those who are older, the savings to the Medicare program from an increase in the eligibility age will not be proportionate to the number of persons who become ineligible as a result of the increase.

Steve Rattner: Stop Stealing from Our Kids!, by Dean Baker: Steve Rattner wants someone to stop stealing from our kids according to the headline of his blogpost in the NYT. The finger should be pointed backwards in Rattner's case because if anyone is going to jeopardize the living standards of our kids it is wealthy people like Mr. Rattner. We have seen an enormous upward redistribution of income over the last three decades. As a result most workers have seen little of the benefits of economic growth. If this upward redistribution continues, then our children are unlikely to see much of the gains of growth in the future. Rather than have people focus on the policies that have led to this upward redistribution..., wealthy people like Rattner use their money and power to try to divert attention to the cost of Social Security and Medicare. They have thrown enormous resources into trying to scare people with the prospective burdens posed by these programs. For example, Rattner today tells us that with Social Security: "The present value of the unfunded liability is 'only' $9 trillion." Are you scared yet? After all, it's "only" $9 trillion. Didn't you love that sarcasm? Yes, $9 trillion is a lot of money... But if we are having a serious discussion, we would talk about this as a share of future income. It's about 0.7 percent of future GDP. Does that scare you?

The Main Reason Medicare Part D Cost Less than Expected Is the Drug Companies Stopped Innovating - Paul Howard celebrates the lower than projected cost of the Medicare prescription drug program and attributes it to the role of private insurers. In fact, the main reason that Part D has cost less than projected is that the rate of increase in drug prices overall has been far less than projected. This in turn is attributable to a sharp fall in the number of breakthrough drugs. If Howard wants to blame the collapse of innovation on the use of private insurers to deliver the Medicare drug benefit then he may have a case that the private insurers were central to controlling costs. Otherwise, he's killing electrons for nothing.

Teachers, colleges getting early lesson in Obamacare - They jokingly refer to themselves as "road scholars," the part-time, often itinerate employees who teach the majority of the classroom hours at community colleges. Without their willingness to work for modest pay, tuition at these colleges would be out of reach for many of those looking to put a foot on the first rung of secondary education. And now some of these instructors are finding themselves among the first to be ensnared by a requirement of Obamacare — the Affordable Care Act — as their employers are planning to cut their teaching hours to make sure they don't qualify for health care benefits under the new law. Friday morning, adjunct professors and their supporters are planning a protest rally during an Illinois Council of Community College Presidents meeting in Lombard to urge leaders of the state's community colleges to "Keep the 'care' in the Affordable Care Act," as their promotional flier puts it. Here's the problem: Starting next year, Obamacare will require companies that employ more than 50 full-time workers to provide health insurance to employees who work 30 or more hours a week, or else pay a fine. But what's an "hour" for a college teacher? Depending on the subject matter, level of interaction with students and other factors, one hour in the classroom can require two, three or more hours of preparation, grading, conferences and so on.

Rep. Paul Ryan: Republicans won’t ‘give up on destroying the health care system’ - House Budget Committee Chairman Paul Ryan (R-WI) said Tuesday that Republicans would continue to push to repeal health care reform. “We believe that this law is going to collapse under its own weight… This to us is something that we’re not going to give up on, because we’re not going to give up on destroying the health care system for the American people,” he said during a news conference to unveil his latest budget plan. “We want to prevent this law, which we really do believe will do great damage to families and the health care system in America.”

What’s Driving Medical-Care Spending Growth?, by Adam Hale Shapiro, FRBSF Economic Letter: The United States spends more per capita on health care than any other developed country. In 2010, health care accounted for more than 17% of gross domestic product (GDP), more than double the average of other developed countries. In addition, the pace of health-care spending growth has been rapid, outpacing overall GDP growth. The Centers for Medicare and Medicaid Services (CMS) projects that, by 2020, health-care spending will total $4.64 trillion, representing approximately 20% of GDP (Keehan et al. 2011). Understanding the source of this growth is essential to control costs, or “bend the cost curve,” without sacrificing access to care or quality.  This Economic Letter summarizes recent research (Dunn, Liebman, and Shapiro 2012a, b, c) that pinpoints the distinct sources of medical-care spending growth in the employer-sponsored and private health insurance market. The privately insured health-care market is economically important. Total spending for employer-sponsored private health insurance was $709 billion in 2011 (Gaynor and Newman 2012), which was approximately 30% more than Medicare outlays that year. Thus, spending growth in the privately insured market can stem from a multitude of sources, including growth in negotiated services prices.

[INFOGRAPHIC] Uninsured and Unhealthy: The Health Insurance Woes of African Americans - One sector that’s already struggling, and has been for some time now, is African Americans. In 2012, 17.4% of non-Hispanic Blacks were uninsured. Although this was lower than the 29.4% recorded for Hispanics, it was much higher than the 11.2% tallied for non-Hispanic Whites. More critically, only 55.9% of African Americans are expected to continue to live in good health, while a more or less healthy life is expected in 69.4% of white Americans. These and other alarming facts were revealed by the National Health Interview Survey of the Center for Disease Control and Prevention, and corroborated by data from the US Census Bureau. Both these agencies were also the data source for this infographic takes a closer look at the health insurance situation of African Americans: their general health profiles compared to other ethnic groups; the insurance status of income groups within the African American sector; and where uninsured African American are clustered around the country.

Why an MRI costs $1,080 in America and $280 in France - Steve Brill’s massive Time article focused national attention on the price of health-care services in the United States. Sarah Kliff got further data showing an MRI can cost anywhere from $400 to $1,861 in Washington, DC alone. But as startling as the price difference between one hospital and another, or one insurer and another, can be in America, the difference between America and other countries is even more extraordinary. There is a simple reason health care in the United States costs more than it does anywhere else: The prices are higher. That may sound obvious. But it is, in fact, key to understanding one of the most pressing problems facing our economy. In 2009, Americans spent $7,960 per person on health care. Our neighbors in Canada spent $4,808. The Germans spent $4,218. The French, $3,978. If we had the per-person costs of any of those countries, America’s deficits would vanish. Workers would have much more money in their pockets. Our economy would grow more quickly, as our exports would be more competitive.

What Hospitals Charge the Uninsured - Steven Brill’s exposé on hospital pricing in Time magazine predictably provoked from the American Hospital Association a statement seeking to correct the impression left by Mr. Brill that the United States hospital industry is hugely profitable. In this regard, the association can cite not only its own regularly published data, but also data from the independent and authoritative Medicare Payment Advisory Commission, or Medpac, established by Congress to advise it on paying the providers of health care for treating Medicare patients. As shown by Chart 6-19 of Medpac’s report from June 2012, “Health Care Spending and the Medicare Program,” the average profit margin (defined as net profit divided by total revenue) for the hospital industry over all is not extraordinarily high, although for a largely nonprofit sector I would rate it more than adequate. But in each year there is a large variance about that year’s average shown in Chart 6-19, with about 25 to 30 percent of hospitals reportedly operating in the red and many others earning margins below the averages. The hospital association also correctly points out that under the pervasive price discrimination that is the hallmark of American health care, the profit margin a hospital earns is the product of a complicated financial juggling act among its mix of payers.

Health Care Thoughts: More Complexity Grumbling - I have made the point many times that if anything stops Obamacare it will be the inability to implement an extremely complicated program. Call it “Rusty’s Theory of Complexity.” The feds have now published (link below) the draft application for financial assistance in health care exchanges and low income plans. Oh boy. With attachments this could easily run 30 + pages, and of course someone is going to have to process this (there will be an online version). Having helped people with paperwork for nearly 40 years I can guarantee this will be intimidating and confusing to many people. Complication is the enemy of implementation. Count on it.  HR Block has already positioned itself as a likely fee-for-service form fill-in service. Somebody is going to profit here.

Who Spends The Most Dollars Lobbying Washington, DC? - Oil? Financials? Aerospace? When someone asks who the biggest sources of lobby dollars for DC's politicians-for-purchase are, these are the three usual suspects that come to mind. Some may, therefore, be surprised to learn according to the database kept by OpenSecrets between Pharmaceutical and health product industry, hospital and nursing homes, health professionals and health services, HMOs, or more broadly Pharma/Healthcare/HMO, the total lobby dollars spent between 1998 and 2012 was a staggering $5.3 billion, or nearly three times greater than the second most generous industry: insurance, and well above Oil and Gas at $1.4 billion, and Securities and Investment at $1.0 billion. Is it becoming clearer why the US government has few qualms about unsustainable taxpayer funded healthcare spending, especially when there are so many current benefits accruing to the politicians who see so many billions in benefits from passing lobby-friendly laws now (by which we mean generous taxpayer funding, the bulk of which benefits the healthcare industry's bottom line)?

What your doctor isn’t telling you: In 2007, a study in the New England Journal of Medicine found that the radiation from CT scans — the tests regularly used to detect internal injuries or signs of cancer — is likely responsible for 2 percent of cancer cases in the United States. While lots of Americans undergo CT scans (their use has tripled over the past 15 years), that research is unlikely to come up in doctors’ offices: Two-thirds of patients in a new JAMA study reported hearing nothing of the risks of the diagnostic procedure. Meanwhile, 17 percent felt like they played an active role in a discussion over whether this diagnostic test was the best path forward. “Our study indicates that most decisions to undergo outpatient CT are made by physicians and risk communication is infrequent,” a team of researchers led by University of Colorado’s Tanner Caverly writes. “The risk communication that took place had limited impact: respondents who recalled discussing the benefits and risks of imaging did not have better knowledge.”

Mississippi Pushes Bill Ensuring Mississippians Stay Fat… - Mississippi — where about  one in three adults is at least 30 pounds heavier than a healthy weight — isn’t on board with New York City Mayor Michael Bloomberg’s attempt to combat obesity rates by  regulating large sugary drinks. In fact, lawmakers in Mississippi want to be absolutely certain their own local officials won’t implement the same kind of public health initiatives. A bill awaiting Gov. Phil Bryant’s (R) signature would  prevent any Mississippi county from taking steps to address the obesity epidemic by regulating the food and beverage industries:  A bill now on the governor’s desk would bar counties and towns from enacting rules that require calorie counts to be posted, that cap portion sizes, or that keep toys out of kids’ meals. “The Anti-Bloomberg Bill” garnered wide bipartisan support in both chambers of the legislature in a state where one in three adults is obese, the highest rate in the nation.

Heart attacks rise following daylight saving time: "The Monday and Tuesday after moving the clocks ahead one hour in March is associated with a 10 percent increase in the risk of having a heart attack," says UAB Associate Professor Martin Young, Ph.D., in the Division of Cardiovascular Disease. "The opposite is true when falling back in October. This risk decreases by about 10 percent." The Sunday morning of the time change doesn't require an abrupt schedule change, but, Young says, heart-attack risk peaks on Monday when most people rise earlier to go to work.

Ancient people had clogged arteries, mummy scans show : Scans of mummies from as long ago as 2,000 BC have revealed that ancient people also had clogged arteries, a condition blamed on modern vices like smoking, overeating and inactivity, a study said Monday. The finding, published in the Lancet medical journal, casts doubt on our understanding of the condition known as atherosclerosis that causes heart attacks and strokes. “The presence of atherosclerosis in premodern human beings suggests that the disease is an inherent component of human ageing and not associated with any specific diet or lifestyle,” states the study conclusion.

Expert warns antibiotic-resistant ‘superbugs’ pose ‘catastrophic threat’ to population - Antibiotic-resistant bacteria with the potential to cause untreatable infections pose “a catastrophic threat” to the population, the chief medical officer warns in a report calling for urgent action worldwide. If tough measures are not taken to restrict the use of antibiotics and no new ones are discovered, said Dame Sally Davies, “we will find ourselves in a health system not dissimilar to the early 19th century at some point”. While antibiotics are failing, new bacterial diseases are on the rise. Although the “superbugs” MRSA and C difficile have been reduced to low numbers in hospitals, there has been an alarming increase in other types of bacteria including new strains of E coli and Klebsiella, which causes pneumonia. These so-called “gram negative” bacteria, which are found in the gut instead of on the skin, are highly dangerous to older and frailer people and few antibiotics remain effective against drug-resistant strains. As many as 5,000 patients die each year in the UK of gram negative sepsis – where the bacterium gets into the bloodstream – and in half the cases the bacterium is resistant to drugs.

New wave of 'superbugs' poses dire threat, says chief medical officer - Antibiotic-resistant bacteria with the potential to cause untreatable infections pose "a catastrophic threat" to the population, the chief medical officer warns in a report calling for urgent action in Britain and worldwide. If tough measures are not taken to restrict the use of antibiotics1 and no new ones are discovered, said Dame Sally Davies, "we will find ourselves in a health system not dissimilar to the early 19th century at some point". While antibiotics are failing, new bacterial diseases are on the rise. Although the "superbugs" MRSA and C difficile have been reduced to low numbers in hospitals, there has been an alarming increase in other types of bacteria including new strains of E coli and Klebsiella, which causes pneumonia. These so-called "gram negative" bacteria, which are found in the gut instead of on the skin, are highly dangerous to older and frailer people and few antibiotics remain effective against drug-resistant strains. As many as 5,000 patients die each year in the UK of gram negative sepsis – where the bacterium gets into the bloodstream – and in half the cases the bacterium is resistant to drugs.

Analysis: Antibiotic apocalypse - A terrible future could be on the horizon, a future which rips one of the greatest tools of medicine out of the hands of doctors. A simple cut to your finger could leave you fighting for your life. Luck will play a bigger role in your future than any doctor could. The most basic operations - getting an appendix removed or a hip replacement - could become deadly. Cancer treatments and organ transplants could kill you. Childbirth could once again become a deadly moment in a woman's life. It's a future without antibiotics. This might read like the plot of science fiction novel - but there is genuine fear that the world is heading into a post-antibiotic era. The World Health Organization has warned that "many common infections will no longer have a cure and, once again, could kill unabated". The US Centers of Disease Control has pointed to the emergence of "nightmare bacteria". And the chief medical officer for England Prof Dame Sally Davies has evoked parallels with the "apocalypse".

Don’t Be Afraid of Genetic Modification - The AquAdvantage fish is an Atlantic salmon that carries two foreign bits of DNA: a growth hormone gene from the Chinook salmon that is under the control of a genetic “switch” from the ocean pout, an eel-like fish that lives in the chilly deep. Normally, Atlantic salmon produce growth hormone only in the warm summer months, but these genetic adjustments let the fish churn it out year round. As a result, the AquAdvantage salmon typically reach their adult size in a year and a half, rather than three years. If the modified fish is approved, which could still happen later this year, it will be the first transgenic animal to officially enter the human food supply. Appropriately, it has been subjected to rigorous reviews, with scientists all over the country weighing in on whether it is fit for human consumption and what might happen if it was to make its way into the wild. Some environmentalists fear that the modified salmon might wriggle free from fish farms, start reproducing, and ultimately drive wild salmon populations to extinction. But scientists, including the F.D.A.’s experts, have concluded that the fish is just as safe to eat as conventional salmon and that, raised in isolated tanks, it poses little risk to wild populations.

Indirect side-effects of the cultivation of genetically modified plants: A team of researchers led by Jörg Romeis from the Agroscope Reckenholz-Tänikon Research Station has now identified a biological mechanism that offers an additional explanation for the increase in new pests in Bt cotton fields. Cotton plants have a sophisticated defence system. When caterpillars begin to nibble on them, they form defensive substances, so-called terpenoids. This spoils the appetite of not only the caterpillars, but of many other nibblers as well.Cotton aphids generally do not cause severe agricultural damage because they succumb to their natural enemies out in the open. His results are therefore not relevant to farming, says Romeis. However, he has for the first time revealed an indirect effect of Bt cotton: the killing of the caterpillars also affects other plant-eating insects because the plants' defence system remains inactive. Romeis now wants to investigate whether this effect is relevant to aphids only or also to the bugs that are creating problems for cotton farmers in China and in other cotton-growing regions of the world.

USDA entwined in U.S. farm output, markets - The U.S. government has a hand in every stage of American agriculture, from planting the crop to harvesting and price discovery. Among other things the automatic budget cuts that began on Friday will affect the Agriculture Department's role in measuring farm output and tracking market prices. Most prominently, USDA says budget cuts may force it to furlough all 8,400 meat inspectors for 15 days. By law, meat plants cannot operate without USDA inspectors, so a furlough en masse would shut down the meat industry. Some $10 billion in production would be lost if that happens, USDA estimates. It says it will try to minimize the impact, perhaps through non-consecutive days off for inspectors. Up to one-third of USDA's 100,000 employees may be affected by furloughs, USDA says. They will get at least 30 days' notice, which means layoffs are still weeks away. At least ten of USDA's agencies and offices have a direct impact on production, marketing and price-setting. The following is a list of what they do and, in cases where USDA has provided details, how the sequester may affect them.

Big Sugar Is Set for a Sweet Bailout - The U.S. Department of Agriculture is considering buying 400,000 tons of sugar to stave off a wave of defaults by sugar processors that borrowed $862 million under a government price-support program. The action aims to prop up tumbling U.S. sugar prices, which have fallen 18% since the USDA made the nine-month operations-financing loans beginning in October. The purchases could leave the price-support program with an $80 million loss, its biggest in 13 years, said Barbara Fecso, an economist at the USDA, in an interview. The move would benefit companies that turn sugar beets and sugar cane into granulated sweetener, a business plied by American Crystal Sugar Co., Amalgamated Sugar Co. and U.S. Sugar Corp. The USDA wouldn't say how many companies have received loans, or identify them. U.S. Sugar said it doesn't have any USDA loans outstanding. American Crystal and Amalgamated didn't respond to requests for comment.

Two Rising Biofuels Trends: Corn Oil Biodiesel and Sorghum Ethanol  - Corn oil is a new favorite product at ethanol plants. Same song, second verse. The EIA reported earlier this week, that ethanol plants are responding to the difficult market conditions by adding corn oil to their production schemes which improves their margins. “POET Biorefining in Macon, Missouri, and Abengoa in Madison, Illinois, may add corn oil recovery units in 2013.” (Some already produce it.) A recent futuristic graph provided by the University of Missouri helps us visualize it better: Furthermore, this graph shows that there is room for growth in the biodiesel category of the biofuels industry. According to this Biodiesel Magazine article, today’s “biodiesel penetration in the diesel fuel pool comes in at a meager 1.9 percent.” A number of ethanol plants are beginning to use sorghum as ethanol feedstock. Aemetis in Keyes, California, is changing its feedstock from corn to sorghum and replacing its natural gas consumption with biomass. Poet is expanding sorghum ethanol production through contracts set up this coming year in South Dakota. And in Nebraska, where there is extreme drought and reduced irrigation, more sorghum may be produced and used at ethanol plants, too.

Clean Fuel From Trash, Crop Waste to Match Corn-Ethanol by 2016 - Ethanol made from inedible matter such as crop waste and household trash will match the price of corn-based ethanol by 2016, potentially spurring output of the motor fuel, according to data compiled by Bloomberg. Cellulosic ethanol costs about 94 cents a liter to produce, about 40 percent more than ethanol from corn, Bloomberg New Energy Finance said today in a statement. That gap will probably close within three years, according to a BNEF survey of 11 of the industry’s biggest companies. “If our survey proves accurate, cellulosic ethanol will make meaningful inroads into the vehicle-fuel market during the last years of this decade,” Harry Boyle, a biofuel analyst at BNEF, said in the statement. Ethanol production from edible crops such as corn has raised concern that grain plantations are being converted, cutting food supply and pushing up prices. Using non-edible plants or waste can help save the more fertile land for food and avoid the need to shift edible crops into more sensitive areas such as forest and peatland, which store carbon dioxide. Countries across the world are setting targets to reduce the use of fossil fuels in vehicles to cut imports and meet carbon-reduction goals. In the U.S., where corn-based ethanol already is competitive with gasoline, the Renewable Fuel Standard requires gasoline and diesel producers to blend 36 billion gallons of biofuel a year into their products by 2022, including 16 billion gallons of cellulosic fuel.

New-And-Improved Biofuels: Report Predicts Cost-Competitive Cellulosic Ethanol By 2016 - Cellulosic ethanol is a biofuel produced from grass, wood chips, and other feedstocks that don’t double as food. So unlike traditional corn-based ethanol, it promises to avoid encroaching upon and destabilizing human food supplies — assuming it can become commercially viable. And according to a survey by Bloomberg New Energy Finance (BNEF), that time may come as soon as 2016. The report found that the costs of enzymes, pre-treatment, and fermentation in the production process have all fallen significantly, and as a result the cellulosic biofuel industry expects its product to be cost competitive with corn-based ethanol and gasoline by 2016. But more ground needs to be covered if that goal is to be achieved. In 2012, cellulosic ethanol production cost $0.94 per litre, compared to the $0.67 per litre cost of corn-based ethanol — which is already competitive with gasoline. If this report proves accurate, it could be a game-changer for biofuels and their role in the climate change solutions mix, given the problems that have so far bedeviled the energy source. On top of all this, corn-based biofuel use drives the conversion of grasslands and forest into cropland, even though the former two actually do much more to reduce carbon in the atmosphere than the latter. Combine that with the carbon emissions from increased agricultural production, and corn-based biofuel actually negates most, if not all, of its carbon-reducing benefits.

After 2012 drought, US farmers adapt for climate change: Emerging from the worst drought in 50 years, US farmers are bracing for long-term challenges from climate change including blasting heat and more capricious rainfall. About 80 percent of the farmland in the world's biggest soybean and corn (maize) producer was scorched by extreme heat and drought last summer, savaging crops and sending global prices for the key food commodities soaring, hurting poor countries that depend on imports. Across the heartland of the corn crop in the Midwest state of Iowa, farmers have turned a jaundiced eye on last season's disaster to focus on this year's weather conditions. By early March, 53 percent of the land was still abnormally dry or suffering drought. But as more and more accept that the climate is changing, farmers are putting their faith in technology to help them beat global warming.

A Dry Spring: Drought Expands In Texas And Florida, Pounding State Economies - According to the latest report from U.S. Drought Monitor, drought conditions expanded in Florida and West Texas last week. While storms and heavy precipitation rolled into much of the eastern United States, several weeks of low rainfall have pushed Florida’s peninsula into “abnormally” — and in some areas “moderate” or “severe” — dry conditions. And much of Texas remains blanketed by “moderate” to “severe” drought, with significant areas sliding all the way into “extreme” and “exceptional.” The state’s climatologist has warned that if the drought persists through the summer, only the record cumulative dry spell Texas suffered in the 1950s would be worse.  And the massive drought conditions that’ve been pummeling the midwest remain as brutal as ever, as Climate Central reported late last week: Although this is the climatological dry season for Florida, the current level of dryness is more intense than in normal years. Since Nov. 1, 2012, Daytona Beach has received just a little more than 40 percent of its normal rainfall, making it the 7th driest period in 80 years. The past several weeks saw the drought in Texas intensify as well, which is a troubling sign moving into spring. Texas typically receives little widespread, steady precipitation during the spring and summer months and relies on the rains from the fall and winter to carry it through the year. Most of Texas has been under drought conditions since the summer of 2011, and that prolonged aridity has left reservoir levels across the state at record low levels, leaving the state vulnerable to water shortages and restrictions if conditions do not improve. [...]

Monarch butterfly population in Mexico drops to record low – Now only one-fifteenth as many butterflies as there were in 1997 (AP) – The amount of Monarch butterflies wintering in Mexico dropped 59 percent this year, falling to the lowest level since comparable record-keeping began 20 years ago, scientists reported Wednesday. It was the third straight year of declines for the orange-and-black butterflies that migrate from the United States and Canada to spend the winter in mountaintop fir forests in central Mexico. Six of the last seven years have shown drops, and there are now only one-fifteenth as many butterflies as there were in 1997. The decline now marks a statistical long-term trend and can no longer be seen as a combination of yearly or seasonal events, the experts said. Illegal logging in the reserve established in the Monarch wintering grounds was long thought to contribute, but such logging has been vastly reduced by increased protection, enforcement and alternative development programs in Mexico. The World Wildlife Fund, one of the groups that sponsored the butterfly census, blamed climate conditions and agricultural practices, especially the use of pesticides that kill off the Monarchs' main food source, milkweed. The butterflies breed and live in the north in the summer, and migrate to Mexico in the winter.

Bee deaths: EU delays action on pesticides ban - EU nations have been unable to reach agreement on proposals to ban the use of three pesticides that have been linked to the decline of bees. The European Commission had called for a two-year EU-wide moratorium, but a number of nations opposed the plans. A recent report by the European Food Safety Agency (EFSA) concluded that the pesticides posed a "high acute risk" to pollinators, including honeybees. The commission is expected to redraft its proposals ahead of another vote. Member states were unable to reach a qualified majority in order for the proposals to be adopted. The news of the stalemate has angered groups that had been campaigning in favour of the ban.

Huge Florida mosquitoes: Monster insects are called “Gallinippers” - One of the most ferocious insects you've ever heard of — it's the size of a quarter — is set to invade Florida this summer. The Sunshine State, already home to man-eating sinkholes, invading Burmese pythons, swarming sharks, tropical storms and other disasters, can expect to see an explosion of shaggy-haired gallinippers (Psorophora ciliata), a type of giant mosquito, according to entomologist Phil Kaufman of the University of Florida. Gallinipper eggs hatch after a rainstorm or flood, and the state saw a big jump in the numbers of gallinippers last summer after Tropical Storm Debby dumped its load on Florida. Eggs laid last year could produce a bumper crop of the blood-sucking bugs this summer if Florida sees a soggy rainy season. "I wouldn't be surprised, given the numbers we saw last year," Kaufman said in a statement. "When we hit the rainy cycle, we may see that again." As insects go, gallinippers are particularly formidable. Their eggs lay dormant for years, awaiting the floodwaters that will enable them to hatch. Even in their larval stage, gallinippers are so tough they'll eat tadpoles and other small aquatic prey.

Warming Means Wetter Weather – and Drier Weather - Welcome to the see-saw world of climate change. Rainy seasons will get rainier. Dry seasons will tend to become more parched. Even if the total annual rainfall does not change very much, the seasonal cycles will – with obvious consequences. Floods and droughts will become more frequent, according to Chia Chou of the University of Taipei, and colleagues from Taiwan and California. Researchers have found evidence that in the last 30 years wet seasons have been becoming wetter and dry ones drier. Credit: 3268Zauber Like all pronouncements about the future, this one comes with caveats: the research is based on climate simulations of future warming, and the forecasts are only as good as the data fed into such simulations.  But the authors start with a trend they can already measure: they report in Nature Geoscience that they looked at rainfall data between 1979 and 2010 and found that the wet seasons were already clearly getting wetter, at the rate of almost a millimeter a day per century, while the dry seasons became drier with just over half a millimeter less in rainfall per day per century.And the gap between wet and dry seasons was widening at a rate of 1.47 millimeters per day per century. All three trends, they report, “are significant at the 99 percent confidence level.”

Canada Losing Its Seasons - Winters are already significantly warmer and shorter than just 30 years ago. The temperature regimes and plant life of the south have marched more than 700 kilometres northward, new research shows. The frozen north is leaving and won’t be back for millennia due to heat-trapping carbon emissions from burning fossil fuels, experts say. By 2091, the north will have seasons, temperatures and possibly vegetation comparable to those found today 20 to 25 degrees of latitude further south, said Ranga Myneni of the Department of Earth and Environment, Boston University. “If we don’t curb carbon emissions, Arctic Sweden might be more like the south of France by the end of the century,” Myneni, co-author of the Nature Climate Change study published Sunday, told IPS. Canada, Northern Eurasia and the Arctic are warming faster than elsewhere as a result of the loss of snow and ice, he said. In 90 years, Alaska or Canada’s Baffin Island in the Arctic may have seasons and temperatures comparable to those in today’s Oregon and southern Ontario.

Rains or Not, India Is Falling Short on Drinkable Water - Almost no place on Earth gets more rain than this small hill town. Nearly 40 feet falls every year — more than 12 times what Seattle gets. Storms often drop more than a foot a day. The monsoon is epic.   But during the dry season from November through March, many in this corner of India struggle to find water. Some are forced to walk long distances to fill jugs in springs or streams. Taps in Shillong, the capital of Meghalaya State, spout water for just a few hours a day. And when it arrives, the water is often not drinkable.  That people in one of the rainiest places on the planet struggle to get potable water is emblematic of the profound water challenges that India faces. Every year, about 600,000 Indian children die because of diarrhea or pneumonia, often caused by toxic water and poor hygiene, according to Unicef.  Half of the water supply in rural areas, where 70 percent of India’s population lives, is routinely contaminated with toxic bacteria. Employment in manufacturing in India has declined in recent years, and a prime reason may be the difficulty companies face getting water.  And India’s water problems are likely to worsen. A report that McKinsey & Company helped to write predicted that India would need to double its water-generation capacity by the year 2030 to meet the demands of its surging population.  A separate analysis concluded that groundwater supplies in many of India’s cities — including Delhi, Mumbai, Hyderabad and Chennai — are declining at such a rapid rate that they may run dry within a few years.

Pentagon weapons-maker finds method for cheap, clean water (Reuters) - A defense contractor better known for building jet fighters and lethal missiles says it has found a way to slash the amount of energy needed to remove salt from seawater, potentially making it vastly cheaper to produce clean water at a time when scarcity has become a global security issue. The process, officials and engineers at Lockheed Martin Corp say, would enable filter manufacturers to produce thin carbon membranes with regular holes about a nanometer in size that are large enough to allow water to pass through but small enough to block the molecules of salt in seawater. A nanometer is a billionth of a meter. Because the sheets of pure carbon known as graphene are so thin - just one atom in thickness - it takes much less energy to push the seawater through the filter with the force required to separate the salt from the water, they said. The development could spare underdeveloped countries from having to build exotic, expensive pumping stations needed in plants that use a desalination process called reverse osmosis.

Tropical forests unexpectedly resilient to climate change - Tropical forests are unlikely to die off as a result of the predicted rise in atmospheric greenhouse gases this century, a new study finds. The analysis refutes previous work that predicted the catastrophic loss of the Amazon rainforest as one of the more startling potential outcomes of climate change. In the most extensive study of its kind1, an international team of scientists simulated the effect of business-as-usual emissions on the amounts of carbon locked up in tropical forests across Amazonia, Central America, Asia and Africa through to 2100. They compared the results from 22 different global climate models teamed with various models of land-surface processes. In all but one simulation, rainforests across the three regions retained their carbon stocks even as atmospheric carbon dioxide concentration increased throughout the century.

NASA: Amplified Greenhouse Effect Shifts North's Growing Seasons - Vegetation growth at Earth's northern latitudes increasingly resembles lusher latitudes to the south, according to a NASA-funded study based on a 30-year record of ground-based and satellite data sets. In a paper published Sunday, March 10, in the journal Nature Climate Change, an international team of university and NASA scientists examined the relationship between changes in surface temperature and vegetation growth from 45 degrees north latitude to the Arctic Ocean. Results show temperature and vegetation growth at northern latitudes now resemble those found 4 degrees to 6 degrees of latitude farther south as recently as 1982. "Higher northern latitudes are getting warmer, Arctic sea ice and the duration of snow cover are diminishing, the growing season is getting longer and plants are growing more," "In the north's Arctic and boreal areas, the characteristics of the seasons are changing, leading to great disruptions for plants and related ecosystems."

Obama: Climate change threatens shipping routes - President Obama said Tuesday that federal investments in waterway maintenance will be vital as drought fueled by climate change creates problems for barges bringing goods out of the Midwest. Obama, during a meeting of the President’s Export Council, noted recent problems moving goods when last year’s major drought lowered water levels in the Mississippi River. “Recently we had the challenge of ... getting goods from the Midwest down the Mississippi when the water started going down,” Obama said. He said the upcoming White House budget proposal would seek to address maintenance needs. “And if in fact temperatures are warming — I know this is not our climate change meeting — but I think we can anticipate that we may end up having some challenges in terms of managing our waterways well, whether or not we can continue to use barges to move a lot of product out of the American heartland to ports around the world, that is going to depend on our infrastructure,” Obama said.

Invasive species hitchhiking to west coast on tsunami debris - Invasive species are hitchhiking to the west coast of North America on debris from the March 2011 Japanese tsunami and it could be years before it is known which species will take hold and how much damage they will do, Oregon State University scientists say. But there is a major gap in the research because no samples have been sent from B.C. and there does not appear to be equivalent research data from Canada, said John Chapman, a marine invasive species specialist. Chapman, who has studied more than three dozen pieces of tsunami debris from Alaska, Oregon and Washington, said several species have the potential to cause widespread ecosystem and economic damage. Examples include wakame kelp, which can spread quickly, fouling docks and blocking sunlight from native kelp and seaweeds; sea squirt tunicate, which can foul aquaculture lines, and a parasite that can kill oysters, said Chapman, one of the first scientists to examine a massive dock that washed ashore last year in Newport, Oregon. The dock was covered in thousands of organisms in layers up to 15 centimetres thick.

In Florida, Sinkhole Risks Grow With Urban Expansion - In spite of regular hurricanes and alligator attacks, Florida keeps growing: Its population is on track to hit 20 million by 2015, making it the third-biggest state in the union. With all this growth comes a further quality-of-life problem: Sinkholes. Thrust into the national spotlight last week after a homeowner died when his house collapsed, the sinkhole that killed Jeff Bush wasn’t even one of the state’s 15,000 verified sinkholes, which are located mainly in central Florida and around Tampa. Plenty are unverified, according to research from CoreLogic. Springhill, on the state’s west coast, has the greatest number of  verified sinkholes, with 3,145—roughly one for every 31 residents. Hernando, Pasco, Hillsborough, and Pinellas counties are home to an area known as “sinkhole alley.” No location in the entire state can say it features zero chance of sinkholes. “Since the entire state is underlain by carbonate rocks, sinkholes could theoretically form anywhere,” according to Most construction sites are not tested.

Global warming’s new frightening deadline: The marker for what would be considered “catastrophic” warming was generally agreed to be anything above a rise of two degrees Celsius in global temperature. “More than 100 countries,” the paper noted, (the actual number was 167 countries) “have adopted a global warming limit of 2°C or below (relative to pre-industrial levels) as a guiding principle for mitigation efforts to reduce climate change risks, impacts and damages.” The problem was, no one was exactly sure how much fossil-fuel consumption had already contributed to global warming, or how much fossil fuel mankind could consume without going over the two degrees Celsius marker. Those phenomena needed to be quantified. Meinshausen’s team did just that. It constructed a rigorous model by incorporating hundreds of factors that had never been grouped together before, and then ran them through a thousand different scenarios. The team’s conclusion? Time was perilously short. It found that if we continued at present levels of fossil fuel consumption (and, in fact, consumption has been rising annually), we have somewhere between an 11- to 15-year window to prevent global temperatures from surpassing the two degree Celsius threshold in this century.

Inevitable headline in 2014: CO2 at 400 ppm, first time in human history - Peter Gleick: - Sometime, about one year from now, the front pages of whatever decent newspapers are left will carry a headline like the one above, announcing that for the first time in human existence (or in nearly a million years, or 3 million years, or 15 million years), the global atmospheric concentration of carbon dioxide – the principal gas causing climate change – will have passed 400 parts per million. That’s a significant and shocking figure. Unfortunately, it is only a temporary marker on the way to even higher and higher levels. Here (Figure 1 below) are the most recent (March 2013) data from the Mauna Loa observatory showing the inexorable increase in atmospheric CO2 and the rapid approach to 400 ppm. There is a range of estimates around the detailed time record of atmospheric composition, and the study of changes in atmospheric carbon dioxide concentrations over the billions of years of the Earth’s existence is an exciting area for research. A commonly cited figure with strong evidence comes from measurements of air trapped in ancient ice cores obtained from Antarctic ice. We now have a detailed 800,000 year record, which shows clearly that atmospheric CO2 levels never approached 400 ppm during this period (as shown in Figure 2).

We’re Screwed: 11,000 Years’ Worth of Climate Data Prove It - A study published in Science reconstructs global temperatures further back than ever before -- a full 11,300 years. The new analysis finds that the only problem with Mann's hockey stick was that its handle was about 9,000 years too short. To be clear, the study finds that temperatures in about a fifth of this historical period were higher than they are today. But the key, said lead author Shaun Marcott of Oregon State University, is that temperatures are shooting through the roof faster than we've ever seen. "What we found is that temperatures increased in the last hundred years as much as they had cooled in the last six or seven thousand," he said. "In other words, the rate of change is much greater than anything we've seen in the whole Holocene," referring to the current geologic time period, which began around 11,500 years ago. Previous historic climate reconstructions typically extended no further back than 2,000 years, roughly as far back as you can go by examining climate indicators from tree rings, as Mann did. To dig even deeper, Marcott's team looked at objects collected from more than 70 sites worldwide, primarily fossilized ocean shells that have been unearthed by oceanographers.

Could melting glaciers slow down climate change? - As glaciers and ice sheets melt and flood the world, they are releasing a type of nutrient that’s lapped up by tiny creatures that could help reduce global warming. Glaciers contain surprisingly high concentrations of iron, according to the results of a study published Sunday in the journal Nature Geoscience. Iron is a nutrient that’s essential for the growth of plankton, which forms the base of ocean food webs. As plankton blooms feast on iron and grow, they also suck down large quantities of carbon dioxide. Some of that carbon is then passed up the food chain to larger animals. When plankton and animals that feed upon them die, some of the biomass sinks to the bottom of the ocean, taking all that carbon to a deepwater grave and removing it from the atmosphere.

"Greedy Lying Bastards," the new documentary film about global climate disruption and the global warming denial machine, opened in theaters in 29 cities nationwide on March 8 - In addition to dramatic footage of extreme events, the film has a large cast of characters, including excellent commentary by Kevin Trenberth, Michael Mann, Pieter Tans, and Mark Serreze, along with Rep. Henry Waxman (D-Calif.), Jim Hoggan of DeSmogBlog, Kert Davies of Greenpeace, George Monbiot, and me -- and a denial machine rogues gallery of politicians, oil billionaires, 'think tanks' and propagandists.  See Climate Science Watch,, or the film's website,, for the film trailer. Additional information at

Climate Change is the Top Threat according to the Commander of US Forces Pacific - According to the Commander of U.S. Forces Pacific (PACCOM), significant upheaval related to the warming planet “is probably the most likely thing that is going to happen . . . that will cripple the security environment, probably more likely than the other scenarios we all often talk about.’ Admiral Samuel Locklear had a meeting the other day with national security experts at Tufts and Harvard. After this session, he met with a reporter who asked him asked what the top security threat was in the Pacific Ocean. Rather than highlighting Chinese ballistic missiles, the new Chinese Navy aircraft carrier, North Korean nuclear weapons, or other traditional military threats, Admiral Locklear looked to a larger definition of national security. Locklear commented that “People are surprised sometimes” that he highlights climate change — despite an ability to discuss a wide-range of threats, from cyber-war to the North Koreans. However, it is the risks — from natural disasters to long-term sea-level rise threats to Pacific nations that has his deepest attention.

Obama Will Use Nixon-Era Law to Fight Climate Change -  President Barack Obama is preparing to tell all federal agencies for the first time that they should consider the impact on global warming before approving major projects, from pipelines to highways. The result could be significant delays for natural gas- export facilities, ports for coal sales to Asia, and even new forest roads, industry lobbyists warn. “It’s got us very freaked out,” said Ross Eisenberg, vice president of the National Association of Manufacturers, a Washington-based group that represents 11,000 companies such as Exxon Mobil Corp. (XOM) and Southern Co. (SO) The standards, which constitute guidance for agencies and not new regulations, are set to be issued in the coming weeks, according to lawyers briefed by administration officials. In taking the step, Obama would be fulfilling a vow to act alone in the face of a Republican-run House of Representatives unwilling to pass measures limiting greenhouse gases. He’d expand the scope of a Nixon-era law that was first intended to force agencies to assess the effect of projects on air, water and soil pollution.

What’s the best way to design a carbon tax? Lawmakers ask for suggestions. - On Tuesday, four Democrats in Congress unveiled a brand-new proposal for a carbon tax. The set-up is simple: The U.S. government would slap a fee on fossil-fuel emissions and refund the revenue back to the public. But there’s a twist: The precise details of the carbon tax have yet to be thrashed out. The four lawmakers are soliciting public comments for how big the tax should be and how best to rebate the money. The proposal is being put forward by Reps. Henry Waxman and Earl Blumenauer, as well as Sens. Sheldon Whitehouse and Brian Schatz. Here are the key questions they’re wrestling with:

  • 1. What is the appropriate price per ton for polluters to pay? The draft contains alternative prices of $15, $25 and $35 per ton for discussion purposes.
  • 2. How much should the price per ton increase on an annual basis? The draft contains a range of increases from 2 percent to 8 percent per year for discussion purposes.
  • 3. What are the best ways to return the revenue to the American people? The discussion draft proposes putting the revenue toward the following goals, and solicits comments on how to best accomplish each: (1) mitigating energy costs for consumers, especially low-income consumers; (2) reducing the Federal deficit; (3) protecting jobs of workers at trade-vulnerable, energy intensive industries; (4) reducing the tax liability for individuals and businesses; and (5) investing in other activities to reduce carbon pollution and its effects.
  • 4. How should the carbon fee program interact with state programs that address carbon pollution?

The Price of Green Energy: Is Germany Killing the Environment to Save It? - The German government is carrying out a rapid expansion of renewable energies like wind, solar and biogas, yet the process is taking a toll on nature conservation. The issue is causing a rift in the environmental movement, pitting "green energy" supporters against ecologists.

In vote, resource-rich Greenland debates new global role (Reuters) - Kuupik Kleist's earliest memories are hunting whales with hand-thrown harpoons. Now, as Greenland's prime minister, he is feted by Chinese and European leaders as he opens up its untapped mineral resources. A verdict on this country's transformation comes on Tuesday, when this island - a quarter the size of the United States and with only 57,000 mostly Inuit inhabitants - holds a general election. There is only one polling station in the capital Nuuk, which has just two traffic lights and where hunting is still the most popular pastime. But the vote may pack a global punch. After four years of Kleist - a quiet-spoken musician known as Greenland's Leonard Cohen for his gravelly voice - the vote is effectively a referendum on how far it embraces international mining companies, energy giants, and foreign workers. At stake may be Greenland's growing geopolitical role as global warming and the thawing of sea ice open up new sea lanes, minerals and oil fields - drawing the interest of world powers from China to the United States.

Greenland's resources boom still more talk than action (Reuters) - The promise of a resources boom has Greenland's locals both eager and anxious, while the European Union sees it as a battleground with China, but the island is still a long way from producing anything. Retreating ice is exposing huge deposits of iron ore, rare earths and hydrocarbons, but it has yet to launch a single major mining project, and oil and gas production is a decade away at best. Greenland may award one of its biggest mining exploitation licenses this summer, a $2.3 billion project by UK-based London Mining Plc that will supply China with around 15 million metric tons (16.53 million tons) of iron ore a year. It is a high-profile project that has awoken concerns about Chinese geopolitical influence from the likes of the EU.

Commodity prices in the (very) long run - BACK in the late 1960s and early 1970s, rapid worldwide population growth and soaring commodity prices gave rise to fears that humans were outgrowing their planet's resource capacity. Some worried that crisis and Malthusian collapse was imminent.  Still, the view that a fundamental scarcity may generate commodity price spikes—and economic damage—beyond our capacity to respond is alive and well, fueled by a new era of dear commodities.... according to an interesting new NBER paper examining commodity prices over the very long run, from about 1850 on. David Jacks has assembled real commodity price data for 30 commodities, spanning animal products, energy products, and industrial and precious metals. He identifies three price trends corresponding to three time horizons: long-run trends, medium-run "supercycles", and short-run booms and busts.

Paul Ryan Budget Contemplates Selling Off ‘Millions Of Acres’ Of Public Land - This morning House Budget Committee Chairman Paul Ryan (R-WI) offered his fiscal year 2014 budget, which the Wall Street Journal called “almost identical” to the Romney-Ryan presidential platform last year.  In addition to cutting taxes for the rich and preserving tax breaks for Big Oil, the budget offers an extreme and flawed view of public lands and energy development. For example, in an editorial in the Wall Street Journal last night, Ryan offered a confused vision of government programs designed to purchase lands from willing sellers: America has the world’s largest natural gas, oil and coal reserves—enough natural gas to meet the country’s needs for 90 years. Yet the administration is buying up land to prevent further development. Our budget opens these lands to development, so families will have affordable energy. In actuality, there are only limited instances in which the federal government buys land, which can occur via two programs.  First, the Land and Water Conservation Fund uses receipts from offshore oil and gas drilling (not taxpayer dollars) to purchase inholdings from willing sellers within national parks, monuments, and other areas.   . Additionally, there must be willing sellers before the government purchases additional land to make it public, and so it is unclear what Ryan means when he says the administration is trying to “prevent further development.”

Nuclear Regulator, Group Disagree Over Plant Safety - Two years after the nuclear crisis in Japan, the top U.S. regulator says American nuclear power plants are safer than ever, though not trouble-free. A group that has been critical of nuclear safety calls that assessment overly rosy. The Union of Concerned Scientists has issued a report saying nearly one in six U.S. nuclear reactors experienced safety breaches last year, due in part to weak oversight. The group accused the Nuclear Regulatory Commission of "tolerating the intolerable." NRC officials disputed the report and said none of the reported incidents harmed workers or the public. "The performance is quite good," NRC Chairman Allison Macfarlane said in an interview. The advocacy group, using the NRC's data, said 14 serious incidents, ranging from broken or impaired safety equipment to a cooling-water leak, were reported last year

Japan faces higher fuel bill as nuclear shutdown enters 3rd year - The restart of Japan’s nuclear power industry is proving pivotal to the economic vision of the country’s prime minister as soaring fuel bills after the Fukushima disaster threaten to keep the country’s trade in a deeper deficit for longer. As Japan marks the second anniversary this week of a crisis that scarred the nation, the fuel bills to pay for lost atomic output are leaving their own scars on the economy, partly owing to Abe’s own making. His mix of economic policies - dubbed Abenomics by the media - has driven the yen down sharply, thus raising the cost of imports that will weigh on the revival of a nation that has traditionally relied on exports to drive growth. The sooner that pro-nuclear Abe can restart atomic power stations, the sooner he will return the country’s record trade deficit to its long-term standing of a trade surplus and so mark a milestone in the recovery of the economy. But in Abe’s way is the country’s new, independent atomic watchdog, which has said it will take as long as three years to approve restarts under safety guidelines it is drawing up.

Potential Cost Of A Nuclear Accident? So High It’s A Secret! -  Catastrophic nuclear accidents, like Chernobyl in 1986 or Fukushima No. 1 in 2011, are very rare, we’re incessantly told, and their probability of occurring infinitesimal. But when they do occur, they get costly. So costly that the French government, when it came up with cost estimates, kept them secret. But now the report was leaked to the French magazine, Le Journal de Dimanche. Turns out, the upper end of the cost spectrum of an accident at a single reactor at the plant chosen for the study, the plant at Dampierre in the Department of Loiret in north-central France, would amount to over three times the country’s GDP. Financially, France would cease to exist as we know it. Hence, the need to keep it secret. The study was done in 2007 by the Institute for Radiological Protection and Nuclear Safety (IRSN), a government agency under joint authority of the Ministry of Defense and the Ministry of Environment, Industry, Research, and Health. This isn’t some overambitious, publicity-hungry think tank. It evaluated a range of disaster scenarios that might occur at the Dampierre plant. In the best-case scenario, costs came to €760 billion—more than a third of France’s GDP. At the other end of the spectrum: €5.8 trillion! Over three times France’s GDP. A devastating amount. So large that France could not possibly deal with it.

The Cassandra Complex - The prophet Cassandra was blessed with the ability to foretell the future: but cursed that no one would believe her. Except that this is the way that prophecy works, if people believe a dire prophecy, it generally doesn’t come true.    There are a lot of organizations you want run by pessimists (for example, nuclear reactors.)  The sort of people who have posters proclaiming “Murphy was an optimist” on their walls.  The sort of people who told the Japanese how to fix their reactors in the 80s, who had they been listened to, would have avoided an meltdown.But the problem with such people is that they run themselves out of jobs.  They make prophecies, scare people, get the problems fixed, and so their prophecies don’t happen.  Absent major disasters for long enough, people become complacent and decide they don’t need to spend money, time and trouble on the warnings of fools whose prophecies never come true.  They look at all the money they can save, or make, by getting rid of regulations, gutting inspections and running without precautions, and they realize that that even if something bad happens, the odds of them being held accountable are infinitesimal.  After all, when the Japanese financial bubble burst, senior people committed suicide.

Indian coal power plants kill 120,000 people a year, says Greenpeace - India's breakneck pace of industrialisation is causing a public health crisis with 80-120,000 premature deaths and 20m new asthma cases a year due to air pollution from coal power plants, a Greenpeace report warns. The first study of the health impact of India's dash for coal, conducted by a former World Bank head of pollution, says the plants cost hospitals $3.3-$4.6bn (£2.2-£3.1bn) a year — a figure certain to rise as the coal industry struggles to keep up with demand for electricity. The Delhi and Kolkata regions were found to be the most polluted but Mumbai, western Maharashtra, Eastern Andhra Pradesh and the Chandrapur- Nagpur region in Vidarbha were all affected. The study, which took data from 111 major power plants, says there is barely any regulation or inspection of pollution. "Hundreds of thousands of lives could be saved, and millions of asthma attacks, heart attacks, hospitalisations, lost workdays and associated costs to society could be avoided, with the use of cleaner fuels, [and] stricter emission standards and the installation and use of the technologies required to achieve substantial reductions in these pollutants," said the report. "There is a conspicuous lack of regulations for power plant stack emissions. Enforcement of what standards [which] do exist, is nearly non-existent," it says. India is the world's second largest coal burner after China, generating 210 GW of electricity a year, mostly from coal. But it is likely to become the largest if plans to generate a further 160 GW annually are approved. 

Coal's True Cost: 100,000+ Deaths A Year In India - A report issued yesterday from Conservation Action Trust and Greenpeace India outlines the health cost of coal. Via ClimateWire: As many as 115,000 people die in India each year from coal-fired power plant pollution, costing the country about $4.6 billion, according to a groundbreaking new study released today. This report, by the Mumbai-based Conservation Action Trust, is the first full study of “the link between fine particle pollution and health problems in India, where coal is the fuel of choice and energy demands are skyrocketing.” The findings are stunning. In addition to more than 100,000 premature deaths, it links millions of cases of asthma and respiratory ailments to coal exposure. It counts 10,000 children under the age of 5 as fatal victims last year alone. “I didn’t expect the mortality figures per year to be so high,” 115,000 people die earlier than they should because of coal pollution — 10,000 children. Millions of cases of breathing problems from fossil fuel addiction. $4.6 billion is about 250 billion rupees (coincidentally the amount that India gave its oil refineries last month to compensate them for selling fuel below cost to help curb inflation).

Japan Begins Test Production of Frozen Gas Under Seabed - Japan, which imports almost all its energy, produced gas in the world’s first tests to extract the fuel from methane hydrate deposits under the seabed, Japan Oil, Gas & Metals National Corp. said in an e-mailed statement.  Gas was produced during drilling today in the Nankai Trough about 50 kilometers (31 miles) off the coast of the country’s main Honshu island, the government-affiliate known as JOGMEC said. Deposits of methane hydrate, known as “burnable ice,” may be large enough to supply the country’s natural gas needs for about 100 years, according to JOGMEC. The government plans to develop technology to enable commercial use by fiscal 2018. “Methane hydrate may start a revolution in Japan as shale gas did in the U.S., but there are still a lot of challenges ahead,”

Japan Discovers New Gas Source - Following on from FT Alphaville’s post on China’s efforts to extract natural gas from shale rock formations, it appears that Japan has now discovered big gas reserves in waters adjoining the Japanese coastline. From The Telegraph: Japan has extracted natural “ice” gas from methane hydrates beneath the sea off its coasts in a technological coup, opening up a super-resource that could meet the country’s gas needs for the next century and radically change the world’s energy outlook. …an exploration ship had successfully drilled 300 metres below the seabed into deposits of methane hydrate, an ice-like solid that stores gas molecules but requires great skill to extract safely. “Methane hydrates available within Japan’s territorial waters may well be able to supply the nation’s natural gas needs for a century,” said the company… Government officials said it was the world’s first off-shore experiment of its kind, though Japan been working closely with the Canadians. The US and China have their own probes underway.

Japan becomes first nation to extract 'frozen gas' from seabed - Japan has successfully extracted natural gas from frozen methane hydrate deposits under the sea, in the first example of production of the gas offshore, officials said on Tuesday. The Ministry of Economy, Trade and Industry showed what it said was gas flaming from a pipe at the project in the Pacific Ocean 80 kilometres (50 miles) off the coast of central Japan. The breakthrough could be a step toward eventual commercial production, though the costs of extracting gas from the seabed are much higher than for other forms of production. Methane hydrate is a form of methane gas frozen below the seabed or in permanently frozen ground. Japan earlier succeeded in producing such gas from permafrost in Canada in 2007-08.

Japan's Methane Hydrate Gas Extraction Is First In The World (Reuters) - A Japanese energy explorer said on Tuesday it extracted gas from offshore methane hydrate deposits for the first time in the world, as part of an attempt to achieve commercial production within six years. Since 2001, Japan, which imports nearly all of its energy needs, has invested several hundred million dollars in developing technology to tap methane hydrate reserves off its coast that are estimated to be equal to about 11 years of gas consumption. State-run Japan Oil, Gas and Metals National Corp (JOGMEC) said the gas was tapped from deposits of methane hydrate, a frozen gas known as "flammable ice", near Japan's central coast. Japan is the world's top importer of liquefied natural gas and the lure of domestic gas resources has become greater since the Fukushima nuclear crisis two years ago triggered a shake-up of the country's energy sector. Japan's trade ministry said the production tests will continue for about two weeks, followed by analysis on how much gas was produced. Methane is a major component of natural gas and governments including Canada, the United States, Norway and China are also looking at exploiting hydrate deposits as an alternative source of energy.

An Energy Coup For Japan: 'Flammable Ice' — Japan said Tuesday that it had extracted gas from offshore deposits of methane hydrate — sometimes called “flammable ice” — a breakthrough that officials and experts said could be a step toward tapping a promising but still little-understood energy source.  The gas, whose extraction from the undersea hydrate reservoir was thought to be a world first, could provide an alternative source of energy to known oil and gas reserves. That could be crucial especially for Japan, which is the world’s biggest importer of liquefied natural gas and is engaged in a public debate about whether to resume the country’s heavy reliance on nuclear power. Experts estimate that the carbon found in gas hydrates worldwide totals at least twice the amount of carbon in all of the earth’s other fossil fuels, making it a potential game-changer for energy-poor countries like Japan. Researchers had already successfully extracted gas from onshore methane hydrate reservoirs, but not from beneath the seabed, where much of the world’s deposits are thought to lie.

Natural gas prices near $4 as power plants cut into supplies - Near-record natural gas demand from U.S. electricity generators is driving prices back toward $4 for the first time since September 2011 even as output climbs to an all-time high for the sixth straight year. Producers including Duke Energy, NRG Energy, Southern Co. and Dynegy say they plan to run their gas-fired units this year at close to the top rates of 2012. Plants burned 24.96 billion cubic feet of gas a day last year, up 4.21 billion from a year earlier and a bigger gain than in the five previous years combined. Gas futures have nearly doubled since trading at a 10-year low in April as utilities switched from coal and unusually hot weather spurred cooling demand. Power plant consumption of gas may come close to, or even exceed, 2012 levels as the fuel retains a cost advantage over coal in the eastern U.S. and the economy grows, according to BNP Paribas and ConocoPhillips. That contrasts with an Energy Information Administration projection that demand for gas will slide 7.5 percent this year.

A Must Read Account of Fracking Colorado - The estimates for the number of new wells in the state over the long term are dicey, at best. The state has made none and apparently has no plans to do so. Thus, a swipe-at-the-sky estimate using industry statements made in public forums must serve as the basis for an estimate. An industry hydrologist said at a public meeting in Castle Rock, CO, a couple of years ago that they expected 60,000 new wells in the state over the next 20 years. More recently an industry spokesperson said that there could be 100,000 new wells in the state in 30 years. These would be in addition to the industry’s 50,000 presently producing wells in the state. These projections are not out of line with the estimated acreage under lease to the industry. The 100,000 new well projection also jibes with recent drilling permit data. Last year 3,770 drilling permits were approved. If this number were to be repeated annually over the next 30 years, we might expect at least 100,000 new wells. In 2007, before natural gas prices tumbled from the production glut, 8,000 new well permits were approved. So, a projection of 3,300 new wells a year, where oil is the prize, not gas, is well within historical bounds. 

Awesome Star-Studded Music Video: Don't Frack My Mother --Sean Lennon, Yoko Ono, and a flotilla of celebrities sing a song titled “Don’t Frack My Mother” that opposes fracking in New York State. The video has some actual information in it, but you’ll get distracted by the sustained barrage of familiar faces. And the fact that they rhyme:

When to Say No to the Keystone XL - The State Department’s latest environmental assessment of the controversial Keystone XL oil pipeline makes no recommendation about whether President Obama should approve it. Here is ours. He should say no, and for one overriding reason: A president who has repeatedly identified climate change as one of humanity’s most pressing dangers cannot in good conscience approve a project that — even by the State Department’s most cautious calculations — can only add to the problem.   To its credit, the State Department acknowledges that extracting, refining and burning the oil from the tar-laden sands is a dirtier process than it had previously stated, yielding annual greenhouse gas emissions roughly 17 percent higher than the average crude oil used in the United States. But its dry language understates the environmental damage involved: the destruction of the forests that lie atop the sands and are themselves an important storehouse for carbon, and the streams that flow through them. And by focusing on the annual figure, it fails to consider the cumulative year-after-year effect of steadily increasing production from a deposit that is estimated to hold 170 billion barrels of oil that can be recovered with today’s technology and may hold 10 times that amount altogether. It is these long-term consequences that Mr. Obama should focus on. Mainstream scientists are virtually unanimous in stating that the one sure way to avert the worst consequences of climate change is to decarbonize the world economy by finding cleaner sources of energy while leaving more fossil fuels in the ground.

Fareed Zakaria is Wrong (Mostly) about the Keystone Pipeline - Fareed Zakaria has now joined the chorus urging construction of Keystone pipeline. If built, that pipeline would carry bitumen, a form of asphalt that can be used as a substitute for conventional crude oil, from Canadian oil sands to refineries on the Gulf of Mexico. The pipeline has been opposed by environmental groups and championed by many in the energy industry. His first argument is that the oil derived from Canadian tar sands will be developed at about the same pace whether or not there is a pipeline to the U.S.  It is very likely true that blocking Keystone would not stop the development of Canadian oil sands in its tracks. Whether or not it proceeds at “about the same pace” is another question. If Keystone is, as its backers argue, the lowest-cost way to get Canadian bitumen to market, then failing to approve it would raise the delivered cost of the product. Other things being equal, we would expect that to slow development. On the other hand, if Keystone is not the least cost means of delivery, or if its cost advantage is trivial, then it would seem that we would gain little by building it. But, you might say, if we block Keystone, and the oil goes to China instead, won’t they gain the benefits of this low-cost energy source that we cut ourselves off from? Not really. First of all, Canadian bitumen is not a low cost substitute for crude oil. Its large scale extraction is profitable only so long as crude oil prices remain high. Furthermore, the global oil market, by and large, operates according to the law of one price

Meet The New US Petroleum Pipelines - Still confused why crony capitalist #1, the "rustic" Octogenarian of Omaha, and Obama tax advisor #1, Warren Buffett has been aggressively attempting to corner the railroad market, while the administration relentlessly refuses to allow assorted new, and very much competing petroleum pipelines from America's neighbor to the north to cross through the US (in gratitude for the former's generous "tax advice" and pedigree by association)? Hint: it's not concern about the environment. The answer is the chart below.

Conservatives, industry strike back on carbon and oil taxes - The oil industry, conservative groups and House GOP lawmakers will ramp up opposition to proposals that would strip industry tax breaks and impose taxes on industrial carbon emissions. The conservative House Republican Study Committee and a number of outside groups will continue a trend: publicly slamming carbon tax proposals that already lack political traction. Their Capitol Hill press conference will feature lawmakers and groups like Grover Norquist’s Americans for Tax Reform and Americans for Prosperity, and discuss the “harmful impacts of a carbon tax on American families and small businesses,” an advisory states. The House lawmakers will introduce a resolution “opposing efforts to implement a national carbon tax.” The White House has said repeatedly that it’s not going to pitch a carbon tax, and the concept lacks enough support to clear either chamber of Congress. But the idea has gained more currency in policy-wonk circles of late as a way to address emissions and, perhaps, help tackle the deficit (although some plans would offset the revenue with cuts to other taxes).

Monthly Liquid Fuel Update: Opec and the IEA are out with initial estimates of global liquid fuel supplies for February. Nothing very exciting happened - we continue in more-or-less the same flattish pattern we've been in since the beginning of 2012. Here is an update on all my global fuel supply graphs. Above is average supply versus price. Then below is supply according to three different sources (left axis), and Brent spot price (right axis): Next shows the same supply data, together with the average of the three data-sources: Then this focusses in on just the interval since 2008:

Did the US already overtake Saudi Arabia for petroleum liquids king? Even more asterisks pop up - A recent declaration by a blogger that the US already has topped Saudi Arabia in total liquids output comes with even more asterisks than we wrote about last week.  Here’s his math: he takes the latest weekly EIA report on supply. That shows US crude production in the week ended December 7 as 6.852 million b/d. He then adds to it another production number the US aggregates under the header of “Other Supply.” That total is 4.492 million b/d, and it includes 2.458 million b/d in NGL production. Crude plus “production” totals a rounded number of 11.34 million b/d. There are two categories in that “production” category that are included by the International Energy Agency as legitimate contributors to the supply/demand balance, and are relatively big numbers in terms of the US portion of that equation. Refinery processing gains, which are estimated by the IEA to be about 2.2 million b/d in non-OPEC countries worldwide, are estimated by the EIA as 1.1 million b/d in the US. So the US would have about half of the processing gains of the entire non-OPEC world, according to this EIA data. That would be way out of whack with US refining capacity of about 17.5 million b/d.

Oil's average price posts new records and they’re telling us it’s abundant! - It is a slick piece of public relations to convince people to disregard what is right in front of them and believe the opposite. And yet, that is what the oil industry has achieved with an oh-so obviously coordinated campaign to tell the public and policymakers that there is no need to be concerned about future oil supplies. U.S. drivers should not be that surprised by this for they paid average daily gasoline prices that were higher in 2011 and 2012—$3.53 and $3.64 per gallon respectively—than they did in the previous record year of 2008 when they paid an average of $3.26, according to the U.S. Energy Information Administration (EIA). Brent Crude, which has become the de facto world benchmark price for crude oil, has also just posted back-to-back years of record prices, higher than even the average daily price in the fateful year of 2008.  So, how is that the public and many policymakers have swallowed the abundance argument even though the evidence of prices suggests the opposite? The industry has made its case by saying that newly accessible tight oil deposits in North Dakota and elsewhere are going to vastly expand oil production. It has coaxed Wall Street firms with whom the industry does business to put out rosy forecasts; it has made an army of paid think-tank propagandists available to the media; it has convinced government agencies that the future is bright; and, in one case, it sent one of its own to Harvard to write an industry-funded report that says everything will be fine—in the future!

Is The U.S. Oil Boom About To Bust? -  The United States is expected to lead the pack among non-OPEC members in terms of oil supply growth for 2013. That's the assessment from this month's market report from the Vienna-based cartel. OPEC said it projected U.S. oil supply growth of around 600,000 barrels per day in 2013, with most of that coming out of tight oil formations in the country.  For the U.S. Energy Department's Energy Information Administration, that means oil imports should fall to their lowest level since 1985. Republican leaders in the House of Representatives said more energy development is the key to a balanced budget, a sentiment enforced by EIA predictions of 7.9 million U.S. bpd by 2014. OPEC, however, said it may need to revise its figures because a possible slowdown in the U.S. oil boom.

Depletion: The one word oil optimists refuse to utter - With the media is awash in stories telling us how much oil is being discovered around the world, there is one word which the optimists quoted in these stories refuse to utter: Depletion. The simple fact is that depletion never sleeps. It starts as soon as a well begins production and goes on 24 hours a day, 365 days year. Furthermore, it is not exactly news that oil is being discovered all around the world. The industry has been spending record amounts to find it. What’s critical to understand is the difference between the annual additions to oil production capacity and the annual decline in the rate of production from existing wells, a decline which is running anywhere from 4 to 9 percent depending on whom you talk to. Even at the low end of decline rate estimates, the world must find and put into production the equivalent of what is currently coming out of the entire North Sea, one the world’s largest finds, and we must do so EVERY SINGLE YEAR before worldwide production can rise. So difficult has this task become, that we’ve only just been able to keep global production on a bumpy plateau since 2005. For now, the oil industry is on a treadmill which requires ever more drilling just to keep production even.

Thieves Blight Nigeria's Swamps with Spilt Oil - Nembe is one of the most important production routes for Africa's top energy producer, but it is also a frequent target for criminal gangs who tap into pipelines and steal crude for sale to world markets or local refineries. This week Shell declared a force majeure on the Nigerian Bonny Light crude oil grade and threatened to shut down the pipeline completely after thieves struck last month. The impact on the environment of such so-called "bunkering" practices - and on the largely subsistence fishing communities who live around the pipelines in the creeks and swamps of the Niger Delta - is devastating. Decades of oil spills from a combination of theft and poor environmental management by oil majors has ravaged this fragile wetlands environment. "The way of life I knew as a child, when we used to eat fresh fish straight out of the water, is all gone,""These oil people have made a shortage of fish. We have to buy it frozen, whereas we used to get it fresh," he said, as his boat cut through a film of thick sludge coating the water.

Scottish independence: Scottish government predicts 'oil boom' - Scotland is in line for a "renewed oil boom", according to analysis released by the Scottish government. Its first Oil and Gas Analytical Bulletin predicts that production in Scottish waters could generate up to £57bn in tax revenue by 2018. It also says more than half the value of total reserves in the UK Continental Shelf are still to be extracted. The figures are higher than those projected by the UK's Office for Budget Responsibility (OBR). The OBR predicts oil tax revenue will drop from £6.7bn this year to £4.1bn by 2017-18.The Scottish government bulletin highlights four potential scenarios that it says, taking account of recent trends in investment and prices, could result in the industry generating between £41bn and £57bn in tax revenue between 2012-13 and 2017-18.

Wild Arabia New Series 2013 - Episode 1 - Sand, Wind and stars - YouTube: new documentary series

U.S. officials warn Pakistan risks sanctions over Iran pipeline - Pakistan risks sparking US sanctions if it pursues its plans with Iran to build a $7.5 billion gas pipeline linking the two nations, a senior US official said in a renewed warning Monday. “We have serious concerns, if this project actually goes forward, that the Iran Sanctions Act would be triggered,” State Department spokeswoman Victoria Nuland said. “We’ve been straight up with the Pakistanis about these concerns.” Iranian President Mahmoud Ahmadinejad launched the construction of a much-delayed section of the gas pipeline with his Pakistani counterpart Asif Ali Zardari at a ceremony on the border of the two neighbors. But Nuland added: “We’ve heard this pipeline announced about 10 or 15 times before in the past. So we have to see what actually happens.” The United States had been seeking alternative plans, saying the move with Iran would take it “in the wrong direction right at a time that we’re trying to work with Pakistan on better, more reliable ways to meet its energy needs.”

Will China ever get its pollution problem under control? - Earlier this year, when Beijing was choking on record levels of smog, observers wondered whether China would ever get its pollution problem under control. It’s an insanely difficult question, with huge implications for everything from climate change to the global economy. So here’s one stab at an answer, in the form of a big recent analysis (pdf) from three Deutsche Bank economists. The bad news: Most of China’s current attempts to curb pollution are failing badly — the country is on pace for ever-higher levels of smog that could throttle the nation’s economy and trigger out-of-control protests. But there are reasons for optimism here, too: It’s still technically possible for China to get a handle on its smog problem without abandoning economic growth. The country will just have to revamp its energy and transportation policies entirely. Starting…  now.

Shanghai Races to Clean River After Finding 2,800 Dead Pigs - Shanghai said it restored clean water to parts of a river that runs through the city from where thousands of dead pigs were retrieved as authorities conducted checks on the safety of food supplies in the municipality.  The retrieval of dead hogs from the Songjiang section of the Huangpu river has “basically” been completed and clean water has been restored in Maogang, where the carcasses were first discovered, the Shanghai government said on its website. Investigations by food regulatory authorities show that there’s no sign diseased pork has entered the city’s markets, according to the statement.

Dead-Pig Tide and the Ongoing Danger of China Epidemics - The dead pigs started appearing on the riverbanks of Shanghai’s iconic Huangpu River on March 4, and by the weekend, state media were reporting that 900 had been found floating in the river, the source of much of the city’s water supply. The reports didn’t offer an explanation for where the dead pigs had come from or how they had died. Still, one thing was absolutely certain in the articles and the social- media chatter: Nothing good comes from a dead-pig tide.  Early today, Shanghai Daily reported that the number of dead pigs floating in the river had increased to 1,200. Later in the morning, the Global Times, a national paper, reported that the number had crossed “at least 2,200” and was expected to rise. By early evening, the government had retrieved 3,323 carcasses from the river, with more still floating toward downtown.  Most disturbing of all was news -- first reported by local suburban papers and spread through microblogs -- that upstream pig farms had been struck by an epidemic that had killed 20,000 pigs in January and February. According to these reports, as far back as January, dead pigs were appearing on the sides of roads in suburban Shanghai. News of the epidemic was partly confirmed by state media today.

Hogwash Update - Latest Number Of Floating Chinese Pigs: 5,916 And Rising Fast -  First it was 900, then 1200, then 3000, and now the latest tally of dead pigs floating in the in Shanghai water supply nearly 6000. AP has the latest number: " The number of dead pigs found floating in a river flowing into Shanghai has reached nearly 6,000. The Shanghai municipal government said in an online announcement that 5,916 swine carcasses had been retrieved from Huangpu River by 3 p.m. Tuesday, but added that municipal water remains safe." At what point will the dead pigs begin to pose a health challenge? 10,000? 100,000? What is the maximum Chinese Surgeon General RDA of dead pig in one's drinking water? And whatever it is, how long until, pulling a page from Fukushima, it is quickly doubled? But perhaps the biggest question is what is causing this mass death phenomenon, and what does it mean for the quality and safety of other pigs in circulation?

Hogwash Spreading - Floating Pig Carcasses Are Found In Second Chinese River - While the media is transfixed with the final figure of floating dead pigs found Shanghai's Huangpu River, which at last check was crossing 6000, a bigger problem has emerged: pig carcasses have now been spotted in a different river, which means that the worst case scenario could be in play. From Shanghai Daily: 'Pig carcasses now found in Hubei river: Around 50 pig carcasses were today discovered in a tributary of the Yangtze River in Yichang City, Hubei Province, China Central Television reported. Some of the bodies were highly decomposed, said the report. The carcasses were spotted floating near Wulong Village. The local government has launched an investigation and dispatched officials to the scene. The news has attracted much public attention as it follows the discovery of thousand of dead pigs in Shanghai's Huangpu River, a branch of the Yangtze. By late yesterday, almost 6,000 pig carcasses had been fished out of the river and an investigation into where they came from is ongoing."

China’s Economic Data Show Weakest Start Since 2009 - China’s industrial output had the weakest start to a year since 2009 and lending and retail sales growth slowed, underscoring challenges for a new leadership that wants to narrow the gap between rich and poor. Production increased 9.9 percent in the first two months and retail sales rose 12.3 percent, government data showed March 9, trailing economists’ estimates. New local-currency loans in February fell to 620 billion yuan ($99.6 billion), the People’s Bank of China said yesterday, lower than the estimates of 27 out of 28 analysts in a Bloomberg News survey. Strengthening U.S. demand after the unemployment rate fell to a four-year low may help incoming Premier Li Keqiang achieve the 7.5 percent expansion in gross domestic product sought by policy makers entering the final week of their meeting at the National People’s Congress in Beijing. The biggest January- February gain in China’s exports since 2010 and accelerating investment show the world’s second-biggest economy yet to wean itself from reliance on trade and spending on fixed assets.

China's Economy Off To Weakest Start Since 2009 - First it was a sudden bout of tightening following a series of record liquidity withdrawing repos, then it was two disappointing PMIs, then it was a warning that China's property market is (as usual) overheating and major curbs were being implemented, then it was China's "state of the union" address in which the country trimmed substantially its outlook for the remainder of the year, predicting well below trendline economic growth, inflation and credit expansion, then we got an absolute collapse in Chinese imports indicating the domestic economy had gone into a state of if not shock then outright stasis, and finally overnight we got an update on China's retail sales and industrial output which both had their weakest combined start to a year since the global recession in 2009, leading Bloomberg to title its summary article, "China’s Economic Data Show Weakest Start Since 2009", and further adding that the data is now "adding to signs of a moderating rebound in the world’s second-biggest economy." Luckily, in the new batshit normal, who needs the fastest growing marginal economy: the weight of the growing world can obviously be dumped on the shoulders of the savings-less, part-time working US consumer, accountable for 70% of US GDP, and thus about 20% of the global economy. What can possibly go wrong?

The Steady Hand of China’s Central Banker - Brookings - Two months ago, Mr. Zhou was expected to step down after a decade at the helm of China’s central bank, but banking and Communist Party officials have recently indicated that China’s leaders want him to stay on a little longer. During a nationally televised news conference on the sidelines of China’s annual parliamentary meetings on Wednesday, Mr. Zhou refused to say whether he would stay or go. Fear of inflation and hope for reform in China’s monetary policy are both rising. Lesser men might have balked, but People’s Bank of China governor Zhou Xiaochuan is facing the challenge.

Report: Chinese Third-Graders Falling Behind U.S. High School Students in Math, Science According to an alarming new report published Wednesday by the International Association for the Evaluation of Educational Achievement, third-graders in China are beginning to lag behind U.S. high school students in math and science. The study, based on exam scores from thousands of students in 63 participating countries, confirmed that in mathematical and scientific literacy, American students from the ages of 14 to 18 have now actually pulled slightly ahead of their 8-year-old Chinese counterparts. “This is certainly a wake-up call for China,” said Dr. Michael Fornasier, an IEA senior fellow and coauthor of the report. “The test results unfortunately indicate that education standards in China have slipped to the extent that pre-teens are struggling to rank among even the average American high school student.”

China’s Exploding Debt - If the international media are to be believed the world, still struggling with recession, is faced with a potential new threat emanating from China. Underlying that threat is a rapid rise in credit provided by a “shadow banking” sector to developers in an increasingly fragile property market. Efforts to address the property bubble or reduce fragility in the financial system can slow China’s growth substantially, aggravating global difficulties. The difficulty here is that the evidence is patchy and not always reliable. According to one estimate, since the post-crisis stimulus of 2008, total public and private debt in China has risen to more than 200 per cent of GDP. Figures collated by the World Bank show that credit to the private sector rose from 104 per cent of GDP in 2008 to 130 per cent in 2010, before declining marginally in 2011. The evidence suggests that 2012 has seen a further sharp increase. The problem is not merely the rapid rise in credit as a means to spurring investment and growth. More significant is the rapid growth of lending by the “shadow banking” system, at the forefront of which are off-balance sheet vehicles of banks to which deposits mobilised by offering relatively higher interest rates, through means such as wealth management products (WMPs), are diverted. Such loans are then provided to borrowers such as real estate developers to whom lending by the banks is being restricted. As of now WMPs are placed at around 10 per cent of total deposits in Chinese banks, but the rate of growth of this relatively new phenomenon is high. Further, banks are diverting these resources even to securities brokerages for management. Overall, central bank figures indicate that conventional bank loans have fallen from 95 per cent of total financing in 2002 to as low as 58 per cent in 2012.

Watch Out For Falling Objects: US Share Of Total Chinese Exports Plunges To All Time Low - We posted this chart previously, but it deserves repeating, for one reason: whereas conventional wisdom in the past was the due to the mutual assured trade destruction between China and the US (with China overly reliant on the US consumer and market for its exports, and the US desperate for Chinese purchases of US bonds as a USD-recycling and, more importantly, deficit-funding pathway), perhaps now that exports to the US as a percentage of total Chinese exports have fallen to an all time low, and with Chinese purchases of US bonds stagnant of 18 months in a row as the Fed's monetization of US paper has replaced the marginal Chinese demand, perhaps it is time to rethink the increasingly unstable MAD Nash Equilibrium that exists between the countries: first in trade, and soon in all other aspects of socio-economic relations

Is China's 'Real' Economy Crashing? - As Marc Faber noted, we hardly expect China to report GDP growth rates that do not perfectly fit the goal-seeked solution for utopian society, but under the covers, there appears to be some considerably more ugly real data. One of the hardest to manipulate, manage, or mitigate for a centrally planned economy is Electricity production. The year-over-year drop in China's electricity production is the largest since the slump in Q1 2009; and the seasonal drop (associated with the New Year) is the largest on record at 25.3%! So on one hand China is discussing tightening monetary policy amid inflation anxiety and a potential real estate bubble - thanks to the rest of the world pumping free money - and on the other hand Chinese officials are faced with the reality of a drastically slowing 'real' economy. At the same time, we note that it appears China's export-import data appears overstated.

Can China Escape the Middle-Income Trap? - One of the great questions facing China is whether or not its economy can continue to produce the rapid gains in welfare for its giant population that the country has witnessed over the past 30 years. The answer is critical to the political and social stability in the nation. There is already quite a bit of grumbling among the working class that they aren’t enjoying the benefits of China’s economic ascent as much as they should be. The gap between rich and poor is worsening — according to one private study, it could be significantly wider than previous estimates. Growth has already drifted downward, in comparison with China’s recent history. In 2012, GDP increased at the slowest rate in more than a decade. If China encounters a prolonged period of slower growth, it could prove catastrophic. The topic of growth and people’s welfare is at the center of this year’s National People’s Congress, taking place right now in Beijing. Wen Jiabao, in his final major speech as Premier before handing over the reins of government to a new crop of leaders, stressed the need to boost the incomes and spending power of the nation’s masses to put the country’s growth on a more sustainable path. “To expand individual consumption, we should enhance people’s ability to consume, keep their consumption expectations stable, boost their desire to consume, improve their consumption environment and

U.S. vs. China: D.C. Dysfunction Gives People’s Republic an Edge - The big political news in America last week was the House vote to avoid a total government shutdown while President Obama broke bread with several GOP Senators (POTUS paid…with his own money!) Meanwhile, China continued its once-a-decade leadership transition and efforts to fine-tune its economy proving a glaring contrast to the ongoing and long-running story of D.C. dysfunction. At least in the near term, Chinese officials “still have enough room in terms of fiscal and monetary policy to deal with shocks,” he says. “An important thing about China is they do have a good sense of what the problems are in the economy.”Here again, the contradiction with America could hardly be more sharp; U.S. policymakers are pretty constrained in what they can do, even if they could somehow agree on whether the “real” problem is too much spending or not enough revenue. (To be clear, this is a bipartisan critique; neither party has a monopoly on common sense right now.) The glaring contrast between what’s happening in Washington vs. what’s happening in Beijing raises the question of whether China’s “command and control” economic system is better than our quasi-free market model.

Is the US headed for a dollar crisis? Not even the Chinese believe that - It’s easy to overemphasize America’s economic woes, especially if you don’t take a close look at our economic competitors. Is King Dollar about to be dethroned by a foreign rival? This FT op-ed gives reason for doubt: An equally compelling reason for scepticism about dollar naysaying is what is being said about the currency in China. Jin Zhongxia, head of the Research Institute at The People’s Bank of China, argues that the dollar’s global dominance will continue, reflecting US economic, financial and military power. Writing in the Official Monetary and Financial Institutions Bulletin in a personal capacity he says that for the foreseeable future the global currency system will operate in a framework of “1+4”, with the dollar as the continuing super reserve currency supplemented by four smaller reserve currencies: the euro and the pound in Europe, and the Japanese yen and the Chinese renminbi in Asia. …The US, with all the advantages of deep financial markets, strong property rights and incumbency, is thus set to remain top dog in the reserve currency set-up. And the dollar may be set for renewed strength. Everything in currency markets is, after all, relative. The eurozone crisis, while in abeyance, is unresolved, which leaves the euro looking shaky against the dollar. In Japan, Abenomics points to continuing currency weakness. Currencies of countries that emerged well from the financial crisis such as Canada and Australia now look vulnerable.

Trans Pacific Partnership: A new Constitution - This past week the Trans Pacific Partnership agreement has been post worthy on a couple of the more read blogs. There are specific groups working to get the public up to speed on this treaty. One is the Citizens Trade Campaign.  Crooks and Liars posted Lee Camps Moment of Clarity episode regarding the treaty.  Common Dreams posted a video by Friends of the Earth.  This potential treaty has direct bearing on the subject of innovation, production and infrastructure as discussed in the posts regarding Richard Elkus's thesis in his book Winner Take All and MIT's latest report on the subject.  Basically this is being referred to as NAFTA on steroids. It is an agreement being negotiated in complete secrecy with only those considered to be a direct player called “clear trade advisers”(600 in the US) having access. Direct players are not you and me, nor congress (you thought the drone unitary executive stuff is tough to get? Ha!) nor that fourth branch known as the press. Yes, Obama is up on this in that he is pushing it.  I'll let Citizens Trade Campaign sum it up:  “The TPP is poised to become the largest free trade agreement in the world, potentially impacting jobs, wages, agriculture, migration, the environment, consumer safety, financial regulations, Internet protocols, government procurement and more. The pact is currently under negotiation between the United States, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam, but is being specifically written as a “docking agreement” that other countries can join over time. Canada, Japan and Mexico are currently pressing to do so.

Is Japan really ready for free trade? - The U.S. trade deficit with Japan has increased steadily over the past four years, reaching $79.9 billion in 2012, an increase of $13.4 billion (20.2 percent) over the 2011 bilateral deficit of $66.5 billion. Two of the most important causes of persistent U.S.-Japan trade deficits are currency manipulation and Japan’s vast and impenetrable network of non-tariff trade barriers. Last month, the United States and Japan agreed on language that could allow Japan to join negotiations to enter the Trans-Pacific Partnership (TPP), a proposed free trade agreement with 10 other Asia-Pacific countries (a new round of negotiations on the TPP began in Singapore last week ). Unless Japan is willing to end its currency manipulation and informal trade barriers once and for all, it should not even be allowed to participate in the TPP negotiations. The effect of trade flows on U.S. jobs is relatively straightforward: exports support U.S. jobs but the larger volume of imports displaces even more jobs. Trade deficits such as the one we have with Japan have cost the United States millions of jobs, most of them high-paying jobs in manufacturing. Signing trade deals is an ineffective way to create jobs, in large part because they usually result in higher trade deficits. Further, trade deals have traditionally not included effective means to deal with one of the biggest causes of our trade deficits: currency manipulation by our trading partners, which acts as an artificial subsidy to other countries’ exports, and a tax on U.S. exports. Japan has a history of currency manipulation, and recently-elected Prime Minister Shinzo Abe campaigned on his intention to stimulate the Japanese economy, in part by weakening the yen.

How is Abenomics doing? - Last December, Shinzo Abe swept to power, promising to force the Bank of Japan to re-inflate the economy at any cost, boost stimulus spending, and (maybe) join the Trans-Pacific Partnership. By far the most striking of these pledges was the first one.So how is Abenomics doing? Well, on the plus side, there have been two pronounced effects. The first is the aforementioned stock market rally. Here is the Topix (similar to our S&P) over the last 3 months: And here is the yen/dollar over the same period (higher means weaker yen): So as you can see, Abe's election has sparked a rapid depreciation of the yen (which should, theoretically, boost Japan's exports), and a rally in the Japanese stock market. So that's the good news. Here's the bad. Since Abe's election, Japan has slipped back into deflation:  But inflation expectations, as measured by breakevens on the Japanese version of TIPS, are up - to 1%. As for Japan's current account, it has continued to log a deficit, as the weak yen made imports more expensive. As for whether or not export demand will pick up...I guess we'll see. In summary: Abe seems to have shifted a lot of people's expectations. He seems to have convinced many foreigners that Japan will print a lot of money; this has caused a fall in the yen. And those expectations of a falling yen seem to have convinced many foreigners that the weaker yen will boost the profits of Japanese companies, since foreign investors are behind Japan's stock market rally. And he has also convinced some Japanese people that deflation will soon give way to weak inflation...though these expectations have not yet translated into real inflation.

BOJ nominee vows swift action as orders data disappoints - The Japan government's choice to lead the country's central bank promised on Monday to move quickly to implement fresh monetary stimulus to lift the struggling economy, a case underlined by a surprisingly sharp drop in a gauge of capital investment. However, Haruhiko Kuroda's declaration that "speed is important" appeared to run into resistance from Bank of Japan board member Koji Ishida, who in separate comments voiced caution against taking unorthodox steps too hastily. The divergence of opinion highlights that while the nine-member board generally agree on the need for further stimulus, there are differing views on how best to revive an economy that has struggled for consistent growth for years. "I want to debate policy steps with the monetary policy committee and implement these steps as soon as possible," Kuroda told lawmakers in a one-day upper house confirmation hearing. He said he would do what ever it takes to hit the Bank of Japan's inflation target of 2 percent. The economy has rarely seen that level of inflation since the early 1990s.

Japanese Welfare Recipients Hit All-Time High - Over the weekend we learned that the most indebted nation in the world (net of unfunded liabilities), that would be the US, just hit an all time high in foodstamp recipients, which when added to record disability recipients, and various other programs providing for free benefits and entitlements, means that just as the US hit a record Dow Jones (and total Federal debt) print, it at least had a record amount of welfare recipients to show for it. From Japan Times: The number of people receiving welfare benefits nationwide hit an all-time high for the eighth consecutive month in December, totaling 2,151,165, the welfare ministry said Wednesday. The number of households on welfare hit 1,570,823 — also a new record.  These represent rises from the 2,147,303 individuals and 1,567,797 households as of the end of November.  Perhaps what is most surprising is that Japan, which has a population that is about a third of the US, has a "record" number of welfare recipients that is 2.2 million. In US terms this would be a measly 6 million, or less than the foodstamp recipients of just New York and California.  So what does it say about the US when the country with the record 220% debt/GDP has about one-tenth the official number of citizens on welfare?

Japan Core Machine Orders Plunge In January - Core machine orders in Japan plummeted a seasonally adjusted 13.1 percent on month in January to 654.4 billion yen, the Cabinet Office said on Monday - falling for the first time in four months. The headline figure was well shy of forecasts for a decline of 1.7 percent following the 2.8 percent increase in December. On a yearly basis, core machine orders dropped 9.7 percent - also missing expectations for a fall of 0.3 percent following the 3.4 percent contraction in the previous month. The total number of machinery orders, including those volatile ones for ships and from electric power companies, saw a decline of 3.0 percent on month and 24.8 percent on year in January to 1,797.6 billion yen. Manufacturing orders dropped 13.2 percent on month and 19.0 percent on year to 256.8 billion yen in January, while non-manufacturing orders lost 6.3 percent on month and 1.5 percent on year to 409.9 billion yen. Government orders plummeted 26.1 percent on month and 21.8 percent on year to 179.8 billion yen. Orders from overseas lost 4.8 percent on month and 36.7 percent on year to 667.5 billion yen. Orders from agencies shed 0.7 percent on month but gained 2.2 percent on year to 90.2 billion yen.

Japan Machinery Orders Fall 13% in Sign of Limits on InvestmentJapan’s machinery orders plunged 13 percent in January, the biggest decline in eight months, signaling limits on corporate investment as Prime Minister Shinzo Abe tries to drive an economic revival.  The decline from the previous month, announced by the Cabinet Office today in Tokyo, compared with the median estimate in a Bloomberg News survey of 26 economists for a 1.7 percent fall. Large orders can cause volatile results. Japan returned to growth in the fourth quarter as the yen began to slide, bolstering Abe’s campaign to end 15 years of deflation and revive the world’s third-biggest economy. Today’s data are a reminder that business investment will not drive the recovery,

Japan's utilities to hike rates amid weak yen --Japanese utilities, forced to idle their nuclear power plants over the past two years and facing higher fuel costs due to a weak yen, are now looking to push through double-digit rate hikes for their commercial customers. The action comes at a bad time for some Japanese companies that were hoping the fall in the yen and much-trumpeted efforts by the government to turn round the economy would help improve their prospects. While the government has raised some concerns about the raising of power rates, the move seems inevitable given the prior deregulation of electricity prices. Eight of the nation's nine utilities with nuclear power plants have been posting losses due to the higher cost of buying imported fossil fuels in the wake of the Fukushima nuclear disaster and the subsequent shutting down of reactors amid safety concerns.

Japan To Hike Utility Prices By 14-19% As Inflation Surges In All The Wrong Places - First it was gas prices, then it was food prices, and now it is the turn of basic utilities to see costs surge by double digits. Dow Jones reports that "Japanese utilities, forced to idle their nuclear power plants over the past two years and facing higher fuel costs due to a weak yen, are now looking to push through double-digit rate hikes for their commercial customers." This means less disposable income, less corporate profits, less monetary velocity, less growth and ultimately less "inflation" in other things such as the much desired stock market, which was supposed to be the wealth effect offset to all staples price increases. At least on paper. Of course we explained on various occasions, most recently here, why in Japan a US-style of wealth effect price substitution would never work. Surely nobody could possibly see this coming - "The action comes at a bad time for some Japanese companies that were hoping the fall in the yen and much-trumpeted efforts by the government to turn round the economy would help improve their prospects." Ah hope - the only strategy left.

Currency Intervention Has Big Trade Impact - Is the world facing currency worries or an all-out war?Last month, the International Monetary Fund chief downgraded fears that the weak global recovery could be derailed as countries push to weaken their exchange rates, saying there’s no risk of a currency war, only “currency worries.”But a new paper by former senior U.S. Federal Reserve economist Joseph Gagnon says currency intervention — when a government forcibly lowers the value of their exchange rate — has an impact on other economies several times larger than originally thought. The findings back arguments by some economists and lawmakers that not enough is being done to stop currency manipulation.

Jim Rogers: We're Wiping Out The Savings Class Globally, To Terrible Consequence - The current globally-coordinated central bank ZIRP/bailout policies are destroying the world's saving class. As Jim Rogers notes, "For the first time in recorded history, we have nearly every central bank printing money and trying to debase their currency. This has never happened before. How it’s going to work out, I don't know." The bigger danger that concerns him is the "hollowing out of the 'saving class'" resulting from this situation. Central planners' policies are "punishing the prudent in favor of rescuing the irresponsible." Rogers owns gold, silver, and other precious metals and commodities - as a better way to play the debasement of currencies - and concludes rather ominously that, "this has happened before in world history, and the aftermath has always had grievous economic, social - and often human - costs."

The Promise and Peril of India’s Youth Bulge - As China, Japan and many other nations face an aging demographic profile, the youth segment of India’s population is growing rapidly, and is projected to continue to do so for the next 30 years. Provided India can act quickly on health, education and employment, this demographic dividend has the potential to inject new dynamism into its flagging economy. Failure to do so, however, will result in demographic disaster. Today, more than half of India’s population is under the age of 25, with 65 percent of the population under 35. By 2020, India’s average age will be just 29 years, in comparison with 37 in China and the United States, 45 in Western Europe and 48 in Japan.This demographic trend will confer a significant competitive advantage upon India. About a quarter of the global increase in the working age population (ages 15-64) between 2010 and 2040 is projected to occur in India, during which time this segment is set to rise by 5 percent to 69 percent of its total population. Roughly a million people are expected to enter the labor market every month, peaking at 653 million people in 2031. As a result the IMF projects that India’s demographic dividend has the potential to produce an additional 2 percent per capita GDP growth each year for the next twenty years.

Disrepair Forces Closure of Vital Shipping Lane - It's the world's most heavily trafficked man-made shipping lane, but since Wednesday few ships have been seen on the 100-kilometer (62-mile) long Kiel Canal, which cuts through the northern German state of Schleswig-Holstein to form a roughly 450-kilometer shortcut between the North and Baltic Seas. Although the canal is under the jurisdiction of the federal government, it has been the subject of financial disputes for years between Berlin and the state. Last year, the German government even reduced the money available for maintaining the canal from €60 million ($78 million) to just €11 million, the Süddeutsche Zeitung newspaper reported Friday. Years of neglect have led some of the locks on the canal to fall into such disrepair that it had to be closed on Wednesday to most ship traffic.

Ships Reject Unprofitable Cargo to Halt Slump in Rates: Freight - The worst start to a year for freight rates is leading one of the creators of shipping derivatives to bet on a recovery as owners of vessels carrying coal, iron ore and grains turn away cargoes. The Baltic Dry Index averaged 769 since Jan. 1, the lowest since at least 1985, according to the Baltic Exchange in London. Rates for all vessels in the gauge are unprofitable, data compiled by Pareto Securities A/S in Oslo show. Investors should bet on a rebound by buying freight swaps, said Philippe Van Den Abeele, the managing director of Castalia Fund Management (U.K.) Ltd. and one of the creators of the derivatives market in shipping two decades ago. “Owners are saying no to unprofitable cargoes,” said Peter Sand, a Bagsvaerd, Denmark-based analyst at the Baltic and International Maritime Council, the trade group whose members control 65 percent of the global merchant fleet. “It’s impossible to run a profitable business at these levels. There is some kind of limit where even owners desperate to relocate or reposition their ships will not go so low.”

Internet pirates of the Caribbean - On Monday the World Trade Organization (WTO) officially authorized Caribbean nation Antigua to sell $21 million in "pirated" U.S.-copyrighted music, films and computer programs in retaliation for the United States failing to comply with a 2005 WTO order to allow online gambling here. Say what? (And, no, this news was not sourced from a parody in The Onion.) The case is an illustrated guide to much of what is wrong with the WTO. And, it should spotlight the lunacy of Obama administration plans to expand this dangerous "trade" agreement model via the Trans-Pacific Partnership (TPP) "free trade" agreement. More on that later. Let's tour what is now a full coop of WTO chickens that have come home to roost on this WTO case.

Sovereign wealth funds to hit record $5.6 trln by year end-study | Reuters: (Reuters) - Sovereign wealth funds (SWFs) are set to see their assets grow to $5.6 trillion by the end of 2013, a study found, a sum more than double British GDP and underscoring their status as the world's wealthiest investors. SWFs, state-owned vehicles such as the Qatar Investment Authority which manage windfall revenues for future generations, have become key global market players after the financial crisis, spending an estimated $90 billion buying up stakes in Western banks including Barclays Plc for instance. Benefiting from a decade of high commodity prices and trade surpluses generated by booming trade, their assets have swollen to record highs, growing 8 percent in 2012 to $5.2 trillion and set for further growth the study by TheCityUK found. By comparison, Britain's GDP was $2.4 trillion in 2012, according to International Monetary Fund estimates.

Impact of fiscal consolidation on debt levels - In recent years, I’ve frequently stated that fiscal consolidation can actually increase debt levels. It may seem a paradox because fiscal consolidation aims to reduce the budget deficit by increasing taxes and cutting spending. Yet, under circumstances, policies to reduce debt levels can actually cause a rise in debt to GDP. This seems to be a particular problem for Eurozone countries embarking on deficit reduction during the current recession. The IMF have a produced a paper – The Challenge of debt reduction during fiscal consolidation – which looks at the theory and empirical evidence behind this idea. It’s a difficult paper, but the main conclusions are

  1. A large fiscal multiplier of close to 1 can cause debt consolidation to increase debt to GDP ratios in the short term.
  2. Using debt ratio targets (e.g. EU fiscal rules) are likely to lead to disappointment. Because government miss their debt targets, they may engage in even more levels of fiscal consolidation trying to meet targets. The IMF propose the use of cyclical adjusted debt targets.
  3. Debt consolidation packages can be modified to minimise the impact on economic growth – e.g. delaying spending cuts until the economy is stronger, and choosing those cuts which have less impact on economic growth.
  4. The increase in Debt – GDP ratios is worse for countries with high debt and in a recession.

The IMF on the Austerity Trap - Paul Krugman - The IMF has just released a new paper on austerity that is kind of heavy going (unnecessarily, I think), but ends up making a simple but important point. Suppose that a government imposes fiscal austerity in a realistic fashion, with spending cuts getting steadily deeper relative to baseline over a period of several years. If the negative impact of these cuts is fairly large — which all the evidence coming in suggests is the case under current liquidity-trap conditions — and if the country starts from a fairly high level of debt — as the austerity countries do — something alarming is likely to happen. Instead of falling, the ratio of debt to GDP is likely to rise for years. In part this is because a weaker economy shrinks revenues, offsetting a large part of the direct austerity. What pushes it over the top is the weakening of GDP, which increases the ratio. Why does this matter? As the paper says, Although this effect is not long-lasting and debt eventually declines, it could be an issue if financial markets focus on the short-term behavior of the debt ratio, or if country authorities engage in repeated rounds of tightening in an effort to get the debt ratio to converge to the official target.

Russia’s Putin Names First Female Central Bank Chief in G-8 - Russian President Putin has offered his economic adviser Elvira Nabiullina the post of governor of the Bank of Russia, to replace departing chief Sergei Ignatyev.

ECB must cut rates or risk crisis again: Roubini --  The bank would act eventually to avoid the recession getting worse, but risked doing "too little, too late," Roubini said. "They have to cut the policy rate, they have to stimulate the economy, they have to try to weaken the value of the euro," said Roubini, who was credited with predicting the financial crisis of 2008."The euro should be 10, 20 or even 30% weaker to restore the competitiveness of the [eurozone] periphery," Roubini said.  With all the world's major central banks using "unconventional" methods to throw money at their economies, Roubini said the ECB could not sit on the sidelines while social tension mounts in weaker eurozone states. That tension is reflected in the Italian protest vote against austerity, and as resentment about the cost of bailouts rises in Germany and other northern states. "If they are the only [central bank] holding out, then the damage economically and politically will be severe," he said. "The risk is there will be a clash between austerity fatigue in the periphery of the eurozone and bailout fatigue in the core -- the two could clash in a way that could put at risk again the entire eurozone system."

US vs European GDP - The graph shows the GDP of the Eurozone and the United States, with both having their peak level prior to the great recession set to 100.  The peak occurred in 2007 Q4 for the US, and in 2008 Q1 for the Eurozone.  The data run through Q4 2012.Whereas US GDP has surpassed the previous peak and continues to rise, albeit sluggishly, Eurozone GDP has not passed the previous peak, and has been slowly falling since early 2011.

Greek GDP Shrank in Fourth Quarter as Investment Falls - Greece’s economy contracted for an 18th straight quarter in the fourth quarter as consumption and investment declined. Gross domestic product fell a revised 5.7 percent from the same quarter from a year earlier, compared with a 6.7 percent drop in the third quarter, according to an e-mailed statement from the Athens-based Hellenic Statistical Authority. The drop is less than a Feb. 14 initial estimate of 6 percent. Greece’s economic slump, which has now entered a sixth year, has been exacerbated by austerity measures imposed by creditors to reduce its budget deficit. The country has received 240 billion euros ($312 billion) in loan pledges from the euro area and International Monetary Fund since 2010 and carried out the biggest sovereign debt restructuring in history last year. Gross fixed capital formation dropped 10.3 percent from the a year earlier, while final consumption expenditure was down 9 percent. Greece’s external trade deficit decreased 17.5 percent in the fourth quarter as imports dropped 8.1 percent. The fourth-quarter contraction is based on available non- seasonally adjusted data. The economy contracted 6.4 percent in 2012, according to the data.

Greek State Budget Deficit Widens - Despite big hikes in taxes, Greece΄s state budget deficit widened sharply in the first two months of the year as steeper spending cuts failed to offset a shortfall in revenues, but the figures were in line with the government΄s broader targets. The tax hikes have worsened the country’s recession, now in its sixth year, and slowed spending so much that expected revenues are far off target. In a statement, the Finance Ministry said the budget shortfall for January to February reached 813 million euros ($1.06 billion) compared with a deficit of 495 million euros in the year-earlier period. The targeted deficit for the period stands at 2.6 billion euros. Revenues fell 700 million euros, to 8.6 billion from 9.3 billion last year, with property and personal taxes rising while indirect taxes fell, the data showed. On the spending side, state budget outlays slipped to 9.4 billion euros from 9.8 billion, compared with a target of 10.5 billion euros.

Sick man of Europe: Life-support drugs run short in Greece - Having to skip cancer therapy twice in the last two months due to a lack of drugs normally available through Greece's national health system, 45-year-old Morfo Karadona says a new fear has entered her life. "I have been battling cancer for the last six years. Now I can't find the drugs I need. Ensuring I get my treatment every two weeks is a matter of life and death for me." Karadona is one of thousands of Greeks trapped in a vicious circle involving a cash-strapped government unable to pay its bills. She spoke as some international pharmaceutical companies have limited supplies to Greece, and increased fears of a parallel export trade as wholesalers and pharmacies look for cash. The president of Greece's Association of Pharmaceutical Companies, Konstantinos Frouzis, who is also the vice president of Novartis Greece, warns that "companies are heading towards a dead end. It is impossible to run a business when there is no cash flow to plan ahead."

Greece Faces 150,000 Job-Cut Hurdle to Next Aid Payment - Greece is locked in talks with international creditors in Athens about shrinking the government workforce by enough to keep bailout payments flowing. Identifying redundant positions and putting in place a system that will lead to mandatory exits for about 150,000 civil servants by 2015 is a so-called milestone that will determine whether the country gets a 2.8 billion-euro ($3.6 billion) aid instalment due this month. More than a week of talks on that has so far failed to clinch an agreement. “Public sector job cuts are a major part of the program and they are one of the most politically difficult parts to achieve,” . “And for the Greek government, which has two left-of-center parties, it is extremely difficult to really implement those job cuts. I’m afraid this will likely stay a point of contention, review after review after review.”

Greece Faces 150,000 Job-Cut Hurdle to Next Aid Payment  - Greece is locked in talks with international creditors in Athens about shrinking the government workforce by enough to keep bailout payments flowing. Identifying redundant positions and putting in place a system that will lead to mandatory exits for about 150,000 civil servants by 2015 is a so-called milestone that will determine whether the country gets a 2.8 billion-euro ($3.6 billion) aid instalment due this month. More than a week of talks on that has so far failed to clinch an agreement.  “Public sector job cuts are a major part of the program and they are one of the most politically difficult parts to achieve,” . “And for the Greek government, which has two left-of-center parties, it is extremely difficult to really implement those job cuts. I’m afraid this will likely stay a point of contention, review after review after review.”  More than three years after revealing that Greece had misled its euro partners on the state of its finances, the nation remains reliant on loans from the euro area and the International Monetary Fund to pay pensions and wages. To qualify for payments from the total of 240 billion euros pledged to the country, it has to continue meeting economic targets, including reducing staff levels.

Greek Prime Minister says no more austerity - Greek Prime Minister Antonis Samaras on Saturday promised his recession-weary nation that there would be “no more austerity measures” as international creditors prolonged an audit of crisis reforms. “There will be no more austerity measures,” Samaras said in a televised speech to his conservative party’s political committee. “And as soon as growth sets in, relief measures will slowly begin,” Samaras said. But he noted that Greece’s ailing economy was “out of intensive care, not out of the hospital.” Representatives from the so-called troika of Greece’s creditors — the European Union, the European Central Bank and the International Monetary Fund — are currently reviewing the steps Greece has taken to meet its multi-billion bailout obligations.

Italy's Recession Deepens as Fitch Downgrade Pressures Debt Sales -Italy's economic contraction was deeper than first anticipated, the country's statistics agency reported just days after the eurozone's third largest economy suffered a further downgrade blow amid its seemingly intractable political gridlock. Gross domestic product shrank by 2.8 percent during the whole of 2012, the National Statistics Agency, ISTAT, said Monday in a statement published on its website. That's 0.1 percent more than its first estimate and much deeper than the 2.2 percent estimated by the European Commission in its most recent Winter Forecast. The contraction for the final three months of the year was left unchanged at -0.9 percent, ISTAT said. Late Friday, Fitch Ratings lowered Italy's sovereign debt grade one notch to BBB+ and assigned a negative outlook to the rating, indicating further cuts could come in the near term. "The inconclusive results of the Italian parliamentary elections on February 24-25 make it unlikely that a stable new government can be formed in the next few weeks," the Fitch report said. "The increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy amidst the deep recession." 

Austerity leaves scar on Italy - Since a government austerity plan designed to shield Italy from Europe's debt crisis took hold last year, the economy has tumbled into one of the worst recessions of any eurozone country, and Tedeschi's orders have all but dried up. His company, Temeca, is still in business, but barely. Advertisement But among Italy's estimated 6 million companies, businesses of all sizes have been going belly-up at the rate of 1000 a day in the past year, especially among the small and mid-size companies that represent the backbone of Italy's €1.5 trillion ($1.79 trillion) economy. Economists fear the pace of business closures might accelerate as long as the country lacks a functioning government. Although the technocratic prime minister Mario Monti was ousted by austerity-weary voters, the election left Parliament gridlocked.

Austerity: Still Not Working - The outcome of the Italian elections should send a clear message to Europe’s leaders: the austerity policies that they have pursued are being rejected by voters. The European project, as idealistic as it was, was always a top-down endeavor. But it is another matter altogether to encourage technocrats to run countries, seemingly circumventing democratic processes, and foist upon them policies that lead to widespread public misery. While Europe’s leaders shy away from the word, the reality is that much of the European Union is in depression. The loss of output in Italy since the beginning of the crisis is as great as it was in the 1930s. Greece’s youth unemployment rate now exceeds 60 percent, and Spain’s is above 50 percent. With the destruction of human capital, Europe’s social fabric is tearing, and its future is being thrown into jeopardy. Advertisement The economy’s doctors say that the patient must stay the course. Political leaders who suggest otherwise are labeled as populists. The reality, though, is that the cure is not working, and there is no hope that it will—that is, without being worse than the disease. Indeed, it will take a decade or more to recover the losses incurred in this austerity process.

Beppe Grillo on the Money System: Stand-up show, 1998 - The following YouTube of Beppe Grillo’s 1998 show, in Italian, is captioned in English and German. I turned the English captions into a complete transcript, tweaking the prose occasionally, and adding some annotations. (See here and here for background on Grillo, the most interesting political figure in Europe today.) Note the date: 1998, before the Euro, which was introduced on January 1, 1999. I think that makes the show all that much more interesting, because as we shall see, there are more targets for Grillo’s japery. Frankly, I’m not quite sure what to make of it all. My knowledge of the Italian political and cultural scene isn’t even rudimentary, and I can’t imagine I’m getting very many of the jokes, so I’m going to annotate with a very light touch. But boy, can Grillo sure pull in a crowd!

This Is Why Central Planners Are So Scared of Italy's Beppe Grillo - If you really want to know why Beppe Grillo is causing Central Planners throughout the European continent to wet themselves, this video will show you.  There’s a real revolution happening in Italy.  This guy is the real deal and he understands the heart of the whole issue plaguing the world. All I can say is:  WOW.

What’s More Important To You, Italy or the Dow? - After the results came in and Beppe Grillo and the Five Star movement (M5S) became the single biggest "party", I was going to simply repost my February 10 article Beppe Grillo Wants To Give Italy Democracy, in which I wrote about my meeting with Beppe and the ideas we talked about which I took away from that. He had won big, but it was clear that most people still had no idea who he is. But after reading through the lazy sloppy "journalism" in the international press in the days following the elections, it was obvious that wouldn't have been sufficient anymore. Hardly anyone seems to know who Beppe Grillo is, and more importantly, they don't seem to care. In their minds, because everybody else does it, they are fine calling him a clown, a dictator and (Italian paper Gazetta Del Sud) a "foul-mouthed rabble rouser". Much easier, because it doesn't require any research. At the very least, whether you work for a major international news organization or a national paper, if you want to stay on the safe side, since deep down you know you haven't done your homework, "populist" looks like an acceptable sort of name-calling. Now, one of the definitions of populist is someone who opposes elites, which certainly applies to Grillo, but these days you can't use the term without implying someone who appeals to the base instincts of the IQ challenged part of the population. And that definitely does not apply. If only because in Italy, Berlusconi's got that demographic covered.

What Beppe Grillo Wants - It’s hard to get the straight story about Grillo anywhere. The Italian press, both liberal and conservative, is unrelentingly hostile. Grillo’s pledge to end the widespread political control and funding of the Italian media may help to explain this. Likewise, the political old guard in Italy denounces Grillo as—take your pick—a right-wing demagogue; a left-wing anarchist/saboteur/naysayer without constructive plans for Italy; a narcissist in the thrall of a personality cult; or the puppet of some menacing, but as yet unidentified, puppet master. This belligerence may have something to do with Grillo’s promises to “send home” the entire ruling class, Europe’s most entrenched and self-serving, which he blames for Italy’s badly frayed economic and social fabric. It’s also true that some Italians simply don’t know what to make of him (and others have listened seriously to him and just don’t agree) Some time ago, I spent a week with Grillo while reporting a Profile for The New Yorker—snooping around his home near Genoa, talking with him backstage after shows and rallies, travelling with him in Lombardy and Sardinia. What I saw makes me think that Peer Steinbrück and other politicians, abroad and in Italy, along with much of the press, has him wrong. True, Grillo is a funny fellow, but in person he’s also pensive, inquisitive, and a tad professorial; his library is filled with underlined, dog-eared tomes on economics, renewable energy, and healthcare, and he frequently sounds out ideas with their authors, members of a Nobel-studded brain trust that includes Joseph Stiglitz, Muhammad Yunus, Lester Brown, and Dario Fo. Grillo ignores other politicians and the press, and broadcasts his messages through alternative channels: comedy shows, city-council meetings, demonstrations, and MeetUp gatherings across Italy, and via his Web site, which is run by the Internet guru Gianroberto Casaleggio but displays Grillo’s blend of irreverence, optimism, and fruitful obscenity.

Grillo’s party to tell Italy president it can lead government (Reuters) - Beppe Grillo's anti-establishment 5-Star Movement said on Sunday it wanted to lead Italy's next government following last month's inconclusive election and reiterated that it would not agree to an alliance with any other party. The movement's newly elected parliamentary leaders told reporters it would make this position clear to President Giorgio Napolitano when he begins consultations later this month on the formation of a government. "Our proposal will be a 5-Star government," the movement's Senate leader Vito Crimi said after a meeting of its lawmakers in a Rome hotel. It is unlikely that the other parties would accept a government led by the 5-Star Movement. This is partly because of policy differences and partly because although it was the most voted single party at the election, 5-Star has fewer seats in parliament than the center-left and center-right coalitions. 5-Star's policies include a minimum income for the unemployed, free Internet access for all, electoral reform, the abolition of state financing for parties and newspapers and the scrapping of work on a high-speed train line in northern Italy. It campaigned on a radical platform to clean up politics and save the environment.

Beppe Grillo: "Italy Is Already De Facto Out Of The Euro" - In a preview of an interview he will conduct today with German's Handelsblatt, the surprise winner of last month's Italian elections Beppe Grillo said that Italy is already de facto” outside the euro and runs the risk of being “dropped” by the region’s wealthiest members as soon as their banks recoup what they invested in the nation’s bonds. His suggestion - the same that got Greece's G-Pap promptle sacked in late 2011 - a popular referendum to decide if Italy should remain in the Eurozone. Grillo's best line, however, was saved for Mario Monti: "he is a bankruptcy trustee on behalf of the banks" which is perhaps the most astute description we have read of the former Goldman operative ever. Still think Grillo is just a simple-minded comic with a penchant for anarchy?

Beppe Grillo warns that Italy will be 'dropped like a hot potato' - Beppe Grillo, the comedian who has become the kingmaker of Italian politics, has declared that his country is 'de facto' already out of the euro and northern European countries were waiting to drop Italy "like a hot potato". Mr Grillo's movement won more than a quarter of the vote in last month's general election, making it the biggest single party in the Italian parliament. Since then, the country has been in a state of political paralysis as Mr Grillo refuses to contemplate a power-sharing deal with the centre-Left Democratic party. In an interview with the German business newspaper Handelsblatt, Mr Grillo said: "The northern European countries are only holding onto us until their banks have recouped their investments in Italian sovereign bonds. Then they'll drop us like a hot potato." The comic-turned-political activist, who campaigned against austerity measures implemented by Prime Minister Mario Monti, compared the technocrat prime minister to "a bankruptcy trustee acting on behalf of the banks" and described his Five Star Movement as: "the French revolution – without the guillotine."

The M5S is cutting their own salaries, perhaps the PD will too: - Beppe Grillo - The parliamentary income of the citizen spokesperson of the MoVimento 5 Stelle {5 Star MoVement} will be 5 thousand euro gross a month, instead of 11,283 euro gross received by all the other parliamentarians. The rest of the money will be left with the State together with the solidarity cheque (or the one for the end of the term of office). That’s not news. The M5S has already done this in the regions where it is participating, like in Sicily. Thanks to the M5S, the saving for the State coffers will be more than 12 million a year. If every parliamentarian were to follow the M5S’s example, the annual saving would be about 70 million or 350 million for the whole term of office. I am appealing to the parties, in particular the party with the greatest number of parliamentarians: the PD. Let Bersani get this document signed by the 468 PD parliamentarians. The parliamentarians that decide to reduce their own salary will get a mention on the blog. The correct Italy starts here. We’re expecting lots of people to sign up to this, at least more than one.

The Fall of the House of Europe - On the surface, Italians voted an overwhelming "No" - against austerity (imposed the German way); against more taxes; against budget cuts in theory designed to save the euro. In the words of the center-left mayor of Florence, Matteo Renzi, "Our citizens have spoken loud and clear but maybe their message has not been fully grasped." In fact it was. There are four main characters in this morality/existential play worthy of the wackiest tradition of commedia dell 'arte. The Pyrrhic winner is Pier Luigi Bersani, the leader of the center-left coalition; yet he is unable to form a government. The undisputed loser is former Goldman Sachs technocrat and caretaker Prime Minister Mario Monti. And then there are the actual winners; "two clowns" - at least from a German point of view and also the City of London's, via The Economist. The "clowns" are maverick comedian Beppe Grillo's 5 Star movement; and notorious billionaire and former prime minister Silvio "Bunga Bunga" Berlusconi. To muddle things even further, Berlusconi was sentenced to one year in prison last Thursday by a Milan court over a wiretapping scandal. He will appeal; and as he was charged and convicted before, once again he will walk. There's more, much more. These four characters - Bersani, Monti, Grillo, Berlusconi - happen to be at the heart of a larger than life Shakespearean tragedy: the political failure of the troika (European Commission, European Central Bank and International Monetary Fund), which translates into the politics of the European Union being smashed to pieces. That's what happens when the EU project was never about a political ''union'' - but essentially about the euro as a common currency. No wonder the most important mechanism of European unification is the European Central Bank. Yet abandon all hope of European politicians asking their disgruntled citizens about a real European union. Does anybody still want it? And exactly under what format?

The Global Austerity Resistance Continues - Tens of thousands of protesters flooded the streets of Spain and Greece this week in response to ongoing budget cuts and high unemployment. In Spain, unemployment has passed the 5 million mark for the first time since records began—attracting widespread criticism over the conservative government’s austerity plans. Similarly, Greece, which has served as a laboratory for austerity enthusiasts, has suffered mass poverty, unemployment and suicide since severe budget cuts were implemented by the government. “Poverty, unemployment, suicides. Enough is enough,” was the slogan chanted on Syntagma square by some 1,500 Greek demonstrators non-affiliated with political parties who were mobilized through social media. The demonstration ended when police shot tear gas at protesters—a police tactic also used during the anti-austerity demonstrations in Athens when the debt crisis began in late 2009. Earlier this month, three people in central Greece killed themselves on the same day, and analysts said there is a correlation between the rising rates and three years of pay cuts, tax hikes and slashed pensions that have pushed many people into poverty

Millions of Europeans Require Red Cross Food Aid - Needy families and individuals in the European Union are becoming increasingly reliant on charity organizations like the Red Cross for basic needs like food, water and shelter. Two-thirds of national Red Cross societies within the European Union have begun distributing food aid, according to the head of the aid groups' international organization -- a sign that the economic crisis in Europe is having an alarming effect on poverty. Yves Daccord, Director-General of the International Committee of the Red Cross, said on a visit to New Delhi on Monday that the scope of food distribution had not been at its current level since the end of World War II. Germany's relative economic strength has made it mostly immune to the rise in food need. In contrast, the Spanish Red Cross is supporting 3 million Spaniards with food aid. Daccord said the need in Spain was so great that the organization has begun soliciting donations for not just foreign, but domestic operations as well.

Good signs from Spain but full recovery is some time away = CNBC ran an interesting story today about the possibility that Spain may begin an economic recovery fairly soon. In particular, two items that are worth pointing out may provide some tailwinds for Spain's economy.
1. Exports: CNBC: - ... a healthy export sector that has increased market share throughout the recession; of these exports, steel and chemicals make up for 26 percent of the total, followed by capital goods (20 percent) and automobiles (17 percent); food products, Spain's traditional source of foreign exchange, are now only 16 percent of the total.

2. Improved competitiveness in the labor markets - something that France for example is struggling with (see post). CNBC: - While public servants have had pay cuts of between 10 and 25 percent, cuts of 20 to 40 percent are not uncommon in the private sector. In short, Spain has regained competitiveness and is in a position to benefit from growth in her trading partners. This second item is particularly interesting given Spain's large temp workforce which provides an additional level of flexibility (see discussion). The one area the article didn't discuss in sufficient detail is Spain's banking system other than to say that the restructuring is nearly complete

Spain's Budget Deficit Grew by 35.4% in January to 1.2% of GDP; Spain's Tax Revenue Drops 20% in Face of VAT Hikes - Via Google Translate, El Economista reports Spain's Budget Deficit Grew by 35.4% in January to 1.2% of GDP. The government deficit in terms of national accounts in January reached 12.729 billion euros, equivalent to 1.2% of GDP, representing an increase of 35.4% over January 2012. According to the budget execution data published in January by the Ministry of Finance website, the cash deficit in January came to 15,252,000, which are the result of a fall in net income of 37% (5.789 billion) and a expenses increased by 15.4% (21.041 billion). Tax revenues fell 20% to 10.608 billion, among other causes by the accumulation of returns earlier this year, says Finance.

Spain unveils $4.6-billion plan to get young back to work -- Spain pledged €3.5-billion ($4.6-billion U.S.) over four years on Tuesday to easing mass unemployment among the country’s youth, as the government tries to stem a relentless tide of layoffs and lengthening jobless queues. Prime Minister Mariano Rajoy presented 100 different measures including tax breaks for young freelance workers and for companies that hire workers in their twenties. Many of the measures, such as lower social security payments for young self-employed workers and up-front payment of unemployment benefits for entrepreneurs, had been announced previously. On Tuesday they were wrapped into a single strategy. During five years of economic stagnation and recession, Spain’s unemployment rate has risen to 26 per cent – the highest level since the 1970s and one of the highest in the European Union – and more than half of 18-25 year olds are out of work.

EU Court Strikes Down Spain’s Eviction Law - Campaigners in Spain hailed a rare legal victory over the country’s banks and government when Europe’s highest court struck down a draconian foreclosure law that had come to symbolise the brutal fallout from the eurozone’s debt crisis. The decision by the European Court of Justice will give Spanish courts new powers to delay or freeze the eviction of home buyers who have fallen behind on their mortgage payments. It will add to rising public pressure on the government in Madrid to change a tough mortgage regime that has allowed banks to evict tens of thousands of struggling homeowners. Spanish lenders have repossessed almost 400,000 houses and offices since the start of the crisis in 2007, sparking angry protests and a broad popular backlash. In some instances, home buyers were reported to have committed suicide days or even hours before their eviction date. Anti-eviction campaigners have collected almost 1.5m signatures to force parliament to debate a change in the law. The initiative seeks to end the current legal situation in which banks can demand full repayment of a mortgage even after it repossesses a house.

An Offer You Cannot Refuse; EU Passes Law Forcing Countries to Take Bailout; Is Spain the First Target? - Want a bailout? Need a bailout? Actually, it does not matter what your country wants or needs. By a 526 to 86 vote, the nannycrats in Brussels just passed a regulation that will require a country to accept a bailout if offered.Via Google translate from El Economista, Brussels may force a country to ask for a rescue if eurozone threat. The full European Parliament on Tuesday gave its final approval to the rule giving new powers to the European Commission to monitor national budgets of eurozone countries and even request changes before parliamentary approval. According to this regulation, agreed with the Twenty, Brussels may force a state to ransom.According to this rule, which goes ahead with 526 votes in favor, 86 against and 66 abstentions, the governments are obliged to send to Brussels its draft budget for next year by 15 October each year. The EU executive may publish its opinion on the national and even request changes if it believes that deviate from the objectives of consolidation undertaken by each country. However, your request will not be binding.

Portugal in worst recession in 37 years - PORTUGAL'S statistics agency says the economy contracted 3.2 per cent last year - its sharpest annual downturn since 1975. Portugal is enacting broad debt-reduction measures, including tax hikes and pay and pension cuts, in return for a 78 billion euro ($100 billion) international financial lifeline it received in May 2011. Those austerity policies are widely blamed for the deepening recession and growing hardship. The National Statistics Institute said on Monday that a drop in private consumption and slower export growth were the main factors behind the slump, with the economy shrinking 3.8 per cent in the fourth quarter. Unemployment stands at 17.6 per cent, the third-highest rate in the 27-nation bloc after Greece and Spain.

Data confirms recession in weakest eurozone economies - Data confirms recession in the eurozone's weakest economies last year, breathing new life into a heated debate on whether aggressive austerity measures may come at the cost of economic growth. The dire individual statistics for Italy, Greece, Portugal and Cyprus come just days ahead of a EU summit where the bloc's leaders are to mull ways to tackle the debt crisis, with countries led by France calling for growth measures while others led by Germany are holding firm for fiscal discipline. Last week, the EU's Eurostat data agency said that the 17-member eurozone sank deeper into recession in the last three months of 2012, with aggregate economic activity shrinking by 0.6 percent compared with the third quarter, when it had contracted by 0.1 percent. For 2012 as a whole, the eurozone economy contracted by 0.6 percent, Eurostat said.

France Postpones Austerity and Deficit Targets for Rest of 2013 - The following Eurostat chart shows that government spending in France accounting for close to 56% of GDP.  The above chart shows it's silly to propose France has been involved in any sort of genuine austerity program, yet that is precisely what the French Minister of the Budget suggests.   El Economista reports France defers further budget measures because of their recessionary impactThe French Minister of Budget, Jérôme Cahuzac, acknowledged that new taxes or spending cuts have a recessionary effect in the short term and "Given the weakness of the current situation, further efforts are ruled ask the French in 2013," said Cahuzac in an interview published by Le Journal du Dimanche. The 3% target was initially set for 2013, but the French government officially decided to postpone further action on account of the poor economic outlook. Hollande stressed his project to achieve "zero deficit" by the end of his term in 2017, is still in place and that France's actions are "not to please the European Commission or the rating agencies, but to regain our sovereignty, alienated by markets in recent years."

France's Francois Hollande admits to miss deficit target - President Francois Hollande has admitted France will miss its target on lowering the budget deficit this year. France's deficit will "without a doubt" be 3.7% of its output this year, he said, above the 3% he promised to cut it to during the election last year. The 3% deficit target is also one set by the European Union - but most of the major euro nations are in breach. The news comes as France's economic progress was criticised by a European Central Bank board member. "The reform course in France seems to have floundered," Germany's Jens Weidmann said. "The crisis that we are facing is a crisis of confidence, and this confidence cannot be gained if we postpone the tackling of the root causes of the crisis," Mr Weidmann said, referring to France, Italy and Cyprus as countries that still face tough financial situations.

Housing Construction in France Lowest in 50 Years; Hollande Responds With Measures to Support Building "For the Public Good" - Housing starts in France will fall to 280,000-300,000 in 2013, the lowest level in 50 years warns developer Nexity. The government wants 500,000 units per year. French president Francois Hollande thinks he knows the proper amount of houses that need to be built. Therefore, Hollande confirmed measures to support building quickly. Here is a Mish-modified translation from Les Echos...  Emergency. This is the word that comes to everyone's lips about building. Housing is at its lowest level since fifty years. François Hollande confirmed in an interview yesterday that "support for building" will be amplified quickly for the "public good". The Ministry of Housing was happy about yesterday's statements from the Head of State: "This means we are moving towards an ambitious plan". We recall the campaign promise to build 500,000 homes per year, of which 150,000 will be in social housing to offset the increase in the VAT rate. France is in the midst of a deflating property bubble. Nonetheless, Hollande wants to build more houses anyway. His rationale is interesting. Hollande wants to offset the increase in the VAT, taxes that he hiked.

The Eurobeatings Will Continue - Paul Krugman - Until morale improves. So says José Manuel Barroso, in a letter to the European Council saying that what Europe needs is — surprise — more austerity.I’m tempted to do a point by point analysis of the data Barroso presents to claim that adjustment is proceeding at an acceptable pace. We know, for example, that what looks like a surge in Irish competitiveness is in large part a compositional effect, in which the relative robustness of highly capital-intensive industries (pharma) creates the illusion of a productivity boom. We also know that even where there are genuine improvements in export performance, as in Portugal, they aren’t contributing enough to aggregate demand to prevent a downward spiral from austerity.But enough; clearly, the Commission won’t change course until catastrophe strikes. Mario Draghi’s actions, by stabilizing markets and bringing down spreads, bought Europe quite a lot of time; Europe is determined to waste all of it.

European factory output falls sharply - Industrial production in Europe sank faster than expected in January, raising the risk that a long-awaited return to growth will be further delayed. The eurozone's seasonally-adjusted output in January fell 0.4%, worse than the 0.1% decline most economists had been expecting. Output from Germany, which accounts for more than a third of industrial production in the 17-member currency area, slid 0.4% last month, while French production dropped 1.2%. The European Central Bank said last week it still expected a gradual recovery to begin during the second half of the year, even as it predicted the eurozone's gross domestic product would contract by 0.5%, rather than 0.3% as previously forecast. Eurozone GDP shrank by 0.6% last year.

Dutch support EU referendum -Dutch lawmakers have been forced to debate a referendum on any further transfers of power to the EU after a citizens’ petition demanding a plebiscite garnered 40,000 signatures in two weeks. Although parliament is not obliged to follow through with legislation, the move underlines the surge euroscepticism in one of the EU’s founding members, which could pose an obstacle to any further integration needed to bolster the eurozone.  Dutch lawmakers have been forced to debate a referendum on any further transfers of power to the EU after a citizens’ petition demanding a plebiscite garnered 40,000 signatures in two weeks. Although parliament is not obliged to follow through with legislation, the move underlines the surge euroscepticism in one of the EU’s founding members, which could pose an obstacle to any further integration needed to bolster the eurozone.

One in four Germans would back anti-euro party - One in four Germans would be ready to vote in September's federal election for a party that wants to quit the euro, according to an opinion poll published on Monday that highlights German unease over the costs of the euro zone crisis. The poll conducted by TNS-Emnid for the weekly Focus magazine showed 26 percent of Germans would consider backing a party that wanted to take Germany out of the euro and as many as four in 10 Germans in the 40-49 age bracket would do so. "This suggests there may be potential here for a new protest party," Emnid chief Klaus Peter Schoeppner told Focus. A new eurosceptic movement called 'Alternative for Germany' (AfD) comprising mostly academics and business people is due to hold its first meeting later on Monday in a northern suburb of Frankfurt.  One of its founders, economics professor Bernd Lucke, told Focus he had no concern that it would be able to raise the required 2,000 signatures in each German region to take part in September's federal election.

Germany’s anti-euro party is a nasty shock for Angela Merkel - A new party led by economists, jurists, and Christian Democrat rebels will kick off this week, calling for the break-up of monetary union before it can do any more damage. "An end to this euro," is the first line on the webpage of Alternative für Deutschland (AfD). "The introduction of the euro has proved to be a fatal mistake, that threatens the welfare of us all. The old parties are used up. They stubbornly refuse to admit their mistakes." They propose German withdrawl from EMU and return to the D-Mark, or a breakaway currency with the Dutch, Austrians, Finns, and like-minded nations. The French are not among them. The borders run along the ancient line of cleavage dividing Latins from Germanic tribes. The plans draw on work by Hans-Olaf Henkel, former head of Germany's industry federation (BDI) and a chastened europhile -- the "worst error of my professional life", he told me. The appeal of German exit is obvious. It is the least traumatic way to end the 20pc to 30pc misalignment between North and South, the cancer eating Europe. Club Med keeps the euro. It enjoys instant devaluation, while still able to uphold euro debt contracts. The spectre of sovereign defaults recedes.

Is The End Of The ‘Coercive Euro Association’ Taking Shape In Germany? - Anti-euro movements were pushed aside or squashed by political establishments across the Eurozone. There is, for example, Marine Le Pen, of the right-wing FN in France—“Let the euro die a natural death,” is her mantra. Though she finished third in the presidential election, her party has next to zero influence in parliament. Austria has Frank Stronach, who is trying to get an anti-euro party off the ground, without much effect. Germany has the Free Voters, an anti-bailout party that has been successful in Bavaria but not on the national scene. Then Italy happened. Two anti-austerity parties with no love for the euro, one headed by Silvio Berlusconi the other by Beppe Grillo, captured over half the vote—and locked up the political system. Newcomer Grillo had thrown the status quo into chaos, for better or worse. Suddenly, everyone saw that anger and frustration could accomplish something.It stoked a fire in Germany. Chancellor Angela Merkel’s euro bailout policies—“There is no alternative,” is her mantra—hit increasing resistance, particularly in her own coalition, but wayward voices were gagged.

German Central Bank Doubles Reserves - In a profound signal of uneasiness about the health of the euro zone, the German central bank said Tuesday that it had nearly doubled the reserves it held to cover possible losses. The Bundesbank said it had raised its risk provisions, or the money it sets aside to cover losses like a default on euro zone bond holdings, to €14.4 billion, or $18.7 billion, from €7.7 billion a year ago. The bank’s profit for the year, which it transfers to the German government, was little changed, rising to €664 million from €643 million. “The crisis is not yet over despite the interim calm on financial markets,” Jens Weidmann, the Bundesbank president, said during a news conference. The decision to set aside further billions can be interpreted as a verdict by Mr. Weidmann on European Central Bank measures he has long criticized, and which include purchases of Italian and Greek government bonds to try to keep those countries’ borrowing costs under control. “New risks are continually being acquired and distributed among member nations,” he said as the bank presented its financial results for 2012. “This has left a clear mark on the Bundesbank’s balance sheet.”

Greek unemployment climbs in Q4 as recession drags on = Greece's unemployment rate climbed to 26.0 percent in the last quarter of 2012 from 24.8 percent in the previous three-month period as the debt-laden country remained sunk in recession, data showed on Thursday. Austerity measures demanded by international lenders under a bailout keeping Greece afloat have deepened the economy's downturn with more pain expected this year as gross domestic product (GDP) is projected to shrink 4.5 percent. Statistics service (ELSTAT) said 1.295 million Greeks were without work in the last quarter of 2012, while the jobless rate among those aged 15-24 climbed to 57.8 percent from 49.9 percent in the previous quarter. More than 800,000 jobs have been lost since the third quarter of 2008 and economists say a big chunk of unemployment is becoming structural because of the protracted economic slump which entered its sixth straight year in 2013.

Greek Unemployment Hits Record 26 Percent Amid Austerity Measures: -- Unemployment in debt-crippled Greece rose to a record of 26 percent in the last quarter of 2012, as austerity measures combined with a deep recession took a harsh toll on the workforce. The figures were worse than the previous quarter's 24.8 percent, and 20.7 percent a year earlier. The national statistical authority said Thursday that 1.29 million people were out of a job in October-December 2012. In the under 25 age group, unemployment was 57.8 percent. The rate for women was 29.7 percent, compared with 23.3 percent for men. Greece's economy has been falling apart over the past three years, savaged by its financial crisis. The country is surviving on international rescue loans, released on condition it keeps up a tough program of spending cuts and tax hikes.

1,000 companies going bankrupt in Italy every day as country faces full-scale ‘credit emergency’ -- Italy’s industry chiefs have warned that the country faces a “full credit emergency” as thousands of companies run out of critical funding, threatening a slide into deeper depression. Confindustria, the business federation, said that 29% of Italian firms cannot meet “operational expenses” and are starved of liquidity. It said that a “third phase of the credit crunch” is under way that matches the shocks in 2008-09 and again in 2011. It said the economy was caught in a “vicious circle” where banks are too frightened to lend, driving more companies over the edge – with 1,000 going bankrupt every day. Franco Bernabe, head of Telecom Italia, said firms are “dying from lack of liquidity” and called on the Bank of Italy to take bold action to head off a disaster. “The Italian economy is being suffocated. The country must intervene rapidly to reinject funds into the economy,” he said. Fulvio Conti, head of the energy group Enel, exhorted Rome to give the economy an immediate shot in the arm by paying euros 48-billion in arrears to companies, arguing that this can be done without breaching EU deficit rules.

Cyprus’ Bank Deposit Bail-in - This morning we learned that after hours of tense negotiation, Europe has hammered out a 10bn euro “bailout” of Cyprus. I put the term bailout in quotes because the key feature of this deal is the bail-in of Cypriot depositors to the tune of 5.8bn euros, about a third of Cyprus’ GDP. This means that depositors went to sleep on Friday night and woke up Saturday to find that their money, deposited safely in Cypriot banks, had been seized and used to “bail out” the country. While the bail-in became official EU bank rescue policy during the Spanish crisis last summer, bank depositors were never mentioned at that time. I see this as an extreme measure which, if the European banking crisis continues elsewhere, will have very negative implications for bank depositor confidence in other European periphery countries.The mitigating factor in terms of preventing a loss of confidence in the European banking system is that the bail-in will happen principally via a one-time 9.9% levy on deposits over 100,000 euros. This is a bank holiday measure that means that Cypriot bank account holders with funds over 100,000 euros will have 9.9% of their account holdings deducted from their accounts when banks open on Tuesday. However, importantly, an additional 6.75% levy is going to hit deposits below that 100,000 euro level. As a bank depositor, given a one-day national holiday to decide what to do with your now shrunken savings, what would you do?

Spanish debt hits record 84.1% of GDP - Spain's public debt hit a new record of 84.1 percent of gross domestic product (GDP) at the end of 2012, owing to increases both at the federal level and that of the country's 17 autonomous regions, official data released on Friday showed. The figure, which gained 14.8 percentage points last year to total 884.4 billion euros ($1.15 trillion), was well above the European Union (EU) limit of 60 percent of GDP, but came in a bit below the government's own forecast of 85.3 percent. In the last three months of 2012 alone, the public debt grew by 6.8 percentage points. The figures, used by the EU to determine if it must launch a procedure to correct a country's excessive public deficit, did not include a Eurozone loan of 41.3 billion euros (US$53.8 billion) to the Spanish banking sector. According to data provided by the Spanish central bank, debt racked up by the Spanish government and social security system alone amounted to 760.3 billion euros, or 72.3 percent of GDP last year, compared with 58.5 percent at the end of 2011. The remainder of the debt was owed by autonomous regions and local governments.

Italian public debt hits new high, 2.023 billioln euros - Italy's public debt, the largest in the eurozone after Greece's, hit a new high of 2,022.7 billion euros in January, 34 billion up on December, the Bank of Italy said Friday. The sum includes 43 billion euros given to Italy by the eurozone's new permanent bailout fund, the European Stability Mechanism (ESM), the central bank said. At the end of last year the debt dipped back below two trillion for the first time in more than a year, at 1,988.363 billion euros. The debt, the main reason Italy has been exposed to the euro crisis, rose last year from around 120% to 126% of GDP despite government cost-cutting. According to commitments with Europe, Italy must cut the debt to 60% of GDP within 20 years.

Farage Slams Eurozone As "Complete Economic Disaster" - "The air is thick with denial in this chamber," is how UKIP's Nigel Farage begins his truthiness rant at the most recent European Council meeting. Reflecting on the Italian election and overwhelming success of 'Eurosceptic' political parties, Farage barks that it "is absolutely clear that Eurozone membership is completely incompatible with nation-state democracy." The complete denial (and "unutterable drivel") about the Eurozone crisis incenses him as he says "you'd think listening to everyone this morning that it's over." The real problem, he explains, is that they won't face up to the reality that "You are not facing up to the consequences for what you've done," as he tries to make the technocrats comprehend, "the Eurozone has been a complete economic disaster," because of the Euro - and the disaster is still coming down the tracks

EU Fires Back In Austerity Debate - The economists of the European Commission are under fire. Critics are blaming them for pushing austerity policies that are partly responsible for Europe’s dreadful economic situation. Worst of all, Paul Krugman is comparing their ideas to disgusting insects. On Wednesday, commission economists fired back at their critics in nearly 3,000 eye-glazing words of economics jargon. Here are their basic points, in relatively plain English: The commission responds to an argument by the economists Paul De Grauwe and Yuemei Ji that Europe’s austerity policies were an overreaction to the market panic that hit Greece, then Ireland and Portugal starting in 2010. Supporting De Grauwe and Ji is the fact that the relative market calm the euro zone now enjoys arrived only after the European Central Bank announced it would buy unlimited quantities of bonds of countries that sign up for a bailout program.

Night of the Living Alesina - Paul Krugman - Ah, remember the good old days of expansionary austerity? On both sides of the Atlantic, austerians seized on academic work by Alberto Alesina and Silvia Ardagna claiming that fiscal consolidation, if focused on spending cuts, would if anything lead to economic expansion. It wasn’t because the paper was especially compelling — even a quick look suggested that the methodology for identifying austerity was seriously flawed. But A-A told people what they wanted to hear, and they went with it. Since then we’ve had what has to be one of the most decisive combinations of scholarly critique and real-world tests of an economic doctrine ever — and expansionary austerity has failed with flying colors. The IMF went about identifying austerity through an examination of actual policy, and A-A’s results were reversed. Critics showed that all of the alleged examples of expansion through austerity involved factors like currency depreciation or sharp falls in interest rates that don’t apply now. Osbornian policies in the UK led to stagnation; and in the euro area, well …

ECB doubles down on austerity - The European Central Bank is doubling down on its insistence that fiscal austerity is the best way to achieve economic growth in the long term. In its Monthly Bulletin, the ECB runs through research going back decades on whether rising levels of national debt help or hinder growth. Its conclusion: “Beyond a threshold of about 90-100% of GDP, public debt has, on average, a negative effect on long-term growth.” The euro zone falls into that category with a 90% debt-to-GDP ratio as of the third quarter of last year, according to Eurostat, though debt levels vary widely across countries. France is right there at 90% and even Germany, whose annual finances are nearly in balance, isn’t far behind with an 82% debt-to-GDP ratio.

Delusions at the European Commission - Paul Krugman - I see that Vox has posted a self-justifying piece on fiscal austerity from the European Commission, declaring that the Commission is pursuing a “delicate balance”. Actually, that’s kind of awesome: how does that “delicate balance” feel in countries with 15, 20, 25 percent unemployment? And in general, it’s quite a spectacle to see officials patting themselves on the back over an economic strategy that, let’s not forget, has tipped Europe back into recession, and keeps pushing overall euro area unemployment to new highs. For me, however, the real “tell” is this sentence: In Germany, the fiscal stance is now broadly neutral, hence consistent with the call for a differentiated fiscal stance according to the budgetary space.Translation: Germany isn’t imposing Greek-level austerity, which proves that we’re flexible!Here’s the key point: Europe as a whole is pursuing a remarkable degree of fiscal austerity that is totally inappropriate in a still-depressed economy. Here’s the cyclically adjusted primary balance from the IMF:

British Proposal to Rein In Banks Is Faulted - Proposed legislation to protect Britain’s financial services sector from future crises does not go far enough and may fail to stop banks from engaging in risky trading, British lawmakers will warn in a report on Monday. The warning comes as Parliament is set to debate the new laws, which outline how firms could be split up if they do not separate their investment banking units from their retail banking operations. The creation of a so-called ring fence between the banks’ businesses is an attempt to shield consumers from an implosion of trading activity and other risky behavior that led to several big banks being bailed out by British taxpayers during the financial crisis. In the wake of the multibillion-pound handouts to British banks and a series of scandals David Cameron, created a parliamentary commission last year to review standards in the British banking industry. In the report to be published on Monday, British politicians will say that the country’s government had failed to adopt several proposals from the commission intended to protect local firms. The recommendations include a regular independent review to check that banks are maintaining a separation between their risky trading activity and retail deposits.

U.K. Industrial Output Unexpectedly Falls on Oil, Gas U.K. industrial production unexpectedly declined in January as the suspension of an oil platform in the North Sea lowered oil and gas output. Production fell 1.2 percent from December, when it rose 1.1 percent, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 29 economists was for a 0.1 percent increase. Oil and gas dropped 4.3 percent. Manufacturing also unexpectedly declined, by 1.5 percent. The pound fell. Enlarge image U.K. Industrial Output Unexpectedly Falls as Oil Platform Halts Simon Dawson/Bloomberg Production fell 1.2 percent from December, when it rose 1.1 percent, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 29 economists was for a 0.1 percent increase. .While the slump in production is largely due to the oil platform, it may raise concerns of another economic contraction this quarter, which would put Britain back into a recession. At the same time, manufacturers are battling a continued slump in the euro area, the U.K.’s biggest trading partner, as well as lackluster demand at home. “These are a worrying set of numbers; the industrial side of the economy may not be growing,” . “I’m not confident at all that we’ve avoided another recession.” The drop in manufacturing output in January compared with economists’ forecast for an unchanged reading.

Manufacturing slump sends sterling crashing to three-year low - Confidence in the UK's ability to recover from the longest depression in 100 years appears to be waning after a slump in manufacturing sent the pound crashing to a level not seen since early 2010. Sterling was worth a little over $1.48 following official data that showed manufacturing dropped 1.5% in January on the previous month. According to the official figures, a sharp fall in the production of pharmaceuticals and building materials sent output tumbling 3% lower than the same month last year. A wider measure of industrial production was dragged lower by cuts in North Sea oil and gas investment. Analysts said the weak numbers from manufacturers and a raft of forecasts showing the economy slowing were consistent with the onset of a triple-dip recession. Chris Williamson, chief economist at Markit, said: "The data will pile more pressure on the Bank of England to inject more stimulus into the economy at its next policy meeting, and on the chancellor, to accept that more needs to be done to boost growth in next week's budget. "With such a weak start to the year, the economy is facing an increased risk of falling into a triple-dip recession and the much-vaunted rebalancing remains elusive. In fact, recent data suggests the UK is moving in the opposite direction: away from goods production and is becoming ever-more dependent on consumer spending."

Majority of British children will soon be growing up in families struggling ‘below the breadline’, Government warned -- The majority of British children will soon be growing up in families which are struggling “below the breadline” because of welfare cuts, tax rises and wage freezes, the Government is warned today. Within two years, almost 7.1m of the nation’s 13m youngsters will be in homes with incomes judged to be less than the minimum necessary for a decent standard of living, according to a new report. The figures, which emerged a week ahead of George Osborne’s Budget, suggest that an unwanted legacy of the Coalition’s squeeze on spending will be to leave more children living close to poverty.  The impact on children of the economic downturn and austerity measures was underlined by an analysis that concluded that the number of under-18s living in households below minimum income standards would increase by 690,000 between 2010 and 2015. The definitions of acceptable living standards are drawn up by the respected charity, the Joseph Rowntree Foundation. Today’s report said 460,000 children would be pushed below those levels by the increase in VAT and cuts to tax credits, 170,000 by sluggish wage growth and 80,000 by the curbs on public sector pay. Just 20,000 would be raised above the minimum level by the new Universal Credit system, which begins to come into force in October.

Politicians bow to pressures to bend data - The British government recently assumed the £37bn liabilities of the Royal Mail pension fund. As a result, government borrowing was reduced by £28bn. Yes, you read it correctly. The explanation is that, by convention, unfunded pension liabilities do not represent government borrowing while, by a different convention, public assets intended for sale – such as securities formerly held by the Royal Mail fund – may be offset against borrowing. And, as my colleague Chris Giles has explained, the government has also decided the interest the Bank of England receives on the securities purchased through quantitative easing should be credited to the government’s revenue account. Nothing of substance has changed but the reported public deficit is reduced to a level consistent with the government’s borrowing targets. During the Thatcher years, politicians began to take an unhealthy interest in how official statistics were compiled. The regime of Gordon Brown took statistical prestidigitation to new heights. The economic cycle was redefined several times, always with the result that the target of controlling borrowing over the cycle had, despite appearances, been met. The status of Network Rail and its financing arrangements were reformulated several times to pretend the body responsible for Britain’s rail infrastructure was not an agency of government – which it manifestly was – and that its borrowings were not guaranteed by government – which markets knew they were; an episode of which the mandarins of Yes Minister would have been proud.

The English Prisoner - Paul Krugman - “If this plan is working, what would a failing one look like?” So asks Martin Wolf in response to David Cameron’s speech insisting that his austerity policy was right, is right, and is succeeding. Simon Wren-Lewis goes through Cameron’s assertions in some detail, among other things catching him more or less lying about what the Office of Budget Responsibility — roughly speaking the counterpart of the CBO here — ha actually said about the impact of austerity on growth. I was particularly struck by the way Cameron is still claiming that Britain’s low interest rates show that his policy is successful and necessary. This is a bit like the high priest sacrificing a virgin once a month to ensure that the sun keeps rising, then claiming that the fact that the sun has risen proves that the sacrifice was indeed necessary. The obvious test is to compare Britain with other countries; if Britain’s 2.07 percent bond yield validates his policies, does America’s 2.05 percent yield validate Obama’s? The trouble, of course, is that Cameron’s political career and his very identity are now totally bound up with his austerity crusade. He’s a prisoner of his past, who can’t and won’t change course. Instead, his incentives are all about gambling for redemption — sticking with the policy in the hope that something turns up that will somehow make him a hero.

Britain’s austerity is indefensible --- David Cameron’s “there is no alternative” speech last week on the UK economy has aroused much criticism. This is justified.The British prime minister’s arguments for sticking to the government’s programme of fiscal austerity were overwhelmingly wrong-headed. It is easy to understand why he had to defend the government’s failing flagship policy. The incoming coalition embarked on a programme of austerity with the emergency Budget of June 2010. The economy, then showing signs of recovery, has since stagnated. Even the fiscal outcomes are poor. Indeed, according to the latest Green Budget from the authoritative Institute for Fiscal Studies, this fiscal year’s borrowing requirement may be bigger than last year’s. Only a productivity collapse saved the day – by keeping unemployment surprisingly low, ameliorating the social impact of the output disaster. How does one defend this record? Simon Wren-Lewis of the University of Oxford and Jonathan Portes of the National Institute of Economic and Social Research, among others, have demolished the prime minister’s views. Here are the key points. Mr Cameron argues that those who think the government can borrow more “think there’s some magic money tree. Well, let me tell you a plain truth: there isn’t.” This is quite wrong. First, there is a money tree, called the Bank of England, which has created £375bn to finance its asset purchases. Second, like other solvent institutions, governments can borrow. Third, markets deem the government solvent, since they are willing to lend to it at the lowest rates in UK history. And, finally, markets are doing this because of the structural financial surpluses in the private and foreign sectors.

Britain’s fiscal failure - Felix Salmon - Never mind Sachs vs Krugman: by far the most interesting and important fiscal-policy debate right now is Cameron vs Wolf. David Cameron, of course, is the prime minister of the UK, and last week he gave a rambling 4,000-word speech on the national economy which is almost impossible to read. For some reason the speech appears online in what you might call teleprompter format, with a single sentence sometimes spanning three separate paragraphs. It’s a clear indication that Cameron is more interested in rhetoric than he is in substance. Meanwhile, Martin Wolf, who for many years has been the most respected and important economic commentator in Europe, has in recent weeks become much more accessible. Check out his column on bankers’ bonuses, for instance: it’s a smart and rollicking read, arguing persuasively that the UK government is being idiotic in its opposition to European bonus caps. Wolf’s immediate response to Cameron was solid, but his second go-round is just devastating: we’re now officially in a world where the wonkiest columnist in the driest newspaper in Britain is stating his case far more simply and clearly than the populist PR man turned prime minister:

The Myth of Debt - FROM the latest cuts to the economic forecasts to the Italian elections to the gathering debate about how George Osborne should play this year's Budget, all discussions about the financial system now lead swiftly back to the world's sovereign debt problem. FROM the latest cuts to the economic forecasts to the Italian elections to the gathering debate about how George Osborne should play this year's Budget, all discussions about the financial system now lead swiftly back to the world's sovereign debt problem.  It towers over every effort to get back to prosperity, threatening to take decades at best before it can be resolved, very possibly with an almighty crash along the way. But maybe that is because we are looking at a 21st-century problem in a 20th-century light. My research at University College London indicates that the answers might lie in modern versions of legal structures and instruments which pre-date the modern financial system and even the incorporating Union of England and Scotland in 1707. But before I explain this "back to the future" proposal for recovery, a warning: we'll need to turn much of the received wisdom that underlies modern economics and politics upside down as we proceed.

Spectre of stagflation haunts UK - The prospect of stagflation has returned to the UK as investors bet on a sharp jump in inflation to its highest level in almost five years. Inflation expectations, as measured by the difference between nominal and inflation-linked bond yields, ticked up to near 3.3 per cent on Tuesday, levels not seen since September 2008. Investor fears that the UK could be simultaneously hit by stagnant growth and high inflation, as experienced in the 1970s, were exacerbated by poor economic data pointing to the probability of another economic contraction in the first quarter of this year.  Sterling, meanwhile, fell 0.5 per cent against the dollar to $1.4832, its lowest level since June 2010. Currency traders were spooked by Office for National Statistics estimates that manufacturing output fell by 1.5 per cent between December and January – and by 3 per cent in the 12 months to January. Separately, the National Institute of Economic and Social Research said the economy continued to flatline in the first two months of 2013. Howard Archer, of IHS Global Insight, said the manufacturing figures were “awful”.

The need for supply-side socialism - There's an important fact that's lost in the debate about economic policy. It's that counter-cyclical policy is nothing like sufficient. Let's say we wanted to get unemployment (on the LFS measure) down from its current 2.5m to one million. How many jobs would we need to create? The answer is NOT 1.5m. This is because many jobs would be filled by those out of the labour force - the retired, home-makers, students on marginal courses and, OK, immigrants. For example, in the last year employment (pdf) has risen by 584,000 but unemployment has dropped by just 156,000. This tells us that reducing unemployment by 1.5m would require well in excess of 3m new jobs. That's an increase of over 10%. This requires a massive expansion in GDP. Once we allow for the possibility that productivity will begin to rise again, we probably need a rise in GDP of over 15%. And we'd need a bigger rise in money GDP to achieve this, simply because a large part of any fiscal or monetary expansion would raise prices rather than real GDP: the Bank of England estimates (pdf) that its first £200bn of QE raised real GDP by 1.5-2 per cent and inflation by up to 1.5 per cent. Getting unemployment down to one million would therefore require a rise in money GDP of perhaps 30 per cent - over £400bn. Nobody is proposing a fiscal or monetary expansion anything like this*.

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