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

Saturday, April 27, 2013

week ending April 27

Fed's Balance Sheet Tops $3.3 Trillion --The Federal Reserve's balance sheet topped the $3.3 trillion mark for the first time this week, continuing a streak of record-setting levels. The Fed's asset holdings in the week ended Wednesday increased by $23.54 billion from a week earlier to $3.319 trillion, the central bank said in a weekly report released Thursday. Holdings of U.S. Treasury securities holdings increased by $11.19 billion in the past week to $1.836 trillion and mortgage-backed securities rose by $9.89 billion to $1.136 trillion. The Fed is buying an average of $85 billion a month in Treasury and mortgage bonds as part of a program to stimulate economic growth. Central bank officials will hold a policy meeting next week and most observers expect the balance sheet expansion to continue at its current pace. The Fed's portfolio has more than tripled since the financial crisis thanks to programs intended to keep interest rates low. Meanwhile, the report showed total borrowing from the Fed's discount lending window was $40 million on Wednesday, up from $22 million a week earlier.

FRB: H.4.1 Release--Factors Affecting Reserve Balances-- Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks - April 25, 2013

Fed’s Balance Sheet Could Take Nearly 10 Years to Normalize - It may take the Federal Reserve nearly a decade to bring its massive balance sheet back toward a more historically normal size, Goldman Sachs economists argue in new research.Forecasters at the firm say that if the Fed presses forward with its expected path of stimulus and continues to buy Treasury and mortgage bonds through the third quarter of 2014, it is unlikely that its balance sheet will get back toward a historical norm of around 6% of GDP until 2022.The Goldman note argues the most likely path for the Fed is that what is now a balance sheet of just over $3 trillion will top out at around $4 trillion when the Fed feels confident enough about the outlook to end its ongoing and currently opened ended campaign of bond buying. The bank expects the Fed to contract its balance sheet by allow its holdings to mature instead of actively shrinking its holding via sales.

Fed Debate Moves From Tapering to Extending Bond Buying - Debate among Federal Reserve policy makers is shifting away from the timing of a reduction in bond buying to the need to extend record stimulus as inflation cools and 11.7 million Americans remain jobless. At their meeting last month, several members of the Federal Open Market Committee advocated slowing purchases and stopping them by year-end. Since then, seven have voiced support for maintaining the current pace, including five who vote on the policy making panel: Governor Daniel Tarullo, New York Fed President William C. Dudley, James Bullard of St. Louis, Chicago’s Charles Evans and Boston’s Eric Rosengren. “We heard a lot of discussion earlier in the year on the timing of tapering,” Ward McCarthy, chief financial economist at Jefferies Group LLC. in New York and a former Richmond Fed economist, said in a Bloomberg Radio interview yesterday. “Some of the more recent developments -- the slowdown in the economy, the somewhat disquieting inflation data -- has taken that off the table for now.”

Fed's Dudley: Bond Buying a Big Plus for Economy - As the Federal Reserve prepares to meet next week to deliberate on the future path of monetary policy, a central banker at the heart of the decision-making process delivered a strong defense of Fed stimulus in a speech Monday. The official, Federal Reserve Bank of New York President William Dudley, told a conference held at his bank that when he looks at the Fed's continuing and open-ended Treasury and mortgage bond buying program, he likes what he sees so far. "Monetary policy has been effective at fostering easier financial market conditions, even with short-term rates pinned at the zero bound," Mr. Dudley said. When it comes to the $85 billion per month bond buying effort, the official said "after reviewing the efficacy and costs of this program, I have concluded that that efficacy has been as high or higher than I expected at the onset of the program and costs the same or lower."

The Ongoing Dereliction of Duty - Last year I made the case that the Fed's failure to keep nominal income growth expectations stable was a dereliction of duty: [We] have long made the case that a nominal GDP (NGDP) level target would firmly anchor the expected growth path of nominal income.  Doing so, in turn, would stabilize current nominal spending since households and firms are forward looking in their decision making.  For example, holding wealth constant, households generally will put off purchasing a new car or renovating their homes if they expect their nominal incomes to fall and vice versa.  This is why Scott Sumner likes to say monetary policy works with long and variable leads. This understanding implies, therefore, that the reason for nominal spending remaining below is its pre-crisis trend is that the Fed has failed to restore expected nominal income to its pre-crisis path. This failure amounts to a passive tightening of  monetary policy.  Since then, the Fed has improved its management of expectations by introducing the conditional asset purchasing program of QE3. While this program is progress, it is still far from adequate. This can be easily seen by looking at data from a question on the University of Michigan/Thompson Reuters Survey of Consumers where households are asked how much their dollar (i.e. nominal) family incomes are expected to change over the next 12 months. The figure below shows the average response for this question up through March, 2013

Fed Watch: Monetary Policy and Financial Stability - I think it is difficult to ignore the role of asset prices in the dynamics of the past two business cycles:  If the objective of monetary policy is a combination of low inflation and unemployment, I think it is difficult to argue that the Federal Reserve pursued an overly loose policy stance in the periods of the internet and housing bubbles. Indeed, it is arguable that asset price bubbles were integral in fostering low unemployment.  With this in mind, consider this conclusion from Minneapolis Federal Reserve President Narayana Kocherlakota: In this way, unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity. All of these financial market outcomes are often interpreted as signifying financial market instability. And this observation brings me to a key conclusion. I've suggested that it is likely that, for a number of years to come, the FOMC will only achieve its dual mandate of maximum employment and price stability if it keeps real interest rates unusually low. I've also argued that when real interest rates are low, we are likely to see financial market outcomes that signify instability. It follows that, for a considerable period of time, the FOMC may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets.

Worth Over $500,000? Then QE Has Worked For You; Everyone Else Better Luck Next Time - Not supremely confident despite the stock market being at all-time highs? Unsure of the future and feeling poorer than in the past? You are not alone. In fact, you are among the 93% majority. As the Pew Research Center finds, during the first two years of the US economic 'recovery', the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%. As they explain, affluent households typically have their assets concentrated in stocks and other financial holdings, while less affluent households typically have their wealth more heavily concentrated in the value of their home. Due to these differences, wealth inequality increased during the first two years of the recovery. The upper 7% of households saw their aggregate share of the nation’s overall household wealth pie rise to 63% in 2011, up from 56% in 2009, with the mean wealth of affluent households now 24x the less affluent group (up from 18x in 2009).

Fed Still Owes Congress a Blueprint on Its Emergency Lending - After the Federal Reserve lent more than $1 trillion to big banks during the 2008 financial crisis, Congress required the central bank to devise specific ways of protecting taxpayers when doling out emergency loans to financial institutions. But nearly three years after that overhaul became law, the Fed still has not established these regulations. The delay involves a crucial but little-noticed part of the Dodd-Frank act, the sweeping financial sector overhaul that Congress passed in July 2010. One part of the legislation focused on the Fed. While the government used many different tools to shore up the financial system during the crisis, Congress was well aware that the Fed played a decisive role. The central bank made huge loans to scores of domestic and foreign banks as markets seized up, dwarfing bailouts like the Troubled Asset Relief Program. But the identities of the borrowers were not disclosed at first, stoking concerns that the Fed had carried out a vast stealth bailout of Wall Street. Against that backdrop, Dodd-Frank required the Fed to develop policies and procedures to safeguard taxpayers when making emergency loans “as soon as is practicable.” To some banking specialists, the delay suggests the Fed is stalling because it values the need to act freely in times of crisis.

Republicans Say Fed ‘Willfully’ Withholding Documents - Two House Republicans have threatened to subpoena the Federal Reserve for nonpublic documents on how the central bank plans to wind down its more than $3 trillion bond portfolio without harming the nation’s economy. In a letter viewed by the Wall Street Journal, House Oversight Chairman Darrell Issa (R., Calif.) and Rep. Jim Jordan (R., Ohio) told Fed Chairman Ben Bernanke that they were frustrated at the lack of response to a February request demanding more details on the central bank’s strategy to unwind assets purchased during years of its easy-money stimulus programs. The lawmakers say Mr. Bernanke continues to “willfully withhold” sensitive documents the committee has requested. “The American people have a right to know the true risks associated with the expansion of the Federal Reserve’s balance sheet,” the lawmakers wrote in a letter dated April 22. “The Fed’s obstruction and lack of transparency must stop.”

Possible Fed Successor Has Admirers and Foes - Ms. Yellen is now widely viewed as a logical candidate to succeed the current Fed chairman, Ben S. Bernanke, when his term ends in January 2014. She has worked closely with him in shaping and building support for the Fed’s campaign to stimulate the economy and bring down unemployment. But some of Ms. Yellen’s critics remain wary. They worry that she would not be sufficiently concerned about the possibility that inflation will accelerate as the economic recovery gains strength. If nominated, she could face opposition from Senate Republicans who have repeatedly expressed concern that the Fed’s campaign would destabilize financial markets and make controlling the pace of inflation more difficult. “I think people read Janet Yellen’s speeches as saying that she puts a higher weight on joblessness compared to inflation” than the typical member of the Fed’s policy-making committee, said Vincent Reinhart, formerly the head of the Fed’s monetary policy staff and now the chief United States economist at Morgan Stanley. “And that includes Ben Bernanke.” He added, however, that her nomination would be unlikely to shake financial markets because she already exercises considerable influence, so any shift in policy would most likely be modest.

Trap Denial - Paul Krugman - Four years ago Meltzer and I effectively had a debate about the effects of the rapidly expanding Fed balance sheet. He (and others) warned of inflation ahead; I (and others) said that we were in a liquidity trap, so that the Fed’s bond purchases would basically just sit there.  So here we are four years later, the huge expansion of the Fed’s balance sheet has not, in fact, led to inflation. And Meltzer is puzzled by the fact that all those bond purchases just sat there: Since late 2007, the Fed has pumped more than $2 trillion into the U.S. economy by buying bonds. Economist Allan Meltzer asked: “Why is there such a weak response to such an enormous amount of stimulus, especially monetary stimulus?” The answer, he said, is that the obstacles to faster economic growth are not mainly monetary. Instead, they lie mostly with business decisions to invest and hire; these, he argued, are discouraged by the Obama administration’s policies to raise taxes or, through Obamacare’s mandate to buy health insurance for workers, to increase the cost of hiring.  He made a monetary prediction; I made a monetary prediction; his prediction was wrong. Therefore, it must be because of Obamacare!

Building A Mystery - Paul Krugman -- Jared Bernstein shakes his head at what he calls “weirdness” at the Washington Post, citing an editorial and a commentary by Robert Samuelson. I second his views, but I’d like to point out something else about Samuelson’s piece. What Samuelson does is to throw up his hands and declare that we just don’t understand what’s going on in the macroeconomy. How does he know this? He talks to several people who declare themselves deeply puzzled by events — notably, Lorenzo Bini Smaghi and Allan Meltzer. But it’s no mystery why Bini Smaghi and Meltzer would find it all very puzzling — they personally got everything wrong. Bini Smaghi spent years sneering at anyone suggesting that Greece might need to write off some of its debts. Meltzer has been predicting runaway inflation for four years. Some of us don’t find the macro developments puzzling at all; we applied basic IS-LM macro, understood from the beginning that monetary policy would have little traction, warned that austerity policies would have major negative effects. Basic textbook macro has in fact worked fine. And so you might think that Samuelson would ask the people who got it wrong why they got it wrong, and whether it might not be because they had the wrong framework while the Keynesians were closer to the truth.

Chinese Sue Fed For Monopoly USD Devaluation - In what could to grow into a class action in US courts, a Chinese woman is suing the Federal Reserve after discovering that the real value of the USD250 she put in an account in 2006 had shrunk by 30%. She claims it was the result of the Fed issuing too much money, and as The South China Morning Post reports, her son Li Zhen, the lawyer, called the lawsuit "litigation for the public good". Alleging "abuse of monopoly in issuing currency," the People's Court of Kunming has yet to rule on the litigants' demand that the Fed cease-and-desist from its quantitative easing policy. While this may seem frivolous, there are some interesting points being made that bear watching, as Li notes, since "the Fed is private institution which enjoys monopoly over the issuing of currency, US Dollar holders can sue it for printing too much money."

How does inflation matter? - THE IMF's recently published a thought-provoking analysis on changes in the apparent relationship between inflation and unemployment. I posted some thoughts on the work here. (It was also the subject of a Free exchange column.) I've since reflected more on the work, and on some related writing by Nick Rowe. And on this chart: The chart shows four different gauges of inflation expectations. Three are mostly market driven. The University of Michigan measure comes from survey data; it is typically higher than other measures and responds more to commodity price swings (or really, oil price swings). Expectations swoon in late 2008 as everyone worries that the world is ending. Since that time there have been wiggles—the mid-2010 dip prompted the launch of QE2—but all of these series have been surprisingly stable, mostly flat, and mostly within a stone's throw of 2%.The IMF notes the stability of inflation expectations and reckons that it is attributable to central bank credibility; from the early 1980s central banks convinced the public (with the help of a honking recession or two) that inflation in future would be generally low and stable. Inflation expectations became so well anchored that not even the worst few months of economic performance since the 1930s could produce deflation.

Is The Recent Fall In Inflation Expectations A Warning Sign? Earlier this month I noted that the relationship between US equities and the Treasury market's implied inflation forecast was looking a bit unusual--unusual by recent standards, that is. Nothing's changed a few weeks down the line, other than the relationship is a bit more unusual. But keep a close eye on this dance between markets for an early warning sign of trouble. Considering the wobbly economic data of late, including yesterday's weak report on March durable goods orders, the recent slide in the market's outlook for inflation isn't productive at this stage... if it rolls on. We're still in what I like to call a period of the new abnormal: an unusually tight positive correlation between changes in the stock market and inflation expectations, as defined by the 10-year Treasury’s yield less its inflation-indexed counterpart. This strange link is largely a byproduct of sluggish growth and the fear that low inflation could deteriorate into outright deflation, which would probably precede/accompany a recession. As such, the crowd tends to cheer when the outlook for inflation turns up, and vice versa. That won't last forever, but for now it's still a powerful force in the macro/market universe.

All Currency is “Fiat” Currency - Or to be more precise, all currency is consensus currency. Units of exchange (dollar bills, great big rocks at the bottom of the ocean) can have value merely because everyone in a community agrees that they have value. That value need not be declared, defined, or enforced by by some “fiat” authority with powers of (ultimately physical) coercion — though it often or usually is. That’s one big realization I came to from Graeber’s Debt: The First Five Thousand Years. (Though he doesn’t state it so succinctly, and I’m not sure he’d agree with it.) Think of gold coins. If their exchange/consensus value is (enough) less than the (commodity) value of their metal content, people will melt them down and sell the metal. Arbitrage happens. Their consensus exchange value must be higher than the exchange value of their constituent metal, or they’re simply not currency any more; they’re chunks of commodity. That differential between currencies’ consensus value and their commodity value is their very sine qua non: the thing that makes them what they are, without which they would not be currencies.

Chicago Fed: “Slower Economic Activity In March” - US economic growth slowed last month, expanding at a rate that’s moderately below the historical trend, according to the March release of the Chicago Fed National Activity Index, a weighted average of 85 indicators. But the index’s three-month moving average (CFNAI-MA3) posted a somewhat brighter reading: -0.01 for last month. That's in line with expectations and a signal that the economy is still expanding on par with its historical trend. Nonetheless, CFNAI-MA3 slipped a bit from the revised February reading of +0.12, a change that reflects evidence that the pace of US economic growth slowed last month.  Despite the weaker numbers for March, recession risk was low through last month, according to this index. The Chicago Fed recommends reading the 3-month moving average as follows: a value below -0.70 after a period of economic expansion "indicates an increasing likelihood that a recession has begun." By that standard, today’s update confirms the low-recession risk signals that have persisted in the regular updates on these pages via the US Economic Profile (here’s last week’s update, for instance).

Chicago Fed: Economic Activity Was Slower in March - According to the Chicago Fed's National Activity Index, March economic activity slowed from February, now at -0.23, down from February's upwardly revised 0.76 (previously 0.44). This index has been negative (meaning below-trend growth) for ten of the past thirteen months. Here are the opening paragraphs from the report: Led by declines in production- and employment-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to -0.23 in March from +0.76 in February. Three of the four broad categories of indicators that make up the index decreased from February, and only one of the four categories made a positive contribution to the index in March.  The index's three-month moving average, CFNAI-MA3, decreased to –0.01 in March from +0.12 in February. The CFNAI Diffusion Index moved down to -0.02 in March from +0.13 in February. Twenty-eight of the 85 individual indicators made positive contributions to the CFNAI in March, while 57 made negative contributions. Fifteen indicators improved from February to March, while 70 indicators deteriorated. Of the indicators that improved, six 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. 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.

Chicago Fed: "Economic Activity Slower in March" -  The Chicago Fed released the national activity index (a composite index of other indicators): Economic Activity Slower in March Led by declines in production- and employment-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.23 in March from +0.76 in February. Three of the four broad categories of indicators that make up the index decreased from February, and only one of the four categories made a positive contribution to the index in March.  The index’s three-month moving average, CFNAI-MA3, decreased to –0.01 in March from +0.12 in February. March’s CFNAI-MA3 suggests that growth in national economic activity was very near its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.  This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. This suggests economic activity slowed in March, and growth was near the historical trend (using the three-month average).

The Effect of Superstorm Sandy on the Macroeconomy - NY Fed - The Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce has reported that real Gross Domestic Product (GDP) increased at a very sluggish 0.4 percent annual rate in the final quarter of 2012. A natural question to ask is to what extent, if any, did superstorm Sandy contribute to this weak performance. While not a particularly intense storm, it was the largest Atlantic storm on record with a diameter of roughly 1,100 miles. The storm severely disrupted economic activity from late October until well into November along the eastern seaboard from the Mid-Atlantic region into New England, an area that is densely populated and that represents a significant portion of total economic activity of the entire country. Nonetheless, we suggest that superstorm Sandy likely had a relatively modest impact on the fourth-quarter growth rate, and that we cannot even be certain of the sign of that impact.

High Bar for First Look at Winter GDP - Economists have set a high bar for the economy’s performance last quarter. On Friday, the Commerce Department is scheduled to report its first reading on first-quarter real gross domestic product. Monthly data already available suggest a bounce in growth after the meager 0.4% annual rate posted in the fourth quarter. The median forecast of economists surveyed by Dow Jones Newswires calls for real GDP expanded at a 3.2% rate last quarter. That would be the fastest pace since a 4.1% surge in the final three months of 2011. Stronger consumer spending as well as faster inventory building helped real GDP growth to bounce back over the winter despite an expected drop in government spending. Two other reports on next week’s calendar will offer clues as to where the economy is headed. Economy-watchers think the economy is slowing this spring, but by how much is unclear. The durable goods report, due out Wednesday, will measure the strength of demand for long-lasting manufactured goods. Economists think new orders declined 2.9% in March, giving back only a fraction of the 5.6% jump in February. The swing, however, reflects volatility in aircraft. Economists will sift through the details to see how well or poorly other goods-makers are doing.

U.S. Economy Accelerates at 2.5% Rate in 1st Quarter - U.S. economic growth accelerated from January through March, buoyed by the strongest consumer spending in more than two years. The strength offset further declines in government spending that are expected to drag on growth throughout the year. The Commerce Department says the overall economy expanded at an annual rate of 2.5 percent in the first quarter, rebounding from the anemic 0.4 percent growth rate in the October-December quarter. Much of the gain reflected a jump in consumer spending, which rose at an annual rate of 3.2 percent. That’s the best since the end of 2010. Businesses responded to the greater demand by rebuilding to their stockpiles. And home construction rose further.But government spending fell, led by another deep cut in federal defense spending.

U.S. Economy Grows Less Than Expected in 1Q - U.S. economic growth regained speed in the first quarter, but not as much as expected, which could heighten fears the already weakening economy could struggle to handle deep government spending cuts and higher taxes. Gross domestic product expanded at 2.5% annual rate, the Commerce Department said on Friday, after growth nearly stalled at 0.4% in the fourth quarter. The increase, however, missed economists' expectations for a 3.0% growth pace. Part of the acceleration in activity reflected farmers' filling up silos after a drought last summer decimated crop output. Removing inventories, the growth rate was a tepid 1.5%. The U.S. central bank, which meets next week, is widely expected to keep purchasing bonds at a pace of $85 billion a month. Data ranging from employment to retail sales and manufacturing weakened substantially in March after robust gains in the first two months of the year. There are indications the weakness persisted into April.

Real GDP increased 2.5% Annualized in Q1 -- From the BEA: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent. The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, residential investment, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.Personal consumption expenditures (PCE) increased at a 3.2% annualized rate, and residential investment increased 12.6%.  However equipment and software increased only 3.0%, and non-residential investment in structures declined slightly.   "Change in private inventories" added 1.03 percentage points to GDP in Q1 (reversing most of the decline last quarter), and the Federal government subtracted 0.65 percentage points (mostly a decrease in defense spending).  State and local governments continued to decline. This was below expectations of a 3.1% growth rate, but domestic demand was decent with PCE and private investment increasing.

GDP Q1 Advance Estimate at 2.5%: A Welcome Increase from Q4 But Below Expectations -  The Advance Estimate for Q1 GDP came in at 2.5 percent, a substantial improvement from the 0.4 percent in Q4 2012 although a bit below mainstream forecasts. The latest WSJ survey of economists had a consensus of 3.1 percent. Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.  The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, residential investment, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased....  The acceleration in real GDP in the first quarter primarily reflected an upturn in private inventory investment, an acceleration in PCE, an upturn in exports, and a smaller decrease in federal government spending that were partly offset by an upturn in imports and a deceleration in nonresidential fixed investment.  [Full ReleaseHere is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product.

BEA Estimates 1st Quarter 2013 GDP Growing at 2.5% Annual Rate: In their first estimate of the US GDP for the first quarter of 2013, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 2.50% annualized rate, some 2.12% better than the 0.38% growth rate for the prior quarter. Although the headline number itself indicates moderate mid-cycle growth, the details within the BEA's report cast at best a mixed message for the overall health of the economy. For example: although the overall contribution from consumer spending was up, it came mainly from spending on services (boosting the headline number by 1.46%, and principally spent on non-discretionary rents and utilities), with consumer spending for goods contributing to the headline number at a more modest 0.78% (down about -0.24% from the prior quarter). And although fixed investments were still contributing a positive 0.53% to the headline number, that was down over a full percent from the prior quarter. In fact, inventories swinging back to growth (after contracting during the prior quarter) arguably provided all of the quarter-to-quarter improvement in the headline growth rate. For this set of revisions the BEA assumed annualized net aggregate inflation of 1.20%. In contrast, during the first quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a 2.10% annualized inflation rate. As a reminder: an understatement of assumed inflation increases the reported headline number -- and in this case the BEA's relatively low "deflater" (nearly a full percent below the CPI-U) boosted the published headline rate. If the CPI-U had been used to convert the "nominal" GDP numbers into "real" numbers, the reported headline growth rate would have been a much more modest 1.63%.

Q1 GDP Rebounds, But Falls Short Of Forecasts - US economic growth rebounded in the first quarter after stalling in last year’s final three months, the Bureau of Economic Analysis reports in today's initial GDP estimate. But while Q1’s 2.5% advance (real seasonally adjusted annual rate) is a substantial improvement over last year’s slim 0.4% rise in Q4, today’s number is still well below expectations. The leading headwind in Q1: another hefty drop in the federal government's spending on defense. By contrast, consumer spending rose the most in two years in the first quarter, although that still wasn't enough to boost growth to match expectations. The Capital Spectator’s average econometric nowcast, for instance, anticipated a 3.2% rise in today’s GDP release.Nonetheless, the return to growth in the first quarter is certainly welcome, even if it's not a surprise. Monthly economic data has been trending positive so far this year, particularly in January and February. Indeed, today's GDP report shows that personal consumption expenditures, which account for roughly 70% of economic activity, revived in Q1 with a 3.2% increase vs. 1.8% in 2012:Q4. The key takeaway is that the US economy continued to post modest growth in the first quarter. The concern is that the momentum is slowing, or so several key indicators in March imply--the growth rate in nonfarm payrolls slowed sharply last month, for instance. For now, April data remains mostly guesswork. One of the early clues for this month is the flash estimate of the PMI Manufacturing Index, which slipped to 52.0 vs. 54.6 in March, reflecting the "weakest manufacturing expansion since last October," notes Markit Economics, which publishes the data.

GDP Up 2.5%, But Underlying Weakness Evident - As expected, the economy grew more quickly at the beginning of this year than at the end of 2012, according to this morning’s GDP release.  Real GDP was up at a yearly rate of 2.5% over the first quarter, compared to a mere 0.4% in the prior three months. But only slightly beneath the surface, the report showed continuing weaknesses in the US economy and, consistent with the unexpectedly weak March jobs report, hints at another softening of demand in recent months.  Expectations were for growth above 3% but disposable income, a critical driver of growth in our 70% consumption economy, fell sharply, down 5% in real terms, partly due the loss of the payroll tax break.The two main factors propelling the economy forward last quarter were firms restocking their shelves (inventory build-up adds to GDP growth) and strong spending by the stalwart American consumer, drawing not on their income but on their savings.  Since the inventory component is both highly volatile and less indicative of current demand, it’s useful to look at final demand, essentially GDP without the inventory build-up.  This measure grew 1.5% in real terms in the first quarter, down from 1.9% in the last quarter.  Given the slowdown in disposable income, accelerating consumer spending was partly financed by spending out of savings, as the savings rate fell two percentage points, to 2.6%, the lowest savings rate since 2007q4, the quarter in which the recession began.  With diminished savings and the fading of stimulus measures like the payroll tax break, future consumer spending will depend more on income growth from jobs and wages, a potentially risky linkage, given recent slowing in the job market.Housing continues to be a bright spot as residential investment was up almost 13% on an annual basis.  Housing has now been a positive contributor to growth for two-years running, adding 0.3% to the 2.5% growth rate for the first quarter.

US GDP Growth Accelerates from a Crawl to a Walk in Q1 -  US GDP growth accelerated from a crawl to a walk in the first quarter of 2013, according to the advance estimate issued today by the Bureau of Economic Analysis. The reported annual growth rate of 2.5 percent was just a bit faster than the average rate during the recovery, and much stronger than the 0.4 percent reported for Q4 2012. Compared with yesterday’s news that the British economy had barely escaped a triple-dip recession and that unemployment hit a record high in Spain, the latest numbers position the United States as one of the healthiest of the advanced economies. Behind the headline growth rate, however, some of the details were less encouraging.   As the following table shows, personal consumption expenditure was the most important component of the acceleration. Consumption contributed 2.24 percentage points to the Q1 growth rate, compared to just 1.28 percentage points in Q4. Nearly all of that came from the service sector. Housing services and utilities, recreation, and financial services all showed strong gains. Growth in consumption of goods slowed slightly. The growth of investment also increased, but not in a way that necessarily points to continued growth later in the year. Total investment contributed 1.56 to Q1 growth, up from just .17 in Q4, but fixed investment slowed. Most of the increased investment was in private inventories, with seasonally adjusted growth of farm inventories especially strong. Coming after a decrease in Q4, that may represent no more than a delayed adjustment to normal inventory levels, rather than more aggressive inventory building based on optimism about future sales growth.

GDP 2.5% for Q1 2013 - Q1 2013 real GDP came in at 2.5%   This is an improvement, from the stagnant economy GDP in the 4th quarter implied.   Government spending declines continue to be a drag on the economy and sucked out -0.9 percentage points from 1st quarter real gross domestic product growth.  Imports increased and cost the United States -0.9 percentage points of Q1 GDP.   Investment recovered on changes to farm private inventories.   Consumer spending increased from Q4 as well.  Generally speaking 2.5% GDP implies moderate economic growth, yet overall demand in the economy is weak.As a reminder, GDP is made up of: Y=C+I+G+(X-M) where Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports*.The below table shows the percentage point spread breakdown from Q4 to Q1 GDP major components.  GDP percentage point component contributions are calculated individually. Consumer spending, C in our GDP equation, shows an increase from Q4.  In terms of percentage changes, real consumer spending increased 3.2% in Q1 in comparison to a 1.8% increase in Q4.  Services drove consumer spending with a 1.58 percentage point contribution in household consumption expenditures.  Durable goods consumer spending contributed 0.62 percentage points to personal consumption expenditures.  Below is a percentage change graph in real consumer spending going back to 2000.

Another mediocre GDP report: is this the new normal? - The BEA released today its estimate of 2013 first-quarter real GDP, which grew at a 2.5% annual rate from the previous quarter. That's below the average 3.1% growth rate since World War II, but better than the 2.1% average since the recovery began in 2009:Q3. The ongoing slow growth has brought our Econbrowser Recession Indicator Index to 9.2%, up slightly from our previous reading of 8.2%. For purposes of calculating this number, we allow one quarter for data revision and trend recognition, so the latest value, although it uses today's released GDP numbers, is actually an assessment of where the economy was as of the end of the fourth quarter of 2012, for which the growth rate is now reported to be a decidedly worse-than-mediocre 0.4%. The index would have to rise above 67% before our algorithm would determine that the U.S. has entered a new recession. One percentage point of that 2.5% growth came from restocking inventories. In other words, real final sales grew at an even more mediocre 1.5%. Strong growth in consumption spending was offset by declines from the public sector, with lower defense spending subtracting 0.6% from the growth rate by itself, and declines in other categories of federal, state, and local spending subtracting an additional 0.2%.

Gross Domestic Product Report Has Good News and Bad News: This morning's gross domestic product (GDP) report showed that the economic recovery continued through the first quarter of this year, growing at 2.5%. That's a reasonable (though not great) rate of growth, although a bit below expectations, which were for something closer to 3%. There's good news and bad news buried in the detail. The good is that consumers seem interested in spending again. We'll see whether that holds up over coming months. The bad is that firms aren't so optimistic, and investment was lackluster. Government spending continues to detract from economic growth, as it has for 10 of the past 11 quarters. This report also provides the latest reading on the core PCE deflator, which is the rate of inflation targeted by the Fed. This measure shows inflation running at 1.2%, well below the Fed's target. Let's not get lost in the detail. This GDP report provides a soon-to-be-revised and noisy indicator of what happened in the economy a few months back. The bigger picture is that we have a fledgling recovery which needs help, but isn't getting it: Fiscal policy is set as a drag on growth, and monetary policy delivering below-target inflation.

Inventory Accumulation Pushes GDP Growth to 2.5 Percent in First Quarter - Dean Baker - GDP grew at just a 2.5 percent annual rate in the first quarter, a bit faster than the 2.2-2.4 percent range needed to keep the unemployment rate from rising. Even this growth only came with a large boost from inventories. Final demand grew at just a 1.5 percent annual rate. The government sector continues to be a major drag on growth. Cutbacks in government spending, primarily on the military side, subtracted 0.8 percentage points from the growth rate for the quarter. However domestic federal spending also contracted, as did state and local spending, falling at a 1.2 percent annual rate. Trade was also a big negative for the quarter, subtracting 0.5 percentage points from growth. This goes along with the jump in inventories, which are largely imported. Investment was weak in the quarter, growing at just a 2.1 percent annual rate following growth of 13.2 percent in the fourth quarter of last year. Equipment and software investment grew at a 3.0 percent rate while non-residential structures actually fell by 0.3 percent.Residential construction had its third consecutive double-digit increase, growing at a 12.6 percent annual rate and adding 0.31 percentage points to growth. This growth is likely to continue through 2013 and 2014. Another bright spot is health care. Spending increased at just a 4.2 percent nominal rate for the quarter and is up just 3.4 percent over the last year. That is less than the growth in GDP over this period. As the period of slow health care cost growth persists, it is becoming increasingly hard to dismiss the slowdown as simply the result of the recession. As the Congressional Budget Office (CBO) incorporates more of this slowdown in its projections, the long-term deficit picture will improve substantially. Consumption grew at a 2.2 percent annual rate in the quarter, its fastest rate of growth since the fourth quarter of 2010. However, much of the uptick can be explained by a surge in utility usage and housing that added 0.53 percentage points to growth in the quarter, reversing an almost identical decline from the prior quarter. This just reflects erratic weather-related factors.

A stiffening headwind - AN OUTBREAK of disappointing American economic data is raising fears of a return of the "spring swoon". For a fourth year running, the American economy seemed to sprint out of the gates in January and February only to lose pace by April. But according to figures released this morning by the Bureau of Economic Analysis, even the early year clip might have been more trot than gallop. The American economy grew at just a 2.5% annual pace in the first quarter. While that is up from a 0.4% performance in the fourth quarter of 2012, it came in below expectations for growth at or just above 3%. This morning's figure was the first, or advance, estimate, and subsequent revisions may yet push growth higher. There is nonetheless plenty of cause for anxiety in the report, beginning with the drag from government. Government belt-tightening has subtracted from overall growth in 11 of the last 13 quarters and federal cuts have been a drag in 8 of the last 10 quarters. But for federal cutbacks in the first quarter—which came mostly from ongoing reductions in defence spending—growth would have been 0.65 percentage points higher. Worringly, today's figures reflect very little impact from the "sequester"—automatic spending cuts that only recently began to take effect and which may hack off a further 0.6 percentage points from GDP growth this year.

How far from full recovery are we, Part II: Housing to the rescue? - I noted a while back that the uptick in residential construction was a genuine bright spot in the economy, and one that would all else equal make one expect better GDP growth in 2013 than 2012. But just how much should we realistically expect from residential investment in driving growth. Not much. Residential investment is only about 2.7 percent of the overall economy (as of the first quarter of 2013), so even extraordinarily fast growth in this sector would not be enough to drag the rest of the economy with it. As a demonstration, look at 2012—the most rapid growth of residential investment in the past two decades—in the figure below (which shows a rolling 4-quarter average of growth rates of residential investment since 1989). The 15.3 percent growth in 2012 was the fastest since 1992, outpacing even bubble-inflated years in the mid-2000s. And yet for 2012 residential investment contributed all of 0.34 percentage points to GDP growth. Essentially it was the difference between 2011 GDP growth of (terribly disappointing) 1.8 percent and 2012 GDP growth of (still terribly disappointing if a tiny bit better) 2.2 percent. Say that we get a full year of the fast growth rate seen in any single quarter since 1989—23 percent growth for all of 2013. This would translate into contribution of GDP of 0.7 percent. That’d be nice to have, for sure (and I think it’s unrealistic), but it would essentially be cancelled out entirely by the macroeconomic drag of the sequester alone. And since additional cuts were embedded in the recently passed continuing resolution, and no decent stimulus was passed to replace the expiring payroll tax cut, this means that the federal fiscal drag will easily overwhelm any boost from housing. And, for the first quarter of 2013 residential investment has continued to grow nicely—12.6 percent. Yet it added just 0.3 percent to the quarter’s growth rate—dwarfed by the 0.8 percentage point subtraction contributed by declining government spending (most of that federal).

Analysis: Consumers Hold Up, Government Weighs on GDP - The latest reading on GDP for the 1st quarter came in short of expectations. Kevin Flanagan, Fixed Income Strategist for Morgan Stanley Wealth Management, breaks down the numbers with the Wall Street Journal’s Mathew Passy.

Overhyped Q1 GDP Grows By Only 2.5%, Biggest Miss To Expectations Since September 2011 -  Less than an hour ago we speculated that "it wouldn't be surprising for GDP to come substantially weaker than expected, only to be revised higher (or lower) subsequently." Sure enough, we have gotten at least the first part right for now, with the advance Q1 GDP number printing a very disappointing 2.5%, on expectations of a 3.0% increase, up from 0.4% in Q4, and the biggest miss since Q3 2011. The reason for the big miss: Inventory and Fixed Investment came well below expectations, comprising 1.03% (of which autos represented 0.24%) and 0.53% of the 2.5% annualized increase GDP. Kiss the great CapEx investment story goodbye.  The only silver lining in today's otherwise very weak report: Personal Consumption Expenditures, which were a sizable 3.2% versus the 2.8% expected, and amounted to 2.24% or virtually all of the net Q1 GDP growth. So far so good .The bad news, however, is that this number will not sustain into Q2 and look for expenditures to plunge in the coming quarter. Finally, let's not forget that it rained like 5 days in March, so there's that. And of course, very soon, all GDP will be revised to add intangibles, so in retrospect Q1 GDP will likely have grown by a Ministry of Truth blush-inducing 10% or so.

Starving the Beast - The G.D.P. report released Friday states the total government part of G.D.P. – federal, state and local – came to $3.0306 trillion in the first quarter of this year. That is 0.01 percent below the $3.0309 trillion recorded four years earlier. Those are nominal figures, not adjusted for inflation (as are the figures in the chart below). On a real basis, the decline was 6.5 percent. Those who complain about big government will point out, correctly, that some government spending does not show up that way in the G.D.P. accounts. Transfer payments like Social Security are recorded when the recipient spends the money, and characterized based on what he or she bought. But the figure does include all the salaries paid by governments, and all the things they buy, from schoolbooks to rifles.  Governments as a group had 648,000 fewer employees in March than they had three years earlier. Some of that decline – 87,000 jobs – reflects temporary employment for the 2010 census, but the rest reflects real cutbacks. Most of that decline has been in local government jobs, and most of the fall in local government jobs has come in schools.

Will Consumers’ First-Quarter Party Lead to Second-Quarter Hangover? - This is the sorriest soiree ever. The old saying about monetary policy and economic growth is that the Federal Reserve removes the punch bowl just as the party gets going. When early-2013 economic data looked robust, investors, Fed-watchers and central bankers themselves started discussing when the Fed would have to begin tapering off its current accommodativeness. Then a strange thing happened: the party fizzled on its own. Real gross domestic product grew at an annual rate of 2.5% last quarter. While that’s a moderate pace and better than the 0.4% rate of the fourth quarter, the rate is below the 3.2% expected by economists and not strong enough to generate high job growth. The party pooper was the government. Real federal spending contracted by 8.4% on top of a 14.8% plunge in the fourth quarter. Economists at J.P. Morgan pointed out the back-to-back drops in defense outlays were the weakest two-quarter run since the end of the Korean War. Add in a drop in state-and-local spending and the government sector cut 0.8 percentage point from first-quarter GDP growth. If anyone was partying last quarter, it was consumers. Real household spending grew by 3.2%, the fastest clip since the fourth quarter of 2010. The festivities came at a price, however. Higher taxes and costlier energy caused a large 5.3% drop in disposable income. To increase spending, consumers had to save less. The saving rate declined to 2.6%, the weakest quarterly rate since the end of 2007.

Q1 GDP and Investment - Final demand increased in Q1 as personal consumption expenditures (PCE) increased at a 3.2% annual rate (up from 1.8% in Q4 2012), and residential investment (RI) increased at a 12.6% annual rate (down  from 17.6% in Q4).  This was the strongest private domestic contribution (PCE and RI) since Q4 2010, and the 2nd strongest quarter since the recession began. Unfortunately PCE will probably slow over the next couple of quarters as the sequester budget cuts ripple through the economy.    The negative contributions came from less Federal Government spending (subtracted 0.65 percentage points), less state and local governments spending (subtracted 0.14 percentage points) and from trade (subtracted 0.50 percentage points). The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy. Residential Investment (RI) made a positive contribution to GDP in Q1 for the eight consecutive quarter. Usually residential investment leads the economy, but that didn't happen this time because of the huge overhang of existing inventory, but now RI is contributing. Equipment and software investment was positve in Q1, however the contribution from nonresidential investment in structures was slightly negative (the three month centered average was still positive). Nonresidential investment in structures typically lags the recovery, however investment in energy and power has masked the ongoing weakness in office, mall and hotel investment (the underlying details will be released next week). The second graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.The last graph shows non-residential investment in structures and equipment and software.

White House: Sequester Cuts Hurt GDP - Federal spending weighed on economic growth in the first quarter – and that’s likely because of the across-the-board cuts that hit Washington earlier this year, the White House said. The nation’s GDP, a measure of all goods and services produced in the economy, advanced at a 2.5% annual rate between January and March, the Commerce Department said Friday. Economists had forecast a 3.2% expansion. Federal defense spending dropped an annualized 11.5% in the first quarter, after falling 22.1% in the prior period, the Commerce Department said Friday. Nondefense spending dropped 2.0% after rising for two consecutive quarters. Overall, federal spending subtracted 0.65 percentage point from the total rate.Those cuts, known as the sequester, took effect March 1.“It is likely that the contraction in Federal defense and non-defense spending, at least in part, reflects the onset of sequestration,” Alan Krueger, the White House chief economist, wrote in a blog post.In the wake of the sequester, which were required under a 2011 deal to raise the federal borrowing limit, tens of thousands of federal employees have faced furloughs and programs have been cut. Economists have said the effects will be more pronounced in coming quarters. The Congressional Budget Office has estimated the drastic spending cuts will reduce GDP growth by 0.6 percentage point for the year.

Did sequestration cause weak Q1 GDP? - We leaned heavily on the idea that sequestration is slowing the growth of the US economy in our write-up of Q1 GDP. The immediate reason to do so is the composition of growth.Federal defence spending knocked 0.65 percentage points off total growth. Without that, the headline figure would have been an annualised 3.2 per cent instead of 2.5 per cent, bang in line with expectations.The White House, at least, is invoking the sequester. “It is likely that the contraction in Federal defense and non-defense spending, at least in part, reflects the onset of sequestration,” writes CEA chair Alan Krueger on the White House blog. The tone of a lot of analyst commentary is fairly similar. But is sequestration really the culprit? I am suspicious because the headline annualised falls in defence spending of 22 per cent in Q4 and 12 per cent in Q1 seem far too big to be explained by the relatively modest sequester cuts.  Some of the fall may be due to sequestration – I’ve heard stories of non-defence agencies saving cash as early as last October because they expected it to take effect – but the Department of Defence issued specific instructions not to cut back in advance of the sequester.

Counterparties: America persists in underwhelming - The one thing that can be said with certainty about this morning’s GDP figures, which showed the US economy advancing at a weak 2.5% pace, is that they’re ephemeral. Many of the data points that make up this advance estimate “could vanish in a flash of re-estimation,” as Matt Yglesias writes. Besides, the Bureau of Economic Analysis is about to recalculate all GDP data back to 1929 in order to better account for the value of intellectual property. Those caveats aside, the today’s GDP figures show economic growth that’s “persistent” but “underwhelming,” in the words of Credit Suisse’s Jay Feldman. Government spending, which fell at 4.1% rate in the first quarter, continued to be a drag on growth, as it has been in 10 of the previous 11 quarters. The six-month decrease in government spending was the largest since the end of the Korean War, according to Capital Economics. The fall was driven in large part by an 18.5% annualized decline in defense outlays over the past two quarters. The White House chalked up a piece of that drop-off to sequestration, although those mandatory budget cuts went into effect only in the final month of the quarter. Investment was more of a mixed bag: residential investment rose, but business investment in structures like factories and office buildings fell. Though business investment in equipment and software was up, it increased by a lower rate than earlier in the recovery, observes Neil Irwin.The data on personal income and spending were also a bit puzzling. Disposable income fell by over 5%, thanks in part to the increase in the top marginal tax rates, the expiration of the cut in the payroll tax, and more expensive energy. However, that dip seemed to have little impact on personal consumption expenditures, which rose at a 3.2% annual rate. Jared Bernstein points out that the savings rate fell by two percentage points to 2.6%, the lowest since the fourth quarter of 2007.

Real GDP Per Capita: Another Perspective on the Economy -- Earlier today we learned that the Advance Estimate for Q1 2013 real GDP came in at 2.5 percent, up from 0.4 percent in Q4 2012. Let's now review the numbers on a per-capita basis. For an alternate historical view of the economy, here is a chart of real GDP per-capita growth since 1960. For this analysis I've chained in today's dollar for the inflation adjustment. The per-capita calculation is based on quarterly aggregates of mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data is available in the FRED series POPTHM. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale. I've drawn an exponential regression through the data using the Excel GROWTH() function to give us a sense of the historical trend. The regression illustrates the fact that the trend since the Great Recession has a visibly lower slope than long-term trend. In fact, the current GDP per-capita is 11.6% below the regression trend. The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 20 quarters beyond the 2007 GDP peak, real GDP per capita is still 1.04% off the all-time high following the deepest trough in the series. Here is a more revealing snapshot of real GDP per capita, specifically illustrating the percent off the most recent peak across time, with recessions highlighted. The underlying calculation is to show peaks at 0% on the right axis. The callouts shows the percent off real GDP per-capita at significant troughs as well as the current reading for this metric.

Data shift to lift US economy by 3% - The US economy will officially become 3 per cent bigger in July as part of a shake-up that will for the first time see government statistics take into account 21st century components such as film royalties and spending on research and development. In an interview with the Financial Times, Brent Moulton, who manages the national accounts at the Bureau of Economic Analysis, said the update is the biggest since computer software was added to the accounts in 1999. “We are carrying these major changes all the way back in time – which for us means to 1929 – so we are essentially rewriting economic history,” said Mr Moulton. The changes will affect everything from the measured GDP of different US states to the stability of the inflation measure targeted by the US Federal Reserve. They will force economists to revisit policy debates about everything from corporate profits to the causes of economic growth.   The changes are in addition to a comprehensive revision of the national accounts that takes place every five years. Steve Landefeld, the BEA director, said it was hard to predict the overall outcome given the mixture of new methodology and data updates. But while the level of GDP may change,  “I wouldn’t be looking for large changes in trends or cycles,”

US GDP Will Be Revised Higher By $500 Billion Following Addition Of "Intangibles" To Economy -- Those who have been following the US debt to GDP ratio now that the US officially does not have a debt ceiling indefinitely, may have had the occasional panic attack seeing how this country's leverage ratio is rapidly approaching that of a Troika case study of a PIIG in complete failure. And at 107% debt/GDP no explanations are necessary. Luckily, the official gatekeepers of America's economic growth (with decimal point precision), the Bureau of Economic Analysis have a plan on how to make the US economy, which is now growing at an abysmal 1.5% annualized pace, or about 5 times slower than US debt growing at 7.5% annually, catch up: magically make up a number out of thin air, and add it to the total. And it literally is out of thin air: according to the FT the addition will constitute of a one-time addition of intangibles, amounting to 3% of total US GDP, or more than the size of Belgium at $500 billion, to the US economy.

Counterparties: The value of ideas -  By adding in the value of American companies’ intellectual property to the way it calculates GDP, the bureau is increasing its estimate of the size of the US economy by roughly 3%. That’s an increase equal to the size of the Belgian economy, Robin Harding points out.“On a purely technical level, this should more precisely match GDP in any one quarter to the actual economic value the nation generates in that span,” says Neil Irwin. But perhaps more importantly, it points to a shift in how governments value the role intangible ideas play in economic growth. The US  is one of the first to adopt a new international standard for GDP accounting, set by the UN in 2008. The new data reclassifies R&D as a capital investment akin to a company buying a new tractor or factory, rather than simply the cost of doing business. Estimates from the BEA show this change alone increased GDP by $300 billion (nearly 2%) in the base year of 2007. The accounting change also includes creative works — the intellectual property behind movies, music, books, and even paintings. In another post, Harding suggests this part of the change may be controversial, as it “will amount to the first official estimate of the value captured from the laws of copyright.”

GDP Revisions Aim to Account for Value of Art - In midsummer, the Commerce Department’s Bureau of Economic Analysis will release a new way to understand what drives U.S. economic growth. The BEA will tweak its formula to include spending on what it calls “artistic originals.” That includes theatrical movies, original songs and recordings as well as books and long-running television programs. Rounding out the category are commercial stock photography, greeting card designs and theatrical play scripts. “These kinds of intangible assets have been important, but have gotten increasingly important in the U.S. economy,” BEA director Steven Landefeld said. “This is the latest in a long series of changing the definition of the GDP to keep up with what the state of the economy is.” The new GDP figures will revise estimates of the nation’s output back to 1929. Because the revisions are spread throughout history, they won’t dramatically rewrite U.S. macroeconomic history or change past business cycles, Mr. Landefeld said. Instead, the new methodology will better reflect a U.S. economy that creates value more through creating intangible assets rather than producing physical goods, as was the case 75 years ago

Add 3% and some bad accounting - Via Mark Thoma, the Financial Times reports on the expected changes to US GDP accounting rules that are likely to raise the GDP level by 3% when they are implemented in July. I am not an expert on all the technical aspects of measuring GDP (I always hope that whomever is dealing with this is doing an excellent job) but this change reminds us of a fundamental issue with macroeconomic statistics: the lack of good data on NDP (Net Domestic Product), a variable that should be much more relevant than GDP to measure economic performance or welfare or activity. What the future accounting rules will do is to reclassify certain business expenditures (such as R&D) as investment instead of an intermediate input that enters the production function. Why is this relevant? When a business expenditure is simply accounted as part of the production process (as a cost), it only enters in GDP through the value of the final good - to avoid double counting. But when a business expenditure is counted as a capital good it will show up twice in GDP. When it is produced it will show up as investment (a component of GDP). But then, as the asset is used and contributes to the production of the final good, the value it generates is incorporated into the value of the final good. We are doing bad accounting here as the cost to the business (which is captured by the depreciation of the asset) will never show up with a minus sign in the calculation of GDP because GDP is a gross measure of production and not a net measure of production.

Problems in GDP Measurement and Rent Seeking - Dean Baker - The Bureau of Economic Analysis (BEA) will adopt a new methodology for measuring GDP this summer. The methodology will treat research and development and the creation of artistic works as forms of capital that depreciate through time rather than one-time expenditures. This will lead to an increase in measured GDP of close to 3.0 percent according to BEA's analysis. There are three points worth making on this change. First, for you conspiracy buffs, this one has been in the works for close to two decades. The government didn't just come up with it to make President Obama look better. The second point is that the methodology for this will inevitably be very troubling. If Pfizer has a patent for a great new cancer drug we will now pick this up as an increase in the investment component of GDP. Suppose Merck develops a drug that does the exact same thing, except that it gets around Pfizer's patent. According to the new methodology this would further increase GDP. Of course, this is a battle over rents, not actually an increase in total output. That is a problem. Expenditures for rent-seeking don't make us richer in aggregate.. Consider the situation where a software developer makes their great new software available for free. Our friends over at BEA won't show any gain to GDP even though our living standards will certainly be improved by much more than if they had patented the software and charged for it.

Instability may not be optional - Steve Keen - Sydney Morning Herald commentator Gareth Hutchens commented that the Rogoff and Reinhart affair shows how slow economists are to realise that their data may be dodgy, but to my mind that is insignificant compared to how slow they are to realise that their theories are dodgier still.  A defining feature of mainstream economic modelling is the belief that the economy is stable: given any disturbance, it will ultimately return to a state of tranquil growth. Mainstreamers argue over how fast this will happen: Chicago /Freshwater / New Classicals argue it adjusts instantly, while Saltwalter/New Keynesians say it will take time because of ‘frictions’ in the economy’s adjustment processes. But they both take the innate stability of the economy for granted, and this belief is hard-coded into their mathematical models.  This stability is also seen as a good thing – so much so that anything which obstructs it being achieved should be removed. They argue over policy in a crisis like the world’s current one, with New Classicals falling firmly into the ‘Austerians’ camp while New Keynesians favour fiscal stimulus, One would think that after as disturbing an event as the Great Recession – and let’s call it as it is now, the Second (or perhaps Third) Great Depression in Europe – that this belief in the innate stability of capitalism might be at least reconsidered by the mainstream. But though they’re willing to tinker at the edges, their core vision of the economy as being either in or near a stable equilibrium remains an unchallenged mantra.

The slowdown in economic activity is right on schedule – for the 4th year in a row - The "spring slowdown" is here again. As discussed earlier (see post), the previous three years saw a strong start in the US, followed by a slowdown in economic activity, particularly in manufacturing. What's especially troubling this year is that we are also seeing a corresponding slowdown in other major economies that were thought to be in good shape, namely Germany ... Source: Markit ... and China. China Manufacturing PMI (source: HSBC, Markit) Treasury yields declined to the lowest level this year in response. This move reflects the bet that given the soft patch in the economy, the Fed will continue buying government paper for some time to come.

The Hissing Sound of Air Leaving the Economy - Yves Smith - There's a remarkable amount of optimism in the US financial media given the underlying health of the economy. But the markets are still dominated by an underlying faith in the willingness of central bankers to protect the backs of investors and limit any downside (while, ironically, many of these same investors howl about ZIRP and QE, which were clearly intended to goose the value of financial assets and real estate, with the hope that would lead to more consumer spending).  And why shouldn't the professional investors (as opposed to widows and orphans who can no longer rely on low risk bond investments to produce adequate income) be pleased as punch? This recovery may be nothing to write home about, but it sure has served those at the very top of the food chain extremely well. Remember, the income gains in this tepid rebound have gone entirely to the top 1% while the rest of us as a whole have lost ground. And aggregates like that mask increasing distress among at the bottom of the economic ladder. For instance, in New York, a city that has benefitted more from the tender ministrations of the Federal Reserve and Treasury than most cities in the US, the number of poor and near-poor increased in 2011. And with so many left out of the fruits of what growth there has been, there's a real possibility that the economy will move into stall speed. And the econopundits are finally waking up to the fact that the slowdown in the rest of the world will drag on the US. 25% of S&P earnings come from Europe

Counterparties: A recovery for the 7% - Here’s the post-crisis recovery in a nutshell: from 2009 to 2011, the “mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%”, according to new report by the Pew Research Center.  The reason for this, Pew says, is clear. Capital markets, where the wealthy hold a disproportionate amount of assets, boomed, while the housing market, the biggest source of wealth for most Americans, was flat. Josh Brown looks at the Pew study and concludes that “wealthy American households have never had it quite so good”. He sees a statistical portrait of American rentiers, a class with “investment portfolios who essentially extract an income from the nation and return very little (in the form of jobs or spending) in comparison to what they take”. At the other end of the spectrum, America’s dealing with the quiet humanitarian disaster of long-term unemployment, which Paul Krugman says is creating an increasingly “permanent class of jobless Americans.” The WSJ’s Neil Shah tries to find a slight silver lining in other data from the Federal Reserve, which show that “Americans have recouped much of the wealth they lost during the recession”. Household wealth at the end of 2012 was $66.1 trillion, just a little more than a trillion short of its 2007 pre-recession peak.

America needs a new war or capitalism dies - Forbes reported that the initial reading of GDP data "fell for the first time in three and a half years in the fourth quarter ... declining by an annualized 0.1%" while "economists had expected GDP to increase 1%. (The GDP number's most recent revision showed a 0.4% gain.) A dramatic 15% drop in government spending dragged on economic activity. Defense outlays were cut the most, falling by 22.2%, the largest decrease in defense since the Vietnam War's end." Wars stimulate the economy and we are a warrior nation: Didn't WWII get us out of the Great Depression? And the Iraq/Afghan Wars, longest in history, sure stimulated the economy ... the Pentagon war machine doubled from $260 billion in 2000 to roughly $550 billion last year ... GDP increased 50% from $10 trillion to $15 trillion ... and federal debt tripled to over $15 trillion from under $5 trillion back when our leaders believed "debt didn't matter." But most of all, wars are great for capitalists: Forbes list of world billionaires skyrocketed from 322 in 2000 to 1,426 recently. Yes the adjusted household income of the rest of Americans flatlined the past generation. But still, life's great for capitalism and for 1,426 capitalists across America and worldwide, a tribute to the "disaster capitalism" doctrines of Nobel economist Milton Friedman and Ayn Rand's free-market capitalism dogma.

Treasury Yield Snapshot: 10-Year Yield Hovers Near 2013 Low -  I've updated the charts below through Friday's close.  The yield on the 10-year note closed Friday at 1.73%, one basis point above the 2013 closing low on April 5th, 15th and 18th. The latest Freddie Mac Weekly Primary Mortgage Market Survey puts the 30-year fixed at 3.41%, down from its interim high of 3.63% in mid-March and 10 basis points above its historic low of 3.31%, which dates from the third week in November of last year.  Here is a snapshot of selected yields and the 30-year fixed mortgage starting shortly before the Fed announced Operation Twist. For a eye-opening context on the 30-year fixed, here is the complete Freddie Mac survey data from the Fed's repository.  At its peak in October 1981, the 30-year fixed was at 18.63 percent.The 30-year fixed mortgage at the current level is a confirmation of a key aspect of the Fed's QE success, and the low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries (although the yields are up from recent historic lows of last summer). But, as for loans to small businesses, the Fed strategy is a solution to a non-problem.

The U.S. Over the Last 50 Years: A Snapshot from the 2014 Budget - When the president's proposed budget  is released each year, I confess that I tend to ignore the actual and projected spending numbers, and instead head right for the "Analytical Perspectives" and "Historical Tables" that  volume that always accompany the budget. The president's proposed budget is a wish list, which will eventually be compared with the budget proposals from the House of Representatives and from the U.S. Senate--although the Senate has failed to pass an actual budget in the last few years. While that process hashes itself out, the analysis and history are more immediately interesting to me.  For example, Chapter 6 of the "Analytical Perpectives" is about "Social Indicators: "The social indicators presented in this chapter illustrate in broad terms how the Nation is faring in selected areas in which the Federal Government has significant responsibilities. Indicators are drawn from six selected domains: economic, demographic and civic, socioeconomic, health, security and safety, and environment and energy." A long table stretching over parts of three pages shows many statistics for ten-year intervals since 1960, and for the last few years. For me, tables like this offer a grounding in basic facts and patterns. Here, I'll just offer 21 comparisons drawn from the table over the last half-century or so, from 1960 or 1970 up to the most recent data.

Total US Debt To GDP: 105% - Now that we have the first estimate of Q1 GDP growth in both rate of change and absolute current dollar terms ($16,010 billion), we can finally assign the appropriate debt number, which we know on a daily basis and which was $16,771.4 billion as of March 31, to the growth number. The end result: as of March 31, 2013, the US debt/GDP was 104.8%, up from 103% as of December 31, 2012 or a debt growth rate that would make the most insolvent Eurozone nation blush. There was a time when people were concerned about this unsustainable trajectory, but then there was an infamous excel error, and now nobody cares anymore.

The Unpossible Chart: Is government spending really at an all-time low? - I was momentarily taken aback when I read the following bit (in bold) from RDQ Economics: The private economy continues to expand at a solid pace as manufactured output growth averaged 5.2% over the last two quarters, and private-sector job creation has averaged 202,000 per month.  For the year as a whole, we are projecting 2½% real GDP growth and, with the share of real government spending in real GDP at a recorded low, we believe much of the measured fiscal ‘drag’ is behind us and we expect the stronger private-sector growth rate to show through in the overall GDP data over the balance of the year. Wait, what? Is it true that the “share of real government spending in real GDP” is at a “recorded low?”  Well, as the above chart shows, it is true. Real GDP, you might recall from high-school econ class, is Government + Investment + Consumption + Net exports. Now the government part is actually ”Real Government Consumption Expenditures & Gross Investment.” It includes federal, state, and local government spending. On the federal side, you can think of it as discretionary spending. Government buying stuff.

Think Tank: August-October Deadline for Debt Ceiling  - The federal government will likely be able to avoid a debt limit crisis until sometime between August and October given current tax and spending projections, the Bipartisan Policy Center said Friday. Current law allows the Treasury Department to continue borrowing money to finance government spending until mid-May. After that time, Treasury can use emergency measures – such as halting certain pension investments – to buy more time. BPC, which studies such matters closely, projected Treasury would be able to continue operating until sometime between mid-August and mid-October before it faced a crisis and potentially started missing payments…

Coding Errors, Austerity, and Exploding Debt - The discovery of errors in the Reinhart-Rogoff paper on the growth-debt nexus is already impacting policy. A participant in last Friday's G20 meetings told me that the error was a factor in the decision to omit specific deficit or debt-to-GDP targets in the G20 communiqué.  It's also a new talking point in the battle over the budget-offered as a reason why the U.S. should stop worrying about budget reform and consolidation and start worrying about austerity.      But the main arguments now for controlling the growth of spending and gradually bringing the U.S federal budget into balance overpower any one study, right or wrong.  First, under current budget policy the debt to GDP ratio will grow at such an explosive rate in the future that, if allowed to continue, will cause economic damage according to virtually any study.  Recall that the CBO projects that under current law the federal debt held by the public will be rising to 250% in 30 years.   Even this is an underestimate if interest rates rise faster than assumed by CBO. If CBO went out further in time, as they used to, the debt ratio goes over 700%.

Reinhart-Rogoff data problems - The methods and conclusions of an influential paper by Carmen Reinhart and Kenneth Rogoff published in 2010 have recently been challenged by Thomas Herndon, Michael Ash, and Robert Pollin. Here I comment on both the details and broader significance of the dispute. Let me begin by stating what I perceive to be the core policy question: are high sovereign debt loads something we should worry about, and if so, why? The main reason that I personally am concerned arises from the fact that, for any level of the interest rate, a higher debt load means that the government will permanently need to spend more money just to pay the interest on the debt. This is not a matter for arcane debate, but rather is a consequence of the most basic arithmetic. At the moment, the interest rate on U.S. government debt is extremely low, so that despite our high debt load, the government's net interest cost is currently quite reasonable. However, most projections call for interest rates to rise over the next few years, and the most recent assessment by the CBO notes that consensus interest-rate forecasts and existing fiscal legislation imply that within a few years, the U.S. interest cost will be bigger than the entire defense budget, and bigger than all of non-defense discretionary spending.

Reply to Prof. Hamilton regarding "Reinhart-Rogoff Data Problems" - Pollin & Ash - We appreciate the opportunity to respond to the careful comments posted by Prof. Hamilton concerning our critical replication with Thomas Herndon of the 2010 Reinhart/Rogoff study, "Growth in a Time of Debt." We will focus on what we see as the three main issues being raised by Prof. Hamilton.  But before we get to these questions, it will be useful to clarify what our paper is about and not about. For starters, let's just be clear that there is not one word in our paper that suggests that one should never, categorically, worry about high sovereign debt loads. The purpose of our paper is much more focused, and is captured in our paper's title: "Do high public debt levels consistently stifle economic growth?" RR's answer to that question was "yes." But their answer was based on flawed calculations and methodology. We argue that the accurate answer based on a corrected analysis of the RR dataset is "no." We show, using RR's own dataset, that there is definitely no threshold point, at 90 percent public debt/GDP, at which countries can anticipate GDP growth dropping sharply on a consistent basis.

Do interest payments on government debt matter? - It is true that interest payments on government debt are part of government spending and they will require some form of taxes to generate revenue and taxes are likely to be distortionary. But this cannot be an argument in favor of a reduction of government debt to avoid paying future interests on it. The reason is that to reduce debt you need to find the resources, which means taxes and therefore creating a distortion today. Is it better to create the distortions today or tomorrow? The optimal path of debt (once you have it) depends on arguments that are all related to intertemporal trade offs. Is it better to raise taxes today by a large amount or over the coming years by a small amount? (economic theory tends to suggest that is better to spread the pain over the years). Also, what is the interest rate at which the government can borrow today relative to other interest rates in the economy (which affect how the private sector sees the trade off between paying taxes today or tomorrow)? And there is also the intertemporal tradeoff related to countercyclical fiscal policy (raise taxes when you are close or above full employment).So the real issue is not how large interest payments on government debt will be in the future. The real issue is about difficult intertemporal trade offs associated to taxation and spending in different years as well as how we think about the interest rate faced by government in the context of how the rates faced by the private sector.

Why Does Anyone Listen to Conservative Economists Anymore? - Last week, we learned that the Reinhart and Rogoff paper which provided one of the strongest pedestals for the austerity debate was deeply flawed.  Mike Konczal at the Next New Deal summarizes the basic problems here.  Several other people added their commentary (see Dean Baker, Paul Krugman and Marginal Revolution).  In addition, the IMF issued a paper in 2011 wherein they recognize that austerity -- especially in a time of economic weakness -- is bad policy.  We also have actual evidence from Europe and the UK that austerity does not work. But just as importantly, an entire branch of economic thought has been wrong for the entire post recession period.  Starting in 2008 with the Fed's QE program, we were told that we'd see hyper-inflation and rising interest rates.  In fact, we've seen the exact opposite in countries that implemented these policies.  (Oddly enough, we are seeing inflationary pressures in countries with high interest rates (India and Brazil being prime examples).  We've also been told that the dollar would collapse, when in fact the dollar has become a safe haven currency.  In short, literally every single prediction and prognostication made by conservative economic thought over the last four years has been wrong, leading to this question: why are we still listening to them?

Full Cred and Props to Reinhart & Rogoff and the BEA: They Collected the Data - The other day I dissed the analysis in Reinhart and Rogoff’s Growth in a Time of Debt as being on the level of a blog post from an amateur internet econocrank. I still hold that opinion.  But I want to walk back on that, or at least clarify, and give lots of credit where due. Because they did make a huge contribution, of a quality that you will not find in econoblog posts from even the best bloggers: they assembled a great data set. As I can attest — having spent hundreds of hours assembling data sets that were far less challenging than theirs — this is not a trivial task. And the value of that data set is high, assuming you throw high-quality analysis at it. Now of course, they didn’t release the goddam data set for years. That seems unforgivable, especially given the paper’s political and policy impact. This paper wasn’t in a peer-reviewed journal (it was a “discussion paper,” which makes its impact even more eyebrow-raising), but I really wonder why those journals (in any field) would publish such papers without requiring that the data sets accompany them, for vetting by other researchers. (Yeah I know: not a new idea.)

The Jobless Trap, by Paul Krugman -  Well, the famous red line on debt, it turns out, was an artifact of dubious statistics, reinforced by bad arithmetic. And America isn't and can't be Greece, because countries that borrow in their own currencies operate under very different rules from those that rely on someone else's money. After years of repeated warnings that fiscal crisis is just around the corner, the U.S. government can still borrow at incredibly low interest rates.  But while debt fears were and are misguided, there's a real danger we've ignored: the corrosive effect, social and economic, of persistent high unemployment. And even as the case for debt hysteria is collapsing, our worst fears about the damage from long-term unemployment are being confirmed. Now, some unemployment is inevitable in an ever-changing economy. Modern America tends to have an unemployment rate of 5 percent or more even in good times. In these good times, however, spells of unemployment are typically brief. Back in 2007 there were about seven million unemployed Americans - but only a small fraction of this total, around 1.2 million, had been out of work more than six months.   Five years after the crisis, unemployment remains elevated, with almost 12 million Americans out of work. But what's really striking is the huge number of long-term unemployed, with 4.6 million unemployed more than six months and more than three million who have been jobless for a year or more. Oh, and these numbers don't count those who have given up looking for work because there are no jobs to be found.

Replicating Research: Austerity and Beyond - The Harvard economists Carmen M. Reinhart and Kenneth Rogoff ironically titled their much-celebrated book on financial instability and economic growth "This Time Is Different," asserting that the last crisis was not unique. Rather, they contend it was the most recent manifestation of an age-old tendency for both governments and private investors to delude themselves about the dangers of debt. Doubly ironic, then, that Thomas Herndon, a graduate student in my department, was seeking to replicate an article that Professors Reinhart and Rogoff published in 2010 for an econometrics class when he discovered evidence of errors in their cross-national analysis of the impact of national debt on economic growth. Efforts to replicate influential research seldom get much attention, but this time was different. It's worth asking why. It's also worth asking how the chance of similar errors might be minimized in the future.

Perils of placing faith in a thin theory - John Kenneth Galbraith memorably put down his fellow economist Milton Friedman by saying: "Milton's misfortune was that his policies had been tried." The same observation might be made of Carmen Reinhart and Kenneth Rogoff. Especially in Europe, pro-austerity policy makers have tried policies based on their research with catastrophic economic and human consequences. The Harvard economists' tragedy is not the misuse of a Microsoft Excel spreadsheet but the misuse of Microsoft PowerPoint. They hyped their results. In doing so, they followed the golden rule of tabloid journalism: simplify then exaggerate. After the publication in 2009 of their bestselling book, This Time Is Different, the professors published research on the relationship between debt and growth which suggested there is a 90 per cent threshold of debt to gross domestic product beyond which economic growth declines rapidly. Many policy makers have interpreted this rule as a call to reduce debt to below that level for the sake of growth. Profs Reinhart and Rogoff have thus become the intellectual godmother and godfather of austerity. To see their enormous influence on the European debate, it is worth quoting an extract from a speech by Olli Rehn, the European Commission's economic chief, to the Council on Foreign Relations in June 2011. "Carmen Reinhart and Kenneth Rogoff have coined the '90 per cent rule'," he said. "That is, countries with public debt exceeding 90 per cent of annual economic output grow more slowly. High debt levels can crowd out economic activity and entrepreneurial dynamism, and thus hamper growth. This conclusion is particularly relevant at a time when debt levels in Europe are now approaching the 90 per cent threshold, which the US has already passed."

The Grad Student Who Took Down Reinhart And Rogoff Explains Why They’re Fundamentally Wrong - I want to address here what I feel are the major misinterpretations of our work, which will in part require engaging with the claim’s made in Reinhart’s and Rogoff’s response. First, we categorically did not impute any negative motives to the authors; and second, our results are not consistent with and do not confirm their findings. I want to start by stating in the strongest possible terms that the purpose of our paper was not to imply that the selective omissions and unconventional weighting were, as R&R asserted in response to us, “intentionally used to bias the results.” The purpose of our paper was strictly to ascertain the veracity of their results. We know nothing whatsoever about their motives, and did not speculate on this at all in our paper. Throughout our paper we assume that their errors were honest mistakes. We also have honest differences over the appropriate methods for calculating average GDP growth figures. We did use the terms “selective” and “unconventional” to describe the problems we saw with their paper, and we believe these are accurate characterizations.

There's no need for all this economic sadomasochism - David Graeber - The intellectual justification for austerity lies in ruins. It turns out that Harvard economists Carmen Reinhart and Ken Rogoff, who originally framed the argument that too high a "debt-to-GDP ratio" will always, necessarily, lead to economic contraction - and who had aggressively promoted it during Rogoff's tenure as chief economist for the IMF -, had based their entire argument on a spreadsheet error. The premise behind the cuts turns out to be faulty. There is now no definite proof that high levels of debt necessarily lead to recession. Will we, then, see a reversal of policy? A sea of mea culpas from politicians who have spent the last few years telling disabled pensioners to give up their bus passes and poor students to forgo college, all on the basis of a mistake? It seems unlikely. After all, as I and many others have long argued, austerity was never really an economic policy: ultimately, it was always about morality. We are talking about a politics of crime and punishment, sin and atonement. True, it's never been particularly clear exactly what the original sin was: some combination, perhaps, of tax avoidance, laziness, benefit fraud and the election of irresponsible leaders. But in a larger sense, the message was that we were guilty of having dreamed of social security, humane working conditions, pensions, social and economic democracy.

Defrocking Reinhart and Rogoff – Controversy Ignores Fundamental Issues in the Use and Abuse of Statistical Studies - Over the past week there has been some fuss over alleged inconsistencies found by the economists Herndon, Pollin and Ash in the famous 2010 Rogoff-Reinhart study on levels of government debt and its effects on growth. It was this study that generated the meme according to which debt-to-GDP levels of over 90% would lead to substantially slower growth. The original study found that countries with a debt-load of 90% or over would experience average growth rates of -0.1% of GDP. When the critics rejigged the numbers a bit and corrected the errors, however, they got an average growth rate of 2.2% of GDP. Needless to say, that this is a substantial difference. The public debate, however, has mainly focused on an error that the critics found in Reinhart and Rogoff’s Excel data-sheet. This is despite the fact that the error did not account for a great deal of the rather dismal findings of the original authors. So, why the focus? Well, it seems that the media like having economics around to treat as a sort of hard science that can generate yes or no answers – while the media are quick to throw certain figures under the bus if the mood is right; they are not so quick to question the system that their reporting largely relies upon. Even though most educated people treat economics with a healthy degree of scepticism they nevertheless often buy into debates that assume that economics can make purely objective judgments.

Yet More Fun With Reinhart and Rogoff - Dean Baker - In Carmen Reinhart and Ken Rogoff's (R&R) famous and now largely discredited "Growth in a Time of Debt," New Zealand's -7.6 percent growth (wrongly transcribed as -7.9 percent) in 1951 played an outsized role in their conclusion that high debt led to sharply lower growth. This number carried inordinate weight because R&R had mistakenly left out 4 high debt years for New Zealand in which it had seen healthy growth. Using their country-weighted methodology (each country counts the same, regardless of size or years with high growth) this mistake by itself subtracted 1.5 percentage points from the growth rate of countries in years of high debt. To make the story better, today I received a tweet that informed that the -7.6 percent growth New Zealand experienced in 1951 was not in any obvious way attributable to its high debt. In fact, the country suffered from a labor dispute that led to a strike/lockout of waterfront workers that lasted 5 months.

Reinhart-Rogoff reprise - AFTER watching the recent feeding frenzy over challenges to the Reinhart-Rogoff debt-threshold stylised fact—that growth rates slow sharply once public debt rises above around 90% of GDP—I feel like it's worth making a few points. 1) Carmen Reinhart and Kenneth Rogoff did not cause the shift toward fiscal consolidation. If one had to list contributing factors to that shift in order of importance, I doubt their work would rate the top ten. Easily the most important driver of the shift was the dynamic shown in the chart at right, which shows the level of public debt. I think it was unreasonable to think that governments would accept that increase in debt with insouciance. And indeed, the Reinhart-Rogoff paper that began the threshold discussion, which was published as a working paper in January of 2010, was a contribution to a discussion that was already well under way. In 2009, the IMF's Fiscal Monitor was already sounding the alarm. Barack Obama's 2010 State of the Union speech which also dated to January of 2010, warned of the dangers of high debt and included plans for a spending freeze. There was no world in which elected leaders didn't begin to worry about and move to address indebtedness.

Mistakes - Mankiw - Several people have asked me to comment on the coding error found in one of the Reinhart-Rogoff papers. I have avoided the topic, since I don't think I have a lot to add to the discussion.  But because so many people have asked, here are a few observations:
1. Everybody makes mistakes. I once made an analytic error in one of my published papers and, after it was pointed out to me, subsequently wrote a correction (published version).  Finding and correcting errors is a part of the research process. 

2.  Policy should not be based on the results of a single study.  And my experience is that it never is.
3. I believe that high levels of debt and deficits are a negative for the economy in the long run.  My views on this issue have not changed substantially since I wrote about it with Larry Ball almost twenty years ago.
4. I never thought there was a magic threshold for the debt-to-GDP ratio above which all hell breaks loose.  The world is more continuous than that.
5. The coding error in Reinhart and Rogoff has gotten a lot more media attention than it deserves.  Some people on the opposite side of the policy debate have taken advantage of this opportunity to pound the drum for their views.  But just because someone in Team A makes an inadvertent excel error does not mean that everything Team B believes is true. 

Austerity doctrine exposed as flimflam - The austerity claque got it wrong. And the harsh bill is being paid by millions of Americans and millions more in Europe in jobs lost, homes foreclosed, families split apart, hopes crushed. They can’t repay the costs of their folly. We don’t really need an apology. But could they at least get out of the way so we could get on with the jobs programs that we should have undertaken years ago? Austerity has been tried and found wanting in practice. Instead of expansion and growth, Europe has been driven back into recession. With Britain’s credit rating downgraded, its economy contracting, its unemployment rolls soaring, its debts rising, three years of rosy forecasts shredded, Tory Chancellor George Osborne’s tears at the lavish funeral for Margaret Thatcher may well have been for the burial of his own reputation. Britain is “playing with fire,” warned the International Monetary Fund’s chief economist, Olivier Blanchard, who told Sky News, “The danger of having no growth, or very little growth, for a long time, is very high. You get a number of vicious circles that come into play.”

The Unbearable Brilliance of Colbert: Reinhart/Rogoff Takedown - OMG–this is an absolute master at the top of his game, explaining the Reinhart/Rogoff mistake, and in the next clip, interviewing the very cool young grad student who discovered it. As someone who spends his life trying to explain this stuff, I stand in slack-jawed awe at Colbert’s mastery of doing so in ways that are hilarious and informative.  He must have an killer team of writers as well. (BTW, I think that’s an edited version of my graphic from here in there!)

The Good Glitch - Paul Krugman - I’ve been cynical about the likelihood that the Reinhart-Rogoff fiasco would lead to any real change in policy, and I still have doubts. But reflecting on the debate so far, I’m wondering a bit if I have been too cynical — or at any rate, cynical in the wrong way. For my vague, unquantifiable sense is that the debacle is changing the conversation quite a lot, even among the guys in suits. And it was the coding error that did it. Now, the truth is that the coding error isn’t the biggest story; in terms of the economics, the real point is that R-R’s results were never at all robust, both because the apparent relationship between debt and growth is fairly weak and because the correlation clearly goes at least partly the other way. But economists have been making these points for years, to no avail. It took the shock of an outright, embarrassing error to shake the faith of the Very Serious People in a result they really wanted to believe. The point is that the next time Olli Rehn, or George Osborne, or Paul Ryan declares, sententiously, that we must have austerity because serious economists tell us that debt is a terrible thing, people in the audience will snicker — which they should have been doing all along, but now it has become socially acceptable.

Very Sensitive People - Paul Krugman - When it comes to inflicting pain on the citizens of debtor nations, austerians are all steely determination – hey, it’s a tough world, and hard choices have to be made. But when they or their friends come under criticism, suddenly it’s all empathy and hurt feelings. We see in Anders Aslund’s defense of Reinhart and Rogoff against what he calls a “vicious” critique by Herndon et al. Aslund praises R-R for providing an important corrective to the view that fiscal stimulus is always right – a position that is common across the Anglo-American economic commentariat, led by Paul Krugman in the New York Times. This is a curious thing for him to say, because it’s an outright lie; as anyone who has been reading me, Martin Wolf, Brad DeLong, Simon Wren-Lewis, etc. knows, our case has always been that fiscal stimulus is justified only when you’re up against the zero lower bound on interest rates. But then, why would he describe Herndon et al as “vicious”? Their paper was a calm, reasoned analysis of how R-R came up with the famous 90 percent threshold; it came as a body blow only because of the contrast between the acclaim R-R received and the indefensible nature of their analysis.  As I see it, the sheer enormity of their error makes it impossible for them to respond to criticism in any reasonable way. They have to lash out any way they can, whether it’s ad hominem attacks on the critics or bitter complaints about bad manners.

Reinhart-Rogoff a Week Later: Why Does This Matter? - We are seeing distancing by conservative writers on the Reinhart/Rogoff thesis. In Feburary, Douglas Holtz-Eakin wrote, “The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone. Entering the zone means slower economic growth. Today, Holtz-Eakin writes about Reinhart and Rogoff in National Review, but drops the "canonical" status. Now they are just two random people with some common sense the left is beating up. "In order to distract from the dismal state of analytic and actual economic affairs, the latest tactic is to blame...two researchers, Carmen Reinhardt and Kenneth Rogoff, who made the reasonable observation that ever-larger amounts of debt must eventually be associated with bad economic news."  Now there's no defense of the "danger zone" argument; just the idea that the stimulus failed. Retreat! This is getting a bigger audience. (If you haven't seen The Colbert Report on the Reinhart/Rogoff issue, it's fantastic.) But going foward, plan beats no plan. And a critique isn't a plan. So what should we conclude about Reinhart-Rogoff a week later, now that the critique seems to have won? How should the government approach the debt?

Debt, Growth and the Austerity Debate - Reinhart and Rogoff - IN May 2010, we published an academic paper, “Growth in a Time of Debt.” Given debates occurring across the industrialized world, from Washington to London to Brussels to Tokyo, about the best way to recover from the Great Recession, that paper, along with other research we have published, has frequently been cited — and, often, exaggerated or misrepresented — by politicians, commentators and activists across the political spectrum.  Last week, three economists at the University of Massachusetts, Amherst, released a paper criticizing our findings. They correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II. Our research, and even our credentials and integrity, have been furiously attacked in newspapers and on television. Each of us has received hate-filled, even threatening, e-mail messages, some of them blaming us for layoffs of public employees, cutbacks in government services and tax increases. A sober reassessment of austerity is the responsible course for policy makers, but not for the reasons these authors suggest. Their conclusions are less dramatic than they would have you believe. Our 2010 paper found that, over the long term, growth is about 1 percentage point lower when debt is 90 percent or more of gross domestic product. The University of Massachusetts researchers do not overturn this fundamental finding, which several researchers have elaborated upon.

Reinhart and Rogoff: Responding to Our Critics - LAST week, we were sent a sharply worded paper by three researchers from the University of Massachusetts, Amherst, at the same time it was sent to journalists. It asserted serious errors in our article “Growth in a Time of Debt,” published  . In an Op-Ed essay for The New York Times, we have tried to defend our research and refute the distorted policy positions that have been attributed to us. In this appendix, we address the technical issues raised by our critics.  These critics, Thomas Herndon, Michael Ash and Robert Pollin, identified a spreadsheet calculation error, but also accused us of two “serious errors”: “selective exclusion of available data” and “unconventional weighting of summary statistics.”  We acknowledged the calculation error in an online statement posted the night we received the article, but we adamantly deny the other accusations.  They neglected to report that we included both median and average estimates for growth, at various levels of debt in relation to economic output, going back to 1800. When you look at our median estimates, they are actually quite similar to those of the University of Massachusetts researchers. (See the attached table.)

Reply to Reinhart and Rogoff’s NYT Response to Critics - The intellectual dishonesty continues. As before, it’s the lie of omission. They know there is a more than material difference between floating and fixed exchange rate regimes that they continue to exclude from their analysis.They know that one agents ‘deficit’ is another’s ‘surplus’ to the penny, a critical understanding they continue to exclude.They know that ‘demand leakages’ mean some other agent must spend more than its income to sustain output and employment.They know federal spending is via the Fed crediting a member bank reserve account, a process that is not operationally constrained by revenues. That is, there is no dollar solvency issue for the US government.They know that ‘debt management’, operationally, is a matter of the Fed simply debiting and crediting securities accounts and reserve accounts, both at the Fed.They know that if there is no problem of excess demand, there is no ‘deficit problem’ regardless of the magnitudes, short term or long term. They know unemployment is the evidence deficit spending is too low and a tax cut and/or spending increase is in order, and that a fiscal adjustment will restore output and employment, regardless of the magnitude of deficits or debt.

The 1 Percent’s Solution, by Paul Krugman - Economic debates rarely end with a T.K.O. But the great policy debate of recent years between Keynesians, who advocate sustaining and, indeed, increasing government spending in a depression, and austerians, who demand immediate spending cuts, comes close... At this point, the austerian position has imploded; not only have its predictions about the real world failed completely, but the academic research invoked to support that position has turned out to be riddled with errors, omissions and dubious statistics.  Yet two big questions remain. First, how did austerity doctrine become so influential in the first place? Second, will policy change at all now that crucial austerian claims have become fodder for late-night comics?On the first question: the dominance of austerians in influential circles should disturb anyone who likes to believe that policy is based on, or even strongly influenced by, actual evidence. After all, the two main studies providing the alleged intellectual justification for austerity — Alberto Alesina and Silvia Ardagna on “expansionary austerity” and Carmen Reinhart and Kenneth Rogoff on the dangerous debt “threshold” at 90 percent of G.D.P. — faced withering criticism almost as soon as they came out.Economists can explain ad nauseam that this is wrong, that the reason we have mass unemployment isn’t that we spent too much in the past but that we’re spending too little now, and that this problem can and should be solved. No matter; many people have a visceral sense that we sinned and must seek redemption through suffering — and neither economic argument nor the observation that the people now suffering aren’t at all the same people who sinned during the bubble years makes much of a dent.

Evidence and Economic Policy – Krugman  - Henry Blodget says that the economic debate is over; the austerians have lost and whatshisname has won. And it’s definitely true that in sheer intellectual terms, this is looking like an epic rout. The main economic studies that supposedly justified the austerian position have imploded; inflation has stayed low; the bond vigilantes have failed to make an appearance; the actual economic effects of austerity have tracked almost exactly what Keynesians predicted. But will any of this make a difference? The story of the past three years, after all, is not that Alesina and Ardagna used a bad measure of fiscal policy, or that Reinhart and Rogoff mishandled their data. It is that important people’s will to believe trumped the already ample evidence that austerity would be a terrible mistake; A-A and R-R were just riders on the wave. The cynic in me therefore says that after a brief period of regrouping, the VSPs will be right back at it — they’ll find new studies to put on pedestals, new economists to tell them what they want to hear, and those who got it right will continue to be considered unsound and unserious.

Reinhart and Rogoff Are Not Being Straight - Dean Baker - Carmen Reinhart and Ken Rogoff, used their second NYT column in a week, to complain about how they are being treated. Their complaint deserves tears from crocodiles everywhere. They try to present themselves as ivory tower economists who cannot possibly be blamed for the ways in which their work has been used to justify public policy, specifically as a rationale to cut government programs and raise taxes, measures that lead to unemployment in a downturn. This portrayal is disingenuous in the the extreme. Reinhart and Rogoff surely are aware of how their work has been used. They have also encouraged this use in public writings and talks. This column is careful to halfway walk back the main claim of their famous paper, telling us: "Our view has always been that causality [between high debt levels and slow growth] runs in both directions, and that there is no rule that applies across all times and places." It is good to hear the reference to causation from slow growth to high debt and that "no rule applies across all times and places." However it is worth noting that Reinhart and Rogoff never felt the need to use their access to the NYT's opinion pages to correct all the politicians who used their paper to argue the exact opposite: that their paper implied that countries with high debt levels could anticipate long periods of slow growth.

The Medium Term Is Not The Message - Paul Krugman - Ezra Klein tries to broker peace: The more modest differences between the various participants in the broader austerity debate are covering up a real area of consensus: We could, and should, do more now, and we could, and should, couple that with policies that reduce deficits in the medium and, more to the point, long term. The debate between most of the academic “austerians” and the “keynesians” is, in many ways, a fake debate: There’s no serious economic model in which $400 billion in stimulus spending — plus some principal reduction — over the next two years would destabilize the bond markets if it was coupled with $4 trillion in deficit reduction over the next 12 years. Reinhart and Rogoff could have been doing much more to call out the inanity of this position, which has blocked both more short-term support for the economy and more long-term deficit reduction. That, for them, should be a lesson of this debacle: They got in bed with politicians whose policy agenda had little to do with their actual research, and so now they’re being blamed for that policy agenda. OK, what I’d say is that it’s not the debate that’s fake; it’s the consensus, because it has nothing to do with actual political possibilities.

Everyone's Missing the Bigger Picture in the Reinhart-Rogoff Debate - But whether you believe that the errors in the RR study are fatal or minor, there is a bigger picture that everyone is ignoring. Initially, RR never pushed an austerity-only prescription.  As they wrote yesterday: The only way to break this feedback loop is to have dramatic write-downs of debt. Early on in the financial crisis, in a February 2009 Op-Ed, we concluded that “authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership.” Significant debt restructurings and write-downs have always been at the core of our proposal for the periphery European Union countries, where it seems to us unlikely that a mix of structural reform and austerity will work.  Indeed, the nation's top economists have said that breaking up the big banks and forcing bondholders to write down debt are essential prerequisites to an economic recovery.Additionally, economist Steve Keen has shown that “a sustainable level of bank profits appears to be about 1% of GDP”, and that higher bank profits leads to a ponzi economy and a depression.  Unless we shrink the financial sector, we will continue to have economic instability.

The Incredible Shrinking Budget Deficit - For four years, during and in the wake of the recession, the federal budget deficit ballooned to more than $1 trillion. But because of belt-tightening in Washington and a strengthening economy, it has started shrinking — and fast.  The number crunchers at Goldman Sachs have lowered their estimates of the deficit both this year and next, on the back of higher-than-expected revenues and lower-than-projected spending. Analysts started the year projecting that the deficit in the current fiscal year would be about $900 billion. Earlier this year, they lowered the estimate to $850 billion. Now they have lowered it again, to $775 billion, or about 4.8 percent of economic output.  " What is more notable is that the strength in revenues preceded the payroll tax hike at the start of the year, and the spending decline does not seem to reflect sequestration, which has just started to take effect.” To translate: the deficit could come in even smaller than currently anticipated because of spending cuts and higher tax rates.  On the face of it, this sounds like something to applaud: The growing economy is bolstering tax revenue and reducing the need for spending on programs like unemployment insurance. But a number of budget experts are booing rather than applauding, including the fiscal hawks at the International Monetary Fund. Last week, the fund nudged down its estimates for United States growth in 2013 and 2014. It said it saw many bright spots in the American economy, including the strength of the private sector, but it criticized Washington for imposing too much austerity, too soon, and thus sapping strength from the recovery and preventing the unemployment rate from coming down faster.

The case for more US austerity right now? This chart suggests there isn’t one - What is the biggest near-term risk to the US economy? Too much debt or too much austerity? The controversy over the Reinhart-Rogoff study is irrelevant here since the US debt-GDP ratio is well below the 90% cliff suggested by that research. A few things to consider here:

  • 1. As the above chart shows, the share of revenue going to pay interest on federal debt is close to a record low at about 1.4%. So given US NGDP growth of around 4%, the US debt burden is quite sustainable for now.
  • 2. By 2014, the fully phased-in sequester — along with the January 2013 Obama tax increases — will cut the US deficit from $1.1 trillion in 2012 to to $615 billion. (In terms of the deficit-to-GDP ratio, that is 7% in 2012 down to 3.7% in 2014.)
  • 3. As AEI’s John Makin notes in a new report, “The years 2015–17 look even better, with Congressional Budget Office projected deficits averaging just 2.5% of GDP, close to the 30-year average of 3.4% and well below the projected G10 average of 3.5%. The US debt-to-GDP ratio stabilizes at about 75% on a slight negative trajectory from 77% in 2014 down to 73.1% in 2018.”

Making The Case Against Austerity - Stephanie Kelton - Neil Irwin at Wonkblog has a new post up:  The Deficit is Falling Fast. Can Washington Accept Victory? He quotes John Makin of the American Enterprise Institute, who says, approvingly, that the U.S. has probably imposed enough austerity “for now.”  Then he shows us the evidence. Irwin makes the obvious point that deficits tend to come down during the recovery phase of the cycle: The economy is gradually healing, leading to higher tax revenue and reducing social welfare spending. What he doesn’t show you is this:It’s the same graph, but with recessions (grey bars) added.  So what does it show?  Basically, that the economy tends to go into recession whenever fiscal policy becomes too tight — a point made routinely by contributors to this blog. Unfortunately, it’s not something Irwin points out.  Instead, he quotes Jan Hatzius (Chief Economist  at Goldman Sachs), who says he expects the federal deficit to continue its downward trend, falling from its current level (about 4.5 percent of GDP) to 3 percent or less in FY2015.   Instead of raising a red flag about the consequences of letting the deficit get too small, Irwin offers this as prima facie good news.  The basic argument being that we will have reduced the size of the deficit enough to keep us out of trouble — for the time being — so we can pause for a moment while we put together a plan to address our really pressing problem: unemployment the long-term deficit.

GOP And The Sequester: Disingenuous, Naive & Misinformed -  But the fact that labor-intensive programs didn't reduce services immediately when the sequester began on March 1 never meant that it wasn't coming. It always was and the protests that the White House was playing fiscal chicken little were simply wrong. That why it's hard not be be at least somewhat amused by the mock congressional Republican outrage over the problems that started to be felt this week by airline passengers because of the sequester-related furloughs and other personnel changes at the Federal Aviation Administration. It's amusing because the air traffic control slowdowns were totally predictable. At least 70 percent of FAA's expenses are personnel-related so it was inevitable that the 5.1 percent across-the-board sequester cut would be felt in everything the agency does including -- or especially -- in its primary function: managing air traffic. When you set up a system like sequestration that requires an agency or department to cut every program, project, and activity by the same percentage, and when an agency's spending is mostly for salaries and other compensation-related expenses, it's not hard to see from the start that there has to be an impact on the number of people doing that agency's work.

A slowmotion sequester hits America's invisible poor with stealth cuts | Robert Reich - So far, the much-dreaded "sequester" – some $85bn in federal spending cuts between the end of March and 30 September – hasn't been evident to most Americans. The warnings that issued from the White House and congressional Democrats about its severity – suggesting social security checks might not go out on time and federal highways would go unattended – seem to many to have been overblown. Only lately do FAA furloughs seem to be having some impact on passengers delayed by lines for security checks.  Sure, March's employment report was a big disappointment. Only 88,000 jobs were created, according to the Bureau of Labor Statistic – a mere drop in the bucket of almost 12 million unemployed Americans and 8 million working part-time who'd rather have full-time jobs. The federal government also shed 14,000 full-time jobs in March. State and local governments, dependent on federal money, laid off thousands more. And government contractors downsized.But it's hard to see any direct connection between the disappointing job numbers and the sequester. After all, government employment has been shrinking for years. And whatever negative effect the sequester may be having on aggregate demand remains unclear.Take a closer look, though, and Americans are feeling the consequences of the sequester. They just don't know it quite yet.

Senate fixes the (part of the) sequestration (that affects rich people)! - After a month or so of the sequestration budget cuts only affecting people Congress doesn’t really care about, the cuts hit home this week when mandatory FAA furloughs caused lengthy flight delays cross the country. Suddenly, sequestration was hurting regular Americans, instead of irregular (poor) ones! Some naive observers thought this would force Congress to finally roll back the purposefully damaging cuts that were by design never intended to actually go into effect. Those observers were … sort of right! The U.S. Senate jumped into action last night and voted to … let the FAA transfer some money from the Transportation Department to pay air traffic controllers so that the sequestration can continue without inconveniencing members of Congress, most of whom will be flying home to their districts today. The system works! (For rich people, like I’ve been saying.) The Washington Post says, “The Senate took the first step toward circumventing sequestration Thursday night,” though in fact what it did was work to ensure that the sequester continues not affecting elites, who fly regularly. I am embarrassed that I did not predict this exact outcome in my column Tuesday morning. The Senate, which can’t confirm a judge without months of delay and a constitutional crisis, passed this particular bill in about two minutes, with unanimous consent. The hope is that the House can get it taken care of today, I guess in time for everyone to fly to Aspen or wherever people whom Congress listens to fly to on Fridays.

This FAA Sequester Vote Doesn’t Smell Right - Well, well.  It appears that both the Senate and House have voted to end sequester-imposed furloughs of air traffic controllers, just in time for the weekend. You choose: is this bipartisan support to mitigate one of the noxious effects of sequestration, which I and others have been tracking?  Or is it papering over the high-visibility stuff that affects the affluent while lots of other budget bleeding goes on beneath the radar? I choose the latter.  While the annoyance of flight delays caught the attention of elected officials, businesspeople and other frequent flyers, lots of other, less advantaged Americans will continue to feel the pain of the sequester due to cuts in a variety of programs. My CBPP colleague Sharon Parrott outlined some of the people outside of airport security lines facing sequestration-induced hardships:

  • Jobless workers losing unemployment benefits. 
  • Children losing Head Start. …
  • Seniors losing Meals on Wheels.
  • Low-income families, seniors, and people with disabilities losing housing assistance.

Budget Conference on Ice - Senate Democrats on Tuesday tried to step up pressure on House Republicans to begin formal negotiations on their competing budget blue prints, but the GOP is trying to postpone the appointment of a conference committee until they make more progress toward compromise in private talks. Senate Republicans objected when Senate Majority Leader Harry Reid (D., Nev.) tried to appoint members of a conference committee — the kind of joint House-Senate panel that is supposed to be established to write up compromise legislation – to iron out the vastly different versions of the budget resolution passed in March by the two chambers. “If the Republicans are serious about reducing the deficit, we need to get to work; get to work sooner rather than later,’’ said Mr. Reid.

Only the Apocalypse Will Stop Simpson and Bowles - Scientists believe the world will end in 7.6 billion years, when the sun turns into a red giant and vaporizes the earth. On that day, few in Washington would be surprised if Alan Simpson and Erskine Bowles introduced their latest deficit-reduction plan. The former Wyoming senator and the former chief of staff to Bill Clinton are the world's most famous and indefatigable budget scolds, as I noted in this recent Bloomberg Businessweek cover profile of the pair. This morning, at a Bloomberg Government event, they unveiled their latest proposal. Bloomberg's ace tax reporter, Richard Rubin, broke the details last night. Here are the top numbers: The new package would reduce the deficit by $2.5 trillion over 10 years. It would raise $740 billion in new revenue, mostly by reforming the tax code. It would cut future Social Security benefits through the same manner ("chained CPI") proposed by President Obama. And it would raise the Medicare eligibility age and subject a broader swath of the population to means testing. Right now, debt as a share of gross domestic product is shrinking; the new Simpson-Bowles plan would shrink it a little faster.

Obama Budget Plan Results In 'Back Door' Tax Increase For Middle-Class Households: Analysis: For those looking to put the woes of Tax Day behind them, we have some bad news: It’s probably only going to get worse. President Obama’s budget proposal, released earlier this month, includes a provision that would steadily boost taxes for middle-class households over the next 10 years, according to an analysis from the nonpartisan Tax Policy Center. Adjustments in income tax brackets are currently tied to the headline inflation measure. By tying the definition of income tax brackets to a different measure of inflation, called the chained consumer price index, Obama’s budget creates a “back door” tax increase, Joseph Rosenberg, a research associate at the Tax Policy Center, told The Huffington Post. With Obama’s budget change, taxpayers would move into higher income tax brackets and face higher tax rates more quickly than they would have before, Rosenberg said. Since growth in real wages tends to outpace inflation, Americans will have to pay more in taxes before their money is worth more.

Graph Shows Who Is And Who Isn't Paying Their Fair Share of Taxes - Mish - In response to 55% of Americans Say Their Income Taxes are Fair; 46.6% Paid No Income Tax in 2011 one seriously misguided soul responded "your hate for low income people disturbing". The above response was humorous because the math shows a large number of people are unhappy even though thy pay no income taxes at all. Nowhere did I state or imply any hatred of anyone.  On a far more credible note, I received an email from Ironman at the Political Calculations blog who posted this chart on "Who Really Isn't Paying Their Fair Share of Income Taxes?" I asked Ironman to explain the chart. Here is his reply.  We used U.S. Census and Tax Policy Center's data.  That result is represented as the "red"-shaded bell curve on the chart.The unshaded region under the "blue" total aggregate income curve is then the portion of income earned by Americans that is not subject to income taxes

Only Richest 7% Saw Wealth Gains From 2009 to 2011 - Wealthy Americans took a hit when the global financial crisis sent the economy into a nosedive, yet new research shows they alone — specifically, the richest 7% — benefited as households rebuilt their wealth in the first two years of the recovery. From 2009 to 2011, the average wealth of America’s richest 7% — the 8 million households with a net worth north of about $800,000 — rose nearly 30% to $3.2 million from $2.5 million, according to a Pew Research Center report that analyzed recent Census data. By contrast, the average wealth of America’s remaining 93%, some 111 million households, actually dropped by 4% to $134,000 from $140,000. Wealth is the value of what a household owns minus what it owes. “Wealth inequality increased during the first two years of the recovery,” the authors said. “On an individual household basis, the mean wealth of households in [the] more affluent group was almost 24 times that of those in the less affluent group in 2011. At the start of the recovery in 2009, that ratio had been less than 18-to-1.” Authors Richard Fry and Paul Taylor said they focused on the upper 7% of households rather than another share of high-wealth households due to limitations in the Census data.

Tricksy budget! How Obama’s chained CPI plan is a nasty tax trap -  See, one of the changes whose fiscal impact is “mechanically extrapolated” is Obama’s proposal to alter how Social Security benefits are calculated. He wants to base them on the so-called chain weighted CPI index instead of the current CPI. But while this switch would reduce cost-of-living increases and cut Social Security’s future shortfall by 15%, AEI’s Social Security guru, Andrew Biggs, isn’t a fan. He would prefer a chain weighted version of the CPI-E, which measures price changes for individuals over 65. Biggs also highlights how the switch in the Obama budget would affect the US tax burden: Currently, most income tax credits and deductions, along with the dollar values attached to different income tax brackets, are indexed to inflation. Using a lower inflation adjustment would reduce the value of credits and deductions and push a greater share of workers’ incomes into the higher tax brackets. Result: higher taxes, and particularly so on low and middle class households. While the Social Security cuts max out at around 3 percent of annual outlays, the income tax increases continue forever. Over the first decade the chained CPI would cut spending by around $130 billion and raise taxes by around $100 billion, but over the second decade and beyond the chained CPI is predominantly a tax increase.

High Income Households Would Pay Most-But Not All-of the New Taxes in Obama's 2014 Budget - The revenue proposals included in President Obama's 2014 budget would, as intended, significantly raise taxes on the highest-income American households. However, despite Obama's long-standing pledge to protect individuals making below $200,000 (and couples making $250,000 or less) from any tax hikes, even many of those families would pay slightly more than under today's tax law. According to new estimates by my colleagues at the Tax Policy Center, nearly everyone making $1 million and above would pay more in 2015. Obama's tax changes (including individual, corporate, estate, and excise tax hikes), would boost their taxes by an average of almost $83,000. Obama would boost their average federal tax rate to a hair above 41 percent, an increase of 2.3 percentage points from today's law. Overall, those making a million and up would pay 60 percent of the tax increases, and those in the top 5 percent (who make more than $227,000) would pay 85 percent of the new taxes. Middle-income households would also pay more than under today's law, but not much more. Those making between $50,000 and $75,000 would face an average tax hike of about $60 in 2015, trimming their after-tax income by 0.1 percent. Those making between $100,000 and $200,000 would also pay a bit more-about $150 on average-and their after-tax income would be cut by about 0.1 percent. While these households represent about 14 percent of all taxpayers, they'd pay roughly 4 percent of Obama's proposed tax hike .

Top 1% Would Pay Two-Thirds of Higher Taxes Under Obama - The top 1 percent of U.S. taxpayers would pay 67 percent of the higher taxes called for in 2023 under President Barack Obama's budget proposal, according to an analysis released today by the nonpartisan Tax Policy Center in Washington. Households making as little as $30,000 a year would pay some higher taxes. By 2023, households making between $30,000 and $40,000 would pay an average of $54 more than if lawmakers made no changes. Households making between $500,000 and $1 million would pay an average of $13,474 in higher federal taxes.High-income and low-income families would encounter different tax increases in Obama's budget plan, which was released on April 10 and calls for raising about $1 trillion more over the next decade. Top earners would be subject to a minimum tax rate of 30 percent, limits on their deductions and an increase in the estate tax rate to 45 percent from 40 percent. Lower-income households would receive benefits from expansions of tax credits for child care and college tuition. For some, those would be outweighed by increases in tobacco taxes and Obama's proposal to link tax brackets and the standard deduction to the slower-growing chained Consumer Price Index.

America goes off the books - When we all finished filing our tax returns last week, there was a little something missing: two trillion dollars. That’s how much money Americans may have made in the past year that didn’t get reported to the I.R.S., according to a recent study by the economist Edgar Feige, who’s been investigating the so-called underground, or gray, economy for thirty-five years. It’s a huge number: if the government managed to collect taxes on all that income, the deficit would be trivial. This unreported income is being earned, for the most part, not by drug dealers or Mob bosses but by tens of millions of people with run-of-the-mill jobs—nannies, barbers, Web-site designers, and construction workers—who are getting paid off the books. Ordinary Americans have gone underground, and, as the recovery continues to limp along, they seem to be doing it more and more. Measuring an unreported economy is obviously tricky. But look closely and you can see the traces of a booming informal economy everywhere. As Feige said to me, “The best footprint left in the sand by this economy that doesn’t want to be observed is the use of cash.” His studies show that, while economists talk about the advent of a cashless society, Americans still hold an enormous amount of cold, hard cash—as much as seven hundred and fifty billion dollars. The percentage of Americans who don’t use banks is surprisingly high, and on the rise. Off-the-books activity also helps explain a mystery about the current economy: even though the percentage of Americans officially working has dropped dramatically, and even though household income is still well below what it was in 2007, personal consumption is higher than it was before the recession, and retail sales have been growing briskly

White House: Internet sales tax ‘will level the playing field’ - The White House Monday backed a Senate bill to force online retailers like Amazon and eBay to collect state and local sales taxes, hoping to end a cost disadvantage hampering bricks and mortar businesses. The bill, which was being debated in the Senate on Monday, could lead to the recouping of $11 billion in lost annual sales taxes, according to a University of Tennessee research study. “We believe that the Marketplace Fairness Act will level the playing field for local small-business retailers, who are undercut every day by out-of-state online companies,” said White House spokesman Jay Carney. “Today, while local small-business retailers follow the law and collect sales taxes from customers who make purchases in their stores, many big-business online and catalog retailers do not collect the same taxes.” “We have heard overwhelmingly from governors, mayors and the business community on the need for federal legislation to level the playing field for our businesses and address sales tax fairness.”

Sales Taxes On Internet Purchases Seem To Be An Inevitability- For years now, brick and mortars retailers have complained about the fact that online retailers like Amazon have an advantage over them in that they are not required to calculate and charge sales tax for their purchases. Indeed, many of these same online retailers have often touted the fact that they don’t charge sales tax, along with lower prices, as one of the reasons to attract customers. States and localities, on the other hand, have long been eager to get their hooks into the revenue that collecting sales taxes on online purchases would bring into their coffers.  Now, it seems, they are closer than they’ve ever been before: It has been labeled a tax grab and a bureaucratic nightmare by conservative antitax activists, an infringement on states’ rights and a federal encroachment on the almost-sacred ground of Internet commerce. Yet legislation to help states force online retailers to collect sales taxes easily cleared its first procedural hurdle on Monday evening, and even its fiercest opponents are looking to the House for a last stand. The Senate voted 74-20 to take up the legislation for debate and amendment.

Five Things You Should Know About the Online Sales Tax Bill - The Senate is close to passing a bill that would let states require online and catalogue sellers to collect sales taxes on the products they sell. Congress has been struggling with this issue for decades, yet few disputes have generated as much confusion and misinformation as this one. To help separate myth from reality, here are five things you should know about what the Marketplace Fairness Act of 2013 does, and does not, do.

  • It is not a tax increase. In most states, if you buy a good or service subject to sales tax you already owe the tax whether you purchase online or in a store.  If you buy online and the seller does not collect the tax, you still must pay an equivalent use tax when you file your state income tax return.
  • It is a back-door way for states to collect more tax revenue. While it isn’t a tax hike, it clearly will generate more revenue for states.
  • It is not an “Internet tax.” The bill does not give states the power to tax access to the Web, the cloud, or even securities transactions, as some fear. All sorts of interests have raised the specter of a digital camel sticking its nose under the tax tent. But there is nothing in the bill that gives state the authority to tax this other stuff.
  • It will not complicate life for buyers. In fact, it will simplify their lives. Those few of us who pay the use tax will finally be able to throw away our receipts.
  • It will not burden online sellers. The law exempts firms with less than $1 million in sales from collecting sales taxes. It requires states to provide sellers with the information they need to determine rates in multiple jurisdictions. It even requires states to give sellers free software to calculate the tax.

The U.S. Corporate Tax Code Is a Giveaway - The Great Corporate Tax Dodge is alive and well.  A couple of new studies show corporate taxes as a percentage of total tax revenues are at a 60 year low and many corporations pay no tax at all.  The GAO issued a new report which shows use of corporate tax breaks cost the U.S. government $181.4 billion in 2011 alone. In 2011, the Department of the Treasury estimated 80 tax expenditures resulted in the government forgoing corporate tax revenue totaling more than $181 billion. Many of these tax expenditures are broadly available to both corporate and individual taxpayers. More than two-thirds or 56 of the 80 tax expenditures used by corporations in 2011 were also used by individual taxpayers, such as other types of businesses not organized as corporations. Beyond accelerated depreciation schedules, parking one's money offshore is the #2 cause of lost tax revenues.  Below is the GAO's table of the top seven reasons tax collections were $181.4 billion short for 2011.  At this investigative site is a treasure trove of corporations and individuals parking their money offshore, using loopholes to avoid paying taxes and outright money laundering.  Yet even when brazen, money laundering gets a slap on the wrist with no real penalties.  We have the Obama administration seemingly hell bent on cutting social security benefits through chained CPI, yet nary a wink and a nod occurs towards the loss of tax revenues from big business and individuals using pass through tax business entities to avoid taxes.  We even have more tax avoidance being enabled through trade treaties.  The below graph shows how low corporate tax revenues are as a percentage of total the government collects, the lowest in 60 years.  Corporate profits, on the other hand, are at a 60 year high.

Executive-Pay Tax Break Saved Fortune 500 Corporations $27 Billion Over the Past Three Years -  Earlier this year, Citizens for Tax Justice reported that Facebook Inc. had used a single tax break, for executive stock options, to avoid paying even a dime of federal and state income taxes in 2012. Since then, CTJ has investigated the extent to which other large companies are using the same tax break. This short report presents data for 280 Fortune 500 corporations that, like Facebook, disclose a portion of the tax benefits they receive from this tax break.

  • These 280 corporations reduced their federal and state corporate income taxes by a total of $27.3 billion over the last three years, by using the so-called “excess stock option” tax break.
  • In 2012 alone, the tax break cut Fortune 500 income taxes by $11.2 billion.
  • Just 25 companies received more than half of the total excess stock option tax benefits accruing to Fortune 500 corporations over the past three years.
  • Apple alone received 12 percent of the total excess stock option tax benefits during this period, enjoying $3.2 billion in stock option tax breaks during the past three years. JP Morgan, Goldman Sachs and ExxonMobil collectively enjoyed 10 percent of the total.
  • In 2012, Facebook wiped out its entire U.S. income tax liability by using excess stock option tax breaks.

Too Big to Fail: Not Easily Resolved - Atlanta Fed's macroblog - As Fed Chairman Ben Bernanke has indicated, too-big-to-fail (TBTF) remains a major issue that is not solved, but “there’s a lot of work in train.” In particular, he pointed to efforts to institute Basel III capital standards and the orderly liquidation authority in Dodd-Frank. The capital standards seek to lower the probability of insolvency in times of financial stress, while the liquidation authority attempts to create a credible mechanism to wind down large institutions if necessary. The Atlanta Fed’s flagship Financial Markets Conference (FMC) recently addressed various issues related to both of these regulatory efforts. At the FMC, Andrew Haldane from the Bank of England gave a fascinating recap of the Basel capital standards as a part of a broader discussion on the merits of complex regulation. His calculations show that the Basel accords have become vastly more complex, with the number of risk weights applied to bank positions increasing from only five in the Basel I standards to more than 200,000 in the current Basel III standards.

Senate Too-Big-to-Fail Bill Boosts Big Banks’ Capital Standards -  Banks with more than $500 billion in assets would face higher capital standards meant to reduce risk and end an implied subsidy for the biggest lenders under a bill to be introduced tomorrow by two U.S. lawmakers. Senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, said in a roundtable discussion in Washington today that their “too big to fail” legislation will focus federal assistance on core commercial banking activities while granting regulatory relief to community banks. "It is our intent to have much more protection against a crisis and against taxpayer bailout in a crisis, and it is our intent to level the playing field and take away a government policy subsidy, if you will, that exists in the market now favoring size,” Vitter said during the discussion at the National Press Club. Brown and Vitter are planning to unveil their proposal amid growing calls to remove the threat that risk-taking by the biggest financial firms might spark a repeat of the 2008 credit crisis that led to the collapse of Lehman Brothers Holdings Inc. and government bailouts for companies including Citigroup Inc. and American International Group. (AIG)

Make Wall Street Choose - Go Small or Go Home - Sherrod Brown and David Vitter - PROGRESSIVES and conservatives can debate the proper role of government, but this is one principle on which we can all agree: The government shouldn’t pick economic winners or losers. In 2008, at the height of the financial crisis, the government stepped in and decided which Wall Street banks were so large and interconnected that they would receive extraordinary help from the government to enable them to survive. They were deemed, to use a now ubiquitous phrase, too big to fail. Meanwhile, smaller banks in communities across the country, including Cleveland and Covington, La., in the states we represent, were allowed to fail. They were, evidently, too small to save. Today, the nation’s four largest banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — are nearly $2 trillion larger than they were before the crisis, with a greater market share than ever. And the federal help continues — not as direct bailouts, but in the form of an implicit government guarantee. The market knows that the government won’t allow these institutions to fail. It’s the ultimate insurance policy — one with no coverage limits or premiums. These institutions can then borrow and lend money at a lower rate than regional banks, Main Street savings and loan institutions, and credit unions. This implicit taxpayer subsidy has been confirmed by three independent studies in the last year; one of them estimated it at $83 billion per year. We have, in essence, a financial system that rewards banks for their size, not the quality of their operations. It’s a “heads the megabanks win, tails the taxpayers lose” scenario, one that discourages innovation and competition and is distinctly un-American.

Senators Brown and Vitter offer a smart and simple plan to end Too Big To Fail -- Banks used to have huge safety cushions, equity capital somewhere in the order of 20% to 30% of assets. Government didn’t tell them to do that. Those levels reflected what depositors and investors demanded. Then came a century of government guarantees and bailouts. Equity capital levels collapsed as banks increasingly funded themselves via borrowing. Senators Sherrod Brown, a Ohio Democrat, and David Vitter, a Louisiana Republican, want to return to the way banking used to be as a way of ending Too Big To Fail. They note that megabanks had capital ratios of about 3.5% of assets in 2007, and about 6.9% in 2012. Their plan to radically change the new and insufficient status quo:

    • 1. The largest banks will have a minimum 15 percent capital requirement. They will be faced with a clear choice: either become smaller or raise enough equity to ensure they can weather the next crisis without a bailout.
    • 2. Federal regulators have the option of increasing the capital level as an institution grows.
    • 3. Capital requirements will focus on common equity and other pure, loss-absorbing forms of capital.
    • 4. Regulators will calculate firms’ balance sheets in a more accurate way, by counting off-balance-sheet assets and obligations and considering counterparty credit risk in calculating derivatives exposures.
    • 5. Regulators would be able to use risk-based capital as a supplement for banks over $20 billion, if their supervisory authority proves insufficient to prevent institutions from over-investing in risky assets.

The Treasury’s Mistaken View on Too Big to Fail - The question of the day has therefore become whether too big to fail is already dead and buried or whether, like some resilient and unsavory zombie, it still stalks within our financial system. In a speech on April 18, Mary Miller, Treasury under secretary for domestic finance, made the case that the Dodd-Frank reform legislation has substantially ended the problem of too-big-to-fail financial institutions. This is a well-composed speech that everyone should read — and then compare with the broadly parallel messages coming from parts of the financial sector (e.g., see the presentation of the Clearing House, an association of banks). The original written version of Ms. Miller’s speech did not contain footnotes or precise references to the sources on which she drew, but the Treasury Department was kind enough to share this information with us and has now posted a version of the speech with links to sources; this is also most helpful. As a result, we are able to evaluate Ms. Miller’s arguments in some detail. Ms. Miller’s argument rests on eight main points. On each there is a serious problem with her logic or her reading of the data, or both. Taken together, we find her position to be completely unpersuasive. Unfortunately, the problem of too big to fail still lurks.

Banking Regulation: Closed for Business -These are heady times for the bipartisan group of reformers seeking a safer and more manageable U.S. financial system. The leaders of this movement, Senators Sherrod Brown and David Vitter, introduced legislation yesterday to force the biggest banks to foot the bill for their own mistakes by imposing higher capital requirements. The bill would increase equity (either retained earnings or stock) in the financial system by $1.1 trillion and incentivize mega-banks to break themselves up, according to a Goldman Sachs report.. With momentum, broadening support, and tangible legislation to push, bank reformers feel better positioned for success than they have since the passage of Dodd-Frank. Or rather, they did until the Treasury Department poured a giant bucket of cold water on their effort. In a speech to the Levy Economics Institute of Bard College's annual Minsky Conference last Thursday, Undersecretary for Domestic Finance Mary Miller claimed that Dodd-Frank had already solved the “Too Big to Fail” problem. Miller indicated that mega-banks do not enjoy an unfair advantage in their borrowing costs and that recent boosts to capital standards were already working to strengthen the financial system. Having a big public speech at an important venue by a top official the week before the release of Brown-Vitter sends a clear message about the Treasury’s position. “This seems like a carefully measured response to Brown-Vitter that the regulatory-reform shop, from the Treasury perspective, is closed.”

Big Banks’ Tall Tales by Simon Johnson - There are two competing narratives about recent financial-reform efforts and the dangers that very large banks now pose around the world. One narrative is wrong; the other is scary. At the center of the first narrative, preferred by financial-sector executives, is the view that all necessary reforms have already been adopted (or soon will be). Banks have less debt relative to their equity levels than they had in 2007. New rules limiting the scope of bank activities are in place in the United States, and soon will become law in the United Kingdom – and continental Europe could follow suit. Proponents of this view also claim that the megabanks are managing risk better than they did before the global financial crisis erupted in 2008. In the second narrative, the world’s largest banks remain too big to manage and have strong incentives to engage in precisely the kind of excessive risk-taking that can bring down economies. Last year’s “London Whale” trading losses at JPMorgan Chase are a case in point. And, according to this narrative’s advocates, almost all big banks display symptoms of chronic mismanagement.

Watchdog: Banks Are Still Too Intertwined -  A government watchdog warned that regulators need to be more aggressive in reducing exposure among major Wall Street firms if they want to eliminate concerns about "too-big-to-fail" banks.  Christy Romero, special inspector general for the $700 billion Troubled Asset Relief Program, said in a report that not enough has been done by government overseers to address the interconnected nature of the largest and most complex financial companies. The ties among major Wall Street firms that posed a challenge at the height of the 2008 financial crisis remain a problem, she said. The report also took aim at the Treasury Department's efforts to provide assistance to troubled homeowners, which have fallen far short of initial expectations.  The report called it "alarming" that 46% of borrowers who received a mortgage modification through the government's Home Affordable Modification Program in the third quarter of 2009 wound up re-defaulting on their loans. A Treasury spokeswoman said those who received help "were among those who were struggling the most," and that borrowers aided by the modification program have fared better than those receiving private-sector loan modifications. 

JPMorgan under pressure in Basel spat - Leading European companies have accused JPMorgan Chase and other US banks of putting their own interests ahead of their clients in a spat over tough new bank capital rules for derivatives sold privately off exchanges. The fight stems from a successful campaign by the European Association of Corporate Treasurers, which represents 6,500 companies, to convince the EU to water down the Basel III rules by exempting so-called over-the-counter derivatives sold to corporates from an onerous capital charge. The EU move means banks based there will be able to charge much less for their OTC derivatives than banks elsewhere. That is good news for EU corporates, who will pay less to hedge their risk, but it has sparked complaints of an unlevel playing field from US competitors and their trade group Sifma. Late last month, Richard Raeburn, chairman of the treasurers group, wrote to JPMorgan complaining about efforts by US banks to lobby their regulators and the Basel Committee on Banking Supervision on the issue. In the letter seen by the Financial Times, he said the complaints about the EU exemption raised questions about “JPMorgan’s concern for its corporate customers globally”.

Banks told to sit down and shut up or else some of them will get ice cream and others won’t, which will indeed totally suck - The speed and enthusiasm with which the new regulations have been adopted has indeed varied considerably by jurisdiction. Countries such as Australia and Hong Kong have already adopted Basel III. . (See pages 18-19 of this BIS report for said full compliers and mind the superscripts). Sticking with said Basel report published on April 12th: as of the end of March, the US is still classified as being in the “implementation phase” for Basel II (<- yes, *two*). While a part of 2.5 has been implemented (around market capital risk requirements), “US banking agencies intend to finalise the rule after consideration of public comments” for the rest. Europe is done with II and 2.5. But with Basel III… well… The European Parliament and the EU Council have reached an agreement on the legislative texts implementing Basel III and further measures regarding sound corporate governance and remuneration structures. The legislators agree that the acts should enter into force before the end of the first half of the year, allowing for a date of application of 1 January 2014. Which is nonetheless easily ahead of where the US is with it: Joint notice of proposed rulemaking approved in June 2012. The US agencies intend to finalise the rule after consideration of public comments. Basel 2.5 and Basel III rulemakings in the United States must be coordinated with applicable work on implementation of the Dodd-Frank regulatory reform legislation.

Markets Insight: Misuse of collateral creates systemic risk - Five years after the global financial crisis, collateral arrangements remain central to financial markets. They provide security for loans, structured as repurchase agreements or as mortgages or pledges of real estate or financial assets. In derivative transactions, collateral is lodged to secure current mark-to-market exposure. Rather than reducing risk, as theory would suggest, collateral in practice creates different risks, for a number of reasons. First, it shifts the emphasis from the borrower or counterparty’s creditworthiness to the collateral. Parties normally ineligible to borrow or transact in the first place are able to enter into transactions. Rapid growth in debt levels, derivative contract volumes and the shadow banking system (hedge funds or structured investment vehicles) are dependent on the use and availability of collateral. Second, the security offered as collateral is not risk free, even if it is government bonds. This introduces exposure to unexpected changes in the value of the collateral. Third, it assumes liquid markets for the collateral, which must be realised in case of default. Fourth, asset liability mismatches compound the risk. For example, where the loan is for a shorter maturity than the security pledged, or where collateral must be adjusted frequently over the life of the transaction. Fifth, collateral in practice introduces significant operational and legal risk, including enforceability of security.

Everything Is Rigged: The Biggest Price-Fixing Scandal Ever - Taibbi - The world is a rigged game. We found this out in recent months, when a series of related corruption stories spilled out of the financial sector, suggesting the world's largest banks may be fixing the prices of, well, just about everything. You may have heard of the Libor scandal, in which at least three – and perhaps as many as 16 – of the name-brand too-big-to-fail banks have been manipulating global interest rates, in the process messing around with the prices of upward of $500 trillion (that's trillion, with a "t") worth of financial instruments. When that sprawling con burst into public view last year, it was easily the biggest financial scandal in history – MIT professor Andrew Lo even said it "dwarfs by orders of magnitude any financial scam in the history of markets." That was bad enough, but now Libor may have a twin brother. Word has leaked out that the London-based firm ICAP, the world's largest broker of interest-rate swaps, is being investigated by American authorities for behavior that sounds eerily reminiscent of the Libor mess. Regulators are looking into whether or not a small group of brokers at ICAP may have worked with up to 15 of the world's largest banks to manipulate ISDAfix, a benchmark number used around the world to calculate the prices of interest-rate swaps. Interest-rate swaps are a tool used by big cities, major corporations and sovereign governments to manage their debt, and the scale of their use is almost unimaginably massive. It's about a $379 trillion market, meaning that any manipulation would affect a pile of assets about 100 times the size of the United States federal budget.

Alchemists of Wall Street at it again: Arcane-sounding names hide big risks - The alchemists of Wall Street are at it again. The banks that created risky amalgams of mortgages and loans during the boom — the kind that went so wrong during the bust — are busily reviving the same types of investments that many thought were gone for good. Once more, arcane-sounding financial products like collateralized debt obligations are being minted on Wall Street. The revival partly reflects the same investor optimism that has lifted the stock market to new heights. With the real estate market and the economy improving, another financial crisis seems a distant prospect. What’s more, at a time when the Federal Reserve has pushed interest rates close to zero, the safest of these new investments offer interest rates almost double that paid by ultrasafe U.S. Treasury securities, according to RBS Securities, which was involved in such instruments in the past. But the revival also underscores how these investments, known as structured financial products, have largely escaped new regulations that were supposed to prevent a repeat of the last financial crisis.

Financial Regulators To Warn About Student Debt Risks: The panel of senior U.S. regulators charged with safeguarding the financial system will warn this week about risks posed by the rapidly growing amount of student debt, increasing pressure on policymakers to deal with the potential problem. At roughly $1 trillion and rising, education loans may hamper economic growth and limit home purchases as overly indebted households and young workers cut back on consumption and borrowing, the Financial Stability Oversight Council is poised to warn in its latest annual report, sources familiar with the matter said. The yearly compendium on financial developments and potential risks to the financial system, prepared by the nine agencies that comprise FSOC, will be made public on Thursday. Student debt will not be presented as an immediate threat to financial stability, these people said, but its mention in the report as a risk is likely to alarm a sector that has been in policymakers’ sights for the past year. FSOC joins the Federal Reserve’s interest rate-setting panel, the Federal Open Market Committee; the Treasury Department’s Office of Financial Research; the Consumer Financial Protection Bureau; and the Federal Reserve Bank of New York in alerting about the possible danger student debt poses to either financial stability or the broader economy.

Rotation out of money market funds - where is the cash going? - Investors are fleeing dollar-based money market funds. After the spike in cash holdings from taxable income "harvesting" at the end of 2012 (see discussion), the assets in money funds have declined sharply.What's causing this decline? The common explanation has been a major rotation into equities. That certainly explains some of it, but there is more to the story. Some institutional investors are becoming uneasy about the impending money market funds regulation. Not only are investors paid a near zero rate on their money market holdings, they also may be subject to some NAV fluctuations in the near future. Furthermore, the NAV fluctuations may only be applied to funds holding commercial paper and not to those holding just treasury bills or treasury repo. Reuters: - Two-tier money market fund reform is as clear as mud. The U.S. Securities and Exchange Commission is trying again to regulate these mutual funds, which compete with bank deposit accounts. But the rules could favor funds that invest in government debt over those buying corporate debt.   Larry Fink, chief executive officer of BlackRock, told analysts this week that some funds may have to adopt a floating net asset value (NAV) - a standard in the mutual fund industry but anathema to those running these accounts that invest in short-term debt. That's because investors, who view money market funds as higher-yielding savings accounts, could actually lose money if NAV is no longer pegged to $1 per share.

MF Global Trustee Sues Corzine Over Firm’s Collapse - A bankruptcy trustee has sued Jon S. Corzine and other former MF Global executives, claiming they were “grossly negligent” in the lead-up to the brokerage firm’s collapse. The action by the trustee, Louis J. Freeh, comes just weeks after he agreed to postpone the lawsuit and enter mediation with Mr. Corzine. Now, by filing litigation that appeared to catch the MF Global executives off-guard, Mr. Freeh may have jeopardized those talks. A spokesman for Mr. Corzine, Steven Goldberg, disputed the accusations and questioned why Mr. Freeh was even bringing the case. “We question why the trustee chose to file this lawsuit, which is filled with seriously flawed allegations, while he is participating in court-ordered mediation of these very claims.” Mr. Freeh, who represents hedge funds and other creditors of MF Global, said on Tuesday that “the mediation process is ongoing,” and that it was “in the best interests of the Chapter 11 estates to file the complaint.”  Mr. Freeh, a former director of the F.B.I., also sued two of Mr. Corzine’s top deputies: Bradley I. Abelow, the chief operating officer, and Henri J. Steenkamp, the chief financial officer. Mr. Freeh labeled the men as “Corzine’s handpicked deputies.”

Mirabile Dictu! Someone (Bankruptcy Trustee Freeh) Finally Sues Jon Corzine Over MF Global - Yves Smith - The great unwashed public might get to enjoy a bit of theater. MF Global bankruptcy trustee Louis Freeh filed suit against Jon Corzine and two other MF Global executives, Brad Abelow and Henri Steenkamp, for running the firm into the ground for breach of fiduciary duty of care, breach of fiduciary duty of loyalty, and breach of fiduciary duty of oversight. That’s legalese for doing a recklessly bad job of being in charge. The suit does not include the issue that has many members of the investing public outraged: the appropriation of customer funds. But even though the specific failings are familiar to anyone who has been following this sorry affair closely, reading them together is a reminder of just how astonishingly irresponsible Corzine was as an executive. One of the basic requirements of a trading operation is you need to have solid controls and reporting. Yet Corzine instead entered into a outsided trading strategy that produced accounting earnings but drained liquidity. It’s frustrating that the suit misses this element, that the trade actually had a two day funding gap on top its other defects, including the fatal one, the risk of increased haircuts on a levered trade. That meant it drained cash even when it was showing accounting profits.

MF Again - The MF Global trustee filed his lawsuit against Jon S. Corzine and other former MF Global executives.  But the complaint itself, while quite well done, makes for rather strange reading upon further reflection. First, note that this is a breach of fiduciary duty action against officers quo officers, whereas the more typical Delaware fiduciary duty action is against the board.  Indeed, one can almost forget that MF Global had a board when reading the complaint.  For example, we are told that “Defendant Corzine was ultimately responsible for the Company’s administrative, back office and technology functions, including the adequacy of the Company’s risk management and internal controls.”  Sure, but where was the board? Certainly they had some responsibility here too, no?

S.E.C. Is Asked to Make Companies Disclose Donations - A loose coalition of Democratic elected officials, shareholder activists and pension funds has flooded the Securities and Exchange Commission with calls to require publicly traded corporations to disclose to shareholders all of their political donations, a move that could transform the growing world of secret campaign spending. S.E.C. officials have indicated that they could propose a new disclosure rule by the end of April, setting up a major battle with business groups that oppose the proposal and are preparing for a fierce counterattack if the agency’s staff moves ahead. Two S.E.C. commissioners have taken the unusual step of weighing in already, with Daniel Gallagher, a Republican, saying in a speech that the commission had been “led astray” by “politically charged issues.” A petition to the S.E.C. asking it to issue the rule has already garnered close to half a million comments, far more than any petition or rule in the agency’s history, with the vast majority in favor of it. While relatively few petitions result in action by the S.E.C., the commission staff filed a notice late last year indicating that it was considering recommending a rule.

Protecting Boards from Their Own Shareholders - I teach corporate law, and one of the topics in a typical introductory corporate law course is hostile takeovers. The central legal question is: to what extent is a board of directors allowed to undertake defenses against a takeover bid, even if (as is always the case) the potential acquirer is offering a premium over the current market price? Whenever I teach one of these cases, I always bring up the nagging economic question: if the share price is $20, and Big Bad Raider is offering $30 in cash to each and every shareholder, where does the board get the chutzpah to claim that, under its leadership, the true value of the company is more than $30? (I understand the argument that Bigger Badder Raider might be convinced to pay more than $30, but the law, at least in Delaware, allows boards to use some takeover defenses to fend off any acquirer.) This always baffles me, but the law is premised on the idea that there is some fundamental value that is hidden deep inside the current board’s “strategic plans,” and that Big Bad Raider may rob shareholders of this fundamental value.

Restyled as Real Estate Trusts, Varied Businesses Avoid Taxes -  A small but growing number of American corporations, operating in businesses as diverse as private prisons, billboards and casinos, are making an aggressive move to reduce — or even eliminate — their federal tax bills.They are declaring that they are not ordinary corporations at all. Instead, they say, they are something else: special trusts that are typically exempt from paying federal taxes. The trust structure has been around for years but, until recently, it was generally used only by funds holding real estate. Now, the likes of the Corrections Corporation of America, which owns and operates 44 prisons and detention centers across the nation, have quietly received permission from the Internal Revenue Service to put on new corporate clothes and, as a result, save many millions on taxes. The Corrections Corporation, which is making the switch, expects to save $70 million in 2013. Penn National Gaming, which operates 22 casinos, including the M Resort Spa Casino in Las Vegas, recently won approval to change its tax designation, too. Changing from a standard corporation to a real estate investment trust, or REIT — a designation signed into law by President Dwight D. Eisenhower — has suddenly become a hot corporate trend. One Wall Street analyst has characterized the label as a “golden ticket” for corporations.

Profits from Poverty: How Food Stamps Benefit Corporations - Three major corporations have cornered the market for providing services to the needy and destitute through the federal food stamp program — now called the Supplemental Nutrition Assistance Program (SNAP). Those three companies are — J.P. Morgan EFS, Affiliated Computer Services, and eFunds. That’s according to a report released last week by the Governmental Accountability Institute.  The title of the report — Profits from Poverty:  How Food Stamps Benefit Corporations. The report quotes an executive from JP Morgan, the largest food stamp industry player, as saying that the business of food stamps “is a very important business to JP Morgan. It’s an important business in terms of its size and scale . . .Right now volumes have gone through the roof in the past couple of years or so. The good news from JP Morgan’s perspective is the infrastructure that we built has been able to cope with that increase in volume.” Originally conceived as a means to prop up sagging crop prices to support American farmers, the Food Stamp Program, now called the Supplemental Nutrition Assistance Program, or SNAP, has exploded into a welfare program that costs taxpayers a record $75.67 billion in 2011, the group reported. Lax security by electronic benefit transfer (EBT) processors and states invites food stamp fraud, often through social media, the report found.

Regulators to Restrict Big Banks’ Payday Lending - Federal regulators are poised to crack down on payday loans — the short-term, high-cost credit that can mire borrowers in debt. But instead of taking aim at storefront payday lenders, the banking authorities are focusing on the small operations’ big bank rivals, like Wells Fargo and U.S. Bank, according to several people briefed on the matter. A handful of banks offer the loans tied to checking accounts, with the understanding that the lender can automatically withdraw the loan amount, plus the origination fee, when it is due. Regulators from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation are expected to clamp down on the loans, which carry interest rates that can soar above 300 percent, by the end of the week, these people said. The F.D.I.C. and the comptroller’s office declined to comment. The regulators are expected to impose more stringent requirements on the loans. Before making a loan, for example, banks will have to assess a consumer’s ability to repay the money.

Financial advisers’ credentials mislead seniors, watchdog says (Reuters) - The consumer watchdog on Thursday called for tougher oversight of the credentials that financial advisers use to show they are trained to work with older Americans. The Consumer Financial Protection Bureau said these financial advisers use more than 50 different credentials, some of which they can simply buy online. This creates a confusing array of titles that leaves older Americans vulnerable to abuse, the CFPB's report said. It noted that it is often impossible to distinguish between the titles, which do not clearly indicate what training advisers received and which are not overseen by a single regulator. "A senior choosing between an Accredited Retirement Advisor and an Accredited Estate Planner will likely do so without knowing which one is required to have five years of experience and some graduate level education and which is not," CFPB Director Richard Cordray said. The report calls for state and federal regulators to require tougher training before people can obtain designations to work with seniors and to set standards of conduct for advisers who claim those certifications.

Fierce Anti Bank Music Video by Animal Kingdom (NSFW) - Yves Smith -  Lambert and other readers old enough to remember the 1960s, when protest ballads of various sorts were an important part of both the civil rights movement and the opposition to the war in Vietnam, have wondered at the absence of anti-bank, anti-autocratic songs. Below is one with a suitably pointed video taking aim squarely at predatory financiers. The members of the band, Animal Kingdom, hail from London but they follow many US left-leaning blogs. I got access to this video privately about a month ago, and I have to confess to being taken enough with it to have watched it several times. I anticipate many of you will like it as well. Please check out the website of Justice Banking, the “official” sponsor of Animal Kingdom:

Regulators Get Banks to Rein In Bonus Pay - U.S. banks are bowing to regulators' concerns about the size of executive pay and its role in financial industry risk-taking. Seven large U.S. financial-services firms, including PNC Financial Services Group, Capital One, Discover Financial Services said they are scaling back the maximum bonuses awarded to executives who beat their performance targets, according to regulatory filings. Late last year, the Federal Reserve began contacting banks about their compensation plans, said a person familiar with the phone calls. In regulatory filings, many of the firms cited the Fed as a reason for changes.  Since the financial crisis the Fed has urged banks to cap bonuses in cases where they could encourage executives to take too much risk. Before the crisis, banks erred by focusing too much on short-term profits and too little on risk when designing bonus plans for employees and executives, according to the Fed. While the moves involve bonuses for exceeding internal financial targets and not basic pay packages, they are the latest hit to Wall Street compensation, which has shriveled in recent years because of smaller bonuses and poor stock performance. A study earlier this year by New York State Comptroller Thomas DiNapoli showed that Wall Street bonuses in 2012, while up from the previous year, were down about 40% from 2006.

Abolish deposit insurance, please -  I am sure many of you still have in mind “the Cyprus debacle”. If not, please start with an excellent piece from Joseph Cotterill entitled “A stupid idea whose time had to come” and work your way through links. The title of Joe’s piece has stuck in my mind ever since and I finally have a few moments to explain why. But instead of spending time explaining why I think the Cyprus solution was a correct one*, I thought I would touch on a somewhat more medium term issue, which is deposit insurance. This is because I think the debate in Europe whether to centralise the deposit insurance scheme or keep it on the national level is a wrong kind of discussion. I think that we should begin to discuss whether one of the lessons from the crisis shouldn’t be to cancel deposit insurance altogether. Please bear with me before you click the unsubscribe/unfollow button.

Unofficial Problem Bank list declines to 781 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Apr 19, 2013.  Changes and comments from surferdude808:  The FDIC got back to closing banks with a vengeance and, as anticipated, the OCC released its actions through mid-March 2013, which caused many changes to the Unofficial Problem Bank list. In all, there were seven removals and two additions that leave the list at 781 institutions with assets of $288.5 billion. A year ago, the list held 976 institutions with assets of $422.2 billion. The FDIC closed three banks this week. It has been about six months since the FDIC last closed three or more banks on a Friday night. Next week, the FDIC should release its actions through March 2013.   Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The number of unofficial problem banks grew steadily and peaked at 1,002 institutions on June 10, 2011. The list has been declining since then.

Senator Warren Questions Consultants On Illegal Foreclosures - Transcript after the jump

As banks get squeezed, non-bank mortgage servicers step in - Politicians continue to pressure banks' mortgage servicing businesses. Senator Barbara Boxer: -  Dear Attorney General Holder, Secretary Donovan, and Mr. Smith:  I am extremely concerned over reports that banks continue to violate the rights of homeowners and the terms of the National Mortgage Settlement (NMS). As a condition of the NMS, participating banks agreed to ensure certain basic consumer protections in exchange for legal relief. However, while the banks have been relieved of that legal uncertainty, struggling homeowners continue to face a seemingly patchwork system that leaves them at risk of losing their homes.  A recent survey of housing counselors in my own state of California found widespread violations of the NMS. What some politicians fail to realize is that all of a sudden banks are overwhelmed with the mortgage volumes they have to process and service. The mortgage servicing arms of banking organizations these days operate with severely reduced staff levels and are simply being overrun by new loans heading their way. Dealing with delinquencies and mortgage modifications becomes challenging when departments are facing sharply higher volumes.

Eric Schneiderman Challenges Obama Administration Over Mortgage Investigations-- New York Attorney General Eric Schneiderman has privately criticized the Obama administration and the Department of Justice for not aggressively investigating dodgy mortgage deals that helped trigger the financial crisis, according to senators and congressional aides who met with him this month. New York’s top prosecutor is co-chair of the administration’s year-old Residential Mortgage Backed Securities Working Group, an initiative that President Barack Obama called for in his State of the Union address last year. Schneiderman, a Democrat who has attempted to investigate Wall Street, expressed his frustrations with the administration earlier this month during private meetings with Democratic senators on Capitol Hill, arguing that he was “naive” when he first entered into the partnership with the Justice Department, lawmakers and their aides said. Critics of Schneiderman's collaboration, which came in exchange for his assent to a national mortgage settlement, warned at the time that the attorney general was being played. His recent criticisms of the administration may renew allegations that he, too, has compiled a lackluster enforcement record.

Error Claims Cast Doubt on Bank of America Foreclosures in Bay Area - Thomas is one of thousands of Bay Area homeowners fighting in court to save their homes from a foreclosure system rife with mistakes, mismanagement and even fraud, a joint investigation by the Center for Investigative Reporting and NBC Bay Area has found. Despite recent settlements with state and federal regulators and a new California law that tightens rules for the mortgage industry, banks and their subsidiaries continue to file invalid documents and foreclose on properties to which they appear to have no legal right, an analysis of thousands of pages of property records and wrongful foreclosure lawsuits shows. At the center of much of this is Bank of America, which plays the largest role of any bank in Bay Area foreclosures. From July 2008 through October, Bank of America's foreclosure trustee, ReconTrust, handled 1 in 5 defaulted properties in the Bay Area, roughly 70 percent more than the next biggest trustee, according to RealtyTrac Inc., a real estate information company. During the past five years, 184,000 Bay Area properties went into default; last year, the value of these loans exceeded $11.6 billion.

DataQuick: Q1 California Foreclosure Starts Lowest Since Late 2005 - From DataQuick: Golden State Foreclosure Starts Lowest Since Late 2005 - The number of California homeowners entering the foreclosure process plunged to the lowest level in more than seven years last quarter.  During first-quarter 2013 lenders recorded 18,567 Notices of Default (NoDs) on California houses and condos. That was down 51.4 percent from 38,212 during the prior three months, and down 67.0 percent from 56,258 in first-quarter 2012, according to San Diego-based DataQuick.Last quarter's number was the lowest since 15,337 NoDs were recorded in fourth-quarter 2005. NoDs peaked in first-quarter 2009 at 135,431. DataQuick's NoD statistics go back to 1992. "Foreclosure starts were already trending much lower late last year because of rising home prices, a stronger labor market and the settlement agreement between the government and some lenders. But it appears last quarter's drop was especially sharp because of a package of new state foreclosure laws - the 'Homeowner Bill of Rights' - that took effect January 1. Default notices fell off a cliff in January, then edged up.,"  This graph shows the number of Notices of Default (NoD) filed in California each year.   For 2013 (red), the bar is the Q1 rate annualized.  

LPS: Total Non-current Mortgages falls below 5 Million for the first time since 2008 - According to the First Look report for March to be released today by Lender Processing Services (LPS), the percent of loans delinquent decreased in March compared to February, and declined about 3% year-over-year. Also the percent of loans in the foreclosure process declined further in March and were down significantly over the last year. March usually see a decline in mortgage delinquencies, so some of the month-to-month decline is seasonal. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 6.59% from 6.80% in January. Note: the normal rate for delinquencies is around 4.5% to 5%. The percent of loans in the foreclosure process declined to 3.37% in March from 3.38% in February.   The number of delinquent properties, but not in foreclosure, is down about 4% year-over-year (151,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 21% or 441,000 properties year-over-year. The percent (and number) of loans 90+ days delinquent and in the foreclosure process is still very high, but the number of loans in the foreclosure process is now declining. LPS will release the complete mortgage monitor for March in early May.

Bank “Zombie Title” Rises, Hurting Communities and Borrowers, as OCC and Fed Sit Pat -  Yves Smith -  We’ve written before about the perverse phenomenon known as “zombie title.” Servicers initiate a foreclosure and complete most of the steps, including evicting the borrowers, but then fail to take title to the house. Adding insult to injury, the banks rarely inform the former homeowner of this cynical move. Not only does often find out years later that he’s on the hook for property taxes and in some cases, fines from the local government, but the servicer has made such a mess of title that the owner can’t get rid of the property, unless he takes a quit title action, which typically can’t commence until five years after the foreclosure was abandoned. Kate Berry of American Banker provides an update. She flags that this abuse has skyrocketed sin e 2010, when the GAO estimated that abandoned homes ranged between 14,500 and 35,600. They are now pegged at 35% of the one million homes in foreclosure.  Homeowner advocates are up in arms because both the Fed and OCC have issued guidance requiring servicers to inform borrowers and municipalities if they intend not to complete a foreclosure. They also contend that this is a fair lending practice abuse, since, natch, the borrowers tend to live in low-income communities. And abandoned homes are a blight.Normal local statues dealing with vacant properties hit the owner, which is the hapless homeowner, not the servicer. This problem is hitting a level where local authorities may start taking more aggressive measures. I’d love to see a “bad faith foreclosure” fine, for parties that evict a homeowner but fail to take title to a property in a stipulated period of time. The fine would need to be punitive, say $10,000, and allow for recovery of costs if the municipality has to take unusual measures to collect (say putting a lien on a local bank branch and then threatening to foreclose).

I Told You So uh sort of - The latest estimates of the cost of bailing out Fannie Mae are dramatically lower than previously reported estimates. Because of accounting rules, Fannie and Freddie would be forced to recognize the increase in value as profit — and turn it over to taxpayers. Fannie has suggested that might occur this spring — and said it could turn over about $60 billion. Freddie appears to be behind in the process.  I don’t understand the actual issue “tax assets” but still claim I, more or less, told you so (maybe more less than more as those posts are about TARP but the issue is similar). The key point is that Fannie Mae will transfer $60 billion to the Treasury but this won’t make another bailout necessary.  The reason is that, in normal times, Fannie Mae gets a normal return on its assets.  Such a return is much higher than the rate the Treasury pays.The cost of bailouts was, by law, adjusted for risk so, unlike everything else, it wasn’t evaluated at the expected effect on the national debt after 10 years but rather that effect plus an additional cost from the Treasury bearing risk.  There is no good reason to count this cost. There is a very strong bad reason that if it weren’t required some people would write that the Treasury could eliminate its  debt problem by selling more bonds and buying equities.

The HARP Success Story - From the LA Times: Federal refi program for underwater homeowners hits its stride Nearly 1.1 million homeowners with little or no equity were able to refinance last year under HARP, which assists borrowers who are current on their monthly payments. That's nearly as many as in the three previous years combined, and the latest figures show that early this year, the pace of these refis abated only slightly. "This is a program that has reached a lot of people — probably more underwater homeowners than anybody thought it would," said "It is also one of the few programs that has rewarded people who have stayed current on their mortgages.  The program has been successful because it addressed one of the hangover effects from the housing bust: the millions of Americans stranded in expensive, high-interest-rate loans.  The HARP program really took off when most of the representations and warranties associated with the original loans were eliminated (meaning the lenders would not be responsible for defects in the original loans) and after the automated systems were updated in March of 2012. Since these borrowers were current, and Fannie or Freddie already owned the loan, it made sense to allow them to refinance at a lower rate even if they owed more than their homes were worth (this lowered the risk of default for the GSEs). 

Before Housing Bubbles, There Was Land Fever - Robert Shiller - SINCE 1997, we have lived through the biggest real estate bubble in United States history — followed by the most calamitous decline in housing prices that the country has ever seen.  Fundamental factors like inflation and construction costs affect home prices, of course. But the radical shifts in housing prices in recent years were caused mainly by investor-induced speculation.  Anyone contemplating the purchase of a home wants an idea of where prices will be when it is eventually time to sell, perhaps many years later. For that kind of long-term forecasting, we need to understand the reasons for the recent, violent price cycle, and whether it is likely to repeat itself. History has much to teach us about real estate bubbles, and some of it is reassuring. The land booms of New York State in the 1790s, Kansas in the 1850s, California in the 1880s and Florida in the 1920s all appear to have been relatively isolated events. And the cycle was not repeated in short order.  But those events were fundamentally different from the recent housing bubble. As relatively local phenomena, involving a fairly small number of adventurers, they did not consume most people’s attention. And a major cause can be easily identified: they developed from the promotion of supposedly valuable lots of land.  . The term “housing bubble” was not even in their vocabulary. Land, not houses, was the object of their desires. They had “land mania” or “land fever.”

MBA: Mortgage Applications Increase, Purchase Index highest since May 2010 - From the MBA: Mortgage Applications Increase Slightly in Latest MBA Weekly Survey The Refinance Index increased 0.3 percent from the previous week. The seasonally adjusted Purchase Index increased 0.3 percent from one week earlier to the highest level since May 2010.  The HARP share of refinance applications increased from 31 percent last week to 32 percent this week, the highest level since MBA began tracking HARP applications in February 2012. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.65 percent from 3.67 percent, with points decreasing to 0.41 from 0.50 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.The first graph shows the refinance index. There has been a sustained refinance boom for over a year. According to the MBA, the HARP program is contributing significant to the current level of refis. The second graph shows the MBA mortgage purchase index.  The 4-week average of the purchase index has generally been trending up over the last year, and the purchase index last week was at the highest level since May 2010

Qualified Residential Mortgages - The New York Times has a major article about the Qualified Residential Mortgage rulemaking under the Dodd-Frank Act. I think there's a lot of confusion about this ruling-making. I'm going to try and clarify a few things in this post. The Dodd-Frank Act requires that a "securitizer" retain 5 percent of the credit risk unhedged on any securitized asset unless the securitization consists solely of "qualified residential mortgages." A securitizer is basically the securitization's sponsor, although the credit risk can be shared between a sponsor and an originator of the securitized assets.  The Dodd-Frank credit risk retention requirement, however, is not limited to mortgage securitization. It covers all types of securitizations. While this doesn't matter much for credit card securitizations, which already have skin-in-the-game requirements, it will affect auto loan securitizations, commercial mortgages, and other sundry asset classes.  The Dodd-Frank Act does not specify how the 5% credit risk retention is to be caluculated, whether it applies to covered bonds, how hedging restrictions are to be enforced, and most importantly, it does not define "qualified residential mortgage" or QRM. Instead, it direct the OCC, the Fed, the FDIC, the SEC, the FHFA, and HUD to come up with a definition of QRM. The definition may be no broader than the CFPB's definition of "Qualified Mortgage" or QM.  In other words, all QRMs, must be QMs. The CFPB came out with its QM rulemaking last January (see here and here).

Poor Case for Low Down Payment Loans - Dean Baker  - One of the big issues left to be resolved in the debate over housing finance is the size of the down payment that homebuyers must put down in order for a mortgage to be considered a "qualified" mortgage. If a mortgage fits this definition, securitizers would not be required to hold capita against the mortgage. NYT's Dealbook had a post discussing the topic which highlighted research at the University of North Carolina at Chapel Hill, which purports to show that there is not much additional risk of default with lower down payments. In fact, the numbers presented in the piece imply that Quercia's research implies that low down payment loans have far higher risks of default. This means that lenders would either have to charge considerably higher interest rates or be subsidized for making these loans. The NYT piece reports that Quercia found that the default rate during the years of the housing crash on a set of loans that met certain quality standards was 5.8 percent. However the default rate on loans with down payments of 20 percent or more was just 3.9 percent.  The piece reports that this higher down payment group comprised less than half of the loans in the study. If we assume that the 20 percent down payment group comprised 40 percent of the loans then this means that the default rate for home buyers putting less than 20 percent down was over 7.0 percent, more than 80 percent higher than for the 20 percent down payment group.

The invidious “down payment requirement” meme -- I feared this would happen. Peter Eavis has a column today about what his headline calls “Down Payment Rules”. Here’s his lede:  It seemed an easy fix to prevent the excesses of the housing market: make home buyers put more money down. Read on, and you’ll find lots of talk about “down payment requirements”, “restrictions” on lenders, and whether “requiring a down payment” is a good idea or not, given that we want to both encourage homeownership and prevent systemic risk. But the subject of Eavis’s column — something called the qualified residential mortgage, or QRM — was never designed to be “an easy fix to prevent the excesses of the housing market”. Rather, it was designed as a loophole to allow banks to wriggle out from an entirely sensible skin-in-the-game requirement. I covered this subject in some depth back in June 2011, so go read that post if you want the details; nothing has really changed. (For even more on the subject, read Kevin Wack’s excellent treatment from a couple of months later.) But the basic story is simple: under Dodd-Frank, banks need to hold on to at least 5% of the loans that they make. The QRM is a loophole in that requirement — loans with high down payments are exempt from the law, and banks can sell the entire thing, rather than just 95%.

Banks Continue to Scaremonger Over Nonexistent Down Payment Requirements - Are banks refusing to make loans unless buyers put up a big down payment? Apparently so. Will this hurt the recovering housing market? Maybe. Is this all due to restrictive Dodd-Frank rules that ought to be discarded?  Nope. Read on for the real story. It turns out that Dodd-Frank allows banks to make any kind of loans they want. What it does say, though, is that if a loan fails to conform to its rules—one of which is a 20 percent down payment—then the issuing bank can't just bundle up the entire loan and immediately sell it off. It has to keep a 5 percent stake. Felix Salmon comments:The question about high down payment mortgages is a relatively arcane backwater of financial underwriting, and we can leave it to the statisticians and bond investors to decide just how much, if at all, such down payments reduce defaults. Instead, we should be concentrating on the banks here, the institutions which seem to be entirely unwilling to underwrite any mortgage at all, unless and until they’re allowed to flip the entire thing, 100%, to bond investors, for a quick, risk-free profit. This violates common sense. If the bank is underwriting the loan, the bank should retain at least a tiny amount of the risk in that loan. Indeed, if I were a bond investor, I would as a matter of course require extra yield on any loans which were sold by a bank without any skin in the game at all. After all, there’s not much point in being assiduous about your underwriting if you’re just going to sell the entire loan anyway.

Sales of Existing U.S. Homes Fall on Limited Inventory: Economy - Previously owned U.S. home sales unexpectedly dropped in March as a lean supply of properties kept the industry from generating a stronger recovery.  Purchases of existing houses, tabulated when a contract closes, fell 0.6 percent to a 4.92 million annual rate, figures from the National Association of Realtors showed today in Washington. The median forecast of 75 economists surveyed by Bloomberg projected sales would increase to a 5 million rate. A decline in the availability of distressed homes and still-tight access to credit are holding back buyers, impeding progress in a real-estate market that's been a source of strength for the economy. Bigger gains may emerge when rising property values encourage more Americans to put their properties on the market. "Despite some little turbulence, the residential housing market is still improving," "We're in a transition mode where distressed sales are falling and conventional sales are growing, which means stagnation in total home sales. This situation is not problematic because it shows the market is returning to normal."

Existing Home Sales in March: 4.92 million SAAR, 4.7 months of supply -  The NAR reports: March Existing-Home Sales Slip Due to Limited Inventory, Prices Maintain Uptrend: Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 0.6 percent to a seasonally adjusted annual rate of 4.92 million in March from a downwardly revised 4.95 million in February, but remain 10.3 percent higher than the 4.46 million-unit pace in March 2012. Total housing inventory at the end of March increased 1.6 percent to 1.93 million existing homes available for sale, which represents a 4.7-month supply at the current sales pace, up from 4.6 months in February. Listed inventory remains 16.8 percent below a year ago when there was a 6.2-month supply.This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in March 2013 (4.92 million SAAR) were 0.6% lower than last month, and were 10.3% above the March 2012 rate.  The second graph shows nationwide inventory for existing homes.The last 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 Decline 0.6% for March 2013 - NAR reported their March 2013 Existing Home Sales.  Existing home sales decreased -0.6% from last month and inventories increased to a still very tight 4.7 months of supply.   Existing homes sales have increased 10.3% from a year ago.    Volume was 4.92 million against February's 4.95 million, annualized existing home sales.  NAR blames inventories yet volume for February was revised downward from 4.98 million.  Inventory of existing homes increased 2.2% for the month, a 4.7 months supply and inventory is down -24.2% from a year ago.  Inventories by months to sell at current sales volume is now at 2005 levels.  Short supply also partially explains the increasing prices.  NAR blames inventories yet last month inventories were lower.  NAR claims buyer traffic has increased 25% from a year ago. The national median existing home sales price, all types, is up, now at $184,300, a 11.8% increase from a year ago.  This is the highest annual increase since November 2005.  Even more eerie, the last time there were 13 consecutive months of median existing home price increases was also the height of the housing bubble, May 2005 through May 2006.   The average home price for March was $233,200, a 9.9% annual increase.  We have bubble like price increases that may very well have much to do with the Federal Reserve mortgage backed securities purchases, known as quantitative easing.  The Fed's move is keeping mortgage interest rates at record lows.  Yet NAR never mentions homes becoming unaffordable as a reason this month's sales declined.

Growing Pains For The Housing Market -The modest decline in existing home sales in March in Monday's update from the National Association of Realtors (NAR) prompted some pundits to wonder if the housing rebound is topping out. Anything's possible, but the reason why sales slipped in March suggests that the market's suffering from growing pains rather than facing a cyclical turn for the worse. The issue to consider is the supply of existing homes for sale. Although the inventory of units for sale turned up slightly last month, for the second time in a row, the rise follows several years of falling supplies. Demand, however, keeps rising. As NAR chief economist Lawrence Yun notes in Monday's press release: Buyer traffic is 25 percent above a year ago when we were already seeing notable gains in shopping activity. In the same timeframe housing inventories have trended much lower, which is continuing to pressure home prices. The good news is home construction is rising and low mortgage rates are continuing to keep affordability conditions at historically favorable levels. The bad news is that underwriting standards remain excessively tight, while renters are getting squeezed by higher rents. Consider the rolling one-year percentage changes for housing starts, new one-family house sales, and the ratio of houses for sale to houses sold (a proxy for measuring the monthly supply of houses for sale). As the chart below shows, the inventory of homes for sale has been shrinking for the better part of the last two years (gray bars). By contrast, new home sales (blue line) have been rising. Reacting to the demand, homebuilders have been creating more supply, as indicated by the rising level of housing starts (red line).

Analysis: Housing Market Still Encouraging - A small dip for existing home sales in March but Gary Thayer, Chief Macrostrategist at Wells Fargo Advisors, tells Wall Street Journal's Mathew Passy that he is still encouraged by the housing market.

The Recovery in Housing Is Behind Us: David Rosenberg - Sales of existing homes unexpectedly fell 0.6% to a seasonally adjusted annual rate of 4.92 million in March, the National Association of Realtors reported Monday. Analysts had been expecting an increase of 5.03 million homes. February existing home sales were revised down to 4.95 million from an original estimate of 4.98 million. The numbers in March continue to point to a healthy housing recovery: existing home sales are up 10.3% compared to a year ago and the median home price in March ($184,300) is nearly 12% higher than it was in March 2012. Last month also marks the largest year-over-year price growth since November 2005. David Rosenberg, chief economist and strategist at Gluskin Sheff, says growth in the housing market could be slowing. He notes that first-time buyers are still hesitant about taking on mortgage debt and their absence from the market is the “missing link” in the recovery. “Most of this recovery in the housing sector is probably behind us,” Rosenberg tells The Daily Ticker. Sales will “probably level off for the next several months” which is not “the worst thing in the world.”

Existing Home Sales: Conventional Sales up Sharply - Here are a few excerpts from a Reuters article: Existing Home Sales Fall as Prices Rise Most Since 2005 U.S. home resales edged downward in March, a pause in the housing market recovery that has helped boost the economy. Nationwide, the median price for a home resale rose to $184,300 in March, up 11.8 percent from a year earlier, the biggest increase since November 2005. The limited supply of available properties is pushing up home values. First, this isn't a "pause in the housing market recovery". The housing recovery is based on residential investment, and only the commission on existing home sales is included in residential investment (the main contributors are new home sales and home improvement).   A decline in the headline number for existing home sales due to fewer distressed sales, is a positive, not a negative! Second, the median price is a poor measure of overall market prices since this reflects changes in the mix in addition to changes in prices (the repeat sales indexes are a better measure of price changes).  Note: Lawler used the median over the weekend to show that investors are buying at a higher price point - an appropriate use of the median price. The NAR reported total sales were up 10.3% from March 2012, but conventional sales are probably up over 20% from March 2012, and distressed sales down. 

Blackstone Buys Atlanta Homes in Largest Rental Trade - Blackstone Group bought 1,400 properties in Atlanta, some eligible for federal low-income housing subsidies, in the biggest bulk purchase for the fledgling homes-for-lease industry. The private-equity firm, which has spent more than $4 billion on 24,000 rental properties in the last year making it the largest buyer in the U.S., purchased the residences from Building and Land Technology, said Marcus Ridgway, chief operating officer of Invitation Homes, Blackstone’s single- family rental division.Private-equity firms, hedge funds and individuals are racing to buy into a shrinking pool of foreclosed or distressed homes to rent. They’re seeking to profit as prices remain 29 percent below their 2006 peak and potential homebuyers can’t get mortgages with banks restricting credit. Jonathan Gray, Blackstone’s global head of real estate, said in an interview last week that it’s getting harder to acquire properties for a profit as competition intensifies.

Housing: Some thoughts on Investor Buying, Inventory and recent Price Increases - Tom Lawler has sent me some rough data that suggests much of the increase in conventional sales in California has been due to investor buying (mostly large institutional investors buying single family homes to rent).   As an example, reports are Blackstone has purchased 20,000 homes nationally and Colony Capital has purchased 7,000 homes. And there a number of other large players. There groups have continued to buy even as the number of foreclosures has declined. Note: some of the smaller investor groups I've mentioned on this blog have stopped buying (they started buying at the low end in late 2008).  They say the numbers no longer make sense. Historically single family rentals were a mom-and-pop venture, and these large institutional buyers are a significant change in the market. These buyers are one of the reason the current active inventory is so low (other reasons include "underwater" homeowners who can't sell, potential sellers unable to find a new home to buy, and a change in seller psychology "not wanting to sell at the bottom"). This investor buying is making it very difficult for first time buyers to find a home, and this is probably keeping some potential buyers as renters - and maybe pushing up some buyers to higher price points just to buy. 

Lawler on Housing: Table of Cash Buyers in March, Updated Table of Short Sales and Foreclosures for Selected Cities -  Economist Tom Lawler sent me the following table of cash buyers for selected cities in March 2013 compared to March 2012.  This suggests significant investor buying in certain areas (like Florida): Lawler also sent me the updated table below of short sales and foreclosures for several selected cities in March.  Note the declines in total distressed sales and foreclosure sales.

Billions flow into the hottest new U.S. housing asset — rentals - Mullen, 54, has raised almost US$1 billion to buy single- family houses to rent since leaving Goldman Sachs last year as head of global credit and mortgages, five years after overseeing the bank’s bet against the imploding subprime home-loan market. His Fundamental REO LLC has already purchased or is close to acquiring almost 2,500 properties through foreclosure auctions, government agencies and even an Arizona non-profit that promotes affordable-home ownership, property records show. Mullen plans to spend as much as US$2 billion by 2016, joining private-equity giants including Blackstone Group LP and Colony Capital LLC seeking to take advantage of home prices 29% below the 2006 peak and rising demand for rentals from Americans blocked out of homeownership. Investors, including former bankers and bond traders, are rushing to buy and renovate properties, as well as secure Wall Street funding to turn what’s been a mom and pop business into an institutional asset class. “This is the biggest trade in the real estate space,” said Justin Berman, a former Goldman Sachs banker who runs Atlanta-based Berman Capital Advisors, a private wealth firm with about US$550 million under management. “They can’t get their hands on enough homes.”

Lawler: How Much Has the Single Family Housing Market Shifted to Rentals (in numbers)? - Estimates of the SHARE of SF housing units occupied by owners vs. renters are available from the American Community Survey annually from 2006 through 2011 and biennially from the American Housing Survey through 2011, and “imprecise” estimates of the owner vs. renter share of “one-unit” structures can be derived from the detailed tables of the Housing Vacancy Survey through 2012 – though rental and homeowner vacancy rates for “one-unit” structures in the HVS include not just SF detached and attached homes but also manufactured/mobile homes. All three surveys show a substantial increase in the share of SF/one-units occupied homes occupied by renters from 2007 to 2011, and the HVS data show a continued share increase in 2012. I believe the ACS data on the renter share of the SF housing market is superior to the AHS and HVS data. Translating the ACS share data to numbers, however, requires a little work. Unfortunately, adjusted for this last factor is difficult, since the degree of the vacancy rate “overstatement” is only available for 2010. As such, I only adjusted the ACS estimates for more reasonable estimates of the housing stock (incorporating the Census 2000 HUCS and the Census 2010 CCM).Making this adjustment, and using estimates for the 2012 ACS data based on HVS results, it would appear that from 2007 to 2012 the number of SF detached and attached homes that were occupied by renters increased by about 2.6 million, while the number of SF detached and attached homes that were occupied by owners declined by about 1.3 million. The largest increase in both the number and the share of renter-occupied SF homes appears to have been in 2009.

Vital Signs Chart: Tight Housing Inventory - The nation’s housing inventory is tight. About 1.9 million existing homes were available for purchase in March, near a 12-year low. The lean supply is thwarting interested buyers and pushing prices higher. Home sales fell 0.6% in March to a seasonally adjusted annual pace of 4.92 million. The median sale price rose 11.8% from a year earlier to $184,300, the fastest pace since 2005.

Markets Insight: US mortgage market depends on state support - This week, the American economy passed a small milestone. For the first time in six years, a Gallup survey showed that just over half of Americans now expect house prices to rise over the next year. That is a sharp contrast to last year, when most people expected further falls. And it follows a host of other upbeat signals: CoreLogic reports that US house values rose at their fastest pace in February since 2006; the pace of home sales has jumped; unsold inventories have declined; and developers have even started to build more homes again.  But amid these hints of optimism, there is a profound irony too: if you look at what is currently driving America’s housing “market”, the funding side of this equation has less and less to do with genuine market forces. Never mind the fact that the US Federal Reserve is gobbling up mortgage-backed securities at a rate of $40bn a month, to try to lower mortgage rates. And ignore the modest (and generally ineffective) measures that the Federal government has unveiled for homeowners who are underwater on their mortgage loans. What is most startling of all is the level of government guarantees for mortgage bonds, following the collapse of the private securitisation market in the wake of the financial crisis. “Investors have nearly completely abandoned the private label [mortgage-backed securities] market— the government is responsible for nearly 100 per cent of the securitisation market,” a Congressional committee on financial services noted this week.

Re-inflating the bubble - Obama hired back all the Clinton-era officials who caused the housing bust — so they can do it all over again. Donovan now serves as secretary of housing, where media reports say he’s pushing hardest to preserve Fannie and Freddie and its “affordable housing mission.” He believes the mortgage giants facilitate “an important democratization of credit” benefiting “underserved groups.”  Another architect of the disastrous housing policies that caused the crisis, Ellen Seidman actually encouraged subprime lending in “underserved” communities as a top Clinton bank regulator enforcing the Community Reinvestment Act. “Growth in the subprime credit market indicates that credit needs in many low- and moderate-income areas are being met,” she said in 1999.

FHFA house price index climbs 0.7% in February -  U.S. home prices rose 0.7% on a seasonally adjusted basis in February, the Federal Housing Finance Agency said Tuesday. In the 12 months ended in February, home prices were up 7.1%, though they are still 13.6% below the index's April 2007 peak. The FHFA index has not declined in any month since January 2012. The index is calculated by using the purchase price of houses whose mortgages have been sold to or guaranteed by Fannie Mae or Freddie Mac.

U.S. Home-Price Index Rises 0.7% in February - Home prices increased 0.7% on a seasonally adjusted basis from a month earlier, according to the Federal Housing Finance Agency's monthly home-price index released Tuesday. Compared with the same month a year earlier, home prices were up 7.1%. The results were above economists' expectations. Those surveyed by Dow Jones Newswires had expected a 0.6% monthly increase. Prices had the biggest increase of 1.7% in southeastern states, compared with a month earlier. They fell 0.6% in New York, New Jersey and Pennsylvania, the report said. The index value in February was 196.3, with a reading of 100 equal to the price of homes in January 1991. The FHFA's index is calculated by using the prices of houses purchased with mortgages backed by government-controlled mortgage companies Fannie Mae (FNMA) and Freddie Mac (FMCC). The index is roughly the same level as in October 2004 and is still 13.6% below its peak in April 2007.

Zillow: Rate of Home Value Appreciation Slows Nationwide in Q1 - From Zillow: Rate of Home Value Appreciation Slows Nationwide in Q1, But Pockets of Volatility Remain  - Zillow’s first quarter Real Estate Market Reports, released today, show home values increased 0.5% from the fourth quarter of 2012 to the first quarter of 2013 to $157,600. This quarter marks five consecutive quarters of national home value appreciation. On an annual basis, the Zillow Home Value Index (ZHVI) rose 5.1% from March 2012 levels. While home values are still experiencing above normal annual home value appreciation we are seeing signs of deceleration. Monthly appreciation, albeit positive, has been continuously getting smaller, and national home values grew by only 0.1% for the past two months. This report is through Q1, the most recent Case-Shiller release was for January. We are starting to see a little more inventory - probably in response to the recent price increases - and it would make sense that with more inventory, the pace of price increases would slow.  Here are the Zillow Home Value Indexes by city.

Update: CoreLogic acquires Case-Shiller - Last night I mentioned that CoreLogic had acquired Case-Shiller house price index, and I wondered if there would be changes to how the index was released. The answer is nothing will change ...From CoreLogic: CoreLogic Acquires Case-Shiller In addition to the widely recognized Case-Shiller Indexes, CoreLogic will continue to offer its CoreLogic HPI® ... The CoreLogic HPI and the Case-Shiller Indexes are complementary measures of home price trends utilizing the same baseline methodology of repeat home sales.  The Case-Shiller Indexes will be renamed the CoreLogic Case-Shiller Indexes. The S&P/Case-Shiller Home Price Indices will retain their brand name. The CoreLogic HPI, CoreLogic Case-Shiller Indexes, and S&P/Case-Shiller Home Price Indices reports will continue to be published and distributed on their customary time schedules and in their current formats.

New Home Sales at 417,000 SAAR in March - The Census Bureau reports New Home Sales in March were at a seasonally adjusted annual rate (SAAR) of 417 thousand. This was up from 411 thousand SAAR in February.   The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate."Sales of new single-family houses in March 2013 were at a seasonally adjusted annual rate of 417,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 1.5 percent above the revised February rate of 411,000 and is 18.5 percent above the March 2012 estimate of 352,000."The second graph shows New Home Months of Supply. The months of supply was unchanged in March at 4.4 months.  The all time record was 12.1 months of supply in January 2009.On inventory, according to the Census Bureau"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted." Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.This graph shows the three categories of inventory starting in 1973.

New Home Sales Increase 1.5% for March 2013 - March New Residential Single Family Home Sales increased 1.5%, or 417,000 annualized sales.   New Single Family Housing inventory is at a 4.4 month supply.  New single family home sales are now 18.5% above March 2012 levels, but this figure has a ±17.2% margin of error.   A year ago new home sales were 352,000.  Sales figures are annualized and represent what the yearly volume would be if just that month's rate were applied to the entire year.   These figures are seasonally adjusted as well.  Beware of this report for most months the change in sales is inside the statistical margin of error and will be revised significantly in the upcoming months. New homes available for sale increased 2.0% from last month.  The average home sale price was $279,900, a -10.8% drop from last month's average price of $310,000.   If one thinks about it, these prices are outside the range of what most wages can afford.  March's median new home price dropped -6.8% to $247,000.  Median means half of new homes were sold below this price and both the average and median sales price for single family homes is not seasonally adjusted. Inventories had no change from last month.   The current supply of new homes on the market would now take 4.4 months to sell.  From a year ago housing inventory has declined -10.2% and is still inside the margin of error of ±15.1%.  Below is a graph of the months it would take to sell the new homes on the market at each month's sales rate.  We can see these inventories vs. sales times did plunge, but the statistics won't show if these rates have stabilized for at least three months.

March New Home Sales As Expected While Average Home Price Plunges To Nine Month Low - It is only logical that after last month's New Home Sales miss (exp. 420, printed 411K), which sent the market higher, today's tiniest of beats in New Home Sales, which printed at 417K, on expectations of 416K, would also send the market higher. The total months of supply indicated was 4.4, the same as February, and well above the 4.0 from January. Unnoticed in the release was that the January housing data was revised higher from 431K to 445K, meaning last month's drop would have been even more acute (-7.6% instead of -4.6%), but who cares about such things as data chronology now that the headline effect is long gone.  All that matters is that the trend is the mainstream media's friend, which can report new home sales have grown once more... if only back to levels last seen in April of 2010 when the same number was 422K. Was the data actually meaningful on a long-term basis? We will let readers decide on their own after one look at the chart below. Finally, and this will not be mentioned anywhere, the average New Home price plunged from $310,000 to $279,900 -  the lowest since June of 2012. One can only imagine the step down in quality that was required to make up in volume what was "lost" in price.

A few comments on New Home Sales - Now that we have three months of data for 2013, one way to look at the growth rate is to use the "not seasonally adjusted" (NSA) year-to-date data.  According to the Census Bureau, there were 104 thousand new homes sold in Q1 2013, up about 19.5% from the 87 thousand sold in Q1 2012. That is a solid increase in sales, and this was the highest sales for Q1 since 2008. Note: For 2013, estimates are sales will increase to around 450 to 460 thousand, or an increase of around 22% to 25% on an annual basis from the 369 thousand in 2012. Although there has been a large increase in the sales rate, sales are still near the lows for previous recessions. This suggest significant upside over the next few years.  Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years. Also housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades.  And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales.  Now I'm looking for the gap to start to close over the next few years. The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through March 2013. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.  Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren't able to compete with the low prices of all the foreclosed properties.  Another way to look at this is a ratio of existing to new home sales.This ratio was fairly stable from 1994 through 2006, and then the flood of distressed sales kept the number of existing home sales elevated and depressed new home sales. (Note: This ratio was fairly stable back to the early '70s, but I only have annual data for the earlier years).

It’s A Housing “Recovery” In Orwellian Terms – Here’s The Reality - The Commerce Department  today reported really good March home sales  relative the the past 4 years of the housing depression. Media reports included only the seasonally adjusted annualized sales rate, which was 417,000 versus a consensus estimate of 415,000. PR flaks at the major financial infomercial outlets were breathless in their reports. Bloomberg proclaimed “A dearth of existing properties is encouraging builders to undertake new projects that will keep fueling the economy. Mortgage rates close to record lows, higher home values and rising household formation are helping lay the groundwork for increased buyer traffic in 2013.” It’s mostly mindless bullshit as usual. The numbers were good relative only to the recent past, and with the tailwind of Benito Bernanke’s massive mortgage rate subsidy. Looking at the actual numbers from the Commerce Department surveys, not annualized and not seasonally adjusted, we get a better view of current reality.  New house sales rose by 7,000 units to 40,000 in March. This was better than last year’s March gain of 4,000 units to 34,000, and better than the March 2011 gain of 6,000 to 28,000. Sales are up 43% in two years. Wow. But let’s put this in perspective. It’s still below the 48,000 units that were sold in March 2008 in the middle of the housing market crash, the 120,000 units a month during the bubble years, and the 80,000 units per month typical before that.

Housing Sector 56% Back to Normal - If the housing recovery were a home, the foundation, framing, roof, windows and siding would all be in place. Now the industry has to complete the second half of its return to normal. This is where progress can slow down. Despite some March setbacks that could be weather-related, housing construction and demand look firmly in recovery. The latest piece of news was the 1.5% rise of new-home sales in March and the continued increase in home prices through February. These trends are just as the Federal Reserve intended when it aimed to bring long-term interest rates down. Better housing activity helps the overall economy, and consumer spending benefits from rising home prices and the ability to refinance mortgages. According to calculations by housing website Trulia, the housing sector is 56% back to normal. Trulia compares the current levels of starts, existing-home sales, and the rate of delinquencies and foreclosures versus their worst readings of the recession and their prebubble normal levels.

Why Housing Won’t Save the U.S. Economy - New home sales during the first quarter stood at their highest level for any first quarter since 2008, boosting hopes that housing could help power the economy through a painfully slow recovery. But in a new essay being presented this week, Amir Sufi of the University of Chicago’s Booth School of Business, says we should “temper our optimism on what a housing recovery can do for the U.S. economy.” The crux of his argument is that a key way that housing stimulates growth — the so-called “wealth effect” in which people spend more because they feel richer as the value of their home increases — is likely to be muted because many of the borrowers who spent most liberally during the housing boom aren’t getting mortgages today. (Mr. Sufi’s argument is a variant on a theme offered by Credit Suisse economists Neal Soss and Henry Mo earlier this year). Housing contributes to the economy in two main ways: from home construction and consumer spending. Mr. Sufi’s work focuses on the latter, which is seen most directly when borrowers tap into their home equity to fund everything from vacation and college tuition to home renovations and dinners out.

Will trailer parks save us all? -- Or are they the new shantytowns?  Or a bit of both?  There is a new article on this topic: A healthy, inexpensive, environmentally friendly solution for housing millions of retiring baby boomers is staring us in the face. We just know it by a dirty name. …To move into Pismodise you must meet four conditions: Be 55 or older, keep your dog under 20 pounds, be present when guests stay at your home, and be comfortable with what most Americans consider a very small house. “If you need more than 800 square feet I can’t help you,” says Louise with a shrug. There seems to be some leeway on the dog’s weight. The unofficial rules are no less definite: If you are attending the late-afternoon cocktail session on the porch of Space 329, bring your own can, bottle, or box to drink. If you are fighting with other residents, you still have to greet them when you run into them. Make your peace with the word “trailer trash.” That is all by Lisa Margonelli, in the new Pacific Standard, which so far is turning out to be an interesting periodical.

Where are all the construction jobs? - The concept of US housing shortage (discussed here) is difficult to fathom, but people who are on the transaction side of the housing business are beginning to take notice.Bloomberg: - Wells Fargo Chief Executive Officer John Stumpf said there aren’t enough homes for sale in some markets and that a rebound in sales, prices and construction will bolster future earnings. “If anything today there’s probably a shortage of housing on the market,” Stumpf, 59, said on a conference call today. “It’s not true in every market and in every price range but when I’m out talking with Realtors and customers, the amount of supply, especially in the lower end or starter houses, there’s not a lot of supply out there.” The various demographics-based data such as homes for sale as a fraction of working age population (below) clearly supports this assessment.Given the improvements in housing starts, where are all the new construction jobs? Ignoring the various seasonal adjustments (which are fairly unreliable in this sector), the raw data shows construction job openings above 2009 levels but by no means on a major growth trajectory.It seems that some construction firms have been operating with enough slack to absorb new construction orders without a great deal of additional hiring. As the peak construction season approaches however, it remains to be seen if this post-crisis pattern of weak hiring changes substantially.

AIA: Architecture Billings Index indicates increasing demand for design services in March - Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: More Positive Momentum for Architecture Billings The Architecture Billings Index (ABI) is reflecting a steady upturn in design activity. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the March ABI score was 51.9, down from a mark of 54.9 in February. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 60.1, down from the reading of 64.8 the previous month.This graph shows the Architecture Billings Index since 1996. The index was at 51.9 in February, down from 54.9 in February. Anything above 50 indicates expansion in demand for architects' services, and this was the eight consecutive month with a reading above 50.

Real Median Household Incomes: Up $69 in March But Down $13 Year-over-Year - Sentier Research monthly median household income data series is now available for March. Nominal median household incomes were down $25 month-over-month but up $736 year-over-year. Adjusted for inflation, real incomes rose $69 MoM but are down $13 YoY. In the latest press release, Sentier Research spokesman Gordon Green concisely summarizes the recent data. This latest reading on real median annual household income reflects, to a large extent, the reduction in consumer prices of 0.2 percent between February 2013 and March 2013. Consumer prices increased by 0.7 percent between January 2013 and February 2013, which contributed to the 1.1 percent decline in real median annual household income recorded during that time period. Even though we are technically in an economic recovery, the most recent experience suggests that real median annual household income is still having difficulty gaining any traction. As we have noted in our previous reports, we are watching this household income series closely for signs of any sustained directional movement. As for the data itself, Sentier makes it available in Excel format for a small fee (here). I have used the latest data to create a pair of charts illustrating the nominal and real income trends during the 21st century. The first chart below chains the nominal values and real monthly values in March 2013 dollars. The red line illustrates the history of nominal median household income in today's dollars (as of the designated month). I've added callouts to show the latest value and the real monthly values for January 2000 and the peak and post-peak trough in between.

Americans Spend Less on Finance as Doubt Lingers - Americans are allocating a smaller share of their spending to investment-related fees since the recession, a sign they are still wary of returning to financial markets even as stocks trade near record highs.  Spending on expenses including securities commissions, investment advice and custodial services totaled about $150.8 billion in February at a seasonally-adjusted annual rate, Commerce Department data show. That accounted for 1.3 percent of total personal consumption, matching the average since the 18- month recession ended in June 2009, compared with 1.6 percent in the 12 months before the downturn started. March figures are scheduled to be released April 29.

Lawmakers warn cost of federal free phone program spinning out of control - What started out as an effort by President Reagan to help poor people in rural areas have a phone in cases of emergency has mushroomed into what critics suspect is a new welfare program. "The cost has gone from $143 million a few years ago to $2.2 billion today," Republican Louisiana Sen. David Vitter said, noting that today's cost is 15 times what it was. The cost of the program increased dramatically after cellphones were added in 2008. Only low-income people on welfare and food stamps legally qualify, but some lawmakers say the program is out of control. Sen. Claire McCaskill, a Democrat from Missouri, was incensed when she got an offer of a free phone. "I got solicitation for a free phone at my apartment, which is certainly not a building where you're going to have people who are qualified for free phones.

We've Dug a Pretty Damn Big Hole for Ourselves - James Howard Kunstler : The most obvious example is what happened to the telephone over the past thirty years. We computerized every phone system in America to “improve communications.” The net effect is that after all that time and expense (billions of capital investment), it is now nearly impossible to get a live human being on the phone, whether you are calling a Fortune 500 corporation, a non-profit charity, or your best friend. Has that improved communication? What you get instead are robots that waste big chunks of your time forcing you to listen to complex call-routing menus – often ending in futility. Companies and institutions assume that they benefit from the “efficiency” of not having to pay gangs of human receptionists. But they only succeed in annoying their customers and clients, who are treated as pests to be avoided. In effect, phone systems became firewalls, not communication enhancers. Add to that the more recent phenomenon of cell phones and smart phones, which, for all their charms, 1) don’t work in all locations, 2) drop calls frequently, 3) have lousy sound quality, 4) feature time delays that make people talk over each other constantly, 5) erode real-time social relations with distracting apps and web features, and 6) possibly harm people’s brains by constantly rinsing them in microwaves.

Final April Consumer Sentiment increases to 76.4 (graph) The final Reuters / University of Michigan consumer sentiment index for April increased to 76.4 from the preliminary reading of 72.3, but down from the March reading of 78.6.  This was above the consensus forecast of 73.0, but still fairly low. There are a number of factors that impact sentiment including unemployment, gasoline prices and, for 2013, the payroll tax increase and even politics (sequestration, etc).    Sentiment is mostly moving sideways over the last year at a fairly low level (with ups and downs).

Michigan Consumer Sentiment: Better Than Expected, But Worse Than Last Month - The University of Michigan Consumer Sentiment final number for April came in at 76.4, a welcome improvement over the preliminary reading of 72.3, but below the March final of 78.6. The consensus was for 72.4. So, choose your spin. Sentiment is worse than a month ago, but better than in early April, which apparently influenced economists' collective expectations.  See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. The University of Michigan Consumer Sentiment final number for April came in at 76.4, a welcome improvement over the preliminary reading of 72.3, but below the March final of 78.6. The consensus was for 72.4. So, choose your spin. Sentiment is worse than a month ago, but better than in early April, which apparently influenced economists' collective expectations.  See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.

The Morose Middle Class - An Allstate/National Journal Heartland Monitor poll released Thursday found that while most Americans (56 percent) hold out hope that they‘ll be in a higher class at some point, even more Americans (59 percent) are worried about falling out of their current class over the next few years. In fact, more than eight in 10 Americans believe that more people have fallen out of the middle class than moved into it in the past few years.  The poll paints a picture of a group that is scared to death about its station in life.  By the way, 58 percent of respondents in the poll viewed themselves as either middle class (46 percent) or upper middle class (12 percent). According to the poll, Americans see a middle class with less opportunity to get ahead, less job security and less disposable income than the middle class of previous generations.  Respondents were most likely (52 percent) to say that losing a job would put them at the greatest risk of falling out of their current class, followed by an unexpected illness or injury in the family.  Most of those polled believe that higher education is the key to staying in the middle class, but many worry about its prohibitive cost and inaccessibility.  And who did most of them say is responsible for making it worse for the middle class? Congress, chief executives of major corporations and big financial institutions.

Weekly Gasoline Update: Eighth Week of Falling Prices -  Gasoline prices fell again last week, via Energy Information Administration (EIA). . Rounded to the penny, the average for Regular dropped one cent and Premium two cents. This is the eighth week of declines after eleven weeks of price rises. Since their interim high in late February, Regular and Premium are both down 25 cents. According to, one state, Hawaii is averaging above $4.00 per gallon, unchanged from last week. The next three highest were California, Illinois and Alaska, all hovering around 3.88 to 399. Last month Business Insider featured a chart illustrating the gasoline price trend over the course of a year. However, if we dig into EIA the data, we find that over the past 20 years, the weekly high for the average retail price of all gasoline formulations occurred in May seven times, in August four times, twice in November and once January, April, June, July, September, October and December. February and March don't make the list. If history is a guide, odds are that the 2013 peak prices lie ahead. So far, this year is shaping up to be different.

Vital Signs Chart: Falling Gas Prices - Gasoline prices are falling, with a gallon of regular unleaded at an average $3.52 nationwide last week, down 26 cents from a 2013 peak in early March. Pump prices typically jump in the spring as refiners switch to summer gasoline blends to meet environmental rules. The decline, partly due to slowing growth and lower oil prices, could buoy consumers restrained by higher taxes and slow wage growth.

DOT: Vehicle Miles Driven decreased 1.4% in February - The Department of Transportation (DOT) reported: Travel on all roads and streets changed by -1.4% (-3.1 billion vehicle miles) for February 2013 as compared with February 2012. Travel for the month is estimated to be 214.6 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.  Currently miles driven has been below the previous peak for 63 months - over 5 years - and still counting.  The second graph shows the year-over-year change from the same month in the previous year. Gasoline prices were up in February compared to February 2012. In February 2013, gasoline averaged of $3.74 per gallon according to the EIA. In 2012, prices in February averaged $3.64 per gallon.   However prices declined in March, and miles driven will probably increase even more than the usual season increase.

Vehicle Miles Driven: Population-Adjusted Hits Yet Another Post-Crisis Low - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through February. Travel on all roads and streets changed by -1.4% (-3.1 billion vehicle miles) for February 2013 as compared with February 2012. The 12-month moving average of miles driven was unchanged from February a year ago (PDF report). And the civilian population-adjusted data (age 16-and-over) has hit yet another post-financial crisis low. 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 1987. My start date is 1971 because I'm incorporating all the available data from the DOT spreadsheets.

Why aren’t younger Americans driving anymore? The Frontier Group has the most comprehensive look yet of why younger Americans are driving less. Public transportation use is up 40 percent per capita in this age group since 2001. Bicycling is up 24 percent overall in that time period. Here are five big hypotheses:
–The cost of driving has gone up. ...
–The recession. This is a big one. If fewer people have jobs, fewer people will commute. ...
–It’s harder to get a license. ...
–More younger people are living in transit-oriented areas. ...
Ecological concerns play a small role too, judging from survey data: “Some young people purposely reduce their driving in an effort to curb their environmental impact.”
–Technology is making it easier to go car-free.

NYC Fliers Confront Delays on FAA Controller Furloughs - Flights to and from New York City- area airports are experiencing delays of almost two hours today because of high traffic volume and the automatic U.S. budget cuts that furloughed air-traffic controllers. New York's LaGuardia had delays of an hour and 43 minutes for some incoming flights as of 8:50 a.m. local time, while departures ran about 30 minutes late, according to the U.S. Federal Aviation Administration's travel website. New Jersey's Newark Liberty Airport had delays of about a half-hour. The disruptions in the nation's busiest air-travel market affected the three largest U.S. airlines. United Continental Holdings Inc. (UAL), the biggest, has a hub at Newark, while Delta Air Lines Inc. (DAL) and AMR Corp. (AAMRQ)'s American Airlines are the largest carriers at LaGuardia. FAA Administrator Michael Huerta warned last week that delays at major U.S. airports may reach more than two hours with fewer controllers on duty because of the spending cuts known as sequestration. The agency has "no choice" about layoffs for those employees and maintenance workers, he said. An average of about 10 percent of controllers will be on furlough on any given day, according to the National Air Traffic Controllers Association, the union that represents about 15,000 FAA-employed controllers.

Obama Administration Is Right to Hold Fliers Hostage - The Wall Street Journal and the Washington Post’s editorial pages are on the case of the Federal Aviation Administration’s apparent mishandling of the budget sequestration. Why hasn’t the FAA been more flexible about how it cuts its budget? Why did it decide to uniformly furlough 10 percent of air-traffic controllers, even at the country’s busiest air-traffic centers, causing travel delays all around the country? The Journal and the Post both have good points about how this could be handled better. The FAA’s protest that it must not "pick winners and losers" among its own facilities by prioritizing the busiest ones is lame; that’s exactly what an agency is supposed to do when it cuts its budget. And though the Obama administration disputes that it has the direct legal authority to avoid the delays, it could surely have a standalone legislative fix for air-traffic control, along the lines the Post proposes, if it wanted one. That said, the administration is actually right to resist a standalone fix for air-traffic control. Implicitly, it is holding fliers hostage and saying it won’t repeat a common mistake of the last five years -- enacting economic policies that respond to elite problems while ignoring ones that mostly affect the poor.

ATA Trucking Index increases in March -  From ATA: ATA Truck Tonnage Index Increased 0.9% in March The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index gained 0.9% in March after decreasing 0.7% in February. (The 0.7% loss in February was revised down from a 0.6% increase ATA reported on March 19, 2013.) Tonnage has now increased in four of the last five months. Specifically, since November 2012, the index is up 7.6%. In March, the SA index equaled 123.5 (2000=100) versus 122.3 in February. The highest level on record was December 2011 at 124.3. Compared with March 2012, the SA index was up a solid 3.8%, beating February’s 3.1% year-over-year gain. “At 3.9% year-over-year growth, the first quarter increase was the best since the final quarter 2011.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.

Rail Traffic Continues To Trend Lower - Business Insider: Recent rail trends have weakened substantially from very strong levels earlier this year. The latest weekly reading came in at 3.3% year over year, but continues a trend of low single digit readings. This latest data brings the 12 week average to 4.4%. That’s still a healthy level, but well off the March high of 3.6%. In this environment I guess any growth is good growth so this has to go down as a moderate positive for the economy even though the trend is negative. Here’s more via AAR: The Association of American Railroads (AAR) reported mixed traffic for the week ending April 13, 2013, with total U.S. weekly carloads of 275,675 carloads, down 0.6 percent compared with the same week last year. Intermodal volume for the week totaled 241,987 units, up 3.3 percent compared with the same week last year. Total U.S. traffic for the week was 517,662 carloads and intermodal units, up 1.2 percent compared with the same week last year. Four of the 10 carload commodity groups posted increases compared with the same week in 2012, including petroleum and petroleum products, up 51.2 percent, and motor vehicles and parts, up 10.9 percent. Commodities showing a decrease included metallic ores, down 13.8 percent, and grain, down 12.1 percent. For the first 15 weeks of 2013, U.S. railroads reported cumulative volume of 4,127,296 carloads, down 2.4 percent from the same point last year, and 3,558,668 intermodal units, up 4.9 percent from last year. Total U.S. traffic for the first 15 weeks of 2013 was 7,685,964 carloads and intermodal units, up 0.8 percent from last year. Chart via Orcam Investment Research:

Spring Slowdown Hits Factories - No matter how you slice it, the durable goods report was miserable. As with so many other data for March, Wednesday’s news on hardgoods orders and shipments confirm what reports from regional Federal Reserve banks has trumpeted: the factory sector has entered a spring slowdown. New orders for all durable goods plunged 5.7% in March, about double the 2.9% drop expected. Falling demand for aircraft and defense goods contributed much of the weakness, but not all of it. Of the major categories, only computer makers reported an increase in new orders.For the first quarter, new orders and the backlog of unfilled demand were pretty much flat compared to year-earlier levels. Shipments held up. But orders are the lifeblood for future production. Unless order books fatten up, gains in production and shipments will slow soon. Businesses have joined consumers in the spring siesta. New orders for core capital goods — which excludes aircraft and defense equipment — edged up 0.2% in March, but are no higher than they were a year ago. Business investment probably added to first-quarter gross domestic product growth, but the sector may not add much to this quarter or beyond. When businesses stop ordering new equipment, it’s usually a sign of economic worry. Companies won’t expand facilities — or add workers — if executives fear they won’t have more customers in the future.

Durable Goods Orders Show US Manufacturing Continuing Secular Decline - New orders for manufactured durable goods in March decreased $13.1 billion or 5.7 percent to $216.3 billion, the U.S. Census Bureau announced today.  This decrease, down two of the last three months, followed a 4.3 percent February increase.  Excluding transportation, new orders decreased 1.4 percent.  Excluding defense, new orders decreased 4.7 percent.  Transportation equipment, also down two of the last three months, led the decrease, $11.0 billion or 15.0 percent to $62.4 billion.  This was led by nondefense aircraft and parts, which decreased $8.5 billion. from Census Bureau. Economic consensus was for a decline of 3.1% according to the widely followed survey by As usual, they weren’t close.  The old seasonal adjustment bugaboo rears its ugly head–that and the fact that most economists are quacks practicing the dark arts of economics fraudquackery.  March Real Durable Goods Orders, adjusted for inflation and not seasonally manipulated, declined 1.5% year over year. That compares with a 1.2% year to year increase in February after an upward revision. March is normally a seasonal peak, and it’s pretty clear that the peaks are declining. This isn’t new. It’s part of a downtrend in US manufacturing that has persisted since 1999. New orders volume remains well below the 2004 through 2007 levels. Those years were when the housing bubble was in full swing, but current levels of orders are even below 1998 through 2000 and 2001 through 2003 when the US was in recession after the internet/telecom/tech bubble collapsed. The economy may be growing in other areas, but the pace of activity by this measure is still no better than the worst level of 2002. 

Durable Goods Orders Plunged in March, Worse Than Expected - The April Advance Report on March Durable Goods was released this morning by the Census Bureau. Here is the Bureau's summary on new orders: New orders for manufactured durable goods in March decreased $13.1 billion or 5.7 percent to $216.3 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 4.3 percent February increase. Excluding transportation, new orders decreased 1.4 percent. Excluding defense, new orders decreased 4.7 percent.Transportation equipment, also down two of the last three months, led the decrease, $11.0 billion or 15.0 percent to $62.4 billion. This was led by nondefense aircraft and parts, which decreased $8.5 billion. Download full PDF  The latest new orders number at -5.7 percent was below the consensus of -3.1 percent. Year-over-year new orders are up a fractional 0.5 percent.If we exclude transportation, "core" durable goods were down 1.4 percent. Year-over-year core goods are down 0.3 percent.If we exclude both transportation and defense, durable goods were up 0.4 percent. Year-over-year core ex-defense goods are up 2.6 percent. The first chart is an overlay of durable goods new orders and the S&P 500.An overlay with unemployment (inverted) also shows some correlation. We saw unemployment begin to deteriorate prior to the peak in durable goods orders that closely coincided with the onset of the Great Recession, but the unemployment recovery tended to lag the advance durable goods orders.

Weak Durable Goods Orders Point to Sluggish U.S. Economy: Orders for long-lasting manufactured goods recorded their biggest drop in seven months in March and a gauge of planned business spending rose only modestly, signs of a slowdown in economic activity. Durable goods orders slumped 5.7 percent as demand fell almost across the board, the Commerce Department said on Wednesday. The drop in orders for these goods, which range from toasters to aircraft, followed a 4.3 percent rise in February. "We have seen a considerable loss of momentum in the economy and that has been obvious in the round of data we had over the last four weeks or so,""Overall, the weak tone of this report underscored the emerging narrative of a considerable slowing in economic growth momentum in March," From transportation to primary metals and machinery, orders were weak, the latest indication of cooling in a sector that has played a pivotal role in the economy's recovery from the 2007-09 recession. The drop last month was double what economists had expected and joins other reports ranging from employment to retail sales and manufacturing that have suggested the economy lost momentum at the end of the first quarter.

March Durable Goods Implode, Plunge -5.7%; CapEx Recovery Put On Indefinite Hiatus - So much for the great American CapEx recovery. Moments ago the Census department released the March Durable Goods report, thanks to which one can lay to rest any hope of a recovery in the US economy, with the headline number printing an absolutely abysmal -5.7%, an epic swing from the +5.7% (revised lower of course to 4.3%) in February, and confirming the recovery is dead and buried. Although we are confident the propaganda spin is just waiting to be unleashed: after all it is possible that March weather was both too hot and too cold, thereby making the number completely irrelevant - after all it is always the inclement weather's fault when the economy does not act as predicted by some economist's DSGE model of reality and stuff.

The ’’Real’’ Goods on the Latest Durable Goods Data - Earlier today I posted an update on the March Advance Report on February Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation. Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer an alternate historical context in which to evaluate the standard reports on the nominal monthly data. Economists frequently study this indicator excluding Transportation or Defense or both. Just how big are these two subcomponents? Here is a stacked area chart to illustrate the relative sizes over time based on the nominal data. Here is the first chart, repeated this time ex Transportation, the series usually referred to as "core" durable goods. Now we'll leave Transportation in the series and exclude Defense orders. And now we'll exclude both Transportation and Defense for a better look at "core" durable goods orders.  Here is the chart that I believe gives the most accurate view of what Consumer Durable Goods Orders is telling us about the long-term economic trend. The three-month moving average of the real (inflation-adjusted) core series (ex transportation and defense) per capita helps us filter out the noise of volatility to see the big picture.

Vital Signs Chart: Small Uptick in Capital Spending - Capital spending inched up in March. New orders for nondefense capital goods excluding aircraft, a proxy for business investment, rose 0.2% to a seasonally adjusted $64.5 billion after falling 4.8% in February. Overall orders for durable goods — big-ticket items such as cars and appliances designed to last three years or more — fell 5.7% to $216.3 billion, with a reversal in aircraft orders.

Manufacturing Continued to Drive Growth in 2012 - Manufacturing posted by far the biggest gains of any industry in the U.S. economy last year, largely because consumers and businesses spent on long-lasting goods such as cars and machinery. The only sectors that contracted last year were the government and the agriculture industry, which struggled with a major drought, the Commerce Department said Thursday. Factories and related production continued to be an important driver of the lackluster economic recovery, with the industry adding 0.71 percentage point to the U.S. gross domestic product, which expanded just 2.2% overall in 2012.Manufacturers’ output grew 6.2% in 2012, more than doubling the prior year’s expansion and causing the sector to be the largest contributor to the modest overall growth among 22 industries, according to data released Thursday.The continued growth in manufacturing shows how some consumers were buying big-ticket products, including vehicles and household appliances, which they had failed to replace during leaner economic times. U.S. auto sales reached 14.5 million cars and light trucks last year, the highest since 2007.

Manufacturing led US economy in growth last year, and would be world’s 10th largest economy as a separate country - The Bureau of Economic Analysis (BEA) released data today on “Gross Domestic Product by Industry” for 2012 with details on the contributions to the nation’s economic output last year that originated from 20 different private-sector industry groups and two government categories (federal and state/local). Here are some highlights of the report:

  • 1. Of the 22 industry groups, 19 made a positive contribution to the real GDP growth last year of 2.2%, and three made a negative contribution (the two government categories and the industry group: Agriculture, forestry, fishing and hunting).
  • 2. Among the 22 industry groups, durable manufacturing led the US economy at 9.1%, which was by far the highest growth rate of any industry, and overall manufacturing grew at a rate of 6.2%. Following manufacturing, the information sector had the next highest growth rate of 5.8%.
  • 3. Total US manufacturing output last year reached $1.866 trillion, which established a new record high for current-dollar manufacturing output in a single year, breaking the previous record in 2011 of $1.73 trillion. In constant dollars, last year’s total manufacturing output was just slightly below the record for factory output established in 2007, before the recession.  Durable manufacturing output, adjusted for inflation, exceeded $1 trillion (in 2005 dollars) for the first time, and rose to a new record high.

April Vehicle Sales forecast to be above 15 million SAAR for Sixth Consecutive Month - Note: The automakers will report April vehicle sales on Wednesday, May 1st. Here are a couple of forecasts: From J.D. Power: J.D. Power and LMC Automotive Report: Solid New-Vehicle Selling Rate in April Driven by Replacement Demand Total light-vehicle sales in April 2013 are projected to reach 1,312,100 units, a 7 percent increase from April 2012. The selling rate is expected to remain above 15 million units for the sixth consecutive month [forecast is 15.2 million Seasonally Adjusted Annual Rate, SAAR]...According to J.D. Power and Associates PIN data, strong sales are being complemented by increasing prices. When comparing year-to-date data for 2013 with the same period last year, consumer-facing transaction prices are up 3.1 percent, which equates to an extra $13.2 billion spent on new vehicles through the first 4 months of the year ($113 billion in total). And from Kelley Blue Book: New-Car Sales Pace Above 15 Million Seasonally Adjusted Annual Rate for Sixth Consecutive Month Through the first three weeks of April 2013, new-car sales are on pace to remain above a 15 million unit annual selling pace for the sixth consecutive month, according to Kelley Blue Book ... Kelley Blue Book projects light vehicle sales to surpass 1.3 million units by month end, which is an 11.4 percent annual gain.

Richmond Fed Manufacturing Composite: Activity Pulled Back In April And Expectations Waned - Seeking Alpha:  The complete data series behind today's Richmond Fed manufacturing report (available here), which dates from November 1993. The chart below illustrates the 21st century behavior of the diffusion index that summarizes the individual components. Tuesday the manufacturing composite slipped into contraction territory at -6, down from 3 last month, which was a decline from 6 the month before. Because of its highly volatile nature of this index, I like to include a 3-month moving average to facilitate the identification of trends (now at 1.0).Here is the Richmond Fed's overview. Manufacturing activity in the central Atlantic region pulled back in April after growing at a slower pace in March, according to the Richmond Fed's latest survey. The index of overall activity landed in negative territory, driven by weak readings for factory shipments and volume of new orders. Employment, however, remained in positive territory but grew at a pace below March's rate. Other indicators also suggested weaker activity. Capacity utilization and backlogs fell further, while the gauge for delivery times was unchanged. In addition, inventories grew at a slightly slower rate. Looking forward, manufacturers in April were less optimistic about their future business prospects. An increasing number of contacts anticipated slower growth across the board for all indicators of activity six months from now.

Factory Activity Contracting in Plains States - Factory activity in the Plains states remains in contraction this month, according to a regional Federal Reserve bank report released Thursday. The Kansas City Fed’s manufacturing composite index held at -5 in April. A reading below zero denotes contraction. On a year-over-year comparison, the composite index fell to -6 from -1. “We saw another small decline in regional factory activity this month,” said Chad Wilkerson, an economist at the bank. “Some firms see signs of a pickup in activity later this year driven by pent-up demand and new product offerings, but others have become more pessimistic recently as anticipated demand has failed to materialize.”

Kansas City Fed: Regional Manufacturing contracted "modestly" in April - So far all of the regional manufacturing surveys have indicated April was pretty weak. From the Kansas City Fed: Tenth District Manufacturing Survey Fell Modestly According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity fell by a similar modest amount as last month, and producers' expectations moderated but remained positive overall. The month-over-month composite index was -5 in April, equal to -5 in March but up from -10 in February ... The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. Durable goods-producing plants reported a smaller decline in activity, but production at nondurable-goods plants fell after increasing last month, particularly for food and plastics products. Most other month-over-month indexes improved somewhat. The production index edged higher from -1 to 1, and the shipments index also increased, with both indexes moving into positive territory for the first time in 8 months. The employment index rebounded from -15 to -3, and the order backlog index also rose. The new orders and new orders for exports indexes were basically unchanged. Both inventory indexes fell further into negative territory after increasing last month.The last regional survey for April will be released next Monday (Dallas), and the ISM index for April will be released on Wednesday, May 1st. Based on the regional surveys, I expect a fairly weak reading for the ISM index (perhaps at or below 50).

Markit Flash Manufacturing Index Falls to Six-Month Low - The U.S factory sector is expanding this month, but the pace has returned to last autumn’s sluggish rate, according to an early reading of April activity released Tuesday. The flash purchasing managers’ index compiled by data provider Markit fell to 52.0 in April from a final reading of 54.6 in March that was preceded by a flash March index of 54.9. Markit said the flash PMI reading, which is based on about 85% of the usual number of monthly replies, is the lowest since October and indicates “a moderate improvement in overall manufacturing business conditions.” A reading above 50 indicates expansion

Congressman Finally Takes Action To Remove Needless Requirement Bankrupting The Postal Service - Rep. Peter DeFazio (D-OR) has introduced legislation to try to save the US Postal Service from its incipient bankruptcy, and he is asking for the public to help him pass it.  DeFazio’s bill would repeal the needless requirement — one no other business or entity must face — that the Postal Service pre-fund 75 years’ worth of employee health benefits. That requirement has hugely contributed to the USPS defaulting for the first and then second time in its history last year. Analysis from 2012 estimated that the USPS would have a $1.5 billion surplus without the benefit requirement.But DeFazio recognizes that facts alone will not influence his colleagues to take up and pass the legislation, so he has also turned to the White House’s petition platform, We The People, to petition President Obama to take a stand against the health benefit requirement. He also points out many of the other flaws in how Congress has managed the postal service: About 80% of USPS financial losses since 2007 are due to a Congressional mandate to prefund 75 years of future retiree health benefits over 10 years. In 2012 USPS lost a record $15.9 billion, but $11.1 billion of that loss went to prefund healthcare. This must change.

Economists See More Willingness to Hire - U.S. businesses are becoming more optimistic about the economy and are increasingly prone to hire, a survey of corporate economists found, suggesting that a significant spring slowdown some fear might not materialize. According to the National Association for Business Economics Industry survey released Monday, 40% of those polled say their firm or sector plans to increase hiring in the next six months-the quarterly study's most positive view of the labor market since early 2011. A mere 9% expect to trim headcount. Those numbers stand in contrast to March payroll figures that showed the weakest job gain in nine months. "Overall business activity has been expanding for well over three years.we're at the point where companies can no longer just pay overtime, and need to go hire more people," said Ken Simonson, chief economist for the Associated General Contractors of America.

Study finds there may not be a shortage of American STEM graduates after all - If there’s one thing that everyone can agree on in Washington, it’s that the country has a woeful shortage of workers trained in science, technology, engineering and math — what’s referred to as STEM. President Obama has said that improving STEM education is one of his top priorities. Chief executives regularly come through Washington complaining that they can’t find qualified American workers for openings at their firms that require a science background. And armed with this argument in the debate over immigration policy, lobbyists are pushing hard for more temporary work visas, known as H-1Bs, which they say are needed to make up for the lack of Americans with STEM skills. But not everyone agrees. A study released Wednesday by the left-leaning Economic Policy Institute reinforces what a number of researchers have come to believe: that the STEM worker shortage is a myth. The EPI study found that the United States has “more than a sufficient supply of workers available to work in STEM occupations.” Basic dynamics of supply and demand would dictate that if there were a domestic labor shortage, wages should have risen. Instead, researchers found, they’ve been flat, with many Americans holding STEM degrees unable to enter the field and a sharply higher share of foreign workers taking jobs in the information technology industry.

Austerity for STEM Jobs - National austerity economics is rightly criticized now for relying on the shoddy analyses in the Reinhart-Rogoff paper.  The claimed skill shortage and pressure for more H-1B visas is even worse because it is not even based on a published paper.  News reporters confidently parrot that importing more high skill workers is important to building the US economy.  The topic is graduates of science, technology, engineering, and mathematics (STEM).   Who is really the “best and the brightest”?  Do employers seek skills they cannot find locally or are the employers just looking for cheaper labor that is easier to exploit?  Professor Norm Matloff at the University of California-Davis writes “No study, other than those sponsored by the industry, has ever shown a shortage.”  This week, a new study of the recent labor market has again shown that there is no shortage.  Here is the article at Slashdot, in the Washington Post, and the original report. Key findings include:

  • Guestworkers may be filling as many as half of all new IT jobs each year
  • IT workers earn the same today as they did, generally, 14 years ago
  • Currently, only one of every two STEM college graduates is hired into a STEM job each year
  • Policies that expand the supply of guestworkers will discourage U.S. students from going into STEM, and into IT in particular

Is Nursing Still an Attractive Career Choice? At a time of grim prospects for Americans without a college degree, nursing can look like a rare chance not just for a job but a real career. Or at least it did. There were more than 2.6 million registered nurses employed in the U.S. in 2012, according to the Labor Department, plus another 718,000 licensed practical and vocational nurses and tens of thousands of nurse practitioners and other advanced specialists. RNs made nearly $68,000 per year on average in 2012, and the Labor Department expects employment to grow by more than a quarter between 2010 and 2020.  Nursing’s appeal isn’t just its size or growth prospects but also its low barriers to entry: Registered nurses typically needed only an associate’s degree, and licensed practical nurses don’t need a college degree at all. And unlike many jobs available to less-educated workers, nursing offers a clear upward path: LPNs can become RNs. RNs can become nurse anesthetists, nurse midwives or nurse practitioners, who can perform many tasks traditionally performed by doctors. Hospitals often provided on-the-job training or tuition reimbursement to help lower-level nurses advance. But now all of that is changing. A story in today’s Wall Street Journal looked at the disappearance of many middle-skill jobs in the health-care sector — the kind of jobs that historically have been the entry points into healthcare careers.

Job Polarization by Skill Level - If skill level is so important in the U.S. economy, then why are the share of low-skilled jobs in labor force rising? The answer lies with the phenomenon of job "polarization," a decades-long pattern in which the share of of medium-skill jobs is falling, while the share of both high-skill and low-skill jobs is rising. Didem Tüzemen and Jonathan Willis examine some aspects of this phenomenon in "The Vanishing Middle:Job Polarization and Workers’ Response to the Decline in Middle-Skill Jobs," published in the First Quarter 2013 issue of the Economic Review from the Federal Reserve Bank of Kansas City.  For starters, here is a figure showing the share of jobs in high skill, medium skill, and low skill occupations. Clearly, the diminution in middle-skill jobs is a fairly steady long-term trend (although the authors present some evidence that it happens a little more quickly during recessions).

Weekly Initial Unemployment Claims decline to 339,000 - The DOL reports:In the week ending April 20, the advance figure for seasonally adjusted initial claims was 339,000, a decrease of 16,000 from the previous week's revised figure of 355,000. The 4-week moving average was 357,500, a decrease of 4,500 from the previous week's revised average of 362,000. The previous week was revised up from 352,000. 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 357,500. Weekly claims were the lowest in six weeks and were below the 350,000 consensus forecast.

Jobless Claims Fell Last Week, Close To A 5-Year Low - Today’s update on jobless claims should dampen worries a bit over the outlook for the economy. New filings for unemployment dropped a healthy 16,000 last week to a seasonally adjusted 339,000. Once again, claims are moving close to the post-recession low of 330,000 reached back in January—a five year low. One number doesn’t mean much, of course, but today’s report certainly boosts the case for thinking positively when it comes to the labor market. In particular, the data du jour implies that the weak payrolls report for March was a one-off event. We'll need to see more supporting evidence to embrace that notion with any confidence, of course, but today's release is a move in the right direction. It's also encouraging to see a drop in the four-week moving average of new claims—the first decline in more than a month. That’s a sign that the drop in today’s weekly number may be more than random noise. A stronger clue can be found in the unadjusted data’s year-over-year change, which posted a hefty 12.7% decline last week vs. the year-earlier level. Indeed, that’s the biggest retreat in the annual pace in six months.

Number of the Week: Fraud in Unemployment Benefits - $2.2 billion: Amount of unemployment benefits paid to people who were employed and earning wages in 2011. Unemployment insurance keeps people in the labor force and acts as an important bridge between jobs, but billions are spent on undeserved overpayments. More than $108 billion was paid out in unemployment benefits in 2011, and the Department of Labor estimates that just under 3% of that was due to fraud. The most common type of overpayment is what’s called concealed earnings fraud, according to an article for the St. Louis Fed. Individuals who are employed but still collecting benefits account for two-thirds of all fraud cases, according to the authors. The total amount paid out in concealed earnings fraud was about $2.2 billion in 2011, the most recent year for which data are available, the St. Louis Fed article states. That number was likely lower in 2012, since total payments dropped so much last year. Payouts declined 22% to some $84 billion in 2012, as many states offered fewer weeks of benefits, and the unemployment rolls declined thanks to a better job market. Meanwhile, the Department of Labor is working on programs aimed at reducing the incidence of fraud. One key issue is better information sharing, so that when a new employee is hired, the unemployment insurance program knows about it. The government releases data on the progress in each state toward implementing programs to reduce fraud, and notes that the they are working.

How far from full labor market recovery are we? - So, another year has passed where the overall unemployment rate significantly over-performed relative to most other economic aggregates. The figure below shows the two-year change in unemployment, both actual and what is predicted from a simple regression of the two-year change on the two-year difference in growth rates of actual gross domestic product versus potential gross domestic product as measured by the CBO.1 What this captures is that the economy must grow faster than underlying trend growth (or growth in potential GDP) in order for unemployment to decline. The figure confirms that the actual unemployment rate rose more rapidly than predicted during the Great Recession, but then fell more rapidly than predicted in 2011 and 2012. By the end of 2012, the actual unemployment was a nearly 1.5 percentage points below what it would have been had the simple Okun’s relationship between output growth and unemployment continued to hold.

The Poorly Attended Hearing on One of the Economy's Toughest Problems - It stands to reason that lawmakers who often decry the high jobless rate would want to be seen publicly trying to tackle the problem, right? Well, apparently not. When a hearing to explore how to get the long-term unemployed back to work kicked off on Wednesday morning, only one lawmaker was in attendance. That was Sen. Amy Klobuchar, who was holding the hearing in her role as the vice chair of the Joint Economic Committee. The long-term unemployed have it incredibly rough: their ranks have swelled in recent years, accounting for a larger share of the unemployed; the problem is compounded by eroding skills; and the psychological effects of unemployment can take a toll on them and their families. In a 2010 Pew survey, close to half of the people out of work six or months said being unemployed for so long had strained family relations, and more than 40 percent said they’d lost contact with close friends. Just being unemployed for a long period makes individuals less employable. It’s what Kevin Hassett, a former economic advisor to Republican presidential contender Mitt Romney, called a “national emergency” at Wednesday’s hearing.

We have an unemployment crisis. Do the politicians care? - We are in the middle of an unemployment crisis, although you wouldn’t know it from today’s Joint Economic Committee (JEC) hearing. (National Journal pic: only one lawmaker attends today’s JEC hearing.)  Nearly 40% of unemployed workers have been out of work for 27 or more weeks. The average length of unemployment is 37.7 weeks, up from 16.6 weeks in December 2007. “The result is nothing short of a national emergency,” according to AEI scholar Kevin Hassett. As far too many Americans have experienced, long-term unemployment has detrimental financial, health, and familial impacts. A 10% increase in the unemployment rate (from 7% to 7.7%) may be responsible for an additional 128 suicides per month in the US, according to Hassett’s research. Divorce, cancer, even children’s academic performance can be linked to a member of the family being unemployed. In testimony before JEC today, Hassett called for a series of policy experiments to help those out of work for extended periods of time. It is clear that something terrible happens to individuals as they stay unemployed longer, but that this negative effect is not responsive to normal policy interventions.  Accordingly, it is imperative that we think outside the box and explore policies that reconnect individuals to the workforce. As our knowledge of what works is so spotty, this is an area that is crying out for policy experiments that can be rigorously evaluated.

Four ideas for fixing the long-term unemployment crisis - There’s been a lot written lately on the tragedy of long-term unemployment. Thanks to the lingering effects of the recession, there are still 4.7 million Americans who have been out of work for at least 27 weeks. And, increasingly, they’re becoming unemployable. So is there anything that can be done? There seems to be no shortage of policy suggestions out there. At a sparsely attended Joint Economic Committee hearing on Wednesday, various experts offered some ideas for helping the long-term unemployed.

  • 1) Better training programs. Harry Holzer of Georgetown University made the case for ”education and training programs, to create worker skills that better match newly available jobs.” Randy Johnson of Workforce Development, Inc. suggested a variation on this:
  • 2) Wage subsidies for displaced workers. Holzer also suggested wage insurance “for displaced workers whose earnings are permanently reduced by their loss of a good job.”
  • 3) The government should just hire people. Kevin Hassett of the American Enterprise Institute was also on board with work subsidies and training programs (though he said that government training programs “are a national embarrassment”). But he also made the case for direct government hiring for the long-term unemployed.
  • 4) Congress and the Fed should push for full employment faster. Meanwhile, over at the Roosevelt Institute, Mike Konczal argues that there’s a much, much more straightforward way to help the long-term unemployed. Namely, full-employment policies.

5 ideas to help the long-term unemployed - As I mentioned earlier today, AEI economist Kevin Hassett recently gave provocative congressional testimony offering some possible micro-suggestions to help the long-term unemployed:

    • 1. Direct hiring into government jobs.. This may allow individuals to look for a new job while employed, a change that may have a large impact on placement.
    • 2.  Policies directed at geographic mismatches. These might include improved empowerment zones, and possibly programs to assist workers as they move from areas with weak labor markets to areas with strong labor markets.
    • 3.  Privatized training. Our government training programs are a national embarrassment, and the unemployed would be better off if the monies were available to individuals who themselves chose the skills they wish to acquire.
    • 4. Work subsidies. Programs that provide employers with tax incentives to employ the long term unemployed may encourage them to hire them.
    • 5. Work Share programs. The U.S. currently has some programs that allow employers to cut hours of workers in downturns and let them receive some unemployment insurance, but they are very little used.

Creating Unsustainable Jobs - Anthony Randazzo writes, Only 23 percent of the 8,381 companies we were able to contact in our sample hired new workers to complete their stimulus project and kept all of them once the project was done. In other words, more than seven out of 10 companies did not hire workers at all or had to lay off the workers they did hire. Of course, this is only microeconomics. Macroeconomics tells you that the stimulus injected money into the economy, and therefore it increased employment. The employment increase would not necessarily show up at companies that were the initial recipients of the money. I’m not being entirely sarcastic. There simply is no reliable way to demonstrate how well the stimulus worked. I do not think that this study refudiates the stimulus. For those of you new to this blog, I do not subscribe to the Keynesian story, in which spending creates jobs and jobs create spending. I think that comparative advantage is what creates jobs. To put it more carefully, comparative advantage creates the opportunity for people to sell labor and buy goods and services in the market. Entrepreneurs who identify these opportunities create jobs.

Vital Signs Chart: Fewer Mass Layoffs - U.S. employers conducted 1,337 mass layoffs — job cuts involving at least 50 workers — during March involving 127,939 workers, seasonally adjusted. That was down by more than 7,500 workers from a month earlier and the lowest number of workers since September. The number of mass layoffs peaked in early 2009 at 3,079, seasonally adjusted, involving more than 334,000 workers.

Coincident Indicator Review: Philly Fed USA Coincident Index Continues Growth in March 2013 - Economic indicators that coincide with economic movements are coincident indicators. Coincident indicators by definition do not provide a forward economic view. However, trends are valid until they are no longer valid, making the trend lines on the coincident indicators a forward forecasting tool. Excerpt from Philly Fed Report for the United States Coincident Index The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for March 2013. In the past month, the indexes increased in 47 states and remained stable in three (New Mexico, Nevada, and Wyoming), for a one-month diffusion index of 94. Over the past three months, the indexes increased in 47 states, decreased in one (Illinois), and remained stable in two (Hawaii and New Mexico), for a three-month diffusion index of 92. For comparison purposes, the Philadelphia Fed has also developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index rose 0.3 percent in March and 0.8 percent over the past three months.

The tragedy of long term unemployment - Paul Krugman and Megan McArdle both point to this chart today: What you’re looking at here is the plight of the long term unemployed in the wake of the Great Recession. If you look at the economy before the recession (the blue line), it works pretty much as you think it would: as the number of job openings goes up, the long term unemployment rate goes down. But then the crisis happened, and now we’re in a Bizarro world where the long term unemployment rate goes up even as the number of job openings increases. It’s worth looking at this chart in the context of one which might be more familiar: What you’re looking at here is initial claims for unemployment (the blue line) and the unemployment rate (the red line); both are rebased to 100 at the end of 2007. You can see that initial claims have historically been a very good leading indicator when it comes to the unemployment rate. And that’s perfectly intuitive: if the number of people newly claiming unemployment each week is going down, you’d expect the overall unemployment rate to follow. But there’s something worrying about this chart: although the unemployment rate is indeed coming down, it’s not coming down as fast as you’d expect it to, given the sharp drop in initial unemployment claims. In other words, people aren’t becoming newly unemployed, but the unemployment rate is still staying stubbornly high. Which is another way of saying that this time around, the long-term unemployed are finding it particularly difficult to get back to work.

The Invisible Class - This new America, where if we say we can’t see you, then you’re not there. Behind the facade you can see the shadows of agenda, a war on the post office, a war on public employees and educators. It is a complete and total deconstruction of society and of the world which we once knew. As a young man, I wondered what it must have been like to have lived in the third Reich. Trapped as just some plain Joe, watching madness coming into season, what would your consciousness say when there was real money on the line? Five years ago, I was of the middle class; today I’m of the missing class. There are fewer Americans working today than there were in December. During the same time period, the civilian labor force has fallen by more than half a million workers. The official numbers of those unemployed also fell. But strangely, the numbers of persons in the Civilian Non-institutional Population rose by almost 600,000 since December. Do you see it; do you understand what it really means? The number of men 20 years and over, not in the labor force, has grown by almost one million. One million American men, not just unemployed or discouraged workers, but men no longer counted as in the labor force in a single year. Rather than fix the economy, they just said they fixed the economy and the media aped along.

What's the Best Way to Help the Long-Term Unemployed?  Full Employment - What's the best way to help the long-term unemployed? There's new concern about how difficult it is for the long-term unemployed to find jobs in light of an interesting study by Rand Ghayad, a visiting scholar at the Boston Fed and PhD candidate. Ghayad sent out resumes that were identical except for how long the candidate was unemployed, and the longer they were unemployed, the less likely it was they would get called back. Matthew O'Brien has a great writeup of the study here, and there's additional thoughts from Megan McArdle, Paul Krugman, Felix Salmon, and Matt Yglesias. The impact of long-term unemployment on human lives is very real, and I think the government should be combating it using every tool it has. However, I want to push back on a few of the economic ideas that tend to hover in the background of these discussions; specifically, the idea that we should consider the long-term unemployed uniquely in trouble in this economy. Because, based on my interpretation of the evidence, the best approach to handling this problem is to aim for full employment.It's well known that it is harder for those who have been out of the labor force the longest to find jobs.  But let's look at the likelihood of finding a job in three different economic scenarios (2000, 2007, and 2012) by duration of unemployment:

Obama Deportation Progam Likely to Be Blocked, Judge Says - A court challenge by federal immigration agents seeking to block President Barack Obama’s deferred-deportation initiative will probably succeed, a judge said. U.S. District Judge Reed O’Connor in Dallas today put off his own decision on whether to grant the request for a preliminary injunction by 10 U.S. Immigration and Customs agents. He asked both sides to file additional arguments no later than May 6. Announced by Obama and Homeland Security Secretary Janet Napolitano last year, the directive gives agents the ability to defer action on people unlawfully in the U.S. if they came to the country under the age of 16, are in school or have obtained a high school diploma, haven’t been convicted of a felony, significant misdemeanor or multiple misdemeanors, and aren’t a threat to public safety or national security. “The court finds that DHS does not have discretion to refuse to initiate removal proceedings” when the requirements for deportation under a federal statute are met, O’Connor said today in a 38-page decision, referring to the Department of Homeland Security. Still, the judge said he can’t decide the case based on the arguments he’s heard so far.

Reforming Immigration Policy-Becker - American immigration policy is simply a mess! Skills of potential immigrants receive a lower weight in determining priority for legal immigration than in any other developed country. This year, the 65,000 places under the H-1B program that gives firms the opportunity to get temporary visas for skilled immigrants (up to two terms of 3 years each) were fully subscribed five days after the program opened. Approximately 11 million illegal immigrants are in the country. They are highly unlikely ever to be deported, yet have an insecure and restless future. And these are just some of the highlights of the U.S.' immigration problems.  Any sensible immigration reform would greatly increase the opportunities for skilled immigrants to come to this country on a permanent basis. Once that were accomplished, there would be no need for an H-1B program, or any other program of temporary visas for skilled workers. The millions of illegal immigrants in the United States will not disappear, so like it or not, ultimately most of them will have to be offered a pathway to citizenship. The years of waiting in one's home country before receiving a green card should end, and be replaced by a process where legal entry into this country is quick and efficient.

Immigration raises American income- There's an awful lot of issues about which reputable economics literature disagrees. One exception to that is the hot-button topic of immigration, where everyone's research indicates that immigration is economically beneficial to America. As I wrote last week, even immigration restrictionists' favorite labor economist George Borjas has done research that clearly shows this, requiring the application of a very strange moral calculus to make immigration look bad. The point can really be driven home by reading this brief Borjas did for the Center on Immigration Studies, a leading restrictionist group. Borjas is basically deploying a lot of rhetorical moves to cover up the fact that he can't really dispute the fact that American incomes go up when more immigrants come. He writes things like this: "Of the $1.6 trillion increase in GDP, 97.8 percent goes to the immigrants themselves in the form of wages and benefits." Damn. That's a high percent. But if you stop and think about it for a moment, that means that keeping the immigrants out only makes economic sense if we put negative weight on the interests of the immigrants. I don't expect American public policy to ever be driven by overwhelmingly levels of concern for the interests of foreigners, but a negative weighting would be pretty odd. The claim would have to be that the typical American ought to deny himself a small benefit purely in order in order to deny a much larger benefit to a foreigner. But why? What's more, if you're upset about this division of the surplus the obvious solution is to divide the surplus some other way with taxes rather than entirely destroying the $1.6 trillion worth of surplus.

High-Skilled Guest Workers Lower U.S. Wages, Study Finds -- As Congress debates whether to grant more visas to high-skilled workers, a new study says contends that the influx leads to lower American wages. The paper from the left-leaning Economic Policy Institute challenges the conventional wisdom among economists that the visas address a shortage of skilled American workers. But the EPI paper says it’s a myth that there is a shortage of skilled labor in the U.S. Instead, the paper says, guest-worker programs have led to more competition for technology jobs, enabling employers to pay lower wages than otherwise. In turn, American graduates in computer, science and engineering move to other fields.That echoes the view of senators such as Dick Durbin (D., Ill.) and Charles Grassley (R., Iowa) who have expressed concerns that foreign workers are displacing Americans.The Senate immigration bill would increase the number of visas granted to high-skilled workers. Guest workers tend to be young — two-thirds are under age 30 — and often come from countries where wages are lower than in the U.S., according to the EPI paper. Thus, they accept lower wages than those typically demanded by American workers, the authors suggest.

House Unveils Immigration Reform Piecemeal Plan; Senators Warn It Is ‘Not Going To Work’ -- House lawmakers rolled out a piecemeal approach to passing immigration reform Thursday, even as senators warned that a go-slow, incremental effort would likely fail. Speaking to reporters on Capitol Hill, Rep. Bob Goodlatte (R-Va.) said the House Judiciary Committee, which he chairs, would unveil a series of measures aimed at fixing the immigration system one piece at a time. "By taking a fine-tooth comb through each of the individual issues within the larger immigration debate, it will help us get a better bill that will benefit Americans and provide a workable immigration system," Goodlatte said. "We want to make sure we get immigration reform right this time so that we don't have the same problems in the future that we've had with past immigration reform bills," he said, referring to President Ronald Reagan's 1986 law that legalized some 3 million people and to the 2007 reform bid that failed. "It was driven from the top down, not brought from the grassroots." The House Republicans intend to start this week by introducing one bill to establish a guest worker program for agricultural laborers and another to set up an "e-verify" type program that would track people who enter and leave the United States.

Study suggests US companies use overseas workers to cut wages - An extensive study of the US labor market has shown that the skills shortage which technology firms are constantly complaining about is overstated and firms may instead be using overseas workers to drive down wage costs. In a paper for the Economic Policy Institute by Hal Salzman of Rutgers University, Daniel Kuehn of American University and B. Lindsay Lowell of Georgetown University, the team studied the market for science, technology, engineering and math (STEM) careers. If there was a shortage of IT jobs then you'd expect wages to rise, but in fact the team found wages in the field (on average) peaked in 2001 and have remained flat ever since, and in some cases have fallen over the last 14 years. The reason, according to the research, is that overseas workers are being recruited to keep wages low.The researchers found that the US produces a surfeit of STEM graduates, but only half of them are hired. The rest of the jobs in the IT industry, primarily entry-level positions for the under 30s, are filled using foreign workers and may account for up to 50 per cent of new hires.

On wage-led growth - Yesterday, I quoted Michal Kalecki pointing out that wage cuts cannot create full employment. The fact that GDP has flatlined recently as real wages has fallen is consistent with this.This raises the question: could it be that policies aimed at raising wages at the expense of profits would boost the economy? A nice non-technical paper (pdf) by Marc Lavoie and Engelbert Stockhammer discusses the issues. The case for such wage-led growth is straightforward. If the marginal propensity to spend out of wages is higher than that out of profits, a transfer of incomes from profits to wages will boost aggregate demand. This could happen. Common sense tells us that the badly off tend to spend their incomes, whilst the fact that rising profits before the recession were not accompanied by strongly rising capital spending suggests that the propensity to spend out of profits has been low. nThis casual empiricism is supported by a paper by Ozlem Onaran and Giorgios Galanis, who have estimated (pdf) that, in many developed countries, rises in the share of profits in GDP have been associated with lower aggregate demand.

Wage Disparity Continues to Grow: The median pay of American workers has stagnated in recent years, but that is not true for all workers. When adjusted for inflation, the wages of low-paid workers have declined. But the wages for better-paid workers have grown significantly more rapidly than inflation. The Labor Department last week reported the levels of “usual weekly wages” reported by Americans questioned in the household survey that determines the unemployment rate. The figures are released quarterly, with details on the distribution of wages available since 2000.  Those figures are different from total income, in that they ignore investment income as well as bonuses or overtime that is not considered usual. The national median wage in the first quarter of this year was $827 a week. In 2013 dollars, the median wage 13 years before was $819, so the increase is about 1 percent. The figures include all workers over the age of 25.  The department said that to reach the 90th percentile — that is, to earn more money than 90 percent of those with jobs — a person needed to earn $1,909 a week. That figure was nearly 9 percent higher than in early 1980.  To reach the 10th percentile — earning less money than 90 percent of those with jobs — required an income of $387 a week. After adjusting for inflation, that figure is down 3 percent from 2000.  The accompanying charts show the trends over time for the 25th and 75th percentiles, as well as the median and the 10th and 90th percentiles.

Waitresses Stuck at $2.13 Hourly Minimum for 22 Years -   Gina Deluca says she was shocked when she moved to New Mexico from California and discovered that her hourly wage as a waitress fell to a federal minimum of $2.13. Her old state required at least $6.75 for all workers at the time.While states can require higher minimums, New Mexico and 12 other states use the federal level, which hasn’t been raised in 22 years. “I always had a base wage that I could count on,” Deluca said. “That brought a little bit of stability and security.”  Legislation in Congress this year would raise the $2.13 base for the first time since 1991. The move would help many of American’s 2.3 million servers, advocates of an increase say, as well as manicurists, bellhops and other workers who rely on tips for much of their earnings. It could also spur firings and reduced hours as thin-margin businesses grapple with higher costs, say some restaurant owners and economists.

New report finds increase in social inequality during US “recovery” - Basing itself on US Census data, the Pew report found that the poorest 93 percent of US households saw, on average, a four percent decline in their net worth during these two years of stock market boom, while the wealthiest seven percent saw their net worth increase by an average of 28 percent. The data give the lie to the administration’s claim that the rise in stock prices since the 2007 financial meltdown is part of an economic recovery. In fact, it merely gives expression to a vast transfer of wealth from the working class to the financial elite. Breaking down the figures for those in the bottom 93 percent, the poll finds that:

    • • A shocking 18 percent of the population has a net worth of zero or less (with debts meeting or exceeding all assets). The mean wealth of this group declined from −$34,777 in 2009 to −35,472 in 2011.
    • • The biggest percentage decline was in the 9 percent of households who have a net worth of between $1 and $4,999. They saw their mean net worth decline from $2,016 to $1,899, a fall of 6 percent.
    • • There was a generally constant average decline of between four and five percent for all households with net worths between $5,000 and $499,999.

Inequality, Technical Change and the “Hunger for Surplus Value” - There is (almost) no quarrel about the fact that inequality has increased during the past three or four decades. One of the consequences of this is the growth of unsustainable indebtedness of households in order to maintain aggregate demand, a problem intimately related to the global financial crisis and the so-called Great Recession. James Galbraith’s book Inequality and Instability highlights this aspect of the crisis and the process of inequality. So it is critically important to understand the causes of this rising inequality. One of the most popular lines of analysis finds in technical change the source of growing inequality. This explanation says that skill-biased technological change has replaced workers at the lower levels of pay with machinery. This has the double effect of reducing the value of their contribution to production and of increasing the reward for highly skilled workers that have the capacity to repair and manipulate more sophisticated machinery. Thus technological change is seen as the force behind changes in wage structure and therefore inequality during the last three decades.

Defining Rich VII: Explaining Income inequality in pictures - I had my hair cut last week.   While there I always get into political conversations with the lady cutting my hair.   Her position still is that the individual citizens collecting welfare are effecting her income.  We’ve discussed this before.  So, I used my simple math of $100 dollars and 100 people and 9% to the 1 person and the remaining 99 splitting what remains.  I then note the current split of 24% to the 1 and the 99 splitting what is left.  Easy? Unfortunately, it did not resolve the issue.  Her question was: You don’t think the welfare people are effecting this?  So, I asked her to explain to me just how someone collecting welfare (we are not talking corporate welfare) could be the cause of her lack of share of the overall income?  This is not a laughing matter.  It shows just how strongly the conflation has been made of associating the indigent population as the cause of ones financial condition, namely the money in their pocket. This got me thinking.  Maybe numbers are just not enough.  Maybe using 100 dollars and the fact that after the 1 gets about $9 as of 1978 the other 99 get $0.92.  Shift the split and it’s $24 vs $0.77.   How is that relative to a median income of today?  And here I’ve been thinking I was keeping it simple. So, I have upped the numbers.  $10 million.  100 people.  This produces the following:

City Report Shows a Growing Number Are Near Poverty - The rise in New York City’s poverty rate as a result of the recession has apparently eased, but not before pushing nearly half of the city’s population into the ranks of the poor or near-poor in 2011, according to an analysis by the Bloomberg administration. That year, according to the city’s measure, about 46 percent of New Yorkers were making less than 150 percent of the poverty threshold, a benchmark used to describe people who are not officially poor but who still struggle to get by. That represents a rise of more than three percentage points since 2009, when the nation’s recession officially ended. By the city’s definition, a family with two adults and two children could earn $46,416 a year and still fall within 150 percent of the city’ poverty level. Unlike the official but rigid federal poverty level, the city’s measure balances the added value of tax credits, food stamps, rent subsidies and other benefits against expenses like health and day care, housing and commuting that reflect New York’s higher living costs. The city says a two-adult, two-child family is poor if it earns less than $30,949 a year. The federal government sets the level at $22,811.

This Week in Poverty: Ignoring Homeless Families -  More than one-third of Americans who use shelters annually are parents and their children. In 2011, that added up to more than 500,000 people. According to Joe Volk, CEO of Community Advocates in Milwaukee, prevalent family homelessness is no accident. "In 2000, we as a nation-and the Department of Housing and Urban Development-made the terrible decision to abandon homeless children and their families," said Volk, speaking at a Congressional briefing on The American Almanac of Family Homelessness, authored by the Institute for Children, Poverty and Homelessness. "Families for a decade have been ignored." As the Almanac makes clear, federal attention and resources have focused instead on chronically homeless single adults-usually the most visible homeless people in communities across the country, most of whom have severe intellectual or physical disabilities. There was a recognition that it is far less expensive to place these men and women in their own apartments with access to social services-called the "Housing First" model-than to continue paying the long-term costs associated with jail time, and recurring treatment at emergency rooms and hospitals.

Meals on Wheels faces Federal cuts - The federal budget sequester enacted March 1 could cut as much as 8 percent of the federal funding for Meals on Wheels of San Antonio in the coming fiscal year, staff from Christian Senior Services, a non-profit organization which runs the program, confirmed last week. “We are really scrambling,” said CEO Sharon Baughman. “We'll probably lose funding for about 1,200 meals (this year), which gives you somewhere around 38 seniors who we won't be able to extend access to.” Baughman took care to reassure current recipients that their meals aren't in jeopardy. “No one is getting kicked out of the program,” Baughman said. “But these cuts will mean we can't offer as many new applicants a spot.” Meals on Wheels of San Antonio delivers food to homebound, Bexar County seniors each weekday. According to Baughman, many of these citizens are veterans or their spouses. In the last two fiscal years, the program has increased its distribution in Bexar County from 890,000 to 950,000 meals per year. The South Side is one of its largest areas of distribution, according to officials.

Record Number of Households on Food Stamps-- 1 out of Every 5 - The latest available data from the United States Department of Agriculture (USDA) shows that a record number 23 million households in the United States are now on food stamps. The most recent Supplemental Assistance Nutrition Program (SNAP) statistics of the number of households receiving food stamps shows that 23,087,886 households participated in January 2013 - an increase of 889,154 families from January 2012 when the number of households totaled 22,188,732.  The most recent statistics from the United States Census Bureau-- from December 2012-- puts the number of households in the United States at 115,310,000. If you divide 115,310,000 by 23,087,866, that equals one out of every five households now receiving food stamps. As previously reported, food stamp rolls in America recently surpassed the population of Spain. A record number 47,692,896 Americans are now enrolled in the program and the cost of food stamp fraud has more than doubled in just three years.

In Florida, a food-stamp recruiter deals with wrenching choices - In fact, it is Nerios’s job to enroll at least 150 seniors for food stamps each month, a quota she usually exceeds. Alleviate hunger, lessen poverty: These are the primary goals of her work. But the job also has a second and more controversial purpose for cash-strapped Florida, where increasing food-stamp enrollment has become a means of economic growth, bringing almost $6 billion each year into the state. The money helps to sustain communities, grocery stores and food producers. It also adds to rising federal entitlement spending and the U.S. debt. Nerios prefers to think of her job in more simple terms: “Help is available,” she tells hundreds of seniors each week. “You deserve it. So, yes or no?” In Florida and everywhere else, the answer in 2013 is almost always yes. A record 47 million Americans now rely on the Supplemental Nutrition Assistance Program (SNAP), also known as food stamps, available for people with annual incomes below about $15,000.

Prisons for profit: The new slave labor - -Now, that wealth and the political power that goes with it are grotesquely concentrated among an ever smaller number of American citizens, in a way to rival the Roman aristocracy of ancient times or the European aristocracy which the first Americans threw off. Democracy itself is threatened. And the soul-less predators among the 1 percent want more, and are flexing their political muscle to get it. Like the remorseless killer of the James Bond movies, for them, “the world is not enough.” Their next acquisition is the hard assets of the American people. Their siren song is “Privatization!” The first target was carefully chosen: prisons. Who cares about prisons, right? I mean, they’re full of criminals. But that is not how Wall Street sees prisons. They see a cheap and captive labor force. And state by state, city by city, county by county, American prisons are being privatized and the prisoners put to work for their new owners, making an astounding array of products that are sold into the American market, to take market share and help drive down the wages of honest labor.

Why State and Local Governments are Hurting the Recovery - Until the Great Recession, state and local governments played a remarkably constant role through down business cycles. For four decades, when the economy turned sour, state and local governments boosted their spending—mitigating the depths of recessions and adding to growth when the economy revived. (Of course, this growth was partially offset by the negative effect of taxes collected to pay for that extra government spending.) It was different this time.  State and local governments addressed looming budget gaps by cutting expenditures. Instead of contributing to growth, their budget cuts dragged down the recession even further. And when the economy turned a corner in mid-2009, state and local government consumption (i.e., current spending on government programs like police and fire departments, education, and health) and investment remained depressed—a big reason why the recovery has been so weak. In a new paper, my Tax Policy Center colleague Yuri Shadunsky and I show what happened. Never before had the state and local consumption and investment been negative three years into a recovery, but in 2009, it was down by about 4 percent (see chart immediately below).

Internet sales taxes can be pro-economic growth, not just a state money grab - The US should have tax code that looks like it was designed on purpose. Even better, it should look like it was efficiently designed according to pro-growth, pro-market principles. And that’s why states should be permitted to require large Internet retailers like Amazon to collect sales taxes on all purchases and send the revenue back to state and local governments. Two big benefits here, as I see it, to the Marketplace Equity Act currently under consideration by Congress:

  • 1) It would end the special tax advantage given to online merchants at the expense of brick-and-mortar stores. The bill might not end the retailing phenomenon where consumers use big-box retailers as mere showrooms before an online purchase, but it would help. We don’t want the tax code picking winners and losers unless it is to compensate for some unwanted externality like air pollution. What we do want is neutrality. (It can reasonably be argued, however, that the $1 million sales threshold is too low.)
  • 2) Broadening the state sales tax base — the exemption of Internet and out-of-state retailers from collecting state sales taxes reduces state tax revenues by $11 billion to $23 billion a year — would make it easier for smart governors to focus on raising revenue through broad-based consumption taxes and lower marginal income tax rates

America The Fallen: 24 Signs That Our Once Proud Cities Are Turning Into Poverty-Stricken Hellholes  -- What is happening to you America?  Once upon a time, the United States was a place where free enterprise thrived and the greatest cities that the world had ever seen sprouted up from coast to coast.  Good jobs were plentiful and a manufacturing boom helped fuel the rise of the largest and most vibrant middle class in the history of the planet.  Cities such as Detroit, Chicago, Milwaukee, Cleveland, Philadelphia and Baltimore were all teeming with economic activity and the rest of the globe looked on our economic miracle with a mixture of wonder and envy.  But now look at us.  Our once proud cities are being transformed into poverty-stricken hellholes. We are in the midst of a long-term economic collapse that is eating away at us like cancer, and things are going to get a lot worse than this.  So if you still live in a prosperous area of the country, don't laugh at what is happening to others.  What is happening to them will be coming to your area soon enough.

Good News, New Yorkers: You Might Get Your Sandy Repair Money After All - At the beginning of this month, Sandy relief dollars ($1.77 billion, to be exact) from Washington began to trickle in to the metropolitan area. But there was a tiny issue: the money would only go to future development--not repairs for past damages.  Remember this? It was a policy that separated New York City from Long Island, where repair money was available to residents. By just crossing a tiny border, you were unable to receive money to pick up the pieces from Mother Nature's wrath, one that was totally out of your control. Well apparently it pissed way too many people off. What a surprise! After the hoi polloi submitted about 400 angry comments in a 14-day span, along with a very heated letter from Senator Chuck Schumer, city officials have changed their mind. Barring federal Department of Housing and Urban Development approval, the city has indicated that it would change the conditions under which the funds will be dispersed to cover "qualifying homeowners" in one-to-four family households.

City remains knee-deep in more than 7,000 abandoned properties - Like many urban cities in recent years, Dayton still finds itself knee-deep in abandoned, dilapidated properties as the result of the foreclosure crisis and economic downturn five years ago. Boarded up buildings that appear to be on their last legs litter the city as it attempts to recover. Kevin Powell, the city’s acting manager of housing inspection, says officials plan to use $5.2 million — half from the state’s Moving Ohio Forward program and a matching grant from the city’s general fund — to raze 475 abandoned properties by the end of September. That will scratch the surface of an estimated 7,000 abandoned property problem that is growing. “This will probably be the most money we have ever spent on single family home (demolitions) in the city of Dayton,” Powell said. “I don’t want to give people the impression that nothing is being done. Four hundred seventy five is a lot, but it is not 7,000.”

Moody's says Detroit bankruptcy could mean further downgrades (Reuters) - Detroit's already low credit ratings could sink further if the city is allowed to file for bankruptcy, Moody's Investors Service said on Wednesday. The credit rating agency said a decision by the city's state-appointed emergency manager and Michigan's governor to authorize a Chapter 9 municipal bankruptcy filing would lead to a restructuring of Detroit's debt that could reduce or delay payments on its outstanding bonds. Moody's, which rates Detroit's general obligation debt deep in the junk category at Caa1 with a negative outlook, also said Detroit could be pushed into bankruptcy if interest rate swap agreements are terminated. While the termination of those agreements has already been triggered, negotiations are ongoing with the swap providers. A termination could cost the city as much as $440 million, or about 22 percent of its annual operating budget.

ACLU Urges Detroit To End Illegal Practice of ‘Dumping’ Homeless People Outside City Limits, Files DOJ Complaint - The American Civil Liberties Union of Michigan sent a letter to the Detroit Police Department and filed a complaint with the United States Department of Justice (DOJ) today demanding an end to the Detroit police’s illegal and abusive tactics toward homeless individuals in the city.  A yearlong ACLU investigation uncovered the disturbing practice of officers approaching individuals who appear to be homeless in the Greektown area, forcing them into police vans, and deserting them miles away.  “DPD’s practice of essentially kidnapping homeless people and abandoning them miles away from the neighborhoods they know – with no means for a safe return -- is inhumane, callous and illegal,” said Sarah Mehta, ACLU of Michigan staff attorney. “The city’s desire to hide painful reminders of our economic struggles cannot justify discriminating against the poor, banishing them from their city, and endangering their lives. A person who has lost his home has not lost his right to be treated with dignity.”

Koch Brothers’ Wealth Grew By $33 Billion in 3 Years As America’s Schools Report 1 Million Homeless Kids - We used to be a country with a rich heart. Now we’re the land of the heartless rich. In one of the worst economic downturns since the Great Depression, the billionaire Koch brothers who habitually rail against government’s unfair burden on the wealthy, have almost doubled their net worth to a combined $64 billion. On March 10, 2010, Forbes listed the net worth of Charles and David Koch at $17.5 billion each. This year, Forbes says the Koch brothers are individually worth $34 billion. During that same time period, some of the bleakest economic news has been reported for the rest of America. Just yesterday, the Pew Research Center released a study showing that between 2009 to 2011 the richest 7 percent of Americans increased their wealth by 28 percent while the remaining 93 percent of households lost 4 percent of their net worth. The study analyzed Census Bureau data for the period. Last June, the U.S. Department of Education reported that there were 1,065,794 homeless children enrolled in America’s preschools, kindergarten and grades 1 to 12 in the 2010-2011 school year — the highest number on record, and a 13 percent increase over the 2009 to 2010 school year. The figure does not capture the total number of homeless children since school data excludes infants and toddlers and homeless children not attending public schools. According to the Department of Housing and Urban Development (HUD), it would cost $20 billion to end homelessness in the United States. The Kochs have enough money to do that with $44 billion left over to funnel to their plethora of right wing front groups who serially bellyache about how unfair things are for the affluent in America.

Federal cuts put women and children last - In forcing the sequester, House Republicans have ensured cuts to programs that fund breast and cervical cancer screenings, child-care assistance and more.The Titanic's captain was trying to save people's lives. In contrast, House Republicans, having contrived the sequester -- $85 billion in federal budget cuts -- are steering straight for that iceberg. And when the economy hits it, when the sequester cuts are fully implemented, women and children will go down first. Sure, the sequester cuts are bad for pretty much everyone. But they're especially harmful to women and their children. Why? More women then men depend on the public services that face cuts. Making matters worse, more women than men work in the public sector, so more women than men will face furloughs or lose their jobs.

Occupy The Department of Education - Real New Network - A four day occupation warns of the privatization of schools turning education into a privilege instead of a right - video with transcript

MU sees 866 percent debt increase over past 10 years - Facility improvements over the last decade have led to record debt levels while Miami University students are often left footing the bill, according to analysis by The Miami Student. Miami’s total debt grew from more than $44 million in 2002 to more than $427 million last year, an 866 percent increase and the fourth-highest debt total in Ohio, while total interest owed grew more than 1,100 percent, before adjusting for inflation. Rising debt levels have funded facility improvements that will eventually cost the university between $600 and $700 million. Meanwhile, long-term debt increased more than 263 percent during that time and grew nearly 39 percent between 2002 and 2008, compared to 12 percent nationally, Rising debt has created a “liquidity crisis” in higher education, as many institutions are now overleveraged by excessive costs. Miami’s operating expenses, funded largely by student tuition and fees, increased more than 38 percent between 2002 and 2012, while in-state tuition increased more than 85 percent and out-of-state tuition increased more than 70 percent. Meanwhile, academic spending increased 36 percent while total state support decreased less than 15 percent during that time, from $82 to $70 million.

Valedictatorian - The cheating scandals prove that education reform is a wholly fraudulent endeavor. It isn't the equivalent of a doping scandal in sports; it's the equivalent of Enron, Madoff, the financial crisis. You think testing has something to do with compensation, hiring, and firing? It doesn't. Testing is the accounting of the reform movement, and the executives are cooking the books. They're manipulating the statements so it looks like the venture is turning a profit. Well, actually, it's got negative cash flow. The gains are phantoms. The enterprise is insolvent. Even by its own standards, reform fails. The central proposition of so-called education reform is that it endeavors to make schooling more entrepreneurial. Now this is bogus on its face. The most salient fact about entrepreneurialism is that most ventures fail. Is that the proper model for the delivery of a universal service? Consider the question irrespective of your thoughts about the larger questions surrounding the provision of universal education. Ostensible reformers say they want to mimic the dynamism and innovation of the private sector. The first question is: to what end, exactly? The second is: do you know how dynamism and innovation work?

What if demand for graduates falls? - What is university for? I ask this old question because the utilitarian answer which was especially popular in the New Labour years - that the economy needs more graduates - might be becoming less plausible. A new paper by Paul Beaudry and colleagues says (pdf) there has been a "great reversal" in the demand for high cognitive skills in the US since around 2000, and the BLS forecasts that the fastest-growing occupations between now and 2020 will be mostly traditionally non-graduate ones, such as care assistants, fast food workers and truck drivers; Allister Heath thinks a similar thing might be true for the UK. There are signs of this happening already. ONS data show that employment in professional occupations, having grown 3.1% a year between 2001 and 2007, has grown just 1.2% per year since, whilst overall employment growth hasn't changed much.And we can tell a futurological story in which high-end work declines: IT could replace accountants and lawyers, not just routine clerical workers; MOOCs could render some college lecturers redundant; a smaller financial and public sector will limit demand for graduates; and the increased supply of graduates from India and China might bid down the wages of their western counterparts.

Are Student Loans Becoming a Macroeconomic Issue? - If you asked economists looking at the data if student loans could be having a macroeconomic effect, especially through a financial burden on those that have them, they'd say that the actual percent of monthly income paying student loans hasn't changed all that much since the 1990s. They may be making larger lifetime payments, since they'll carry the debts longer, but that's a choice they are making, which could reflect positive or negative developments. Certaintly there's no short-term strain. So there aren't any economic consequences worth mentioning when it comes to student loans. I always thought this approach had problems. First, they were only looking at the pre-crisis era, so we couldn't see the impact of student loans once we hit a serious problem. And they were just rough averages of short-term income aggregates, rather than looking at specific individuals with or without student-debt and seeing what kinds of spending, particularly on longer-term durable goods, they do. But since I had no data myself, I never pushed on this very hard. Part of the problem is that student loans have happened relatively quickly, so quantitatively it's hard for data agencies to adjust their techniques to "see" this data easily, and not just lump them in with "other debts."

The Retirement Gamble - video - PBS Frontline Investigation - The Retirement Gamble raises troubling questions about how America’s financial institutions protect our retirement savings.

Even Harsh Frontline Program on Retirement Investments Understates How Bad They Are - Yves Smith - Wall Street must get indigestion every time Frontline rolls out another program showing the depths of its chicanery. The only problem is the industry deserves much worse punishment. The latest report, The Retirement Gamble, focuses on the scams in the retirement industry, the retail brokers and asset managers who sell products to 401 (k)s and other tax exempt plans. Anyone who knows this arena will find that the report covers familiar terrain. But the appalling fact remains that ordinary Americans who don’t have the time or interest to be full time investors but want to take prudent steps to prepare for retirement are systematically fleeced by the industry. And due to the time limits and complexity of the terrain, the program can hit only on some important issues.

PBS Drops Another Bombshell: Wall Street Is Gobbling Up Two-Thirds of Your 401(k) - If you work for 50 years and receive the typical long-term return of 7 percent on your 401(k) plan and your fees are 2 percent, almost two-thirds of your account will go to Wall Street. This was the bombshell dropped by Frontline’s Martin Smith in this Tuesday evening’s PBS program, The Retirement Gamble. This is not so much a gamble as a certainty: under a 2 percent 401(k) fee structure, almost two-thirds of your working life will go toward paying obscene compensation to Wall Street; a little over one-third will benefit your family – and that’s before paying taxes on withdrawals to Uncle Sam. To put it another way – you work for Wall Street. You are their slave, their lackey and as long as their toadies dominate in Congress, nothing is going to change on the legislative front to stop the looting. Wall Street seized millions of homes through illegal foreclosures and stripped the equity from the owners. They got away with it. Some Wall Street firms further enriched themselves making bets that the housing market would collapse, using their inside knowledge of the bogus loans they had made. They got away with that also. Now Wall Street is busy asset stripping the retirement plans of the working class in America while President Obama proposes to cut Social Security benefits through a discredited calculation called Chained CPI – conveniently causing people to save more in their 401(k) plans to make up for the potential loss. But the more you save, the more Wall Street asset strips.

A New Report Suggests Seniors Are Already Getting Stiffed By Social Security — Before Chained CPI - The report addressed and largely affirmed a key criticism of an inflation measure called Chained CPI, which among other things would reduce Social Security cost of living increases and kick people into higher income tax brackets, if adopted across the government. The implicit finding: Chained CPI — which President Obama included as a compromise measure in his budget — will typically harm seniors more than the rest of the population. Supporters of Chained CPI argue that, unlike the two main existing indexes the government uses, it incorporates the assumption that consumers will substitute cheaper goods for costlier ones when prices rise, counteracting the economic impact of inflation. Thus, they argue, Chained CPI provides a more accurate calculation of inflation, and the ones the government currently uses to index benefits and tax brackets are too generous.  The most common criticism of Chained CPI dismisses the technical accuracy of Chained CPI as an inflation index and points out that benefit cuts and regressive tax increases are undesirable policies, whether they’re effectuated directly or via a technical change to tax and benefit calculations.

Robert Reich Video: Chained CPI Makes No Sense For Seniors - With, Robert Reich has produced a new video on the proposed change to Social Security that would REDUCE BENEFITS for seniors and wreak the most havoc on the most vulnerable.  As he notes in the video, the proposed change--which the Obama Administration has supported, presumably as a way to win favor with the radical right in the GOP that wants to significantly reduce Social Security and Medicare benefits--isn't necessary since Social Security isn't hurting for cash, won't be fair to elderly recipients who already face increased medical costs and decreased income to pay for them, and won't do a thing about the deficit (which is the wrong focus, anyway).

The Chained CPI in people terms - At last comes a story in a major news outlet that explains in people terms what exactly the Chained CPI will or won’t do for the family budget. The New York Times deserves a CJR laurel for its Saturday “Your Money” piece by Tara Siegel Bernard who showed how the alternative method of calculating cost-of-living adjustments for Social Security benefits will impact the monthly payments for those who receive them. As we’ve noted, until now the saga of the Chained CPI has been a tale told—mostly by bloggers and the Beltway elite press corps—as a necessary feature of some grand bargain the president and the Republicans may strike. The president’s budget calls for a switch to the Chained CPI in 2015 that will result in smaller monthly benefit adjustments that will eventually compound over time, hurting the oldest of the old at a time when their savings and assets are often depleted. The advocacy group Social Security Works estimates that this change could mean an 85-year-old would have $1,139 less a year to live on. This—the people story—has, as I’ve written before, been missing in coverage

‘The outlook for Medicaid expansion looks bleak’: “As state legislative sessions are wrapping up,” Avalere Health’s Caroline Pearson tweets, “The outlook for Medicaid expansion looks bleak.” She posts this map of where states are at in their thinking about the health law provision.Twenty states and the District of Columbia have agreed to expand their Medicaid programs, to cover everyone under 133 percent of the federal poverty line. That leaves 30 states that haven’t, although Avalere categorizes four states as leaning in that direction (Tennessee, Kentucky, Florida and New York). Some of these states have especially large uninsured populations. Texas, for example, has an estimated 1.8 million people who would be expected to enroll in Medicaid under the expansion. Florida has the same number—and, while Gov. Rick Scott (R) has endorsed the expansion, the Florida House and Senate are now feuding over whether they will move forward.

Employer-based health coverage on the decline, study finds -  The number of people who receive healthcare coverage through their work has dropped sharply over the last 10 years as costs have risen, according to a new study. The Robert Wood Johnson Foundation (RWJF) reported Thursday that the share of people with employer-based coverage fell from about 70 percent in 2000 to about 60 percent in 2011. These figures mean that about 11.5 million people who once received health insurance through their jobs no longer do. Researchers related the trend to decreasing overall employment, as well as rising healthcare costs. According to the study, the average annual premium for individuals with work-based coverage doubled in the last decade from about $2,500 to about $5,000. Family premiums rose even more sharply, from about $6,400 on average to about $14,500. "Everyone’s costs have increased dramatically,”

Utah cancer clinics turning away Medicare patients - Cuts to Medicare are driving Utah cancer clinics to turn away patients and refer them instead to hospitals for treatment. Oncologists say the cuts, ordered April 1 under the recent budget sequester, reduced what Medicare pays them for expensive chemotherapy drugs, making it impossible for them to administer the drugs and stay afloat. "Inconvenient is not the right word for it. It’s tragic when you have patients you’ve been treating in your office and now all of a sudden you have to arrange to have them treated elsewhere." Utah Cancer has referred 10 Medicare patients to hospitals and has identified 100 more for possible transfer. It’s the state’s largest oncology group, logging about 7,500 patient visits a month across its eight clinics in Salt Lake, Davis, Tooele and Utah counties. About 40 percent of its patients are on Medicare, the government insurance program for retirees. Frame says the disruptions could delay care for those who can’t land hospital appointments right away or who will have to drive long distances multiple times a week for their chemo treatments.

Cancer clinics are turning away thousands of Medicare patients. Blame the sequester.: Cancer clinics across the country have begun turning away thousands of Medicare patients, blaming the sequester budget cuts. Oncologists say the reduced funding, which took effect for Medicare on April 1, makes it impossible to administer expensive chemotherapy drugs while staying afloat financially. Patients at these clinics would need to seek treatment elsewhere, such as at hospitals that might not have the capacity to accommodate them. “If we treated the patients receiving the most expensive drugs, we’d be out of business in six months to a year,” “The drugs we’re going to lose money on we’re not going to administer right now.” After an emergency meeting Tuesday, Vacirca’s clinics decided that they would no longer see one-third of their 16,000 Medicare patients. “A lot of us are in disbelief that this is happening,” he said. “It’s a choice between seeing these patients and staying in business.”Some who have been pushing the federal government to spend less on health care say this is not the right approach.

San Francisco official probes whether Nevada is 'patient dumping' - San Francisco City Attorney Dennis Herrera on Monday opened a formal investigation into whether the state of Nevada improperly "dumped" psychiatric patients in his city and throughout California.In a letter to the director of Nevada's Department of Health and Human Services, Herrera demanded that the state turn over documents related to its aggressive practice of discharging patients from a Las Vegas state mental hospital via Greyhound bus and transporting them to cities across America.The letter, copied to Nevada Gov. Brian Sandoval and Nevada Attorney General Catherine Cortez Masto, cites a Sacramento Bee report that found the Rawson-Neal Psychiatric Hospital in Las Vegas bused roughly 1,500 patients from July 2008 through early March 2013, sending at least one person to every state in the continental United States.Rawson-Neal bused 500 patients to California during that period, according to a Bee review of Greyhound bus receipts purchased by Southern Nevada Adult Mental Health Services, which oversees the hospital.

American hospitals deporting unconscious patients - Days after they were badly hurt in a car accident, Jacinto Cruz and Jose Rodriguez-Saldana lay unconscious in an Iowa hospital while the American health care system weighed what to do with the two immigrants from Mexico.The men had health insurance from jobs at one of the nation’s largest pork producers. But neither had legal permission to live in the U.S., nor was it clear whether their insurance would pay for the long-term rehabilitation they needed. So Iowa Methodist Medical Center in Des Moines took matters into its own hands: After consulting with the patients’ families, it quietly loaded the two comatose men onto a private jet that flew them back to Mexico, effectively deporting them without consulting any court or federal agency. When the men awoke, they were more than 1,800 miles away in a hospital in Veracruz, on the Mexican Gulf Coast.

Medical Journal Editorial Blasts Obamacare for Increasing Underinsurance - During the protracted Congressional fight over the Affordable Care Act, its supporters kept stressing the importance of extending coverage to tens of millions of uninsured. But some observers, including your humble blogger, warned that having overpriced insurance that didn’t cover much was a headfake, not real progress. Physicians for a National Health Program has gotten access to an editorial approved for publication next week in the Journal of General Internal Medicine titled Life or Debt (hat tip martha r). It which takes aim at the lousy job Obamacare does for the group it was billed as benefitting, the un- and underinsured, keying off an article in the same journal, “Prevalence and Predictors of Underinsurance Among Low-Income Adults,” whose lead author is Hema Magge.  If you’ve had a look at how the bronze plans work, you’ll find the conclusion of this article to be no surprise. Bronze plans for individuals are expected to cost between $4,500 and $5,800 a year in 2016. But if you make less than 4 times the Federal poverty line ($11,170 in 2012), you’ll pay less by virtue of receiving tax credits. But the real problem is that this is only a portion of what lower-income people will pay. They’ll presumably only be able to afford the lowest tier plans, which are bronze plans. And bronze plans are terrible. They are designed so that the insurance covers only 60% of costs. The insured is expected to pick up 40%. And this is inadequate.

Lawmakers, aides may get Obamacare exemption - Congressional leaders in both parties are engaged in high-level, confidential talks about exempting lawmakers and Capitol Hill aides from the insurance exchanges they are mandated to join as part of President Barack Obama’s health care overhaul, sources in both parties said. The talks — which involve Senate Majority Leader Harry Reid (D-Nev.), House Speaker John Boehner (R-Ohio), the Obama administration and other top lawmakers — are extraordinarily sensitive, with both sides acutely aware of the potential for political fallout from giving carve-outs from the hugely controversial law to 535 lawmakers and thousands of their aides. Discussions have stretched out for months, sources said. Democrats, in particular, would take a public hammering as the traditional boosters of Obamacare. Republicans would undoubtedly attempt to shred them over any attempt to escape coverage by it, unless Boehner and Senate Minority Leader Mitch McConnell (R-Ky.) give Democrats cover by backing it.

Congress Scheming to Avoid Eating its Own Cooking on Obamacare - Yves Smith - You cannot make this stuff up. From Politico: Congressional leaders in both parties are engaged in high-level, confidential talks about exempting lawmakers and Capitol Hill aides from the insurance exchanges they are mandated to join as part of President Barack Obama’s health care overhaul, sources in both parties said. The talks — which involve Senate Majority Leader Harry Reid (D-Nev.), House Speaker John Boehner (R-Ohio), the Obama administration and other top lawmakers — are extraordinarily sensitive, with both sides acutely aware of the potential for political fallout from giving carve-outs from the hugely controversial law to 535 lawmakers and thousands of their aides. Discussions have stretched out for months, sources said…. And what’s the reason? Oh, the policies might cost too much! But that is because Congresscritters have enjoyed particularly generous coverage. From a 2009 Truthout article: How can lawmakers empathize with the underinsured or those lacking insurance when they receive a benefits package — heavily subsidized by taxpayers — that most Americans can only envy? Among the advantages: a choice of 10 healthcare plans that provide access to a national network of doctors, as well as several HMOs that serve each member’s home state.  Lawmakers also get special treatment at Washington’s federal medical facilities and, for a few hundred dollars a month, access to their own pharmacy and doctors, nurses and medical technicians standing by in an office conveniently located between the House and Senate chambers.

Does Congress know how Obamacare works? - There was an awesome article in Politico yesterday on how certain members of Congress are trying to come up with a plan to exempt themselves and their aides from Obamacare. Specifically, they appear to be panicking about a provision that says they need to go to the exchanges to buy their insurance. I’m going to ignore the political implications of these negotiations, which are horrific. If they, themselves, don’t want to be under Obamacare, then how can politicians ask anyone else to be? But what concerns me even more is the fact that the arguments they are using don’t make any sense. It’s as if they don’t understand the law at all. Take this, for example: Sen. Richard Burr (R-N.C.) said if OPM decides that the federal government doesn’t pick up “the 75 percent that they have been, then put yourself in the position of a lot of entry-level staff people who make $25,000 a year, and all of a sudden, they have a $7,000 a year health care tab? That would be devastating.” Wow. It sure would be – if that were possible. But it took all of 5 seconds for me to go to the Kaiser reform calculator and plug in some numbers. I made up a 30-year-old single staffer, said he makes $25,000, and was looking for a single person plan. I found out that in 2014, such a plan will likely cost $3440. But this person actually makes only 217% of the poverty line (nice, Congress!) so he would qualify for a significant subsidy. Therefore, the cost to him would be only $1714. That’s if the federal government refused to pay for a staffer’s insurance at all!

Why It Would Be Great if Congress Was Forced to Buy Their Own Health Insurance at Full Cost -  That Congress is looking for an exemption from the Affordable Care Act requirement that they and their staff will have to use the new exchanges is all about money. Basically the entire concern is that because of the way the law was drafted, Congress may no longer be able to cover some of the costs for their staffers’ insurance premiums if they buy on the new Obamacare exchanges. This would force the staffers to buy insurance at full price. Personally, I consider this scenario a wonderful outcome because it would force Congress and their staff to actually live according to the questioned principles they used to justify the law. Making Congress and their staffers pay the full cost of their insurance is fine with me because that is how the law will treat millions of middle class families. All members of Congress and most staffers will have salaries high enough they would not qualify for subsidies on the exchanges. If Congress is going to make regular people with similar salaries buy insurance out-of-pocket than that should be good enough for Congressional aides. I also have no problem with the law forcing Congressional staffers to lose their relatively good insurance because that is a long term goal of the law for everyone. The excise tax on “Cadillac coverage” was designed to stop employers from providing good insurance, covering a large share of your premium, and/or getting them to drop offering coverage altogether.  What might happen to Congress is very similar to what Congress intended to happen to others.

The Bad Economy Behind the Health Care Slowdown - In today’s paper, I took a look at a major innovation in health care delivery, one that Obama administration officials think might play a big role in holding down health costs in the future. It is called accountable care, and the general idea is to enlist doctors and nurses in the fight to control spending.  But how much have such shifts away from fee-for-service medicine already contributed to the big slowdown in health care costs?  That has been one of the biggest puzzles in health economics — indeed, in all of public economics — in the last few years. Policy makers broadly consider rising health costs to be the single biggest long-term budget challenge, and those same rising costs are eating away at workers’ wages. Economists figured that Americans would spend less on health care because of the deep recession and sluggish recovery. But health costs have slowed even more than they expected given the size of the downturn, leading many to surmise that other factors were at work.  A new study from the Kaiser Family Foundation helps sort out definitively what is the bad economy and what is not. All in all, Kaiser estimates that 77 percent of the cost slowdown is due to the recession, with the remaining quarter due to “continuing changes in the way health care is delivered, but also to rising levels of patient cost-sharing in private insurance plans that discourage use of services.”

The Email I Want to Send To Our Tech Guys But Keep Deleting…So today I’m doing anesthesia for colonoscopies and upper GI scopes. Nowadays we have three board-certified anesthesiologists doing anesthesia for GI procedures every single day at my institution. I’ll probably do 8 cases today. I will sign into a computer or electronically sign something 32 times. I have to type my user name and password into 3 different systems 24 times. I’m doing essentially the same thing with each case, but each case has to have the same information entered separately. I have to do these things, but my department also pays four full-time masters-level trained nurses to enter patient information and medical histories into the computer system, sometimes transcribed from a different computer system. Ironically, I will also generate about 50 pages of paper, since the computer record has to be printed out. Twice. No wonder almost everyone I know hates electronic medical records! I don’t know anything about computers, and I don’t know what systems other hospitals have. I may be dreaming of a world that doesn’t exist or that world is here and I haven’t heard about it. Nevertheless, here’s my wish list for a system that doctors would actually want to use:

Aging U.S. to drive up heart-related health costs: study (Reuters) - The costs linked to heart failure in the United States are expected to more than double within the next two decades as the population ages and treatments help patients with the disease live longer, a study released on Wednesday found. The American Heart Association predicted that the number of Americans with the fatal condition will grow to 8 million in 2030 from about 5 million in 2012. The costs to treat them will rise to $53 billion from $21 billion, the group said in its analysis. If indirect costs related to heart failure are included, such as lost productivity and wages when patients become too sick to work, the total costs jump to $70 billion from $31 billion over the 18-year period, its study showed. The steep increase highlights just one of several added pressures on the nation's already $2.5 trillion healthcare system as the country ages and more of the 77 million so-called baby boomers turn 65 and older.

Americans ‘snapping’ by the millions: Terrorism. Chaos. Fear of the future. In the age of Obama, America is undergoing a “fundamental transformation” – that much everyone knows. But what few seem to realize about this transformation is that the sheer stress of living in today’s America is driving tens of millions to the point of illness, depression and self-destruction. Consider the following trends:

America: #1 In Fear, Stress, Anger, Divorce, Obesity, Anti-Depressants, Etc. - The United States is a deeply unhappy place.  We are a nation that is absolutely consumed by fear, stress, anger and depression.  It isn't just our economy that is falling apart - the very fabric of society is starting to come apart at the seams and it is because of what is happening to us on the inside. We are overwhelmed by anxiety, and much of the time the ways that we choose to deal with those emotions lead to some very self-destructive behaviors.  Americans have experienced a standard of living far beyond the wildest dreams of most societies throughout human history, and yet we are an absolutely miserable people.  Why is this?  Why is America #1 in so many negative categories? There is vast material wealth all around us.  So why can't we be happy?

2,644 died during clinical trial of drugs in 7 years: Govt to SC - The Times of India - As many as 2,644 people, called subjects, died during the clinical trials of 475 new drugs on human beings in last seven years and only 17 of the medicines were approved for marketing in India, Responding to allegations by NGO, Swasthya Adhikar Manch, in its PIL that Indians were used as guinea pigs by foreign pharmaceutical majors for human trial of their new drugs, the Union health and family welfare ministry said of the 57,303 enrolled subjects, 39,022 completed the clinical trials. "Serious adverse events of deaths during the clinical trials during the said period were 2,644, out of which 80 deaths were found to be attributable to the clinical trials," "Around 11,972 serious adverse events (excluding death) were reported during the period from January 1, 2005 to June 30, 2012, out of which 506 events were found to be related to clinical trials," Clinical trial of two drugs - Bayer's Rivaroxaban and Novartis's Aliskiren vs. Enalapril - accounted for maximum number of deaths. Bayer's Rivaroxaban was first used for human trials in 2008 resulting in death of 21 of which it claimed that only five were related to clinical trial but it has till date paid compensation to kin of only two. Two years later, the same drug was again put on human trial and this time 125 deaths were reported, of which it was stated that five were related to clinical trial. Novartis used the investigational product listed as Aliskiren vs. Enalapril last year and it resulted in death of 47 of which only one has been attributed to clinical trial of the new drug. Only another clinical trial of new drug on humans, Sun Pharma's Paclitaxel injection concentrate for nano-dispersion, registered a double-digit death figure (12) during the last seven years. Majority of the pharmaceutical companies, whose drugs were permitted for clinical trial on human beings, were of foreign origin.

Superbugs Invade American Supermarkets: Antibiotic-resistant bacteria are now common in the meat aisles of American supermarkets. These so-called superbugs can trigger foodborne illness and infections that are hard to treat. An analysis by the Environmental Working Group has determined that government tests of raw supermarket meat published last February 5 detected antibiotic-resistant bacteria in: These little-noticed tests, the most recent in a series conducted by the National Antimicrobial Resistance Monitoring System, a joint project of the federal Food and Drug Administration, Centers for Disease Control and Prevention and U.S. Department of Agriculture, found that supermarket meat samples collected in 2011 harbored significant amounts of the superbug versions of salmonella and Campylobacter, which together cause 3.6 million cases of food poisoning a year. Moreover, the researchers found that some 53 percent of raw chicken samples collected in 2011 were tainted with an antibiotic-resistant form of Escherichia coli, or E. coli, a microbe that normally inhabits feces. Certain strains of E. coli can cause diarrhea, urinary tract infections and pneumonia. The extent of antibiotic-resistant E. coli on chicken is alarming because bacteria readily share antibiotic-resistance genes.

Analysis Finds 55% Ground Beef, 39% Chicken Contaminated with Superbugs - Would you still eat that turkey burger if you knew it contained antibiotic resistant bacteria? Maybe not. But if you eat turkey, there’s a good chance you are ingesting some of these potentially lethal “super bugs”. The same holds true for beef, chicken, and pork, according to a recent analysis from the Environmental Working Group. The EWG analyzed tests recently released from the federal government, and what they found was that a great deal of American meat is contaminated with antibiotic-resistant bacteria. More specifically, the EWG found the following contamination levels:

  • 81% of raw ground turkey
  • 69% of pork chops
  • 55% of raw ground beef
  • 39% of raw chicken

With the vast majority of U.S.-made pharmaceuticals going into livestock production, how could this possibly be? It’s because the superbugs are created in part by an overabundance of antibiotics.

Lead Levels In Rice Cause For Concern, Study - Rice imported into the United States from certain countries contains levels of lead that could pose health risks, particularly for infants and children, who are especially sensitive to lead’s effects, and adults of Asian heritage who consume large amounts of rice, according to a new study.  Their research was presented as part of a symposium titled “Food and Its Environment: What Is In What We Eat?” at the 245th National Meeting & Exposition of the American Chemical Society, which ran from April 7-11 in New Orleans, USA. Tsanangurayi Tongesayi and colleagues at Monmouth University in New Jersey determined the levels the levels of cadmium and lead in rice imported into the U.S. from different regions of the world, and showed that the levels of the two elements were significantly higher than the toxicity reference doses of the elements for all age and sex categories.

USGS Release: High Arsenic Levels Found in 8 Percent of Groundwater Wells Studied in Pennsylvania (4/17/2013 9:00:00 AM): Eight percent of more than 5,000 wells tested across Pennsylvania contain groundwater with levels of arsenic at or above federal standards set for public drinking water, while an additional 12 percent – though not exceeding standards – show elevated levels of arsenic. These findings, along with maps depicting areas in the state most likely to have elevated levels of arsenic in groundwater, are part of a recently released U.S. Geological Survey study done in cooperation with the Pennsylvania Departments of Health and Environmental Protection.Arsenic occurs naturally and, in Pennsylvania, is most common in shallow glacial and shale/sandstone type aquifers, particularly those containing pyrite minerals. Arsenic can also result from human activities. Geologic conditions, such as fractures, and chemical factors in groundwater, such as low oxygen, extreme pH, and salinity, can cause arsenic to leach from rocks, become mobile, and contaminate wells distant from the source. Groundwater with elevated arsenic levels – more than 4 micrograms per liter -- can be found in scattered locations throughout Pennsylvania. Arsenic in drinking water has been linked to several types of cancer, reproductive problems, diabetes, a weakened immune system, and developmental delays in children. Arsenic can be reduced or eliminated in tap water through treatment.

John Galt Kills Texans in Massive Fertilizer Plant Explosion from naked capitalism  Yves here. Coverage of the horrific fertilizer plant explosion has taken a back seat to reporting of the Boston Marathon bombings. Yet more people died in the Texas tragedy, which was also preventable.  Who needs pesky safety regulations or zoning laws when there is money to made running a fertilizer plant? Sadly, the small Texas town of West, which is just north of Waco, is suffering the consequences of unregulated free enterprise today, as a massive explosion at West Fertilizer has leveled much of the town. Perhaps the only remotely fortunate aspect of this tragedy is that it occurred at 8 pm local time and so West Middle School, which burned after the explosion, was not full of children. A look at the satellite image above shows the folly of putting “free enterprise” ahead of sensible zoning laws. At almost 20 miles north of Waco, Texas, one thing that is in abundance in the region is open space (I’ve driven past this spot several times in the last two or three years–it’s desolate), and yet this fertilizer plant is immediately adjacent to a large apartment building (see the photo at the top of this article for how that building fared in the explosion) and very close to a middle school. There is no reason at all for any other building to be within two or three miles of a facility that produces material that is so explosive.

How farmers could benefit from fertilizer taxes - Some of the worst water quality problems result from nutrient leaching and runoff from agricultural lands. Nitrogen and phosphorus applied to cropland and not absorbed by crops in the process of photosynthesis will, one way or another, one day or another, end up in the water. The same goes for animal waste. The nutrients cause algae blooms, reduced concentrations of dissolved oxygen, and diminished fisheries and ecosystem health (called eutrophication).  One obvious remedy would be to tax fertilizer. Now, I’ve seen some economists propose fertilizer taxes on a graduated scale. If fertilizer is applied at a sufficiently low rate, no tax would be levied, but the tax would then rise sharply with higher application levels (which is where most runoff and leaching comes from). If done this way, the total tax bill would cost farmers far less, but cause the same reduction in fertilizer use. And farmers would still get the full compensating price increase, since less output would be collectively produced. That is, a statutory tax on farmers could cause their profits to go up.

Brazil congestion delays export of record soybean crop - A quarter of the country's foreign trade flows through Santos. But in the past few weeks, this vital route has been clogged up as a result of the record amount of grain on its way to the port. Soybean and corn harvests here have reached all-time highs this year and Brazil looks set to become the world's top exporter of soybean. Most of Brazil's soybean harvest goes to China, where it is fed to chickens and used to make tofu, soy mince and soy milk. But attempts to deliver the grain have exposed the shortcomings of Brazil's infrastructure. "The production is growing very fast but the infrastructure doesn't react with the same speed," says Sergio Mendes, director of the National Association of Cereal Exporters. The port of Santos has tripled its capacity in the past two decades. It now handles more than 100 million tonnes of goods every year - not just soybeans but also Brazil's other top exports such as sugar, cars and fuel. But there just have not been enough improvements.

Monsanto soybean oil could replace fatty fish acids - Fatty acids don't sound like things that could be particularly good for you. But over the past decade, nutritionists and health organizations have said we need more of them - specifically omega-3 fatty acids - for cardiovascular and brain health. Now the global market for omega-3 foods hovers around $25 billion. A problem, though, is that the primary source of the most beneficial omega-3s come from cold-water fish - and there just aren't enough of those fish in the sea. Plus, fish can have high levels of toxic mercury and pollutants. Plants also contain omega-3s, yet they're problematic, too. The omega-3s most prevalent in plants - called alpha linolenic acids, or ALAs - aren't converted efficiently by the human body into the optimal forms. But Monsanto Co., the Creve Coeur-based biotechnology giant, believes it has an answer: A soybean oil genetically engineered to produce a type of fatty acid, called stearidonic acid, or SDA, that can be converted into the same form found in fish oil and best utilized by the body.

The Biotech Industry Has Trotted Out a Flimsy Lie to Avoid Labeling the Food We Buy as Genetically Modified - The biotech industry, led by Monsanto, will soon descend on the state of Washington to try their best to defeat I-522, a citizens’ ballot initiative to require mandatory labeling of foods that contain genetically engineered (GE) ingredients. Voters should prepare themselves for an onslaught of discredited talking points, nonsensical red herrings, and outright lies designed to convince voters that they shouldn’t have the right to know what’s in the food they eat.  Topping the biotech industry’s propaganda playlist will no doubt be this old familiar tune: that requiring retailers to verify non-GMO ingredients in order to label them will be burdensome and costly, and the additional cost will be passed on to consumers who are already struggling to feed their families.  Playing to consumers’ fears of higher food costs makes good strategic sense, especially in tough economic times. But the argument doesn’t hold water, say food manufacturers and retailers who already have systems in place for verifying non-GMO, as well as rBGH-free, trans fat-free, country of origin and fair trade. The system involves using chain-of-custody, legally binding affidavits, not expensive testing. 

Modeling Agents Recruit Outside Swedish Eating Disorder Clinic  - A well-known clinic in Sweden has managed to attract a following that stands outside the entrance, approaches patients, and ... tries to recruit them to be models? Indeed, while the United States struggles to keep women's health clinic patients safe from vitriolic anti-abortion protesters, Sweden's issue is based at the 1,700-bed Stockholm Center for Eating Disorders, the largest clinic of its kind in the country. Agents have been known to stand outside the clinic and approach teenage patients, offering the sometimes horrifically ill girls work as models because of their small size. These instances provide a shocking look into how shallow the modeling world is capable of being, caring only about young women's physical attributes and not their health.

Giant Snails Advance On Florida - South Florida is battling a growing infestation of the giant African land snail. The snail is considered one of the most destructive invasive species, feeding voraciously on more than 500 plant species. They can also eat through plaster walls, which provides the calcium content they need for their shells. Experts recently gathered at a science meeting in Gainesville to seek the best way of eradicating the snails. According to Denise Feiber, a spokeswoman for the Florida Department of Agriculture and Consumer Services, more than 1,000 of the snails are being caught each week in Miami-Dade county and 117,000 in total since the first snail was spotted by a homeowner in September 2011. Residents could soon begin encountering them more often, crunching them underfoot as the snails emerge from underground hibernation at the start of the state's rainy season in seven weeks, Ms Feiber told the Reuters news agency. She added that the snails attack "pretty much anything that's in their path and green".

Pa. climate change: Less winter chill could mean trouble for state's apple crop - Could one of life’s simple pleasures, the apple, be endangered by changes in our climate? It could, according to some experts, who maintain that apples, like other fruit, depend heavily on a certain amount of what is called “winter chill,” before they bloom in the spring. “If there’s not enough winter chill that happens in a certain year there can be anywhere from a decreased production of fruit to a complete crop failure,” says Evan Girvetz, the senior scientist on climate change for the non-profit Nature Conservancy. If that were to happen, it would be troubling news for the state’s apple industry, which according to the Pennsylvania Apple Marketing Program is the fourth biggest apple producer in the country.

Climate change feared to create global food crisis - When Tunisian street vendor Mohamed Bouazizi set himself on fire Dec. 17, 2010, it was in protest at heavy-handed treatment and harassment in his province. But a host of new studies suggest that a major factor in the subsequent uprisings that became known as the Arab Spring was food insecurity. Drought, rocketing bread prices, food and water shortages have all blighted parts of the Middle East. Analysts at the Center for American Progress in Washington say a combination of food shortages and other environmental factors are exacerbating the already tense politics of the region. An unpublished U.S. government study indicates that the world needs to prepare for much more of the same as food prices spiral and long-standing agricultural practices are disrupted by climate change. "We should expect much more political destabilization of countries as it bites," said Richard Choularton, a policy officer in the U.N. World Food Program's climate change office. "What is different now from 20 years ago is that far more people are living in places with a higher climatic risk: 650 million people now live in arid or semiarid areas where floods and droughts and price shocks are expected to have the most impact.

Japanese Scientist Blames China for Yakushima’s Dying Trees - A mysterious pestilence has befallen this island’s primeval forests, leaving behind the bleached, skeletal remains of dead trees that now dot the dark green mountainsides. Osamu Nagafuchi, an environmental engineer with a passion for the island and its rugged terrain, believes he knows the culprit: airborne pollutants from smog-belching China, hundreds of miles upwind.  Japan has begun taking his warnings more seriously, as the nation has been gripped by a national health scare over rising levels of potentially dangerous airborne particles that have swept into other parts of Japan and that many now believe were produced by China, its huge and rapidly industrializing neighbor. These fears have reached a new level recently as China itself has issued more public warnings about the growing health risks from its cities’ gray, soupy air. . Japanese officials still dispute whether airborne pollutants are responsible for killing the pine trees. But they and other scientists have at least begun to view Yakushima, which is far from Japan’s own industrial centers, as a pristine laboratory for understanding how China’s growing environmental problems could be affecting its neighbors. Many islanders are already believers, and they worry that the pollutants may be threatening their health.

Depleted North Atlantic cod stocks are unlikely to recover, according to study - The Weather Network: A new study suggests the recovery of overexploited fish populations has been slower than expected and many depleted stocks may never bounce back. The study, appearing today in the journal Science, was compiled by researchers who examined 153 fish and invertebrate stocks from around the world. The researchers say most fish species are tough enough to recover within a decade if swift action is taken to ease pressure on depleted stocks. But when you don't act rapidly, not only does it result in a much longer recovery time, it's not a sure bet that a recovery will even happen.

Federal officials leery of ‘increasingly warm’ coastal waters near Northeast U.S. - From North Carolina to Maine, the waters have been unusually warm lately.This is according to the National Oceanic and Atmospheric Administration's Northeast Fisheries Science Center, which issued an advisory today noting that sea surface temperatures in the Northeast Shelf Large Marine Ecosystem during the second half of 2012 were the highest recorded in 150 years.  According to the advisory, sea surface temperatures in this region, which extends from Cape Hatteras to the Gulf of Maine and outward to the boundary of the continental shelf, increased dramatically to reach a record 57.2 degrees Fahrenheit, beating a previous record high in 1951. The average temperature over the past three decades has been typically lower than 54.3 degrees Fahrenheit.  The temperatures were recorded via satellite and ship-board measurements. Historical measurements, based on ship-board thermometers, date back to 1854. According to NOAA, the warming was the greatest increase on record, and one of only five instances when the temperature has changed by more than 1.8 degrees Fahrenheit. These drastic changes have not been noted elsewhere in the ocean basin, although in recent years global sea surface temperatures have been the highest on record.

Midwestern river cities brace for floodwaters - Clarksville, Mo., was among many towns under siege across the Midwest after days of heavy rain sent river levels surging and caused flash flooding that's blamed in at least two deaths and possibly a third. By Saturday, the sudden floods had stopped, but river flooding was getting worse, both on the Mississippi and on dozens of smaller rivers in Iowa, Illinois, Indiana, Wisconsin, Michigan and Missouri. Levees were threatened, and hundreds of people had been evacuated from their homes. The National Weather Service predicted what it characterizes as "major" flooding on the Mississippi from the Quad Cities through just north of St. Louis by this weekend, with similar projections further south into early next week.

Mississippi Barges Slowed by Flooding Following Record Drought - Barge traffic on a stretch of the Mississippi River, slowed early this year by shallow water during a drought, now is being hindered by flooding, according to the U.S. Army Corps of Engineers. The Corps on April 20 closed locks in Clarksville and Winfield, Missouri, both north of St. Louis, in anticipation of high water, the Army said yesterday in a statement. The towns are upstream from the confluence of the Illinois River and Mississippi, America’s busiest waterway. Heavy rains have led the Corps to close seven locks further north on the river, blocking barge and other traffic. “Barge traffic isn’t going to move north of the Illinois until the locks reopen,” .Low water levels on river in December and January, caused by the worst drought since the 1930s, forced barge companies to idle boats until contractors cleared rock obstructions in the river in southern Illinois. Carriers transporting grain, coal, fertilizer and crude oil now are being slowed by too much water. The Corps shut the locks, used to help boats navigate past impediments, to prevent components of the facilities from being damaged during a flood, Petersen said.

Let’s Not Talk About Climate Change - The tide is rising fast on Louisiana. A report late last year by the National Oceanic and Atmospheric Administration concluded that along the Gulf Coast, the sea level is surging three times faster than the global average—and studies have for years singled out New Orleans as the U.S. city most vulnerable to destruction from the effects of climate change. “Louisiana might just be the most vulnerable state in the country, in terms of climate change,” said Barry Keim, the state’s official climatologist. It faces a double whammy: The sea level is rising above miles of slowly sinking and eroding wetlands. That combination means, Keim said, “relative sea-level rise here is off the charts compared to anywhere else.” Climate change presents Louisiana with an existential crisis—and its lawmakers with a wrenching political problem. The Pelican State is at the nexus of two profoundly conflicting forces: fossil fuels and global warming. Oil is the economic lifeblood of the economy in this state at the heart of the nation’s offshore oil- and gas-drilling industry, home to thousands of jobs at refineries, ports, construction firms, and other industries that together account for up to 20 percent of Louisiana’s jobs. That’s why many of its lawmakers don’t even acknowledge the science of climate change, and why even those who do are opposed to tough regulations on fossil-fuel pollution. “It’s just a shibboleth that you have to protect and shill for the industry—that’s the key to being seen as taking care of Louisiana,”

Global Ponzi Scheme: We’re Taking $7.3 Trillion A Year In Natural Capital From Our Children Without Paying For It - Last week, David Roberts over at Grist flagged a report carried out by the environmental consultant group Trucost, at the behest of The Economics of Ecosystems and Biodiversity over at the United Nations. The idea behind the report was simple. Tally up all the world’s natural capital — land, water, atmosphere, etc. — that doesn’t currently have a dollar value attached to it, and figure out the price. But the next step was where it got interesting. Figure how much of that natural capital is being consumed, depleted or degraded without the responsible party paying the cost for that use. The number the study hit on was a staggering $7.3 trillion in 2009 — about 13 percent of global economic output for that year.In a theoretically perfect market, the price of consuming, degrading or depleting a resource would be paid by the party responsible.But getting the theory of markets to map onto the real world is difficult. Dumping trash on a neighbor’s lawn is technically free, so a lot of us should be doing it more. But because we’ve built societies in which our neighbor can sue us, or the cops can fine us, we’re forced to internalize that cost. Lots of costs can only be internalized through smart institutional design and government policy, rather than by leaving the markets free to do their market thing.

Sudden Stratospheric Warming: Causes & Effects - Arctic Sea Ice: I first became interested in SSW's a few years back when it became increasingly apparent to me the extreme effects that SSW's can have on Northern Hemisphere winter weather. It wasn't just their extreme effects that interested me, but rather, the fact that their specific causes were still a bit of a mystery-- and I've always loved a good mystery. Isn't that what is (or should be) at the heart and soul of any good scientist? In this post I reveal what I think is an original synthesis that gives the full picture of some of the main causes and effects of Northern Hemisphere Sudden Stratospheric Warming events based on my readings of many other papers along with hours of my own original research. For research material I relied heavily on the use of the amazing amount of satellite derived reanalysis data as well as ground based observations. I am heavily indebted to organizations such as NASA, NCAR and NOAA for the data they have made available at my fingertips through the web.

Death Spiral Video: Arctic Sea Ice Minimum Volume 1979-2012 - Many experts now say that if recent volume trends continue we will see a "near ice-free Arctic in summer" within a decade. Creative tech guru Andy Lee Robinson shows why in a wondrous new video - set to music he wrote and played:

Antarctic Methane Could Escape, Worsen Warming - Swamp gas trapped under miles of Antarctic ice, a chemical souvenir of that continent's warmer days, may someday escape to warm the planet again, an international team of researchers report in Nature this week. The researchers suggest that microbes isolated from the rest of the world since the ice closed over them, some 35 million years ago, have kept busy digesting organic matter and making methane-a much more effective greenhouse gas than carbon dioxide. If global warming causes the ice sheets to retreat in the coming decades or centuries, the researchers warn, some of the methane could belch into the atmosphere, amplifying the warming. Jemma Wadham of the University of Bristol, England, and her colleagues have not actually detected methane-producing microbes under the Antarctic ice sheet. They haven't detected methane either-though they are participating in drilling projects that could do so later this year. Yet a top journal has now published their analysis of the potential climate impact of those undiscovered microbes. That says a lot about the paradigm shift in microbiology in recent decades. 

EPA proposes water pollution rules for power plants - The Environmental Protection Agency (EPA) proposed new regulations Friday that aim to reduce water pollution near nuclear and fossil fuel-fired power plants. The rules would require power plants to install pollution control technology and implement waste-treatment procedures in a phased approach between 2017 and 2022. The department said fewer than half of the 500 coal-fired power plants affected by the rules would incur costs. "Reducing the pollution of our waters through effective but flexible controls such as we are proposing today is a win-win for our public health and our economic vitality. We look forward to hearing from all stakeholders on the best way forward," EPA Acting Administrator Bob Perciasepe said in a Friday statement. The proposed rules will go through a 60-day public comment period. The EPA must finalize the rules by May 22, 2014. The measures will likely attract challenges from industry and Republicans who have opposed regulations affecting coal-fired power plants issued through the Clean Water Act and Clean Air Act.

Obama administration seeks to sell off Tennessee Valley Authority -  Today, the TVA provides 9 million people with electricity in parts of seven southeastern states, spanning 80,000 square miles. It owns 29 hydropower, 11 coal and 3 nuclear plants, and employs 13,600 people. With 38,040 megawatts of output, it is currently the third largest power producer in the U.S.  At the time of the TVA's creation, the Tennessee Valley was in a state of environmental crisis. The soil had been eroded and depleted from over-farming, and crop yields had fallen sharply. The TVA project built dams, harnessing the valley's rivers to control flooding and provide electricity, and developed fertilizers, while teaching farmers how to increase crop yields. The TVA is funded by power sales and bond financing, and it does not use taxpayer funds. It is currently $25.5 billion in debt and may exceed its debt cap of $30 billion, which the Obama administration is using as an excuse to junk the program. The potential sale may yield as much as $35 billion in cash after paying off bondholders

California Governor commits to collaborate on clean energy with China's largest province: The US state of California and Chinese province of Guangdong have signed an accord that aims to help both regions reach their low carbon development goals, one of many positive results from Governor Jerry Brown's visit to China this week. The agreement states that local officials from California and Guangdong will coordinate efforts to cut pollution and spur low carbon growth. Home to over 109 million people, Guangdong is China's most populous province and the country's manufacturing hub. It is also one of China's leading regions for climate change mitigation efforts, including a carbon-trading market pilot which is a country-first experience shared with California.

Chinese Auto Market Shifts Toward Larger Cars -Gone are the days when buyers in China, the world’s largest car market since 2009, mostly purchased fuel-sipping compacts and subcompacts. Their shift toward larger and ever-more-numerous vehicles is not only driving up China’s oil import bill and contributing to pollution but is also fattening automakers’ profits — and manufacturers made clear over the weekend that they plan to infuse the market with large vehicles. General Motors announced that it would introduce nine new or restyled S.U.V. models in China in the next five years, and disclosed that it would build four more factories and add 6,000 jobs to accommodate its ever-rising sales here. A Chrysler executive said that his company would start making Jeep Cherokees in Changsha in southern China by the end of next year. And China’s domestic carmakers showed a wide range of S.U.V.’s, the heftier the better. S.U.V. sales jumped 49 percent in March from a year ago as new models poured into the market. Overall auto sales in China climbed 13 percent in March and are on track for almost 21 million vehicles sold this year. By comparison, the latest forecasts in the United States this year are for a little more than 15 million vehicles. Both totals include sales of pickup trucks and other light commercial vehicles.

Inside a mile-deep open-pit copper mine after a catastrophic landslide - Bingham is an open-pit mine—a gigantic hole in the ground. The landslide, in effect, was the collapse of one of the pit walls. (For scale, the pit is a bit less than three miles wide and a bit more than three-quarters of a mile deep, and as you can see, the collapse stretches halfway across it and all the way from top to bottom.) Kennecott Utah Copper, the subsidiary of the mining giant Rio Tinto which runs Bingham Canyon, has a spectacular Flickr set here. Check ’em out.  Approximately 165 million tons of rock shifted, causing a highly localized earthquake measuring 5.1 Richter. It damaged or destroyed roads, power lines, and other infrastructure, and a number of the giant shovels and dump trucks that move ore and waste rock out of the pit. The lost equipment was worth tens of millions of dollars, but much more significant is the fact that the landslide has shut Bingham Canyon down for an as-yet undetermined length of time. Much more significant because Bingham Canyon is not just another copper mine. Physically, it is the largest in the world, and it is among the most productive. Each year it supplies about 17 percent of U.S. copper consumption and 1 percent of the world’s. When a cog that big loses its teeth, the whole global economic machine goes clunk.

Many coal sludge impoundments have weak walls, federal study says - Many of the man-made ponds for storing toxic sludge from coal mining operations have dangerously weak walls because of poor construction methods, according to the synopsis of a study for the Office of Surface Mining Reclamation and Enforcement obtained by The Washington Post.  Tests of the density of these impoundment walls showed flaws at all seven sites surveyed in West Virginia, with only 16 field tests meeting the standards out of 73 conducted, the 2011 report says.The Interior Department’s mining agency ordered the survey — which is in draft form and has not been publicly released — after its engineers noticed that companies were using coarse refuse that will not stay compacted except “within a narrow range” of moisture conditions, according to the synopsis. The conditions were not monitored and bulldozers were used to compact the soil, a task for which they are poorly suited, it added.

Federal court backs EPA regulation of mountaintop removal - A federal appeals court unanimously backed the Environmental Protection Agency’s authority to regulate a controversial form of coal mining called mountaintop removal, overturning a lower court decision that barred the agency from stopping a large coal mine in West Virginia. The ruling by the D.C. Circuit Court of Appeals is likely to set off considerable political backlash from industry, some utilities and their congressional allies who have long contended that the EPA’s regulatory efforts are killing the coal sector. In the opinion, Judge Karen Henderson wrote that the Clean Water Act “does indeed clearly and unambiguously give EPA the power to act” to halt the West Virginia Spruce Mine No. 1 project, the biggest mountaintop removal mine ever planned in the state. However, the appeals court did not rule on another key question, whether the EPA’s action was “arbitrary and capricious.” It instructed the district court to consider the second question, meaning that the lawsuit could continue indefinitely. Mountaintop mining involves slicing away a mountain through controlled explosions in order to expose coal seams. The dispute before the federal appeals court centered on the EPA’s decision to rescind a permit that Arch Coal needed to build Spruce Mine No. 1. Under the Clean Water Act, the Army Corps of Engineers issues permits to mining companies so that they can dispose of millions of tons of rubble left over from blasting mountaintops by depositing it in nearby ravines, in the process burying streams. Already, mountaintop mining has buried thousands of miles of streams in Appalachia.

Court hands EPA a victory in fight against mountaintop-removal mining - Score one for the EPA — and everyone else who doesn’t like the idea of a coal company blasting the tops off mountains and dumping the waste into streams. From The Wall Street Journal: The Environmental Protection Agency won an important legal victory Tuesday in a long-brewing battle with Arch Coal Inc. over a coal mining project in West Virginia known as Spruce No. 1. The case tests whether the EPA can revoke a permit for the controversial practice known as mountaintop mining after another federal agency, the U.S. Army Corps of Engineers, has already approved it. The D.C. Circuit Court of Appeals ruled that the EPA can indeed revoke such a permit, acting under the authority of the Clean Water Act. (Turns out that dumping tons of dirt and rock into streams does not promote clean water.) The ruling is “is likely to set off considerable political backlash from industry, some utilities and their congressional allies who have long contended that the EPA’s regulatory efforts are killing the coal sector,” reports the L.A. Times.

In Huge Win On Mountaintop Removal With Big Implications, Court Upholds EPA Authority To Protect Clean Water -  An important court decision yesterday on mountaintop removal mining for coal has significant ramifications for future decisions. Yesterday’s ruling by the D.C. Circuit Court of Appeals affirms the authority of the Environmental Protection Agency to protect clean water from coal mine and other destructive waste. Naturally, the industry’s backers in Congress are already threatening legislative action to take away the government’s authority to ensure clean water.  At issue is a section of the Clean Water Act that allows the EPA to veto “dredge and fill” permits that let mining companies dispose of waste in streams and bodies of water. The permits are issued by the Army Corps of Engineers, but EPA has the authority to set certain areas off limits—effectively vetoing the permits—if it determines that dumping the waste will “have unacceptable adverse impacts” on recreation, wildlife, and the like. But questions remained as to when EPA could veto these permits. In the particular case of the Spruce No. 1 mine, the EPA vetoed a permit to allow the mining company (a subsidiary of corporate giant Arch Coal) to dispose of waste from its mountaintop removal operation into three streams and their tributaries after the Army Corps had granted the permit.

Why the Peak Resource Crowd Is Wrong - Legendary investor Jeremy Grantham says we're headed for "a disaster of biblical proportions" because the earth has only enough resources to support a population of 1.5 billion-- just a fraction of the 7 billion already here on earth and growing. Computer scientist and former Microsoft executive Ramez Naam agrees that the world's population now is using too many resources, but he's confident that we can not only remedy the situation but enhance our standard of living through ingenuity and innovation. " "It's possible for humanity to live in higher numbers than today in far greater wealth, comfort and prosperity with far less destructive impact on the planet than we have today...We need to act but if we do act there's a bright future ahead." So on this Earth Day we look at what can be to save out planet? Here's the basic problem, as Naam sees it: “...the world’s population right now is using up 1.5 planets’ worth of natural resources. And if everyone on Earth lived like an American, we’d be using up 4.4 planets’ worth of natural resources…This doesn’t look like a situation that can be maintained indefinitely.” The key to reversing that situation, says Naam, is to replace nonrenewable resources like coal and oil with renewable resources like solar power.

Reforming energy subsidies globally - Energy-subsidy reform is notoriously difficult. This column argues that the environmental and social payoff from a concerted worldwide effort to replace these subsidies with better targeted measures would be substantial. Subsidy reform is an especially attractive option for countries under pressure to bring public debt to more prudent levels. The success of reform in several countries shows that the challenge is not insurmountable.

Ohio Manufacturers Fight To Keep The Energy Efficiency Standards The GOP Is Trying To Weaken - Ohio is one of many states trying to scale back energy efficiency standards set for utility providers — even though these standards have lowered costs and reduced energy consumption by customers, according to the Ohio Manufacturers’ Association. OMA, the state’s largest manufacturing trade group, is fighting against Republican-led efforts to weaken the laws that require utilities providers help customers use less electricity. The laws set a deadline of 2025 for electric utilities to help their customers reduce consumption by 22 percent. All but one state legislator approved the bill in 2008. The effects were dramatic and immediate; from 2008 to 2009 alone, Ohio electric utilities saved 530,062 megawatt-hours, ten times the prior year’s savings. First Energy Corp, Ohio’s influential utility company, is seeking to freeze the efficiency standards at 2012 levels, which mandate reductions of .8 percent. The energy giant tried to rally its larger industrial customers against the efficiency standards, claiming they were hurting businesses. While First Energy Corp’s profits have certainly dropped, industrial manufacturers and Ohio consumers alike are enjoying the lower utility bills resulting from greater energy efficiency.

U.S. States Turn Against Renewable Energy as Gas Plunges -  More than half the U.S. states with laws requiring utilities to buy renewable energy are considering ways to pare back those mandates after a plunge in natural gas prices brought on by technology that boosted supply. Sixteen of the 29 states with renewable portfolio standards are considering legislation that would reduce the need for wind and solar power, according to researchers backed by the U.S. Energy Department. North Carolina lawmakers may be among the first to move, followed by Colorado and Connecticut. The efforts could benefit U.S. utilities such as Duke Energy Corp (DUK). and PG&E Corp (PCG). as well as Exxon Mobil Corp (XOM)., the biggest U.S. oil producer, and Peabody Energy Corp (BTU)., the largest U.S. coal mining company. Those companies contributed to at least one of the lobby groups pushing the change, according to the Center for Media and Democracy, a Madison, Wisconsin-based non-profit group. It would hurt wind turbine maker Vestas Wind Systems A/S (VWS) and First Solar Inc (FSLR)., which develops solar farms. “We’re opposed to these mandates, and 2013 will be the most active year ever in terms of efforts to repeal them,” said Todd Wynn, task force director for energy of the American Legislative Exchange Council, or Alec, a lobby group pushing for the change. “Natural gas is a clean fuel, and regulators and policy makers are seeing how it’s much more affordable than renewable energy.”

US CO2 emissions per capita in 2012 were the lowest since 1964. Main reason? Shale gas -  It’s been widely reported here and elsewhere that CO2 emissions in the US have been falling pretty dramatically over the last five years, thanks in large part to the substitution of natural gas for coal to generate electricity in the US. Natural gas is much more environmentally friendly than coal, which emits about twice as much CO2 as gas when used for electricity generation. Last year, CO2 emissions in the US fell to an 18-year low, the lowest level since 1994, and C02 emissions from coal fell to a 26-year low, the lowest since 1986. Further, as the WSJ reported this week (“Rise in U.S. Gas Production Fuels Unexpected Plunge in Emissions“) the US now leads the world in reducing CO2 emissions thanks to the shale revolution. At the same time that America is using less coal and more shale gas and reducing C02 emissions, Europe and Asia are becoming more coal-dependent for electricity generation, and increasing C02 emissions.

A Mother Fights Toxic Trespassers - Moyers & Company April 19, 2013 -  Biologist, mother and activist Sandra Steingraber discusses her fight against fracking and the toxic trespassers she says are contaminating our air, water, and food, and threatening our children’s health.

Fracking the Future - How Unconventional Gas Threatens our Water, Health and Climate - Table of Contents:

Environmentalists fear weaker fracking rule - Environmentalists fear the oil and gas industry has the Obama administration’s ear as the government prepares to release a new draft rule to govern fracking on federal lands. Though the Interior Department has yet to release an official draft, each subsequent leaked version contains less of what environmental groups want, the activists say, taking the rule further away from its potential of setting strict standards for the industry. “What we see is every step of the way, these rules are getting weaker,” said Fran Hunt, senior Washington representative for the Sierra Club’s Beyond Natural Gas campaign. The Interior Department declined Friday to comment on the environmental groups’ complaints.

What If We Never Run Out of Oil? - Japan’s methane-hydrate program began in 1995. Its scientists quickly focused on the Nankai Trough, about 200 miles southwest of Tokyo, an undersea earthquake zone where two pieces of the Earth’s crust jostle each other. Step by step, year by year, a state-owned enterprise now called the Japan Oil, Gas, and Metals National Corporation (JOGMEC) dug test wells, made measurements, and obtained samples of the hydrate deposits: 130-foot layers of sand and silt, loosely held together by methane-rich ice. The work was careful, slow, orderly, painstakingly analytical—the kind of process that seems intended to snuff out excited newspaper headlines. But it progressed with the same remorselessness that in the 1960s and ’70s had transformed offshore oil wells from Waterworld-style exoticisms to mainstays of the world economy.In January, 18 years after the Japanese program began, the Chikyu left the Port of Shimizu, midway up the main island’s eastern coastline, to begin a “production” test—an attempt to harvest usefully large volumes of gas, rather than laboratory samples. Many questions remained to be answered, the project director, Koji Yamamoto, told me before the launch. JOGMEC hadn’t figured out the best way to mine hydrate, or how to ship the resultant natural gas to shore. Costs needed to be brought down. “It will not be ready for 10 years,” Yamamoto said. “But I believe it will be ready.” What would happen then, he allowed, would be “interesting.”

EPA releases harsh review of Keystone XL environmental report -The Environmental Protection Agency issued a sharply critical assessment of the State Department’s recent environmental impact review of the controversial Keystone XL pipeline, certain to complicate efforts to win approval for the $7-billion project. In a letter to top State Department officials overseeing the permit process for the pipeline, the EPA lays out detailed objections regarding greenhouse gas emissions related to the project, pipeline safety and alternative routes. Based on its analysis, the EPA said it had “Environmental Objections” to the State Department’s environmental assessment due to “insufficient information. ”  A State Department spokesman could not immediately be reached for comment. The State Department assessment concluded that Keystone XL would have a minimal impact on the environment. But the EPA analysis appears to challenge that conclusion.

EPA Slams State’s Draft Impact Statement For Keystone XL -  On the proposed Keystone XL pipeline, EPA rated the adequacy of the State Department’s Draft Environmental Impact Statement (DEIS) as having “Insufficient Information.”EPA’s Cynthia Giles, the Assistant Administrator for the Office of Enforcement, has submitted the agency’s public comment. They could have rated the adequacy of the impact statement three different ways: “Adequate,” “Insufficient Information,” or “Inadequate.” They rated it “Insufficient Information,” which means that they do not know enough to fully assess the environmental impacts of a tar sands pipeline traversing the continent.Here are the reasons EPA said that State’s DEIS needs more work:

  • Increased carbon pollution: EPA acknowledged the DEIS’s attempt to do a life-cycle analysis of the pipeline’s emissions, which found that emissions from oil sands crude would be 81 percent higher than regular crude, or an incremental increase of 18.7 million metric tons of CO2 per year. EPA noted that “If GHG intensity of oil sands crude is not reduced, over a 50 year period the additional CO2 from oil sands crude transported by the pipeline could be as much as 935 million metric tons.” These statistics are alarming, yet EPA’s analysis did not stop there.
  • Not inevitable: Like other experts, EPA doubted State’s assurance that this tar sands oil would come out of the ground with the Keystone pipeline or without it:

How much does EPA’s objection to Keystone XL matter? A lot. - How much does it matter that the Environmental Protection Agency has officially questioned aspects of the State Department’s draft environmental review of the Keystone XL pipeline proposal? A lot. The State Department is the agency in charge of deciding whether the administration should give a presidential permit to TransCanada to build a pipeline to transport heavy crude oil 1,179 miles between Hardisty, Alberta, and Steele City, Okla. (The Obama administration has already given all the necessary federal permits to construct the 485-mile southern leg of the pipeline known as the Gulf Coast Project between Steele City and Port Arthur, Tex., which is two-thirds built.) But other agencies can weigh in on the project, and force President Obama to serve as the final referee. At the end of February the State Department released a draft environmental impact assessment of the project, suggesting that the project would have little impact on climate change because the oil it was shipping would be extracted anyway even if the pipeline wasn’t built.But in a letter Monday, the EPA suggested the draft assessment may have underestimated the climate impact of the pipeline, which could transport as much as 830,000 barrels of diluted bitumen crude to refineries in Texas.

The Source for Keystone: Tar Sands Production -The above is an update on Canadian tar sands production, monthly from 1985 through Jan 2013.  (The location of the data is described here).  The blue is upgraded synthetic crude, and the red is straight bitumen (for use in roads, etc).  The synthetic crude is the stuff that will be filling the Keystone pipeline if it were to be approved.  Since global liquid fuel production is about 90mbd, this represents a shade over 2% of the world total. If we look at the growth rates (here the year-over-year change in the trailing twelve month average), we get this: The above is an update on Canadian tar sands production, monthly from 1985 through Jan 2013.  (The location of the data is described here).  The blue is upgraded synthetic crude, and the red is straight bitumen (for use in roads, etc).  The synthetic crude is the stuff that will be filling the Keystone pipeline if it were to be approved.  Since global liquid fuel production is about 90mbd, this represents a shade over 2% of the world total. If we look at the growth rates (here the year-over-year change in the trailing twelve month average), we get this: Growth has stabilized at around 10% p.a.  That gives a doubling time of about seven years.  If that growth were to continue, Canada would reach 4mbd by about 2020, and 8mbd before 2030 - although the latter is perhaps implausible given that it will be harder to sustain growth at these high levels and this would likely require a lot more conversion of bitumen to oil (we probably won't need that much bitumen). This shows total production to 2025 if it continued to grow at the same rate as the last decade:

After 70 quiet years, Portland pipeline thrust into fierce energy, environmental debate -   Environmentalists are bitterly fighting a plan to reverse the flow of the pipeline and send Canadian crude surging to offloading piers on Casco Bay. This would provide Canada — whose Alberta-centered oil industry is suffering from too much supply and too little access to overseas markets — its first direct pipeline to a year-round, deep-water port. The hullabaloo has pushed the low-key pipeline operator into a broader, angrier North American controversy over several proposed pipelines to transport oil extracted from western Canada’s tar sands. Perhaps best known is the battle over the Keystone XL Pipeline, which would stretch nearly 1,200 miles from Alberta across the American Heartland to the Gulf of Mexico. From an engineering vantage, the Portland project would be small potatoes. No big construction is envisioned. New pumps would be installed at company facilities in Montreal, a couple burn-off vents hoisted in South Portland. But opponents see a ploy to make northern New England the first express conduit for what is viewed as the most polluting form of crude, opening the door to increased use and environmentally damaging production of the fuel. Detractors say carbon dioxide and other gases emitted during extraction and processing of Alberta’s ultra-heavy crude known as bitumen contribute to global warming. Moreover, they say, tar sands oil is inherently more toxic than other crudes — and spills would do greater harm.

Alberta exploring at least two oil pipeline projects to North - Hemmed in by unco-operative jurisdictions to the south, west and east, Alberta is looking upward, exploring at least two new northern projects that would help the province get its oil to tidewater, making it available for export to overseas markets. The Alberta government says it is in “serious talks” with the Northwest Territories to build an oil pipeline connecting the oil sands to the northern hamlet of Tuktoyaktuk, near the Beaufort Sea. “We have been approached by the government of the Northwest Territories and we are engaged in a conversation with them because they have immense resources as well and are about to take responsibility for their own resources,” Ken Hughes, Alberta’s Minister of Energy told the National Post. Alberta has hired Canatec Associates International to assess the project’s feasibility, at a cost of $50,000. The Calgary-based consultancy, which specializes in the offshore and Arctic petroleum business, is expected to submit its findings before the end of the year.

"Peak Rail" – Has The Crude Shipping Train Left The Station? - In Alberta Canada, an estimated 120,000 barrels of oil per day are shipped out by train to the U.S. east coast and Gulf coast region. By the end of the year - when several terminals are completed - that number could reach 200,000 barrels a day. Despite rail costs doubling pipeline tariffs, the logistics have often been worth the time for producers - those that have been able to get a better price railing it past the mid-continent refineries all the way to the US East Coast and Gulf Coast. But just as Canadian rail use is set to soar again, say analysts - rail may no longer be economic. In fact, rail could be a victim of its own success. “In May or June, producers that have traditional access to pipe may see better netbacks than rail,” one oil and gas marketer told me last week. Netback is the industry word for profit per barrel.

New fossil fuel frontiers pose 'catastrophic' threat to global recovery -: Soaring risks around new fossil fuel frontiers – shale gas, deepwater exploration and the Arctic – have the potential to blow the global economic recovery off course, according to a report. Energy companies need to adopt more sophisticated risk management strategies to take account of relatively low-likelihood but potentially "catastrophic" disasters, says the paper from the global insurance broker Marsh. The warning comes amid a heated debate around environmental and other dangers associated with shale and other unconventional reserves. The industry says they are needed to meet a near-40% increase in energy demand forecast by 2030. The so-called shale gas revolution in the US has led to a dramatic fall in American energy prices, which has boosted the competitiveness of domestic manufacturers. "The global energy sector is driving struggling countries out of the economic mire, while sating surging demand for power in China, the Middle East and North Africa," said Andrew George, chairman of Marsh's global energy business.

Exxon Earns $9.5 Billion Q1 Profit One Month After Arkansas Oil Spill That It Pays No Taxes To Help Clean Up -  One month after dumping 500,000 gallons of tar sands crude oil from a ruptured pipeline in Arkansas, the most valuable and profitable corporation in the world ExxonMobil announced higher first quarter profits. Exxon earned $9.5 billion in the first quarter, compared to $9.45 billion last year, and Exxon’s total oil and natural gas production declined 3.5 percent.Meanwhile, Exxon is exempt from paying taxes toward the oil spill liability fund that helps clean up spills like in Arkansas, where wildlife have been killed and covered by oil. The 1980 law exemption applies to diluted bitumen so companies escape paying the 8-cents-per-barrel fee to the fund that helps clean up hundreds of spills each year. At the federal level, Exxon’s tax rate comes to only 13 percent.

What BP Doesn’t Want You to Know About the 2010 Gulf Spill - Like hundreds, possibly thousands, of workers on the cleanup, Griffin soon fell ill with a cluster of excruciating, bizarre, grotesque ailments. By July, unstoppable muscle spasms were twisting her hands into immovable claws. In August, she began losing her short-term memory. After cooking professionally for 10 years, she couldn’t remember the recipe for vegetable soup; one morning, she got in the car to go to work, only to discover she hadn’t put on pants. The right side, but only the right side, of her body “started acting crazy. It felt like the nerves were coming out of my skin. It was so painful. My right leg swelled—my ankle would get as wide as my calf—and my skin got incredibly itchy.”“These are the same symptoms experienced by soldiers who returned from the Persian Gulf War with Gulf War syndrome,” says Dr. Michael Robichaux, a Louisiana physician and former state senator, who treated Griffin and 113 other patients with similar complaints. As a general practitioner, Robichaux says he had “never seen this grouping of symptoms together: skin problems, neurological impairments, plus pulmonary problems.”

Why the Rush to Return to the Gulf of Mexico? - British energy company BP announced that its mega Mad Dog project in the Gulf of Mexico wasn't necessarily as attractive as once thought. Oil companies like BP are looking to get things moving again three years after the tragedy tied to the Deepwater Horizon oil rig. Members of the U.S. House of Representatives last week proposed legislation that would open up more areas for drillers offshore. Lawmakers say getting more work done in the Gulf of Mexico would ensure energy independence. The oil industry says U.S. oil production is setting records, however, so it's not yet clear what, if any, interest there is to return so quickly back to the Gulf of Mexico. BP announced it was reviewing a decision to move ahead with its multibillion dollar Mad Dog development in the Gulf of Mexico. The company started production in the field in 2005 with a facility designed to process 80,000 barrels of oil and 60,000 cubic feet of natural gas per day. The entire field is estimated to hold 4 billion barrels of oil equivalent. BP said Friday it wasn't necessarily keen to move ahead with the second phase of development there, however."The current development plan for Mad Dog Phase 2 is not as attractive as previously modeled, due largely to market conditions and industry inflation," the company said in a statement.

Norway opens up arctic waters to oil exploration -- Norway has taken a major step towards opening up an environmentally sensitive Arctic area to oil and gas exploration. Exploration in the waters around the Lofoten islands just above the Arctic circle is becoming one of the most contentious issues for parliamentary elections in September, but yesterday the ruling Labour Party gave the go-ahead for an impact study. The picturesque area had been off limits because it is home to the world's richest cod stocks, with environmental groups and the tourism industry opposed to any development. The Labour party voted for the study, a precursor to any exploration, but also said it would take another vote in 2015, before actual drilling could begin. Oil is the Norwegian economy's lifeblood – the nation is the world's seventh-biggest oil exporter and western Europe's biggest gas supplier. Its sprawling offshore energy sector continuously needs new areas to explore to halt the decline in production and energy firms have argued that they should be allowed to investigate the Lofoten islands.

Latest Saudi Arabian Oil Supply - I'm resolved to follow Saudi Arabia a bit more closely after the big cut-back this winter.  The above is the latest data: March shows a very slight increase in production (probably less than the uncertainties in the data, so we could call it basically flat over February).  There was also one extra oil rig in country.  No sign of a return to the mid 2012 production level at present.

The generalized resource curse -- The resource curse is pretty easy to understand. It’s not associated with just any sort of natural resource. Switzerland has beautiful mountains and stuff that people would pay a lot of money for, but it is still well-governed. Accursed resources are of a very particular type. They are valuable tradable goods the extraction of which requires a small numbers of workers relative to the size of the economy as a whole. [*] Goods like this create a very strong tension between private property and social welfare. In the mythology of capitalist economics, “as if by an invisible hand”, the self-interested pursuit of private wealth promotes the general welfare precisely because we all require one another’s help. The butcher slaughters her beasts and the baker sugars his cakes, each with an eye to their own profit. But the butcher needs her carbs and the baker likes his meat, so the end result of their self-interested selling is mutual aid rather than mere accumulation. This logic breaks down in an economy dominated by a valuable natural resource. Yes, the miners require meat and mead, but if they are small in number relative to the rest of the population, that won’t cost them very much. They  If there exists a very valuable natural resource, and if that resource can be privately controlled, there is no balance. Self-interested agents drop their butchering and bakering, and try to gain control of the resource. No magic force turns that into a positive sum game. Unless there are “very strong institutions” — whatever that might mean — the pursuit of wealth becomes a game with winners and losers. The invisible hand can manage no more than to lift a middle finger.

Entering a Resource-Shock World: How Resource Scarcity and Climate Change Could Produce a Global Explosion - Michael T. Klare - Brace yourself. You may not be able to tell yet, but according to global experts and the U.S. intelligence community, the earth is already shifting under you.  Whether you know it or not, you’re on a new planet, a resource-shock world of a sort humanity has never before experienced. Two nightmare scenarios — a global scarcity of vital resources and the onset of extreme climate change — are already beginning to converge and in the coming decades are likely to produce a tidal wave of unrest, rebellion, competition, and conflict.  Just what this tsunami of disaster will look like may, as yet, be hard to discern, but experts warn of “water wars” over contested river systems, global food riots sparked by soaring prices for life’s basics, mass migrations of climate refugees (with resulting anti-migrant violence), and the breakdown of social order or the collapse of states. Start with one simple given: the prospect of future scarcities of vital natural resources, including energy, water, land, food, and critical minerals.  This in itself would guarantee social unrest, geopolitical friction, and war. Oil — the single most important commodity in the international economy — provides an apt example.  Although global oil supplies may actually grow in the coming decades, many experts doubt that they can be expanded sufficiently to meet the needs of a rising global middle class.

Should We Be Worried About China's North American Energy Grab?: As you probably recall, toward the end of February China's oil giant CNOOC closed on its largest purchase ever, a $15.1 billion takeover of Canadian oil and gas company Nexen. With that acquisition, CNOOC has now expanded its presence in Canada and the U.S. -- both onshore and in the Gulf of Mexico -- to go along with operations in the South and East China seas, Indonesia, Iraq, Australia, Africa, South America, and the North Sea. Should we be concerned about the company's movement into many of the world's major producing areas? After all, while many look to China as the primary engine of global economic growth, there are those who view the giant country as a hotbed of corruption and fraud. The powers that be at heavy-equipment manufacturer Caterpillar would probably vote for the later label. The company acquired a Chinese mine safety equipment manufacturer last summer, only to discover before year's end the presence of "deliberate multi-year, coordinated accounting misconduct." That incident appears to be anything but isolated. One observer maintains that in 2010 a whopping 146,000 corruption cases were initiated in China, about 400 per day. Of the 14 that the country's media chose to discuss, the average amount pilfered was 18 million yuan, or nearly $2.9 million. None of this is to claim corruption and fraud at CNOOC. But the atmosphere from which it has sprung, along with the scope of China's worldwide energy spread, is enough to inspire both economic and geopolitical concerns

Pollution Is Radically Changing Childhood in China’s Cities - Levels of deadly pollutants up to 40 times the recommended exposure limit in Beijing and other cities have struck fear into parents and led them to take steps that are radically altering the nature of urban life for their children. Parents are confining sons and daughters to their homes, even if it means keeping them away from friends. Schools are canceling outdoor activities and field trips. Parents with means are choosing schools based on air-filtration systems, and some international schools have built gigantic, futuristic-looking domes over sports fields to ensure healthy breathing. “I hope in the future we’ll move to a foreign country,” Ms. Zhang, a lawyer, said as her ailing son, Wu Xiaotian, played on a mat in their apartment, near a new air purifier. “Otherwise we’ll choke to death.” She is not alone in looking to leave. Some middle- and upper-class Chinese parents and expatriates have already begun leaving China, a trend that executives say could result in a huge loss of talent and experience. Foreign parents are also turning down prestigious jobs or negotiating for hardship pay from their employers, citing the pollution.

China’s post-modern macro data (or, when Q1 is not Q1) - Since China’s Q1 GDP growth came in last week at well below consensus forecasts, strategists have been searching for reasons why this is or isn’t the beginning of a new era. Morgan Stanley’s Helen Qiao and Yuande Zhu say there are three reasons why the Q1 figure might have ended up presenting a picture of slower growth than is warranted. The first is the relatively late Lunar new year, which they say may have led to a belated start to construction in March. Debates over the Lunar new year are a feature of Chinese data. It’s the next reason they give that is really astounding: The leap year effect: The number of working days in 1Q13 is the same as in 1Q12, but 1 calendar day short this year due to the leap year effect. Since there is no standard practice in adjusting the leap year effect, the NBS leaves all reported data unadjusted. A simplistic extrapolating approach by assuming adding back 1/100 of all investment, consumption and net exports could improve quarterly GDP by 1.2ppts (in YoY terms). However, we find it difficult to rely upon such a crude methodology for reliable adjustments.

The 91st day - China's economic statistics attract a lot of criticism, of which 43.6% is justified*. Critics typically assume that China's statistical lapses tend to flatter the economy. But is that necessarily true? If you think the figures are fiddled for fiendish political ends, then they should always paint a rosier picture than reality warrants. But if you think that measuring China is just fiendishly fiddly, then the mismeasurements might go either way. Last week provided one striking example of a statistical shortcoming that cast the economy in an unflattering light. On April 15th the National Bureau of Statistics reported that China's economy grew by 7.7% in the year to the first quarter, notably slower than the 8% pace analysts had expected. The disappointment prompted many economists to lower their forecasts and raise their eyebrows. Why was the economy slowing when credit was surging and monthly surveys were broadly encouraging?  But perhaps the statisticians were a little wrong themselves. The 7.7% figure compares the first three months of this year with the same months of 2012. But 2012 was a leap year, in which the first quarter lasted for 91 days not the usual 90. That gave China one extra day to produce stuff in the first quarter of 2012 that it didn't have in the first quarter of this year.

The economy: Climbing, stretching and stumbling - New figures showed China’s economy growing by 7.7% in the year to the first quarter, falling short of expectations and the previous quarter’s pace. The figures were puzzling as well as perturbing. The job market still seems tight: there are 1.1 job vacancies for every applicant, the highest ratio since records began in 2001, points out Zhang Zhiwei of Nomura, a bank. Meanwhile, credit seems incredibly loose: the broad flow of financing to China’s economy (including bank loans, trust-company loans and corporate-bond sales among other things) set a monthly record in January, then matched it in March.The slower figures may be easier to excuse than to explain. China’s new government is intent on “improving the quality and efficiency of growth”, according to the NBS. If that is true, it might justify some reduction in the quantity of growth. More efficient growth would require a lower input of capital (as well as energy and labour) per yuan of extra output. It was, therefore, notable that investment (the addition of capital) contributed only 30% of China’s growth in the first quarter. That was an unusually small contribution for an economy often accused of building bridges to nowhere. In 2012, by comparison, investment contributed about half of China’s growth; in 2009, more than 87%. The first quarter’s growth was instead led by consumer spending, which contributed over 55% of it, despite Mr Xi’s frugality drive. Consumption is often strong in the first quarter, notes Mark Williams of Capital Economics, a research company. But its prominence was no seasonal fluke. In both 2011 and 2012, consumption exceeded investment’s contribution to growth—a welcome sign that rebalancing of the economy is finally under way.

China Manufacturing Slows - WSJ  - An initial gauge of manufacturing activity in China showed more weakness in the world's second-largest economy in April, after disappointing growth in the first quarter. The HSBC China Manufacturing Purchasing Managers Index showed growth in April, but at a slower pace, with weakness particularly apparent in exports and jobs. The preliminary measurement of manufacturing activity fell to 50.5 in April, compared with a final  reading of 51.6 in March, barely in expansionary territory. A reading above 50 indicates growth, while a reading below 50 shows contraction. "New export orders contracted after a temporary rebound in March, suggesting external demand for China's exporters remains weak," said HSBC economist Qu Hongbin in a statement. "Weaker overall demand has also started to weigh on employment in the manufacturing sector." The weak PMI reading comes after gross domestic product grew by an unexpectedly sluggish 7.7% in the first three months of the year, below the 7.9% growth in the final quarter of 2012. China has been hit by weak demand for its exports as other countries struggle for growth. Analysts said they expect exports to remain weak in the coming months. "The contribution of exports to GDP growth this quarter may be less than in the first quarter,"

Abandon hope, all ye who look at today’s China flash PMIs - The China flash HSBC PMIs missed for April, staying barely positive at 50.5 and providing little encouragement for those hoping that the first quarter GDP growth was an anomaly. Here’s the table of main index components: Only backlogs of work is unequivocally positive, and that’s a change of direction from slightly negative to slightly positive. Most concerning is probably the new orders and new export orders, which had been ticking along above 50 for much of the past six months: Societe Generale’s spider web chart underlines how it’s a mostly negative picture: The PMI components have often revealed a mixed bag over the past year or so, but this one seems fairly consistent. Nomura’s Zhiwei Zhang points out that in the context of previous April results, it’s especially poor: In the past seven years, the PMI in April has risen five times, fallen once and been flat once – on average, it rose by 1.2 percentage points (pp) from March to April. Excluding 2009 (an abnormal year when the RMB4trn fiscal stimulus pushed it up quickly), it rose by 0.5pp.

China’s Recovery Falters as Manufacturing Growth Cools - China’s manufacturing is expanding at a slower pace this month on weakness in global and domestic demand, fueling concern that the world’s second-biggest economy is faltering. The preliminary reading of 50.5 for a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics compared with a final 51.6 for March. The number was also below the median 51.5 estimate in a Bloomberg News survey of 11 analysts. A reading above 50 indicates expansion. China’s stocks slumped as the data provided further evidence of an economic slowdown after weaker-than-estimated numbers for gross domestic product last week prompted banks including Goldman Sachs Group Inc. to cut full-year forecasts. In Washington, central bank Governor Zhou Xiaochuan said April 20 that a 7.7 percent first-quarter expansion was reasonable and “normal,” highlighting reduced expectations after 10 percent- plus rates during the past decade. “This paints a picture of a continued painfully slow recovery for China’s manufacturing sector,”

Chanos: China is getting worse - Following on from his recent PowerPoint presentation at the 2013 Wine Country Conference, Jim Chanos – founder and president of New York investment company Kynikos Associates – on Wednesday gave the above video interview on CNBC where he summarised the key risks facing the Chinese economy and why he believes the economic situation there is getting worse.According to Chanos:  “I actually think it’s [China has] gotten worse. what’s happened more recently after the new party leaders took in, was another burst of investment. But more importantly, another burst of credit expansion. And what really has us concerned now, you have credit actually accelerating in China. But GDP growth is still slowing. In the last quarter, China pronounceded some staggering numbers a couple weeks ago. New credit outstanding jumped by $1 trillion US. Now this is an $8 trillion US. economy. So on an annualized rate, that’s 50% GDP of new credit creation. And to put that also in perspective, total new credit globally went up by $1.5 trillion in the first quarter. China is $1 trillion of that, yet only 10% of the world economy. So there is a credit bubble that’s actually not only huge, but getting bigger.

China Top Leaders Warn on Financial Risks as Rebound Falters -China’s top leaders said the country must guard against financial risks and boost consumption amid signs that the recovery in the world’s second-biggest economy is faltering. “China needs to cement its domestic economic growth momentum and guard against potential risks in financial sectors,” the Politburo Standing Committee said in a statement late yesterday published by the official Xinhua News Agency. Macro-economic policies should be stabilized and micro controls in some sectors should be loosened, it said after what Xinhua said was a “special session” on the economy. Data this week showed China’s manufacturing is expanding at a slower pace, adding to evidence a recovery is losing steam after an unexpected slowdown in growth in the first quarter. Goldman Sachs Group Inc. and JPMorgan Chase & Co. last week cut forecasts for 2013 expansion while Nomura Holdings Inc. said this week that growth needs to moderate to avoid a systemic financial crisis. The Politburo Standing Committee’s comments “provide support to the State Council’s decisions and don’t imply policy changes,” . “While the leadership is saying China needs to boost growth momentum, it’s also warning about financial risks -- it isn’t going to pursue the old way of stimulus to push up growth at the expense of long-term structural reform.”

Chinese leaders more worried about financial risks than slower growth - China’s Politburo Standing Committee, the country’s top decision-making group, held a special session yesterday to discuss the economy — apparently the first time they’ve held this sort of economy-focused meeting since 2004, (via Bloomberg). So what came out of it? It’s always hard to tell, but it probably wasn’t good news for anyone hoping for big stimulus measures. The official Xinhua report is here and its headline suggests some worry at the economic growth rate. “China needs to cement its domestic economic growth momentum and guard against potential risks in financial sectors,” , although it goes on to point out that Q1′s 7.7 per cent growth that had many China watchers worried was in fact higher than the 7.5 per cent official target. Then there’s this:While focusing on improving the quality and efficiency of economic development, the country should keep a proactive fiscal policy and prudent monetary policy while making them more targeted, it said. Hmm… more targetedBloomberg’s take is here and they’ve also noted that the official statement focused on risks despite the slowdown; they also point out the emphasis on boosting the consumption (ie, rebalancing the economy; which as we’ve outlined before, can’t really happen unless growth slows).

Chinese downturn fuels fears crisis is spreading east -  Exhibit number one in the prosecution case is that the property market is running hot. The cost of real estate in Beijing is 8% up on a year ago; in Shanghai, prices are up by more than 6%. In both cities, house price inflation is accelerating. Exhibit number two is debt. Last week, the ratings agency Fitch downgraded China's sovereign rating amid concerns about the debt amassed by local government to fund an expansion in infrastructure spending in 2011. The new government in Beijing sees tackling the local government debt timebomb as a priority, but some officials say privately it is already too late. Exhibit number three is that growth is both unbalanced and slowing. China's expansion, despite moves towards stronger consumer demand in the past four years, is still reliant on investment and exports. Much of the capital spending has been on inefficient enterprises that are now struggling due to rising wages and competition from other developing nations. So while China's growth rate at 7.7% in the year to March was still strong, it was weaker than the 8% expected. Nor is business in the high-end shopping malls as brisk as it was.

On China's Rising Hatred Of The Japanese, And Why The BoJ Just Doesn't Get It - It is becoming increasingly evident that Japan is attempting to use monetary policy to paper over the cracks of imploding foreign policy decisions. The 'storm in a teacup' that has brought China and Japan into fierce rhetorical battles over the Senkaku (or Diaoyu) Islands is having far more deep-seated impacts on the people of the two nations - and implicitly their buying habits. Unfortunately for the embattled Japanese - they are the ones in need far more than vice versa. As Bloomberg reports, discrimination against Japanese is increasingly common in China, as the head of China's Honda plant notes, he’s "never worked in a more hostile place." The dispute over the islands is raising resentment with bars and restaurants showings signs at the door saying, 'Japanese are barred from entering.' "Wherever I go, like department stores or in taxis, people ask me whether I am Japanese,"

Japanese Capital in China. In the beginning of the 1990s, the spread between discount rates in Japan and China was under 4.00%. It then dropped below 2.00%. At that time, the yuan was rapidly depreciating against the yen. It lost about sixty percent of its value in less than six years. During this time, the People’s Bank of China increased the discount rate while the Bank of Japan decreased it. By 1996, the spread had reached 9.94%. Anyone who was in China during the 2012 anti-Japanese riots would have seen just how extensive Japanese investment in China has been. Any Chinese seriously looking to boycott Japanese products would have soon realized that they could not use almost any household appliance, drive their car, use their building’s elevator, use telecommunications, or watch pornography.  For at least the last fourteen years, China’s discount rate has been Japan’s discount rate plus about 300 basis points. At some point Japan will have to increase interest rates to rebuild its domestic capital structure. With the current political environment, that may be a long time from now. When it does happen, Japanese capital will leave China and repatriate for higher yield in more productive investments. China will be left to raise its own cost of capital, exposing the malinvestments that had been hidden by the high tide of overinvested capital.

Record fall for Japan's population, 1/4th over 65 - Tokyo Times -  Japan’s population is rapidly ageing and has suffered a record decrease by around 284,000 to an estimated 127.5 million people by October 2012, according to the government’s Internal Affairs and Communications Ministry figures. Around 30 million people, almost a quarter (24 percent) of Japan’s population, are aged 65 or over, according to the figures. In contrast, the number of children aged 14 or less decreased to a record low of 13 percent. As a result, the elderly officially outnumbered children, with a higher number of over-65s compared to children aged 14 and under in each of Japan’s 47 prefectures for the first time, according to the international press. The results confirmed Japan’s reputation for being the fastest ageing country in the developed world. Around 40 out of Japan’s 47 prefectures reported a population decrease, with the worst hit being nuclear-hit Fukushima where resident volumes declined by 1.41 percent.The government is looking for solutions in order to face the consequences of its ageing society. Japan’s population is now facing a sharp rise in welfare costs and medical care demands forecast in coming years combined with a drop in workforce and national tax revenues.

Japanese inflation expectations, revisited - NY Fed - An important measure of success for monetary policy is a central bank’s ability to anchor inflation expectations; inflation expectations influence actual inflation and, hence, the achievement of a given inflation goal. This notion has special significance for Japan, where CPI inflation has been intermittently negative since 1994 and where it is widely believed that expectations of future inflation have been persistently negative (that is, ongoing deflation is expected). In this post, we describe and evaluate an alternative, market-based measure of Japanese inflation expectations based on international price parity conditions. We find that recent inflation expectations have attained a level substantially higher than their previous peaks over the past three years.  By way of background, recent policy action by the Bank of Japan has shone a spotlight on Japanese inflation expectations. On April 4, the Bank announced a program called Quantitative and Qualitative Monetary Easing (QQE), which was a pledge to drastically ramp up asset purchases to increase the monetary base, and to extend the duration of assets held on the Bank’s balance sheet. Since nominal yields on Japanese government bonds have been quite low for some time, a preferred indicator of QQE’s success would be a decline in real interest rates as inflation expectations move closer to the Bank’s recently announced 2 percent price stability target.

Japan's Inflation Propaganda And Why The BoJ Better Hope It's Not Successful - The existing (and ongoing) massive expansion of base money into the banking systems of the US, England, and Japan is without precedent. As Nomura's Richard Koo notes, at 16x statutory reserves, the liquidity 'should' have led to unprecedented inflation rates of 1,600% in the US, 970% in the UK, and 480% in Japan. However, it has not, yet. In short, Koo explains, businesses and households in these economies have stopped borrowing money even though interest rates have fallen to zero. There is little physical or mechanical reason for the BOJ’s easing program to work. But the program could also have a psychological impact - and Japanese media is on an 'inflation' full-court press currently. The risk here is that not only borrowers but also lenders will start to believe the lies. No financial institutions anticipating inflation could ever lend money at current interest rates. No actual damage will be done as long as the easing program remains ineffective. But once it starts to affect psychology, the BOJ needs to quickly reverse the policy and bring the monetary base back to 'normal'. the policy reversal is delayed, the Japanese economy (and inflation) could spiral out of control

The Time Series of High Debt and Growth in Italy, Japan, and the United States -  A recent paper by Thomas Herndon, Michael Ash, and Robert Pollin (HAP) has effectively refuted one of the most frequently cited stats of recent years: countries with public debt above 90 percent of GDP experience sharp drop offs in economic growth. This “90 percent” result was put into circulation in 2010 by a paper written by Carmen Reinhart and Kenneth Rogoff (RR) and was heavily circulated by conservative policymakers, commentators, and economists. I think the most important issue in the subsequent discussion in blogs and newspaper op-eds (for a quick rundown see here) is the question of causality. Does the negative correlation between public debt and economic growth rest on high levels of public debt causing low economic growth, as RR and other “austerians” claim (we borrow this term from Jim Crotty)? Or is the causation the reverse of what the austerians say, meaning low economic growth causes higher public debt? Using the HAP data set for 20 OECD countries, economist Arindrajit Dube of University of Massachusetts-Amherst has shown that (a) the negative relationship between public debt and growth is much stronger at low levels of growth, and (b) the association between past economic growth and current debt levels is much stronger than the association between current levels of debt and future economic growth. This is strong evidence for the second causation argument, where low growth leads to high debt.

Does Japan have a debt problem or a nominal growth problem? -- From the Financial Times: The OECD has warned Japan that taming its vast debts remains the country’s “paramount policy challenge”, as prime minister Shinzo Abe goes all out to reflate the sluggish economy via aggressive fiscal and monetary stimulus. Next year the OECD expects Japan’s gross debt to approach 240 per cent of gross domestic product, the highest ratio in the developed world. The OECD is warning Japan that it needs to get its sovereign debt under control, that “fiscal consolidation” needs to be the “fourth arrow” in Shinzo Abe’s economic strategy quiver. Certainly the last thing Japan needs now is anti-growth tax hikes.Better a strategy of faster growth in nominal GDP and higher inflation to whittle down that massive debt-to-GDP ratio. Consider: What if the Japanese economy, 4% smaller in nominal terms than in 1994, had grown as fast as America’s over that span? US NGDP grew by 120%. In that case, Japan’s debt/GDP ratio — all else equal — would be roughly 110% of GDP — high but obviously far more manageable. In other words, the Japanese continue to have a big NGDP problem. And they’re not the only ones

OECD sounds fresh warning on Japan - The OECD has warned Japan that taming its vast debts remains the country’s “paramount policy challenge”, as prime minister Shinzo Abe goes all out to reflate the sluggish economy via aggressive fiscal and monetary stimulus. During a visit to Tokyo to present the OECD’s bi-annual review of Japan, secretary-general Angel Gurría said he welcomed Japan’s “gutsy bet” to boost growth, but stressed that it should be accompanied by a detailed “blueprint” to put the country’s finances on a more stable footing. Next year the OECD expects Japan’s gross debt to approach 240 per cent of gross domestic product, the highest ratio in the developed world. “When you are at [this level], going for fiscal stimulus is not intuitive,” said Mr Gurría, in an interview with the Financial Times. “But at the same time, getting some growth on the books is the only way you’re going to be able to solve the debt conundrum. It’s a careful balancing act.” The warning comes amid concerted efforts by Japan’s policy makers to overcome the state of deflation that has sapped spirits for most of the past 15 years. Mr Abe, riding high in the polls with near-record approval ratings, has already pushed through a big supplementary budget and has leaned on the central bank’s new governor, Haruhiko Kuroda, to increase the pace and scale of monetary easing in pursuit of a higher inflation target.

Bank of Japan Sees Inflation Nearing Target in 2015 - Consumer prices excluding fresh food slid 0.5 percent in March from a year earlier, the statistics bureau said today. The median estimate of 25 economists surveyed by Bloomberg News was for a 0.4 percent decline. Overall prices dropped 0.9 percent. The BOJ this month said that it expects prices to keep declining for “the time being.” Eisuke Sakakibara, an ex-Finance Ministry colleague, has predicted Kuroda will fail to achieve the 2 percent price goal, and former BOJ board member Atsushi Mizuno sees the central bank hitting a “wall of reality” as bond purchases escalate risks of a market bubble.  Policy makers may come under pressure to expand stimulus should prices continue to drop. “It’s unrealistic -- they won’t be able to reach their target in two years, or even in five,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo and a former BOJ official. Extra easing may be needed as early as October, when the BOJ releases new price forecasts, he said. Policy board members themselves are divided over the outlook for inflation, with some anticipating that consumer prices won’t even rise at half the rate they set as a target this month. While the highest of their projections for fiscal 2015 is for a 2.3 percent consumer-price gain excluding the tax increase, the lowest is 0.8 percent.

Japan’s ‘wall of money’ proves elusive for global markets - Japanese investors are repatriating funds from around the world at an accelerating pace, dashing hopes that stimulus from the Bank of Japan will flood global asset markets with newly-printed money.Fresh data from Japan's finance ministry showed that large banks, insurers, and pension funds sold a net $8.7bn in foreign bonds and stocks last week, bringing the total to $35bn over the last six weeks. Analysts had expected the big institutions to start chasing global assets in a revival of the "yen carry trade" after dramatic policy shift by the Bank of Japan's new team under Haruhiko Kuroda, but the fondly-awaited "wall of money" has yet to materialise. Instead, Tokyo's behemoth funds are cashing windfall gains abroad generated by the 20pc slide in the yen since July, rotating the profits into assets at home. "We have looked at the flow data and contrary to high hopes our clients have not bought a single Italian or Spanish bond," said an analyst at one Japanese bank. The repatriation effect has major implications for global bonds and stocks. Japan is still the world's biggest creditor with an overseas portfolio of $3.75 trillion, and its actions can at times shape the financial universe

Australia facing 'decades of budget deficit' - Federal Treasurer Wayne Swan has said the budget revenue has taken a $7.5 billion "sledgehammer" hit because of twin factors - a high dollar and lower terms of trade. Swan's statement comes even as a think-tank warns that Australia is facing a decade of budget deficits, , with the annual total set to pass $60 billion in 2023. A report released today by the Grattan Institute predicts federal and state budgets will generate yearly combined deficits of at least $80 billion within a decade unless drastic cuts in welfare, health and education are made.

S. Korea Economy Grows at the Fastest Pace in Two Years: Economy - South Korea’s economy grew the most in two years in the first quarter as the government front-loaded spending and exporters weathered the slide in the yen that aids rivals in Japan. Gross domestic product gained 0.9 percent from the previous three months after a 0.3 percent increase in the fourth quarter, the Bank of Korea said today. That exceeded the median 0.7 percent estimate of 15 economists surveyed by Bloomberg News.President Park Geun Hye unveiled a $15 billion extra budget and property stimulus package this month as Asia’s fourth- largest economy grapples with the yen’s decline, record household debt and a stagnant housing market. Today’s report may encourage Bank of Korea Governor Kim Choong Soo to continue to resist political pressure for an interest-rate cut after borrowing costs were left unchanged on April 11.

IMF Says Monetary Policy Should Remain Accommodative for Growth - The International Monetary Fund said today that monetary policy should remain accommodative to boost growth in advanced economies, while complaints about competitive currency devaluation appear “overstated.” “Unconventional policies continue to provide essential support to demand and have lessened bank vulnerabilities in advanced economies,” the Washington-based IMF said in a report. “But vigilance is needed to ensure that a prolonged period of low interest rates and expanding central bank balance sheets does not give rise to fresh financial excesses.” Group of 20 finance chiefs and central bankers last week backed the Bank of Japan (8301)’s recent stimulus push, signaling its focus on supporting domestic demand was strong enough for them to ignore the side-effects of a sliding yen. At the same time, nations from the Philippines to South Korea have enacted or are considering policies to curb the effects of capital inflows. The global recovery remains unbalanced with growth prospects in the U.S. strengthening even as the euro area remains stuck in “low gear” and Japan’s economic expansion may be “sluggish” after the effects of its stimulus measures wear off, the lender said. Advanced economies require more progress with medium- and long-term fiscal adjustment plans, entitlement reform and balance sheet repair, according to the report.

Tata Faces Crisis as $20 Billion Spent on Water: Corporate India - India, the world's second-most populous nation, is doubling spending on water management to a record as conglomerates from the Tatas to Adani face shortages that the United Nations calls an impending crisis. The federal and state governments have set aside 1.1 trillion rupees ($20 billion) for sewage treatment, irrigation and recycling for the five-year period ending March 2017, G. Mohan Kumar, special secretary in the Ministry of Water Resources, said in an interview. The nation with 1.2 billion people, which treats only 20 percent of its sewage, is pouring more money as inadequate clean water is threatening to stunt growth in industrial and farm output. Disputes with farmers demanding rights to their irrigated land have stalled about $80 billion of investment by companies including Posco (005490) and ArcelorMittal (MT) as Prime Minister Manmohan Singh seeks to revive an economy growing at the slowest pace in a decade. Tata Steel Ltd. (TATA), India's biggest maker of the alloy, is setting annual targets to cut water usage as two-thirds of the country faces a scarcity

Bangladesh mourns as factory toll rises - Bangladesh was observing a day of national mourning on Thursday, as rescue workers searched through the rubble of a collapsed garment factory building in a hunt for survivors among the up to 1,000 people feared inside. The eight-story Rana Plaza, which housed at least four garment factories producing clothing for major western brands including Primark, collapsed on Wednesday morning, with thousands of workers inside. The official death toll had risen to 194 by Thursday, with another 700 people injured, many critically. But many hundreds of people are still trapped inside, and feared dead. Amid the rubble, rescue workers, working with limited equipment and no protective clothing, heard cries for help, water and air from desperate survivors buried beneath the concrete. Thousands of relatives of those trapped inside gathered at the site, weeping and pleading for help. The Bangladeshi Garment Manufacturers and Exporters Association said that as many as 3,000 people were in the building at the time of the collapse, though it remains unclear how many of those have been accounted for.

Different Places Have Different Safety Rules and That’s OK - It's very plausible that one reason American workplaces have gotten safer over the decades is that we now tend to outsource a lot of factory-explosion-risk to places like Bangladesh where 87 people just died in a building collapse.* This kind of consideration leads Erik Loomis to the conclusion that we need a unified global standard for safety, by which he does not mean that Bangladeshi levels of workplace safety should be implemented in the United States. I think that's wrong. Bangladesh may or may not need tougher workplace safety rules, but it's entirely appropriate for Bangladesh to have different—and, indeed, lower—workplace safety standards than the United States. The reason is that while having a safe job is good, money is also good.  Bangladesh is a lot poorer than the United States, and there are very good reasons for Bangladeshi people to make different choices in this regard than Americans. That's true whether you're talking about an individual calculus or a collective calculus. Safety rules that are appropriate for the United States would be unnecessarily immiserating in much poorer Bangladesh. Rules that are appropriate in Bangladesh would be far too flimsy for the richer and more risk-averse United States. Split the difference and you'll get rules that are appropriate for nobody. The current system of letting different countries have different rules is working fine. American jobs have gotten much safer over the past 20 years, and Bangladesh has gotten a lot richer..

There is no alternative - Neo-liberalism, which was supposed to replace grubby politics with efficient, market-based competition, has led not to the triumph of the free market but to the birth of new and horrid chimeras. The traditional firm, based on stable relations between employer, workers and customers, has spun itself out into a complicated and ever-shifting network of supply relationships and contractual forms. The owners remain the same but their relationship to their employees and customers is very different. For one thing, they cannot easily be held to account.  US firms have systematically divested themselves of inconvenient pension obligations to their employees, by farming them out to subsidiaries and spin-offs. Walmart has used hands-off subcontracting relationships to take advantage of unsafe working conditions in the developing world, while actively blocking efforts to improve industry safety standards until 112 garment workers died in a Bangladesh factory fire in November last year. Amazon uses subcontractors to employ warehouse employees in what can be unsafe and miserable working conditions, while minimising damage to its own brand. Instead of clamping down on such abuses, the state has actually tried to ape these more flexible and apparently more efficient arrangements, either by putting many of its core activities out to private tender through complex contracting arrangements or by requiring its internal units to behave as if they were competing firms. As one looks from business to state and from state to business again, it is increasingly difficult to say which is which. The result is a complex web of relationships that are subject neither to market discipline nor democratic control.

The Hidden Global Poverty Problem - The upcoming semi-annual IMF/World Bank meetings will no doubt be calling attention to a slew of recent reports that suggest that we are winning the war on global poverty.    The latest, from the Oxford Poverty and Human Development Initiative, found that a multi-dimensional index of widespread poverty declined significantly in 18 of 22 developing countries, which contain over two billion people.  However, as I pointed out in a policy paper, also written for the World Bank, the renewed optimism over “ending” global poverty will be short-lived, unless the world is prepared to address an important, and seemingly intractable, “hidden” dimension to this problem. Since 1950, the estimated population in developing economies on “fragile lands” has doubled.  These fragile environments are prone to land degradation, and consist of upland areas, forest systems and drylands that suffer from low agricultural productivity, and areas that present significant constraints for intensive agriculture. Today, nearly 1.3 billion people – almost a fifth of the world’s population – live in such areas in low and middle income economies.  Almost half of the people in these fragile environments (631 million) consist of the rural poor, who throughout the developing world outnumber the poor living on favored lands by 2 to 1.

Hot Money Inflows to Bandage Brazil’s Bleeding Current Account? - Brazil’s overseas accounts set all kinds of records in March…the kind no one should want. Deficits in Brazil’s current account for the month, the quarter and the past 12 months–the latter a whopping $67 billion–were all-time records. The figures raise a number of issues. How will Brazil close the gap? Is it time to begin attracting, rather than repelling, short-term foreign investment inflows? Specifically, should Brazil ditch a series of punishing gateway taxes aimed at so-called portfolio investors, foreigners seeking quick returns from Brazilian money markets? Since 2002, Brazil has been able to plug the gap in its current account–a calculation incorporating most incoming and outgoing trade and financial transactions–with foreign direct investment, the nuts-and-bolts capital that increases the country’s productive capacity and export potential.

Bank of Mexico Caught Between Stronger Peso, Rising Inflation - The Bank of Mexico faces a conundrum at its policy meeting this week: growth has slowed, the peso’s strength threatens to hurt exporters, and inflation is running hot. Economists say Mexican policy makers have limited options to address those issues at the moment, especially following their decision in March to slash the country’s benchmark lending rate by half a percentage point to 4%, the country’s first rate move since 2009. That’s left the central bank with less room to maneuver at its Thursday meeting. On the one hand, concern about a slowdown in growth coupled with a 6.7% surge in the peso against the U.S. dollar since the start of the year might suggest that another rate cut is warranted. Such a move might help spur consumer spending and relieve pressure on the exchange rate from foreign investors searching for higher yields. But analysts and investors say a jump in Mexico’s annual inflation rate to 4.72% in early April, well above the central bank’s 3% target, makes another reduction in the key lending rate unlikely. All 22 banks surveyed this week by Citi‘s local unit Banamex expect the central bank to leave the rate unchanged.

The Inflation Dog Didn’t Bark, But What About the Others? - The IMF released the April edition of its World Economic Outlook (WEO). One of the key analytical chapters (Chapter 3) of the Report is titled “The Dog that Didn’t Bark: Has Inflation Been Muzzled, or Was It Just Sleeping?” Its main argument (or rather sort of a mystery that needs to be resolved, in the words of its authors) is that over the course of the previous crisis episodes we used to witness severe increases in unemployment along with a simultaneous fall in inflation. Yet, during the current great recession there has been very little movement in inflation, while unemployment rates soared almost everywhere; —hence the metaphor: inflation (the dog…) does not respond (… bark). And the alleged mystery is but why? The WEO suggests two candidates for explaining the mystery: the first one is based on the “structural unemployment has shifted” hypothesis, arguing that “the failure of inflation to fall is evidence that output gaps are small and that the large increases in unemployment are mostly structural.” . Yet, by itself this argument does not provide much of an explanation, as the underlying causes of this structural shift still remains unanswered. A second hypothesis that the WEO’s authors unapologetically side with is that “… the stability of inflation reflects the success of inflation-targeting central banks in anchoring inflation expectations and, thus inflation”. Accordingly, with the hard, and yet valuable, lessons learned over the 1990s, economists and central banks are now better rooted in addressing problems of price instability.

Central Banks Load Up on Equities as Low Rates Kill Yields - Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.  In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10 percent of reserves

Solutions Remain Elusive After Financial Crisis - Last week the International Monetary Fund hosted a conference of some of the world’s top macroeconomists to assess how the most intense crisis to have shaken the industrialized economies since the Great Depression has changed the profession’s collective understanding of how the world economy works. things struck me about the conclave. The first was hearing George Akerlof, a Nobel-winning economist from Berkeley, take to the lectern to compare the crisis to a cat stuck in a tree, afraid to move. The second was realizing how, after five years of coping with the consequences of the disaster, there is still so much uncertainty about what policies are needed to prevent another financial shock from tipping the world economy into the abyss again a few years down the road. “We don’t have a sense of the final destination,” said Olivier Blanchard, chief economist of the monetary fund. “Where we end I really don’t have much of a clue.” In determining what is a sustainable level of government debt, or whether central banks should focus on anything other than inflation, or what should be done to prevent further bubbles from destabilizing economies, he argued “we are still very much navigating by sight.” If you are one of the nearly five million American workers who have been unemployed for over six months, or one of the six million Spaniards, three million Italians or 1.3 million Greeks without a job or a clear prospect of finding one, this amounts to a tragedy.

What a floating currency gives and what it does not - The crisis has brought important lessons about the benefits of possessing a freely floating currency. One benefit, UK experience suggests, is monetary and fiscal policy autonomy. But a substantial depreciation has contributed much less to the adjustment of the current account than most would have expected. These lessons have important policy implications. As Belgian economist Paul De Grauwe of the London School of Economics has noted, the benefits of retaining a currency on one’s own are visible in the post-crisis interest rates paid on long-term public debt. The observation is simple: the International Monetary Fund’s forecasts for the ratio of net public debt to gross domestic product of the UK and Spain are essentially identical. In 2017, the ratio is 93 per cent for the UK and 95 per cent for Spain. Yet the yield on UK 10-year bonds is firmly under 2 per cent – among the lowest in UK history, and not much above Germany’s. The yield on Spanish 10-year bonds, meanwhile, is just under 5 per cent, far below the 7.5 per cent last July, but expensive for a country that is being forced towards deflation.

Global Manufacturing Data Cast Shadow Over Latin America Growth Forecasts  - Just-released International Monetary Fund and United Nations forecasts of a rebound in Latin American economic growth this year already look dated, given the latest data out of Europe, the U.S. and especially China. If the euro zone is headed for no and sputtering growth this year and next, expectations for solid expansion in China have at least bolstered thinking that commodities prices, a key driver of Latin America’s performance, will “remain elevated,” albeit a bit lower than they were last year, the United Nations Commission on Latin America and the Caribbean, or ECLAC, said Tuesday. But the global growth outlook, which has lately been weighing on commodities prices, just grew a little darker. Euro zone private sector activity slipped yet again in April, while manufacturing growth in China, the world’s second-biggest economy and main factory floor, also slowed this month, with weakness in exports.  China’s lower-than-expected economic growth in the first quarter looks like it’s spilling over into the second. Coupled with data indicating U.S. manufacturing growth slowed to its slowest pace in six month, and commodities prices took it on the chin.

Factory orders slide across the world, despite booming stock markets - A rash of weak manufacturing data from America, Europe and Asia has cast serious doubts on the strength of the global economy and was starkly at odds with surging stock markets in the West. Markit’s PMI factory index for the US suffered the biggest one-month fall in almost three years as the most sudden fiscal tightening since 1946 starts to bite. While the gauge remains above the expansion line 50 at 53.6, there was a sharp drop in new order growth and an ominous rise in inventories. “The picture has already begun to darken again. The fall raises concerns that the manufacturing expansion is losing momentum rapidly,” said Markit’s Chris Williamson. But the markets were dancing to an entirely different tune. Wall Street brushed aside Tuesday’s data, focusing instead on bumper earnings from the cable network Netflix and news that US house prices have risen 7.1pc over the past year. The S&P 500 index jumped 16 points to 1,579 in early trading. The FTSE 100 in London closed at 6406, up 2pc, and there were similar rises in European bourses as investors bet that more evidence that the Continent is mired in recession will force the European Central Bank to cut rates.

World factory orders flash warning signals despite booming markets - A rash of weak manufacturing data from America, Europe and Asia has cast serious doubts on the strength of the global economy and was starkly at odds with surging stock markets in the West.Markit’s PMI factory index for the US suffered the biggest one-month fall in almost three years as the most sudden fiscal tightening since 1946 starts to bite. While the gauge remains above the expansion line 50 at 53.6, there was a sharp drop in new order growth and an ominous rise in inventories. “The picture has already begun to darken again. The fall raises concerns that the manufacturing expansion is losing momentum rapidly,” said Markit’s Chris Williamson. But the markets were dancing to an entirely different tune. Wall Street brushed aside Tuesday’s data, focusing instead on bumper earnings from the cable network Netflix and news that US house prices have risen 7.1pc over the past year. The S&P 500 index jumped 16 points to 1,579 in early trading. The FTSE 100 in London closed at 6406, up 2pc, and there were similar rises in European bourses as investors bet that more evidence that the Continent is mired in recession will force the European Central Bank to cut rates.

World Industrial Production - I see some evidence that higher domestic energy production and improved competitiveness of US manufacturing is having a positive impact on the US trade balance and US industrial production. But I still expects the impact to be limited. In particular, the real non-petroleum trade balance continues to deteriorate. Increased supplies of cheap natural gas helps the petrol-chemical industry, but  its impact on other industries appear limited. If their is any segment of the economy where the rule of one world price holds, it is energy. Cheap energy prices in the US will only last until the industry can remove the bottle-necks and open those markets to competition. Firms do not build new plants to exploit temporary advantages.  Work is already underway to reverse a pipeline from the Gulf Coast to Cushing, Oklahoma so the surplus oil in the Midwest can be exported.  The Boston  Globe reported that an application was just filed to reverse the oil pipeline from the Maine Coast to Montreal to facilitate exports of Canadian tar sands oil. If you compare US industrial production to the rest of the world there does not seem to be much of a change that can not be traced to recent world economic growth rather than structural changes in US production.

World Bank Mulls Infrastructure Facility ---The World Bank is working on setting up a global infrastructure facility that would channel funding into much-needed projects, nurturing domestic and global economic growth, India's finance minister said.  P. Chidambaram told The Wall Street Journal that the World Bank had done a lot of work on the proposal, and had tasked two of its managing directors to come up with a paper on the subject. "I've urged the World Bank president that the global infrastructure facility should be set up as early as possible because countries like India require a large amount of finances for infrastructure," "The World Bank Group, as it is presently placed, cannot provide that kind of resources. So an additional facility, outside the balance sheet of the World Bank, will certainly be a great help to countries like India," he said.  The World Bank estimates $800 billion to $900 billion is invested in infrastructure projects in emerging-market countries each year, but that around $1 trillion more is needed to keep up with growing consumer and producer demand. A further $200 billion to $300 billion would be required to make those investments more environmentally sustainable, the bank calculates.

Global Military Expenditures - The above shows global military expenditures as a fraction of gross world product. Although there are certainly things to worry about in the world, this is a reassuring graph.  With the end of the cold war, the world as a whole has moved to relatively low and stable levels of military spending at about 2.5 - 3% of gross world product.  That's a fairly small fraction of our total efforts going on killing each other, or preparing in case we decide to kill each other.  The fears that dominated my youth -- thundering herds of Soviet tanks crossing Germany, closely followed by large-scale thermonuclear ICBM exchanges between the US and the USSR -- have receded.  In turn, this was less a concern that what my grandparents faced: actual waves of bombers criss-crossing European skies. Maybe some day climate change will affect food production, oil production will decline, masses of technologically disenfranchised citizens will rebel, or China and the US will enter an arms race, and the world will get ready to start fighting wars left and right.  But there are no signs of preparations at present.

Worldwide Defense Spending: A Snapshot - For a global perspective on military expenditures, my go-to source is "Trends in World Military Expenditure, 2012." from the Stockholm International Peace Research Institute.  One theme of the report is that global military spending dropped by half of 1% or so in 2012. But at least to my eye, the recent leveling out of military spending in a time of considerable economic stress around the world catches my eye less than how global military spending sagged from the late 1980s to the late 1990s, and the rebounded over the following decade. Some of this recent rise , of course, is higher U.S. military spending in the aftermath of the terrorist attacks of September 11, 2001. But in a more global perspective, it's also a rise in Chinese and Russian military spending.  The U.S accounts for 39% of global military expenditures, by far the highest of any country. The list below of the top 15 countries for military spending includes about 80% of all global military spending. U.S. military spending is about as much as the next 10 countries on the list, combined. In addition, while countries around the world on average spent 2.5% of GDP on the military in 2012, the U.S. military spending in 2012 was 4.4% of GDP.

Great Recession and Not-So-Great Recovery - This week's IMF meetings in Washington lacked the sense of crisis which has characterised many such meetings since the crash in 2008. Although the official IMF growth forecasts were revised down slightly for 2013, mainly due to tighter fiscal policy in the US, the organisation also said that downside risks, relative to the central forecasts, had diminished since the October 2012 meetings. These improved downside risks seem to have stemmed mainly from greater confidence in the financial system, reflecting the budget deal on the US fiscal cliff, and the actions of the ECB to reduce systemic threats to the euro. Global equity markets agree with this: they are up by 13 per cent since last autumn. There is, however, a dangerous schism between the improvements in financial confidence and the marked lack of improvement in global GDP growth. On this latter problem, the Washington meetings were focused mainly on the weakness of the eurozone, with Christine Lagarde calling for "more investment" in Germany, greater steps towards banking union and bank recapitalisation, and ECB measures to deal with fragmentation in monetary conditions between the core and the periphery. The G20 statement refrained from setting any targets for public debt reduction, which suggests that Keynesian thinking is gaining ground in international policy circles.

Italy centre-left leader Pier Luigi Bersani announced resignation  - Mr Bersani’s move came after backers in his party voted down two candidates that he had proposed for the role of president. Late on Friday night, he accused fellow party members of betraying him, adding that there was a “tendency in some towards permanent destruction.” The centre-left’s implosion is the latest reminder of how it is made up of a string of parties, from former communists to Christian democrats who have never gelled, failing to hold a government together when elected in 2006 and never mounting a truly convincing opposition to Silvio Berlusconi.While the centre-left has stumbled since the election, former prime minister Silvio Berlusconi’s centre-right coalition has taken a lead in the polls. Mr Bersani’s exit could allow his photogenic young rival in the Democratic Party, Matteo Renzi - who also appeals to right wing voters -- to take charge.

Italian Lawmakers, Re-elect President to Second Term - In a bid to quiet growing political chaos, Italian lawmakers on Saturday elected President Giorgio Napolitano to a second term, turning to him as the last best hope to break a profound deadlock.  The election of Mr. Napolitano, supported by both the main center-left and center-right parties, suggested that the two sides would now be more willing to negotiate the formation of a government. But it also infuriated the anti-establishment Five Star Movement of Beppe Grillo, which won a quarter of the recent parliamentary vote.  While he cannot prevent a grand coalition, one including both major parties, from forming, Mr. Grillo could complicate matters by stirring renewed anger against the old political establishment, which is in upheaval. After Mr. Grillo called on his supporters to take to the streets, hundreds of protesters gathered in front of the Parliament building, many holding placards in support of Five Star’s candidate, Stefano Rodotà , a legal expert and former leader of the center-left, which nonetheless did not back him. Mr.dà is “not part of the old guard,” said one protester, Anna Maria Vatrella, an unemployed social worker. “All the left knows how to do is to hold on to the power they have. They have no interest in change. They have no idea what it means to live as normal people do.”

Grillo says Italy faces bankruptcy, wants 'German invasion' - Beppe Grillo, the leader of the anti-establishment 5-Star Movement that won around a quarter of the vote in February's general election, gave an incendiary interview to German daily Bild Tuesday, saying that the Italian State faces bankruptcy in the autumn and quipping that he would welcome an invasion from Germany. "Between September and October the State will run out of money and it will be difficult to pay pensions and salaries," Grillo said. "In Italy 30 lawmakers convicted of serious crimes sit in parliament," Grillo continued. "I'd like to have honest, competent, professional people in the right positions too. In this situation, I'd be happy with a German invasion of Italy," said Grillo. "The re-election of Giorgio Napolitano is the equivalent of a sneaky coup d'etat," Grillo declared, making reference to the 87-year-old Italian president, who was reinstated on Monday. Grillo attributed political support for Napolitano, who M5S opposed, to "the parties fighting for their survival". "The situation is not funny. In Italy, there is enormous anger. We keep this anger in check," Grillo said. Grillo called centre-right leader and ex-premier Silvio Berlusconi "finished" and complained that Italian small and medium businesses are "going bankrupt". When asked whether politics wasn't an art of compromise, Grillo responded, "Oh no, not compromise". "In Italy, new compromises have always been made for too long".

Italy Led by Letta Brings Berlusconi Back to Governing as Winner - Silvio Berlusconi, the three-time prime minister and two-time convicted lawbreaker, won a path back to power in Italy by outmaneuvering rivals during an eight- week political stalemate.  A year and a half after resigning in near-disgrace, the 76- year-old billionaire became the key figure in talks that began today to form the next Cabinet after the Democratic Party’s Enrico Letta was appointed prime minister. Berlusconi and his 241 lawmakers, the second-biggest contingent, hold the votes Letta, 46, needs to secure a parliamentary majority.  Berlusconi is one of the last of his generation standing after outgoing Premier Mario Monti, 70, was rejected by voters in February and 61-year-old Pier Luigi Bersani was discarded in a Democratic Party mutiny.

Italy needs Churchillian leader to fight ‘war damage’ of EU austerity - Old ways die hard. Two months after Italian voters rebelled in fury against the establishment, the country’s elites have chosen yet another insider to be leader. Anarchist comedian Beppe Grillo – patron of the Five Star bloc in parliament – called the shadowy manouevres that led to this a “coup d’etat”, orchestrated over a “quiet weekend of vomit”. Incoming prime minister Enrico Letta is no doubt a decent, steady, honourable technocrat. He has good intentions. He vowed on Wednesday to lead the charge against austerity in Europe. Yet it is hard to imagine a man less inclined to throw down the gauntlet and force a radical change in EU policy before Italy’s economy chokes to death. He grew up in Strasbourg. He wrote his PhD on EU community law. He is just as wedded to the EU Project as the man he replaces, ex-EU commissioner Mario Monti, who surrounded himself in Rome with Brussels emigres still on the EU payroll. Italy’s business lobby Confindustria said this week that austerity policies had caused “devastating damage, comparable with a war”. This follows its warning that the country faces a “full credit emergency”.

Underwater: The Netherlands Falls Prey to Economic Crisis - More than a decade ago, the Dutch central bank recognized the dangers of [the housing] euphoria, but its warnings went unheeded. Only last year did the new government, under conservative-liberal Prime Minister Mark Rutte, amend the generous tax loopholes, which gradually began to expire in January. But now it's almost too late. No nation in the euro zone is as deeply in debt as the Netherlands, where banks have a total of about €650 billion in mortgage loans on their books. Consumer debt amounts to about 250 percent of available income. By comparison, in 2011 even the Spaniards only reached a debt ratio of 125 percent. The Netherlands is still one of the most competitive countries in the European Union, but now that the real estate bubble has burst, it threatens to take down the entire economy with it. Unemployment is on the rise, consumption is down and growth has come to a standstill.  Even €46 billion in austerity measures are apparently not enough to remain within the EU debt limit.

Minister of Spain's Housing Board Cites "Mortgage Scam, Illegal Evictions" Calls for Mortgage Debt Reduction - The Minister of Public Works and Housing of the Government of Andalusia, Elena Cortes Jimenez, advocates a Reduction in Mortgage Debt for All Spanish Families. - Elena Cortes Jimenez, Minister of Public Works, claims eviction proceedings lead to further drying of mortgage lending, making it harder for young people to access home ownership. Jimenez proposes a "haircut" on private debt, in particular, mortgages. The minister stressed that "Spain has carried out 440,000 illegal evictions due to a mortgage scam, and it is absolutely necessary to have truth, justice and reparation for these families who have been in that situation."  Jimenez once again defends the need for a restructuring of private debt. In his view, Congress of Deputies, and specifically the PP, have the "golden opportunity" to approve the initiatives on evictions and retroactive payments.

Holders of Bankia hybrid instruments take huge hit - The Bank of Spain's Orderly Bank Restructuring Fund (FROB) on Wednesday unveiled the sharply discounted prices at which nationalized bank Bankia will repurchase hybrid financial instruments such as preferred shares and subordinated bonds in exchange for shares in the lender, with some investors set to lose up to 70 percent of their initial investment. Bankia, the amalgam of seven savings banks led by Caja Madrid, was taken over by the FROB in May of last year after coming unstuck because of its exposure to the ailing property sector. In the case of preferred shares issued by Caja Madrid for an amount of 2.999 billion euros, investors will receive 62.68 percent of the nominal value of the instruments, meaning that for every 1,000 euros, investors will receive shares in Bankia worth 626 euros. However, the FROB also set the price for new shares to be issued by Bankia at 1.35266 euros for every 100 shares, a huge discount to Bankia's closing share price on Wednesday of 0.1712 euros. Once the reinvestment rate is taken into account, holders of Caja Madrid preferred shares will receive the equivalent of only 463 euros for every 1,000 euros of their investment.

Spain central bank: recession continued in Q1 - Spain's recession continued in the first three months of the year, with the economy shrinking by 0.5 percent, its seventh quarterly contraction, the Bank of Spain said Tuesday. The central bank said that the first-quarter drop was somewhat milder than the 0.8 percent recorded in the final quarter of 2012. Compared with a year earlier, the economy was 2 percent smaller. The central bank blamed the quarterly contraction on a further fall in consumer spending, which dropped 0.8 percent in the first quarter. The unemployment rate is 26 percent. The bank has predicted the economy will contract 1.5 percent this year and only return to growth in late 2014. Official figures by the national statistics agency will be reported on April 30.

Spain's population shrinks as immigrants flee economic crisis: Spain's population fell last year for the first time in decades, as immigrants left the country amid a major economic crisis, officials say. The National Statistic Institute (NSI) says the number of residents dropped by almost 206,000 to 47.1m - the decline entirely accounted for by foreigners. Immigrants from Ecuador and Colombia showed the biggest fall. The figures do not take into account many Spaniards who have left in search of work but are still on the census. The statistics agency recorded Spain's first population drop since the regular census began in the 1990s. Although the number of native Spaniards grew in 2012 by some 10,000 - it only minimally offset the overall fall of nearly 216,000 among registered foreign residents. The figures show that the ongoing economic crisis has reversed the country's rapid population growth in the decade before the financial crisis erupted in 2008.

Cash-Strapped Greece Sells off Palaces and Islands - Idyllic islands, spectacular stretches of coastline, marinas and even a London embassy have been put on the market in the latest fire-sale by the bankrupt Greek government. As the condition of the new ?8.8bn bailout instalment from the Troika of the EU, the IMF and the European Central Bank, 70,000 state-owned assets will have to be sold off as the government struggles to boost revenue. Among the eye-catching items on the list are large swathes of the island of Rhodes, which has remained one-third state-owned since it was re-integrated into Greece following the Italian occupation of 1912. One of them is the Mandraki marina, once the site of the famous Colossus of Rhodes, a 98-foot statue that bestrode the harbour entrance and was regarded as one of the seven wonders of the ancient world. Foreign oligarchs have already been snapping up Aegean islands. The Emir of Qatar recently bought six islands for ?7 million, whilst Russian billionaire Dmitry Rybolovlev bought Skorpios, once owned by shipping magnate Aristotle Onassis, as a present for his 24-year-old socialite daughter

The Stupid Cruelty of the Creditor - In the middle ages those who could not afford to pay their debts were sent to prison by their creditors. An efficient solution to the moral hazard problem? Hardly, because the chances that the debtor could earn some money to repay something to the creditor from a prison cell were not high. So countries gradually developed rather more civilised bankruptcy laws, like Chapter 11 in the US.  Yet we are seeing the equivalent of these medieval practices in Europe at the moment. Arguably the harm being inflicted on the people of Greece by its creditors is even more cruel, and more stupid. More cruel, because the harm is being done to those totally innocent of the original contract - children indeed, as Karl Smith notes. More stupid, because those doing the damage cannot see what they are doing, either by refusing to open an economics textbook, or believing that they somehow know better.  Just look at these numbers, from the latest OECD economic outlook.

Greece will probably pull through - Greece is not yet out of the woods. But there is a credible path that could lead the country back into the sunlight. That’s the main conclusion of a week I have just spent in the country. Although the economy will have a terrible 2013, next year should be better. Antonis Samaras’ coalition government has held together surprisingly well since it came to power last June following a period of political chaos, despite pushing through extremely unpopular measures. Largely as a result of Samaras’ effective government, the troika – the European Commission, the International Monetary Fund and the European Central Bank – last week gave Greece a thumbs-up in its latest progress report. More bailout funds, which so far total around 200 billion euros, will be disbursed. Last year’s trauma, when it looked like Greece might quit the euro, and the ongoing austerity will cause the economy to shrink by another 5 percent or so this year, taking the cumulative decline to around 25 percent. Unemployment will probably rise to about 30 percent. These are grim figures. But Athens now seems on course to achieve “primary balance” this year. In other words, it won’t have a budget deficit before interest payments. That means it probably won’t have to implement another round of austerity next year, so the economy won’t be struggling against that headwind

What success looks like - HUGO DIXON has written a nice piece on the case for optimism about the Greek economy. It is the saddest thing I have ever read. Although the economy will have a terrible 2013, next year should be better. But the outlook is fragile: political crisis could yet rear its ugly head, tax evasion is rife and there's the risk of external shocks...Last year's trauma, when it looked like Greece might quit the euro, and the ongoing austerity will cause the economy to shrink by another 5 percent or so this year, taking the cumulative decline to around 25 percent. Unemployment will probably rise to about 30 percent. These are grim figures. But Athens now seems on course to achieve "primary balance" this year. In other words, it won't have a budget deficit before interest payments. This year will be awful. Next year, however, should be less so (though it might not be; there are risks). Either way, the Greek economy will have suffered one of the worst economic contractions to befall a rich, industrialised country in history. But what a prize at the end: primary balance.

Strike Shuts Down Greek Tax Offices - With Prime Minister Antonis Samaras, the New Democracy Conservative leader, hoping there won’t be a repeat of last year’s repeated strikes, protests and riots against austerity measures he’s imposing on the orders of international lenders, workers in tax offices across Greece walked off the jobs on April 23 and staged a rally outside the Finance Ministry. According to the union of tax workers, POE DOY, the protest was to pressure the government to abolish “unjust taxation policies” such as an emergency levy colloquially known as “haratsi,” a 100 percent property tax surcharge put into electric bills under the threat of having power turned off for non-payment, which is happening to about 30,000 customers a month. The government said it would reduce the tax by 15 percent. The levy, ordered by former finance minister Evangelos Venizelos, now head of the PASOK Socialists which is one of Samaras’ coalition partners, was begun two years ago and was supposed to be for one year only but looks to be permanent.

Greece’s Trap - Greece is at the hard end of another European policy problem, related to austerity, but this time to do with immigration, and it’s turning into a serious human rights and humanitarian crisis. According to Europe’s border control agency Frontex, 93% of migrants to Europe came through eastern and central Mediterranean routes in 2011.With the tightening of the patrolling of Spanish and Italian access routes, most of these arrived first in Greece, with legal rights under the European Convention of Human Rights to seek asylum status there. Greece doesn’t have the resources to provide adequate social services, and the justice system is grossly inadequate to deal with the demands put on it. This means that large numbers of people are cast adrift in Greece in a legal limbo and with no resources. They are then at the mercy not only of highly repressive policing but of the fascist organization Golden Dawn, whose growing influence is now also starting to contaminate the political discourse of other political parties. A new internet crowd-released film, Into the Fire, documents the human face on what’s going on.

Neo-Nazis and Right-Wing Extremists Gaining Support in Greece - SPIEGEL ONLINE: The right-wing extremist party Chrysi Avgi, or Golden Dawn, convened this demonstration on a Thursday in February to protest an arson attack on its local party office -- and to make another display of its strength. Ringed by a group of brawny toughs, party leader Nikos Michaloliakos, 55, bellowed: "No one can stop us -- not the bombs, not all your filth. We will triumph!" His listeners, many of them hidden beneath black hoods, replied with a thunderous "Zito! Zito!" The phrase literally means something like "Long live!" but the affect is more like "Heil!" -- and deliberately so. Many also raised their right arms, while the police remained in the background. The right-wing extremists then took their burning torches and marched through the downtown of this port city. Foreigners and any young people dressed in alternative-looking clothing made sure to clear out of the streets before they arrived. The scent of danger hung in the air.Right-wing thugs have been spreading fear and terror in Greece for months. The worse the financial crisis gets and the harsher the budget cuts imposed by European creditors are, the worse the terror gets on the streets. Foreigners have been attacked, homosexuals chased and leftists assaulted. Some were beaten to death. There are parts of Athens in which refugees and minorities no longer dare to go out alone at night, and streets that are echoingly empty. Foreign merchants have had to close their doors, while journalists and politicians who criticize these developments receive threats or beatings. Ta Nea, a leading Greek daily, has described conditions here as similar to those of Weimar Germany. Vassiliki Georgiadou, a political science professor in Athens, likewise calls it "an atmosphere like in the 1930s in Germany against the Jews and their businesses."

Study reveals austerity’s harmful impact on health in Greece - In one of the most detailed studies of its kind, a team of Greek and U.S. researchers have vividly chronicled the harmful public health impacts of the economic austerity measures imposed on Greece’s population in the wake of the global economic crisis. Writing in today’s American Journal of Public Health, the researchers cite data showing the economic recession and subsequent austerity policies in Greece have led to a sharp deterioration of health services and health outcomes. Researchers at the Aristotle University of Thessaloniki in Greece and the University of New Mexico in the United States studied current data on economic and social conditions, utilization of health services, and health outcomes. They found that key public health indicators declined in tandem with the recession and austerity policies that reduced public services. For example, between 2007 and 2009, suicide and homicide mortality rates among men increased by 22.7 percent and 27.6 percent, respectively. Mental disorders, substance abuse, and infectious diseases showed worsening trends

Eurozone 2012 Public Deficit 3.7% Of GDP, Debt 90.6%: Eurostat - The combined public deficit of the 17 Eurozone governments declined to 3.7% of GDP last year from 4.2% in 2011, while outstanding public debt climbed to 90.6% of GDP from 87.3%, Eurostat said Monday. The deficit reduction was due exclusively to higher revenues, which mounted to 46.2% of GDP from 45.3%, while public spending increased to 49.9% from 49.5%. Eleven countries failed to respect the Maastricht deficit ceiling of 3.0%: Spain (-10.6%), Greece (-10.0%), Ireland (-7.6%), Portugal (-6.4%), Cyprus (-6.3%), France (-4.8%), Slovakia (-4.3%), the Netherlands (-4.1%), Slovenia (-4.0%), Belgium (-3.9%) and Malta (-3.3%), while Italy was right at the limit (-3.0%). The lowest deficits were in Estonia (-0.3%) and Luxembourg (-0.8%). Only Germany managed to post a small surplus (+0.2%). Most countries also overshot the Maastricht public debt limit of 60% of GDP last year: Greece (156.9%), Italy (127.0%), Portugal (123.6%), Ireland (117.6%), Belgium (99.6%), France (90.2%), Cyprus (85.8%), Spain (84.2%), Germany (81.9%), Austria (73.4%), Malta (72.1%) and the Netherlands (71.2%). The lowest debt ratios were in Estonia (10.1%) and Luxembourg (20.8%). In its scenario from February, the European Commission had estimated a slightly lower Eurozone deficit of 3.5% for 2012 before France overshot its target by 0.3 point. The projection for this year is 2.8% and for next year 2.7%, assuming no change in fiscal policy. The cyclically adjusted structural deficit would decline by around 0.75 point this year but deteriorate slightly in 2014, excluding policy changes.

Spain's GDP Contracts at 2% Annualized Rate in First Quarter - According to the Bank of Spain and as reported by Libre Mercado, Spain's GDP Drops at 2% Annualized Rate in First Quarter The Spanish economy fell 0.5% in the first quarter and declined 2% year on year, according to economic bulletin of the Bank of Spain , which estimates a fall of 4.5% of employment in the same period, two tenths less than in the previous quarter. The Bank of Spain estimates that domestic demand fell by 0.8%, also lower than in the previous quarter, to reverse the impact of temporary factors that had a negative impact on domestic spending in the final months of 2012, as raising indirect taxes and the abolition of the bonus for public employees. However, the central bank indicated that the reduced capacity of household savings, the fall of his wealth, the persistence of job outlook "uncertain" and a high debt leaves little room for recovery of short-term consumption. For residential investment, it also highlights that demand continues to show "great weakness". Thus, private consumption fell by 0.3%, against a fall of 2% in the previous quarter, while gross capital formation contracted by 1.8%, also well below the 3.9% decline previous quarter.

Spain Jobless Rate Breaches 27% on Recession Woes - Spanish unemployment rose more than economists forecast in the first quarter to the highest in at least 37 years as efforts to tackle the European Union’s biggest budget deficit crimped growth.The number of jobless increased to more than 6 million for the first time, climbing to 27.2 percent of the workforce, compared with 26.02 percent in the previous three months, the National Statistics Institute in Madrid said today. That was more than the 26.5 percent median forecast of 8 economists surveyed by Bloomberg News. Prime Minister Mariano Rajoy will tomorrow unveil measures aimed at halting a six-year slump in the euro region’s fourth- largest economy. Spain’s recession dragged into a seventh quarter in the first three months of 2013, leaving the country with more than a fifth of all jobless people in the EU.

Spain's Unemployment Rate Rises Full Percentage Point to Record 27.2%; Unemployment Tops 6.2 Million - Spain's budget deficits are out of control, home prices are still falling, GDP is down 2% annualized in the first quarter, production is down, the unemployment rate soared a full percentage point to 27.16%, and a record 6.2 million are out of work. Here are some stats from Spain's National Statistics Office as noted in the Financial Times.

  • Almost 240,000 people lost their jobs in the first three months of the year.
  • The overall number of jobless is 6.2 million.
  • The unemployment rate rose by more than 1 point to 27.16%
  • 2 million out of 17.4 million Spanish households are without a single person holding a job.
  • Job losses were particularly heavy in the services sector, but also in industry and farming.
  • Construction has shed more than 1.6 million jobs since 2008 as a result of the bursting of Spain’s housing bubble.

Marginalized in Spain (Chart from El Pais) That’s more than six million Spaniards out of work in the first quarter of 2013. As Reuters said, that raises the jobless rate in the eurozone’s fourth biggest economy to 27.2 per cent, the highest since records began in the 1970s. The full history, courtesy of ReutersJamie: We can argue about the number of people not in education, employment or training (so-called “NEETs”), or falling Spanish yields, but that number (and others like it throughout Europe), is incredibly stark and a more potent argument against the logic and political tenability of austerity than any Excel error. From the FT on Thursday: The people left behind are coalescing into the hard core of a new Spanish underclass that will become more difficult to dissolve with every month that passes. Some 640,000 jobless Spaniards below 30 are – despite their age – already classified as long-term unemployed. Economists warn that the rapidly swelling ranks of young, low-skilled unemployed pose a challenge to the country that is likely to outlive the crisis by many years. What is at stake is not just Spain’s long-term economic prospects but also the social and political fabric of a society that has faced the downturn – at least until now – with remarkable equanimity and solidarity.

Spain Says Deficit Target Must Wait 2 More Years Amid Slump - Spanish Prime Minister Mariano Rajoy sought a two-year extension to meet European Union deficit rules, as he lowered his growth forecast and predicted little relief from a record 27 percent unemployment rate. Rajoy’s Cabinet at a meeting in Madrid today approved a plan to cut the shortfall of 10.6 percent of gross domestic product back within the EU limit of 3 percent by 2016 instead of 2014 as demanded by euro-area governments. The European Commission endorsed the plan in a statement on its website. This is “a balanced, but still ambitious fiscal consolidation path, given the difficult economic environment,” the commission in Brussels said. With the euro area in its second year of recession, officials in Brussels and Berlin are backing away from their austerity-first policies amid criticism from institutions including the International Monetary Fund. Spanish output has contracted for seven straight quarters and remains 6.5 percent below its 2008 peak. In mid-2012, Rajoy won a one-year extension until 2014 to meet the 3 percent target.

El Pais Article Discusses “Liberating Spain from Shackles of the Euro” - The El Pais Screwdriver Blog openly asks "Are we to Liberate the Euro?" Here is a Mish-modified translation:  Today Spain has reached a record number of unemployed. Although we do not like the current state of things, no one seems to know against whom to direct their anger. Actually, we are under a dictatorship perhaps worse than the Portuguese or Spanish forty years ago because it is more subtle and works almost invisibly. And we can embody it it, too, not in an institution or a person, but with a symbol: the euro.  There are many reasons to believe that Spain would not be as bad off out of the single currency. To explore this question we must look at least three things: First, what is the profile of the countries that have left monetary unions? Second, what does empirical evidence tells us regarding effectiveness of countries have left currency unions? Third, what are the economic and social conditions that need to be taken into account in making such a decision? Spain fits he profile of the countries that have tended to get out of currency unions: large countries economically developed with well-established democracies.

The great Spanish nation can end its crucifixion at will by leaving EMU - The mind goes numb. Spanish unemployment jumped by yet another 237,000 people in the first quarter to 6.2 million, or 27.2pc. This is equivalent to roughly 8.3 million in Britain, or 39 million in the United States. The country is losing 3,581 jobs a day. There are 1.9m households where no member of the family has a job. As you can see from this graphic, the rate has reached 36.8pc in Andalusia, Spain's most populous region. The national rate of unemployed youth is 57.2pc, rising to 70pc in the Canaries. This is in spite of mass emigration by Spanish youth. El Pais reports that 260,000 young people aged between 16 and 30 left the country last year. A great number have come to London. They are all around the Telegraph offices at Victoria working in Pret a Manger and Starbucks, delightfully well-mannered. Others have gone to Germany, or the Persian Gulf, or further afield. Such is Spanish diaspora, unseen since mass exodus after the Civil War, or the Conquista.

Visualizing The Dead-Weight On The Global Economic Recovery - Youth unemployment has become a worrying phenomenon with 74.6 million young people unemployed globally in 2012. Rising youth unemployment has a detrimental effect on economic growth, political and social stability as well as on the ability to exploit the potential demographic dividend. Young people who are neither in employment nor in education or training (NEET) are a particular social concern. The economic and social impact of a growing number of NEET young people aged 15 - 24 has raised concerns as they represent a dead weight burden.

Unemployment Hits New Highs in Spain, France -  Unemployment in Spain and France has jumped to new highs, data showed Thursday, lending ammunition to a growing chorus calling for easing the euro zone's austerity drive as the cure for its debt crisis because of the high social fallout.The jobless rate in Spain rose sharply to 27.2% of the workforce in the first quarter, the highest level since records began in the 1970s. In France, the number of registered job seekers who are fully unemployed rose to more than 3.2 million, topping a previous record set in 1997.  The weak figures in France and Spain, two of the biggest euro-zone economies, come on the heels of sharp rises in unemployment in March in the Netherlands and Sweden—an indication that the European Union's northern members are also suffering from the bloc's economic weakness. The slowdown has prompted a broad rethink of the reliance on austerity measures in the bloc.  Last week, the International Monetary Fund joined the U.S. in saying the euro zone should ease up on belt-tightening, arguing it was holding back the global economic recovery and could end up being self-defeating. The head of the European Commission said Monday the policy had "reached its limits."

Unemployment in Spain and France climbs to record levels - The number of unemployed Spaniards has risen beyond 6m for the first time since records began, underlining the depth of the country’s economic suffering and raising pressure on European leaders to address the social crisis spreading across the continent’s southern periphery. The latest surge in unemployment is certain to provide fresh ammunition to critics of the EU policy response to the financial and economic crisis in countries such as Greece, Portugal and Spain. France also reported record unemployment figures on Thursday, with the number of jobseekers without any work rising for the 23rd month to 3.2m in March, surpassing a previous peak in 1997. The total including all those seeking full-time work rose to 4.7m. The increase has raised doubts over President François Hollande’s promise to reverse the trend of rising unemployment, now well above 10 per cent of the workforce, by the end of this year. In Spain almost 240,000 people lost their jobs in the first three months of the year, according to the national statistics office, taking the overall number of jobless to 6.2m. The unemployment rate rose by more than 1 point to 27.16 per cent – worse than predicted by most economic forecasters. Close to 2m out of 17m Spanish households are now without a single person holding a job.

Unemployment hits new highs in Spain and France - As if there were not already abundant proof of the failure of austerity in the eurozone, the BBC reported yesterday that both Spain and France have hit new unemployment milestones. In Spain, unemployment has jumped from February’s 26.3% to a first-quarter rate of 27.2% (implying an even higher figure for March). In March 2012, it was “only” 24.1% (see source in table below). In France, there are now 3.2 million unemployed, more than at any time since the country began keeping records in 1996. Complete EU unemployment data for March should be released in early May. For a fuller picture of the continuing deterioration of the situation in the European Union and the eurozone, the unemployment rates tell a stark story.

France, Spain miss deficit goals; EU seeks focus on growth - France and Spain fell short of their budget deficit goals last year, data showed on Monday, although the overall fiscal picture for the euro zone improved. France's 2012 budget deficit was 4.8 percent of economic output, statistics office Eurostat said in the final reading of all 27 countries' public accounts. It compared with a target of 4.5 percent. Spain's budget shortfall was 7.1 percent, excluding bank recapitalisation, higher than the government's 6.98 percent official year-end reading and well above Madrid's original target of 6.3 percent. Overall, the 17-nation euro zone looked much better off at the end 2012, however. Its combined fiscal deficit was 3.7 percent of gross domestic product, compared with 4.2 percent in 2011 and 6.5 percent in 2010. Budget cuts are at the centre of the euro zone's strategy to overcome a three-year public debt crisis but they are also blamed for a damaging cycle where governments cut back, companies lay off staff, Europeans buy less and young people have no little hope of finding a job.

France unemployment hits new high - The number of unemployed people in France climbed to new record levels in March, according to official data. Around 3.2 million people were out of work in the country, an 11.5 percent annual increase, the labour ministry said on Thursday. With a wave of industrial layoffs taking effect, the March jobless figure beat the previous all-time record of 3.1 million set in January. 1997. The new figures are a symbolic blow to President Francois Hollande, whose approval ratings have sunk to the lowest of any modern French leader in recent months as jobless claims soared. Battling to make good on his promise to reverse the rise in unemployment by the end of this year, Hollande has launched subsidised youth-job schemes and pushed through a reform to make hiring and firing slightly easier.

Small graces: French flash PMI edition [updated... now with less grace] Depressing eurozone and German prints below. The eurozone composite was bleakly steady at 46.5 while the German comp hit 48.8 from 50.6 in March — its worst level in six months. The only real good news is that this might increase the chances of an ECB refi cut in the near future. But since France came out first…. Being punched in the face is better than being punched in the crotch, we suppose. From Markit’s Jack Kennedy: The downturn in French private sector output eased in April from March’s four-year record, but nonetheless remained sharp. Accelerated job shedding and an ongoing squeeze on output prices also highlight the pressures facing firms amid a tough economic backdrop. It still appears to be a difficult slog that lies ahead.The French release is here with the German and eurozone flash PMIs making their appearances before 0900.

Should the German IFO Chart Be Concerning Us? - On March 27, I posted the chart of the German IFO index with the title, "Should This Chart Be More Concerning?"  While the chart is still at decent levels, it has been clearly declining for over two years.  The latest reading shows a continued decline: The Ifo Business Climate Index for German industry and trade fell in April. Although the majority of companies assessed their current business situation as good, they were far more cautious than last month. Their expectations regarding future business developments were also lower. The German economy is taking a breather. Here's a chart of the data: I believe the biggest problem with the above data is the "assessment of business situation" number, which peaked in early/mid-2011 and has been declining since. And while business expectations and IFO climate numbers bumped higher last winter, they both have moved lower recently.

Southern Europe’s Recession Threatens to Spread North - No company symbolizes German industrial might like Daimler, the giant maker of Mercedes-Benz autos and trucks. So when the company said this week that it, too, had finally been caught in the downdraft of the European economic crisis, it was an ominous sign for all of the Continent, if not the whole world. German exporters like Daimler have been bastions of stability on a continent burdened with shaky banks, dysfunctional governments and legions of unemployed youth — not to mention the worst auto industry slump in two decades. But Daimler’s glum forecast for 2013 was the latest evidence that Germany, and other relatively healthy countries like Austria and Finland, risk falling into the recession that has long afflicted their southern neighbors. The slowdown in Germany was foreshadowed by months of declining industrial output, said Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y. “The E.U. has made Europe a much more cohesive economy, which is good when things are going up,” he said. “But when things are going down the multiplier is very strong. An outgoing tide lowers all ships.” The region’s overall economic weakness as well as slowing demand in China and other big markets for German exports of consumer products, cars and sophisticated machine tools, industrial robots and construction equipment are finally taking their toll.

CONFIRMED: The Economic Crisis Has Infected Europe’s Core - There is no place to hide out in Europe anymore.  This morning, German Flash PMI for April confirmed that it too is going into contraction, as the headline number fell below 50, falling to the worst level in 6 months.  Here's the key summary, but the obvious thing here is that every indicator has fallen below 50, signifying contraction. Manufacturing outpout at 47.9 is particularly gruesome.

Germany Private Sector Output Declines First Time Since November; Eurozone Activity Declines 19th Time in 20 Months As expected, the Markit Flash Germany PMI® shows German private sector output declines for first time since November 2012.  Key Points:

  • Flash Germany Composite Output Index(1) at 48.8 (50.6 in March), 6-month low.
  • Flash Germany Services Activity Index(2) at 49.2 (50.9 in March), 6-month low.
  • Flash Germany Manufacturing PMI(3) at 47.9 (49.0 in March), 4-month low.
  • Flash Germany Manufacturing Output Index(4) at 47.9 (50.0 in March), 4-month low.

The overall pace of contraction was the steepest since October 2012, largely driven by a marked decrease in new work received by service providers. Manufacturing new orders dropped at the fastest pace so far this year but, in contrast to the service sector, the rate of new business decline remained slower than on average in 2012. In the manufacturing sector, new export orders declined at the most marked pace so far in 2013, but the rate of contraction was slightly slower than seen for overall new work.The Markit Flash Eurozone PMI® shows Eurozone suffers ongoing downturn in April.  Key Points:

  • Flash Eurozone PMI Composite Output Index at 46.5 (46.5 in March).
  • Flash Eurozone Services PMI Activity Index at 46.6 (46.4 in March). Two-month high.
  • Flash Eurozone Manufacturing PMI at 46.5 (46.8 in March). Four-month low.
  • Flash Eurozone Manufacturing PMI Output Index at 46.3 (46.7 in March). Four-month low

Europe’s bog deepens - There was a hint from yesterday’s China PMI that the good news from global trade was looking very toppy. There was therefore a good chance that the powerhouse of Europe, German, was going to disappoint with its PMI number overnight, and it certainly managed that. April data indicated a decline in German private sector output, thereby ending a four-month period of expansion. This was highlighted by the seasonally adjusted Markit Flash Germany Composite Output Index posting 48.8 in April, below the crucial 50.0 no-change value and down from 50.6 in March. The latest reading indicated a moderate reduction in private sector business activity, with the pace of decline the fastest since October 2012. The manufacturing and service sectors both registered renewed falls in output levels during April, with the former posting a slightly faster rate of contraction. The decrease in manufacturing production was the first so far in 2013, while the reduction in service sector activity was the first in five months and the most marked since last October.

Counterparties: Europe’s economic decoupling - Economic data out today paints an even more depressing picture of Europe’s major economies. As the Guardian reports, the UK just barely managed to avoid a triple-dip recession, eking out 0.3% GDP growth in the first quarter. While British Chancellor George Osborne said the news was encouraging, others were less impressed. “Normally, we would expect the economy to grow by around 12% over any five-year period. The fact that it has contracted by 2.6% instead means almost 15% of potential output has been lost,”  Oxford economist Simon Wren-Lewis summed up the British economy in three charts, and wondered if slow growth is here to stay: In even more bad news: Unemployment in Spain is now 27.2%, the highest since the Franco years, and now equal to Greece as the highest rate across the Eurozone. “The people left behind are coalescing into the hard core of a new Spanish underclass that will become more difficult to dissolve with every month that passes,” Tobias Buck says of Spain’s unemployed. David Keohane says Spanish unemployment is a “more potent argument against the logic and political tenability of austerity than any Excel error”. Despite the unemployment crisis, the WSJ reports that bond market is booming in both Spain and Italy because of investor confidence that the ECB will intervene in the event of a crisis. Citi strategist Jose Luis Martinez called this a “shocking decoupling between the real and the financial economy”. However, in Germany, unemployment, which stood at 6.9% in March, is forecast to fall to 6.6% by 2014, according to Bloomberg, and the country’s leaders seem more worried about inflation at home than turmoil to the south. The ECB, meanwhile, still somehow seems committed to austerity.

If Only Europe Could Sell Unemployment - Another day, another round of atrocious data out of the Eurozone: Spain’s unemployment rate soared to a new record of 27.2% of the workforce in the first quarter of 2013, according to official figures. The total number of unemployed people in Spain has now passed the six million figure, although the rate of the increase has slowed. The figures underline Spain’s struggle to emerge from an economic crisis which began five years ago. A big demonstration in Madrid is being planned against the austerity measures. On Friday, Prime Minister Mariano Rajoy will unveil fiscal and policy measures aimed at halting recession in the eurozone’s fourth-largest economy. “These figures are worse than expected and highlight the serious situation of the Spanish economy as well as the shocking decoupling between the real and the financial economy,” Last week, the International Monetary Fund cut its 2013 forecast for Spain’s growth to a 1.6% contraction from 1.5% and said the unemployment rate would peak at 27% this year. Youth unemployment is reported at 57.2%, which is a number so large its almost impossible to comprehend. The IMF claims it will peak this year, but you only have to look at their track record on economic forecasting to know you should take that with a pinch of salt. The latest PMIs still show contraction, industrial production is down 6.5% from a year ago, and bad loans are still over 10% even after the implementation of a bad bank in an attempt to clean out the banking system.

Luxembourg Is Not The Next Cyprus, Not Yet, But…. from naked capitalism -  - Yves here. This article if anything underplays how much a one-trick pony Luxembourg is and what a fix it is in if Germany and/or the EU continues its campaign against tax avoidance and evasion (which as we argued was overstated in the case of Cyprus; a lot of the money was for investment in Russia, both by Russians and foreign nationals, because the Cyprus legal system uses UK law and is vastly preferable for contracting and resolving disputes. Notice that the party that would be the loser from tax avoidance by Russians, namely Russia, wasn’t the one leading the charge against Cyprus?) Depending on how and when you measured it, Cyprus’s bank assets were roughly 800% of GDP. Luxembourg’s are roughly 2500% of GDP. Richter tells us that 38% of the Luxembourg economy is banking. That is presumably defined narrowly and does not include the accountants and lawyers who serve foreign investors and are major parts of the economy. I don’t have any firm data, but it’s not hard to imagine that they are as important as the formal banking sector. Luxembourg hope to come to an understanding with the Eurozone and slowly reach accommodations, which would still shrink its banks, but in a less brutal manner than Cyprus. But with such a large financial sector, any action is still going to cause a fair number of customers to flee. It’s hard to see how any gradual path can be found, which then raises the question of whether a series of bank failures in Luxembourg would have broader ramifications.

IMF: Evidence does not support the ban on naked SCDS purchases - As discussed back in September (see post), the hysteria over sovereign CDS (SCDS) within the European Commission and other governing organizations has been completely overblown. Sovereign CDS has been more of a "canary in a coal mine", while EU politicians, bureaucrats, and often the public would sometimes prefer that the world does not know that their "sovereign canary" has died.  The IMF recently came out with a report confirming that much of the regulatory madness governing SCDS within the EU is unproductive. And a big part of the regulatory effort has in fact focused on the wrong risks. IMF: - ... the evidence here does not support the need to ban purchases of naked SCDS protection. Such bans may reduce SCDS market liquidity to the point where these instruments are less effective as hedges and less useful as indicators of market-implied credit risk. In fact, in the wake of the European ban, SCDS market liquidity already seems to be tailing off , although the effects of the ban are hard to distinguish from the influence of other events that have reduced perceived sovereign credit risk. In any case, concerns about spillovers and contagion effects from SCDS markets could be more effectively dealt with by mitigating any detrimental outcomes from the underlying interlinkages and opaque information. Hence, efforts to lower risks in the over-the-counter derivatives market, such as mandating better disclosure, encouraging central clearing, and requiring the posting of appropriate collateral, would likely alleviate most SCDS concerns.

European Austerity Does a 180 as Lagarde Weighs In - It will not be long before we look back on this year’s meetings of the International Monetary Fund and the World Bank, which conclude Monday, and see a turning point in the global economic crisis. Europeans, who have suffered the most, are now a considerable step closer to the right recovery policies, and Europe is likely to embrace these first. Austerity has entered the beginning of its end. Does Europe need to clean up its messes of debt and its deficits? Most certainly and obviously, and there is hard work and sacrifice ahead. It is austerity in its undiluted form that is on the way out—austerity without ballast. This is what makes the gatherings in Washington worth noting. The agenda is taking a turn. For years, politicians and central bankers the world over have groped to find the mix of fiscal, economic, and monetary strategies to counter the economic crisis most effectively. But it is in Europe that the confusion has been of greatest consequence. It has taken up countless summits, central bank board meetings, op-ed pages, academic papers, think-tank seminars, and who knows what else. Numerous governments have risen and fallen. Look around: At best you can get away with calling Europe’s current fate a mixed outcome.

EU near austerity limit, says Barroso - The European Union's focus on austerity has hit the limits of public acceptance, according to the head of the EU's executive arm, as Brussels joined the International Monetary Fund in raising concerns over the impact of public spending cuts.José Manuel Barroso, president of the European commission, also signalled that governments would be given more leeway if they were struggling to get their budget deficits within the required ceiling of 3% of GDP. He said the argument raging over the merits of austerity versus more public spending was a false debate – the answer was to combine the two, although public spending cuts alone would not provide the solution. "Socially and politically, one policy that is only seen as austerity is, of course, not sustainable," Barroso said. "We haven't done everything right … The policy has reached its limits because it has to have a minimum of political and social support." His comments follow last week's intervention on UK economic policy by the IMF. Its chief, Christine Lagarde, said the poor performance of the UK economy left her with no alternative but to urge George Osborne to revisit his austerity policy.

Time for Growth: Austerity Has 'Reached its Limits,' Barroso Says - Striking statements were made by one of Europe's most powerful men on Monday night, when European Commission President José Manuel Barroso said the strict austerity measures thus far imposed on the EU's beleaguered economies may have reached their political limits. Although this policy is "fundamentally right," it has nevertheless "reached its limits," he told a conference in Brussels. "A policy, to be successful, not only has to be properly designed, it has to have the minimum of political and social support," he added. Barroso's comments came just ahead of the release of the EU's latest budget deficit numbers by the body's statistics agency Eurostat on Monday. They showed that for 2012, though Europe's combined deficit level dropped, the overall debt for the 17 members of the EU currency union jumped from €8.2 trillion ($10.7 trillion) to €8.6 trillion. The drastic belt-tightening policies imposed on a number of ailing member states have apparently had little effect. On the contrary, many theorize that the spending cuts intensify budgetary problems because they stifle growth, which has prompted fierce protest in the Southern European countries in recession. Barroso suggested that these countries in crisis be given more time to bring their deficits down to the required 3 percent of gross domestic product (GDP).

Europeans Are Thinking the Unthinkable: That Debt Defaults Might Make Sense - Consider the latest developments in these six countries (from west to east):

  • Portugal. In an interview on a public-broadcasting station two weeks ago, former Prime Minister and President Mário Soares argued that default was preferable to greater austerity. In the interview, Soares specifically cited the precedent of Argentina.
  • Spain. For the fifth year in a row, Spain remained the euro-zone country with the highest overall unemployment rate, at 25% for 2012.
  • France. After less than a year in office, Socialist François Hollande is the least popular President in more than 30 years. Financial scandal in his administration is one reason, but a more serious problem is the downturn of the economy, with France likely to fall back into recession this year.
  • Italy. February’s elections resulted in a deadlock, as more than a quarter of the vote went to an antiestablishment protest party. That made it impossible to elect a new President, so the 87-year-old incumbent has been re-elected to another seven-year term.
  • Greece. Austerity in the country has become so brutal, according to the Atlantic, that children are starving. That may be alarmist, but conditions are bad enough that the most productive workers are emigrating. This brain drain will make it much harder for the economy to recover.
  • Cyprus. The current bailout plan has such harsh terms that Cyprus will be forced to sell off all the assets it can. The alternative, the editorial concludes, is to exit the euro.

Europe Facing More Pressure to Reconsider Cuts as a Cure -  Unemployment has surpassed Great Depression-era levels in Southern Europe. Recession is drifting to the once resilient economies of the north. Even some onetime hawks on government spending say they cannot cut any more.  After years of insisting that the primary cure for Europe’s malaise is to slash spending, the champions of austerity, most notably Chancellor Angela Merkel of Germany, find themselves under intensified pressure to back off unpopular remedies and find some way to restore faltering growth to the world’s largest economic bloc.  On Friday, Prime Minister Mariano Rajoy of Spain, who once promoted aggressive budget cuts, became the latest leader to reject European Union targets for reducing deficits.  That is one of several developments — a recent court ruling against job cuts in Portugal; a new, austerity-averse prime-minister-in-waiting in Italy; and mounting doubts among ordinary Europeans and even the International Monetary Fund — that have forced senior officials in Brussels to acknowledge that a move away from what critics see as a fixation on debt and deficits toward more growth-friendly policies is necessary

ECB says ditching austerity would not help euro zone - (Reuters) - ECB policymakers rebuffed suggestions that Europe should ease up on austerity and said that while the central bank has room to cut interest rates, such a move would not necessarily help the economy much. European Central Bank Vice-President Vitor Constancio said that seeking to stimulate economies by stopping measures aimed at cutting government debt could merely increase countries' borrowing costs rather than triggering growth. Finance leaders of the G20 economies last Friday edged away from a long-running drive toward cutting spending and raising taxes in rich nations, rejecting the idea of setting hard targets for reducing national debt in a sign of concern about a sluggish global recovery. With budget cuts blamed for a second straight year of recession in the euro zone, the EU's top economics official Olli Rehn indicated over the weekend that more flexibility on tough economic targets was needed. His boss, European Commission President Jose Manuel Barroso, said on Monday that austerity had reached its natural limits of popular support.

The Frankfurt veto - AUSTERITY has been under fire from all corners, lately: from IMF reports showing painfully high multipliers on fiscal cuts, to challenges to the Reinhart-Rogoff debt-threshold research, to the European Commission, whose president, Jose Manuel Barroso, noted this week that austerity in Europea has "reached its limits". Even the data itself appears to be rebelling. Eurostat released updated figures this week on euro-area fiscal statistics, which show remarkably little progress toward fiscal goals; Germany was the only European Union economy to run a fiscal surplus in 2012. But despite this, yields on peripheral sovereign debt continued their long march down. Soaring borrowing costs apparently weren't about indebtedness at all, but about uncertainty over the European Central Bank's willingness to act as lender of last resort. That, of course, means that any pivot away from fiscal consolidation in the euro area will require approval from Frankfurt. While many have focused on the German government's chilly reaction to the change in fiscal mood, it is the European Central Bank that has the most influence over government borrowing costs and which has so far used that influence to extract a pound of austerity flesh from the struggling periphery.

Inside Merkel’s Bet on the Euro’ Future -  It was a typical Merkel move: trying to play down Germany's dominant role in reshaping Europe's currency union. Few in Europe believe it. However lightly Ms. Merkel treads, German strength in Europe is raising tensions. Many Greeks and Spaniards blame Berlin's austerity diktat for turning their countries' financial crises into economic depressions. This account of Ms. Merkel's handling of Europe's crisis, based on interviews with 17 European policy makers, shows Cyprus's bailout flowing directly from principles that will continue to guide German leadership in Europe.  In September, Ms. Merkel is expected to win a third term as chancellor. That means her agenda will dominate Europe's crisis response for years. The euro's survival hinges to a considerable extent on whether her strategy works.  Her approach is to put the onus on struggling nations to save the euro by cutting their budget deficits, labor costs and welfare. It is a strategy that is as popular in Germany as it is divisive in Europe's weakest countries.

Crisis for Europe as trust hits record low - Public confidence in the European Union has fallen to historically low levels in the six biggest EU countries, raising fundamental questions about its democratic legitimacy more than three years into the union's worst ever crisis, new data shows. After financial, currency and debt crises, wrenching budget and spending cuts, rich nations' bailouts of the poor, and surrenders of sovereign powers over policymaking to international technocrats, Euroscepticism is soaring to a degree that is likely to feed populist anti-EU politics and frustrate European leaders' efforts to arrest the collapse in support for their project. Figures from Eurobarometer, the EU's polling organisation, analysed by the European Council on Foreign Relations (ECFR), a thinktank, show a vertiginous decline in trust in the EU in countries such as Spain, Germany and Italy that are historically very pro-European. The six countries surveyed – Germany, France, Britain, Italy, Spain, and Poland – are the EU's biggest, jointly making up more than two out of three EU citizens or around 350 million of the EU's 500 million population. The findings represent a nightmare for Europe's leaders, whether in the wealthy north or in the bailout-battered south, suggesting a much bigger crisis of political and democratic legitimacy.

Financial transactions tax: UK launches legal challenge - The UK government has launched a legal challenge against plans for a European financial transactions tax (FTT). The FTT, which aims to raise public funds and discourage speculative trading, will be adopted by 11 EU states - but not by the UK. Ministers fear it could be imposed on UK firms trading with businesses based in one of those states. The Robin Hood Tax campaign group said the legal move was about "defending one rather rich square mile". The 11 countries going ahead with the FTT are Germany, France, Italy, Spain, Belgium, Austria, Portugal, Greece, Slovenia, Slovakia and Estonia. Under their plans, transactions of shares, currencies and bonds would be taxed. The City of London could be hit by the tax if, for example, a British firm trades with branches of French or German banks based in the capital. The British government would have to collect the tax but would not be allowed to keep it.

Fitch cuts British bond rating from AAA - Fitch Ratings on Friday stripped the UK of its cherished top AAA credit score, citing a weaker economic outlook that continues to hinder the country in keeping control of its debt. Fitch becomes the second major ratings agency to downgrade its rating for the UK to AA+. Though Fitch said the country had fiscal financing flexibility helped by the strength of the pound, it warned of problems ahead due to higher-than-projected debt and deficits. "The fiscal space to absorb further adverse economic and financial shocks is no longer consistent with a 'AAA' rating," Fitch said in a statement. Britain's government took the announcement in stride and declared that the rating was proof that the country could not walk away from its troubles. It took strength in the fact that Fitch gave the country a "stable" outlook. The British government, which has long played on its AAA rating as a sign of its economic might, has been pursuing a harsh programme of spending cuts and tax increases designed to reduce the nation's hefty deficit, which Fitch put at 7.4 per cent of the country's economic output.

Fitch Downgrades Britain. No One Cares. - Fitch Ratings announced today that it is cutting the U.K.'s credit rating from AAA to AA+, the second-highest level, because of its weak economic performance and high public debt. This follows a similar move by Moody's in February, and it doesn't matter. As Svenja O'Donnell and Scott Hamilton note in reporting on the downgrade for Bloomberg, "Investors often ignore such moves," and U.K. sovereign bond yields fell after the Moody's downgrade. Investors are similarly blase today: Credit-default swap prices for the U.K. have barely moved. As of 2:05 p.m. in New York, U.K. five-year CDS are trading at $47.01, up all of 11 cents today. (That's a price to insure $10,000 in bonds against five years of losses.)That means that, despite the warnings from Fitch and Moody's, investors still consider U.K. bonds to be less risky than they were in February and far less risky than they were last summer, when all three rating agencies were giving the country their top rating (see chart).

The real meaning of Fitch's downgrade - The credit ratings agency Fitch has downgraded the UK's sovereign debt by one notch to AA+ from AAA. This was not unexpected: the UK has been on "negative watch" for some time and was downgraded by Moody's not long ago. However, the terms of the downgrade are distinctly odd. Firstly, let's remind ourselves what the purpose of a credit rating is. For sovereign debt, it is supposed to give investors an indication of the risk of loss due to default. Credit ratings are NOT intended to give a general indication of the health of an economy. Nor are they intended to indicate risk of indirect losses due to inflation or low interest rates. So the downgrade indicates that the UK is considered slightly more likely to default on its debt than countries such as Canada and Norway that still have AAA ratings.  Except that Fitch then goes on to undermine the entire justification for this downgrade by pointing out that there is virtually zero chance of a "self-fulfilling fiscal financing crisis" because of the UK's status as a reserve currency issuer and the Bank of England's willingness to "intervene in the government debt market". Fitch implies that, rather than allowing the UK to default on its debt, the Bank of England would monetise it. Now, the risk from monetisation is inflation. But a credit rating does not assess the risk of losses due to inflation. It is supposed to assess the default risk. If, as Fitch suggests, the Bank of England would as a last resort monetise debt, there is ZERO risk of default.

Taxman doubles asset seizures over VAT bills - HM Revenue & Customs has almost doubled its use of asset seizures to settle companies' unpaid VAT bills, according to data studied by finance provider Syscap. Figures sourced from HMRC show that the use of powers of "distraint" - whereby the taxman can seize possessions and arrange for them auctioned off to pay VAT bills - increased from 2,401 cases in the year to end-March 2011, to 4,746 in the following 12 months. Syscap warned that small and medium-sized enterprises are now at greater risk of having their assets seized in VAT disputes, and estimated that 95 per cent of all uses of distraint in VAT cases involved SMEs.

IMF steps up call for Osborne to slow down austerity plans as row escalates - A row between George Osborne and the International Monetary Fund over Britain’s economic strategy has escalated after the fund’s deputy managing director joined those urging the Chancellor to consider slowing down his austerity plans.  Mr Osborne had tried to dismiss calls by the IMF’s chief economist Olivier Blanchard last week for the UK to ease the £130bn programme of spending cuts and tax rises as “just one voice”, claiming: “The IMF’s position has not changed.” But David Lipton, the IMF’s second-in-charge, has waded into the battle alongside Mr Blanchard. “The UK economy has turned out to be somewhat weaker than had been foreseen, so our view is that the pace of consolidation ought to be reconsidered, and we’ll want to come and have some discussions about that,” he told Sky News.  Mr Lipton’s intervention will heap more pressure on Mr Osborne to change course after a difficult week in which a second credit rating agency stripped the UK of its AAA status and the Chancellor’s favourite economists had their work called into question.  Mr Lipton is a key figure because he is scheduled to unveil the IMF’s latest detailed analysis of the UK and present its policy recommendations in London next month. Mr Blanchard and Mr Lipton have both signalled that the Fund will tell Mr Osborne to ease his spending cuts to rekindle growth at the event.

IMF boss turns on the Chancellor to hide her own sins - Bruised and battered from his recent encounters with the International Monetary Fund, George Osborne retreated to an American Civil War battlefield last week to indulge a personal passion before leaving the United States for home. Until very recently, Britain had been regarded as a pin-up for fiscal rectitude. It was a country willing to take the pain through cuts to deal with the twin problems of a budget deficit and the accumulating pile of national debt built up over many years. The hope was that reducing both would create the space for growth driven by households and businesses. The UK's rigorous approach of extended public spending and welfare cuts was viewed as an example of how to stabilise a deeply troubled economy. Now, however, Osborne's greatest allies have turned against him. The IMF, the world's economic overseer, has launched a full-scale attack, accusing Britain - and by extension the Chancellor - of 'playing with fire' with its austerity programme because the shock treatment has failed to spark any discernable growth. Not only that, two of the international credit rating agencies, first Moody's followed by Fitch - with the third, Standard & Poor's, keeping a close watch - have deprived the UK of its much-prized 'AAA' top draw credit rating.

Who is in charge of the British economy? - The UK has had a decade of disappointing economic policy. It is now under attack for failing to generate a recovery from the recession, but the bigger mistakes were made before the financial crisis when unsustainable imbalances built up during “the great stability”. So a searching reappraisal of the framework for policy throughout that period – inflation targeting – seems overdue. Unfortunately, the review produced by the Treasury last month is not so ambitious. It focuses on whether the existing framework can deal with post-crisis demands, not whether there is a better alternative. By stretching the concept of “flexible inflation targeting” to the limit, it concludes that no change is required in our regime. The UK’s 2 per cent inflation target “at all times” will do. That has not been the experience of the past decade. There was a build-up of imbalances before the crisis of 2007-08 even though inflation was well behaved. The years since have seen a persistent shortfall in demand even though inflation has been above target, and is expected to remain so for the medium term. Furthermore, monetary policy is no longer the only tool for managing the economy. Fiscal and financial (“macro-prudential”) policy are now part of the mixture – and we have to manage the conflicts and overlaps between them. For five years a very expansionary monetary policy has had to contend not just with depressed demand from the private sector but with deflationary fiscal and prudential policies. All three arms of policy have affected banking. Monetary policy and fiscal subsidies have sought to revive lending to businesses and households, while financial regulation has been pushing the other way by demanding that banks cut leverage.

Growing out of trouble - THE excellent Martin Wolf has lots of very sensible things to say about the Reinhart-Rogoff fiasco in his column today. He points out the very real problems in the research that purported to find a change in the nature of the relationship between debt and growth once debt tops 90% of GDP. He notes that the surge in debt levels across the rich world is quite clearly a consequence of abysmal growth related to the crisis. He makes the important point that how and why the debt is incurred matters for growth, and he argues quite rightly that—with the exception of euro-area countries that lost access to markets—the quick pivot to austerity following the crisis was an almost universally bad choice. For some reason, he chooses to open this sensible column with this: In 1816, the net public debt of the UK reached 240 per cent of gross domestic product. This was the fiscal legacy of 125 years of war against France. What economic disaster followed this crushing burden of debt? The industrial revolution. [T]he UK grew out of its debt. By the early 1860s, debt had already fallen below 90 per cent of GDP. I understand the point is he trying to make: debt is not destiny. And yet I'm not sure he could have found a more compelling defence of the need for some fiscal vigilance.

UK avoids triple-dip recession with better-than-expected 0.3% GDP growth - George Osborne has welcomed news that Britain's economy expanded by a stronger-than-expected 0.3% in the first quarter of 2013, avoiding a triple-dip recession. As the first estimate from the Office for National Statistics showed that a healthy performance from the services sector helped GDP growth to beat the 0.1% expected by City pundits, the chancellor said it was evidence that the coalition's policies were helping to "build an economy fit for the future". "Today's figures are an encouraging sign the economy is healing," he said. "Despite a tough economic backdrop, we are making progress. We all know there are no easy answers to problems built up over many years, and I can't promise the road ahead will always be smooth, but by continuing to confront our problems head on, Britain is recovering and we are building an economy fit for the future." The key services sector expanded by 0.6% on the quarter, according to the ONS, while industrial production also grew, by 0.2% – though much of that was accounted for by North Sea output. The struggling construction sector declined by 2.5%.

Revealed: George Osborne’s secret veto on fraud inquiries -George Osborne has a secret veto over large and potentially politically sensitive fraud investigations, The Independent has learnt. Under a government agreement the Serious Fraud Office must get permission from the Treasury to launch any complex new inquiry which comes on top of its normal budget. But controversially the Treasury can keep its decisions secret – potentially allowing it to veto politically sensitive fraud inquiries, either before or midway through an investigation, without public scrutiny. Ministers have now become the final arbiters of which major financial crimes are investigated as a result of 25 per cent cuts to the SFO’s budget over the past three years, Labour warned. The move is particularly sensitive as the Government has intervened in the past to halt embarrassing fraud investigations.

"Working Poor" Spark 170% Increase In Britons Needing Food Handouts In Past Year - While the dismal news of endlessly rising food stamp recipients in the US seems to be glossed over by most of the media because, well, stock markets are at all-time highs, in Britain, things are becoming increasingly awful. As the FT reports, the number of people receiving emergency food rations has surged from 130,000 to almost 350,000 in the past year. As inflation eroded incomes and government austerity pushed hundreds of thousands into crisis, the 'working poor' has emerged. The food bank provider estimates about half of the households it helped has at least one person in work. During the Great Depression, the desperation was graphically evident with long lines of families waiting for soup; in the new depression, the record levels of starving and needy are hidden by a blanket of EBT cards and direct transfers from government. The situation is no less terrible - no matter how hidden from view. As one food bank manager noted, "the fundamental thing is that more and more people are living an increasingly precarious life financially."

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