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

Saturday, April 20, 2013

week ending April 20

Assets Held on Federal Reserve Balance Sheet Hit Record High: --Assets held on the U.S. Federal Reserve's balance sheet again reached a record high this week, driven up by purchases of mortgaged-backed securities. The Fed's asset holdings in the week ended Wednesday increased by $67.35 billion from a week earlier to $3.295 trillion, the central bank said in a weekly report released Thursday. Holdings of mortgage-backed securities jumped by $55.04 billion to $1.126 trillion and U.S. Treasury securities holdings increased by $10.56 billion in the past week to $1.825 trillion. The Fed remains committed to its bond-buying programs despite recent evidence of economic improvement. The central bank has promised to purchase an average of $85 billion a month of Treasury and mortgage bonds. The Fed's portfolio has more than tripled since the financial crisis thanks to stimulus programs intended to keep interest rates low. Thursday's report showed total borrowing from the Fed's discount lending window was $404 million on Wednesday, down from $439 million a week earlier.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--April 18, 2013: statistical release

Fed’s Dudley Suggests No Urgency in Paring Back QE3 - A Federal Reserve official at the center of monetary-policy deliberations on Tuesday reiterated his support for the central bank’s bond-buying stimulus program, saying the economy is likely to see only “sluggish” growth as the year progresses. “The labor-market outlook has yet to show substantial improvement,” Federal Reserve Bank of New York President William Dudley said. “Consequently, I see the current pace of asset purchases as appropriate.” But at some point, the official warned, “I expect that I will see sufficient evidence of improved economic momentum to lead me to favor gradually dialing back the pace of asset purchases.” He also said, though, that “any subsequent bad news could lead me to favor dialing them back up again.”

Fed’s Plosser: Now Is A Good Time To Revisit Tightening Plan - The leader of the Philadelphia Fed said Tuesday any central bank exit strategy should return the institution to its pre-crisis roots, and he warned his colleagues not to over-rely on a relatively new power that allows them to pay interest on bank reserves. The official, Charles Plosser, has been a consistent critic of the Federal Reserve‘s move to provide stimulus to the economy. He has opposed the central bank’s decision to push forward with an open ended campaign of Treasury and mortgage bond buying, amid worries about rising reserve levels and an ever growing central bank balance sheet that will at some point need to be shrunk. Mr. Plosser believes now is a good time for the Fed to revisit its exit strategy, given that it’s been nearly two years since it’s been given formal consideration. While much of what he believed then still holds now, the official notes much has happened since then, most notably a massive expansion in an already historical swollen Fed balance sheet. For that reason, it would be good for the central bank to clarify the manner in which it will ultimately withdraw the stimulus it is still pumping into the economy.

Fed’s Duke: Don’t Want to Raise Rates Too Early - Federal Reserve officials shouldn’t move too early to raise interest rates because it could have a detrimental effect on the economy, central bank governor Elizabeth Duke said Tuesday. Ms. Duke, speaking to a conference of bankers, said she would like to see interest rates move higher, but only if that’s because the economy is on solid enough footing for the Fed to feel comfortable in removing monetary stimulus. Moving too quickly to raise interest rates could imperil the recovery, she said.

Fed’s Yellen Doesn’t See Excessive Risk Taking - The Federal Reserve’s No. 2 official on Tuesday defended the Fed’s easy-money policies against charges that they could ignite another financial crisis although she said financial stability is “a major concern” for the central bank. “It’s not my expectation that financial stability concerns will rise to the level where that becomes the dominant factor that should control our policy,” said Janet Yellen, the vice chairwoman of the Fed board in Washington.Yet Ms. Yellen went on to say she agreed with her Fed colleague Jeremy Stein that “there are things that are happening that are worrisome” and some market participants are “reaching for yield,” or taking on new risks in search of higher returns. Mr. Stein was among the first Fed officials to publicly air concerns that the long period of ultra-low interest rates fueled by the Fed’s policies could be causing overheating in some corners of the credit markets.

Fed Watch: Yellen and the Reach for Yield - Federal Reserve Vice Chair Janet Yellen, speaking at the IMF "Rethinking Macro Policy II" conference, notes that Fed policy is intended, at least in part, to increase risky-taking behavior: Some have asked whether the extraordinary accommodation being provided in response to the financial crisis may itself tend to generate new financial stability risks. This is a very important question. To put it in context, let's remember that the Federal Reserve's policies are intended to promote a return to prudent risk-taking, reflecting a normalization of credit markets that is essential to a healthy economy.  Certainly some reflation of asset prices is helpful in healing household balance sheets. But she and other realize that it can go too far:  . Low interest rates may induce investors to take on too much leverage and reach too aggressively for yield. I don't see pervasive evidence of rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would threaten financial stability. But there are signs that some parties are reaching for yield, and the Federal Reserve continues to carefully monitor this situation. It would be hard not to make this conclusion given the role of asset bubbles in the dynamics of the last two business cycles. Still, what is the right policy response? Yellen: However, I think most central bankers view monetary policy as a blunt tool for addressing financial stability concerns and many probably share my own strong preference to rely on micro- and macroprudential supervision and regulation as the main line of defense.

Fed’s Bullard: Softer Inflation May Lead to Boosted Bond Buying - Federal Reserve Bank of St. Louis President James Bullard said Wednesday inflationary pressures may be growing too weakly and if they soften further, the central bank may have to boost its asset buying to bring price pressures back up to more desirable levels. “Inflation is running very low” as measured by the personal consumption expenditures price index, the Fed’s favored inflation gauge, the policymaker said. “I’m getting concerned about that,” he said. “If inflation [gains] continues to go down, I’d be willing to increase the pace of purchases” of bonds the Fed is now engaged in, Mr. Bullard said. “This is not what I expected, and I think inflation should be closer to the target than it is,” the official said, adding he considers it just as important to defend the Fed’s 2% inflation target from the low side, as it is to keep prices from going over 2%.

Fed Watch: Bullard Concerned About Low Inflation - St. Louis Federal Reserve President James Bullard sees inflation as a potential problem, but not in the way you might think. From the Wall Street Journal: Federal Reserve Bank of St. Louis President James Bullard said Wednesday inflationary pressures may be growing too weakly and if they soften further, the central bank may have to boost its asset buying to bring price pressures back up to more desirable levels. “Inflation is running very low” as measured by the personal consumption expenditures price index, the Fed’s favored inflation gauge, the policymaker said. “I’m getting concerned about that,” he said. “If inflation [gains] continues to go down, I’d be willing to increase the pace of purchases” of bonds the Fed is now engaged in, Mr. Bullard said. “This is not what I expected, and I think inflation should be closer to the target than it is,” the official said, adding he considers it just as important to defend the Fed’s 2% inflation target from the low side, as it is to keep prices from going over 2%. This is the problem: With the Fed's preferred inflation target trending down, it seems a little silly to start talking about ending the asset purchase program. Indeed, as Bullard suggests, there might be room to expand it further. Note also that Bullard comes to this conclusion despite his concern that monetary policy has limited ability to create jobs, the main point of his speech. See the Wall Street Journal article cited above or Neil Irwin for more.

Fed’s Kocherlakota: Very Low Rates Could Persist for a Decade - A Federal Reserve official said Thursday interest rates are likely to stay very low for years to come, which raised the prospect that chronic financial instability risks will dog the economy for a long time. “For a considerable period of time, the [Federal Open Market Committee] may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets,” Federal Reserve Bank of Minneapolis President Narayana Kocherlaktoa said. “For many years to come, the FOMC will have to maintain low real interest rates to achieve its congressionally mandated goals,” the official said. “Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity,” he said.

Tapering Talk: What Fed Officials Are Saying About Winding Down Bond Purchases - Tapering is all the rage these days when it comes to the Federal Reserve’s unconventional $85 billion-a-month bond-buying programs. Minutes from the Fed’s latest policy meeting in March showed a robust internal debate about exactly when the Fed should begin to gradually reduce the amounts of its monthly purchases of Treasury debt and mortgage-backed securities. But it’s clear a consensus has emerged that the central bank will indeed reduce the pace of its monthly purchases before stopping the programs altogether. Since the March meeting, Fed officials have had to confront a jobs report that was far worse than expected and some other disappointing data, including falling consumer sentiment at home and weak economic growth in China — all of which could impact the Fed’s decision-making process about tapering its bond-buying programs. Here’s a roundup (in no particular order) of what Fed officials have said on the subject since March 20, when the last policy meeting wrapped up.

Several Central Bankers Note Tapering Not a Done Deal - Talk of tapering Federal Reserve bond buying has dominated the monetary policy debate over recent weeks. But over recent days, several central bankers have reminded market participants pulling back is not a done deal. What’s more, in the view of two of those officials, there is a chance the Fed may have to even increase the level of stimulus it’s providing based what is so far a softening inflation environment. The other official, New York Fed President William Dudley, remains unwilling to predict a pullback as long as labor markets remain in their present state. The three men, who also include St. Louis Fed leader James Bullard and Minneapolis Fed boss Narayana Kocherlakota, are a reminder of the high level of uncertainty surrounding the outlook for monetary policy. Over recent weeks, the economy’s improving prospects, as well as increased anxiety over the risks created by aggressive central bank action, have boosted talk that the Fed may be able to pull back on what is currently an open-ended $85 billion-per-month effort to buy Treasury and mortgage bonds.

IMF warns on risks of excessive easing - Extraordinarily loose monetary policy risks sparking credit bubbles that threaten to tip the world back into financial crisis, the International Monetary Fund warned on Wednesday. In its global financial stability report, the fund cautioned that policy reforms were needed urgently to restore long-term health to the financial system before the long-term dangers of monetary stimulus materialised. Without more progress, the IMF said “the global financial crisis could morph into a more chronic phase, marked by a deterioration of financial conditions and recurring bouts of financial instability”. In the short term, however, the fund was more upbeat. José Viñals, IMF head of financial stability, said: “Spring has arrived to global financial markets where after very rainy days and threatening clouds, we are beginning to see some blue skies and more sunny days.” The IMF believes unorthodox monetary policies to encourage growth are better than other options, but is concerned that the long-term consequences of such strategies represent a “new risk” to financial stability.

Operationalizing the Dual Mandate - In January 2012, the Federal open Market Committee put out a principles statement describing its longer-run goals and policy strategy. On April 13, Narayana Kocherlakota, President Federal Reserve Bank of Minneapolis, gave a speech on the "operational implications" of the principles statement.  The Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them. If the Fed's only mandate were to mitigate deviations of inflation from its longer- run goal, Kocherlakota explains, then the Fed would aim for the green line, rather than the red line, in the graph below (from his slides.) He is confident that monetary policy works in one to two years, so reaching the inflation target of 2% (indicated by pi* in the graph) in two years would be both feasible and consistent with the mandate concerning inflation, if that were the only mandate.

Why a Dual Mandate is Essential - Monetary policy has two crucial roles. The first is to set the medium/long term inflation rate. Pretty well everyone understands this. The economy will not by itself settle down to an inflation rate of 2% or whatever - it needs monetary policy to set this rate and help achieve it. The second is to ensure that aggregate demand matches aggregate supply. Now here there is sometimes confusion, even among the best economists. [1] The basic idea is that there is a ‘natural’ level of output determined by supply side factors, like how much people want to work, the degree of monopoly in the labour market, the state of technology etc. [2] There will be a real rate of interest associated with this level of output, which we can call the natural interest rate. On the other hand how much firms produce in the short run is largely determined by aggregate demand: firms tend to set prices, and do not ration demand. There is no reason why aggregate demand has to equal supply in the short run in a monetary economy. The difference between actual output and natural output is the output gap. If the output gap is not zero, problems will arise. For example with excess demand we get inflation, and with deficient demand we can have wasted resources and the misery of involuntary unemployment. Aggregate demand depends on real interest rates. As monetary policy can influence real interest rates in the short run, then its job is to try and match aggregate supply and demand, by bringing the real interest rate as close as possible to the natural interest rate. [3]

Single mandate or fear of inflation demons - - During the Boston Federal Reserve conference on Fulfilling the Full Employment Mandate, there was a panel discussion on the importance of the dual mandate for the US Federal Reserve. The panelists were two of the Presidents of the Federal Reserve System (Kocherlakota and Evans), a member of the monetary policy of the Bank of England (David Miles) and Lars Svensson from the Riksbank (Swedish Central Bank). The four panelists presented complementary views on how central banks manage the trade off between inflation and unemployment under different mandates: an explicit dual mandate for the US Federal Reserve and a single mandate for the Bank of England or the Riksbank (same as the ECB). What I found shocking in the presentations is how the panelists felt the need to explain the obvious. Both in Sweden and the US (as well as in the Euro area), inflation is and has been below the target for the recent past. Even if one thought of these central banks as being responsible for just inflation (single mandate), it is clear that they are failing to keep inflation from reaching that target. As Svensson made explicit, in the case of Sweden, inflation has now been below 2% for a significant period of time and it is unclear how the Riksbank will manage to produce an average around 2% over a medium-term horizon.

Is inflation targeting dead? Central banking after the Crisis - Inflation targeting did not prevent financial instability before the Crisis nor did it provide sufficient stimulus after the Crisis. In a new Vox eBook, 14 world-renowned scholars, practitioners and market participants analyse inflation targeting and its future. They argue that inflation targeting should be refined not replaced. Indeed, it is needed now more than ever to keep expectations anchored while the advanced economies work their way through today’s slow growth, rickety banks, and over-indebted public sectors.

Inflation Targets and Rewriting History -  Simon Wren-Lewis wrote I think there were three important contributory factors to what happened in the 1970s that are just not present today. First, our knowledge of inflation output trade-offs, although hardly complete now, was much weaker back then. Second, the Fed and other monetary policy makers did not have clear inflation targets that they were publicly committed to. Third, there appeared to be an alternative instrument for dealing with inflation: direct controls on prices and wages. Wren_Lewis was principally arguing that a dual mandate is not necessarily worse than a single price stability mandate, because the Fed has a dual mandate and the USA has had low and stable inflation.  I think the argument for publicly stated inflation targets has the same vulnerability as the argument for a single mandate.  The Fed did not state an inflation target until recently. I just googled [greenspan inflation target].  The second link is entitled "Greenspan Rejects Inflation Targets" "'A specific numerical inflation target would represent an unhelpful and false precision,' Mr. Greenspan said."  I submit that Mr Greenspan managed to avoid high inflation in spite of specifically rejecting the widespread advice to make a clear specific public commitment to an inflation target. The first hit says that Bernanke is for inflation targetting, but I think a FOMC chaired by him first announced a target well after 2010 (I think in 2012).[update: actually January 25 2012 see below]

Inflation targeting is not dead yet - Inflation targeting is dead, or so we are told with increasing frequency nowadays. There is, however, a major problem with this line of argument. It does not tally with what the major central banks say they are actually trying to do, either in public or in private. Far from disappearing, inflation targets continue to gain prominence. Furthermore, they still play an essential role in ensuring good economic performance. As recently as January 2012, the Federal Reserve formalised a 2 per cent inflation objective, while the Bank of Japan did the same for the first time only last month. The ECB continues to face heavy criticism because it pays such close attention to keeping inflation “below but close to” 2 per cent. Only the Bank of England can be seriously accused of downgrading its inflation objective in recent years, and even that may have changed in the past couple of MPC meetings. The sceptics argue that the central banks are cynically saying one thing and doing another: publishing 2 per cent inflation targets while knowingly risking the long term stability of inflation by expanding their balance sheets with the real objective of reducing unemployment and public debt ratios. Again, this shows a misunderstanding of how the central bankers think the economy currently works. Essentially, they have come to believe that they can adopt expansionary monetary policies without risking the stability of inflation. If they believed there was a choice between low inflation and low unemployment, they would (probably) choose the former, but they no longer recognise that this choice exists.

Are Central Banks Putting Their Independence at Risk? - Over the past 20 or so years, central banks have won, cherished and defended their independence from elected politicians. If you want to keep inflation down, they said to the politicians, don’t meddle when we move interest rates up or down. In country after country, the politicians, recognizing that they would tend to want a little more growth now at the cost of a little more inflation later, gave the central bankers their wish. And until the financial crisis hit in 2007, it seemed a very comfortable arrangement. Now some central bankers — and the economists who made the case for independent central banks — are suggesting that it’s not so simple. Not only have central banks greatly expanded their toolkit — in some cases buying huge amounts of long-term government bonds — but the mandate of central banks has expanded beyond resisting inflation to maintaining “financial stability,” that is, avoiding the excesses that create financial crises. And that, it turns out, is a big change, one that could complicate — some say undermine — the hard-won independence of central banks.Among the big-name economists and policymakers at a conference convened by the International Monetary Fund this week, “Rethinking Macro Policy II: First Steps and Early Lessons,” there were at least two camps on this issue.

Missing Deflation - Paul Krugman - One area where things haven’t worked out as expected is on the deflation front. Inflation has stayed very subdued; but coming in to the crisis I certainly thought that actual Japanese-style deflation was a real possibility. That hasn’t materialized (and for that matter, even Japan never had more than very gradual deflation). Why? One possibility was that there wasn’t as much slack in the economy as we thought, that a lot of the problem was structural rather than cyclical. Another possibility, however, which I at least noted fairly early on, was that downward nominal wage rigidity could explain why the fairly rapid falls in inflation seen in previous slumps weren’t happening this time; if wages are “reluctant” to actually fall, inflation becomes “sticky” at low levels even with a very depressed economy. So now we have two new analyses, by Hobijn and Daly at a Boston Fed conference, and in the IMF’s new World Economic Outlook, both of which strongly suggest that the issue isn’t structural unemployment, it’s low responsiveness of inflation to unemployment when inflation is low to begin with.

How central banks beat deflation - Martin Wolf - Why are the high-income countries not mired in deflation? This is the puzzle today, not the absence of the hyperinflation that hysterics have wrongly expected. It is weird that inflation has remained so stable, despite huge shortfalls in output, relative to pre-crisis trends, and prolonged high unemployment. Understanding why this is the case is important because the answer determines the correct policy action. Fortunately, the news is good. The stability of inflation seems to be a reward for the credibility of inflation targeting. That gives policy makers room to risk expansionary policies. Ironically, the success of inflation targeting has revitalised Keynesian macroeconomic stabilisation.  A chapter in the latest World Economic Outlook from the International Monetary Fund presents the case for this encouraging conclusion, as has already been noted by, among others, Gavyn Davies and Paul Krugman. Its starting point is with the stickiness of inflation, despite the lengthy period of very high joblessness. Thus, states the IMF, “we find a dog that did not bark”. A possible explanation for this phenomenon is structural. It is argued by many, for example, that the workers who lost their jobs in construction and other bubble-era activities have the wrong skills or are located in the wrong places to take up the new jobs that might now – or soon – be on offer. An alternative explanation is more encouraging. It is that inflation targeting has anchored expectations and so labour market behaviour. Moreover, these targets are close to zero.

More on missing downward price pressure (hint, blame corporate profits) - Paul Krugman has been writing (and linking to helpful pieces) about the “missing deflation” of recent years. Despite lots of hand-wringing that activist macroeconomic policy (especially the large degree of easing done by the Federal Reserve) is laying the powder for an explosion of inflation, it’s clear that this is the wrong worry and that the extraordinary degree of economic slack actually argues that disinflation is much more likely, and is actually a problem. But Krugman notes it’s actually a puzzle that disinflation (a reduction in the rate of price-growth) has not been ongoing and has not pushed over into outright deflation (falling prices) like in Japan.  But, I’d also note something else holding up prices—the determination of the corporate sector to earn historically high profit margins. The Bureau of Economic Analysis (BEA) has a great table on prices and unit labor and profit costs for the non-financial corporate sector, which accounts for just about half of the U.S. economy. In the NFC sector, prices per unit of output since the end of the recession are up just 4.1 percent. But labor costs per unit of output are down by 1.1 percent. Given that labor costs are more than 60 percent of overall prices in the NFC sector and that they’re falling, this must mean some other cost component in the production process with a much smaller share is rising a lot to drive prices up.

Is the Fed Printing Money? - Here's a seemingly simple question for you: "Is the Fed Printing Money?" I suspect most of you will reply an emphatic yes, but some of you will say no. Before I give you my take, please ponder a similar question: "Is inflation or deflation coming?"  I posed the inflation question to the audience in my presentation at the Wine Country Conference.When I asked the audience "On what does it depend?", one person answered that it depended on what the Fed did. That answer is incorrect. Whether the state of affairs is inflation or deflation has precisely the same answer as the question "Is the Fed Printing Money?": It all depends on the definition.Personally, I think the Fed is printing. Indeed Bernanke is on record stating that he is printing. For an extremely humorous look at the question of printing as captured on the Daily Show, please consider Caught in a Massive Lie: Daily Show Comments on Bernanke's Lies Regarding "Printing Money" The pertinent point is not whether or not the "Fed is Printing" but rather the consequences of alleged printing and the effect that is having on the credit markets and the Fed's ability to stimulate loans.

Key Measures show low inflation in March - Note: Researchers at the Cleveland Fed recently wrote a post about the usefulness of median CPI: Forecasting Inflation? Target the Middle. 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 0.1% (1.1% annualized rate) in March. The 16% trimmed-mean Consumer Price Index rose 0.1% (0.7% 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 fell 0.2% (-2.2% annualized rate) in March. The CPI less food and energy increased 0.1% (1.3% annualized rate) on a seasonally adjusted basis.  Note: The Cleveland Fed has the median CPI details for March here. Motor fuel declined at a 40% annualized rate in March following the huge increase in February. 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 2.1%, the trimmed-mean CPI rose 1.7%, and the CPI less food and energy rose 1.9%. Core PCE is for January and increased 1.3% year-over-year.

To Track Inflation, Look at the Middle - What’s the best way to measure inflation? Researchers at the Federal Reserve Bank of Cleveland say the answer is simple: Look at the middle. Federal Reserve watchers know to ignore the headline figure and look at the “core” consumer price index, which ignores food and energy prices. The focus on core inflation can be frustrating for many consumers, however. Why ignore food and gas, perhaps the two items families buy most frequently? The Fed’s logic is that food and energy prices are volatile. A one-month spike in the price of corn isn’t inflation — it’s a one-month spike in the price of corn. What matters is the trend in overall prices, which means it makes sense to ignore volatile components. And in any case, the “core” definition can feel arbitrary. If used-car prices rise because of surge in demand after a hurricane, that “counts” in the inflation gauge. But if that same hurricane wipes out the year’s citrus crop, the resulting spike in orange-juice prices is ignored.  The goal of an inflation gauge is to distinguish true inflation — a rise in the general price level — from monthly fluctuations in prices for specific goods and services. Core CPI has historically done a better job of that than the main headline number, but it has clear drawbacks, as a trio of Cleveland Fed economists noted in a recent commentary. Permanently excluding food and energy prices treats any changes in those categories as “noise” — therefore missing any actual hints of inflation they might contain — while simultaneously treating all other price changes as inflation signals, no matter how noisy they may be.The Cleveland Fed economists propose a simple alternative: median CPI. 

Soft Inflation Readings Could Delay Fed Tapering - Tuesday’s inflation data reported by the Labor Department gives the Federal Reserve a new reason to keep its easy money policies in tact – inflation could be slowing. The consumer price index was up 1.5% in March from a year earlier, the fourth time in five months that it has been below the Fed’s 2% inflation goal. The index for consumer prices excluding volatile food and energy was up 1.9% for the fourth time in five months. Readings like that are likely to get the attention of central bank officials. The Fed has been debating when to begin winding down an $85 billion-per-month bond-buying program. The Fed has linked the bond buying to developments in the job market, saying it would gradually reduce the amount of the monthly purchases once the job market improves substantially.

Forever Blowing Bubbles - Are we moving from the crash to the bubble, dispensing with that pesky economic recovery thing altogether? The Federal Reserve is well into its third round of "quantitative easing," in which it buys longer-term assets to bring down long-term lending rates. We are about five and a half years into the Fed's extraordinary monetary policies (its out-of-the-box lending programs began before the crash, in late 2007). The effect the central bank hopes to produce hasn't materialized. Despite modest growth, the economy remains a wellspring of misery, with mass unemployment, wage stagnation and factories going unused. In March, a smaller percentage of working-age people [1] were actually working than at any other time since 1979. Through its unconventional policies, the Fed is trying to alleviate the crisis. It has succeeded in driving down lending rates. Ben S. Bernanke and company would also like to kindle inflation expectations, spurring people to buy and companies to invest today instead of waiting until tomorrow. Supposedly, all of this will drive a self-sustaining economic recovery. Instead, the Fed has kindled speculation. Investors are desperate for yield and are paying up for riskier assets. In areas like real estate, structured finance and equities, the markets are ahead of the fundamentals. It doesn't look to me like a bubble yet. But I would call it the Dysplasia Stage, abnormal growth that looks precancerous. It's not just an economic or financial issue, it's cultural and psychological. We seem to have unlearned what real growth is and simply substituted speculative bubbles. Policy makers are either paralyzed or barrel forward because this is all they know how to do.

Posen: ‘Central bankers can’t spot bubbles, ok?’ - From Adam Posen, writing in the Cato Journal… Abstract:This article challenges the validity of the the assumption that monetary policymakers can correctly identify asset price bubbles in time to respond preemptively (or at least usefully). This is something where many policymakers even previously skeptical now feel they can be like Supreme Court Justice Potter Stewart and recognize obscenity in asset prices when they see it. Some patterns do emerge if we look more carefully at the historical record of asset price booms and busts, but, in light of those patterns, the prospect of getting the call right becomes very daunting. The difficulty arises because of the complex nature of asset price booms and busts, a complexity that seems to be overlooked in the advocacy of leaning against the wind. This is very readable stuff from the president of the Peterson Institute. Click below for the full 12 page paper.

The Scary Risks of Safety Bubble Up Over the past five years more than a trillion dollars have flowed out of stocks and into bonds in the U.S. That’s an epical scale of seeking safety. Also, investors felt that actively managed funds were risky, so they moved to index funds. They've felt that within active management, strategies like growth or value were risky and dividend strategies were safer, so they've moved into those investments. In commodities, people moved into precious metals.  People usually associate financial bubbles with greed and investors throwing caution to the wind. Seth Masters sees different dynamics behind a bubble today: fear and investors’ desire for safety. In his recent report, “Desperately Seeking Safety,” the chief investment officer of Bernstein Global Wealth Management argues that the asset classes investors now consider safe havens -- gold, bonds and dividend-paying stocks -- are dangerously overpriced.

A Chat With the Boston Fed’s Chief - Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said in an interview that he wanted to see the economy adding at least 200,000 jobs a month in addition to a declining unemployment rate before he would be ready to consider scaling back the Fed’s efforts to stimulate the economy.Other Fed officials have made similar statements in recent weeks, reflecting concern that the unemployment rate is declining because fewer people are looking for work, and not because faster growth is creating opportunities. But Mr. Rosengren also expressed optimism that the economic recovery was gaining strength, and that growth could reach 3 percent this year. We spoke during a Boston Fed conference focused on the Fed’s commitment to reducing unemployment. The transcript is edited for clarity.

Do Treasury Term Premia Rise around Monetary Tightenings? - NY Fed - Some commentators have expressed concern that Treasury yields might rise sharply once the Federal Open Market Committee (FOMC) begins to raise the federal funds rate (FFR), worrying, in particular, about a sudden increase in Treasury term premia. In this post, we analyze the dynamics of Treasury term premia over the last fifty years and discuss their evolution around recent tightening cycles, paying special attention to the 1994 episode when bond prices dropped sharply around the world. We find that term premia don’t typically rise when monetary policy tightens. We also conclude, based on the behavior of term premia and survey evidence, that the sharp rise in Treasury yields in 1994 was in large part due to an upward shift in the expected path of future short-term interest rates.

Fed's Beige Book: Economic activity expanded at "moderate" pace - Fed's Beige Book - Reports from the twelve Federal Reserve Districts suggest overall economic activity expanded at a moderate pace during the reporting period from late February to early April. ... Most Districts noted increases in manufacturing activity since the previous report. Particular strength was seen in industries tied to residential construction and automobiles, while several Districts reported uncertainty or weakness in defense-related sectors. Consumer spending grew modestly, and firms in some Districts cited higher gasoline prices, expiration of the payroll tax cut, and winter weather as factors restraining sales growth. Retailers in several Districts expect continued sales growth in the near term.  And on real estate: Residential real estate activity continued to improve in most Districts, and some Districts, including Cleveland, Richmond, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco, noted increased momentum since the last report. The New York District, in particular, noted especially strong improvement in residential real estate—both in for-sale housing and apartment markets.

Fed’s Beige Book: District-by-District Summary - The Federal Reserve‘s latest “beige book” report Wednesday noted that the economy expanded at a “moderate pace” in the country, with bright spots in the New York and Dallas regions. Of the 12 Fed districts, only those two reported growth at a faster pace than during the previous period. The following is a district-by-district summary of economic conditions for late February through early April:

Fed’s Evans: U.S. Economy Is ‘Definitely Improving’ - A key Federal Reserve official said Tuesday he expected its asset purchases to continue through the fall before winding down in 2014. Charles Evans, president of the Federal Reserve Bank of Chicago, said the central bank’s monetary policy remains “appropriate,” though it may have to tinker with the plan laid out in June 2011 to start unwinding its balance sheet. Mr. Evans told reporters after a speech in Chicago that he expected “with a high probability” that bond buying would continue into the fall. He added he “would not be surprised” if a wind-down carried over into 2014, though offered an upbeat assessment of the economy’s current trajectory and saw no immediate inflation threat.

Raskin: Housing Recovery to Make Fed Policy More Potent - Federal Reserve stimulus aimed at spurring growth will likely grow more powerful as the housing market recovers further, but the trends that have fueled income inequality aren’t likely to change much, a U.S. central bank official said Thursday. “The accommodative policies of the [Federal Open Market Committee] and the concerted effort we have made to ease conditions in the mortgage markets will help the economy continue to gain traction,” Fed governor Sarah Bloom Raskin said. “As house prices rise, more and more households have enough home equity to gain renewed access to mortgage credit and the ability to refinance their homes at lower rates,” she said. “I think it is possible that accommodative monetary policy could be increasingly potent” as the housing market picks up, Ms. Raskin said.

IMF lowers world, U.S. growth forecasts - The International Monetary Fund lowered its estimate of U.S. and global economic growth, as part of its world economic outlook the organization publishes twice a year. The IMF now sees global growth of 3.3% in 2013 and 4% in 2014 and U.S. growth of 1.9% this year and 3% in 2014. Both of those forecasts represent declines of 0.2 percentage points in 2013 and no change in 2014. One notable upgrade came in the U.K., where it now forecasts 1.6% growth in 2013 and 1.4% growth in 2014. The IMF says the world now has a three-speed recovery: "Emerging market and developing economies are still going strong, but in advanced economies, there appears to be a growing bifurcation between the United States on one hand and the euro area on the other," the IMF said. The IMF said the sequester, while decreasing worries about debt sustainability, "is the wrong path to proceed."

The World’s Three-Speed Economic Recovery - IMF - Olivier Blanchard - The main theme of our latest outlook is one that you have now heard for a few days: we have moved from a two-speed recovery to a three-speed recovery. Emerging market and developing economies are still going strong, but in advanced economies, there appears to be a growing bifurcation between the United States on the one hand, and the Euro area on the other. This is reflected in our forecasts. Growth in emerging market and developing economies is forecast to reach 5.3% in 2013, and 5.7% in 2014. Growth in the United States is forecast to be 1.9% in 2013, and 3.0% in 2014. In contrast, growth in the Euro area is forecast to be -0.3% in 2013, and only 1.1% in 2014. The growth figure for the United States for 2013 may not seem that high, and it is indeed insufficient to make a large dent in the still high unemployment rate. But it comes in the face of a very strong, I would even say overly strong, fiscal consolidation of about 1.8% of GDP. Underlying private demand is actually strong, spurred in part by the anticipation of low policy rates under the Fed’s “forward guidance’’, improving banking conditions, and pent up demand for housing and for durables. The forecast for negative growth in the euro area reflects not only weaknesses in periphery countries, but also some weaknesses in the core.

The Big Four Economic Indicators: Real Retail Sales and Industrial Production - I've now updated this commentary to include March Industrial Production, which included revisions to one decimal place for the three previous months, and Friday's Advance Estimate for Retail Sales, now adjusted for inflation using today's release of the March seasonally adjusted Consumer Price Index. As the thumbnails above illustrate, Industrial Production has shown good improvement over the past two months. In contrast, real Retail Sales contracted in March after a few months of weak and intermittent growth. The chart and table below illustrate the performance of the Big Four and simple average of the four since the end of the Great Recession. Thus far the March numbers are mixed. Employment Report released earlier this showed less job growth than expected, although the trend is still positive. Last week's data for March Retail Sales, now adusted for inflation, shows month-over-month contraction and little better than running in place for the past four months. In contrast, March Industrial Production came in better than expected. Next up will be the March Personal Income data on April 29th -- too far in the future for mainstream economic forecasts. Ad of course all recent data are subject to further revision, so we must view these numbers accordingly.

Spring is a season of growth — but not for the U.S. economy  - For the third year in a row, the nation’s economic recovery seems to be petering out just as temperatures start to go up. Hiring has dropped off. Shoppers are putting away their wallets. Government spending cuts are looming. That has fueled predictions of an abrupt slowdown over the next few months. Economists are forecasting tepid growth of just over 1 percent during the second quarter of the year. ..No one seems to have a good explanation for why the recovery has taken a nosedive around the same time each year. ... At first, economists wondered whether the problem was purely technical. The 2008 financial crisis upended mathematical models for how many people are hired and fired on a normal basis, resulting, they hypothesized, in artificial boosts in the fall that evaporated by spring. But that explanation for the swoon was almost too easy — and certainly too optimistic. It turns out the trouble lay not in the data but in the real world.  In 2011, the problem was international. A tsunami in Japan coincided with a financial crisis in Europe that pushed Greece into default and almost caused a collapse of the continent’s common currency. Last year, economists blamed the weather. The mild winter, they said, siphoned away traditional springtime jobs. This year, all fingers are pointed at Washington.

Fed Watch: Another Spring Slowdown? - While expectations for a solid first quarter GDP report are running high, the most recent data flow has been somewhat sloppy. Sloppy enough that it should raise red flags for monetary policymakers pushing to end QE by the end of this year. In addition to the weak employment report for March, the ISM manufacturing index retreated: In contrast, the industrial production report appeared to signal ongoing strength: But the details suggest a loss of momentum in March aside from a temporary boost from utilities: Manufacturing output edged down 0.1 percent in March after having risen 0.9 percent in February; the index advanced at an annual rate of 5.3 percent in the first quarter. Production at mines decreased 0.2 percent in March and edged down in the first quarter. In March, the output of utilities jumped 5.3 percent, as unusually cold weather drove up heating demand.  More disconcerting was the retail sales report, which signaled that the recent strength in consumer spending is waning: Indeed, this is not terribly unexpected as it likely reflects the impact of higher tax this year. But it is a signal that one should be cautious before extrapolating Q1 GDP numbers. On a more positive note, housing starts were higher, with much of the improvement stemming from multifamily construction: The solid improvement in housing starts seems at odds with waning builder confidence, but that may have more to do with supply constraints than demand.

Update: Federal and State improving Fiscal Situation - A couple of updates ... From Goldman Sachs economist Alec Phillips: The Federal Budget Deficit: Shrinking Faster  The federal deficit continues to shrink. Through the first six months of the fiscal year, revenues have come in higher than expected, while spending has come in lower than expected. As a result we are lowering our deficit forecast for the current and next two fiscal years. Earlier this year we lowered our FY2013 deficit forecast from $900bn (5.6% of GDP) to $850bn (5.3%). In light of recent trends, we are lowering it again to $775bn (4.8%). We expect the improvement to continue for the next few years. Although we had already expected additional cyclical improvement and residual fiscal policy tightening to reduce the deficit further in 2014 and 2015, we have reduced our estimates a bit further, to $600bn (3.5% of GDP) and $475bn (2.7%). There are still longer term issues, but the deficit is shrinking fairly quickly. The Controller of California has a website showing daily income tax collections compared to last year. The California budget expects personal income taxes of $51.4 billion as if April 30th. Right now, as of Thursday April 18th, net income taxes are at $53.3 billion - ahead of plan with more collections to come.

High student debt is dragging down the U.S. economy: Nowadays, younger Americans are becoming less likely to take out loans to buy a house or a car. One possible reason? They’re too overloaded with student debt. That’s one takeaway, at least, from some interesting new research by the Federal Reserve Bank of New York, flagged by Doug Henwood. The paper starts by noting that student debt has grown dramatically over the last decade — some 43 percent of Americans under the age of 25 had student debt in 2012, with the average debt burden now $20,326. By contrast, back in 2003, just 25 percent of younger Americans had debt, and the average burden was $10,649. What’s particularly notable is that these student loans appear to be crowding out other types of borrowing. For a long time, younger Americans with student debt were more likely to own homes than those without — largely because college grads are likelier to have higher earnings. But that trend has reversed:

Flaws Are Cited in a Landmark Study on Debt and Growth -- An influential 2010 economics paper by Carmen Reinhart and Kenneth Rogoff showed that countries with high levels of debt experienced significantly slower rates of growth – and became a justification for many countries to adopt austerity budgets to hold down their debt loads. Now a provocative new paper is arguing that the paper was seriously flawed, in part because of basic calculation errors in a spreadsheet. Because policy makers, economists and journalists have repeatedly cited the Reinhart-Rogoff paper in recent years, the new paper is causing a significant stir, with commentary from across the economics blogosphere. Here is a sense of the controversy. Ms. Reinhart and Mr. Rogoff found little relationship between growth and debt for countries with debt-to-economic output ratios of 90 percent or less. But for countries with debt loads equivalent to or above 90 percent of annual economic output, “median growth rates fall by one percent, and average growth falls considerably more.” Since that paper came out, dozens of policy makers around the world have cited it as a reason for cutting budgets despite a down economy. Keep your debt below 90 percent of output, the logic went, and you would be rewarded with stronger growth in the future. (See, for instance, the House Republican budget.)

Holy Coding Error, Batman - Krugman - The intellectual edifice of austerity economics rests largely on two academic papers that were seized on by policy makers, without ever having been properly vetted, because they said what the Very Serious People wanted to hear. One was Alesina/Ardagna on the macroeconomic effects of austerity, which immediately became exhibit A for those who wanted to believe in expansionary austerity. Unfortunately, it turned out that contractionary policy was contractionary. The other paper, which has had immense influence — largely because in the VSP world it is taken to have established a definitive result — was Reinhart/Rogoff on the negative effects of debt on growth. Very quickly, everyone “knew” that terrible things happen when debt passes 90 percent of GDP. Some of us never bought it, arguing that the observed correlation between debt and growth probably reflected reverse causation. But even I never dreamed that a large part of the alleged result might reflect nothing more profound than bad arithmetic. But it seems that this is just what happened. Mike Konczal has a good summary of a review by Herndon, Ash, and Pollin. According to the review paper, R-R mysteriously excluded data on some high-debt countries with decent growth immediately after World War II, which would have greatly weakened their result; they used an eccentric weighting scheme in which a single year of bad growth in one high-debt country counts as much as multiple years of good growth in another high-debt country; and they dropped a whole bunch of additional data through a simple coding error.

The Reinhart and Rogoff magical 90 percent threshold loses its magic? - One of the most influential findings in the never-ending debate over American fiscal policy came from a 2010 paper by economists Carmen Reinhart and Kenneth Rogoff—“Growth in a Time of Debt.” They claimed to have identified a clear debt ratio (total public debt divided by  gross domestic product) threshold above which countries’ economic growth would significantly slow. This 90 percent debt ratio has been referenced by budget writers, policymakers and others arguing for steep reductions in budget deficits soon. We didn’t buy it. In the same year their paper was released, I co-authored a paper (along with John Irons) looking at the historical record for the U.S., and found very little evidence that such a threshold existed (and we weren’t alone in our skepticism). Further, we noted that the causality of any such finding was deeply in doubt—slow growth could lead to high debt as surely (actually, much more surely) as high debt could impede growth. Most importantly (if not most thrillingly), we argued (in the first bullet-point!) that “there is no compelling theoretical reason why the stock of debt at a given point in time should harm contemporaneous economic growth.” And it turns out that there is no longer any compelling empirical reason to think that the 90 percent threshold is operable any more either, as a new working paper by Herndon, Ash and Pollin makes clear. After receiving the original Reinhart and Rogoff data set (collegially provided by the original authors), they found a number of errors that, when corrected, essentially overturn the finding that debt ratios of over 90 percent are associated with slower growth. Mike Konczal reviews the paper in some detail here.

Linchpin Pro-Austerity Paper Rife with Errors; Recomputed Results Show No Growth Hit from High Government Debt - Yves Smith - There appears to be no intellectually honest defense of austerity left standing. The IMF has already ‘fessed up that it does not work in practice, that cutting government spending when growth is weak simply leads the economy to contract further, making debt to GDP levels even worse than before. That admission was based on the miserable results it has produced when implemented.  But now, a new paper by Thomas Herndon, Michael Ash and Robert Pollin of PERI, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” is a devastating takedown of the factoid commonly bandied about by austerians, that if government debt rises above 90% of GDP, growth suffers. That belief in turn was based on a paper “Growth in the Time of Debt” by Carmen Reinhardt and Kenneth Rogoff, which did a 20 country comparison from 1946 to 2009. This paper claimed that when debt rose over the scary 90% to GDP level, growth fell to -0.1%.  Turns out that is not true. A number of economists had challenged the findings for asserting causality when all it showed was a correlation. In addition, a number of economists tried replicating the Reinhart-Rogoff results for years, with no success. Reinhardt and Rogoff refused to share their underlying computations. Five years later, now that the Reinhart/Rogoff work is widely accepted as true, they finally sent their “working spreadsheet” to the PERI team. As Herndon, Ash, and Pollin report: Our finding is that when properly calculated, the average real GDP growth rate for coun- tries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not −0.1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.

Elementary misuse of spreadsheet data leaves millions unemployed - Remember, earlier this year, when the IMF admitted they had made errors in their modelling of expenditure multipliers. They had been tramping into countries with their jackboots telling all and sundry that fiscal austerity would promote growth because their multiplier estimates told them so. Millions of job losses later, they came clean. It turns out that when they revised their multiplier estimates exactly the opposite was the case. Now they acknowledge that spending multipliers are in range of 1.5 1.75, meaning that increasing government spending adds at least 150 cents in the dollar spent extra to the economy. Now, the darlings of the austerity cultists – Rogoff and Reinhart – has been exposed for poor research standards – to wit, errors in spreadsheet coding.  Forecast errors are a fact of life and are not in themselves a reason for considering the forecaster deficient. But the IMF and other major neo-liberal inspired organisations produce systematic errors – which mean they do not arise from the stochastic nature of the underlying forecasting process. It is easy to trace these systematic mistakes to the underlying ideological biases, which shape the way they create their economic models.  The IMF admitted that the spending multipliers were, in fact, “larger” than they had predicted and which they had used in their modelling. These models underpin their policy advice and have been instrumental in the imposition of fiscal austerity on many nations.

How Much Unemployment Was Caused by Reinhart and Rogoff's Arithmetic Mistake?, by Dean Baker: That's the question millions will be asking when they see the new paper by Herndon, Ash, and Pollin (HAP) who corrected the spreadsheets of Carmen Reinhart and Ken Rogoff. They show the correct numbers tell a very different story about the relationship between debt and GDP growth than the one that Reinhart and Rogoff have been hawking. Just to remind folks, Reinhart and Rogoff (R&R) are the authors of the widely acclaimed book on the history of financial crises, This Time is Different. They have also done several papers derived from this research, the main conclusion of which is that high ratios of debt to GDP lead to a long periods of slow growth. Their story line is that 90 percent is a cutoff line, with countries with debt-to-GDP ratios above this level seeing markedly slower growth than countries that have debt-to-GDP ratios below this level. The moral is to make sure the debt-to-GDP ratio does not get above 90 percent.There are all sorts of good reasons for questioning this logic. First, there is good reason for believing causation goes the other way. Countries are likely to have high debt-to-GDP ratios because they are having serious economic problems. Second, as Josh Bivens and John Irons have pointed out, the story of the bad growth in high debt years in the United States is driven by the demobilization after World War II. In other words, these were not bad economic times, the years of high debt in the United States had slow growth because millions of women opted to leave the paid labor force.

'How Much Unemployment Was Caused by Reinhart and Rogoff's Arithmetic Mistake?' - The work of Reinhart and Rogoff was a major reason for the push for austerity at a time when expansionary policy was called for, i.e. their work supported the bad idea that austerity during a recession can actually be stimulative. It isn't as the events in Europe have shown conclusively. To be fair, as I discussed here (in "Austerity Can Wait for Sunnier Days") after watching Reinhart give a talk on this topic at an INET conference, she didn't assert that contractionary policy was somehow expansionary (i.e. she did not claim the confidence fairy would more than offset the negative short-run effects of austerity). What she asserted is that pain now -- austerity -- can avoid even more pain down the road in the form of lower economic growth.  Here's the problem. She is right that austerity causes pain in the short-run. But according to a review of her work with Rogoff discussed below, the lower growth from debt levels above 90 percent that austerity is supposed to avoid turns out, it appears, to be largely the result of errors in the research. In fact, there is no substantial growth penalty from high debt levels, and hence not much gain from short-run austerity.Here's Dean Baker with a rundown on the new work (see also Mike Konczal who helped to shed light on this research):

How influential was the Rogoff-Reinhart study warning that high debt kills growth? – New research suggests that an influential study showing that high debt levels can hurt economic growth overstated the risk, and thus the importance of speedy debt reduction during a recession. But how influential was the study, anyhow? For an indicator, read the following passage from a book on US debt by Republican Senator Tom Coburn. This is a scene that takes place on April 5, 2011, when forty senators met the authors of the study, Harvard economists Kenneth Rogoff and Carmen Reinhart, for a briefing. It was just months before disagreements over America’s fiscal path lead to a confrontation over the country’s borrowing limit and a near-default. Johnny Isakson, a Republican from Georgia and always a gentleman, stood up to ask his question: “Do we need to act this year? Is it better to act quickly?” “Absolutely,” Rogoff said. “Not acting moves the risk closer,” he explained, because every year of not acting adds another year of debt accumulation. “You have very few levers at this point,” he warned us. … Senator Kent Conrad, the chairman of the Senate Budget Comittee, said our current deficits were severe because we had very low revenues due to a slow economy combined with very high spending. He then offered his own stern warning to the assembled senators. Turning around in his chair in the middle of the room, he explained to his colleagues that when our high debt burden causes our economy to slow by 1 point of GDP, as Reinhart and Rogoff estimate, that doesn’t slow our economy by 1 percent by 25 to 33 percent when we are growing at only 3 to 4 GDP points a year.

Not to Pile On, But…Correcting Reinhart and Rogoff - I’m late to this and many excellent posts have already gone up citing a new paper that corrects what appear to be fundamental mistakes in Reinhart and Rogoff’s (R&R) influential finding that high debt levels lead to slower growth.  Specifically, they argued that when a country’s debt-to-GDP level gets above 90%, real GDP growth takes a big hit. The authors of the new paper—Herndon, Ash, and Pollin—replicate R&R’s original work and make various corrections to a) methods and data choices and b) a ”spreadsheet error,” the latter where R&R appear to have left out some important data that has a big impact on their results.  When they correct R&R’s boo-boos, they get the results shown in the figure below.    In R&R’s work, countries in their top debt level category have a slightly negative average growth rate ; the corrected data find average growth rates of 2.2% in that category. It’s a big difference, though I suspect R&R will say, assuming they acknowlege they messed up, that it still shows slower growth.  But that’s been the problem with their work from the beginning.  As I’ve written many times, riffing off of Bivens and Irons for one, if you mush everything together they way they do, you’re likely to get the causality backwards.  You’ll convince yourself that higher debt leads to slower growth when it’s more often the opposite. 

Reinhart, Rogoff Admit Excel Mistake, Rebut Other Critiques - Real Time Economics - WSJ: A new paper, by University of Massachusetts Amherst economics doctoral student Thomas Herndon and professors Michael Ash and Robert Pollin, says Harvard University scholars Carmen Reinhart and Kenneth Rogoff were wrong in concluding in their 2010 study that a high level of public debt dooms an economy to protracted slow growth. The following is a detailed response from the Harvard economists.

Debt to GDP & Future Economic Growth - There has been a lot of discussion today on Reinhart and Rogoff’s work on Debt to GDP & future economic growth (see Mike Konczal, Krugman, CEPR, Brad Plumer,  and the original critique from Herden, Ash, Pollin), so I wanted to highlight some work on this issue that I put together when helping Brad Delong and Laura Tyson on an IMF presentation on fiscal policy after the crisis. I pulled data from R&R’s AER paper on debt to GDP and economic growth to see if there is any evidence of a break at a 90. Here are three preliminary conclusions and supporting graphs:

  1. Persistently 90+ Public Debt to GDP countries tend to grow less quickly over next 5 years, but the distribution of historical outcomes suggests that disaster scenarios are much less common than modestly slower 5 year growth for these countries.
  2. Nonparametric graphs of Public Debt to GDP and subsequent GDP growth show that there’s no break at a debt to GDP ratio of 90.
  3. The slope of this nonparametric graph is negative, which indicates that higher public Debt to GDP is associated with modestly slower subsequent growth.

It’s important to note that these are not causal relationships! You should read Dylan Matthews nice post on how to interpret this correlation and whether causality goes the other way. And note that it is not at all obvious how (and by how much) changing Debt to GDP would affect subsequent economic growth in practice for a given country.

Debt and growth: Revisiting Reinhart-Rogoff - THIS week's Free exchange column discusses the week's hot macroeconomic controversy: In a 2010 paper* Carmen Reinhart, now a professor at Harvard Kennedy School, and Kenneth Rogoff, an economist at Harvard University...argued that GDP growth slows to a snail’s pace once government-debt levels exceed 90% of GDP. The 90% figure quickly became ammunition in political arguments over austerity...[T]his week a new piece of research poured fuel on the fire by calling the 90% finding into question. The 2010 calculation was a relatively simple one. The authors had already drawn on two centuries of public-debt data for their seminal 2009 financial history, “This Time is Different”. In their paper Ms Reinhart and Mr Rogoff sorted the figures into four categories of indebtedness and took average growth rates for each. They found that public debt has little effect on growth rates until debt reaches 90% of GDP. Growth rates then drop sharply. The new paper, by Thomas Herndon, Michael Ash and Robert Pollin of the University of Massachusetts, Amherst, sought to replicate the Reinhart-Rogoff result for the post-war period. They reckon that mistakes in the analysis led Ms Reinhart and Mr Rogoff to understate average growth at high debt levels...Taken together, the authors of the new paper reckon that average post-war growth above the 90% threshold ought to have been reported at 2.2% rather than -0.1% (see chart).

Reinhart-Rogoff, Continued - Paul Krugman  - I was going to post something sort of kind of defending Reinhart-Rogoff in the wake of the new revelations — not their results, which I never believed, nor their failure to carefully test their results for robustness, but rather their motives. But their response to the new critique is really, really bad. What Herndon et al did was find that the R-R results on the relationship between debt and growth were partly the result of a coding error, partly the result of some very odd choices about which data to exclude and how to weight the data that remained. The effect of fixing these lapses was to raise the estimated mean growth of highly indebted countries by more than 2 percentage points. So how do R-R respond? First, they argue that another measure — median growth — isn’t that different from the Herndon et al results. But that is, first of all, an apples-and-oranges comparison — the fact is that when you compare the results head to head, R-R looks very off. Something went very wrong, and pointing to your other results isn’t a good defense.Second, they say that they like to emphasize the median results, which are much milder than the mean results; but what everyone using their work likes to cite is the strong result, and if R-R have made a major effort to disabuse people of the notion that debt has huge negative effects on growth, I haven’t noticed it.

Global move to austerity based on mistake in Excel -- As Rortybomb reported yesterday on the Roosevelt Institute blog, a recent paper written by Thomas Herndon, Michael Ash, and Robert Pollin looked into replicating the results of a economics paper originally written by Carmen Reinhart and Kenneth Rogoff entitled Growth in a Time of Debt. The original Reinhart and Rogoff paper had concluded that public debt loads greater than 90 percent of GDP consistently reduce GDP growth, a “fact” which has been widely used. However, the more recent paper finds problems. Here’s the abstract:Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogo ff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower. The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff ’s claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.

Twisted Tale of Bad Math and Hubris: Global Austerity Based on a Spreadsheet Error - Lynn Parramore - Please savor the following twisted tale of bad math, academic folly and pundit hubris. Since 2010, the names of Carmen Reinhart and Kenneth Rogoff have become famous in politic and economic circles. These two economists wrote a paper, “Growth in the Time of Debt” that has been used by everyone from Paul Ryan to Olli Rehn of the European Commission to justify harmful austerity policies. The authors purported to show that once a country's gross debt to GDP ratio crosses the threshold of 90 percent, economic growth slows dramatically. Debt, in other words, seemed very scary and bad. Their historical data appeared impressive, as did their credentials. Policy-makers and journalists cited the paper to convince the public that instead of focusing on the jobs crisis that was hampering recovery, we should instead focus on deficits. But something didn’t smell right. Progressive economists I knew were shocked at what appeared to be the shoddiness of the research and the absurdity of the conclusions. In their paper “A World Upside Down? Deficit Fantasies in the Great Recession,” Thomas Ferguson and Robert Johnson observed that R&R had truncated their sample of British data in a way that skewed their conclusions, eliminating more than a century of data in which British debt loads exploded but economic growth raced ahead (see pages 11-13). The always savvy Marshall Auerback called them out in a blog for New Deal 2.0, which I edited at the time, criticizing the relevance of the cases they had used to justify their conclusions.

The Excel Depression, by Paul Krugman - At the beginning of 2010, two Harvard economists, Carmen Reinhart and Kenneth Rogoff, circulated a paper, “Growth in a Time of Debt,” that purported to identify a critical “threshold,” a tipping point, for government indebtedness. Once debt exceeds 90 percent of gross domestic product, they claimed, economic growth drops off sharply.  Ms. Reinhart and Mr. Rogoff had credibility thanks to a widely admired earlier book on the history of financial crises, and their timing was impeccable. The paper came out just after Greece went into crisis and played right into the desire of many officials to “pivot” from stimulus to austerity.  Reinhart-Rogoff quickly achieved almost sacred status among self-proclaimed guardians of fiscal responsibility; their tipping-point claim was treated not as a disputed hypothesis but as unquestioned fact.   As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt. Indeed, that’s obviously the case for Japan, which went deep into debt only after its growth collapsed in the early 1990s.  Finally, Ms. Reinhart and Mr. Rogoff allowed researchers at the University of Massachusetts to look at their original spreadsheet — and the mystery of the irreproducible results was solved. First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent “threshold.”

The Reinhart/Rogoff Mistake and Economic Epistemology - By now, it is well known, at least in wonkish circles, that the economists Reinhart&Rogoff (R&R) made a number of errors in deriving their highly influential finding that debt-to-GDP ratios above 90% lead to slower growth.  Kudos to the various academics and bloggers who dug into this—particularly Herndan et al, who most recently found and documented the spreadsheet error and other questionable practices in R&R’s work, Mike Konczal who neatly summarized the critique, and Bivens and Irons, who back in 2010 showed the R&R thesis to be deeply flawed (and here’s a smart oped by Herndon’s co-authors).Yet, as I noted in my brief review of this the other day, neither the older nor the more recent revelations are likely to have much impact on policy (or even, it would seem, on R&R, whose response has pretty been much been, “yeah, ok…but if we did it right, we still woulda got the same answer”).  In the first place, the fatal error in their work was not the spreadsheet error.  It was ignoring context (the unique, country, and time-specific reasons why is debt/GDP is rising) and thus conflating correlation with causality, specifically, periods when it’s slow growth leading to higher debt.

Reframing Reinhart & Rogoff - The economics world is aghast. Two distinguished economists, Carmen Reinhart & Kenneth Rogoff, have been shown to have produced shoddy work. I don't propose to comment on the details of the case. Suffice it to say that Reinhart & Rogoff were wounded by a paper that showed that their data was flawed. They defended themselves, and were also defended by numerous economists around the world who argued that although the data might be flawed, the economic analysis justified their conclusions. But the next day, the Rortybomb blog delivered the killer punch. Econometric analysis by Arindrajit Dube demonstrated that even with good data, the economic analysis was flawed and the conclusions unjustifiable. High public debt cannot reliably be shown to cause low growth. But low growth can reasonably reliably be shown to cause high public debt.This is a no-brainer, actually. There are two reasons for this...

Reinhart/Rogoff Shot Full of Holes Updated X3 - This story has rapidly made the rounds in the blogosphere, and it is indeed a big deal. One of the most significant economics papers underlying the argument for why high government debt (especially over 90% of gross domestic product) is bad for growth was published in 2010 by Carmen Reinhart and Kenneth Rogoff, “Growth in a Time of Debt” (ungated version here). The basic finding of this paper was that if debt exceeds 90% of GDP, then on average growth turns negative. But as Thomas Herndon, Michael Ash, and Robert Pollin report in a new paper (via Mike Konczal at Rortybomb), there are substantial errors including data omitted for no reason, a weighting formula that makes one year of negative growth by New Zealand equal to 19 years years of decent growth by the UK, and a simple error on their spreadsheet that excluded five countries from their analysis altogether (see Rortybomb for the screen shot). The authors say that with these errors corrected, the average growth rate for 20 OECD countries from 1946 to 2009 with debt/GDP ratios over 90% is 2.2%, not the -0.1% found by Reinhart and Rogoff. This is a huge difference. We still have a negative correlation between debt/GDP and growth rate, but it is much smaller, as we can see from Figure 3 from their paper:

A Bit on Public Debt GDP Growth and Causation - Here I  analyze the data set used by Reinhart and Rogoff (R-R) and by Herndon Ash and Pollin (HAP) in their critique and in particular the stata data set RR-processed.dta with data on public debt to GDP ratios and real GDP growth in 20 developed countries since 1946. I show evidence that low growth causes a high debt to GDP ratio, so the correlation can’t be interpreted simply as the effect of debt on growth (damn fractions how do they work anyway). Of course this has been shown much better and much more thoroughly by HAP at PERI (warning the sudden traffic killed their hamster) and then their colleague  Arindrajit Dube using non parametric regressions.  I note you can test whether the debt to GDP ratio is a good regressor or instrument (technically is it weakly exogenous) by considering it and another variable as instruments for it.  The other variable should not affect growth except through the debt to GDP ratio.  This motivates a regression on the debt to GDP ratio and the 5 year lagged debt to GDP ratio.   This is a regression of one years real GDP growth on the debt to GDP ratio and the 5 year lagged debt to GDP ratio ( l5debtgdp)

Reinhart, Rogoff, and How the Macroeconomic Sausage Is Made - Three University of Massachusetts economists — Thomas Herndon, Michael Ash, and Robert Pollin — came out with a working paper that recrunched the Reinhart and Rogoff data set and arrived at a very different result: instead of average -0.1% growth in countries with debt/GDP of more than 90%, they came up with 2.2% growth. Most of the attention since then has focused on an Excel error that Herndon, Ash, and Pollin found — which caused five countries to be excluded from the analysis — and Reinhart and Rogoff have subsequently acknowledged. That's pretty embarrassing, but it only changed the result by 0.3 percentage points. Most of the difference had to do instead with how Reinhart and Rogoff weighted the results from different countries. They chose to give each country's average growth in a particular debt/GDP range the same weight, regardless of how many years the country had been in that situation. As Herndon-Ash-Pollin write, this isn't an indefensible approach (they do argue that Reinhart and Rogoff should have devoted a lot more ink to defending it). But by taking a different approach, and instead weighting countries' results by how many years they were above 90% debt/GDP, they were able to get a very different result. This is watching the sausage of macroeconomics being made. It's not appetizing. Seemingly small choices in how to handle the data deliver dramatically different results. And it's not hard to see why: The Reinhart-Rogoff data set, according to Herndon-Ash-Pollin's analysis, contained just 110 "country-years" of debt/GDP over 90%, and 63 of those come from just three countries: Belgium, Greece, and the UK.

Austerity after Reinhart and Rogoff - - A main policy plank is riddled with faults, write Robert Pollin and Michael Ash. In 2010, two Harvard economists published an academic paper that spoke to the world’s biggest policy question: should we cut public spending to control the deficit or use the state to rekindle economic growth? “Growth in a Time of Debt” by Carmen Reinhart and Kenneth Rogoff has served as an important intellectual bulwark in support of austerity policies in the US and Europe. It has been cited by politicians ranging from Paul Ryan, the US congressman, to George Osborne, the UK chancellor. But we have shown that several critical findings advanced in this paper are wrong. So do we need to rethink austerity economics more broadly? The Reinhart-Rogoff research is best known for its result that, across a broad range of countries and historical periods, economic growth declines dramatically when a country’s level of public debt exceeds 90 per cent of gross domestic product. In their work with a sample of 20 advanced economies over the postwar period, they report that average annual GDP growth ranges between about 3 per cent and 4 per cent when the ratio of public debt to GDP is below 90 per cent. But average growth collapses to -0.1 per cent when the ratio rises above a 90 per cent threshold.  In a new working paper, co-authored with Thomas Herndon, we found that these results were based on a series of data errors and unsupportable statistical techniques. For example, because of straightforward miscalculation and unconventional method of averaging data, a one-year experience in New Zealand in 1951, during which economic growth was -7.6 per cent and the public debt level was high, ends up exerting a big influence on their overall findings.

Reinhart/Rogoff and Growth in a Time Before Debt - Recent work by my colleagues at UMass Thomas Herndon, Michael Ash and Robert Pollin (2013)—hereafter HAP—has demonstrated that in contrast to the apparent results in Reinhart and Rogoff (2010), there is no real discontinuity or "tipping point" around 90 percent of debt-to-GDP ratio. In their response, Reinhart and Rogoff—hereafter RR—admit to the arithmetic mistakes, but argue that the negative correlation between debt-to-GDP ratio and growth in the corrected data still supports their original contention. Taking the Stata dataset that HAP generously made available as part of their replication exercise, I first reproduced the nonparametric graph in HAP (2013) using a lowess regression (slightly different than the specific method they used). The dotted lines are 95 percent bootstrapped confidence bands. There is a visible negative relationship between growth and debt-to-GDP, but as HAP point out, the strength of the relationship is actually much stronger at low ratios of debt-to-GDP. This makes us worry about the causal mechanism. After all, while a nonlinearity may be expected at high ratios due to a tipping point, the stronger negative relationship at low ratios is difficult to rationalize using a tipping point dynamic.

Chart of the day, reverse-causality edition -- This chart comes from Arindrajit Dube, who has a fantastic post chez Rortybomb on whether high debt causes lower growth or whether it’s the other way around. What you’re looking at is the famous Reinhart-Rogoff dataset, as made available by their critics (and Dube’s colleagues), Herndon, Ash and Pollin. Reinhart and Rogoff are the poster children for the statement that high debt loads cause lower growth, especially once those debt loads exceed 90%. But do they? There does seem to be an inverse correlation between debt and growth, but Dube shows that the correlation is strongest at low levels of debt, below 30% of GDP, rather than at high levels of debt. Countries with debt of 30% of GDP have a significantly lower growth rate, on average, than countries with debt of 10% of GDP, while the numbers at debt ratios above 90% have much wider error bars and are much less useful.

Counterparties: R-squared regression analysis - The fallout over the Reinhart and Rogoff errors continues. Yesterday’s debate circled around what this all means for austerity. Today, the debate widened, taking a few steps backwards in search of perspective. The economic profession as a whole – along with that of the bloggers who popularize it – ended up coming  in for criticism and soul-searching. The authors at the heart of the controversy did continue to argue about the substance of the criticisms. RR published their second response, conceding that the UMass paper has indeed found a “significant mistake” in their data on international debt-to-GDP ratios. They said that their overall argument, however, remains valid. Meanwhile, Robert Pollin and Michael Ash, two of the UMass researchers, kept pushing in an FT op-ed this morning, saying that the time has come to “rethink austerity economics”. Both Josh Barro and Matt Yglesias took issue with one of the most common interpretations of RR’s work  – the existence of a sort of economic tipping point for countries with debt-to-GDP ratios above 90% – and argued that new evidence makes that thesis extremely weak. Other bloggers, however, moved on from the argument over minutiae in the data to ask what this mistake means for the field of economics. Chris Dillow questions whether today’s economists value the right skills. He says that RR’s errors “reflect a culture which prizes” the ability to produce brilliant, explanatory theories over the “dull pedantry” of meticulously examining data. Justin Fox likens the debate to “watching the sausage of macroeconomics being made.” Data is relatively scarce in the field, he says. As a result, we should “acknowledge that our knowledge is limited and proceed anyway on a mix of data, theory, and intuition.” Peter Frase uses the controversy to rail against non-academic econobloggers, or “wonks”, who parrot the findings of academics:

Reading Reinhart-Rogoff on Reinhart-Rogoff - I won’t repeat the numerous points that have been made in the debate of the past couple of days over the Reinhart and Rogoff paper “Growth in a time of debt”. A useful overview is provided by Bruegel here. I will emphasise a few points based, not on the original paper nor on what recent critics have written, but largely with reference to a journalistic article written by the authors themselves.. The statistical errors and shortcomings (excel mistakes, exclusion of countries, weighting issues etc.), that have dominated the debate are not the key issue. In fact there is a certain irony that computational errors have finally drawn much-needed attention to much more fundamental problems with the whole approach. The crucial point is that even on the basis of the data reported and discussed prior to the recent “shitstorm”, everyone should have been highly suspicious about the results and the claim made – specifically the idea that there is a threshold around 90% for the debt-GDP ratio beyond which countries subsequently experience substantially slower growth. There are two main reasons for this. The first is the known fact that there are a very small number of cases of countries with debt-to-GDP ratios above that threshold. The second is that there is very obviously a question as to whether, even if the statistical correlation were strong, it is correct to read the causation from high debt ratios to slow growth rather than the other way around.

A dose of reality for the dismal science - Reinhart and Rogoff’s claim of a debt-level tipping point never made any sense, writes Adam Posen  For a few years, advocates of rapid fiscal austerity have argued as though public debt is like a black hole – once it reaches a certain size, it collapses in on itself under its own weight and pulls the economy down with it. Crisis awaits the spendthrift. A 2010 academic paper by Carmen Reinhart and Kenneth Rogoff, two eminent economics professors, provided many pundits and politicians with the desired evidence for this instinctive view. They seemingly found that economic growth fell off sharply when national debts reached 90 per cent of gross domestic product.  A new study that has attracted lots of attention, however, shows that no such sharp fall-offs occur. Put aside the details of Excel coding errors and statistical weights. In fact, forget that specific paper. The claim that there was a clear tipping point for the ratio of government debt to GDP past which an economy’s walls caved in never made any sense. If such a critical level were to hold, there would have to be some equally abrupt causal mechanism by which the dire predictions for growth would have to come to pass – perhaps interest rate rises, a currency crisis or an increase in hoarding and saving resulting from feared future tax rises? Such an event would be clearly visible in the data among those countries that went past the debt event horizon of 90 per cent. But it is not there.

Fatal Sensitivity - While the spreadsheet problems in Reinhart and Rogoff’s analysis are the most most obvious mistake, they are not as economically significant as the two other issues identified by Herndon, Ash, and Pollin: country weighting (weighting average GDP for each country equally, rather than weighting country-year observations equally) and data exclusion (the exclusion of certain years of data for Australia, Canada, and New Zealand). According to Table 3 in Herndon et al., those two factors alone reduced average GDP in the high-debt category from 2.2% (as Herndon et al. measure it) to 0.3%.* In their response, Reinhart and Rogoff say that some data was “excluded” because it wasn’t in their data set at the time they wrote the 2010 paper, and I see no reason not to believe them. But this just points out the fragility of their methodology. If digging four or five years further back in time for just three countries can have a major impact on their results, then how robust were their results to begin with? If the point is to find the true, underlying relationship between national debt and GDP growth, and a little more data can cause the numbers to jump around (mainly by switching New Zealand from a huge outlier to an ordinary country), then the point I take away is that we’re not even close to that true relationship.

Reinhart-Rogoff Argument Didn't Make Much Sense - Brad DeLong - Let me highlight a passage from the "Understanding Our Adversaries" evolution-of-economists'-views talk that I started giving three months ago, a passage based on work by Owen Zidar summarized by the graph above:The argument [for fiscal contraction and against fiscal expansion in the short run] is now: never mind why, the costs of debt accumulation are very high. This is the argument made by Reinhart, Reinhart, and Rogoff: when your debt to annual GDP ratio rises above 90%, your growth tends to be slow.This is the most live argument today. So let me nibble away at it. And let me start by presenting the RRR case in the form of Owen Zidar's graph.First: note well: no cliff at 90%.  Second, RRR present a correlation--not a causal mechanism, and not a properly-instrumented regression. There argument is a claim that high debt-to-GDP and slow subsequent growth go together, without answering the question of which way causation runs. Let us answer that question.

Lack Of Nuance Is Not The Problem - Krugman - I see that both Tyler Cowen and Austin Frakt are offering explanations/excuses for the Reinhart-Rogoff affair in terms of the dynamics of wonk celebrity — basically, the pressure one feels under to take strong positions to attract and hold media attention. As an explanation, I think this has some merit; as an excuse, none at all. What happened with R-R was that they came out with a sloppy paper that played to the spirit of the times. The sloppiness was immediately obvious from the way they highlighted slow US growth in the late 1940s as an illustration of the price of debt overhang, somehow missing the point about postwar demobilization. It took only a few days for critics to point out the correlation versus causation issue too. Now, that was the point where R-R should have said, OK, we’ve been careless here, we need to rethink this, and backed off. But the paper was also a huge immediate hit with the austerians, and they got sucked in

Blogs review: The Reinhart and Rogoff debacle - Bruegel - What’s at stake: The authors of the widely acclaimed book on the history of financial crises, This Time is Different, have faced the mother of all academic backlashes after a group of economists identified important flaws (including basic coding errors) in their analysis of the relationship between public debt and economic growth. They, in particular, debunked the now popular notion that there is a debt threshold (90% of GDP) after which economic growth decreases in a nonlinear way. The availability of the dataset (in Stata) has also allowed an econometrician raise serious doubts on the idea that the causality runs from debt to GDP. While the backlash has, until now, centered mostly around this particular work on debt and GDP growth, similar data issues have been identified in the book This Time is Different.

Meet the 28-Year-Old Grad Student Who Just Shook the Global Austerity Movement - Herndon became instantly famous in nerdy economics circles this week as the lead author of a recent paper, "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff," that took aim at a massively influential study by two Harvard professors named Carmen Reinhart and Kenneth Rogoff.  Herndon found some hidden errors in Reinhart and Rogoff's data set, then calmly took the entire study out back and slaughtered it. Herndon's takedown — which first appeared in a Mike Konczal post that crashed its host site with traffic — was an immediate sensation. It was cited by prominent anti-austerians like Paul Krugman, spoken about by incoming Bank of England governor Mark Carney, and mentioned on CNBC and several other news outlets as proof that the pro-austerity movement is based, at least in part, on bogus math.

How much of Reinhart/Rogoff has survived? - The work of Carmen Reinhart and Ken Rogoff (RR) on public sector debt ratios, and their relationship with GDP growth, has been extraordinarily influential in academic and policy circles since 2010. Before this week, their statistical analysis, based on a 200-year database which they had painstakingly assembled covering dozens of countries, had appeared to establish an important stylised fact: that debt ratios above 90 per cent were associated with much lower rates of GDP growth than debt ratios under 90 per cent. The sudden drop in growth at a debt ratio similar to that reached in many developed economies acted as a wake up call to governments and encouraged the adoption of austerity programmes. This week, a paper by Thomas Herndon, Michael Ash and Robert Pollin (HAP) argued that the RR stylised fact was based on simple statistical errors, including a spreadsheet error which RR have now acknowledged. Their critique of the original RR stylised fact promises to establish an alternative conventional wisdom, which is that high public debt ratios are never damaging for GDP growth. But the truth is more complicated than that, and far less certain.For those who have not been paying attention to this dispute, here is my (hopefully not too biased) commentary on the current state of the debate.

Number of the Week: How Big an Effect From Slower Growth? - 20%: About how much lower a country’s output would be after 23 years of slower growth. Slow economic growth has large cumulative effects, though not quite as big as claimed by two Harvard economists in their response to a critique this week. This week Carmen Reinhart and Kenneth Rogoff came under fire over their well-known study of the relationship between economic growth and a nation’s public-debt levels. Part of the critique dealt with calculation errors made in Excel, while also challenging the economists’ choice of data to analyze. In their response to the criticism, Ms. Reinhart and Mr. Rogoff acknowledge the Excel mistake, but stand by their data selection. The economists also note that the critique finds a relationship between high debt and slower growth. (Though, whether that connection has any causality is up for debate.) The critique finds a one percentage point difference in average growth between high- and medium-debt countries, not as large as Ms. Reinhart and Mr. Rogoff found but still substantial. In their response, Ms. Reinhart and Mr. Rogoff say: “If a country grows at 1% below trend for 23 years, output will be roughly 25% below trend at the end of the period, with massive cumulative effects.”

What the Reinhart & Rogoff Debacle Really Shows: Verifying Empirical Results Needs to be Routine —There’s been an enormous amount of buzz since a study was released this week questioning the methodology in a published paper. The paper under fire is Reinhart and Rogoff’s “Growth in a Time of Debt” and the firing is being done by Herndon, Ash, and Pollin in their article “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff.” Herndon, Ash, and Pollin claim to have found “spreadsheet errors, omission of available data, weighting, and transcription” in the original research which, when corrected, significantly reduce the magnitude of the original findings. These corrections were possible because of openness in economics, and this openness needs to be extended to make all computational publications reproducible.

Economics: The ivory fortress | The Economist - ONE of the more interesting responses to this week's Reinhart-Rogoff debate was this, from the economics blog Cheap Talk. "I Move That The AEA Stop Publishing Papers and Proceedings", the post title reads. Then:  Non-peer reviewed, inaccessible data, and punditry that can’t tell the difference between P&P and a regular AER article can’t be good for the reputation of the journal, the AEA, or the profession. "Papers and Proceedings" means that the original Reinhart-Rogoff work was presented at the annual meeting of the American Economic Association and deemed interesting enough to be included, alongisde many other results, in the May edition of the American Economic Review (of 2010). It was in the journal, in other words, but it didn't go through the peer-review process that a typical journal article might have (a process that often takes a lot longer than the five months between the conference and the May publication). The implication is that only the rigorous, professional, and lengthy journal process can protect the reputation of economics and its licensed practicioners.

Empirical Economics Isn’t Yet as Smart as Dentistry -The thought is prompted by two burning topics being discussed this week by the world’s top economic officials who are gathered in Washington to attend the semi-annual meetings of the International Monetary Fund and the World Bank. The first is a paper trashing a study by Carmen Reinhart and Kenneth Rogoff on the relationship between public debt and economic growth. The other is new work from the IMF on the relationship between inflation and unemployment.  The Reinhart-Rogoff paper looked at historical data and found that when the ratio of public debt to gross domestic product exceeds a “threshold” (their word) of about 90 percent, economic growth drops sharply. These are two of the world’s most distinguished researchers -- Rogoff is a former chief economist of the IMF -- so their findings were taken seriously. Now three economists from the University of Massachusetts at Amherst contend the paper is “riddled with faults” and its headline finding is wrong. The IMF’s new study on inflation and unemployment is another instance of the limits of the discipline. The fund’s economists show that since 1995 inflation has been less sensitive to unemployment than in earlier years. Previously, lower unemployment tended to mean higher inflation. Lately, inflation has stayed put regardless of whether unemployment is high or low.

With Debt Study’s Errors Confirmed, Debate on Conclusion Goes On - The Harvard economists Carmen M. Reinhart and Kenneth S. Rogoff have acknowledged that their groundbreaking 2010 study “Growth in a Time of Debt” includes statistical errors that significantly alter its results.  Three economists at the University of Massachusetts, Amherst, uncovered those errors in a bombshell paper released this week, which has prompted a huge debate in the economics blogosphere and resonated with policy makers gathered in Washington for the spring meetings of the World Bank and the International Monetary Fund. In an e-mailed statement, Professors Reinhart and Rogoff admit their mistakes but argue that they do not change the ultimate lessons of the paper, originally published in The American Economic Review. “We are grateful to Herndon et al. for the careful attention to our original ‘Growth in a Time of Debt’ AER paper and for pointing out an important correction,” they write. “We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work.”  Both the University of Massachusetts and the Harvard authors now find that countries whose debt loads are 90 percent or more of their annual economic output tend to experience slower growth than countries whose debt loads are lighter — though the effect is much smaller than previously thought.  The debate now centers on how to interpret those muddier results — and how the incorrect results influenced public policy in the post-crisis years.

No Time for Austerity: US Edition - With unemployment at 7.6% and an output gap of around 6%, it's (still) not the time to embark on front-loaded spending cuts in the United States. Annie Lowrey in Economix muses on the exact impact on policy of the original Reinhart and Rogoff debt/growth results. She concludes that while in the constrained economies of the eurozone (the GIIPS), it's unclear whether there would have been an impact, it's a potentially different matter in countries not facing imminent constraints: A better question is what effect studies like Reinhart-Rogoff might have had in countries that elected to start the process of fiscal consolidation without much pressure from the bond markets or other external financiers.  Britain and the United States are the big question marks there. The Cameron government in Britain — over the protestations of the opposition party and the monetary fund and other groups — has slashed the country’s budget. But it still has not met its own deficit-reduction targets, because the economy has remained mired in recession and automatic spending on social programs has increased. The country still could reverse course and engage in an effort to improve growth rather than an effort to hold down its debts..  The United States has also embarked on a campaign of deficit reduction, though a more modest one. Thus far, the Obama administration and Congress have raised taxes on the wealthiest Americans and agreed to trillions in budget cuts. With the aggressive actions taken by the Federal Reserve, the economy has continued to grow. How important were academics like Professors Reinhart and Rogoff to that process? My sense is not very, as well, even if policy makers pushing for deficit reduction cited them.

The Debt We Shouldn't Pay - Public debt was not implicated in the collapse of 2008, nor is it retarding the recovery today. Enlarged government deficits were the consequence of the financial crash, not the cause.1 Indeed, there’s a strong case that government deficits are keeping a weak economy out of deeper recession. When Congress raised taxes in January at an annual rate of over $180 billion to avoid the so-called fiscal cliff, and then accepted a “sequester” of $85 billion in spending cuts in March, the combined fiscal contraction cut economic growth for 2013 about in half, according to the Congressional Budget Office. Moreover, some of the causes of public deficits, such as Medicare, reflect to a large extent inefficiency and inflation in health care rather than profligacy in public budgeting.It was private speculative debts—exotic mortgage bonds financed by short-term borrowing at very high costs—that produced the crisis of 2008. The burden of private debts continues to hobble the economy’s potential. In the decade prior to the collapse of 2008, private debts grew at more than triple the rate of increase of the public debt. In 22 percent of America’s homes with mortgages, the debt exceeds the value of the house. Young adults begin economic life saddled with student debt that recently reached a trillion dollars, limiting their purchasing power. Middle-class families use debt as a substitute for wages and salaries that have lagged behind the cost of living. This private debt overhang, far more than the obsessively debated question of public debt, retards the recovery.

Going Underwater in the Long Recession - They call it the “spring swoon.” For the third straight year, the American economy bounded out of the starting blocks, adding hundreds of thousands of jobs in January and February. And for the third year in a row, that momentum melted away in the spring like the last traces of winter snow. Employers added only 88,000 jobs this March, the Labor Department announced on Friday, the worst monthly jobs report since June. Economists predicted gains of at least twice as much, and the news fed fears that the economy's modest recovery might be faltering. And this before we’ve even felt the real effect of the "sequester," those $85 billion across-the-board budget cuts recently approved by Congress and President Obama. The biggest cause for concern, however, isn't actually that anemic monthly job-gain figure. . Here's the real news, as U.S. corporations rake in record profits (and shift record amounts of money into offshore tax havens): nearly half a million workers "disappeared" last month. Yes, disappeared. The Labor Department tracks what it calls the "labor force participation rate" -- wonk-speak for the percentage of people working or actively hunting for a job. In March, that number slumped to 63.3%, the lowest point since 1979. That means there are millions of people out there who have lost their jobs, stopped interviewing or even applying, who have packed it in, given up. The government excludes them when it calculates the main unemployment rate. They have entered the invisible workforce.

America’s problem is not political gridlock - Larry Summers - With last week’s release of the president’s budget, Washington has once again descended into partisan squabbling. In the US today, there is pervasive concern about the basic functioning of democracy. Congress is viewed less favourably than ever before in the history of opinion polling. There is widespread revulsion at political figures seemingly unable to reach agreement on measures to reduce future budget deficits. Pundits and politicians alike condemn “gridlock”. Angry movements, such as Occupy Wall Street and the Tea Party, are present and still active on the extremes of both sides of the political spectrum. Meanwhile, profound changes are redefining the global order. Emerging economies, led by China, are converging towards the west. Beyond the current economic downturn lies the even more serious challenge of the rise of technologies, which may raise average productivity but will displace large numbers of workers. Public debt is increasing in a way that is without precedent except in times of total war. A combination of an ageing population and the rising prices of health and education will put pressure on future budgets. Anyone who has worked in a political position in Washington has had ample experience with great frustration. Almost everyone in US politics feels there is much that is essential yet unfeasible in the current environment. Many yearn for a return to an imagined era when centrists in both parties negotiated bipartisan compromises that moved the country forward. Yet fears about the functioning of the US government have been a recurring feature of the political landscape since Virginian Patrick Henry’s 1791 assertion that the spirit of the revolution had been lost.

President Obama’s Budget Revives Benefits as Divisive Issue - — Whether or not Republicans ever agree to a budget deal with President Obama, one thing seems certain: now that he has officially put Social Security and Medicare benefits on the negotiating table, opponents on his party’s left will make that an issue for Democrats in the midterm elections next year — and perhaps in the 2016 presidential contest.  In the midterm races already taking shape, Democrats who back Mr. Obama’s budget proposals to trim future benefits as part of a long-term deficit-reduction compromise could be attacked from the left and the right.  Liberal groups and some union activists are threatening to recruit candidates to challenge these Democrats in their primaries. At the same time, the head of the House Republicans’ campaign committee gleefully signaled last week that he would use Mr. Obama’s “shocking attack on seniors” against Democrats in general-election races — though Republican Congressional leaders demanded the concessions from Mr. Obama. And while party leaders rebuked the campaign committee chief, Representative Greg Walden of Oregon, individual Republican candidates and “super PACs” would be free to wage their own attacks. For now, at least, the political warnings to Democrats are coming mostly from the left of their own party.

Obama 2014 Budget Shows Administration is Trying To Divide GOP -- And It's Working - The Obama 2014 budget has far less to do with what was proposed than almost any other presidential budget in history. It's real purpose...and value...comes from understanding it as a document designed to drive a wedge between House and Senate Republicans. To a certain extent it's hard to understand why more of the people who comment on the federal budget -- that is, almost all of Washington -- didn't get the fact that the individual proposals in the Obama plan weren't the big story.  As part of its so-called charm offensive, the White House clearly is using its budget proposal to appeal to Senate Republicans and get them at least to use more moderate language when talking about the administration. That would have been far more difficult had the president not included the chained CPI proposal in the budget, which seemed to be the price of admission and political litmus test for Republican senators.The chance of Republican Senators agreeing with the White House on much of anything are still small, but they are now definitely greater than the they were before the Obama budget was released.

Obama Does Social Security and Medicare - With Barack Obama putting his plan to cut Social Security and Medicare expenditures into writing in his Federal budget proposal the ability of those who voted for him to credibly deny his years of publicly stating he would do so disappeared. The pathetic pleas from liberals and progressives who only a few short months ago were assuring the unwashed masses Mr. Obama was on the cusp of a ‘liberal’ renaissance if only doubters would join them in granting him another term are today as empty as their assurances were then. And Mr. Obama’s self ‘sacrifice’ of voluntarily giving up 5% of his own $400,000 per year salary in solidarity with seniors present and future who will see their Social Security payments reduced calls into question his intelligence if sincere—the difference between the rich (Mr. Obama) voluntarily giving up a fraction of their yacht allowance versus millions of seniors choosing between eating and living indoors is fundamental.

The Grand Betrayal has Arrived - Real News video: Bill Black: President Obama's bargain with Republicans opens the door to Wall St.'s dream - the privatization of Social Security.

The Real News Debate: Social Security on the Table -  interviews - Joseph Minarik (former chief economist of the Office of Management and Budget for eight years during the Clinton Administration) and economist Richard Wolff take on President Obama's proposed changes to Social Security

The Chained CPI: A Bad Deal All Around -  The Chain-Weighted Consumer Price Index (or chained CPI, for short), which President Obama included as part of his formal budget proposal, seems like a no-brainer for any White House–GOP grand bargain on the budget deficit. After all, the chained CPI ... would reduce entitlement spending and increase tax revenues by a combined $340 billion over ten years, providing something for both sides to like and dislike. Yet ... the chained CPI is bad policy that both liberals and conservatives may come to regret. ... In Social Security, the chained CPI would replace the CPI-W (intended for urban wage-earners and clerical workers) in calculating annual cost-of-living adjustments (COLAs). Once fully implemented, lower COLAs would reduce a retiree’s average lifetime benefits by around 4 percent, cutting Social Security’s long-term shortfall by around one quarter. Yet while Social Security does need to be fixed, and lower benefits for middle and high earners should be a part of the equation, smaller COLAs weaken a feature of Social Security that actually works: The program’s generous inflation adjustment counteracts the absence of inflation adjustment in private pensions. And unlike most reforms, which reduce benefits progressively ... COLA reductions fall hardest on the oldest beneficiaries, who are most at risk of poverty. An 85-year-old is 66 percent more likely to be in poverty than a 65-year-old, but the chained CPI will cut the 65-year-old’s by only 1 percent and the 85-year-old’s benefits by 8 percent. Moreover, the chained CPI, like CPI-W, doesn’t account for the fact that older retirees spend disproportionately on health care, a sector in which inflation is particularly high.

Chained CPI Helps Fund Corporate Tax Breaks and Trickle Down - Jack Lew, the Treasury Secretary and former head of the Office of Management and Budget, testified before the Senate Budget Committee recently. His written testimony explains the priorities set by President Bipartisan, Barack Obama, who seems to think he was elected on the long-term Republican promise to balance the budget.  Lew tells us that Obama’s budget is based on his Grand Bargain offers to Speaker Boehner that couldn’t garner any Republican backing. Lew doesn’t explain why that should be a starting point for further capitulations. Lew mentions such balanced ideas as the Chained CPI. That’s the part where we slash at Social Security and raise taxes on the middle class by raising income tax brackets less than inflation. Lew explains the reason for this assault on the 99%: “The chained CPI is a more accurate measure of inflation in that it does a better job of reflecting the substitution of goods in response to relative price changes.” That is a lie.  The CPI is supposed to measure how much it costs to maintain your lifestyle. The Chained CPI measures the decline in your standard of living as you change your protein intake from an occasional piece of beef to Alpo. Lew thinks that’s not a problem because it’s all protein. And it’s not a problem for the administration’s rich clients, whose life-style is utterly unaffected by inflation. For the 99%, the Chained CPI assumes that you are just as happy with canned catfood as you were with fresh salmon.

What If Chained CPI Had Been Used to Calculate COLAs Since 2002?: Each year the Social Security cost-of-living adjustment COLA is calculated based on the change from the Q3 average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the Q3 average of the previous year, rounded to one decimal place. If the average for the most recent year is below the previous high, there is no adjustment, as was the case in 2010 and 2011. The President's 2014 proposed budget recommends that, starting in 2015, COLAs should calculated with the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). Let's look at what the effect would have been over the past twelve years for a typical Social Security recipient. The earliest Q3 of Chained CPI data we have is for the year 2000. So the first COLA we can calculate would be for 2002 based on the change from Q3 2000 to Q3 2001. Here is a table showing the actual COLAs since 2002 and the hypothetical COLAs if we substitute the Chained CPI. I've illustrated the difference with a case history of a Social Security recipient who had received $12,000 in 2001, an even thousand per month, which I think was fairly close to the national average in that year. The rightmost column shows the annual and total shrinkage of annual income had the Chained CPI been used for COLA calculations.

Income inequality: Why cutting Social Security is the last thing we should do - These two charts "show, for example, that the average middle-income family had $8,700 less after-tax income in 2009, and an average household in the top 1 percent had $349,000 more, than if incomes of all groups had grown at the same rate since 1979." Of course, incomes haven't grown at the same rate for all groups. That has big implications for current policy discussions. First and foremost, yes, the rich should be paying more in taxes. Second, the last thing policy-makers should be doing is hitting the middle class harder, either by raising their taxes (which the chained CPI would do when applied to tax brackets) or cutting their benefits after they retire (which the chained CPI would do). Income inequality is real, and it's been real for the past four decades. Stagnant income (in real terms, falling income) for the middle class has made saving and building for a secure retirement that much more difficult. Pundits and politicians have long complained that we're a nation of spenders instead of savers, as if the lack of retirement savings among us was a character flaw instead of a simple reality. For those who could save, the places where they put their money have proven to be shaky, at best, whether the stock market or real estate. That, along with the still shitty economy and high unemployment means that the near-term picture for the next generation of retirees is downright grim. Now is not the time to be talking about cutting critical earned benefits programs like Social Security and Medicare. It's time to be talking about shoring them up with smart—and fair—policies like getting rid of the payroll tax cap. It's time to be talking about expanding Social Security and Medicare instead of cutting them.

Gov. Howard Dean threatens to leave Democratic party over Obama budget - Former Vermont Governor Howard Dean has told Business Week that if Obama's budget passes, with its cuts to Social Securtiy and restoration of virtually all the cuts made by the sequester to the Pentagon, he may have to leave the Democratic party and register as an independent.  This is a Big Deal, in my opinion. Should even a small fraction of current and former democratic officeholders leave the party over the Grand Betrayal, it's likely they won't simply sit at home crocheting. We could see the founding of a new major political party for the first time in 150 years.  And if Obama's budget passes, that new party will have my full support.

Why Do Bowles And Simpson Even Bother? - Erskine Bowles and Alan Simpson, who stopped being the co-chairs of a failed deficit reduction commission at the end of 2010, are at it again. At some point today they will unveil yet another B-S plan they say will reduce the deficit and debt to manageable levels.Never mind that they completely failed in 2010 to get their own commission to agree to what they recommended. Never mind that since the B-S commission failed, Congress has overwhelmingly rejected several efforts that supposedly were based on what the two co-chairs recommended. And never mind that after these repeated failures neither Bowles nor Simpson have any standing to offer a a new plan that is so politically toxic it has no chance of (1) being taken seriously, (2) jump starting negotiations or (3) having any positive impact whatsoever.

Apache Helicopter: Congress Asks Army Why It’s Accepting Unfinished AH-64Es - Congress has asked the Army to explain why it has officially taken delivery of at least seven AH-64E Apache Guardian helicopters that don't have transmissions installed yet, AOL Defense has learned. An unidentified subcontractor to Boeing which makes the helicopter, fell behind on building the transmissions and is now trying to catch up, but until it does, the high-tech gunships are unflyable. The Government Accountability Office (GAO) mentioned the Apache transmission issue in one sentence of a 190-page report released last month, as reported by our colleagues at Inside Defense. But the problem remained unfixed as of yesterday, when Hill staff first learned of it during an Army briefing on the service's 2014 budget. Both Congress and AOL Defense are now waiting on further explanation from the Army.

Many options exist for raising revenue in a smart and progressive manner - For too long our tax policies have lacked progressivity and efficiency, exacerbated income inequality, and underfunded key national priorities. The American Taxpayer Relief Act of 2012 (ATRA), which was passed to purportedly address the so-called fiscal cliff at the start of 2013, enacted numerous tax policy changes affecting federal revenue levels for the foreseeable future.1 It did little to mitigate these failures. Though the legislation included modest tax increases on the very wealthy, it cemented in place tax policies that do not—and will not—adequately fund national priorities. At the same time, conservative policymakers have forced deficit reduction measures into law since mid-2011, even as the economic recovery has faltered.  The bulk of these policy-induced deficit reductions have been spending cuts, with tax increases accounting for only 20 percent of the policy reductions since mid-2011 (Murray 2013).2 This spending-cuts approach to deficit reduction makes for poor economic policy. For one, in the near term there is no need to reduce deficits, as larger deficits to support job-creating investments and transfer payments should be the policy goal in coming years. But if political constraints do demand deficit reduction, reductions achieved through revenue increases—particularly progressive revenue increases—are far less damaging to economic recovery than spending cuts.3

Vital Signs Chart: Income Tax Revenue - Today is tax day. Individual income-tax receipts have climbed for two years, rising to $1.13 trillion in 2012 from $1.09 trillion in 2011. That represents something of a comeback after receipts tumbled following the 2007-09 recession. The downturn’s toll registered gradually in tax receipts, with totals falling below $1 trillion in 2009 from $1.15 trillion in 2008.

What Your Tax Dollars Are Buying - Given how much we pay to Washington every year, it seems only fair that we ask for a receipt. The White House and research organizations including Third Way have made it easy to do just that: Go to their online widgets and input a little tax and income information, and they will tell you just what you bought with your federal tax dollars. The widgets all operate on the same principle. They take the amount you paid in taxes and then divide that money up into separate piles that are proportionate to the spending categories of the federal budget. Let’s say that you paid $20,000 in income taxes last year. According to the White House receipt, you would have spent about $7,000 on defense, including the military operations in Afghanistan and Iraq. The second-biggest category is health spending, on programs like Medicaid and Medicare. That accounted for about $6,400. After that comes “job and family security,” which includes unemployment insurance and programs for the working poor, which you spent about $5,000 on last year. Net interest on the debt is also a major category, accounting for about $2,300.  Then, there are many much smaller categories. Humanitarian aid, for instance, cost you only $228 out of your $20,000. You spent about $1,300 on programs for veterans and $190 on agriculture. Education and job training cost you about $940 and NASA about $170. Disaster response worked out to about $120.

A Tax System Stacked Against the 99 Percent - Joe Stiglitz - LEONA HELMSLEY, the hotel chain executive who was convicted of federal tax evasion in 1989, was notorious for, among other things, reportedly having said that “only the little people pay taxes.”  As a prediction about the fairness of American tax policy, Mrs. Helmsley’s remark might actually have been prescient. No one enjoys paying taxes, and yet all but the extreme libertarians agree, as Oliver Wendell Holmes said, that taxes are the price we pay for civilized society. But in recent decades, the burden for paying that price has been distributed in increasingly unfair ways.About 6 in 10 of us believe that the tax system is unfair — and they’re right: put simply, the very rich don’t pay their fair share. The richest 400 individual taxpayers, with an average income of more than $200 million, pay less than 20 percent of their income in taxes — far lower than mere millionaires, who pay about 25 percent of their income in taxes, and about the same as those earning a mere $200,000 to $500,000. And in 2009, 116 of the top 400 earners — almost a third — paid less than 15 percent of their income in taxes.

Joe Stiglitz Blasts Our Wealthy-Coddling Tax System for Increasing the Returns on Rent-Seeking  - It’s a sign of how well relentless propagandizing works that Joe Stiglitz has to devote a lengthy op-ed in the New York Times to debunking the idea that our income tax system, whose salient characteristic is low tax burdens for the rich, is good for anyone other than the rich. Economists have increasingly taken note of the fact that the US experiment in lowering taxes produced the opposite of the outcomes that were claimed for it, namely, spurring growth and increasing incomes in all cohorts (the barmy “trickle down” theory). Cross-country comparisons show that advanced economies with higher growth rates, like Germany, typically tax their wealthy more, showing that high taxes on the rich are not a negative for growth. Instead, giving tax breaks to the rich has turbo-charged rentier capitalism: the household savings rate fell to a record level of near zero after President George W. Bush’s two rounds of cuts, in 2001 and 2003, on taxes on dividends and capital gains. What low tax rates at the top did do was increase the return on rent-seeking. It flourished, which meant that growth slowed and inequality grew. This is a pattern that has now been observed across countries. Stiglitz provides a compelling summary of how the rich get favored treatment:

On Whether the Rich Pay Too Little in Taxes - On Tuesday Bruce Bartlett mentioned that a majority of Americans believe that high-income people do not pay enough in taxes. That majority, though, has been shrinking over the last couple of decades, according to new data from Gallup. Gallup asks respondents about whether they think members of different income groups are paying “their fair share in federal taxes, paying too much or paying too little.” In 1992 and 1993, 77 percent of Americans said that upper-income people paid too little. Today, the share is 61 percent.  That change in public opinion seems to contradict the trend in the actual tax burden faced by high-income households. As a New York Times data analysis showed last fall, the average tax rate paid by people of all income classes has fallen since the mid-1990s, including that for wealthier people. That said, the share of the nation’s total tax bill that is paid by the wealthy has been growing — but that’s because the incomes of the wealthy have increased so strikingly, faster than the individual tax rates they face have fallen. Meanwhile, as I noted last year, Americans have become much more critical of the tax share paid by the poor.

How High Should Top Income Tax Rates Be? - Over at Forbes, Tim Worstall didn’t take kindly to an op-ed I authored for The Fiscal Times pointing out that research by two economists, Peter Diamond and Emmanuel Saez, indicates that individual income tax rates are currently well below their revenue-maximizing rates. He accuses me of misrepresenting their work … by completely misrepresenting their work, as well as mine. The crux of his ire with my “propaganda” is this paragraph in my piece: “Most importantly, recent economic research has shown that productive economic activity is relatively unresponsive to increases in the top income tax rate, and the top income tax rate is well below the levels where it maximizes revenue. Economists Peter Diamond and Emmanuel Saez estimate that the revenue maximizing income tax rate is 73 percent (combing federal, state and local taxes).” Worstall: “No, that is not what that paper says. What it does say is that in a tax system with no allowances then that peak of the Laffer Curve, that revenue [maximizing] rate, is 73 percent. What it also says is that the peak in a system with allowances is more like 54 percent.” Nope, that’s totally wrong. What the paper says — it’s on page 7 — is that in today’s system the best estimate of the revenue-maximizing rate is 73 percent. Period.

Why Republicans Should Never Raise Taxes - Grover Norquist -Republican elected officials should never raise taxes. Never. Ever. Why? Government spending at all levels in the United States is too high and existing government programs need to be reformed to spend less. Raising taxes is what politicians do to avoid reforming government. AdvertisementReforming government is always the last resort of politicians — and tried only after they have exhausted every imaginable way to pry more money from taxpayers in order to fund the status quo and those who benefit from it. Reforming government to cost less requires confronting the spending interests that benefit financially from unreformed spending. Government waste and corruption have appreciative constituencies that will fight all efforts at reform: teachers’ unions at the state and local levels, government workers with gold-plated pensions, government contractors. Tax increases fund Democratic precinct chairmen.

Payroll Tax Returns, Anyone? - NYT - APRIL 15 is dreaded as the deadline for filing income tax returns, but in fact every day is tax day for most working people. That’s because more than half of all Americans pay more in payroll tax than in income tax. That includes nearly everyone in the bottom half of the income distribution.  We don’t file annual payroll tax returns because payroll taxes have one rate and they aren’t adjusted for individual differences that affect taxpaying ability. Your bill remains the same regardless of how many children you support, your medical or education expenses, or your charitable contributions. No standard deduction or personal exemption either: payroll taxes apply to the first dollar.  At $70,000 total income, the worker pays almost $20,000 in federal taxes, roughly half in payroll tax and half in income tax. The investor with $70,000 in capital gains pays less than a fifth of that. This is not just an abstract discussion; it means that the 25-year-old trust funder is paying less in tax than his counterpart who fixes computers for a living.

Tax Expenditures - In the lingo of government budgets, a "tax expenditure" is a provision of the tax code that looks like government spending: that is, it takes tax money that the government would otherwise have collected and directs it toward some social priority. Each year, the Analytical Perspectives volume that is published with the president's proposed budget has a chapter on tax expenditures.  Here's a list of the most expensive tax expenditures, although you probably need to expand the picture to read it. The provisions are ranked by the amount that they will reduce government revenues over the next five years. It includes all provisions that are projected to reduce tax revenue by at least $10 billion in 2014.  The monetary amounts here are large. Any analysis of tax expenditures is always sprinkled with warnings that you can't just add up the revenue costs, because a number of these provisions interact with each other in different ways. With that warning duly noted, I'll just point out that individual and corporate income taxes are expected to collect about $1.7 trillion in 2014, and the list of items here would add up to about $1 trillion in 2014.

Big Corporations Won't Be Sweating the IRS This Year  Lots of average Americans who filed their tax returns this week will soon face the unpleasant prospect of having those returns audited. But corporations with at least $10 million in assets (or far more) have much less to fear from the tax man. Behemoths such as Microsoft and General Electric have taken a beating in the press lately because of how little in US taxes they pay, thanks to extremely complicated and aggressive use of offshore tax havens. The criticism doesn't seem to have affected how corporations are treated by the IRS, though. According to a new report by the Transactional Records Access Clearinghouse, in the current fiscal year, the IRS plans to devote 18 percent less effort to auditing companies with more than $10 million in assets than it did just two years ago. The agency has seen a $1 billion budget cut in the past year, and all of this comes before the effect of the sequester, which will slash $600 million from its budget this year. The IRS also projects that the amount of time available for specialized agents to conduct these audits will drop 14 percent as well, thanks to staffing cuts.

Congress Quietly Repeals Congressional Insider Trading Ban · While Congress might be stuck in a deadlock on just about every issue imaginable, there’s one piece of legislation that both Democrats and Republicans hate unanimously: the Stop Trading on Congressional Knowledge (STOCK) Act, a law passed last year designed to prevent insider trading among lawmakers and government officials by requiring them to post disclosures of their financial transactions online. Both parties and both houses of Congress hated the disclosure portion of the law so much that it was repealed on Friday without debate—the measure was sent to the president by unanimous consent. The ordeal took about 10 seconds in the Senate and 14 seconds in the House, according to official records. The STOCK Act would have required members of Congress, their aides, and other federal employees making more than $119,554 a year to disclose their financial dealings in an online database. It was supposed to prevent government officials from using insider knowledge about policy-making to profit from stock trades and other investments.

Congress Repeals Financial Disclosure Requirements For Senior U.S. Officials - Joining the Senate, the House of Representatives approved a measure today that repeals a requirement that top government officials post financial disclosures on the Internet. The House, like the Senate, acted quietly without a vote. Instead, they sent the measure to the president's desk by unanimous consent. The provision was part of the Stop Trading on Congressional Knowledge Act (Stock), which became law in March of 2012. The act was intended to stop members of congress from profiting from nonpublic information. As NPR's Tamara Keith reported, at the time, Sen. Joe Lieberman called the law "the most significant congressional ethics reform legislation to pass Congress in at least five years."

Obama Signs Partial Repeal of STOCK Act - President Barack Obama signed a partial repeal of the STOCK Act on Monday, with the White House citing national security concerns in canceling a planned online database of investment information of top congressional staffers and administration employees. “Both houses of Congress passed this bill unanimously and it was not done in a vacuum,” Press Secretary Jay Carney said. “Congress changed the online posting provision only after a panel of experts from the National Academy of Public Administration studied this issue and issued a report recommending indefinite suspension,” raising national security, law enforcement and personal security concerns. However, advocates of the legislation — notably Public Citizen and the Sunlight Foundation — had ripped both the repeal of the online database as a blow to accountability and the way it was passed without debate in either the House or the Senate.

Obama Signs Bill Gutting Transparency Provisions in Insider Trading Law - President Obama has signed into law a measure critics say guts key transparency provisions from a law designed to combat insider trading by members of Congress. The new bill repeals a requirement in the Stop Trading on Congressional Knowledge Act that high-level federal officials disclose financial information online.  But, according to the Center for Responsive Politics, it also removes requirements for the searchable and electronic filing of information related to potential conflicts of interest by the president, vice president, Congress and other officials.  On its website, the Center wrote: "Without the provisions, the STOCK act is made toothless. Insider trading by members of Congress and federal employees is still prohibited, but the ability of watchdog groups to verify that Congress is following its own rules is severely limited because these records could still be filed on paper — an unacceptably outdated practice that limits the public’s access."

War on Whistleblowers: How the Obama Administration Destroyed Thomas Drake For Exposing Government Waste Marcy Wheeler - When Thomas Drake, then an official at the National Security Agency, realized that the agency’s decision to shut down an internal data analysis program and instead outsource the project to a private contractor provided the government with less effective analysis at much higher cost, he tried to do something about it. Drake’s decision to join three other whistleblowers in asking the agency’s inspector general to investigate ultimately made him the target of a leak investigation that tore his life apart. In 2005, the inspector general of the Department of Defense, of which NSA is a part, confirmed the whistleblowers’ accusations of waste, fraud and security risk.  Earlier this year, former NSA Director Michael Hayden even conceded that TrailBlazer, the program for which the NSA paid over $1 billion to the Science Applications International Corporation, had failed. The agency, after killing its own program (called ThinThread) “outsourced how we gathered other people’s communications,” . “ We tried a moonshot, and it failed.”Nevertheless, Drake’s efforts to expose that waste and abuse would ultimately lead to his being charged under the 1917 Espionage Act — a law intended for the prosecution of spies, not whistleblowers.

Obama: The Buckraking Starts Here - Yves Smith - When I was in DC about a month ago, speaking at the Atlantic Economy conference, the keynote speaker was Paul Volcker. Tall Paul could not refrain from starting his remarks by commenting on how prosperous the capital looked and made it clear he regarded it as unseemly. And indeed, at least to someone breezing in and out, the town is ostentatiously well turned out, with lots of new construction and upscale stores and restaurants. The cab driver pointed out a new commercial building which he said had been built on spec and was leasing up well. It has become depressingly normal to hear of senior Administration officials going immediately for the golden ring when they leave public service. But for every Mary Shapiro joining Promontory and Lanny Breuer returning to Covington & Burling for $4 million a year, there are even more operatives at similar or lower levels who make a very juicy return on their association with Obama but don’t get the same level of attention in the mainstream media. Norm Scheiber, in a must-read article in The New Republic, “Get Rich or Deny Trying: How to make millions off Obama,” chronicles how this process works. It’s even uglier than you might imagine.

Full List of Bankers at White House Meeting Thursday - President Barack Obama is meeting with members of the members of the Financial Services Forum Thursday morning at 11 a.m. They are expected to discuss the economy, the employment picture and the administration’s new budget proposal. Here is the list of bank executives who will be attending, according to a White House official:

More Washington Sleaze: Lobbyist Tip Stoked Health Care Stock Jump -  Yves Smith - Yesterday, we featured an important article by Noam Scheiber on how Obama insiders cash out on their connections once they leave the fold. Today, in the Wall Street Journal, we read of the Congressional version in terms of how a tip by a lobbyist (and former Congressional aide) connected to an investment research firm led to a Congressional decision being leaked to investors before it was announced officially.  Understand how this connection game works. One way is that Corporate America tries to influence policy in Congress, with regulators, and with the Administration. Former insiders advise business chieftans and their minions who to approach, whose campaigns to support, how to craft their message, and with lobbying and with regulators, will act as agents, often fronting for industry associations with Orwellian names. Notice only working to influence Congress is considered “lobbying” and requires registering as a lobbyist. The second sort of information flow is that of pending Congressional and regulatory actions (and Fed thinking) that can move markets. The Journal stresses that the political intelligence industry heretofore hasn’t gotten much attention, but the SEC has launched a probe of the case in question, that of a lobbyist Mark Hayes, who has Humana as a client. Hayes is a former health care aide to Senator Chuck Grassley. He also works for a broker-dealer and investment research firm, Height Securities.

Fed, FDIC Ask Banks for More Details on Living Wills - U.S. regulators are pushing back a deadline for large banks to submit “living wills” to the government after identifying a number of potential obstacles to the government quickly winding down a failing firm. The Federal Reserve and Federal Deposit Insurance Corp. said they were pushing back the original July 1 deadline for 11 of the largest banks with U.S. operations to submit the next round of living wills. Banks will now have until October 1 to provide the information to regulators.

When Gauging Bank Capital Adequacy, Simplicity Beats Complexity - Dallas Fed: The pace of bank failures during the recent financial crisis reached a level not seen in nearly 20 years, capturing the attention of regulators and policymakers—particularly those in search of the best gauge of institutional stress that might have reliably foretold of the difficulties. The capital ratio, a measure of a bank’s cushion against losses, is a key metric, and its adequacy is critical to bankers, regulators and, ultimately, taxpayers. Over time, regulatory capital ratios have evolved along with the shifting landscape of banking, becoming more complex in an effort to capture the risks of an increasingly complicated financial world. This reflects the idea that because a bank’s risk profile helps determine the amount of capital it needs, more complex capital ratios should provide a better assessment of institutional capital adequacy. Financial crisis experience suggests it is unclear whether ratio complexity enhances the ability to identify failure and is better than a simpler ratio.[1] But a simpler ratio offers the benefits of greater transparency and accountability. Conversely, the presence of more complicated ratios—whatever the measurement shortcomings—may influence the incentives for engaging in excessive risk taking.

Fed’s Stein Says Liquidity Regulation Has Key Role for Stability - Bloomberg: Federal Reserve Governor Jeremy Stein said liquidity regulation is essential to financial stability, while noting a need for a more moderate approach to such oversight compared with supervision of capital. “Liquidity regulation involves more uncertainty about costs than capital regulation,” Stein said in remarks prepared for a speech today in Charlotte, North Carolina. “Even a policy maker with a very strict attitude toward capital might find it sensible to be somewhat more moderate and flexible with respect to liquidity.” The Fed is enacting new powers setting capital, liquidity and risk management standards under the 2010 Dodd-Frank Act overhauling financial regulation. Central bank officials aim to prevent a repeat of the financial crisis in which liquidity vanished for many firms, contributing to the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc. Too much demand for liquidity, particularly during a financial crisis, could lead to a shortage of liquid assets, Stein said. Though the Fed can act as a lender of last resort, this may induce financial institutions to be less prudent.

'Financial Stability Monitoring' - In order to stabilize the financial system, there are two recommendations that I would definitely make. One is to reduce the chance of runs in the shadow banking system -- a key factor behind the financial crisis. As noted below, the Dodd-Frank Act "does not address structural problems in wholesale short-term funding markets, such as the susceptibility of money market funds to investor runs or the inherent fragility of repo markets." Regulators have been working on fixes for this problem, but it's not fixed yet and that should be a bit more alarming than it seems to be. The other change is to develop a better early warning system for financial crises. Dean Baker would say just call me, but I'd like to go beyond that and develop new tools, statistics, etc. that can help us do a better job of identifying risks before they become destructively large. I won't be satisfied with the excuse that we can't predict bubbles reliably until we have done the work of trying to find better leading indicators for problems. Those two changes are far from exhaustive, reducing leverage, for example, should be on the list as well. But they are key issues that need to be addressed and it's nice to see that the Fed recognizes this and is trying to develop a "broad and forward-looking monitoring program" (the problem of bank runs in the shadow banking system isn't directly addressed, the idea is to prevent problems through early detection coupled with a policy response to relieve the pressure in the market).

Fed Proposes Fee on Financial Institutions to Cover Costs of Regulation - The Federal Reserve Monday proposed new assessments that would see 70 of the biggest financial firms operating in the U.S. pay a combined $440 million to cover some of the costs of regulating the sector. The assessments would apply to banks and savings and loan companies with $50 billion or more in assets, as well as other nonbank financial companies that regulators determine pose a risk to the financial system.

Goldman’s Big Guns Fire Dud in Defense of Megabanks - Simon Johnson - The six very large U.S. bank holding companies -- JPMorgan Chase, Bank of America, Citigroup (C), Wells Fargo, Goldman Sachs and Morgan Stanley  -- share a pressing intellectual problem: They need to explain why they should be allowed to continue with their dangerous business model.  So far their justifications have been weak, and the latest analysis on this topic from Goldman Sachs may even help make the case for breaking up the financial institutions and making them safer. Legislative proposals from two senators, Democrat Sherrod Brown of Ohio and Republican David Vitter of Louisiana, have grabbed attention and could move the consensus against the modern megabanks. Under intense pressure from Democratic Senator Elizabeth Warren of Massachusetts, Federal Reserve Chairman Ben S. Bernanke conceded recently that the U.S. still has a problem with financial institutions that are seen as too big to fail. In this context, it is no surprise to see the financial sector wheel out its own intellectual big guns. A frisson no doubt rippled through the financial-lobbying community last week with the release of a report from Goldman Sachs’s equity research team, “Brown-Vitter bill: The impact of potential new capital rules.” This is the A-team at bat, presumably with clearance from the highest levels of management.  Yet instead of providing any kind of rebuttal to the proposals in Brown-Vitter, the report may strengthen the case for breaking up the six megabanks, while also requiring that they and any successors protect themselves with more equity relative to levels of debt.

The Impact of Higher Capital Requirements for Banks - Simon Johnson - The Clearing House, an association of banks, is at the forefront of efforts to prevent further potential restrictions on how large financial firms operate. One piece of the Clearing House-led pushback is a report recently commissioned from Oxford Economics, which purports to show that higher capital requirements would depress economic growth. (The report appeared on the Clearing House Web site last week.) There are three major conceptual and factual problems with the Oxford Economics report. Taken together, these issues are serious enough that the report should be given precisely zero weight in thinking about policy. First, Oxford Economics fails to engage with the central analytical question: why exactly would higher capital requirements be bad for the economy? We know that banks like to borrow a great deal relative to their equity funding — excessive leverage, as it is known, means that the people running banks get the upside when things go well and someone else gets the downside when everything goes badly. Second, the Oxford Economics report almost completely ignores the costs of financial crises, such as the deep recession that followed the downturn in fall 2008. Highly leveraged banks are more likely to collapse and to bring down the economy; avoiding this is the central rationale for capital requirements.Third, the central mechanism for the negative effect of higher capital requirements does not make sense on Oxford Economics’ macroeconomic framework. It assumes that the interest rates charged on loans will go up (see Page 8). However, they are also aware that monetary policy can offset this effect (for example, see Page 33). They assume that the offset is only partial, but why?

Jeffrey Sachs Calls Out Wall Street Criminality and Pathological Greed from naked capitalism -  One of the things that Matt Stoller has stressed that the possibility of reform is remote until breaks within the elites take place. Jeffrey Sachs, Columbia professor and director of the Earth Institute at Columbia, is a controversial figure for his neoliberal stance on macroeconomics and his role in promoting the use of “shock therapy” in emerging economies. But it is also important to recognize that criticism from a connected, respected insider has more significance than that of someone like Bill Black, who has made a career of taking on bank fraud but has never reached a top policy-making level. This talk is blistering at several points. It was recorded at a conference “Fixing the Banking System for Good” on April 17 (hat tip Jesse). If you have trouble with the embedded version, try YouTube.

Financial crisis caused by too many bankers taking cocaine, says former drugs tsar -- David Nutt, the former Government drugs tsar sacked after claiming that horse riding was as safe as taking ecstasy, has said that the banking crisis was caused by too many workers taking cocaine. Prof Nutt said that too many bankers who took the drug were “overconfident” and so “took more risks” and said that not only did it lead to the current crisis in this country, but also the 1995 collapse of Barings bank. He said cocaine was perfect for their "culture of excitement and drive and more and more and more", adding: “Bankers use cocaine and got us into this terrible mess. It is a 'more' drug." Prof Nutt is not a stranger to making controversial claims about drugs. His latest attack is on the Government for “absurd” and “insane” laws dealing with magic mushrooms, ecstasy and cannabis, which he said were hindering medical research because regulations meant one of the ingredients - psilocybin, which is used to treat depression - was so hard to get hold of.

CEOs average $12.3 million in 2012, 354 times the average worker - The AFL-CIO is out with its Executive Paywatch. Here's how some of the numbers break down:

  • In 2012, CEOs of S&P 500 Index companies averaged $12.3 million in total compensation, while rank-and-file worker wages averaged $34,645, for a ratio of 354 to one.
  • CEO pay fell five percent from 2011 to 2012, but that's mostly because of Apple CEO Tim Cook. The stock he got in 2011 vests over 10 years, but was counted all at once, skewing 2011 CEO pay data. If you take Cook out, average CEO pay increased five percent in 2012.
  • In Germany, the CEO-to-worker pay ratio is a relatively modest 147 to one. Workers make more—$40,223—and CEOs make less—$5,912,781. In Canada, it's 206 to one. In Sweden, Australia, Japan, Norway, Poland, the United Kingdom, and other countries, the ratio is below 100 to one.

The comparisons with other nations and with our own past are a powerful reminder that how things are in this country right now is not how things have to be to have a healthy economy. The growing inequality in the United States that goes beyond a few CEOs isn't good for our economy or our politics. But when you consider that 354 to one ratio, you understand the power that's lined up against changing things for the better.

Taxpayers failing to get their fair share of wireless gold rush -   Satellite TV provider Dish Network says it's thinking only of customers as it offers $25.5 billion to buy Sprint Nextel, the third-biggest U.S. wireless company. Dish now controls billions of dollars worth of unused wireless spectrum that it obtained from the federal government as well as through a series of acquisitions, such as its $2.9-billion spectrum purchases last year from failed satellite operators DBSD North America and TerreStar Networks. Under the terms of a deal cut in December with the Federal Communications Commission, Dish now has seven years in which to start operating a wireless network covering at least 70% of the population. If it fails to do so, its wireless license from the FCC will expire. Dish's attempt to purchase Sprint isn't about serving customers. It's about positioning the company for a wireless future that, regardless of what role the company plays, will be worth a bundle. Consumer advocates remain wary of the ongoing trend of consolidation among telecom companies.

Gold: The fear bubble bursts - The total amount of gold in the world, according to Thomson Reuters, is 171,300 metric tonnes, or 5.5 billion troy ounces. What that means is that every time the price of gold falls by $100 an ounce, as it did on Friday and it has done again today, the value of the world’s gold falls by more than $500 billion. That doesn’t mean investors have lost $1 trillion in the space of two trading days. Some gold is used in industry or jewelry, and there’s a huge amount in central banks, which don’t mark to market and therefore aren’t really investors as we normally understand the term. Still, with a “market capitalization” at the end of 2012 of about $9 trillion, the gold market is not much smaller than the NYSE, is twice the size of the Nasdaq, and is almost three times the size of the Tokyo and London stock exchanges.   To put that number in context, the NYSE has risen 6.6% since the end of 2012, a rise in value of some $930 billion. Which means that the value of gold has been falling faster than the value of stocks has been rising. But gold is held in much more concentrated hands: most people have very little exposure to it, while a relatively small number of investors have huge allocations. As a result, the wealth effect from the fall in gold prices is likely to be felt quite acutely.

Paulson Gold Bet Loses Almost $1 Billion: Chart of Day - Hedge-fund manager John Paulson’s wager on gold wiped out almost $1 billion of his personal wealth in the past two trading days as the precious metal plummeted 13 percent.  The CHART OF THE DAY shows gold’s tumble since the start of the year has cut his riches by $1.52 billion on paper, including about $973 million in the rout that began on April 12 and continued with yesterday’s 9.3 percent drop. Paulson started the year with about $9.5 billion invested across his hedge funds, of which 85 percent was in gold share classes.

Fed and Bank of Japan caused gold crash - My view is that the US Federal Reserve and the Bank of Japan "caused" the gold crash. The rest is noise. The Fed assault began in February when it published a paper warning that the longer quantitative easing continues, the harder it will be for the bank to extricate itself.  The report was co-written by former Fed governor Frederic Mishkin, often deemed Ben Bernanke's "alter ego". It said the Fed's capital base could be wiped out "several times" once borrowing costs climb. The window will start shutting by 2014, with trouble then compounding at a "dramatic" pace.  This was a shock. It suggested that the Fed has lost its nerve, and will think long and hard before launching a fresh blitz of money if growth falters. Then came last week's Fed Minutes, with hints of tapering off QE earlier that expected. That was the next shock. What they seemed to be saying is that the US economy is groping it way back to normality, that the era of silly money is over, that the dollar will stand tall again.  As for the Bank of Japan, it had been assumed that the colossal monetary stimulus of Haruhiko Kuroda would revive the yen-carry trade, leaking $1 trillion into world asset markets. But the early evidence is the opposite. Japanese investors brought money home last week. "Mrs Watanabe" is selling her Kiwi and Aussie bonds to bet on stocks and property at home. And she is selling gold like never before. That too is a shock.

Bernanke Drives Margin Debt to Pre-Crisis Highs - Investors have boosted their borrowing to near-record levels to load up on stocks.   The last time that margin debt was this high was just before the bubble burst in 2007.  In January, New York Stock Exchange (NYSE) margin debt tipped $366 billion,  just shy of the 2007 peak of $380 billion. The Fed’s zero rates and $85 billion per month bond buying program (QE) have sparked the same irrational exuberance that preceded the Crash of ’08.  Investors are piling on the leverage because they feel confident that Fed chairman Ben Bernanke will not allow markets to fall too sharply. (This is called the Bernanke Put) This week’s see-sawing markets suggest that QE’s impact may be wearing off. Deflationary pressures are building in the real economy at home and abroad. As these pressures intensify, stocks will retreat forcing deeply-leveraged investors to exit their positions which will accelerate the pace of decline.

At Least the Big Banks Are Kickin’ It -- I just read that Goldman Sachs posted a profit of $2.2 billion in the first quarter, “…driven by strength in its investment banking business as well as its investing and lending unit.” And they’re mere pikers compared to their banking brethren:Across Wall Street, banks are showing signs of strength. Last week, JPMorgan posted a 33 percent jump in quarterly profit, to $6.53 billion. Profit at Wells Fargo rose 22 percent, to $5.17 billion.  Citigroup profit surged by 30 percent…What explains this robust profitability of the banking sector?:Goldman, like other banks, is benefiting from the ongoing improvement in the markets and the economy. While banks are adjusting to new regulation, they are finding new ways to bolster profit and cut costs, helping to drive record profit.“Adjusting to the new regulation??”  I’ll say. Meanwhile, here’s a picture of the annual growth rate in weekly earnings of middle-wage workers.  After falling in real terms for the last seven quarters, they broke zero last quarter, up 0.1%.  The dollar value of the average paycheck for these non-supervisory workers is $675/week, or about $35,000 per year, assuming full-year work.

Nicole Foss – Relocalising the Trust Horizon - Leading economics – energy – environment commentator Nicole Foss joins to discuss the state of finance. She is in Australia on an extensive speaking tour.

Don’t Depend on Bank Deposit Insurance: Mike Shedlock - SitkaPacific Capital Management's Mike Shedlock, who is also the author of the Global Economic Analysis blog, says the Cyprus fiasco is an example of what can happen in a banking system that really can’t guarantee everything it’s promised. He argues these are issues that exist in the U.S. banking system too. “Here in the U.S. we have something like $3 trillion worth of monetary base, with $50 trillion worth of money out there that’s lent on that monetary base,” Shedlock told The Daily Ticker on the sidelines at the Wine Country Conference in Sonoma. “So how are we going to pay this all back? We can’t.” Shedlock argues that deposit insurance - guaranteed by the FDIC for accounts up to $250,000 - can’t possibly cover all bank deposits.

Deposit Insurance: Lauren Lyster Interviews Mish at Wine Country Conference - This is an interview of me by Lauren Lyster of Yahoo! Finance regarding FDIC deposit insurance. I did not discuss deposit insurance in my presentation, however, deposit insurance was the focus of a five minute interview with Lauren Lyster. You can play the interview at the Daily Ticker site Don’t Depend on Bank Deposit Insurance: Mike Shedlock SitkaPacific Capital Management's Mike Shedlock, who is also the author of the Global Economic Analysis blog, says the Cyprus fiasco is an example of what can happen in a banking system that really can’t guarantee everything it’s promised. He argues these are issues that exist in the U.S. banking system too. “Here in the U.S. we have something like $3 trillion worth of monetary base, with $50 trillion worth of money out there that’s lent on that monetary base,” Shedlock told The Daily Ticker on the sidelines at the Wine Country Conference in Sonoma. “So how are we going to pay this all back? We can’t.”  Shedlock argues that deposit insurance - guaranteed by the FDIC for accounts up to $250,000 - can’t possibly cover all bank deposits. “The whole idea of insurance... is fraudulent,” he says.

Unofficial Problem Bank list declines to 786 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Apr 12, 2013.  Changes and comments from surferdude808:  Mergers were the theme of the week as four problem banks exited the list by merging on an unassisted basis. After removal, the list holds 786 institutions with assets of $289.4 billion. A year ago, the list had 944 institutions with assets of $375.3 billion. Next week, we anticipate the OCC will release its actions through mid-March 2013.

CoStar: Commercial Real Estate prices up 5.1% Year-over-year in February -  From CoStar: Pricing Recovery for Commercial Property Continues in February Despite Seasonal Volatility The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index—dipped by 0.7% and 1.4%, respectively, in the month of February 2013, reflecting a continuation of a seasonal pattern first observed in January, in which commercial real estate prices gave back some of the pricing gains from the surge in sales activity at the close of 2012. Despite the recent seasonal dip in activity, commercial real estate prices are still up significantly from year ago levels. The equal-weighted index increased 6.0% since February 2012, while value-weighted index expanded by 5.1% during the same period. This graph from CoStar shows the Value-Weighted and Equal-Weighted indexes. As CoStar noted, the Value-Weighted index is up 36.7% from the bottom (showing the demand for higher end properties) and up 5.1% year-over-year. However the Equal-Weighted index is only up 7.1% from the bottom, and up 6.0% year-over-year.

Can Dodd-Frank fix mortgage servicing if we don’t know what went wrong?: It’s critically important that we understand what went wrong in the financial market institutions that manage the mortgage market, both during the bubble and the crash. One of those institutions is the mortgage “servicing” industry, which is responsible for collecting payments and handling problems for securitized mortgages. It is at the center for those seeking justice for past wrongdoing, and crucial for writing new regulations to prevent trouble in the future. But a new obstacle to this has arrived on the scene: federal regulators blocking the release of records they have collected documenting illegal abuses. A heated exchange broke out at a Senate hearing this week, where Sen. Elizabeth Warren (D-Mass.) asked regulators from the Office of the Comptroller of the Currency and the Federal Reserve why they were not sharing the results of their investigations into mortgage servicing abuses and illegal activities with Congress and the people who were subject to abuses.

The Fed messed with the wrong senator - Dave Dayen - I have spent the better part of four years trying, with little success, to raise awareness about foreclosure fraud, the largest consumer fraud in the history of the United States.  In fact, there’s a whole little band of us writers and activists and foreclosure fighters. We have provided multitudes of evidence about fake documents, forged documents, illegal foreclosures, foreclosures on military members while they served overseas, foreclosures on homes with no mortgages, breaking and entering into the wrong homes, suicides by foreclosure victims, and above all the complete lack of accountability for these crimes and abuses. But instead of giving voice to thousands upon thousands of victims of illegal foreclosures, instead of documenting the banks’ criminal practices, maybe what we all should have done is simply let the Office of Comptroller of the Currency – part of the Treasury Department — and the Federal Reserve construct their own settlement with the banks. Then, when it utterly unraveled — as it has over the past couple of months — the unimaginable fraud heaped upon homeowners would get more attention than ever before, particularly from a frustrated and angry Congress led by Sen. Elizabeth Warren. Indeed, despite OCC and the Fed’s best efforts to protect banks from harm, they’ve actually exposed them like never before. If I didn’t know better, I’d think there were moles among this gang-that-couldn’t-regulate-straight.

The Foreclosure Settlement Scandal: It’s All About Paying Former Regulators Billions - In a Senate hearing last Thursday, Senator Elizabeth Warren revealed for the first time that it was the actual banks that engaged in the illegal foreclosure activities, not the so-called Independent Foreclosure Review consultants, that were allowed by the government to tally up and classify their own wrongdoing under various degrees of harm; deciding themselves how many people would receive anywhere from  $300 to $125,000 in restitution. The Government Accountability Office, which will send a witness to testify before a second Senate hearing on the matter this Wednesday, has issued two reports casting the process as botched and deeply flawed. But neither of those reports factually captures the depths of the settlement scam. The ethics of the  foreclosure investigation was further undermined by the banks being allowed to directly hire, negotiate their contracts with, and directly pay the consultants conducting the foreclosure investigations. The consultants also worked directly on the premises of the banks in many cases. In addition to Promontory’s deep conflicts, Federal regulators allowed it to hire an outside law firm to assist in its foreclosure investigation that was equally conflicted. Promontory selected Fried, Frank, Harris, Shriver & Jacobson LLP which had long, deep and broad involvement with Bank of America. According to public records, Bank of America has typically been one of Fried Frank’s largest clients.

Foreclosure Settlement Shows 4.2 Million Borrowers Shafted in 2009-2010 - The truth comes out on the mortgage fraud settlement.  The OCC announced the payout terms and for most people, they get less than $1,000 out of the deal.  Only in America can one be fraudulently foreclosed on, lose their home, have their credit ruined, only to be compensated less than $1,000 for the ordeal.  A whopping 4.2 million borrowers are part of this settlement for years 2009 and 2010.  Payments to 4.2 million borrowers are scheduled to begin on April 12 following an agreement reached by the Office of the Comptroller of the Currency and the Federal Reserve Board with 13 mortgage servicers. The agreement, which was reached earlier this year, provides $3.6 billion in cash payments to borrowers whose homes were in any stage of the foreclosure process in 2009 or 2010 and whose mortgages were serviced by one of the following companies, their affiliates, or subsidiaries: Aurora, Bank of America, Citibank, Goldman Sachs, HSBC, JPMorgan Chase, MetLife Bank, Morgan Stanley, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo.  Below is the OCC table of payouts, which doesn't include Goldman Sachs or Morgan Stanley yet.  Look at the number of people illegally foreclosed on when they were in bankruptcy versus the settlement amount they will actually get.  Only the first three categories in the below table can potentially receive more money over lost equity, but it is unclear if the individual has to sue to get it.  The vast majority of people given the run around while they lost their homes will get $300 and $400 dollars.

Foreclosure Review Hearings Show It’s Time to Burn Down the OCC - Yves Smith - There has already been a lot of good commentary on the Senate hearings on the misnamed Independent Foreclosure Reviews, notably by Pam Martens. I’ve finally gotten a transcript (it will be going up shortly at Corrente) which helps in reviewing it more carefully. Since Part 2 of the hearings take place this week, I’ll focus on some key issues that haven’t gotten the attention they warrant.  First is that even though Elizabeth Warren correctly has gotten a lot of praise for her pointed and persistent questioning, Sherrod Brown and Jack Reed also did exemplary jobs. What emerged from the hearings, particularly if you have been following the story, is the remarkably poor performance of the OCC. The only open question is to what extent that resulted from pure incompetence, and how much resulted from being so completely captured by the banks that it swallowed their PR, that hardly any homeowners had been harmed by bad servicing, and accordingly botched the design and execution of a coverup. No matter which theory you subscribe to, it paint a picture of an agency that is hopelessly bad at its job, which raises the question of why it should continue to exist.

Senator Jeff Merkley Says Federal Reserve and OCC Agreed to “Fictitious Accounting”: $6 Billion of Bank Foreclosure Settlement Could Amount to Just $12 Million - The past week has delivered revelation after revelation suggesting that the foreclosure frauds perpetrated against the American homeowner by the too-big-to-fail (or prosecute) banks, have been deviously matched with a corrupted settlement that has members of Senate hearings shaking their heads in astonishment. Yesterday brought the latest example of Federal bank regulators serving as lapdogs of their charges. The Senate Banking Committee’s Subcommittee on Housing, Transportation and Community Development held a hearing titled: “Helping Homeowners Harmed by Foreclosures: Ensuring Accountability and Transparency in Foreclosure Reviews, Part II.” Senator Merkley delivered the fireworks of the session. The settlement was to consist of $3.6 billion in cash being paid directly to more than 4 million aggrieved borrowers with another $5.7 billion in soft dollar assistance such as loan modifications, principal reduction and forgiveness of deficiency judgments. Yesterday’s bombshell, that the $5.7 billion may only amount to a paltry $12 million, was captured in this exchange at the hearing between Senator Jeff Merkley and Deborah Goldberg, Special Project Director of the National Fair Housing Alliance:

  • Senator Merkley: “In your testimony Ms. Goldberg, you note that ‘on a loan with an unpaid balance of $500,000, a loan modification that provides any amount of principal reduction – be that $1,000, $10,000, or $100,000 – will yield $500,000 worth of credit for the servicer.’ It’s hard for anyone apart from this process to truly believe that if you do a $1,000 reduction you get $500,000 credit. Yet, are you saying absolutely that’s the way it works?”
  • Ms. Goldberg: “That’s what it says in the settlement…”
  • Senator Merkley: “Well, I’d just like to point out that the roughly $6 billion in soft money that’s in the settlement, at that 500 to 1 rate, that is reduced down to $12 million.  Six billion goes to $12 million. That’s a vast difference.

Here’s How the Foreclosure Reviews Could Have Been Done Much Faster and Cheaper - Yves here. The OCC made the not-surprising confession in Senate hearings last week that if it had to do them all over again, it would have handled them differently. On the assumption that the OCC is sincere in its repentance, Michael Olenick offers one way to have executed the reviews at vastly lower cost than the botched process that resulted. However, there is no particular reason to believe that. As we and other observers said from the announcement of the Fed and OCC consent orders, the IFR was never intended to be a serious exercise. The approach of having bank-friendly consultants hired by the banks assured a compromised outcome. Sadly, Sherrod Brown unwittingly gave the OCC a pass on this issue:

Mortgage Relief Checks Go Out, Only to Bounce - When the bank account is running dry and the mortgage payment is coming due, the phrase “insufficient funds” is the last thing you want to hear. Now imagine hearing those two words when trying to cash a long-awaited check from the same bank that foreclosed on you. Many struggling homeowners got exactly that this week when they lined up to take their cut of a $3.6 billion settlement with the nation’s largest banks — lenders accused of wrongful evictions and other abuses. It is unclear how many of the 1.4 million homeowners who were mailed the first round of payments covered under the foreclosure settlement have had problems with their checks. But housing advocates from California to New York and even regulators say that in recent days frustrated homeowners have bombarded them with complaints and questions. The mishap is just the latest setback to troubled homeowners. It took more than two years to resolve a federal investigation into the foreclosure abuses. Even after the settlement in January, the checks were delayed for weeks.

The Fed’s Foreclosure-Relief Fail - Like far too many Americans, Debbie Marler of South Point, Ohio has her own foreclosure horror story. It involves one house, seven fraudulent mortgage assignments, three foreclosures, as many states, and five years. It ruined her career prospects, threatened her retirement security, and turned her life into what she calls “a living nightmare.” This week, Debbie walked to her mailbox and found what the federal government considers appropriate compensation for this odyssey of suffering at the hands of JPMorgan Chase, the nation’s largest bank. A check for $800.  The money is a product of the Independent Foreclosure Reviews, part of an enforcement action against 14 banks for crimes committed in the foreclosure process. The IFRs, shepherded by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, were supposed to give anyone in foreclosure during 2009 or 2010—a total of 4.2 million borrowers—the chance to have their case investigated by an independent reviewer, and to be compensated if the review revealed harm. But the OCC and the Fed found the program so flawed and mismanaged that they cancelled the reviews early this year and instead ordered the banks to pay $3.6 billion to all 4.2 million borrowers, whether they were harmed or not. The banks, not the regulators, determined how much cash each borrower would ultimately receive; the overwhelming majority received less than $1,000. Despite the paltry payouts, the meager data we have on the reviews shows that as many as 30 percent of all borrowers covered potentially suffered serious harm that led to the improper loss of their home. That matches up with Debbie’s story.

Foreclosure Settlement Checks Bounce In Latest Setback For Troubled Program: The foreclosure abuse settlement that was intended to speed relief to homeowners is ending as it began: with controversy and complaints that the program isn't working. On Tuesday, some of the first people to receive payouts under the $9.2 billion deal between federal regulators and the mortgage industry called into a government hotline to report that their bank would not cash their check, the Federal Reserve announced in a press release. Though the unspecified problem was resolved, the Federal Reserve noted, the episode is likely to further erode confidence in a program that has failed to deliver on almost every promise made by federal regulators. The Independent Foreclosure Review began in 2011 as part of a deal between bank regulators and 14 mortgage companies to resolve widespread accounts of bank mismanagement through all stages of the foreclosure process. After a long years of repeated delays and mounting concerns about both the cost and effectiveness of the case-by-case reviews, the program was abruptly dropped in most instances in favor of a blanket settlement, which included $3.6 billion in cash payments to 4.4 million homeowners who received a foreclosure notice in 2009 or 2010. Late last week, regulators announced that the first batch of payments were on their way. Most of these checks are small, with payouts averaging less than $1,000. A small number of borrowers, mostly military personnel who were improperly foreclosed on, will receive checks for the maximum amount of $125,000.

Independent Foreclosure Review Fiasco: OCC and Fed Decided Not to Find Harm - The last few days have had more and more ugly revelations emerge about the botched OCC and Fed Independent Foreclosure Review settlement, with some particularly important ones coming out of the hearings in Robert Menendez’s Senate Banking subcommittee today. We’ll turn to that soon, but first wanted to cover some issues that have correctly stirred ire among the NC commentariat.  First was the embarrassing confirmation of complaints all over the web that paying agent Rust Consulting did not have sufficient funds in its account to cover the first batch of settlement checks sent out Friday. And this isn’t the first time that Rust has sent out bum checks in a settlement. And in some jurisdictions, passing bum checks is a crime. What gives? Second is the fact that the envelopes themselves look like numerous scam letters, in particular debt collection letters and offers. Lisa Epstein kindly provided this example: People who sent in letters to the IFR are waiting for payments and will presumably be on the lookout for the settlement letters. But what about the everyone else? Third is that the check itself has stern “Valid for only 90 days” language (huh? why was that deemed necessary?) and the accompanying letter indicates that recipients will be liable for any taxes owed: The “if required” is unnecessarily ambiguous. Rust has said it will issue 1099s if the amount is $600 or higher. Why not say that in the letter proper?  Of course, taxes could be an issue for the folks who do get a check. Despite Rust Consulting’s protest that it was trying really really hard to find borrowers, we’ve gotten reports that contradict that already.

More Foreclosure Review Fiasco: Paying Agent Rust Consulting Sends Letters to Different Addresses Than on Borrower Letters, Refuses to Make Corrections - Yves Smith - David Einhorn is right: no matter how bad you think it is, it’s worse. Consider this pious statement by David Holland of Rust Consulting, the firm responsible for sending out settlement checks, at the Senate Banking subcommittee hearings on the Independent Foreclosure Review earlier this week:  We have a call center and we’re taking calls, you know, currently from people who have received the postcard notice as part of the settlement and now our first wave of checks that went out on Friday. So we do have a phone bank ready to answer any and all questions that we get from affected borrowers. We have on-site Spanish-speaking operators that can assist Spanish-speaking people, and there is a process by where we can use a third party to help translate I believe it’s up to 200 languages if somebody calls, you know, and has a language that we’re not supporting live with Spanish or English, and we can get an operator on the phone that can help them. In terms of the – your other question about, you know, are we making efforts to reach out to people? You know, we’ve had the data, the mailing data, for this group of people going back to the IFR and it went through several levels of mailing address correction that we performed. So when we had the settlement, we started with that address information and once again ran it through the national change of address database, and we’re mailing checks, you know, to the best address that we have currently. Some of those will be returned as undeliverable, and we will make other attempts to find better address information for those that are undeliverable. And there’s nothing in place yet, but we’ve had conversations about taking additional steps beyond what we’ve done in terms of address trace.

BANK-INDUCED DEFAULT: THE NEXT WAVE OF FORECLOSURE DEFENSE - How many cases can this impact?  As I see it, thousands.  Maybe tens of thousands.  In my experience, there are untold thousands of homeowners who were induced to default under promises of a loan modification, and all such homeowners can use this argument to not only contest foreclosure, but to ask that they be returned to the position they were in at the moment the homeowner stopped making payments.  That means not only that the bank can’t foreclose, but that all late charges, default interest, and attorneys’ fees are eliminated, and the homeowner can resume making normal, monthly mortgage payments. One notable aspect of the Second District’s ruling … the fact that three years has passed without the homeowner making monthly mortgage payments is not relevant.  Think about that for a minute.  There’s no obligation to get current.  Just begin making payments again, as if it were three years ago. Can this concept work for everyone?  Undoubtedly not.  Many homeowners were not the victims of “bank-induced default.”  But many were.  And now that we have precedent from a Florida appellate court, it’s time to start pushing the envelope on this defense, over and over again.

Mark Zandi: Washington’s New Housing Czar? - If the White House nominates economist Mark Zandi as the director of the regulator that controls Fannie Mae and Freddie Mac, there shouldn’t be too many surprises about what Zandi thinks about housing finance.  That’s because Zandi has been one of the most frequently quoted economists since the housing boom turned to bust. He’s a regular presence on cable television news shows, the industry panel circuit, and Capitol Hill testifying before lawmakers. Zandi, who The Wall Street Journal reported on Friday is under consideration to run the Federal Housing Finance Agency, has been an early and outspoken advocate for more aggressive action to stem the foreclosure crisis, championing efforts to boost refinancing and to force banks to write down mortgage principal. He also endorsed a bankruptcy overhaul known as “cram-down,” in which judges would be allowed to write down mortgage debt.Zandi has argued for the government to replace Fannie and Freddie with a public-private hybrid system whereby the U.S. would provide catastrophic risk insurance for certain loans, but he’s also advocated for the government to revisit how much it invests in housing. Here’s a look at some of Zandi’s public positions on housing over the past few years.

Why Zandi to FHFA could mean Obama mortgage principal reductions, mass refi plan - If Mark Zandi becomes the new regulator for Fannie Mae and Freddie Mac, it could potentially be one of the most significant economic events of President Obama’s second term. Unlike Ed DeMarco, the acting director of the Federal Housing Finance Agency, Zandi, currently chief economist of Moody’s Analytics, favors the use of principal reduction by Fannie and Freddie to help some of America’s 6-7 million underwater borrowers refinance their mortgages. Here is Zandi in March 2012: Principal reduction works,” said Mark Zandi, chief economist of Moody’s Analytics. “If someone gets a reduction in their principal amount, it gives them a real powerful hook to really fight to try to hold onto the home, even if things aren’t going financially right for them.” The re-default rate for homeowners who receive a principal reduction is lower compared with the rate on other types of mortgage modifications, Zandi said. “It saves taxpayers money and makes homeowners less likely to default,” said Zandi. Given the Obama Administration’s policy changes, “I’m now perplexed why DeMarco is not more fully engaged” in supporting principal reductions. Last May, Zandi outlined a plan of debt forbearance which would evolve into “earned” forgiveness if the homeowner kept current on the new mortgage for five years.

Did underwater mortgages kill the economy? - How much has the phenomenon of people being underwater on their mortgages – rather than simply the decline in home prices – held back growth?  A recently revised paper suggests that underwater mortgages have played a significant role in holding back the recovery. It is widely recognized that the fall in housing prices had a “wealth effect” that led homeowners across the country to cut back on spending.   Mian, Sufi and Rao measured how much more underwater borrowers probably  cut back on spending compared to borrowers without an overhang of mortgage debt. (More precisely, they measured how much homeowners cut back on auto spending for each dollar loss of housing wealth. But that’s important; the decline in auto sales was a significant part of the economic contraction.) The authors found that being underwater makes a big difference. As the chart below shows, Zip codes with fewer than 15 percent of homeowners only cut back only a little – spending only half a cent less for every dollar their home fell in value. But in Zip codes where more than 50 percent of homeowners were underwater, borrowers cut back five times as much – spending 2.5 cents less on car purchases for each dollar of reduced housing wealth.

Eminent domain to fix troubled mortgages makes a Calif. comeback (Reuters) - A controversial proposal to get local government officials to condemn distressed mortgages -- in the same way they might condemn a dangerous property -- is slowly gaining traction in some California communities, several months after it appeared the idea had been killed. After months of contentious debate, officials in San Bernardino County, in January killed the idea of seizing troubled home loans in a process known as eminent domain. They rejected the idea after fierce opposition from Wall Street trade associations and investors in mortgage-backed securities. But since then, San Francisco-based Mortgage Resolution Partners (MRP) has signed advisory agreements with five California towns that permit the financier-backed group to begin negotiating a sharp reduction in the dollar value of distressed loans that are held in securities administered by banks and mortgage servicing firms. MRP's strategy is to either achieve a voluntary agreement with servicers and banks to reduce the principal owed on loans that are valued at prices higher than the homes are worth, or use the club of eminent domain to forcibly seize the loans and restructure them at a lower price. MRP, which earns a $4,500 fee for every loan that is restructured, argues the threat of eminent domain gives municipalities, hard-hit by the housing crisis, an opportunity to help cash-strapped homeowners struggling to pay their mortgages. But Wall Street trade groups like the Securities Industry and Financial Markets Association and the Association of Mortgage Investors argue that forcibly condemning home loans and rewriting them is a violation of contractual agreements between a bank and a borrower

Lawler: Updated Table of Short Sales and Foreclosures for Selected Cities in March - Economist Tom Lawler sent me the updated table below of short sales and foreclosures for several selected cities in March.  Look at the right two columns in the table below (Total "Distressed" Share for March 2013 compared to March 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 many areas.   This is worth repeating: Imagine that the number of total existing home sales doesn't change or even declines 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 sharply, and conventional sales increase significantly. That would be a positive sign - and that is what is now happening. I think the two keys for existing housing are active inventory and the number of conventional sales.

DataQuick on California Home Sales: Foreclosures lowest since September 2007 - From DataQuick: California March Home Sales - An estimated 37,764 new and resale houses and condos sold statewide last month. That was up 31.5 percent from 28,719 in February, and up 0.8 percent from 37,481 sales in March 2012, according to San Diego-based DataQuick.It’s normal for sales to shoot up between February and March. California March sales have varied from a low of 24,565 in 2008 to a high of 68,848 in 2005. Last month's sales were 13.5 percent below the average of 43,648 sales for all the months of March since 1988, when DataQuick's statistics begin....Of the existing homes sold last month, 15.2 percent were properties that had been foreclosed on during the past year – the lowest level since foreclosure resales were 12.6 percent of the resale market in September 2007. Last month’s figure compares with 18.0 percent in February and 32.8 percent a year earlier. Foreclosure resales peaked at 58.8 percent in February 2009. Short sales - transactions where the sale price fell short of what was owed on the property - made up an estimated 21.5 percent of the homes that resold last month. That was down from an estimated 22.4 percent the month before and 24.5 percent a year earlier.

Neediest Homebuyers in U.S. Lifted by Japan  -  U.S. homebuyers are getting an unexpected boost from the Bank of Japan. As Governor Haruhiko Kuroda’s efforts to spark inflation by doubling the central bank’s bond purchases shrinks the available debt in his country, traders are betting that will bolster demand for U.S-owned Ginnie Mae’s mortgage securities, pushing up prices and lowering yields that guide home-loan rates. Japanese investors venturing into the U.S. home-loan market typically favor debt from Ginnie Mae, which helps finance borrowers with down payments as low as 3.5 percent, because it carries an explicit government guarantee, unlike Fannie Mae and Freddie Mac notes. Bond buyers from the Asian nation that has suffered three recessions in five years may increase their Ginnie Mae holdings by $50 billion annually as a result of the BoJ’s easing, Nomura Securities International estimates. “It’s amazing to see the spillover effects of different central bank actions,” “It could be quite stimulative to the U.S. economy by keeping mortgage rates low and assisting the Fed.”

MBA: Mortgage Applications Increase, Purchase Index highest since May 2010 From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey The Refinance Index increased 5 percent from the previous week and is at its highest level since mid-January of 2013. The seasonally adjusted Purchase Index increased 4 percent from one week earlier is at its highest level since May of 2010 and the adjusted Conventional Purchase Index increased 3 percent to the highest level since October 2009.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.67 percent from 3.68 percent, with points increasing to 0.50 from 0.43 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) decreased to 3.77 percent from 3.79 percent, with points decreasing to 0.27 from 0.36 (including the origination fee) for 80 percent LTV loans. The first graph shows the refinance index. There has been a sustained refinance boom for over a year. The second graph shows the MBA mortgage purchase index.  The 4-week average of the purchase index has generally been trending up over the last year, and the purchase index last week was at the highest level since May 2010.

Low-down loans coming back - An article in USA Today is noting an uptick in non-FHA backed loans, but with less than 20% down payment. Loans with down payments between 5% and 10% accounted for almost a fifth of the conventional loan offers that lenders made on the LendingTree online exchange in the first quarter, the article states. Compared to the same time last year, similar mortgages made up to 6% of the market share for new originations. And LendingTree is not the only website to notice. The number of lenders quoting non-FHA loans with down payments of 5% to 10% is almost double what it was two years ago, Zillow says in the article. The Home Equity Conversion Mortgage is one of the most popular forms of the reverse mortgage. Or at least it used to be, according to this article in Business Insider. It was the most popular because it offered the most money, often hundreds of thousands in dollars. But there are problems, the article states that while HECM loans are still available, they are now offered only with variable rates, which yield less immediate cash. "The FHA insures some 90% of reverse mortgages purchased from private lenders. It says about 58,000 loans — or nearly ten percent of its reverse mortgages — were in default in 2012," the article finds. "That's up from 2% ten years ago." The FHA now faces $2.8 billion in losses from various mortgage defaults and the institution may seek a federal bailout later this year.

Meet your new landlord, Wall Street - Another twist in the nation’s evolving housing market has hedge funds and multi-billion dollar companies becoming the landlords of the future, snapping up discounted single-family homes to rent out as they’ve done in the past with commercial properties and multi-family apartments. It’s been just a year since a spontaneous comment by billionaire Warren Buffett ignited the corporate world’s home-buying spree. But already the New York-based Blackstone Group has 20,000 homes nationwide, including 4,000 in Florida. Canada’s Tricon Capital, working with Lake Success Rentals, claims a bounty of 1,500 homes in South Florida and North Carolina. Colony Capital, based in Santa Monica, Calif., just announced its intention to buy 1,000 South Florida homes with a $2 billion nationwide investment. One of the more aggressive buyers in South Florida is the Connecticut-based Starwood Property Trust. Despite having “no news to share” when contacted by The Palm Beach Post for this story, the company has picked up more than 80 Palm Beach County homes at foreclosure auction since it began buying in late November.

Housing Trends, Short and Long Term - Home prices in the United States have been on a roller coaster ride for the last decade — soaring through 2005, then plunging in the steepest decline since the Great Depression. In 2012, though, prices began moving upward.  How solid is the incipient housing recovery, and what are the prospects for home prices in the decade ahead?  Some fresh clues about the short-term trends began arriving this week. And an analysis of the long-term prospects for home prices began appearing in a three-part series of columns in Sunday Business by Robert Shiller, the Yale economist.  First, the short-term trend: based, at least, on a report on Monday morning, it appeared to be taking a zigzag path rather than a straight line upward. According to the National Association of Home Builders/Wells Fargo Housing Market index, sentiment among home builders declined in April for the third consecutive month, to 42 from 44 the previous month. While that index climbed in 2012, it has not been above the neutral level of 50 since April 2006, when the market collapse was already under way.

Existing Home Inventory is up 9.6% year-to-date on April 15th - 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 Realtor (NAR) data is monthly and released with a lag.  However Ben at Housing Tracker (Department of Numbers) has provided 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 (to normalize the data).In 2010 (blue), inventory mostly 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 April 15th - inventory is increasing faster than in 2011 and 2012.

NMHC Apartment Survey: Market Conditions Tighten in April - From the National Multi Housing Council (NMHC): Apartment Markets Resume Growth According to NMHC Survey Apartment markets improved across all areas according to the National Multi Housing Council’s (NMHC) April Quarterly Survey of Apartment Market Conditions. All four indexes – Market Tightness (54), Sales Volume (55), Equity Financing (56) and Debt Financing (59) – came in above 50, which indicates improving conditions. This reverses last January’s findings, where Market Tightness and Sales Volume dipped below 50 for the first time since 2010. “While concern about overbuilding has begun to crop up, demand for apartment residences remains strong. New construction may have finally recovered fully, but most units under construction won’t be delivered until 2014 or later. The dearth of recent completions has contributed to relatively low product availability. As deliveries increase, we expect to see an even greater pick-up in sales volume.” Market Tightness Index rose to 54 from 45. The index has been above 50 for 12 of the past 13 quarters, with only January 2013 indicating contraction. One quarter of respondents saw markets as tighter, up from 16 percent last quarter.This graph shows the quarterly Apartment Tightness Index. Any reading above 50 indicates tightening from the previous quarter. This quarterly increase was small, but indicates tighter market conditions.

FNC: House prices increased 6.1% year-over-year in February, At 28 Month High - From FNC: FNC Index: February Home Prices at 28-month High The latest FNC Residential Price Index® (RPI) indicates that U.S. property values rose again in February, continuing a trend that began in the spring of 2012 which has become widely recognized as the beginning of the housing market’s recovery. In February, the FNC RPI recorded a 28-month high after rising for 12 straight months. For the 12 months through February, the index rose 6.1%−its fastest acceleration since July 2006. ... Despite rising prices, the supply remains limited as foreclosure activities decline.  The median sales-to-list price ratio in February was 95.0, up from 93.8 in January and 90.3 a year ago. Foreclosure sales were down to 20.2% from 26.5% 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 February home prices rose 0.2% from the previous month and were up 6.1% year-over-year from the same period in 2012. The year-over-year change continued to increase in February, with the 100-MSA composite up 6.1% compared to February 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. Even with the recent increase, the FNC composite 100 index is still off 29.1% from the peak

Why Home Prices Change (Or Don't) - Robert Shiller - WHAT prices will today’s home buyers get if they sell a decade from now? The problem is that modern economics has a poor understanding of past movements in home prices. And that makes the task of predicting the state of the market in 2023 challenging, at the very least. Still, we can learn something by analyzing the factors that affect home prices in general. There has been some good news lately: home prices have risen over the last year, and with those gains there has been a renewed sense of optimism. But do these price increases mean that homes are now good investments for the long haul? Unfortunately, no. We do know one thing from economic research: one-year home price increases, after correcting for inflation, have had almost no statistical relationship to increases 10 years down the road. Thus, the upturn last year is irrelevant to long-run forecasting. Booms are typically followed by busts, usually in far less than 10 years. In a decade, an entire housing boom, if there is one in inflation-corrected terms, is likely to have been reversed and completely washed away. Inflation has a major impact on long-term home prices. So do the costs of construction. We’ll examine these factors now, and turn to other important influences like speculative pressures and cultural and demographic trends in subsequent columns.

Shiller and the Upward Slope of Real House Prices - McBride - Professor Robert Shiller wrote in the NY Times: Why Home Prices Change (or Don’t) Home prices look remarkably stable when corrected for inflation. Over the 100 years ending in 1990 — before the recent housing boom — real home prices rose only 0.2 percent a year, on average. The smallness of that increase seems best explained by rising productivity in construction, which offset increasing costs of land and labor. Shiller's comment on the stability of real house prices is based on the long run price index he constructed for the second edition of his book "Irrational Exuberance". As I've noted before, if Shiller had used some different indexes for earlier periods, his graph would have indicated an upward slope for real house prices. Here was an earlier post on this: The upward slope of Real House Prices. The FHFA index used by Shiller was based on a small percentage of transactions back in the '70s. If we look at the CoreLogic index instead, there is a clear upward slope to real house prices. If Professor Shiller had used the Freddie Mac quarterly index back to 1970 (instead of the PHCPI), there would be more of an upward slope to his graph too. So it is important to understand that for earlier periods the data is probably less accurate.

Will land prices rise as population rises? -- Bill McBride, like many others, thinks that rising population implies that housing prices should have a long-term upward trend. I'm not sure he's right. McBride writes: A key reason for the upward slope in real house prices is because some areas are land constrained, and with an increasing population, the value of land increases faster than inflation...The bottom line is there is an upward slope to real house prices.I'm not sure this is true. The reasoning is intuitive: More people + same amount of land = land is more scarce. But here's why I think that reasoning is not quite right: Most of the value of land is the value of its proximity to centers of economic activity. Any urban economic model that incorporates geometry, geography, etc. will tell you this. In other words, New York City real estate is high-priced because New York City is an agglomeration of economic activity. It is not high-priced because an increasing number of people are being forced to live in New York City; you are legally free to move out to North Texas and get a nice ranch. People choose to live in the heart of New York City because of the economic (and social) opportunities offered by proximity to all the other people living there. So they're willing to pay lots for land. To use an old real estate cliche: Location, location, location.

Housing Starts in U.S. Surge on Multifamily Unit Demand -  New-home construction in the U.S. climbed in March to the highest level in almost five years, propelled by a surge in multifamily building that will support economic growth. Starts (NHSPSTOT) climbed 7 percent to a 1.04 million annual rate, the most since June 2008, from a revised 968,000 pace in February that was larger than previously reported, according to Commerce Department figures issued today in Washington. Other reports showed consumer prices unexpectedly dropped last month and factory production cooled. Near record-low mortgage rates and pent-up demand for rental units will keep residential construction a pillar of the expansion as concern grows that mandated cuts in planned federal spending will slow the world’s largest economy. A lack of inflation also means the Federal Reserve can keep pumping money into financial markets to help stem any slackening.

Housing Starts increase to 1.036 million SAAR in March - From the Census Bureau: Permits, Starts and Completions  - Privately-owned housing starts in March were at a seasonally adjusted annual rate of 1,036,000. This is 7.0 percent above the revised February estimate of 968,000 and is 46.7 percent above the March 2012 rate of 706,000. Single-family housing starts in March were at a rate of 619,000; this is 4.8 percent below the revised February figure of 650,000. The March rate for units in buildings with five units or more was 392,000. Privately-owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 902,000. This is 3.9 percent below the revised February rate of 939,000, but is 17.3 percent above the March 2012 estimate of 769,000..The first graph shows single and multi-family housing starts for the last several years. Multi-family starts (red, 2+ units) increased sharply in March.  Single-family starts (blue) declined to 619,000 in March (Note: February was revised up sharply from 618 thousand to 650 thousand). The second graph shows total and single unit starts since 1968.

Housing Starts Surge Due To Rental Housing Construction, Permits Miss Even With Seasonal Distortion - On the surface, today's Housing Data was good. Yes, there was a miss in the housing permits number, which declined from a downward revised 939K to 902K, on expectations of a strong 942K print, but let's ignore that: after all bad news is good news (although as the chart below shows even this number was highly skewed due to seasonal adjustments and the NSA number hasn't really budged in the past year). But look at the housing starts: what a whopper: at 1036K, this was the highest print since June 2008 - great news, right? Not really, because the one key indicator here, single-family units, actually posted a sizable drop from 650K in February to 619K in March. The offset: construction starts of multi-family, aka rental units, which in March was a whopping 392K, a 83K seasonally adjusted surge from February, which brings the total multifamily starts to the highest since January 2006 at 423K. Of course, in January 2006, single-family units hit a record 1823K, or about three times as much as the March 2013 number. Thank you Fed and QE for making yet another capital allocation mockery as America is increasingly shifting into a nation of renters. At this pace expect multi-family starts to surpass single unit starts in 4-6 months for the first time ever.

Housing Starts & Industrial Production Rose In March - Today’s updates on housing construction and industrial production for March bring mostly good news for growth, but with some caveats. First the good news: housing starts climbed more than expected, rising to the highest levels since 2008. Industrial production also increased last month, advancing 0.4% and beating expectations slightly. But the generally upbeat news was tempered by the downturn in new housing permits in March and a modest slide in the manufacturing component of industrial output. What’s going on? Let’s sort it all out with a closer look at the numbers. For residential construction, last month’s activity was clearly a robust signal that housing's recovery rolls on. Starts pushed north of the 1,000 mark (on a seasonally adjusted annualized basis) for the first time in nearly five years. But the party may set to cool for a while, or so the drop in newly issued housing permits implies. The divergence between rising starts and falling permits is especially stark when we look at rolling one-year changes for the two series. If permits are a reliable estimate of future construction activity, and they usually are, it seems safe to assume that the pace of growth for starts will cool in the months ahead. That doesn’t mean that the housing recovery has come to an end—far from it, or so the latest data suggests. But the softer side of permits in March hints at a slower rate of recovery for the near term.

Analysis: Weakness in Single-Family Construction - The Wall Street Journal’s Mathew Passy and Sarah Watt, economist at Wells Fargo, explore the increase in housing starts and muted consumer inflation in March.

Single Family Housing Starts Dead But Not Dead Enough – Multifamily Hot, But Not Too Hot -Housing starts rose in March. Most of the increase was in the multifamily sector. Single family starts remained at extremely weak levels, belying the much ballyhooed housing recovery. However, single family starts are getting a little ahead of the rate of sales. That could develop into a problem if new house sales don’t pick up, or if there’s a sudden increase in existing home inventory for sale.  The NAHB builder survey is not encouraging that March or April will show much of an increase new home sales.  The media reported the headline housing start numbers on a seasonally adjusted annualized basis as usual. That number came in at 1.036 million units versus the consensus of economic forecasters who expected 935,000.  The big underestimate is not surprising. Economic forecasting is fraudquackery, and the seasonally adjusted number in all economic data releases is pure fiction that’s virtually impossible to guess even by those with the best of intentions. Without looking at the actual data in graphical form, there’s no way to know whether the seasonally adjusted number accurately reflects the trend. Seasonally adjusted data is worthless from that perspective. In looking at the actual data it becomes instantly clear that the gain in total housing starts is predominantly due to multifamily starts, which soared in March to a record level for that month in this century.

A few comments on Housing Starts - Total housing starts in March were up 46.7% from the March 2012 pace, although some of that increase was due to a surge in multi-family starts in March (Multi-family starts are volatile month-to-month). Single family starts were up 28.7%.  That is a very strong year-over-year increase.  Even with this significant increase, housing starts are still very low. Starts averaged 1.5 million per year from 1959 through 2000, and demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will probably increase 50% or so from the current level (1.036 million SAAR in March).  There is some concern that multi-family starts are now too high.  That is possible, especially considering all the units currently under construction and not yet completed.  However single family starts are still near record lows, and most of the future increase in starts will probably be from single family starts.  Residential investment and housing starts are usually the best leading indicator for economy.  Nothing is foolproof as a leading indicator, but this suggests the economy will continue to grow over the next couple of years.Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment).

Builder Confidence declines in April due to higher costs - The National Association of Home Builders (NAHB) reported the housing market index (HMI) decreased 2 points in April to 42. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Rising Costs Put Squeeze on Builder Confidence in April Facing increasing costs for building materials and rising concerns about the supply of developed lots and labor, builders registered less confidence in the market for newly built, single-family homes in April, with a two-point drop to 42 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. “Supply chains for building materials, developed lots and skilled workers will take some time to re-establish themselves following the recession, and in the meantime builders are feeling squeezed by higher costs and limited availability issues,” While the HMI component gauging current sales conditions declined two points to 45 and the component gauging buyer traffic declined four points to 30 in April, the component gauging sales expectations in the next six months posted a three-point gain to 53 – its highest level since February of 2007.This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the April release for the HMI and the February data for starts (March housing starts will be released tomorrow). This was below the consensus estimate of a reading of 45.

Has the Household Sector Delevered? - It is generally agreed that the recent recession was a balance sheet recession. The slow recovery has been widely viewed as the result of economic agents reducing the use of leverage and otherwise repairing their balance sheets. However, attention has been focused almost exclusively on the balance sheets and behavior of the financial sector. Policy initiatives aimed directly at rebuilding household balance sheets have garnered headlines, but have had little impact. There has been little discussion of the riskiness of the asset side of the household balance sheets and the appropriate use of leverage by the household sector. Nonetheless, some commentators have suggested that households have completed the deleveraging process. This post reviews changes in the household sector’s balance sheet by focusing on the use of leverage by the household sector; the ratio of assets on the balance to the reported net worth of the household sector; and the asset mix on the household sector balance sheet. It parallels analyses of capital ratios and the balance sheets of the financial sector and financial institutions. The post raises three questions. How has the risk appetite of the household sector, as reflected in the leverage ratio and the asset mix, changed over time? Does it appear as if the household sector has completed the rebuilding of its balance sheet? What are the implications, if any, if the deleveraging of the household sector balance sheet is incomplete?

American Dream Eludes With Student Debt Burden: Mortgages -  Luke Nichter of Harker Heights, Texas, said he’s not a renter by choice. The Texas A&M University history professor’s $125,000 of student debt means he has no hope of getting a mortgage. Nichter, 35, who’s paying $1,500 a month on loans for degrees from Bowling Green State University in Ohio, is part of the most debt-laden generation to emerge from college. Two- thirds of student loans are held by people under the age of 40, according to the Federal Reserve Bank of New York, blocking millions of them from taking advantage of the most affordable housing market on record. The number of people in that age group who own homes fell by 4.6 percent in the fourth quarter from the third, the biggest drop in records dating to 1982. “Student debt has a dramatic impact on the ability to buy a house, and to buy the dishwashers and the lawnmowers and all the other purchases that stem from that,” said Diane Swonk, chief economist of Mesirow Financial. “It has a ripple effect throughout the economy.” The issue is being exacerbated by an explosion in the $150 billion private market for student debt with interest rates for some existing loans surpassing 12 percent. Unlike mortgage holders, borrowers have little hope of refinancing at lower rates. Interest on some new federal loans is set to double to 6.8 percent in July if Congress doesn’t extend the current rate, as they did last year.

How Student Debt Is Holding Back The Housing Market - College grads should be getting ready to live the American Dream and buy a house of their own. But they’re being held back by their crushing debt loads, meaning that fewer single family homes are being built. Students got caught in a housing market spiral: many parents who had once used home equity to help finance college costs had to pull back when the market tanked, leaving students to take on more debt, which is now getting in their way of owning their own homes. According to Bloomberg News, at the height of the housing boom, about $7 billion of equity was cashed out to pay for education.Bloomberg News also reports that young people hold the majority of student loan debt, but their rates of homeownership have cratered: Two- thirds of student loans are held by people under the age of 40, according to the Federal Reserve Bank of New York, blocking millions of them from taking advantage of the most affordable housing market on record. The number of people in that age group who own homes fell by 4.6 percent in the fourth quarter from the third, the biggest drop in records dating to 1982. […]The issue is being exacerbated by an explosion in the $150 billion private market for student debt with interest rates for some existing loans surpassing 12 percent. Unlike mortgage holders, borrowers have little hope of refinancing at lower rates.

Occupy Affiliate Aims at Abolishing Consumer Debt - Strike Debt, an affiliate of the Occupy movement, has devised a legal and what some consider ingenious way to abolish millions of dollars in consumer debt. The project is called Rolling Jubilee, and by raising money from other citizen activists to purchase debt on the secondary market, Rolling Jubilee has purchased millions of dollars in unpaid medical debt that is – or, was – owed by consumers. The secondary market is where companies go to sell bad debts, often for pennies on the dollar, to other companies who then try to collect the debts. These debt collectors often engage in relentless phone calls, letters, negative credit reporting, legal threats, actual litigation and other tactics to attempt to collect the debts. Sometimes these additional tactics involve breaking laws intended to protect consumers, media reports have shown. But instead of trying to collect the debts through practises that range from threatening letters to lawsuits, Rolling Jubilee is mailing letters to families saying that their debts have been forgiven. Thus the debt is actually being abolished for pennies on the dollar – a fraction of what it would have cost for the families to pay off the debts.

Retail Sales Rebound in March after Weak January-February - The headlines and mainstream media stories on retail sales were hysterical and misleading as usual, thanks again to screwy, fictitious seasonally adjusted data.  Retail Sales in U.S. Dropped in March by Most in Nine Months!” blared the Bloomberg headline. In fact, that’s not only misleading, in reality it’s false. Retail sales not only gained last month, the gain was pretty close to the average for any March of the last 10 years. And it was way better than January and February when sales were considerably worse than average.  So it was not worse than any month in the last nine months. Only the fictitious seasonally adjusted number declined. That number is not real. It misleads everybody who isn’t paying attention to the actual data, which is everybody but you, me, and a few others reading this post. According to the Commerce Department’s March Advance Retail Sales Report, retail sales fell by 0.4% in March (month to month)  but were up 2.8% annually. Those are seasonally adjusted estimates, which will be revised several times before they are finalized. Neither figure is adjusted for inflation. On a month to month basis March is always an up month.  This year, the monthly gain was 13%. That was better than March 2012 at +10.6%, and just slightly less than the 13.6% gain in 2011.  The average change for the 10 year period from 2003 to 2012 was an increase of 12.6%. This year was consistent with the 10 year average for the month. The hysteria prompted by the headline numbers is misplaced. It wasn’t a bad month at all. In fact, it was better than average.

GOLDMAN: The US Consumer Has Suffered A Setback - Goldman's chief economist Jan Hatzius — who has been optimistic that the US economy will turn a corner in 2013 — is the latest to talk more about signs of a soft patch. In a new note, he talks about 'A Consumption Setback.' He writes: Real consumer spending growth in the first quarter is tracking 2-1/2%, much stronger than we had expected at the start of the year. But the March retail sales and the dip in consumer sentiment in early April suggest that consumption is entering the second quarter on a weak note. The personal saving rate also looks somewhat low relative to our model, which is based on household wealth, bank lending standards, and labor market conditions. The most plausible explanation is that we are seeing a delayed impact from the January payroll tax hike. If this is the right explanation, we could see a couple of quarters of weaker consumption growth in the 1%-2% range, despite the increase in household wealth and the more recent decline in gasoline prices. Combined with the hit from the sequester to federal spending, this would probably make it difficult for real GDP to grow much more than 2%, even if homebuilding and business investment continue to perform well. Still, Hatzius remains optimistic about growth and even US consumption growth in the latter half of the year, as the benefits of America's low level of debt service and deleveraging kick in.

Poll: Public Pessimism on Economy Is Increasing - For the third year in a row, the nation’s economic recovery has hit a springtime soft spot. Reflecting that weakness, only 1 in 4 Americans now expects his or her own financial situation to improve over the next year, a new Associated Press-GfK poll shows. The sour mood is undermining support for President Barack Obama‘s economic stewardship and for government in general. The poll shows that just 46 percent of Americans approve of Obama’s handling of the economy while 52 percent disapprove. That’s a negative turn from an even split last September — ahead of Obama’s November re-election victory — when 49 percent approved and 48 percent disapproved. Just 7 percent of Americans said they trust the government in Washington to do what is right “just about always,” The downbeat public attitudes registered in the survey coincide with several dour economic reports showing recent slowdowns in gains in hiring, consumer retail spending, manufacturing activity and economic growth. Automatic government spending cuts, which are starting to kick in, also may be contributing to the current sluggishness and increased wariness on the part of both shoppers and employers.

Gloomy Consumers May Suffer from Media Overload - The Reuters/University of Michigan‘s preliminary reading of April consumer sentiment unexpectedly dropped to its lowest reading since last July. Economists at BNP Paribas pointed out the decline in the index mirrored the drop in the “news heard” reading. That tracks the difference between favorable and unfavorable news heard about the economy. Its large eight-point drop meant more people in early April reported hearing bad news. The link between news and sentiment isn’t new. But today’s media may have put the link into overdrive. A consumer has one reaction after hearing about a weak employment report on the evening news and again in the newspapers, but may experience a hyper-reaction when the weak jobs number is on traditional media plus covered on cable news, posted on a few blogs, headlined on an aggregator’s website and tweeted by economists. To try to filter out the overexposure, economists at UBS developed the “blasé barometer.” The barometer compares the volatility of sentiment readings with the swings in pertinent underlying economic data. If the barometer is falling, people are blase about the news. If it is rising, it suggests sentiment reflects an overreaction to news. Right now, the barometer is shooting up like a rocket.

P&G taking longer to pay suppliers, offers financing - Procter & Gamble Co is increasing the time it takes to pay for supplies and offering financing to help mitigate the impact a longer payment cycle could have on small and midsize businesses, the household products maker told suppliers earlier this month.P&G plans to increase the time it takes to pay suppliers by as much as 30 days, which could free up to $2 billion in cash, the Wall Street Journal reported, citing people familiar with the matter. The world's largest household products company is seeking to pay its bills in 75 days from the average of 45 days it takes currently, the paper said. In a letter dated April 5 on a P&G website for suppliers, the company said that its "working capital program will focus on moving to longer payables with our external business partners."

Hotels: Occupancy Rate tracking pre-recession levels - Another update on hotels from STR: US results for week ending 13 April In year-over-year comparisons, occupancy was up 3.2 percent to 64.1 percent, average daily rate rose 7.2 percent to US$110.88 and revenue per available room increased 10.7 percent to US$71.04. The 4-week average of the occupancy rate is close to normal levels. Note: ADR: Average Daily Rate, RevPAR: Revenue per Available Room.The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.

Weekly Gasoline Update: Seventh Week of Falling Prices - It's time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Gasoline prices fell again last week. Rounded to the penny, the average for Regular dropped seven cents and Premium six cents. This is the seventh week of declines after eleven weeks of price rises. Since their interim high in late February, Regular is down 24 cents and Premium 23 cents. According to, one state, Hawaii is averaging above $4.00 per gallon, unchanged from last week. California and Alaska are in $3.90 to $4.00 range.

Inflation Comes in Below Forecast, Thanks Mostly to Lower Gasoline Prices - The Bureau of Labor Statistics released the latest CPI data this morning. Year-over-year unadjusted Headline CPI came in at 1.47%, which the BLS rounds to 1.5%, up from 1.98% last month (rounded to 2.0%). Year-over year-Core CPI (ex Food and Energy) came in at an even 1.89% (rounded to 1.9%), down from last month's 2.00%. 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) decreased 0.2 percent in March on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.5 percent before seasonal adjustment.  The all items seasonally adjusted decrease was primarily due to a 4.4 percent decline in the gasoline index. The indexes for electricity and fuel oil declined as well, as the energy index fell 2.6 percent in March after a 5.4 percent increase in February. The food index was unchanged in March, with the index for food at home declining slightly.  The index for all items less food and energy increased 0.1 percent in March, after a 0.2 percent increase in February. The indexes for shelter, used cars and trucks, medical care, personal care, and airline fares all rose in March. These increases more than offset declines in the indexes for apparel, household furnishings and operations, and tobacco.  .  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.

US CPI Lower in March on Falling Gasoline Prices - The US Consumer Price Index fell in March at an annual rate of -2.14 percent. The decrease reversed a sharp upward spike in February, when the annualized inflation rate rose to over 8 percent. Almost all of the volatility in recent months has been due to ups and downs in energy prices, especially gasoline. Energy prices have a weight of over 9 percent in the CPI. Energy prices rose by 5.4 percent in February, and decreased by 2.6 percent in March. Energy prices are strongly influenced by events in the global economy. For that reason, policymakers at the Fed and elsewhere pay more attention to measures of underlying inflation. One such measure is the core CPI, published by the Bureau of Labor Statistics. The core CPI, which strips out food and energy prices, rose at an annual rate of 1.33 percent in March. Another measure of underlying inflation is the 16-percent trimmed mean CPI published by the Cleveland Fed. That index drops the 8 percent of prices that increase most in a given month, along with the 8 percent that increase least or decrease most. The 16-percent trimmed mean index rose at an annual rate of just 0.72 percent in March. The following chart shows all three measures. The Fed considers that inflation of 2 percent is consistent with its mandate to maintain price stability. In March, both measures of underlying inflation were well below the 2 percent target. Furthermore, estimates of expected inflation also remain well below 2 percent over both 5- and 10-year time horizons. In view of those data, most observers consider it unlikely that the Fed will tighten monetary policy any time soon.

Gas Price Drop Prompts Biggest Deflationary CPI Miss In 7 Months - Thanks, it seems, to the global economic slowdown driving energy prices lower, the Consumer Price Index just printed at -0.2% MoM, notably below expectations (its biggest miss in 7 months) and well down from last month's +0.7%. The main driver of this deflationary spike is the drop in gasoline prices -4.4% MoM. Year-over-year CPI (ex Food and Energy) lagged expectations also (1.9% vs 2.0% exp.) meeting the Fed's oh-so-well engineered mandates. However, the 1.9% rise is the slowest pace of inflation in 20 months. On the bright side, the price of used cars is rising at its fastest pace in months thanks to the 97-month term loans and government credit creation.

In the Inland Empire, an industrial real estate boom - The clamor for these big buildings is so intense in San Bernardino and Riverside counties that developers are erecting more than 16 million square feet of warehouses on speculation, meaning they are gambling that buyers or renters will rush forward to claim the buildings by the time they are complete. Southern California, with its enormous population and teeming seaports, has long been a vital hub for major retailers and manufacturers ... But with Los Angeles and Orange counties essentially full, the Inland Empire with its wide-open spaces is now where the big new buildings are flying up. Los Angeles County's industrial vacancy is a mere 2.5%, the lowest in the country, and some of the priciest industrial property in the U.S. is around Los Angeles International Airport. Orange County is the second-tightest market in the U.S., with 3.5% vacancy. he two counties and the Inland Empire have a combined total of more than 1.65 billion square feet of industrial property, which is twice as big as the next largest market, Chicago.

LA area Port Traffic decreases year-over-year in March - Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for March since LA area ports handle about 40% of the nation's container port traffic. The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.   On a rolling 12 month basis, inbound traffic was up 2% in March, and outbound traffic down slightly, compared to the rolling 12 months ending in February.  In general, inbound traffic has been increasing slightly recently, and outbound traffic has been mostly moving sideways. The 2nd graph is the monthly data (with a strong seasonal pattern for imports).

Railcar Loadings Drop Most Year-To-Date Since Crisis -  While the rise in railcar loadings (whether driven by the rotation from pipelines to rail or a 'real' recovery in the economy) has been impressive off the lows and had got back to pre-recession levels, this year is not looking so good. The typical seasonal pattern - somewhat obviously - starts around mid January and rises all year tending to roll over around the start of November into holiday season. 1995 was the last year that intermodal railcar loadings rolled over notably away from this pattern. Since mid-January, 2013 has seen a notably different pattern from the norm - worse than 2009's abrupt plunge.

New York Manufacturing Activity Barely Expands - New York manufacturing activity is barely expanding this month, although hiring picked up, the Federal Reserve Bank of New York‘s Empire State Manufacturing Survey showed Monday. The weak reading should add fuel to the debate about a spring swoon within the U.S. economy. The Empire State’s business conditions index declined to 3.05 in April from 9.24 in March. A reading above 0 indicates expansion. April’s was the third consecutive positive reading in the index.

Just Released: April Empire State Manufacturing Survey - NY Fed -According to the most recent Empire State Manufacturing Survey, manufacturing conditions are continuing to improve in New York State, but only barely. The headline general business conditions index from the April 2013 report was 3.1—down 6 points from March and not much above zero. The positive reading indicates that activity is growing, though its decline suggests that the pace of growth has slowed. Employment indexes, however, climbed higher and suggested a modest increase in hiring and hours worked. It will be particularly important to see how next month’s report turns out to get a clearer sense of whether regional manufacturing conditions are getting better or if the slow growth signaled by the past few reports is fizzling out.  This month’s survey also included supplementary questions on employment issues. One of the questions asked manufacturers how difficult it is to find workers with specific types of skills. As was the case in last April’s survey, when these questions were also asked, workers with advanced computer skills were the hardest to find. This was also the case in earlier surveys. The second hardest-to-find skill set turned out to be punctuality and reliability, surpassing basic math skills (which had ranked second in last year’s survey). Interestingly, compared with past reports, companies appear to be having a bit less trouble finding workers with interpersonal and basic English skills..

NY Fed: Empire State Manufacturing index declines, Shows slight expansion in April - From the NY Fed: Empire State Manufacturing Survey The April 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved slightly. The general business conditions index fell six points but, at 3.1, remained positive for a third consecutive month. Similarly, the new orders index was lower than last month but still positive, dipping six points to 2.2, and the shipments index fell to 0.8. Employment indexes pointed to some firming in labor market conditions. The index for number of employees rose four points to 6.8, indicating a modest increase in employment levels, and the average workweek index rose six points to 5.7, indicating a modest increase in hours worked. This suggests some expansion, but was below the consensus forecast of a reading of 7.5.

Empire Fed Latest Economic Disappointment, Drops To Lowest Since January, Misses Expectations -  As if the world needed yet another confirmation that the US economy is floundering (even if it means a new all time high for the now largely laughable farce formerly known as the S&P500), it just got it courtesy of the April Empire Fed Mfg Index, which dropped for the second month in a low to the lowest since January, printing at just 3.05, down from 9.24, and well below expectations of 7.00. Supposedly this too will be blamed on either balmy April weather, or Easter. The key New Orders index dropped from 8.18 to 2.20, which in itself may be insufficient to push the S&P to new all time highs, so the Shipments drop from 7.76 to 0.75 should definitely top the ES well into the green. The only piece of bad news for the "market" was the Number of Employees, which rose from 3.23 to 6.82. Although this may be one of those reports where bad data is great, but good data is greater.

Philly Fed Manufacturing Index Barely Positive - Business conditions for mid-Atlantic manufacturers remain barely positive this month, according to a report released Thursday by the Federal Reserve Bank of Philadelphia. The Philadelphia Fed’s index of general business activity within its regional factory sector slowed to 1.3 in April from 2.0 in March. Economists surveyed by Dow Jones Newswires expected the latest index to be little changed at 2.5. Readings under zero denote contraction, and above-zero readings denote expansion. The Philadelphia report follows another survey showing an April slowdown in manufacturing. On Monday, the New York Fed said its survey of regional factories showed conditions slowed significantly this month but remained in expansionary territory.

Philly Fed Manufacturing Survey Shows Slower Expansion in April - From the Philly Fed: April Manufacturing Survey Manufacturers responding to the Business Outlook Survey reported near steady business activity in April. The indicator for overall activity remained slightly positive this month, but other broad indicators were mixed. Indicators for new orders and employment were weaker this month. The survey's broad indicators of future activity suggest that firms expect continued growth, but optimism waned compared with last month. The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, was 1.3, just slightly lower than the reading of 2.0 in March ... The demand for manufactured goods remained weak, with the current new orders index declining from 0.5 to -1.0. Labor market conditions showed continued signs of weakness, with indexes suggesting lower employment overall. The employment index decreased from 2.7 in March to -6.8 this month, its first negative reading in three months. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through April. The ISM and total Fed surveys are through March.

Philly Fed Business Outlook: Essentially Flat Growth - The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. Today's gauge of General Activity remains positive at 1.3 but is fractionally lower than last month's 2.0. However, the 3-month moving average came in at -3.1, the tenth negative reading in eleven months. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. Here is the introduction from the Business Outlook Survey released today:  Manufacturers responding to the Business Outlook Survey reported near steady business activity in April. The indicator for overall activity remained slightly positive this month, but other broad indicators were mixed. Indicators for new orders and employment were weaker this month. The survey's broad indicators of future activity suggest that firms expect continued growth, but optimism waned compared with last month.... The indicators for general activity and new orders remained near their levels in March, but shipments showed some improvement. Employment levels edged lower, however. Although firms expect continued growth over the next six months, the survey's measures of overall expectations suggest diminished optimism this month. Firms continue to indicate modest hiring plans. (Full PDF Report)  The first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as an indicator of coincident economic activity.

Philly Fed Is Latest Economic Miss: Number of Employees Dumps, Inventories Plunge - Hardly anyone will be surprised to learn that moments ago we just got the latest disappointing economic indicator for an economy that is clearly accelerating in its deterioration. As expected, the April Philly Fed was the latest economic indicator miss, printing at 1.3, down from last month's 2.0, and below expectations of am increase to 3.0. And while the key New Orders reverted back into negative territory after one brief month positive, it was the other components of the Index that a far more pronounced deterioration, namely the Number of Employees which dumped from 2.7 to -6.8, the biggest drop since May 2012, boding ill for the upcoming April NFP number, as well as the Inventories which plunged from 0.0 to -22.2, which means downward Q1 GDP revisions will be forthcoming from every side momentarily as the Wall Street lemmings are forced to resume trimming their exuberance once more just like in 2012... and 2011... and 2010.

Fed: Industrial Production increased 0.4% in March - From the Fed: Industrial production and Capacity Utilization Industrial production rose 0.4 percent in March after having increased 1.1 percent in February. For the first quarter as a whole, output moved up at an annual rate of 5.0 percent, its largest gain since the first quarter of 2012. Manufacturing output edged down 0.1 percent in March after having risen 0.9 percent in February; the index advanced at an annual rate of 5.3 percent in the first quarter. Production at mines decreased 0.2 percent in March and edged down in the first quarter. In March, the output of utilities jumped 5.3 percent, as unusually cold weather drove up heating demand. At 99.5 percent of its 2007 average, total industrial production in March was 3.5 percent above its year-earlier level. The rate of capacity utilization for total industry moved up in March to 78.5 percent, a rate that is 1.2 percentage points above its level of a year earlier but 1.7 percentage points below its long-run (1972--2012) average. This graph shows Capacity Utilization. This series is up 11.5 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 78.5% is still 1.7 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.8% in December 2007.  The second graph shows industrial production since 1967. Industrial production increased in March to 99.5. This is 18.8% above the recession low, but still 1.3% below the pre-recession peak.

Industrial Production Rises 0.4% on Utilities for March 2013 -  The March 2013 Federal Reserve's Industrial Production & Capacity Utilization report shows a monthly increase of 0.4% in industrial production.  March's increase would have been non-existent if the weather hadn't turned cold.  Utilities' output increased 3.5% for March as mining fell -0.2% and Manufacturing dropped -0.1% for the month.  February was revised up to a 1.1% increase, buoyed again by utilities.  Q1 2013 gives an annualized output gain of 5.0%, the largest since Q1 2012.  The Q1 output gain was spurred by utilities, which by itself grew 10.5% for Q1 2013. The G.17 industrial production statistical release is also known as output for factories and mines. Total industrial production has increased 3.5% from March 2012 and is still down -0.5% from 2007 levels, going on past an incredible five years.  Here are the major industry groups industrial production percentage changes from a year ago.

  • Manufacturing: +2.5%
  • Mining:             +3.8%
  • Utilities:           +10.5%

Manufacturing alone dropped -0.1%  for March, but was revised to 0.9% for February.  Q1 2013 has an 5.3% annualized percent change for manufacturing overall.   Below is a graph of just the manufacturing portion of industrial production.

Durable manufacturing, motor vehicle production reach record highs in Q1, and oil output is highest in 20 years - The Federal Reserve released data today on US industrial production for March, here are some highlights:

  • 1. The output from America’s factories, mines and utilities increased in March by 3.5% compared to a year ago, and by 5.6% at an annual rate during the first quarter of 2012.
  • 2. Manufacturing output increased by 2.94% year-over-year through March, and by 4.9% at an annual rate over the last six months.
  • 3. One of the strongest factory sectors for growth over the last year has been production of “Motor Vehicles and Parts,” which increased by 10.2% on an annual basis through March (data here).
  • 4. Boosted by record motor vehicle production, the Durable Manufacturing component of industrial production in March fell just slightly from the all-time record high in February, and increased by 4.0% above a year ago.
  • 5. One of the strongest sectors for growth in March was the Crude Oil component of industrial production, which rose last month to the highest level since October 1992, more than twenty years ago (see bottom chart above, data available here). Compared to a year earlier, crude oil production increased by more than 13% in March, which was the seventh straight month that crude oil output increased by 13% or more.

Thinking About Employment: Why Aren't Employers Hiring More People? - I want to return to this chart from MacroBlog:Here is an explanation of the above chart from Macroblog: The circle at the perimeter of this chart represents labor market conditions that existed just before the recession. We have dated this as late 2007. The inner circle represents the state of affairs when payroll employment reached its trough in late 2009. The oddly shaped red figure inside the perimeter depicts where each of the indicators was in March 2011 relative to the benchmarks. The purple figure depicts the state of the labor market in March 2012. Finally, the blue figure shows where the indicators were as of March 2013. All of the indicators are scaled so that outward movement represents improvement. The progression of these point-in-time snapshots provides us with a picture of how labor market conditions have evolved over the past four years.As I previously mentioned, I think this is the best chart on employment out there, largely because it shows how complicated this concept is.  Unfortunately, we (Bonddad Blog included) tend to only focus on two employment statistics: weekly unemployment claims and the monthly jobs report.  And the monthly jobs report has become subject to a fair amount of political skew at the expense of actual analysis.  In contrast, the above chart recognizes there are numerous factors and statistics that go into a full interpretation of the jobs market and what is actually happening.

Vital Signs Chart: Utilities and Mines Push Industrial Output Higher - Cold weather boosted U.S. industrial output in March. The Federal Reserve’s Industrial Production Index — measuring output at factories, utilities and mines — rose a seasonally adjusted 0.4% from February. The increase came from a 5.3% jump in utility output amid stronger heating demand during the month. Manufacturing output and mining output declined.

Is the successor to manufacturing jobs … manufacturing?: When the factory jobs disappear, what comes next? That’s one of the most important economic questions America has confronted over the last decade-plus – where are the new industries, the new big ideas, the new jobs that should be springing up to replace the millions of manufacturing jobs lost to outsourcing and automation? Obama’s acting commerce secretary, Rebecca Blank, announced a small-bore program Wednesday that hopes to plant the seeds of new, advanced manufacturing activity in cities across the country. (If the goal sounds familiar, it is – Obama has been preaching the virtues of advanced manufacturing since he first ran for president, like so many other American politicians.) This year, the program will offer grants to 20 to 25 communities, of about $200,000 each, to write “strategic plans” for their advanced manufacturing futures. The plans are supposed to say what each region is good at, what sort of product it might become a manufacturing hub for, and what federal help the region needs to make that happen. Blank calls that investing in “industrial ecosystems.”

Are the Good Jobs Gone? - Among those paying serious attention to the economic dilemmas facing the United States and other advanced nations, uncertainty is the only constant. President Obama faces powerful forces not under his control. The susceptibility of these forces to governmental action is hard to fathom, and in any case many of the best ideas appear to be politically impossible. Economists are of many minds on the question of whether government policies can reverse negative trends. David Autor, an economist at M.I.T., argued in an email to The Times that “we’re not going to rapidly reverse the tide with any conceivable policy that a mainstream political party or even a mainstream economist would adopt.” Autor believes that “middle-skill jobs,” the source of employment crucial to lessening inequality and enhancing economic and social mobility, “are not,” as some argue, “slated to disappear.” In a paper, “The Task Approach to Labor Markets: An Overview,” Autor writes:  To take one prominent example, medical paraprofessional positions—radiology technicians, phlebotomists, nurse technicians, etc.—are a numerically significant and rapidly growing category of relatively well-remunerated, middle skill occupations. While these para-professions do not require a college degree, they do demand one to two years of post-secondary vocational training.

Getting Back to Full Employment - Getting back to full employment—not debt, deficits, sequester, debt ceilings—is what we ought to be talking about (along with R&R, of course).  I’m happy to say, in fact, that in my travels outside this benighted town (DC), it’s the question I get asked most often, What do I mean by full employment?  Well, there’s the NAIRU definition (Non-Accelerating Inflationary Rate of Unemployment)—that’s the lowest unemployment rate consistent with stable price growth, estimated to be 5.5% right now by CBO.  Is that the right number?  Probably not—we’ve historically set the NAIRU too high, a bias that worries more about high inflation than weak job growth.  Note the class bias embedded in there—high inflation hurts asset-holdings more than high unemployment, the latter of which hurts wage earners more; though spiraling inflation hurts everyone. I’d define it—full employment—more by contemporary movements in key variables: it’s the unemployment rate consistent with broadly rising real earnings, or the rate at which resources are fully engaged in the economy such that lower unemployment would not engage more people (or capital), it would just raise prices.But, whatever.   I’d be perfectly happy to go with 5.5% for awhile.  So how do we get there from here?

More Losers Than Winners in America's New Economic Geography - The trickle-down effect disappears once the higher housing costs borne by less skilled workers are taken into account. The benefits of highly skilled regions accrue mainly to knowledge, professional, and creative workers. While less-skilled blue-collar and service workers also earn more in these places, more expensive housing costs eat away those gains. There is a rising tide of sorts, but it only lifts about the most advantaged third of the workforce, leaving the other 66 percent much further behind. The full effects of talent clustering are even more insidious.  "[t]he combination of desirable wage and amenity growth for all workers causes large amounts of in-migration, as college workers are particularly attracted by desirable amenities, while low skill workers are particularly attracted by desirable wages." But this leads directly to higher housing costs, which according to Diamond "disproportionately discourage low skill workers from living in these high wage, high amenity cities." This creates an additional level of inequality — inequality of well-being — where more skilled workers not only take home more money, but benefit from better neighborhoods, superior amenities, and better schools. This well-being inequality, Diamond explains, is an additional 20 percent higher than can be explained by the simple wage gap between college and high school grads.

Weekly Initial Unemployment Claims increase to 352,000 - The DOL reports: In the week ending April 13, the advance figure for seasonally adjusted initial claims was 352,000, an increase of 4,000 from the previous week's revised figure of 348,000. The 4-week moving average was 361,250, an increase of 2,750 from the previous week's revised average of 358,500.  The previous week was revised up from 346,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 361,250 - the highest level since January. Weekly claims were above the 347,000 consensus forecast.

Weekly Unemployment Claims Rise Slightly, Up by 4,000 - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 352,000 new claims number was a 4,000 increase from the previous week's upwardly revised 348,000. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, rose by 2,750 to 361,250. Here is the official statement from the Department of Labor: In the week ending April 13, the advance figure for seasonally adjusted initial claims was 352,000, an increase of 4,000 from the previous week's revised figure of 348,000. The 4-week moving average was 361,250, an increase of 2,750 from the previous week's revised average of 358,500.  The advance seasonally adjusted insured unemployment rate was 2.4 percent for the week ending April 6, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending April 6 was 3,068,000, a decrease of 35,000 from the preceding week's revised level of 3,103,000. The 4-week moving average was 3,083,000, a decrease of 2,250 from the preceding week's revised average of 3,085,250.  Today's seasonally adjusted number was slightly below the consensus estimate of 355K. Here is a close look at the data over the past few years (with a callout for the several months), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks.

Hiring Momentum Slows for College Grads - The hiring picture for college graduates looks about the same as last year, according to a new report released on Thursday by the National Association of Colleges and Employers. The nonprofit organization said that its survey indicates a 2.1% increase in the hiring of college graduates from the class of 2013. This is the smallest uptick since 2009, when projections spiraled downward to a 21.6% decrease in hiring. “The momentum that has built in college hiring in 2011 and 2012 has kind of come to an end here in 2013,” said Edwin Koc, who oversees research studies at NACE. “So we’re hitting a stagnant period right now.” The director of strategic and foundation research called the results from about 200 employers “somewhat disappointing,” noting that a survey last fall predicted a 13% increase in hiring. The shift, he said, is due to the softening of the economy at the end of the first quarter and the beginning of the second quarter this year.

Part-Time Work Becomes Full-Time Wait for Better Job - The American economy has generated 30 straight months of job growth. But for millions of people looking for more work and greater income, that improvement provides little solace. In March, 7.6 million Americans who want more hours were stuck in part-time jobs, about the same as a year earlier and three million more than there were when the recession began at the end of 2007. These almost invisible underemployed workers do not count toward the standard jobless rate of 7.6 percent. A broader measure, which includes the involuntary part-timers as well as people who want to work but have stopped looking, stands at 13.8 percent. “The problem is that people are accepting part-time pay because they have no other choice.” Even for those who have been able to take advantage of the better job market, the opportunities have not been good. Since the economy began to recover almost four years ago, hiring has been concentrated in relatively low-wage service sectors, like retailing, home health care, and food preparation, and in contingent jobs at temporary-hiring companies. For example, nearly one out of every 13 jobs is at a restaurant, bar or other food-service establishment, a record high.

The Terrifying Reality of Long-Term Unemployment - There are two labor markets nowadays. There's the market for people who have been out of work for less than six months, and the market for people who have been out of work longer. The former is working pretty normally, and the latter is horribly dysfunctional. That was the conclusion of recent research I highlighted a few months ago by Rand Ghayad, a visiting scholar at the Boston Fed  Now, what Ghayad and Dickens found is that the Beveridge curves look normal across all ages, industries, and education levels, as long as you haven't been out of work for more than six months. But the curves shift up for everybody if you've been unemployed longer than six months. In other words, it doesn't matter whether you're young or old, a blue-collar or white-collar worker, or a high school or college grad; all that matters is how long you've been out of work. But just how bad is it for the long-term unemployed? Ghayad ran a follow-up field experiment to find out. In a new working paper, he sent out 4800 fictitious resumes to 600 job openings, with 3600 of them for fake unemployed people. Among those 3600, he varied how long they'd been out of work, how often they'd switched jobs, and whether they had any industry experience. Everything else was kept constant. The question was which of them would get callbacks. It turns out long-term unemployment is much scarier than you could possibly imagine.

Companies won’t even look at resumes of the long-term unemployed: Here’s one big reason why America’s unemployment crisis may be here to stay. Thanks to the lasting effects of the recession, there are currently 4.7 million workers who have been out of work for at least 27 weeks. And new research suggests that employers will almost never consider hiring them. Matthew O’Brien reports on a striking recent experiment by Rand Ghayad of Northeastern University. He sent out 4,800 fake resumes at random for 600 job openings. And what he found is that employers would rather call back someone with no relevant experience who’s only been out of work for a few months than someone with more relevant experience who’s been out of work for longer than six months. In other words, it doesn’t matter how much experience you have. It doesn’t matter why you lost your previous job — it could have been bad luck. If you’ve been out of work for more than six months, you’re essentially unemployable. Many companies won’t even consider you for a job. Here’s what this looks like in chart form:

Unemployment benefits should encourage mobility - Some overdue changes in unemployment insurance could improve the mobility of less-educated Americans, narrow their earning gap with better-educated workers, ease unemployment and reduce income inequality. Today, about 40 percent of U.S. households change addresses every five years. A significant number relocate to a different city. Consider the uneven economic performance of U.S. cities. Some cities — Austin, Boston, San Francisco — are growing quickly, attracting innovative employers and adding well-paying jobs. Other cities — Detroit and Buffalo, for example — are falling behind, shedding jobs and population.  Government policies offer little help. If you are living off unemployment checks in Flint, Mich., you do not have a lot of incentives to move to a stronger labor market, such as Chicago, to look for a job because your housing expenses would double while your check would still reflect the cost of living in Flint.  But what if jobless people in areas with above-average unemployment rates received part of their unemployment insurance in the form of a mobility voucher that would cover some of the costs of moving to another area? Instead of encouraging out-of-work residents to remain in depressed labor markets, the government could provide incentives to some to relocate to stronger markets. This would help those workers — especially unskilled ones — who want to move but lack cash to cover upfront costs. Ultimately, this could help reduce income inequality in the United States.

Demographics in Pictures: Peak Earning (and Peak Spending Years) - Here is a nice theme from reader "BC" regarding peak earning years that I merged into a single chart. The above chart shows what is happening to employment in age groups 35-44 (blue), 45-54 (red), and the combined effect 35-54 (green). Those in age group 35-54 are in their peak earning and spending years. This is the period where people upgrade houses and have a need for larger cars as family sizes grow. Between 34-44 family sizes reach peak. Expenses hit maximum when kids graduate from high school and head to college.Employment in age group 35-44 peaked just prior to the 2001 recession.

  1. Employment in age group 45-54 peaked right at the start of the 2007 recession.
  2. Employment in age group 34-54 peaked just after the housing bubble burst.

Earning power for boomers has peaked. Yet as a whole, boomers are unprepared for retirement. The effect on spending and GDP should not be hard to figure out.

Struggling to Get Ahead: The Age Demographics of Weekly Earnings: The BLS database gives public access to weekly earnings of the general population age 16 years and over. The data is limited to full-time wage and salary workers, excluding the incorporated self-employed. This first chart below gives us a snapshot of the annual data for compete series, which reaches back to 1979. We're looking at median weekly wages. The blue line shows us the nominal averages, and the red line shows the same data adjusted for inflation based on the Consumer Price Index for Urban Consumers (what we normally refer to as the CPI). The blue line is certainly the more optimistic of the two, because the red "reality", which shows the purchasing power over time, looks rather flat. As annotated on the chart, the point of adjustment is average CPI from 1982-1984. The next chart shows the nominal weekly earnings broken down by seven age groups. The first two cohorts are the smallest, ages 16-19 and 20-24, and have the lowest earnings, as we would expect, given the limited job experience and low numbers of college degree holders. The next four are 10-year cohorts, and the last has no upper boundary -- the 65 and older.The two adjacent tables summarize the nominal and real change in earnings for the seven age groups from the first available data in 2000 to the latest in 2012. The real break-even point in the nominal table is 33.3%. In other words, based on annual averages for the Consumer Price Index, the cost of living in 2012 has risen by 33.3% since the turn of the century. In short, it takes about one-third more money in 2012 to have the same purchasing power as in 2000. That's effect of that average annual increase of 2.43% that I mentioned earlier.

Vital Signs Chart: Wages Not Keeping Pace With Inflation - Wages are rising but not keeping pace with inflation. Median weekly earnings of the U.S.’s 102.6 million full-time wage and salary workers hit $773 in the first quarter, up 0.5% from a year earlier; consumer prices rose 1.7% in the same period. Workers age 25 and up without a high-school diploma earned a median $457 a week, compared with $1,189 for those with at least a bachelor’s degree.

The oil choke collar and wages - One of the themes I've been exploring is whether and how much the Oil choke collar has been responsible for the slow growth in the US economy since the turn of the Millenium. The increase in the price of a gallon of gas from $0.91 at its low in February 1999 to $4.11 in July 2008 was certainly spectacular, as shown in the graph below: So significant is that rise that at one point Professor James Hamilton estimated that the Oil shock of 2008 was responsible for nearly half of the entire decline in GDP during the great recession.  During that same time since 1999, the average Amercian's wages in real, inflation-adjusted terms have only risen very slowly, and have been very much constrained by the increasing price they must pay at the pump, as shown in the next graph which compares the increase in the price of gas (blue, left scale) with the increase in real wages (red, right scale):  Real wages have only grown about 7% over the last 14 years, almost all of that growth during three stairstep increasies coinciding with gas price declines during two recessions and during the very weak economy of 2006.

Time to Upgrade America's Miserly Minimum Wage - Ralph Nader - America's highest-paid CEO last year, John Hammergren of McKesson, received compensation of over $131 million. That is the equivalent of about $63,000 per hour, or $10,000 more than the annual median household income in the United States. Meanwhile, some of this country's lowest-paid workers—those on minimum wage—made just $15,080 annually at $7.25 per hour. Mr. Hammergren had surpassed that amount by 9:15 a.m. on his first workday of the year. It is long past time for minimum-wage workers to receive a raise. Had the federal minimum wage just kept pace with inflation since 1968, it would stand today at $10.67 per hour, not $7.25. President Obama finally broke his four-year silence on this issue by calling for a minimum-wage increase in this year's State of the Union address. But he advocated a federal rate of $9.00 per hour by 2016—well short of the $9.50 by 2011 he promised while campaigning in 2008, and far from catching up with 1968. Rep. Alan Grayson (D., Fla.) rightfully went a step further this month by introducing a bill to increase the minimum wage to $10.50 per hour. At a Senate Labor Committee hearing last month, Sen. Elizabeth Warren (D., Mass.) noted that had the minimum wage increased in proportion to worker productivity since 1960, it would stand today at $22 per hour.

Can we get wages rising?, by Lane Kenworthy: In the United States, wages for people in middle-paying jobs and below have been flat for more than three decades. This has gone on for so long now that we should see it as the new normal, rather than a temporary aberration. There are a host of causes: intense product market competition (whether global or domestic), shareholders obsessed with short-term profits, mechanization, the shift from manufacturing to services, firms’ ability to offshore, “pay for performance,” immigration, stagnant educational attainment, weak unions, and a flat minimum wage. I suspect (here, here) that some of the left’s chief strategies for solving this problem — reviving manufacturing, strengthening unions, and full employment — aren’t likely to be achievable. Indeed, I don’t see any reason for optimism about wage growth for the lower half going forward. I therefore think it’s worth exploring alternative ways to ensure that household incomes and living standards can keep pace with economic growth. Jared Bernstein has some characteristically thoughtful comments. His main point is that we shouldn’t give up on rising wages. He thinks in particular that there’s a reasonable chance we can get the labor market tight enough to push wages up, as happened in the late 1990s. He and I agree that much hinges on the Fed’s approach. Here’s Jared...

How to achieve shared prosperity even if wages aren't rising - Many of the rich countries, when they return to reasonably robust economic growth, will face two potential obstacles to shared prosperity. One is a shortage of jobs. The other is stagnant (or falling) wages for those in the lower half. The quantity of jobs is easier to solve, as there is considerable scope for expansion of employment in helping-caring services. These jobs will be valuable to society; we will benefit from having more people educate children, keep us healthy and care for us when we are ill, and give us personalized assistance in transitioning from school to work, switching from one type of work to another in middle age, improving our family life, transitioning into retirement, flourishing during retirement years, and much more. There will be plenty of demand for these services. But some of these jobs, maybe many of them, will be low paying. Moreover, an array of economic shifts coupled with likely weakening of unions and collective bargaining may cause pay for workers in the lower half to stagnate or even decrease. The potential result: a replication of the American experience since the 1970s, featuring decoupling between growth of the economy and growth of household incomes for those in the middle and below (see figure 1). The economy will grow, but little of the gain will trickle down to the bottom half. ...
What can we do to ensure that the incomes and living standards of lower-half households more closely track growth of the economy?

Immigration Bill Opens Path for Foreign Workers - The bipartisan plan to overhaul the nation's immigration law would drastically rewrite the system for awarding visas to live in the U.S., giving preference based on skills and economic needs and putting less emphasis on family ties. The sweeping immigration legislation, which a group of eight senators is expected to unveil this week, creates a pathway to citizenship for the more than 11 million immigrants living in the U.S. illegally, increases border security and overhauls a bevy of visa programs, many tied to employment opportunities. "We're motivated by the fact that our immigration system is just completely broken," said New York Sen. Chuck Schumer, a Democratic member of the group crafting legislation. "We turn away people who can create jobs in America and let cross the border people who take jobs away from Americans."

Gang of Eight bill delivers on bold, broad legalization of undocumented workers - Over the next several days and weeks, I’ll be reviewing the provisions of the 844-page comprehensive immigration reform bill, the Border Security, Economic Opportunity, and Immigration Modernization Act, with an eye on those elements that will particularly affect the operation and outcomes of the labor market. Secure Borders delivers on its most important goal: granting legal status to almost all of the eleven million immigrants currently here without authorization to work. Every undocumented immigrant who came before January 2012, who passes a criminal background check and pays $500 will be given a provisional status that will allow them to work. That single, dramatic step will change their lives for the better, improve the labor market prospects of every other legal resident with whom they compete for jobs, and free their employers from the taint and guilt of an illegal employment relationship. It won’t make these immigrants full citizens or give them the full rights of other residents of the United States, but it will remove them from the precarious status of working illegally, with the terrifying threat of discovery and deportation always hanging over their heads.

Rubio: Economy Will Benefit From Immigration Bill - Sen. Marco Rubio sought to blunt a wave of criticism from the conservative Heritage Foundation Thursday with a letter touting the economic benefits of immigration. On Monday, the Florida Republican met with David Addington, group vice president of research at Heritage, and just days later the think tank slammed the senator’s immigration proposal as a costly “amnesty” program. In a letter to Mr. Addington Thursday, Mr. Rubio said immigration would ultimately be a boon to the economy. Under the Senate plan, future immigrants would be evaluated more frequently based on their skills and employment prospects, which would help promote economic growth, Mr. Rubio wrote. “I am keenly aware that there will be budgetary impacts when illegal immigrants begin to access citizenship beginning 13 years after immigration reform is enacted,” Mr. Rubio wrote. “However, I also believe that immigration reform…will improve the labor market, increase entrepreneurship and create jobs, leading to a net increase in economic growth and reducing the deficit.”

Comprehensive Immigration Bill is a Disaster for American Workers - America has a problem, a big problem.  We have a Congress who will only act when powerful lobbyists throw enough money at them.  Such is the result of the new Comprehensive Immigration Reform bill.  This bill will be an unmitigated disaster for working America.  The bill increases the U.S. legal labor supply by at least 14 million by giving not just those here illegally legal status but also those who were previously deported who still have family members in the U.S. the legal status to work.  Yet the massive increase in the U.S. labor supply caused by legalizing those here unauthorized isn't even half of the labor disaster story this bill will bring.  The bill title is S.744 Border Security, Economic Opportunity, and Immigration Modernization Act, and is simply unlimited immigration and migration defacto.  A summary of the 844 page bill is here.  Hit particularly hard will be American Scientists, Technologists, Engineers and Mathematicians (STEM).  Not only will the bill increase H-1B Visas from 85,000 to 135,000, they are allowing the limit to go to 180,000 per year.  That is basically all of the jobs created each year in these occupations.  That means every single STEM job would end up being foreigners preferred, forcing U.S. workers out of their careers as the faux pas worker protections are clearly written to be vague and loophole ridden.  Just as lobbyists wrote this turkey in actuality, big business will also make sure any U.S. workers protections will be removed before actual legislation passage.  We have shown many times, there is no labor shortage at any skill level in the United States  In particular there is no labor shortage in the Science, Technology, Engineering and Mathematics occupational areas.   Yet in this bill there would be no limits or instant green cards for the below occupational categories.  Bear in mind many STEM PhDs currently cannot find a job as there is already such oversupply of workers at this educational level. 

State Job Creation Mediocre in March - Seven states saw their unemployment rates increase in March, countering the trend in most of the nation, the Labor Department said Friday.The national jobless rate dipped to 7.6% in March from 7.7% in February. The District of Columbia and 26 states posted month-over-month declines on their jobless rates. Seventeen states were unchanged. The seven states posting increases were Delaware, Kansas, Kentucky, Louisiana, Nevada, New Mexico and Tennessee. Nevada had the nation’s highest unemployment rate in March, 9.7% (up from 9.6% in February), as the state struggles from the aftermath of its housing-sector downturn. Illinois was the second-worst, at 9.5%, followed by California and Mississippi at 9.4% each. North Dakota again held the nation’s lowest jobless rate, 3.3%, as an energy boom propels the state’s economy. Nonfarm payrolls increased in 23 states, declined in 26 states (and in D.C.) and was unchanged in one state. The Labor Department said only 11 states recorded statistically significant monthly changes in their payroll jobs. Four gained employment, including Florida (up 32,700 jobs) and California (up 25,500 jobs). Seven states posted statistically significant declines, including Ohio (down 20,400 jobs) and Illinois (down 17,800 jobs).

BLS: Unemployment Rate declined in 26 States in March -- From the BLS: Jobless rate down in 26 states, up in 7 in March; payroll jobs down in 26 states, up in 23 Regional and state unemployment rates were little changed in March. Twenty-six states and the District of Columbia had unemployment rate decreases, 7 states had increases, and 17 states had no change, the U.S. Bureau of Labor Statistics reported today. ... Nevada had the highest unemployment rate among the states in March, 9.7 percent. The next highest rates were in Illinois (9.5 percent) and California and Mississippi (9.4 percent each). North Dakota again had the lowest jobless rate, 3.3 percent. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are below the maximum unemployment rate for the recession.The size of the blue bar indicates the amount of improvement - Michigan and Nevada have seen the largest declines - New Jersey remains the laggard.The states are ranked by the highest current unemployment rate. No state has double digit unemployment and the unemployment rate is at or above 9% in only seven states: Nevada, Mississippi, Illinois, California, North Carolina, Rhode Island and New Jersey. In early 2010, almost half the states had an unemployment rate above 9%

U.S. ranks near bottom of UNICEF report on child well-being - The United States ranked in the bottom four of a United Nations report on child well-being. Among 29 countries, America landed second from the bottom in child poverty and held a similarly dismal position when it came to “child life satisfaction.” Keeping the U.S. company at the bottom of the report, which gauged material well-being, overall health, access to housing and education, were Lithuania, Latvia and Romania, three of the poorest countries in the survey. UNICEF said in a statement on the survey that child poverty in countries like the U.S. “is not inevitable but is policy-susceptible” and that there isn’t necessarily a strong relationship between per capita GDP and overall child well-being, explaining: “The Czech Republic is ranked higher than Austria, Slovenia higher than Canada, and Portugal higher than the United States.” The Netherlands ranked number one on the list, with Norway, Iceland, Finland and Sweden filling out the top five.

The Hell of American Day Care: An investigation into the barely regulated, unsafe business of looking after our children - In the United States, despite the fact that work and family life has changed profoundly in recent decades, we lack anything resembling an actual child care system. Excellent day cares are available, of course, if you have the money to pay for them and the luck to secure a spot. But the overall quality is wildly uneven and barely monitored, and at the lower end, it’s Dickensian. This situation is especially disturbing because, over the past two decades, researchers have developed an entirely new understanding of the first few years of life. This period affects the architecture of a child’s brain in ways that indelibly shape intellectual abilities and behavior. Kids who grow up in nurturing, interactive environments tend to develop the skills they need to thrive as adults—like learning how to calm down after a setback or how to focus on a problem long enough to solve it. Kids who grow up without that kind of attention tend to lack impulse control and have more emotional outbursts. Later on, they are more likely to struggle in school or with the law. They also have more physical health problems. Numerous studies show that all children, especially those from low-income homes, benefit greatly from sound child care. The key ingredients are quite simple—starting with plenty of caregivers, who ideally have some expertise in child development. By these metrics, American day care performs abysmally. A 2007 survey by the National Institute of Child Health Development deemed the majority of operations to be “fair” or “poor”—only 10 percent provided high-quality care. 

US Households On Foodstamps Hit Record High - Record Dow, record S&P, record debt, record plunge in gold, and now: record US households on foodstamps. What's not to like. While today's gold selloff may be confusing to everyone, one can scratch off some 23,087,886 US households, or the number that according to the USDA were on foodstamps in January and just happen to be a fresh all time high, as the likely sellers, especially when one considers that the average monthly benefit to each household dropped to a record low of $274.04. This number probably ignores, for good reason, the once every four years fringe benefits of Obamaphones and other such made in China trinkets.

The Dis-Uniting of America - Robert Reich  - Being wealthy in modern America means you don’t come across anyone who isn’t, and being poor and lower-middle class means you’re surrounded by others who are just as hard up. Upward mobility — the old notion that anyone can make it with enough guts and gumption — is less of a reality.  The probability that a poor child in America will become a poor adult is higher now than it was 30 years ago, and higher in the United States than in the United Kingdom, which has a long history of class rigidity.  Almost 1 out of 4 of the nation’s children is in now in poverty, but you wouldn’t know that in Washington, where our representatives are now busily cutting safety nets children depend on, or in many state capitals that continue to slash budgets for education and social services.  Many of America’s wealthy don’t see why they should pay more taxes to support the less advantaged because they have no idea what it means to be less advantaged, while many in America’s middle class can’t afford to pay more because their real wages continue to decline.

NRA 500 suicide highlights “hidden epidemic” -  News that a man shot and killed himself at a NASCAR race sponsored by the National Rifle Association Saturday night is sure to launch a thousand columns and politicians’ statements making liberal use of the word “irony” — and rightly so — but it also underscores a type of gun violence that is the least talked about in Washington but also the most common: suicide. Here’s what we know about the incident: 42-year-old Kirk Franklin was found dead in the infield of the Texas Motor Speedway, where he had been camping. Police say the man died of a “self-inflicted” gunshot wound, apparently after getting into an argument with other campers. Alcohol may have been involved. Of the more than 32,000 firearm-related deaths in 2011, almost 20,000 — 62 percent — were suicides. While horrific mass shootings like the one in Newtown, Conn., provoke national outrage and demands for legislation, they represent less than 1 percent of all gun deaths. It’s the kind of quotidian but lethal admixture of mental health issues, interpersonal dispute and the presence of a firearm that is responsible for the majority of all gun deaths in this country.

What Ever Happened to State Tax Reform? - Just months ago, to the joy of conservatives and the consternation of liberals, several Republican governors proposed major tax reform plans. At least three–Bobby Jindal of Louisiana, Dave Heineman of Nebraska, and Pat McCrory of North Carolina– vowed to completely repeal their state corporate and individual income taxes. But by Tax Day, two of those governors, Jindal and Heineman, had abandoned their plans, at least for this year. In North Carolina, McCrory and House Republicans appear to be scaling back their ambitions. What happened? Pretty simple really. The chief executives thought they could pay for abolishing their income taxes by boosting sales tax revenues. They’d do it by raising sales tax rates and eliminating exemptions. For instance, many services that are now exempt from sales tax would become subject to the levy. Instead, the exercise became an object lesson in special interest politics. Much of the business community (especially those firms whose goods and services are now exempt from the sales tax) rose up in revolt. So did local governments that saw their own sales tax revenues jeopardized by a big new state levy.

Legislature OKs Parnell oil tax cuts that will cost state billions - The Alaska Senate on Sunday afternoon approved the oil-tax bill that passed the House 13 hours before, sending to Gov. Sean Parnell the measure he had sought to save billions of dollars for Alaska's leading industry..Parnell said that Alaska's current tax regime, which he backed as lieutenant governor in 2007 when it was pushed by Gov. Sarah Palin, is broken. It is taking so much money from industry, he said, that producers have been investing elsewhere, explaining the decline in oil production here. His bill, modified but not changed drastically in either the House or Senate, effectively wipes out Palin's tax policy,

After Courts Block GOP Laws, Wisconsin GOP Pushes Bill To Strip Most State Courts’ Power To Block Laws -  Last November, Wisconsin was able to run a fair election unmarred by one of the Republican Party’s favorite voter suppression tactics because two lower courts struck down the state’s unconstitutional voter ID law, and the conservative state supreme court repeatedly refused requests to take up the case before it winds its way through the normal appeals process. Now, a group of Wisconsin Republicans are pushing legislation to ensure that something like this never happens again: Since 2011, circuit judges have blocked all or parts of laws backed by Republicans that required voters to show photo ID at the polls, limited collective bargaining for public employees and expanded the governor’s power over administrative rules. Under a measure announced Wednesday, such injunctions would be automatically stayed as soon as they were appealed – meaning laws that were blocked would be put back in effect until a higher court issued a ruling. . . .

Pennsylvania lawmakers would earmark liquor store sale to transportation - On Feb. 5, Gov. Tom Corbett proposed selling the state liquor stores to generate a four-year $1 billion education grant. Since then, he has toured the state to push liquor privatization, which passed the House 105-90 in March. "What we have here is the chance to do two good things," Corbett said April 3, surrounded by school and business leaders in Berks County. "We can expand consumer choice and convenience while taking the state out of the Prohibition era, and we can build new programs in our public schools." But on Monday — with Corbett thousands of miles away on a trade mission to South America — about a dozen House Republicans said education was not the best use for the money. Proceeds from auctioning off liquor licenses to private business should go to transportation, according to House Bill 220, introduced by Rep. Jerry Knowles, R-Schuylkill. At a news conference, Knowles said he was introducing his bill now because it was more important to get a liquor privatization bill past the House than to publicly oppose Corbett's plan for spending the money.

Philadelphia Holds Closed Meeting With Wall Street - Philadelphia Mayor Michael Nutter, whose municipality has the lowest credit rating of the five most-populous U.S. cities, will address investors at a conference financed by underwriters and closed to the public and the press. The invitation bills tomorrow’s meeting as a chance to hear “Philadelphia leaders and investors discuss building the city’s future.” Philadelphia is hoping to attract investors for the city, which is rated three steps above junk by Standard & Poor’s. The city and its authorities have $8.75 billion in outstanding debt as of September, according to bond documents. Philadelphia’s pension system is 47.6 percent funded this year, the documents say. Tours of city assets are set for the second day of the conference, including the Philadelphia Gas Works, the largest municipally owned natural-gas utility in the U.S. The city plans to hire a broker to steer the sale of the system, which may fetch as much as $496 million, according to Lazard Ltd.

Detroit's encroaching blight as seen through Google and Bing maps -  Despite the reported demolition of 6,700 dangerous and abandoned homes under the Mayor Dave Bing's administration, 40,000 still remain.  That figure hasn't fluctuated significantly in the last few years, as the blight — burnt-out, abandoned, looted and decaying homes — seem just as determined as the mayor and other blight-fighting forces.  The New York Times reported the abandoned-home figure as high as 70,000 in November, while a Mother Jones story reported the inventory near 45,000 in 2010. With the wide-ranging figures, it seems the actual inventory of abandoned homes in the city is a difficult number to peg. As one is demolished, another is foreclosed on, another set ablaze, another looted by scrappers. With Google and Bing Streetview maps, a recent Tumblr post entitled "GooBing Detroit" reveals the still growing blight problem by placing side-by-side photos taken by each company over a three year span for a before-and-after effect. See before-and-after pictures here

Almost half of NYC workforce on food stamps - They’ve fallen through the cracks: millions of jobless or underemployed New Yorkers whose daily struggle is to find work and food. They certainly don’t show up in the 9.1 percent unemployment rate for the city, since they have exhausted those benefits. But the number of city residents on food stamps is on pace to jump this year from just above 1 million in 2007 to a breathtaking 2 million sometime this summer. That equals almost 50 percent of the city’s labor force today, which, according to the latest government calculations, shrank by nearly 200,000 people since 2011. There’s also 176,000 New Yorkers collecting Social Security disability insurance, which is up 30,000 in last 4 years.

Faltering Courts, Mired in Delays - With criminal cases languishing for years, a plague of delays in the Bronx criminal courts is undermining one of the central ideals of the justice system, the promise of a speedy trial. At a time of slashed judicial budgets across the country, the Bronx offers a stark picture of what happens when an overwhelmed justice system can no longer keep pace: Old cases pile up, prosecutions fail at alarming rates, lives stall while waiting for court hearings and trust in the system and its ability to protect the public evaporates. In the Bronx in recent years, there were more people in jail waiting years for their trials than in the rest of the city combined, court data show. The borough was responsible for more than half of the cases in New York City’s criminal courts that were over two years old, and for two-thirds of the defendants waiting for their trials in jail for more than five years.

'Catastrophic' budget laid out by Philly schools - There could be no money for counselors or librarians. There might be no sports or extracurricular activities. No dedicated funds for secretaries, aides, or summer school would be provided. And that would follow the steep cuts made over the last two years. There also could be 3,000 layoffs, including some teachers. This doomsday scenario comes as a result of a deficit of more than $300 million in the district's $2.7 billion 2013-14 budget. Officials have asked for $120 million in additional funding from the state and $60 million from the city, as well as $133 million in concessions from labor unions. But none of that money is guaranteed.  Laying out the grimmest possible reality is a strategic move, as the district makes its case in Harrisburg and City Hall for more funding and sits at the negotiating table with its unions, including the 15,000-member Philadelphia Federation of Teachers. But $220 million in additional school-based cuts is a very real possibility.

Study: School Reform in 3 Major Cities Didn't Pass the Test - Many people paying attention to corporate-based school reform in recent years will not be surprised by this, but a new study on the effects of this movement in Washington, D.C., New York City and Chicago concludes that little has been accomplished and some harm has been done to students, especially the underprivileged. The report looks at the impact of reforms that have been championed by Education Secretary Arne Duncan and other well-known reformers, including Michelle Rhee, the former chancellor of D.C. Public Schools, and, in New York City, Joel Klein, the former chancellor of New York City Public Schools and Mayor Michael Bloomberg. It says:  The reforms deliver few benefits and in some cases harm the students they purport to help, while drawing attention and resources away from policies with real promise to address poverty-related barriers to school success…The full study, titled “Market-oriented education reforms’ rhetoric trumps reality,” was conducted by Elaine Weiss and Don Long of the Broader, Bolder Approach to Education initiative, which was convened in 2008 by Economic Policy Institute President Larry Mishel in an effort to champion a well-rounded approach to education that goes beyond test-based accountability. It will be available here next week. The executive summary can be seen here now.

Pulling the Trigger - Put simply, a parent trigger law allows a group of parents to hand over their kids’ public schools to private contractors, and then allows these new private contractors to tear up teacher union contracts and fire or hire as they see fit — all while receiving taxpayer money to fund their private-charter school business. The law works like this: If enough parents sign a trigger petition (representing more than 50% of the number of students in the school), they can fire its principal, lay off unionized teachers or hand it over to a private charter school company.  According to a recent investigation by FryingPanNews, Parent Revolution has received $14.8 million since its founding in 2009. Almost half of that — $6.3 million — came from the Walton Family Foundation, which has long bankrolled the war on unions and public education. The rest of Parent Revolution’s cash came from more liberal sources, including The Bill & Melinda Gates Foundation and Broad Foundation, each of which has given about $1.5 million to the group.  As reported in Dissent, these three foundations -- Gates, Walton and Broad -- spend roughly $4 billion a year to hand public K-12 education to the private sector, giving them increasing leverage over a sector that's worth $500 billion per year.

Some States Dropping GED as Test Price Spikes - Several dozen states are looking for an alternative to the GED high school equivalency test because of concerns that a new version coming out next year is more costly and will no longer be offered in a pencil and paper format. The responsibility for issuing high school equivalency certificates or diplomas rests with states, and they've relied on the General Education Development exam since soon after the test was created to help returning World War II veterans. But now 40 states and the District of Columbia are participating in a working group that's considering what's available besides the GED, and two test makers are hawking new exams. "It's a complete paradigm shift because the GED has been the monopoly. It's been the only thing in town for high school equivalency testing. It's kind of like Kleenex at this point,"

America’s Biggest Entrepreneurs: High School Dropouts -- Among America’s most celebrated entrepreneurs are college dropouts like Mark Zuckerberg, Bill Gates, Steve Jobs and Michael Dell. But as it turns out, the country’s most frequent business founders are dropouts of a different kind: They dropped out of high school. That’s according to the latest numbers from the Kauffman Index of Entrepreneurial Activity, as prepared by Robert W. Fairlie at the University of California, Santa Cruz. Professor Fairlie looked at different demographic groups, and what share of each group started businesses in any given month (which is generally tiny, less than 1 percent for basically all major demographics). When he looked at entrepreneurship by educational attainment, he found that people who had not completed high school were most likely to start new businesses. The chart above is based on data from the Labor Department’s monthly Current Population Survey. It shows the percentage of individuals (ages 25 to 64) who do not own a business in the first survey month but then started a business in the following month, with 15 or more hours worked per week. For those who didn’t complete high school, this entrepreneurship rate was 0.52 percent, compared with 0.32 percent for people in this age range over all.

Vital Signs Chart: Depressed College Enrollment - The share of high-school graduates enrolled in college in 2012 shrank from a year earlier. About 3.2 million people between ages 16 and 24 graduated from high school between January and October last year, with about 2.1 million of them — 66.2% — enrolled in colleges or universities in October. The share peaked at 70.1% in 2009 just after the recession ended. Almost 88% of the recent high school graduates enrolled in college last fall were full-time students.

Many Colleges and Universities Face Financial Problems - STUDENTS piling on debt to go to college might attract all the attention, but colleges have been on a borrowing spree as well, nearly doubling the amount of debt they’ve taken on in the last decade to fix aging campuses, keep up with competitors and lure students with lavish amenities.n January, Moody’s Investors Service put a negative outlook on the entire higher education sector, even at major research universities, which had been spared in previous forecasts. And that came after a year in which the agency downgraded the credit ratings of 22 colleges, including Alabama A&M, Wellesley College and Morehouse College. At the same time, Standard & Poor’s Ratings Service downgraded 13 institutions, including Amherst College, Tulane University and Yeshiva University. Combined, both agencies upgraded only eight colleges in 2012. Bond ratings aren’t scoured like the U.S. News and World Report rankings. But if you’re a parent preparing to start the college search with your son or daughter, the negative financial outlook raises plenty of questions to ask the college tour guide: Will outdated buildings be renovated? Will more part-time instructors replace retiring professors? Will classes get bigger or will students end up in partly online courses? Will the school even be in business by the time your child graduates in four years?

Online Education Trumps the Cost Disease - In a large, randomized experiment Bowen et al. found that students enrolled in an online/hybrid statistics course learned just as much as those taking a traditional class (noted earlier by Tyler). Perhaps even more importantly, Bowen et al. found that the online model was significantly less costly than the traditional model, some 36% to 57% less costly to produce than a course using a traditional lecture format. In other words, since outcomes were the same, online education increased productivity by 56% to 133%! Online education trumps the cost disease! Bowen et al. caution that their results on cost savings are speculative and it is true that they do not include the fixed costs of creating the course (either the online course or the traditional course) so these cost savings should be thought of as annual savings in steady-state equilibrium. The main reason these results are speculative, however, is that Bowen et al. only considered cost savings from faculty compensation. Long-run cost reductions from space savings may be even more significant, as the authors acknowledge. Bowen et al. also do not count cost savings to students. Based on my work with Tyler at MRUniversity, I argued in Why Online Education Works that students in online course can learn the same material in less time.

Why grad schools should require students to blog - Approximately one month ago, I fell into a rabbit hole – the rabbit hole better known as Writing My Dissertation. I’d been working toward that point for five years and counting, through seminars and conferences, experiments and literature reviews, conversations and late-night therapy sessions with an open statistics textbook and eyes full of tears over yet another beta or epsilon that I couldn’t for the life of me comprehend. But here it was: the home stretch. The final product of years of loving—and sometimes not-so-loving—labor. And partway through another all-nighter (I was working under some tight deadlines), I had an epiphany: thank god I’ve spent the last few years blogging, writing a book, and doing freelance journalism. Otherwise, I’d be lost. Truly.

Growing student debt - I was curious to take a look at the growing student debt load and the government's exposure to potential repayment issues. A recent analysis of individual credit data by Donghoon Lee of the Federal Reserve Bank of New York found that student loans are the one category of household debt that continued to rise during the Great Recession. As of the end of 2012, student loans came to nearly a trillion dollars, more than total credit card debt, auto loans, or home equity lines of credit. Lee found that 17% of the student loans are currently delinquent. An additional 44% are not yet in repayment, because the borrowers were still in school, or had graduated but were granted deferrals or forbearances delaying their regular payments. The explosion in student debt has primarily been driven by federal funding. Historically this took two forms. The first was the Federal Family Education Loan Program, which provided federal guarantees of loans made to students by nonfederal entities. The GAO estimated that FFEL loans outstanding as of the end of fiscal year 2009 stood at $493 B. This program was discontinued as part of the Health Care and Education Reconciliation Act of 2010. No new guarantees were issued after that date, though the Department of Education remained liable for guarantees previously issued.The Act replaced FFEL with greater reliance on the second form of assistance, namely direct loans from the federal government.

How Obama Wants to Change Student Loan Interest Rates - Buried in President Obama’s proposed budget is a big change to federal student loans. According to the Department of Education’s draft budget, Obama wants the interest rate on federal loans to be pegged to market rates annually. Currently, the rate is 6.8 percent for most loans, with a subsidized rate of 3.4 percent for needy undergrads. Congress set the current rate for loans in 2001, and in 2007 voted to lower the subsidized rates. The economy’s changed since then, but the rates haven’t been adjusted to reflect today’s low-interest-rate environment. Under Obama’s proposal, the interest rate on student loans will be set each year based on the government’s borrowing costs. For subsidized loans, the rate would be 0.93 percentage points above the rate on a 10-year Treasury bond; unsubsidized loans would be two percentage points higher than that, and grad student loans one more percentage point higher still. So at the current 10-year T-note rate of a little over 1.8 percent, subsidized loans would be about 2.75 percent, unsubsidized loans would be 4.75 percent, and grad student loans would be about 5.75 percent—all lower than the current fixed rates.

Update on the higher education bubble – it’s starting to deflate - The chart above is an updated version of one I have featured before on CD (it also appears in Glenn’s book), and which helps to visually understand the seriousness of the higher education bubble. The chart compares: a) college tuition and fees annually in current dollars from 1978 to 2012 based on data from the Department of Education for all institutions of higher education, b) the CPI for medical care, c) the median sales price for new homes, and d) the CPI for all items. All variables have been converted to an index series that equals 100 in the base year of 1978 to allow for a comparison of relative increases over time in the four variables. In current dollars, average college tuition and fees have increased from $984 during the 1977-1978 school year to $10,111 for 2011-2012. That 10.28 time increase in nominal tuition over the last 34 years is reflected in an increase in the chart’s college tuition index from 100 in 1978 to 1,028 in the chart (see blue line). On an annual basis, college tuition has increased more than 7% per year, which is almost double the 3.8% rate of increase for consumer prices on average (see orange line in chart). In contrast, prices for medical care have increased by 5.8% per year since 1978, and the median price for new homes has increased by only 4.4% per year on average. That last comparison is key, because we had an unsustainable housing bubble followed by a painful and disruptive correction, caused by increases in home prices that were relatively inconsequential compared to the increases in college tuition.

Young Student Loan Borrowers Retreat from Housing and Auto Markets - New York Fed - Student loans have soared in popularity over the past decade, with the aggregate student loan balance, as measured in the FRBNY Consumer Credit Panel, reaching $966 billion at the end of 2012. Student debt now exceeds aggregate auto loan, credit card, and home-equity debt balances—making student loans the second largest debt of U.S. households, following mortgages. Student loans provide critical access to schooling, given the challenge presented by increasing costs of higher education and rising returns to a degree. Nevertheless, some have questioned how taking on extensive debt early in life has affected young workers’ post-schooling economic activity.    To address this issue, we examine trends in homeownership, auto debt, and total borrowing at standard ages of entry into the housing and vehicle markets for U.S. workers.

The economic consequences of student debt - The Federal Reserve Bank of New York is out with new research (“Young Student Loan Borrowers Retreat from Housing and Auto Markets”) showing that student debt is not merely painful to those owing it, but has also become economically damaging. The debt service burden is essentially neutralizing, or worse, the income advantage of having earned a bachelor’s degree or more, at least as measured by the ability to buy a house or a car. Over the last decade, the share of 25-year-olds with student debt has risen from about 25% in 2003 to 43% in 2012, and their average debt burden has nearly doubled, from $10,649 in 2003 to $20,326 in 2012. At first this seemed to have few economic consequences; from 2003 to 2009, the homeownership rate of people with student debt was significantly higher than that of those without student debt—which isn’t surprising, given the income premium still enjoyed by those with education after high school. That changed during the Great Recession, as homeownership rates fell across the board. But those for student debtors fell harder than others, and as of 2012, the homeownership rate of those with student debt was lower than those without.

Student lending vs the housing bubble - The above chart is from another good note by Neal Soss of Credit Suisse, and here’s the main takeaway: We maintain that the systemic financial market risks posed by student loans are probably overstated. At their 2008 peak, residential mortgages totaled some $10.6 trillion (according to the Fed’s Flow of Funds report) versus some $0.97tr in student loans currently outstanding.  In addition, the credit risk was multiplied many times over by the presence of $450B in cash CDOs and extremely large (multitrillion-dollar) positions in synthetic CDS and CDOs. That said, any rise in student loan delinquency/default rates will be systemic in the sense that the burdens of the losses will be borne broadly by US taxpayers, thereby adding another item to a long list of US fiscal challenges. The scope of potential losses may come as a surprise to some, as education lending is not counted as a federal outlay in on-budget deficit accounting. In a low-delinquency/default environment, student lending is a big money-making business for the government. Given that the DOE can borrow at low Treasury rates, larger loan volumes produce greater earnings. Indeed, for new loans issued in fiscal year 2013, even after accounting for the fairly high projected default rates cited above, the US government expects to earn $5.7bn.

California Pension May Ask for 50% Boost to Close Gap - California taxpayers may see the municipal pension contributions they fund for the California Public Employees’ Retirement System rise as much as 50 percent under a plan to fill $87 billion in unfunded obligations. Alan Milligan, the fund’s chief actuary, recommends that the biggest U.S. pension stop spreading out losses and gains over 15 years and instead set rates based on how much is needed to reach 100 percent funding within 30 years.  The Sacramento-based pension, known as Calpers, is about 26 percent short of meeting its long-term commitments. The state and cities contributed $7.8 billion in the last fiscal year, almost four times more than a decade earlier.  In a version of pay-me-now-or-pay-me-later, Milligan said the plan “will result in a lower probability of large increases in employer contribution rates” in the future, according to a report to a Calpers committee. If approved, the plan could be presented to the full board as soon as tomorrow.

CalPERS rate hike will hit California cities hard - California’s largest public pension fund approved a rate hike on Wednesday that will see some local governments paying as much as 50 percent more for their employees’ pensions over the next several years. The California Public Employees Retirement System approved the higher pension costs as part of a plan to pay off its own liabilities faster, according to Reuters. CalPERS lost $100 billion in the recession and has already been charging local governments more to make up for its losses, but the gap isn’t being closed fast enough. The fund has been “smoothing” its gains and losses over 15 years to keep payments consistent, but the new policy will speed up that period to five years to help CalPERS pay off its losses and become fully funded within 30 years, according to the Sacramento Bee. CalPERS, which currently has $87 billion in unfunded liabilities, is about 70 percent funded, which means it is 30 cents short for every dollar it must pay retirees in the future. A recent CalPERS report said the agency’s major pension plans have at least a 50 percent chance of falling below 50 percent funding status at some point in the next 30 years, according to SacBee.

Singles swing into retirement with little savings - If you think it’s hard saving for retirement as a couple, trying doing it as a single. According to a study—described by one expert as the most intriguing of 2012—the amount of money singles in their late 60s have saved up for retirement is dramatically less than that of married-couple households. In fact, the median married household had in 2008 nearly 10 times more saved up for retirement than the median single-person household, $111,600 vs. $12,500. (Savings, for the record, included 401(k)s and IRAs and all taxable savings and investment accounts, but it did not include Social Security, pensions, or housing wealth. And single, at least for the purpose of this research could mean divorced, widowed or unmarried for most/all of their life.) The difference was also extreme at the extremes, according to a blog post by Steve Utkus, who oversees the Vanguard Center for Retirement Research. In his review of the study, Utkus noted that the top 30% of married households had savings of $332,400 or more while the top 30% of single-person households had just $90,000 or more. The bottom 30% of married households, meanwhile, had less than $24,000 saved while the bottom 30% of single-person households had less than $800.

‘Risks’ loom for health exchange technology - As Colorado’s health exchange managers sprint toward an October 1 launch, a top manager warned board members on Monday that a recent decision to build a new “eligibility” IT system poses the greatest risk of delay and could undermine the quality of the online health marketplace. Adele Work, who is leading implementation for the exchange, made a presentation about “key implementation risks” during a technology update for the board. No. 1 on that list of risks is the new decision to divide one planned IT system into two. The report to the board said that IT developers for the exchange are now having to contract with a “team of eligibility experts” to develop the new engine that will determine if customers of the exchange qualify for federal subsidies. State Medicaid managers are building their own separate system to determine if exchange customers are eligible for Medicaid. In order to try to open the exchange on time, Work also told board members that IT developers will delay some functions to future years.Exchange board member Eric Grossman asked about planning in case IT systems don’t work.“The best laid plans go awry,” Grossman said. “What’s plan B? We can’t just keep dumping stuff on the plan.”

Nevada buses hundreds of mentally ill patients to cities around country - Over the past five years, Nevada's primary state psychiatric hospital has put hundreds of mentally ill patients on Greyhound buses and sent them to cities and towns across America. Since July 2008, Rawson-Neal Psychiatric Hospital in Las Vegas has transported more than 1,500 patients to other cities via Greyhound bus, sending at least one person to every state in the continental United States, according to a Bee review of bus receipts kept by Nevada's mental health division. About a third of those patients were dispatched to California, including more than 200 to Los Angeles County, about 70 to San Diego County and 19 to the city of Sacramento. In recent years, as Nevada has slashed funding for mental health services, the number of mentally ill patients being bused out of southern Nevada has steadily risen, growing 66 percent from 2009 to 2012. During that same period, the hospital has dispersed those patients to an ever-increasing number of states. By last year, Rawson-Neal bused out patients at a pace of well over one per day, shipping nearly 400 patients to a total of 176 cities and 45 states across the nation.

Hospitals Profit From Surgical Errors, Study Finds - Hospitals make money from their own mistakes because insurers pay them for the longer stays and extra care that patients need to treat surgical complications that could have been prevented, a new study finds.  Changing the payment system, to stop rewarding poor care, may help to bring down surgical complication rates, the researchers say. If the system does not change, hospitals have little incentive to improve: in fact, some will wind up losing money if they take better care of patients.  The study and an editorial were published Tuesday in The Journal of the American Medical Association. The study authors are from the Boston Consulting Group, Harvard’s schools of medicine and public health, and Texas Health Resources, a large nonprofit hospital system.  The study is based on a detailed analysis of the records of 34,256 people who had surgery in 2010 at one of 12 hospitals run by Texas Health Resources. Of those patients, 1,820 had one or more complications that could have been prevented, like blood clots, pneumonia or infected incisions.

Drug Makers Use Safety Rule to Block Generics - For decades, pharmaceutical companies have deployed an array of tactics aimed at preventing low-cost copies of their drugs from entering the marketplace. But federal regulators contend the latest strategy — which relies on a creative interpretation of drug safety laws — is illegal. The Federal Trade Commission recently weighed in on a legal case over the tactic involving the drug maker Actelion, and earlier this month a federal suit was filed in another case in Florida. “We definitely see this as a significant threat to competition,” said Markus Meier, who oversees the commission’s health care competition team. The new approach is almost elegant in its simplicity: brand-name drug makers are refusing to sell their products to generic companies, which need to analyze them so they can create the copycat versions. Traditionally, the generic drug makers purchased samples from wholesalers. But because of safety concerns, an increasing number of drugs are sold with restrictions on who can buy them, forcing the generic manufacturers to ask the brand-name companies for samples. When they do, the brand-name firms say no.

FDA Lets Drugs Approved on Fraudulent Research Stay on the Market - When Food and Drug Administration agent Patrick Stone explained the gravity of the inquiry to Chinna Pamidi, the testing facility's president, the Cetero executive made a brief phone call. Moments later, employees rolled in eight flatbed carts, each double-stacked with file boxes. The documents represented five years of data from some 1,400 drug trials. Pamidi bluntly acknowledged that much of the lab's work was fraudulent, Stone said. "You got us," Stone recalled him saying.  The health threat was potentially serious: About 100 drugs, including sophisticated chemotherapy compounds and addictive prescription painkillers, had been approved for sale in the United States at least in part on the strength of Cetero Houston's tainted tests. The vast majority, 81, were generic versions of brand-name drugs on which Cetero scientists had often run critical tests to determine whether the copies did, in fact, act the same in the body as the originals. For example, one of these generic drugs was ibuprofen, sold as gelatin capsules by one of the nation's largest grocery-store chains for months before the FDA received assurance they were safe. Stone said he expected the FDA to move swiftly to compel new testing and to publicly warn patients and doctors.Instead, the agency decided to handle the matter quietly, evaluating the medicines with virtually no public disclosure of what it had discovered. It pulled none of the drugs from the market, even temporarily, letting consumers take the ibuprofen and other medicines it no longer knew for sure were safe and effective. To this day, some drugs remain on the market despite the FDA having no additional scientific evidence to back up the safety and efficacy of these drugs.

Will the Supreme Court end human gene patents after three decades? - Since the 1980s, patent lawyers have been claiming pieces of humanity's genetic code. The United States Patent and Trademark Office has granted thousands of gene patents. Meanwhile, a growing number of researchers, health care providers, and public interest groups have raised concerns about the harms of gene patents. The American Civil Liberties Union estimates that more than 40 percent of genes are now patented. Those patents have created "patent thickets" that make it difficult for scientists to do genetic research and commercialize their results. Monopolies on genetic testing have raised prices and reduced patient options.  On Monday, the high court will hear arguments about whether to invalidate a Utah company's patents on two genes associated with breast cancer. But the legal challenge, spearheaded by the American Civil Liberties Union and the Public Patent Foundation, could have much broader implications. A decision could invalidate thousands of patents and free medical researchers and clinicians to practice medicine without interference from the patent system.

China Said to Invite Four Flu Experts as Disease Outbreak Widens - Four international flu experts will arrive in China within days to help authorities respond to the country’s widening bird-flu emergency, according to two people familiar with the matter. Nancy Cox, director of the flu division at the U.S. Centers for Disease Control and Prevention in Atlanta, Anne Kelso, director of a World Health Organization flu research center in Melbourne, Malik Peiris from the University of Hong Kong, and Angus Nicoll, head of the Stockholm-based European Centre for Disease Prevention and Control’s flu program, will arrive on about April 17 to offer technical advice, said the people, who declined to be identified because the Chinese government hasn’t announced that the experts are being invited. The group will seek to assist Chinese authorities grappling to identify the source and mode of transmission of the H7N9 avian influenza that has infected at least 60 people and killed 13. Beijing yesterday said that a 7-year-old girl has the virus, and Henan province reported its first two cases, opening a new front in the spread of the new pathogen in the world’s most populous nation. “There’s no way to predict how this will spread,” Michael O’Leary, the WHO’s China representative, told reporters in Beijing yesterday. “The good news is we have no evidence of sustained human-to-human transmission. That’s a key factor in this situation.”

H7N9 bird flu poised to spread - The H7N9 avian flu virus greatly expanded its geographical range over the weekend, with two new  human cases reported in Beijing in the north of China, and another two in Henan province in the centre. Up until now, the virus had been restricted to Shanghai and neighbouring regions on the Eastern seaboard. Experts worry that this new development may be the start of an expansion that may see H7N9 quickly fan out across large areas of China, and beyond. There is still no evidence of any sustained human-to-human spread of the H7N9 virus. But the World Health Organisation confirmed on Saturday that Chinese authorities are investigating two suspicious clusters of human cases. Though these can arise by infection from a common source, they can also signal that limited human-to-human transmission has occurred. "I think we need to be very, very concerned" about the latest developments"

Hundreds of Thousands of Rat-Sized, House-Eating Snails Invade Florida  - Florida has a new problem: Giant African land snails. The snails, which can grow as large as rats, were first discovered in South Florida by a homeowner in 2011, according to the Florida Department of Agriculture. Since then over 117,000 have been found and more than a thousand more are caught each week. Denise Feiber, a spokeswoman for the Florida Department of Agriculture, told NBC News that, despite their apparently friendly appearance, the mollusks pose a danger to various plants and homes in the region. Feiber noted that the snails eat over 500 species of plants, or "pretty much anything that's in their path and green," as well as stucco and plaster. In seven weeks, even more of the snails – each female can produce 1,200 eggs a year — will emerge from the ground after Florida's rainy season ends. In some Caribbean countries, enough snails emerge that roads, lawns, and homes become covered with the creatures, resulting in damages to car tires and lawnmower blades, not to mention the slime and shit stains on building walls. "It becomes a slick mess," Feiber said.

The Pine Beetles Are Coming - Peter Jackson, a meteorologist in Prince George, B.C., couldn't believe what he was seeing on his radar screen. It was like a rainstorm, but thicker, and it was crossing east over the Rocky Mountains. It looked a little like insect swarms, except insects had never been seen at such high altitudes before. Farmers on the eastern slope of the Rockies described huge clouds of insects. They could hear them pinging off their steel roofs. The swarms were so dense they gummed up the windshield wipers on the farmers' vehicles. This was this first attack of the Mountain Pine Beetle east of the Rocky Mountains... the year when the unthinkable actually happened: carried along by the prevailing winds, trillions of Mountain Pine Beetles crossed the Rocky Mountains from BC into Alberta. Now, the great Northern Boreal Forest, one of the world's richest ecosystems and one of its greatest carbon sinks, was face to face with a grave threat - a plague of insects, each the size of a grain of rice. In British Columbia, the damage done by this hungry little creature was already well known.  In a period of less than 10 years, swarms of Mountain Pine Beetles ate their way through 18 million hectares of lodgepole Pine forest, an area the size of Nova Scotia and New Brunswick combined. The ecological and economic cost has been staggering.

Farm subsidies and entrenched wealth - Veronique de Rugy has a great argument for ending farm subsidies in the April issue of Reason (and yes, do read the whole thing, well worth your time). One feature of Vero’s argument that distinguishes it from others is that it follows this process to its logical, disturbing conclusion for income distribution. Farm subsidies have existed for 80 years, and while their initial intent was to assist struggling farmers during the Depression, their success at doing so has created an entrenched group of land-owning farmers who are now wealthy, but fight against attempts to reduce their subsidies. While the number of farms is down 70 percent since the 1930s—only 2 percent of Americans are directly engaged in farming—farmers aren’t necessarily struggling anymore. In 2010, the average farm household earned $84,400, up 9.4 percent from 2009 and about 25 percent more than the average household income nationwide. What’s more, a handful of farmers reap most of the benefits from the subsidies: Wheat, corn, soybeans, rice, and cotton have always taken the lion’s share of the feds’ largesse. The Environmental Working Group (EWG) reports that “since 1995, just 10 percent of subsidized farms—the largest and wealthiest operations—have raked in 74 percent of all subsidy payments. 62 percent of farms in the United States did not collect subsidy payments.”

Biofuels are ‘irrational strategy’ - The UK's "irrational" use of biofuels will cost motorists around £460 million over the next 12 months, a think tank says. A report by Chatham House says the growing reliance on sustainable liquid fuels will also increase food prices. The author says that biodiesel made from vegetable oil was worse for the climate than fossil fuels. Under EU law, biofuels are set to make up 5% of the UK's transport fuel from today. Since 2008, the UK has required fuel suppliers to add a growing proportion of sustainable materials into the petrol and diesel they supply. These biofuels are mainly ethanol distilled from corn and biodiesel made from rapeseed, used cooking oil and tallow. But research carried out for Chatham House says that reaching the 5% level means that UK motorists will have to pay an extra £460m a year because of the higher cost of fuel at the pump and from filling up more often as biofuels have a lower energy content. The report say that if the UK is to meet its obligations to EU energy targets the cost to motorists is likely to rise to £1.3bn per annum by 2020.

Paraguay Supplies Grain To World - With its highly favorable soil and climate, Paraguay will provide to the world, more than 8.5 million tons of grain. The region has a great potential for growth and is currently demanding the establishment of additional ports in the Rio de la Plata region, in order to reduce the constant burdens caused from the lack of infrastructure logistics in the region. MERCOSUR, South America’s largest trading block is emerging as the largest provider of grain in the World, and Paraguay is positioned as the third largest producer and exporter of grain and cereals in the World. Although South American countries are becoming the World’s breadbasket, many logistical problems arise, and that is not a coincidence for Paraguay, a land locked country in the heart of South America, where even MERCOSUR was founded in 1991. With all transportation difficulties, Paraguay is emerging as the third largest producer of three agricultural crops, soybean, corn and wheat, together with Argentina, Brazil and Uruguay will generate 264.4 million tons of grain in the 2012-2013 harvesting year.

Thailand’s Farmer-Friendly Rice Subsidy Backfires - With Thailand dominating the global market for rice exports, Uthai enjoyed strong demand. In 2012, though, he had to cut his workforce by 40 percent. The culprit: a Thai government policy that pays local farmers vastly inflated prices for their rice. While the government sees the program as a way to boost rural incomes, the policy has made Thai rice uncompetitive against rice from Vietnam and India. Before the new policy went into effect, Uthai exported 200,000 tons to the U.S., China, and Hong Kong. This year, he says, “we will be lucky if we get 80,000.” Charoen’s troubles are related to the political challenges the kingdom has endured since a military coup ousted populist Prime Minister Thaksin Shinawatra in 2006. The current premier is his sister, Yingluck Shinawatra, and in 2011 she decided an easy way to cement her party’s grip on power was to win over farmers by paying above-market prices for their rice. “I earn more and have higher savings thanks to the program,” says Groon To-Chai, a 67-year-old farmer from Nakon Sawan province in central Thailand who says his monthly income has jumped by 50 percent, to 30,000 baht ($1,000). At $571 per metric ton, Thai rice is now much more expensive than Vietnamese and Indian rice.

Global Crop Production - Pursuant to yesterday's discussion, particularly for those looking for a bigger picture than just cereal yields.  The above shows global production, by weight, of the major food crops.  Even by weight, cereals are more than half, and if we were to look at calorie content this would be much more strongly true as fruits and vegetables have a lot of water content. If we look at the total weight of all these crops, it's been increasing at a very slightly above linear pace: And as with the cereal yields, fluctuations in the amount of food produced, as a fraction of the total produced, have been dropping over time: Thus the picture is the same - global food production is increasing steadily, and the global food supply is becoming more stable. This is not to say there aren't constantly problems with the weather/climate in various places, and many people going hungry. But overall, at the moment, the trend is to greater food production and more stable supply.

Arabs must invest $80bn to avoid food shortage - Arab states will need to invest US$65-80 billion in agriculture by 2020 to cover the escalating gap in food security, UAE Minister of Finance and Deputy Ruler of Dubai, Sheikh Hamdan bin Rashid Al Maktoum said. Speaking at the annual forum of financial institutions and ministers in Dubai on Tuesday, Sheikh Hamdan said the region’s poor agricultural infrastructure and investment would cause the food security gap to more than double from nearly US$41 billion in 2010 to US$89 billion in 2020. “Food security is one of the main challenges that Arab countries face, taking in consideration that Arab agriculture projects did not achieve the predicted increased productivity for several reasons,” Sheikh Hamdan said. “Those reasons vary and include the following: weakness in the infrastructure, investment environment, financial resources, scientific research and agriculture services.

Millions face starvation as world warms, say scientists - Millions of people could become destitute in Africa and Asia as staple foods more than double in price by 2050 as a result of extreme temperatures, floods and droughts that will transform the way the world farms. As food experts gather at two major conferences to discuss how to feed the nine billion people expected to be alive in 2050, leading scientists have told the Observer that food insecurity risks turning parts of Africa into permanent disaster areas. Rising temperatures will also have a drastic effect on access to basic foodstuffs, with potentially dire consequences for the poor. Frank Rijsberman, head of the world's 15 international CGIAR crop research centres, which study food insecurity, said: "Food production will have to rise 60% by 2050 just to keep pace with expected global population increase and changing demand. Climate change comes on top of that. The annual production gains we have come to expect … will be taken away by climate change. We are not so worried about the total amount of food produced so much as the vulnerability of the one billion people who are without food already and who will be hit hardest by climate change. They have no capacity to adapt."

Climate Change Still Not Affecting Global Cereal Yields - A couple of years ago, I took a look at the FAO data for global cereal yields with a view to answering the question of whether climate change was yet having a noticeable impact on global food production.  At that time, the answer was unequivocally no: So, clearly, the overwhelming story in global agricultural yields is this: improving agricultural technology has increased yields at a steady, reliable pace - they have more than doubled over the last 50 years. There just is absolutely no support in the data for the idea that climate change, or any other negative or scary factor you care to name - eroding soil, depleting aquifers, peaking oil supplies - is causing the agricultural yield curve to start bending downward. Maybe they will in the future, but it sure isn't happening yet.  At that time, the slope of the straight line through the yield data was 0.0442 tonnes/hectare/year.  The straight line explained 99.132% of the variance in the data, and a quadratic, which could potentially capture the data bending downward, only explained an additional 0.016% of the data. So has two additional years worth of data (2010-2011) changed the picture?No, it hasn't.  2011 was the highest yield yet, the slope of the line has increased to 0.0446 tonnes/hectare/year, it now explains 99.153% of the variance in the data, and the quadratic is down to explaining only an additional 0.00001% of the variance (yes, four zeroes).

The Elephants in the Room: Citizens United, Trade and Corporate Ownership of Our Natural Resources from naked capitalism-  This is a short but useful reminder of how the failure to enforce anti-trust laws leads to oligopolies. MBAs are taught how to make markets inefficient to increase corporate profits, and one of the most lasting ways is to achieve a dominant position, ideally in a concentrated industry. “Roll ups” which is a consolidation play, is a favorite among private equity firms (but they often stumble in integrating the companies). The author describes how dominant players preserve their profits through aggressive lobbying in the food space, and why that is particularly troubling.  Wenonah Hauter is the Executive Director of Food & Water Watch. She has worked extensively on food, water, energy and environmental issues at the national, state and local level. Her book Foodopoly: The Battle Over the Future of Food and Farming in America examines the corporate consolidation and control over our food system and what it means for farmers and consumers.

Missouri - Floods Predicted Along the Mississippi - The Mississippi River, so low for much of the winter that barge traffic was nearly halted, could reach up to 10 feet above flood stage by the middle of next week in parts of Iowa, Illinois and Missouri, National Weather Service hydrologists said Wednesday. The weather service is predicting three to four inches of rain — and perhaps more — from Kansas City, Mo., to Chicago by Friday morning, the result of an unsettled weather pattern that prompted widespread tornado and thunderstorm watches. Soil is already saturated from an unusually wet early spring, raising concerns along the Mississippi from the Quad Cities, along the Iowa-Illinois border, south to St. Louis. “North of St. Louis, we’re looking at the kind of flooding we haven’t seen since 2008,” said Mark Fuchs, a National Weather Service hydrologist. Floods in the spring of 2008 were particularly troublesome in Iowa, where hundreds of homes were damaged in Cedar Rapids, Iowa City and other towns.

Extreme Drought To Extreme Flood: Weather Whiplash Hits The Midwest - It seems like just a few months ago barges were scraping bottom on the Mississippi River, and the Army Corps of Engineers was blowing up rocks on the bottom of the river to allow shipping to continue. Wait, it was just a few months ago–less than four months ago! Water levels on the Mississippi River at St. Louis bottomed out at -4.57′ on January 1 of 2013, the 9th lowest water level since record keeping began in 1861, and just 1.6′ above the all-time low-water record set in 1940 (after the great Dust Bowl drought of the 1930s.) But according to National Weather Service, the exceptional April rains and snows over the Upper Mississippi River watershed will drive the river by Tuesday to a height 45 feet higher than on January 1. The latest forecast calls for the river to hit 39.4′ on Tuesday, which would be the 8th greatest flood in history at St. Louis, where flood records date back to 1861. Damaging major flooding is expected along a 250-mile stretch of the Mississippi from Quincy, Illinois to Thebes, Illinois next week.

Greenland Bets on Mining as Global Warming Hits Fishing Industry -  Greenland is betting that rising mineral production will help cushion the impact of global warming on its fishing industry and boost economic growth in the Arctic island-nation as its pursues independence from Denmark. “In the past we’ve relied mainly on fisheries which made the economy very fragile,” Prime Minister Aleqa Hammond told reporters in Copenhagen today. “We need another way to stabilize the economy, and that will be mining. There’s really no alternative to that.” The 58,000 inhabitants of Greenland, the world’s most scarcely-populated nation, are trying to attract offshore funds to develop its energy and mineral resources as changes to global weather systems disrupt fishing patterns and threaten its main source of income. The country’s $2.1 billion economy, which gets about half its exports from shrimp, is also propped up by about $600 million in subsidies from Denmark. “Foreign interest in Greenland based on mineral exploration has exploded and we can take advantage of that,” Hammond said. “Before our contact with the outside world was based on whales and seals and what we ate. Today, it’s based on minerals and the consequences of climate change.”

NOAA: Arctic summers to be nearly ice-free earlier than predicted - Most of the Arctic will stop sporting summer ice sooner than expected, according to a study by a pair of National Oceanic and Atmospheric Administration (NOAA) scientists.  Arctic summers will be nearly ice-free before 2050, James Overland and Muyin Wang noted in their study. They stressed a need for further study of the Arctic to better understand the impact of climate change.  “Rapid Arctic sea ice loss is probably the most visible indicator of global climate change; it leads to shifts in ecosystems and economic access, and potentially impacts weather throughout the northern hemisphere,” Overland said in a statement.  The report comes after some Democrats used a large ice-melt event last year in Greenland to call attention to climate change. But congressional climate action remains unlikely with Republicans and centrist Democrats resistant to such measures.

Video Explains How Loss Of Arctic Ice Weakens Jet Stream, Amplifies Extreme Weather - We’ve written extensively about how how arctic ice loss is driving extreme weather.Jennifer A. Francis of Rutgers University’s Institute of Marine and Coastal Sciences has been at the forefront of this research. She appears in many videos explaining the connection between climate change and extreme weather (see recent 40 minute video here). Here’s a short version aimed at a very general audience:

As Arctic Ice Melts, It's A Free-For-All For Oil ... And Tusks - It's widely known that the world's icecaps are melting. While most people are focused on what we're losing, some have considered what might be gained by the disappearance of all that ice. In 2008, the U.S. Geological Survey released a report estimating that 13 percent of the world's remaining undiscovered oil and 30 percent of the remaining undiscovered natural gas could be in the Arctic.Amy Crawford, writing in this month's Smithsonian Magazine, says that Russia has already sent submarines deep into the Arctic Ocean to look for that oil and natural gas, and that China, too, wants a piece of the action. "China obviously does not have any Arctic coastline," Crawford says. "Their northern border is about 900 miles from the Arctic Circle. But they are seeking influence." That influence would come through Canada, one of their chief providers of oil. But so far, Russia has the upper hand.

When Will Arctic Summers Be (Nearly) Ice Free? - NOAA scientists are trying to answer the title question. A new report Arctic nearly free of summer sea ice during first half of 21st century takes a stab at it. The results are bit perplexing. For scientists studying summer sea ice in the Arctic, it’s not a question of “if” there will be nearly ice-free summers, but “when.” And two scientists say that “when” is sooner than many thought — before 2050 and possibly within the next decade or two. James Overland of NOAA’s Pacific Marine Environmental Laboratory and Muyin Wang of the NOAA Joint Institute for the Study of Atmosphere and Ocean at the University of Washington, looked at three methods of predicting when the Arctic will be nearly ice free in the summer. The work was published recently online in the American Geophysical Union publication Geophysical Research Letters... “There is no one perfect way to predict summer sea ice loss in the Arctic,” said Wang. “So we looked at three approaches that result in widely different dates, but all three suggest nearly sea ice-free summers in the Arctic before the middle of this century.” No perfect way? Well, you could look at the ice volume trend and do a simple extrapolation.

Ice Ice Baby – podcast - This week we speak to Professor Peter Wadhams, Professor of Ocean Physics, and Head of the Polar Ocean Physics Group in the Department of Applied Mathematics and Theoretical Physics, at the University of Cambridge. Prof. Wadhams is an expert in Arctic sea-ice, and is a review editor for the physical sciences component of the upcoming 2014 IPCC (or Intergovernmental Panel on Climate Change ) Fifth Assessment Report. We discuss the precarious nature of the Arctic Sea-Ice, the end of summer ice altogether, the problems with the IPCC reports, climate tipping points, the release of massive quantities of methane into the atmosphere, and likelihood of Southern Europe turning into desert in this century.

The Antarctic Half of the Global Thermohaline Circulation Is Faltering -  The sudden cooling of Europe, triggered by collapse of the global thermohaline circulation in the north Atlantic and the slowing of the Gulf Stream has been popularized by the movies and the media. The southern half of the global thermohaline circulation is as important to global climate but has not been popularized. The global oceans' coldest water, Antarctic bottom water forms in several key spots around Antarctica. The water is so cold and dense that it spreads out along the bottom all of the major ocean basins except the north Atlantic and Arctic. Multiple recent reports provide strong evidence that the formation of Antarctic bottom water has slowed dramatically in response to massive subsurface melting of ice shelves and glaciers. The meltwater is freshening a layer of water found between depths of 50 and 150 meters. This lightened layer is impeding the formation of Antarctic bottom water, causing the Antarctic half of the global thermohaline circulation to falter.

Summer Ice Melt On Antarctic Peninsula Is Now Nonlinear, Fastest In Over 1000 Years -  A new study finds “a nearly tenfold increase in melt intensity” on the Antarctic Peninsula in the last few hundreds years. Here’s the most worrisome news from this 1000-year reconstruction of ”ice-melt intensity and mean temperature” published in Nature Geoscience: The warming has occurred in progressive phases since about AD 1460, but intensification of melt is nonlinear, and has largely occurred since the mid-twentieth century. Summer melting is now at a level that is unprecedented over the past 1,000 years. We conclude that ice on the Antarctic Peninsula is now particularly susceptible to rapid increases in melting and loss in response to relatively small increases in mean temperature. In short, while some mistakenly assert the climate is less sensitive than we thought, the fact is that polar ice loss is accelerating far beyond what the models had projected even a few years ago, and the whole region appears even more sensitive than previously thought.

Summer Ice Melt In Antarctica Is At The Highest Point In 1,000 Years, Researchers Say: (Reuters) - The summer ice melt in parts of Antarctica is at its highest level in 1,000 years, Australian and British researchers reported on Monday, adding new evidence of the impact of global warming on sensitive Antarctic glaciers and ice shelves. Researchers from the Australian National University and the British Antarctic Survey found data taken from an ice core also shows the summer ice melt has been 10 times more intense over the past 50 years compared with 600 years ago. "It's definitely evidence that the climate and the environment is changing in this part of Antarctica," lead researcher Nerilie Abram said. Abram and her team drilled a 364-metre (400-yard) deep ice core on James Ross Island, near the northern tip of the Antarctic Peninsula, to measure historical temperatures and compare them with summer ice melt levels in the area. They found that, while the temperatures have gradually increased by 1.6 degrees Celsius (2.9 degrees Fahrenheit) over 600 years, the rate of ice melting has been most intense over the past 50 years.

Jeremy Grantham, environmental philanthropist: 'We're trying to buy time for the world to wake up' -  Grantham – who occupies a legendary place in the world of finance for predicting all the major stock market bubbles of recent decades (and doing very well in the process) – had decided, after 15 years of low-key environmental philanthropy, to, as he puts it, "walk the walk"."I was committed to getting arrested," says Grantham, a tall, slight man, as he looks out across the City from his London office on the 15th floor of a glass-and-steel tower next to the Bank of England. He speaks machine gun-quickly in a soft, mid-Atlantic accent. "But the day before [the protest] my wife checked with the lawyer, who said, 'Don't do that!'" It turned out that being arrested would give him serious problems when it came to travelling.From where he stands, this bubble, the "carbon bubble", is the biggest he's seen. "We're already in a bad place. The worst accidents are [only] 20, 30, 40 years from now." Such apocalyptic talk is often the preserve of deep-green doom-mongers – the kind of talk that has led many to reject environmentalism. But Grantham insists he's guided "by the facts alone". On some issues (immigration and education) he "would be considered rightwing", but with the environment, he says he calls it as he sees it. He is disdainful of those who ignore the data, or worse, misinform the public.

U.S., China joint statement calls for ‘forceful’ climate change action, after Sec. of State John Kerry talks with Chinese leaders - “The United States of America and the People's Republic of China recognize that the increasing dangers presented by climate change measured against the inadequacy of the global response requires a more focused and urgent initiative,” the two nations said in a statement issued to U.S. reporters and members of the Chinese media on Saturday night. “The two sides have been engaged in constructive discussions through various channels over several years bilaterally and multilaterally, including the UN Framework Convention on Climate Change process and the Major Economies Forum,” the statement read. “In addition, both sides consider that the overwhelming scientific consensus regarding climate change constitutes a compelling call to action crucial to having a global impact on climate change.”

Africa Aims To Combat The Effects Of Climate Change By Greening The Desert -  Desertification affects about 40 percent of the continent, and according to the U.N., two-thirds of the continent’s arable land could be lost by 2025 if the trend continues unabated. Africa has recognized these threats and has turned to projects that re-vegetate the land in hopes of holding off the spread of the desert. One initiative, the Great Green Wall, aims to battle desertification by planting a wall of trees and vegetation from coast to coast across the continent, below the southern edge of the Sahara. Once completed, the wall will be 4,300 miles long and 9 miles wide and will cut through 11 African countries in the Sahel region of the continent. The plan was approved by the African Union in 2007, and in July 2008, the 11 countries in the wall’s path began planting their trees. The trees and vegetation are planted to prevent erosion and slow wind speeds, but they also provide fruit and vegetables for Africans in a region that is in the midst of a food crisis — according to the United Nation’s Food Program, as many as 11 million people in the Sahel don’t have enough to eat. In Senegal, which is farthest along in the planting of the wall, 2 million trees are planted each year during the rainy season. Already Senegal has been able to reap the benefits of the fruit and vegetables grown along the wall, but it will take some time to assess its effectiveness at combating desertification– it will be another 10 to 15 years before the wall becomes a forest.

EPA: U.S. greenhouse gases drop 1.6% from 2010 to 2011 -  The Environmental Protection Agency says greenhouse gas emissions in the United States showed a 1.6% decline from 2010 to 2011. The decrease continued an overall decline in U.S. greenhouse gas emissions, down 6.9% since 2005. The EPA said the drop from 2010 to 2011 is driven mostly by power plants switching from coal to natural gas, which emits less carbon dioxide when burned. Additionally, a mild winter in the south Atlantic region of the U.S., where much of the heating is electric, resulted in lower electricity demand. Power plants are the single biggest source of greenhouse gases, with 33%. The transportation sector is second, with 28% of emissions. Increases in vehicle fuel economy through 2025 should reduce transportation emissions even further. Greater switching to natural gas from coal will cut power plant emissions. President Obama has pledged to reduce U.S. greenhouse gas emissions 17% below 2005 levels by 2020. Despite the general decline in greenhouse gas emissions, many experts contend that the administration would have to take further steps to meet the 2020 goal. On Monday, the EPA confirmed that it had missed a deadline to pass a final rule to cut carbon dioxide emissions from new power plants. The EPA did not provide an explanation for the delay.

Clean energy progress too slow to limit global warming - report (Reuters) - The development of low-carbon energy is progressing too slowly to limit global warming, the International Energy Agency (IEA) said on Wednesday. With power generation still dominated by coal and governments failing to increase investment in clean energy, top climate scientists have said that the target of keeping the global temperature rise to less than 2 degrees Celsius this century is slipping out of reach. "The drive to clean up the world's energy system has stalled," said Maria van der Hoeven, the IEA's executive director, at the launch of the agency's report on clean energy progress. "Despite much talk by world leaders, and a boom in renewable energy over the past decade, the average unit of energy produced today is basically as dirty as it was 20 years ago." Global clean energy investment in the first quarter fell to its lowest level in four years, driven by cuts in tax incentives at a time of austerity, according to a separate report by Bloomberg New Energy Finance this week. The IEA said that coal-fired generation grew by 45 percent between 2000 and 2010, far outpacing the 25 percent growth in non-fossil fuel generation over the same period.

Chevron Defies California On Carbon Emissions - Chevron helped write the first-in-the-nation rule ordering reduced carbon emissions from cars and trucks. Its biofuels chief spoke at the ceremony where California Governor Arnold Schwarzenegger signed the executive order in 2007, the same year the oil company pledged to develop a gasoline replacement from wood.  Now Chevron is leading a lobbying and public relations campaign to undercut the California mandate aimed at curbing global warming, two years after the state started phasing it in. Research on commercially viable climate-friendly products has come to naught, stymied by the poor economics of coaxing hydrocarbons from plants’ stubborn cell walls, according to Chevron officials.  We’ve looked at 100 feedstocks, 50 conversion technologies, worked to shape this law the best we can, and we have not come up with a solution to be able to comply,” said Rhonda Zygocki, Chevron’s executive vice president of policy and planning,  Rick Zalesky, the Chevron official who celebrated the order’s signing with Schwarzenegger, was blunt last June when he declared the low-carbon standard “not achievable.” 

Europe Rejects Bid to Raise Cost of Carbon Emissions - The European Parliament voted narrowly in Strasbourg on Tuesday to reject a measure to raise the costs of emitting greenhouse gases for electric utilities and manufacturers, placing the future of the European Union’s flagship effort to combat climate change in doubt.  The European Emissions Trading System, or E.T.S., has been losing credibility even as other countries like China consider adopting similar measures to help bring down greenhouse gas emissions, which scientists have linked to global warming. But in the 334-to-315 vote, members of the European Parliament seemed to focus less on the global implications than on not wanting to add further to energy costs in Europe. Natural gas prices in Europe are roughly three times those in the United States, which is benefiting from the shale gas boom. “This is a crisis in European leadership on the climate issue,” said Anthony Hobley, head of the climate change practice at Norton Rose, a law firm in London. “We have reached the stage where the E.U. E.T.S. has ceased to be an effective environmental tool.”

Carbon-Intensive Investors Risk $6 Trillion ‘Bubble,’ Study Says - Investors in carbon-intensive business could see $6 trillion wasted as policies limiting global warming stop them from exploiting their coal, oil and gas reserves, according to a report. The top 200 oil, gas and mining companies spent $674 billion last year finding and developing fossil fuel resources, according to research by the Carbon Tracker Initiative and a climate-change research unit at the London School of Economics. If this rate continues for the next decade some $6 trillion risks being wasted on “unburnable” or stranded assets, according to the report, released today. Banks, funds and institutional investors are seeking clarity from government and central banks about how greenhouse- gas emissions may affect the value of their investments. The Bank of England said last year it will evaluate whether the U.K.’s exposure to investments in polluting industries poses a risk to financial stability after a group of more than 20 investors called for a such a probe.

Reducing Emissions of Soot, Methane Can Decrease Sea-Level Rise - Cutting-down emissions of pollutants such as methane, soot, refrigerants, and gases can help in reducing sea-level rise by 2100, according to a new study. Researchers said that reducing emissions of these short-lived pollutants could slow-down the annual rise in sea-levels by as much as 25 to 50 percent. "To avoid potentially dangerous sea level rise, we could cut emissions of short-lived pollutants even if we cannot immediately cut carbon dioxide emissions. This new research shows that society can significantly reduce the threat to coastal cities if it moves quickly on a handful of pollutants," said Aixue Hu of the National Center for Atmospheric Research (NCAR), the first author of the study.  Previous research has shown that reducing levels of soot and methane in the atmosphere is a better strategy to adopt against climate change. Sea levels are rising at a rate of 3 millimeters (0.12 inches) per year and could rise between 18 and 200 centimeters (between 7 inches and 6 feet) by the end of this century. As most of the world's major cities are located near the sea, rising sea-levels could be disastrous for many people.

California Power Facing Biggest Test Since Enron: Energy Markets - California may face the biggest regional power shortages in more than a decade this summer, sending wholesale prices higher, as idled nuclear reactors and low hydroelectric output cut generating capacity. The California Independent System Operator Corp. said last month that managing the state grid, especially in parts of Southern California, will prove “difficult” because the system will be operating without Edison International (EIX)’s San Onofre nuclear power plant and two natural gas-fired units, while hydroelectric output will be at a three-year low. The nuclear plant, California’s single largest source of baseload power, accounts for 3.7 percent of the state’s capacity. Southern California wholesale electricity for July through September already is at the highest level for this season since 2008 on the outlook for a shift to costlier, more volatile fossil fuels. A strain on the grid could lead to power failures reminiscent of the state’s worst energy crisis in 2000 and 2001, when generation shortfalls and market manipulation by traders at companies including Enron Corp. sent prices to record highs and triggered blackouts that affected millions of customers in the most populous U.S. state.

Clean Energy Investment Woes -The first quarter of 2013 has been a rather depressing one for clean energy and climate change: Global investment in clean energy is at its lowest since 2009; there is talk of ending fuel subsidies to level the playing field; and the European Union’s vote against a backloading proposal that would have boost its languishing emissions trading scheme will send the once-promising carbon market into a downward spiral. Global investment in clean energy in this quarter was lower than at any quarter since 2009, according to Bloomberg New Energy Finance. The research company says global investment in Q1 2013 was down 22% from Q1 2012 at $40.6 billion for renewable energy, energy efficiency and energy-smart technologies. From the last quarter of 2012, global investment in clean energy plummeted 38%. The largest drops were seen in asset finance of utility-scale projects like wind farms and solar parks.

World’s largest OTEC power plant planned for China - Lockheed Martin has now shifted its OTEC sights westward by teaming up with Hong Kong-based Reignwood Group to co-develop a pilot plant that will be built off the coast of southern China. OTEC uses the natural difference in temperatures between the cool deep water and warm surface water to produce electricity. There are different cycle types of OTEC systems, but the prototype plant is likely to be a closed-cycle system. This sees warm surface seawater pumped through a heat exchanger to vaporize a fluid with a low boiling point, such as ammonia. This expanding vapor is used to drive a turbine to generate electricity with cold seawater then used to condense the vapor so it can be recycled through the system.

Is 70 Percent Renewable Power Possible? Portugal Just Did It For 3 Months -  Portugal’s electricity network operator announced that renewable energy supplied 70 percent of total consumption in the first quarter of this year. This increase was largely due to favorable weather conditions resulting in increased wind and water flow, as well as lower demand. Portuguese citizens are using less energy and using sources that never run out for the vast majority of what they do use.

  • Hydropower supplied most: Hydroelectric power supplied 37 percent of total electricity — a 312 percent increase compared to last year.
  • Wind turbines broke a record: Wind energy represented 27 percent of the total share, which is 60 percent higher than last year. This is 37 percent above average and good for the highest amount generated by wind in Portugal, ever.
  • 2.3 percent less energy used: Energy consumption has fallen every year since 2010 and is now at 2006 levels. Some of the drop this quarter was due to fewer working days and a warmer winter, but even controlling for those factors, there was still a drop of .4 percent.

Engineers use brain cells to power smart grid - "The brain is one of the most robust computational platforms that exists," says Ganesh Kumar Venayagamoorthy, Ph.D., director of the Real-Time Power and Intelligent Systems Laboratory at Clemson University. "As power-systems control becomes more and more complex, it makes sense to look to the brain as a model for how to deal with all of the complexity and the uncertainty that exists." Led by Venayagamoorthy, a team of neuroscientists and engineers is using neurons grown in a dish to control simulated power grids. The researchers hope that studying how neural networks integrate and respond to complex information will inspire new methods for managing the country's ever-changing power supply and demand.In other words, the brainpower behind our future electric power grid might not be what you think.

Why strong regulatory agencies matter - I have always believed that if we are doing our job right at the Center for Public Integrity, then our investigations should anticipate the news. That was the case on Wednesday. The Center posted an important story early that morning about the U.S. Chemical Safety Board’s failure to complete its investigations into chemical accidents in a timely manner. Further, we reported that a former member of the board believed the agency was being “grossly mismanaged.” Later that same day, an explosion tore through a fertilizer plant north of Waco in Central Texas, killing more than a dozen people and injuring more than 150, authorities say. The horrific accident was similar to other deadly industrial accidents described in our piece — accidents requiring Chemical Safety Board investigations that have dragged on, in some cases for years. Sluggish and incomplete investigations are important because finished reports often contain recommendations that can save lives going forward. Delay has a human cost.

None of the world’s top industries would be profitable if they paid for the natural capital they use - The notion of “externalities” has become familiar in environmental circles. It refers to costs imposed by businesses that are not paid for by those businesses. For instance, industrial processes can put pollutants in the air that increase public health costs, but the public, not the polluting businesses, picks up the tab. In this way, businesses privatize profits and publicize costs. Environmentalists these days love speaking in the language of economics — it makes them sound Serious — but I worry that wrapping this notion in a bloodless technical term tends to have a narcotizing effect. It brings to mind incrementalism: boost a few taxes here, tighten a regulation there, and the industrial juggernaut can keep right on chugging. However, if we take the idea seriously, not just as an accounting phenomenon but as a deep description of current human practices, its implications are positively revolutionary. To see what I mean, check out a recent report [PDF] done by environmental consultancy Trucost on behalf of The Economics of Ecosystems and Biodiversity (TEEB) program sponsored by United Nations Environmental Program. TEEB asked Trucost to tally up the total “unpriced natural capital” consumed by the world’s top industrial sectors.

Walmart's CEO doubles down on the company's aggressive bet on renewable energy -- The retail behemoth is throwing its full economic muscle behind energy sustainability. Local utilities that don't get on board with Walmart's green energy programs could be left behind like an old, worn-out shopping center. The company's new energy policy, announced this week at its Global Sustainability Milestone Meeting, calls for Walmart to produce or procure 7 billion kilowatt-hours of renewable energy globally by the end of the decade, a 600 percent increase over 2010 levels. At the same time, the retailer will make deep cuts to its energy consumption by shaving 20 percent from 2010 levels the amount of electricity required to power a square foot of a Walmart store or warehouse.

As China Addresses Its ‘Airpocalypse,’ Coal Exporters Fear Loss Of Another Market - China’s air pollution crisis is more evident than ever. A new research report, conducted under the World Health Organization’s Global Burden of Disease project, shows that over 1.2 million premature deaths were caused by PM2.5 pollution (fine particles like soot, mostly resulting from fossil fuel combustion). That accounts for 15 percent of the total deaths in China during 2010 and 40 percent of global air pollution-related deaths. The data also showed that Chinese people’s average exposure to PM2.5 increased 50 percent from 1990 to 2010, compared to 10 percent globally. Burning coal is a leading cause of air pollution in China, coal fired power plants release dangerous pollutants such as SO2, NOx and particulate matter that contributes to PM2.5 pollution. Of course, burning coal is also a major source of the carbon pollution that is changing our climate. The crisis was especially severe in Beijing earlier this year, when air pollution levels soared, “hitting pollution levels 25 times that considered safe in the U.S.” It’s clear that addressing China’s air pollution crisis will require reducing coal consumption. In response to the air pollution crisis, Deutsche Bank issued a report on measures needed to bring air quality to acceptable levels. Their conclusion was that to meet national air quality targets even by 2030, China’s coal consumption will need to peak and decline within this decade. That would have big impacts on the global coal market – as Bloomberg News reported, “Global shipments of thermal coal could be 18 percent lower than forecasted by 2015 should China, the biggest importer, toughen measures to curb air pollution to safe levels.”

Wood: The fuel of the future | The Economist: WHICH source of renewable energy is most important to the European Union? Solar power, perhaps? (Europe has three-quarters of the world’s total installed capacity of solar photovoltaic energy.) Or wind? (Germany trebled its wind-power capacity in the past decade.) The answer is neither. By far the largest so-called renewable fuel used in Europe is wood. In its various forms, from sticks to pellets to sawdust, wood (or to use its fashionable name, biomass) accounts for about half of Europe’s renewable-energy consumption. In some countries, such as Poland and Finland, wood meets more than 80% of renewable-energy demand. Even in Germany, home of the Energiewende (energy transformation) which has poured huge subsidies into wind and solar power, 38% of non-fossil fuel consumption comes from the stuff. After years in which European governments have boasted about their high-tech, low-carbon energy revolution, the main beneficiary seems to be the favoured fuel of pre-industrial societies.The idea that wood is low in carbon sounds bizarre. But the original argument for including it in the EU’s list of renewable-energy supplies was respectable. If wood used in a power station comes from properly managed forests, then the carbon that billows out of the chimney can be offset by the carbon that is captured and stored in newly planted trees. Wood can be carbon-neutral. Whether it actually turns out to be is a different matter. But once the decision had been taken to call it a renewable, its usage soared.

New Rules for U.S. Nuclear Disaster Response - — Two years after the Fukushima nuclear accident in northern Japan, the United States government is using lessons from that disaster to rewrite its plans for responding to radiation contamination, focusing on long-term cleanup instead of emergency response. But the proposals have set off vehement opposition from critics of nuclear power.On Monday, the Environmental Protection Agency expects to publish in the Federal Register a draft document that would change its long-standing advice to state and local governments about how to limit long-term exposure to radiation after a reactor accident or a “dirty bomb” attack. By reducing the projections for how much radiation exposure is likely in the years after such an episode, the proposal could also reduce the amount of contaminated land that would have to be abandoned.  A federally chartered research group will close its comment period on Monday on a draft report that it has prepared for the Department of Homeland Security and that lays out long-term cleanup standards.

Nuclear Is NOT a Low-Carbon Source of Energy - Even well-known, well-intentioned scientists sometimes push bad ideas. For example, well-known scientists considered pouring soot over the Arctic in the 1970s to help melt the ice – in order to prevent another ice age. That would have been stupid. Even . In other words, scientists – even prominent ones – sometimes fall prey to hairball theories and dangerous proposals. (Remember, doctors used to bleed patients to remove the “bad humors”.) Similarly, some scientists are under the mistaken impression that nuclear power is virtually carbon-free, and thus must be pushed to prevent runaway global warming. But this is a myth. Amory Lovins is perhaps America’s top expert on energy, and a dedicated environmentalist for close to 50 years. His credentials as an energy expert and environmentalist are sterling. Lovins says nuclear is not the answer: Nuclear plants are so slow and costly to build that they reduce and retard climate protection.

New Interior Secretary Sally Jewell called out by 21 groups wanting moratorium on Powder River coal giveaways - The leaders of 21 organizations welcomed Secretary of the Interior Sally Jewell to her first day on the job today with a letter calling for “an immediate moratorium on new coal leasing in the Powder River Basin and a comprehensive review of the federal coal leasing program.” Today’s letter emphasizes the huge quantities of carbon pollution unlocked by federal coal leasing in the Powder River Basin of northeastern Wyoming and southeastern Montana, and how that is undermining President Obama’s climate commitment and record. As the letter states; “Between 2011-2012, BLM leased over 2.1 billion tons of coal in the Powder River Basin, unlocking nearly 3.5 billion metric tons of CO2 that will be released when this coal is burned. In comparison, EPA’s newest passenger vehicle emissions standards will reduce an estimated 2 billion tons of carbon dioxide over the lifetime of cars made from 2017-2025.” In addition to the enormous amounts of carbon pollution, the Department of Interior’s coal giveaways amount to a massive fossil fuel subsidy. As Kelly Mitchell wrote last week, “A federal coal leasing program run by DOI’s Bureau of Land Management has resulted in almost $30 billion in government handouts to the coal industry. The giveaway happens through noncompetitive “auctions” where the Department sells the rights to publicly-owned coal for a fraction of what it’s worth.”

New Opportunities for US Natural Gas Industry with Japan’s Entry to TPP: During his confirmation hearing, Secretary of Energy designate Moniz gave a strong endorsement for the export of natural gas, and just last week the US Trade Representative gave the go ahead for Japan’s entry into the Trans-Pacific Partnership(TPP). The Trans-Pacific Partnership was one of the first Obama initiatives to strengthen trade between the US and the emerging economies of the Pacific. Although Japan and the US have a strong history of trade, Japan’s entry into the TPP will produce significant benefits for both nations.We are the Saudi Arabia of natural gas. Our reserves of unconventional gas are more than sufficient to meet our needs at competitive prices while creating thousands of new jobs and contributing to robust economic growth. All we have to do is take a look at the economic benefits that have flowed to states where shale gas is being produced to get a snap shot of the potential when the full potential of gas production and use, including export, is realized. Some domestic companies are opposing natural gas exports in the mistaken belief that doing so will keep its price low which contributes to their self interest. Whatever benefit they derive will be short lived because continued increased in production is based on a growing market not a closed one.

Pennsylvania Court Deals Blow to Secrecy-Obsessed Fracking Industry: Corporations Not The Same As Persons With Privacy Rights - A Pennsylvania judge in the heart of the Keystone State’s fracking belt has issued a forceful and precedent-setting decision holding that there is no corporate right to privacy under that state’s constitution, giving citizens and journalists a powerful tool to understand the health and environmental impacts of natural gas drilling in their communities. “Whether a right of privacy for businesses exists within the prenumbral rights of Pennsylvania’s constitution is a matter of first impression,” wrote Washington County Court of Common Pleas Judge Debbie O’Dell Seneca late last month. “It does not.” Judge O’Dell Seneca’s ruling comes in an ongoing case where several newspapers sued to unseal a confidential settlement where major fracking corporations paid $750,000 to a family that claimed the gas drilling had contaminated their water and harmed their health. The Court ordered that settlement unsealed, enabling the papers, environmentalists and community rights advocates to examine the health issues and causes. But where the ruling is likely to make the biggest waves is in the so-called corporate personhood debate. The Judge spent more than a third of her 32-page decision saying why corporations and business entities were not the same as people under Pennsylvania’s constitution, and why, for the purposes of doing business in the state, that federal court rulings that blur the rights of people and businesses do not apply.

Fear of Fracking: The Problem with the Precautionary Principle - An amazing thing has happened over the last five years.   Against all expectations, American emissions of carbon dioxide into the atmosphere, since peaking in 2007, have fallen by 12%, back to 1995 levels.  (As of 2012. US Energy Information Agency).   How can this be?   The United States did not ratify the Kyoto Protocol to cut emissions of greenhouse gases below 1997 levels by 2012, as Europe did.   Was the achievement a side-effect of reduced economic activity?   It is true that the US economy peaked in late 2007, the same time as emissions.   But the US recession ended in June 2009 and GDP growth since then, though inadequate, has been substantially higher than Europe’s.  Yet US emissions continued to fall, while EU emissions began to rise again after 2009 (EU).  Something else is going on.  The primary explanation, in a word, is “fracking.”   In fourteen words: the use of horizontal drilling and hydraulic fracturing to recover deposits of shale gas.

Ohio’s $500B Oil Dream Fades as Drillers Misjudge - U.S. drillers that set up rigs amid the rolling farmland of eastern Ohio on projections underground shale held $500 billion of oil are packing up. Four of the biggest stakeholders in untapped deposits known as the Utica Shale have put up all or part of their acreage for sale, as prices fall by a third in some cases. Chesapeake Energy Corp. (CHK) of Oklahoma City, the biggest U.S. shale lease owner, last week offered up 94,200 acres (38,121 hectares). EnerVest Ltd. and Devon Energy Corp. (DVN) are selling as early results show lower production than their predictions.The flip-flop underscores the difficulties faced by even experienced drillers around the world in tapping the sedimentary rock. In California, Occidental Petroleum Corp. was stymied by the Monterey Shale’s fault-riddled terrain. In Poland, Exxon Mobil Corp. (XOM) stopped drilling because shale output was minimal. China’s failures with shale gas drove producers Cnooc Ltd. and China Petrochemical Corp. to seek expertise in North America.  In Ohio’s Utica formation, which runs eastward as far as New York, drillers frequently found the rock too dense and underground pressures insufficient to produce oil.  The rush to buy acreage has reversed.

Energy expects natural-gas export decisions ‘very soon’ - A top Energy Department official said Thursday that the department is on the cusp of making decisions about an array of industry applications to export liquefied natural gas. “We are very soon going to be in a position to start making decisions based on the record, based on the documents supplied,” Deputy Energy Secretary Daniel Poneman said of proposals that would expand U.S. exports. “I wouldn’t think it would be months,” he told the Senate Energy and Natural Resources Committee. Poneman noted the department is vetting a large number of public comments on the analysis of exports that Energy commissioned. The department is reviewing 20 applications to export gas to nations that do not have a free-trade agreement with the United States. Plans to export gas to countries without formal trade deals face, by law, a much more intensive level of vetting. One of the pending applications dates back to 2010.

Has Exxon Mobil Tried to Cover Up the Truth at Arkansas Oil Spill? - It was two weeks ago that Exxon Mobil’s (NYSE: XOM) Pegasus pipeline ruptured, spilling hundreds of thousands of gallons of oil into the town of Mayflower, Arkansas, and I think it is about time that someone called it what it is … a grade A f**k-up! Contaminated water has leaked into Lake Conway, local residents have fallen ill from the toxic fumes, lawsuits have been filed, a severe thunderstorm in the area caused complications with the clean-up efforts, and to top this off, in an attempt to keep all of this quiet Exxon Mobil has tried to intimidate the local media and block coverage. The latest detail that has intrigued the media is the revelation that the break in the pipe was 22 feet long, not a small, innocent, rupture then. A 22 foot rupture suggests a huge amount of pressure within the pipe, which then raises new questions about the cause of the spill.Attorney General McDaniel told Rachel Maddow of MSNBC; “I think when people found out that there was a rupture and there was a 65-year-old pipeline, I think that almost everybody assumed that there was some small crack due to age. The rupture was 22 feet long. Twenty-two feet is not something one would think would happen gradually. So now we’re starting to ask all new questions.”

House Energy Committee panel passes bill to expedite Keystone XL approval - A bill to bypass President Obama’s authority to decide the Keystone XL oil sands pipeline’s fate passed a House Energy and Commerce Committee panel on Tuesday. The Northern Route Approval Act (H.R. 3) passed the Energy and Power subcommittee with a 17-9 vote. All Republicans voted in favor of the bill, with Democratic Reps. John Barrow (Ga.) and Gene Green (Texas) joining them. The bill would strip the need for pipeline builder TransCanada Corp. to receive a cross-border permit from the State Department to construct its northern leg, which would stretch into Canada. Republicans, centrist Democrats and business groups who say Keystone would supply jobs and oil from an ally have accused Obama of slow-walking the permit decision. Many Democrats, along with green and progressive groups, oppose the pipeline. They say it would foster development of oil sands, a dense form of oil that Keystone detractors say would cause a spike in greenhouse gas emissions. "The bill effectively short-circuits the environmental review process," said Rep. Henry Waxman (D-Calif.), the House Energy and Commerce Committee's top Democrat.

Keystone Pipeline Will Create Only 35 Permanent Jobs, Emit 51 Coal Plants' Worth Of Carbon - Today, Secretary of State John Kerry told the House Foreign Affairs Committee that he wasn’t touching the Keystone pipeline decision with a ten-foot pole: “I am staying as far away from that as I can now so that when the appropriate time comes to me, I am not getting information from any place I shouldn’t be, and I am not getting engaged in the debate at a time that I shouldn’t be,” Kerry told the House Foreign Affairs Committee on Wednesday. Right now, Kerry has the State Department’s Draft Supplemental Environmental Impact Statement, but if that is all he information he relies on, he won’t get the full picture. While he will see that the project will only bring 35 permanent jobs, which is true, he would also see almost no discussion of the pipeline’s impact on the climate. (Oddly, he will be able to read an extended discussion of climate change’s projected impacts on the construction and maintenance of the proposed pipeline.) So where is a Secretary of State sincerely concerned about climate change to go to find the climate consequences of approving the Keystone XL pipeline? He could peruse a new report out yesterday from Oil Change International called: “Cooking the Books: How The State Department Analysis Ignores The True Climate Impact of the Keystone XL Pipeline.”

Former Wyden aide to lobby for ExxonMobil - The former long-time chief of staff for Sen. Ron Wyden (D-Ore.) is now lobbying for ExxonMobil Corp. on energy, environment and tax issues, according to documents made public in mid-April. ExxonMobil retained Josh Kardon, who served on Wyden’s staff from 1992 until 2011, through lobby shop Capitol Hill Consulting Group. Kardon is senior vice president with the firm. Kardon will bring intimate knowledge about Wyden, who chairs the Senate Energy and Natural Resources Committee. Aside from Kardon, Jack Victory, who was a senior adviser to former House Majority Leader Tom DeLay (R-Texas), will also lobby for ExxonMobil through Capitol Hill Consulting Group.

First Quarter Petroleum Usage Charts: Total Distillates, Gasoline, Jet Fuel, Fuel Oil - Here are some first quarter 2013 petroleum usage charts from Tim Wallace. The charts all show first quarter usage in 2013 as compared to first quarter usage in prior years. Tim Wallace writes ... Here are separate charts for Total Distillates, Gasoline, Kerosene Jet Fuel, Fuel Oil (diesel, etc.) and Residual Oils. Total distillates usage is at a level seen in 1998, and not much higher than 1996. Gasoline usage is at a 2002 level. The drop from the peak year of 2007 is now 8.3%, quite dramatic. Kerosene Type Jet Fuel is now lower in demand than 1992 and is 21.9% lower than the peak in 2001. Distillate Fuel Oil usage which include such things as diesel and heating oils is now all the way back to 1996 levels, down 17.6% from the 2007 peak. Once again that there can be little proof of major economic recovery, and more importantly, although we have apparently reached a bottom it is well off of historical levels.

Monthly Oil Supply Update - Time for the monthly update on global oil supply in which I summarize the numbers for global oil production from the various oil agencies into a small set of convenient charts. This is for the benefit of those of us who like to do micro-tracking of peak-oil related issues.  This month, I have made one charting innovation.  The above graph shows global oil production since 2002 to give the full period of the "bumpy plateau" that started about the beginning of 2005.  I have now added to this a green line (C&C (EIA)), which shows just the "Crude & Condensate" numbers from the EIA.  This eliminates biofuels, natural gas liquids, and refinery gains from the picture, and is a more purist definition of oil.  Which is better to consider is a matter of debate, but now we don't have to choose - we can see both at a glance.  The big picture is that the bumpy plateau slopes upward in both sets of data (ie anyone claiming peak monthly oil production was in 2005 or 2008 is not paying attention to the data).  However, the "all liquids" line slopes up more than "C&C", because the natural gas liquids and biofuels have grown quite a bit. This next graph shows the all-liquids data since just before the great recession, to give a tighter context for looking at the most recent months:

What's causing sharp declines in crude oil prices? - Staying with the theme of bearish sentiment in commodity markets, crude oil came under severe pressure recently. Based on today's data, US crude inventory actually declined last week, surprising some forecasters who expected crude stocks to continue rising. One would expect lower inventories to result in higher prices, but that did not occur.Instead WTI futures took a 2% hit today, reaching a 10-month low.  Here are some of the explanations from market participants for these violent moves to the downside:
1. Weaker than expected growth in China has precipitated a negative sentiment in commodity markets (see discussion).
2. Major commodity investors such as hedge funds have been unwinding positions.
3. Today we saw what could amount to weaker than expected demand for gasoline in the US, as more drivers stay home.

Developed Nations have Already Passed Peak Oil Demand - We in the United States, the Euro-zone, and Japan are already past peak oil demand. Oil demand has to do with how much oil we can afford. Many of the developed nations are not able to outbid the developing nations when it comes to the world’s limited oil supply. A chart of oil consumption shows that oil consumption peaked for the combination of the United States, EU-27, and Japan in 2005 (Figure 1).We can see an even more pronounced version of this pattern if we look at the oil consumption of the five countries known as the PIIGS in Europe: Portugal, Italy, Ireland, Greece, and Spain. All of these countries have had serious declines in oil consumption in recent years, as high oil prices have impeded their economies. Oil consumption for the PIIGS in total hit its highest level in 2004, before the decline began. Peak oil consumption by country varied a bit: Portugal, 2002; Italy, declining since 1995; Ireland, peak in 2007; Spain, peak in 2007; Greece, peak in 2006. Peak demand is very much related to jobs. Peak oil demand occurs when a country is not competitive in the world market-place, and because of this, loses industry and jobs. One reason this happens is because the country’s energy cost structure is not competitive in the world market-place. With the run-up in oil prices starting about 2003, oil is by far the most expensive of the traditional energy sources we have available today. Countries that use a large percentage of oil in their energy mix can be expected to have a hard time competing, because of oil’s higher cost.

Arab Countries Openly Discuss Peak Oil for the First Time - I was fortunate to be among the few westerners invited to attend and speak at this first-of-its kind “peak oil” (PO) conference in a Middle East. The fact that a major Middle East oil exporter would hold such a conference on what has long been a verboten subject was quite remarkable and a dramatic change from decades of PO denial. The two and a half day meeting was well attended by people from the GCC as well as other regional countries.  The going-in assumption was that “peak oil” will occur in the near future.  While many PO aficionados have been focused on the impacts and the mitigation of “peak oil” in the importing countries, most attendees at this conference were concerned with the impact that finite oil and gas reserves will have on the long-term future of their own exporting countries. They see the depletion of their large-but-limited reserves as affording their countries a period of time in which they either develop their countries into sustainable entities able to continue into the long term future or they lapse back into the poor, nomadic circumstances that existed prior to the discovery of oil/gas. Accordingly, much of the conference focus was on how the GCC countries might use their current and near-term largesse to build sustainable economic and government futures.

Never Mind Oil, Libya could Supply Europe with Solar Power - A few years back, an article appeared in the Tripoli Post outlining Libya’s energy prospects for Europe. What made the article different, however, was its focus on solar power rather than oil as the Libyan asset appealing to European clients across the sea. It’s not often one hears about Libya’s energy portfolio outside of oil and gas. Since the discovery of oil in 1959, Libya’s economic progress has been driven by hydrocarbon profits. Typically, oil and gas wealth has represented up to 90% of Libya’s income. Nonetheless, renewable energy has been a part of Libya’s energy policy since the 1970’s. Libya’s Center for Solar Energy Research and Studies was established in 1978. In 2007, Libya also created the Renewable Energy Authority. The Authority’s Planning and Studies Department was working on structured plans for balancing renewable and traditional energy sources as recently as 2011.

Huge landslide shuts Kennecott Utah Copper's Bingham Canyon Mine - The world's largest man-made excavation - a US copper mine - has been shut down by an enormous landslide that smashed roads and buildings and left two-thirds of the pit base buried. Nobody was hurt in the collapse at the massive open-cast Bingham Canyon Mine, run by Rio Tinto-owned Kennecott Utah Copper - largely because workers had been evacuated amid several weeks of warning signs the ground was going to shift.  Bingham Canyon Mine is the largest man-made excavation in the world. It has been in production since 1906, and features a pit almost one kilometre deep and 4km wide. "This is something that we had anticipated," Bennett told Deseret News. "We knew the slide was imminent. We had relocated machinery, we had rerouted roads, we had rerouted utilities, we had rerouted buildings."   Ted Himebaugh, Kennecott's general manager of operation readiness, said he had seen nothing like it in his 36 years with the company.  "Our primary goal now is to determine how we can safely resume operations and provide not only the jobs for the people but money to the state of Utah and economy,"

Is China's anti-corruption campaign responsible for global commodities sell-off? -- Commodities came under severe pressure yesterday, in part driven by some negative news out of China, the world's largest single consumer of natural resources.The nation's GDP growth rate came in below expectations. Many point to China's lackluster industrial production as the cause for this weaker than expected growth. But there is a new theory emerging to explain China's negative surprise. Some analysts believe that the latest anti-corruption campaign is having a chilling effect on the nation's economy. Worried about being accused of spending excesses, local officials have cut down on extravagant parties and gifts used to entice (and essentially bribe) central government bureaucrats. Restaurants and luxury goods have been hit especially hard.  Global Post: - Since the end of last year, Xi has spearheaded a drive to curb officials' notoriously lavish dinners and high-end gift-giving. At a Party meeting in December, he called for new regulations that require cadres to cut back on liquor, flowers and extravagant banquets. Some provinces even banned the use of red carpets to greet visiting officials... "Abalone, baby birds, sharks, big prawns, sea cucumbers and geoduck clams are just some of the creatures who can breathe easier, for a bit at least,"

Iceland and China Enter a Free Trade Agreement - NYT - In its first such agreement with a European country, China signed a free-trade deal with Iceland on Monday as Beijing reached out for allies at a time when many of its trading partners are wary of its increasing economic might.  The accord, meant to eliminate most tariffs over the next few years, was signed by trade officials in Beijing during a state visit by Prime Minister Johanna Sigurdardottir of Iceland. When completed, it will unite two hugely mismatched economies: Iceland’s 2011 gross domestic product of $14 billion was little more than a rounding error in China’s G.D.P. that year of $7.3 trillion.  Trade between the countries is small by global standards. Iceland’s exports to China last year, mainly fish, totaled $61 million, while it imported Chinese goods and services valued at $341 million.  But while Iceland cannot offer much in the way of significant new market growth, it could help China in its quest for more influence in the Arctic, as global warming and polar ice retreat make that area increasingly accessible. China is seeking to join the Arctic Council, an intergovernmental body that promotes cooperation in the region, as a permanent observer.

Economic Report: China economic data disappoint, slamming stocks - Chinese economic data released Monday, including first-quarter growth, came in weaker than expected, sending stocks lower across Asia, even as some analysts predicted a better numbers ahead.  Gross domestic product for the January-March quarter rose 7.7% from a year earlier, the National Bureau of Statistics said, weakening from 7.9% growth in the fourth quarter, and missing projections for 8% growth in separate surveys from Dow Jones Newswires and Reuters.  Among the March data, industrial production increased 8.9% from the year-earlier period, well below the Dow Jones Newswires forecast for a 10% gain. The growth was the weakest in more than a year, slowing from a 9.9% average rise for the January-February period, which China’s statistics bureau reports as one figure due to seasonal distortions from the Lunar New Year holiday.

China Growth Loses Momentum in Blow to Global Expansion - China’s economic growth unexpectedly lost momentum in the first quarter as gains in factory output and consumption weakened, driving stocks and commodities lower on concern global expansion will slow.Gross domestic product rose 7.7 percent from a year earlier, the National Bureau of Statistics said in Beijing today. That compares with the 8 percent median forecast in a Bloomberg News survey of 41 analysts and 7.9 percent in the fourth quarter. March industrial production increased less than estimated while retail-sales growth matched forecasts. Today’s data add to concerns the global recovery is struggling, with the International Monetary Fund set to lower its forecast for U.S. growth and investor George Soros warning that Germany will probably be in recession by the end of September. Moderating inflation may give new Premier Li Keqiang more room to boost domestic demand as the euro-area debt crisis clouds the outlook for exports. “The disappointing data show the recovery is much weaker and bumpier than expected, dragged down by soft domestic demand,”

China enters era of slower growth - China has entered an era of slower growth and must adjust to the end of three decades of double-digit annual economic expansion, the government department that produces the nation’s statistics warned on Monday. In announcing that economic growth had unexpectedly slowed to 7.7 per cent in the first quarter compared with a year ago, Sheng Laiyun, National Bureau of Statistics spokesman, said that “after 30 years of high-speed economic growth, potential productivity in China has dropped”.  … Echoing Beijing’s warning, the World Bank on Monday said Chinese growth would slow to “between 6 and 7 per cent by the end of the decade”, according to Bert Hofman, its chief Asia economist. … Mr Sheng said he expected China to meet the annual growth target of 7.5 per cent set by China’s new leaders earlier this year. If the economy grew at that rate or less in 2013, it would mark the slowest annual growth since 1990, when Beijing faced sanctions over the 1989 Tiananmen Square crackdown.

China's Pettis moment - The reactions to Chinese macro data tend to go something like this… Beat: Bulls are okay with this. Bears say it’s unsustainable, usually because of inflationary risks, policy tightening risks, credit risks, or the imbalances. FT AV commenters say the numbers are made up anyway. Miss: Bears are okay with. Bulls say not to worry as it means more stimulus/loosening will happen. FT AV commenters say the numbers are made up anyway.We’re wondering though if this will change with yesterday’s relatively wide miss with Q1 GDP growth, and much of the other data out yesterday looking soft.Here’s Bloomberg outlining how this changes everything: A sustained shift to a lower-growth gear would affect everything from iron-ore demand in Australia to the fortunes of companies including carmaker General Motors Co. (GM), who are counting on China to drive profits. It increases challenges for global policy makers contending with Europe’s debt turmoil and Japan’s record monetary easing, with BHP Billiton Ltd. (BHP) saying GDP gains will moderate toward 6 percent later this decade.

China’s First Quarter, in Charts - It’s tough getting your hands on China’s economic data. The release of the quarterly gross domestic product numbers always triggers a melee at the press conference as reporters fight to be the first to see the release. This time round, Chinese news and gaming portal Netease was so excited they couldn’t stop themselves from flashing the news a few minutes ahead of the 10 a.m. embargo (in Chinese). China Real Time has too much respect for the Chinese law and statistical system to break embargos. But we were in there at the press conference throwing elbows too. Why? So we could bring you this chart set on the Chinese economy in the first quarter.  Growth in GDP dropped to 7.7% year-on-year, down from 7.9% in the fourth quarter of 2012. That’s below the consensus forecast of 8% growth from a Wall Street Journal survey of economists, and raises fears that the recovery at the end of last year is already losing steam.  The pace of sequential growth continued to be the subject of controversy. Based on the National Bureau of Statistics data, the annualized quarter-on-quarter growth rate came in at 6.6%, down from 8.2% in the fourth quarter of 2012. But investment bank economists continued to publish their own calculations. Louis Kuijs, China economist at RBS, put sequential growth at 6.1%, down from 9.5% at the end of 2012.

China local authority debt ‘out of control’ - A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash. Zhang Ke said his accounting firm, ShineWing, had all but stopped signing off on bond sales by local governments as a result of his concerns. Local government debts soared after 2008, when Beijing loosened borrowing constraints to soften the impact of the global financial crisis. Provinces, cities, counties and villages across China are now estimated to owe between Rmb10tn and Rmb20tn ($1.6tn and $3.2tn), equivalent to 20-40 per cent of the size of the economy. Last week, Fitch cut China’s sovereign credit rating, in the first such move by an international agency since 1999. On Tuesday, Moody’s cut its outlook for China’s rating from positive to stable. Local governments are prohibited from directly raising debt, so they have used special purpose vehicles to circumvent these rules, issuing bonds under the vehicles’ names to fund infrastructure projects. Investment companies owned by local governments sold Rmb283bn of bonds in the first quarter of 2013, more than double the total for the same period last year. Such an increase would normally be expected to boost the economy, but China’s growth unexpectedly slowed to 7.7 per cent in the first quarter of 2013.

Vice Chairman of Chinese Accounting Association Warns Chinese Local Debt Could Create Bigger Crisis than US Housing Implosion -  Yves Smith - The Financial Times tells us the alert comes from Zhang Ke, vice chairman of the Chinese accounting association, who said his accounting firm, ShineWing, had virtually stopped signing the financial statements for bond sales by local governments. He described the debt as “out of control” with the potential to cause a bigger-than-housing-crisis level bust. But since the obligations can still be rolled, who knows when the dubious debt will fall under its own weight. As the article explains: Local government debts soared after 2008, when Beijing loosened borrowing constraints to soften the impact of the global financial crisis. Provinces, cities, counties and villages across China are now estimated to owe between Rmb10tn and Rmb20tn ($1.6tn and $3.2tn), equivalent to 20-40 per cent of the size of the economy.  Local governments are prohibited from directly raising debt, so they have used special purpose vehicles to circumvent these rules, issuing bonds under the vehicles’ names to fund infrastructure projects. Investment companies owned by local governments sold Rmb283bn of bonds in the first quarter of 2013, more than double the total for the same period last year. Such an increase would normally be expected to boost the economy, but China’s growth unexpectedly slowed to 7.7 per cent in the first quarter of 2013.

More on China’s debt-to-GDP ratio - Following on from our post on Monday comparing China’s relatively low GDP growth and its relatively high levels of new credit… Here are some updated charts from Michael Werner of Bernstein Research, which show that the total stock of non-government and non-financial debt to nominal GDP continued to climb to new levels in Q1 (it was 193 per cent at the end of 2012):  (There are other ways of comparing credit growth and GDP which we looked at in theoriginal post; those did not change so much.) Meanwhile the cost of financing all that debt continues to rise, relative to the total economy: This increased cost of financing has occurred together with a rise in shadow banking as a proportion of total credit: We’ve mentioned before that shadow financing, as well as tending to be more expensive than bank loans, also seems to generate less growth.

China Takes Another Stab At The Dollar, Launches Currency Swap Line With France - One more domino in the dollar reserve supremacy regime falls. Following the announcement two weeks ago that "Australia And China will Enable Direct Currency Convertibility", which in turn was the culmination of two years of Yuan internationalization efforts as summarized by the following: "World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says", "India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees", and "The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap", China has now launched yet another feeler to see what the apetite toward its currency is, this time in the heart of the Eurozone: Paris. According to China Daily, as reported by Reuters, "France intends to set up a currency swap line with China to make Paris a major offshore yuan trading hub in Europe, competing against London." As a reminder the BOE and the PBOC announced a currency swap line back in February, in effect linking up the CNY to the GBP. Now it is the EUR's turn.

RBA May Have to Cap Australian Dollar - Ross Garnaut, one of the authors of the float of the Australian dollar 30 years ago, warns that the Reserve Bank might have to consider intervening to push the currency down to minimise the recession he sees coming as the mining boom goes bust. Professor Garnaut, of the University of Melbourne, says he would rather see the Reserve cushion the economy's looming fall and bring down the overvalued dollar by cutting interest rates to bring them closer to those of other Western countries.While the International Monetary Fund forecast Australia will stay on its present track, with growth of 3 per cent this year and 3.3 per cent next year, Professor Garnaut warned that mining investment would fall from 8 per cent of gross domestic product back to its long-term average of 2 per cent.  He said the fall in China's use of coal in electricity generation last year was a forerunner of its shift to a new, less resource-intensive phase of growth, which would trigger a plunge in Australian mining investment. ''We can be pretty sure that we'll be [losing] 5 or 6 per cent of GDP from expenditure, and that's one hell of a fall,'' he said.

US Overtakes China As Japan's Top Export Market  - Demand for Japanese goods in China have plunged across the board since the Senkaku Islands dispute has led to widespread Chinese boycottts of Japanese products. As the FT reports, the last 12 months have seen shipments to China plunge over 9% to JPY11.3tn. But have no fear, the credit-loving, all-consuming US citizen stepped up to the plate (though we note not enough since Japan's trade balance has crashed anyway) buying cars, car parts, and electrical machinery. Exports to the US have risen over 10% in the last year to JPY11.4tn - now larger than China. This is the first time since May 2009. Clearly the slowdown in the Chinese economy is also exacerbating the problems for Japan but one analyst warns, "this weakness is structural, not cyclical." The IMF's chief economist was hardly optimistic, noting that the US overtaking China was a "big change" in light of a longer-term trend to deeper intra-Asia integration - "I hope the clouds clear soon." We are sure Abe is watching closely as the US economy also rolls over.

Yen’s decline hits cost of power in Japan - Japanese manufacturers have hailed the recent precipitous drop in the yen as a boon for their exports, but a new estimate of the fast-rising cost to the country of importing foreign oil and gas has highlighted the downside of a weaker currency. The report, released on Wednesday by a panel of experts commissioned by the industry ministry, shows how the yen’s decline has exacerbated the economic impact of the Fukushima nuclear accident two years ago. The disaster led to the shutdown of most of Japan’s atomic power plants and forced electric utilities to import more fossil fuel – fuel that is now more expensive as a result of the yen’s roughly 15 per cent decline against the dollar and other currencies since late last year. According to the report, buying the additional liquefied natural gas (LNG) and other fuel needed to make up for lost nuclear capacity is likely to cost utilities Y3.8tn in the fiscal year that began on April 1. That is more than their total fuel bill in the year before the Fukushima accident and Y700bn more than they paid to fill the nuclear gap last year. The panel attributed most of the expected increase over fiscal 2012 to the yen’s fall. “Reducing fuel procurement costs is an urgent matter,” it said in the report, which assumed an exchange rate of Y100 to the dollar on average for the year.

Japan Logs Record $83.4 Billion Trade Deficit In FY2012 - Japan's trade deficit rose to a record $83.4 billion in the fiscal year that ended in March, as exports faltered and costs for imported gas and crude oil rose. Customs figures released Thursday also showed a deficit for March, the ninth monthly deficit in a row, of 362.4 billion yen ($3.7 billion), down from February's gap of 779.5 billion yen.Exports fell 2.1 percent in the fiscal year from the year before, to 63.9 trillion yen ($652.4 billion) while imports rose 3.4 percent to 72.1 trillion yen ($735.8 billion). The deficit of 8.17 trillion yen ($83.4 billion) was up 84 percent from the previous fiscal year's 4.4 trillion yen ($45.1) shortfall. A sharp depreciation in Japan's currency since late 2012 has failed to fully offset weak demand for Japan's exports

Japanese Exports Exceed Estimates as Yen’s Slide Aids Sales - Japan’s exports exceeded estimates in March and the trade deficit narrowed from the previous month after declines in the yen made the nation’s products more competitive in overseas markets.  Overseas shipments rose 1.1 percent from a year earlier, the Finance Ministry said in Tokyo today. The median estimate of 22 economists surveyed by Bloomberg News was for a 0.2 percent increase. The trade shortfall was 362.4 billion yen ($3.7 billion) from 777.5 billion yen in February. Better-than-forecast trade numbers add to positive signs for Japan’s economy as central bank Governor Haruhiko Kuroda rolls out unprecedented monetary stimulus to trigger a growth rebound. At the same time, declines in shipments to China and the European Union highlighted limits on the likely scale of export gains this year. The U.S. displaced China as Japan’s biggest export market for the year through March.

Japan rewarded for launching the currency war - Japan's "Merchandise Trade" exports surprised to the upside this morning. All of a sudden Japan's export activity is picking up steam. Furthermore, Japan just overtook China as the largest exporter into the US. CNN: - Japan has posted its narrowest trade deficit for nine months, helped by a big rise in the value of shipments to the US, which has toppled China as Japan's number one export destination. Provisional figures released on Thursday by Japan's finance ministry showed that overall exports rose 1.1 per cent in March from a year earlier to Y6.3tn ($64bn)...  Very little has changed over the past few months in Japan's product and service offerings or in the way the nation's companies market their products. The yen however is down nearly 14% against the dollar this year alone. And in this price sensitive global economy 14% makes a great deal of difference. It didn't take long for Japan to be rewarded for its currency devaluation policy.

Aso Says Japan Policy Unopposed at G-20 Meeting as Yen Falls - Japanese Finance Minister Taro Aso said that Japan’s policies went unopposed at a Group of 20 nations’ meeting in Washington, driving the yen lower in the absence of any roadblock for the nation’s monetary stimulus. Japan explained that its easing is for price stability, Aso told reporters. Central bank Governor Haruhiko Kuroda earlier said that nations understand Japan’s stance, indicating that he expects no censure. The G-20 will affirm a commitment to avoid competitive devaluation without singling out any nation, according to a draft statement seen by a Bloomberg BNA reporter. The yen has dropped about 20 percent against the dollar in the past six months, the biggest loser among 16 major currencies, on plans for unprecedented easing. “Chances are high that the result of the G-20 meeting will deliver tailwinds for Japan and yen depreciation,” Aso said “no one” opposed Japan’s policies at the meeting, about two weeks after the BOJ unveiled a plan to ramp up bond buying and double the monetary base by the end of 2014.

Yen gains on Japanese investor inflows - The Japanese yen strengthened after figures showed that domestic Japanese investors were continuing to repatriate money from overseas, disappointing those expecting the currency to be hit by a new wave of selling. Data from Japan’s Ministry of Finance showed that domestic residents continued to be net sellers of overseas assets in the first full week after the Bank of Japan announced its ramped up bond-buying programme at the start of April. Analysts and investors expect domestic Japanese investors to start moving money overseas in search of income if the BoJ’s easing plans cause domestic bond yields to fall. So far, Japanese investors have preferred to take advantage of the weaker yen to bring overseas assets back home. However, the figures did indicate the pace of repatriation had slowed, with net sales of foreign securities at Y0.55tn, down from Y1.06tn the week before. “The data suggest that while markets have been anticipating Japanese investors to increasingly move overseas post-BoJ, the evidence is not quite there at the moment,” said analysts at BNP Paribas. “Still, in our view the BoJ’s aggressive buying of JGBs will over time lead to the ‘crowding out’ of Japanese domestic investors and increased capital outflows from Japan.”

Three Parts to Macro Policy, by Tim Duy: The G20 has accepted Japan's policy approach. From the Financial Times: The yen fell sharply against other major currencies on Friday after the Japanese finance minister said Japan’s monetary policies had not met with resistance at the G20 group of nations in Washington.  This interpretation of the meeting helped sink the Yen to almost 100. More specifically, from the statement: In particular, Japan’s recent policy actions are intended to stop deflation and support domestic demand. Still, there remains a pro-austerity contingent: Japan should define a credible medium-term fiscal plan.  I think the only credible medium-term plan for fiscal consolidation first involves higher near-term growth.  I tend to see room for all three policy tools - monetary, fiscal, and structural - in fighting weak growth and outright recessions, although the weighting will vary according to circumstances.  Those changes, however, need to be cushioned with expansionary monetary and fiscal policy to yield a positive growth trajectory. With this in mind, consider this recent post by Ed Harrison. He expands the Reinhart/Rogoff debate to current events in Japan: This is the takeaway in Japan: stimulus without reform leads to a policy cul-de-sac. Monetary and fiscal stimulus is not a cure-all for economies or Japan would be the model and it most assuredly is not the model. If you want to use stimulus, then you need to have reform policies as well. It’s a three-pronged approach. The supply side matters. And that is the promise of Abenomics, isn’t it: fiscal and monetary stimulus as bridges to sustainable growth due to economic reform. . Be sceptical, of course. Let’s just see what happens.

Regional Patterns of World Trade - Looking at trade between regions of the world reveals some intriguing patterns of the ties across the global economy. Here's a table based on data from the World Trade Organization, which splits the world into seven regions. The rows of the table are the regions where trade originates; the columns of the table are the regions that are destinations.  For context, total world trade in 2011 was $17.8 trillion.Here are some patterns that jump out at me:
1) Trade in the global economy is still dominated by trade within regions. For example, by far the biggest entries in the table are from Europe/to Europe and from Asia/to Asia.
2) When looking at international trade within regions, remember that the amount is strongly influenced by the size of countries and how many countries are in a region. Trade between U.S. states is not counted as "international trade" in this table, but trade between, say, Belgium and Netherlands is counted as international trade.

3) For the economy of North America, our biggest regional trading partner is still North America. But the countries of North America are a destination for almost almost as much in exports from the countries of Asia as they are from other countries in North America. but a nearly equivalent amount of exports from the region also go to Asia.

South Korea Proposes $15.3 Billion Stimulus Budget — The South Korean government proposed a 17.3 trillion won stimulus Tuesday to revive slowing growth in the country. The $15.3 billion effort would be the third-largest supplementary budget ever in South Korea. It would be exceeded, when measured as a proportion of gross domestic product, only by the efforts approved after the 1998 Asia financial crisis and the 2008 global financial turmoil. The Ministry of Strategy and Finance said the budget would add 0.3 percentage point to growth this year and create 40,000 new jobs. A ministry statement said the budget would be used to cover a shortfall in tax revenue, to aid small and medium-size companies and to lift the stagnant real estate market. It said it would submit the plan to Parliament on Thursday. The ministry estimated a tax revenue shortfall of 6 trillion won because of the slower-than-expected economic recovery and another shortfall of 6 trillion won from delays in selling stakes in state-owned banks. The remaining 5.3 trillion won would be a net increase in the government’s budget.

Serious Threat to Asian Economic Model - There’s an interesting discussion underway about whether rising population necessarily leads to rising land prices over time. Bill McBride of Calculated Risk says yes: Noah Smith disagrees, because land isn’t really particularly scarce — when we see high land prices in some metro areas, it’s all about the agglomeration effects, which could go in various directions over time. And we have data! Via Richard Florida, new work by the Census (pdf) calculates “population-weighted density” — a weighted average of density across census tracts, where the tracts are weighted not by land area but by population; this gives a much better idea of how the average person lives.As Florida points out, the new measure conveys a much better sense of how metros differ. For example, by the standard density measure Los Angeles is actually denser than New York, basically because LA is hemmed in by mountains, limiting how far the sprawl/commuting zone can reach. But New York has an urban core in a way that LA does not, and sure enough, it has a much, much higher population-weighted density.What I wanted, however, was trends — and the Census has calculated this measure both for metros and for national aggregates for both 2000 and 2010. Here’s what it looks like:

Density - Paul Krugman - East Asian countries are branded as practising “state capitalism” in which the government plays a major role in helping the local private sector and the state also fully or partially owns many enterprises. The Western countries are increasingly attacking the Asian model, claiming that state-owned companies or state-aided commercial firms have an unfair advantage vis-à-vis the foreign firms competing with them. In our region, countries with a substantial role of the state include China, Malaysia, Vietnam and Singapore. Of course, in Japan and Korea their domestic firms grew to become world-beaters with the systematic backing of their governments. For these countries, the so-called state capitalism (or in the case of socialist countries, market-oriented socialism) have worked well through industrial development and relatively high and sustained economic growth. Some Western countries have been trying to curb or even eventually eliminate the Asian model of state-owned or state-aided capitalism. Of course this is largely hypocritical because the America, European and Japanese agricultural sectors are highly subsidised and protected; many of their farms could not survive without massive state aid and high import tariffs.

Where the World’s Poorest People Live - The world’s poorest people are now concentrated most heavily in Sub-Saharan Africa after China’s huge leap in pulling its citizens out of extreme poverty in recent decades, according to new estimates released Wednesday by the World Bank. About 1.2 billion people in the world lived in extreme poverty in 2010, subsisting on less than $1.25 a day. That’s down from 1.9 billion three decades ago despite a nearly 60% increase in the developing world’s population. The total number of people living in extreme poverty has dropped in every developing region over the past three decades. About 21% of the developing world lived on less than $1.25 a day in 2010. In 1981 it was 52%. The sharpest decline came in China, where the extreme poverty rate fell to 12% in 2010 from 84% in 1981. India’s extreme poverty dropped to 33% of the population from 60% three decades ago. Sub-Saharan Africa is the only region in the world in which the total number of poor people has increased, more than doubling to 414 million in 2010 from three decades earlier. The rate of extreme poverty dropped to 48% in 2010 from 51% in 1981. But the tiny improvement compared with other regions meant that 34% of the world’s extreme-poor population came from Sub-Saharan Africa in 2010. In 1981, it was 11%.

Let them eat vegetables: Egypt's wheat farmers hit hard by diesel price hikes - Soaring fuel costs are expected to deal a major blow to the profit margins of Egypt's wheat farmers this year, driving them away from the government-subsidised crop at a time when the country plans to increasingly rely on local production of the vital commodity. Wheat farmers in Minya Al-Qamh, the second largest town of the Sharqiya governorate in Egypt's Nile Delta, the very name of which means ' port of wheat,' are bracing for a tough harvest season, which in this region will begin in the second week of May. The fertile governorate is the country's largest wheat producer, as its lush, golden landscape attests. "We're going to suffer this year," lamented Mohamed, a small landowner from one of the many little villages surrounding Minya Al-Qamh. "One jerrycan (20 litres) of diesel officially costs LE22 (approx. $3.2), but now we're forced to buy it on the black market for double – even triple – the price."

IMF cuts 2013 global economic outlook - The International Monetary Fund warned that an “uneven recovery is also a dangerous one” for the global economy as it again downgraded its growth forecasts for 2013, while holding out the prospect of relief late in the year. In its twice-yearly World Economic Outlook, the fund outlined high medium-term risks stemming from doubts about the eurozone’s ability to claw its way out of its crisis, and the ability of the US and Japan to cut public sector deficits and debt. But the IMF recognised that short-term perils had abated as financial markets approved of the eurozone’s crisis management last year and the US authorities’ willingness to come to arrangements to limit automatic and rapid fiscal tightening under sequestration. Highlighting the differential outlook for countries’ economic prospects, Olivier Blanchard, chief economist of the IMF, said: “The world economy is as weak as its weakest link.” He added: “Given the strong interconnections between countries, an uneven recovery is also a dangerous one. Some tail risks have decreased, but it is not time for policy makers to relax.” The IMF believes the world economy is running at three speeds, with emerging market and developing economies still strong, but the US doing much better than the eurozone among advanced economies. Reflecting this nuanced view of the global economy, the IMF revised down its 2013 global growth forecast 0.2 percentage points to 3.3 per cent and kept the 2014 forecast constant at 4 per cent. The downward revision was shared among emerging and advanced economies, with the exception of Japan, where the IMF became markedly more optimistic following the strenuous efforts of Tokyo to defeat deflation through its revolution on monetary policy.

IMF downgrades global growth forecast again - The International Monetary Fund delivered a pessimistic update to its forecast for the world's economy on Tuesday. In January — the last time it gave an update — the group expected the world's economy to grow at a reasonable pace, slightly ahead of 2012's pace. Conditions have worsened further in the past three months, however, and the situation in Europe demands more "aggressive" action from policymakers, the IMF said. "Europe should do everything it can to strengthen private demand," IMF's chief economist Olivier Blanchard said. "What this means is aggressive monetary policy, and what this means is getting the financial system to be stronger — it’s still not in great shape." The IMF says the world's economy will expand by 3.3 per cent this year. That's less than the 3.5 per cent pace of growth that the IMF expected previously, but a bit higher than the 3.2 per cent growth seen in 2012. The IMF expects the U.S. economy to expand 1.9 per cent this year. That's below its January estimate of 2.1 per cent and last year's U.S. growth of 2.2 per cent. Still, the IMF says the U.S. economy should expand 3 per cent in 2014.

The Most Disturbing Chart From Today's IMF Outlook Revision - That the IMF is the most unwavering optimist despite fundamentals, facts and reality has been well-documented over the years. For those who still haven't seen the agency's perpetual upward bias in forecasting world growth, a quick scan of the charts below will cement the understanding that all the Washington-based serial bail-outer of insolvent countries is, is a dispenser of optimism and whose agenda is simply to preserve confidence that all is still well. The charts show how just over the past year's six outlook revisions, the IMF has been forced to downgrade, with quarterly precision, its overly optimistic forecast for virtually every part of the world, from the US, to the Euroarea, to China, and of course, the entire world: the black line is the most recent revision set - it also happens to be the lowest one. US: expect the US 2014 forecast growth to tumble in the next several revisions - it only took 12 months for the IMF's 2013 US GDP growth forecast to drop from 2.4% to 1.9%. Obviously, the 2013 to 2014 hockeystick is laughable at best.

Global economy stuck in a rut - The global economy is stuck in a rut, unable to sustain a decent recovery and susceptible to a sudden stall, according to the latest Brookings Institution-Financial Times tracking index of recovery. Despite strong financial markets and confidence returning to business and consumers in emerging economies, overall indicators of growth have hardly budged since mid-2011, since when repeated tentative upswings have always been snuffed out by weak data and renewed stress in the eurozone. Tiger (Tracking Indexes for the Global Economic Recovery) shows the global economy “unable to achieve lift-off and facing the risk of stalling”, said Professor Eswar Prasad, a senior fellow at the Brookings Institution.  “The best that can be said about the weak pace of economic activity is that it has bottomed out in some key economies,” he added.  The evidence of continued stress in the global economy will ensure a subdued mood at this week’s spring meetings of the International Monetary Fund and World Bank in Washington. Christine Lagarde, IMF managing director, has already warned of the new risks inherent in what she called a “three-speed” global economy with some countries doing well, some on the mend and some still in trouble.

Stimulus Lets Developing Economies Recover More Quickly - THIS has not been a good recovery for the wealthy countries. Growth has lagged, in part, because government spending has been far more restrained than in past recoveries from major recessions.  But developing economies have been free to increase government spending, and their economies are generally growing more rapidly than they did after past recessions. The accompanying charts, based on data released this week by the International Monetary Fund in the semiannual World Economic Outlook, show the stark differences in performance. At the top are charts comparing changes in real gross domestic product per capita in developing countries and advanced economies since 2008, including the fund’s forecasts for 2013 and 2014. In every year, the developed countries have lower growth. The monetary fund forecasts that this year the increase in the United States will be a paltry 1 percent, which at least is better than the forecast for the euro zone and Britain, where declines are expected. A major reason for the slow recoveries is the absence of fiscal stimulus in much of the developed world.

Putin Calls for Stimulus Plan After Recession Alarm - Russian President Vladimir Putin urged the government to come up with a plan to revive the flagging economy after a minister warned that a recession is possible as companies cut investment and export demand wanes. Putin told Prime Minister Dmitry Medvedev, who will address lawmakers tomorrow, to devise steps to aid “shoots” of growth, according to televised remarks. While not the main scenario, Russia risks sliding into a recession without stimulus, Economy Minister Andrei Belousov said last week after cutting this year’s growth forecast. Russia’s $2 trillion economy is growing at the weakest pace since a 2009 contraction as Europe’s debt crisis curbed exports and prompted companies to trim investment as the government scaled back spending after elections. Gross domestic product will rise 2.4 percent this year, according to the Economy Ministry, which downgraded an earlier projection of 3.6 percent. The slowdown is hurting incomes, Putin told Medvedev yesterday, asking him to use Russia’s “tested” crisis-fighting tools and new measures to counter the slump. The president’s remark that the slowdown is sapping incomes suggests “the government may be prompted to revisit demand- supporting measures such as wage and pension increases,”

Exclusive: G20 to consider cutting debt to well below 90 percent/GDP: document -  Financial leaders of the world's 20 biggest economies will consider next week in Washington a proposal to cut their public debt over the longer term to well below 90 percent of gross domestic product, a document prepared for the meeting showed. The proposal, prepared by the co-chairs of the G20 Working Group on the Framework for Growth, follows agreement of the leaders of G20 countries in June last year to set ambitious debt reduction targets beyond 2016, when, under an earlier agreement from Toronto in 2010, debt was to stop growing. "The co-chairs proposed that: 'over the longer-term, G20 members should gear their fiscal policy towards achieving a debt level that is well below 90 percent of GDP,'" a document prepared for European Union delegates for the meeting said. "We take note of the proposal made by the co-chairs on fiscal objectives as a good basis for discussion," said the document, endorsed by EU finance ministers on Saturday and seen by Reuters. The European Union itself, however, has a more ambitious debt ceiling of 60 percent of GDP for its 27 members and will suggest a lower target for the G20 would be better, too.

Europe to Face Washington Disbelief With Economic Claims -  A two-year slump, 19 million unemployed and five countries on emergency aid are no reason to take bold, immediate action to spur economic growth, according to European officials set to defend their handling of the debt crisis in Washington this week. Shrugging off the U.S. Federal Reserve’s stimulus and the Bank of Japan’s reflation campaign, Europe’s economic managers say they are on the right track in propping up the 17-nation euro zone, even if evidence is taking time to filter through.“The euro area has made further progress in the implementation of its comprehensive crisis-response strategy,” European Union officials will tell the Group of 20 finance ministers this week, according to a draft statement obtained by Bloomberg News at an EU meeting in Dublin two days ago. The bloc expects “a mild recovery setting in toward mid-2013 and strengthening in the second half of 2013 and in 2014.” That message is unlikely to find many believers at the economic policy gatherings in Washington, which start Thursday. U.S. Treasury Secretary Jacob J. Lew appealed last week for a European growth offensive, and International Monetary Fund Managing Director Christine Lagarde warned of a “three-speed” global economy, with Europe stuck in the lowest gear.

Counterparties: The economics of flying blind - The leaders of the G20 met in Washington today; their official communique was sent out, like any grand pronouncement, as a Word document posted on a Russian website. The world’s most powerful finance ministers and central bankers appeared to be working through some serious confusion today.  Three days after a grad student dismantled the widely-held idea of a 90%-of-GDP tipping point for national debt, the G20 agreed to move away from the idea of setting specific national debt targets. This a big change — just three years ago, the G20’s richest nations pledged to cut their deficits in half by this year. Now, as Reuters notes, Europe is not just re-thinking austerity, but promising to slow it down. The IMF, which previously endorsed Britain’s austerity program, has now changed its stance on debt. That may augur a direct confrontation with the Cameron government. Just today, the UK had its credit outlook downgraded by Fitch, in part because of a “weaker fiscal and economic outlook”. Mohamed El-Erian blames the IMF for some of the global policy confusion. While he admires the Fund’s “highly respected” analysis and “world class insight”, he says that policy implementation “frequently falls hostage to pressure from its political masters in advanced economies.”

Europe’s Stark Choice: Resignation or Revolution - Two years ago this May, Madrid’s Puerta del Sol and Barcelona’s Plaza Catalunya, Spain’s two most important city squares, were occupied by thousands of indignant protestors. For many of the nation’s highly educated but disillusioned youth, enough was enough, and for a short while it seemed that a new era of political mobilization beckoned. In little more than an hour, a whirlwind of police violence cleared the square of all the occupants and pretty much all of their belongings, many of which were never returned. All the while, a thick, dense ring of shell-shocked protestors and curious bystanders gathered around the square, looking on in a mixture of bewilderment, fear and anger. As I strolled around the square, with one wary eye on the aggrieved protestors and the other on the fearsomely armed and highly unpredictable mossos d’esquadra, a placard caught my attention. Its message was beautifully simple: “No soy anti sistema, el sistema es anti yo” (I’m not anti-system; the system is anti-me). The placard was held aloft by a small child riding on his father’s shoulders. The cynical realist within me knew full well that the boy, who must have been no more than five or six years old, was merely channeling his father’s thoughts. But that didn’t stop my more romantic side from imagining that the child was, in actual fact, eloquently speaking out for his soon-to-be lost generation.

Former Portuguese Prime Minister Says "Portugal Cannot Pay Its Debts", Calls for "Argentine-Style Default" - It's rare to hear any bit of common sense from political leaders, but today I have a sterling example. Mário Soares, Prime Minister and the 17th President of Portugal from 1986 to 1996 speaks the truth. Soares says "Portugal Cannot Pay Its Debts". He calls for an "Argentine-Style Default", and states "The desire please chancellor Merkel is ruining the country."  "Portugal can not pay what you owe and however much they impoverish people, however much they steal the money to people who have it, not be able to pay what you owe. And when you cannot, the only solution is not pay. " The president of Portugal, Mario Soares socialist argues that it is impossible for Portugal to return all of its foreign debt. So has asked to make a Argentine-style default to avoid economic collapse. "Look at Argentina, was in crisis when he said we do not pay. 'And something happened?" Asks Soares. "No, nothing happened," he says in an interview with Antena 1, which airs tonight and that includes the Business Journal. Soares, who was also prime minister, has called for the overthrow of the government, has criticized the European Commission president, José Manuel Barroso and launched a series of warnings to the President of the Republic, Cavaco Silva. The former head of state also defended as imperative the change in government and an end to austerity

Debt Inspectors Reach Agreement with Greece — Greece cleared a key hurdle in its drive to receive its next batch of bailout loans after international debt inspectors said Monday they had reached an agreement over the country’s economic reforms, including the firing of thousands of civil servants. The review by delegates from the International Monetary Fund, European Commission and European Central Bank, known collectively as the troika, is part of a regular process under which Greece receives installments of its multi-billion euro bailout if it meets certain conditions. Greece has been dependent on the rescue loans since 2010. In total, Greece has been granted 270 billion euros in bailouts, which it receives gradually. In return, successive governments pledged to overhaul the Greek economy and have imposed stringent spending cuts and tax hikes. The reforms have been painful. The country is mired in a deep recession, currently in its sixth year, and unemployment has spiraled to around 27 percent.

Greece to sack 4,000 state workers to unlock bail-out cash - Greece will fire 4,000 civil servants this year as part of programme of austerity measures agreed with the EU-IMF “troika” as the condition for the next €8.8bn of payments in its €270bn bail-out. The redundancies will begin a savage round of job cuts in the Greek public sector, with another 11,000 officials due to be sacked by the end of next year. Greece is in deep recession, GDP has contracted by 22pc since 2008 and unemployment has spiralled to 27pc as the Greek government has implemented deeply unpopular EU-IMF austerity measures or “fiscal adjustment” in return for loans. “Our society has reached its limits. But finally we are meeting our targets and the programme is being improved,” said Antonis Samaras, the Prime Minister, in a nationally televised address. “Soon, Greece will not depend on the memorandums. Greece will have growth, it will be competitive and outward-looking. In other words, we will have a strong Greece.”

DNWR in the EA - Paul Krugman -  That’s downward nominal wage rigidity in the euro area (and actually in neighboring countries too). I’ve been talking about DNWR in the US context, but it’s a much bigger issue in Europe, where the whole adjustment strategy relies on “internal devaluation”: countries that experienced large capital inflows during the period 2000-2007 are supposed to regain competitiveness by cutting costs, and that’s really hard if nominal wages have to come down. Now, there have been various claims of success for internal devaluation. Some of them rely on alleged surges in productivity, which mainly seem to be statistical illusions (e.g., Ireland looks good because pharma has held up while everything else shrinks); some rely on overall wage numbers, which include savage cuts in public-sector wages. However, Eurostat has just released numbers for hourly compensation excluding agriculture and public administration (pdf), and they show very little movement in nominal wages except in Greece. Here are the percentage changes from 2008 to 2012: This doesn’t mean that no internal devaluation has taken place; euro area compensation was up 8.4 percent, so everyone except Spain did gain competitiveness in relative terms (and Spain has been gaining in recent years). But the fact remains that internal devaluation looks very hard, which is exactly what euroskeptics warned from the beginning.

When Can We All Admit the Euro is an Economic Failure?, by Tim Duy: The last month of data flow from Europe is nothing short of depressing. It seems that the history of the Eurocrisis can be summed up as a repeated effort to snatch failure from the jaws of defeat. The Euro and the policy framework that supports it is now clearly inconsistent with anything but sustained recession. Consider a handful of recent reports. First, unemployment continues to reach new highs. From Bloomberg: Unemployment in the 17-nation euro area was 12 percent in February and the January figure was revised up to the same level from 11.9 percent estimated earlier, the European Union’s statistics office in Luxembourg said today...The European Commission predicts unemployment rates of 12.2 percent this year and 12.1 percent in 2014.  Greece remains a complete disaster. Via Aljazeera: Greece's unemployment rate reached a new record of 27.2 percent in January, new data has showed, reflecting the depth of the country's recession after years of austerity imposed under its international bailout. Meanwhile, the Troika continues to demand further job cuts in return for a drip feed of bailouts that have arguably done little other than ensure Greece remains in recession:

Europe in Brief - Paul Krugman -- Tim Duy asks, when can we all admit that the euro is a failure? The answer, of course, is never. Too much history, too many declarations, too much ego is invested in the single currency for those involved ever to admit that maybe they made a mistake. Even if the project ends in total disaster, they will insist that the euro didn’t fail Europe, Europe failed the euro. But it it occurs to me that it might be a good idea for me to recapitulate my view of what really ails Europe, and what could yet be done.

Mario Draghi: The role of monetary policy in addressing the crisis in the euro area » This speech by Mario Draghi is generating some interest in comments. It usefully puts the ECB’s approach to monetary policy during the crisis in a comparative perspective. Some complementary reading: Paul Krugman on euro area macro policy; Simon Wren-Lewis and Antonio Fatas on the dual mandate; Janet Yellen on communication/expectations management at the Fed; and Gavyn Davies on inflation targeting. On the subject of inflation targeting, this new Vox ebook contains a number of interesting perspectives, including chapters by Stefan Gerlach and Karl Whelan (pdf here).

Euro banking union ‘could need treaty change’ - Germany's finance minister has claimed that a banking union could require changes to EU law, potentially putting the brakes on a plan designed to prop up the euro. Wolfgang Schaeuble said that Europe’s Lisbon treaty had to be changed to allow common rules on shutting troubled banks – a key element of the union. “Banking union only makes sense... if we also have rules for restructuring and resolving banks. But if we want European institutions for that, we will need a treaty change,” he said after a meeting of European finance ministers. The banking union is one of the currency bloc’s central measures to stabilise the euro and prevent taxpayers from footing bills for bank rescues. But Mr Schaeuble, who has long held reservations about the banking union, said they would “not be able to take any steps on... a doubtful legal basis”. He also made clear that legal change would be necessary for the unified scheme for tackling failed banks. Altering the Lisbon treaty, which underpins the bloc’s law, would be lengthy as it needs the agreement of all member states. As a first step towards the union, the European Central Bank is poised to start supervising eurozone banks from July next year. A bank resolution scheme to salvage or close struggling banks should then follow.

Europe Split Over Austerity as a Path to Growth - Economic fortunes during the recovery from the Great Recession have diverged, with new estimates of growth by the monetary fund expected on Tuesday. But they will not change the basic picture, which Ms. Lagarde has taken to describing as a “three-speed” world. Developing and emerging economies are growing apace. Some advanced economies, including the United States, are gaining strength. But a third category of countries remains mired in stagnation or recession. Japan has struggled with a stalled-out economy, but has recently engaged in an athletic campaign of fiscal and monetary stimulus. The true laggard is Europe, suffering from rising unemployment and another bout of economic contraction — seemingly without the political consensus or economic mechanisms to tackle those problems. In light of that reality, the monetary fund and its European partners, the European Commission and the European Central Bank — the so-called troika — have come under continued criticism for the austerity measures imposed on countries including Spain, Portugal and Greece, where unemployment rates extend well into the double digits. The criticism has become louder since the fund said it had determined that austerity had a far worse impact on weak economies than it once thought.

German 'Wise Men' push for wealth seizure to fund EMU bail-outs -  Two top advisers to German Chancellor Angela Merkel have called for a tax on private wealth and property in eurozone debtor states to force the rich to fund rescue costs, marking a radical new departure for EMU crisis strategy. Prof Bofinger told Spiegel Magazine that it was a mistake to target deposit holders in banks, the formula used in the EU-IMF Troika bail-out for Cyprus where those with savings above €100,000 at Laiki and Bank of Cyprus face huge losses. “The canny rich in southern Europe just shift their money to banks in Northern Europe to escape seizure,” he said. Prof Feld said a new survey by the European Central Bank had revealed that people in the crisis countries are richer than the Germans themselves. “This shows that Germany has been right to take a tough line of euro rescue loans,” he said. The ECB study found that the “median” wealth of is €267,000 in Cyprus, compared to just €51,000 in Germany where home ownership rate is just 44pc and large numbers of people have almost no assets.

"Wise Men" Propose Theft to Bail Out Banks - Far be it from bondholders or banks that caused the debt crisis to be punished for their sins, German 'Wise Men' push for wealth seizure to fund EMU bail-outsTwo top advisers to German Chancellor Angela Merkel have called for a tax on private wealth and property in eurozone debtor states to force the rich to fund rescue costs, marking a radical new departure for EMU crisis strategy. Lars Feld and Peter Bofinger said states in trouble must pay more for their own salvation, said arguing that there is enough wealth in homes and private assets across the Mediterranean to cover bail-out costs. “The rich must give up part of their wealth over the next ten years,” said Prof Bofinger. The two economist are members of the Germany’s Council of Economic Experts or “Five Wise Men”, a body that advises the Chancellor on major issues. There is no formal plan to launch a wealth tax but the council is often used to fly kites for new policies.  Prof Feld said a new survey by the European Central Bank had revealed that people in the crisis countries are richer than the Germans themselves. “This shows that Germany has been right to take a tough line of euro rescue loans,” he said.

German Economic Sentiment Misses Big And Dives In April - The ZEW survey of economic sentiment -- a widely regarded German survey -- plunged in April.  The dive from 48.5 to 36.3 greatly exceeded the expected drop to 42.  Here's the press releaseIn April 2013 the ZEW Indicator of Economic Sentiment for Germany has fallen by 12.2 points and is now at a level of 36.3 points. Despite its decline, the indicator currently hovers at its third highest mark within the last 24 months. The current level has only been exceeded in the two preceding months.   "Basically, the surveyed financial market experts remain confident, but are less optimistic than they have been in the previous month. The decline in economic sentiment is consistent with the release of economic data that fell short of expectations",  German exports into the Eurozone as well as the rest of the world have declined, for instance. The debt crisis in the Eurozone is still unresolved and causes uncertainty.   The assessment of the current economic situation for Germany has slightly declined in April. The respective indicator has fallen by 4.4 points and now stands at the 9.2 points-mark. Economic expectations for the Eurozone have decreased again in April. The respective indicator has fallen by 8.5 points to 24.9 points. The indicator for the current economic situation in the Eurozone has remained almost unchanged and now stands at the minus 76.0 pointsmark.

Merkel: Germany too weak to withstand more stimulus - Germany does not have the economic strength to launch another stimulus package now without running the risk of losing market confidence, Chancellor Angela Merkel said.  In 2009, Germany boosted its crisis-hit economy, Europe's largest, with large-scale spending. The €50bn package was the biggest of its kind since World War II and included investment in education and infrastructure, as well as tax cuts for firms and individuals.  But now, said the Chancellor, "we do not have the strength for a second economic package without losing international confidence".  In the debate about how to help eurozone countries hit by high deficits, debt and recession, Ms Merkel has long stressed the need for structural reforms and cost-cutting to rebalance public finances. Critics especially in southern Europe and France have charged that the fiscal discipline approach stifles growth and adds to the economic pain, calling instead for greater stimulus measures that would revitalise demand.  Last week, the new US Treasury Secretary Jack Lew during a Berlin visit also urged economies to stimulate consumer demand. He said that evidence from his side of the Atlantic suggested increased government spending and looser monetary policy was having a more positive effect than anything being tried in Brussels.

Double Standards: Europeans Are Right to Be Angry with Merkel - Chancellor Angela Merkel has tenaciously insisted that austerity is the only way out of the crisis for ailing EU countries. She doesn't practice what she preaches in Germany, though, which makes growing anger toward her understandable.  The question is not about whether Krugman is right when he almost obsessively labels Merkel "dim-witted" and writes that "senior German officials are living in Wolkenkuckucksheim -- cloud-cuckoo land."  No, it is not the know-it-alls from abroad who spark doubts. It is Merkel's own policies here at home that prove the error of the measures she champions for the ailing economies of Southern Europe -- and feed the suspicion that the outrage directed at the German taskmaster is wholly justified.

Bailouts push German debt to new record - Bailouts for struggling eurozone nations helped push Germany‘s financial liabilities to a new record of 2.166 trillion euros (2.83 trillion dollars) as of the end of 2012, central bank data showed Tuesday. In 2011, the figure stood at 2.085 trillion euros. During 2012, Germany provided 36 billion euros to the European Financial Stability Facility (EFSF) and 9 billion euros to its successor, the European Stability Mechanism (ESM), raising Germany‘s outlays to save the euro to 65 billion euros since 2008. Germany has been the principal source of bailout funds during the euro crisis. Its government has to borrow on the financial markets to provide such aid, which far exceeds any tax surplus. Germany enjoys low interest rates because of Berlin‘s rock-solid credit rating. Germany‘s debt-to-gross domestic product ratio rose to 81.9 per cent, up 1.5 points and also a record, the Bundesbank said. Under the Maastricht stability pact, euro nations are not supposed to exceed a ratio of 60 per cent. Germany was last at that level in 2001.

Stick with the Germans? -MOST of Germany's political leadership continues to state unwavering support for euro zone. And perhaps if push came to shove and an economy truly were on the brink of exit, the German government would accept quite significant sacrifices to forestall that possibility. One wonders, though. For now, many prominent Germans seem to believe that discomfort should be shunted onto the periphery to the greatest extent possible. Today Wolfgang Schaeuble, Germany's finance minister, had this to say: "There is much money in the market, in my view too much money," "If the ECB tries to use what leeway it has to reduce this great liquidity a little I would welcome that," he said, adding that the ECB had done well to bring inflation below 2 percent. In an interview this week German economist Hans Werner Sinn at least acknowledged that if internal devaluation were to take place mostly through price and wage declines in the periphery, that would squeeze economies there toward "civil war". But as improved competitiveness through price increases in the core would mean inflation at about 5.5% for a decade (his figures) he reckoned it would be best for some peripheral economies to consider leaving. Obviously that sort of inflation (a touch worse than what America experienced in the 1980s) would be intolerable for the Germans. Better this:

Are Germans really poorer than Spaniards, Italians and Greeks? - A recent ECB household-wealth survey was interpreted by the media as evidence that poor Germans shouldn’t have to pay for southern Europe. This column takes a look at the numbers. Whilst it’s true that median German households are poor compared to their southern European counterparts, Germany itself is wealthy. Importantly, this wealth is very unequally distributed, but the issue of unequal distribution doesn’t feature much in the press. The debate in Germany creates an inaccurate perception among less wealthy Germans that transfers are unfair.

The riddle of Europe’s single currency with many values - A European Central Bank survey shows that households in northern Europe have a much lower net wealth than those in southern Europe. Average German net assets per household are just under €200,000, while they are €300,000 in Spain and €670,000 in Cyprus. No, this not a typo. German newspapers screamed that poor Germans are bailing out rich Cypriots. This interpretation is wrong but the truth behind these counter-intuitive findings is even more disturbing. What the survey shows is not wealth differentials but the de facto exchange rates between the eurozone economies. They are not measures of net wealth but of imbalances. And they are enormous. Since the start of the eurozone, wages and consumer prices have remained broadly constant in Germany. In southern Europe, the general level of wages and prices has increased year in, year out. Over the period, this persistent inflation gap has led to a large discrepancy in asset prices. This is why an apartment in Milan costs much more than one in Munich, the city with the highest property prices in Germany. A German euro buys more real estate in Munich than an Italian euro buys in Milan. In the frantic German debate about these figures, the focus is on median wealth – the statistic that pinpoints the exact middle if one were to rank households by wealth. Looking at the median, the gap becomes even more extreme. In countries with extremely large wealth differentials such as Germany, where a few super-rich people own a large share of the land and real estate, the median is significantly lower than the mean. Measured in terms of the median, German households occupy the last place among all eurozone countries, with net wealth of a mere €51,000, while the median Cypriot household has net wealth of €267,000. The explanation for this gap is the low property ownership rate in Germany – well under 50 per cent. This means that the median German does not own a house, while the median Cypriot or Spaniard does.

How can the ECB fight fragmentation of the eurozone? - Monetary conditions in the eurozone are fragmented. Bank lending rates are, perversely, much higher in the weakest economies than they are in the core. Unless this is solved, the eurozone economy will remain in trouble. In order to address this issue, the ECB needs to think in ways which are unconventional, and therefore unpalatable for many of the conservatives on the governing council. However, both Mario Draghi and his colleague Benoît Cœuré have recently hinted that they view measures to eliminate fragmented lending rates as essential to fulfil the mandate of the ECB. They have also said that the power of the ECB in this area is limited, and have argued repeatedly that effective action will require co-operation from member governments and from the European Investment Bank (EIB). It is therefore probable that discussions are under way between the ECB and member states to decide what can be done. There are two options which could have significant beneficial effects. The first would be the provision of extra liquidity to the banking sectors in the periphery in a manner which would induce them to increase their lending to the SMEs. The UK did this by introducing the Funding for Lending Scheme last year. This scheme incentivises the banks by offering reduced funding rates for those which increase their lending books the most.A more radical proposal would be somehow to involve the EIB in the provision of additional loans to SMEs in the troubled economies.

IMF Sees 20% of Corporate Debt Unsustainable in Parts of Europe - As much as 20 percent of non-bank corporate debt in the weakest euro-area economies is unsustainable and may force companies to cut dividends and sell assets, dealing further blows to investor confidence, the International Monetary Fund said. Businesses (SXXP) in Italy, Spain and Portugal have the largest “debt overhang,” according to the IMF’s Global Financial Stability Report released today, which analyzed 1,500 publicly traded non-financial European firms. Strains in the corporate sector may in turn hurt banks’ asset quality, the report showed. “Firms in the euro-area periphery have built a sizable debt overhang during the credit boom, on the back of high profit expectations and easy credit conditions,” the IMF said. Now they “face the challenge of reducing the debt overhang in an environment of lower growth and higher interest rates, in part related to financial fragmentation in the euro area.” European policy makers are struggling for ways to give companies in the so-called periphery access to affordable credit even after the European Central Bank’s plan to purchase bonds of debt-burdened countries. The IMF report defined the periphery as Cyprus, Greece, Ireland, Italy, Portugal and Spain.

Framing: Taxpayers money and Fiscal Space at the IMF - In writing this recent post, when I discussed the potential cost of a government scheme, I initial wrote ‘a cost that taxpayers will bear’. That is what everyone does when pointing out that the government’s finances are really our finances. But I changed what I wrote, because I realised this description is actually incorrect. One possible reading of the similar phrase ‘taxpayers money’ is that this money in some sense belongs to the taxpayer. That is clearly wrong. This money belongs to the state, and the state is meant to reflect the people’s wishes. So if we want to remind ourselves that we live in a democracy, we could talk about the people’s money, or society’s money, or our money.  Now perhaps you are thinking that the phrase ‘taxpayers money’ is simply designed to remind ourselves where the government’s money comes from. I guess some people need to be reminded that most of the government’s money once belonged to taxpayers. But of course everyone in society is a taxpayer, because we all buy things which the government levies indirect taxes on. Yet I suspect most people read taxpayer as someone who pays income tax, so I would argue that the phase is misleading compared to something like ‘society’s money’ or ‘citizens’ money’.

The IMF must quit the troika to survive - There are many victims of the eurozone crisis but one loser is seldom mentioned: the IMF has suffered considerable collateral damage. It has been dragged along in an unprecedented set-up as a junior partner within Europe, used as a cover for the continent’s policy makers and its independence lost.The monetary fund was set up as a technocratic institution. That, indeed, is why it was brought into Europe: it was felt that a neutral broker was needed to fix the eurozone’s problems. It is an outsider that would seem less biased in its assessments of peripheral eurozone countries than, say, the chancellor of Germany or the president of the European Commission. While the distribution of voting power within the IMF has been controversial for some time, it is a consensus-driven body. Its independence from any one region or power has provided the basis for efficient decision-making – and is essential to it. So the fact that decisions about IMF-supported adjustment programmes are seemingly being taken in Berlin, Frankfurt and Brussels should horrify its members. The commission and the European Central Bank are not even members of the IMF yet they seem to be running the show. Together with the IMF, they are the troika running the continent’s rescues. Being part of this approach means political meddling has been institutionalised. The approach to the eurozone crisis also undermines the long-running efforts to reform the governance of the IMF, which were, after all, intended to reduce the disproportionate influence of western European governments.

European Car Sales Plunge 10% From Last Year - European new car registrations fell by another 10.2 percent in March from the same month a year earlier, marking the 18th consecutive monthly decline, to 1.307 million vehicles, data released on Wednesday by the European Automobile Manufacturer's Association (ACEA) showed. Almost all main automakers suffered declines, with the exception of two high-end brands, Jaguar with a leap of 21.2 percent and Mercedes with a much more modest gain of 0.6 percent, the association said in a statement. The biggest drop was that of the French group PSA Peugeot Citroen, which sold 16.0 percent fewer vehicles, and US giant General Motors, which was off by 12.8 percent. Renault sales were 9.6 percent lower, but were spared a heavier drop owing to its Romanian subsidiary Dacia, which reported a jump of 20.2 percent. The Korean automaker Kia also posted a gain, turning in a rise of 3.7 percent while compatriot Hyundai fell by 9.5 percent. A breakdown by country showed that the British market held up better then the rest, posting an increase of 5.9 percent on the year and 7.4 percent in the period from January through March from the same period a year earlier. The biggest decline in March was in Germany, Europe's biggest car market, which was off by 17.1 percent, followed by France, which was down by 16.2 percent.

Europe Car Sales Heading for 20-Year Low on German Slide - European car sales are sliding to a 20-year low after German concerns over the debt crisis sent demand plunging last month in the region’s biggest economy and removed the main buffer protecting automakers. Registrations in March fell 10 percent to 1.35 million vehicles, the 18th consecutive decline, with Germany’s auto market plunging 17 percent, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said today. First-quarter deliveries in the region dropped 9.7 percent to a record-low 3.1 million cars. Volkswagen AG (VOW3), Bayerische Motoren Werke AG (BMW) and Daimler AG (DAI), which last year shrugged off Europe’s decline, are forecasting unchanged 2013 earnings as investor and consumer confidence fall in their home country. A recession stemming from the debt crisis, which reared back up last month with a rescue for Cyprus, has led to 12 percent unemployment in the 17 countries sharing the euro, the highest since records began in 1995. “The car boom in Germany has come to an end,” said Hans- Peter Wodniok, an analyst at Fairesearch GmbH & Co. “People have stopped buying cars as consumers are much less confident of the future, especially after the latest decision on Cyprus.”

Francois Hollande faces austerity revolt from own ministers - Telegraph: French president Francois Hollande is facing an anti-austerity revolt from his own ministers as he pushes through a fresh round of tax rises and austerity to meet EU deficit targets.Three cabinet members have launched a joint push for a drastic policy change, warning that cuts have become self-defeating and are driving the country into a recessionary spiral. “Its high time we opened a debate on these policies, which are leading the EU towards a debacle. If budget measures are killing growth, it is dangerous and absurd,” said industry minister Arnaud Montebourg. “What is the point of fiscal consolidation if the economy goes to the dogs. Budget discipline is one thing, cutting to death is another,” he said. Mr Hollande will on Wednesday unveil another round of belt-tightening worth €12bn, even though Paris is already carrying out the harshest fiscal squeeze since the Second World War and France may already be in a triple-dip recession. The cuts are hard to reconcile with Mr Hollande’s campaign pledge last year to end austerity. They have set off furious criticism across the French Left. “Austerity is no longer tenable in Europe today with millions of unemployed,” said social economy minister Benoît Hamon.

Italy in grips of liquidity crisis, Confindustria warns - Italy is in the grips of an "unprecedented" liquidity crisis due to a new credit crunch and late payment of public sector debt to private companies, industrial employers' association Confindustria told parliament on Tuesday. "Business loans have been falling for over a year and a half; in February they were 5.1% below levels in September 2011," said Confindustria Director General Marcella Panucci. "The amount of credit issued fell by 47 billion euros, an unprecedented event in the post-war period," she continued. "A third of companies have insufficient liqidity to meet their operating costs: companies with valid investment projects, and so with turnover expectations that would allow them to service their debt, are in crisis due to the lack of short-term funds," explained Panucci. The reticence of credit institutions to issue loans is compounded by delays within the public administration in repaying its debt to private companies. . The number of bankruptcies in Italy has doubled in five years as a result of the scarcity of funds, Panucci told parliament. There were 3.596 bankruptcies in the fourth quarter of 2012 compared to around 1,800 over the same period in 2007

Italy's temporary layoff scheme runs out of cash, sparks protests (Reuters) - Thousands of idled Italian workers staged a sit-in in front of parliament on Tuesday and trade unions threatened strikes unless the government steps in to back a temporary jobless scheme which is running out of funds. Italy's often divided union confederations united to call on Mario Monti's caretaker government to find around 1.5 billion euros to guarantee payments due to some 700,000 workers sent home on reduced pay under the "cassa integrazione" scheme. The scheme is paid for jointly by the state and companies and allows firms in crisis to stand down workers for a limited period on a reduced salary in the hope of better times. But it is struggling to meet those commitments due to the huge numbers of workers thrown onto the programme by an economy deep in recession. Some 520,000 have already been sent home this year and the fund for 2013 is almost empty. With Italy striving to reduce its 2 trillion euro public debt, that raises the risk that the workers will soon have no income at all, like most of the country's 3 million of officially unemployed.

Italy May Cut $6.6 Billion in Defense Spending This Year - Italy may save as much as 5 billion euros ($6.6 billion) this year by cutting defense spending as the recession-hit country needs to tame its public finances and cannot raise taxes further, a Finance Ministry official said. “We don’t want to penalize the military staff, but faced with a dramatic economic situation they need to realize that unfortunately cuts may be necessary if there is room for them,” Finance Undersecretary Gianfranco Polillo said late yesterday in an interview in Rome. About 5 billion euros in spending could be saved, including the country’s investment in the F-35 fighter- plane program, he said. The Rome-based Parliament passed a bill in December to cut defense spending and the size of the military to shore up the public finances. Italy aims to to reduce the number of military personnel by about 16 percent to 150,000 and civil staff by about a third to 20,000 by 2024. Italy last year said it will reduce its planned order for Lockheed Martin F-35 jets by about 40 planes to 90 units. The cuts were a blow for the F-35, the world’s costliest defense project, which sees Finmeccanica (FNC), Italy’s top military contractor, contributing parts.

Italy May Need $9.2 Billion of Spending Cuts, Official Says -  Italy may need to make as much as 7 billion euros ($9.2 billion) in additional spending cuts this year to cover jobless benefits and other expenses, said Finance Undersecretary Gianfranco Polillo. “There are additional expenses worth 5 billion euros to 7 billion euros that need to be covered,” Polillo said in an interview in Rome on April 15. These include as much as 600 million euros to finance military operations abroad and about 1.2 billion euros for unemployment programs, he said. Funding the expenses through tax increases would aggravate Italy’s fourth recession since 2001, he said. The estimate doesn’t take into account possible changes in the government policies such as a reduction in a property tax introduced by Prime Minister Mario Monti’s government, Polillo said. All political parties promised to cut or abolish the tax during the campaign for February’s inconclusive elections. Italy is mired in a second month of a political stalemate after the Feb. 24-25 vote failed to produce a majority in Parliament. Still, the yield on the 10-year bond has dropped about 60 basis points since then, as investors shrug off the risks of a prolonged political impasse. Italy doesn’t need a bailout, though may be a victim of “a domino effect” if Spain were forced to ask for aid, he said. Only a government with full powers would be able to make an aid request. “

Italy: Lost in stagnation - But, like the rest of Italy, L’Aquila is rich in suffocating bureaucratic impositions. Gian Antonio Stella, a reporter known for exposing the waste and corruption of the elite known as the “caste”, counts 1,109 laws, directives and ordinances passed to deal with the city’s revival. Some aim to prevent the Mafia – one branch of the Italian economy that is flourishing amid crisis – from taking the spoils of reconstruction. Families are still lodged in a police barracks outside the city that were used to host the 2009 G8 summit after Silvio Berlusconi, then prime minister, shifted the venue to L’Aquila, ostensibly to draw attention to its plight. The summit budget, Mr Stella notes, included €26,000 for 60 limited edition pens and €22,500 for 45 silver Bulgari ashtrays. Beyond L’Aquila, Italy’s crisis is deepening as the economy enters its eighth consecutive quarter of contraction, the longest recession since the war. In the decade to the end of 2012, the eurozone’s third-largest economy recorded 15 quarters of decline. An array of statistics attest to Italy’s slide during that period. In education, Italy has slipped down the table so that only Greece spends less. Prisoners do even worse than students, with 140 crammed into communal cells built for 100, the most overcrowded in Europe. Packed even more solidly are commuters on trains, among the slowest on the continent. Opening a business? According to the World Bank, it costs far more to start a business in Italy than in France, Germany or the UK.

Italy Presidential Election Still Deadlocked; Political Posturing in Perspective - The seven-year term of president Giorgio Napolitano is up in May. The Italian parliament has the task of voting for the next president. However, parliament is so splintered  that no suitable candidate has surfaced. The first three rounds of voting require a two-thirds majority. In the first round of voting, Pier Luigi Bersani, the left party leader struck a deal with Mr Berlusconi to support Franco Marini, an 80-year-old former Christian Democrat trade unionist. However, in a secret ballot vote shocking to Bersani, about 200 center-left politicians voted against the deal as did Beppe Grillo's Five star movement. The second round vote also failed as did the third given no candidate can come to a two-thirds majority.The 4th round of votes only requires a simple majority. For that vote the center-left abandoned Marini in favor of former prime minister Romano Prodi.The rally around Prodi attempt may gather in some center-left votes, but Berlusconi wants nothing to do with Prodi. He was willing to back Marini in belief that Marini would shield him from prosecution, but will not back Prodi.

Italy protest leader vows to export revolution to Europe - Italian protest party leader Beppe Grillo on Thursday told AFP he would export his brand of anti-establishment politics to Europe in a "revolution without the guillotine -- for now". The tousle-haired former comedian, who has shaken Italy's political system by winning a quarter of the vote in February elections, said he was not afraid of being called a "clown" and called into question the future of the euro. "This is the greatest revolution in history. This is a revolution without the guillotine -- for now," he said in an interview during a campaign stop for local elections in northeast Italy's Friuli Venezia Giulia region. "In Europe, we are getting organised. They are getting organised. There are movements in Spain that are taking inspiration from us," said the 64-year-old, whose movement now has 163 deputies and senators in parliament. "This has gone beyond the Indignados and Occupy Wall Street," he said.

Greeks have lost a third of their disposable income (Reuters) - Greeks have lost almost a third of their disposable incomes since the debt crisis started more than three years ago, data showed on Friday. The reading fell a total of 22 percent in 2009-2012, according to figures provided by national statistics agency ELSTAT. Allowing for cumulative inflation of around 10 percent in that period, the real drop is just under a third. Fiscal austerity to comply with the terms of an international bailout coupled with record unemployment eroded purchasing power and consumption, which in Greece accounts for about three-quarters of gross domestic product (GDP), the biggest such share of the 17 countries sharing the euro. The resulting squeeze on household budgets led to a 16 percent slump in consumption since 2009 when Greece's debt crisis began, deepening the economic slump which is now in its sixth consecutive year. Weighed by record umemployment and wage cuts to make the country's companies' more competitive, total workers' compensation fell by a quarter. To make matters worse for households, the government slashed social benefits by 15 percent over the same period to save money.

The Euro Legacy: In Greece, Children Pick Through Trash Cans For Food - "We have reached a point where children are coming to school hungry," as with an estimated 10% of Greek elementary and middle school students suffering from 'food insecurity', the troubled nation has fallen to the level of some African countries. As the NY Times reports, unlike the US, Greek schools do not offer subsidized cafeteria lunches. Exacerbated by the austerity measures including cuts in subsidies for larger families, the cost has become insurmountable for many. With 26% of Greek households on an 'economically weak diet', children are starting to steal for food and picking through trash cans as they proclaim, "our dreams are crushed." What is frightening is the speed at which it is happening, "a year ago it wasn't like this," as one family talks of the 'cabbage-based diet' which it supplements by foraging for snails in nearby fields. Programs are being started to help from wealthier Greeks, but as one parent said, "unless the EU acts, we're done for."

This Is the Reality of Austerity: Greek Children Are Starving - It's not fair to blame Rogoff and Reinhart for the austerity craze that has gripped Europe. It is fair to say that their presentation of flawed data about the last half-century of growth and debt was used as intellectual ammunition in a total war on deficits that has destroyed families across the continent. In Greece, the fog of austerity is more than a metaphor. This winter, a very real cloud of smoke haunted the city at night, as families burned felled trees and broken chairs to stay warm. While the economy has shrunk by a fifth and youth unemployment has screamed past 50 percent, the real tragedy can't really be told with numbers. It's simple, really. Children are starving. The New York Times reports the heart-breaking details:

EU warns of budget constraints as Cyprus seeks more aid - There is little room in the European Union's 2014-20 budget to find extra funds for crisis-battered Cyprus, the European Commission said in a letter Tuesday, dampening the island's hopes for more financial support. "Unfortunately, no unallocated margin was left" in the budget that has been agreed by European Union governments, which foresees 945 million euros (1.2 billion dollars) for Cyprus, commission President Jose Manuel Barroso wrote. The budget is, however, still subject to negotiations, as the European Parliament has rejected the governments' deal. Cypriot President Nicos Anastasiades had asked the EU for "additional help," citing "the financial crisis, but also the measures that were forced onto us" as part of the island's international bailout. Cyprus could see its economy contract by as much as 15 per cent this year, EU Economy Commissioner Olli Rehn has warned.

Cyprus braces for Russian cash exodus - Russian investors were shocked by having to contribute heavily to the international bailout of Cyprus, the east Mediterranean island which now faces a tall order in restoring its allure. Some participants who live in Russia and attended a Global Russia Business Meeting in the southern resort of Limassol suffered a major so-called «haircut» on deposits of more than 100,000 euros in the small country's two largest banks. Speaking to AFP on condition of anonymity, some said that they felt a sense of «betrayal». Russians have billions of euros in deposits parked in Cyprus, with estimates ranging from 5-31 billion euros. Some will take a hit of as much as 60 percent or more on bank deposits above the 100,000-euro mark. Cypriot officials at the conference admitted there would be a large cash outflow as a consequence of the bailout terms. "The money is going to leave, but I think the majority of the structures set up by international companies will remain in Cyprus,» said Christodoulos Angastiniotis, chairman of the Cyprus investment promotion agency. Theo Parperis, president of the Institute of Certified Public Accountants of Cyprus, agreed: «There will be a very important outflow of money because... the Eurogroup decision has broken the trust in the Cypriot banking system.

Deposit Leak in Southern Europe as Money Heads for Germany; Stress Indicators from Saxo Bank  - Steen Jakobsen, chief economist at Saxo Bank in Denmark has some interesting "stress" charts in this week's email. Steen writes: "Europe’s depositors – mainly the weak Club Med states (Greece+ Portugal) continue to take money out of the country – even increasing the speed with which they do it." Steen sarcastically added "Sure Mr. Draghi, the ECB has been a great success. The shown data is only including January as IMF data is as slow as their willingness to accept changes. Imagine when March and April data is in." Recall that Draghi said there was no rush to exit following Cyprus. We will see soon enough.

European Construction Stats - The latest came out a couple of days back.  Clearly, life continues to be a vale of tears for European builders.  Now going on seven years of unrelenting gloom, and no hope in sight.

Spain sees ‘tide of squatters’ in wake of foreclosures - A 285-unit apartment complex in Parla, less than half an hour’s drive from Madrid, should be an ideal target for investors seeking cheap property in Spain. Unfortunately, two thirds of the building generates zero revenue because it’s overrun by squatters. “This is happening all over the country,” “People lost their jobs, they can’t pay mortgages or rent so they lost their homes and this has produced a tide of squatters.” The gray concrete and orange cinderblock building, peppered with broken windows and graffiti labeling the property as a squat, is about 12 miles (20 kilometers) south of the capital. It’s just one of thousands transferred to Spain’s bad bank, Sareb, after the developer skipped town two years ago and Bankia SA, the nationalized lender that backed its construction with an 18 million-euro (US$24-million) loan, foreclosed on the property.The proliferation of illegal tenants threatens to complicate efforts to manage the bad bank, set up by Spain under the terms of a European bailout for its financial system to absorb 37 billion euros of soured real estate. Sareb has pledged to sell 42,500 homes, about half its stock, in the first five years of its 15-year life span and aims to generate a return for investors of 13 to 14%. It foresees 1.5 billion euros of asset sales this year, a target that must be met to demonstrate to investors the vehicle is viable.

The New “Nazis” Of Spain - On Saturday, Popular Party Secretary-General María Dolores de Cospedal, number two of the governing party in Spain, said that she knew she was going to get criticized, “but this is pure Nazism.” On Sunday, rather than resigning, she repeated it.  But these “Nazis” are folks who are standing up to the banks and draconian mortgage laws that the government is hell-bent on protecting. And they have a special word for their action: escrache. It had become popular in Argentina in 1995 after President Carlos Menem pardoned collaborators of the Junta. Activists with banners would gather in front of the home or office of a pardoned perpetrator. They’d chant and play music to let neighbors know. While Junta members were beyond the law, they could still be publicly humiliated. In Spain, escraches were sparked by the implosion of the housing bubble and the coincident rise in unemployment: people fell behind on their mortgages and got evicted from their homes. But unlike in the US, Spanish homeowners borrow under a draconian law where the bank, after the eviction, saddles ex-homeowners with the debt for life.

Spain's Community Debt Tops €42 Billion as Unpaid Bills Mount; Madrid Worst Offender - If you don't have the money, and cannot borrow the money, and cannot print the money, what can you do? The easy to understand answer is "you do not pay the bills" at least on time. This has been happening all over Spain, but particularly Madrid. Via Google translate from Libre Mercado, please consider Hidden Debt Soars Thanks to Mayor Gallardón of Madrid. Local authorities accumulated a total debt of €41.9642 billion euros at the end of last year, €6.545 billion more than in 2011, representing an increase of 18.4% yoy, according to data released Wednesday by the Ministry of Finance.  But the most striking is, once again, that of Madrid. Madrid owes ​​a total of €7.4296 billion in 2012, the most municipal debt Spain. This amount is equivalent to almost 18% of total debt of local authorities, 21% of all municipal debt, nearly half (46.5%) of the debt accumulated provincial capitals, and 63.5% of the debt of the big cities. In fact, Madrid's debt is six times that of Barcelona (€1.780 billion) and nearly eight of Valencia (€975.7 million euros). What is most relevant, however, is that Madrid's debt soared by €1.082 billion in 2012 alone, representing an increase of 17% yoy. This is the largest increase registered by the council since 2006, when it grew by €1.700 billion.

Spain needs more time for fiscal consolidation: IMF's Lagarde (Reuters) - Spain needs more time for fiscal consolidation, International Monetary Fund chief Christine Lagarde said on Thursday, as the European Union is considering whether to grant Madrid additional time to cut its budget deficit. "We believe, considering the situation of the country and the efforts that had been undertaken, the 25 percent unemployment rate at the moment, (that) it's clearly needed to do fiscal consolidation but we don't see the need to do upfront, heavy duty fiscal consolidation as was initially planned," Lagarde said. "Spain needs more time and needs to be able to adjust into its fiscal consolidation efforts after it has done already," she told a news conference. In late-April, Spanish authorities will send the European Commission an updated program of reforms it is planning for the next three years as well as revised economic forecasts. The EU executive will use the two documents to decide whether Spain can take one or two extra years, to 2015 or 2016, to reduce its fiscal gap to below the EU's targeted ceiling of 3 percent of gross domestic product.

Ireland’s cash-strapped borrowers face ban on vacations, limits on food spending - Irish borrowers struggling to meet their loan repayments may be banned from taking vacations and face limits on how much they can spend on food under guidelines published by the country’s personal insolvency service. Monthly individual living expenses for people seeking debt relief may be capped at 35.73 euros ($46.7) for clothing, 247.04 euros for food and 33.40 euros for personal-hygiene items, the Insolvency Service of Ireland said in Dublin today. Households in towns with “adequate public transport links” may not need a car, while private health insurance may also be banned, the ISI said. The guidelines set a “standard of living that is based on needs, not wants, but it is more than survival and allows for meaningful participation in society,” the ISI said. “It should not be regarded as a standard of living for people in poverty.”

Cyprus bail-out vote stirs fresh jitters as slump fears grow in Europe - Cyprus has stunned EU officials by ordering a vote in its parliament on the terms of the EU-IMF Troika bailout for the country, risking a rejection by angry lawmakers and a fresh eruption of the crisis. Attorney general Petros Clerides said the assembly must have a say on the accord, which will inflict huge losses on depositors at Laika and Bank of Cyprus. The Orthodox Church of Cyprus expects to lose €100m, crippling its charities. It is unclear whether the government can muster a majority as popular fury erupts. The Communists and Socialists have been vehement critics of the deal. Green MP George Perdikis told the Cyprus Mail that he would vote against it to uphold the “freedom” of his country. “It is a crime to deliver Cyprus into the hands of the troika and allow it to become a colony.” The Cypriot parliament threw out the original plan for a levy on guaranteed deposits below €100,000. A rejection of the final deal might exhaust patience in Berlin and Frankfurt. The country would be forced out of the euro within days if the European Central Bank cuts off support.

Accepting Failure - It is starting to look like European policymakers have given up trying.  Bundesbank President Jens Weidmann, via the Wall Street Journal: "Overcoming the crisis and the crisis effects will remain a challenge over the next decade," he said in an interview from his conference room at Bundesbank's headquarters overlooking Frankfurt's financial district, contrasting recent comments from European Commission President José Manuel Barroso that the worst of Europe's crisis is over. Also from the Wall Street Journal:An aging society and the time needed to work through its debt crisis will keep growth in Europe subdued for years to come, German Finance Minister Wolfgang Schaeuble said Friday.“No one should expect that Europe will deliver high growth rates for years,” he said. Apparently the new strategy is to keep expectations low.  One has to imagine that given the current path of activity and the lack of fiscal support from European nations, the European Central Bank will find itself not only cutting rates but implementing its own version of quantitative easing by year end.  The only other option would be to sit back and watch Europe slide from recession to depression. 

Why can’t the IMF face up to the truth about the failing euro?  - I've been in Washington most of this week for the spring meeting of the International Monetary Fund. I wish I could say there was light at the end of the tunnel, but the reality is still deeply depressing. Sorry to use cliches, but two sayings spring to mind: fiddling while Rome burns, and re-arranging deck chairs on the Titanic. Instead of addressing the underlying causes of today's economic funk – the failing euro – debate has focused on marginal fiscal and monetary issues such as whether the UK and the US are consolidating too fast. That the IMF's chief economist, Olivier Blanchard, and his managing director, Christine Lagarde, could think some minor loosening of the fiscal purse strings in the UK either appropriate or capable of getting growth going again, when there is such a deep seated crisis going on in Europe is not just odd, it is pitiful. I've already written about the wider failings of the IMF in confronting the worst economic crisis since the second world war in today's print edition of the Daily Telegraph, but there is a lot more to say about it. Instead of forcing eurozone leaders to face up to the truth – that their project in its present form is failing not just them, but the whole world economy – the IMF busies itself with irrelevances such as whether the UK has the fiscal space for a little more debt fuelled demand management. Worse, it meakly goes along with attempts to sustain what is plainly in its current form a completely unsustainable endeavour.

Central Bankers Say They Are Flying Blind - Growing concern at the International Monetary Fund over the long-term side-effects of interest rates close to zero came as some of the leading figures in central banking conceded they were flying blind when steering their economies. Lorenzo Bini Smaghi, the former member of the European Central Bank's executive board, captured the mood at the IMF's spring meeting, saying: "We don't fully understand what is happening in advanced economies." In this environment of uncertainty about the way economies work and how to influence recoveries with policy, Sir Mervyn King, the outgoing governor of the Bank of England, said that "there is the risk of appearing to promise too much or allowing too much to be expected of us". It is troubling for monetary policy experts that their crisis-fighting tools - rates stuck at zero, money printing operations to bring down longer-term interest rates and encourage private sector spending, and efforts to calm financial market fears - might have nasty side-effects.  The central bankers were clear that they had got it wrong before the crisis, allowing themselves to be lulled, by stable inflation, into thinking they had eliminated financial vulnerabilities.

The Non-Secret of Our Non-Success - Krugman - Chris Giles of the FT reports that central bankers are worried that they are “flying blind”; he quotes Lorenzo Bibi-Smaghi, formerly of the ECB governing board, saying “We don’t fully understand what is happening in advanced economies.” Um, guys, that’s because you don’t want to understand. Nothing about our current situation, except maybe the absence of outright deflation, is at all surprising or mysterious.  We had a huge financial crisis, and the combination of a housing bust (on both sides of the Atlantic) and an overhang of household debt (also on both sides) has acted as a drag on private demand. Monetary policy quickly found itself up against the zero lower bound, while fiscal policy, after providing some stimulus, soon turned strongly contractionary. Here’s real primary (non-interest) spending, from the IMF’s latest World Economic Outlook, with the blue lines representing the historical average in recessions and aftermath, the red lines representing current policies:

Trouble brews over EU transactions tax - Much like the moronic rock musicians of Spinal Tap, the fortunes of the peripheral European sovereign debt markets have been revived by unexpected support from Japan. In the week after the Bank of Japan governor’s announcement of an aggressive easing policy, Spanish and Italian 10-year sovereign yields dropped by more than 25 basis points, and Greek 10-year paper’s yield by more than 75bp. That’s enough to pay for the effects of several new corruption scandals, should they come up. Yet the eurocracy and its political leadership may have found a Spinal Tap-like way to screw up this wonderful temporary fix. It’s called the financial transactions tax, or FTT, which, according to the European Commission, is supposed to be fully agreed on a fast-track procedure by September 1, then implemented by the beginning of next year. The intent is to raise €35bn a year for the eurozone member states (and the commission itself), by taxing each stage of financial transactions that either take place in the 11 core euro area countries that have signed on for “enhanced co-operation”, or that take place elsewhere and involve financial instruments that, broadly defined, have been “issued” by the 11 member states. I put “issued” in quotes, because the definitions in the proposed rule are so broad as to cover any derivative of any security issued in the core euro area, or any trust vehicle involving those securities, and so on. So, for example, if a US family office were to buy a forward contract priced on the basis of the German Bund market from a US financial institution, and do so using a US platform, under the rule, each stage of that transaction would be subject to German taxes, at the gross value of what’s being traded.

Britain launches legal challenge to Financial Transaction Tax -  Britain has threatened to provoke a fresh row with Brussels by launching legal proceedings against a €35bn tax on financial transactions agreed by 11 European Union members earlier this year.The UK lodged the challenge at the European Court of Justice in protest at the spillover effects the private agreement might have on the UK economy. Although the FTT will only be adopted by the 11 euro area signatories, which include Germany, France, Italy and Spain, it will hit investors worldwide. As it stands, any trade in euro-denominated financial instruments and any transaction with a bank from the 11-nation group, or one of its overseas branches, would be subject to the tax – regardless of where the deal took place. Speaking in Washington while attending the International Monetary Fund’s spring meetings, George Osborne said: “The UK has launched a legal challenge to the European Commission proposal to a Financial Transaction Tax. “The British Government [is] not against financial transaction taxes in principle – we have stamp duty on shares – but we are concerned about the extra-territorial aspects of the Commission’s proposal. That concern is shared by some other countries.”

Threat of ‘wealth tax’ on holiday homes - Britons who own homes in Spain and other troubled eurozone states could face a new "wealth tax" to help fund future bail-outs, influential German economists have suggested. Senior advisers to Chancellor Angela Merkel are pushing for better-off households to pay towards the cost of any future bail-outs for the weaker members of the single currency. The proposals, from members of Germany's council of economic experts, raise the prospect of taxes being imposed on property in a country such as Spain if its government was forced to seek a bail-out. The council, known as the "Five Wise Men", is often used to test new policies that are later adopted officially. As well as inflaming tensions between Germany and its smaller southern partners, the suggestion could also mean that Britons with holiday homes are dragged deeper into the eurozone crisis. Around 400,000 Britons live or own homes in the south of Spain, which is suffering a deep recession that is hampering Madrid's attempts to balance the public finances and stave off a bail-out. Senior figures in Germany are now arguing that some richer home owners in countries like Spain, Portugal and Greece have so far avoided paying their fair share to rescue the euro, leaving Germany paying too much.

Almost One in Five U.K. Companies Favor Leaving EU - Almost one in five U.K. companies favor Britain pulling out of the European Union because it would have a positive impact on their business, according to a survey.  The British Chambers of Commerce said today its polling of 4,387 companies showed 18 percent say full withdrawal from the EU could have a positive impact, while 33 percent favor pulling out and renegotiating a free-trade deal. The biggest majority, 64 percent, back Prime Minister David Cameron’s approach of remaining inside the 27-nation union while repatriating some powers.  “These findings suggest that U.K. businesses increasingly feel that some sort of change to Britain’s relationship with the EU is needed to boost our trading prospects,”  Cameron pledged in January to hold a referendum on Britain leaving the European Union, saying backing for the status quo in Europe was “wafer thin.” He promised a popular vote by the end of 2017 if re-elected in two years and once he has negotiated a return of some powers to the U.K.  Companies cited employment law and health-and-safety legislation as areas where they’d most like to see powers returned to the U.K., the BCC said.

‘It’s odd bank bosses have avoided charges’ - Britain's chief financial regulator, Andrew Bailey, has said it is “more than odd” that the chairmen and chief executives who were at the helm of the failed banks have avoided formal charges. The chief executive of the Prudential Regulation Authority (PRA) said that it was a “source of some surprise” to him that authorities had brought cases against junior bankers but not senior directors. Speaking at a conference in London, Mr Bailey said it was “not the job of the regulator” to say if individuals should go to prison. But he added: “It is to my mind a very striking observation and difficulty with the crisis that no formal action has been taken against any chief executive or any chairmen of a failed institution. Not because I have a personal vendetta against them but it is more than odd that action has been taken against people lower down institutions but not at the top.”

If the IMF is criticising UK austerity, things must be bad - The failure of the government's economic policy has led to a damning indictment from the International Monetary Fund. In the fund's flagship World Economic Outlook report it lowered the forecast growth for the advanced economies as a whole, but Britain by more than the rest. The IMF repeatedly singled out the British economy for weak growth and negative outlook. Its chief economist, Olivier Blanchard, said the UK chancellor, George Osborne, was "playing with fire".  If the IMF has become a severe critic of Britain's version of austerity, then things must be bad. Within the "troika", including the EU and the European Central Bank, the IMF has been a key architect of those policies in the bailout countries. Visitors to the soup kitchens of Greece, the poor of Cyprus who cannot access their savings and the Irish forced to leave their country must wonder what they have done to incur its wrath. The IMF cannot produce an over-arching framework for its policies precisely because there is no intellectual justification for the different policies it pursues. In Britain the economy was experiencing a mild recovery before the coalition came to office. Stagnation since has seen the public deficit start to rise when economic policy is purportedly aimed at lowering it. The government's main response has been to prolong austerity to 2018. It is hard to avoid the conclusion that the IMF's criticism is a case of a rat leaving the sinking ship.

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