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

Saturday, January 25, 2014

week ending Jan 25

FRB: H.4.1 Release--Factors Affecting Reserve Balances--January 23, 2014: Federal Reserve Statistical Release. Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Next Cut in Fed Bond Buys Looms - The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank’s expectations for solid U.S. economic growth this year, according to interviews with officials and their public comments.  A reduction in the program to $65 billion a month from the current $75 billion could be announced at the end of the Jan. 28-29 meeting, which would be the last meeting for outgoing Chairman Ben Bernanke. The Fed has been buying Treasurys and mortgage bonds in an effort to drive down long-term interest rates and spur spending, hiring and investment. Last year the Fed spent $85 billion a month buying bonds. Bernanke suggested at a December news conference that officials were inclined to continue cutting purchases in $10 billion increments at subsequent meetings as long as the economy keeps strengthening.  “We’re likely to continue on a path of gradual, measured reductions in the pace of purchases, assuming the economy tracks as we expect it to,” San Francisco Fed President John Williams said in an interview early in the month.  Bond buying is one of two prongs in the Fed’s strategy to boost the economy. The other is low interest rates, and Fed officials are once again debating how best to describe their plans for when they eventually begin raising short-term rates.  In December, the Fed said rates would remain near zero “well past” the time when the unemployment rate falls to 6.5%. The Fed is in no hurry to raise interest rates. But because officials have tied their plans to movements in the jobless rate, they see a need to better explain their plans as the jobless rate drops.

The QE Weakness That Might Just Bode Well for Unwinding - WSJ - One of the main ways that central bank asset purchases are supposed to work to stimulate the economy might be less effective than first thought, according to a paper co-authored by Bank of England policy maker David Miles, published by the U.K. central bank Monday. But that also means that unwinding stimulus might be much less disruptive than feared.Central banks believe that one of the channels through which asset purchases work is by prompting investors to juggle their portfolios. When the Fed or the BOE prints money to buy assets such as government bonds, a policy also known as quantitative easing, the seller of the bonds will often use the cash he or she receives to buy something else. This drives up the price of a wide range of assets and drives down yields, which in turn lowers interest rates for households and companies and, so the theory goes, spurs greater spending and activity. In their paper, Mr. Miles and BOE staffer Jochen Schanz show this portfolio rebalancing effect might be small, perhaps much smaller than central banks suppose. Using a lot of complicated math and an economic model, they report that “across a fairly wide set of environments –with different rules for the setting of interest rates and different ways in which fiscal policy is conducted–the impact of asset purchases working through a portfolio rebalancing channel is weak or absent.” The paper, one of a series of discussion papers on monetary policy, doesn’t necessarily reflect the view of the BOE as a whole, nor the rate-setting Monetary Policy Committee.  Other papers in the series have covered topics including business cycle, house prices and bank capital requirements.

Janet Yellen should ignore unemployment rate: Focus on inflation and keep interest rates low. - If it seems odd to suggest that the best way to help the unemployed is to ignore the unemployment rate, here is some context. For decades now, the pattern of tension around the Fed has pitted what are known as “inflation hawks” against “inflation doves.” The hawks have been in ascendance for more than 30 years, save for a brief spell in the late 1990s; they believe the Fed’s overwhelming emphasis must be keeping the inflation rate low and stable. Doves, who are largely in disfavor, tend to say the Fed shouldn’t worry about overshooting its inflation target a bit if that’s what’s needed to avoid mass unemployment. Somewhat perversely, Ben Bernanke has acquired a reputation as a dove, even though on his watch inflation was the lowest it’s ever been in the postwar era, and unemployment the highest it’s ever been. The key thing for now, however, is that the unemployment rate has ceased to be a reliable indicator of the state of the economy. Spending too much time thinking about the unemployment rate may cause you to develop an excessively optimistic view of the labor market, and an excessively pessimistic view of the economy’s capacity for growth. The key test for the Fed in 2014 will be its willingness to look past the unemployment rate at broader measures of the economy’s health.

Markets Price in Fed Rate Changes Long Before They Happen -- Federal Reserve officials have been working hard to convey their strong beliefs that they won’t raise interest rates for a long time to come. But new research suggests financial markets may start getting ready for that shift well before central bankers actually pull the trigger. Traders and investors start pricing in changes in the central bank’s overnight target rate as much as half a year before the change takes place, according to a National Bureau of Economic Research paper published this week. “The market prepares for [Federal Open Market Committee] announcements much farther in advance than had previously been demonstrated” in prior studies. “We find strong evidence of anticipatory set-up, going back as far as six months prior to an FOMC meeting,” they noted. The paper’s conclusions are based on a review of monetary policy and markets from 2002 through 2008. The researchers took stock of market movements, economic data, the speeches of Fed board members and official policy statements, to get a sense of how traders and investors moved to reflect the changing monetary policy outlook. The authors focused on how the markets anticipated changes in the Fed’s benchmark federal funds rate, the overnight rate charged between banks and once the central bank’s chief tool to influence the economy. The Fed cut the rate to near zero at the end of 2008 and has held it there since.

Former Fed Economists Call For Central Bank to Scrap Fed Funds Rate Target - Economists Brian Sack and Joseph Gagnon have proposed that the Federal Reserve stop targeting the federal funds rate as its benchmark interest rate, and instead use other tools that might give the Fed more flexibility to operate with a central bank portfolio that has dramatically in the past few years.  The Wall Street Journal wrote about their idea a few weeks ago. At the time, their paper was in draft form. A number of readers asked for a copy of the paper, but it wasn’t yet circulating. The two economists have now posted it on the Peterson Institute of International Economics website. Have a look.Managing the fed funds rate — which is a rate banks charge each other for overnight loans — has become difficult because the Fed has flooded the banking system with so many reserves. To move the rate up in the future, the Fed would have to drain trillions of dollars from the banking system. Under the Gagnon and Sack proposal, the Fed would manage interest rates through two new facilities, one called a reverse repurchase facility and another called interest on reserves, which wouldn’t require the Fed to drain reserves. In effect, it would allow the Fed to push up interest rates even with an enormous balance sheet, which already has $4 trillion in assets.  Their ideas are being closely watched in financial markets because both are former senior Fed economists. Sack ran the New York Fed’s markets desk until 2012 and is now at the hedge fund D.E. Shaw. Mr. Gagnon is a former staff economist at the Fed Board in Washington and is now a fellow at Peterson.

How the Fed can raise Fed rate without unwinding excess reserves - If inflation starts to rise or the economy overheat, how can the Federal Reserve raise their Fed rate? One might think it would be impossible with $4 trillion in reserves, but the Fed does have a way. They can simply raise the floor under the Fed rate. What is the floor? The interest on reserves. If you raise the interest on reserves, banks will not lend below that rate. For example, if the interest on reserves was 1.5%, a bank would not lend at 1% with risk, when it could keep the money with the Fed and earn 1.5% interest. Effectively the Fed rate is raised by raising the interest on reserves. Here is a quick video explaining this visually.

Central Banks Should Lean In Against Bubbles, BIS Official Says - The world’s major central banks should be more proactive about restraining excessive asset price increases rather than just trying to clean up the mess after the bubbles pop, according to a new working paper from Claudio Borio, head of the Monetary and Economic Department at Bank for International Settlements.“For monetary policy, this means leaning more deliberately against booms and easing less aggressively and persistently during busts,” the author writes. His approach runs contrary to the recent record of many prominent central banks including the Federal Reserve. During the housing boom preceding the financial crisis, top Fed officials raised interest rates in a series of small steps, while downplaying the possibility of a national real estate bubble that could deeply damage the economy. Since the crisis, Fed officials have argued that regulatory tools, not interest rate increases, should be applied as the first line of defense against possible market distortions. Mr. Borio argues such action may be too timid to contain a world increasingly prone to bubbles in the wake of large-scale financial deregulation over several decades.

How Bitcoin Plays Into the Hands of Central Bankers and Will Facilitate the Use of Negative Interest Rates - Yves Smith --Bitcoin enthusiasts like to present it as a “power to the people” form of money, stressing its apparent lack of ownership (the “Napster for finance“). They stress the lack of need for a “trusted party” like a bank or broker to verify that a payment has been made. And many clearly relish the idea of launching a currency outside the control of central banks (plus this beats Cryptonomicon in geekery). If you believe the hype, you’ve been had. As Izabella Kaminska of the Financial Times tells us, you all are really just doing free/underpaid R&D for central banks, since you are debugging and building legitimacy for one of their fond projects, making currencies digital and getting rid of cash altogether. I had wondered about the complacency of Fed and SEC officials in Senate Banking Committee hearings on Bitcoin last year. Press reports at the time attributed it to successful lobbying. But there’s no need to fight when you understand how to become the alpha quant per Tom LehrerAs Kaminska explains: Central bankers, after all, have had an explicit interest in introducing e-money from the moment the global financial crisis began…Bitcoin has helped to de-stigmatise the concept of a cashless society by generating the perception that digital cash can be as private and anonymous as good old fashioned banknotes. It’s also provided a useful test-run of a digital system that can now be adopted universally by almost any pre-existing value system.This is important because, in the current economic climate, the introduction of a cashless society empowers central banks greatly. A cashless society, after all, not only makes things like negative interest rates possible, it transfers absolute control of the money supply to the central bank, mostly by turning it into a universal banker that competes directly with private banks for public deposits. All digital deposits become base money.Consequently, anyone who believes Bitcoin is a threat to fiat currency misunderstands the economic context. Above all, they fail to understand that had central banks had the means to deploy e-money earlier on, the crisis could have been much more successfully dealt with.

Jack Lew and Jamie Dimon warn of Bitcoin dangers - Bitcoin has been tossed into the virtual gutter at the World Economic Forum in Davos this week, as top US financial leaders warned the virtual currency could be used to fund terrorism and predicted that regulation would put it out of business. Jack Lew, US Treasury secretary, said: “From the government’s point of view, we have to make sure it does not become an avenue to funding illegal activities or to funding activities that have malign purposes like terrorist activities. “It is an anonymous form of transaction and it offers places for people to hide,” Mr Lew said in an interview with CNBC at Davos. Jamie Dimon, JPMorgan chairman and chief executive, told the same channel: “The question isn’t whether we accept it. The question is do we even participate with people who facilitate Bitcoin?” Ultimately, Mr Dimon said, Bitcoin would be subjected to the same regulatory standards as other payment systems and “that will probably be the end of them”. Regulatory uncertainty has deterred banks from offering services to virtual currency start-ups. But Mr Dimon’s cautious approach contrasts with rival Wells Fargo, which recently launched a group to examine how it might safely offer Bitcoin-related services or banking arrangements to virtual currency entrepreneurs. The JPMorgan boss said: “Governments put a huge amount of pressure on banks, and so, to know who your client is, anti-money laundering, did you do real reviews of that? Obviously it’s almost impossible with something like that.” He added that Bitcoin was “a terrible store of value” that “can be replicated over and over”, and that according to reports, “a lot of it is being used for illicit purposes”.

Robert Shiller: Bitcoin Is An Amazing Example Of A Bubble - Nobel Laureate economist Robert Shiller is on a panel at Davos about digital trends in financial markets. Almost immediately he started talking about Bitcoin. He says that he finds it to be an "inspiration" because of the computer science. But he's not into it as an economic advance. As a currency he says it's a return to the dark ages. Shiller is a student and expert in the nature of bubbles, and he's adamant that Bitcoin is one. He says he's blown away by how much fascination Bitcoin has engendered, though it makes sense because human nature causes us to be interested in markets that exhibit extreme volatility. Says Shiller: "It is a bubble, there is no question about it. ... It's just an amazing example of a bubble." He added that he's "amazed by how people are so excited about it" and that he tells his students that "No, it's not such a great idea."

Additional Thoughts Concerning Deflation -- I have written a variety of posts concerning "deflationary pressures" and deflation as I continue to believe that deflationary conditions are on the horizon, and that such deflationary conditions will cause, as well as accompany, inordinate economic hardship. [note: to clarify, for purposes of this discussion, when I mention "deflation" I am referring to the CPI going below zero. Also, I have been using the term "deflationary pressures" as a term to describe deflationary manifestations within an environment that is still overall inflationary but heading towards deflation.] For reference purposes, here is a chart of the Core CPI and Core PCE, as seen in Doug Short's update of January 17, 2014 titled "Two Measures of Inflation: CPI and the PCE Price Index and Fed Policy" : I consider it highly notable that while various "deflationary pressures" continue to manifest expectations of deflation among various parties and measures remain (almost entirely) nonexistent. For example, one can see in the various professional economic forecasts mentioned in this blog economic forecasters have virtually no expectation of deflation either in the near-term or for the next few years. As well, continually low readings from the Federal Reserve Bank of Atlanta's series titled "Deflation Probabilities" continue to show negligible possibilities for deflation. Because of this relative lack of deflation over the past 100 years, not only may there be (considerable) complacency regarding the possibility of deflation – but there may be a widespread inability to "spot" or "predict" impending deflation. As I mentioned in the November 14 post ("Thoughts Concerning Deflation"):

Coping with secular stagnation by raising the inflation target - Brad Delong and Isabella Kaminska are against raising the inflation target as a response to secular stagnation.  To recap.  Larry Summers argued that currently the natural real rate is very low and may remain so for quite some time ahead.  Other things equal, this is going to generate a low value for the nominal central bank interest rate required to hit a given inflation target.  This leaves less room for rates to respond to further contractionary shocks, since starting out at this already low nominal interest rate ‘steady state’ [if that is the right word for it] means the ZLB is not far away.  To make more room, to raise the low-frequency nominal interest rate, central banks or their finance ministry bosses could temporarily – or, as Blanchard suggested before, permanently – raise inflation targets.  Delong emphasises the corrosion of credibility that would result.  Kaminska suggests that it could prompt a flight from state, fiat stores of value.  A few quick points in favour of increasing inflation targets.

 Fed Watch: The Week That Was - Plenty of data and Fedspeak to chew on last week, the sum total of which I think point in the same general direction. Economic activity is on average improving modestly, the Federal Reserve will push through with another round of tapering next week, and low inflation continues to hold back the threat of rate hikes. After stripping out the auto component, retail sales were solid in December: I think we are at or nearing the point where auto sales will generally move sideways and thus induce some additional volatility in the headline number. Consequently, it will be increasingly important to focus on core sales ("core" meaning less autos and gas). Looking at the three-month change, we see a modest acceleration in the back half of 2013: Likewise, industrial production accelerated in the final months of 2013: The initial read on consumer sentiment was modestly disappointing but not a cause for worry. In general, consumer sentiment has been weaker than what would be suggested by the pace of spending since the recovery began: Housing starts stumbled in December after surging the previous month: Housing activity continues to grind higher, with plenty of room left to climb. Increasingly, the gains seem likely to be coming from the single family side of the equation; multifamily has already experienced a solid rebound:

Recovery Measures: Three out of Four Ain't Bad - Here is an update to four key indicators used by the NBER for business cycle dating: GDP, Employment, Industrial production and real personal income less transfer payments. The following graphs are all constructed as a percent of the peak in each indicator. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%. Three of the indicators are above pre-recession levels (GDP and Personal Income less Transfer Payments and Industrial Production).  Only employment is still below the  pre-recession peak.

IMF raises outlook for U.S., global economy: (AP) — The International Monetary Fund is slightly more optimistic about the global and U.S. economies this year than it was three months ago. In an updated outlook released Tuesday, the global lending organization forecasts that the world economy will grow 3.7% in 2014 and that the U.S. economy will grow 2.8%. The global forecast is 0.1 percentage point higher and the U.S. forecast 0.2 point higher than the IMF's October forecast. After a sluggish start, global economic growth picked up in the second half of 2013. As a result, growth amounted to 3% last year. The IMF expects it will be even stronger growth this year. The IMF forecasts that the U.S. economy grew 1.9% last year. And its 2.8% forecast for this year would match U.S. growth in 2012. Part of the anticipated improvement is based on expectations for less drag from higher U.S. taxes and across-the-board spending cuts. By 2015, the IMF forecast the U.S. economy will grow 3%, or 0.4 percentage point lower than its October forecast. The IMF reduced its outlook because a recent budget agreement left in place most of the spending cuts. The IMF had expected most of those cuts to have been eliminated by next year.

Conference Board Leading Economic Index Edged Up in December - The Latest Conference Board Leading Economic Index (LEI) for November was released this morning. The index rose to 0.1 percent to 99.4 percent from the previous month's 99.3 (2004 = 100). Today's number was slightly below the 0.2 percent increase forecasted by Here is an overview of today's release from the LEI technical notes: The Conference Board LEI for the U.S. edged up in December. This month's gain was mostly driven by positive contributions from financial components. In the six-month period ending December 2013, the leading economic index increased 3.4 percent (about a 7.0 percent annual rate), much faster than the growth of 1.9 percent (about a 3.9 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have been more widespread than the weaknesses.   [Full notes in PDF] Here is a chart of the LEI series with documented recessions as identified by the NBER.  And here is a closer look at this indicator since 2000. We can more readily see that the recovery from the 2000 trough weakened in 2012 but began trending higher in the latter part of the year.

Chicago Fed: Economic Growth Moderated in December"Index shows economic growth moderated in December" is the headline for today's release of the Chicago Fed's National Activity Index, and here are the opening paragraphs from the report: Led by declines in employment- and production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to +0.16 in December from +0.69 in November. Three of the four broad categories of indicators that make up the index decreased from November, although three of the four categories also made positive contributions to the index in December.  The index's three-month moving average, CFNAI-MA3, edged down to +0.33 in December from +0.36 in November, marking its fourth consecutive reading above zero. December's CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.  The CFNAI Diffusion Index ticked down to +0.38 in December from +0.40 in November. Forty-seven of the 85 individual indicators made positive contributions to the CFNAI in December, while 38 made negative contributions. Twenty-seven indicators improved from November to December, while 56 indicators deteriorated and two were unchanged. Of the indicators that improved, seven made negative contributions. [Download PDF News Release]  The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website.  Negative values indicate below-average growth, and positive values indicate above-average growth. The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity. I've added a high-low channel for the MA3 data since 2010. As we can see, the MA3 of the index has risen fractionally above the trend channel.

Q4 GDP Seen at 3.8% -   From Merill Lynch on Q4 GDP:  We look for the first estimate of 4Q GDP to show solid growth of 3.8%. Of course, there is greater room for forecast error with the first release since a number of inputs are estimates (particularly trade and inventory data). That said, we forecast a strong gain in consumer spending, reflecting the healthy retail sales data and holiday shopping season. We also look for equipment and software investment to strengthen, as suggested by the pop higher in core capital goods orders. The trade deficit should narrow due to strong global growth but also a continued decline in US imports of petroleum. Inventory should remain little changed at very high levels, which we believe is unintentional. We think businesses will look to reduce inventories to more sustainable levels in the next few quarters. Overall, the report should show a healthy end to 2013 and momentum heading into 2014. That would put 2013 real GDP growth at about 2.0% (over 2012).

Trickle-down economics: greatest broken promise - The richest 85 people in the world have as much wealth as the poorest 3.5 billion – or half the world's entire population – put together. This is the stark headline of a report from Oxfam ahead of the World Economic Forum at Davos. Is there a reason why the world's powerful, gathering at the exclusive resort to sip cognac and eat blinis, should care? Well, yes.  If one subscribes to the charitable view that neoliberal philosophy was simply naive or misguided in thinking that "trickle down" would work infinitely, then evidence that it doesn't, should be cause for concern. It is a fundamental building block of supply-side economic theory – the tool of choice these past few decades for those in charge to make adjustments. The realisation that governments have been pulling at economic levers which, for some time, have been attached to nothing, should be a wake-up call to the deepest sleepers. Even if one subscribes to the cynical view that the elite knew what they were doing all along, observing that the "rising tide" is lifting fewer and fewer boats and leaving more and more to rot in the sediment – both at a personal and national level – must make most wonder "am I in the right boat and is it big enough?" Concentration is rampant. Credit Suisse estimates that the world will have 11 trillionaires within two generations. It is not so much that the supply-side principle "if you build it, they will come" is no longer true. It is more that we appear to have passed a tipping point, where so much wealth has been concentrated at the top, they no longer need bother to "build" anything. In short, it has become more economically efficient to buy countries' economic policy than to create value in order to sell it on. If one can control government to favour the richest, while raising barriers for new entrants, thus increasing their share of the pie exponentially, what is the incentive to grow the pie?

An AWESOME MMT Video - A big MMT thanks to Donna D’Souza aka Trixie aka @HaikuCharlatan. She has done an awesome job of animating J.D. Alt’s wonderful new ebook Diagrams & Dollars: Modern Money Illustrated. For your viewing enjoyment, Donna’s video is below.

The Great Mistake: How Academic Economists and Policymakers Wrongly Abandoned Fiscal Policy - As of 2013, the US economy remained far from fully recovered from the effects of the Great Recession. The “output gap” between actual GDP and potential GDP – how much could have been produced had unemployment and capacity utilization not been depressed due to insufficient aggregate demand – stood at 5.8 percent of potential GDP, or roughly $900 billion. This is by far the largest output gap measured in terms of time from either the previous business cycle peak or the trough of the recession.   However, the roots of this slow recovery are far from mysterious: the very large negative shock to aggregate demand provided by the bursting housing bubble (starting in 2007) has never been fully neutralized by policy measures to boost demand. Moreover, because the housing bubble burst in a macroeconomic environment characterized by already low interest rates and inflation, monetary policymakers quickly found themselves hard up against the zero lower bound on the nominal “policy” interest rates controlled by the Federal Reserve. This made conventional counter-cyclical monetary policy ineffective, a state of play that is often referred to as a “liquidity trap”. Liquidity trap conditions argue strongly that expansionary fiscal policy should be the primary tool used to spur recovery. However, fiscal policy as a macroeconomic stabilization tool had fallen deeply out of favor among many academic macroeconomists in recent decades – and had reached the depths of disfavor immediately preceding the Great Recession.

Geithner Said U.S. Would Respond to Downgrade, S&P Says - Former U.S. Treasury Secretary Timothy Geithner told McGraw Hill Financial Inc. (MHFI) Chairman Harold W. McGraw III in 2011 that Standard & Poor’s downgrade of the U.S. debt would be met by a response, S&P said. S&P filed a declaration by McGraw yesterday in federal court in Santa Ana, California, as part of a request to force the U.S. to hand over potential evidence the company says will support its claim that the government filed a fraud lawsuit against it last year in retaliation for its downgrade of the U.S. debt two years earlier. In his court statement, McGraw said Geithner called him on Aug. 8, 2011, after S&P was the only credit ratings company to downgrade the U.S. debt. Geithner, McGraw said, told him that S&P would be held accountable for the downgrade. Government officials have said the downgrade was based on an error by S&P. “S&P’s conduct would be looked at very carefully,” Geithner told McGraw according to the filing. “Such behavior would not occur, he said, without a response from the government.” The Justice Department last year accused S&P of lying about its ratings being free of conflicts of interest and may seek as much as $5 billion in civil penalties. The government alleged in its Feb. 4, 2013, complaint that S&P knowingly downplayed the risk on securities before the credit crisis to win business from investment banks seeking the highest possible ratings to help sell the instruments.

U.S. debt ceiling to bind by late February: Treasury (Reuters) - The Obama administration warned Congress on Wednesday that the government would likely run out of borrowing authority needed to help pay its bills by late February if lawmakers do not swiftly raise the federal debt ceiling. Previously, the administration had projected the borrowing authority could last until as late as early March, but the Treasury Department said it now believed Congress had a more narrow window in which to act. "I respectfully urge Congress to provide certainty and stability to the economy and financial markets by acting to raise the debt limit," Treasury Secretary Jack Lew said in a letter to congressional leaders. Congress passed a two-year budget deal in December to avert some spending cuts planned for next year, and the pact reduces the risk of a government shutdown. But the legislation does nothing to avoid a potential unprecedented U.S. debt default that could occur if Washington does not raise the borrowing cap soon.

Treasury Secretary sounds alarm on new debt ceiling deadline - Treasury Secretary Jack Lew told House Speaker John Boehner and other congressional leaders Wednesday that Congress must vote to increase the government’s borrowing limit before late February. As part of the deal last year between President Barack Obama and Congress ending the government shutdown, the debt limit, which is just under $17 trillion, was temporarily suspended through Feb. 7. Lew said that as in the past the Treasury could use certain accounting and cash management methods to push back the point at which it reaches its legal borrowing limit, but officials believe the Treasury is likely to exhaust those measures in late February. One special timing factor, he noted, is that “the government experiences large net cash outflows in the month of February, due to tax refunds” so its cash balance will be lower than it would be at other times.

It's time to fight over the debt ceiling again - The U.S. Treasury is likely to exhaust all extraordinary measures to fund the government if members of Congress fail to raise the nation’s debt ceiling by the end of February, Treasury Secretary Jack Lew warned in a letter to the House of Representatives Monday. In what seems like a six-month ritual in Washington, D.C., Lew sent a letter to Speaker of the House John Boehner, R-Ohio, asking for Congress to act on the impending debt limit breach before Feb. 7. "When I previously wrote to you in December, I estimated that Treasury would exhaust extraordinary measures in late February or early March," Lew wrote. "Based on our best and most recent information, we believe that Treasury is more likely to exhaust those measures in late February. While this forecast is subject to inherent variability, we do not foresee any reasonable scenario in which the extraordinary measures would last for an extended period of time." Lew admits last year the Treasury was able to extend the country’s borrowing authority for a period of time, but this is not the case in 2014 with large tax refunds going out in February. "In addition, the amount of borrowing capacity that can be provided by the extraordinary measures is significantly more limited than in 2011 and 2013,” Lew wrote. "In February, we estimate that they could free up only about $200 billion, compared to $330 billion in 2013. The difference results largely because some of the extraordinary measures are only available at certain times of the year."

US tech firms make eleventh-hour attempt to halt tax avoidance reforms - Silicon Valley has launched a last-ditch attempt to derail plans devised by the G20 group of countries to close down international loopholes that are exploited by the likes of Google, Amazon and Apple to pay less tax in the UK and elsewhere. The Digital Economy Group, a lobbying group dominated by the leading US digital firms, has written to the OECD, the Paris-based thinktank tasked by G20 leaders with drawing up reforms, saying it is not true that communications advances have allowed multinational groups to game national tax systems. Suggesting that any leakage of tax revenues flowing from the complex corporate structures of digital groups is merely coincidental, the Digital Economy Group says: "Enterprises that employ digital communications models do not organise their business operations differently as a legal or tax matter." Their denial of tax engineering follows a string of tax scandals in Europe and the US in the past two years. In the UK, Google bore the brunt of criticism from Margaret Hodge, who chairs the public accounts committee, after it emerged that Google – which the Guardian understands is a member of the DEG – had been allowed to pay £3.4m in tax to HMRC in 2012 despite UK revenues of £3.2bn.  Above all the DEG letter insists international tax rules should not be altered specifically to target digital companies, a move it says would be penalising their operational innovation. "

Huge cash pile puts recovery in hands of the few - The pile of unspent corporate cash that has built up since the start of the financial crisis is being held by an increasingly concentrated pool of companies that will be crucial to hopes of a pick-up in business investment to stimulate the world economy. About a third of the world’s biggest non-financial companies are sitting on most of a $2.8tn gross cash pile, according to a study by advisory firm Deloitte, with the polarisation between hoarders and spenders widening since the financial crisis. This will have a big influence on whether 2014 will bring a revival in capital expenditure or dealmaking, warned Iain Macmillan, head of mergers and acquisitions at Deloitte. “Looking ahead, the wave of cash that many are expecting will depend on the decisions of a few, rather than the many,” he said. Of the non-financial members of the S&P Global 1200 index, just 32 per cent of companies held 82 per cent of the aggregate cash pile, the highest level since at least 2000. With nearly $150bn in its coffers, Apple alone was sitting on about 5 per of the total at the end of its fiscal year. Such concentration has increased since 2007 when companies that held more than $2.5bn in cash or “near cash” items – not including debt – accounted for 76 per cent of the aggregate cash pile in 2007. The study focused on gross cash holdings rather than subtracting their debt in an effort to simplify comparisons over time and identify how much money companies have to hand. The study comes amid increasing investor calls for companies to step up capital spending. An influential survey of fund managers conducted by Bank of America Merrill Lynch released on Tuesday showed a record 58 per cent of investors polled want companies’ cash piles spent on capex. A record 67 per cent said companies were “underinvesting” and less than a third of asset managers surveyed want companies to return more money to shareholders – the usual complaint of investors.

Analysis: Corporate cash may not all flow back with recovery - Investors betting that the past year of more than 20 percent gains in western stock markets can be echoed, or at least sustained, through 2014 have long assumed that a corporate spending revival will nurture a building economic recovery. The argument is simple. Years of banking crises, credit droughts and economic uncertainty have prevented businesses investing for the future. Instead, they have clipped costs, wages and jobs and built up huge stockpiles of cash rather than investing in new plants, staff, updated technology, equipment or acquisitions. As the economic fog lifts, this idle, near zero-yielding cash will surely be put back to work eventually, they argue, creating a potentially virtuous circle of greater demand, higher growth, earnings and employment all round. The problem, however, is that assumes cash stockpiling has all been due simply to a hiatus in the economic cycle. Many argue the hoarding is instead driven by more durable demographic trends and political reforms that are stirring corporate anxiety about exposure to soaring pension and healthcare costs as workforces age and government coffers shrink. If that's true, then this brewing economic recovery may not release pent-up business cash on any scale close to that suggested by the eye-popping cashpiles. According to Thomson Reuters data, companies around the world held almost $7 trillion of cash and equivalents on their balance sheets at the end of 2013 - more than twice the level of 10 years ago. Capital expenditure relative to sales is at a 22-year low and some strategists reckon the typical age of fixed assets and equipment has been stretched to as much as 14 years from pre-crisis norms of about 9 years.

Corporations Hoard Cash While Americans Go Without A Job - The amount of cash multinational corporations are stashing is at an all time high and economists are wondering why.  A recent Federal Reserve research paper examined some of the reasons.  A big one is multinationals pay no taxes on profits if they park them offshore.  A stash of cash is building and the miser pile is now a mountain. A large study released early last year showed corporate taxes are at a 60 year low.  Multinationals park huge amounts of cash offshore, all to avoid paying taxes on these vast sums if brought to the United States, at least that's the claim.  The official corporate nominal tax rate is 35%, but multinational corporations never pay that and they would not pay 35% if they repatriated those offshore held hoards of cash back into the United States. Federal Reserve economists Sánchez & Yurdagul tell us corporations were sitting on over $5 trillion in cash and short term investments during 2011.   The last flow of funds report also shows corporate cash, otherwise known as liquid assets, at an all time high, $1.925 trillion in the 3rd quarter of 2013. Some try to claim these companies are hoarding cash due to outstanding debt.  Others even try to blame the money supply.  While the Sánchez & Yurdagul paper does not come out and say the O word, outsourcing, as the cause of the great corporate misery cash pile, they do present a most interesting graph from their research results.  It seems cash hoarding is directly correlated to how much research and development a multinational corporation is engaged in.  Their below graph shows this R&D to cash hoard correlation and their research results are astonishing:  In two sub-indexes within the S&P 500 corresponding to two R&D-intensive sectors, cash holdings increased at a high yearly rate between 1995 and 2011: by 15 percent for the pharmaceutical sector and by 11 percent for the information technology sector. In the former sector, some firms had an annual increase as high as 26 percent. Within the latter sector, the top firms had increases between 16 and 22 percent in cash holdings in the same interval.

Want to help the middle class? Don’t kill corporate taxes - “In recent decades, American workers have suffered one body blow after another.” So writes economist Laurence Kotlikoff, who has just the policy prescription to help those ailing workers: abolishing the corporate income tax. You can expect to hear this proposal a lot more often as the nation’s debate over widening income inequality heats up. But know this: Our new research suggests that Kotlikoff is wrong – that eliminating corporate taxes would help shareholders more than workers, likely making inequality worse. Kotlikoff argues that high taxes drive companies away and that companies need to be willing to operate in a local area for workers to have jobs. He cites Boeing’s successful campaign to lower its tax and labor costs in Washington state as an example of the importance of low taxes in attracting firms and jobs. However, if corporate taxes were as important for location decisions as Kotlikoff suggests, it is hard to see why California, with a state corporate tax rate of nearly 10 percent, is home to more than one out of nine establishments in the United States. Indeed, firms are not rapidly leaving for next-door Nevada, which has no corporate tax rate at all. Our research suggests that not all places are created equal in the eyes of corporations — their particular form of production might be more productive in particular cities. This idea – that some firms may be especially productive in certain areas – is missing in the large-scale simulation that Kotlikoff uses.

Did Goldman Just Kill The Music? - "The S&P500 Is Now Overvalued By Almost Any Measure" - Late last night the music may have just skipped a major beat after Goldman released a Friday evening note that is perhaps the most bearish thing to come out of Goldman's chief strategist David Kostin in over a year, (and who incidentally just repeated what we said most recently a week ago in "Stocks Are More Expensive Now Than At Their 2007 Peak"). To wit:S&P 500 valuation is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x). We believe S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion. However, many clients argue that the P/E multiple will continue to rise in 2014 with 17x or 18x often cited, with some investors arguing for 20x. We explore valuation using various approaches. We conclude that further P/E expansion will be difficult to achieve. Of course, it is possible. It is just not probable based on history. The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7)nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.

Look Out Below, Follow-Through Edition - Ritholtz - Yesterday, we discussed the likelihood of an equity correction versus the end of the bull market. Today, futures are deep in the red, looking like another 1 percent sell-off or worse awaits us. European stocks are down 1 percent or more, with the IBEX off more than 2 percent. In Asia, it is a 2 percent whackage, although China has (so far) managed to hold on to small gains. Perhaps on this philosophical Friday, it might be a good time to wonder aloud as to the causes of this change in fortunes. Why the sudden shift, from excess bullishness and exuberant expectations of more double-digit gains, to a recognition that perhaps the party won’t go on forever? You humans seem to desperately search for a simple narrative that explains complex events of unknown causation. An explanatory need not be accurate, only understandable and comforting. This is inherent in a species that has a rich tradition of storytelling. The narrative trumps data almost all of the time. The price action and misbehaviors of markets are certainly no different. Hence, a correction is not simply the random meanderings of a complex system comprised of the buying and selling activities of millions of participants, but rather must have been caused by stocks that were too pricey, or earnings that have not lived up to expectations, or the development of big trouble in China. The problem with these rationalizations is that all of these things were well understood by markets -- and have been for some time. None are surprises, and none reflect information that is new or was especially unknown previously.

A Safe Harbor Without Full Protection -- A recent ruling by a bankruptcy judge in New York adds to a growing body of opinions that appear to leave the door open for actions under state law that would normally be prohibited in federal bankruptcy proceedings. The issue concerns the so-called safe harbor provisions of the bankruptcy code, which exempt derivatives and other securities transactions from the usual stay that blocks creditors’ efforts to collect debts. Last week, Judge Robert E. Gerber of Federal Bankruptcy Court in Manhattan ruled in a lingering part of a case involving the Lyondell Chemical Company that the safe harbor provisions applied only to the bankruptcy process. His decision joined the mini-trend of court opinions that do not extend the exemptions to state courts. That is, while a bankruptcy trustee or debtor might be precluded from bringing a fraudulent transfer action in bankruptcy court, creditors retain their right to do so under nonbankruptcy state law. In the Lyondell case, Judge Gerber refused to dismiss a lawsuit initially brought in New York State court that seeks to claw back $12.5 billion paid to shareholders as part of merger deal. Given the statutory language of the bankruptcy code, this seems like the right result. But consideration of the justification for the safe harbors makes this a somewhat more difficult matter.

JPMorgan Chase Gives CEO Jamie Dimon a Raise -- After paying approximately $20 billion in fines to federal authorities over the past year, JP Morgan Chase’s board voted to give their chairman and chief executive Jamie Dimon a raise. The debate, taking place in a conference room overlooking a snow-covered Central Park, became heated at times, but was finally settled in favor of those who argued that Dimon had proved a good steward through these shaky times. The raise comes a year after Dimon’s salary was slashed in half, following the “London Whale” debacle, during which the bank made a multibillion-dollar loss. Over that period, the company has generated strong profits, and its stock price has increased more than 22 percent.

Bill Black: Dimon Does Davos, and His Board Gives Him a Raise  - If, as an effort at satire, I had written the story that the New York Times’ “DealBook” has just written about what JPMorgan’s board of directors has just actually done, people would have dismissed my piece as absurdly over the top. The board has decided to increase Jamie Dimon’s compensation substantially. The reason the board gives (in leaks to DealBook) must have resonated with Deal Book because it is the theme song that Deal Book has been singing for months, another “‘somebody done Dimon wrong’ song.” Recall that the title of Andrew Ross Sorkin’s country-western lament was that Dimon was the victim of “bloodlust” because Dennis Kelleher, the head of the NGO “Better Markets,” believed that Dimon should be fired for poor performance. As a slight reality check, which DealBook religiously avoids, Dimon led JPMorgan while it committed what government investigators have identified as over 15 frauds, most of them massive. As I’ve explained, Deal Book’s graphic laying out (very tersely) these frauds goes on for pages. These frauds represent the greatest financial crime spree the government has ever identified. I am not counting the frauds of Bear Stearns and Washington Mutual (WaMu).

Fed May Protect Warren Buffett as a National Treasure - Should Berkshire Hathaway be designated a systemically important non-bank financial firm and subjected to Federal Reserve oversight, as the Financial Stability Oversight Council is considering? Oh I don't know. Obviously, insurers don't want to be subjected to Federal Reserve oversight; pretty much no one ever wants to be subjected to any oversight. I'm not entirely clear on what that oversight would entail, though the Fed might "impose stricter capital, leverage and liquidity requirements and demand stress testing for crisis scenarios." I don't know if that would be good or bad or irrelevant; so far Berkshire seems to have done a decent job of avoiding crises all on its own. Better than the Fed, even. And it would sure be a shame if a systemic-importance designation took away Berkshire's ability to, I don't know, bet a billion dollars on some random numbers picked by a monkey rolling dice. That seems like the sort of thing you can get away with as a scrappy little $280 billion AA/Aa2-rated insurance company, but that gets a little bit more awkward once you're systemically important. AIG, which has received the systemic-importance designation, hasn't bet that much money on monkeys since it closed AIG Financial Products, ZING!

US regulators ‘funded at a level to fail’ - Even with new budget increases, US securities regulators are falling further behind the market when it comes to technology investment, and the investment advisers and swaps dealers they oversee are likely to remain largely uninspected. The first comprehensive federal spending plan since 2009, hammered out in Congress last week, raises the Securities and Exchange Commission funding by $29m, to $1.35bn, or $324m below the White House’s request. The Commodity Futures Trading Commission (CFTC) budget rises about $10m, to $215m, or $100m less than requested.  The additional funding sought by the administration for the SEC was intended to pay in part for the hiring of 250 examiners dedicated to registered investment advisers, whom the regulator now examines only once every 11 years on average.
“Whatever increase in the examination of advisers they are able to perform will have to be gained through efficiencies, and while I am certain that examiners’ productivity can be increased, I don’t think we can expect to see a significant change in the overall examination rate,” says Neil Simon, vice-president for government relations at the Investment Adviser Association. The CFTC will be able to reinstate a number of staff positions eliminated during across-the-board budget cuts last year. However, it too was hoping to add examiners for newly registered swaps dealers, execution facilities and clearing houses – one of the commission’s new responsibilities under the Dodd-Frank financial reform law.
“To an enormous extent, they are going to be dependent on the industry self-regulatory organisations to provide that oversight,” says Barbara Roper, director of investor protection for the Consumer Federation of America. “The SEC situation is bad, but the CFTC situation is criminal.”

Wall Street Reform: D.C. Has Not Won the War Yet - Watching D.C. conventional wisdom change is like watching a house getting built. One day it’s a pile of bricks and lumber strewn all over the ground, the next it’s a completed building.  There have been a lot of arguments lately that the battle to reform Wall Street has been won. Housewright Ben White of Politico does his best to turn it into an established fact with a piece last week titled "How Washington beat Wall Street," which claims that “Washington went to war against big Wall Street ... And Washington won in a blowout.” In White’s narrative, Wall Street has been reduced to a shell of its former glory, the result of “a strong reform bill” and the “mistake after mistake” that Wall Street made in pushing back on reform.  Let's split White’s argument into two parts. The first is whether the rule-writing process for Dodd-Frank went well or was a failure. Here we can be optimistic. Certainly White’s point that Wall Street has been unsuccessful in repealing any part of the law, for now, is true. They waged a scorched-earth campaign against credit-card fee regulations, which failed. Efforts to pull back on derivatives have stalled in the Senate. The Consumer Financial Protection Bureau retains its original structure. Even the Volcker Rule wasn’t a disaster. Not everything was successful. The courts, in particular, have been tossing grenades at rules without rhyme or reason. But Dodd-Frank remains largely intact.  The second is whether this is the end of the story, and here the answer is a definitive no. There are at least four major issues in financial reform that still need to be addressed, and will determine how well we've reformed Wall Street.

Financial Reform Remains a Work in Progress - Simon Johnson - Of all the arguments put forward by big banks and their allies in recent years against financial reform, the line that surfaced last week was arguably the most strange. Wall Street has been reformed, according to this view: There was a great battle, and we (the big banks) lost. There is, consequently, nothing more to do. In contrast to that position, I suggest that the decisive battles lie ahead. Some regulatory changes are in the works, but these are relatively limited and all would be easily reversible if attitudes change.The dangers to the global economy posed by very large banks are more clearly understood by a handful of people in policy-making circles. On the other hand, many influential people in Washington refuse even to discuss how to measure the extent to which undercapitalized megabanks contribute to the risk of serious crisis, as well as the true cost of such crises.Megabanks’ lobbyists and other representatives certainly remain hard at work. At a House Financial Services Committee hearing last week, they continued to push back against the Volcker Rule. The charge, as so often in the last five years, was led by the Securities Industry and Financial Markets Association, known as Sifma, which represents many companies in the securities industry, but which always seems to have the interests of the biggest closest to heart. The chairman of Sifma is Jim Rosenthal, chief operating officer of Morgan Stanley; the vice chairman is John Rogers, executive vice president at Goldman Sachs, and so on.

Unofficial Problem Bank list declines to 605 Institutions - Here is the unofficial problem bank list for January 17, 2014.   Changes and comments from surferdude808:  The Unofficial Problem Bank List had many changes as the OCC released details of its latest enforcement action activity and the closing of a national bank. In all, there were eight removals leaving the list at 605 institutions with assets of $199.8 billion. Aggregate assets fell under $200 billion for the first time since May 2009. A year ago, there were 826 institutions with assets of $308.7 billion on the list. During the week, every manner of exit possible was used as there were four action terminations, two voluntary liquidations, one merger, and one failure, which has not happened since almost a year ago during the week ending January 18, 2013.  We do not anticipate for the FDIC to release its enforcement action activity through December 2013 next week, rather they will likely release on Friday, January 31st. After the FDIC release, the institution count on the list should drop below 600.

The Damage From the Housing Bubble: How Much Did the Greenspan-Rubin Gang Cost Us? - Dean Baker - Eduardo Porter asks how much the housing bubble and its collapse cost us in his column today. (He actually asks about the financial crisis, but this was secondary. The damage was caused by the loss of demand driven by bubble wealth in a context where we had nothing to replace it.) Porter throws out some estimates from different sources, but there are some fairly straightforward ways to get some numbers from authoritative sources. We can use as a starting point the Congressional Budget Office's projections for GDP growth from 2008, before it recognized the damage from the collapse of the bubble. We can then compare these projections with the most recent projections from last year.  If we just take the dollar losses through 2013 we get $7.6 trillion, in 2013 dollars. This is just economic losses, it does not include any effort to quantify the pain that workers or their families have suffered from being unemployed or losing their homes. This comes to roughly $25,000 for every person in the country. Alternatively, it is 190 times as much as the Republicans hoped to save from their cuts to food stamps over the next decade.

Wall Street’s unexpected allies: How groups who “represent the poor” quietly push deregulation -- It’s hard enough to regulate Wall Street’s activities with the usual band of well-paid lobbyists and lawyers attacking every provision. But imagine what would happen if organizations purporting to represent the poor and disenfranchised swarmed Capitol Hill and demanded deregulation. Last week saw two such incidents, both focused on the Consumer Financial Protection Bureau’s new mortgage rules, based on the simple idea that lenders should only offer mortgages to borrowers who can afford the terms. Lenders can still make riskier loans, but they would be on the hook for a lawsuit if the borrower defaulted. . The basic idea is to prevent a glut of dangerous mortgages in the marketplace, like the ones that collapsed after the housing bubble and led to the financial crisis. The rules went into effect Jan. 10. The sky has not fallen and people are still getting loans, but mortgage bankers and their allies in Washington have been screaming about how the rules will inhibit lending, despite the fact that over 87 percent of all mortgages originated in 2012 would have met the qualified mortgage standard, and the other mortgages aren’t even banned. Sadly, some unlikely voices joined the Wall Street chorus last week. Representatives from Habitat for Humanity, which builds and repairs houses with volunteer labor for poor families all over the world, testified to the House Financial Services Committee that the new rules unfairly burden them. Habitat doesn’t give away homes, but outfits them with no-interest, affordable mortgages.

A housing relief program with policies that ‘throw people into the grinder’ -  Amal and Rizkalla Kamel survived the housing crisis and the recession with their home and finances intact; their personal collapse wouldn’t come until 2012. That winter, Amal suffered two heart attacks in two months, drastically reducing his ability to work. At the same time, Rizkalla lost her job at a gas station. Then everything really started falling apart. A year later, the family found themselves $36,000 in debt, spending what money they had on a lawyer they hired to help them avoid losing their home. They filed motions against their bank, but they had another nemesis too: the Kamels were in court battling the very government relief agency that they had turned to in hopes it would save them from their mortgage troubles. In the Kamels' case, they turned to the Florida Hardest-Hit Fund, one of the biggest housing relief programs in the nation. During the course of a year, they fell through the cracks of the system: they have alleged in court that Hardest Hit did not intervene enough with their bank and that they received dubious legal advice from housing counselors. What the Kamels didn't know is that their struggles were no surprise to critical government officials. The Hardest-Hit Fund has been on the radar of federal officials for some time, particularly that of the special inspector general of the Troubled Asset Relief Program (Tarp), Christy Romero, who regularly criticizes Hardest-Hit in her reports to Congress for failing to force banks to participate. Last April, Romero’s office initiated an audit of Florida Hardest-Hit, based on a request from Senator Bill Nelson. That audit could be completed within the month, but the state of Florida and the Treasury Department get to take a look first, so a public release is several months away.

DataQuick: California Foreclosure Starts Dip to Eight-Year Low - From DataQuick: California Foreclosure Starts Dip to Eight-Year LowThe number of California homeowners pulled into the formal foreclosure process dropped to an eight-year low last quarter, the result of an improving economy, foreclosure prevention efforts and higher home prices, a real estate information service reported.  A total of 18,120 Notices of Default (NoDs) were recorded by lenders and their servicers on California owners of houses and condos during the October-through-December period. That was down 10.8 percent from 20,314 for the prior quarter, and down 52.6 percent from 38,212 in fourth-quarter 2012. Last quarter's tally was the lowest since 15,337 NoDs were recorded during fourth-quarter 2005. NoDs peaked in first-quarter 2009 at 135,431. DataQuick's NoD statistics go back to 1992.  "Some of this decline in foreclosure starts stems from the use of various foreclosure prevention efforts - short sales, loan modifications and the ability of some underwater homeowners to refinance. But most of the drop is because of the improving economy and the increase in home values.Most of the loans going into default are still from the 2005-2007 period. The median origination quarter for defaulted loans is still third-quarter 2006. That has been the case for more than four years, indicating that weak underwriting standards peaked then.This graph shows the number of Notices of Default (NoD) filed in California each year. 2013 is in red. This was the lowest year for foreclosure starts since 2005, and also below the levels in 1997 through 2000 when prices were rising following the much smaller late '80s housing bubble / early '90s bust in California. Some of the decline in foreclosure starts is related to the "Homeowner Bill of Rights" that slowed foreclosures, some to higher house prices and a better economy - but overall foreclosure starts are close to a normal level (foreclosure starts were over 50,000 in 2004 and 2005 when prices were rising quickly).

Lawler: Updated Table of Distressed Sales and Cash buyers for Selected Cities in December - Economist Tom Lawler sent me the updated table below of short sales, foreclosures and cash buyers for several selected cities in December. Total "distressed" share is down in all of these markets, and down significantly in most. Short sales are down sharply in all of these markets (this was a real change in 2013, and I expect further declines in short sales in 2014).   Important Note on short sales: Historically the IRS has considered debt forgiveness (like short sales) as taxable income. In 2007, Congress passed a measure to exempt most forgiven mortgage debt from being considered taxable income (this helped increase short sale activity). This measure expired on Dec 31, 2013. However, according to a letter from the IRS"[I]f a property owner cannot be held personally liable for the difference between the loan balance and the sales price, we would consider the obligation as a nonrecourse obligation. In this situation, the owner would not treat the cancelled debt as income."  So in states that passed anti-deficiency provisions (like California), this means many loans will be considered nonrecourse by the IRS (and forgiven debt will not be taxed). In other states, forgiven debt will be taxed.  Foreclosures are down in all of these areas too (except Springfield, Ill).  The All Cash Share (last two columns) is mostly declining year-over-year.  It appears investors are pulling back in markets like Las Vegas and SoCal - probably because of fewer distressed sales and higher prices.

Wall Street Group Aggressively Lobbied a Federal Agency to Thwart Eminent Domain Plans -- One plan by private equity company Mortgage Resolution Partners proposes that cities use eminent domain—a power traditionally reserved for seizing property for public use—to seize mortgage loans. The amount owed on the loans would then be reduced so that the borrower was no longer underwater, avoiding foreclosure. In January 2013, Brockton, Massachusetts commissioned a study and formed a working group to investigate using eminent domain to help struggling homeowners. In September 2013, the city council of Richmond, California, voted to move forward with such a plan. One might think these small, local efforts shouldn’t be of much concern to Wall Street—after all, Richmond’s plan affects a mere 624 loans. But one of Wall Street’s most powerful trade groups, the Securities Industry and Financial Markets Association (SIFMA), has responded with ferocious urgency. SIFMA is the attack dog the largest Wall Street banks send when they don’t want their names attached to politically controversial lobbying efforts or lawsuits. The group does everything from denying that “too big to fail” still exists to drafting lengthy comment letters arguing for weaker financial regulation. New e-mails obtained through a Freedom of Information Act request by the Alliance of Californians for Community Empowerment (ACCE) and a coalition of other community groups and shared with The Nation reveal the extent to which SIFMA has been spearheading Wall Street’s fight against using eminent domain to mitigate the foreclosure crisis. (The complete set of e-mails are available at the website of the ACLU, which sued the FHFA when the original FOIA request was ignored). When Brockton began considering using eminent domain, SIFMA employees traveled there and kept an entire section of its website, complete with an array of resources, to decrying the plans.

Housing Bubble 2.0 Hits Messy Resistance In California - Wolf Richter - The salary “you must earn” to be able to buy the median home in San Francisco is $125,071 as of November, according to That home costs $705,000 – up 24% from a year ago (DataQuick figured the median price in December at $813,000). San Francisco tops the list of the most unaffordable cities. Next are San Diego and Los Angeles – the California trifecta – then New York City, where a mere $71,245 in income suffices to buy the median home. Households earning the median income of $51,000, well, forget it.  Housing bubbles do that. San Francisco has gone through this before. Its boom-and-bust cycles are legendary. People getting evicted and pushed out of the city because they suddenly can’t afford to live here anymore – that’s not new. But it has heated up again. The tech bubble has attracted billions in fresh money, and tax incentives are handed out to tech companies, and controversy boils over, as it did in the Twitter debacle  Hence the allergic reaction in San Francisco to the “Google buses” (though Apple, Yahoo, Genentech, and others have buses too). These gleaming buses share taxpayer-funded bus stops with beat-up San Francisco city buses to pick up employees and haul them out of San Francisco to their campuses on the peninsula. It triggered a series of protests. In the end, it’s the housing bubble, which is in full bloom, and locals don’t want to be forced out by costs they can no longer afford. San Francisco may be extreme, but housing bubbles are now re-cropping up across the nation – and so are the very factors that helped inflate the prior housing bubble and then magnified the ferociousness of its implosion. Home-equity loans are back with a vengeance – up 30.8% in the first nine months of 2013 from prior year and are expected to reach $60 billion for the year, the highest level since 2009 when the market was in collapse mode. But it’s still a far cry from 2006, when such loans hit an all-time crazy record of $430 billion, in a $15 trillion economy!

Research: The impact of 2014 FHA Loan Limit Changes - Here is some research from Laurie Goodman, Ellen Seidman, and Jun Zhu at the Urban Institute: FHA Loan Limits—What Areas Are the Most Affected?. Some excerpts: FHA loan limits are set at the county level, and there are 3,234 counties in the United States. Loan limits will not change for 2014 in 2,493 counties, most of which remain at the loan limit floor of $271,050. However, 652 counties will have lower limits and 89 will have higher limits. The Mortgage Bankers' Association has calculated that 92 percent of the counties located in non-metropolitan areas are unaffected. The situation is very different in metropolitan areas. While limits are unchanged in 50.7 percent of the counties located in Metropolitan Statistical Areas (MSAs), they will decline in 44.4 percent while increasing in 4.9 percent of the areas. The changes in some markets are larger than would be predicted by either the drop in the ceiling from $729,750 to $625,500 (a 14.3 percent decline), or the change in the median home price multiplier from 125 percent to 115 percent (an 8 percent decline). This has two primary causes: a change in the base year for determining median house price and a revision of MSA boundaries. ..While the impact of the change in the FHA loan limits is very modest overall, some communities will be very adversely affected. These are communities where the drop in the limits is large and FHA guarantees a high percentage of mortgages.

Mortgage applications rise 4.7% -- Mortgage applications continue to climb, rising 4.7% for the week ending Jan. 17, the latest report from the Mortgage Bankers Association said. The refinance index also reported a 10% jump from last week, compared to the purchase index, which fell 4% from a week ago. Overall, the refinance share of mortgage activity edged higher to 64% of total applications. The 30-year, fixed-rate mortgage with a conforming loan limit decreased to 4.57%: the lowest level since November 2013. In addition, the 30-year, FRM with a jumbo loan balance dipped to 4.57% from 4.58%, while the 30-year, FHA rate also dropped to 4.24% from 4.29%. All three 30-year mortgage rates reached their lowest levels since November 2013, with the 15-year FRM decreasing to 3.68% from 3.72% a week earlier. Meanwhile, the average contract interest rate for a 5/1 ARM fell to 3.23% from 3.28%.

MBA: Refinance Mortgage Applications Increase - From the MBA: Refinance Mortgage Applications Increase in Latest MBA Weekly Survey Mortgage applications increased 4.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 17, 2014. ...The Refinance Index increased 10 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. ...The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.57 percent, the lowest level since November 2013, from 4.66 percent, with points increasing to 0.36 from 0.33 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. The refinance index is up a little over the last two week, but down 67% from the levels in early May. With the mortgage rate increases, refinance activity will be significantly lower in 2014 than in 2013. The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index is now down about 9% from a year ago. The purchase index is probably understating purchase activity because small lenders tend to focus on purchases, and those small lenders are underrepresented in the purchase index.

Mortgage Rates compared to Ten Year Treasury Yield and Refinance Activity -- From Freddie Mac yesterday: Fixed Mortgage Rates Move Lower for Second Consecutive Week Freddie Mac ... released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates drifting slightly lower for the second consecutive week amid recent reports that inflation remains subdued...30-year fixed-rate mortgage (FRM) averaged 4.39 percent with an average 0.7 point for the week ending January 23, 2014, down from last week when it averaged 4.41 percent. A year ago at this time, the 30-year FRM averaged 3.42 percent. 15-year FRM this week averaged 3.44 percent with an average 0.7 point, down from last week when it averaged 3.45 percent. A year ago at this time, the 15-year FRM averaged 2.71 percent. This graph shows the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey® compared to the MBA refinance index.   The refinance index dropped sharply last year when mortgage rates increased (activity down 67% from last May).  The second graph shows the relationship between the monthly 10 year Treasury Yield and 30 year mortgage rates from the Freddie Mac survey.

The exception to the rule about interest rates and housing: "Buy now or be forever priced out" - As I have written extensively in the last several months, a rise in interest rates has almost always - 17 of 21 cases since World War 2, to be precise - been consistent with an outright decline several quarters later in housing.  Typically a 1% increase in interest rates has been consistent with a 100,000 decline in the volume of housing permits and starts. But what about the 4 exceptions?  Are they just random outliers, or is there a common thread linking them? It turns out that, in at least 3 of the 4 cases, there is a common thread: in the immortal words of housing bubbleheads circa 2005, "Buy now or be forever priced out." The housing bubble of 2004-06 remains the biggest exception in the nearly 70 year history of housing and interest rates that I've examined.  Here's the graph of interest rates YoY change (inverted, red) and housing permits YoY change (blue) during that period and the immediate aftermath: As you can see, despite the fact that interest rates not only had not fallen, but in fact had risen somewhat and remained elevated for several years, housing permits continued to increase stoutly.  As we all recall that housing prices (Case Shiller Index, green, index values at right) were rising at the brisk clip of 10% or more a year for about half a decade at that point.  It was a common trope that "real estate only goes up!"  If so, you had better buy today, because tomorrow the house you wanted would only get even more expensive.  And for a long while it did.  Until it didn't, and housing crashed in equally spectacular fashion, as you can see from the latter part of the graph above.

Weekly Update: Housing Tracker Existing Home Inventory up 2.6% year-over-year on Jan 20th - Here is another weekly update on housing inventory ... for the fourteenth consecutive week housing inventory is up year-over-year.  This suggests inventory bottomed early in 2013. 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 (the most recent data was for November).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years.This graph shows the Housing Tracker reported weekly inventory for the 54 metro areas for 2010, 2011, 2012, 2013 and 2014. In 2011 and 2012, inventory only increased slightly early in the year and then declined significantly through the end of each year. Inventory in 2014 is now 2.6% above the same week in 2013 (red is 2014, blue is 2013). Inventory is still very low - and barely up year-over-year - but this increase in inventory should slow house price increases.

The NAR reports existing Home Sales for December - The National Association of Realtors (NAR) reported today that existing Home Sales for December came in at 4.87 million. The consensus was for sales of 4.94 million on seasonally adjusted annual rate (SAAR) basis. Sales in November were revised downward to 4.82 million SAAR. The inventory of homes for sale came in at 1.86 million, down 9.3% from November and represents a 4.6 month supply.Sales for all of 2013 are at a healthy pace given sluggish job growth. It is the highest level since 2006 and near the 5.2 million average for 1998-2001. Sales are being helped by loose lending standards and interest rates still near their lowest level in decades.For example, nearly half of all home purchase loans in December 2013 had a downpayment of 5% or less and nearly a quarter of purchase loans had a debt-to-income ratio >43% – high by anyone’s measure. Loose lending combined with the Fed’s low interest rate policies are driving home prices up faster than fundamentals such as rents and consumer prices. Given the 4.6 month supply of homes for sale (down from 5.1 months in November), home prices can be expected to continue to outpace rents. This does not  bode well for the middle class as government policies are once again driving an unsustainable increase in home prices. While the NAR supports loose, unsustainable lending standards, working class homebuyers would be better served by a “straight, broad highway to debt-free ownership” – the standard espoused and successfully implemented by FHA in 1935, but now long since abandoned.

Existing Home Sales in December: 4.87 million SAAR, Inventory up 1.6% Year-over-year - The NAR reports: December Existing-Home Sales Rise, 2013 Strongest in Seven Years: Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 1.0 percent to a seasonally adjusted annual rate of 4.87 million in December from a downwardly revised 4.82 million in November, but are 0.6 percent below the 4.90 million-unit level in December 2012.For all of 2013, there were 5.09 million sales, which is 9.1 percent higher than 2012. It was the strongest performance since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom.Total housing inventory at the end of December fell 9.3 percent to 1.86 million existing homes available for sale, which represents a 4.6-month supply at the current sales pace, down from 5.1 months in November. Unsold inventory is 1.6 percent above a year ago, when there was a 4.5-month supply..This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in December 2013 (4.87 million SAAR) were 1.0% higher than last month, and were 0.6% below the December 2012 rate. The second graph shows nationwide inventory for existing homes.  According to the NAR, inventory declined to 1.86 million in December from 2.05 million in November.   Inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer.  The third graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Existing home sales down YoY and down 10% from high for second month in a row - Let me be the first to say that, of the measures of the housing market, existing home sales are the least important, because they don't have the impact that new home construction has on the economy. But, that being said, they typically move in the same direction as new home construction. So, for the Doubting Thomases who think my forecast of a weakening housing market due to the rise in interest rates last year is off the mark, the title of this post states the simple facts.  For the second month in a row, existing home sales are less than they were a month ago.  For the second month in a row, existing home sales are down over -500,000 sales annualized from their July and August 2013 peaks.  November was off slightly more than 10%, and this month was -9.6% off that peak.  Here's the graph of existing home sales since their bottom at the end of 2010, with 2013 highlighted in red (set to 100 for January 2013):

Existing Home Sales Miss 4th Month In A Row; Lowest Since October 2012 -- NAR chose to blame the weather in keeping with the rest of the nation as it cited "cold" in the Northeast and Midwest for the 4th miss on existing home sales in a row and the lowest level of sales since October 2012. What is ironic is that while the always independent NAR proclaims weather to blame for the miss (despite Midwest condo sales up 14%!?), it crows that December sales were the strongest for a December in 7 years. The median home price rose 9.9% Year-over-year (so half that of China's). NAR sums it up: "we lost some momentum toward the end of 2013 from disappointing job growth and limited inventory..." It would appear home sales are catching down to the collapse in mortgage applications as the fast-money cash-buyers have stepped away for now...

Existing Home Sales Soaring Highs Deceptive -- The NAR reported existing home sales increased 1.0% from last month and are down -0.6% from December of last year.  This is the 2nd decline from from year ago, previously not seen since June 2011.   Existing home sales for the entire 2013 year, on the other hand, hit housing bubble levels not seen since 2006.  For all of 2013, existing home sales increased 9.1% from 2012.  In 2006 existing home sales were 6.48 million.  For all of 2013, existing home sales hit 5.09 million. The above graph shows why existing home sales are showing declines from a year ago yet hit levels for 2013 not seen since 2006.  That large bubble area for 2013 is averaged against the entire previous year, whereas we see a strong downward slide in volume and why the decline in sales in comparing December 2013 to December 2012 levels.  This is why the annual total comparisons are deceptive for recently existing home sales have been flat or declining. The national median existing home sales price, all types, is $198,000, a 9.9% increase from a year ago.  Below is a graph of the median price.  One needs to compare prices only a year ago for increases due to the monthly ups and downs in prices associated with the seasons.  For all of 2013, median home prices also soared by housing bubble amounts to $197,100.  This is 11.5% higher than the 2012 annual median of $176,800.  In 2005 the annual median price increased by 12.4%. The average home price for December was $246,800, a 7.0% increase from a year ago.  For all of 2013 average home prices increased 8.9%.  What is more interesting is the decline in distressed home sales.   Foreclosures and short sales are now only 14% in December whereas a year ago they were 24% of all sales.  The breakdown in distressed sales was 10% foreclosures and 4% short sales.  The discount breakdown was 18% for foreclosure sales and 13% for short sales.

Comments on Existing Home Sales: Watch Inventory -- The key story in the NAR release this morning was that inventory was only up 1.6% year-over-year in December. The year-over-year inventory increase for November was revised down to 3.0% (from 5.0%).  A few points:
• The NAR inventory data is "noisy" (and difficult to forecast based on other data).
• The headline NAR inventory number is NOT seasonally adjusted (and there is a clear seasonal pattern).
• On a seasonally adjusted basis, inventory was down in December from November, but up 4.3% from the low in January 2013 (see first graph below).
• Inventory is still very low, and with the low level of inventory, there is still upward pressure on prices.
• I expect inventory to increase in 2014, and I expect the year-over-year increase to be in the 10% to 15% range by the end of 2014.
• However, if inventory doesn't increase, prices will probably increase a little faster than expected (a key reason to watch inventory right now).

Vital Signs: Existing Home Sales Approach a New Normal - Higher mortgage rates, weather and few homes on the market hurt sales of existing homes at the end of 2013. Sales increased 1.0% in December, to an annual rate of 4.87 million, below economists’ expectations, and the November sales pace was revised down to 4.82 million. But the year-end weakness wasn’t enough to stop the year from being the best for resales in years. Sales totaled just over 5 million last year, “the strongest performance since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom,” said the National Association of Realtors that compiles the existing home data. A sales pace of five million homes looks more sustainable. “We lost some momentum toward the end of 2013 from disappointing job growth and limited inventory, but we ended with a year that was close to normal given the size of our population,” said Lawrence Yun, NAR chief economist. Mr. Yun expects sales activity to be about flat in 2014, as the NAR forecasts a 30-year fixed mortgage rate averages 5.0% this year about a percentage point higher than 2013’s average.

Vital Signs: U.S. Housing Stock Is Getting Older --The median U.S. house has 35 candles on its birthday cake. In a blog post on the National Association of Home Builders’ website, economist Joshua Miller notes the U.S. housing stock is getting older, according to Census data. The median age in 1985 was 23 years; by 2011 the median had crept up to 35 years. A greater share of homes was built more than four decades ago. Data for 2011 show 41% of owner-occupied homes were constructed in 1969 or earlier, while only 15% of the current housing stock was built during the 2000s which included the housing boom. The aging housing stock is a plus for the construction industry since the homes will “require remodeling or replacement in the years ahead,” Miller writes. While economy-watchers tend to focus on housing starts, remodeling and alterations represent a big part of the construction sector. Whether it’s improving energy efficiency or swapping a Formica countertop for granite, homeowners are willing to upgrade their properties. According to nominal gross domestic product data, spending on residential improvements accounted for about 38% of all residential investment in 2012. In addition, spending on improvements suffered far less during the housing bust, providing work for construction workers during the lean years.

A Stunning 63% Of Florida December Home Purchases Were "All Cash" --Back in August, when we wrote that "A Stunning 60% Of All Home Purchases Are "Cash Only" - A 200% Jump In Five Years" based on Goldman data, many laughed, unable to fathom that the majority of the US housing market has become a flippers' game played by institutions and the uber wealthy, who don't need a stinking mortgage to buy that South Beach mansion. As it turns out we were just a little ahead of the curve as usual, and as real estate company RealtyTrac reported overnight, with data that naturally is delayed due to the delayed impact of houses coming out of the much delayed foreclosure pipeline, "All-cash purchases accounted for 42.1 percent of all U.S. residential sales in December, up from a revised 38.1 percent in November, and up from 18.0 percent in December 2012."  That's a 10% increase in one month for a 6-9 month delayed series, which means that in reality, roughly about 60% of all homes are now purchased with cold, hard cash.  The chart below shows how in June and July the data finally started reflecting the Fed's September 2012 QEternity reality. As we said: 6-9 month lag.

Home Ownership Rates By Demographic - Talk about an amazing reversal of fortune! This may be the most amazing, underreported demographic fact today.

  • 30-34 year olds in 2012 had the lowest homeownership rate of any similarly aged group before them!
  • Five years prior, this exact same group had the highest homeownership rate at 25-29 years old than any group before them!

Using homeownership-by-age data from the Census Bureau, we compared households by years of birth to examine how homeownership changes over consumers' lifetimes.

  • Lowest ever in 2012: 30-34 year-olds in 2012 (born between 1978 and 1982) had a 47.9% homeownership rate. This is a full 6.5 percentage points lower than those five years older had achieved at the same age and lower than any group before them! (This is based on data available beginning with those born in 1948.)
  • Highest ever 5 years prior: Those same 30-34 year-olds had a 40.5% homeownership rate 5 years prior when they were 25-29 years old in 2007. This is 6.2 percentage points higher than 25-29 year-olds in 2012 and higher than any 5-year cohort before them.

Santa’s Gift to Builders: Higher Home Prices -- Did home builders regain their pricing mojo in December? Several measures indicate that builders again started hiking prices last fall as buyers regained a bit of confidence in the market. A monthly survey of builders conducted by housing analysis firm John Burns Real Estate Consulting Inc. found that 24% of respondents raised their prices in December, up from a recent low of 19% in November. The Burns survey, which included 231 respondents, also found that the percentage of respondents who lowered their prices declined to 8% in December from a recent high of 12% in October. “The pricing environment notably improved,” said Jody Kahn, a senior vice president at Burns who organizes the monthly survey, which covers an estimated 10% of the U.S. home-building market. “It’s still not back to where we were earlier in (2013) with builders raising prices aggressively.” Indeed, in many months in early 2013, Burns’ survey found that more than half of respondents had increased their prices. Double-digit percentage increases from 2012 levels were common in markets such as California and Arizona. For the first 11 months of 2013, average new-home prices exceeded $300,000, a level rarely achieved since 2007, according to the U.S. Census Bureau. Of late, the average price has risen from $310,800 in August to an all-time high of $340,300 in November. However, the Census data is notoriously volatile and often gets revised. Census is scheduled to release its December figures on Jan. 27. The recent price increases come after summer months in which buyers balked at higher prices and sales suffered in consequence. In addition, a steep increase in long-term interest rates to 4.57% in September from 3.35% in May rattled buyers.

Cold Weather Hits Construction, but Not Contractors’ Confidence - Unusually cold and stormy weather crimped construction activity over the last couple of months, but it hasn’t dented builders’ optimism about the industry’s recovery. —James Tensuan for The Wall Street Journal“Contractors are more optimistic about 2014 than they have been in a long time,” Stephen Sandherr, chief executive of Associated General Contractors of America, told reporters Tuesday. A survey by the trade group found its members expect private spending to rise this year for most types of building projects. They forecast government spending on infrastructure will level off after several years of declines. “Many firms plan to begin hiring again, while relatively few plan to start making layoffs,” said Mr. Sandherr. The group’s economists forecast construction spending will rise by 8% to 10% this year and that the industry will add between 250,000 and 350,000 jobs. In 2013, construction spending rose by just under 6% in the first eleven months from the same period a year earlier. The construction industry added 211,000 jobs in 2013, though hiring abruptly fell off in December after six months of gains.

 Housing Starts and the Unemployment Rate -- By request, here is an update to a graph that I've been posting for several years.  This shows single family housing starts (through December 2013) and the unemployment rate (inverted) through December. Note: there are many other factors impacting unemployment, but housing is a key sector.You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.  Housing starts (blue) increased a little in 2009 with the homebuyer tax credit - and then declined again - but mostly starts moved sideways for two and a half years and only started increasing steadily near the end of 2011. This was one of the reasons the unemployment rate remained elevated.  Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover.  However this time, with the huge overhang of existing housing units, this key sector didn't participate for an extended period.

Framing Lumber Prices: Moving on Up - Here is another graph on framing lumber prices. Early last year lumber prices came close to the housing bubble highs. Then prices started to decline sharply, with prices declined over 25% from the highs by June. The price increases early last year were due to stronger demand (more housing starts) and supply constraints (framing lumber suppliers were working to bring more capacity online).  My understanding is capacity has increased, but demand has increased too. Prices have been increasing since June (there is some seasonality to prices). Prices in early January are at about the same level as last year. This graph shows two measures of lumber prices: 1) Framing Lumber from Random Lengths through last week (via NAHB), and 2) CME framing futures.

The First Domino to Fall: Retail-CRE (Commercial Real Estate) - All this boils down to one simple question: can the top 10% (roughly 11 million households) support the billions of square feet of retail space that were added in the 2000s? If the answer is no, as it clearly is, then the retail CRE sector is doomed to implode. Let's try a second simple question: what's holding the retail CRE sector up? Answer: leases that will soon expire or be voided by insolvency, bankruptcy, etc. as retailers close stores and shutter their businesses. One last question: who's holding all the immense debt that's piled on top of this soon-to-collapse sector? The domino of retail CRE will not fall in isolation; it will topple the domino of debt next to it, and that will topple the lenders who are bankrupted by the implosion of retail-CRE debt. And once that domino falls, it will take what's left of the nation's illusory financial stability down with it.

Dead Mall Syndrome: The Self-Reinforcing Death Spiral of Retail  - Dead Mall Syndrome: The Self-Reinforcing Death Spiral of Retail Retail CRE is highly leveraged and loaded with staggering amounts of debt that rests on leases that are only as good as the retailers' profit-loss statements and solvency. The decay of the "build it and they will come" model of commercial real estate is gathering speed for a simple systemic reason: the decline is self-reinforcing in several critical ways. Before we start the analysis, let's ask a basic question: How much of the stuff and services purchased at retail outlets, malls, strip malls, etc. is absolutely necessary and how much is excess consumption? Put another way: what if Degrowth is the future, for a variety of structural reasons? If so, the need for billions of square feet of commercial space will implode.

AIA: Architecture Billings Index declines in December - This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Another Decline for Architecture Billings Index Following consistently increasing demand for design services throughout most of 2013, the Architecture Billings Index (ABI) has posted its first consecutive months of contraction since May and June of 2012. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the December ABI score was 48.5, down from a mark of 49.8 in November. This score reflects a decrease in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.2, up from the reading of 57.8 the previous month.  This graph shows the Architecture Billings Index since 1996. The index was at 48.5 in December, down from 49.8. Anything below 50 indicates contraction in demand for architects' services. Still this index has indicated expansion in 14 of the last 17 months. Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions. According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. Even when positive, this index was not as strong as during the '90s - or during the bubble years of 2004 through 2006 - because the vacancy rates are still high for many CRE sectors. However, the readings last year do suggest some increase in CRE investment in 2014.

Private Investment and the Business Cycle - The following is an update to a few graphs and analysis that I started posting in 2005.  In 2005 I was bearish on residential investment, and I used these graphs to argue that the then coming housing bust would lead the economy into a recession. Now this analysis is suggesting more growth ... (note: Some of this discussion is updated from previous posts).  Discussions of the business cycle frequently focus on consumer spending (PCE: Personal consumption expenditures), but the key is to watch private domestic investment, especially residential investment. Even though private investment usually only accounts for around 15% of GDP, the swings for private investment are significantly larger than for PCE during the business cycle, so private investment has an outsized impact on GDP at transitions in the business cycle.  The first graph shows the real annualized change in GDP and private investment since 1960 (this is a 3 quarter centered average to smooth the graph).GDP has fairly small annualized changes compared to the huge swings in investment, especially during and just following a recession. This is why investment is one of the keys to the business cycle.The second graph shows the contribution to GDP from the five categories of private investment: residential investment, equipment and software, nonresidential structures, intellectual property and "Change in private inventories". Note: this is a 3 quarter centered average of the contribution to GDP.  This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment lags the business cycle. Red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, and blue.

The Keeping-Up-With-the-Joneses Myth - Behind the Great Recession, there was a credit crunch. Behind the credit crunch, there was a housing bust. And behind the housing bust, there was an explosion in debt in mid-2000s among low-income households. So what was behind that? One explanation begins with inequality. The idea is that the rich-poor gap leads to credit booms—as the poor try to close the gap with borrowed money— and this leads to defaults, financial busts, and recessions. This story would make the "keeping-up-with-the-Joneses principle" a key player in the great crash. There are two problems with this story. First, there's no evidence that inequality actually leads to credit booms, in the first place. Second, a new paper finds that the parts of the country where poor families took on the most debt weren't the areas with the most inequality. They were the areas with the least inequality.  To examine whether big rich-poor gaps turn poor people into big borrowers, researchers looked at local levels of income inequality and debt-accumulation. They found that poor households didn't borrow more in high-inequality areas. Instead, poor households borrowed more in poorer areas (i.e.: areas with less overall inequality). In short, it's the opposite of what the keeping-up-with-the-Joneses effect would predict. Poor households borrowed more when they had poor neighbors, not rich neighbors.

U.S. Household Finances Rebound - - One signal for whether the U.S. economy is ready for a more robust recovery is the extent to which the financial position of households has rebounded. Here are some illustrative figures, taken from the January 2014 issue of Economic Trends from the Cleveland Fed.  O.Emre Ergungor and Daniel Kolliner write about "Household Economic Conditions." Here's a figure showing the movements in household wealth since 2000. Household assets and net worth have now rebounded and surpassed their pre-recession highs. Part of what's happening here is that households have trimmed back on many of their debts. This figure show the change in outstanding debt in various categories over the previous four quarters. During the housing bubble, for example, mortgage debt was growing at more than 10% per year. But household mortgage debt has been contracting (that is, negative growth) since about 2008. The authors write: "Revolving consumer credit balances plummeted in 2008 and are currently barely higher than their level in the third quarter of 2012. Outstanding home mortgage debt is still contracting due to record write-off s and reduced demand for homes in previous years. Nonrevolving consumer credit, which consists of secured and unsecured credit for student loans, automobiles, durable goods, and other purposes, is the only credit category that shows some sign of life. It is currently 8.5 percent above year-ago levels. Note, however, that the student loan component is entirely driven by federal government loans to students and does not reflect private market activity."

Real Median Household Income: Off Its 2011 Low, But a Fractional Decline in 2013 - The Sentier Research monthly median household income data series is now available for December. Nominal median household incomes were up $134 month-over-month and up $714 year-over-year. However, adjusted for inflation, real median income fell $21 MoM and is down $55 YoY (that's -0.1%). Note that these numbers do not factor in the expiration of the 2% FICA tax cut in December 2013. The median real household income is up only 2.4% since its post-recession trough set in August of 2011, now 28 months later. The traditional source of household income data is the Census Bureau, which publishes annual household income data in mid-September for the previous year. The 2012 annual updates were published last week. Sentier Research offers a more up-to-date glimpse of household incomes by accessing the Census Bureau data and publishing monthly updates. Sentier Research uses the more familiar Consumer Price Index (CPI) for the inflation adjustment. The Census Bureau uses the little-known CPI-U-RS (RS stands for "research series") as the deflator for their annual data. The first chart below is an overlay of the nominal values and real monthly values chained in December 2013 dollars. The red line illustrates the history of nominal median household, and the blue line shows the real (inflation-adjusted value). I've added callouts to show specific nominal and real monthly values for January 2000 start date and the peak and post-peak troughs.

Why the decelerating trend in housing and car sales is a cause for concern -- As I have already written, there are increasing signs that the increase in interest rates and the death of mortgage refinancing are beginning to eat into consumer purchases.  Specifically, growth is flagging as to both the two biggest assets owned by families:  houses and cars.   I have been sounding the alarm about decelerating housing for awhile, but now this may also have spread to vehicles as well.  I say “may” because typically vehicle sales plateau at some point in expansions – but in the last expansion vehicle sales plateaued at a level 1,000,000 vehicles per year above the maximum number sold on an annual basis in 2013. Below is a graph (averaged quarterly to cut down on noise) of  the YoY% growth in housing permits (blue) and auto sales (green), compared with GDP (red) for the last 30 years: Now here is the same data for the last two years, but monthly better to show up the recent trend:  Note that, measured quarterly, both houses and cars are selling at a level of YoY growth that is very strong compared with the last 30 years, even though there has been a significant decline in that rate of growth.  At the same time, when we look at the trend on a monthly basis, both housing and cars look set to turn negative by the end of the first quarter. That housing and cars are showing relative weakness may not sound like a big deal.  Until you remember a paper presented by UCSD economist Edward Leamer at Jackson Hole in 2007, Housing and the Business Cycle, in which he said:We have experienced 8 recessions preceded by substantial problems in housing and consumer durables....Residential investment consistently and substantially contribute[d] to weakness [in GDP growth] before [these 8] recessions.... ....After residential investment as a contributor to prior weakness come consumer durables, consumer services, and then consumer nondurables.  Those are all consumer spending items -- it's weakness in consumer spending that is a symptom of an oncoming recession....  The timing is: homes, durables, nondurables, and services.

Vital Signs: More Households Don’t Own a Car -- A study out this month by the University of Michigan’s Transportation Research Institute finds that a larger share of U.S. households do not own a car, light truck or SUV. In 2012, 9.22% of all U.S. households were without a vehicle, little changed from 9.29% in 2011 but continuing an uptrend started since 2007, just before the economy fell into recession. Ownership rates vary greatly among the 30 largest cities, says the study’s author Michael Sivak, director of Sustainable Worldwide Transportation at Michigan. New York had the highest share of non-car households, 56.5%, while San Jose had the fewest, 5.8%. Sivak calculates that 21 of the 30 cities have seen a rise in non-ownership since 2007. What’s behind the vehicle avoidance? Sivak writes that many factors can influence a household’s decision to own a car, such as income, availability and cost of parking and local weather, but “the five cities with the highest proportions of households without a vehicle were all among the top five cities in a recent ranking of the quality of public transportation.” Looking at nationwide data Sivak concludes, “we now have fewer light-duty vehicles, we drive each of them less, and we consume less fuel than in the past. These trends suggest that motorization in the U.S. might have reached a peak several years ago.”

The Auto Industry’s Hard Sell to Convince Your Kids They Need a Car - Car ownership rates among young Americans have been low for years, perhaps due to the economy, perhaps due to disinterest, or some combination of both. Yet the auto industry insists that sooner or later, it’ll be time for millennials to take the wheel.  The decline in car ownership, and driving in general, among young Americans in recent years has been well documented. “From 2007 to 2011, the share of sales to car buyers aged 18 to 34 fell nearly 30 percent,” an report on millennial consumers published last fall stated. Surely, the Great Recession, along with the sorry state of the jobs market and record-high levels of student loan debt among young people, is a major reason for the dropoff.  But there’s also a case to be made that millennials aren’t particularly interested in cars, even if they could afford them. In the years leading up to the Great Recession, the rate of teenagers with driver’s licenses fell sharply. Experts theorized that in the era of Facebook, Twitter, and smartphones, having a car no longer represented the freedom and possibilities for social connectivity it did to previous generations. To draw millennial consumers—and others frustrated with the confusing, time-consuming exercise in futility and aggravation that constitutes car buying as we know it—manufacturers have been trying to make it easier to buy cars online. In some cases, sellers are also calling on millennial-consumer specialists to help win the business of this bunch.

DOT: Vehicle Miles Driven decreased 0.1% in November -- First, an interesting article from Brad Plumer at the WaPo: The U.S. government keeps predicting we’ll drive more than we do. That’s a problem.  The Department of Transportation (DOT) reportedTravel on all roads and streets changed by -0.1% (-0.2 billion vehicle miles) for November 2013 as compared with November 2012. Travel for the month is estimated to be 239.5 billion vehicle miles.The following graph shows the rolling 12 month total vehicle miles driven.  The rolling 12 month total is still mostly moving sideways but has started to increase a little recently.Currently miles driven has been below the previous peak for 72 months - 6 years - and still counting.  Currently miles driven (rolling 12 months) are about 2.3% below the previous peak.  The second graph shows the year-over-year change from the same month in the previous year.  In November 2013, gasoline averaged of $3.32 per gallon according to the EIA.  that was down sharply from 2012 when prices in November averaged $3.52 per gallon.  As we've discussed, gasoline prices are just part of the story.  The lack of growth in miles driven over the last 6 years is probably also due to the lingering effects of the great recession (high unemployment rate and lack of wage growth), the aging of the overall population (over 55 drivers drive fewer miles) and changing driving habits of young drivers.

Vehicle Miles Driven: A Year-over-Year Decline -  The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through November.  Travel on all roads and streets changed by -0.1% (-0.2 billion vehicle miles) for November 2013 as compared with November 2012. Cumulative Travel for 2013 changed by 0.6% (15.4 billion vehicle miles). Cumulative estimate for the year is 2732.2 billion vehicle miles of travel (see report). Both the civilian population-adjusted data (age 16-and-over) and total population-adjusted data are only fractionally above the post-financial crisis lows set in June of last year.  Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1988. My start date is 1971 because I'm incorporating all the available data from earlier DOT spreadsheets. Total Miles Driven, however, is one of those metrics that should be adjusted for population growth to provide the most meaningful analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.

Weekly Gasoline Update: Regular and Premium Down Three Cents - It’s time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, Regular and Premium both dropped three cents. Regular and Premium are down 49 cents and 43 cents, respectively, from their interim highs in late February of last year.  According to, Hawaii is averaging a fraction of a cent below $4.00 per gallon. The next highest state average is Connecticut at $3.64. One state (Montana) is averaging under $3.00, unchanged from last Monday.

ATA Trucking Index increased in December - Here is a minor indicator that I follow, from ATA: December Tonnage Gain Caps ATA Tonnage Index's Best Year Since 1998:  The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index increased 0.6% in December, after surging 4.7% in November. The increase pushed the index 6.2% higher for the full year making it the index's best year since 1998. November’s increase was significantly larger than the preliminary gain of 2.7% ATA reported on December 20, 2013. In December, the index equaled 131.7 (2000=100) versus 130.9 in November. December’s level is a record high. Compared with December 2012, the SA index increased 8.2%.“I’m seeing more broad-based gains now. The improvement is not limited to the tank truck and flatbed sectors like earlier in the year," he said. "With manufacturing and consumer spending picking up, coupled with solid volumes from hydraulic fracturing, I look for tonnage to be good in 2014 as well.”Here is a long term graph that shows ATA's For-Hire Truck Tonnage index.The dashed line is the current level of the index. The index is up solidly year-over-year. The index is at a record high, and this was best year for growth since 1998.

LA area Port Traffic up solidly year-over-year in December - Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for December 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 0.3% compared to the rolling 12 months ending in November. Outbound traffic increased 1.0% compared to 12 months ending in November. Inbound traffic has been increasing and now it appears outbound traffic is also starting to increase. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). Usually imports peak in the July to October period as retailers import goods for the Christmas holiday, and then decline sharply and bottom in February or March (depending on the timing of the Chinese New Year). Inbound traffic was up 9% compared to December 2012 and outbound traffic was up 13%. This suggests a pickup in trade in December.

Survey: Mid-Sized Companies Still Holding Back on Hiring, Investment - Mid-sized businesses are holding back on hiring and investment because of unpredictable health-care costs, a lack of clarity on federal regulations and expectations of slow domestic economic growth, according to a quarterly survey of firms. “A majority of middle-market companies said that uncertainty regarding government policies is impeding their ability to grow and their willingness to hire and spend,” according to the Middle Market Indicator, a poll of 1,000 executives from companies with revenues ranging from $10 million to $1 billion. The National Center for the Middle Market published the survey in collaboration with The Ohio State University and GE Capital. Health-care costs were the No. 1 worry, with respondents broadly disapproving of the Affordable Healthcare Act’s rollout. Despite some lingering concerns, the survey shows rising confidence in the global economy and stable growth prospects at home. For 2014, more than half of all companies expect revenue to expand–albeit at a slower pace than in 2013–and more than one third expect to hire more workers. Only one in 10 companies said they would reduce their workforce. Overall, employment grew 2.5% in 2013 and is expected to grow about 2.2% this year. “The stabilizing employment outlook, even in the face of a decelerating revenue outlook, bodes well for job creation,” the report said.

What Products Drove Consumer Spending? Luxury Items, Mostly -- Consumer spending really took flight in 2013 — among the wealthy. Aircraft, luggage and air travel were among the fastest-growing segments, according to a Morgan Stanley analysis.  Overall, real consumer spending accelerated last year, likely growing about 2.5% after 2012′s 2.2% pace. Where are U.S. households splashing out the most? Morgan Stanley drilled down into more than 100 categories of consumer spending and found the strongest growth in durable goods (products designed to last at least three years), particularly luxury goods. “Spending on pleasure aircraft, boats and other recreational vehicles has raced higher since April and is on track to double its growth rate in 2013 (to 8.5% compared with just over 4.0% in 2012),” Televisions, luggage and personal computers also were big gainers last year. Ms. Zentner found that spending on jewelry and watches is on pace for the fastest growth since 2004.  Among nondurable items, housing-related goods saw the biggest spending gains. For services, spending on portfolio management and investment advice, as well as air travel, were among top categories. The findings reflect a two-track recovery for the U.S. economy. The wealthy, buoyed by stock market gains and rising real estate prices, were willing and able consumers last year. Households relying on income from wages and salaries were hit harder by higher taxes at the start of the year, tamping down demand.

A nearly 17-year-old is reportedly author of malware that led to Target’s data breach - The  Target Corp. data breach that has hurt its sales and has made many consumers skittish about using their cards has been traced to a Russian teenager who authored the malware used in the security breach, according to a cyber-intelligence firm. IntelCrawler, based in Los Angeles, said that nearly 17-year-old Sergey Taraspov is a well-known programmer of malicious code in the underground world.  The cyber-intelligence firm added the BlackPOS malware is an inexpensive “off the shelf” malware, which it said may also have been involved in the Neiman Marcus attack. The company has uncovered six other breaches, including two small clothing firms in Los Angeles and four medium-sized department stores in  Colorado, Arizona, New York and California, said IntelCrawler CEO Andrew Komarov in an interview, declining to specify the names of the four retailers, citing an ongoing investigation. He said the extent of the damage and the number of retailers affected could be much larger because the malware author has close to 60 customers, several of whom were involved in the Target attack. IntelCrawler has partnered with law enforcement officials and Visa and Mastercard on the case and counts financial firms as its customers, Komarov told MarketWatch. He said the malware is being sold for $2,000 or 50% of the proceeds from selling compromised card information. “He is still visible for us, but the real bad actors responsible for the past attacks on retailers such as Target and Neiman Marcus were just his customers,” said Dan Clements, the company’s president, on its website.

Amazon says it can ship items before customers order - Online retail giant Amazon says it knows its customers so well it can start shipping even before orders are placed. The Seattle-based company, which late last year said it wants to use drones to speed package delivery, gained a patent last month for what it calls "anticipatory shipping,'' the Wall Street Journal reports. Amazon, the Journal reported, says it may box and ship products that it expects customers in a specific area will want, based on previous orders and other factors it gleans from its customers' shopping patterns, even before they place an online order. Among those other factors: previous orders, product searches, wish lists, shopping cart contents, returns and other online shopping practices. Amazon didn't estimate how much delivery time it expects to save, or whether it has already put its new system to work, the Journal reported. "It appears Amazon is taking advantage of their copious data," "Based on all the things they know about their customers they could predict demand based on a variety of factors." 

Hierarchy Works -  There has been a lot of excitement about Zappos new hierarchy free, self-organising, boss-less organisation. The holocracy, as it’s known, is all very zeitgeisty. My Twitter timeline is full of articles about smashing corporate hierarchies and getting rid of executives. Last year, Gary Hamel, described in Fortune magazine as ‘the world’s leading expert on business strategy’, told the CIPD conference that “management is a busted flush” and organisations should be getting rid of their managers. And, of course, everyone knows that Generation Blah don’t like hierarchy. Executives, reporting lines, procedures, organisation charts – all that stuff is just so square, daddio. At what looks like the other extreme of management philosophy, Amazon has gone for a neo Taylorist model with high control over workers at all levels in the organisation. It’s not very trendy and, on the whole, my Twitter timeline doesn’t like Amazon.  But, of course, Amazon owns Zappos. Under one corporate roof, what looks like a social experiment is taking place. Two rival philosophies of management are being tested out.

“Everything Amazon did had the underlying tone of fear” -  After Amazon vanquished a rare U.S. union effort last week in a 21-to-6 vote, keeping the retail giant union-free across the United States, a union spokesperson blamed that result on a corporate campaign to make workers fear for their jobs — and told Salon a much larger union campaign could be ahead at Amazon. “Everything Amazon did had the underlying tone of fear,” said International Association of Machinists and Aerospace Workers spokesperson John Carr. Amazon did not respond to a Tuesday request for comment on the result and the allegations. Company spokesperson Mary Osako told CNN that the Jan. 15 “vote against third-party representation” showed workers “prefer a direct connection with Amazon,” which she called “the most effective way to understand and respond to the wants and needs of our employees.” Carr said that the IAM is still reviewing whether it had sufficient evidence to file charges alleging law-breaking by Amazon in the lead-up to the vote among a handful of mechanics at a Delaware warehouse. Under federal law, it’s generally illegal for companies to explicitly punish or threaten workers for supporting a union, but legal to hold mandatory anti-union meetings and to make “predictions” about dire consequences that could result from unionization. With the help of the firm Morgan Lewis, contended Carr, the company used such “captive audience” meetings to “put an intense amount of pressure on these workers,” and thus “of course they feared for their jobs.”

Amazon CEO is Laughing All the Way to the Headlines - First, Amazon CO Jeffrey Bezos got sensational global coverage of his absurd yet adorable (yet rather creepy) plan to have millions of packages delivered “right to your porch” by drones. What a mess our skies would be, as if the pollution wasn’t ruining the view enough. How silly and invasive and inefficient and dangerous. This will never happen, of course. But he got millions of dollars in free coverage for Amazon.  The media reported the story uncritically and straightforwardly. No brain, no pain.  Now he’s breathlessly announcing "a method and system for anticipatory package shipping,” an algorithm-based protocol that could ship products before even consumers place an order for them. Mind reading! ESP and all sorts of hocus-pocus (not to mention the stunning presumption involved in shipping – and charging for? – items you have not even decided to purchase). Has no one thought through the gross impractically of this? I believe the endearing chortler Bezos is bored, and he is having a blast messing with heads of journalists, who are disseminating his riveting “news” as if an impeccable and saintly source were involved.  Maybe he’ll keep pushing the envelope until some reporter – probably one of those unkempt, obsessive types who embarrasses the cool, in-crowd ones – says, “WAIT A MINUTE. THIS APPEARS TO BE CRAP.”  Bezos has plenty of clothes, but this Emperor of Internet commerce has no fear. Reporters are on autopilot. Brainwaves are flatlined. It’s like the old days, when we just ripped the wire copy and plugged a hole in the paper, without vetting anything.Isn’t ANYBODY thinking?

What Recovery? Sears And J.C. Penney Are Dying - Two of the largest retailers in America are steamrolling toward bankruptcy.  Sears and J.C. Penney are both losing hundreds of millions of dollars each quarter, and both of them appear to be caught in the grip of a death spiral from which it will be impossible to escape.  Once upon a time, Sears was actually the largest retailer in the United States, and even today Sears and J.C. Penney are "anchor stores" in malls all over the country. They are both shutting down unprofitable stores and laying off employees in a desperate attempt to avoid bankruptcy, but everyone knows that they are just delaying the inevitable.  These two great retail giants are dying, and they certainly won't be the last to fall.  This is just the beginning.

Retail Sales Cannibalization  - Retail firings continue. Today, Wal-Mart announced a 2% Reduction in Sam's Club Employees to thin middle-manager ranks.  Wal-Mart Stores Inc. (WMT) is laying off about 2,300 employees at its Sam's Club warehouse unit to help thin the ranks of middle managers in its weakest stores, marking the club chain's biggest round of job cuts in four years. Nearly half the job cuts at Sam's Club will target salaried assistant managers, and the remainder will be hourly employees at underperforming stores.The Sam's Club cuts are fresh on the heels of this announcement: J.C. Penney cutting 33 stores and 2,000 jobs J.C. Penney Co. is attempting to right-size itself by closing 33 under-performing stores around the country and eliminating 2,000 positions, the retailer said Wednesday. Also recall this announcement earlier this month: Macy's to Lay Off 2,500 Employees Amid Cost-Cutting  In the same breath as it announced a “successful” holiday season, Macy’s Inc. said it would lay off some 2,500 employees as it attempts to achieve $100 million in savings a year.

A 'tsunami' of store closings expected to hit retail -  Get ready for the next era in retail—one that will be characterized by far fewer shops and smaller stores. On Tuesday, Sears said that it will shutter its flagship store in downtown Chicago in April. It's the latest of about 300 store closures in the U.S. that Sears has made since 2010. The news follows announcements earlier this month of multiple store closings from major department stores J.C. Penney and Macy's. Further signs of cuts in the industry came Wednesday, when Target said that it will eliminate 475 jobs worldwide, including some at its Minnesota headquarters, and not fill 700 empty positions. Experts said these headlines are only the tip of the iceberg for the industry, which is set to undergo a multiyear period of shuttering stores and trimming square footage. Shoppers will likely see an average decrease in overall retail square footage of between one-third and one-half within the next five to 10 years, as a shift to e-commerce brings with it fewer mall visits and a lesser need to keep inventory stocked in-store, said Michael Burden, a principal with Excess Space Retail Services.

"Net Neutrality" Ruling Opens Door for 2-Tiered Internet Market - An “open Internet” became endangered this week at a time when the U.S. increasingly relies on Web-based services to deliver everything from education to entertainment. A new court ruling achieved this by opening the doors for U.S. broadband providers to offer speedier delivery of Internet services at a higher price to those who can pay. The decision could limit consumer choices and stifle innovation by favoring huge corporate players over new start-ups. The ruling by a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit handed victory to Verizon by rejecting the legal framework of the Federal Communications Commission's attempt to regulate the telecom giant and its peers based on net neutrality rules. Such net neutrality, or open Internet, rules aim to prohibit Internet service providers (ISPs) such as Verizon from offering tiered broadband services that would push content providers—such as Netflix or Amazon—to pay more for faster delivery of their content. The rules also prevent ISPs from blocking lawful Internet applications and services. FCC Chairman Tom Wheeler responded to the court ruling by holding out the possibility of appealing the decision: "We will consider all available options, including those for appeal, to ensure that these networks on which the Internet depends continue to provide a free and open platform for innovation and expression, and operate in the interest of all Americans.”

Back to the Digital Drawing Board - — IN less than 20 years, ubiquitous, reliable high-speed Internet access has gone from a vision to a novelty to a fundamental part of the American economy — not to mention our civic, social and personal lives. Central to this is the principle of net neutrality: that the cables that bring the Internet into our homes should be there for all to use equally. Whether you are a content provider or a subscriber, as long as you pay your bill, it shouldn’t matter whether you use them to send email or connect to Netflix or YouTube.That, however, may change, thanks to a circuit court ruling this week in the case of Verizon v. the Federal Communications Commission. The decision deferred to an old F.C.C. determination that telecom cables, the primary conduit for Internet access, are not utilities, and cannot be regulated as such, leaving American businesses unprotected from the depredations of a handful of giant Internet access providers. Service providers can now strike a deal with YouTube to get faster delivery speeds to customers, and Comcast, which owns sizable content assets itself, can use its control of the cables to get an edge over rival content providers. But rather than despair, this is a moment of opportunity. The court didn’t make its decision because it was opposed to net neutrality, but because the F.C.C. had painted itself into a regulatory corner, having developed a convoluted, contradictory set of rules regarding Internet access over the last decade. The decision now forces the commission to go back to square one and reverse the industry-compromised decisions that set it on this path in the first place and that have long undermined its authority over this crucial infrastructure.

Kansas City Fed: Manufacturing Survey shows "Activity rebounded moderately in January" -- From the Kansas City Fed: Tenth District Manufacturing Survey Rebounded Moderately - The Federal Reserve Bank of Kansas City released the January Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity rebounded moderately in January, and factories’ production expectations continued to climb higher.“We were encouraged to see overall regional factory activity grow in January after dropping last month, said Wilkerson. Production fell slightly in January, which many firms again attributed to weather-related delays, but orders rose and optimism about the future increased.”The month-over-month composite index was 5 in January, up from -3 December and similar to the reading of 6 in November ... The employment index jumped from 0 to 11–its highest level since October 2011–and the new orders for exports index moved into positive territory for the first time in five months. ... All of the regional surveys have suggested somewhat faster growth in January than in December. The last of the regional Fed manufacturing surveys for January will be released early next week (Richmond and Dallas Fed).

WSJ Can't Figure Out Why Hiring Lags When Factories Are Not Humming - Actually the headline of the WSJ piece is "why hiring lags behind even as factories hum." It then presents accounts of several companies putting off hiring and expansion plans because of uncertainty about the course of the economy. Several factory owners or managers report increasing the length of the workweek or investing in new technology as an alternative to new hiring.  While the anecdotes are interesting, the reality is that the main reason that firms are not hiring is that manufacturing is not humming. Capacity utilization rates are up from the recession troughs but at 77.8 percent are still below pre-recession levels, and far below the 82 percent plus range reached in the mid-1990s before a rising dollar led to a surge in the trade deficit and falling manufacturing employment.  The WSJ could have also discovered that its story that firms are turning to longer hours and capital investment as alternatives to hiring does not make sense by looking at data on hours and productivity growth in manufacturing. Neither show much support for its story. Average weekly hours are up very slightly compared to pre-recession levels or the mid-1990s, the last time there was consistent hiring in the sector, but the differences are small. The average workweek in 2013 was 41.9 hours, compared to 41.7 hours in 1997. The increase was entirely in non-durable manufacturing as there was a small drop in hours in durable goods manufacturing. And productivity growth has actually been relatively weak in recent years, going in the opposite direction as would be expected if firms were investing heavily to avoid hiring.

Liquidity Insurance - In contrast to silly reporting yesterday regarding an alleged but nonexistent corporate cash pile that could be used for capital expenditures, here is a far more realistic report: US Corporate Capex to Grow at Slowest Rate in Four Years Total capital expenditure by the non-financial companies in the S&P 500 index is forecast to rise by just 1.2 per cent in the 12 months to October, according to Factset, a market data company that compiles a consensus of analysts’ forecasts.  In aggregate, analysts’ forecasts indicated the slowest growth in capital spending by the largest US companies since it declined in 2010, in the aftermath of the recession of 2007-09. Nick Nelson, an equity strategist at UBS, said: “Chief executives and chief financial officers have been battle-scarred by 2008-09, when they couldn’t get financing when they wanted it. So they are running their businesses with much more available cash than in the past.

Another Obama Corporate Gimmie: Broadens Corporate R&D Tax Credits -- Obama is looking more and more like an ideal Republican president with every passing day. The Washington Post reports that the Administration is on the verge of giving companies like Dow Chemical, Boeing, and Lockheed Martin hundreds of millions in tax breaks, which drops directly to their bottom line. The concession involves research and development tax credits. They were launched under President Reagan in 1981, intended to be a temporary program, out of concern that the US was falling behind Japan in innovation. The problem with this scheme is that it frequently winds up subsidizing activities that companies would have engaged in anyhow. Here’s the gist of the account: Marty Sullivan, chief economist for the nonprofit Tax Analysts, called the new rules “a significant giveaway to business.” “The IRS is under a lot of pressure from lobbyists to be accommodating,” Sullivan said. “So over the years, business has been successful in pushing that boundary out.”… Currently, the IRS forbids companies from claiming tax breaks for costs associated with experimental products they ultimately sell. But after losing a number of recent lawsuits, the Treasury Department proposed last fall to let firms claim the credit for prototypes of new products, even when the companies are able to sell the prototypes themselves to their customers. Any tax benefits under the new rules would be retroactive, permitting firms to reduce tax bills dating back years….corporate tax lawyers who are paid to follow such changes say the new rules could prove to be a bonanza for a wide range of companies whose expenses are not currently eligible. “Almost anybody who is making, designing things in the United States potentially could qualify for some of these benefits,” . “It’s a very, very broad scope.”

Why are US corporate profits so high? Because wages are so low - U.S. businesses have never had it so good.  Corporate cash piles have never been bigger, either in dollar terms or as a share of the economy.  The labor market, meanwhile, is still millions of jobs short of where it was before the global financial crisis first erupted over six years ago. Coincidence? Not in the slightest, according to Jan Hatzius, chief U.S. economist at Goldman Sachs:“The strength (in profits) is directly related to the weakness in hourly wages, which are still growing at just a 2% nominal pace. The weakness of wages and the resulting strength of profits are telling signs that the US labor market is still far from full employment. Companies have been unable to raise prices much because of the economic recovery has been fragile. But they’ve still managed to boost profits beyond anything ever seen before because they’ve got away with employing as few workers as possible at as low a rate as possible. Compare and contrast these two charts:

Silent misery: Actual US unemployment 37.2%, record number of households on food stamps in 2013 — RT As the White House proclaims a recovery is occurring, and the stock market has a head of steam, millions of Americans and their dependents are being left out of the recovery, according to a set of economic indicators. Perhaps the most worrying yet least reported aspect of the so-called US recovery involves the national labor picture. Although the official US unemployment rate is 6.7 percent, this figure obscures the reality, according to an influential Wall Street adviser. In a leaked memo to clients, David John Marotta calculates the actual unemployment rate of Americans out of work at an astronomic 37.2 percent, as opposed to the 6.7 percent claimed by the Federal Reserve. “The unemployment rate only describes people who are currently working or looking for work,” he said. “Unemployment in its truest definition, meaning the portion of people who do not have any job, is 37.2 percent. This number obviously includes some people who are not or never plan to seek employment. But it does describe how many people are not able to, do not want to or cannot find a way to work,” he and colleague Megan Russell reveal in their client report, which was leaked to the Washington Examiner. Contrary to expectations, a drop in the unemployment rate, Marotta argues, is presently a sign that the unemployed are simply dropping out of the job market.

The Greatest Depression: Is the real unemployment rate 37.2% — or is it 44.5%? - The Drudge Report is linking to a Washington Examiner column by my old pal Paul Bedard that features this astounding insight from a financial pro:   David John Marotta calculates the actual unemployment rate of those not working at a sky-high 37.2 percent, not the 6.7 percent advertised by the Fed, and the Misery Index at over 14, not the 8 claimed by the government. Here is the headline: “Wall Street adviser: Actual unemployment is 37.2%, ‘misery index’ worst in 40 years”. Now what sort of mathematical and economic wizardry did Marotta use to arrive at the “real” unemployment rate of 37.2%? Marotta went over to the Bureau of Labor Statistics web site and found the current labor force participation rate, which is 62.8%. Then Marotta subtracted that number from 100. That’s it. 100 – 62.8 = 37.2. Voila! Since 37.2% of the civilian, noninstitutional population is neither employed nor actively seeking working, then are “unemployed.” Hey, that’s even higher than the unemployment rate during the Great Depression! Doom! Gloom!  But wait, isn’t Marotta including as “unemployed” people who really aren’t in the job market such as retirees and college students and stay-at-home moms — as well as discouraged potential workers? He sure is — which is why the 37.2% number is absolutely ridiculous and tremendously overstates labor market weakness. A total joke. Using Marotta’s “logic,” maybe the “real” unemployment rate is merely the share of of the civilian noninstitutional without a job. That comes out to a whopping 44.5%! The Greatest Recession!

Weekly Initial Unemployment Claims at 326,000 - The DOL reports: In the week ending January 18, the advance figure for seasonally adjusted initial claims was 326,000, an increase of 1,000 from the previous week's revised figure of 325,000. The 4-week moving average was 331,500, a decrease of 3,750 from the previous week's revised average of 335,250. The previous week was revised down from 326,000. 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 decreased to 331,500. This week was the BLS reference period for the employment report and the recent decline in claims is a positive sign for the January report.

Weekly Applications for U.S. Jobless Aid Up Slightly to 326K — The number of Americans seeking unemployment benefits ticked up 1,000 last week to a seasonally adjusted 326,000, a level consistent with steady job gains.The Labor Department says the four-week average, a less volatile measure, fell for the third straight week to 331,500. Both figures are close to pre-recession levels and suggest that companies are laying off few workers. One sour note in the report: Nearly 1.4 million people who have been unemployed longer than six months lost benefits in the week that ended Jan. 4, the latest period for which figures are available. That’s because an emergency program that provided extended benefits expired Dec. 28. The number of recipients fell to 3.7 million from 4.7 million in the previous week. About 300,000 people began receiving unemployment benefits in the week ended Jan. 4. The total number of beneficiaries was already falling steadily even before the cutoff: More than 5.6 million people were receiving aid a year ago.

Strange Brew: Long-Term Unemployment and the Beveridge Curve - One of the mysteries of the job market is why companies aren’t filling openings like they used to. The answer may lie within the large number of people who have been unemployed for a very long time. Last week the Labor Department reported that the job vacancy rate — job openings as a percentage of the labor force — stood at 2.8% in November. That’s just a snick higher than the median rate of 2.7% since the Labor Department started collecting the data in late 2000. But the median unemployment rate over that period was 6%, far lower than the November rate of 7%. So something is awry. Plotting out a chart of the unemployment rate against the vacancy rate yields what is called the Beveridge curve, a downward-sloping line named after the late British economist William Henry Beveridge. Movements along the Beveridge curve reflect the usual ups and downs of the economy — when unemployment is high, vacancy rates are low, and vice versa. But the massive job losses that occurred in the year that began August 2008 sent things awry, shifting the curve outward, with unemployment rates much higher versus job opening rates than prior to the recession. It’s a sign that there may have been a structural shift in the labor market, and that the economy can’t generate as low rates of unemployment as it did in the past without getting into trouble. That’s a big concern for Federal Reserve, and will be a major topic of debate for it in the months ahead. If the natural rate of unemployment is higher than it used to be, then the economy may not be able to grow as quickly without generating wage inflation. That could lead it to raise short-term rates earlier than it now expects.

Is There Really a Shortage of Skilled Workers? - The Congressional Budget Office estimates that if we were at full employment, the labor force would now number about 159.2 million, but the actual labor force is just 155.8 million. That means there are 3.4 million “missing workers” – jobless workers who would be in the labor force if job opportunities were stronger, but in the current environment are not actively seeking work and are therefore not counted. If those missing workers were in the labor force looking for work, the unemployment rate would be 9.4 percent instead of 7.4 percent. Despite the clear consensus among researchers that the unambiguous problem is a shortfall of aggregate demand, there is a strong public narrative that today’s jobs recovery is weak because workers don’t have the right skills. Why? One reason may be psychological – it’s easier to blame workers for lack of skills rather than face the fact that millions cannot find work no matter what they do because the jobs simply are not there. Figure 1 shows the unemployment rate by education, both in 2007 and over the last year (the 12-month period from August 2012-July 2013). It shows that workers with higher levels of education currently face – as they always do — substantially lower unemployment rates than other workers. However, they too have seen large percentage increases in unemployment. Workers with a college degree or more still have unemployment rates that are more than one-and-a-half times as high as they were before the recession began. In other words, demand for workers at all levels of education is significantly weaker now than it was before the recession started. There is no evidence of workers at any level of education facing tight labor markets relative to 2007.

"Like Gravity" Fast-Track Trade Sinks Jobs and Wages -  Rep. Dave Camp (R- MI) and Sen. Max Baucus (D-MT) have introduced “Fast Track” legislation in Congress. It’s been 15 years since a U.S. president sought Fast Track authority, which strips Congress of its Constitutional authority to have a meaningful role in U.S. trade policy. If the Fast Track bill passes, the Trans-Pacific Partnership (TPP), a trade deal involving 11 Pacific Rim countries could be completed and signed before it is sent to Congress for a vote. Then the far-reaching trade deal will be railroaded through with no amendments and only 20 hours of debate. Obama is seeking Fast Track to get the TPP and the 27-nation Transatlantic Trade and Investment Partnership (TTIP) through Congress. His road is a rocky one. His trade team could not convince a single Democrat to author the bill in the House, and with hundreds of groups across the political spectrum -- from progressive environmental and consumer groups to the conservative Farm Bureau and Tea Party patriots -- lined up against it, it’s possible Fast Track can be defeated. As Dean Baker and Jared Bernstein explain in the New York Times, Washington’s obsession with lowering the budget deficit by slashing spending and supports for the economy will only lead to slower growth, whereas “reducing the trade deficit would have the opposite effect. Not only that, but by increasing growth and getting more people back to work in higher-than-average value-added jobs, a lower trade deficit would itself help to reduce the budget deficit." EPI projects that reducing the trade deficit could generate a "manufacturing-based recovery" for the United States. The two trade agreements in the works right now, the TPP and the TTIP, will only add to our job-killing trade deficit.

Who Needs a Balanced Trade Policy? - It’s easy to recognize that after many years of trade deficits accompanying implementation of trade agreements beginning with NAFTA the US needs to change what it’s doing. Many, including Robert Borosage of the Campaign for the American Future (CAF), advocate for balanced trade and they contrast that with the so-called “free trade” policies we have now. The case for balance trade policy is summarized by Borosage this way: Our global trade policies have been defined by and for multinational banks and companies. They have shipped good jobs abroad and driven wages down at home, while racking up unprecedented and unsustainable trade deficits. Those imbalances, as the International Monetary Fund and former Federal Reserve Chair Ben Bernanke have noted, contributed directly to blowing up the global economy. So, we need “a balanced trade policy” meaning one that reduces trade deficits because it will support lower unemployment by keeping “good jobs” here, drive wages up rather than down, be more sustainable, and won’t contribute to a collapse of the global economy. But, is that the only or the best way to get these outcomes?I raise that question because there is an important truth of macroeconomics to take account of. That truth is that: “Exports are real costs; and Imports are real benefits.”This notion is based on the distinction between real wealth measured in accumulated products and services and nominal wealth measured in accumulated financial credits. Exports add to real wealth being sent to other nations; in return for nominal wealth received from them (financial credits). Imports add to real wealth being received from other nations; in return for nominal wealth we send to them.

Millions Of People Are Quitting Their Jobs Every Month. That's Good News. - It might hard to imagine in this sputtering recovery, but 2.4 million people actually quit their jobs in November, according to the Bureau of Labor Statistics. That's nearly a million more quitters than there were during the darkest months of the recession.As the graph shows, there's a big range in quit rates between industries. Some industries, like retail, always have a higher share of quitters than others, like government. But what matters is the change over time in each industry. In general, a rise in quitters is a promising sign: People usually quit because they have another job, or are confident that they can get one.Janet Yellen, who is going to be one of the world's most important policy makers, singled out the quit rate early last year as an important labor market signal. She said: "A pickup in the quit rate, which also remains at a low level, would signal that workers perceive that their chances to be rehired are good

Gallup's Report on Boomer Reluctance to Retire -  My Research Confirms: Yesterday Gallup released another in its series of studies of Boomer behavior, this time focusing on attitudes toward retirement. The article opens with some generalizations that come as no surprise to those of us who study the government's monthly employment data: True to their "live to work" reputation, some baby boomers are digging in their heels at the workplace as they approach the traditional retirement age of 65. While the average age at which U.S. retirees say they retired has risen steadily from 57 to 61 in the past two decades, boomers -- the youngest of whom will turn 50 this year -- will likely extend it even further.   [Link to Article]] Here is the first of four tables in the article: Early last year I started posting monthly updates on demographic trends in employment, one of which examines two broad labor force cohorts: age 25-64 and 65 and over. The other offers a closer examination of six cohorts starting at age 50.

Whereas the Gallup study is concerned with future expectations, my analysis focuses on patterns we've actually seen, especially since the turn of the century. There are some observations that I would highlight. The first is that the labor force participation rate (LFPR) of workers under the age of 50 has been declining since 2000 and rising for those 50 and older, with the rise in participation most dramatic in the 65-and-over cohort.  In fact, when we examine the 50+ population, we find that older the cohort, the greater the growth.

Why George Lucas, Eric Schmidt, (and yes, Steve Jobs) Should Go to Jail: Conspiring to Reduce Wages of 100,000 Tech Pros - Yves Smith -- One big difference between West Coast and East Coast oligarchs is that a lot fewer people lionize the Eastern ones. Even though the media and sadly too many regulators treat the likes of Lloyd Blankfein with far too much deference, the broader public has wised up. Even MBAs, who normally side with the rich and powerful, have asked me, “When is Jamie Dimon going to jail?” But Silicon Valley’s royalty occupy a class of their own, the toast of TED talks and the model for aspiring entrepreneurs the world over. And the admiration is particularly strong among the rank and file workers in the San Francisco area. So it’s more than a bit ironic to see that these titans of technology engaged in a formal arrangement to suppress pay to the tune of $9 billion across Apple, Google, Intel, Adobe, Intuit, and Pixar.  But the conduct in question, namely price fixing, is slam-dunk criminal if the charges prove out. For instance, an early 1990s price rigging investigation involving lysine and citric acid at ADM led to $100 million in fines and jail time for top executives, including the vice chairman, who was also the heir apparent, and criminal fines from other corporate co-conspirators. That success also led to other successful price fixing prosecutions, yielding billions in fines. This victory led to other successful cartel-busting prosecutions.  The government’s case, as summarized by Mark Ames at Pando, is chock full of damning e-mails among top executives, which reveal Steve Jobs to have been the lead actor and main enforcer of the pay-containment pact, which dates to 2005. But its real mastermind was George Lucas, who had a similar scheme in place in the 1980s and enlisted Jobs when he sold the computer animation division of Lucasfilm to Pixar. As Ames explains: One of the more telling elements to this lawsuit is the role played by “Star Wars” creator George Lucas, who emerges as the Obi-Wan Kenobi of the wage-theft scheme. It’s almost too perfectly symbolic that Lucas — the symbiosis of Baby Boomer New Age mysticism, Left Coast power, political infantilism, and dreary 19th century labor exploitation — should be responsible for dreaming up the wage theft scheme back in the mid-1980s, when Lucas sold the computer animation division of Lucasfilm, Pixar, to Steve Jobs.

The Costs of Working Too Much - For decades, junior bankers and Wall Street firms had an unspoken pact: in exchange for reasonably high-paying jobs and a shot at obscene wealth, young analysts agreed to work fifteen hours a day, and forgo anything resembling a normal life.  Alexandra Michel, a former Goldman associate who is now on the faculty at the University of Pennsylvania, published a nine-year study of two big investment banks and found that people spent up to a hundred and twenty hours a week on the job. In the pre-cell-phone, pre-e-mail days, it was possible for people to find respite when they left the office. But, as David Solomon, the global co-head of investment banking at Goldman, told me, “Today, technology means that we’re all available 24/7. And, because everyone demands instant gratification and instant connectivity, there are no boundaries, no breaks.”  Thirty years ago, the best-paid workers in the U.S. were much less likely to work long days than low-paid workers were. By 2006, the best paid were twice as likely to work long hours as the poorly paid, and the trend seems to be accelerating. A 2008 Harvard Business School survey of a thousand professionals found that ninety-four per cent worked fifty hours or more a week, and almost half worked in excess of sixty-five hours a week. Overwork has become a credential of prosperity. The perplexing thing about the cult of overwork is that, as we’ve known for a while, long hours diminish both productivity and quality. Among industrial workers, overtime raises the rate of mistakes and safety mishaps; likewise, for knowledge workers fatigue and sleep-deprivation make it hard to perform at a high cognitive level. As Solomon put it, past a certain point overworked people become “less efficient and less effective.” And the effects are cumulative. The bankers Michel studied started to break down in their fourth year on the job. They suffered from depression, anxiety, and immune-system problems, and performance reviews showed that their creativity and judgment declined.

Three-Piece Suits, Breakfast Meetings, and Overwork - Paul Krugman - No, this isn’t more about “American Hustle”; it’s a commentary on James Surowiecki’s interesting piece on the cult of long hours. I don’t exactly disagree with his argument, but I’d place the emphasis a bit differently. First of all, he’s right that for what he calls knowledge workers — I’d just say elite workers in general — the whole time ethos has changed. When I was growing up on Long Island, there was a clear class hierarchy on commute times. Early trains were filled with menial workers; the later the train the more and fancier suits, with executives starting their day at 9:30 or 10. These days it is if anything reversed: lots of hard-driving suits on the early trains, much more mixed later on. So what is this about? Surowiecki emphasizes the incentives of employers, and their difficulty in taking the negative effects on productivity into account. My sense, however, is that the most important factor — which he alludes to but doesn’t put at the center — is signaling. Working insane hours is a sign of commitment, of willingness to sacrifice for the job; the personal destructiveness of the practice isn’t a bug, it’s a feature.

Economic revolutions: There could be trouble ahead | The Economist:  THIS week's print edition features a cover package (leader here, accompanying briefing here) on how automation may affect labour markets over the next few decades. I certainly encourage you to read the pieces, but I will summarise one of the arguments here. The pieces generally accept the contention of scholars that exponential progress in computing power has reached a critical point, and machine capabilities are suddenly growing very rapidly. That, in turn, is likely to facilitate a wave of disruptive change around rich economies as entrepreneurs develop much more productive ways to do everything from moving goods around cities, to diagnosing and treating common diseases, to educating workers. We reckon that a decent parallel for this transformation is the experience of industrialisation, which wholly remade the structure of rich economies. Industrialisation led to sweeping changes in labour demand and large sectoral shifts, and it took a very long time for the benefits of industrialisation to begin to accrue to workers in a meaningful way. Real wage growth was imperceptible for the first 60 years of the industrial era, and it was about a century before the big improvements in living standards that we associated with the modern era began to emerge.

Dr. Doom Roubini: Tech to Replace White Collar Jobs - Bloomberg video

The Robots are Coming for White Collar Jobs  - Yves here. Bad enough having to worry about offshoring eating into your employment prospects and compensation level. Alan Blinder, in Senate testimony in 2007, had argued that up to 29% of US jobs were “offshorable,” including many service industry positions. And now this….. Cross posted from MacroBusiness: Computers and improvements in technology have long been an important part of many industries and have already replaced humans in many jobs (think typists and bank tellers). However, a whole new wave of technological development means that even positions once thought to be safe from computerisation are now under threat. Across developed economies, low income service jobs have expanded sharply at the expense of middle-income manufacturing and production jobs. At the same time, computers have increased the productivity of higher income workers – including professional managers, engineers and consultants – resulting in a polarised labour force, with rising wage inequality and the “hollowing-out” of the middle class.To date, the threat from computerisation has been limited more to routine manufacturing jobs, such as production line workers. However, advancements in technology, which is extending robotics beyond simple routine-based tasks to dynamic problem solving, has raised the prospect that higher order jobs might soon be under threat. Take, for example, the autonomous driverless cars under development by Google. They are a prime example of a how a human worker, such as long-haul truck and taxi drivers, could soon be replaced by machines – just like a scene from the 1990s futuristic movie Total Recall or the 2000s film Artificial Intelligence. Over the weekend, The Economist released a list of jobs that it believes are most at risk from computerisation (see below).

The Federal Government Shouldn’t Directly Contribute To America’s Job-Quality Problem - As President Obama searches for ways to improve the wages of American workers by giving them a boost in bargaining for better job quality with their employers, he is limited by the dysfunctionality of Congress, which because of Republican opposition is unlikely to help even with a minimum wage increase. But the president, who manages the vast amount of work the government does through private contractors, should consider what he can do to set reasonable standards for the pay and compensation of the millions of employees of those federal contractors. As EPI has estimated again and again, far too many people working for private firms— but for the benefit of the federal government, with their wages ultimately paid by the taxpayers—are likely working for poverty wages. This is unacceptable; it is damaging to those workers and their families, and it hurts the economy by reducing demand for goods and services—currently a problem of crisis proportions. In November 2000, an EPI briefing paper by Chauna Brocht, The Forgotten Workforce, estimated that 162,000 federal contract workers earned less than the then-poverty level wage of $8.20 an hour (by poverty-level wage, we mean a wage for a full-time, full-year worker that would not lift a family of four out of official poverty). Most of the low-wage employers were large businesses and most were defense contractors. In Outsourcing Poverty, an update published in 2009, EPI researchers Kai Filion and Kathryn Anne Edwards found a huge increase in the total number of federal contract workers and estimated a large increase in the number and share of them who worked for poverty wages. More than 400,000 workers, nearly 20 percent of contract employees in 2006, earned less than the poverty threshold for a family of four, which at the time was $9.91 an hour. By comparison, only 8 percent of federal employees earned less than the poverty threshold; contracting out had the effect of increasing the poverty of employees who did work for the federal government. Contract employees were also far less likely to receive health benefits or pension coverage.

Number of the Week: Buy Forever Stamps Before Prices Increase Monday - On Monday, the U.S. Postal Service will increase the cost of a stamp to 49 cents from the current 46. That’s a 6.5% jump in price, and an opportunity to save some money if you’re going to be doing any bulk mailing over the next two years, at least.  Forever stamps are always a good buy right before any price increase. That’s when they are at their most valuable. But over time rising overall prices eat away at the investment. In a year the one or two cents you save will usually have been gobbled up by inflation. The buying power of a cent drops as prices increase, and you’d often be better off having spent it on something else than parking it in an asset that isn’t appreciating more than the rate of inflation. That’s especially true of forever stamps. In 2006, the government passed the Postal Accountability and Enhancement Act, which states that the price of a stamp can’t increase faster than the rate of inflation. Those of you paying attention may have already noticed something strange. The postal increase is 6.7%, even though inflation never topped 2% in 2013. So what’s going on?  Basically, the Postal Service is in dire straits. Because of mounting financial losses, the USPS asked for the authorization to increase prices more than the rate of inflation. Regulators approved the request last month, but declined to make it permanent. The 49 cent stamp is only guaranteed for two years.

Postal workers' union criticizes Staples-run post offices - California leaders from a national postal workers' union are criticizing a Staples pilot program that has installed dozens of small post offices in the office-supply stores. American Postal Workers Union leaders said that opening retail units staffed by Staples employees is a "disservice to postal workers and the nation's mail service." Staples Inc. and the U.S. Postal Service announced late last year an arrangement to allow 82 small post offices to operate at Staples stores in California, Georgia, Pennsylvania and Massachusetts. The beleaguered postal service, which has seen mail volume and revenue decline, said in November the program might expand to other Staples stores if the pilot is successful. Union leaders had no comment at that time, but on Friday a delegation of APWU leaders visited 13 Bay Area Staples stores and delivered copies of a letter criticizing the move to store managers. “Only U.S. Postal Service postal employees are fully accountable to the public, and sworn to uphold the sanctity of the mail,” the letter said, according to statement by the union

Vital Signs: It’s Getting Harder to Look for the Union Label - The union membership rate—the share of U.S. wage and salary workers who are unionized—stood at 11.3% in 2013, says the Labor Department. While the rate is unchanged from 2012, union membership has been in a downtrend since Labor started tracking comparable data in 1983. Three decades ago, 20.1% of the workforce had a union card. The share of unionized private workers , which excludes the incorporated self-employed, ticked up to 6.7% last year from 6.6% in 2012, but that’s still below the rates of 6.9% in 2011 and nearly 17% back in 1983. The long-term decline among public-sector workers has not been as large. About 35% of public sector workers were unionized in 2013, compared to 36.7% in 1983. According to the Labor report, North Carolina had the lowest share of union members, at 3.0%, while New York had the highest, 24.4%.  Union membership has advantages for workers. In 2013, among full-time wage and salary workers, unionized workers had median usual weekly earnings of $950, while those who were not union members had earnings of $750, although Labor said the differential can also reflect differences in occupation, firm size and geography. Unionized workers also enjoy better benefits. In a separate report, Labor estimates $17.06 of total hourly compensation for union members in the third quarter of 2013 went to benefits, while nonunion workers accrued only $10.15. The biggest gaps were in insurance, mostly for healthcare, and retirement funding.

Is ACA leading to less hiring? -- There is a new study from West Michigan (pdf), by Leslie A. Muller, Paul Isely, & Adelin Levin, based on questionnaire responses.  I would take this with a grain of salt, but still it is useful information to throw into the pot.  Here is one excerpt: Many firms have decided however to minimize their exposure to ACA costs by limiting the employees that must be covered. Questions 14a – 14c show that 36 percent of firms are considering (or using) temporary workers, 44 percent are considering or have reduced/limited hiring over the next 12 months, and 51 percent are considering or have already reduced/limited hours so that the employee is considered part-time. You may find the tables on the last few pages of the paper of interest.  The results are based on fewer than 180 observations and presumably involve some selection bias as well.

Deficit Scolds Holding the Unemployed Hostage - Since Republicans took control of the House of Representatives in 2011, economic policy has remained in a stalemate so deep it extends even to policies of putative agreement. The most current example is unemployment assistance. The main reason for the stalemate is the combination of strategic obstruction and ideological radicalism that dominates Congressional Republican thinking. But a second and nontrivial reason is that the deficit scolds have given the Republicans cover at every turn. The deficit scolds are a loose amalgamation of business executives, activists, and pundits, often centered around Pete Peterson and his network of activist groups, allied around the goal of bringing both parties together to agree on a plan to reduce the long-term budget deficit. The deficit scolds have consistently failed in their quest to achieve this bipartisan deficit-reducing dream. Despite this, they have dominated the economic-policy debate for most of the Obama era, and their influence has been an unremitting disaster for America. The influence of the deficit scolds has worked in three major ways. The first has been to focus public, and especially elite, attention on the long-term deficit as the major crisis facing the world. Future economic historians will look back at the current day and wonder why American elites reacted to the crisis of mass unemployment — a humanitarian emergency of the first order, which has posed serious threats to the long-term capacity of its workforce for decades to come — by instead identifing as their highest priority a problem of no special urgency. Interest rates have sat at rock-bottom levels, yet productive labor, which could have been mobilized cheaply through short-term stimulus, has withered away out of misplaced fear of a phantasmal threat.

39% of unemployed are seeking work for 6+ months - Thirty-nine percent of unemployed Americans are experiencing long-term unemployment in the wake of the 2008 recession, which is more than double the percent unemployed more than six months but actively seeking work in 2007, according to new research about trends in long-term unemployment since the recession from the Carsey Institute at the University of New Hampshire.  "As the debate about the extension of the federal Emergency Unemployment Compensation program continues, it is important to gain an understanding of the long-term unemployed in terms of their demographic and economic characteristics and how those characteristics differ across place. Doing so can help better target strategies for alleviating the negative effects of long-term unemployment,"  The research is presented in the Carsey Institute brief "The Long-Term Unemployed in the Wake of the Great Recession."According to Schaefer, the percentage of unemployed workers who were seeking employment for more than six months more than doubled between 2007 and 2013, from 18.4 percent to 39.3 percent.  In addition, the percentage of women among the long-term unemployed has increased in the last six years, from 35 in 2007 to 44 percent in 2013. In contrast, the percentage of men among the long-term unemployed decreased from 65 percent in 2007 to 56 percent in 2013.

States Cutting Weeks of Aid to the Jobless -  After losing her job as a security guard in June, Alnetta McKnight turned to food stamps and unemployment insurance to support herself and her 14-year-old son. But her jobless payments ran out after 20 weeks, and now they are living on close to nothing. “I worked for 26 years; I lost my job through no fault of my own,”  “This is what I get?” Had Ms. McKnight been laid off a year earlier, she almost certainly would have qualified for more than a year of unemployment insurance payments, helping keep her family out of penury while she sought another position. But last July, North Carolina sharply cut its unemployment program, reducing the maximum number of weeks of benefits to 20 from 73 and reducing the maximum weekly benefit as well. The rest of the country is now following North Carolina’s lead. A federal program supplying extra weeks of benefits to the long-term unemployed expired at the end of 2013, and congressional Democrats failed in an effort to revive it. About 1.3 million jobless workers received their last payment on Dec. 28. Starting on Jan. 1, the maximum period of unemployment payments dropped to 26 weeks in most states, down from as much as 73 weeks.

1.4 Million Jobless Officially Get The Emergency Claims Axe --Initial claims rose very marginally week over week (with the declining trend of early 2013 now over); continung claims rose more - considerably more than expectations - with its biggest 7-week rise since early 2009 to the highest in 6 months; but the major news is the drop in Emergency Unemployment Compensation beneficiaries from 1.37 million to (drum roll please) zero! Congress decision not to extend this beenfit means there are 2 million fewer people on benefits than a year ago. The 1.4 million drop also means the number of people NOT in the labor force is about to rise by the same amount, which as we explained before, means the US unemployment rate is about to drop by up to 0.8%, which means the January unemployment rate could be as low as 5.9%.

 Objectively Pro-Unemployment - Paul Krugman -- Jonathan Chait makes a good point about the deficit scolds: whatever they may say, they have in practice played a key role in promoting short-run fiscal austerity and therefore in keeping unemployment high. That’s not what they say, of course. Talk to almost any tentacle of the Peterson octopus, and he or she will say “Of course I’m against spending cuts in a depressed economy — in fact, I’m for more stimulus.” But this will be followed by a declaration that such stimulus must be accompanied by an agreement on long-term deficit reduction. Confidence, don’t you know. See, for example, Robert Rubin’s latest.  And the point is that given America’s current political situation, long-run deficit reduction is simply not on the table except to the extent that it takes place by controlling health costs (which actually is going pretty well.) Democrats are willing to cut a deal, trading spending cuts for tax hikes, but Republicans insist on cuts only, and in fact want more tax cuts. So no deal — and no relief from austerity. Even the scolds have to realize this, so their anti-austerity rhetoric is empty. Objectively — and I think knowingly — they are on the side of higher unemployment.

The Myth of the Deserving Rich -  Krugman -Many influential people have a hard time thinking straight about inequality. Partly, of course, this is because it’s hard for a man to understand something when his salary depends on his not understanding it. Part of it is because even acknowledging that inequality is a real problem implicitly opens the door to taking progressive policies seriously.  But there’s also a factor that, while not entirely independent of the other two, is somewhat distinct; I think of it as the urge to sociologize.   I’ve written about that urge in the context of poverty: many pundits and politicians clearly want to believe that poverty is all about dysfunctional families and all that, a view that’s at least 30 years out of date, overtaken by the raw fact of stagnant or declining wages for the bottom third of workers.What’s a sociologizer to do? Well, what you see, over and over, is that they find ways to avoid talking about the one percent. They talk about the top quintile, or at most the top 5 percent; this lets them discuss rising incomes at the top as if we were talking about two married lawyers or doctors, not the CEOs and private equity managers who are actually driving the numbers. And this in turn lets them keep the focus on comfortable topics like family structure, and away from uncomfortable topics like runaway finance and the corruption of our politics by great wealth.This is, by the way, why the Occupy slogan about the one percent is so brilliant. I would actually argue that the number should be even smaller. But one percent is an easy to remember number, and small enough to make it clear that we’re not talking about the upper middle class.And that’s good. The myth of the deserving rich is, in its own way, as destructive as the myth of the undeserving poor.

In Reality, the Wealthy Inherit Ungodly Sums of Money - At the National Review, Kevin Williamson tells us that the rich and wealthy are hard workers, not people who just inherit a bunch of money. It's not clear who exactly he thinks he is responding to, but someone must have really irked him on this. In any case, the reality is that the wealthy, whether they work hard or not, are generally inheritors of enormous sums of money. On average, the wealthiest 1 percent of households have inherited 447 times more money than households with wealth below $25,000. As a preliminary matter, it deserves emphasizing that Williamson's focus on intergenerational transfers of money is extremely narrow. Rich parents pass along more than just money to their kids. They also pass along social and cultural capital that help their kids capture the scarce supply of highly-paid jobs. Indeed, even rich kids who do not receive a college degree are 2.5 times more likely to wind up as high-income adults than poor kids who do receive a college degree. That is not because of money transfers, but it's unfair intergenerational advantage nonetheless.  With that noted, it also turns out that Williamson is even wrong (or at least very deceptive) about the narrow inheritance point that he inappropriately focuses on.

Why the Rich Don't Think They're Rich. And Why It Matters - The evidence is mixed on how the rich see themselves. A 2012 Gallup poll found that 2 percent of Americans self-identify as "upper class," which is remarkably close to the portion of people who make over $200k. On the other hand, one recent survey found that "Of those with investable assets worth $1 million to $5 million, only 28% answered yes to the question 'Do you consider yourself wealthy?'" Even many respondents with $5 million or more in assets didn't consider themselves wealthy. This in a country where nearly half of all households own no stock at all, even indirectly through retirement accounts. Other surveys have found the same thing -- that millionaires just don't feel like millionaires. Or think a few million is enough to be rich, when median household wealth in America was $68,828 in 2011. What all this means is that when politicians or pundits talk about the "rich," the people they are often talking about think that they are actually talking about somebody else. So then when the time comes to impose higher taxes, many of the rich think they are being picked on unfairly. Two doctors struggling to afford a jumbo mortgages, medical school debt, and everything else in Brookline may think, "wait a minute, we're not rich. Why are we getting hit with a tax increase?" And that makes equity policies a heavier lift.

Upward Mobility Has Not Declined, Study Says - The odds of moving up — or down — the income ladder in the United States have not changed appreciably in the last 20 years, according to a large new academic study that contradicts politicians in both parties who have claimed that income mobility is falling.Both President Obama and leading Republicans, like Representative Paul Ryan, have argued recently that the odds of climbing the income ladder are lower today than in previous decades. The new study, based on tens of millions of anonymous tax records, finds that the mobility rate has held largely steady in recent decades, although it remains lower than in Canada and in much of Western Europe, where the odds of escaping poverty are higher.Raj Chetty, a professor of economics at Harvard and one of the authors, said in an interview that he and his colleagues still believed that a lack of mobility was a significant problem in the United States. Despite less discrimination of various kinds and a larger safety net than in previous decades, the odds of escaping the station of one’s birth are no higher today than they were decades ago. The results suggested that other forces — including sharply rising incomes at the top of the ladder, which allows well-off families to invest far more in their children — were holding back talented people, the authors said.“The level of opportunity is alarming, even though it’s stable over time,” said Emmanuel Saez, another author and a professor at Berkeley. The study has the potential to alter the way Mr. Obama and other public figures talk about mobility trends.

Upward mobility in the United States is not declining as many citizens think - Here is the new Raj Chetty paper that everyone is talking about (pdf); We use administrative records on the incomes of more than 40 million children and their parents to describe three features of intergenerational mobility in the United States. First, we characterize the joint distribution of parent and child income at the national level. The conditional expectation of child income given parent income is linear in percentile ranks. On average, a 10 percentile increase in parent income is associated with a 3.4 percentile increase in a child’s income. Second, intergenerational mobility varies substantially across areas within the U.S. For example, the probability that a child reaches the top quintile of the national income distribution starting from a family in the bottom quintile is 4.4% in Charlotte but 12.9% in San Jose. Third, we explore the factors correlated with upward mobility. High mobility areas have (1) less residential segregation, (2) less income inequality, (3) better primary schools, (4) greater social capital, and (5) greater family stability. While our descriptive analysis does not identify the causal mechanisms that determine upward mobility, the new publicly available statistics on intergenerational mobility by area developed here can facilitate future research on such mechanisms. Here is summary coverage from David Leonhardt

Is the US still a land of opportunity? New NBER research says yes. - According to a recent NBER paper “Is the United States Still a Land of Opportunity? Recent Trends in Intergenerational Mobility?” by researchers from Harvard, UC-Berkeley and the US Treasury, the answer to the question posed in the title is clearly yes. From the paper’s executive summary: There is a growing public perception that intergenerational income mobility – a child’s chance of moving up in the income distribution relative to her parents – is declining in the United States. Contrary to the popular perception, we find that percentile rank-based measures of intergenerational mobility have remained extremely stable for the 1971-1993 birth cohorts. The key finding from the paper’s abstract: We find that children entering the labor market today have the same chances of moving up in the income distribution (relative to their parents) as children born in the 1970s.

Income Mobility in the US is Terrible, But at Least It's Not Getting Worse - Kevin Drum - A new study confirms what I've been reading for a while now: income mobility in America hasn't changed much in the past few decades. We continue to trail most other advanced economies, but at least things aren't getting any worse.  Interestingly, it turns out that mobility changes fairly dramatically depending on where you grow up. The heat map on the right shows a measure of absolute mobility: the odds that a child of poor parents will move up the income ladder. Mobility is highest in the Midwest, followed by the Northeast and the Pacific Coast. The authors conclude that there are five main factors that contribute to higher mobility: High mobility areas have (1) less residential segregation, (2) less income inequality, (3) better primary schools, (4) greater social capital, and (5) greater family stability. While our descriptive analysis does not identify the causal mechanisms that determine upward mobility, the new publicly available statistics on intergenerational mobility by area developed here can facilitate future research on such mechanisms. There are some other remarkable charts in the paper, including one that shows virtually perfect correlation between parent income and the odds of children attending college, and another that shows nearly as good a correlation between parent income and teen birthrates. (The teen birthrate correlation is inverse: the higher the income, the lower the birthrate.)

New Research Finds No Evidence of a “Great Gatsby Curve” - Alan Krueger, Chairman of Obama’s Council of Economic Advisors, gave a major policy speech two years ago in which he claimed rising income inequality is reducing economic mobility, i.e. reducing the likelihood of climbing the economic ladder. He called this the Great Gatsby Curve, and it became a major justification for the administration’s efforts to raise taxes on high-income earners, which came to fruition in last year’s fiscal cliff deal. Top tax rates on ordinary income were raised to Clinton-era levels, while top tax rates on investment income were raised higher than Clinton-era levels, to rates not seen since the early 1980s.But new research indicates there is no Great Gatsby Curve, at least not in the U.S. over the last several decades (see coverage by WSJ and Washington Post). Raj Chetty of Harvard and other economists associated with the NBER use previously unavailable data from tax returns and elsewhere to show that economic mobility has remained remarkably constant since 1971, while income inequality appears to have increased during the 1980s. For example, they find children born to parents in the lowest quintile of income earners (the bottom 20 percent) have about a 9 percent chance of eventually making it into the top quintile of income earners (the top 20 percent), and that has essentially not changed since 1971.

New economic mobility study shows the 1% didn’t kill the American dream - President Obama got it half right. Kind of. Last month, he declared the “defining challenge of our time” was “a dangerous and growing inequality and lack of upward mobility that has jeopardized middle-class America’s basic bargain … .” Obama, shorter: What’s good for the 1% isn’t at all good for America. In fact, extreme income differences are toxic for the rest of us — and for equality of opportunity. But new data tell a different, more complex story about income inequality and economic mobility and causality. A landmark study from the Equality of Opportunity Project — which includes rock-star economists Raj Chetty and Emmanuel Saez — examined millions of tax records and found that mobility has change little in nearly half a century. Children born in 1971 in the bottom 20% of household earners, according to The Wall Street Journal, had an 8.4% chance of eventually making it into the top 20% of earners by their 20s or 30s vs. for 9.0% kids born in 1986. And about 20% of children born into the middle fifth households in the mid-1980s climbed into the top fifth as adults, also largely unchanged from earlier. Upward mobility has not been declining. Progressives like the president argue that extreme income inequality has been hurting mobility. They point to research from Saez and fellow economist Thomas Piketty finding the share of market income going to the top 1% of the population has more than doubled since the 1970s. Maybe so, but that phenomenon — driven mostly by technology and globalization — doesn’t seem to be hurting mobility. Indeed, the EOP study inconveniently found that when you looking mobility across geographic areas “upper tail inequality is uncorrelated with upward mobility … .”

Evening Must-Read: Justin Wolfers Explains the Latest Chetty et al. Piece on Lack of Mobility Justin Wolfers: Twitter / JustinWolfers: Explaining the big new Chetty…: “Explaining the big new Chetty mobility study:

  1. No change in odds of moving higher or lower on the economic ladder than your parents.

  2. But higher income inequality today means that the rungs of the income ladder are now much further apart than in the past.

  3. Consequences of the “birth lottery” are larger now, because low mobility has bigger consequences.

  4. Bottom line of mobility study: Kids, more than ever, be careful to choose the right parents.

Economists: Your Parents Are More Important Than Ever - Let's go ahead and call social mobility in America what it really is: social immobility. Even in the parts of the country where students have the best shot at moving up the income ladder, the vast majority of them fail to make it past one rung. About 8 percent of kids born in the early 1980s who grew up in families in the poorest fifth managed to reach the top quintile of earners today. For those born smack dab in the middle of America's income distribution, there was just a 20 percent chance of making it to the top.   So for most children, where they're born on the economic ladder determines where they wind up. That's the conclusion of a tremendous social mobility study out today. Its bottom line is pretty simple. Your parents matter. A lot. First, the income of your parents matters—not just as a strong predictor for your own income (given how weak social mobility is), but also as a nudge for your life path. The kids of rich parents are 80 percent more likely to attend college than those of low-income parents.  Second, your parents' marriage (or living arrangement) matters. The single strongest predictor of a child's economic fortunes is the fraction of single parents in the area where she grew up.  It's important not to overstate the causality here. Rich single parents tend to produce richer children than married couples living in poverty. Instead it's best to see marriages as a powerful centripetal force in the vicious cycle of poverty. Low-income parents tend to have children who grow up to be lower-income, who are in turn more likely to form single-parent households and raise children who follow this well-worn life path.

Did We Need a Landmark Study to Tell Us Mobility Didn't Decrease Between 1990 and 2007? - Dean Baker -- The Washington Post gave front page coverage to some serious non-news when it highlighted a "landmark" study showing no substantial changes in mobility for children born in the early 1990s relative to children born in the early 1970s. While this findings is presented as surprising to both people who expected an increase or decrease in mobility, it really would have been surprising if the study had found otherwise.  The big shift in the income distribution against workers at the bottom occurred in the 1980s before the oldest people in this study entered the labor force. The upward redistribution in the period between when the oldest and youngest people in this study entered the labor force would have been primarily to the one percent. It would have been very surprising in a context where they are not big changes in the income distribution among the bottom four quintiles that there would be substantial changes in mobility.  It is probably useful that these researchers confirmed what most observers of the economy already believed, but it doesn't seem like front page news.

In Climbing Income Ladder, Location Matters -   This geography appears to play a major role in making Atlanta one of the metropolitan areas where it is most difficult for lower-income households to rise into the middle class and beyond, according to a new study that other researchers are calling the most detailed portrait yet of income mobility in the United States. The study — based on millions of anonymous earnings records and being released this week by a team of top academic economists — is the first with enough data to compare upward mobility across metropolitan areas. These comparisons provide some of the most powerful evidence so far about the factors that seem to drive people’s chances of rising beyond the station of their birth, including education, family structure and the economic layout of metropolitan areas. Climbing the income ladder occurs less often in the Southeast and industrial Midwest, the data shows, with the odds notably low in Atlanta, Charlotte, Memphis, Raleigh, Indianapolis, Cincinnati and Columbus. By contrast, some of the highest rates occur in the Northeast, Great Plains and West, including in New York, Boston, Salt Lake City, Pittsburgh, Seattle and large swaths of California and Minnesota. “Where you grow up matters,” said Nathaniel Hendren, a Harvard economist and one of the study’s authors. “There is tremendous variation across the U.S. in the extent to which kids can rise out of poverty.”

Here’s to wishing you the best of luck in the birth lottery—you’re going to need it - A new paper by economists Raj Chetty and Nathaniel Hendren of Harvard University, Patrick Kline and Emmanuel Saez of the University of California at Berkeley, and Nicholas Turner of the Treasury Department’s Office of Tax Analysis finds that even as inequality has risen sharply in the United States in recent decades, the chances of moving up (or down) the ladder have stayed about the same. This research poses a challenge to the Great Gatsby Curve. This is a relationship between inequality and mobility showing that countries with greater inequality have less economic mobility. To be clear, the Great Gatsby Curve shows that countries with more inequality have less mobility; the new Chetty, et al. paper doesn’t challenge this. What the paper does is add new evidence—using tax records for cohorts going back to 1971—on changes in economic mobility. The United States still has higher inequality and less economic mobility than most other developed nations.  We have evidence that economic mobility is lower in the United States than in most other developed countries. And recent research by Chetty and his co-authors finds that where you’re born within the United States matters: there is a high degree of variation in the chances of moving up depending on where you live.In terms of specific questions I’m left with after reading the paper, I’ll start with the tantalizing cliffhanger. The authors don’t yet have much income data for children born after 1986. As an interim measure, they look at college attendance rates. College attendance is correlated with later earnings, so this makes sense. But, of course, we don’t know yet what that relationship will look like for students who just graduated, especially for those starting their careers in the Great Recession.  Second, if Chetty and his co-authors are correct, the variation in intergenerational mobility is much greater within the United States than across time. In the United States, it matters more where you were born than when you were born. So, what are some places doing right (and what are others doing wrong)? What’s so special about Northern California or Salt Lake City?

We Can't Afford to Leave Inequality to the Economists -- Americans are about as likely to move from one income quintile to another as they used to be. That, put as prosaically as possible, was the big economic news of the week, as the epic income-mobility study led by Harvard’s Raj Chetty and Nathaniel Hendren, UC Berkeley’s Patrick Kline and Emmanuel Saez, and the U.S. Treasury Department’s Nicholas Turner generated another data-rich installment. Yet when it comes to the income distribution in the U.S., quintiles are so 1970s. All the really interesting things over the past few decades have been happening in the top 20%. Consider this chart, which shows the share of aggregate income going to each of the bottom four income quintiles, to those between the 80th and 95th income percentiles, and to the top 5%. The lines for the bottom four quintiles — 80% of American households — are pretty much parallel, showing almost no change in their relative positions. If you just look at the bottom 80% of the income distribution, then, there’s been no significant increase in income inequality. You do see a steady decline in the share of national income going to the bottom 80%, but in absolute terms, incomes for this group are up modestly over the same period.

Conservatives and the CBO - Paul Krugman - Conservatives have recently made a horrifying discovery: if you look not at nominal but at real incomes, Census data do not show a rising tide raising all boats — they show income actually falling for the bottom quintile. Some of them have responded by turning to a CBO report that took account of transfers and taxes, and shows the income of the bottom fifth rising a bit — 18 percent — between 1979 and 2007. Before they start claiming vindication, however, these people might want to read the whole report, which actually punctures several of their favorite myths. One of these myths is that inequality, while maybe it rose a bit in the 80s, has been flat since the early 1990s. It can look that way if you use the Census survey data, which have a hard time tracking very high incomes. But CBO, which uses tax data to remedy this gap, finds that most of the surge in the income share of the one percent actually happened after 1992. It rose from 7.7 percent in 1979 to 10.9 in 1992 — then to 17.1 in 2007. CBO also has something to say about the notion that we’re becoming a “nation of takers”, ever more dependent on government handouts. Here’s government transfers as a share of personal income:  See the long-term upward trend? Neither do I.

Professor Krugman’s Nervous Tic? -- Paul Krugman’s recent post makes some good points about the myth of the undeserving poor. But does he have a nervous tic? When criticizing conservative economic views, doesn’t he always seem to genuflect slightly to conservative opinion in order to appear “reasonable”? In this post he says: “I’ve noted before that conservatives seem fixated on the notion that poverty is basically the result of character problems among the poor. This may once have had a grain of truth to it, but for the past three decades and more the main obstacle facing the poor has been the lack of jobs paying decent wages. But the myth of the undeserving poor persists, and so does a counterpart myth, that of the deserving rich.” What “grain of truth” ever existed in this story? Where is the empirical evidence that the poor were ever more “lazy” than the rich or had other “character defects” (Not K’s words) that the rich don’t have in abundance, as well? I don’t think there is any. What the conservatives believe is pure BS. Some people are certainly “lazier” than others. But there’s no evidence that this aspect of character is class-based. It’s just prejudice, myth, and conservative fairy tales, which they embrace in place of authentic religion, run rampant. Many of our most visible and celebrated “liberals” or “progressives” seem to share this nervous tic with Professor K.   Bernie Sanders, for example, seems always to begin any comment he makes about fiscal policy by genuflecting to the idea that, of course, “. . . the US has a long-term debt problem, and we must have a plan for long-term deficit reduction, but . . .”  I’m sure my readers can easily multiply examples. But the larger point here is that genuflecting just reinforces the conservative framing and we don’t need that. What we do need are full-throated statements of progressive ideas that make no full or partial validations of the myths and shibboleths of the neoliberal and conservative past.

“Marriage promotion” is a destructive cargo cult - I think I’ll basically be repeating what Matt Yglesias said yesterday, but maybe I can put things more plainly.“Marriage promotion” as a means of address social problems at the lower end of the socioeconomic ladder is a bad idea. It’s not a neutral idea, or a nice idea that probably won’t work. It’s inexcusably obtuse and may be outright destructive. It is quite literally a cargo cult. A cargo cult is a particularly colorful way of mistaking cause for effect. Airplanes do not actually come to remote Pacific Islands because of rituals performed by soldiers at airports. But absent other information, to someone with no knowledge of the larger world, it might well look that way. So when the soldiers leave and the airplanes full of valuable stuff no longer come, it’s forgivable in its way that some islanders populated the abandoned tarmacs with wooden facsimile airplanes and tried to reenact the odd dances that used to precede the arrival of wonderful machines. The case for marriage promotion begins with some perfectly real correlations. Across a variety of measures — household income, self-reported life satisfaction, childrearing outcomes — married couples seem to do better than pairs of singles (and much better than single parents), particularly in populations towards the lower end of the socioeconomic ladder. So it is natural to imagine that, if somehow poor people could be persuaded to marry more, they too would enjoy those improvements in household income, life satisfaction, and childrearing. But neither wedding cake nor the marriages they celebrate cause observed “marriage premia” any more than dances on tarmacs caused airplanes landing on Melanesian islands. In fact, for the most part, the evidence we have suggests that marriage is an effect of other things that facilitate good social outcomes rather than a cause on its own. In particular, for poor women, the availability of suitable mates is a binding constraint on marriage behavior. People in actually observed marriages do well because they are the lucky ones to find scarce good mates, not because marriage would be a good thing for everyone else too. Marrying badly, that is marriage followed by subsequent divorce, increases the poverty rate among poor women compared to never marrying at all.

Most Republicans think poverty caused by laziness, new poll finds -- A slight majority of Republicans believe that laziness is to blame for poverty in American, according to a new poll out Thursday.  The new Pew poll finds that 51% of Republicans agreed that “lack of effort on his or her part” was the primary reason that a poor person would find his or herself in poverty, while only 32% put the blame on “circumstances beyond his or her control.” Conversely, Democrats are more likely to blame circumstances rather than a lack of effort, 63% to 29%. Independent voters track more closely to Democrats on this issue as well, with 51% blaming circumstances and 33% blaming laziness for poverty.  Republicans are also more likely to attribute affluence to hard work than circumstances. When asked if the main cause of a rich person’s wealth was his or her hard work or “advantages,” 57% of Republicans pointed to hard work, while just over a third picked advantages. Again, Democrats were more likely to say greater advantages are the primary factor causing someone to be rich, with 63% naming that compared to just 27% saying it’s because that person has worked harder than others.

The Poverty of Minimum Wage “Facts” - In a recent post, Tyler Cowen discusses my recent paper on minimum wages and poverty. Cowen acknowledges that “[my] paper, econometrically speaking, is a clear advance over [a 2010 paper by] Sabia and Burkhauser.”  However, he is more persuaded by “facts” such as simulation results from Sabia and Burkhuaser’s paper that claims “[o]nly 11.3% of workers who will gain from an increase in the federal minimum wage to $9.50 per hour live in poor households.”Cowen concludes that my paper “pays little heed to integrating econometric results with common sense facts and observations about the economy.”I’m pleased that Cowen thinks my paper represents a clear econometric advance. But I strongly disagree that the econometrics are at odds with common sense facts. Simulation studies are not facts, and when we interpret the relationship between wages and poverty properly, the econometric results appear eminently sensible. Let’s start with the econometrics. First, both the weight of the existing studies, and my own econometric evidence that Cowen considers an advance, suggest that minimum wages have a modest impact on reducing poverty. I find minimum wage elasticities for the poverty rate ranging between -0.12 and -0.37.  This range of estimates is based on 16 different models, and the list includes just about every specification (or close to it) used in the literature.

Minimum Wages: The Effects on Employment and Labour-Force Turnover - Yves here. This article discusses how minimum wages effect not just employment levels, but also turnover in low-wage jobs. It presents them as a “tradeoff” which is arguably a mischaracterization. Losing a job is stressful to the employee and turnover is also costly to the employer (time spent screening, training; possible frictions with existing work teams that require management time and attention). Thus greater job stability is a net benefit. Originally published at VoxEU - Economic research finds little evidence in support of the hypothesis that an increase in minimum wages significantly affects employment – either positively or negatively. This column discusses a study of the impact of minimum-wage changes on turnover rates. Minimum-wage increases are associated with a lower probability that a job will end, and with a lower probability that an unemployed person will find work. The former effect is established only for newly hired workers. Increases in the minimum wages are also associated with more stable jobs for all low educated workers. Thus, the trade-off between fewer jobs with higher wages and more job stability versus easier access to jobs should be taken into account in the minimum-wage policy debates.

Teen Employment Isn't Really Very Well Correlated With the Minimum Wage -- Via Tyler Cowen, here is a chart from Kevin Erdmann that shows raw teen employment figures during periods after the minimum wage was increased. What it shows, roughly speaking, is that in nearly every case, the trend rate of teen employment declined when a minimum wage hike went into effect. He asks: "Is there any other issue where the data conforms so strongly to basic economic intuition, and yet is widely written off as a coincidence?" But what about the long-term trend? Between 1954 and 1970 the minimum wage went up steadily in real terms, and so did teen employment. Since 1980 the minimum wage has been declining steadily, and so has teen employment. Is it really possible that changes in the minimum wage would have immediate effects in one direction but long-term effects in the exact opposite direction? Sure, maybe. But it doesn't seem likely.   Bottom line: Teen employment has dropped substantially since about 1980. But during that time the real minimum wage has declined from $8 to $6 and then gone back up to a little over $7. Maybe there's a correlation there, but it sure isn't easy to see. Whatever's happening, the minimum wage seems to be a pretty small part of it.

Raising the Minimum is the Bare Minimum: It’s not just workers at the low end of the wage scale who need a raise. It’s not just the work of the bottom 9 percent of labor force that is undervalued. It’s the work of the bottom 90 percent. Conservatives who oppose raising the minimum wage argue that we need to address the decline of the family and the failure of the schools if we are to arrest the income decline at the bottom of the economic ladder. But how then to explain the income stagnation of those who are, say, on the 85th rung of a 100-rung ladder? How does the decline of the family explain why all gains in productivity now go to the richest 10 percent of Americans only? And are teachers unions really to blame for the fact that wages now constitute the lowest share of Gross Domestic Product since the government started measuring shares, and that corporate profits now constitute the highest share? We need to raise the minimum wage, but that’s only the start. Even more fundamentally, we must reverse the deeper and more profound redistribution of wealth that has now plagued the nation for several decades: that from capital to labor. For as income from work declines for the nation as a whole—inflation-adjusted median hourly wages are now more than $1.50 lower than they were in 1972—income from investment soars. The stock markets are hitting record highs, and major corporations are using the $1.5 trillion they have lying around to raise not wages but dividends. They are also using some of that cash to buy back their own stock, which raises the value of the outstanding shares, to which, happily, most CEO’s compensation packages are linked.

What Happens When the Poor Receive a Stipend? -  Today, more than one in five American children live in poverty. How, if at all, to intervene is almost invariably a politically fraught question. Scientists interested in the link between poverty and mental health, however, often face a more fundamental problem: a relative dearth of experiments that test and compare potential interventions.  So when, in 1996, the Eastern Band of Cherokee Indians in North Carolina’s Great Smoky Mountains opened a casino, Jane Costello, an epidemiologist at Duke University Medical School, saw an opportunity. The tribe elected to distribute a proportion of the profits equally among its 8,000 members. Professor Costello wondered whether the extra money would change psychiatric outcomes among poor Cherokee families.  When the casino opened, Professor Costello had already been following 1,420 rural children in the area, a quarter of whom were Cherokee, for four years. That gave her a solid baseline measure. The poorest children tended to have the greatest risk of psychiatric disorders, including emotional and behavioral problems. But just four years after the supplements began, Professor Costello observed marked improvements among those who moved out of poverty. The frequency of behavioral problems declined by 40 percent, nearly reaching the risk of children who had never been poor. Already well-off Cherokee children, on the other hand, showed no improvement. The supplements seemed to benefit the poorest children most dramatically.

Former Trader Joe's president plans to open store that ONLY sells 'expired' food - Many consumers throw out 'expired' food without a second thought, but one man hopes to change that attitude with a store that will exclusively sell food that has passed its sell-by date.In May, former president of Trader Joe's Doug Rauch is launching The Daily Table, a grocery store and restaurant in Dorchester, Massachusetts, that will offer nutritious, inexpensive and perfectly edible food deemed 'unsellable' by conventional stores because of its date label. His hope is that the store will provide healthy meals to the working poor in America, who would otherwise opt for junk food because it's all they can afford.  With his new store, Mr Rauch is mostly targeting the 15per cent of American households that are 'food insecure', which means they are unsure where their next meal will come from. He told that far from trash, 'expired' food is an 'underrealized asset' that can help solve hunger problems in American if utilized efficiently. 'Most families know that they're not giving their kids the nutrition they need,' he explained. 'But they just can't afford it, they don't have an option.'

Unemployment Rate falling in "Sand" States - The BLS will release December unemployment rates for all states next Tuesday. Here are a few "bubble" states rates that were released today by the states:

  • From the Orlando Sentinel: Florida unemployment dips to 6.2 percent for December Florida's unemployment rate fell to 6.2 percent in December ... The state unemployment rate has been dropping steadily for three years and now stands at its lowest level since June 2008. At the height of the recession in early 2010, Florida's jobless rate peaked at 11.4 percent.
  • From the Arizona Daily Sun: Arizona unemployment rate drops to 7.6 percent The state’s seasonally adjusted jobless rate dropped two-tenths of a point last month, to 7.6 percent, the lowest it’s been since November of 2008. But it’s still more than double the historic low of 3.5 percent recorded in July 2007. The Arizona unemployment rate peaked at 10.7%, and this is the lowest since November 2008.
  • From the California EDD: Labor Force and Industry Employment Data for December 2013: California's seasonally adjusted unemployment rate was 8.3 percent in December, down 0.2 percentage point in November, and down 1.5 percentage points from 1 year ago. California's unemployment rate peaked at 12.8%, and this is the lowest level since October 2008.

The State in the Worst Fiscal Condition In America is ... - PolicyMic: A study on U.S. states' fiscal conditions released earlier this week by Mercatus Center at George Mason University ranked New Jersey dead last, citing citing revenue shortfalls, budget practices and high levels of debt. California, Massachusetts, Illinois, and Connecticut rounded out the rest of the bottom five. On the brighter side, Wyoming, Nebraska, North Dakota, South Dakota and Alaska took the top five.  The researchers looked at 11 indicators of financial health and stability: cash ratio, quick ratio, current ratio, operating ratio, surplus (deficit) per capita, net asset ratio, long-term liability ratio, long-term liability per capita, tax per capita, revenue per capita and expenses per capita. To get a better sense of the situation in general, these 11 were then grouped into four larger categories: cash solvency, budget solvency, long-run solvency and service-level solvency. The Garden State was seeing anything but green as it fell last in budget solvency and long-run solvency and was in the bottom 15 in every other category for the 2012 fiscal year. Alaska ranked in the top two in three of the four categories, though it came dead last in service-level solvency.

Bottom 5 States in Fiscal Condition: New Jersey, Connecticut, Illinois, Massachusetts, California - Inquiring minds are digging into a George Washington University paper on State Fiscal Conditions, a ranking of 50 states, by Sarah Arnett. PolicyMic Produced this Chart of State Fiscal Conditions based on the working paper. Let's return to the original working paper for some highlights and lowlights.  At the bottom of the rankings are New Jersey and Illinois. New Jersey faces long-run solvency problems due in part to nearly 15 years of underfunding its state and local pensions. It has an estimated unfunded pension liability of around $25.6 billion as well as $59.3 billion in unfunded liabilities for the health benefits of retired teachers, police, firefighters, and other government workers (State Budget Crisis Task Force 2012). Illinois has also underfunded its public pensions, resulting in an estimated state retirement system combined unfunded liability of $ 96.8 billion as of 2012 (Illinois Commission on Government Forecasting and Accountability 22 2013). To cover the costs of its pension obligations, Illinois has also sold bonds to cover its annual contributions — 60 percent of Illinois’ total outstanding debt is in pension bonds (State Budget Crisis Task Force 2012). In essence, Illinois is using long-term debt instruments to meet current year pension obligations. [In Contrast] Nebraska is constitutionally prohibited from incurring debt. As such, the long-term liabilities reflected in Nebraska’s long-run solvency score are mainly due to claims payable for worker’s compensation, Medicaid claims, and other employee-related items. With no significant bond debt, Nebraska has a much lower long-term liability per capita and a much lower long-term liability ratio than most other states.

White House not considering Puerto Rico bailout, official says --(Reuters) - The White House is not considering a financial bailout for Puerto Rico, where chronic fiscal challenges have raised the specter of a Detroit-like bankruptcy, an Obama administration official said on Wednesday. The island's woes have led credit rating agencies to say they are considering labeling the U.S. territory's general obligation debt as junk bonds. Puerto Rico already pays the highest interest rates of any big municipal bond issuer. "The President's Task Force continues to partner with the Commonwealth to strengthen Puerto Rico's economic outlook and to ensure that it is taking advantage of all existing federal resources available to the Commonwealth," White House spokeswoman Katherine Vargas told Reuters in an email. "There is no deep federal assistance being contemplated at this time," she said.

UVA Study: One in 10 Virginians Receives Food Stamp Benefits - University of Virginia research shows that slightly more than one in 10 people in the commonwealth receive monthly food stamp benefits. According to a census brief released Tuesday through the Weldon Cooper Center, 11.6 percent of Virginians get subsidies through the Supplemental Nutrition Assistance Program (SNAP). The center says the majority of households with people receiving benefits have at least one person who is employed. “This is not replacing earned income; this is supplementing earned income in order to provide for a critical need, which is food,” said Annie Rorem, policy associate at the Weldon Cooper Center. The current maximum award in terms of SNAP benefits for a family of four is $632 a month. In order to get subsidies, the gross monthly income for a family of four can't be more than about $2,500.

Utah is Ending Homelessness by Giving People Homes -- In eight years, Utah has quietly reduced homelessness by 78 percent, and is on track to end homelessness by 2015. How did Utah accomplish this? Simple. Utah solved homelessness by giving people homes. In 2005, Utah figured out that the annual cost of E.R. visits and jail stays for homeless people was about $16,670 per person, compared to $11,000 to provide each homeless person with an apartment and a social worker. So, the state began giving away apartments, with no strings attached. Each participant in Utah’s Housing First program also gets a caseworker to help them become self-sufficient, but they keep the apartment even if they fail. The program has been so successful that other states are hoping to achieve similar results with programs modeled on Utah’s. It sounds like Utah borrowed a page from Homes Not Handcuffs, the 2009 report by The National Law Center on Homelessness & Poverty and The National Coalition for the Homeless. Using a 2004 survey and anecdotal evidence from activists, the report concluded that permanent housing for the homeless is cheaper than criminalization. Housing is not only more human, it’s economical. This happened in a Republican state! Republicans in Congress would probably have required the homeless to take a drug test before getting an apartment, denied apartments to homeless people with criminal records, and evicted those who failed to become self-sufficient after five years or so. But Utah’s results show that even conservative states can solve problems like homelessness with decidedly progressive solutions.

A Henry George Tax for San Francisco -- In Quartz, I call for a Henry George Tax (or land value tax) as part of a solution to San Francisco's class war:  George suggested that the fair thing to do would be to tax the value of the land—not the structures built on top of it, but only the land itself—and distribute the proceeds to the poor, or use them for infrastructure and other public improvements...  The Henry George Tax has many good points and few downsides. Unlike income taxes, sales taxes, or corporate taxes, the Henry George Tax has no chance of choking off economic activity; after all, the amount of land is fixed, so you can’t tax it out of existence. Also, unlike the property taxes we have now, a Henry George Tax actually encourages landlords to build useful, valuable stuff on top of the land they own. Conventional property tax pays people not to build things on their land, since doing so will mean having to pay more tax. But the Henry George Tax—which would replace conventional property taxes—makes buildings and other productive structures tax-free, thus encouraging landowners to build more of them...  What San Francisco needs now is a Henry George Tax. The policy would bring rents down, and thus encourage tech companies and their brilliant employees to keep moving into the city, to keep interacting and mixing and generating the ideas that make the tech world go. At the same time, it would raise the money the city needs to build better trains, run more bus lines, and build more public housing that will benefit the poor and middle class of San Francisco. And it would do it all in a way that seems much more fair than other kinds of taxation...

Vast Stretches Of Impoverished Appalachia Look Like They Have Been Through A War - If you want to get an idea of where the rest of America is heading, just take a trip through the western half of West Virginia and the eastern half of Kentucky some time.  Once you leave the main highways, you will rapidly encounter poverty on a level that is absolutely staggering.  Overall, about 15 percent of the entire nation is under the poverty line, but in some areas of eastern Kentucky, more than 40 percent of the population is living in poverty.  Most of the people would work if they could.  Over the past couple of decades, locals have witnessed businesses and industries leave the region at a steady pace.  When another factory or business shuts down, many of the unemployed do not even realize that their jobs have been shipped overseas.  Coal mining still produces jobs that pay a decent wage, but Barack Obama is doing his very best to kill off that entire industry.  After decades of decline, vast stretches of impoverished Appalachia look like they have been through a war.  Those living in the area know that things are not good, but they just try to do the best that they can with what they have.

TRIP report: Deficient roads, bridges cost Michigan motorists up to $1,600 a year in 'hidden' costs - -- Deficient roads and bridges cost Michigan motorists nearly $8 billion a year in aggregate costs, according to a report released Tuesday by Trip, a national transportation nonprofit that advocates for state and national infrastructure funding.  Here in Lansing, driving on deficient roads costs the average motorist $1,032 a year, according to the report, which considers lost time and gas due to congestion, traffic accidents and annual vehicle operations costs including repairs.  The estimated cost is $1,600 per motorist in Detroit and $1,027 in Grand Rapids. The report pegs the total cost for all motorists in Michigan at $7.7 billion a year. Overall, 29 percent of Michigan roads are in poor or mediocre condition, according to the report, which indicates that major roadways in Detroit, Lansing and Grand Rapids are in even worse shape.

About 10,000 Ohioans lose food stamps -- More than 10,000 poor Ohioans have lost food stamp benefits this month for failing to meet newly enforced work requirements. That’s 7 percent of the roughly 140,000 able-bodied adults ages 18 to 50 without dependent children who are now required to spend at least 20 hours a week working, training for a job, attending class or volunteering to receive assistance, according to figures provided by state officials. Human-services officials and advocates for the poor expect the number to increase sharply in February and the following months. “This is just the start,” County caseworkers, particularly in urban areas with larger caseloads, have not completed required assessments of food-stamp recipients to determine if they must comply with the new rules or should be exempt because of mental illness, substance abuse or other issues. In addition, thousands have failed to respond to letters asking them to come to their county Job and Family Services office for an assessment. They are likely to be booted from the rolls in February.

Slammed by food stamp cuts, New York City soup kitchens ran out of food - Nearly half of New York City food pantries and soup kitchens ran out of some foods required for meals or pantry bags after November's cuts to Supplemental Nutrition Assistance Program benefits went into effect. Before the cuts went into effect, many food pantry directors warned that they would not be able to make up the difference, and that's just what happened. A new survey from Food Bank for New York City finds that, among emergency food providers in the city:

  • 85% reported an overall increase in visitors in November 2013, as compared to November 2012, immediately following Super Storm Sandy.
  • 76% of food pantries and soup kitchens saw an increase in visitors in November 2013 compared to the previous two months, with nearly half (45%) reporting considerable increases in visitor traffic of more than 25%;
  • Nearly half (48%) of emergency food providers ran out of food required for meals or pantry bags, with 26% reporting having to turn people away due to insufficient food supplies;
  • Nearly one quarter (23%) of food pantries and soup kitchens reported having to reduce the total number of meals they otherwise provided[.]

New York City Pantries Ran Out Of Food After Food Stamps Were Cut -- After food stamps were reduced at the beginning of November, New York City food pantries and soup kitchens ran out of food, turned people away, and reduced the meals they handed out after experiencing a surge of demand, according to a new report from Food Bank For New York City. The organization surveyed 522 food pantries and 138 soup kitchens and found that in November 2013, nearly half had either run out of food altogether or the particular kinds of food they need to make adequate meals. About a quarter had to turn people away since they didn’t have enough food, and another quarter had to reduce the number of meals they provided. The survey asked them to compare conditions in November of last year to September and October, as well as to November 2012. Three-quarters saw a surge in visitors in November as compared to the months before, with 16 percent saying demand increased by more than 50 percent. Even more reported that the number of visitors climbed compared to the year before, making it likely that the uptick was about the food stamp cut, rather than seasonal changes. The report notes that “the SNAP cuts that took effect November 1 represent the biggest systemic factor reducing the food purchasing power of low-income people,” adding that “other factors that meaningfully affect emergency food program participation, like local unemployment, actually decreased in November 2013.”

State school board seeks $1 billion increase next year - — At a time when the state may be facing a $2.2 billion loss of revenue, state school officials are poised to ask lawmakers and Gov. Pat Quinn for a more than $1 billion increase in funding next fiscal year. Staff at the Illinois State Board of Education will ask board members Thursday to sign off on a proposed spending plan that is 16 percent higher than what the agency is receiving this year. Tops among the requests is for the state to fully fund general state aid to local schools to reverse three years of declining state assistance. The request for more money, however, comes as the state’s temporary income tax increase will expire next January. Estimates show the end of the increase will result in a $2.2 billion loss of revenue beginning in the second half of the fiscal year. Education officials say schools continue to see their costs rise at the same time property tax values and federal assistance are falling.In his budget outline to the board, state schools Superintendent Christopher Koch says even though his proposal calls for a more than $1 billion increase over the current fiscal year, the recommendation is still nearly 2 percent less than what schools received in fiscal year 2009 when adjusted for inflation.

Louisiana Court Rules That 7,000 Teachers Were Wrongfully Terminated - It is always astonishing to be reminded that the rule of law still exists in Louisiana, despite the authoritarian command of Governor Bobby Jindal. But it does! Louisiana courts found the funding of the voucher program, using money dedicated to public schools, to be unconstitutional. The courts found Jindal’s law stripping teachers of all legal rights and protections to be unconstitutional because it included too many subjects in one bill. And now, miracle of miracles, the Louisiana Fourth Circuit Court of Appeal ruled that 7,000 teachers who were fired after the devastation of Hurricane Katrina were wrongfully terminated and entitled to back wages. The judgement could bankrupt the Orleans Parish Board. “In a lawsuit that some say could bankrupt the Orleans Parish public school system, an appeals court has decided that the School Board wrongly terminated more than 7,000 teachers after Hurricane Katrina. Those teachers were not given due process, and many teachers had the right to be rehired as jobs opened up in the first years after the storm, the court said in a unanimous opinion.

Low-Wage Workers Have far More Education than They Did in 1968, yet They Make far Less - The minimum wage is 23 percent less than its peak inflation-adjusted value in 1968. This is despite  productivity (how much output can be produced in an average hour of work in the economy) more than doubling in that time period. The low-wage workforce has surely contributed to this rise in economy-wide productivity, since as a group they have far more education now than they did then. For the workforce overall, 37 percent in 1968 had not completed high school (or received a GED), which was true for only 9 percent in 2012 (the latest year with comparable data). We can drill down to examine low-wage workers, which we are defining for this analysis as those earning in the bottom fifth of the wage distribution. The figure below shows that low-wage workers have far more education now than they did back in 1968. In 1968, 48 percent of low-wage workers had a high school degree, compared to 79 percent in 2012. Correspondingly, many more low-wage workers have attended at least some college or have a college degree, which the graph identifies as ‘college experience.’ While only 16.8 percent of low-wage workers in 1968 had gone to some college or had a college degree, that group had grown to nearly half (45.7 percent) by 2012. The bottom line is that minimum wage in 2013 is far less now than it was in 1968 despite the economy’s productivity more than doubling, and low-wage workers attaining far more education.

Harvard, MIT Online Courses Dropped by 95% of Registrants - About 95 percent of students enrolled in free, online courses from Harvard University and the Massachusetts Institute of Technology dropped them before getting a completion certificate. Out of 841,687 registrants in 17 courses offered in 2012 and 2013 by the universities’ joint EdX program, 43,196 saw the classes to conclusion, according to an e-mailed statement from the Cambridge, Massachusetts-based schools. Some of the students signed up for multiple courses, according to the statement. Harvard and MIT began the $60 million EdX project in 2012 as an experiment to research the potential of massive open online courses, or MOOCs. The data released today show that while there’s broad interest in the classes, people are accessing them for many other reasons besides obtaining a certificate of completion, said Andrew Ho, an associate professor in Harvard’s Graduate School of Education. “The data are demanding that we think of new metrics beyond certification rates to capture the diverse goals of users,” Ho, who conducted the research along with MIT electrical engineering and physics professor Isaac Chuang, said in a telephone interview. “I don’t think there’s any reason to be concerned that many more people are interested and many more people are learning.”

The coming Calculus MOOC Revolution and the end of math research - mathbabe - I don’t usually like to sound like a doomsayer but today I’m going to make an exception. I’m going to describe an effect that I believe will be present, even if it’s not as strong as I am suggesting it might be. There are three points to my post today.

  • 1) Math research is a byproduct of calculus teaching - I’ve said it before, calculus (and pre-calculus, and linear algebra) might be a thorn in many math teachers’ side, and boring to teach over and over again, but it’s the bread and butter of math departments.  Math research is essentially funded through these teaching jobs.
  • 2) Calculus MOOCs and other web tools are going to start replacing calculus teaching very soon and at a large scale It’s already happening at Penn through Coursera. Word on the street is it is about to happen at MIT through EdX. If this isn’t feasible right now it will be soon. Right now the average calculus class might be better than the best MOOC, especially if you consider asking questions and getting a human response. But as the calculus version of math overflow springs into existence with a record of every question and every answer provided, it will become less and less important to have a Ph.D. mathematician present.
  • 3) Math researchers will be severely reduced if nothing is done Let’s put those two things together, and what we see is that math research, which we’ve basically been getting for free all this time, as a byproduct of calculus, will be severely curtailed. Not at the small elite institutions that don’t mind paying for it, but at the rest of the country. That’s a lot of research. In terms of scale, my guess is that the average faculty will be reduced by more than 50%, and some faculties will be closed altogether.

Are adjunct professors the fast-food workers of the academic world? - I am what's called an adjunct. I teach four courses per semester at two different colleges, and I am paid just $24,000 a year and receive no health or pension benefits. Recently, I was profiled in the New York Times as the face of adjunct exploitation, and though I was initially happy to share my story because I care about the issue, the profile has its limits. Rather than use my situation to explain the systemic problem of academic labor, the article personalized – even romanticized – my situation as little more than the deferred dream of a struggling PhD with a penchant for poetry. But the adjunct problem is not about PhDs struggling to find jobs or people being forced to give up their dreams. The adjunct problem is about the continued exploitation of a large, growing and diverse group of highly educated and dedicated college teachers who have been asked to settle for less pay (sometimes as little as $21,000 a year for full-time work) because the institutions they work for have callously calculated that they can get away with it. The adjunct problem is institutional, not personal, and its affects reach deep into our culture and society. Though there are tens of thousands of personal stories like mine of economic hardship and lives ruined or put on hold, it is not to these stories that we should turn when we consider the exploitation of adjuncts in academia, but to our universal sense of justice. For the continued exploitation of adjuncts is, to put it bluntly, nothing less than unjust.

Student Loans: Debt for Life -  You can lose your house to foreclosure, but never your education. Four-year college graduates’ pay advantage over high school grads has doubled over the past 30 years. If money for tuition is tight, the advice goes, borrow what you need. Students have been listening. In 2010 student debt exceeded credit-card debt for the first time. In 2011 it surpassed auto loans. In March, the Consumer Financial Protection Bureau announced that student debt had passed $1 trillion. It grew by $300 billion from the third quarter of 2008 even as other forms of debt shrank by $1.6 trillion, according to a separate tabulation by the Federal Reserve Bank of New York. In a press briefing at the White House in April, Education Secretary Arne Duncan said, “Obviously if you have no debt that’s maybe the best situation, but this is not bad debt to have. In fact, it’s very good debt to have.” If student loans are good debt, how do you account for the reaction of Christina Mills, 30, of Minneapolis, when she found out her payment on college and law school loans would be $1,400 a month? “I just went into the car and started sobbing,” says Mills, who works for a nonprofit. “It was more than my paycheck at the time.” Medical student Thomas Smith, 25, of Hamilton, N.J., is $310,000 in debt and is struggling to make ends meet even before beginning to repay his loans. “I don’t even know what I eat,” he says. “I just go to the supermarket and buy the cheapest thing I can and buy as much of it as I can.” Then there’s Michael DiPietro, 25, of Brooklyn, who accumulated about $100,000 in debt while getting a bachelor’s degree in fashion, sculpture, and performance, and spent the next two years waiting tables.  “I’ve come to the conclusion that it’s an obsolete idea that a college education is like your golden ticket,” DiPietro says. “It’s an idea that an older generation holds on to.”

Baby Boomers Reluctant to Retire; What About the Fed's Retirement Thesis?  - A new Gallup survey shows Many Baby Boomers Reluctant to RetireTrue to their "live to work" reputation, some baby boomers are digging in their heels at the workplace as they approach the traditional retirement age of 65. While the average age at which U.S. retirees say they retired has risen steadily from 57 to 61 in the past two decades, boomers -- the youngest of whom will turn 50 this year -- will likely extend it even further. Nearly half (49%) of boomers still working say they don't expect to retire until they are 66 or older, including one in 10 who predict they will never retire.Gallup finds that baby boomers who strongly agree that they currently "have enough money to do everything [they] want to do" expect to retire at age 66. Boomers who strongly disagree with this statement predict they will retire significantly later, at age 73. As the largest generation born in U.S. history, baby boomers' sheer numbers coupled with their reluctance to retire will likely ensure that their influence endures in the workplace in the coming years. Although the first wave of boomers became eligible for early retirement under Social Security about six years ago, the generation still constitutes about one-third (31%) of the workforce, similar to percentages for millennials (33%) and Generation X (32%).In Spot The Labor Force Collapse Culprit, ZeroHedge produced a chart that allegedly debunks the thesis that the participation rate is declining because of retirement.

When Thinking about Retirement, Beware the Averages - When contemplating all those stories, charts and advice columns about how financially prepared Americans are for retirement: Beware the averages. “It is simply striking how much heterogeneity there is,” MIT economist James Poterba observed.  The latest government surveys of Americans 65 years old and older found that those in the bottom quarter of the income distribution (average income of $6,756) get about 85% of their income from Social Security; the rest comes from wages, pensions, savings and welfare. The important role that Social Security plays in lifting many of the elderly out of poverty has become an increasingly salient argument made by those seeking to shield the program from those who seek to trim benefits (as opposed to raising payroll taxes) to strengthen the program’s finances or reduce the federal deficit. But, Mr. Poterba noted, those low-income retirees get Social Security benefits equal to about 77% of what they earned as workers, substantially above the 42% average for all retirees. For those in the top quarter (average income of $78,180), only 18% of their income comes from Social Security. They get 39% from pensions and savings and 44% from wages — because a rising share of the over-65 crowd is still working. “We’re in a very different scenario depending on which part of this [over-65] group you want to look at,”

Battle over police pensions in US cities takes ugly turn - (Reuters) - A drive by some American cities to cut costly police retirement benefits has led to an extraordinary face-off between local politicians and the law enforcement officers who work for them. In Costa Mesa, California, lawmaker Jim Righeimer says he was a target of intimidation because he sought to curb police pensions. In a lawsuit in November, Righeimer accused the Costa Mesa police union and a law firm that once represented them, of forcing him to undergo a sobriety test (he passed) after driving home from a bar in August 2012. Disputes such as these have intensified as Detroit and two California cities, Stockton and San Bernardino, have gone bankrupt in the past two years. Police pension costs were a major factor in the financial troubles facing all three. Now large cities, including San Jose and San Diego, say they have no choice but to alter pension agreements lest they end up in bankruptcy too. The suit by lawmaker Righeimer also said that an FBI raid of the law firm last October uncovered evidence that an electronic tracking device had been attached to the underside of the car driven by another lawmaker, Steve Mensinger, one of Righeimer's allies in the pension fight. "What we are alleging is a conspiracy to gather information against political opponents",

Winning Veterans’ Trust, and Profiting From It - The benefit, known as the Veterans Pension program, can be worth more than $20,000 a year to war veterans who are disabled or over age 65.  As baby boomers head toward retirement — worrying not only about their financial futures, but also their parents’ — a cottage industry has sprung up around the pension program. Lawyers, financial advisers and insurance brokers have formed a lucrative alliance with retirement communities and assisted living facilities to extract many billions of taxpayer dollars from the V.A., according to interviews with state and federal authorities, as well as a review by The New York Times of hundreds of legal documents and client contracts. Questionable actors are capitalizing on loose oversight to unlock the V.A. money and enrich themselves, sometimes at veterans’ expense. The V.A. accreditation process is so lax that applicants provide their own background information, including any criminal records. But the V.A. has only four full-time employees evaluating the approximately 5,000 applications that it receives annually. Once people get the V.A.’s stamp of approval, they rarely lose it, even if a customer complains or regulatory actions mount. Last year, the V.A. revoked its accreditation for two of its more than 20,000 advisers.

Hospital Chain Said to Scheme to Inflate Bills - Physicians hitting the target to admit at least half of the patients over 65 years old who entered the emergency department were color-coded green.  Failing physicians were red.  The scorecards, according to one whistle-blower lawsuit, were just one of the many ways that Health Management Associates, a for-profit hospital chain based in Naples, Fla., kept tabs on an internal strategy that regulators and others say was intended to increase admissions, regardless of whether a patient needed hospital care, and pressure the doctors who worked at the hospital.  This month, the Justice Department said it had joined eight separate whistle-blower lawsuits against H.M.A. in six states. The lawsuits describe a wide-ranging strategy that is said to have relied on a mix of sophisticated software systems, financial incentives and threats in an attempt to inflate the company’s payments from Medicare and Medicaid by admitting patients like an infant whose temperature was a normal 98.7 degrees for a “fever.” The accusations reach all the way to the former chief executive’s office, whom many of the whistle-blowers point to as driving the strategy. For H.M.A., the timing could not be worse. Shareholders recently approved the planned $7.6 billion acquisition of the company by Community Health Systems, which will create the nation’s second-largest for-profit hospital chain by revenue, with more than 200 facilities. The deal is expected to be completed by the end of the month.

Health Insurance Companies See ObamaCare Medicaid Boon - As the Obama administration touts the need for uninsured Americans to sign up for private coverage via exchanges under the Affordable Care Act, the insurance industry sees growth in an expanded Medicaid program for the poor under the health law. This week, the chief executive of the nation’s largest health insurance company and a new analysis indicate major growth ahead for health plans that have contracts with state Medicaid programs thanks in large part to President Obama’s signature legislative achievement.  As state budgets have been hurt by the stagnant economy, lawmakers have turned more patients eligible for Medicaid over to privately-contracted insurance companies. Now, the health law provides a cash infusion of more than $900 billion in federal dollars from 2014 to 2022 to expand Medicaid programs for states interested in the proposition.  "We expect to realize strong growth by serving in several ways: as established Medicaid programs grow through the ACA expansions; as eligible Medicaid prospects are identified through the federal and state exchange markets; and as the inevitable dual eligible …initiatives begin to form and are implemented,” UnitedHealth Group UnitedHealth Group (UNH) chief executive officer Stephen J. Hemsley said on the company’s 2013 fourth-quarter and full-year earnings call earlier this week.

Medicaid enrollment jump spurred by Obamacare, but how much? -- Enrollment in Medicaid spiked in December, aided by Obamacare exchanges and an expansion of the government-run health coverage program for the poor in 25 states.  But it was far from clear just how many of the Medicaid enrollees are new people drawn by Affordable Care Act-related initiatives, as opposed to re-enrollments, according to a leading health-care analyst who called the data released Wednesday "confusing." By the end of December, more than 6.3 million people were determined to be eligible for Medicaid or CHIP, the program covering children, through state-run agencies and state-based Obamacare exchanges, according to a Centers for Medicare & Medicaid Services report released Wednesday.   That tally does not include the 750,000 or so people who were determined eligible in Medicaid through the federally-run Obamacare exchange  Adding the two enrollment numbers together equals more than 7 million Medicaid-eligible determinations. But some of the determinations made by may be duplicative of state-based decisions.  Another 2.2 million or so people had purchased private Obamacare insurance through a federally run or state-run exchange by the end of December.

Target to Drop Health Insurance for Part-Time Workers -  Target Corp. said it will end health insurance for part-time employees, joining Trader Joe’s Co., Home Depot Inc. and other retailers that have scaled back benefits in response to changes from Obamacare. About 10 percent of Target’s part-time employees, defined as those working fewer than 30 hours a week, use the company’s health plans now, according to an announcement posted on the Minneapolis-based company’s website. Target said it would pay $500 to part-timers losing coverage and a consulting firm will help workers sign up for new Obamacare plans. The U.S. Patient Protection and Affordable Care Act is the largest regulatory overhaul of health care since the 1960s, creating a system of penalties and rewards to encourage people to obtain medical insurance. The law known as Obamacare doesn’t require most companies to cover part-time workers, and offering them health plans may disqualify those people from subsidies in new government-run insurance exchanges that opened in October. “Health care reform is transforming the benefits landscape and affecting how all employers, including Target, administer health benefits coverage,”  . She cited “new options available for our part-time team, and the historically low number of team members who elected to enroll in the part-time plan.”The health law requires all companies employing 50 or more people to offer health insurance to those working 30 or more hours starting in 2015. No part-timers will see their hours cut, Kozlak said. Target, the second largest U.S. discount retailer, had an estimated 361,000 total employees at the end of the last fiscal year, according to data compiled by Bloomberg.

Obamacare Strikes Again: Target Drops Part-Timers From Healthcare Plan (And Fires Others Just In Case) - Effective April 1st, Target announced to day that it would no longer offer healthcare coverage to its part-time employees. As The Hill reports, Target's HR executives 'spun' the decision as good for the employees..."by offering them insurance, we could actually disqualify many of them from being eligible for newly available subsidies that could reduce their overall health insurance expense." The company will provide a $500 cash payment to "minimize disruption," and specifically calls out Obamacare as "providing new options... that we believe our part-time members may prefer."Of course, just for good measure, Target is cutting 475 jobs and chooing not to fill a further 700 open positions - again, we presume, to minimize disruption (to their bottom line).

In Target’s wake, businesses plot Obamacare paths - Target became the latest big company to follow the old drill: drop health coverage for some workers, blame Obamacare and watch Republicans pounce. Home Depot and Trader Joe’s made similar changes to their health plans last year, and UPS limited coverage for spouses. Each time, it drew ugly headlines for the health care law.While each situation was a little different, the initial conclusion that Obamacare was leaving consumers worse off starts to gets squishy when the details are unpacked. But an impression was created.  More shoes are going to drop Some business groups say they wouldn’t be surprised if more companies shift their part-time workers to Obamacare, if they ever offered them health coverage in the first place. That’s because employers are still making decisions about how they’ll react to the health care law. The employer mandate, which will require all businesses with the equivalent of 50 or more more full-time workers to provide health coverage or pay fines, was delayed until 2015. Many businesses are still figuring out what they’ll do.

True Single-Payer Healthcare System Being Considered in New York Assembly -- New York State Assemblyman Richard Gottfried, who represents the Chelsea and Hell's Kitchen sections of Manhattan (D-17th District), has introduced a bill to implement a true single-payer healthcare system in New York State. Although the legislation made it out of the healthcare committee of the Assembly last year, it then was basically stonewalled from going much further. Gottfried, chair of the health committee, told BuzzFlash at Truthout, the bill was re-introduced at the beginning of this session on January 8th of 2014. What makes Gottfried's bill distinct is that it would -- if implemented in its ideal configuration -- be a true single-payer healthcare system for all New Yorkers (except Veterans, who receive care through a government-administered system of providers employed by the Veterans Administration. This differs from what is called the Vermont "single-payer" system, which is a laudable one coming down the pike. But the Vermont healthcare insurance program would more accurately be called a comprehensive coverage system than a true single-payer. Gottfried's bill (2078A) would create the New York Health Trust Fund and all New Yorkers -- in theory -- (except veterans) would eventually receive care through the fund. They would carry a "New York Health" card for all their medical needs. Although still far from being enacted, what would make Gottfried's bill a near seamless single-payer, if passed and implemented in its ideal form, is that the federal government would (and that is something, alas, unlikely to see for the time being given current DC private insurance control of politicians) pay Medicare and other federal programs directly into the state health insurance program.

Obamacare rules on equal coverage delayed (Reuters) - The Obama administration is delaying enforcement of a provision of the new healthcare law that prohibits employers from providing better health benefits to top executives than to other employees, the New York Times reported on Saturday. Tax officials said they would not enforce the provision this year because they had yet to issue regulations for employers to follow, according to the Times. Internal Revenue Service spokesman Bruce Friedland said employers would not have to comply until the agency issued regulations or other guidance, the newspaper reported. The IRS was not immediately available to confirm the Times story. The rollout of the Affordable Care Act, known as Obamacare, has been marked by a number of delays in implementing certain parts of the law. In November, the administration announced a one-year delay in online insurance enrollment for small businesses. Technical problems with the enrollment website plagued its launch on October 1, but they have largely been fixed and more than 2 million people have signed up for private insurance. The White House hopes to have 7 million people sign up by March 31, the deadline for coverage under Obamacare.

Under Construction:’s Payment System - An Obama administration official told Congress Thursday that the “back-end” of is still being built and he didn’t forecast a completion date. An automated system to send payments to insurance companies isn’t finished. The payment system will transfer directly to insurance companies the federal subsidies some consumers get to help pay for their premiums. Mr. Cohen testified Thursday before the House that a temporary payment system is in place that lets insurance companies calculate what they are owed.  He said the first set of payments will be made to insurance companies next week. Mr. Cohen said he didn’t have an estimate for when the work would be complete.  In November another administration official said that about 30% of the federal health insurance marketplace was still being developed. When was launched Oct. 1, it had just the functions consumers needed to create an account, choose and insurance plan and figure out whether they were eligible for a subsidy. It planned to add the back-office functions later.  But the website’s inability to smoothly carry out basic functions forced the administration to bring in new technical experts to fix it. “I had no indication prior to Oct. 1 that we were going to have the major, major problems with the website that we ended up having,” Mr. Cohen said.

Document: ObamaCare contractor faces mid-March deadline or disaster - If the ObamaCare contractor brought on last week to fix the back-end of the portal doesn’t finish the build-out by mid-March the healthcare law will be jeopardized, according to a procurement document posted on a federal website. It says insurers could be bankrupt and the entire healthcare industry threatened if the build out is not completed. The procurement document signed by healthcare officials in late December says that the government determined in mid-December that CGI Federal, the contractor originally tasked with connecting the online healthcare portal to insurers, is not up to the task. The Centers for Medicaid and Medicare Services (CMS) announced last week it was firing CGI Federal, and bringing on Accenture to finish the website. The document says officials realized in December that the need to bring on Accenture is so urgent that there is no time to go through the “full and open competition process” before awarding them with a $91 million contract. “There is limited time to build this functionality and failure to deliver…by mid-March 2014 will result in financial harm to the government,”

"Entire Healthcare Reform Program" Jeopardized Unless Accenture Fixes By Mid-March - How does the Federal government explain this scramble to hand over the "sole-sourced" IT contract (to a company made possible thanks to Enron) so late in the process? Simple: the usual mutually assured destruction tactic used so "effectively" in all other recent rushed decisions. As the Hill reports, unless Accenture finishes (and fixes) the back-end of the portal by mid-March, the healthcare law will be jeopardized, according to a procurement document posted on a federal website. The punchline: "It says insurers could be bankrupt and the entire healthcare industry threatened if the build out is not completed." In other words, a newly retained consulting company has less than three months to fix all the errors of coding by a different company, and make sure is working properly... all 500 million lines of's code?

What to do about the coming Obamacare bailout (or is it subsidy?) of insurers -- “Bailout” and “subsidy” are often treated as equally nasty seven-letter words by free-marketeers. But Ramesh Ponnuru and Avik Roy certainly have a preference when describing the possibility that Washington will offset Obamacare losses for insurers. Under the Affordable Care Act’s “risk corridor” provisions, US taxpayers pitch in if a insurer’s “allowable costs” are too high. And this seems likely given the lopsided nature of the exchange risk pools. No one knows the costs, but the law puts no ceiling on them. In his Bloomberg piece, “Stop Obamacare’s Outrageous Bailouts,” Ponnuru argues that these companies made a strategic business blunder “by supporting Obamacare and participating in it.” And they should suffer the consequences without Washington smoothing the rough edges. Ponnuru: “Conservatives, who almost all believe that Obamacare is a very bad law that can’t be made to work tolerably through mere tinkering, have every reason to fight a bailout.” Over at Forbes, Roy counters with “Obamacare’s Risk Corridors Won’t Be A ‘Bailout’ Of Insurers.” While conceding that it “is reasonable to think that on balance, the program will be a net ‘subsidy’ to insurers,” the program is only skedded to run through 2017. More importantly, Roy explains, critics of this risk-adjustment mechanism are being short sighted: … any conservative reform plan for universal coverage will have to use similar methods of risk adjustment. The point here is simple – if you want insurers to participate more broadly in the individual market, you’ll need to offer a carrot to offset the unavoidable uncertainties. And railing against risk corridors now will make them a hard sell further down the road. Risk adjustment mechanisms get you the buy-in of insurers, but they also helps keep premiums at manageable levels while insurers develop enough experience to properly price plans on their own.

Security Expert Hacks Obamacare Website In 4 Minutes; Accesses 70,000 Records - The hits just keep on coming for ObamaCare. It was less than two weeks ago that we highlighted the potential premium rate death spiral that Obamacare faces due to the fact that only old and sick people are signing up for the program. Now it seems there are further security related concerns plaguing the site, as cyber-security expert David Kennedy recently claimed that “gaining access to 70,000 personal records of Obamacare enrollees via took about 4 minutes.” Simply put, he added, " was '100 percent insecure'."

Oh, dear. Another loopy challenge to yet another ACA provision, this one concerning the Independent Payment Advisory Board. -- Beverly Mann - A legal-news blog I read mentions an article published today on the National Review Online aspirationally titled “A Strike at the Heart of Obamacare” and subtitled “A case against IPAB is heard by the Ninth Circuit — and eventually by the Supreme Court?”  I don’t normally read the National Review and am not familiar with the article’s author, Quin Hillyer.  But the article discusses in frenzied fashion a case that will be argued on appeal next week at the Ninth Circuit Court of Appeals, the federal appellate court based in San Francisco, that hears appeals in federal cases from west-coast and several mountain states. I did not know what the IPAB is, so after reading the full name of the article on that legal-issues blog, I clicked the link to the article in order to find out, and learned that the IPAB is “that monstrosity called the Independent Payment Advisory Board (IPAB), a 15-member body invested with virtually unreviewable, plenipotentiary powers.” Glad I did. The case to be heard on appeal next week, Coons v. Lew, was filed by the Goldwater Institute and several medical practitioners, and challenges the constitutionality of the section of the ACA that creates and establishes the powers of the IPAB, the ACA provision that Hillyer says is “the law’s most obnoxious violations of Madisonian principle and essential constitutional structure.”  Which, best as I can tell from what he says about the provision, absolves the law from any obnoxious violations of Madisonian principle and essential constitutional structure.  I’ll take his word for it.

Sugar Linked To $1 Trillion In U.S. Healthcare Spending - It’s not new, but last month’s Credit Suisse report on sugar is both detailed and provocative. The sobering assessment is worth a second look – especially during this week’s binge festival of candy – Halloween. While the focus of the report is largely financial, there’s something for everyone – including healthcare professionals, researchers, politicians and really all of us as consumers. There are many highlights, but this one is a good summary of the sheer size and scope of excess sugar consumption on the U.S. healthcare system: “So 30% – 40% of healthcare expenditures in the USA go to help address issues that are closely tied to the excess consumption of sugar.” Credit Suisse Report – Sugar: Consumption At A Crossroads (PDF here) At this level, the math clearly lacks scientific precision, but it does emphasize the huge burden associated with a single and truly ubiquitous substance – sugar. Assuming a U.S. National Healthcare Expenditure of $3 trillion per year – and further assuming we simply take 33% (the lower end of the Credit Suisse range), the calculation is easy. Basically, the U.S. healthcare system spends about $1 trillion per year (and possibly more) fighting the effects of excess sugar consumption.

Food Stamps Obesity and Dependency -- Hilary W. Hoynes et al made a genuinely important contribution to the debate on the effects of social welfare programs in this NBER working paper/revised manuscript “Long Run Impacts of Childhood Access to the Safety Net” They took advantage of a natural experiment to estimate the long run effects of access to Food Stamps (SNAP) in utero and in early infancy. SNAP was introduced at different times in different US counties. From 1964 when counties could provide food stamps until 1973 participation increased pretty much linearly so in 1968 food stamps were provided in roughly half of US counties. Here is the abstract of the paper: A growing economics literature establishes a causal link between in utero shocks and health and human capital in adulthood. Most studies rely on extreme negative shocks such as famine and pandemics. We are the first to examine the impact of a positive and policy-driven change in economic resources available in utero and during childhood. In particular, we focus on the introduction of a key element of the U.S. safety net, the Food Stamp Program, which was rolled out across counties in the U.S. between 1961 and 1975. We use the Panel Study of Income Dynamics to assemble unique data linking family background and county of residence in early childhood to adult health and economic outcomes. The identification comes from variation across counties and over birth cohorts in exposure to the food stamp program. Our findings indicate that the food stamp program has effects decades after initial exposure. Specifically, access to food stamps in childhood leads to a significant reduction in the incidence of “metabolic syndrome” (obesity, high blood pressure, and diabetes) and, for women, an increase in economic self-sufficiency. Overall, our results suggest substantial internal and external benefits of the safety net that have not previously been quantified.

Doctors Are The Third Leading Cause of Death in the US, Killing 225,000 People Every Year: This article in the Journal of the American Medical Association (JAMA) is the best article I have ever seen written in the published literature documenting the tragedy of the traditional medical paradigm. This information is a followup of the Institute of Medicine report which hit the papers in December of last year, but the data was hard to reference as it was not in peer-reviewed journal. Now it is published in JAMA which is the most widely circulated medical periodical in the world. The author is Dr. Barbara Starfield of the Johns Hopkins School of Hygiene and Public Health and she desribes how the US health care system may contribute to poor health. ALL THESE ARE DEATHS PER YEAR:

  • 12,000 -- unnecessary surgery
  • 7,000 -- medication errors in hospitals
  • 20,000 -- other errors in hospitals
  • 80,000 -- infections in hospitals
  • 106,000 -- non-error, negative effects of drugs

Forget about forgetting: The elderly know more and use it better - What happens to our cognitive abilities as we age? If your think our brains go into a steady decline, research reported this week in the Journal Topics in Cognitive Science may make you think again. The work, headed by Dr. Michael Ramscar of Tübingen University, takes a critical look at the measures usually thought to show that our cognitive abilities decline across adulthood. Instead of finding evidence of decline, the team discovered that most standard cognitive measures, which date back to the early twentieth century, are flawed. "The human brain works slower in old age," says Ramscar, "but only because we have stored more information over time." Technology now allows researchers to make quantitative estimates of the number of words an adult can be expected to learn across a lifetime, enabling the Tübingen team to separate the challenge that increasing knowledge poses to memory from the actual performance of memory itself. "Imagine someone who knows two people's birthdays and can recall them almost perfectly. Would you really want to say that person has a better memory than a person who knows the birthdays of 2000 people, but can 'only' match the right person to the right birthday nine times out of ten?" asks Ramscar.

Health Canada library changes leave scientists scrambling - Health Canada scientists are so concerned about losing access to their research library that they're finding workarounds, with one squirrelling away journals and books in his basement for colleagues to consult, says a report obtained by CBC News. The draft report from a consultant hired by the department warned it not to close its library, but the report was rejected as flawed and the advice went unheeded.  Before the main library closed, the inter-library loan functions were outsourced to a private company called Infotrieve, the consultant wrote in a report ordered by the department. The library's physical collection was moved to the National Science Library on the Ottawa campus of the National Research Council last year. "Staff requests have dropped 90 per cent over in-house service levels prior to the outsource. This statistic has been heralded as a cost savings by senior HC [Health Canada] management," the report said. "However, HC scientists have repeatedly said during the interview process that the decrease is because the information has become inaccessible — either it cannot arrive in due time, or it is unaffordable due to the fee structure in place."

California Gov. Brown Declares Drought Emergency Amid Broken Heat Records And Low Reservoirs - On Friday, California Governor Jerry Brown declared a drought emergency in the Golden State, asking residents to cut back water use by 20 percent. “We’re facing perhaps the worst drought that California has ever seen since records began being kept about a hundred years ago,” Brown said. “Hopefully it will rain eventually but in the meantime we have to do our part… make it easier to transfer water from one part of the state to the other so that farmers, particularly those with permanent crops can keep them alive.” This declaration makes it easier for the state to ask the federal government for aid, and does several things to facilitate the flexible management and transportation of water resources within the state. The state must now hire more seasonal firefighters, and stop new, nonessential landscaping on public property. Lawmakers of both parties welcomed the declaration.  Water restrictions could become mandatory this summer if a rain-blocking, 13-month-strong high-pressure ridge off the California coast does not move in the next few months. Many reservoirs are running at or below half of normal. This includes the state’s largest reservoir, Lake Shasta. On Thursday, outside of San Francisco, Marin County officials began drawing from one of two backup reservoirs. January and February are supposed to be the wettest months of the year.

California declares drought emergency - California Governor Jerry Brown declared a drought emergency on Friday, a move that will allow the parched state to seek federal aid as it grapples with what could turn out to be the driest year in recorded state history for many areas. The dry year California experienced in 2013 has left fresh water reservoirs with a fraction of their normal reserves and slowed the normally full American River so dramatically that brush and dry riverbed are showing through in areas normally teeming with fish. "We can't make it rain, but we can be much better prepared for the terrible consequences that California's drought now threatens, including dramatically less water for our farms and communities and increased fires in both urban and rural areas," Brown said in a statement. "I've declared this emergency and I'm calling all Californians to conserve water in every way possible," he said, in a move that will allow him to call for conservation measures and provide flexibility in deciding state water priorities. Speaking at a news conference in San Francisco, he said the drought threatens to leave farms and communities with dramatically less water and increases the risk of fires in both urban and rural areas.

California's historic drought – in pictures - As he put the state under an official emergency declaration last week, California governor Jerry Brown warned his state is 'facing perhaps the worst drought California has ever seen since records began being kept 100 years ago'. Wildfire dangers are increased, and some cities are close to running out of water

U.S. Cattle Herd Is At A 61 Year Low And Organic Food Shortages Are Being Reported All Over America - If the extreme drought in the western half of the country keeps going, the food supply problems that we are experiencing right now are only going to be the tip of the iceberg.  The size of the U.S. cattle herd has dropped to a 61 year low, and organic food shortages are being reported all over the nation.  Surprisingly cold weather and increasing demand for organic food have both been a factor, but the biggest threat to the U.S. food supply is the extraordinary drought which has had a relentless grip on the western half of the country. According to the U.S. Drought Monitor, drought conditions currently stretch from California all the way to the heart of Texas.  In fact, the worst drought in the history of the state of California is happening right nowAnd considering the fact that the rest of the nation is extremely dependent on produce grown in California and cattle raised in the western half of the U.S., this should be of great concern to all of us.

Climate Proofing of Farms Seen Too Slow as Industry Faces Havoc - Climate change will play havoc with farming, and policy makers and researchers aren’t fully aware of the significance on food supply, according to the World Bank.  Earth will warm by 2 degrees Celsius (3.6 degrees Fahrenheit) “in your lifetime,” Rachel Kyte, the World Bank’s vice-president for climate change, said at a meeting of agriculture ministers in Berlin over the weekend. That will make farming untenable in some areas, she said.  Extreme weather from China’s coldest winter in at least half a century in 2010 to a July hailstorm in Reutlingen, Germany, already started to affect food prices. In the past three years, orange juice, corn, wheat, soybean meal and sugar were five of the top eight most volatile commodities, according to data compiled by Bloomberg. Natural gas was first.  “Significant damage and destruction is already happening,” Kyte said. “It isn’t a benign and slightly warmer world. It will be a volatile warming of the planet, with unpredictable impact.”  Adapting agriculture to withstand a world with a changed climate and depleting resources isn’t happening fast enough, according to Achim Steiner, the director general of the UN’s Environment Programme.

Australia’s hottest year was no freak event: humans caused it:  We previously analysed the role human-caused climate change played in recent extremes across Australia. For various record-breaking 2013 Australian temperatures, we investigated the contributing factors to temperature extremes using a suite of state-of-the-art global climate models. The models simulated well the natural variability of Australian temperatures. Using this approach, we calculated the probability of hot Australian temperatures in model experiments. These incorporated human (changes in greenhouse gases, aerosols and ozone) and natural (solar radiation changes and volcanic) factors. We compared these probabilities to those calculated for a parallel set of experiments that include only natural factors. In this way, natural and human climate influences can be separated. In our previous studies, we then applied an approach (known as Fraction of Attributable Risk) widely used in health and population studies to quantify the contribution of a risk factor to the occurrence of a disease. Health studies, for example, can quantify how much smoking increases the risk of lung cancer. In our earlier study of our record hot Australian summer of 2012-13, we found that it was very likely (with 90% confidence) that human influences increased the odds of extreme summers such as 2012-13 by at least five times. In August 2013, Australia broke the record for the hottest 12-month period. The odds of this occurring increased again from the hottest summer. We found that human influence increased the odds of setting this new record by at least 100 times.

NOAA: 2013 global temperature ties as fourth warmest on record since 1880 -- The globally-averaged temperature for 2013 tied as the fourth warmest year since record keeping began in 1880, according to NOAA scientists. It also marked the 37th consecutive year with a global temperature above the 20th century average. The last below-average annual temperature was 1976. Including 2013, all 13 years of the 21st century (2001-2013) rank among the 15 warmest in the 134-year period of record. The three warmest years on record are 2010, 2005, and 1998. Most areas of the world experienced above-average annual temperatures. Over land, parts of central Asia, western Ethiopia, eastern Tanzania, and much of southern and western Australia were record warm, as were sections of the Arctic Ocean, a large swath of the southwestern Pacific Ocean, parts of the central Pacific, and an area of the central Indian Ocean. Only part of the central United States was cooler than average over land. Small regions scattered across the eastern Pacific Ocean and a region of the Southern Ocean south of South America were cooler than average. No region of the globe was record cold during 2013.

GO FIGURE: Alaska is warmer than Lower 48: The weather seems more than a bit upside down. The average temperature for the Lower 48 states midmorning Wednesday was a chilly 22 degrees. The average temperature for the entire state of Alaska at the same time was 24 degrees, according to calculations by Weather Bell Analytics meteorologist Ryan Maue. Parts of Alaska were 30 degrees warmer than normal, southeastern Alaska hit 57 earlier in the week and the forecast for the rest of week was more unseasonable warmth, said National Weather Service climate science manager Rick Thoman in Fairbanks. He said it's possible that the state record January high of 62 could be broken later this week. Atlanta dropped to 16, Washington, D.C., to 9 and Central Park in New York fell to 7 on Wednesday. The jet stream — the river of air that dictates much of America's weather — is meandering again, said Jeff Masters, meteorology director at Weather Underground. So warm air is flowing from near Hawaii north to Alaska and from Canada south to the Lower 48. "It's kind of something we've seen a lot of lately," Masters said. "You get major kinks in the jet stream. You get warm air where you don't usually see it in the north and cold air where you don't see it very often in the south." So far this month, weather stations in the Lower 48 have broken or tied more than 2,600 records for cold, while Alaskan weather stations have broken or tied more than 20 daily temperature records for warmth. Alaska's relative warmth has shut down ski slopes and caused road problems.

Believe It: Global Warming Can Produce More Intense Snows - We all remember "Snowmageddon" in February of 2010. Even as Washington, D.C., saw 32 inches of snowfall for the month of February—more than it has seen in any February since 1899—conservatives decided to use the weather to mock global warming. Oklahoma Senator James Inhofe and his family even built an igloo on Capitol Hill and called it "Al Gore's New Home." Har har.Yet at the same time, scientific voices were pointing out something seemingly counterintuitive, but in fact fairly simple to understand: Even as it raises temperatures on average, global warming may also lead to more intense individual snow events. It's a lesson to keep in mind as the northeast braces for winter storm Janus—which is expected to deliver as much as a foot of snow in some regions—and we can expect conservatives to once again mock climate change. To understand the relationship between climate change and intense snowfall, you first need to understand that global warming certainly doesn't do away with winter or the seasons. So it'll still be plenty cold enough for snow much of the time. Meanwhile, global warming loads the dice in favor of more intense precipitation through changes in atmospheric moisture content. "Warming things up means the atmosphere can and does hold more moisture," explains Kevin Trenberth, a climate scientist at the National Center for Atmospheric Research in Boulder, Colo. "So in winter, when there is still plenty of cold air there's a risk of bigger snows. With east coast storms, where the moisture comes from the ocean which is now warmer, this also applies."

Is our Sun falling silent?: "I've been a solar physicist for 30 years, and I've never seen anything quite like this," says Richard Harrison, head of space physics at the Rutherford Appleton Laboratory in Oxfordshire. He shows me recent footage captured by spacecraft that have their sights trained on our star. The Sun is revealed in exquisite detail, but its face is strangely featureless. "If you want to go back to see when the Sun was this inactive... you've got to go back about 100 years," he says. This solar lull is baffling scientists, because right now the Sun should be awash with activity. It has reached its solar maximum, the point in its 11-year cycle where activity is at a peak. This giant ball of plasma should be peppered with sunspots, exploding with flares and spewing out huge clouds of charged particles into space in the form of coronal mass ejections. The Sun should be at the peak of its activity - bursting with flares and coronal mass ejections But apart from the odd event, like some recent solar flares, it has been very quiet. And this damp squib of a maximum follows a solar minimum - the period when the Sun's activity troughs - that was longer and lower than scientists expected. "It's completely taken me and many other solar scientists by surprise," says Dr Lucie Green, from University College London's Mullard Space Science Laboratory. The drop off in activity is happening surprisingly quickly, and scientists are now watching closely to see if it will continue to plummet. "It could mean a very, very inactive star, it would feel like the Sun is asleep... a very dormant ball of gas at the centre of our Solar System,"

One-quarter of shark and ray species are in trouble - The first global analysis of the threats to sharks and their kin suggests that about one-quarter of all the world’s species are at risk.  Nicholas Dulvy, a marine ecologist at Simon Fraser University in Burnaby, Canada, and his colleagues analysed 1,041 species of cartilaginous fishes, or chondrichthyans — the group that encompasses sharks, rays and ‘ghost sharks’, also known as chimaeras. Of these, 25 species are critically endangered, 43 are endangered and 113 are vulnerable according to the ‘red list’ criteria of the International Union for the Conservation of Nature (IUCN); an additional 132 species are classed as ‘near threatened’, while there was insufficient data to make a decision in 487 cases, Dulvey and his collaborators report in the journal eLife.“In greatest peril are the largest species of rays and sharks, especially those living in shallow water that is accessible to fisheries,” said Dulvy in a statement. Dulvy also co-chairs the IUCN’s Shark Specialist Group. Extinction risk among these animals is “substantially higher” than for most other vertebrates, write Dulvy and his colleagues, with deliberate and accidental targeting by fishing the main culprit.

Is "the environment" now obsolete? - For millennia the presence of humans on planet Earth hardly made a dent in its ecosystems. Humans were at the mercy of their environment as much as any other creature. But with the advent of agriculture, humans began to influence the planet in major ways. Some scientists posit that the clearing of large swaths of land for planting over the past 10,000 years released enough carbon into the atmosphere to delay the next ice age. Of course, in the past two centuries the pace of those carbon releases has grown exponentially with the industrial revolution through the burning of fossil fuels. These emissions now threaten to flip the planet into a warm state far beyond anything experienced by humans in their relatively brief time on Earth. The question we must now face is whether humans still live in "the environment" or whether they now are "the environment" by virtue of their actions. "The global economy is now so large that society can no longer safely pretend it operates within a limitless ecosystem." And, pretending is all we've been doing since the dawn of humans. We see the imprint of living organisms shaping the biosphere everywhere. The carbon cycle--the very basis of life as we know it--involves plants and microorganisms both on land and in the sea. Even our human bodies are part of it as we breathe in oxygen and expel carbon dioxide.  And there is the nitrogen cycle, a cycle critical to the survival of all living things. None of us can live without the nitrogen needed to build the proteins and the nucleic acids (DNA and RNA) we depend on for our functioning. Nitrogen in the atmosphere, however, cannot be utilized by plants. But, it turns out that soil bacteria convert this nitrogen into a form that is usable for plants and therefore usable for the animals that eat those plants. (Lightning also performs this transformation.) So the principle is that organisms are both acted upon by their environment and act on their environment. They both adapt to their circumstances and attempt to alter those circumstances to enable them to survive and thrive. And, that's how we get evolution on Earth. Organisms gradually change over time or go extinct if they cannot adapt quickly enough to changing circumstances or alter those circumstances enough to allow their survival.

China’s Off-The-Charts Air Pollution Is Making Its Way To The U.S -- China’s pollution has shut down schools and shortened lifespans in the country — but according to a new study, its not just Chinese residents who should be worried about their smog.On the West Coast of the U.S., pollution blown in from China can account for 12 to 24 percent of sulfate concentrations on any given day, a study published Monday in the Proceedings of the National Academy of Sciences found. That pollution caused Los Angeles to experience an extra day of smog levels that were above the federal health standards for ozone in 2006. But though the pollution comes from China, the U.S. still bears part of the responsibility. That’s because about a fifth of China’s air pollution comes from the manufacture of goods for export to other countries, including the U.S., China’s second-largest trading partner. The study found that manufacturing for the export sector contributed to 36 percent of China’s sulfur dioxide emissions, 27 percent of its nitrogen oxides, 22 percent of its carbon monoxide and 17 percent of its black carbon — a pollutant linked to cancer, emphysema and asthma.

U.S. carbon emissions rose 2% in 2013 after years of decline - Carbon dioxide emissions from the nation’s energy sector rose about 2% in 2013 after declining for several years, federal energy officials reported Monday. The reversal came because power plants last year burned more coal to generate electricity, after years in which natural gas accounted for an increasing share of the nation’s electricity, according to the U.S. Energy Information Administration, the analytical branch of the Department of Energy. Though the 2013 figures are not final, once all the data are in, analysts expect a roughly 2% increase in carbon emissions over 2012 because of a small rise in coal consumption, the agency said in a report posted online on Monday. Power plants are the biggest source of greenhouse gases that are building up in the atmosphere and causing climate change. Carbon dioxide emissions from domestic power generation peaked in 2007 and have declined four out of the six years since, the agency said. The downward trend is tied in part to sagging energy demand in the wake of the recent recession, but is also being propelled by improvements in energy efficiency, shifts in energy prices and the displacement of coal power by natural gas and renewables. The energy administration, in a report last year, warned of the 2013 increase in carbon emissions. That report found coal use on the upswing because of a drop in coal prices and a rise in natural gas prices. Power plants that burn natural gas produce about half as much heat-trapping carbon dioxide as coal-fired plants.

Industry Awakens to Threat of Climate Change - Coca-Cola has always been more focused on its economic bottom line than on global warming, but when the company lost a lucrative operating license in India because of a serious water shortage there in 2004, things began to change.Today, after a decade of increasing damage to Coke’s balance sheet as global droughts dried up the water needed to produce its soda, the company has embraced the idea of climate change as an economically disruptive force.“Increased droughts, more unpredictable variability, 100-year floods every two years,” said Jeffrey Seabright, Coke’s vice president for environment and water resources, listing the problems that he said were also disrupting the company’s supply of sugar cane and sugar beets, as well as citrus for its fruit juices. “When we look at our most essential ingredients, we see those events as threats.”Related Coverage Europe, Facing Economic Pain, May Ease Climate RulesJAN. 22, 2014 Coke reflects a growing view among American business leaders and mainstream economists who see global warming as a force that contributes to lower gross domestic products, higher food and commodity costs, broken supply chains and increased financial risk. Their position is at striking odds with the longstanding argument, advanced by the coal industry and others, that policies to curb carbon emissions are more economically harmful than the impact of climate change.

Massive Antarctic Glacier Uncontrollably Retreating, Study Suggests -- The glacier that contributes more to sea level rise than any other glacier on Antarctica has hit a tipping point of uncontrollable retreat, and could largely collapse within the span of decades, a new study suggests. Pine Island Glacier accounts for about 20 percent of the total ice flow on the West Antarctic Ice Sheet — an amalgam of glaciers that covers roughly 800,000 square miles (2 million square kilometers) and makes up about 10 percent of the total ice on Antarctica. Many researchers think that, given the size of Pine Island Glacier, its demise could have a domino effect on surrounding glaciers and ultimately — over the course of many years — lead to the collapse of the entire ice sheet, which would raise average global sea level by between 10 and 16 feet (3 and 5 meters). The glacier is not only massive, but also one of the least stable of the West Antarctic Ice Sheet ice flows. In the past 40 years, its melting rate has accelerated due to relatively warm ocean currents that have seeped underneath its base and lubricated its flow seaward. As it slips into the ocean, the glacier's ice shelf — the part that floats on water and extends beyond the glacier's base — disintegrates through a natural process called calving, exposing yet more of the glacier to warm waters.

Toxic Mercury Pollution May Rise with Arctic Meltdown - Cracks in sea ice are funneling additional mercury to the Arctic surface, raising concerns about the toxic element seeping into the food chain of the delicate ecosystem, according to a new study. The research, published yesterday in Nature, finds that channels of open water in Arctic ice, known as leads, are stirring up air so that mercury is pumped from higher in the atmosphere to air close to the surface. Warming temperatures are increasing the amount of seasonal sea ice that melts every summer, which in turn helps create the leads, "As more and more of that seasonal sea ice is around as the Arctic changes, then there is the potential that this mechanism can occur over a larger and larger area," said Moore. Environment Canada, the Desert Research Institute and NASA jointly funded the research. He emphasized that the new study does not definitively make conclusions that additional mercury is getting deposited on snow or ice or entering the food chain. Much more research is needed to outline what is ultimately happening in the region, the scientists said.

Arctic Warmth Unprecedented in 44,000 Years, Reveals Samples of Ancient Moss: When the temperature rises on Baffin Island, in the Canadian high Arctic, ancient Polytrichum mosses, trapped beneath the ice for thousands of years, are exposed. Using radiocarbon dating, new research in Geophysical Research Letters has calculated the age of relic moss samples that have been exposed by modern Arctic warming. Since the moss samples would have been destroyed by erosion had they been previously exposed, the authors suggest that the temperatures in the Arctic now must be warmer than during any sustained period since the mosses were originally buried. The authors collected 365 samples of recently exposed biological material from 110 different locations, cutting a 1000 kilometer long transect across Baffin Island, with samples representing a range of altitudes. From their samples the authors obtained 145 viable measurements through radiocarbon dating. They found that most of their samples date from the past 5000 years, when a period of strong cooling overtook the Arctic. However, the authors also found even older samples which were buried from 24,000 to 44,000 years ago. The records suggest that in general, the eastern Canadian Arctic is warmer now than in any century in the past 5000 years, and in some places, modern temperatures are unprecedented in at least the past 44,000 years. The observations, the authors suggest, show that modern Arctic warming far exceeds the bounds of historical natural variability.

High-stakes climate poker - My friends and I get together once a month to play Texas HoldEm poker - great conversation, a few drinks, snacks and laughs. But I don't like high-stakes poker. Gambling with high-value is not a wise choice, particularly if the pain of the loss translates beyond oneself. The fossil fuel industry is bluffing society in a multi-trillion dollar high-stakes poker game. Current reserves of fossil fuels are five times more than we can afford to burn if we want to keep global warming to less than 2°C; and we have to keep global warming below 2°C. The net worth of fossil fuel corporations, the value of their chip stack, is based on fully exploiting these reserves. Financial leaders are expressing great concerns about betting on fossil fuels. Forbes magazine says, "Groups as diverse as Shell, Mercer, HSBC, prominent insurance companies and re-issuers, Standard & Poor's and the International Energy Agency (IEA) have been giving clear warning signs about continuing to invest in fossil fuels." But fossil fuel-based corporations are still bluffing. They want expanded fossil fuel use; making massive investments in oil exploration, hydraulic fracturing for oil and natural gas, and the Canadian tar sands. The latter two are particularly bad bets given their large greenhouse gas footprints, water, soil and air pollution problems; and tar sands need 40 years to recover the costs of multi-billion dollar plants.

It’s all a Question of Balance -  The Earth is warming, accumulating heat. As has been discussed recently this extra heat is building up at a rate of around 250 trillion Watts (Joules per second). Recently Skeptical Science’s Bob Lacatena published his Heat Widget highlighting that this heat build-up is the equivalent of adding the energy of 4 Hiroshima bombs per second to the Earth (or 1.8 Hurricane Sandy’s per second or 4 magnitude 6 earthquakes per second). You can see it ticking away in the sidebar on the right.  Most of the extra heat that is being added to the Earth's climate systems is going into the oceans - over 90% of it on average. In contrast the atmosphere, which is the part of the climate system that we directly experience, is only accumulating 2-3% of this extra heat. To assess what is happening to Earth's climate we need to look at all parts of the system. So let’s explore this heating a little, where it comes from and what the significance of it is. There are some surprises. (For the calculations behind this post take a look at the notes at the end)

Hydropower Struggle: Dams Threaten Europe's Last Wild Rivers - Europe's last remaining wild rivers flow through the Balkans, providing stunning scenery and habitat to myriad plants and animals. But hundreds of dam projects threaten to do irreparable harm to the region's unique biospheres -- to provide much needed electricity to the people who live there.Most of the Continent's waterways, like the Elbe, the Rhine and the Danube, have long since been hemmed in. But examples of Europe's largely vanished wilderness remain. Such as the Vjosë, which flows unfettered through its valley in southwestern Albania, splitting off into tributaries that once again flow together in a constant game of give-and-take with solid ground. "With every flood, the Vjosë shifts its course," "Such a thing in Europe can only be found here, in the Balkans." The Vjosë: 270 kilometers (168 miles) of river landscape, from the Pindus Mountains of Greece all the way down to the Adriatic Sea. Not a single dam disturbs the water's course. No concrete bed directs its flow. The Vjosë is not alone. Several crystal clear, untamed rivers rush through many countries in the region. "The blue heart of Europe beats in the Balkans," says Eichelmann, who, together with environmental organization EuroNatur, works to preserve these natural water systems. Experts say that approximately 80 percent of rivers in the Balkans remain in good or very good ecological condition -- a paradise for fish, freshwater molluscs, snails and insects. But Europe's last wild rivers are now at risk. More than 570 large dams, complete with hydroelectric power plants (each with a capacity of more than one megawatt), are planned for the region (see graphic). With money from international financial institutions -- among them Deutsche Bank, the World Bank and the European Bank for Reconstruction and Development (EBRD) -- dam construction is well underway.

Will Europe Scrap its Renewables Target? - The European Union is considering scrapping the use of binding renewable energy targets as part of its global climate change policy mix that will extend action from 2020 to 2030.  The Financial Times reported that this move – presumably due to concerns over high European energy costs during the ongoing economic turndown – will “please big utility companies but infuriate environmental groups.”  The International New York Times framed the story in similar ways. The press coverage has missed the very important reality that this potential decision by the European Commission will be good news both for the economy and for the environment.  The fundamental reason is that in the presence of the European Union’s Emissions Trading Scheme (EU ETS) – its pioneering, regional cap-and-trade system that covers electricity generators and large-scale manufacturing – the “complementary” renewables mandate conflicts with, rather than complements other policies.  Without the renewables mandate, the cap being planned for the EU ETS will be achieved at lower cost and will foster greater incentives for climate-friendly technological change.

Europe, Facing Economic Pain, May Ease Climate Rules -— For years, Europe has tried to set the global standard for climate-change regulation, creating tough rules on emissions, mandating more use of renewable energy sources and arguably sacrificing some economic growth in the name of saving the planet.But now even Europe seems to be hitting its environmentalist limits.High energy costs, declining industrial competitiveness and a recognition that the economy is unlikely to rebound strongly any time soon are leading policy makers to begin easing up in their drive for more aggressive climate regulation.On Wednesday, the European Union proposed an end to binding national targets for renewable energy production after 2020. Instead, it substituted an overall European goal that is likely to be much harder to enforce.It also decided against proposing laws on environmental damage and safety during the extraction of shale gas by a controversial drilling process known as fracking. It opted instead for a series of minimum principles it said it would monitor.Europe pressed ahead on other fronts, aiming for a cut of 40 percent in Europe’s carbon emissions by 2030, double the current target of 20 percent by 2020. Officials said the new proposals were not evidence of diminished commitment to environmental discipline but reflected the complicated reality of bringing the 28 countries of the European Union together behind a policy.

Trade and the Environment -  Editorial Board, New York Times -- One of the most laudable American goals in negotiating the trade agreement known as the Trans-Pacific Partnership with 11 other countries was to strengthen environmental protections around the world. But a draft chapter of the agreement made public last week by WikiLeaks shows that many of the countries involved in the talks are trying to undermine that goal. American negotiators have sought to make the environmental provisions in the agreement enforceable through a dispute settlement process, an idea that most of the other countries appear to oppose. That list includes countries like Canada, Australia and New Zealand that might have been expected to play a more constructive role.  The disagreement is a reminder that this trade agreement is more complex — and in many ways more ambitious — than most. Unlike other agreements that are concerned mainly with lowering import tariffs and quotas, these talks are also trying to set common legal and regulatory standards in areas like the environment, intellectual property, labor rights and state-owned companies.If done right, agreement on these issues should ease fears that freer trade would lead to greater environmental damage and sweatshop conditions by giving businesses an incentive to ship production and jobs to countries with lower standards. But winning agreement is difficult when a large and diverse group of countries is involved. The other partners are Japan, Malaysia, Vietnam, Brunei, Singapore, Mexico, Chile and Peru.

Alaska & Washington Salmon Tested For Radiation - A Seattle fish company had some of their fish privately tested in late 2013. With all the US government agencies refusing to test anything and growing consumer anxiety due to the lack of information, Loki Fish company paid for private testing. This is some of the only North American seafood testing done. While the current findings of these limited samples is somewhat good news, more testing is needed to have a better understanding of the situation across a large geographic area of ocean. These are a “snapshot” of a much larger picture. More testing should be done by more parties and done over time to understand the potential progression of radionuclides in the environment. Artificial isotopes like cesium 137, 134 or strontium 90 should not be ingested, even in small amounts ideally. Even small amounts have the potential to add to health damage that can cause cancer and other health problems over time.What Loki Fish found in their testing was out of seven samples, five were below the level of detection and two had low levels of cesium. One sample had cesium 134, a marker that confirms at least that contamination came from Fukushima Daiichi due to the short half life. The two with detectable levels were:
Alaskan Keta at 1.4Bq/kg for Cesium 137
Alaskan Pink at 1.2Bq/kg for Cesium 134

Two Former Japanese Prime Ministers Try to Shake Up Japanese Politics to Kill Nuclear Energy  -- Japan may have enacted a fascist state secrecy law which outlaws independent reporting on Fukushima … but there might be some hope yet.Specifically, two former Prime Ministers are speaking out on Fukushima and Japan’s energy future. EneNews gave an excellent roundup last week: Kyodo, Jan. 14, 2014: Former Prime Minister Morihiro Hosokawa said Tuesday he will run in the upcoming Tokyo gubernatorial election with an antinuclear agenda after securing the backing of popular former Prime Minister Junichiro Koizumi [...] The move [...] could have game-changing impact on the race for the helm of the Japanese capital [...] “I have made my decision to run in the Tokyo governor election,” Hosokawa told reporters after meeting Koizumi. “I have a sense of crisis myself that the country’s various problems, especially nuclear power plants, are matters of survival for the country.” [...] Koizumi indicated the main focus of the election will be whether to pursue nuclear power or not, calling the election “a war between the group that says Japan can grow with zero nuclear power plants” and the group that says it cannot. [...]

Big Coal Undercuts Landmark U.S. Overseas Investment Policy - Environmentalists and some lawmakers are decrying a surprise move by conservative members of Congress to roll back landmark “clean energy” policies guiding U.S. investments in overseas power projects. Two federal agencies have new guidance in place largely barring government investment in power-generation projects that fail to adequately cut carbon emissions. The rules, by the Export-Import Bank and the Overseas Private Investment Corporation (OPIC), which facilitate U.S. private investments into foreign projects, would essentially discontinue U.S. funding for overseas coal-fired power generation.  Yet a surprise addendum to a massive U.S. government spending bill would disallow the Export-Import Bank from implementing its new rule, which was unveiled in December. The provision, made public Monday evening, also guts a court-ordered greenhouse gas cap put in place in 2009 to force OPIC to set limits on the carbon emissions of its investments.“In our view, this is a direct attack on one of the key achievements of the president’s Climate Action Plan,” Justin Guay, a Washington representative for the Sierra Club, a conservation and advocacy group, told IPS.“This was the coal industry striking back symbolically at what it saw as a very serious set of political headwinds, as the overseas markets represent their lone opportunity to remain a relevant industry.”

The Housing Market Impacts of Shale Gas Development - 52 pp PDF - Abstract Using data from New York and Pennsylvania and an array of empirical techniques to control for confounding factors, we recover hedonic estimates of property value impacts from shale gas development that vary with geographic scale and water source. Results indicate large negative impacts on nearby groundwater-dependent homes, while piped water-dependent homes are positively impacted by proximity (although by a smaller amount), suggesting an impact of lease payments. At a broader geographic scale, we find evidence that new wellbores can increase property values, but these effects diminish over time. Undrilled permits, conversely, may cause property values to decrease.

Natural gas: Not all it’s fracked up to be? - Natural gas is being touted as a “game changer” and a “bridge to a low carbon economy.” It is an abundant, made-in-America energy source.  It is about half as carbon intensive as coal when burned.The figure below suggests that a natural gas fueled transition to a less carbon intensive economy has already begun. Domestic, energy-related carbon dioxide emissions have declined 12 percent since the peak in 2007. An important driver of this trend is the substitution of natural gas for coal in electricity generation. Of course, this picture gets much more complicated when you look upstream and broaden your perspective to consider not just carbon dioxide -the most prevalent anthropogenic greenhouse gas- but also “fugitive” methane emissions. Methane, the primary constituent of natural gas, can escape during extraction, processing, and distribution. These emissions have the potential to eliminate the carbon advantage of gas over coal and oil. There is heated debate over the extent to which this potential is being realized. A new study suggests that more methane is leaking out of the natural gas supply system than we previously thought.

Radioactive Waste Dumped by Oil Companies Is Seeping out of the Ground in North Dakota - After oil companies and state executives in North Dakota hid the news from the public that nearly 300 oil spills occured between 2011 and 2013, radioactive toxic sludge is brimming back up to the surface, bubbling forth from the ground and mixing with fresh water across the state. In late 2013, the shale oil industry in North Dakota received national attention when a train carrying explosive "Bakken" oil derailed and exploded near the city of Cassleton on December 30. Eighteen rail cars attached to the train also spilled 400,000 gallons of crude oil--one of the biggest spills ever recorded in the United States.  The state is now the number two oil producer in the country behind Texas, and it is producing about a million barrels of oil a day. Environmentalists say the speed of the boom has not only encouraged sloppy practices that lead to spills, but have also resulted in a proliferation of illegal chemical dumping in landfills and fracking wells. Radiation testing has confirmed that the sludge secreting up from fracking wells is a mix of corrosive chemicals used in hydaulic fracking and a substance dubbed TENORM (Technologically enhanced normally occuring radioactive material). 

Shaken By ‘Frackquakes,’ Texans Demand Halt On Wastewater Injection Wells - There have been more than 30 small earthquakes in and around the north Texas town of Azle in the last three months. The residents there think it’s because of fracking.  “They haven’t had earthquakes around here for 100 years, and to have this happen now — 32 within just the last couple of months — is crazy,” Darla Hobbs, an Azle resident, told NBC news. “And it’s not our fault for living here. It’s the gas well industry for drilling, and fracking, and the injection wells.” Their claims are not unfounded. Researchers at Southern Methodist University have recently linked a string of 2009 and 2010 earthquakes in Texas to the injection of fracking wastewater into the ground. The U.S. Geological Survey says that the wastewater injection process — which lets fracking companies dispose of wastewater by storing it wells underground — can help cause of earthquakes by reducing underground friction along seismic faults. In early 2013, fracking wastewater disposal was also linked to the 109 earthquakes that shook Youngstown, Ohio in 2011 — an area that hadn’t ever experienced an earthquake before an injection well came online in December 2010.  So a busload of about 50 Azle residents traveled three hours to a Texas Railroad Commission meeting in Austin on Tuesday, urging commissioners to halt the use of the wells. The three-member commission regulates the oil and gas industry in Texas. Though members of the commission are supposed to be elected, Railroad Commission Chairman Barry Smitherman was appointed to the commission in 2011 by Governor Rick Perry — a longstanding proponent of fracking who has claimed that Americans are being “hoodwinked” into thinking it can cause groundwater pollution.  So following the meeting led by Smitherman, the residents predictably did not get what they came for. After hearing their reports of what they call “frackquakes,” strong enough to rattle houses and move furniture, Smitherman refused to acknowledge to local reporters that the quakes were linked to any part of the fracking process.

How America’s Fracking Boom Is Helping Bolster Treasuries Demand - America’s shale boom is providing an unintended benefit to U.S. government bonds.  With the U.S. economy relying less on oil and gas imports than at any time in two decades, energy expenses for Americans have fallen and cut into inflation more than any other living cost in the past year, according to data compiled by the Labor Department. Economists say consumer prices will rise less than 2 percent for a second straight year in 2014, the first time that’s happened during an expansion in a half-century.  Slowing inflation, which increases the purchasing power of fixed-rate payments, would give support to Treasuries after the Federal Reserve’s plan to curtail its unprecedented bond buying ignited their first annual losses since 2009. Ten-year notes yielded 1.76 percent last month after deducting inflation, close to the highest since 2011. Spending fewer dollars on foreign oil also means that any gain in crude prices no longer leads to a weaker greenback, upending a decade-long relationship that may strengthen the value of U.S. assets.  Rising U.S. oil production means “lower inflation than it would otherwise be, lower interest rates than would otherwise be,” . “We don’t have to provide the incentives to recycle the dollar back from a foreign holder, be it friend or enemy” with higher bond yields.

Oilprice Intelligence Report: Race to Finish Line for Next Shale Boom -- While China, Russia and Argentina have topped the list of potential venues for the next shale boom, a new analytical report says all eyes should be on Australia as the most attractive venue for shale and tight oil and gas.While huge reserves elsewhere have massive potential, Australia and the infrastructure and experience to make drilling in shale plays more attractive and easier to recoup costs, according to analysis released earlier this week by Lux Research. The report notes that while Australia does not have the “seemingly bottomless development capital of China, or the powerful government incentives of Argentina”, it does have more characteristics “conducive to successful commercial production, which other front-runners like Argentina, China, the UK and Poland lack.” “This includes existing infrastructure, low population density in key shale plays, and citizens who welcome resource extraction through its long mining legacy,” the report notes.Argentina has massive shale reserves, but its political instability makes it less attractive. China is on a learning curve here; hence its foray into North American shale to pick up some pointers on how to develop at home. For Russia, though, there is no real learning curve, and though the investment atmosphere isn’t as attractive as Australia, political will here to make this happen couldn’t be higher.

Fracking won't avert energy crisis, Davos is told - - A British businessman will tell world leaders meeting in Switzerland today that it is dangerous to argue that fracking for shale oil and gas can help avert a global energy crisis. Jeremy Leggett, a former Greenpeace staff member who founded a successful solar energy company, has been invited to the annual World Economic Forum meeting in Davos from 22 to 25 January. The theme of the meeting is "The Reshaping of the World: Consequences for Society, Politics and Business." Leggett told the Climate News Network: "The WEF likes to deal in big ideas, and last year one of its ideas was to argue that the world can frack its way to prosperity. There are large numbers of would-be frackers in Davos."I'm a squeaky wheel within the system. I'm in Davos to put the counter-arguments to Big Energy, and I'll tell them: 'You're in grave danger of repeating the mistakes of the financial services industry in pushing a hyped narrative." This refers to the way in which banking leaders had "their particular comforting narrative catastrophically wrong, until the proof came along in the shape of the financial crash."

What Freedom Industries’ Bankruptcy Really Means For Those Harmed By The Chemical Spill - After contaminating the state’s drinking water with 7,500 gallons of a mysterious chemical called Crude MCHM (and possibly another chemical), the company responsible — Freedom Industries Inc. — has now declared bankruptcy, citing the combined pressure of demands for payments from creditors, and a pile of lawsuits over the spill. The bankruptcy has many wondering what exactly this will mean for the more than 25 lawsuits that have been filed against the company, and for the people who have been harmed by Freedom Industries’ spill. Those who claim injury from the spill are not just those who have drank, cooked or bathed in the water — not just those who have become nauseous, developed rashes, or gone to the emergency room. Business owners, too, have lost profits after being forced to close for days on end. Workers at those businesses have lost wages. And West Virginia’s capital city of Charleston has said it has lost more than $120,000 in tax revenue over the course of the week following the disaster. In its bankruptcy filing, Freedom Industries listed a maximum of $10 million in liabilities, or potential debts. But that $10 million is dubious — the company’s debts already include $6 million in combined debts to both the IRS and other creditors, with no lawsuits mentioned. Now that they’ve filed for bankruptcy, however, lawyers may begin dropping their lawsuits against Freedom, according to Lutter. “The motivation for most lawyers to pursue somebody in court disintegrates once they’ve filed for bankruptcy,”

Many remain wary of W.Va. water as smell lingers-- The smell lingers - the slightly sweet, slightly bitter odor of a chemical that contaminated the water supply of West Virginia's capital more than a week ago. It creeps out of faucets and shower heads. It wafts from the Elk River, the site of the spill. Sometimes it hangs in the cold nighttime air. For several days, a majority of Charleston-area residents have been told their water is safe to drink, that the concentration of a chemical used to wash coal is so low that it won't be harmful. Restaurants have reopened - using tap water to wash dishes and produce, clean out their soda fountains and make ice. But as long as people can still smell it, they're wary - and given the lack of knowledge about the chemical known as MCHM, some experts say their caution is justified. "I would certainly be waiting until I couldn't smell it anymore, certainly to be drinking it," said Richard Denison, a scientist with the Environmental Defense Fund who has followed the spill closely. "I don't blame people at all for raising questions and wondering whether they can trust what's being told to them." The Jan. 9 spill from a Freedom Industries facility on the banks of the Elk River, less than 2 miles upstream from Charleston's water treatment plant, led to a ban on water use that affected 300,000 people.

Experts Warn West Virginia Water May Still Be Unsafe - Nine days after a leak was discovered at a Freedom Industries chemical storage site, spilling an estimated 7,500 gallons of a hazardous and little-known chemical into the Elk River and contaminating the water supply for 300,000 West Virginians, officials said that a study used to determine whether the water is safe doesn’t include several chemical components that leached into the water.  “A key corporate study used by federal health officials to set a screening level for ‘crude MCHM’ in the West Virginia American Water system actually tested a pure form of the material’s main ingredient and might not account for potential toxicity of other components,” the Charleston Gazette reported on Friday. . “There are six chemicals plus water that are ingredients of crude MCHM,” said Hansen. The primary ingredient is 4-methylcyclohexanemethanol, which comprises 68 to 89 percent of crude MCHM. Of the multiple ingredients, the only one that a material safety data sheet (MSDS) has any information about in terms of exposure limits is methanol. “If crude MCHM is truly what leaked, it’s possible that we don’t even know which of this ‘cocktail’ is most harmful. We could have set a threshold based on the wrong one. We may be testing the wrong one,” said Hansen. State officials have maintained that concentrations of the chemical below 1 part per million are considered safe, based on consultations with the Centers for Disease Control and Prevention (CDC). The CDC derived that threshold largely from a 1990 study conducted by Eastman Chemical Company, which sold the chemical to Freedom Industries. The Eastman study, however, only tested the substance in its pure form, 4-MCHM. . And the agency’s questionable safety standard came under fire earlier this week after the CDC recommended that pregnant women not drink the water until there was no traceable amount of crude MCHM, despite the fact that tens of thousands of residents had already been told their water was safe.

West Virginians Still Need Water After Coal Chemical Spill - On January 9th, Freedom Industries, a company that stores chemicals for the coal industry, spilled 7,500 gallons of Crude Methylcyclohexanemethanol (MCHM), a little known, little understood compound into the Elk river. The spill occurred one mile upriver from the water intake that supplies tap water for all of West Virginia‘s capital city of Charleston. The thick oily chemical was pumped through the water system and into homes and businesses throughout the area, causing vomiting, skin problems, and diarrhea. Now, nearly two weeks since the disaster was discovered, the water has been deemed “safe to drink,” though water from the tap still releases a sickly sweet chemical odor, especially when heated. Pregnant women and children are still advised to drink bottled water, but very few people in the affected area are interested in drinking from the tap, with child or not. The tremendous need for potable water has led to the creation of the West Virginia Clean Water Hub, a community led effort to provide the people of Charleston and the outlying areas with bottled water, a need that government agencies have largely ignored. So little is known about 4-MCHM that regulators didn’t even know it’s boiling point. Now scientists are scrambling to find out how the chemical reacts with the chlorine in the municipal water system, and whether the chemical has leached into water heaters and water pipes in people’s homes. Authorities recommend that all pipes that have come in contact with the pollutant be flushed, including water heaters and outdoor faucets.

West Virginia Governor On Safety Of Water Supply: ‘It’s Your Decision… I’m Not A Scientist’ - Amid growing concerns over whether or not the water is actually safe for 300,000 West Virginians following a massive chemical spill into the water supply, the state’s governor said it was up to each of them to decide whether they use it. “It’s your decision,” Gov. Tomblin told reporters at a press conference on Monday. “If you do not feel comfortable drinking or cooking with this water then use bottled water.” “I’m not going to say absolutely, 100 percent that everything is safe,” Tomblin continued. “But what I can say is if you do not feel comfortable, don’t use it.” On Saturday, the last of the ‘do not use’ bans were lifted, meaning all of West Virginia American Water’s customers were given the green light to use and drink their water. While state officials have maintained that a level of the coal-cleaning chemical mixture, known as crude MCHM, below 1 part per million is safe, the justification for that threshold has been called into question. . Crude MCHM is a mixture of six chemicals but only the pure form of the main ingredient, 4-MCHM, has been studied. “If crude MCHM is truly what leaked, it’s possible that we don’t even know which of this ‘cocktail’ is most harmful,”  “We could have set a threshold based on the wrong one. We may be testing the wrong one.”

Company forgot to mention that another chemical may have spilled into West Virginia’s water supply - In the days following the leak of 75,000 gallons of a coal industry chemical into West Virginia’s Elk River, much was made of how little the now-bankrupt company responsible, Freedom Industries, or any regulatory agencies knew about the properties of crude MCHM the chemical that tainted the water supply across nine counties.Even after the water had been declared safe, health officials suggested that pregnant women stick to bottled water, leading everyone else to wonder whether they were still at risk. At a press conference this past Monday, West Virginia Gov. Earl Ray Tomblin told the 300,000 people affected that they had to decide for themselves whether they wanted to trust the water supply.And Freedom Industries has just given them a new reason not to. Twelve full days after the spill was discovered, the company has revealed that a second, previously undisclosed chemical was also in the mix. The company told investigators that about 300 gallons of PPH had been added to the tank containing the MCHM, the Charleston Gazette reported Tuesday night; it’s unknown how much leaked from the tank or made it to the river:Mike Dorsey, director of homeland security and emergency response for the state Department of Environmental Protection, said he learned about the additional chemical’s presence in the tank that leaked at about 10 a.m., just before a routine daily meeting with various agencies and Freedom Industries about the situation at the site. Dorsey said Freedom Industries President Gary Southern asked to speak with him privately, told him about the chemical being in the tank, and handed him data sheets on the material, which Dorsey referred to as polyglycol ethers. “He said, ‘I’m going to have a terrible day today,’” Dorsey said. Little is known about this second chemical, either: it’s believed to be “less lethal” than crude MCHM, and is believed to irritate the eyes and skin and be harmful if swallowed.

Company that contaminated WV water supply reaches bankruptcy deal, bemoans ‘perception’ problem - First, the news, with a dash of spin: The embattled company behind West Virginia’s chemical spill has reached a bankruptcy court deal for up to $4 million in credit from a lender to help continue operations, an attorney said. The arrangement reached Tuesday will allow the company to continue paying its employees and top vendors and also provide funds to cover environmental cleanup from the spill in the Elk River, said Freedom Industries attorney Mark Freelander. And now the jaw-dropper: [Freedom Industries President Gary] Southern said money isn’t the solution to lift the stigma on his company for its suppliers and customers. He said the spill was causing “perception problems” for the firm. Well, to be completely fair to Southern, I'm sure Freedom Industries does have a perception problem. Kind of goes with the territory when your company contaminates the drinking water for 300,000 people. And whining about it is guaranteed to do just one thing: Make it worse.

Chemical Spill Muddies Picture in a State Wary of Regulations— Here in West Virginia, residents were still reeling from the chemical spill that left more than 300,000 people without usable water for days, many of them still frightened and unsure whether official assurances that they could once again drink tap water or bathe their children were true.  But in Washington on Wednesday, among friends at an event sponsored by the American Coalition for Clean Coal Electricity, West Virginia’s junior senator and former governor, Joe Manchin III, was preaching a familiar gospel of an industry under siege by overzealous regulators. “You feel like everyone’s turned against you,” he said. He assured his audience that he would continue to fight back against proposed new Environmental Protection Agency regulations on coal, quoting the state motto in Latin: “Montani semper liberi” — “Mountaineers are always free.”  The spill, which occurred when 7,500 gallons of a chemical used to clean coal leaked from an aging, outmoded storage tank into the Elk River, played out in a state that outsiders often see as a place apart. West Virginia, with its strong ties to coal and chemicals, has long had a fierce opposition to environmental regulations. It has also been the scene of five major accidents related to coal or chemicals in eight years.  But amid an energy boom that stretches from Pennsylvania to North Dakota and the belief among many conservatives that the nation suffers from too much regulation, the issues involved have enormous relevance well beyond West Virginia’s borders. They include all the questions about the incident raised by regulators and environmental critics: why the tank was so close to a water treatment plant, how often it was inspected and by whom, the hazard status accorded the chemical inside the tanks, what regulations might have prevented the spill and what would have been their costs.

Canadian doctors afraid to speak out about health impacts of toxic tar sands emissions and even refuse care in Peace River, Alberta  - Some Peace River area doctors are afraid to speak out about health impacts of oil and gas activity and in some cases have declined to treat area residents who wondered if their health problems were related to emissions, says one of two independent health experts hired by the Alberta Energy Regulator. Doctors fear negative consequences to their careers if they speak out, and in one case, one lab refused to process a test, says Dr. Margaret Sears, an Ontario expert in toxicology and health who will appear this week at a special hearing into complaints about emissions from the Baytex oilsands operation 32 kilometres south of Peace River. In a rare move, the energy regulator called a special ten-day public hearing, starting in Peace River Tuesday, to examine whether emissions from wells or from bitumen heated in storage tanks could be causing health problems, including dizziness, headaches, cognitive impairment and sleeping problems among residents who left their homes. To prepare for the hearing, AER hired eight independent expert to provide advice on various issues, including possible health impacts, the chemistry of local bitumen, impact on livestock, and to track various vapour sources on the plant sites. Baytex also provided studies for the year. The company has consistently stated is complying with all regulation.

More Oil Spilled in 2013 US Rail Incidents than Previous 37 Years Combined -- A new analysis of data from the Pipeline and Hazardous Materials Safety Administration (PHMSA) has shown that more crude oil was spilled in US rail incidents last year than during the previous 37 years, since the federal government began to collect data on rail spills. The data suggests that in 2013 more than 1.15 million gallons of crude oil was spilled from rail cars. This includes the major derailment in Aliceville, Alabama on the 8th of November when 748,800 gallons spilt as the train derailed in a swampy area and burst into flames, but not yet the derailment in Casselton, North Dakota 30th of December, for which the PHMSA have yet to receive data, although it is estimated to be in the region of 400,000 gallons. Nor does this figure include spills that occurred in Canada, where the 6th of July derailment in Lac-Megantic, Quebec spilled an estimated 1.5 million plus gallons of crude oil.  In contrast to 2013, the total crude oil spilled from 1975, when federal records began, to 2012 was 800,000 gallons. In fact in eight of those years not one drop of crude oil was spilt, and in five only one gallon or less was spilt. The increase noted last year is due to the fact delivering oil by rail has become a much more popular choice of transport as pipeline capacity has been unable to keep pace with the increases in oil production during the North American shale boom. The Association of American Railroads has estimated that 400,000 carloads of crude oil were shipped last year, and with each car holding 28,800 gallons that totals more than 11.5 billion gallons.

‘Risky’ Crude Oil Trains Should Stay Away From Cities, Federal Investigators Say - After investigating multiple fiery accidents involving crude oil trains that have derailed and crashed, The National Transportation Safety Board [NTSB] is now calling for tougher regulations on the practice — including recommendations that those trains stay far away from urban population centers.   “The NTSB is concerned that major loss of life, property damage and environmental consequences can occur when large volumes of crude oil or other flammable liquids are transported on a single train involved in an accident,” the agency said in its Thursday release. “Crude oil is problematic when released because it is flammable, and the risk is compounded because it is commonly shipped in large units.” Though the agency has not yet issued any new binding rules, it issued three recommendations to both the Federal Railroad Administration and the Pipeline and Hazardous Materials Safety Administration. The first would require expanded infrastructure to allow hazardous materials and crude oil to route around cities, rather than through them.  The second would require agencies to audit rail carriers that carry petroleum products, making sure they have adequate response capabilities to address worst-case-scenarios. Under the third recommendation, agencies would also be required to audit rail carriers to make sure they are properly classifying hazardous materials.

Halliburton Manager Gets Probation For Gulf Oil Spill And Destroying Evidence  Four years after the Deep Horizon Oil Spill, with all the big fish long free, one man was set to actually pay for his role in poisoning the gulf then destroying the evidence of it. Anthony Badalamenti was the cementing technology director for Halliburton on the Deepwater Horizon drilling rig. Badalamenti was charged by prosecutors for telling two Halliburton employees to destroy data that was to be used in a post-spill review. Presumably the data would have shown that Badalamenti had not performed quality work. So what was Badalamenti’s punishment? 100 hours of community service and a $1000 fine. Not only will Badalamenti get probation but the judge lavished praise on him, vouching for his character. The judge said that the sentence of probation is “very reasonable in this case.” “I still feel that you’re a very honorable man,” he told Badalamenti. “I have no doubt that you’ve learned from this mistake.”  All he did was help wreck an ecosystem then destroy evidence to cover it up. Then again, it’s not like any other Halliburton executives had to face the music. The politically connected company simply paid a $200,000 fine to the Justice Department and went on it’s way.

Some key takeaways from BP’s latest outlook to 2035: BP has just released the latest version of its Energy Outlook to 2035. Although it contains the usual themes we have come to know and trust, such as energy demand growth being driven by developing nations, renewables grappling for a greater share of power generation, etc – there were as usual some great observations and takeaways. Here they are…

  • 1) The US is expected to become a net exporter of natural gas by 2018, with net exports reaching 10.6 Bcf/d by 2035. Australia is set to overtake Qatar as the largest LNG exporting country by 2019, followed by the US overtaking Qatar in 2030.
  • 2) The non-OECD’s vehicle population more than triples from 0.4 to 1.5 billion by 2035, although fuel demand only rises by 82% due to efficiency improvements (…demand falls 15% in the OECD for the same reason). Car ownership grows quickest in India (8.4% p.a. to 130 vehicles per 1000), with China following (6.9% p.a. to 360 per 1000).By 2035, sales of conventional vehicles will only make up a quarter of total sales, while hybrids dominate (full hybrids 23%, mild hybrids 44%). Plug-in vehicles, including full battery electric vehicles (BEVs), are forecast to make up 7% of sales in 2035. Meanwhile, natural gas will account for 8% of US transport sector fuels, almost matching biofuels.

Can we sever the link between energy and economic growth? -- Over at FT Alphaville, Izabella Kaminska highlights a fascinating chart from BP's latest Energy Outlook 2035 report (pdf): Let's focus on the chart on the left for now: "Energy is gradually decoupling from economic growth." Here's what this graph is showing: Ever since the 1970s, the world appears to be using less and less energy to produce a given unit of economic activity. Much of that has likely been achieved through technology — more fuel-efficient trucks, more efficient power plants, more energy-efficient manufacturing techniques. That allows us to do more with less. One question is whether this trend will continue in the future. The analysts at BP are predicting the decoupling will accelerate in the next two decades: "Energy consumption grows less rapidly than the global economy," they note, "with GDP growth averaging 3.5% p.a. 2012-35. As a result energy intensity, the amount of energy required per unit of GDP, declines by 36% (1.9% p.a.) between 2012 and 2035." There's some debate among economists, however, as to whether it's actually possible to significantly reduce the amount of energy used per unit of economic activity, as Steve Sorrell and David Ockwell of the University of Sussex explain in this overview essay (pdf). "Orthodox economists," they note, suggest that it's definitely possible to decouple the two: Energy appears to make only a small contribution to productivity. But as Sorrell and Ockwell note, many "ecological economists" dispute this. To them, the chart above is a bit of an illusion. The global economy hasn't become less dependent on energy. We've simply shifted to higher quality forms of energy over time.

Oil demand to rise as global economy recovers, energy watchdog says --Global oil demand will increase more quickly this year as economic growth accelerates, outstripping supply even as shale oil production in the United States reaches record highs, the west's energy watchdog said on Tuesday. The International Energy Agency (IEA) said world oil consumption would increase by 1.3m barrels per day (bpd) this year, 50,000 bpd higher than previously forecast. "Global oil demand growth appears to have gradually gained momentum in the last 18 months, driven by economic recovery in the developed world," the IEA said in its monthly report. "Most OECD economies have by now largely exited the restraints of recession, with strong gains in some countries in the energy-intensive manufacturing and petrochemical sectors." US oil production is increasing rapidly and is forecast to rise by 780,000 bpd this year, but the Organization of the Petroleum Exporting Countries (Opec) will also have to pump more to meet increasing demand. The IEA, which advises most of the largest energy-consuming countries on energy policy, raised its forecast of demand for Opec oil this year by 200,000 bpd to 29.4m bpd.

What growing global oil thirst means for economy -- A new International Energy Agency report out Tuesday says global oil demand will rise by 1.3 million barrels per day this year, higher than its previous forecast. That number tells a story about the global economy and will also have impact in America. . “Higher demand for energy in general and for crude oil in particular is an indication the global economy is back on track.” More oil demand means more shipping and more production and hopefully more jobs. On the down side, more oil use and production also means higher environmental impact. America is having an oil boom, but energy companies can only profit so much. Current law allows export of only a tiny fraction of crude. As the domestic boom continues, expect a stronger push to change that. “The producers who are producing that are saying, well, gosh, let us export,” explains Sarah Emerson, president of Energy Security Analysis, Inc. “So 2014, in that sense, is a bit of a tipping point.”

Currencies of natural resource exporters under pressure - Some of the largest natural resource exporters with floating exchange rates have seen their currencies come under significant pressure over the past year. And it wasn't just the US dollar strength that was responsible for commodity producers' currency adjustments - the dollar (DXY index) is up only about 2% over the same period. Some of these countries clearly have other issues that prompted the currency selloff, but as a whole, it is the decline in demand for natural resources (the end of the "commodities super cycle") that precipitated this weakness. Of course much of this adjustment in demand is driven by slower economic expansion in China. Bloomberg: - China’s factory output and investment growth probably weakened in December, adding to signs the world’s second-largest economy is losing momentum as analysts forecast 2014 expansion at the lowest in 24 years.  Industrial-production gains slowed to a five-month low of 9.8 percent and gross domestic product grew 7.6 percent from a year earlier in the October-December period, based on the median estimates of analysts before data due Jan. 20. Expansion will moderate to 7.4 percent this year as investment slows and overcapacity is squeezed, according to a survey last month.

Iran, Russia Ruffle US Feathers With Oil-Swap Deal -- This morning's apparent U-turn in US-Iran relations - when the US demanded the UN rescind Iran's invite to the Syrian peace conference having somewhat instigated their invitation in the first place - is a little confusing for some. However, as OilPrice's Joao Peixe points out, reports are emerging that Iran and Russia are in talks about a potential $1.5 billion oil-for-goods swap that is sure to upset the powers that be in Washington.

U.N. Rescinds Invitation to Iran for Syria Peace Talks - The United Nations, under intense pressure from the U.S. and other countries, withdrew an invitation to Iran to participate in a Syria peace conference this week, a diplomatic bungle that muddied international efforts to end the civil war. The bruising international face-off over Iran's participation came just two days before world powers gather in Switzerland for a long-awaited conference aimed at finding a way out of the nearly three-year conflict that has claimed more than 100,000 lives. Beside calling attention to international friction over Syria, the political discord exposed challenges the U.S. is facing as its pursues a rapprochement with Tehran's hard-line Islamic leadership. Iran is the main military and financial supporter of Syrian President Bashar al-Assad's regime. Even as the U.S. pushed back on Iran's participation in the Syria talks, Iran took concrete steps Monday, verified by U.N. nuclear inspectors, to rein in its nuclear program in line with an interim agreement with the U.S. and other global powers reached in November.

West's 30-year vendetta with Iran is finally buried in Davos – The Iranian nuclear deal is on. Hassan Rouhani's charm offensive in Davos has been a tour de force, the moment of rehabilitation for the Islamic Republic. His words were emollient. "The world hasn't seen a speech like that from an Iranian leader since the Revolution," tweeted Ian Bremmer from the Eurasia Group. Anybody betting on oil futures in the belief that Iran's nuclear deal with great powers is a negotiating ploy – to gain time – should be careful. There is a very high likelihood that the sanctions against Iran will be lifted in stages, leading to an extra 1.2 barrels a day on the global market just as Libya, Iraq, and the US all crank up output. “One of the theoretical and practical pillars of my government is constructive engagement with the world. Without international engagement, objectives such as growth, creativity and quality are unattainable," said Rouhani. "I strongly and clearly state that nuclear weapons have no place in our security strategy,” he said. Behind closed doors in Davos, the Iranian leaders made a sweet sales pitch to oil executives. BP said it is eyeing the "potential". Chevron and ConocoPhillips have been approached, assured by Iran's leader that there are "no limitations for U.S. companies." Total's Christophe de Margerie hopes to restart work at the South Pars field.

Rich nations outsourcing pollution to China, says UN report -- The world's richest countries are increasingly outsourcing their carbon pollution to China and other rising economies, according to a draft UN report. The problem stems from electronic devices such as smartphones, cheap clothes and other goods being made in China and other rising economies but consumed in the US and Europe. The draft of the latest report from the Intergovernmental Panel on Climate Change says emissions of carbon dioxide and other greenhouse gases warming the planet grew twice as fast in the first decade of the 21st century than during the previous three decades. Much of that rise was due to the burning of coal. And much of that coal went to power factories in rising economies that produce goods for US and European consumers. Since 2000, annual carbon dioxide emissions for rising economies more than doubled to nearly 14 billion tonnes a year, according to the draft report. But about 2 billion tonnes a year of that was produced making goods for export. "A growing share of CO2 emissions from fossil fuel combustion in developing countries is released in the production of goods and services exported, notably from upper-middle income countries to high-income countries," the report says.

Where Does China Import Its Energy From (And What This Means For The Petroyuan) - Before the "shale revolution" many considered that the biggest gating factor for US economic growth is access to cheap, abundant energy abroad - indeed, US foreign policy around the world and especially in oil rich regions was largely dictated by the simple prerogative of acquiring and securing oil exposure from "friendly" regimes. And while domestic US crude production has soared in recent years, making US reliance on foreign sources a secondary issue (yes, the US is still a major net importer of crude) at least as long as the existing stores of oil at domestic shale sites are not depleted, marginal energy watchers have shifted their attention elsewhere, namely China.Recall that as we reported in October, a historic event took place late in the year, when China (with 6.3MMbpd) officially surpassed the US (at 6.24MMbpd) as the world's largest importer of oil. China's reliance on imports is likely only to grow: "In 2011, China imported approximately 58 percent of its oil; conservative estimates project that China will import almost two-thirds of its oil by 2015 and three-quarters by 2030."Which means that the question that most were focused on before, i.e., where the US gets its oil, and what is the US energy strategy, refocuses to China. The graphic below summarizes all the known Chinese energy import transit routes.

China’s Economy Slows on Investment Spending - China’s economy grew 7.7% on-year in the fourth quarter, down from 7.8% in the third quarter. Annual growth in 2013 came in at 7.7%, unchanged from 2012. Here’s a breakdown of some of what the data tell us:  China’s government has pledged to pivot the economy away from state-led investment and toward domestic consumption and a more vibrant service sector. Investment, which accounts for about half of China’s economic output, was a major drag on growth in the fourth quarter, a result of monetary authorities making credit more expensive. Fixed-asset investment expanded 19.6% on-year in 2013, down from 19.9% from the first 11 months of the year, indicating slowing capital spending, according to ANZ Bank.  Investment in infrastructure and real estate, sectors that powered the economy in 2013, have eased since the middle of last year as credit costs rose. “Higher interest rates are starting to bite,” ANZ notes that an anti-graft drive by the Communist Party’s leadership may also have dragged on growth. By the end of November, the Finance Ministry held a record 4.1 trillion yuan ($677.30 billion) in deposits with the central bank. ANZ said this points to a slower pace of fiscal spending as bureaucrats look to crack down on corruption and wasteful spending. The economy was growing more slowly in December than at the beginning of the final quarter of the year. Louis Kuijs, an economist at RBS in Hong Kong, points out that industrial production grew 9.7% on-year in December versus 10.3% in October. And export growth slowed in December after a strong showing in November. That could point to a slow start to 2014, unless other drivers like exports or local demand pick up above expectations.

China's GDP questioned; monetary conditions tighten once again  - Markets were not impressed with China's 7.7% annualized 4th quarter GDP, which came in better than expected.Most economists still expect further deceleration in China's economic expansion in 2014. Reuters: - China's economy narrowly missed expectations for growth to hit 14-year lows in 2013, though some economists say a cooldown will be inevitable this year as officials and investors hunker down for difficult reforms.  The chance that the world's second-largest economy may decelerate in coming months was underscored on Monday by data that showed growth in investment and factory output flagged in the final months of last year.  Waning momentum capped China's annual economic growth at a six-month low of 7.7 percent in the October-December quarter, a slowdown some analysts say may deepen this year as China endures the short-term pain of revamping its growth model for the long-term good. Moreover, some analysts are questioning the validity of China's growth data.ISI China Research: - ... from what we have seen, we think it would be a mistake for investors to markedly revise their views on China's economy on the basis of these new data.  So a few comments on the process, and what analysts have to work with from the NBS in monitoring China's economy.  Beijing does not report its GDP data in a way that is consistent with the UN standards for the National Income and Product Accounts - the way data is reported in all of the world's modern economies. A little more data will be provided in the next days, but not sufficient detail for anyone to form a well-reasoned judgment of whether the economy and its important components are doing better, about the same or worse.

China’s Working Population Fell Again in 2013 - China’s working-age population continued to shrink in 2013, suggesting that labor shortages would further drive up wages in the years to come. The nation’s working-age population—those between the ages of 16 and 59—was 920 million in 2013, down 2.4 million from a year earlier and accounting for 67.6% of the total population, the National Bureau of Statistics said Monday. The country’s workforce dropped in 2012 for the first time in decades, raising concerns about a shrinking labor force and economic growth prospects. Last year, the statistics bureau said the population between the ages of 15 and 59 was 937 million in 2012, down 3.45 million from a year earlier, accounting for 69.2% of the total population. The bureau didn’t explain why it began using a different starting age of 16 to measure the working-age population in 2013.The share of the elderly, or those who are more than 65 years old, was 9.7% in 2013, up from 9.4% in 2012, official data showed.Labor shortages are still common in several regions throughout the country, and many employers reported an increase of between 10% and 15% in labor costs last year, Ma Jiantang, chief of the National Statistics Bureau, said at a news conference Monday.

China Manufacturing Activity Contracts, HSBC Gauge Shows - —China's economy started the year on a weaker note, as an initial gauge of manufacturing activity in January slipped to its lowest level in six months. The preliminary HSBC Purchasing Managers' Index for January showed a contraction compared with December's reading, suggesting that a loss of economic momentum in the final quarter of last year could carry through into the new year. The initial manufacturing PMI slipped to 49.6 from December's 50.5, according to the measure released Thursday by lender HSBC Holdings and financial data provider Markit. A reading below 50 designates contraction compared with the previous month, while a reading above that shows growth. "The data show China's economic growth momentum has slowed significantly," "There may be some seasonal factors but the trend is clear." Economic  rowth slipped slightly in the fourth quarter from a year earlier, coming in at 7.7% against 7.8% in the third quarter.

China Manufacturing Index Signals Surprise Contraction -  China’s manufacturing may contract for the first time in six months, adding to stresses in the world’s second-biggest economy, according to a gauge released by HSBC Holdings Plc and Markit Economics. The preliminary reading of 49.6 for January in a Purchasing Managers’ Index released today was below a final figure of 50.5 in December and all 19 estimates of analysts in a Bloomberg News survey. A number above 50 indicates expansion. Asian stocks and the Australian dollar extended losses as the data pointed to weakening domestic and global demand. While Bank of America Corp. cautioned that figures may have been distorted by workers’ holidays ahead of the Lunar New Year, a manufacturing slowdown would add to strains that include elevated interest rates and the risk of defaults on high-yield investment products.

China PMI Signals First Contraction In 6 Months; Drops Most Since May -- With every component of HSBC's China Manufacturing PMI either dropping or showong slower growth, it is hardly a surprise that the much-watched survey of economic strength dipped into contractionary territory. At 49.6 this is the lowest since July 2013 and dropped month-over-month by the most since May 2013. HSBC argues this is "domestic demand cooling" but new export orders tumbled at an accelerating pace as did employment. Of course, the silver lining is that because the prices components did not show acceleration then the PBOC has room to 'stimulate' to avoid repeating growth deceleration but that appears - despite today's further CNY 120 billion reverse repo - to not be the plan for the PBOC for now (given the 20-plus percent YoY gains in house prices). S&P futures fell 6 points on the news, AUDJPY is turmoiling, and Treasuries rallied 1bps.

Slowing China Economy Raises Questions About Policy - A sharp downturn in manufacturing activity in China is a warning sign to the government not to move too quickly to tighten monetary conditions, says HSBC's chief China economist, Qu Hongbin. HSBC and Markit released data Thursday that show conditions in China’s manufacturing sector deteriorated for the first time in six months in January. The HSBC flash China purchasing managers index stood at 49.6, below the 50 mark that separates expansion from contraction. For Mr. Qu, the data show the dangers of China’s moves to tighten credit due to its concerns over off-balance-sheet borrowing by local governments. A slowdown in investment in sectors that local administrations favor, like property and infrastructure, is feeding through to lower orders in the manufacturing sector. Meanwhile, export orders haven’t yet picked up due to tepid consumer demand in the U.S and Europe. Mr. Qu said China needs to get a handle on its huge shadow banking sector to avoid messy defaults. But he pointed out that policy makers need to do this without tightening credit for companies in the manufacturing sector, given that inflation remains low across the economy. The risk of a general rise in interest rates is a slowdown similar to the one China experienced a year ago. That gave authorities the chills and led to a mini fiscal stimulus that helped restore growth later in 2013, The HSBC data, an early indication of the final survey that comes out at the end of January, was worse than many commentators expected. A sub-index that charts new orders turned negative, suggesting weaker local demand. The pace of decline in new export orders accelerated. Employment conditions also worsened. The data come after deteriorating economic conditions in the final quarter of 2013, when growth was 7.7% from a year earlier. Industrial production was up 9.7% on year in December, against 10.3% growth in October. Investment growth numbers also fell.

China’s princelings storing riches in Caribbean haven - More than a dozen family members of China's top political and military leaders are making use of offshore companies based in the British Virgin Islands, leaked financial documents reveal. The brother-in-law of China's current president, Xi Jinping, as well as the son and son-in-law of former premier Wen Jiabao are among the political relations making use of the offshore havens, financial records show. Graphic shows senior Chinese figures and their relatives with offshore connections. There is no indication the leadership figures had any involvement in or awareness of the family members' financial activities. The documents also disclose the central role of major Western banks and accountancy firms, including PricewaterhouseCoopers, Credit Suisse and UBS in the offshore world, acting as middlemen in the establishing of companies.

Reports highlighting use of offshore accounts damaging for China’s elite - This was supposed to be the week the ruling Chinese Communist Party crushed a nascent popular movement that’s pressed for fuller disclosure of the hidden wealth of party leaders.The crackdown wasn’t very well-timed. As Chinese authorities were launching the closed trial of a prominent leader of the New Citizens Movement, a group of international journalists released investigative reports detailing how many Chinese leaders and their families have hidden some of their vast wealth in the British Virgin Islands and other places offshore.The reports, compiled by the International Consortium of Investigative Journalists, reveal a greater scope of offshoring by China’s political elite than had previously been reported. Having spent six months poring over a cache of 2.5 million leaked files, the consortium found that some 22,000 Chinese had taken advantage of offshore tax havens. Among those were Deng Jiagui, brother-in-law of Xi Jinping, China’s president and Communist Party chairman; Wen Yunsong, the son of former Premier Wen Jiabao; and Li Xiaolin, the daughter of former Premier Li Peng. “Chinese officials aren’t required to disclose their assets publicly and until now citizens have remained largely in the dark about the parallel economy that can allow the powerful and well-connected to avoid taxes and keep their dealings secret,” said the report, a project of the Center for Public Integrity. “By some estimates, between $1 trillion and $4 trillion in untraced assets have left the country since 2000.”

China Credit Worries Rise as Large Shadow Banking Default Looms -  Yves Smith -  Over the last few years, the foreigners who’ve been concerned about China’s growth model, with its extreme dependence on investment and exports and increased use of borrowings, have looked like worrywarts. But it’s getting harder and harder for the officialdom to keep navigating the hairpin turns. The government does have the luxury of a known drop-dead date to decide what to do about an imminent large default in its shadow banking system. We’ve written off and on about how important it has become to providing new loans in the last year, rising from 20% to 30% of the total (and experts think it’s really more like 50%), and lending has in recent years been the driver of growth, but each yuan of new borrowing now produces 1/4 the amount of GDP increase that it did five years ago. One bit of good fortune for the officialdom is that its first major test of the shadow banking system is known in advance, giving them time to decide what to do and take any needed precautionary measures. China Credit Trust Co. has told investors it may not make a January 31 principal repayment on a 3 billion remnimbi trust product. Various financial sites, including this blog, have taken note of the concerns about default in China’s so-called wealth management products, an important source of funding for provincial real estate projects. WMP are somewhat cleaned-up cousins of structured investment vehicles. Both funded short and lent long in supposed off balance sheet vehicles. But the maturity mismatch is less with wealth management products, and the authorities apparently believe that investors will not be able to pressure banks into supporting these investments.

Another Look at China’s GDP Numbers - Did Thursday’s surprise fall in one of China’s purchasing manager indexes give you pause about the pace of Chinese economic growth? Some indices had already said that China’s economy was doing worse than advertised. Lombard Street Research, a London economic research firm that takes a bearish view on China, constructs its own version of the country’s GDP.  Lombard’s conclusion: China’s economy grew just 6.1% in the fourth quarter of 2013, year-over-year, down from 7.5% the previous quarter. That compares with the 7.7% fourth-quarter increase reported by China’s statistics bureau, which was down a smidgen from 7.8% in the third quarter. The main difference between Lombard’s numbers and the official numbers, said Lombard economist Diana Choyleva, is the estimation of China’s inflation. GDP is reported in real—that is, inflation adjusted — terms. If China’s inflation is higher than reported, its GDP growth will be lower. Ms. Choyleva said that China doesn’t release enough information to get a good grasp on how it constructs the inflation measure, called the GDP deflator. She said she puts together her GDP deflator based on various weights she gives to prices of such variables as consumer goods, imports, exports and investment.

China: Ripe for a sharp slowdown -- In the years since the 2008 financial crisis China has posted impressive growth in gross domestic product (GDP), in spite of a lackluster global recovery. The country managed to do this by creating an investment boom, which in turn was powered by a surge in credit. Total debt, private and public, rose from 125% of GDP in 2008 to 215% in 2012. Corporations alone have racked up debt worth 111% of GDP.A lot of that capital has been misallocated. China has built more ports, railways, smelting plants and residential complexes than it should have, given its productivity level. Because those projects will not deliver significant returns for a long time, if ever, bad debt is piling up. As a result, the balance sheets of Chinese banks are laden with dubious assets.  The official reported rate of non-performing loans (NPL) is less than 1%, which belies the actual quality of bank assets. Financial institutions use all kinds of maneuvers to inflate profits and dress up their balance sheets. In 2012 there was evidence of misclassification of dud debts as “special-mention loans,” which do not need provisioning but are expected to face difficulties. Loan officials enjoy substantial discretion in such classifications. More recently banks have introduced shady financial innovations.  The upshot is that balance sheets, especially those of mid-sized banks, are increasingly opaque.

On the overvaluation of the yuan -- There aren’t many people out there who agree with us that China has a yuan overvaluation problem, and that floating the currency will result in the opposite of the expected effect. But there are some. Diana Choyleva at Lombard Street research is one such economist. In a note on Tuesday, she sums up the problem beautifully. As she notes, the key issue is that China’s export-driven growth model, which depended on long-term currency devaluation, created excessive savings which encouraged unproductive investments at the expense of consumer spending. Accordingly, attempts to restructure the economy and make it more consumer-focused depended on an explicit currency appreciation path. And yet, overturning a decade’s worth of competitive devaluation was never going to be easy. For one, it was bound to stifle China’s export advantage and simultaneously increase Chinese purchasing power abroad much more significantly than at home.So, even though some consumer spending was encouraged, it was compartmentalised in nature, conspicuous, directed mainly at foreign-made goods or assets or at investments abroad. Hence China’s growing fad for all things luxury and western the last six or seven years or so. Hence also the distortion of many foreign prices as they responded to what was suddenly a very excessive Chinese bid

China Growth Figures Show Rapidly Narrowing Gap With U.S. Economy -  China’s economic growth figures released Monday morning may show a slowdown, but they still indicate that China is growing almost four times as fast as the United States in dollar terms, rapidly closing the gap in the size of the two countries’ economies.That is happening much faster than might be suggested by the headline figures: China said Monday that its economy grew 7.7 percent last year after adjusting for inflation, while the United States is expected to announce on Jan. 30 that its economy grew about 2 percent last year.But such comparisons of inflation-adjusted growth rates ignore two big factors: that prices are rising faster in China than in the United States, and that China’s currency is also rising against the dollar. Nominal economic output — which is not adjusted for inflation — grew 9.5 percent last year in China. Thomas Lam, the chief economist for industrialized economies at OSK-DMG, a Singapore investment bank and brokerage, estimates that nominal growth in the United States was 3.4 percent last year.Further fueling China’s growth is the renminbi’s creeping up another 3 percent against the dollar during the last year. Compile the various factors, including that the currency difference was a little smaller earlier in the year, and it works out that China’s economy grew 12.4 percent last year in dollar terms.That is nearly four times the estimated 3.4 percent rate in the United States.

Japan-China war of words goes ballistic in Davos – Anybody who thinks China's dispute with Japan is subject to rational calculation should have heard the astonishing outburst a few minutes ago by China's foreign minister, Wang Yi. "We will never allow past aggressors to overturn the verdict of history," he began. It went downhill from there. When asked what he thought about the latest warning by Japan's leader Shinzo Abe that the two countries are like England and Germany in 1914, he exploded with barely contained rage: "Why would he make such a statement? Japanese leaders like to rewrite their history, but the Chinese people cannot forget episodes of history. The invasion of Manchuria in 1930 was an infamous chapter in Japan's history. In 1937 they instigated the Marco Polo bridge incident before launching an all-out onslaught on China. "Thirty-five million Chinese soldiers and civilians were killed. Who was the instigator? Who was the troublemaker? It is all too clear." He turned visceral over Mr Abe's recent visit to the Yasukuni shrine in Tokyo: "Even to this day the shrine still advocates that past aggression was justified, that the Pacific War was in self defence. It calls war criminals heroes, even today. "How can a leader puts flowers on a shrine that violates international principles in this way? Japan's Class A criminals were likes the Nazis. Can you imagine a European leader laying a wreath at a Nazi memorial?"

IMF Calls Out South Korea on Its Currency Policy —In unusually strong language, the International Monetary Fund Wednesday questioned South Korea’s currency policy, telling Seoul that it should only intervene in exchange-rate markets to prevent volatility that might damage the economy. The fund’s scrutiny of Korea’s currency policy comes after Bank of Korea’s top official indicated early this year the central bank is ready to intervene in currency markets to curb the won’s strength. It also follows criticism from the IMF’s most powerful member, the U.S., late last year. The Treasury Department said in October that it was concerned that Korea had resumed currency intervention and needed to be more transparent about its activities. “The won should continue to be market determined, with intervention limited to smoothing disorderly market conditions,” the IMF’s executive board said in a statement on the annual review of the country’s economy. The fund says the won is “moderately undervalued,” accounting for inflation, but the currency is coming under increased appreciation pressure as the emerging market outperforms many of its peers. Korean officials say their efforts are to stabilize markets. But some U.S. economists say Korea’s keeping a lid on the value of their exchange rate to bar exports from becoming too expensive. Although countries can devalue their currency by buying foreign currency, the move puts upward pressure on other countries’ exchange rates and can fuel trade and political tensions between governments. To avoid creating friction over currency policies, the IMF said Korea should be more candid about its exchange-rate operations.

Japan plans to raid dormant bank accounts to raise new revenue - Infamously saddled with a public debt that is running at an eye-watering 214 per cent of GDP, the Japanese government is planning to raid dormant private bank accounts to boost its bottom line. The ruling Liberal Democratic Party and its main ally in government, New Komeito, are planning to submit a bill to allow the government to access bank accounts that have not been touched for 10 years or more. The funds would be used for welfare and education projects. Accounts holding some 85 billion yen (HK$6.3 billion) are classified as dormant each year, with depositors who are notified of the situation reclaiming about 35 billion yen.The new legislation would therefore free up about 50 billion yen each year. That however is dwarfed by the debt, which exceeded 1,000 trillion yen last year - that's a million billion. The bill is likely to sail through the legislative process with the backing of the opposition as a similar suggestion was put forward by the equally desperate Democratic Party of Japan when it was in power. That plan never came to fruition as the DPJ focused its efforts on attempting to hang on to government. One stumbling block was the anticipated cost of managing the system, while questions were also raised by the powerful banking lobby about the propriety of using depositors' assets.

Japan to US: You Can’t Railroad the Trans-Pacific Partnership -- The headline, in a one liner, is what this article is saying. You may have to take my word for it if you’re not a Japanese reader, but read on to find out why I hope you can. I don’t think I’m straying too far from the truth to say that the Trans-Pacific Partnership (TPP) – along with its equally ugly sister for those of us in Europe the Transatlantic Trade and Investment Partnership (T-TIP) – would be, if enacted, amongst the defining geopolitical and geo-economic developments of the century. They seek to cement the near- three-decade gains made by commerce and the losses made by nation states and their citizens. Supra-nationalistic legally binding “trade courts”, embedding of the commercial rule of law’s higher ranking over the national rule of law for the rest of us, and prevention of countermeasures to the growth of the global mega corporation are just some of the treats we’ve got in store for ourselves if these agreements are accepted. And yet, there’s scarcely a murmur from the mainstream media. At least in the US and Europe. Asia, on the other hand, is a little more interested. I would argue that Japan is ground-zero for TPP. Japan was a latecomer to the TPP party, the invitation being extended because without Japan, which is still after countless lost decades the world’s third biggest economy with a GDP almost 10 times the size of, for example, Malaysia. Without Japan, any resultant TPP would be a doughnut with a Japan-shaped hole in the middle.

The TPP: A Dangerous Proposal Whose Time Has Gone - A recent, very good post at Naked Capitalism by Clive, may think that writing to your elected representative, commenting negatively on articles you read in the mainstream media about the TPP and generally kicking up a bit of a fuss, making some noise, is a waste of effort. That is not so. The world does watch what goes on in the US. If popular sentiment is against something, the US government has a much harder job of convincing foreigners that it’s just them being awkward and reactionary and not getting the big, progressive, reform-minded, modernising picture. I agree that this is a good proposal for one way the American public could register its objections to the Trans-Pacific Partnership (TPP) with foreign leaders. But, I think that such letters ought also to point out that even if the TPP were railroaded successfully in the next few months, then it is unlikely to stick. After all, it is only a Treaty. Wouldn’t an electoral victory here by a movement dedicated to overturning corporate control of the political system, result in withdrawal from the TPP before any concrete legislation likely to conflict with it was passed by Congress?  The TPP is one of those things that would really engender paranoia here in the United States. In turn, this would become a continuing foundation for anti-government and second American Revolution buffs to use in building a much bigger movement.

US trade shocker one step closer to reality -- I have written previously about the risks posed to Australia’s sovereignty and consumer welfare from the Trans-Pacific Partnership (TPP). If the TPP goes ahead, it will establish a US-style regional regulatory framework that meets the demands of major US export industries, including pharmaceutical and digital. The draft chapter on intellectual property rights, revealed by WikiLeaks, included a “Christmas wishlist” for pharmaceutical companies, including the proposal to extend patent protection and strengthen monopolies on clinical data.   The pact poses a huge risk to Australia’s world class public health system, which faces cost blowouts via reduced access to cheaper generic drugs and reduced rights for the government to regulate medicine prices. It also risks stifling innovation in the event that patent terms are extended too far. The US is also seeking to insert an Investor-State Dispute Settlement (ISDS) clause into the agreement, which could give authority to major corporations to challenge laws made by governments in the national interest in international courts of arbitration. So effectively, US companies would be allowed to sue the Australian Government under international law. The US is also opposing a proposal that would allow the circumvention of technology that restricts products to certain regions, even though this was recommended by the Australian parliament’s Inquiry into IT Pricing, as well as opposing the parallel importation of goods made under authorisation in other countries – both of which would act to maintain higher prices (to the detriment of Australian consumers). Australia’s Trade Minister, Andrew Robb, has signaled Australia’s unbridled support for the TPP provided Australia gains significant access to agricultural markets, even labeling the agreement as a “platform for 21st-century trade rules”.

Malaysia blocks US trade shocker. Will we? - The AFR has reported today how the Malaysian Government is pushing back on the Trans-Pacific Partnership (TPP) – the proposed regional trade deal between 12 Pacific Rim countries – citing concerns that it could harm its national sovereignty: “You cannot rush into things. This is a very big trade pact, going beyond the conventional areas of tariffs. It’s natural that it’s taken quite some time” [Mustapa Mohamed, Malaysia’s International Trade and Industry Minister, said in an interview]…“We cannot be pushing the TPP at the expense of our national interest and national agenda,” Mr Mustapa said. The Malaysian trade minister’s cautious views contrast nicely against Australian trade minister, Andrew Robb, who has signaled Australia’s unbridled support for the TPP provided Australia gains significant access to agricultural markets, even labeling the agreement as a “platform for 21st-century trade rules”. As noted previously, if the TPP goes ahead, it will establish a US-style regional regulatory framework that meets the demands of major US export industries, including pharmaceutical and digital. The draft chapter on intellectual property rights, revealed by WikiLeaks, included a “Christmas wishlist” for pharmaceutical companies, including the proposal to extend patent protection and strengthen monopolies on clinical data. It’s a huge risk to Australia’s world class public health system, which risks cost blowouts via reduced access to cheaper generic drugs and reduced rights for the government to regulate medicine prices. It also risks stifling innovation in the event that patent terms are extended too far.

Aussies Stunned By Inflation Surprise - Australia’s central bank can no longer assume the country’s inflation outlook will remain pleasantly benign, a revelation that will dramatically complicate the setting of interest rates in 2014. Official inflation data for the fourth quarter of 2013 published Wednesday showed prices surging broadly as the year ended. Economists say the shock rise in inflation has stripped the Reserve Bank of Australia of any flexibility to cut rates further this year to support the economy. “The consumer price index numbers reinforce the idea that interest rate cuts are off the table and add support to the arguments for higher rates by end 2014,” said Diana Mousina, an economist at the Commonwealth Bank of Australia. The central bank has cut interest rates eight times in the last two years to cushion the economy against a sharp slowdown in mining investment, which has powered stellar growth over the last decade. The benchmark cash-rate target was cut to a record low 2.5% in August. Economic growth in Australia has slowed sharply through that period. To say the fourth-quarter inflation report took all by surprise is an understatement. Consumer prices rose 0.8% in the December quarter compared with an expected 0.5% gain. Over the year, inflation ran at 2.7%. Core inflation, which dictates decision making at the central bank, jumped 0.9% from the preceding quarter and 2.6% from a year earlier.

Finish the Job on Financial Regulation - The IMF Blog  - Brisbane and Basel may be 10,000 miles apart, but when it comes to financial regulation the two cities will be standing cheek by jowl. At the next summit of the Group of Twenty advanced and emerging economies, to be held in Brisbane in November, political leaders will take the pulse of the global financial regulatory reform agenda, launched five years ago. The explicit goal of the Australian G-20 presidency is to finally complete these essential reforms. As Prime Minister Tony Abbott said today in Davos, “Financial regulation is always a work-in-progress, but these reforms now need to be finalized in ways that promote confidence without eliminating risk.”  I strongly support this extra push to create a safer financial system that can better support the needs of the real economy, and better protect taxpayers. For far too long, critics have been able to portray the G-20 reform agenda as a regulatory supertanker stuck in the shallow waters of technical complexity, financial industry pushback, and diverging national views. This image is increasingly off the mark.  I believe the reform process has gradually moved the global financial system to a better place. It is now safer than before the crisis—but not yet safe enough. This is why I believe policymakers should particularly focus on one of the key unfinished reforms—the too-important-to-fail problem.

The Impact of Exchange Rate Movements on Exports - In the last quarter century, the global economy has witnessed not just a rapid expansion in international trade but also the growing prominence of dynamic emerging economies on the global trade landscape. Despite steady growth in global trade, however, there have been recurring concerns about the impact of exchange-rate movements on trade - rekindled more recently by the 1997 Asian financial crisis and the 2008 global financial crisis. India provides an interesting case study in how exchange-rate fluctuations impact exports. In 1991, India implemented a series of globalization and liberalization measures primarily targeting the foreign-exchange market and tradable sectors. Undeniably, India’s economy has become increasingly integrated with rest of the world and now has a considerable presence as an exporter in the global economy.  The annual growth rate of India’s exports of goods and services increased from 16% in 1999−2000 to around 33% in 2010-11. The contribution of exports to GDP went up from 6% in 1990 to 12% in 2000 and 23% in 2010. Simultaneously, India’s overall share of total world trade (which includes trade in both goods and services) increased from 0.5% in 1990 to about 1.4% in 2010. The remarkable increase in India’s exports can be seen from Figures 1-3. India also adopted a more market-oriented exchange rate regime in the first half of 1990s. Since deregulation, the rupee’s exchange rate has mostly been in a managed floating regime.

India’s Central Bank Set to Test Its Influence Over Inflation - India’s central bank is likely to start targeting consumer price inflation soon, after an internal report published Tuesday recommended a formal consumer-price-index objective of two percentage points above or below 4%. But a deeper question remains: How much influence does the Reserve Bank of India have over consumer prices? In India,  the issue is complicated by the large role of food in determining consumer prices, and a financial system that doesn’t efficiently pass changes in interest rates through to borrowers. Food items–from cereals and lentils to spices, meat, milk and vegetables–make up a third of the basket of goods whose prices determine India’s CPI. Monetary policy has only a limited effect on such prices, and hence on headline inflation. For one, weather patterns, and a lack of irrigation systems in many areas, play an outsized role in determining food supplies and prices. Poor transport, storage and delivery infrastructure for agricultural products creates supply bottlenecks that keep retail prices high regardless of consumers’ demand and farmers’ output. Then there are the Indian government’s extensive interventions in the food market, which create further distortions. To provide staple foods at cut-rate prices to poor households, the government buys enormous quantities of wheat, rice, sugar and other goods at prices set each year by the cabinet. This creates an effective floor that can keep prices elevated even as demand slows or supply increases. The central bank’s task is complicated further by the fact that demand for food is relatively inelastic, which means the central bank would have to raise rates aggressively to squeeze demand and bring down prices.

The risk-on trade sends emerging markets currencies to new lows - (see currency graphs) Today's China-induced "risk-off" trade sent emerging markets currencies sharply lower. As discussed before Turkey and South Africa have been hit the hardest recently and today touched fresh all-time lows... But even some of the larger emerging markets nations saw their currencies decline to multi-year lows. Brazil and Russia in particular saw significant a selloff.The "risk-on" currency correction was not limited to emerging markets, as the Australian dollar touched the lows not seen since 2009. It seems that the volatility seen in global markets during the Eurozone crisis is returning.

Contagion Spreads in Emerging Markets as Crises Grow - The worst selloff in emerging-market currencies in five years is beginning to reveal the extent of the fallout from the Federal Reserve’s tapering of monetary stimulus, compounded by political and financial instability.  The Turkish lira plunged to a record and South Africa’s rand fell yesterday to a level weaker than 11 per dollar for the first time since 2008. Argentine policy makers devalued the peso by reducing support in the foreign-exchange market, allowing the currency to drop the most in 12 years to an unprecedented low.  Investors are losing confidence in some of the biggest developing nations, extending the currency-market rout triggered last year when the Fed first signaled it would scale back stimulus. While Brazil, Russia, India, China and South Africa were the engines of global growth following the financial crisis in 2008, emerging markets now pose a threat to world financial stability.  “The current environment is potentially very toxic for emerging markets,”  . “You have two very troubling things: uncertainty about the Fed policy, combined with concerns about growth, particularly in China. It’s difficult to justify that it’s time to go out and buy emerging markets at the moment.”

Emerging markets selloff picks up, drags down Europe, U.S (Reuters) - A full-scale flight from emerging markets accelerated on Friday, as investors sold shares in major markets and bought safe-haven assets such as U.S. Treasuries, the yen and gold. On Wall Street, the benchmark S&P 500 stock index tumbled 2.0 percent on the day, and ended the week down 2.6 percent, its worst week since June 2012. Concerns about slower growth in China, reduced support from U.S. monetary policy and political problems in Turkey, Argentina and Ukraine drove the selling. The Turkish lira hit a record low as the cost of insuring against a Turkish default rose to an 18-month high. Argentina's peso fell again after the country's central bank abandoned its support of the currency. The declines mirror moves from last June when developing country stocks fell almost 18 percent over about two months and hit global shares after the Federal Reserve indicated it would soon reduce its bond-buying.

Emerging market rout turns serious, punctures exuberance in Davos -- The worst emerging market rout in five years has raised fresh fears of global contagion, puncturing the mood of exuberance at the World Economic Forum in Davos.  Brazil's President Dilma Rousseff sought to reassure investors that this week's currency collapse in Argentina would not spread to the Brazilian real, insisting that all contracts would be honoured and that foreign funds would be "treated well".  "Today, the stability of our currency is a central value of our country," she said. The real has weakened by 20pc against the dollar this year, breaking through the crucial line of 2.40 in trading on Friday.  The IMF's deputy-director, Min Zhu, said in Davos that the Fund is watching the violent gyrations around the world "very carefully", saying the effect of bond tapering by the US Federal Reserve is causing global liquidity to dry up.   Mr Zhu said this had combined with a slow structural crisis in a number of developing states that have already picked the low-hanging fruit of catch-up growth, warning that those that resist market reforms "will face trouble".

Billionaire Braves Bloated Self-Importance for Davos Chat - Bloomberg - Filipino mogul Enrique Razon loathes rubbing shoulders with fellow billionaires in Davos.  “It’s loaded with bloated self-importance,” the casino and cargo-terminal owner said in an interview today in the Swiss village, where he was wrapping up his second trip to the World Economic Forum’s annual meeting. “I’m here to do business, not save the world.”  Razon, who controls a $4.7 billion fortune, according to the Bloomberg Billionaires Index, is one of at least 80 billionaires in town. Most have spent their time attending panels on the state of the global economy, debating income inequality and attending parties with bankers.  Razon, 53, said he flew to Switzerland from his home in the Philippines to meet with a delegation of politicians from Nigeria. Just getting to them proved notably annoying.  Razon found himself in the minority in his global outlook too. International investors are the most upbeat about the global economy than at any time in almost five years, according to a Bloomberg Global Poll released on the eve of the WEF. “The reality is business has been run by monetary policy since 2009. Period,” he said. “Liquidity has sort of reflated the bubble. We’re sort of in that party mode. You can go broke saying when the party’s going to end, but my feeling is absolutely it’s going to end.”

So Long, Asia: Africa is Now Fastest-Growing Continent - At  midyear 2013, IMF bloggers declared Africa to be the second-fastest growing region in the world after (developing) Asia. Fast-forward a couple of months and it now has the distinction of being the world's fastest-growing region outright. Given that Africa has unfortunately lagged behind other regions in terms of growth during the past few decades, this occurrence is a welcome one, and this Asian certainly bears no grudges in seeing our African peers outperforming. Well done!  However, this distinction being bestowed by the African Development Bank, the AfDB unsurprisingly asks for more of the "good governance" agenda it has championed for quite some time alike its other regional development bank counterparts as well as the World Bank. It is still very much in vogue in development circles:Africa is now the fastest growing continent in the world, the African Development Bank’s Annual Development Effectiveness Review 2013 [ADER] states. The report, just published, says this growth has been driven mainly by improved economic governance on the continent and the private sector. “Africa’s economic growth could not have happened without major improvement in economic governance. More than two-thirds of the continent has registered overall improvement in the quality of economic governance in recent years, with increased capacity to deliver economic opportunity and basic services,” it says.

Incomes in sub-Saharan Africa: Standing still but going backwards | The Economist -- A NEW World Bank paper* paints a rather depressing picture of global poverty. From 1993 to 2008 the average per capita income of sub-Saharan African economies barely budged—it increased from $742 to $762 per year (measured in 2005 purchasing-power parity-adjusted dollars). If we exclude South Africa and the Seychelles, we see a decline from $608 to $556 over the period.  The graph below is even more worrying. The authors divided the world distribution of income in 1993 and 2008 into 20 income groups, or “ventiles”, each representing 5% of the world population. The groups get richer from left to right. Between 1993 and 2008, countries like India and, especially China, shift to the right. By 2008 China completely left the poorest 5% of the world’s population.   But sub-Saharan Africa shifted to the left. Whereas in 1993 about 25% of the world’s poorest 5% lived in sub-Saharan Africa, by 2008 it was nearly 60%.

What we talk about when we talk about corruption - I agree with Bill Gates: corruption is a second order development issue at best. A commenter pushes back: I think both Gates and Blattman are being a bit blithe on the issue of corruption–or at least constraining the issue to an unhelpfully narrow conception of corruption. I agree that the problem of graft or illegally channeling public funds into private bank accounts is a pretty minor problem in the overall scheme of things. But if we think of corruption in the broader sense of subverting democracy and making holders of public office accountable to people other than the public they purport to represent, I think that not only is corruption a serious problem, but that aid bears a large part of the blame. I agree that subverting democracy and institutions, or wholesale pillaging of the nation (a la Mobutu), is a big problem.  If that’s what World Bank president Jim Kim or others mean by ‘corruption’ then I’m all for tackling it. But that’s not what the word means, what many people understand it to mean, or what the policy solutions seem to tackle.  A focus on bribery and diversion of aid money is precisely what a lot of aid agencies and donors worry about, because the people that give them money hate that theft, petty or large-scale. Their answers and policy solutions are revealing. Anti-corruption commissions for example. That is not a solution to the fundamental problem. Most anti-corruption policies obscure the real challenges. Band-aids for cancer patients.

Oxfam: World's Richest 1 Percent Control Half Of Global Wealth -- Just 1 percent of the world's population controls nearly half of the planet's wealth, according to a new study published by Oxfam ahead of the World Economic Forum's annual meeting. The study says this tiny slice of humanity controls $110 trillion, or 65 times the total wealth of the poorest 3.5 billion people. Other key findings in the report:

  • — The world's 85 richest people own as much as the poorest 50 percent of humanity.
  • — 70 percent of the world's people live in a country where income inequality has increased in the past three decades.
  • — In the U.S., where the gap between rich and poor has grown at a faster rate than any other developed country, the top 1 percent captured 95 percent of post-recession growth (since 2009), while 90 percent of Americans became poorer.

The World's Top 1% has 50% of the Wealth -- The wealth of the entire world is now divided in two, with almost half going to the richest one percent, and the other half to the remaining 99 percent. In November 2013 the World Economic Forum released a 49-page report titled Outlook on the Global Agenda 2014. It says that, based on those surveyed, inequality is "impacting social stability within countries and threatening security on a global scale." According to a 32-page study by Oxfam titled Working for the Few, they have calculated:

  • In a world of 7 billion people, 85 of the richest people on the planet now have the combined wealth of 3.5 billion of the world's poorest people.
  • The wealth of the richest 1% in the world is $110 trillion, and this is 65 times the total wealth of the bottom 50% of the world's population.
  • 1,426 individuals have a combined net worth of $5.4 trillion.

This massive concentration of economic resources in the hands of fewer and fewer people presents a real threat to inclusive political and economic systems, and compounds other inequalities. Left unchecked, political institutions are undermined and governments overwhelmingly serve the interests of  the economic elites—to the detriment of ordinary people.

World's 85 richest have same wealth as 3.5 billion poorest: The combined wealth of the world's richest 85 people is now equivalent to that owned by half of the world's population – or 3.5 billion of the poorest people – according to a new report from Oxfam. ----- It added that the wealth of the richest one percent of people in the world now amounts to $110 trillion, or 65 times the total wealth of the bottom half of the world's population. ----- Oxfam singled out India as an example, where the number of billionaires increased from less than 6 to 61 in the past decade, concentrating approximately $250 billion among a few dozen people in a country of 1.2 billion. "What is striking is the share of the country's wealth held by this elite minority, which has skyrocketed from 1.8 percent in 2003 to 26 percent in 2008," the report said. Oxfam said that India's billionaires acquired their wealth in 'rent thick' sectors – industries where profits are dependent on access to scarce resources – "made available exclusively through government permissions and therefore susceptible to corruption by powerful actors, as opposed to creation of wealth."

You’d be surprised at how poor the new ‘middle class’ is in the developing world -- When a million people swarmed on to the streets of Brazil last June there was consensus that the protest was a phenomenon of the “new middle class” – squeezed by corruption and failing infrastructure. As the Thai protests continue, these too are labelled middle class: office workers staging flashmobs in their neat, pressed shirts.But what does middle class mean in the developing world? About 3 billion people earn less than two dollars a day, but figures for the rest are hazy. Now, fresh research by the International Labour Organisation (ILO) economists shows in detail what’s been happening to the workforce of the global south during 25 years of globalisation: it is becoming more stratified – with the rapid growth of what they term “the developing middle class” – a group on between $4 and $13 a day. This group has grown from 600 million to 1.4 billion; if you include around 300 million on above $13 a day, that’s now 41% of the workforce, and on target to be over 50% by 2017. But in world terms they’re not really middle class at all. That $13 a day upper limit corresponds roughly to the poverty line in the US in 2005. So what’s going on?

IMF warns on threat of income inequality - The International Monetary Fund has highlighted the threat posed to the global economy by growing income inequality as the world’s business and political leaders prepare to head off to the World Economic Forum in Davos this week. Christine Lagarde, managing director of the IMF, is concerned that the fruits of economic activity in many countries are not being widely shared. “Business and political leaders at the World Economic Forum should remember that in far too many countries the benefits of growth are being enjoyed by far too few people. This is not a recipe for stability and sustainability,” she told the Financial Times. The message is hitting home. Shinzo Abe, Japan’s prime minister, is coming to Switzerland with the message that Japanese companies must raise wages, while the government of David Cameron, his UK counterpart who is also attending the forum, called for a large inflation-busting rise in the British minimum wage last week. . Ensuring progress is made on tackling multinational corporation tax avoidance is high on Australia’s list of priorities. The change in sentiment comes as campaigners argue that the world’s population has rarely had such unequal access to wealth and power. In a report published on Monday, Oxfam, the charity, used the Forbes rich list to calculate that the $1.7tn in wealth owned by the world’s richest 85 people is the same as that shared between the bottom half of the world’s population.

Davos 2014: Two-Track Future Imperils Global Growth - Globalization has made the world a more equal place, lifting the economic fortunes of billions of poor people over the last quarter century. Here's the rub: At the same time, it has made richer countries more unequal—squeezing the incomes of the poor and the middle class. For a while, the financial crisis appeared to have reversed the trend toward more inequality in industrialized countries. But the latest data suggest it was only a brief interruption. In about 2010, the pre-crisis trends reasserted themselves, as government stimulus gave way to austerity, unemployment benefits ran out and—most importantly—the actions of central banks boosted returns on financial assets, helping the better off. As central banks pumped unprecedented sums of money into western economies, the super-rich have thrived as prices of high-end properties in cities such as London and New York have rocketed and equity markets soared. Figures compiled by Emmanuel Saez of University of California Berkeley and Thomas Piketty of Paris School of Economics showed that in 2012 the top 10% took half of all income earned in the U.S. That's the highest since 1917, the first year for which there is reasonable data.

The Real Threat to Economic Growth Is the Digital Divide - I was speaking with a couple of Boston Consulting Group guys who’ve come out with a new report tallying up the economic costs to countries that make it tough for their populations to access the net. The reasons can be myriad—poor infrastructure (Africa), red tape (parts of Latin America and the Middle East), a lack of free speech (China, parts of the Arab world)—but whatever the reasons, the frictionless nature of the internet seems to be changing. And the digital world is in danger of becoming Balkanized, with large swaths of the population unable to connect easily, cheaply, and freely. That will have a big economic impact. The BCG report, which represents some of the best tallying of the economic impact of the digital economy, found that countries like Sweden, Switzerland, the UK and others that make digital connection and commerce easier for their populations have a much larger share of their economies represented by digital business–about 2.5 more percentage points to be exact. So far, so obvious. The crucial point is that the digital economy is growing exponentially faster than the real economy. BCG tabulates that even during the post financial crisis recession, the digital economy (which includes not only e-commerce, but the cost of online access via broadband subscription fees) was growing by about 8 percentage points a year. The consultancy is busy tabulating the new, recovery growth numbers, and estimate that they could be as high as 10% to 15 % a year.

Recovery Strengthening, but Much Work Remains | iMFdirect - The IMF Blog: Let me now turn to our update of the World Economic Outlook and distill its three main messages: First, the recovery is strengthening. We forecast world growth to increase from 3% in 2013 to 3.7% in 2014. We forecast growth in advanced economies to increase from 1.3% in 2013 to 2.2% in 2014. And we forecast growth in emerging market and developing economies to increase from 4.7% in 2013 to 5.1% in 2014. Second, this recovery was largely anticipated. We have revised our forecast for world growth in 2014 by just 0.1% relative to our October forecast. The basic reason behind the stronger recovery is that the brakes to the recovery are progressively being loosened. The drag from fiscal consolidation is diminishing. The financial system is slowly healing. Uncertainty is decreasing. Third, it is still a weak and uneven recovery. Among advanced economies, it is stronger in the US than in Europe, stronger in the Euro core than in Southern Europe. In most advanced economies, unemployment remains much too high. And downside risks remain

IMF Raises Global Outlook as Advanced Nations Accelerate - The International Monetary Fund raised its forecast for global growth this year as expansions in the U.S. and U.K. accelerate, and urged advanced economies to maintain monetary accommodation to strengthen the recovery. The global economy will grow 3.7 percent this year, compared with an October estimate of 3.6 percent, the IMF said in revisions to its World Economic Outlook released in Washington today. U.S. gross domestic product will expand 2.8 percent, compared with 2.6 percent; Japan will gain 1.7 percent versus 1.2 percent; and the U.K. will increase 2.4 percent from 1.9 percent, the report showed. “In advanced economies, output gaps generally remain large and, given the risks, the monetary policy stance should stay accommodative while fiscal consolidation continues,” the Washington-based organization said in the report. “In many emerging market and developing economies, stronger external demand from advanced economies will lift growth, although domestic weaknesses remain a concern.”

Global austerity? -- There is a new UBS study which among other things covers the fiscal stance of the world as a whole.  Please do not misinterpret me as suggesting this implies anything particular for the policy of any individual nation, still the aggregate numbers are interesting to ponder.  Here is part of an FTAlphaville summary:

  • Government consumption’s share of global GDP has risen from 11 per cent to 14 per cent over the past 15 years. In 2013, it hit its highest level since 1980.
  • At the same time, government debt-to-GDP ratios have hit record highs in many countries.
  • Working-age populations are growing more slowly, or in some countries, such as Japan, beginning to decline.
  • Accordingly, the window of opportunity for mature economies to bring government debt levels down to sustainable levels is narrowing, owing to demographic shifts.
  • Given the situation in the government sector, private consumption needs to make a bigger contribution to the next phase of the recovery. Its share of GDP continues to hit multi-decade lows. Fixed investment is also making a smaller contribution to global growth than it did in the pre-crisis years.

Ann Pettifor on Combatting the Despotic Power of Finance - Economist Ann Pettifor discusses how economies around the world moved from using borrowing to support productive investments to fueling speculation and consumption, and how that led to the financial crisis. She also describes how the post-crisis response to the debt overhang isn’t merely ineffective but in fact counterproductive.

Global unemployment jumped to nearly 202 million last year -  Global unemployment jumped to nearly 202 million in 2013 as jobs failed to keep up with the world's growing labor force, according to one report. That represents an almost 5 million increase from 2012, with almost half of the new jobless coming from East Asia and South Asia, the International Labour Organization said Monday. A big chunk of the freshly unemployed are also located in Europe and sub-Saharan Africa. The labor agency said the huge pool of workers who lost their jobs since the 2008 financial crisis has only widened in recent years. "If current trends continue, global unemployment is set to worsen further," the report said, estimating that global unemployment will climb to more than 215 million job seekers by 2018. That's especially troublesome for young people around the world; among those aged 15 to 24, the global jobless rate has hit 13.1%, almost three times as high as the adult unemployment rate. Many in their teens or 20s are looking at years of either no work or low-wage jobs with little prospect for advancement. In 2013, an estimated 74.5 million were without work.

ILO warns young hit hardest as global unemployment continues to rise - The world could face years of jobless economic recovery, with young people set to be hit hardest as global unemployment continues to rise this year, a report from the International Labour Organisation warns. As the World Economic Forum kicks off in the Swiss town of Davos on Wednesday with a focus on growing inequality, the ILO has highlighted a "potentially dangerous gap between profits and people". The UN agency forecasts millions more people will join the ranks of the unemployed as companies choose to increase payouts to shareholders rather than invest their burgeoning profits in new workers. The ILO's Global Employment Trends report forecasts that world unemployment will rise to 6.1% this year from 6% in 2013 and will remain well above its pre-crisis rate of 5.5% for several years.  It puts the youth unemployment rate at 13.1%, more than double that for the whole workforce and almost three times the adult rate of 4.6% – a record for the ratio of youth to adult unemployment.

Guatemala Factory Supplying Walmart and Other US Retailers Stole $6 Million From Workers -- A factory company that made clothes for at least sixty American labels, including Macy’s, JCPenney, Kohl’s and Walmart, allegedly owes Guatemalan workers more than $6 million in back wages and benefits, according to an investigation by the Institute for Global Labour and Human Rights.  Investigators obtained more than 200 internal documents smuggled out of Alianza Fashion factory last spring, including invoices, pay stubs and manufacturing instructions from some of the most well-known brands in the world. The factory, owned by South Korean national Boon Chong Park, went out of business last March. Here are some of the report’s findings:

  • From 2001 to 2013, Alianza management filed legal pension and healthcare benefits for just sixty-five workers per year. Through those years, Alianza employed between 1,050 and 1,500 workers, adding up to more than $4.7 million in lost benefits.

  • Since the factory shut down last year, Alianza has failed to pay the 548 workers employed until closure $1.2 million in back wages and benefits.

Argentina restricts online shopping as foreign reserves drop: Argentina has introduced new restrictions on online shopping as part of efforts to stop foreign currency reserves from falling any further. Anyone buying items through international websites will now need to sign a declaration and produce it at a customs office, where the packages have to be collected. The procedure will need to be repeated for every new purchase. Argentina's reserves of hard currencies dropped by 30% last year. The government of President Cristina Fernandez de Kirchner has introduced a number of restrictions on transactions with foreign currency. Items imported through websites such as Amazon and eBay are no longer delivered to people's home addresses. The parcels need to be collected from the customs office. Individuals are allowed to buy items up to the value of $25 (£15) from abroad tax free every year. Once the $25 level is reached, online shoppers in Argentina need to pay a 50% tax on each item bought from international websites.

Argentine crisis deepens as peso plunges 11 percent -– Argentina’s currency crisis worsened dramatically Thursday as the peso plunged 11.1 percent against the U.S. dollar, its depreciation picking up pace in the sharpest one-day fall since 2002.  Amid growing capital flight, the central bank appeared to drop any effort to defend the peso, letting it fall to 8.01 to the U.S. dollar from 7.12 late Wednesday — when the currency lost 3.2 percent of its value. That took the currency’s depreciation so far this year to nearly 19 percent, creating deeper challenges for the government wrestling with falling foreign reserves and mounting inflation. The peso also fell on the black market, though not as fast, slipping to 12.5 per dollar from 12 Wednesday. The fall came a day after the government moved to cut back spending abroad by Argentinians, to stem the drain on reserves. The government restricted purchases from abroad over the Internet to two a year, at a maximum of $25 each, beyond which it will assess a 50 percent tax. The Central Bank of Argentina had rigidly managed the official exchange rate over the past several years.

Trouble for the 'Brazilian Miracle' -- The slowing down of the Brazilian economy is not due only to external factors, such as the reduction of demand from China and Europe. Internal factors also do play a role. After a positive initial reaction to anti-cyclical governmental policies with the expansion of credit and consumption, there was an overreliance on the capacity of these policies to promote growth coupled with a lack of timely investments in infrastructure. There was also an excessive propaganda about the emergence of the 'new middle classes' and too much public fiscal incentives to promote consumption. The small but persistent inflation at the annual rate of 6% and the ensuing restrictions on credit with the rise of interest rates produced a shift in the overall economic climate from unbridled optimism to concern with low growth and increasing cost of living. Linked to and prompted by the strong public reaction against widespread corruption, this change in people's expectations explains how quickly the wave of protests spread virally through the Internet and led to massive protests in the streets. World Cup as a symbol of waste.The wave of protests was sparked by the waste of public funds in preparation for the 2014 World Cup. But they express a more profound feeling of discontent. People are fed up with corruption and impunity. They want better public services, especially in health, education and public transportation. They also want to participate and are calling for institutional reforms. The vast majority of the protesters were peaceful. However a small but vocal and aggressive minority of radical groups, as the so-called Black Block with its anarchist symbols and destructive behavior, have resorted to the systematic use of violence as the means to discredit any and all public institutions.

Statistics Canada's Attention Deficit Disorder -This happens all the time:With the release of November 2013 data, Statistics Canada converted the Industrial Product Price Index (IPPI) and the Raw Materials Price Index (RMPI) series to 2010=100, with 2010 as the base year. These indexes have also been updated using a weighting pattern based on the 2010 production values of Canadian manufacturers.At the same time, the classification system was converted to the North American Product Classification System (NAPCS).  What this self-congratulatory blurb doesn't mention is that Statistics Canada has replaced an IPPI that went back to 1956 with one that goes back to 2010. I can't think of any interesting question that can be answered with a price index that starts in 2010. Then there's this announcement in a recent Survey of Employment, Payrolls and Hours (SEPH) release:  As of the September 27 release, data in CANSIM tables 281-0023 to 281-0046 cover the period 2001 to present. At the same time, new tables were created for the time series prior to 2001. Two new tables were created with data starting in 2001: Table 281-0048 (formerly 281-0031 and 281-0034) and Table 281-0063 (formerly 281-0025 and 281-0028). As of this release, CANSIM tables 281-0050 and 281-0051 on payroll employment from 1991 to 2000 are available (formerly part of tables 281-0023 and 281-0024). I can't make head nor tail of this. For what appears to be no reason whatsover, StatsCan has taken a data table that went back to 1991 and split it up into two tables that span 1991-2001 and 2001-present. Even worse, the older data has been tossed into the vast and rapidly-expanding swamp of terminated data tables that threatens to swallow the entire Cansim site.

Inflation, or Lack of It, A Growing Concern for Bank of Canada -- The Bank of Canada is becoming increasingly concerned with low inflation, as evidenced in Wednesday’s interest-rate statement. And Governor Stephen Poloz, who has surprised markets with an increasingly dovish tilt since last October, dropped an old phrase and introduced a new wrinkle into the highly anticipated statement. The Bank said it will take about two years for inflation to reach the 2% target, but the path returning to that is expected to be lower than it anticipated in October.The dovish tone about languishing consumer prices was in contrast to a more upbeat note about economic growth. “Although the fundamental drivers of growth and future inflation appear to be strengthening, inflation is expected to remain well below target for some time, and therefore the downside risks have grown in importance,” the central bank said in its first interest-rate statement of 2014.  At the same time, risks associated with elevated household imbalances–referring to the strong housing market and record-high household debt–haven’t changed materially.With no change to the balance of risks–risks to inflation projections are described as “roughly balanced” in the separate Monetary Policy Report–the central bank left the benchmark overnight rate at the 1% level it has stood at since September 2010. But gone was a longstanding line which said the substantial policy stimulus of a 1% rate remains appropriate.The former line was replaced with the following: “The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks.” In other words, it will be very dependent on economic data.

Deflation: The Failed Macroeconomic Paradigm Plumbs New Depths of Self-Parody - By William K. Black - Imagine you were a doctor in the ER when a patient was brought in presenting symptoms indicating a likely internal bleed.  Here are the two critical questions you face.

  1. Would you (a) find and stop the bleed or (b) wheel the patient off to a “recovery” room with instructions to alert the crash cart to be ready to try to revive the patient should he go into cardiac arrest due to the continued, untreated bleed?
  2. If you chose option (b) in response to the first question, would you tell them to (a) use the crash cart that is known to be most effective, or (b) use the experimental prototype crash cart that has never been used successfully to revive a patient suffering from a cardiac arrest triggered by an untreated bleed and that most physicians think employs a methodology that is inherently incapable of reviving such patients?

If you picked option (b) in response to both questions, congratulations!  Your patient may have died and your career in medicine may be over but you have demonstrated that you are the very model of the modern chief economist of the IMF, OECD, and ECB.   The latest proof of this dynamic is the series of recent European warnings about the “danger of deflation.” As Warren Mosler and my macroeconomic colleagues Randy Wray and Stephanie Kelton have been trying to explain for decades, deflation is the symptom.  Lack of adequate demand is the cause.  Symptoms are important in both medicine and economics.  A cardiac arrest is likely to kill you.  But it’s the untreated internal bleed in my metaphor that causes the cardiac arrest.  When a patient presents with a likely internal bleed any competent ER physician would start parallel treatment.  One track would be looking to confirm, locate, and fix the bleed (or rule it out) and the other track could include providing fluids and transfusions.  No competent ER physician would fail to look for and treat the likely bleed and instead simply alert the crash cart to stand by to attempt to resuscitate the patient if he went into cardiac arrest.

Euro and Non-Euro Countries and Fiscal Policy - Contractionary fiscal policy is ... contractionary There has been some dispute over the robustness of the finding that countries that embarked upon fiscal contraction experienced lower growth. There's also been some dispute over the proper time horizon (I used 2010-12 in this post.) Here I provide some additional information. First, here is the entire sample of advanced countries (as defined in the IMF's World Economic Outlook), for cumulative growth rates 2009-13 plotted against cumulative change in the cyclically adjusted budget balances. Note the statistically significant negative relationship, indicating that the more contractionary the policy stance, the slower the growth. The slope coefficient is negative, and highly significant, with the adj-R2=0.39. Second, it's clear that eurozone countries are a special case, where monetary policy is out of the control of the individual countries; a question is whether countries with their own monetary policy could actually experience an expansionary fiscal contraction. Figure 2 illustrates the same relationship, excluding euro area countries (and Singapore, which is an outlier, even in the full sample).

How the ECB could be radical by being old fashioned - As we all know, short term nominal interest rates in the US, UK, Eurozone and Japan are as low as they can go, so it appears as if there is nothing more central banks can do with conventional interest rate policy. However that is not the case. What they can do is promise to keep future interest rates lower than they would otherwise be. This policy, first suggested by Paul Krugman for Japan and championed by the highly influential Michael Woodford, I will call ‘forward commitment’. It is not the same as ‘forward guidance’, which central banks are implementing.  The form of forward guidance that the US and UK operate involves giving the public some information about when interest rates might begin to rise.  The forward commitment policy is radically different. It promises to allow both inflation and the output gap to be above target in the future, so as to increase demand today. How does this work? Perhaps the easiest way to think about this is by considering long term interest rates. Long term (say 5 year) interest rates are mainly a combination of expected short rates from now until 5 years ahead. If you promise to have above target inflation tomorrow, the central bank must allow future short term interest rates to be lower tomorrow, which reduces long term rates today. Lower long term interest rates encourage additional consumption and investment today.

Fiscal Expansion or What? -The preliminary estimates for 2013 released by the German Federal Statistical Office, depict a mixed picture. Timid signs of revival in domestic demand do not seem able to compensate for the slowdown in exports to other countries in the euro zone, still mired in weak or negative growth rates. The German economy does not seem able to ignore the economic health of its European partners. In spite of fierce resistance of Germany policymakers, there is increasing consensus that the key to a durable exit from the Eurozone crisis can only be found in restoring symmetry in the adjustment following the crisis. The reduction of expenditure and deficits in the Eurozone periphery, that is currently happening, needs to be matched by an increase of expenditure and imports by the core, in particular by the Netherlands and Germany (Finland and Austria have actually drastically reduced their trade surpluses). In light of the coalition agreement signed by the CDU and the SPD, it seems unlikely that major institutional innovation will happen in the Eurozone, or that private demand in Germany will increase sufficiently fast to have an impact on imbalances at the aggregate level. This leaves little alternative to an old-fashioned fiscal expansion in Germany.

French Banks Face €285 Bn Capital Shortfall, Germany €199 Bn, Spain €92 Bn -- At the risk of incurring another nonsensical fine for quoting someone on leverage and capital ratios of French banks, please consider European Banks Face $1 Trillion Gap Before Review. European banks have a capital shortfall of as much as 767 billion euros ($1 trillion) before the European Central Bank’s probe into the financial health of the region’s lenders, according to a study. French banks show the biggest gap of 285 billion euros, followed by German lenders with as much as 199 billion euros, Sascha Steffen of the European School of Management and Technology in Berlin and Viral Acharya at New York University said in their study dated Jan. 15. The figures assume a benchmark capital ratio for other book measures of leverage of 7 percent, they wrote. “A comprehensive and decisive AQR will most likely reveal a substantial lack of capital in many peripheral and core European banks,” the authors wrote, referring to the central bank’s Asset Quality Review stage of the Comprehensive Assessment.  Spanish banks have a shortfall of 92 billion euros, while Italian banks lack 45 billion euros, the study showed.

Hollande is completely out of touch with modern economics - Dean Baker - French President François Hollande startled many of his supporters last week, along with fans of evidence-based economics everywhere, when he rejected modern economics in favor of the sayings of an early 19th-century French economist. After winning the election on a platform that the government needed to fill the gap in demand created by the collapse of asset bubbles, Hollande repeated the old line from Jean-Baptiste Say that "supply creates its own demand." While the appeal to French national pride may be touching, it is completely out of touch with modern economics. His plan to cut spending will have serious consequences. The problem is that the private sector does not necessarily generate enough demand to buy back everything it produces, leaving large numbers of workers unemployed and vast amounts of productive capacity sitting idle. From an economic standpoint this is an incredible waste of resources. Economists often concern themselves with distortions created by quirks in the tax code or barriers to trade, but the losses from having an economy operate below full employment dwarf these inefficiencies.From a social standpoint, the costs are even greater as millions of people are needlessly denied the opportunity to work. This often has devastating outcomes for unemployed workers and their families. There is considerable evidence linking unemployment with alcoholism and suicides. There is also a growing body of evidence that there are serious life consequences for the children of unemployed workers.

Invasion of Spanish Builders Angers France Struggling to Compete - The earth movers digging out a sandy pit in the beach town of Biarritz could be any construction site in France. Except the builder of the 300 homes and its workers are Spanish. In the neighboring town of Anglet, a Spanish company built the concert hall inaugurated this month. A kilometer up the road, in Bayonne, a Spanish company is building a 15-lodging apartment block. And that’s just in a small corner of southwestern France. The losing French bidders are crying foul, saying the Spanish pay lower wages and cut corners on regulations. The Spanish, fleeing a construction slump and an unemployment rate of 26 percent at home, say they’re just using European Union rules allowing free movement of businesses and workers. The French builders’ inability to stop their Spanish counterparts from wresting business away highlights President Francois Hollande’s uphill battle to make France more competitive.

Greek Unpaid Electricity Bills Grow By €4 Million Per Day: Over 700,000 Pay In Installments -- Judging by the collapsing Greek yields, which at this rate may drop below US bonds soon enough, the Greek economy has never been stronger. Sadly, manipulated bond levels driven by yet another bout of pre-QE euphoria (suddenly the conventional wisdom is that the ECB will conduct QE in a few months as first explained here in November) no longer reflect anything besides a massive liquidity glut and momentum chasing lemmings. Alas, as usual the reality on the European ground is much worse. The latest example comes from the Greek Public Power Corporation which has reported that Greek households and corporations are finding it increasingly difficult to pay their electricity bills. In total, debts to the power utility from unpaid bills currently amount to some €1.3 billion and growing at an average rate of €4 million per day. Also known as the Grecovery.

Greek court strikes down wage cuts connected troika bailout - A top Greek court has struck down wage cuts imposed by the government in 2012 on police and armed forces to comply with the terms of the country’s EU-IMF bailout, court and government officials said today. The ruling by the Council of State, Greece’s highest administrative court, could blow a hole of as much as €500 million in the country’s finances, a senior finance ministry official warned, further complicating already stalled talks with international lenders to release more rescue loans. Its ruling that a 10 per cent wage cut for policemen and soldiers applied in 2012 was unconstitutional has not been made public but was confirmed by court and government officials after it was leaked to local media. “They are a core part of the state and therefore deserve special protection,” a senior court official told Reuters on condition of anonymity. Portugal’s constitutional court has also rejected austerity measures agreed by the government under its bailout.

EU sounds alarm on poverty among working-age people - In its latest review of social developments, the European Commission has said finding a job increasingly has not pulled people out of economic hardship. It said poverty among people with jobs was a major problem. The EU executive said Tuesday the European debt crisis had led to a significant rise in poverty among people of working age. It stated that finding fresh employment only helped people out of poverty in 50 percent of all cases as those who managed to land a job tended to work fewer hours or for lower wages than before. "Unfortunately, we cannot say that having a job necessarily equates with a decent standard of living," EU Employment Commissioner Laszlo Andor said in a statement. "A gradual reduction of unemployment is unlikely to be enough to reverse the increasing trend in poverty levels," he concluded.

Eurozone manufacturing expansion accelerates; risks remain  - We've had some significant moves in the currency markets this morning. In particular, the euro rose quite sharply on the back of some strong manufacturing numbers out of the Eurozone. Germany remains the euro area's powerhouse, with manufacturing expansion there accelerating further. The primary reason for the equity markets' sell-off was the weak manufacturing data out of China (see Twitter post). As discussed here, China's near-term economic trajectory presents the greatest risk to global growth - particularly for the Eurozone. The equity markets were also uneasy with the euro strength, which could choke exports from the area. Furthermore, Draghi struck a cautious tone with respect to the Eurozone's recovery: "All in all, the risk of setbacks is large. I would be very careful not to give an overly optimistic outlook."

Eurozone PMI Strengthens, Except France; Germany-France Yield Spread Widens; Where to From Here? - The Eurozone composite PMI hit its highest since June 2011, but it did so with France still in contraction as noted by the Markit Flash Eurozone PMI. The euro area private sector economy grew for a seventh consecutive month in January, according to the flash Markit Eurozone PMI® , with the rate of growth accelerating to the fastest since June 2011. The headline PMI (which tracks output across both manufacturing and services) rose from 52.1 in December to 53.2  New orders across the euro area rose for a sixth successive month, albeit growing at a rate unchanged on December. Backlogs of work also continued to fall marginally, suggesting that the level of demand, although rising, remain s insufficiently strong to enable companies to build up a pipeline of orders to fall back on if demand weakens. Employment was consequently trimmed slightly again, having stabilised in December, as companies remained uncertain about expanding capacity. Employment has not risen since December 2011, though the trend in the rate of job losses has eased considerably over the past year. Selling prices also continued to fall, highlighting the fragility of demand, and have now declined continually over the past two-and-a-half years. The latest reduction was only modest, however, and the weakest since May 2012. The easing in the rate of decline reflected in part the need to pass higher costs on to customers. Growth in Germany hit the highest since June 2011. The strong pace of expansion was fuelled by a seventh consecutive monthly rise in new business. In France, output fell for a third successive month, through the rate of decline eased to the slowest seen over this period. Rates of decline eased in both manufacturing and services. New orders likewise fell at a reduced rate, but the pace of job losses accelerated slightly.

What Is Going on in Euro Money Markets? - Something fishy is up in the euro money markets. Not only is the benchmark overnight rate for euros on the interbank market, spiking, but demand for the European Central Bank’s cheap liquidity is suddenly taking off again. The Euro Overnight Interest Average , or Eonia, has risen to 0.35% as of Monday’s fixing, from only 0.14% a week ago, and less than 0.10% earlier in the month.  That puts it back above the ECB’s key 0.25% refinancing rate, which determines the price of all the €672 billion in loans outstanding from the ECB.  This is important because an “unwarranted” tightening of money-market rates is one of the two factors that President Mario Draghi said would trigger action from the ECB to keep short-term rates as low as they want them to be, in order to protect a weak and fragile economy. The economic outlook has hardly changed in the two weeks since he said that, so the rise in short rates will be a clear challenge to the ECB at next month’s policy meeting on Feb. 6 if it persists until then. The shift in euro rates has had an immediate impact on banks’ behavior. Those in the safer parts of the euro zone, which have been able to do without the ECB for a long time because market rates were depressed by huge excess reserves, are suddenly finding it cheaper to borrow from the central bank than from the market: the number of bidders at the weekly Main Refinancing Operation rose to 212 Tuesday from 87 the previous week, while the amount borrowed rose to €116.3 billion from €94.7 billion. That was followed later in the day by another failure on the part of the ECB to drain the targeted amount of €177.5 billion at its weekly deposit auction. As a result of the two operations, the amount of ECB money in the system has risen by over €50 billion in the course of 24 hours.

Euro-area money markets: An unwelcome spike - SOMETHING odd has been happening in the euro area's financial markets. Although bond yields have been falling nicely, especially in Portugal, the rate that banks charge when they lend overnight money to each other has risen sharply in recent days, reaching levels not seen since the summer of 2012. This amounts to a tightening in monetary conditions even though the European Central Bank (ECB) has made it clear through explicit forward guidance that its bias is towards easing. Unless the spike turns out to be short-lived, the ECB is likely to take action to bring money-market rates into line with its intentions, maybe as soon as February 6th when its governing council meets next to set monetary policy. The money-market overnight rate, called Eonia (“euro overnight index average”), is a crucial one for the ECB and the banks that it shepherds. Until the financial crisis, the central bank was able to ensure that Eonia closely tracked its policy lending rate by providing just enough funding to the banking system to meet the minimum reserves banks are obliged to hold (together with liquidity requirements that do not arise from monetary-policy settings such as banknotes in circulation, which are passively provided). There was no incentive for a bank to hold more than those reserves, on which they earned interest at the ECB’s lending rate, since they would get a lower rate in the ECB’s deposit facility, where banks can stash away spare funds.

Crippled eurozone to face fresh debt crisis this year, warns ex-ECB strongman Axel Weber - Ex-Bundesbank head Axel Weber expects fresh market attacks on eurozone this year and economist Kenneth Rogoff says the euro was a "giant historic mistake".   A top panel of experts in Davos has poured cold water on claims that the European crisis is over, warning that the eurozone remains stuck in a low-growth debt trap and risks being left on the margins of the global economy by US and China. Axel Weber, the former head of the German Bundesbank, said the underlying disorder continues to fester and region is likely to face a fresh market attack this year. "Europe is under threat. I am still really concerned. Markets have improved but the economic situation for most countries has not improved," he said that the World Economic Forum in Davos. Mr Weber, now chairman of UBS, said the European Central Bank's stress test for banks in November risks setting off a new sovereign debt scare, reviving the crisis in the Mediterranean countries. "Markets are currently disregarding risks, particularly in the periphery. I expect some banks not to pass the test despite political pressure. As that becomes clear, there will be a financial reaction in markets," he said.

Italian Banks Need Extra $57 Billion for Loan Loss Reserves, 18% of Loans Non-Performing -  It will be interesting to see how well Italian banks handle stress tests later this year given new S&P capital shortfall estimates. Of course, the stress tests were watered down twice already, and if need be I am sure ECB president Mario Draghi can find additional ways to further dilute the tests.Yet, whether or not the losses are hidden, they are real. S&P warns Full recovery a long way off for Italian banks Italian banks will need to set aside as much as 42 billion euros ($57 billion) in new provisions for credit losses by the end of 2014 and some may have to raise additional capital, rating agency Standard & Poor's said on Tuesday. It said a full recovery for the sector, which was badly hit by the euro zone debt crisis and is struggling with rising bad debts, remained a long way off because of Italy's weak economic prospects and continued deterioration in asset quality.S&P expects the stock of bad loans at Italian banks to rise to 310 billion-320 billion euros by the end of this year, or about 18 percent of customer loans.That will force the lenders to set aside an additional 32 billion-42 billion euros to cover for credit losses between June 2013 and December 2014, according to the agency's estimates. Combined loan loss reserves stood at 111 billion euros at the end of June last year

Nassim Taleb: If Bankers Don’t Like Bonus Caps They Should Grow Some Balls And Start A Hedge Fund - “I admire the move by the European Union to restrict the bonuses of that class of privileged civil servants called “bankers” — a recognition that the taxpayers have the right to control the income of those they subsidize and bail out, just as they set the salaries of other state-sponsored workers. Alas, bankers in their current status are an offense to capitalism; they are in a strange situation of having upside without downside, no skin in the game. As an additional insult to the taxpayer, bankers paid themselves the largest bonus pool of their history in 2010 — thanks to Troubled Asset Relief Program. If a banker wants to be free in his income, he should start his own hedge fund. Because hedge fund operators are invested in their funds; they typically have 50 times more risk as a share of their net worth than their largest customer.”

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