A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Tuesday, April 26, 2011

Transcript: 436 Going Nowhere Fast

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Jeff Fisher:

My presumption is that capital markets are inherently unkind, don't actually care about things like fairness, are concerned about discounted cash flows, and so the beneficiary of productivity is the corporate shareholder unless society intervenes socially some other way. Does that provide cruelness to some people? Yes. But capital markets have never been kind. There is nothing new about this.

I am not expecting suddenly what I call the great humuliator or the spiritual function behind capital markets to turn into a benevolent soul.

That was billionaire Jeff Fisher talking to Bloomberg, answering the question of why we don’t find the public’s largesse to the private capital markets reflected in an echoing willingness to finance real investment or mitigate the huge employment losses. The answer is capital moves mechanically to its own advantage. If managers don’t obey, there are soon new managers.

Later on today’s podcast we have Christina Romer, Idiot of the Week, but first, No matter how much hot air emanates from Wall Street and Washington, it still doesn’t fill the sails of the real economy.
As Calculated Risk said recently
There are currently 130.738 million payroll jobs in the U.S. (as of March 2011). There were 130.781 million payroll jobs in January 2000. So that is over eleven years with no increase in total payroll jobs.  
And the median household income in constant dollars was $49,777 in 2009. That is barely above the $49,309 in 1997, and below the $51,100 in 1998.

Just a reminder that many Americans have been struggling for a decade or more. The aughts were a lost decade for most Americans.  

And I'd like to think every U.S. policymaker wakes up every morning and reminds themselves of the following:   

There are currently 7.25 million fewer payroll jobs than before the recession started in 2007, with 13.5 million Americans currently unemployed. Another 8.4 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6.1 million have been unemployed for six months or more.
Ted Kavadas presented ten troubling charts recently at Seeking Alpha.

What are they?

Housing starts tanking from 2007 and now scraping the baseline. Any help from the Fed’s low interest rates is off the bottom of the chart.

The Federal Deficit hit 1.4 trillion before its little bounce, as the taxpayer absorbed the financial sector collapse.

Federal Net Outlays troubles Mr. Kavadas, but the non-indexed chart is difficult to interpret.

State & Local Personal Income Tax Receipts , percent change year-over-year shows no recovery and hides the absence of any federal help.

Total Loans and Leases of Commercial Banks, percent change, uh-oh, credit is contracting.

Bank Credit – All Commercial Banks . Confirm that, credit is contracting.

M1 Money Multiplier. This is a silly chart. At best it shows a deleveraging quotient.

Median Duration of Unemployment, twice as high as any other period in the post World War II era.

Calculated Risk’s chart of employment recessions in the postwar, showing the current downturn, before it is over, is going to surpass all other downturns combined in terms of total months of work lost. Just eyeballing it, I would say we are about halfway there.

And finally, a chart that depicts the V-shaped bull. This particular one is the Chicago Fed National Activity Index which depicts broad-based economic activity. It went in a hole and came back up to zero, but on the left side, you see it is percentage change year-over-year, so a level as opposed to change description would be very much like the employment chart, Down to the bottom and now bouncing along.


We certainly don’t see Christina Romer in the same category as, say, a John Taylor or Greg Mankiw or Glenn Hubbard, but we are featuring her on Idiot of the Week. She is, and her economics are, as dangerous to our future as any of the market fundamentalist crackpots who still get a sober hearing. The problem is much as it is with the deficit debate.
Barack Obama was recently fond of saying, don’t make the perfect the enemy of the good. Obama and his crew have made the inadequate the enemy of the practical and useful by characterizing that inadequate as good. Like don’t make the car the enemy of the b icycle, or maybe it should be don’t make the bicycle the enemy of the unicycle. Don’t make the highway the enemy of the dirt road. Don’t make the subway the enemy of the oxcart. We could spend a lot of time looking for the most apt alnalogy.
Obama is helped in this regard by the screaming Republican Right which has staked out a position beyond the boundaries of the bizarre. No, Obama’s position is not that foolhardy, but it is plenty foolhardy. The oven the enemy of the open fire in the floor. And it is all the more dangerous as poison for the fact that it doesn’t stink so much.
In that theater, the premise is that best case for the American people lies somewhere in between the extremes of Democrat and Republican. These extremes are freezing and minus ten. What we need is growing weather. And the American population seems to get it. According to the most recent Washington Post-ABC poll, 78 percent of Americans oppose cutting spending on Medicare as a way to reduce the debt, and 72 percent support raising taxes on the rich – including 68 percent of Independents and 54 percent of Republicans.

As Robert Kuttner said recently,
“if Americans also knew two-thirds of [Republican Paul] Ryan’s budget cuts come from programs serving lower and moderate-income Americans and over 70 percent of the savings fund tax cuts for the rich – meaning it’s really just a giant transfer from the less advantaged to the super advantaged without much deficit reduction at all – far more would be against it.

And if people knew that the Ryan plan would channel hundreds of billions of their Medicare dollars into the pockets of private for-profit heath insurers, almost everyone would be against it.”
Obama may have gotten leverage on the Republicans for 2012, but the economy needs more than a Democratic victory, it needs some New Deal policy.

But that is another discussion, here we want to talk with Christina Romer, professor of economics at UC Berkeley, former chair of Obama’s Council of Economic Advisers. She begins by counseling against accepting a new normal of high unemployment.
I certainly don’t think anyone should accept that. One of the key facts about any economy is that even in good times the unemployment rate isn’t zero. There is a certain amount of unemployment that comes because you have to match people with jobs. What people said, I think most economists thought, before the current recession, that number for the United States was about 5 percent.
So the whole question is, “Has that normal level of unemployment risen to something like 8 or even 9 percent. And I certainly don’t think so. It would be devastating if it had, because that normal unemployment rate is where you tend to come to rest over the long haul. And I can’t think of anything worse for this economy or for Americans if we came to rest at 8 or 9 percent unemployment.

The normal rate of unemployment is full employment. There is no reason to accept less. The fact that we have accepted underemployment, mis-employment, mal-employment and unemployment for the past thirty years does not mean it is any way to run an economy. Demand Side has railed against the so-called “normal rate” for a long time. What does it mean to be “normal.” It means nothing about the labor market, it means that inflation is not happening to a degree that alarms the oligarchs. And at present it doesn’t even mean that. Since it is patently apparent that no pressure on inflation is coming from the labor side, it means that unemployment is where it is and that is okay with the powers that be.
Christina Romer:
One of the things you hear, for example, is that we’ve had some changes in our industrial structure, that construction and finance are probably going to be smaller sectors of the economy than they were before the crisis. So some have said that just that readjustment of changing construction workers and finance workers into other industries can make the normal unemployment rate higher. But one of the things I do in the column is a back of the envelope calculation to say that right now there are about 1.3 million workers that used to be in those troubled sectors. If under the very unrealistic assumption that they never found another job, were permanently unemployment, What would that do to the unemployment rate?

That would raise the normal unemployment by about a percentage point. So to say that kind of structural change explains a three or more percentage point rise in the natural rate, I think, just doesn’t make sense.
One of the things that I actually talked about in the column is the long-run shrinkage of manufacturing as a share of employment is actually an argument against the notion that that kind of structural change raises the normal unemployment rate.

Because that’s been going on for decades. It certainly was going on all through the 1990s, and yet the 1990s were a time when normal unemployment was certainly at 5 percent. Some people think it might have even been lower than that toward the end of the 1990s. So normally an economy can adapt to changes in industrial structure. That’s a hallmark of a healthy economy is that industries die and other industries grow and workers have the flexibility to move to those new industries.

What I argue is that where we are today is that we have a lot of cyclical unemployment. We’re still a very sick economy. Jobs aren’t being created anywhere. That’s why it’s hard, regardless of what industry you used to be in, if you’re unemployed today, it’s hard to get reabsorbed into the labor market. We just aren’t creating jobs.

Certainly if you believe as I do that most of what we’re seeing today is still cyclical unemployment, then that is caused by inadequate demand. It means consumers aren’t buying enough, firms aren’t investing enough, so there isn’t demand for products, so there isn’t demand for workers. So the remedy for that are programs that stimulate demand. Everything from more aggressive quantitative easing by the Federal Reserve to additional fiscal actions like more public investment, which the president called for in his State of the Union. Or maybe a payroll tax cut on the employer side of the Social Security tax as a way a way of encouraging firms to be hiring more workers.

Have we not tried enough of the Helicopter Ben approach. If it was going to work, would it not have worked by now. Of course, you need to reduce unemployment by hiring people directly doing things that need to be done. $30 billion a year buys a million jobs. Far more efficient than hundreds of billions in tax giveaways and inefficient bonuses to corporations and the rich. You get the people on the payroll, paying taxes, doing things we need done. Business gets what it needs most – customers!
Christina Romer

One of the things that I feel so strongly about is, even if I’m wrong, and more of the unemployment today is structural, or normal, than I think the evidence suggests, that doesn’t mean you say, “Ah, it’s not our problem, let’s just live with it. It just means the kinds of solutions that you’re looking for would be different. You’d have to work much more on, How do you help workers, you know, match up with the available jobs? How do you help workers move if the jobs aren’t where they are? It puts a real premium on retraining as a way of dealing the unemployment. You never want to say the unemployment is high, so we shouldn’t do anything about it. What this debate is over, is it the normal unemployment or is it cyclical unemployment, matters to what the remedies you suggest would be.
Retraining for what, barista? Beer truck driver? Medical coder? Retraining is the last vestige of the capitalist apologist. It does not put anybody to work except the retrainer. Infrastructure is falling apart, education is disintegrating – which reminds me that soon we are going to be ruled by the rich because the rich will be the only ones who can afford to get a decent education. We already have lost the meritocracy that arose with the GI Bill. It is only going to get worse as education is rationed more and more by price.

Christina Romer, Idiot of the Week


And now we have depressed ourselves. The Demand Side forecast is for negative growth by the end of the year. We called the commodity bubble back in November. Even consensus Q1 2011 GDP is now down to 1.8 % (advance release tomorrow Thursday).

Our puzzle is why anybody should expect it to get better. It’s like they’re looking at the sky hoping for a change in the weather. It is not rocket science. Outcomes derive directly from the demand profiles. No government spending. Cutbacks in states and localities. Consumers stressed by high debt and the commodity bubble. Confidence shaken by attacks on the social safety net by the Republicans. No prospect that policy-makers will do anything about anything. In our opinion, more cheap chips to the speculators will only raise the speculation premium. Marginal cash outlays to consumers will cause them to improve their balance sheets before they start buying that next home. People with jobs have a robust profile of consumption. A few more dollars on the margin of the average consumer does not raise their profile very much.

Tuesday, April 19, 2011

Transcript: 435 Wall Street Rules

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Next week we will move on to more interesting economics, starting with “Is the supply curve flat?” This week we are going to continue our theme of the year so far, also known as beating a dead horse. That is, “Why do we let the financial sector, the bankers, run the economy?”

Does it work? No. We have entered a period of continuous near-crisis.

Do they know what they are doing? I suppose they know they are enriching themselves. But we all did better back when it was boring banking, 3-6-3, borrow at three percent, lend at six and be on the golf course at three o’clock.

Are they the adults in theroom? Hardly. Robert Rubin plays one on TV, but there are no adults in the room. There are the crackpot theorists, primarily academics like Milton Friedman, Eugene Fama, Robert Barro, John Taylor, and many others, but also including Alan Greenspan and Ben Bernanke. There are the hard pragmatists of business, who insist the industrial machine has to run over everybody for the economy to work right. This would include the brain trust of the Reagan era, led by Don Regan, whose influence has crippled economic health for decades. There are the bond market vigilantes, whose computer screens stream columns of numbes and arcane curves, but who are mostly picking red or black and holding a gun to the head of the house if their bets don’t pay off. And there are the politicians, along with their front-running ideological stooges, who make sure they are not offending too many well-heeled individuals and pretend to manage the flood of lobbyists while avoiding doing the standing up for the people themselves. To this last group, we would like to say, “Do your job.”

When the banking industry effectively avoided the trust-busting of the Teddy Roosevelt era and captured the first version of the Federal Reserve, we got into the speculative insanity of the 1920’s and the bust of the 1930’s. Franklin Delano Roosevelt and his New Deal crew reined them in for awhile. But it was shortly after the war that the Fed broke back into the control of the bankers, in the infamous “Treasury Accord” of 1951. Still, with boring banking the model, thanks to the Glass-Steagall Act, for one thing, there was limited damage they could do. Regulation became a dirty word under “government is the problem” Ronny Reagan, who probably played an adult better than any president ever who didn’t actually knowing what he was doing. The controls on banking were relaxed. Almost immediately came the S&L crisis, multiple disasters in foreign countries, Latin America, Russia, East Asia, the dot.com bust, the housing bust, and now the demise of the peripheral EU area and the wholesale enrichment of the American bankers in full view of everybody.

Ben Bernanke made his academic reputation on the theory that allowing the banks to fail in the Depression caused it to be deeper and longer. He was not convinced, as most are, by the Keynesian demand push from World War II and the New Deal. So Baffled Ben pushed trillions of dollars in outright cash for junk and in guarantees and supports to various markets into the middle of the table on what was, after all, only his unproven hypothesis. Now we can call it his DIS-proven hypothesis. The wherewithall to deal with the problems, however, is now on the other side of the table, secure in the cash balances of the banks and the absurd bonuses they pay their looters, also known as their managers. That is taxpayer money.

So, we spend so much time on the banks and Big Oil because the economy is being run by the banks and Big Oil for the benefit of Banks and Big Oil. Reasonable, solid returns are no longer any good (well, they’re no longer available, either), so risk addicts in the casino reach for yield. Entrenched fossil fuel extracters do very well, so the planet is transitioning into a toxic climate. But hey, we can’t afford to save ourselves.

Some promise came last week, when the Senate’s Permanent Subcommittee on Investigations referred to the Justice Department and SEC findings that indicated Goldman Sachs profited from the financial crisis by criminal means, then lied to Congress and its own investors about it. The Senate panel, led by Carl Levin of Michigan had investigated the matter for two years, before coming up with the conclusions.

"In my judgment, Goldman clearly misled their clients and they misled the Congress," Levin said.

"Goldman was, I think, the only major bank that did well during the recession. We tried to find out, 'How is it they did well?' " Levin said Wednesday. "The tactics that they used … were disgraceful. And sticking it to their own clients violates their own claim that the clients come first."

Was he disappointed that nobody on Wall Street had gone to jail? Levin responded, "There's still time."

"It shows without a doubt the lack of ethics in some of our financial institutions," agreed Sen. Tom Coburn (R-Okla.), the subcommittee's top Republican, who approved the report along with Levin.

Goldman Sachs is just one focus of the subcommittee's probe, according to the LA Times report, into Wall Street's role in the financial crisis. The 639-page report — based on internal memos, emails and interviews with employees of financial firms and regulators — casts broad blame, saying the crisis was caused by "conflicts of interest, heedless risk-taking and failures of federal oversight."

Among the culprits cited by the panel are Washington Mutual, a major mortgage lender that failed in 2008, as well as the Office of Thrift Supervision, a federal bank regulator, and credit rating firms. The subcommittee echoes the conclusions of the Financial Crisis Inquiry Commission, the Angelides Commission, but those were muted by a smokescreen of pushback from the bankers shills, i.e., the Republicans on the panel.

According to the LA Times,

The SEC suit that Goldman settled last year at the cost of in excess of half a billion dollars alleged that the firm had misled investors in a complex mortgage-related security known as Abacus. The Senate report cites three similar securities that it said Goldman betted against, or shorted, without informing its clients.

The report also says Goldman Chief Executive Lloyd Blankfein and other executives misled the subcommittee when they appeared before the subcommittee last April and testified that the investment bank had not consistently tilted its own investments heavily against the housing market — a position known as being "net short."

The subcommittee has estimated that in 2007 Goldman's bets against the mortgage markets more than balanced out the bank's mortgage losses and led to a $1.2-billion profit in the mortgage department alone that year.

Goldman was so focused on shorting the market it even tried a strategy called a "short squeeze" to drive down the price of obtaining short positions, the report said.

In a statement issued Wednesday, Goldman said that during the subcommittee's hearing last year, its executives "repeatedly and consistently acknowledged that we were intermittently net short during 2007. We did not have a massive net short position because our short positions were largely offset by our long positions, and our financial results clearly demonstrate this point."

But the subcommittee report says such denials by Goldman "are directly contradicted by its own financial records and internal communications."

The real situation was described in the best-seller by Michael Lewis, the Big Short, which suggested that Goldman was caught with its pants down holding long positions and when the obvious was upon them muscled or scammed their way into short positions

And we’re going to conclude today with an extended rendition, a portion of the epilog from the Big Short. Hopefully since we don’t do commercial business on this podcast, we’ll be held legally harmless. Consider it a favorable review. Lewis’ book is indeed worth reading, and eminently readable, even compelling. It opens the casino so you can see the big players from the back. The games are rigged. The rules are fixed or floating, depending on the interests of the big players. The drunk guy in the corner gets his pocket picked every time there’s a problem. Oh, that’s Ben Bernanke.

Surprising to me was the psychological stress on those who made the big short pay off for them. Severe stress came not beforehand, but after the bets paid off.

The following is not included in the transcript. You’ll have to buy the book.

Tuesday, April 12, 2011

Transcript: 434 James K. Galbraith and Joseph Stiglitz

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James K. Galbraith
...When you think about this problem coherently, the long-term policy problem is the same as the short-term policy problem: it is to create jobs and to place the economy back on the footing of stable prosperity. That is the desirable objective per se, and something that will require a sustained effort, a new strategic direction (as well as comprehensive reform that has not actually occurred and is not sufficiently addressed in the reform bills of the financial sector), to make it once again an effective, functioning part of the economy. That’s the correct strategy, as I said, not only for economic growth and the condition of the economy in the medium- and long-term, but also for the funding of Social Security and Medicare.
That was James K. Galbraith, an excerpt from the keynote we relayed earlier in the week. We have some Joseph Stiglitz a little later. But let’s get a little more from Galbraith before we start.

James K. Galbraith:
As has been argued very effectively in the earlier panels, the major problems with Social Security and Medicare’s funding is low wage growth and inadequate employment; there are not enough people paying the payroll taxes at present rates. Fix that problem. Then the other problem, to the extent that it is a problem, goes away.

Suppose it were true that even large public debts were associated in general with low economic growth in countries whose conditions were comparable to our own. That would be the case because those countries do not have an effective growth mechanism generated by the private financial sector, so that they do not have a credit system creating jobs and enabling people to pay taxes that cover the services that the public sector provides. These two problems are integrated; they cannot be separated.

The prescription cannot simply be cutting the public sector’s interventions in the economy. It has to be to repair the other side of the balance sheet. That has to be the first step in a strategic proposal for the economy – to recognize that the private sector is important, that it has taken a colossal hit in the last three years as a result of a colossal mismanagement in the previous fifteen or so, and that the reconstruction of a functioning private financial sector that serves our economic purposes is an indispensable priority.
Galbraith debunked the assumptions by the CBO for interest rates and debt service earlier in his speech. It is well worth listening to, twice.

We mentioned last week that the great weakness of the Neoliberal orthodoxy is that it is intellectual junk. It is held together by political forces and payments to appropriate offices.

The great strength of their position is that it is surrounded by concentric defenses. You can imagine the outer ring of FoxNews-style reactionaries and reality deniers. But even if that ring is defeated, there is interior to it, the blue dogs and their so-called responsibility, there are the defeatists and the collaborators, and of course, the tens of thousands of economics graduates educated only in its fundamentals, the chairs of their departments on the corporate payroll, and so on. All the while you need to slog through the great mass of apathy and ignorance and a population obsessed with trivia or vice.

Discouragement if not despair is a likely response.   But hey! It is not necessary to defeat these armies, just to find a way through and get enough of them to turn around and see that what they are defending is what is attacking them. And heads are starting to turn.

Joseph Stiglitz, speaking with Ariana Huffington recently at the 92nd Street Y, had these comments on the last days of the Congressional Oversight Committee.

Joseph Stiglitz

To those of you who don't know who the Congressional Oversight Panel is, about two years ago, or three years ago, when the financial sector was collapsing, Hank Paulson went to Congress with a three- or five-page bill, saying, "Give us $700 billion. Trust me." No Congressional oversight. No judicial review. Just, "Give me a blank check."

The surprising thing was that Congress said, "No."

Then there was a lot of discussion, and finally Congress, acting in perhaps a more normal way, they said, "With a $150 billion bribe to our constituents, big business tax cuts, we'll pass the bill. But we'll have one condition, there has to be a little Congressional oversight."

And that's how they created the Congressional Oversight Panel. It has done a very good job. Very impressive. It has been a real thorn in the side of both administrations. They didn't like anybody's oversight. And we can understand why when we see what they found out. So this is supposed to be the last meeting, where they're going to say, "Was it good? Was it bad? Did it work?"

If you remember, again, what both presidents said. What was the reason they were giving so much money to the banks? It wasn't because they loved the banks. You know, they're cuddly, but they're not that cuddly, for $700 billion.

So, What was it they said? They said that they needed to save the banks to get the flow of money going again. Credit, the lifeblood of the economy. That was the argument. But if you look at what they did. It hasn't worked. That is to say, credit is still lower than it was before the crisis. Profits have returned to the banks and to ... some parts of the market are doing well.

But unemployment? It is still the case that one out of six Americans who would like a full-time job can't get one. So you can't say it worked if the ultimiate objective is to get the economy back to work. It failed. What those in the Administration claim [is], "Well, things might have been worse. At least you got repaid."

But then you look at the deals that they did. They gave money to the banks at very unfair terms. And this is where the Congressional Oversight Panel played a very important role. They said, "Look, If you're going to give money to the banks, don't let them just pour the money out in dividends and bonuses. Bonuses for record losses. That doesn't make sense." Money going in and money going out.How is that going to lead to more lending? The Congressional Oversight Panel pointed out that when we gave them money, we got back stocks, preferred shares, warrants, and they valued these. They were worth sixty-six cents for every dollar that we gave them.  So we got cheated. Now in the end, the market went up. And we got paid barely what we have them. But if we had gotten an arm's length deal like Warren Buffett got when he put money into Goldman Sachs, our deficit would have been have been much smaller, our national debt would be much smaller. We would be in much stronger position.
We wouldn't have to be cutting back on education and infrastructure. And what's so interesting is that there is broad agreement about this. Except from the bankers. They liked the way things worked out. This is a statement about how our political process works.

It has been said, we have the best government money can buy. The more recent Supreme Court cases made things worse, because what we've done is we've said that corporations, or the Supreme Court said that corporations are like people. They have the right to contribute anything they want. And just think about it for a minute. The obligation of a firm is to maximize its profits. You look at how the banks invested their capital in housing, versus their political capital.

What gave them a higher return? Clearly the political capital gave them a very high return, not the investments they made that went way south. So it's they're obligation now to buy the politicians. Forget about the consequences for our country. Maximize profits. They almost have an obligation to buy the polticians in any way they can so long as they don't go to jail.
And why shouldn’t Wall Street be happy? They own the central bank, or even better, they don’t own it but got it to take a trillion and a quarter of garbage securities off their hands and to give them ever more and ever cheaper money for their casino games. Let the fundamentalists dither about inflation. The progressives will fight that battle for them. Inflation and the second coming are about as likely absent real investment. And gross private domestic spending went negative in Q4 2010. (chart of components of GDP courtesy econ intersect online)

They point out that gross private domestic investment went negative several months before the Great Recession. Let’s hope that’s not a leading indicator for the direction of overall GDP as it was in the second half of 2007.

A couple of notes on taxes. GE with the minus 3.6 billion dollar tax bill reminds us that the folks who complain about the high corporate tax rates in the U.S. are talking bull. While the nominal rates are higher than most, the effective rates are in the middle of the pack at best. It is hard to find, for example, another nation who charges negative corporate tax rates or rewards creative accounting the way the U.S. does. Solidifying our position as a banana republic.

Second, it was reported that State and Local tax revenue was up, and it was, although it fluctuates wildly from quarter to quarter. Up modestly, as governments go looking for some way to mitigate the massive cuts they are being forced to make. The rational revenue-sharing from the federal government did not arrive, for political reasons, or likely out of sheer ignorance. Government is not going to help fill the PCE gap.

From Connor Dougherty at the WSJ:

State and local tax revenue has nearly snapped back to the peak hit several years ago—a gain attributed to a reviving economy and tax increases implemented during the recession.

But the improvement masks deeper problems for state and local governments that are likely to linger for years. To weather the recession, state governments relied on now-depleted federal stimulus funds ...

Total tax receipts for state and local governments hit $1.29 trillion in 2010, just 2.3% shy of the $1.32 trillion taken in during 2008, not adjusted for inflation, according to Census Bureau data.
Local governments are mostly funded by property taxes, and it usually takes some time for falling prices to show up in property taxes. Local property tax revenue is just starting to decline in the Census data.
Even with improving revenue, there will be more state and local fiscal tightening this year - and that will remain a drag on economic growth.

The personal savings rate has dropped back down to about 5.8% from 6.1% in January. Econ Intersect says this produces widespread concern, in that the economy needs spending.

Demand Side suggests the government could tax and spend on useful projects, but this is heresy. It is also an illusion that the normal person is now saving 5.8 percent of her income. The great mass of the savings is going on in the upper income brackets, produced both by their increases in income and by their increasing reluctance to spend. In the middle and lower income brackets, savings is bouncing along the bottom, as people are burdened by debt payments, watching what they thought was their savings disappear into the housing meltdown, and many drawing down any savings they may have to mitigate unemployment or underemployment.

Personal income was 5.8 percent in February, compared with 6.1 percent in January.

The good news?

Calculated Risk tells us that the BLS reported that payroll employment increased 216,000 in March and that the unemployment rate declined to 8.8%. If we average the first three months of 2011, there were 160,000 payroll jobs added per month. Private payrolls were a little better with an average of 188,000 per month, as state and local governments continued to lay off workers.

There are 7.25 million fewer payroll jobs now than before the recession started in 2007. 13.5 million Americans are currently unemployed. Another 8.4 million are working part time for economic reasons. About 4 million have left the labor force. Of those unemployed, 6.1 million have been unemployed for six months or more. The all-in U-6 measure, aka real unemployment, was down to 15.7 percent from 15.9.

Sunday, April 10, 2011

Transcript: 432b Relay James K. Galbraith

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James K. Galbraith is one of the great economists of our time, and with one of the best outlooks for what can actually work. So we're just going to get out of the way.

James K. Galbraith
Keynote at the EPS Bernard Schwartz Symposium
October 2010
This morning I want to address a very specific aspect of the debate, and to do so as an economist. I want to ask whether the fear of long-term deficits should legitimately be used to justify proposed cuts in Social Security and Medicare, and for that matter, whether that fear of long-term deficits stands as an effective obstacle to the entire project of a new strategic direction for economic growth and recovery. To address that question, I need to say a few words about the work of an institution that is justifiably an icon in this city, one of the very few respected, non-partisan and professional organizations we have – the Congressional Budget Office. Its work is used as the foundation for much of the debate over the future fiscal position of the United States.

The CBO has an important professional function, and everybody who has been on the Hill, as Congresswoman Kennelly and I have, understands what that is. It is to provide a fair evaluation of the budget costs of particular legislative proposals. Its fundamental job is to permit people to make proposals, and to have them come back costed in a way that is trustworthy, transparent, and consistent. In order to do that, there needs to be a common set of baseline economic projections to provide that standard of consistency. For that purpose, however, it is not necessarily important that the baseline forecast be realistic as a projection of what the economic future is going to be.

So long as it’s consistent and everything is being judged by the same yardstick, then the internal consistency of that forecast is a secondary consideration. But those forecasts are being turned and used for a much different purpose: to describe for us all the fiscal future of the United States. As those forecasts are presently constructed, that future looks to many people to be extraordinarily scary, with the public debt spiraling out of control. It is important to ask whether the forecasts are realistic. For that we have to ask, how does the CBO make that forecast?

First is to assume away our current economic difficulties over a period of time; that is to say, assume that the economy will recover from the recent crisis and recession. Generally over a five-year horizon, we return to a relatively low rate of unemployment. To get there, we have a relatively rapid rate of growth. If this were to happen, it would be great; we’d all be in favor of it. If it were to happen without any changes in policy, it would be wonderful; we would all be delighted.

Of course with economic recovery, people would resume paying income taxes and the deficits would fall, as they did in the 1990s, when we moved to full employment and the budget went into surplus. The problem with this as a projection of the actual future is the one already given at the start of this program by Tom Palley, which is the growth model that got us to full employment in the late 1990s, and that got us closer to full employment in the 1980s; a model based upon the very rapid expansion of bank credit for various purposes in the late 1990s, the drive for information technology investment, and in the 2000s, for that matter, the housing bubble. That model is broken. The institutions that underpinned that form of growth are not going to be able to do it again. The institutions themselves remain deeply impaired by the effects of the crisis, and they don’t have customers. They don’t have households with equity they can borrow against. They don’t have businesses who are out there trying to find credit for business expansion.

We are not going to return to full employment by any automatic process. However, having assumed that we are, the CBO then recreates very large deficits with a new series of assumptions that kick in after the effects of economic recovery are felt. One of them is runaway healthcare costs, and the assumption that the worst things that could happen in that sector are going to happen. I’ll leave that one aside for the most part. Another, which is very important, is that there will be a return to what are historically very high real interest rates – a nominal interest rate on short-term money of about 5% (with a 2% inflation rate, or a real interest rate on short-term money of 3%, as opposed to the present levels, which are negative 1.5%–2%), so a 4%–5% shift in the short-term real rate of interest, the rate that applies to government debt.

Another thing that happens as a consequence is an enormous run-up in the net interest payments of the federal government, running up to fantastic values, 20% and plus of GDP in 25 or 30 years, which is an expenditure item on the federal budget. These things are supposed to happen in conjunction with a very low rate of inflation – 2% – with the result that debt in comparison to nominal GDP spirals out of control. That is where the long-term budget deficit and debt projection comes from. Are there weak points from the standpoint of an economic realist in this projection? I think there are two major weak points.

One is that it is extremely unlikely that the Federal Reserve will return or would return to a high short-term real interest rate in the absence of a rise in inflation. There’s no reason why they would take that step. If they did, it would have catastrophic effects on business investment. It most likely would precipitate back into recession.

There’s very little historical precedent for such a policy. There was one stage in the postwar period when we had 3% real interest rates, 4% real interest rates with a 2% inflation rate; that was the late 1990s. It wasn’t true in the’50s and ’60s; it wasn’t true in the 2000s. The ’70s were an unstable period in which the inflation assumptions didn’t apply. Those 1990s years were very different from our present situation. There’s no logical reason for that assumption to be there, but it generates an enormous part of this deficit debt dynamic.

The second problem is that those interest payments are public spending; they have to go to somebody. We’re not wiring them to Mars; we’re sending them to people who hold US government debt. That’s going to show up as income on those people’s accounts, income that would amount to three or four times the total of present defense spending, in relation to GDP – vast sums that look like the mobilization for World War II more than like anything else, although they’re not going for anything particular except checks into people’s bank accounts. Assuming that the money would be spent – some of it would be – the inflation projection is surely out the window. If the inflation projection’s out the window, the debt to GDP ratio isn’t going to look like they project it’s going to be.

My position, my argument, is that much of the debate on this issue is based on a mirage, hidden inside technical assumptions the CBO has made. These are not terribly damaging for most of the purposes, but are completely inappropriate for a serious discussion of the actual fiscal position of the United States and its actual economic condition. That’s not to say that we aren’t likely to have large deficits going forward. We are, but those large deficits are likely to be due in the future for the same reasons that we have them today: an underperforming economy, a very high rate of unemployment, and relatively low tax take in comparison to what it would be at potential. That will be accompanied not with high but with continuing very low interest rates, with different implications for the debt.

This suggests that when you think about this problem coherently, the long-term policy problem is the same as the short-term policy problem: it is to create jobs and to place the economy back on the footing of stable prosperity. That is the desirable objective per se, and something that will require a sustained effort, a new strategic direction (as well as comprehensive reform that has not actually occurred and is not sufficiently addressed in the reform bills of the financial sector), to make it once again an effective, functioning part of the economy. That’s the correct strategy, as I said, not only for economic growth and the condition of the economy in the medium- and long-term, but also for the funding of Social Security and Medicare.

As has been argued very effectively in the earlier panels, the major problems with Social Security and Medicare’s funding is low wage growth and inadequate employment; there are not enough people paying the payroll taxes at present rates. Fix that problem. Then the other problem, to the extent that it is a problem, goes away.

Suppose it were true that even large public debts were associated in general with low economic growth in countries whose conditions were comparable to our own. That would be the case because those countries do not have an effective growth mechanism generated by the private financial sector, so that they do not have a credit system creating jobs and enabling people to pay taxes that cover the services that the public sector provides. These two problems are integrated; they cannot be separated.

The prescription cannot simply be cutting the public sector’s interventions in the economy. It has to be to repair the other side of the balance sheet. That has to be the first step in a strategic proposal for the economy – to recognize that the private sector is important, that it has taken a colossal hit in the last three years as a result of a colossal mismanagement in the previous fifteen or so, and that the reconstruction of a functioning private financial sector that serves our economic purposes is an indispensable priority.

What are the other components of the program? It seems to me that we ought to recognize right now that we have an ongoing housing crisis. The problems of home mortgage finance – and for that matter, of mortgage fraud – are being compounded by a vast new industry of practically automated foreclosures, driving hundreds of thousands of people out of their homes on the basis of incomplete and shoddy documentation. This is an emerging social crisis, and stabilizing people in their homes is an emerging and hugely important social priority for stabilizing jobs, neighborhoods, local property tax revenues, and an entire infrastructure of the American economy.

Part and parcel of that, extending from it very slightly, is the step that’s already been discussed this morning on a number of occasions: the need to stabilize the budgets of states and localities for the duration of the crisis. There is no reason why, in an economic downturn, we should tolerate the destruction of public schools, of police and fire forces, the closing of libraries, the non-maintenance of parks. These are services on which people rely, on which they fall back in hard economic times, and it’s just an artifact of the way we structured things that they’re under such pressure. There’s no economic reason why they should be. Steps should be taken to take this problem off the books. Heather Boushey made a political argument as to why Democratic Congress doesn’t want to help Republican governors. Fine, do it the other way: take Greg Anrig’s suggestion and federalize Medicaid, and there will be a flow of funds that will go to the states and localities that will help deal with that problem.

We need to think about how the national economy can be made to grow. It seems to me that the important concept here is once again encaptured by the word “strategic.” We need a strategic policy imparting a new direction to economic growth. We have had, broadly speaking, recognizable strategies in the past. In the postwar period, we created a broad middle class that was largely home-owning; institutions achieved this. In the late 1990s, we created a very large, effective and internationally successful information technology sector, in part through a drumbeat of public promotion of the importance of these technologies. I don’t think there was a day in the Clinton-Gore administration in which the President or the Vice President didn’t talk about the importance and value of those industries.

What is it going to be in the future? We have to address our energy challenges, our climate challenge, and that part of the fact that doing so involves the reconstruction of the country. That is to say, we need to give people choices about the way in which we produce and use energy. For that, we need to rebuild our infrastructure.

There are many other things we could do to rebuild our common public capital in a way that the private sector knows can be sustained. We need to have both public and private investment moving down this road. That is a reason for enacting a national infrastructure fund: to create an institution akin to the reconstruction finance corporation, and akin to institutions that have existed and still exist in many countries around the world. It would give the private sector confidence that there will be a sustained effort in this direction, that their investments, in which they are staking their own money, have a good chance of paying off.

The same can be said for jobs programs. The programs should be put in place, focused on goals and objectives that meet our immediate needs, providing hope for progress toward solving the country’s actual economic and environmental problems – not temporarily, but permanently.

Another thing is getting up to scale, and moving toward a recovery program that the public perceives as making a difference in a relatively short period of time. One element should be wholesale measures that will affect a large number of people in a short period of time, if they work. There’s been some discussion of having a payroll tax holiday for this purpose, to give a major injection of funds into working American families, which they can use to rectify their balance sheets, improve their consumption. I supported the President’s decision to take a proposal that originated in the Reagan tax cuts, a major tax break for business investment. Even though this is a vast subsidy to capital, if it works, the idea is that business investments will pick up, and there will be a reciprocal effect of firms’ investment activities stimulating the investment activities of other firms, thus beginning to move from a vicious to a virtuous cycle of economic growth.

Even if we do all of that, the crisis we have experienced has been profound beyond any of our professional experience. We have lost more jobs, and people have stayed out of work longer, than in the ’70s or the ’80s, or in the recession at the end of the millennium. We’ve lost eight million jobs. Many of those have been lost by older workers for whom work is hard, not people like me who speak from a microphone and sit in a chair, but people who stand up behind cash registers with back braces year in and year out.

We have to recognize that looking for jobs for many of those people is an exercise in futility and will be so until they are ready for Social Security, because there will always be a younger or a healthier person who’s better for that job, and who actually needs the job more in many respects because they’re starting out rather than finishing up. This is why we should consider another wholesale measure: reducing the age of eligibility for Social Security and Medicare.

I suggest that we create a window, the way universities do when they need to get rid of an ineffective professor. At the age of 62, for the next three years, people could retire with full benefits. It should allow people for whom that’s a good deal, people for whom work has been hardest, to take it up.

Someone asked earlier, “What do you do for the older workers who still want to look for jobs?” This is one thing. Other workers who still want jobs would find it easier to get them, if they weren’t competing with this enormous pool. In addition, younger people would find it easier; there would be more openings. The unemployment rate would come down, and the whole population would be on a happier, more rational footing in a very, very early stage. The same would be true if the age of eligibility for Medicare were reduced to 55. Allow people who have medical issues, but who are holding onto their jobs just because of their insurance, to move on, if they want to.

We hear the opposite proposal, for cuts in both of these programs, and I would bet it will take the form of further increases in the retirement age. We’ve talked about the consequences of raising the retirement age to 70, up to a 40% cut in the lifetime stream of benefits for those who, for one reason or another, are obliged to take early retirement. This is justified on the very shallow grounds that the average life-span of the population is lengthening – a fact which is only the case because we’ve been paying people successfully under Social Security and Medicare to live longer; a real example of successful economic incentives, if you ask me. The fact is that the increase in life expectancy doesn’t apply to the bottom half of the income distribution; it’s much less for those who actually work hard in their working lives.

That policy is a particularly invidious, dishonest, and cruel way to approach whatever is done about Social Security and Medicare. I want to stress that it has also very adverse economic effects. It would make unemployment worse by requiring people to hang onto jobs that they would otherwise happily give up in favor of other applicants and contestants for those jobs.

Without having gotten back to full employment, doing this simply congests the labor queue, creating problems which will afflict younger workers for their entire lives, as they experience long periods of job search and unemployment before they get that crucial first job. Overall, there will be less demand, less growth, and the economy will not meet the needs of its actual population. Poverty will be greater under these proposals. All of this is unnecessary and avoidable. It is certainly not justified by the argument that we face somehow a long-term, very-hard-to-specify in any concrete sense problem with the funding of the United States government.

If you could pin deficit hawks to a wall (which I would very much like to do), and get them to try and tell you what it is that they are worried about, what would such people say? I think the only thing they would say is that with the United States government soaking up capital funds, there would be less available for business. If there’s less available for business, that means the cost of funds for business must be much higher. That will show up in the interest rate.

We have to ask, do all of these people from Wall Street know what they’re talking about? Have they looked at the interest rate lately? The capital markets are in some ways the arbiter of this. Are the capital markets afraid that the United States government is going to run into difficulty paying off its debts? Are they unwilling to lend to the US government because they fear a rising rate of inflation?

The answer is: not in the next 30 years, not over the longest term of debt that the US government presently issues, where the interest rate has been falling, and is now at practically historical lows – 3.6% for 30 years the last time I looked. We have, I think, a refutation. It’s not the most conclusive bit of evidence, but it is a fairly strong refutation, that the problems (that appear on a superficial glance in the budget projections of the Congressional Budget Office) are actually taken seriously by people who have money – their own money, and other people’s money – on the line.

There’s been a good deal of talk of the sustainability of Social Security. The point has been made that very small adjustments in payroll tax formulas would cover the actuarial deficit of the Social Security trust fund over 75 years. Even if this were not the case, even if there was a substantial difference between what the payroll tax is expected to take in and what Social Security is expected to pay out, the programs would still be sustainable.

What is it that Social Security and Medicare actually do? You cannot separate the public effect from the effect on private finances. Social Security provides a benefit, a payment, to the elderly population, survivors and dependents, which in some respects replaces payment that those who have families who are prepared to support them would otherwise make. It assures that those who do not have families that would otherwise support them get a payment anyway, on the basis of their past contributions to the system. The payroll tax likewise assures that you make a contribution, whether you have parents you would otherwise support or not.

When thinking about this, assuming that we don’t want the elderly population to get out of the way by dying off, the major transfers in both halves are not from the young to the old. They’re within the elderly population, from those who would otherwise have means to those who don’t, and within the working population, from those who would otherwise not have burdens, to those who otherwise would. In economic terms, both of those transfers occur in the present. They are not matters that pass back and forth across time. They both can be sustained indefinitely. They are also fair. They are generous in the broad sense of that term; that is to say they are wise, they are just. And they give us a society which is vastly happier than it could ever otherwise be.

In Session One, Mike said that his Medicare does not benefit society. I guarantee you it benefits your children and your grandchildren. They don’t have to worry about the specific consequences of something that might happen to you, in terms of the medical cost, and otherwise would be worried greatly about it. Medicare spreads the risk over all of us, which is what we should properly be doing. Again, there is no financial impediment along those lines.

Congress will face recommendations, the first of December, from a Commission of very doubtful judgment and fairness. It seems to me very important that Congress take the message from this panel, and from all of our efforts, that it should not panic, that it should not be panicked. They’re not facing any form of an emergency that requires action in the lame duck session – action which on mature reflection, we would only come to regret.

We need to continue discussing these issues, continue the process of educating the American policy elites about what the American public already knows: that these programs are stable, they are successful. They are a vital element in the design of a successful strategy for economic growth and recovery going forward.

Wednesday, April 6, 2011

Transcript: 433 The Census Forecast is fading

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The best lagging indicator of the economy is the consensus forecast of professional economists. Whatever the previous quarter or two, it is amplified into the indefinite future by professional forecasters. This gives contrarians like Demand Side private satisfaction, but public problems.

As you know, according to Demand Side, we are bouncing along the bottom in a weak economy with downside risks from commercial real estate slash regional banks and from sovereign debt mismanagement. We have called for negative growth by the end of the year, a new downturn triggered by oil and commodity bubbles and by tight credit to the real economy

According to the current consensus view, we have had a consensus substantial recovery that is in danger for now from the consensus black swan even of the week. We can look into a recent piece by David Leonhardt of the New York times and get some clarity on the confusion, if that is not too mixed a notion. After we do that, we’ll go over some of the data on this first full week of Q2 2011.

But here in the March 29 NYT Economic Scene, David Leonhardt begins

Actually, before he begins we have the header “As Economy Sputters, a Timid Fed.”


Timid? We don’t think so. Wrong? Well, You may have heard us say that once or twice.
But continuing, Leonhardt writes:

Whenever officials at the Federal Reserve confront a big decision, they have to weigh two competing risks. Are they doing too much to speed up economic growth and touching off inflation? Or are they doing too little and allowing unemployment to stay high?
It’s clear which way the Fed has erred recently. It has done too little. It stopped trying to bring down long-term interest rates early last year under the wishful assumption that a recovery had taken hold, only to be forced to reverse course by the end of year.

Given this recent history, you might think Fed officials would now be doing everything possible to ensure a solid recovery. But they’re not. Once again, many of them are worried that the Fed is doing too much. And once again, the odds are rising that it’s doing too little.


Is the Fed doing too much to speed up economic growth and touching off inflation, or are they doing too little and allowing employment to stay high?

We would say they’re doing too much of the wrong thing and they don’t really have the capacity in a liquidity trap to do anything anyway. What they ARE doing is dangerous and destabilizing.

If low long-term rates are the target, target achieved. If actual investment and growth in the real economy is the target, it is missed completely. Low rates make financial markets happy. It used to be the story that happy financial markets led directly to happy real economy markets. Now, it’s just happy financial markets are good for our confidence. In point of fact, the connection exists between a healthy real economy and a sturdy financial sector, but in the reverse direction. A happy real economy leads to happy financial markets, as productive, stable investments are widely available.

The Fed has noticed that the cart and the horse are in similar positions, and is trying ever more inventive mechanisms of steerage and control to get that cart going with the horse in the rear.

As to inflation. There is no inflation. Hysteria over “setting off inflation,” as if it were a dry forest and the Fed were playing with matches is just wrong. Not as wrong as, say, allowing our economy and political apparatus to be run by Big Oil even as climate change looms over the survival of the civilization. But wrong. The wild runaway economy overheated spiraling desperate inflation that the hysterics fear is not even on the horizon in a society with a decaying labor market and outlandishly low capacity utilization.

Inflation is occuring, of course, in the prices of financial instruments. Stocks, bonds, exchange rates, commodity futures and so on, not from any demand pressure, but from the leveraging of financial players. This money is sure to be destroyed in the bust, just as money was destroyed in the Great Financial Crisis. There will be losers, but it won’t be because inflation ate their lunch. The kind of cost-push price rises, which Leonhardt and others identify as inflation, is not demand pull, it is cost push, even though it is generated by the Fed’s easy money.

Why we should be so intolerant, I’m not sure. After all, as we said, Demand Side would not mind seeing interest rates rise, even though it would shake the unstable pyramids of the financial casino. If it rises because Chicken Little is putting up a roof, Why should we care?

Our primary issue is, I guess, that we should welcome inflation. Inflation is how in previous such debt situations, the real value of that debt was reduced. Inflation is a tax on the holders of wealth. What a good idea. But mostly, with any kind of real investment activity, there will be inflation. We’ve gone over Minsky’s algebra, or Kalecki and Minsky’s algebra, before. Prices rising is a way of embedding the profits that private actors want if they are going to invest.

But what about the public side? Prices could rise from taxation. Again, we like the idea of taxes on carbon, financial transactions and rich people. But public spending on things that need to be done would be inflationary from the right end of the cart and horse. Thirty billion dollars, no more, buys you a million jobs. They come with healthy multipliers and feature new taxpayers.

But we were supposed to be letting David Leonhardt talk. He was laying out the consensus of the week. Here, quote
Higher oil prices, government layoffs, Japan’s devastation and Europe’s debt woes are all working against the recovery. Already, a prominent research firm founded by a former Fed governor, Macroeconomic Advisers, has downgraded its estimate of economic growth in the current quarter to a paltry 2.3 percent, from 4 percent. The Fed’s own forecasts, notes that former governor, Laurence Meyer, “have been incredibly optimistic.”


As much as we agree with that last point, we need to mention that Laurence Meyer’s own forecasts have been incredibly optimistic. Coming down from 4 to 2.3 in the space of three months, the three months of the actual quarter, indicates to us that Macroeconomic Advisers is busy forecasting the past. As little as we like GDP, and wish people would concentrate on employment, we don’t see first quarter GDP coming in above 2.0. I think I saw, yes, here, Econ Intersect points out that GDP in the first two months of the quarter was 1.38 percent.

Parenthesis, Econ Intersect also points out that were the GDP deflator used by the BEA to estimate real growth swapped out for an annualized CPI-U, the entirety of the Q4 2010 3.1 percent growth would disappear. They say that 0.4 percent as a deflator is suspect. Exclamation point.

Sorry, David, you were saying, [quoting Leonhardt]

Why is this happening? Above all, blame our unbalanced approach to monetary policy.
One group of Fed officials and watchers worries constantly about the prospect of rising inflation, no matter what the economy is doing. Some of them are haunted by the inflation of the 1970s and worry it may return at any time. Others spend much of their time with bank executives or big investors, who generally have more to lose from high inflation than from high unemployment.

There is no equivalent group — at least not one as influential — that obsesses over unemployment. Instead, the other side of the debate tends to be dominated by moderates, like Ben Bernanke, the Fed chairman, and Mr. Meyer, who sometimes worry about inflation and sometimes about unemployment. “
Demand Side’s question is How long will zero be an acceptable result? How firmly embedded in the policy-maker’s psyche is the notion that monetary policy is useful? When will accountability return to the debate? Can the financial sector really run the economy for its own account without constraint?

And there’s more from Leonhardt, link online.


So, let’s give the data some different spin than you get elsewhere
  • March ISM manufacturing. Same old, same old.
  • February Construction spending. Continues in depression.
  • March employment. Tepid growth is better than we’re used to. But it is not very good.
  • March home prices, up seasonally, but January Case-Shiller is still declining, call it down and stagnant.
  • March Conferece Board Consumer Sentiment, big drop.
  • Feburary Personal Income, not good.
  • February Personal consumption expenditures, improving slightly, maybe, maybe not. PCE grew at 1.38 percent, after a January of 1.38 percent growth, annualized. Q4 2010 was 4.0. GDP for Q4 2010 has settled in at around 3.1. Weak PCE is a foreboding sign.

GDP is composed of PCE, investment, net exports, government spending and inventory changes. Unless we expect strength in any of those other components, GDP is going to be lower than expected.

Econ Intersect offered the following look forward:
 The real economy is not presented in the world of Gross Domestic Product (GDP) which is a dinosaur left over from the days of the gold standard and the industrial revolution. Economic forecasting requires a broad brush integration of many economic related elements.

Regardless, GDP is a rear view mirror of economic activity. Knowing that GDP was 3.1% in 4Q2011 tells you little about where the economy is headed.

The economy will continue to expand in April 2011, but there is every indication that the rate of growth will be nearly flat. We are living in a tortoise economy where the rate of growth has seldom been been strong since the 2001 recession.

The price indexes used for this revision were only modestly changed from the previous report. Again the overall price “deflater” reflected an annualized 0.4% inflation rate. The importance of this low deflater cannot be over emphasized: if the average monthly CPI-U for the fourth quarter is annualized and used as an alternate deflater, the growth reported for the fourth quarter simply vanishes. Could real GDP growth simply be an accounting artifact?
The world’s best bear David Rosenberg has taken his daily reports behind the paywall, including all those old reports we didn’t read, but saved the e-mail connection for. We appreciate David’s generousity to this point. We read him less often than we would have if our notions had not been so similar. We think, however, David exists in the financial market space, and peers out at the real economy. Demand Side’s perspective is firmly in the real economy, peering back at the financial sector. That may be where the money is being made, but ultimately everyone – including investors – depends on the health of the real economy. And ultimately that health depends on the demand side.

There is no stability inherent in capitalism. There is no return to equilibrium, return to normal, as a natural phenomenon. There is not even a jump-start to normal, putting things back on track with a few years of stimulus.

Capitalism has to be managed.

It doesn’t produce the public goods on which in depends, the education, infrastructure, institutional framework.

It tends to maximize externalities for private gain. Externalities are damage to the commons which are external only to the moment of purchase and sale, not to any prior or subsequent use of the product of service. Consequently, the entire human experiment is sacrificed for the short-term profit of the capitalists. Think Big Oil.

Capitalism does not even manage markets efficiently. The big players tend to set the rules. The products are as opaque as is allowed. Activities flow to the parts of the world where they are least regulated. The fact that one person’s cost is another person’s income is completely ignored in favor of cutting costs at every point and ultimately incomes.

So the sturdy revenue sources, simple and transparent rules, strong institutions, substantial infrastructure, forward-looking planning for environment and social welfare are absent in a capitalist-dominated economy, which is the corporate republic in which we live. Unfortunately for the capitalists, they live in the same world as the rest of us. Investments are as dependent as anything else on the health of our economy.

The great weakness of the orthodox Neoliberalism that sits in the center of this mess is that it is intellectual junk that is consistently contradicted by events, the people who defend it don’t really believe it themselves, and the corporate oligopoly for whom it is the official religeon completely ignore it their daily operations. It will collapse by its own hand, eventually. The question is whether it will collapse in a chaotic mess, or will it be defeated in a way that demostrates the necessary orgnization and priorities for the future.

Friday, April 1, 2011

Transcript 432: What is Economics?

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Bill McKibben
Two hundred years ago the level of carbon in the atmosphere was 275 parts per million. It had been that way all through the Holocene. Then we learned this new trick, burning coal and gas and oil. In essence we took millions and millions and millions of years of biological history, filed away there in oil wells and coal mines, and tossed it all up in the atmosphere at once. That 275 has gone now to 390.

Today, the new data shows that we enter the Arctic ice melt season this year with lowest amount of ice we’ve ever recorded. It looks quite possible that we’ll have an ice-free Arctic within the decade. These changes are already enormous. What we do in the next ten, twenty, thirty years really decides what happens ten thousand, twenty thousand years down the pike.

This just turns out to be this incredible geological hinge. The question is, “Can we keep what’s left of that coal and oil and gas in the ground. Ultimately that is a political question. Two days ago the President announced that they were opening up 750 million tons worth of coal in Wyoming under federal land, most of which will end up in China fueling their power plants if we don’t keep it in the ground.

That’s the kind of unbelievably tragic and short-sighted mistake that people make when they don’t pay attention. This is not one on a kind of endless list of problems that we’re always dealing with. You know, the drug crisis, the war in whatever. This is the only geological scale crisis that we’ve ever come up against. But because it plays out over tens of thousands of years, the politically relevant timeframe is tens of years, not tens of thousands. All of that is just the aftermath. We’re in the middle of the drama right now.

Today, Economics, What is it? Then taking lessons from Libya and oil, a few notes on Ireland, consumer sentiment, and GDP v. GDI, and finally the closing comments of Nouriel Roubini at the MIPIM conference.

We led today with the planetary health situation laid bare by Bill McKibben speaking to Tom Ashbrook. The society’s major challenge and its best opportunity to create value in a depression lie in this climate crisis. Yet it is virtually off the screen of public policy. Why is that? Our answer is, Economics. McKibben calls them political decisions, but it is Economics. Economic power is driving political power.

So, Let’s visit the question,

What is Economics?

Robert Heilbroner defined economics as the study of how we provision ourselves.

Paul Samuelson’s classic text tried out several:

Economics is the study of those activities which, with or without money, involve exchange transactions among people.

Economics is the study of how men choose to use scarce or limited productive resources (land, labor, capital goods, technical knowledge) to produce various commodities (wheat, beef, overcoats, concerts, roads, bombers, yachts) and distribute them to various members of society for their consumption

Economics is the study of men in their ordinary business of life, earning and enjoying a living.

Economics is the study of how mankind goes about the business of organizing its consumption and production activities.

Economics is the study of wealth.

Samuelson, the high priest of economics when it had its greatest credibility, finally settled on “Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources, which could have alternative uses, to produce various commodities over time and distribute them for consumption, now and in the future, among various people and groups in society.”

That’s nice. But none of them adequately convey the muscle and sinew, nor do they describe how basically economic processes are leading to fundamental and potentially catastrophic destruction. The bland definitions conceal more than they disclose.

Commodities and material production are essential, but they are not primary. The fact that a rich person buys a yacht is far less important to economics than the fact that as a rich person, he or she finds income flowing in and wealth accumulating in such amounts. The bread that a poor person can or cannot buy is less important in an economics sense, than the fact that such an individual has trouble marshalling the income.

To us it is not the product, but the organization that is key.

The fact that one person spends a quarter of a million going to Harvard is less important economically than the fact that he or she can afford it, and not so important, either, as the utility of the education. A Harvard economics education, for example, produces a tool that cannot form a functioning policy. At the same time, the Harvard economics education assures that the tool will be employed in the attempt.

So there are institutional aspects and effectiveness and coordination.

Economics is neither individual nor volitional. It is organic and it is evolutionary. Economics is nothing less than the character and organization of the social structure of humanity. This structure is organic and evolutionary. Its skeleton, nervous system, muscles, circulatory system and intelligence mirrors the human body. There may be psychological, religious, biological, artistic and other structures. And notwithstanding the fact that each will influence all, the social organization is economics.

Now that is a beginning to a much longer discussion, and some of the questions for that discussion might be: Where is politics? Where is money? How about the basics of provisioning?

But scarcity, individuals, business, transactions? Components but not definers. Least of all is economics a kind of huge game where the actions of individuals for their own self-interest is independent, but generating a harmonious and efficient outcome.

Take some cases for consideration.

An enterprising Kenyan can work hard, save, invest, entrepreneur himself six ways from Sunday, and if he gets a bit luck he can rise above the poverty of his society. Another enterprising Kenyan can emigrate to the U.S., take a job as janitor in a county building, and do much better.

Free market fundamentalists preach the primacy of the individual, an absurd contention when so very few manufacture and produce in isolation. It is sun worship. In our community, one of the great critics of public goods and government action is Kemper Freeman, whose fortune was based on paving public roads. Question mark.

And consider the triumphant figure of capitalism -- the CEO, whose individual exploits must pale compared to his ability to motivate a workforce to march in lockstep. Often you see these CEO’s try to take their success to the public sector, saying “Vote for me, I made Jack Rendering a successful company, I can run state government like a successful business. Turns out it doesn’t work that way. Jack Rendering took roads, schools, courts, police, the workforce as given inputs – and complained about the cost in taxes – and Jack Rendering produced a narrowly targeted private consumption good, sold into a market similarly dependent on public goods as inputs. Most often the fullness of the businessman’s self-congratulation is exceeded only by his delusion. Effective economics is a lot more about cooperation and coordination and planning than about individual self-interest,

The best smallest metaphor for an economy is not the individual, but the family farm. Here you have infrastructure, a workforce, management, old people, young people, sick people, decisions about what to do in downtimes and emergencies, and so on. You can trade eggs for beef or even money to buy this and that. On a farm, for example, when the weather is bad, or the fields are not amenable to planting or tilling, a recession as it were, you don’t lay off the kids and cut rations to grandma, you turn to repairing, building, learning, planning and so on. Activities that have no immediate market payoff, but without which life is and will be poorer. These are productive activities, and there are plenty of parallels in the current recession. They produce, in fact, the ultimate well-being.

We are, instead, letting the barn that grandpa built fall apart and eating the seed corn. We are not adapting to changing times, and we are failing a moral and practical duty to empower the kids and protect the old.

The greatest betrayal of the society by economics lies in the notion of self-interest and the dominance of self-interest. Greed is not good. It is an embolism or tumor if left unchecked. The famous study of economics undergraduates which showed that two years after beginning their studies they demonstrated markedly greater selfishness is proof enough that economics as taught is fundamentally wrong.

What is economics? We’ll come back to that in a future podcast. Leave your own thoughts on in the comments section of the transcript, or drop us a line at demandside one word at live dot com.


It is not so unnatural a segue from this into the economics dimension of the current revolution in the Middle East and North Africa.

Point One, very few saw it coming in the dimensions it has.

Point Two, this does not mean popular mass action sprang out of nothing, nor that it is not substantial and world-changing. Evidence is quite the contrary.

Point Three. Having failed to forecast it does not mean we should ignore a study of its causes. That would be like ignoring the obvious causes and best fixes for the Great Financial Crisis and going on with the same old paradigms.

Oops. Bad example. I guess that’s what we are doing.

So maybe that makes it a good example. In any event, hindsight is 20-20. There is plenty of light in that direction, even if the future is dark.

Can we not agree that instability arose from the following sources

One, an unemployed population of young people.

Two, rising food and commodity prices.

Three, repressive, autocratic regimes which

Three – A: Promoted and nourished corruption in economic activity


Three – B: Failed to provide and in some cases privatized and withdrew basic public goods.

Four: Regimes were financed by oil.

We’ll get back to this someday soon. Today, we need to move on.

In Ireland, stress tests conducted by Blackrock prompted announcement of a radical overhaul of the banking sector, forcing EBS into the bank AIB, among other things. Earlier reports had Finance Minister Michael Noonan describing haircuts needed from bondholders as also necessary in the restructuring process. If so, and those comments were notably absent from today’s coverage, what a welcome change it would be. Earlier descriptions were to “share bank losses with bondholders.” Much better than the practice of completely protecting finacial investors. It is unclear whether the dreaded term “default” will be applied to such arrangements.

Calculated Risk reports that Gross Domestic Income (GDI) is still 0.25% below the pre-recession peak. The U.S. produces two conceptually identical official measures of its economic output, GDI and GDP. These two measures have shown markedly different business cycle fluctuations over the past twenty five years, with GDI showing a more-pronounced cycle than GDP. GDI is by our accounts, a more accurate description of the economy. Numbers are not as immediately available, however.

And before we get to Nouriel Roubini, just a note that Consumer Sentiment declined in March. The final March Reuters / University of Michigan consumer sentiment index declined to 67.5 from the preliminary March reading of 68.2 - and down from 77.5 in February. This is the lowest level since November 2009.

And now, the Nouriel Roubin’s closing comments in his keynote to the MIPIM conference. The entire presentation is available as a Demand Side relay. We put that up last Sunday.

Nouriel Roubini
My final observation will be the following one, which will be another downside risk. I said at the beginning that the glass is half full. But it is half full because for the last two or three years we have had on one side a massive amount of monetary liquidity injections in the global economy, near zero policy rates in advanced economies, Quantitative Easing I, Quantitative Easing II in the U.S., in Japan, in other economies. So the glass has become full because liquidity has been huge chasing assets and leading to asset reflation. And on the fiscal side, until recently, we had massive fiscal stimulus in the U.S., in Japan, in emerging markets.

But if you look at the road ahead, there is going to be less monetary and fiscal stimulus. On the fiscal side, the Eurozone is already retrenching -- cutting spending, raising taxes -- because the bond vigilantes are forcing it in the Eurozone and United Kingdom. But even in the United States, where we are kicking the can down the road, there will be fiscal consolidation. It is already occurring at the state and local level. It is going to start to occur at the federal level as the
Republicans in Congress are pushing for spending cuts. So even in the U.S., the fiscal side is going to be a drag on economic growth. Not just in the Eurozone. Not just in the United Kingdom.

On the monetary side, with rising inflation, the European Central Bank has already signalled that they are going to start to increase interest rates, because they are worried about inflation. Inflation is already well above target in the United Kingdom, and the pressure on the Bank of England to raising interest rates if not today, in the next few months is going to be significant. And even in the United States, where policy rates are going to remain at zero, after the end of QE II in June, we are not going to have QE III, most likely. We are not going to have QE III because growth is positive, because inflation at the headline is rising, because Republicans are in control of the House and they are bashing the Fed, saying that the Fed is threatening to debase the currency and lead to inflation. And because a larger number of the members of the FOMC of the Fed, the three new governors are all more hawkish than Ben Bernanke (Kocher Lakota, Prosser, Fisher) and therefore even the Fed is going to be more cautious.

So the closing question is the following one: If the glass is half full because we had monetary and fiscal injections, but in the next few years, we are going to have fiscal austerity and exit from zero rates in the U.K, in the Eurozone, and eventually next year even in the United States, is there enough resilience in the private markets.
Is there enough resilience of consumption, of the corporate sector, of capex, to have resilient economic growth, when part of the monetary and the fiscal stimulus is going to go away.

I think that is an open question. So there are strengths, there are upside risks.
The real economies are doing well, and they are recovering, but certainly some of the downside risks I talked about, certainly those coming from the political risk in the Middle East, the risk of rising food and energy prices, may lead to a slowdown of growth and increasing inflation, and some of the downside risks that I referred to.

So the glass is half full, but it is also half empty, and we are going to still be in a world in which there is macro uncertainty and volatility, not just micro, financial, fiscal, political, policy, and also geopolitical. So it is still an uncertain world in which there are upside risks as well as downside risks.