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Saturday, March 26, 2011

Transcript: Relay 431C Nouriel Roubini

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One of the few who called the housing bust and financial meltdown in public was Nouriel Roubini of the Stern School at New York University. In a period of two years, Roubini went from a perpetual outsider, Doctor Doom, Jr., perhaps, to being the toast of the economics set, keynoting conferences from Dubai to London to East Asia.

We featured Roubini in last week's regular podcast, but here he is in complete form, in his keynote to the MIPIM, M - I - P - I - M, Marche' Internationale de Professionels d'Immobilier in my poor French, an international congress of real estate professionals, held as he notes at the site of the Cannes Film Festival.

Comprehensive, clear, coherent if you get past Roubini's thick accent, this presentation should serve as the baseline forecast for the economic world going forward. Demand Side disagrees with everyone, so we also disagree with Roubini, but he IS talking about the right things.

Nouriel Roubini 
Good morning everyone. It is a great pleasure and honor to be here. I remember the last time I was in this hall was last May during the Cannes Film Festival. It was the world of two movies in which I had a little cameo role. One was "Wall Street II," and the other was this documentary on the financial crisis, "Inside Job," that won last week the award for the best documentary at the Oscars. Unfortunately here this morning you are not going to be watching a great film. You will have to listen to me and my views on the global economy. But hopefully there will be some good food for thought, if not entertainment.

So what I want to do is just to give you my outlook for the global economy, what is happening. I was recently in Davos at the World Economic Forum, and the way I characterized the global economy then was as a glass that was half full and a glass that was half empty. There are many positive developments in the global economy, and upside risks, and it think we should recognize them. But there are also clouds over the global economy. And there are downside risks and vulnerabilities. it is worth to be thinking about to be realistic about what may be happening next.

If I could start with the positives. I think many things are actually going on in the global economy today that are actually going in the right direction. We have had the fairly severe economic and financial crisis, but there has been global economic recovery for the last three years. And if you look at the last economic indicators, these forward indicators of economic activity, both in emerging markets and advanced economies, they suggest not only positive growth, but growth that is accelerating -- in the United States, in many parts of Europe, and even in Japan. So there is positive economic growth and growth is accelerating in the last few months.

The second positive in the global economy is that the kind of tail risks that people were worrying about last year: The tail risk of outright deflation, the tail risk of a double dip recession in the U.S. and other advanced economies, the tail risk of a disorderly breakup of the Monetary Union or disorderly default in the Eurozone, those type of risks are today a lower probability event than they were a year ago. Not a zero probability event, but certainly the risk of those tail risks is smaller today than it was a year ago. So that is also positive.

The third positive about the global economy is that if you look at the balance sheet of
and the P&L of corporates, especially the high-grade, low-leverage corporates, in the United States, in Europe, in advanced economies, they are in very good shape. They took the crisis as an opportunity to reduce costs, especially labor costs. That has been painful for the unemployment rate. But these corporates have become lean and mean. They are highly profitable. Earnings have been surprising on the upside quarter after quarter. They are sitting on a pile of cash, $2 trillion of cash, available for investment, for job hiring, for M&A activity, for financial transactions.

As these corporates become more confident about the global economic recovery, they are more willing to spend. Of course, one question is, Are they going to spend, going to hire, in slow-growing advanced economies, or are they going to do most of it in more fast-growing emerging market economies. That's an open question, but certainly their financial conditions are much stronger than they were two years ago.

The fourth positive about the global economy is the rise of emerging market economies. There are now multiple poles of growth -- engines or locomotives of growth -- not just the United States and other advanced economies. And the story is not only about China or India or about the BRIC's, but is also about the rest of emerging Asia, about the positive things that are happening in emerging markets in Latin America, in Central Asia. Even in the Middle East where there is turmoil today, given high oil prices, the opportunity for high economic growth are there. So most emerging markets are growing very fast, and that is not just cyclical. It is a permanent shift of economic power, from West to East, from North to South, from advanced economies to emerging markets.

And for the purposes of this conferences, property and real estate, I would say that the growth of emerging markets is going to be medium- and long-term positive for real estate, commercial and residential. You have fast-growing economies, where income and wages are growing, you have industrialization, you have urbanization, on a massive scale in China today, but it is going to be increasingly so in India and most other emerging markets. And as you have urbanization and industrialization and fast growth,
demand for real estate and property rises. Huge demand for residential real estate investment, for commercial real estate, retail and offices, infrastructure, you name it. So the long-term trends of emerging markets are certainly positive for the property sector.

The fifth positive about the global economy is that the last year last year for financial markets was a story of risk on and risk off. Risk was off and risk aversion was high in the spring during the Greek crisis. Risk was off again in the summer when people were worried about a double dip recession in the United States. But by the fall of last year, things started to improve in financial markets and equity markets started to rise. That was a result of quantitative easing number two by the U.S. Fed, the result of another fiscal stimulus in the United States, the result of the Europeans patching up the problems of the periphery of the Eurozone, and coming up with official financing to backstop banks and governments in trouble. But the year ended actually on a positive note. And that rally in equity markets and reduction in credit spreads continued into the beginning of this year. Of course, the clouds coming from the Middle East have led now to an increasing risk aversion, but the current global equity market correction has been very modest compared to the one we had, for example, in the spring of last year, when the problems a small Greece led to a 20 percent equity market correction globally.

So you can tell a story that as the global economy recovery, and the economies surprise on the upside in terms of recovery, asset prices can go higher. If asset prices go higher, there are positive wealth effects as the reduction in credit spreads further stimulates economic activity. And you could have a virtuous circle when the real economy improves, financial markets improve, as opposed to that vicious circle that you saw between 2007 and 2009, when asset prices were falling and real economic activity was contracting. So you could have positive surprises.

Now these are the positives about the global economy. And I would say we should not underestimate the power of these positive factors that are driving global economic growth, both in advanced economies and in emerging markets.

Let me talk now about what are the potential downside risks and the vulnerabilities. Certainly the one that is key in the minds of investors today is the turmoil in the Middle East and the rise in oil, energy, food and other commodity prices. I'm going to get to that point in a moment, but I'd like first to address a number of the other concerns.

The first observation to make is that in most advanced economies, the recovery is going to be still anemic, subpar, below trend -- more like a U-shaped recovery rather than a V-shaped recovery of previous economic recoveries. Why? The crisis was caused, of course, by too much debt and leverage in the private sector: households, financial institutions, even parts of the corporate sector. Those debt ratios still remain very high in the private sector, while at the same time in the past year, we have seen a massive releveraging of the public sector with large budget deficits.

So over the next few years, the painful process of private and public sector deleveraging is going to occur and everything I've seen implies there will be positive growth in advanced economies, but that growth is going to be weakened by the fact there is this burden of private and public debt. The need to spend less, save more, as a way of reducing this debt burden in the private and public sector.

So that's one constraint to growth.

The second issue is related to the first one, is that as you know there is significant sovereign risk and rising sovereign risk in most advanced economies. Of course, the bond market vigilantes have already woken up in the periphery of the Eurozone, Italy, Spain, Portugal, Greece, Ireland, you name it. But let's not forget we have large budget deficits and large stocks of rising public debt in the United States, in the United Kingdom, in Japan, and most of the other advanced economies. So the question of sovereign risk, of public debt sustainability, of the willingness and ability of governments in the advanced economies to tackle this fiscal problem is going to remain a serious one for many years. In addition to the official public debt, as you know there are also contingent liabilities of the public sector deriving from aging of population in most advanced economies. That is leading to Social Security systems, pension funds being unfunded. The rising cost of health care for the elderly. So you have public debt officially, and you also have contingent liabilities or unfunded debt, as well.

So that's a second problem.

The third problem in the global economy derives from the economic and financial trouble still existing in the periphery of the Eurozone. Greece, Ireland, Portugal, Spain, Italy, potentially other countries. The fundamental problems of these economies are chronic and are not going to be solved any time soon even if the Eurozone is now much more willing to backstop the weak governments and the banks and support the Euro. There are problems of large public debt and deficit, but also problems of large
foreign liabilities of the private sector, especially in countries like Ireland or Spain where there was a housing boom and bubble that went bust. So you have public and private debt and deficits that are significant and have to be rolled over.

You have a problem of a loss of competitiveness of the periphery of the Eurozone. Countries that were losing market shares to Asia already a decade ago because of exports being labor-intensive and low value added. Then a decade of wages rising more than productivity and unit labor cost rising, and then the sharp appreciation of the Euro being the final nail in the coffin of competitiveness.

And then you have the problem that in most of the periphery of the Eurozone, there is either no economic growth or negative economic growth. Greece, Ireland, Spain are still contracting, while economic growth is barely positive in Italy and in Portugal. So you have public and private debt and deficits. You have lack of competitiveness on the external side. Large current account deficits. Lack of structural reform. Lack of economic reform.

How are you going to square these things to restore economic growth? I think even if a disorderly breakup of the Eurozone is unlikely, the challenges to the Eurozone remain.

The fourth problem I think we have to recognize is that while in the short run the United States is doing well. This year it could add economic growth of the order of 3 percent or so, there are significant problems also in the United States. The private sector deleveraging of the household sector has been postponed so far -- this year and next year -- because the household sector received another tax cut or transfer payments of a trillion dollars, but the trillion dollars has been financed through an increase in the budget deficit of a similar amount, another trillion dollars of public debt.

So in the U.S. we are postponing the private sector deleveraging by even more releveraging in the public sector. Eventually the process of deleveraging in the public sector is going to continue again, and that's going to slow down growth, especially starting with next year.

But there are four issues I think that are not addressed in the United States.

One is that the unemployment rate remains high, and job creation is still modest -- just barely enough to satisfy the increase in the labor supply. And therefore the unemployment rate is going to stay high. Including discouraged workers and partially employed workers, actually, unemployment is not 8.9, but rather 16 percent.

The second problem in the United States is that unfortunately if there is one sector of the U.S. economy that is already double-dipping, it is the housing sector. Demand was artificially boosted last spring with a tax credit. Supply was constrained by an effective moratorium on foreclosures. After the tax credit expired, demand fell. Supply now is rising. Since August, unfortunately, home prices started to fall again. That has a negative wealth effect on consumption and pushes a million or more households into negative equity, with the risk of many more of them walking away from their homes. A high unemployment and double dip in housing implies that losses for the financial system may be higher than what the Market is pricing.

The third problem in the United States is the fiscal deficits of the state and local governments that are very severe. They are starting to address them, but it is putting pressure on the municipal bond market.

The fourth problem in the United States is that, while Europe and the U.K. are starting to address their fiscal problems, the U.S. decided to kick the can down the road. There is political gridlock in Congress. Democrats and Republicans are completely divided. Republicans are against tax increases. Democrats are against spending cuts, especially entitlement spending. In a world in which the U.S. can borrow at zero rates on the short end and three and a half on the long end, the path of least resistance politically is to kick the can down the road. Keep on running trillion dollar budget deficits this year, next year, into the next administration. The risk is that at some point the bond market vigilantes are going to wake up in the U.S. the way they did in Europe. There is going to be a bond market revolt. The increase in long-term interest rates is likely to crowd out the recovery.

So those are the risks from the U.S.

Let me talk briefly about emerging market economies. The strength of emerging markets' high economic growth is also a source of vulnerability. In these emerging markets where there is overheating, where there is excessive credit growth, where there is froth in some of the financial markets, there is a risk of rising inflation. And in emerging markets, as you know, two-thirds of the consumption basket is oil, energy, food and transportation. So the rise in food and energy and commodity prices has a much more significant effect on headline and core inflation than in advanced economies, even before you had this shock in the Middle East.

So the question for China and many emerging markets is, Can they tighten monetary policy and use the exchange rate to reduce inflation and maintain economic growth, and achieve a soft landing of their economy rather than a hard landing? Many of these emerging markets are behind the curve in terms of credit controls, in terms of monetary tightening, in in terms of allowing the exchange rate to appreciate to control imported inflation. The risk is that there is going to be a hard landing rather than a soft landing. It is a low risk probability event, but certainly the rise in commodity prices make that trade-off between maintaining high growth and controlling inflation more difficult than it was in the past.

That leads me now to the question about what's going on right now in the Middle East. The reality is that almost nobody predicted this economic and political turmoil, and we don't know whether this political turmoil and uprising is going to stabilize in the next few months or whether it is going to spread to many more countries, with threat to the supply of oil and energy in other countries, other than Lybia.

The reality is that you can tell a scenario where things stabilize politically, and oil prices, while remaining high, they gradually fall to more sustainable levels. But you can tell also a scenario could exacerbate with upside risks to oil and energy prices.

Now what are the effects in the rise of oil prices?

One effect is on inflation. The effect on inflation is going to be much more sharp in overheating emerging markets, where oil, energy, food are a large part of the consumption basket. And these countries are behind the curve in terms of policy tightening, and therefore the risk of double-digit inflation is rising in many of these emerging economies.

In the case of advanced economies where there is a slow recovery from this financial crisis, the risk to inflation is much more modest. Yes, you might have some rise in headline inflation gradually, but core inflation is not going to rise very much. And it is not going to rise very much because you have slack in the goods market, with capacity utilization still being low in the U.S., Europe and Japan. You have severe slack in the labor markets, where the unemployment rate is close to 10 percent. Workers don't have wage bargaining power. Wages are growing less than productivity
and unit labor costs are falling. And in some economies like the U.S., U.K, Ireland, Spain, you also have slack also still in the housing market, where the bust has led to a longer-term slump in terms of excess capacity.

So I worry less about inflation becoming a severe problem at current levels of oil prices in advanced economies. Of course, if oil were to go to $140 or $150 per barrel, this story could be different.

So the impact of oil prices is more significant on inflation in emerging markets, less significant in advanced economies. There is also an impact on economic growth, because rising oil prices are a negative terms of trade effect on advanced economies and lead to a reduction in income and therefore in consumption. So you may expect a slowdown in economic growth. So far it is going to be a slowdown in economic growth, not a double dip recession, but if oil were to reach a level of $140 or $150. If -- and that's a big If -- the turmoil in the Middle East becomes much worse, then certainly the risk of a double dip recession, the risk of a stagflationary shock, where you have recession and rising inflation, would be a bigger risk for many economies. For the U.K., for the periphery of the Eurozone, eventually even for the United States.

So current levels of oil prices are a drag on growth for the global economy, but a modest drag, and they lead to a modest increase in inflation. Further shocks would have more destabilizing effect. They would also negatively affect business confidence, consumer confidence, investor confidence, in a way that could slow down growth more than otherwise. So that's a risk, but we don't know yet what the developments are going to be.

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.

Transcript: Relay 431B Barbara Kennelly on Social Security

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As part of our continuing relay of the Economists for Peace and Security's Barnard Schwartz Symposium, today on the podcast we relay the keynote of Barbara Kennelly, a long-time and effective warrior for the cause of Social Security.

That Social Security, perhaps the oldest and most successful government program in history, should continually be the object of reactionary venom is quite unfortunate, both for social security and for the credibility of the Right Wing.

Created literally out of nothing during the leanest times of the 20th Century, Social Security is repeatedly castigated for not pre-funding its benefits. In fact, as Kennelly points out here, during times when the program WAS growing its trust fund, the operating side of the budget was borrowing every dime of the surplus to fund its low tax rates.

Robert Barro made his name on the so-called Ricardian equivalence, which was the highly ... well, let's call it ... preposterous theory that the public from small to large were rational -- economic speak for having the prescience of Nostradamus -- and realized that when taxes were cut, they would have to rise in the future, so the public large and small saved against that contingency and basically washed out the stimulus benefits. We saw then that people did no such thing, but that pales to the fact that the government will do no such thing -- CAN do no such thing, according to the Right -- as to raise taxes. Taxes will not have to go up, because the government will renege on its bonds held by Social Security.

That is the choice, renege on its bonds, "Default" is the term we use for it when we talk about Greece, or pay full benefits to recipients, since the financing is adequate -- let's see, solvent into the 2030's.

So, with that rather lengthy introduction, let's turn to the introduction of James K. Galbraith and then to Barbara Kennelly.

James K. Galbraith:
I’m very happy at this moment to be able to introduce our first keynote speaker. We’re very privileged to have, as a speaker, one of the country’s great authorities on the Social Security System. Congresswoman Barbara Kennelly served 23 years in electoral office and 17 years in the United States House of Representatives. She was the first woman to serve as Chief Majority Whip, and only the third in history to serve on the Ways and Means Committee, which speaks well of her, and not so well of the Ways and Means Committee. During the 105th Congress, she was the ranking member of the subcommittee on Social Security. After serving in the Congress, she was counselor to the Commissioner of the Social Security Administration, that commissioner being my dear friend and former LBJ School colleague Ken Apfel. She has since become the President and Chief Executive Officer of an extremely important enterprise, the National Committee to Preserve Social Security and Medicare. Having said that, I just welcome you, Congresswoman Kennelly. Many thanks for being here.

Barbara Kennelly:
Thank you very much. I never consider myself an expert or an authority on Social Security. Having been in elective office for 23 years, I knew a little about a lot of things, but not an expert at Social Security, but I have them in my office. I have a number of experts on Social Security and Medicare. Today, I would like to talk about these important programs, not merely as budget issues, but put faces behind the numbers. The National Committee Members are these faces. National Committee to Preserve Social Security and Medicare have three million members and supporters.

These people come from all walks of life, of all political persuasions, but what they have in common is their absolute passion to protect Social Security and Medicare.
This summer in August, we celebrated the 75th anniversary of Social Security. It gave us a very wonderful opportunity to reflect on the importance of this program. I will recall to you Franklin Delano Roosevelt’s words when he signed the Social Security Act: “We can never insure 100% of the population against the accidents and vicissitudes of life. But we have tried to frame a law that will give some measure of protection to the average citizen and to his family against the loss of his or her family, against the loss of a job, or against a poverty-ridden old age.” This was a bedrock promise that President Roosevelt made. The whole idea was after a lifetime of work, Americans would protect seniors in their retirement.

Social Security was never meant to be a welfare program - certainly not - or a charity. It’s an earned benefit, built on twin goals of equity and adequacy. We pay in during our working years; I’m sure all of us here pay in, as I do. We get return when we retire. I am so always amazed that people don’t know how really not exactly generous are Social Security benefits. The average benefit of Social Security is $14,000. For women, it’s just a little below $12,000. That’s really not much to live on, but what it does is let seniors have a life of dignity and independence.

Social Security really has been our nation’s jewel. It’s been a very important and popular program, until very recently, with almost everybody. It lifts half of individuals who are retired out of poverty. Family benefit is a family benefit, not just a retirement benefit; it’s a family benefit, whether the breadwinner has retired, died or is disabled. One out of three of the beneficiaries – and we don’t often talk about this – are not seniors; they’re either disabled or they have left their families and the Social Security is needed. Social Security is the only program with an automatic cost of living increase. It keeps up with inflation. It’s especially critical to the oldest of the old, mostly women who really didn’t have a lot of resources. By the time they get older, they’ve run out of those resources. Social Security is incredibly important to them. Those 85 and older who really need Social Security is the fastest-growing demographic in our population.

I think some of you probably, knowing this audience, certainly paid attention the Census Bureau poverty data that came out last week. We saw poverty increase for children. But what we saw was the only group to experience a decline in poverty was seniors. Why was this? One of the reasons is in 2009, we had an exceptionally high cost of living adjustment; 5.8% was the COLA. That was the result of the spike in oil prices, and when the formula was figured as a benefit. The other reason, the $250 stimulus; the big stimulus bill that we had, included a $250 check to seniors. This shows how close seniors are to poverty, in that these two changes could make sure that they didn’t go into poverty. I have to tell you something: unless the Congress acts, we’re not going to have a COLA this year or next year. I will tell you, I don’t think we’re going to see a 5.8% spike as we did two years ago.

I can’t discuss Social Security without discussing Medicare. For many seniors, Medicare is their single out-of-pocket expenditure. Part B premiums are deducted from Social Security from the check, and many seniors kind of think of these programs together. Medicare provides healthcare to a population shunned by the insurance companies. I represented Hartford, Connecticut, the former insurance capitol of the world, for 17 years. I understand insurance. I can tell you, the insurance industry had no, no, no interest in covering seniors because they have too many claims. Insurance companies have to be responsible for profits and to their shareholders. Medicare provides health insurance to a population that was shunned and now it covers these benefits. Today’s Medicare is affordable insurance to elderly with disabilities. But having said that and how important Medicare is, we have to remember that Medicare uses the same doctors, the same hospitals, the same MRI machines as our whole healthcare system. A senior now spends an average of 40% of Social Security benefit on out-of-pocket expenses. We need to contain costs across the board. We can’t just look at Medicare for cuts.

That’s why my organization supported the Healthcare Reform Bill. I have never in all my years seen a piece of legislation that had so much information and much of it directed to seniors. That was because seniors care so much about Medicare, and also because seniors vote in midterm elections. Of course, many of what was going on in the healthcare reform had political implications. Seniors were bombarded with distortions, half-truths - and I have to tell you something - outright lies. I don’t care how many times you read the Healthcare Reform legislation, you cannot find death panels; they were never there. Let me tell you, when seniors are polled, they still believe there are death panels, and this is very harmful to the program. National Committee, my organization, spent millions helping members to understand the truth, and we have no political agenda. Our membership is split one-third Republican, one-third Democrat, and one-third unaffiliated. But we know that the status quo was not an option for Medicare. You just can’t cut Medicare without the rest of healthcare being addressed. If we do, providers will withdraw from the program, and as a result, seniors will have a very difficult time finding a doctor. The Affordable Care Act was a unique opportunity to strengthen Medicare while slowing the cost of healthcare. And it protects access for seniors while keeping Medicare affordable. Let me tell you something: it’s not a perfect bill; most of them aren’t. But it’s a beginning on Medicare reform and healthcare reform.

Those who were opposed to the whole idea of healthcare reform, before the ink was dry on the President’s signature, they are talking repeal. I will tell you right now: no matter what happens in the fall’s election, we’re not going to have repeal because the President would not sign any veto of Social Security, but there’s lots of ways to undermine this program. You can chip away at the less popular provisions, which has already begun. Small business can’t stand the reporting regulations. They’re absolutely hated by small businesses. But if the legislature hadn’t done that, $13 billion would be lost to preventive healthcare. Individual mandates, those aren’t popular either; in fact, they’re hated by many people. But without it, the economics of the whole healthcare bill wouldn’t work.

We really have to pledge to keep some of these popular positions. When I say pledge, I think many of you saw last week that the Republicans have a new pledge. What it does, it includes little pieces of repeal of Medicare. It’s a prohibition against insurance company rescissions and preexisting condition denials. Very popular, but if you look at them, and attack them singly, there’s a chance they could pass. What you also have to worry about is starving the program of resources. Health reform is unbelievable, if you read the bill - an unbelievable amount of regulation. Congress could refuse to appropriate the money for the regulation, and that could stop healthcare in its tracks. Many provisions don’t take effect till 2014. That’s plenty of time to organize repeal activities. Those of us who believe a country as advanced as the United States of America should have a robust social insurance program… but I have to say to you this morning, and you that care enough to come to a meeting like this, I think those of us who believe in social insurance will have to fight to keep these programs.

On the 25th anniversary of Social Security, Frances Perkins, the hero, Labor Secretary of Social Security said, “One thing I know. Social Security is so firmly embedded in the American psychology today that no politician, no political movement, no political group could possibly destroy that act and still maintain our democratic system. It is safe. It is safe forever, and for the everlasting benefit of the American people.” Well, that may no longer be true. The forces are at work undermining Social Security, and they’re using legitimate fear about the deficits as the weapon to undermine the program. There are those that are in very important positions that claim we can no longer afford Social Security. I have to tell you this. I’m appalled as anybody that we have a deficit of $1.5 trillion. I can remember when $200 billion was looked at as a real problem. What’s happening is, running surpluses [unintelligible]. We have been running surpluses in the Social Security system that have been masking the real amount of the deficits, as we well know. What we have to know is also that Social Security has not added one thin dime to the deficits. Americans have completely always contributed to the program and expected to have Social Security when they retire. It is a very safe retirement instrument. The treasury bonds are backed by the full faith and credit of the United States of America.

The problem is, the enemies of Social Security don’t want to honor these – they won’t say it – but they don’t want to honor these bonds. Fiscal hawks’ drumbeat is that we can’t afford it. The truth of the matter is, they don’t want to honor the bonds. Policymakers may be listening. You know why? The President appointed a fiscal committee. That fiscal committee has been moving very rapidly. Now do we know what the fiscal committee has been suggesting? Not much because, oh, they have their public meetings by law, but the subcommittee meetings are held with no publicity whatsoever. So we don’t know what these deliberations in secret are going to do to our program. We have to plan by what they’re going to do, and this is what we know; because we have public statements by people like Mr. Bernanke and others who are saying, everything should be on the table. But the only thing that we see on the table are cuts in benefits. The Fiscal Commission won’t meet again until after the election; in fact - I get a kick out of it - the date for the next meeting, I think, is November 3; election day is November 2. Usually you’re pretty tired after the election, and I don’t know exactly how many people are going to attend this meeting. But what they have on the commission, a strong group of people who really don’t believe in Social Security. I’ll tell you, they’ve made it very clear that they don’t want to raise revenues. They just don’t want to raise revenues. If you don’t raise revenues, you’ve got to cut benefits and if we raise the age to 70, benefit could be cut by almost up to 40% or 40%. That becomes a poverty wage.

Another thing we hear a lot about is changing the way we index the formula of benefits. It’s a complicated idea. It sounds progressive. But over the time, it breaks the important link between contribution and benefits that Social Security has had for 75 years. It could leave everybody once again with a poverty level benefit. I’m not one - and I really am not one - who would never support any reductions. I won’t just say, “Don’t touch it; touch everything else, but don’t touch Social Security.” What I say is, when they’re only talking about Social Security, I want to ask the commission, “Why don’t we hear about anything else? Until we hear about other things, we can’t have an intelligent conversation about what’s going to happen.” Social Security is not only important to seniors; it’s clearly going to be important to our children and our grandchildren, and retirees in the future. Right now, only one-half the workforce has a retirement plan, a 401(k), and only one-half of those people are putting in the maximum amount. What we have is a situation where Social Security will never be more important, and the members who are pushing cuts in Social Security claim that they don’t want our children or our grandchildren to have this debt. The fact of the matter is, our children and our grandchildren are going to need Social Security. Social Security is so special. It is no investment risk. Checks go out regardless of the market. Checks went out when we had Katrina. People had to go from Louisiana to Texas; Social Security found those people, and got their checks. After 9/11, Social Security, it was there for those people who were left without the breadwinner. It was there in a matter of weeks. The benefits increased, keep increasing to keep up with the cost of living. That’s something we have to, have to protect.

I know that this symposium is to find solutions for budget problems. And as long as benefit cuts are all that’s on the table, I don’t see how we can have an intelligent conversation. We should decide what services we want, and then figure out how we’re going to pay for them. The commission is going backwards, picking an arbitrary funding target and then squeezing programs into it. I will tell you, there’s a real disconnect between fiscal hawks and the American people. The National Foundation has recently taken a poll - we didn’t take the poll; we paid the University of New Hampshire, which has a very good reputation on poll taking, to take a poll. What we saw, people absolutely back the Social Security program. We also saw something interesting. People are more willing to pay a higher payroll tax rather than cut benefits. Even young people very blithely would say, “It’s not going to be there.” Millions of dollars have been spent. To tell young people that Social Security isn’t going to be there - for the first time when asked this question, they say, worried that it’s not going to be there, but they think it should be there. We’re going to have to start up a campaign again, make cutting Social Security really something that we have to protect against.

I look at you people and so many people, even people who collect Social Security don’t understand the program. What we have to have is people who are interested in the future of this country going around and helping us about Social Security. I for years have been working with Social Security. You have talked to a newspaper that had one person to cover Social Security; that’s no longer true. I was on a panel with a woman that wrote, The Woman That Gave Us Social Security; it’s a wonderful book – the New Deal, excuse me - about Frances Perkins. This woman got a Nobel Peace Prize when she was working at The Washington Post. I said to her, “Why did you leave The Washington Post? We need you so definitely at this time.” She said, “Barbara, I couldn’t stand it.” She said, “They’re reacting now to their advertisers, and many of their advertisers are arch conservatives. So therefore, they’re very careful that they make them happy.”

We must preserve Social Security for future generations. Before I end, let me give you a little bit of history. In 1983, I was on the Ways and Means Committee. We had a real problem. Because the way the formula was written, and because of inflation that had been so high the past years, we had a problem. We didn’t know if those checks were going to go out. We were really worried, and we knew we had to do something. Something else was happening. We had the baby boomers coming. One of the key people on the commission says, “Nobody knew the baby boomers were coming.” I don’t know what was the matter with him because they were in their late 20s and in their 30s. We raised that payroll tax, and these people worked all their adult lives, paying into the Social Security System. That surplus was building up so they would have really prefunding their benefits. We thought about it; what do you do with that surplus? What do you do with that surplus? What better to do than put it in government bonds. Now we’re hearing, “We’re not going to honor those government bonds.” We’re hearing that Social Security is going flat broke, that the government bonds are worth nothing.

Let me tell you something: those are government securities. They’re the same as the bonds that we sell to our international neighbors, to Citigroup, to well-off people. I’m wondering, are they saying to us, “We will honor those bonds, but not honor the bonds that people paid in month after month, month, month?” I don’t think so. The difference between ’83 and now is the people who were on the commission, and the people who were in the House Ways and Means Committee believed in the program, and were willing to work hard to make that program work, and they did. And the program since then has not only worked; it’s built up to surplus. The difference is now, we have people in decision-making places – and I’ll name one of them because he drives me crazy – Representative Paul Ryan. He’s got a roadway to fix the whole country. One of those ways is to absolutely privatize Social Security. We had that fight in 2005. I watched the President go around the country, and talk about privatization. He went to 60 cities. We kept hoping he’d go to more. Because every time he talked about privatization, more people realized, “No, we can’t do this.” There were a number of reasons against privatization, but even just this idea that the transition costs would be so high that the solvency question would not be addressed.

Speaking of solvency, the whole point of fixing Social Security, and our actuaries now say that the program has enough money, if we honor the bonds, to 2037. After 2037, it can only pay 76%. People are acting like all of a sudden, there’s no workers. Money is coming into Social Security all the time. Is there a shortfall? Yes. Would I be more than willing to work hard to see that we look at the solvency issue? Yes. But what the commission says, what the executive order says, is that any savings found in this study of budget problems, any savings goes toward deficit reduction. Just say they raise the cap; everybody’s saying, that’s a good way and probably is a more fair way. But that money wouldn’t go towards Social Security; it would only make the solvency problem worse. It would go through a deficit reduction.

What we have here is a real difference of opinion. And what we have here are those people who were detractors of Social Security when we began the program, remained detractors of Social Security. Nancy can tell you, there were there in 1983 when we were doing reform. They were there… a guy named Pete Peterson, a very successful man. He made his money in an equity firm in Wall Street. He has given his adult life… For some reason, he just can’t stand Social Security. So this year, he gave a billion dollars to a group, the Peterson Foundation, to work towards solving the deficit problem, but really work hurting Social Security. We should be worried; we really should be worried. I believe in democracy, and differences of opinion. I also think, having studied it, looked at it, heard about it, campaigned against privatization, I also feel committed to future generations - not just today’s retirees - to have a strong social insurance program. Every other developed country has.

You hear things about, we’re like Greece. Greece had the most unbelievable, favorable benefits - much, much too high. We don’t have anything like that. Other countries are raising the age. Let me tell you something, France is having a big fight over raising the age from 60 to 62. We’re at 67 and we’re being told that maybe 70 is a good age. What I really ask you to do is get involved. Talk to your newspapers. Talk to your Congress members. Talk to other people to explain that, yes, the deficit is terrible, yes, the debt is terrible, but Social Security didn’t cause it, and we still need Social Security now and we’re going to need it for future generations. I thank you for coming to an event like this because obviously you care about the future of the United States of America.

Tuesday, March 22, 2011

Transcript: 431 Triple Shocks: Japan, Oil, European Debt

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Nouriel Roubini

In my view, the fundamental problems of the peripherals are not going to be resolved by a lower interest rate on the official loan. Greece has a public debt that is going to be soon 150 percent of GDP. The Irish banks are in big trouble, and putting their liabilities on the balance sheet of the government makes the government insolvent. So you need something much more fundamental.

In Greece you need an orderly restructuring of the public debt. In Ireland, you need to convert that debt and secured claims of the banks into equity as a way of recapitalizing the banks. So you need debt restructuring in both the public and the private sector. That is much more radical than reducing the interest rate on the loans of the IMF or the EU.

They are going to move in the right direction, but whatever they are going to do in my view is going to be too little, too late.

You have to extend the official resources. You have to redo hard restore competitiveness and growth. You have to restructure private and public debt. So in my view, there is not going to be a comprehensive plan that resolves the problems of the periphery of the Eurozone, especially the excessive amounts of private and public debt. So you're going to kick the can down the road, and then the Market is going to react negatively and they'll have to do more somewhere down the line. So this is a chronic problem that is going to take many years to resolve.

The view that they are going to resolve them in March with an agreement is far-fetched.

Certainly, in the periphery of the Eurozone, fiscal austerity, structural reform, lack of competitiveness implies either continued recession or very, very anemic economic growth. Could be longer term near depression of the sort we saw in Japan in the 1990s.
On Japan:
In the short run whenever you have shocks like this -- there was the earthquake in Kobe in Japan in 1995 -- you have a weakening of economic activity, because suddenly capital stock is destroyed, people die or cannot work or go to work, there is damage to supply and the productive capacity. So you have a slowdown in output. But then over time, if there is a massive of fiscal stimulus to rebuild infrastructure, you name it, there could be an economic recovery over the medium term. But certainly it is a negative for the stock market. Given the destruction of wealth and also the kind of effects on confidence are going to be significant. And let's not forget there will be fiscal stimulus to reconstruct, but Japan already has a budget deficit close to ten percent of GDP, a debt close to 180 percent of GDP, an aging of population, so this is certainly the worst thing that can happen to Japan at the worst time.

There we have Nouriel Roubini speaking to Bloomberg on the prospects for Europe and Japan. The third flavor of crisis is, of course, the Middle East and North Africa and oil. Today we look at it all.

First, we need to look again at the manifest inadequacy of GDP as a measure of economic well-being. In the current case, with Japan, a whole lot of economic activity will occur in the coming year to reconstruct the energy infrastructure away from Nuclear and to adapt to and mitigate quake damage. So the GDP impacts in the short term will be offset more than completely in the medium and longer terms.

Notice that the well-being of the citizenry will not be captured by this GDP metric, which is concerned only with the buzzing around the hive, not with the output of the hive or its physical condition, nor even the condition of the buzzers.

Take some contrast – in the current situation in Lybia, for example, undergoing a civil war or a war of liberation. Since its GDP consists of its export of oil, there is zero influence of its people in actual economic measures.

Contrast again to the environmental damage being inflicted on the planet every year by greenhouse gas emissions. Arguably as a global economy each year we absorb several times the damage to the long-term viability of our resource base and ability to produce, from the way we go about our business every day. The Fukushima nuclear plant is still not stabilized, and radiation is continuing to be emitted, but it is only ironic that many times that damage is being denied or else accepted under the dictum that we cannot do anything for fear of overtaxing our economy.

Regarding GDP. Alternative measurements of economic activity were explored by the Sarkozy Commission chaired by Amartya Sen and Joseph Stiglitz, but they may have gotten lost in the weeds. If GDP simply included an accounting for net depletion or damage to our economy’s physical, natural and human resources, we’d be doing things a lot differently than we are. Supporting the price of liquid financial assets and stimulated credit creation would not be the first order of business for the Fed, for example. Economic growth would come to mean more than buzzing around the hive. The REAL condition of our economies would appear on the screen of public understanding. The effect of not having a coherent measure is the effect of mapping a path over a cliff.


As a forecaster who predicted a downturn in 2011 based on a weak economy and risks to the financial sector from European debt and American commercial real estate, a downturn triggered by oil prices and restrictions on credit, the Japanese catastrophe was eerily reminiscent of 2001 and 9-11

The 2001 recession was dated from April 2001, and Alan Greenspan was in Europe hat in hand pleading for lower interest rates from the ECB on 9-11. He couldn’t get back into the country for three days. But 9-11 occurred and bailed out Greenspan, W and the host of incumbent forecasters on the economy, who had predicted the New Economy quote unquote and the end of the business cycle.

Same like now. The commodity bubble is clearly in play, the downturn clearly continues unabated, but because this huge, dramatic and tragic event occurred, the forecasts in place which predicted what eventually happens have become immediately obsolete. Now we can throw it like sand in the eyes of the public. Another black swan.


PRUITT:  Even Callaway Golf considers Japan, I mean they get 17 percent of their revenue out of the country.

POWERS: Yes, yes. Despite the decline of Japan's economy, the Japanese remain avid golfers. Their golf courses are among the finest in the world, and they insist on the best golf clubs. Now the feeling is that as Japan is digging out of the rubble, a Japanese salaried man is not going to feel like splurging and going off and buying a new set of sticks from Callaway, so that's another impact on the U.S. economy.

PRUITT: And they're so ubiquitous on television, Aflac, the insurance company with the duck. Well, who knew until this that Aflac gets 75 percent of its business from Japan?

POWERS: Yes. In a very shrewd move, they started thirty years ago recognizing a gap in the medical insurance business in Japan. They exploited that gap and they're very, very established in Japan. Now they say they'll be okay, but time will tell.
Cutting into this coverage by Bloomberg’s Ken Pruitt and Chris Power, we have to note that the effect of the catastrophe on individual Japanese is not coming up on the radar too well. Here you see that we are more worried about the company that provides can’t work coverage, i.e., unemployment insurance, than we are about the tens of thousands who may have lost their livelihoods.

In discussing the tendency of the Japanese to hoard against old age and want, we at Demand Side have characterized the social safety net in that country as very poor. It is, overall , however, not that much poorer than the United States’, ranking on a par in some measurements with Mexico. Although lifetime employment in Japanese companies is something of a thing of the past, there are substantial private pension benefits for former workers in big companies, although these have come under attack during the past few years.

LEGGETT: So I think we have problems with nuclear and we have problems with oil. As the Daily Telegraph said, Nuclear and Oil both look as if they could be in meltdown. We have an array of problems. And I think the most important thing that governments have to do now is to accelerate their clean energy programs, particularly energy efficiency. We lead with energy efficiency, but we've also got to mobilize the full family of renewable energy technologies, and do it as quickly as we can. That's the main message coming out of this.

COHEN: Dr. Takin. Let me put it to you. Are you being too sanguine about oil?

TAKIM: The first part is that there is plenty of oil that is available. Supply is ... Saudi Arabia has the spare capacity. And in the pipeline there are oil fields, giant discoveries have been made, in the tens of billions of barrels around the world, and they can come on stream. So I don't think we will have a crunch in oil supply, at least for another twenty years. That I don't think would happen. But to go and encourage other uses of energy, I definitely agree. Especially to encourage conservation, to increase efficiency in our energy use, all sorts of energy, and go to renewables. But we have to accept in reality in the world, it takes time.

LEGGETT: Yeah, well, there are two very different risk narratives. You know, there are profound disagreements.

There we have Jeremy Legget and Manasheen Takim from the BBC’s Business Daily with Leslie Cohen.

On this subject Roubini in a Project Syndicate column, raises the spectre that political turmoil in the Middle East increases the risk of stagflation, a lethal combination of slowing growth and sharply rising inflation. While Demand Side reserves the term “inflation” for a general phenomenon, Roubini’s point is well taken. Here quoting:
The latest increases in oil prices - and the related increases in other commodity prices, especially food - imply several unfortunate consequences (even leaving aside the risk of severe civil unrest).

First, inflationary pressure will grow in already-overheating emerging market economies, where oil and food prices represent up to two-thirds of the consumption basket.

The second risk posed by higher oil prices - a terms-of-trade and disposable income shock to all energy and commodity importers - will hit advanced economies especially hard, as they have barely emerged from recession and are still experiencing an anemic recovery.

The third risk is that rising oil prices reduce investor confidence and increase risk aversion, leading to stock-market corrections that have negative wealth effects on consumption and capital spending. Business and consumer confidence are also likely to take a hit, further undermining demand.

If oil prices rise much further - towards the peaks of 2008 - the advanced economies will slow sharply; many might even slip back into recession. And, even if prices remain at current levels for most of the year, global growth will slow …
The ammunition bag is empty, according to Stephen Roach: quoting
Alas, there is an added complication that makes today's shocks all the more vexing: governments and central banks have exhausted the traditional ammunition upon which they have long relied during times of economic duress. That is true of both monetary and fiscal policy … Policy interest rates are close to zero in the major economies in the developed world, and outsize budget deficits are the norm. As a resulth more vexing: governments and central banks have exhausted the traditional ammunition upon which they have long relied during times of economic duress. That is true of both monetary and fiscal policy … Policy interest rates are close to zero in the major economies in the developed world, and outsize budget deficits are the norm. As a result, unconventional - and untested - policies, such as so-called "quantitative easing," have become the rage among central bankers.

All along, such unconventional policies were viewed as a temporary fix. The hope was that policy settings soon would return to pre-crisis norms. But, with one shock following another, the "exit strategy" keeps being deferred.

Just as it is next to impossible to take a critically ill patient off life-support treatment, it is equally difficult to wean post-bubble economies from their now steady dose of liquidity injections and deficit spending. In an era of extraordinarily high unemployment, political pressures only compound the problem.
This raises perhaps the most troublesome concern of all: with a post-crisis world getting hit by one shock after another, and with central banks having no latitude to cut interest rates, it is not hard to envision a scenario of open-ended monetary expansion that ends in tears. The dreaded inflationary endgame suddenly looms as a very real possibility.
Inflationary, here, is connected specifically with central banks shoving money into the financial sector. Deficits as Minsky has pointed out, end up as corporate revenues. We continue to call for abandoning trickle down and employing people directly doing things that need to be done. This is perhaps more directly inflationary, but is also more stable. The wealth effect in a poor society is not to be trusted.

Meanwhile, the surest sign of a downturn emerged last week from the Fed’s Open Market Committee, which pronounced, The Economic recovery is on a firmer footing, although the target range for the federal funds rate remains at 0 to 1/4 percent , the policy of reinvestment of principal payments remains, there is no change to the plan to purchase an additional $600 billion of longer-term Treasury securities by the end of June 2011, and the key sentence "likely to warrant exceptionally low levels for the federal funds rate for an extended period" remains.

So firmer is a relative term.

Friday, March 18, 2011

Transcript: 430B Relay: Barack Obama is No FDR

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What happened to the model of the Great Depression. When Barack Obama entered office, he was widely viewed as having the opportunity to replicate the success of Franklin Delano Roosevelt, to bring the progressive energy to a serious national crisis.

It turns out that the nation has benefitted from the laws past those seventy and eighty years ago more than it has from the immediate response to the financial collapse and recession. It is social security, unemployment insurance, bank insurance, and the remnants of the New Deal that have supported demand in the crisis.

Here panel one at the Economists for Peace and Security Bernard Schwartz Symposium visit the politics of this day and recall the difference. Heather Boushey concludes her remarks by reminding us that in the 1930s, the minimum wage was understood by the public as a strut under demand. Michael Intriligator reminds us that employment is still in the tank and the federal government is required by law to promote full employment, meaning hiring people. Intriligator also gets a gold star from Demand Side for his insistence that the NBER's recovery call was premature.

Heather Boushey:
Good morning. It’s a real pleasure to be with you here today. I can see that this is going to be a war of alliteration, and it’s fantastic to follow Tom. I was also thinking about the timely, targeted, and temporary mantra that when I was working on the Hill a couple of years ago, and we were talking about that stimulus. If I heard that phrase one time, I heard it like 3000 times from people that had no idea really what it meant, but it stuck in their heads. I like substantial, smart, and sustained, but this morning and this past week, I was thinking of clear, comprehensible, and credible. I’ll get to that at the end. Let the alliteration go on.

It’s great to follow Tom because he said a lot of the things that I don’t have to say. I’m going to reference it – all of it - so the laying out of the problem is already clear. We clearly have an output gap here in the US economy. As a labor economist, what I focus on most each and every day is the massive number of unemployed folks we have, and the need to do more to get those people back to work, and to fill in that output gap. One of the things that I find striking is while we’re having these debates about deficits and tax cuts here in Washington, month after month, the National Federation of Independent Businesses, which is a membership organization of small businesses in the United States, puts out a survey, the front page of which, they talk about how we need tax cuts. When you actually look at what their members keep saying month after month after month, is that they don’t have enough sales. That is their major concern: they’re not seeing customers come through the door. I think that that is one of sort of the nicest, crispest pieces of evidence that you can point to, especially for policymakers who claim to really care about small businesses - that we have this massive output gap.

The question is, how can we fill it, how can we get back to full employment within this climate where we are concerned about deficits and where the mantra is now fast becoming concerns about tax cuts? I want to start my comments this morning in my brief eight minutes, by taking a few minutes to sort of remember how we got to this particular moment. Then I want to go back a little bit further in history. Back into 2008, when we elected President Obama, unemployment was already starting to rise. We were already seeing output falling. Over the transition, before he actually even took office, Christina Romer, who became of course the Chair of the Council of Economic Advisors, and Jared Bernstein put together a paper that laid out the administration’s view, what would become their view on what was going to happen. They did this over the Christmas holiday. I found it very annoying because that meant over the Christmas holiday, I had to read it and comment on it, but I also felt bad for them that here they were, they don’t even have their jobs yet, they’re not even being paid, and they’re doing this economic modeling for the country.

By the time that report was released, it was already too optimistic. Unemployment was already clearly going higher than what they had forecasted. They estimated that in the absence of stimulus that we would lose about five to six million jobs. Of course, we lost over eight million jobs over the course of the Great Recession, and unemployment went far higher than they had predicted. That model formed the basis of the various policy proposals that the administration looked at that January and that winter. The story is that Christina Romer had run a number of simulations on how much we needed to do to get the economy back on track - three of them. One, a recovery package about $600 billion; one for about 800 billion; and one for 1.2 trillion. Of course, Christina Romer was, in my view, at least, not really known as some radical, lefty economist before she took this job at the White House. But based on her analysis, and her understanding of the Great Depression, and work that she’d done, she came to the conclusion that it was the $1.2 trillion package that we needed to fill in a two trillion dollar output gap.

As we now know, however, that proposal really never made it to the President’s ear. That was not a part of the conversation that the folks in the White House had as they were trying to figure out what to do. Why? Right? Why wasn’t the one – even though we knew we had this output gap, we could see the labor market falling off a cliff, why weren’t we talking about it?

The three answers that have been given are, number one, Congress. The sticker shock of 1.2 trillion would just make everybody fall flat on their back, and there was no way that that was going to go through Congress. That’s probably a fair assessment.

Government bureaucracy, how could we spend $1.2 trillion, and we see now as the recovery dollars have flowed through the economy, that that actually is a real concern; how fast can government pick up and throw that much money out into the economy in a way that’s smart and is targeted at growth? The third issue, of course, that Dr. Summers brought up at that time was deficits, and the concern that we would be here now with these deficits, and that would have impacts on the bond market, which of course, we haven’t seen in the negative way that we would think.

I want to be clear that the recovery package and the money that we’ve spent that has helped create the deficit has been important for the economy, but clearly we haven’t done enough. I’m going to an event that’s actually starting right now, but later this afternoon with a bunch of economists talking about all the things that we need to do to create jobs. Of course, most of them - and you look at those lists of things that we need to do, the kinds of things that Tom alluded to, the kinds of things that we talked about here in Washington every day - investments and infrastructure, investments and job creation, direct job creation, making sure that we’re maintaining demand by getting those unemployment benefits out into the economy. We spent over $75 billion on benefits for just the longer-term unemployed last year. That alone sort of, I think, makes Congress feel a little nauseous in terms of just how much money we’re having to spend.

But all of those require that we continue to deficit-spend. I think that the arguments that we had at the end of 2008 and early 2009 that set the framework for how we got from there to here, the fact that we didn’t put a package out that was big enough to begin with; and that we weren’t able to communicate to the American public effectively in any way, shape or form that we were doing something but we were only going half there.

I want to touch back on something Tom said, which is, this idea about the neoliberal two-step. There is this notion that the neoliberals tell us, “We’re doing these things, but we didn’t do enough of them so we need to do more.” That’s actually the exact same situation that we’re in. I was talking to a group of college kids last night, so here’s the analogy I used, so bear with me. It’s like you threw a party for 100 people, and you wanted to buy enough soda pop for everybody. You know you were going to need about $200 to do that, but your dad only gave you $100 for the party, so you’re only able to buy enough soda pop for half the people . Essentially, you threw a really crappy party, but it wasn’t your fault; it was because you didn’t actually funnel enough resources to actually do what you needed to do, to fill in that gap. That isn’t the conversation that we’re having now because nobody but those of us in this room actually understand that that’s what’s going on.

Here I come back to the notion of clear, comprehensible, and credible. This is the moment where I often think of people like my mom, who’s a good person, typically votes Democratic, not an economist, doesn’t get it. You can’t explain to her why we can have deficits from now until as far as the eye can see and that that won’t make something bad happen to the economy. You can’t connect with people with that message. As much as I completely agree with Tom, and I completely agree that we need to spend… I could bore you for hours with all the things that we need to do to get people back to work, and how we need to continue to deficit-spend, and the importance of Social Security, and Medicare. We’re not going to be able to do anything until we get to a place where the fact that Congress can’t comprehend that, because the public can’t comprehend that, isn’t our main sticking point.

Here I want to take the last of my couple of minutes, which hopefully I still have a couple left, to try to argue that I think we actually lost this debate a decade ago, or even longer. We are still sort of dealing with the aftershocks of it. The last time we had a surplus or projected surplus was in the end of the Clinton era. Then the national conversation became what to do with that surplus. The answer was, give it to rich people because they’re the ones that create jobs. We all know that that didn’t work. We gave massive tax cuts to the richest people in this country, and what that led to was a decade of McMansions and Hummers, the lowest investment growth in the post-World War II period, and the lowest growth in employment that we’ve seen in any economic recovery. The rich people didn’t invest, because basically you gave money to people like Paris Hilton. No diss on her, but didn’t really create jobs; it wasn’t targeted. The American public doesn’t understand that disconnect. Now we’re having a debate about tax cuts for the wealthy.

What the Republicans keep wanting to say is that those are tax cuts for small business owners. There’s facts, and we can have that argument, and we often do. But I would like to encourage us today to think about today how we’re going to communicate with people like my mom, and every other sort of normal person I talk to when I get out of DC and talk to folks around the country, who just can’t wrap their head around the fact that we need these deficits because the way that they have been told for ten, twenty, thirty years that the economy works is that what gets our economy going is rich people investing, and that they’ve got to cut costs and cut wages.

Back in the Great Depression when we passed all these great things that we’re always pointing back to – the Social Security Act, the Fair Labor Standards Act – the debate was different. They raised the minimum wage because people understood that workers bought stuff. That link isn’t there for most people these days. That is my sort of challenge to you, is we’re thinking about the deficit; how do we reshape that conversation so that people understand that if we don’t spend, people can’t buy? That means the economy doesn’t work, not just that we need to make sure to cut costs and have untargeted tax cuts for the wealthy. Thank you.

Richard Kaufman: The third final speaker is Mike Intriligator, who is Co-Chair of EPS, among many other titles that he holds.

Michael Intriligator:

My talk is called “The Global Recession Continues.” Overview – the current financial and economic crisis is number one. Number two: I want to talk about the mistake of the National Bureau of Economic Research and their dating committee in dating the end of the recession in the US June of last year. This was a huge mistake, in my view, and it gave all the wrong signals to politicians and policymakers and so forth. Number three: it will take years before the current recession will end. I published on this last year, and our predictions are coming exactly right, what I stated last year. Finally: navigating out of the crisis and lessons for the future.

The current crisis began in December ’07, the collapse of the subprime mortgages spread to others, the financial system and the overall US economy. My view was still here; I’ll get back to that later. This crisis has spread to Europe, Japan, and transition economies, the rest of the world basically, with devastating effects worldwide. It affects virtually every country in the world. China is a major exception, but the rest of the world is still in the same crisis that we’re in. Recent financial crisis in Greece, huge demonstrations in Athens, also in Brussels, but also the crisis in Italy, Spain, Portugal, Ireland, and other countries as well – these countries are in deep trouble, as we are, in my view.

Mistake in the National Bureau of Economic Research. The National Bureau of Economic Research is a private organization based in Cambridge, Massachusetts. They were delegated the responsibility by the US Federal Government to date the beginning and end of recessions. They’ve been doing that for many years, and they have a very distinguished group of people who are in charge of that on that dating committee. Quite recently, on September 20, they dated the end of the recession as June 2009. But they also cautioned - and people forget this as an important caution - that this finding bears no relation to the current state of the economy, and is not a forecast. They made that extremely clear in their statement dating the end of the recession. But I don’t think that that date is correct. I find it doubtful, given the continuing high unemployment, now at 9.6%, much higher in other states. In my state of California, we’re the third highest unemployment rate, after Michigan and Nevada. Continued foreclosures all around the country; houses are being foreclosed. Bankruptcies, not only corporate bankruptcies, but bank bankruptcies. This is not well known. People see the big banks are doing well. They don’t realize the little banks are in deep trouble; many have gone belly up. Personal bankruptcies are enormous. Loss of savings, loss of equity, difficulty in getting credit, particularly for small business. All these things are true, and they continue to be true now, despite what the National Bureau has to say about this.

My view is that we have a continued recession worldwide, except for China. Some people ask me, “Are we going to have a double dip?” I say, “No, it’s not a double dip; it’s a single dip, we’re still in the single dip. It’s not a double dip, but we’re still in deep trouble.” It will take years before the current crisis will end. In my view, the recession will likely have a U-shape. This was fashionable a year or so ago to talk about the shape of the recession, whether it’s a U, a V, a W, or some such letter. I’m a U-shape person, with a prolonged downturn, rather than a V, rapid down, rapid up again, it will bounce back up again. One of my colleges at UCLA, Ed Lemur[?] who runs the Anderson forecast had this view that it’s a V-shape; we’ve had some arguments about that. And will take perhaps six to eight years to recover from its official start in December of 2007. That also comes from the National Bureau Dating Committee; that data, I agree with. It’s their ending date that I don’t agree with.

The normal recovery forces that we’ve seen in previous recessions won’t work. The fiscal problems of the states: virtually every state with only one or two exceptions, are in deep financial difficulties, particularly my state of California; huge deficits in our state. Cutbacks all over the place. My colleagues at the University of California have had to take salary cuts. We have these days where you’re not supposed to work, and they don’t pay you basically. We’ve had these cuts. Banks are not lending, particularly to small business. Big business is a different story, but small business, I talk to small business owners, they say they have all kinds of plans, they would love to hire people, put up new buildings or whatever, but they can’t get the loans; there’s no credit available for them. What do they do? Where can they go? It’s a difficult situation. Of course, that feeds the problem. There’s no international locomotive of growth. This was a theory we had in previous recessions that if we’re in trouble, some other countries will bail us out, whether it’s the European union, Germany in particular, or China, Vietnam, and some other countries, that they would be locomotives of growth, and we would sort of follow that locomotive kind of out of the recession. That locomotive doesn’t exist anymore with the exception of China. They’re not going to lead us out of the recession; they exacerbate the problem, in my view. We can talk about that later.

I published an article in August last year, about a year ago, with Kyle Martin, a colleague, in The Huffington Post called “The Rise and Fall of Artificial Wealth.” This was very widely quoted, [unintelligible], reproduced amazing number of places. Here’s our prediction. We talked about artificial wealth that, particularly housing, equity in homes, rose to a new unbelievable values, and we have to sort of work through that problem in the system before we can solve the recession. Our prediction was this: the GDP we realized in 2008 of $14.26 trillion will not be achieved again on an inflation-adjusted basis until 2013. In other words, the recession didn’t end last year in June; it’s going to end in three years’ time - 2013. We also predicted the unemployment would not fall back to a level of 6.25% - which we had before the recession, which is considered a normal value for unemployment; now it’s, of course, 9.6%, higher in other states - until 2016. We have another three or six years to go before this recession ends, in our opinion. Say this has tracked well.

How do we navigate out of the current crisis? What are the lessons for the future? False choice in economic stimulation, I agree with the previous speakers about the need for fiscal stimulus; that’s very important. But [unintelligible] regulation, we need to do both. It’s not one or the other; it’s both. We require a greater transparency and limits on leverage for banks, which was one of the major causes of this recession. The leverage that they were using, the leverage ratios were incredible. They were taking real risks with themselves and their depositors or owners. We have to rethink the remainder of the stimulus funding by requiring specific actions, including new investments. We did this bailout of the banks; basically, we followed Gordon Brown in Britain, who had the idea: recapitalizing the banks. That was his idea, and we basically borrowed his idea. Lack of ideas of our own, perhaps, but we followed the British on this. We capitalized the banks, and we put a lot of money into banks and other large financial institutions – AIG and some others. What’d they do with the money? The theory was that they would provide more lending opportunities in the economy; they did not do that. What did they do with the money? They paid themselves big bonuses, they had big parties, they took cruises to Bermuda – almost everything but what we hoped they would do with the money. If we’re going to have more stimulus funding, there should be some specific requirements on people who get the money that they use it for some valuable things.

In my view, we made a mistake of working from a top-down idea, bailing out these huge financial institutions, corporations. We should move to a bottom-up approach instead. Family housing vouchers – I published a piece on this also in The Huffington Post. Guaranteed mortgage assistance, support for small and medium-sized businesses. We have this big small business administration here in Washington. They don’t seem to be active in providing credit to small business, which they desperately need. We have to extend unemployment and health insurance, student loans, aid to states and localities. States are in deep, deep trouble, as I said, unprecedented deficit in my state in California, but many states face that problem.

What’s our major problem? Our major problem - and the previous speakers have talked about this as well - is unemployment, which is required under the laws of this country. We passed a bill in 1946 called the Employment Act of 1946, which calls for the Federal Government to promote full employment. That was followed up by the Humphrey-Hawkins Bill, the Full Employment Act of 1978. These are two laws that are still on the books. They said that the intent, objective of the United States Federal Government is to promote full employment. We’ve not done that. We’ve let unemployment rise precipitously. We need a government guarantee for a portion of the commercial investment bank loans, as in Small Business Administration guarantees. Mind you, if banks don’t provide credit, then we should use closer supervision by the fed with their restructuring, by receivership or even nationalization, as a last resort. The word “resort” didn’t get in there, but it’s the last resort.

We have to set up investment banks. When we let Lehman Brothers fail, this was a huge blow to our economy, and a signal to the rest of the world. That was one of the major reasons the rest of the world ended up in recession. Lehman Brothers had operations all over the world. When they failed, virtually overnight, those other countries were in deep trouble; that was a big mistake. Compare what we did with Long-Term Capital Management, where they were in trouble at one point, another big hedge fund, and we bailed them out basically. The New York Fed brought the banks together to bail out Long-Term Capital Management. We did not do that with Lehman Brothers, and I think that was a huge mistake. I have a suspicion that it was due to Paulson. Paulson was the chairman at Goldman-Sachs; his whole career was at Goldman-Sachs. Their arch competitor was Lehman Brothers. Lehman Brothers gets into trouble. What does he do to help them? He doesn’t help them. He claims that they tried everything, that it didn’t work. I have some doubts about that, I have to say.

Then I believe, as a last resort, if businesses don’t provide jobs, the government should, as the employer, last resort, like we did in the Great Depression under FDR. We had these various programs: the Works Progress Administration, the Stability and Conversation Corps, the whole host of other things that they set up during the Great Depression, and we benefited from that. We still benefit to this day from things that went back to the ‘30s. Many of our roads, post offices, public buildings, arts, conservation, national parks, and so forth, a lot of that we inherited from happened during the Great Depression under FDR’s program as the Great Depression. I think we should resume some of those programs. That’s part of the government being the Employer Last Resort; this is one way we can employ people. Anyway, that’s my presentation. Thank you very much.

Tuesday, March 15, 2011

Transcript:: 430 Economic common sense vs. Neoliberal fantasy theology

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We are stuck in what a friend of mine, Stephan Schulmeister, calls “the neoliberal two-step.”

The two-step works as follows. Step one is you adopt neoliberal economic policy and create a problem. Step two is then you claim we need more neoliberal policy to solve the problem. It really is that simple. That is exactly what’s going on with the budget deficit debate in this talk about taxes – irresponsible tax policy creates huge budget deficits, and then we need more irresponsible tax policy to get out of it. Same way we talk about regulation. Irresponsible regulation and lack of regulation created a problem, so guess what? A lot of the Congress says we need less regulation, more of that irresponsible stuff. The same on labor market policy. The same on trade policy. The same across the board with federal reserve policy. You look everywhere you go, and you see the imprint of the neoliberal two-step.


We have to discredit neoliberal policy because we cannot fix these problems until we abandon neoliberal policy and restore a pro-people shared prosperity policy, but that’s really very tough. It’s tough because a lot of Democrats, a lot of the media, a lot of voters, and almost the entire economics profession believe in neoliberal economics in one form or another.

Today on the podcast, economic theology, GDP as a measure of what?, and the Fed’s policy, effective in producing what we don’t want.

In terms of punditry, Demand Side is far behind the curve. We have not yet mastered the skills of avoiding issues and going after the cheap shots, of dealing only in stereotypes, or of treating politics as a spectator sport. Least of all have we listened only to the flavor of the week commentary. We have in fact, tried to bring attention to last month's fashion, the promises and pledges of policy makers, remembering for example, that profitable companies will hire people and that solvent banks are the first step in a return to healthy investment. Reminding you that both of these were explicit justification for huge transfers of public money to the private sector.

Half a century ago, in his book American Capitalism, (p. 15-16) John Kenneth Galbraith made the point that "Man cannot live without an economic theology -- without some rationalization of the abstract and seemingly inchoate arrangements which provide him with his livelihood."

It is the construction of this economic theology which is our concern here.

Ah, but as you heard at the top, Thomas Palley objects. The Neoliberal two-step is indeed alive and well. Parentheses. Neoliberalism is economic speak for conservative free market free trade small government doctrine. End parentheses.

Galbraith also noted, writing in the middle of the 1950s, that the ideas which comprise the economic orthodoxy are derived from an eighteenth and nineteenth century system developed in England and Scotland that is internally consistent as a system, but bear precious little resemblance to reality. As Galbraith said,

"It is described as an economic system of high social efficiency -- that is to say, one in which all incentives encouraged the employment of men, capital and natural resources in producing most efficiently what people most wanted. There could be no misuse of private power because [competition ensured] no one had power to misuse. An innocuous role was assigned to government because there was little that was useful that a government could do. There was no place in the theory for severe depression or inflation."
Still, as he said then and as is true today.
"In the contemporary United States few of the preconditions for the system can seriously be supposed to exist. Nor do we pretend to live by its rules. Accordingly, we are forced to assume that we stand constantly in danger …. The dangers and even the disasters we risk are no less fearsome because we do not know their precise shape or why they do not come."
Hence the anxiety of the times is over inflation when no inflation exists. Hysteria over inflation is not only premature, it is misplaced. We see the absence of inflation as evidence of stagnation, and having been schooled in endogenous money by Minsky and Keen, we do not fear inflation in the future. If it happens – that is, a general price rise – it will mean investment is happening. Ersatz inflation as a speculation-induced rise in commodity prices is already happening.

Likewise, the fever over unions and pension plans which are issues only because of a financial collapse and the government's solution, low interest rates, and over government deficits which are assumed to be a problem in recession when they were not in the expansion. That is, the public discourse has returned to the dominant economic theology in direct view of a reality which is quite different.

It is as if we have accepted that all calamity is the result of fires, so we employ fire hoses on the occasion of a flood.

I was doing a short presentation to the Economists Club last week and found myself pointing to the bottom of the curve describing the employment recession and wondering silently, “What the hell is GDP doing in recovery, when employment is stuck at the bottom?” GDP reached its previous level in Q4 of 2010. Employment is not even back to its level in 2001. Clearly stimulus measures and Fed monetary policy have done wonders for activity, but little for jobs.

Econ Intersect had some other problems with the GDP metric last week. Writing after the reduction in Q4 estimates by the Bureau of Economic Analysis, Econ Intersect wrote,

“… this report is still showing modest GDP growth during 4Q-2010, although that growth is now not statistically distinguishable from the BEA’s last estimate for the third quarter of 2010. The estimate-to-estimate changes lowered the contributions of both consumers and governments to the growth rate, with the contraction of state and local governmental expenditures now removing … nearly three times the impact estimated only 30 days ago.

It should be noted that the BEA still used “price deflaters” that reflected an aggregate 0.4% national annualized inflation rate (up slightly from the 0.3% used in the “Advance Estimate”). At a number of levels this “deflater” is curious.

The numbers are so volatile on a quarter-to-quarter basis that a rational observer might lack confidence in their values.

In some cases the numbers defy common sense or real-world experiences (e.g., the last two quarters of computer prices inflating at annualized rates exceeding 60%).

The aggregate inflation rate was shown to be 0.4% even though the “GDP Excluding Food and Energy” (i.e., excluding the two key items which have recently seen the most sharply rising prices) was inflating three times faster at a 1.2% rate and total “Gross Domestic Purchases” was showing a 2.1% inflation rate.

None of these numbers translate in any obvious way into the official U.S. inflation rates published by the Bureau of Labor Statistics.

[A] rational observer might conclude that the values in this table have been hijacked by volatile seasonal adjustment factors or a blind conformance to historical methodologies that have lost touch with reality. As a consequence it is possible that quirky “deflaters” might have caused the published 2.79% growth rate to include between 1% and 2% of uncorrected inflation.”
And Econ Intersect concludes with a comment on how inventory adjustments are skewing economic measurement

"… a rapidly rising “deflater” will cause “real” inventories to deflate even as physical quantities remain relatively constant.

This is where a bizarre “deflater” can do its damage, because at the highest level the BEA’s logic attributes any variations in the quarter-to-quarter rates of change in inventory valuations to changes in factory production levels.

This whole process tends to highlight one of our major concerns: that the quality of traditional economic data drops sharply during times of dynamic or unprecedented changes in the economy. We would trust these reports more if the BEA had previously experienced periods of economic dislocations or governmental interventions on the same scale as those being seen today."

We are in recovery, though, and the economy is perking right along according to Wall Street. Never mind the immense federal deficits, the housing recession, the labor recession, nor the fact that unprecedented Federal Reserve action continues unabated, with zero percent interest rates and financial market manipulation.

Most people who object to the Fed’s action say it is setting us up for hyperinflation. If you don’t think that, you are not a realist. I know, weird.

Demand Side objects to the Fed’s action because it is destabilizing and ineffective.

To say that the Fed’s policy is ineffective would not be precise. It is effectively keeping commodity prices up and stock prices in bubble territory and promoting commodity price rises around the world. It is effectively delaying the reckoning with the banks. It effectively shifted trillions of dollars into the accounts of people who formerly held dodgy derivatives and securities. It has effectively continued the party on Wall Street for several years.

But it is not effective in creating jobs.

To say that deficit spending has not been effective is likewise not completely accurate. True, tax cuts for the wealthy have no economic benefit, and only a political purpose. But even after campaign donors have been made whole, the tax benefits for business were virtually useless, as investment is not produced by tax cuts, but by prospects for profit. The marginal rate reductions even for the middle class, including the payroll tax reduction may be welcome, but they are not job-producing. Only the one-third of the original Redevelopment and Recovery Act funds that went to spending on real projects have any jobs benefit to speak of. At the time, it was said that infrastructure spending was useless because it was too slow. Timely, Targeted and Temporary. Well. Here we are three years on and the only stimulus left with any pop are roads, rails, and power grid construction.

The “wealth effect” is the object of both the Fed’s monetary and the Administration’s main fiscal policy. Now that IS working, very effective in producing profitable corporations, cash-flush banks, and an ever wealthier ruling class. Jobs, not so much.

Stocks, bonds, liquid derivatives, doing quite well with the Fed’s cheap chips. But it is all Ponzi. Stable financing, as Minsky taught, is hedge financing (“Hedge” here has nothing to do with “hedge funds,” but refers to what we normally think of as productive investment; build a plant or facility, produce a good or service; pay back the loan from a portion of sales.

Ponzi finance is wealth effect finance. Inflate the value of financial assets with leverage so people will buy.

The more effective policy would be to provide jobs. It is not the owners of financial assets, nor even the currently employed who are hurting, or even who will produce demand if given the money. It is the jobless, who if given a job will demand housing, manufactures, and essential services.

I know this is at odds with my progressive fellow-travelers, for whom all deficit spending is okay. But as we will hear from Heather Boushey in next week’s relay, that argument has already been lost with regard to deficits. Liberals say all deficit spending is Keynesian. Keynes said … advocated … in times of unemployment burying ten pound notes in bottles and hiring people to dig them up. This is as useless an activity as he could imagine. But it involved hiring people hiring people hiring people. It was not helicopter Ben.

Even Helicopter Ben, as we’ve said, is not Helicopter Ben. He is providing cheap leverage to financial players, keeping the party going on Wall Street, creating a bigger problem every day in commodity markets, and wasting time and people’s lives.